Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
Submission Data File
Form Type*
Contact Name
Contact Phone
Filer Accelerated Status*
Filer File Number
Filer CIK*
Filer CCC*
Filer is Shell Company*
Filer is Voluntary Filer*
Filer is Well Known Seasoned Issuer*
Confirming Copy
Notify via Website only
Return Copy
SROS*
Period*
Emerging Growth Company
Elected not to use extended transition period
General Information
20-F
Kelvin Shiwnath
866-683-5248
Large Accelerated Filer
0001357450 [Hollysys Automation Technologies, Ltd.]
(Hollysys Automation Technologies, Ltd.)
**********
N
N
Y
No
No
No
NASD
06-30-2017
No
No
(End General Information)
Document Information
File Count*
Document Name 1*
Document Type 1*
Document Description 1
Document Name 2*
Document Type 2*
Document Description 2
Document Name 3*
Document Type 3*
Document Description 3
Document Name 4*
Document Type 4*
Document Description 4
Document Name 5*
Document Type 5*
Document Description 5
Document Name 6*
Document Type 6*
Document Description 6
Document Name 7*
Document Type 7*
Document Description 7
Document Name 9*
Document Type 9*
Document Description 9
Document Name 10*
Document Type 10*
Document Description 10
Document Name 11*
14
v474603_20f.htm
20-F
Form 20-F
v474603_ex8-1.htm
EX-8.1
Exhibit 8.1
v474603_ex12-1.htm
EX-12.1
Exhibit 12.1
v474603_ex12-2.htm
EX-12.2
Exhibit 12.2
v474603_ex13-1.htm
EX-13.1
Exhibit 13.1
v474603_ex13-2.htm
EX-13.2
Exhibit 13.2
v474603_ex15-1.htm
EX-15.1
Exhibit 15.1
holi-20170630.xml
EX-101.INS
XBRL INSTANCE DOCUMENT
holi-20170630.xsd
EX-101.SCH
XBRL TAXONOMY EXTENSION SCHEMA
holi-20170630_cal.xml
Document Type 11*
Document Description 11
Document Name 12*
Document Type 12*
Document Description 12
Document Name 13*
Document Type 13*
Document Description 13
Document Name 14*
Document Type 14*
Document Description 14
Notify via Website only
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EX-101.CAL
XBRL TAXONOMY EXTENSION CALCULATION
LINKBASE
holi-20170630_def.xml
EX-101.DEF
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
holi-20170630_lab.xml
EX-101.LAB
XBRL TAXONOMY EXTENSION LABEL LINKBASE
holi-20170630_pre.xml
EX-101.PRE
XBRL TAXONOMY EXTENSION PRESENTATION
LINKBASE
(End Document Information)
Notifications
No
kelvinshiwnath@toppanlf.com
(End Notifications)
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 1 of 147
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
(cid:133)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:95)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended June 30, 2017
OR
(cid:133)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
OR
(cid:133)
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _________________________
Commission file number: 001-33602
HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
British Virgin Islands
(Jurisdiction of incorporation or organization)
No. 2 Disheng Middle Road,
Beijing Economic-Technological Development Area,
Beijing, P. R. China 100176
(Address of principal executive offices)
Arden Xia, Tel: (86 10) 5898 1386, Email: xiachuan@hollysys.com
Address: No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, P.R. China 100176
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Ordinary Shares, $0.001 par value per share
Name of each exchange on which registered
The NASDAQ Global Select Market
Preferred Share Purchase Rights
The NASDAQ Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or ordinary shares as of the close of the period covered by the
annual report (June 30, 2017): 60,342,099 ordinary shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. (cid:95) Yes (cid:133) No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934. (cid:133) Yes (cid:95) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. (cid:95) Yes (cid:133) No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). (cid:95) Yes (cid:133) No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth
company. See definition of “large accelerated filer”, “accelerated filer”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:95)
Emerging growth company (cid:133)
Accelerated filer (cid:133)
Non-accelerated filer (cid:133)
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has
elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to
Section 13(a) of the Exchange Act. (cid:133)
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its
Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP (cid:95)
International Financial Reporting Standards as issued by the
International Accounting Standards Board (cid:133)
Other (cid:133)
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow.
(cid:133) Item 17 (cid:133) Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). (cid:133)
Yes (cid:95) No
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 2 of 147
HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
ANNUAL REPORT ON FORM 20-F
FOR THE FISCAL YEAR ENDED JUNE 30, 2017
TABLE OF CONTENTS
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
ITEM 3.
KEY INFORMATION
ITEM 4.
INFORMATION ON THE COMPANY
ITEM 4A.
UNRESOLVED STAFF COMMENTS
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8.
FINANCIAL INFORMATION
ITEM 9.
THE OFFER AND LISTING
ITEM 10.
ADDITIONAL INFORMATION
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
2
Page
5
5
6
28
43
43
64
74
76
77
78
90
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ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS
ITEM 15.
CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
ITEM 17.
FINANCIAL STATEMENTS
ITEM 18.
FINANCIAL STATEMENTS
ITEM 19.
EXHIBITS
PART III
3
91
92
92
93
93
93
94
94
94
94
94
95
95
95
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Except as otherwise indicated by the context, references in this annual report to:
USE OF CERTAIN DEFINED TERMS
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
“Hollysys,” “we,” “us,” or “our,” and the “Company,” refer to the combined business of Hollysys Automation Technologies Ltd., a BVI
company, and its consolidated subsidiaries, HI, HAP, HAIP, Bond Group, Concord Group, CSHK, CMDE, CECL, GTH, Clear Mind,
World Hope, Helitong, Hollysys Group, Hangzhou Hollysys, Hangzhou System, Hollysys Intelligent, Beijing Hollysys, Hollysys
Electronics, Xi’an Hollysys and Hollysys Investment;
“HI” refers to Hollysys International Pte. Limited, a Singapore company;
“HAP” refers to Hollysys (Asia Pacific) Pte. Limited, a Singapore company;
“HAIP” refers to Hollysys Automation India Private Limited, an India Company;
Bond Group” refers to a group of our subsidiaries, including Bond Corporation Pte. Ltd., a Singapore company (“BCPL”), Bond M&E Pte.
Ltd., a Singapore Company (“BMSG”), Bond M&E Sdn. Bhd., a Malaysia company (“BMJB”), and Bond M&E (K.L.) Sdn. Bhd., a
Malaysia company (“BMKL”);
“Concord Group” refers to a group of our subsidiaries, including Concord Corporation Pte. Ltd. (“CCPL”), a Singapore company, and
CCPL’s subsidiaries, Concord Electrical Pte. Ltd., a Singapore company (“CEPL”), Concord Electrical Sdn. Bhd., a Malaysia company
(“CESB”), Concord Corporation Pte. Ltd, Dubai Branch (“CCPL Dubai”) Concord Electrical Contracting Ltd., a Qatar company(“CECL”),
and Concord M Design and Engineering Company Ltd, a Macau company(“CMDE”);
“CSHK” refers to Concord Solutions (HK) Limited, a Hong Kong company;
“GTH” refers to Gifted Time Holdings Limited, a BVI company;
“Clear Mind” refers to Clear Mind Limited, a BVI company;
“World Hope” refers to World Hope Enterprises Limited, a Hong Kong company;
“Helitong” refers Beijing Helitong Science & Technology Exploration Co., Ltd., a PRC company;
“Hollysys Group” refers to Beijing Hollysys Group Co., Ltd., formerly known as Beijing Hollysys Science & Technology Co., Ltd, a PRC
company;
“Hangzhou Hollysys” refers to Hangzhou Hollysys Automation Co., Ltd., a PRC company;
“Hangzhou System” refers to Hangzhou Hollysys System Engineering Co., Ltd., a PRC company;
“Hollysys Intelligent” refers to Beijing Hollysys Intelligent Technologies Co., Ltd., formerly named as Beijing Hollysys Automation &
Drive Co., Ltd., a PRC company;
“Beijing Hollysys” refers to Beijing Hollysys Co., Ltd., a PRC company;
“Hollysys Electronics” refers to Beijing Hollysys Electronics Technology Co., Ltd., a PRC company;
“Xi’an Hollysys” refers to Xi’an Hollysys Co., Ltd, a PRC company;
4
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
“Hollysys Investment” refers to Hollysys (Beijing) Investment Co., Ltd., a PRC company;
“RMB” and “CNY” refer to Renminbi, the legal currency of China; “SGD” and “S$” refer to the Singapore dollar, the legal currency of
Singapore; “US dollar,” “$” and “US$” refer to the legal currency of the United States; “MYR” refers to the Malaysian Ringgit, the legal
currency of Malaysia; “AED” refers to the United Arab Emirates Dirham, the legal currency of United Arab Emirates; “HKD” refers to the
Hong Kong dollar, the legal currency of Hong Kong; “MOP” refers to the Macau Pataca, the legal currency of Macau; “INR” refers to the
Indian Rupee, the legal currency of India; and “QAR” refers to the Qatar Riyal, the legal currency of Qatar;
“BVI” refers to the British Virgin Islands;
“China” and “PRC” refer to the People’s Republic of China;
“Hong Kong” and “Hong Kong SAR” refer to the Hong Kong Special Administrative Region of China;
“Macau” refers to the Macau Special Administrative Region of China;
“Exchange Act” refers to the Securities Exchange Act of 1934, as amended; and
“Securities Act” refers to the Securities Act of 1933, as amended.
FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements and information relating to us that are based on the current beliefs, expectations,
assumptions, estimates and projections of our management regarding our company and industry. When used in this annual report, the words “may”,
“will”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan” and similar expressions, as they relate to us or our management, are intended
to identify forward-looking statements. These statements reflect management's current view of us concerning future events and are subject to certain
risks, uncertainties and assumptions, including among many others: our potential inability to achieve similar growth in future periods as we did
historically, a decrease in the availability of our raw materials, the emergence of additional competing technologies, changes in domestic and foreign
laws, regulations and taxes, changes in economic conditions, uncertainties related to China’s legal system and economic, political and social events
in China, the volatility of the securities markets, and other risks and uncertainties which are generally set forth under the heading, “Key information
- Risk Factors” and elsewhere in this annual report. Should any of these risks or uncertainties materialize, or should the underlying assumptions
about our business and the commercial markets in which we operate prove incorrect, actual results may vary materially from those described as
anticipated, estimated or expected in this annual report.
All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we
undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this annual report or to
reflect the occurrence of unanticipated events.
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
PART I
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
5
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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ITEM 3.
KEY INFORMATION
A. Selected Consolidated Financial Data
The following table presents selected financial data regarding our business. It should be read in conjunction with our consolidated financial
statements and related notes contained elsewhere in this annual report and the information under Item 5, “Operating and Financial Review and
Prospects.” The selected consolidated statement of comprehensive income data for the fiscal years ended June 30, 2015, 2016 and 2017 and the
consolidated balance sheet data as of June 30, 2016 and 2017 have been derived from the audited consolidated financial statements of Hollysys that
are included in this annual report beginning on page F-1. The selected statement of comprehensive income data for the fiscal years ended June 30,
2013 and 2014, and balance sheet data as of June 30, 2013, 2014 and 2015 have been derived from our audited financial statements that are not
included in this annual report.
The audited consolidated financial statements for the years ended June 30, 2015, 2016 and 2017 are prepared and presented in accordance with
generally accepted accounting principles in the United States, or US GAAP. The selected financial data information is only a summary and should
be read in conjunction with the historical consolidated financial statements and related notes of Hollysys contained elsewhere herein. The financial
statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative of our future performance.
Financial information in this report is reported in United States dollars, the reporting currency of the Company.
(In USD thousands, except share numbers and per share data)
Statement of Comprehensive Income Data
Revenue
Operating income
Income before income taxes
Net income attributable to Hollysys
Add: Share-based compensation expenses
Amortization of intangible assets
Acquisition-related consideration fair value adjustments
Fair value adjustments of a bifurcated derivative
Non-GAAP net income attributable to Hollysys
Weighted average ordinary shares:
Basic
Diluted
Earnings per share:
Basic
Diluted
Non-GAAP earnings per share:
Basic
Diluted
Balance Sheet Data
Total current assets
Total assets
Total current liabilities
Total liabilities
Net assets
Non-controlling interests
Stockholders’ equity
2013
2014
Years ended June 30,
2015
2016
2017
349,055
57,702
60,618
51,994
1,599
2,848
1,163
-
57,605
521,332
98,407
91,312
69,620
2,986
5,413
8,920
-
86,939
531,379
130,107
125,227
96,527
2,492
4,454
(166)
35
103,342
544,325
120,583
137,742
118,471
3,860
818
(1,745)
93
121,497
431,943
60,270
83,355
68,944
464
581
-
89
70,078
56,167,592
56,412,469
57,926,333
58,426,642
58,612,596
60,134,203
59,170,050
60,611,456
60,189,004
61,011,510
1.20
1.19
1.50
1.49
729,893
926,695
398,891
434,637
492,058
3,583
488,475
1.65
1.61
1.76
1.72
806,640
983,686
374,596
398,301
585,385
6,285
579,100
2.00
1.97
2.05
2.02
827,310
1,004,156
297,326
321,471
682,685
8,529
674,156
1.15
1.14
1.16
1.16
865,356
1,058,254
302,978
334,714
723,540
21
723,519
0.93
0.92
1.03
1.02
546,448
744,633
268,452
329,158
415,475
1,747
413,728
6
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In evaluating our results, the non-GAAP measures of “Non-GAAP general and administrative expenses (“Non-GAAP G&A expenses”)”,“Non-
GAAP cost of integrated contracts”, “Non-GAAP other income (expenses), net”, “Non-GAAP interest expenses”, “Non-GAAP net income
attributable to Hollysys” and “Non-GAAP earnings per share” serve as additional indicators of our operating performance and not as a replacement
for other measures in accordance with US GAAP. We believe these non-GAAP measures are useful to investors as they exclude: 1) share-based
compensation expenses, 2) amortization of intangible assets, 3) acquisition-related consideration fair value adjustments and 4) fair value adjustments
of a bifurcated derivative. All of above will not result in any cash inflows or outflows. We believe that using non-GAAP measures help our
shareholders have a better understanding of our operating results and growth prospects. In addition, given the business nature of Hollysys, it has
been a common practice for investors and analysts to use such non-GAAP measures to evaluate the Company. Specifically, the non-GAAP
measures excluded the following items:
1) Share-based compensation expenses, which are calculated based on the number of shares or options granted and the fair value as of grant date.
2) Amortization of intangible assets, which is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the identifiable
definite-lived intangible assets of the acquired company, such as customer relationships and order backlog, are valued and amortized over their
estimated lives. Value is also assigned to the acquired indefinite-lived intangible assets, which comprise goodwill that are not subject to
amortization.
3) Acquisition-related consideration fair value adjustments are accounting adjustments to report contingent share consideration liabilities at fair
value and cash consideration at present value. These adjustments can be highly variable and are excluded from our assessment of performance
because they are considered non-operational in nature and, therefore, are not indicative of current or future performance or ongoing costs of doing
business.
4) Fair value adjustments of a bifurcated derivative are accounting adjustments to report the change of fair value of the feature bifurcated as a
derivative from the underlying host instrument of a convertible bond, and accounted for as a liability at its fair value.
7
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The following table provides a reconciliation of U.S. GAAP measures to the non-GAAP measures for the periods indicated:
(In USD thousands, except share numbers and per share data)
Cost of integrated contracts
Less: Amortization of intangible assets
Non-GAAP cost of integrated contracts
G&A expenses
Less: Share-based compensation expenses
Non-GAAP G&A expenses
Other income (expenses), net
Add: Acquisition-related incentive share contingent consideration
fair value adjustments
Add: Fair value adjustments of a bifurcated derivative
Non-GAAP other income, net
Interest expenses
Add: Acquisition-related cash consideration adjustments
Non-GAAP interest expenses
Net income attributable to Hollysys
Add: Share-based compensation expenses
Amortization of intangible assets
Acquisition-related consideration fair value adjustments
Fair value adjustments of a bifurcated derivative
Non-GAAP net income attributable to Hollysys
Weighted average number of ordinary shares outstanding used in
computation:
Basic
Diluted
Non-GAAP earnings per share:
Basic
Diluted
Exchange Rate Information
2013
218,586
2,848
215,738
29,648
1,599
28,049
80
855
-
935
(2,170)
308
(1,862)
51,994
1,599
2,848
1,163
-
57,605
Years ended June 30,
2015
300,332
4,454
295,878
2014
330,039
5,413
324,626
2016
310,545
818
309,727
2017
277,476
581
276,895
39,716
2,986
36,730
(6,452)
7,989
-
1,537
(1,998)
931
(1,067)
69,620
2,986
5,413
8,920
-
86,939
50,786
2,492
48,294
2,601
(368)
35
2,268
(1,821)
202
(1,619)
96,527
2,492
4,454
(166)
35
103,342
45,832
3,860
41,972
4,061
(1,745)
93
2,409
(1,404)
-
(1,404)
118,471
3,860
818
(1,745)
93
121,497
44,297
464
43,833
1,722
-
89
1,811
(938)
-
(938)
68,944
464
581
-
89
70,078
56,167,592
56,412,469
57,926,333
58,426,642
58,612,596
60,134,203
59,170,050
60,611,456
60,189,004
61,011,510
1.03
1.02
1.50
1.49
1.76
1.72
2.05
2.02
1.16
1.16
A majority of our business is conducted in China. We also operate in Singapore, Malaysia and several other jurisdictions in Asia and Middle East
through HAP, Concord Group, and Bond Group. We use US dollars as our reporting currency in our financial statements in this annual report. For
entities whose functional currencies are not US dollars, assets and liabilities are translated into US dollars at the balance sheet date rates; equity
accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year as
published by the International Monetary Fund. Translation adjustments are reported as cumulative translation adjustments and are shown as a
separate component of other comprehensive income in the consolidated statement of comprehensive income and changes in equity. Transactions and
amounts in other parts of this annual report in foreign currencies recorded at the rates of exchange prevailing when the transactions occurred. With
respect to amounts not recorded in our consolidated financial statements but included elsewhere in this annual report, all conversion between RMB
and US dollars were made at a rate of RMB 6.7875 to $1.00, and all conversion between Singapore dollars and US dollars were made at a rate of
SGD 1.3872 to $1.00, as set forth by the International Monetary Fund. We make no representation of any kind that RMB, Singapore dollar, US
dollar or any other currency referenced in this report could have been, or could be, converted into the other stated currencies at the rates stated
below, any particular rate, or at all. The Chinese government imposes control over its foreign-currency reserves through both direct regulation
concerns conversion of RMB into foreign exchange and through restrictions on foreign trade. On September 18, 2017, the closing rate for using
RMB and SGD to buy $1.00 was 6.5565 and 1.3440 respectively, as set forth by the International Monetary Fund.
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The following table sets forth information concerning exchange rates between the RMB, Singapore dollars and the US dollar for the periods
indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report on Form
20-F or will use in the preparation of our periodic reports or any other information to be provided to you.
Period
Calendar year 2012
Calendar year 2013
Calendar year 2014
Calendar year 2015
Calendar year 2016
January 2017
February 2017
March 2017
April 2017
May 2017
June 2017
July 2017
August 2017
September 18, 2017
Exchange Rate between RMB and US$
Exchange Rate between SGD and US$
Period End
6.2301
6.0537
6.2046
6.4778
6.9430
6.8768
6.8665
6.8832
6.8900
6.8098
6.7793
6.7240
6.5888
6.5565
Average
6.2990
6.1478
6.1620
6.2827
6.6400
6.8907
6.8694
6.8940
6.8876
6.8843
6.8066
6.7694
6.6670
6.5289
Low
6.2221
6.0537
6.0402
6.1870
6.4480
6.8360
6.8517
6.8687
6.8778
6.8098
6.7793
6.7240
6.5888
6.4483
High
6.3879
6.2438
6.2591
6.4896
6.9580
6.9575
6.8821
6.9132
6.8988
6.9060
6.8382
6.8039
6.7272
6.5769
Period End Average
1.2492
1.2511
1.2665
1.3746
1.3800
1.4276
1.4137
1.4049
1.3983
1.3951
1.3834
1.3707
1.3608
1.3470
1.2214
1.2622
1.3244
1.4166
1.4465
1.4095
1.3990
1.3967
1.3970
1.3833
1.3765
1.3559
1.3565
1.3440
Low
1.2973
1.2203
1.2376
1.3171
1.3366
1.4095
1.3990
1.3926
1.3927
1.3816
1.3718
1.3559
1.3520
1.3370
High
1.2159
1.2831
1.3244
1.4337
1.4522
1.4498
1.4235
1.4192
1.4045
1.4112
1.3912
1.3850
1.3676
1.3551
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
An investment in our capital stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the
other information included in this annual report, before making an investment decision. If any of the following risks actually occurs, our business,
prospects, financial condition or results of operations could suffer. In that case, the trading price of our capital stock could decline, and you may
lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We commit substantial resources to new product and service development and acquisition opportunities in order to stay competitive and grow
our business, and we may fail to offset the increased cost of such investment with a sufficient increase in net sales or margins.
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The success of our business depends in great measure on our ability to keep pace with, or even lead, changes that occur in our industry and expand
our product and service offerings. Traditionally, the automation and control systems business was relatively stable and slow moving. Successive
generations of products offered only marginal improvements in terms of functionality and reliability. However, the emergence of computers,
computer networks and electronic components as key elements of the systems that we design and build has accelerated the pace of change in our
industry. Where there was formerly as much as a decade or more between successive generations of automation systems, the time between
generations is now as little as two to three years. Technological advances and the introduction of new products, new designs and new manufacturing
techniques by our competitors could adversely affect our business unless we are able to respond with similar advances. To remain competitive, we
must continue to incur significant costs in product development, equipment and facilities and to make capital investments and seek complementary
acquisitions. These costs may increase, resulting in greater fixed costs and operating expenses than we have incurred to date. As a result, we could
be required to expend substantial funds for and commit significant resources to the following:
(cid:120)
Research and development activities on existing and potential product solutions;
(cid:120) Additional engineering and other technical personnel;
(cid:120) Advanced design, production and test equipment;
(cid:120) Manufacturing services that meet changing customer needs;
(cid:120)
(cid:120)
Technological changes in manufacturing processes;
Expansion of manufacturing capacity; and
(cid:120) Acquiring technology through licensing and acquisitions.
Our future operating results will depend to a significant extent on our ability to continue providing new product and service solutions that compare
favorably on the basis of time to market, cost and performance, with competing third-party suppliers and technologies. However, we may develop
new products and services that do not gain market acceptance, which would result in the failure to recover the significant costs for design and
manufacturing for new product solutions or service development, thus adversely affecting operating results.
We may experience trade barriers in expanding to our targeted emerging markets and may be subject to tariffs and taxes that will result in
significant additional costs for our business and products.
We may experience barriers to conducting business and trade in our planned expansion to emerging markets. These barriers may be in the form of
delayed customs clearances, customs duties or tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from
local currency into foreign currency, substantial taxes of profits, revenues, assets and payroll, as well as value-added tax. The markets into which we
may expand may impose onerous and unpredictable duties, tariffs and taxes on our business and products. These barriers or expenses could have an
adverse effect on our operations and financial results.
To the extent we acquire businesses and technologies from others, we will need to integrate these into our business, which if not successful will
adversely impact our business and increase our financial expenses.
One important aspect of our expansion has been and will be the use of acquisitions, which may include acquiring an operating business or specific
assets. Examples of this strategy have been the acquisitions of Concord Group in 2011 and Bond Group in 2013. As with any acquisition, we will
have to integrate the business with our operations so as to achieve the value of our investment. Accommodating different business cultures,
operating systems and product lines, as well as understanding and implementing different regulatory issues, often takes time and can result in
unexpected expenses. Acquisitions are not always successful, resulting in unintended expenses and write-downs. Any failure to smoothly integrate
acquired businesses and technologies may adversely affect our business operations.
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As we expand our business outside of mainland China, we will encounter the increasing need for international certifications and compliance
with the regulation of different governments, which if not obtained and complied with may adversely impact our business.
We are expanding our business outside of mainland China, including seeking business opportunities in Hong Kong SAR, Singapore, Malaysia,
India, and the Middle East. For our marketing both in China and in other jurisdictions, we seek international certifications and have obtained
certificates such as the European Safety Standard Certification Level 4. As we operate in jurisdictions other than China, we will have to comply with
local laws, some of which relate to various safety and quality requirements for the kinds of products we provide. The failure to have any necessary
or beneficial certifications and the failure to comply with local laws will have an adverse impact on our marketing and business, and may result in
additional costs and expenses.
During our expansion into overseas market, a lack of qualified local engineers and the inability to relocate enough China’s experienced
engineers to overseas could delay our international projects’ execution and lose potential business opportunities.
In our international business expansion to Southeast Asia, India and the Middle East, we may not be able to find adequate and qualified local
engineers to bid and complete sizable rail transportation orders and industrial automation projects, and because of the visa problems, we may have
difficulties to relocate adequate engineers from China to various foreign countries and have them stay there long enough to finish the projects, which
could cause adverse impact on our international business expansion.
We do not have long-term purchase commitments from our customers, so our customers are free to choose products from our competitors,
which increases our marketing expenses to continually find new clients and win new contracts.
We are engaged in the design, production and installation of automation and process control systems. As a result, our revenues result from
numerous individual contracts that are nonrecurring in nature. Furthermore, customers may change or delay or terminate orders for products and
services without notice for any reasons unrelated to us, including lack of market acceptance for the products to be produced by the process that our
system was designed to control. As a result, in order to maintain and expand our business, we must expend increasing amounts on marketing to
identify clients and win contracts so as to be able to replenish the orders in our pipeline on a continuous basis. Increased marketing expenses and the
inability to continue with current contracts or win new sources of revenue could result in a decline in revenues and profitability.
Although we do not have a concentration of business with any customer at this time, our business has become more dependent on a few
significant customers.
We have developed significant customer relationships with several local subway providers and railway authorities in respect of the high speed train
system in China. We currently also have significant contracts with the MTR Corporation Ltd. of Hong Kong, Land Transport Authority of
Singapore, and Mitsubishi Heavy Industries, Ltd. Qatar Branch. We expect that these relationships will continue to grow, and we will win more
contracts with them over time. To the extent that these customer groups or specific customers with a group represent an increasing proportion of our
business, we will become more dependent on them for our revenues and business growth. In that case, our cash flows also will become more
dependent on those customers’ payment practices and overall public funding policies, including the lengthening of collection times under contracts
that have been performed. Therefore, the loss of one or more of these customers or market groups as customers would have a material adverse
impact on our revenues and our business operations and development.
We have a backlog of contracts, the execution of unfinished contracts in the backlog may be lengthened due to various external reasons, and the
increase of backlog may not necessarily reflect our business expansion.
To date, our backlog has been a reflection of our ability to sell our products and services and increase our business. This represents an amount of
unrealized revenue to be earned from contracts secured by the Company. Backlog, however, can also reflect upon our inability to perform our
contracts on a timely basis. Therefore, when evaluating our backlog, analysis should be made as to whether or not it is a reflection of an expanding
business, successful marketing and increasing acceptance of our products and services in the marketplace or problems in our contract performance
and acceptance.
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A lack of adequate engineering resources could cause our business to have diminished profitability and lose potential business prospects.
Among the competitive advantages and key business advantages that we enjoy are the plentiful supply of engineering talent in China and the
comparatively lower cost of our engineering staff compared to those of our Western and Japan-based competitors. Recently, however, our costs for
these persons have been subject to increased wage pressures due to the economic growth of China and certain inflationary pressures and additional
employment related taxation. If the available supply of engineers were to be absorbed by competing demands, or otherwise not as plentiful as we
have experienced to date, then the costs of hiring, training and retaining capable engineers would likely increase. If we are unable to pass any
additional costs through to our customers, this could result in a reduction in our profitability, and the inability to have qualified and trained persons
could adversely affect our business prospects or could even cause a change in our business strategy.
Our products may contain design or manufacturing defects, which could result in reduced demand for our products or services, customer claims
and uninsured liabilities.
Our products are very complex, integrated systems, often with elements designed specifically for the particular situation of a customer, which may
have undetected design or manufacturing issues or defects until put into actual use. Also, we manufacture spare parts for maintenance and
replacement purposes after completion of integrated solution contracts. While there have been no significant issues or defects identified so far, any
issues or defects in the design, manufacture and spare parts we provide may result in returns, claims, delayed shipments to customers or reduced or
cancelled customer orders and other forms of damages asserted against the Company. If these issues or defects occur, we will incur additional costs,
and if they occur in large quantity or frequency, we may sustain a permanent increase in costs, a loss of business reputation and legal
liability. Moreover, we are increasingly active in the conventional and nuclear power generation and railway control systems sectors. Each of these
sectors poses a substantially higher risk of liability in the event of a system failure, than was present in the industrial process controls markets in
which we traditionally compete.
We generally do not carry large amounts of insurance, and in the future we may not be able to obtain adequate insurance coverage. The typical
practice of the industries with which we are involved is for the customers to obtain insurance to protect their own operational risks. As a practice, we
do not carry insurance coverage to protect against the risks related to product failure. It is possible that customers could assert claims against us for
any damages caused by a failure in one of our systems, and as a result, the failure of any of our designs, manufacture and installation of our products
could result in a liability that would seriously impair our financial condition or even force us out of business.
Our failure to adequately protect our intellectual property rights may undermine our competitive position, and litigation to protect our
intellectual property rights may be costly.
Our business is based on a number of proprietary products and systems, some of which are patented and others of which we protect as trade
secrets. We strive to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements. As a
result, we believe that the protection of our intellectual property will become increasingly important to our business as the functionality of
automation systems increases to meet customer demand and as we try to open new markets for our products.
Currently, we hold PRC utility patents that relate to various product configurations and product components and software copyrights and have
pending PRC patent applications. We will continue to rely on a combination of patents, trade secrets, trademarks and copyrights to provide
protection in this regard, but this protection may be inadequate.
Our pending or future patent applications may not be approved or, if allowed, they may not be of sufficient strength or scope. As a result, third
parties may use the technologies and proprietary processes that we have developed and compete with us, which could negatively affect any
competitive advantage we enjoy, dilute our brand and harm our operating results.
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In addition, policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our
intellectual property rights. Protection of intellectual property and proprietary rights in China may not be as effective as in other countries. Given the
fact that the majority of our intellectual property rights are in China and under Chinese law, the relative unpredictability of China’s legal system and
potential difficulties of enforcing a court judgment in China may result in an outcome that is unfavorable to us when we assert intellectual property
ownership in a particular situation. Furthermore, any litigation may be costly and may divert management attention away from our business
operations. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation
and result in additional expense for penalties, licensing and redesign. We have no insurance coverage against litigation costs so we would be forced
to bear all litigation costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial condition.
As we are going to sell more of our proprietarily developed products and systems to foreign countries, we may not continue to have the protection of
our patents and software copyright in foreign countries for some of our proprietary products, which could negatively impact our competitive
position and our business expansion in overseas.
The Company’s goodwill outstanding as of June 30, 2017 was assessed to be impaired by $11.2 million, it may be further impaired in the future
depending on the future market development and the outcome of the operating in Singapore, Malaysia and the Middle East.
The goodwill outstanding as of June 30, 2017 was related to the acquisition of Concord Group in 2011 and Bond Group in 2013. Based on our
quantitative assessment, the goodwill related to Concord Group acquisition was impaired by $11.2 million as of June 30, 2017. The fair value of
Concord Group is highly dependent on the future market development and the outcome of the operating in Singapore, Malaysia and the Middle
East. Slowing down in mechanical and electrical engineering sector, or fewer than expected contract awards to Concord Group may result in further
goodwill impairment in the future.
We performed a qualitative and the two-step assessment for Bond Group in 2017 and evaluated all relevant factors, weighed all factors in their
entirety and concluded that no impairment charge for Bond Group was needed as of June 30, 2017.
RISKS RELATED TO THE INDUSTRY IN WHICH WE OPERATE
The Company mainly operates in the industrial and manufacturing automation sectors, the high-speed rail, subway and nuclear power
automation sectors; in some industry verticals within the industrial automation sector, we may experience the inconstant growth rate from time
to time, which may present variation of business opportunities; the contracts for high-speed rail, subway and nuclear power are substantially
larger which may result in a greater dependence on a particular customer or business sector, and could cause significant fluctuations in our
revenues.
The principal focus of our business has been to provide Distributed Control Systems, Programmable Logic Controller and related industrial
automation and control solution to industrial and manufacturing companies. Even though there are enormous opportunities in the industrial
automation arena, some industry verticals may experience slower growth or decreased growth that will provide us with fewer opportunities and
contract awards from the industry and manufacturing sectors. Both high-speed rail and nuclear power sectors have one or few customers and are
closely related to the national development policies, and the contract size for these two sectors is usually much larger, and as a result, there could be
severe fluctuation of these sectors’ growth, which may affect our business and revenues.
Although China is committed to expanding its energy production with nuclear power and building a high speed railway network, both these
industries have experienced various setbacks due to higher than expected accidents for various reasons several years ago. The future growth rate of
these two sectors may not be as fast as the market previously expected but on a more sustainable and safer basis, thus we will, likely experience
slower annual growth or possibly even a reduction in these sectors’ revenues.
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International business recently has expands to Southeast Asia and the Middle East area. Projects awarded in these areas may be exposed to potential
delay in construction progress due to political reasons.
To the extent that our business is more dependent on large contracts and contracts from a few customers, our revenues, cash flows and profits
will be influenced by this type of contracting and the timely payment for our products and services.
As we develop our business with the entities responsible for building municipal subway systems and railroads, power plants and larger system
contract customers, such as building retrofits, we will be entering into contracts for larger sized projects than in the past, which will be for
significantly greater contract value. These contracts will require us to commit greater operating resources to a more limited number of customers
and contract fulfillment. Therefore, our revenues, cash flows and profits will become increasingly dependent on our ability to perform these
contracts and collect the payments due on a timely basis. Some of the entities ultimately responsible for the funding of infrastructure projects are
governmental authorities or ministries, our contract requirements and collections will become subject to these entities being able to adequately
budget and have the revenues to timely pay for our products and services. We expect a long collection period in some of our business. To some
extent, we may become subject to delays and reductions in scope of project due to changes in the policies, objectives and budgeting of any of the
public entities which control the projects on which we are contracting. We will also become increasingly subject to government contract
requirements in the performance of contracts that are ultimately the responsibility of public bodies.
At this time, contracting with the entities that provide the subway and rail systems and power plants for which we provide control systems is similar
to contracting with the customers we have sold to in the past. Therefore, our contracts are written on a similar basis as before, and we expect that we
will be operating under these contracts and accounting for their revenues in a similar manner as before.
Many of our competitors have substantially greater resources than we do, allowing them to compete on an advantageous basis.
We operate in a very competitive environment with many major international and domestic companies, such as Honeywell, General Electric, ABB,
Siemens, Emerson, Yokogawa and Hitachi. Many of our competitors are much better established and more experienced than we are, have
substantially greater financial resources, operate in more international markets and are much more diversified than we are. As a result, they are in a
stronger position to compete effectively with us. These large competitors are also in a better position than we are to weather any extended
weaknesses in the market for automation and control systems. Other emerging companies or companies in related industries may also increase their
participation in our market, which would add to the competitive pressures that we face.
A decrease in the rate of growth in China’s industrial activity and the Chinese economy in general may lead to a slower growth or decrease in
our revenues because industrial companies in China are significant sources of revenues for us.
Industrial companies operating in China are significant sources of revenues for us. Our business benefited in the past from the rapid expansion of
China’s industrial activity, which has created additional demand from existing companies and led to the formation of numerous additional
companies that have need for our products and services. We have also benefited from the infrastructure projects of the different governmental
authorities of China, such as power production and transportation systems. China’s industrial and infrastructure expansion has been fueled in large
measure by international demand for the low-cost goods that China is able to produce due to labor advantages and other comparative advantages,
such as governmental subsidies to offset research and development expenses and taxes and reduced land use/facilities costs for targeted
industries. The failure of Chinese economy to sustain this rate of growth in the future and any reduction in the rate of China’s industrial growth or a
shrinking of China’s industrial base could adversely affect our revenues. We may also be impacted as major infrastructure projects are
completed. The resulting increase in competition for customers might also cause erosion of profit margins that we have been able to achieve
historically.
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Our efforts to operate in the international automation market may not prove successful, and we may expend capital resources without achieving
value and needlessly divert management’s time and attention from our principal market.
We are penetrating international markets, emphasizing Southeast Asia, India, and the Middle East with the objective of diversifying our products,
clients and places of operations and growing our overall business. Our expansion is likely to use substantial resources, including substantial amounts
of capital and equity and deploy meaningful amounts of management time and attention. Our products and our overall approach to the automation
and controls system business may not be accepted in other markets to the extent needed to make that effort profitable. In addition, the additional
demands on our management from these activities may detract from our efforts in the domestic Chinese market and market of surrounding
countries, causing the operating results in our principal markets to be adversely affected.
We depend heavily on key personnel, and loss of key employees and senior management could harm our business.
Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior
management personnel. The Company also depends in significant part upon its ability to attract and retain additional qualified senior executives and
management, technical, marketing and sales and support personnel for our operations. If we lose a key employee, 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. Turnover in our senior
management could significantly deplete institutional knowledge held by our existing senior management team and impair our operations.
In addition, if any of these key personnel joins a competitor or forms a competing company, we may lose some of our customers. We have entered
into confidentiality and non-competition agreements with key personnel. However, if any disputes arise between these key personnel and us, it is not
clear, in light of uncertainties associated with the PRC legal system, what the court decisions will be and the extent to which these court decisions
could be enforced in China, where all of these key personnel reside and hold some of their assets.
Our control systems are used in infrastructure projects such as subway systems, surface railways and nuclear plants; to the extent that our
systems do not perform as designed, we could be found responsible for the damage resulting from that failure.
We face potential responsibility for the failure of our control systems in performing the various functions for which they are designed and the
damages resulting from any such problem. To the extent that we contract to provide control systems in larger scale projects, the level of damages for
which we may be held responsible is likely to increase. To the extent that any of our installed control systems do not perform as designed for their
intended purposes, and we are held responsible for the consequences of those performance failures and resulting damages, there may be an adverse
impact on our business, business reputation, revenues and profits. We do believe our control systems have so far performed as designed, and there
are no claims asserted against us based on any significant, non-performance event. Notwithstanding our record, no assurance can be given that no
claims will be sought in the future based on the design and performance of our control systems.
We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those controls positively
attested to by our independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of
management on the Company’s internal controls over financial reporting in their annual reports and the independent registered public accounting
firm auditing a company’s financial statements to attest to and report on the operating effectiveness of such company’s internal controls. No
material weakness has been identified as of June 30, 2017. In the event we identify material weaknesses in our internal controls that we cannot
remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls,
investors and others may lose confidence in the reliability of our financial statements.
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Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by the
Public Company Accounting Oversight Board, and as such, investors may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual report filed with the SEC, as an auditor of
companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States),
or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of
the United States and professional standards. Because our auditor is located in China, a jurisdiction where the PCAOB is currently unable to conduct
inspections without the approval of the PRC authorities like other independent registered public accounting firms operating in China, is currently
not inspected by the PCAOB. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement
Cooperation with the China Securities Regulatory Commission (“CSRC”) and the Ministry of Finance, which establishes a cooperative framework
between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC, or the
Ministry of Finance in China and the Department of the Treasury in the United States respectively. PCAOB continues to be in discussions with the
CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese
companies that trade on U.S. exchanges.
Inspections of other firms that the PCAOB has conducted have identified deficiencies in those firms’ audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct
inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our
auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of the PCAOB inspections.
Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could
result in financial statements being determined to be not in compliance with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting
firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules
and regulations there under by failing to provide to the SEC the firms’ work papers related to their audits of certain PRC-based companies that are
publicly traded in the United States. Rule 102(e)(1)(iii) grants to the SEC the authority to deny to any person, temporarily or permanently, the ability
to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated, or willfully aided and
abetted the violation of, any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, sanctioning
four of these accounting firms and suspending them from practicing before the SEC for a period of six months. The sanction will not take effect
until there is an order of effectiveness issued by the SEC. In February 2014, four of these PRC-based accounting firms filed a petition for review of
the initial decision. In February 2015, each of these four accounting firms agreed to a censure and to pay fine to the SEC to settle the dispute with
the SEC. The settlement stays the current proceeding for four years, during which time the firms are required to follow detailed procedures to seek
to provide the SEC with access to Chinese firms' audit documents via the CSRC. If a firm does not follow the procedures, the SEC would impose
penalties such as suspensions, or commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the
administrative proceeding against all four firms.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with
major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial
statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any
negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed
companies and the market price of our ordinary shares may be adversely affected.
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If our independent registered public accounting firm were denied, temporarily or permanently, the ability to practice before the SEC, and we are
unable to find in a timely manner another registered public accounting firm which can audit and issue a report on our financial statements, our
financial statements could be determined to not be in compliance with the requirements for financial statements of public companies with a class of
securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately lead to the
SEC’s revocation of the registration of our ordinary shares under the Exchange Act, which would cause the immediate delisting of our ordinary
shares from the NASDAQ Global Select Market, and the effective termination of the trading market for our ordinary shares in the United States,
which would likely have a significant adverse effect on the value of our ordinary shares.
RISKS RELATED 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.
We conduct a substantial portion of our business in China. Accordingly, our results of operations, financial condition and prospects are significantly
dependent on economic and political developments in China. China’s 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’s
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’s 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 its business and results of operations.
The PRC government exercises significant control 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 and the United States, Europe and other economies went 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 of 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.”
If the CSRC, or another PRC regulatory agency, determines that CSRC approval of our initial merger was required or if other regulatory
obligations are imposed upon us, we may incur sanctions, penalties or additional costs which would damage our business.
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulations on Mergers and Acquisitions of Domestic
Companies by Foreign Investors, or the M&A Regulations, which became effective on September 8, 2006. Under these regulations, the prior
approval of the CSRC is required for the overseas listing of offshore special purpose vehicles that are directly or indirectly controlled by PRC
companies or individuals and used for the purpose of listing PRC onshore interests on an overseas stock exchange.
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On September 20, 2007, we completed a merger transaction with Chardan North China Acquisition Corporation, or Chardan, which resulted in our
current ownership and corporate structure. We believe that CSRC approval was not required for our merger transaction or for the listing and trading
of our securities on a trading market because we are not an offshore special purpose vehicle that is directly or indirectly controlled by PRC
companies or individuals. Although the M&A Regulations provide specific requirements and procedures, there are still many ambiguities in the
meaning of many provisions. Further regulations are anticipated in the future, but until there has been clarification either by pronouncements,
regulation or practice, there is some uncertainty in the scope of the regulations and the regulators have wide latitude in the enforcement of the
regulations and approval of transactions. If the CSRC or another PRC regulatory agency subsequently determines that the CSRC’s approval was
required, we may face sanctions by the CSRC or another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and
penalties on our operations in China, limit our operating privileges in China, restrict or prohibit payment or remittance of dividends paid by
Hollysys, or take other actions that could damage our business, financial condition, results of operations, reputation and prospects, as well as the
trading price of our securities.
Fluctuations in exchange rates could harm our business and the value of our securities.
The value of our securities will be indirectly affected by the foreign exchange rate between US dollars and those currencies in which our sales may
be denominated. Because a large portion of our earnings and cash assets are denominated in RMB, SGD and MYR, and our financial results are
reported in US dollars, fluctuations in the exchange rate between the US dollar and RMB, SGD and MYR will affect our balance sheet and our
earnings per share as stated in US dollars. In addition, appreciation or depreciation in the value of the RMB, SGD and MYR relative to the US
dollar would affect our financial results reported in US 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 US dollars as
well as earnings from, and the value of, any US dollar-denominated investments we make in the future.
As our main functional currency, the RMB has no longer been pegged to the US dollar since July 2005. 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 US 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 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 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.
Exchange controls that exist in the PRC may limit our ability to utilize our cash flow effectively.
We are subject to the PRC’s rules and regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange, or SAFE,
regulates the conversion of the RMB into foreign currencies. Currently, foreign investment enterprises, or FIEs, are required to apply to the SAFE
for “Foreign Exchange Registration Certificates for FIEs.” We believe Helitong is an FIE. With such registration certificates, which need to be
renewed annually, FIEs are allowed to open foreign currency accounts including a “basic account” and “capital account.” Currency conversion
within the scope of the “basic account,” such as remittance of foreign currencies for payment of dividends, can be effected without requiring the
approval of the SAFE. However, conversion of currency in the “capital account,” including capital items such as direct investment, loans and
securities, still require approval of the SAFE. We cannot assure you that the PRC regulatory authorities will not impose further restrictions on the
convertibility of the RMB. Any future restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends
to our shareholders or to fund operations it may have outside of the PRC.
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 -0.7%. These factors have led to the adoption by the Chinese government, from
time to time, of 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.
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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial
owners or our company to liabilities or penalties, limit our ability to contribute capital to our PRC subsidiaries, limit the ability of our PRC
subsidiaries to increase their registered capital or distribute profits to us, or otherwise materially and adversely affect us.
On July 14, 2014, the SAFE issued the Circular Relating to Foreign Exchange Administration of Offshore Investment, Financing and Roundtrip
Investment by Domestic Residents through Special Purpose Vehicles, or Circular 37. Circular 37 repeals and replaces the Notice Concerning
Foreign Exchange Controls on Domestic Residents’ Financing and Roundtrip Investment through Offshore Special Purpose Vehicles, or Circular
75. Under Circular 37, PRC residents are required to register with the SAFE or its local branches prior to establishing, or acquiring control of, an
offshore company for the purpose of investment or financing that offshore company with equity interests in, or assets of, a PRC enterprise or with
offshore equity interest or assets legally held by such PRC resident. In addition, PRC residents are required to amend their registrations with the
SAFE and its local branches to reflect any material changes with respect to such PRC resident’s investment in such offshore company, including
changes to basic information of such PRC resident, increase or decrease in capital, share transfer or share swap, merger or division. In the event that
a PRC shareholder fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that offshore special
purpose vehicle may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their
offshore parent company, and the offshore parent company may also be prohibited from contributing additional capital into its PRC subsidiaries.
Furthermore, failure to comply with the various foreign exchange registration requirements described above could result in liability under the PRC
laws for evasion of applicable foreign exchange restrictions.
We do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE
regulations. The failure of our beneficial owners who are PRC residents to comply with these SAFE registrations may subject such beneficial
owners or our PRC subsidiaries to fines and legal sanctions. Furthermore, since Circular 37 was recently promulgated and it is unclear how this
regulation, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant
PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure to register or
comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries and limit our PRC subsidiaries’
ability to distribute dividends to our company. These risks may have a material adverse effect on our business, financial condition and results of
operations.
Because Chinese law governs many of our material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which
could result in a significant loss of business, business opportunities or capital.
Chinese law governs many of our material agreements, some of which may be with Chinese governmental agencies. We cannot assure you that we
will be able to enforce any of our material agreements or that remedies will be available outside of the PRC. The system of laws and the
enforcement of existing laws and contracts in the PRC may not be as certain in implementation and interpretation as in the United States. The
Chinese judiciary is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as to
the outcome of any litigation. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of
business, business opportunities or capital.
If any dividend is declared in the future and paid in a foreign currency, you may be taxed on a larger amount in US dollars than the US dollar
amount that you will actually ultimately receive.
If you are a U.S. holder, you will be taxed on the US dollar value of your dividends at the time you receive them, even if you actually receive a
smaller amount of US dollars when the payment is in fact converted into US dollars. Specifically, if a dividend is declared and paid in a foreign
currency, the amount of the dividend distribution that you must include in your income as a U.S. holder will be the US dollar value of the payments
made in the foreign currency, determined at the conversion rate of the foreign currency to the US dollar on the date the dividend distribution is
includible in your income, regardless of whether the payment is in fact converted into US dollars. Thus, if the value of the foreign currency
decreases before you actually convert the currency into US dollars, you will be taxed on a larger amount in US dollars than the US dollar amount
that you will actually ultimately receive.
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Legal regulations may limit our ability to make dividend payments to our shareholders.
We are a holding company in the BVI. We generally rely on our subsidiaries to provide us with cash flow and to meet our other obligations. For
PRC subsidiaries, relevant PRC laws and regulations permit payment of dividends by a PRC subsidiary only from accumulated distributable profits,
if any, determined in accordance with PRC accounting standards and regulations, and only after setting aside at least 10% of its current year profits
(up to an aggregate amount equal to half of its registered capital). The PRC tax authorities may initiate changes in determining income of our PRC
subsidiaries that would further limit their ability to pay dividends and make other distributions to us. It is therefore possible that our PRC
subsidiaries will not have any distributable profit to pay us, even if they are profitable under U.S. GAAP.
The ability, as well as the decision, to declare dividends will also be influenced by the withholding taxes imposed on payments by companies in one
jurisdiction to a company in another jurisdiction. For example, there is a 10% withholding tax imposed on a PRC company paying dividends to a
company located in the BVI. This will reduce the value of any potential dividend to the ultimate shareholders, and therefore the board may
determine that it would be a more prudent use of funds to reinvest funds that could be available for dividends into the business or acquire other
businesses and assets.
Based on the articles of association and the Companies Act in Singapore and Malaysia, no dividend shall be payable except out of the profits of the
companies. There is no limit to the number of dividend payable as long as there are sufficient profits. There is no withholding tax imposed on a
Singapore and Malaysia company paying dividends to a company located outside of Singapore and Malaysia upon remittance.
Our business could be severely harmed if the Chinese government changes its policies, laws, regulations, tax structure or its current
interpretations of its laws, rules and regulations relating to our operations in China.
Our results of operations, financial state of affairs and future growth are, to a significant degree, subject to China’s economic, political and legal
development and related uncertainties. Our operations and results could be materially affected by a number of factors, including, but not limited to
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Changes in policies by the Chinese government resulting in changes in laws or regulations or the interpretation of laws or regulations,
Changes in taxation,
Changes in employment restrictions,
Restrictions on imports and sources of supply,
Import duties, and
Currency revaluation.
Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic
activities and greater economic decentralization. If the Chinese government does not continue to pursue its present policies that encourage foreign
investment and operations in China, or if these policies are either not successful or are significantly altered, then our business could be harmed. The
China government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of
industries or
foreign currency-denominated obligations, setting monetary policy and providing preferential
companies. Continued efforts to increase tax revenues could result in increased taxation expenses being incurred by us. Economic development may
be limited as well by the imposition of austerity measures intended to reduce inflation, the inadequate development of infrastructure and the
potential unavailability of adequate power and water supplies, transportation and communications. In addition, the Chinese government continues to
play a significant role in regulating industry by imposing industrial policies.
to particular
treatment
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The Chinese laws and regulations which govern our current business operations are sometimes vague and uncertain and may be changed in a
way that hurts our business.
China’s legal system is a civil law system based on written statutes, in which system decided legal cases have less value as precedents, unlike the
common law system prevalent in the United States or the BVI. There are substantial uncertainties regarding the interpretation and application of
Chinese laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of
our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese
government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and
trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial
interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties.
New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We are considered an FIE under
Chinese laws, and as a result, we must comply with Chinese laws and regulations. We cannot predict what effect the interpretation of existing or
new Chinese laws or regulations may have on our business. If the relevant authorities find us to be in violation of Chinese laws or regulations, they
would have broad discretion in dealing with such a violation, including, without limitation: levying fines; revoking our business and other licenses;
requiring that we restructure our ownership or operations; and requiring that we discontinue any portion or all of our business.
The implementation of PRC employment law is likely to result in increased labor costs in China, which may affect our business and profitability.
The Labor Contract Law, which became effective on January 1, 2008, imposes on employers’ requirements to enter into fixed-term employment
contracts, and effects the recruitment of temporary employees and dismissal of employees. In addition, under the Regulations on Paid Annual Leave
for Employees, which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to
paid vacation time ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such vacation entitlements
at the request of the employer will be compensated for three times their normal daily salaries for each vacation day so waived. On July 1, 2011,
China promulgated the Social Insurance Law to unify pervious scattered laws relating to social insurance matters. The law clarifies that the social
insurance system in China includes pension insurance, medical insurance, unemployment insurance, work-related injury insurance and maternity
insurance, all of which are mandatory benefits for employees of companies operating in China. Employers are required to make contributions under
these insurance schemes, which although local in rates, are overall expected to increase employee expense over time. There is no assurance that
disputes, work stoppages or strikes will not arise in the future over these and other matters. Increases in the labor costs or future disputes with our
employees could damage our business, financial condition or operating results.
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 of substance-over-form should be applied and
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 such company by equity or
asset acquisition, capital increase or even through any contractual arrangement.
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 which 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.”
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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, which 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 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, SAT Announcement 7 could be determined by PRC tax
authorities to be applicable to the historical reorganization, and it is possible that these transactions could be determined by PRC tax authorities to
lack 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, and PRC tax authorities could impose tax obligations on the transferring
shareholders or subject us to penalty if the transferring shareholders do not pay such obligations and withhold such tax.
SAT Announcement 7 and its interpretation by relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers of
shares in a publicly-traded entity that is listed overseas is available if the purchase of the shares and the sale of the shares both take place in 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.
Under the EIT 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 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 pursuant to Criteria of de facto Management Bodies, or the Notice,
further interpreting 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 are 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
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 guidance with respect to the processing of outbound remittances to entities that are treated as
resident enterprises for 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.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we
violated these laws could have a material 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, 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 the employees, consultants, sales agents, or distributors of our Company may engage in conduct 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 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
Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to
expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and
could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public 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 on financial and accounting
irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of
adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of
many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has 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 what effect 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 defend our company. This situation will be costly and time consuming and distract our management
from growing our company.
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The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any
regulatory bodies in the PRC. Accordingly, our public disclosure 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.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations
promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily
in the United States, however, substantially most of our operations are located in China. Since substantially all of our operations and business takes
place in China, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing
our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the
United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC
regulatory authority. For example, the disclosure 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.
RISKS RELATED TO OUR SHARES
The market price of our ordinary shares is 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 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:
(cid:120) our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations
of financial market analysts and investors;
(cid:120) changes in financial estimates by us or by any securities analysts who might cover our stock;
(cid:120) speculation about our business in the press or the investment community;
(cid:120) significant developments relating to our relationships with our customers or suppliers;
(cid:120) stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the same industry as we are;
(cid:120) customer demand for our products;
(cid:120) investor perceptions of the automation and control industry in general and our company in particular;
(cid:120) the operating and stock performance of comparable companies;
(cid:120) general economic conditions and trends;
(cid:120) major catastrophic events;
(cid:120) announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
(cid:120) changes in accounting standards, policies, guidance, interpretation or principles;
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(cid:120) loss of external funding sources;
(cid:120) failure to maintain compliance with NASDAQ rules;
(cid:120) sales of our ordinary shares, including sales by our directors, officers or significant shareholders; and
(cid:120) additions or departures of key personnel.
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 our management’s attention 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.
We are a “foreign private issuer,” and have disclosure obligations that are different than those of other U.S. domestic reporting companies so
you should not expect to receive the same information about us at the same time as a U.S. domestic reporting company may provide.
Furthermore, if we lose our status as a foreign private issuer, we would 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 we
would not incur as a foreign private issuer.
We are a foreign private issuer and, 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 to issue quarterly reports or proxy statements. Also, we are allowed four months to file our annual report with the
SEC. We are 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 and transactions in our equity 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 other U.S. domestic reporting companies, our shareholders should not expect to receive
information about us in the same amount and at the same time as information is received from, or provided by, other 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.
The payment of cash dividends depends on the decision of the Board of Directors and the cash and legal requirements of our company.
The Board of Directors decides if and when the Company will pay cash dividends. On August 11, 2016, the Board of Directors approved a regular
cash dividend policy pursuant to which future cash dividends are expected to be paid to holders of the Company’s ordinary shares on an annual
basis out of funds legally available for such purpose. However, the declaration and payment of future dividends will be at the discretion of the
Board, and will depend upon many factors, including the Company’s financial condition, earnings, capital requirements of its businesses, legal
requirements, regulatory constraints, industry practice, and other factors that the Board deems relevant.
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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 our shares and make obtaining future debt or equity financing more difficult for us.
Our ordinary shares are traded and listed on the Nasdaq Global Select Market under the symbol “HOLI.” The ordinary shares may be delisted if we
fail to maintain certain listing requirements of the Nasdaq Stock Market, or NASDAQ.
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 NASDAQ
Capital Market, our shares would likely trade in the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our
shares could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security
analysts’ coverage of us may be reduced. In addition, in the event our shares are delisted, broker-dealers have certain regulatory burdens imposed
upon them, which may discourage broker-dealers from effecting transactions in our shares, 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.
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 afford 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 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:
(cid:120) have a majority of the board be independent (although all of the members of the audit committee must be independent under the U.S.
Securities Exchange Act of 1934, as amended, or the Exchange Act);
(cid:120) have a compensation committee and a nominating committee to be comprised solely of "independent directors; and
(cid:120) hold an annual meeting of shareholders no later than one year after the end of the Company’s fiscal year-end.
As discussed elsewhere in this Annual Report, we have relied on and intend to continue to rely on some of these exemptions. As a result, our
shareholders may not be provided with the benefits of certain corporate governance requirements of the Nasdaq Stock Market.
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. 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 are 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 in 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 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 person is 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.
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Because we are incorporated under the laws of the BVI, it may be more difficult for our shareholders to protect their rights than it would be for
a shareholder of a corporation incorporated in another jurisdiction.
Our corporate affairs are governed by our memorandum and articles of association, by the BVI Business Companies Act, 2004 (as amended), or the
2004 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 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 action must be taken in good faith, and 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 jurisdictions. In addition, the circumstances in which 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 shareholder approval which would require shareholder approval under the laws of most
United States jurisdictions. The directors of a BVI corporation, subject in certain cases to court approval but without shareholder approval, may
implement a reorganization, merger or consolidation, the sale of any assets, property, part of the business, or securities of the corporation, 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 shareholder 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.
We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequences to
U.S. shareholders.
We believe that we currently are not considered a “passive foreign investment company,” or PFIC, for United States federal income tax
purposes. However, each year we must make a separate determination as to whether we are a PFIC. We cannot assure you that we will not be a
PFIC for our future tax years. If a non-U.S. corporation either (i) has at least 75% of its gross income is passive income for a tax year or (ii) has at
least 50% of the value of its assets (based on an average of the quarterly values of the assets during a tax year) attributable to assets that produce or
are held for the production of passive income, then the non-U.S. corporation will be deemed a PFIC. The market value of our assets may be
determined to a large extent by the market price of our ordinary shares. If we are treated as a PFIC for any tax year during which U.S. shareholders
hold ordinary shares, certain adverse United States federal income tax consequences could apply to such U.S. holders.
Our Shareholder Rights Plan and charter documents may hinder or prevent change of control transactions.
Our shareholder rights plan and provisions contained in our Memorandum and Articles of Association may discourage transactions involving an
actual or potential change in our ownership. In addition, our Memorandum and Articles of Association authorizes our board of directors to issue up
to 90,000,000 shares of preferred stock without any further action by the stockholders. Please see Item 10, Additional Information for more
information regarding our shareholder rights plan. Such restrictions and issuances could make it more difficult, delay, discourage, prevent or make it
more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a
favorable offer is extended and could materially and negatively affect the market price of our ordinary shares, even if you or our other stockholders
believe that such actions are in the best interests of us and our stockholders.
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ITEM 4.
INFORMATION ON THE COMPANY
A. History and Development of the Company
We were established under the laws of the BVI on February 6, 2006, as HLS Systems International, Ltd., in order to merge with Chardan North
China Acquisition Corporation (“Chardan”), a Delaware special purpose acquisition company, originally established on March 10, 2005, with the
primary purpose of effecting a business combination with an unidentified operating business that has its primary operating facilities located in
China, in any city or province north of Yangtze River. On September 20, 2007, we acquired all of the issued and outstanding ordinary shares of
GTH, a BVI company. On August 1, 2008, our ordinary shares started trading on NASDAQ Global Select Market. On July 17, 2009, we changed
our name to Hollysys Automation Technologies Ltd. to more accurately reflect our core value of leveraging proprietary technologies to provide
state-of-the-art automation and control solutions for our clients.
On July 1, 2011, we purchased 100% of the equity of Concord Group for a combination consideration of cash and stock for a total value of
approximately $42.9 million. Concord Group provides electric solutions with end-to-end design, engraving, engineering, procurement, project
management, construction and commissioning, and maintenance, active in the rail industry in Singapore, Qatar, UAE and Saudi Kingdom and the
building retrofit market in Singapore.
On April 1, 2013, we purchased 100% of the equity of Bond Group for a purchase price of approximately US$73 million, payable 50% in cash and
50% in ordinary shares of Hollysys. The stock will be issued to the Bond Group shareholders in three installments over three years, 60% of which
are incentive shares and will be based on certain performance targets for calendar years 2013 and 2014. Additional ordinary shares, as a premium on
performance, will be issuable to the Bond Group shareholders, if Bond Group outperforms the established targets, but the premium will not exceed
15% of the total incentive shares in any case. The operating results of Bond Group have been included in our consolidated financial statements
effective from April 1, 2013. Bond Group provides complete mechanical and electrical solutions with end to end capabilities in design, engineering,
procurement, project management, construction and commissioning, and maintenance to a wide array of industries, including factories, data centers,
banks, hospitals, airports, power stations, gas and instrumentation plants, hotels, commercial centers, residential buildings and infrastructure works.
We seek to take advantage of Bond Group’s strong presence and brand name in Southeast Asia and to strengthen our Southeast Asian business.
On November 24, 2015, the Company established Concord Electrical Contracting, Ltd. (“CECL”) to explore the market in Qatar. CCPL has a 49%
direct ownership of CECL and the remaining 51% equity interest is held by a nominee shareholder. Through a series of contractual arrangements,
CCPL is entitled to appoint majority of directors of CECL who have the power to direct the activities that significantly impact CECL’s economic
performance. Further, CCPL is entitled to 95% of the variable returns from CECL’s operations. As a result, despite of its minority direct ownership
of CECL arrangements, CCPL is considered the primary beneficiary of CECL.
In July 2016, Beijing Hollycon Medicine& Technology. Co., Ltd. (“Hollycon”), previously as one of the Company’s subsidiaries, issued new shares
for an aggregate cash consideration of $30,943 to two new third investors. At the same time, the Company disposed 0.6% of its equity interest in
Hollycon for cash consideration of $464. These two transactions resulted in dilution of the Company’s equity interest in Hollycon from 51% to
30%. According to the revised article of association, Hollycon will be managed by a board of directors comprising of a total 5 members, of which,
the Company can appoint two directors while the other three shareholders can appoint one director each. The Company can also appoint the
chairman of the board. All major management and operation decision need be approved by the board and requires approval by at least 2/3 of board
directors. Profits is allocated to shareholders based on the percentage of respective initial investment. The Company lost control over Hollycon upon
the completion of the two transactions set out above, but maintained significant influence over Hollycon, and accounted for the investment in
Hollycon under equity method. Upon the deconsolidation date, the Company recorded the retained non-controlling equity investee at fair value of
$22,737 and recognized a gain of $14,514. The fair value of retained non-controlling interest in Hollycon was measured using a discounted cash
flow approach. Key estimates and assumptions include the amount and timing of future expected cash flows, terminal value growth rates, and
discount rate.
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B. Business Overview
We are a leading provider of automation and control technologies and products in China and increasingly in Southeast Asia, India and the Middle
East that enable our diversified industry and utility customers to improve operating safety, reliability, and efficiency. Founded in 1993, we have
approximately 3,200 employees with a nationwide China presence and with subsidiaries and offices in Southeast Asia, India and the Middle East.
We serve over approximately 10,000 customers in the industrial, railway, subway, nuclear power, and mechanical and electronic industries in China,
Southeast Asia, India and the Middle East. Our proprietary technologies are applied through our industrial automation solution suite, including the
DCS (Distributed Control System), PLC (Programmable Logic Controller), RMIS (Real-time Management Information System), HAMS (HolliAS
Asset Management System), OTS (Operator Training System), HolliAS BATCH (Batch Application Package), HolliAS APC Suite (Advanced
Process Control Package), SIS (Safety Instrumentation System), high-speed railway signaling system of TCC (Train Control Center), ATP
(Automatic Train Protection), SCADA System (Subway Supervisory and Control platform Data Acquisition), nuclear power non-safety automation
and control system HolliAs-NMS DCS and other products.
We historically focused our efforts on the area of DCS, which are networks of controllers, sensors, actuators and other devices that can be
programmed to control outputs based on input conditions and/or algorithms, which are mainly used to control continuous manufacturing processes.
Our DCS have been widely used in the industries involving continuous flow of material handling, such as power generation, petro-chemical,
chemical, metallurgy, building materials and new energy. We also command a position in Chinese nuclear power automation and control market as
the only qualified local automation and control product provider to the non-safety control for both nuclear island and conventional island of nuclear
power reactors in nuclear power stations.
We have a substantial reputation in the PRC domestic industrial automation industry for our comprehensive capabilities and have focused on the
development of this market. We carry out integrated solution projects for, render automation services to, or sell our products to, national or multi-
provincial companies with subsidiaries located throughout China. To date, we have served more than 10,000 industrial enterprise customers
including state-owned enterprises, multinational corporations and local private companies and have undertaken over 25,000 projects. We believe
that the quality of our systems is unsurpassed by local Chinese competitors and comparable to high-end foreign suppliers of DCS and the history of
our projects supports that view. Some of our renowned customers include BASF, SINOPEC and Shenhua Group, etc.
We are as well a player in the PLC market, where the products are mainly used in discrete control and applied to a wide array of industries. PLCs
are usually integrated together into machines to provide control at machinery level. We have been expanding our proprietary products suite and
gradually shifting ourselves from a single PLC product provider to a total solution provider. As the outlook for intelligent manufacturing and factory
automation stays positive, we believe that such repositioning would enable us to better respond to the changing behavior of the customers.
Generally speaking, our solution encompasses third-party hardware-centric products such as instrumentation and actuators, our proprietary
DCS/PLC products, and valued-added software packages such as AMS (Asset Management System), MES (Manufacturing Execution System),
APC (Advanced Process Control), OTS Simulation (Operator Training System), and others. The safety system SIS (Safety Instrumentation System),
certified under European safety standards and newly introduced to the market in July 2012 has further expanded our proprietary product suite in the
industrial automation segment.
We have branched out from the industrial automation domain into the subway and high-speed rail businesses, leveraging on our core competency
and strong research and development capabilities, and have already established a key position in the high-speed rail signaling market and subway
SCADA market. Besides, we have developed our proprietary high-speed rail signaling system and subway signaling system, and certified both
according to European Safety Standard Certification Level 4.
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Internationally, we have a strong presence in Southeast Asia and increasingly in the Middle East, India and Hong Kong SAR. Through the
acquisitions of Concord and Bond Groups, we are expanding and deepening our ability to offer mechanical and electrical solutions in design,
engineering, procurement, project management, construction and commissioning, and maintenance to a wide range of industries, such as
manufacturing, banks, hospitals, airports, power plants, commercial centers, hotels, and infrastructure works. We believe that our present leadership
position in the high-growth segments is attributable to our vision, execution, and strong research and development capabilities.
During the past several years we have achieved a number of significant contract wins in international arena, including (i) contracts with MTR
Corporation of Hong Kong SAR to provide a complete suite of high-speed rail signaling systems to Guangzhou-Shenzhen-Hong Kong Express Rail
Hong Kong Section; (ii) a contract with SMRT Trains Ltd. in Singapore to provide design, electrification and installation for station renovations on
North-South and East-West lines and a contract with Thales Solutions Asia Pte. Ltd. to provide design, installation, testing and commission for
replacing the existing signaling systems for the North-South and East-West lines and install new signaling systems for the Tuas West Extension line
in Singapore; (iii) a contract with Land Transport Authority in Singapore to provide the Integrated Supervisory Control System for the Thomson &
Eastern Region Lines in Singapore; (iv) a contract with Mitsubishi Heavy Industries Ltd. to provide electrical installation services for part of the
Power Distribution System Package of the first Phase of Doha Metro. In overseas industrial automation business, we have as well achieved
remarkable milestone in several sub-industries in India in fiscal year 2017, and we are expecting more to come in future.
Strategy
The goal for Hollysys is to become one of the world's well-known automation and control technology and product providers. To meet this goal we
plan to enhance the core competencies that have made us a leading domestic automation and control solutions provider in China, the only Chinese
company qualified to design and manufacture non-safety control systems of nuclear power stations, and a leader in the industrial automation and in
the high-speed rail and subway sectors. The principal elements of our core business strategies are as follows:
(cid:120)
(cid:120)
To further establish our leadership position as a dominant automation and control solutions provider across all the addressable market
segments– We seek to be a potential industry consolidator in China and Southeast Asia to become a leading provider of industrial
automation and control technology applications for clients in various industries, by presenting ourselves as a total solution provider. We
seek to further penetrate the industrial automation and railway business with more proprietary products to enhance our leading position and
expand our market share. Since the majority of our customers are operating in a wide range of industries, we stand to be a prime
beneficiary of China’s and increasingly Southeast Asia’s industrial automation market growth. Such growth is closely related to the
economic development, rising labor costs, and growing awareness on environment protection, clean energy and lower carbon emission in
the region. Our combination of patented technologies, strong research and development capabilities, ability to leverage strategic alliances
and acquisitions to enter and penetrate new market segments, and a comprehensive understanding of the Chinese and Southeast Asia
markets should allow us to capitalize on these growth opportunities.
To continuously enhance our leadership position in technology – We have long been recognized as a pioneer in the development of
industrial automation and control technology and applications in China. We are continuously seeking ways to improve our existing product
lines while being committed to the development of new applications, platforms, and products. In order to maintain our leadership in
technology, we have devoted significant resources to the research and development that is undertaken by a group of trained and skilled
experts and engineers. We have improved the 5th generation DCS named HOLLiAS-K, which is superior to the performance of the 4th
generation in terms of reliability, flexibility, and ease of use. Hollysys has applied its years of experiences from nuclear DCS into the
design of HOLLiAS-K. Flexible architectures of P-to-P (Peer to Peer), C/S (Client/Server), or hybrid system can be selected according to
the project scale. Industry specific software solutions are designed for better customization leveraging our deep industry knowhow and
expertise. Further advantages such as vertical mounting, modular connection, and tilted I/O design make the engineering and wiring more
effective and deliver the customers faster and more stable field installation. We also developed China’s first proprietary Safety
Instrumented System, named HiaGuard-SIS, and passed Safety Integrity Level 3 certification in compliance with the most stringent
European standards. HiaGuard-SIS is a critical safety protection system comprising sensors, logic solvers and actuators for the purposes of
taking a process to a safe state when normal predetermined set points are exceeded, or safe operating conditions are violated. The SIS
developed by Hollysys is applicable to ESD (Emergency Shutdown System), PSD (Process Shutdown System), FGS (Fire and Gas
Systems), BMS (Burner Management System), and ETS (Emergency Trip System). In March 2017, with our LK series PLC passing the
international certification of Wurldtech’s Achilles, we became the first domestic PLC supplier to have been certified under Achilles Level
1, Besides, we are continuously devoting resources to research and development on our addressable market related technologies and
products, and international market, including track circuit subway signaling system, industrial automation motion control, machinery
control products and technologies to complement our existing product portfolio.
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(cid:120)
To actively explore and prepare for international market expansion– Management is pursuing a strategy for Hollysys to have meaningful
revenue generated from the international market and to become one of the prominent and well-known automation and control players in the
world. We made significant progress in this business objective through the acquisitions of Concord and Bond Groups, which are
headquartered in Singapore and Malaysia respectively, by which we obtained a well-established distribution channel and customer/partner
bases to cross-sell our products in the rail and industrial automation segments and building automation and retrofit segments, and seasoned
management teams to form the core of our international team. We have also increased our mechanical and engineering solution capabilities
and are expanding to be able to serve a wider array of industries. We entered into a contract with Hong Kong MTR Corporation to supply
the entire high-speed rail signaling system to Shenzhen-Hong Kong Express Rail with a total contract value amounted to approximately
US$85 million, including the main contract signed and the supplementary contracts obtained subsequently, In addition, we signed the
contract with Land Transport Authority in Singapore to provide the Integrated Supervisory Control System for the Thomson & Eastern
Region Lines in Singapore valued at approximately SGD 16 million.
The high-speed rail signaling system includes the on-board ATP (Automatic Train Protection) system that is used to protect the train from
travelling at excessive speeds, the ground based TCC (Train Control Center) for ground safety control of trains, and other auxiliary
interfacing products. Based on our own technologies, we are able to customize our system platforms to meet every level of requirements
from conventional rail signaling systems to the most state-of-the-art, high-speed rail applications, not only for the Chinese market but also
for the international market.
China Railway Corporation employs its own administrative admission system and set specific standards for the high-speed rail signaling
products deployed in China’s high-speed rail lines. In addition to our products certified under those domestic standards, we have
redesigned the whole set of our high-speed rail signaling systems based wholly on our own proprietary technologies, to better compete in
the rail market outside of China,. Our products that have passed European Safety Standards SIL 4 certification (Safety Integrity Level 4)
include ATP (Automatic Train Protection), TCC (Train Control Center), LEU (Line-Side Electronic Unit), BTM (Balise Transmission
Module), TSRS (Temporary Speed Restriction Server), HVC (Hollysys Vital Computer) and Interlocking system in the high-speed rail
sector.
In the subway sector, the proprietary ATS (Automatic Train Supervision) and CBI (Computer Based Interlocking) passed SIL2 and SIL4
certification respectively in 2011. And in early 2013, we finished the development and certified ZC (Zone Controller), LEU (Line-side
Electronic Unit) and Balise for subway signaling system according to SIL4 requirements. The ATP (Automatic Train Protection) for
subway signaling was developed and passed SIL4 certification in the end of 2013, thus all subway signaling products have been certified
according to SIL4.
Products and Services
As a leading provider of automation and control technology and applications in China, and increasingly in Southeast Asia, we provide our
customers with our standard and customized products and corresponding services based on each client’s specific requirements. We are committed
to providing reliable, advanced and cost-effective solutions to help customers optimize their processes to achieve higher quality, greater reliability
and better productivity and profitability.
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Industrial Automation:
Our principal offering is a comprehensive suite of automation systems for a wide spectrum of industrial market clientele, ranging from power,
chemical, petrochemical, to nuclear, metallurgy, building materials, food-beverage, pharmaceutical and other industries. Our comprehensive suite of
automation solution consists of third-party hardware-centric products such as instrumentation and actuators, our proprietary software-centric
DCS/PLC, and valued-added software packages such as RMIS (Real-time Management Information System), HAMS (HolliAS Asset Management
System), OTS (Operator Training System), HolliAS BATCH (Batch Application Package), HolliAS APC Suite (Advanced Process Control
Package), and SIS (Safety Instrumentation System). Our mainstream products for this market segment are DCS products and PLC. DCS is a
network of controllers, sensors, actuators and other devices that can be programmed to control outputs based on input conditions through logic
calculations. In an automated production line, sensors or so-called “instrumentations” are distributed across the production facility to monitor sub-
systems like the robots, CNC machines, and logistic tools. These sensors are like human eyes, which monitor the process, and detect any abnormal
situations. The information collected from those sensors is then transmitted to the DCS for centralized data processing through communication
networks. The central computer (brain) processes information and generates commands, based on sophisticated algorithmic and pre-set
parameters. These commands are then sent to actuators (muscles/bones) through communication devices to execute the orders and maintain
production flow. PLCs are computer devices installed on machines or equipment, for example, on a factory assembly line, for manufacturing
automation.
As the only proven domestic automation control systems provider to the nuclear power industry in China, we provide our HOLLiAS-NMS DCS
product to China’s nuclear power industry. In a nuclear power station, the nuclear island operates to transform nuclear energy to heat energy, and
pass on the steam generated by the steam generator to the conventional island, where steam drives the turbine to generate the electricity, and pass on
to the transformer for loading onto the grid. Our HOLLiAS-NMS proprietary control systems are now used for non-safety operation control. The
know-how was accumulated from our industrial DCS applications in high-end, conventional energy power plants, with much more sophisticated
software and hardware specifications, and more stringent production and quality assurance process. Our nuclear joint venture with China General
Nuclear Power Corporation and China Techenergy Co., Ltd., has already successfully completed developing its proprietary safety nuclear power
automation and control system and has started to commercialize such technology.
Rail Transportation:
Hollysys has successfully scaled its automation application from industrial manufacturing to rail and subway industries, with proprietary product
lines including, TCC (Train Control Center) and ATP (Automation Train Protection). An ATP essentially acts as the train over-speed protection
mechanism. It collects real-time information like speed limit ahead, train operation status, line data, instructions from train control center, and then
combines that information with the train parameters to produce train protection curves. In case of any human errors, like driver’s negligence at the
red light, it applies emergency brakes automatically. TCCs is an on-ground control center at railway stations or equipment stations which monitor
route condition, track status, train schedules, distance between trains, and the working status of other essential function devices, and then through
logic calculation, generate control instructions and commands. The command information from the TCC is then transmitted to the ATP located on
the locomotives/trains, through track circuits and electronic beacons located at various points along the railway line, or wirelessly.
We have been providing our SCADA system to a number of China’s subway lines for many years, including the Beijing Metro, Guangzhou Metro,
Shenzhen Metro, Tianjin Metro, Dalian Metro, Wuhan Metro, Chengdu Metro and Lanzhou Metro. SCADA is an open software platform to enable
integrated and unified monitoring of all necessary sub-systems of the subway, including the Power Supervisory Control and Data Acquisition
System, Building Automatic System, Fire Alarm System, Platform Screen Door System, Access Control System, Closed Circuit Television,
Passenger Information System, Passenger Train Information System, and Alarm System. Given the exponential growth in China’s subway market
and the continued growth expected for the decades to come, Hollysys has developed its proprietary Subway Signaling System, based on its strong
research and development capability and technical know-how of signaling application accumulated from high-speed rail. Currently the development
and certification according to the European safety standards are basically finished. The current subway signaling market is predominantly occupied
by multi-national corporations, such as Siemens, Alstom and Thales.
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We are the supplier of the entire high-speed rail signaling system to Shenzhen-Hong Kong high-speed rail line for the Hong Kong MTR, which
marked our breakthrough into the international high-speed rail signaling market. In addition, we signed a contract with Land Transport Authority
("LTA") in Singapore to provide our proprietary Integrated Supervisory Control System for Thomson & Eastern Region Lines in Singapore.
Mechanical and Electrical:
We established a stronger foot-hold in Southeast Asia through the acquisitions of Concord and Bond Groups in 2011 and 2013 respectively.
Concord and Bond Groups mainly provide mechanical and electrical solutions, including design, engineering, procurement, project management,
construction and commissioning, and maintenance related services. Concord Group mainly focuses on railway transportation in Singapore, Macau,
Qatar, UAE and Saudi Kingdom markets, and Bond Group mainly focuses on factories, data centers, banks, hospitals, airports, power stations, gas
and instrumentation plants, hotels, commercial centers, residential buildings and infrastructure works in Malaysia. Through the acquisitions, the
Company seeks to expand the existing distributions and marketing channels to sell the Company’s existing product lines to the fast growing
Southeast Asia and the Middle East markets.
Project Implementation:
We establish a project group of sales engineers, technical engineers and project management professionals for each of our potential customer to
provide them total integrated solutions tailored to their specific requirements. The sales engineers and technical engineers work together to offer the
best customized solutions from understanding customer’s detailed requirements through on-site studies. The technical engineers are responsible for
hardware assembly, software configuration, testing and installation, commissioning and trial operation, and start-up and training; while the project
management professionals oversee budgetary matters, coordinate the work force, ensure adequacy of resources and monitor progress and quality to
ensure the timely completion of each project. Our integrated solutions projects involve one or more of the following activities:
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Solution planning – We provide our customers with strategic and tactical reviews of their current operations and future requirements. The
planning includes defining client business requirements, developing appropriate hardware and software, and selecting preferred technology.
Solution design – We detail the industry specifications and implementation tactics necessary to achieve our customer’s objectives. Hollysys
also take into consideration the integration of the hardware and software deployed in our integrated solution with the existing ones of the
customer, and the ongoing management followed Examples of these services include defining functional requirements for the system and
our components, developing integration plans and designing of customer-specific system and services applications.
Solution implementation –We install the recommended systems and provide essential services throughout the solution implementation
process, to better meet our customers' specific requirements. Key activities include project management, hardware procurement and
production, software development, configuration and field installation and testing, and development of customized system and services
management applications.
Our proprietary technology and products based integrated solutions create value for our customers and improve their competitive strengths by:
(cid:120) Generating synergy and improving efficiency of our customers through integrating communications, marketing and service functions;
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(cid:120) Utilizing our industry and process knowledge to develop customized solutions that improve the efficiency of our customers;
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Providing a software platform for the optimization of management operations, which provides real-time automation and information
solutions throughout a business; and
(cid:120) Offering maintenance and training services to our customers, which help to cut costs and improve operating efficiency.
We customize our floor plans based on conducting careful on-site studies, building design-specific network systems using our proprietary
technology and software, and offering manufacturing execution system services to ensure that real-time management control is available to our
customers in a streamlined and easy-to-use manner.
We believe that our product design and applications integrated in the solutions are unmatched among our domestic competitors. We also believe
that the sophistication and quality of our products rival those of the multi-national automation and control product suppliers, while our insightful
understanding of demands of our Chinese customers and the ability to respond give us a leading edge over foreign competitors. The value of this
combination is reflected in our strong revenue and profit growth over the years.
Markets
Industrial Automation Market
According to the Gong Kong Data, an industry research group, the DCS and PLC market in China, was around RMB 7,020 million and RMB 7,350
million respectively in calendar year 2016. With the experience of our actual projects, if adding software and specific controller, the market would
be multiple.
Currently, the vast majority of the global automation market is still controlled by a handful of multi-national companies including Honeywell (US),
Siemens (Germany), Emerson (US), ABB (Sweden), Rockwell (US), Yokogawa (Japan) and Hitachi (Japan). Industrialization began in the west,
however, the shifting focus of industrial automation development to China and more recently, Southeast Asia is not by now an unfamiliar story.
Several underlying background of China’s industrial automation market should be well noticed. The slogan of “China Manufacture 2025” and
“Industry 4.0” proposed by the government, coupled with China’s regional development planning, indicates a national commitment to realize
industrial upgrading. Growing social awareness on environmental protection, supported by government policies, is creating demand for green
manufacture. In order to achieve a favorable stance in competition, companies are seeking more efficiency and sophistication in manufacturing and
management. Customers are also transiting from product buyers to service buyer. Furthermore, the growing pressure on labor cost and shortage of
labor remain a challenge to the manufacture industry. The above mentioned have created a substantial and growing demand for the automation
systems in an era of green, efficiency and intelligence, posing both opportunities and challenges.
We believe that the growth of China’s industrial automation market will continue to be healthy given its relatively lower penetration rate and the
rising cost of labor. The client base includes large state-owned enterprises, multi-national companies, and other domestic companies. Our main
competitors in this field are global players such as ABB, Siemens, and Emerson, as well as Supcon from China. We believe that the Hollysys brand
recognition and market reputation, and our strong research and development capabilities will continuously enable us to penetrate high-margin
market segments currently dominated by foreign companies.
We are well-positioned to benefit from China’s nuclear power development. At present, China’s nuclear power sector is relatively underdeveloped,
with the vast majority of power generated by coal-fired power plants. According to figures announced by China Nuclear Energy Association, as of
May 25, 2017 there were 36 nuclear reactors in commercial operation in China. This represents a very small fraction of the total installed gross
capacity of power generation. In terms of electricity generated watt per hour, the nuclear electricity generated by now is approximately 2%-3%,
lagging far behind the world average of 15%, with France being the highest with 70% of its power generated from nuclear power plants. Driven by
clean energy initiatives and China’s commitment of reducing its carbon emission by 45% per GDP unit by 2020, China’s installed nuclear power
generating capacity is expected to reach 70GW-80GW by 2020. Typically, one nuclear reactor generates 1GW electricity.
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We are penetrating into international markets with primary focus on Singapore, Malaysia, Indonesia, India and the Middle East, all of which are
largely developing areas. The strong growth of infrastructure and increased demand for automation technologies will benefit us in these areas.
Rail Transportation Market
Another important end-market for Hollysys is the high-speed rail market in China, where we command a leading position in providing high-speed
rail signaling systems to ensure the safety of passenger train movement. The China Railway Corporation developed a national high-speed rail
signaling technological standard, the China Train Control System, or the CTCS. Under the CTCS, the standard governing the 200-250km/hour
speed category is called C2, while C3 governs the 300-350km/hour category. These standards are different from the international standards
propounded by European organizations or Japan.
By the end of the 12th Five Year Plan, the total length of China’s high-speed railway has already reached 19,000 kilometers. According to the 13th
Five Year Plan another 11,000 kilometers of high-speed railway will be built by the end of 2020, making a total length of 30,000 kilometers,
covering over 80% of China’s major cities. A more comprehensive network of “Eight Horizontals and Eight Verticals” will be in place by 2025,
surpassing the previous “Four Horizontals and Four Verticals”, making inter and intra-regional railway transportation more efficient and
convenient. As one of the three high-speed rail signaling products providers in the C2 category in China, and one of the three high-speed rail
signaling products providers to the C3 segment, we believe that Hollysys is well positioned to benefit from this unprecedented, world leading high-
speed railway build-out.
We are also working to expand our rail products supply such as track circuit. We have finished testing of track circuit and the official admission
progress and got the permit to enter track circuit market which is another sizable market. We are entering into this market and expecting to gain our
first track circuit contract in the near future.
We also provide our proprietary software platform and solutions of SCADA to the subway market. China’s subway market is expected to receive
significant government investment due to urbanization and environmental concerns. According to the development plan for a modern
comprehensive transportation system during the 13th five-year-plan published by the State Council, total length of subway lines under operation by
2020 will be 6000 km, compared with 3300km by the end of the 12th five-year-plan period. Leveraging on our know-how from high-speed surface
rail signaling technology and our well-recognized brand name, we have finished the development of our proprietary subway signaling system, and
are preparing for bidding subway signaling projects both in China and abroad. We believe it will present a better value positioning to our subway
customers by bundling our proprietary subway SCADA system with our proprietary signaling system, in this way we are also expecting our market
share and gross margin to expand in this business sector.
In Southeast Asia, there are also extensive subway lines construction and subway signaling system reconstruction projects due to the operation
safety and efficiency concern in densely populated areas such as Hong Kong, Singapore and Malaysia. There are several subway lines under
construction in Hong Kong and Southeast Asia, including Hong Kong Shatin to Central Link in Hong Kong, and Thomson Line (TSL) in Singapore
and MRT Line No. 2 in Kuala Lumpur, Malaysia. Besides, the reconstruction of subway signaling systems will be a huge opportunity, such as the
signaling upgrade of Singapore’s North-South and East-West lines in which Hollysys has participated. As an increasing number of subway signaling
systems in developed countries are approaching the end of their product cycle, Hollysys will take the opportunity to meet the demand of subway
signaling system replacement and upgrading
Mechanical and Electrical Solutions Market
We offer mechanical and electrical solutions (M&E) through Concord and Bond Groups in Southeast Asia, the Middle East and Hong Kong.
Through acquisitions of the above entities, we are expanding and deepening our ability to offer mechanical and electrical solutions in design,
engineering, procurement, project management, construction and commissioning, and maintenance to a wide range of industries, such as
manufacturing, banks, hospitals, airports, power plants, commercial and residential buildings, hotels, and railway and subway lines.
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Extensive constructions in infrastructure in Southeast Asia and Middle East result in significant demands for M&E solutions. Taking Malaysia for
example, the estimated total gross development value (GDV) in Iskandar development area is around $118 billion, where estimated M&E sector
potential worth is $23.56 billion in the areas such as education, commercial, residential, factories and theme park project; the estimated total GDV in
Sabah development area is around $32.3 billion, where estimated M&E potential worth is $6.5 billion including residential, resorts, commercial, oil
& gas projects; the estimated total GDV of Sarawak Corridor is around $102.7 billion, where estimated M&E potential worth is $20.5 billion
including renewable energy and energy resources, residential, commercial, factories projects.
In the rail transportation field, there are several subway lines under construction in Hong Kong and Southeast Asia, including, among others, Hong
Kong Shatin to Central Link, Thomson Line (TSL) in Singapore and MRT Line No. 2 in Kuala Lumpur, Malaysia. Concord Group participated in
the Singapore North-South and East-West subway lines signaling reconstruction project cooperating with Thales, Concord Group was responsible
for design, installation, testing and commission for replacement of existing signaling systems. Bond and Concord Groups will actively explore the
M&E opportunities, and cooperate with Hollysys for the installation and implementation works for industrial automation and railway transportation
total solution works in South East Asia and the Middle East.
Integrated Contracts
The main channel through which we get our automation system business is the procurement bidding process. Customers seeking bids propose their
requirements and specifications in legal bidding documents and those companies that are interested in obtaining these contracts make a bid in
written form. If we win the bid, we finalize an integrated contract. We derive a large percentage of our total consolidated revenues from the
integrated contracts that we win through the bid process. In addition, we also generate revenue from products sales of spare parts and component
products to customers for maintenance and replacement purposes after the completion of the integrated solution contract, and from provision of
service such as maintenance and training which tends to provide a recurring revenue stream.
The purpose of an integrated contract is to furnish an automation system that provides the customer with a total solution for the automation or
process control requirement being addressed. The automation system and total solution that we offer consists of hardware, software and services, all
of which are customized to meet the particular needs and technical specifications of our customers. None of the hardware, software and service has
independent functionality, and therefore cannot be sold separately to customers.
The major terms of an integrated solution contract include solution planning and design, system installation, customer acceptance, payment
milestones and warranty. The process of fulfilling an integrated contract consists of the following four stages:
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Solution planning and design - We provide customers with a customized plan for achieving the required solution by establishing a project
group for each contract. The project group includes system engineers who propose and discuss and agree on the system design and
implementation plan with the technical personnel of the customers.
System manufacturing and installation - Based on the design and implementation plan, and in accordance with the project schedule, we
enter into the process of purchasing the necessary hardware, manufacturing components for the hardware, developing software platform,
re-configuring the software embedded in the hardware, and fabricating the integrated hardware into cabinets, on-site installation and
testing, and training customer’s personnel about how to use the automation and total solution.
Customer acceptance - The procedures for customer inspection and acceptance of the system are typically contained in the contracts. The
initial inspection usually occurs when the hardware is delivered to the customer’s site for the purpose of detecting any obvious physical
damage during shipping and to confirm that the entire order was delivered. A final acceptance will be performed upon the satisfaction of
integrated solution testing.
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(cid:120) Warranty period - The integrated solution contracts customarily provide our customers with a one-year warranty (although sometimes the
warranty period may be more than one year depending on the customer and the negotiations for the contract), which runs from the date of
the final customer acceptance. The end of the warranty period represents fulfillment of the entire contract.
Because of the nature of customized integrated contracts, a customer does not have the right to return the products that we deliver, so long as such
products conform and perform to the customer’s specification. Prior to delivering our products to a customer’s site, we perform an internal test to
ensure that the automation system works as intended. After installing the products on a customer’s site, any problems are solved during trial
runs. Once the testing requirements have been satisfied, a customer will execute a customer acceptance document, which marks the beginning of the
warranty period. Due to the nature of this process, many companies in the automation systems business generally do not carry product liability
insurance.
The size of an integrated contract is determined by a customer’s needs in terms of the amount of equipment needed and the complexity of the
integrated solution. The size of an integrated contract drives the revenues generated by the contract. Because certain contracts will require working
periods longer than one year, the best way to measure the contract revenue realized is to use the percentage-of-completion method. Ultimately, our
revenue stream will be driven by the average price of an integrated contract and how many integrated contracts have started in each reporting
period.
Our backlog of contracts presents the amount of unrealized revenue to be earned from the contracts that we have won. Accordingly, any increase or
decrease in new contracts won by us, or any change of scheduled delivery dates will have a future impact on our future revenue streams. In the event
of a delay in the delivery schedule, then the time of inspection, installation, trial run and customer acceptance will be delayed accordingly, all of
which will affect our revenue recognition. If the delay of delivering the specified automation systems was a result of our inability to deliver the
system on a timely basis, then we will be held responsible for this delay, in accordance with the terms specified in the respective integrated
contracts.
Competition
We compete with various domestic and international corporations offering automation and control systems. We believe that our proprietary
technologies and products provide us with a strong competitive advantage over our domestic Chinese competitors. However, a number of
multinational companies, some of whom have substantially greater financial and other resources than we currently have, have been offering first rate
automation systems in competition with us. We believe that our primary competitors in China industrial automation market for our products multi-
national corporations, such as ABB, Honeywell, Emerson and Siemens. Supcon, a local private company affiliated with Zhejiang University, is
among the primary competitors as well. In the Southeast Asian and Middle Eastern markets, our principal competitors for industrial automation are
multinational corporations such as ABB, Siemens, Emerson, Yokogawa and Honeywell.
In the PRC high-speed rail business, given the administrative admission system employed by China Railway Corporation and the governing of
national rail technology standard, the China Train Control Standard (CTCS), we believe that competition from multi-national companies will
decrease gradually. Currently, Hollysys is currently one of the three entities that supply signaling products to China’s 200-250km/h segment of the
high-speed rail market. The other two are China Academy of Railway Science and Zhuzhou CRRC. Hollysys is one of the three signaling product
providers to China’s 300-350km/h segment of the high-speed rail market. The other providers are CRSC and China Academy of Railway Science.
In SCADA market, we mainly compete with Nanjing Automation Research Institute (NARI). In the nuclear automation segment, we mainly
compete with multi-national corporations such as Siemens, Areva, and Invensys. The major competitors in the international rail and subway
signaling markets are Bombardier and Alstom.
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For the mechanical and electrical solutions business, the main competitors for Concord and Bond Groups include Bintai Kinden Corporation
Berhad, PJI Holding Berhad, and LFE Corporation Berhad, Kurihara, Sanyo, Bintai KDK and Gammon Construction.
When compared to our competitors, apart from satisfying certain local based criteria, we believe that our key competitive edge is the provision of
better value for money to our customers with the following distinctive attributes:
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Emphasis on Engineering. Engineers are a critical element of effective design of both hardware and software components of automation
equipment and systems. For western companies, they are also a very costly element of the process. Even the largest western companies
face constraints in the size of their engineering staff due to the high salaries and attendant costs. One of our competitive advantages is the
lower cost of engineers in China relative to those in the Western nations. Applying high levels of engineering effort to each product enables
us to provide a solution that is tailored not only to the industry in which the customer operates, but also to the customer’s specific needs.
That custom solution is provided at a cost that is typically lower than the generic products of our competitors.
Industry Process Knowledge. We devote substantial time and effort to understand our customers and their business. This knowledge helps
to ensure that the systems we design will provide the optimum in benefits for our customers. We maintain this information in an extensive
“library” of industry process information that we utilize to speed up the system design process and to maximize the quality of the result,
while at the same time minimizing costs. As a result, we were able to take into account the widely varying degrees of sophistication and
resources that our customers possess. The result of this strategy is to broaden our potential customer base and to consistently deliver
products that are of value to these customers.
Integration Services. Western automation system companies are principally system platform suppliers and the role of integrating the
systems into the customer’s overall management information system is generally left to independent firms. While such firms are
widespread in western countries, China and other emerging market countries do not have a large number of systems integration companies
to perform this work, as these companies have been historically unprofitable in China. We have bridged this gap by providing a vertically
integrated solution to our customers that includes the integration of our hardware into the customers’ overall manufacturing and
information systems. This combination of the two aspects of system design and installation take further advantage of a lower cost of
engineering services and provides another benefit, as the design and integration teams can work together to produce the best result more
quickly and efficiently, again lowering costs.
Core Technologies. Although we deliver tailored systems, our systems are based on basic modules of automation technology that are
common across a broad array of industries and applications. Using these modules as a starting point, development of an industry and
customer-specific product is both more efficient and produces a better result than starting from scratch each time. That means, with our
labor cost advantages, we can provide a highly customized automation product at a very favorable cost.
(cid:120) Use of Engineering Sales Personnel. The use of trained engineers in product and system design is complemented by the use of engineers in
the sales process as well. With engineers included in the sales process, we provide the ability to understand from the beginning the needs of
the customer and how to address their issues and the ability to convey that information to the team that will ultimately develop the system
to be installed.
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Providing service for the Broad Array of Chinese Customers’ Capabilities. China’s rapid growth and industrialization distinguish it from
other manufacturing nations in some ways. There are many “established” Chinese companies that operate in facilities that are decades old,
many companies that operate in new or recently upgraded facilities, and the largest number that fall somewhere in between. We
understand, to a greater extent than our western competitors, the full range of needs and capabilities that Chinese customers possess, and
we have designed our business to meet them. As a result, we are able to offer even the most basic control systems solution while also
providing the most sophisticated systems available to applications that meet the rigorous requirement of the highly complex and demanding
nuclear power industry.
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Pace of Product Development. Another way that we keep ahead of our competitors is by our pace of development. HOLLiAS-K is the 5th
generation of Distributed Control System developed by us and released to the market. In 1993, we developed China’s first proprietary DCS
to the market as our first generation system. During the past 20 years, we continuously moved ahead of the market and developed leading
technologies, including China’s first proprietary large scale PLC in 2005, the earliest and till now the only domestic approved and applied
nuclear power automation and control system HOLLiAS-NMS, China’s earliest subway SCADA and high-speed rail signaling system. We
believe we have the capability to identify high-growth markets and quickly develop and deliver the most advanced technologies, while
leveraging our strong R&D and innovative capabilities.
Manufacturing
We design and manufacture the hardware of our products in Beijing and Hangzhou facilities, and in rare cases we outsource the production
depending on special circumstances and delivery requirements. The core part of the hardware of our products is the printed circuit board. We
manufacture the printed circuit boards in our SMT (Surface Mounting Technology) lines and plug-in mounting lines, and assemble them into
various types of modules and then form the modules into the final products. The raw materials which we procure mainly include bare printed circuit
boards from vendors based on our requirements and design considerations, and electronic components, chips, cabinets and cables among other
factors. Our products are subjected to rigorous testing in our facilities prior to shipment.
Several subsidiaries of the Company, including Beijing Hollysys, Hangzhou Hollysys, Hollysys Intelligent, and Hollysys Electronics, have all
passed GB/T 19001/ISO 9001 international quality management system certification, GB/T 24001/ISO 14001environmental management system
certification, and GB/T 28001 occupational health and safety management system certification.
The GB/T 19001/ISO 9001 international quality management system certificate is valid for production, and technical service of industrial automatic
control system equipment. The other two certificates are valid for production, technical service and related management activities of industrial
automatic control system equipment.
Seasonality
Like many other companies operating in China and Southeast Asia, our businesses experience lower levels of revenues in the quarter ending on
March 31 due to the Chinese New Year holiday.
Regulation
PRC. We operate a significant portion of our business in China under a legal regime that consists, at the national level, of the State Council, which is
the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its leadership, including: the
Ministry of Agriculture and its local authorities; the Ministry of Commerce and its local authorities; SAFE and its local authorities; the State
Administration of Industry and Commence and its local authorities; and the State Administration of Taxation, and the Local Taxation Bureau. The
following sets forth a summary of significant regulations or requirements that affect our business activities in China and our shareholders’ right to
receive dividends and other distributions from us.
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Foreign Currency Regulations. We are subject to the PRC’s foreign currency regulations. The PRC government has control over RMB
reserves through, among other things, direct regulation of the conversion of RMB into other foreign currencies. Although foreign
currencies which are required for “current account” transactions can be bought freely at authorized Chinese banks, the proper procedural
requirements prescribed by Chinese law must be met. See Item 10 “Additional Information – D. Exchange Controls” for detailed
discussion of PRC foreign exchange control rules.
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Taxation. The EIT Law, as further clarified by the Implementation Rules of the EIT Law and the Notice on Implementation of Enterprise
Income Tax Transition Preferential Policy under the EIT Law, applies a unified enterprise income tax, or EIT, rate at 25% to both FIEs and
domestic invested enterprises. The EIT rate applicable to the enterprises established before March 16, 2007 those were eligible for
preferential tax rate according to the effective tax laws and regulations will gradually transition to the uniform 25% EIT rate by January 1,
2013. In addition, certain enterprises may still benefit from a preferential tax rate of 15% under the EIT Law if they qualify as “High and
New Technology Enterprises strongly supported by the state,” (“HNTE”) subject to certain general factors described therein.
“Administrative Measures for Assessment of High-New Tech Enterprises,” or Measures, and “Catalogue of High/New Tech Domains
Strongly Supported by the State,” or Catalogue (2008), jointly issued by the Ministry of Science and Technology and the Ministry of
Finance and State Administration of Taxation set forth general guidelines regarding criteria as well as application procedures for
qualification as a HNTE under the New EIT Law. Beijing Hollysys, Hangzhou Hollysys and Hollysys Intelligent have met the
qualifications for the HNTE designation, and are accordingly subject to a reduced national enterprise income tax rate of 15%. Both Beijing
Hollysys and Hangzhou Hollysys’s “HNTE” certificate are effective from January 1, 2011 to December 31, 2016, and both are in the
process of reapplying the qualifications of HNTE for the following 3 years from January 1, 2017 to December 31, 2019. Both are expecting
to receive new HNTE certification in late 2017. While Hollysys Intelligent’s “HNTE” certificate is effective from January 1, 2013 to
December 31, 2018. According to the Notification on Preferential Enterprise Income Tax of Software and Integrated Circuit Industry,
Caishui [2016] No. 49, which was issued in May 2016 by the China State Administration of Taxation (“SAT”) and the Ministry of Finance
(“MOF”), Beijing Hollysys and Hangzhou Hollysys satisfied the definitions of Key Software Enterprise, and applied a preferential tax rate
of 10% in calendar year of 2015 and 2016.
In addition to the changes to the current tax structure, under 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 our public holding company’s global income 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 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.”
(cid:120) Dividend Distribution. Under PRC law, FIEs in China, may pay dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting principles. In addition, FIEs in China are required to set aside at least 10% of their after-tax profit based
on PRC accounting standards each year for their general reserves until the accumulative amount of such reserves reaches 50% of registered
capital. These reserves are not distributable as loans, advances or 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, and expansion (development) funds, which, once allocated, may
not be distributed to equity owners except in the event of liquidation. In addition, under the new EIT Law, effective as of January 2008,
dividends from our PRC subsidiaries to us are subject to a withholding tax of 10%.
The foregoing summary does not purport to be complete and is qualified by reference to the relevant provisions of applicable law in the jurisdictions
in which we operate. We believe that we are currently in compliance with all applicable laws and regulations relating to our business.
Southeast Asia. The kinds of currency regulation, taxation regimes and dividend restrictions imposed in China are not replicated in Singapore,
Malaysia, and other Southeast Asian markets in which we operate. Generally these markets are free-trade based economies, with no direct or
indirect currency or similar operational barriers.
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Marketing, Sales and Customer Support
Our marketing and sales activities are focused on the development of and addressing the growing demand for automation and control products,
systems and services in the Chinese domestic market and the Southeast Asian, Indian and Middle Eastern markets. We insist on building
cooperative relationships with our customers, educating them about technological developments and reflecting their needs in our products and
services.
Our sales teams consist of a complementary group of sales personnel and hardware and software engineers from a variety of disciplines to tailor
products to specific customer needs. Employing a pool of skilled personnel in the early stage of a project accelerates the design and the subsequent
production of a particular customized solution, typically exceeding that of our competitors. Our sales teams possess significant hands-on, industry-
specific experience which permit them to do on-site process analyses, which in turn, makes the design and implementation of upgrades simpler. The
result is an automation system that is more effective, efficient and reliable, which in turn leads to a truly satisfied customer.
Our sales force is organized into three principal groups, (i) regional sales, to provide business consulting, promote pre-sale activity and serve as
customer contacts, (ii) customer relationship management, to manage relations with contracted customers and improve customer satisfaction by
coordinating responses to the client’s information requests, sale of supplemental parts or components and make customer visits, and (iii) market
planning, to facilitate strategic cooperation with certain specialized manufacturers, to expand the specific fields for our products.
We identify and target market segments and select target sales opportunities within our markets and conduct sales opportunity studies to ensure that
adequate sales resources are available. Sales quotas are assigned to all sales personnel according to annual sales plans. We classify market segments
and target opportunities on national and regional levels. Segmentation of our markets helps us to determine our primary sales targets and to prepare
monthly and quarterly sales forecasts. The sales team approves target projects, develops detailed sales promotion strategies and prepares reports on
order forecasts, technical evaluation, sales budgeting expense, schedules and competition analysis. After the report has been approved, a marketing
group is appointed, consisting of sales personnel and engineers. We employ marketing personnel to conduct market research, to analyze user
requirements and to organize marketing communications.
Our marketing team engages in a variety of marketing activities, including:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
publishing internal research reports and customer newsletters;
conducting seminars and conferences;
conducting ongoing public relations programs; and
creating and placing advertisements
We actively participate in technology-related conferences and demonstrate our products at trade shows or at exhibitions targeted at our existing and
potential customers. We also evaluate a range of joint-marketing strategies and programs with our business partners in order to take advantage of
their strategic relationships and resources. We also support our customers by offering field services such as maintenance and training services,
which help customers to cut their costs and improve their operating efficiency.
As of June 30, 2017, we employed over 500 direct sales personnel through our subsidiaries in mainland China, Southeast Asia, Middle East, Hong
Kong and Macau
C. Organizational Structure
The following diagram illustrates our corporate structure as of the date of this annual report. We are a holding company with no operations of our
own. We conduct our operations in China mainly through our Chinese operating companies, and in Southeast Asia and the Middle East mainly
through Concord and Bond Groups.
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* On November 24, 2015, the Company established Concord Electrical Contracting, Ltd. (“CECL”) to explore the market in Qatar. CCPL has a
49% direct ownership of CECL and the remaining 51% equity interest is held by a nominee shareholder. Through a series of contractual
arrangements, CCPL is entitled to appoint majority of directors of CECL who have the power to direct the activities that significantly impact
CECL’s economic performance. Further, CCPL is entitled to 95% of the variable returns from CECL’s operations. As a result, despite of its
minority direct ownership of CECL arrangements, CCPL is considered the primary beneficiary of CECL.
Our corporate headquarters are located at No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, 100176,
China. Our telephone number is (+86) 10 58981386. We maintain a website at http://www.Hollysys.com that contains information about our
company, but that information is not a part of this annual report.
D. Property, Plant and Equipment
Since 2010, our principal executive offices have been located at No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area,
Beijing, 100176, China. At this location in Beijing, we have ample room for substantial expansion, as our needs require. We own the prepaid land
leases to the properties at the following principal locations, each of which contains principal administrative offices, sales and marketing offices,
research and development facilities, and manufacturing facilities:
Location
Beijing
Hangzhou
Singapore
Malaysia
Approximate Sq. Meters
120,000
25,000
1,200
3,400
The manufacturing facilities at the Beijing and Hangzhou locations are used for the system integration production, including hardware testing
instruments, auxiliary material processing, packaging and shipping, and for self-made product integration production, including inspection and
testing.
ITEM 4A.
UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of our financial condition and results of operations should be read 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 based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in
these forward-looking statements as a result of various factors, including the risk factors and the discussion of our business set forth in other parts of
this annual report on Form 20-F.
Overview
Through our operating subsidiaries, we are one of the leading automation solutions providers in China, developing a number of core technologies
and completing numerous projects utilizing a wide array of automation products. With our philosophy of sincere concern for customers and our
technical innovation capabilities, we specialize in the research, development, production, sale and distribution of industrial automation for digital
railway signals and information systems, e-government, motor drive transmissions and non-safety controls for nuclear power reactors.
The main channel through which we obtain our automation system business is the procurement bidding process. Customers propose their
requirements and specifications via legally binding bid documents. Companies interested in obtaining the contract can respond with an appropriate
bid.
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We derive our revenue mainly from three operating segments including industrial automation, railway transportation and mechanical and electrical
solutions. Around 90% of our total consolidated revenues derived from integrated contracts we have won through the bid process. In addition, we
generate revenue from sales of spare parts and component products to customers for maintenance and replacement purposes after the completion of
the integrated solution contract, and from providing maintenance and training service, after the warranty period to customers for efficiency
improvement or environment protection purpose; which tends to provide a recurring revenue stream. Spare part and component sales and services
rendered are not part of the integrated solutions contracts.
The purpose of an integrated solutions contract is to furnish an automation system that provides the customer with a total solution for the automation
or process control requirement being addressed. The automation system and total solution we offer, consisting of hardware, software and services, is
customized to meet the customer’s particular needs and technical specifications. None of the hardware, software and services has independent
functionality, and therefore, is not sold separately to customers.
Order backlog of contracts presents the amount of unrealized revenue to be earned from the contracts that we have won. The following table sets
forth the information regarding contracts we won during the last three fiscal years and the backlog at the dates indicated:
Number of new contracts won during the year
Total amount of new contracts (million)
Average price per contract
Backlog Situation:
Contracts newly entered and unfinished (million)
Contracts entered in prior years and unfinished (million)
Total amount of backlog (million)
2015
Years Ended June 30,
2016
2,256
587.7
260,505
$
$
2,031
527.9
259,916
$
$
2017
2,777
476.5
171,599
2015
Years Ended June 30,
2016
280.4
288.1
568.5
$
$
$
284.2
243.0
527.2
$
$
$
2017
222.4
301.6
524.0
$
$
$
$
$
Key Factors Affecting Our Growth, Operating Results and Financial Condition
Our future growth, operating results and financial condition will be affected by a number of factors including:
(cid:120)
(cid:120)
The ability in developing and acquiring new products and systems in order to improve competitiveness, which can increase both sales
revenue and margins. The success of our business depends in great measure on our ability to keep pace with or even lead changes that
occur in our industry.
The success in expanding our business in targeted emerging markets and overseas markets, which may require us to overcome domestic
competition and trade barriers.
(cid:120) Our ability to retain our existing customers and to obtain additional business opportunities. Since we do not have long-term purchase
commitments from customers, our customers can shift to other competitors for future projects. It is important to maintain our customer
base in order to sustain and expand our business.
(cid:120)
(cid:120)
The success of our business also depends on securing a steady stream of new customers. In order for our business to continue to succeed
and grow, it is vital to secure contracts with new customers on a regular basis.
The ability to secure adequate engineering resources and relatively low cost engineering staff can increase our profitability and potential
business prospects. One of the competitive advantages that we enjoy is the access to lower cost engineering staff as compared to those of
our Western and Japan-based competitors. The plentiful supply of affordable engineering talent in China is a key element of our overall
business strategy.
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(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Further improvement in product design and maintaining high standard of quality control, which can reduce or avoid product defects. Any
product defects will result in additional costs and cause damage to our business reputation.
The ability to secure and protect our intellectual property rights is critical, as our business is based on a number of proprietary products and
systems, and we strive to strengthen and differentiate our product portfolio by developing new and innovative products and product
improvements.
The success in penetrating into the railway, conventional and nuclear power market sectors can develop revenue streams and improve
margins. In addition to the traditional industrial automation business, our plan for future growth includes an increasing emphasis on rail
control systems, power generation control systems and mechanical and electrical solutions both in China and internationally.
The ability to obtain greater financial resources to match or even exceed our major competitors, in order to compete effectively with them,
and to weather any extended weaknesses in the automation and control market.
The continued growth in the Chinese and Southeast Asia industry in general. This continued growth will create more business
opportunities for us, because industrial companies in Asia are our principal source of revenues.
The ability to maintain key personnel and senior management, who will have significant impact and contribution to our future
business. The ability to attract and retain additional qualified management, technical, sales and marketing personnel will be vital.
The continuation of the preferential tax treatment and subsidies currently available to our PRC subsidiaries will be critical to our future
operating results. If governmental subsidies were reduced or eliminated, our after-tax income would be adversely affected.
The exchange rate fluctuation of RMB and SGD against US dollars will result in future translation gain or loss as most of our assets are
denominated in RMB and SGD. In addition, some of our raw materials, components and major equipment are imported from overseas. In
the event that the RMB and SGD appreciate against other foreign currencies, our costs will decrease and our profitability will increase.
However, the impact will be the other way around if RMB and SGD depreciate against other foreign currencies.
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Critical Accounting Policies
Revenue recognition
Integrated solutions contracts
Revenues generated from designing, building, and delivering customized integrated industrial automation systems are recognized over the
contractual terms based on the percentage of completion method. The contracts for designing, building, and delivering customized integrated
industrial automation systems are legally enforceable and binding agreements between the Company and customers. The duration of contracts
depends on the contract size and ranges from 6 months to 5 years excluding the warranty period. The majority of the contract duration is longer than
one year.
Revenue generated from mechanical and electrical solution contracts for the construction or renovation of buildings, rail or infrastructure facilities
are also recognized over the contractual terms based on the percentage of completion method. The contracts for mechanical and electrical solution
are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract size and the
complexity of the construction work and ranges from 6 months to 3 years excluding the warranty period. The majority of the contract duration is
longer than one year.
In accordance with ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts (“ASC 605-35”), recognition is based
on an estimate of the income earned to date, less income recognized in earlier periods. Extent of progress toward completion is measured using the
cost-to-cost method where the progress (the percentage complete) is determined by dividing costs incurred to date by the total amount of costs
expected to be incurred for the integrated solutions contract. Revisions in the estimated total costs of integrated solutions contracts are made in the
period in which the circumstances requiring the revision become known. Provisions, if any, are made in the period when anticipated losses become
evident on uncompleted contracts.
The Company reviews and updates the estimated total costs of integrated solutions contracts at least annually. The Company accounts for revisions
to contract revenue and estimated total costs of integrated solution contracts, including the impact due to approved change orders, in the period in
which the facts that cause the revision become known as changes in estimates. Unapproved change orders are considered claims. Claims are
recognized only when it has been awarded by customers. Excluding the impact of change orders, if the estimated total costs of integrated solution
contracts, which were revised during the years ended June 30, 2015, 2016 and 2017, had been used as a basis of recognition of integrated contract
revenue since the contract commencement, net income for the years ended June 30, 2015, 2016 and 2017 would have been decreased by $26,232,
$30,270, and $12,062, respectively; basic net income per share for years ended June 30, 2015, 2016 and 2017 would have been decreased by $0.45,
$0.51, and $0.20, respectively; and diluted net income per share for the years ended June 30, 2015, 2016 and 2017, would have decreased by $0.44,
$0.50, and $0.20, respectively. Revisions to the estimated total costs for the years ended June 30, 2015, 2016 and 2017 were made in the ordinary
course of business.
The Company combines a group of contracts as one project if they are closely related and are, in substance, parts of a single project with an overall
profit margin. The Company segments a contract into several projects, when they are of different business substance, for example, with different
business negotiation, solutions, implementation plans and margins.
Revenue in excess of billings on the contracts is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues
recognized on the contracts are recorded as deferred revenue until the above revenue recognition criteria are met.
The Company generally recognizes 100% of the contractual revenue when the customer acceptance has been obtained and no further major costs are
estimated to be incurred, and normally this is also when the warranty period commences. Revenues are presented net of taxes collected on behalf of
the government.
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Product sales
Revenue generated from sales of products is recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
Service rendered
The Company has in recent years extended its service offerings as described below. The Company mainly provides two types of services:
Revenue from one-off services: the Company provides different types of one-off services, including on-site maintenance service and training
services which are generally completed on site within a few working days. Revenue is recognized when the Company has completed all the
respective services described in the contracts, there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is
reasonably assured.
Revenue from services covering a period of time: the Company also separately sells extended warranties to their integrated solution customers for a
fixed period. Such arrangements are negotiated separately from the corresponding integrated solution system and are usually entered into upon the
expiration of the warranty period attached to the integrated solution contract. During the extended warranty period, the Company is responsible for
addressing issues related to the system. Part replacement is not covered in such services. The Company recognizes revenue on a pro-rata basis over
the contractual term.
Allowance for doubtful accounts
The carrying value of the Company’s accounts receivable and costs and estimated earnings in excess of billings, net of the allowance for doubtful
accounts, represents their estimated net realizable value. An allowance for doubtful accounts is recognized when it’s probable that the Company will
not collect the amount and is written off in the period when deemed uncollectible. The Company periodically reviews the status of contracts and
decides how much of an allowance for doubtful accounts should be made based on factors surrounding the credit risk of customers and historical
experience. The Company does not require collateral from its customers and does not charge interest for late payments by its customers.
Warranties
Warranties represent a major term under an integrated contract, which will last, in general, for one to three years or otherwise specified in the terms
of the contract. The Company accrues warranty liabilities under an integrated contract as a percentage of revenue recognized, which is derived from
its historical experience, in order to recognize the warranty cost for an integrated contract throughout the contract period.
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Goodwill
Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired. The
Company assesses goodwill for impairment in accordance with ASC subtopic 350-20 (“ASC 350-20”), Intangibles – Goodwill and Other, which
requires that goodwill is not amortized but to be tested for impairment at the reporting unit level at least annually and more frequently upon the
occurrence of certain events, as defined by ASC 350-20.
The Company’s goodwill outstanding at June 30, 2017 was related to the acquisitions of two reporting units, Concord Group and Bond Group.
The Company has the option to assess qualitative factors first to determine whether it is necessary to perform the two-step test in accordance with
ASC 350-20. If the Company believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit
is less than its carrying amount, the two-step quantitative impairment test described above is required. Otherwise, no further testing is required. In
the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the
reporting unit, and other specific information related to the operations. In performing the two-step quantitative impairment test, the first step
compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares
or estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the
carrying value of the reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the
reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to
determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in a
manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of
the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss.
The Company elected to assess goodwill for impairment using the two-step process for both Concord Group and Bond Group for the year ended
June 30, 2017, with assistances from a third-party appraiser. Concord and Bond Groups’ management judgment is involved in determining these
estimates and assumptions, and actual results may differ from those used in valuations. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit which could trigger future impairment. The judgment in estimating the fair value of
reporting units includes forecasts of future cash flows, which are based on management’s best estimate of future revenue, gross profit, operating
expenses growth rates, future capital expenditure and working capital level, as well as discount rate determined by Weighted Average Cost of
Capital approach and the selection of comparable companies operating in similar businesses. The Company also reviewed marketplace and/or
historical data to assess the reasonableness of assumptions such as discount rate and working capital level.
The carrying amount of Concord Group exceeded its fair value as of June 30, 2017, and a goodwill impairment charge of $11,211 was recorded in
the statement of comprehensive income based on the second step testing result.
There are uncertainties surrounding the amount and timing of future expected cash flows as they may be impacted by negative events such as a
slowdown in the mechanical and electrical engineering sector, deteriorating economic conditions in the geographical areas Concord Group operates
in, political, economic and social uncertainties in the Middle East, increasing competitive pressures and fewer than expected mechanical and
electrical solution contracts awarded to Concord Group. These events can negatively impact demand for Concord Group’s services and result in
actual future cash flows being less than forecasted or delays in the timing of when those cash flows are expected to be realized. Further, the timing
of when actual future cash flows are received could differ from the Company’s estimates, which are based on historical trends and does not factor in
unexpected delays in project commencement or execution.
The fair value of Bond Group exceeded its carrying amounts as of June 30, 2017, and therefore goodwill related to Bond Group was not impaired
and the Company was not required to perform further step testing.
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Impairment of long-lived assets other than goodwill
The Company evaluates its long-lived assets or asset group including acquired intangibles with finite lives for impairment whenever events or
changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the
carrying amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Company evaluates the impairment by
comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an
impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally based upon discounted cash flows or
quoted market prices.
Income taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the
period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the
weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.
The Company adopted ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in income taxes.
Interests and penalties arising from underpayment of income taxes shall be computed in accordance with the related tax laws. The amount of interest
expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount
previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with ASC 740 are classified in the financial
statements as a component of income tax expense. In accordance with the provisions of ASC 740, the Company recognizes in its financial
statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to prevail based on the facts and
technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax
benefit that has a greater than fifty percent likelihood of being realized upon settlement. The Company’s estimated liability for unrecognized tax
positions which is included in the accrued liabilities is periodically assessed for adequacy and may be affected by changing interpretations of laws,
rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome for a
particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual
benefits ultimately realized may differ from the Company’s estimates. As each audit is concluded, adjustments, if any, are recorded in the
Company’s financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require the Company to
adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are
recognized in the period in which the changes occur.
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Share-based compensation
The Company accounts for share-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). The
Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over
the requisite service period for the entire award. The compensation cost for each vesting tranche in an award subject to performance vesting is
recognized ratably from the service inception date to the vesting date for each tranche. To the extent the required service and performance
conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards
are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in a subsequent period if actual forfeitures
differ from initial estimates.
For share-based awards that are subject to performance-based vesting conditions in addition to time-based vesting, the Company recognizes the
estimated grant-date fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the vesting
period based upon the Company’s determination of whether it is probable that the performance-based criteria will be achieved. At each reporting
period, the Company reassesses the probability of achieving the performance-based criteria. Determining whether the performance-based criteria
will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the
probability of achieving the performance-based criteria. Revisions are reflected in the period in which the estimate is changed. If the performance-
based criteria are not met, no share-based compensation expense is recognized, and, to the extent share-based compensation expense was previously
recognized, such share-based compensation expense is reversed.
Recent accounting pronouncements
In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-14, which defers the effective date
of ASU 2014-09 Revenue from Contracts with Customers (Topic 606) (" ASU 2014-09") by one year and allows entities the option to early adopt
the new revenue standard as of the original effective date. Issued in May 2014, ASU 2014-09 provided guidance on revenue recognition on
contracts with customers to transfer goods or services or on contracts for the transfer of nonfinancial assets. ASU 2014-09 requires that revenue
recognition on contracts with customers depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for us on July 1, 2018. The new
revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized in retained
earnings as of the date of adoption. The Company preliminarily plans to use the modified retrospective method and has developed an
implementation plan. We are currently evaluating the impact of adoption of this guidance, including required disclosures, and based upon current
analysis, the Company does not expect a significant impact on processes, systems or controls. The company will continue their assessment, which
may identify other impacts of the adoption of ASC 606.
In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17”), Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities
and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all deferred tax
liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for fiscal years
beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented.
Early adoption is permitted. The Company will adopt ASU 2015-17 on July 1, 2017, and does not expect this adoption of this update to have a
material effect on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 specifies the accounting for leases. For operating
leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease
payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated
over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods, and interim
periods within those years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of
adopting this standard on its consolidated financial statements.
On March 30, 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”), which relates to the accounting for employee share-based payments. This standard addresses several aspects of the
accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2017.
Early adoption is permitted. The Company is in the process of evaluating the impact of this accounting standard on its consolidated financial
statements, but does not expect the impact of adoption to be material.
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments. This new standard will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after
December 15, 2017, which means that it will be effective for the Company in the first quarter of the fiscal year beginning July 1, 2018. The new
standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the
amendments prospectively as of the earliest date practicable. The Company is currently evaluating the impact of the pending adoption of ASU 2016-
15 on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Under the
new standard, the selling (transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the
purchasing (receiving) entity is required to recognize a deferred tax asset or liability, as well as the related deferred tax benefit or expense, upon
purchase or receipt of the asset. This pronouncement is effective for reporting periods beginning after December 15, 2017, with early adoption
permitted. The Group is still evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying Definition of a Business (“ASU 2017-01”).
ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The
revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a
business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets
and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for
interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been
reported in previously issued (or available to be issued) financial statements. The Group does not believe this standard will have a material impact
on the results of operations or financial condition.
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In January 2017, the FASB issued Accounting Standards Update No. 2017-04(“ASU 2017-04”), Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a
goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its
fair value. This standard is effective for public business entities in the first quarter of 2020. Early adoption is permitted. The Company is currently
evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies
when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the
modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted.
A. Operating Results
The following are some financial highlights for the fiscal year ended June 30, 2017:
(cid:120)
(cid:120)
Total assets increased by approximately $54.1 million, from approximately $1,004.2 million as of June 30, 2016, to approximately
$1,058.3 million as of June 30, 2017. The increase was mainly due to an increase of approximately $53.8 million in time deposits with
maturities over three months and approximately $28.5 million in investments in equity investees, which was partially offset by the decrease
of costs and estimated earnings in excess of billings of approximately $27.8 million.
Cash and cash equivalents decreased by approximately $31.5 million, from approximately $229.1 million as of June 30, 2016, to
approximately $197.6 million as of June 30, 2017. The decrease was mainly due to approximately $22.8 million was placed in time
deposits with original maturities over three months.
(cid:120) Accounts receivable at June 30, 2017 were approximately $246.6 million, an increase of approximately $9.4 million, or 4.0%, compared to
approximately $237.2 million at June 30, 2016. The increase was mainly due to the fact that the Company successfully converted a larger
portion of cost and estimated earnings in excess of billings into accounts receivable.
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Cost and estimated earnings in excess of billings as of June 30, 2017, were approximately $162.1 million compared to approximately
$189.9 million as of June 30, 2016, representing a decrease of approximately $27.8 million, or 14.7%. The cost and estimated earnings in
excess of billings were accounted for based on the difference between percentages of completion and progress billings. Different contracts
have different billing arrangements, and consequently result in different cost and estimated earnings in excess of billings. The higher or
lower balance of cost and estimated earnings in excess of billings as of the balance sheet date was due to the different contracts mix with
different billing arrangements.
Inventory increased by approximately $9.3 million, from approximately $36.4 million as of June 30, 2016, to approximately $45.7 million
as of June 30, 2017.
Property, plant and equipment increased by approximately $0.6 million, from approximately $79.9 million as of June 30, 2016, to
approximately $80.5 million as of June 30, 2017.
Investments in equity investees increased by approximately $28.5 million, from $18.7 million as of June 30, 2016, to approximately $47.2
million as of June 30, 2017. The increase was mainly due to the dilution of the Company’s interests in Hollycon. In July 2016, the
Company’s interests in Hollycon were diluted from 51.0% to 30.0% and lost the control of Hollycon, and then the 30% interest in Hollycon
was accounted for as an investment in an equity investee in the Company’s balance sheet.
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(cid:120)
(cid:120)
Total liabilities increased by approximately $13.2 million or 4.1% from approximately $321.5 million at June 30, 2016, to approximately
$334.7 million as of June 30, 2017. The increase in liabilities was mainly due to an increase of approximately $25.4 million in deferred
revenue, which was partially offset by the decrease of other tax payable used of approximately $7.6 million.
Short-term bank loans increased by approximately $5.0 million, from approximately $3.1 million at June 30, 2016, to $8.1 million at June
30, 2017.
(cid:120) Accounts payable increased by approximately $15.9 million, or 14.9% from approximately $106.8 million at June 30, 2016, to $122.7
million at June 30, 2017, mainly due to more favorable payment terms negotiated with the suppliers.
(cid:120) Deferred revenue increased by approximately $25.4 million, or 31.0%, from approximately $82.0 million at June 30, 2016, to
approximately $107.4 million at June 30, 2017. The deferred revenue was accounted for based on the difference between progress billings
and percentages of completion. Different contracts have different billing arrangements, and consequently result in different deferred
revenue. The higher or lower balance of deferred revenue as of the balance sheet date was due to the different contracts mix with different
billing arrangements.
(cid:120) Deferred tax assets were $8.9 million as of June 30, 2017. Based on the Company’s historical operating results and order backlog, the
Company believes that it is more than likely that the deferred tax assets net of valuation allowance would be realized.
Comparison of Fiscal Years Ended June 30, 2017 and 2016
Revenues: For the fiscal year ended June 30, 2017, total revenues amounted to approximately $431.9 million, a decrease of approximately $112.4
million, compared to approximately $544.3 million for the prior fiscal year, representing a decrease of 20.6%. In July 2016, the company’s interests
in Hollycon were diluted from 51.0% to 30.0% and the Company lost the control of Hollycon. As a result, Hollycon’s financials were not included
in the Company’s consolidated financials since July 2016. If Hollycon’s revenue were excluded from the comparable figure for the prior fiscal year,
the total revenues for fiscal year 2017 would have been decreased by 16.7%.
Integrated contract revenue accounted for approximately $385.5 million of total revenues, a decrease of approximately $92.3 million or 19.3%,
compared to approximately $477.8 million for the prior fiscal year. The decrease in integrated revenues was mainly composed of a decrease of
approximately $84.6 million or 38.0% in rail transportation and a decrease of approximately $10.2 million or 7.6% in industrial automation projects.
The revenue decrease was partially offset by an increase of $8.3 million or 8.7% in mechanical and electrical solutions business.
Approximately $32.7 million of total revenues was generated from product sales, a decrease of approximately $21.8 million, or 40.0% compared to
approximately $54.5 million in product sales revenue for the prior year. Excluding Hollycon’s revenue from the comparable figure for the prior
fiscal year, the products sales revenue for fiscal year 2017 increased by 13.9 %. Product sales revenue depends on overall demand for the
Company’s spare parts for customers’ maintenance and replacement purposes.
Approximately $13.8 million of total revenue was generated from service rendered, an increase of $1.8 million or 15.0% compared to $12.0 million
of last year.
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The Company’s total revenue by segments was as follows:
(In USD millions)
Industrial Automation
Rail Transportation
Mechanical and Electrical Solution
Miscellaneous
Total
Fiscal year ended June 30,
2016
2017
$
% to Total Revenue
$
% to Total Revenue
182.9
240.3
95.3
25.8
544.3
33.6%
44.2%
17.5%
4.7%
100.0%
172.7
155.7
103.5
-
431.9
39.9%
36.1%
24.0%
0.0%
100.0%
Order Backlog: An important measure of the stability and growth of the Company’s business is the size of its order backlog, which represents the
total amount of unrecognized contract revenue associated with existing contracts. Our order backlog as of June 30, 2017 amounted to approximately
$524.0 million, representing a decrease of approximately $3.2 million, or 0.6%, compared to approximately $527.2 million as of June 30, 2016.
Of the total order backlog as of June 30, 2017, the unrecognized revenue associated with new contracts signed in the fiscal year 2017 was
approximately $222.4 million and the amount brought forward from prior periods was approximately $301.6 million, comparing to the total backlog
as of June 30, 2016 of approximately $243.0 million from new contracts signed in fiscal year 2016, and approximately $284.2 million from
contracts carried forward from prior year.
Cost of revenues: Mirroring the categories of revenues, the cost of revenues can also be divided into three components including cost of integrated
contracts, cost of products sold and cost of service rendered. For the fiscal year ended June 30, 2017, the total cost of revenues amounted to
approximately $291.5 million, a decrease of approximately $47.1 million, or 13.9%, compared to approximately $338.6 million for the prior fiscal
year. The decrease was due to an approximate $33.1 million decrease in the cost of integrated contracts, and a decrease of approximately $14.1
million or 58.5% in the cost of products.
The cost of integrated contract revenue consists primarily of three components: cost of equipment and materials, labor costs and other
manufacturing expenses including but not limited to detecting expense, technology service fee, all of which incurred during the designing, building
and delivering customized automation solutions process to customers. For the fiscal year ended June 30, 2017, the total cost of integrated contracts
was approximately $277.5 million, compared to approximately $310.5 million for the prior fiscal year, representing a decrease of approximately
$33.0 million, or 10.6%. The decrease was primarily due to a decrease of approximately $41.3 million in cost of equipment and materials, which
was partially offset by an increase of approximately $6.8 million in other manufacturing expenses, and an increase of approximately $1.5 million in
labor cost. Of the total cost of integrated contract revenue for the fiscal year 2017, cost of equipment and materials accounted for approximately
$161.4 million, compared to approximately $202.8 million for the prior fiscal year; labor cost accounted for approximately $78.4 million, compared
to approximately $71.6 million for the prior fiscal year; and other manufacturing expenses accounted for approximately $37.6 million, compared to
approximately $36.2 million for the prior fiscal year. Of the total integrated contract revenue for the fiscal year 2017, cost of equipment and
materials accounted for 37.4%, compared to 37.2% for the prior fiscal year; labor cost accounted for 18.2%, compared to 13.2% for the prior fiscal
year; and other manufacturing expenses accounted for 8.7%, compared to 6.6% for the prior fiscal year. The cost components of integrated contracts
were determined and varied according to requirements of different customers.
Sales of products represent sales of spare parts (either company manufactured or purchased from outside vendors) to customers for maintenance and
replacement purposes. Given the fact that the products purchased from outside vendors have different functions and capabilities from our self-made
products, we decide whether to purchase or manufacture the necessary products based on the needs and preferences of different customers while
considering the efficiency factor. Therefore, as a percentage of the cost of products sold, the self-made products and purchased products have varied
significantly from time to time. The cost of products sold for the fiscal year ended June 30, 2017 was approximately $10.0 million, a decrease of
approximately $14.0 million, compared to approximately $24.0 million for the prior fiscal year.
As for the cost of the service revenue, our employees spend time and incur expenses while they are with the customers. From time to time, materials
costs related to the service are incurred, especially for providing extended warranty services. The cost of service revenue for fiscal year ended June
30, 2017 was approximately $4.0 million, stayed at about the same level, compared to approximately $4.0 million for the prior fiscal year.
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Gross margin: For the fiscal year ended June 30, 2017, as a percentage of total revenues, the overall gross margin was 32.5%, compared to 37.8%
for the prior fiscal year. The gross margin for integrated contracts was 28.0% for the year ended June 30, 2017, compared to 35.0% for the prior
year. The decrease in gross margin for integrated contracts was mainly due to our different sales mix during the fiscal year 2017. The gross margin
for products sold was 69.5% for the fiscal year ended June 30, 2017, compared to 56.0% for the prior fiscal year. The gross margin for service
provided was 70.8% for the fiscal year ended June 30, 2017, compared to 66.4% for the prior fiscal year.
Selling expenses: Selling expenses mainly consist of compensation, traveling and administrative expenses related to marketing, sales and promotion
activities incurred by the Company’s marketing departments. Selling expenses were approximately $24.4 million for the fiscal year ended June 30,
2017, a decrease of 4.7%, or approximately $1.2 million, compared to approximately $25.6 million for the prior fiscal year. As a percentage of total
revenues, selling expenses accounted for 5.7% and 4.7% for the fiscal years ended June 30, 2017 and 2016, respectively. The Company has
established guidelines specifically tailored for different industries and regions to monitor and evaluate sales performance, and to control selling
expenses.
General and administrative expenses: General and administrative expenses mainly include compensation, traveling and other administrative
expenses of non-sales-related departments, such as the finance department,
information systems department and human resources
department. General and administrative expenses amounted to approximately $44.3 million for the fiscal year ended June 30, 2017, representing a
decrease of approximately $1.5 million, or 3.3%, compared to approximately $45.8 million for the prior fiscal year. The decrease was mainly due to
a decrease of $1.2 million in bad debt provision. As a percentage of total revenues, general and administrative expenses were 10.3% and 8.4% for
the fiscal years ended June 30, 2017 and 2016, respectively.
Goodwill impairment charge: The Company engaged an independent third-party appraiser to perform goodwill impairment test on June 30 in each
year, to judge whether the carrying amount of goodwill related to Concord and Bond Groups exceeded its fair value. The Company concluded that
the carrying amount of goodwill associated with Concord Group was less than fair value of the goodwill and recorded a goodwill impairment charge
of $11,211 and nil for the fiscal years ended June 30, 2017 and 2016, respectively. The impairment charge was mainly resulted from a revision of
Concord Group’s long-term financial outlook.
Research and development expenses: Research and development expenses represent mostly employee compensation, materials consumed and
experiment expenses related to specific new product research and development, as well as any expenses incurred for basic research on advanced
technologies. For the fiscal year ended June 30, 2017, research and development expenses were approximately $30.1 million, representing a
decrease of approximately $6.5 million, or 17.7%, compared to approximately $36.6 million for the prior fiscal year. As a percentage of total
revenues, research and development expenses were 7.0% and 6.7% for the fiscal years ended June 30, 2017 and 2016, respectively.
VAT refunds and government subsidies: The state tax bureaus in China provide refunds out of the value added tax (“VAT”) they collect in order to
encourage the research and development efforts made by certain qualified enterprises. Some of our subsidiaries in China received such refunds. All
VAT refunds, that have no further conditions to be met, are recognized in the statements of comprehensive income when cash or approval from the
tax bureaus is received. For the fiscal year ended June 30, 2017, VAT refunds were approximately $16.9 million, compared to approximately $20.0
million for the prior fiscal year, decreasing by approximately $3.1 million, or 15.5%. As a percentage of total revenues, VAT refunds were 3.9% and
3.7% for the fiscal years ended June 30, 2017 and 2016, respectively.
The local governments in China also provide financial subsidies to encourage research and development efforts made by certain qualified
enterprises. Some of our subsidiaries received such subsidies. For the government subsidies that have no further conditions to be met, the funds
received are recognized in the statements of comprehensive income; for the subsidies that have certain operating conditions yet to be met, the fund
received are recorded as liabilities and will be released to income when the conditions are met. Subsidy income from the government amounted to
approximately $12.9 million and $2.9 million for the fiscal years ended June 30, 2017 and 2016, respectively, an increase of approximately $10.0
million, or 344.8%.
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Income from operations: Income from operations decreased by approximately $60.3 million, from approximately $120.6 million for the fiscal year
ended June 30, 2016 to approximately $60.3 million for the fiscal year ended June 30, 2017. The decrease was mainly due to the decrease of $65.3
million in the gross profit.
Interest income: For the fiscal year ended June 30, 2017, interest income decreased by approximately $2.2 million, or 37.1% from approximately
$5.9 million for the prior year, to approximately $3.7 million for the current period. As a percentage of total revenue, interest income accounted for
0.9% and 1.1% for the fiscal years ended June 30, 2017 and 2016, respectively. The interest income was mainly earned from time deposits with
maturities over three months.
Interest expenses: For the fiscal year ended June 30, 2017, interest expenses decreased by approximately $0.5 million, or 33.2% from approximately
$1.4 million for the prior year, to approximately $0.9 million for the current period. As a percentage of total revenue, interest expenses accounted
for 0.2% and 0.3% for the fiscal years ended June 30, 2017 and 2016, respectively. The interest expenses were incurred by the short-term and long-
term loan/bond we had.
Other income (expenses), net: For the fiscal year ended June 30, 2017, the other income (expenses), net decreased by approximately $2.4 million
from approximately $4.1 million for the prior year, to approximately $1.7 million for the current period. The decrease was mainly due to the
fluctuation of fair value of the contingent consideration related to the acquisition of Bond Group. We recorded approximately $1.7 million gain for
the prior fiscal year.
Income tax expenses: For the fiscal year ended June 30, 2017, the Company’s income tax expense was approximately $14.4 million for financial
reporting purposes, an increase of approximately $0.2 million, as compared to $14.2 million for the prior year. During the fiscal year 2017, the
Company recorded a deferred tax expense of $5.4 million related to the dilution of the Company’s interest in Hollycon. In addition, in the process of
Settlement and Payment of Enterprise Income Tax for calendar year 2016 in May 2017, Beijing Hollysys and Hangzhou Hollysys were eligible for a
preferential income tax rate of 10% for calendar year 2016 due to its “Key Software Enterprise” status, instead of the 15% used by the Company in
calendar year 2016. As a result, the Company recorded a tax benefit of $4.4 million during the fourth quarter of fiscal 2017. Excluding the impact of
the abovementioned tax expenses and tax benefit, the effective tax rate for the current year is 16.1%.
Net income attributable to non-controlling interest: The non-controlling interests of the Company include non-controlling shareholders’ interests in
each subsidiary. For the fiscal year ended June 30, 2017, the non-controlling interest was the ownership interest of 5% in CECL. The net income
attributable to non-controlling interest for the fiscal year ended June 30, 2017 was approximately nil, a decrease of approximately $5.0 million, from
approximately $5.0 million for the prior year. The decrease was mainly due to the disposal of Hollycon (Italy) and dilution and divestment of
Hollycon, there is no other non-controlling interests except for 5% in CECL.
Net income and earnings per share attributable to Hollysys: For the fiscal year ended June 30, 2017, net income attributable to Hollysys amounted
to approximately $68.9 million, representing a decrease of approximately $49.6 million, as compared to approximately $118.5 million for the prior
year. The basic and diluted earnings per share were $1.15 and $1.14 for the year ended June 30, 2017, as compared to $2.00 and $1.97 for the prior
year, representing a decrease of $0.85 and $0.83, respectively. The decrease was primarily due to the lower net income attributable to Hollysys
compared to fiscal 2016.
Comparison of Fiscal Years Ended June 30, 2016 and 2015
Revenues: For the fiscal year ended June 30, 2016, total revenues amounted to approximately $544.3 million, an increase of approximately $12.9
million, compared to approximately $531.4 million for the prior fiscal year, representing an increase of 2.4%.
Integrated contract revenue accounted for approximately $477.8 million of total revenues, a decrease of approximately $3.2 million or 0.7%,
compared to approximately $481.0 million for the prior fiscal year. The decrease in integrated revenues was mainly composed of a decrease of
approximately $40.0 million or 21.3% in industrial automation projects and a decrease of approximately $14.2 million or 13.0% in mechanical and
electrical solutions business. The revenue decrease was partially offset by an increase of $51.0 million or 27.7% in rail transportation.
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Approximately $54.5 million of total revenues was generated from product sales, an increase of approximately $14.7 million, or 36.9% compared to
approximately $39.8 million in product sales revenue for the prior year. Product sales revenue depends on overall demand for the Company’s spare
parts for customers’ maintenance and replacement purposes.
Approximately $12.0 million of total revenue was generated from service rendered, an increase of $1.4 million or 13.2% compared to $10.6 million
of last year.
The Company’s total revenue by segments was as follows:
(In USD millions)
Industrial Automation
Rail Transportation
Mechanical and Electrical Solution
Miscellaneous
Total
Fiscal year ended June 30,
2015
2016
$
% to Total Revenue
$
% to Total Revenue
213.3
193.3
110.0
14.8
531.4
40.1%
36.4%
20.7%
2.8%
100.0%
182.9
240.3
95.3
25.8
544.3
33.6%
44.2%
17.5%
4.7%
100.0%
Integrated Contract Revenue Backlog: An important measure of the stability and growth of the Company’s business is the size of its integrated
contract backlog, which represents the total amount of unrecognized integrated contract revenue associated with existing contracts. Our integrated
contract backlog as of June 30, 2016 amounted to approximately $527.2 million, representing a decrease of approximately $41.2 million, or 7.3%,
compared to approximately $568.5 million as of June 30, 2015.
Of the total integrated contract backlog as of June 30, 2016, the unrecognized revenue associated with new contracts signed in the fiscal year 2016
was approximately $284.2 million and the amount brought forward from prior periods was approximately $243.0 million, comparing to the total
backlog as of June 30, 2015 of approximately $280.5 million from new contracts signed in fiscal year 2015, and approximately $288.1 million from
contracts carried forward from prior year.
Cost of revenues: Mirroring the categories of revenues the cost of revenues can also be divided into three components including cost of integrated
contracts, cost of products sold and cost of service rendered. For the fiscal year ended June 30, 2016, the total cost of revenues amounted to
approximately $338.6 million, an increase of approximately $21.6 million, or 6.8%, compared to approximately $317.0 million for the prior fiscal
year. The increase was due to an approximate $10.2 million increase in the cost of integrated contracts, and an increase of approximately $11.5
million or 91.5% in the cost of products.
The cost of integrated contract revenue consists primarily of three components: cost of equipment and materials, labor costs and other
manufacturing expenses including but not limited to detecting expense, technology service fee, all of which incurred during the designing, building
and delivering customized automation solutions process to customers. For the fiscal year ended June 30, 2016, the total cost of integrated contracts
was approximately $310.5 million, compared to approximately $300.3 million for the prior fiscal year, representing an increase of approximately
$10.2 million, or 3.4%. The increase was primarily due to an increase of approximately $8.2 million in cost of equipment and materials, an increase
of approximately $1.0 million in other manufacturing expenses, and an increase of approximately $1.0 million in labor cost. Of the total cost of
integrated contract revenue for the fiscal year 2016, cost of equipment and materials accounted for approximately $202.8 million, compared to
approximately $194.6 million for the prior fiscal year; labor cost accounted for approximately $71.6 million, compared to approximately $70.6
million for the prior fiscal year; and other manufacturing expenses accounted for approximately $36.2 million, compared to approximately $35.1
million for the prior fiscal year. Of the total integrated contract revenue for the fiscal year 2016, cost of equipment and materials accounted for
37.2%, compared to 36.6% for the prior fiscal year; labor cost accounted for 13.2%, compared to 13.3% for the prior fiscal year; and other
manufacturing expenses accounted for 6.6%, compared to 6.6% for the prior fiscal year. The cost components of integrated contracts were
determined and varied according to requirements of different customers.
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Sales of products represent sales of spare parts (either company manufactured or purchased from outside vendors) to customers for maintenance and
replacement purposes. Given the fact that the products purchased from outside vendors have different functions and capabilities from our self-made
products, we decide whether to purchase or manufacture the necessary products based on the needs and preferences of different customers while
considering the efficiency factor. Therefore, as a percentage of the cost of products sold, the self-made products and purchased products have varied
significantly from time to time. The cost of products sold for the fiscal year ended June 30, 2016 was approximately $24.0 million, an increase of
approximately $11.5 million, compared to approximately $12.5 million for the prior fiscal year.
As for the cost of the service revenue, our employees spend time and incur expenses while they are with the customers. From time to time, materials
costs related to the service are incurred, especially for providing extended warranty services. The cost of service revenue for fiscal year ended June
30, 2016 was approximately $4.0 million, stayed at about the same level, compared to approximately $4.1 million for the prior fiscal year.
Gross margin: For the fiscal year ended June 30, 2016, as a percentage of total revenues, the overall gross margin was 37.8%, compared to 40.3%
for the prior fiscal year. The gross margin for integrated contracts was 35.0% for the year ended June 30, 2016, compared to 37.6% for the prior
year. The decrease in gross margin for integrated contracts was mainly due to our different sales mix during the fiscal year 2016. The gross margin
for products sold was 56.0% for the fiscal year ended June 30, 2016, compared to 68.4% for the prior fiscal year. The gross margin for service
provided was 66.4% for the fiscal year ended June 30, 2016, compared to 61.4% for the prior fiscal year.
Selling expenses: Selling expenses mainly consist of compensation, traveling and administrative expenses related to marketing, sales and promotion
activities incurred by the Company’s marketing departments. Selling expenses were approximately $25.6 million for the fiscal year ended June 30,
2016, a decrease of 2.7%, or approximately $0.7 million, compared to approximately $26.3 million for the prior fiscal year. As a percentage of total
revenues, selling expenses accounted for 4.7% and 4.9% for the fiscal year ended June 30, 2016 and 2015, respectively. The Company has
established guidelines specifically tailored for different industries and regions to monitor and evaluate sales performance, and to control selling
expenses.
General and administrative expenses: General and administrative expenses mainly include compensation, traveling and other administrative
expenses of non-sales-related departments, such as the finance department,
information systems department and human resources
department. General and administrative expenses amounted to approximately $45.8 million for the fiscal year ended June 30, 2016, representing a
decrease of approximately $5.0 million, or 9.8%, compared to approximately $50.8 million for the prior fiscal year. The decrease was mainly due to
a decrease of $6.5 million in bad debt provision. As a percentage of total revenues, general and administrative expenses were 8.4% and 9.6% for the
fiscal years ended June 30, 2016 and 2015, respectively.
Research and development expenses: Research and development expenses represent mostly employee compensation, materials consumed and
experiment expenses related to specific new product research and development, as well as any expenses incurred for basic research on advanced
technologies. For the fiscal year ended June 30, 2016, research and development expenses were approximately $36.6 million, representing an
approximately $0.8 million, or 2.2%, compared to approximately $35.8 million for the prior fiscal year. As a percentage of total revenues, research
and development expenses were 6.7% and 6.7 % for the fiscal years ended June 30, 2016 and 2015, respectively.
VAT refunds and government subsidies: The state tax bureaus in China provide refunds out of the value added tax (“VAT”) they collect in order to
encourage the research and development efforts made by certain qualified enterprises. Some of our subsidiaries in China received such refunds. All
VAT refunds, that have no further conditions to be met, are recognized in the statements of comprehensive income when cash or approval from the
tax bureaus is received. For the fiscal year ended June 30, 2016, VAT refunds were approximately $20.0 million, compared to approximately $25.5
million for the prior fiscal year, decreasing by approximately $5.5 million, or 21.6%. As a percentage of total revenues, VAT refunds were 3.7% and
4.8% for the fiscal years ended June 30, 2016 and 2015, respectively.
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The local governments in China also provide financial subsidies to encourage research and development efforts made by certain qualified
enterprises. Some of our subsidiaries received such subsidies. For the government subsidies that have no further conditions to be met, the funds
received are recognized in the statements of comprehensive income; for the subsidies that have certain operating conditions yet to be met, the fund
received are recorded as liabilities and will be released to income when the conditions are met. Subsidy income from the government amounted to
approximately $2.9 million and $4.9 million for the fiscal years ended June 30, 2016 and 2015, respectively, a decrease of approximately $2.0
million, or 40.8%.
Income from operations: Income from operations decreased by approximately $9.5 million, from approximately $130.1 million for the fiscal year
ended June 30, 2015 to approximately $120.6 million for the fiscal year ended June 30, 2016. The decrease was mainly due to the decrease of $8.7
million in the gross profit.
Interest income: For the fiscal year ended June 30, 2016, interest income increased by approximately $2.2 million, or 59.5% from approximately
$3.7 million for the prior year, to approximately $5.9 million for the current period. As a percentage of total revenue, interest income accounted for
1.1% and 0.7% for the fiscal years ended June 30, 2016 and 2015, respectively. The interest income was mainly earned from time deposits with
maturities over three months.
Interest expenses: For the fiscal year ended June 30, 2016, interest expenses decreased by approximately $0.4 million, or 22.2% from approximately
$1.8 million for the prior year, to approximately $1.4 million for the current period. As a percentage of total revenue, interest expenses accounted
for 0.3% and 0.3% for the fiscal years ended June 30, 2016 and 2015, respectively. The interest expenses were incurred by the short-term and long-
term loan/bond we had.
Other income (expenses), net: For the fiscal year ended June 30, 2016, the other income (expenses), net increased by approximately $1.5 million
from approximately $2.6 million for the prior year, to approximately $4.1 million for the current period. The increase was mainly due to the
fluctuation of fair value of the contingent consideration related to the acquisition of Bond Group. We recorded approximately $1.7 million gain for
current year as compared to approximately $0.4 million gain from the prior fiscal year.
Income tax expenses: For the year ended June 30, 2016, the Company’s income tax expense was approximately $14.2 million for financial reporting
purposes, a decrease of approximately $11.8 million, as compared to $26.0 million for the prior year. According to the Notification on Preferential
Enterprise Income Tax of Software and Integrated Circuit Industry, Caishui [2016] No. 49, which was issued in May 2016 by the China SAT and
the MOF, Beijing Hollysys and Hangzhou Hollysys satisfied the definitions of Key Software Enterprise, and applied for a preferential tax rate of
10% effective for the year from January 1, 2015 to December 31, 2015. As a result, the Company recorded a tax benefit of $7.0 million during the
fourth quarter of fiscal 2016. In addition, a $3.1 million income tax expense was accrued and withheld for the expected profits distribution from
PRC to overseas. The remaining retained earnings of the Company’s PRC entities are expected to be reinvested for its operations. Excluding the
impact of the abovementioned tax benefit and withholding tax expenses, the effective tax rate for the current year is 13.2%.
Net income attributable to non-controlling interests: The non-controlling interests of the Company include non-controlling shareholders’ interests in
each subsidiary. For fiscal 2016, the non-controlling interests are the ownership interests of 49% in Hollycon, 1% in Hollycon Italy, and 5% in
CECL. The net income attributable to non-controlling interests for the fiscal year ended June 30, 2016 was approximately $5.0 million, an increase
of approximately $2.3 million, from approximately $2.7 million for the prior year.
Net income and earnings per share attributable to Hollysys: For the fiscal year ended June 30, 2016, net income attributable to Hollysys amounted
to approximately $118.5 million, representing an increase of approximately $22.0 million, as compared to approximately $96.5 million for the prior
year. The basic and diluted earnings per share were $2.00 and $1.97 for the year ended June 30, 2016, as compared to $1.65 and $1.61 for the prior
year, representing an increase of $0.35 and $0.36, respectively. The increase was primarily due to the higher net income attributable to Hollysys
compared to fiscal 2015.
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B. Liquidity and Capital Resources
We believe our working capital is sufficient to meet our present requirements. We may, however, require additional cash due to changing business
conditions or other future developments, including any investments or acquisitions we may decide to pursue. In the long-term, we intend to rely
primarily on cash flow from operations and additional borrowings from banks to meet our anticipated cash needs. If our anticipated cash flow and
borrowing capacity is insufficient to meet our requirements, we may also seek to sell additional equity, debt or equity-linked securities. We cannot
assure you that any financing will be available in the amounts we need or on terms acceptable to us, if at all.
In line with the industry practice, we typically have a long receivable collection cycle. As a result, our cash provided by our operations in any given
year may not be sufficient to fully meet our operating cash requirements in that year. We will use available financing means, including bank loans,
to provide sufficient cash inflows to balance timing differences in our cash flows.
We estimate our liquidity needs for investing and financing activities for fiscal 2018 will be approximately $14.4 million, which will be primarily
related to the repayment of bank borrowings and capital expenditures. Our future working capital requirements will depend on many factors,
including, among others, the rate of our revenue growth, the timing and extent of expansion of our sales and marketing activities, the timing of
introductions of new products and/or enhancements to existing products, and the timing and extent of expansion of our manufacturing capacity.
Our long-term liquidity needs will relate primarily to working capital to pay our suppliers, and third-party manufacturers, as well as any increases in
manufacturing capacity or acquisitions of third party businesses that we may seek in the future. We expect to meet these requirements primarily
through our current cash holdings, revolving bank borrowings, as well as our cash flow from operations. For fiscal year 2018, we expect $5.9
million of capital expenditures, mainly related to information system enhancement and manufacturing facility upgrades. We currently do not have
any plan to incur significant capital and investing expenditures for the foreseeable future beyond 2018.
Cash Flow and Working Capital
As of June 30, 2017, we had total assets of approximately $1,058.3 million, of which cash and cash equivalents amounted to $197.6 million, time
deposits with original maturities over three months amounted to $96.2 million, accounts receivable amounted to $246.6 million and inventories
amounted to $45.7 million. While working capital was approximately $562.8 million, equity amounted to $723.5 million and our current ratio was
approximately 2.9.
See Item 8, Financial Information, A. Consolidated Statements and Other Financial Information, Dividend Policy, for information on the ability of
certain of our subsidiaries in China to make dividends to their respective parent companies.
The following table shows our cash flows with respect to operating activities, investing activities and financing activities for the fiscal years ended
June 30, 2015, 2016 and 2017:
(In USD thousands)
Cash Flow Item
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided (used in) by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
59
Fiscal Years Ended June 30
2016
2015
2017
$
$
$
$
$
$
$
83,952
$
(39,895) $
$
1,261
$
357
$
45,675
$
162,159
$
207,834
46,737
$
(2,454) $
(6,780) $
(16,242) $
$
21,261
$
207,834
$
229,095
69,813
(89,553)
(7,413)
(4,302)
(31,455)
229,095
197,640
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Operating Activities
For the fiscal year ended June 30, 2017, net cash provided by operating activities was approximately $69.8 million, compared to approximately
$46.7 million for prior fiscal year 2016. The net cash inflow of operating activities in fiscal year 2017 was primarily consisted of net income of
approximately $69.8 million and approximately $13 million generated from non-operating items and non-cash items. All of which were partially
offset by approximately $13.1 million used in working capital. Changes in working capital are attributable to an increase in deferred revenue of
approximately $28.2 million, an increase of accounts payable of approximately $23.6 million, an increase of costs and estimated earnings in excess
of billings approximately of $21.9 million, all of which were partially offset by a decrease in accounts receivable of approximately $23.4 million,
and a decrease in accruals and other payable of approximately $20.3 million, a decrease in deposits and other assets approximately $12.7 million, a
decrease in inventories approximately $10.7 million, and a decrease in other tax payables approximately $7.0 million.
For the fiscal year ended June 30, 2016, net cash provided by operating activities was approximately $46.7 million, compared to approximately
$84.0 million for prior fiscal year 2015. The net cash inflow of operating activities in fiscal year 2016 was primarily consisted of net income of
approximately $123.5 million, and changes in working capital attributable to a decrease in deferred revenue of approximately $47.6 million, a
decrease of costs and estimated earnings in excess of billings approximately of $37.0 million, a decrease in accounts receivable of approximately
$16.4 million, a decrease in income tax payable and other tax payable of approximately $5.0 million combined, and a decrease in inventories of
approximately $4.6 million, all of which were partially offset by an increase in accounts payable of approximately $8.3 million, and an increase in
due from related parties of approximately $8.2 million.
For the fiscal year ended June 30, 2015, net cash provided by operating activities was approximately $84.0 million, compared to approximately
$83.3 million for prior fiscal year 2014. The net cash inflow of operating activities in fiscal year 2015 primarily consisted of net income of
approximately $99.2 million, and changes in working capital attributable to a decrease in accounts payable of approximately $25.5 million, a
decrease of due from related parties approximately of $15.2 million, a decrease in accounts receivable of approximately $7.6 million and a decrease
in income tax payable and other tax payable of approximately $13.8 million combined, all of which were partially offset by an increase in cost and
estimated earnings in excess of billings of approximately $10.5 million.
Investing Activities
For the fiscal year ended June 30, 2017, net cash used in investing activities was approximately $89.6 million, compared to approximately $2.5
million for prior fiscal year 2016. The net cash used in investing activities in fiscal year 2017 mainly consisted of a cash outflow of approximately
$3.7 million for capital expenditures, a cash outflow of approximately $16.7 million cash in deconsolidated subsidiary, a cash outflow of
approximately $2.7 million investment of an equity investee, a cash outflow of approximately $154.8 million transferred from current accounts to
time deposits in banks with original maturities between six months and one year, partially offset by a cash inflow of approximately $89.3 million
from maturity of time deposits.
For the fiscal year ended June 30, 2016, net cash used in investing activities was approximately $2.5 million, compared to approximately $39.9
million for prior fiscal year 2015. The net cash used in investing activities in fiscal year 2016 mainly consisted of a cash outflow of approximately
$7.9 million for capital expenditures, a cash outflow of approximately $107.1 million transferred from current accounts to time deposits in banks
with original maturities between six months and one year, and a cash inflow of approximately $112.0 million from maturity of time deposits.
For the fiscal year ended June 30, 2015, net cash used in investing activities was approximately $39.9 million, compared to approximately $25.2
million for the prior fiscal year 2014. The net cash used in investing activities in fiscal year 2015 mainly consisted of a cash outflow of
approximately $14.6 million paid for acquisition of Bond Group, net of cash acquired, a cash outflow of approximately $4.6 million for capital
expenditures, a cash outflow of approximately $33.4 million transferred from current accounts to time deposits in banks with original maturities
between six months and one year, and a cash inflow of approximately $11.6 million from maturity of time deposits.
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Financing Activities
For fiscal year ended June 30, 2017, net cash used in financing activities was approximately $7.4 million, as compared to approximately $6.8
million cash provided for the prior year. The net cash used in financing activities in fiscal year 2017 mainly consisted of a repayment of short-term
bank loans of approximately $4.9 million, a repayment of long-term bank loans of approximately $7.4 million, a payment of dividends of
approximately $12.0 million, partially offset by proceeds from short-term bank loans of approximately $10.1 million, and proceeds from exercise of
share options of approximately $6.3 million.
For fiscal year ended June 30, 2016, net cash used in financing activities was approximately $6.8 million, as compared to approximately $1.3
million cash provided for the prior year. The net cash used in financing activities in fiscal year 2016 mainly consisted of a repayment of short-term
bank loans of approximately $17.0 million, a repayment of long-term bank loans of approximately $9.7 million, partially offset by proceeds from
issuance of shares of a subsidiary of approximately $7.7 million, and proceeds from exercise of share options of approximately $5.4 million.
For fiscal year ended June 30, 2015, net cash provided by financing activities was approximately $1.3 million, as compared to approximately $8.3
million cash used for the prior year. The net cash provided by financing activities in fiscal year 2015 mainly consisted of proceeds of short-term
loans and IFC convertible bond of approximately $25.1 million and $20.0 million respectively. The cash inflow was partially offset by a dividend
payout of approximately $23.3 million, a repayment of long-term bank loans of approximately $12.6 million, and a repayment of short-term bank
loans of approximately $8.8 million.
C. Research and Development, Patents and Licenses
Research and Development Efforts
As a high-technology company, our business and long-term development rely highly on our research and development capabilities. Our research
and development process is based on Capability Maturity Model Integration Level 2&3 and can be classified into the following seven phases:
Study phase
Requirement phase
(cid:120)
(cid:120)
(cid:120) Designing phase
Implementation phase
(cid:120)
Testing phase
(cid:120)
Inspection phase
(cid:120)
(cid:120) Maintaining phase
We use standard product development life cycle models, including the waterfall model, increment model, iterative model and prototype. As a
technology leader we continually develop and patent new automation technologies. We also continually review and evaluate technological changes
affecting the automation and integrated system industries and invest substantially in application-based research and development. We currently
employ over 700 staff in the research and development department or engaged in research and development work.
Our core technologies achieved from our research and development efforts include:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Large scale software platform architecture design;
Proprietary network design and development technologies;
Safety computer platform design and manufacturing;
Efficient I/O (Input /Output) signal processing design technology; and
Embedded system design and manufacturing.
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We are committed to incorporating the latest advances in electronics and information system technology into its products and, whenever possible,
developing state-of-the-art proprietary products based on its extensive internal expertise and research efforts. We currently spend approximately
6-9% of our annual revenues on research and development. Our recent major research and development focuses include:
Transportation Automation;
(cid:120)
(cid:120) Manufacturing Automation; and
(cid:120)
Process Automation.
Our research and development efforts have led to the invention of several proprietary systems in the fields of DCS, PLC and transportation
automation systems. We improved our 5th generation DCS (Distributed Control System), which represents higher reliability, stability, better safety
protection and user-friendliness with advanced system architecture, hardware, software designs and industry expert solutions. We completed the
development and certified our SIS (Safety Instrumented System) –HiaGuard with SIL3 (Safety Integrity Level 3) in compliance with international
standards. HiaGuard is the first domestically developed SIS technology and breaks the monopoly held by foreign systems in China in this product.
Hollysys’ HiaGuard can be applied for ESD (Emergency Shutdown System), PSD (Process Shutdown System), and FGS (Fire and Gas Systems)
used in various industries. We also invented several series of PLC (Programmable Logic Controller) products, and the most successful applications
include the mining safety protection systems and Traditional Chinese Medicine manufacturing and packaging machine and dispensing machine. Our
core technologies provide a platform that is designed to enable the rapid and efficient development of our technologies for specific applications that
are quickly, efficiently and affordably tailored to particular industries and to the needs of our customers. Our software development tools enable us
to program our systems rapidly, allowing us to apply digital technologies that take advantage of the tremendous advances in electronics and
information technology to improve quality and reliability while reducing cost. The market for our products includes, not only the large number of
factories that are continually under construction in China’s rapidly expanding industrial base, but also extends to the replacement and upgrading of
outdated legacy systems to bring a higher degree of control and efficiency to the automation of processes, delivering increasing benefits to
customers as they meet increased competition. In the future we expect that the market for our products will extend further into South Asia and the
Middle East.
We already have our proprietary high-speed rail signaling system including ATP (Automatic Train Protection), TCC (Train Control Center), LEU
(Line-Side Electronic Unit), BTM (Balise Transmission Module), TSRS (Temporary Speed Restriction Server), HVC (Hollysys Vital Computer)
and Interlocking system been certified according to international standards and have passed the Safety Integrity Level 4 (SIL4) certification. For the
subway signaling system, the proprietary ATS (Automatic Train Supervision) and CBI (Computer Based Interlocking) have passed SIL2 and SIL4
certification respectively by the end of 2011. And in March 2013 we finished the development and certified ZC (Zone Controller), LEU (Line-side
Electronic Unit) and Balise according to SIL4 (Safety Integrity Level 4) requirements in compliance of international standards, the certification of
ATP (Automatic Train Protection) for subway signaling system was finished at the end of calendar year 2013. For both of the signaling systems,
Hollysys is one of the earliest domestic companies in developing and certifying the signaling systems according to the international standards.
Hollysys will be one of the few companies in the world which command the most leading and safety critical technologies of rail signaling system
and we will compete with multinational companies such as Siemens, Alston and Bombardier in domestic and world arena. We believe our research
and development efficiency, latest technology, strong customization and better value for money proposition will give us an unparalleled advantage
in the high-speed rail and subway signaling markets.
For the fiscal years 2017, 2016, and 2015, aggregate annual research and development expenses were approximately $30.1 million, $36.6 million,
and $35.8 million, respectively.
Intellectual Property Rights
We rely on a combination of copyright, patent, trademark and other intellectual property laws, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to
protect them. As of June 30, 2017, we held 163 software copyrights, 141 authorized patents, 182 patent applications and 2 registered
trademarks. Our earliest software copyrights will expire in 2051. Our invention patents have terms of 20 years. The first expiration will be in 2020
and the second will be in 2023 and our utility patents and design patents have terms of 10 years. One utility patent is expected to expire in 2018 and
one design patent expires in fiscal year 2018.
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Although we employ a variety of intellectual property in the development and manufacturing of products, we believe that only a few of our
intellectual property rights are critical to our current operations. However, when taken as a whole, we believe that our intellectual property rights are
significant and that the loss of all or a substantial portion of such rights could have a material adverse effect on our results of operations. Also, from
time to time, we may desire or be required to renew or to obtain licenses from others in order to further develop and manufacture commercially
viable products effectively.
We market our DCS products mainly under the brand name of “HOLLiAS”. Our brand name is well-established and is recognized as associated
with high quality and reliable products by industry participants and customers. We have obtained trademark protection for our brand name
“HOLLiAS” in the PRC as well as in other countries in the world. In addition, we have also registered or applied for a series of trademarks
including brand names for us and our products. The trademarks are issued for 10-year periods and may be renewed prior to expiration.
D. Trend Information
Other than as disclosed in the foregoing disclosures and elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,
commitments or events for the fiscal year 2017 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability,
liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or
financial conditions.
E. Off-Balance Sheet Arrangements
We do not believe that we have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that are material to an investment in our securities.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations, including long-term loans and operating leases and capital and operational commitments
as of June 30, 2017.
(In USD thousands)
Short-term & Long-term Loans
-Principal
-Interest
Operating Lease Obligations(1)
Purchase Obligations(2)
Capital Obligations(3)
Standby Letters of Credit(4)
Performance Guarantees(5)
Total
(1) Operating lease obligations
Total
Less than 1 year
1-3 years
3-5 years
More than 5
years
29,922
1,243
3,942
142,424
1,026
24,941
62,914
266,412
8,541
670
2,453
127,609
1,026
24,941
36,376
201,616
21,170
569
1,323
10,380
-
-
25,720
59,162
116
4
166
3,470
-
-
525
4,281
95
-
-
965
-
-
293
1,353
It represents the future minimum payments under non-cancelable operating leases.
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(2) Purchase obligations
As of June 30, 2017, the Company had approximately $142.4 million in purchase obligations for the coming fiscal year, for purchases of
inventories. The inventories will be mainly used for fulfilling existing contracts or new contracts resulted from the expansion of our operations.
(3) Capital obligations
As of June 30, 2017, the Company had approximately $1.0 million in capital obligations for the coming fiscal year, mainly for the Company’s
information system construction.
(4) Standby letters of credit
We have issued letters of credit to our suppliers to serve as assurance of payment. When a letter of credit is issued, a proportion of the total
amount covered by the letter of credit may be required to be deposited in the bank, and is not available until the payment has been settled or
the letter of credit has expired. As of June 30, 2017, we had approximately $24.9 million in standby letters of credit obligations, with $23.0
million of restricted cash deposited in banks for standby letter of credit.
(5) Performance guarantees
We have provided performance guarantees to our customers to serve as assurance of performance for the contractual obligations. When a
performance guarantee is issued, a proportion of the total guarantee amount may be required to be deposited in the bank, and is not available
until the guarantee is expired. As of June 30, 2017, we had approximately $62.9 million performance guarantees obligation, with $5.8 million
of restricted cash deposited in banks for performance guarantees.
Other than the contractual obligations and commercial commitments set forth above, we did not have any other long-term debt obligations,
operating lease obligations, capital commitments, purchase obligations or other long-term liabilities as of June 30, 2017.
G. Safe Harbor
See "Forward-Looking Information" on page 8.
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth certain information regarding our directors and senior management as of June 30, 2017.
Name
Baiqing Shao
Herriet Qu
Colin Sung
Jerry Zhang
Jianyun Chai
Li Qiao
Age
49
47
51
45
55
60
Position
Chairman of Board of Directors and Chief Executive Officer
Chief Financial Officer
Director
Director
Director
Director
Mr. Baiqing Shao, one of the main founders of the Company, has served as our Chief Executive Officer since November, 2013 and Chairman of
the Company and General Manager of Hollysys Group since December, 2016. Prior to that, he was the Vice General Manager of Hollysys Group
starting from December 2010. Since July 2014, he has been serving as the head of overseas business. From February 2012 to November 2013, he
was the Senior Vice President, Business Development of the Company. From 2002 to 2010, he served as the General Manager of Beijing Hollysys
Information Technology Co., Ltd.(currently known as “Shenhua Hollysys Information Technology Co., Ltd.”), one of our indirect equity investees.
From October 1996 to January 1999, he served as the head of R&D. Mr. Shao has served the Company for more than twenty-four years as one of
the founding group of engineers. Mr. Shao holds a Master Degree of Computer Science from the 6th Research Institute of China Electronics
Corporation and an MBA degree from Peking University.
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Ms. Herriet Qu, has served as our Chief Financial Officer since February 2012. Prior to that, Ms. Qu served as the Financial Controller of the
Company from October 2007 to January 2012. Ms. Qu holds an MBA degree from Oklahoma City University and a Bachelor’s degree from Tianjin
University of Finance & Economics.
Mr. Colin Sung, has served as a member of the Board of Directors and Chairman of the Audit Committee of Board of Directors of the Company
since February 2008. Mr. Sung is the Chief Financial Officer for eHi Auto Services Limited since April 2013. Mr. Sung also has served as adviser
of NeWorld Education Group, Inc. since August 2012 and served as Chief Financial Officer of NeWorld Education Group since August 2011. Prior
to joining NeWorld, he was the CFO of Lighting the Box from March 2011. Mr. Sung served as the deputy Chief Executive Officer and the Chief
Financial Officer of Linktone Ltd., a NASDAQ-listed wireless interactive entertainment service provider in China, from 2009 to 2011. From 2008
to 2009, he served as the Chief Financial Officer and President of China Cablecom Holdings, Ltd. From 2005 to 2008, he was the Chief Financial
Officer of Linktone Ltd., where he also served as the acting Chief Executive Officer in 2006 and as its director of board from 2007 to 2008. From
2004 to 2005, Mr. Sung was the Corporate Controller of UTI, United States, Inc., a subsidiary of International Freight Forwarder (NASDAQ:
UTIW), and from 2001 to 2004, was a Vice President of finance and Corporate Controller of USF Worldwide, Inc., a subsidiary of US Freightways.
From 1997 to 2001, Mr. Sung was Vice President and Corporate Controller for US Operation of Panalpina Welttransport Holding, (PWTN.SW).
Mr. Sung received his bachelor’s degree in accounting from William Paterson University in 1992 and his MBA degree from American
InterContinental University in 2004. Mr. Sung is a Certified Public Accountant and Certified Global Management Accountant.
Ms. Jerry Zhang, has served as a member of the Board of Directors of the Company since September 2007. Ms. Jerry Zhang is Executive Vice
Chairman and Chief Executive Officer (“CEO”) of Standard Chartered Bank (China) Limited (“Standard Chartered China”). Prior to this role, she
has held a variety of senior roles at Standard Chartered China. She was the bank’s Deputy CEO, China and CEO, North China and General
Manager, Beijing Branch. Her key focuses were strategic planning, business development and corporate governance of the Bank’s operations in
North China. As the General Manager of Beijing Branch, Ms. Zhang was also responsible for overall management of Beijing Branch. Ms. Zhang
enjoys a strong track record in setting up good relationship with clients and creating value both for the bank and the clients. In her position as Head
of Financial Institutions (“FI”), Ms. Zhang has led to achieve frog leap developments of the Bank’s FI business, which has become the biggest FI
business amongst all foreign banks in China in almost all aspects. Ms. Zhang joined Standard Chartered China in 1994, and has accumulated rich
implementation and management experiences in wholesale banking business. She has successfully established non-banking financial institutions
business in China for the Bank. In 2009, Ms. Zhang has left the bank for a short duration during which she acted as Chief Representative of Fidelity
International Asset Management Co. Beijing Representative Office. Mrs. Zhang received her M.B.A. from Lancaster University.
Dr. Jianyun Chai, has served as a member of the Board of Directors of the Company since June 2008. Dr. Chai is currently a professor and the
head of the Institute of Power Electronic and Electrical Machine System at Tsinghua University in China. Before he joined Tsinghua University as
an Associate Professor in 1999, Dr. Chai spent eight years working in the motor and information industries in Japan. Dr. Chai is also a member of
various societies and organizations, including the China Renewable Energy Society, the Chinese Society for Electrical Engineering, and the Chinese
Wind Energy Association. Dr. Chai received a Bachelor’s degree and a PhD in Electrical Engineering from Tsinghua University in 1984 and 1989.
Ms. Li Qiao, is the Chairman of Agriculture Resources Pte Ltd. and the Director of CSIC International Pte Ltd. She served as Chairman of the
Company from 2007 to 2010 and as Director of Beijing Hollysys Co., Ltd. from 1999 to 2008. Before that, Ms. Qiao had worked in government for
more than ten years. She was the Minster of Enterprise Division in Business Administration Committee of The Beijing Municipality Concerning the
Experimental Area for Developing New-Technology Industries, and also served as the head of the Zhongguancun Technology Park
(“Zhongguancun”) Administrative Committee. Ms. Li Qiao participated in setting the Five-year plan of Chinese High-Tech Industrial Area and
Zhongguancun High-Tech Development and Industrial Policy. She also participated in organizing and editing “The Regulations of Zhongguancun
High-Tech Development Park” which is regarded as the fundamental law of Zhongguancun. Ms. Qiao also has extensive experience in equity
investment. She organized twelve industry annual analysis reports and participated in establishing the first Beijing venture capital company,
invested and successfully helped a number of companies listed in domestic and abroad. The investment projects that Ms. Qiao involved with include
biological medicine, high-end equipment manufacturing, new energy, chemical and energy, agriculture, education, integrated circuits, aerospace,
fast moving consumer goods, electronic information and other industries. She holds an EMBA of Science and Technology from Hong Kong
University.
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There is no arrangement or understanding with any major shareholders, customers, suppliers or others, pursuant to which any person named above
was selected as a director or member of senior management.
No family relationship exists between any of the persons named above.
B. Compensation
Executive Compensation
The aggregate cash compensation paid to our executive officers as a group was $954,867 for the fiscal year ended June 30, 2017.
In the fiscal year ended June 30, 2012, we granted stock options for a total of 1,476,000 ordinary shares under the long-term incentive plan of the
Company to key employees, including options to purchase 561,000 ordinary shares to the senior executives listed in the table below under the
caption “2012 Options” in this section. All of the grants have specific performance milestones. Additionally, the awards have a provision that if in
certain instances the milestones are exceeded by specified targets, then additional ordinary shares will vest for the related period. The exercise
periods for the options are five years from the date of grant, February 20, 2012. As of June 30, 2017, all the options granted to the above-mentioned
executive officers were vested and exercised.
In the fiscal year ended June 30, 2015, the Company granted 1,740,000 stock options to key employees, including options to purchase 675,000
ordinary shares to the senior executives listed in the table below under the caption “2015 Options” in of this section. The current outstanding awards
have vesting periods of up to five years depending on the person’s position and all of the grants have specific performance milestones. Additionally,
the outstanding awards have a provision that if in certain instances the milestones are exceeded by specified targets, then additional ordinary shares
will vest for the related period. The exercise periods for the options are five years from the date of grant, May 14, 2015. As of June 30, 2017,
198,000 options granted to the above-mentioned executive officers were vested and none of the options were exercised.
Director Compensation
We pay each of our non-employee directors who are not Company employees a monthly fee as compensation for the services to be provided by
him/her as a non-employee director. During fiscal 2017, we paid $4,000 per month from July 2016 to January 2017 and $4,500 per month beginning
from February 2017 to Colin Sung, $3,000 per month from July to December 2016 and $3,500 per month beginning from January 2017 to Jerry
Zhang, $2,000 per month from July 2016 to May 2017 and $2,500 per month beginning from June 2017 to Jianyun Chai, $3,500 per month to Li
Qiao beginning from January 2017. We also reimburse our non-employee directors for out-of-pocket expenses incurred in attending meetings.
In 2011, as the compensation for their continuous service on the Board, we granted to each of the non-employee directors restricted shares (“2011
Restricted Shares”), which vested in equal installments on a quarterly basis over a three-year period beginning on the grant date, which included
22,500 restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang, Jianyun Chai and Qingtai Chen. As of June 30,
2017, all the 2011 Restricted Shares were vested and 22,500 restricted shares granted to Colin Sung were issued.
In 2014, as the compensation for their continuous service on the Board, we granted to each of the non-employee directors restricted shares (“2014
Restricted Shares”), which will vest in equal installments on a quarterly basis over a three-year period beginning on the service inception date,
which included 22,500 restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang and Jianyun Chai, respectively.
As of June 30, 2017, all the 2014 Restricted Shares were vested and 22,500 restricted shares granted to Colin Sung were issued.
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In 2016, as the compensation for their continuous service on the Board, we granted to each of the non-employee directors restricted shares (“2016
Restricted Shares”), which will vest in equal installments on a quarterly basis over a three-year period beginning on the service inception date,
which included 22,500 restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang, Jianyun Chai and Li Qiao,
respectively. As of June 30, 2017, 4,375 shares of the 2016 Restricted Shares were vested and none were issued.
For the fiscal year ended June 30, 2017, the aggregate amount of cash compensation paid to our directors as a group was $135,000.
2006 Stock Plan
On September 7, 2007, our stockholders approved the 2006 Stock Plan, or the 2006 Plan. The 2006 Plan was assumed by us as of the closing of the
merger of Chardan with and into us. The 2006 Plan provided for 3,000,000 ordinary shares for issuance in accordance with the 2006 Plan’s terms.
As of the date of this report, there are 708,000 shares available under the 2006 Plan, 2,292,000 shares have been allocated to outstanding awards that
have not vested or been exercised. A copy of the 2006 Stock Plan was filed with the Registration Statement on Form S-8 (No. 333-170811) and is
incorporated herein by reference.
2015 Equity Plan
On May 14, 2015, the Board of Directors approved 2015 Equity Incentive Plan (the “2015 Equity Plan”). The 2015 Equity Plan authorized the
issuance of five million shares. It will terminate ten years following the date that it was adopted by the Board of Directors. The purposes of 2015
Equity Plan are similar as the 2006 Plan, which is used to promote the long-term growth and profitability of the Company and its affiliates by
stimulating the efforts of employees, directors and consultants of the Company and its affiliates who are selected to be participants, aligning the
long-term interests of participants with those of shareholders, heightening the desire of participants to continue in working toward and contributing
to the success of the Company, attracting and retaining the best available personnel for positions of substantial responsibility, and generally
providing additional incentive for them to promote the success of the Company’s business through the grant of awards of or pertaining to shares of
the Company’s ordinary shares. The 2015 Equity Plan permits the grant of incentive share options, Non-statutory share options, restricted shares,
restricted share units, share appreciation rights, performance units and performance shares as the Company may determine. A copy of 2015 Equity
Plan was filed with the Registration Statement on Form S-8 (No. 333-208615) and is incorporated herein by reference.
2012 Options
The following table sets forth options granted on February 20, 2012 to the following senior management of the Company.
Name
Jianfeng He1
Herriet Qu2
Baiqing Shao3
Number of Ordinary Shares
Issuable upon Exercise of
Options
Number of
Ordinary
Shares
Vested
Exercise
Price
198,000
198,000
165,000
198,000 $
198,000 $
165,000 $
8.69
8.69
8.69
Date of Grant
2012-2-20
2012-2-20
2012-2-20
Date of
Expiration
2017-2-19
2017-2-19
2017-2-19
1198,000 options vest on the 24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year
2011 to fiscal year 2014 exceeds stated thresholds on those dates. As of June 30, 2017, the securities reported as held by Mr. Jianfeng He include
options to purchase 198,000 ordinary shares that are vested and exercised.
2198,000 options vest on the 24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year
2011 to fiscal year 2014 exceeds stated thresholds on those dates. As of June 30, 2017, the securities reported as held by Ms. Herriet Qu include
options to purchase 198,000 ordinary shares that are vested and exercised.
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3165,000 options vest on the 24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year
2011 to fiscal year 2014 exceeds stated thresholds on those dates. As of June 30, 2017, the securities reported as held by Mr. Baiqing Shao include
options to purchase 165,000 ordinary shares that are vested and exercised.
These options were part of options to purchase an aggregate of 1,476,000 ordinary shares issued to certain individuals on February 20, 2012, all
with similar vesting provisions.
On September 26, 2016, the Company announced a regular cash dividend of US$ 0.20 per share to the holders of the Company’s ordinary shares.
Shareholders of record as of the close of business on October 26, 2016 were eligible to receive the dividend. As a result, the options to be exercised
by the above optionees after October 27, 2016 will be subject to an adjusted exercise price of US$8.69.
The above options vest annually over a period of four years from their grant date, subject to different performance conditions and are exercisable
once vested for up to five years from the date of grant. As of June 30, 2017, all of the 1,476,000 options have been vested and exercised.
2015 Options
On May 14, 2015, the Company granted an aggregate of 1.74 million of options to certain officers and employees of the Company pursuant to the
2015 Equity Plan. The options vest annually over a period of four years from their grant date of May 14, 2015, subject to different performance
conditions and are exercisable up to five years from the date of grant. As of June 30, 2017, 198,000 of the options were vested and none of them
were exercised.
The following table sets forth options granted on May 14, 2015 to the following named directors and officers:
Name
Herriet Qu1
Baiqing Shao1
Number of
Ordinary Shares
Issuable upon Exercise of
Options
Number of
Ordinary
Shares
Vested
Exercise
Price
225,000
225,000
45,000 $
45,000 $
22.05
22.05
Date of Grant
2015-5-14
2015-5-14
Date of
Expiration
2020-5-13
2020-5-13
1The total Option Shares to be granted will be determined by the yearly growth rate of Non-GAAP diluted earnings per share (“EPS”) from June 30,
2014 to June 30, 2017. An aggregate of up to 150,000 Options in total will vest to the optionee if the yearly growth rate of Non- GAAP diluted
earnings per share (“EPS”) from June 30, 2014 to June 30, 2017 equals or exceed stated thresholds on those dates; an aggregate of up to 187,500
Options in total will vest to the optionee if the yearly growth rate of Non-GAAP diluted EPS from June 30, 2014 to June 30, 2017 equals or exceeds
an additional threshold; and an aggregate of up to 225,000 Options will vest to the optionee if the yearly growth rate of Non-GAAP diluted EPS
from June 30, 2014 to June 30, 2017 equals or exceeds foregoing threshold.
These options were part of an aggregate of 1,740,000 ordinary shares underlying options issued to optionees on May 14, 2015, all with similar
vesting provisions.
2011 Restricted shares:
The following table sets forth the 2011 Restricted Shares granted to the following directors:
Jerry Zhang
Colin Sung
Jianyun Chai
Name
Number of Restricted
Shares Granted
15,000
22,500
15,000
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Date of Grant
2011-1-1
2011-2-1
2011-6-2
Number of Restricted
Shares Vested
Number of Restricted
Shares Issued
15,000
22,500
15,000
-
22,500
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The restricted shares set forth in the table above vest quarterly over a period of 3 years from their respective grant date. As of June 30, 2017, all the
2011 restricted shares were vested, and 22,500 of them have been issued to Colin Sung.
2014 Restricted shares:
The following table sets forth the 2014 Restricted Shares granted to the following independent directors:
Name
Jerry Zhang
Colin Sung
Jianyun Chai
Number of Restricted
Shares Granted
15,000
22,500
15,000
Date of Grant
2014-1-1
2014-2-1
2014-6-2
Number of Restricted
Shares Vested
Number of Restricted
Shares Issued
15,000
22,500
15,000
-
22,500
-
The restricted shares set forth in the table above vest quarterly over a period of 3 years from their respective service inception date. As of June 30,
2017, all the restricted shares were vested, and 22,500 of them have been issued to Colin Sung.
2016 Restricted shares:
The following table sets forth the 2016 Restricted Shares granted to the following directors:
Jerry Zhang
Colin Sung
Jianyun Chai
Li Qiao
Name
Number of Restricted
Shares Granted
15,000
22,500
15,000
15,000
Date of Grant
2017-1-1
2017-2-1
2017-6-2
2017-1-1
Number of Restricted
Shares Vested
Number of Restricted
Shares Issued
1,250
1,875
-
1,250
-
-
-
-
The restricted shares set forth in the table above vest quarterly over a period of 3 years from their respective service inception date. As of June 30,
2017, 4,375 restricted shares were vested, and none of them have been issued.
Employment Agreements
We entered into a three-year employment agreement with our Chief Executive Officer, Mr. Baiqing Shao on November 30, 2013. The agreement
was automatically renewed on November 30, 2016. Mr. Shao is entitled to insurance benefits, four weeks’ vacation, and reimbursement of business
expenses and, if necessary, relocation expenses. The agreement may be terminated by us for death, disability and cause. Mr. Shao may terminate the
employment agreement for any good reason at any time. The agreements contain provisions for the protection of confidential information and a
three-year-after employment non-competition period within China.
We entered into a three-year employment agreement with our Chief Financial Officer, Ms. Herriet Qu on February 1, 2015. Ms. Qu is entitled to
insurance benefits, four weeks’ vacation, and reimbursement of business expenses and, if necessary, relocation expenses. The agreement may be
terminated by us for death, disability and cause. Ms. Qu may terminate the employment agreement for any good reason at any time. The agreements
contain provisions for the protection of confidential information and a three-year-after employment non-competition period within China.
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C. Board Practices
Terms of Directors and Executive Officers
Our board consisted of five directors for fiscal year 2017. Our directors are not subject to a term of office limitation, and hold office until the next
annual meeting of members or until such director’s earlier resignation, removal from office, death or incapacity. Any vacancy on our board resulting
from death, resignation, removal or other cause, and any newly created directorship resulting from any increase in the authorized number of
directors between meetings of members, may be filled either by the affirmative vote of a majority of all the directors then in office (even if less than
a quorum) or by a resolution of members. In addition, the service agreement between us and the directors do not provide benefits upon termination
of their services In connection with the adoption of the 2010 Rights Plan, we amended our Memorandum and Articles of Association to provide that
directors may only be removed by shareholders for cause.
Our executive officers are appointed by our board. The executive officers shall hold office until their successors are duly elected and qualified, but
any officer elected or appointed by the directors may be removed at any time, with or without cause, by resolution of directors. Any vacancy
occurring in any office may be filled by resolution of directors.
Independence of Directors
We have elected to follow the rules of NASDAQ to determine whether a director is independent. Our board will also consult with counsel to ensure
that our board’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence
of directors. Rule 5605(a)(2) of Listing Rules of The NASDAQ Stock Market, Inc., or the NASDAQ Listing Rules, defines an “independent
director” generally as a person, other than an officer of the Company, who does not have a relationship with the Company that would interfere with
the director’s exercise of independent judgment. Consistent with these considerations, our board has affirmatively determined that, Mr. Colin Sung,
Mr. Jianyun Chai and Ms. Jerry Zhang currently are our independent directors.
Board Committees
Our board has established an audit committee, a compensation committee and a corporate governance and nominating committee. Each committee
is comprised solely of independent directors within the meaning of Rule 5605(a)(2) of the Nasdaq Listing Rules, and meet the criteria for
independence set forth in Rule 10A-3(b)(1) of the Exchange Act.
Audit Committee
Our audit committee consists of Mr. Colin Sung, Ms. Jerry Zhang, and Mr. Jianyun Chai, with Mr. Sung serving as the Chair. Our board has
determined that all of our audit committee members are independent directors within the meaning of applicable NASDAQ listing rules, and meet the
criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act.
Our board has determined that each of the committee members has an understanding of generally accepted accounting principles and financial
statements, the ability to assess the general application of such principles in connection with our financial statements, including estimates, accruals
and reserves, experience in analyzing or evaluating financial statements of similar breadth and complexity as our financial statements, an
understanding of internal controls and procedures for financial reporting, and an understanding of audit committee functions.
Our board believes that Mr. Sung qualifies as an “audit committee financial expert” within the meaning of all applicable rules. Our board believes
that Mr. Sung has financial expertise from his degrees in business, his activities as a chief executive officer and chief financial officer of various
companies, and his consulting activities in the areas of accounting, corporate finance, capital formation and corporate financial analysis.
We adopted an audit committee charter under which the committee is responsible for reviewing the scope, planning and staffing of the audit and
preparation of the financial statements. This includes consultation with management, the auditors and other consultants and professionals involved
in the preparation of the financial statements and reports. The committee is responsible for performing oversight of the relationship with our
independent auditors. The committee also has a general compliance oversight role in assuring that our directors, officers and management comply
with our code of ethics, reviewing and approving of related party transactions, dealing with complaints regarding accounting, internal controls and
auditing matters, and complying with accounting and legal requirements applicable to us.
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Pursuant to the terms of its charter, the audit committee’s responsibilities include, among other things:
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selecting our independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by our independent
auditors;
reviewing with our independent auditors any audit problems or difficulties and management’s response;
reviewing and approving all proposed related-party transactions;
discussing the annual audited financial statements with management and our independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of significant internal
control deficiencies;
annually reviewing and reassessing the adequacy of our audit committee charter;
such other matters that are specifically delegated to our audit committee by our board of directors from time to time;
(cid:120)
(cid:120)
(cid:120) meeting separately and periodically with management and our internal and independent auditors; and
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reporting regularly to the full board of directors.
Compensation Committee
Our compensation committee consists of Ms. Jerry Zhang and Mr. Jianyun Chai and Mr. Colin Sung, with Ms. Jerry Zhang serving as its Chair. Our
board has determined that all of our compensation committee members are independent directors within the meaning of applicable NASDAQ listing
rules, and meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act.
Our compensation committee assists the board in reviewing and approving the compensation structure of our executive officers, including all forms
of compensation to be provided to our executive officers. Our chief executive officer may not be present at any committee meeting during which
his compensation is deliberated. The Compensation Committee is responsible for, among other things:
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approving and overseeing the compensation package for our chief executive officer and the other senior executive officers;
reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer, evaluating the
performance of our chief executive officer in light of those goals and objectives, and setting the compensation level of our chief executive
officer based on this evaluation;
reviewing and making recommendations in respect of director compensation;
engaging and overseeing compensation consultants;
reviewing periodically and making recommendations to the Board regarding any long-term incentive compensation or equity plans,
programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans and the administration of those plans; and
reviewing and making recommendations to the Board regarding succession plans for the chief executive officer and other senior officers.
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Ms. Jerry Zhang, Mr. Jianyun Chai and Mr. Colin Sung with Ms. Zhang acting as
the Chair. Each member is “independent” as that term is defined under the NASDAQ listing rules. The corporate governance and nominating
committee assists the board of directors in identifying individuals qualified to become our directors and in determining the composition of the board
and its committees. The corporate governance and nominating committee is responsible for, among other things:
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identifying and recommending to the Board nominees for election or re-election to the board, or for appointment to fill any vacancy;
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reviewing annually with the board the current composition of the board in light of the characteristics of independence, age, skills,
experience and availability of service to us;
identifying and recommending to the board the directors to serve as members of the board’s committees; and
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(cid:120) monitoring compliance with our Corporate Governance Guidelines
D. Employees
We had 3,202, 3,641 and 3,632 employees as of June 30, 2017, 2016, and 2015, respectively. As of June 30, 2017, there were 2,638 employees
located in China and 564 employees outside China. The following table sets forth our employees as of June 30, 2017 based on their functional areas
within the Company:
Category
China
Overseas
Total
Sales & Marketing
Research and development
Engineering
Production
Management
Total
501
596
866
361
314
2,638
17
-
426
-
121
564
518
596
1,292
361
435
3,202
We believe that our relationship with our employees is good. The remuneration payable to employees includes basic salaries and bonuses. We have
not experienced any significant problems or disruption to our operations due to labor disputes, nor have we experienced any difficulties in
recruitment and retention of experienced staff. As required by applicable laws of China, Singapore, Malaysia, Hong Kong, Dubai, Saudi Arabia,
India and Qatar, we have entered into employment contracts with all of our officers, managers and employees.
Our employees in China participate in a state pension scheme organized by Chinese municipal and provincial governments. We also contribute to
social insurance for our employees each month, which includes pension, medical insurance, unemployment insurance, occupational injuries
insurance and housing providence fund in accordance with PRC regulations.
Our employees in Singapore, who are Singapore citizens and Singapore permanent residents, participate in monthly statutory contribution
requirements into the Central Provident Fund organised by the Central Provident Fund Board, a statutory board under the Ministry of Manpower. It
is a comprehensive social security system that enables the qualified to set aside funds for retirement, healthcare, home ownership, family protection
and asset enhancement.
Our employees in Malaysia participate in contributing into an Employee’s Provident Fund, a monthly mandatory saving and retirement plan
organized by the Employee’s Provident Fund Board, a Malaysian government agency under the Ministry of Finance. We also contribute to social
insurance for our employees each month, which include medical and cash benefits, provision of artificial aids and rehabilitation to employees in
order to provide financial guarantees and protection to the family in accordance to Malaysia regulations.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary shares (i) by each of our officers and directors, as
of September 18, 2017; (ii) by each person who is known by us to beneficially own more than 5% of our ordinary shares as of June 30, 2017. The
table does not include any preferred shares or ordinary shares that may be issued under the Rights Plan of the Company. The address of each of the
persons set forth below is in care of Hollysys Automation Technologies Ltd., No. 2 Disheng Middle Road, Beijing Economic-Technological
Development Area, Beijing, P. R. China 100176.
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Name & Address of
Beneficial Owner
Officers and Directors
Baiqing Shao
Herriet Qu
Colin Sung
Jerry Zhang
Jianyun Chai
Li Qiao
5% Securities Holder
Baiqing Shao
Prudential PLC
Davis Selected Advisers
Schroder Investment Management Group
* Less than 1%.
Office, if Any
Title of Class
Amount & Nature
of Beneficial
Ownership (1)
Percent of
Class (2)
Chairman and Chief
Executive Officer
Chief Financial Officer
Director
Director
Director
Director
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
4,354,223(3)
726,471(4)
48,750(5)
32,500(6)
31,250(7)
530,588(8)
4,354,223(3)
10,792,037(9)
3,391,934
3,241,090
7.20%
1.2%
*
*
*
*
7.20%
17.88%
5.62%
5.37%
(1) Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as otherwise indicated, each of the beneficial owners listed above has direct ownership of
and sole voting power and investment power with respect to our ordinary shares.
(2) As of September 18, 2017, a total of 60,342,099 ordinary shares are outstanding pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner
above, any options exercisable within 60 days have been included in the denominator.
(3) The securities reported as held by Mr. Baiqing Shao include 4,144,223 shares of our ordinary shares held indirectly through Ace Lead Profits
Limited. The foregoing entity is a BVI entity that is wholly-owned and controlled by Mr. Baiqing Shao therefore he may be deemed to be the
beneficial owner of the ordinary shares held by it. The securities reported as held by Mr. Baiqing Shao also include options to purchase 165,000
ordinary shares that are vested and exercised, and options to purchase 45,000 ordinary shares that are vested but do not include options to
purchase 45,000 ordinary shares that will not be vested within 60 days.
(4) The securities reported as held by Ms. Herriet Qu include 681,471 shares of our ordinary shares held indirectly through Golden Result
Enterprises Limited. The foregoing entity is a BVI entity that is wholly-owned and controlled by Ms. Herriet Qu therefore she may be deemed
to be the beneficial owner of the ordinary shares held by it. The securities reported as held by Ms. Qu also include options to purchase 45,000
ordinary shares that are vested, and do not include options to purchase 45,000 ordinary shares that will not vest within 60 days.
(5) The securities reported as held by Mr. Colin Sung include 45,000 ordinary shares that were issued and 3,750 restricted shares vested but not
issued, but do not include 18, 750 restricted shares that are not yet vested.
(6) The securities reported as held by Ms. Jerry Zhang include 32,500 restricted shares vested but not issued; and do not include 12,500 restricted
shares that are not yet vested.
(7) The securities reported as held by Mr. Jianyun Chai includes 31,250 restricted shares vested but not issued, and do not include 13,750 restricted
shares that are not yet vested.
(8) The securities reported as held by Ms. Li Qiao include 528,088 ordinary shares and 2,500 restricted shares vested but not issued, but do not
include 12,500 restricted shares that are not yet vested.
(9) Based on information provided by Eastspring Investments (Singapore) Limited and Eastspring Investments in Amendment No. 1 to Schedule
13G filed with the SEC on August 9, 2017, reporting beneficial ownership of our ordinary shares as of July 31, 2017, Eastspring Investments
(Singapore) Limited had sole power to vote and dispose with respect to 6,061,300 shares while Eastspring Investments beneficially owned
3,250,000 shares. To our knowledge, both Eastspring Investments (Singapore) Limited and Eastspring Investments are members of Prudential
PLC.
None of our major shareholders have different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent
date, result in a change of control of the Company.
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ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Please refer to Item 6.E “Directors, Senior Management and Employees — Share Ownership.”
B. Related Party Transactions
The related party relationships and related party transactions are listed as follows:
Related party relationships
Name of related parties
Relationship with the Company
Shenhua Hollysys Information Technology Co., Ltd. (“Shenhua Information”)
China Techenergy Co., Ltd. (“China Techenergy”)
Beijing Hollysys Electric Motor Co., Ltd. (“Electric Motor”)
Beijing Hollysys Machine Automation Co., Ltd. (“Hollysys Machine”)
Heilongjiang Ruixing Technology Co., Ltd. (“Heilongjiang Ruixing”)
Beijing IPE Biotechnology Co., Ltd. (“Beijing IPE”)
Beijing Hollycon Medicine & Technology. Co., Ltd. (“Hollycon”)
Shenzhen HollySys Intelligent Technologies Co., Ltd. (“Shenzhen HollySys”)
Due from related parties (in USD Thousands)
20% owned by Beijing Hollysys
40% owned by Beijing Hollysys
40% owned by Beijing Hollysys
30% owned by Hollysys Investment
6% owned by Beijing Hollysys
22.02% owned by Beijing Hollysys
30% owned by Hollysys Group
60% owned by Hollysys Intelligent
China Techenergy
Shenhua Information
Heilongjiang Ruixing
Hollysys Machine
Hollycon
Shenzhen HollySys
Beijing IPE
June 30,
2016
2017
$
$
22,579
2,995
1,071
1,367
-
-
-
28,778
3,267
1,049
965
79
2
2
$
28,012
$
34,142
The Company’s management believes that the collection of amounts due from related parties is reasonably assured and accordingly, no provision
had been made for these balances.
Due to related parties (in USD Thousands)
China Techenergy
Hollysys Machine
Shenhua Information
Electric Motor
Beijing IPE
Hollycon
June 30,
2016
2017
$
$
$
1,170
112
358
5
-
-
1,645
$
1,117
817
353
11
2
1
2,301
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Transactions with related parties (in USD Thousands)
Purchases of goods and services from:
Hollysys Machine
Electric Motor
Hollycon
Shenhua Information
China Techenergy
Sales of goods and integrated solutions to:
China Techenergy
Shenhua Information
Hollysys Machine
Hollycon
Beijing IPE
Electric Motor
Operating lease income from:
Hollycon
Hollysys Machine
Purchases of intangible asset:
$
$
$
2015
Year ended June 30,
2016
2017
$
914
50
-
368
1
$
555
354
-
-
-
1,333
$
909
$
749
29
8
-
-
786
2015
Year ended June 30,
2016
2017
$
21,936
2,128
512
-
-
1
$
3,657
847
235
-
-
-
10,842
765
167
108
7
-
$
24,577
$
4,739
$
11,889
2015
Year ended June 30,
2016
2017
-
41
-
40
$
41
$
40
$
602
-
602
2015
Year ended June 30,
2016
2017
Hollysys Machine
$
- $
- $
1,648
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The Company sells automation control systems to China Techenergy which is used for non-safety operations control in the nuclear power industry.
China Techenergy incorporates the Company’s non-safety automation control systems with their proprietary safety automated control systems to
provide an overall automation and control system for nuclear power stations in China. The Company is not a party to the integrated sales contracts
executed between China Techenergy and its customers. The Company’s pro rata shares of the intercompany profits and losses are eliminated until
realized through a sale to outside parties, as if China Techenergy were a consolidated subsidiary.
The Company sells automation control systems to Shenhua Information which is used for operations control in the information automation industry.
Shenhua Information incorporates the Company’s automation control systems with their proprietary automated remote control systems to provide an
overall automation and control system to its customers. The Company is not a party to the integrated sales contracts executed between Shenhua
Information and its customers. The Company’s pro rata shares of the intercompany profits and losses are eliminated until realized through a sale to
an outside party as if Shenhua Information were a consolidated subsidiary.
The Company engages Hollysys Machine to sell the Company’s products to end customers. The Company pays commission to Hollysys Machine in
exchange for its services. The amount of the commission is determined based on the value of the products sold by Hollysys Machine during the
year. In fiscal year 2017, one of the Company’s subsidiary Hollysys Intelligent reached an agreement with Hollysys Machine to purchase a series of
fixed assets, software copyrights and patents because of their similar business category.
The Company entered into an operating lease agreement with Hollycon to lease part of its one building located in Beijing. The lease term is for 1
year from the commencement date of July 1, 2016 to June 30, 2017.
Amounts due from and due to the related parties relating to the above transactions are unsecured, non-interest bearing and repayable on demand.
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this Annual Report. See Item 18 “Financial Statements.”
Legal Proceedings
We are currently not a party to any material legal or administrative proceedings, and we are not aware of threatened material legal or administrative
proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of
our business.
Dividend Policy
Historically we have retained our earnings for use in the expansion and operation of our business except that on February 9, 2015, we declared a
special cash dividend of $0.40 per share to the holders of the Company’s ordinary shares. The record day was February 23, 2015 and payment day
was March 16, 2015. Continental Stock Transfer & Trust acted as the paying agent. During the fiscal year of 2016, no cash dividend was declared
and paid. On August 11, 2016, the Board of Directors approved a regular cash dividend policy pursuant to which future cash dividends are expected
to be paid to holders of the Company’s ordinary shares on an annual basis out of funds legally available for such purpose. On September 26, 2016,
the Board of Directors declared a regular annual dividend of $0.20 per ordinary share for 2016. The dividend was paid on November 11, 2016 to
shareholders of record at the close of business on October 26, 2016. However, the declaration and payment of future dividends will be at the
discretion of the Board, and will depend upon many factors, including the Company’s financial condition, earnings, and capital requirements of its
businesses, legal requirements, regulatory constraints, industry practice, and other factors that the Board deems relevant. As a BVI company, we
may only declare and pay dividends if our directors are satisfied, on reasonable grounds, that immediately after the distribution (i) the value of our
assets will exceed our liabilities and (ii) we will be able to pay our debts as they fall due.
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Notwithstanding the understanding that earnings will be accumulated, our ability to pay dividends depends substantially on the receipt of dividends
to us by our subsidiaries.
For the PRC subsidiaries, each of them may pay dividends only out of its accumulated distributable profits, if any, determined in accordance with its
articles of association and the accounting standards and regulations in China. Pursuant to applicable PRC laws and regulations, 10% of after-tax
profits of each of our consolidated PRC entities are required to be set aside in a statutory surplus reserve fund annually until the reserve balance
reaches 50% of such PRC entity’s registered capital. Allocations from these statutory surplus reserves may only be used for specific purposes and
are not distributable to us in the form of loans, advances, or cash dividends.
Under the New EIT Law and its implementation rules issued by the PRC State Council, both of which became effective on January 1, 2008,
dividends from our PRC subsidiaries to us may be subject to a withholding tax at the rate of 10% if the dividend is derived from profits generated
after January 1, 2008. If we are deemed to be a PRC resident enterprise, the withholding tax may be exempted, but in such a case we will be subject
to a 25% tax on our global income, and our non-PRC investors may be subject to PRC income tax withholding. For a more detailed discussion of
the New EIT Law, see Item 10 - Additional Information, Subpart E, Taxation in China of this Form 20-F.
For the Singapore and Malaysia subsidiaries, each of them may pay dividends only out of its profits based on the articles of association and the
Companies Act in Singapore and Malaysia. There is no limit to the amount of dividend payable as long as there are sufficient profits. There is no
withholding tax imposed on a Singapore and Malaysia company paying dividends to a company located outside of Singapore and Malaysia upon
remittance.
For the Qatar subsidiary, it may pay dividends only out of its profits based on the articles of association and the Companies Act in Qatar. Pursuant to
applicable Qatari laws and regulations, 10% of after-tax profits are required to be set aside in a statutory surplus reserve fund annually until the
reserve balance reaches 50% of registered capital. The statutory reserve can be used to cover the losses of the companies or to increase the capital of
the companies with a decision by the general assembly. There is no withholding tax imposed on the Qatar company paying dividends to parent
company located in Singapore.
B. Significant Changes
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this Annual Report.
ITEM 9.
THE OFFER AND LISTING
A. Offer and Listing Details
Since August 1, 2008, our ordinary shares have been listed on the NASDAQ Global Select Market under the symbol “HOLI”. The following table
provides the high and low reported market prices of our ordinary shares as reported by Yahoo! Finance for the periods indicated.
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Nasdaq Price per Share
Low
High
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
13.96
24.94
26.84
23.49
23.21
23.49
22.60
21.74
20.80
23.21
23.09
19.18
17.28
18.19
16.69
17.19
17.28
19.18
20.50
21.15
7.33
11.79
17.18
15.21
15.25
15.89
17.34
15.21
15.95
16.95
17.89
16.56
15.25
16.56
15.25
15.56
16.04
15.84
17.79
19.86
Annual Market Prices(1)
Fiscal Year 2013
Fiscal Year 2014
Fiscal Year 2015
Fiscal Year 2016
Fiscal Year 2017
Quarterly Market Prices
First Quarter 2016 ended September 30, 2015
Second Quarter 2016 ended December 31, 2015
Third Quarter 2016 ended March 31, 2016
Fourth Quarter 2016 ended June 30, 2016
First Quarter 2017 ended September 30, 2016
Second Quarter 2017 ended December 31, 2016
Third Quarter 2017 ended March 31, 2017
Fourth Quarter 2017 ended June 30, 2017
Monthly Market Prices
March 2017
April 2017
May 2017
June 2017
July 2017
August 2017
September 2017 (through September 18, 2017)
(1) All periods end June 30 of the stated year, unless otherwise noted.
B. Plan of Distribution
Not applicable
C. Markets
See our disclosures under “Item 9. A. Offer and Listing.”
D. Selling Shareholders
Not Applicable
E. Dilution
Not Applicable
F. Expenses of Issue
Not Applicable
ITEM 10.
ADDITIONAL INFORMATION
A. Share Capital
Not applicable
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B. Memorandum and Articles of Association
The following represents a summary of certain key provisions of the Company’s amended and restated memorandum and articles of
association. The summary does not purport to be a summary of all of the provisions of our memorandum and articles of association and of all
relevant provisions of BVI law governing the management and regulation of BVI companies.
Register
The Company was incorporated in the BVI on February 6, 2006 under the BVI Business Companies Act (the “Act”). The Company filed a
Certificate of Change of Name to change its name from HLS Systems International, Inc. to Hollysys Automation Technologies Ltd. on July 17,
2009. On May 26, 2016, the Board of Directors the Company approved the amended and restated memorandum and articles of association (the
“Amended and Restated M&A”) to exclude the application of Sections 60 and 61 of the Act. The Amended and Restated M&A became effective
upon the registration by the Registrar of Corporate Affairs of the British Virgin Islands on May 27, 2016. The Board of Directors believes that such
change is desirable and to the benefit of all of the shareholders of the Company because it will provide the Company with increased flexibility of
action to purchase its own shares from time to time based on market conditions, stock prices, and other factors without the delay and expense
involved in offering to purchase share from all shareholders or obtaining written consent on such purchase from the shareholders as otherwise
required under Sections 60 and 61 of the Act. The Amended and Restated M&A authorizes the issuance of up to 100,000,000 ordinary shares of
$0.001 par value, and (ii) 90,000,000 preferred shares of $0.001 par value.
Objects and Purposes
The Company’s Amended and Restated M&A grants the Company full power and capacity to carry on or undertake any business or activity and do
any act or enter into any transaction not prohibited by the Act or any other BVI legislation.
Directors
A director must, immediately after becoming aware of the fact that he is interested in a transaction entered into or to be entered into by us, disclose
such interest to the board of directors, unless (i) the transaction or proposed transaction is between the director and the company and (ii) the
transaction or proposed transaction is or is to be entered into in the ordinary course of our business and on usual terms and conditions. The director
who is interested in a transaction entered into or to be entered into by the Company may (i) vote on a matter relating to the transaction; (ii) attend a
meeting of directors at which a matter relating to the transaction arises and be included in the quorum; and (iii) sign a document on behalf of the
Company, or do any other thing in his capacity as a director, that relates to the transaction.
The directors may fix their compensation for services rendered to us.
By a resolution of directors, the directors may exercise all our powers to borrow money, mortgage or charge our undertakings and property, issue
debentures, denture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation occurred by us or of
any third party.
Each director holds office until his successor takes office or until his earlier death, resignation or removal by the members or a resolution passed by
the majority of the remaining directors.
A director shall not require a share qualification.
Directors may only be removed for cause by the shareholders.
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Rights and Obligations of Shareholders
Dividends
Subject to the Act, the directors may, by resolution of directors, declare dividends and distributions by the Company to members and authorize
payment on the dividends or distributions so long as that immediately after the distribution, the value of the Company’s assets exceeds its liabilities
and the Company is able to pay its debts as they fall due. Any distribution payable in respect of a share which has remained unclaimed for three
years from the date when it became due for payment shall, if the board of the directors so resolves, be forfeited and cease to remain owing by the
Company. The directors may, before authorizing any distribution, set aside out of the profits of the Company such sum as they think proper as a
reserve fund, and may invest the sum so set apart as a reserve fund upon such securities as they may select.
The holder of each ordinary share has the right to an equal share in any distribution paid by the Company.
Voting Rights
Each ordinary share confers on the shareholder the right to one vote at a meeting of the members or on any resolution of members on all matters
before the shareholders of the Company.
Rights in the event of winding up
The holder of each ordinary share is entitled to an equal share in the distribution of the surplus assets of the Company on a winding up.
Redemption
The Company may purchase, redeem or otherwise acquire and hold its own shares with the consent of members whose shares are to be purchased,
redeemed or otherwise acquired unless the Company is permitted by the Act or any provision of the Amended and Restated M&A to purchase,
redeem or otherwise acquire the shares without their consent.
The Company may purchase, redeem or otherwise acquire its shares at a price lower than the fair value if permitted by, and then only in accordance
with, the terms of the Amended and Restated M&A or a written agreement for the subscription for the shares to be purchased, redeemed or
otherwise acquired.
Changes in the rights of shareholders
The rights attached to any class of shares (unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the
Company is being wound-up, be varied with the consent in writing of not less than three-fourths of the issued shares of that class and the holders of
not less than three-fourths of the issued shares of any other class of shares which may be affected by such variation.
Meetings
The directors may convene meetings of the members of the Company at such times and in such manner and places as the directors consider
necessary or desirable. A meeting of members must be held if requested by members holding at least 30% of the voting rights in respect of the
matter for which the meeting is being held. No less than seven days' notice of meetings is required to be given to members.
A meeting of members is properly constituted if at the commencement of the meeting the holder or holders present in person or by proxy entitled to
exercise at least fifty percent of the voting rights of the shares of each class or series of shares entitled to vote as a class or series thereon and the
same proportion of the votes of the remaining shares entitled to vote thereon.
A member shall be deemed to be present at the meeting if he participates by telephone or other electronic means and all members participating in the
meeting are able to hear each other.
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A resolution of members may be approved at a duly constituted meeting of members by the affirmative vote of a simple majority of the votes of
those members entitled to vote and voting on the resolution.
A meeting of members held in contravention of the requirement to give notice is valid if members holding not less than 90% of:(a) the total voting
rights on all matters to be considered at the meeting; or (b) the votes of each class or series of shares where members are entitled to vote thereon as a
class or series together with an absolute majority of the remaining votes, have waived notice of the meeting. Attendance at the meeting is deemed to
constitute waiver.
The inadvertent failure of the directors to give notice of a meeting to a member, or the fact that a member has not received notice, does not
invalidate the meeting.
A member may be represented at a meeting of members by a proxy who may speak and vote on behalf of the member. A written instrument giving
the proxy such authority must be produced at the place appointed for the meeting before the time for holding the meeting at which such person
proposes to vote.
Limitations on Ownership of Securities
There are no limitations on the right of non-residents or foreign persons to own the Company’s securities imposed by BVI law or by the Amended
and Restated M&A
Change in Control of Company
While directors of the Company may be appointed by the members or directors for such terms as may be determined at the time of such
appointment, and may be removed by resolution of directors with or without cause, directors may not be removed by the members except for cause.
The unissued shares of the Company are at the disposal of the directors who may offer, allot, grant options over or otherwise dispose of them to
such persons at such times and for such consideration, being not less than the par value of the shares being disposed of, and upon such terms and
conditions as the directors may determine.
Ownership Threshold
There are no provisions governing the ownership threshold above which shareholder ownership must be disclosed.
Changes in Capital
Subject to the provisions of the Act, we may, by a resolution of directors or members, amend the Amended and Restated M&A to increase or
decrease the number of shares authorized to be issued. The directors of the Company may, by resolution, authorize a distribution (including a capital
distribution) by the Company at a time, of an amount, and to any members they think fit if they are satisfied, on reasonable grounds, that the
Company will, immediately after the distribution, satisfy the solvency test. The solvency test is satisfied if the value of the Company’s assets
exceeds its liabilities, and the Company is able to pay its debts as they fall due.
Differences in Corporate Law
The company law of the BVI differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the
significant differences between the provisions of the companies law applicable to us and the laws applicable to companies incorporated in the
United States and their shareholders.
Protection for minority shareholders
Under the laws of most U.S. jurisdictions, majority and controlling shareholders of a company generally have certain “fiduciary” responsibilities to
the minority shareholders. Corporate actions taken by majority and controlling shareholders that are unreasonable and materially detrimental to the
interests of minority shareholders may be declared null and void. Minority shareholders may have less protection for their rights under BVI law
than they would have under U.S. law.
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Powers of directors
Unlike most U.S. jurisdictions, the directors of a BVI company, subject in certain cases to court’s approvals but without shareholders’ approval,
may implement the sale, transfer, exchange or disposition of any asset, property, part of the business, or securities of the company, with the
exception that shareholder approval is required for the disposition of over 50% in the value of the total assets of the company.
Conflict of interests
Similar to the laws of most U.S. jurisdictions, when a director becomes aware of the fact that he has an interest in a transaction which we are to enter
into, he must disclose it to our board. However, with sufficient disclosure of interest in relation to that transaction, the director who is interested in a
transaction entered into or to be entered into by the Company may (i) vote on a matter relating to the transaction; (ii) attend a meeting of directors at
which a matter relating to the transaction arises and be included in the quorum; and (iii) sign a document on behalf of us, or do any other thing in his
capacity as a director, that relates to the transaction.
Written consent and cumulative voting
Similar to the laws of most U.S. jurisdictions, under the BVI law, shareholders are permitted to approve matters by way of written resolution in
place of a formal meeting. BVI law does not make a specific reference to cumulative voting, and our current Amended and Restated M&A have no
provision authorizing cumulative voting.
Takeover provisions
On August 27, 2010, our Board of Directors adopted the 2010 Rights Plan. In connection with the 2010 Rights Plan, the Board of Directors declared
a dividend distribution of one “Right” for each outstanding ordinary share to shareholders of record at the close of business on August 27, 2010,
effective as of September 27, 2010. Each Right entitles the shareholder to buy one share of our Class A Preferred Stock at a price of $160. Unless
terminated earlier by our Board of Directors, the 2010 Rights Plan will expire on September 27, 2020.
Initially, the Rights will be attached to all certificates representing ordinary shares then outstanding, and no separate Rights certificates or stock
statements will be distributed or provided. The Rights will separate from the ordinary shares and become exercisable if a person or group
announces an acquisition of 20% or more of our outstanding ordinary shares, or announces commencement of a tender offer for 20% or more of the
ordinary shares. In that event, the Rights permit shareholders, other than the acquiring person, to purchase our ordinary shares having a market
value of twice the exercise price of the Rights, in lieu of the Class A Preferred Stock. In addition, in the event of certain business combinations, the
Rights permit the purchase of the ordinary shares of an acquiring person at a 50% discount. Rights held by the acquiring person become null and
void in each case.
The 2010 Rights Plan is designed to ensure that all of our shareholders receive fair and equal treatment in the event of any proposed takeover of us
and to guard against partial tender offers, open market accumulations and other abusive or coercive tactics to gain control of us without paying all
shareholders a control premium. The Rights will cause substantial dilution to a person or group that acquires 20% or more of our stock on terms not
approved by the our Board of Directors, but the Rights should not interfere with any merger or other business combination approved by the Board of
Directors at any time prior to the first date that a person or group has become an acquiring person.
Shareholder’s access to corporate records
A shareholder is entitled, on giving written notice to the Company, to inspect the Company’s (i) Memorandum and Articles of Association; (ii)
register of members; (iii) register of directors; and (iv) minutes of meetings and resolutions of members and of those classes of members of which
the shareholder is a member.
The directors may, if they are satisfied that it would be contrary to the Company’s interests to allow a member to inspect any document listed above
(or any part thereof), refuse the member to inspect the document or limit the inspection of the document. Our board may also authorize a member to
review the Company account if requested.
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Indemnification
Under BVI law and our Amended and Restated M&A, we may indemnify against all expenses, including legal fees, and against all judgements,
fines and amounts paid in settlement and reasonably incurred in connection with legal, administrative or investigative proceedings any person who:
(a) is or was a party or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative
or investigative, by reason of the fact that the person is or was a director of the Company; or (b) is or was, at the request of the Company, serving as
a director of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise.
To be entitled to indemnification, these persons must have acted honestly and in good faith and in what he believes to be the best interest of the
Company, and they must have had no reasonable cause to believe their conduct was unlawful. Furthermore, such a person must be indemnified by
the Company if he has been successful in the defense of any proceedings.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under the
foregoing provisions, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Mergers and similar arrangements
Under the laws of the BVI, two or more companies may merge or consolidate in accordance with Section 170 of the Act. A merger means the
merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more
constituent companies into a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan
of merger or consolidation which must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation
contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or
series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of
whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
The shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may receive debt
obligations or other securities of the surviving or consolidated company, or other assets, or a combination thereof. Further, some or all of the shares
of a class or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind of asset. As
such, not all the shares of a class or series must receive the same kind of consideration.
After the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles of merger or
consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the BVI.
Dissenter Rights
A shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder
was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) and a
consolidation. A shareholder properly exercising his dissent rights is entitled to payment in cash of the fair value of his shares.
A shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on
the merger or consolidation, unless notice of the meeting was not given to the shareholder. If the merger or consolidation is approved by the
shareholders, the company must within 20 days give notice of this fact to each shareholder who gave written objection, and to each shareholder who
did not receive notice of the meeting. Such shareholders then have 20 days to give their written election in the form specified by the Act to dissent
from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.
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Upon giving notice of his election to dissent, a shareholder ceases to have any rights of a shareholder except the right to be paid the fair value of his
shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding the dissent.
Within seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation, the company
must make a written offer to each dissenting shareholder to purchase his shares at a specified price that the company determines to be their fair
value. The company and the shareholder then have 30 days to agree upon the price. If the company and a shareholder fail to agree on the price
within the 30 days, then the company and the shareholder shall each designate an appraiser and these two appraisers shall designate a third
appraiser. These three appraisers shall fix the fair value of the shares as of the close of business on the day before the shareholders approved the
transaction without taking into account any change in value as a result of the transaction.
Under BVI law, shareholders are not entitled to dissenters’ rights in relation to liquidation.
Shareholders’ suits
Similar to the laws of most U.S. jurisdictions, BVI law permits derivative actions against its directors. However, the circumstances under which
such actions may be brought, and the procedures and defenses available may result in the rights of shareholders of a BVI company being more
limited than those of shareholders of a company incorporated and/or existing in the United States.
The High Court of the BVI may, on the application of a shareholder of a company, grant leave to that shareholder to bring proceedings in the name
and on behalf of that company, or intervene in proceedings to which the company is a party for the purpose of continuing, defending or
discontinuing the proceedings on behalf of the company. In determining whether to grant leave, the High Court of the BVI must take into account
(i) whether the shareholder is acting in good faith; (ii) whether the derivative action is in the interests of the company taking account of the views of
the company’s directors on commercial matters; (iii) whether the proceedings are likely to succeed; (iv) the costs of the proceedings in relation to
the relief likely to be obtained; and (v) whether an alternative remedy to the derivative claim is available.
Leave to bring or intervene in proceedings may be granted only if the court is satisfied that (i) the company does not intend to bring, diligently
continue or defend, or discontinue the proceedings, as the case may be; or (ii) it is in the interests of the company that the conduct of the proceedings
should not be left to the directors or to the determination of the shareholders as a whole.
C. Material Contracts
Except for the following, we have not entered into any material contracts other than in the ordinary course of business and other than those
described in Item 4, “Information on the Company,” Item 7, “Major Shareholders and Related Party Transactions,” or Item 5. Operating And
Financial Review And Prospects – Contractual Obligations,” or elsewhere in this annual report.
On April 3, 2013, Beijing Hollysys entered into an operating lease agreement to lease out one of its buildings located in Beijing. The lease term is
10 years from September 1, 2013 to August 31, 2023. The annual minimum lease payment receivable after five years are subject to renegotiation in
case the Chinese consumer price index published by the government exceeds 5%.
On May 30, 2014, the Company entered into a convertible loan agreement with International Finance Corporation, an international organization
established by Articles of Agreement among its member countries including the British Virgin Islands ("IFC"), under which the Company will
borrow $20,000,000 from IFC (the “Convertible Bond”) with an interest rate of 2.1% per annum and commitment fee of 0.5% per annum paid in
rear semi-annually. The Company received the loan disbursement on August 30, 2014, and the loan interest started accumulating since then.
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D. Exchange Controls
BVI Exchange Controls
There are no material exchange controls restrictions on payment of dividends, interest or other payments to the holders of our ordinary or preferred
shares or on the conduct of our operations in the BVI, where we were incorporated. There are no material BVI laws that impose any material
exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of our ordinary or preferred
shares. BVI law and our Amended and Restated Memorandum and Articles of Association do not impose any material limitations on the right of
non-residents or foreign owners to hold or vote our ordinary or preferred shares.
Exchange Controls in China
Under the Foreign Currency Administration Rules promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other
relevant PRC government authorities, RMB is convertible into other currencies without prior approval from SAFE only to the extent of current
account items, such as trade related receipts and payments, interest and dividends and after complying with certain procedural requirements. The
conversion of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items,
such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office. 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.
On October 21, 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse
Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005.
According to the notice, a special purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for
the special purpose of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control
of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration procedures
with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established or acquired control of these
SPVs that previously made onshore investments in China were required to complete the relevant overseas investment foreign exchange registration
procedures by March 31, 2006. These PRC residents must also amend the registration with the relevant SAFE branch in the following
circumstances: (i) the PRC residents have completed the injection of equity investment or assets of a domestic company into the SPV; (ii) the
overseas funding of the SPV has been completed; (iii) there is a material change in the capital of the SPV. Under the rules, failure to comply with
the foreign exchange registration procedures may result in restrictions being imposed on the foreign exchange activities of the violator, including
restrictions on the payment of dividends and other distributions to its offshore parent company, and may also subject the violators to penalties under
the PRC foreign exchange administration regulations.
On August 29, 2008, SAFE promulgated Circular 142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB
by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the
application of Circular 142. Under Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-
invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used
for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign
currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such
RMB capital may not in any case be used to 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 control regulations.
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On April 8, 2015, SAFE released the Notice on the Reform of the Administration Method for the Settlement of Foreign Exchange Capital of
Foreign-invested Enterprises, or SAFE Circular 19, which came into force and superseded SAFE Circular 142 on June 1, 2015. Circular 19 allows
foreign invested enterprises to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business operation
and provides the procedures for foreign invested companies to use Renminbi converted from foreign currency-denominated capital for equity
investment. Nevertheless, Circular 19 also reiterates the principle that Renminbi converted from foreign currency-denominated capital of a foreign-
invested company may not be directly or indirectly used for purposes beyond its business scope. Since Circular 19 was only recently promulgated,
there are uncertainties on how it will be interpreted and implemented in practice.
In February 2015, SAFE also promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration
Applicable to Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE Circular 13, the current foreign
exchange procedures will be further simplified, and foreign exchange registrations of direct investment will be handled by the banks designated by
the foreign exchange authority instead of SAFE and its branches. However, the foreign invested enterprises are still prohibited by SAFE Circular 13
to use the RMB converted from foreign currency-registered capital to extend entrustment loans, repay bank loans or inter-company loans.
E. Taxation
The following is a general summary of certain material BVI, China and U.S. federal income tax considerations. The discussion is not intended to
be, nor should it be construed as, legal or tax advice to any particular prospective shareholder. The discussion is based on laws and relevant
interpretations thereof in effect as of the date hereof, all of which are subject to change or different interpretations, possibly with retroactive effect.
BVI Taxation
The BVI does not impose a withholding tax on dividends paid to holders of our ordinary shares, nor does the BVI levy any capital gains or income
taxes on us. Further, a holder of our ordinary shares who is not a resident of the BVI is exempt from the BVI income tax on dividends paid with
respect to the ordinary shares. Holders of ordinary shares are not subject to the BVI income tax on gains realized on the sale or disposition of the
ordinary shares.
Our ordinary shares are not subject to transfer taxes, stamp duties or similar charges in the BVI. However, as a company incorporated under the
2004 Act, we are required to pay the BVI government an annual license fee based on the number of shares we are authorized to issue.
There is no income tax treaty or convention currently in effect between the United States and the BVI.
Taxation in China
We are a holding company incorporated in the BVI, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and
its implementation rules, both of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax
rate of 25% and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally be
subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s jurisdiction of incorporation and
China to reduce such rate.
Under the Arrangement between the Mainland and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend
withholding tax rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. Under the
aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong Kong holding companies may be subject to a
withholding tax at the rate of 5% if they are not considered to be a PRC “resident enterprise” as described below. However, if the Hong Kong
holdings companies are not considered to be the “beneficial owner” of such dividends under the Notice Regarding Interpretation and Recognition of
Beneficial Owners under Tax Treaties promulgated by the State Administration of Taxation on October 27, 2009 (and not a PRC “resident
enterprise”), such dividends would be subject to the withholding tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a
significant impact on the amount of dividends to be received by us and ultimately by shareholders.
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According to the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a
person who has the right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner” may
be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit company is not a
“beneficial owner.” The term “conduit company” refers to a company which is usually established for purposes of dodging or reducing taxes, and
transferring or accumulating profits. Such a company is only registered in the country of domicile to satisfy the organizational form as required by
law, but it does not engage in such substantial business operations as manufacturing, distribution and management.
In addition to the changes to the current tax structure, under 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.”
It remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises.
We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident
enterprise” for 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 offering 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 guidance with respect to the processing of outbound remittances to entities that
are treated as resident enterprises for 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 shareholders from transferring our shares.
United States Federal Taxation
The following is a discussion of certain material U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary
shares by U.S. holders (as defined below). It does not purport to be a comprehensive description of all of the tax considerations that may be relevant
to a particular person’s situation. The discussion applies only to U.S. holders that hold their ordinary shares as capital assets (generally property held
for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code. This discussion is based on the
Code, income tax regulations promulgated there under, judicial positions, published positions of the Internal Revenue Service, or the IRS, and other
applicable authorities, all as in effect as of the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion is
general in nature and is not exhaustive of all possible tax considerations, nor does the discussion address any state, local or foreign tax
considerations or any U.S. tax considerations (e.g., estate or gift tax) other than U.S. federal income tax considerations, that may be applicable to
particular holders.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it
address the U.S. federal income tax consequences to persons who are subject to special rules under U.S. federal income tax law, including:
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banks, insurance companies or other financial institutions;
persons subject to the alternative minimum tax;
tax-exempt organizations;
controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid United States
federal income tax;
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certain former citizens or long-term residents of the United States;
dealers in securities or currencies;
traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
persons that own, or are deemed to own, more than five percent of our capital stock;
holders who acquired our stock as compensation or pursuant to the exercise of a stock option;
persons who hold our common stock as a position in a hedging transaction, “straddle,” or other risk reduction transaction; or
persons who do not hold our ordinary shares as a capital asset (within the meaning of Section 1221 of the Code).
For purposes of this discussion, a U.S. holder is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax
purposes; (ii) a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of
the United States (or treated as such under applicable U.S. tax laws), any state thereof, or the District of Columbia; (iii) an estate the income of
which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if (a) a U.S. court is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) it has a valid
election in effect under applicable law and regulations to be treated as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a
holder that is neither a U.S. holder nor a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
In the case of a partnership or entity classified as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a
partner generally will depend on the status of the partner and the activities of the partnership. Partners of partnerships should consult their tax
advisors regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition of our ordinary shares.
Distributions
On August 11, 2016, the Board of Directors approved a regular cash dividend policy pursuant to which future cash dividends are expected to be paid
to holders of the Company’s ordinary shares on an annual basis out of funds legally available for such purpose. The gross amount of such
distributions will be included in the gross income of the U.S. holder as dividend income on the date of receipt to the extent that the distribution is
paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such dividends will be eligible for
the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. Dividends received by non-
corporate U.S. holders, including individuals, may be subject to reduced rates of taxation under current law. A U.S. holder may be eligible to claim
a foreign tax credit with respect to any PRC withholding tax imposed on dividends paid by us. However, the foreign tax credit rules are complex,
and their application in connection with Section 7874 of the Code and the Agreement Between the Government of the United States of America and
the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes
on Income, or the U.S.-PRC Tax Treaty, is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect to any
benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
To the extent that dividends paid on our ordinary shares exceed current and accumulated earnings and profits, the distributions will be treated first as
a tax-free return of tax basis on our ordinary shares, and to the extent that the amount of the distribution exceeds tax basis, the excess will be treated
as gain from the disposition of those ordinary shares.
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Sale or Other Disposition
U.S. holders of our ordinary shares will recognize taxable gain or loss on any sale, exchange, or other taxable disposition of ordinary shares equal to
the difference between the amounts realized for the ordinary shares and the U.S. holder’s tax basis in the ordinary shares. This gain or loss generally
will be capital gain or loss. Under current law, non-corporate U.S. holders, including individuals, are eligible for reduced tax rates if the ordinary
shares have been held for more than one year. The deductibility of capital losses is subject to limitations. A U.S. holder may be eligible to claim a
foreign tax credit with respect to any PRC withholding tax imposed on gain from the sale or other disposition of ordinary shares. However, the
foreign tax credit rules are complex, and their application in connection with Section 7874 of the Code and the U.S.-PRC Tax Treaty is not entirely
clear at this time. U.S. holders should consult their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit
rules and the U.S.-PRC Tax Treaty.
Unearned Income Medicare Contribution
Certain U.S. holders who are individuals, trusts or estates are required to pay an additional 3.8% Medicare tax on, among other things, dividends on
and capital gains from the sale or other disposition of shares of stock for taxable years beginning after December 31, 2013. U.S. holders should
consult their own advisors regarding the effect, if any, of this legislation on their ownership and disposition of our ordinary shares.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”), when
applicable, will impose a U.S. federal withholding tax of 30% on certain “withholdable payments” (generally certain U.S.-source income, including
dividends, and the gross proceeds from the sale or other disposition of assets producing U.S. source dividends or interest ) to foreign financial
institutions and other non-U.S. entities that fail to comply with certain certification and information reporting (generally relating to ownership by
U.S persons of interests in or accounts with those entities). The obligation to withhold under FATCA applies to, among other items, (i) U.S.-source
dividend income that is paid on or after July 1, 2014 and (ii) to gross proceeds from the disposition of property that can produce U.S.-source
dividends paid on or after January 1, 2017. Non-U.S. holders should consult their tax advisors concerning application of FATCA to our ordinary
shares in their particular circumstances.
Information Reporting and Backup Withholding
Payments of dividends or of proceeds on the disposition of stock made to a holder of our ordinary shares may be subject to information reporting
and backup withholding at a current rate of 28% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other
appropriate withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S.
status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8. Payments of dividends to holders must generally be
reported annually to the IRS, along with the name and address of the holder and the amount of tax withheld, if any. A similar report is sent to the
holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in the holder’s
country of residence.
Backup withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that
the required information is furnished to the IRS in a timely manner.
F. Dividends and Paying Agents
On February 9, 2015, we declared a special cash dividend of US$0.40 per share to the holders of the Company’s ordinary shares. The record day
was February 23, 2015, and payment day was March 16, 2015. Continental Stock Transfer & Trust acted as the paying agent. During the fiscal year
of 2016, no cash dividend was declared and paid.
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On August 11, 2016, the Board of Directors of the Company approved a regular cash dividend policy pursuant to which future cash dividends are
expected to be paid to holders of the Company’s ordinary shares on an annual basis out of funds legally available for such purpose. On September
26, 2016, the Board of Directors declared a regular annual dividend of $0.20 per ordinary share for 2016. The dividend was payable on November
11, 2016 to shareholders of record at the close of business on October 26, 2016. The declaration and payment of future dividends will be at the
discretion of the Board of Directors, and will depend upon many factors, including the Company’s financial condition, earnings, capital
requirements of its businesses, legal requirements, regulatory constraints, industry practice, and other factors that the Board of Directors deems
relevant.
G. Statement by Expert
Not applicable.
H. Documents on Display
We have filed this Annual Report on Form 20-F with the SEC under the Exchange Act. Statements made in this Annual Report as to the contents of
any document referred to are not necessarily complete. With respect to each such document filed as an exhibit to this Annual Report, reference is
made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such
reference.
We are subject to the informational requirements of the Exchange Act as a foreign private issuer and file reports and other information with the
SEC. Reports and other information filed by us with the SEC, including this Annual Report on Form 20-F, may be inspected and copied at the
public reference room of the SEC at 100 F. Street, N.E., Washington D.C. 20549. You can also obtain copies of this Annual Report on Form 20-F
by mail from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally, copies of this
material may be obtained from the SEC’s Internet site at http://www.sec.gov. The SEC’s telephone number is 1-800-SEC-0330.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and
proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.
I.
Subsidiary Information
Not applicable.
ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to interest rate risk primarily with respect to our bank loans. A hypothetical 1.0% increase in the annual interest rates for all of our
credit facilities under which we had outstanding borrowings as of June 30, 2017, would decrease income before income taxes by approximately $0.3
million for the fiscal year ended June 30, 2017. Management monitors the banks’ prime rates in conjunction with our cash requirements to
determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to
reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S. dollar, 75.6% of our consolidated revenues and consolidated costs and expenses are denominated in RMB,
and 83.9% of our assets are denominated in RMB, and the remaining are mainly denominated in SGD. As a result, we are exposed to foreign
exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rates of the U.S. dollar, RMB and SGD. If
the RMB or SGD depreciates against the U.S. dollar, the value of our RMB or SGD revenues, earnings and assets as expressed in our U.S. dollar
financial statements will decline. Assets and liabilities are translated at exchange rates at the balance sheet dates and revenue and expenses are
translated at the average exchange rates and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are
not included in determining net income but are included in determining other comprehensive income, a component of shareholders’ equity. An
average appreciation or depreciation of the RMB against the US dollar of 5% would increase or decrease our comprehensive income by $508,651
and $562,192, respectively. An average appreciation or depreciation of the SGD against the US dollar of 5% would decrease or increase our
comprehensive income by $501,068 or $553,813 respectively, based on our current revenues, costs and expenses, assets, and liabilities denominated
in RMB or SGD as of June 30, 2017.
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Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations for the RMB. To date, we have not
entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk in any of the currencies in which we
operate. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and it
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 its ability to convert RMB into foreign currencies.
Inflation
Inflation in China and the other regions in which we operate has not materially impacted our results of operations. Although we have not been
materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation. To the
extent that we operate in a more diverse range of countries and regions, the risk of inflation on our operations is minimized. If inflation were a
significant factor in our financial performance, then certain operating costs and expenses, such as employee compensation and office operating
expenses may increase. Additionally, because a substantial portion of our assets from time to time consists of cash and cash equivalents and time
deposits with original maturities over three months, high inflation could significantly reduce the value and purchasing power of these assets.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
We do not have any American Depositary Shares.
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
None.
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ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS
On August 27, 2010 our Board of Directors adopted a rights plan, or the 2010 Rights Plan. The 2010 Rights Plan provides for a dividend
distribution of one preferred share purchase Right, for each outstanding ordinary share to shareholders of record at the close of business on August
27, 2010, effective as of September 27, 2010. Each Right entitles the shareholder to buy 1 share of our Class A Preferred Stock at an exercise price
of $160. The Rights will become exercisable if a person or group announces an acquisition of 20% or more of our outstanding ordinary shares, or
announces commencement of a tender offer for 20% or more of the ordinary shares. In that event, the Rights permit shareholders, other than the
acquiring person, to purchase our ordinary shares having a market value of twice the exercise price of the Rights, in lieu of the Class A Preferred
Stock. In addition, in the event of certain business combinations, the Rights permit the purchase of the ordinary shares of an acquiring person at a
50% discount. Rights held by the acquiring person become null and void in each case. Unless terminated earlier by our Board of Directors, the 2010
Rights Plan will expire on September 27, 2020.
In connection with the adoption of the 2010 Rights Plan, we amended our Memorandum and Articles of Association to increase our authorized
shares of Class A Preferred Stock from 10,000,000 shares to 90,000,000 shares, and to provide that directors may only be removed by shareholders
for cause.
ITEM 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act, our management has carried out an evaluation, with the
participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of June 30, 2017.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports
we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls
and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible
controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under the supervision of our principal executive officer and our
principal financial officer. Based upon, and as of the date of this evaluation, our principal executive officer and principal financial officer concluded
that our disclosure controls and procedures were effective as of June 30, 2017.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act for our company. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with
generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and
that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that
could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to
consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
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Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2017. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (2013 framework). Based on our assessment, management believes that, as of June 30, 2017, our internal control over
financial reporting was effective based on those criteria.
Our independent registered public accounting firm has audited our internal control over financial reporting as of June 30, 2017 and has issued an
attestation report, which appears on page F-3 of this annual report on Form 20-F.
Changes in Internal Control over Financial Reporting
Except for the changes arising from the implementation of a new financial reporting management system Hyperion Financial Management (“HFM”)
which became operational during the year ended June 30, 2017, there has been no change in our internal control procedure over financial reporting
during the year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Colin Sung, one of our independent directors, meets the criteria for an “audit committee financial
expert,” as established by the SEC. Mr. Sung will not be deemed an “expert” for any other purpose, including, without limitation, for purposes of
Section 11 of the Securities Act, as a result of being designated or identified as an audit committee financial expert. The designation or
identification of Mr. Sung as an audit committee financial expert does not impose on him any duties, obligations or liability that are greater than the
duties, obligations and liability imposed on him as a member of our Audit Committee and board of directors in the absence of such designation or
identification.
ITEM 16B.
CODE OF ETHICS
In March 2006, our board of directors adopted a code of conduct, or Code of Conduct, which applies to all of our directors, officers and employees,
including our principal executive officer, principal financial officer, and principal accounting officer. Our Code of Conduct addresses, among other
things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, confidentiality, and reporting of violations
of the code. A copy of the Code of Conduct was filed as Annex G to our registration statement on Form S-4 filed with the SEC on March 30, 2006
and is incorporated herein by reference. Our Code of Conduct is also posted on the corporate governance page of our website at www.hollysys.com.
During the fiscal year ended June 30, 2017, there were no waivers from a provision of our Code of Conduct granted to our directors, officers or
employees.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Ernst &Young Hua Ming LLP was our principal accountant for the fiscal years ended June 30, 2017 and 2016. The aggregate fees incurred for fiscal
years ended June 30, 2017 and 2016 were $1,292,771 and $1,199,400, respectively. The fees were related to the audit of our annual financial
statements and services that are normally provided by the accountant in connection with statutory and regulatory filings.
Audit-Related Fees
The audit-related fees includes service rendered related to our quarterly financial information for the fiscal year ended June 30, 2017 and 2016 were
$73,725 and $224,514 respectively.
Tax Fees
The aggregate fees incurred in the fiscal years ended June 30, 2017 and 2016 for tax services rendered were $39,731 and $47,981, respectively. The
tax service includes tax compliance and tax advice.
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All Other Fees
No other fees were incurred in each of the fiscal years ended June 30, 2017 and 2016 for services provided by the principal accountant, other than
the services reported above under other captions of this Item 16C.
Audit Committee Pre-Approval Policies and Procedures
Our Audit Committee pre-approves all auditing services and permitted non-audit services to be performed for us by our independent auditor,
including the fees and terms thereof (subject to the de minimums exceptions for non-audit services described in Section 10A(i)(l)(B) of the
Exchange Act that are approved by our Audit Committee prior to the completion of the audit).
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
We have not asked for, nor have we been granted, an exemption from the applicable listing standards for our Audit Committee.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
There were no purchases of equity securities by us or by any of our affiliates during the period covered by this Annual Report.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G.
CORPORATE GOVERNANCE
We are incorporated in the BVI and our corporate governance practices are governed by applicable BVI law as well as our memorandum and
articles of association. In addition, because our ordinary shares are listed on NASDAQ, we are subject to NASDAQ's corporate governance
requirements.
NASDAQ Listing Rule 5620(a) requires each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer's
fiscal year end. NASDAQ Listing Rule 5635(c) also requires each issuer to obtain shareholders’ approval when a plan or other equity compensation
arrangement is established or materially amended. However, NASDAQ Listing Rule 5615(a)(3) permits a foreign private issuer like us to follow
home country practices in lieu of certain requirements of Listing Rule 5600, provided that such foreign private issuer discloses in its annual report
filed with the SEC each requirement of Rule 5600 that it does not follow and describes the home country practice followed in lieu of such
requirement. We follow home country practice with respect to annual meetings and did not hold an annual shareholder meeting in fiscal 2017. Our
BVI counsel, Maples and Calder, has provided a letter to NASDAQ certifying that under BVI law, we are not required to hold annual shareholder
meetings. We may, however, hold annual shareholder meetings in the future if there are significant issues that require shareholders’ approvals.
Maples and Calder has also provided a letter to NASDAQ certifying that under BVI law, we are not required to seek shareholder approval for the
establishment of our equity compensation plans. In 2015, we followed home country practice with respect to the adoption of our 2015 Equity Plan
without seeking shareholder approval.
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
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ITEM 17.
FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18.
FINANCIAL STATEMENTS
PART III
Our Audited Financial Statements for the Years Ended June 30, 2017, 2016 and 2015 are included at the end of this annual report.
ITEM 19.
EXHIBITS
Number
Description
1.1
2.1
4.1
4.2
4.3
8.1*
11.1
12.1*
12.2*
13.1*
13.2*
15.1*
99.1
Amended and Restated Memorandum and Articles of Association (Incorporated by reference to Exhibit 3.1 of the Form 6-K filed
with the Securities and Exchange Commission on May 31, 2016).
Rights Agreement, dated as of August 27, 2010, between Hollysys Automation Technologies Ltd. and Continental Stock Transfer &
Trust Company, which includes the Form of Right Certificate as Exhibit A and the Summary of Rights to Purchase Preferred Shares
as Exhibit B (Incorporated by reference to Exhibit 2.1 of the Form 6-K filed with the Securities and Exchange Commission on
September 21, 2010).
Chardan North China Acquisition Corporation 2006 Stock Plan (Incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form S-8 (file no. 333-170811) filed with the Securities and Exchange Commission on November 24, 2010).
Form of Stock Consignment Agreement (Incorporated by reference to Exhibit 10.2 of the Registration Statement S-4/A (file no. 333-
132826) filed with the Securities and Exchange Commission on June 28, 2006).
Share Sale and Purchase Agreement, by Unionway Resources Limited and the Company, dated December 23, 2009. ((Incorporated
by reference to Exhibit 4.20 of the Report on Form 20-F for the fiscal year ended June 30, 2010 filed with the Securities and
Exchange Commission on December 22, 2010).
List of Subsidiaries
Code of Ethics (included as Annex G to the Proxy Statement/Prospectus contained in Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on March 30, 2006 and incorporated by reference herein)
CEO Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-
14(a))
CFO Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Ernst and Young Hua Ming LLP
Hollysys Automation Technologies Ltd. 2015 Equity Incentive Plan (Incorporated by reference to Exhibit 99.1 of the Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on December 18, 2015).
101.INS*
XBRL Instant Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBLR Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
* Filed with this annual report on Form 20-F
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The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
SIGNATURE
Date: September 22, 2017
/s/ Baiqing Shao
Baiqing Shao
Chief Executive Officer
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HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2016 and 2017
Consolidated Statements of Comprehensive Income for the years ended June 30, 2015, 2016 and 2017
Consolidated Statements of Cash Flows for the years ended June 30, 2015, 2016 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2015, 2016 and 2017
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-4
F-5
F-6
F-7
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Hollysys Automation Technologies Ltd.
We have audited the accompanying consolidated balance sheets of Hollysys Automation Technologies Ltd. (the “Company”) as of June 30, 2017
and 2016, and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the
period ended June 30, 2017. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hollysys
Automation Technologies Ltd. at June 30, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended June 30, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hollysys Automation
Technologies Ltd.’s internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated September
22, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young Hua Ming LLP
Beijing, the People’s Republic of China
September 22, 2017
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Hollysys Automation Technologies Ltd.
We have audited Hollysys Automation Technologies Ltd.’s internal control over financial reporting as of June 30, 2017, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) (the “COSO criteria”). Hollysys Automation Technologies Ltd.’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, Hollysys Automation Technologies Ltd. maintained, in all material respects, effective internal control over financial reporting as of
June 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Hollysys Automation Technologies Ltd. as of June 30, 2017 and 2016, and the related consolidated statements of comprehensive
income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2017 of Hollysys Automation Technologies
Ltd. and our report dated September 22, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young Hua Ming LLP
Beijing, the People’s Republic of China
September 22, 2017
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147
HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(In US dollars thousands except for number of shares and per share data)
Notes
2016
2017
June 30,
ASSETS
Current assets
Cash and cash equivalents
Time deposits with maturities over three months
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $42,471 and $48,089 as
of June 30, 2016 and 2017, respectively
Costs and estimated earnings in excess of billings, net of allowance for doubtful
accounts of $6,383 and $8,660 as of June 30, 2016 and 2017, respectively
Other receivables, net of allowance for doubtful accounts of $1,302 and $1,448 as of
June 30, 2016 and 2017, respectively
Advances to suppliers
Amounts due from related parties
Inventories
Prepaid expenses
Income tax recoverable
Deferred tax assets
Total current assets
Non-current assets
Restricted cash
Prepaid expenses
Property, plant and equipment, net
Prepaid land leases
Intangible assets, net
Investments in equity investees
Investments in cost investees
Goodwill
Deferred tax assets
Total non-current assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities (including amounts of the VIE without recourse to the primary
beneficiary of $270 and $14,051 as of June 30, 2016 and 2017, respectively):
Derivative financial liability
Short-term bank loans
Current portion of long-term loans
Accounts payable
Construction costs payable
Deferred revenue
Accrued payroll and related expenses
Income tax payable
Warranty liabilities
Other tax payables
Accrued liabilities
Amounts due to related parties
Deferred tax liabilities
Total current liabilities
Accrued liabilities
Long-term loans
Deferred tax liabilities
Warranty liabilities
$
$
229,095
42,368
27,592
237,179
189,928
13,358
11,661
28,012
36,401
569
4,488
6,659
827,310
402
13
79,938
10,773
856
18,714
4,108
59,847
2,195
176,846
197,640
96,214
39,534
246,552
162,096
20,036
9,964
34,142
45,660
619
5,169
7,730
865,356
522
-
80,529
10,206
1,928
47,242
4,024
47,326
1,121
192,898
$
1,004,156
$
1,058,254
$
$
398
3,051
6,833
106,833
647
82,004
13,193
4,917
6,782
18,069
44,041
1,645
8,913
297,326
-
20,508
59
3,578
487
8,121
420
122,714
383
107,407
13,600
3,371
5,386
10,488
23,950
2,301
4,350
302,978
2,220
20,581
6,689
2,246
4
5
20
3
18
6
7
8
10
10
9
18
1
13
12
13
11
20
18
13
18
11
Total non-current liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Ordinary shares, par value $0.001 per share, 100,000,000 shares authorized; 59,598,099
and 60,342,099 shares issued and outstanding as of June 30, 2016 and 2017,
respectively
Additional paid-in capital
Statutory reserves
Retained earnings
Accumulated other comprehensive income
Total Hollysys Automation Technologies Ltd. stockholders’ equity
Non-controlling interest
Total equity
Total liabilities and equity
F-4
21
15
24,145
31,736
321,471
334,714
-
-
60
215,403
36,533
430,627
(8,467)
674,156
8,529
682,685
60
222,189
41,130
482,999
(22,859)
723,519
21
723,540
$
1,004,156
$
1,058,254
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 101 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In US dollars thousands except for number of shares and per share data)
Net revenues
Integrated contract revenue (including revenue from related parties of
$22,544, $3,871 and $2,442 for the years ended June 30, 2015, 2016
and 2017, respectively)
Product sales (including revenue from related parties of $2,014, $868
and $9,447 for the years ended June 30, 2015, 2016 and 2017,
respectively)
Revenue from services (including revenue from related parties of $19,
nil and nil for the years ended June 30, 2015, 2016 and 2017,
respectively)
Total net revenues
Costs of integrated contracts (including purchases from related parties
of $419, $22 and $762 for the years ended June 30, 2015, 2016 and
2017, respectively)
Costs of products sold (including purchases from related parties of nil,
$370 and $24 for the years ended June 30, 2015, 2016 and 2017,
respectively)
Costs of services rendered
Gross profit
Operating expenses
Selling (including expenses from related parties of $914, $517 and nil
for the years ended June 30, 2015, 2016 and 2017, respectively)
General and administrative
Goodwill impairment charge
Research and development
VAT refunds and government subsidies
Total operating expenses
Notes
2015
Year ended June 30,
2016
2017
$
481,006
$
477,790
$
385,500
39,762
54,546
32,665
10,611
531,379
11,989
544,325
13,778
431,943
300,332
310,545
277,476
12,547
4,098
214,402
26,263
50,786
1,855
35,779
(30,388)
84,295
24,023
4,031
205,726
25,637
45,832
-
36,564
(22,890)
85,143
9,971
4,025
140,471
24,412
44,297
11,211
30,109
(29,828)
80,201
Income from operations
130,107
120,583
60,270
Other income, net (including other income from related parties of $41,
nil and $602 for the years ended June 30, 2015, 2016 and 2017,
respectively)
Foreign exchange loss
Gains on deconsolidation of the Company’s interests in Beijing
Hollycon Electronic Technology Co., Ltd (“Hollycon”)
Gains on disposal of a subsidiary
Gain on disposal of an equity investee
Share of net (loss) income of equity investees
Interest income
Interest expenses
Dividend income from a cost investee
Income before income taxes
Income tax expenses
Net income
Less: net income attributable to non-controlling interests
Net income attributable to Hollysys Automation Technologies Ltd.
Other comprehensive income, net of tax of nil
Translation adjustments
Comprehensive income
2,601
(6,765)
-
-
80
(2,910)
3,686
(1,821)
249
125,227
26,040
99,187
4,061
(299)
-
-
-
7,834
5,858
(1,404)
1,109
137,742
14,238
123,504
2,660
96,527
$
5,033
118,471
$
1,722
(135)
14,514
628
-
3,607
3,687
(938)
-
83,355
14,386
68,969
25
68,944
(1,386) $
97,801
(48,841) $
74,663
(14,428)
54,541
18
$
$
Less: comprehensive income attributable to non-controlling interests
Comprehensive income attributable to Hollysys Automation
Technologies Ltd.
Net income per ordinary share:
Basic
Diluted
Shares used in income per share computation:
Weighted average number of ordinary shares
Weighted average number of diluted ordinary shares
$
$
$
19
19
2,701
2,244
(11)
95,100
$
72,419
$
54,552
1.65
1.61
$
$
2.00
1.97
$
$
1.15
1.14
58,612,596
60,134,203
59,170,050
60,611,456
60,189,004
61,011,510
F-5
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 102 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In US dollars thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2015
Year ended June 30,
2016
2017
$
99,187
$
123,504
$
68,969
Depreciation of property, plant and equipment
Amortization of prepaid land leases
Amortization of intangible assets
Allowance for doubtful accounts
Loss on disposal of property, plant and equipment
Impairment loss on property, plant and equipment
Goodwill impairment charge
Share of net loss (income) of equity investees
Dividends received from a cost investee
Gain on disposal of investment in an equity investee
Gains on deconsolidation of the Company’s interests in HollyCon
Gain on disposal of a subsidiary
Share-based compensation expenses
Deferred income tax (benefit) expenses
Acquisition-related consideration fair value adjustments
Accretion of convertible bond
Fair value adjustments of a bifurcated derivative
Changes in operating assets and liabilities:
Accounts receivable
Costs and estimated earnings in excess of billings
Inventories
Advances to suppliers
Other receivables
Deposits and other assets
Due from related parties
Accounts payable
Deferred revenue
Accruals and other payables
Due to related parties
Income tax payable
Other tax payables
Net cash provided by operating activities
Cash flows from investing activities:
Time deposits placed with banks
Purchases of property, plant and equipment
Proceeds from disposal of investment in an equity investee
Maturity of time deposits
Proceeds from disposal of property, plant and equipment
Investment of an equity investee
Net cash reduced upon deconsolidation of a subsidiary
Acquisition of a subsidiary, net of cash acquired
Dividends received from a cost investee
Proceeds from sale of shares of a subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from short-term bank loans
Repayments of short-term bank loans
Proceeds from long-term bank loans
Repayments of long-term bank loans
Proceeds from convertible bond
Convertible bond issuance cost
8,508
197
4,454
17,418
598
-
1,855
2,910
(249)
(80)
-
-
2,492
4,846
(166)
192
35
(7,675)
10,527
560
(3,690)
(1,928)
(13,375)
(15,205)
(25,836)
7,556
6,897
(2,301)
(6,153)
(7,622)
83,952
(33,416)
(4,553)
80
11,551
794
-
-
(14,600)
249
-
$
$
$
(39,895) $
25,074
(12,631)
-
(8,813)
20,000
(349)
6,266
281
818
10,918
224
-
-
(7,834)
-
-
-
-
3,860
(462)
(1,745)
230
93
(16,413)
(36,971)
(4,607)
2,497
(2,481)
(674)
8,226
8,272
(47,637)
5,015
351
(4,558)
(436)
46,737
$
(107,118)
(7,887)
-
112,013
74
-
-
-
-
464
(2,454) $
4,138
(17,020)
2,606
(9,681)
-
-
8,752
261
623
9,760
596
361
11,211
(3,607)
-
-
(14,514)
(628)
464
2,133
-
230
89
(23,441)
21,945
(10,701)
881
(6,767)
(12,698)
(6,819)
23,563
28,168
(21,013)
801
(1,779)
(7,027)
69,813
(154,810)
(3,711)
-
89,262
64
(2,654)
(16,140)
(1,652)
88
-
(89,553)
10,061
(4,932)
461
(7,350)
-
-
Proceeds from exercise of options
Payment of dividends
Proceeds from issuance of shares of a subsidiary
Net cash (used in) provided by financing activities
Effect of foreign exchange rate changes
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest
Income tax
Supplementary disclosures of significant non-cash transactions:
Acquisition of property, plant and equipment included in construction costs payable and
accrued liabilities
Issuance of ordinary shares as purchase consideration in connection with the acquisition
of Bond Group
F-6
1,280
(23,300)
-
1,261
357
45,675
162,159
207,834
1,855
26,183
484
15,231
$
$
$
$
$
$
$
5,441
-
7,736
(6,780) $
(16,242)
21,261
207,834
229,095
1,048
19,099
4,439
13,336
$
$
$
$
$
$
6,322
(11,975)
-
(7,413)
(4,302)
(31,455)
229,095
197,640
727
13,918
7,266
-
$
$
$
$
$
$
$
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 103 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In US dollars thousands except for number of shares)
Ordinary shares
Additional
paid-in capital
Statutory
reserves
Retained
earnings
Accumulated
other
comprehensive
income
Total Hollysys
Automation
Technologies
Ltd.
stockholders’
equity
Non-controlling
interest
Total
equity
Amount
$
58
-
173,765
2,492
$
23,288
-
$
252,351
-
$
39,013
-
$
488,475
2,492
$
3,583
-
$
492,058
2,492
Balance at June 30, 2014
Share-based compensation
Issuance of ordinary shares upon
exercise of options
Exercise of share-based
compensation on restricted
shares issued to directors
Issuance of Incentive Shares and
Premium Shares for Bond
Group
Net income for the year
Appropriations to statutory
reserves
Dividend paid
Other
Translation adjustments
Balance at June 30, 2015
Share-based compensation
Issuance of ordinary shares upon
exercise of options
Issuance of Incentive Shares and
Premium Shares for Bond
Group
Net income for the year
Appropriations to statutory
reserves
Translation adjustments
Balance at June 30, 2016
Share-based compensation
Issuance of ordinary shares upon
exercise of options
Net income for the year
Appropriations to statutory
reserves
Dividend paid
Deconsolidation of a subsidiary
Translation adjustments
Balance at June 30, 2017
Shares
57,554,824
-
$
142,500
12,500
648,697
-
-
-
-
-
58,358,521
$
-
612,000
627,578
-
-
-
59,598,099
$
-
744,000
-
-
-
-
-
60,342,099
$
- *
- *
- *
-
-
-
-
-
58
-
1
1
-
-
-
60
-
- *
-
-
-
-
-
60
$
$
$
1,280
-
15,231
-
-
-
-
-
192,768
3,860
5,440
13,335
-
-
-
-
-
7,137
-
(177)
-
30,248
$
$
-
-
-
-
-
-
-
96,527
(7,137)
(23,300)
-
-
318,441
$
-
-
-
118,471
-
-
-
-
-
-
-
(1,428)
37,585
$
-
-
-
-
1,280
-
15,231
96,527
-
(23,300)
(177)
(1,428)
579,100
3,860
5,441
13,336
118,471
-
-
215,403
$
6,285
-
36,533
(6,285)
-
430,627
$
$
-
(46,052)
(8,467) $
-
(46,052)
674,156
$
464
6,322
-
-
-
-
-
222,189
-
-
-
-
-
68,944
-
-
-
464
6,322
68,944
4,993
-
(396)
-
41,130
$
(4,993)
(11,975)
396
-
482,999
$
$
-
-
-
(14,392)
(22,859) $
-
(11,975)
-
(14,392)
723,519
$
-
-
-
2,660
-
-
$
42
6,285
$
-
-
1,280
-
15,231
99,187
-
(23,300)
(177)
(1,386)
585,385
3,860
5,441
-
5,033
13,336
123,504
-
(2,789)
8,529
$
-
(48,841)
682,685
-
-
25
464
6,322
68,969
-
-
(8,497)
(36)
21
$
-
(11,975)
(8,497)
(14,428)
723,540
* The share capital increase for the issuance of ordinary shares upon exercise of options, restricted share and Incentive and Premium Shares for
Bond are less than $1.
F-7
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 104 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017
(Amounts in thousands except for number of shares and per share data)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -
ORGANIZATION AND BUSINESS BACKGROUND
Hollysys Automation Technologies Ltd. (“Hollysys” or the “Company”) was established under the laws of the British Virgin Islands (“BVI”) on
February 6, 2006.
As of June 30, 2017, the Company had subsidiaries incorporated in countries and jurisdictions including the People’s Republic of China (“PRC”),
Singapore, Malaysia, Macau, Hong Kong, BVI and India.
The Company makes a determination at the inception of each arrangement whether an entity in which the Company has made an investment or in
which the Company has other variable interests is considered a variable interest entity (“VIE”). The Company consolidates a VIE when it is deemed
to be the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (i) has the power to make
decisions that most significantly affect the economic performance of the VIE; and (ii) has the obligation to absorb losses or the right to receive
benefits that in either case could potentially be significant to the VIE. Periodically, the Company determines whether any changes occurred
requiring a reassessment of whether it is the primary beneficiary of a VIE. If the Company is not deemed to be the primary beneficiary in a VIE, the
investment or other variable interests in a VIE is accounted for in accordance with applicable GAAP.
In November 2015, CECL was established in Doha, Qatar, by CCPL, a wholly-owned subsidiary of the Company incorporated under the laws of
Singapore, and a Qatar citizen as a nominee shareholder, with 49% and 51% of equity interest in CECL, respectively. Through a series of
contractual arrangements signed in November 2015 and September 2016, CCPL is entitled to appoint majority of directors of CECL who have the
power to direct the activities that significantly impact CECL’s economic performance. In addition, CCPL is entitled to 95% of the variable returns
or loss from CECL’s operations. In accordance with ASC 810, Consolidation, despite the lack of technical majority ownership, there exists a parent-
subsidiary relationship between CCPL and CECL through the series of contractual arrangements and CCPL is considered the primary beneficiary of
CECL. CECL was concluded as a VIE of the Company and consolidated by the Company since inception.
The carrying amounts and classifications of the assets and liabilities of the VIE are as follows:
Current assets
Non-current assets
Total assets
Current liabilities
Total liabilities
Revenue
Cost of revenue
Net (loss) profit
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
June 30,
2016
2017
$
$
105
69
174
270
270
14,331
239
14,570
14,178
14,178
Year ended June 30,
2016
2017
-
-
(151)
71
(71)
55
$
$
6,914
5,753
494
8,721
(216)
-
$
$
$
$
As of June 30, 2017, the current assets of the VIE included amounts due from subsidiaries of the Group amounting to $1,629 (June 30, 2016: nil),
and the current liabilities of the VIE included amounts due to subsidiaries of the Group amounting to $127 (June 30, 2016: nil), which were all
eliminated upon consolidation by the Company. Creditors of the VIE do not have recourse to the general credit of the Company for the liabilities of
the VIE. The Company is obligated to absorb the VIE’s expected losses and to provide financial support to the VIE if required. For the years ended
June 30, 2016 and 2017, the Company has not provided financial support other than that which it was contractually required to provide. The
Company believes that there are no assets of the VIE that can be used only to settle obligations of the VIE.
The Group is principally engaged in the manufacture, sale and provision of integrated automation systems and services, mechanical and electrical
solution services and installation services in the PRC, Southeast Asia and the Middle East.
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).
Principles of Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries and a VIE. All inter-company transactions
and balances between the Company, its subsidiaries, and the VIE are eliminated upon consolidation. The Company included the results of
operations of acquired businesses from the respective dates of acquisition.
F-8
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 105 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Use of estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Management evaluates estimates, including those related to the expected total costs
of integrated contracts, expected gross margins of integrated solution contracts, allowance for doubtful accounts, fair values of share options, fair
value of bifurcated derivative, fair value of retained non-controlling investment in the former subsidiary, warranties, valuation allowance of deferred
tax assets and impairment of goodwill and other long-lived assets. Management bases the estimates on historical experience and on various other
assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and
liabilities. Actual results could differ materially from those estimates.
Foreign currency translations and transactions
The Company’s functional currency is the United States dollars (“US dollars” or “$”); whereas the Company’s subsidiaries and VIE use the primary
currency of the economic environment in which their operations are conducted as their functional currency. According to the criteria of Accounting
Standards Codification (“ASC”) Topic 830 (“ASC 830”), the Company uses the US dollars as its reporting currency.
F-9
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 106 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The Company translates the assets and liabilities into US dollars using the rate of exchange prevailing at the balance sheet date, and the statements
of comprehensive income are translated at average rates during the reporting period. Adjustments resulting from the translation of financial
statements from the functional currency into US dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income.
Transactions dominated in currencies other than the functional currency are translated into functional currency at the exchange rates prevailing on
the transaction dates, and the exchange gains or losses are reflected in the consolidated statements of comprehensive income for the reporting
period.
Transactions denominated in foreign currencies are measured into the functional currency at the exchange rates prevailing on the transaction dates.
Foreign currency denominated financial assets and liabilities are re-measured at the exchange rates prevailing at the balance sheet date. Exchange
gains and losses are included in earnings, except for those raised from intercompany transactions with investment nature, which are recorded in
other comprehensive income.
Business combinations
The Company accounts for its business combinations using the purchase method of accounting in accordance with ASC Topic 805, Business
Combinations (“ASC 805”). The purchase method of accounting requires that the consideration transferred to be allocated to the assets, including
separately identifiable assets and liabilities the Company acquired based on their estimated fair values. The consideration transferred of an
acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments
issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and
contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-
controlling interests. The excess of (i) the total cost of the acquisition, fair value of the non-controlling interests and acquisition date fair value of
any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the
cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statements of
comprehensive income.
The determination and allocation of fair values to the identifiable assets acquired, liabilities assumed and non-controlling interests is based on
various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations
are discount rates, terminal values, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company
determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal
values are based on the expected life of assets and forecasted cash flows over that period.
Acquisition-related costs are recognized as general and administrative expenses in the statements of comprehensive income as incurred.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use. All highly liquid investments
that are readily convertible to known amounts of cash with original stated maturities of three months or less are classified as cash equivalents.
Time deposits with original maturities over three months
Time deposits with original maturities over three months consist of deposits placed with financial institutions with original maturity terms from four
months to one year. As of June 30, 2017, $80,507, $11,690, $3,935 and $82 of time deposits with original maturities over three months were placed
in financial institutions in the PRC, Singapore, Malaysia and India, respectively. As of June 30, 2016, $35,318, $7,042, $8 and nil of time deposits
with original maturities over three months were placed in financial institutions in the PRC, Singapore and Malaysia and India, respectively.
F-10
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 107 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Restricted cash
Restricted cash mainly consists of the cash deposited in banks pledged for performance guarantees, or bank loans. These cash balances are not
available for use until these guarantees are expired or cancelled, or the loans are repaid.
Revenue recognition
Integrated solutions contracts
Revenues generated from designing, building, and delivering customized integrated industrial automation systems are recognized over the
contractual terms based on the percentage of completion method. The contracts for designing, building, and delivering customized integrated
industrial automation systems are legally enforceable and binding agreements between the Company and customers. The duration of contracts
depends on the contract size and ranges from 6 months to 5 years excluding the warranty period. The majority of the contract duration is longer than
one year.
Revenue generated from mechanical and electrical solution contracts for the construction or renovation of buildings, rail or infrastructure facilities
are also recognized over the contractual terms based on the percentage of completion method. The contracts for mechanical and electrical solution
are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract size and the
complexity of the construction work and ranges from 6 months to 3 years excluding the warranty period. The majority of the contract duration is
longer than one year.
In accordance with ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts (“ASC 605-35”), recognition is based
on an estimate of the income earned to date, less income recognized in earlier periods. Extent of progress toward completion is measured using the
cost-to-cost method where the progress (the percentage complete) is determined by dividing costs incurred to date by the total amount of costs
expected to be incurred for the integrated solutions contract. Revisions in the estimated total costs of integrated solutions contracts are made in the
period in which the circumstances requiring the revision become known. Provisions, if any, are made in the period when anticipated losses become
evident on uncompleted contracts.
The Company reviews and updates the estimated total costs of integrated solutions contracts at least annually. The Company accounts for revisions
to contract revenue and estimated total costs of integrated solution contracts, including the impact due to approved change orders, in the period in
which the facts that cause the revision become known as changes in estimates. Unapproved change orders are considered claims. Claims are
recognized only when it has been awarded by customers. Excluding the impact of change orders, if the estimated total costs of integrated solution
contracts, which were revised during the years ended June 30, 2015, 2016 and 2017, had been used as a basis of recognition of integrated contract
revenue since the contract commencement, net income for the years ended June 30, 2015, 2016 and 2017 would have been decreased by $26,232,
$30,270, and $12,062, respectively; basic net income per share for years ended June 30, 2015, 2016 and 2017 would have been decreased by $0.45,
$0.51, and $0.20, respectively; and diluted net income per share for the years ended June 30, 2015, 2016 and 2017, would have decreased by $0.44,
$0.50, and $0.20, respectively. Revisions to the estimated total costs for the years ended June 30, 2015, 2016 and 2017 were made in the ordinary
course of business.
The Company combines a group of contracts as one project if they are closely related and are, in substance, parts of a single project with an overall
profit margin. The Company segments a contract into several projects, when they are of different business substance, for example, with different
business negotiation, solutions, implementation plans and margins.
Revenue in excess of billings on the contracts is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues
recognized on the contracts are recorded as deferred revenue until the above revenue recognition criteria are met. Recognition of accounts receivable
and costs and estimated earnings in excess of billings are discussed below.
F-11
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 108 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The Company generally recognizes 100% of the contractual revenue when the customer acceptance has been obtained and no further major costs are
estimated to be incurred, and normally this is also when the warranty period commences. Revenues are presented net of taxes collected on behalf of
the government.
Product sales
Revenue generated from sales of products is recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
Service rendered
The Company has in recent years extended its service offerings as described below. The Company mainly provides two types of services:
Revenue from one-off services: the Company provides different types of one-off services, including on-site maintenance service and training
services which are generally completed on site within a few working days. Revenue is recognized when the Company has completed all the
respective services described in the contracts, there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is
reasonably assured.
Revenue from services covering a period of time: the Company also separately sells extended warranties to their integrated solution customers for a
fixed period. Such arrangements are negotiated separately from the corresponding integrated solution system and are usually entered into upon the
expiration of the warranty period attached to the integrated solution contract. During the extended warranty period, the Company is responsible for
addressing issues related to the system. Part replacement is not covered in such services. The Company recognizes revenue on a pro-rata basis over
the contractual term.
Accounts receivable and costs and estimated earnings in excess of billings
Performance of the integrated contracts will often extend over long periods and the Company’s right to receive payments depends on its
performance in accordance with the contractual agreements. There are different billing practices in the PRC, overseas operating subsidiaries and the
VIE (Concord and Bond Groups). For the Company’s PRC subsidiaries, billings are issued based on milestones specified in contracts negotiated
with customers. In general, there are four milestones: 1) project commencement, 2) system manufacturing and delivery, 3) installation, trial-run and
customer acceptance, and 4) expiration of the warranty period. The amounts to be billed at each milestone are specified in the contract. All contracts
have the first milestone, but not all contracts require prepayments. The length of each interval between two continuous billings under an integrated
contract varies depending on the duration of the contract (under certain contracts, the interval lasts more than a year) and the last billing to be issued
for an integrated solution contract is scheduled at the end of a warranty period. For Concord and Bond Groups, billing claims rendered are subject to
the further approval and certification of the customers or their designated consultants. Payments are made to Concord or Bond Groups based on the
certified billings according to the payment terms mutually agreed between the customers and Concord or Bond Groups. Certain amounts are
retained by the customer and payable to Concord and Bond Groups upon satisfaction of final quality inspection or at the end of the warranty period.
The retained amounts which were recorded as accounts receivable were $10,848 and $12,838 for the two years ended June 30, 2016 and 2017,
respectively. Prepayments received are recorded as deferred revenue. The deferred revenue will be recognized as revenue under the percentage of
completion method along with the progress of a contract.
The carrying value of the Company’s accounts receivable and costs and estimated earnings in excess of billings, net of the allowance for doubtful
accounts, represents their estimated net realizable value. An allowance for doubtful accounts is recognized when it’s probable that the Company will
not collect the amount and is written off in the period when deemed uncollectible. The Company periodically reviews the status of contracts and
decides how much of an allowance for doubtful accounts should be made based on factors surrounding the credit risk of customers and historical
experience. The Company does not require collateral from its customers and does not charge interest for late payments by its customers.
Inventories
Inventories are composed of raw materials, work in progress, purchased and manufactured finished goods and low value consumables. Inventories
are stated at the lower of cost or market. The Company elected to use weighted average cost method as inventory costing method.
The Company assesses the lower of cost or market for non-saleable, excess or obsolete inventories based on its periodic review of inventory
quantities on hand and the latest forecasts of product demand and production requirements from its customers. The Company writes down
inventories for non-saleable, excess or obsolete raw materials, work-in-process and finished goods by charging such write-downs to cost of
integrated contracts and/or costs of products sold.
Warranties
Warranties represent a major term under an integrated contract, which will last, in general, for one to three years or otherwise specified in the terms
of the contract. The Company accrues warranty liabilities under an integrated contract as a percentage of revenue recognized, which is derived from
its historical experience, in order to recognize the warranty cost for an integrated contract throughout the contract period.
F-12
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 109 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Property, plant and equipment, net
Property, plant and equipment, other than construction in progress, are recorded at cost and are stated net of accumulated depreciation and
impairment, if any. Depreciation expense is determined using the straight-line method over the estimated useful lives of the assets as follows:
Buildings
Machinery
Software
Vehicles
Electronic and other equipment
30 -50 years
5 - 10 years
3 - 5 years
5- 6 years
3 - 10 years
Construction in progress represents uncompleted construction work of certain facilities which, upon completion, management intends to hold for
production purposes. In addition to costs under construction contracts, other costs directly related to the construction of such facilities, including
duty and tariff, equipment installation and shipping costs, and borrowing costs are capitalized. Depreciation commences when the asset is placed in
service.
Maintenance and repairs are charged directly to expenses as incurred, whereas betterment and renewals are capitalized in their respective accounts.
When an item is retired or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is
recognized for the reporting period.
Prepaid land leases, net
Prepaid land lease payments, for the land use right of three parcels of land in the PRC, three parcels of leasehold land in Malaysia and one parcel of
leasehold land in Singapore, are initially stated at cost and are subsequently amortized on a straight-line basis over the lease terms of 49 to 88 years.
F-13
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 110 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Intangible assets, net
Intangible assets are carried at cost less accumulated amortization and any impairment. Intangible assets acquired in a business combination are
recognized initially at fair value at the date of acquisition. Intangible assets, except for which are estimated to have an indefinite useful life, are
amortized using a straight-line method. Intangible assets estimated to have an indefinite useful life are not amortized but tested for impairment
annually or more frequently when indicators of impairment exist.
The estimated useful lives for the intangible assets are as follows:
Category
Customer relationship
Order backlog
Patents and copyrights
Residual values are considered nil.
Goodwill
Estimated useful life
57 - 60 months
21 - 33 months
60 - 120 months
Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired. The
Company assesses goodwill for impairment in accordance with ASC subtopic 350-20 (“ASC 350-20”), Intangibles – Goodwill and Other, which
requires that goodwill is not amortized but to be tested for impairment at the reporting unit level at least annually and more frequently upon the
occurrence of certain events, as defined by ASC 350-20.
The Company’s goodwill outstanding at June 30, 2017 was related to the acquisitions of two reporting units, Concord Group and Bond Group.
The Company has the option to assess qualitative factors first to determine whether it is necessary to perform the two-step test in accordance with
ASC 350-20. If the Company believes, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit
is less than its carrying amount, the two-step quantitative impairment test described above is required. Otherwise, no further testing is required. In
the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the
reporting unit, and other specific information related to the operations. In performing the two-step quantitative impairment test, the first step
compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares
or estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the
carrying value of the reporting unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the
reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the impairment test in order to
determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in a
manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of
the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss.
The Company elected to assess goodwill for impairment using the two-step process for both Concord Group and Bond Group for the year ended
June 30, 2017, with assistances from a third-party appraiser. Concord and Bond Groups’ management judgment is involved in determining these
estimates and assumptions, and actual results may differ from those used in valuations. Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit which could trigger future impairment. The judgment in estimating the fair value of
reporting units includes forecasts of future cash flows, which are based on management’s best estimate of future revenue, gross profit, operating
expenses growth rates, future capital expenditure and working capital level, as well as discount rate determined by Weighted Average Cost of
Capital approach and the selection of comparable companies operating in similar businesses. The Company also reviewed marketplace and/or
historical data to assess the reasonableness of assumptions such as discount rate and working capital level.
F-14
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 111 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The carrying amount of Concord Group exceeded its fair value as of June 30, 2017, and a goodwill impairment charge of $11,211 was recorded in
the statement of comprehensive income based on the second step testing result.
There are uncertainties surrounding the amount and timing of future expected cash flows as they may be impacted by negative events such as a
slowdown in the mechanical and electrical engineering sector, deteriorating economic conditions in the geographical areas Concord Group operates
in, political, economic and social uncertainties in the Middle East, increasing competitive pressures and fewer than expected mechanical and
electrical solution contracts awarded to Concord Group. These events can negatively impact demand for Concord Group’s services and result in
actual future cash flows being less than forecasted or delays in the timing of when those cash flows are expected to be realized. Further, the timing
of when actual future cash flows are received could differ from the Company’s estimates, which are based on historical trends and does not factor in
unexpected delays in project commencement or execution.
The fair value of Bond Group exceeded its carrying amounts as of June 30, 2017, and therefore goodwill related to Bond Group was not impaired
and the Company was not required to perform further step testing.
Impairment of long-lived assets other than goodwill
The Company evaluates its long-lived assets or asset group including acquired intangibles with finite lives for impairment whenever events or
changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the
carrying amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Company evaluates the impairment by
comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company recognizes an
impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally based upon discounted cash flows or
quoted market prices.
Shipping and handling costs
All shipping and handling fees charged to customers are included in net revenue. Shipping and handling costs incurred are included in cost of
integrated contracts and/or costs of products sold as appropriate.
Income taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the
period in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the
weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on
deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the enactment date of the change in tax rate.
F-15
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 112 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The Company adopted ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in income taxes.
Interests and penalties arising from underpayment of income taxes shall be computed in accordance with the related tax laws. The amount of interest
expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the amount
previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with ASC 740 are classified in the financial
statements as a component of income tax expense. In accordance with the provisions of ASC 740, the Company recognizes in its financial
statements the impact of a tax position if a tax return position or future tax position is “more likely than not” to prevail based on the facts and
technical merits of the position. Tax positions that meet the “more likely than not” recognition threshold are measured at the largest amount of tax
benefit that has a greater than fifty percent likelihood of being realized upon settlement. The Company’s estimated liability for unrecognized tax
positions which is included in the accrued liabilities is periodically assessed for adequacy and may be affected by changing interpretations of laws,
rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. The outcome for a
particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual
benefits ultimately realized may differ from the Company’s estimates. As each annual filling is done, adjustments, if any, are recorded in the
Company’s financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may require the Company to
adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are
recognized in the period in which the changes occur.
Research and development costs
Research and development costs consist primarily of salaries, bonuses and benefits for research and development personnel. Research and
development costs also include travel expenses of research and development personnel as well as depreciation of hardware equipment and software
tools and other materials used in research and development activities. Research and development costs are expensed as incurred. Software
development costs are also expensed as incurred as the costs qualifying for capitalization have been insignificant.
VAT refunds and government subsidies
Pursuant to the laws and regulations of the PRC, the Company remits 17% of its sales as valued added tax (“VAT”), and then is entitled to a refund
of the portion that the Company’s actual VAT burden exceeding 3% levied on all sales containing internally developed software products. VAT
refunds are recognized in the statements of comprehensive income when cash refunds or the necessary approval from the tax authority has been
received. Certain subsidiaries of the Company located in the PRC receive government subsidies from local PRC government agencies. Government
subsidies are recognized in the statement of comprehensive income when the attached conditions have been met. Government grants received for the
years ended June 30, 2015, 2016 and 2017 amounted to $7,593, $6,085 and $10,238 respectively, of which $2,191, $2,886 and $12,885 were
included as a credit to operating expenses in the statements of comprehensive income for the years ended June 30, 2015, 2016 and 2017,
respectively.
Appropriations to statutory reserve
Under the corporate law and relevant regulations in the PRC, all of the subsidiaries of the Company located in the PRC are required to appropriate a
portion of its retained earnings to statutory reserve. All subsidiaries located in the PRC are required to appropriate 10% of its annual after-tax
income each year to the statutory reserve until the statutory reserve balance reaches 50% of the registered capital. In general, the statutory reserve
shall not be used for dividend distribution purposes. In Dubai and Qatar, companies are required to appropriate 10% of its annual after-tax income
each year to the statutory reserve and the appropriation may be suspended by the shareholders if the reserve reaches 50% of the registered capital.
The statutory reserve can be used to cover the losses of the companies or to increase the capital of the companies with a decision by the general
assembly of CCDB and CECL.
Segment reporting
In accordance with ASC 280, Segment reporting (“ASC 280”), segment reporting is determined based on how the Company’s chief operating
decision makers review operating results to make decisions about allocating resources and assessing performance of the Company. According to
management’s approach, the Company organizes its internal financial reporting structure based on its main product and service offerings. The
Company operates in three principal business segments in the financial reporting structure and their management report, namely industrial
automation, rail transportation and mechanical and electrical solutions. The Company does not allocate any assets to the three segments as
management does not use the information to measure the performance of the reportable segments.
F-16
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 113 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Comprehensive income
Comprehensive income is defined as the changes in equity of the Company during a period from transactions and other events and circumstances
excluding transactions resulting from investments by owners and distributions to owners. In accordance with ASC 220, Comprehensive Income
(“ASC 220”), the Company presents components of net income and other comprehensive income in one continuous statement.
Investments in cost and equity investees
The Company accounts for its equity investments under either the cost method or the equity method by considering the Company’s rights and ability
to exercise significant influence over the investees. Under the cost method, investments are initially carried at cost. In the event that the fair value of
the investment falls below the initial cost and the decline is considered as other-than-temporary, the Company recognizes an impairment charge,
equal to the difference between the cost basis and the fair value of the investment. A variety of factors are considered when determining if a decline
in fair value below carrying value is other than temporary, including, among others, the financial condition and prospects of the investee.
The investments in entities over which the Company has the ability to exercise significant influence are accounted for using the equity method.
Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock of the investee between 20%
and 50%. Other factors, such as representation on the investee’s board of directors and the impact of commercial arrangements, are also considered
in determining whether the equity method of accounting is appropriate.
Under the equity method, original investments are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these
entities, by the amortization of any basis difference between the amount of the Company’s investment and its share of the net assets of the investee,
and by dividend distributions or subsequent investments. Unrealized inter-company profits and losses related to equity investees are eliminated. An
impairment charge, being the difference between the carrying amount and the fair value of the equity investee, is recognized in the consolidated
statements of comprehensive income when the decline in value is considered other than temporary.
There was no impairment loss on investments in cost or equity investees for the years ended June 30, 2015, 2016 and 2017, respectively.
Capitalization of interest
Interest incurred on borrowings for the Company’s construction of facilities and assembly line projects during the active construction period are
capitalized. The capitalization of interest ceases once a project is substantially complete. The amount to be capitalized is determined by applying the
weighted-average interest rate of the Company’s outstanding borrowings to the average amount of accumulated capital expenditures for assets under
construction during the year and is added to the cost of the underlying assets and amortized over their respective useful lives.
Income per share
Income per share is computed in accordance with ASC 260, Earnings Per Share (“ASC 260”). Basic income per ordinary share is computed by
dividing income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period. Diluted
income per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or
converted into ordinary shares.
F-17
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 114 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Share-based compensation
The Company accounts for share-based compensation in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). The
Company recognizes compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over
the requisite service period for the entire award. The compensation cost for each vesting tranche in an award subject to performance vesting is
recognized ratably from the service inception date to the vesting date for each tranche. To the extent the required service and performance
conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards
are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in a subsequent period if actual forfeitures
differ from initial estimates.
For share-based awards that are subject to performance-based vesting conditions in addition to time-based vesting, the Company recognizes the
estimated grant-date fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the vesting
period based upon the Company’s determination of whether it is probable that the performance-based criteria will be achieved. At each reporting
period, the Company reassesses the probability of achieving the performance-based criteria. Determining whether the performance-based criteria
will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the
probability of achieving the performance-based criteria. Revisions are reflected in the period in which the estimate is changed. If the performance-
based criteria are not met, no share-based compensation expense is recognized, and, to the extent share-based compensation expense was previously
recognized, such share-based compensation expense is reversed.
Fair value measurements
The Company has adopted ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes a
three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure fair value and
include the following:
Level 1
Level 2
Level 3
-
-
-
Quoted prices in active markets for identical assets or liabilities.
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
Classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
ASC 820 describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3)
cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or
comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The
measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.
F-18
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 115 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Leases
Leases have been classified as either capital or operating leases. Leases that transfer substantially all the benefits and risks incidental to the
ownership of assets are accounted for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other
leases are accounted for as operating leases wherein rental payments are expensed as incurred.
Accounting for lessor
Minimum contractual rental from leases are recognized on a straight-line basis over the non-cancelable term of the lease. With respect to a particular
lease, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue
recognized for the period. Straight-line rental revenue commences when the customer assumes control of the leased premises. Accrued straight-line
rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with lease agreements.
Contingent rental revenue is accrued when the contingency is removed.
Concentration of risks
Concentration of credit risk
Assets that potentially subject the Company to significant concentration of credit risk primarily consist of cash and cash equivalents, time deposits
with original maturities over three months, restricted cash, accounts receivable, other receivables and amounts due from related parties. The
maximum exposure of such assets to credit risk is their carrying amounts as of the balance sheet date. As of June 30, 2017, substantially all of the
Company’s cash and cash equivalents and time deposits with original maturities exceeding three months were managed by financial institutions
located in the PRC, Singapore, Malaysia and Dubai, which management believes are of high credit quality. Accounts receivable, other receivables
and amounts due from related parties are typically unsecured and the risk with respect to accounts receivable is mitigated by credit evaluations the
Company performs on its customers and its ongoing monitoring process of outstanding balances.
The Company has no customer that individually comprised 10% or more of the outstanding balance of accounts receivable as of June 30, 2016 and
2017, respectively.
Concentration of business and economic risk
A majority of the Company’s net revenue and net income are derived in the PRC. The Company’s operations may be adversely affected by
significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for
more than 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s
political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or
effective.
Concentration of currency convertibility risk
A majority of the Company’s businesses are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange
transactions take place either through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates
quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory institutions
requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.
F-19
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 116 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Concentration of foreign currency exchange rate risk
The Company’s exposure to foreign currency exchange rate risk primarily relates to monetary assets or liabilities held in foreign currencies. Since
July 21, 2005, the RMB has been permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. On June
19, 2010, the People’s Bank of China announced the end of the RMB’s de facto peg to USD, a policy which was instituted in late 2008 in the face of
the global financial crisis, to further reform the RMB exchange rate regime and to enhance the RMB’s exchange rate flexibility. The exchange rate
floating bands will remain the same as previously announced in the inter-bank foreign exchange market. The depreciation of the US dollars against
RMB was approximately 0.64% for the years ended June 30, 2015, and an appreciation of the US dollars against RMB was approximately 8.68%
and 2.07% for the years ended June 30, 2016 and 2017, respectively. Any significant revaluation of RMB may materially and adversely affect the
Company’s cash flows, revenues, earnings and financial position, and the value of its shares in US dollars. An appreciation of RMB against the US
dollar would result in foreign currency translation losses when translating the net assets of the Company from RMB into US dollar.
For the years ended June 30, 2015, 2016 and 2017, the net foreign currency translation losses resulting from the translation of RMB, SGD and other
functional currencies to the U.S. dollar reporting currency recorded in other comprehensive income was $1,386, $48,841 and $14,428, respectively.
F-20
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Recent accounting pronouncements
In August 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-14, which defers the effective date
of ASU 2014-09 Revenue from Contracts with Customers (Topic 606) (" ASU 2014-09") by one year and allows entities the option to early adopt
the new revenue standard as of the original effective date. Issued in May 2014, ASU 2014-09 provided guidance on revenue recognition on
contracts with customers to transfer goods or services or on contracts for the transfer of nonfinancial assets. ASU 2014-09 requires that revenue
recognition on contracts with customers depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for us on July 1, 2018. The new
revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized in retained
earnings as of the date of adoption. The Company preliminarily plans to use the modified retrospective method and has developed an
implementation plan. We are currently evaluating the impact of adoption of this guidance, including required disclosures, and based upon current
analysis, the Company does not expect a significant impact on processes, systems or controls. The company will continue their assessment, which
may identify other impacts of the adoption of ASC 606.
In November 2015, the FASB issued ASU No. 2015-17 (“ASU 2015-17”), Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities
and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all deferred tax
liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for fiscal years
beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented.
Early adoption is permitted. The Company will adopt ASU 2015-17 on July 1, 2017, and does not expect this adoption of this update to have a
material effect on the consolidated financial statements.
F-21
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases. ASU 2016-02 specifies the accounting for leases. For operating
leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease
payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated
over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public companies for annual reporting periods, and interim
periods within those years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of
adopting this standard on its consolidated financial statements.
On March 30, 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”), which relates to the accounting for employee share-based payments. This standard addresses several aspects of the
accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. The new standard will be effective for the Company for the fiscal year beginning July 1, 2017.
Early adoption is permitted. The Company is in the process of evaluating the impact of this accounting standard on its consolidated financial
statements, but does not expect the impact of adoption to be material.
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments. This new standard will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after
December 15, 2017, which means that it will be effective for the Company in the first quarter of the fiscal year beginning July 1, 2018. The new
standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the
amendments prospectively as of the earliest date practicable. The Company is currently evaluating the impact of the pending adoption of ASU 2016-
15 on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Under the
new standard, the selling (transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the
purchasing (receiving) entity is required to recognize a deferred tax asset or liability, as well as the related deferred tax benefit or expense, upon
purchase or receipt of the asset. This pronouncement is effective for reporting periods beginning after December 15, 2017, with early adoption
permitted. The Group is still evaluating the effect that this guidance will have on the consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying Definition of a Business (“ASU 2017-01”).
ASU 2017-01 clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The
revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a
business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets
and activities that do not meet the definition of a business are accounted for as asset acquisitions. This update is effective for fiscal years, and for
interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for transactions that have not been
reported in previously issued (or available to be issued) financial statements. The Group does not believe this standard will have a material impact
on the results of operations or financial condition.
F-22
Date: 09/22/2017 08:33 AM
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Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
In January 2017, the FASB issued Accounting Standards Update No. 2017-04(“ASU 2017-04”), Intangibles – Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a
goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its
fair value. This standard is effective for public business entities in the first quarter of 2020. Early adoption is permitted. The Company is currently
evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting. The guidance clarifies
when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the
modification accounting guidance if the value, vesting conditions or classification of the award changes. This guidance is effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted.
NOTE 3 -
INVENTORIES
Components of inventories are as follows:
Raw materials
Work in progress
Finished goods
NOTE 4 -
ACCOUNTS RECEIVABLE
Accounts receivable
Allowance for doubtful accounts
The movements in allowance for doubtful accounts are as follows:
Balance at the beginning of year
Additions
Deconsolidation of a subsidiary
Written off
Translation adjustment
Balance at the end of year
June 30,
2016
2017
$
12,975
12,770
10,656
36,401
$
15,781
19,525
10,354
45,660
June 30,
2016
2017
279,650
(42,471)
$
237,179
$
294,641
(48,089)
246,552
$
$
$
$
2015
June 30,
2016
2017
$
$
$
25,691
13,907
-
(5,499)
160
$
34,259
12,000
-
(714)
(3,074)
42,471
7,400
(160)
(784)
(838)
34,259
$
42,471
$
48,089
NOTE 5 -
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
Contracts costs incurred plus estimated earnings
Less: Progress billings
$
887,037
(690,726)
$
810,327
(639,571)
June 30,
2016
2017
Cost and estimated earnings in excess of billings
Less: Allowance for doubtful accounts
196,311
(6,383)
170,756
(8,660)
$
189,928
$
162,096
F-23
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The movements in allowance for doubtful accounts are as follows:
Balance at the beginning of year
Additions
Written off
Translation adjustment
Balance at the end of the year
NOTE 6 -
PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
Buildings
Machinery
Software
Vehicles
Electronic and other equipment
Construction in progress
Less: Accumulated depreciation and impairment
2015
June 30,
2016
2017
$
$
$
5,839
3,085
(122)
48
$
8,850
(1,823)
-
(644)
8,850
$
6,383
$
6,383
2,404
-
(127)
8,660
June 30,
2016
2017
$
$
$
$
$
71,037
8,148
7,377
3,886
23,704
5,753
119,905
(39,967)
79,938
$
70,029
10,892
10,004
4,378
29,321
4,113
128,737
(48,208)
80,529
Buildings with a total carrying value of $1,014 and $991 were pledged to secure short-term bank loans (note 12) as of June 30, 2016 and 2017,
respectively.
Buildings with a total carrying value of $3,976 and $3,209 were pledged to secure lines of credits from various banks in the PRC and Malaysia as of
June 30, 2016 and 2017, respectively.
F-24
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Buildings and vehicles with a total carrying value of $1,157 and $1,703 were pledged to secure long-term bank loans as of June 30, 2016 and 2017,
respectively (note 13).
Construction in progress consists of capital expenditures and capitalized interest charges related to the construction of facilities and assembly line
projects and the expenditures related to the Company’s information system constructions.
The depreciation expenses for the years ended June 30, 2015, 2016 and 2017 were $8,508, $6,266 and $8,752, respectively.
Assets leased to others under operating leases
The Company has entered into operating lease contracts related to certain buildings owned with the carrying amount as shown below:
Buildings leased to others - at original cost
Less: accumulated depreciation
Buildings leased to others - net
NOTE 7 -
PREPAID LAND LEASES
A summary of prepaid land leases is as follows:
Prepaid land leases
Less: Accumulated amortization
June 30,
2016
2017
10,086
(3,725)
6,361
$
$
13,925
(4,261)
9,664
June 30,
2016
2017
12,641
(1,868)
$
10,773
$
12,335
(2,129)
10,206
$
$
$
$
The amortization for the years ended June 30, 2015, 2016 and 2017 were $197, $281 and $261, respectively.
Of the total prepaid land leases, $4,593 and nil as of June 30, 2016 and 2017, respectively, are pledged to secure the long-term bank loans (note 13).
The annual amortization of prepaid land leases for each of the five succeeding years is as follows:
Year ending June 30,
2018
2019
2020
2021
2022
$
$
263
263
263
263
263
1,315
F-25
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
NOTE 8 -
INTANGIBLE ASSETS, NET
Customer relationships
Order backlog
Patents and copyrights
June 30,
2016
Accumulated
amortization
Net
carrying
value
Gross
carrying
value
2017
Accumulated
amortization
Net
carrying
value
(2,308)
(11,835)
-
(14,143)
$
843
13
-
3,086
11,605
1,695
856
$
16,386
(2,811)
(11,605)
(42)
(14,458)
275
-
1,653
1,928
Gross
carrying
value
$
$
3,151
11,848
-
14,999
The customer relationships and order backlog were related to the acquisition of Concord and Bond Groups, which were acquired on July 1, 2011
and April 1, 2013, respectively. The amortization for the years ended June 30, 2015, 2016 and 2017 were $4,454, $818 and $623, respectively. The
weighted-average remaining amortization periods for customer relationships are within one year as of June 30, 2017.
The annual amortization expense relating to the existing intangible assets for the next year is as follow:
Year ending June 30,
2018
2019
2020
2021
2022
NOTE 9 -
GOODWILL
The changes in the carrying amount of goodwill are as follows:
Balance at beginning of year
Goodwill impairment charge
Translation adjustment
Balance at the end of year
F-26
$
$
500
225
225
225
215
1,390
June 30,
2016
2017
$
$
$
59,918
-
(71)
59,847
$
59,847
(11,211)
(1,310)
47,326
Date: 09/22/2017 08:33 AM
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Concord Group, as a component of the M&E operating segment, is considered to be a reporting unit for goodwill impairment purposes as Concord
Group constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results
of Concord Group. The amount of goodwill allocated to Concord Group was $25,111 and $24,595 as of June 30, 2016 and 2017, respectively,
before any impairment charges. The Company engaged an independent third-party appraiser to assist in the goodwill impairment test. For the year
ended June 30, 2016, the Company’s step one impairment test indicated that the fair value of Concord Group exceeded its carrying amount and thus
no impairment was noted. For the year ended June 30, 2017, the Company concluded that the carrying amount of Concord Group exceeded its fair
value and recorded a goodwill impairment charge of $11,211 under the caption of “Goodwill impairment charge” in the statement of comprehensive
income as a result of lower profitability levels resulting from increased competition and changes in market. Based on the testing results, the amount
of goodwill allocated to Concord Group after impairment was $23,258 and $11,488 as of June 30, 2016 and 2017.
Estimating the fair value of Concord Group requires the Company to make assumptions and estimates regarding its future plans, market share,
industry and economic conditions of the various geographical areas in which it operates which includes Singapore, Malaysia and the Middle East. In
applying the discounted cash flow approach, key assumptions include the amount and timing of future expected cash flows, terminal value growth
rates and appropriate discount rates. The Company estimates future expected cash flows for each geographical area in which it operates and
calculates the net present value of those estimated cash flows using risk adjusted discount rates ranging from 12.7% to 16.9% (2016: 13.5% to
16.4%) and a terminal value growth rate was 2% (2016: 2%). If the discount rates adopted in 2017 increased or decreased by 1%, the fair value of
Concord Group would decrease or increase by $1,187 and $1,383, respectively. If the terminal value growth rates adopted in 2017 increased or
decreased by 1%, the fair value of Concord Group would increase or decrease by $562 and $498, respectively.
There are uncertainties surrounding the amount and timing of future expected cash flows as they may be impacted by negative events such as a
slowdown in the mechanical and electrical engineering sector, deteriorating economic conditions in the geographical areas Concord Group operates
in, political, economic and social uncertainties in the Middle East, increasing competitive pressures and fewer than expected mechanical and
electrical solution contracts awarded to Concord Group. These events can negatively impact demand for Concord Group’s services and result in
actual future cash flows being less than forecasted or delays in the timing of when those cash flows are expected to be realized. Further, the timing
of when actual future cash flows are received could differ from the Company’s estimates, which are based on historical trends and does not factor in
unexpected delays in project commencement or execution.
NOTE 10 -
INVESTMENTS IN EQUITY AND COST INVESTEES
The following long-term investments were accounted for under either the equity method or the cost method as indicated:
June 30, 2016
Equity method
China Techenergy Co., Ltd.
Beijing Hollysys Electric Motor Co., Ltd.
Beijing IPE Biotechnology Co., Ltd.
Southcon Development Sdn Bhd.
Beijing Hollysys Machine Automation Co., Ltd.
Cost method
Shenhua Hollysys Information Technology Co., Ltd.
Heilongjiang Ruixing Technology Co., Ltd.
Zhejiang Sanxin Technology Co., Ltd.
Zhongjijing Investment Consulting Co., Ltd.
Long-term
investment, at
cost, less
impairment
Share of
undistributed
profits
Advance
to
investee
company
Interest
held
Total
9,030
797
1,484
224
452
11,987
2,387
1,631
90
-
4,108
40.00% $
40.00%
22.02%
30.00%
30.00%
$
20.00% $
6.00%
6.00%
5.00%
$
F-27
1,077
3,961
2,213
(116)
(452)
6,683
-
-
-
-
-
44
-
-
-
-
44
-
-
-
-
-
10,151
4,758
3,697
108
-
18,714
2,387
1,631
90
-
4,108
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
June 30, 2017
Equity method
Beijing Hollycon Medicine & Technology. Co.,
Ltd.
China Techenergy Co., Ltd.
Beijing Hollysys Electric Motor Co., Ltd.
Beijing IPE Biotechnology Co., Ltd.
Shenzhen HollySys Intelligent Technologies Co.,
Ltd.
Southcon Development Sdn Bhd.
Beijing Hollysys Machine Automation Co., Ltd.
Cost method
Shenhua Hollysys Information Technology Co.,
Ltd.
Heilongjiang Ruixing Technology Co., Ltd.
Zhejiang Sanxin Technology Co., Ltd.
Zhongjijing Investment Consulting Co., Ltd.
Interest
held
Long-term
investment, at
cost, less
impairment
Share of
undistributed
profits
Advance
to
investee
company
Total
30.00% $
40.00%
40.00%
22.02%
60.00%
30.00%
30.00%
$
20.00% $
6.00%
6.00%
5.00%
$
22,737
8,847
781
1,454
2,654
210
442
37,125
2,338
1,598
88
-
4,024
1,773
2,503
4,262
2,241
(159)
(104)
(442)
10,074
-
-
-
-
-
-
43
-
-
-
-
-
43
-
-
-
-
-
24,510
11,393
5,043
3,695
2,495
106
-
47,242
2,338
1,598
88
-
4,024
In July 2016, Beijing Hollycon Medicine& Technology. Co., Ltd. (“Hollycon”), previously one of the Company’s subsidiaries, issued new shares
for an aggregate cash consideration of $30,943 to two new third party investors. At the same time, the Company disposed 0.6% of its equity interest
in Hollycon for cash consideration of $464. These two transactions resulted in dilution of the Company’s equity interest in Hollycon from 51% to
30%. According to the revised article of association, Hollycon will be managed by a board of directors comprising of a total 5 members, of which,
the Company can appoint two directors while the other three shareholders can appoint one director each. The Company can also appoint the
chairman of the board. All major management and operation decision need be approved by the board and requires approval by at least 2/3 of board
directors. Profits is allocated to shareholders based on the percentage of respective initial investment. The Company lost control over Hollycon upon
the completion of the two transactions set out above, but maintained significant influence over Hollycon, and accounted for the investment in
Hollycon under equity method. Upon the deconsolidation date, the Company recorded the retained non-controlling equity investee at fair value of
$22,737 and recognized a gain of $14,514. The fair value of retained non-controlling interest in Hollycon was measured using a discounted cash
flow approach. Key estimates and assumptions include the amount and timing of future expected cash flows, terminal value growth rates, and
discount rate.
F-28
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Shenzhen HollySys Intelligent Technologies Co., Ltd. (“Shenzhen HollySys”) was set up in October 2016. The Company holds a 60% equity
interest of Shenzhen HollySys, but uses the equity method to account for the investment as the Company does not control Shenzhen Hollysys since:
1) Only one out of the three board representatives is elected by the Company and the remaining two are elected by other two shareholders;
2) Based on the articles of association of Shenzhen HollySys, all major decisions in the normal business operation and appointment of key
managements of Shenzhen HollySys is subject to approval by at least two-third vote of the Board of Directors.
The Company holds a 20% equity interest of Shenhua Hollysys Information Technology Co., Ltd. (“Shenhua Information”), but uses the cost
method to account for the investment since:
1) Only one out of the five board representatives is elected by the Company and the remaining 80% equity interest is held by a large state-owned
company which, in the view of the management, operates Shenhua Information without regards to the views of the Company;
2) Key management of Shenhua Information including the chief executive officer, chief financial officer, chief operating officer and head of
accounting are all appointed by the other shareholder.
3) Based on the articles of association of Shenhua Information, there are no matters that require unanimous approval of all shareholders and there
are no participating rights for non-controlling shareholders.
The Company reduced the investment in Zhongjijing Investment Consulting Co., Ltd. (“Zhongjijing”) to nil since June 30, 2014. The Company
expects that the recoverable amount of the investment in Zhongjijing to be nil.
NOTE 11 -
WARRANTY LIABILITIES
Beginning balance
Deconsolidation of a subsidiary
Expense accrued
Expense incurred
Translation adjustment
Less: current portion of warranty liabilities
Long-term warranty liabilities
F-29
June 30,
2016
2017
$
$
$
10,387
-
3,876
(3,075)
(828)
10,360
(6,782)
3,578
$
$
$
10,360
(227)
1,547
(3,836)
(212)
7,632
(5,386)
2,246
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
NOTE 12 -
SHORT-TERM BANK LOANS
On June 30, 2016, the Company’s short-term bank borrowings consisted of revolving bank loans of $3,051 from several banks, which were subject
to annual interest rates ranging from 0.8% to 5.12%, with a weighted average interest rate of 1.5%. Some of the short-term loans are secured by the
pledge of restricted cash and buildings with carrying values of $2,743 and $1,014 as of June 30, 2016, respectively.
On June 30, 2017, the Company’s short-term bank borrowings consisted of revolving bank loans of $8,121 from several banks, which were subject
to annual interest rates ranging from 3.09% to 4.85%, with a weighted average interest rate of 3.53%. Some of the short-term loans are secured by
the pledge of restricted cash and buildings with carrying values of $16,410 and $991 as of June 30, 2017, respectively.
For the years ended June 30, 2015, 2016, and 2017, interest expenses on short-term bank loans amounted to $286, $211 and $178 respectively.
As of June 30, 2016, the Company had available lines of credit from various banks in the PRC, Singapore and Malaysia amounting to $205,129, of
which $72,592 was utilized and $132,537 is available for use. These lines of credit were secured by the pledge of restricted cash and buildings with
a carrying value of $3,754 and $3,976, respectively.
As of June 30, 2017, the Company had available lines of credit from various banks in the PRC, Singapore and Malaysia amounting to $257,670, of
which $78,910 was utilized and $178,760 is available for use. These lines of credit were secured by the pledge of restricted cash and buildings with
a carrying value of $4,954 and $3,209, respectively.
NOTE 13 -
LONG-TERM LOANS
USD denominated loan
MYR denominated loan
SGD denominated loan
Convertible Bond
Less: current portion
(i)
(ii)
(iii)
(iv)
June 30,
2016
2017
4,770
830
1,939
19,802
27,341
$
-
782
187
20,032
21,001
(6,833)
(420)
20,508
$
20,581
$
$
i.
The USD denominated loan was repaid in March 2017. The borrowing was secured by restricted cash amounting to $4,515 which was released
in March 2017 upon the repayment.
ii. The MYR denominated loans are repayable in 3 to 75 installments with the last installment due in December 2041. For the year ended June 30,
2017, the effective interest rates ranged from 2.19% to 5.68% per annum. The borrowings are secured by the mortgages of buildings, vehicles,
and prepaid land leases in Malaysia, with an aggregate carrying value of $1,019 and $1,396 as of June 30, 2016 and 2017, respectively.
F-30
Date: 09/22/2017 08:33 AM
Toppan Vintage
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
iii. The SGD denominated loans are repayable in 10 to 31 installments with the last installment due on March 15, 2020. For the year ended June 30,
2017, the effective interest rates ranged from 2.68% to 5.44% per annum. The borrowing is secured by vehicles and restricted cash with a total
carrying value of $3,148 and $307 as of June 30, 2016 and 2017, respectively.
iv. Convertible Bond
On May 30, 2014, the Company entered into a Convertible Bond agreement with International Finance Corporation ("IFC"), under which the
Company borrowed $20,000 from IFC (the “Convertible Bond”) with an interest rate of 2.1% per annum and commitment fee of 0.5% per
annum paid in arrears semi-annually. The Convertible Bond has a five year term and was drawn down on August 30, 2014 and is repayable in
full on August 29, 2019. The loan may not be prepaid before it is due.
Conversion rate
The initial conversion rate at the time of the agreement is 38 ordinary shares per $1, and the initial conversion price is $26.35 per share. The
initial conversion rate and conversion price are subject to subsequent adjustments with events that may dilute the unit price per share. Since the
Company paid out a cash dividend of $0.40 per share in March 2015 and $0.2 per share in November 2016, the conversion rate and conversion
price was adjusted to 39.22 ordinary shares per $1 and $25.50 per share, respectively.
Conversion
The Convertible Bond has both voluntary and mandatory conversion terms. IFC may at its option convert, in $1,000 increments, the
Convertible Bond in whole or in part, into the Company’s ordinary shares at any time on or prior to the maturity date at a conversion rate and a
conversion price in effect at such time. The conversion rate is subject to anti-dilution. According to the Convertible Bond agreement, 50% of
the principal amount of the Convertible Bond then outstanding will be mandatorily converted into ordinary shares of the Company at the
conversion rate and conversion price then in effect if at any time, with respect to the period of 30 consecutive trading days ending at such time,
the volume weighted average prices for 20 trading days or more in such 30 consecutive trading day period is equal to or more than 150% of the
conversion price in effect at such time. In addition, 100% of the principal amount of the Convertible Bond then outstanding will be mandatorily
converted into ordinary shares at the conversion rate and conversion price then in effect if at any time, with respect to the period of 30
consecutive trading days ending at such time, the volume weighted average prices for 20 trading days or more in such 30 consecutive trading
day period is equal to or more than 200% of the conversion price in effect at such time.
Non-conversion compensation feature
In the event that there remains any outstanding principal of the Convertible Bond not converted by IFC into ordinary shares at the maturity date,
the Company shall pay to IFC an additional amount equal to 4% of such outstanding principle (“non-conversion compensation feature”). The
non-conversion compensation feature is bifurcated as a derivative liability and measured at the fair value in each reporting period.
Registration rights agreement
The Company has filed a shelf-registration statement with the United States Securities and Exchange Commission with respect to the resale of
any ordinary shares issued or issuable upon conversion of the Convertible Loan. The Company shall maintain the effectiveness of the
registration statement for so long as any registrable securities remain issued and outstanding. In the event that the registration statement is not
declared effective or ceases to remain continuously effective such that IFC is not able to utilize the prospectus to resell its ordinary shares, the
Company shall pay a penalty equal to 0.5% of the aggregate principal amount of the Convertible Bond that was converted into unregistered
ordinary shares then held by IFC. The maximum aggregate penalty payable to IFC shall be 5% of the aggregate principal amount of the
Convertible Bond that was converted.
F-31
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 128 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
In accounting for the issuance of the Convertible Bond, the Company bifurcated the non-conversion compensation feature from the Convertible
Bond in accordance with ASC 815-15-30-2. The bifurcated feature is accounted for as a liability at its fair value in each reporting period. The
Company did not bifurcate the conversion option, as it is considered indexed to the entity’s own stock and meets the equity classification
guidance in ASC 815-40-25, it is eligible for a scope exception from ASC 815 and does not need to be bifurcated from the underlying debt host
instrument. At the commitment date, there was no beneficial conversion as the conversion price was higher than the stock price. The fees and
expenses associated with the issuance of the Convertible Bond are recorded as a discount to the debt liability in accordance with ASU 2015-03,
which the Company has early adopted in fiscal year ended June 30, 2015. The Convertible Bond, which is the proceeds net of fees and expenses
payable to the creditor and the fair value of the bifurcated derivative, will be accreted to the redemption value on the maturity date using the
effective interest method over the estimated life of the debt instrument. The registration right liability is accounted for in accordance with ASC
450-20 which defines that a liability should be recorded in connection with the registration rights agreement when it becomes probable that a
payment under the registration rights agreement would be required and the amount of payment can be reasonably estimated. As of June 30,
2017, the Company did not recognize any liability related to the registration right.
The Company paid up-front fees related to the issuance of the Convertible Bond amounting to $349.
For fiscal year 2016 and 2017, the accretion of the Convertible Bond was $230 and $230, respectively.
Scheduled principal payments for all outstanding long-term loans as of June 30, 2017 are as follows:
Year ending June 30,
2018
2019
2020
2021
2022 and onwards
$
$
420
215
20,955
90
121
21,801
For the years ended June 30, 2015, 2016, and 2017, interest expenses of long-term loans incurred amounted to $1,535, $1,193 and $760
respectively, and nil was capitalized as construction in progress for either of these three years.
NOTE 14 -
FAIR VALUE MEASUREMENT
Financial instruments include cash and cash equivalents, time deposits with maturities over three months, accounts receivable, other receivables,
amounts due to or from related parties, accounts payable, short-term bank loans, long-term bank loans and bifurcated derivative. The carrying values
of these financial instruments, other than long-term bank loans and a bifurcated derivative (which is a recurring fair value measurement),
approximate their fair values due to their short-term maturities. The carrying value of the Company’s long-term bank loans other than the
Convertible Bond approximates its fair value as the long-term bank loans are subject to floating interest rates. These assets and liabilities, excluding
cash and cash equivalents (which fall into level 1 of the fair value hierarchy), fall into level 2 of the fair value hierarchy. The carrying value of the
Convertible Bond is $19,802 and $20,032 as of June 30, 2016 and 2017, respectively; whereas the fair value is $13,929 and $15,359 as of June 30,
2016 and 2017, respectively. The fair value measurement of the Convertible Bond falls into level 3 of the fair value hierarchy.
F-32
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2016, and 2017 are stated below:
Liabilities:
Derivative financial liability (i)
Total liabilities measured at fair value on a recurring basis
Liabilities:
Derivative financial liability (i)
Total liabilities measured at fair value on a recurring basis
Quoted prices
in active
markets for
identical assets
(Level 1)
June 30, 2016
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
$
$
$
$
Quoted prices
in active
markets for
identical assets
(Level 1)
- $
- $
- $
- $
- $
- $
398 $
398 $
398
398
June 30, 2017
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
- $
- $
487 $
487 $
487
487
(i) The derivative financial liability represents the fair value of the non-conversion compensation feature (note 13). The Company engaged an
independent third-party appraiser to assist with the valuation of the feature. The Company is ultimately responsible for the fair value of the non-
conversion compensation feature recorded in the consolidated financial statements. The Company adopted the binomial model to assess the fair
value of such feature as of year-end. The non-conversion compensation feature is equal to the difference between the fair value of the whole
Convertible Bond with the non-conversion compensation feature and the whole Convertible Bond without the non-conversion feature. The
significant unobservable inputs used in the fair value measurement of the non-conversion compensation feature includes the risk-free rate of
return, expected volatility, expected life of the Convertible Bond and expected ordinary dividend yield. The changes in fair value of the non-
conversion compensation feature during fiscal year 2016 and 2017 are shown in the following table.
F-33
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 130 of
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Balance as at June 30, 2016
Change in fair-value (included within other expenses, net)
Balance as of June 30, 2017
Assets measured at fair value on a nonrecurring basis as of June 30, 2017 are stated below:
Fair value measurements as of June
30, 2017 using significant
unobservable inputs
(Level 3)
Non-conversion compensation feature
related to the Convertible Bond
$
$
398
89
487
June 30, 2017
Quoted prices in
active markets for
identical assets
(Level 1)
Significant other
observable inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total
Assets:
Retained non-controlling interest in a former subsidiary(i)
Goodwill(ii)
Total assets measured at fair value on a non-recurring basis
$
$
- $
-
- $
- $
-
- $
22,737 $
11,488
22,737
11,488
34,225 $
34,225
(i) During the year ended June 30, 2017, the investment in Hollycon was measured based on significant unobservable inputs (Level 3), using a
discounted cash flow approach assuming a certain terminal growth rate and discount rate (Note 10).
(ii) As of June 30, 2017, the Company’s goodwill of $11,488 was related to the acquisition of Concord Group and $35,838 was related to the
acquisition of Bond Group. The Company engaged an independent third-party appraiser to assist with the valuation of the goodwill related to
the Concord and Bond Groups. The Company is ultimately responsible for the fair value of the goodwill recorded in the consolidated financial
statements. For the purposes of step one of the goodwill impairment test, the Company has adopted the income approach, in particular the
discounted cash flow approach, to evaluate the fair value of the reporting unit. In applying the discounted cash flow approach, key assumptions
include the amount and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. For the purpose of step
two of the goodwill impairment test, the Company has allocated the fair value of the reporting unit derived in step one to the assets and
liabilities of the reporting unit, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was
the price paid to acquire the reporting unit. The Company adopted the multi-period excess earnings model to evaluate the fair value of the
intangible assets of the reporting unit, which was then used to compute the implied fair value of the goodwill via a residual approach. As a
result, the Company recorded a goodwill impairment charge of $11,211 (Note 9).
NOTE 15 -
STOCKHOLDERS’ EQUITY
In August 2010, the Board of Directors adopted the 2010 Rights Plan. The 2010 Rights Plan provides for a dividend distribution of one preferred
share purchase (the “Right”), for each outstanding ordinary share. Each Right entitles the shareholder to buy one share of the Class A Preferred
Stock at an exercise price of $160. The Right will become exercisable if a person or group announces an acquisition of 20% or more of the
outstanding ordinary shares of the Company, or announces commencement of a tender offer for 20% or more of the ordinary shares. In that event,
the Right permits shareholders, other than the acquiring person, to purchase the Company’s ordinary shares having a market value of twice the
exercise price of the Right, in lieu of the Class A Preferred Stock. In addition, in the event of certain business combinations, the Right permits the
purchase of the ordinary shares of an acquiring person at a 50% discount. Right held by the acquiring person become null and void in each
case. Unless terminated earlier by the Board of Directors, the 2010 Rights Plan will expire on September 27, 2020. There is no accounting impact
related to the Right.
F-34
Date: 09/22/2017 08:33 AM
Toppan Vintage
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
On May 30, 2013, October 29, 2014, and December 9, 2015, pursuant to the terms of the acquisition of Bond Group, the Company issued
1,407,907, 648,697 and 627,578 ordinary shares, respectively.
On February 9, 2015, the Company declared a special cash dividend of $0.40 per share to the holders of the Company’s ordinary shares. The record
date was February 23, 2015, and the dividend was paid on March 16, 2015.
On September 26, 2016, the Company declared a regular cash dividend of $0.20 per share to the holders of the Company’s ordinary shares. The
record date was October 26, 2016, and the dividend was paid on November 11, 2016.
NOTE 16 -
SHARE-BASED COMPENSATION EXPENSES
On September 20, 2007, the Company adopted the 2006 Stock Plan (the “2006 Plan”) which allows the Company to offer a variety of incentive
awards to employees, officers, directors and consultants. Options to purchase 3,000,000 ordinary shares are authorized under the 2006 Plan. The
Company issues new shares to employees, officers, directors and consultants upon share option exercise or share unit conversion.
On May 14, 2015, the Board of Directors approved the 2015 Equity Incentive Plan (the “2015 Equity Plan”). The 2015 Equity Plan provided for
5,000,000 ordinary shares, and it will terminate ten years following the date that it was adopted by the Board of Directors. The purposes of the 2015
Equity Plan are similar as the 2006 Plan, which is used to promote the long-term growth and profitability of the Company and its affiliates by
stimulating the efforts of employees, directors and consultants of the Company and its affiliates who are selected to be participants, aligning the
long-term interests of participants with those of shareholders, heightening the desire of participants to continue in working toward and contributing
to the success of the Company, attracting and retaining the best available personnel for positions of substantial responsibility, and generally
providing additional incentive for them to promote the success of the Company’s business through the grant of awards of or pertaining to the
Company’s ordinary shares. The 2015 Equity Plan permits the grant of incentive share options, non-statutory share options, restricted shares,
restricted share units, share appreciation rights, performance units and performance shares as the Company may determine.
Performance options
Performance share options granted in 2012 (“2012 Performance Options”)
The Company granted 1,476,000 share options to certain employees under the terms of the 2006 Plan in 2012. All the share options had been vested
and exercised by June 30, 2017. During the current year, the remaining 721,500 share options were exercised.
The Company recorded share-based compensation expense relating to 2012 performance share options of $1,602, $251 and nil which is included in
general and administrative expenses, for the years ended June 30, 2015, 2016 and 2017, respectively.
Performance options granted in 2015 (“2015 Performance Options”)
On May 14, 2015, certain employees of the Company were granted share-based compensation awards totaling 1,740,000 performance share options
to purchase ordinary shares according to the terms of the 2015 Equity Plan. The exercise price of these options is $22.25 per share. The exercise
price of the option will be adjusted in the event dividends are paid by the Company.
On the 24, 36, 48 month anniversary of the grant date, 30%, 30%, 40% of 1,160,000 performance share options will vest if the Company’s annual
growth rate of Non-GAAP diluted EPS for fiscal years 2015, 2016 and 2017 equals or exceeds 15% per annum. On the 48 month anniversary of the
grant date, 50% of the remaining 580,000 options will vest if the Company’s CAGR of Non-GAAP diluted EPS for fiscal years 2015 to 2017 equals
or exceeds 20%, and another 50% of the 580,000 performance options will vest if he Company’s CAGR of Non-GAAP diluted EPS for fiscal years
2015 to 2017 equals or exceeds 25%.
F-35
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 132 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Moreover, for option grantees who are responsible for individual businesses, they have to meet the following additional criteria in each year, from
fiscal years 2015 to 2017, to exercise the options in that particular year. The annual revenue growth rate compared to prior fiscal year must equal to
or exceed 15%, 5%, 15% and 50% respectively for industrial automation (“IA”), rail transportation (“Rail”), mechanical and electrical solutions
(“M&E”) and medical (“Medical”) revenue streams.
The vesting schedule for such performance share options is as below:
EPS Threshold
Annual growth rate over 15% but below 20%
CAGR equals or over 20% but below 25%
CAGR equals 25% or above
Number of vested
options
1,160,000
Additional 290,000
Additional 290,000
24 months
Months after the grant date
36 months
48 months
348,000
-
-
348,000
-
-
464,000
290,000
290,000
Total
348,000
348,000
1,044,000
The 2015 Performance Options will remain exercisable from the vesting date until the 60 month anniversary of the grant date. The EPS threshold
and the revenue growth thresholds for Rail and Medical were met for fiscal years ended June 30, 2015 and 2016, however, the revenue growth
thresholds of IA and M&E was not achieved. The annual growth rate of Non-GAAP diluted EPS for fiscal year 2017 failed to fall between 15% and
20%, in addition, the revenue growth thresholds were not met for all revenue streams. Based on this performance, 396,000 out of 1,740,000 2015
performance options are expected to be vested.
A summary of the 2015 performance option activity for the year ended June 30, 2017 is as shown below:
2015 Performance
Options
Outstanding as at June 30, 2016
Forfeited
Outstanding as at June 30, 2017
Vested and expected to vest at June 30, 2017
Exercisable at June 30, 2017
Weighted
average
exercise price
Weighted average
remaining
contractual life
(years)
Number of
shares
Aggregate
intrinsic value
22.25
22.05
22.05
22.05
22.05
3.87
2.87
2.87
2.87
-
-
-
-
1,740,000
1,344,000
396,000
396,000
198,000
F-36
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The weighted averaged grant-date fair value of the 2015 performance options granted in fiscal year 2015 was $22.22.
The Company recorded share-based compensation expense relating to the 2015 performance options in the amount of $471, $3,190 and $(263)
which is included in general and administrative expenses, in fiscal year 2015, 2016 and 2017, respectively. As of June 30, 2017, total unrecognized
share-based compensation expense of $588 related to 2015 performance options is expected to be recognized over a weighted average vesting
period of 0.87 years.
For the 2015 performance options, the Company engaged an independent third-party appraiser to assist with the valuation of the option. The
Company has adopted the binomial option pricing model to assess the fair value as of the valuation date.
The major inputs to the binomial model are as follows:
Risk-free rate of return
Weighted average expected volatility
Expected life (in years)
Expected ordinary dividend yield
Restricted shares
For options granted on
May 14, 2015
1.51%
53.42%
5 years
nil
During the year ended June 30, 2014, the Company granted 52,500 restricted ordinary shares to certain directors under the 2006 Plan. All shares
were granted on June 23, 2014. These restricted shares vest quarterly over a three-year period starting from the directors’ respective service
inception date. Fair value of the restricted shares was determined with reference to the market closing price at grant date.
During the year ended June 30, 2017, the Company granted 67,500 restricted ordinary shares to certain directors under the 2015 Plan. All shares
were granted on December 10, 2016. These restricted shares vest quarterly over a three-year period starting from the directors’ respective service
inception date. Fair value of the restricted shares was determined with reference to the market closing price at grant date.
A summary of the restricted share activity for the year ended June 30, 2017 is as follows:
Un-vested at June 30, 2016
Granted
Vested
Un-vested at June 30, 2017
Number of restricted shares Weighted average grant-date fair value
23.95
20.09
23.05
20.09
14,375
67,500
18,750
63,125
The aggregated grant-date fair value of restricted shares vested during the years ended June 30, 2015, 2016 and 2017 were $419, $419 and $432
respectively. $419, $419 and $727 were recorded in general and administrative expenses as restricted share compensation expenses, for the years
ended June 30, 2015, 2016 and 2017, respectively. As of June 30, 2017, the aggregated unrecognized compensation expense of $904 related to the
restricted shares is expected to be recognized over a weighted-average vesting period of 2.63 years.
NOTE 17 -
EMPLOYEE BENEFITS
The Company contributes to a state pension scheme run by the Chinese government in respect of its employees in China, a central provision fund
run by the Singapore government in respect of its employees in Singapore, and an employment provident fund in respect of its employees in
Malaysia. The expenses related to these plans were $17,018, $18,235 and $17,568 for the years ended June 30, 2015, 2016 and 2017, respectively.
These schemes were accounted for as defined contribution plans.
F-37
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
NOTE 18 -
INCOME TAX
BVI
Hollysys and its subsidiaries incorporated in the BVI are not subject to income tax under the relevant regulations.
Singapore
The Company’s wholly owned subsidiaries incorporated in Singapore are subject to Singapore corporate tax at a rate of 17% on the assessable
profits arising from Singapore.
Malaysia
The Company’s wholly owned subsidiaries incorporated in Malaysia are subject to Malaysia corporate income tax at a rate of 24% on the assessable
profits arising from Malaysia.
Dubai
The branch of the Company’s wholly owned subsidiary is a tax exempt company incorporated in Dubai, and no tax provision has been made for
each of the years ended June 30, 2015, 2016 and 2017.
Hong Kong
The Company’s wholly owned subsidiaries incorporated in Hong Kong are subject to Hong Kong profits tax at a rate of 16.5% on the assessable
profits arising from Hong Kong. No provision for Hong Kong profits tax has been made in the statement of comprehensive income as there were
sustained taxable losses arising from Hong Kong for each of the years ended June 30, 2015, 2016 and 2017.
Macau
The Company’s wholly owned subsidiary incorporated in Macau is subject to the Macau corporate income tax at a rate of 12% on the assessable
profits arising from Macau, with an exemption up to MOP 600. No provision for Macau profits tax has been made in the statement of
comprehensive income for each of the years ended June 30, 2015, 2016 and 2017.
India
The Company’s wholly owned subsidiary incorporated in India is subject to India corporate tax at a rate of 30% on its worldwide income. No
provision for India profits tax has been made in the statement of comprehensive income as there were no taxable profits noted for each of the years
ended June 30, 2015, 2016 and 2017.
Qatar
CECL is subject to the Qatar Corporate income tax at a rate of 10% on the assessable profit arising from Qatar. No provision for Qatar tax has been
made in the statement of comprehensive income as there were no assessable profits noted for each of the years ended June 30, 2016 and 2017.
F-38
Date: 09/22/2017 08:33 AM
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
PRC
The Company’s subsidiaries incorporated in the PRC are subject to PRC enterprise income tax (“EIT”) on their respective taxable incomes as
adjusted in accordance with relevant PRC income tax laws. The PRC statutory EIT rate is 25%. The Company’s PRC subsidiaries are subject to the
statutory tax rate except for the followings:
Beijing Hollysys Co., Ltd (“Beijing Hollysys”)
Beijing Hollysys was certified as a High and New Technology Enterprise (“HNTE”) which provides a preferential EIT rate of 15% for three
calendar years from 2014 to 2016, and is in the process of reapplying the qualifications of HNTE for the following three calendar years from 2017
to 2019. Beijing Hollysys is expecting to receive the renewed certification in late 2017.
Further, Beijing Hollysys was expected to be qualified for the Key Software Enterprise (“KSE”) status in 2017 and would be entitled to the
preferential tax rate of 10% for calendar year 2016. Beijing Hollysys will be subject to the statutory tax rate of 25% for calendar year 2017 and
onwards, if and when it fails to be certified or qualified as a HNTE or KSE in the future.
Hangzhou Hollysys Automation Co., Ltd (“Hangzhou Hollysys”)
Hangzhou Hollysys was certified as a HNTE which provides a preferential EIT rate of 15% for three calendar years from 2014 to 2016, and is in the
process of reapplying the qualifications of HNTE for the following three calendar years from 2017 to 2019. Hangzhou Hollysys is expecting to
receive the renewed certification in late 2017.
Further, Hangzhou Hollysys was qualified for the KSE status in 2017 and was entitled to the preferential tax rate of 10% for calendar year 2016.
Hangzhou Hollysys will be subject to the statutory tax rate of 25% for calendar year 2017 and onwards, if and when it fails to be certified or
qualified as a HNTE or KSE in the future.
The Company’s income before income taxes consists of:
PRC
Non-PRC
2015
Year ended June 30,
2016
2017
$
$
134,657
(9,430)
$
142,900
(5,158)
$
105,331
(22,976)
125,227
$
137,742
$
83,355
Income tax expense, most of which is incurred in the PRC, consists of:
Current income tax expense (benefit)
PRC
Non-PRC
Deferred income tax expense (benefit)
PRC
Non-PRC
2015
Year ended June 30,
2016
2017
16,074
5,120
21,194
5,834
(988)
4,846
26,040
$
$
10,590
4,110
14,700
(196)
(266)
(462)
14,238
$
$
12,911
(658)
12,253
2,616
(483)
2,133
14,386
$
$
$
F-39
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Client: v474603_Hollysys Automation Technologies, Ltd._20-F
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Reconciliation of the income tax expenses as computed by applying the PRC statutory tax rate of 25% to income before income taxes and the actual
income tax expenses is as follows:
2015
Year ended June 30,
2016
2017
Income before income taxes
$
125,227
$
137,742
$
Expected income tax expense at statutory tax rate in the PRC
Effect of different tax rates in various jurisdictions
Effect of preferential tax treatment
Effect of non-taxable income
Effect of additional deductible research and development expenses
Effect of non-deductible expenses
Effect of change in tax rate
Change in valuation allowance
Tax rate differential on deferred tax items
Withholding tax on dividend paid by subsidiaries
Others
Total
$
31,307
1,286
(12,453)
(6,770)
(2,772)
8,402
(4,191)
1,475
3,139
6,028
589
26,040
$
34,436
2,109
(12,296)
(4,985)
(4,716)
5,569
(6,613)
540
(587)
1,252
(471)
14,238
$
83,355
20,838
2,627
(10,650)
-
(2,385)
4,608
(4,835)
3,964
2,056
(2,799)
962
14,386
Had the above preferential tax treatment not been available, the tax charge would have been increased by $12,453, $12,296 and $10,650 and the
basic net income per share would have been reduced by $0.21, $0.21 and $0.18 for the years ended June 30, 2015, 2016 and 2017, respectively, and
the diluted net income per share for the years ended June 30, 2015, 2016 and 2017 would have been reduced by $0.21, $0.20 and $0.17 respectively.
The breakdown of deferred tax assets/liabilities caused by the temporary difference is shown as below:
F-40
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
June 30,
2016
2017
Deferred tax assets, current
Allowance for doubtful accounts
Inventory provision
Provision for contract loss
Long-term assets
Deferred revenue
Deferred subsidies
Warranty liabilities
Recognition of intangible assets
Accrued payroll
Net operating loss carry forward
Valuation allowance
Total deferred tax assets, current
Deferred tax liabilities, current
Costs and estimated earnings in excess of billings
Recognition of intangible assets
PRC dividend withholding tax
Others
Total deferred tax liabilities, current
Net deferred tax assets, current
Net deferred tax liabilities, current
Deferred tax assets, non-current
Long-term assets
Deferred subsidies
Net operating loss carryforward
Warranty liabilities
Others
Total deferred tax assets, non-current
Deferred tax liabilities, non-current
Share of net gains of equity investees
Property, plant and equipment
Intangible assets and other non-current assets
Total deferred tax liabilities, non-current
Net deferred tax assets-non-current
Net deferred tax liabilities-non-current
$
$
$
$
$
$
$
$
$
$
$
$
9,838
205
917
13
3,522
1,020
1,322
57
960
6,361
(6,307)
17,908
$
$
(16,068) $
(1,060)
(3,010)
(24)
(20,162) $
$
6,659
(8,913) $
699
2,642
-
874
(16)
4,199
$
$
(1,733) $
-
(330)
(2,063) $
2,195
$
(59) $
9,172
179
694
13
3,220
1,654
829
(2)
998
9,801
(10,160)
16,398
(10,071)
-
(2,949)
2
(13,018)
7,730
(4,350)
112
333
1,573
332
192
2,542
(2,520)
(38)
(5,552)
(8,110)
1,121
(6,689)
As of June 30, 2017 the Company had incurred net losses of approximately $9,748, $48,342, $1,377 derived from entities in the PRC, Singapore
and Hong Kong, respectively. The net losses in the PRC can be carried forward for five years, to offset future net profit for income tax
purposes. The net losses in Singapore and Hong Kong can be carried forward without an expiration date. For the amount as of June 30, 2017, $9,748
will expire, if not utilized, from calendar years ending December 31, 2017 to 2022.
The valuation allowance is considered on an individual entity basis.
Under the EIT Law and the implementation rules, profits of the Company’s PRC subsidiaries earned on or after January 1, 2008 and distributed by
the PRC subsidiaries to their respective foreign holding companies are subject to a withholding tax at 10% unless reduced by tax treaty. As of June
30, 2016 and 2017, the aggregate undistributed earnings from the Company’s PRC subsidiaries that are available for distribution are approximately
RMB2,907,542 (equivalent to $447,025) and RMB3,654,625 (equivalent to $557,093), respectively. The Company expects to distribute a portion of
the earnings (approximately RMB200,000 or $29,490) to the holding companies located outside mainland China, and has hence accrued a
withholding tax of $2,947 as of June 30, 2017. The remaining undistributed earnings of the Company’s PRC subsidiaries are intended to be
permanently reinvested, and accordingly, no deferred tax liabilities have been provided for the PRC dividend withholding taxes that would be
payable upon the distribution of those amounts to the Company.
F-41
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
As of June 30, 2016 and June 30, 2017, the undistributed retained earnings generated from periods prior to January 1, 2008 were approximately
$63,716 which are not subject to PRC dividend withholding taxes. Accordingly, as of June 30, 2016 and June 30, 2017, the total amounts of
undistributed earnings generated from the Company’s PRC subsidiaries for which no withholding tax has been accrued were $372,040 and
$484,314, respectively. Deferred tax liabilities subject to recognize would have been approximately $30,832 and $42,060 respectively, if all such
undistributed earnings planned to be distributed to the Company in full as of June 30, 2016 and June 30, 2017.
The Chinese tax law grants the tax authorities the rights to further inspect companies’ tax returns retroactively in a three-year period (up to five
years under certain special conditions), which means theoretically the tax authorities can still review the PRC subsidiaries’ tax returns for the years
ended December 31, 2012 through 2016. The tax law also states that companies will be liable to additional tax, interest charges and penalties if
errors are found in their tax returns and such errors have led to an underpayment of tax.
Determining income tax provisions involves judgment on the future tax treatment of certain transactions. The Company performed a self-assessment
and concluded that there was no significant uncertain tax position requiring recognition in its financial statements. The tax treatment of such
transactions is reconsidered periodically to take into account all changes in tax legislations. Where the final tax outcome of these transactions is
different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions in the year in which
such determination is made.
There were no material interest or penalties incurred for and as of the years ended June 30, 2015, 2016 and 2017, respectively.
NOTE 19 -
INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share attributable to Hollysys for the years indicated:
Numerator:
Net income attributable to the Company - basic
Net income attributable to the Company - diluted(i)
Denominator:
Weighted average ordinary shares outstanding used in computing
basic income per share
Effect of dilutive securities
Convertible Bond
Share options
Restricted shares
Weighted average ordinary shares outstanding used in computing
diluted income per share
Income per share - basic
Income per share - diluted
$
$
$
$
2015
Year ended June 30,
2016
2017
96,527
96,877
$
$
118,471
119,121
$
$
68,944
69,605
58,612,596
59,170,050
60,189,004
644,850
839,425
37,332
776,800
642,184
22,422
784,400
-
38,106
60,134,203
60,611,456
61,011,510
1.65
1.61
2.00
1.97
1.15
1.14
(i) For the year ended June 30, 2016 and 2017, interest accretion related to the Convertible Bond of $650 and $661, respectively, is added back to
derive net income attributable to the Company for computing diluted income per share.
F-42
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Vested and unissued restricted shares of 58,726, 75,066 and 72,263 shares are included in the computation of basic and diluted income per share for
the years ended June 30, 2015, 2016 and 2017, respectively. The effects of share options have been excluded from the computation of diluted
income per share for the year ended June 30, 2017 as their effects would be anti-dilutive.
NOTE 20 -
RELATED PARTY TRANSACTIONS
The related party relationships and related party transactions are listed as follows:
Related party relationships
Name of related parties
Relationship with the Company
Shenhua Hollysys Information Technology Co., Ltd. (“Shenhua
Information”)
China Techenergy Co., Ltd. (“China Techenergy”)
Beijing Hollysys Electric Motor Co., Ltd. (“Electric Motor”)
Beijing Hollysys Machine Automation Co., Ltd. (“Hollysys Machine”)
Heilongjiang Ruixing Technology Co., Ltd. (“Heilongjiang Ruixing”)
Beijing IPE Biotechnology Co., Ltd. (“Beijing IPE”)
Beijing Hollycon Medicine & Technology. Co., Ltd. (“Hollycon”)
Shenzhen HollySys Intelligent Technologies Co., Ltd. (“Shenzhen
HollySys”)
20% owned by Beijing Hollysys
40% owned by Beijing Hollysys
40% owned by Beijing Hollysys
30% owned by Hollysys (Beijing) Investment Co., Ltd. (“Hollysys
Investment”)
6% owned by Beijing Hollysys
22.02% owned by Beijing Hollysys
30% owned by Beijing Hollysys Group Co., Ltd. (“Hollysys Group”)
60% owned by Beijing Hollysys Intelligent Technologies Co., Ltd.
(“Hollysys Intelligent”)
Due from related parties
China Techenergy
Shenhua Information
Heilongjiang Ruixing
Hollysys Machine
Hollycon
Shenzhen HollySys
Beijing IPE
June 30,
2016
2017
$
$
22,579
2,995
1,071
1,367
-
-
-
28,778
3,267
1,049
965
79
2
2
$
28,012
$
34,142
The Company’s management believes that the collection of amounts due from related parties is reasonably assured and accordingly and no
provision had been made for these balances.
F-43
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Due to related parties
China Techenergy
Hollysys Machine
Shenhua Information
Electric Motor
Beijing IPE
Hollycon
Transactions with related parties
Purchases of goods and services from:
Hollysys Machine
Electric Motor
Hollycon
Shenhua Information
China Techenergy
Sales of goods and integrated solutions to:
China Techenergy
Shenhua Information
Hollysys Machine
Hollycon
Beijing IPE
Electric Motor
Operating lease income from:
Hollycon
Hollysys Machine
June 30,
2016
2017
$
$
$
1,170
112
358
5
-
-
1,645
$
2015
Year ended June 30,
2016
2017
$
914
50
-
368
1
$
555
354
-
-
-
1,333
$
909
$
1,117
817
353
11
2
1
2,301
749
29
8
-
-
786
2015
Year ended June 30,
2016
2017
$
21,936
2,128
512
-
-
1
$
3,657
847
235
-
-
-
10,842
765
167
108
7
-
$
$
$
$
24,577
$
4,739
$
11,889
2015
Year ended June 30,
2016
2017
-
41
-
40
$
41
$
40
$
602
-
602
F-44
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Purchases of intangible assets:
2015
Year ended June 30,
2016
2017
Hollysys Machine
$
- $
- $
1,648
The Company sells automation control systems to China Techenergy which is used for non-safety operations control in the nuclear power industry.
China Techenergy incorporates the Company’s non-safety automation control systems with their proprietary safety automated control systems to
provide an overall automation and control system for nuclear power stations in China. The Company is not a party to the integrated sales contracts
executed between China Techenergy and its customers. The Company’s pro rata shares of the intercompany profits and losses are eliminated until
realized through a sale to outside parties, as if China Techenergy were a consolidated subsidiary.
The Company sells automation control systems to Shenhua Information which is used for operations control in the information automation industry.
Shenhua Information incorporates the Company’s automation control systems with their proprietary automated remote control systems to provide an
overall automation and control system to its customers. The Company is not a party to the integrated sales contracts executed between Shenhua
Information and its customers. The Company’s pro rata shares of the intercompany profits and losses are eliminated until realized through a sale to
an outside party as if Shenhua Information were a consolidated subsidiary.
The Company engages Hollysys Machine to sell the Company’s products to end customers. The Company pays commission to Hollysys Machine in
exchange for its services. The amount of the commission is determined based on the value of the products sold by Hollysys Machine during the
year.
In fiscal year 2017, one of the Company’s subsidiary Hollysys Intelligent reached an agreement with Hollysys Machine to purchase a series of fixed
assets, software copyrights and patents because of their similar business category.
The Company entered into an operating lease agreement with Hollycon to lease part of its one building located in Beijing. The lease term is for 1
year from the commencement date of July 1, 2016 to June 30, 2017.
Amounts due from and due to the related parties relating to the above transactions are unsecured, non-interest bearing and repayable on demand.
NOTE 21 -
COMMITMENTS AND CONTINGENCIES
Operating lease commitments
The Company leases premises under various operating leases. Rental expenses under operating leases included in the consolidated statements of
comprehensive income were $1,492, $1,811 and $2,718 for the years ended June 30, 2015, 2016 and 2017, respectively.
Future minimum lease payments under non-cancelable operating leases with initial terms of one year or more consist of the following:
Years ending June 30,
2018
2019
2020
2021
2022 and onwards
Total minimum lease payments
F-45
Minimum lease payments
$
$
2,453
1,060
263
103
63
3,942
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The Company’s lease arrangements have no renewal or purchase options, rent escalation clauses, restriction or contingent rents and are all
conducted with third parties.
Capital commitments
As of June 30, 2017, the Company had approximately $1,026 in capital obligations for the coming fiscal year, mainly for the Company’s
information system construction.
Purchase obligation
As of June 30, 2017, the Company had $142,424 purchase obligations for the coming fiscal year, for purchases of inventories, mainly for fulfillment
of in-process or newly entered contracts resulting from the expansion of the Company’s operations.
Performance guarantee and standby letters of credit
The Company had stand-by letters of credit of $24,941 and outstanding performance guarantees of $62,914 as of June 30, 2017, with restricted cash
of $13,289 pledged to banks. The purpose of the stand-by letter of credit and performance guarantees is to guarantee that the performance of the
Company’s deliveries reach the pre-agreed requirements specified in the integrated solutions contracts. The guarantee is to ensure the functionality
of the Company’s own work. The disclosed amount of stand-by letters of credit and outstanding performance guarantees represent the maximum
potential amount of future payments the Company could be required to make under such guarantees.
The Company accounts for performance guarantees and stand-by letters of credit in accordance with ASC topic 460 (“ASC 460”), Guarantees.
Accordingly, the Company evaluates its guarantees to determine whether (a) the guarantee is specifically excluded from the scope of ASC 460, (b)
the guarantee is subject to ASC 460 disclosure requirement only, but not subject to the initial recognition and measurement provisions, or (c) the
guarantee is required to be recorded in the financial statements at fair value.
Both the performance guarantees and the stand-by letters of credit are for the Company’s commitment of its own future performance, and the
outcome of which is within its own control. As a result, performance guarantees and stand-by letters of credit are subject to ASC 460 disclosure
requirements only.
NOTE 22 -
OPERATING LEASES AS LESSOR
On April 3, 2013, Beijing Hollysys entered into an operating lease agreement to lease out one of its buildings located in Beijing. The lease term is
for a period of 10 years from the commencement date of September 1, 2013 and will end on August 31, 2023. On July 1, 2016, the Company
entered into an operating lease agreement with Hollycon to lease a part of a building located in Beijing. The lease term was for one year and ended
on June 30, 2017, the renewed lease agreement is from July 1, 2017 to June 30, 2018. The minimum rental income in the next five years is shown as
below:
Year ending June 30,
Minimum lease payments
2018
2019
2020
2021
2022
Total minimum lease payments to be received in the next five years
F-46
$
$
1,477
1,522
1,567
1,614
1,663
7,843
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The minimum lease payment receivable after five years is $2,003.
NOTE 23 -
SEGMENT REPORTING
The chief operating decision makers have been identified as the Chairman, Chief Executive Officer and Chief Financial Officer of the Company.
The Company organizes its internal financial reporting structure based on its main product and service offerings.
Based on the criteria established by ASC 280, Segment Reporting (“ASC 280”), the Company has determined that the reportable segments of the
Company consist of (1) IA, (2) Rail, (3) M&E and (4) miscellaneous, in accordance with the Company’s organization and internal financial
reporting structure. The chief operating decision makers assess the performance of the operating segments based on the measures of revenues, costs
and gross profit. Other than the information provided below, the chief operating decision makers do not use any other measures by segments.
Summarized information by segments for the years ended June 30, 2015, 2016, and 2017 is as follows:
Revenues from external customers
Costs of revenue
Gross profit
Revenues from external customers
Costs of revenue
Gross profit
Revenues from external customers
Costs of revenue
Gross profit
$
$
$
$
$
$
IA
213,252
119,520
Year ended June 30, 2015
M&E
Miscellaneous
Rail
Consolidated
193,274
97,503
110,030
93,452
14,823
6,502
531,379
316,977
93,732
95,771
16,578
8,321
214,402
Year ended June 30, 2016
M&E
Miscellaneous
Rail
Consolidated
IA
182,901
113,314
240,310
131,043
69,587
109,267
95,277
82,900
12,377
25,837
11,342
14,495
544,325
338,599
205,726
IA
Rail
M&E
Miscellaneous
Consolidated
Year ended June 30, 2017
172,667
106,583
155,732
86,128
103,544
98,761
66,084
69,604
4,783
-
-
-
431,943
291,472
140,471
The Company’s assets are shared among the segments thus no assets have been designated to specific segments.
The majority of the Company’s revenues and long-lived assets other than goodwill and intangible assets are derived from and located in the PRC.
The following table sets forth the revenues by geographical area:
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HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
Revenues:
PRC
Non-PRC
2015
Year ended June 30,
2016
2017
$
$
410,644
120,735
$
443,256
101,069
$
326,713
105,230
531,379
$
544,325
$
431,943
The following table sets forth the long-lived assets other than goodwill and intangible assets by geographical area:
Long-lived assets other than goodwill and acquired intangible assets
PRC
Non-PRC
June 30,
2016
2017
$
$
100,454
13,079
$
131,625
12,029
113,533
$
143,654
NOTE 24 -
SUBSEQUENT EVENTS
On July 10, 2017, the Company completed the acquisition of 100% equity of Beijing Shuanghe Technology Company Limited with a cash
consideration of approximately $2,380. As a subsidiary of the Company, its financial performance will be included in the Company’s consolidated
financial statements from the first quarter of fiscal year 2018.
NOTE 25 -
ENDORSEMENT OF NOTE RECEIVABLES
The Company endorsed bank acceptance bills to its suppliers as a way of settling accounts payable. The total endorsed but not yet due bank
acceptance bills amounted to $31,991 and $25,462 as of June 30, 2016 and 2017, respectively. The endorsement of bank acceptance bills qualify as
deemed sales of financial assets according to ASC 860, Transfer and Servicing (“ASC 860”) because the bank acceptance bills have been isolated
from the Company upon transfer, the transferee of the bank acceptance bills have the rights to pledge or exchange, and the Company has no control
over the bank acceptance bills upon endorsement. As a result, bank acceptance bills are derecognized at the time of endorsement.
NOTE 26 -
CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
Under the PRC laws and regulations, the Company’s PRC subsidiaries’ ability to transfer net assets in the form of dividend payments, loans, or
advances are restricted. The amount restricted was RMB 538,113 (equivalent to $79,500) and RMB 569,279 (equivalent to $84,091) as of June 30,
2016, and 2017, respectively.
F-48
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147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
The following represents condensed unconsolidated financial information of the parent company only:
CONDENSED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Amounts due from subsidiaries
Prepaid expenses
Total current assets
Investments in subsidiaries
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued payroll and related expense
Accrued liabilities
Amounts due to subsidiaries
Total current liabilities
Long-term loan
Total liabilities
Equity:
Ordinary shares, par value $0.001 per share, 100,000,000 shares authorized; 59,598,099 and 60,342,099
shares issued and outstanding as of June 30, 2016 and 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total equity
Total liabilities and equity
F-49
$
$
$
June 30,
2016
2017
$
$
$
8,571
72,303
63
80,937
669,326
750,263
9
427
55,869
56,305
19,802
76,107
60
215,403
467,160
(8,467)
674,156
13,103
59,920
61
73,084
726,837
799,921
14
487
55,869
56,370
20,032
76,402
60
222,189
524,129
(22,859)
723,519
$
750,263
$
799,921
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 146 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
General and administrative expenses
Loss from operations
Other expense, net
Interest income
Interest expenses
Foreign exchange gains (losses)
Equity in profit of subsidiaries
Income before income taxes
Income tax expenses
Net income
Other comprehensive income, net of tax of nil
Translation adjustment
Comprehensive income
2015
Year Ended June 30,
2016
2017
$
$
$
3,169
(3,169)
$
4,484
(4,484)
$
(35)
1
(463)
238
99,955
96,527
-
96,527
$
(93)
80
(705)
(719)
124,392
118,471
-
118,471
$
1,062
(1,062)
(89)
4
(1,074)
(740)
71,905
68,944
-
68,944
(1,427)
95,100
$
(46,052)
72,419
$
(14,392)
54,552
F-50
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_20f.htm Type: 20-F Pg: 147 of
147
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2015, 2016 AND 2017 – continued
(Amounts in thousands except for number of shares and per share data)
CONDENSED STATEMENTS OF CASH FLOWS
Net cash used in operating activities
Net cash (used in) provided by investing activities
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Basis of presentation
2015
Year ended June 30,
2016
2017
$
$
$
$
$
(397) $
(1,697) $
(4,402) $
11,390
$
(930)
(396)
13,236
8,437
-
8,437
$
$
$
$
(9,559) $
5,858
134
8,437
8,571
$
$
$
4,532
8,571
13,103
For the presentation of the parent company only condensed financial information, the Company records its investment in subsidiaries under the
equity method of accounting as prescribed in ASC 323, Investments—Equity Method and Joint Ventures (“ASC 323”). Such investment is presented
on the balance sheets as “Investment in subsidiaries” and the subsidiaries’ profit as “Equity in profit of subsidiaries” on the statements of
comprehensive income. The parent company only financial statements should be read in conjunction with the Company’s consolidated financial
statements.
F-51
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_ex8-1.htm Type: EX-8.1 Pg: 1 of
1
LIST OF SUBSIDIARIES OF HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
Exhibit 8.1
Subsidiaries and VIE
Hollysys International Pte. Limited
Hollysys (Asia Pacific) Pte. Limited
Hollysys Automation India Private Limited
Gifted Time Holdings Limited
Clear Mind Limited
World Hope Enterprises Limited
Concord Solutions (HK) Limited
Beijing Helitong Science &Technology Exploration Co., Ltd.
Beijing Hollysys Group Co., Ltd.
Beijing Hollysys Intelligent Technologies Co., Ltd.
Beijing Hollysys Co., Ltd.
Hangzhou Hollysys Automation Co., Ltd.
Hangzhou Hollysys System Engineering Co., Ltd.
Beijing Hollysys Electronics Technology Co., Ltd.
Hollysys (Beijing) Investment Co., Ltd.
Xi’an Hollysys Co., Ltd.
Concord Electrical Pte. Ltd.
Concord Corporation Pte. Ltd.
Concord Electrical Contracting Ltd.
Concord Electrical Sdn. Bhd.
Concord M Design and Engineering Company Limited
Bond Corporation Pte. Ltd .
Bond M&E Pte. Ltd.
Bond M&E Sdn. Bhd.
Bond M&E (KL) Sdn. Bhd.
Jurisdiction of
incorporation
Singapore
Singapore
India
British Virgin Islands
British Virgin Islands
Hong Kong
Hong Kong
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
Singapore
Singapore
Qatar
Malaysia
Macau
Singapore
Singapore
Malaysia
Malaysia
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_ex12-1.htm Type: EX-12.1 Pg: 1
of 1
CERTIFICATIONS
Exhibit 12.1
I, Baiqing Shao, certify that:
1. I have reviewed this annual report on Form 20-F of Hollysys Automation Technologies Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period
covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal controls over financial reporting.
Date: September 22, 2017
/s/ Baiqing Shao
By:
Name: Baiqing Shao
Title: Chief Executive Officer
(Principal Executive Officer)
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_ex12-2.htm Type: EX-12.2 Pg: 1
of 1
CERTIFICATIONS
Exhibit 12.2
I, Herriet Qu, certify that:
1. I have reviewed this annual report on Form 20-F of Hollysys Automation Technologies Ltd.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period
covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial
reporting; and
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal controls over financial reporting.
Date: September 22, 2017
/s/ Herriet Qu
By:
Name: Herriet Qu
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_ex13-1.htm Type: EX-13.1 Pg: 1
of 1
CERTIFICATION
PURSUANT TO RULE 13A-14(B) UNDER THE SECURITIES EXCHANGE ACT OF 1934
Exhibit 13.1
In connection with the Annual Report of Hollysys Automation Technologies Ltd. (the “Company”) on Form 20-F for the fiscal year ended June 30,
2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Baiqing Shao, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of June 30,
2017 and results of operations of the Company for the fiscal year ended June 30, 2017.
/s/ Baiqing Shao
Name: Baiqing Shao
Title: Chief Executive Officer
(Principal Executive Officer)
Date: September 22, 2017
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of this Annual Report or as a
separate disclosure document.
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_ex13-2.htm Type: EX-13.2 Pg: 1
of 1
CERTIFICATION
PURSUANT TO RULE 13A-14(B) UNDER THE SECURITIES EXCHANGE ACT 0F 1934
Exhibit 13.2
In connection with the Annual Report of Hollysys Automation Technologies Ltd. (the “Company”) on Form 20-F for the fiscal year ended June 30,
2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Herriet Qu, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. 1350, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition of the Company as of June 30,
2017 and results of operations of the Company for the fiscal year ended June 30, 2017.
/s/ Herriet Qu
Name: Herriet Qu
Title: Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: September 22, 2017
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of this Annual Report or as a
separate disclosure document.
Date: 09/22/2017 08:33 AM
Toppan Vintage
Project: v474603 Form Type: 20-F
Client: v474603_Hollysys Automation Technologies, Ltd._20-F
File: v474603_ex15-1.htm Type: EX-15.1 Pg: 1
of 1
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-170811) pertaining to the 2006 Stock Plan of Hollysys Automation Technologies Ltd.,
(2) Registration Statement (Form S-8 No. 333-208615) pertaining to the 2015 Equity Incentive Plan of Hollysys Automation
Technologies Ltd., and
(3) Registration Statement (Form F-3 No. 333-208631) pertaining to the registration of 776,800 ordinary shares of Hollysys
Automation Technologies Ltd.
of our reports dated September 22, 2017, with respect to the consolidated financial statements of Hollysys Automation Technologies Ltd., and the
effectiveness of internal control over financial reporting of Hollysys Automation Technologies Ltd., included in this Annual Report (Form 20-F) for
the year ended June 30, 2017.
/s/ Ernst & Young Hua Ming LLP
Beijing, the People’s Republic of China
September 22, 2017