Unfavorable economic conditions may affect the level of technology spending by our customers which could cause the demand for our products and services to decline.

The revenue growth and profitability of our business rely on the overall demand for software, display technology products, and internet related services. Our business depends on the overall economy in China and the economic and business conditions within our respective product and service sectors. If economic conditions become unstable, our existing and prospective customers may reassess their decisions to purchase our products and services. Fragile Chinese economic conditions or a reduction in information technology spending by our customers could harm our business in many ways, including longer sales cycles and lower prices for our products and services. These events could have a material effect on our future revenuerevenues and earnings.

Our periodic operating results are difficult to predict and could fall below investors’ expectations or estimates by securities research analysts, which may cause the trading price of our ordinary shares to decline.

Our revenues and operating results can vary significantly from a filing period to the next due to a number of factors, many of which are outside of our control, such as fluctuations in the volume of business from our customers as a result of changes in their operations, their decisions to purchase our products and services, and currency fluctuations. Our revenues and operating results could also be affected by delays or difficulties in expanding our operational facilities and infrastructure, changes to our pricing strategies due to a competitive business environment and improper estimates of resources and time required to complete ongoing projects. Our first quarter revenues are relatively low compared to the other quarters due to the Chinese New Year holiday. Moreover, our operating and financial results may vary as a result of our dependency on our customers’ budgets and spending patterns. Therefore we may not be able to reasonably estimateforecast the demand for our products and services beyond the current calendar year, which could adversely affect our business, operations, and financial condition. In addition, business volumes for specific customers are likely to vary from year to year. Thus, a major customer in one year may not remain as a major customer in the subsequent years.

These fluctuations are likely to continue in the future and operating results for any period may not be indicative of our performance in any future period. If our operating results for any filing period fall below investors’ expectations or estimates by securities research analysts, the trading price of our ordinary shares may decline.

We face risks once businesses are acquired through mergers or acquisitions and the acquired companies may not perform to our expectations, which may adversely affect our results of our operations.

We face risks when we acquire other businesses. These risks include:

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Acquired companies may not perform to our expectations for various reasons, including loss of key personnel resulting changes in key customers, and our strategic focus may change.focuses. Therefore we may not realize the benefits that we have previously anticipated. If we fail to integrate acquired businesses or realize expected benefits, we may lose economic returns on investments in these mergers and acquisitions, and incur transaction costs causing our operating results to be materially and adversely affected.

If we are unable to secure additional financing or identify suitable merger or acquisition targets, we may be unable to implement our long-term business plan, develop or enhance our products and services, take advantage of future opportunities, or respond to competitive pressures on a timely manner.

Our long-term business plan includes the identification of suitable targets for horizontal or vertical mergers or acquisitions, so as to enhance overall productivity and to benefit from economies of scale. Due to the recent uncertainties in the global economic outlook and financial market stability, we may not be able to secure an adequate level of additional financing, whether through equity financing, debt financing or other sources. To raise additional capital, we may need to issue new securities, which could result in further dilution to our shareholders and significant dilution to our earnings per share. Issuance of new securities with registration rights or covenants through additional financings may be superior to the current ones that would restrict our operations and strategies. If we are unable to raise additional financing, we may be unable to implement our long-term business plan, develop or enhance our products and services, take advantage of future opportunities, or respond to competitive pressures on a timely basis, if at all. In addition, lack of additional capital could force us to substantially curtail or even cease operations.

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We also may not be able to identify merger or acquisition targets or, after a merger or acquisition,targets. We may not be able to successfully integrate the targeted business or operations with ours.ours after a merger or acquisition, Such failure to execute our long-term business plan likely will negatively impact our results of our operations.

We generally do not have exclusive agreements with our customers and we may lose their contracts if they are not satisfied with our products and services or for other reasons.

We generally do not have exclusive agreements with our customers. As a result, we must rely on the quality of our products and services, our reputation in the industry, and favorable pricing terms to attract and retain customers. There is no assurance that we will be able to maintain and retain our relationships with current and/and or future customers. Our customers may choose to terminate their relationships with us if they are not satisfied with our services. If a substantial number of our customers choose not to continue to purchase products and services from us, it would materially and adversely affect on our business and results of operations.

If we are unable to develop and offer competitive new products and services, our future operations could be adversely affected.

Our future revenue stream, to a large degree, depends on our ability to capitalize on our technology strength and capabilities to offer new software applications and services to a broader client base. We are required to make investments in research and development to continue developing and offering new software applications and internet related products and services, and to enhance our existing software applications and internet related services to achieve market acceptance of our products and services. We may encounter potential challenges in innovation and introduction of new products services. Our development-stage software applications may not be successfully completed or, if developed, may not achieve significant customer acceptance. If we are unable to successfully define, develop, and introduce competitive new software applications, and enhance the existing ones, our future operating results would be adversely affected. Timing for software developments is difficult to predict. Timely launch of new applications and their acceptance by customers are important to our future success. A delay in the development of new applications could have a significantly adverse impact on our results of operations.

If we are unable to keep abreast with the rapid technical changes in our industry, demand for our products and services could decline and adversely affect our revenue and growth.

Our industry is known for rapid changes in technology, frequent introductions of new applications, quick evolution of industry standards, and changes in customer demands. These conditions require continuous investments in product research and development to enhance existing products, innovate new products, and keep up with the leading edge technologies. We believe that the timely development of new products and continuous enhancements to the existing products are essential to maintain our competitive position in the marketplace. Our future success depends in part upon customer and market acceptance of our products and innovations. Failure to achieve market acceptance of our existing products and services and launch of new products could materially and adversely affect our business and results of operations.

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Our software applications may contain defects or errors, which could decrease sales, damage our reputation, or delay deliveries of our products.

Our software products are complex and must meet the stringent technical requirements requested by our customers. In order to keep pace with the current technologies and the rapid changes in the industry standards, we must accelerate new product developments and enhancements for our existing products. Because of the complex designs and the expeditious development cycles, we cannot assure that our software products are free of errors, especially for the newly released software applications and the updates for the existing software products. If our software is not free of errors, this could potentially result in litigation, declining sales, increasing product returns and product warranty costs, and further damage to our reputation, which would adversely affect our business.

Our technology may become obsolete, which could materially and adversely affect our ability to sell our products and services.

If our technology, products and services become obsolete, our business operations would be materially and adversely affected. The market in which we compete is known for rapid changes in technologies, quick evolution of industry standards, fast introductions of new products, and changes in customer demands. These market characteristics can cause the existing products to be obsolete and unmarketable. Our future success depends upon our ability to timely address the increasingly sophisticated requests from our customers to support the existing and new hardware, software, database, and networking platforms. We have to invest in research and development in order to succeed in this competitive industry and timely satisfy market demands. Research and development expenses from continuing operations were $3,446,867, $1,477,246approximately $3.0 million, $3.4 million and $2,190,074$1.5 million for the years ended December 31, 2016, 2015, and 2014, and 2013, respectively.

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We face the riskrisks of systemssystem interruptions and capacity constraints, possibly resulting in adverse publicity, revenue loss and erosion of customer trust.

The satisfactory performance, reliability, and availability of our network infrastructure are critical to our reputation and our ability to attract and retain customers and to maintain adequate customer service levels. We may experience temporary service interruptions for a variety of reasons, including telecommunications or power failures, fire, water damage, vandalism, computer bugs, or viruses or hardware failures. We may not be able to correct a problem in a timely manner. Any service interruption that results in the unavailability of our system or reduces its capacity could result in real or perceived public safety issues that may affect customer confidence in our services and result inafflict negative publicity that could cause us to lose customer accounts or fail to obtain new accounts. Any inability to scale our systems may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, or impaired quality and speed of transaction processing. We are not certain that we will be able to project the rate or timing of increases, if any, in the use of our services to permit us to upgrade and expand our systems effectively or to efficiently integrate smoothly any newly developed or purchased modules with our existing systems.

We have a limited history with our pricing models for our CBT products and services and, as a result, we may be forced to change the prices we charge for our applications or the pricing models upon which they are based.models.

We have limited experience with respect to determining the optimal prices and pricing models for certain of our CBT products and services and certain geographic markets. As the markets for our applications mature, or as competitors introduce products or services that compete with ours, including bundling competing offerings with additional products or services, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically. As a result, in the future we may be required to reduce our prices, which could adversely affect our financial performance. In addition, we may offer volume price discounts based on the number of products or services purchased by a customer or the number of our applications purchased by a customer, which would effectively reduce the prices we charge for our applications.products and services. Also, we may be unable to renew existing customer agreements or enter into new customer agreements at the same prices or upon the same terms that we have historically, which could have a material and adverse effect on our financial position.

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Security breaches may harm our business.

Our cloud-based applications involve the storage and transmission of our customers’ proprietary and confidential information, including personal or identifyingidentification information regarding their employees and customers. Any security breaches, unauthorized access, unauthorized usage, virus or similar breach or disruption could result in loss of confidential information, damage to our reputation, early termination of our contracts, litigation, regulatory investigations, indemnity obligations, or other liabilities. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to customer data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because the techniques used to obtain unauthorized access or sabotage computer systems change frequently, and generally are not identified until they are launched against a target, we may be unable to anticipate these hacking techniques or implement adequate preventative measures. Any or all of these issuesconcerns could negatively affect our ability to attract new customers and cause existing customers to elect not to renew or upgrade their subscriptions that result in reputational damage or subject us to third-party lawsuits, regulatory fines, or other action or liability, which could adversely affect our operating results.

If we are not able to adequately secure and protect our patent, trademark, and other proprietary rights, our business may be materially affected.

Under our Amended and Restated Management Services Agreement, or the MSA, among our subsidiary IST, our variable interest entity, iASPEC, and Mr. Jiang Huai Lin, our Chairman and Chief Executive Officer, we licensehave licensed 71 copyrighted software applications from iASPEC on an exclusive basis. To protect the intellectual property underlying these applications and our other intellectual property, we rely on a combination of copyright, trademark, and trade secret laws. We also rely on non-disclosure agreements and other confidentiality procedures and contractual provisions to protect our intellectual property rights. Some of these technologies, other than the iASPEC copyrighted software applications, are very important to our business and are not protected by copyrights or patents. It may be possible for unauthorized third parties to copy or reverse engineer our products, or otherwise obtain and use information that we regard as proprietary. Further, third parties could challenge the scope or enforceability of our copyrights. In certain foreign countries, including China where we operate, the laws do not protect our proprietary rights to the same extent as the laws of the United States. Any misappropriation of our intellectual property could have a material and adverse effect on our business and results of operations, and weoperations. We cannot assure you that the measures we take to protect our proprietary rights are adequate.

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Claims that we infringe the proprietary rights of third parties could result in significant expenses or restrictions on our ability to sell our products and services.

Third parties may claim that our products or services infringe their proprietary rights. Any infringement claim, with or without merit, would be time-consuming and expensive to litigate or settle and could divert our management’s attention from our core business. In the event of a successful infringement claim against us, we may have to pay significant damages, incur substantial legal fees, develop costly non-infringing technology, or enter into license agreements that require us to pay substantial royalties and that may not be available on terms acceptable to us, if at all.

A significant portion of our sales areis derived from a limited number of customers, and resultscustomers. Results from our operations could be adversely affected, and shareholder value could be harmed, if we lose any of these customers.

Historically, a significant portion of our revenues havehas been derived from a limited number of customers. For each of the years ended December 31, 2016, 2015 and 2014, 72%, 21% and 2013, 21%, 17% and 21%, respectively, of our revenues of continuing operations were derived from our five largest customers. The loss of any of these significant customers would adversely affect our revenues and shareholder value.

The markets for digital security, geographic, and hospital information systems markets in China are highly competitive, and wecompetitive. We may fail to compete successfully, thereby resulting in loss of customers and decline in our revenues.

The markets for digital security, geographic, and hospital information systems markets in China are intensely competitive and are characterized by frequent technological changes, evolving industry standards, and changing in customer demands. We have competition from multiple domestic competitors in each segment. Increased competition may result in price reductions, reduced margins, and inability to gain or hold market share.

We have limited insurance coverage for our operations in China.

The insurance industry in China is still atin an early stage of development. Insurance companies in China offer limited insurance products. We have determined that the risks of disruption or liability from our business, the loss or damage to our property, including our facilities, equipment and office furniture, the cost of insuring for these risks, and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, we do not have any business liability, disruption, litigation or property insurance coverage for our operations in China, except for insurance on some company owned vehicles. Any uninsured occurrence of loss or damage to property, or litigation, or business disruption may result in the incurrence of substantial costs and the diversion of resources, which could have an adverse effect on our operating results.

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We depend heavily on key personnel, and turnover of key employees and senior management could harm our business.

Our future business and results of operations significantly depend in significant part upon the continuedcontinuous contributions of ourby key technical and senior management personnel, including Jiang HuaiJianghuai Lin, our Chairman and Chief Executive Officer, Zhiqiang Zhao, our President and Interim Chief Financial Officer, Zhixiong Huang, our Chief Operating Officer, Guangzeng Chen, our Chief Technology Officer, and Chief Product Officer, Guangyuan Zong, our Chief Marketing Officer and Junping Sun, our Chief Investment Officer. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing, and sales, and support personnel for our operations. If we lose a key employee or if a key employee fails to perform in his or her current position, or if we are not able to attract and retain skilled employees as needed, our business could suffer. Significant turnover in our senior management could significantlylargely deplete our institutional knowledge held by our existing senior management team. We depend on the skills and abilities of these key employees in managing the technical, marketing, and sales aspects of our business, any part of which could be harmed by further turnover.

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We may be exposed to potential risks relating to our internal controls over financial reporting.

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K or Form 20-F filed under the Exchange Act that are required to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated or accelerated filers must include in their annual reports on Form 10-K or Form 20-F an attestation report of their auditorsauditors’ attesting to and reporting on the management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation report of their auditors in the annual reports.

A report of our management is included under Item 15 “Controls and Procedures” of this report. We are a non-accelerated filer and consequently, are not required to include an attestation report of our auditor in this annual report. Management believes that our internal control over financial reporting was not effective as of December 31, 2015,2016, as a result of material weaknesses identified as discussed in Item 15 of this report. WeAlthough we have made improvements to overcome the concern, we can provide no assurance that these material weaknesses will be remediated in a timely manner, asmanner. As a result, investors and others may lose confidence in the reliability of our financial statements.

Our holding company structure may limit the payment of dividends.

We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations dependsdepend upon the receiptreceipts of dividends or other payments from our operating subsidiaries, and other holdings, and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency, and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by the U.S. stockholders upon conversion of the dividend paymentpayments into U.S. dollars.

Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits to fund certain reserve funds according to the Chinese accounting standards and regulations to fund certain reserve funds.regulations. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fundsatisfy certain reserve funds as required by the Chinese accounting standards, we will be unable to pay any dividends.

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After-tax profits/losses with respect to the payment of dividends out offrom accumulated profits and the annual appropriation of after-tax profits as calculated pursuant to PRCthe Chinese 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. GAAP, arising from different treatment of items such as amortization of intangible assets and change in fair value of contingent consideration rising from business combinations.

Risks Relating to our Commercial Relationship with iASPEC

Mr. Lin’s association with iASPEC could pose a conflict of interest, which may result in iASPEC decisions that are adverse to our business.

Mr. Jiang HuaiJianghuai Lin, our Chairman and Chief Executive Officer and the beneficial owner of 37.7%39.5% of our outstanding ordinary shares, beneficially owns 100% of the equity interests in iASPEC, from whomwhich we derived 38.4%, 68.2%, 42.4% and 22.5%42.4% of our revenue in the fiscal years ended December 31, 2016, 2015, 2014 and 2013,2014, respectively, pursuant to the existing commercial arrangements. As a result, conflicts of interest may arise from time to time and these conflicts may result in management decisions that could negatively affect our operations and potentially result in the loss of opportunities.

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If iASPEC or its shareholders violate our contractual arrangements, with it, our business could be disrupted and we mayhave to resort to litigation to enforce our rights which may be time consuming and expensive.

Our operations are currently dependent upon our commercial relationship with iASPEC. During the fiscal years ended December 31, 2016, 2015, 2014 and 2013,2014, we derived 68.20%38.4%, 42.4%68.2%, and 22.5%42.4% of our revenues, respectively, from the provision of services to iASPEC customers. A significant portion of these revenues havehas not yet been collected. Amounts owed by iASPEC under the amended MSAManagement Services Agreement (MSA) for each quarter will be due and payable no later than the last day of the month following the end of each such quarter. Our contractual arrangements may not be as effective as direct ownership, ifownership. If iASPEC or its shareholders are unwilling or unable to perform their obligations under our commercial arrangements, with it, including payment of revenues under the MSA as they become due each quarter, we will not be able to conduct our operations in the manner currently planned. In addition, iASPEC may seek to renew these agreements on terms that are disadvantageous to us. Although we have entered into a series of agreements that provide us with substantial ability to control iASPEC, we may not succeed in enforcing our rights under them.legal rights. If we are unable to renew these agreements on favorable terms, or to enter into similar agreements with other parties, our business may not be able to operate or expand, and our operating expenses may significantly increase.

Uncertainties in the PRC legal system may impede our ability to enforce the commercial agreements that we have entered into with iASPEC or any arbitral award thereunder and any inability to enforce these agreements could materially and adversely affect our business and operation.

While disputes under the amended MSA and the option agreement with iASPEC are subject to binding arbitration before the Shenzhen Branch of the China International Economic and Trade Arbitration Commission, or CIETAC, inCIETAC. In accordance with CIETAC Arbitration Rules, the agreements are governed by PRC lawlaws and an arbitration award may be challenged in accordance with PRC law.laws. For example, a claim that the enforcement of an award in our favor will be detrimental to the public interest, or that an issue does not fall within the scope of the arbitration would require us to engage in administrative and judicial proceedings to defend an award. China’s legal system is a civil law system based on written statutes, and unlike common law systems, it is a system in which decided legal cases have little value as precedent.precedent, and unlike common law systems. As a result, China’s administrative and judicial authorities have significant discretion in interpreting and implementing statutory and contractual terms, and it may be more difficult to evaluate the outcome of administrative and judicial proceedings and the level of legal protection available than in more developed legal systems. These uncertainties may impede our ability to enforce the terms of the MSA, the option agreement, and the other contracts that we may enter into with iASPEC. Any inability to enforce the MSA and option agreement or an award thereunder could materially and adversely affect our business and operation.

If iASPEC fails to comply with the confidentiality requirements of certain of its customer contracts, then iASPEC could be subject to sanctions and could lose its business license, which in turn would significantly disrupt or shut down our operations.

The business and operations of iASPEC, the owner and licensor to us of the copyrighted software applications and other intellectual property that are essential to the operation of our business, isare subject to Chinese contractual obligations and laws and regulations that restrict its use of securityconfidential information and other information that it obtains from its customers in the public security sector. For some of its contracts with governmentgovernmental agencies, iASPEC has agreed to keep confidential all technical and commercial secretsproprietary and classified information in confident that were obtained during the performance of services under the contract. iASPEC or its shareholders could violate these contractual obligations and laws and regulations by inadvertently or intentionally disclosing confidential information or by otherwise failing to operate its business in a manner that complies with these contractual and legal obligations. A violation of these agreements could result in the significant disruption, or shut down of our business, or adversely affect our reputation in the market. If iASPEC or its shareholders violate these contractual and legal obligations, we may have to resort to litigation to enforce our rights under our contractual obligations with iASPEC.

This litigation could result in the disruption of our business, diversion of our resources from our operations, and the incurrence of substantial costs.

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All of the share capital of iASPEC is held by our major shareholder, who may cause these agreements to be amended in a manner that is adverse to us.

Our major shareholder, Mr. Jiang HuaiJianghuai Lin, owns and controls iASPEC. As a result, Mr. Lin may be able to cause our commercial arrangements with iASPEC to be amended in a manner that will be adverse to our company, or may be able to cause these agreements not to be renewed, even if their renewal would be beneficial for us. Although we have entered into an agreement that prevents the amendment of these agreements without the approval of the members of our Board other than Mr. Lin, we can provide no assurances that these agreements will not be amended in the future to contain terms that might differ from the terms that are currently in place. These differences may be adverse to our interests.

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Our arrangements with iASPEC and its shareholders may be subject to a transfer pricing adjustment by the PRC tax authorities, which could have an adverse effect on our income and expenses.profitability.

We could face material and adverse tax consequences, if the PRC tax authorities determine that our contracts with iASPEC and its shareholders were not entered into based onbeing arm’s length negotiations. Although our contractual arrangements are similar to other companies conducting similar operations in China, if the PRC tax authorities determine that these contracts were not entered into on an arm’s length basis, they maytransactions, and adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment.adjustments for PRC tax purposes. Such an adjustmentadjustments may require that weus to pay additional PRC taxes plus applicable penaltiespenalty and interest, if any.

The exercise of our option to purchase part or all of the equity interests in or assets of iASPEC under the option agreement might be subject to approval by the PRC government, and ourgovernment. Our failure to obtain this approval may impair our ability to substantially control iASPEC and could result in actions by iASPEC that conflict with our interests.

Our option agreement with iASPEC gives our Chinese operating subsidiary, IST, the option to purchase all or part of the equity interests in or assets of iASPEC, however,iASPEC. However, the option may not be exercised by IST, if exercise of the exerciseoption would violate any applicable laws and regulations in China or cause any license or permit held by andIST that is necessary for the operation of iASPEC to be cancelled or invalidated. Under theChinese laws, of China, if a foreign entity, throughin which a foreign investment company that it invests in,has invested, acquires a domestic related company China’sthat are under common control, Chinese regulations regardinggoverning mergers and acquisitions would technically apply to the transaction. Application of these regulations requires an examination and approval of the transaction by China’sthe Chinese Ministry of Commerce, or MOFCOM, or its local counterparts. Also, an appraisal of the equity or assets to be acquired is mandatory. However, Guangdong Jin Di Law Firm Sichuan Office, our local PRC counsel, has advised us that Shenzhen and other local counterparts of MOFCOM hold the view that such a transaction would not require their approval.

Therefore, we do not believe at this time that an approval and an appraisal are required for IST to exercise its option to acquire iASPEC in Shenzhen. In light of the different views on this issue, however, it is possible that the central MOFCOM office in Beijing will issue a standardized opinion imposing the requirements for approval and appraisal requirement.appraisal. If we are not able to purchase the equity or assets of iASPEC, then we will lose a substantial portion of our ability to control iASPEC and our ability to ensure that iASPEC will act in our interests.

Our right to elect a majority of the members onof the iASPEC’s Board of Directors and other provisions of the MSA may be viewed by iASPEC’s customers as a change in control of iASPEC, which could subject iASPEC to sanctions and loss of its business license whichresulting in turn would significantlysignificant disrupt ion or possibly terminatepossible termination of our operations.

Our commercial arrangement with iASPEC gives us the right to designate two Chinese citizens to serve as senior managers of iASPEC, serve as directors on iASPEC’s Board of Directors, and assist in managing the business and operations of iASPEC. In addition, iASPEC will require the affirmative vote offrom the majority of the our Board of Directors, as well as at least one non-insider director, for completingto conclude certain material actions, with respect to iASPEC, including but not limited to: (a) the nomination, appointment, election, or replacement of any board members; (b) the distribution of any dividend or profits; (c) any merger, division, change of corporate form,structure, dissolution, or liquidation; (d) any reimbursement of net losses or other payments or transfers of funds from IST to iASPEC; (e) the formation or disposition of a subsidiary or the acquisition or disposition of any interest in any other entity; and (f) the encumbrance of any assets under any lien not in the ordinary course of business. However, fulfillment of certain Police-use Geographic Information Systems, or PGIS, contracts with customers in PRC Government customerssector is restricted to entities such aslike iASPEC that possesspossesses the necessary PRC government licenses and approvals, and anyapprovals. Any change in control may be viewed under PRC law as creating a new entity.entity under PRC law. If iASPEC’s government customers view these MSA provisions as a change in control of iASPEC or as evidence of iASPEC’s failure to operate its business in a manner that complies with its contractual obligations or with related laws and regulations, such a perception could result in the cancellation or invalidation of iASPEC’s licenses and permits. A loss by iASPEC of its licenses and permits could result in the significant disruption or possible termination of our business orand adversely affect our reputation in the market.

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Risks Relating to Doing Business in China

Changes in the economic and political policies of the PRC government could have a material and adverse effect on our business and operations.

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We conduct substantially all our business operations in China. Accordingly, our results of operations, financial condition, and prospects are significantly dependent on economic and political developments in China. China’sChinese economy differs from the economies of developed countries in many aspects, including the level of development, growth rate, and degree of government control over foreign exchange, and allocation of resources. While China’sChinese economy has experienced significant growth in the past 30 years, the growth has been uneven across different regions and periods and among various economic sectors in China. We cannot assure you that China’sChinese economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have a negative effect on itsour business and results of operations.

The PRC government exercises significant controlcontrols over China. Accordingly, our results of operations, financial condition, and prospects are significantly dependent on economic and political developments in China. Certain measures adopted by the PRC government may restrict loans to certain industries, such as changes in the statutory deposit reserve ratio and lending guidelines for commercial banks by the People’s Bank of China, or PBOC. These current and future government actions could materially affect our liquidity, access to capital, and ability to operate our business.

The global financial markets experienced significant disruptions in 2008 andthat caused the United States, Europe, and other economies wentgoing into recession. Since 2012, growth of the Chinese economy has slowed down. The PRC government has implemented various measures to encourage economic growth and guide the allocation ofallocate resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, any stimulus measures designed to boost the Chinese economy may contribute to higher inflation, which could adversely affect our results of operations and financial condition. See “Risks Relating to Doing Business in China - Future inflation in China may inhibit our ability to conduct business in China.”

Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in the PRC. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign invested entities established in the PRC, or FIEs. The PRC legal system is based on written statutes, and prior courtstatutes. Prior courts’ decisions may be cited for reference but havewith limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform,consistent, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in incurring substantial costs and diversion of resources and management attention. In addition, all of our executive officers and most of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.

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You may have difficulty enforcing judgments against us.

Most of our assets are located outside of the United States and most of our current operations are conducted in the PRC. In addition, most 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 is located outside the United States. As a result, it may be difficult for you to effectaffect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courtscourts’ judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whosetheir assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers, if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

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The PRC government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulationregulations and state ownership. Our ability to operate in China may be harmed by changes in itsChinese laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions, in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

The enforcement of the PRC labor contract law may materially increase our costs and decrease our net income.

China adopted a new Labor Contract Law, effective on January 1, 2008, and issued its implementation rules, effective on September 18, 2008. The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among others, minimum wages, severance payment and non-fixed-term employment contracts, time limits for probation periods, as well as the duration and the times that an employee can be placed on a fixed-term employment contract. Due to the limited period of effectiveness of the Labor Contract Law and its implementation rules and regulations, and the lack of clarity with respect to their implementation and potential penalties and fines, it is uncertain how they will impact our current employment policies and practices. In particular, complianceCompliance with the Labor Contract Law and its implementation rules and regulations may increase our operating expenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules and regulations may also limit our ability to effectaffect those changes in a manner that we believe to be cost-effectivecost effective or desirable, and could result in a material decrease in our profitability.

If we fail to obtain or maintain all licenses and approvals required to operate our businesses in the PRC, our business and operations may be adversely affected.

Fulfillment of certain PGIS contracts with PRC governmentgovernmental customers is restricted to entities possessingthat possess the necessary government licenses and approvals, which our subsidiary IST does not have. We currently perform Police-use Geographic Information Systems contracts through iASPEC, which possesses the requisite licenses and approvals, pursuantapprovals. Pursuant to our MSA with iASPEC, whereby iASPEC exclusively engages IST as its subcontractor to provide iASPEC with outsourcing services (to the extent that those services do not violate any special governmental permits held by iASPEC and do not involve the improper transfer of any sensitive confidential governmental or other data). If the PRC government determines that we are operating without the requisite licenses, we may become subject to administrative penalties or an order to discontinue our business operations, both of which could have a material and adverse effect on our business and results of operations.

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Future inflation in China may inhibit our ability to conduct business in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8% . These factors have led to the adoption by the Chinese government, from time to time, ofto adopt various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.

Restrictions on currency exchange may limit our ability to receive and use our salesrevenue effectively.

The majority of our sales will be settled in RMB, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside of China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell, or remit foreign currencies after providing valid commercial documents atto those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, isare subject to governmental approval in China, and requires companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.

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Fluctuations in exchange rates could adversely affect our business and the value of our securities.

The value of our ordinary shares will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB, and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from and the value of, any U.S. dollar-denominated investments we make in the future.

Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.

Very limited hedging transactions are available in China to reduce our exposure to the exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and welimited. We may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.

Restrictions under PRC law on our PRC subsidiaries’ abilityabilities to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.

Substantially all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent companies.company. PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with the PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of their registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

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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.

On July 14, 2014, SAFE issued the Circular on Relevant Issues Relating to Domestic Residents’ Investment and FinancingInvestments, Financings and Roundtrip InvestmentInvestments through Special Purpose Vehicles, or Circular 37, which replaced the Circular 75, promulgated by SAFE on October 21, 2005. Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishmentestablishments 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.” See Item 4 “Information on the Company—B. Business Overview—Regulation—Circular 37” for a detailed discussion of Circular 37 and its implementation.

We have notified substantial beneficial owners of our company, whowhom 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 by beneficial owners of our company 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. These risks may have a material and adverse effect on our business, financial condition, and results of operations.

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We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations, which became effective on September 8, 2006.

On August 9, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006, and was subsequently amended in 2009. This regulation, among other things, governs the approval process by whichof a PRC company may participatecompany’s participation in an acquisition of assets or equity interests. Depending on the structure of the transaction, the regulation will requirerequires the PRC parties to make a series of applications and supplemental applications to the government agencies.agencies for approval of acquisition of assets or equity interests from other entity. In some instances, the application process may require thea presentation of economic data concerning athe transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess viability of the transaction. Government approvals will have expiration dates, by which a transaction must be completed and reported to the government agencies. Compliance with the regulation is likely to be more time consuming and expensive than it was in the past, and provides the government can now exert more controlcontrols over thebusiness combination of two businesses. Accordingly, due to the regulation,enterprises. As a result, our ability to engage in business combination transactions has become significantly more complicated, time consuming, and expensive, and weexpensive. We may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.

The regulation allows PRC governmentgovernmental agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to MOFCOM and other relevant government agencies an appraisal report, an evaluation report, and the acquisition agreement, all of which formwere a part of the application for approval, depending on the structure of the transaction. The regulation also prohibits a transaction atwith an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, and requires that consideration must bebeing paid within a defined periods,period, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions, and provisions relatingrelated to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.

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Our existing contractual arrangements with iASPEC and its shareholders may be subject to national security review by MOFCOM and the failure to receive the national security review could have a material and adverse effect on our business and operating results.

In August 2011, MOFCOM promulgated the Rules of Ministry of Commerce on Implementation of Security Review System offor Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the Security Review Rules, to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or Circular 6. The Security Review Rules became effective on September 1, 2011. Under the Security Review Rules, a national security review is required for certain mergers and acquisitions by foreign investors raising concerns regarding national defense and security. Foreign investors are prohibited from circumventing the national security review requirements by structuring transactions through proxies, trusts, indirect investments, leases, loans, controlcontrols through contractual arrangements or offshore transactions. The application and interpretation of the Security Review Rules remain unclear. Based on our understanding of the Security Review Rules, we do not need to submit our existing contractual arrangements with iASPEC and its shareholders to the MOFCOM for national security review because, among other reasons, (i) we gained de facto control over iASPEC in 2007 prior to the effectiveness of Circular 6 and the Security Review Rules; and (ii) there are currently no explicit provisions or official interpretations indicating that our current businesses fall within the scope of national security review. Although we have no plan to submit our existing contractual arrangements with iASPEC and its shareholders to MOFCOM for national security review, the relevant PRC governmentgovernmental agencies, such as MOFCOM, may reach a different conclusion.conclusion, if we had submitted our existing contractual arrangements with iASPEC and its shareholders for security review. If MOFCOM or another PRC regulatory agency subsequently determines that we need to submit our existing contractual arrangements with iASPEC and its shareholders for national security review by interpretation, clarification or amendment of the Security Review Rules or by any new rules, regulations, or directives promulgated, we may face sanctions by MOFCOM or another PRC regulatory agency. These sanctions may include revoking the business or operating licenses of our PRC subsidiary, IST, or iASPEC and its subsidiaries, discontinuing or restricting our operations in China, confiscating our income or the income offrom iASPEC, and taking other regulatory or enforcement actions, such as levying fines, that could be harmful to our business. Any of these sanctions could cause significant disruption to our business operations.

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The Security Review Rules may make it more difficult for us to make future acquisitions or dispositions of our business operations or assets in China.

The Security Review Rules, effective as of September 1, 2011, provides that when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the national security review by MOFCOM, the principle application of substance-over-form, should be applied and prohibits foreign investors are prohibited from circumventing the national security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. If the business of any target company that we plan to acquire falls within the scope subject to national security review, we may not be able to successfully acquire suchequity interests, or assets of the targeted company, by equity or asset acquisition,provide capital increase to, or evencapital injection through any form of contractual arrangement.arrangement with the targeted company.

Under the Enterprise Income Tax 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.

On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and onLaw. On November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuantEnterprises. According to the Criteria of de facto Management Bodies, or the Notice, further interpretinginterprets the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10%, when paying dividends to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor areperson, nor detailed measures on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

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We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for the PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although, under the EIT Law and its implementing rules, dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued a guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for the PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation, in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.

If we were treated as a “resident enterprise” by the PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable againstused as a credit to reduce our U.S. tax.

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Heightened scrutiny of acquisition transactions by PRC tax authorities may have a negative impact on Chinese company’s business operations and its acquisition strategy.

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, effective on January 1, 2008, and 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 non-resident enterprise transfers the equity interests of or similar rights or interests in overseas companies whichthat directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose, but rather to avoid PRC corporate income tax, the 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 newly issued, there is uncertainty as to the application of SAT Announcement 7 and the interpretation of the term “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 pay corporate income tax that is due for a transfer and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose a penalty on the entity that so fails to withhold, whichwithhold. 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 February 3, 2015, it also applies to the cases, where the PRC tax treatment of a transaction that took place prior to its effectiveness has not yet been finally settled. As a result, the PRC tax authorities can determine SAT Announcement 7 could be determined by PRC tax authorities to be applicable to the historical reorganization, and it is possiblecan possibly determine that these transactions could be determined by PRC tax authorities to lacklacking a reasonable commercial purpose. As a result, the transfer of shares by certain shareholders to other parties could be subject to corporate income tax of up to 10% on capital gains generated from such transfers, andtransfers. 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-tradedpublicly traded entity that is listed overseas is available, if the purchase of the shares and the sale of the shares both take place in open-marketthe 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 SAT Announcement 7, which could subject such shareholder to additional 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 provide assistance for their investigation or impose a penalty on it, which could have a negative impact on the 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.

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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.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 November 23, 2015,October 17, 2016 we received a letterwritten notice from NASDAQ indicatingstating that we are no longer in compliance with the requirement for the 30 consecutive business days between October 12, 2015 and November 20, 2015, the$1.00 minimum closing bid price of our ordinary shares closed below the minimum $1.00 per share requirement pursuant to NASDAQset forth in Nasdaq Listing Rule 5450(a)(1) for continued inclusionlisting on The NASDAQNasdaq Global Select Market. In accordance with NASDAQNasdaq Listing Rule 5810(c)(3)(A), we had an initialhave a grace period of 180 calendar days, or until May 23, 2016,April 17, 2017, to regain compliance with the requirement for minimum closing bid price requirement.price. On December 22, 2015, we received a notification fromApril 17, 2017, NASDAQ notified us that we had regainedwere 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 minimum bid price requirement after maintaining afor minimum closing bid price equalby October 16, 2017, our ordinary shares will be subject to or in excess of $1.00 from November 27, 2015 to December 21, 2015. As a result, the matter of our noncompliance with the minimum bid price requirement had been closed.delisting.

We cannot ensure you that we will continue to comply with the requirements for continued listing on The NASDAQ Global Select Market in the future. If our shares lose their status on The NASDAQ Global Select Market and we are not successful in obtaining a listing on The NASDAQNasdaq Capital Market, our shares would likely tradebe traded in the over-the-counter market. If our shares were to tradetraded 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-dealersbroker dealers would have bear certain regulatory burdens imposed upon them, which may discourage broker-dealersbroker 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 The NASDAQ Global Select Market 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.

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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 lower thanbelow $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:

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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.

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Our 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. Jiang HuaiJianghuai Lin, our Chairman and Chief Executive Officer, is the beneficial owner of approximately 37.7%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 as a foreign private issuer at some future time, we will be required to 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 it would not incur as a foreign private issuer.19

As a foreign private issuer, we are permitted to rely on exemptions from certain NASDAQ corporate governance standards applicable to domestic U.S. issuers. This may affordprovide less protection to holders of our securities.

We are exempted from certain corporate governance requirements of the Nasdaq 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:

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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.

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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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)755-8831-9888. 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.

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) $50 million.

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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.

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:

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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:

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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, 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 TopCloud to iASPEC for a purchase price of approximately RMB 53.9854.0 million (approximately $8.57 million).

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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, 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% .

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.

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) (formerly(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 would 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% .

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% .

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% .

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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% .

On September 18, 2013, IST HK and iASPEC entered into an equity transfer agreement, pursuant to which iASPEC transferred 100% of equity interests in 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 in Zhongtian for RMB6.91RMB 6.9 million (approximately $1.11$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 in Geo for RMB8.28RMB 8.3 million (approximately $1.33$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-and-mediumsmall to medium sized enterprise (SME) corporate advertisers, seekingwho seek marketing campaignsand advertising channels with owners of networked 21-to-75 inch digital display media terminals.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, and servesserving as an exchange platform for idle time-slotadvertising 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 entity purchasers, pursuantinstitutional purchasers. Pursuant to which,the transfer agreement, iASPEC sold all of its ownership ofin Geo, which constitutesconstituted approximately 54.89% of total capital stock of Geo for an aggregate of RMB 91.33891.3 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 entity purchaser, pursuantinstitutional purchaser. Pursuant to which,the transfer agreement, iASPEC sold all of its ownership of Zhongtian, which constitutesconstituted 100% of total capital stock of Zhongtian for an aggregate of RMB 3030.0 million (approximately $4.8 million). Pursuant to the agreement, the transferee agreed to paypaid the purchase price in three installments by May 31, 2016. As

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 April 12,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 RMB 27approximately $0.6 million (approximately $4.25 million) offor the purchase price had been received by the Company, and the remaining RMB 3 million ((approximately $0.47 million) is expected to be received by Mayyear 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. Jiang Huai 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 (the "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.

“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. Jiang HuaiJianghuai 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 .Group.

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

As ofOn October 11, 2016, the date of this annual report,Buyer Group submitted a letter to the Special Committee is still into notify the processSpecial Committee that the Buyer Group had unanimously determined to withdraw the Proposal. The withdrawal of reviewing and evaluating the Proposal and there can be no assurance that the Proposal will be approved until such process is completed.became effective on October 11, 2016.

Corporate Structure

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

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Principal Capital Expenditures and Divestitures

For the year ended December 31, 2016, our total capital expenditures and divestitures were $3.46 million and $12.31 million, respectively. For the year ended December 31, 2015, our total capital expenditures and divestitures were $4.58$4.6 million and $45.11$45.1 million, respectively. For the year ended December 31, 2014, our total capital expenditures and divestitures were $8.60$8.6 million and $16.45 million, respectively. For the year ended December 31, 2013, our total capital expenditures and divestitures were $2.19 million, and $1.67$16.5 million, respectively. Such expenditures and divestitures were primarily related to the purchase and sale of long-lived assets and business acquisitions.

B. Business Overview

General

We were founded in 1993 and are headquartered1993. Headquarter of the Company is located in Shenzhen, China. As of December 31, 2015,2016, we had approximately 190125 employees and 10 sales offices nationwide.

We are a leading provider of integrated cloud-based platform, exchange,cloud-app technologies for Smart City IoT platforms, digital advertising delivery, and big data solutions to the Chinese new media industry.other internet-based information distribution systems in China. Our Internet ecosystem enables all participants of the new media community to efficiently promote brands,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 government, education, healthcare,residential community management, media, transportation, and other private sectors.

Prior to 2014, we generated athe majority of our revenues through selling our products and services mostly to the public service entities to help them improve their operational efficiency and service quality. Our representative customers included China Ministry of Public Security, provincial bureaus of public security, fire departments, traffic bureaus, police stations, human resource departments, urban planning boards, civic administrations, land resource administrations, mapping and surveying bureaus, and the Shenzhen General Station of Exit and EntryImmigration Frontier Inspection.

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Since 2014, we have expanded and diversified our customer base to include the private sector.sector as well. Our customers in the private sector customers include, among others, elevator maintenance companies, residential community management, advertising agencies, auto dealerships, hotels,and educational institutes and beauty spas.institutes. Our new corporate mission is to make publicity accessible and affordable for businesses of all size.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 generate additional recurring monthly revenues from SaaS fees. In 2016, a small portion of our revenue was generated from SaaS, which is expected to increase in the coming years with the roll-out of our cloud-based elevator IoT and ad display terminals.

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

Industry Overview

General

Urbanization 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 30 years. Urban population has grown by over 100 million in the past five years to more than 770793 million in 2015.2016. According to Chinese Social Development Research, by 2035, approximately 70% of the Chinese population is expected to live in urban areas.areas by 2035. Urban lifestyle revolves around information acquisition and consumption of information, goods, and services whichthat necessitates advertising and public information dissemination. At the same time, urbanization has imposed considerable pressure on land use, environment protection, and municipal infrastructure. Urbanization has also led to increasing demands for equitable treatment for all city-dwellers.dwellers in the cities.

In the first quarter of 2014, China’s State Council unveiled a new urbanization plan for the period from 2014 --to 2020 period in an effort to steer the country onto a more humanistic and environmentally 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 development,developments, better optimization of city layouts,planning, and tighter integration of environmental protection measures into urbanization efforts. The plan also projects new construction 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-sizedmedium sized cities of over 200,000 residentsin population and high-speed railways to connect large cities of over 500,000 residentsin population by 2020. Also, it plans to expand the nation’s civil aviation network to cover 90 percent of its total population.

As a result of urbanization, the number of elevators in China has increased sharply in recent years. According to the General Administration of Quality 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 the increasing elevator safety challenges, the AQSIQ, mandated cities and urban areas to utilize 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-largemedium 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-onetier 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-generatingrevenue generating opportunities for out-of-home advertisers, who seek attentive audience at high-traffichigh traffic areas. According to China-watchingChina watching e-commerce analyst EnfoDesk (“EnfoDesk”), the out-of-home digital advertising market in China grew to RMB 11.312.8 billion in 2015,2016, representing a 12% CAGR growth.

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The growth, starting in 2013, scancan 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;tier one cities like Beijing, Guangzhou, Shanghai, and Shenzhen; 3) rapid advancement in Internet and mobile technologies has resulted in new O2O (Online-to-Offline)(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 continued to rankare ranked as top spenders.spenders consistently. Internet and real estate companies also increased their advertisement spending significantly.

Over 50% of the advertisers rated commercial buildings and public transportation hubs as the top two prime locations for advertisement placement. Commercial buildings raked in RMB 3540 billion of advertising revenue in 20152016, and public transportation hubs raked in RMB 40 billion.45 billion of advertising revenue in the same period of time. The number of advertisers opting for residential buildings also increased considerably. Ad targeting precision with the use ofPrecision advertisement uses digital technologies, such as internet-based ads management and distribution and big data analysis, continuedto target its audience, and continues to be the advertisers’ focal point, which resulted in the increasing demands offor digital advertising.

Market Trends

In addition to urbanization, two technological developments are further acceleratingaccelerate 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 adadvertising display terminals in China are not connected to any network. Consequently, updating their media contents requires onsite manual operation through flash drives.drives or other means. They also tend to have low asset utilization rates. Based on our own primary research, we estimatehave 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-fourtier-three and smaller cities. In comparison, content on cloud-based terminals can be remotely uploaded, updated, and managed thus savingresulting in substantial labor cost savings for terminal operators, i.e., ad agencies, substantial labor cost. advertising agencies. In addition, cloud-based terminals afford adoffer advertising agencies the flexibility of fine-tuning adadvertisement schedules on the fly and customizing adadvertisement 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, and therefore theirsystem. 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 barcode that contains merchants’ information. By incentivizing consumers to scan the QR code embedded in advertisement, adadvertising agencies can analyze the effectiveness of their 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 rest of the country. Although QR codes have frequently appeared in print ads as well as in digital ads displayed on offline terminals, because the codes can be changed only as frequently as the advertisement itself,itself. The data brought in to advertising agencies by the data they bring to ad agenciesQR codes cannot be segmented by precise locations or time slots, and thus 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, thus affording adand 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 cloud-based ad display terminals.

Geographic Information System (GIS) Industry in China

The demand for our TIT products and services is mostly related to the growth and maturation of Geographic Information Systems (GIS). GIS is becoming an integral component of government, healthcare, security, trade, media, transportation, and tourism industries in China. Through centralized geographic information repositories, GIS software enables various Chinese governmental agencies to easily exchange and share geographic information, thus increasing their operational efficiency. GIS also allows Chinese businesses to better analyze their workflow, gain additional insights, and thus better manage their own operations. GIS has many applications in the Chinese public and private sectors, including land surveying, mining, water conservancy, environmental protection, power generation, mapping, telecommunication, civic construction, and public services.

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Our Products and Services

In the CBT segment, we provide cloud-based ecosystem solutions to fourthree end markets: 1) new media, 2) healthcare, 3) education, and 4)3) residential community management. Underpinning our ecosystems are our industry-specific integrated technology platform, resource exchange, and big data analysis services. In 2014, we sold our cloud-based solutions predominately to the Chinese new media industry. Starting from 2015, we further expanded our customer base into healthcare, education and residential community management markets.

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For the new media industry, we provide our software as a service to automate the entire interactive workflowworkflows between advertising agencies and their customers, including, among others, establishing new advertising projects, submitting advertisement proposals, revising and approving adadvertising 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 functionoperate in all available operating systems, including Windows, Android and iOS. It unifies all access points into one unique user account, through which a user can log intoonto our cloud system and enjoy all available software features and functions.

Our Resource Exchange

BuiltBuilding 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 the city of Shenzhen City may need to place advertisement in the city of Guangzhou City, but does not own any display terminals in Guangzhou. Through Taoping, the adadvertising 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 adadvertising agency can upload advertisement content onto remote terminals, manage display schedules, monitor adadvertisement performances, and editmake necessary editing to the advertisement, and update adadvertisement content.

Taoping enables advertising resource owners to improve their asset utilization raterates and returnreturns on investments. At the same time, Taoping allows advertising resource seekersadvertisement promoters to leverage available advertising resources in other people’s assetsgeographic regions, and cost effectively expand into new business territories cost effectively.territories.

Our Big Data Services

BuiltBuilding 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 analysis,analyses, we will be able to make insightful suggestions to advertising resource owners aswith regards to whichspecific types of venues being displayed at whatspecific time slots will likely garner high rental pricesfees and what is the optimal range of rental pricesfees they could charge for each type of resources they own. For advertising resource seekers,promoters, we will be able to provide advices such as what is 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.

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Our Industry-Specific Ecosystems

Combining our proprietary CAT technology platform, resource exchange, and big data services with our industry expertise, we provide integrated ecosystem solutions to the industries of new media, healthcare, education, and residential community management. As described above, starting from the new media industry, we will gradually 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, 2) transportation management, and 3) community management.

Product Warranty

For our TIT segment, we usually offer a one-year or three-year warranty for our system integration services depending on the project. Our warranty includes support services, minimal updates and system maintenance. Based on our past experiences, the cost of our warranty provision has been immaterial.

For our CBT segment, we provide a three-yearone-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 minimal.

Sales and Marketing

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 solidify 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. Currently we have 5030 salespeople in 10 offices nationwide.

Customers

In fiscal years 2016, three customers represented 10% or more of our total revenue. In fiscal years 2015, 2014, and 2013,2014, 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, 2016, 2015 2014 and 2013.2014.

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Year 2015

Year 2014

Year 2013

Competition

In the CBT segment, there are many small IT service companies in China providing one-off software packages to solve one aspect of the problem,problems, but not the integrated solutions combining technology platform, resource exchange, and big data services like ours. For example, in the new media industry, we encounter competition from 56iq.com, Fujian Star-net Communication Co., Ltd, Shanghai View Show Technology Co., Ltd,Ltd., and Maipu Communications Technology Co., Ltd. We do not compete with adadvertising agencies, such as Focus Media, Air Media, and VisionChina, because we are not an advertising agency nor do we place advertisement ourselves.

In the TIT segment, we encounter competition from Beijing Founder Digital Co., Ltd,Ltd., Beijing Easymap Information Technology Co., Ltd,Ltd., Esri, Super Map Software Co., Ltd., and Zondy Cyber Group Co., LtdLtd. in the geographic information system industry. In the digital hospital information system sector, our main competitors include Neusoft Corp. and DHC Software Co., Ltd.

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 existing receivables became uncollectable.

In early 2013, our management team made a strategic decision to transition our business from servicing the 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 wrote off accounts receivable that we deemed no longer collectable. At the same time, we decided to transform our business from a build-and-transfer IT service company into a standardized IT product company. Leveraging our experience and expertise in handling 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 software 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 which was completed during 2015. As a result, we wrote off a large amount of inventory and accounts receivable and took substantial goodwill and identifiable intangible asset impairment charges in 20142015 and 2015.2016.

As part of transition from the traditional IT business to the cloud-based business, in 2015 we sold iASPEC’s 100% equity holding in Zhongtian and 54.89% equity holding in Geo.Geo in 2015. Proceeds from these sales which totaledtotaling $19.5 million will be invested in the development and market expansion of our new cloud-based business, as well as used to pay off a portion of our short term debt.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, 2015,2016, through our wholly-owned subsidiaries IST and TopCloud, we had 7762 registered and copyrighted software products and held 23 patents. In addition, our variable interest entities, including iASPEC, Taoping, Biznest and Bocom, hold 10697 registered and copyrighted software products and 1752 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 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, TopCloud 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.”

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 (asoffice. Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in 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 caseNotice 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 be) is obtained. In May, 2013result 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 21142 which providesregulates 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 the applicable government authority and simplifiesmay not be used for equity investments within the operational stepsPRC. In addition, SAFE strengthened its oversight of the flow and regulations onuse 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 repay 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 matters related to direct investment by foreign investors, includingcontrol 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 registration, account opening and use, receipt and paymentcapitals of funds, and settlement and sales of foreign exchange. Pursuantforeign-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 Foreign Currency Administration Rules, FIEs in China may purchase foreign currency without the approval of SAFE for trade and service-relatedRenminbi converted from their foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retaincapitals for purposes beyond its business scope. On March 30, 2015, SAFE promulgated Circular 19, to expand 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 exchange (subjectcapitals to a cap approved by SAFE)make equity investment and removes certain other restrictions provided under Circular 142 for these enterprises. Circular 19 will remove those restrictions for all foreign-invested enterprises established in the PRC. However, both Circular 36 and Circular 19 continue to satisfyprohibit foreign-invested enterprises from, among other things, using the Renminbi fund converted from its foreign exchange liabilitiescapitals for expenditure beyond its business scope, providing entrusted loans or to pay dividends. In addition, if a foreign company acquires a company in China, the acquired company will also become an FIE. However, the relevant PRC government authorities may limit or eliminate the ability of FIEs to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from, and/or registration with, SAFE.repaying loans between non-financial enterprises.

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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, the Notice of the State Administration of Taxation on Negotiated Reduction of Dividends and Interest Rates which was issued on January 29, 2008, the Arrangement 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 the Notice 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 the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion.

Circular 37

On July 14, 2014, SAFE issued thea Circular on Relevant Issues Relating to Domestic Residents’ Investment and FinancingInvestments, Financings, and Roundtrip InvestmentInvestments 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 event.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, andactivities. 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, whowhom 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.

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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 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 collateral 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, 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 and Chongqing in the PRC, pursuant to lease agreements that will expire on various dates through December 2017. Rent expense for the years ended December 31, 2016, 2015, 2014 and 2013,2014, was approximately $170,000, $263,915$95, 000, $219,000 and $153,101,$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.

None.

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

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We are a leading provider of integrated cloud-based platform, exchange, and big data solutions to the Chinese new media, industry.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 exchange 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 government, education, healthcare, media, transportation, and other private sectors.

We were founded in 1993 and are headquartered in Shenzhen, China. As of December 31, 2015,2016, we had approximately 190125 employees and 10 sales offices nationwide.

Prior to 2014, we generated majority of our revenues through selling our products mostly to public service entities to help improve their operational efficiency and service quality. Our representative customers included China Ministry of Public Security, provincial bureaus of public security, fire departments, traffic bureaus, police stations, human resource departments, urban planning boards, civic administrations, land resource administrations, mapping and surveying bureaus, and the Shenzhen General Station of Exit and Entry Frontier 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 beauty spas.etc. Our new 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 supportsupporting services. Starting in 2015, with the introduction of our cloud-based software as a service (SaaS) offering, we generated additional recurring monthly revenues from SaaS fees, althoughfees. Although the revenue from SaaS is relatively small in a small amount in 2015 but are2016, it is expected to pick up quickly in 20162017 along with the roll-out of our cloud-based new media terminals.terminals and 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 people migratea result of migration to the cities, theirindividuals’ disposable income increases, and, their consumptionconsumptions of information to assist their acquisitionpurchases of materials goods and services increasesincrease 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 advertisementadvertisements as a way to make their brands discoverablevisible and memorable which in turnthat 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 information technology 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 software application in China, and has become a linchpin of state and local economic development strategies in the recent years.

For example, the Golden Shield Program promotes the use of information technology for public security services; the Digital City Program aims to integrate the functions of multiple government departments through geographic information system technology; the Golden Health Program strives to improve the efficiency of public healthcare through digital hospital technologies. All these initiatives are among Chinese government’s top priorities and are driving the demand for our DPST, GIS and DHIS offerings.

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%.

CNIT is subject to United States taxesincome taxe at a tax rate of 35%. No provision for income taxestax in the United States has been made as CNIT hadhas no taxable income taxable in the United States.

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ISSI, ISIID,IST HK, and HPC wereare incorporated in Hong Kong and under the current laws of Hong Kong, 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, IST, ISIOT and TopCloud, are approved as High Technology Enterprises and respective income tax rates are subjectreduced to 15%. Biznest enjoys EIT at athe tax rate of 15%. Biznest is subject to EIT at a rate 12.5% . iASPEC and Bocom are subject to regular EIT at a rate 25%.

Business Segment Information

Segment information is consistent with how management reviews business health, makes investment, allocates resources, and assesses operating performances. Transfers and sales between reportable segments, if any, are recorded at cost.

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

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For more information regarding our operating segments, see Note 2122 (Consolidated Segment Data) to our audited consolidated financial statements included elsewhere in this report.

Results of Operations

Comparison of Years Ended December 31, 2016 and 2015

The following table sets forth key components of our results of operations for fiscal years ended December 31, 2016 and 2015, both in dollars and as a percentage of our revenue.

Revenue. We generate revenues from selling hardware, software, system integration, software as a service, and other technology-related services. For the year ended December 31, 2016, our revenue was $10.2 million, slightly decreased from $10.3 million for the year ended December 31, 2015. The decrease was primarily due to our continuing transition from a traditional custom-made IT software development and system integrations (TIT) provider to the public sector to a cloud-based technology (CBT) solutions provider to private enterprise.

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

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 increased by $1.2 million, or 19.21%, to $7.6 million, for the year ended December 31, 2016, from $6.4 million for the year ended December 31, 2015. As a percentage of revenue, our cost of revenue increased to 74.63% during the year ended December 31, 2016, from 62.04% during the year ended December 31, 2015. As a result, gross profit as a percentage of revenue was 25.37% for the year ended December 31, 2016, a decrease of 12.59% from 37.96% for the year ended December 31, 2015. The decrease in the overall gross margin primarily resulted from significant deterioration of cost position in the TIT 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 cloud-based elevator advertising terminal, a standardized product consisting of screen hardware, our proprietary cloud software, and service, also contributed a moderate decrease in gross margin.

Administrative expenses. Our administrative expenses consist primarily of compensation and benefits for 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 decreased by $2.9 million, or 25.67%, to $8.3 million for the year ended December 31, 2016, from $11.2 million for the year ended December 31, 2015. As a percentage of revenue, administrative expenses decreased to 81.84% for 2016, from 109.13% for 2015. Such decrease was primarily due to our continued transition to the CBT business, which resulted in reduction in headcount and overhead in traditional TIT business segment.

Research and development expenses. Our research and development expenses consist primarily of personnel related expenses, as well as costs associated with new software and hardware development and enhancement. Our research and development expenses decreased by $0.4 million, or 11.66%, to $3.0 million for the year ended December 31, 2016, from $3.5 million for the year ended December 31, 2015. As a percentage of revenue, research and development expenses decreased to 29.87% for 2016, from 33.51% in 2015. Research and development expenses were consistent with prior year.

Selling expenses. Our selling expenses consist primarily of compensation and benefits to our sales and marketing staff, traveling costs, and other selling activities related costs. Our selling expenses decreased by $1.3 million, or 49.87%, to $1.3 million for the year ended December 31, 2016, from $2.7 million for the year ended December 31, 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.

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Revenue. We generate revenues from selling hardware, software, system integration, software as a service, and other technology-related services. For the year ended December 31, 2015, our revenue was $10.28$10.3 million, compared to $38.63$38.6 million for the year ended December 31, 2014, a decrease of $28.35$28.3 million, or 73.38% . The decrease was primarily due to two factors: (1) in 2015 we continued shifting hardware production from our own factory to OEM partners; as a result our hardware revenue reduced to $4.95$4.9 million in 2015, as compared to $22.63$22.6 million; (2) our strategic business transformation from the traditional IT business to the cloud-based business resulted in a decrease in the revenue of customized software and system integration, from $10.37$15.2 million and $4.82 million, respectively, in 2014, to $3.20$4.2 million and $1.01 million, respectively, in 2015.

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

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

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Cost of revenue and gross profit. As indicated in the tables above, our cost of revenue decreased by $21.77$21.8 million, or 77.33%, to $6.38$6.4 million, for the year ended December 31, 2015, from $28.15$28.1 million for the year ended December 31, 2014. As a percentage of revenue, our cost of revenue decreased to 62.04% duringfor the year ended December 31, 2015, from 72.85% duringfor the year ended December 31, 2014. As a result, gross profit as a percentage of revenue was 37.96% for the year ended December 31, 2015, an increase of 10.81% from 27.15% for the year ended December 31, 2014. The increase in the overall gross margin primarily resulted from the Company's strategic shift from a traditional IT business to a cloud-based technology business, which commands higher margins.

Administrative expenses. Our administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Our administrative expenses decreased by $9.62$9.6 million, or 46.14%, to $11.22$11.2 million for the year ended December 31, 2015, from $20.84$20.8 million for the year ended December 31, 2014. As a percentage of revenue, administrative expenses increased to 109.13% for 2015, from 53.93% for 2014. Such increase was primarily due to the significant decrease in revenues for which we are continuing to address this concern through reduction in headcount and overhead into 2016.

Research and development expenses. Our research and development expenses consist primarily of personnel-related expenses, as well as costs associated with new software and hardware development and enhancement. Our research and development expenses increased by $1.97$2.0 million, or 133.33%, to $3.45$3.4 million for the year ended December 31, 2015, from $1.48$1.5 million for the year ended December 31, 2014. As a percentage of revenue, research and development expenses increased to 33.51% for 2015, from 3.82% in 2014. Such increase was primarily due to the increased R&D personnel in accordance with our increasing focus on the CBT business in 2015.

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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-related costs. Our selling expenses decreased by $1.58$1.6 million, or 37.23%, to $2.66$2.7 million for the year ended December 31, 2015, from $4.24$4.2 million for the year ended December 31, 2014. This decrease was dueattributed to our shrinkdownsizing of salesforcesales force in the traditional IT business. As a percentage of revenue, our selling expenses increased to 25.88% for 2015, from 10.97% for 2014.

Impairment of intangible assets and goodwill.As we transition our business focus from the public sector to the private sector and from a hardware manufacturingmanufacturer to a software and cloud-based solutions development,provider, we analyzed our operations and tested our goodwill and intangible assets for impairment in 20142015 and 2015.2014. We recognized a goodwill and intangible assets impairment loss of $8.92$8.9 million, and an impairment of intangible assets of $0$7.0 million respectively, in 2015, based on our best estimation. Forfor the yearyears ended December 31, 2015 and 2014, we recorded $4.68 million of goodwill impairment loss and $2.33 million of impairment in intangible assets.respectively.

Impairment of property, plant and equipment. SinceAs a result of shifting our business strategy from a hardware manufacturer to a software and cloud-based solutions provider, we started ourclosing factory closure process in late 2014, weand began selling most of our factory-relatedfactory related property, plant, and equipment, and disposing of the remainder. Consequently we recorded $4.62$4.6 million and $0.8 million of impairment in property, plant and equipment for the yearyears ended December 31, 2015. In comparison, we recognized $0.83 million of impairment in property, plant2015 and equipment for the year ended December 31, 2014.2014, respectively.

Subsidy income. Because we have developed a number of technology products in fieldsthat are promoted and designated by the Chinese government as highly innovative technology, we received governmental incentivized subsidies of $0.50$0.5 million inand $0.7 million for the periods ended December 31, 2015 and $0.68 million in 2014, respectively.

Gain on sale of assets. In 2015, we completed the sale of our factory-relatedfactory related real estate property which resulted inand recorded a gain of $29.99$30.0 million on the sale of these assets.

Income tax expense.We recorded income tax expense of $4.31$4.3 million for the year ended December 31, 2015, as compared to $4.602015. We recorded a $4.6 million of income tax benefit in 2014 whichthat was primarily resulted from a reversal of a deferred tax asset in 2014, which was utilized in 2015 after we sold our factory-related real estate property.

Warrant expenseChange in fair value of warrants liability. We recorded $5.64$5.7 million in warrantof expense in 2015 related to changes in the fair value of the warrant derivative liability recorded in connection with our equity offering finalized in May 2015 equity offering.2015.

Net (loss) incomeloss attributable to the Company. As a result of the cumulative effect of the foregoing factors, we had a net loss attributable to the Company of $7.50$7.5 million for the year ended December 31, 2015, as compared to a net loss of $29.23$29.2 million for the year ended December 31, 2014.

Comparison of Years Ended December 31, 2014 and 2013

The following table sets forth key components of our results of operations for fiscal years ended December 31, 2014 and 2013, both in dollars and as a percentage of our revenue.

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Revenue. For the year ended December 31, 2014, our revenue was $38.63 million, compared to $55.42 million for the year ended December 31, 2013, a decrease of $16.79 million, or 30.29% . The decrease was primarily due to our strategic transformation from a hardware manufacturer to a software solution provider. In 2014 we started shifting hardware production from our own factory to our OEM partners. As a result, our hardware revenue reduced to $22.63 million in 2014, as compared to $46.11 million in 2013, a decrease of 50.93% . Meanwhile, our software revenue increased to $10.37 million in 2014 from $ 2.92 million in 2013, an increase of 251.61% . Our system integration revenue decreased 11.07% to $4.82 million, as compared to $5.42 million in 2013. Other revenue, which constituted only 2% of total revenues in 2014, declined slightly to $0.82 million in 2014 from $0.96 million in 2013.

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