Pursuant to the Notice on Strengthening the Administration of Enterprise Income Tax on NonResident Enterprises’for Share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.

The Chinese State Administration of Taxation,Transfers by Non-PRC Resident Enterprises, or SAT released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which is effective retroactively toon January 1, 2008, may haveand the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident Enterprises , or SAT Announcement 7, effective on February 3, 2015, issued by the SAT, if a significant impact on manynon-resident enterprise transfers the equity interests of or similar rights or interests in overseas companies that use offshore holding companies to invest in China.

Circular 698, which provides parties with a short period of time to comply with its requirements,directly or indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is notown PRC taxable the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterpriseassets through an abuse of form of organization and there are noarrangement without a reasonable commercial purposes such that thepurpose, but rather to avoid PRC corporate income tax, liabilitythe transaction will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. SAT Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable commercial purpose. However, as SAT Announcement 7 is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. Therenewly issued, there is uncertainty as to the application of Circular 698. For example, whileSAT Announcement 7 and the interpretation of the term “indirectly transfer”“reasonable commercial purpose.”

Under SAT Announcement 7, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any PRC corporate income tax that is due. If the transferring shareholders do not defined, itpay corporate income tax that is understood thatdue for a transfer and the relevantentity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities have jurisdiction regarding requests for information overmay impose a wide rangepenalty on the entity that so fails to withhold. The penalty may be relieved or exempted from the withholding obligation and any resulting penalty under certain circumstances, if it reports such transfer to the PRC tax authorities.

Although SAT Announcement 7 is generally effective as of foreign entities having no direct contact with China. Moreover,February 3, 2015, it also applies to the relevant authoritycases, where the PRC tax treatment of a transaction that took place prior to its effectiveness has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular 698.been finally settled. As a result, we may become at riskthe PRC tax authorities can determine SAT Announcement 7 to be applicable to the historical reorganization, and can possibly determine that these transactions lacking a reasonable commercial purpose. As a result, the transfer of being taxed undershares by certain shareholders to other parties could be subject to corporate income tax of up to 10% on capital gains generated from such transfers. The PRC tax authorities could impose tax obligations on the transferring shareholders or subject us to penalty, if the transferring shareholders do not pay such obligations and withhold such tax.

SAT Announcement 7 and its interpretation by relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers of shares in a publicly traded entity that is listed overseas is available, if the purchase of the shares and the sale of the shares both take place in the open market transactions. However, if a shareholder of an entity that is listed overseas purchases shares in the open market and sells them in a private transaction, or vice-versa, PRC tax authorities might deem such a transfer to be subject to SAT Circular 698 and we may be requiredSAT Announcement 7, which could subject such shareholder to expend valuable resourcesadditional reporting obligations or tax burdens. Accordingly, if a holder of the Company’s ordinary shares purchases such ordinary shares in the open market and sells them in a private transaction, or vice-versa, and fails to comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities may take actions, including requesting to establish that we should not be taxed under Circular 698,provide assistance for their investigation or impose a penalty on it, which could have a material adverse effectnegative impact on our financial condition and results ofthe company’s business operations.

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We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and anylaws. Any determination that we violated these laws could have a material and adverse effect on our business.

We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations and agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective and thethan we have anticipated. As a result, employees, consultants, sales agents, or distributors of our Company may engage in conductconducts, for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject us to other liabilities, which could negatively affect our business, operating results, and financial condition. In addition, the U.S. government may seek to hold our Companyus liable for successor liability FCPA violations committed by companies, in which we invest or that we acquire.

If we become directly subject to the recent scrutiny, criticism, and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter, which could harm our business operations, stock price, and reputation andreputation. It could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

Recently,In the past few years, U.S. publicpublicly traded companies that have substantially all of their operations in China, particularly companies like us, which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism, and negative publicity by investors, financial commentators, and regulatory agencies, such as the SEC. Much of the scrutiny, criticism, and negative publicity has centered around financial and accounting irregularities and mistakes, a lacklacking of effective internal controls over financial accounting, inadequate corporate governance policies or a lacklacking of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism, and negative publicity, the publicly traded stockstocks of many U.S. listed Chinese companies hashave sharply decreased in value and, in some cases, hashave become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions, and are conducting internal and external investigations into the allegations. It is not clear whatthe effect of this sector-wide scrutiny, criticism, and negative publicity will have on our Company, our business, and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defenddefending our company.Company. This situation will be costly, and time consuming, and distract our management from growing our company.

The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny ofby any regulatory bodies in the PRC. Accordingly, our public disclosuredisclosures should be reviewed in light of the fact that no governmental agency that is located in China, where substantially all of our operations and business are located have conducted any due diligence on our operations, or reviewed, or cleared any of our disclosure.disclosures.

WeBecause we are regulated by the SEC, andthat our reports and other filings with the SEC are subject to SECSEC’s review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reportingpublicly traded companies whose operations are located primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takestake place in China, it may be more difficult for the SEC staff of the SEC to overcome the geographic and cultural obstacles, that are present when reviewingthey review our disclosure.disclosures. These same obstacles are not present for similar companies, whose operations orand business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosuredisclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosuredisclosures in our SEC reports and other filings are not subject to the review of the China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings, and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings, or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.

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Risks Relating to the Market for our Shares

If we fail to comply with the continued listing requirements of NASDAQ, we would face possible delisting, which would result in a limited public market for trading our shares and make obtaining future debt or equity financing more difficult for us

Our ordinary shares are traded and listed on the Nasdaq Global Select Market under the symbol of “CNIT.” The ordinary shares may be delisted, if we fail to maintain certain listing requirements of the Nasdaq Stock Market, or NASDAQ. For instance, companies listed on NASDAQ are subject to delisting for, among other things, failure to maintain a minimum closing bid price per share of $1.00 for 30 consecutive business days. On October 17, 2016 we received written notice from NASDAQ stating that we are no longer in compliance with the requirement for $1.00 minimum closing bid price set forth in Nasdaq Listing Rule 5450(a)(1) for continued listing on The Nasdaq Global Select Market. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have a grace period of 180 calendar days, or until April 17, 2017, to regain compliance with the requirement for minimum closing bid price. On April 17, 2017, NASDAQ notified us that we were provided an additional 180-day period to regain compliance and effective on April 19, the listing of our ordinary shares was transferred to Nasdaq Capital Market. In the event we do not regain compliance with the requirement for minimum closing bid price by October 16, 2017, our ordinary shares will be subject to delisting.

If our shares lose their status on Nasdaq Capital Market, our shares would likely be traded in the over-the-counter market. If our shares were traded on the over-the-counter market, selling our shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our shares are delisted, broker dealers would have bear certain regulatory burdens which may discourage broker dealers from effecting transactions in our shares and further limiting the liquidity of our shares. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares. Such delisting from NASDAQ and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.

If we were delisted from NASDAQ, we may become subject to the trading complications experienced by “Penny Stocks” in the over-the-counter market.

Delisting from NASDAQ may cause our shares to become the SEC’s “penny stock” rules. The SEC generally defines a penny stock as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. One such exemption is to be listed on NASDAQ. The market price of our ordinary shares is currently close tobelow $5.00 per share. Therefore, were we to be delisted from NASDAQ, our ordinary shares may become subject to the SEC’s “penny stock” rules. These rules require, among other things, that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document, (ii) disclosure of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons in the transaction, and (iv) monthly account statements showing the market values of our securities held in the customer’s accounts. A broker would be required to provide the bid and offer quotations and compensation information before effecting the transaction. This information must be contained on the customer’s confirmation. Generally, brokers are less willing to effect transactions in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for shareholders to purchase or sell our ordinary shares. Because the broker, not us, prepares this information, we would not be able to assure that such information is accurate, complete or current.

Our stock price is highly volatile leading to the possibility of its value being depressed at a time, when you want to sell your holdings.

The market price of our ordinary shares is volatile, and thisvolatile. This volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price of our ordinary shares to fluctuate significantly. These factors include:

• our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors;
• changes in financial estimates by us or by any securities analysts who might cover our shares;
• speculation about our business in the press or the investment community;
• significant developments relating to our relationships with our customers or suppliers;
• stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the our industries;
• customer demand for our products;
• investor perceptions of the our industry in general and our company in particular;
• the operating and stock performance of comparable companies;
• general economic conditions and trends;
• major catastrophic events;
• announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
• changes in accounting standards, policies, guidance, interpretation or principles;
• loss of external funding sources;
• sales of our ordinary shares, including sales by our directors, officers or significant shareholders; and
• additions or departures of key personnel.

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Securities class action litigation is often instituted against companies following periods of volatility in their share price. This type of litigation could result in substantial costs to us and divert attention of our management’s attentionmanagement and resources. Moreover, securities markets may, from time to time, experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in July 2008, the securities markets in the United States, China, and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our ordinary shares and other interests in our company at a time, when you want to sell your interest in us.

17Our outstanding warrants may adversely affect the market price of our ordinary shares.

Currently we have 525,621 series A warrants outstanding. Each warrant has a term of three years and entitles the holders to purchase one ordinary share of the Company at a price of $7.73. The series A warrant could be exercised on a cashless basis. The sale or possibility of sale of the shares underlying the warrants could have an adverse effect on the market price of our ordinary shares or our ability to obtain future financing. If and to the extent these warrants are exercised, you may experience dilution to your holdings.

We do not intend to pay dividends for the foreseeable future.

For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our shares. Accordingly, investors must be prepared to rely on sales of their shares after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our shares. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors, and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable lawlaws, and other factors our board deems relevant.

Certain of our shareholders hold a significant percentage of our outstanding voting securities.

Mr. Jianghuai Lin, our Chairman and Chief Executive Officer, is the beneficial owner of approximately 39.5% of our outstanding voting securities. As a result, he possesses significant influence, and can elect a majority of our board of directors and authorize or prevent proposed significant corporate transactions. His ownership and control may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover, or other business combination, or discourage a potential acquirer from making a tender offer.

We are a “foreign private issuer” and have disclosure obligations that are different than those of U.S. domestic reporting companies, socompanies. Therefore, you should not expect to receive the same information about us as a U.S. domestic reporting company may provide. Furthermore, if we or lose our status as a foreign private issuer, we would be required to fully comply fully with the reporting requirements of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal, and accounting costs that we would not incur as a foreign private issuer.

We are a foreign private issuer and, asissuer. As a result, we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required by the SEC or the federal securities laws to issue quarterly reports or file proxy statements with the SEC. We are also allowed to file our annual report with the SEC within four months of our fiscal year end. We are also not required to disclose certain detailed information regarding executive compensation that is required from U.S. domestic issuers. Further, our directors and executive officers are not required to report equity holdings under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer are different than those required by U.S. domestic reporting companies, our shareholders should not expect to receive all of the same types of information about us and at the same time as information is received from, or provided by, U.S. domestic reporting companies. We are liable for violations of the rules and regulations of the SEC, which do apply to us as a foreign private issuer. Violations of these rules could affect our business, results of operations, and financial condition.

If we lose our status as19

As a foreign private issuer, at some future time, we will be requiredare permitted to comply fully with the reportingrely on exemptions from certain NASDAQ corporate governance standards applicable to domestic U.S. issuers. This may provide less protection to holders of our securities.

We are exempted from certain corporate governance requirements of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not incur asNasdaq Stock Market by virtue of being a foreign private issuer. As a foreign private issuer, we are permitted to follow the governance practices of our home country, the BVI, in lieu of certain corporate governance requirements of NASDAQ. As a result, the standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance, we are not required to:

As a result, you may not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.

You may have difficulty enforcing judgments obtained against us.

We are a BVI company and substantially all of our assets are located outside of the United States. Virtually all of our assets and a substantial portion of our current business operations are conducted in the PRC. In addition, almost all of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons areis located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce inthe U.S. courts judgments obtained in U.S. courts including judgments based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, many of whom are not residents in the United States, and whose significant part of assets are located in significant part outside of the United States. The courts of the BVI would recognize as a valid judgment, a final and conclusive judgment in personamperson and obtained in the federal or state courts in the United States against the Company, under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of the BVI, (c) such judgment was not obtained by fraud, (d) the enforcement of the judgment would not be contrary to the public policy of the BVI, (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the BVI, and (f) there is due compliance with the correct procedures under the laws of the BVI. In addition, there is uncertainty as to whether the courts of the BVI or the PRC, respectively, would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state. In addition, it is uncertain whether such BVI or PRC courts would entertain original actions brought in the courts of the BVI or the PRC, against us or such persons predicated upon the securities laws of the United States or any state.

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Because we are incorporated under the laws of the BVI, it may be more difficult for our shareholders to protect their rights than it would be for a shareholder of a corporation incorporated in another jurisdiction.

Our corporate affairs are governed by our memorandum and articles of association, by the BVI Business Companies Act, 2004 (as amended), or the BVI Act, and by the common law of the BVI. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management, and the rights of our shareholders differ from those that would apply, if we were incorporated in the United States or another jurisdiction. The rights of shareholders under BVI law may not be as clearly established as are the rights of shareholders are in the United States or other jurisdictions. Under the laws of most jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder actionShareholders’ actions must be taken in good faith, andfaith. Obviously unreasonable actions by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in United States or other jurisdictions. In addition, the circumstances in whichAlthough a shareholder of a BVI company may sue the company derivatively, and the procedures and defenses that may be available to the company may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company organized in the United States. Furthermore, our directors have the power to take certain actions without shareholdershareholders’ approval, of which would require shareholdershareholders’ approval under the laws of most United States or other jurisdictions. The directors of a BVI corporation, subject in certain cases to courtthe court’s approval but without shareholdershareholders’ approval, may implement a reorganization, merger or consolidation, the sale of any assets, property, part of the business, or securities of the corporation, of which is subject to a limit of up to 50% of such assets. The ability of our board of directors to create new classes or series of shares and the rights attached by amending our Memorandum of Association and Articles of Association without shareholdershareholders’ approval could have the effect of delaying, deterring or preventing a change in our control without any further action by the shareholders, including a tender offer to purchase our ordinary shares at a premium over then current market prices. Thus, our shareholders may have more difficulty protecting their interests in the face of actions by our board of directors or our controlling shareholders than they would have as shareholders of a corporation incorporated in another jurisdiction.

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ITEM 4.              INFORMATION ON THE COMPANY

A. History and Development of the Company

General Information

The current legal and commercial name of the Company is China Information Technology, Inc. The Company was incorporated in the BVI under the BVI Act on June 18, 2012. The address of our principal place of business is 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, Guangdong Province 518040, People’s Republic of China, and ourChina. Our telephone number is (+86) 755 -8370-8333.755-8831-9888. The name and address of our agent for service in the United States is Corporation Service Company, 80 State Street, Albany, NY 12207-2543.

Corporate History

Our predecessor company, CITN, was originally organized under the laws of the State of Florida on September 19, 1979 under the name Mark Thomas Publishing Inc. and onOn April 29, 2003 we changed our name to Irish Mag, Inc. From our inception through October 8, 2006, we provided consulting services in the offset printing industry, targeting individual retail consumers as well as small to mid-sizemedium sized companies.

Between October 6, 2006 and January 31, 2007, our shareholders approved a series of transactions whereby we purchased all the issued and outstanding stock of CITH from our current Chairman and Chief Executive Officer, Jiang Huai Lin, for 25,500,000 shares of our common stock. As a result of these transactions, CITH and its wholly-owned subsidiary, IST, became our wholly-owned subsidiaries, andsubsidiaries. Mr. Lin became the beneficial owner of 25,500,000 shares of our common stock, which, at January 31, 2007, constituted 80.8% of our issued and outstanding common stock. As a result of these transactions, our business operationsoperation was changed to the provisionas a service provider of integrated geographic information services. On January 26, 2007, we changed our name to China Public Security Technology, Inc. to more accurately reflect our new business and commercial objectives.

On April 7, 2008, we reincorporated tore-incorporated in the State of Nevada by merging into China Information Security Technology, Inc., a subsidiary that we established in Nevada to effect the reincorporation.re-incorporation. As a result, our name was changed to China Information Security Technology, Inc. and we became a Nevada corporation.

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On August 26, 2010, we changed our name to China Information Technology, Inc.

On October 31, 2012, we completed a corporate reorganization, whereby the Company, which was established as a subsidiary of CITN under the laws of the BVI to effect the reorganization, became the parent company of a publicly held parent company andentity. Consequently, CITN became a wholly-owned subsidiary of the Company. In connection with the reorganization, each outstanding share of the common stock of CITN was converted into the right to receive one ordinary share of the Company and theCompany. The ordinary shares of the Company were listed on the NASDAQ Global Select Market under the trading symbol of “CNIT,” the same symbol under which the common stock of CITN were listed. Prior to the reorganization, shares of CITN’s common stock were registered pursuant to Section 12(b) of the Exchange Act. On October 31, 2012, the Company filed a Form 8-K12B under cover of a Form 6-K to establish the Company as the successor issuer to CITN pursuant to Rule 12g-3 under the Exchange Act, and pursuantAct. Pursuant to Rule 12g-3(a) under the Exchange Act, the ordinary shares of the Company, as successor issuer, were deemed registered under Section 12(b) of the Exchange Act. On November 13, 2012, CITN filed a Form 15 with the SEC to terminate the registration of the shares of its common stock and suspend its reporting obligations under Sections 13 and 15(d) of the Exchange Act. On November 19, 2012, we changed the name of CITN to China Information Technology (Nevada), Inc., which was liquidated and dissolved in July 2014.

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Management Services Agreement

On July 1, 2007, our subsidiary IST entered into a management services agreement, or MSA, with iASPEC and its shareholders, pursuantshareholders. Pursuant to whichthe MSA, iASPEC granted IST an exclusive, royalty-free, transferable, worldwide license to use and install for a ten-year term, certain iASPEC software, along with copies of source and object codecodes relating to such software in any manner permitted by applicable laws andfor ten years. Also, IST licensed back to iASPEC a royalty-free, limited, non-exclusive license to the software without right of sub-license for the sole purpose of permitting iASPEC to carry out its business as presently conducted. IST was also granted the right to designate two Chinese citizens to serve as senior managers of iASPEC, to serve on iASPEC’s Board of Directors and assist in managing the business and operations of iASPEC. In addition, both iASPEC and IST agreed to require the affirmative vote of the majority of our Board of Directors, as well as at least one non-insider director, for certain material actions with respect to iASPEC. Furthermore, under the MSA, IST was entitled to receive 100% of the modified net received profit of iASPEC, and would reimburse iASPEC for all net losses incurred by iASPEC.incurred. IST was also obligated to pay iASPEC $180,000 per year. If iASPEC or any of the iASPEC shareholders materially breaches the MSA and fails to remedy the breach within 60 days after receipt of notice from IST of such breach, theyiASPEC and its shareholders will be jointly and severally obligated to pay to IST liquidated damages in an amount equal to the higher of (a) eight times the annualized revenues of IST for the last completed fiscal quarter, or (b) US$50$50 million.

In connection with the MSA, IST also entered into a purchase option agreement, or Option Agreement, with iASPEC and its shareholders, effective as of July 1, 2007, pursuant2007. Pursuant to whichthe Option Agreement, the iASPEC shareholders granted IST, or its designee(s), an exclusive, irrevocable option to purchase from the iASPEC shareholders, from time to time, all or a part of iASPEC’s shares, pursuantaccording to an equity transfer agreement, or to purchase all or a part of iASPEC’s assets, pursuantaccording to an asset purchase and transfer agreement. However, according to the Option Agreement, the option may not be exercised by IST, if the exercise would violate any applicable laws and regulations in China or cause any license or permit held by, and necessary for the operation of iASPEC, to be cancelled or invalidated. Under the terms of the Option Agreement, the option is immediately exercisable at an exercise price of $1,800,000, in the aggregate, which is subject to regulatory approval. In addition, iASPEC and the iASPEC shareholders agreed to use their best efforts to acquire all necessary government approvals and other consents to complete a share purchase under the Option Agreement. The Option Agreement may be rescinded by IST upon 30 days’ notice, and will terminatebe terminated on the date, thatwhen we purchasehave purchased all remaining shares or assets of iASPEC, pursuant to the terms of the Option Agreement. If any of the parties breaches the Option Agreement and fails to remedy the breach, the breaching party will pay a penalty of RMB5,000,000 (approximately $683,600) to the non-breaching party or parties, and compensate the non-breaching party or parties for any losses caused by the breach.

As a result of itsthe relationship with iASPEC, iASPEC became a variable interest entity of our Company. A variable interest represents a contractual or ownership interest in another entity that causes the holder to absorb the changes in fair value of the other entity’s net assets. Potential variable interests include:include holding economic interests,interests; voting rights,rights; or obligations to an entity; issuing guarantees on behalf of an entity; transferring assets to an entity; managing the assets of an entity; leasing assets from an entity; and providing financing to an entity. In such cases consolidation of the variable interest entity is required by the enterprise that controls the economic risks and rewards of the entity, regardless of ownership. While we have held an economic interest in iASPEC since October 9, 2006, the MSA and the Option Agreement gave us controlcontrols over the business and operations of iASPEC. As a result, iASPEC’s financial data is subject to consolidation with our financial data, commencing July 1, 2007.

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On July 1, 2008, our Chairman and Chief Executive Officer, Mr. Jiang HuaiJianghuai Lin, entered into an Equity Transfer Agreement with Mr. Jin Zhu Cai, the owner of a 24% minority interest in iASPEC, pursuantiASPEC. Pursuant to whichthe Agreement, Mr. Lin purchased Mr. Cai’s minority interest for a total consideration of RMB60RMB 60 million (approximately $8.72$8.7 million). As a result of the Equity Transfer Agreement, Mr. Lin holds 100% of the equity interests of iASPEC.

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On December 13, 2009, IST, iASPEC and Mr. Lin, as the sole shareholder of iASPEC, amended and restated the MSA, pursuantMSA. Pursuant to whichthe amended MSA, IST would continue to provide management and consulting services to iASPEC, subject to the following changes:

• iASPEC agreed that IST will be entitled to receive ninety five percent (95%) of the net received profit of iASPEC during the term of the agreement, to be calculated as follows: accrued accounts receivable plus net turnover (revenue), minus cost of sales, minus operating expenses, and minus accrued but not collected accounts receivable, but only if the result is a positive number. iASPEC is obligated to calculate and pay the net received profit due to IST no later than the last day of the first month following the end of each fiscal quarter;

• Mr. Lin agreed to enter into a pledge agreement with IST to pledge all his equity interests in iASPEC as security for his and iASPEC’s fulfillment of their respective obligations under the MSA, and to register the pledge agreement with the local Administration for Industry and Commerce;

• Mr. Lin confirmed his status as the sole shareholder of iASPEC and his assumption of all the obligations of the iASPEC shareholder under the agreement, including a confirmation of his continuing obligation under a written guaranty, dated August 1, 2007, executed by the iASPEC shareholders in connection with the MSA;

• Based on iASPEC’s needs for its development and operation, IST has the right, from time to time, at its sole discretion, to provide iASPEC with capital support either as an entrustment of funds to iASPEC, or as an advance to Mr. Lin, as iASPEC’s shareholder, for the sole purpose of making a capital contribution to iASPEC for use in the business of iASPEC; provided that, any such advance for capital contribution will be evidenced by an “advance agreement” in the form attached to the amended and restated MSA; and

• IST agreed that it will not interfere in any business of iASPEC covered by iASPEC’s State Secret related Computer Information System Integration Certificate, including but not limited to, seeking access to relevant documents regarding such business; provided, however, that iASPEC agreed that it will cooperate with the requests of the Company as necessary to comply with the Company’s reporting obligations to the SEC.

In addition, during the term of the amended MSA, certain material actions with respect to iASPEC will require the affirmative vote of the majority of the Board of Directors of the Company, including the affirmative vote of at least one member of which who is not employed by IST, iASPEC, or any affiliate of either of them. Such material actions include: (a) the nomination, appointment, election or replacement of any members of any Board of Directors of iASPEC (who must be a citizen of the PRC); (b) the approval of any profit distribution plan and loss compensation plan; (c) any merger, division, change of corporate form, dissolution or liquidation of iASPEC; (d) any loan or advance or other payments or transfers of funds from IST to iASPEC; (e) any declaration of any dividend or any distribution of profits by iASPEC; (f) the formation or disposition of any subsidiary by iASPEC, or the acquisition or disposition of any equity interest or other interest in any other entity by iASPEC; (g) any corporate borrowing or lending by iASPEC, except for routine extension of terms to trade creditors; (h) the encumbrance of any of the assets of iASPEC under any lien, except in the ordinary course of business; (i) any change in the methods of accounting or accounting practices of iASPEC; (j) any change in the scope of business of iASPEC, or any decision to engage in any type of business other than those engaged in by iASPEC as of the date of the agreement or (k) any agreement to do any of the foregoing.

After the amended MSA was executed, based on the advice of the Company’s PRC legal counsel, in January 2010 all the parties to the MSA decided not to enter into a pledge agreement.

The amended MSA has a term of 30 years unless otherwise earlier terminated by the parties by one of the following means:

• Either iASPEC or IST may terminate the amended MSA immediately (a) upon the material breach by the other of its obligations and the failure of such party to cure such breach within 30 working days after written notice from the non-breaching party; or (b) upon the filing of a voluntary or involuntary petition in bankruptcy by the other or of which the other is the subject, or the insolvency of the other, or the commencement of any proceedings placing the other in receivership, or of any assignment by the other for the benefit of creditors; or

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• The amended MSA may be terminated at any time by IST upon 90 calendar days’ written notice delivered to all other parties.

Upon any effective date of any termination of the amended:amended MSA: (a) IST will cease providing management services to iASPEC; (ii) IST will deliver to iASPEC all chops and seals of iASPEC; (iii) IST will deliver to iASPEC all of the financial and other books and records of iASPEC, including any and all permits, licenses, certificates, and other proprietary and operational documents and instruments; (iv) the senior managers who are recommended by IST and elected as directors of iASPEC will resign from the Board of Directors of iASPEC in a lawful way; and (v) the software license that iASPEC granted to IST according to the amended MSA will terminate unless otherwise agreed by the parties. In addition, any amounts owing from anyone party to anythe other, party on the effective date of any termination under the terms of the amended MSA, will continue to be dueliable and owingpayable despite such termination.

The amended MSA does not have renewal provisions. We expect that the parties to the amended MSA will negotiate to extend the term of the agreement before its expiration.

Purchase Option Agreement

On July 1, 2007, in connection with the execution of the original MSA, IST entered into a purchase option agreement, or the Option Agreement, with iASPEC and the then shareholders of iASPEC. The Option Agreement will terminate on the date IST exercises its purchase option and acquires all the shares or assets of iASPEC pursuant to the terms of the Option Agreement. The Option Agreement may be rescinded by IST upon 30 days’ notice without costs to terminate. The Option Agreement does not have renewal provisions.

Acquisitions

On November 7, 2007, we acquired 100% of the equity interests of ISSI, and its PRC operating subsidiary, ISS,TopCloud, for which we paid approximately $7.1 million in cash and issuedwith 883,333 shares.shares of the Company’s stock. On July 16, 2012, ISSI and iASPEC entered into an equity transfer agreement, pursuant to which ISSI agreed to transfer 100% of its equity interest in ISSTopCloud to iASPEC for a purchase price of approximately RMB 53.9854.0 million (approximately $8.57 million).

On February 1, 2008, we acquired 100% of the equity interests of ISIID, and its PRC operating subsidiary, Bocom, for a purchase price of approximately $18,000,000. We paid approximately $9,000,000 of the purchase price in cash and the remaining $9,000,000 was paid in 1,125,000 shares.

On April 7, 2008, iASPEC acquired Geo, pursuant to (1) a share purchase and increased capital injection agreement, dated as of February 16, 2008, by and among iASPEC, Wuhan Wuda Venture Capital Co., Ltd., Song Ai HongHong‚ and Geo, for the purchase of 46% of Geo forwith a purchase price of approximately $4,819,000,$4.8 million, and (2) a share purchase agreement, dated as of February 16, 2008, between iASPEC and Li Wei, for the purchase of 2.4% of Geo forwith a purchase price of approximately $666,700.$0.7 million. On September 3, 2010, Geo increased its registered capital from RMB 60,000,00060 million (approximately $8,849,680)$8.8 million) to RMB 79,200,00079.2 million (approximately $11,681,588)$11.7 million). The RMB 19,200,00019.2 million (approximately $2,831,900)$2.8 million) increase in capital was contributed by iASPEC and a group of new shareholders, consisting of the management teams of both GEO and iASPEC, including Mr. Jiang Huai Lin, our chief executive officer.Chief Executive Officer. On August 30, 2013, MrMr. Huang chengdong,Chengdong, Geo’s minority shareholder, disposed his interest in Geo of total RMB 7,000,000,7.0 million, while PPG Business Management and Advisory Center L.P. (“PPG”) injected capital in Geo for total of RMB9,000,000RMB 9.0 million and four natural person shareholders invested RMB2,000,000 worth of patent rights valued at approximately RMB 2.0 million, which reinforced Geo’s operating business. As a result of the capital increase,injection, the equity interest owned by iASPEC in Geo was reduced from 57%57.00% to 50.37%, and the management teams of Geo and iASPEC now hold 54.50% of the equity interest in Geo. .

On October 31, 2008, we completed the acquisition of Kwong Tai International Technology Limited, a Hong Kong company, or Kwong Tai, and its PRC operating subsidiary, Zhongtian, from Wide Peace International Investments Limited, or Wide Peace, for a purchase price of $16,500,000.$16.5 million. We paid $9,900,000$9.9 million (approximately RMB 67,617,000)67.6 million) in cash, and the remaining $6,600,000$6.6 million was paid in 1,280,807 shares.shares of the Company’ common stock.

Wide Peace was obligated to return 355,164 of the purchased shares to us, if Zhongtian did not attain an audited minimum after tax net income, or ATNI, at minimum of $2,200,000$2.2 million for the fiscal year of 2009, and an additional 355,164 of the shares, if Zhongtian did not attain an audited minimum ATNI of $2,860,000$2.9 million for the fiscal year of 2010. The 2009 and 2010 targets of ATNI were met by Zhongtian.

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On October 1, 2009, we completed the acquisition of HPC Electronics (China) Company, Ltd., a Hong Kong company, or HPC and its PRC operating subsidiary, Information Security IoT Technology Co., Ltd. (ISIOT) (former Huipu Electronics (Shenzhen) Co., Ltd.” from Ms. Rita Kwai Fong Leung for a purchase price of $16,000,000.$16.0 million. We paid $8,000,000$8.0 million (approximately RMB54,640,000)RMB 54.6 million) of the purchase price in cash, and the remaining $4,000,000$4.0 million in 1,101,930 shares.shares of the Company’ common stock. We were also obligated to issue and deliver to Ms. Leung up to an additional 1,101,930 shares of our common stock in accordance with certain make good provisions agreed to between the parties, if HCP attained certain audited consolidated ATNI thresholds for fiscal years 2010 through 2012. On August 26, 2011, the parties entered into an amendment to the purchase agreement, pursuantagreement. Pursuant to whichthe amendment, we waived the requirement for HPC to attain the ATNI thresholds for fiscal years 2011 and 2012, and we agreed to issue 344,353 shares of the Company’s common stock to Ms. Leung in consideration offor termination of employment ofwith Ms. Leung and certain other members of HPC’s management with immediate effect andeffect. We also obtained a release of all claims that Ms. Leung and the related members of HPC’s management have or may have against us. The parties agreed that the termination of the relationship willwould put us in a better position to execute our management strategies related to HPC.

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On May 5, 2011, Kwong Tai and iASPEC entered into an equity transfer agreement, pursuantagreement. According to whichthe Agreement, Kwong Tai agreed to transfer 100% of its equity interest in Zhongtian to iASPEC for a purchase price of RMB 20,240,65020.2 million (approximately $3,113,946)$3.1 million). On December 29, 2011, Zhongtian’s registered capital was increased by RMB 7,470,0007.5 million (approximately $1,175,778)$1.2 million) from RMB 33,240,65033.2 million (approximately $5,232,078)$5.2 million) to RMB 40,710,65040.7 million (approximately $6,407,856)$6.4 million). This contribution was made by members of the management of Zhongtian, including Mr. Jiang Huai Lin, our chief executive officer.Chief Executive Officer. As a result of the capital increase, the equity interest owned by iASPEC in Zhongtian was reduced from 100% to 81.65%, and members of the management of Zhongtian now hold 18.35% of the equity interest in Zhongtian. .

On February 20, 2012, Zhongtian, increased its registered capital from RMB40.7 million (approximately $6.2 million) to RMB42.5RMB 42.5 million (approximately $6.5 million). The RMB1.79RMB 1.8 million (approximately $0.28$0.3 million) was contributed by new shareholders, comprising the management teams of Zhongtian, including Mr. Lin, the Company’s chief executive officer.Chief Executive Officer. As a result of the capital increase, the equity interest owned by iASPEC in Zhongtian was reduced from 81.65% to 78.21% and resulted in approximately $0.12 million of Zhongtian’s equity being reclassified to non-controlling interest..

On August 30, 2013, a minority shareholder disposed of its interest in Geo totaling RMB 77.0 million (approximately $ 1.13$1.1 million). In addition, duringin 2013, various individual shareholders injected capital in Geo totaling of RMB21.50RMB21.5 million (approximately $3.53$3.5 million), and four other shareholders contributed patent rights valued at RMB2RMB2.0 million (approximately $0.32$0.3 million) which. Influx of capital contrition and patents reinforced Geo’s operating business. As a result of the capital increase, Geo’s minority interest increased from 47.46% to 49.63%, while the equity interest owned by iASPEC in Geo was decreased from 52.54% to 50.37%, and resulted in approximately $0.20 million of Geo’s equity being reclassified to non-controlling interest with iASPEC still remaining as the controlling shareholder in Geo thereafter. .

On September 10, 2013, iASPEC purchased common shares of Zhongtian from minority interest holders in Zhongtian for a total of RMB2.34RMB 2.3 million (approximately $0.38$0.4 million). As a result, the equity interest owned by iASPEC in Zhongtian was increased from 78.21% to 83.72% and resulted in approximately $0.21 million of Zhongtian’s equity being reclassified from non-controlling interest.

On September 18, 2013, Information Security Technology (PRC) Co., Ltd ("IST"), our wholly-owned subsidiary,IST HK and iASPEC entered into an equity transfer agreement, pursuant to which iASPEC agreed to transfertransferred 100% of equity interests in ISS,TopCloud, to IST HK, for a purchase price of RMB53.98RMB 54.0 million (approximately $8.84$8.8 million).

On April 30, 2014, iASPEC purchased common shares of Zhongtian from minority interest holders for RMB 6.9 million (approximately $1.1 million). As a result, the equity interest owned by iAPSEC in Zhongtian was further increased from 83.72% to 99.99% .

On April 30, 2014, iASPEC purchased common shares of Geo from minority interest holders for RMB 8.3 million (approximately $1.3 million). As a result, the equity interest owned by iAPSEC in Geo was further increased from 50.37% to 54.89% .

On September 16, 2014, iASPEC and Shenzhen Yunchao Software Internet Co., Ltd., a PRC company, or Yunchao, entered into an equity transfer agreement to acquire 100% equity interest of Yuntao’s subsidiary, Shenzhen Biznest Internet Software Co., Ltd., or Biznest, for the total consideration of approximately $12.7 million, consisting of approximately $7.5 million to be paid in cash and 1,543,455 ordinary shares to be issued by the Company. Both the cash consideration and the ordinary shares have been delivered as of the date of this report.

Newly Formed Subsidiary

On November 3, 2014, iASPEC formed a wholly owned PRC subsidiary, Shenzhen Taoping Internet Technology Co. Ltd. (“Taoping”), to construct online exchange for out-of-home advertisement resources. Taoping pairs small to medium sized enterprise (SME) corporate advertisers, who seek marketing and advertising channels with owners of networked digital display media terminals with display screen of 21 inch to 75 inch in size. Currently, Taoping is a module of our Yunfa Net (www.pubds.com), an information distribution and advertising delivery system, serving as an exchange platform for advertising time slot management of digital screens owned by our customers of new media industry.

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Disposal of Subsidiary

On November 6, 2015, iASPEC entered into an equity transfer agreement with certain individual and institutional purchasers. Pursuant to the transfer agreement, iASPEC sold all of its ownership in Geo, which constituted approximately 54.89% of total capital stock of Geo for an aggregate of RMB 91.3 million (approximately $14.7 million). Pursuant to the transfer agreement, the transferees agreed to pay the purchase price in four installments by March 30, 2016. The purchase price had been fully collected by the Company as of February 29, 2016.

On November 9, 2015, iASPEC entered into an equity transfer agreement with a certain institutional purchaser. Pursuant to the transfer agreement, iASPEC sold all of its ownership of Zhongtian, which constituted 100% of total capital stock of Zhongtian for an aggregate of RMB 30.0 million (approximately $4.8 million). Pursuant to the agreement, the transferee paid the purchase price in three installments by May 31, 2016.

On January 31, 2015, the Company deregistered Information Security Int’l Investment & Development Ltd (ISIID) in line with its business restructure. The deregistration did not result in any gain or loss for the year ended December 31, 2015.

On March 31, 2016, the Company disposed of Information Security Software Investment Limited (“ISSI”), a wholly-owned subsidiary, to an unrelated third party. On August 1, 2016, the Company also disposed of Dongguan Information Security Technology (China) Co., Ltd. (“IST DG”) to an unrelated party. Both IST DG and ISSI were holding companies. The Company divested these two subsidiaries as it determined that they were no longer necessary for the business of the Company. There was no consideration exchanged for the disposals that resulted in a total loss of approximately $0.6 million for the year ended December 31, 2016.

“Going Private” Transaction

On June 22, 2015, the Company announced that its Board of Directors received a preliminary, non-binding proposal letter (the “Proposal”), dated June 19, 2015, from Mr. Jianghuai Lin ("Mr. Lin"), Chairman and Chief Executive Officer of the Company, Mr. Zhiqiang Zhao (“Mr. Zhao”), Director and Chief Operating Officer of the Company, Mr. Junping Sun (“Mr. Sun”), Senior Vice President of the Company and Mr. Jinzhu Cai (“Mr. Cai”), an individual investor (together with Mr. Lin, Mr. Zhao and Mr. Sun, the "Buyer Group"), proposing a "going-private" transaction to acquire all of the outstanding ordinary shares of the Company not already owned by the Buyer Group at a proposed price of $4.43 per ordinary share.

On July 1, 2015, the Board of Directors announced that a special committee, consisting of three independent and disinterested directors of the Company, Mr. Yusen Huang, Mr. Remington Hu, and Dr. Yong Jiang, (the “Special Committee”) was formed to consider the previously announced non-binding "going private" proposal that the Board received from the Buyer Group.

On August 19, 2015, the Special Committee announced the engagements of Duff & Phelps Securities, LLC and Duff & Phelps, LLC as its financial advisors, and Gibson, Dunn & Crutcher LLP as its legal counsel, to review and evaluate the Proposal.

On October 11, 2016, the Buyer Group submitted a letter to the Special Committee to notify the Special Committee that the Buyer Group had unanimously determined to withdraw the Proposal. The withdrawal of the Proposal became effective on October 11, 2016.

Corporate Structure

The following diagram illustrates our corporate structure as of the date of this annual report.

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Principal Capital Expenditures and Divestitures

     In fiscal years 2013, 2012 and 2011,For the year ended December 31, 2016, our total capital expenditures and divestitures were $3.23 million, $5.56$3.46 million and $18.63$12.31 million, respectively. For the year ended December 31, 2015, our total capital expenditures and divestitures were $4.6 million and $45.1 million, respectively. For the year ended December 31, 2014, our total capital expenditures and divestitures were $8.6 million and $16.5 million, respectively. Such expenditures and divestitures were primarily used forrelated to the purchase and sale of long lived assets. We will reduce our capital expenditures in the traditional display hardwarelong-lived assets and government-related businesses, thus making more funding available for the internet-related products and servicesbusiness acquisitions.

B. Business Overview

General

We were founded in 1993. Headquarter of the Company is located in Shenzhen, China. As of December 31, 2016, we had approximately 125 employees and 10 sales offices nationwide.

We are a leading provider of integrated cloud-based solutions including Internet-of-Things (“IoT”), public InfoCloud, WeMedia platform,cloud-app technologies for Smart City IoT platforms, digital advertising delivery, and other Internet-related servicesinternet-based information distribution systems in China WeChina. Our Internet ecosystem enables all participants of the new media community to efficiently promote branding, disseminate information, and exchange resources. In addition, we provide a broad portfolio of software, hardware andwith fully integrated solutions, including Information Technology infrastructure, Internet-enabled display technologies, and IoT platforms to customers in a varietygovernment, education, residential community management, media, transportation, and other private sectors.

Prior to 2014, we generated the majority of technology sectors including Internet-enabled display technologies, Geographic Information Systems, or GIS, Digital Public Security Technologies, or DPST, Digital Hospital Information Systems, or DHIS, education, media, and consumer products.

We were founded in 1993 and are headquartered in Shenzhen, China. As of December 31, 2013, we had approximately 1,266 employees and 14 sales offices nationwide.

Our traditional customers are mostly public sector entities that useour revenues through selling our products and services mostly to the public service entities to help them improve thetheir operational efficiency and service quality and management level and efficiency of public security, traffic control, fire control, medical rescue, border control, and surveying and mapping.quality. Our typicalrepresentative customers include some of the most important governmental departments inincluded China including the Ministry of Public Security, theprovincial bureaus of public security, fire fighting,departments, traffic bureaus, police stations, human resource departments, urban planning boards, civic administrations, land resource administrations, mapping and police departments of several provinces,surveying bureaus, and the Shenzhen General Station of Exit and EntryImmigration Frontier Inspection, and several provincial personnel, urban planning, civil administration, land resource, and mapping and surveying bureaus. Over the past several years,Inspection.

Since 2014, we have expanded and diversified our customer base beyondto the public sector. Inprivate sector as well. Our customers in the future,private sector include, among others, elevator maintenance companies, residential community management, advertising agencies, auto dealerships, and educational institutes. Our new corporate mission is to make publicity accessible and affordable for businesses of all sizes.

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We generated revenues from sales of hardware products, software licenses, system integration services, and related maintenance and support services. Starting in 2015, with the introduction of our cloud-based software as a service (SaaS) offering, we expect to continually expand our market and product offerings in the public and other sectors, through geographic expansion and enhancement of our technical capabilities.

We generate additional recurring monthly revenues through the sale of our software and hardware products and internet-related services, through our fully integrated total solutions, and through the provision of related support services. A significantfrom SaaS fees. In 2016, a small portion of our operations are conducted through iASPEC, our variable interest entity. iASPECrevenue was generated from SaaS, which is a PRC domestic company owned by Mr. Jiang Huai Lin, our Chairman and Chief Executive Officer, who is a PRC citizen and resident. iASPEC is ableexpected to obtain governmental licenses that are restricted to PRC entities that have no foreign ownership. These licenses allow iASPEC to perform Police-use Geographic Information Systems, or PGIS, services for PRC governmental customers. Under our MSA among our subsidiary, IST, iASPEC and Mr. Lin, IST is entitled to receive 95% ofincrease in the net received profit of iASPEC duringcoming years with the term of the agreement, less costs and expenses related to sales and operations, and accrued but uncollected accounts receivable. In fiscal years 2013, 2012 and 2011, 42.1%, 44.6% and 47.1%roll-out of our revenues, respectively, were generated under this exclusive commercial arrangement with iASPEC.cloud-based elevator IoT and ad display terminals.

We report financial and operatingoperational information in the following two segments:

As we are continuing to shift our business towards an internet-focused model, we intend to reallocate and rename our operating segments for financial reporting purposes during 2014.

Industry Overview

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General

OverUrbanization is the primary driver for the demand of our Cloud-based solutions for advertising placement and public information dissemination. China’s urbanization rate has accelerated in the past two decades,30 years. Urban population has grown by over 100 million in the PRC governmentpast five years to more than 793 million in 2016. According to Chinese Social Development Research, approximately 70% of the Chinese population is expected to live in urban areas by 2035. Urban lifestyle revolves around consumption of information, goods, and services that necessitates advertising and public information dissemination. At the same time, urbanization has encouragedimposed considerable pressure on land use, environment protection, and municipal infrastructure. Urbanization has also led to increasing demands for equitable treatment for all dwellers in the developmentcities.

In the first quarter of 2014, China’s State Council unveiled a new urbanization plan for the period from 2014 to 2020 in an effort to steer the country onto a more humanistic and useenvironmentally friendly urbanization path. The plan will increase the country’s investment in urban infrastructure, public service facilities, and affordable housing constructions. It also calls for closer coordination between urban and rural developments, better optimization of city planning, and tighter integration of environmental protection measures into urbanization efforts. The plan also projects new technologies for informationconstruction of 20,000 to 50,000 skyscrapers around the country, as well as implementation of mass transit systems in more than 170 cities by 2025. In addition, it requires construction of regular railways to connect all medium sized cities of over 200,000 in population and communication, or ICTs, and their applicationhigh-speed railways to connect large cities of over 500,000 in all spherespopulation by 2020. Also, it plans to expand the nation’s civil aviation network to cover 90 percent of government, industry, education and culture. The term “Informatization” or “xinxihua” has been coined in China to describe the overall process of ICT application in China and has in recent years become a linchpin of central and many local economic development strategies.its total population.

As a partresult of urbanization, the Informatization process,number of elevators in China has increased sharply in recent years. According to the PRC government has launched a seriesGeneral Administration of online programsQuality Supervision of China (AQSIQ), the number of elevators operating in China reached 4.3 million by the end of 2015, representing an average annual growth rate of 10%. In reaction to accelerate its pace of implementingthe increasing elevator safety challenges, the AQSIQ, mandated cities and using information technology. For example, the Golden Shield Program promotes the use of information technology for public security services. The Public GIS platform aimsurban areas to integrate the functions of multiple government departments by using the GIS technology. The Golden Health Program strivesutilize technologies, especially IoT technologies, to improve the efficiency of elevator maintenance, emergency response, and government supervision.

Out-of-Home Digital Advertising Market in China

Rising urbanization has resulted in prevalent traffic congestions throughout China. In medium to large sized cities, people on an average spend 39 minutes of commuting time to work. According to China New-type Urbanization Report (2014-2018), in densely populated tier one cities including Beijing, Guangzhou, and Shanghai, it costs commuters 14, 12, and 11 minutes every day in traffic jams, respectively. In Beijing, a megacity of over 20 million residents, the daily commute takes 52 minutes, the worst of all Chinese cities.

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While traffic jams are a headache for urban commuters and city planners, they present revenue generating opportunities for out-of-home advertisers, who seek attentive audience at high traffic areas. According to China watching e-commerce analyst EnfoDesk (“EnfoDesk”), the out-of-home digital advertising market in China grew to RMB 12.8 billion in 2016, representing a 12% CAGR growth.

The growth, starting in 2013, can be attributed to three factors: 1) macroeconomic recovery in China has encouraged businesses to increase their advertising spending; 2) industry leaders have led consolidation in the out-of-home advertising market and grown their market share in tier one cities like Beijing, Guangzhou, Shanghai, and Shenzhen; 3) rapid advancement in Internet and mobile technologies has resulted in new O2O (offline-to-online) advertising opportunities.

According to China Industry Information Net, the estimated total market size of China's out-of-home advertising was RMB113 billion in 2015, and is expected to reach RMB 190 billion in 2018, with a CAGR of 19%. Cosmetics, beverage, and financial service companies are ranked as top spenders consistently. Internet and real estate companies also increased their advertisement spending significantly.

Over 50% of the advertisers rated commercial buildings and public healthtransportation hubs as the top two prime locations for advertisement placement. Commercial buildings raked in RMB 40 billion of advertising revenue in 2016, and public transportation hubs raked in RMB 45 billion of advertising revenue in the same period of time. The number of advertisers opting for residential buildings also increased considerably. Precision advertisement uses digital technologies, such as internet-based ads management byand distribution and big data analysis, to target its audience, and continues to be the advertisers’ focal point, which resulted in the increasing demands for digital advertising.

Market Trends

In addition to urbanization, two technological developments further accelerate the demand for our CBT products and services: 1) offline-to-online migration of display terminals and 2) adoption of Quick Response (QR) codes.

Currently, most of the advertising display terminals in China are not connected to any network. Consequently, updating their media contents requires onsite manual operation through flash drives or other means. They also tend to have low asset utilization rates. Based on our own primary research, we have estimated that offline terminals have an average asset utilization rate of 40% in tier-one cities, 30% in tier-two cities, and 20% in tier-three and smaller cities. In comparison, content on cloud-based terminals can be remotely uploaded, updated, and managed resulting in substantial labor cost savings for terminal operators, i.e. advertising agencies. In addition, cloud-based terminals offer advertising agencies the flexibility of fine-tuning advertisement schedules on the fly and customizing advertisement content at each location as specific as one single office building. More importantly, idle time slots on cloud-based terminals can be discovered and sold on Taoping, an online resource exchange platform of ours that was released in the fourth quarter of 2015 as a module of our Yunfa Net (www.pubds.com), an information distribution and advertising delivery system. Therefore, asset utilization rate of advertising agencies can be greatly improved. As a result, there is a growing demand to convert offline terminals into networked terminals using our CBT products and services.

Furthermore, the wide adoption of QR codes is also positively impacting the demand for our cloud-based products and services. A QR code is a digital hospital technologies. All these initiatives arebarcode that contains merchants’ information. By incentivizing consumers to scan the QR code embedded in advertisement, advertising agencies can analyze the effectiveness of top prioritytheir advertisements and adjust their sales and marketing tactics on a real-time basis. In China, the application of QR codes is permeating from tier-one cities to the Chinese governmentrest of the country. Although QR codes have frequently appeared in print ads as well as in digital ads displayed on offline terminals, the codes can be changed only as frequently as the advertisement itself. The data brought in to advertising agencies by the QR codes cannot be segmented by precise locations or time slots, and arethus can generate only limited insight into viewer behavior. In contrast, individualized QR codes embedded in advertisement displayed on networked terminals can vary by location and time slot, and offer advertising agencies deeper insights at a much higher precision than offline terminals or print ads. Consequently, adoption of QR codes is further driving the demand for our product offerings.

Global GIS Industry

The GIS field is a rapidly growing field that identifies data according to location. GIS incorporates geographical features with data in order to assess real world problems. In the strictest sense, a GIS is a computer system capable of capturing, storing, analyzing, and displaying geographically referenced information. The term GIS also includes the procedures, operating personnel, and spatial data that go into the system.

The power of a GIS comes from the ability to relate different information in a spatial context and reach a conclusion about this relationship. Most of the information we have about our world contains a location reference, placing that information at some point on the globe. However, GIS can be used to emphasize objects on a map, their absolute location on the Earth’s surface and their spatial relationships, in a series of attribute tables—the “information” part of a GIS. For example, while a computer-aided mapping system may represent a road simply as a line, a GIS may also recognize that road as the boundary between wetland and urban development between two census statistical areas. A GIS, therefore, can reveal important new information (such as whether features intersect or whether they are adjacent) that leads to better decision making or solutions.

Data Capture and Integration — In order to utilize a GIS, data must be directly entered into (or captured by) a GIS in digital form, that is, in a form the computer can recognize. A GIS can also convert existing digital information, which may not yet be in map form, into forms it can recognize and use. Map data may also be created by (1) digitizing maps by hand-tracing with a computer mouse on the screen or on a digitizing tablet to collect the coordinates of features, (2) using electronic scanners to convert maps to digits, or (3) uploading coordinates from Global Positioning System, or GPS, receivers into a GIS. Once a time-consuming process, the data capture process is now made easier by the development in the GIS industry of software tools to automatically extract features from satellite images or aerial photographs and create databases in map form for use in a GIS.

Information Retrieval and Data Output — With a GIS you can “point” at a location, object, or area on the screen and retrieve recorded information about it from off-screen files. For example, using scanned aerial photographs as a visual guide, you can ask a GIS about the location of a fire, analyze the area around the fire and determine conditions of adjacency (what is next to it), containment (what is enclosed by it) and proximity (how close is something to it).

Another critical component of a GIS is its ability to produce graphics on the screen or on paper to convey the results of analyses to the people who make decisions about resources. Wall maps, Internet-ready maps, interactive maps and other graphics can be generated, allowing decision makers to visualize and thereby understand the results of analyses or simulations of potential events.

Components of GIS

Hardware — Hardware comprises the equipment needed to support the many activities ranging from data collection to data analysis. A central piece of the equipment is a workstation, which runs the GIS software and is the attachment point for the equipment. Data collection efforts can also require the use of a digitizer for conversion of hard copy data to digital data and a GPS data logger to collect the field. The use of handheld field technology is also becoming an important tool in GIS. With the advent of web-enabled GIS, web servers have become an important piece of equipment for GIS.

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Software — Different software packages are important for GIS. Central to this is the GIS application package. Such software is essential for creating, editing and adding spatial and attributed data, therefore these packages contain a myriad of functions inherent to them. Extensions or add-ons are software that extends capabilities of the GIS software package. Component GIS software is the opposite of application software. Component GIS seeks to build software applications that meet a specific purpose and thus are limited in their spatial analysis capabilities. Utilities are stand-alone programs that perform a specific function. For example, a file format utility that converts from one type of GIS file to another. There is also web-GIS software that helps serve data through Internet browsers.

Data — Data is the core of any GIS. There are two primary types of data that are used in GIS, data in geodatabases and attribute data. A geodatabase is a database that is in some way referenced to locations on earth. Geodatabases are grouped into two different types: vector and raster. A vector image is stored as geometric objects, such as lines and arcs, which are drawn between specific coordinates. If you magnify a vector image you see the lines more accurately, and the line edges stay smooth. A raster image is made up from pixels, like the picture obtained from a scanner, or the screen image on a computer monitor, and has a finite amount of detail which is dependent upon the image size and resolution. However, the closer one looks at a raster image the coarser it appears and one does not see any extra detail. Vector drawings are utilized in GIS and other applications where accuracy is important. Usually coupled with this data is data known as attribute data. Attribute data are data that relate to a specific, precisely defined location. The data are often statistical but may be text, images or multimedia. These are linked in the GIS to spatial data that define the location.

People — Well-trained people knowledgeable in spatial analysis and skilled in using GIS software are essential to the GIS process.

Public Sector Use of GIS

GIS can be used by the public sector in the following ways:

Public Safety and Emergency Response Planning — GIS technology gives public safety personnel the ability to manage and analyze large amounts of location-based information. Data (including files from legacy systems) can be stored in a geodatabase and used to visualize spatial relationships and reveal trends critical to public safety response and planning. Computer-generated maps can be shared across a network or the Internet with multiple agencies to coordinate efforts and maximize resources.

Law Enforcement — GIS software uses geography and computer-generated maps as an interface for integrating and accessing massive amounts of location-based information. GIS allows law enforcement and criminal justice personnel to effectively plan for emergency response, determine mitigation priorities, analyze historical events, and predict future events. GIS can also be used to get critical information to emergency responders upon dispatch or while en route to an incident to assist in tactical planning and response. While law enforcement agencies collect vast amounts of data, only a very small part of this information can be absorbed from spreadsheets and database files. GIS provides a visual, spatial means of displaying data, allowing law enforcement agencies to integrate and leverage their data for more informed decision-making.

Public Works and Development — Use of GIS software in public works improves efficiency and productivity to better serve citizens. For example, GIS applications are in demand in connection with the construction of the Pan Asia Railway and development of the Meigong River and Tumen River in northwestern China. Such public works systems could use GIS to connect all divisions in a public works department from engineering to accounting, which streamlines work flows, asset management, operations, and planning. Using a GIS throughout the department allows all sections to share and easily access geographic data. GIS promotes data integrity and facilitates better communication and decision-making throughout the organization.

Economic Development — GIS may be used to foster economic development. Agencies could work to advance the quality of life and strengthen the economic base of their region by retaining and growing existing businesses and attracting new investment.

Urban Planning and Site Selection — Information regarding a proposed site for parcel zoning, transportation planning, waste disposal or other use may be combined and manipulated in a GIS to address planning and natural resource issues (such as the location of a water well near a proposed waste disposal site) to guarantee the quality of life for everyone in livable communities. Planning agencies have realized the power of enterprise GIS to identify problems, respond to them efficiently, and share the results with the public.

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GIS Industry in China

GIS is becoming an increasingly important component of business, healthcare, security, government, trade, media, transportation and tourism industries and operations in China. GIS software is playing an increasingly strategic role for the Chinese government to increase its efficiency and enable the geographic information consolidation for information sharing and exchange, and for Chinese companies to analyze and manage business operations. GIS has been put to use in many spheres by the Chinese public and private sectors, including land survey, mineral exploitation, water conservancy and environmental protection. It also has applications in power generation, mapping, telecommunication, and the management of public administration and public services.

According to the National Administration of Surveying, Mapping and Geoinformation of China, the GIS industry in China was valued at RMB 200 billion in 2012, and will reach RMB 350 billion in 2015. China’s GIS software market by itself was valued at RMB 11.7 billion in 2012. It was further expected that this market would grow by 30% over the next 5 years.

Our Growth Strategy

Our objective is to be the leading provider of integrated solutions for our IT, DT, and internet-related business, which provides primarily high-end digitalcloud-based ad display products, integrated software and internet related services specialized for GIS, DPST, education, media, and other various industry uses.

Our intelligence solutions can help organizations make more insightful decisions and improve the efficiency of their internal processes. Our strategy for achieving this objective includes the following key elements:

• Expand geographic footprint to cover all major markets in China. We intend to leverage our strengths to expand into new geographic markets. For the fiscal year ended December 31, 2013, approximately 23% of our total revenue was generated through our operations in Guangdong Province. We manage our nationwide operations in strategic development areas in China’s south, north, east, center, southwest, northwest, and northeast. We have established offices in Guangzhou, Beijing, Wuhan, and Hunan Province, and Xinjiang Uyghur Autonomous Region, and work through representatives in Nanning (Guangxi Province), Dongguan (Guangdong Province), Chongqing Municipality, Nanjing (Jiangsu Province), Harbin (Heilongjiang Province), Shandong Province, and other cities and provinces in China. Our nationwide distribution network in China covers 32 provinces and provincial cities throughout China. We believe that expanding our presence in new geographic areas will allow us to increase our cross-selling opportunities for our product and service offerings.

• Strengthen R&D capability to enhance and expand core products and further penetrate customer base. To provide our clients with innovative solutions, we expect to offer additional value-added services and add-ins to our current platform through continuous research and development, to enhance our product and service offerings and to maintain our leadership position in our core areas of focus.

• Continue to maintain our leading position in the GIS and internet technology market. We plan to leverage our strong industry reputation and brand recognition to obtain new customers and new projects from existing customers.

• Expand into the private sector. We are witnessing market readiness to adopt our IT and DT solutions that used to serve highly specialized activities of public agencies. As the private sector grows in technological sophistication, we plan to penetrate into this new sector of the market with both IT and DT solutions.

• Move up the value-chain. As we integrate our core competencies within our software and display technology groups we are creating innovative multifunctional products that can open up whole new markets for us. For example, our industry leading interactive digital education system (IT-Pad) and our multifunctional digital display products (DS-Pad) will help us to transition our DT segment away from low-margin LCD TV products and into the more high value and differentiated product markets. We intend to leverage our expertise in internet-enabled display technology and penetrate the high-growth Internet-of-Thing digital market.

We expect to execute these key elements of our growth strategy through a combination of investments in internal initiatives. Internal initiatives will focus on expanding capacity and enhancing our technology and services capabilities.terminals.

Our Products and Services

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ThroughIn the operations ofCBT segment, we provide cloud-based ecosystem solutions to three end markets: 1) new media, 2) education, and 3) residential community management. Underpinning our China-based subsidiariesecosystems are our industry-specific integrated technology platform, resource exchange, and the subcontracting services provided for underbig data analysis services. In 2014, we sold our MSA, we are a provider of products and integratedcloud-based solutions for China’s IT and DT markets in GIS, DPST, DHIS, education, media, and consumer products.

Geographic Information Systems (GIS) Software Services and Operations

We provide system management and support services in connection with our PGIS platform. The PGIS platform is a set of GIS solutions that was developed by iASPEC and licensed exclusively to us, for use in creating, editing and adding data to our customers’ systems. The PGIS platform allows us to provide our law enforcement customers with different services, including specialized mapping services, positioning services, messaging services and services which monitor access to their GIS by users of different levels. We offer the PGIS platform with a full complement of services, including providing basic map image data from the GIS and specific data in connection with that map image (such as a bus stop), a consolidation of both basic data and specific data services for data inquiry services, and application system services, which is the application of consolidated services to a specific service requirement, such as the position of a police officer in the field.

We also provide application interface services which ensure that our PGIS platform is equipped to interact with other programspredominately to the benefit ofChinese new media industry. Starting from 2015, we further expanded our customers. The data from different law enforcement command systems can be integrated with our PGIS platform to provide our law enforcement customers with more robust communicationcustomer base into education and location information. Typically, our platforms are integrated with the City Emergency Commanding System, the Police Resource Consolidated Management System, the Residence Management System, the Internet Surveillance System, the Traffic Commanding System, the Criminal Investigation System and the City Surveillance System. Our core PGIS technology has been selected for use in the Ministry of Public Security’s PGIS Project, which when complete, is expected to standardize and interconnect all PGIS systems in China.

In the Civil-use GIS sector, we have obtained the highest level of qualifications (some of them are mentioned in the sections under the heading “Competition—High Barriers to Entry” and “Regulation” below) with the widest range of applications, through its affiliation with Geo. In addition, Geo’s copyrighted GIS software, “Geostar,” has been widely applied in many mission-critical projects covering national defense, surveying and mapping, land resource, city planning and electricity. Management believes that these qualifications and intellectual property have positioned the Company to benefit for the next few years from the PRC government’s recent emphasis on and promulgation of favorable policies to encourage more applications of domestic-grown GIS software.

In January 2010, China’s State Bureau of Surveying and Mapping announced its plan to build a National Geographic Information Public Service Platform. The whole program will include the construction of one national level master node, 31 provincial level nodes, and 333 city level nodes throughout China, and each city level node will centralize approximately 20 local government departments’ different applications. This program aims to improve the capability and efficiency of geographic information public service, and optimize the utilization of national geographic information resources in China. The whole program will be completed in 5 years.

Digital Public Security Technology (DPST)

First Responder Coordination Platform—The First Responder Coordination Platform is a software program which integrates the contact numbers for general police, fire, traffic and other related government organizations into one contact number and enables these agencies to consolidate and improve their public emergency response. Through this platform, our public security customers are able to command and coordinate joint responses to provide the public with immediate, efficient and reliable assistance. The PRC government, through its “Police Force Technology Reinforcement” initiative, has mandated the adoption of the first responder system to consolidate and improve public emergency response. Approximately 660 cities across China are expected to initiate the deployment of their coordinated emergency response platforms, creating significant opportunities for us.

Intelligent Recognition Systems —Our Intelligent Recognition product is used by the Ministry of Public Security for effective border control management. The Recognition System stores biometric information, such as finger-prints and facial features from passengers in a database and integrates it with infrared and license plate recognition technologies to enable the automation of border control checkpoints for faster and more accurate processing of passengers, while at the same time helping to safeguard borders from stowaways, and greatly improving overall efficiency and the effectiveness of border control management. The rapid development of China in recent years has also led to growing passenger traffic across its borders, which reached over 200 million people in 2012. To address the increasing requirement and faster and more accurate checkpoint processing of passenger traffic, Exit and Entry Frontier Stations throughout China are in the process of implementing their own intelligent border control systems. These systems can also be used to strengthen port control and surveillance in China’s over 200 air, sea and land ports and have many alternative private sector applications, including theresidential community management and control of stadium attendance, parking lot traffic, work attendance and toll road traffic.markets.

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Residence Card Information Management System—This system is designed to applyFor the latest information technologynew media industry, we provide our software as a service to automate the entire interactive workflows between advertising agencies and their customers, including, among others, establishing new advertising projects, submitting advertisement proposals, revising and approving advertising proposals, processing payment online, remotely uploading advertisement content, and tracking and analyzing performance data.

Our Technology Platform

The foundation of our product offerings is our proprietary technology platform called Cloud-Application-Terminal (CAT). Its trademark has been registered in PRC. Our CAT platform includes three layers of technology: 1) cloud infrastructure, 2) software application, and 3) high-definition digital display terminals ranging from 18.5 to 84 inches in display size. Bundled together, three layers of technology serve as a turnkey solution for our customers to improve their operational efficiency and maximize their revenue.

Our CAT platform can be accessed from a variety of devices, including networked display terminals, desktop computers, and mobile devices. It can operate in all operating systems, including Windows, Android and iOS. It unifies all access points into one unique user account, through which a user can log onto our cloud system and enjoy all available software features and functions.

Our Resource Exchange

Building on top of our CAT platform is our industry-specific resource exchange. For the new media industry, in the fourth quarter of 2015, we released a resource exchange called “Taoping” as a module of our proprietary cloud-based information distribution and ad delivery platform - Yunfa Net (www.pubds.com). Taoping means “search and select display terminals” in Chinese. Taoping pairs those, who seek, with those who own out-of-home advertisement resources, and facilitates their transactions online.

For example, a local advertising agency based in Shenzhen Residence Card System,City may need to place advertisement in Guangzhou City, but does not own any display terminals in Guangzhou. Through Taoping, the advertising agency can search available display terminals by location, venue, and time slots, find suitable resources, negotiate rental prices with terminal owners, and process payments online. Then through Taoping, the advertising agency can upload advertisement content onto remote terminals, manage display schedules, monitor advertisement performances, make necessary editing to the advertisement, and update advertisement content.

Taoping enables advertising resource owners to improve their asset utilization rates and returns on investments. At the same time, Taoping allows advertisement promoters to leverage available advertising resources in other geographic regions, and cost effectively expand into new business territories.

Our Big Data Services

Building on top of our resource exchange is our big data analysis service. After we release our resource exchange, we plan to compile and analyze data related to buyer/seller behavioral preferences, so that we can provide value-added services to our customers.

For example, through big data analyses, we will integratebe able to make insightful suggestions to advertising resource owners with police GIS systems. Through anregards to specific types of venues being displayed at specific time slots will likely garner high rental fees and the optimal range of rental fees they could charge for each type of resources they own. For advertising promoters, we will be able to provide advices such as the optimal combination of terminals to rent in order to reach the biggest possible audience they desire, and attain the greatest impact while staying within their advertising budget.

Our Industry-Specific Ecosystems

Combining our proprietary CAT technology platform, resource exchange, and big data services with our industry expertise, we provide integrated information transfer platform,ecosystem solutions to the systemindustries of new media, healthcare, education, and residential community management. As described above, starting from the new media industry, we will facilitate several social programs, including social welfaregradually roll out product offerings to all of those four industries.

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Within the new media industry, we have sold industry-specific solutions to three types of businesses: 1) elevator management, education2) transportation management, and house rental service3) community management. Various government and functional departments can access information regarding the immigrant population in the system to improve work efficiency and increase managing capability. In the near future, the system may be expanded to be compatible with other applications, such as medical, personal credit history, and driving records. In many mid-to-large cities, the population of recent immigrants from rural areas exceeds the resident population. As a key pilot project for the Ministry of China Public Security, our Residence Card information Management System will be deployed in Shenzhen first for evaluation.

Digital Hospital Information Systems (DHIS)

We provide various hospital information management software and solutions, such as Medical Case Statistics Software and Electronic Medical Case Management System, to help build modern, scientific and digital hospitals. Our products have been widely used to efficiently manage hospital fiscal information, clinic information, medical technologies, equipment and inventory, as well as comprehensive hospital information.

Medical Case Statistics Software serves the growing demand for digital hospital and electronic medical record systems in China. Medical records, including health examinations, medical care, immunity or infectious diseases, will be integrated into one centralized system so that doctors within the network can review a patient’s complete medical history. Such digital hospital systems are expected to reduce medical errors and improve the efficiency of delivering healthcare services, so as to benefit patients, while helping to minimize medical claims fraud. Our Medical Case Statistics Software can also be used to provide public health authorities with an integrated command and decision system for public health and disease control.

Our Electronic Medical Case Management System is able to integrate Hospital Information System, Laboratory Information System, Picture Archiving & Communication System, Radiology Information System and Corporate Identity System, to digitize all clinic information. The System also provides access interfaces with related agencies such as Social Insurance and Bank.

Display Technology

After years of effort, we have developed new digital display technologies products embedded with our industry-leading software development and customization capabilities. We expect in 2014 to continue to introduce more valued-added features to our portfolio of advanced digital technology products includinga full line of internet-enabled display technology products including:

CNIT IT-Pad — The CNIT IT-Pad is a display device with a built-in, customizable computer, and a digital high-definition touch-screen. The CNIT IT-Pad is tailored for “Interactive Teaching” and is intended to provide innovative and multimedia-rich interactive education and conferencing tools for our customers.

CNIT DS-Pad — The CNIT DS-Pad is a type of multimedia advertising device that can display compelling advertisements by means of video, animation, pictures and text. The CNIT DS-Pad comes in various sizes, with screens ranging from 15 to 82 inches. The product is also customizable to fit different needs, with styles including free-standing or wall-mountable, indoor or outdoor, and with traditional or touch-screen technology.

	•	New Media Elevator Management – Our New Media Elevator Management solution integrates advertisement placement with safety supervision into one single technology unit. The built-in LED screen of the unit delivers high definition digital advertisement, while its safety sensors and data collectors transmit operational and technical data of the elevator to the appropriate property managers, safety supervisors, and maintenance crew, so that the latter can efficiently maintain operational safety of the elevator, and instantaneously respond to emergencies. Because our New Media Elevator Management solution combines public safety with media display, property managers view our products as of strategic importance to their daily operations, they welcome our products better than the ones that are pure advertisement display terminals without safety devices. As a result, we are able to help advertising agencies that purchase our products to attain customers more easily and enter into new markets more cost effectively. In addition, the Elevator Management platform could be sold as a separate product depending on customer needs facilitating digital elevator maintenance, big data solution for elevator maintenance company, residential management, and government authorities.
	•	New Media Transportation Management – Our New Media Transportation Management solution remotely uploads advertisement content together with critical transportation information -- such as arrival and departure schedules, delay or cancellation notifications, gate assignments, and station announcements – into our cloud infrastructure and displays the content on our large-screen terminals strategically placed at high-traffic transportation hubs, including high-speed railway stations, subway stations, airports, and onboard public buses. Because our Transportation New Media Application combines advertisement display with transportation information crucial to commuters, we enable advertising agencies that purchase our products to attain large and attentive audiences at prime locations, which in turn help them achieve good advertisement placement rates and generate high revenue dollars.
	•	New Media Community Management – Our New Media Community Management solution combines advertisement display with dissemination of community information. Placed within various high-rise residential communities, our large screen display terminals serve as a window of information into various resources available to community residents, including community maps, news updates, emergency announcements, safety precautions, health tips, recreational activities, and local commercial promotions.

Product Warranty

WeFor our TIT segment, we usually offer a one-year serviceor three-year warranty for our system integration services. Theservices depending on the project. Our warranty includes support services, minimal updates and system maintenance. InBased on our experiencepast experiences, the cost of providing thisour warranty provision has been immaterial.

For our CBT segment, we provide a one-year warranty for our digital displays. The actual warranty service is carried out by our OEM partners, with whom we have obtained a contractual guarantee that they will repair or replace any defective hardware products that we have purchased on behalf of our customers. Our OEM partners ultimately bear and are liable for the costs of product warranty. Consequently, our own cost of warranty has been immaterial. We also offer warranties for our hardware sales, but the suppliers of such hardware provide the final warranty services.minimal.

Sales and Marketing

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We develop new business by identifying and contacting potential new customers and through referrals, or by direct contacts by new customers as a result of new customers contacting us because of our strong brand recognition and reputation in the industry. We strengthensolidify our market presence through various types of marketing campaigns, such as participating in exhibitions, trade fairsshows, and seminars, developing distributors and dealers, and presenting solutions to prospective customers. We participateCurrently we have 30 salespeople in several domestic and international trade fairs such as the China High-Tech Fair in Shenzhen and the e-Gov China Fair and the China Education Devices Exhibition in Beijing. We also participate in seminars held by Esri, IBM, and other prominent market participants each year, to raise our recognition and promote our products. These trade fairs not only promote our reputation, but also our brand name.10 offices nationwide.

Customers

In fiscal years 2013, 20122016, three customers represented 10% or more of our total revenue. In fiscal years 2015, and 2011,2014, no single customer represented 10% or more of our total revenue. The following tables provide revenue by our major customers for the years ended December 31, 2013, 20122016, 2015 and 2011.2014.

Year 201331

Year 2012

Year 2011

Competition

The markets forIn the GIS, DPST and DHIS sectorsCBT segment, there are many small IT service companies in China have developedproviding one-off software packages to solve one aspect of the problems, but not the integrated solutions combining technology platform, resource exchange, and big data services like ours. For example, in recent years butthe new media industry, we encounter competition from 56iq.com, Fujian Star-net Communication Co., Ltd, Shanghai View Show Technology Co., Ltd., and Maipu Communications Technology Co., Ltd. We do not compete with advertising agencies, such as Focus Media, Air Media, and VisionChina, because we are still innot an emerging stage. There are currently only a few key players engaged in each of these fields. advertising agency nor do we place advertisement ourselves.

In the PGIS area,TIT segment, we encounter competition from Beijing Founder Digital Company Limited andCo., Ltd., Beijing Easymap Information Technology Co., Ltd. are two important competitors. In the GIS platform software business, we consider, Esri, Super Map Software Co., Ltd., or SuperMap, and Zondy Cyber Group Co., Ltd., or Zondy Cyber, as meaningful competitors. in the geographic information system industry.

Compared with our competitors, we believe we have the following advantages:

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Business Transformation

Prior to 2014, we predominately sold large-scale customized IT solutions to the Chinese public service sector through various build-and-transfer projects. Due to changes in policies and regulations in China in 2012, various local governments started postponing IT projects they had previously contracted with us indefinitely. As a result, many of our main competitors include Neusoft Corporation, or Neusoft, and DHC Software Company Limited, or DHC Software.existing receivables became uncollectable.

In early 2013, our management team made a strategic decision to transition our business from servicing the digital display field,public sector to focusing on the private sector. We started completing our in-process IT projects and ceased taking on new customers in the public sector. In addition, we believewrote off accounts receivable that we have becomedeemed no longer collectable. At the same time, we decided to transform our business from a leading supplierbuild-and-transfer IT service company into a standardized IT product company. Leveraging our experience and expertise in China. Onlyhandling large-scale IT projects for the public sector, we started investing in research and development of our own software products suitable for the private sector.

In 2014, continuing our transition from the public sector to the private sector, we identified new media, healthcare, education, and residential community management as the four core end markets on which we would focus. After fortifying our own software R&D effort through our acquisition of Biznest in September 2014, we decided to exit the hardware manufacturing business and complete our transformation into a few major playerssoftware company. In November 2014, we initiated the process of closing our own manufacturing facilities and transferring hardware production to our OEM partners. Transferring hardware production to our OEM partners was completed during 2015. As a result, we wrote off a large amount of accounts receivable and took substantial goodwill and identifiable intangible asset impairment charges in this market have comparably strong hardware, software,2015 and internet capabilities.2016.

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We believe thatAs part of transition from the traditional IT business to the cloud-based business, we sold iASPEC’s 100% equity holding in Zhongtian and 54.89% equity holding in Geo in 2015. Proceeds from these sales totaling $19.5 million will be able to effectively compete with these companiesinvested in the future. We believe that our pioneering solutions, our ongoing customer relationshipsdevelopment and our reputation for success in the industry have enabled us to maintain our competitive advantages.

We believe the following are our key competitive strengths.

• Broad and Growing Portfolio of Software and Services. We offer our customers a growing portfolio of software and services offerings in each of the two segments and four categories in which we operate. We are therefore able to provide multiple integrated solutions for our clients. Public entities use our core products to incorporate ever- growing data into their decision-making processes to drive more effective results. Through our platforms, our customers can develop customized applications, which can be extended across their agencies to support a variety of needs and generate more valuable insights. As a complement to these offerings, we offer related services, such as application development, software upgrades, follow-on phases, and systems integration, which help our customers quickly implement and customize our solutions.

• Successful Implementation of High Profile Contracts. Our management team has a proven track record of successful implementation of high profile government contracts in China. This track record has enabled us to expand our customer base, which has grown beyond its historical geographic area in the Guangdong province and now includes customers in over 32 provinces throughout China. We have completed numerous high-profile mission-critical projects related to our core DPST, GIS and DHIS businesses, including the Police-use GIS for the 2010 Shanghai Expo, the security system for the 2011 Shenzhen Summer Universiade, the intelligent traffic management system for the 2010 Guangzhou Asian Games, the Police-use GIS for 15 major cities under China’s National PGIS Standardization Project, and the exclusive contract with the Guangdong Department of Health for our patented Medical Case Statistics (MCS) software to be rolled out to 2,000 hospitals within the province. In 2010, our proprietary Geoglobe and Geostar was selected by China’s State Grid Corporation as the sole domestic GIS software provider for the build-out of the Smart Grid project; China’s newly released state-sponsored online mapping service “Map World” are entirely run on our GIS platform software. In addition, allmarket expansion of our operating entities have been awarded the National High-Tech Enterprise Status, which allows usnew cloud-based business, as well as used to receive significant benefits including lower income tax rate, government subsidies, etc. In 2011, we were ranked among Deloitte Technology Fast 500 Asia Pacific for the fourth consecutive year and were named 13th among 2010 Forbes China Best SMEs.

• High Barriers to Entry. We believe our qualifications, our successful contract implementation record, and the high cost of switching to other providers provide us withpay off a “first mover” advantage in the PRC market and pose high barriers to entry for our potential competitors. Examplesportion of our unique position in our industry, particularly the PGIS sector, include our government-sponsored Internet-based global mapping project, Map World Platform, and essential permits and qualifications in China, including iASPEC’s Computer System Integration Level 2 license from the PRC Ministry of Information, the Information System Security Service qualification from Guangdong Province, and a State Secret-related Computer Information Integration Certificate, and Geo’s Level A Certificate of Surveying and Mapping. As discussed above, we are gaining wider market recognition from our successful contract execution record. In addition, after investing in our systems, our existing customers have a strong incentive to purchase follow-on phases from us in order to expedite implementation and save costs.short term debts.

Intellectual Property

Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without infringing on the proprietary rights of others. We rely primarily on a combination of copyrights, patents, trademarks, and trade secrets, as well as executions of employee and third-party confidentiality agreements, to safeguard our intellectual property.

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As of December 31, 2013,2016, through our wholly-owned subsidiaries IST ISS and ISIOTTopCloud, we had 4562 registered and copyrighted software products and held 2523 patents. In addition, our variable interest entities, including iASPEC, Biznest and Bocom, and Zhongtian, hold 14397 registered and copyrighted software products and 2552 patents.

We protect our know-how and technologies through confidentiality provisions in the employment contracts we enter into with our employees. In addition, our engineers are generally divided into different project groups, each of which generally handles only a portion of the project. As a result, no one engineer generally has access to the entire design process and documentation for a particular product.

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RegulationRegulations

Because all of our operating entities are located in the PRC, we are regulated by the national and local laws of the PRC. This section summarizes the major PRC regulations relating to our business.

Permits and Certificates

Our PRC subsidiary IST is a Shenzhen City Software Enterprise and holds ISO 9001:2000 Certification, Environment Management System Certificate, and National High-Tech Enterprise.Enterprise Certification. However, fulfillment of certain Information Technologyinformation technology system integration contracts with PRC GovernmentGovernmental customers is restricted to entities possessingthat possess the necessary government licenses and approvals, which IST does not have. Through our wholly-owned subsidiaries IST, ISSTopCloud and ISIOT, as well as our variable interest entities, we hold the following permits and certificates:

Taxation

On March 16, 2007, the National People’s Congress of China passed the Under The Enterprise Income Tax Law (“EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Before the implementation of the EIT Law, foreign invested enterprises, or FIEs, established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an earned income tax, or EIT, rate of 33%Law”), which included a 30% state income tax and a 3% local income tax. The EIT Law and its implementing rules, impose a unified EIT of 25.0%the statutory tax rate is 25% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. For instance, companiesEntities that are approved as High Technology Enterprises by the PRC government are eligible for a preferential tax rate of 15% if they are approved as High Technology Enterprises by the PRC government..

In addition to the changes to the current tax structure, underUnder the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then global income of our public holding company’s global incomecompany will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see Item 3 “Key information—D. Risk Factors—Risks Relating to Doing Business in China—Under the New Enterprise Income TaxEIT Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.”

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Foreign Currency Exchange

The principal regulation governing foreign currency exchange in China isUnder the Foreign Currency Administration Rules (1996), as amended (2008). Under these Rules,promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities, RMB is freely convertible forinto other currencies without prior approval from SAFE only to the extent of current account items, such as trade related receipts and service-relatedpayments, interest and dividends and after complying with certain procedural requirements. The conversion of RMB into other currencies and remittance of the converted foreign exchange transactions, but notcurrency outside PRC for the purpose of capital account items, such as direct equity investments, loans and repatriation of investment, loan or investment in securities outside China unlessrequires the prior approval of, and/or registration with,from SAFE or its local counterparts (as the case may be) is obtained. Pursuant to the Foreign Currency Administration Rules, FIEsoffice. Payments for transactions that take place within China must be made in China may purchaseRMB. Unless otherwise approved, PRC companies must repatriate foreign currency without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. Theypayments received from abroad. Foreign-invested enterprises may also retain foreign exchange (subjectin accounts with designated foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved, domestic enterprises must convert all of their foreign currency proceeds into RMB.

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On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas investment foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material change in the capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange administration regulations.

On August 29, 2008, SAFE promulgated Circular 142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of Circular 142. Under Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by SAFE)the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to satisfyrepay RMB loans if the proceeds of such loans have not been used. Violations of Circular 142 and Circular 45 could result in severe penalties, such as heavy fines as set out in the relevant foreign exchange liabilitiescontrol regulations. On July 4, 2014, SAFE promulgated SAFE Circular 36, which launched a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4, 2014. However, SAFE Circular 36 continues to prohibit foreign-invested enterprises from directly or indirectly using the Renminbi converted from their foreign exchange capitals for purposes beyond its business scope. On March 30, 2015, SAFE promulgated Circular 19, to pay dividends. In addition, if aexpand the reform nationwide. Circular 19 will come into force and replace both Circular 142 and Circular 36 on June 1, 2015. Circular 36 allows enterprises established within the pilot areas to use their foreign company acquires a company in China, the acquired companyexchange capitals to make equity investment and removes certain other restrictions provided under Circular 142 for these enterprises. Circular 19 will also become an FIE. However, the relevant PRC government authorities may limit or eliminate the ability of FIEs to purchase and retain foreign currenciesremove those restrictions for all foreign-invested enterprises established in the future. In addition,PRC. However, both Circular 36 and Circular 19 continue to prohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange transactionscapitals for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from, and/expenditure beyond its business scope, providing entrusted loans or registration with, SAFE.repaying loans between non-financial enterprises.

Dividend Distributions

Under applicable PRC regulations, FIEs in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a FIE in China is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners, except in the event of liquidation.

After-tax profits/losses with respect to the payment of dividends out of accumulated profits and the annual appropriation of after-tax profits as calculated pursuant to PRC accounting standards and regulations do not result in significant differences as compared to after-tax earnings as presented in our financial statements. However, there are certain differences between PRC accounting standards and regulations and U.S. generally accepted accounting principles, arising from different treatmenttreatments of items such as amortization of intangible assets and change in fair value of contingent consideration rising from business combinations.

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In addition, under the EIT Law, theNotice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates, which was issued on January 29, 2008, theArrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, which became effective on December 8, 2006, and theNotice of the State Administration of Taxation Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, which became effective on October 27, 2009, dividends from our PRC operating subsidiaries paid to us through our Hong Kong subsidiaries may be subject to a withholding tax at a rate of 10%, or at a rate of 5%, if our Hong Kong subsidiaries are considered a “beneficial owner” that is generally engaged in substantial business activities and entitled to treaty benefits under theArrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion.Evasion.

SeasonalityCircular 37

On July 14, 2014, SAFE issued a Circular on Relevant Issues Relating to Domestic Residents’ Investments, Financings, and Roundtrip Investments through Special Purpose Vehicles, or Circular 37, which replaced the Circular 75. Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular 37 as a “special purpose vehicle.” Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material events. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities. Also, the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls.

As we stated under “Risk factors—Risks Relating to Doing Business in China— Failure to comply with PRC regulations relating to the investment in offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us,” we have notified substantial beneficial owners of our company, whom we know are PRC residents to comply with the registration obligation. However, we may not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with Circular 37. The failure of our beneficial owners, who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to Circular 37, or the failure of future beneficial owners of our company, who are PRC residents to comply with the registration procedures set forth in Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.

Seasonality

The first quarter of the calendar year is typically the slowest season of the year due to the Chinese New Year holiday. During this period, accounts receivable collection is very slow and we also need to prepare for upcoming busier seasons by making payments for inventory. With the implementation plan of our cloud-based business, seasonality can be less obvious.

C. Organizational Structure

See “—A. History and Development of the Company—Corporate Structure” above for details of our current organizational structure.

D. Property, Plants and Equipment

All land in China is owned by the state or collectives.local governments. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms according to the relevant Chinese laws. Granted land use rights are transferable and may be used as securitycollateral for borrowings and other obligations.

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Our executive offices are located at 21st Floor, Everbright Bank Building, Zhuzilin, Futian District, Shenzhen, China, for which IST currently has land use rights. Our executive offices consist of approximately 1,200 square meters, all of which are dedicated to administrative office space. We have fully paid the land use fees. Our other property primarily consists of computer equipment, servers, licensed software, some furniture and fixtures. There is no lien on any of our property and weWe currently do not have any intention to make large scale improvements or developments with respect to these properties. This office facility property is currently collateralized for our certain short-term bank loans.

On November 14, 2014, we entered into an agreement to sell our Fuyong Industrial Park to an unrelated third party for a cash consideration of RMB 375 million. As of December 2015, the cash consideration had been fully collected.

iASPEC and Bocom lease offices, employee dormitories, and factory space in Shenzhen Guangzhou, Beijing and WuhanChongqing in the PRC, pursuant to lease agreements that will expire on various dates through November 2015.December 2017. Rent expense for the years ended December 31, 2013, 20122016, 2015, and 2011,2014, was approximately $352,000, $415,000$95, 000, $219,000 and $468,000,$282,000, respectively.

We believe that all our properties have been adequately maintained are generallyand kept in good condition and are suitable and adequate for our business.

ITEM 4A.            UNRESOLVED STAFF COMMENTS

None.

ITEM 5.              OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements because of various factors, including those set forth under Item 3 “Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F. See also “Introductory Notes—Forward-looking Information.”

A. Operating Results

Overview

We are a leading provider of integrated cloud-based platform, exchange, and big data solutions to the Chinese new media, education residential community management, and elevator IoT industries. Our Internet ecosystem enables all participants of the new media community to efficiently promote brands, disseminate information, and display technologies in the PRC. Weexchange resources. In addition, we provide a broad portfolio of software, hardware and fully integrated solutions, including information technology infrastructure, Internet-enabled display technologies to customers in a variety of technology sectors including GIS, DPST, DHIS,government, education, healthcare, media, transportation, and consumer products.other private sectors.

We were founded in 1993 and are headquartered in Shenzhen, China. As of December 31, 2013,2016, we had approximately 1,266125 employees and 1410 sales offices nationwide.

Our traditional customers are mostly public sector entities that usePrior to 2014, we generated majority of our revenues through selling our products mostly to public service entities to help improve their operational efficiency and services to improve the service quality and management level and efficiency of public security, traffic control, fire control, medical rescue, border control, and surveying and mapping.quality. Our traditionalrepresentative customers include some of the most important governmental departments inincluded China including the Ministry of Public Security, theprovincial bureaus of public security, fire fighting,departments, traffic bureaus, police stations, human resource departments, urban planning boards, civic administrations, land resource administrations, mapping and police departments of several provinces,surveying bureaus, and the Shenzhen General Station of Exit and Entry Frontier Inspection, and several provincial personnel, urban planning, civil administration, land resource, and mapping and surveying bureaus. During the past year,Inspection.

Since 2014, we have diversified our customer base beyond the public sector into private sectors. Our private sector customers include, among others, advertising agencies, auto dealerships, hotels, shopping malls, educational institutes, beauty spas, and introducedetc. Our new internet-related businesses. corporate mission is to make publicity accessible and affordable for businesses of every size.

In 2014, we generated revenues from sales of hardware products, software licenses, system integration services, and related maintenance and supporting services. Starting in 2015, with the future, we expect to continually expand our market and product offerings in the hardware, software, and internet sectors, through geographic expansion and enhancementintroduction of our technical capabilities

We generatecloud-based software as a service (SaaS) offering, we generated additional recurring monthly revenues throughfrom SaaS fees. Although the salerevenue from SaaS is relatively small in 2016, it is expected to pick up quickly in 2017 along with the roll-out of our softwarecloud-based new media terminals and hardware products, through our fully integrated total solutions, and through the provision of related support services. A significant portion of our operations are conducted through iASPEC, our variable interest entity. iASPEC is a PRC domestic company owned by Mr. Jiang Huai Lin, our Chairman and Chief Executive Officer, who is a PRC citizen and resident. iASPEC is able to obtain governmental licenses that are restricted to PRC entities that have no foreign ownership. These licenses allow iASPEC to perform PGIS services for PRC governmental customers. Under our MSA among our subsidiary, IST, iASPEC and Mr. Lin, IST is entitled to receive 95% of the net received profit of iASPEC during the term of the agreement, less costs and expenses related to sales and operations, and accrued but uncollected accounts receivable. In fiscal years 2013, 2012 and 2011, 42.1%, 44.6% and 47.1% of our revenues, respectively, were generated under this exclusive commercial arrangement with iASPEC.elevator IoT box.

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Principal Factors Affecting Our Financial Performance

Demand for Software Products and Services

The revenue growth and profitability of our business depend on the overall market demand for software products and related services. The demand for our CBT products is attributable to rapid urbanization and rising living standards in China. As a result of migration to the cities, individuals’ disposable income and, consumptions of information to assist their purchases of goods and services increase as well. Consequently our CBT products become increasingly receptive to advertisements displayed at public locations. Meanwhile, rising competition has driven merchants and service providers to seek advertisements as a way to make their brands visible and memorable that drives up the demand for innovative advertising technology like our cloud-based software and services.

The demand for our TIT products is attributable to digitization of public services in China. Over the past two decades, the PRCChinese government has encouraged the development and use of new technologies for information and communication and their applicationtechnology in all spheres of government, industry,governmental agendas, private industries, education, and culture.cultural affairs. The term “Informatization” or “xinxihua” has been coined in China to describe the overall process of ICTsoftware application in China, and has in recent years become a linchpin of centralstate and many local economic development strategies.

For example,strategies in the Golden Shield Program promotes the use of information technology for public security services; the Digital City Program aims to ultimately integrate the functions of multiple government departments by using the GIS technology; the Golden Health Program strives to improve the efficiency of public health care by using digital hospital technologies. All these initiatives are of top priority to the Chinese government and are driving the demand for our DPST, GIS and DHIS offerings.recent years.

Taxation

CNIT and CITH wereare incorporated in the BVI, but areand not subject to taxation in that jurisdiction. Under the “anti-inversion” rules of Section 7874 of the U.S. Internal Revenue Code, CNIT is treated for U.S. federal tax purposestaxation purpose as a U.S. corporation and, accordingly, is subject to U.S. federal income tax on its worldwide income currently atwith a maximum income tax rate of 35%.

CITN and CNIT areis subject to United States taxincome taxe at a tax rate of 35%. No provision for income taxestax in the United States has been made as CITN and CNIT havehas no taxable income taxable in the United States.

ISSI, ISIID,IST HK, and HPC wereare incorporated in Hong Kong and under the current laws of Hong Kong, and are subject to a Hong Kong Profits Tax of 16.5% .according to the current Hong Kong tax laws.

Under the PRC’sChinese EIT Law, Geo, iASPEC, Bocom,IST, ISIOT and Zhongtian,TopCloud, are approved as High Technology Enterprises and respective income tax rates are reduced to 15%. Biznest enjoys EIT at the tax rate of 12.5% . iASPEC and Bocom are subject to regular EIT at a rate of 15%. IST benefited from a two-year tax exemption, followed by a 50% exemption for three years, retroactive to as of January 1, 2007. 2011 was the fifth year that IST was entitled to the tax holiday and subject to a favorable tax rate of 12%. For 2013 and 2012, IST was subject to EIT at a rate 25% since its certificate of High Technology Enterprises was expired in year 2012. For year 2013 and 2012, IST DG was subject to EIT at a rate 25%.

Business Segment Information

Segment information is consistent with how management reviews the businesses,business health, makes investing and resource allocation decisionsinvestment, allocates resources, and assesses operating performance.performances. Transfers and sales between reportable segments, if any, are recorded at cost.

We report financial and operatingoperational information in the following two segments:

(1) IT segment — The IT segment includes revenues from products and services surrounding a variety of our software core competencies, currently primarily in GIS, DPST and DHIS. IT segment revenues are generated from the sales of software and system

	(1)	Cloud-based Technology (“CBT”) segment — The CBT segment is our current and future focus of corporate development. It includes our cloud-based products and services offered to private sectors, including new media, healthcare, education, and residential community management. In this segment, we generate revenues from sales of hardware and total solutions consisting of integrated hardware and proprietary software along with platform content. Starting in the fourth quarter of 2014, we also began to generate additional revenues from monthly software licensing and Software-as-a Service (“SaaS”) fees.
	(2)	Traditional Information Technology (“TIT”) segment — The TIT segment includes our project-based technology products and services sold to the public sector, including Digital Public Security Technology (DPST) and Multi- screen Digital Display System (MDDS). In this segment, we generate revenues from sales of software and systems integration services, as well as hardware other than display products. (2) DT segment — The DT segment includes revenues from products and services surrounding our display technology core competencies, currently primarily in GIS, DPST, education, media, and consumer products. DT segment revenues are generated from sales of hardware and total solutions of hardware integrated with proprietary software and content, as well as services.

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For more information regarding our operating segments, see Note 1722 (Consolidated Segment Data) to our audited consolidated financial statements included elsewhere in this report.

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Results of Operations

Comparison of Years Ended December 31, 20132016 and 20122015

The following table sets forth key components of our results of operations for fiscal years ended December 31, 20132016 and 2012,2015, both in dollars and as a percentage of our revenue.

Revenue. Our revenue is generatedWe generate revenues from the sales of ourselling hardware, software, system integration, software as a service, and hardware products, our fully integrated total solutions, and the related after-salesother technology-related services. For the year ended December 31, 2013,2016, our revenue was $76.15$10.2 million, compared to $86.38slightly decreased from $10.3 million for the year ended December 31, 2012, a decrease of $10.23 million, or 11.85% .2015. The decrease was primarily due to our conscious effortcontinuing transition from a traditional custom-made IT software development and system integrations (TIT) provider to transform the Company into an internet-focused company, which led uspublic sector to gradually exit the traditional-only hardware display business,a cloud-based technology (CBT) solutions provider to restructure our government-related businesses to embody the Smart City macro concept, and to reduce low-margin non-core IT project business.private enterprise.

Product sales increased by $0.96 million, or 2.10%, to $46.65 million for the year ended December 31, 2013, as compared to $45.69 million for the year ended December 31, 2012. Product sales constituted 61.26% of total revenue during 2013 as compared with 52.90% during 2012. We have been successful replacing the traditional display products with internet-enabled multi-functional products, which we believe will continue to strengthen the Company’s internet-focused strategy.39

Software sales decreased by $2.42 million, or 13.04%, to $16.17 million for the year ended December 31, 2013, from $18.6 million for the year ended December 31, 2012. Software sales constituted 21.24% of our total revenue during 2013, compared with 21.53% during 2012. We have turned away projects and even shut down some ongoing government-related projects which we believe are high-risk and non-core to our long-term strategy in an effort to realign our software-related business with internet and Smart City focus.

Sales of system integration services decreased by $9.20 million, or 44.02%, to $11.70 million for the year ended December 31, 2013, as compared to $20.91 million for the year ended December 31, 2012. As a percentage of revenue, it decreased from 24.20% during 2012 to 15.37% during 2013. In line with our transition strategy, we have been turning away non-core IT projects to instead focus on internet and Smart City-related businesses.

Other revenue increased from $1.18 million for the year ended December 31, 2012 to $1.62 million for the year ended December 31, 2013, an increase of $0.44 million, or 36.87% . Other revenue was mainly derived from maintenance services.

The following table shows our revenue, percentage of revenue, cost of revenue, and gross margin, by revenue categories:

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A breakdown of revenue, percentage of revenue, cost of revenue and gross margin by segments is as follows:

Cost of revenue and gross profit. As indicated in the tables above, our cost of revenue decreasedincreased by $7.01$1.2 million, or 10.64%19.21%, to $58.87$7.6 million, for the year ended December 31, 2013,2016, from $65.88$6.4 million for the year ended December 31, 2012.2015. As a percentage of revenue, our cost of revenue increased to 77.31%74.63% during the year ended December 31, 2013,2016, from 76.27%62.04% during the year ended December 31, 2012.2015. As a result, gross profit as a percentage of revenue was 22.69%25.37% for the year ended December 31, 2013,2016, a decrease of 104 basis points12.59% from 23.73%37.96% for the year ended December 31, 2012.

2015. The decrease in the overall gross profit margins, as displayedmargin primarily resulted from significant deterioration of cost position in the tables above, resulted primarilyTIT segment as revenue declined by 50% from the prior year with same level of cost of revenue consisting of maintenance fees for certain close-out government projects. An increase in sales of our deliberate efforts to reduce government-related projects in order to lower collection riskcloud-based elevator advertising terminal, a standardized product consisting of screen hardware, our proprietary cloud software, and to focus more on internet-related businesses. Government services had been our core business and its gross margins were the highest among all the business segments. Thus, theservice, also contributed a moderate decrease in government revenues had a significant downward effect on the Company’s overall gross margin. Furthermore, the new business services replacing the government services did not have the same high level gross margins. The combined effect is mainly captured in the gross margins of software sales, which decreased to 36.2%from 52.1% in 2012. Offsetting these lower software gross margins are the rising gross margins from the new internet-enabled display products, which helped to increase our DT segment’s gross margins to 16.5% in 2013 from 12.5% in 2012.

Administrative expenses. Our administrative expenses consist primarily of compensation and benefits tofor our general management, finance and administrative staff, professional advisor consulting fees, audit fees, and other expenses incurred in connection with general operations. Our administrative expenses increaseddecreased by $40.13$2.9 million, or 76.00%25.67%, to $92.93$8.3 million for the year ended December 31, 2013,2016, from $52.80$11.2 million for the year ended December 31, 2012.2015. As a percentage of revenue, administrative expenses increaseddecreased to 122.04%81.84% for 2013,2016, from 61.13%109.13% for 2012. Notable changes that2015. Such decrease was primarily due to our continued transition to the CBT business, which resulted in increased administrative expenses include: (1) an increase of $40.33 millionreduction in provision of accounts receivable;headcount and (2)an increase of $6.9 millionoverhead in stock-based compensation expenses for our employees. The increase in the provision of accounts receivable was mainly due to the continued sluggishness in our government client sector relating to the digital public securitytraditional TIT business in light of the challenging government fiscal environment.segment.

Research and development expenses. Our research and development expenses consist primarily of personnel-relatedpersonnel related expenses, as well as costs associated with new software and hardware development and enhancement. Our research and development expenses decreased by $2.04$0.4 million, or 41.11%11.66%, to $2.92$3.0 million for the year ended December 31, 2013,2016, from $4.95$3.5 million for the year ended December 31, 2012.2015. As a percentage of revenue, research and development expenses decreased to 3.83%29.87% for 2013,2016, from 5.73%33.51% in 2012. Such decrease was primarily due to lower spending in government related software research2015. Research and development.development expenses were consistent with prior year.

Selling expenses. Our selling expenses consist primarily of compensation and benefits to our sales and marketing staff, sales and after-sales traveling costs, and other sales-relatedselling activities related costs. Our selling expenses decreased by $0.97$1.3 million, or 9.87%49.87%, to $8.82$1.3 million for the year ended December 31, 2013,2016, from $9.79$2.7 million for the year ended December 31, 2012.2015. This decrease was attributed to our continuous downsizing of sales force in TIT segment..

Impairment of intangible assets and goodwill. As we transition our business focus from the public sector to the private sector, and from a hardware manufacturer to a software and cloud-based solutions provider, we analyzed our operations and tested our goodwill and intangible assets for impairment in 2016 and 2015. We recognized goodwill and intangible assets impairment loss of $4.4 million and $8.9 million for the periods ended December 31, 2016 and 2015, respectively.

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Impairment of property, plant and equipment. As a result of shifting our business strategy from a hardware manufacturer to a software and cloud-based solutions provider we started closing our factory in late 2014, and began selling most of our manufacturing related property, plant, and equipment and disposing of the remainder. Closure of factory was completed in 2015. Consequently, we recorded $-0- million and $4.6 million of impairment in property, plant and equipment for the years ended December 31, 2016 and 2015, respectively.

Subsidy income. Because we have developed a number of products that are promoted and designated by the Chinese government as highly innovative technology, we received governmental incentivized subsidies of $0.2 million and $0.5 million in for the years ended December 31, 2016 and 2015, respectively.

Gain on sale of assets. As previously discussed, we completed the sale of our factory related real estate property and resulted in a gain of approximately $30.0 million on the sale of these assets.

Loss on disposal of consolidated entities. In August 2016, we disposed of our wholly-owned subsidiary Dongguan Information Security Technology (China) Co., Ltd. (“IST DG”) to an unrelated third party, as the company determined that it was no longer necessities for the organization. The disposal resulted in a loss of approximately $0.6 million for the year ended December 31, 2016.

Loss on sale of deposits for land-use right.In September 2016, due to the shift of business strategy and transformation of our business, we terminated the purchase agreement with Dongguan municipal government for purchase of a piece of land located in Dongguan. In addition, we sold the land-use right deposit receivable of approximately $13.2 million without recourse to an unrelated party, in a consideration of approximately $10.4 million with an installment payment plan until December 31, 2019. The sale of deposit receivable resulted in a loss of approximately $2.8 million

Other (loss) income.Other loss for the year ended December 31, 2016 was approximately $0.3 million, compared to other income of approximately $0.8 million in 2015. Other loss in 2016 was primarily due to the disposal of the obsolete inventories.

Interest expense.Interest expense for the year ended December 31, 2016 was approximately $0.5 million, significantly decreased from approximately $3.1 million in 2015. The decrease was primarily a result of the shrink of our short-term bank loans in 2016.

Income tax expense. We recorded income tax expense of $57,844 in 2016, as compared to $4.3 million of income tax expense in 2015, which was attributable to gain on sales of assets. The income tax expense decrease was primarily due to our operating loss in 2016.

Change in fair value of warrants liability. In 2016, we recorded a gain of approximately $34,000 in change in the fair value of the warrant derivative liability in comparison to a $5.7 million of expense recorded in 2015, in connection with our equity offering closed in May 2015.

Net loss attributable to Company. As a result of the cumulative effect of the foregoing factors, we incurred a net loss attributable to the Company of $18.2 million for the year ended December 31, 2016, as compared to a net loss of $7.5 million for the year ended December 31, 2015.

Comparison of Years Ended December 31, 2015 and 2014

The following table sets forth key components of our results of operations for fiscal years ended December 31, 2015 and 2014, both in dollars and as a percentage of our revenue.