Taoping Inc. — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone 2018 Q4 report; the filing does not provide clear Q4-only financial results. Financial statements are prepared under U.S. GAAP. The company provides cloud, IoT and digital-advertising products and services, principally in China.
Financial performance and position
| Metric | FY2018 / Dec. 31, 2018 | Prior comparable period |
|---|---|---|
| Revenue | $20.58 million | $18.19 million in FY2017; up 13.1% |
| Gross profit / margin | $9.65 million / 46.9% | $8.32 million / 45.8% |
| Operating income (loss) / margin | $0.17 million / 0.8% | $(0.45) million / (2.5)% |
| Net income attributable to Taoping | $1.69 million; $0.04 per share | $0.86 million; $0.02 per share |
| Operating cash flow | $2.47 million | $4.54 million in FY2017 |
| Cash and cash equivalents | $1.65 million | $3.26 million at Dec. 31, 2017 |
| Working capital | $4.87 million | $(1.49) million at Dec. 31, 2017 |
| Total liabilities / short-term bank loans | $24.01 million / $6.08 million | $23.01 million / $7.82 million |
| Total assets / total equity | $41.62 million / $17.60 million | $37.53 million / $14.52 million |
Consolidated net income was $1.88 million, including $0.19 million attributable to non-controlling interests. The $1.20 million income-tax benefit materially supported reported net income; pretax income was $0.68 million. Gross margin improvement reflected product mix and outsourced terminal production. CBT generated $20.19 million of revenue and $2.39 million of operating income; the legacy TIT segment generated $0.38 million of revenue and recorded a $0.53 million operating loss.
Products accounted for 77.4% of revenue, software 15.0%, and other revenue 7.7%. SaaS revenue remained small, and system-integration revenue was zero in 2018. The company reported $1.80 million of capital expenditures and $4.07 million of cash used in investing activities, including a $2.27 million loan to an unrelated third party. Financing cash flow was positive $0.18 million; cash declined by $1.61 million during the year.
Material changes versus FY2017
- Revenue rose 13.1%, while gross margin improved by 1.2 percentage points. CBT became a larger share of revenue; TIT revenue fell from $1.24 million to $0.38 million.
- Taoping returned to operating profitability, compared with an operating loss in 2017. Attributable net income increased to $1.69 million from $0.86 million.
- Operating cash flow decreased by $2.07 million. Receivables increased: net related-party receivables were $9.55 million versus $4.87 million, and net non-related receivables were $8.00 million versus $5.27 million.
- Cash fell by about half, although working capital improved to a surplus. Short-term bank loans declined by $1.74 million.
- Administrative and R&D expenses increased; selling expenses decreased by about 62%. The company recorded an $0.86 million increase in its allowance for doubtful accounts before foreign-exchange effects.
Outlook, risks and unusual items
- Management said it expects to improve market share and financial performance in 2019 and beyond. It targeted expansion from more than 100 Chinese cities in 2018 to more than 300 in 2019 and 800 in 2020. These are plans, not guaranteed results. Management also cited international expansion initiatives.
- The auditor included a going-concern explanatory paragraph, citing limited operating income and a substantial accumulated deficit. Management pointed to positive operating cash flow and improved working capital, but acknowledged that financing may be needed and is not assured.
- Revenue and control depend materially on related parties and the iASPEC variable-interest-entity arrangements. About 46% of 2018 revenue came from related parties; the filing separately says iASPEC accounted for 77.4% of revenue under existing commercial arrangements. The CEO controls iASPEC and holds about 41.8% of Taoping’s shares.
- Credit and collection risk warrants attention: net accounts receivable, including related parties, was substantial, and the company had a $3.68 million doubtful-account allowance. It also reported $3.22 million of advances to unrelated parties, non-interest-bearing and due on demand; management identified inadequate written documentation and assessment controls over these advances.
- Management concluded that internal control over financial reporting and disclosure controls were ineffective at year-end due to material weaknesses, including insufficient U.S. GAAP expertise, inadequate financial-close supervision, and deficient documentation for certain advances. The auditor did not attest to internal controls.
- Other risks include PRC regulatory uncertainty affecting VIE arrangements and foreign investment, currency and cash-transfer restrictions, customer and supplier concentration, limited insurance, and competition. The company reported customer-related arbitration proceedings with an estimated possible loss of $0–$300,000 at 50% probability.
- All $6.08 million of bank loans were short-term, secured and due from May to November 2019; rates were 6.0%–6.74%. The filing says banks may extend the loans, but does not assure renewal. The office property was pledged as collateral for certain loans.
- FY2018 included a $1.20 million income-tax benefit, government subsidy income of $0.56 million and a $1.50 million private placement of one million shares at $1.50 per share. Series A warrants expired unexercised in May 2018.
Important facts for investors to verify
- Whether related-party and iASPEC receivables are collectible, and how customer collections compare with revenue growth.
- Documentation, purpose, repayment status and recoverability of advances to unrelated parties and the $2.18 million third-party loan.
- Progress in remediating the disclosed material weaknesses and the status of auditor going-concern concerns.
- Renewal and enforceability of iASPEC VIE agreements, related-party transaction terms, and the basis for the differing revenue-dependency disclosures.
- Availability and renewal terms of short-term bank facilities, and whether management’s city-expansion targets can be funded while preserving liquidity.
- The sustainability of earnings excluding the income-tax benefit, subsidies and other non-operating items; the filing does not provide standalone Q4 results.