Taoping Inc. (China Information Technology, Inc.) — FY 2012 Form 20-F
Reporting period: Fiscal year ended December 31, 2012; filed April 22, 2013. This is an annual report, not a standalone fourth-quarter filing, and it does not provide clear Q4-only financial results. Financial statements are prepared under U.S. GAAP. The company provides software, hardware, and integrated information/display solutions in China, including GIS, public security, hospital systems, and digital displays.
Key financial metrics
| Metric | FY 2012 / year-end | FY 2011 / prior year-end |
|---|---|---|
| Revenue | $86.38 million | $114.54 million |
| Gross profit; gross margin | $20.50 million; 23.73% | $44.32 million; 38.69% |
| Operating income (loss) | $(85.68) million | $9.53 million |
| Net income (loss) attributable to company | $(89.63) million; $(3.32) per basic and diluted share | $7.91 million; $0.30 basic and $0.29 diluted per share |
| Operating cash flow | $(9.27) million | $16.34 million |
| Cash and cash equivalents | $10.75 million | $14.02 million |
| Working capital | $21.73 million | $61.90 million |
| Total assets; total liabilities | $287.42 million; $123.41 million | $361.79 million; $109.25 million |
| Bank loans | $50.81 million short-term; $0.07 million long-term | $40.98 million short-term; $0.11 million long-term |
Restricted cash was $10.35 million at year-end. Bills payable were $33.69 million, generally repayable within nine months. Capital expenditures were $5.66 million. The company reported no material off-balance-sheet arrangements. Its independent auditor issued an unqualified opinion on the financial statements.
Material changes versus FY 2011
- Revenue fell 24.6%, mainly due to reduced government project activity amid Chinese fiscal tightening and the company’s effort to rebalance its business and customer mix.
- Software revenue declined 52.7% to $18.60 million; system-integration revenue fell 24.5% to $20.91 million. Product revenue was nearly flat at $45.69 million, but rose to 52.9% of revenue as the company won digital education and display projects.
- IT-segment revenue declined to $39.87 million from $68.28 million; DT-segment revenue edged up to $46.51 million from $46.25 million. The greater contribution from lower-margin display technology, fewer high-margin software projects, and lower system-integration margins reduced gross margin by 14.96 percentage points.
- Administrative expenses rose to $64.61 million from $22.79 million. Major cited items included a $24.71 million increase in the allowance for doubtful accounts, $11.81 million impairment of purchased software, and $2.24 million of inventory write-downs. The company also recorded $26.83 million of goodwill impairment, primarily in DT.
- Accounts receivable allowance increased to $29.52 million from $9.37 million. Receivables outstanding more than one year represented 74% of total receivables at year-end, versus 52% a year earlier.
- Operating cash flow moved from positive $16.34 million to negative $9.27 million. Financing cash flow was positive $11.48 million, mainly reflecting net bank borrowing; cash declined by $3.27 million.
Outlook, commentary, risks, and unusual items
- Management said existing cash and anticipated operating cash flow should cover expected needs for at least 12 months, while noting that changing conditions or investments could require additional financing. No quantified revenue or earnings guidance is provided.
- Management plans to expand geographic reach, invest in R&D, pursue private-sector customers, and shift the display business away from traditional LCD products toward higher-value interactive and integrated solutions. R&D expense was $4.95 million, up from $4.48 million.
- Management identified DT goodwill impairment in 2012 and said IT goodwill had only about a 1% excess of estimated fair value over carrying value, leaving it vulnerable to a future impairment if assumptions weaken.
- Collection and liquidity are key concerns: public-sector customers accounted for 84% of receivables, and payment delays contributed to longer collection periods. Much of reported receivables is unbilled; gross billed and unbilled receivables totaled $115.48 million, including $73.32 million unbilled.
- The company depends materially on iASPEC, a variable-interest entity owned by CEO Jiang Huai Lin. The company reported 44.6% of FY 2012 revenue generated under its iASPEC arrangement. The filing highlights related-party conflicts, contract-enforcement, licensing, and PRC regulatory risks.
- Short-term bank loans rose to $50.81 million and were largely secured or guaranteed; the filing says debt covenants were met at year-end. Management also disclosed $15.39 million of additional borrowing availability as of March 31, 2013, and renewal of $17.62 million of short-term loans.
- The company disclosed a NASDAQ minimum-bid-price deficiency notice received in January 2013; NASDAQ notified it in February that compliance had been regained and the matter closed. The filing warns that future listing compliance is not assured.
- The company does not expect to pay dividends in the foreseeable future. It also disclosed that its PRC contractual structure, currency controls, tax treatment, and ability to remit funds offshore are subject to regulatory uncertainty.
Most important facts for investors to verify
- Whether the $29.52 million receivables allowance adequately reflects collection risk, particularly for aged and unbilled balances, and subsequent cash collections from major customers.
- Whether the company can sustain liquidity while operating cash flow is negative, given short-term bank loans, bills payable, restricted cash, and covenant or renewal terms.
- Whether the DT shift improves margins and whether the IT segment avoids further goodwill impairment.
- The operation, enforceability, and renewal of the iASPEC agreements; related-party safeguards; and continued validity of licenses needed for government contracts.
- Whether NASDAQ listing compliance and the company’s stated access to credit facilities remain in place after the filing date.