| Summary of Significant Accounting Policies | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation and Principles of Consolidation The consolidated financial statements of the Company
have been prepared in accordance with U.S. generally accepted accounting principles. The consolidated financial statements include the
accounts of the Company, its subsidiaries, and its VIE and VIE subsidiaries for which the Company is the primary beneficiary. All significant
intercompany accounts and transactions have been eliminated in consolidation. Reverse Stock Split: A one (1)-for-six (6) reverse
stock split of the Company’s issued and outstanding ordinary shares was effective on July 30, 2020 (the “Reverse Stock Split”).
Except shares authorized, all share and per share information has been retroactively adjusted to give effect to the Reverse Stock Split
for all periods presented, unless otherwise indicated. (b) Use of Estimates The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. The Company’s significant estimates include its accounts receivable,
fair value of stock options and warrants, valuation allowance of deferred tax assets, and other intangible assets. Management makes these
estimates using the best information available at the time the estimates are made; however actual results could differ from those estimates. (c) Economic, pandemic, and Political Risks All the Company’s revenue-generating operations
are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by
the political, economic, public health, and legal environments in the PRC, and by the general state of the PRC economy. The Company’s
operations in the PRC are subject to special considerations and significant risks that are not typically pertaining to the companies in
North America and Western Europe. These include risks associated with, among others, the political, economic, public health, and legal
environments and foreign currency exchange. The Company’s financial results may be adversely affected by changes in the political,
public health, and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, fiscal
and monetary policies, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation. (d) Cash and Cash Equivalents The Company considers all highly liquid investments
purchased and cash deposits with financial institutions with original maturities of three months or less to be cash equivalents. The Company
had no cash equivalents as of December 31, 2020 or 2019. The Company maintains its cash accounts at credit
worthy financial institutions and closely monitors the movements of its cash positions. As of December 31, 2020 and 2019, approximately
$0.9 million and $1.5 million of cash, respectively, was held in bank accounts in the PRC. (e) Restricted Cash The Company also held restricted cash of $0.2 million
as of December 31, 2020. The restricted fund is a time deposit served as collateral to secure a bank loan facility that matures on May
7, 2021. (f) Accounts Receivable, Accounts Receivable –related
parties, and Concentration of Risk In January 2020, the Company adopted ASU 2016-13,
Topics 326-Credit Loss, Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected
loss methodology that is referred to as the current expected credit loss (CECL) methodology, as its accounting standard for its trade
accounts receivable. The adoption of the credit loss accounting standard
has no material impact on the Company’s consolidated financial statements as of January 1, 2020. Accounts receivable are recognized
and carried at carrying amount less an allowance for credit loss, if any. The Company maintains an allowance for credit losses resulting
from the inability of its customers to make required payments based on contractual terms. The Company reviews the collectability of its
receivables on a regular and ongoing basis. The Company has also included in calculation of allowance for credit losses, the potential
impact of the COVID-19 pandemic on our customers businesses and their ability to pay their accounts receivable. After all attempts to
collect a receivable have failed, the receivable is written off against the allowance. The Company also considers external factors to
the specific customer, including current conditions and forecasts of economic conditions, including the potential impact of the COVID-19
pandemic. In the event the Company recovers amounts previously reserved for, the Company will reduce the specific allowance for credit
losses. The balance of allowance for credit loss for the year ended December 31, 2020 has increased approximately $14.0 million from the
year ended December 31, 2019. The Company evaluates the creditworthiness of all
of its customers individually before accepting them and continuously monitors the recoverability of accounts receivable. If there are
any indicators that a customer may not make payment, the Company may consider making provision for non-collectability for that particular
customer. At the same time, the Company may cease further sales or services to such customer. The following are some of the factors that
the Company considers in determining whether to discontinue sales, record as contra revenue or allowance for credit losses:
● the customer fails to comply with its payment schedule;
● the customer is in serious financial difficulty;
● a significant dispute with the customer has occurred regarding job progress or other matters;
● the customer breaches any of the contractual obligations;
● the customer appears to be financially distressed due to economic or legal factors;
● the business between the customer and the Company is not active; and
● other objective evidence indicates non-collectability of the accounts receivable. The Company considers the following factors when determining
whether to permit a longer payment period or provide other concessions to customers:
● the customer’s past payment history;
● the customer’s general risk profile, including factors such as the customer’s size, age, and public or private status;
● macroeconomic conditions that may affect a customer’s ability to pay; and
● the relative importance of the customer relationship to the Company’s business. Accounts receivable as at December 31, 2020 and
2019 are as follows:
December 31, 2020 December 31, 2019
Accounts Receivable $ 12,359,619 $ 9,611,788
Allowance for credit losses (8,095,362 ) (4,685,707 )
Accounts Receivable, net $ 4,264,257 $ 4,926,081
Accounts Receivable - related parties $ 12,017,651 $ 10,862,238
Allowance for credit losses (9,098,436 ) (2,128,975 )
Accounts Receivable - related parties, net $ 2,919,215 $ 8,733,263
Non-current Accounts Receivable $ 3,013,532 $ 1,804,189
Non-current credit losses (1,174,302 ) (156,080 )
Non-current Accounts Receivable, net $ 1,839,230 $ 1,648,109
Non-current Accounts Receivable - related parties $ 4,172,502 $ 4,035,831
Non-current Allowance for credit losses - related parties (2,849,306 ) (241,882 )
Non-current Accounts Receivable - related parties, net $ 1,323,196 $ 3,793,949 The normal credit term is ranging from 1 month to
3 months after the customers’ acceptance of hardware or software, and completion of services. However, because of various factors
of business cycle, the actual collection of outstanding accounts receivable may be beyond the normal credit terms. In accordance with ASC 210-10-45, the non-current
accounts receivable and non-current accounts receivable-related parties represent the amounts that the Company does not reasonably expect
to be realized during the normal operating cycle of the Company. Considering the limited operating history with the customers and Taoping
Alliance members, in accordance with ASC 210-10-45, the operating cycle of the Company is not identifiable. Therefore, the Company uses
one-year time period as the basis for the separation of current and non-current assets. The allowance for credit losses at December 31, 2020
and 2019, totaled approximately $21.2 million and $7.2 million, respectively, representing management’s best estimate. The following
table describes the movements for allowance for credit losses during the years ended December 31, 2020 and 2019.
Balance at January 1, 2019 $ 3,683,842
Increase in allowance for credit losses 3,576,669
Foreign exchange difference (47,867 )
Balance at December 31, 2019 $ 7,212,644
Increase in allowance for credit losses 13,528,638
Foreign exchange difference 476,124
Balance at December 31, 2020 $ 21,217,406 (g) Advances to Suppliers Advances to suppliers represent cash deposits for
the purchase of inventory items including but not limited to super-computing server machines from suppliers. (h) Advances from Customers and Related Parties Advances from customers and related parties represent
cash received from customers and related parties as advance payments for the purchases of the Company’s products and services. (i) Fair Value and Fair Value Measurement of Financial
Instruments Management has estimated that carrying amounts reported
in the consolidated balance sheets for cash, accounts receivable, accounts receivable – related party, advances to suppliers, loan
receivable - related party, other current assets, accounts payable, other payables and accrued expenses, income taxes payable, convertible
note payable, net, and due to related parties approximate their fair market value based on the short-term maturity of these instruments. (j) Fair Value Accounting Financial Accounting Standards Board (FASB) Accounting
Standards Codifications (ASC) 820-10 “Fair Value Measurements and Disclosures”, establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
As required by FASB ASC 820-10, assets are classified in their entirety based on the lowest level of input that is significant to the
fair value measurement. The three levels of the fair value hierarchy under FASB ASC 820-10 are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). On January 1, 2020, the Company adopted ASU 2018-13,”
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.”
The adoption of the disclosure requirements for Fair Value Accounting has no material impact on the Company’s consolidated financial
statements. (k) Inventories, net Inventories are valued at the lower of cost (weighted
average basis) or net realizable value. Net realizable value is the expected selling price in the ordinary course of business minus any
costs of completion, disposal, and transportation to make the sale. The Company performs an analysis of slow-moving or
obsolete inventory periodically and any necessary valuation reserves, which could potentially be significant, are included in the period
in which the evaluations are completed. Any inventory impairment results in a new cost basis for accounting purposes. (l) Property, equipment and software, net Property, equipment and software are stated at cost
less accumulated amortization and depreciation. Amortization and depreciation is provided over the assets’ estimated useful lives,
using the straight-line method. Estimated useful lives of property, equipment and software are as follows:
Office buildings 20-50 years
Plant and machinery 3-20 years
Electronics equipment, furniture and fixtures 3-5 years
Motor vehicles 5 years
Purchased software 5 years Maintenance and repairs costs are expensed as incurred,
whereas significant renewals and betterments are capitalized. (m) Intangible assets, net Intangible assets represent technology, and software
development costs and trademarks acquired by the Company through business acquisition. Intangible assets are stated at acquisition fair value
or cost less accumulated amortization, and amortized using the straight-line method over the following estimated useful lives:
Software development costs 3-5 years
Trademarks 5 years (n) Long-term investment. The Company’s long-term investment consists
of equity investments without readily determinable fair value. The Company adopted ASU No. 2016-01, Recognition and Measurement of Financial
Assets and Financial Liabilities (“ASU 2016-01”), codified in ASC Topic 321, Investments—Equity Securities (“ASC
321”), from January 1, 2018. Pursuant to ASC 321, equity investments, except for those accounted for under the equity method, those
that result in consolidation of the investee and certain other investments, are measured at fair value, and any changes in fair value
are recognized in earnings. For equity securities without readily determinable fair value and do not qualify for the existing practical
expedient in ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) to estimate fair value using the net asset
value per share (or its equivalent) of the investment, the Company elected to use the measurement alternative to measure those investments
at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar
investments of the same issuer, if any. Significant judgments are required to determine (i) whether observable price changes are orderly
transactions and identical or similar to an investment held by the Company; and (ii) the selection of appropriate valuation methodologies
and underlying assumptions, including expected volatility and the probability of exit events as it relates to liquidation and redemption
features used to measure the price adjustments for the difference in rights and obligations between instruments. For equity investments that the Company elects to
use the measurement alternative, the Company makes a qualitative assessment considering impairment indicators to evaluate whether investments
are impaired at each reporting date. Impairment indicators considered include, but are not limited to, a significant deterioration in
the earnings performance or business prospects of the investee, including factors that raise significant concerns about the investee’s
ability to continue as a going concern, a significant adverse change in the regulatory, economic, or technologic environment of the investee
and a significant adverse change in the general market condition of either the geographical area or the industry in which the investee
operates. If a qualitative assessment indicates that the investment is impaired, the entity has to estimate the investment’s fair
value in accordance with the principles of ASC 820. If the fair value is less than the investment’s carrying value, the Company
recognizes an impairment loss in net income equal to the difference between the carrying value and fair value. (o) Convertible promissory note The Company determines the appropriate accounting
treatment of its convertible debts in accordance with the terms in relation to conversion features. After considering the impact of such
features, the Company may account for such instrument as a liability in its entirety, or separate the instrument into debt and equity
components following the guidance described under ASC 815 Derivatives and Hedging and ASC 470 Debt. The debt discount, if any, together
with related issuance cost are subsequently amortized as interest expense over the period from the issuance date to the earliest conversion
date or stated redemption date. The Company presented the issuance cost of debt in the balance sheet as a direct deduction from the related
debt. (p) Impairment of Long-Lived Assets Long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable.
It is reasonably possible that these assets could become impaired as a result of technology or other industry changes. Recoverability
of assets to be held and used is determined by comparing their carrying amount with their expected future net undiscounted future cash
flows from the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by how much the carrying
amount exceeds the fair value of the assets. There were no impairment charges for the years ended December 31, 2020, 2019 and 2018. Assets
held for disposal, if any, are reported at the lower of the carrying amount or fair value less costs to sell. (q) Revenue Recognition Beginning January 1, 2018, the Company has adopted
the ASU 2014-09, Topic 606, “Revenue from Contracts with Customers” and its related amendments (collectively referred to as
“ASC 606”) as its new revenue recognition accounting policy that depicts the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The
adoption of the new revenue recognition standard has no material impact on the Company’s consolidated financial statements for any
periods prior to 2018. Therefore prior period amounts are not adjusted. The Company generates its revenues primarily from
three sources: (1) product sales, (2) software sales, and (3) other sales. Revenue is recognized when obligations under the terms of a
contract with our customers are satisfied; and generally occurs upon delivery of the goods and services. Revenue-Products Product revenues are generated primarily from the
sale of Cloud-Application-Terminal based digital ads display terminals with integrated software essential to the functionality of the
hardware to our customers (inclusive of related parties) and high-end data storage servers. Although manufacturing of the hardware has
been outsourced to the Company’s Original Equipment Manufacturer (OEM) suppliers, the Company has acted as the principal of the
contract. The Company recognized the hardware sales at the point of delivery. The Company has indicated that it may from time to time
provide future unspecified software upgrades to the hardware products’ essential software, which is expected to be infrequent and,
free of charge. Non-software service is mainly the one-time training session provided to the customer to familiarize them with the software
operation upon the customer’s initial introduction to the software platform. The costs of providing infrequent software upgrade
and training provided to the customer for familiarizing the software operations are de minimis. As a result, the Company does not allocate
transaction price to software upgrade and customer training. Product sales are classified as “Revenue-Products” on the Company’s
consolidated statements of operations. Revenue-Software Customers in the private sector contract the Company
to design and develop software products specifically customized for their needs for a fixed price. Software development projects usually
include developing software, integrating various isolated software systems into one, and testing the system. The design and build services,
together with the integration of the various elements, are generally determined to be essential to the functionality of the delivered
software. The contracted price is usually paid in installments based on progression of the project or at the delivery of the software.
The Company usually provides non-software services including after-sale support, technical training. The technical training only occurs
at the introduction of the software. The software is highly specialized and stable, after-sale support and subsequent upgrade or enhancement
are infrequent. The Company has estimated the costs associated with the non-software performance obligations and concludes that these
obligations are de minimis to the overall contract. Therefore, the Company does not further allocate transaction price. The Company usually completes the customized software
contracts less than 12 months and recognizes the revenue at the point of delivery because the Company does not have an enforceable right
to payment for performance completed to date. Revenues from software development contracts are classified as “Revenue-Software”
on the Company’s consolidated statements of operations. Revenue-Other The Company also reports other revenue which comprises
revenue generates from System upgrade and technical support services, platform service fee, advertising revenue, and rental income. System upgrade and technical support revenue is recognized
when performance obligations are satisfied upon completion of the services. Platform service fee is charged based on number of the display
terminals used by the customers or a percentage of advertising revenue generated by the display terminals. Platform service revenue is
recognized on a monthly basis over the contract period. The Company recognizes new media advertising revenue
upon transferring services for delivering the advertisements as contracted with customers, who rent advertising slots on vehicular display
terminals for an agreed upon transaction price. New media advertising revenue is recognized over period of time. On January 1, 2019, the Company adopted ASC 842 –
Leases that requires lessor to identify the underlying assets and allocate rental income among considerations in lease and non-lease components.
Upon adoption, the Company will recognize a lease liability and corresponding right-to-use asset based on the present value of minimum
lease payments. The effects on the results of operations are not expected to be significant, as recognition and measurement of expenses
and cash flows for leases will be substantially the same under the new standard. Therefore, prior period amounts are not adjusted. The
Company owns two units of office space renting out to a third party and a related party under non-cancelable operating lease agreements
with lease terms of six years starting from May 1, 2016 and three years starting from July 1, 2019, respectively. The lease agreements
have fixed monthly rental payments, and no non-lease component or option for lessees to purchase the underlying assets. The Company collects
monthly rental payments from the lessees, and has generated approximately $405,000 and $420,000 rental income for the years ended December
31, 2020, and 2019, respectively. Annual minimum lease payments to be received in the
next 5 years:
2021 378,940
2022 136,452
Total 515,392 Contract balances The Company records advances from customers when cash
payments are received or due in advance of our performance. For the year ended December 31, 2020, 2019 and 2018, the Company recognized
revenue of approximately $256,000, $335,000 and $1,290,000, respectively, that was included in the advances from customers balance at
the beginning of each reporting period. Practical expedients and exemptions The Company generally expenses sales commissions if
any incurred because the amortization period would have been one year or less. In many cases, the Company is approached by customers for
customizing software products for their specific needs without incurring significant selling expenses. The Company does not disclose the value of unsatisfied
performance obligations for contracts with an original expected length of one year or less. (r) Treasury Stock The Company repurchases its ordinary shares from time
to time in the open market and holds such shares as treasury stock. The Company applies the “cost method” and presents the
cost to repurchase such shares as a reduction in equity. (s) Stock-based compensation The Company applies ASC No. 718, “Compensation-Stock
Compensation”, which requires that share-based payment transactions with employees, such as share options, be measured based on
the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding
addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at
the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide
service in exchange for the award, which generally is the vesting period. The Company adopted ASU 2018-07, Compensation-Stock
Compensation (Topic: 718): Improvements to Nonemployee Share-Based Payment Accounting on January 1, 2019, to account for stock-based compensation
to goods and services provided by the third parties. The fair value of the equity awards to nonemployee are measured on the grant day.
Under this guidance, compensation cost related to nonemployee share options or similar equity instruments is recognized in the same period
and in the same manner (i.e. capitalize or expense) the entity would if it paid cash for the goods or services. The Company’s adoption
of ASU 2018-07 has no material impact to the Company’s consolidated financial statements, nor requirement for cumulative adjustment
in retained earnings or other components of equity or net assets. During the year ended December 31, 2020, 2019, and
2018, the Company recognized approximately $744,000, $580,000 and $629,000, respectively, of stock-based compensation expense. (t) Foreign Currency Translation The functional currency of the US and BVI companies
is the United States dollar. The functional currency of the Company’s Hong Kong subsidiaries is the Hong Kong dollar. The functional currency of the Company’s wholly-owned
PRC subsidiaries and its VIE is the Chinese Renminbi Yuan, (“RMB”). RMB is not freely convertible into foreign currencies.
The Company’s PRC subsidiaries’ and their VIE’s financial statements are maintained in the functional currency. Monetary
assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates
of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated
into the functional currency at the exchange rates prevailing at the dates of the transactions. Exchange gains or losses arising from
foreign currency transactions are included in the determination of net loss for the respective periods. For financial reporting purposes, the financial statements
of the Company have been translated into United States dollars. Assets and liabilities are translated at exchange rates at the balance
sheet dates, revenue and expenses are translated at average exchange rates, and equity is translated at historical exchange rates. Any
resulting translation adjustments are not included in determining net income but are included in other comprehensive loss, a component
of equity. The exchange rates adopted are as follows:
December 31, 2020 December 31, 2019
Year-end RMB to US$ exchange rate 6.5377 6.9692
Average yearly RMB to US$ exchange rate 6.9044 6.9072 The average yearly RMB to US$ exchange rate adopted
for the year ended December 31, 2018 was 6.8787. No representation is made that the RMB amounts could
have been, or could be, converted into United States dollars at the rates used in translation. (u) Research & Development Expenses The Company follows the guidance in FASB ASC 985-20,
Cost of Software to Be Sold, Leased or Marketed, regarding software development costs to be sold, leased, or otherwise marketed. FASB ASC 985-20-25 requires research and development
costs for software development to be expensed as incurred until the software model is technologically feasible. Technological feasibility
is established when the enterprise has completed all planning, designing, coding, testing, and identification of risks activities necessary
to establish that the product can be produced to meet its design specifications, features, functions, technical performance requirements.
A certain amount of judgment and estimation is required to assess when technological feasibility is established, as well as the ongoing
assessment of the recoverability of capitalized costs. The Company’s products reach technological feasibility shortly before the
products are released and sold to the public. Therefore research and development costs are generally expensed as incurred. (v) Subsidy Income Subsidy income mainly represents income received from
various local governmental agencies in China for developing high technology products in the fields designated by the government as new
and highly innovative. The Company has no continuing obligation under the subsidy provision. The Company recognizes subsidy income upon
receipt of official grant notice from local government authorities. (w) Sales, use, other value-added taxes, and income
taxes Revenue is recorded net of applicable sales, use,
and value-added taxes. Income taxes are provided on an asset and liability
approach for financial accounting and reporting of income taxes. Deferred income taxes are recognized for all significant temporary differences
at enacted rates and classified as non-current in the financial statements. A valuation allowance is provided to reduce the amount of
deferred tax assets if it is considered more likely than not that some portion, or all of, the deferred tax assets will not be realized.
The Company classifies interest and/or penalties related to unrecognized tax benefits, if any, as a component of income tax expense. The Company applies the provisions of ASC No. 740
“Income Taxes” (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized by prescribing
a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. ASC 740 also provides accounting guidance on de-recognition, classification, interest and penalties, and
disclosure. (x) Discontinued Operations The Company follows “ASU 2014-08, Presentation
of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity” for reporting discontinued operations. Under the revised standard, a discontinued operation
must represent a strategic shift that has or will have a major effect on an entity’s operations and financial results. Examples
could include a disposal of a major line of business, a major geographical area, a major equity method investment, or other major parts
of an entity. The revised standard also allows an entity to have certain continuing cash flows or involvement with the component after
the disposal. Additionally, the standard requires expanded disclosures about discontinued operations that will provide financial statement
users with more information about the assets, liabilities, income, and expenses of discontinued operations. (y) Segment reporting Segment information is consistent with how management
reviews the businesses, makes investing and resource allocation decisions and assesses operating performance. Transfers and sales between
reportable segments, if any, are recorded at cost. ASC 280, Disclosures about Segments of an Enterprise
and Related Information establishes standards for reporting information about operating segments. Operating segments are defined as components
of an enterprise which engage in business activities from which they may earn revenues and incur expenses, and about which separate financial
information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how
to allocate resources and in assessing performance. Reportable segments are defined as an operating segment that either (a) exceeds 10%
of revenue, or (b) rep |
