Date of event requiring this shell company
report _________________________
(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act.
Securities registered or to be registered
pursuant to Section 12(g) of the Act.
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or ordinary shares as of the close of the period covered by the annual report (June 30, 2017): 60,342,099 ordinary
shares.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
x
Yes
¨
No
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
¨
Yes
x
No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
x
Yes
¨
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
x
Yes
¨
No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated
filer”, “accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company that prepares its financial statements
in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
¨
† The term “new or revised financial accounting
standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement
If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨
Yes
x
No
Except as otherwise indicated by the context,
references in this annual report to:
This annual report contains forward-looking
statements and information relating to us that are based on the current beliefs, expectations, assumptions, estimates and projections
of our management regarding our company and industry. When used in this annual report, the words “may”, “will”,
“anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”
and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These
statements reflect management's current view of us concerning future events and are subject to certain risks, uncertainties and
assumptions, including among many others: our potential inability to achieve similar growth in future periods as we did historically,
a decrease in the availability of our raw materials, the emergence of additional competing technologies, changes in domestic and
foreign laws, regulations and taxes, changes in economic conditions, uncertainties related to China’s legal system and economic,
political and social events in China, the volatility of the securities markets, and other risks and uncertainties which are generally
set forth under the heading, “Key information - Risk Factors” and elsewhere in this annual report. Should
any of these risks or uncertainties materialize, or should the underlying assumptions about our business and the commercial markets
in which we operate prove incorrect, actual results may vary materially from those described as anticipated, estimated or expected
in this annual report.
All forward-looking statements included
herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations,
we undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this
annual report or to reflect the occurrence of unanticipated events.
PART I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
|
A.
|
Selected Consolidated Financial Data
|
The following table presents selected financial
data regarding our business. It should be read in conjunction with our consolidated financial statements and related notes
contained elsewhere in this annual report and the information under Item 5, “Operating and Financial Review and Prospects.”
The selected consolidated statement of comprehensive income data for the fiscal years ended June 30, 2015, 2016 and 2017 and the
consolidated balance sheet data as of June 30, 2016 and 2017 have been derived from the audited consolidated financial statements
of Hollysys that are included in this annual report beginning on page F-1. The selected statement of comprehensive income
data for the fiscal years ended June 30, 2013 and 2014, and balance sheet data as of June 30, 2013, 2014 and 2015 have been derived
from our audited financial statements that are not included in this annual report.
The audited consolidated financial statements
for the years ended June 30, 2015, 2016 and 2017 are prepared and presented in accordance with generally accepted accounting principles
in the United States, or US GAAP. The selected financial data information is only a summary and should be read in conjunction
with the historical consolidated financial statements and related notes of Hollysys contained elsewhere herein. The
financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative
of our future performance.
Financial information in this report is
reported in United States dollars, the reporting currency of the Company.
(In USD thousands, except share numbers and per share data)
|
|
|
|
Years ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Statement of Comprehensive Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
349,055
|
|
|
|
521,332
|
|
|
|
531,379
|
|
|
|
544,325
|
|
|
|
431,943
|
|
Operating income
|
|
|
57,702
|
|
|
|
98,407
|
|
|
|
130,107
|
|
|
|
120,583
|
|
|
|
60,270
|
|
Income before income taxes
|
|
|
60,618
|
|
|
|
91,312
|
|
|
|
125,227
|
|
|
|
137,742
|
|
|
|
83,355
|
|
Net income attributable to Hollysys
|
|
|
51,994
|
|
|
|
69,620
|
|
|
|
96,527
|
|
|
|
118,471
|
|
|
|
68,944
|
|
Add: Share-based compensation expenses
|
|
|
1,599
|
|
|
|
2,986
|
|
|
|
2,492
|
|
|
|
3,860
|
|
|
|
464
|
|
Amortization of intangible assets
|
|
|
2,848
|
|
|
|
5,413
|
|
|
|
4,454
|
|
|
|
818
|
|
|
|
581
|
|
Acquisition-related consideration fair value adjustments
|
|
|
1,163
|
|
|
|
8,920
|
|
|
|
(166
|
)
|
|
|
(1,745
|
)
|
|
|
-
|
|
Fair value adjustments of a bifurcated derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
93
|
|
|
|
89
|
|
Non-GAAP net income attributable to Hollysys
|
|
|
57,605
|
|
|
|
86,939
|
|
|
|
103,342
|
|
|
|
121,497
|
|
|
|
70,078
|
|
Weighted average ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
56,167,592
|
|
|
|
57,926,333
|
|
|
|
58,612,596
|
|
|
|
59,170,050
|
|
|
|
60,189,004
|
|
Diluted
|
|
|
56,412,469
|
|
|
|
58,426,642
|
|
|
|
60,134,203
|
|
|
|
60,611,456
|
|
|
|
61,011,510
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.93
|
|
|
|
1.20
|
|
|
|
1.65
|
|
|
|
2.00
|
|
|
|
1.15
|
|
Diluted
|
|
|
0.92
|
|
|
|
1.19
|
|
|
|
1.61
|
|
|
|
1.97
|
|
|
|
1.14
|
|
Non-GAAP earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.03
|
|
|
|
1.50
|
|
|
|
1.76
|
|
|
|
2.05
|
|
|
|
1.16
|
|
Diluted
|
|
|
1.02
|
|
|
|
1.49
|
|
|
|
1.72
|
|
|
|
2.02
|
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
546,448
|
|
|
|
729,893
|
|
|
|
806,640
|
|
|
|
827,310
|
|
|
|
865,356
|
|
Total assets
|
|
|
744,633
|
|
|
|
926,695
|
|
|
|
983,686
|
|
|
|
1,004,156
|
|
|
|
1,058,254
|
|
Total current liabilities
|
|
|
268,452
|
|
|
|
398,891
|
|
|
|
374,596
|
|
|
|
297,326
|
|
|
|
302,978
|
|
Total liabilities
|
|
|
329,158
|
|
|
|
434,637
|
|
|
|
398,301
|
|
|
|
321,471
|
|
|
|
334,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
415,475
|
|
|
|
492,058
|
|
|
|
585,385
|
|
|
|
682,685
|
|
|
|
723,540
|
|
Non-controlling interests
|
|
|
1,747
|
|
|
|
3,583
|
|
|
|
6,285
|
|
|
|
8,529
|
|
|
|
21
|
|
Stockholders’ equity
|
|
|
413,728
|
|
|
|
488,475
|
|
|
|
579,100
|
|
|
|
674,156
|
|
|
|
723,519
|
|
In evaluating our results, the non-GAAP
measures of “Non-GAAP general and administrative expenses (“Non-GAAP G&A expenses”)”,“Non-GAAP
cost of integrated contracts”, “Non-GAAP other income (expenses), net”, “Non-GAAP interest expenses”,
“Non-GAAP net income attributable to Hollysys” and “Non-GAAP earnings per share” serve as additional indicators
of our operating performance and not as a replacement for other measures in accordance with US GAAP. We believe these non-GAAP
measures are useful to investors as they exclude: 1) share-based compensation expenses, 2) amortization of intangible assets, 3)
acquisition-related consideration fair value adjustments and 4) fair value adjustments of a bifurcated derivative. All of above
will not result in any cash inflows or outflows. We believe that using non-GAAP measures help our shareholders have a better understanding
of our operating results and growth prospects. In addition, given the business nature of Hollysys, it has been a common practice
for investors and analysts to use such non-GAAP measures to evaluate the Company. Specifically, the non-GAAP measures excluded
the following items:
1) Share-based compensation expenses, which
are calculated based on the number of shares or options granted and the fair value as of grant date.
2) Amortization of intangible assets, which
is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the identifiable definite-lived intangible
assets of the acquired company, such as customer relationships and order backlog, are valued and amortized over their estimated
lives. Value is also assigned to the acquired indefinite-lived intangible assets, which comprise goodwill that are not subject
to amortization.
3) Acquisition-related consideration
fair value adjustments are accounting adjustments to report contingent share consideration liabilities at fair value and cash
consideration at present value. These adjustments can be highly variable and are excluded from our assessment of performance
because they are considered non-operational in nature and, therefore, are not indicative of current or future performance or
ongoing costs of doing business.
4) Fair value adjustments of a bifurcated
derivative are accounting adjustments to report the change of fair value of the feature bifurcated as a derivative from the underlying
host instrument of a convertible bond, and accounted for as a liability at its fair value.
The following table provides a reconciliation
of U.S. GAAP measures to the non-GAAP measures for the periods indicated:
(In USD thousands, except share numbers and per share data)
|
|
|
|
Years ended June 30,
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Cost of integrated contracts
|
|
|
218,586
|
|
|
|
330,039
|
|
|
|
300,332
|
|
|
|
310,545
|
|
|
|
277,476
|
|
Less: Amortization of intangible assets
|
|
|
2,848
|
|
|
|
5,413
|
|
|
|
4,454
|
|
|
|
818
|
|
|
|
581
|
|
Non-GAAP cost of integrated contracts
|
|
|
215,738
|
|
|
|
324,626
|
|
|
|
295,878
|
|
|
|
309,727
|
|
|
|
276,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses
|
|
|
29,648
|
|
|
|
39,716
|
|
|
|
50,786
|
|
|
|
45,832
|
|
|
|
44,297
|
|
Less: Share-based compensation expenses
|
|
|
1,599
|
|
|
|
2,986
|
|
|
|
2,492
|
|
|
|
3,860
|
|
|
|
464
|
|
Non-GAAP G&A expenses
|
|
|
28,049
|
|
|
|
36,730
|
|
|
|
48,294
|
|
|
|
41,972
|
|
|
|
43,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
80
|
|
|
|
(6,452
|
)
|
|
|
2,601
|
|
|
|
4,061
|
|
|
|
1,722
|
|
Add: Acquisition-related incentive share contingent consideration fair value adjustments
|
|
|
855
|
|
|
|
7,989
|
|
|
|
(368
|
)
|
|
|
(1,745
|
)
|
|
|
-
|
|
Add: Fair value adjustments of a bifurcated derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
93
|
|
|
|
89
|
|
Non-GAAP other income, net
|
|
|
935
|
|
|
|
1,537
|
|
|
|
2,268
|
|
|
|
2,409
|
|
|
|
1,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
(2,170
|
)
|
|
|
(1,998
|
)
|
|
|
(1,821
|
)
|
|
|
(1,404
|
)
|
|
|
(938
|
)
|
Add: Acquisition-related cash consideration adjustments
|
|
|
308
|
|
|
|
931
|
|
|
|
202
|
|
|
|
-
|
|
|
|
-
|
|
Non-GAAP interest expenses
|
|
|
(1,862
|
)
|
|
|
(1,067
|
)
|
|
|
(1,619
|
)
|
|
|
(1,404
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Hollysys
|
|
|
51,994
|
|
|
|
69,620
|
|
|
|
96,527
|
|
|
|
118,471
|
|
|
|
68,944
|
|
Add: Share-based compensation expenses
|
|
|
1,599
|
|
|
|
2,986
|
|
|
|
2,492
|
|
|
|
3,860
|
|
|
|
464
|
|
Amortization of intangible assets
|
|
|
2,848
|
|
|
|
5,413
|
|
|
|
4,454
|
|
|
|
818
|
|
|
|
581
|
|
Acquisition-related consideration fair value adjustments
|
|
|
1,163
|
|
|
|
8,920
|
|
|
|
(166
|
)
|
|
|
(1,745
|
)
|
|
|
-
|
|
Fair value adjustments of a bifurcated derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
93
|
|
|
|
89
|
|
Non-GAAP net income attributable to Hollysys
|
|
|
57,605
|
|
|
|
86,939
|
|
|
|
103,342
|
|
|
|
121,497
|
|
|
|
70,078
|
|
Weighted average number of ordinary shares outstanding used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
56,167,592
|
|
|
|
57,926,333
|
|
|
|
58,612,596
|
|
|
|
59,170,050
|
|
|
|
60,189,004
|
|
Diluted
|
|
|
56,412,469
|
|
|
|
58,426,642
|
|
|
|
60,134,203
|
|
|
|
60,611,456
|
|
|
|
61,011,510
|
|
Non-GAAP earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.03
|
|
|
|
1.50
|
|
|
|
1.76
|
|
|
|
2.05
|
|
|
|
1.16
|
|
Diluted
|
|
|
1.02
|
|
|
|
1.49
|
|
|
|
1.72
|
|
|
|
2.02
|
|
|
|
1.16
|
|
Exchange Rate Information
A majority of our business is conducted
in China. We also operate in Singapore, Malaysia and several other jurisdictions in Asia and Middle East through HAP, Concord Group,
and Bond Group. We use US dollars as our reporting currency in our financial statements in this annual report. For entities
whose functional currencies are not US dollars, assets and liabilities are translated into US dollars at the balance sheet date
rates; equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using
the average rate for the year as published by the International Monetary Fund. Translation adjustments are reported as cumulative
translation adjustments and are shown as a separate component of other comprehensive income in the consolidated statement of comprehensive
income and changes in equity. Transactions and amounts in other parts of this annual report in foreign currencies recorded at the
rates of exchange prevailing when the transactions occurred. With respect to amounts not recorded in our consolidated financial
statements but included elsewhere in this annual report, all conversion between RMB and US dollars were made at a rate of RMB 6.7875
to $1.00, and all conversion between Singapore dollars and US dollars were made at a rate of SGD 1.3872 to $1.00, as set forth
by the International Monetary Fund. We make no representation of any kind that RMB, Singapore dollar, US dollar or any other currency
referenced in this report could have been, or could be, converted into the other stated currencies at the rates stated below, any
particular rate, or at all. The Chinese government imposes control over its foreign-currency reserves through both direct regulation
concerns conversion of RMB into foreign exchange and through restrictions on foreign trade. On September 18, 2017, the closing
rate for using RMB and SGD to buy $1.00 was 6.5565 and 1.3440 respectively, as set forth by the International Monetary Fund.
The following table sets forth information
concerning exchange rates between the RMB, Singapore dollars and the US dollar for the periods indicated. These rates are provided
solely for your convenience and are not necessarily the exchange rates that we used in this annual report on Form 20-F or will
use in the preparation of our periodic reports or any other information to be provided to you.
|
|
Exchange Rate between RMB and US$
|
|
|
Exchange Rate between SGD and US$
|
|
Period
|
|
Period End
|
|
|
Average
|
|
|
Low
|
|
|
High
|
|
|
Period End
|
|
|
Average
|
|
|
Low
|
|
|
High
|
|
Calendar year 2012
|
|
|
6.2301
|
|
|
|
6.2990
|
|
|
|
6.2221
|
|
|
|
6.3879
|
|
|
|
1.2214
|
|
|
|
1.2492
|
|
|
|
1.2973
|
|
|
|
1.2159
|
|
Calendar year 2013
|
|
|
6.0537
|
|
|
|
6.1478
|
|
|
|
6.0537
|
|
|
|
6.2438
|
|
|
|
1.2622
|
|
|
|
1.2511
|
|
|
|
1.2203
|
|
|
|
1.2831
|
|
Calendar year 2014
|
|
|
6.2046
|
|
|
|
6.1620
|
|
|
|
6.0402
|
|
|
|
6.2591
|
|
|
|
1.3244
|
|
|
|
1.2665
|
|
|
|
1.2376
|
|
|
|
1.3244
|
|
Calendar year 2015
|
|
|
6.4778
|
|
|
|
6.2827
|
|
|
|
6.1870
|
|
|
|
6.4896
|
|
|
|
1.4166
|
|
|
|
1.3746
|
|
|
|
1.3171
|
|
|
|
1.4337
|
|
Calendar year 2016
|
|
|
6.9430
|
|
|
|
6.6400
|
|
|
|
6.4480
|
|
|
|
6.9580
|
|
|
|
1.4465
|
|
|
|
1.3800
|
|
|
|
1.3366
|
|
|
|
1.4522
|
|
January 2017
|
|
|
6.8768
|
|
|
|
6.8907
|
|
|
|
6.8360
|
|
|
|
6.9575
|
|
|
|
1.4095
|
|
|
|
1.4276
|
|
|
|
1.4095
|
|
|
|
1.4498
|
|
February 2017
|
|
|
6.8665
|
|
|
|
6.8694
|
|
|
|
6.8517
|
|
|
|
6.8821
|
|
|
|
1.3990
|
|
|
|
1.4137
|
|
|
|
1.3990
|
|
|
|
1.4235
|
|
March 2017
|
|
|
6.8832
|
|
|
|
6.8940
|
|
|
|
6.8687
|
|
|
|
6.9132
|
|
|
|
1.3967
|
|
|
|
1.4049
|
|
|
|
1.3926
|
|
|
|
1.4192
|
|
April 2017
|
|
|
6.8900
|
|
|
|
6.8876
|
|
|
|
6.8778
|
|
|
|
6.8988
|
|
|
|
1.3970
|
|
|
|
1.3983
|
|
|
|
1.3927
|
|
|
|
1.4045
|
|
May 2017
|
|
|
6.8098
|
|
|
|
6.8843
|
|
|
|
6.8098
|
|
|
|
6.9060
|
|
|
|
1.3833
|
|
|
|
1.3951
|
|
|
|
1.3816
|
|
|
|
1.4112
|
|
June 2017
|
|
|
6.7793
|
|
|
|
6.8066
|
|
|
|
6.7793
|
|
|
|
6.8382
|
|
|
|
1.3765
|
|
|
|
1.3834
|
|
|
|
1.3718
|
|
|
|
1.3912
|
|
July 2017
|
|
|
6.7240
|
|
|
|
6.7694
|
|
|
|
6.7240
|
|
|
|
6.8039
|
|
|
|
1.3559
|
|
|
|
1.3707
|
|
|
|
1.3559
|
|
|
|
1.3850
|
|
August 2017
|
|
|
6.5888
|
|
|
|
6.6670
|
|
|
|
6.5888
|
|
|
|
6.7272
|
|
|
|
1.3565
|
|
|
|
1.3608
|
|
|
|
1.3520
|
|
|
|
1.3676
|
|
September 18, 2017
|
|
|
6.5565
|
|
|
|
6.5289
|
|
|
|
6.4483
|
|
|
|
6.5769
|
|
|
|
1.3440
|
|
|
|
1.3470
|
|
|
|
1.3370
|
|
|
|
1.3551
|
|
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
An investment in our capital stock involves
a high degree of risk. You should carefully consider the risks described below, together with all of the other information included
in this annual report, before making an investment decision. If any of the following risks actually occurs, our business, prospects,
financial condition or results of operations could suffer. In that case, the trading price of our capital stock could decline,
and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We commit substantial resources to
new product and service development and acquisition opportunities in order to stay competitive and grow our business, and we may
fail to offset the increased cost of such investment with a sufficient increase in net sales or margins.
The success of our business depends in
great measure on our ability to keep pace with, or even lead, changes that occur in our industry and expand our product and service
offerings. Traditionally, the automation and control systems business was relatively stable and slow moving. Successive
generations of products offered only marginal improvements in terms of functionality and reliability. However, the emergence
of computers, computer networks and electronic components as key elements of the systems that we design and build has accelerated
the pace of change in our industry. Where there was formerly as much as a decade or more between successive generations of
automation systems, the time between generations is now as little as two to three years. Technological advances and the introduction
of new products, new designs and new manufacturing techniques by our competitors could adversely affect our business unless we
are able to respond with similar advances. To remain competitive, we must continue to incur significant costs in product development,
equipment and facilities and to make capital investments and seek complementary acquisitions. These costs may increase, resulting
in greater fixed costs and operating expenses than we have incurred to date. As a result, we could be required to expend substantial
funds for and commit significant resources to the following:
|
·
|
Research and development activities on existing and potential product solutions;
|
|
·
|
Additional engineering and other technical personnel;
|
|
·
|
Advanced design, production and test equipment;
|
|
·
|
Manufacturing services that meet changing customer needs;
|
|
·
|
Technological changes in manufacturing processes;
|
|
·
|
Expansion of manufacturing capacity; and
|
|
·
|
Acquiring technology through licensing and acquisitions.
|
Our future operating results will depend
to a significant extent on our ability to continue providing new product and service solutions that compare favorably on the basis
of time to market, cost and performance, with competing third-party suppliers and technologies. However, we may develop new
products and services that do not gain market acceptance, which would result in the failure to recover the significant costs for
design and manufacturing for new product solutions or service development, thus adversely affecting operating results.
We may experience trade barriers
in expanding to our targeted emerging markets and may be subject to tariffs and taxes that will result in significant additional
costs for our business and products.
We may experience barriers to conducting
business and trade in our planned expansion to emerging markets. These barriers may be in the form of delayed customs clearances,
customs duties or tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local
currency into foreign currency, substantial taxes of profits, revenues, assets and payroll, as well as value-added tax. The
markets into which we may expand may impose onerous and unpredictable duties, tariffs and taxes on our business and products. These
barriers or expenses could have an adverse effect on our operations and financial results.
To the extent we acquire businesses
and technologies from others, we will need to integrate these into our business, which if not successful will adversely impact
our business and increase our financial expenses.
One important aspect of our expansion has
been and will be the use of acquisitions, which may include acquiring an operating business or specific assets. Examples of this
strategy have been the acquisitions of Concord Group in 2011 and Bond Group in 2013. As with any acquisition, we will have to integrate
the business with our operations so as to achieve the value of our investment. Accommodating different business cultures, operating
systems and product lines, as well as understanding and implementing different regulatory issues, often takes time and can result
in unexpected expenses. Acquisitions are not always successful, resulting in unintended expenses and write-downs. Any failure to
smoothly integrate acquired businesses and technologies may adversely affect our business operations.
As we expand our business outside
of mainland China, we will encounter the increasing need for international certifications and compliance with the regulation of
different governments, which if not obtained and complied with may adversely impact our business.
We are expanding our business outside of
mainland China, including seeking business opportunities in Hong Kong SAR, Singapore, Malaysia, India, and the Middle East. For
our marketing both in China and in other jurisdictions, we seek international certifications and have obtained certificates such
as the European Safety Standard Certification Level 4. As we operate in jurisdictions other than China, we will have to comply
with local laws, some of which relate to various safety and quality requirements for the kinds of products we provide. The failure
to have any necessary or beneficial certifications and the failure to comply with local laws will have an adverse impact on our
marketing and business, and may result in additional costs and expenses.
During our expansion into overseas
market, a lack of qualified local engineers and the inability to relocate enough China’s experienced engineers to overseas
could delay our international projects’ execution and lose potential business opportunities.
In our international business expansion
to Southeast Asia, India and the Middle East, we may not be able to find adequate and qualified local engineers to bid and complete
sizable rail transportation orders and industrial automation projects, and because of the visa problems, we may have difficulties
to relocate adequate engineers from China to various foreign countries and have them stay there long enough to finish the projects,
which could cause adverse impact on our international business expansion.
We do not have long-term purchase
commitments from our customers, so our customers are free to choose products from our competitors, which increases our marketing
expenses to continually find new clients and win new contracts.
We are engaged in the design, production
and installation of automation and process control systems. As a result, our revenues result from numerous individual contracts
that are nonrecurring in nature. Furthermore, customers may change or delay or terminate orders for products and services without
notice for any reasons unrelated to us, including lack of market acceptance for the products to be produced by the process that
our system was designed to control. As a result, in order to maintain and expand our business, we must expend increasing amounts
on marketing to identify clients and win contracts so as to be able to replenish the orders in our pipeline on a continuous basis.
Increased marketing expenses and the inability to continue with current contracts or win new sources of revenue could result in
a decline in revenues and profitability.
Although we do not have a concentration
of business with any customer at this time, our business has become more dependent on a few significant customers
.
We have developed significant customer
relationships with several local subway providers and railway authorities in respect of the high speed train system in China. We
currently also have significant contracts with the MTR Corporation Ltd. of Hong Kong, Land Transport Authority of Singapore, and
Mitsubishi Heavy Industries, Ltd. Qatar Branch. We expect that these relationships will continue to grow, and we will win more
contracts with them over time. To the extent that these customer groups or specific customers with a group represent an increasing
proportion of our business, we will become more dependent on them for our revenues and business growth. In that case, our cash
flows also will become more dependent on those customers’ payment practices and overall public funding policies, including
the lengthening of collection times under contracts that have been performed. Therefore, the loss of one or more of these customers
or market groups as customers would have a material adverse impact on our revenues and our business operations and development.
We have a backlog of contracts, the
execution of unfinished contracts in the backlog may be lengthened due to various external reasons, and the increase of backlog
may not necessarily reflect our business expansion.
To date, our backlog has been a reflection
of our ability to sell our products and services and increase our business. This represents an amount of unrealized revenue to
be earned from contracts secured by the Company. Backlog, however, can also reflect upon our inability to perform our contracts
on a timely basis. Therefore, when evaluating our backlog, analysis should be made as to whether or not it is a reflection of an
expanding business, successful marketing and increasing acceptance of our products and services in the marketplace or problems
in our contract performance and acceptance.
A lack of adequate engineering resources
could cause our business to have diminished profitability and lose potential business prospects.
Among the competitive advantages and key
business advantages that we enjoy are the plentiful supply of engineering talent in China and the comparatively lower cost of our
engineering staff compared to those of our Western and Japan-based competitors. Recently, however, our costs for these persons
have been subject to increased wage pressures due to the economic growth of China and certain inflationary pressures and additional
employment related taxation. If the available supply of engineers were to be absorbed by competing demands, or otherwise not
as plentiful as we have experienced to date, then the costs of hiring, training and retaining capable engineers would likely increase. If
we are unable to pass any additional costs through to our customers, this could result in a reduction in our profitability, and
the inability to have qualified and trained persons could adversely affect our business prospects or could even cause a change
in our business strategy.
Our products may contain design or
manufacturing defects, which could result in reduced demand for our products or services, customer claims and uninsured liabilities.
Our products are very complex, integrated
systems, often with elements designed specifically for the particular situation of a customer, which may have undetected design
or manufacturing issues or defects until put into actual use. Also, we manufacture spare parts for maintenance and replacement
purposes after completion of integrated solution contracts. While there have been no significant issues or defects identified
so far, any issues or defects in the design, manufacture and spare parts we provide may result in returns, claims, delayed shipments
to customers or reduced or cancelled customer orders and other forms of damages asserted against the Company. If these issues
or defects occur, we will incur additional costs, and if they occur in large quantity or frequency, we may sustain a permanent
increase in costs, a loss of business reputation and legal liability. Moreover, we are increasingly active in the conventional
and nuclear power generation and railway control systems sectors. Each of these sectors poses a substantially higher risk of liability
in the event of a system failure, than was present in the industrial process controls markets in which we traditionally compete.
We generally do not carry large amounts
of insurance, and in the future we may not be able to obtain adequate insurance coverage. The typical practice of the industries
with which we are involved is for the customers to obtain insurance to protect their own operational risks. As a practice,
we do not carry insurance coverage to protect against the risks related to product failure. It is possible that customers
could assert claims against us for any damages caused by a failure in one of our systems, and as a result, the failure of any of
our designs, manufacture and installation of our products could result in a liability that would seriously impair our financial
condition or even force us out of business.
Our failure to adequately protect
our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights
may be costly.
Our business is based on a number of proprietary
products and systems, some of which are patented and others of which we protect as trade secrets. We strive to strengthen
and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, we
believe that the protection of our intellectual property will become increasingly important to our business as the functionality
of automation systems increases to meet customer demand and as we try to open new markets for our products.
Currently, we hold PRC utility patents
that relate to various product configurations and product components and software copyrights and have pending PRC patent applications.
We will continue to rely on a combination of patents, trade secrets, trademarks and copyrights to provide protection in this regard,
but this protection may be inadequate.
Our pending or future patent applications
may not be approved or, if allowed, they may not be of sufficient strength or scope. As a result, third parties may use the
technologies and proprietary processes that we have developed and compete with us, which could negatively affect any competitive
advantage we enjoy, dilute our brand and harm our operating results.
In addition, policing the unauthorized
use of our proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual
property rights. Protection of intellectual property and proprietary rights in China may not be as effective as in other countries.
Given the fact that the majority of our intellectual property rights are in China and under Chinese law, the relative unpredictability
of China’s legal system and potential difficulties of enforcing a court judgment in China may result in an outcome that is
unfavorable to us when we assert intellectual property ownership in a particular situation. Furthermore, any litigation may
be costly and may divert management attention away from our business operations. An adverse determination in any lawsuit involving
our intellectual property is likely to jeopardize our business prospects and reputation and result in additional expense for penalties,
licensing and redesign. We have no insurance coverage against litigation costs so we would be forced to bear all litigation
costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial condition.
As we are going to sell more of our proprietarily
developed products and systems to foreign countries, we may not continue to have the protection of our patents and software copyright
in foreign countries for some of our proprietary products, which could negatively impact our competitive position and our business
expansion in overseas.
The
Company’s goodwill outstanding as of June 30, 2017 was assessed to be impaired by $11.2 million, it may be
further impaired in the future depending on the future market development and the outcome
of the operating in Singapore, Malaysia and the Middle East.
The goodwill outstanding as of June 30,
2017 was related to the acquisition of Concord Group in 2011 and Bond Group in 2013. Based on our quantitative assessment, the
goodwill related to Concord Group acquisition was impaired by $11.2 million as of June 30, 2017. The fair value of Concord Group
is highly dependent on the future market development and the outcome of the operating in Singapore, Malaysia and the Middle East.
Slowing down in mechanical and electrical engineering sector, or fewer than expected contract awards to Concord Group may result
in further goodwill impairment in the future.
We performed a qualitative and the
two-step assessment for Bond Group in 2017 and evaluated all relevant factors, weighed all factors in their entirety and
concluded that no impairment charge for Bond Group was needed as of June 30, 2017.
RISKS RELATED TO THE INDUSTRY
IN WHICH WE OPERATE
The Company mainly operates in the
industrial and manufacturing automation sectors, the high-speed rail, subway and nuclear power automation sectors; in some industry
verticals within the industrial automation sector, we may experience the inconstant growth rate from time to time, which may present
variation of business opportunities; the contracts for high-speed rail, subway and nuclear power are substantially larger which
may result in a greater dependence on a particular customer or business sector, and could cause significant fluctuations in our
revenues.
The principal focus of our business has
been to provide Distributed Control Systems, Programmable Logic Controller and related industrial automation and control solution
to industrial and manufacturing companies. Even though there are enormous opportunities in the industrial automation arena, some
industry verticals may experience slower growth or decreased growth that will provide us with fewer opportunities and contract
awards from the industry and manufacturing sectors. Both high-speed rail and nuclear power sectors have one or few customers and
are closely related to the national development policies, and the contract size for these two sectors is usually much larger, and
as a result, there could be severe fluctuation of these sectors’ growth, which may affect our business and revenues.
Although China is committed to expanding
its energy production with nuclear power and building a high speed railway network, both these industries have experienced various
setbacks due to higher than expected accidents for various reasons several years ago. The future growth rate of these two sectors
may not be as fast as the market previously expected but on a more sustainable and safer basis, thus we will, likely experience
slower annual growth or possibly even a reduction in these sectors’ revenues.
International business recently has expands
to Southeast Asia and the Middle East area. Projects awarded in these areas may be exposed to potential delay in construction progress
due to political reasons.
To the extent that our business is
more dependent on large contracts and contracts from a few customers, our revenues, cash flows and profits will be influenced by
this type of contracting and the timely payment for our products and services.
As we develop our business with the entities
responsible for building municipal subway systems and railroads, power plants and larger system contract customers, such as building
retrofits, we will be entering into contracts for larger sized projects than in the past, which will be for significantly greater
contract value. These contracts will require us to commit greater operating resources to a more limited number of customers and
contract fulfillment. Therefore, our revenues, cash flows and profits will become increasingly dependent on our ability to perform
these contracts and collect the payments due on a timely basis. Some of the entities ultimately responsible for the funding of
infrastructure projects are governmental authorities or ministries, our contract requirements and collections will become subject
to these entities being able to adequately budget and have the revenues to timely pay for our products and services. We expect
a long collection period in some of our business. To some extent, we may become subject to delays and reductions in scope of project
due to changes in the policies, objectives and budgeting of any of the public entities which control the projects on which we are
contracting. We will also become increasingly subject to government contract requirements in the performance of contracts that
are ultimately the responsibility of public bodies.
At this time, contracting with the entities
that provide the subway and rail systems and power plants for which we provide control systems is similar to contracting with the
customers we have sold to in the past. Therefore, our contracts are written on a similar basis as before, and we expect that we
will be operating under these contracts and accounting for their revenues in a similar manner as before.
Many of our competitors have substantially
greater resources than we do, allowing them to compete on an advantageous basis.
We operate in a very competitive environment
with many major international and domestic companies, such as Honeywell, General Electric, ABB, Siemens, Emerson, Yokogawa and
Hitachi. Many of our competitors are much better established and more experienced than we are, have substantially greater
financial resources, operate in more international markets and are much more diversified than we are. As a result, they are
in a stronger position to compete effectively with us. These large competitors are also in a better position than we are to
weather any extended weaknesses in the market for automation and control systems. Other emerging companies or companies in
related industries may also increase their participation in our market, which would add to the competitive pressures that we face.
A decrease in the rate of growth
in China’s industrial activity and the Chinese economy in general may lead to a slower growth or decrease in our revenues
because industrial companies in China are significant sources of revenues for us.
Industrial companies operating in China
are significant sources of revenues for us. Our business benefited in the past from the rapid expansion of China’s industrial
activity, which has created additional demand from existing companies and led to the formation of numerous additional companies
that have need for our products and services. We have also benefited from the infrastructure projects of the different governmental
authorities of China, such as power production and transportation systems. China’s industrial and infrastructure expansion
has been fueled in large measure by international demand for the low-cost goods that China is able to produce due to labor advantages
and other comparative advantages, such as governmental subsidies to offset research and development expenses and taxes and reduced
land use/facilities costs for targeted industries. The failure of Chinese economy to sustain this rate of growth in the future
and any reduction in the rate of China’s industrial growth or a shrinking of China’s industrial base could adversely
affect our revenues. We may also be impacted as major infrastructure projects are completed. The resulting increase in
competition for customers might also cause erosion of profit margins that we have been able to achieve historically.
Our efforts to operate in the international
automation market may not prove successful, and we may expend capital resources without achieving value and needlessly divert management’s
time and attention from our principal market.
We are penetrating international markets,
emphasizing Southeast Asia, India, and the Middle East with the objective of diversifying our products, clients and places of operations
and growing our overall business. Our expansion is likely to use substantial resources, including substantial amounts of capital
and equity and deploy meaningful amounts of management time and attention. Our products and our overall approach to the automation
and controls system business may not be accepted in other markets to the extent needed to make that effort profitable. In
addition, the additional demands on our management from these activities may detract from our efforts in the domestic Chinese market
and market of surrounding countries, causing the operating results in our principal markets to be adversely affected.
We depend heavily on key personnel,
and loss of key employees and senior management could harm our business.
Our future business and results of operations
depend in significant part upon the continued contributions of our key technical and senior management personnel. The Company
also depends in significant part upon its ability to attract and retain additional qualified senior executives and management,
technical, marketing and sales and support personnel for our operations. If we lose a key employee, if a key employee fails
to perform in his or her current position or if we are not able to attract and retain skilled employees as needed, our business
could suffer. Turnover in our senior management could significantly deplete institutional knowledge held by our existing senior
management team and impair our operations.
In addition, if any of these key personnel
joins a competitor or forms a competing company, we may lose some of our customers. We have entered into confidentiality and non-competition
agreements with key personnel. However, if any disputes arise between these key personnel and us, it is not clear, in light of
uncertainties associated with the PRC legal system, what the court decisions will be and the extent to which these court decisions
could be enforced in China, where all of these key personnel reside and hold some of their assets.
Our control systems are used in infrastructure
projects such as subway systems, surface railways and nuclear plants; to the extent that our systems do not perform as designed,
we could be found responsible for the damage resulting from that failure.
We face potential responsibility for the
failure of our control systems in performing the various functions for which they are designed and the damages resulting from any
such problem. To the extent that we contract to provide control systems in larger scale projects, the level of damages for which
we may be held responsible is likely to increase. To the extent that any of our installed control systems do not perform as designed
for their intended purposes, and we are held responsible for the consequences of those performance failures and resulting damages,
there may be an adverse impact on our business, business reputation, revenues and profits. We do believe our control systems have
so far performed as designed, and there are no claims asserted against us based on any significant, non-performance event. Notwithstanding
our record, no assurance can be given that no claims will be sought in the future based on the design and performance of our control
systems.
We may be exposed to potential risks
relating to our internal controls over financial reporting and our ability to have those controls positively attested to by our
independent auditors.
As directed by Section 404 of the Sarbanes-Oxley
Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the Company’s internal
controls over financial reporting in their annual reports and the independent registered public accounting firm auditing a company’s
financial statements to attest to and report on the operating effectiveness of such company’s internal controls. No
material weakness has been identified as of June 30, 2017. In the event we identify material weaknesses in our internal controls
that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with
respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.
Our auditor, like other independent
registered public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting
Oversight Board, and as such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting
firm that issues the audit reports included in our annual report filed with the SEC, as an auditor of companies that are traded
publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the
PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the
laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where the PCAOB is
currently unable to conduct inspections without the approval of the PRC authorities like other independent registered public accounting
firms operating in China, is currently not inspected by the PCAOB. In May 2013, PCAOB announced that it had entered into a Memorandum
of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission (“CSRC”) and the Ministry
of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant
to investigations undertaken by PCAOB, the CSRC, or the Ministry of Finance in China and the Department of the Treasury in the
United States respectively. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections
in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
Inspections of other firms that the PCAOB
has conducted have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be
addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections
of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our
auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of the PCAOB
inspections.
Proceedings instituted by the SEC
against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial
statements being determined to be not in compliance with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted proceedings
under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting firms, including our independent
registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations
there under by failing to provide to the SEC the firms’ work papers related to their audits of certain PRC-based companies
that are publicly traded in the United States. Rule 102(e)(1)(iii) grants to the SEC the authority to deny to any person, temporarily
or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to
have willfully violated, or willfully aided and abetted the violation of, any such laws or rules and regulations. On January 22,
2014, an initial administrative law decision was issued, sanctioning four of these accounting firms and suspending them from practicing
before the SEC for a period of six months. The sanction will not take effect until there is an order of effectiveness issued by
the SEC. In February 2014, four of these PRC-based accounting firms filed a petition for review of the initial decision.
In February 2015, each of these four accounting firms agreed to a censure and to pay fine to the SEC to settle the dispute with
the SEC. The settlement stays the current proceeding for four years, during which time the firms are required to follow detailed
procedures to seek to provide the SEC with access to Chinese firms' audit documents via the CSRC. If a firm does not follow the
procedures, the SEC would impose penalties such as suspensions, or commence a new, expedited administrative proceeding against
the non-compliant firm or it could restart the administrative proceeding against all four firms.
In the event that the SEC restarts the
administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may
find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements
being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any
negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed
companies and the market price of our ordinary shares may be adversely affected.
If our independent registered public accounting
firm were denied, temporarily or permanently, the ability to practice before the SEC, and we are unable to find in a timely manner
another registered public accounting firm which can audit and issue a report on our financial statements, our financial statements
could be determined to not be in compliance with the requirements for financial statements of public companies with a class of
securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately
lead to the SEC’s revocation of the registration of our ordinary shares under the Exchange Act, which would cause the immediate
delisting of our ordinary shares from the NASDAQ Global Select Market, and the effective termination of the trading market for
our ordinary shares in the United States, which would likely have a significant adverse effect on the value of our ordinary shares.
RISKS RELATED TO DOING BUSINESS
IN CHINA
Changes in the economic and political policies of the
PRC government could have a material and adverse effect on our business and operations.
We conduct a substantial portion of our
business in China. Accordingly, our results of operations, financial condition and prospects are significantly dependent on economic
and political developments in China. China’s economy differs from the economies of developed countries in many aspects, including
the level of development, growth rate and degree of government control over foreign exchange and allocation of resources. While
China’s economy has experienced significant growth in the past 30 years, the growth has been uneven across different regions
and periods and among various economic sectors in China. We cannot assure you that China’s economy will continue to grow,
or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have
a negative effect on its business and results of operations.
The PRC government exercises significant
control over China. Accordingly, our results of operations, financial condition and prospects are significantly dependent on economic
and political developments in China. Certain measures adopted by the PRC government may restrict loans to certain industries, such
as changes in the statutory deposit reserve ratio and lending guidelines for commercial banks by the People’s Bank of China,
or PBOC. These current and future government actions could materially affect our liquidity, access to capital, and ability to operate
our business.
The global financial markets experienced
significant disruptions in 2008 and the United States, Europe and other economies went into recession. Since 2012, growth of the
Chinese economy has slowed down. The PRC government has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures may benefit the overall PRC economy but may also have a negative effect on us.
Our financial condition and results of operation could be materially and adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. In addition, any stimulus measures designed to boost the Chinese
economy, may contribute to higher inflation, which could adversely affect our results of operations and financial condition. See
“Risks Relating to Doing Business in China - Future inflation in China may inhibit our ability to conduct business in China.”
If the CSRC, or another PRC regulatory
agency, determines that CSRC approval of our initial merger was required or if other regulatory obligations are imposed upon us,
we may incur sanctions, penalties or additional costs which would damage our business.
On August 8, 2006, six PRC regulatory agencies,
including the CSRC, promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the
M&A Regulations, which became effective on September 8, 2006. Under these regulations, the prior approval of the CSRC is required
for the overseas listing of offshore special purpose vehicles that are directly or indirectly controlled by PRC companies or individuals
and used for the purpose of listing PRC onshore interests on an overseas stock exchange.
On September 20, 2007, we completed a merger
transaction with Chardan North China Acquisition Corporation, or Chardan, which resulted in our current ownership and corporate
structure. We believe that CSRC approval was not required for our merger transaction or for the listing and trading of our
securities on a trading market because we are not an offshore special purpose vehicle that is directly or indirectly controlled
by PRC companies or individuals. Although the M&A Regulations provide specific requirements and procedures, there are
still many ambiguities in the meaning of many provisions. Further regulations are anticipated in the future, but until there
has been clarification either by pronouncements, regulation or practice, there is some uncertainty in the scope of the regulations
and the regulators have wide latitude in the enforcement of the regulations and approval of transactions. If the CSRC or another
PRC regulatory agency subsequently determines that the CSRC’s approval was required, we may face sanctions by the CSRC or
another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations
in China, limit our operating privileges in China, restrict or prohibit payment or remittance of dividends paid by Hollysys, or
take other actions that could damage our business, financial condition, results of operations, reputation and prospects, as well
as the trading price of our securities.
Fluctuations in exchange rates could
harm our business and the value of our securities.
The value of our securities will be indirectly
affected by the foreign exchange rate between US dollars and those currencies in which our sales may be denominated. Because a
large portion of our earnings and cash assets are denominated in RMB, SGD and MYR, and our financial results are reported in US
dollars, fluctuations in the exchange rate between the US dollar and RMB, SGD and MYR will affect our balance sheet and our earnings
per share as stated in US dollars. In addition, appreciation or depreciation in the value of the RMB, SGD and MYR relative
to the US dollar would affect our financial results reported in US dollar terms without giving effect to any underlying change
in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue that will be exchanged into US dollars as well as earnings from, and the value of, any US dollar-denominated investments
we make in the future.
As our main functional currency, the RMB
has no longer been pegged to the US dollar since July 2005. Although the People’s Bank of China regularly intervenes
in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate
significantly in value against the US dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities
may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While
we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be
magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Exchange controls that exist in the
PRC may limit our ability to utilize our cash flow effectively.
We are subject to the PRC’s rules and
regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange, or SAFE, regulates the conversion
of the RMB into foreign currencies. Currently, foreign investment enterprises, or FIEs, are required to apply to the SAFE
for “Foreign Exchange Registration Certificates for FIEs.” We believe Helitong is an FIE. With such registration
certificates, which need to be renewed annually, FIEs are allowed to open foreign currency accounts including a “basic account”
and “capital account.” Currency conversion within the scope of the “basic account,” such as remittance
of foreign currencies for payment of dividends, can be effected without requiring the approval of the SAFE. However, conversion
of currency in the “capital account,” including capital items such as direct investment, loans and securities, still
require approval of the SAFE. We cannot assure you that the PRC regulatory authorities will not impose further restrictions
on the convertibility of the RMB. Any future restrictions on currency exchanges may limit our ability to use our cash flow for
the distribution of dividends to our shareholders or to fund operations it may have outside of the PRC.
Future inflation in China may inhibit our ability to conduct
business in China.
In recent years, the Chinese economy has
experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 5.9% and as low as -0.7%. These factors have led to the adoption by the Chinese government, from time
to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.
High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market for our products and our company.
PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our company to liabilities
or penalties, limit our ability to contribute capital to our PRC subsidiaries, limit the ability of our PRC subsidiaries to increase
their registered capital or distribute profits to us, or otherwise materially and adversely affect us.
On July 14, 2014, the SAFE issued the Circular
Relating to Foreign Exchange Administration of Offshore Investment, Financing and Roundtrip Investment by Domestic Residents through
Special Purpose Vehicles, or Circular 37. Circular 37 repeals and replaces the Notice Concerning Foreign Exchange Controls on Domestic
Residents’ Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular 75. Under Circular 37,
PRC residents are required to register with the SAFE or its local branches prior to establishing, or acquiring control of, an offshore
company for the purpose of investment or financing that offshore company with equity interests in, or assets of, a PRC enterprise
or with offshore equity interest or assets legally held by such PRC resident. In addition, PRC residents are required to amend
their registrations with the SAFE and its local branches to reflect any material changes with respect to such PRC resident’s
investment in such offshore company, including changes to basic information of such PRC resident, increase or decrease in capital,
share transfer or share swap, merger or division. In the event that a PRC shareholder fails to make the required registration or
update the previously filed registration, the PRC subsidiaries of that offshore special purpose vehicle may be prohibited from
distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their offshore parent
company, and the offshore parent company may also be prohibited from contributing additional capital into its PRC subsidiaries.
Furthermore, failure to comply with the various foreign exchange registration requirements described above could result in liability
under the PRC laws for evasion of applicable foreign exchange restrictions.
We do not have control over our beneficial
owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE regulations. The failure of our
beneficial owners who are PRC residents to comply with these SAFE registrations may subject such beneficial owners or our PRC subsidiaries
to fines and legal sanctions. Furthermore, since Circular 37 was recently promulgated and it is unclear how this regulation, and
any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant
PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure
to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries
and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect
on our business, financial condition and results of operations.
Because Chinese law governs many
of our material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant
loss of business, business opportunities or capital.
Chinese law governs many of our material
agreements, some of which may be with Chinese governmental agencies. We cannot assure you that we will be able to enforce any of
our material agreements or that remedies will be available outside of the PRC. The system of laws and the enforcement of existing
laws and contracts in the PRC may not be as certain in implementation and interpretation as in the United States. The Chinese judiciary
is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as
to the outcome of any litigation. The inability to enforce or obtain a remedy under any of our future agreements could result
in a significant loss of business, business opportunities or capital.
If any dividend is declared in the
future and paid in a foreign currency, you may be taxed on a larger amount in US dollars than the US dollar amount that you will
actually ultimately receive.
If you are a U.S. holder, you will be taxed
on the US dollar value of your dividends at the time you receive them, even if you actually receive a smaller amount of US dollars
when the payment is in fact converted into US dollars. Specifically, if a dividend is declared and paid in a foreign currency,
the amount of the dividend distribution that you must include in your income as a U.S. holder will be the US dollar value of the
payments made in the foreign currency, determined at the conversion rate of the foreign currency to the US dollar on the date the
dividend distribution is includible in your income, regardless of whether the payment is in fact converted into US dollars. Thus,
if the value of the foreign currency decreases before you actually convert the currency into US dollars, you will be taxed on a
larger amount in US dollars than the US dollar amount that you will actually ultimately receive.
Legal regulations may limit our ability
to make dividend payments to our shareholders.
We are a holding company in the BVI. We
generally rely on our subsidiaries to provide us with cash flow and to meet our other obligations. For PRC subsidiaries, relevant
PRC laws and regulations permit payment of dividends by a PRC subsidiary only from accumulated distributable profits, if any, determined
in accordance with PRC accounting standards and regulations, and only after setting aside at least 10% of its current year profits
(up to an aggregate amount equal to half of its registered capital). The PRC tax authorities may initiate changes in determining
income of our PRC subsidiaries that would further limit their ability to pay dividends and make other distributions to us. It is
therefore possible that our PRC subsidiaries will not have any distributable profit to pay us, even if they are profitable under
U.S. GAAP.
The ability, as well as the decision, to
declare dividends will also be influenced by the withholding taxes imposed on payments by companies in one jurisdiction to a company
in another jurisdiction. For example, there is a 10% withholding tax imposed on a PRC company paying dividends to a company located
in the BVI. This will reduce the value of any potential dividend to the ultimate shareholders, and therefore the board may determine
that it would be a more prudent use of funds to reinvest funds that could be available for dividends into the business or acquire
other businesses and assets.
Based on the articles of association and
the Companies Act in Singapore and Malaysia, no dividend shall be payable except out of the profits of the companies. There is
no limit to the number of dividend payable as long as there are sufficient profits. There is no withholding tax imposed on a Singapore
and Malaysia company paying dividends to a company located outside of Singapore and Malaysia upon remittance.
Our business could be severely harmed
if the Chinese government changes its policies, laws, regulations, tax structure or its current interpretations of its laws, rules
and regulations relating to our operations in China.
Our results of operations, financial state
of affairs and future growth are, to a significant degree, subject to China’s economic, political and legal development and
related uncertainties. Our operations and results could be materially affected by a number of factors, including, but not limited
to
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Over the past several years, the Chinese
government has pursued economic reform policies including the encouragement of private economic activities and greater economic
decentralization. If the Chinese government does not continue to pursue its present policies that encourage foreign investment
and operations in China, or if these policies are either not successful or are significantly altered, then our business could be
harmed. The China government also exercises significant control over China’s economic growth through the allocation
of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential
treatment to particular industries or companies. Continued efforts to increase tax revenues could result in increased taxation
expenses being incurred by us. Economic development may be limited as well by the imposition of austerity measures intended
to reduce inflation, the inadequate development of infrastructure and the potential unavailability of adequate power and water
supplies, transportation and communications. In addition, the Chinese government continues to play a significant role in regulating
industry by imposing industrial policies.
The Chinese laws and regulations
which govern our current business operations are sometimes vague and uncertain and may be changed in a way that hurts our business.
China’s legal system is a civil law
system based on written statutes, in which system decided legal cases have less value as precedents, unlike the common law system
prevalent in the United States or the BVI. There are substantial uncertainties regarding the interpretation and application of
Chinese laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement
and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal
proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress
has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization
and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because
of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and
enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively. We are considered an FIE under Chinese laws, and as a result,
we must comply with Chinese laws and regulations. We cannot predict what effect the interpretation of existing or new Chinese
laws or regulations may have on our business. If the relevant authorities find us to be in violation of Chinese laws or regulations,
they would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business
and other licenses; requiring that we restructure our ownership or operations; and requiring that we discontinue any portion or
all of our business.
The implementation of PRC employment
law is likely to result in increased labor costs in China, which may affect our business and profitability.
The Labor Contract Law, which became effective
on January 1, 2008, imposes on employers’ requirements to enter into fixed-term employment contracts, and effects the recruitment
of temporary employees and dismissal of employees. In addition, under the Regulations on Paid Annual Leave for Employees,
which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid
vacation time ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such
vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation
day so waived. On July 1, 2011, China promulgated the Social Insurance Law to unify pervious scattered laws relating to social
insurance matters. The law clarifies that the social insurance system in China includes pension insurance, medical insurance, unemployment
insurance, work-related injury insurance and maternity insurance, all of which are mandatory benefits for employees of companies
operating in China. Employers are required to make contributions under these insurance schemes, which although local in rates,
are overall expected to increase employee expense over time. There is no assurance that disputes, work stoppages or strikes will
not arise in the future over these and other matters. Increases in the labor costs or future disputes with our employees could
damage our business, financial condition or operating results.
The Security Review Rules may make
it more difficult for us to make future acquisitions or dispositions of our business operations or assets in China.
The Security Review Rules, effective as
of September 1, 2011, provides that when deciding whether a specific merger or acquisition of a domestic enterprise by foreign
investors is subject to the national security review by MOFCOM, the principle of substance-over-form should be applied and foreign
investors are prohibited from circumventing the national security review requirement by structuring transactions through proxies,
trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. If the business
of any target company that we plan to acquire falls within the scope subject to national security review, we may not be able to
successfully acquire such company by equity or asset acquisition, capital increase or even through any contractual arrangement.
Heightened scrutiny of acquisition
transactions by PRC tax authorities may have a negative impact on Chinese company’s business operations and its acquisition
strategy.
Pursuant to the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, effective on
January 1, 2008, and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC
Resident Enterprises, or SAT Announcement 7, effective on February 3, 2015, issued by the SAT, if a non-resident enterprise transfers
the equity interests of or similar rights or interests in overseas companies which directly or indirectly own PRC taxable assets
through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate income tax, the transaction will
be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. SAT Announcement
7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable commercial purpose.
However, as SAT Announcement 7 is newly issued, there is uncertainty as to the application of SAT Announcement 7 and the interpretation
of the term “reasonable commercial purpose.”
Under SAT Announcement 7, the entity which
has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any
PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer
and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose
a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting
penalty under certain circumstances if it reports such transfer to the PRC tax authorities.
Although SAT Announcement 7 is generally
effective as of February 3, 2015, it also applies to cases where the PRC tax treatment of a transaction that took place prior to
its effectiveness has not yet been finally settled. As a result, SAT Announcement 7 could be determined by PRC tax authorities
to be applicable to the historical reorganization, and it is possible that these transactions could be determined by PRC tax authorities
to lack a reasonable commercial purpose. As a result, the transfer of shares by certain shareholders to other parties could be
subject to corporate income tax of up to 10% on capital gains generated from such transfers, and PRC tax authorities could impose
tax obligations on the transferring shareholders or subject us to penalty if the transferring shareholders do not pay such obligations
and withhold such tax.
SAT Announcement 7 and its interpretation
by relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers of shares in a publicly-traded
entity that is listed overseas is available if the purchase of the shares and the sale of the shares both take place in open-market
transactions. However, if a shareholder of an entity that is listed overseas purchases shares in the open market and sells them
in a private transaction, or vice-versa, PRC tax authorities might deem such a transfer to be subject to SAT Circular 698 and SAT
Announcement 7, which could subject such shareholder to additional reporting obligations or tax burdens. Accordingly, if a holder
of the Company’s ordinary shares purchases such ordinary shares in the open market and sells them in a private transaction,
or vice-versa, and fails to comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities may take actions, including
requesting to provide assistance for their investigation or impose a penalty on it, which could have a negative impact on the company’s
business operations.
Under the EIT Law, we may be classified
as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to
us and our non-PRC shareholders.
On March 16, 2007, the National People’s
Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the State Council of China
passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China
with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can
be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law
define de facto management as “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration
of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application
of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an
enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties
mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial
assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half
of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an
enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends
to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated
by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises
are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise
by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this
would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income
tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding
tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect
to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could
result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect
to gains derived by our non-PRC stockholders from transferring our shares.
We may be exposed to liabilities
under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could
have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice
Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and
political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We
have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of
government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees,
consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our
policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future
improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company
may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business,
operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability
FCPA violations committed by companies in which we invest or that we acquire.
If we become directly subject to
the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant
resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could
result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have
substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions,
have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory
agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities
and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack
of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the
publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually
worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal
and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative
publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations,
whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations
and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company.
The disclosures in our reports and
other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the
PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in
China where substantially all of our operations and business are located have conducted any due diligence on our operations or
reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports
and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under
the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United
States, however, substantially most of our operations are located in China. Since substantially all of our operations and business
takes place in China, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles that
are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business
take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements
are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other
filings are not subject to the review of the China Securities Regulatory Commission, a PRC regulator that is tasked with oversight
of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with
the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our
SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local
regulator.
RISKS RELATED TO OUR SHARES
The market price of our ordinary
shares is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of our ordinary shares
is volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market
price of our ordinary shares to fluctuate significantly. These factors include:
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our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating
results or our failure to meet the expectations of financial market analysts and investors;
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changes in financial estimates by us or by any securities analysts who might cover our stock;
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speculation about our business in the press or the investment community;
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significant developments relating to our relationships with our customers or suppliers;
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stock market price and volume fluctuations of other publicly traded companies and, in particular,
those that are in the same industry as we are;
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customer demand for our products;
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investor perceptions of the automation and control industry in general and our company in particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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major catastrophic events;
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announcements by us or our competitors of new products, significant acquisitions, strategic partnerships
or divestitures;
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changes in accounting standards, policies, guidance, interpretation or principles;
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loss of external funding sources;
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failure to maintain compliance with NASDAQ rules;
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sales of our ordinary shares, including sales by our directors, officers or significant shareholders;
and
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additions or departures of key personnel.
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Securities class action litigation is often
instituted against companies following periods of volatility in their share price. This type of litigation could result in substantial
costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience
significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example,
in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share
prices since September 2001. These market fluctuations may adversely affect the price of our ordinary shares and other interests
in our company at a time when you want to sell your interest in us.
We are a “foreign private issuer,”
and have disclosure obligations that are different than those of other U.S. domestic reporting companies so you should not expect
to receive the same information about us at the same time as a U.S. domestic reporting company may provide. Furthermore, if we
lose our status as a foreign private issuer, we would be required to comply fully with the reporting requirements of the Exchange
Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that
we would not incur as a foreign private issuer.
We are a foreign private issuer and, as
a result, we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are
not required to issue quarterly reports or proxy statements. Also, we are allowed four months to file our annual report with
the SEC. We are not required to disclose certain detailed information regarding executive compensation that is required from
U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings and transactions
in our equity under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements
of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific
information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation
rules of the SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer
are different than those required by other U.S. domestic reporting companies, our shareholders should not expect to receive information
about us in the same amount and at the same time as information is received from, or provided by, other U.S. domestic reporting
companies. We are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private
issuer. Violations of these rules could affect our business, results of operations and financial condition.
If we lose our status as a foreign private
issuer at some future time, we will be required to comply fully with the reporting requirements of the Exchange Act applicable
to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not
incur as a foreign private issuer.
The payment of cash dividends depends
on the decision of the Board of Directors and the cash and legal requirements of our company.
The Board of Directors decides if and when
the Company will pay cash dividends. On August 11, 2016, the Board of Directors approved a regular cash dividend policy pursuant
to which future cash dividends are expected to be paid to holders of the Company’s ordinary shares on an annual basis out
of funds legally available for such purpose. However, the declaration and payment of future dividends will be at the discretion
of the Board, and will depend upon many factors, including the Company’s financial condition, earnings, capital requirements
of its businesses, legal requirements, regulatory constraints, industry practice, and other factors that the Board deems relevant.
If we fail to comply with the continued listing requirements
of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares and make obtaining future
debt or equity financing more difficult for us.
Our ordinary shares are traded and listed
on the Nasdaq Global Select Market under the symbol “HOLI.” The ordinary shares may be delisted if we fail to maintain
certain listing requirements of the Nasdaq Stock Market, or NASDAQ.
We cannot ensure you that we will continue
to comply with the requirements for continued listing on The NASDAQ Global Select Market in the future. If our shares lose their
status on The NASDAQ Global Select Market and we are not successful in obtaining a listing on The NASDAQ Capital Market, our shares
would likely trade in the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our shares
could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and
security analysts’ coverage of us may be reduced. In addition, in the event our shares are delisted, broker-dealers have
certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our shares, further
limiting the liquidity of our shares. These factors could result in lower prices and larger spreads in the bid and ask prices for
our shares. Such delisting from The NASDAQ Global Select Market and continued or further declines in our share price could also
greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly increase
the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
As a foreign private issuer, we are
permitted to rely on exemptions from certain NASDAQ corporate governance standards applicable to domestic U.S. issuers. This may
afford less protection to holders of our securities
.
We are exempted from certain corporate
governance requirements of the Nasdaq Stock Market by virtue of being a foreign private issuer. As a foreign private issuer, we
are permitted to follow the governance practices of our home country, the BVI in lieu of certain corporate governance requirements
of NASDAQ. As result, the standards applicable to us are considerably different than the standards applied to domestic U.S. issuers.
For instance, we are not required to:
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have a majority of the board be independent (although all of the members of the audit committee
must be independent under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act);
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have a compensation committee and a nominating committee to be comprised solely of "independent
directors; and
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hold an annual meeting of shareholders no later than one year after the end of the Company’s
fiscal year-end.
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As discussed elsewhere in this Annual Report,
we have relied on and intend to continue to rely on some of these exemptions. As a result, our shareholders may not be provided
with the benefits of certain corporate governance requirements of the Nasdaq Stock Market.
You may have difficulty enforcing
judgments obtained against us.
We are a BVI company and substantially
all of our assets are located outside of the United States. A substantial portion of our current business operations are conducted
in the PRC. In addition, almost all of our directors and officers are nationals and residents of countries other than the United
States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult
for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in
U.S. courts judgments obtained in U.S. courts including judgments based on the civil liability provisions of the U.S. federal securities
laws against us and our officers and directors, many of whom are not residents in the United States and whose assets are located
in significant part outside of the United States. The courts of the BVI would recognize as a valid judgment, a final and conclusive
judgment in person is obtained in the federal or state courts in the United States against the Company under which a sum of money
is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect
of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over
the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of the BVI, (c) such judgment
was not obtained by fraud, (d) the enforcement of the judgment would not be contrary to the public policy of the BVI, (e) no new
admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the BVI and (f)
there is due compliance with the correct procedures under the laws of the BVI. In addition, there is uncertainty as to whether
the courts of the BVI or the PRC, respectively, would recognize or enforce judgments of U.S. courts against us or such persons
predicated upon the civil liability provisions of the securities laws of the United States or any state.
Because we are incorporated under
the laws of the BVI, it may be more difficult for our shareholders to protect their rights than it would be for a shareholder of
a corporation incorporated in another jurisdiction.
Our corporate affairs are governed by our
memorandum and articles of association, by the BVI Business Companies Act, 2004 (as amended), or the 2004 Act, and by the common
law of the BVI. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management
and the rights of our shareholders differ from those that would apply if we were incorporated in the United States or another jurisdiction.
The rights of shareholders under BVI law may not be as clearly established as are the rights of shareholders in the United States
or other jurisdictions. Under the laws of most jurisdictions in the United States, majority and controlling shareholders generally
have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions
by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of
minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in United States
jurisdictions. In addition, the circumstances in which a shareholder of a BVI company may sue the company derivatively, and the
procedures and defenses that may be available to the company, may result in the rights of shareholders of a BVI company being more
limited than those of shareholders of a company organized in the United States. Furthermore, our directors have the power to take
certain actions without shareholder approval which would require shareholder approval under the laws of most United States jurisdictions.
The directors of a BVI corporation, subject in certain cases to court approval but without shareholder approval, may implement
a reorganization, merger or consolidation, the sale of any assets, property, part of the business, or securities of the corporation,
subject to a limit of up to 50% of such assets. The ability of our board of directors to create new classes or series of shares
and the rights attached by amending our memorandum of association and articles of association without shareholder approval could
have the effect of delaying, deterring or preventing a change in our control without any further action by the shareholders, including
a tender offer to purchase our ordinary shares at a premium over then current market prices. Thus, our shareholders may have more
difficulty protecting their interests in the face of actions by our board of directors or our controlling shareholders than they
would have as shareholders of a corporation incorporated in another jurisdiction.
We may be classified as a passive
foreign investment company, which could result in adverse United States federal income tax consequences to U.S. shareholders.
We believe that we currently are not considered
a “passive foreign investment company,” or PFIC, for United States federal income tax purposes. However,
each year we must make a separate determination as to whether we are a PFIC. We cannot assure you that we will not be
a PFIC for our future tax years. If a non-U.S. corporation either (i) has at least 75% of its gross income is passive income
for a tax year or (ii) has at least 50% of the value of its assets (based on an average of the quarterly values of the assets during
a tax year) attributable to assets that produce or are held for the production of passive income, then the non-U.S. corporation
will be deemed a PFIC. The market value of our assets may be determined to a large extent by the market price of our ordinary
shares. If we are treated as a PFIC for any tax year during which U.S. shareholders hold ordinary shares, certain adverse
United States federal income tax consequences could apply to such U.S. holders.
Our Shareholder Rights Plan and charter
documents may hinder or prevent change of control transactions.
Our shareholder rights plan and provisions
contained in our Memorandum and Articles of Association may discourage transactions involving an actual or potential change in
our ownership. In addition, our Memorandum and Articles of Association authorizes our board of directors to issue up to 90,000,000
shares of preferred stock without any further action by the stockholders. Please see Item 10, Additional Information
for more information regarding our shareholder rights plan. Such restrictions and issuances could make it more difficult,
delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders
from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price
of our ordinary shares, even if you or our other stockholders believe that such actions are in the best interests of us and our
stockholders.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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We were established under the laws of the
BVI on February 6, 2006, as HLS Systems International, Ltd., in order to merge with Chardan North China Acquisition Corporation
(“Chardan”), a Delaware special purpose acquisition company, originally established on March 10, 2005, with the primary
purpose of effecting a business combination with an unidentified operating business that has its primary operating facilities located
in China, in any city or province north of Yangtze River. On September 20, 2007, we acquired all of the issued and outstanding
ordinary shares of GTH, a BVI company. On August 1, 2008, our ordinary shares started trading on NASDAQ Global Select Market. On
July 17, 2009, we changed our name to Hollysys Automation Technologies Ltd. to more accurately reflect our core value of leveraging
proprietary technologies to provide state-of-the-art automation and control solutions for our clients.
On July 1, 2011, we purchased 100% of the
equity of Concord Group for a combination consideration of cash and stock for a total value of approximately $42.9 million. Concord
Group provides electric solutions with end-to-end design, engraving, engineering, procurement, project management, construction
and commissioning, and maintenance, active in the rail industry in Singapore, Qatar, UAE and Saudi Kingdom and the building retrofit
market in Singapore.
On April 1, 2013, we purchased 100% of
the equity of Bond Group for a purchase price of approximately US$73 million, payable 50% in cash and 50% in ordinary shares of
Hollysys. The stock will be issued to the Bond Group shareholders in three installments over three years, 60% of which are incentive
shares and will be based on certain performance targets for calendar years 2013 and 2014. Additional ordinary shares, as a premium
on performance, will be issuable to the Bond Group shareholders, if Bond Group outperforms the established targets, but the premium
will not exceed 15% of the total incentive shares in any case. The operating results of Bond Group have been included in our consolidated
financial statements effective from April 1, 2013. Bond Group provides complete mechanical and electrical solutions with end to
end capabilities in design, engineering, procurement, project management, construction and commissioning, and maintenance to a
wide array of industries, including factories, data centers, banks, hospitals, airports, power stations, gas and instrumentation
plants, hotels, commercial centers, residential buildings and infrastructure works. We seek to take advantage of Bond Group’s
strong presence and brand name in Southeast Asia and to strengthen our Southeast Asian business.
On November 24, 2015, the Company established
Concord Electrical Contracting, Ltd. (“CECL”) to explore the market in Qatar. CCPL has a 49% direct ownership of CECL
and the remaining 51% equity interest is held by a nominee shareholder. Through a series of contractual arrangements, CCPL is entitled
to appoint majority of directors of CECL who have the power to direct the activities that significantly impact CECL’s economic
performance. Further, CCPL is entitled to 95% of the variable returns from CECL’s operations. As a result, despite of its
minority direct ownership of CECL arrangements, CCPL is considered the primary beneficiary of CECL.
In July 2016, Beijing Hollycon Medicine
& Technology. Co., Ltd. (“Hollycon”), previously as one of the Company’s subsidiaries, issued new shares
for an aggregate cash consideration of $30,943 to two new third investors. At the same time, the Company disposed 0.6% of its
equity interest in Hollycon for cash consideration of $464. These two transactions resulted in dilution of the Company’s
equity interest in Hollycon from 51% to 30%. According to the revised article of association, Hollycon will be managed by a board
of directors comprising of a total 5 members, of which, the Company can appoint two directors while the other three shareholders
can appoint one director each. The Company can also appoint the chairman of the board. All major management and operation decision
need be approved by the board and requires approval by at least 2/3 of board directors. Profits is allocated to shareholders based
on the percentage of respective initial investment. The Company lost control over Hollycon upon the completion of the two transactions
set out above, but maintained significant influence over Hollycon, and accounted for the investment in Hollycon under equity method.
Upon the deconsolidation date, the Company recorded the retained non-controlling equity investee at fair value of $22,737 and
recognized a gain of $14,514. The fair value of retained non-controlling interest in Hollycon was measured using a discounted
cash flow approach. Key estimates and assumptions include the amount and timing of future expected cash flows, terminal value
growth rates, and discount rate.
We are a leading provider of automation
and control technologies and products in China and increasingly in Southeast Asia, India and the Middle East that enable our diversified
industry and utility customers to improve operating safety, reliability, and efficiency. Founded in 1993, we have approximately
3,200 employees with a nationwide China presence and with subsidiaries and offices in Southeast Asia, India and the Middle East.
We serve over approximately 10,000 customers in the industrial, railway, subway, nuclear power, and mechanical and electronic industries
in China, Southeast Asia, India and the Middle East. Our proprietary technologies are applied through our industrial automation
solution suite, including the DCS (Distributed Control System), PLC (Programmable Logic Controller), RMIS (Real-time Management
Information System), HAMS (HolliAS Asset Management System), OTS (Operator Training System), HolliAS BATCH (Batch Application Package),
HolliAS APC Suite (Advanced Process Control Package), SIS (Safety Instrumentation System), high-speed railway signaling system
of TCC (Train Control Center), ATP (Automatic Train Protection), SCADA System (Subway Supervisory and Control platform Data Acquisition),
nuclear power non-safety automation and control system HolliAs-NMS DCS and other products.
We historically focused our efforts on
the area of DCS, which are networks of controllers, sensors, actuators and other devices that can be programmed to control outputs
based on input conditions and/or algorithms, which are mainly used to control continuous manufacturing processes. Our DCS have
been widely used in the industries involving continuous flow of material handling, such as power generation, petro-chemical, chemical,
metallurgy, building materials and new energy. We also command a position in Chinese nuclear power automation and control market
as the only qualified local automation and control product provider to the non-safety control for both nuclear island and conventional
island of nuclear power reactors in nuclear power stations.
We have a substantial reputation in the
PRC domestic industrial automation industry for our comprehensive capabilities and have focused on the development of this market.
We carry out integrated solution projects for, render automation services to, or sell our products to, national or multi-provincial
companies with subsidiaries located throughout China. To date, we have served more than 10,000 industrial enterprise customers
including state-owned enterprises, multinational corporations and local private companies and have undertaken over 25,000 projects.
We believe that the quality of our systems is unsurpassed by local Chinese competitors and comparable to high-end foreign suppliers
of DCS and the history of our projects supports that view. Some of our renowned customers include BASF, SINOPEC and Shenhua Group,
etc.
We are as well a player in the PLC market,
where the products are mainly used in discrete control and applied to a wide array of industries. PLCs are usually integrated together
into machines to provide control at machinery level. We have been expanding our proprietary products suite and gradually shifting
ourselves from a single PLC product provider to a total solution provider. As the outlook for intelligent manufacturing and factory
automation stays positive, we believe that such repositioning would enable us to better respond to the changing behavior of the
customers.
Generally speaking, our solution encompasses
third-party hardware-centric products such as instrumentation and actuators, our proprietary DCS/PLC products, and valued-added
software packages such as AMS (Asset Management System), MES (Manufacturing Execution System), APC (Advanced Process Control),
OTS Simulation (Operator Training System), and others. The safety system SIS (Safety Instrumentation System), certified under European
safety standards and newly introduced to the market in July 2012 has further expanded our proprietary product suite in the industrial
automation segment.
We have branched out from the industrial
automation domain into the subway and high-speed rail businesses, leveraging on our core competency and strong research and development
capabilities, and have already established a key position in the high-speed rail signaling market and subway SCADA market. Besides,
we have developed our proprietary high-speed rail signaling system and subway signaling system, and certified both according to
European Safety Standard Certification Level 4.
Internationally, we have a strong presence
in Southeast Asia and increasingly in the Middle East, India and Hong Kong SAR. Through the acquisitions of Concord and Bond Groups,
we are expanding and deepening our ability to offer mechanical and electrical solutions in design, engineering, procurement, project
management, construction and commissioning, and maintenance to a wide range of industries, such as manufacturing, banks, hospitals,
airports, power plants, commercial centers, hotels, and infrastructure works. We believe that our present leadership position in
the high-growth segments is attributable to our vision, execution, and strong research and development capabilities.
During the past several years we have achieved
a number of significant contract wins in international arena, including (i) contracts with MTR Corporation of Hong Kong SAR to
provide a complete suite of high-speed rail signaling systems to Guangzhou-Shenzhen-Hong Kong Express Rail Hong Kong Section; (ii)
a contract with SMRT Trains Ltd. in Singapore to provide design, electrification and installation for station renovations on North-South
and East-West lines and a contract with Thales Solutions Asia Pte. Ltd. to provide design, installation, testing and commission
for replacing the existing signaling systems for the North-South and East-West lines and install new signaling systems for the
Tuas West Extension line in Singapore; (iii) a contract with Land Transport Authority in Singapore to provide the Integrated Supervisory
Control System for the Thomson & Eastern Region Lines in Singapore; (iv) a contract with Mitsubishi Heavy Industries Ltd. to
provide electrical installation services for part of the Power Distribution System Package of the first Phase of Doha Metro. In
overseas industrial automation business, we have as well achieved remarkable milestone in several sub-industries in India in fiscal
year 2017, and we are expecting more to come in future.
Strategy
The goal for Hollysys is to become one
of the world's well-known automation and control technology and product providers. To meet this goal we plan to enhance the
core competencies that have made us a leading domestic automation and control solutions provider in China, the only Chinese
company qualified to design and manufacture non-safety control systems of nuclear power stations, and a leader in the industrial
automation and in the high-speed rail and subway sectors. The principal elements of our core business strategies are as follows:
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To
further establish our leadership position as a dominant automation and control solutions provider across all the addressable market
segments
– We seek to be a potential industry consolidator in China and Southeast Asia to become a leading provider
of industrial automation and control technology applications for clients in various industries, by presenting ourselves as a total
solution provider. We seek to further penetrate the industrial automation and railway business with more proprietary products
to enhance our leading position and expand our market share. Since the majority of our customers are operating in a wide range
of industries, we stand to be a prime beneficiary of China’s and increasingly Southeast Asia’s industrial automation
market growth. Such growth is closely related to the economic development, rising labor costs, and growing awareness on environment
protection, clean energy and lower carbon emission in the region. Our combination of patented technologies, strong research and
development capabilities, ability to leverage strategic alliances and acquisitions to enter and penetrate new market segments,
and a comprehensive understanding of the Chinese and Southeast Asia markets should allow us to capitalize on these growth opportunities.
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To continuously enhance our leadership position in technology
– We have long been
recognized as a pioneer in the development of industrial automation and control technology and applications in China. We are
continuously seeking ways to improve our existing product lines while being committed to the development of new applications, platforms,
and products. In order to maintain our leadership in technology, we have devoted significant resources to the research and development
that is undertaken by a group of trained and skilled experts and engineers. We have improved the 5th generation DCS named
HOLLiAS-K, which is superior to the performance of the 4th generation in terms of reliability, flexibility, and ease of use. Hollysys
has applied its years of experiences from nuclear DCS into the design of HOLLiAS-K. Flexible architectures of P-to-P (Peer to Peer),
C/S (Client/Server), or hybrid system can be selected according to the project scale. Industry specific software solutions are
designed for better customization leveraging our deep industry knowhow and expertise. Further advantages such as vertical mounting,
modular connection, and tilted I/O design make the engineering and wiring more effective and deliver the customers faster and more
stable field installation. We also developed China’s first proprietary Safety Instrumented System, named HiaGuard-SIS, and
passed Safety Integrity Level 3 certification in compliance with the most stringent European standards. HiaGuard-SIS is a critical
safety protection system comprising sensors, logic solvers and actuators for the purposes of taking a process to a safe state when
normal predetermined set points are exceeded, or safe operating conditions are violated. The SIS developed by Hollysys is applicable
to ESD (Emergency Shutdown System), PSD (Process Shutdown System), FGS (Fire and Gas Systems), BMS (Burner Management System),
and ETS (Emergency Trip System). In March 2017, with our LK series PLC passing the international certification of Wurldtech’s
Achilles, we became the first domestic PLC supplier to have been certified under Achilles Level 1, Besides, we are continuously
devoting resources to research and development on our addressable market related technologies and products, and international market,
including track circuit subway signaling system, industrial automation motion control, machinery control products and technologies
to complement our existing product portfolio.
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To actively explore and prepare for international market expansion–
Management
is pursuing a strategy for Hollysys to have meaningful revenue generated from the international market and to become one of
the prominent and well-known automation and control players in the world. We made significant progress in this business
objective through the acquisitions of Concord and Bond Groups, which are headquartered in Singapore and Malaysia
respectively, by which we obtained a well-established distribution channel and customer/partner bases to cross-sell our
products in the rail and industrial automation segments and building automation and retrofit segments, and seasoned
management teams to form the core of our international team. We have also increased our mechanical and engineering solution
capabilities and are expanding to be able to serve a wider array of industries. We entered into a contract with Hong Kong MTR
Corporation to supply the entire high-speed rail signaling system to Shenzhen-Hong Kong Express Rail with a total contract
value amounted to approximately US$85 million, including the main contract signed and the supplementary contracts obtained
subsequently, In addition, we signed the contract with Land Transport Authority in Singapore to provide the Integrated
Supervisory Control System for the Thomson & Eastern Region Lines in Singapore valued at approximately SGD 16
million.
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The high-speed rail signaling
system includes the on-board ATP (Automatic Train Protection) system that is used to protect the train from travelling at excessive
speeds, the ground based TCC (Train Control Center) for ground safety control of trains, and other auxiliary interfacing products.
Based on our own technologies, we are able to customize our system platforms to meet every level of requirements from conventional
rail signaling systems to the most state-of-the-art, high-speed rail applications, not only for the Chinese market but also for
the international market.
China Railway Corporation employs
its own administrative admission system and set specific standards for the high-speed rail signaling products deployed in China’s
high-speed rail lines. In addition to our products certified under those domestic standards, we have redesigned the whole set of
our high-speed rail signaling systems based wholly on our own proprietary technologies, to better compete in the rail market outside
of China,. Our products that have passed European Safety Standards SIL 4 certification (Safety Integrity Level 4) include ATP (Automatic
Train Protection), TCC (Train Control Center), LEU (Line-Side Electronic Unit), BTM (Balise Transmission Module), TSRS (Temporary
Speed Restriction Server), HVC (Hollysys Vital Computer) and Interlocking system in the high-speed rail sector.
In the subway sector, the proprietary
ATS (Automatic Train Supervision) and CBI (Computer Based Interlocking) passed SIL2 and SIL4 certification respectively in 2011.
And in early 2013, we finished the development and certified ZC (Zone Controller), LEU (Line-side Electronic Unit) and Balise for
subway signaling system according to SIL4 requirements. The ATP (Automatic Train Protection) for subway signaling was developed
and passed SIL4 certification in the end of 2013, thus all subway signaling products have been certified according to SIL4.
Products and Services
As a leading provider of automation and
control technology and applications in China, and increasingly in Southeast Asia, we provide our customers with our standard and
customized products and corresponding services based on each client’s specific requirements. We are committed to providing
reliable, advanced and cost-effective solutions to help customers optimize their processes to achieve higher quality, greater reliability
and better productivity and profitability.
Industrial Automation
:
Our principal offering is a comprehensive
suite of automation systems for a wide spectrum of industrial market clientele, ranging from power, chemical, petrochemical, to
nuclear, metallurgy, building materials, food-beverage, pharmaceutical and other industries. Our comprehensive suite of automation
solution consists of third-party hardware-centric products such as instrumentation and actuators, our proprietary software-centric
DCS/PLC, and valued-added software packages such as RMIS (Real-time Management Information System), HAMS (HolliAS Asset Management
System), OTS (Operator Training System), HolliAS BATCH (Batch Application Package), HolliAS APC Suite (Advanced Process Control
Package), and SIS (Safety Instrumentation System). Our mainstream products for this market segment are DCS products and PLC. DCS
is a network of controllers, sensors, actuators and other devices that can be programmed to control outputs based on input conditions
through logic calculations. In an automated production line, sensors or so-called “instrumentations” are distributed
across the production facility to monitor sub-systems like the robots, CNC machines, and logistic tools. These sensors are
like human eyes, which monitor the process, and detect any abnormal situations. The information collected from those sensors
is then transmitted to the DCS for centralized data processing through communication networks. The central computer (brain)
processes information and generates commands, based on sophisticated algorithmic and pre-set parameters. These commands are
then sent to actuators (muscles/bones) through communication devices to execute the orders and maintain production flow. PLCs
are computer devices installed on machines or equipment, for example, on a factory assembly line, for manufacturing automation.
As the only proven domestic automation
control systems provider to the nuclear power industry in China, we provide our HOLLiAS-NMS DCS product to China’s nuclear
power industry. In a nuclear power station, the nuclear island operates to transform nuclear energy to heat energy, and pass
on the steam generated by the steam generator to the conventional island, where steam drives the turbine to generate the electricity,
and pass on to the transformer for loading onto the grid. Our HOLLiAS-NMS proprietary control systems are now used for non-safety
operation control. The know-how was accumulated from our industrial DCS applications in high-end, conventional energy power plants,
with much more sophisticated software and hardware specifications, and more stringent production and quality assurance process.
Our nuclear joint venture with China General Nuclear Power Corporation and China Techenergy Co., Ltd., has already successfully
completed developing its proprietary safety nuclear power automation and control system and has started to commercialize such technology.
Rail Transportation:
Hollysys has successfully scaled its automation
application from industrial manufacturing to rail and subway industries, with proprietary product lines including, TCC (Train Control
Center) and ATP (Automation Train Protection). An ATP essentially acts as the train over-speed protection mechanism. It collects
real-time information like speed limit ahead, train operation status, line data, instructions from train control center, and then
combines that information with the train parameters to produce train protection curves. In case of any human errors, like
driver’s negligence at the red light, it applies emergency brakes automatically. TCCs is an on-ground control center
at railway stations or equipment stations which monitor route condition, track status, train schedules, distance between trains,
and the working status of other essential function devices, and then through logic calculation, generate control instructions and
commands. The command information from the TCC is then transmitted to the ATP located on the locomotives/trains, through track
circuits and electronic beacons located at various points along the railway line, or wirelessly.
We have been providing our SCADA system
to a number of China’s subway lines for many years, including the Beijing Metro, Guangzhou Metro, Shenzhen Metro, Tianjin
Metro, Dalian Metro, Wuhan Metro, Chengdu Metro and Lanzhou Metro. SCADA is an open software platform to enable integrated
and unified monitoring of all necessary sub-systems of the subway, including the Power Supervisory Control and Data Acquisition
System, Building Automatic System, Fire Alarm System, Platform Screen Door System, Access Control System, Closed Circuit Television,
Passenger Information System, Passenger Train Information System, and Alarm System. Given the exponential growth in China’s
subway market and the continued growth expected for the decades to come, Hollysys has developed its proprietary Subway Signaling
System, based on its strong research and development capability and technical know-how of signaling application accumulated from
high-speed rail. Currently the development and certification according to the European safety standards are basically finished.
The current subway signaling market is predominantly occupied by multi-national corporations, such as Siemens, Alstom and Thales.
We are the supplier of the entire high-speed
rail signaling system to Shenzhen-Hong Kong high-speed rail line for the Hong Kong MTR, which marked our breakthrough into the
international high-speed rail signaling market. In addition, we signed a contract with Land Transport Authority ("LTA")
in Singapore to provide our proprietary Integrated Supervisory Control System for Thomson & Eastern Region Lines in Singapore.
Mechanical and Electrical:
We established a stronger foot-hold in
Southeast Asia through the acquisitions of Concord and Bond Groups in 2011 and 2013 respectively. Concord and Bond Groups mainly
provide mechanical and electrical solutions, including design, engineering, procurement, project management, construction and commissioning,
and maintenance related services. Concord Group mainly focuses on railway transportation in Singapore, Macau, Qatar, UAE and Saudi
Kingdom markets, and Bond Group mainly focuses on factories, data centers, banks, hospitals, airports, power stations, gas and
instrumentation plants, hotels, commercial centers, residential buildings and infrastructure works in Malaysia. Through the acquisitions,
the Company seeks to expand the existing distributions and marketing channels to sell the Company’s existing product lines
to the fast growing Southeast Asia and the Middle East markets.
Project Implementation:
We establish a project group of sales engineers,
technical engineers and project management professionals for each of our potential customer to provide them total integrated solutions
tailored to their specific requirements. The sales engineers and technical engineers work together to offer the best customized
solutions from understanding customer’s detailed requirements through on-site studies. The technical engineers are responsible
for hardware assembly, software configuration, testing and installation, commissioning and trial operation, and start-up and training;
while the project management professionals oversee budgetary matters, coordinate the work force, ensure adequacy of resources and
monitor progress and quality to ensure the timely completion of each project. Our integrated solutions projects involve one
or more of the following activities:
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Solution planning
– We provide our customers with strategic and tactical reviews of
their current operations and future requirements. The planning includes defining client business requirements, developing appropriate
hardware and software, and selecting preferred technology.
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Solution design
– We detail the industry specifications and implementation tactics
necessary to achieve our customer’s objectives. Hollysys also take into consideration the integration of the hardware and
software deployed in our integrated solution with the existing ones of the customer, and the ongoing management followed Examples
of these services include defining functional requirements for the system and our components, developing integration plans and
designing of customer-specific system and services applications.
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Solution implementation
–We install the recommended systems and provide essential
services throughout the solution implementation process, to better meet our customers' specific requirements. Key activities include
project management, hardware procurement and production, software development, configuration and field installation and testing,
and development of customized system and services management applications.
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Our proprietary technology and products
based integrated solutions create value for our customers and improve their competitive strengths by:
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Generating synergy and improving efficiency of our customers through integrating communications,
marketing and service functions;
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Utilizing our industry and process knowledge to develop customized solutions that improve the efficiency
of our customers;
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Providing a software platform for the optimization of management operations, which provides real-time
automation and information solutions throughout a business; and
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Offering maintenance and training services to our customers, which help to cut costs and improve
operating efficiency.
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We customize our floor plans based on conducting
careful on-site studies, building design-specific network systems using our proprietary technology and software, and offering manufacturing
execution system services to ensure that real-time management control is available to our customers in a streamlined and easy-to-use
manner.
We believe that our product design and
applications integrated in the solutions are unmatched among our domestic competitors. We also believe that the sophistication
and quality of our products rival those of the multi-national automation and control product suppliers, while our insightful understanding
of demands of our Chinese customers and the ability to respond give us a leading edge over foreign competitors. The value
of this combination is reflected in our strong revenue and profit growth over the years.
Markets
Industrial Automation Market
According to the Gong Kong Data, an industry
research group, the DCS and PLC market in China, was around RMB 7,020 million and RMB 7,350 million respectively in calendar year
2016. With the experience of our actual projects, if adding software and specific controller, the market would be multiple.
Currently, the vast majority of the global
automation market is still controlled by a handful of multi-national companies including Honeywell (US), Siemens (Germany), Emerson
(US), ABB (Sweden), Rockwell (US), Yokogawa (Japan) and Hitachi (Japan). Industrialization began in the west, however, the shifting
focus of industrial automation development to China and more recently, Southeast Asia is not by now an unfamiliar story.
Several underlying background of China’s
industrial automation market should be well noticed. The slogan of “China Manufacture 2025” and “Industry 4.0”
proposed by the government, coupled with China’s regional development planning, indicates a national commitment to realize
industrial upgrading. Growing social awareness on environmental protection, supported by government policies, is creating demand
for green manufacture. In order to achieve a favorable stance in competition, companies are seeking more efficiency and sophistication
in manufacturing and management. Customers are also transiting from product buyers to service buyer. Furthermore, the growing pressure
on labor cost and shortage of labor remain a challenge to the manufacture industry. The above mentioned have created a substantial
and growing demand for the automation systems in an era of green, efficiency and intelligence, posing both opportunities and challenges.
We believe that the growth of China’s
industrial automation market will continue to be healthy given its relatively lower penetration rate and the rising cost of labor.
The client base includes large state-owned enterprises, multi-national companies, and other domestic companies. Our main competitors
in this field are global players such as ABB, Siemens, and Emerson, as well as Supcon from China. We believe that the Hollysys
brand recognition and market reputation, and our strong research and development capabilities will continuously enable us to penetrate
high-margin market segments currently dominated by foreign companies.
We are well-positioned to benefit from
China’s nuclear power development. At present, China’s nuclear power sector is relatively underdeveloped, with the
vast majority of power generated by coal-fired power plants. According to figures announced by China Nuclear Energy Association,
as of May 25, 2017 there were 36 nuclear reactors in commercial operation in China. This represents a very small fraction of the
total installed gross capacity of power generation. In terms of electricity generated watt per hour, the nuclear electricity generated
by now is approximately 2%-3%, lagging far behind the world average of 15%, with France being the highest with 70% of its power
generated from nuclear power plants. Driven by clean energy initiatives and China’s commitment of reducing its carbon emission
by 45% per GDP unit by 2020, China’s installed nuclear power generating capacity is expected to reach 70GW-80GW by 2020.
Typically, one nuclear reactor generates 1GW electricity.
We are penetrating into international markets
with primary focus on Singapore, Malaysia, Indonesia, India and the Middle East, all of which are largely developing areas. The
strong growth of infrastructure and increased demand for automation technologies will benefit us in these areas.
Rail Transportation Market
Another important end-market for Hollysys
is the high-speed rail market in China, where we command a leading position in providing high-speed rail signaling systems to ensure
the safety of passenger train movement. The China Railway Corporation developed a national high-speed rail signaling technological
standard, the China Train Control System, or the CTCS. Under the CTCS, the standard governing the 200-250km/hour speed category
is called C2, while C3 governs the 300-350km/hour category. These standards are different from the international standards propounded
by European organizations or Japan.
By the end of the 12
th
Five
Year Plan, the total length of China’s high-speed railway has already reached 19,000 kilometers. According to the 13
th
Five Year Plan another 11,000 kilometers of high-speed railway will be built by the end of 2020, making a total length of 30,000
kilometers, covering over 80% of China’s major cities. A more comprehensive network of “Eight Horizontals and Eight
Verticals” will be in place by 2025, surpassing the previous “Four Horizontals and Four Verticals”, making inter
and intra-regional railway transportation more efficient and convenient. As one of the three high-speed rail signaling products
providers in the C2 category in China, and one of the three high-speed rail signaling products providers to the C3 segment, we
believe that Hollysys is well positioned to benefit from this unprecedented, world leading high-speed railway build-out.
We are also working to expand our rail
products supply such as track circuit. We have finished testing of track circuit and the official admission progress and got the
permit to enter track circuit market which is another sizable market. We are entering into this market and expecting to gain our
first track circuit contract in the near future.
We also provide our proprietary software
platform and solutions of SCADA to the subway market. China’s subway market is expected to receive significant government
investment due to urbanization and environmental concerns. According to the development plan for a modern comprehensive transportation
system during the 13th five-year-plan published by the State Council, total length of subway lines under operation by 2020 will
be 6000 km, compared with 3300km by the end of the 12th five-year-plan period. Leveraging on our know-how from high-speed surface
rail signaling technology and our well-recognized brand name, we have finished the development of our proprietary subway signaling
system, and are preparing for bidding subway signaling projects both in China and abroad. We believe it will present a better value
positioning to our subway customers by bundling our proprietary subway SCADA system with our proprietary signaling system, in this
way we are also expecting our market share and gross margin to expand in this business sector.
In Southeast Asia, there are also extensive
subway lines construction and subway signaling system reconstruction projects due to the operation safety and efficiency concern
in densely populated areas such as Hong Kong, Singapore and Malaysia. There are several subway lines under construction in Hong
Kong and Southeast Asia, including Hong Kong Shatin to Central Link in Hong Kong, and Thomson Line (TSL) in Singapore and MRT Line
No. 2 in Kuala Lumpur, Malaysia. Besides, the reconstruction of subway signaling systems will be a huge opportunity, such as the
signaling upgrade of Singapore’s North-South and East-West lines in which Hollysys has participated. As an increasing number
of subway signaling systems in developed countries are approaching the end of their product cycle, Hollysys will take the opportunity
to meet the demand of subway signaling system replacement and upgrading
Mechanical and Electrical Solutions
Market
We offer mechanical and electrical solutions
(M&E) through Concord and Bond Groups in Southeast Asia, the Middle East and Hong Kong. Through acquisitions of the above entities,
we are expanding and deepening our ability to offer mechanical and electrical solutions in design, engineering, procurement, project
management, construction and commissioning, and maintenance to a wide range of industries, such as manufacturing, banks, hospitals,
airports, power plants, commercial and residential buildings, hotels, and railway and subway lines.
Extensive constructions in infrastructure
in Southeast Asia and Middle East result in significant demands for M&E solutions. Taking Malaysia for example, the estimated
total gross development value (GDV) in Iskandar development area is around $118 billion, where estimated M&E sector potential
worth is $23.56 billion in the areas such as education, commercial, residential, factories and theme park project; the estimated
total GDV in Sabah development area is around $32.3 billion, where estimated M&E potential worth is $6.5 billion including
residential, resorts, commercial, oil & gas projects; the estimated total GDV of Sarawak Corridor is around $102.7 billion,
where estimated M&E potential worth is $20.5 billion including renewable energy and energy resources, residential, commercial,
factories projects.
In the rail transportation field, there
are several subway lines under construction in Hong Kong and Southeast Asia, including, among others, Hong Kong Shatin to Central
Link, Thomson Line (TSL) in Singapore and MRT Line No. 2 in Kuala Lumpur, Malaysia. Concord Group participated in the Singapore
North-South and East-West subway lines signaling reconstruction project cooperating with Thales, Concord Group was responsible
for design, installation, testing and commission for replacement of existing signaling systems. Bond and Concord Groups will actively
explore the M&E opportunities, and cooperate with Hollysys for the installation and implementation works for industrial automation
and railway transportation total solution works in South East Asia and the Middle East.
Integrated Contracts
The main channel through which we get our
automation system business is the procurement bidding process. Customers seeking bids propose their requirements and specifications
in legal bidding documents and those companies that are interested in obtaining these contracts make a bid in written form. If
we win the bid, we finalize an integrated contract. We derive a large percentage of our total consolidated revenues from the
integrated contracts that we win through the bid process. In addition, we also generate revenue from products sales of spare
parts and component products to customers for maintenance and replacement purposes after the completion of the integrated
solution contract, and from provision of service such as maintenance and training which tends to provide a recurring revenue stream.
The purpose of an integrated contract is
to furnish an automation system that provides the customer with a total solution for the automation or process control requirement
being addressed. The automation system and total solution that we offer consists of hardware, software and services, all of
which are customized to meet the particular needs and technical specifications of our customers. None of the hardware, software
and service has independent functionality, and therefore cannot be sold separately to customers.
The major terms of an integrated solution
contract include solution planning and design, system installation, customer acceptance, payment milestones and warranty. The
process of fulfilling an integrated contract consists of the following four stages:
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Solution planning and design
- We provide customers with a customized plan for achieving
the required solution by establishing a project group for each contract. The project group includes system engineers who propose
and discuss and agree on the system design and implementation plan with the technical personnel of the customers
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System manufacturing and installation
- Based on the design and implementation plan, and
in accordance with the project schedule, we enter into the process of purchasing the necessary hardware, manufacturing components
for the hardware, developing software platform, re-configuring the software embedded in the hardware, and fabricating the integrated
hardware into cabinets, on-site installation and testing, and training customer’s personnel about how to use the automation
and total solution.
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Customer acceptance
- The procedures for customer inspection and acceptance of the system
are typically contained in the contracts. The initial inspection usually occurs when the hardware is delivered to the customer’s
site for the purpose of detecting any obvious physical damage during shipping and to confirm that the entire order was delivered. A
final acceptance will be performed upon the satisfaction of integrated solution testing.
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Warranty period
- The integrated solution contracts customarily provide our customers with
a one-year warranty (although sometimes the warranty period may be more than one year depending on the customer and the negotiations
for the contract), which runs from the date of the final customer acceptance. The end of the warranty period represents fulfillment
of the entire contract.
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Because of the nature of customized integrated
contracts, a customer does not have the right to return the products that we deliver, so long as such products conform and perform
to the customer’s specification. Prior to delivering our products to a customer’s site, we perform an internal
test to ensure that the automation system works as intended. After installing the products on a customer’s site, any problems
are solved during trial runs. Once the testing requirements have been satisfied, a customer will execute a customer acceptance
document, which marks the beginning of the warranty period. Due to the nature of this process, many companies in the automation
systems business generally do not carry product liability insurance.
The size of an integrated contract is determined
by a customer’s needs in terms of the amount of equipment needed and the complexity of the integrated solution. The
size of an integrated contract drives the revenues generated by the contract. Because certain contracts will require working
periods longer than one year, the best way to measure the contract revenue realized is to use the percentage-of-completion method. Ultimately,
our revenue stream will be driven by the average price of an integrated contract and how many integrated contracts have started
in each reporting period.
Our backlog of contracts presents the amount
of unrealized revenue to be earned from the contracts that we have won. Accordingly, any increase or decrease in new contracts
won by us, or any change of scheduled delivery dates will have a future impact on our future revenue streams. In the event
of a delay in the delivery schedule, then the time of inspection, installation, trial run and customer acceptance will be delayed
accordingly, all of which will affect our revenue recognition. If the delay of delivering the specified automation systems
was a result of our inability to deliver the system on a timely basis, then we will be held responsible for this delay, in accordance
with the terms specified in the respective integrated contracts.
Competition
We compete with various domestic and international
corporations offering automation and control systems. We believe that our proprietary technologies and products provide us
with a strong competitive advantage over our domestic Chinese competitors. However, a number of multinational companies, some of
whom have substantially greater financial and other resources than we currently have, have been offering first rate automation
systems in competition with us. We believe that our primary competitors in China industrial automation market for our products
multi-national corporations, such as ABB, Honeywell, Emerson and Siemens. Supcon, a local private company affiliated with Zhejiang
University, is among the primary competitors as well. In the Southeast Asian and Middle Eastern markets, our principal competitors
for industrial automation are multinational corporations such as ABB, Siemens, Emerson, Yokogawa and Honeywell.
In the PRC high-speed rail business, given
the administrative admission system employed by China Railway Corporation and the governing of national rail technology standard,
the China Train Control Standard (CTCS), we believe that competition from multi-national companies will decrease gradually. Currently,
Hollysys is currently one of the three entities that supply signaling products to China’s 200-250km/h segment of the high-speed
rail market. The other two are China Academy of Railway Science and Zhuzhou CRRC. Hollysys is one of the three signaling product
providers to China’s 300-350km/h segment of the high-speed rail market. The other providers are CRSC and China Academy of
Railway Science. In SCADA market, we mainly compete with Nanjing Automation Research Institute (NARI). In the nuclear automation
segment, we mainly compete with multi-national corporations such as Siemens, Areva, and Invensys. The major competitors in the
international rail and subway signaling markets are Bombardier and Alstom.
For the mechanical and electrical solutions
business, the main competitors for Concord and Bond Groups include Bintai Kinden Corporation Berhad, PJI Holding Berhad, and LFE
Corporation Berhad, Kurihara, Sanyo, Bintai KDK and Gammon Construction.
When compared to our competitors, apart
from satisfying certain local based criteria, we believe that our key competitive edge is the provision of better value for money
to our customers with the following distinctive attributes:
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Emphasis on Engineering
. Engineers are a critical element of effective design of both
hardware and software components of automation equipment and systems. For western companies, they are also a very costly element
of the process. Even the largest western companies face constraints in the size of their engineering staff due to the high
salaries and attendant costs. One of our competitive advantages is the lower cost of engineers in China relative to those
in the Western nations. Applying high levels of engineering effort to each product enables us to provide a solution that is
tailored not only to the industry in which the customer operates, but also to the customer’s specific needs. That custom
solution is provided at a cost that is typically lower than the generic products of our competitors.
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Industry Process Knowledge
. We devote substantial time and effort to understand our
customers and their business. This knowledge helps to ensure that the systems we design will provide the optimum in benefits for
our customers. We maintain this information in an extensive
“library”
of industry process information that
we utilize to speed up the system design process and to maximize the quality of the result, while at the same time minimizing costs. As
a result, we were able to take into account the widely varying degrees of sophistication and resources that our customers possess. The
result of this strategy is to broaden our potential customer base and to consistently deliver products that are of value to these
customers.
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Integration Services
. Western automation system companies are principally system platform
suppliers and the role of integrating the systems into the customer’s overall management information system is generally
left to independent firms. While such firms are widespread in western countries, China and other emerging market countries
do not have a large number of systems integration companies to perform this work, as these companies have been historically unprofitable
in China. We have bridged this gap by providing a vertically integrated solution to our customers that includes the integration
of our hardware into the customers’ overall manufacturing and information systems. This combination of the two aspects
of system design and installation take further advantage of a lower cost of engineering services and provides another benefit,
as the design and integration teams can work together to produce the best result more quickly and efficiently, again lowering costs.
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Core Technologies
. Although we deliver tailored systems, our systems are based on basic
modules of automation technology that are common across a broad array of industries and applications. Using these modules
as a starting point, development of an industry and customer-specific product is both more efficient and produces a better result
than starting from scratch each time. That means, with our labor cost advantages, we can provide a highly customized automation
product at a very favorable cost.
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Use of Engineering Sales Personnel
. The use of trained engineers in product and system design
is complemented by the use of engineers in the sales process as well. With engineers included in the sales process, we provide
the ability to understand from the beginning the needs of the customer and how to address their issues and the ability to convey
that information to the team that will ultimately develop the system to be installed.
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Providing service for the Broad Array of Chinese Customers’ Capabilities
. China’s
rapid growth and industrialization distinguish it from other manufacturing nations in some ways. There are many
“established”
Chinese companies that operate in facilities that are decades old, many companies that operate in new or recently upgraded facilities,
and the largest number that fall somewhere in between. We understand, to a greater extent than our western competitors, the
full range of needs and capabilities that Chinese customers possess, and we have designed our business to meet them. As a
result, we are able to offer even the most basic control systems solution while also providing the most sophisticated systems available
to applications that meet the rigorous requirement of the highly complex and demanding nuclear power industry.
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Pace of Product Development
. Another way that we keep ahead of our competitors is by
our pace of development. HOLLiAS-K is the 5th generation of Distributed Control System developed by us and released to the
market. In 1993, we developed China’s first proprietary DCS to the market as our first generation system. During the past
20 years, we continuously moved ahead of the market and developed leading technologies, including China’s first proprietary
large scale PLC in 2005, the earliest and till now the only domestic approved and applied nuclear power automation and control
system HOLLiAS-NMS, China’s earliest subway SCADA and high-speed rail signaling system. We believe we have the capability
to identify high-growth markets and quickly develop and deliver the most advanced technologies, while leveraging our strong R&D
and innovative capabilities.
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Manufacturing
We design and manufacture the hardware
of our products in Beijing and Hangzhou facilities, and in rare cases we outsource the production depending on special circumstances
and delivery requirements. The core part of the hardware of our products is the printed circuit board. We manufacture the printed
circuit boards in our SMT (Surface Mounting Technology) lines and plug-in mounting lines, and assemble them into various types
of modules and then form the modules into the final products. The raw materials which we procure mainly include bare printed circuit
boards from vendors based on our requirements and design considerations, and electronic components, chips, cabinets and cables
among other factors. Our products are subjected to rigorous testing in our facilities prior to shipment.
Several subsidiaries of the Company, including
Beijing Hollysys, Hangzhou Hollysys, Hollysys Intelligent, and Hollysys Electronics, have all passed GB/T 19001/ISO 9001 international
quality management system certification, GB/T 24001/ISO 14001environmental management system certification, and GB/T 28001 occupational
health and safety management system certification.
The GB/T 19001/ISO 9001 international quality
management system certificate is valid for production, and technical service of industrial automatic control system equipment.
The other two certificates are valid for production, technical service and related management activities of industrial automatic
control system equipment.
Seasonality
Like many other companies operating in
China and Southeast Asia, our businesses experience lower levels of revenues in the quarter ending on March 31 due to the Chinese
New Year holiday.
Regulation
PRC.
We operate a significant portion
of our business in China under a legal regime that consists, at the national level, of the State Council, which is the highest
authority of the executive branch of the PRC central government, and several ministries and agencies under its leadership, including:
the Ministry of Agriculture and its local authorities; the Ministry of Commerce and its local authorities; SAFE and its local authorities;
the State Administration of Industry and Commence and its local authorities; and the State Administration of Taxation, and the
Local Taxation Bureau. The following sets forth a summary of significant regulations or requirements that affect our business
activities in China and our shareholders’ right to receive dividends and other distributions from us.
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Foreign Currency Regulations
. We are subject to the PRC’s foreign currency regulations. The
PRC government has control over RMB reserves through, among other things, direct regulation of the conversion of RMB into other
foreign currencies. Although foreign currencies which are required for “current account” transactions can be bought
freely at authorized Chinese banks, the proper procedural requirements prescribed by Chinese law must be met. See Item 10
“Additional Information – D. Exchange Controls” for detailed discussion of PRC foreign exchange control rules.
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Taxation.
The EIT Law, as further clarified by the Implementation Rules of the EIT
Law and the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law, applies a unified
enterprise income tax, or EIT, rate at 25% to both FIEs and domestic invested enterprises. The EIT rate applicable to the enterprises
established before March 16, 2007 those were eligible for preferential tax rate according to the effective tax laws and regulations
will gradually transition to the uniform 25% EIT rate by January 1, 2013. In addition, certain enterprises may still benefit from
a preferential tax rate of 15% under the EIT Law if they qualify as “High and New Technology Enterprises strongly supported
by the state,” (“HNTE”) subject to certain general factors described therein. “Administrative Measures
for Assessment of High-New Tech Enterprises,” or Measures, and “Catalogue of High/New Tech Domains Strongly Supported
by the State,” or Catalogue (2008), jointly issued by the Ministry of Science and Technology and the Ministry of Finance
and State Administration of Taxation set forth general guidelines regarding criteria as well as application procedures for qualification
as a HNTE under the New EIT Law. Beijing Hollysys, Hangzhou Hollysys and Hollysys Intelligent have met the qualifications
for the HNTE designation, and are accordingly subject to a reduced national enterprise income tax rate of 15%. Both Beijing Hollysys
and Hangzhou Hollysys’s “HNTE” certificate are effective from January 1, 2011 to December 31, 2016, and both
are in the process of reapplying the qualifications of HNTE for the following 3 years from January 1, 2017 to December 31, 2019.
Both are expecting to receive new HNTE certification in late 2017. While Hollysys Intelligent’s “HNTE” certificate
is effective from January 1, 2013 to December 31, 2018. According to the Notification on Preferential Enterprise Income Tax of
Software and Integrated Circuit Industry, Caishui [2016] No. 49, which was issued in May 2016 by the China State Administration
of Taxation (“SAT”) and the Ministry of Finance (“MOF”), Beijing Hollysys and Hangzhou Hollysys satisfied
the definitions of Key Software Enterprise, and applied a preferential tax rate of 10% in calendar year of 2015 and 2016.
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In addition to the changes to
the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies”
within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing
rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax
authorities subsequently determine that we should be classified as a resident enterprise, then our public holding company’s
global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise
status, see Item 3 “Key information—D. Risk Factors—Risks Relating to Doing Business in China—Under the
New Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC shareholders.”
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·
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Dividend Distribution
. Under PRC law, FIEs in China, may pay dividends only out of
their accumulated profits, if any, determined in accordance with PRC accounting principles. In addition, FIEs in China are required
to set aside at least 10% of their after-tax profit based on PRC accounting standards each year for their general reserves until
the accumulative amount of such reserves reaches 50% of registered capital. These reserves are not distributable as loans,
advances or cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its after-tax profits
to staff welfare and bonus funds, and expansion (development) funds, which, once allocated, may not be distributed to equity owners
except in the event of liquidation. In addition, under the new EIT Law, effective as of January 2008, dividends from our PRC
subsidiaries to us are subject to a withholding tax of 10%.
|
The foregoing summary does not purport
to be complete and is qualified by reference to the relevant provisions of applicable law in the jurisdictions in which we operate. We
believe that we are currently in compliance with all applicable laws and regulations relating to our business.
Southeast Asia.
The kinds of currency
regulation, taxation regimes and dividend restrictions imposed in China are not replicated in Singapore, Malaysia, and other Southeast
Asian markets in which we operate. Generally these markets are free-trade based economies, with no direct or indirect currency
or similar operational barriers.
Marketing, Sales and Customer
Support
Our marketing and sales activities are
focused on the development of and addressing the growing demand for automation and control products, systems and services in the
Chinese domestic market and the Southeast Asian, Indian and Middle Eastern markets. We insist on building cooperative relationships
with our customers, educating them about technological developments and reflecting their needs in our products and services.
Our sales teams consist of a complementary
group of sales personnel and hardware and software engineers from a variety of disciplines to tailor products to specific customer
needs. Employing a pool of skilled personnel in the early stage of a project accelerates the design and the subsequent production
of a particular customized solution, typically exceeding that of our competitors. Our sales teams possess significant hands-on,
industry-specific experience which permit them to do on-site process analyses, which in turn, makes the design and implementation
of upgrades simpler. The result is an automation system that is more effective, efficient and reliable, which in turn leads to
a truly satisfied customer.
Our sales force is organized into three
principal groups, (i) regional sales, to provide business consulting, promote pre-sale activity and serve as customer contacts,
(ii) customer relationship management, to manage relations with contracted customers and improve customer satisfaction by coordinating
responses to the client’s information requests, sale of supplemental parts or components and make customer visits, and (iii)
market planning, to facilitate strategic cooperation with certain specialized manufacturers, to expand the specific fields for
our products.
We identify and target market segments
and select target sales opportunities within our markets and conduct sales opportunity studies to ensure that adequate sales resources
are available. Sales quotas are assigned to all sales personnel according to annual sales plans. We classify market segments and
target opportunities on national and regional levels. Segmentation of our markets helps us to determine our primary sales targets
and to prepare monthly and quarterly sales forecasts. The sales team approves target projects, develops detailed sales promotion
strategies and prepares reports on order forecasts, technical evaluation, sales budgeting expense, schedules and competition analysis.
After the report has been approved, a marketing group is appointed, consisting of sales personnel and engineers. We employ marketing
personnel to conduct market research, to analyze user requirements and to organize marketing communications.
Our marketing team engages in a variety
of marketing activities, including:
|
·
|
publishing internal research reports and customer newsletters;
|
|
·
|
conducting seminars and conferences;
|
|
·
|
conducting ongoing public relations programs; and
|
|
·
|
creating and placing advertisements
|
We actively participate in technology-related
conferences and demonstrate our products at trade shows or at exhibitions targeted at our existing and potential customers. We
also evaluate a range of joint-marketing strategies and programs with our business partners in order to take advantage of their
strategic relationships and resources. We also support our customers by offering field services such as maintenance and training
services, which help customers to cut their costs and improve their operating efficiency.
As of June 30, 2017, we employed over 500 direct
sales personnel through our subsidiaries in mainland China, Southeast Asia, Middle East, Hong Kong and Macau
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C.
|
Organizational Structure
|
The following diagram illustrates our corporate
structure as of the date of this annual report. We are a holding company with no operations of our own. We conduct
our operations in China mainly through our Chinese operating companies, and in Southeast Asia and the Middle East mainly through
Concord and Bond Groups.
* On November
24, 2015, the Company established Concord Electrical Contracting, Ltd. (“CECL”) to explore the market in Qatar. CCPL
has a 49% direct ownership of CECL and the remaining 51% equity interest is held by a nominee shareholder. Through a series of
contractual arrangements, CCPL is entitled to appoint majority of directors of CECL who have the power to direct the activities
that significantly impact CECL’s economic performance. Further, CCPL is entitled to 95% of the variable returns from CECL’s
operations. As a result, despite of its minority direct ownership of CECL arrangements, CCPL is considered the primary beneficiary
of CECL.
Our corporate headquarters are located
at No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, 100176, China. Our telephone number
is (+86) 10 58981386. We maintain a website at
http://www.Hollysys.com
that contains information about our company,
but that information is not a part of this annual report.
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D.
|
Property, Plant and Equipment
|
Since 2010, our principal executive offices
have been located at No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, 100176, China. At
this location in Beijing, we have ample room for substantial expansion, as our needs require. We own the prepaid land leases
to the properties at the following principal locations, each of which contains principal administrative offices, sales and marketing
offices, research and development facilities, and manufacturing facilities:
Location
|
|
Approximate Sq. Meters
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Beijing
|
|
120,000
|
Hangzhou
|
|
25,000
|
Singapore
|
|
1,200
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Malaysia
|
|
3,400
|
The manufacturing facilities at the Beijing
and Hangzhou locations are used for the system integration production, including hardware testing instruments, auxiliary material
processing, packaging and shipping, and for self-made product integration production, including inspection and testing.
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ITEM 4A.
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UNRESOLVED STAFF COMMENTS
|
There are no unresolved staff comments.
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ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with our consolidated financial statements and
the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements
based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors, including the risk factors and the discussion of
our business set forth in other parts of this annual report on Form 20-F.
Overview
Through our operating subsidiaries, we
are one of the leading automation solutions providers in China, developing a number of core technologies and completing numerous
projects utilizing a wide array of automation products. With our philosophy of sincere concern for customers and our technical
innovation capabilities, we specialize in the research, development, production, sale and distribution of industrial automation
for digital railway signals and information systems, e-government, motor drive transmissions and non-safety controls for nuclear
power reactors.
The main channel through which we obtain
our automation system business is the procurement bidding process. Customers propose their requirements and specifications
via legally binding bid documents. Companies interested in obtaining the contract can respond with an appropriate bid.
We derive our revenue mainly from three
operating segments including industrial automation, railway transportation and mechanical and electrical solutions. Around 90%
of our total consolidated revenues derived from integrated contracts we have won through the bid process. In addition, we
generate revenue from sales of spare parts and component products to customers for maintenance and replacement purposes after the
completion of the integrated solution contract, and from providing maintenance and training service, after the warranty period
to customers for efficiency improvement or environment protection purpose; which tends to provide a recurring revenue stream. Spare
part and component sales and services rendered are not part of the integrated solutions contracts.
The purpose of an integrated solutions
contract is to furnish an automation system that provides the customer with a total solution for the automation or process control
requirement being addressed. The automation system and total solution we offer, consisting of hardware, software and services,
is customized to meet the customer’s particular needs and technical specifications. None of the hardware, software and
services has independent functionality, and therefore, is not sold separately to customers.
Order backlog of contracts presents the
amount of unrealized revenue to be earned from the contracts that we have won. The following table sets forth the information regarding
contracts we won during the last three fiscal years and the backlog at the dates indicated:
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|
Years Ended June 30,
|
|
|
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2015
|
|
|
2016
|
|
|
2017
|
|
Number of new contracts won during the year
|
|
|
2,256
|
|
|
|
2,031
|
|
|
|
2,777
|
|
Total amount of new contracts (million)
|
|
$
|
587.7
|
|
|
$
|
527.9
|
|
|
$
|
476.5
|
|
Average price per contract
|
|
$
|
260,505
|
|
|
$
|
259,916
|
|
|
$
|
171,599
|
|
|
|
Years Ended June 30,
|
|
Backlog Situation:
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Contracts newly entered and unfinished (million)
|
|
$
|
280.4
|
|
|
$
|
284.2
|
|
|
$
|
222.4
|
|
Contracts entered in prior years and unfinished (million)
|
|
$
|
288.1
|
|
|
$
|
243.0
|
|
|
$
|
301.6
|
|
Total amount of backlog (million)
|
|
$
|
568.5
|
|
|
$
|
527.2
|
|
|
$
|
524.0
|
|
Key Factors Affecting Our Growth,
Operating Results and Financial Condition
Our future growth, operating results and
financial condition will be affected by a number of factors including:
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·
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The ability in developing and acquiring new products and systems in order to improve competitiveness,
which can increase both sales revenue and margins. The success of our business depends in great measure on our ability to
keep pace with or even lead changes that occur in our industry.
|
|
·
|
The success in expanding our business in targeted emerging markets and overseas markets, which
may require us to overcome domestic competition and trade barriers.
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|
·
|
Our ability to retain our existing customers and to obtain additional business opportunities. Since
we do not have long-term purchase commitments from customers, our customers can shift to other competitors for future projects. It
is important to maintain our customer base in order to sustain and expand our business.
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|
·
|
The success of our business also depends on securing a steady stream of new customers. In
order for our business to continue to succeed and grow, it is vital to secure contracts with new customers on a regular basis.
|
|
·
|
The ability to secure adequate engineering resources and relatively low cost engineering staff
can increase our profitability and potential business prospects. One of the competitive advantages that we enjoy is the access
to lower cost engineering staff as compared to those of our Western and Japan-based competitors. The plentiful supply of affordable
engineering talent in China is a key element of our overall business strategy.
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|
·
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Further improvement in product design and maintaining high standard of quality control, which can
reduce or avoid product defects. Any product defects will result in additional costs and cause damage to our business reputation.
|
|
·
|
The ability to secure and protect our intellectual property rights is critical, as our business
is based on a number of proprietary products and systems, and we strive to strengthen and differentiate our product portfolio by
developing new and innovative products and product improvements.
|
|
·
|
The success in penetrating into the railway, conventional and nuclear power market sectors can
develop revenue streams and improve margins. In addition to the traditional industrial automation business, our plan for future
growth includes an increasing emphasis on rail control systems, power generation control systems and mechanical and electrical
solutions both in China and internationally.
|
|
·
|
The ability to obtain greater financial resources to match or even exceed our major competitors,
in order to compete effectively with them, and to weather any extended weaknesses in the automation and control market.
|
|
·
|
The continued growth in the Chinese and Southeast Asia industry in general. This continued
growth will create more business opportunities for us, because industrial companies in Asia are our principal source of revenues.
|
|
·
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The ability to maintain key personnel and senior management, who will have significant impact and
contribution to our future business. The ability to attract and retain additional qualified management, technical, sales and
marketing personnel will be vital.
|
|
·
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The continuation of the preferential tax treatment and subsidies currently available to our PRC
subsidiaries will be critical to our future operating results. If governmental subsidies were reduced or eliminated, our after-tax
income would be adversely affected.
|
|
·
|
The exchange rate fluctuation of RMB and SGD against US dollars will result in future translation
gain or loss as most of our assets are denominated in RMB and SGD. In addition, some of our raw materials, components and
major equipment are imported from overseas. In the event that the RMB and SGD appreciate against other foreign currencies,
our costs will decrease and our profitability will increase. However, the impact will be the other way around if RMB and SGD depreciate
against other foreign currencies.
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Critical Accounting Policies
Revenue recognition
Integrated solutions contracts
Revenues generated from designing, building,
and delivering customized integrated industrial automation systems are recognized over the contractual terms based on the percentage
of completion method. The contracts for designing, building, and delivering customized integrated industrial automation systems
are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract
size and ranges from 6 months to 5 years excluding the warranty period. The majority of the contract duration is longer than one
year.
Revenue generated from mechanical and electrical
solution contracts for the construction or renovation of buildings, rail or infrastructure facilities are also recognized over
the contractual terms based on the percentage of completion method. The contracts for mechanical and electrical solution are legally
enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract size and
the complexity of the construction work and ranges from 6 months to 3 years excluding the warranty period. The majority of the
contract duration is longer than one year.
In accordance with ASC 605-35,
Revenue
Recognition - Construction-Type and Production-Type Contracts
(“ASC 605-35”), recognition is based on an estimate
of the income earned to date, less income recognized in earlier periods. Extent of progress toward completion is measured using
the cost-to-cost method where the progress (the percentage complete) is determined by dividing costs incurred to date by the total
amount of costs expected to be incurred for the integrated solutions contract. Revisions in the estimated total costs of integrated
solutions contracts are made in the period in which the circumstances requiring the revision become known. Provisions, if any,
are made in the period when anticipated losses become evident on uncompleted contracts.
The Company reviews and updates the estimated
total costs of integrated solutions contracts at least annually. The Company accounts for revisions to contract revenue and estimated
total costs of integrated solution contracts, including the impact due to approved change orders, in the period in which the facts
that cause the revision become known as changes in estimates. Unapproved change orders are considered claims. Claims are recognized
only when it has been awarded by customers. Excluding the impact of change orders, if the estimated total costs of integrated solution
contracts, which were revised during the years ended June 30, 2015, 2016 and 2017, had been used as a basis of recognition of integrated
contract revenue since the contract commencement, net income for the years ended June 30, 2015, 2016 and 2017 would have been decreased
by $26,232, $30,270, and $12,062, respectively; basic net income per share for years ended June 30, 2015, 2016 and 2017 would have
been decreased by $0.45, $0.51, and $0.20, respectively; and diluted net income per share for the years ended June 30, 2015, 2016
and 2017, would have decreased by $0.44, $0.50, and $0.20, respectively. Revisions to the estimated total costs for the years ended
June 30, 2015, 2016 and 2017 were made in the ordinary course of business.
The Company combines a group of contracts
as one project if they are closely related and are, in substance, parts of a single project with an overall profit margin. The
Company segments a contract into several projects, when they are of different business substance, for example, with different business
negotiation, solutions, implementation plans and margins.
Revenue in excess of billings on the contracts
is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues recognized on the contracts are
recorded as deferred revenue until the above revenue recognition criteria are met.
The Company generally recognizes 100% of
the contractual revenue when the customer acceptance has been obtained and no further major costs are estimated to be incurred,
and normally this is also when the warranty period commences. Revenues are presented net of taxes collected on behalf of the government.
Product sales
Revenue generated from sales of products
is recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
Service rendered
The Company has in recent years extended
its service offerings as described below. The Company mainly provides two types of services:
Revenue from one-off services: the Company
provides different types of one-off services, including on-site maintenance service and training services which are generally completed
on site within a few working days. Revenue is recognized when the Company has completed all the respective services described in
the contracts, there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured.
Revenue from services covering a period
of time: the Company also separately sells extended warranties to their integrated solution customers for a fixed period. Such
arrangements are negotiated separately from the corresponding integrated solution system and are usually entered into upon the
expiration of the warranty period attached to the integrated solution contract. During the extended warranty period, the Company
is responsible for addressing issues related to the system. Part replacement is not covered in such services. The Company recognizes
revenue on a pro-rata basis over the contractual term.
Allowance for doubtful
accounts
The
carrying value of the Company’s accounts receivable and costs and estimated earnings in excess of billings, net of the allowance
for doubtful accounts, represents their estimated net realizable value.
An allowance for doubtful accounts is recognized
when it’s probable that the Company will not collect the amount and is written off in the period when deemed uncollectible.
The Company periodically reviews the status of contracts and decides how much of an allowance for doubtful accounts should be made
based on factors surrounding the credit risk of customers and historical experience. The Company does not require collateral from
its customers and does not charge interest for late payments by its customers.
Warranties
Warranties represent a major term under
an integrated contract, which will last, in general, for one to three years or otherwise specified in the terms of the contract.
The Company accrues warranty liabilities under an integrated contract as a percentage of revenue recognized, which is derived
from its historical experience, in order to recognize the warranty cost for an integrated contract throughout the contract period.
Goodwill
Goodwill represents the excess of the purchase
price over the estimated fair value of net tangible and identifiable intangible assets acquired. The Company assesses goodwill
for impairment in accordance with ASC subtopic 350-20 (“ASC 350-20”), Intangibles – Goodwill and Other, which
requires that goodwill is not amortized but to be tested for impairment at the reporting unit level at least annually and more
frequently upon the occurrence of certain events, as defined by ASC 350-20.
The Company’s goodwill outstanding
at June 30, 2017 was related to the acquisitions of two reporting units, Concord Group and Bond Group.
The Company has the option to assess qualitative
factors first to determine whether it is necessary to perform the two-step test in accordance with ASC 350-20. If the Company believes,
as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than
its carrying amount, the two-step quantitative impairment test described above is required. Otherwise, no further testing is required.
In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial
performance of the reporting unit, and other specific information related to the operations. In performing the two-step quantitative
impairment test, the first step compares the carrying amount of the reporting unit to the fair value of the reporting unit based
on either quoted market prices of the ordinary shares or estimated fair value using a combination of the income approach and the
market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired
and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value
of the reporting unit, then the Company must perform the second step of the impairment test in order to determine the implied fair
value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in
a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If
the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss.
The Company elected to assess goodwill for impairment using the two-step process for both Concord Group
and Bond Group for the year ended June 30, 2017, with assistances from a third-party appraiser. Concord and Bond Groups’
management judgment is involved in determining these estimates and assumptions, and actual results may differ from those used in
valuations. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting
unit which could trigger future impairment. The judgment in estimating the fair value of reporting units includes forecasts of
future cash flows, which are based on management’s best estimate of future revenue, gross profit, operating expenses growth
rates, future capital expenditure and working capital level, as well as discount rate determined by Weighted Average Cost of Capital
approach and the selection of comparable companies operating in similar businesses. The Company also reviewed marketplace and/or
historical data to assess the reasonableness of assumptions such as discount rate and working capital level.
The carrying amount of Concord Group exceeded
its fair value as of June 30, 2017, and a goodwill impairment charge of $11,211 was recorded in the statement of comprehensive
income based on the second step testing result.
There are uncertainties surrounding the
amount and timing of future expected cash flows as they may be impacted by negative events such as a slowdown in the mechanical
and electrical engineering sector, deteriorating economic conditions in the geographical areas Concord Group operates in, political,
economic and social uncertainties in the Middle East, increasing competitive pressures and fewer than expected mechanical and
electrical solution contracts awarded to Concord Group. These events can negatively impact demand for Concord Group’s services
and result in actual future cash flows being less than forecasted or delays in the timing of when those cash flows are expected
to be realized. Further, the timing of when actual future cash flows are received could differ from the Company’s estimates,
which are based on historical trends and does not factor in unexpected delays in project commencement or execution.
The fair value of Bond Group exceeded its
carrying amounts as of June 30, 2017, and therefore goodwill related to Bond Group was not impaired and the Company was not required
to perform further step testing.
Impairment of long-lived
assets other than goodwill
The Company evaluates its long-lived assets
or asset group including acquired intangibles with finite lives for impairment whenever events or changes in circumstances (such
as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying
amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Company evaluates the impairment
by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets
and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets,
the Company recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally
based upon discounted cash flows or quoted market prices.
Income taxes
The Company follows the liability method
of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period
in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based
on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the
enactment date of the change in tax rate.
The Company adopted ASC 740,
Income
Taxes
(“ASC 740”)
,
which clarifies the accounting and disclosure for uncertainty in income taxes. Interests
and penalties arising from underpayment of income taxes shall be computed in accordance with the related tax laws. The amount of
interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized
and the amount previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with
ASC 740 are classified in the financial statements as a component of income tax expense. In accordance with the provisions of ASC
740, the Company recognizes in its financial statements the impact of a tax position if a tax return position or future tax position
is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet
the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater
than fifty percent likelihood of being realized upon settlement. The Company’s estimated liability for unrecognized tax positions
which is included in the accrued liabilities is periodically assessed for adequacy and may be affected by changing interpretations
of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations.
The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases,
appeal or litigation process. The actual benefits ultimately realized may differ from the Company’s estimates. As each audit
is concluded, adjustments, if any, are recorded in the Company’s financial statements. Additionally, in future periods, changes
in facts, circumstances, and new information may require the Company to adjust the recognition and measurement estimates with regard
to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes
occur.
Share-based compensation
The Company accounts for share-based compensation
in accordance with ASC 718,
Compensation-Stock Compensation
(“ASC 718”). The Company recognizes compensation
cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award. The compensation cost for each vesting tranche in an award subject to performance vesting is recognized
ratably from the service inception date to the vesting date for each tranche. To the extent the required service and performance
conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating
to those awards are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary,
in a subsequent period if actual forfeitures differ from initial estimates.
For share-based awards that are subject
to performance-based vesting conditions in addition to time-based vesting, the Company recognizes the estimated grant-date fair
value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the vesting period based
upon the Company’s determination of whether it is probable that the performance-based criteria will be achieved. At each
reporting period, the Company reassesses the probability of achieving the performance-based criteria. Determining whether the
performance-based criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised
periodically based on changes in the probability of achieving the performance-based criteria. Revisions are reflected in the period
in which the estimate is changed. If the performance-based criteria are not met, no share-based compensation expense is recognized,
and, to the extent share-based compensation expense was previously recognized, such share-based compensation expense is reversed.
Recent accounting
pronouncements
In
August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-14, which defers
the effective date of ASU 2014-09
Revenue from Contracts with Customers (Topic 606) ("
ASU 2014-09") by one year
and allows entities the option to early adopt the new revenue standard as of the original effective date. Issued in May 2014,
ASU 2014-09 provided guidance on revenue recognition on contracts with customers to transfer goods or services or on contracts
for the transfer of nonfinancial assets. ASU 2014-09 requires that revenue recognition on contracts with customers depict the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services.
ASU 2014-09 will be effective for us on July 1, 2018. The new revenue
standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized
in retained earnings as of the date of adoption. The Company preliminarily plans to use the modified retrospective method and
has developed an implementation plan. We are currently evaluating the impact of adoption of this guidance, including required
disclosures, and based upon current analysis, the Company does not expect a significant impact on processes, systems or controls
.
The company will continue their assessment, which may identify other impacts of the adoption of ASC 606.
In November 2015, the FASB issued ASU No.
2015-17 (“ASU 2015-17”),
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. ASU 2015-17
simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities
and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all
deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update
are effective for fiscal years beginning after December 15, 2016, and interim periods therein and may be applied either prospectively
or retrospectively to all periods presented. Early adoption is permitted. The Company will adopt ASU 2015-17 on July 1, 2017, and
does not expect this adoption of this update to have a material effect on the consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02 (“ASU 2016-02”),
Leases
. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU
2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the
lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public
companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption
is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
On March 30, 2016, the FASB issued ASU
2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”),
which relates to the accounting for employee share-based payments. This standard addresses several aspects of 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. This standard will be effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The new standard will be effective for the Company
for the fiscal year beginning July 1, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact
of this accounting standard on its consolidated financial statements, but does not expect the impact of adoption to be material.
In August 2016, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments.
This new standard will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning
after December 15, 2017, which means that it will be effective for the Company in the first quarter of the fiscal year beginning
July 1, 2018. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case
the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
evaluating the impact of the pending adoption of ASU 2016-15 on its consolidated financial statements.
In October 2016, the FASB issued ASU No.
2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. Under the new standard, the selling
(transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the purchasing
(receiving) entity is required to recognize a deferred tax asset or liability, as well as the related deferred tax benefit or expense,
upon purchase or receipt of the asset. This pronouncement is effective for reporting periods beginning after December 15, 2017,
with early adoption permitted. The Group is still evaluating the effect that this guidance will have on the consolidated financial
statements and related disclosures.
In January 2017, the FASB issued ASU No.
2017-01,
Business Combinations (Topic 805): Clarifying Definition of a Business (“ASU 2017-01”)
. ASU 2017-01 clarifies
the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised
framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the
definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions
of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions.
This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017,
with early adoption permitted for transactions that have not been reported in previously issued (or available to be issued) financial
statements. The Group does not believe this standard will have a material impact on the results of operations or financial condition.
In January 2017, the FASB issued Accounting
Standards Update No. 2017-04(“ASU 2017-04”),
Intangibles – Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment
. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to
measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s
carrying amount over its fair value. This standard is effective for public business entities in the first quarter of 2020. Early
adoption is permitted. The Company is currently evaluating the effect that this guidance will have on our consolidated financial
statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation: Scope of Modification Accounting
. The guidance clarifies when changes to the terms
or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting
guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual periods,
including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted.
The following are some financial highlights
for the fiscal year ended June 30, 2017:
|
·
|
Total assets increased by approximately $54.1 million,
from approximately $1,004.2 million as of June 30, 2016, to approximately $1,058.3 million as of June 30, 2017. The increase
was mainly due to an increase of approximately $53.8 million in time deposits with maturities over three months and approximately
$28.5 million in investments in equity investees, which was partially offset by the decrease of costs and estimated earnings in
excess of billings of approximately $27.8 million.
|
|
·
|
Cash and cash equivalents decreased by approximately $31.5
million, from approximately $229.1 million as of June 30, 2016, to approximately $197.6 million as of June 30, 2017. The decrease
was mainly due to approximately $22.8 million was placed in time deposits with original maturities over three months.
|
|
·
|
Accounts receivable at June 30, 2017 were approximately
$246.6 million, an increase of approximately $9.4 million, or 4.0%, compared to approximately $237.2 million at June 30,
2016. The increase was mainly due to the fact that the Company successfully converted a larger portion of cost and estimated earnings
in excess of billings into accounts receivable.
|
|
·
|
Cost and estimated earnings in excess of billings as of June 30, 2017, were approximately $162.1 million compared to approximately
$189.9 million as of June 30, 2016, representing a decrease of approximately $27.8 million, or 14.7%. The cost and estimated earnings
in excess of billings were accounted for based on the difference between percentages of completion and progress billings. Different
contracts have different billing arrangements, and consequently result in different cost and estimated earnings in excess of billings.
The higher or lower balance of cost and estimated earnings in excess of billings as of the balance sheet date was due to the different
contracts mix with different billing arrangements.
|
|
·
|
Inventory increased by approximately $9.3 million, from approximately $36.4 million as of June 30, 2016, to approximately $45.7
million as of June 30, 2017.
|
|
·
|
Property, plant and equipment
increased
by approximately $0.6 million, from approximately $79.9 million as of June 30, 2016, to approximately $80.5 million as of June
30, 2017.
|
|
·
|
Investments in equity investees increased by approximately $28.5 million, from $18.7 million as of June 30, 2016, to approximately
$47.2 million as of June 30, 2017. The increase was mainly due to the dilution of the Company’s interests in Hollycon.
In July 2016, the Company’s interests in Hollycon were diluted from 51.0% to 30.0% and lost the control of Hollycon, and
then the 30% interest in Hollycon was accounted for as an investment in an equity investee in the Company’s balance sheet.
|
|
·
|
Total liabilities increased by approximately $13.2 million
or 4.1% from approximately $321.5 million at June 30, 2016, to approximately $334.7 million as of June 30, 2017. The
increase in liabilities was mainly due to an increase of approximately $25.4 million in deferred revenue, which was partially
offset by the decrease of other tax payable used of approximately $7.6 million.
|
|
·
|
Short-term bank loans increased by approximately $5.0 million,
from approximately $3.1 million at June 30, 2016, to $8.1 million at June 30, 2017.
|
|
·
|
Accounts payable increased by approximately $15.9 million, or 14.9% from approximately $106.8 million at June 30, 2016, to
$122.7 million at June 30, 2017, mainly due to more favorable payment terms negotiated with the suppliers.
|
|
·
|
Deferred revenue increased by approximately $25.4 million,
or 31.0%, from approximately $82.0 million at June 30, 2016, to approximately $107.4 million at June 30, 2017. The deferred revenue
was accounted for based on the difference between progress billings and percentages of completion. Different contracts have different
billing arrangements, and consequently result in different deferred revenue. The higher or lower balance of deferred revenue as
of the balance sheet date was due to the different contracts mix with different billing arrangements.
|
|
·
|
Deferred tax assets were $8.9 million as of June 30, 2017.
Based on the Company’s historical operating results and order backlog, the Company believes that it is more than likely
that the deferred tax assets net of valuation allowance would be realized.
|
Comparison of Fiscal
Years Ended June 30, 2017 and 2016
Revenues
: For the fiscal year
ended June 30, 2017, total revenues amounted to approximately $431.9 million, a decrease of approximately $112.4 million, compared
to approximately $544.3 million for the prior fiscal year, representing a decrease of 20.6%. In July 2016, the company’s
interests in Hollycon were diluted from 51.0% to 30.0% and the Company lost the control of Hollycon. As a result, Hollycon’s
financials were not included in the Company’s consolidated financials since July 2016. If Hollycon’s revenue were excluded
from the comparable figure for the prior fiscal year, the total revenues for fiscal year 2017 would have been decreased by 16.7%.
Integrated contract revenue accounted for
approximately $385.5 million of total revenues, a decrease of approximately $92.3 million or 19.3%, compared to approximately $477.8
million for the prior fiscal year. The decrease in integrated revenues was mainly composed of a decrease of approximately
$84.6 million or 38.0% in rail transportation and a decrease of approximately $10.2 million or 7.6% in industrial automation projects.
The revenue decrease was partially offset by an increase of $8.3 million or 8.7% in mechanical and electrical solutions business.
Approximately $32.7 million of total
revenues was generated from product sales, a decrease of approximately $21.8 million, or 40.0% compared to approximately
$54.5 million in product sales revenue for the prior year. Excluding Hollycon’s revenue from the comparable figure for
the prior fiscal year, the products sales revenue for fiscal year 2017 increased by 13.9 %
.
Product
sales revenue depends on overall demand for the Company’s spare parts for customers’ maintenance and replacement
purposes.
Approximately $13.8 million of total revenue
was generated from service rendered, an increase of $1.8 million or 15.0% compared to $12.0 million of last year.
The Company’s total revenue by segments
was as follows:
(In USD millions)
|
|
|
Fiscal year ended June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
$
|
|
|
% to Total Revenue
|
|
|
$
|
|
|
% to Total Revenue
|
|
Industrial Automation
|
|
|
182.9
|
|
|
|
33.6
|
%
|
|
|
172.7
|
|
|
|
39.9
|
%
|
Rail Transportation
|
|
|
240.3
|
|
|
|
44.2
|
%
|
|
|
155.7
|
|
|
|
36.1
|
%
|
Mechanical and Electrical Solution
|
|
|
95.3
|
|
|
|
17.5
|
%
|
|
|
103.5
|
|
|
|
24.0
|
%
|
Miscellaneous
|
|
|
25.8
|
|
|
|
4.7
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Total
|
|
|
544.3
|
|
|
|
100.0
|
%
|
|
|
431.9
|
|
|
|
100.0
|
%
|
Order Backlog
: An important
measure of the stability and growth of the Company’s business is the size of its order backlog, which represents the total
amount of unrecognized contract revenue associated with existing contracts. Our order backlog as of June 30, 2017 amounted
to approximately $524.0 million, representing a decrease of approximately $3.2 million, or 0.6%, compared to approximately $527.2
million as of June 30, 2016.
Of the total order backlog as of June 30,
2017, the unrecognized revenue associated with new contracts signed in the fiscal year 2017 was approximately $222.4 million and
the amount brought forward from prior periods was approximately $301.6 million, comparing to the total backlog as of June
30, 2016 of approximately $243.0 million from new contracts signed in fiscal year 2016, and approximately $284.2 million from contracts
carried forward from prior year.
Cost of revenues
: Mirroring
the categories of revenues, the cost of revenues can also be divided into three components including cost of integrated contracts,
cost of products sold and cost of service rendered. For the fiscal year ended June 30, 2017, the total cost of revenues amounted
to approximately $291.5 million, a decrease of approximately $47.1 million, or 13.9%, compared to approximately $338.6 million
for the prior fiscal year. The decrease was due to an approximate $33.1 million decrease in the cost of integrated contracts,
and a decrease of approximately $14.1 million or 58.5% in the cost of products.
The cost of integrated contract revenue
consists primarily of three components: cost of equipment and materials, labor costs and other manufacturing expenses including
but not limited to detecting expense, technology service fee, all of which incurred during the designing, building and delivering
customized automation solutions process to customers. For the fiscal year ended June 30, 2017, the total cost of integrated contracts
was approximately $277.5 million, compared to approximately $310.5 million for the prior fiscal year, representing a decrease of
approximately $33.0 million, or 10.6%. The decrease was primarily due to a decrease of approximately $41.3 million in
cost of equipment and materials, which was partially offset by an increase of approximately $6.8 million in other manufacturing
expenses, and an increase of approximately $1.5 million in labor cost. Of the total cost of integrated contract revenue for the
fiscal year 2017, cost of equipment and materials accounted for approximately $161.4 million, compared to approximately $202.8
million for the prior fiscal year; labor cost accounted for approximately $78.4 million, compared to approximately $71.6 million
for the prior fiscal year; and other manufacturing expenses accounted for approximately $37.6 million, compared to approximately
$36.2 million for the prior fiscal year. Of the total integrated contract revenue for the fiscal year 2017, cost of equipment and
materials accounted for 37.4%, compared to 37.2% for the prior fiscal year; labor cost accounted for 18.2%, compared to 13.2% for
the prior fiscal year; and other manufacturing expenses accounted for 8.7%, compared to 6.6% for the prior fiscal year. The cost
components of integrated contracts were determined and varied according to requirements of different customers.
Sales of products represent sales of spare
parts (either company manufactured or purchased from outside vendors) to customers for maintenance and replacement purposes. Given
the fact that the products purchased from outside vendors have different functions and capabilities from our self-made products,
we decide whether to purchase or manufacture the necessary products based on the needs and preferences of different customers while
considering the efficiency factor. Therefore, as a percentage of the cost of products sold, the self-made products and purchased
products have varied significantly from time to time. The cost of products sold for the fiscal year ended June 30, 2017 was
approximately $10.0 million, a decrease of approximately $14.0 million, compared to approximately $24.0 million for the prior fiscal
year.
As for the cost of the service revenue,
our employees spend time and incur expenses while they are with the customers. From time to time, materials costs related to the
service are incurred, especially for providing extended warranty services. The cost of service revenue for fiscal year ended June
30, 2017 was approximately $4.0 million, stayed at about the same level, compared to approximately $4.0 million for the prior fiscal
year.
Gross margin
: For the fiscal
year ended June 30, 2017, as a percentage of total revenues, the overall gross margin was 32.5%, compared to 37.8% for the prior
fiscal year. The gross margin for integrated contracts was 28.0% for the year ended June 30, 2017, compared to 35.0% for
the prior year. The decrease in gross margin for integrated contracts was mainly due to our different sales mix during the
fiscal year 2017. The gross margin for products sold was 69.5% for the fiscal year ended June 30, 2017, compared to 56.0%
for the prior fiscal year. The gross margin for service provided was 70.8% for the fiscal year ended June 30, 2017, compared to
66.4% for the prior fiscal year.
Selling expenses
: Selling expenses
mainly consist of compensation, traveling and administrative expenses related to marketing, sales and promotion activities incurred
by the Company’s marketing departments. Selling expenses were approximately $24.4 million for the fiscal year ended
June 30, 2017, a decrease of 4.7%, or approximately $1.2 million, compared to approximately $25.6 million for the prior fiscal
year. As a percentage of total revenues, selling expenses accounted for 5.7% and 4.7% for the fiscal years ended June 30, 2017
and 2016, respectively. The Company has established guidelines specifically tailored for different industries and regions
to monitor and evaluate sales performance, and to control selling expenses.
General and administrative expenses
: General
and administrative expenses mainly include compensation, traveling and other administrative expenses of non-sales-related departments,
such as the finance department, information systems department and human resources department. General and administrative
expenses amounted to approximately $44.3 million for the fiscal year ended June 30, 2017, representing a decrease of approximately
$1.5 million, or 3.3%, compared to approximately $45.8 million for the prior fiscal year. The decrease was mainly due to a decrease
of $1.2 million in bad debt provision. As a percentage of total revenues, general and administrative expenses were 10.3% and 8.4%
for the fiscal years ended June 30, 2017 and 2016, respectively.
Goodwill impairment charge:
The
Company engaged an independent third-party appraiser to perform goodwill impairment test on June 30 in each year, to judge whether
the carrying amount of goodwill related to Concord and Bond Groups exceeded its fair value. The Company concluded that the carrying
amount of goodwill associated with Concord Group was less than fair value of the goodwill and recorded a goodwill impairment charge
of $11,211 and nil for the fiscal years ended June 30, 2017 and 2016, respectively. The impairment charge was mainly resulted from
a revision of Concord Group’s long-term financial outlook.
Research and development expenses
:
Research and development expenses represent mostly employee compensation, materials consumed and experiment expenses related to
specific new product research and development, as well as any expenses incurred for basic research on advanced technologies. For
the fiscal year ended June 30, 2017, research and development expenses were approximately $30.1 million, representing a decrease
of approximately $6.5 million, or 17.7%, compared to approximately $36.6 million for the prior fiscal year. As a percentage of
total revenues, research and development expenses were 7.0% and 6.7% for the fiscal years ended June 30, 2017 and 2016, respectively.
VAT refunds and government subsidies
: The
state tax bureaus in China provide refunds out of the value added tax (“VAT”) they collect in order to encourage the
research and development efforts made by certain qualified enterprises. Some of our subsidiaries in China received such
refunds. All VAT refunds, that have no further conditions to be met, are recognized in the statements of comprehensive income
when cash or approval from the tax bureaus is received. For the fiscal year ended June 30, 2017, VAT refunds were approximately
$16.9 million, compared to approximately $20.0 million for the prior fiscal year, decreasing by approximately $3.1 million, or
15.5%. As a percentage of total revenues, VAT refunds were 3.9% and 3.7% for the fiscal years ended June 30, 2017 and 2016,
respectively.
The local governments in China also provide
financial subsidies to encourage research and development efforts made by certain qualified enterprises. Some of our subsidiaries
received such subsidies. For the government subsidies that have no further conditions to be met, the funds received are recognized
in the statements of comprehensive income; for the subsidies that have certain operating conditions yet to be met, the fund received
are recorded as liabilities and will be released to income when the conditions are met.
Subsidy income from the government
amounted to approximately $12.9 million and $2.9 million for the fiscal years ended June 30, 2017 and 2016, respectively, an increase
of approximately $10.0 million, or 344.8%.
Income from operations
: Income
from operations decreased by approximately $60.3 million, from approximately $120.6 million for the fiscal year ended June 30,
2016 to approximately $60.3 million for the fiscal year ended June 30, 2017. The decrease was mainly due to the decrease of $65.3
million in the gross profit.
Interest income
: For the fiscal
year ended June 30, 2017, interest income decreased by approximately $2.2 million, or 37.1% from approximately $5.9 million for
the prior year, to approximately $3.7 million for the current period. As a percentage of total revenue, interest income accounted
for 0.9% and 1.1% for the fiscal years ended June 30, 2017 and 2016, respectively. The interest income was mainly earned from time
deposits with maturities over three months.
Interest expenses
: For the
fiscal year ended June 30, 2017, interest expenses decreased by approximately $0.5 million, or 33.2% from approximately $1.4 million
for the prior year, to approximately $0.9 million for the current period. As a percentage of total revenue, interest expenses accounted
for 0.2% and 0.3% for the fiscal years ended June 30, 2017 and 2016, respectively. The interest expenses were incurred by the short-term
and long-term loan/bond we had.
Other income (expenses), net
: For
the fiscal year ended June 30, 2017, the other income (expenses), net decreased by approximately $2.4 million from approximately
$4.1 million for the prior year, to approximately $1.7 million for the current period. The decrease was mainly due to the fluctuation
of fair value of the contingent consideration related to the acquisition of Bond Group. We recorded approximately $1.7 million
gain for the prior fiscal year.
Income tax expenses
: For the
fiscal year ended June 30, 2017, the Company’s income tax expense was approximately $14.4 million for financial reporting
purposes, an increase of approximately $0.2 million, as compared to $14.2 million for the prior year. During the fiscal year
2017, the Company recorded a deferred tax expense of $5.4 million related to the dilution of the Company’s interest in Hollycon.
In addition, in the process of Settlement and Payment of Enterprise Income Tax for calendar year 2016 in May 2017, Beijing Hollysys
and Hangzhou Hollysys were eligible for a preferential income tax rate of 10% for calendar year 2016 due to its “Key Software
Enterprise” status, instead of the 15% used by the Company in calendar year 2016. As a result, the Company recorded a tax
benefit of $4.4 million during the fourth quarter of fiscal 2017. Excluding the impact of the abovementioned tax expenses and tax
benefit, the effective tax rate for the current year is 16.1%.
Net income attributable to non-controlling
interest
: The non-controlling interests of the Company include non-controlling shareholders’ interests in each subsidiary.
For the fiscal year ended June 30, 2017, the non-controlling interest was the ownership interest of 5% in CECL. The net income
attributable to non-controlling interest for the fiscal year ended June 30, 2017 was approximately nil, a decrease of approximately
$5.0 million, from approximately $5.0 million for the prior year. The decrease was mainly due to the disposal of Hollycon (Italy)
and dilution and divestment of Hollycon, there is no other non-controlling interests except for 5% in CECL.
Net income and earnings per share attributable
to Hollysys
:
For
the fiscal year ended June 30, 2017, net income attributable to Hollysys amounted to approximately $68.9 million, representing
a decrease of approximately $49.6 million, as compared to approximately $118.5 million for the prior year. The basic and diluted
earnings per share were $1.15 and $1.14 for the year ended June 30, 2017, as compared to $2.00 and $1.97 for the prior year, representing
a decrease of $0.85 and $0.83, respectively. The decrease was primarily due to the lower net income attributable to Hollysys
compared to fiscal 2016.
Comparison of Fiscal
Years Ended June 30, 2016 and 2015
Revenues
: For the fiscal year
ended June 30, 2016, total revenues amounted to approximately $544.3 million, an increase of approximately $12.9 million, compared
to approximately $531.4 million for the prior fiscal year, representing an increase of 2.4%.
Integrated contract revenue accounted for
approximately $477.8 million of total revenues, a decrease of approximately $3.2 million or 0.7%, compared to approximately $481.0
million for the prior fiscal year. The decrease in integrated revenues was mainly composed of a decrease of approximately
$40.0 million or 21.3% in industrial automation projects and a decrease of approximately $14.2 million or 13.0% in mechanical and
electrical solutions business. The revenue decrease was partially offset by an increase of $51.0 million or 27.7% in rail transportation.
Approximately $54.5 million of total revenues
was generated from product sales, an increase of approximately $14.7 million, or 36.9% compared to approximately $39.8 million
in product sales revenue for the prior year. Product sales revenue depends on overall demand for the Company’s spare
parts for customers’ maintenance and replacement purposes.
Approximately $12.0 million of total revenue
was generated from service rendered, an increase of $1.4 million or 13.2% compared to $10.6 million of last year.
The Company’s total revenue by segments
was as follows:
(In USD millions)
|
|
|
Fiscal year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
$
|
|
|
% to Total Revenue
|
|
|
$
|
|
|
% to Total Revenue
|
|
Industrial Automation
|
|
|
213.3
|
|
|
|
40.1
|
%
|
|
|
182.9
|
|
|
|
33.6
|
%
|
Rail Transportation
|
|
|
193.3
|
|
|
|
36.4
|
%
|
|
|
240.3
|
|
|
|
44.2
|
%
|
Mechanical and Electrical Solution
|
|
|
110.0
|
|
|
|
20.7
|
%
|
|
|
95.3
|
|
|
|
17.5
|
%
|
Miscellaneous
|
|
|
14.8
|
|
|
|
2.8
|
%
|
|
|
25.8
|
|
|
|
4.7
|
%
|
Total
|
|
|
531.4
|
|
|
|
100.0
|
%
|
|
|
544.3
|
|
|
|
100.0
|
%
|
Integrated Contract Revenue Backlog
: An
important measure of the stability and growth of the Company’s business is the size of its integrated contract backlog, which
represents the total amount of unrecognized integrated contract revenue associated with existing contracts. Our integrated
contract backlog as of June 30, 2016 amounted to approximately $527.2 million, representing a decrease of approximately $41.2 million,
or 7.3%, compared to approximately $568.5 million as of June 30, 2015.
Of the total integrated contract backlog
as of June 30, 2016, the unrecognized revenue associated with new contracts signed in the fiscal year 2016 was approximately $284.2
million and the amount brought forward from prior periods was approximately $243.0 million, comparing to the total backlog
as of June 30, 2015 of approximately $280.5 million from new contracts signed in fiscal year 2015, and approximately $288.1 million
from contracts carried forward from prior year.
Cost of revenues
: Mirroring
the categories of revenues the cost of revenues can also be divided into three components including cost of integrated contracts,
cost of products sold and cost of service rendered. For the fiscal year ended June 30, 2016, the total cost of revenues amounted
to approximately $338.6 million, an increase of approximately $21.6 million, or 6.8%, compared to approximately $317.0 million
for the prior fiscal year. The increase was due to an approximate $10.2 million increase in the cost of integrated contracts,
and an increase of approximately $11.5 million or 91.5% in the cost of products.
The cost of integrated contract revenue
consists primarily of three components: cost of equipment and materials, labor costs and other manufacturing expenses including
but not limited to detecting expense, technology service fee, all of which incurred during the designing, building and delivering
customized automation solutions process to customers. For the fiscal year ended June 30, 2016, the total cost of integrated contracts
was approximately $310.5 million, compared to approximately $300.3 million for the prior fiscal year, representing an increase
of approximately $10.2 million, or 3.4%. The increase was primarily due to an increase of approximately $8.2 million
in cost of equipment and materials, an increase of approximately $1.0 million in other manufacturing expenses, and an increase
of approximately $1.0 million in labor cost. Of the total cost of integrated contract revenue for the fiscal year 2016, cost of
equipment and materials accounted for approximately $202.8 million, compared to approximately $194.6 million for the prior fiscal
year; labor cost accounted for approximately $71.6 million, compared to approximately $70.6 million for the prior fiscal year;
and other manufacturing expenses accounted for approximately $36.2 million, compared to approximately $35.1 million for the prior
fiscal year. Of the total integrated contract revenue for the fiscal year 2016, cost of equipment and materials accounted for 37.2%,
compared to 36.6% for the prior fiscal year; labor cost accounted for 13.2%, compared to 13.3% for the prior fiscal year; and other
manufacturing expenses accounted for 6.6%, compared to 6.6% for the prior fiscal year. The cost components of integrated contracts
were determined and varied according to requirements of different customers.
Sales of products represent sales of spare
parts (either company manufactured or purchased from outside vendors) to customers for maintenance and replacement purposes. Given
the fact that the products purchased from outside vendors have different functions and capabilities from our self-made products,
we decide whether to purchase or manufacture the necessary products based on the needs and preferences of different customers while
considering the efficiency factor. Therefore, as a percentage of the cost of products sold, the self-made products and purchased
products have varied significantly from time to time. The cost of products sold for the fiscal year ended June 30, 2016 was
approximately $24.0 million, an increase of approximately $11.5 million, compared to approximately $12.5 million for the prior
fiscal year.
As for the cost of the service revenue,
our employees spend time and incur expenses while they are with the customers. From time to time, materials costs related to the
service are incurred, especially for providing extended warranty services. The cost of service revenue for fiscal year ended June
30, 2016 was approximately $4.0 million, stayed at about the same level, compared to approximately $4.1 million for the prior fiscal
year.
Gross margin
: For the fiscal
year ended June 30, 2016, as a percentage of total revenues, the overall gross margin was 37.8%, compared to 40.3% for the prior
fiscal year. The gross margin for integrated contracts was 35.0% for the year ended June 30, 2016, compared to 37.6% for the
prior year. The decrease in gross margin for integrated contracts was mainly due to our different sales mix during the fiscal
year 2016. The gross margin for products sold was 56.0% for the fiscal year ended June 30, 2016, compared to 68.4% for the
prior fiscal year. The gross margin for service provided was 66.4% for the fiscal year ended June 30, 2016, compared to 61.4% for
the prior fiscal year.
Selling expenses
: Selling expenses
mainly consist of compensation, traveling and administrative expenses related to marketing, sales and promotion activities incurred
by the Company’s marketing departments. Selling expenses were approximately $25.6 million for the fiscal year ended
June 30, 2016, a decrease of 2.7%, or approximately $0.7 million, compared to approximately $26.3 million for the prior fiscal
year. As a percentage of total revenues, selling expenses accounted for 4.7% and 4.9% for the fiscal year ended June 30, 2016 and
2015, respectively. The Company has established guidelines specifically tailored for different industries and regions to monitor
and evaluate sales performance, and to control selling expenses.
General and administrative expenses
: General
and administrative expenses mainly include compensation, traveling and other administrative expenses of non-sales-related departments,
such as the finance department, information systems department and human resources department. General and administrative
expenses amounted to approximately $45.8 million for the fiscal year ended June 30, 2016, representing a decrease of approximately
$5.0 million, or 9.8%, compared to approximately $50.8 million for the prior fiscal year. The decrease was mainly due to a decrease
of $6.5 million in bad debt provision. As a percentage of total revenues, general and administrative expenses were 8.4% and 9.6%
for the fiscal years ended June 30, 2016 and 2015, respectively.
Research and development expenses
:
Research and development expenses represent mostly employee compensation, materials consumed and experiment expenses related to
specific new product research and development, as well as any expenses incurred for basic research on advanced technologies. For
the fiscal year ended June 30, 2016, research and development expenses were approximately $36.6 million, representing an approximately
$0.8 million, or 2.2%, compared to approximately $35.8 million for the prior fiscal year. As a percentage of total revenues, research
and development expenses were 6.7% and 6.7 % for the fiscal years ended June 30, 2016 and 2015, respectively.
VAT refunds and government subsidies
: The
state tax bureaus in China provide refunds out of the value added tax (“VAT”) they collect in order to encourage the
research and development efforts made by certain qualified enterprises. Some of our subsidiaries in China received such
refunds. All VAT refunds, that have no further conditions to be met, are recognized in the statements of comprehensive income
when cash or approval from the tax bureaus is received. For the fiscal year ended June 30, 2016, VAT refunds were approximately
$20.0 million, compared to approximately $25.5 million for the prior fiscal year, decreasing by approximately $5.5 million, or
21.6%. As a percentage of total revenues, VAT refunds were 3.7% and 4.8% for the fiscal years ended June 30, 2016 and 2015,
respectively.
The local governments in China also provide
financial subsidies to encourage research and development efforts made by certain qualified enterprises. Some of our subsidiaries
received such subsidies. For the government subsidies that have no further conditions to be met, the funds received are recognized
in the statements of comprehensive income; for the subsidies that have certain operating conditions yet to be met, the fund received
are recorded as liabilities and will be released to income when the conditions are met.
Subsidy income from the government
amounted to approximately $2.9 million and $4.9 million for the fiscal years ended June 30, 2016 and 2015, respectively, a decrease
of approximately $2.0 million, or 40.8%.
Income from operations
: Income
from operations decreased by approximately $9.5 million, from approximately $130.1 million for the fiscal year ended June 30, 2015
to approximately $120.6 million for the fiscal year ended June 30, 2016. The decrease was mainly due to the decrease of $8.7 million
in the gross profit.
Interest income
: For the fiscal
year ended June 30, 2016, interest income increased by approximately $2.2 million, or 59.5% from approximately $3.7 million for
the prior year, to approximately $5.9 million for the current period. As a percentage of total revenue, interest income accounted
for 1.1% and 0.7% for the fiscal years ended June 30, 2016 and 2015, respectively. The interest income was mainly earned from time
deposits with maturities over three months.
Interest expenses
: For the
fiscal year ended June 30, 2016, interest expenses decreased by approximately $0.4 million, or 22.2% from approximately $1.8 million
for the prior year, to approximately $1.4 million for the current period. As a percentage of total revenue, interest expenses accounted
for 0.3% and 0.3% for the fiscal years ended June 30, 2016 and 2015, respectively. The interest expenses were incurred by the short-term
and long-term loan/bond we had.
Other income (expenses), net
: For
the fiscal year ended June 30, 2016, the other income (expenses), net increased by approximately $1.5 million from approximately
$2.6 million for the prior year, to approximately $4.1 million for the current period. The increase was mainly due to the fluctuation
of fair value of the contingent consideration related to the acquisition of Bond Group. We recorded approximately $1.7 million
gain for current year as compared to approximately $0.4 million gain from the prior fiscal year.
Income tax expenses
: For the
year ended June 30, 2016, the Company’s income tax expense was approximately $14.2 million for financial reporting purposes,
a decrease of approximately $11.8 million, as compared to $26.0 million for the prior year. According to the
Notification
on Preferential Enterprise Income Tax of Software and Integrated Circuit Industry, Caishui [2016] No. 49,
which was issued
in May 2016 by the China SAT and the MOF, Beijing Hollysys and Hangzhou Hollysys satisfied the definitions of Key Software Enterprise,
and applied for a preferential tax rate of 10% effective for the year from January 1, 2015 to December 31, 2015. As a result, the
Company recorded a tax benefit of $7.0 million during the fourth quarter of fiscal 2016. In addition, a $3.1 million income tax
expense was accrued and withheld for the expected profits distribution from PRC to overseas. The remaining retained earnings of
the Company’s PRC entities are expected to be reinvested for its operations. Excluding the impact of the abovementioned tax
benefit and withholding tax expenses, the effective tax rate for the current year is 13.2%.
Net income attributable to non-controlling
interests
: The non-controlling interests of the Company include non-controlling shareholders’ interests in each
subsidiary. For fiscal 2016, the non-controlling interests are the ownership interests of 49% in Hollycon, 1% in Hollycon Italy,
and 5% in CECL. The net income attributable to non-controlling interests for the fiscal year ended June 30, 2016 was approximately
$5.0 million, an increase of approximately $2.3 million, from approximately $2.7 million for the prior year.
Net income and earnings per share attributable
to Hollysys
: For the fiscal year ended June 30, 2016, net income attributable to Hollysys amounted to approximately $118.5
million, representing an increase of approximately $22.0 million, as compared to approximately $96.5 million for the prior year.
The basic and diluted earnings per share were $2.00 and $1.97 for the year ended June 30, 2016, as compared to $1.65 and $1.61
for the prior year, representing an increase of $0.35 and $0.36, respectively. The increase was primarily due to the higher
net income attributable to Hollysys compared to fiscal 2015.
|
B.
|
Liquidity and Capital Resources
|
We believe our working capital is sufficient
to meet our present requirements. We may, however, require additional cash due to changing business conditions or other future
developments, including any investments or acquisitions we may decide to pursue. In the long-term, we intend to rely primarily
on cash flow from operations and additional borrowings from banks to meet our anticipated cash needs. If our anticipated cash flow
and borrowing capacity is insufficient to meet our requirements, we may also seek to sell additional equity, debt or equity-linked
securities. We cannot assure you that any financing will be available in the amounts we need or on terms acceptable to us, if at
all.
In line with the industry practice, we
typically have a long receivable collection cycle. As a result, our cash provided by our operations in any given year may not be
sufficient to fully meet our operating cash requirements in that year. We will use available financing means, including bank loans,
to provide sufficient cash inflows to balance timing differences in our cash flows.
We estimate our liquidity needs for investing
and financing activities for fiscal 2018 will be approximately $14.4 million, which will be primarily related to the repayment
of bank borrowings and capital expenditures. Our future working capital requirements will depend on many factors, including, among
others, the rate of our revenue growth, the timing and extent of expansion of our sales and marketing activities, the timing of
introductions of new products and/or enhancements to existing products, and the timing and extent of expansion of our manufacturing
capacity.
Our long-term liquidity needs will relate
primarily to working capital to pay our suppliers, and third-party manufacturers, as well as any increases in manufacturing capacity
or acquisitions of third party businesses that we may seek in the future. We expect to meet these requirements primarily through
our current cash holdings, revolving bank borrowings, as well as our cash flow from operations. For fiscal year 2018, we expect
$5.9 million of capital expenditures, mainly related to information system enhancement and manufacturing facility upgrades. We
currently do not have any plan to incur significant capital and investing expenditures for the foreseeable future beyond 2018.
Cash Flow and Working Capital
As of June 30, 2017, we had total assets
of approximately $1,058.3 million, of which cash and cash equivalents amounted to $197.6 million, time deposits with original maturities
over three months amounted to $96.2 million, accounts receivable amounted to $246.6 million and inventories amounted to $45.7 million.
While working capital was approximately $562.8 million, equity amounted to $723.5 million and our current ratio was approximately
2.9.
See Item 8, Financial Information, A. Consolidated
Statements and Other Financial Information, Dividend Policy, for information on the ability of certain of our subsidiaries in China
to make dividends to their respective parent companies.
The following table shows our cash flows
with respect to operating activities, investing activities and financing activities for the fiscal years ended June 30, 2015, 2016
and 2017:
(In USD thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Item
|
|
Fiscal Years Ended June 30
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Net cash provided by operating activities
|
|
$
|
83,952
|
|
|
$
|
46,737
|
|
|
$
|
69,813
|
|
Net cash used in investing activities
|
|
$
|
(39,895
|
)
|
|
$
|
(2,454
|
)
|
|
$
|
(89,553
|
)
|
Net cash provided (used in) by financing activities
|
|
$
|
1,261
|
|
|
$
|
(6,780
|
)
|
|
$
|
(7,413
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
$
|
357
|
|
|
$
|
(16,242
|
)
|
|
$
|
(4,302
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
45,675
|
|
|
$
|
21,261
|
|
|
$
|
(31,455
|
)
|
Cash and cash equivalents, beginning of year
|
|
$
|
162,159
|
|
|
$
|
207,834
|
|
|
$
|
229,095
|
|
Cash and cash equivalents, end of year
|
|
$
|
207,834
|
|
|
$
|
229,095
|
|
|
$
|
197,640
|
|
Operating Activities
For the fiscal year ended June 30, 2017, net
cash provided by operating activities was approximately $69.8 million, compared to approximately $46.7 million for prior
fiscal year 2016. The net cash inflow of operating activities in fiscal year 2017 was primarily consisted of net income
of approximately $69.8 million and approximately $13 million generated from non-operating items and non-cash items. All of which
were partially offset by approximately $13.1 million used in working capital. Changes in working capital are attributable to an
increase in deferred revenue of approximately $28.2 million, an increase of accounts payable of approximately $23.6 million, an
increase of costs and estimated earnings in excess of billings approximately of $21.9 million, all of which were partially offset
by a decrease in accounts receivable of approximately $23.4 million, and a decrease in accruals and other payable of approximately
$20.3 million, a decrease in deposits and other assets approximately $12.7 million, a decrease in inventories approximately $10.7
million, and a decrease in other tax payables approximately $7.0 million.
For the fiscal year ended June 30, 2016, net
cash provided by operating activities was approximately $46.7 million, compared to approximately $84.0 million for prior
fiscal year 2015. The net cash inflow of operating activities in fiscal year 2016 was primarily consisted of net income
of approximately $123.5 million, and changes in working capital attributable to a decrease in deferred revenue of approximately
$47.6 million, a decrease of costs and estimated earnings in excess of billings approximately of $37.0 million, a decrease in accounts
receivable of approximately $16.4 million, a decrease in income tax payable and other tax payable of approximately $5.0 million
combined, and a decrease in inventories of approximately $4.6 million, all of which were partially offset by an increase in accounts
payable of approximately $8.3 million, and an increase in due from related parties of approximately $8.2 million.
For the fiscal year ended June 30, 2015, net
cash provided by operating activities was approximately $84.0 million, compared to approximately $83.3 million for prior
fiscal year 2014. The net cash inflow of operating activities in fiscal year 2015 primarily consisted of net income
of approximately $99.2 million, and changes in working capital attributable to a decrease in accounts payable of approximately
$25.5 million, a decrease of due from related parties approximately of $15.2 million, a decrease in accounts receivable of approximately
$7.6 million and a decrease in income tax payable and other tax payable of approximately $13.8 million combined, all of which were
partially offset by an increase in cost and estimated earnings in excess of billings of approximately $10.5 million.
Investing Activities
For the fiscal year ended June 30, 2017,
net cash used in investing activities was approximately $89.6 million, compared to approximately $2.5 million for prior fiscal
year 2016. The net cash used in investing activities in fiscal year 2017 mainly consisted of a cash outflow of approximately
$3.7 million for capital expenditures, a cash outflow of approximately $16.7 million cash in deconsolidated subsidiary, a cash
outflow of approximately $2.7 million investment of an equity investee, a cash outflow of approximately $154.8 million transferred
from current accounts to time deposits in banks with original maturities between six months and one year, partially offset by a
cash inflow of approximately $89.3 million from maturity of time deposits.
For the fiscal year ended June 30, 2016,
net cash used in investing activities was approximately $2.5 million, compared to approximately $39.9 million for prior fiscal
year 2015. The net cash used in investing activities in fiscal year 2016 mainly consisted of a cash outflow of approximately
$7.9 million for capital expenditures, a cash outflow of approximately $107.1 million transferred from current accounts to
time deposits in banks with original maturities between six months and one year, and a cash inflow of approximately $112.0 million
from maturity of time deposits.
For the fiscal year ended June 30, 2015,
net cash used in investing activities was approximately $39.9 million, compared to approximately $25.2 million for the prior
fiscal year 2014. The net cash used in investing activities in fiscal year 2015 mainly consisted of a cash outflow of approximately
$14.6 million paid for acquisition of Bond Group, net of cash acquired, a cash outflow of approximately $4.6 million for capital
expenditures, a cash outflow of approximately $33.4 million transferred from current accounts to time deposits in banks with
original maturities between six months and one year, and a cash inflow of approximately $11.6 million from maturity of time deposits.
Financing Activities
For fiscal year ended June 30, 2017, net
cash used in financing activities was approximately $7.4 million, as compared to approximately $6.8 million cash provided
for the prior year. The net cash used in financing activities in fiscal year 2017 mainly consisted of a repayment of short-term
bank loans of approximately $4.9 million, a repayment of long-term bank loans of approximately $7.4 million, a payment of dividends
of approximately $12.0 million, partially offset by proceeds from short-term bank loans of approximately $10.1 million, and proceeds
from exercise of share options of approximately $6.3 million.
For fiscal year ended June 30, 2016, net
cash used in financing activities was approximately $6.8 million, as compared to approximately $1.3 million cash provided
for the prior year. The net cash used in financing activities in fiscal year 2016 mainly consisted of a repayment of short-term
bank loans of approximately $17.0 million, a repayment of long-term bank loans of approximately $9.7 million, partially offset
by proceeds from issuance of shares of a subsidiary of approximately $7.7 million, and proceeds from exercise of share options
of approximately $5.4 million.
For fiscal year ended June 30, 2015, net
cash provided by financing activities was approximately $1.3 million, as compared to approximately $8.3 million cash
used for the prior year. The net cash provided by financing activities in fiscal year 2015 mainly consisted of proceeds of short-term
loans and IFC convertible bond of approximately $25.1 million and $20.0 million respectively. The cash inflow was partially offset
by a dividend payout of approximately $23.3 million, a repayment of long-term bank loans of approximately $12.6 million, and
a repayment of short-term bank loans of approximately $8.8 million.
|
C.
|
Research and Development, Patents and Licenses
|
Research and Development Efforts
As a high-technology company, our business
and long-term development rely highly on our research and development capabilities. Our research and development process is
based on Capability Maturity Model Integration Level 2&3 and can be classified into the following seven phases:
We use standard product development life
cycle models, including the waterfall model, increment model, iterative model and prototype. As a technology leader we continually
develop and patent new automation technologies. We also continually review and evaluate technological changes affecting
the automation and integrated system industries and invest substantially in application-based research and development. We currently
employ over 700 staff in the research and development department or engaged in research and development work.
Our core technologies achieved from our
research and development efforts include:
|
·
|
Large scale software platform architecture design;
|
|
·
|
Proprietary network design and development technologies;
|
|
·
|
Safety computer platform design and manufacturing;
|
|
·
|
Efficient I/O (Input /Output) signal processing design technology; and
|
|
·
|
Embedded system design and manufacturing.
|
We are committed to incorporating the latest
advances in electronics and information system technology into its products and, whenever possible, developing state-of-the-art
proprietary products based on its extensive internal expertise and research efforts. We currently spend approximately
6-9% of our annual revenues on research and development. Our recent major research and development focuses include:
|
·
|
Transportation Automation;
|
|
·
|
Manufacturing Automation; and
|
Our research and development efforts have
led to the invention of several proprietary systems in the fields of DCS, PLC and transportation automation systems. We improved
our 5th generation DCS (Distributed Control System), which represents higher reliability, stability, better safety protection and
user-friendliness with advanced system architecture, hardware, software designs and industry expert solutions. We completed the
development and certified our SIS (Safety Instrumented System) –HiaGuard with SIL3 (Safety Integrity Level 3) in compliance
with international standards. HiaGuard is the first domestically developed SIS technology and breaks the monopoly held by foreign
systems in China in this product. Hollysys’ HiaGuard can be applied for ESD (Emergency Shutdown System), PSD (Process Shutdown
System), and FGS (Fire and Gas Systems) used in various industries. We also invented several series of PLC (Programmable Logic
Controller) products, and the most successful applications include the mining safety protection systems and Traditional Chinese
Medicine manufacturing and packaging machine and dispensing machine. Our core technologies provide a platform that is designed
to enable the rapid and efficient development of our technologies for specific applications that are quickly, efficiently and affordably
tailored to particular industries and to the needs of our customers. Our software development tools enable us to program our systems
rapidly, allowing us to apply digital technologies that take advantage of the tremendous advances in electronics and information
technology to improve quality and reliability while reducing cost. The market for our products includes, not only the large number
of factories that are continually under construction in China’s rapidly expanding industrial base, but also extends to the
replacement and upgrading of outdated legacy systems to bring a higher degree of control and efficiency to the automation of processes,
delivering increasing benefits to customers as they meet increased competition. In the future we expect that the market for our
products will extend further into South Asia and the Middle East.
We already have our proprietary high-speed
rail signaling system including ATP (Automatic Train Protection), TCC (Train Control Center), LEU (Line-Side Electronic Unit),
BTM (Balise Transmission Module), TSRS (Temporary Speed Restriction Server), HVC (Hollysys Vital Computer) and Interlocking system
been certified according to international standards and have passed the Safety Integrity Level 4 (SIL4) certification. For the
subway signaling system, the proprietary ATS (Automatic Train Supervision) and CBI (Computer Based Interlocking) have passed SIL2
and SIL4 certification respectively by the end of 2011. And in March 2013 we finished the development and certified ZC (Zone Controller),
LEU (Line-side Electronic Unit) and Balise according to SIL4 (Safety Integrity Level 4) requirements in compliance of international
standards, the certification of ATP (Automatic Train Protection) for subway signaling system was finished at the end of calendar
year 2013. For both of the signaling systems, Hollysys is one of the earliest domestic companies in developing and certifying the
signaling systems according to the international standards. Hollysys will be one of the few companies in the world which command
the most leading and safety critical technologies of rail signaling system and we will compete with multinational companies such
as Siemens, Alston and Bombardier in domestic and world arena. We believe our research and development efficiency, latest technology,
strong customization and better value for money proposition will give us an unparalleled advantage in the high-speed rail and subway
signaling markets.
For the fiscal years 2017, 2016, and 2015,
aggregate annual research and development expenses were approximately $30.1 million, $36.6 million, and $35.8 million, respectively.
Intellectual Property Rights
We rely on a combination of copyright,
patent, trademark and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary
rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect them. As of
June 30, 2017, we held 163 software copyrights, 141 authorized patents, 182 patent applications and 2 registered trademarks. Our
earliest software copyrights will expire in 2051. Our invention patents have terms of 20 years. The first expiration will
be in 2020 and the second will be in 2023 and our utility patents and design patents have terms of 10 years. One utility patent
is expected to expire in 2018 and one design patent expires in fiscal year 2018.
Although we employ a variety of intellectual
property in the development and manufacturing of products, we believe that only a few of our intellectual property rights are critical
to our current operations. However, when taken as a whole, we believe that our intellectual property rights are significant and
that the loss of all or a substantial portion of such rights could have a material adverse effect on our results of operations. Also,
from time to time, we may desire or be required to renew or to obtain licenses from others in order to further develop and manufacture
commercially viable products effectively.
We market our DCS products mainly under
the brand name of “HOLLiAS”. Our brand name is well-established and is recognized as associated with high
quality and reliable products by industry participants and customers. We have obtained trademark protection for our brand name
“HOLLiAS” in the PRC as well as in other countries in the world. In addition, we have also registered or applied for
a series of trademarks including brand names for us and our products. The trademarks are issued for 10-year periods and may be
renewed prior to expiration.
Other than as disclosed in the foregoing
disclosures and elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events
for the fiscal year 2017 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability,
liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating
results or financial conditions.
|
E.
|
Off-Balance Sheet Arrangements
|
We do not believe that we have any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are
material to an investment in our securities.
|
F.
|
Tabular Disclosure of Contractual Obligations
|
The following table sets forth our contractual
obligations, including long-term loans and operating leases and capital and operational commitments as of June 30, 2017.
(In USD thousands)
|
|
Total
|
|
|
|
Less than 1 year
|
|
|
|
1-3 years
|
|
|
|
3-5 years
|
|
|
|
More than 5
years
|
|
Short-term & Long-term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Principal
|
|
|
29,922
|
|
|
|
|
8,541
|
|
|
|
|
21,170
|
|
|
|
|
116
|
|
|
|
|
95
|
|
-Interest
|
|
|
1,243
|
|
|
|
|
670
|
|
|
|
|
569
|
|
|
|
|
4
|
|
|
|
|
-
|
|
Operating Lease Obligations
(1)
|
|
|
3,942
|
|
|
|
|
2,453
|
|
|
|
|
1,323
|
|
|
|
|
166
|
|
|
|
|
-
|
|
Purchase Obligations
(2)
|
|
|
142,424
|
|
|
|
|
127,609
|
|
|
|
|
10,380
|
|
|
|
|
3,470
|
|
|
|
|
965
|
|
Capital Obligations
(3)
|
|
|
1,026
|
|
|
|
|
1,026
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Standby Letters of Credit
(4)
|
|
|
24,941
|
|
|
|
|
24,941
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Performance Guarantees
(5)
|
|
|
62,914
|
|
|
|
|
36,376
|
|
|
|
|
25,720
|
|
|
|
|
525
|
|
|
|
|
293
|
|
Total
|
|
|
266,412
|
|
|
|
|
201,616
|
|
|
|
|
59,162
|
|
|
|
|
4,281
|
|
|
|
|
1,353
|
|
|
(1)
|
Operating lease obligations
|
It represents the future minimum
payments under non-cancelable operating leases.
As of June 30, 2017, the Company
had approximately $142.4 million in purchase obligations for the coming fiscal year, for purchases of inventories. The inventories
will be mainly used for fulfilling existing contracts or new contracts resulted from the expansion of our operations.
As of June 30, 2017, the Company
had approximately $1.0 million in capital obligations for the coming fiscal year, mainly for the Company’s information system
construction.
|
(4)
|
Standby letters of credit
|
We have issued letters of credit
to our suppliers to serve as assurance of payment. When a letter of credit is issued, a proportion of the total amount covered
by the letter of credit may be required to be deposited in the bank, and is not available until the payment has been settled or
the letter of credit has expired. As of June 30, 2017, we had approximately $24.9 million in standby letters of credit obligations,
with $23.0 million of restricted cash deposited in banks for standby letter of credit.
|
(5)
|
Performance guarantees
|
We have provided performance
guarantees to our customers to serve as assurance of performance for the contractual obligations. When a performance guarantee
is issued, a proportion of the total guarantee amount may be required to be deposited in the bank, and is not available until the
guarantee is expired. As of June 30, 2017, we had approximately $62.9 million performance guarantees obligation, with $5.8 million
of restricted cash deposited in banks for performance guarantees.
Other than the contractual obligations
and commercial commitments set forth above, we did not have any other long-term debt obligations, operating lease obligations,
capital commitments, purchase obligations or other long-term liabilities as of June 30, 2017.
See "Forward-Looking Information"
on page 8.
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and Senior Management
|
The following table sets forth certain
information regarding our directors and senior management as of June 30, 2017.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Baiqing Shao
|
|
49
|
|
Chairman of Board of Directors and Chief Executive Officer
|
Herriet Qu
|
|
47
|
|
Chief Financial Officer
|
Colin Sung
|
|
51
|
|
Director
|
Jerry Zhang
|
|
45
|
|
Director
|
Jianyun Chai
|
|
55
|
|
Director
|
Li Qiao
|
|
60
|
|
Director
|
Mr. Baiqing Shao
, one of the
main founders of the Company, has served as our Chief Executive Officer since November, 2013 and Chairman of the Company and General
Manager of Hollysys Group since December, 2016. Prior to that, he was the Vice General Manager of Hollysys Group starting from
December 2010. Since July 2014, he has been serving as the head of overseas business. From February 2012 to November 2013, he was
the Senior Vice President, Business Development of the Company. From 2002 to 2010, he served as the General Manager of Beijing
Hollysys Information Technology Co., Ltd.(currently known as “Shenhua Hollysys Information Technology Co., Ltd.”),
one of our indirect equity investees. From October 1996 to January 1999, he served as the head of R&D. Mr. Shao has served
the Company for more than twenty-four years as one of the founding group of engineers. Mr. Shao holds a Master Degree of Computer
Science from the 6th Research Institute of China Electronics Corporation and an MBA degree from Peking University.
Ms. Herriet Qu,
has served as our
Chief Financial Officer since February 2012. Prior to that, Ms. Qu served as the Financial Controller of the Company from October
2007 to January 2012. Ms. Qu holds an MBA degree from Oklahoma City University and a Bachelor’s degree from Tianjin University
of Finance & Economics.
Mr. Colin Sung,
has served as a
member of the Board of Directors and Chairman of the Audit Committee of Board of Directors of the Company since February 2008.
Mr. Sung is the Chief Financial Officer for eHi Auto Services Limited since April 2013. Mr. Sung also has served as adviser
of NeWorld Education Group, Inc. since August 2012 and served as Chief Financial Officer of NeWorld Education Group since August
2011. Prior to joining NeWorld, he was the CFO of Lighting the Box from March 2011. Mr. Sung served as the deputy Chief Executive
Officer and the Chief Financial Officer of Linktone Ltd., a NASDAQ-listed wireless interactive entertainment service provider in
China, from 2009 to 2011. From 2008 to 2009, he served as the Chief Financial Officer and President of China Cablecom Holdings,
Ltd. From 2005 to 2008, he was the Chief Financial Officer of Linktone Ltd., where he also served as the acting Chief Executive
Officer in 2006 and as its director of board from 2007 to 2008. From 2004 to 2005, Mr. Sung was the Corporate Controller of UTI,
United States, Inc., a subsidiary of International Freight Forwarder (NASDAQ: UTIW), and from 2001 to 2004, was a Vice President
of finance and Corporate Controller of USF Worldwide, Inc., a subsidiary of US Freightways. From 1997 to 2001, Mr. Sung was Vice
President and Corporate Controller for US Operation of Panalpina Welttransport Holding, (PWTN.SW). Mr. Sung received his bachelor’s
degree in accounting from William Paterson University in 1992 and his MBA degree from American InterContinental University in 2004.
Mr. Sung is a Certified Public Accountant and Certified Global Management Accountant.
Ms. Jerry Zhang,
has served as a
member of the Board of Directors of the Company since September 2007. Ms. Jerry Zhang is Executive Vice Chairman and Chief Executive
Officer (“CEO”) of Standard Chartered Bank (China) Limited (“Standard Chartered China”). Prior to this
role, she has held a variety of senior roles at Standard Chartered China. She was the bank’s Deputy CEO, China and CEO, North
China and General Manager, Beijing Branch. Her key focuses were strategic planning, business development and corporate governance
of the Bank’s operations in North China. As the General Manager of Beijing Branch, Ms. Zhang was also responsible for overall
management of Beijing Branch. Ms. Zhang enjoys a strong track record in setting up good relationship with clients and creating
value both for the bank and the clients. In her position as Head of Financial Institutions (“FI”), Ms. Zhang has led
to achieve frog leap developments of the Bank’s FI business, which has become the biggest FI business amongst all foreign
banks in China in almost all aspects. Ms. Zhang joined Standard Chartered China in 1994, and has accumulated rich implementation
and management experiences in wholesale banking business. She has successfully established non-banking financial institutions business
in China for the Bank. In 2009, Ms. Zhang has left the bank for a short duration during which she acted as Chief Representative
of Fidelity International Asset Management Co. Beijing Representative Office. Mrs. Zhang received her M.B.A. from Lancaster University.
Dr. Jianyun Chai,
has served
as a member of the Board of Directors of the Company since June 2008. Dr. Chai is currently a professor and the head of the
Institute of Power Electronic and Electrical Machine System at Tsinghua University in China. Before he joined Tsinghua University
as an Associate Professor in 1999, Dr. Chai spent eight years working in the motor and information industries in Japan. Dr. Chai
is also a member of various societies and organizations, including the China Renewable Energy Society, the Chinese Society for
Electrical Engineering, and the Chinese Wind Energy Association. Dr. Chai received a Bachelor’s degree and a PhD in Electrical
Engineering from Tsinghua University in 1984 and 1989.
Ms. Li Qiao
, is the Chairman of
Agriculture Resources Pte Ltd. and the Director of CSIC International Pte Ltd. She served as Chairman of the Company from 2007
to 2010 and as Director of Beijing Hollysys Co., Ltd. from 1999 to 2008. Before that, Ms. Qiao had worked in government for more
than ten years. She was the Minster of Enterprise Division in Business Administration Committee of The Beijing Municipality Concerning
the Experimental Area for Developing New-Technology Industries, and also served as the head of the Zhongguancun Technology Park
(“Zhongguancun”) Administrative Committee. Ms. Li Qiao participated in setting the Five-year plan of Chinese High-Tech
Industrial Area and Zhongguancun High-Tech Development and Industrial Policy. She also participated in organizing and editing “The
Regulations of Zhongguancun High-Tech Development Park” which is regarded as the fundamental law of Zhongguancun. Ms. Qiao
also has extensive experience in equity investment. She organized twelve industry annual analysis reports and participated in establishing
the first Beijing venture capital company, invested and successfully helped a number of companies listed in domestic and abroad.
The investment projects that Ms. Qiao involved with include biological medicine, high-end equipment manufacturing, new energy,
chemical and energy, agriculture, education, integrated circuits, aerospace, fast moving consumer goods, electronic information
and other industries. She holds an EMBA of Science and Technology from Hong Kong University.
There is no arrangement or understanding
with any major shareholders, customers, suppliers or others, pursuant to which any person named above was selected as a director
or member of senior management.
No family relationship exists between any
of the persons named above.
Executive Compensation
The aggregate cash compensation paid to
our executive officers as a group was $954,867 for the fiscal year ended June 30, 2017.
In the fiscal year ended June 30, 2012,
we granted stock options for a total of 1,476,000 ordinary shares under the long-term incentive plan of the Company to key employees,
including options to purchase 561,000 ordinary shares to the senior executives listed in the table below under the caption “2012
Options” in this section. All of the grants have specific performance milestones. Additionally, the awards have a provision
that if in certain instances the milestones are exceeded by specified targets, then additional ordinary shares will vest for the
related period. The exercise periods for the options are five years from the date of grant, February 20, 2012. As of June 30, 2017,
all the options granted to the above-mentioned executive officers were vested and exercised.
In the fiscal year ended June 30, 2015,
the Company granted 1,740,000 stock options to key employees, including options to purchase 675,000 ordinary shares to the senior
executives listed in the table below under the caption “2015 Options” in of this section. The current outstanding awards
have vesting periods of up to five years depending on the person’s position and all of the grants have specific performance
milestones. Additionally, the outstanding awards have a provision that if in certain instances the milestones are exceeded by specified
targets, then additional ordinary shares will vest for the related period. The exercise periods for the options are five years
from the date of grant, May 14, 2015. As of June 30, 2017, 198,000 options granted to the above-mentioned executive officers were
vested and none of the options were exercised.
Director Compensation
We pay each of our non-employee directors
who are not Company employees a monthly fee as compensation for the services to be provided by him/her as a non-employee director.
During fiscal 2017, we paid $4,000 per month from July 2016 to January 2017 and $4,500 per month beginning from February 2017 to
Colin Sung, $3,000 per month from July to December 2016 and $3,500 per month beginning from January 2017 to Jerry Zhang, $2,000
per month from July 2016 to May 2017 and $2,500 per month beginning from June 2017 to Jianyun Chai, $3,500 per month to Li Qiao
beginning from January 2017. We also reimburse our non-employee directors for out-of-pocket expenses incurred in attending meetings.
In 2011, as the compensation for their
continuous service on the Board, we granted to each of the non-employee directors restricted shares (“2011 Restricted Shares”),
which vested in equal installments on a quarterly basis over a three-year period beginning on the grant date, which included 22,500
restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang, Jianyun Chai and Qingtai Chen. As
of June 30, 2017, all the 2011 Restricted Shares were vested and 22,500 restricted shares granted to Colin Sung were issued.
In 2014, as the compensation for their
continuous service on the Board, we granted to each of the non-employee directors restricted shares (“2014 Restricted Shares”),
which will vest in equal installments on a quarterly basis over a three-year period beginning on the service inception date, which
included 22,500 restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang and Jianyun Chai,
respectively. As of June 30, 2017, all the 2014 Restricted Shares were vested and 22,500 restricted shares granted to Colin Sung
were issued.
In 2016, as the compensation for their
continuous service on the Board, we granted to each of the non-employee directors restricted shares (“2016 Restricted Shares”),
which will vest in equal installments on a quarterly basis over a three-year period beginning on the service inception date, which
included 22,500 restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang, Jianyun Chai and
Li Qiao, respectively. As of June 30, 2017, 4,375 shares of the 2016 Restricted Shares were vested and none were issued.
For the fiscal year ended June 30, 2017,
the aggregate amount of cash compensation paid to our directors as a group was $135,000.
2006 Stock Plan
On September 7, 2007, our stockholders
approved the 2006 Stock Plan, or the 2006 Plan. The 2006 Plan was assumed by us as of the closing of the merger of Chardan
with and into us. The 2006 Plan provided for 3,000,000 ordinary shares for issuance in accordance with the 2006 Plan’s
terms. As of the date of this report, there are 708,000 shares available under the 2006 Plan, 2,292,000 shares have been allocated
to outstanding awards that have not vested or been exercised. A copy of the 2006 Stock Plan was filed with the Registration
Statement on Form S-8 (No. 333-170811) and is incorporated herein by reference.
2015 Equity Plan
On May 14, 2015, the Board of Directors
approved 2015 Equity Incentive Plan (the “2015 Equity Plan”). The 2015 Equity Plan authorized the issuance of five
million shares. It will terminate ten years following the date that it was adopted by the Board of Directors. The purposes of 2015
Equity Plan are similar as the 2006 Plan, which is used to promote the long-term growth and profitability of the Company and its
affiliates by stimulating the efforts of employees, directors and consultants of the Company and its affiliates who are selected
to be participants, aligning the long-term interests of participants with those of shareholders, heightening the desire of participants
to continue in working toward and contributing to the success of the Company, attracting and retaining the best available personnel
for positions of substantial responsibility, and generally providing additional incentive for them to promote the success of the
Company’s business through the grant of awards of or pertaining to shares of the Company’s ordinary shares. The 2015
Equity Plan permits the grant of incentive share options, Non-statutory share options, restricted shares, restricted share units,
share appreciation rights, performance units and performance shares as the Company may determine. A copy of 2015 Equity Plan
was filed with the Registration Statement on Form S-8 (No. 333-208615) and is incorporated herein by reference.
2012 Options
The following table sets forth options
granted on February 20, 2012 to the following senior management of the Company.
Name
|
|
Number of Ordinary Shares
Issuable upon Exercise of
Options
|
|
|
Number of
Ordinary
Shares
Vested
|
|
|
Exercise
Price
|
|
|
Date of Grant
|
|
Date of
Expiration
|
Jianfeng He
1
|
|
|
198,000
|
|
|
|
198,000
|
|
|
$
|
8.69
|
|
|
2012-2-20
|
|
2017-2-19
|
Herriet Qu
2
|
|
|
198,000
|
|
|
|
198,000
|
|
|
$
|
8.69
|
|
|
2012-2-20
|
|
2017-2-19
|
Baiqing Shao
3
|
|
|
165,000
|
|
|
|
165,000
|
|
|
$
|
8.69
|
|
|
2012-2-20
|
|
2017-2-19
|
1
198,000 options vest on the
24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year 2011 to fiscal
year 2014 exceeds stated thresholds on those dates. As of June 30, 2017, the securities reported as held by Mr. Jianfeng He include
options to purchase 198,000 ordinary shares that are vested and exercised.
2
198,000 options vest on the
24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year 2011 to fiscal
year 2014 exceeds stated thresholds on those dates. As of June 30, 2017, the securities reported as held by Ms. Herriet Qu include
options to purchase 198,000 ordinary shares that are vested and exercised.
3
165,000 options vest on the
24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year 2011 to fiscal
year 2014 exceeds stated thresholds on those dates. As of June 30, 2017, the securities reported as held by Mr. Baiqing Shao include
options to purchase 165,000 ordinary shares that are vested and exercised.
These options were part of options to purchase
an aggregate of 1,476,000 ordinary shares issued to certain individuals on February 20, 2012, all with similar vesting provisions.
On September 26, 2016, the Company announced
a regular cash dividend of US$ 0.20 per share to the holders of the Company’s ordinary shares. Shareholders of record as
of the close of business on October 26, 2016 were eligible to receive the dividend. As a result, the options to be exercised by
the above optionees after October 27, 2016 will be subject to an adjusted exercise price of US$8.69.
The above options vest annually over a
period of four years from their grant date, subject to different performance conditions and are exercisable once vested for up
to five years from the date of grant. As of June 30, 2017, all of the 1,476,000 options have been vested and exercised.
2015 Options
On May 14, 2015, the Company granted an
aggregate of 1.74 million of options to certain officers and employees of the Company pursuant to the 2015 Equity Plan. The options
vest annually over a period of four years from their grant date of May 14, 2015, subject to different performance conditions and
are exercisable up to five years from the date of grant. As of June 30, 2017, 198,000 of the options were vested and none of them
were exercised.
The following table sets forth options
granted on May 14, 2015 to the following named directors and officers:
Name
|
|
Number of
Ordinary Shares
Issuable upon Exercise of
Options
|
|
|
Number of
Ordinary
Shares
Vested
|
|
|
Exercise
Price
|
|
|
Date of Grant
|
|
Date of
Expiration
|
Herriet Qu
1
|
|
|
225,000
|
|
|
|
45,000
|
|
|
$
|
22.05
|
|
|
2015-5-14
|
|
2020-5-13
|
Baiqing Shao
1
|
|
|
225,000
|
|
|
|
45,000
|
|
|
$
|
22.05
|
|
|
2015-5-14
|
|
2020-5-13
|
1
The total Option Shares
to be granted will be determined by the yearly growth rate of Non-GAAP diluted earnings per share (“EPS”) from
June 30, 2014 to June 30, 2017. An aggregate of up to 150,000 Options in total will vest to the optionee if the yearly growth
rate of Non- GAAP diluted earnings per share (“EPS”) from June 30, 2014 to June 30, 2017 equals or exceed stated
thresholds on those dates; an aggregate of up to 187,500 Options in total will vest to the optionee if the yearly growth rate
of Non-GAAP diluted EPS from June 30, 2014 to June 30, 2017 equals or exceeds an additional threshold; and an aggregate of up
to 225,000 Options will vest to the optionee if the yearly growth rate of Non-GAAP diluted EPS from June 30, 2014 to June 30,
2017 equals or exceeds foregoing threshold.
These options were part of an
aggregate of 1,740,000 ordinary shares underlying options issued to optionees on May 14, 2015, all with similar vesting
provisions.
2011 Restricted shares:
The following table sets forth the 2011
Restricted Shares granted to the following directors:
Name
|
|
Number of Restricted
Shares Granted
|
|
|
Date of Grant
|
|
Number of Restricted
Shares Vested
|
|
|
Number of Restricted
Shares Issued
|
|
Jerry Zhang
|
|
|
15,000
|
|
|
2011-1-1
|
|
|
15,000
|
|
|
|
-
|
|
Colin Sung
|
|
|
22,500
|
|
|
2011-2-1
|
|
|
22,500
|
|
|
|
22,500
|
|
Jianyun Chai
|
|
|
15,000
|
|
|
2011-6-2
|
|
|
15,000
|
|
|
|
-
|
|
The restricted shares set forth in the
table above vest quarterly over a period of 3 years from their respective grant date. As of June 30, 2017, all the 2011 restricted
shares were vested, and 22,500 of them have been issued to Colin Sung.
2014 Restricted shares:
The following table sets forth the 2014
Restricted Shares granted to the following independent directors:
Name
|
|
Number of Restricted
Shares Granted
|
|
|
Date of Grant
|
|
Number of Restricted
Shares Vested
|
|
|
Number of Restricted
Shares Issued
|
|
Jerry Zhang
|
|
|
15,000
|
|
|
2014-1-1
|
|
|
15,000
|
|
|
|
-
|
|
Colin Sung
|
|
|
22,500
|
|
|
2014-2-1
|
|
|
22,500
|
|
|
|
22,500
|
|
Jianyun Chai
|
|
|
15,000
|
|
|
2014-6-2
|
|
|
15,000
|
|
|
|
-
|
|
The restricted shares set forth in the
table above vest quarterly over a period of 3 years from their respective service inception date. As of June 30, 2017, all the
restricted shares were vested, and 22,500 of them have been issued to Colin Sung.
2016 Restricted shares:
The following table sets forth the 2016
Restricted Shares granted to the following directors:
Name
|
|
Number of Restricted
Shares Granted
|
|
|
Date of Grant
|
|
Number of Restricted
Shares Vested
|
|
|
Number of Restricted
Shares Issued
|
|
Jerry Zhang
|
|
|
15,000
|
|
|
2017-1-1
|
|
|
1,250
|
|
|
|
-
|
|
Colin Sung
|
|
|
22,500
|
|
|
2017-2-1
|
|
|
1,875
|
|
|
|
-
|
|
Jianyun Chai
|
|
|
15,000
|
|
|
2017-6-2
|
|
|
-
|
|
|
|
-
|
|
Li Qiao
|
|
|
15,000
|
|
|
2017-1-1
|
|
|
1,250
|
|
|
|
-
|
|
The restricted shares set forth in the
table above vest quarterly over a period of 3 years from their respective service inception date. As of June 30, 2017, 4,375 restricted
shares were vested, and none of them have been issued.
Employment Agreements
We entered into a three-year employment
agreement with our Chief Executive Officer, Mr. Baiqing Shao on November 30, 2013. The agreement was automatically renewed
on November 30, 2016. Mr. Shao is entitled to insurance benefits, four weeks’ vacation, and reimbursement of business expenses
and, if necessary, relocation expenses. The agreement may be terminated by us for death, disability and cause. Mr. Shao
may terminate the employment agreement for any good reason at any time. The agreements contain provisions for the protection
of confidential information and a three-year-after employment non-competition period within China.
We entered into a three-year employment
agreement with our Chief Financial Officer, Ms. Herriet Qu on February 1, 2015. Ms. Qu is entitled to insurance benefits,
four weeks’ vacation, and reimbursement of business expenses and, if necessary, relocation expenses. The agreement may
be terminated by us for death, disability and cause. Ms. Qu may terminate the employment agreement for any good reason at
any time. The agreements contain provisions for the protection of confidential information and a three-year-after employment
non-competition period within China.
Terms of Directors and Executive
Officers
Our board consisted of five directors for
fiscal year 2017. Our directors are not subject to a term of office limitation, and hold office until the next annual meeting of
members or until such director’s earlier resignation, removal from office, death or incapacity. Any vacancy on our board
resulting from death, resignation, removal or other cause, and any newly created directorship resulting from any increase in the
authorized number of directors between meetings of members, may be filled either by the affirmative vote of a majority of all the
directors then in office (even if less than a quorum) or by a resolution of members. In addition, the service agreement between
us and the directors do not provide benefits upon termination of their services In connection with the adoption of the 2010 Rights
Plan, we amended our Memorandum and Articles of Association to provide that directors may only be removed by shareholders for cause.
Our executive officers are appointed by
our board. The executive officers shall hold office until their successors are duly elected and qualified, but any officer
elected or appointed by the directors may be removed at any time, with or without cause, by resolution of directors. Any
vacancy occurring in any office may be filled by resolution of directors.
Independence of Directors
We have elected to follow the rules of
NASDAQ to determine whether a director is independent. Our board will also consult with counsel to ensure that our board’s
determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence
of directors. Rule 5605(a)(2) of Listing Rules of The NASDAQ Stock Market, Inc., or the NASDAQ Listing Rules, defines an “independent
director” generally as a person, other than an officer of the Company, who does not have a relationship with the Company
that would interfere with the director’s exercise of independent judgment. Consistent with these considerations,
our board has affirmatively determined that, Mr. Colin Sung, Mr. Jianyun Chai and Ms. Jerry Zhang currently are our independent
directors.
Board Committees
Our board has established an audit committee,
a compensation committee and a corporate governance and nominating committee. Each committee is comprised solely of independent
directors within the meaning of Rule 5605(a)(2) of the Nasdaq Listing Rules, and meet the criteria for independence set forth in
Rule 10A-3(b)(1) of the Exchange Act.
Audit Committee
Our audit committee consists of Mr. Colin
Sung, Ms. Jerry Zhang, and Mr. Jianyun Chai, with Mr. Sung serving as the Chair. Our board has determined that all of our audit
committee members are independent directors within the meaning of applicable NASDAQ listing rules, and meet the criteria for independence
set forth in Rule 10A-3(b)(1) of the Exchange Act.
Our board has determined that each of the
committee members has an understanding of generally accepted accounting principles and financial statements, the ability to assess
the general application of such principles in connection with our financial statements, including estimates, accruals and reserves,
experience in analyzing or evaluating financial statements of similar breadth and complexity as our financial statements, an understanding
of internal controls and procedures for financial reporting, and an understanding of audit committee functions.
Our board believes that Mr. Sung qualifies
as an “audit committee financial expert” within the meaning of all applicable rules. Our board believes that
Mr. Sung has financial expertise from his degrees in business, his activities as a chief executive officer and chief financial
officer of various companies, and his consulting activities in the areas of accounting, corporate finance, capital formation and
corporate financial analysis.
We adopted an audit committee charter under
which the committee is responsible for reviewing the scope, planning and staffing of the audit and preparation of the financial
statements. This includes consultation with management, the auditors and other consultants and professionals involved in
the preparation of the financial statements and reports. The committee is responsible for performing oversight of the relationship
with our independent auditors. The committee also has a general compliance oversight role in assuring that our directors,
officers and management comply with our code of ethics, reviewing and approving of related party transactions, dealing with complaints
regarding accounting, internal controls and auditing matters, and complying with accounting and legal requirements applicable to
us.
Pursuant to the terms of its charter, the
audit committee’s responsibilities include, among other things:
|
·
|
selecting our independent auditors and pre-approving all auditing and non-auditing services permitted
to be performed by our independent auditors;
|
|
·
|
reviewing with our independent auditors any audit problems or difficulties and management’s
response;
|
|
·
|
reviewing and approving all proposed related-party transactions;
|
|
·
|
discussing the annual audited financial statements with management and our independent auditors;
|
|
·
|
reviewing major issues as to the adequacy of our internal controls and any special audit steps
adopted in light of significant internal control deficiencies;
|
|
·
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
·
|
such other matters that are specifically delegated to our audit committee by our board of directors
from time to time;
|
|
·
|
meeting separately and periodically with management and our internal and independent auditors;
and
|
|
·
|
reporting regularly to the full board of directors.
|
Compensation Committee
Our compensation committee consists of
Ms. Jerry Zhang and Mr. Jianyun Chai and Mr. Colin Sung, with Ms. Jerry Zhang serving as its Chair. Our board has determined
that all of our compensation committee members are independent directors within the meaning of applicable NASDAQ listing rules,
and meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act.
Our compensation committee assists the
board in reviewing and approving the compensation structure of our executive officers, including all forms of compensation to be
provided to our executive officers. Our chief executive officer may not be present at any committee meeting during which
his compensation is deliberated. The Compensation Committee is responsible for, among other things:
|
·
|
approving and overseeing the compensation package for our chief executive officer and the other
senior executive officers;
|
|
·
|
reviewing and approving corporate goals and objectives relevant to the compensation of our chief
executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting
the compensation level of our chief executive officer based on this evaluation;
|
|
·
|
reviewing and making recommendations in respect of director compensation;
|
|
·
|
engaging and overseeing compensation consultants;
|
|
·
|
reviewing periodically and making recommendations to the Board regarding any long-term incentive
compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans and
the administration of those plans; and
|
|
·
|
reviewing and making recommendations to the Board regarding succession plans for the chief executive
officer and other senior officers.
|
Corporate Governance and Nominating
Committee
Our corporate governance and nominating
committee consists of Ms. Jerry Zhang, Mr. Jianyun Chai and Mr. Colin Sung with Ms. Zhang acting as the Chair. Each member is “independent”
as that term is defined under the NASDAQ listing rules. The corporate governance and nominating committee assists the
board of directors in identifying individuals qualified to become our directors and in determining the composition of the board
and its committees. The corporate governance and nominating committee is responsible for, among other things:
|
·
|
identifying and recommending to the Board nominees for election or re-election to the board, or
for appointment to fill any vacancy;
|
|
·
|
reviewing annually with the board the current composition of the board in light of the characteristics
of independence, age, skills, experience and availability of service to us;
|
|
·
|
identifying and recommending to the board the directors to serve as members of the board’s
committees; and
|
|
·
|
monitoring compliance with our Corporate Governance Guidelines
|
We had 3,202, 3,641 and 3,632 employees as
of June 30, 2017, 2016, and 2015, respectively. As of June 30, 2017, there were 2,638 employees located in China and 564 employees
outside China. The following table sets forth our employees as of June 30, 2017 based on their functional areas within the
Company:
Category
|
|
China
|
|
|
Overseas
|
|
|
Total
|
|
Sales & Marketing
|
|
|
501
|
|
|
|
17
|
|
|
|
518
|
|
Research and development
|
|
|
596
|
|
|
|
-
|
|
|
|
596
|
|
Engineering
|
|
|
866
|
|
|
|
426
|
|
|
|
1,292
|
|
Production
|
|
|
361
|
|
|
|
-
|
|
|
|
361
|
|
Management
|
|
|
314
|
|
|
|
121
|
|
|
|
435
|
|
Total
|
|
|
2,638
|
|
|
|
564
|
|
|
|
3,202
|
|
We believe that our relationship with our
employees is good. The remuneration payable to employees includes basic salaries and bonuses. We have not experienced
any significant problems or disruption to our operations due to labor disputes, nor have we experienced any difficulties in recruitment
and retention of experienced staff. As required by applicable laws of China, Singapore, Malaysia, Hong Kong, Dubai, Saudi Arabia,
India and Qatar, we have entered into employment contracts with all of our officers, managers and employees.
Our employees in China participate in a
state pension scheme organized by Chinese municipal and provincial governments. We also contribute to social insurance for
our employees each month, which includes pension, medical insurance, unemployment insurance, occupational injuries insurance and
housing providence fund in accordance with PRC regulations.
Our employees in Singapore, who are Singapore
citizens and Singapore permanent residents, participate in monthly statutory contribution requirements into the Central Provident
Fund organised by the Central Provident Fund Board, a statutory board under the Ministry of Manpower. It is a comprehensive social
security system that enables the qualified to set aside funds for retirement, healthcare, home ownership, family protection and
asset enhancement.
Our employees in Malaysia participate in
contributing into an Employee’s Provident Fund, a monthly mandatory saving and retirement plan organized by the Employee’s
Provident Fund Board, a Malaysian government agency under the Ministry of Finance. We also contribute to social insurance for our
employees each month, which include medical and cash benefits, provision of artificial aids and rehabilitation to employees in
order to provide financial guarantees and protection to the family in accordance to Malaysia regulations.
The following
table sets forth information with respect to the beneficial ownership of our ordinary shares (i) by each of our officers and directors,
as of September 18, 2017; (ii) by each person who is known by us to beneficially own more than 5% of our ordinary shares as of
June 30, 2017. The table does not include any preferred shares or ordinary shares that may be issued under the Rights Plan
of the Company. The address of each of the persons set forth below is in care of Hollysys Automation Technologies Ltd., No.
2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, P. R. China 100176.
Name & Address of
Beneficial Owner
|
|
Office, if Any
|
|
Title of Class
|
|
Amount & Nature
of Beneficial
Ownership
(1)
|
|
|
Percent of
Class
(2)
|
|
Officers and Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Baiqing Shao
|
|
Chairman and Chief Executive Officer
|
|
Ordinary Shares
|
|
|
4,354,223
|
(3)
|
|
|
7.20
|
%
|
Herriet Qu
|
|
Chief Financial Officer
|
|
Ordinary Shares
|
|
|
726,471
|
(4)
|
|
|
1.2
|
%
|
Colin Sung
|
|
Director
|
|
Ordinary Shares
|
|
|
48,750
|
(5)
|
|
|
*
|
|
Jerry Zhang
|
|
Director
|
|
Ordinary Shares
|
|
|
32,500
|
(6)
|
|
|
*
|
|
Jianyun Chai
|
|
Director
|
|
Ordinary Shares
|
|
|
31,250
|
(7)
|
|
|
*
|
|
Li Qiao
|
|
Director
|
|
Ordinary Shares
|
|
|
530,588
|
(8)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Securities Holder
|
|
|
|
|
|
|
|
|
|
|
|
|
Baiqing Shao
|
|
|
|
Ordinary Shares
|
|
|
4,354,223
|
(3)
|
|
|
7.20
|
%
|
Prudential PLC
|
|
|
|
Ordinary Shares
|
|
|
10,792,037
|
(9)
|
|
|
17.88
|
%
|
Davis Selected Advisers
|
|
|
|
Ordinary Shares
|
|
|
3,391,934
|
|
|
|
5.62
|
%
|
Schroder Investment Management Group
|
|
|
|
Ordinary Shares
|
|
|
3,241,090
|
|
|
|
5.37
|
%
|
* Less than 1%.
|
(1)
|
Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to securities. Except as otherwise indicated,
each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to our
ordinary shares.
|
|
(2)
|
As of
September 18, 2017, a
total of 60,342,099 ordinary shares are outstanding pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner above,
any options exercisable within 60 days have been included in the denominator.
|
|
(3)
|
The securities reported as held by Mr. Baiqing Shao include 4,144,223 shares of our ordinary shares
held indirectly through Ace Lead Profits Limited. The foregoing entity is a BVI entity that is wholly-owned and controlled by Mr.
Baiqing Shao therefore he may be deemed to be the beneficial owner of the ordinary shares held by it. The securities reported as
held by Mr. Baiqing Shao also include options to purchase 165,000 ordinary shares that are vested and exercised, and options to
purchase 45,000 ordinary shares that are vested but do not include options to purchase 45,000 ordinary shares that will not be
vested within 60 days.
|
|
(4)
|
The securities reported as held by Ms. Herriet Qu include 681,471 shares of our ordinary shares
held indirectly through Golden Result Enterprises Limited. The foregoing entity is a BVI entity that is wholly-owned and controlled
by Ms. Herriet Qu therefore she may be deemed to be the beneficial owner of the ordinary shares held by it. The securities reported
as held by Ms. Qu also include options to purchase 45,000 ordinary shares that are vested, and do not include options to purchase
45,000 ordinary shares that will not vest within 60 days.
|
|
(5)
|
The securities reported as held by Mr. Colin Sung include 45,000 ordinary shares that were issued
and 3,750 restricted shares vested but not issued, but do not include 18, 750 restricted shares that are not yet vested.
|
|
(6)
|
The securities reported as held by Ms. Jerry Zhang include 32,500 restricted shares vested but
not issued; and do not include 12,500 restricted shares that are not yet vested.
|
|
(7)
|
The securities reported as held by Mr. Jianyun Chai includes 31,250 restricted shares vested but
not issued, and do not include 13,750 restricted shares that are not yet vested.
|
|
(8)
|
The securities reported as held by Ms. Li Qiao include
528,088 ordinary shares and 2,500 restricted shares vested but not issued, but do not include 12,500 restricted shares that are
not yet vested.
|
|
(9)
|
Based on information provided by Eastspring Investments
(Singapore) Limited and Eastspring Investments in Amendment No. 1 to Schedule 13G filed with the SEC on August 9, 2017, reporting
beneficial ownership of our ordinary shares as of July 31, 2017, Eastspring Investments (Singapore) Limited had sole power to
vote and dispose with respect to 6,061,300 shares while Eastspring Investments beneficially owned 3,250,000 shares. To our
knowledge, both Eastspring Investments (Singapore) Limited and Eastspring Investments are members of Prudential PLC.
|
None of our major shareholders have different
voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change
of control of the Company.
|
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Please refer to Item 6.E “Directors,
Senior Management and Employees — Share Ownership.”
|
B.
|
Related Party Transactions
|
The related party relationships and related
party transactions are listed as follows:
Related party relationships
Name of related parties
|
|
Relationship with the Company
|
|
|
|
Shenhua Hollysys Information Technology Co., Ltd. (“Shenhua Information”)
|
|
20% owned by Beijing Hollysys
|
China Techenergy Co., Ltd. (“China Techenergy”)
|
|
40% owned by Beijing Hollysys
|
Beijing Hollysys Electric Motor Co., Ltd. (“Electric Motor”)
|
|
40% owned by Beijing Hollysys
|
Beijing Hollysys Machine Automation Co., Ltd. (“Hollysys Machine”)
|
|
30% owned by Hollysys Investment
|
Heilongjiang Ruixing Technology Co., Ltd. (“Heilongjiang Ruixing”)
|
|
6% owned by Beijing Hollysys
|
Beijing IPE Biotechnology Co., Ltd. (“Beijing IPE”)
|
|
22.02% owned by Beijing Hollysys
|
Beijing Hollycon Medicine & Technology. Co., Ltd. (“Hollycon”)
|
|
30% owned by Hollysys Group
|
Shenzhen HollySys Intelligent Technologies Co., Ltd. (“Shenzhen HollySys”)
|
|
60% owned by Hollysys Intelligent
|
Due from related parties (in USD Thousands)
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
22,579
|
|
|
$
|
28,778
|
|
Shenhua Information
|
|
|
2,995
|
|
|
|
3,267
|
|
Heilongjiang Ruixing
|
|
|
1,071
|
|
|
|
1,049
|
|
Hollysys Machine
|
|
|
1,367
|
|
|
|
965
|
|
Hollycon
|
|
|
-
|
|
|
|
79
|
|
Shenzhen HollySys
|
|
|
-
|
|
|
|
2
|
|
Beijing IPE
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,012
|
|
|
$
|
34,142
|
|
The Company’s management believes
that the collection of amounts due from related parties is reasonably assured and accordingly, no provision had been made for these
balances.
Due to related parties (in USD Thousands)
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
1,170
|
|
|
$
|
1,117
|
|
Hollysys Machine
|
|
|
112
|
|
|
|
817
|
|
Shenhua Information
|
|
|
358
|
|
|
|
353
|
|
Electric Motor
|
|
|
5
|
|
|
|
11
|
|
Beijing IPE
|
|
|
-
|
|
|
|
2
|
|
Hollycon
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,645
|
|
|
$
|
2,301
|
|
Transactions with related
parties (in USD Thousands)
Purchases of goods and services from:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Hollysys Machine
|
|
$
|
914
|
|
|
$
|
555
|
|
|
$
|
749
|
|
Electric Motor
|
|
|
50
|
|
|
|
354
|
|
|
|
29
|
|
Hollycon
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
Shenhua Information
|
|
|
368
|
|
|
|
-
|
|
|
|
-
|
|
China Techenergy
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,333
|
|
|
$
|
909
|
|
|
$
|
786
|
|
Sales of goods and integrated solutions to:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
21,936
|
|
|
$
|
3,657
|
|
|
$
|
10,842
|
|
Shenhua Information
|
|
|
2,128
|
|
|
|
847
|
|
|
|
765
|
|
Hollysys Machine
|
|
|
512
|
|
|
|
235
|
|
|
|
167
|
|
Hollycon
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
Beijing IPE
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
Electric Motor
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,577
|
|
|
$
|
4,739
|
|
|
$
|
11,889
|
|
Operating lease income from:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Hollycon
|
|
|
-
|
|
|
|
-
|
|
|
|
602
|
|
Hollysys Machine
|
|
|
41
|
|
|
|
40
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41
|
|
|
$
|
40
|
|
|
$
|
602
|
|
Purchases of intangible asset:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Hollysys Machine
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,648
|
|
The Company sells automation control systems
to China Techenergy which is used for non-safety operations control in the nuclear power industry. China Techenergy incorporates
the Company’s non-safety automation control systems with their proprietary safety automated control systems to provide an
overall automation and control system for nuclear power stations in China. The Company is not a party to the integrated sales contracts
executed between China Techenergy and its customers. The Company’s pro rata shares of the intercompany profits and losses
are eliminated until realized through a sale to outside parties, as if China Techenergy were a consolidated subsidiary.
The Company sells automation control systems
to Shenhua Information which is used for operations control in the information automation industry. Shenhua Information incorporates
the Company’s automation control systems with their proprietary automated remote control systems to provide an overall automation
and control system to its customers. The Company is not a party to the integrated sales contracts executed between Shenhua Information
and its customers. The Company’s pro rata shares of the intercompany profits and losses are eliminated until realized through
a sale to an outside party as if Shenhua Information were a consolidated subsidiary.
The Company engages Hollysys Machine to
sell the Company’s products to end customers. The Company pays commission to Hollysys Machine in exchange for its services.
The amount of the commission is determined based on the value of the products sold by Hollysys Machine during the year. In fiscal
year 2017, one of the Company’s subsidiary Hollysys Intelligent reached an agreement with Hollysys Machine to purchase a
series of fixed assets, software copyrights and patents because of their similar business category.
The Company entered into an operating lease
agreement with Hollycon to lease part of its one building located in Beijing. The lease term is for 1 year from the commencement
date of July 1, 2016 to June 30, 2017.
Amounts due from and due to the related
parties relating to the above transactions are unsecured, non-interest bearing and repayable on demand.
|
C.
|
Interests of Experts and Counsel
|
Not applicable.
|
ITEM 8.
|
FINANCIAL INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information
|
We have appended consolidated financial
statements filed as part of this Annual Report. See Item 18 “Financial Statements.”
Legal Proceedings
We are currently not a party to any material
legal or administrative proceedings, and we are not aware of threatened material legal or administrative proceedings against us. We
may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
Dividend Policy
Historically we have
retained our
earnings for use in the expansion and operation of our business except that on February 9, 2015, we declared a special cash dividend
of $0.40 per share to the holders of the Company’s ordinary shares. The record day was February 23, 2015 and payment day
was March 16, 2015. Continental Stock Transfer & Trust acted as the paying agent. During the fiscal year of 2016, no cash dividend
was declared and paid. On August 11, 2016, the Board of Directors approved a regular cash dividend policy pursuant to which future
cash dividends are expected to be paid to holders of the Company’s ordinary shares on an annual basis out of funds legally
available for such purpose. On September 26, 2016, the Board of Directors declared a regular annual dividend of $0.20 per ordinary
share for 2016. The dividend was paid on November 11, 2016 to shareholders of record at the close of business on October 26, 2016.
However, the declaration and payment of future dividends will be at the discretion of the Board, and will depend upon many factors,
including the Company’s financial condition, earnings, and capital requirements of its businesses, legal requirements, regulatory
constraints, industry practice, and other factors that the Board deems relevant. As a BVI company, we may only declare and pay
dividends if our directors are satisfied, on reasonable grounds, that immediately after the distribution (i) the value of our assets
will exceed our liabilities and (ii) we will be able to pay our debts as they fall due.
Notwithstanding the understanding that
earnings will be accumulated, our ability to pay dividends depends substantially on the receipt of dividends to us by our subsidiaries.
For the PRC subsidiaries, each of them
may pay dividends only out of its accumulated distributable profits, if any, determined in accordance with its articles of association
and the accounting standards and regulations in China. Pursuant to applicable PRC laws and regulations, 10% of after-tax profits
of each of our consolidated PRC entities are required to be set aside in a statutory surplus reserve fund annually until the reserve
balance reaches 50% of such PRC entity’s registered capital. Allocations from these statutory surplus reserves may only be
used for specific purposes and are not distributable to us in the form of loans, advances, or cash dividends.
Under the New EIT Law and its implementation
rules issued by the PRC State Council, both of which became effective on January 1, 2008, dividends from our PRC subsidiaries to
us may be subject to a withholding tax at the rate of 10% if the dividend is derived from profits generated after January 1, 2008.
If we are deemed to be a PRC resident enterprise, the withholding tax may be exempted, but in such a case we will be subject to
a 25% tax on our global income, and our non-PRC investors may be subject to PRC income tax withholding. For a more detailed discussion
of the New EIT Law, see Item 10 - Additional Information, Subpart E, Taxation in China of this Form 20-F.
For the Singapore and Malaysia subsidiaries,
each of them may pay dividends only out of its profits based on the articles of association and the Companies Act in Singapore
and Malaysia. There is no limit to the amount of dividend payable as long as there are sufficient profits. There is no withholding
tax imposed on a Singapore and Malaysia company paying dividends to a company located outside of Singapore and Malaysia upon remittance.
For the Qatar subsidiary, it may pay dividends
only out of its profits based on the articles of association and the Companies Act in Qatar. Pursuant to applicable Qatari laws
and regulations, 10% of after-tax profits are required to be set aside in a statutory surplus reserve fund annually until the reserve
balance reaches 50% of registered capital. The statutory reserve can be used to cover the losses of the companies or to increase
the capital of the companies with a decision by the general assembly. There is no withholding tax imposed on the Qatar company
paying dividends to parent company located in Singapore.
We have not experienced any significant
changes since the date of our audited consolidated financial statements included in this Annual Report.
|
ITEM 9.
|
THE OFFER AND LISTING
|
|
A.
|
Offer and Listing Details
|
Since August 1, 2008, our ordinary shares
have been listed on the NASDAQ Global Select Market under the symbol “HOLI”. The following table provides the high
and low reported market prices of our ordinary shares as reported by Yahoo! Finance for the periods indicated.
|
|
Nasdaq Price per Share
|
|
|
|
High
|
|
|
Low
|
|
Annual Market Prices
(1)
|
|
|
|
|
|
|
|
|
Fiscal Year 2013
|
|
$
|
13.96
|
|
|
|
7.33
|
|
Fiscal Year 2014
|
|
$
|
24.94
|
|
|
|
11.79
|
|
Fiscal Year 2015
|
|
$
|
26.84
|
|
|
|
17.18
|
|
Fiscal Year 2016
|
|
$
|
23.49
|
|
|
|
15.21
|
|
Fiscal Year 2017
|
|
$
|
23.21
|
|
|
|
15.25
|
|
|
|
|
|
|
|
|
|
|
Quarterly Market Prices
|
|
|
|
|
|
|
|
|
First Quarter 2016 ended September 30, 2015
|
|
$
|
23.49
|
|
|
|
15.89
|
|
Second Quarter 2016 ended December 31, 2015
|
|
$
|
22.60
|
|
|
|
17.34
|
|
Third Quarter 2016 ended March 31, 2016
|
|
$
|
21.74
|
|
|
|
15.21
|
|
Fourth Quarter 2016 ended June 30, 2016
|
|
$
|
20.80
|
|
|
|
15.95
|
|
First Quarter 2017 ended September 30, 2016
|
|
$
|
23.21
|
|
|
|
16.95
|
|
Second Quarter 2017 ended December 31, 2016
|
|
$
|
23.09
|
|
|
|
17.89
|
|
Third Quarter 2017 ended March 31, 2017
|
|
$
|
19.18
|
|
|
|
16.56
|
|
Fourth Quarter 2017 ended June 30, 2017
|
|
|
17.28
|
|
|
|
15.25
|
|
|
|
|
|
|
|
|
|
|
Monthly Market Prices
|
|
|
|
|
|
|
|
|
March 2017
|
|
$
|
18.19
|
|
|
|
16.56
|
|
April 2017
|
|
$
|
16.69
|
|
|
|
15.25
|
|
May 2017
|
|
$
|
17.19
|
|
|
|
15.56
|
|
June 2017
|
|
$
|
17.28
|
|
|
|
16.04
|
|
July 2017
|
|
$
|
19.18
|
|
|
|
15.84
|
|
August 2017
|
|
$
|
20.50
|
|
|
|
17.79
|
|
September 201
7 (through September
18, 2017)
|
|
$
|
21.15
|
|
|
|
19.86
|
|
(1) All periods end June 30 of the stated
year, unless otherwise noted.
Not applicable
See our disclosures under “Item 9.
A. Offer and Listing.”
Not Applicable
Not Applicable
Not Applicable
|
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not applicable
|
B.
|
Memorandum and Articles of Association
|
The following represents a summary of
certain key provisions of the Company’s amended and restated memorandum and articles of association. The summary does
not purport to be a summary of all of the provisions of our memorandum and articles of association and of all relevant provisions
of BVI law governing the management and regulation of BVI companies.
Register
The Company was incorporated in the BVI
on February 6, 2006 under the BVI Business Companies Act (the “Act”). The Company filed a Certificate of
Change of Name to change its name from HLS Systems International, Inc. to Hollysys Automation Technologies Ltd. on July 17, 2009. On
May 26, 2016, the Board of Directors the Company approved the amended and restated memorandum and articles of association (the
“Amended and Restated M&A”) to exclude the application of Sections 60 and 61 of the Act. The Amended and Restated
M&A became effective upon the registration by the Registrar of Corporate Affairs of the British Virgin Islands on May 27, 2016.
The Board of Directors believes that such change is desirable and to the benefit of all of the shareholders of the Company because
it will provide the Company with increased flexibility of action to purchase its own shares from time to time based on market conditions,
stock prices, and other factors without the delay and expense involved in offering to purchase share from all shareholders or obtaining
written consent on such purchase from the shareholders as otherwise required under Sections 60 and 61 of the Act. The Amended and
Restated M&A authorizes the issuance of up to 100,000,000 ordinary shares of $0.001 par value, and (ii) 90,000,000 preferred
shares of $0.001 par value.
Objects and Purposes
The Company’s Amended and Restated
M&A grants the Company full power and capacity to carry on or undertake any business or activity and do any act or enter into
any transaction not prohibited by the Act or any other BVI legislation.
Directors
A director must, immediately after becoming
aware of the fact that he is interested in a transaction entered into or to be entered into by us, disclose such interest to the
board of directors, unless (i) the transaction or proposed transaction is between the director and the company and (ii) the transaction
or proposed transaction is or is to be entered into in the ordinary course of our business and on usual terms and conditions. The
director who is interested in a transaction entered into or to be entered into by the Company may (i) vote on a matter relating
to the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction arises and be included in
the quorum; and (iii) sign a document on behalf of the Company, or do any other thing in his capacity as a director, that relates
to the transaction.
The directors may fix their compensation
for services rendered to us.
By a resolution of directors, the directors
may exercise all our powers to borrow money, mortgage or charge our undertakings and property, issue debentures, denture stock
and other securities whenever money is borrowed or as security for any debt, liability or obligation occurred by us or of any third
party.
Each director holds office until his successor
takes office or until his earlier death, resignation or removal by the members or a resolution passed by the majority of the remaining
directors.
A director shall not require a share qualification.
Directors may only be removed for cause
by the shareholders.
Rights and Obligations of Shareholders
Dividends
Subject to the Act, the directors may,
by resolution of directors, declare dividends and distributions by the Company to members and authorize payment on the dividends
or distributions so long as that immediately after the distribution, the value of the Company’s assets exceeds its liabilities
and the Company is able to pay its debts as they fall due. Any distribution payable in respect of a share which has
remained unclaimed for three years from the date when it became due for payment shall, if the board of the directors so resolves,
be forfeited and cease to remain owing by the Company. The directors may, before authorizing any distribution, set aside
out of the profits of the Company such sum as they think proper as a reserve fund, and may invest the sum so set apart as a reserve
fund upon such securities as they may select.
The holder of each ordinary share has the
right to an equal share in any distribution paid by the Company.
Voting Rights
Each ordinary share confers on the shareholder
the right to one vote at a meeting of the members or on any resolution of members on all matters before the shareholders of the
Company.
Rights in the event of winding up
The holder of each ordinary share is entitled
to an equal share in the distribution of the surplus assets of the Company on a winding up.
Redemption
The Company may purchase, redeem or otherwise
acquire and hold its own shares with the consent of members whose shares are to be purchased, redeemed or otherwise acquired unless
the Company is permitted by the Act or any provision of the Amended and Restated M&A to purchase, redeem or otherwise acquire
the shares without their consent.
The Company may purchase, redeem or otherwise
acquire its shares at a price lower than the fair value if permitted by, and then only in accordance with, the terms of the Amended
and Restated M&A or a written agreement for the subscription for the shares to be purchased, redeemed or otherwise acquired.
Changes in the rights of shareholders
The rights attached to any class of shares
(unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the Company is being wound-up,
be varied with the consent in writing of not less than three-fourths of the issued shares of that class and the holders of not
less than three-fourths of the issued shares of any other class of shares which may be affected by such variation.
Meetings
The directors may convene meetings of the
members of the Company at such times and in such manner and places as the directors consider necessary or desirable. A meeting
of members must be held if requested by members holding at least 30% of the voting rights in respect of the matter for which the
meeting is being held. No less than seven days' notice of meetings is required to be given to members.
A meeting of members is properly constituted
if at the commencement of the meeting the holder or holders present in person or by proxy entitled to exercise at least fifty percent
of the voting rights of the shares of each class or series of shares entitled to vote as a class or series thereon and the same
proportion of the votes of the remaining shares entitled to vote thereon.
A member shall be deemed to be present
at the meeting if he participates by telephone or other electronic means and all members participating in the meeting are able
to hear each other.
A resolution of members may be approved
at a duly constituted meeting of members by the affirmative vote of a simple majority of the votes of those members entitled to
vote and voting on the resolution.
A meeting of members held in contravention
of the requirement to give notice is valid if members holding not less than 90% of:(a) the total voting rights on all matters to
be considered at the meeting; or (b) the votes of each class or series of shares where members are entitled to vote thereon as
a class or series together with an absolute majority of the remaining votes, have waived notice of the meeting. Attendance at the
meeting is deemed to constitute waiver.
The inadvertent failure of the directors
to give notice of a meeting to a member, or the fact that a member has not received notice, does not invalidate the meeting.
A member may be represented at a meeting
of members by a proxy who may speak and vote on behalf of the member. A written instrument giving the proxy such authority
must be produced at the place appointed for the meeting before the time for holding the meeting at which such person proposes to
vote.
Limitations on Ownership of Securities
There are no limitations on the right of
non-residents or foreign persons to own the Company’s securities imposed by BVI law or by the Amended and Restated M&A
Change in Control of Company
While directors of the Company may be appointed
by the members or directors for such terms as may be determined at the time of such appointment, and may be removed by resolution
of directors with or without cause, directors may not be removed by the members except for cause.
The unissued shares of the Company are
at the disposal of the directors who may offer, allot, grant options over or otherwise dispose of them to such persons at such
times and for such consideration, being not less than the par value of the shares being disposed of, and upon such terms and conditions
as the directors may determine.
Ownership Threshold
There are no provisions governing the ownership
threshold above which shareholder ownership must be disclosed.
Changes in Capital
Subject to the provisions of the Act, we
may, by a resolution of directors or members, amend the Amended and Restated M&A to increase or decrease the number of shares
authorized to be issued. The directors of the Company may, by resolution, authorize a distribution (including a capital distribution)
by the Company at a time, of an amount, and to any members they think fit if they are satisfied, on reasonable grounds, that the
Company will, immediately after the distribution, satisfy the solvency test. The solvency test is satisfied if the value of
the Company’s assets exceeds its liabilities, and the Company is able to pay its debts as they fall due.
Differences in Corporate Law
The company law of the BVI differs from
laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences
between the provisions of the companies law applicable to us and the laws applicable to companies incorporated in the United States
and their shareholders.
Protection for minority shareholders
Under the laws of most U.S. jurisdictions,
majority and controlling shareholders of a company generally have certain “fiduciary” responsibilities to the minority
shareholders. Corporate actions taken by majority and controlling shareholders that are unreasonable and materially
detrimental to the interests of minority shareholders may be declared null and void. Minority shareholders may have
less protection for their rights under BVI law than they would have under U.S. law.
Powers of directors
Unlike most U.S. jurisdictions, the directors
of a BVI company, subject in certain cases to court’s approvals but without shareholders’ approval, may implement the
sale, transfer, exchange or disposition of any asset, property, part of the business, or securities of the company, with the exception
that shareholder approval is required for the disposition of over 50% in the value of the total assets of the company.
Conflict of interests
Similar to the laws of most U.S. jurisdictions,
when a director becomes aware of the fact that he has an interest in a transaction which we are to enter into, he must disclose
it to our board. However, with sufficient disclosure of interest in relation to that transaction, the director who is interested
in a transaction entered into or to be entered into by the Company may (i) vote on a matter relating to the transaction; (ii) attend
a meeting of directors at which a matter relating to the transaction arises and be included in the quorum; and (iii) sign a document
on behalf of us, or do any other thing in his capacity as a director, that relates to the transaction.
Written consent and cumulative voting
Similar to the laws of most U.S. jurisdictions,
under the BVI law, shareholders are permitted to approve matters by way of written resolution in place of a formal meeting. BVI
law does not make a specific reference to cumulative voting, and our current Amended and Restated M&A have no provision authorizing
cumulative voting.
Takeover provisions
On August 27, 2010, our Board of Directors
adopted the 2010 Rights Plan. In connection with the 2010 Rights Plan, the Board of Directors declared a dividend distribution
of one “Right” for each outstanding ordinary share to shareholders of record at the close of business on August 27,
2010, effective as of September 27, 2010. Each Right entitles the shareholder to buy one share of our Class A Preferred Stock
at a price of $160. Unless terminated earlier by our Board of Directors, the 2010 Rights Plan will expire on September
27, 2020.
Initially, the Rights will be attached
to all certificates representing ordinary shares then outstanding, and no separate Rights certificates or stock statements will
be distributed or provided. The Rights will separate from the ordinary shares and become exercisable if a person or
group announces an acquisition of 20% or more of our outstanding ordinary shares, or announces commencement of a tender offer for
20% or more of the ordinary shares. In that event, the Rights permit shareholders, other than the acquiring person,
to purchase our ordinary shares having a market value of twice the exercise price of the Rights, in lieu of the Class A Preferred
Stock. In addition, in the event of certain business combinations, the Rights permit the purchase of the ordinary shares
of an acquiring person at a 50% discount. Rights held by the acquiring person become null and void in each case.
The 2010 Rights Plan is designed to ensure
that all of our shareholders receive fair and equal treatment in the event of any proposed takeover of us and to guard against
partial tender offers, open market accumulations and other abusive or coercive tactics to gain control of us without paying all
shareholders a control premium. The Rights will cause substantial dilution to a person or group that acquires 20% or more
of our stock on terms not approved by the our Board of Directors, but the Rights should not interfere with any merger or other
business combination approved by the Board of Directors at any time prior to the first date that a person or group has become an
acquiring person.
Shareholder’s access to corporate
records
A shareholder is entitled, on giving
written notice to the Company, to inspect the Company’s (i) Memorandum and Articles of Association; (ii) register of
members; (iii) register of directors; and (iv) minutes of meetings and resolutions of members and of those classes of members
of which the shareholder is a member.
The directors may, if they are satisfied
that it would be contrary to the Company’s interests to allow a member to inspect any document listed above (or any part
thereof), refuse the member to inspect the document or limit the inspection of the document. Our board may also authorize
a member to review the Company account if requested.
Indemnification
Under BVI law and our Amended and Restated
M&A, we may indemnify against all expenses, including legal fees, and against all judgements, fines and amounts paid in settlement
and reasonably incurred in connection with legal, administrative or investigative proceedings any person who: (a) is or was a party
or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative
or investigative, by reason of the fact that the person is or was a director of the Company; or (b) is or was, at the request of
the Company, serving as a director of, or in any other capacity is or was acting for, another body corporate or a partnership,
joint venture, trust or other enterprise.
To be entitled to indemnification, these
persons must have acted honestly and in good faith and in what he believes to be the best interest of the Company, and they must
have had no reasonable cause to believe their conduct was unlawful. Furthermore, such a person must be indemnified by the Company
if he has been successful in the defense of any proceedings.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions,
we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Mergers and similar arrangements
Under the laws of the BVI, two or more
companies may merge or consolidate in accordance with Section 170 of the Act. A merger means the merging of two or more constituent
companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into
a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger
or consolidation which must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to
vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision
which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or series
on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective
of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
The shareholders of the constituent companies
are not required to receive shares of the surviving or consolidated company but may receive debt obligations or other securities
of the surviving or consolidated company, or other assets, or a combination thereof. Further, some or all of the shares of a class
or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind
of asset. As such, not all the shares of a class or series must receive the same kind of consideration.
After the plan of merger or consolidation
has been approved by the directors and authorized by a resolution of the shareholders, articles of merger or consolidation are
executed by each company and filed with the Registrar of Corporate Affairs in the BVI.
Dissenter Rights
A shareholder may dissent from a mandatory
redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the
surviving company prior to the merger and continues to hold the same or similar shares after the merger) and a consolidation. A
shareholder properly exercising his dissent rights is entitled to payment in cash of the fair value of his shares.
A shareholder dissenting from a merger
or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on the merger or consolidation,
unless notice of the meeting was not given to the shareholder. If the merger or consolidation is approved by the shareholders,
the company must within 20 days give notice of this fact to each shareholder who gave written objection, and to each shareholder
who did not receive notice of the meeting. Such shareholders then have 20 days to give their written election in the form specified
by the Act to dissent from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan
of merger is delivered to the shareholder.
Upon giving notice of his election to dissent,
a shareholder ceases to have any rights of a shareholder except the right to be paid the fair value of his shares. As such, the
merger or consolidation may proceed in the ordinary course notwithstanding the dissent.
Within seven days of the later of the delivery
of the notice of election to dissent and the effective date of the merger or consolidation, the company must make a written offer
to each dissenting shareholder to purchase his shares at a specified price that the company determines to be their fair value.
The company and the shareholder then have 30 days to agree upon the price. If the company and a shareholder fail to agree on the
price within the 30 days, then the company and the shareholder shall each designate an appraiser and these two appraisers shall
designate a third appraiser. These three appraisers shall fix the fair value of the shares as of the close of business on the day
before the shareholders approved the transaction without taking into account any change in value as a result of the transaction.
Under BVI law, shareholders are not entitled
to dissenters’ rights in relation to liquidation.
Shareholders’ suits
Similar to the laws of most U.S. jurisdictions,
BVI law permits derivative actions against its directors. However, the circumstances under which such actions may be brought,
and the procedures and defenses available may result in the rights of shareholders of a BVI company being more limited than those
of shareholders of a company incorporated and/or existing in the United States.
The High Court of the BVI may, on the application
of a shareholder of a company, grant leave to that shareholder to bring proceedings in the name and on behalf of that company,
or intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings
on behalf of the company. In determining whether to grant leave, the High Court of the BVI must take into account (i) whether
the shareholder is acting in good faith; (ii) whether the derivative action is in the interests of the company taking account of
the views of the company’s directors on commercial matters; (iii) whether the proceedings are likely to succeed; (iv) the
costs of the proceedings in relation to the relief likely to be obtained; and (v) whether an alternative remedy to the derivative
claim is available.
Leave to bring or intervene in proceedings
may be granted only if the court is satisfied that (i) the company does not intend to bring, diligently continue or defend,
or discontinue the proceedings, as the case may be; or (ii) it is in the interests of the company that the conduct of the proceedings
should not be left to the directors or to the determination of the shareholders as a whole.
Except for the following, we have not entered
into any material contracts other than in the ordinary course of business and other than those described in Item 4, “Information
on the Company,” Item 7, “Major Shareholders and Related Party Transactions,” or Item 5. Operating And Financial
Review And Prospects – Contractual Obligations,” or elsewhere in this annual report.
On April 3, 2013, Beijing Hollysys entered
into an operating lease agreement to lease out one of its buildings located in Beijing. The lease term is 10 years from September
1, 2013 to August 31, 2023. The annual minimum lease payment receivable after five years are subject to renegotiation in case the
Chinese consumer price index published by the government exceeds 5%.
On May 30, 2014, the Company entered into
a convertible loan agreement with International Finance Corporation, an international organization established by Articles of Agreement
among its member countries including the British Virgin Islands ("IFC"), under which the Company will borrow $20,000,000
from IFC (the “Convertible Bond”) with an interest rate of 2.1% per annum and commitment fee of 0.5% per annum paid
in rear semi-annually. The Company received the loan disbursement on August 30, 2014, and the loan interest started accumulating
since then.
BVI Exchange Controls
There are no material exchange controls
restrictions on payment of dividends, interest or other payments to the holders of our ordinary or preferred shares or on the conduct
of our operations in the BVI, where we were incorporated. There are no material BVI laws that impose any material exchange
controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of our ordinary or preferred
shares. BVI law and our Amended and Restated Memorandum and Articles of Association do not impose any material limitations
on the right of non-residents or foreign owners to hold or vote our ordinary or preferred shares.
Exchange Controls in China
Under the Foreign Currency Administration
Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities,
RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as
trade related receipts and payments, interest and dividends and after complying with certain procedural requirements. The conversion
of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items,
such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office.
Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies must repatriate
foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated
foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved, domestic enterprises must convert
all of their foreign currency proceeds into RMB.
On October 21, 2005, SAFE issued the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special
purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose
of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control
of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration
procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established
or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas
investment foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with
the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment
or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material
change in the capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result
in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends
and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange
administration regulations.
On August 29, 2008, SAFE promulgated Circular
142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted
RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of Circular
142. Under Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not
be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital
converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed
without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans
have not been used. Violations of Circular 142 and Circular 45 could result in severe penalties, such as heavy fines as set out
in the relevant foreign exchange control regulations.
On April 8, 2015, SAFE released the Notice
on the Reform of the Administration Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE
Circular 19, which came into force and superseded SAFE Circular 142 on June 1, 2015. Circular 19 allows foreign
invested enterprises to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business
operation and provides the procedures for foreign invested companies to use Renminbi converted from foreign currency-denominated
capital for equity investment. Nevertheless, Circular 19 also reiterates the principle that Renminbi converted from foreign
currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business
scope. Since Circular 19 was only recently promulgated, there are uncertainties on how it will be interpreted and implemented
in practice.
In February 2015, SAFE also promulgated
the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment,
or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE Circular 13, the current foreign exchange procedures will
be further simplified, and foreign exchange registrations of direct investment will be handled by the banks designated by the foreign
exchange authority instead of SAFE and its branches. However, the foreign invested enterprises are still prohibited by SAFE Circular
13 to use the RMB converted from foreign currency-registered capital to extend entrustment loans, repay bank loans or inter-company
loans.
The following is a general summary of
certain material BVI, China and U.S. federal income tax considerations. The discussion is not intended to be, nor should
it be construed as, legal or tax advice to any particular prospective shareholder. The discussion is based on laws and
relevant interpretations thereof in effect as of the date hereof, all of which are
subject to change or different interpretations,
possibly with retroactive effect.
BVI Taxation
The BVI does not impose a withholding tax
on dividends paid to holders of our ordinary shares, nor does the BVI levy any capital gains or income taxes on us. Further, a
holder of our ordinary shares who is not a resident of the BVI is exempt from the BVI income tax on dividends paid with respect
to the ordinary shares. Holders of ordinary shares are not subject to the BVI income tax on gains realized on the sale or disposition
of the ordinary shares.
Our ordinary shares are not subject to
transfer taxes, stamp duties or similar charges in the BVI. However, as a company incorporated under the 2004 Act, we are required
to pay the BVI government an annual license fee based on the number of shares we are authorized to issue.
There is no income tax treaty or convention
currently in effect between the United States and the BVI.
Taxation in China
We are a holding company incorporated in
the BVI, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation rules,
both of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax rate of
25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally
be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s jurisdiction
of incorporation and China to reduce such rate.
Under the Arrangement between the Mainland
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend withholding tax
rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. Under the
aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong Kong holding companies may be subject
to a withholding tax at the rate of 5% if they are not considered to be a PRC “resident enterprise” as described below.
However, if the Hong Kong holdings companies are not considered to be the “beneficial owner” of such dividends under
the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties promulgated by the State Administration
of Taxation on October 27, 2009 (and not a PRC “resident enterprise”), such dividends would be subject to the withholding
tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a significant impact on the amount of dividends to
be received by us and ultimately by shareholders.
According to the Notice Regarding Interpretation
and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a person who has the
right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner”
may be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit
company is not a “beneficial owner.” The term “conduit company” refers to a company which is usually established
for purposes of dodging or reducing taxes, and transferring or accumulating profits. Such a company is only registered in the country
of domicile to satisfy the organizational form as required by law, but it does not engage in such substantial business operations
as manufacturing, distribution and management.
In addition to the changes to the current
tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within
China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing
rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.”
It remains unclear whether the PRC tax
authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently
consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax
reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income
would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends
paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax,
have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
United States Federal Taxation
The following is a discussion of certain
material U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares by U.S. holders
(as defined below). It does not purport to be a comprehensive description of all of the tax considerations that may be relevant
to a particular person’s situation. The discussion applies only to U.S. holders that hold their ordinary shares as capital
assets (generally property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended,
or the Code. This discussion is based on the Code, income tax regulations promulgated there under, judicial positions, published
positions of the Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect as of the date hereof
and all of which are subject to change, possibly with retroactive effect. This discussion is general in nature and is not exhaustive
of all possible tax considerations, nor does the discussion address any state, local or foreign tax considerations or any U.S.
tax considerations (e.g., estate or gift tax) other than U.S. federal income tax considerations, that may be applicable to particular
holders.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it address the U.S. federal
income tax consequences to persons who are subject to special rules under U.S. federal income tax law, including:
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banks, insurance companies or other financial institutions;
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persons subject to the alternative minimum tax;
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tax-exempt organizations;
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controlled foreign corporations, passive foreign investment companies and corporations that accumulate
earnings to avoid United States federal income tax;
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certain former citizens or long-term residents of the United States;
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dealers in securities or currencies;
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traders in securities that elect to use a mark-to-market method of accounting for their securities
holdings;
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persons that own, or are deemed to own, more than five percent of our capital stock;
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holders who acquired our stock as compensation or pursuant to the exercise of a stock option;
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persons who hold our common stock as a position in a hedging transaction, “straddle,”
or other risk reduction transaction; or
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●
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persons who do not hold our ordinary shares as a capital asset (within the meaning of Section 1221
of the Code).
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For purposes of this discussion, a U.S.
holder is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; (ii) a
corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the
laws of the United States (or treated as such under applicable U.S. tax laws), any state thereof, or the District of Columbia;
(iii) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if
(a) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or (b) it has a valid election in effect under applicable
law and regulations to be treated as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder that is
neither a U.S. holder nor a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
In the case of a partnership or entity
classified as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner generally
will depend on the status of the partner and the activities of the partnership. Partners of partnerships should consult their tax
advisors regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition of our ordinary
shares.
Distributions
On August 11, 2016, the Board of Directors
approved a regular cash dividend policy pursuant to which future cash dividends are expected to be paid to holders of the Company’s
ordinary shares on an annual basis out of funds legally available for such purpose. The gross amount of such distributions will
be included in the gross income of the U.S. holder as dividend income on the date of receipt to the extent that the distribution
is paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such dividends
will be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S.
corporations. Dividends received by non-corporate U.S. holders, including individuals, may be subject to reduced rates of taxation
under current law. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed
on dividends paid by us. However, the foreign tax credit rules are complex, and their application in connection with Section 7874
of the Code and the Agreement Between the Government of the United States of America and the Government of the People’s Republic
of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC
Tax Treaty, is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect to any benefits
they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
To the extent that dividends paid on our
ordinary shares exceed current and accumulated earnings and profits, the distributions will be treated first as a tax-free return
of tax basis on our ordinary shares, and to the extent that the amount of the distribution exceeds tax basis, the excess will be
treated as gain from the disposition of those ordinary shares.
Sale or Other Disposition
U.S. holders of our ordinary shares will
recognize taxable gain or loss on any sale, exchange, or other taxable disposition of ordinary shares equal to the difference between
the amounts realized for the ordinary shares and the U.S. holder’s tax basis in the ordinary shares. This gain or loss generally
will be capital gain or loss. Under current law, non-corporate U.S. holders, including individuals, are eligible for reduced tax
rates if the ordinary shares have been held for more than one year. The deductibility of capital losses is subject to limitations.
A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on gain from the sale
or other disposition of ordinary shares. However, the foreign tax credit rules are complex, and their application in connection
with Section 7874 of the Code and the U.S.-PRC Tax Treaty is not entirely clear at this time. U.S. holders should consult
their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC
Tax Treaty.
Unearned Income Medicare Contribution
Certain U.S. holders who are individuals,
trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things, dividends on and capital gains
from the sale or other disposition of shares of stock for taxable years beginning after December 31, 2013. U.S. holders should
consult their own advisors regarding the effect, if any, of this legislation on their ownership and disposition of our ordinary
shares.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions
of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”), when applicable, will impose
a U.S. federal withholding tax of 30% on certain “withholdable payments” (generally certain U.S.-source income, including
dividends, and the gross proceeds from the sale or other disposition of assets producing U.S. source dividends or interest ) to
foreign financial institutions and other non-U.S. entities that fail to comply with certain certification and information reporting
(generally relating to ownership by U.S persons of interests in or accounts with those entities). The obligation to withhold under
FATCA applies to, among other items, (i) U.S.-source dividend income that is paid on or after July 1, 2014 and (ii) to gross proceeds
from the disposition of property that can produce U.S.-source dividends paid on or after January 1, 2017. Non-U.S. holders should
consult their tax advisors concerning application of FATCA to our ordinary shares in their particular circumstances.
Information Reporting and Backup
Withholding
Payments of dividends or of proceeds on
the disposition of stock made to a holder of our ordinary shares may be subject to information reporting and backup withholding
at a current rate of 28% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other appropriate
withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S.
status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8. Payments of dividends to holders must generally
be reported annually to the IRS, along with the name and address of the holder and the amount of tax withheld, if any. A similar
report is sent to the holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available
to tax authorities in the holder’s country of residence.
Backup withholding is not an additional
tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld.
If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the
required information is furnished to the IRS in a timely manner.
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F.
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Dividends and Paying Agents
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On February 9, 2015, we declared a
special cash dividend of US$0.40 per share to the holders of the Company’s ordinary shares. The record day was February
23, 2015, and payment day was March 16, 2015. Continental Stock Transfer & Trust acted as the paying agent. During the
fiscal year of 2016, no cash dividend was declared and paid.
On August 11, 2016, the Board of Directors
of the Company approved a regular cash dividend policy pursuant to which future cash dividends are expected to be paid to holders
of the Company’s ordinary shares on an annual basis out of funds legally available for such purpose. On September 26, 2016,
the Board of Directors declared a regular annual dividend of $0.20 per ordinary share for 2016. The dividend was payable on November
11, 2016 to shareholders of record at the close of business on October 26, 2016. The declaration and payment of future dividends
will be at the discretion of the Board of Directors, and will depend upon many factors, including the Company’s financial
condition, earnings, capital requirements of its businesses, legal requirements, regulatory constraints, industry practice, and
other factors that the Board of Directors deems relevant.
Not applicable.
We have filed this Annual Report on Form
20-F with the SEC under the Exchange Act. Statements made in this Annual Report as to the contents of any document referred
to are not necessarily complete. With respect to each such document filed as an exhibit to this Annual Report, reference is
made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in
its entirety by such reference.
We are subject to the informational requirements
of the Exchange Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information
filed by us with the SEC, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of
the SEC at 100 F. Street, N.E., Washington D.C. 20549. You can also obtain copies of this Annual Report on Form 20-F
by mail from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally,
copies of this material may be obtained from the SEC’s Internet site at
http://www.sec.gov
. The SEC’s
telephone number is 1-800-SEC-0330.
As a foreign private issuer, we are exempt
from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section
16 of the Exchange Act.
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I.
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Subsidiary Information
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Not applicable.
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Interest Rate Risk
We are exposed to interest rate risk primarily
with respect to our bank loans. A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under
which we had outstanding borrowings as of June 30, 2017, would decrease income before income taxes by approximately $0.3 million
for the fiscal year ended June 30, 2017. Management monitors the banks’ prime rates in conjunction with our cash requirements
to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging
transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S.
dollar, 75.6% of our consolidated revenues and consolidated costs and expenses are denominated in RMB, and 83.9% of our assets
are denominated in RMB, and the remaining are mainly denominated in SGD. As a result, we are exposed to foreign exchange
risk as our revenues and results of operations may be affected by fluctuations in the exchange rates of the U.S. dollar, RMB and
SGD. If the RMB or SGD depreciates against the U.S. dollar, the value of our RMB or SGD revenues, earnings and assets
as expressed in our U.S. dollar financial statements will decline. Assets and liabilities are translated at exchange
rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders’
equity is translated at historical exchange rates. Any resulting translation adjustments are not included in determining
net income but are included in determining other comprehensive income, a component of shareholders’ equity. An
average appreciation or depreciation of the RMB against the US dollar of 5% would increase or decrease our comprehensive income
by $508,651 and $562,192, respectively. An average appreciation or depreciation of the SGD against the US dollar of 5% would decrease
or increase our comprehensive income by $501,068 or $553,813 respectively, based on our current revenues, costs and expenses, assets,
and liabilities denominated in RMB or SGD as of June 30, 2017.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations for the RMB. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk in any of the currencies in which we operate. While we may
enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and it
may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by
PRC exchange control regulations that restrict its ability to convert RMB into foreign currencies.
Inflation
Inflation in China and the other regions
in which we operate has not materially impacted our results of operations. Although we have not been materially affected by inflation
in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation. To the extent
that we operate in a more diverse range of countries and regions, the risk of inflation on our operations is minimized. If inflation
were a significant factor in our financial performance, then certain operating costs and expenses, such as employee compensation
and office operating expenses may increase. Additionally, because a substantial portion of our assets from time to time consists
of cash and cash equivalents and time deposits with original maturities over three months, high inflation could significantly reduce
the value and purchasing power of these assets.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
We do not have any American Depositary
Shares.
* The share capital increase for the issuance of ordinary shares
upon exercise of options, restricted share and Incentive and Premium Shares for Bond are less than $1.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
(Amounts in thousands except for number
of shares and per share data)
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS
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NOTE 1 -
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ORGANIZATION AND BUSINESS BACKGROUND
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Hollysys Automation Technologies Ltd. (“Hollysys”
or the “Company”) was established under the laws of the British Virgin Islands (“BVI”) on February 6, 2006.
As of June 30, 2017, the Company had subsidiaries incorporated in countries and jurisdictions including the
People’s Republic of China (“PRC”), Singapore, Malaysia, Macau, Hong Kong, BVI and India.
The Company makes a determination at the
inception of each arrangement whether an entity in which the Company has made an investment or in which the Company has other variable
interests is considered a variable interest entity (“VIE”). The Company consolidates a VIE when it is deemed to be
the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power
to make decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses
or the right to receive benefits that in either case could potentially be significant to the VIE. Periodically, the Company determines
whether any changes occurred requiring a reassessment of whether it is the primary beneficiary of a VIE. If the Company is not
deemed to be the primary beneficiary in a VIE, the investment or other variable interests in a VIE is accounted for in accordance
with applicable GAAP.
In November 2015, CECL was established
in Doha, Qatar, by CCPL, a wholly-owned subsidiary of the Company incorporated under the laws of Singapore, and a Qatar citizen
as a nominee shareholder, with 49% and 51% of equity interest in CECL, respectively. Through a series of contractual arrangements
signed in November 2015 and September 2016, CCPL is entitled to appoint majority of directors of CECL who have the power to direct
the activities that significantly impact CECL’s economic performance. In addition, CCPL is entitled to 95% of the variable
returns or loss from CECL’s operations. In accordance with ASC 810,
Consolidation
, despite the lack of technical
majority ownership, there exists a parent-subsidiary relationship between CCPL and CECL through the series of contractual arrangements
and CCPL is considered the primary beneficiary of CECL. CECL was concluded as a VIE of the Company and consolidated by the Company
since inception.
The carrying amounts and classifications of the assets and liabilities of the VIE are as follows:
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June 30,
|
|
|
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2016
|
|
|
2017
|
|
|
|
|
|
|
|
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Current assets
|
|
$
|
105
|
|
|
$
|
14,331
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|
Non-current assets
|
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|
69
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|
|
|
239
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Total assets
|
|
|
174
|
|
|
|
14,570
|
|
|
|
|
|
|
|
|
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Current liabilities
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|
$
|
270
|
|
|
$
|
14,178
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Total liabilities
|
|
|
270
|
|
|
|
14,178
|
|
|
|
Year ended June 30,
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|
|
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2016
|
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2017
|
|
|
|
|
|
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|
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Revenue
|
|
$
|
-
|
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$
|
6,914
|
|
Cost of revenue
|
|
|
-
|
|
|
|
5,753
|
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Net (loss) profit
|
|
|
(151
|
)
|
|
|
494
|
|
Net cash provided by operating activities
|
|
|
71
|
|
|
|
8,721
|
|
Net cash used in investing activities
|
|
|
(71
|
)
|
|
|
(216
|
)
|
Net cash provided by financing activities
|
|
$
|
55
|
|
|
$
|
-
|
|
As of June 30, 2017, the current assets
of the VIE included amounts due from subsidiaries of the Group amounting to $1,629 (June 30, 2016: nil), and the current liabilities
of the VIE included amounts due to subsidiaries of the Group amounting to $127 (June 30, 2016: nil), which were all eliminated
upon consolidation by the Company. Creditors of the VIE do not have recourse to the general credit of the Company for the liabilities
of the VIE. The Company is obligated to absorb the VIE’s expected losses and to provide financial support to the VIE if
required. For the years ended June 30, 2016 and 2017, the Company has not provided financial support other than that which it
was contractually required to provide. The Company believes that there are no assets of the VIE that can be used only to settle
obligations of the VIE.
The Group is principally engaged in the
manufacture, sale and provision of integrated automation systems and services, mechanical and electrical solution services and
installation services in the PRC, Southeast Asia and the Middle East.
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NOTE 2 -
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation
The consolidated financial statements are prepared in accordance
with United States generally accepted accounting principles (“U.S. GAAP”).
Principles of Consolidation
The consolidated financial statements include
the financial statements of the Company, its subsidiaries and a VIE. All inter-company transactions and balances between the Company,
its subsidiaries, and the VIE are eliminated upon consolidation. The Company included the results of operations of acquired businesses
from the respective dates of acquisition.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Use of estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Management evaluates estimates, including those related to the expected
total costs of integrated contracts, expected gross margins of integrated solution contracts, allowance for doubtful accounts,
fair values of share options, fair value of bifurcated derivative, fair value of retained non-controlling investment in the former
subsidiary, warranties, valuation allowance of deferred tax assets and impairment of goodwill and other long-lived assets. Management
bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results
of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ
materially from those estimates.
Foreign currency translations
and transactions
The Company’s functional currency
is the United States dollars (“US dollars” or “$”); whereas the Company’s subsidiaries and VIE use
the primary currency of the economic environment in which their operations are conducted as their functional currency. According
to the criteria of Accounting Standards Codification (“ASC”) Topic 830 (“ASC 830”), the Company uses the
US dollars as its reporting currency.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
The Company translates the assets and liabilities
into US dollars using the rate of exchange prevailing at the balance sheet date, and the statements of comprehensive income are
translated at average rates during the reporting period. Adjustments resulting from the translation of financial statements from
the functional currency into US dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income.
Transactions dominated in currencies other than the functional currency are translated into functional currency at the exchange
rates prevailing on the transaction dates, and the exchange gains or losses are reflected in the consolidated statements of comprehensive
income for the reporting period.
Transactions denominated in foreign currencies
are measured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated
financial assets and liabilities are re-measured at the exchange rates prevailing at the balance sheet date. Exchange gains and
losses are included in earnings, except for those raised from intercompany transactions with investment nature, which are recorded
in other comprehensive income.
Business combinations
The Company accounts for its business combinations
using the purchase method of accounting in accordance with ASC Topic 805,
Business Combinations
(“ASC 805”).
The purchase method of accounting requires that the consideration transferred to be allocated to the assets, including separately
identifiable assets and liabilities the Company acquired based on their estimated fair values. The consideration transferred of
an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred,
and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition
date. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value
as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total cost of the
acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest
in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of
acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in
the statements of comprehensive income.
The determination and allocation of fair
values to the identifiable assets acquired, liabilities assumed and non-controlling interests is based on various assumptions and
valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount
rates, terminal values, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines
discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons.
Terminal values are based on the expected life of assets and forecasted cash flows over that period.
Acquisition-related costs are recognized
as general and administrative expenses in the statements of comprehensive income as incurred.
Cash and cash equivalents
Cash and cash equivalents consist of cash
on hand and bank deposits, which are unrestricted as to withdrawal and use. All highly liquid investments that are readily convertible
to known amounts of cash with original stated maturities of three months or less are classified as cash equivalents.
Time deposits with
original maturities over three months
Time deposits with original maturities
over three months consist of deposits placed with financial institutions with original maturity terms from four months to one year.
As of June 30, 2017, $80,507, $11,690, $3,935 and $82 of time deposits with original maturities over three months were placed in
financial institutions in the PRC, Singapore, Malaysia and India, respectively. As of June 30, 2016, $35,318, $7,042, $8 and nil
of time deposits with original maturities over three months were placed in financial institutions in the PRC, Singapore and Malaysia
and India, respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Restricted cash
Restricted cash mainly consists of the
cash deposited in banks pledged for performance guarantees, or bank loans. These cash balances are not available for use until
these guarantees are expired or cancelled, or the loans are repaid.
Revenue recognition
Integrated solutions contracts
Revenues generated from designing, building,
and delivering customized integrated industrial automation systems are recognized over the contractual terms based on the percentage
of completion method. The contracts for designing, building, and delivering customized integrated industrial automation systems
are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract
size and ranges from 6 months to 5 years excluding the warranty period. The majority of the contract duration is longer than one
year.
Revenue generated from mechanical and electrical
solution contracts for the construction or renovation of buildings, rail or infrastructure facilities are also recognized over
the contractual terms based on the percentage of completion method. The contracts for mechanical and electrical solution are legally
enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract size and
the complexity of the construction work and ranges from 6 months to 3 years excluding the warranty period. The majority of the
contract duration is longer than one year.
In accordance with ASC 605-35,
Revenue
Recognition - Construction-Type and Production-Type Contracts
(“ASC 605-35”), recognition is based on an estimate
of the income earned to date, less income recognized in earlier periods. Extent of progress toward completion is measured using
the cost-to-cost method where the progress (the percentage complete) is determined by dividing costs incurred to date by the total
amount of costs expected to be incurred for the integrated solutions contract. Revisions in the estimated total costs of integrated
solutions contracts are made in the period in which the circumstances requiring the revision become known. Provisions, if any,
are made in the period when anticipated losses become evident on uncompleted contracts.
The Company reviews and updates the estimated
total costs of integrated solutions contracts at least annually. The Company accounts for revisions to contract revenue and estimated
total costs of integrated solution contracts, including the impact due to approved change orders, in the period in which the facts
that cause the revision become known as changes in estimates. Unapproved change orders are considered claims. Claims are recognized
only when it has been awarded by customers. Excluding the impact of change orders, if the estimated total costs of integrated solution
contracts, which were revised during the years ended June 30, 2015, 2016 and 2017, had been used as a basis of recognition of integrated
contract revenue since the contract commencement, net income for the years ended June 30, 2015, 2016 and 2017 would have been decreased
by $26,232, $30,270, and $12,062, respectively; basic net income per share for years ended June 30, 2015, 2016 and 2017 would have
been decreased by $0.45, $0.51, and $0.20, respectively; and diluted net income per share for the years ended June 30, 2015, 2016
and 2017, would have decreased by $0.44, $0.50, and $0.20, respectively. Revisions to the estimated total costs for the years ended
June 30, 2015, 2016 and 2017 were made in the ordinary course of business.
The Company combines a group of contracts
as one project if they are closely related and are, in substance, parts of a single project with an overall profit margin. The
Company segments a contract into several projects, when they are of different business substance, for example, with different business
negotiation, solutions, implementation plans and margins.
Revenue in excess of billings on
the contracts is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues recognized on
the contracts are recorded as deferred revenue until the above revenue recognition criteria are met. Recognition of accounts receivable
and costs and estimated earnings in excess of billings are discussed below.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
The Company generally recognizes 100% of
the contractual revenue when the customer acceptance has been obtained and no further major costs are estimated to be incurred,
and normally this is also when the warranty period commences. Revenues are presented net of taxes collected on behalf of the government.
Product sales
Revenue generated from sales of products
is recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
Service rendered
The Company has in recent years extended
its service offerings as described below. The Company mainly provides two types of services:
Revenue from one-off services: the Company
provides different types of one-off services, including on-site maintenance service and training services which are generally completed
on site within a few working days. Revenue is recognized when the Company has completed all the respective services described in
the contracts, there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured.
Revenue from services covering a period
of time: the Company also separately sells extended warranties to their integrated solution customers for a fixed period. Such
arrangements are negotiated separately from the corresponding integrated solution system and are usually entered into upon the
expiration of the warranty period attached to the integrated solution contract. During the extended warranty period, the Company
is responsible for addressing issues related to the system. Part replacement is not covered in such services. The Company recognizes
revenue on a pro-rata basis over the contractual term.
Accounts receivable
and costs and estimated earnings in excess of billings
Performance of the integrated contracts
will often extend over long periods and the Company’s right to receive payments depends on its performance in accordance
with the contractual agreements. There are different billing practices in the PRC, overseas operating subsidiaries and the VIE
(Concord and Bond Groups). For the Company’s PRC subsidiaries, billings are issued based on milestones specified in contracts
negotiated with customers. In general, there are four milestones: 1) project commencement, 2) system manufacturing and delivery,
3) installation, trial-run and customer acceptance, and 4) expiration of the warranty period. The amounts to be billed at each
milestone are specified in the contract. All contracts have the first milestone, but not all contracts require prepayments. The
length of each interval between two continuous billings under an integrated contract varies depending on the duration of the contract
(under certain contracts, the interval lasts more than a year) and the last billing to be issued for an integrated solution contract
is scheduled at the end of a warranty period. For Concord and Bond Groups, billing claims rendered are subject to the further approval
and certification of the customers or their designated consultants. Payments are made to Concord or Bond Groups based on the certified
billings according to the payment terms mutually agreed between the customers and Concord or Bond Groups. Certain amounts are retained
by the customer and payable to Concord and Bond Groups upon satisfaction of final quality inspection or at the end of the warranty
period. The retained amounts which were recorded as accounts receivable were $10,848 and $12,838 for the two years ended June 30,
2016 and 2017, respectively. Prepayments received are recorded as deferred revenue. The deferred revenue will be recognized as
revenue under the percentage of completion method along with the progress of a contract.
The
carrying value of the Company’s accounts receivable and costs and estimated earnings in excess of billings, net of the allowance
for doubtful accounts, represents their estimated net realizable value.
An allowance for doubtful accounts is recognized
when it’s probable that the Company will not collect the amount and is written off in the period when deemed uncollectible.
The Company periodically reviews the status of contracts and decides how much of an allowance for doubtful accounts should be
made based on factors surrounding the credit risk of customers and historical experience. The Company does not require collateral
from its customers and does not charge interest for late payments by its customers.
Inventories
Inventories are composed of raw materials, work in progress,
purchased
and manufactured finished goods and low value consumables. Inventories are stated at the lower of cost or market. The Company elected
to use weighted average cost method as inventory costing method.
The Company assesses the lower of cost
or market for non-saleable, excess or obsolete inventories based on its periodic review of inventory quantities on hand and the
latest forecasts of product demand and production requirements from its customers. The Company writes down inventories for non-saleable,
excess or obsolete raw materials, work-in-process and finished goods by charging such write-downs to cost of integrated contracts
and/or costs of products sold.
Warranties
Warranties represent a major term under
an integrated contract, which will last, in general, for one to three years or otherwise specified in the terms of the contract.
The Company accrues warranty liabilities under an integrated contract as a percentage of revenue recognized, which is derived from
its historical experience, in order to recognize the warranty cost for an integrated contract throughout the contract period.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Property, plant and
equipment, net
Property, plant and equipment, other than
construction in progress, are recorded at cost and are stated net of accumulated depreciation and impairment, if any. Depreciation
expense is determined using the straight-line method over the estimated useful lives of the assets as follows:
Buildings
|
30 -50 years
|
Machinery
|
5 - 10 years
|
Software
|
3 - 5 years
|
Vehicles
|
5- 6 years
|
Electronic and other equipment
|
3 - 10 years
|
Construction in progress represents uncompleted
construction work of certain facilities which, upon completion, management intends to hold for production purposes. In addition
to costs under construction contracts, other costs directly related to the construction of such facilities, including duty and
tariff, equipment installation and shipping costs, and borrowing costs are capitalized. Depreciation commences when the asset is
placed in service.
Maintenance and repairs are charged directly
to expenses as incurred, whereas betterment and renewals are capitalized in their respective accounts. When an item is retired
or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized
for the reporting period.
Prepaid land leases,
net
Prepaid land lease payments, for the land
use right of three parcels of land in the PRC, three parcels of leasehold land in Malaysia and one parcel of leasehold land in
Singapore, are initially stated at cost and are subsequently amortized on a straight-line basis over the lease terms of 49 to 88
years.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Intangible assets, net
Intangible assets are carried at cost less
accumulated amortization and any impairment. Intangible assets acquired in a business combination are recognized initially at fair
value at the date of acquisition. Intangible assets, except for which are estimated to have an indefinite useful life, are amortized
using a straight-line method. Intangible assets estimated to have an indefinite useful life are not amortized but tested for impairment
annually or more frequently when indicators of impairment exist.
The estimated useful lives for the intangible
assets are as follows:
Category
|
|
Estimated
useful life
|
|
|
|
Customer relationship
|
|
57 - 60 months
|
Order backlog
|
|
21 - 33 months
|
Patents and copyrights
|
|
60 - 120 months
|
Residual values are considered nil.
Goodwill
Goodwill represents the excess of the purchase
price over the estimated fair value of net tangible and identifiable intangible assets acquired. The Company assesses goodwill
for impairment in accordance with ASC subtopic 350-20 (“ASC 350-20”), Intangibles – Goodwill and Other, which
requires that goodwill is not amortized but to be tested for impairment at the reporting unit level at least annually and more
frequently upon the occurrence of certain events, as defined by ASC 350-20.
The Company’s goodwill outstanding
at June 30, 2017 was related to the acquisitions of two reporting units, Concord Group and Bond Group.
The Company has the option to assess qualitative
factors first to determine whether it is necessary to perform the two-step test in accordance with ASC 350-20. If the Company
believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit
is less than its carrying amount, the two-step quantitative impairment test described above is required. Otherwise, no further
testing is required. In the qualitative assessment, the Company considers primary factors such as industry and market considerations,
overall financial performance of the reporting unit, and other specific information related to the operations. In performing the
two-step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair value of
the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination of
the income approach and the market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting
unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the reporting
unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order
to determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated
to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value
of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized
as an impairment loss.
The Company elected to assess goodwill
for impairment using the two-step process for both Concord Group and Bond Group for the year ended June 30, 2017, with assistances
from a third-party appraiser. Concord and Bond Groups’ management judgment is involved in determining these estimates and
assumptions, and actual results may differ from those used in valuations. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit which could trigger future impairment. The judgment in estimating
the fair value of reporting units includes forecasts of future cash flows, which are based on management’s best estimate
of future revenue, gross profit, operating expenses growth rates, future capital expenditure and working capital level, as well
as discount rate determined by Weighted Average Cost of Capital approach and the selection of comparable companies operating in
similar businesses. The Company also reviewed marketplace and/or historical data to assess the reasonableness of assumptions such
as discount rate and working capital level.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
The carrying amount of Concord Group exceeded
its fair value as of June 30, 2017, and a goodwill impairment charge of $11,211 was recorded in the statement of comprehensive
income based on the second step testing result.
There are uncertainties surrounding the
amount and timing of future expected cash flows as they may be impacted by negative events such as a slowdown in the mechanical
and electrical engineering sector, deteriorating economic conditions in the geographical areas Concord Group operates in, political,
economic and social uncertainties in the Middle East, increasing competitive pressures and fewer than expected mechanical and electrical
solution contracts awarded to Concord Group. These events can negatively impact demand for Concord Group’s services and result
in actual future cash flows being less than forecasted or delays in the timing of when those cash flows are expected to be realized.
Further, the timing of when actual future cash flows are received could differ from the Company’s estimates, which are based
on historical trends and does not factor in unexpected delays in project commencement or execution.
The fair value of Bond Group exceeded its
carrying amounts as of June 30, 2017, and therefore goodwill related to Bond Group was not impaired and the Company was not required
to perform further step testing.
Impairment of long-lived
assets other than goodwill
The Company evaluates its long-lived assets
or asset group including acquired intangibles with finite lives for impairment whenever events or changes in circumstances (such
as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying
amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Company evaluates the impairment
by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets
and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets,
the Company recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally
based upon discounted cash flows or quoted market prices.
Shipping and handling
costs
All shipping and handling fees charged
to customers are included in net revenue. Shipping and handling costs incurred are included in cost of integrated contracts and/or
costs of products sold as appropriate.
Income taxes
The Company follows the liability method
of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period
in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based
on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the
enactment date of the change in tax rate.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
The Company adopted ASC 740,
Income
Taxes
(“ASC 740”)
,
which clarifies the accounting and disclosure for uncertainty in income taxes. Interests
and penalties arising from underpayment of income taxes shall be computed in accordance with the related tax laws. The amount of
interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized
and the amount previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with
ASC 740 are classified in the financial statements as a component of income tax expense. In accordance with the provisions of ASC
740, the Company recognizes in its financial statements the impact of a tax position if a tax return position or future tax position
is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet
the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater
than fifty percent likelihood of being realized upon settlement. The Company’s estimated liability for unrecognized tax positions
which is included in the accrued liabilities is periodically assessed for adequacy and may be affected by changing interpretations
of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations.
The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases,
appeal or litigation process. The actual benefits ultimately realized may differ from the Company’s estimates. As each annual
filling is done, adjustments, if any, are recorded in the Company’s financial statements. Additionally, in future periods,
changes in facts, circumstances, and new information may require the Company to adjust the recognition and measurement estimates
with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which
the changes occur.
Research and development
costs
Research and development costs consist
primarily of salaries, bonuses and benefits for research and development personnel. Research and development costs also include
travel expenses of research and development personnel as well as depreciation of hardware equipment and software tools and other
materials used in research and development activities. Research and development costs are expensed as incurred. Software development
costs are also expensed as incurred as the costs qualifying for capitalization have been insignificant.
VAT refunds and government
subsidies
Pursuant to the laws and regulations of
the PRC, the Company remits 17% of its sales as valued added tax (“VAT”), and then is entitled to a refund of the portion
that the Company’s actual VAT burden exceeding 3% levied on all sales containing internally developed software products.
VAT refunds are recognized in the statements of comprehensive income when cash refunds or the necessary approval from the tax authority
has been received. Certain subsidiaries of the Company located in the PRC receive government subsidies from local PRC government
agencies. Government subsidies are recognized in the statement of comprehensive income when the attached conditions have been met.
Government grants received for the years ended June 30, 2015, 2016 and 2017 amounted to $7,593, $6,085 and $10,238 respectively,
of which $2,191, $2,886 and $12,885 were included as a credit to operating expenses in the statements of comprehensive income for
the years ended June 30, 2015, 2016 and 2017, respectively.
Appropriations to
statutory reserve
Under the corporate law and relevant regulations
in the PRC, all of the subsidiaries of the Company located in the PRC are required to appropriate a portion of its retained earnings
to statutory reserve. All subsidiaries located in the PRC are required to appropriate 10% of its annual after-tax income each year
to the statutory reserve until the statutory reserve balance reaches 50% of the registered capital. In general, the statutory reserve
shall not be used for dividend distribution purposes. In Dubai and Qatar, companies are required to appropriate 10% of its annual
after-tax income each year to the statutory reserve and the appropriation may be suspended by the shareholders if the reserve reaches
50% of the registered capital. The statutory reserve can be used to cover the losses of the companies or to increase the capital
of the companies with a decision by the general assembly of CCDB and CECL.
Segment reporting
In accordance with ASC 280,
Segment
reporting
(“ASC 280”), segment reporting is determined based on how the Company’s chief operating decision
makers review operating results to make decisions about allocating resources and assessing performance of the Company. According
to management’s approach, the Company organizes its internal financial reporting structure based on its main product and
service offerings. The Company operates in three principal business segments in the financial reporting structure and their management
report, namely industrial automation, rail transportation and mechanical and electrical solutions. The Company does not allocate
any assets to the three segments as management does not use the information to measure the performance of the reportable segments.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Comprehensive income
Comprehensive income is defined as the
changes in equity of the Company during a period from transactions and other events and circumstances excluding transactions resulting
from investments by owners and distributions to owners. In accordance with ASC 220,
Comprehensive Income
(“ASC 220”),
the Company presents components of net income and other comprehensive income in one continuous statement.
Investments in cost
and equity investees
The Company accounts for its equity investments
under either the cost method or the equity method by considering the Company’s rights and ability to exercise significant
influence over the investees. Under the cost method, investments are initially carried at cost. In the event that the fair value
of the investment falls below the initial cost and the decline is considered as other-than-temporary, the Company recognizes an
impairment charge, equal to the difference between the cost basis and the fair value of the investment. A variety of factors are
considered when determining if a decline in fair value below carrying value is other than temporary, including, among others, the
financial condition and prospects of the investee.
The investments in entities over which
the Company has the ability to exercise significant influence are accounted for using the equity method. Significant influence
is generally considered to exist when the Company has an ownership interest in the voting stock of the investee between 20% and
50%. Other factors, such as representation on the investee’s board of directors and the impact of commercial arrangements,
are also considered in determining whether the equity method of accounting is appropriate.
Under the equity method, original investments
are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these entities, by the amortization
of any basis difference between the amount of the Company’s investment and its share of the net assets of the investee, and
by dividend distributions or subsequent investments. Unrealized inter-company profits and losses related to equity investees are
eliminated. An impairment charge, being the difference between the carrying amount and the fair value of the equity investee, is
recognized in the consolidated statements of comprehensive income when the decline in value is considered other than temporary.
There was no impairment loss on
investments
in cost or equity investees for the years ended June 30, 2015, 2016 and 2017, respectively.
Capitalization of
interest
Interest incurred on borrowings for the
Company’s construction of facilities and assembly line projects during the active construction period are capitalized. The
capitalization of interest ceases once a project is substantially complete. The amount to be capitalized is determined by applying
the weighted-average interest rate of the Company’s outstanding borrowings to the average amount of accumulated capital expenditures
for assets under construction during the year and is added to the cost of the underlying assets and amortized over their respective
useful lives.
Income per share
Income per share is computed in accordance
with ASC 260,
Earnings Per Share
(“ASC 260”). Basic income per ordinary share is computed by dividing income
attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period. Diluted
income per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares
were exercised or converted into ordinary shares.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Share-based compensation
The Company accounts for share-based compensation
in accordance with ASC 718,
Compensation-Stock Compensation
(“ASC 718”). The Company recognizes compensation
cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award. The compensation cost for each vesting tranche in an award subject to performance vesting is recognized
ratably from the service inception date to the vesting date for each tranche. To the extent the required service and performance
conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating
to those awards are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary,
in a subsequent period if actual forfeitures differ from initial estimates.
For share-based awards that are subject
to performance-based vesting conditions in addition to time-based vesting, the Company recognizes the estimated grant-date fair
value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the vesting period based
upon the Company’s determination of whether it is probable that the performance-based criteria will be achieved. At each
reporting period, the Company reassesses the probability of achieving the performance-based criteria. Determining whether the
performance-based criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised
periodically based on changes in the probability of achieving the performance-based criteria. Revisions are reflected in the period
in which the estimate is changed. If the performance-based criteria are not met, no share-based compensation expense is recognized,
and, to the extent share-based compensation expense was previously recognized, such share-based compensation expense is reversed.
Fair value measurements
The Company has adopted ASC 820,
Fair
Value Measurements and Disclosures
(“ASC 820”), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may
be used to measure fair value and include the following:
Level 1
|
-
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2
|
-
|
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
Level 3
|
-
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Classification within the hierarchy is
determined based on the lowest level of input that is significant to the fair value measurement.
ASC 820 describes three main approaches
to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market
approach uses prices and other relevant information generated from market transactions involving identical or comparable assets
or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement
is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Leases
Leases have been classified as either capital
or operating leases. Leases that transfer substantially all the benefits and risks incidental to the ownership of assets are accounted
for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases
are accounted for as operating leases wherein rental payments are expensed as incurred.
Accounting for lessor
Minimum contractual rental from leases
are recognized on a straight-line basis over the non-cancelable term of the lease. With respect to a particular lease, actual amounts
billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized
for the period. Straight-line rental revenue commences when the customer assumes control of the leased premises. Accrued straight-line
rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with
lease agreements. Contingent rental revenue is accrued when the contingency is removed.
Concentration of risks
Concentration of credit risk
Assets that potentially subject the Company
to significant concentration of credit risk primarily consist of cash and cash equivalents, time deposits with original maturities
over three months, restricted cash, accounts receivable, other receivables and amounts due from related parties. The maximum exposure
of such assets to credit risk is their carrying amounts as of the balance sheet date. As of June 30, 2017, substantially all of
the Company’s cash and cash equivalents and time deposits with original maturities exceeding three months were managed by
financial institutions located in the PRC, Singapore, Malaysia and Dubai, which management believes are of high credit quality.
Accounts receivable, other receivables and amounts due from related parties are typically unsecured and the risk with respect to
accounts receivable is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process
of outstanding balances.
The Company has no customer that individually
comprised 10% or more of the outstanding balance of accounts receivable as of June 30, 2016 and 2017, respectively.
Concentration of business and economic
risk
A majority of the Company’s net revenue
and net income are derived in the PRC. The Company’s operations may be adversely affected by significant political, economic
and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years,
no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting
the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of
economic reforms will be consistent or effective.
Concentration of currency convertibility
risk
A majority of the Company’s businesses
are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either
through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted
by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed
contracts.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Concentration of foreign currency
exchange rate risk
The Company’s exposure to foreign
currency exchange rate risk primarily relates to monetary assets or liabilities held in foreign currencies. Since July 21, 2005,
the RMB has been permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. On June
19, 2010, the People’s Bank of China announced the end of the RMB’s de facto peg to USD, a policy which was instituted
in late 2008 in the face of the global financial crisis, to further reform the RMB exchange rate regime and to enhance the RMB’s
exchange rate flexibility. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign
exchange market. The depreciation of the US dollars against RMB was approximately 0.64% for the years ended June 30, 2015, and
an appreciation of the US dollars against RMB was approximately 8.68% and 2.07% for the years ended June 30, 2016 and 2017, respectively.
Any significant revaluation of RMB may materially and adversely affect the Company’s cash flows, revenues, earnings and financial
position, and the value of its shares in US dollars. An appreciation of RMB against the US dollar would result in foreign currency
translation losses when translating the net assets of the Company from RMB into US dollar.
For the years ended June 30, 2015, 2016
and 2017, the net foreign currency translation losses resulting from the translation of RMB, SGD and other functional currencies
to the U.S. dollar reporting currency recorded in other comprehensive income was $1,386, $48,841 and $14,428, respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Recent accounting pronouncements
In August 2015, the Financial Accounting
Standards Board ("FASB") issued Accounting Standards Update 2015-14, which defers the effective date of ASU 2014-09
Revenue
from Contracts with Customers (Topic 606) ("
ASU 2014-09") by one year and allows entities the option to early adopt
the new revenue standard as of the original effective date. Issued in May 2014, ASU 2014-09 provided guidance on revenue recognition
on contracts with customers to transfer goods or services or on contracts for the transfer of nonfinancial assets. ASU 2014-09
requires that revenue recognition on contracts with customers depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU
2014-09 will be effective for us on July 1, 2018. The new revenue standard may be applied retrospectively to each prior period
presented or retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption. The Company
preliminarily plans to use the modified retrospective method and has developed an implementation plan. We are currently evaluating
the impact of adoption of this guidance, including required disclosures, and based upon current analysis, the Company does not
expect a significant impact on processes, systems or controls. The company will continue their assessment, which may identify other
impacts of the adoption of ASC 606.
In November 2015, the FASB issued ASU No.
2015-17 (“ASU 2015-17”),
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. ASU 2015-17
simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities
and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all
deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update
are effective for fiscal years beginning after December 15, 2016, and interim periods therein and may be applied either prospectively
or retrospectively to all periods presented. Early adoption is permitted. The Company will adopt ASU 2015-17 on July 1, 2017, and
does not expect this adoption of this update to have a material effect on the consolidated financial statements.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
In February 2016, the FASB issued ASU No.
2016-02 (“ASU 2016-02”),
Leases
. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU
2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the
lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public
companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption
is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
On March 30, 2016, the FASB issued ASU
2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”),
which relates to the accounting for employee share-based payments. This standard addresses several aspects of 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. This standard will be effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The new standard will be effective for the Company
for the fiscal year beginning July 1, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact
of this accounting standard on its consolidated financial statements, but does not expect the impact of adoption to be material.
In August 2016, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments.
This new standard will make eight targeted changes to how cash receipts and cash
payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning
after December 15, 2017, which means that it will be effective for the Company in the first quarter of the fiscal year beginning
July 1, 2018. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case
the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
evaluating the impact of the pending adoption of ASU 2016-15 on its consolidated financial statements.
In October 2016, the FASB issued ASU No.
2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. Under the new standard, the selling
(transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the purchasing
(receiving) entity is required to recognize a deferred tax asset or liability, as well as the related deferred tax benefit or expense,
upon purchase or receipt of the asset. This pronouncement is effective for reporting periods beginning after December 15, 2017,
with early adoption permitted. The Group is still evaluating the effect that this guidance will have on the consolidated financial
statements and related disclosures.
In January 2017, the FASB issued ASU No.
2017-01,
Business Combinations (Topic 805): Clarifying Definition of a Business
(“ASU 2017-01”). ASU 2017-01
clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business.
The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and
narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations.
Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset
acquisitions. This update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2017, with early adoption permitted for transactions that have not been reported in previously issued (or available to be
issued) financial statements. The Group does not believe this standard will have a material impact on the results of operations
or financial condition.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
In January 2017, the FASB issued Accounting
Standards Update No. 2017-04(“ASU 2017-04”),
Intangibles – Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment
. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to
measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s
carrying amount over its fair value. This standard is effective for public business entities in the first quarter of 2020. Early
adoption is permitted. The Company is currently evaluating the effect that this guidance will have on our consolidated financial
statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation: Scope of Modification
Accounting
.
The guidance clarifies when changes to
the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification
accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted.
Components of inventories are as follows:
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
12,975
|
|
|
$
|
15,781
|
|
Work in progress
|
|
|
12,770
|
|
|
|
19,525
|
|
Finished goods
|
|
|
10,656
|
|
|
|
10,354
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,401
|
|
|
$
|
45,660
|
|
|
NOTE 4 -
|
ACCOUNTS RECEIVABLE
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
279,650
|
|
|
$
|
294,641
|
|
Allowance for doubtful accounts
|
|
|
(42,471
|
)
|
|
|
(48,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237,179
|
|
|
$
|
246,552
|
|
The movements in allowance for doubtful
accounts are as follows:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of year
|
|
$
|
25,691
|
|
|
$
|
34,259
|
|
|
$
|
42,471
|
|
Additions
|
|
|
13,907
|
|
|
|
12,000
|
|
|
|
7,400
|
|
Deconsolidation of a subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
(160
|
)
|
Written off
|
|
|
(5,499
|
)
|
|
|
(714
|
)
|
|
|
(784
|
)
|
Translation adjustment
|
|
|
160
|
|
|
|
(3,074
|
)
|
|
|
(838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year
|
|
$
|
34,259
|
|
|
$
|
42,471
|
|
|
$
|
48,089
|
|
|
NOTE 5 -
|
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Contracts costs incurred plus estimated earnings
|
|
$
|
887,037
|
|
|
$
|
810,327
|
|
Less: Progress billings
|
|
|
(690,726
|
)
|
|
|
(639,571
|
)
|
Cost and estimated earnings in excess of billings
|
|
|
196,311
|
|
|
|
170,756
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(6,383
|
)
|
|
|
(8,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
189,928
|
|
|
$
|
162,096
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
The movements in allowance for doubtful
accounts are as follows:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of year
|
|
$
|
5,839
|
|
|
$
|
8,850
|
|
|
$
|
6,383
|
|
Additions
|
|
|
3,085
|
|
|
|
(1,823
|
)
|
|
|
2,404
|
|
Written off
|
|
|
(122
|
)
|
|
|
-
|
|
|
|
-
|
|
Translation adjustment
|
|
|
48
|
|
|
|
(644
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$
|
8,850
|
|
|
$
|
6,383
|
|
|
$
|
8,660
|
|
|
NOTE 6 -
|
PROPERTY, PLANT AND EQUIPMENT
|
A summary of property, plant and equipment
is as follows:
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
71,037
|
|
|
$
|
70,029
|
|
Machinery
|
|
|
8,148
|
|
|
|
10,892
|
|
Software
|
|
|
7,377
|
|
|
|
10,004
|
|
Vehicles
|
|
|
3,886
|
|
|
|
4,378
|
|
Electronic and other equipment
|
|
|
23,704
|
|
|
|
29,321
|
|
Construction in progress
|
|
|
5,753
|
|
|
|
4,113
|
|
|
|
$
|
119,905
|
|
|
$
|
128,737
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation and impairment
|
|
|
(39,967
|
)
|
|
|
(48,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,938
|
|
|
$
|
80,529
|
|
Buildings with a total carrying
value of $1,014 and $991 were pledged to secure short-term bank loans (note 12) as of June 30, 2016 and 2017,
respectively.
Buildings with a total carrying value of
$3,976 and $3,209 were pledged to secure lines of credits from various banks in the PRC and Malaysia as of June 30, 2016 and 2017,
respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Buildings and vehicles with a total carrying
value of $1,157 and $1,703 were pledged to secure long-term bank loans as of June 30, 2016 and 2017, respectively (note 13).
Construction in progress
consists
of capital expenditures and capitalized interest charges related to the construction of facilities and assembly line projects and
the expenditures related to the Company’s information system constructions.
The depreciation expenses for the years
ended June 30, 2015, 2016 and 2017 were $8,508, $6,266 and $8,752, respectively.
Assets leased to others under operating
leases
The Company has entered into operating
lease contracts related to certain buildings owned with the carrying amount as shown below:
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Buildings leased to others - at original cost
|
|
$
|
10,086
|
|
|
$
|
13,925
|
|
Less: accumulated depreciation
|
|
|
(3,725
|
)
|
|
|
(4,261
|
)
|
Buildings leased to others - net
|
|
$
|
6,361
|
|
|
$
|
9,664
|
|
|
NOTE 7 -
|
PREPAID LAND LEASES
|
A summary of prepaid land leases is as
follows:
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Prepaid land leases
|
|
$
|
12,641
|
|
|
$
|
12,335
|
|
Less: Accumulated amortization
|
|
|
(1,868
|
)
|
|
|
(2,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,773
|
|
|
$
|
10,206
|
|
The amortization for the years ended June
30, 2015, 2016 and 2017 were $197, $281 and $261, respectively.
Of the total prepaid land leases, $4,593
and nil as of June 30, 2016 and 2017, respectively, are pledged to secure the long-term bank loans (note 13).
The annual amortization of prepaid land
leases for each of the five succeeding years is as follows:
Year ending June 30,
|
|
|
|
2018
|
|
$
|
263
|
|
2019
|
|
|
263
|
|
2020
|
|
|
263
|
|
2021
|
|
|
263
|
|
2022
|
|
|
263
|
|
|
|
|
|
|
|
|
$
|
1,315
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
|
NOTE 8 -
|
INTANGIBLE ASSETS, NET
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
Gross
carrying
value
|
|
|
Accumulated
amortization
|
|
|
Net
carrying
value
|
|
|
Gross
carrying
value
|
|
|
Accumulated
amortization
|
|
|
Net
carrying
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
3,151
|
|
|
|
(2,308
|
)
|
|
|
843
|
|
|
$
|
3,086
|
|
|
|
(2,811
|
)
|
|
|
275
|
|
Order backlog
|
|
|
11,848
|
|
|
|
(11,835
|
)
|
|
|
13
|
|
|
|
11,605
|
|
|
|
(11,605
|
)
|
|
|
-
|
|
Patents and copyrights
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,695
|
|
|
|
(42
|
)
|
|
|
1,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,999
|
|
|
|
(14,143
|
)
|
|
|
856
|
|
|
$
|
16,386
|
|
|
|
(14,458
|
)
|
|
|
1,928
|
|
The customer relationships and order backlog
were related to the acquisition of Concord and Bond Groups, which were acquired on July 1, 2011 and April 1, 2013, respectively.
The amortization for the years ended June 30, 2015, 2016 and 2017 were $4,454, $818 and $623, respectively. The weighted-average
remaining amortization periods for customer relationships are within one year as of June 30, 2017.
The annual amortization expense relating
to the existing intangible assets for the next year is as follow:
Year ending June 30,
|
|
|
|
2018
|
|
$
|
500
|
|
2019
|
|
|
225
|
|
2020
|
|
|
225
|
|
2021
|
|
|
225
|
|
2022
|
|
|
215
|
|
|
|
$
|
1,390
|
|
The changes in the carrying amount of goodwill
are as follows:
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
59,918
|
|
|
$
|
59,847
|
|
Goodwill impairment charge
|
|
|
-
|
|
|
|
(11,211
|
)
|
Translation adjustment
|
|
|
(71
|
)
|
|
|
(1,310
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of year
|
|
$
|
59,847
|
|
|
$
|
47,326
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017
– continued
(Amounts in thousands except for number
of shares and per share data)
Concord Group, as a component of the M&E
operating segment, is considered to be a reporting unit for goodwill impairment purposes as Concord Group constitutes a business
for which discrete financial information is available and segment management regularly reviews the operating results of Concord
Group. The amount of goodwill allocated to Concord Group was $25,111 and $24,595 as of June 30, 2016 and 2017, respectively, before
any impairment charges. The Company engaged an independent third-party appraiser to assist in the goodwill impairment test. For
the year ended June 30, 2016, the Company’s step one impairment test indicated that the fair value of Concord Group exceeded
its carrying amount and thus no impairment was noted. For the year ended June 30, 2017, the Company concluded that the carrying
amount of Concord Group exceeded its fair value and recorded a goodwill impairment charge of $11,211 under the caption of “Goodwill
impairment charge” in the statement of comprehensive income as a result of lower profitability levels resulting from increased
competition and changes in market. Based on the testing results, the amount of goodwill allocated to Concord Group after impairment
was $23,258 and $11,488 as of June 30, 2016 and 2017.
Estimating the fair value of Concord Group
requires the Company to make assumptions and estimates regarding its future plans, market share, industry and economic conditions
of the various geographical areas in which it operates which includes Singapore, Malaysia and the Middle East. In applying the
discounted cash flow approach, key assumptions include the amount and timing of future expected cash flows, terminal value growth
rates and appropriate discount rates. The Company estimates future expected cash flows for each geographical area in which it
operates and calculates the net present value of those estimated cash flows using risk adjusted discount rates ranging from 12.7%
to 16.9% (2016: 13.5% to 16.4%) and a terminal value growth rate was 2% (2016: 2%). If the discount rates adopted in 2017 increased
or decreased by 1%, the fair value of Concord Group would decrease or increase by $1,187 and $1,383, respectively. If the terminal
value growth rates adopted in 2017 increased or decreased by 1%, the fair value of Concord Group would increase or decrease by
$562 and $498, respectively.
There are uncertainties surrounding the
amount and timing of future expected cash flows as they may be impacted by negative events such as a slowdown in the mechanical
and electrical engineering sector, deteriorating economic conditions in the geographical areas Concord Group operates in, political,
economic and social uncertainties in the Middle East, increasing competitive pressures and fewer than expected mechanical and
electrical solution contracts awarded to Concord Group. These events can negatively impact demand for Concord Group’s services
and result in actual future cash flows being less than forecasted or delays in the timing of when those cash flows are expected
to be realized. Further, the timing of when actual future cash flows are received could differ from the Company’s estimates,
which are based on historical trends and does not factor in unexpected delays in project commencement or execution.
|
NOTE 10 -
|
INVESTMENTS IN EQUITY AND COST INVESTEES
|
The following long-term investments were
accounted for under either the equity method or the cost method as indicated:
June 30, 2016
|
|
Interest
held
|
|
|
Long-term
investment, at
cost, less
impairment
|
|
|
Share of
undistributed
profits
|
|
|
Advance
to
investee
company
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China Techenergy Co., Ltd.
|
|
|
40.00
|
%
|
|
$
|
9,030
|
|
|
|
1,077
|
|
|
|
44
|
|
|
|
10,151
|
|
Beijing Hollysys Electric Motor Co., Ltd.
|
|
|
40.00
|
%
|
|
|
797
|
|
|
|
3,961
|
|
|
|
-
|
|
|
|
4,758
|
|
Beijing IPE Biotechnology Co., Ltd.
|
|
|
22.02
|
%
|
|
|
1,484
|
|
|
|
2,213
|
|
|
|
-
|
|
|
|
3,697
|
|
Southcon Development
Sdn Bhd.
|
|
|
30.00
|
%
|
|
|
224
|
|
|
|
(116
|
)
|
|
|
-
|
|
|
|
108
|
|
Beijing Hollysys Machine Automation Co., Ltd.
|
|
|
30.00
|
%
|
|
|
452
|
|
|
|
(452
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
11,987
|
|
|
|
6,683
|
|
|
|
44
|
|
|
|
18,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenhua Hollysys Information Technology Co., Ltd.
|
|
|
20.00
|
%
|
|
$
|
2,387
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,387
|
|
Heilongjiang Ruixing Technology Co., Ltd.
|
|
|
6.00
|
%
|
|
|
1,631
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,631
|
|
Zhejiang Sanxin Technology Co., Ltd.
|
|
|
6.00
|
%
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90
|
|
Zhongjijing Investment Consulting Co., Ltd.
|
|
|
5.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
4,108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,108
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
June 30, 2017
|
|
Interest
held
|
|
|
Long-term
investment, at
cost, less
impairment
|
|
|
Share of
undistributed
profits
|
|
|
Advance
to
investee
company
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Hollycon Medicine & Technology. Co., Ltd.
|
|
|
30.00
|
%
|
|
$
|
22,737
|
|
|
|
1,773
|
|
|
|
-
|
|
|
|
24,510
|
|
China Techenergy Co., Ltd.
|
|
|
40.00
|
%
|
|
|
8,847
|
|
|
|
2,503
|
|
|
|
43
|
|
|
|
11,393
|
|
Beijing Hollysys Electric Motor Co., Ltd.
|
|
|
40.00
|
%
|
|
|
781
|
|
|
|
4,262
|
|
|
|
-
|
|
|
|
5,043
|
|
Beijing IPE Biotechnology Co., Ltd.
|
|
|
22.02
|
%
|
|
|
1,454
|
|
|
|
2,241
|
|
|
|
-
|
|
|
|
3,695
|
|
Shenzhen HollySys Intelligent Technologies Co., Ltd.
|
|
|
60.00
|
%
|
|
|
2,654
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
2,495
|
|
Southcon Development Sdn Bhd.
|
|
|
30.00
|
%
|
|
|
210
|
|
|
|
(104
|
)
|
|
|
-
|
|
|
|
106
|
|
Beijing Hollysys Machine Automation Co., Ltd.
|
|
|
30.00
|
%
|
|
|
442
|
|
|
|
(442
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
37,125
|
|
|
|
10,074
|
|
|
|
43
|
|
|
|
47,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenhua Hollysys Information Technology Co., Ltd.
|
|
|
20.00
|
%
|
|
$
|
2,338
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,338
|
|
Heilongjiang Ruixing Technology Co., Ltd.
|
|
|
6.00
|
%
|
|
|
1,598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,598
|
|
Zhejiang Sanxin Technology Co., Ltd.
|
|
|
6.00
|
%
|
|
|
88
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88
|
|
Zhongjijing Investment Consulting Co., Ltd.
|
|
|
5.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
4,024
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,024
|
|
In July 2016, Beijing Hollycon Medicine
& Technology. Co., Ltd. (“Hollycon”), previously one of the Company’s subsidiaries, issued new shares for
an aggregate cash consideration of $30,943 to two new third party investors. At the same time, the Company disposed 0.6% of its
equity interest in Hollycon for cash consideration of $464. These two transactions resulted in dilution of the Company’s
equity interest in Hollycon from 51% to 30%. According to the revised article of association, Hollycon will be managed by a board
of directors comprising of a total 5 members, of which, the Company can appoint two directors while the other three shareholders
can appoint one director each. The Company can also appoint the chairman of the board. All major management and operation decision
need be approved by the board and requires approval by at least 2/3 of board directors. Profits is allocated to shareholders based
on the percentage of respective initial investment. The Company lost control over Hollycon upon the completion of the two transactions
set out above, but maintained significant influence over Hollycon, and accounted for the investment in Hollycon under equity method.
Upon the deconsolidation date, the Company recorded the retained non-controlling equity investee at fair value of $22,737 and recognized
a gain of $14,514. The fair value of retained non-controlling interest in Hollycon was measured using a discounted cash flow approach.
Key estimates and assumptions include the amount and timing of future expected cash flows, terminal value growth rates, and discount
rate.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
Shenzhen HollySys Intelligent Technologies
Co., Ltd. (“Shenzhen HollySys”) was set up in October 2016. The Company holds a 60% equity interest of Shenzhen HollySys,
but uses the equity method to account for the investment as the Company does not control Shenzhen Hollysys since:
1) Only one out of the three board representatives
is elected by the Company and the remaining two are elected by other two shareholders;
2) Based on the articles of association
of Shenzhen HollySys, all major decisions in the normal business operation and appointment of key managements of Shenzhen HollySys
is subject to approval by at least two-third vote of the Board of Directors.
The Company holds a 20% equity interest of Shenhua Hollysys Information Technology Co., Ltd. (“Shenhua Information”),
but uses the cost method to account for the investment since:
1) Only one out of the five board representatives
is elected by the Company and the remaining 80% equity interest is held by a large state-owned company which, in the view of the
management, operates Shenhua Information without regards to the views of the Company;
2) Key management of Shenhua Information
including the chief executive officer, chief financial officer, chief operating officer and head of accounting are all appointed
by the other shareholder.
3) Based on the articles of association
of Shenhua Information, there are no matters that require unanimous approval of all shareholders and there are no participating
rights for non-controlling shareholders.
The Company reduced the investment in Zhongjijing
Investment Consulting Co., Ltd. (“Zhongjijing”) to nil since June 30, 2014. The Company expects that the recoverable
amount of the investment in Zhongjijing to be nil.
|
NOTE 11 -
|
WARRANTY LIABILITIES
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
10,387
|
|
|
$
|
10,360
|
|
Deconsolidation of a subsidiary
|
|
|
-
|
|
|
|
(227
|
)
|
Expense accrued
|
|
|
3,876
|
|
|
|
1,547
|
|
Expense incurred
|
|
|
(3,075
|
)
|
|
|
(3,836
|
)
|
Translation adjustment
|
|
|
(828
|
)
|
|
|
(212
|
)
|
|
|
$
|
10,360
|
|
|
$
|
7,632
|
|
Less: current portion of warranty liabilities
|
|
|
(6,782
|
)
|
|
|
(5,386
|
)
|
Long-term warranty liabilities
|
|
$
|
3,578
|
|
|
$
|
2,246
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
|
NOTE 12 -
|
SHORT-TERM BANK LOANS
|
On June 30, 2016, the Company’s short-term
bank borrowings consisted of revolving bank loans of $3,051 from several banks, which were subject to annual interest rates ranging
from 0.8% to 5.12%, with a weighted average interest rate of 1.5%. Some of the short-term loans are secured by the pledge of restricted
cash and buildings with carrying values of $2,743 and $1,014 as of June 30, 2016, respectively.
On June 30, 2017, the Company’s short-term
bank borrowings consisted of revolving bank loans of $8,121 from several banks, which were subject to annual interest rates ranging
from 3.09% to 4.85%, with a weighted average interest rate of 3.53%. Some of the short-term loans are secured by the pledge of
restricted cash and buildings with carrying values of $16,410 and $991 as of June 30, 2017, respectively.
For the years ended June 30, 2015, 2016,
and 2017, interest expenses on short-term bank loans amounted to $286, $211 and $178 respectively.
As of June 30, 2016, the Company had available
lines of credit from various banks in the PRC, Singapore and Malaysia amounting to $205,129, of which $72,592 was utilized and
$132,537 is available for use. These lines of credit were secured by the pledge of restricted cash and buildings with a carrying
value of $3,754 and $3,976, respectively.
As of June 30, 2017, the Company had available
lines of credit from various banks in the PRC, Singapore and Malaysia amounting to $257,670, of which $78,910 was utilized and
$178,760 is available for use. These lines of credit were secured by the pledge of restricted cash and buildings with a carrying
value of $4,954 and $3,209, respectively.
|
NOTE 13 -
|
LONG-TERM LOANS
|
|
|
|
|
June 30,
|
|
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
USD denominated loan
|
|
(i)
|
|
|
4,770
|
|
|
|
-
|
|
MYR denominated loan
|
|
(ii)
|
|
|
830
|
|
|
|
782
|
|
SGD denominated loan
|
|
(iii)
|
|
|
1,939
|
|
|
|
187
|
|
Convertible Bond
|
|
(iv)
|
|
|
19,802
|
|
|
|
20,032
|
|
|
|
|
|
$
|
27,341
|
|
|
$
|
21,001
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
|
|
(6,833
|
)
|
|
|
(420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,508
|
|
|
$
|
20,581
|
|
|
i.
|
The USD denominated loan was repaid in March 2017. The borrowing was secured by restricted cash
amounting to $4,515 which was released in March 2017 upon the repayment.
|
|
ii.
|
The MYR denominated loans are repayable in 3 to 75 installments with the last installment due in
December 2041. For the year ended June 30, 2017, the effective interest rates ranged from 2.19% to 5.68% per annum. The borrowings
are secured by the mortgages of buildings, vehicles, and prepaid land leases in Malaysia, with an aggregate carrying value of $1,019
and $1,396 as of June 30, 2016 and 2017, respectively.
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
|
iii.
|
The SGD denominated loans are repayable in 10 to 31 installments with the last installment due
on March 15, 2020. For the year ended June 30, 2017, the effective interest rates ranged from 2.68% to 5.44% per annum. The borrowing
is secured by vehicles and restricted cash with a total carrying value of $3,148 and $307 as of June 30, 2016 and 2017, respectively.
|
On May 30, 2014, the Company
entered into a Convertible Bond agreement with International Finance Corporation ("IFC"), under which the Company borrowed
$20,000 from IFC (the “Convertible Bond”) with an interest rate of 2.1% per annum and commitment fee of 0.5% per annum
paid in arrears semi-annually. The Convertible Bond has a five year term and was drawn down on August 30, 2014 and is repayable
in full on August 29, 2019. The loan may not be prepaid before it is due.
Conversion rate
The initial conversion rate at
the time of the agreement is 38 ordinary shares per $1, and the initial conversion price is $26.35 per share. The initial conversion
rate and conversion price are subject to subsequent adjustments with events that may dilute the unit price per share. Since the
Company paid out a cash dividend of $0.40 per share in March 2015 and $0.2 per share in November 2016, the conversion rate and
conversion price was adjusted to 39.22 ordinary shares per $1 and $25.50 per share, respectively.
Conversion
The Convertible Bond has both
voluntary and mandatory conversion terms. IFC may at its option convert, in $1,000 increments, the Convertible Bond in whole or
in part, into the Company’s ordinary shares at any time on or prior to the maturity date at a conversion rate and a conversion
price in effect at such time. The conversion rate is subject to anti-dilution. According to the Convertible Bond agreement, 50%
of the principal amount of the Convertible Bond then outstanding will be mandatorily converted into ordinary shares of the Company
at the conversion rate and conversion price then in effect if at any time, with respect to the period of 30 consecutive trading
days ending at such time, the volume weighted average prices for 20 trading days or more in such 30 consecutive trading day period
is equal to or more than 150% of the conversion price in effect at such time. In addition, 100% of the principal amount of the
Convertible Bond then outstanding will be mandatorily converted into ordinary shares at the conversion rate and conversion price
then in effect if at any time, with respect to the period of 30 consecutive trading days ending at such time, the volume weighted
average prices for 20 trading days or more in such 30 consecutive trading day period is equal to or more than 200% of the conversion
price in effect at such time.
Non-conversion compensation
feature
In the event that there remains
any outstanding principal of the Convertible Bond not converted by IFC into ordinary shares at the maturity date, the Company shall
pay to IFC an additional amount equal to 4% of such outstanding principle (“non-conversion compensation feature”).
The non-conversion compensation feature is bifurcated as a derivative liability and measured at the fair value in each reporting
period.
Registration rights agreement
The Company has filed a shelf-registration
statement with the United States Securities and Exchange Commission with respect to the resale of any ordinary shares issued or
issuable upon conversion of the Convertible Loan. The Company shall maintain the effectiveness of the registration statement for
so long as any registrable securities remain issued and outstanding. In the event that the registration statement is not declared
effective or ceases to remain continuously effective such that IFC is not able to utilize the prospectus to resell its ordinary
shares, the Company shall pay a penalty equal to 0.5% of the aggregate principal amount of the Convertible Bond that was converted
into unregistered ordinary shares then held by IFC. The maximum aggregate penalty payable to IFC shall be 5% of the aggregate principal
amount of the Convertible Bond that was converted.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
In accounting for the issuance
of the Convertible Bond, the Company bifurcated the non-conversion compensation feature from the Convertible Bond in accordance
with ASC 815-15-30-2. The bifurcated feature is accounted for as a liability at its fair value in each reporting period. The Company
did not bifurcate the conversion option, as it is considered indexed to the entity’s own stock and meets the equity classification
guidance in ASC 815-40-25, it is eligible for a scope exception from ASC 815 and does not need to be bifurcated from the underlying
debt host instrument. At the commitment date, there was no beneficial conversion as the conversion price was higher than the stock
price. The fees and expenses associated with the issuance of the Convertible Bond are recorded as a discount to the debt liability
in accordance with ASU 2015-03, which the Company has early adopted in fiscal year ended June 30, 2015. The Convertible Bond, which
is the proceeds net of fees and expenses payable to the creditor and the fair value of the bifurcated derivative, will be accreted
to the redemption value on the maturity date using the effective interest method over the estimated life of the debt instrument.
The registration right liability is accounted for in accordance with ASC 450-20 which defines that a liability should be recorded
in connection with the registration rights agreement when it becomes probable that a payment under the registration rights agreement
would be required and the amount of payment can be reasonably estimated. As of June 30, 2017, the Company did not recognize any
liability related to the registration right.
The Company paid up-front fees
related to the issuance of the Convertible Bond amounting to $349.
For fiscal year 2016 and 2017, the accretion of the Convertible Bond was $230 and $230, respectively.
Scheduled principal payments
for all outstanding long-term loans as of June 30, 2017 are as follows:
Year ending June 30,
|
|
|
|
2018
|
|
$
|
420
|
|
2019
|
|
|
215
|
|
2020
|
|
|
20,955
|
|
2021
|
|
|
90
|
|
2022 and onwards
|
|
|
121
|
|
|
|
$
|
21,801
|
|
For the years ended June 30, 2015, 2016,
and 2017, interest expenses of long-term loans incurred amounted to $1,535, $1,193 and $760 respectively, and nil was capitalized
as construction in progress for either of these three years.
|
NOTE 14 -
|
FAIR VALUE MEASUREMENT
|
Financial instruments include cash and
cash equivalents, time deposits with maturities over three months, accounts receivable, other receivables, amounts due to or from
related parties, accounts payable, short-term bank loans, long-term bank loans and bifurcated derivative. The carrying values of
these financial instruments, other than long-term bank loans and a bifurcated derivative (which is a recurring fair value measurement),
approximate their fair values due to their short-term maturities. The carrying value of the Company’s long-term bank loans
other than the Convertible Bond approximates its fair value as the long-term bank loans are subject to floating interest rates.
These assets and liabilities, excluding cash and cash equivalents (which fall into level 1 of the fair value hierarchy), fall into
level 2 of the fair value hierarchy. The carrying value of the Convertible Bond is $19,802 and $20,032 as of June 30, 2016 and
2017, respectively; whereas the fair value is $13,929 and $15,359 as of June 30, 2016 and 2017, respectively. The fair value measurement
of the Convertible Bond falls into level 3 of the fair value hierarchy.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
Assets and liabilities measured at fair
value on a recurring basis as of June 30, 2016, and 2017 are stated below:
|
|
June 30, 2016
|
|
|
|
Quoted prices
in active
markets for
identical assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial
liability (i)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
398
|
|
|
$
|
398
|
|
Total liabilities measured at fair value on a recurring basis
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
398
|
|
|
$
|
398
|
|
|
|
June 30, 2017
|
|
|
|
Quoted prices
in active
markets for
identical assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial
liability (i)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
487
|
|
|
$
|
487
|
|
Total liabilities measured at fair value on a recurring basis
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
487
|
|
|
$
|
487
|
|
|
(i)
|
The derivative financial liability represents the fair value of the non-conversion compensation feature
(note 13). The Company engaged an independent third-party appraiser to assist with the valuation of the feature. The Company is
ultimately responsible for the fair value of the non-conversion compensation feature recorded in the consolidated financial statements.
T
he Company adopted the binomial model to assess the
fair value of such feature as of year-end. The non-conversion compensation feature is equal to the difference between the fair
value of the whole Convertible Bond with the non-conversion compensation feature and the whole Convertible Bond without the non-conversion
feature. The significant unobservable inputs used in the fair value measurement of the non-conversion compensation feature includes
the risk-free rate of return, expected volatility, expected life of the Convertible Bond and expected ordinary dividend yield.
The changes in fair value of the non-conversion compensation feature during fiscal year 2016 and 2017 are shown in the following
table.
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
|
|
Fair value measurements as of June
30, 2017 using significant
unobservable inputs
(Level 3)
|
|
|
|
Non-conversion compensation feature
related to the Convertible Bond
|
|
|
|
|
|
Balance as at June 30, 2016
|
|
$
|
398
|
|
Change in fair-value (included within other expenses, net)
|
|
|
89
|
|
Balance as of June 30, 2017
|
|
$
|
487
|
|
Assets measured at fair value on a nonrecurring
basis as of June 30, 2017 are stated below:
|
|
June 30, 2017
|
|
|
|
Quoted prices in active markets for identical assets
|
|
|
Significant other observable inputs
|
|
|
Significant unobservable inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained non-controlling interest in a former subsidiary
(i)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,737
|
|
|
$
|
22,737
|
|
Goodwill
(ii)
|
|
|
-
|
|
|
|
-
|
|
|
|
11,488
|
|
|
|
11,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
34,225
|
|
|
$
|
34,225
|
|
|
(i)
|
During the year ended June 30, 2017, the investment in Hollycon was measured
based on significant unobservable inputs (Level 3), using a discounted cash flow approach assuming a certain terminal growth rate
and discount rate (Note 10).
|
|
(ii)
|
As of June 30, 2017, the Company’s goodwill of $11,488 was related
to the acquisition of Concord Group and $35,838 was related to the acquisition of Bond Group. The Company engaged an independent
third-party appraiser to assist with the valuation of the goodwill related to the Concord and Bond Groups. The Company is ultimately
responsible for the fair value of the goodwill recorded in the consolidated financial statements. For the purposes of step one
of the goodwill impairment test, the Company has adopted the income approach, in particular the discounted cash flow approach,
to evaluate the fair value of the reporting unit. In applying the discounted cash flow approach, key assumptions include the amount
and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. For the purpose of step two
of the goodwill impairment test, the Company has allocated the fair value of the reporting unit derived in step one to the assets
and liabilities of the reporting unit, as if the reporting unit had been acquired in a business combination and the fair value
of the reporting unit was the price paid to acquire the reporting unit. The Company adopted the multi-period excess earnings model
to evaluate the fair value of the intangible assets of the reporting unit, which was then used to compute the implied fair value
of the goodwill via a residual approach. As a result, the Company recorded a goodwill impairment charge of $11,211 (Note 9).
|
|
NOTE 15 -
|
STOCKHOLDERS’ EQUITY
|
In August 2010, the Board of Directors
adopted the 2010 Rights Plan. The 2010 Rights Plan provides for a dividend distribution of one preferred share purchase (the “Right”),
for each outstanding ordinary share. Each Right entitles the shareholder to buy one share of the Class A Preferred Stock at
an exercise price of $160. The Right will become exercisable if a person or group announces an acquisition of 20% or more
of the outstanding ordinary shares of the Company, or announces commencement of a tender offer for 20% or more of the ordinary
shares. In that event, the Right permits shareholders, other than the acquiring person, to purchase the Company’s ordinary
shares having a market value of twice the exercise price of the Right, in lieu of the Class A Preferred Stock. In addition, in
the event of certain business combinations, the Right permits the purchase of the ordinary shares of an acquiring person at a 50%
discount. Right held by the acquiring person become null and void in each case. Unless terminated earlier by the Board
of Directors, the 2010 Rights Plan will expire on September 27, 2020. There is no accounting impact related to the Right.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
On May 30, 2013, October 29, 2014, and
December 9, 2015, pursuant to the terms of the acquisition of Bond Group, the Company issued 1,407,907, 648,697 and 627,578 ordinary
shares, respectively.
On February 9, 2015, the Company declared
a special cash dividend of $0.40 per share to the holders of the Company’s ordinary shares. The record date was February
23, 2015, and the dividend was paid on March 16, 2015.
On September 26, 2016, the Company declared
a regular cash dividend of $0.20 per share to the holders of the Company’s ordinary shares. The record date was October 26,
2016, and the dividend was paid on November 11, 2016.
|
NOTE 16 -
|
SHARE-BASED COMPENSATION EXPENSES
|
On September 20, 2007, the Company adopted
the 2006 Stock Plan (the “2006 Plan”) which allows the Company to offer a variety of incentive awards to employees,
officers, directors and consultants. Options to purchase 3,000,000 ordinary shares are authorized under the 2006 Plan. The Company
issues new shares to employees, officers, directors and consultants upon share option exercise or share unit conversion.
On May 14, 2015, the Board of Directors
approved the 2015 Equity Incentive Plan (the “2015 Equity Plan”). The 2015 Equity Plan provided for 5,000,000 ordinary
shares, and it will terminate ten years following the date that it was adopted by the Board of Directors. The purposes of the 2015
Equity Plan are similar as the 2006 Plan, which is used to promote the long-term growth and profitability of the Company and its
affiliates by stimulating the efforts of employees, directors and consultants of the Company and its affiliates who are selected
to be participants, aligning the long-term interests of participants with those of shareholders, heightening the desire of participants
to continue in working toward and contributing to the success of the Company, attracting and retaining the best available personnel
for positions of substantial responsibility, and generally providing additional incentive for them to promote the success of the
Company’s business through the grant of awards of or pertaining to the Company’s ordinary shares. The 2015 Equity Plan
permits the grant of incentive share options, non-statutory share options, restricted shares, restricted share units, share appreciation
rights, performance units and performance shares as the Company may determine.
Performance options
Performance share options granted in
2012 (“2012 Performance Options”)
The Company granted 1,476,000 share options
to certain employees under the terms of the 2006 Plan in 2012. All the share options had been vested and exercised by June 30,
2017. During the current year, the remaining 721,500 share options were exercised.
The Company recorded share-based compensation
expense relating to 2012 performance share options of $1,602, $251 and nil which is included in general and administrative expenses,
for the years ended June 30, 2015, 2016 and 2017, respectively.
Performance options granted in 2015
(“2015 Performance Options”)
On May 14, 2015, certain employees of the
Company were granted share-based compensation awards totaling 1,740,000 performance share options to purchase ordinary shares according
to the terms of the 2015 Equity Plan. The exercise price of these options is $22.25 per share. The exercise price of the option
will be adjusted in the event dividends are paid by the Company.
On the 24, 36, 48 month anniversary of
the grant date, 30%, 30%, 40% of 1,160,000 performance share options will vest if the Company’s annual growth rate of Non-GAAP
diluted EPS for fiscal years 2015, 2016 and 2017 equals or exceeds 15% per annum. On the 48 month anniversary of the grant date,
50% of the remaining 580,000 options will vest if the Company’s CAGR of Non-GAAP diluted EPS for fiscal years 2015 to 2017
equals or exceeds 20%, and another 50% of the 580,000 performance options will vest if he Company’s CAGR of Non-GAAP diluted
EPS for fiscal years 2015 to 2017 equals or exceeds 25%.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
Moreover, for option grantees who are responsible
for individual businesses, they have to meet the following additional criteria in each year, from fiscal years 2015 to 2017, to
exercise the options in that particular year. The annual revenue growth rate compared to prior fiscal year must equal to or exceed
15%, 5%, 15% and 50% respectively for industrial automation (“IA”), rail transportation (“Rail”), mechanical
and electrical solutions (“M&E”) and medical (“Medical”) revenue streams.
The vesting schedule for such performance
share options is as below:
EPS Threshold
|
|
Number of vested
options
|
|
Months after the grant date
|
|
|
|
|
|
24 months
|
|
|
36 months
|
|
|
48 months
|
|
Annual growth rate over 15% but below 20%
|
|
1,160,000
|
|
|
348,000
|
|
|
|
348,000
|
|
|
|
464,000
|
|
CAGR equals or over 20% but below 25%
|
|
Additional 290,000
|
|
|
-
|
|
|
|
-
|
|
|
|
290,000
|
|
CAGR equals 25% or above
|
|
Additional 290,000
|
|
|
-
|
|
|
|
-
|
|
|
|
290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
348,000
|
|
|
|
348,000
|
|
|
|
1,044,000
|
|
The 2015 Performance Options will remain
exercisable from the vesting date until the 60 month anniversary of the grant date. The EPS threshold and the revenue growth thresholds
for Rail and Medical were met for fiscal years ended June 30, 2015 and 2016, however, the revenue growth thresholds of IA and M&E
was not achieved. The annual growth rate of Non-GAAP diluted EPS for fiscal year 2017 failed to fall between 15% and 20%, in addition,
the revenue growth thresholds were not met for all revenue streams. Based on this performance, 396,000 out of 1,740,000 2015 performance
options are expected to be vested.
A summary of the 2015 performance option
activity for the year ended June 30, 2017 is as shown below:
2015 Performance
Options
|
|
Number of
shares
|
|
|
Weighted
average
exercise price
|
|
|
Weighted average
remaining
contractual life
(years)
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as at June 30, 2016
|
|
|
1,740,000
|
|
|
|
22.25
|
|
|
|
3.87
|
|
|
|
-
|
|
Forfeited
|
|
|
1,344,000
|
|
|
|
22.05
|
|
|
|
|
|
|
|
|
|
Outstanding as at June 30, 2017
|
|
|
396,000
|
|
|
|
22.05
|
|
|
|
2.87
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2017
|
|
|
396,000
|
|
|
|
22.05
|
|
|
|
2.87
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
198,000
|
|
|
|
22.05
|
|
|
|
2.87
|
|
|
|
-
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
The weighted averaged grant-date fair
value of the 2015 performance options granted in fiscal year 2015 was $22.22.
The Company recorded share-based compensation
expense relating to the 2015 performance options in the amount of $471, $3,190 and $(263) which is included in general and administrative
expenses, in fiscal year 2015, 2016 and 2017, respectively. As of June 30, 2017, total unrecognized share-based compensation expense
of $588 related to 2015 performance options is expected to be recognized over a weighted average vesting period of 0.87 years.
For the 2015 performance options, the Company
engaged an independent third-party appraiser to assist with the valuation of the option. The Company has adopted the binomial option
pricing model to assess the fair value as of the valuation date.
The major inputs to the binomial model
are as follows:
|
|
For options granted on
May 14, 2015
|
|
Risk-free rate of return
|
|
|
1.51%
|
|
Weighted average expected volatility
|
|
|
53.42%
|
|
Expected life (in years)
|
|
|
5 years
|
|
Expected ordinary dividend yield
|
|
|
nil
|
|
Restricted shares
During the year ended June 30, 2014, the
Company granted 52,500 restricted ordinary shares to certain directors under the 2006 Plan. All shares were granted on June 23,
2014. These restricted shares vest quarterly over a three-year period starting from the directors’ respective service inception
date. Fair value of the restricted shares was determined with reference to the market closing price at grant date.
During the year ended June 30, 2017, the
Company granted 67,500 restricted ordinary shares to certain directors under the 2015 Plan. All shares were granted on December
10, 2016. These restricted shares vest quarterly over a three-year period starting from the directors’ respective service
inception date. Fair value of the restricted shares was determined with reference to the market closing price at grant date.
A summary of the restricted share activity
for the year ended June 30, 2017 is as follows:
|
|
Number of restricted shares
|
|
|
Weighted average grant-date fair value
|
|
Un-vested at June 30, 2016
|
|
|
14,375
|
|
|
|
23.95
|
|
Granted
|
|
|
67,500
|
|
|
|
20.09
|
|
Vested
|
|
|
18,750
|
|
|
|
23.05
|
|
Un-vested at June 30, 2017
|
|
|
63,125
|
|
|
|
20.09
|
|
The aggregated grant-date fair value of
restricted shares vested during the years ended June 30, 2015, 2016 and 2017 were $419, $419 and $432 respectively. $419, $419
and $727 were recorded in general and administrative expenses as restricted share compensation expenses, for the years ended June
30, 2015, 2016 and 2017, respectively. As of June 30, 2017, the aggregated unrecognized compensation expense of $904 related to
the restricted shares is expected to be recognized over a weighted-average vesting period of 2.63 years.
|
NOTE 17 -
|
EMPLOYEE BENEFITS
|
The Company contributes to a state pension
scheme run by the Chinese government in respect of its employees in China, a central provision fund run by the Singapore government
in respect of its employees in Singapore, and an employment provident fund in respect of its employees in Malaysia. The expenses
related to these plans were $17,018, $18,235 and $17,568 for the years ended June 30, 2015, 2016 and 2017, respectively. These
schemes were accounted for as defined contribution plans.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
BVI
Hollysys and its subsidiaries incorporated
in the BVI are not subject to income tax under the relevant regulations.
Singapore
The Company’s wholly owned subsidiaries
incorporated in Singapore are subject to Singapore corporate tax at a rate of 17% on the assessable profits arising from Singapore.
Malaysia
The Company’s wholly owned subsidiaries
incorporated in Malaysia are subject to Malaysia corporate income tax at a rate of 24% on the assessable profits arising from Malaysia.
Dubai
The branch of the Company’s wholly
owned subsidiary is a tax exempt company incorporated in Dubai, and no tax provision has been made for each of the years ended
June 30, 2015, 2016 and 2017.
Hong Kong
The Company’s wholly owned subsidiaries
incorporated in Hong Kong are subject to Hong Kong profits tax at a rate of 16.5% on the assessable profits arising from Hong Kong.
No provision for Hong Kong profits tax has been made in the statement of comprehensive income as there were sustained taxable losses
arising from Hong Kong for each of the years ended June 30, 2015, 2016 and 2017.
Macau
The Company’s wholly owned subsidiary
incorporated in Macau is subject to the Macau corporate income tax at a rate of 12% on the assessable profits arising from Macau,
with an exemption up to MOP 600. No provision for Macau profits tax has been made in the statement of comprehensive income for
each of the years ended June 30, 2015, 2016 and 2017.
India
The Company’s wholly owned subsidiary
incorporated in India is subject to India corporate tax at a rate of 30% on its worldwide income. No provision for India profits
tax has been made in the statement of comprehensive income as there were no taxable profits noted for each of the years ended June
30, 2015, 2016 and 2017.
Qatar
CECL is subject to the Qatar Corporate
income tax at a rate of 10% on the assessable profit arising from Qatar. No provision for Qatar tax has been made in the statement
of comprehensive income as there were no assessable profits noted for each of the years ended June 30, 2016 and 2017.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
PRC
The Company’s subsidiaries incorporated
in the PRC are subject to PRC enterprise income tax (“EIT”) on their respective taxable incomes as adjusted in accordance
with relevant PRC income tax laws. The PRC statutory EIT rate is 25%. The Company’s PRC subsidiaries are subject to the statutory
tax rate except for the followings:
Beijing Hollysys Co., Ltd
(“Beijing
Hollysys”)
Beijing Hollysys was certified as a High
and New Technology Enterprise (“HNTE”) which provides a preferential EIT rate of 15% for three calendar years from
2014 to 2016, and is in the process of reapplying the qualifications of HNTE for the following three calendar years from 2017 to
2019. Beijing Hollysys is expecting to receive the renewed certification in late 2017.
Further, Beijing Hollysys was expected
to be qualified for the Key Software Enterprise (“KSE”) status in 2017 and would be entitled to the preferential tax
rate of 10% for calendar year 2016. Beijing Hollysys will be subject to the statutory tax rate of 25% for calendar year 2017 and
onwards, if and when it fails to be certified or qualified as a HNTE or KSE in the future.
Hangzhou Hollysys Automation Co., Ltd
(“Hangzhou Hollysys”)
Hangzhou Hollysys was certified as a HNTE
which provides a preferential EIT rate of 15% for three calendar years from 2014 to 2016, and is in the process of reapplying the
qualifications of HNTE for the following three calendar years from 2017 to 2019. Hangzhou Hollysys is expecting to receive the
renewed certification in late 2017.
Further, Hangzhou Hollysys was qualified for the KSE status in 2017 and was entitled to the preferential
tax rate of 10% for calendar year 2016. Hangzhou Hollysys will be subject to the statutory tax rate of 25% for calendar year
2017 and onwards, if and when it fails to be certified or qualified as a HNTE or KSE in the future.
The Company’s income before income
taxes consists of:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
134,657
|
|
|
$
|
142,900
|
|
|
$
|
105,331
|
|
Non-PRC
|
|
|
(9,430
|
)
|
|
|
(5,158
|
)
|
|
|
(22,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,227
|
|
|
$
|
137,742
|
|
|
$
|
83,355
|
|
Income tax expense, most of which is incurred
in the PRC, consists of:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
16,074
|
|
|
|
10,590
|
|
|
|
12,911
|
|
Non-PRC
|
|
|
5,120
|
|
|
|
4,110
|
|
|
|
(658
|
)
|
|
|
$
|
21,194
|
|
|
$
|
14,700
|
|
|
$
|
12,253
|
|
Deferred income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
5,834
|
|
|
|
(196
|
)
|
|
|
2,616
|
|
Non-PRC
|
|
|
(988
|
)
|
|
|
(266
|
)
|
|
|
(483
|
)
|
|
|
$
|
4,846
|
|
|
|
(462
|
)
|
|
|
2,133
|
|
|
|
$
|
26,040
|
|
|
$
|
14,238
|
|
|
$
|
14,386
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
Reconciliation of the income tax expenses
as computed by applying the PRC statutory tax rate of 25% to income before income taxes and the actual income tax expenses is as
follows:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Income before income taxes
|
|
$
|
125,227
|
|
|
$
|
137,742
|
|
|
$
|
83,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense at statutory tax rate in the PRC
|
|
|
31,307
|
|
|
|
34,436
|
|
|
|
20,838
|
|
Effect of different tax rates in various jurisdictions
|
|
|
1,286
|
|
|
|
2,109
|
|
|
|
2,627
|
|
Effect of preferential tax treatment
|
|
|
(12,453
|
)
|
|
|
(12,296
|
)
|
|
|
(10,650
|
)
|
Effect of non-taxable income
|
|
|
(6,770
|
)
|
|
|
(4,985
|
)
|
|
|
-
|
|
Effect of additional deductible research and development expenses
|
|
|
(2,772
|
)
|
|
|
(4,716
|
)
|
|
|
(2,385
|
)
|
Effect of non-deductible expenses
|
|
|
8,402
|
|
|
|
5,569
|
|
|
|
4,608
|
|
Effect of change in tax rate
|
|
|
(4,191
|
)
|
|
|
(6,613
|
)
|
|
|
(4,835
|
)
|
Change in valuation allowance
|
|
|
1,475
|
|
|
|
540
|
|
|
|
3,964
|
|
Tax rate differential on deferred tax items
|
|
|
3,139
|
|
|
|
(587
|
)
|
|
|
2,056
|
|
Withholding tax on dividend paid by subsidiaries
|
|
|
6,028
|
|
|
|
1,252
|
|
|
|
(2,799
|
)
|
Others
|
|
|
589
|
|
|
|
(471
|
)
|
|
|
962
|
|
Total
|
|
$
|
26,040
|
|
|
$
|
14,238
|
|
|
$
|
14,386
|
|
Had the above preferential tax treatment
not been available, the tax charge would have been increased by $12,453, $12,296 and $10,650 and the basic net income per share
would have been reduced by $0.21, $0.21 and $0.18 for the years ended June 30, 2015, 2016 and 2017, respectively, and the diluted
net income per share for the years ended June 30, 2015, 2016 and 2017 would have been reduced by $0.21, $0.20 and $0.17 respectively.
The breakdown of deferred tax assets/liabilities
caused by the temporary difference is shown as below:
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets, current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
9,838
|
|
|
$
|
9,172
|
|
Inventory provision
|
|
|
205
|
|
|
|
179
|
|
Provision for contract loss
|
|
|
917
|
|
|
|
694
|
|
Long-term assets
|
|
|
13
|
|
|
|
13
|
|
Deferred revenue
|
|
|
3,522
|
|
|
|
3,220
|
|
Deferred subsidies
|
|
|
1,020
|
|
|
|
1,654
|
|
Warranty liabilities
|
|
|
1,322
|
|
|
|
829
|
|
Recognition of intangible assets
|
|
|
57
|
|
|
|
(2
|
)
|
Accrued payroll
|
|
|
960
|
|
|
|
998
|
|
Net operating loss carry forward
|
|
|
6,361
|
|
|
|
9,801
|
|
Valuation allowance
|
|
|
(6,307
|
)
|
|
|
(10,160
|
)
|
Total deferred tax assets, current
|
|
$
|
17,908
|
|
|
$
|
16,398
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, current
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
(16,068
|
)
|
|
$
|
(10,071
|
)
|
Recognition of intangible assets
|
|
|
(1,060
|
)
|
|
|
-
|
|
PRC dividend withholding tax
|
|
|
(3,010
|
)
|
|
|
(2,949
|
)
|
Others
|
|
|
(24
|
)
|
|
|
2
|
|
Total deferred tax liabilities, current
|
|
$
|
(20,162
|
)
|
|
$
|
(13,018
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets, current
|
|
$
|
6,659
|
|
|
$
|
7,730
|
|
Net deferred tax liabilities, current
|
|
$
|
(8,913
|
)
|
|
$
|
(4,350
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, non-current
|
|
|
|
|
|
|
|
|
Long-term assets
|
|
$
|
699
|
|
|
$
|
112
|
|
Deferred subsidies
|
|
|
2,642
|
|
|
|
333
|
|
Net operating loss carryforward
|
|
|
-
|
|
|
|
1,573
|
|
Warranty liabilities
|
|
|
874
|
|
|
|
332
|
|
Others
|
|
|
(16
|
)
|
|
|
192
|
|
Total deferred tax assets, non-current
|
|
$
|
4,199
|
|
|
$
|
2,542
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, non-current
|
|
|
|
|
|
|
|
|
Share of net gains of equity investees
|
|
$
|
(1,733
|
)
|
|
$
|
(2,520
|
)
|
Property, plant and equipment
|
|
|
-
|
|
|
|
(38
|
)
|
Intangible assets and other non-current assets
|
|
|
(330
|
)
|
|
|
(5,552
|
)
|
Total deferred tax liabilities, non-current
|
|
$
|
(2,063
|
)
|
|
$
|
(8,110
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets-non-current
|
|
$
|
2,195
|
|
|
$
|
1,121
|
|
Net deferred tax liabilities-non-current
|
|
$
|
(59
|
)
|
|
$
|
(6,689
|
)
|
As of June 30, 2017 the Company had incurred
net losses of approximately $9,748, $48,342, $1,377 derived from entities in the PRC, Singapore and Hong Kong, respectively. The
net losses in the PRC can be carried forward for five years, to offset future net profit for income tax purposes. The net
losses in Singapore and Hong Kong can be carried forward without an expiration date. For the amount as of June 30, 2017, $9,748
will expire, if not utilized, from calendar years ending December 31, 2017 to 2022.
The valuation allowance is considered on
an individual entity basis.
Under the EIT Law and the implementation rules, profits of
the
Company’s PRC subsidiaries earned on or after January 1, 2008 and distributed by the PRC subsidiaries to their respective
foreign holding companies are subject to a withholding tax at 10% unless reduced by tax treaty. As of June 30, 2016 and 2017, the
aggregate undistributed earnings from the Company’s PRC subsidiaries that are available for distribution are approximately
RMB2,907,542 (equivalent to $447,025) and RMB3,654,625 (equivalent to $557,093), respectively. The Company expects to distribute
a portion of the earnings (approximately RMB200,000 or $29,490) to the holding companies located outside mainland China, and has
hence accrued a withholding tax of $2,947 as of June 30, 2017. The remaining undistributed earnings of the Company’s PRC
subsidiaries are intended to be permanently reinvested, and accordingly, no deferred tax liabilities have been provided for the
PRC dividend withholding taxes that would be payable upon the distribution of those amounts to the Company.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
As of June 30, 2016 and June 30, 2017,
the undistributed retained earnings generated from periods prior to January 1, 2008 were approximately $63,716 which are not subject
to PRC dividend withholding taxes. Accordingly, as of June 30, 2016 and June 30, 2017, the total amounts of undistributed earnings
generated from the Company’s PRC subsidiaries for which no withholding tax has been accrued were $372,040 and $484,314,
respectively. Deferred tax liabilities subject to recognize would have been approximately $30,832 and $42,060 respectively, if
all such undistributed earnings planned to be distributed to the Company in full as of June 30, 2016 and June 30, 2017.
The Chinese tax law grants the tax authorities
the rights to further inspect companies’ tax returns retroactively in a three-year period (up to five years under certain
special conditions), which means theoretically the tax authorities can still review the PRC subsidiaries’ tax returns for
the years ended December 31, 2012 through 2016. The tax law also states that companies will be liable to additional tax, interest
charges and penalties if errors are found in their tax returns and such errors have led to an underpayment of tax.
Determining income tax provisions involves
judgment on the future tax treatment of certain transactions. The Company performed a self-assessment and concluded that there
was no significant uncertain tax position requiring recognition in its financial statements. The tax treatment of such transactions
is reconsidered periodically to take into account all changes in tax legislations. Where the final tax outcome of these transactions
is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions
in the year in which such determination is made.
There were no material interest or penalties
incurred for and as of the years ended June 30, 2015, 2016 and 2017, respectively.
|
NOTE 19 -
|
INCOME PER SHARE
|
The following table sets forth the computation
of basic and diluted net income per share attributable to Hollysys for the years indicated:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company - basic
|
|
$
|
96,527
|
|
|
$
|
118,471
|
|
|
$
|
68,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company - diluted
(i)
|
|
$
|
96,877
|
|
|
$
|
119,121
|
|
|
$
|
69,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used in computing basic income per share
|
|
|
58,612,596
|
|
|
|
59,170,050
|
|
|
|
60,189,004
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Bond
|
|
|
644,850
|
|
|
|
776,800
|
|
|
|
784,400
|
|
Share options
|
|
|
839,425
|
|
|
|
642,184
|
|
|
|
-
|
|
Restricted shares
|
|
|
37,332
|
|
|
|
22,422
|
|
|
|
38,106
|
|
Weighted average ordinary shares outstanding used in computing diluted income per share
|
|
|
60,134,203
|
|
|
|
60,611,456
|
|
|
|
61,011,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share - basic
|
|
$
|
1.65
|
|
|
|
2.00
|
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share - diluted
|
|
$
|
1.61
|
|
|
|
1.97
|
|
|
|
1.14
|
|
(i) For the year ended June 30, 2016
and 2017, interest accretion related to the Convertible Bond of $
650
and $661, respectively, is added back to derive net income attributable to the Company for computing diluted income per
share.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
Vested and unissued restricted shares of 58,726, 75,066 and
72,263 shares are included in the computation of basic and diluted income per share for the years ended June 30, 2015, 2016 and
2017, respectively. The effects of share options have been excluded from the computation of diluted income per share for the year
ended June 30, 2017 as their effects would be anti-dilutive.
|
NOTE 20 -
|
RELATED PARTY TRANSACTIONS
|
The related party relationships and related
party transactions are listed as follows:
Related party relationships
Name of related parties
|
|
Relationship with the Company
|
|
|
|
Shenhua Hollysys Information Technology Co., Ltd. (“Shenhua
Information”)
|
|
20% owned by Beijing Hollysys
|
China Techenergy Co., Ltd. (“China Techenergy”)
|
|
40% owned by Beijing Hollysys
|
Beijing Hollysys Electric Motor Co., Ltd. (“Electric Motor”)
|
|
40% owned by Beijing Hollysys
|
Beijing Hollysys Machine Automation Co., Ltd. (“Hollysys Machine”)
|
|
30% owned by Hollysys (Beijing) Investment Co., Ltd. (“Hollysys
Investment”)
|
Heilongjiang Ruixing Technology Co., Ltd. (“Heilongjiang Ruixing”)
|
|
6% owned by Beijing Hollysys
|
Beijing IPE Biotechnology Co., Ltd. (“Beijing IPE”)
|
|
22.02% owned by Beijing Hollysys
|
Beijing Hollycon Medicine & Technology. Co., Ltd. (“Hollycon”)
|
|
30% owned by Beijing Hollysys Group Co., Ltd. (“Hollysys
Group”)
|
Shenzhen HollySys Intelligent Technologies Co., Ltd.
(“Shenzhen HollySys”)
|
|
60% owned by Beijing Hollysys Intelligent Technologies Co., Ltd. (“Hollysys Intelligent”)
|
Due from related parties
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
22,579
|
|
|
$
|
28,778
|
|
Shenhua Information
|
|
|
2,995
|
|
|
|
3,267
|
|
Heilongjiang Ruixing
|
|
|
1,071
|
|
|
|
1,049
|
|
Hollysys Machine
|
|
|
1,367
|
|
|
|
965
|
|
Hollycon
|
|
|
-
|
|
|
|
79
|
|
Shenzhen HollySys
|
|
|
-
|
|
|
|
2
|
|
Beijing IPE
|
|
|
-
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,012
|
|
|
$
|
34,142
|
|
The Company’s management believes
that the collection of amounts due from related parties is reasonably assured and accordingly and no provision had been made for
these balances.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
Due to related parties
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
1,170
|
|
|
$
|
1,117
|
|
Hollysys Machine
|
|
|
112
|
|
|
|
817
|
|
Shenhua Information
|
|
|
358
|
|
|
|
353
|
|
Electric Motor
|
|
|
5
|
|
|
|
11
|
|
Beijing IPE
|
|
|
-
|
|
|
|
2
|
|
Hollycon
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,645
|
|
|
$
|
2,301
|
|
Transactions with related parties
Purchases of goods and services from:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Hollysys Machine
|
|
$
|
914
|
|
|
$
|
555
|
|
|
$
|
749
|
|
Electric Motor
|
|
|
50
|
|
|
|
354
|
|
|
|
29
|
|
Hollycon
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
Shenhua Information
|
|
|
368
|
|
|
|
-
|
|
|
|
-
|
|
China Techenergy
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,333
|
|
|
$
|
909
|
|
|
$
|
786
|
|
Sales of goods and integrated solutions to:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
21,936
|
|
|
$
|
3,657
|
|
|
$
|
10,842
|
|
Shenhua Information
|
|
|
2,128
|
|
|
|
847
|
|
|
|
765
|
|
Hollysys Machine
|
|
|
512
|
|
|
|
235
|
|
|
|
167
|
|
Hollycon
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
Beijing IPE
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
Electric Motor
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,577
|
|
|
$
|
4,739
|
|
|
$
|
11,889
|
|
Operating lease income from:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Hollycon
|
|
|
-
|
|
|
|
-
|
|
|
|
602
|
|
Hollysys Machine
|
|
|
41
|
|
|
|
40
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41
|
|
|
$
|
40
|
|
|
$
|
602
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
Purchases of intangible assets:
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Hollysys Machine
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,648
|
|
The Company sells automation control systems
to China Techenergy which is used for non-safety operations control in the nuclear power industry. China Techenergy incorporates
the Company’s non-safety automation control systems with their proprietary safety automated control systems to provide an
overall automation and control system for nuclear power stations in China. The Company is not a party to the integrated sales contracts
executed between China Techenergy and its customers. The Company’s pro rata shares of the intercompany profits and losses
are eliminated until realized through a sale to outside parties, as if China Techenergy were a consolidated subsidiary.
The Company sells automation control systems
to Shenhua Information which is used for operations control in the information automation industry. Shenhua Information incorporates
the Company’s automation control systems with their proprietary automated remote control systems to provide an overall automation
and control system to its customers. The Company is not a party to the integrated sales contracts executed between Shenhua Information
and its customers. The Company’s pro rata shares of the intercompany profits and losses are eliminated until realized through
a sale to an outside party as if Shenhua Information were a consolidated subsidiary.
The Company engages Hollysys Machine to
sell the Company’s products to end customers. The Company pays commission to Hollysys Machine in exchange for its services.
The amount of the commission is determined based on the value of the products sold by Hollysys Machine during the year.
In fiscal
year 2017, one of the Company’s subsidiary Hollysys Intelligent reached an agreement with Hollysys Machine to purchase a
series of fixed assets, software copyrights and patents because of their similar business category.
The Company entered into an operating lease
agreement with Hollycon to lease part of its one building located in Beijing. The lease term is for 1 year from the commencement
date of July 1, 2016 to June 30, 2017.
Amounts due from and due to the related
parties relating to the above transactions are unsecured, non-interest bearing and repayable on demand.
|
NOTE 21 -
|
COMMITMENTS AND CONTINGENCIES
|
Operating lease commitments
The Company leases premises under various
operating leases. Rental expenses under operating leases included in the consolidated statements of comprehensive income were $1,492,
$1,811 and $2,718 for the years ended June 30, 2015, 2016 and 2017, respectively.
Future minimum lease payments under non-cancelable
operating leases with initial terms of one year or more consist of the following:
Years ending June 30,
|
|
Minimum lease payments
|
|
|
|
|
|
2018
|
|
$
|
2,453
|
|
2019
|
|
|
1,060
|
|
2020
|
|
|
263
|
|
2021
|
|
|
103
|
|
2022 and onwards
|
|
|
63
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
3,942
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
The Company’s lease arrangements
have no renewal or purchase options, rent escalation clauses, restriction or contingent rents and are all conducted with third
parties.
Capital commitments
As of June 30, 2017, the Company had approximately
$1,026 in capital obligations for the coming fiscal year, mainly for the Company’s information system construction.
Purchase obligation
As of June 30, 2017, the Company had $142,424
purchase obligations for the coming fiscal year, for purchases of inventories, mainly for fulfillment of in-process or newly entered
contracts resulting from the expansion of the Company’s operations.
Performance guarantee and standby
letters of credit
The Company had stand-by letters of
credit of $24,941 and outstanding performance guarantees of $62,914 as of June 30, 2017, with restricted cash of $13,289
pledged to banks. The purpose of the stand-by letter of credit and performance guarantees is to guarantee that the
performance of the Company’s deliveries reach the pre-agreed requirements specified in the integrated solutions
contracts. The guarantee is to ensure the functionality of the Company’s own work. The disclosed amount of stand-by
letters of credit and outstanding performance guarantees represent the maximum potential amount of future payments the
Company could be required to make under such guarantees.
The Company accounts for performance guarantees
and stand-by letters of credit in accordance with ASC topic 460 (“ASC 460”),
Guarantees.
Accordingly, the Company
evaluates its guarantees to determine whether (a) the guarantee is specifically excluded from the scope of ASC 460, (b) the guarantee
is subject to ASC 460 disclosure requirement only, but not subject to the initial recognition and measurement provisions, or (c)
the guarantee is required to be recorded in the financial statements at fair value.
Both the performance guarantees and the
stand-by letters of credit are for the Company’s commitment of its own future performance, and the outcome of which is within
its own control. As a result, performance guarantees and stand-by letters of credit are subject to ASC 460 disclosure requirements
only.
|
NOTE 22 -
|
OPERATING LEASES AS LESSOR
|
On April 3, 2013, Beijing Hollysys entered
into an operating lease agreement to lease out one of its buildings located in Beijing. The lease term is for a period of 10 years
from the commencement date of September 1, 2013 and will end on August 31, 2023. On July 1, 2016, the Company entered into an operating
lease agreement with Hollycon to lease a part of a building located in Beijing. The lease term was for one year and ended on June
30, 2017, the renewed lease agreement is from July 1, 2017 to June 30, 2018. The minimum rental income in the next five years is
shown as below:
Year ending June 30,
|
|
Minimum lease payments
|
|
|
|
|
|
2018
|
|
$
|
1,477
|
|
2019
|
|
|
1,522
|
|
2020
|
|
|
1,567
|
|
2021
|
|
|
1,614
|
|
2022
|
|
|
1,663
|
|
|
|
|
|
|
Total minimum lease payments to be received in the next five years
|
|
$
|
7,843
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
The minimum lease payment receivable after
five years is $2,003.
|
NOTE 23 -
|
SEGMENT REPORTING
|
The chief operating decision makers have
been identified as the Chairman, Chief Executive Officer and Chief Financial Officer of the Company. The Company organizes its
internal financial reporting structure based on its main product and service offerings.
Based on the criteria established by ASC
280,
Segment Reporting
(“ASC 280”), the Company has determined that the reportable segments of the Company consist
of (1) IA, (2) Rail, (3) M&E and (4) miscellaneous, in accordance with the Company’s organization and internal financial
reporting structure. The chief operating decision makers assess the performance of the operating segments based on the measures
of revenues, costs and gross profit. Other than the information provided below, the chief operating decision makers do not use
any other measures by segments.
Summarized information by segments for
the years ended June 30, 2015, 2016, and 2017 is as follows:
|
|
Year ended June 30, 2015
|
|
|
|
IA
|
|
|
Rail
|
|
|
M&E
|
|
|
Miscellaneous
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
213,252
|
|
|
|
193,274
|
|
|
|
110,030
|
|
|
|
14,823
|
|
|
|
531,379
|
|
Costs of revenue
|
|
|
119,520
|
|
|
|
97,503
|
|
|
|
93,452
|
|
|
|
6,502
|
|
|
|
316,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
93,732
|
|
|
|
95,771
|
|
|
|
16,578
|
|
|
|
8,321
|
|
|
|
214,402
|
|
|
|
Year ended June 30, 2016
|
|
|
|
IA
|
|
|
Rail
|
|
|
M&E
|
|
|
Miscellaneous
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
182,901
|
|
|
|
240,310
|
|
|
|
95,277
|
|
|
|
25,837
|
|
|
|
544,325
|
|
Costs of revenue
|
|
|
113,314
|
|
|
|
131,043
|
|
|
|
82,900
|
|
|
|
11,342
|
|
|
|
338,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
69,587
|
|
|
|
109,267
|
|
|
|
12,377
|
|
|
|
14,495
|
|
|
|
205,726
|
|
|
|
Year ended June 30, 2017
|
|
|
|
IA
|
|
|
Rail
|
|
|
M&E
|
|
|
Miscellaneous
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
172,667
|
|
|
|
155,732
|
|
|
|
103,544
|
|
|
|
-
|
|
|
|
431,943
|
|
Costs of revenue
|
|
|
106,583
|
|
|
|
86,128
|
|
|
|
98,761
|
|
|
|
-
|
|
|
|
291,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
66,084
|
|
|
|
69,604
|
|
|
|
4,783
|
|
|
|
-
|
|
|
|
140,471
|
|
The Company’s assets are shared among
the segments thus no assets have been designated to specific segments.
The majority of the Company’s revenues
and long-lived assets other than goodwill and intangible assets are derived from and located in the PRC. The following table sets
forth the revenues by geographical area:
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
410,644
|
|
|
$
|
443,256
|
|
|
$
|
326,713
|
|
Non-PRC
|
|
|
120,735
|
|
|
|
101,069
|
|
|
|
105,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
531,379
|
|
|
$
|
544,325
|
|
|
$
|
431,943
|
|
The following table sets forth the long-lived
assets other than goodwill and intangible assets by geographical area:
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
Long-lived assets other than goodwill and acquired intangible assets
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
100,454
|
|
|
$
|
131,625
|
|
Non-PRC
|
|
|
13,079
|
|
|
|
12,029
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,533
|
|
|
$
|
143,654
|
|
|
NOTE 24 -
|
SUBSEQUENT EVENTS
|
On July 10, 2017, the Company completed
the acquisition of 100% equity of Beijing Shuanghe Technology Company Limited with a cash consideration of approximately $2,380.
As a subsidiary of the Company, its financial performance will be included in the Company’s consolidated financial statements
from the first quarter of fiscal year 2018.
|
NOTE 25 -
|
ENDORSEMENT OF NOTE RECEIVABLES
|
The Company endorsed bank acceptance bills
to its suppliers as a way of settling accounts payable. The total endorsed but not yet due bank acceptance bills amounted to $31,991
and $25,462 as of June 30, 2016 and 2017, respectively. The endorsement of bank acceptance bills qualify as deemed sales of financial
assets according to ASC 860,
Transfer and Servicing
(“ASC 860”) because the bank acceptance bills have been
isolated from the Company upon transfer, the transferee of the bank acceptance bills have the rights to pledge or exchange, and
the Company has no control over the bank acceptance bills upon endorsement. As a result, bank acceptance bills are derecognized
at the time of endorsement.
|
NOTE 26 -
|
CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
|
Under the PRC laws and regulations, the
Company’s PRC subsidiaries’ ability to transfer net assets in the form of dividend payments, loans, or advances are
restricted. The amount restricted was RMB 538,113 (equivalent to $79,500) and RMB 569,279 (equivalent to $84,091) as of June 30,
2016, and 2017, respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
The following represents condensed unconsolidated
financial information of the parent company only:
CONDENSED BALANCE SHEETS
|
|
June 30,
|
|
|
|
2016
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,571
|
|
|
$
|
13,103
|
|
Amounts due from subsidiaries
|
|
|
72,303
|
|
|
|
59,920
|
|
Prepaid expenses
|
|
|
63
|
|
|
|
61
|
|
Total current assets
|
|
|
80,937
|
|
|
|
73,084
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
669,326
|
|
|
|
726,837
|
|
Total assets
|
|
$
|
750,263
|
|
|
$
|
799,921
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and related expense
|
|
$
|
9
|
|
|
$
|
14
|
|
Accrued liabilities
|
|
|
427
|
|
|
|
487
|
|
Amounts due to subsidiaries
|
|
|
55,869
|
|
|
|
55,869
|
|
Total current liabilities
|
|
|
56,305
|
|
|
|
56,370
|
|
|
|
|
|
|
|
|
|
|
Long-term loan
|
|
|
19,802
|
|
|
|
20,032
|
|
Total liabilities
|
|
|
76,107
|
|
|
|
76,402
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Ordinary shares, par value $0.001 per share, 100,000,000 shares authorized; 59,598,099 and 60,342,099 shares issued and outstanding as of June 30, 2016 and 2017, respectively
|
|
|
60
|
|
|
|
60
|
|
Additional paid-in capital
|
|
|
215,403
|
|
|
|
222,189
|
|
Retained earnings
|
|
|
467,160
|
|
|
|
524,129
|
|
Accumulated other comprehensive loss
|
|
|
(8,467
|
)
|
|
|
(22,859
|
)
|
Total equity
|
|
|
674,156
|
|
|
|
723,519
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
750,263
|
|
|
$
|
799,921
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
CONDENSED STATEMENTS OF COMPREHENSIVE
INCOME
|
|
Year Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
3,169
|
|
|
$
|
4,484
|
|
|
$
|
1,062
|
|
Loss from operations
|
|
|
(3,169
|
)
|
|
|
(4,484
|
)
|
|
|
(1,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(35
|
)
|
|
|
(93
|
)
|
|
|
(89
|
)
|
Interest income
|
|
|
1
|
|
|
|
80
|
|
|
|
4
|
|
Interest expenses
|
|
|
(463
|
)
|
|
|
(705
|
)
|
|
|
(1,074
|
)
|
Foreign exchange gains (losses)
|
|
|
238
|
|
|
|
(719
|
)
|
|
|
(740
|
)
|
Equity in profit of subsidiaries
|
|
$
|
99,955
|
|
|
$
|
124,392
|
|
|
$
|
71,905
|
|
Income before income taxes
|
|
|
96,527
|
|
|
|
118,471
|
|
|
|
68,944
|
|
Income tax expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income
|
|
|
96,527
|
|
|
|
118,471
|
|
|
|
68,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax of nil
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
(1,427
|
)
|
|
|
(46,052
|
)
|
|
|
(14,392
|
)
|
Comprehensive income
|
|
$
|
95,100
|
|
|
$
|
72,419
|
|
|
$
|
54,552
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016
AND 2017 – continued
(Amounts in thousands except for number
of shares and per share data)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
Year ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(397
|
)
|
|
$
|
(1,697
|
)
|
|
$
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(4,402
|
)
|
|
$
|
11,390
|
|
|
$
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
13,236
|
|
|
$
|
(9,559
|
)
|
|
$
|
5,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
8,437
|
|
|
$
|
134
|
|
|
$
|
4,532
|
|
Cash and cash equivalents, beginning of year
|
|
$
|
-
|
|
|
$
|
8,437
|
|
|
$
|
8,571
|
|
Cash and cash equivalents, end of year
|
|
$
|
8,437
|
|
|
$
|
8,571
|
|
|
$
|
13,103
|
|
Basis of presentation
For the presentation of the parent company
only condensed financial information, the Company records its investment in subsidiaries under the equity method of accounting
as prescribed in ASC 323,
Investments—Equity Method and Joint Ventures
(“ASC 323”). Such investment is
presented on the balance sheets as “Investment in subsidiaries” and the subsidiaries’ profit as “Equity
in profit of subsidiaries” on the statements of comprehensive income. The parent company only financial statements should
be read in conjunction with the Company’s consolidated financial statements.