The accompanying notes are an integral part of these
consolidated financial statements
The accompanying notes are an integral part of these
consolidated financial statements
CHINA
INFORMATION
TECHNOLOGY,
INC.
CONSOLIDATED
STATEMENTS
OF
CHANGES
IN
EQUITY
YEARS
ENDED
DECEMBER
31, 2016, 2015 AND 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Ordinary
shares
|
|
|
Treasury
Shares
|
|
|
Additional
|
|
|
|
|
|
|
|
|
other
|
|
|
Non
|
|
|
|
|
|
|
Par value
$0.01
|
|
|
Par value
$0.01
|
|
|
Paid-in
|
|
|
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Reserve
|
|
|
deficit
|
|
|
income
|
|
|
interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS AT JANUARY 1, 2014
|
|
30,591,839
|
|
$
|
309,076
|
|
|
(1,225,311
|
)
|
$
|
(4,814,775
|
)
|
$
|
115,668,644
|
|
$
|
14,629,369
|
|
$
|
(113,513,766
|
)
|
$
|
25,070,226
|
|
$
|
20,655,676
|
|
$
|
58,004,450
|
|
Purchase of treasury stock (Note 21)
|
|
-
|
|
|
-
|
|
|
(76,368
|
)
|
|
(486,316
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(486,316
|
)
|
Issuance of ordinary shares to employees for cash (Note
21)
|
|
920,757
|
|
|
9,208
|
|
|
-
|
|
|
-
|
|
|
3,673,820
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,683,028
|
|
Stock-based compensation (Note 21)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
81,615
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
81,615
|
|
Issuance of ordinary shares to acquire additional
ownership from minority shareholders in Geo and Zhongtian (Notes 1 and 21)
|
|
439,503
|
|
|
4,395
|
|
|
-
|
|
|
-
|
|
|
1,753,618
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,758,013
|
)
|
|
-
|
|
Issuance of ordinary shares for consulting services (Note
21)
|
|
50,000
|
|
|
500
|
|
|
-
|
|
|
-
|
|
|
205,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
206,000
|
|
Cancellation of ordinary shares
|
|
(584,231
|
)
|
|
(5,842
|
)
|
|
584,231
|
|
|
1,011,091
|
|
|
(1,005,249
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Reclassification of temporary equity to ordinary shares
(Note 21)
|
|
-
|
|
|
2,500
|
|
|
-
|
|
|
-
|
|
|
747,500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,000
|
|
Ordinary shares issued for acquisition of Biznest (Notes
6 and 21)
|
|
1,543,455
|
|
|
15,434
|
|
|
-
|
|
|
-
|
|
|
5,736,601
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,752,035
|
|
Net loss for the year
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(29,231,347
|
)
|
|
|
|
|
(520,951
|
)
|
|
(29,752,298
|
)
|
Foreign currency translation loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(314,769
|
)
|
|
(58,271
|
)
|
|
(373,040
|
)
|
Transfer to reserve (Note 20)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
126,577
|
|
|
(126,577
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Changes in a Parents Ownership Interest in Geo (Note 1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,533
|
)
|
|
-
|
|
|
4,533
|
|
|
-
|
|
Purchase of shares by iASPEC from minority shareholders
in GEO (Note 1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(61,698
|
)
|
|
(61,698
|
)
|
Changes in a Parents Ownership Interest in Zhongtian
(Note 1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(34,253
|
)
|
|
-
|
|
|
34,253
|
|
|
-
|
|
Purchase of shares by iASPEC from minority shareholders
in Zhongtian (Note 1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(649,967
|
)
|
|
(649,967
|
)
|
BALANCE AS AT DECEMBER 31, 2014
|
|
32,961,323
|
|
$
|
335,271
|
|
|
(717,448
|
)
|
$
|
(4,290,000
|
)
|
$
|
126,862,049
|
|
$
|
14,755,946
|
|
$
|
(142,910,476
|
)
|
$
|
24,755,457
|
|
$
|
17,645,562
|
|
$
|
37,153,809
|
|
Purchase of treasury stock (Note 21)
|
|
-
|
|
|
-
|
|
|
(685,000
|
)
|
|
(2,827,500
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,827,500
|
)
|
Reclassification of temporary equity to ordinary shares
(Note 21)
|
|
-
|
|
|
3,550
|
|
|
-
|
|
|
-
|
|
|
1,061,450
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,065,000
|
|
Stock-based compensation (Note21)
|
|
51,875
|
|
|
519
|
|
|
-
|
|
|
-
|
|
|
101,763
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
102,282
|
|
Issued common stock (Note 21)
|
|
2,102,484
|
|
|
21,025
|
|
|
-
|
|
|
-
|
|
|
12,765,328
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,786,353
|
|
Issued warrant liability (Note 18)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,982,694
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,982,694
|
)
|
Issuance of ordinary shares for consulting services (Note
21)
|
|
5,000
|
|
|
50
|
|
|
-
|
|
|
-
|
|
|
12,600
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,650
|
|
Common stock issued for warrants exercised (Notes 18 and
21)
|
|
5,613,130
|
|
|
56,131
|
|
|
-
|
|
|
-
|
|
|
8,885,358
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,941,489
|
|
Sale of Geo (Notes 1 and 16)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(705,087
|
)
|
|
(304,002
|
)
|
|
(2,139,719
|
)
|
|
(154,717
|
)
|
|
(8,563,205
|
)
|
|
(11,866,730
|
)
|
Sale of Zhongtian (Notes 1 and 16)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(639,849
|
)
|
|
(2,061,731
|
)
|
|
(165,572
|
)
|
|
(581
|
)
|
|
(2,867,733
|
)
|
Net loss for the year
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,504,262
|
)
|
|
-
|
|
|
308,473
|
|
|
(7,195,789
|
)
|
Foreign currency translation loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
116,539
|
|
|
19,468
|
|
|
136,007
|
|
Dividend to minority
shareholders in Geo (Note 1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(362,907
|
)
|
|
-
|
|
|
-
|
|
|
(362,907
|
)
|
BALANCE AS AT DECEMBER 31, 2015
|
|
40,733,812
|
|
$
|
416,546
|
|
|
(1,402,448
|
)
|
$
|
(7,117,500
|
)
|
$
|
144,000,767
|
|
$
|
13,812,095
|
|
$
|
(154,979,095
|
)
|
$
|
24,551,707
|
|
$
|
9,409,717
|
|
$
|
30,094,237
|
|
Common stock issued for
warrants exercised (Notes 18 and 21)
|
|
899,795
|
|
|
8,998
|
|
|
-
|
|
|
-
|
|
|
1,109,494
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,118,492
|
|
Reclassification of temporary equity to
ordinary shares (Note 21)
|
|
-
|
|
|
1,200
|
|
|
-
|
|
|
-
|
|
|
358,800
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
360,000
|
|
Sale of IST DG (Note 4)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,400
|
)
|
|
-
|
|
|
(4,400
|
)
|
Net loss for the year
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(18,170,601
|
)
|
|
-
|
|
|
(353,876
|
)
|
|
(18,524,477
|
)
|
Foreign currency translation
loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(552,950
|
)
|
|
38,244
|
|
|
(514,706
|
)
|
Employee Stock Incentive-stock option (Note
21)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
273,102
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
273,102
|
|
BALANCE AS AT DECEMBER
31, 2016
|
|
41,633,607
|
|
$
|
426,744
|
|
|
(1,402,448
|
)
|
$
|
(7,117,500
|
)
|
$
|
145,742,163
|
|
$
|
13,812,095
|
|
$
|
(173,149,696
|
)
|
$
|
23,994,357
|
|
$
|
9,094,085
|
|
$
|
12,802,248
|
|
The accompanying notes are an integral part of these
consolidated financial statements
F-7
CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2016, 2015 AND
2014
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(18,524,477
|
)
|
$
|
(7,195,789
|
)
|
$
|
(29,752,298
|
)
|
Adjustments to reconcile
net loss to net cash
used in operating activities from
continuing operations:
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations,
|
|
|
|
|
|
|
|
|
|
net of income taxes
|
|
-
|
|
|
(1,498,971
|
)
|
|
5,260,538
|
|
Provision for losses on accounts receivable
and other current assets
|
|
1,995,046
|
|
|
2,659,499
|
|
|
6,398,463
|
|
Impairment of intangible
assets and goodwill
|
|
4,442,367
|
|
|
8,918,427
|
|
|
7,015,727
|
|
Provision for obsolete inventories
|
|
324,581
|
|
|
274,663
|
|
|
3,808,307
|
|
Depreciation
|
|
1,736,607
|
|
|
1,665,257
|
|
|
2,135,644
|
|
Amortization of intangible assets and land
use rights
|
|
845,149
|
|
|
876,237
|
|
|
917,780
|
|
(Gain) loss on sale of
property and equipment and land use rights
|
|
(8,544
|
)
|
|
(30,005,007
|
)
|
|
(6,550
|
)
|
Loss on disposal of inventories
|
|
345,963
|
|
|
-
|
|
|
476,597
|
|
Loss from disposals of
consolidated entities
|
|
575,956
|
|
|
-
|
|
|
-
|
|
Loss on disposal of deposit for land use
rights
|
|
2,762,033
|
|
|
-
|
|
|
-
|
|
Stock-based payment
compensation for consulting services
|
|
-
|
|
|
98,483
|
|
|
120,167
|
|
Stock-based compensation
|
|
273,102
|
|
|
102,282
|
|
|
81,615
|
|
Impairment of property, plant
and equipment
|
|
-
|
|
|
4,616,679
|
|
|
827,319
|
|
Income tax expense (benefit)
|
|
365,401
|
|
|
3,761,084
|
|
|
(4,603,763
|
)
|
Change in fair value of
warrants liability
|
|
(34,175
|
)
|
|
5,657,988
|
|
|
-
|
|
Changes in operating assets and
liabilities, net
of effects of business acquisitions and
dispositions:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(913,486
|
)
|
|
2,914,918
|
|
|
(1,497,285
|
)
|
Inventories
|
|
(590,274
|
)
|
|
1,546,570
|
|
|
6,019,174
|
|
Other receivables and prepaid
expenses
|
|
6,222,650
|
|
|
(1,089,481
|
)
|
|
(3,435,388
|
)
|
Advances to suppliers
|
|
1,981,816
|
|
|
(1,708,552
|
)
|
|
5,781,743
|
|
Restricted cash
|
|
848,573
|
|
|
9,566,303
|
|
|
(1,515,573
|
)
|
Amounts due to/from related parties
|
|
(154,331
|
)
|
|
(1,088,001
|
)
|
|
1,126,768
|
|
Other payables and accrued
expenses
|
|
(2,344,677
|
)
|
|
(2,736,926
|
)
|
|
(3,808,563
|
)
|
Advances from customers
|
|
(846,599
|
)
|
|
1,598,944
|
|
|
(2,017,504
|
)
|
Accounts payable and bills
payable
|
|
(1,811,119
|
)
|
|
(24,134,831
|
)
|
|
(6,018,929
|
)
|
Income tax payable
|
|
(312,615
|
)
|
|
(118,973
|
)
|
|
171,552
|
|
Net cash used in
continuing operations
|
|
(2,821,053
|
)
|
|
(25,319,197
|
)
|
|
(12,514,459
|
)
|
Net cash used in operating activities
from
discontinued operations
|
|
-
|
|
|
(595,404
|
)
|
|
(115,066
|
)
|
Net cash used in operating
activities
|
|
(2,821,053
|
)
|
|
(25,914,601
|
)
|
|
(12,629,525
|
)
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Deposit (paid) received for assets held-for
sale
|
|
-
|
|
|
(20,717
|
)
|
|
13,024,000
|
|
Deposit refunded for land use
rights
|
|
-
|
|
|
-
|
|
|
3,355,088
|
|
Cash acquired in Biznest acquisition
|
|
-
|
|
|
-
|
|
|
67,506
|
|
Proceeds from sale of
property and equipment
|
|
299,298
|
|
|
55,101
|
|
|
6,561
|
|
Consideration paid for acquisition of Biznest
|
|
-
|
|
|
(1,488,969
|
)
|
|
(5,951,968
|
)
|
Investment in Geo
|
|
-
|
|
|
-
|
|
|
(128,901
|
)
|
Investment in Biznest's joint company
|
|
(45,179
|
)
|
|
-
|
|
|
-
|
|
Capitalized and purchased
software development costs
|
|
-
|
|
|
(66,870
|
)
|
|
(1,353,028
|
)
|
Purchases of property and equipment
|
|
(3,463,915
|
)
|
|
(3,004,209
|
)
|
|
(529,053
|
)
|
Investment in Zhongtian
|
|
-
|
|
|
-
|
|
|
(638,723
|
)
|
Cash received from sale of Zhongtian and Geo
|
|
12,312,378
|
|
|
-
|
|
|
-
|
|
Cash received for sale of
assets held for sale
|
|
-
|
|
|
45,052,000
|
|
|
-
|
|
Net cash provided by investing activities
from
continuing operations
|
|
9,102,582
|
|
|
40,526,336
|
|
|
7,851,482
|
|
Net cash provided by (used
in) investing
activities from discontinued operations
|
|
-
|
|
|
1,558,581
|
|
|
(1,530,773
|
)
|
Net cash provided by investing
activities
|
|
9,102,582
|
|
|
42,084,917
|
|
|
6,320,709
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under short-term loans
|
|
10,541,720
|
|
|
44,584,103
|
|
|
58,862,064
|
|
Common stock issued for cash
|
|
-
|
|
|
12,786,353
|
|
|
3,683,028
|
|
Decrease (increase) in restricted cash in
relation to bank borrowings
|
|
-
|
|
|
543,300
|
|
|
256,427
|
|
Repayment of short-term loans
|
|
(17,101,230
|
)
|
|
(79,952,564
|
)
|
|
(56,153,075
|
)
|
Repurchase of ordinary shares
|
|
(379,710
|
)
|
|
(1,310,184
|
)
|
|
(1,290,000
|
)
|
Repayment of long-term loans
|
|
(214,527
|
)
|
|
(97,751
|
)
|
|
(94,279
|
)
|
Cash paid to warrant holders
|
|
-
|
|
|
(542,806
|
)
|
|
-
|
|
Net cash (used in)
provided by financing
activities from continuing operations
|
|
(7,153,747
|
)
|
|
(23,989,549
|
)
|
|
5,264,165
|
|
Net cash (used in) provided by
financing
activities from discontinued operations
|
|
-
|
|
|
(147,237
|
)
|
|
1,131,223
|
|
Net cash (used in)
provided by financing
activities
|
|
(7,153,747
|
)
|
|
(24,136,786
|
)
|
|
6,395,388
|
|
Effect of exchange rate changes on cash and
cash equivalents
|
|
837,747
|
|
|
564,125
|
|
|
19,027
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
AND
CASH EQUIVALENTS
|
|
(34,471
|
)
|
|
(7,402,345
|
)
|
|
105,599
|
|
CASH AND CASH
EQUIVALENTS,
BEGINNING
|
|
3,786,846
|
|
|
11,189,191
|
|
|
11,083,592
|
|
CASH AND CASH EQUIVALENTS,
ENDING
|
$
|
3,752,375
|
|
$
|
3,786,846
|
|
$
|
11,189,191
|
|
Less cash and cash
equivalents from
discontinued operations
|
$
|
-
|
|
$
|
-
|
|
$
|
4,499,343
|
|
CASH AND CASH EQUIVALENTS FROM
CONTINUING OPERATIONS, end of
period
|
$
|
3,752,375
|
|
$
|
3,786,846
|
|
$
|
6,689,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
cash flow
information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
$
|
192
|
|
$
|
188,932
|
|
$
|
382,741
|
|
Interest
|
$
|
498,931
|
|
$
|
3,769,498
|
|
$
|
6,593,549
|
|
F-8
Supplemental disclosure of significant non-cash
transactions:
In 2014, the Company granted an aggregate of 439,503 ordinary
shares under its 2013 Equity Incentive Plan at a price of $4.00 per share to
certain individuals at the fair value of approximately $1.8 million in the
aggregate at the date of grant in exchange for their respective ownership in Geo
and Zhongtian.
In 2014, the Company issued 50,000 restricted ordinary shares
for consulting services for the period from June 4, 2014 to June 3, 2015. The
fair value of these shares was approximately $206,000 at the date of grant,
based on the quoted market price ordinary shares, resulting in $120,000 recorded
as consulting fees and $86,000 recorded as prepaid expenses as of December 31,
2014, which was fully amortized in 2015.
In 2014, the Company issued a total of 1,543,455 ordinary
shares valued at approximately $5.8 million in connection with the acquisition
of Biznest. In addition, the Company agreed to pay Biznest $7.5 million in cash,
of which approximately $1.5 million was recorded in payables as of December 31,
2014, which was paid in cash in 2015.
In 2015, the Company repurchased a total of 685,000 ordinary
shares for $2.8 million. The Company paid $1.3 million in cash, offset other
receivables for $1.1 million, and recorded $0.4 million of other payables that
was paid in 2016.
In 2015, the Company issued a total of 2,102,484 ordinary
shares to certain institutional investors at the price of $6.44 per share. Gross
proceeds from the Offering were approximately $13.5 million. The Company paid of
a total of $0.8 million in placement agency fees, legal fees and other related
expenses, and received $12.8 million net proceeds from the Offering.
In 2016, 98,741 Series B warrants were exercised in exchange
for 899,795 ordinary shares at the fair value of approximately $1.1 million. No
Series B warrant remains outstanding as of the current date.
On May 9, 2016, the Board of Directors of the Company adopted
the 2016 Equity Incentive Plan (the 2016 Plan). Pursuant to the 2016 Plan, the
Company may offer up to five million ordinary shares as equity incentives to its
directors, employees, and consultants. Such number of shares is subject to
adjustment in the event of certain reorganizations, mergers, business
combinations, recapitalizations, stock splits, stock dividends, or other changes
in the corporate structure of the Company affecting the issuable shares under
the 2016 Plan. On May 27, 2016, the Company granted options to purchase an
aggregate of 2,712,000 ordinary shares under the 2016 Plan. As a result of
employee turnover, the number of options to purchase 2,286,000 ordinary shares
remained as of December 31, 2016. The fair value of these options was
approximately $1.6 million at the date of the grant, of which approximately
$273,000 was recorded as compensation for the services provided in 2016.
F-9
1. ORGANIZATION, PRINCIPAL ACTIVITIES AND MANAGEMENT'S
PLANS
China Information Technology Inc., together with its
subsidiaries (the "Company" or "CNIT"), is a provider of integrated
Cloud-Application-Terminal (CAT) solutions including public information
distribution platform, elevator safety management system, cloud-based new media
terminal, as well as applications and platform for education in the Peoples
Republic of China ("PRC"). The Companys total solutions include software
licensing, specialized software, hardware, systems integration, and related
services. As listed in the table below, these services are provided through the
Companys wholly-owned PRC subsidiaries, Information Security Technology
International Co., Ltd. ("IST"), TopCloud Software Co., Ltd., ("TopCloud "), and
Information Security IoT Tech. Co., Ltd. ("ISIOT ), and through the Companys
variable interest entity ("VIE"), iASPEC Geo Information Technology Co., Ltd.
("iASPEC"), and its subsidiaries, iASPEC Bocom IoT Technology Co. Ltd.
("Bocom"), Shenzhen Taoping Internet Tech. Co., Ltd. (Taoping), and Shenzhen
Biznest Internet Tech. Co., Ltd. (Biznest), and the Companys wholly-owned
Hong Kong subsidiaries Information Security Tech. International Co. Ltd. (IST
HK), and HPC Electronics (China) Co., Limited (HPC).
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
Subsidiaries/
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
Entities
|
|
VIE
|
|
|
% owned
|
|
|
% owned
|
|
|
% owned
|
|
|
Location
|
|
China Information Technology, Inc (CNIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
British Virgin Islands
|
|
China Information Technology Holdings Limited (CITH)
|
|
Subsidiary
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
British Virgin Islands
|
|
Information Security International
Investment & Development Ltd. (ISIID) (Note 4)
|
|
Subsidiary
|
|
|
0%
|
|
|
0%
|
|
|
100%
|
|
|
Hong Kong, China
|
|
Information Security Tech. International Co., Ltd. (IST HK)
|
|
Subsidiary
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Hong Kong, China
|
|
Information Security Software Investment
Limited (ISSI) (Note 4)
|
|
Subsidiary
|
|
|
0%
|
|
|
100%
|
|
|
100%
|
|
|
Hong Kong, China
|
|
HPC Electronics (China) Co., Limited (HPC HK)
|
|
Subsidiary
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Hong Kong, China
|
|
Information Security Tech. (China) Co.,
Ltd. (IST)
|
|
Subsidiary
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Shenzhen, China
|
|
TopCloud Software (China) Co., Ltd. (TopCloud)
|
|
Subsidiary
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Shenzhen, China
|
|
Information Security IoT Tech. Co.,
Ltd. (ISIOT)
|
|
Subsidiary
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Shenzhen, China
|
|
Dongguan Information Security Technology Co., Ltd. (IST DG)
(Note 4)
|
|
Subsidiary
|
|
|
0%
|
|
|
100%
|
|
|
100%
|
|
|
Shenzhen, China
|
|
iASPEC Technology Group Co., Ltd. (iASPEC)
|
|
VIE
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Shenzhen, China
|
|
Biznest Internet Tech. Co., Ltd. (Biznest)
|
|
VIE
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Shenzhen, China
|
|
Shenzhen Taoping Internet Tech. Co., Ltd. (Taoping)
|
|
VIE
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Shenzhen, China
|
|
iASPEC Bocom IoT Tech. Co., Ltd. (Bocom)
|
|
VIE
|
|
|
100%
|
|
|
100%
|
|
|
100%
|
|
|
Shenzhen, China
|
|
Shenzhen IASPEC Zhongtian
Software. Co., Ltd. (Zhongtian)
|
|
VIE
|
|
|
0%
|
|
|
0%
|
|
|
99.99%
|
|
|
Shenzhen, China
|
|
Wuda Geo informatics Co., Ltd (Geo)
|
|
VIE
|
|
|
0%
|
|
|
0%
|
|
|
54.89%
|
|
|
Wu Han, China
|
|
F-10
Strategic Shift and Business Transformation
In early 2013, the Company made a strategic decision to
transform its business from servicing the public sector to focusing on the
private sector. Leveraging the experience and expertise in handling large-scale
IT projects for the public sector, the Company started investing in research and
development to develop software products for the private sector. In 2014,
continuing business transformation, the Company identified four core markets and
provided cloud-based ecosystem solutions to new media, healthcare, education,
and residential community management. In 2014, the Company predominately sold
its cloud-based solutions to the Chinese new media industry. Starting from 2015,
the Company further expanded the customer base of cloud-based solutions to
education, government and residential community management. In 2016, the Company
grew its industry-specific integrated technology platform, resource exchange,
and big data services to elevator IoT application for residential community
customers.
As part of the strategic shift, the company disposed of its
equity ownership in Geo and Zhongtian respectively in 2015.
On November 6, 2015, iASPEC entered into an equity transfer
agreement with certain individual and institutional purchasers (the
Transferees). Pursuant to the transfer agreement, iASPEC sold all of its
equity ownership of Wuda Geoinformatics Co., Ltd. ( Geo), which constituted
54.89% of the total capital stock of Geo, for an aggregate purchase price of RMB
91.3 million (approximately $14.7 million) (the Geo Purchase Price). Control
of Geo was legally transferred to the Transferees on December 4, 2015 (Note 16).
Pursuant to the transfer agreement, the Transferees agreed to pay the Geo
Purchase Price in four installments by March 30, 2016, which has been paid in
full.
On November 9, 2015, iASPEC entered into an equity transfer
agreement with a purchaser (the Transferee). Pursuant to the transfer
agreement, iASPEC sold all of its equity ownership of Shenzhen iASPEC Zhongtian
Software Co., Ltd. (Zhongtian), which constituted 100% of total capital stock
of Zhongtian for an aggregate of RMB 30.0 million (approximately $4.8 million)
(the Zhongtian Purchase Price). Control of Zhongtian was legally transferred
to the Transferee on November 9, 2015, (Note 16). Pursuant to the transfer
agreement, the Transferee agreed to pay the Zhongtian Purchase Price in three
installments by May 31, 2016, which has been paid in full.
Disposals of Geo and Zhongtian represented a strategic shift in
the Companys strategy and would have a major effect on the Companys operations
and financial results. Operations of the two companies have been presented as
discontinued operations in the Companys consolidated financial statements
(Note 16).
F-11
Withdrawal of Going-Private Proposal
On June 22, 2015, the Company announced that its Board of
Directors received a preliminary, non-binding proposal letter (the Proposal),
dated June 19, 2015, from Mr. Jiang Huai Lin ("Mr. Lin"), Chairman and Chief
Executive Officer of the Company, Mr. Zhiqiang Zhao (Mr. Zhao), Director,
Chief Operating Officer, and Interim Financial Officer of the Company, Mr.
Junping Sun (Mr. Sun), Senior Vice President of the Company, and Mr. Jinzhu
Cai (Mr. Cai), an individual investor (together with Mr. Lin, Mr. Zhao and Mr.
Sun, the "Buyer Group"), proposing a "going-private" transaction (the
"Transaction") to acquire all of the outstanding ordinary shares of the Company
not already owned by the Buyer Group at a proposed price of $4.43 per ordinary
share.
On July 1, 2015, the Board of Directors announced that a
special committee, consisting of three independent, disinterested directors of
the Company, Mr. Yusen Huang, Mr. Remington Hu, and Dr. Yong Jiang, (the
Special Committee) was formed to consider the previously announced non-binding
"going private" proposal that the Board had received from the Buyer Group.
On August 19, 2015, the Special Committee announced the
engagements of Duff & Phelps Securities, LLC and Duff & Phelps, LLC as
its financial advisors and Gibson, Dunn & Crutcher LLP as its legal counsel,
to review and evaluate the Proposal.
On October 11, 2016, the Buyer Group submitted a letter to the
Special Committee which notified the Special Committee that the Buyer Group had
unanimously determined to withdraw the Proposal. The withdrawal of the Proposal
became effective on October 11, 2016.
Management Service Agreement
iASPEC is a VIE of the Company. To comply with PRC laws and
regulations that restrict foreign ownership of companies that provide public
security information technology and Geographic Information Systems software
operating services to certain government and other customers, the Company
operates the restricted aspect of its business through iASPEC.
Pursuant to the terms of a management service agreement by and
among IST, iASPEC and its shareholders, dated July 1, 2007 ("MSA"), iASPEC
granted IST a ten-year, exclusive, royalty-free, transferable worldwide license
to use and install certain iASPEC software, along with copies of source and
object codes relating to such software. In addition, IST licensed back to iASPEC
a royalty-free, limited, non-exclusive license to the software, without right of
sub-license, for the sole purpose of permitting iASPEC to carry out its business
as presently conducted. IST has the right to designate two Chinese citizens to
serve as senior managers of iASPEC, to serve as a majority on iASPECs Board of
Directors, and to assist managing the business and operations of iASPEC. In
addition, both iASPEC and IST will require the affirmative vote of a majority of the Companys Board of Directors, including at
least one non-insider director, for certain material actions, as defined, with
respect to iASPEC.
F-12
Option Agreement
In connection with the MSA, on July 1, 2007, IST also entered
into an immediately exercisable purchase option agreement (the "Option
Agreement") with iASPEC and its shareholders. Pursuant to the Option Agreement,
the iASPEC shareholder granted IST or its designee(s) an exclusive, irrevocable
option to purchase, from time to time, all or a part of iASPECs shares or
iASPECs assets from the iASPEC shareholder for $1,800,000 in aggregate. The
option may not be exercised if the exercise would violate any applicable laws
and regulations in PRC or cause any license or permit held by, and necessary for
the operation of iASPEC, to be cancelled or invalidated. The Option Agreement
will terminate on the date that IST exercises its purchase option and acquires
all the shares or assets of iASPEC pursuant to the terms of the Option
Agreement. The Option Agreement may be rescinded by IST upon 30 days notice
without costs to terminate. The Option Agreement does not have renewal
provisions.
Amended and Restated MSA
The Amended and Restated MSA was entered into on December 13,
2009, by and among IST, iASPEC and iASPECs sole shareholder, Mr. Lin. Pursuant
to the Amended and Restated MSA, IST will provide management and consulting
services to iASPEC, under the following terms:
|
|
iASPEC agreed that IST will be entitled to receive ninety
five percent (95%) of the Net Received Profit, as defined, of iASPEC
during the term of the Agreement. iASPEC is obligated to calculate and pay
the Net Received Profit due to IST no later than the last day of the first
month following the end of each fiscal quarter. Mr. Lin, agreed to enter
into an agreement with IST to pledge all of his equity interests in iASPEC
as security for his and iASPECs fulfillment of their respective
obligations under the MSA, and to register the pledge agreement with the
local AIC (Administration for Industry and Commerce). The Amended and
Restated MSA was executed on December 13, 2009. Based on the advice of the
Companys PRC legal counsel, in January 2010 all the parties to the
agreement decided not to enter into a pledge agreement.
|
|
|
|
|
|
Mr. Lin confirmed his status as the sole iASPEC
shareholder and his assumption of all of the obligations of the iASPEC
shareholder under the agreement, including a confirmation of his
continuing obligation under a written guaranty, executed by the then
iASPEC shareholders.
|
|
|
|
|
|
Based on iASPECs needs for its development and
operation, IST has the right, from time to time, at its sole discretion,
to provide iASPEC with capital support.
|
|
|
|
|
|
IST agreed that it will not interfere with any business
of iASPEC covered by iASPECs PRC State Secret related Computer
Information System Integration Certificate, including but not limited to,
seeking access to relevant documents regarding such business. However,
iASPEC agreed that it will cooperate with the requests of the Company as
necessary to comply with the Companys reporting obligations to the
Securities and Exchange Commission. (SEC).
|
F-13
The Amended and Restated MSA amended certain terms of the
original Management Service Agreement which became effective on July 1, 2007 and
has a term of 30 years unless otherwise early termination by the parties by one
of the following means:
|
|
Either iASPEC or IST may terminate the Amended and
Restated MSA immediately (a) upon the material breach by a party of its
obligations and the failure of such party to cure such breach within 30
working days after written notice from the non-breaching party; or (b)
upon the filing of a voluntary or involuntary petition in bankruptcy by a
party, or of which the party is the subject to insolvency, or the
commencement of any proceedings placing the party in a receivership, or of
any assignment by a party for the benefit of creditors; or
|
|
|
|
|
|
The Amended and Restated MSA may be terminated at any
time by IST upon 90 calendar days written notice delivered to all other
parties.
|
Upon any effective date of any termination of the Amended and
Restated MSA: (a) IST will cease providing management services to iASPEC; (ii)
IST will deliver to iASPEC all chops and seals of iASPEC; (iii) IST will deliver
to iASPEC all of the financial and other books and records of iASPEC, including
any and all permits, licenses, certificates and other proprietary and
operational documents and instruments; (iv) the senior managers who are
recommended by IST and elected as directors of iASPEC will resign from the Board
of Directors of iASPEC in a lawful way; and (v) the software license that iASPEC
granted to IST according to the Amended and Restated MSA will terminate unless
otherwise agreed by the parties. In addition, any amounts owing from any party
to any other party on the effective date of any termination under the terms of
the Amended and Restated MSA will continue to be due and owing despite such
termination.
The Amended and Restated MSA does not have renewal provisions.
We expect that the parties to the Amended and Restated MSA will negotiate to
extend the term of the agreement before its expiration.
The substance of the Amended and Restated MSA and the Option
Agreement is to:
|
|
Allow the Company to utilize the business licenses,
contacts, permits, and other resources of iASPEC in order for the Company
to be able to expand its operations and business model;
|
|
|
|
|
|
Provide the Company with effective control over all of
iASPECs operations; and provide the shareholders of iASPEC an opportunity
to monetize a portion of their investment through the $1.8 million
purchase option.
|
Non-controlling interest transactions
On April 30, 2014, the Company issued various minority
shareholders of Geo 318,794 shares of restricted CNIT ordinary shares valued at
$4.00 per share under the Companys 2013 Equity Incentive Plan. Instead of using
cash, those Geo shareholders opted for using their ownership in Geo shares to
pay for the CNIT restricted shares through Geos parent company, iASPEC. They
transferred the Geo shares they owned to iASPEC. Consequently, iASPECs ownership in Geo increased from
50.37% to 54.89%, resulting in approximately $4,500 of Geos equity being
reclassified to controlling interest and iASPEC still remaining as the
controlling shareholder in Geo thereafter. In addition, iASPEC paid those Geo
shareholders $61,698 in cash for the difference between the value of the CNIT
restricted shares issued and that of the Geo shares that iASPEC received.
F-14
On April 30, 2014, the Company issued various minority
shareholders of Zhongtian 120,709 shares of restricted CNIT ordinary shares
valued at $4.00 per share under the Companys 2013 Equity Incentive Plan.
Instead of using cash, those Zhongtian shareholders opted for using their
ownership in Zhongtian to pay for the CNIT restricted shares through Zhongtians
parent company, iASPEC. They transferred the Zhongtian shares they owned to
iASPEC. Consequently, iASPECs ownership in Zhongtian increased from 83.72% to
100%, resulting in approximately $34,000 of Zhongtians equity being
reclassified to controlling interest. In addition, iASPEC paid those Zhongtian
shareholders $649,967 of cash for the difference between the value of the CNIT
restricted shares issued and that of the Zhongtian shares that iASPEC
received.
On March 19, 2015, a profit distribution plan was approved by
Geos board of directors. As a result, a total cash dividend of approximately
$0.8 million (RMB 5.0 million) was distributed to the shareholders of Geo. On
March 27, 2015, iAPSEC received $0.4 million of cash dividend, and the minority
shareholders of Geo received $0.4 million of cash dividend.
In November 2015, as noted above, iASPEC sold its equity
ownership holdings in Geo and Zhongtian.
Going Concern and Managements Plans
For the years ended December 31, 2016 and 2015, the Company
incurred net loss from continuing operations of approximately $18.5 million and
$8.7 million, respectively. The Company reported negative cash flows from
operations of $2.8 million and $25.9 million, respectively. Net cash used in
operating activities in 2016 significantly decreased by $23.1 million from 2015.
The Company had a working capital deficiency of $5.7 million as of December 31,
2016, compared to a working capital deficiency of $1.6 million as of December
31, 2015. Further, the Company had significant accumulated deficit approximately
$173.1 million and $155.0 million as of December 31, 2016 and 2015,
respectively. Continuing the Companys business transformation from providing IT
software, hardware, and system integration services to the public sectors to
offering cloud-based ecosystem solutions to the private sectors, management has
developed its 2015 business plan which will continue to be executed in 2017,
encompassing six strategies: 1) redirect the Companys resources to selling
high-margin software solutions; 2) reinforce stringent cash collection policies
to shorten the Companys days of sales outstanding; 3) streamline the Companys
purchase order management process to reduce inventory; 4) control the Companys
cost structure; 5) obtain additional government subsidies for developing new and
innovative cloud-based software solutions; and 6) reduce the Companys
short-term debt burden. As of December 31, 2016, the Company has further reduced
its short-term debt burden to $8.0 million, decreased from $15.3 million at the
end of 2015. Starting in April 2016, the Company began receiving an annual rental fee of
$380,000 from certain third parties for leasing of its office facility located
in Nanshan Industrial Park, Shenzhen. As of December 31, 2016, the Company had
no additional availability under its credit facilities. The Company believes it
has the ability, if needed, to obtain additional credit lines from local banks
to provide capital needs by using the title of its office facility with
estimated fair value of approximately $6.0 million as collateral.
F-15
However, if one or all of these events do not occur or the
Companys business strategies are not successful in addressing its current
financial concerns, substantial doubt exists about the Companys ability to
continue as a going concern. The consolidated financial statements have been
prepared assuming that the Company will continue as a going concern and,
accordingly, do not include any adjustments that might result from the outcome
of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation
The consolidated financial statements of the Company have been
prepared in accordance with U.S. generally accepted accounting principles. The
consolidated financial statements include the accounts of the Company, its
subsidiaries, and its VIE for which the Company is the primary beneficiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. The Companys significant estimates include its accounts
receivable, warrants liability, goodwill, and other intangible assets.
Management makes these estimates using the best information available at the
time the estimates are made; however actual results could differ from those
estimates.
(c) Economic and Political Risks
All the Companys revenue-generating operations are conducted
in the PRC. Accordingly, the Companys business, financial condition and results
of operations may be influenced by the political, economic and legal
environments in the PRC, and by the general state of the PRC economy. The
Companys operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Companys results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion, remittances abroad, and rates
and methods of taxation.
F-16
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
and cash deposits with financial institutions with original maturities of three
months or less to be cash equivalents. The Company had no cash equivalents as of
December 31, 2016 or 2015.
The Company maintains its cash accounts at credit worthy
financial institutions and closely monitors the movements of its cash positions.
As of December 31, 2016 and 2015, approximately $3.7 million and $3.8 million of
cash, respectively, was held in bank accounts in the PRC.
(e) Restricted Cash
Restricted cash consists of security deposits in bank accounts
in the PRC that serve as collateral for the Companys revolving working capital
facility, which are included in short-term loans, bills payable, as well as
letter of credit facilities. There is no restricted cash as of December 31,
2016.
(f) Accounts Receivable, Bills Receivable and Concentration of
Risk
Accounts receivable are recognized and carried at invoiced
amount less an allowance for any uncollectible accounts, if any. The Company
maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The Company reviews
the collectability of its receivables on an ongoing basis. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance.
The Company evaluates the creditworthiness of all of its
customers individually before accepting them and continuously monitors the
recoverability of accounts receivable. If there are any indicators that a
customer may not make payment, the Company may consider making provision for
non-collectability for that particular customer. At the same time, the Company
may cease further sales or services to such customer. The following are some of
the factors that the Company considers in determining whether to discontinue
sales or record an allowance:
|
the customer fails to comply with its payment
schedule;
|
|
the customer is in serious financial
difficulty;
|
|
a significant dispute with the customer has
occurred regarding job progress or other matters;
|
|
the customer breaches any of the contractual
obligations;
|
|
the customer appears to be financially
distressed due to economic or legal factors;
|
|
the business between the customer and the
Company is not active; and
|
|
other objective evidence indicates
non-collectability of the accounts receivable.
|
F-17
The Company considers the following factors when determining
whether to permit a longer payment period or provide other concessions to
customers:
|
the customers past payment history;
|
|
the customers general risk profile, including
factors such as the customers size, age, and public or private status;
|
|
macroeconomic conditions that may affect a
customers ability to pay; and
|
|
the relative importance of the customer
relationship to the Companys business.
|
Bills receivable represent bank undertakings that essentially
guarantee payment of amounts hereunder. The undertakings are provided by banks
upon receipt of collateral deposits from the Companys customers or debtors.
Bills receivable can be sold at a discount before maturity, which is typically
within three months.
Accounts receivable as at December 31, 2016 and 2015 are as
follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts Receivable
|
$
|
5,645,114
|
|
$
|
8,209,245
|
|
Allowance for doubtful accounts
|
|
(2,625,765
|
)
|
|
(5,029,107
|
)
|
Accounts Receivable Net
|
$
|
3,019,349
|
|
$
|
3,180,138
|
|
The allowance for doubtful accounts at December 31, 2016 and
2015, totaled $2.6 million and $5.0 million, respectively, representing
managements best estimate. The following table describes the movements in the
allowance for doubtful accounts during the years ended December 31, 2016 and
2015:
Balance at January 1,
2015
|
$
|
4,484,321
|
|
Increase in allowance for doubtful
accounts
|
|
787,033
|
|
Foreign exchange difference
|
|
(242,247
|
)
|
Balance at December 31, 2015
|
$
|
5,029,107
|
|
Increase in allowance for
doubtful accounts
|
|
826,232
|
|
Amounts written off as uncollectible
|
|
(2,900,447
|
)
|
Foreign exchange difference
|
|
(329,127
|
)
|
Balance at December 31, 2016
|
$
|
2,625,765
|
|
(g) Advances to Suppliers
Advances to suppliers represent cash deposits for the purchase
of inventory items from suppliers.
(h) Advances from Customers
Advances from customers represent cash received from customers
as advance payments for the purchase of the Companys products and services.
F-18
i) Fair Value and Fair Value Measurement of Financial
Instruments
Management has estimated that the carrying amounts of
non-related party financial instruments approximate fair values for all periods
presented due to their short-term maturities.
Fair Value Accounting
Financial Accounting Standards Board (FASB) Accounting
Standards Codifications (ASC) 820-10 Fair Value Measurements and Disclosures,
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). As required by FASB ASC 820-10, assets are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. The three levels of the fair value
hierarchy under FASB ASC 820-10 are described below:
Level 1
|
Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted assets or
liabilities;
|
Level 2
|
Quoted prices in markets that are not active, or inputs
that are observable, either directly or indirectly, for substantially the
full term of the asset or liability; and
|
Level 3
|
Prices or valuation techniques that require inputs that
are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The following tables present the fair value hierarchy of those
assets and liabilities measured at fair value:
Recurring fair value measurements:
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
(Losses) for
|
|
|
|
As of
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
the year
|
|
|
|
December
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
ended
|
|
|
|
31,
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2016
|
|
Warrants liability
|
$
|
3,720
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,720
|
|
$
|
34,175
|
|
Total recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,175
|
|
F-19
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
(Losses) for
|
|
|
|
As of
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
the year
|
|
|
|
December
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
ended
|
|
|
|
31,
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
2015
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2015
|
|
Warrants liability:
|
$
|
1,156,386
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,156,386
|
|
$
|
(5,657,988
|
)
|
Bills payable
|
$
|
1,322,912
|
|
$
|
1,322,912
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Total recurring fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,657,988
|
)
|
As of December 31, 2016 and 2015, the Company measured the fair
value of its derivative liability related to warrants using a binomial or
lattice model and Monte-Carlo Simulation for warrants A and warrants B,
respectively. The following tables reflect the quantitative information about
recurring Level 3 fair value measurements:
|
|
Series A
|
|
|
Series B
|
|
|
|
Warrants
|
|
|
Warrants
|
|
December 31, 2016:
|
|
|
|
|
|
|
Annual volatility
|
|
85.43%
|
|
|
-
|
|
Risk-free rate
|
|
0.96%
|
|
|
-
|
|
Dividend rate
|
|
0.00%
|
|
|
-
|
|
Contractual term
|
|
1.4 years
|
|
|
-
|
|
Closing price of ordinary shares
|
$
|
0.72
|
|
$
|
-
|
|
Conversion/exercise price
|
$
|
7.73
|
|
$
|
-
|
|
December 31, 2015:
|
|
|
|
|
|
|
Annual volatility
|
|
89.55%
|
|
|
150.85%
|
|
Risk-free rate
|
|
1.27%
|
|
|
0.56%
|
|
Dividend rate
|
|
0.00%
|
|
|
0.00%
|
|
Contractual term
|
|
2.4 years
|
|
|
0.2 years
|
|
Closing price of
ordinary shares
|
$
|
1.68
|
|
$
|
1.68
|
|
Conversion/exercise price
|
$
|
7.73
|
|
$
|
7.09
|
|
Origination:
|
|
|
|
|
|
|
Annual volatility
|
|
88.00%
|
|
|
92.00%
|
|
Risk-free rate
|
|
1.00%
|
|
|
0.09%
|
|
Dividend rate
|
|
0.00%
|
|
|
0.00%
|
|
Contractual term
|
|
3 years
|
|
|
0.5 years
|
|
Closing price of ordinary shares
|
$
|
3.85
|
|
$
|
3.85
|
|
Conversion/exercise price
|
$
|
7.73
|
|
$
|
7.09
|
|
The warrants liability is considered a Level 3 liability on the
fair value hierarchy as the determination of fair values includes various
assumptions about future activities, stock price, and historical volatility
inputs. Significant unobservable inputs for the Level 3 warrants liability
include (1) the estimated probability of the occurrence of a down round
financing during the term over which the related warrants are exercisable, (2)
the estimated magnitude of the down round, and (3) the estimated magnitude of
any net cash fractional share settlement. Significant increases or decreases in
any of those inputs in isolation would result in a significantly different fair
value measurement.
The table below reflects the components effecting the change in
fair value for the year ended December 31, 2016 and 2015, respectively:
F-20
|
|
Level 3
Liabilities
|
|
|
|
For the Year Ended December 31,
2016
|
|
|
|
January 1,
|
|
|
|
|
|
Change in Fair
|
|
|
December 31,
|
|
|
|
2016
|
|
|
Settlements
|
|
|
Value
|
|
|
2016
|
|
Warrants liability (see Note
18)
|
$
|
1,156,386
|
|
$
|
(1,118,492
|
)
|
$
|
(34,175
|
)
|
$
|
3,719
|
|
|
|
Level 3
Liabilities
|
|
|
|
For the Year Ended December 31,
2015
|
|
|
|
January 1,
|
|
|
|
|
|
|
|
|
Change in Fair
|
|
|
December 31,
|
|
|
|
2015
|
|
|
Issuances
|
|
|
Settlements
|
|
|
Value
|
|
|
2015
|
|
Warrants liability (see Note
18)
|
$
|
-
|
|
$
|
4,982,694
|
|
$
|
(9,484,295
|
)
|
$
|
5,657,987
|
|
$
|
1,156,386
|
|
Non-recurring fair value measurements:
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
Losses for
|
|
|
|
As of
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
the year
|
|
|
|
December
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
ended
|
|
|
|
31,
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2016
|
|
Goodwill
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(4,442,367
|
)
|
Total non-recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,442,367
|
)
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
Losses for
|
|
|
|
As of
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
the year
|
|
|
|
December
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
ended
|
|
|
|
31,
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
2015
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2015
|
|
Goodwill
|
$
|
4,753,454
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,753,454
|
|
$
|
(8,918,427
|
)
|
Total non-recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,918,427
|
)
|
As of December 31, 2016 and 2015, goodwill was measured at fair
value on a non-recurring basis using level 3 inputs, which resulted in
impairment charges being recorded. Refer to Notes 7 for impairment detail.
Quantitative Information about non-recurring Level 3 Fair Value
Measurements:
F-21
|
|
Fair Value as
|
|
|
Valuation
|
|
|
Unobservable
|
|
|
|
|
|
|
of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
Techniques
|
|
|
Inputs
|
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
-
|
|
|
Discounted cash
flow
|
|
|
Profit after tax
Annual Growth
|
|
|
(125)%-142%
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
22.57%
|
|
The significant unobservable inputs used in the fair value
measurement of the noncash impairment of goodwill are the forecasted
performance results of the operations and the discount rate of the Company .The
discount rate applied to the cash flow streams attributable to the Reporting
Unit is the cost of equity of the Reporting Unit, which is developed through the
application of the Capital Asset Pricing Model (CAPM) with reference to the
required rates of return demanded by investors for similar projects. The Company
based its fair value estimates on assumptions it believes to be reasonable but
that are unpredictable and inherently uncertain. Actual future results related
to assumed variables could differ from these estimates.
(j) Inventories
Inventories are valued at the lower of cost or market price.
Market price is the estimated selling price in the ordinary course of business
less the estimated cost of completion and the estimated costs necessary to make
the sale.
The Company performs an analysis of slow-moving or obsolete
inventory periodically and any necessary valuation reserves, which could
potentially be significant, are included in the period in which the evaluations
are completed. Any inventory impairment results in a new cost basis for
accounting purposes.
(k) Property, plant and equipment
Property, plant and equipment are stated at cost less
accumulated amortization and depreciation. Amortization and depreciation is
provided over the assets estimated useful lives, using the straight-line
method. Estimated useful lives of property, plant and equipment are as follows:
Office buildings
|
|
20-50
years
|
|
Plant and machinery
|
|
3-20
years
|
|
Electronics equipment,
furniture and fixtures
|
|
3-5 years
|
|
Motor vehicles
|
|
5 years
|
|
Purchased software
|
|
3-10 years
|
|
Maintenance and repairs costs are expensed as incurred, whereas
significant renewals and betterments are capitalized.
(l) Land use rights
All land in the PRC is owned by the PRC government. The
government in the PRC, according to the PRC law, may sell the right to use the
land for a specified period of time. Thus, all of the Companys land purchases in the PRC are considered to be leasehold land under
operating lease arrangements and are stated at cost less accumulated
amortization and any recognized impairment loss. The cost of the land use right
is amortized on a straight-line basis over the beneficial period of 46 years.
F-22
(m) Intangible assets
Intangible assets represent technology and customer base
intangible assets acquired in connection with business acquisitions, and
software development costs capitalized by the Companys subsidiaries.
Intangible assets are stated at acquisition fair value or cost
less accumulated amortization, and amortized using the straight-line method over
the following estimated useful lives:
Software development
costs
|
|
3-5 years
|
|
Trademarks
|
|
5 years
|
|
(n) Goodwill
ASC 350-30-50, Goodwill and Other Intangible Assets, requires
the testing of goodwill and indefinite-lived intangible assets for impairment at
least annually. The Company tests goodwill for impairment in the fourth quarter
each year or earlier if an indicator of impairment exists.
Under applicable accounting guidance, the goodwill impairment
analysis is a two-step test. The first step of the goodwill impairment test
involves comparing the fair value of each reporting unit with its carrying
amount including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired;
however, if the carrying amount of the reporting unit exceeds its fair value,
the second step must be performed to measure potential impairment.
The second step involves calculating an implied fair value of
goodwill for each reporting unit for which the first step indicated possible
impairment. If the implied fair value of goodwill exceeds the goodwill assigned
to the reporting unit, there is no impairment. If the goodwill assigned to a
reporting unit exceeds the implied fair value of goodwill, an impairment charge
is recorded for the excess.
(o) Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. It is reasonably possible that
these assets could become impaired as a result of technology or other industry
changes. Recoverability of assets to be held and used is determined by comparing
their carrying amount with their expected future net undiscounted future cash
flows from the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by how much the carrying amount exceeds
the fair value of the assets. Assets held for disposal, if any, are
reported at the lower of the carrying amount or fair value less costs to sell.
F-23
(p) Derivative liability - Warrants
The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is determined
and re-assessed at the end of each reporting period, in accordance with FASB ASC
Topic 815, Derivatives and Hedging. This guidance affects the accounting for
warrants issued acquiring the Companys ordinary shares that contain provisions
to protect warrant holders from a decline in the stock price, referred to as
down-round protection. Down-round provisions reduce the exercise price of a
warrant, if the company either issues equity shares for a price that is lower
than the exercise price of the warrants, or issues convertible instruments with
a conversion price per equity share that is less than the exercise price of the
warrants, or issues new warrants or options that have a lower exercise price.
For derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value charged to
earning or loss. The Company generally uses a binomial or lattice model and
Monte-Carlo simulation to value the warrants at inception and subsequent
valuation dates. Derivative instrument liabilities are classified in the balance
sheet as current or non-current based on whether or not net-cash settlement of
the derivative instrument could be required within 12 months of the balance
sheet date.
(q) Revenue Recognition
The Company generates its revenues primarily from four sources,
(1) hardware sales, (2) software subscription, (3) software sales, and (4)
system integration services. The Companys revenue recognition policies are in
accordance with SEC Staff Accounting Bulletin No. 104, "Revenue Recognition",
FASB ASC No. 605-35 "Construction-Type and Production-Type Contracts" ("FASB ASC
605-35"), and FASB ASC No. 605-25 Multiple-Element Arrangements (FASB ASC
605-25) , and FASB ASC 985-605 Software Revenue Recognition (FASB ASC
985-605).
Hardware
Hardware revenues are generated primarily from the sales of
elevator IoT box and display technology products, and are recognized only when
persuasive evidence of an arrangement exists, delivery has occurred and upon
receipt of customers acceptance, the price to the customer is fixed or
determinable in accordance with the contract, and collectability is reasonably
assured. Hardware products include hardware and software essential to the
hardware products functionalities. The Company accounts for hardware sales in
accordance with FASB ASC 605-25. Accordingly, the Company has identified three
deliverables regularly included in arrangements involving the sale of hardware
products. The first deliverable, which represents the substantial portion of the
allocation sales price, is the hardware and software essential to the
functionality of the hardware products delivered at the time of sale. The second
deliverable is the embedded right to receive on a when-and-if-available basis, future
unspecified software upgrades relating to the products essential software. The
third deliverable is the non-software services to be provided to the hardware
products. The Company allocates revenue among these deliverables using the
relative selling price method. Because the Company has neither Vendor-Specific
Objective Evidence of fair value (VSOE) nor Third-Party Evidence of Selling
Price (TPE) for these deliverables, the allocation of revenue is based on the
Companys ESPs. Revenue allocated to the delivered hardware and related
essential software is recognized at the time of sales provided other conditions
for revenue recognition have been met.
F-24
The Companys process for determining its EPS for deliverables
without VSOE or TPE considers multiple factors that may vary depending on the
unique facts and circumstances related to each deliverable, including, where
applicable, prices charged by the Company and market trends in the pricing for
similar offerings, product specifics business objectives, estimated cost to
provide the non-software services and the relative ESP of the upgrade rights and
non-software services as compared to the total selling prices of the products.
The Company has indicated it may from time to time provide future unspecified
software upgrades to the hardware products essential software and/or
non-software services free of charge.
In November 2014, the Company began outsourcing production of
hardware to its OEM partners. The Company also shifted after-sale support of
hardware to its original equipment manufacturer (OEM) partners for hardware
products sold to its private-sector customers. The Companys OEM partners are
ultimately responsible for support and product warranty of hardware. Therefore,
the Company normally does not defer hardware revenue for potential product
warranty. Hardware sales are classified on the Revenue-products line on the
Companys consolidated statements of operations.
Software subscription
Starting in the fourth quarter of 2014, the Company began to
generate software subscription revenues from the private sector. The basis for
the Companys software subscription revenue recognition is substantially
governed by the accounting guidance contained in ASC 985-605, Software-Revenue
Recognition.
In the private sector, the Companys customers pay software
subscription fee for the right to access and use the Companys proprietary
Cloud-Application-Terminal platform, which does not require significant
customization and modification to the customers specifications. For software
subscription arrangements that usually do not require customers acceptance, the
Companys customers subscribe to the Companys Cloud-Application-Terminal
platform as a service. The Company generates software-as-a-service (SaaS)
revenues selling its Cloud-based Technology platform as a monthly subscription
service. The Companys SaaS revenues are generally recognized ratably over the
contract term commencing with the date its service is made available to
customers and all other revenue recognition criteria have been satisfied, when:
(1) the Company enters into a legally binding agreement with a customer for the
subscription of software platform; (2) the Company delivers the products; (3)
the sale price is fixed or determinable and free of contingencies or significant
uncertainties; and (4) collection is probable. Revenues from software
subscription contracts are classified on the Revenue Software line on the Companys
consolidated statements of operations. The Company has indicated that it may
from time to time provide future unspecified software upgrades to the Companys
Cloud-Application-Terminal platform free of charge.
F-25
Non-software element arrangements of training, technical
support, and future unspecified software upgrades related to use our
Cloud-Application-Terminal platform are included in the monthly subscription
fee. The facts of training to use our Cloud-Application-Terminal platform being
a one-time event during the first introduction of the platform to the customers,
technical support being on a needed basis, and software upgrades being
infrequent on the when-and-if-available basis and free of charge, the fair value
of these elements is immaterial to overall monthly software subscription based
on the Companys best estimate, and the Company does not allocate any portion of
software subscription revenue to the non-software elements and does not defer
revenue associated with non-software elements. The Company will continuously
monitor the fair value of these elements and see if the cost would be material
to allocate the fair value.
Customers typically subscribe to SaaS offerings on a
three-to-five-year basis to obtain access to the Companys display terminals
deployed on their premises and to the Companys cloud-based software hosted on
their server via the Internet. Although the duration of some of the Companys
SaaS contracts are longer than 75% of the economic life of the hardware
equipment, because in the PRC payment collection beyond any three-year term is
highly uncertain, the Company has chosen to recognize its SaaS revenues ratably
over the contract term. Revenues from SaaS contracts are classified on the
Revenue-Software line on the Companys consolidated statements of operations.
Software sales
Customers pay the Company a fixed price to design and develop
software products specifically customized for their needs. Software development
projects usually include developing software, integrating various isolated
software systems into one, and testing the system. The design and build
services, together with the integration of the various elements, are generally
determined to be essential to the functionality of the delivered software, and
accordingly revenue is recognized using the percentage of completion method of
accounting in accordance with FASB ASC 985-605. The percentage of completion for
each contract is estimated based on the ratio of direct labor hours incurred to
total estimated direct labor hours. Revenues from software development contracts
do not include either hardware or system integration, and are classified on the
Revenue-Software line on the Companys consolidated statements of operations.
The related technical support and maintenance services are generally sold
separately as stand-alone contracts. Revenues from these services are recognized
as services are performed or ratably over the term of service period.
For software products that do not require significant
modification or customization, the Company will provide subsequent software updates and
support. Such software sales are recognized and classified on the
Revenue-Products line on the Companys consolidated statements of operations.
The Company has identified two deliverables regularly included in arrangements
involving the sale of software products and the rights to receive, on a
when-and-if-available basis, future unspecified software upgrades and support
and maintenance. Because software is highly specialized and stable, subsequent
upgrade or enhancement is infrequent. The fair value of software support and
maintenance is immaterial estimating approximately $50,000 per annum. Therefore
the Company does not allocate any portion of revenue to future upgrades or support.
F-26
As a result of our business transformation from traditional IT
business to integrated cloud-based solutions, most IT projects performed by
iASPEC are being phased out. Due to the high risk of uncollectablility, the
Company has recognized revenues when promised goods or services are transferred
to customers in an amount that reflects the consideration that is expected to be
received for those goods or services.
System integration services
System integration revenues are generated from fixed-price
contracts which combine both customized software development and integration,
and non-customized hardware. System integration projects usually include the
purchase of hardware, software development, and integration of various systems
into one, and test of the system. Accordingly, system integration revenues
contain multiple deliverables consisting of two separate units of account (1)
software development and integration, and (2) hardware, both of which are
clearly outlined in contracts executed with customers. Revenue from the software
element is recognized using the percentage of completion method of accounting
outlined above under software development contracts. Revenue from the hardware
element is recognized when all four revenue recognition criteria are met, as
outlined above under hardware revenues, which generally occurs upon customers
acceptance. The hardware component of system integration projects consists of
standard products and requires only minor modification and an insignificant
amount of labor to meet customers needs. Collectively, revenues from system
integration projects are recognized using percentage of completion based on the
ratio of costs incurred to total estimated costs, and are classified on the
Revenue-System Integration line on the Companys consolidated statements of
operations.
The Company accounts for system integration projects in
accordance with FASB ASC 605-25. To determine the selling price of each unit of
account included within the system integration contracts, the Company uses
vendor-specific objective evidence (VSOE) for the software component, and
third-party evidence for the hardware component. In addition, the Company
provides post contract support (PCS), which includes telephone technical support
that is not essential to the functionality of the software or hardware elements.
Although VSOE does not exist for PCS, because (1) the PCS fees are included in
the total contract amount, (2) the PCS service period is for less than one year,
(3) the estimated cost of providing PCS is not significant, and (4) unspecified
upgrades and enhancements offered are minimal and infrequent; the Company
recognizes PCS revenue after delivery and customer acceptance.
Contract periods are usually less than six months, and typical
contract periods for PCS are 12 months.
Customers are billed in accordance with contract terms, which
typically require partial payment at the signing of the contract, partial
payment at delivery and customer acceptance dates, with the remainder due within
a stated period of time not exceeding 12 months. Occasionally, the Company
enters into contracts which allow a percentage (generally 5%) of the total contract
price to be paid one to three years after completion of a system integration
project. Revenues on these extended payments are recognized upon completion of
the terms specified in the contract and collectability is reasonably assured.
F-27
For hardware products sold to the Companys public sector
customers, the Company remains responsible for providing after-sale support due
to contractual requirements specific to the public sector. However, the original
vendors of hardware are ultimately liable for replacement of defective or
non-conforming products. Therefore, the Company normally does not defer hardware
revenue for potential product warranty.
No rights of return are allowed except for non-conforming
products, which have been insignificant based on historical experiences. If
non-conforming products are returned due to software issues, the Company will
provide upgrades or additional customization to suit the customers needs, which
is infrequent with immaterial costs. In cases where non-conformity is a result
of integrated hardware, the Company returns the hardware to the original vendor
for replacement.
Changes in estimates for revenues, costs and profits are
recognized in the period in which they are determinable. When the Companys
estimates indicate that the entire contract will be performed at a loss, a
provision for the entire loss is recorded in the current accounting period.
As a result of our business transformation from traditional IT
business to integrated cloud-based solutions, most IT projects performed by
iASPEC are being phased out. The Company has recognized revenues when promised
goods or services are transferred to customers in an amount that reflects the
consideration that is expected to be received for those goods or services.
(r) Treasury Stock
The Company repurchases its ordinary shares from time to time
in the open market and holds such shares as treasury stock. The Company applies
the cost method and presents the cost to repurchase such shares as a reduction
in equity. During the years ended December 31, 2016, 2015 and 2014, the Company
repurchased a total of -0-, 685,000 and 76,368 ordinary shares,
respectively.
(s) Stock-based compensation
The Company applies ASC No. 718, Compensation-Stock
Compensation, which requires that share-based payment transactions with
employees, such as share options, be measured based on the grant date fair value
of the equity instrument and recognized as compensation expense over the
requisite service period, with a corresponding addition to equity. Under this
method, compensation cost related to employee share options or similar equity
instruments is measured at the grant date based on the fair value of the award
and is recognized over the period during which an employee is required to
provide service in exchange for the award, which generally is the vesting
period.
F-28
During the years ended December 31, 2016, 2015, and 2014, the
Company recognized approximately $273,000, $201,000, and $201,000, respectively,
of compensation expense.
(t) Foreign Currency Translation
The functional currency of the US and BVI companies is the
United States dollar. The functional currency of the Companys Hong Kong
subsidiaries is the Hong Kong dollar.
The functional currency of the Companys wholly-owned PRC
subsidiaries and its VIE is the Chinese Renminbi Yuan, (RMB). RMB is not
freely convertible into foreign currencies. The Companys PRC subsidiaries and
their VIEs financial statements are maintained in the functional currency.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into the functional currency at rates of
exchange prevailing at the balance sheet date. Transactions denominated in
currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transactions.
Exchange gains or losses arising from foreign currency transactions are included
in the determination of net loss for the respective periods.
For financial reporting purposes, the financial statements of
the Company have been translated into United States dollars. Assets and
liabilities are translated at exchange rates at the balance sheet dates, revenue
and expenses are translated at average exchange rates, and equity is translated
at historical exchange rates. Any resulting translation adjustments are not
included in determining net income but are included in other comprehensive loss,
a component of equity.
The exchange rates adopted are as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Year-end RMB to US$ exchange
rate
|
|
6.9437
|
|
|
6.4893
|
|
Average yearly RMB to US$ exchange rate
|
|
6.6403
|
|
|
6.2150
|
|
The average yearly RMB to US$ exchange rate adopted for the
year ended December 31, 2014 was 6.1425
No representation is made that the RMB amounts could have been,
or could be, converted into United States dollars at the rates used in
translation.
(u) Research & Development Expenses
The Company follows the guidance in FASB ASC 985-20,
Cost of
Software to Be Sold, Leased or Marketed,
regarding software development
costs to be sold, leased, or otherwise marketed.
FASB ASC 985-20-25 requires research and development costs for
software development to be expensed as incurred until the software model is
technologically feasible. Technological feasibility is established when the
enterprise has completed all planning, designing, coding, testing, and
identification of risks activities necessary to establish that the product can be
produced to meet its design specifications, features, functions, technical
performance requirements. A certain amount of judgment and estimation is
required to assess when technological feasibility is established, as well as the
ongoing assessment of the recoverability of capitalized costs. The Companys
products reach technological feasibility shortly before the products are
released and sold to the public. Therefore research and development costs are
generally expensed as incurred.
F-29
(v) Subsidy Income
Subsidy income mainly represents income received from various
local governmental agencies in China for developing high technology products in
the fields designated by the government as new and highly innovative. We have no
continuing obligation under the subsidy provision.
(w) Sales, use and other value-added taxes, and Income Taxes
Revenue is recorded net of applicable sales, use and
value-added taxes.
Income taxes are provided on an asset and liability approach
for financial accounting and reporting of income taxes. Deferred income taxes
are recognized for all significant temporary differences at enacted rates and
classified as current or non-current based upon the classification of the
related asset or liability in the financial statements. A valuation allowance is
provided to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion, or all of, the deferred tax assets will not
be realized. The Company classifies interest and/or penalties related to
unrecognized tax benefits, if any, as a component of income tax expense.
The Company applies the provisions of ASC No. 740 Income
Taxes (ASC 740), which clarifies the accounting for uncertainty in income
taxes recognized by prescribing a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. ASC 740 also provides
accounting guidance on de-recognition, classification, interest and penalties,
and disclosure.
(x) Discontinued Operations
ASU 2014-08,Presentation of Financial Statements (Topic 205)
and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity was effective for the
Company during the year ended December 31, 2015. The amendments contained in
this update change the criteria for reporting discontinued operations and
enhance the reporting requirements for discontinued operations. Under the
revised standard, a discontinued operation must represent a strategic shift that
has or will have a major effect on an entitys operations and financial results.
Examples could include a disposal of a major line of business, a major
geographical area, a major equity method investment, or other major parts of an entity. The revised standard also
allows an entity to have certain continuing cash flows or involvement with the
component after the disposal. Additionally, the standard requires expanded
disclosures about discontinued operations that will provide financial statement
users with more information about the assets, liabilities, income, and expenses
of discontinued operations. The Company accounted for the sale of Geo and
Zhongtian during 2015 as a discontinued operation pursuant to this standard.
Refer to Note 16 for additional details.
F-30
(y) Segment reporting
Segment information is consistent with how management reviews
the businesses, makes investing and resource allocation decisions and assesses
operating performance. Transfers and sales between reportable segments, if any,
are recorded at cost.
The Company reports financial and operating information in the
following two segments:
(a)
|
Cloud-based Technology (CBT) segment The CBT segment is
the Companys current and future focus for corporate development. It
includes the Companys cloud-based products and services sold to private
sectors including new media, healthcare, education, and residential
community management. In this segment, the Company generates revenues from
the sales of hardware and software total solutions with proprietary
software and content. Starting in the fourth quarter of 2014, the Company
also began to generate additional revenue from monthly software licensing
and Software-as-a Service (SaaS) fees.
|
|
|
(b)
|
Traditional Information Technology (TIT) segment The TIT
segment includes the Companys project-based technology products and
services sold to the public sector. The solutions the Company has sold
primarily include Geographic Information Systems (GIS), Digital Public
Security Technology (DPST), and Digital Hospital Information Systems
(DHIS). In this segment, the Company generates revenues from sales of
software and system integration services.
|
(z) Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No.
2014-09 (ASU 2014-09),"ASC 606-10-65-1, Revenue from Contracts with Customers
(Topic 606)." ASU 2014-09 supersedes the revenue recognition requirements in
"Revenue Recognition (Topic 605)", and requires entities to recognize revenue
when it transfers promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled to in
exchange for those goods or services. ASU 2014-09 is effective for annual
reporting periods beginning after December 15, 2017, including interim periods
within that reporting period, and is to be applied retrospectively. Early
adoption is permitted to the effective date of December 31, 2016 using either of
two methods: (1) retrospective application of Topic 660 to each prior reporting
period presented with the option to elect certain practical expedients as
defined within Topic 606 or (2) retrospective application of Topic 606 with the
cumulative effect of initially applying Topic 606 recognized at the date of
initial application and providing certain additional disclosures as defined per
Topic 606. Preliminarily, the Company plans to adopt Topic 606 in the fiscal
year of 2018 pursuant to the aforementioned adoption method (2), and believes that there
will not be material impact to the Companys revenues upon adoption. The Company
is continuing to evaluate the impact to the Companys revenues related to the
adoption of Topic 606 and may change the initial assessments.
F-31
In August 2014, the FASB issued ASU 2014-5, ASC 205-40-65-1,
Presentation of Financial Statements Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about and Entitys Ability to Continue as a Going
Concern. The new guidance which requires an entity to evaluate whether there
are conditions or events, 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
financial statements are available to be issued when applicable), and to provide
related footnote disclosures in certain circumstances. The new standard is
effective for annual periods ending after December 15, 2016, and for annual and
interim periods thereafter. Early application is permitted. The Company has
adopted this guidance and believes that the adoption of the new guidance has no
material impact on the results of operations or financial position, although the
Company is still in the process of transitioning its business strategy from the
public sector to the private customer based.
In July 2015, the FASB issued ASU No. 2015-11, ASC
330-10-65-1, Inventory (Topic 330) Simplifying the Measurement of Inventory,
which changes the measurement from lower of cost or market to lower of cost and
net realizable value. The guidance requires prospective application for
reporting periods beginning after December 15, 2016 and permits adoption in an
earlier period. The adoption of this ASU is not expected to have a material
impact on the Companys consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, ASC
740-10-65-4, Balance Sheet Classification of Deferred Taxes. This guidance
requires that all deferred tax assets and liabilities, along with any related
valuation allowance, be classified as noncurrent on the balance sheet. The
guidance becomes effective for annual reporting periods beginning after December
15, 2016 with early adoption permitted. The Company has applied this guidance to
its consolidated financial statements for the year ended December 31, 2015 and
retroactively reclassified its balance sheet for the year ended December 31,
2014. Adoption of this guidance had no material impact on the results of
operations or financial position.
In January 2016, the FASB issued ASU 2016-01, ASC 825-10-65-2,
Financial Instruments Overall (Subtopic 825-10) Recognition and Measurement of
Financial Assets and Financial Liabilities. The guidance requires equity
investments (except those accounted for under the equity method of accounting,
or those that result in consolidation of the investee) to be measured at fair
value with changes in fair value recognized in net income. The guidance requires
to use the exit price notion, when measuring the fair value of financial
instruments for disclosure purposes and separate presentation of financial
assets and financial liabilities by measurement category and form of financial
asset (i.e., securities or loans and receivables). The guidance also eliminates
the requirement for disclosure of the method(s) and significant assumptions used
to estimate the fair value that is required to be disclosed for financial
instruments measured at amortized cost. The guidance requires prospective
application for reporting periods beginning after
F-32
December 15, 2017 and permits adoption in an earlier period.
Adoption of ASU 2016-1is not expected to have a material impact on the Companys
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, ASC
842-10-65-1, Leases (Topic 842). The guidance requires, with the exception of
short-term leases, a lease liability, which is a lessees obligation to make
lease payments arising from a lease, measured on a discounted basis; and a
right-of-use asset, which is an asset that represents the lessees right to use,
or control the use of, a specified asset for the lease term. Under the new
guidance, lessor accounting is largely unchanged. Certain targeted improvements
were made to align, where necessary, lessor accounting with the lessee
accounting model and Topic 606, Revenue from Contracts with Customers. The
guidance requires prospective application for reporting periods beginning after
December 15, 2018 and early adoption is permitted. Lessees (for capital and
operating leases) and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for leases
existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements. The modified retrospective
approach would not require any transition accounting for leases that expired
before the earliest comparative period presented. Lessees and lessors may not
apply a full retrospective transition approach. Adoption of ASU 2016-2 is not
expected to have material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, ASC 323-10-65-2,
Equity Method and Joint Ventures (Topic 323): Simplifying the Transaction to the
Equity Method of Accounting. The new guidance eliminates the requirement that
when an investment qualifies for use of the equity method as a result of an
increase in the level of ownership interest or degree of influence, an investor
must adjust the investment, results of operations, and retained earnings
retroactively on a step-by-step basis, as if the equity method had been in
effect during all previous periods that the investment had been held. The
guidance requires that the equity method investor add the cost of acquiring the
additional interest in the investee to the current basis of the investors
previously held interest and adopt the equity method of accounting as of the
date the investment becomes qualified for equity method accounting. Therefore,
upon qualifying for the equity method of accounting, no retroactive adjustment
of the investment is required. The guidance requires an entity that has an
available-for-sale equity security that becomes qualified for the equity method
of accounting recognize through earnings the unrealized holding gain or loss in
accumulated other comprehensive income at the date the investment becomes
qualified for use of the equity method. The guidance is effective for reporting
periods beginning after December 15, 2016. Adoption of ASU 2016-07 is not
expected to have material impact to the Companys consolidated financial
statements.
In March 2016, the FASB issued ASU 2016-09, ASC 718-10-65-4,
Compensation Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting. The guidance simplifies the accounting for
share-based payment award transactions, including: (a) income tax consequences;
(b) classification of awards as either equity or liabilities; and (c)
classification on the statement of cash flows. The guidance is effective for
reporting periods beginning after December 15, 2016. Adoption of ASU 2016-09 is
not expected to have material impact to the Companys consolidated financial
statements.
F-33
In April 2016, the FASB issued ASU 2016-10, ASC 606-10-65-1,
Revenue from Contracts with Customers (Topic 606): identifying Performance
Obligation and Licensing. "The amendments add further guidance on identifying
performance obligations and also to improve the operability and
understandability of the licensing implementation guidance. Nevertheless, the
amendments do not change the core principle of the guidance in Topic 606. The
guidance is effective for reporting periods beginning after December 15, 2017.
Adoption of ASU 2016-10 is not expected to have material impact to the Companys
consolidated financial statements.
In May 2016, the FASB issued ASU 2016-11, ASC 606-10-65-1,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815):
Rescission of SEC Guidance Because of Accounting Standards U[dates 2014-09 and
2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. The
new guidance rescinds SEC paragraphs pursuant to two SEC Staff Announcements at
the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically,
registrants should not rely on the following SEC Staff Observer comments upon
adoption of Topic 606: (1) Accounting for Shipping and Handling Fees and Costs,
which is codified in paragraph 605-45-S99-1; (2) Accounting for Consideration
Given by a Vendor to a Customer (including Reseller of the Vendors Products),
which is codified in paragraph 605-50-S99-1. The guidance is effective for
reporting periods beginning after December 15, 2017. Adoption of ASU 2016-11 is
not expected to have material impact to the Companys consolidated financial
statements.
In May 2016, the FASB issued ASU 2016-12, ASC 606-10-65-1,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients. The guidance, among other things: (1) clarifies the
objective of the collectability criterion for applying paragraph 606-10-25-7;
(2) permits an entity to exclude amounts collected from customers for all sales
(and other similar) taxes from the transaction price; (3) specifies that the
measurement date for noncash consideration is contract inception; (4) provides a
practical expedient that permits an entity to reflect the aggregate effect of
all modifications that occur before the beginning of the earliest period
presented when identifying the satisfied and unsatisfied performance
obligations, determining the transaction price, and allocating the transaction
price to the satisfied and unsatisfied performance obligations; (5) clarifies
that a completed contract for purposes of transition is a contract for which all
(or substantially all) of the revenue was recognized under legacy GAAP before
the date of initial application, and (6) clarifies that an entity that
retrospectively applies the guidance in Topic 606 to each prior reporting period
is not required to disclose the effect of the accounting change for the period
of adoption. ASU 2014-12 is effective for annual reporting periods beginning
after December 15, 2017, including interim periods within that reporting period,
and is to be applied retrospectively. Early adoption is permitted to the
effective date of adoption of ASU 2014-09. The Company is currently in the
process of evaluating the impact of the adoption of ASU 2014-12 on the
consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, ASC 230-10-65-2,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments. These updates provide cash flow statement classification
guidance applicable to the Company for: (1) Debt Prepayment or Debt
Extinguishment Costs; (2) Contingent Consideration Payments Made after a Business
Combination; (3) Proceeds from the Settlement of Insurance Claims; (4)
Distributions Received from Equity Method Investees. These updates are effective
for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period. Early adoption is permitted.
Adoption of ASU 2016-15 is not expected to have material impact to the Companys
consolidated financial statements.
F-34
In October 2016, the FASB issued ASU 2016-16, ASC 740-10-65-5,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory. The new guidance requires an entity to recognize the income tax
consequences of an intra-entity transfer of an asset other than inventory, when
the transfer occurs. The new guidance eliminates the exception for an
intra-entity transfer of an asset other than inventory. Although the new
guidance does not require new disclosure, the existing disclosure requirements
might be applicable, when accounting for the current and deferred income taxes
for an intra-entity transfer of an asset other than inventory. The guidance is
effective for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. Early adoption is
permitted. The new guidance should be applied on a modified retrospective basis
through a cumulative-effect adjustment directly to retained earnings as of the
beginning of the period of adoption. The Company is currently in the process of
evaluating the impact of the adoption of ASU 2016-16 on the consolidated
financial statements.
In October 2016, the FASB issued ASU 2016-17, ASC 810-10-65-8,
Consolidation (Topic 810): Interests Held through Related Parties That Are Under
Common Control. The new guidance changes the evaluation of whether a reporting
entity is the primary beneficiary of a variable interest entity by changing how
a reporting entity that is a single decision maker of a variable interest entity
treats indirect interests in the entity held through related parties that are
under common control with the reporting entity The new guidance is effective for
annual reporting periods beginning after December 15, 2016, including interim
periods within those fiscal years. If an entity adopts the content that links to
this paragraph in an interim period, any adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. Adoption of
ASU 2016-17 is not expected to have material impact to the Companys
consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, ASC
230-10-65-3, Statement of Cash Flows (Topic 230): Restrict Cash. The new
guidance requires that a statement of cash flows explain the change during the
period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. As a result, amounts
generally described as restricted cash and restricted cash equivalents should be
included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. The new
guidance is effective for annual reporting periods beginning after December 15,
2017, including interim periods within those fiscal years. Early adoption is
permitted. The guidance should be applied using a retrospective transition
method to each period presented. Adoption of ASU 2016-18 is not expected to have
material impact to the Companys consolidated financial statements.
F-35
In December 2016, the FASB issued ASU 2016-20, ASC
606-10-65-1, Technical Corrections and Improvements to Topic 606, Revenue from
Contract with Customers. The amendments in ASU 2016-20 affect narrow aspects of
the guidance issued in ASU 2014-09 applicable to the Company include: (1)
Contract Costs, (2) Provisions for Losses on Construction-Type and
Production-Type Contracts, (3) Disclosure of Remaining Performance Obligations,
(4) Disclosure of Prior Period Performance Obligations, (5) Contract
Modifications, (6) Contract Asset vs. Receivable, (7) Refund Liability. The
effective date of these amendments are at the same date that Topic 606 is
effective for annual reporting periods beginning after December 15, 2017,
including interim reporting periods therein. The Company is currently in the
process of evaluating the impact of the adoption of ASU 2016-20 on the
consolidated financial statements.
In January 2017, the FASB issued 2017-01, ASC 805-10-65-4,
Business Combinations (Topic 805): Clarifying the Definition of a Business. The
new update is effective for annual periods beginning after December 15, 2017,
including interim periods within those periods. Early adoption is permitted
under certain circumstances, and should be applied prospectively as of the
beginning of the period of adoption. Adoption of ASU 2017-01 is not expected to
have material impact to the Companys consolidated financial statements.
In January 2017, the FASB issued 2017-04, ASC 350-20-65-3,
Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment. The new guidance eliminates Step 2 from the goodwill impairment
test. The annual, or interim, goodwill impairment test is performed by comparing
the fair value of a reporting unit with its carrying amount. An impairment
charge should be recognized for the amount by which the carrying amount exceeds
the reporting units fair value; however, the loss recognized should not exceed
the total amount of goodwill allocated to that reporting unit. In addition,
income tax effects from any tax deductible goodwill on the carrying amount of
the reporting unit should be considered when measuring the goodwill impairment
loss, if applicable. The new guidance also eliminates the requirements for any
reporting unit with a zero or negative carrying amount to perform a qualitative
assessment and, if it fails that qualitative test, to perform Step 2 of the
goodwill impairment test. An entity still has the option to perform the
qualitative assessment for a reporting unit to determine if the quantitative
impairment test is necessary. The new update is effective for annual or any
interim goodwill impairment tests in fiscal years beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. ASU 2017-04 should be
adopted on a prospective basis. Adoption of ASU 2017-04 is not expected to have
material impact to the Companys consolidated financial statements.
The Company has considered all other recently issued accounting
pronouncements and does not believe that the adoption of such pronouncements
will have a material impact on the consolidated financial statements.
F-36
3.
VARIABLE INTEREST ENTITY
The Company is the primary beneficiary of iASPEC, pursuant to
the Amended and Restated MSA. iASPEC is qualified as a variable interest entity
of the Company and is subject to consolidation. Accordingly, the assets and
liabilities and revenues and expenses of iASPEC have been included in the
accompanying consolidated financial statements. In the opinion of management,
(i) the ownership structure of the Company, and the VIEs are in compliance with
existing PRC laws and regulations; (ii) the contractual arrangements with the
VIEs and its shareholder are valid and binding, and do not result in any
violation of PRC laws or regulations currently in effect; and (iii) the
Companys business operations are in compliance with existing PRC laws and
regulations in all material respects.
However, there are substantial uncertainties regarding the
interpretation and application of current and future PRC laws and regulations.
Chinas legal system is a civil law system based on written statutes and unlike
common law systems. It is a system in which decided legal cases have little
value as precedent. As a result, Chinas administrative and judicial authorities
have significant discretion in interpreting and implementing statutory and
contractual terms. Thus, it may be more difficult to evaluate the outcome of
administrative and judicial proceedings and the level of legal protection
available than in more developed legal systems. Accordingly, the Company cannot
be assured that PRC regulatory authorities will not ultimately take a contrary
view to its opinion with respect to the contractual arrangements with its VIEs.
Because all of these contractual arrangements are governed by the PRC laws and
provide for the resolution of disputes through arbitration in the PRC, these
contracts would be interpreted in accordance with the PRC laws and any dispute
would be resolved in accordance with the PRC legal procedures. If the VIEs or
their respective shareholders fail to perform their respective obligations under
the contractual arrangements, of which they are a party, the Company may have to
incur substantial costs and resources to enforce its rights under the contracts
and rely on legal remedies under the PRC laws, which may not be sufficient or
effective. Under the PRC laws, rulings by arbitrators are final; parties cannot
appeal the arbitration results in courts; and the prevailing parties may only
enforce the arbitration awards in the PRC courts through arbitration award
recognition proceedings, which would cause the Company to incur additional
expenses and delays. As a result, uncertainties in the PRC legal system could
limit the Companys ability to enforce these contractual arrangements. In the
event the Company is unable to enforce these contractual arrangements, it may
not be able to exert effective control over the VIEs, and its ability to conduct
its business may be negatively affected.
In addition, if the PRC government determines that the Company
is not in compliance with applicable laws, it may revoke the Companys business
and operating licenses, and require the Company to discontinue or restrict its
operations, deconsolidate the Companys interests in the VIEs, restrict its
right to collect revenues. The PRC government may require the Company to
restructure its operations, impose additional conditions, of which the Company
may not be able to comply, impose restrictions on the Companys business
operations or on its customers, or take other regulatory or enforcement actions
against the Company that could be harmful to its business. The Company believes
that the contractual arrangements with its VIEs are in compliance with current
PRC laws and are legally enforceable. In the opinion of management, the likelihood of loss in respect to the Companys
current ownership structure or the contractual arrangements with VIEs is remote
based on current facts and circumstances.
F-37
In order to facilitate iASPECs expansion and provide financing
for iASPEC to complete the acquisition of Geo, the Company advanced RMB38.0
million (approximately $5.4 million) to iASPEC in two installments in 2007 and
2008 for increase of iASPECs registered capital. In order to comply with PRC
laws and regulations, the advance was made to Mr. Lin, iASPECs then majority
shareholder, who, then upon the authority and direction of the Board of
Directors, forwarded the funds to iASPEC. The Company has recorded the advance
of these funds as an interest-free loan to iASPEC, which was eliminated against
additional capital of iASPEC in the Companys consolidated financial statements.
The increase in iASPECs registered capital does not affect ISTs exclusive
option to purchase iASPECs assets and shares under the MSA.
For the years ended December 31, 2016, 2015 and 2014, net loss
of $ 353,876, net income of $ 308,473, and net loss of $520,951 respectively,
have been attributed to non-controlling interest in the consolidated statements
of operations of the Company. The $520,951 net loss attributed to
non-controlling interest in 2014 was comprised of $404,662 from continuing
operations and $116,289 from dis-continued operations.
Government licenses, permits and certificates represent
substantially all of the unrecognized revenue-producing assets held by the VIEs.
Recognized revenue-producing assets held by the VIEs consist of property, plant
and equipment, and intangible assets.
The VIEs assets and liabilities were as follows for the years
ended December 31, 2016 and 2015:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current assets from discontinued
operations
|
$
|
-
|
|
$
|
13,272,186
|
|
Total current assets
|
|
7,391,365
|
|
|
27,860,566
|
|
Property, plant and equipment
|
|
2,655,188
|
|
|
2,930,365
|
|
Intangible assets
|
|
1,556,306
|
|
|
2,431,599
|
|
Non-current assets from discontinued
operations
|
|
-
|
|
|
-
|
|
Total assets
|
|
17,742,097
|
|
|
41,439,773
|
|
Intercompany payable to the WFOE
|
|
14,204,071
|
|
|
28,347,903
|
|
Total current liabilities
|
|
24,864,098
|
|
|
42,249,136
|
|
Total liabilities
|
|
24,864,098
|
|
|
42,249,136
|
|
Total equity
|
$
|
(7,122,001
|
)
|
$
|
(809,363
|
)
|
4. DISPOSALS OF CONDOLIDATED ENTITIES
On March 31, 2016, the Company disposed of Information Security
Software Investment Limited (ISSI), a wholly-owned subsidiary, to an unrelated
third party. On August 1, 2016, the Company also disposed of Dongguan
Information Security Technology (China) Co., Ltd. (IST DG) to an unrelated
third party. Both IST DG and ISSI were holding companies. The Company divested
these two subsidiaries as being determined that they were no longer necessities for the
organization. There was no consideration exchanged for the disposals that
resulted in a total loss of approximately $0.6 million for the year ended
December 31, 2016. In accordance with ASC 810-10-40, Deconsolidation of a
Subsidiary, the Company derecognized the net assets associated with ISSI and IST
DG on March 31, 2016 and on August 1, 2016, respectively, when the Company
ceased to have controlling financial interest in these entities.
F-38
On January 31, 2015, the Company deregistered Information
Security Intl Investment & Development Ltd (ISIID) in line with its
business restructure. The deregistration did not result in any gain or loss for
the year ended December 31, 2015.
5. LOSS PER SHARE
Basic loss per share is computed by dividing loss available to
common shareholders by the weighted-average number of ordinary shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur, if securities or other contracts to issue ordinary
shares were exercised or converted into ordinary shares, or resulted in the
issuance of ordinary shares that shared in the earnings of the entity.
Components of basic and diluted loss per share were as follows
for the years ended December 31, 2016, 2015, and 2014:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net loss attributable to the Company
|
$
|
(18,170,601
|
)
|
$
|
(7,504,262
|
)
|
$
|
(29,231,347
|
)
|
Weighted average outstanding ordinary shares-Basic
|
|
40,175,439
|
|
|
34,483,100
|
|
|
30,601,209
|
|
Weighted average outstanding ordinary
shares-Diluted
|
|
40,175,439
|
|
|
34,483,100
|
|
|
30,601,209
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.45
|
)
|
$
|
(0.22
|
)
|
$
|
(0.96
|
)
|
Diluted
|
$
|
(0.45
|
)
|
$
|
(0.22
|
)
|
$
|
(0.96
|
)
|
CONTINUING OPERATIONS
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net loss attributable to the Company
|
$
|
(18,170,601
|
)
|
$
|
(9,003,233
|
)
|
$
|
(24,087,098
|
)
|
Weighted average outstanding ordinary shares-Basic
|
|
40,175,439
|
|
|
34,483,100
|
|
|
30,601,209
|
|
Weighted average outstanding ordinary
shares-Diluted
|
|
40,175,439
|
|
|
34,483,100
|
|
|
30,601,209
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.45
|
)
|
$
|
(0.26
|
)
|
$
|
(0.79
|
)
|
Diluted
|
$
|
(0.45
|
)
|
$
|
(0.26
|
)
|
$
|
(0.79
|
)
|
DISCONTINUED OPERATIONS
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net income (loss) attributable to
the Company
|
$
|
-
|
|
$
|
1,498,971
|
|
$
|
(5,144,249
|
)
|
Weighted average outstanding ordinary shares-Basic
|
|
-
|
|
|
34,483,100
|
|
|
30,601,209
|
|
Weighted average outstanding ordinary
shares-Diluted
|
|
-
|
|
|
35,382,895
|
|
|
30,601,209
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
-
|
|
$
|
0.40
|
|
$
|
(0.17
|
)
|
Diluted
|
$
|
-
|
|
$
|
0.40
|
|
$
|
(0.17
|
)
|
F-39
Warrants for the purchase of 525,621 and 1,425,416 shares were
not included in the calculations for the years ended December 31, 2016 and 2015
as their effect would have been anti-dilutive.
As the Company reported income from discontinued operations in
2015, 899,795 shares underlying 98,741 series B warrants (Note 18) were included
in diluted calculation.
6. BUSINESS ACQUISITION
On October 14, 2014, the Company acquired 100% of the equity
interests of Shenzhen Biznest Internet Technology Co., Ltd, or Biznest, for a
total purchase price with a fair value of approximately $12.7 million.
Approximately $7.5 million of the purchase price was paid in cash and
approximately $0.7 million of the Companys previously recorded accounts payable
to the previous owner of Biznest were forgiven. Approximately $1.5 million of
the cash payment was included in payables as of December 31, 2014, which was
subsequently paid in February 2015. The balance of the purchase price was paid
through the issuance of 1,543,455 ordinary shares of the Company valued at
approximately $5.8 million.
The following table summarizes the purchase price allocation
for Biznest, and the amounts of the assets acquired and liabilities assumed
which were based on their estimated fair values at the acquisition date:
Cash and cash equivalents
|
$
|
67,506
|
|
Advances to suppliers
|
|
406,273
|
|
Other receivables
|
|
308,158
|
|
Property, plant, and equipment
|
|
2,478,165
|
|
Identifiable intangible assets
|
|
3,600,746
|
|
Goodwill
|
|
6,152,243
|
|
Accounts payable
|
|
(223,030
|
)
|
Salary payable
|
|
(108,535
|
)
|
Other payables
|
|
(9,493
|
)
|
|
$
|
12,672,033
|
|
The operating results of Biznest have been included in the
Companys consolidated financial statements since October 14, 2014, the
acquisition date. Intangible assets represent software development costs with an
estimated useful life of 5 years. Goodwill has been allocated to the Companys
CBT segment, and is not expected to be deductible for tax purposes. Goodwill
arising from the transaction is attributable primarily to expected operating
synergies and assembled workforce of Biznest. See Note 7.
The following unaudited pro forma information shows the results
of continuing operations for the year ended December 31, 2014, as if the
acquisition of Biznest had been completed at the beginning of the respective
periods. The unaudited pro forma information is based on estimates and
assumptions which management believes are reasonable. It is not necessarily
indicative of the consolidated results in future periods or the results that
would have been realized for 2014.
F-40
For the year ended December 31, 2014
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
CNIT
|
|
|
Biznest
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
38,634,747
|
|
$
|
2,457,139
|
|
$
|
(2,457,139
|
)
|
$
|
38,634,747
|
|
(Loss) income from operations-continuing operations
|
|
(29,091,319
|
)
|
|
210,619
|
|
|
(780,619
|
)
|
|
(29,661,319
|
)
|
Net (loss)income-continuing operations
|
|
(24,087,098
|
)
|
|
211,526
|
|
|
(780,619
|
)
|
|
(24,656,191
|
)
|
Weighted Average Number of Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted-continuing operations
|
|
30,601,209
|
|
|
|
|
|
1,234,764
|
|
|
31,835,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted-continuing operations
|
|
(0.79
|
)
|
|
|
|
|
|
|
|
(0.78
|
)
|
The pro forma adjustments represent the amortization of the
intangible assets and the depreciation of property, plant and equipment arising
upon the acquisition of Biznest, as well as the elimination of Biznests revenue
and loss (income) from operations, as the Company was Biznests only
customer.
7. GOODWILL
Goodwill by segments at December 31, 2016 and 2015 are as
follows:
|
|
January 1,
|
|
|
|
|
|
Exchange rate
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
Transfer
|
|
|
adjustment
|
|
|
Impairment
|
|
|
2015
|
|
CBT Segment
|
$
|
9,210,122
|
|
$
|
(3,057,879
|
)
|
$
|
(332,350
|
)
|
$
|
(1,066,439
|
)
|
$
|
4,753,454
|
|
TIT Segment
|
|
2,908,695
|
|
|
3,057,879
|
|
|
1,885,414
|
|
|
(7,851,988
|
)
|
|
-
|
|
Total
|
$
|
12,118,817
|
|
$
|
-
|
|
$
|
1,553,064
|
|
$
|
(8,918,427
|
)
|
$
|
4,753,454
|
|
|
|
December 31,
|
|
|
|
|
|
Exchange rate
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
Transfer
|
|
|
adjustment
|
|
|
|
Impairment
|
|
|
2016
|
|
CBT Segment
|
$
|
4,753,454
|
|
$
|
-
|
|
$
|
(311,087
|
)
|
$
|
(4,442,367
|
)
|
$
|
-
|
|
TIT Segment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
4,753,454
|
|
$
|
-
|
|
$
|
(311,087
|
)
|
$
|
(4,442,367
|
|
$
|
-
|
|
In accordance with FASB ASC Topic 350, management reviews
goodwill impairment annually or more frequently, if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Management used the discounted cash
flow method to estimate the fair value of its reporting units. Determining the
fair value of a reporting unit involves the use of significant estimates and
assumptions, such as revenue growth rate, gross profit rate, and discount
rate.
F-41
In 2016 and 2015, CBT Segment revenue has grown significantly
below what was anticipated, and incurred a substantial loss as research and
development of the cloud-based ecosystem just being completed causing delay in
marketing the products and services. Based on the impairment test performed in
2016, step one of the test results indicated that the carrying amount of CBT
segments exceeded their fair value, and therefore an impairment of goodwill was
probable. Management then determined the implied fair value of goodwill for the
CBT segments. As a result, the Company recognized a goodwill impairment loss of
$4.4 million in the CBT segment in 2016.
Based on the impairment test performed in 2015, step one of the
test results indicated that the carrying amount of the TIT and CBT segments
exceeded their fair value, and therefore an impairment of goodwill was probable.
Management then determined the implied fair value of goodwill for the TIT and
CBT segments. As a result, the Company recognized goodwill impairment losses of
$7.9 million and $1.1 million in the TIT and CBT segments in 2015,
respectively.
Based on the impairment test performed in 2014, step one of the
test results indicated that the carrying amount of the TIT segment exceeded its
fair value, and therefore an impairment of goodwill was probable. Management
then determined the implied fair value of goodwill for the TIT segment. As a
result, the Company recognized a goodwill impairment loss of $4.7 million in the
TIT segment in 2014.
8. RELATED PARTY BALANCES AND TRANSACTIONS
(a) Related party balances
As of December 31, 2016 and 2015, amounts due from/to related
parties consist of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Due to related party - Shareholder
|
$
|
-
|
|
$
|
154,331
|
|
Due to related party
The balance due to shareholder represents the balance of $-0-
and $141,972 personal loans with interest free from Mr. Lin, Chairman and CEO of
the Company , and $-0- and $12,359 of payables due to Mr. Zhixiong Huang, Chief
Operating Officer of the Company as of December 31, 2016 and 2015,
respectively.
(b) Rental expenses - related party
iASPEC and Bocom leased office spaces in a building personally
owned by Mr. Lin, Chairman and CEO of the Company. The lease discontinued on
December 18, 2015. Consequently, the Company paid Mr. Lin approximately $-0-, $170,000, and $263,915 of rental expenses
during the years ended December 31, 2016, 2015, and 2014, respectively.
F-42
Zhongtian leased office space in a building personally owned by
Mr. Lin. The lease discontinued on November 9, 2015. Consequently, the Company
paid Mr. Lin $-0-, $ 160,166, and $ 67,114 of rental expenses during the years
ended December 31, 2016, 2015, and 2014, respectively. These amounts were
included within discontinued operations.
(c) Receivable from sale of stock
The amounts represented the loan balances of $144,015 and
$154,100 (RMB 1,000,000) to Mr. Sun Jun Ping, Chief Investment Officer of the
Company, as of December 31, 2016 and 2015, respectively. The receivable was
related to the sale of the Companys ordinary shares on November 15, 2013 under
2013 Equity Incentive Plan and included in other current assets, and was fully
collected on April 28, 2017.
9. INVENTORIES
As of December 31, 2016 and 2015, inventories consist of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
$
|
193,713
|
|
$
|
617,833
|
|
Work in Process
|
|
11,947
|
|
|
101,441
|
|
Finished goods
|
|
874,899
|
|
|
1,108,968
|
|
Cost of projects
|
|
651,266
|
|
|
1,693,737
|
|
|
$
|
1,731,825
|
|
$
|
3,521,979
|
|
Allowance for slow-moving or obsolete inventories
|
|
(254,042
|
)
|
|
(1,380,886
|
)
|
Inventories, net
|
$
|
1,477,783
|
|
$
|
2,141,093
|
|
For the years ended December 31, 2016, 2015 and 2014,
impairments for obsolete inventories were approximately $325,000, $275,000, and
$3,808,000, respectively. Impairment charges on inventories are included with
general and administrative expenses.
10. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2016 and 2015, property, plant and equipment
consist of:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Office buildings
|
$
|
4,175,613
|
|
$
|
580,863
|
|
Plant and machinery
|
|
677,504
|
|
|
724,948
|
|
Electronic equipment, furniture and
fixtures
|
|
10,440,392
|
|
|
16,318,202
|
|
Motor vehicles
|
|
390,238
|
|
|
817,725
|
|
Purchased software
|
|
6,104,043
|
|
|
3,179,938
|
|
|
|
21,787,790
|
|
|
21,621,676
|
|
Less: accumulated depreciation
|
|
(13,112,940
|
)
|
|
(13,248,715
|
)
|
Property, plant and equipment, net
|
$
|
8,674,850
|
|
$
|
8,372,961
|
|
F-43
Depreciation expenses for the years ended December 31, 2016,
2015, and 2014 were approximately $1.7 million, $1.7 million, and $2.1 million,
respectively.
Management regularly evaluates property, plant and equipment
for impairment, if an event occurs or circumstances change that would
potentially indicate that the carrying amount of the property, plant and
equipment exceeded its fair value. Management utilizes the discounted cash flow
method to estimate the fair value of the property, plant and equipment.
Based on the test of recoverability and the estimated fair
value, management determined that approximately $-0-, $4.6 million, and $0.8
million of property, plant and equipment were impaired for the years ended
December 31, 2016, 2015 and 2014.
11.
ASSETS HELD FOR SALE
Assets held for sale are reported at the lower of the carrying
amount or fair value less costs to sell. Depreciation expense is not recognized
on assets held for sale. In November 2014, the Company signed an agreement to
sell certain assets to an unrelated third party for RMB375.0 million
(approximately US$61.2 million). The following table reflected the assets held
for sale on the transaction closing date, November 30, 2015.
|
|
September 30,
|
|
|
|
2015
|
|
Property, plant and equipment
|
$
|
20,430,446
|
|
Land use rights, net
|
|
12,871,988
|
|
Total
|
|
33,302,434
|
|
Less: current portion
|
|
(13,032,000
|
)
|
Noncurrent portion
|
$
|
20,270,434
|
|
As of December 31, 2014, the Company had received a $13.0
million deposit under the agreement, which is classified on the balance sheet as
a deposit for assets held for sale as of December 31, 2014. In September 2015,
the Company completed the sale and title transferred to the buyer upon payment
in full of all amounts due under the contract. The Company recorded a pre-tax
gain on the sale of approximately $30 million for the year ended December 31,
2015.
12.
LAND USE RIGHTS AND INTANGIBLE ASSETS
(a) Deposits for purchase of land use rights Deposits for the purchase of land use rights represent deposits
for purchase of land use rights in Dongguan City. There was a deposit for
purchase of land use rights by IST in the amount of approximately $14.0 million
(RMB90.8 million) at December 31, 2015
F-44
See Note 17(a) (i) for sale of land use rights in 2016.
(b) Intangible assets
As of December 31, 2016 and 2015, intangible assets consist of:
|
|
Software and software
|
|
|
|
|
|
|
|
|
|
development costs
|
|
|
Trademarks
|
|
|
Total
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Gross carrying amounts
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
$
|
4,575,753
|
|
$
|
932,765
|
|
$
|
5,508,518
|
|
Addition
|
|
-
|
|
|
64,044
|
|
|
64,044
|
|
Foreign currency translation
|
|
(247,187
|
)
|
|
(50,388
|
)
|
|
(297,575
|
)
|
Balance as of December 31, 2015
|
|
4,328,566
|
|
|
946,421
|
|
|
5,274,987
|
|
Foreign currency translation
|
|
(283,281
|
)
|
|
(61,938
|
)
|
|
(345,219
|
)
|
Balance as of December 31, 2016
|
|
4,045,285
|
|
|
884,483
|
|
|
4,929,768
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
1,109,295
|
|
|
905,208
|
|
|
2,014,503
|
|
Amortization expense
|
|
821,038
|
|
|
18,167
|
|
|
839,205
|
|
Foreign currency translation
|
|
(59,924
|
)
|
|
(48,900
|
)
|
|
(108,824
|
)
|
Balance as of December 31, 2015
|
|
1,870,409
|
|
|
874,475
|
|
|
2,744,884
|
|
Amortization expense
|
|
789,736
|
|
|
18,480
|
|
|
808,216
|
|
Foreign currency translation
|
|
(122,409
|
)
|
|
(57,229
|
)
|
|
(179,638
|
)
|
Balance as of December 31, 2016
|
|
2,537,736
|
|
|
835,726
|
|
|
3,373,462
|
|
Total amortized intangible assets
|
$
|
1,507,549
|
|
$
|
48,757
|
|
$
|
1,556,306
|
|
Amortization expense for the years ended December 31, 2016,
2015, and 2014 was approximately $0.8 million, $0.8 million, and $0.9 million,
respectively.
Based on the impairment test performed, management determined
no impairment for the years ended December 31, 2016 and 2015, and impairment
loss was approximately $2.3 million for the year ended December 31, 2014.
Estimated amortization for the next four years is as follows:
2017
|
$
|
798,301
|
|
2018
|
|
698,645
|
|
2019
|
|
57,858
|
|
2020
|
|
1,502
|
|
Total
|
$
|
1,556,306
|
|
F-45
13. BANK LOANS
(a) Short-term bank loans
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Secured short-term loans
|
$
|
7,799,852
|
|
$
|
15,058,189
|
|
Add: amounts due within one year under long-term loan
contracts
|
|
-
|
|
|
214,797
|
|
Total short-term bank loans
|
$
|
7,799,852
|
|
$
|
15,272,986
|
|
(1) Detailed information of secured short-term loan balances as
of December 31, 2016 and 2015 were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Guaranteed by ISIOT
|
$
|
-
|
|
$
|
2,311,500
|
|
Collateralized by land and office buildings and guaranteed
by IST and guaranteed by Mr. Lin and Secured by iASPECs trade receivables
|
|
3,600,375
|
|
|
-
|
|
Secured by ISTs trade receivables and
guaranteed by iASPEC, ISIOT, IST and Mr. Lin
|
|
2,759,327
|
|
|
-
|
|
Guaranteed by High-tech Investment Company and Mr.
Lin
(i)
|
|
1,440,150
|
|
|
-
|
|
Guaranteed by ISIOT and Mr. Lin
|
|
-
|
|
|
3,082,000
|
|
Guaranteed by IST and Mr. Lin
|
|
-
|
|
|
3,837,089
|
|
Guaranteed by IASEPC, ISIOT and Mr. Lin
|
|
-
|
|
|
5,827,600
|
|
Total
|
$
|
7,799,852
|
|
$
|
15,058,189
|
|
(i) High-tech Investment Company is an unrelated third
party.
As of December 31, 2016, the Company had short-term bank loans
of $7.8 million, which mature on various dates from November 22, 2017 to
December 28, 2017. The short-term bank loans can be extended for another year by
the banks without additional charges to the Company upon maturity. The bank
borrowings are in the form of credit facilities. Amounts available to the
Company from the banks are based on the amount of collateral pledged or the
amount guaranteed by the Companys subsidiaries. These borrowings bear interest
rates ranging from 5.66% to 6.09% per annum. The weighted average interest rates
on short term debt were approximately 6.01%, 6.74%, and 7.74% for the years
ended December 31, 2016, 2015, and 2014, respectively. The interest expenses
were approximately $0.5 million, $3.1 million, and $5.9 million, respectively,
for the same periods.
14. BILLS PAYABLE
For bills payable, total available borrowing facilities with
various banks for the Company were $-0- and $10.7 million of as of December 31,
2016 and 2015, respectively. The Company utilized $9.39 million of bills payable
borrowing facilities at December 31, 2015.The funds borrowed under these
facilities are generally repayable within 1 year. Bills payable are non-interest
bearing.
All of the bank acceptance bills as of December 31, 2015
matured prior to May 3, 2016. Due to the short term to maturity, the Company
believes the bank acceptance bills carrying amount approximates fair value.
F-46
15. INCOME TAXES
Pre-tax income (loss) from continuing operations for the years
ended December 31, 2016, 2015, and 2014 were taxable in the following
jurisdictions:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
PRC
|
$
|
(1,442,284
|
)
|
$
|
3,397,483
|
|
$
|
(27,612,320
|
)
|
Others
|
|
(17,024,349
|
)
|
|
(7,787,215
|
)
|
|
(1,478,999
|
)
|
Total income (loss) before income taxes
|
$
|
(18,466,633
|
)
|
$
|
(4,389,732
|
)
|
$
|
(29,091,319
|
)
|
United States
Because of the domestication transaction in 2012 by which CNIT
BVI became the parent of our group, under Section 7874 of the Internal Revenue
Code of 1986, as amended, the Company is treated for U.S. federal tax purposes
as a U.S. corporation and, among other consequences, is subject to U.S. federal
income tax on its worldwide income. It is managements intention to reinvest all
the income attributable to the Company earned by its operations outside the
United States. Accordingly, no U.S. corporate income taxes are provided in these
consolidated financial statements.
BVI
Under the current laws of the BVI, dividends and capital gains
arising from the Companys investments in the BVI and ordinary income, if any,
are not subject to income taxes.
Hong Kong
Under the current laws of Hong Kong, ISSI, IST HK and HPC are
subject to a profit tax rate of 16.5% .
PRC
Income tax (benefit) expense from continuing operations
consists of the following:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current taxes
|
$
|
(307,557
|
)
|
$
|
543,944
|
|
$
|
4,204
|
|
Deferred taxes
|
|
365,401
|
|
|
3,761,084
|
|
|
(4,603,763
|
)
|
Income tax expense (benefit)
|
$
|
57,844
|
|
$
|
4,305,028
|
|
$
|
(4,599,559
|
)
|
Current income tax benefit was recorded in 2016 and was related
to differences between the book and corporate income tax returns. Income tax expense recorded in 2015 primarily related to utilization of
deferred tax assets relating to net operating loss carry forwards offset with
taxable income recorded relating to the sale of assets held for sale discussed
in Note 11.
F-47
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
PRC statutory tax rate
|
|
25%
|
|
|
25%
|
|
|
25%
|
|
Computed expected income tax (benefit) expense
|
$
|
(4,616,658
|
)
|
$
|
(1,097,433
|
)
|
$
|
(7,272,830
|
)
|
Tax rate differential benefit from tax
holiday
|
|
652,038
|
|
|
(1,771,273
|
)
|
|
1,753,640
|
|
Permanent differences
|
|
2,648,828
|
|
|
6,039,892
|
|
|
1,471,243
|
|
Tax effect of deductible temporary
differences not recognized
|
|
264,418
|
|
|
601,779
|
|
|
(914,667
|
)
|
Non-deductible tax loss
|
|
1,109,218
|
|
|
532,063
|
|
|
363,055
|
|
Income tax (benefit) expense
|
$
|
57,844
|
|
$
|
4,305,028
|
|
$
|
(4,599,559
|
)
|
The significant components of deferred tax assets and deferred
tax liabilities were as follows as of December 31, 2016 and December 31, 2015:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Deferred
|
|
|
Deferred
|
|
|
Deferred
|
|
|
Deferred
|
|
|
|
Tax
|
|
|
Tax
|
|
|
Tax
|
|
|
Tax
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Allowance for doubtful accounts
|
$
|
1,007,812
|
|
$
|
-
|
|
$
|
1,810,234
|
|
$
|
-
|
|
Loss carry-forwards
|
|
1,397,179
|
|
|
-
|
|
|
631,424
|
|
|
-
|
|
Fixed assets
|
|
35,341
|
|
|
(226,784
|
)
|
|
111,803
|
|
|
(221,530
|
)
|
Inventory valuation
|
|
302,134
|
|
|
-
|
|
|
1,323,187
|
|
|
-
|
|
Salary payable
|
|
28,569
|
|
|
-
|
|
|
16,618
|
|
|
-
|
|
Intangible assets
|
|
190,077
|
|
|
126,349
|
|
|
128,183
|
|
|
135,198
|
|
Gross deferred tax assets and liabilities
|
|
2,961,112
|
|
|
(100,435
|
)
|
|
4,021,449
|
|
|
(86,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
(2,860,677
|
)
|
|
-
|
|
|
(3,561,212
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets and liabilities
|
$
|
100,435
|
|
$
|
(100,435
|
)
|
$
|
460,237
|
|
$
|
(86,332
|
)
|
The Company has net operating loss carry forwards totaling RMB
67.0 million ($9.6 million) as of December 31, 2016, substantially all of which
were from PRC subsidiaries and will expire on various dates through December 31,
2021. Valuation allowance for deferred tax asset was fully provided.
ISIOT, IST and Topcloud are all governed by the Income Tax Laws
of the PRC. These companies are approved as being high-technology enterprises
and subject to PRC enterprise income tax rate (EIT) at 15%, while Biznest is
subject to a 12.5% of EIT.
The Company recognizes that virtually all tax positions in the
PRC are not free of some degree of uncertainty due to tax law and policy changes
by the State. However, the Company cannot reasonably quantify political risk
factors and thus must depend on guidance issued by current State officials.
Based on all known facts, circumstances, and current tax law,
the Company has recorded $-0- and $433,000 of unrecognized tax benefits as of
December 31, 2016 and 2015, respectively. The Company believes that the total
amount of unrecognized tax benefits as of December 31, 2015, if recognized,
would not have a material effect on its effective tax rate. The Company further
believes that there are no tax positions for which it is reasonably possible,
based on current Chinese tax laws and policies, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months, individually or in the aggregate, and have a
material effect on the Companys results of operations, financial condition or
cash flows.
F-48
The Companys policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense.
Any accrued interest or penalties associated with any unrecognized tax benefits
were not significant for the years ended 2016, 2015, and 2014.
Since the Company intends to reinvest its earnings to further
expand its businesses in the PRC, the PRC subsidiaries do not intend to declare
dividends to their parent companies in the foreseeable future. The Companys
foreign subsidiaries are in a cumulative deficit position. Accordingly, the
Company has not recorded any deferred taxes on the cumulative amount of any
undistributed deficit earnings. It is impractical to calculate the tax effect of
the deficit at this time.
16. DISCONTINUED OPERATIONS
In 2015, the Company disposed of two of iASPECs subsidiaries
(Zhongtian and Geo) by sale of equity ownership to third parties. As a result,
the operations of Zhongtian and Geo were reflected within discontinued
operations in the Companys consolidated statements of operations for all
periods presented.
The significant items included within discontinued operations
are as follows:
|
|
Year Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
$
|
24,904,321
|
|
$
|
29,522,952
|
|
Cost of revenue
|
|
15,040,537
|
|
|
17,541,786
|
|
Total operating expenses
|
|
9,856,344
|
|
|
18,031,318
|
|
Operating income (loss) from discontinued operations
|
|
7,440
|
|
|
(6,050,152
|
)
|
Net gain on sale of Geo and Zhongtian
|
|
3,699,088
|
|
|
-
|
|
Other (loss) income
|
|
(2,038,675
|
)
|
|
1,000,272
|
|
Income (loss) from discontinued operations
before income taxes
|
|
1,667,853
|
|
|
(5,049,880
|
)
|
Provision for income taxes
|
|
(168,882
|
)
|
|
(210,658
|
)
|
Income (loss) from discontinued operations, net of income
taxes
|
$
|
1,498,971
|
|
$
|
(5,260,538
|
)
|
Due from sales of Zhongtian and Geo for $13.3 million was
recorded in other receivables at December 31, 2015, and was received in
2016.
17. OTHER CURRENT AND NON-CURRENT ASSETS
(a) As of December 31, 2016 and 2015, other currents assets
consist of:
F-49
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Advances to unrelated-parties
(ii)
|
$
|
3,572,368
|
|
$
|
7,412,911
|
|
Receivable from sale of the deposit of the land use
right
(i)
|
|
3,117,907
|
|
|
-
|
|
Advances to employees
|
|
105,081
|
|
|
221,153
|
|
Receivable from sale of stock (Note 8(c) )
|
|
144,015
|
|
|
154,100
|
|
Installation contract deposits
(iii)
|
|
16,477
|
|
|
67,722
|
|
Other current assets
|
|
203,955
|
|
|
257,975
|
|
|
$
|
7,159,803
|
|
$
|
8,113,861
|
|
(i)
|
The Company planned to purchase land use rights in
Dongguan City for expansion of operations in manufacturing and office
building in 2010. Under the terms of the purchase agreement with Dongguan
Fenggang Municipal Government (the Local Government), IST paid
approximately $14.0 million (RMB 90.8 million) in total with the Local
Government as security deposit for purchase of land use rights, which was
refundable, if the Company was to terminate the agreement. In September
2016, the Company terminated the purchase agreement because of the shift
of the Companys business strategy and transformation of the Companys
business. The Company sold deposit receivable of approximately $13.0
million (RMB 90.2 million) without recourse to an unrelated party,
Dongguan Dongyi Industrial Co., Ltd. (Dongyi), in a consideration of
approximately $10.4 million (RMB 72.2 million) with an installment payment
plan until December 31, 2019. As of December 31, 2016, the Company
received approximately $1.0 million from Dongyi.
|
|
|
|
The transaction was governed by FASB ASC 860-20, Sales of
Financial Assets. The Company recognized and recorded a loss of
approximately $2.7 million from the sale in the consolidated statement of
operations for the year ended December 31, 2016.
|
|
|
(ii)
|
The advances to unrelated parties for business
development, and are non-interest bearing.
|
|
|
(iii)
|
Deposits for installation contract are made from
time-to-time by the Company to demonstrate the Companys capabilities in
capital and resources in connection with bidding on certain projects. Such
amounts are refundable upon completion of the bidding
processes.
|
(b) As of December 31, 2016 and 2015, other non-currents assets
consist of:
|
|
December 31,
|
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
Receivable from sale of the deposit of the
land use right
(i)
|
$
|
6,235,550
|
|
$
|
-
|
|
Advances to unrelated third-parties
(ii)
|
|
2,031,466
|
|
|
2,065,000
|
|
|
$
|
8,267,016
|
|
$
|
2,065,000
|
|
18. WARRANTS LIABILITY
In May 2015, the Company closed an equity offering and issued
2,102,484 ordinary shares to certain institutional investors at a price of $6.44
per share. At the same time, the Company also issued Series A and Series B
warrants to purchase an aggregate of 1,576,863 ordinary shares to the same
investors under the equity offering.
F-50
The following table outlines the number of warrants outstanding
and exercisable as of December 31, 2016 and 2015, respectively:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
Warrants
|
|
Warrants
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Expiration
|
|
Outstanding
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Price
|
|
|
Date
|
|
Series A
|
|
525,621
|
|
|
525,621
|
|
$
|
7.73
|
|
|
05/27/2018
|
|
Series B
|
|
-
|
|
|
98,741
|
|
$
|
7.09
|
|
|
03/15/2016
|
|
Total
|
|
525,621
|
|
|
624,362
|
|
|
|
|
|
|
|
Series A warrants
Series A warrants were issued to purchase an aggregate of
525,621 ordinary shares at an exercise price of $7.73 per share. The Series A
warrants have a term of three years and are exercisable by the holders at any
time after the date of issuance before the expiration date. A holder of the
Series A warrants has the right to exercise warrants on a cashless basis, if a
registration statement or prospectus is not available for the issuance of the
ordinary shares upon exercise of the warrants. None of the Series A warrants has
been exercised as of December 31, 2016. The Series A warrants are classified as
liabilities with the amount of its fair value $3,719 at December 31, 2016.
Series B warrants
Series B warrants were issued to purchase an aggregate of
1,051,242 ordinary shares at an exercise price of $7.09 per share. The Series B
warrants are exercisable by the holders at any time after the date of issuance,
and expired six months after the date on which they are first exercisable. A
holder of the Series B warrants also has the right to exercise its warrants on a
cashless basis, if a registration statement or prospectus is not available for
the issuance of the ordinary shares upon exercise of the warrants. In addition,
commencing on the 40th day after the issuance date of the Series B warrants,
holders may exercise the Series B warrants in whole or in part and, in lieu of
making cash payment upon such exercise and in lieu of making a cashless
exercise, elect to receive upon such exercise the net number of ordinary shares
determined according the formula specified in the Series B warrant agreement. If
the applicable market price of the ordinary shares is less than $4.00 per share
(as adjusted for share splits, share distributions, recapitalizations or similar
events), and the Company has previously delivered a Net Cash Settlement Notice
(as defined in the Series B warrant agreement) to the holders that has not been
withdrawn, the Company will pay the holders a certain amount of cash in addition
to such number of ordinary shares according to a formula specified in the Series
B warrant agreement. Subsequent to the issuance of the Series B warrants, the
Company extended the expiration date of the Series B warrants through March 15,
2016. A total of 952,501 Series B warrants were exercised in exchange for
5,613,130 ordinary shares in 2015 and 98,741 Series B warrants were exercised in
exchange for 899,795 ordinary shares subsequent to December 31, 2015.No Series B
warrant remains outstanding as of December 31, 2016.
F-51
Series B warrants contain down-round protection upon the
issuance of any ordinary shares, securities convertible into ordinary shares, or
certain other issuances at a price below the then-existing exercise price of the
warrants, with certain exceptions. In addition, the Series B warrants contain
provisions that could require cash payments to the holders of the warrants or
payment in additional ordinary shares.
The Company recognizes the warrants liability at their
respective fair values at inception and on each reporting date. The Company
utilized a binomial option pricing model (BOPM) and a Monte-Carlo simulation
to develop its assumptions for determining the fair value of the warrants A and
B, respectively. Changes in the fair value of the derivative warrant liabilities
and key assumptions at the issue date and each reporting date are as
follows:
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Total
|
|
Balance at January 1, 2015
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Fair value at warrants liability at issuance
date
|
|
1,075,500
|
|
|
3,907,194
|
|
|
4,982,694
|
|
Exercise of warrants and
resulting reclassification to equity at fair value
|
|
-
|
|
|
(8,941,489
|
)
|
|
(8,941,489
|
)
|
Cash paid to warrant holders
|
|
-
|
|
|
(542,806
|
)
|
|
(542,806
|
)
|
Adjustment resulting from the
change in the fair value for the reporting period
|
|
(918,969
|
)
|
|
6,576,956
|
|
|
5,657,987
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
156,531
|
|
$
|
999,855
|
|
$
|
1,156,386
|
|
Exercise of warrants and resulting
reclassification to equity at fair value
|
|
-
|
|
|
(1,118,492
|
)
|
|
(1,118,492
|
)
|
Adjustment resulting from the
change in the fair value for the reporting period
|
|
(152,812
|
)
|
|
118,637
|
|
|
(34,175
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
$
|
3,719
|
|
$
|
-
|
|
$
|
3,719
|
|
19. OTHER PAYABLES AND ACCRUED EXPENSES
As of December 31, 2016 and 2015, other payables and accrued
expenses consist of:
|
|
December 31,
|
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
Advances from unrelated third-parties
(i)
|
$
|
1,185,837
|
|
$
|
1,889,818
|
|
Tax payable
(ii)
|
|
924,861
|
|
|
1,202,185
|
|
Unrecognized tax benefits
(iii)
|
|
433,000
|
|
|
433,000
|
|
Repurchase common stock payable
|
|
-
|
|
|
392,771
|
|
Amount due to employees
(iv)
|
|
206,491
|
|
|
249,895
|
|
Other current liabilities
|
|
294,590
|
|
|
402,629
|
|
|
$
|
3,044,779
|
|
$
|
4,570,298
|
|
(i)
|
The advances from unrelated parties are non-interest
bearing and due on demand.
|
|
|
(ii)
|
The tax payable were the amounts due to the value added
tax, business tax, city maintenance and construction tax, and individual
income tax.
|
F-52
(iii)
|
The Unrecognized tax benefits refer to the land value
added tax due to the sale of property, equipment, and land use rights in
September 2015.
|
|
|
(iv)
|
The amounts due to employees were pertaining to
employees out-of-pocket expenses for travel and meal allowance,
etc.
|
20. RESERVE AND DISTRIBUTION OF PROFIT
In accordance with relevant PRC regulations and the Articles of
Association of our PRC subsidiaries, our PRC subsidiaries are required to
allocate at least 10% of their annual after-tax profits determined in accordance
with PRC statutory financial statements to a statutory general reserve fund
until the amounts in said fund reaches 50% of their registered capital. As of
December 31, 2016, the balance of general reserve is $13.8 million.
Under the applicable PRC regulations, the Company may pay
dividends only out of the accumulated profits, if any, determined in accordance
with the PRC accounting standards and regulations. As the statutory reserve
funds can only be used for specific purposes under the PRC laws and regulations.
The general reserves are not distributable as cash dividends.
Our after-tax profits or losses with respect to the payment of
dividends out of accumulated profits and the annual appropriation of after-tax
profits as calculated pursuant to the PRC accounting standards and regulations
do not result in significant differences as compared to after-tax earnings as
presented in our consolidated financial statements. However, there are certain
differences between the PRC accounting standards and regulations and the U.S.
generally accepted accounting principles, arising from different treatment of
items such as amortization of intangible assets and change in fair value of
contingent consideration arising from business combinations.
21. EQUITY
(a) Issuance of new shares
In 2016 and 2015, the Company issued a total of 899,795 and
5,613,130 ordinary shares, respectively, resulting from the Series B warrants
exercise. Refer to Note 18 above.
In 2015, the Company issued a total of 2,102,484 ordinary
shares to certain institutional investors at the price of $6.44 per share. Gross
proceeds from the offering were approximately $13.5 million. The Company paid a
total of $0.7 million in placement agency fees, legal fees, and other related
expenses. As a result, the Company received $12.8 million of net proceeds from
the equity offering.
(b) Repurchase of common shares
F-53
On October 4, 2013, the Company announced a $9.0 million share
repurchase program. Repurchases may be made in open-market transactions or
through privately negotiated transactions. The timing and extent of any
repurchase will depend upon market conditions, the trading price of the
Companys ordinary shares, and other factors, and are subject to the
restrictions relating to volume, price and timing under the applicable laws,
including but not limited to, Rule 10b-18 promulgated under the Securities
Exchange Act of 1934, as amended. The Companys Board of Directors will review
the share repurchase program periodically, and may authorize adjustment of its
terms and size accordingly. During the years ended December 31, 2016, 2015 and
2014, a total of 0, 685,000, and 76,368 ordinary shares were repurchased in
accordance with the program at a cost of $0, $2,827,500 and $486,316,
respectively. During the year ended December 31, 2014, 584,231 ordinary shares
were cancelled.
(c) Stock-based compensation
On September 11, 2013, the Board of Directors of the Company
adopted the 2013 Equity Incentive Plan, or the 2013 Plan, pursuant to which, the
Company may offer up to five million ordinary shares as equity incentives to its
directors, employees and consultants. Such number of shares is subject to
adjustment in the event of certain reorganizations, mergers, business
combinations, recapitalizations, stock splits, stock dividends, or other change
in the corporate structure of the Company affecting the shares issuable under
the 2013 Plan. As of December 31, 2016, the Company had issued 4,467,135 shares
of restricted stock to our officers and employees under the 2013 Plan.
On November 15, 2013, the Company granted eligible employees a
total of 3,000,000 ordinary shares as compensation under the 2013 Equity
Incentive Plan. The fair value of these shares was approximately $15.9 million
at the date of the grant, based on the quoted market price of the Companys
ordinary shares. The employees paid the Company $9.0 million in cash resulting
in approximately $6.9 million being recorded as the compensation for services
provided in 2013.
For the purpose of acquiring the ordinary shares from the
Company, certain employees had entered into loan contracts with local banks. The
Company had agreed to guarantee the employees repayment of these bank loans in
the event of default. Of the 3,000,000 shares issued to employees, a total of
725,000 shares were purchased from the Company using the proceeds from these
guaranteed bank loans. In December 2014, the Company loaned a total of
approximately $1.5 million to these employees in order to for them to repay
their respective bank loans. Since the Company has guaranteed these loans, the
Company classified $2.2 million, of the total proceeds received as temporary
equity in the accompanying balance sheet. In May 2015, the liability of these
employees to the Company was repaid through either selling a certain numbers of
their shares back to the Company or through repayment of cash to the Company. As
a result, $1.1 million and $0.8 million were reclassified to permanent equity
in 2015 and 2014, respectively. In 2016, additional $360,000 of temporary equity
was reclassified to permanent equity as a result of a promise to repay the
outstanding balance of the loan for purchasing ordinary shares executed by Mr.
Sun Jun Ping, Chief Investment Officer of the Company.
F-54
On April 30, 2014, the Company granted eligible employees a
total of 920,757 restricted shares as compensation under the 2013 Equity
Incentive Plan. The fair value of these shares was approximately $3.8 million at
the date of the grant, based on the quoted market price. The employees paid the
Company approximately $3.7 million in cash, resulting in approximately $0.1
million being recorded as the compensation for services provided in 2014.
On April 30, 2014, the Company issued an aggregate of 439,503
shares of restrict CNIT ordinary shares to various minority shareholders to
acquire additional ownership in Geo and Zhongtian. See Note 1.
On June 25, 2014, the Company issued 50,000 restricted shares
as payable in a lump sum for one year consulting fee from June 2014 to June
2015. The fair value of these shares was approximately $206,000 at the date of
the grant, based on the quoted market price of the ordinary shares, resulting in
approximately $120,000 being recorded as consulting expense in 2014, and
approximately $86,000 being recorded as prepaid expenses as of December 31,
2014, which was fully amortized in 2015.
In 2015, the Company granted eligible employees a total of
51,875 shares of ordinary shares under the Companys Equity Incentive Plan as
compensation. The fair value of these shares was approximately $102,000, based
on the quoted market price. The amount was recorded as the compensation for
services provided in 2015.
In 2015, the Company issued 5,000 restricted shares of ordinary
shares in exchange for a consulting fee. The fair value of these shares was
approximately $13,000 at the date of the grant, based on the quoted market
price, resulting in approximately $13,000 being recorded as consulting fee in
2015.
The following table provides the details of the approximate
total share based payments expense during the years ended December 31, 2016,
2015 and 2014:
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Employees and directors share-based
payments
|
$
|
273,000 $
|
|
|
102,000
|
|
$
|
81,000
|
|
Stock issued for services
|
|
-
|
|
|
99,000
|
|
|
120,000
|
|
|
$
|
273,000
$
|
|
|
201,000
|
|
$
|
201,000
|
|
(d) Stock options
On May 9, 2016, the Board of Directors of the Company adopted
the 2016 Equity Incentive Plan, or the 2016 Plan. Pursuant to the 2016 Plan, the
Company may offer up to five million ordinary shares as equity incentives to its
directors, employees and consultants. Such number of shares is subject to
adjustment in the event of certain reorganizations, mergers, business
combinations, recapitalizations, stock splits, stock dividends, or other change
in the corporate structure of the Company affecting the issuable shares under
the 2016 Plan. On May 27, 2016, the Company granted options to purchase an
aggregate of 2,712,000 ordinary shares under the 2016 Plan. As a result of employee
turnover, the number of options to purchase 2,286,000 ordinary shares remained
as of December 31, 2016. The Company accounts for its stock option awards to
employees and directors pursuant to the provisions of ASC 718, Compensation
Stock Compensation. The fair value of each option award is estimated on the date
of grant using the Black-Scholes Merton valuation model. The Company recognizes
the fair value of each option as compensation expense ratably using the
straight-line attribution method over the service period, which is generally the
vesting period. The fair value of these options was approximately $1.6 million
at the date of the grant, of which approximately $273,000 was recorded as
compensation and included in administrative expenses in the consolidated
statements of operations for the services provided for the year ended December
31, 2016.
F-55
The following table summarizes the assumptions used to estimate
the fair values of the share options:
|
|
December 31,
|
|
|
|
2016
|
|
Exercise multiple
|
$
|
1.21
|
|
Expected term
|
|
4 years
|
|
Expected volatility
|
|
90.40%
|
|
Expected dividend yield
|
|
0%
|
|
Risk free interest rate
|
|
1.23%
|
|
Fair Value
|
$
|
0.78
|
|
Stock option activity for the year ended December 31, 2016 is
summarized as follows:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregated
|
|
|
|
Options
|
|
|
Weighted Average
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Value
|
|
Outstanding at January 1, 2016
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
|
|
Granted
|
|
2,712,000
|
|
|
1.21
|
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
426,000
|
|
|
1.21
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
2,286,000
|
|
$
|
1.21
|
|
|
4.40
|
|
$
|
0
|
|
Vested and expected to be vested as of December 31, 2016
|
|
2,057,400
|
|
$
|
1.21
|
|
|
4.40
|
|
$
|
0
|
|
Options exercisable as of December 31, 2016 (vested)
|
|
0
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The weighted average grant-date fair value of options granted
during the year ended December 31, 2016, was $0.78. There was no option
exercised during the year ended December 31, 2016.
F-56
As of December 31, 2016, approximately $1.3 million of total
unrecognized compensation expense related to non-vested share options is
expected to be recognized over a weighted average remaining vesting period of
approximately 1.8 years. To the extent the actual forfeiture rate is different
from what the Company has anticipated, stock-based compensation related to these
awards will be different from its expectations.
22.
CONSOLIDATED SEGMENT DATA
Segment information is consistent with how management reviews
the businesses, makes investing and resource allocation decisions, and assesses
operating performance. Transfers and sales between reportable segments, if any,
are recorded at cost. All sales occurred in China since our revenue-generating
operations are located in China.
Selected information by segment is presented in the following
tables for the years ended December 31, 2016, 2015 and 2014.
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues
(1)
|
|
|
|
|
|
|
|
|
|
TIT Segment
|
$
|
1,488,882
|
|
$
|
2,970,952
|
|
$
|
13,024,506
|
|
CBT Segment
|
|
8,704,708
|
|
|
7,313,916
|
|
|
25,610,241
|
|
|
$
|
10,193,590
|
|
$
|
10,284,868
|
|
$
|
38,634,747
|
|
(1)
Revenues by operating segments exclude
intercompany transactions.
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Loss from operations:
|
|
|
|
|
|
|
|
|
|
TIT Segment
|
$
|
(3,452,860
|
)
|
$
|
(2,593,743
|
)
|
$
|
(7,675,174
|
)
|
CBT Segment
|
|
(8,983,828
|
)
|
|
(22,238,917
|
)
|
|
(14,876,016
|
)
|
Corporate and others
(2)
|
|
(2,141,240
|
)
|
|
(2,130,697
|
)
|
|
(1,358,023
|
)
|
Loss from operations
|
|
(14,577,928
|
)
|
|
(26,963,357
|
)
|
|
(23,909,213
|
)
|
Corporate other (expenses) income, net
|
|
(3,441,369
|
)
|
|
31,271,674
|
|
|
268,543
|
|
Corporate interest income
|
|
17,420
|
|
|
76,716
|
|
|
408,121
|
|
Corporate interest expense
|
|
(498,931
|
)
|
|
(3,116,777
|
)
|
|
(5,858,770
|
)
|
Corporate warrant income (expense)
|
|
34,175
|
|
|
(5,657,988
|
)
|
|
-
|
|
Loss from continuing operations before
income taxes
|
|
(18,466,633
|
)
|
|
(4,389,732
|
)
|
|
(29,091,319
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
(57,844
|
)
|
|
(4,305,028
|
)
|
|
4,599,559
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(18,524,477
|
)
|
|
(8,694,760
|
)
|
|
(24,491,760
|
)
|
Income (loss) from discontinued operations, net of
taxes
|
|
-
|
|
|
1,498,971
|
|
|
(5,260,538
|
)
|
Net loss
|
|
(18,524,477
|
)
|
|
(7,195,789
|
)
|
|
(29,752,298
|
)
|
|
|
|
|
|
|
|
|
|
|
Net lo
ss
(income) attributable to
the non-controlling interest
|
|
353,876
|
|
|
(308,473
|
)
|
|
520,951
|
|
Net loss attributable to the Company
|
$
|
(18,170,601
|
)
|
$
|
(7,504,262
|
)
|
$
|
(29,231,347
|
)
|
(2)
Includes non-cash compensation, professional
fees and consultancy fees for the Company.
F-57
Non-cash employee compensation by segment as of December 31,
2016, 2015 and 2014 are as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Non-cash employee compensation:
|
|
|
|
|
|
|
|
|
|
TIT Segment
|
$
|
-
|
|
$
|
-
|
|
$
|
81,615
|
|
CBT Segment
|
|
-
|
|
|
-
|
|
|
-
|
|
Corporate and others
|
|
273,102
|
|
|
102,282
|
|
|
-
|
|
|
$
|
273,102
|
|
$
|
102,282
|
|
$
|
81,615
|
|
Depreciation and amortization by segment for the years ended
December 31, 2016, 2015 and 2014 are as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
TIT Segment
|
$
|
48,155
|
|
$
|
90,379
|
|
$
|
420,556
|
|
CBT Segment
|
|
2,513,780
|
|
|
2,332,037
|
|
|
2,513,790
|
|
Corporate and others
|
|
19,821
|
|
|
119,078
|
|
|
119,078
|
|
|
$
|
2,581,756
|
|
$
|
2,541,494
|
|
$
|
3,053,424
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Provisions for bad debt allowance on accounts
receivable,
other receivable and advances to supplier; :
|
|
|
|
|
|
|
|
|
|
TIT Segment
|
$
|
918,960
|
|
$
|
910,824
|
|
$
|
3,102,627
|
|
CBT Segment
|
|
1,076,086
|
|
|
1,748,675
|
|
|
3,287,604
|
|
Corporate and others
|
|
-
|
|
|
-
|
|
|
8,232
|
|
|
$
|
1,995,046
|
|
$
|
2,659,499
|
|
$
|
6,398,463
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Inventory obsolescence provision:
|
|
|
|
|
|
|
|
|
|
TIT Segment
|
$
|
278,233
|
|
$
|
226,943
|
|
$
|
308,683
|
|
CBT Segment
|
|
46,348
|
|
|
47,720
|
|
|
3,499,624
|
|
|
$
|
324,581
|
|
$
|
274,663
|
|
$
|
3,808,307
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Impairment of intangible assets and goodwill
|
|
|
|
|
|
|
|
|
|
TIT Segment
|
$
|
-
|
|
$
|
7,851,987
|
|
$
|
4,685,843
|
|
CBT Segment
|
|
4,442,367
|
|
|
1,066,440
|
|
|
2,329,884
|
|
|
$
|
4,442,367
|
|
$
|
8,918,427
|
|
$
|
7,015,727
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Impairment of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
TIT Segment
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
CBT Segment
|
|
-
|
|
|
4,616,679
|
|
|
827,319
|
|
|
$
|
-
|
|
$
|
4,616,679
|
|
$
|
827,319
|
|
Total assets by segment as at December 31, 2016 and 2015 are as
follows:
F-58
|
|
2016
|
|
|
2015
|
|
Total assets
|
|
|
|
|
|
|
TIT Segment
|
$
|
9,995,520
|
|
$
|
19,803,442
|
|
CBT Segment
|
|
23,701,298
|
|
|
32,651,184
|
|
Corporate and others
|
|
590,181
|
|
|
364,892
|
|
Assets from discontinued operations
|
|
-
|
|
|
13,272,186
|
|
|
$
|
34,286,999
|
|
$
|
66,091,704
|
|
23. COMMITMENTS AND CONTINGENCIES
iASPEC and Bocom lease
offices, employee dormitories, and factory space in Shenzhen , China. Lease
agreements will expire on various dates through December 2017. For the years
ended December 31, 2016, 2015, and 2014, the rental expense was approximately
$95,000, $219,000, and $282,000, respectively. Future minimum lease payments
under these lease agreements are as follows:
We may be subject to legal proceedings, investigations, and
claims incidental to conduct of our business from time to time. We are currently
subject to legal or arbitration proceedings with customers pertaining to our
performance of the sales contracts. The Company estimates, with 50% of
probability, a possible loss ranging from approximately $ 0 to $300,000, if the
proceedings are ruled by arbitration.
24. CONCENTRATIONS
For the year ended December 31, 2016, three customers each
accounted for greater than 10% of revenue. For the years ended December 31, 2015
and 2014, no customer accounted for greater than 10% of revenue. However, for
the years ended December 31, 2016, 2015, and 2014, the Companys top five
customers accounted for 72%, 21%, and 17% of the Companys revenues from
continuing operations, respectively.
The Companys top five customers accounted for 95% of accounts
receivable as of December 31, 2016, of which three customers each accounted for
greater than 10% or more of accounts receivable. The Companys top five
customers accounted for 50% of accounts receivable as of December 31, 2015, of
which two customers each accounted for greater than 10% or more of accounts
receivable.
For the years ended December 31, 2016, 2015 and 2014,
approximately 79%, 63%, and 32%, respectively, of total inventory purchases were
from five unrelated suppliers. Four suppliers accounted for greater than 10% of
total inventory purchases in 2016 and 2015. No single supplier accounted for
greater than 10% of total inventory purchases in 2014.
F-59
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
1.1
|
|
Amended and Restated Memorandum and Articles of
Association of the registrant (incorporated by reference to Exhibit 1.1 to
the Annual Report on Form 20-F filed by the registrant on April 15, 2014)
|
4.1
|
|
Agreement and Plan of Merger and Reorganization, dated
June 20, 2012, by and among the registrant, CITN and China Information
Mergerco Inc. (incorporated by reference to Annex A to the Registration
Statement on Form F-4 filed by the registrant on June 21, 2012)
|
4.2
|
|
Amended and Restated Management Services Agreement, dated
as of December 13, 2009, among Information Security Technology (China)
Co., Ltd., iASPEC Software Co., Ltd. and Jiang Huai Lin (incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K filed by CITN
on December 17, 2009)
|
4.3
|
|
Guaranty, dated August 1, 2007, by Jiang Huai Lin and Jin
Zhu Cai (incorporated by reference to Exhibit 10.2 to the Current Report
on Form 8-K filed by CITN on August 6, 2007)
|
4.4
|
|
Purchase Option Agreement, dated August 1, 2007, among
Information Security Technology (China) Co., Ltd., iASPEC Software Co.,
Ltd., Jiang Huai Lin and Jin Zhu Cai (incorporated by reference to Exhibit
10.3 to the Current Report on Form 8-K filed by CITN on August 6, 2007)
|
4.5
|
|
First Amendment to Stock Purchase Agreement, dated August
26, 2011, by and among China Information Technology Holdings Limited, HPC
Electronics (China) Company Limited, Rita Kwai Fong Leung and CITN
(incorporated by reference to Exhibit 10.1 to the Current Report on Form
8-K filed by CITN on August 30, 2011)
|
4.6
|
|
Equity Transfer Agreement, dated May 5, 2011, between
Kwong Tai International Technology Ltd. and iASPEC Software Company, Ltd.
(English Translation) (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by CITN on May 12, 2011)
|
4.7
|
|
Form of Employment Agreement (English Translation)
(incorporated by reference to Exhibit 10.7 to the Annual Report on Form
10-KSB filed by CITN on April 16, 2007)
|
4.8
|
|
Form of Independent Director Agreement (incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form F-4 filed
by the registrant on June 21, 2012)
|
4.9
|
|
Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form F-4 filed
by the registrant on June 21, 2012)
|
4.10
|
|
English Translation of Form of Employee Incentive Stock
Purchase Agreement (incorporated by reference to Exhibit 4.1 to the
Registration Report on Form 6-K furnished by the registrant on September
27, 2013)
|
4.11
|
|
China Information Technology, Inc. 2013 Equity Incentive
Plan (incorporated by reference to Exhibit 4.1 to the Registration Report
on Form 6-K furnished by the registrant on September 17, 2013)
|
4.12
|
|
Equity Transfer Agreement, dated September 16, 2014, by
and among the Company, iASPEC and Shenzhen Yunchao Software Internet Co.
Ltd. (incorporated by reference to Exhibit 4.1 to the Report on Form 6-K
furnished by the registrant on September 23, 2014)
|
4.13
|
|
Form of Warrant (incorporated by reference to Exhibit 4.1
to the Report on Form 6-K furnished by the registrant on May 21, 2015)
|
4.14
|
|
Form of Purchase Agreement, dated May 20, 2015, between
the Company and the Investors named therein (incorporated by reference to
Exhibit 10.1 to the Report on Form 6-K furnished by the registrant on May
21, 2015)
|
4.15
|
|
Placement Agency Agreement, dated May 7, 2015, between
the Company and FT Global Capital, Inc. (incorporated by reference to
Exhibit 10.2 to the Report on Form 6-K furnished by the registrant on May
21, 2015)
|
4.16
|
|
Form of Standstill Agreement between the Company and the
Holder named therein (incorporated by reference to Exhibit 4.1 to the
Report on Form 6-K furnished by the registrant on September 24, 2015)
|
4.17
|
|
Form of Standstill Agreement between the Company and the
Holder named therein (incorporated by reference to Exhibit 4.1 to the
Report on Form 6-K furnished by the registrant on October 7, 2015)
|
4.18
|
|
Form of Stock Option Agreement (incorporated by reference
to Exhibit 99.1 to the Report on Form 6-K furnished by the registrant on
June 1, 2016)
|
8.1*
|
|
List of the registrants subsidiaries
|
11.1
|
|
Amended and Restated Code of Ethics, adopted on December
25, 2007 (incorporated by reference to Exhibit 14 to the Annual Report on
Form 10-K filed by CITN on March 31, 2008)
|
12.1*
|
|
Certifications of Chief Executive Officer Pursuant to
Rule 13a-14(a) or Rule 15d-1(a)
|
12.2*
|
|
Certifications of Interim Chief Financial Officer
Pursuant to Rule 13a-14(a) or Rule 15d-1(a)
|
13.1*
|
|
Certifications of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
_________________________
*Filed herewith.
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