China Information Technology, Inc. Announces First Half-year 2014 Results

SHENZHEN, China, August 20, 2014 /PRNewswire/ — China Information Technology, Inc. (the “Company”) (Nasdaq: CNIT), a leading provider of internet-based platforms, products and services in China, today announced its financial results for the six month period ended June 30, 2014.

First Half-Year 2014 Financial Highlights

  • Revenue decreased 19.6% to $30.0 million compared to the first six months of 2013
  • Gross margin increased significantly to 39.3%, up from 20.6% a year ago
  • Net income attributable to the Company was $31,000, compared with a net loss of $50.5 million for the first six months of 2013
  • Excluding non-cash items, adjusted net income increased to $1.6 million, from an adjusted net loss of $5.2 million for the first six months of 2013
  • Fully diluted net income attributable to the Company per share was break-even, an increase from fully diluted net loss attributable to the Company per share of $1.87 for the six months ended June 30, 2013
  • Excluding non-cash items, adjusted net income per share was $0.06, compared to an adjusted net loss per share of $0.19 for the prior year’s period

Mr. Jiang Huai Lin, Chairman and Chief Executive Officer of the Company, commented, “Our transition to a cloud-based business model driven by our proprietary Cloud-App-Terminal (CAT) technology is progressing well. We are already experiencing improved margins and the revenue from our internet-based software business which grew significantly during the period. Our Cloud Platform is comprised of robust sector-specific applications and we will continue to innovate and introduce new cloud-based applications to meet the growing market demand for mobile internet and Internet-of-Things.”

“Our early-mover advantage in the vertically integrated CAT model has paved the way for us to penetrate many sectors. This cloud-based platform and its variety of applications enable end-users in education, healthcare, consumer goods, property management, and community services sectors to improve efficiencies and save costs with a one-stop online platform. Users can manage all of their services through a single interface with one log-in, centralized storage, one-click payment and a standardized e-Commerce shopping cart. Our goal is to create a cross-platform, cloud-based eco-system where users, products and services are fully integrated.”

“As we move forward with our transition and continue to restructure our business units, we are focused on increasing market share, posting faster growth in new business segments, producing stronger margins and generating stronger cash-flow. We look forward to a further improved 2014.”

First Half-Year 2014 Results

The Company reported financial and operating information in the following two segments:

(1)

Information Technology, or IT, segment ———— The IT segment includes revenues from products and services surrounding a variety of our software core competencies, primarily including Geographic Information Systems (GIS), Digital Public Security Technology (DPST) and Digital Hospital Information Systems (DHIS). IT segment revenues are generated from the sales of software and system integration services, as well as hardware other than display products.

(2)

Internet-based Technology, or IBT, segment ———— The IBT segment includes revenues from products and services surrounding our internet-based cloud platform and applications primarily comprising of Cloud-based Education Platform (CEP), Information Distribution Platform (IDP), Online Ad Exchange Platform (OAEP), and display terminals. IBT segment revenues are generated from sales of hardware and total solutions of hardware integrated with proprietary software and content, as well as services.

Revenue

A breakdown of revenue, percentage of revenue and percentage of gross margin by segment is as follow:

Six Months Ended June 30, 2014

Six Months Ended June 30, 2013

Revenue

% of
Revenue

Gross
Margin

Revenue

% of
Revenue

Gross
Margin

IT Business

$17,366,980

57.9%

44.6%

$12,205,206

32.7%

27.4%

Internet-based Business

$12,609,188

42.1%

32.0%

$25,077,866

67.3%

17.3%

Total

$29,976,168

100%

39.3%

$37,283,072

100%

20.6%

For the six months ended June 30, 2014, revenue was $30.0 million, compared with $37.3 million for the six months ended June 30, 2013, a decrease of $7.3 million, or 19.6%. The change in total revenue was primarily due to the effective optimization within the Company’s internet-based business unit by shifting from hardware sales to cloud-based software and platform services, which resulted in significant revenue reduction but substantial gross margin expansion. The revenue from IT business also grew from $12.2 million a year ago to $17.4 million in the first six months of 2014, as a few large IT infrastructure projects completed and, subsequently, the related revenue was recognized in the period.

The following table shows revenue, percentage of revenue and gross margin by category:

Six Months Ended June 30, 2014

Six Months Ended June 30, 2013

Revenue

% of
Revenue

Gross
Margin

Revenue

% of
Revenue

Gross
Margin

Products

$10,916,881

36.4%

21.5%

$25,210,925

67.6%

18.3%

Software

11,414,618

38.1%

65.5%

7,225,853

19.4%

27.7%

System integration

6,885,972

23.0%

29.2%

3,988,882

10.7%

24.8%

Others

758,697

2.5%

-6.4%

857,412

2.3%

10.0%

Total

$29,976,168

100%

39.3%

$37,283,072

100%

20.6%

The Company’s product sales decreased by $14.3 million, or 56.7%, to $10.9 million for the six months ended June 30, 2014, compared with $25.2 million in the same period of 2013. Hardware product sales constituted 36.4% of total revenue during the six month period ended June 30, 2014, compared with 67.6% during the same period in 2013. The decrease in product sales was attributable to the Company’s new strategy on shifting from hardware sales to cloud-based software and platform services, As a result of the transition, the overall gross margin also increased from 20.6% a year ago to 39.3% in the first six months of 2014.

Software sales increased by $4.2 million, or 58.0%, to $11.4 million for the six months ended June 30, 2014, from $7.2 million for the same period in 2013. Software sales increased to 38.1% of total revenue, from 19.4% during the same period in the prior year. The change was primarily due to the increased sales of new cloud-based platform products and information systems.

Sales of system integration services increased by $2.9 million, or 72.6%, to $6.9 million for the six months ended June 30, 2014, from $4.0 million for the same period in 2013. This increase was primarily due to the sales of new large system integration solutions engagements in connection with some large IT infrastructure projects. As a percentage of revenue, system integration sales increased from 10.7% during the six months ended June 30, 2013 to 23.0% during the six months ended June 30, 2014.

Other revenue decreased by $99,000, or 11.5%, from $0.9 million in the six months ended June 30, 2013 to $0.8 million in the same period of 2014. This decrease was mainly due to a decrease in maintenance services during the current period.

Cost of Revenue and Gross Profit

Cost of revenue decreased by $11.4 million, or 38.5%, to $18.2 million for the six months ended June 30, 2014, as compared with $29.6 million for the six months ended June 30, 2013. As a percentage of revenue, cost of revenue decreased to 60.7% during the six months ended June 30, 2014, from 79.4% in the same period of 2013. As a result, gross margin was 39.3% for the six months ended June 30, 2014, a significant increase from 20.6% in the same period of 2013.

The increase in the overall gross margin primarily resulted from the Company’s strategic shift from a traditional IT business to an internet-based technology business, which commands higher margins.

Administrative Expenses

Administrative expenses decreased by $37.4 million, or 83.9%, to $7.2 million for the six months ended June 30, 2014, from $44.6 million for the same period of 2013. The significant decrease in administrative expenses was primarily due to a $34.7 million decrease in provision for doubtful accounts receivables.

Research and Development Expenses

Research and development expenses decreased by $0.5 million, or 33.2%, to $1.0 million for the six months ended June 30, 2014, from $1.5 million for the same period of 2013. As a percentage of revenue, research and development expenses accounted for approximately 3.2% of total revenue for the six months ended June 30, 2014, compared with 3.9% for the same period in 2013.

Selling Expenses

Selling expenses decreased by $61,000, or 1.5%, to $4.0 million for the six months ended June 30, 2014, from $4.1 million for the same period of 2013. As a percentage of revenue, selling expenses accounted for approximately 13.4% of total revenue for the six months ended June 30, 2014, compared with 11.0% for the same period in 2013. The increase in percentage of revenue was due to the decrease in revenue outpaced the decrease in selling expenses.

Impairment of property, plant and equipment

Impairment of property, plant and equipment was $9.1 million for the six months ended June 30, 2013 as compared with nil for the six months ended June 30, 2014, reflecting the declining market value of certain purchased GIS-related software in light of the protracted challenging environment in the software contracting segment for Chinese government projects.

Net Income and Adjusted Net Income

Net income was $31,000 for the six months ended June 30, 2014, compared to a net loss of $50.5 million for the same period in 2013. Fully diluted net income per share was break-even, compared with a fully diluted net loss per share of $1.87, in the six months ended June 30, 2013. Excluding non-cash items mainly in the categories of provision for losses on accounts receivables, impairment of property, plant, equipment, and stock-based compensation, adjusted net income for the period was $1.6 million, compared with an adjusted net loss of $5.2 million in the first six months of 2013. Adjusted net income per share was $0.06 for the six months ended June 30, 2014, compared with adjusted net loss per share of $0.19 for the six months ended June 30, 2013.

Cash and Cash Equivalents

As of June 30, 2014, the Company had $5.4 million in cash and cash equivalents and $11.0 million in restricted cash. For the six month period ended June 30, 2014, net cash used in operating activities was $4.7 million, as compared with net cash used in operating activities of $13.5 million in the same period of last year.

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.

The following table presents the non-GAAP financial measures contained in this press release and the most directly comparable GAAP measures and provides a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures.

Six Months Ended June 30, 2014 Reconciliation of Net Income Attributable to the Company and EPS
to Exclude Amortization of Intangible Assets,
Stock-based Expenses, Provision for Losses on Accounts Receivable and Other Asset Write-downs (unaudited)

Six Months

Six Months

Ended

Ended

June, 30 2014

June, 30 2013

Net Income (Loss) Attributable to the Company

$

30,649

$

(50,516,426)

Amortization of intangible assets

466,220

489,228

Provision for losses on accounts receivable

1,014,262

35,680,106

Impairment of property, plant, equipment and other long lived assets

37,615

9,122,945

Stock-based expenses

98,782

Adjusted Net Income (Loss)

$

1,647,528

$

(5,224,147)

Weighted Average Number of Shares Outstanding

Basic

27,865,021

27,007,608

Diluted

27,865,021

27,007,608

Adjusted Earnings (Loss) per share

Basic

$

0.06

$

(0.19)

Diluted

$

0.06

$

(0.19)

About China Information Technology, Inc.

Headquartered in Shenzhen, China, China Information Technology, Inc., through its subsidiaries and other consolidated entities, provides the CNIT Cloud Platform based on its proprietary Cloud-App-Terminal (CAT) model. The Company’s cloud-based products include Cloud-based Education Platform (CEP), Information Distribution Platform (IDP), Online Ad Exchange Platform (OAEP), etc. The Company’s integrated hardware, software, and cloud-based services serve a variety of customers in the fields of government, education, healthcare, 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 may contain certain “forward-looking statements” relating to the business of China Information Technology, Inc., and its subsidiary companies. All statements, other than statements of historical fact included herein, 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. 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.
Tiffany Pan
Tel: +86 755 8370 4767
Email: IR@chinacnit.com
http://www.chinacnit.com

Grayling
Investor Relations
Tel: +1.646.284.9474
Email: cnit@grayling.com

CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2014 (UNAUDITED) AND DECEMBER 31, 2013
Expressed in U.S. dollars (Except for share amounts)

June 30

December 31

2014

2013

(unaudited)

ASSETS

CURRENT ASSETS

Cash and cash equivalents

$

5,406,699

$

11,083,592

Restricted cash

11,047,912

10,345,825

Accounts receivable, net of allowance for doubtful
accounts of $60,673,000 and $60,699,000, respectively

32,919,812

22,716,298

Bills receivable

406,638

1,097,025

Advances to suppliers

6,546,553

8,331,149

Amounts due from related parties

488,391

508,355

Inventories

14,543,458

15,655,723

Other receivables and prepaid expenses

14,927,587

10,975,335

Deferred tax assets

542,842

498,459

TOTAL CURRENT ASSETS

86,829,892

81,211,761

Deposit for purchase of land use rights

18,141,482

18,237,303

Long-term investments

2,641,875

2,661,385

Property, plant and equipment, net

30,415,128

31,531,027

Land use rights, net

12,969,987

13,222,442

Intangible assets, net

14,491,762

14,307,939

Goodwill

27,487,936

27,719,869

Deferred tax assets

1,077,608

347,264

TOTAL ASSETS

$

194,055,670

$

189,238,990

LIABILITIES AND EQUITY

CURRENT LIABILITIES

Short-term bank loans

$

56,737,622

$

58,948,332

Accounts payable

18,418,513

17,857,866

Bills payable

33,278,899

26,549,982

Advances from customers

2,745,035

4,623,283

Accrued payroll and benefits

2,325,728

2,845,977

Amounts due to related parties

862,643

900,350

Other payables and accrued expenses

12,955,955

12,544,571

Income tax payable

3,837,694

3,720,807

TOTAL CURRENT LIABILITIES

131,162,089

127,991,168

Long-term bank loans

264,106

312,547

Amounts due to related parties, long-term portion

13,129

Deferred tax liabilities

578,178

742,696

TOTAL LIABILITIES

$

132,004,373

$

129,059,540

COMMITMENTS AND CONTINGENCIES

Common stock, par $0.01; shares issued and outstanding: 725,000 shares

$

2,175,000

$

2,175,000

EQUITY

Common stock, par $0.01; authorized capital 100,000,000 shares; shares issued and outstanding, 2014:29,975,420 shares; 2013:28,641,528 shares

$

317,336

$

309,076

Treasury stock,2014: 717,448;2013: 1,225,311 shares

(4,290,000)

(4,814,775)

Additional paid-in capital

120,377,948

115,668,644

Reserve

14,629,369

14,629,369

Accumulated deficit Retained

(113,521,900)

(113,513,766)

Accumulated other comprehensive income

24,750,115

25,070,226

Total equity of the Company

42,262,868

37,348,774

Non-controlling interest

17,613,429

20,655,676

Total equity

59,876,297

58,004,450

TOTAL LIABILITIES AND EQUITY

$

194,055,670

$

189,238,990

CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013
Expressed in U.S. dollars (Except for share amounts)
(Unaudited)

Six Months

Ended June 30,

Six Months

Ended June 30,

2014

2013

Revenue – Products

$

10,916,881

$

25,210,925

Revenue – Software

11,414,618

7,225,853

Revenue – System integration

6,885,972

3,988,882

Revenue – Others

758,697

857,412

TOTAL REVENUE

29,976,168

37,283,072

Cost – Products sold

8,575,669

20,604,248

Cost – Software sold

3,941,523

5,222,113

Cost – System integration

4,872,634

2,999,223

Cost – Others

806,930

771,986

TOTAL COST

18,196,756

29,597,570

GROSS PROFIT

11,779,412

7,685,502

Administrative expenses

7,209,614

44,647,394

Research and development expenses

973,596

1,458,136

Selling expenses

4,031,732

4,092,764

Impairment of property, plant and equipment

9,122,945

LOSS FROM OPERATIONS

(435,530)

(51,635,737)

Subsidy income

1,281,608

866,798

Other income, net

435,817

657,381

Interest income

245,994

173,037

Interest expense

(2,536,690)

(2,642,502)

LOSS BEFORE INCOME TAXES

(1,008,801)

(52,581,023)

Income tax benefit (expense)

511,208

(411,550)

NET LOSS

(497,593)

(52,992,573)

Less: Net loss attributable to the non-controlling interest

528,242

2,476,147

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY

$

30,649

$

(50,516,426)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING

Basic

27,865,021

27,007,608

Diluted

27,865,021

27,007,608

EARNINGS (LOSS) PER SHARE-BASIC AND DILUTED

Basic

$

*

$

(1.87)

Diluted

$

*

$

(1.87)

* Amount is less than $0.01 per share

CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013
Expressed in U.S. dollars
(Unaudited)

Six Months Ended

Six Months Ended

June 30,

June 30,

2014

2013

Net loss

$

(497,593)

$

(52,992,573)

Other comprehensive income:

Foreign currency translation (loss) gain

(403,224)

2,794,303

Comprehensive loss

(900,817)

(50,198,270)

Comprehensive loss attributable to the non-controlling interest

611,355

2,269,106

Comprehensive loss attributable to the Company

$

(289,462)

$

(47,929,164)

CHINA INFORMATION TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2014 AND 2013
Expressed in U.S. dollars
(Unaudited)

Six Months

Six Months

Ended

Ended

June 30, 2014

June 30, 2013

OPERATING ACTIVITIES

Net loss

$

(497,593)

$

(52,992,573)

Adjustments to reconcile net loss to net cash used in operating activities:

Impairment of intangible assets

37,615

Provision for losses on accounts receivable

1,014,262

35,680,106

Depreciation

1,141,391

4,929,656

Amortization of intangible assets and land use rights

1,020,474

1,211,730

Stock-based expenses

98,782

Gain on disposal of property and equipment, net

(20,401)

Impairment of property, plant and equipment, net

9,122,945

Provision (recovery) for inventory allowance

12,794

(1,433,684)

Change in deferred income tax

(942,313)

351,802

Changes in operating assets and liabilities

Increase in restricted cash

(1,290,868)

(6,325,755)

(Increase)decrease in accounts receivable

(10,293,759)

377,404

Decrease in advances to suppliers

1,773,433

724,276

Increase in other receivables and prepaid expenses

(4,346,491)

(2,774,225)

Decrease(increase) in inventories

984,636

(1,514,168)

Increase (decrease) in accounts payable and bills payable

7,633,826

(6,559,336)

(Decrease)increase in advances from customers

(1,848,899)

1,122,859

(Decrease)increase in amounts due to/from related parties

(72,954)

841,430

Increase in accrued expenses and other liabilities

800,104

4,061,813

Increase (decrease) in income tax payable

143,794

(342,935)

Net cash used in operating activities

(4,652,167)

(13,518,655)

INVESTING ACTIVITIES

Proceeds from sales of property and equipment

20,411

16,992

Purchases of property, plant and equipment

(285,572)

(138,228)

Capitalized and purchased software development costs

(1,187,378)

(1,355,726)

Deposit refunded for land-use-rights

1,458,730

Investment in Zhongtian and GEO

(698,152)

Net cash used in investing activities

(2,150,691)

(18,232)

FINANCING ACTIVITIES

Borrowings under short-term loans

53,370,861

67,900,348

Repayment of short-term loans

(55,160,129)

(55,817,665)

Repayment of long-term loans

(46,670)

(17,788)

Purchase of treasury stock

(1,290,000)

Decrease (increase)in restricted cash in relation to bank borrowings

511,026

(1,261,026)

Common stock issued for cash

3,683,028

Net cash provided by financing activities

1,068,116

10,803,869

Effect of exchange rate changes on cash and cash equivalents

57,849

42,406

NET DECREASE IN CASH AND CASH EQUIVALENTS

(5,676,893)

(2,690,612)

CASH AND CASH EQUIVALENTS, BEGINNING

11,083,592

10,747,998

CASH AND CASH EQUIVALENTS, ENDING

$

5,406,699

$

8,057,386

Supplemental disclosure of significant non-cash transactions:

In 2014, the Company issued 439,503 shares of its common stock with a market value of $1,784,382 to minority shareholders of Zhongtian and Geo in exchange for 4.53% and 16.27%, respectively, of Zhongtian and Geo.