TAOPING INC 
By SHENZHEN, China, April 15, 2014 - China Information Technology, Inc. ("CNIT" or the "Company") (Nasdaq: CNIT), a leading provider of integrated cloud-based solutions including Internet-of-Things ("IoT"), public InfoCloud, WeMedia platform, Smart City and other Internet-related services in China, today announced its financial results for the second-half and fiscal year ended December 31, 2013.
Second Half 2013 Financial Highlights
. Revenue decreased by 31.6% YoY to $38.9 million
. Gross profit decreased by 19.0% YoY to $9.6 million
. Operating loss of $67.7 million mainly due to increases in other long-lived assets impairments and bad debt reserves
. Net loss of $68.7 million; adjusted net loss of $5.9 million
. Fully diluted net loss per share of $2.48
. Adjusted fully diluted net loss per share of $0.21
. Cashflow from operations decreased 61.4% to $2.1 million
Full Year 2013 Financial Highlights
. Revenue decreased 11.9% YoY to $76.1 million
. Gross profit decreased 15.7% YoY to $17.3 million
. Operating loss of $119.4 million
. Net loss of $119.2 million; adjusted net loss of $11.2 million
. Fully diluted net loss per share of $4.36;
. Adjusted fully diluted net loss per share of $0.41;
. Cashflow from operations decreased 22.8% to a cash outflow of $11.4 million
Mr. Jianghuai Lin, Chairman and Chief Executive Officer of the Company, commented, "2013 was a challenging year for us as expected. However, we were able to successfully complete our business transition and we are entering 2014 with a whole new outlook and a new business model that will demonstrate our strength in internet-related products and services, including cloud-computing services, IoT, public InfoCloud, and WeMedia, as well as our total solutions in theSmartCitymarket."
"We are excited about the major accomplishments that we have achieved in our strategic areas. In the digital education sector, we had strong growth in our smart EduCloud products which contributed 62.7% of total revenue in FY2013, up from 53.8% in the previous year. During 2013 we secured many pilot projects including, a $4.5 million contract with the educational institutions inChongqingCity, a $3.8 million contract with Luoyang Education Bureau of Henan Province, and a $2.8 million contract with Xinjiang Uyghur Autonomous Region Education Department.
In the public InfoCloud and WeMedia business sector, our products have been widely applied and have gained high customer recognition in the fields of financial, property, weather forecast, media, jewelry retail, education, entertainment, hospitality, train business, healthcare and e-commerce. We expect to scale up our cloud platform by rolling out more internet-enabled display terminals throughout the country. In the IoT area, through the integration of intelligent sensory and recognition, positioning, cloud computing and big data technologies, we have successfully produced wide industry-use IoT applications, which includeChina's first IoT-based production-line management system and an IoT monitoring application to be used in an elevator environment.
In the SmartCitymarket, we broke away from the disadvantages of traditional project-based system integration by integrating our cloud-computing platform as an integral part of our many SmartCitysolutions and services. We continued to seek opportunities and secure our leading position in the fields of urban planning, land resource, public security, social management, medical, transportation, and electricity. Furthermore, we were elected as the Chairman of the newly launched Shenzhen City Big Data Industry and Innovation Alliance, members of which also include CCID Consulting, Tencent, Huawei, Shenzhen University, National Supercomputing Centre in Shenzhen (NSCS) and Audaque."
"According to International Data Corporation (IDC), the global cloud-computing industry will reach a $107 billion market size by 2017 and China's Smart City market size reached $10.8 billion in 2013 with an 18% annual growth rate. We believe our successful transition to the internet-based products and services business model will greatly enhance our growth potential and financial performance. As we anticipate regaining business growth in 2014, we expect our total revenue to be in the range of $100 million to $120 million for 2014, and our adjusted net income in the range of $6 million to $8 million, excluding any non-cash expenses as a result of employee stock awards, and amortization of intangible assets and land use rights. In addition, we expect to achieve 50% adjusted net income growth in 2015 and 2016."
Second Half 2013 Results
Revenue
Revenue was $38.9 million, compared to $56.8 million in the same period of 2012, a decrease of $18.0 million, or 31.6%. The decline in total revenue was primarily due to the Company's strategic transition from the traditional IT software and product business to a more internet-focused business model which resulted in significant reduction in government projects and in low-margin IT systems integration projects.
Product sales decreased by $11.8 million, or 35.4%, to $21.4 million in the second half of 2013, as compared to $33.2 million in the same period of 2012. Product sales constituted 55.2% of total revenue during the current period as compared with 58.4% during the prior year. The product sales decrease was primarily due to the Company's strategy of exiting from the traditional DT products and moving into internet-enabled multifunctional display technology. The Company expects the growth in product sales to regain momentum once the traditional vs. internet-enabled technology replacement cycle is complete in 2014.
Software sales decreased by 11.1% to $8.9 million in the second half of 2013, from $10.1 million in the same period of 2012, mainly due to the Company's strategic intention of moving away from government projects which constituted a meaningful portion of its software business. Software sales constituted 23.0% of total revenue, as compared to 17.7% during the prior year.
Sales of system integration services decreased by 41.1% to $7.7 million in the second half of 2013, as compared to $13.1 million in the same period of 2012. As a percentage of revenue, it decreased to 19.9% during the second half of 2013 as compared with 23.1% during the same period of 2012. The decrease in system integration sales was primarily due to the Company's shifting away from the low-end IT system integration projects and focusing more on internet-related products and services.
Other revenue was $763,311 inthe second half of 2013, an increase of 72.9%, from $441,612 inthe same period of 2012.
Gross Profit and Gross Margin
Cost of revenue decreased $15.7 million, or 34.9%, to $29.3 million in the second half of 2013, from $45.0 million in the same period of 2012. As a result, gross margin was 24.7% in the second half of 2013, an increase of 383 basis points, from 20.8% in the same period of 2012.
The increase in the overall gross margin primarily resulted from the Company's shift from the traditional DT products to the internet-enabled display technologies, which command higher margins, partially offset by in the reduction in governmental software sales, which traditionally had relatively higher gross margins than the other segments.
Administrative Expenses
Administrative expenses increased by $10.1 million, or 26.4%, to $48.3 million in the second half of 2013, from $38.2 million in the same period of 2012. As a percentage of revenue, administrative expenses increased to 124.2% in the second half of 2013, from 67.4% for the second half of 2012.
Notable changes that resulted in increased administrative expenses included: (1) an increase of $10.3 million in provision of accounts receivable; (2) an increase of $6.9 million stock-compensation expenses for the employees; (3) a decrease of $2.8 million of depreciation of property, plant and equipment; and (4) a decrease of $3.1 million in provision for obsolete inventories. The increase in the provision of accounts receivable was mainly due to the continued sluggishness in the Company's government client sector relating to the digital public security business in light of the challenging government fiscal policies.
Research and Development Expenses
Research and development expenses decreased to $1.5 million in the second half of 2013 from $2.2 million in the same period of 2012, a decrease of $0.8 million, or 34.8%. As a percentage of revenue, research and development expenses decreased to 3.7% in the second half of 2013, from 3.9% in the same period of 2012.
Selling Expenses
Selling expenses decreased $1.2 million in the second half of 2013, or 20.0%, to $4.7 million, from $5.9 million in the same period of 2012. This decrease was in line with the decrease in revenues as a result of the Company's strategy in reducing high-risk and low-margin businesses, partially offset by higher expenses related to the Company's efforts to introduce new internet-related products during the period. As a percentage of revenue, selling expenses increased to 12.2% for the second half of 2013, from 10.4% in the same period of 2012.
Impairment of intangible assets and goodwill
In light of the negative impact as a result of the falling economic growth, stringent macro policies, and declining industry trends especially in the traditional hardware display sector, the Company tested its goodwill for impairment during the fourth quarter of 2013 and 2012. After analyzing the various operations and reporting units, the Company came to the conclusion that a goodwill impairment loss was probable, and consequently recognized a goodwill impairment loss of $19.0 million during the second half of 2012 based on its best estimation. There was no further impairment of goodwill recognized in the year of 2013, however, the Company did record an impairment of $2.0 million on identifiable intangible assets during the second half of 2013.
Impairment of property, plant and equipment.
As the Company reduced and terminated many governmental projects in light of the tight fiscal policies and its shift towards the internet-based business model, it examined the property, plant and equipment for possible impairment. Impairment of property, plant and equipment was $20.9 million in the second half of 2013, compared to $11.8 million in the second half of 2012.
Loss from Operations
Loss from operations was $67.7 million in the second half of 2013, compared to a loss of $65.4 million in the same period of 2012.
Net Loss Attributable to the Company
Net loss attributable to the Company decreased by $1.2 million to a loss of $68.7 million in the second half of 2013, from $69.9 million in the same period of 2012.
Cash and Cash Equivalents
As of December 31, 2013, the Company had $11.1 million in cash and cash equivalents, and $10.3 million in restricted cash, as compared to $10.7 million in cash and cash equivalents, and $10.3 million in restricted cash as of December 31, 2012. During the second half of 2013, cash provided by operating activities amounted to $2.1 million, a decrease of 61.4% from $5.6 million in the same period of 2012.
To improve the Company's liquidity, in 2013 it reappraised some of its real estate and plant assets using an international real estate appraisal firm. These assets have been appraised at a market value of RMB 351.3 million (or approximately $57.5 million), which is approximately $33.9 million above their book value, allowing the Company to more easily access additional bank borrowings if there is a future working capital need for faster business expansion.
Full Year 2013 Results
Revenue
Revenue was $76.1 million, compared to $86.4 million for FY2012, a decrease of $10.2 million, or 11.9%. The decrease was primarily due to the Company's conscious effort to transform itself into an internet-focused company, which led it to gradually exit the traditional hardware display business, to restructure its government-related businesses to embody theSmartCitymacro concept, and to reduce low-margin non-core IT project business.
Product sales increased by $1.0 million, or 2.1%, to $46.6 million for FY2013, as compared to $45.7 million for FY2012. Product sales constituted 61.3% of total revenue during 2013 as compared with 52.9% during 2012. The Company has been successfully replacing the traditional display products with internet-enabled multi-functional products, which is expected to continue to strengthen the Company's internet-focused strategy.
Software sales decreased by $2.4 million, or 13.0%, to $16.2 million for FY2013, from $18.6 million for FY2012. Software sales constituted 21.2% of total revenue during 2013, compared with 21.5% during 2012. The Company has turned away projects and even shut down some ongoing government-related projects which it believes are high-risk and non-core to the Company's long-term strategy in an effort to realign its software-related business with an internet andSmartCityfocus.
Sales of system integration services decreased by $9.2 million, or 44.0%, to $11.7 million for FY2013, as compared to $20.9 million for FY 2012. As a percentage of revenue, it decreased from 24.2% during 2012 to 15.4% during 2013. In line with the Company's transition strategy, it has been turning away non-core IT projects to focus on internet and Smart City-related businesses.
Other revenue was $1.6 million, an increase of $0.4 million, or 36.9%, as compared to $1.2 million for FY2012.
Cost of revenue and gross profit.
Cost of revenue decreased by $7.0 million, or 10.6%, to $58.9 million, for the year ended December 31, 2013, from $65.9 million for FY2012. As a percentage of revenue, cost of revenue increased to 77.3% during 2013, from 76.3% in 2012. As a result, gross profit as a percentage of revenue was 22.7% for FY2013, a decrease of 104 basis points from 23.7% for FY2012. The decrease in gross profit margins resulted primarily from the Company's deliberate efforts to reduce government-related projects in order to lower collection risk and to focus on internet-related businesses.
Administrative expenses
Administrative expenses increased by $40.1 million, or 76.0%, to $92.9 million for FY2013, from $52.8 million for FY2012. As a percentage of revenue, administrative expenses increased to 122.0% for FY2013, from 61.1% for FY2012. Notable changes that resulted in increased administrative expenses include: (1) an increase of $40.3 million in provision of accounts receivable; and (2) an increase of $6.9 million stock-compensation expenses for the employees. The increase in the provision of accounts receivable was mainly due to the continued sluggishness in the Company's government client sector relating to the digital public security business in light of the challenging government fiscal environment.
Research and development expenses
Research and development expenses decreased by $2.0 million, or 41.1%, to $2.9 million for FY2013, from $5.0 million for FY2012. As a percentage of revenue, research and development expenses decreased to 3.83% for FY2013, from 5.7% in 2012. Such decrease was primarily due to lower spending in government related software research and development.
Selling expenses
Selling expenses decreased by $1.0 million, or 9.9%, to $8.8 million for FY2013, from $9.8 million for FY2012. This decrease was due to the Company's shift towards an internet business model and the reduction in project-oriented government businesses, which tend to have expensive long sales cycles. As a percentage of revenue, selling expenses increased to 11.6% for FY2013, from 11.3% for FY2012.
Impairment of intangible assets and goodwill
There was no impairment of goodwill recognized in the year of 2013, compared to goodwill impairment of $26.8 million in 2012. The Company did record an impairment of $2.0 million on identifiable intangible assets in 2013.
Impairment of property, plant and equipment
As the Company reduced and terminated many governmental projects in light of the tight fiscal policies and its shift towards the internet-based business model, it examined its property, plant and equipment for possible impairment. Impairment of property, plant and equipment increased by $18.2 million to $30.0 million for FY2013, from $11.8 million for FY2012 based on its impairment analysis.
Loss from Operations
Loss from operations was $119.4 million in FY2013, comparing to a loss of $85.7 million in FY2012.
Net loss attributable to the Company
Net loss attributable to the Company was $119.2 million for FY2013, as compared to a net loss of $89.6 million for FY2012.
Cash flow from Operations
During 2013, cash used in operating activities amounted to $11.4 million, an increase from $9.3 million in net cash used in operating activities during 2012.
About Non-GAAP Financial Measures
This press release contains non-GAAP financial measures for earnings that exclude non-cash charges. The Company believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, as these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of the Company. Accordingly, management excludes the expense arising from certain non-cash charges when making operational decisions. The Company also believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand the Company's financial performance in comparison to historical periods. In addition, it allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company's management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded.
Second half and Full Year 2013 Reconciliation of Net Loss and EPS
to Exclude Amortization of Intangible Assets, Goodwill Impairment, Employee Stock-based Compensation and Other Asset Write-downs
About China Information Technology, Inc.
Headquartered in Shenzhen, China, China Information Technology, Inc., through its subsidiaries and other consolidated entities, provides information technologies and cloud-based business solutions in China. The Company's cloud-based products include Smart EduCloud and Public InfoCloud; IT solutions include geographic information systems (GIS), digital public security technology (DPST), and hospital information systems (HIS). The Company's integrated hardware, software, and cloud-based services serve a variety of customers in the fields of government, education, medical, financial, commercial, communication and individual consumers. To learn more about the Company, please visit its corporate website at http://www.chinacnit.com.
Safe Harbor Statement
This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements in nature within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties. Such forward-looking statements including statements regarding: the financial outlook of the Company; the ability of the Company to regain profitability and secure future opportunities in the market by adopting new business strategy and leveraging its R&D capabilities and reputation; the ability of the Company to develop new products and new markets successfully; the general ability of the Company to achieve its commercial objectives, including the Company's plan to sustain growth while creating shareholder value; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website (http://www.sec.gov). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.
For further information, please contact:
China Information Technology, Inc.
Iris Yan
Tel: +86 755 8370 4767
Email: IR@chinacnit.com
http://www.chinacnit.com
CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2013 AND 2012
Expressed in U.S. dollars (Except for share amounts)
CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
YEARS ENDED/SECOND HALF ENDED DECEMBER 31, 2013 and 2012
Expressed in U.S. dollars (Except for share amounts)
CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
YEARS ENDED DECEMBER 31, 2013, 2013 AND 2011
Expressed in U.S. dollars
CHINA INFORMATION TECHNOLOGY, INC
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Expressed in U.S. dollars (Except for share amounts)
CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2013, 2012 AND 2011
Expressed in U.S. dollars
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