Business context and reporting period
This is China Information Technology, Inc.’s audited annual report on Form 20-F for the fiscal year ended December 31, 2014, prepared under U.S. GAAP—not a standalone fourth-quarter report. Although the request identifies Taoping Inc., the filing issuer is China Information Technology, Inc. (CNIT); Shenzhen Taoping Internet Technology Co., Ltd. is described as a subsidiary formed in November 2014.
CNIT was shifting from public-sector, project-based IT work and in-house hardware manufacturing toward private-sector cloud-based software and solutions. Its Cloud-based Technology (CBT) segment generated 37.6% of 2014 revenue; Traditional Information Technology (TIT) generated 62.4%. The company began outsourcing hardware production and reported initial software licensing and SaaS revenue in the fourth quarter.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $68.16 million | $76.15 million |
| Gross profit / margin | $22.47 million / 33.0% | $17.28 million / 22.7% |
| Operating loss | $29.96 million | $119.38 million |
| Net loss attributable to CNIT | $29.23 million; $0.96 per share | $119.24 million; $4.36 per share |
| Net cash used in operating activities | $12.63 million | $11.38 million |
| Cash and cash equivalents | $11.19 million | $11.08 million |
| Working capital | Deficit of $55.31 million | Deficit of $46.78 million |
| Total liabilities | $140.83 million | $129.06 million |
At December 31, 2014, restricted cash was an additional $11.93 million. Short-term bank loans were $62.68 million and long-term bank loans were $0.21 million; bills payable were $24.23 million. Total assets were $179.41 million and total equity was $37.15 million. Interest expense was $6.59 million.
Revenue by segment was $42.55 million for TIT and $25.61 million for CBT. Software revenue rose 57% to $25.39 million, while hardware revenue fell 48% to $23.87 million. Research and development expense was $3.04 million. The filing reports no material off-balance-sheet arrangements. The independent auditor issued an unqualified opinion on the consolidated financial statements.
Material changes versus the prior comparable period
- Revenue declined 10.5%, largely as the company moved hardware production to outside manufacturers: hardware revenue fell, while software and system-integration revenue increased.
- Gross margin rose to 33.0% from 22.7%, reflecting a larger share of higher-margin software and lower cost of revenue.
- Net loss attributable to CNIT narrowed to $29.23 million from $119.24 million. Administrative expense fell substantially, including because of lower receivables provisions; however, 2014 still included $9.58 million of goodwill impairment and $2.33 million of intangible-asset impairment.
- Cash from operations remained negative and worsened to $12.63 million used. Investing activities provided $6.32 million, mainly including the deposit on assets held for sale; financing activities provided $6.40 million.
- Working-capital deficit widened, and total liabilities increased. The allowance for doubtful accounts declined to $8.83 million from $60.70 million, primarily after previously reserved receivables were written off; gross receivables were also written down materially.
Outlook, management commentary, risks and unusual items
- Management planned to focus on higher-margin software, improve collections, reduce inventory and costs, seek subsidies, and lower short-term debt. It expected cash, operating and investing cash flows, credit availability, and proceeds from the property sale to cover obligations for the remainder of 2015. This is management’s expectation, not a quantified revenue or earnings forecast.
- CNIT agreed to sell factory-related property and land-use rights for approximately $61.1 million. It had received a $13.03 million deposit by year-end and expected the balance before July 1, 2015. Management anticipated approximately $28.5 million in net proceeds after repayment of collateralized debt. Completion and timing of the sale are important to the liquidity outlook.
- Liquidity is a central risk: the company had a $55.31 million working-capital deficit, recurring operating cash outflows, and substantial short-term borrowings. Management also said additional financing might be needed if conditions or investment plans changed.
- Receivables risk remains significant: government customers accounted for 73% of receivables, and 85% of net receivables outstanding more than one year were due from government customers. Collection delays had been linked to fiscal tightening in China.
- CNIT relied on contractual arrangements to consolidate iASPEC, a VIE controlled by CEO Jiang Huai Lin. Services to iASPEC customers generated 67.2% of 2014 revenue; the filing notes related-party conflict, enforceability, licensing and PRC regulatory risks.
- Other material risks include rapid technology and competitive change, execution of the private-sector transition and Biznest acquisition, customer acceptance of new SaaS offerings, PRC legal and currency restrictions, and the possibility that VIE arrangements or required permits could be challenged. The company had limited insurance for its China operations.
- The filing states management considered disclosure controls and internal control over financial reporting effective at year-end. As a non-accelerated filer, CNIT did not include an auditor attestation on internal controls. The filing also says CNIT did not anticipate cash dividends in the foreseeable future.
Most important facts for investors to verify
- Whether the property sale closed, the remaining consideration was collected, and the proceeds were applied to debt as planned.
- Subsequent trends in operating cash flow, working capital, short-term borrowing, bills payable, and available credit facilities.
- Cash collection and aging of receivables, especially government balances and the impact of prior write-offs on reported allowance levels.
- Whether software/SaaS growth and improved gross margin can offset declining hardware revenue and support a sustainable path to profitability.
- The status and enforceability of iASPEC VIE agreements, related-party arrangements, required licenses, and the concentration of revenue associated with iASPEC customers.
- Share-count and dilution effects from the Biznest acquisition and equity incentive issuances; the filing reported 32,243,875 ordinary shares outstanding at December 31, 2014.