Taoping Inc. / China Information Technology, Inc. — FY 2017 Form 20-F
Reporting-period note: This is an annual report for the fiscal year ended December 31, 2017, not a standalone fourth-quarter filing. The registrant is identified in the filing as China Information Technology, Inc. (CNIT); Shenzhen Taoping Internet Technology Co. is identified as a subsidiary. Investors should verify the relationship to the company named in the request.
Business context
CNIT completed a shift toward Cloud-Application-Terminal (CAT) and IoT products and services for China’s out-of-home digital advertising market. Its Cloud-based Technology (CBT) segment sells integrated advertising display terminals, software and related services; its Traditional Information Technology (TIT) segment provides project-based technology services, primarily to public-sector customers. The company reported 96 employees at year-end and 40,231,159 ordinary shares outstanding.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $18.19 million | $10.19 million |
| Gross profit / gross margin | $8.32 million / 45.75% | $2.59 million / 25.37% |
| Operating loss | $0.45 million | $14.58 million |
| Net income (loss) attributable to CNIT | $0.86 million | ($18.17 million) |
| Basic and diluted EPS | $0.02 | ($0.45) |
| Cash from operating activities | $4.54 million | ($2.82 million) |
| Cash and cash equivalents at year-end | $3.26 million | $3.75 million |
| Working capital | ($1.49 million) | ($5.74 million) |
| Short-term bank loans | $7.82 million | $7.80 million |
| Total assets / liabilities / equity | $37.64 million / $23.12 million / $14.52 million | $34.29 million / $21.48 million / $12.80 million |
Revenue increased 78.4%. CBT generated $16.95 million, or 93.2% of revenue, and reported $1.93 million of operating income; TIT revenue was $1.24 million and its operating loss was $0.98 million. Gross-margin improvement reflected the product mix and outsourced manufacturing, while lower administrative expenses and the absence of 2016 impairment charges also improved results. The company recorded a $1.07 million income-tax benefit, principally from reclaiming excess prior-year tax accruals.
Investing activities used $3.78 million, including $3.78 million of property and equipment purchases. Financing activities used $0.49 million: $8.88 million of short-term borrowings were offset by $9.37 million of repayments. Short-term loans bore rates of 5.66%–6.74% and were due during 2018, with possible one-year extensions at the banks’ discretion. There was no long-term debt reported.
Material changes and notable items
- Revenue growth and the return to attributable profitability followed the company’s 2017 business-model transition; FY 2016 included $4.44 million of goodwill and intangible-asset impairment and a $2.76 million loss on sale of a land-use-right deposit.
- Approximately $9.16 million of FY 2017 revenue came from related parties, including companies controlled by CEO Jianghuai Lin. The filing separately states that about 50% of revenue was related-party revenue. Related-party accounts receivable were $4.87 million at year-end.
- Net accounts receivable were $5.27 million, with a $2.98 million doubtful-account allowance. Customer advances included $2.19 million from related parties.
- The company received $0.48 million of government subsidies. It also recorded a $1.07 million tax benefit; these items contributed to reported results and should be distinguished from recurring operating performance.
Outlook, risks and contingencies
Management expected “significant” financial improvement in 2018 and beyond, citing the new CAT/IoT advertising model, but provided no quantified revenue, earnings or cash-flow guidance. It said cash and anticipated operating cash flow should support operations and expansion, while acknowledging possible need for additional financing. The filing reports that the auditor’s opinion includes a substantial-doubt paragraph on the company’s ability to continue as a going concern, citing the pretax loss and significant accumulated deficit. Management points to 2017 net income, positive operating cash flow and a reduced working-capital deficit, but these do not eliminate the stated uncertainty.
- Customer and related-party concentration: Top five customers represented 47% of 2017 continuing-operations revenue; CEO Lin controls iASPEC and related counterparties and beneficially owns about 41.6% of the shares.
- VIE and PRC regulatory exposure: Operations depend on contractual arrangements with iASPEC and other variable-interest entities. Their enforceability, licensing and regulatory treatment in China are uncertain.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of material weaknesses involving qualified U.S. GAAP resources and supervision of the financial-statement close. The auditor did not attest to ICFR.
- Legal proceedings: Customer contract disputes were subject to legal or arbitration proceedings; the company estimated a possible loss of $0–$300,000, with 50% probability.
- Other risks: The filing cites uncollected receivables, reliance on short-term secured borrowing, foreign-exchange and cash-transfer restrictions, competition, and limited insurance. No dividends were anticipated for the foreseeable future.
Important facts for investors to verify
- Confirm the registrant’s identity and corporate relationship to Taoping Inc., and whether later filings use a different company name or ticker.
- Review collection and aging of the $4.87 million related-party receivable and the assumptions supporting the doubtful-account allowance.
- Assess whether 2017 growth and margins are repeatable, including the extent of related-party sales and the sustainability of product costs and customer demand.
- Track 2018 loan maturities, bank extensions, cash generation and progress toward eliminating the working-capital deficit and going-concern uncertainty.
- Check remediation of the disclosed control weaknesses, the status of customer arbitration, and continued validity of the VIE contracts and required PRC licenses.