You should read this
annual report thoroughly with the understanding that our actual future results may be materially different from, and/or worse,
than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this annual
report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in
an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management
to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
This annual report
also contains estimates, projections and statistical data related to the enterprise mobile software and IT services market in China.
This market data, including data from IDC, a leading provider of market data and intelligence, speaks as of the date it was published
and includes projections that are based on a number of assumptions and are not representations of fact. The enterprise mobile software
and IT services market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at
the projected rates may materially and adversely affect our business and the market price of our ADSs. In addition, the rapidly
changing nature of the software and IT services market subjects any projections or estimates relating to the growth prospects or
future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data proves
to be incorrect, actual results may differ from the projections based on these assumptions.
You should not rely
upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
PART I
ITEM 1. IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS.
Not applicable.
ITEM 2. OFFER STATISTICS
AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION.
A. SELECTED
FINANCIAL DATA.
Kingtone Wirelessinfo
Solution Holding Ltd and its consolidated subsidiaries (“Kingtone Wireless”, “we”, “us”, or
“the Company”) and Xi’an Kingtone Information Technology Co., Ltd., a PRC limited liability company (“Kingtone
Information”), which was incorporated in Xi’an, Shaanxi province, China on December 28, 2001, are under common control
from the earliest date presented. On October 27, 2009, we were incorporated with a fiscal year end of November 30, and on December
15, 2009, we consummated a number of related transactions to acquire contractual control of Kingtone Information (the “Reorganization”). The
selected financial data are solely those of Kingtone Information for the fiscal year ended September 30, 2009, and then they are
combined with Kingtone Wireless through December 15, 2009, the date of the Reorganization, and they are consolidated with Kingtone
Wireless following the date of the Reorganization.
In March 2010, we changed
our fiscal year end from November 30 to September 30 to have the same fiscal year end as Kingtone Information. As we and our wholly-owned
subsidiaries had no operations from October 1, 2009 to November 30, 2009, except for our initial capitalization and our preparation
for our initial public offering, the statement of income and comprehensive income for the year ended September 30, 2009 is the
same as those for the fiscal year ended November 30, 2009.
The selected financial
data for fiscal years 2016, 2015, 2014, 2013 and 2012 have been derived from our audited consolidated and combined financial statements.
The selected consolidated and combined financial data should be read in conjunction with our audited financial statements and the
accompanying notes and “Item 5 – Operating and Financial Review and Prospects.” Our consolidated and combined
financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S.
GAAP. Our historical results do not necessarily indicate our results expected for any future periods. You should not view our historical
results as an indicator of our future performance.
Kingtone Wirelessinfo Solution Holding Ltd
and Subsidiaries
Selected Consolidated
And Combined Statements of Operations and Comprehensive Income (Loss) Data
|
|
For the Years Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
($ in Thousands, Except per Share Data)
|
|
Total revenues
|
|
$
|
1,192
|
|
|
$
|
8,819
|
|
|
$
|
6,186
|
|
|
$
|
11,562
|
|
|
$
|
1,451
|
|
Cost of sales
|
|
|
988
|
|
|
|
5,618
|
|
|
|
4,222
|
|
|
|
10,544
|
|
|
|
1,689
|
|
Gross (loss) profit
|
|
|
204
|
|
|
|
3,201
|
|
|
|
1,964
|
|
|
|
1,018
|
|
|
|
(238
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
134
|
|
|
|
153
|
|
|
|
364
|
|
|
|
557
|
|
|
|
685
|
|
General and administrative expenses
|
|
|
1,917
|
|
|
|
3,355
|
|
|
|
1,940
|
|
|
|
2,805
|
|
|
|
8,278
|
|
Research and development expenses
|
|
|
55
|
|
|
|
288
|
|
|
|
202
|
|
|
|
249
|
|
|
|
201
|
|
Total operating expenses
|
|
|
2,106
|
|
|
|
3,796
|
|
|
|
2,506
|
|
|
|
3,611
|
|
|
|
9,164
|
|
Operating (loss) income
|
|
|
(1,902
|
)
|
|
|
(595
|
)
|
|
|
(542
|
)
|
|
|
(2,593
|
)
|
|
|
(9,402
|
)
|
Subsidy income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
237
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
400
|
|
|
|
29
|
|
|
|
32
|
|
|
|
79
|
|
|
|
117
|
|
loss of net investment in sales-type leases
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,443
|
)
|
|
|
-
|
|
Other income (expense), net
|
|
|
1,342
|
|
|
|
1,593
|
|
|
|
509
|
|
|
|
(1,176
|
)
|
|
|
60
|
|
Income (Loss) before income tax expense
|
|
|
(160
|
)
|
|
|
1,027
|
|
|
|
(1
|
)
|
|
|
(5,133
|
)
|
|
|
(8,988
|
)
|
Income tax expenses
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net (loss) income
|
|
|
(160
|
)
|
|
$
|
1,027
|
|
|
$
|
(1
|
)
|
|
$
|
(5,133
|
)
|
|
$
|
(8,988
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
(867
|
)
|
|
|
(686
|
)
|
|
|
(38
|
)
|
|
|
616
|
|
|
|
1,194
|
|
Comprehensive (loss) income
|
|
|
(1,027
|
)
|
|
$
|
341
|
|
|
$
|
(39
|
)
|
|
$
|
(4,517
|
)
|
|
$
|
(7,794
|
)
|
(Loss) Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.11
|
)
|
|
$
|
0.73
|
|
|
$
|
(0.00
|
)
|
|
$
|
(3.65
|
)
|
|
$
|
(6.40
|
)
|
Weighted average number of ordinary shares outstanding
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
1,405,000
|
|
|
|
1,405,000
|
|
|
|
1,405,000
|
|
|
|
1,405,000
|
|
|
|
1,405,000
|
|
Kingtone Wirelessinfo Solution Holding Ltd
and Subsidiaries
Selected Consolidated and Combined Balance
Sheets Data
|
|
As of September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
Consolidated
|
|
|
|
($ in Thousands)
|
|
Cash and cash equivalents
|
|
|
1,239
|
|
|
|
2,743
|
|
|
|
4,166
|
|
|
|
6,132
|
|
|
|
6,439
|
|
Total current assets
|
|
|
6,182
|
|
|
|
7,489
|
|
|
|
19,393
|
|
|
|
19,591
|
|
|
|
15,385
|
|
Total assets
|
|
|
23,724
|
|
|
|
25,694
|
|
|
|
32,894
|
|
|
|
33,581
|
|
|
|
29,892
|
|
Advances from customers
|
|
|
381
|
|
|
|
392
|
|
|
|
8,365
|
|
|
|
9,062
|
|
|
|
1,528
|
|
Dividend payable
|
|
|
775
|
|
|
|
812
|
|
|
|
840
|
|
|
|
842
|
|
|
|
817
|
|
Total current liabilities
|
|
|
4,034
|
|
|
|
4,977
|
|
|
|
12,518
|
|
|
|
13,168
|
|
|
|
4,962
|
|
Total shareholders’ equity
|
|
|
19,690
|
|
|
|
20,717
|
|
|
|
20,376
|
|
|
|
20,413
|
|
|
|
24,930
|
|
Total liabilities and shareholders’ equity
|
|
|
23,724
|
|
|
|
25,694
|
|
|
|
32,894
|
|
|
|
33,581
|
|
|
|
29,892
|
|
B. CAPITALIZATION
AND INDEBTEDNESS.
Not applicable.
C. REASONS FOR THE
OFFER AND USE OF PROCEEDS.
Not applicable.
D. RISK FACTORS.
An investment in our ADSs
involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all other
information contained in this annual report, including the matters discussed under “Special Note Regarding Forward-Looking
Statements,” before you decide to invest in our ADSs. You should pay particular attention to the fact that we are a holding
company with substantial operations in China and are subject to legal and regulatory environments that in many respects differ
from those of the United States. If any of the following risks, or any other risks and uncertainties that are not presently foreseeable
to us, actually occur, our business, financial condition, results of operations, liquidity and our future growth prospects would
be materially and adversely affected. You should also consider all other information contained in this annual report before deciding
to invest in our ADSs.
Risks Related to Our Company and Our Industry
If demand for enterprise remote and mobile
connectivity does not continue to expand in China, we may experience a shortfall in revenues or earnings or otherwise fail to meet
public market expectations.
The growth of our business
is dependent, in part, upon the increased migration by enterprises to wireless connectivity services in China and our ability to
capture a higher proportion of this market. If the demand in China for enterprise connectivity services does not continue to grow,
or grows in ways that do not use our services, then we may not be able to grow our business, maintain our profitability or meet
public market expectations. Increased usage of enterprise connectivity services depends on numerous factors, including:
|
1.
|
the willingness of enterprises to make additional information technology expenditures;
|
|
2.
|
the availability of security products necessary to ensure data privacy over the public networks;
|
|
3.
|
the quality, cost and functionality of these services and competing services;
|
|
4.
|
the increased adoption of wired and wireless broadband access methods;
|
|
5.
|
the proliferation of electronic devices such as handhelds and smart-phones and related applications; and
|
|
6.
|
the willingness of enterprises to invest in our services during the current world-wide economic crisis.
|
The Company had incurred negative cash
flows from operative activities and net losses as of September 30, 2016. These matters raise substantial doubt about the Company’s
ability to continue as a going concern.
The Company’s consolidated
financial statements are prepared using generally accepted accounting principles in the United States of America applicable to
a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As of and for the year ended September 30, 2016, the Company had incurred significant operating losses and working capital deficit.
The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating
losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
In order to continue as
a going concern, the Company will need, among other things, additional capital resources. Management’s plans to obtain such
resources for the Company include (1) obtaining contracts with higher gross margin, (2) proceeds from the related party loans
lent to its related parties, and (3) short-term or long-term borrowings from banks, stockholders or other party (ies) when needed.
However, management cannot provide any assurance that the Company will be successful in accomplishing any of its plans.
We face intense competition from other
software development and IT service companies and, if we are unable to compete effectively, we may lose customers and our revenues
may decline.
The market for software
products and IT services, including wireless IT application products and solutions, is highly competitive and subject to rapid
changes in technology. In fiscal year 2015, we faced significant competition from both established and emerging software companies
which contributed to the decline in our revenues and we expect to continue to face significant competition in the future. In addition,
our growth opportunities in new product markets could be limited to the extent established and emerging software companies enter
or have entered those markets. We believe the principal competitive factors in our markets are industry experience, quality of
the products and services offered, reputation, marketing and selling skills, as well as price. We face significant competition
from various competitors, including:
|
1.
|
other Chinese wireless data communication and exchange software application and service providers, such as Beijing CEICT Technology Co., Ltd., Xi’an Future Technology Information Co., Ltd., Shenzhen Shi Ji An Ruan Technology Co., Ltd. and Cyber Technologies (Suzhou) Co., Ltd.;
|
|
2.
|
other Chinese software developers and IT service providers, that may decide to add wireless data communication and exchange programming capability;
|
|
3.
|
telecommunication equipment producers and suppliers; and
|
|
4.
|
multi-national service providers.
|
Many of our current and
prospective competitors have significantly greater financial, marketing, service, support, technical and other resources than we
do. As a result, they may be able to adapt more quickly than us to new or emerging technologies and changes in customer requirements
or to devote greater resources to the promotion and sale of their products. Announcements of competing products by large competitors
or other vendors could result in the cancellation of orders by customers in anticipation of the introduction of such new products.
Smaller competitors can also competing against us in terms of price, and some regional small competitors have a closer relationship
with the local government. In addition, some of our competitors currently make complementary products that are sold separately.
Such competitors could decide to enhance their competitive position by bundling their products to attract customers seeking integrated,
cost-effective software applications. We also expect competition to increase as a result of software industry consolidations, which
may lead to the birth of additional large and well-financed competitors. Increased competition is likely to result in price reductions,
fewer customer orders, reduced margins and loss of market share.
We may undertake acquisitions, investments,
joint ventures or other strategic alliances, which could have a material adverse effect on our ability to manage our business.
In addition, such undertakings may not be successful.
Our strategy includes
plans to grow both organically and through acquisitions, participation in joint ventures or other strategic alliances. Joint ventures
and strategic alliances may expose us to new operational, regulatory and market risks, as well as risks associated with additional
capital requirements. We may not be able, however, to identify suitable future acquisition candidates or alliance partners. Even
if we identify suitable candidates or partners, we may be unable to complete an acquisition or alliance on terms commercially acceptable
to us. If we fail to identify appropriate candidates or partners, or complete desired acquisitions, we may not be able to implement
our strategies effectively or efficiently.
In addition, our ability
to successfully integrate acquired companies and their operations may be adversely affected by a number of factors. These factors
include:
|
1.
|
diversion of management’s attention;
|
|
2.
|
difficulties in retaining customers of the acquired companies;
|
|
3.
|
difficulties in retaining personnel of the acquired companies;
|
|
4.
|
entry into unfamiliar markets;
|
|
5.
|
unanticipated problems or legal liabilities; and
|
|
6.
|
tax and accounting issues.
|
If we fail to integrate
acquired companies efficiently, our earnings, revenue growth and business could be negatively affected.
Due to intense competition for highly-skilled
personnel, we may fail to attract and retain enough sufficiently trained employees to support our operations; our ability to bid
for and obtain new projects may be negatively affected and our revenues could decline as a result.
The IT industry relies
on skilled employees, and our success depends to a significant extent on our ability to attract, hire, train and retain qualified
employees. Wireless information management application development is a relatively new area in the IT industry. There is a small
pool of experienced developers. As the market demand picks up and more IT companies enter this market, there is significant competition
in China for professionals with the skills necessary to develop the products and perform the services we offer to our customers.
Increased competition for these professionals, in the wireless information management application development areas or otherwise,
could have an adverse effect on us if we experience significant increase in the attrition rate among employees with specialized
skills, which could decrease our operating efficiency and productivity and could lead to a decline in demand for our services.
In addition, our ability
to serve existing customers and business partners and obtain new business will depend, in large part, on our ability to attract,
train and retain skilled personnel that enable us to keep pace with growing demands for wireless information management application,
evolving industry standards and changing customer preferences. Our failure to attract, train and retain personnel with the qualifications
necessary to fulfill the needs of our existing and future customers or to assimilate new employees successfully could have a material
adverse effect on our business, financial condition and results of operations. Our failure to retain our key personnel on business
development or find suitable replacements of the key personnel upon their departure may lead to shrinking new implementation projects,
which could materially adversely affect our business.
Our business depends substantially on
the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose
their services.
Our future success heavily
depends upon the continued services of our senior executives and other key employees. In particular, we rely on the expertise and
experience of Mr. Tao Li, our chairman. In addition, we rely on Mr. Peng Zhang, our chief executive officer, Ms. Li Wu, our chief
financial officer. If one or more of our senior executives or key employees is unable or unwilling to continue in his or her present
position, we may not be able to replace such employee easily, or at all, we may incur additional expenses to recruit, train and
retain replacement personnel, our business may be severely disrupted, and our financial condition and results of operations may
be materially adversely affected.
If Mr. Li’s other professional
duties interfere or conflict with his duties for our company, our business, results of operations and financial condition could
be materially and adversely affected.
Mr. Li, our chairman,
currently serves as Chairman and Chief Executive Officer of China Green Agriculture, Inc. (“CGA”), a producer of humic
acid based compound fertilizer in the PRC whose common stock is listed on the New York Stock Exchange. Mr. Li’s duties as
Chairman and Chief Executive Officer of CGA require the devotion of a substantial amount of his professional time and attention.
Mr. Li currently devotes approximately 70% of his professional time to his duties for CGA. Similarly, our success and the execution
of our growth strategy will require his significant efforts and the devotion of a substantial amount of his professional time and
attention. If the performance of his duties on behalf of CGA interferes or conflict with his duties as Chairman of our company,
we may not be able to achieve our anticipated growth and our business, results of operations and financial condition could be materially
adversely affected.
Our business could suffer if our executives
and directors compete against us and our non-competition agreements with them cannot be enforced.
If any of our senior executives
or key employees joins a competitor or forms a competing company, we may lose customers, know-how and key professionals and staff
members to them. Also, if any of our business development managers who keep a close relationship with our customers and business
partners joins a competitor or forms a competing company, we may lose customers, and our revenues may be materially adversely affected.
Most of our executives have entered into employment agreements with us that contain non-competition provisions. However, if any
dispute arises between our executive officers and us, such non-competition provisions may not be enforceable, especially in China,
where all of these executive officers and key employees reside, in light of the uncertainties with China’s legal system.
See “Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect to the
PRC legal system could adversely affect us.”
A significant portion of the software
development, ongoing system support and enhancement service revenues we generate are fixed amounts according to our sales contracts.
If we fail to accurately estimate costs and determine resource requirements in relation to our projects, our margins and profitability
could be materially and adversely affected.
A significant portion
of the software development, ongoing system support and enhancement service revenues we generate are fixed amounts according to
our sales contracts or bids we submit. Our projects often involve complex technologies and must often be completed within compressed
timeframes and meet increasingly sophisticated customer requirements. We may be unable to accurately assess the time and resources
required for completing projects and price our projects accordingly. If we underestimate the time or resources required, we may
experience cost overruns and mismatches in project staffing. Conversely, if we over-estimate requirements, our bids may become
uncompetitive and we may lose business as a result. Furthermore, any failure to complete a project within the stipulated timeframe
could expose us to contractual and other liabilities and damage our reputation.
Our computer networks may be vulnerable
to security risks that could disrupt our services and adversely affect our results of operations.
Our computer networks
may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by unauthorized
access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate
proprietary information or cause interruptions or malfunctions in operations. Computer attacks or disruptions may jeopardize the
security of information stored in and transmitted through computer systems of our customers. Actual or perceived concerns that
our systems may be vulnerable to such attacks or disruptions may deter telecom operators and consumers from using our solutions
or services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches
or to alleviate problems caused by these breaches, which could adversely affect our results of operations.
If we do not continually enhance our
solution and service offerings, we may have difficulty in retaining existing customers and attracting new customers.
We believe that our future
success will depend, to a significant extent, upon our ability to enhance our existing solutions and to introduce new solutions
and features to meet the requirements of our customers in a rapidly developing and evolving market. We currently devote significant
resources to refining and expanding our base software modules and to developing solutions that operate in accordance with our customers’
networks and systems. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction
of one or more of these products or services, or any products or services that we may plan to introduce in the future. Our present
or future products may not satisfy the evolving needs of the telecom industry, and these solutions and services may not achieve
anticipated market acceptance or generate incremental revenue. If we are unable to anticipate or respond adequately to the need
for solutions and service enhancements due to resource, technological or other constraints, our business, financial condition and
results of operations could be materially and adversely affected.
If we are unable to develop competitive
new products and service offerings our future results of operations could be adversely affected.
Our future revenue stream
depends to a large degree on our ability to utilize our technology in a way that will allow us to offer new types of software applications
and services to a broader client base. We will be required to make investments in research and development in order to continually
develop new software applications and related service offerings, enhance our existing software applications and related service
offerings and achieve market acceptance of our software applications and service offerings. We may incur problems in the future
in innovating and introducing new software applications and service offerings. Our development-stage software applications may
not be successfully completed or, if developed, may not achieve significant customer acceptance. If we are unable to successfully
define, develop and introduce competitive new software applications, and enhance existing software applications, our future results
of operations would be adversely affected. Development schedules for software applications are difficult to predict. The timely
availability of new applications and their acceptance by customers are important to our future success. A delay in the development
of new applications could have a significant impact on its results of operations.
Changes in technology could adversely
affect our business by increasing our costs, reducing our profit margins and causing a decline in our competitiveness.
China’s wireless
telecom industry, in which we operate, is characterized by rapidly changing technology, evolving industry standards, frequent introductions
of new services and solutions and enhancements as well as changing customer demands. New solutions and new technologies often render
existing solutions and services obsolete, excessively costly or otherwise unmarketable. As a result, our success depends on our
ability to adapt to the latest technological progress, such as the 4G standard and technologies, and to develop or acquire and
integrate new technologies into our software solutions and IT-related services. Advances in technology also require us to commit
substantial resources to developing or acquiring and then deploying new technologies for use in our operations. We must continuously
train personnel in new technologies and in how to integrate existing hardware and software systems with these new technologies.
We may not be able to adapt quickly to new technologies or commit sufficient resources to compete successfully against existing
or new competitors in bringing to market solutions and services that incorporate these new technologies. We may incur problems
in the future in innovating and introducing new software applications and service offerings. Our development-stage software applications
may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we fail to adapt to changes
in technologies and compete successfully against established or new competitors, our business, financial condition and results
of operations could be adversely affected.
Returns on our investment in new technologies,
such as 4G technology, and new solutions may not materialize as expected.
We have invested and will
invest in the future a substantial amount of capital, manpower and other resources to develop new solutions and acquire technologies
in preparation for the adoption by the wireless telecom industry in China of new standards and technologies, such as the 4G standard
and technologies. However, our abilities to successfully develop and commercialize these new solutions and technologies are subject
to a number of risks and uncertainties, including uncertainty surrounding the timing of the adoption of these new standards and
technologies by China’s telecom industry and the receptiveness to these new technologies by their customer base, as well
as our abilities to develop and market these new solutions cost-effectively and to deliver these solutions ahead of our competitors.
Any of the above risks and uncertainties could jeopardize our ability to successfully realize a significant return on our investment
in the 4G and other new technologies and solutions, if at all.
Problems with the quality or performance
of our solutions may cause delays in the introduction of new solutions or result in the loss of customers and revenues, which could
have a material and adverse effect on our business, financial condition and results of operations.
Our software solutions
are complex and may contain defects, errors or bugs when first introduced to the market or to a particular customer, or as new
versions are released. Because we cannot test for all possible scenarios, our solutions may contain errors which are not discovered
until after they have been installed, and we may not be able to timely correct these problems. These defects, errors or bugs could
interrupt or delay completion of projects or sales to our customers. In addition, our reputation may be damaged and we may fail
to acquire new projects from existing customers or new customers. Errors may occur when we provide systems integration and maintenance
services. Some of the contracts with our customers do not have provisions setting forth limitations on liability for consequential
damages. Even in cases where we have agreements with our customers that contain provisions designed to limit our exposure to potential
claims and liabilities arising from customer problems, these provisions may not effectively protect us against such claims in all
cases and in all jurisdictions. In addition, as a result of business and other considerations, we may undertake to compensate our
customers for damages arising from the use of our solutions, even if our liability is limited by these provisions. Moreover, claims
and liabilities arising from customer problems could also result in adverse publicity and materially and adversely affect our business,
results of operations and financial condition. We currently do not carry any product or service liability insurance and any imposition
of liability on us may materially and adversely affect our business and increase our costs, resulting in reduced revenues and profitability.
Our products may contain undetected software
defects, which could negatively affect our revenues.
Our software products
are complex and may contain undetected defects. In the past, we have discovered software defects in certain of our products and
have experienced delayed or lost revenues during the period it took to correct these problems. Although we test our products, it
is possible that errors may be found or occur in our new or existing products after we have commenced commercial shipment of those
products. Defects, whether actual or perceived, could result in adverse publicity, loss of revenues, product returns, a delay in
market acceptance of our products, loss of competitive position or claims against us by customers. Any such problems could be costly
to remedy and could cause interruptions, delays, or cessation of our product sales, which could cause us to lose existing or prospective
customers and could negatively affect our results of operations.
We may be subject to infringement, misappropriation
and indemnity claims in the future, which may cause us to incur significant expenses, pay substantial damages and be prevented
from providing our services or technologies.
Our success depends, in
part, on our ability to carry out our business without infringing the intellectual property rights of third parties. Patent and
copyright law covering software-related technologies and IT marketing is evolving rapidly and is subject to a great deal of uncertainty.
Our self-developed or licensed technologies, processes or methods may be covered by third-party patents or copyrights, either now
existing or to be issued in the future. Any potential litigation may cause us to incur significant expenses. Third-party claims,
if successfully asserted against us may cause us to pay substantial damages, seek licenses from third parties, pay ongoing royalties,
redesign our services or technologies, or prevent us from providing services or technologies subject to these claims. Even if we
were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel
from our business operations.
Additionally, most of
our software development contracts signed with our customers contain indemnity clauses whereby we will indemnify our customers
for any loss or damages suffered as a result of any third-party claims against them for any infringement of intellectual property
rights in connection with the installation and use of the customized software solutions we develop for them. We may still be exposed
to significant liabilities under these indemnity clauses to which we’ve agreed with our customers.
Our failure to protect our intellectual
property rights may undermine our competitive position, and subject us to costly litigation to protect our intellectual property
rights.
Any misappropriation of
our technology or the development of competitive technology could seriously harm our business. We regard a substantial portion
of our software solutions and systems as proprietary and rely on statutory copyright, trademark, patent, trade secret laws, customer
license agreements, employee and third-party non-disclosure agreements and other methods to protect our proprietary rights. Nevertheless,
these resources afford only limited protection and the actions we take to protect our intellectual property rights may not be adequate.
In particular, third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights,
which could have a material adverse effect on our business, financial condition and results of operations. In addition, intellectual
property rights and confidentiality protection in China may not be as effective as in the United States, and policing unauthorized
use of proprietary technology can be difficult and expensive. In addition, litigation may be necessary to enforce our intellectual
property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. The outcome
of any such litigation may not be in our favor. Furthermore, any such litigation may be costly and may divert management attention,
as well as our other resources, away from our business. An adverse determination in any such litigation will impair our intellectual
property rights and may harm our business, prospects and reputation. In addition, we have no insurance coverage against litigation
costs and would have to bear all litigation costs in excess of the amount recoverable from other parties. The occurrence of any
of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Our solutions incorporate a portion of,
and work in conjunction with, third-party hardware and software solutions. If these third-party hardware or software solutions
are not available to us at reasonable costs, or at all, our results of operations could be adversely impacted.
Although our solutions
primarily rely on our own core technologies, some of our solutions incorporate a small portion of third-party hardware and software
solutions. In addition, our solutions are designed to work in conjunction with the third-party hardware and software in our customers’
existing systems. If any third party were to discontinue making their solutions available to us or our customers on a timely basis,
or increase materially the cost of their solutions, or if our solutions failed to properly function or interoperate with replacement
hardware or software solutions, we may need to incur costs in finding replacement third-party solutions and/or redesigning our
solutions to replace or function with or on replacement third-party solutions. Replacement solutions may not be available on terms
acceptable to us or at all, and we may be unable to develop alternative solutions or redesign our solutions on a timely basis or
at a reasonable cost. If any of these were to occur, our results of operations could be adversely impacted.
Our ability to sell our products is highly
dependent on the quality of our service and support offerings, and our failure to offer high quality service could have a material
adverse effect on our ability to market and sell our products.
Our customers depend upon
our customer service and support staff to resolve issues relating to our products. High-quality support services are critical for
the successful marketing and sale of our products. If we fail to provide high-quality support on an ongoing basis, our customers
may react negatively and we may be materially and adversely affected in our ability to sell additional products to these customers.
This could also damage our reputation and prospects with potential customers. Our failure to maintain high-quality support services
could have a material and adverse effect on our business, results of operations and financial condition.
Weaknesses In Our Internal Controls Over
Financial Reporting or Disclosure Controls and Procedures May Have A Material Adverse Effect On Our Business, The Price Of Our
ADSs, Operating Results And Financial Condition.
We are required to establish
and maintain appropriate internal controls over financial reporting and disclosure controls and procedures. Pursuant to Section
404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission, every public company
is required to include a management report on its internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of the company’s internal controls over financial reporting. This
requirement first applied to our annual report on Form 20-F for the fiscal year ended on September 30, 2011. In connection with
our assessments of our disclosure controls and procedures and internal controls over financial reporting, management concluded
that as of September 30, 2016, our disclosure controls and procedures and our internal controls over financial reporting were not
effective due to lack of U.S. generally accepted accounting principles (“U.S. GAAP”) expertise in our current accounting
team. Please refer to the discussion under Item 15, “Controls and Procedures” for further discussion of our material
weakness as of September 30, 2016. Should we be unable to remediate the material weakness promptly and effectively, such weakness
could harm our operating results, result in a material misstatement of our financial statements, cause us to fail to meet our financial
reporting obligations or prevent us from providing reliable and accurate financial reports or avoiding or detecting fraud. This,
in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have
an adverse effect on the trading price of our ADSs. Any litigation or other proceeding or adverse publicity relating to the material
weaknesses could have a material adverse effect on our business and operating results.
We have very limited insurance coverage
which could expose us to significant costs and business disruption.
We do not maintain any
insurance coverage for our leased properties. Should any natural catastrophes such as earthquakes, floods, typhoons or any acts
of terrorism occur in Shaanxi Province, where our head office is located and most of our employees are based, or elsewhere in China,
we might suffer not only significant property damages, but also loss of revenues due to interruptions in our business operations,
which could have a material adverse effect on our business, operating results or financial condition.
The insurance industry
in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and
do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage
for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption
and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources, particularly if it affects our technology platforms which we depend
on for delivery of our software and services, and could have a material adverse effect on our financial condition and results of
operations.
We may be liable to our customers for
damages caused by unauthorized disclosure of sensitive and confidential information, whether through our employees or otherwise.
We are typically required
to manage, utilize and store sensitive or confidential customer data in connection with the products and services we provide. Under
the terms of our customer contracts, we are required to keep such information strictly confidential. We seek to implement specific
measures to protect sensitive and confidential customer data. We require our employees to enter into non-disclosure agreements
to limit such employees’ access to, and distribution of, our customers’ sensitive and confidential information and
our own trade secrets. We can give no assurance that the steps taken by us in this regard will be adequate to protect our customers’
confidential information. If our customers’ proprietary rights are misappropriated by our employees, in violation of any
applicable confidentiality agreements or otherwise, our customers may consider us liable for that act and seek damages and compensation
from us. However, we currently do not have any insurance coverage for mismanagement or misappropriation of such information by
our employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in
substantial costs and diversion of resources and management attention.
We may face intellectual property infringement
claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant
intellectual property rights and may be unable to continue providing our existing products and services.
It
is critical that we use and develop our technology and products without infringing upon the intellectual property rights of third
parties, including patents, copyrights, trade secrets and trademarks. Intellectual property litigation is expensive and time-consuming
and could divert management’s attention from our business. A successful infringement claim against us, whether with or without
merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, or re-brand our name
or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease making, licensing
or using products that have infringed a third party’s intellectual property rights. Protracted litigation could also result
in existing or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation,
or could require us to indemnify our customers against infringement claims in certain instances. Also, we may be unaware of intellectual
property registrations or applications relating to our services that may give rise to potential infringement claims against us.
Parties making infringement claims may be able to obtain an injunction to prevent us from delivering our services or using technology
containing the allegedly infringing intellectual property. Any intellectual property litigation could have a material adverse effect
on our business, results of operations or financial condition.
We have transferred intellectual property
rights to a number of our customized software solutions to our customers in the past and may not own all these intellectual property
rights. We may be subject to intellectual property infringement claims from these customers and others, which may force us to incur
substantial legal expenses and, if determined adversely against us, may disrupt our business and materially and adversely affect
our revenues and net income.
Our business involves
the development and customization of software solutions for customers. While we retain ownership in the intellectual property rights
underlying the core technologies required to develop our customized finished software solutions, in most cases, our contracts for
custom-designed projects provided that our customers own, or share with us, intellectual property rights to the finished software
solutions developed under such contracts. Under these circumstances, we may not have the right to reuse the related finished software
in projects involving other customers nor can we unilaterally apply for copyright registrations, patents or other intellectual
property rights for these software solutions. To the extent that we are unable to reuse the software and to the extent that the
use of such software is important to the growth of our business with other customers, the inability to reuse such software could
hinder the growth of our business. Furthermore, a portion of these contracts provide that our customers have ownership rights to
any substantial improvements we subsequently make to the software solutions developed under these contracts. As a result, we may
be subject to intellectual property infringement or profit sharing claims in the future from these customers. Any such claims could
subject us to costly litigation and may require us to pay damages and develop non-infringing intellectual property, or acquire
licenses to the intellectual property that is the subject of the alleged infringement. These could harm our reputation and materially
and adversely affect our business and net income.
Seasonality and fluctuations in our customers’
annual IT budget and spending cycle and other factors can cause our revenues and operating results to vary significantly from quarter
to quarter and from year to year.
Our revenues and operating
results will vary significantly from quarter to quarter and from year to year due to a number of factors, many of which are outside
of our control. A large number of our engineers take leave around the Chinese New Year holiday, which typically falls between late
January and February of each year. The lack of man-hours during this holiday period usually leads to relatively lower revenues
during the first calendar quarter. Due to the annual budget cycles of most of our customers, we may be unable to accurately estimate
the demand for our solutions and services beyond the immediate calendar year, which could adversely affect our business planning.
Moreover, our results will vary depending on our customers’ business needs from year to year. Due to these and other factors,
our operating results have fluctuated significantly from quarter to quarter and from year to year. These fluctuations are likely
to continue in the future, and operating results for any period may not be indicative of our future performance in any future period.
Our corporate actions are substantially
controlled by our principal shareholders, who can cause us to take actions in ways you may not agree with.
Mr. Tao Li, our Chairman,
beneficially owns and has voting control over approximately 47.9% of our ordinary shares, and our officers and directors as a group
beneficially own and have voting control over an aggregate of approximately 48.9% of our ordinary shares. These shareholders, acting
individually or as a group, could exert control and substantial influence over matters such as electing directors, amending our
constitutional documents, and approving acquisitions, mergers or other business combination transactions. This concentration of
ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders
of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares.
Alternatively, our controlling shareholders may cause a merger, consolidation or change of control transaction even if it is opposed
by our other shareholders, including those who purchase shares in this offering.
We depend on a small number of customers
to derive a significant portion of our revenues. If we were to become dependent again upon a few customers, such dependency
could negatively impact our business, operating results and financial condition.
We derived a material
portion of our revenues from a small number of customers. In the years ended September 30, 2016 and 2015, our five largest
customers accounted for 46% and 91% of our total sales, respectively, and our largest customer - Hunan Huanan Photoelectricity
Science & Technology Co., Ltd. accounted for approximately 46.2% of our total sales during for the fiscal year ended September
30, 2016. As our customer base may change from year-to-year, during such years that the customer base is highly concentrated, the
fluctuation of our sales to any of such major customers could have a material adverse effect on our business, operating results
and financial condition. Moreover, our high customer base concentration may also adversely affect our ability to negotiate contract
prices with these customers, which may in turn materially and adversely affect our results of operations.
Our historical outstanding accounts receivable
have been relatively high. Inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely
affect our financial condition, liquidity and results of operations.
Historically,
our outstanding accounts receivable have been relatively high. As of September 30, 2016 and 2015, our outstanding accounts
receivable were $4.2_million and $5.1 million, respectively. Although we conduct credit evaluations of our customers, we generally
do not require collateral or other security from our customers. In addition, we have had a relatively high customer concentration.
The outstanding accounts receivable balance for our largest customer was 72.6% and 77.9% of the total accounts receivable balance
as of September 30, 2016 and 2015, respectively. As a result, an extended delay or default in payment relating to a significant
account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. Our inability
to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition,
liquidity and results of operations.
Risks Related to Doing Business in China
Adverse changes in political and economic
policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce
the demand for our services and materially and adversely affect our competitive position.
Substantially all of our
business operations are conducted in China. Accordingly, our business, results of operations, financial condition and prospects
are subject to a significant degree to economic, political and legal developments in China. Although the Chinese economy is no
longer a planned economy, the PRC government continues to exercise significant control over China’s economic growth through
direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage
or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and
regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant
growth in the past 30 years. The reorganization of the telecommunications industry encouraged by the PRC government has directly
affected our industry and our growth prospect. In response to the recent global and Chinese economic downturn, the PRC government
has adopted policy measures aimed at stimulating the economic growth in China. If the PRC government’s current or future
policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits
the growth of the telecommunications industry in China or our industry or otherwise negatively affects our business, our growth
rate or strategy, our results of operations could be adversely affected as a result.
Our business benefits from certain government
tax incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and reduce
our net income.
Under
the PRC Enterprise Income Tax Law passed in 2007 and the implementing rules, both of which became effective on January 1, 2008,
or the New EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standard is applied equally to both domestic-invested
enterprises and foreign-invested enterprises, or FIEs. Enterprises established prior to March 16, 2007 eligible for preferential
tax treatment in accordance with the then tax laws and administrative regulations shall gradually become subject to the New EIT
Law rate over a five-year transition period starting from the date of effectiveness of the New EIT Law. However, certain qualifying
high-technology enterprises may still benefit from a preferential tax rate of 15% if they own their core intellectual properties
and they are enterprises in certain State-supported high-tech industries to be later specified by the government. As a result,
if our PRC subsidiaries qualify as “high-technology enterprises,” they will continue to benefit from the preferential
tax rate of 15%, subject to transitional rules implemented from January 1, 2008. Kingtone Information is qualified as a “high-technology
enterprise” until 2017 and therefore it had benefited from the preferential tax rate of 15%, subject to transitional rules
implemented on January 1, 2008. Currently, the value-added taxes we pay on our software products are refunded to us by the tax
authorities as part of the PRC state policies to encourage the development of the PRC software industry. If Kingtone Information
ceases to qualify as a “high-technology enterprise”, or if the refund of the value-added taxes ceases to apply, or
the tax authorities change their position on our preferential tax treatments in the future, our future tax liabilities may materially
increase, which could materially and adversely affect our financial condition and results of operations .
If we and/or Topsky were deemed a “resident
enterprise” by PRC tax authorities, we and/or Topsky could be subject to tax on our global income at the rate of 25% under
the New EIT Law and our non-PRC shareholders could be subject to certain PRC taxes.
Under the New EIT Law
and the implementing rules, both of which became effective January 1, 2008, an enterprise established outside of the PRC with “de
facto management bodies” within the PRC may be considered a PRC “resident enterprise” and will be subject to
the enterprise income tax at the rate of 25% on its global income as well as PRC enterprise income tax reporting obligations. The
implementing rules of the New EIT Law define “de facto management” as “substantial and overall management and
control over the production and operations, personnel, accounting, and properties” of the enterprise. However, as of the
date of this annual report, no final interpretations on the implementation of the “resident enterprise” designation
are available. Moreover, any such designation, when made by PRC tax authorities, will be determined based on the facts and circumstances
of individual cases. Therefore, if we and/or Topsky were to be considered a “resident enterprise” by the PRC tax authorities,
our and/or Topsky’s global income would be taxable under the New EIT Law at the rate of 25% and, to the extent we and/or
Topsky were to generate a substantial amount of income outside of PRC in the future, we and/or Topsky would be subject to additional
taxes. In addition, the dividends we pay to our non-PRC enterprise shareholders and gains derived by such shareholders or ADS holders
from the transfer of our shares or ADSs may also be subject to PRC withholding tax at the rate up to 10%, if such income were regarded
as China-sourced income.
Our holding company structure may limit
the payment of dividends.
We have no direct business
operations, other than our ownership of our subsidiaries and our contractual control of Kingtone Information. While we have no
current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends
and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings
and investments. Current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits,
if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China
is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve
reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries
in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends
or make other payments to us. As a result, there may be limitations on the ability of our PRC subsidiaries to pay dividends or
make other investments or acquisitions that could be beneficial to our business, or otherwise fund and conduct our business.
In addition, under the
New EIT Law and the implementing rules that became effective on January 1, 2008, dividends generated from the business of our PRC
subsidiaries after January 1, 2008 and payable to us and/or Topsky may be subject to a withholding tax rate of 10% if the PRC tax
authorities subsequently determine that we and/or Topsky is a non-resident enterprise, unless there is a tax treaty with China
that provides for a different withholding arrangement. Topsky, the direct holder of 100% of the equity interests of Softech, is
organized in Singapore. Under the Notice of the State Administration of Taxation on Delivering the Table of Negotiated Dividends
and Interest Rates to Lower Levels of People’s Republic of China, such dividend withholding tax rate is reduced to 5% if
a Singapore resident enterprise owns over 25% of the PRC Company distributing the dividends. As Topsky is a Singapore company and
owns 100% of Softech, under the aforesaid notice, any dividends that Softech pays to Topsky will be subject to a withholding tax
at the rate of 5%, provided that Topsky is not considered to be PRC tax resident enterprises. If, however, Topsky is regarded as
a resident enterprise, the dividends payable to Topsky from Softech may be exempt from the PRC income tax, and the dividends payable
from Topsky to us will be subject to a 10% PRC withholding tax (unless we are considered to be a PRC tax resident enterprise).
Any such taxes could thus materially reduce the amount of funds available to us to meet our cash requirements, including the payment
of dividends to our shareholders.
Uncertainties with respect to the PRC
legal system could adversely affect us.
We conduct all of our business
through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable
to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference
but have limited precedential value.
Since 1979, PRC legislation
and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all
aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the
limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations
involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which
are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation
of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result
in substantial costs and diversion of resources and management attention.
PRC regulation of loans and direct investment
by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our May 2010 public offering to
make loans or additional capital contributions to our PRC operating subsidiaries, which could materially and adversely affect our
liquidity and our ability to fund and expand our business.
In utilizing the proceeds
of our May 2010 public offering as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC
subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject
to PRC regulations. For example, loans by us to our subsidiaries in China, which are FIEs, to finance their activities cannot exceed
statutory limits and must be registered with the State Administration of Foreign Exchange, or SAFE. On August 29, 2008, SAFE promulgated
Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how
the converted RMB may be used. The notice requires that RMB converted from the foreign currency-denominated capital of a foreign-invested
company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be
used for equity investments within the PRC unless specifically provided for otherwise. The foreign currency-denominated capital
shall be verified by an accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow
and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital
into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used to the reported purposes.
According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used
to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties,
including substantial fines as set forth in the Foreign Exchange Administration Rules.
We may also decide to finance
our subsidiaries by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce,
or MOFCOM, or its local counterpart. We may not be able to obtain these government approvals on a timely basis, if at all, with
respect to future capital contributions by us to our PRC subsidiaries. If we fail to receive such approvals, our ability to use
the proceeds of our May 2010 public offering and to capitalize our PRC operations may be negatively affected, which could adversely
affect our liquidity and our ability to fund and expand our business.
Governmental control of currency conversion
may affect the value of your investment.
The PRC government imposes
controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China.
We receive substantially all of our revenues in RMB. Under our current corporate structure, our income is primarily derived from
dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our
PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without
prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities
is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment
of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign
currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including
holders of our ADSs or ordinary shares.
Fluctuation in the value of the RMB may
have a material adverse effect on the value of your investment.
The value of the RMB against
the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the
new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.
This change in policy has resulted in an approximate 26.8% appreciation of the RMB against the U.S. dollar between July 21, 2005
and September 30, 2015. Provisions on Administration of Foreign Exchange, as amended in August 2008, further changed China’s
exchange regime to a managed floating exchange rate regime based on market supply and demand. Since reaching a high against the
U.S. dollar in July 2008, however, the RMB has traded within a narrow band against the U.S. dollar, remaining within 1% of its
July 2008 high but never exceeding it. As a consequence, the RMB has fluctuated sharply since July 2008 against other freely-traded
currencies, in tandem with the U.S. dollar. In August 2015, the PRC Government devalued its currency by approximately 3%, represented
the largest yuan depreciation for 20 years. Concerns remain that China’s slowing economy, and in particular its exports,
will need a stimulus that can only come from further cuts in the exchange rate.
It is difficult to predict
how long the current situation may continue and when and how it may change again as the People’s Bank of China may regularly
intervene in the foreign exchange market to achieve economic policy goals. Substantially all of our revenues and costs are denominated
in the RMB, and a significant portion of our financial assets are also denominated in RMB. We principally rely on dividends and
other distributions paid to us by our subsidiaries in China. Any significant revaluation of the RMB may materially and adversely
affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs or ordinary
shares in U.S. dollars. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign
currency translation losses for financial reporting purposes.
We control Kingtone Information through
contractual arrangements which may not be as effective in providing control over Kingtone Information as direct ownership, and
if Kingtone Information or its shareholders breach the contractual arrangements, we would have to rely on legal remedies under
PRC law, which may not be available or effective, to enforce or protect our rights.
We conduct substantially
all of our operations, and generate substantially all of our revenues, through contractual arrangements with Kingtone Information,
our variable interest entity, or VIE, that provide us, through our ownership of Topsky and its ownership of Softech, with effective
control over Kingtone Information. We have no direct ownership interest in Kingtone Information. We depend on Kingtone Information
to hold and maintain contracts with our customers. Kingtone Information also owns substantially all of our intellectual property,
facilities and other assets relating to the operation of our business, and employs the personnel for substantially all of our business.
Neither our company nor Softech has any ownership interest in Kingtone Information. Although we believe that that each contract
under Softech’s contractual arrangements with Kingtone Information is valid, binding and enforceable under current PRC laws
and regulations in effect, these contractual arrangements may not be as effective in providing us with control over Kingtone Information
as direct ownership of Kingtone Information would be. In addition, Kingtone Information may breach the contractual arrangements.
For example, Kingtone Information may decide not to make contractual payments to Softech, and consequently to our company, in accordance
with the existing contractual arrangements. In the event of any such breach, we would have to rely on legal remedies under PRC
law. These remedies may not always be available or effective, particularly in light of uncertainties in the PRC legal system.
Softech’s contractual arrangements
with Kingtone Information may result in adverse tax consequences to us.
We could face material
and adverse tax consequences if the PRC tax authorities determine that Softech’s contractual arrangements with Kingtone Information
were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes in the form of a transfer
pricing adjustment. A transfer pricing adjustment could result in a reduction, for PRC tax purposes, of adjustments recorded by
Kingtone Information, which could adversely affect us by increasing Kingtone Information’s tax liability without reducing
Softech’s tax liability, which could further result in late payment fees and other penalties to Kingtone Information for
underpaid taxes.
PRC laws and regulations governing our
businesses and the validity of certain of our contractual arrangements are uncertain. If we are found to be in violation of such
PRC laws and regulations, we could be subject to sanctions. In addition, changes in such PRC laws and regulations may materially
and adversely affect our business.
There are substantial uncertainties
regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of Softech’s contractual arrangements with Kingtone Information.
Softech is considered a foreign invested enterprise under PRC law. As a result, Softech is subject to PRC law limitations on its
businesses and foreign ownership of Chinese companies. These laws and regulations are relatively new and may be subject to change,
and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that
affect existing and proposed future businesses may also be applied retroactively. In January 2015, China’s Ministry of Commerce
unveiled a draft legislation that could change how the government is regulating corporate structures, especially for VIEs controlled
by foreign investments. Instead of looking at “ownership”, the draft law focused on the entities or individuals hold
control of a VIE. If a VIE is deemed to be controlled by foreign investors, it may be barred from operating in restricted sectors
or the prohibited sectors listed on a “negative list”, where only companies controlled by Chinese nationals could operate,
even if structured as VIEs.
In the event that the draft
law is implemented in any form, and that the Company’s business is characterized as one of the “restricted” or
“prohibited” sectors, Kingtone Information may be barred from operation which will materially adversely affect our
business.
The PRC government has
broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses
and requiring actions necessary for compliance. In particular, licenses and permits issued or granted to us by relevant governmental
bodies may be revoked at a later time by higher regulatory bodies. We cannot predict the effect of the interpretation of existing
or new PRC laws or regulations on our businesses. We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future PRC laws or regulations. As a result, we may be subject to sanctions, including
fines, and could be required to restructure our operations or cease to provide certain services. In addition, any litigation in
China may be protracted and result in substantial costs and diversion of resources and management attention. Any of these or similar
actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business
operations, which could materially and adversely affect our business, financial condition and results of operations.
If we were required to obtain the prior
approval of the China Securities Regulatory Commission, or CSRC, of the listing and trading of our ADSs on the NASDAQ Capital Market,
we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies.
On August 8, 2006, six
PRC regulatory agencies, including the Ministry of Commerce, the State Assets Supervision and Administration Commission, the State
Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations
on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006 (the “New
M&A Rules”). This regulation, among other things, includes provisions that purport to require that an offshore special
purpose vehicle formed for the purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly
by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s
securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding
its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of a number of documents
with the CSRC and it would take several months to complete the approval process, if practicable at all. The application of this
new PRC regulation remains unclear with no consensus currently existing among leading PRC law firms regarding the scope of the
applicability of the CSRC approval requirement.
Prior to our May 2010 initial
public offering, our PRC counsel has advised us that, based on its understanding of the current PRC laws and regulations as well
as the procedures announced on September 21, 2006: (i) Softech was directly incorporated by Topsky as a foreign investment enterprise
under PRC law; therefore, there was no acquisition of the equity of a “PRC domestic company” as defined under the New
M&A Rules; and (ii) the contractual arrangements between Kingtone Information and Softech are not clearly defined and considered
as the transaction which shall be applied to the New M&A Rules. Therefore, we did not seek prior CSRC approval for our initial
public offering.
However, if the CSRC required
that we obtain its approval prior to the completion of our initial public offering and the listing of our ADSs on the NASDAQ Capital
Market, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies
may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation
of the proceeds from our initial public offering into the PRC, or take other actions that could have a material adverse effect
on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.
Also, if the CSRC requires
that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements if and when procedures are established
to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material
adverse effect on the trading price of our shares.
PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to penalties and limit our ability
to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise adversely
affect us.
On October 21, 2005, the
SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities
of Domestic Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1,
2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control
an offshore company for the purposes of financing such offshore company with assets or equity interests in an onshore enterprise
located in the PRC, or an offshore special purpose company. An amendment to registration or filing with the local SAFE branch by
such PRC resident is also required for the injection of equity interests or assets of an onshore enterprise in the offshore special
purpose company or overseas funds raised by such offshore company, or any other material change involving a change in the capital
of the offshore special purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established
or acquired control of offshore special purpose companies that have made onshore investments in the PRC in the past are required
to have completed the relevant registration procedures with the local SAFE branch by March 31, 2006. To further clarify the implementation
of Notice 75, the SAFE issued Circular 106 on May 29, 2007. Under Circular 106, PRC subsidiaries of an offshore special purpose
company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders
or beneficial owners who are PRC residents in a timely manner.
Some of our current shareholders
and/or beneficial owners may fall within the ambit of the SAFE notice and be required to register with the local SAFE branch as
required under the SAFE notice. If so required, and if such shareholders and/or beneficial owners fail to timely register their
SAFE registrations pursuant to the SAFE notice, or if future shareholders and/or beneficial owners of our company who are PRC
residents fail to comply with the registration procedures set forth in the SAFE notice, this may subject such shareholders, beneficial
owners and/or our PRC subsidiaries to fines and legal sanctions and may also limit our ability to contribute additional capital
into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company, or otherwise adversely
affect our business.
Our auditor, like other independent registered
public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight
Board, and as such, investors may be deprived of the benefits of such inspection.
The independent registered
public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies
that has the securities traded publicly in the United States and a firm registered with the Public Company Accounting Oversight
Board (United States), or PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to assess
its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction
where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like other independent
registered public accounting firms operating in China, is currently not inspected by PCAOB. Inspections of other firms that PCAOB
has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which may be addressed as part of the inspection process to improve future audit quality. The inability of PCAOB to conduct inspections
of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our
auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB
inspections.
On May 24, 2013, the PCAOB
announced that it has entered into a Memorandum of Understanding (“MOU”) on Enforcement Cooperation with the China
Securities Regulatory Commission (the “CSRC”) and the Ministry of Finance (the “MOF”). The MOU establishes
a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in both
countries’ respective jurisdictions. More specifically, it provides a mechanism for the parties to request and receive
from each other assistance in obtaining documents and information in furtherance of their investigative duties. In addition
to developing enforcement MOU, the PCAOB has been engaged in continuing discussions with the CSRC and MOF to permit joint inspections
in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges. Despite of
the foregoing, until PCAOB can inspect its registered firms in China as it can do on the firms in the United States, the shareholders
are still less advantageous in obtaining the benefits of PCAOB inspections comparing to the shareholders of a company that retains
a PCAOB registered audit firm domiciled in the United States.
Risks Associated with our ADSs
The market price of our ADSs may be highly
volatile, and you may not be able to resell at or above your initial purchase price.
There is a limited public
market for our shares and ADSs. We cannot assure you that there will be an active trading market for our ADSs. You may not be able
to sell your ADSs quickly or at the market price if trading in our ADSs is not active.
The trading price of our
ADSs may be volatile. The price of our ADSs could be subject to wide fluctuations in response to a variety of factors, including
the following:
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1.
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Introduction of new products, services or technologies offered by us or our competitors;
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2.
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Failure to meet or exceed revenue and financial projections we provide to the public;
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3.
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Actual or anticipated variations in quarterly operating results;
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4.
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Failure to meet or exceed the estimates and projections of the investment community;
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5.
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General market conditions and overall fluctuations in United States equity markets;
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6.
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Announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;
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7.
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Disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
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8.
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Additions or departures of key management personnel;
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9.
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Issuances of debt or equity securities;
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10.
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Significant lawsuits, including patent or shareholder litigation;
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11.
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Changes in the market valuations of similar companies;
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12.
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Sales of additional ADSs by us or our shareholders in the future;
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13.
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Trading volume of our ADSs;
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14.
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Fluctuations in the exchange rate between the U.S. dollar and Renminbi;
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15.
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Negative market perception and media coverage of our company or other companies in the same or similar industry with us; and
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16.
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Other events or factors, many of which are beyond our control.
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In addition, the stock
market in general, and the NASDAQ Capital Market and software products and services companies in particular, have experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies.
Broad market and industry factors may negatively affect the market price of our ADS, regardless of our actual operating performance.
Our ADSs are subject to the SEC’s
penny stock rules which may make it difficult for broker-dealers to complete customer transactions and trading activity in our
securities.
Our ADSs are deemed to
be “penny stock” as that term is defined under the Securities Exchange Act of 1934, as amended. Penny stocks
generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such
securities is provided by the exchange or system). Penny stock rules impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited
investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess
of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse in each of the prior two years.
The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the
penny stock market. Moreover, broker-dealers are required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor. A broker-dealer must receive a written agreement to the transaction from the investor setting
forth the identity and quantity of the penny stock to be purchased. These requirements may make it more difficult for
broker-dealers to effectuate customer transactions and trading activity in our securities. As a result, the market price of our
ADSs may be depressed, and you may find it more difficult to sell our ADSs.
Sales of a substantial number of ordinary
shares or ADSs in the public market by our existing shareholders could cause the price of our ADSs to fall.
Sales of a substantial
number of our ordinary shares or ADSs in the public market or the perception that these sales might occur, could depress the market
price of our ADSs and could impair our ability to raise capital through the sale of additional equity securities. We are unable
to predict the effect that sales may have on the prevailing market price of our ADSs.
All of our existing shareholders
prior to our May 2010 offering were subject to lock-up agreements with the underwriters of the offering that restricted the shareholders’
ability to transfer ordinary shares or ADSs until expiration of the lock-up period in November 2010. The lock-up agreements limited
the number of ordinary shares or ADSs that may be sold immediately following the public offering. Subject to certain limitations,
approximately 1,000,000 of our total outstanding shares are now eligible for sale. Sales of ordinary shares by these shareholders
could have a material adverse effect on the trading price of our ADSs.
Future sales and issuances of our ordinary
shares or ADSs, or rights to purchase our ordinary shares or ADSs, including pursuant to our 2010 Omnibus Incentive Plan, could
result in additional dilution of the percentage ownership of our shareholders and could cause the price of our ADSs to fall.
We expect that significant
additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by
issuing equity securities, our shareholders may experience substantial dilution. We may sell ordinary shares, ADSs, convertible
securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If
we sell ordinary shares, ADSs, convertible securities or other equity securities in more than one transaction, investors may be
materially diluted by subsequent sales. Such sales may also result in material dilution to our existing shareholders, and new investors
could gain rights superior to our existing shareholders.
We do not intend to pay dividends on
our ordinary shares, so any returns will be limited to the value of our ADSs.
We have never declared
or paid any cash dividend on our ordinary shares. We currently anticipate that we will retain future earnings for the development,
operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future.
Any return shareholders will therefore be limited to the value of their ADSs.
As the rights of shareholders under British
Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.
Our corporate affairs will
be governed by our memorandum of association and articles of association, the BVI Business Companies Act, 2004, or the BVI Act,
of the British Virgin Islands and the common law of the British Virgin Islands. The rights of shareholders to take legal action
against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin
Islands law are to a large extent governed by the BVI Act and the common law of the British Virgin Islands. The common law of the
British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as
from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights
of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established
as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin
Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have
more fully developed and judicially interpreted bodies of corporate law.
As a result of all of the
above, holders of our ADSs may have more difficulty in protecting their interests through actions against our management, directors
or major shareholders than they would as shareholders of a U.S. company.
British Virgin Islands companies may
not be able to initiate shareholder derivative actions, thereby depriving shareholders of the ability to protect their interests.
British Virgin Islands
companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances
in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may
result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company
organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate
wrongdoing has occurred. The British Virgin Islands courts are also unlikely to recognize or enforce against us judgments of courts
in the United States based on certain liability provisions of U.S. securities law; and to impose liabilities against us, in original
actions brought in the British Virgin Islands, based on certain liability provisions of U.S. securities laws that are penal in
nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the
courts of the British Virgin Islands will generally recognize and enforce the non-penal judgment of a foreign court of competent
jurisdiction without retrial on the merits.
The laws of the British Virgin Islands
provide little protection for minority shareholders, so minority shareholders will have little or no recourse if the shareholders
are dissatisfied with the conduct of our affairs.
Under the law of the British
Virgin Islands, there is little statutory law for the protection of minority shareholders other than the provisions of the BVI
Act dealing with shareholder remedies. The principal protection under statutory law is that shareholders may bring an action to
enforce the constituent documents of the corporation, our memorandum of association and articles of association. Shareholders are
entitled to have the affairs of the company conducted in accordance with the general law and the memorandum of association and
articles of association.
There are common law rights
for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British
Virgin Islands is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court
will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express
dissatisfaction with the conduct of the company’s affairs by the majority or the board of directors. However, every shareholder
is entitled to have the affairs of the company conducted properly according to law and the company’s constituent documents.
As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the
company’s memorandum of association and articles of association, then the courts will grant relief. Generally, the areas
in which the courts will intervene are the following: (1) an act complained of which is outside the scope of the authorized business
or is illegal or not capable of ratification by the majority; (2) acts that constitute fraud on the minority where the wrongdoers
control the company; (3) acts that infringe on the personal rights of the shareholders, such as the right to vote; and (4) where
the company has not complied with provisions requiring approval of a majority of shareholders, which are more limited than the
rights afforded minority shareholders under the laws of many states in the United States.
Anti-takeover provisions in our memorandum
of association and articles of association and our right to issue preference shares could make a third-party acquisition of us
difficult.
Some provisions of our
memorandum of association and articles of association may discourage, delay or prevent a change in control of our company or management
that shareholders may consider favorable, including provisions that authorize our board of directors to issue preference shares
in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares.
You may not have the same voting rights
as the holders of our ordinary shares and must act through the depositary to exercise your rights.
Holders of our ADSs will
not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs
will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented
by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons
who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.
Upon our written request, the depositary will mail to you a shareholder meeting notice which contains, among other things, a statement
as to the manner in which your voting instructions may be given, including an express indication that such instructions may be
given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received
by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be
deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary that
(i) we do not wish such proxy given, (ii) substantial opposition exists, or (iii) such matter materially and adversely affects
the rights of shareholders. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely
manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs.
Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the
manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to
vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you
will not be able to call a shareholders’ meeting.
You may not be able to participate in
rights offerings and may experience dilution of your holdings as a result.
We may from time to time
distribute rights to our shareholders, including rights to acquire our securities. However, we may not, and under the deposit agreement
for the ADSs, the depositary will not, offer those rights to ADS holders unless both the rights and the underlying securities to
be distributed to ADS holders are registered under the Securities Act, or the distribution of them to ADS holders is exempted from
registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement
with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective.
In addition, we may not be able to rely on an exemption from registration under the Securities Act to distribute such rights and
securities. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in
their holdings as a result.
You may be subject to limitations on
transfer of your ADSs.
Your ADSs are transferable
on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems
expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register
transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem
it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the
deposit agreement, or for any other reason.
We may be a passive foreign investment
company, of PFIC, which could lead to additional taxes for U.S. holders of our ADSs or ordinary shares.
We do not expect to be,
for U.S. federal income tax purposes, a passive foreign investment company, or a PFIC, which is a foreign company for which, in
any given taxable year, either at least 75% of its gross income is passive income, or investment income in general, or at least
50% of its assets produce or are held to produce passive income, for the current taxable year, and we expect to operate in such
a manner so as not to become a PFIC for any future taxable year. However, because the determination of PFIC status for any taxable
year cannot be made until after the close of such year and requires extensive factual investigation, including ascertaining the
fair market value of our assets on a quarterly basis and determining whether each item of gross income that we earn is passive
income, we cannot assure you that we will not become a PFIC for the current taxable year or any future taxable year. If we are
or become a PFIC, a U.S. holder of our ADSs or ordinary shares could be subject to additional U.S. federal income taxes on gain
recognized with respect to the ADSs or ordinary shares and on certain distributions, plus an interest charge on certain taxes treated
as having been deferred under the PFIC rules. Non-corporate U.S. holders will not be eligible for reduced rates of taxation on
any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable
year.
If the trading price of our ADSs fails
to comply with the continued listing requirements of the NASDAQ Capital Market, we would face possible delisting, which would result
in a limited public market for our ADS and make obtaining future debt or equity financing more difficult for us.
Companies listed on NASDAQ
are subject to delisting for, among other things, failure to maintain a minimum closing bid price of $1.00 per share for 30 consecutive
business days. On December 19, 2011, we received a letter from NASDAQ indicating that for the last 30 consecutive business days,
the closing bid price of our ADSs fell below the minimum $1.00 per share requirement pursuant to NASDAQ Listing Rule 5550(a)(2)
for continued listing on the NASDAQ Capital Market. We have regained compliance with the minimum bid price requirement for continued
listing set forth in NASDAQ Listing Rule 5550(a)(2), as its ADS with its underlying ordinary share has achieved a closing bid price
of $1.00 or greater for the 10 consecutive business days from November 6 to November 23, 2012 by implementing a 1-for-10 combination,
or reverse split of the ordinary shares effective November 6, 2012,we cannot be sure that the price of our ADSs will comply with
this requirement for continued listing on the NASDAQ Capital Market in the future. If we were not able to do so, our ADSs would
be subject to delisting and would likely trade on the over-the-counter market. If our ADSs were to trade on the over-the-counter
market, selling our ADSs could be more difficult because smaller quantities of shares would likely be bought and sold, transactions
could be delayed, and security analysts’ coverage of us may be reduced. In addition, broker-dealers have certain regulatory
burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our ADSs, further limiting the liquidity
of our ADS. As a result, the market price of our ADSs may be depressed, and you may find it more difficult to sell our ADSs. Such
delisting from the NASDAQ Capital Market and continued or further declines in our share price could also greatly impair our ability
to raise additional necessary capital through equity or debt financing.
ITEM 4. INFORMATION ON THE
COMPANY.
A
.
HISTORY AND DEVELOPMENT
OF THE COMPANY.
Overview
We are a holding company and conduct our operations
through a contractually-controlled entity in the PRC named Xi’an Kingtone Information Technology Co., Ltd., a PRC limited
liability company (“Kingtone Information”) that develops and provides mobile enterprise solutions in the PRC. In May
2010, we consummated an initial public offering of our American Depository Shares, or ADSs, for gross proceeds of $16 million,
and our ADSs were listed on the NASDAQ Capital Market under the ticker symbol “KONE”.
Kingtone Information was incorporated in Xi’an,
Shaanxi Province, as a company limited by stocks on December 28, 2001. When it was incorporated, it had a registered capital of
RMB50 million and its name was Xi’an TechTeam Intelligent Technology Stock Co., Ltd. Kingtone Information increased its registered
capital to RMB56,000,000 on June 16, 2008 and changed its name to the current name on November 5, 2003. Kingtone Information is
majority-owned by Mr. Tao Li, our chairman.
In December 2009, we consummated a number of
related transactions through which we acquired control of Kingtone Information. Xi’an Softech Co., Ltd. (“Softech”),
a company incorporated on November 27, 2009 under the laws of the PRC as a wholly foreign-owned enterprise (“WFOE”),
entered into a series of agreements (the “Control Agreements”) with Kingtone Information and the shareholders of Kingtone
Information pursuant to which Softech was granted full managerial and economic control over Kingtone Information, effectively rendering
Kingtone Information a contractual subsidiary of Softech. We entered into this contractual-control relationship in order to comply
with certain PRC regulations relating to the nature and sensitivity of certain aspects of Kingtone Information’s business;
namely, its work on PRC government projects. See “Item 4. – Information on the Company – C. Organizational
Structure – Contractual Arrangements with Kingtone Information and Its Respective Shareholders” for further information
on these contractual arrangements.
Softech is a wholly-owned subsidiary of Topsky
Info-tech Holdings Pte Ltd. (“Topsky”), a company incorporated under the laws of Singapore on November 3, 2009. Topsky,
in turn, is our wholly-owned subsidiary. We were incorporated under the name Reizii Capital Management Ltd. in the British Virgin
Islands on October 27, 2009 and changed our name to KingtoneWirelessinfo Solution Holding Ltd (“Kingtone Wireless”)
on December 17, 2009.
In exchange for causing Kingtone Information
to enter into the Control Agreements, the shareholders of Kingtone Information received beneficial ownership of ordinary shares
of Kingtone Wireless, through certain nominee entities, in the same relative ownership percentage as they held in Kingtone Information
prior to our May 2010 public offering.
Corporate Information
Our principal executive offices are located
at 3/F, Borough A, Block A, No. 181 South Taibai Road in Xi’an, Shaanxi Province, People’s Republic of China 710065.
Our website is
www.kingtoneinfo.com
. We routinely post important information on our website. The information
contained on our website is not a part of this annual report.
Our agent for service of process in the United
States is Vcorp Services LLC with an address at 20 Robert Pitt Drive, Suite 214, Monsey, NY10952.
B. BUSINESS OVERVIEW.
We are a China-based developer and provider
of mobile enterprise solutions. Mobile enterprise solutions allow company personnel whose work function requires mobility (as opposed
to operating from a single work station) to be connected with enterprise information technology, or IT systems, including Enterprise
Asset Management (EAM), Enterprise Resource Planning (ERP), Supply Chain Management (SCM), and Customer Relationship Management
(CRM). Our software enables such systems to get extended to personnel in the field using wireless devices such as smart phones,
PDAs (or Personal Digital Assistant), cameras, barcode scanners, portable printers, GPS devices, and tablet computers. Mobile enterprise
solutions also contain custom software applications for specific industries and businesses.
Our mobile enterprise solutions are built
on our proprietary core middleware platform consisting of standardized modules. This core middleware platform allows our solutions
to seamlessly integrate with our customers’ existing information management systems. The core middleware platform can host
an array of standardized and scalable applications developed by us or by others. This structured design allows us to timely and
cost-effectively meet our customers’ specific requirements, and to respond to their changing needs.
Mobile enterprise solutions are generally aimed
at reducing processing times and facilitating the flow of information among people and systems. Mobile computing allows field workers
to communicate and interact more efficiently with their central operations, and vice versa. Enterprises are able to capture more
accurate and timely information, and to achieve major reductions in paperwork and administration. Mobile enterprise solutions can
be used to put important data in the hands of field workers, thus improving decision-making and productivity in the field. They
improve efficiency in everyday functions including work dispatch, sales, inspections, repairs, deliveries, tracking and scheduling.
They can also be used within factory settings, where wireless data connections are used to improve central control and monitoring
of production and automations systems. For example, we designed and implemented a solution for a PRC-based petroleum company that
allows plant managers to wirelessly monitor its production lines from off-site or remote locations.
According to latest data from China's three
mobile operators as quoted by Ministry of Industry and Information Technology on April 19 , 2015, China, the world’s largest
mobile phone market by subscribers, posted a 0.3 percent monthly increase in the number of mobile subscribers to 1.29 billion from
1.24 billion at February 20, 2014. The number of subscribers reached 1.24 billion in February 2014, up from 1.15 billion at ended
of March 2013; it reached 1.15 billon at the end of March 2013, up from 1.11 billion at end-December 2012. The Chinese mobile market
recorded the highest annual net additions with 135 million in 2012, up from 134 million in 2011, bringing the total to 1.11 billion.
By end of 2017, it is envisaged 1.57 billion mobile subscribers in the country, representing a 114.0% penetration rate, with the
growth rate averaging 7.2% between 2013 and 2017. It also forecasted the number of 3G/4G subscribers to increase to 768.7 million
in 2017.
As the foundation of the mobile Internet, mobile
networks play a crucial role in the development of the entire market. Thus, China’s high bandwidth mobile application market
has been developing slowly, limited by the mobile bandwidth. However, with the formal commercial application of the 4G service,
the download rate of 100Mbps will be provided for users, effectively breaking the bandwidth limitation and laying a foundation
for the development of China’s high bandwidth mobile application market. Internet Data Centre (IDC) is optimistic about the
development prospect of high bandwidth mobile applications such as mobile videos, mobile music and mobile online games. According
to the planning of the Ministry of Industry and Information Technology of the People’s Republic of China (“MIIT”),
the executive bodies of "Broadband China" are the three major telecom operators, with China Telecom and China Unicom
undertaking most of the tasks. With the formal commercial application of the 4G service, China Telecom and China Unicom have adjusted
their core services and taken the 4G service as new key focus of investment and development. This will affect the investment and
operation of the broadband service and have certain effects on the entire development process of “Broadband China”.
To cooperate with our telecom partners, we are offering solutions to enable wider forms of mobile computing that take advantage
of the 4G bandwidth. We also plan to devote resources to 4G products in anticipation of future government approval and commercial
deployment.
We typically act as a total solution provider,
packaging our software with various third-party hardware and related equipment. We are headquartered in Xi’an, China and
sell our products widely throughout China.
Our Industry — Mobile Enterprise
Software Industry
We operate in the mobile enterprise software
industry in China. We believe the mobile enterprise market in China benefits from compelling industry fundamentals such as increasing
investment in IT, the country’s 4G rollout, and increasing demand for wireless applications within working environments.
However, as the macro economy is slowing down, the government will be more conservative on the investment on the mobile enterprise
software, especially mobile enterprise software for some vertical industries such as police and emergency.
“Internet of Things” (“IOT”)
Development in China
There has been a boom
in research and development of China's IOT industry since the second half of 2009 when the government decided to promote the promising
industry as well as other progressive industries including new energy, new materials and information networks.
China's State Council,
the cabinet, issued guiding opinions for the orderly and healthy development of IOT, targeting breakthroughs in core technologies,
shaping an IOT industry system Under the guiding opinions, China will form a group of leading companies as well as small and medium-sized
firms with creativity and innovation, and establish a complete IOT industrial chain. China promises to offer stronger financial
and tax-related support to the IOT industry.
The Chinese government
has been gradually increasing its financial support for the development of the IOT. In April 2011, the Ministry of Finance and
the MIIT promulgated the Interim Measures for the Management of Special Funds for the Development of the Internet of Things. The
government has earmarked over RMB 5 billion ($750 million) for IOT investment by 2015. China’s IOT market hit 500 billion
($80 billion USD) by 2015, and MIIT estimates it will double to RMB 1 trillion ($166 billion USD) by 2020.
Information Technology Development in
China
The IDC study presents
forecasts and analysis for the China IT services market for the period 2012-2016."China's focus on economic development could
promote strong development in tertiary industries, especially the services industry. Technology development is an important focus
in the economy. China's economic transformation leads to a strong need for IT services. According to an IDC report, China's IT
services market is projected to grow 8.1% in US dollar terms to $28.54 billion in 2016, while this will be a decrease comparing
to the 9.4% growth expected for 2015, China is still one of the fastest growing IT services markets in the world.
This supports our
belief that market acceptance of enterprise mobility applications, solutions and systems usually accelerates when potential customers’
back-end information technology systems are fairly developed and they start to invest in applications. By identifying sectors with
high growth rates of IT investment, we can exploit opportunities to expand our business by capturing the growth in targeted vertical
industry markets.
Mobile Enterprise Solutions in China
We believe that China's
enterprise mobility market is experiencing rapid development, driven primarily by the development of the mobile industry.
The growth of mobile
enterprise solutions is driven by the demand for increased business efficiencies and new functionalities. In many modern businesses,
operations are distributed over a large area, with individual operating elements. Mobile enterprise solutions allow organizations
to enable mission-specific field and long-distance information management on a real-time basis. Mobile enterprise solutions consist
of packaged, mission-specific and industry-specific applications and software designed especially for enterprise using wireless
connectivity.
Enterprise wireless
applications can be tailored to meet the specific needs of many industry sectors, such as manufacturing, energy, transportation,
logistics, utilities, healthcare, and government agencies (such as police and emergency services). These custom software solutions
include production control automation, sales force automation, field force automation, customer relationship management, enterprise
resource planning, supply chain management, operations management, inventory management, time and expense, logistics, and other
collaborative items.
Wireless enablement
for an enterprise and its many activities is a prominent trend according to the IDC report. With the growth of the domestic economy,
improvements in bandwidth, and increased mobility in working environments, enterprises and government agencies are increasing spending
on the construction of mobile platforms and applications to extend their functionality outside of stationary locations. Mobile
enterprise solutions including mobile middleware software, mobile security software, mobile device management software, and mobile
enterprise applications have fueled the growth of both business data and video/voice usage, which are also major driving factors
in communication spending.
Our Strengths
We believe the following
strengths differentiate us from our competitors:
Proprietary suite of mobile enterprise
solutions offerings
We are among the first
of Chinese companies to focus predominantly on developing mobile enterprise solutions. Since we began our operations in 2001, we
have completed many successful client installations (approximately 172) and have accumulated special knowledge and expertise that
has directly resulted in the creation and development of our proprietary adaptable middleware platform, and an array of software
applications. A client installation is considered “successful” when we have developed the solutions/systems according
to the customer’s contractual specifications and have otherwise fulfilled all other material terms set forth in the sales
contract, including installing, configuring and making the solutions/systems operational within the specified time periods. Additionally,
to be considered “successful”, a customer must have test run the solutions/systems and indicated its satisfaction by
signing the acceptance letter.
We believe our mobile
enterprise software is superior in breadth of application. Our middleware platform and software applications can be selectively
packaged to create tailored solutions that can be installed on both new systems and existing frameworks.
Strong development capability
We have taken advantage
of the significant talent pool within the universities and research institutes in Xi’an China, where our operations are located,
to establish a dedicated research and development team. As of September 30, 2016, we had 10 engineers dedicated to technology development
and customer implementations. Our development engineers have diverse technical backgrounds and are led by experienced development
practitioners. We have been able to track and incorporate the latest technologies into our software to continuously improve our
core middleware platform and applications, and to develop new functionalities.
Industry knowledge
We work closely with our customers to build
upon our understanding of our customers’ operational processes and requirements. Our sales teams coordinate closely with
our development teams to reflect those requirements in our solutions. As a result, our mobile enterprise solutions fit smoothly
into our customers’ operations. In addition, our presence in the mobile enterprise solution market since its inception provides
us with domain knowledge which we use to help position ourselves for future growth. We continually receive feedbacks from this
evolving market and are able to anticipate emerging sectors and future product requirements.
Good track record
Virtually all businesses and public service
operations have the potential to experience efficiencies and new functionalities with mobile enterprise solutions. We have successfully
completed projects for clients, such as the Central Government Security Bureau and Beijing Emergency Response Center, from many
verticals. These serve as high-profile case studies and enhance our reputation in the marketplace and, thus, provide a key endorsement
for the quality and stability of our product offerings. Moreover, by having our main corporate office in Xi’an, China, we
benefit from the continued surge in IT investment by the Western provinces.
Joint efforts with Chinese wireless telecom
carriers
We benefit from joint business development
efforts with China Telecom, China Mobile and China Unicom. These wireless telecom carriers have a strategic interest in the advancement
of the mobile enterprise in China. Our sales professionals work closely with those companies to access their large pools of corporate
customers. Together we make joint presentations to candidate customers, where the carrier will provide the wireless network and
we will provide the mobile enterprise solution. We have unwritten cooperative relationships with all three telecom carriers to
co-promote next-generation mobile solutions for various other applications in China. In addition we have a formal co-marketing
agreement with China Telecom to co-promote next-generation mobile solutions for law enforcement applications in Shaanxi province.
For the year ended September 30, 2016, we completed a total of twelve customer projects with the three telecom carriers. Typically
under these arrangements, we jointly market our products and services for customer applications as customers contract with the
telecom carrier with us providing our solutions to the customer and receiving our remuneration from the telecom carrier.
Our Strategy
Seize the opportunity presented by 4G
adoption in China
As the foundation of the mobile Internet, mobile
networks play a crucial role in the development of the entire market. China’s high bandwidth mobile application market has
been developing slowly, limited by the mobile bandwidth. However, with the formal commercial application of the 4G service, the
download rate of 100Mbps will be provided for users, effectively breaking the bandwidth limitation and laying a foundation for
the development of China’s high bandwidth mobile application market. IDC is optimistic about the development prospect of
high bandwidth mobile applications such as mobile videos, mobile music and mobile online games. According to the planning of MIIT,
the executive bodies of "Broadband China" are the three major telecom operators, with China Telecom and China Unicom
undertaking most of the tasks. With the formal commercial application of the 4G service, China Telecom and China Unicom have adjusted
their core services and taken the 4G service as new key focus of investment and development. This will affect the investment and
operation of the broadband service and have certain effects on the entire development process of “Broadband China”.
To cooperate with our telecom partners, we are offering solutions to enable wider forms of mobile computing that take advantage
of the 4G bandwidth. We also plan to devote resources to 4G products in anticipation of future government approval and commercial
deployment.
Recruit, train and retain engineering
professionals
We must train and retain our technical and
business development teams. Once employed, we provide our technical employees with a comprehensive training program to understand
our technologies, market and product offerings.
Pursue strategic acquisition opportunities
We will from time to time consider acquisitions
or alliances that enable us to acquire talented and experienced software development personnel, enhance our technological capabilities
and competitive advantages or provide licensing or recurring revenue opportunities, and propel our expansion.
Our Products and Solutions
We use various combinations of our existing
middleware software modules, together with custom application software that we develop, to create a complete mobile enterprise
software solution. For some customers, we provide the mobile enterprise software solution only. For other customers, we provide
a complete wireless system solution, including mobile enterprise software and all hardware (our own plus third party hardware such
as servers or wireless devices).
An example of our mobile enterprise software
products is an insurance industry application that we developed with China Mobile. Our mobile enterprise software for this application
enables an insurance company’s field personnel to receive their dispatch information and proceed accident reporting and claim
processing while in the field. Form data is inputted electronically and high-resolution photos can be collected and filed over
wireless, from the accident site. For this application, we provide the software only, while China Mobile provides hardware and
the network services.
Our mobile enterprise software consists of
core middleware and a broad array of software applications. Our middleware serves as an intelligent platform that operates on top
of our customers’ operating systems and management information systems. Our software applications can be integrated onto
our middleware platform as well as attached mobile devices (mobile phones, PDAs, laptops, etc.) to perform essential tasks or extend
our customers’ existing applications over wireless communications to fixed or mobile nodes. We have combined elements of
both browser/server and client/server frameworks in our software design to allow for both reliable and flexible access by authorized
personnel, virtually at anytime and from anywhere.
An example of our complete wireless systems
(software and hardware) is a mobile video surveillance system that we developed for the Beijing Emergency Response Center. Using
servers and cameras combined with our mobile enterprise software, we provided a complete wireless system that enables the Beijing
Emergency Response Center to collect and monitor video from its patrol cars. This system improved the speed and quality of the
emergency response by enabling supervisors to approach an emergency situation in a faster and more thorough way.
Core Middleware Platform
Our core middleware platform resides on the
customers’ servers. It is comprised of two layers of modules. The
General Purpose Layer
consists of mandatory software
modules required to support the application software plugged into the middleware platform. The
Basic Layer
modules are also
mandatory components that perform basic functions, such as communicating with a variety of hardware and software platforms, computer
operating systems, networking and database products, coordinating and synchronizing the tasks performed by our solutions, and adding
information security to data transmission.
Software Applications
We have developed two types of software applications
that can be selectively overlaid with middleware to complete a packaged solution, namely, Information and Communication-Technology
Converged, or ICT-converged, and Vertical Industry Applications.
ICT-converged applications perform generic
functionalities that may be applied across multiple industries. Vertical Industry Applications, on the other hand, are non-generic
and perform a specific task required by a particular industry. Both types of applications can reside on converged mobile devices
(“Terminal-end Applications”), or on computer servers (“Server-end Applications”). Our Terminal-end Applications
work on a variety of mobile devices and mobile operating systems.
In the terminal-end, we have information security,
Radio Frequency Identification Devices (RFID), location-based service, steam media, information exchange, and management and configuration
applications. The information security application encrypts or decrypts the information to ensure sensitive or classified information
of our vertical industry customers can be transmitted over the public wireless telecommunication network safely. Installed with
our RFID application and appropriate chips, a mobile phone can be turned into a RFID reader and writer for faster information input
in certain vertical industry customers, such as the police and administration of industry and commerce. Our location-based service
application enables a mobile phone to receive information relevant to its location. This application can greatly improve the operating
efficiency of the mobile workforce of some of our vertical industry customers’ by pushing timely information to them. Our
steam media application turns a mobile phone into a moveable video monitor and collector to facilitate decision-making by delivering
live pictures anywhere anytime to the decision-maker. The information exchange application automatically synchronizes information
in the mobile phone and in the back-end database.
Our Hardware Products
Portable Video Server
. Our portable
video server for vehicles or individuals can be integrated into the overall solution or purchased separately to add live mobile
video surveillance or transmission functions to our customers’ existing systems.
We design the server, including the breadboard,
the layout of internal structures, the specifications of the electronic components, and the I/O specifications. We currently outsource
the production of our hardware to third-party manufacturers. We program the embedded software and write the software into the portable
video servers. We also program the software loaded on our customers’ central servers to work with our portable video servers.
By using our portable video server solution, our customers enjoy higher quality video and experience better transmission compared
to the generic webcam solutions available elsewhere in the marketplace. Many industries and applications require this superior
quality.
Tailoring Our Solutions
The engineers in our internal solution implementation
department develop the tailored mobile enterprise solution according to our customer’s requirements. The tailored solution
includes our core middleware platform and a selected combination of our software applications, and sometimes hardware we develop
ourselves or outsource to third-party vendors. The tailored solution is delivered as a turn-key package.
Research and Development
As of September 30, 2016, we had 10 engineers
devoted to developing our software products. They are currently all located in our main corporate office in Xi’an, China.
Our success depends on continued enhancement
of our current products and our ability to develop new technologically advanced products that meet the increasingly sophisticated
requirements of our customers. Our research and development center is responsible for conducting all of our basic research
and development activities. The focus of our research and development personnel is on developing and improving our core middleware
platform, our CIT-converged applications and our hardware products. Currently, there are 6 professionals out of the total 10 engineers
in our research and development center, including two with doctorate degrees and two with other post-graduate degrees, with diverse
backgrounds in computer science and technology, telecommunication engineering, software engineering and physical electronics.
We believe our professionals are adept at utilizing
the latest technical developments in our industry to create new products and functionality. They also receive customer feedback
from the sales and marketing team to develop applications demanded by our customers in certain sectors.
As of September 30, 2016, we had four engineers
in our Vertical Industry Application Development Department, which is responsible for developing vertical industry applications.
As of September 30, 2016, we had two engineers out of the aforementioned four engineers in our Automation Telematics Application
Development Department that are responsible for developing automation telematics applications, which is a sub-group of vertical
industry applications required by customers in manufacturing sectors with high degree of automation in their operations. Engineers
in these two departments are also responsible for implementing the solutions for our customers.
Sales and Marketing
We sell our products and services mainly through
our sales and marketing team, which is primarily based at our headquarters in Xi’an, China and our branch office in Beijing,
China. We had four professionals in sales and marketing as of September 30, 2016.
To date, we have sold our mobile enterprise
solutions to customers in 27 provinces, municipalities and autonomous regions in the PRC. In addition to those in Xi’an and
Beijing, we have local sales teams that maintain close contact with our business partners and customers. We ensure that most of
our sales and marketing professionals also have a technical background to make them competent for specialized IT sales, such as
mobile enterprise solutions. Our sales and marketing professionals are organized into two teams: (i) Vertical Industry Application.
and (ii) Automation Telematics.
The Vertical Industry Application sales force
targets general business and government customers. They work closely with sales professionals at China’s wireless telecommunication
carriers (China Telecom, China Mobile and China Unicom), under general cooperation framework agreements to develop new customers.
We believe the carriers are motivated to improve their average revenue per user, or ARPU, by selling integrated services to enterprise
customers. However, they generally lack the ability to develop applications to overlay on their basic data communication network.
In most cases, the carriers directly contract with us to provide the wireless application solution. In other cases, we sell directly
to our enterprise customers or are engaged as a sub-contractor or by other IT companies with the customer relationship.
Our Automation Telematics Application sales
team focuses on industrial automation projects. These are mainly factory-specific wireless solutions that enable automated or semi-automated
factory production lines, using our proprietary middleware and wireless capability. Automation Telematics utilizes wireless over
short distances in a wide variety of usages that enable great automation control and production line monitoring and management.
For such projects, typically we are contracted directly by the project owners or sub-contracted by the general contractors to provide
automation telematics solutions. In most cases, building our software into large and complex physical systems (such as automated
production lines) enables us to make a greater profit than if we sold our software independently.
Sales Process
Our sales process begins by explaining to our
potential customers the benefit of our wireless application products to the customer’s particular business. Some companies
seek mobile functionality for their sales force, some seek cross-company, real-time networking across all fixed and mobile nodes,
while others seek a particular functionality specific to their own trade or business. Our team first seeks to understand each company’s
particular needs and then develops a product design proposal. For each project or mandate, we will typically compete against several
other companies in an open bid invitation process.
Major Customers
On March 1, 2016, we entered into a contract
with Hunan Huanan Photoelectricity Science & Technology Co., Ltd. ("Huanan") to provide monitoring system service
to Jinan's Olympic Stadium in Jinan, Shandong Province. Pursuant to the agreement, we shall provide engineering services to Jinan’s
Olympic Stadium. The services performed under this contract include installation, debugging and initial training the staff operating
the tank, engineering instruments and telecommunications. It contributed RMB 1.5 million, or approximately $223,880 revenue to
the Company as of September 30, 2016.
Competition
The wireless applications software market is
currently a highly-fragmented industry with many players offering industry-specific solutions. We compete with a variety of different
companies, some of which do not have a proprietary wireless platform and must therefore outsource and/or do more development and
testing. Other companies have developed a wireless system for a single application that is not widely adaptable to usages across
many industries. We believe one of our competitive advantages is the versatility of our platform, which allows for its application
across numerous industries without significant ground-up redevelopment for each customer.
Our main competitors in the wireless application
market in China are:
|
1.
|
International IT consulting and service providers that have a strong foothold in customized enterprise software and information system design and implementation, such as Syclo and Accenture;
|
|
2.
|
International mobile enterprise software and solution providers that have a significant presence in China, such as Sybase and CDC Software; and
|
|
3.
|
Domestic mobile enterprise solution developers, such as Beijing Silu Innovation Technology Co., Ltd., a mobile application provider that focuses solely on environmental protection areas, and Cyber Technologies (Suzhou) Co., Ltd., a wireless application software and IT service provider that focuses solely on public securities areas.
|
We believe we have a superior understanding
of our vertical industry markets compared to our international competitors and that our software products have much wider application
areas than those of our domestic competitors. We also bring mobile applications to industrial automation management and control,
an area in which we believe we have a higher level of sophistication than our competitors.
Intellectual Property
We have registered the following software copyrights,
patents and trademarks for our business operations. We believe this intellectual property forms an integral part of our competitive
strength.
Patents:
Through Kingtone Information, we have been
granted one invention patent by the State Intellectual Property Office (“SIPO”) of PRC on September 23, 2009. This
patent is “wireless video transmission system based on BREW platform”. The patent code is ZL 200710018138.4. We enjoy
a 20-year protection period starting from the grant date of the patent.
We also have been granted a utility model patent
(application number: 200820228566.X) on December 9, 2009. The name of this utility model invention is “Multi-business Data
Collection Equipment”.
The third patent is “multilink wireless
mobile industrial management and control integrated data transmission system” with the application number 200810150072.9
that was granted to us on March 30, 2011.
Software Copyrights:
Through Kingtone Information, we have received
the following software copyrights from the National Copyright Administration (“NCA”) of PRC:
Name of Software
|
Registration Number
|
Date of Issuance
|
Wireless video monitoring system V1.0
|
2007SR12909
|
August 28, 2007
|
RFID based wireless transportation administration monitoring system V1.0
|
2007SR17240
|
November 1, 2007
|
Wireless emergency command and management system V1.0
|
2008SR04120
|
February 26, 2008
|
Mobile industry management and control integrated system V1.0
|
2008SR18892
|
September 10, 2008
|
Wireless mobile news dispatches system V1.0
|
2008SR18893
|
September 10, 2008
|
Wireless police affairs system V1.0
|
2009SR04756
|
November 10, 2009
|
Wireless OA system V1.0
|
2009SR07729
|
February 25, 2009
|
Vertical industrial application software platform
|
2010SR031071
|
June 26, 2010
|
Third-grade unattended platform system V1.0
|
2014SR149914
|
May 1, 2011
|
Wireless police system V2.0
|
2014SR149829
|
June 1, 2012
|
Wireless emergency system based on Windows Phone 8 system
|
2014SR149864
|
July 20, 2014
|
Mobile monitor terminals software iOS version V1.0
|
2015SR038094
|
October 31, 2014
|
Trademarks:
We have registered the following trademarks
with the Trademark Office, State Administration for Industry and Commerce in the PRC:
Registered Trademark
|
|
Registration
Number
|
|
Classification
Number
|
|
Valid Period
|
|
|
|
|
|
|
|
KingTone
|
|
4392291
|
|
42*
|
|
July 28, 2008 to July 27, 2018
|
KingTone
|
|
4392292
|
|
38*
|
|
July 28, 2008 to July 27, 2018
|
联合信息
|
|
6484024
|
|
38*
|
|
April 7, 2010 to April 6, 2020
|
联合
|
|
6484025
|
|
38*
|
|
March 28, 2010 to March 27, 2020
|
Kingtone
|
|
4392292
|
|
38*
|
|
July 28, 2008 to July 27, 2018
|
Kingtone
|
|
4392294
|
|
35*
|
|
July 28, 2008 to July 27, 2018
|
联合信息
|
|
7402930
|
|
45*
|
|
January 7, 2011 to January 6, 2021
|
“KINGTONE
INFORMATION”
|
|
7402927
|
|
37*
|
|
November
21, 2010 to November 20, 2020
|
“KINGTONE
INFORMATION”
|
|
7402928
|
|
9*
|
|
December 21, 2010 to December 20, 2020
|
“KINGTONE
INFORMATION”
|
|
7402926
|
|
45*
|
|
October 21, 2010 to October 20, 2020
|
“KINGTONE
INFORMATION”
|
|
7402925
|
|
41*
|
|
July 7, 2011 to July 6, 2021
|
联合信息
|
|
7402911
|
|
35*
|
|
January 7, 2011 to January 6, 2021
|
联合信息
|
|
7402912
|
|
37*
|
|
June 4, 2011 to June 3, 2021
|
|
|
7402901
|
|
9*
|
|
December 21, 2010 to December 20, 2020
|
|
|
7402916
|
|
45*
|
|
October 21, 2010 to October 20, 2020
|
|
|
7402917
|
|
35*
|
|
October 28, 2010 to October 27, 2020
|
|
|
7402918
|
|
37*
|
|
October 21, 2010 to October 20, 2020
|
|
|
7402919
|
|
42*
|
|
January 28, 2011 to January 27, 2021
|
|
|
7402920
|
|
38*
|
|
October 21, 2010 to October 20, 2020
|
|
|
7402915
|
|
41*
|
|
January 28, 2011 to January 27, 2021
|
翼讯
|
|
7703614
|
|
37*
|
|
January 21, 2011 to January 20, 2021
|
翼讯
|
|
7703613
|
|
35*
|
|
January 7, 2011 to January 6, 2021
|
翼讯
|
|
7703612
|
|
45*
|
|
January 7, 2011 to January 6, 2021
|
翼讯
|
|
7703611
|
|
41*
|
|
January 7, 2011 to January 6, 2021
|
翼讯
|
|
7703617
|
|
9*
|
|
April 21, 2011 to April 20, 2021
|
翼讯
|
|
7703615
|
|
42*
|
|
August 21, 2011 to August 20, 2021
|
鼎翼
|
|
7703623
|
|
45*
|
|
January 7, 2011 to January 6, 2021
|
鼎翼
|
|
7703624
|
|
35*
|
|
January 7, 2011 to January 6, 2021
|
鼎翼
|
|
7703627
|
|
38*
|
|
January 7, 2011 to January 6, 2021
|
鼎翼
|
|
7703625
|
|
37*
|
|
January 21, 2011 to January 20, 2021
|
鼎翼
|
|
7703626
|
|
42*
|
|
February 21, 2011 to February 20, 2021
|
鼎翼
|
|
7703610
|
|
9*
|
|
March 14, 2011 to March 13, 2021
|
鼎翼
|
|
7703622
|
|
41*
|
|
February 21, 2011 to February 20, 2021
|
鼎翼
|
|
7703611
|
|
41*
|
|
February 21, 2011 to February 20, 2021
|
联合信息
|
|
7402914
|
|
9*
|
|
October 14, 2011 to October 13, 2021
|
联合信息
|
|
7402912
|
|
37*
|
|
February 14, 2012 to February 13, 2022
|
Konelive
|
|
9042353
|
|
9*
|
|
January 21, 2012 to January 20, 2022
|
Konelive
|
|
9042455
|
|
35*
|
|
January 21, 2012 to January 20, 2022
|
Konelive
|
|
9042539
|
|
37*
|
|
January 21, 2012 to January 20, 2022
|
Konelive
|
|
9042598
|
|
38*
|
|
January 21, 2012 to January 20, 2022
|
Konelive
|
|
9042675
|
|
41*
|
|
January 21, 2012 to January 20, 2022
|
Konelive
|
|
9042605
|
|
42*
|
|
January 21, 2012 to January 20, 2022
|
Konelive
|
|
9042643
|
|
45*
|
|
January 21, 2012 to January 20, 2022
|
Superlive
|
|
9046346
|
|
9*
|
|
|
Superlive
|
|
9046385
|
|
35*
|
|
January 21, 2012 to January 20, 2022
|
Superlive
|
|
9046404
|
|
37*
|
|
January 21, 2012 to January 20, 2022
|
Superlive
|
|
9046433
|
|
38*
|
|
January 21, 2012 to January 20, 2022
|
Superlive
|
|
9046471
|
|
41*
|
|
April 7, 2012 to April 6, 2022
|
Superlive
|
|
9046666
|
|
42*
|
|
July 14, 2012 to July 3, 2022
|
Superlive
|
|
9046733
|
|
45*
|
|
February 14, 2012 to February 13, 2022
|
*
|
See below for an explanation of each classification number used in the table above.
|
We have submitted applications for the following
trademarks to the Trademark Office of State Administration for Industry and Commerce in the PRC:
Pending Trademark
|
|
Application Number
|
|
Classification
Number
|
|
Application Date
|
|
Date of Acceptance
for Application
|
|
|
|
|
|
|
|
|
|
联合信息
|
|
7402913
|
|
42*
|
|
May 18, 2009
|
|
June 4, 2009
|
联合信息
|
|
7402914
|
|
9*
|
|
May 18, 2009
|
|
June 4, 2009
|
联合信息
|
|
7402929
|
|
41*
|
|
May 18, 2009
|
|
June 4, 2009
|
翼讯
|
|
7703616
|
|
38*
|
|
September 17, 2009
|
|
October 21, 2009
|
Superlive
|
|
9046666
|
|
42*
|
|
January 12, 2011
|
|
January 19, 2011
|
Superlive
|
|
9046346
|
|
9*
|
|
January 12, 2011
|
|
January 19, 2011
|
* See below for an explanation of each classification
number used in the table above.
Classification No. 9: data processing
apparatus, couplers (data processing equipment), computer software (recorded), monitors (computer programs), smart cards (integrated
circuit cards), electro-dynamic apparatus for the remote control of signals, alarms, and electric installations for the remote
control of industrial operations.
Classification No. 35: auctioneering,
sales promotion for others, marketing analysis, marketing research, import-export agencies, advisory services for business management,
business management for franchise, personnel management consultancy, relocation services for businesses, and systemization of information
into computer databases.
Classification No. 37: building
construction supervision, electric appliance installation and repair, installation, maintenance and repair of computer hardware,
interference suppression in electrical apparatus, machinery installation, maintenance and repair, burglar alarm installation and
repair, and telephone installation and repair.
Classification No. 38: message sending,
telephone communication, cellular telephone communication, communications by computer terminals, computer aided transmission of
messages and images, electronic mail, information about telecommunication, and providing telecommunications connections to a global
computer network.
Classification No. 41: instruction
services, teaching, education information, tuition, arranging and conducting of colloquiums, publication of electronic books and
journals on-line, amusements, and vocational guidance.
Classification No. 42: technical
research, studies (technical project), computer software design, updating of computer software, recovery of computer data, computer
systems analysis, installation of computer software, computer anti-virus protection, and research and development for others.
Classification No. 45: security
consultancy, monitoring of burglar and security alarms, computer software permit (legal service), factory security inspection,
household service security consultancy, copyright management, and baggage examination for safety.
Business Certificates and Qualifications
We have obtained all necessary regulatory certifications
to conduct our business in the PRC, including without limitation, the following: Software Enterprise Recognition Certificate, Computer
Information System Integration Qualification Certificate, Construction Enterprise Qualification Certificate, and Security Technology
& Protection Enterprise Certificate. We have also been properly certified as a high-tech enterprise and met the ISO 9001:2000
qualification management system.
Legal Proceedings
Although we may, from time to time, be involved
in litigation and claims arising out of our operations in the normal course of business, we do not believe that we are a party
to any litigation that will have a material adverse impact on our financial condition or results of operations. We are not aware
of any significant legal or governmental proceedings against us, or contemplated to be brought against us.
C.
ORGANIZATIONAL STRUCTURE
The following diagram illustrates our corporate
structure and the place of formation and affiliation of each of our subsidiaries and affiliates.
Contractual Arrangements with Kingtone Information
and Its Respective Shareholders
Our relationship with Kingtone Information
and each of its respective shareholders is governed by a series of contractual arrangements. Some of the businesses in which Kingtone
Information is engaged deal with classified government information in China. The current PRC laws and regulations do not allow
companies with foreign equity holders to carry out such business activities. If we had a direct or indirect ownership in Kingtone
Information, it could materially and adversely affect Kingtone Information’s ability to perform existing contracts and to
win future contracts. Therefore, Softech and Kingtone Information entered into a series of contractual arrangements that allow
us to effectively control Kingtone Information without violating relevant PRC laws and regulations. Under PRC laws, each of Softech
and Kingtone Information is an independent legal person and neither of them is exposed to liabilities incurred by the other party.
Pursuant to the contractual arrangements between Softech and Kingtone Information, as applicable, Kingtone Information transfers
any and all net profits generated from its operations to Softech. Effective December 15, 2009, Softech entered into several control
agreements with Kingtone Information, which agreements are summarized below.
Entrusted Management Agreement
Pursuant to the terms of the Entrusted Management
Agreement dated December 15, 2009 among Kingtone Information, Softech and the shareholders of Kingtone Information (the “Entrusted
Management Agreement”), Kingtone Information and its shareholders agreed to entrust the operations and management of its
business to Softech. According to the Entrusted Management Agreement, Softech possesses the full and exclusive right to manage
Kingtone Information’s operations, assets and personnel, has the right to control all of Kingtone Information's cash flows
through an entrusted bank account, is entitled to Kingtone Information's net profits as a management fee, is obligated to pay all
of Kingtone Information’s payables and loan payments, and bears all losses of Kingtone Information. The Entrusted Management
Agreement shall remain in effect until (i) the parties mutually agree to terminate the agreement, (ii) the dissolution of Kingtone
Information or (iii) Softech acquires all of the assets or equity of Kingtone Information (as more fully described below under
“Exclusive Option Agreement”). We anticipate that Kingtone Information will continue to be the contracting party under
its customer contracts, banks loans and certain other assets until such time as those may be transferred to Softech.
Exclusive Technology Service Agreement
Pursuant to the terms of the Exclusive Technology
Service Agreement dated December 15, 2009 between Kingtone Information and Softech (“the Exclusive Technology Services Agreement”),
Softech is the exclusive technology services provider to Kingtone Information. Kingtone Information agreed to pay Softech all fees
payable for technologies services prior to making any payments under the Entrusted Management Agreement. Any payment from Kingtone
Information to Softech must comply with applicable Chinese laws. Further, the parties agreed that Softech shall retain sole ownership
of all intellectual property developed in connection with providing technology services to Kingtone Information. The Exclusive
Technology Services Agreement shall remain in effect until (i) the parties mutually agree to terminate the agreement, (ii) the
dissolution of Kingtone Information or (iii) Softech acquires Kingtone Information (as more fully described below under “Exclusive
Option Agreement”).
Shareholders’ Voting Proxy Agreement
Pursuant to the terms of the Shareholders’
Voting Proxy Agreement dated December 15, 2009 among Softech and the shareholders of Kingtone Information (the “Shareholders’
Voting Proxy Agreement”), each of the shareholders of Kingtone Information irrevocably appointed Softech as their proxy to
exercise on each of such shareholder’s behalf all of their voting rights as shareholders pursuant to PRC law and the Articles
of Association of Kingtone Information, including the appointment and election of directors of Kingtone Information. Softech agreed
that it shall maintain a board of directors composed of the members of the board of directors of Kingtone Wireless, except for
those directors that are employed solely for the purpose of satisfying listing or financing requirements of Kingtone Wireless.
The Shareholders’ Voting Proxy Agreement shall remain in effect until Softech acquires all of the assets or equity of Kingtone
Information.
Exclusive Option Agreement
Pursuant to the terms of the Exclusive Option
Agreement dated December 15, 2009 among Softech, Kingtone Information and the shareholders of Kingtone Information (the “Exclusive
Option Agreement”), the shareholders of Kingtone Information granted Softech an irrevocable and exclusive purchase option
(the “Option”) to acquire Kingtone Information’s equity interests and/or remaining assets, but only to the extent
that the acquisition does not violate limitations imposed by PRC law on such transactions. As discussed above, the current PRC
law and regulations do not allow foreigners to hold equity interests in a PRC entity that engages in business dealings with classified
government information. Accordingly, the Option is exercisable at any time at Softech’s discretion so long as such exercise
and subsequent acquisition of Kingtone Information does not violate PRC law. The consideration for the exercise of the Option is
to be determined by the parties and memorialized in the future by definitive agreements setting forth the kind and value of such
consideration. To the extent Kingtone Information shareholders receive any of such consideration, the Option requires them to transfer
(and not retain) the same to Kingtone Information or Softech. The Exclusive Option Agreement may be terminated by mutual agreement
or in 30 days following a written notice from Softech.
Equity Pledge Agreement
Pursuant to the terms of the Equity Pledge
Agreement dated December 15, 2009 among Softech and the shareholders of Kingtone Information (the “Pledge Agreement”),
the shareholders of Kingtone Information pledged all of their equity interests in Kingtone Information, including the proceeds
thereof, to guarantee all of Softech's rights and benefits under the Entrusted Management Agreement, the Exclusive Technology Service
Agreement, the Shareholders’ Voting Proxy Agreement and the Exclusive Option Agreement. Prior to termination of the Pledge
Agreement, the pledged equity interests cannot be transferred without Softech's prior written consent. The Pledge Agreement may
be terminated only upon the written agreement from the parties.
D. PROPERTY AND EQUIPMENT
We operate out of the office located at 3/F,
Borough A, Block A, No. 181 South Taibai Road in Xi’an. We own our office space, which covers a floor space of 3,022.94 square
meters.
Our Beijing branch office is located at Room
2208 and 2209 at Building 16, An Hui Dong Li, Chaoyang District, Beijing. It covers a floor space of 184.81 square meters.
Our chairman Mr. Tao Li owns this space. We pay no consideration for the use of this office.
In April 2008, we purchased an approximately
20,000 square meter six-story warehouse and industrial facility in Xi’an, which we named the “Kingtone Center”.
We have paid the entire purchase price and obtained both the property ownership certificate and land use right certificate from
the provincial government. We have finished the interior design phase of refurbishing the Kingtone Center.. On October 28, 2013,
the Company signed a twenty-year lease agreement with Xi’an Zhongde Orthopedics Hospital Co., Ltd. (“Zhongde”).
According the lease agreement, the Company shall lease “Kingtone Center” to Zhongde with a monthly rent of approximately
$0.1 million from July 1, 2014 till December 31, 2034, The rent will have an incremental 2 percent increase year over year during
the next following years.
ITEM 4A. UNRESOLVED STAFF
COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL
REVIEW AND PROSPECTS
A
.
OPERATING RESULTS.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and the notes to those financial statements appearing elsewhere in this report. This discussion
and analysis contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors,
such as our anticipated growth strategy, our plans to recruit more employees, our plans to invest in research and development
to enhance our product or service lines, our future business development, results of operations and financial condition, expected
changes in our net revenues and certain cost or expense items, our ability to attract and retain customers, trends and competition
in the enterprise mobile software application market, and the factors set forth elsewhere in this report, our actual results may
differ materially from those anticipated in these forward-looking statements. In light of those risks and uncertainties, there
can be no assurance that the forward-looking statements contained in this report will in fact occur. You should not place undue
reliance on the forward-looking statements contained in this report.
The
forward-looking statements speak only as of the date on which they are made, and, except to the extent required by U.S. federal
securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the
date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information
about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon,
among other things, the existing regulatory environment, industry conditions, market conditions and prices and our assumptions
as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors,
in our assumptions or otherwise.
Unless
the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic
of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”,
“Yuan” and Renminbi are to the currency of the PRC or China.
Overview
Kingtone
Wireless was incorporated on October 27, 2009 under the laws of the British Virgin Islands and acts as a holding company. We conduct
substantially all of our operations through our contractually-controlled PRC entity, Kingtone Information, which focuses on developing
mobile enterprise solutions in China. We provide a suite of applications that enable mission-specific field and long-distance
information management in wireless environments.
Kingtone
Information commenced its current line of business in 2001 as an industrial automation management and control software system
developer. We subsequently developed a core middleware platform consisting of standardized modules. This core middleware platform
allows our solutions to seamlessly integrate with our customers’ existing information management systems. The core middleware
platform can host an array of standardized and scalable applications developed by us. This structured design allows us to timely
and cost-effectively meet our customers’ specific requirements and respond to their operational changes. Customized packages
of our middleware platform and applications are marketed as tailored solutions to business and government customers of all kinds.
Results
of Operations for the fiscal year ended September 30, 2016 compared to the fiscal year ended September 30, 2015.
The
following table sets forth key components of our results of operations for the periods indicated, in thousands of dollars and
percentage of revenue and changes.
|
|
For the Years Ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
($ in Thousands, Except per Share Data)
|
|
|
|
|
Revenue
|
|
$
|
1,192
|
|
|
|
100.0
|
%
|
|
$
|
8,819
|
|
|
|
100.0
|
%
|
|
|
(86.5
|
)%
|
Cost of sales
|
|
|
988
|
|
|
|
82.9
|
%
|
|
|
5,618
|
|
|
|
63.7
|
%
|
|
|
(82.4
|
)%
|
Gross profit
|
|
|
204
|
|
|
|
17.1
|
%
|
|
|
3,201
|
|
|
|
36.3
|
%
|
|
|
(93.6
|
)%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
134
|
|
|
|
11.2
|
%
|
|
|
153
|
|
|
|
1.7
|
%
|
|
|
(12.4
|
)%
|
General and administrative expenses
|
|
|
1,917
|
|
|
|
160.8
|
%
|
|
|
3,355
|
|
|
|
38.0
|
%
|
|
|
(42.9
|
)%
|
Research and development expenses
|
|
|
55
|
|
|
|
4.6
|
%
|
|
|
288
|
|
|
|
3.3
|
%
|
|
|
(80.9
|
)%
|
Total operating expenses
|
|
|
2,106
|
|
|
|
176.7
|
%
|
|
|
3,796
|
|
|
|
43.0
|
%
|
|
|
(44.5
|
)%
|
Loss from operations
|
|
|
(1,902
|
)
|
|
|
(115.9
|
)%
|
|
|
(595
|
)
|
|
|
(6.7
|
)%
|
|
|
(219.7
|
)%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
400
|
|
|
|
33.6
|
%
|
|
|
29
|
|
|
|
0.3
|
%
|
|
|
1,279.3
|
%
|
Other income, net
|
|
|
1,342
|
|
|
|
112.6
|
%
|
|
|
1,593
|
|
|
|
18.1
|
%
|
|
|
(15.8
|
)%
|
Total other income, net
|
|
|
1,742
|
|
|
|
146.1
|
%
|
|
|
1,622
|
|
|
|
18.4
|
%
|
|
|
7.4
|
%
|
Income (Loss) before income tax expenses
|
|
|
(160
|
)
|
|
|
(13.4
|
)%
|
|
|
1,027
|
|
|
|
11.6
|
%
|
|
|
(115.6
|
)%
|
Net Income (loss)
|
|
$
|
(160
|
)
|
|
|
(13.4
|
)%
|
|
$
|
1,027
|
|
|
|
11.6
|
%
|
|
|
(115.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
(867
|
)
|
|
|
(72.7
|
)%
|
|
|
(686
|
)
|
|
|
(7.8
|
)%
|
|
|
26.4
|
%
|
Comprehensive Income ( loss)
|
|
$
|
(1,027
|
)
|
|
|
(86.2
|
)%
|
|
$
|
341
|
|
|
|
3.9
|
%
|
|
|
(401.2
|
)%
|
Income (Loss) per ordinary share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
(115.6
|
)%
|
Weighted average number of ordinary shares outstanding
|
|
|
1,405,000
|
|
|
|
|
|
|
|
1,405,000
|
|
|
|
|
|
|
|
0
|
%
|
The
following is a breakdown of our revenue, cost of sales and gross margin for the years indicated, in thousands of dollars, and
our respective gross margin percentages and changes.
|
|
For the Years Ended September 30
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Changes
|
|
|
|
($ in Thousands)
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
62
|
|
|
|
5.2
|
%
|
|
$
|
136
|
|
|
|
1.5
|
%
|
|
|
(54.4
|
)%
|
Wireless system solutions
|
|
|
1,130
|
|
|
|
94.8
|
%
|
|
|
8,683
|
|
|
|
98.5
|
%
|
|
|
(87.0
|
)%
|
Total Revenue
|
|
|
1,192
|
|
|
|
100.0
|
%
|
|
|
8,819
|
|
|
|
100.0
|
%
|
|
|
(86.5
|
)%
|
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
40
|
|
|
|
4.0
|
%
|
|
|
61
|
|
|
|
1.1
|
%
|
|
|
(34.4
|
)%
|
Wireless system solutions
|
|
|
948
|
|
|
|
96.0
|
%
|
|
|
5,557
|
|
|
|
98.9
|
%
|
|
|
(82.9
|
)%
|
Total Cost of Sales
|
|
|
988
|
|
|
|
100.0
|
%
|
|
|
5,618
|
|
|
|
100.0
|
%
|
|
|
(82.4
|
)%
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
22
|
|
|
|
10.8
|
%
|
|
|
75
|
|
|
|
2.3
|
%
|
|
|
(70.7
|
)%
|
Wireless system solutions
|
|
|
182
|
|
|
|
89.2
|
%
|
|
|
3,126
|
|
|
|
97.7
|
%
|
|
|
(94.2
|
)%
|
Total Gross Profit
|
|
|
204
|
|
|
|
100.0
|
%
|
|
|
3,201
|
|
|
|
100.0
|
%
|
|
|
(93.6
|
)%
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
|
|
|
|
35.5
|
%
|
|
|
|
|
|
|
55.1
|
%
|
|
|
|
|
Wireless system solutions
|
|
|
|
|
|
|
16.1
|
%
|
|
|
|
|
|
|
36.0
|
%
|
|
|
|
|
Blended Gross Margin
|
|
|
|
|
|
|
17.1
|
%
|
|
|
|
|
|
|
36.3
|
%
|
|
|
|
|
Revenue
We
are a China-based developer and provider of mobile enterprise solutions. We generate revenue in two ways, from customized software
middleware and applications for various public and private service agencies, which we identify as software solution sales, and
from packaged solutions that include both software and hardware in automation telematics for clients mainly in the manufacturing
sector, which we identify as wireless system solution sales. In the year ended September 30, 2016, we experienced a significant
contraction in our software solution business and our wireless system solution business. While the business conditions deteriorated
rapidly, we faced strong competition in our wireless system solution business. There is also a growing number of small service
providers compete very aggressively on price which negatively affected our ability to win new contracts. Thereafter our revenue
decreased by 86.5% to approximately $1.2 million in the year ended September 30, 2016 from approximately $8.8 million in the year
ended September 30, 2015.
Our
revenue from software solution sales decreased by 54.4% to approximately $0.06 million in the year ended September 30, 2016 from
approximately $0.14 million in the year ended September 30, 2015. As a percentage of total revenue, software solution sales increased
from 1.5% to 5.2%.
Our
revenue from wireless system solution sales decreased by 87.0% to approximately $1.1 million in the year ended September 30, 2016
from approximately $8.7 million in the year ended September 30, 2015. As a percentage of total revenue, wireless system solution
revenue decreased from 98.5% to 94.8% of our total revenue.
Cost
of Sales
Our
cost of sales decreased by 82.4% to approximately $1 million in the year ended September 30, 2016 from approximately $5.6 million
in the year ended September 30, 2015. As a percentage of our total revenues, our cost of sales increased to 82.9% of revenues
in the year ended September 30, 2016 from 63.7% of our total revenues in the year ended September 30, 2015. The decrease in cost
of sales was primarily attributable to the decrease in revenue from both software business and wireless system solutions business.
Cost
of sales for software decreased by 34.4% to approximately $0.04 million in the year ended September 30, 2016 from approximately
$0.06 million in the year ended September 30, 2015, representing 4.0% and 1.1% of our total cost of sales and 64.5% and 44.9% of
our software revenue in the fiscal years ended September 30, 2016 and 2015, respectively. Cost of sales for wireless system solutions
decreased by 82.9% to approximately $0.9 million in the year ended September 30, 2016 from approximately $5.6 million in the year
ended September 30, 2015, representing 96.0% and 98.9% of total cost of sales and 83.9% and 64.0% of wireless system solution
revenues in the fiscal years ended September 2016 and 2015, respectively.
Gross
Profit and Gross Margin
Our
total gross profit decreased by 93.6% to approximately $0.2 million in the year ended September 30, 2016 from approximately $3.2
million in the year ended September 30, 2015. Our total gross margin was 17.1% and 36.3% in the years ended September 30, 2016
and 2015 of total revenue, respectively. This decrease of gross margin was primarily due to national slow-down economy, which
resulted in the overall decrease in industry profit margin.
Our
gross profit for software solution sales decreased by 70.7% to approximately $22,000 in the year ended September 30, 2016 from
approximately $75,000 in the year ended September 30, 2015. Our gross margin for software solutions sales decreased to 35.5% in
the year ended September 30, 2016 from 55.1% in the year ended September 30, 2015. Our gross profit for wireless system solution
sales decreased by 94.2% to approximately $0.2 million in the year ended September 30, 2016 from approximately $3.1 million in
the year ended September 30, 2015. Our gross margin for wireless system solution sales decreased to 16.1% in the year ended September
30, 2016 from 36.0% in the year ended September 30, 2015, which is partially attributable to the lower margin of some of the wireless
projects.
Operating
Expenses
Selling
and Marketing Expenses
Our
selling and marketing expenses decreased by 12.4% to approximately $0.13 million in fiscal year 2016 from approximately $0.15
million in fiscal year 2015, and represented 11.2% and 1.7% of our revenue for the years ended September 30, 2016 and 2015, respectively.
Selling and marketing expenses consisted primarily of compensation and benefit expenses relating to our sales and marketing personnel,
travel and communication expenses, and selling and marketing-related office expenses. The decrease in sales and marketing expenses
was a direct result of the Company’s cost-control decision to reduce the related marketing and traveling expenses coping
with the depressing software solution market and the decreased labor cost. The lower demand for software solutions products is
caused by the fact that most of our clients in our business sectors are government sponsored companies. With the macro-policy
in China that controls the spending budgets in governmental agencies, less clients in such nature were inclined to buy value-added
software solutions.
General
and Administrative Expenses
Our general and administrative
expenses decreased by 42.9% to approximately $1.9 million in fiscal year 2016 from approximately $3.4 million in fiscal year 2015,
and represented 160.8% and 38.0% of our revenue for the years ended September 30, 2016 and 2015, respectively. General and administrative
expenses consist primarily of compensation and benefit expenses relating to personnel other than our engineers and our sales and
marketing team, depreciation and amortization expenses and overhead expenses. General and administrative expenses also include
legal and other professional fees, share-based compensation and other miscellaneous administrative costs. The decrease in general
and administrative expenses was mainly due to the decrease in bad debt expense, and we reduced the related labor cost.
Research
and Development Expenses
Our research and development
expenses decreased 80.9% to approximately $0.06 million in fiscal year 2016 from approximately $0.3 million in fiscal year 2015,
and represented 4.6% and 3.3% of our revenue for the years ended September 30, 2016 and 2015, respectively. Research and development
expenses consist primarily of compensation and benefit expenses relating to engineers in our research and development center,
materials cost in research and development activities relating to our research and development center. The decrease in research
and development expenses was mainly because the Company intended to decrease the expenses under an unsatisfied business condition.
Loss
from Operations
We
incurred a loss of $1.9 million in the year ended September 30, 2016, a 219.7% increase in such a loss from approximately loss
of $0.6 million in the year ended September 30, 2015. The increase in loss from operations was mainly due to significantly lower
revenues from software solutions and wireless system solutions business.
Net
Income (Loss)
We
incurred a net loss of $0.2 million in the year ended September 30, 2016 as compared to net income of approximately $1 million
in the year ended September 30, 2015. Basic and diluted loss per share was $0.11 in the year ended September 30, 2016, compared
to income per share $0.73 in the prior year period. The number of weighted average ordinary shares outstanding was 1,405,000 for
the years ended September 30, 2016 and 2015, respectively.
Results of operations for the fiscal year
ended September 30, 2015 compared to the fiscal year ended September 30, 2014.
The following table sets forth key components
of our results of operations for the periods indicated, in thousands of dollars and percentage of revenue and changes.
|
|
For the Years Ended September 30,
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Change
|
|
|
|
($ in Thousands, Except per Share Data)
|
|
|
|
|
Revenue
|
|
$
|
8,819
|
|
|
|
100.0
|
%
|
|
$
|
6,186
|
|
|
|
100.0
|
%
|
|
|
42.6
|
%
|
Cost of sales
|
|
|
5,618
|
|
|
|
63.7
|
%
|
|
|
4,222
|
|
|
|
68.3
|
%
|
|
|
33.1
|
%
|
Gross profit
|
|
|
3,201
|
|
|
|
36.3
|
%
|
|
|
1,964
|
|
|
|
31.7
|
%
|
|
|
63.0
|
%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
153
|
|
|
|
1.7
|
%
|
|
|
364
|
|
|
|
5.9
|
%
|
|
|
(58.0
|
)%
|
General and administrative expenses
|
|
|
3,355
|
|
|
|
38.0
|
%
|
|
|
1,940
|
|
|
|
31.4
|
%
|
|
|
72.9
|
%
|
Research and development expenses
|
|
|
288
|
|
|
|
3.3
|
%
|
|
|
202
|
|
|
|
3.3
|
%
|
|
|
42.6
|
%
|
Total operating expenses
|
|
|
3,796
|
|
|
|
43.0
|
%
|
|
|
2,506
|
|
|
|
40.5
|
%
|
|
|
51.5
|
%
|
Loss from operations
|
|
|
(595
|
)
|
|
|
(6.7
|
)%
|
|
|
(542
|
)
|
|
|
(8.8
|
)%
|
|
|
9.8
|
%
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss of net investment in sales-type leases
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
%
|
Interest income
|
|
|
29
|
|
|
|
0.3
|
%
|
|
|
32
|
|
|
|
0.5
|
%
|
|
|
(9.4
|
)%
|
Other income (expense), net
|
|
|
1,593
|
|
|
|
18.1
|
%
|
|
|
509
|
|
|
|
8.2
|
%
|
|
|
213.0
|
%
|
Total other income (expense), net
|
|
|
1,622
|
|
|
|
18.4
|
%
|
|
|
541
|
|
|
|
8.7
|
%
|
|
|
199.8
|
%
|
Income (loss) before income tax expenses
|
|
|
1,027
|
|
|
|
11.6
|
%
|
|
|
(1
|
)
|
|
|
(0.02
|
)%
|
|
|
(102,800
|
)%
|
Net income (loss)
|
|
$
|
1,027
|
|
|
|
11.6
|
%
|
|
$
|
(1
|
)
|
|
|
(0.02
|
)%
|
|
|
(102,800
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
|
(864
|
)
|
|
|
(7.8
|
)%
|
|
|
(38
|
)
|
|
|
(0.6
|
)%
|
|
|
1,705.3
|
%
|
Comprehensive Income ( loss)
|
|
$
|
341
|
|
|
|
3.9
|
%
|
|
$
|
(39
|
)
|
|
|
(0.6
|
)%
|
|
|
(974.4
|
)%
|
Earnings (loss) per ordinary share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.73
|
|
|
|
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
0
|
%
|
Weighted average number of ordinary shares outstanding
|
|
|
1,405,000
|
|
|
|
|
|
|
|
1,405,000
|
|
|
|
|
|
|
|
0
|
%
|
The following is a breakdown of our revenue,
cost of sales and gross margin for the years indicated, in thousands of dollars, and our respective gross margin percentages and
changes.
|
|
For the Years Ended September 30
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Changes
|
|
|
|
($ in Thousands)
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
136
|
|
|
|
1.5
|
%
|
|
$
|
187
|
|
|
|
3.0
|
%
|
|
|
(27.3
|
)%
|
Wireless system solutions
|
|
|
8,683
|
|
|
|
98.5
|
%
|
|
|
5,999
|
|
|
|
97.0
|
%
|
|
|
44.7
|
%
|
Total Revenue
|
|
|
8,819
|
|
|
|
100.0
|
%
|
|
|
6,186
|
|
|
|
100.0
|
%
|
|
|
42.6
|
%
|
Cost of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
61
|
|
|
|
1.1
|
%
|
|
|
103
|
|
|
|
2.5
|
%
|
|
|
(40.8
|
)%
|
Wireless system solutions
|
|
|
5,557
|
|
|
|
98.9
|
%
|
|
|
4,119
|
|
|
|
97.5
|
%
|
|
|
34.9
|
%
|
Total Cost of Sales
|
|
|
5,618
|
|
|
|
100.0
|
%
|
|
|
4,222
|
|
|
|
100.0
|
%
|
|
|
33.1
|
%
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
75
|
|
|
|
2.3
|
%
|
|
|
84
|
|
|
|
4.3
|
%
|
|
|
(10.7
|
)%
|
Wireless system solutions
|
|
|
3,126
|
|
|
|
97.7
|
%
|
|
|
1,880
|
|
|
|
95.7
|
%
|
|
|
66.3
|
%
|
Total Gross Profit
|
|
|
3,201
|
|
|
|
100.0
|
%
|
|
|
1,964
|
|
|
|
100.0
|
%
|
|
|
63.0
|
%
|
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
|
|
|
|
55.1
|
%
|
|
|
|
|
|
|
44.9
|
%
|
|
|
|
|
Wireless system solutions
|
|
|
|
|
|
|
36.0
|
%
|
|
|
|
|
|
|
31.3
|
%
|
|
|
|
|
Blended Gross Margin
|
|
|
|
|
|
|
36.3
|
%
|
|
|
|
|
|
|
31.7
|
%
|
|
|
|
|
Revenue
We are a China-based developer and provider
of mobile enterprise solutions. We generate revenue in two ways, from customized software middleware and applications for various
public and private service agencies, which we identify as software solution sales, and from packaged solutions that include both
software and hardware in automation telematics for clients mainly in the manufacturing sector, which we identify as wireless system
solution sales. In the year ended September 30, 2015, although we experienced a significant contraction in our software solution
business and our wireless system solution business, we recognized a large amount of revenue from Jingbian Project which was completed
by the end of 2014. Thereafter our revenue increased by 42.6% to approximately $8.8 million in the year ended September 30, 2015
from approximately $6.2 million in the year ended September 30, 2014.
Our revenue from software solution sales decreased
by 27.3% to approximately $0.14 million in the year ended September 30, 2015 from approximately $0.19 million in the year ended
September 30, 2014. As a percentage of total revenue, software solution sales decreased from 3.0% to 1.5%.
Our revenue from wireless system solution sales
increased by 44.7% to approximately $8.7 million in the year ended September 30, 2015 from approximately $6.0 million in the year
ended September 30, 2014. As a percentage of total revenue, wireless system solution revenue increased from 97.0% to 98.5% of our
total revenue.
Cost of Sales
Our cost of sales increased by 33.1% to approximately
$5.6 million in the year ended September 30, 2015 from approximately $4.2 million in the year ended September 30, 2014. The increase
in cost of sales was primarily attributable to the increase in revenue from wireless system solution. As a percentage of our total
revenues, our cost of sales decreased to 63.7% of revenues in the year ended September 30, 2015 from 68.3% of our total revenues
in the year ended September 30, 2014, which is partially attributable to the fact that the projects the Company had worked with
old clients and therefore made our work more efficient.
Cost of sales for software decreased by 40.8%
to approximately $0.06 million in the year ended September 30, 2015 from approximately $0.1 million in the year ended September
30, 2014, representing 1.1% and 2.5% of our total cost of sales and 44.9% and 55.1% of our software revenue in the fiscal years
ended September 30, 2015 and 2014, respectively. Cost of sales for wireless system solutions increased by 34.9% to approximately
$5.6 million in the year ended September 30, 2015 from approximately $4.1 million in the year ended September 30, 2014, representing
98.9% and 97.5% of total cost of sales and 64.0% and 68.7% of wireless system solution revenues in the fiscal years ended September
2015 and 2014, respectively.
Gross Profit and Gross Margin
Our total gross profit increased by 63.0% to
approximately $3.2 million gross profit in the year ended September 30, 2015 from approximately $2.0 million loss in the year ended
September 30, 2014. Our total gross margin was 36.3% and 31.7% in the years ended September 30, 2015 and 2014 of total revenue,
respectively. This increase of gross profit and gross margin was primarily due to the increase in industry profit and profit margin
and revenue from Jingbian integration project that was partially recognized in the last fiscal year as of September 30, 2015.
Our gross profit for software solution sales
decreased by 10.7% to approximately $75,000 in the year ended September 30, 2015 from approximately $84,000 in the year ended September
30, 2014. Our gross margin for software solutions sales increased to 55.1% in the year ended September 30, 2015 from 44.9% in the
year ended September 30, 2014. This increase of gross margin was primarily due to the increase of system maintenance contract with
less R&D expense. Our gross profit for wireless system solution sales increased by 66.3% to approximately $3.1 million
in the year ended September 30, 2015 from approximately $1.9 million in the year ended September 30, 2014. Our gross margin for
wireless system solution sales increased to 36.0% in the year ended September 30, 2015 from 31.3% in the year ended September 30,
2014, which is partially attributable to the higher margin of some of the wireless projects. The increase in gross margins
in both of our business sections above was due to the fact we had higher gross margin projects and smaller up-front investments
with old customers comparing to the last fiscal year.
Operating Expenses
Selling and Marketing Expenses
Our selling and marketing expenses decreased
by 58.0% to approximately $0.2 million in fiscal year 2015 from approximately $0.4 million in fiscal year 2014, and represented
1.7% and 5.9% of our revenue for the years ended September 30, 2015 and 2014, respectively. Selling and marketing expenses consisted
primarily of compensation and benefit expenses relating to our sales and marketing personnel, travel and communication expenses,
and selling and marketing-related office expenses. The decrease in sales and marketing expenses was a direct result of the Company’s
cost-control decision to reduce the related marketing and traveling expenses coping with the depressing software solution market.
The lower demand for software solutions products is caused by the fact that most of our clients in our business sectors are government
sponsored companies. With the macro-policy in China that controls the spending budgets in governmental agencies, fewer clients
in such nature were inclined to buy value-added software solutions.
General and Administrative Expenses
Our general and administrative expenses increased
by 72.9% to approximately $3.4 million in fiscal year 2015 from approximately $1.9 million in fiscal year 2014, and represented
38.0% and 31.4% of our revenue for the years ended September 30, 2015 and 2014, respectively. General and administrative expenses
consist primarily of compensation and benefit expenses relating to personnel other than our engineers and our sales and marketing
team, depreciation and amortization expenses and overhead expenses. General and administrative expenses also include legal and
other professional fees, share-based compensation and other miscellaneous administrative costs. The significant increase in general
and administrative expenses was mainly due to the increased bad debt expense. Bad debt expenses increased due to the write-off
of certain receivables, which are more than three years old and are evaluated by management to be non-collectable because the
customers are unable to pay due to their poor operations.
Research and Development Expenses
Our research and development expenses increased
by 42.6% to approximately $0.3 million in fiscal year 2015 from approximately $0.2 million in fiscal year 2014, and represented
3.3% and 3.3% of our revenue for the years ended September 30, 2015 and 2014, respectively. Research and development expenses consist
primarily of compensation and benefit expenses relating to engineers in our research and development center, materials cost in
research and development activities relating to our research and development center. The increase in research and development expenses
was mainly due to the increased labor cost of R&D staffs that the Company invested for industrial competition.
Loss From Operations
We incurred a loss of $0.6 million in the year
ended September 30, 2015, a 9.8% increase in such a loss from approximately loss of $0.5 million in the year ended September 30,
2014. The increase in loss from operations was mainly due to significantly higher general and administrative expenses.
Other Income (Expense)
Our other income increased by 199.8% to approximately
$1.6 million in fiscal year 2015 from approximately $0.5 million in fiscal year 2014, and represented 18.4% and 8.2% of our revenue
for the years ended September 30, 2015 and 2014, respectively. The increase in our other income was largely due to our rental income.
In April 2008, we purchased an approximately 20,000 square meter six-story warehouse and industrial facility in Xi’an, which
we named the “Kingtone Center”. On October 28, 2013, the Company signed a lease agreement with Xi’an Zhongde
Orthopedics Hospital Co., Ltd. (“Zhongde”) with rental period from July 1, 2014 to February 28, 2033. According to
the lease agreement, the Company shall lease “Kingtone Center” to Zhongde with a monthly rent of approximately $0.1
million from July 1, 2014 till February 28, 2033. The rent will have an incremental 2 percent increase year over year during the
next following years. We had approximately $1.2 million rental income from Zhongde for the year ended September 30, 2015.
Net Income (Loss)
We incurred a net income of $1.0 million in
the year ended September 30, 2015 as compared to net loss of approximately $1,000 in the year ended September 30, 2014. Basic and
diluted loss per share was $0.73 in the year ended September 30, 2015, compared to loss per share $0 in the prior year period.
The number of weighted average ordinary shares outstanding was 1,405,000 for the years ended September 30, 2015 and 2014, respectively.
Liquidity and Capital Resources
Cash Flows and Working Capital
As of September 30, 2016,
we had a working capital of approximately $2.7 million, including cash of approximately $1.2 million. The following table sets
forth a summary of our cash flow for the periods indicated:
|
|
For the Years Ended September 30,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
($ in Thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(780
|
)
|
|
$
|
2,366
|
|
|
$
|
258
|
|
Net cash provided by (used in) investing activities
|
|
|
(22
|
)
|
|
|
1
|
|
|
|
(137
|
)
|
Net cash used in financing activities
|
|
|
(690
|
)
|
|
|
(3,714
|
)
|
|
|
(2,077
|
)
|
Effect of exchange rate fluctuation on cash and cash equivalents
|
|
|
(12
|
)
|
|
|
(76
|
)
|
|
|
(9
|
)
|
Net decrease in cash and cash equivalents
|
|
|
(1,504
|
)
|
|
|
(1,423
|
)
|
|
|
(1,965
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
2,743
|
|
|
|
4,166
|
|
|
|
6,132
|
|
Cash and cash equivalents, end of year
|
|
|
1,239
|
|
|
|
2,743
|
|
|
|
4,166
|
|
Operating Activities
Net cash used in operating
activities was approximately $0.8 million for the year ended September 30, 2016 as compared to $2.3 million net cash provided
by operating activities the year ended September 30, 2015. During 2016, the Company had a net loss of $0.2 million compared to
$1 million for the last year, depreciation and amortization decreased $1 million. In addition, the Company’s inventory decreased
to $0.07 million from $2 million and there was nil unbilled revenue compared to $5 million in the prior year.
Investing Activities
Net cash used in investing
activities for the year ended September 30, 2016 was approximately $22,000 as compared to net cash provided by investing activities
of approximately $1,000 for the year ended September 30, 2015. The cash used in investing activities in 2016 was mainly due to
the purchase of property and equipment.
Financing Activities
Net cash used in financing
activities during the fiscal year of 2016 was approximately $0.7 million as compared to $3.7 million for the fiscal year of 2015.
The decrease is due to Company lent less loans to related companies compared to last year.
As a result of
the total cash activities, our net cash decreased by approximately $1.5 million from September 30, 2015 to September 30, 2016 and
to approximately $1.4 million from September 30, 2014 to September 30, 2015.
Current PRC regulations
permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with
Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least
10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital.
These reserves are not distributable as cash dividends. Furthermore, if our subsidiaries in China incur debt on their own behalf
in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Also,
our PRC subsidiaries must file the board resolutions authorizing the payment of dividends, the capital verification report of our
PRC subsidiaries, the audit report issued by a certified public accountant company and other required materials to the banks entrusted
by the local foreign exchange bureau for the examination of the remittance of the dividend. Our PRC subsidiaries can only remit
dividends to us after passing the examination. Such examination requirement may limit our PRC subsidiaries’ ability to pay
dividends to us which may limit our ability to pay dividends to our shareholders. If we are unable to pay dividends to our shareholders,
our ability to secure equity financing in the future may be adversely affected.
Contractual Obligations
As of September 30, 2016,
we did not have any contractual obligations required to be disclosed.
Quantitative and Qualitative Disclosure
about Market Risk
Interest Rate Risk
Our exposure to interest
rate risk primarily relates to the interest expense incurred as a result of short-term bank loans maturing within 12 months. We
have not used any derivative financial instruments to manage our interest risk exposure. We carry refinancing risk related to short-term
interest-bearing loans. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest
rates. However, our future interest expense may be higher than expected due to changes in market interest rates.
Foreign Exchange Risk
Translation adjustments
amounted to $0.9 million loss, $0.7 million loss and $0.04 million loss for years ended September 30, 2016, 2015 and 2014, respectively.
We translated balance sheet amounts with the exception of equity at September 30, 2016, 2015 and 2014 at RMB 6.6702, RMB 6.3683
and RMB 6.1547 to $1.00, respectively. We stated equity accounts at their historical rate. The average translation rates applied
to income statement accounts for the years ended September 30, 2016, 2015 and 2014 were RMB 6.5321, RMB 6.648 and RMB 6.1425 to
$1.00, respectively. So far, the PRC government has been able to manage a stable exchange rate between RMB and the U.S. Dollar.
We do not anticipate material translation adjustments due to large fluctuations in exchange rates between RMB and the U.S. Dollar.
However, our future upward translation adjustments may occur and can be significant due to changes in such exchange rate.
The PRC government imposes
strict restrictions on PRC resident companies regarding converting RMB into foreign currencies and vice versa under capital account
transactions, such as receiving equity investments from outside of the PRC, making equity investments outside of the PRC, borrowing
money from or lending money outside of the PRC, and repaying debt or remitting liquidated assets and/or accumulated profits outside
of the PRC. These transactions have to be approved by the relevant PRC government authorities, including but not limited to the
commerce bureau, the tax bureau and the State Administration of Foreign Exchange, or SAFE, and have to be conducted at banks entrusted
by the local SAFE branch. Kingtone Information has not conducted any foreign currency transactions during prior fiscal years since
its inception. Softech had not conducted any foreign currency transactions except for converting a relevantly small amount of foreign
currency into RMB as registered capital pursuant to PRC regulations. As our business continues to grow, we may need to continuously
finance our PRC subsidiaries by raising capital from outside of the PRC. The restriction on converting RMB into foreign currencies,
and vice versa, may limit our ability to use capital resources from outside of the PRC. Such restrictions may also limit our ability
to remit profits from our PRC subsidiaries outside of the PRC, therefore potentially limiting our ability to pay dividends to our
shareholders. In addition, such restrictions will limit our ability to freely transfer temporary excess cash in our or our subsidiaries’
bank accounts in and out of the PRC, therefore limiting our ability to conduct cross-border cash management activities to optimize
the utilization of our cash.
Inflation
Although China has experienced
an increasing inflation rate, inflation has not had a material impact on our results of operations in recent years. According to
the National Bureau of Statistics of China, Chinese consumer price index in December 2012 was 2.5% higher than that of the same
period in 2011. The consumer price index increased 2.6% from January to December, 2012. In 2013, the average consumer price index
increase rate was 2.6%. In 2014 and 2015, the average consumer price index increased rate was 2.0% and 1.5%. respectively. In 2016,
the average consumer price index increased rate was1.2%. The results of the PRC government’s actions to combat inflation
are difficult to predict. Adverse changes in the Chinese economy, if any, will likely impact the financial performance of a variety
of industries in China that use, or would be candidates to use, our software products and services.
Critical Accounting Policies
We prepare our financial
statements in conformity with the accounting principles generally accepted in the United States of America, which requires us to
make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available
information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances.
Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those
estimates. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could
have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact
the consolidated financial statements. We believe the following accounting policies involve the most significant judgments and
estimates used in the preparation of our financial statements and should be read in conjunction with our consolidated financial
statements and other disclosures included in this annual report.
Revenue Recognition
Revenues consist primarily
of sales of wireless system solutions and software solutions with support contracts. We recognize revenue when (1) pervasive evidence
of an arrangement exists, (2) delivery has occurred and customer acceptance is reasonably assured, (3) the fee is fixed or determinable,
and (4) collectability is probable.
We generally provide wireless
system software service solutions and customized software under short and long-term fixed-price contracts that require significant
production and customization. The contract periods range from two months to approximately two years in length. We recognize income
for these contracts following both the percentage-of-completion method, measured by contract milestones and on the basis of actual
costs incurred versus the total estimated contract costs, and on the completed contract method in accordance with the ASC No. 605-35,
“
Construction-Type and Certain Production-Type Contracts
” and ASC No.985-605, “
Software-revenue recognition
”.
Provided unapproved change
orders or claims occur in the future, in accounting for contracts, we follow ASC No. 605-35. We will recognize revenues associated
with unapproved change orders or claims to the extent it is probable that such claims and change orders will result in additional
contract revenue, and the amount of such additional revenue can be reliably estimated. Contract losses are provided in their entirety
in the period that they become known, without regard to the percentage-of-completion. However, we have not experienced significant
unapproved change orders in the past.
The software contracts
generally provide for post-contract customer support (“PCS”) for a period of one year from delivery of the software.
The value of PCS revenue is not separately reported and is accounted for as part of the entire fee under the contract accounting
methods described above since the PCS meets the criteria specified in ASC No. 985-605-25-71 as follows:
|
1.
|
PCS is included in the total contract price;
|
|
2.
|
PCS is for one year or less;
|
|
3.
|
estimated costs are insignificant;
|
|
4.
|
upgrades and enhancements during the PCS term have historically been and are expected to continue to be minimal and infrequent; and
|
|
5.
|
the contract does not include any service elements that are accounted for separately.
|
All other services are
provided under separate agreements and fee arrangements and the related revenue is recognized over the period the services are
provided.
Unbilled revenue consists
of recognized recoverable costs and accrued profits on contracts for which billings had not been presented to clients as of the
balance sheet date.
We present all sales revenue
net of a value-added tax (“VAT”) .
The Company recognizes
revenue using the fair value of the software and service by reference to the retail market price of the software and service. These
revenues are recorded as “Software Revenue”.
Cost of sales
When the criteria for
revenue recognition have been met, costs incurred are recognized as cost of sales. Cost of sales (exclusive of depreciation and
amortization) primarily includes the cost of the hardware purchased from the third parties, direct labor, materials and the applicable
share of overhead expense directly related to the execution of services and delivery of projects.
The Company's PRC subsidiary
and VIE are subject to business tax on revenues related to certain types of services at various rates. Business tax on revenues
earned from provision of services to customers is recorded as an additional item to cost of sales in the same period in which the
related revenue is recognized.
Accounts and notes receivable
Accounts and notes receivable
are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed.
The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s
existing accounts receivable. The Company determines the allowance based on aging data, historical collection experience, customer
specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. The Company did not have any off-balance-sheet credit exposure
related to its customers.
Inventories
Inventories consist of
raw materials, finished goods, and project-in-progress, which include the direct labor, direct materials and overhead costs related
to projects. Inventories are stated at lower of cost or market value. Cost is determined using first in first out method.
Where there is
evidence that the market value of inventories, in their disposal in the ordinary course of business, will be less than cost, whether
due to physical deterioration, obsolescence, changes in price levels, or other causes, the carrying value of inventories will be
written down.
Share-based compensation
Share options granted
to employees and independent directors are accounted for under ASC 718, "
Share-Based Payment
". In accordance with
ASC 718, the Company determines whether a share option should be classified and accounted for as a liability award or an equity
award. All grants of share options to employees classified as equity awards are recognized in the financial statements based on
their grant date fair values. All grants of share options to employees classified as liability awards are re-measured at the end
of each reporting period with an adjustment for fair value recorded to the current period expense in order to properly reflect
the cumulative expense based on the current fair value of the vested options over the vesting period. The Company has elected to
recognize compensation expenses using the Black-Scholes-Merton (BSM) option-pricing model estimated at the grant date based on
the award’s fair value and is recognized as expense on a straight-line basis for each separately vesting portion of the award
(the graded vesting attribution method).
Restricted stock units
(RSUs) are measured based on the fair market values of the underlying stock on the dates of grant. Shares are issued on the vesting
dates net of the statutory withholding requirements to be paid by us on behalf of our employees. As a result, the actual number
of shares issued will be fewer than the actual number of RSUs outstanding. Also, the Company recognizes stock-based compensation
using the graded vesting attribution method.
The Company records share-based
compensation expense for awards granted to non-employees in exchange for services at fair value in accordance with the provisions
of ASC 505-50, "
Equity based payment to non-employees
”. For the awards granted to non-employees, the Company
will record compensation expenses equal to the fair value of the share at the measurement date, which is determined to be the earlier
of the performance commitment date or the service completion date.
Impairment of long-lived assets
The Company applies the
Accounting Standards Codification (“ASC”) No. 360-10 “
Property, plant and equipment
”, ASC NO. 360
requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the
carrying value exceeds the fair value.
The Company tests long-lived
assets, including property, plant and equipment and intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater
than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent
of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation
of potential impairment and then compares the carrying amount of the asset to the future estimated cash flows expected to result
from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company
measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value
is generally measured by discounting expected future cash flows as the rate the Company utilizes to evaluate potential investments.
The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are
considered necessary. No impairment of long-lived assets was recognized for the years ended September 30, 2015 and 2014, respectively.
Recently Issued Accounting Standards
In August 2014,
the FASB issued ASU 2014-15, “
Presentation of Financial Statements—Going Concern (Subtopic 205-40)
”. In
connection with preparing financial statements for each annual and interim reporting period, an entity’s management should
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year
after the date that the financial statements are available to be issued when applicable). The amendments in this Update are effective
for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application
is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial
position and results of operations.In August, 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts with Customers (Topic
606): Deferral of the Effective Date
. The amendment defers the effective date of ASU No. 2014-09 for all entities for one year.
The guidance in ASU 2014-09 will now apply to public business entities, certain not-for-profit entities, and certain employee benefit
plans from annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period.
Earlier application is permitted only as of annual reporting periods after December 31, 2016, including interim reporting periods
with that reporting period.
In September,
2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805)
. ASU No. 2015-16 requires that an acquirer retrospectively
adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for
adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined.
The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in
depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as
if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on
the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period
earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts
had been recognized as of the acquisition date. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s
consolidated financial statements.
In November 2015,
the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. The new guidance requires that all deferred
tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. This
update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company
does not anticipate the adoption of this ASU will have a significant impact on its consolidated financial position, results of
operations, or cash flows.
In February 2016, the FASB
issued ASU No. 2016-02,
Leases (Topic 842)
. The guidance in ASU No. 2016-02 supersedes the lease recognition requirements
in ASC Topic 840,
Leases (FAS 13)
. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease
for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect
this standard will have on its consolidated financial statements.
In March 2016, the FASB
issued ASU 2016-09,
Improvements to Employee Share Based Payment Accounting
, to simplify several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. The guidance will be effective for annual periods beginning after December 15,
2016 and interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The
Company is currently evaluating the impact of the adoption of this newly issued guidance to its consolidated financial statements.
In April 2016, the FASB
issued ASU No. 2016-09,
Compensation—Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment
Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions. The areas for simplification
in ASU No. 2016-09 include the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The amendments in this ASU will be effective for annual periods beginning after December 15, 2016
and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of
the adoption of ASU No. 2016-09 on its consolidated financial statements
In June 2016, the FASB
issued ASU No. 2016-13,
Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial
Instruments. Financial Instruments—Credit Losses (Topic 326) amends guideline on reporting credit losses for assets held
at amortized cost basis and available-for-sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the
probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all
expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of
the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses
should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance
rather than as a write-down. ASU No. 2016-13 affects entities holding financial assets and net investment in leases that are not
accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments
in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope
that have the contractual right to receive cash. The amendments in this ASU will be effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption
of ASU No. 2016-13 on its consolidated financial statements.
In August 2016,
the FASB issued ASU No. 2016-15,
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon
debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest
rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance
claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies;
distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable
cash flows and application of the predominance principle. The amendments in this ASU are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. The Company is currently evaluating the impact of the adoption of ASU No. 2016-15 on its
consolidated financial statements.
B.
LIQUIDITY
AND CAPITAL RESOURCES
The information contained
in “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Liquidity and Capital Resources”
is incorporated herein by reference.
C. RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
The discussions of our
research and development activities were contained in “Item 4. Information about our Company – B. Business
Overview – Research and Development” and “Item 5. Operating and Financial Review and Prospects – A.
Operating Results – Operating Expenses – Research and Development Expenses” are incorporated herein by reference. In
the years ended September 30, 2016, 2015 and 2014, we spent $56,654 $288,214 and $202,481, respectively, on research and development
activities.
D. TREND INFORMATION.
Industry and Market Outlook
China has awarded
licenses to mobile phone companies to provide the superfast 4G network to customers. The licenses, which are designed to give mobile
phone users faster access to services, were granted by the government to China Mobile, China Unicom Hong Kong and China Telecom.
Since China Mobile offered 4G to subscribers from December 18, 2013. It was followed by China Unicom and China Telecom, the country's
other two major carriers. China Mobile 4G customers has exceeded 400 million by the end of October in 2016. The move greatly boosted
business for telecom equipment makers and a range of other companies.
Under China’s 12th
Five-Year Plan, a key priority is for China to transition from “Made in China” to “Designed in China.”
In order to achieve this goal, the government plans to heavily invest in science and technology education and R&D so as to
further develop China’s intellectual property rights system and support “Next-Generation IT” as a Strategic Emerging
Industry (SEI). Additionally, China plans to upgrade the technological capabilities of private and public services, including “triple
play” services (the convergence of telecom, broadcasting and Internet networks), ecommerce, and e-government and statistics
systems. Furthermore, the government plans to invest in R&D of the "Internet of things" and cloud computing, and
develop digital and virtual technologies.
E. OFF-BALANCE SHEET
ARRANGEMENTS
We have not
entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are
not reflected in our consolidated financial statements. Furthermore, except for the mortgage referenced above, we do not have any
retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk
support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market
risk or credit support to us or engages in leasing, hedging or research and development services with us.
F. TABULAR DISCLOSURE
OF CONTRACTUAL OBLIGATIONS
As of September 30, 2016,
we did not have any contractual obligations required to be disclosed in this Item 5.F.
ITEM 6. DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES.
A. DIRECTORS AND SENIOR
MANAGEMENT.
Executive Officers and Directors
The following table sets
forth the names and ages as of the date of this annual report of each of our executive officers and directors:
Name
|
|
Age
|
|
Position
|
Tao Li
|
|
51
|
|
Chairman
|
Peng Zhang
|
|
49
|
|
Chief Executive Officer
|
Li Wu
|
|
54
|
|
Chief Financial Officer
|
Lili Dong(1)(2)(3)
|
|
56
|
|
Independent Director
|
Xianyun Zhang (1)(2)(3)
|
|
52
|
|
Independent Director
|
Junwei Wang (1)(2)(3)
|
|
41
|
|
Independent Director
|
|
(1)
|
Member of the Compensation Committee
|
|
(2)
|
Member of the Audit Committee
|
|
(3)
|
Member of the Nominating and Corporate Governance Committee
|
Set forth below is biographical
information concerning our executive officers and directors.
Tao Li
has
served as our chairman of the board of directors since December 2009. Since December 26, 2007, Mr. Li has served as the chairman
of the board of directors, Chief Executive Officer and President of China Green Agriculture, Inc. (NYSE: CGA), a producer of humic
acid based fertilizer products. Currently, Mr. Li devotes approximately 70% of his professional time to China Green Agriculture,
Inc. Since 2000, Mr. Li has served as the President and CEO of Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”),
a wholly-owned subsidiary of China Green Agriculture, Inc., when he formed Jinong. Mr. Li established Xi’an TechTeam Industry
(Group) Co., Ltd. in 1996. He graduated from Northwest Polytechnic University and obtained his Master’s degree in heat and
metal treatment. Mr. Li is the current Vice Chairman of the China Green Food Association. Previously, he has held positions at
the World Bank Loan Office of China Education Commission, National Key Laboratory for Low Temperature Technology, and Northwest
Polytechnic University. Mr. Li is active in Shaanxi Province business and trade organizations including being a member of the CPPCC
Shaanxi Committee, the Shaanxi Provincial Decision-Making Consultation Committee, Vice Chairman of the Shaanxi Provincial Federation
of Industry and Commerce, Vice President of the Shaanxi Overseas Friendship Association, Vice Chairman of the Shaanxi Provincial
Credit Association, Vice Chairman of the Shaanxi Provincial Youth Entrepreneurs Association, Vice Chairman of the Xi’an Municipal
Federation of Industry and Commerce and Vice Chairman of the Xi’an Municipal Youth Entrepreneurs Association. These
attributes make Mr. Li an ideal person to be our Chairman.
Peng Zhang
has served as our Chief Executive Officer since December 2009. Since March 2009, Mr. Zhang has served as the President and Chief
Executive Officer of Kingtone Information, our contractually-controlled PRC operating company. Mr. Zhang joined Kingtone Information
in August 2001 as an engineer and subsequently worked as the manager of the automation department, deputy manager and manager of
the management and control department, and the vice president. Prior to joining Kingtone Information, Mr. Zhang was the deputy
general manager of Lanzhou Hualong Gardening Co., Ltd. from January 2000 to July 2001. Prior to that, Mr. Zhang worked as a technician,
assistant engineer, engineer and deputy department head at the material supply department of Yumen Petroleum Administration Bureau
of China National Petroleum Corporation (“CNPC”) from 1988 to 1999. Mr. Zhang graduated from Chongqing Petroleum Technical
School with an Associate degree in mining mechanics in 1988. He continued his education at the Open College of the Communist Party
of China (“CPC”) University, Gansu Campus and graduated in 2000 with a Bachelor’s degree in Business Administration.
We believe Mr. Zhang’s knowledge of our history and expertise in the engineering area qualify him to serve our Chief Executive
Officer.
Li Wu
has
served as our Chief Financial Officer since May 31, 2011. Prior to becoming our Chief Financial Officer, Ms. Li Wu served as a
director of our company since December 2009, and served as the Chief Financial Officer of our company from December 2009 to April
2010. Since 2004, Ms. Wu has served as the finance director of Kingtone Information, our contractually-controlled PRC operating
company. Prior to this position, she worked as the Deputy Finance Director at the state-owned Xi’an Metal forming Machine
Factory from 1981 to 2003. Ms. Wu graduated from Shaanxi Finance and Economics College and obtained her Bachelor’s degree
in 1990. She is a Certified Public Account in PRC. We believe Ms. Wu’s knowledge of our history and her accounting background
suit her to be our Chief Financial Officer.
Dr. Lili Dong
has served as an independent director of our Company since March 2010. Dr. Dong has over 20 years’ experience in the computing
distributed system, computer network application and data mining research. She has been a professor of Xi’an Construction
Science & Technology University since December 2007. Dr. Dong has led several important research projects, including Distributed
Object Computing Models and Multimedia Digital Watermarking Application projects funded by Shanxi Province Fund, Peer to Peer Network
Communication Technology project funded by Xi’an Science & Technology Bureau. Dr. Dong’s experience in computing
distributed system and other similar areas qualifies her to serve as our director and chairman of our compensation committee.
Xianyun Zhang
,
CICPA, has over 20 years of experience in accounting and has served as an independent director of the Company since December 2011.
Since 2004, he has served as the chairman of Beijing Zhongzheng Tiantong Certified Public Accountant Co., Ltd. Mr. Zhang previously
worked at Beijing Zhongzhou Guanghu Certified Public Accountant Co., Ltd, the Import-Export Bank of China, and the Ministry of
Finance in the People’s Republic of China. Mr. Zhang obtained a bachelor’s degree in accounting in 1988 from Jiangxi
University of Finance and Economics. In 1996, Mr. Zhang obtained a master’s degree in accounting from Zhejiang University.
Mr. Zhang’s accounting and financial management expertise qualifies him to be our director and chairman of the audit committee.
Junwei Wang
has
significant experience in legal affairs and has served as an independent director of the Company since December 2011. Since 2007,
Ms. Wang served as the attorney of China Galaxy Securities Co., Ltd. Ms. Wang previously worked at Beijing Zhongxin
Legal Firm, China Science & Merchants Venture Capital Management Co. Ltd. and Heilongjiang Posts and Telecommunications Bureau.
Ms. Wang obtained a bachelor’s degree in law in 1998 from Heilongjiang University. In 2008, she obtained a master’s
degree in law from Renmin University of China. Ms. Wang’s legal background qualifies her to be our director and chairman
of the nominating and corporate governance committee.
B. COMPENSATION.
Compensation of Directors and
Executive Officers
For the fiscal year ended
September 30, 2016, we paid an aggregate of approximately $41,387 in cash compensation to our executive officers and an aggregate
of approximately $104,112 in cash compensation to our directors for serving on our board of directors.
Other than non-employee
directors, we do not intend to compensate directors for serving on our board of directors or any of its committees. We do, however,
intend to reimburse each member of our board of directors for out-of-pocket expenses incurred by each director in connection with
attending meetings of the board of directors and its committees.
As of September 30, 2016,
we have made the following grants under our 2010 Omnibus Incentive Plan to our directors and executive officers and certain former
directors and officer:
|
|
Type of
Equity Award
|
|
Number of
Ordinary Shares
|
|
|
Exercise Price
|
|
Grant Date
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ying Yang
|
|
Options
|
|
|
10,000
|
|
|
$
|
40.00
|
|
May 14, 2010
|
|
May 14, 2020
|
|
Lili Dong
|
|
Options
|
|
|
1,000
|
|
|
$
|
40.00
|
|
May 14, 2010
|
|
May 14, 2020
|
|
Melody Shi
|
|
Options
|
|
|
666
|
|
|
$
|
40.00
|
|
May 14, 2010
|
|
May 14, 2020
|
|
James Fong
|
|
Options
|
|
|
666
|
|
|
$
|
40.00
|
|
May 14, 2010
|
|
May 14, 2020
|
|
Note : The EPS data and the weighted average
shares outstanding for all periods have been retroactively restated to reflect the 1-for-10 reverse stock split effected on November
6, 2012.
2010 Omnibus Incentive Plan
A description of the provisions
of our 2010 Omnibus Incentive Plan (the “Incentive Plan”) is set forth below. This summary is qualified in its entirety
by the detailed provisions of the Incentive Plan, which was included as an exhibit to our initial registration statement on Form
F-1 filed on April 13, 2010.
In April 2010, our board
of directors and our shareholders approved and adopted the Incentive Plan, reserving 1,500,000 ordinary shares for future issuances
thereunder. The purpose of the Incentive Plan is to attract and to encourage the continued employment and service of, and maximum
efforts by, our officers, key employees and other key individuals by offering those persons an opportunity to acquire or increase
a direct proprietary interest in our operations and future success. As of September 30, 2016, we had outstanding under the Incentive
Plan the equity awards set forth in the table above.
Administration
The Incentive Plan is
administered by our board of directors, or at the discretion of the board, by our compensation committee. Our board of directors
has delegated authority to our compensation committee to administer the Incentive Plan. Subject to the terms of the Incentive Plan,
the compensation committee may select participants to receive awards, determine the types of awards and terms and conditions of
awards, and interpret provisions of the Incentive Plan.
The ordinary shares issued
or to be issued under the Incentive Plan consist of authorized but unissued shares. If any ordinary shares covered by an award
are not purchased or are forfeited, or if an award otherwise terminates without delivery of any ordinary shares, then the number
of ordinary shares counted against the aggregate number of ordinary shares available under the plan with respect to the award will,
to the extent of any such forfeiture or termination, again be available for making awards under the Incentive Plan.
Eligibility
Awards may be made under
the Incentive Plan to our employees, officers, directors, consultants or advisers or to any of our affiliates, and to any other
individual whose participation in the Incentive Plan is determined to be in our best interests by our board of directors.
Amendment or Termination of the Plan
Our board of directors
may terminate or amend the Incentive Plan at any time and for any reason. No amendment, however, may adversely impair the rights
of grantees with respect to outstanding awards. The Incentive Plan has a term of ten years. Amendments will be submitted for shareholder
approval to the extent required by applicable stock exchange listing requirements or other applicable laws.
Options
The Incentive Plan permits
the granting of options to purchase ordinary shares intended to qualify as incentive share options under the Internal Revenue Code
and share options that do not qualify as incentive share options, or non-qualified share options.
The exercise price of
each share option may not be less than 100% of the fair market value of our ADSs representing ordinary shares on the date of grant.
In the case of certain 10% shareholders who receive incentive share options, the exercise price may not be less than 110% of the
fair market value of our ADSs representing ordinary shares on the date of grant. An exception to these requirements is made for
options that we grant in substitution for options held by employees of companies that we acquire. In such a case the exercise price
is adjusted to preserve the economic value of the employee’s share option from his or her former employer.
The term of each share
option is fixed by the compensation committee and may not exceed ten years from the date of grant. The compensation committee determines
at what time or times each option may be exercised and the period of time, if any, after retirement, death, disability or termination
of employment during which options may be exercised.
Options may be made exercisable
in installments. The award agreement provides the vesting of the options. Exercisability of options may be accelerated by the compensation
committee.
In general, an optionee
may pay the exercise price of an option by (1) cash or check (in U.S. dollars or Renminbi or other local currency as approved by
the compensation committee), (2) ordinary shares held for such period of time as may be required by the compensation committee,
(3) delivery of a notice of a market order with a broker with respect to ordinary shares then issuable upon exercise of an option,
and that the broker has been directed to pay us a sufficient portion of net proceeds of the sale in satisfaction of the exercise
price, provided that payment of such proceeds is then made to us upon settlement of such sale, (4) other property acceptable to
the compensation committee with a fair market value equal to the exercise price, (5) cashless exercise or (6) any combination of
the foregoing.
Share options granted
under the Incentive Plan may not be sold, transferred, pledged, or assigned other than by will or under applicable laws of descent
and distribution. However, we may permit limited transfers of non-qualified options for the benefit of immediate family members
of grantees to help with estate planning concerns or pursuant to a domestic relations order in settlement of marital property rights.
Other Awards
The compensation committee
may also award under the Incentive Plan:
|
1.
|
ordinary shares subject to restrictions;
|
|
2.
|
deferred ordinary shares, credited as deferred ordinary share units, but ultimately payable in the form of unrestricted ordinary shares in accordance with the terms of the grant or with the participant’s deferral election;
|
|
3.
|
ordinary share units subject to restrictions;
|
|
4.
|
unrestricted ordinary shares, which are ordinary shares issued at no cost or for a purchase price determined by the compensation committee which are free from any restrictions under the 2011 Omnibus Incentive Plan;
|
|
5.
|
dividend equivalent rights entitling the grantee to receive credits for dividends that would be paid if the grantee had held a specified number of ordinary shares; or
|
|
6.
|
a right to receive a number of ordinary shares or, in the discretion of the compensation committee, an amount in cash or a combination of ordinary shares and cash, based on the increase in the fair market value of the ADSs representing ordinary shares underlying the right during a stated period specified by the compensation committee.
|
Effect of Certain Corporate Transactions
Certain change of control
transactions involving us may cause awards granted under the Incentive Plan to vest, unless the awards are continued or substituted
for by the surviving company in connection with the corporate transaction.
Unless otherwise provided
in the appropriate option agreement on the date of grant or provided by our board of directors thereafter with the consent of the
grantee, options granted under the Incentive Plan become exercisable in full following (1) a dissolution of our company or a merger,
consolidation or reorganization of our company with one or more other entities in which we are not the surviving entity, (2) a
sale of substantially all of our assets to another person or entity, or (3) any transaction (including without limitation a merger
or reorganization in which we are the surviving entity) which results in any person or entity owning 50% or more of the combined
voting power of all classes of our shares.
Adjustments for Dividends and Similar
Events
The compensation
committee will make appropriate adjustments in outstanding awards and the number of ordinary shares available for issuance under
the Incentive Plan, including the individual limitations on awards, to reflect ordinary share dividends, stock splits and other
similar events.
C. BOARD PRACTICES.
Board of Directors
Our board of directors
consists of five members being Mr. Tao Li, Ms. Li Wu, Dr. Lili Dong, Mr. Xianyun Zhang and Ms. Junwei Wang. Our directors hold
office until our annual meeting of shareholders, where their successors will be duly elected and qualified, or until the directors’
death, resignation or removal, whichever is earlier. Our directors are not subject to a term of office and hold office until their
resignation, death or incapacity or until their respective successors have been elected and qualified in accordance with our fourth
amended and restated memorandum of association and articles of association. A director will be removed from office if, among other
things, the director (1) becomes bankrupt, (2) dies or becomes of unsound mind, or (3) is absent from meetings of our board of
directors for six consecutive months without leave and our board of directors resolves that the office is vacated. A director is
not entitled to any special benefits upon termination of service with the company.
Director Independence
Our board of directors
consists of five members, Dr. Lili Dong, Mr. Xianyun Zhang and Ms. Junwei Wang have been determined by us to be independent directors
within the meaning of the independent director guidelines of the NASDAQ Corporate Governance Rules (the “NASDAQ Rules”).
Committees of Our Board of Directors
To enhance our corporate
governance, we established three committees under our board of directors: an audit committee, a compensation committee, and a nominating
and corporate governance committee. We have adopted a charter for each of these committees. The committees have the following functions
and members.
Audit Committee
Our audit committee reports
to our board of directors regarding the appointment of our independent public accountants, the scope and results of our annual
audits, compliance with our accounting and financial policies and management’s procedures and policies relating to the adequacy
of our internal accounting controls. Our audit committee consists of Dr. Lili Dong, Mr. Xianyun Zhang and Mr. Junwei Wang. Mr.
Xianyun Zhang, having accounting and financial management expertise, serves as the chairman of the audit committee. Our board of
directors has determined that each of these persons meet the definition of an “independent director” under
the applicable NASDAQ Rules and under Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Our audit committee is
responsible for, among other things:
|
●
|
the appointment, evaluation, compensation, oversight and termination of the work of our independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting);
|
|
|
|
|
●
|
an annual performance evaluation of the audit committee;
|
|
|
|
|
●
|
establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, auditing matters or potential violations of law, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters or potential violations of law;
|
|
|
|
|
●
|
ensuring that it receives an annual report from our independent auditor describing our internal control procedures and any steps taken to deal with material control deficiencies and attesting to the auditor’s independence and describing all relationships between the auditor and us;
|
|
|
|
|
●
|
reviewing our annual audited financial statements and quarterly financial statements with management and our independent auditor;
|
|
|
|
|
●
|
reviewing and approving all proposed related party transactions;
|
|
●
|
reviewing
our policies with respect to risk assessment and risk management;
|
|
|
|
|
●
|
meeting separately and periodically with management and our independent auditor; and
|
|
|
|
|
●
|
reporting regularly to our board of directors.
|
Compensation Committee
Our compensation committee
assists the board of directors in reviewing and approving the compensation structure of our directors and executive officers, including
all forms of compensation to be provided to our directors and executive officers. In addition, the compensation committee reviews
share compensation arrangements for all of our other employees. Members of the compensation committee are not prohibited from direct
involvement in determining their own compensation. Our chief executive officer is not permitted to be present at any committee
meeting during which his or her compensation is deliberated. Our compensation committee consists of Lili Dong, Xianyun Zhang and
Junwei Wang, with Dr. Dong serving as the chairman of the compensation committee. Our board of directors has determined that each
of these persons meet the definition of “independent director” under the applicable requirements of the NASDAQ Rules.
Our compensation committee
is responsible for, among other things:
|
●
|
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives and setting the compensation level of our chief executive officer based on this evaluation;
|
|
|
|
|
●
|
reviewing and making recommendations to the board with respect to the compensation of our executives, incentive compensation and equity-based plans that are subject to board approval; and
|
|
|
|
|
●
|
providing annual performance evaluations of the compensation committee.
|
Nominating and Corporate Governance Committee
Our nominating and corporate
governance committee assists the board of directors in identifying and selecting or recommending individuals qualified to become
our directors, developing and recommending corporate governance principles and overseeing the evaluation of our board of directors
and management. Our nominating and corporate governance committee consists of Lili Dong, Xianyun Zhang and Junwei Wang, with Ms.
Wang serving as the chairman of the nominating and corporate governance committee. Our board of directors has determined that each
of these persons meet the definition of “independent director” under the applicable requirements of the NASDAQ Rules.
Our nominating and corporate
governance committee is responsible for, among other things:
|
●
|
selecting
and recommending to our board nominees for election or re-election to our board, or for appointment to fill any vacancy;
|
|
|
|
|
●
|
reviewing annually with our board the current composition of the board of directors with regards to characteristics such as independence, age, skills, experience and availability of service to us;
|
|
|
|
|
●
|
selecting and recommending to our board the names of directors to serve as members of the audit committee and the compensation committee, as well as the nominating and corporate governance committee itself; advising our board of directors periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any remedial action to be taken; and
|
|
|
|
|
●
|
monitoring
compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures
to ensure proper compliance.
|
Code of Business Conduct and Ethics
Our board of directors
adopted a code of business conduct and ethics applicable to our directors, officers and employees.
Duties of Directors
Under British Virgin Islands
law, our directors have a duty to act honestly, in good faith and with a view to our best interests. Our directors also have a
duty to exercise care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. In fulfilling
their duty of care to us, our directors must ensure compliance with our memorandum of association and articles of association.
We have the right to seek damages if a duty owed by our directors is breached.
The functions and powers
of our board of directors include, among others:
|
●
|
appointing officers and determining the term of office of the officers;
|
|
|
|
|
●
|
authorizing the payment of donations to religious, charitable, public or other bodies, clubs, funds or associations as deemed advisable;
|
|
|
|
|
●
|
exercising the borrowing powers of the company and mortgaging the property of the company;
|
|
|
|
|
●
|
executing cheques, promissory notes and other negotiable instruments on behalf of the company; and
|
|
|
|
|
●
|
maintaining or registering a register of mortgages, charges or other encumbrances of the company.
|
Remuneration and Borrowing
The directors may receive
such remuneration as our board of directors may determine from time to time. Each director is entitled to be repaid or prepaid
all traveling, hotel and incidental expenses reasonably incurred or expected to be incurred in attending meetings of our board
of directors or committees of our board of directors or shareholder meetings or otherwise in connection with the discharge of his
or her duties as a director. The compensation committee will assist the directors in reviewing and approving the compensation structure
for the directors.
Our board of directors
may exercise all the powers of the company to borrow money and to mortgage or charge our undertakings and property or any part
thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability
or obligation of the company or of any third party.
Qualification
A director is not required
to hold shares as a qualification to office.
Limitation on Liability and Other Indemnification
Matters
British Virgin Islands
law does not limit the extent to which a company’s memorandum of association and articles of association may provide for
indemnification of officers and directors, except to the extent any such provision may be held by the British Virgin Islands courts
to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Under our memorandum of
association and articles of association, we may indemnify our directors, officers and liquidators against all expenses, including
legal fees, and against all judgments, fines and amounts paid in settlement and reasonably incurred in connection with civil, criminal,
administrative or investigative proceedings to which they are party or are threatened to be made a party by reason of their acting
as our director, officer or liquidator. To be entitled to indemnification, these persons must have acted honestly and in good faith
with a view to the best interest of the company and, in the case of criminal proceedings, they must have had no reasonable cause
to believe their conduct was unlawful.
Compensation Committee Interlocks and Insider
Participation
None of the members of
our compensation committee is an officer or employee of our company. None of our executive officers currently serves, or in the
past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive
officers serving on our board of directors or compensation committee.
Employment Agreements
In 2009, each of our executive
officers has entered into a five-year employment agreement with Softech, our wholly-owned PRC subsidiary. In 2015, certain of our
executive officers renewed the employment agreement for five years ending in 2019. Softech may terminate a senior executive officer’s
employment for cause, at any time, without prior notice or remuneration, for certain acts of the officer, including, but not limited
to, material violation of our regulations, failure to perform agreed duties or embezzlement that caused material damage to us and
conviction of a crime. A senior executive officer may terminate his or her employment at any time by 30-days prior written notice.
Each senior executive officer is entitled to certain benefits upon termination, including a severance payment equal to a certain
specified number of months of his or her then salary, if he or she resigns for certain good reasons specified by the agreement
or the relevant rules or if Softech terminated his or her employment without any of the above causes.
D. EMPLOYEES.
As of September 30, 2016,
we had a total of 49 full-time employees, including 10 in research and development, four in sales and marketing and the rest in
a variety of other divisions. All of our employees are full-time employees. None of our employees is currently represented by a
union and/or collective bargaining agreements. We believe that we have good relations with our employees and since our inception
we have had no history of work stoppages or union organizing campaigns.
E. SHARE
OWNERSHIP.
The following table provides
information as to the beneficial ownership of our ordinary shares as of December 21, 2016 by the persons listed. Beneficial ownership
of shares is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared
voting or investment power. For purposes of the following table, a person is deemed to have beneficial ownership of any ordinary
shares if such person has the right to acquire such shares within 60 days of December 21, 2016. For purposes of computing the percentage
of outstanding shares held by each person, any shares that such person has the right to acquire within 60 days after of December
21, 2016 are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership
of any other person. Except as otherwise noted, the persons named in the table have sole voting and investment power with respect
to all of the ordinary shares beneficially owned by them. Unless otherwise indicated, the address of each person listed is c/o
Xi’an Kingtone Information Co., Ltd., 3rd Floor, Borough A, Block A. No. 181, South Taibai Road, Xi’an, Shaanxi Province,
People’s Republic of China 710065.
Percentage ownership in
the following table is based on 1,405,000 ordinary shares outstanding on December 21, 2016.
Name
|
|
Position
|
|
Number of
Shares
Beneficially
Owned
|
|
|
Percent of Shares
Outstanding
|
|
Officers
and Directors
|
|
|
|
|
|
|
|
|
Tao
Li
|
|
Chairman
|
|
|
672,676
|
(1)
|
|
|
47.9
|
%
|
Li
Wu
|
|
Chief
Financial Officer, Director
|
|
|
10,676
|
(2)
|
|
|
|
*
|
Peng
Zhang
|
|
Chief
Executive Officer
|
|
|
3,500
|
(3)
|
|
|
|
*
|
Lili
Dong
|
|
Independent
Director
|
|
|
1,000
|
(4)
|
|
|
|
*
|
Xianyun
Zhang
|
|
Independent
Director
|
|
|
|
0
|
|
|
|
*
|
Junwei
Wang
|
|
Independent
Director
|
|
|
|
0
|
|
|
|
*
|
All
directors and executive officers as a group (6 persons)
|
|
|
|
|
|
|
|
|
48.92
|
%
|
5%
Shareholders
|
|
|
|
|
|
|
|
|
|
|
Hu
Gao
|
|
n/a
|
|
|
125,432
|
(5)
|
|
|
8.9
|
%
|
SCGC
Capital Holding Company Limited
|
|
n/a
|
|
|
106,071
|
(6)
|
|
|
7.5
|
%
|
Xuetao
Chen
|
|
n/a
|
|
|
88,398
|
(7)
|
|
|
6.3
|
%
|
*
|
Less than 1%.
|
|
|
|
|
(1)
|
Represents (i) 68,864 ADSs owned by Mr. Li and (ii) 603,811.6 ordinary shares held of record by First Choice Investment Ltd, a company organized under the laws of Somoa, which are beneficially owned by Mr. Li.
|
|
(2)
|
Represents (i) 4,375.4 ordinary shares held of record by Ms. Wu and (ii) 6,300.7 ordinary shares held of record by Xtra Heights Management Ltd (“Xtra”), a company organized under the laws of the British Virgin Islands, which are beneficially owned by Ms. Wu pursuant to a certain Call Option Agreement, dated December 15, 2009, between Ms. Wu, Xtra and Sha Li.
|
|
(3)
|
Represents
(i) 875 ordinary shares held of record by Mr. Zhang, and (ii) 2,625.3 ordinary shares held of record Xtra, which are beneficially
owned by Mr. Zhang pursuant to a certain Call Option Agreement, dated December 15, 2009, between Mr. Zhang, Xtra and Sha Li.
|
|
|
|
|
(4)
|
Represents
options to purchase 1,000 ordinary shares exercisable within 60 days.
|
|
|
|
|
(5)
|
Represents
ADSs owned by Silver Avenue Overseas Inc., a British Virgin Islands company, which are beneficially owned by Hu Gao.
|
|
(6)
|
Represents ADSs owned by SCGC Capital
Holding Company Limited, a British Virgin Islands company (“SCGC”), which is owned by Shenzhen Capital Group Co.,
Ltd. The registered address of SCGC is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
The beneficial owners of the shares held by SCGC are Shenzhen Capital Group Co., Ltd and Xi’an Hongtu Capital Co., Ltd.,
both of which are shareholders of Xi’an Kingtone Information Co., Ltd. (“Kingtone Information”) and are owned
and controlled (as to voting and disposition) by the Shenzhen Municipal Government in the PRC.
|
|
(7)
|
Represents ADSs owned by Big Leap Enterprises Limited, a British Virgin Islands company (“Big Leap”), which are beneficially owned by Mr. Chen. Big Leap is the owner of an aggregate of 115,357 ADSs, of which the remaining ADSs are beneficially owned by shareholders of Kingtone Information other than Mr. Chen.
|
ITEM 7. MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS.
A. MAJOR SHAREHOLDERS
Please refer to Item 6.E
“Directors, Senior Management and Employees — Share Ownership.”
To our knowledge, (A) we
are not directly or indirectly owned or controlled by (i) another corporation or (ii) any foreign government and (B) there
are no arrangements (including any announced or expected takeover bid), the operation of which may at a subsequent date result
in a change in our control.
The voting rights of our
major shareholders do not differ from the voting rights of other holders of the same class of shares.
B. RELATED
PARTY TRANSACTIONS. BUSINESS RELATIONSHIPS.
Members of our management
team and our principal shareholders currently hold majority equity interests in Kingtone Information, our contractually-controlled
entity in the PRC from which we derive substantially all of our revenues. We are party to a series of control agreements with Kingtone
Information. See “Item 4 – Information About the Company – C. Organizational Structure - Contractual Arrangements
with Kingtone Information and Its Respective Shareholders”. In addition, certain of our officers, directors and
principal shareholders serve as officers and directors of Kingtone Information and/or are shareholders of Kingtone Information.
The following table sets forth the relationship of such officers, directors and principal shareholders with Kingtone Information
and their respective ownership interest in Kingtone Information:
Name
|
|
Relationship with
Kingtone Wireless
|
|
Relationship with
Kingtone Information
|
|
Percentage
Ownership
Interest in
Kingtone
Information
|
|
Tao Li
|
|
Chairman
|
|
Chairman
|
|
|
61.61
|
%
(1)
|
Peng Zhang
|
|
Chief Executive Officer
|
|
Vice President
|
|
|
0.36
|
%
|
Li Wu
|
|
Chief Financial Officer
|
|
Chief Financial Officer
|
|
|
1.09
|
%
|
Shenzhen Capital Group Co.,
Ltd.
(2)
|
|
Indirect Shareholder
|
|
Shareholder
|
|
|
10.72
|
%
|
Xuetao Chen
|
|
Indirect Shareholder
|
|
Shareholder
|
|
|
8.93
|
%
|
(1)
|
Consists of (i) 36.61% of the shares of Kingtone Information owned of record by Mr. Li, and (ii) 25% of the shares of Kingtone Information owned of record by Xi’an TechTeam Investment Holding Group Company (“TechTeam Investment”). Mr. Li, as the majority shareholder of TechTeam Investment, has dispositive power over the shares of Kingtone Information owned by TechTeam Investment.
|
(2)
|
Shenzhen Capital Group Co., Ltd. has dispositive power with respect to the 106,071 ADSs of our company held of record by SCGC Capital Holding Company Limited.
|
Our Beijing branch office
is located in office space leased to us by Mr. Tao Li, our Chairman, who owns this space. We lease it from him for no consideration.
On September 30, 2010,
Kingtone Information entered into a lease agreement with Shaanxi TechTeam Jinong Humic Acid Product Co., Ltd. (“Jinong”),
a wholly-owned subsidiary of CGA, pursuant to which Jinong rents 360 square meters of office space from Kingtone Information. The
lease provides for a two-year term effective as of July 1, 2010 with monthly rent of RMB10,800, or approximately $1,600. On June
29, 2012, Kingtone Information renewed the lease agreement with Jinong for the monthly rent of US$3,867 (RMB24,480) for a two-year
term starting from July 1, 2012. From July 1, 2014 to June 29, 2016, the monthly rent was US$3,977 (RMB24,480). On June 29, 2016,
the lease was renewed with Jinong with the same monthly rent in the prior term for another two-year term from July 1, 2016.
As of September 30, 2016,
we had the outstanding loans as listed below. Each entity is indirectly owned and controlled by Mr. Tao Li, our Chairman. The Company
provided short-term financing to such parties:
As of September 30, 2016,
we had an outstanding loan of approximately $44 thousand to Shaanxi Tech Team Jinong Humid Acid Product Co., Ltd., which was indirectly
owned and controlled by Tao Li, Chairman of the Company. The largest amount of the outstanding loan was $83 thousand during the
past three years. The loan was the unsecured rental expense, interest free and payable on demand.
As of September 30, 2016,
we had an outstanding loan of approximately $1.8 million to Xi’an Tech Team Investment Holdings (Group) Co., Ltd. (the “Group
Company”), which was 66% indirectly owned and controlled by Tao Li, Chairman of the Company. The largest amount of the outstanding
loan was $1.2 million during the past three years. This loan was an unsecured verbal agreement and bearing no interest, which provided
one-year term starting from January 1, 2016.
On November 1, 2013 and
August 10, 2015, the Company entered into loan agreements with Xi’an Xinrong Engineering and Industry (Group) Co., Ltd (“Xinrong”),
which was 74% indirectly owned and controlled by Tao Li, Chairman of the Company, pursuant to which the Company provides $1.8
million and $2.7 million to Xinrong for its normal business operations. The largest amount of each outstanding loan was $1.8 million
and $2.7 million since such a loan was made which was also the outstanding loan amount as of September 30, 2016 and 2015, respectively.
Each of the unsecured loans was interest free for a three-year term and five-year term, respectively.
Section 402 of the Sarbanes-Oxley
Act of 2002 (“Section 402”) amended the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
by adding Section 13(k) that contains certain provision making it unlawful for any issuer, “directly or indirectly, including
through any subsidiary, to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit,
in the form of a personal loan
(emphasis added) to or for any director or executive officer (or equivalent thereof)
of that issuer.”
The loans the Company
lent to the Group Company and Xinrong as referenced above (the “Loans”) should not be considered prohibited under
Section 402 because they are not “personal loans” as the statute defines and they are not related to the concerns
the statute was designed to address. Consequently, the Company believes the Loans comply with Section 13(k) of the Exchange Act.
The Sarbanes-Oxley loan provision as cited above prohibits only “arrange for the extension of credits” “in the
form of a personal loan” to directors and executive officers. A loan made to a company controlled by an executive officer
or director would be prohibited by Section 402 if made primarily for the executive officer’s or director’s personal
benefit. In contrast, if such a loan is made primarily for legitimate business purposes of the borrowing company (other than compensation
of the controlling executive officer or director), it should not be prohibited by Section 402.
In our case, the Company
lent a total of $5.7 million to its affiliate companies (the “Borrowers”) which are two information technology developers.
The Borrowers are going to apply the Loans to advance their businesses. In return, when the Borrowers grow and cumulate funds,
they will support the Company to seize its chance when the Company identifies suitable business opportunities and demands large
working capital. It is common practice in China that affiliated companies make loans to each other to achieve business development
when funds are available in one entity but are in demand in another entity. Therefore, we believe the Loans are not “personal
loans” because the primary purpose of the Loans, from the perspective of the Company, is to advance the business of the Company,
as oppose to benefiting the directors of the Company.
The proceeds of the loans
to “Xinrong”, an information technology developer, were used to research and develop certain application for a police
geographic detection system. Once the project is completed, this technology could be shared by Kingtone Information given we had
provided Xinrong the funding support. Xinrong, who otherwise has no obligation to share the technology with us, will provide us
necessary technology support in return. The terms for the loans are three years and five years but the parties both understand
that if the project is completed earlier than expected, the loans could be repaid to us earlier. In addition, if we demand the
early repayment, Xinrong should honor such a demand. The loans are interest free so that sufficient consideration is given to Xinrong
to provide us with the technology support we need. Mr. Tao Li indirectly owns 74% of Xinrong but the other shareholder is not a
shareholder of the Company.
The proceed of the loan
made to Group Company was for the marketing expenses of the Group Company. The Group Company has reached out to more clients and
it otherwise has no obligation to cross-sell to Kingtone Information its clients who may need Kingtone Information’s products.
With the loan from us, the Group Company could refer their clients to Kingtone Information so that our market share may expand
faster than we develop it from scratch. The terms of the loan is for five years but early repayment is permitted. Furthermore,
if we demand the early repayment, the Group Company should honor such a demand. Mr. Tao Li owns 66% of the Group Company. The other
shareholders of the Group Company are not shareholders of the Company.
When Sarbanes-Oxley loan
provisions were put into legislation, among the reasons identified were concerns over the use of company funds to provide personal
financing to insiders. Here, Chairman of the Company, who controlled the Borrowers did not get any personnel benefits from the
Loans. The Loans are made on a company to company basis and for legitimate business purposes. Consequently, we believe the Loans
comply with Section 13(k) of the Exchange Act.
On January 17, 2017, the Borrowers repaid a total of $4.4 million to the Company.
C. INTERESTS
OF EXPERTS AND COUNSEL.
None.
ITEM 8. FINANCIAL INFORMATION.
A. CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION.
See “Item 18. Financial
Statements.”
Legal Proceedings
We are not currently a
party to any material legal proceeding and, to our knowledge, there are no material legal proceedings threatened against us. From
time to time, we may be subject to various claims and legal actions arising in the ordinary course of business.
Dividend Policy
We currently intend to
retain all of our available funds and future earnings for use in the operation and expansion of our business and do not anticipate
paying cash dividends in the foreseeable future. Under the terms of our Amended and Restated Memorandum and Articles of Association
the declaration and payment of any dividends in the future will be determined by our board of directors, in its discretion, and
will depend on a number of factors, including our earnings, capital requirements and overall financial condition and our ability
to receive dividends from our subsidiaries. If we pay any dividends, we will pay our ADS holders dividends with respect to their
underlying shares to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including
the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
Our ability to receive
dividends from our subsidiaries may limit our ability to pay dividends on our ordinary shares. See Risk Factors – Risks
Related to Doing Business in China – Our holding company structure may limit the payment of dividends” and
“Item 10. Additional Information – D. Exchange Controls – Dividend Distribution”.
B. SIGNIFICANT CHANGES.
Except as otherwise set
forth in annual report, there have been no significant changes since September 30, 2016, the date of the financial statements
in this annual report.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS.
Markets and Share Price History
The primary
trading market for our ordinary shares, as represented by American Depositary Shares or ADSs is the NASDAQ Capital Market, where
our shares have been listed and traded under the symbol KONE since May 14, 2010.
The
table below sets forth the high and low reported sales prices in dollars of our ordinary shares, which are represented by ADSs,
as reported by NASDAQ in the periods as indicated:
|
|
ADS
|
|
|
|
High
|
|
|
Low
|
|
Annual Highs and Lows (as of the fiscal year end 09/30 for the five most recent full financial years)*
|
|
|
|
|
|
|
2016
|
|
|
13.85
|
|
|
|
1.60
|
|
2015
|
|
|
7.88
|
|
|
|
2.02
|
|
2014
|
|
|
16.74
|
|
|
|
1.95
|
|
2013
|
|
|
3.80
|
|
|
|
0.20
|
|
2012
|
|
|
1.14
|
|
|
|
0.20
|
|
Quarterly Highs and Lows (for the two most recent full financial years and any subsequent period, based on calendar quarter end)*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
7.8
|
|
|
|
4.12
|
|
Third Quarter
|
|
|
13.85
|
|
|
|
1.60
|
|
Second Quarter
|
|
|
3.43
|
|
|
|
2.19
|
|
First Quarter
|
|
|
3.59
|
|
|
|
2.05
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
4.85
|
|
|
|
2.73
|
|
Third Quarter
|
|
|
7.69
|
|
|
|
3.35
|
|
Second Quarter
|
|
|
7.39
|
|
|
|
3.00
|
|
First Quarter
|
|
|
5.25
|
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
|
Monthly Highs and Lows (for the most recent six months)
|
|
|
|
|
|
|
|
|
December 2016
|
|
|
5.56
|
|
|
|
4.15
|
|
November 2016
|
|
|
7.48
|
|
|
|
4.12
|
|
October 2016
|
|
|
7.80
|
|
|
|
4.31
|
|
September 2016
|
|
|
8.88
|
|
|
|
5.74
|
|
August 2016
|
|
|
8.8
|
|
|
|
4.99
|
|
July 2016
|
|
|
13.85
|
|
|
|
1.60
|
|
* The Company effected a 1-for-10 reverse stock
split of its ordinary shares on November 6, 2012 (the “Reverse Split”). The ratio between each American Depositary
Share (“ADS”) and its underlying ordinary share post-Reverse Split remains the same, namely, one ADR remains to represent
one ordinary share post the Reverse Split. The price listed here after November 6, 2012 reflected the effect from the Reverse Split.
B. PLAN OF DISTRIBUTION.
Not Applicable.
C. MARKETS.
Our ADSs are listed on the NASDAQ
Capital Market under the symbol “KONE”.
D. SELLING SHAREHOLDERS.
Not applicable.
E. DILUTION.
Not applicable.
F. EXPENSES OF THE ISSUE.
Not applicable.
ITEM 10. ADDITIONAL INFORMATION.
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND
ARTICLES OF ASSOCIATION
The description of our
Memorandum of Association and Articles of Association set forth in the section entitled “Description of Share Capital”
contained in Amendment No. 3 to our Registration Statement on Form F-1 filed with the Securities and Exchange Commission on May
11, 2010 is incorporated by reference herein.
C. MATERIAL CONTRACTS.
None.
D. EXCHANGE CONTROLS.
This section sets forth
a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’
right to receive dividends and other distributions from us.
Regulations of the Software Industry
The software industry
in the PRC is regulated pursuant to two primary policies — the Measures Concerning Software Products Administration
(the “Software Products Measures”) and the Recognition Standard and Management measures of Software Enterprises (the
“Standards and Measures”). As further discussed below, Kingtone Information as a registered software enterprise with
registered software products can take advantage of certain favorable tax, investment, government and other programs and policies
that are designed to encourage development of the software industry in the PRC.
Software Products Registration and Administration
On March 1, 2009, the
Ministry of Industry and Information Technology of the People’s Republic of China (the “MIIT”) promulgated the
Software Products Measures which became effective on April 10, 2009. Under the Software Products Measures, software products developed
in China (including those developed in China on the basis of imported software) can enjoy certain favorable policies when the products
have been registered and recorded pursuant to the “Certain Policies to Encourage the Development of Software and Integrated
Circuit Industries” issued by the State Council on June 24, 2000 (the “2000 Software Encouragement Policies”).
Kingtone Information has registered its software products, including its “Wireless emergency command and management system
V1.0,” with the Shaanxi Provincial Department of Information Technology through Kingtone Information. Please refer to the
specific favorable policies under the sub-section below entitled “Policies to Encourage the Development of Software and Integrated
Circuit Industries.”
Software Enterprise Registration and
Administration
On October 16, 2000, the
Ministry of Information Industry, the Ministry of Education, the Ministry of Science and Technology and the State Tax Bureau issued
the “Standard and Measures” to encourage the development of the software industry in China and to enhance the competitiveness
of the PRC information technology industry in the international market. The Standard and Measures provide strict conditions and
standards, including but not limited to, the requirement of ownership of the software products, technical employees proportion,
independent software technology and product research to recognize a company as a “software enterprise”. Such recognized
software enterprises can enjoy the favorable policies pursuant to the 2000 Software Encouragement Policies. Kingtone Information
has been recognized as a software enterprise since January 6, 2009. A software enterprise is subject to annual inspection, failure
of which in a given year shall cause the enterprise to be disqualified for the relevant benefits.
Policies to Encourage the Development of
Software and Integrated Circuit Industries
The 2000 Software Encouragement
Policies encourage the development of the software and integrated circuit industries in China and to enhance the competitiveness
of the PRC information technology industry in the international market. The 2000 Software Encouragement Policies encourage such
development through various methods, including:
|
●
|
Encouraging venture capital investment in the software industry and providing or assisting software enterprises to raise capital overseas;
|
|
|
|
|
●
|
Providing tax incentives, including an immediate tax rebate for taxpayers who sell self-developed software products, before 2010, of the amount of the statutory value-added tax that exceeds 3% and a number of exemptions and reduced enterprise income tax rates;
|
|
|
|
|
●
|
Providing government support, such as government funding in the development of software technology;
|
|
|
|
|
●
|
Providing preferential treatment, such as credit facilities with low interest rates to enterprises that export software products;
|
|
|
|
|
●
|
Taking various strategies to ensure that the software industry has sufficient expertise; and
|
|
|
|
|
●
|
Implementing measures to enhance intellectual property protection in China.
|
As discussed above, to
qualify for favorable treatment, an enterprise must be recognized as a software enterprise by governmental authorities and must
have registered software products. Because Kingtone Information is recognized as a software enterprise, it can enjoy the above
favorable policies. For example, Kingtone Information currently receives an immediate tax rebate on the sale of software products
that it creates equal to the amount of the statutory value-added tax that exceeds 3%.
Relevant Laws and Regulations of the Computer
Information System
Management Measures on the Computer Information
System Integration
On February 13, 2001,
the MIIT promulgated the Management Measures on the Computer Information System Integration Qualification (trial) or the Management
Measures, which commenced to be enforced on February 13, 2001. The Management Measures provide that enterprises involved in providing
the computer information system integration services shall apply for the qualification recognition to the MIIT or its provincial
branch pursuant to the conditions required in the Management Measures and obtain the qualification certificate to provide information
system integration service. The computer information system integration means the engagement in the overall plan, design, development,
execution, protection of the computer application system projects and network system projects. Kingtone Information has obtained
the computer information system integration certificate and we are qualified to provide the computer information system integration
services.
Regulations for Safety Protection of
Computer Information System
The State Security Bureau
of PRC issued the “Administration of the Maintenance of Secrets in the International Networking of Computer Information Systems
Provisions of the People’s Republic of China” to protect the safety of national secrets on January 25, 2000. Under
the Administration, computer systems that contain information that is considered to be national secrets are forbidden to directly
or indirectly connect to international or other public information networks. The State Security Bureau of PRC and its branch handle
the secret maintenance work of the international networking of computer information systems. The company has the obligation to
safeguard the national secrets of governmental authorities that it learns through the company’s services to such governmental
authorities.
Relevant Regulations of the High-tech Enterprise
The Ministry of Information
Industry, the Ministry of Science and Technology and the State Tax Bureau collectively promulgated and issued the “Certifying
Standard and Managing Measures for High-tech Enterprises” and “the High-tech Areas of Main National Support ”
on April 14, 2008 to certify the High-tech enterprise and encourage and support the development of the Chinese High-tech enterprises.
Under the High-tech Enterprises Measures, the enterprise can enjoy the favorable tax policy when it is certified as a High-tech
enterprise by the Ministry of Information Industry, the Ministry of Science and Technology and the State Tax Bureau or with its
provincial branch according to the stipulated standard. The software and computer and network technology are recognized as the
main national supported High-tech field. Kingtone Information is a High-tech enterprise and enjoys a favorable income tax rate
of 15%.
Laws and Regulations of Intellectual Property
Rights
China has adopted legislation
governing intellectual property rights, including patents, copyrights and trademarks. China is a signatory to the main international
conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property
Rights upon its accession to the WTO in December 2001.
Patents
The “Patent Law
of the People’s Republic of China” promulgated by the Standing Committee of the National People's Congress, adopted
in 1985 and revised in 1992, 2001 and 2008, protects registered patents. The State Intellectual Property Office of PRC handles
granting patent rights, providing for a twenty-year patent term for inventions and a ten-year patent term for utility models and
designs. As we disclosed in Item 4, of this Annual Report on Form 20-F, through Kingtone Information, we have been granted one
invention patent “wireless video transmission system based on BREW platform” by the State Intellectual Property Office
(“SIPO”) of PRC on September 23, 2009 and therefore such invention is entitled to all the protections provided under
the Patent Law for twenty years.
Computer Software Copyright and Administration
On December 20, 2001,
the State Council of PRC issued the “Regulation for Computer Software Protection of the People’s Republic of China”
(the “Regulation for Computer Software Protection”) which became effective on January 1, 2002 to protect the interests
of copyright owners, to promote the research and application and to encourage the development of the Chinese software industry.
Under the Regulation for Computer Software Protection, natural persons, legal persons or any other organizations shall have a copyright
on the software developed by such persons no matter whether such software has been published. The protection period of software
copyrights owned by the legal person or other organization is fifty years and expires on December 31 of the fiftieth year from
the initial publication date of such computer software. Currently, Kingtone Information has twelve registration certificates for
software copyrights.
Trademarks
The “Trademark Law
of the People’s Republic of China” promulgated by the State Council of PRC, adopted in 1982 and revised in 1993 and
2001, protects registered trademarks. The Trademark Office under the Chinese State Administration for Industry and Commerce handles
trademark registrations and grants a term of ten years to registered trademarks which are renewable for another ten years after
the application to the Trademark Office by the owners of the trademarks. Trademark license agreements must be filed with the Trademark
Office for record. China has a “first-to-register” system that requires no evidence of prior use or ownership. Kingtone
Information has its registered trademarks as described in Item 4 of this Annual Report on Form 20-F. Accordingly, such trademarks
are entitled to the protection under the Trademark Law.
Foreign Currency Exchange
On August 29, 2008, the
SAFE issued the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating
Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded
Enterprises, or Circular 142. Pursuant to Circular 142, RMB converted from the foreign currency-denominated capital of a foreign-invested
company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be
used for equity investments within the PRC unless specifically provided for otherwise. The use of such Renminbi capital may not
be changed without SAFE’s approval and may not in any case be used to repay Renminbi loans if the proceeds of such loans
have not been used.
See “Risk Factors — Risks
Related to Doing Business in China — PRC regulation of loans and direct investment by offshore holding companies
to PRC entities may delay or prevent us from using the proceeds of our initial public offering to make loans or additional capital
contributions to our PRC operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund
and expand our business”.
Dividend Distribution
We are a British Virgin
Islands holding company and substantially all of our operations are conducted through Kingtone Information. We rely on dividends
and other distributions from our PRC subsidiary and Kingtone Information to provide us with our cash flow and allow us to pay dividends
on the shares underlying our ADSs and meet our other obligations. The principal regulations governing distribution of dividends
paid by wholly foreign-owned enterprises include:
|
1.
|
Wholly Foreign-Owned Enterprise Law (1986), as amended; and
|
|
|
|
|
2.
|
Implementation Rules on Wholly Foreign-Owned Enterprise Law (1990), as amended.
|
Under these regulations,
wholly foreign-owned 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, wholly foreign-owned enterprises in China are required to set aside
at least 10% 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% of its registered capital. These reserves are not distributable as cash dividends. The board
of directors of a FIE 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.
Regulation of Foreign Exchange in Certain
Onshore and Offshore Transactions
In October 2005, the SAFE
issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities
of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November
1, 2005, and was further supplemented by two implementation notices issued by the SAFE on November 24, 2005 and May 29, 2007, respectively.
Under Circular 75, prior registration with the local SAFE branch is required for PRC residents to establish or to control an offshore
company for the purposes of financing that offshore company with assets or equity interests in an onshore enterprise located in
the PRC. An amendment to the registration or filing with the local SAFE branch by such PRC resident is also required for the injection
of equity interests or assets of an onshore enterprise in the offshore company or overseas funds raised by such offshore company,
or any other material change with respect to the offshore company in connection with any increase or decrease of capital, transfer
of shares, merger, division, equity investment, debt investment, or creation of any security interest over any assets located in
the PRC.
Under SAFE Notice 75,
PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from their
shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration
and filing procedures under SAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital
inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity,
such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital
reduction. Therefore, failure to comply with such registration may subject us to certain restrictions on, including but not limited
to, the increase of the registered capital of our PRC subsidiary, making loans to our PRC subsidiary, and making distributions
to us from our on-shore companies.
Regulations of Overseas Investments and
Listings
On August 8, 2006, six
PRC regulatory agencies, including the MOFCOM, the State Assets Supervision and Administration Commission, the State Administration
for Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly adopted the New M&A Rule,
which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that
an offshore SPV formed for purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly
by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities
on an overseas stock exchange.
On September 21, 2006,
the CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. The CSRC approval procedures
require the filing of a number of documents with the CSRC and it would take several months to complete the approval process.
The application of the
New M&A Rule with respect to overseas listings of SPVs remains unclear with no consensus currently existing among the leading
PRC law firms regarding the scope of the applicability of the CSRC approval requirement.
We believe that, based
on our understanding of the current PRC laws, regulations and rules and the procedures announced on September 21, 2006, there is
no requirement in this regulation that would require an application to be submitted to the MOFCOM or the CSRC for the approval
of the listing and trading of our ADSs on the NASDAQ Capital Market.
See “Risk Factors — Risks
Related to Doing Business in China — If we were required to obtain the prior approval of the China Securities Regulatory
Commission, or CSRC, of the listing and trading of our ADSs on the NASDAQ Capital Market, we may face regulatory actions or other
sanctions from the CSRC or other PRC regulatory agencies.”
E. TAXATION
The following discussion
sets forth the material British Virgin Islands, PRC and U.S. federal income tax consequences of an investment in our ADSs and
the ordinary shares represented by our ADSs, sometimes referred to collectively as the “securities”. It is based upon
laws and relevant interpretations thereof in effect as of the date of this report, all of which are subject to change. This discussion
does not deal with all possible tax consequences relating to an investment in the securities, such as the tax consequences under
state, local and other tax laws. As used in this discussion, “we,” “our” and “us” refers only
to Kingtone Wirelessinfo Solution Holding Ltd.
British Virgin Islands Taxation
Under the law of the British
Virgin Islands as currently in effect, a holder of the securities who is not a resident of the British Virgin Islands is not liable
for British Virgin Islands tax on dividends paid with respect to the securities and all holders of the securities are not liable
to the British Virgin Islands for tax on gains realized during that year on the sale or disposal of such ordinary shares. The British
Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated or re-registered under the BVI Act.
There are no capital gains,
gift or inheritance taxes levied by the British Virgin Islands on companies incorporated under the BVI Act. In addition, shares
of companies incorporated under the BVI Act are not subject to transfer taxes, stamp duties or similar charges.
There is no income tax
treaty or convention currently in effect between the United States and the British Virgin Islands or between China and the British
Virgin Islands.
People’s Republic of China Taxation
In 2007, the PRC National
People’s Congress enacted the new Enterprise Income Tax Law (the “EIT Law”), which became effective on January
1, 2008. The new EIT Law imposes a single uniform income tax rate of 25% on all Chinese enterprises, including foreign-invested
enterprises, and levies a withholding tax rate of 10% on dividends payable by Chinese subsidiaries to their foreign shareholders
unless any such foreign shareholders’ jurisdiction of incorporation has a tax treaty with China that provides for a different
withholding agreement. Under the new EIT Law, enterprises established outside China but deemed to have a “de facto management
body” within the country may be considered “resident enterprises” for Chinese tax purposes and, therefore, may
be subject to an enterprise income tax rate of 25% on their worldwide income. Pursuant to the implementation rules of the new EIT
Law, a “de facto management body” is defined as a body that has material and overall management control over the business,
personnel, accounts and properties of the enterprise. Although substantially all members of our management are located in China,
it is unclear whether Chinese tax authorities would require (or permit) us to be treated as PRC resident enterprises. If we and/or
Topsky are deemed a Chinese tax resident enterprise, we and/or Topsky may be subject to an enterprise income tax rate of 25% on
our worldwide income, excluding dividends received directly from another Chinese tax resident enterprise, as well as PRC enterprise
income tax reporting obligations. If we and/or Topsky are not deemed to be a Chinese tax resident enterprise, we and/or Topsky
may be subject to certain PRC withholding taxes. See “Risk Factors — Risks Related to Doing Business in China — Our
holding company structure may limit the payment of dividends.” As a result of such changes, our and Topky’s historical
tax rates may not be indicative of our and Topky’s tax rates for future periods and the value of our ADSs may be adversely
affected. If we are deemed a PRC resident enterprise and investors’ gain from the sales of the securities and dividends payable
by us are deemed sourced from China, such gains and dividends payable by us may be subject to PRC tax. See “Risk Factors — Risks
Related to Doing Business in China — If we and/or Topsky were deemed a “resident enterprise” by PRC
tax authorities, we and/or Topsky could be subject to tax on our global income at the rate of 25% under the New EIT Law and our
non-PRC shareholders could be subject to certain PRC taxes.”
United States Federal Income Taxation
General
The following is a discussion
of the material U.S. federal income tax consequences to an investor of purchasing, owning and disposing of our securities. This
discussion does not address any aspects of U.S. federal gift or estate tax or the state, local or non-U.S. tax consequences of
an investment in the securities.
YOU SHOULD CONSULT YOUR
OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF
THE SECURITIES IN YOUR PARTICULAR SITUATION.
This discussion applies
only to those investors that purchase the securities in this offering and that hold the securities as capital assets within the
meaning of section 1221 of the Internal Revenue Code of 1986, as amended (the “Code”). This section does not apply
to holders that may be subject to special tax rules, including but not limited to:
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dealers in securities or currencies;
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traders in securities that elect to use a mark-to-market method of accounting;
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banks, insurance companies or certain financial institutions;
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tax-exempt organizations;
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governments or agencies or instrumentalities thereof;
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partnerships or other entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or persons holding the securities through such entities;
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regulated investment companies or real estate investment trusts;
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holders subject to the alternative minimum tax;
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9.
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holders that actually or constructively own 10% or more of the total combined voting power of all classes of our shares entitled to vote;
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holders that acquired the securities pursuant to the exercise of employee stock options, in connection with employee stock incentive plans or otherwise as compensation;
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holders that hold the securities as part of a straddle, hedging or conversion transaction; or
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holders whose functional currency is not the U.S. dollar.
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This section is based
on the Code, its legislative history, existing and proposed U.S. Treasury regulations, published rulings and other administrative
guidance of the U.S. Internal Revenue Service (the “IRS”) and court decisions, all as in effect on the date hereof.
These laws are subject to change or different interpretation by the IRS or a court, possibly on a retroactive basis.
We have not sought, and
will not seek, a ruling from the IRS as to any U.S. federal income tax consequence described herein. The IRS may disagree with
the discussion herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation,
regulation, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
The discussion below of
the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of the securities that
is for U.S. federal income tax purposes:
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a citizen or resident of the United States;
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a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or
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organized) under the laws of the United States, any state thereof or the District of Columbia;
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an estate whose income is subject to U.S. federal income tax regardless of its source; or
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a trust if (a) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S.
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persons are authorized to control all substantial decisions of the trust, or (b) if the trust has a valid election in effect under applicable U.S.
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Treasury regulations
to be treated as a U.S. person.
If a beneficial owner
of the securities is not described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity
for U.S. federal income tax purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal
income tax consequences applicable specifically to Non-U.S. Holders are described below under the heading “Tax Consequences
to Non-U.S. Holders.”
If a partnership (including
for this purpose any entity treated as a partnership for U.S. tax purposes) is a beneficial owner of the securities, the U.S. tax
treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership.
A holder of the securities that is a partnership or partners in such a partnership should consult their own tax advisors about
the U.S. federal income tax consequences of holding and disposing of the securities.
This discussion assumes
that any distributions made (or deemed made) on the securities and any consideration received by a holder in consideration for
the sale or other disposition of the securities will be in U.S. dollars. This discussion also assumes that the representations
contained in the Deposit Agreement are true and that the obligations in the Deposit Agreement and any related agreement will be
complied with in accordance with their terms. Finally, this discussion assumes that each ADS will only represent ordinary shares
in us, and will not represent any other type of security, such as a bond, cash or other property.
For U.S. federal income
tax purposes, a holder of an ADS will be treated as the beneficial owner of the shares represented by such ADS and an exchange
of an ADS for ordinary shares will not be subject to U.S. federal income tax. The U.S. Treasury has expressed concerns that parties
to whom ADSs are pre-released, or intermediaries in the chain of ownership between holders of ADSs and the issuer of the securities
underlying the ADSs may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs.
Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain
non-corporate U.S. Holders, including individual U.S. Holders, as described below under “Tax Consequences to U.S. Holders — Taxation
of Distributions.” Accordingly, the availability of foreign tax credits or the reduced tax rate for dividends received by
certain non-corporate U.S. Holders, including individual U.S. Holders, could be affected by actions taken by parties to whom the
ADSs are released, or by future actions by the U.S. Treasury.
Tax Consequences to U.S. Holders
Taxation of Distributions
Subject to the passive
foreign investment company, or PFIC, rules discussed below, the gross amount of any cash distributions we make with respect to
a U.S. Holder in respect of such U.S. Holder’s ADSs or shares will generally be treated as dividend income if the distributions
are made from our current or accumulated earnings and profits, calculated according to U.S. federal income tax principles. Cash
dividends will generally be subject to U.S. federal income tax as ordinary income on the day the U.S. Holder actually or constructively
receives such income. With respect to non-corporate U.S. Holders for taxable years beginning before January 1, 2011, dividends
may be taxed at the lower applicable long-term capital gains rate provided that (a) our ADSs or shares are readily tradable on
an established securities market in the United States, or, in the event we are deemed to be a Chinese “resident enterprise”
under the EIT Law (as described above under “People’s Republic of China Taxation”), we are eligible for the benefits
of the income tax treaty between the United States and the PRC (the “U.S.-PRC Tax Treaty”), (b) we are not a PFIC,
as discussed below, for either the taxable year in which the dividend was paid or the preceding taxable year, and (c) certain holding
period requirements are met. Under published IRS authority, ADSs are considered for purposes of clause (a) above to be readily
tradable on an established securities market in the United States only if they are listed on certain exchanges, which presently
include the NASDAQ Capital Market. U.S. Holders should consult their own tax advisors regarding the availability of the lower rate
for any dividends paid with respect to our ADSs or shares.
Dividends will not be
eligible for the dividends-received deduction allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
Generally, if we distribute non-cash property as a dividend (other than pro rata distributions of our shares) out of our current
or accumulated earnings and profits (as determined for U.S. federal income tax purposes), a U.S. Holder generally will include
in income an amount equal to the fair market value of the property, on the date that it is distributed.
Distributions in excess
of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable
return of capital to the extent of the U.S. Holder’s basis in its shares or ADSs and thereafter as capital gain. However,
we do not plan on calculating our earnings and profits in accordance with U.S. federal income tax principles. U.S. holders therefore
should generally assume that any distributions paid by us will be treated as dividends for U.S. federal income tax purposes.
If PRC taxes apply to
dividends paid by us to a U.S. Holder (see “People’s Republic of China Taxation,” above), such taxes may be treated
as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations),
and a U.S. Holder may be entitled to certain benefits under the U.S.-PRC Tax Treaty. The rules relating to the U.S. foreign tax
credit are complex. U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their
eligibility for the benefits of the U.S.-PRC Tax Treaty.
Taxation of Dispositions of ADSs or Shares
Subject to the PFIC rules
discussed below, a U.S. holder that sells or otherwise disposes of its shares or ADSs will recognize capital gain or loss for U.S.
federal income tax purposes equal to the difference between the amount realized and such U.S. Holder’s tax basis in its shares
or ADSs. Prior to January 1, 2011, capital gains of a non-corporate U.S. holder are generally taxed at a maximum rate of 15% where
the property is held for more than one year (and 20% thereafter). The ability to deduct capital losses is subject to limitations.
If PRC taxes apply to
any gain from the disposition of our ADSs or shares by a U.S. Holder, such taxes may be treated as foreign taxes eligible for credit
against such holder’s U.S. federal income tax liability (subject to certain limitations), and a U.S. Holder may be entitled
to certain benefits under the U.S.-PRC Tax Treaty. U.S. Holders should consult their own tax advisors regarding the creditability
of any such PRC tax and their eligibility for the benefits of the U.S.-PRC Tax Treaty.
Passive Foreign Investment Company
We do not expect to be
a PFIC for U.S. federal income tax purposes for our current tax year or in the foreseeable future. The determination of whether
or not we are a PFIC in respect of any of our taxable years is a factual determination that cannot be made until the close of the
applicable tax year and that is based on the types of income we earn and the value and composition of our assets (including goodwill),
all of which are subject to change. Therefore, we can make no assurances that we will not be a PFIC in respect of our current taxable
year or in the future.
In general, we will be
a PFIC in any taxable year if either:
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at least 75% of our gross income for the taxable year is passive income; or
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at least 50% of the value, determined on the basis of a quarterly average, of our assets is attributable to assets that produce or are held for the production of passive income.
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Passive income includes
dividends, interest, royalties, rents (other than certain rents and royalties derived in the active conduct of a trade or business),
the excess of gains over losses from certain types of transactions in commodities, annuities and gains from assets that produce
passive income. We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income
of any corporation in which we own, directly or indirectly, at least 25% (by value) of the stock.
If we are treated as a
PFIC in any year during which a U.S. Holder owns the securities, and such U.S. Holder did not make a mark-to-market election, as
described below, the U.S. Holder will be subject to special rules with respect to:
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any gain recognized by the U.S. Holder on the sale or other disposition of its shares or ADSs; and any excess distribution that we make to the U.S. Holder (generally, the excess of the amount of any distributions to such U.S. Holder during a single taxable year of such U.S. Holder over 125% of the average annual distributions received by such U.S. Holder in respect of the shares or ADSs during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder holding period for the shares or ADSs).
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Under these rules:
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the gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the shares and ADSs;
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the amount allocated to the U.S. Holder’s taxable year in which it realized the gain or excess distribution or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we are a PFIC will be taxed as ordinary income;
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the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year; and
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the interest charge generally applicable
to underpayments of tax will be imposed in respect of the tax attributable to each such other taxable year of the U.S. Holder.
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Special rules apply for calculating the amount of the foreign tax credit with respect to excess distributions by a PFIC.
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Alternatively, if a U.S.
Holder, at the close of its taxable year, owns ordinary shares or ADSs in a PFIC that are treated as marketable stock, the U.S.
Holder may make a mark-to-market election with respect to such shares for such taxable year. Our ADSs or shares will be “marketable”
to the extent that they remain regularly traded on a national securities exchange, such as the NASDAQ Capital Market. If a U.S.
Holder makes this election in a timely fashion, it will not be subject to the PFIC rules described above. Instead, in general,
the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value of its shares or ADSs at
the end of the taxable year over its adjusted basis in its shares or ADSs. Any ordinary income resulting from this election would
generally be taxed at ordinary income tax rates and would not be eligible for the reduced rate of tax applicable to qualified dividend
income. The U.S. Holder will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of
its shares or ADSs over the fair market value at the end of the taxable year (but only to the extent of the net amount of previously
included income as a result of the mark-to-market election). The U.S. Holder’s basis in the shares or ADSs will be adjusted
to reflect any such income or loss amounts. U.S. Holders should consult their own tax advisor regarding potential advantages and
disadvantages of making a mark-to-market election with respect to their ADSs or shares.
Alternatively, a U.S.
Holder of stock in a PFIC may avoid the PFIC tax consequences described above in respect to our ADSs or shares by making a timely
“qualified electing fund” election to include in income its pro rata share of our net capital gains (as long-term capital
gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the
taxable year of the U.S. Holder in which or with which our taxable year ends. However, the qualified electing fund election is
available only if the PFIC provides such U.S. Holder with certain information regarding its earnings and profits as required under
applicable U.S. Treasury regulations. We do not intend to furnish the information that a U.S. Holder would need in order to make
a qualified electing fund election. Therefore, U.S. Holders will not be able to make or maintain such election with respect to
their ADSs or shares.
If a U.S. Holder owns
our shares or ADSs during any year that we are a PFIC, such holder must file U.S. Internal Revenue Service Form 8621 regarding
such holder’s shares or ADSs and the gain realized on the disposition of the shares or ADSs. The reduced tax rate for dividend
income, discussed in “Taxation of Distributions,” is not applicable to dividends paid by a PFIC. U.S. Holders should
consult with their own tax advisors regarding reporting requirements with respect to their shares or ADSs.
Tax Consequences to Non-U.S. Holders
Dividends paid to a Non-U.S.
Holder in respect of our ADSs or shares generally will not be subject to U.S. federal income tax, unless the dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains in the United States).
In addition, a Non-U.S.
Holder generally will not be subject to U.S. federal income tax on any gain attributable to a sale or other disposition of our
ADSs or shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if
required by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains
in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable
year of sale or other disposition and certain other conditions are met (in which case, such gain from United States sources generally
is subject to tax at a 30% rate or a lower applicable tax treaty rate).
Dividends and gains that
are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required
by an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally
will be subject to tax in the same manner as for a U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for
U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax
treaty rate.
Information Reporting and Backup Withholding
In
general, information reporting for U.S. federal income tax purposes generally should apply to distributions made on the securities
within the United States to a non-corporate U.S. Holder and to the proceeds from sales and other dispositions of the securities
by a non-corporate U.S. Holder to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected
at an office) outside the United States generally should be subject to information reporting in limited circumstances.
Dividend payments made
to U.S. Holders and proceeds paid from the sale or other disposition the securities may be subject to information reporting to
the IRS and possible U.S. federal backup withholding at a current rate of 28%. Certain exempt recipients, such as corporations,
are not subject to these information reporting requirements. Backup withholding will not apply to a U.S. Holder who furnishes a
correct taxpayer identification number and makes any other required certification, or who is otherwise exempt from backup withholding.
U.S. Holders who are required to establish their exempt status must provide a duly executed IRS Form W-9.
A Non-U.S. Holder generally
may eliminate the requirement for information reporting and backup withholding by providing certification of its foreign status,
under penalties of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is
not an additional tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or
a non-U.S. Holder’s U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required
information is timely furnished to the IRS.
PROSPECTIVE PURCHASERS
OF OUR SECURITIES SHOULD CONSULT WITH THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY ADDITIONAL TAX CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF OUR SECURITIES,
INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR NON-U.S. JURISDICTION, INCLUDING ESTATE, GIFT, AND
INHERITANCE LAWS AND APPLICABLE TAX TREATIES.
F. DIVIDENDS
AND PAYING AGENTS.
Not applicable
.
G. STATEMENT
BY EXPERTS.
Not applicable.
H. DOCUMENTS
ON DISPLAY.
We previously filed a
registration statement on Form F-1 (File No. 333-166056) with the SEC relating to our initial public offering in May 2010.
This annual report does not contain all of the information in the registration statement and the exhibits and financial statements
included with the registration statement. References in this annual report to any of our contracts, agreements or other documents
are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual
contracts, agreements or documents. In addition, we will file annual reports on Form 20-F and submit other information under cover
of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act and our officers,
directors and principal shareholders will be exempt from the insider short-swing disclosure and profit recovery rules of Section
16 of the Exchange Act. You may read and copy the registration statement, the related exhibits and other materials we file with
the SEC at the SEC's public reference room in Washington, D.C. at 100 F Street, Room 1580, N.E., Washington, D.C.20549. You can
also request copies of those documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference rooms. The SEC also maintains an Internet site that contains reports,
proxy and information statements and other information regarding issuers that file with the SEC. The website address is
http://www.sec.gov
.
You may also request a copy of these filings, at no cost, by writing us at 3rd Floor, Borough A, Block A. No. 181, South Taibai
Road, Xi’an, Shaanxi Province, People’s Republic of China 710065 or telephoning us at +86-29-88266383.
I. SUBSIDIARY
INFORMATION
For a listing of our subsidiaries,
see “Item 4. Information on the Company – C. Organizational Structure.”
ITEM 11. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of September 30, 2016,
we had no short-term or long-term borrowings. If we borrow money in future periods, we may be exposed to interest rate risk. Our
exposure to market risk for changes in interest rates relates primarily to the interest income generated by our cash deposits with
our banks and held-to-maturity investments. We have not used any derivative financial instruments in our investment portfolio.
Interest earnings instruments carry a degree of interest rate risk. We have not been exposed, nor do we anticipate being exposed
to material risks due to changes in interest rates. However, our future interest income may fall short of expectations due to changes
in interest rates.
Foreign Exchange Risk
Translation adjustments
amounted to $0.9 million and $0.7 million as of September 30, 2016 and 2015, respectively. The Company translated balance sheet
amounts with the exception of equity at September 30, 2016 at RMB 6.6702 to $1.00 as compared to RMB 6.3638 to $1.00 at September
30, 2015. The Company stated equity accounts at their historical rate. The average translation rates applied to income statement
accounts for the year ended September 30, 2016 and September 30, 2015 were RMB 6.5321 and RMB6.1648 to US$1.00, respectively. So
far, the PRC government has been able to manage a stable exchange rate between RMB and the U.S. Dollar. We do not anticipate material
translation adjustments due to large fluctuations in exchange rates between RMB and the U.S. Dollar. However, our future downward
translation adjustments may occur and can be significant due to changes in such exchange rate.
To the extent that we
need to convert U.S. dollars received in our May 2010 public offering into the RMB for our operations, appreciation of the RMB
against the U.S. dollar would have an adverse effect on the RMB amount that we receive from the conversion. Conversely, if we decide
to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other
business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available
to us.
The PRC government imposes
strict restrictions on PRC resident companies regarding converting RMB into foreign currencies and vice versa under capital account
transactions, such as receiving equity investments from outside of the PRC, making equity investments outside of the PRC, borrowing
money from or lending money outside of the PRC, and repaying debt or remitting liquidated assets and/or accumulated profits outside
of the PRC. These transactions have to be approved by the relevant PRC government authorities, including but not limited to the
commerce bureau, the tax bureau and the State Administration of Foreign Exchange, or SAFE, and have to be conducted at banks entrusted
by the local SAFE branch. Kingtone Information has not conducted any foreign currency transactions during prior fiscal years since
its inception. Softech was recently established and had not conducted any foreign currency transactions except for converting a
relevantly small amount of foreign currency into RMB as registered capital pursuant to PRC regulations. In anticipation of this
offering, we will invest or lend the proceeds as equity or loans into our PRC subsidiaries. As our business continues to grow,
we may need to continuously finance our PRC subsidiaries by raising capital from outside of the PRC. The restriction on converting
RMB into foreign currencies, and vice versa, may limit our ability to use capital resources from outside of the PRC. Such restrictions
may also limit our ability to remit profits from our PRC subsidiaries outside of the PRC, therefore potentially limiting our ability
to pay dividends to our shareholders. In addition, such restrictions will limit our ability to freely transfer temporary excess
cash in our or our subsidiaries’ bank accounts in and out of the PRC, therefore limiting our ability to conduct cross-border
cash management activities to optimize the utilization of our cash.
Inflation
Although China has experienced
an increasing inflation rate, inflation has not had a material impact on our results of operations in recent years. According to
the National Bureau of Statistics of China, the change in the consumer price index in China was 0.46%, (0.77%), and 1.16% in 2001,
2002 and 2003, respectively. However, in connection with a 3.9% increase in 2004, the PRC government announced measures to restrict
lending and investment in China in order to reduce inflationary pressures in China’s economy. Following the government’s
actions, the consumer price index decreased to 1.8% in 2005 and to 1.5% in 2006. In 2007, the consumer price index increased to
4.8%. In response, China’s central bank, the People’s Bank of China, announced that the bank reserve ratio would rise
half a percentage point to 15.5% in an effort to reduce inflation pressures. China’s consumer price index growth rate reached
8.7% year over year in 2008. In 2009 and 2010, the change in the consumer price index in China was minus 0.7% and 3.3%.
China consumer price index
in December 2016 was 2.0% higher than that of the same period in 2015.China consumer price index in December 2015 was 4.8% higher
than that of the same period in 2014. China consumer price index in December 2014 was 3.3% higher than that of the same period
in 2013. China consumer price index in December 2013 was 2.5% higher than that of the same period in 2012. The results of the PRC
government’s actions to combat inflation are difficult to predict. Adverse changes in the Chinese economy, if any, will likely
impact the financial performance of a variety of industries in China that use, or would be candidates to use, our software products
and services.
ITEM 12. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES.
A. DEBT SECURITIES.
Not applicable.
B. WARRANTS AND RIGHTS.
Not applicable.
C. OTHER SECURITIES.
Not applicable.
D. AMERICAN DEPOSITARY
SHARES.
The Bank of New York Mellon,
as depositary, will register and deliver ADSs. Each ADS will represent one (1) ordinary share (or a right to receive one (1) ordinary
share) deposited with principal Hong Kong office of The Hong Kong and Shanghai Banking Corporation Limited, as custodian for the
depositary. Each ADS will also represent any other securities, cash or other property that may be held by the depositary. The depositary’s
corporate trust office at which the ADSs will be administered is located at 101 Barclay Street, New York, New York 10286. The Bank
of New York Mellon’s principal executive office is located at One Wall Street, New York, New York 10286.
You may hold ADSs either
(A) directly (i) by having ADSs registered in your name in the Direct Registration System, or (ii) by having an American depositary
receipt, also referred to as an ADR, which is a certificate evidencing a specific number of ADSs, registered in your name, or (B)
indirectly by holding a security entitlement in ADSs through your broker or other financial institution. If you hold ADSs directly,
you are a registered ADS holder, also referred to as an ADS holder. This description assumes you are an ADS holder. If you hold
the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS
holders described in this section. You should consult with your broker or financial institution to find out what those procedures
are.
The Direct Registration
System, or DRS, is a system administered by The Depository Trust Company, also referred to as DTC, pursuant to which the depositary
may register the ownership of uncertificated ADSs, which ownership will be confirmed by periodic statements sent by the depositary
to the registered holders of uncertificated ADSs.
As an ADS holder, you
will not be treated as one of our registered shareholders and you will not have direct shareholder rights. British Virgin Island’s
law governs our direct shareholders’ rights. The depositary will be the holder of the shares underlying your ADSs. As a registered
holder of ADSs, you will have ADS holder rights. A Deposit Agreement among us, the depositary and you, as an ADS holder, and all
other persons indirectly holding ADSs, sets out ADS holder rights as well as the rights and obligations of the depositary. New
York law governs the Deposit Agreement and the ADSs.
The following is a summary
of the material provisions of the Deposit Agreement. For more complete information, you should read the entire Deposit Agreement
and the form of ADS, which contains the terms of the ADSs. The Deposit Agreement is filed as an exhibit to our registration statement
filed on Form F-1. You may obtain the registration statement and the attached Deposit Agreement from the SEC’s website at
http://www.sec.gov
. You may also obtain a copy of the Deposit Agreement at the SEC’s Public Reference Room, which
is located at 100 F Street, NE, Washington, DC20549. You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-732-0330.
Fees and Expenses
Persons depositing or withdrawing shares or ADS holders must pay:
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For:
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$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
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Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
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Cancellation of ADSs for the purpose of withdrawal, including if the Deposit Agreement terminates
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$.05 (or less) per ADS
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Any cash distribution to ADS holders
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A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs
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Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders
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$.05 (or less) per ADSs per calendar year
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Depositary services
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Registration or transfer fees
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Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
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Expenses of the depositary
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Cable, telex and facsimile transmissions (when expressly provided in the Deposit Agreement) converting foreign currency to U.S. dollars
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Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, share transfer taxes, stamp duty or withholding taxes
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As necessary
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Any charges incurred by the depositary or its agents for servicing the deposited securities
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As necessary
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Payment of Taxes
Holders of our ADSs are
responsible for any taxes or other governmental charges payable on their ADSs or on the deposited securities represented by any
of their ADSs. The depositary may refuse to register any transfer of a holder’s ADSs or allow withdrawal of the deposited
securities represented by the ADSs until such taxes or other charges are paid. It may apply payments owed to the holder or sell
deposited securities represented by the ADSs to pay any taxes owed and the holder will remain liable for any deficiency. If the
depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders
any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.
The short-term loans
between the Company and its related parties are disclosed under Note 6 to the consolidated financial statements herein.
On January 17, 2017,
the related companies repaid a total of $4.4 million to the Company.