RISKS RELATED TO OUR BUSINESS
Below please find a summary of the principal risks we face, organized under relevant headings. All the legal and operational risks associated with being based in and having operations in the PRC also apply to our operations in Hong Kong and Macau.
management of our international operations requires significant resources and management attention. Entering into new markets presents challenges, including, among others, the challenges of supporting a rapidly growing business in new environments with diverse cultures, languages, customs, legal systems, alternative dispute systems and economic, political and regulatory systems. We expect to incur significant costs associated with expanding our overseas operations, including hiring personnel internationally. The risks and challenges associated with overseas expansion include:
Tocondition, and results of operations.
One important aspectresults of our expansion has beenoperations.
During
In our international business expansion to Southeast Asia, India andtime for the Middle East, wesocial benefit or other administrative purposes, resulting in additional costs incurred by us, which may not be ablereimbursed by such customers in full. If any early termination by any government-affiliated customers occurs or if government-affiliated customers fail 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 engagedrenew their contracts with us in the design, productionfuture, our backlog may be reduced and installation of automation and process control systems. As a result, our revenues result from numerous individual contracts that are nonrecurring in nature. Furthermore, customersinvestment plan 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 wouldhindered, which may have a material adverse impacteffect 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.
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.
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.
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.
basis, and any increased competition from foreign and PRC domestic competitors within the industries where we operate could negatively impact our market share in the industry.basis.
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 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 demandslargely dependent 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 harmand 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 qualifiedengineering talents.
In addition, if any of these key personnel joins a competitor or forms a competing company, we may lose some ofbusiness operations and 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.
prospects.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companiesreporting obligations under U.S. securities laws. Under these laws, we are required to include in our annual report on Form 20-F a management report of management on the Company’sour internal controlscontrol over financial reporting in their annual reports andcontaining management’s assessment of the effectiveness of our internal control over financial reporting. In addition, under the U.S. securities laws, an independent registered public accounting firm auditing a company’s financial statements tomust attest to and report on the operating effectiveness of such company’sour internal controls. No material weaknesscontrol over financial reporting.
auditor, likeemployees or third parties may commit fraud or other independent registered public accounting firms operatingmisconduct that is beyond our control despite the internal control measures in place.
Our independent In addition, the enactment of the Holding Foreign Companies Accountable Act and the adoption of any rules, legislations or other efforts to increase U.S. regulatory access to audit information could cause uncertainty and our securities listed on the NASDAQ Global Select Market could be delisted or prohibited from being traded “over-the-counter” if we are unable to meet the PCAOB requirement in time.
Inspections of other firms thattaking 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 offirst step toward opening access for the PCAOB to conduct inspections of independentinspect and investigate registered public accounting firms operatingheadquartered in mainland China makes it more difficult to evaluateand Hong Kong. By the effectivenessend of our auditor’s audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of2022, the PCAOB inspections.
Proceedings institutedis required to assess whether China remains a jurisdiction where the PCAOB is not able to inspect and investigate completely auditors registered with the PCAOB. There is no assurance that the PCAOB will be able to complete such inspections and investigations in mainland China and Hong Kong and reassess its determination in a timely and adequate manner or at all. Notwithstanding the foregoing, if, in the future, we have been identified by the SEC against five PRC-based accounting firms, including our independentfor three consecutive years (or two consecutive years if the Accelerating Holding Foreign Companies Accountable Act is signed into law) as a “commission-identified issuer” whose registered public accounting firm could resultis determined by the PCAOB that it is unable to inspect or investigate completely because of a position taken by one or more authorities in financial statements being determined to be not in compliance with the requirements of the Securities Exchange Act of 1934.
In December 2012,China, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting firms, includingmay prohibit our independent registered public accounting firm, alleging that these firms had violated U.S.ordinary shares from being traded on a national 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 tradedexchange or 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 companiesover-the-counter trading market in the United States with major PRC operations may find it difficultby 2024 (or 2023 if the Accelerating Foreign Companies Accountable Act is signed into law). The potential delisting would substantially impair your ability to sell or impossiblepurchase our ordinary shares when you wish 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 companiesdo so, and the marketrisk and uncertainty associated with delisting would have a negative impact on the price of our ordinary shares may be adversely affected.
Ifshares. Also, such a delisting would significantly affect our independent registered public accounting firm were denied, temporarily or permanently, the ability to practice before the SEC, and we are unableraise capital on terms acceptable to find inus, or at all, which would have a timely manner another registered public accounting firm which can audit and issue a reportmaterial adverse impact on our business, 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 ofcondition, and prospects. If our ordinary shares under the Exchange Act, which would cause the immediate delisting of our ordinary sharesare delisted from the NASDAQ Global Select Market,U.S. exchange and are prohibited from trading in the effective termination ofover-the-counter market in the tradingU.S., there is no certainty that we will be able to list on a non-U.S. exchange or that a market for our ordinary shares will develop outside of the U.S.
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.
your investment.
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.”
future. If the CSRC, or another PRC regulatory agency, determines that CSRC approval offoreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our initial merger was required or if other regulatory obligations are imposed upon us,foreign currency demands, we may incur sanctions, penalties or additional costs which would damagenot be able to pay dividends in foreign currencies to 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.
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.
shares.securities.
As our main functional currency, the RMB has no longer been pegged to the US dollar since July 2005. Although the People’s Bank
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.
beneficial owners or our companyshareholders to liabilities or penalties,personal liability and limit our ability to contributeinject capital tointo our PRC subsidiaries, limit the ability of our PRC subsidiariessubsidiaries’ ability to increase their registered capital or distribute profits to us, or otherwise materially and adversely affect us.On July 14, 2014, the
relevant requirements. We do not have control overcannot provide any assurance that our shareholders and beneficial owners and cannot assure you that all of our shares who are PRC resident beneficial ownersresidents have complied or will comply with SAFE regulations. Thethe requirements imposed by Circular 37 or other related rules. Any failure by any of our shareholders and beneficial owners of our shares who are PRC residents to comply with these SAFE registrations mayrelevant requirements under this regulation could subject such shareholders, beneficial owners or our PRC subsidiariesand us 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 implementedsanctions imposed by the relevant PRC government, authorities, we cannot predict how these regulations will affectincluding limitations on our business operationsrelevant subsidiary’s ability to pay dividends or future strategy. Failuremake distributions to register or comply with relevant requirements may also limitus and our ability to contribute additional capital toincrease our PRC subsidiaries and limitinvestment in China, or other penalties that may adversely affect our PRC subsidiaries’ ability to distribute dividends to our company.operations. 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
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 three times their daily salary, subject to certain exceptions. In the dividend distributionevent that you must include in your income as a U.S. holder will bewe decide to change our employment or labor practices, 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.
Legal regulationsLabor Contract Law and its implementation rules may limit our ability to effect those changes in a manner that we believe to be cost-effective. In addition, as the interpretation and implementation of these new regulations are still evolving, our employment practices may not be at all times deemed in compliance with the new regulations. We could be subject to severe penalties or incur significant liabilities in connection with labor disputes or investigations, as a result of which our business and financial conditions may be adversely affected.
We areability to satisfy our liquidity requirements.
The ability, as well asassist in 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% withholdingfiling. Any PRC 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
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 foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or 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.
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 performancetransfer of our arrangements with customers in the eventshares not through a public stock exchange, or any adjustment 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 findgains would cause 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 businessincur additional costs 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 operationsthe value of your investment in our company.
Pursuantour shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a PRC establishment of a non-PRC company.
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 asdirect holder, being 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. Anon-PRC 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.
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 taxes. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, factors to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise directly or indirectly derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China, directly or indirectly; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of the existence of the business model and organizational structure; the foreign income tax purposes,liabilities arising from the indirect transfer of PRC taxable assets; the replicability of the transaction by direct transfer of PRC taxable assets; and the applicable tax treaties or similar arrangements. In respect of an indirect offshore transfer of assets of a numberPRC establishment or place of unfavorable PRC tax consequences could follow. First, we maybusiness, the resulting gain is to be subject toincluded with the enterprise income tax at a ratefiling of 25% on our worldwide taxable income as well asthe PRC enterprise income tax reporting obligations. In our case, thisestablishment or place of business being transferred, and would mean that income such as interest on financing proceeds and non-China source income wouldconsequently be subject to PRC enterprise income tax at a rate of 25%. Second, although underWhere the EIT Law and its implementing rules dividends paidunderlying transfer relates to us from ourthe immoveable properties located in China or to equity investments in a PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends willresident enterprise, which is not be subjectrelated 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 processingestablishment or place of outbound remittances to entities that are treated as resident enterprises forbusiness of a non-resident enterprise, a PRC enterprise income tax purposes. Finally, itat 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is possible that future guidance issued with respectobligated to make the transfer payments has the withholding obligation. Where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the new “resident enterprise” classification could result intax authority by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Bulletin 7 does not apply to transactions of sale of shares by investors through a situation in whichpublic stock exchange where the shares are acquired from a 10% withholding tax is imposed on dividends we paytransaction through a public stock exchange.
Wethe application of Bulletin 7. Bulletin 7 may be exposeddetermined by the tax authorities to liabilitiesbe applicable to some of our offshore restructuring transactions or sale of the shares of our offshore subsidiaries or investments where PRC taxable assets are involved. The transferors and transferees may be subject to the tax filing and withholding or tax payment obligation, while our PRC subsidiaries may be requested to assist in the filing. Furthermore, we, our non-resident enterprises and our PRC subsidiaries may be required to spend valuable resources to comply with Bulletin 7 or to establish that we, our non-resident enterprises and our PRC subsidiaries should not be taxed under Bulletin 7, for our previous and future restructuring or disposal of shares of our offshore subsidiaries, which may have a material adverse effect on our financial condition and results of operations.
financial condition and results of operations. Moreover, the PRC government could eliminate any of these preferential tax treatments before their scheduled expiration.
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 businessof 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.
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, itreputation may be more difficult for the staffadversely affected.
RISKS RELATED TO OUR SHARES
Our Shares
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.
securities.
NASDAQ.
We are
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.
Our Shareholder Rights Plan
Our shareholder rights plan and provisions contained in ourRestated Memorandum and Articles of Association and terms of our Amended and Restated Rights Plan may discourage, transactions involving an actualdelay or potentialprevent a change of control of our company or changes in our ownership. In addition,management. As a result, our Memorandumshareholders may be limited in their ability to obtain a premium for their shares.
| ITEM 4. | INFORMATION ON THE COMPANY |
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 outlookSCADA systems 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-speedurban 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.
(including subways). Internationally, we have a strong presence in Southeast Asia and increasingly in the Middle East, India and Hong Kong SAR. Throughthrough the acquisitions of Concord Group and Bond Groups,Group in 2011 and 2013 respectively, 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
During the past several yearspower industry into a group providing integrated automation control system solutions for customers in diverse industry verticals. As of June 30, 2022, we have achieved a number of significant contract winshad cumulatively carried out more than 40,000 projects for approximately 22,000 customers in international arena,various sectors 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 thepetrochemical, high-speed rail, and subway sectors. The principal elementsurban rail, in which we have established leading market positions. With our strong customer base and highly-reputable brand, we believe we are well positioned to capture opportunities from untapped growth potential in China and around the world.
The high-speed rail signaling system includes
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 providerfull spectrum of automation hardware, software, and services spanning field devices, control technologysystems and applications in China, and increasingly in Southeast Asia,enterprise manufacturing management. Historically, we providefocused our customers with our standard and customized products and corresponding services basedefforts 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.
Industrial Automation:
Our principal offering is a comprehensive suitethe area 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 InformationDCS (Distributed Control 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. DCSwhich 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. 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 computer devices installed onusually integrated together into machines orto provide control at machinery level.
Asleading position in the only proven domestic automation control systems provider to thefield of nuclear power industrydigital instrument control in China we provide our HOLLiAS-NMS DCS product to China’s nuclear power industry. In a nuclear power station,as one of 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 powerqualified local automation and control systemproduct providers. The product we developed for nuclear field, HOLLiAS MACS-N DCS, has been successfully applied in nuclear power plant with multi-generation stack and has started to commercialize such technology.
multi-stack technology, and we have accumulated rich engineering and technical experience. The hardware and software of the product both meet the strict requirements of the nuclear energy industry. During the manufacturing and implementation process, the quality control of our product strictly complies with relevant safety standard requirements.
Hollysys has successfully scaled its
We are the supplier of the entire high-speed rail signaling system to Shenzhen-Hong Kong high-speed rail line
Singapore and Shenzhen-Hong Kong high-speed rail line.
Solution planning Solution design Solution implementation Leveraging our |
Our proprietary technology and products, basedour integrated solutions create value for our customers and improve their competitive strengths by:
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.
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 ElectricalMarketWe 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.
Contracts35
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
Competition
We compete with various
When compared to our competitors, apart from satisfying certain local based criteria, we
Manufacturing
The GB/T 19001/certification such as ISO 9001 international/ ISO 14001 / ISO 45001. Some subsidiaries have also passed ISO27001 information security management system certification and proprietary quality management system certificate is valid for production,certification in different industries. The Company has established a complete comprehensive management system to ensure the efficient operation of various business activities and technical service of industrial automatic control system equipment. The other two certificates are valid for production, technical serviceprovide customers with high-quality products 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.
services.
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
Contents
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.
C. | Organizational Structure |
| (i) | On November 24, 2015, the Company established 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 99% 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. |
| (ii) | In July 2017, BCPL, a wholly-owned Singapore subsidiary of the Company, and a Malaysian citizen (the “Trustee”) entered into a trust deed, under which, 49.1% of BCPL’s equity interests in BMJB, a Malaysian company, which previously was a 100% subsidiary of BCPL, was transferred to the Trustee. According to the trust deed, all of the beneficial interests in BMJB belong to BCPL and the Trustee shall hold the legal title of the transferred shares on trust for and act on behalf of BCPL absolutely. Any dividend, interest and other benefits received or receivable by the Trustee will be transferred to BCPL. The Trustee shall exercise the managerial rights and voting power in a manner directed by a prior written notice from BCPL. The Trustee shall be obligated to vote in the same manner as BCPL in the absence of any written notice. In addition, an undated Form of Transfer of Securities with the transferee’s name left blank was duly executed by the Trustee and delivered to BCPL. Therefore, BCPL can transfer the 49.1% of equity interests to any party at any time without further approval by the Trustee. Accordingly, we believe we hold all beneficial rights, obligation and the power of the 100% equity interest in BMJB, and therefore consolidate 100% of equity interests in BMJB into our financial statements. |
* 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 athttp://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 |
Location | Approximate Sq. Meters | |||
Beijing | 120,000 | |||
Hangzhou | 25,000 | |||
Singapore | 1,200 | |||
Malaysia | 3,400 | |||
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
| Years Ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Number of new contracts won during the year | 2,256 | 2,031 | 2,777 | |||||||||
| Total amount of new contracts (million) | $ | 587.7 | $ | 527.9 | $ | 476.5 | ||||||
| Average price per contract | $ | 260,505 | $ | 259,916 | $ | 171,599 | ||||||
| Years Ended June 30, | ||||||||||||
| Backlog Situation: | 2015 | 2016 | 2017 | |||||||||
| Contracts newly entered and unfinished (million) | $ | 280.4 | $ | 284.2 | $ | 222.4 | ||||||
| Contracts entered in prior years and unfinished (million) | $ | 288.1 | $ | 243.0 | $ | 301.6 | ||||||
| Total amount of backlog (million) | $ | 568.5 | $ | 527.2 | $ | 524.0 | ||||||
Fiscal Years Ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Number of new contracts won during the year | 4,784 | 5,588 | 6,003 | |||||||||
Total amount of new contracts (million) | $ | 549.2 | $ | 734.3 | $ | 1,065.4 | ||||||
Average price per contract | $ | 114,790 | $ | 131,408 | $ | 177,474 | ||||||
Fiscal Years Ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Backlog Situation: | ||||||||||||
Contracts newly entered and unfinished (million) | $ | 262.3 | $ | 356.5 | $ | 588.1 | ||||||
Contracts entered in prior years and unfinished (million) | $ | 309.5 | $ | 328.6 | $ | 360.7 | ||||||
Total amount of backlog (million) | $ | 571.8 | $ | 685.0 | $ | 948.8 | ||||||
Our
The success in penetrating into the railway, conventional and nuclear power market sectors, which 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 |
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 constructionsolutions both in China and internationally.
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 furthereven exceed our 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.
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,competitors, in order to recognizecompete effectively with them, and to weather any extended weaknesses in the warranty costautomation and control market.
Goodwill
Goodwill represents the excess
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,financial statements as a result of the qualitative assessment, that it is more-likely-than-not thatCOVID-19 outbreak. However, we anticipate the fair valuepandemic will continue to have an adverse effect on our overseas business, especially in Southeast Asia and South Asia. The duration and magnitude 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 basedpandemic 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 conditionsour business will depend on numerous evolving factors 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, appealaccurately predicted 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.
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 scheduleevaluated. For additional details 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 2014-09Revenue 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 adoptionCOVID-19 outbreak, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—An outbreak 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 Transfersdisease or similar public health threat, or fear 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 whethersuch 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 willevent, could have a material adverse impact on theour business, operating results of operations orand financial condition.
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.
2021
year.
Approximately $32.7solutions.
Approximately $13.8ended June 30, 2022, $95.4 million of total revenuerevenues was generated from service rendered, an increaserepresenting a decrease of $1.8$9.2 million, or 15.0%8.8%, compared to $12.0$104.6 million of lastfor the prior fiscal year.
The Company’s total revenue
| (In USD millions) | ||||||||||||||||
| Fiscal year ended June 30, | ||||||||||||||||
| 2016 | 2017 | |||||||||||||||
| $ | % to Total Revenue | $ | % to Total Revenue | |||||||||||||
| Industrial Automation | 182.9 | 33.6 | % | 172.7 | 39.9 | % | ||||||||||
| Rail Transportation | 240.3 | 44.2 | % | 155.7 | 36.1 | % | ||||||||||
| Mechanical and Electrical Solution | 95.3 | 17.5 | % | 103.5 | 24.0 | % | ||||||||||
| Miscellaneous | 25.8 | 4.7 | % | - | 0.0 | % | ||||||||||
| Total | 544.3 | 100.0 | % | 431.9 | 100.0 | % | ||||||||||
(In USD millions) | Fiscal Year Ended June 30, | |||||||||||||||
2021 | 2022 | |||||||||||||||
$ | % of Revenues | $ | % of Revenues | |||||||||||||
Industrial Automation | 337.1 | 56.8 | 439.9 | 62.2 | ||||||||||||
Rail Transportation | 188.2 | 31.7 | 183.8 | 26.0 | ||||||||||||
Mechanical and Electrical Solution | 68.2 | 11.5 | 83.8 | 11.8 | ||||||||||||
Total | 593.5 | 100.0 | 707.5 | 100.0 | ||||||||||||
2021.
to the fiscal year ended June 30, 2021, respectively.
products sold, and an increase of $2.2 million in the cost of service rendered.
2017, as a percentage of total revenues,2022, the overall gross margin was 32.5%33.8%, compared to 37.8%36.8% for the prior fiscal year. The gross margin for integrated solutions contracts was 28.0%26.4% for the year ended June 30, 2017,2022, compared to 35.0%26.9% for the prior year. The decrease in gross margin for integrated solutions contracts was mainly due to our different sales mix during the fiscal year 2017.2022. The gross margin for products sold was 69.5%73.4% for the fiscal year ended June 30, 2017,2022, compared to 56.0%81.5% for the prior fiscal year. The gross margin for service providedrendered was 70.8%62.7% for the fiscal year ended June 30, 2017,2022, compared to 66.4%68.1% for the prior fiscal year.
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.
The local
Income from operations: Income from operations decreased by approximately $60.3 million, from approximately $120.6$7.9 million for the fiscal year ended June 30, 20162022, representing a decrease of $1.3 million, or 13.9%, compared to approximately $60.3$9.2 million for the prior fiscal year.
operating expenses.
short-term investments and cash and cash equivalents.
16.7%, as compared to 18.7% for the prior fiscal year.
2021, respectively.
year ended June 30, 2021.
Revenues: 2020
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.
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) | ||||||||||||||||
| Fiscal year ended June 30, | ||||||||||||||||
| 2015 | 2016 | |||||||||||||||
| $ | % to Total Revenue | $ | % to Total Revenue | |||||||||||||
| Industrial Automation | 213.3 | 40.1 | % | 182.9 | 33.6 | % | ||||||||||
| Rail Transportation | 193.3 | 36.4 | % | 240.3 | 44.2 | % | ||||||||||
| Mechanical and Electrical Solution | 110.0 | 20.7 | % | 95.3 | 17.5 | % | ||||||||||
| Miscellaneous | 14.8 | 2.8 | % | 25.8 | 4.7 | % | ||||||||||
| Total | 531.4 | 100.0 | % | 544.3 | 100.0 | % | ||||||||||
Integrated Contract Revenue Backlog: An important measuredetailed description of the stability and growthcomparison 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.
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 soldoperating results for the fiscal year ended June 30, 2016 was approximately $24.0 million, an increase of approximately $11.5 million, compared2021 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 percentage2020, see “Item 5.A. Operating Results—Results 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 endedOperations—Comparison of Fiscal Years Ended June 30, 2016, compared to 37.6% for the prior year. The decrease in gross margin for integrated contracts was mainly due to2021 and 2020” of our different sales mix during the fiscal year 2016. The gross margin for products sold was 56.0%annual report on Form 20-F for the fiscal year ended June 30, 2016, compared to 68.4% for2021 filed with the prior fiscal year. The gross margin for service provided was 66.4% for the fiscal year endedSecurities and Exchange Commission on February 18, 2022.
Selling expenses: Selling expenses mainly consistuse. These lines of compensation, traveling and administrative expenses related to marketing, sales and promotion activities incurredcredit were secured by the Company’s marketing departments. Selling expenses were approximately $25.6 million for the fiscal year ended June 30, 2016,pledge of restricted cash and buildings with a decreasecarrying value 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.
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$36.1 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 theNotification 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.
(In USD thousands) | Fiscal Years Ended June 30, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Net cash provided by operating activities | $ | 175,124 | $ | 79,283 | $ | 54,526 | ||||||
Net cash (used in)/provided by investing activities | $ | (187,580 | ) | $ | 270,258 | $ | 13,257 | |||||
Net cash used in financing activities | $ | (18,213 | ) | $ | (12,218 | ) | $ | (19,556 | ) | |||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | $ | (8,621 | ) | $ | 39,127 | $ | (24,747 | ) | ||||
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (39,290 | ) | $ | 376,450 | $ | 23,480 | |||||
Cash, cash equivalents and restricted cash, beginning of year | $ | 358,387 | $ | 319,097 | $ | 695,547 | ||||||
Cash, cash equivalents and restricted cash, end of year | $ | 319,097 | $ | 695,547 | $ | 719,027 | ||||||
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.
(In USD thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Short-term & Long-term Loans | ||||||||||||||||||||
-Principal | 15,710 | 15,276 | 266 | 77 | 91 | |||||||||||||||
-Interest | 73 | 23 | 21 | 8 | 21 | |||||||||||||||
Operating Lease Obligations (1) | 4,145 | 2,712 | 1,331 | 102 | — | |||||||||||||||
Purchase Obligations (2) | 331,895 | 218,487 | 73,742 | 27,813 | 11,853 | |||||||||||||||
Capital Obligations (3) | 47,426 | 41,553 | 5,873 | — | — | |||||||||||||||
Standby Letters of Credit (4) | 629 | 629 | — | — | — | |||||||||||||||
Performance Guarantees (5) | 75,406 | 32,308 | 41,013 | 2,085 | — | |||||||||||||||
Total | 475,284 | 310,988 | 122,246 | 30,085 | 11,965 | |||||||||||||||
| (1) | Operating lease obligations represent the future minimum payments under non-cancelable operating leases. |
| (2) | As of June 30, 2022, we had $331.9 million in purchase obligations for the coming fiscal years, for purchases of inventories and subcontracts. The inventories will be mainly used for fulfilling existing contracts or new contracts resulted from the expansion of our operations. |
| (3) | As of June 30, 2022, we had $47.4 million in capital obligations for the coming fiscal year, mainly for the construction of facilities. |
| (4) | We have issued letters of credit to our suppliers to serve as assurance of payment, and issued to our subsidiaries as comprehensive credit. 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, 2022, we had $0.6 million in standby letters of credit obligations. |
| (5) | 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, 2022, we had $75.4 million of outstanding performance guarantees obligation, with $3.0 million of restricted cash deposited in banks for performance guarantees. |
Cash Flow and Working Capital
Ascommitments, purchase obligations or other long-term liabilities as of June 30, 2017,2022.
of the enterprise. Statutory reserves are not distributable as cash dividends except in the event of liquidation. See Item 8,“Item 8. Financial Information, Information—A. Consolidated Statements and Other Financial Information, Information—Dividend Policy, for informationPolicy.” For the fiscal years of 2020, 2021 and 2022, the amount of dividends distributed from our PRC subsidiaries to GTH and World Hope was nil and $36.7 million, respectively.
The following table showsthe dividend distributions by our subsidiaries incorporated in Hong Kong.
| (In USD thousands) | ||||||||||||
| Cash Flow Item | Fiscal Years Ended June 30 | |||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Net cash provided by operating activities | $ | 83,952 | $ | 46,737 | $ | 69,813 | ||||||
| Net cash used in investing activities | $ | (39,895 | ) | $ | (2,454 | ) | $ | (89,553 | ) | |||
| Net cash provided (used in) by financing activities | $ | 1,261 | $ | (6,780 | ) | $ | (7,413 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | $ | 357 | $ | (16,242 | ) | $ | (4,302 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | $ | 45,675 | $ | 21,261 | $ | (31,455 | ) | |||||
| Cash and cash equivalents, beginning of year | $ | 162,159 | $ | 207,834 | $ | 229,095 | ||||||
| Cash and cash equivalents, end of year | $ | 207,834 | $ | 229,095 | $ | 197,640 | ||||||
Operating Activities
2022, World Hope, a subsidiary wholly owned by Hollysys Automation Technologies Ltd. through GTH and Clear Mind, borrowed loans of RMB400 million ($56.6 million), RMB400 million ($61.9 million) and RMB 1,300 million ($194.2 million), respectively, each with an interest rate of 0.5%, from Hollysys Group. For the fiscal yearyears 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 million2020, 2021 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.
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 bank2022, World Hope repaid loans of approximately $4.9RMB 450 million a repayment of long-term bank loans of approximately $7.4($63.7 million), RMB 400 million a payment of dividends of approximately $12.0($61.9 million) and RMB 1,300 million partially offset by proceeds from short-term bank loans of approximately $10.1 million,($194.2 million) to Hollysys Group, respectively.
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,Development, Patents 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.
Licenses, Etc.
Transportation Automation; Manufacturing Automation; |
Our research and development efforts have led
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 advantagecenter in the high-speed rail and subway signaling markets.
For the fiscal years 2017, 2016, and 2015, aggregate annualXi’an, including research and development, expenses were approximately $30.1 million, $36.6 million,design, testing and $35.8 million, respectively.
Intellectual Property Rights
We rely on a combinationstaff offices. The construction and operation of copyright, patent, trademarkthe Xi’an infrastructure project is in line with our long-term development strategy 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. Asis 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.
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 criticalstrategic importance to our current operations. However, when taken as a whole, we believe that our intellectual property rights are significantlong-term development. We expect to complete the construction in 2023.
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.
R&D capabilities.”
The following table sets forth our contractual obligations, including long-term loansimpairment existed within the Bond Group reporting unit and operating leases and capital and operational commitmentsperformed a quantitative goodwill impairment test as of June 30, 2017.
| (In USD thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||||||
| Short-term & Long-term Loans | ||||||||||||||||||||||||
| -Principal | 29,922 | 8,541 | 21,170 | 116 | 95 | |||||||||||||||||||
| -Interest | 1,243 | 670 | 569 | 4 | - | |||||||||||||||||||
| Operating Lease Obligations(1) | 3,942 | 2,453 | 1,323 | 166 | - | |||||||||||||||||||
| Purchase Obligations(2) | 142,424 | 127,609 | 10,380 | 3,470 | 965 | |||||||||||||||||||
| Capital Obligations(3) | 1,026 | 1,026 | - | - | - | |||||||||||||||||||
| Standby Letters of Credit(4) | 24,941 | 24,941 | - | - | - | |||||||||||||||||||
| Performance Guarantees(5) | 62,914 | 36,376 | 25,720 | 525 | 293 | |||||||||||||||||||
| Total | 266,412 | 201,616 | 59,162 | 4,281 | 1,353 | |||||||||||||||||||
It represents2020. The Company performed the two-step quantitative goodwill impairment test with the assistance of an independent third-party appraiser and estimated the fair value of the reporting unit using a discounted cash flow approach.
As of
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.
We have issued letters of credit to our suppliers to serve as assurance of payment. When a letter of credit is issued, a proportionHollysys Intelligent includes forecasts of the total amount covered byand timing of expected future cash flows, which are based on management’s best estimates of forecasted revenue, gross profit, operating expenses, future capital expenditures and working capital levels, as well as the letterdiscount rate, which is determined using the Weighted Average Cost of credit may be required to be depositedCapital and Capital Asset Pricing Model approach and the selection of comparable companies operating in the bank, and is not available until the payment has been settled or the lettersimilar businesses. The fair value 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.
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 guaranteeHollysys Intelligent exceeded its carrying 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.
See "Forward-Looking Information"2022, and no goodwill impairment charge was recorded in the consolidated statement of comprehensive income for the year ended June 30, 2022 based on page 8.
Name | Age | Position | ||
Li QIAO | 65 | Chairwoman and Director | ||
Changli WANG | Chief Executive Officer, Chief Strategy Officer and Director | |||
Jianyun CHAI | Director | |||
Kok Peng TEH | 74 | Director | ||
Khiaw Ngoh TAN | 65 | Director | ||
Chit Nim (Colin) SUNG | 56 | Deputy Chief Executive Officer | ||
Steven WANG | 54 | Chief Financial Officer | ||
Yue XU | Co-Chief Operating Officer | |||
Lei FANG | 45 | Co-Chief Operating Officer | ||
Chunming HE | Chief Technology Officer | |||
Hongyuan SHI | Chief Human Resource Officer | |||
Chuan (Arden) XIA | 38 | Chief Public Relations Officer |
Mr. Baiqing Shao
Ms. Herriet Qu, has served as our Chief Financial Officer since February 2012. Prior to that, Ms. Qu served as the Financial ControllerCEO of the Company from OctoberSeptember 2007 to January 2012. Ms. Qu holds an MBANovember 2013 and served as Chairman of the board from May 2010 to November 2013. Dr. Changli Wang worked for the No. 6 Institute of Electronic Industry Department before he established Hollysys entity in 1993. Dr. Changli Wang also has been the Vice Chairman of the Chinese Automation Association since 2003. Dr. Changli Wang received his Bachelor’s degree from Oklahoma City University and a Bachelor’s degreein Automation from Tianjin University of Finance & Economics.
Mr. Colin Sung,in 1984 and his PhD in Automation from Lancaster University in 1988.
Ms. Jerry Zhang,
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 Universitytop 500 company in China. Before he joined TsinghuaFrom 2005 to 2012, Mr. Wang worked at various managerial positions at Globe Specialty Metals Inc. and Zhonglian Zhongke Co., Ltd., a Hong Kong Stock Exchange listed company. Mr. Wang received an MBA degree in Finance from the Wharton School, the 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, Pennsylvania.
Officers
In2022. For the fiscal year ended June 30, 2012, we granted stock options for a total2022, the aggregate amount of 1,476,000 ordinary shares under the long-term incentive plan of the Companycash compensation paid 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 ofour directors who served between July 1, 2021 and 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 have2022 as 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
group was $2,335,000. 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/him or 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 We have not set aside or accrued any amount 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.
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 paidprovide pension, retirement or other similar benefits to our directors asand executive officers. Our PRC subsidiaries are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a group was $135,000.
2006 Stock Plan
On September 7, 2007, our stockholders approved the 2006 Stock Plan, or the 2006 Plan. The 2006 Plan was assumed by us ashousing provident fund.
2012 Options
Name | Ordinary Shares Underlying Options Granted/Restricted Shares Awarded | Exercise Price (US$ per Option Granted) | Date of Grant | Date of Expiration | ||||
Li QIAO | * (1) | 11.85 | November 16, 2020 | November 16, 2030 | ||||
| * (2) | — | December 10, 2016 September 19, 2019 November 16, 2020 | — | |||||
Jianyun CHAI | * (2) | — | December 10, 2016 September 19, 2019 November 16, 2020 | — | ||||
Kok Peng TEH | * (2) | — | November 16, 2020 | — | ||||
Khiaw Ngoh TAN | * (2) | — | November 16, 2020 | — | ||||
Chit Nim (Colin) SUNG | * (1) | 11.85 | November 16, 2020 | November 16, 2030 | ||||
| * (2) | — | December 10, 2016 September 19, 2019 November 16, 2020 | — | |||||
Steven WANG | * (1) | 11.85 | November 16, 2020 | November 16, 2030 | ||||
| * (2) | — | November 16, 2020 | — | |||||
Yue XU | * (1) | 11.85 | November 16, 2020 | November 16, 2030 | ||||
| * (2) | — | November 16, 2020 | — | |||||
Lei FANG | * (1) | 11.85 | November 16, 2020 | November 16, 2030 | ||||
| * (2) | — | November 16, 2020 | — | |||||
Chunming HE | * (1) | 11.85 | November 16, 2020 | November 16, 2030 | ||||
| * (2) | — | November 16, 2020 | — | |||||
Hongyuan SHI | * (1) | 11.85 | November 16, 2020 | November 16, 2030 | ||||
| * (2) | — | November 16, 2020 | — | |||||
Chuan (Arden) XIA | * (1) | 11.85 | November 16, 2020 | November 16, 2030 | ||||
| * (2) | — | November 16, 2020 | — |
| * | Less than 1% of our total outstanding ordinary shares on an as-converted basis. |
| (1) | Represents ordinary shares underlying options. |
| (2) | Represents restricted shares awarded. These restricted shares are vested in quarterly installment over a three-year period commencing from January 2017 to November 2020 in the case of directors and March 2021 in the case of executive officers and other employees. Holders of restricted shares are entitled to dividend and voting rights attached to the underlying ordinary shares but are not permitted to transfer such shares to any third parties unless such shares are registered and qualified under the Securities Act, or unless an exemption from such registration and qualification is otherwise available. |
| Name | Number of Ordinary Shares Issuable upon Exercise of Options | Number of Ordinary Shares Vested | Exercise Price | Date of Grant | Date of Expiration | |||||||||||
| Jianfeng He1 | 198,000 | 198,000 | $ | 8.69 | 2012-2-20 | 2017-2-19 | ||||||||||
| Herriet Qu2 | 198,000 | 198,000 | $ | 8.69 | 2012-2-20 | 2017-2-19 | ||||||||||
| Baiqing Shao3 | 165,000 | 165,000 | $ | 8.69 | 2012-2-20 | 2017-2-19 | ||||||||||
1198,000 options vest on the 24, 36death) will receive payment for all salary and 48 month anniversariesunpaid vacation accrued as of the date of grant if the CAGRtermination of the Non-GAAP diluted EPS form fiscal year 2011employment, and shall be entitled to fiscal year 2014 exceeds stated thresholds on those dates. As of June 30, 2017, the securities reportedreceive all vested equity awards 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 CAGRexecutive officer’s termination of employment subject to 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.
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, allexecutive officer’s written agreement with similar vesting provisions.
On September 26, 2016, the Company announced a regular cash dividend of US$ 0.20 per sharewith respect to the holders of the Company’s ordinary shares. Shareholders of record as of the close of business on October 26, 2016 were eligiblesuch equity awards, and shall be entitled to receive the dividend. As a result, the optionsall accrued benefits and 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 Companyany additional benefits pursuant to the 2015 Equity Plan. The options vest annually overcompany’s plans or policies in effect at the time of termination or as required by law, less all required withholdings. In addition, each of our executive officer has agreed to be bound by 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 fromthree-year non-competition covenant after the date of grant. As of June 30, 2017, 198,000termination 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 | Number of Ordinary Shares Issuable upon Exercise of Options | Number of Ordinary Shares Vested | Exercise Price | Date of Grant | Date of Expiration | |||||||||||
| Herriet Qu1 | 225,000 | 45,000 | $ | 22.05 | 2015-5-14 | 2020-5-13 | ||||||||||
| Baiqing Shao1 | 225,000 | 45,000 | $ | 22.05 | 2015-5-14 | 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:
| Name | Number of Restricted Shares Granted | Date of Grant | Number of Restricted Shares Vested | Number of Restricted Shares Issued | ||||||||||
| Jerry Zhang | 15,000 | 2011-1-1 | 15,000 | - | ||||||||||
| Colin Sung | 22,500 | 2011-2-1 | 22,500 | 22,500 | ||||||||||
| Jianyun Chai | 15,000 | 2011-6-2 | 15,000 | - | ||||||||||
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 | Number of Restricted Shares Granted | Date of Grant | Number of Restricted Shares Vested | Number of Restricted Shares Issued | ||||||||||
| Jerry Zhang | 15,000 | 2014-1-1 | 15,000 | - | ||||||||||
| Colin Sung | 22,500 | 2014-2-1 | 22,500 | 22,500 | ||||||||||
| Jianyun Chai | 15,000 | 2014-6-2 | 15,000 | - | ||||||||||
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:
| Name | Number of Restricted Shares Granted | Date of Grant | Number of Restricted Shares Vested | Number of Restricted Shares Issued | ||||||||||
| Jerry Zhang | 15,000 | 2017-1-1 | 1,250 | - | ||||||||||
| Colin Sung | 22,500 | 2017-2-1 | 1,875 | - | ||||||||||
| Jianyun Chai | 15,000 | 2017-6-2 | - | - | ||||||||||
| Li Qiao | 15,000 | 2017-1-1 | 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.
of Directors
functions are described below.
NASDAQ Listing Rules.
working experiences.
NASDAQ Listing Rules.
Board Diversity Matrix (as of September 2, 2022) | ||||||||||||||||
Country of Principal Executive Offices | China | |||||||||||||||
Foreign Private Issuer | Yes | |||||||||||||||
Disclosure Prohibited Under Home Country Law | No | |||||||||||||||
Total Number of Directors | 5 | |||||||||||||||
Female | Male | Non-Binary | Did Not Disclose Gender | |||||||||||||
Part I: Gender Identity | ||||||||||||||||
Directors | 2 | 3 | 0 | 0 | ||||||||||||
Part II: Demographic Background | ||||||||||||||||
Underrepresented Individual in Home Country Jurisdiction | 0 | |||||||||||||||
LGBTQ+ | 0 | |||||||||||||||
Did Not Disclose Demographic Background | 5 | |||||||||||||||
| Category | China | Overseas | Total | |||||||||
| Sales & Marketing | 501 | 17 | 518 | |||||||||
| Research and development | 596 | - | 596 | |||||||||
| Engineering | 866 | 426 | 1,292 | |||||||||
| Production | 361 | - | 361 | |||||||||
| Management | 314 | 121 | 435 | |||||||||
| Total | 2,638 | 564 | 3,202 | |||||||||
Category | China | Overseas | Total | |||||||||
Sales & Marketing | 580 | 15 | 595 | |||||||||
Research and development | 1,118 | — | 1,118 | |||||||||
Engineering | 1,288 | 511 | 1,799 | |||||||||
Production | 389 | 6 | 395 | |||||||||
Management | 418 | 73 | 491 | |||||||||
Total | 3,793 | 605 | 4,398 | |||||||||
Ordinary Shares Beneficially Owned as of September 2, 2022 | ||||||||||
Title (if any) | Number | % | ||||||||
Officers and Directors † | ||||||||||
Li QIAO | Chairwoman | 689,338 | (1) | 1.11 | ||||||
Changli WANG | Director, Chief Executive Officer and Chief Strategy Officer | 1,306,942 | (2) | 2.11 | ||||||
Jianyun CHAI | Director | * | * | |||||||
Kok Peng TEH | Director | * | * | |||||||
Khiaw Ngoh TAN | Director | * | * | |||||||
Chit Nim (Colin) SUNG | Deputy Chief Executive Officer | * | * | |||||||
Steven WANG | Chief Financial Officer | * | * | |||||||
Yue XU | Co-Chief Operating Officer | * | * | |||||||
Lei FANG | Co-Chief Operating Officer | 842,570 | (3) | 1.36 | ||||||
Chunming HE | Chief Technology Officer | * | * | |||||||
Hongyuan SHI | Chief Human Resource Officer | * | * | |||||||
Chuan (Arden) XIA | Chief Public Relations Officer | * | * | |||||||
All directors and officers as a group | 3,548,139 | 5.71 | ||||||||
5% Securities Holder | ||||||||||
Davis Selected Advisers, L.P. | 6,802,977 | (4) | 10.98 | |||||||
FIL Ltd | 4,447,326 | (5) | 7.18 | |||||||
Ace Lead Profit Limited | 4,144,223 | (6) | 6.69 | |||||||
| * |
Name & Address of Beneficial Owner | Office, if Any | Title of Class | Amount & Nature of Beneficial Ownership(1) | Percent of Class(2) | ||||||||
| Officers and Directors | ||||||||||||
| Baiqing Shao | Chairman and Chief Executive Officer | Ordinary Shares | 4,354,223 | (3) | 7.20 | % | ||||||
| Herriet Qu | Chief Financial Officer | Ordinary Shares | 726,471 | (4) | 1.2 | % | ||||||
| Colin Sung | Director | Ordinary Shares | 48,750 | (5) | * | |||||||
| Jerry Zhang | Director | Ordinary Shares | 32,500 | (6) | * | |||||||
| Jianyun Chai | Director | Ordinary Shares | 31,250 | (7) | * | |||||||
| Li Qiao | Director | Ordinary Shares | 530,588 | (8) | * | |||||||
| 5% Securities Holder | ||||||||||||
| Baiqing Shao | Ordinary Shares | 4,354,223 | (3) | 7.20 | % | |||||||
| Prudential PLC | Ordinary Shares | 10,792,037 | (9) | 17.88 | % | |||||||
| Davis Selected Advisers | Ordinary Shares | 3,391,934 | 5.62 | % | ||||||||
| Schroder Investment Management Group | Ordinary Shares | 3,241,090 | 5.37 | % | ||||||||
* Less than 1%.
| † | The business address of each director and |
| (1) | Represents (i) 528,088 ordinary shares |
| (2) | Represents ordinary shares held by |
| (3) | Represents (i) 749,076 ordinary shares held by Mr. |
| (4) | Represents 6,934,478 ordinary shares held by |
| (5) | Represents 4,380,844 ordinary shares held by |
| (6) | Represents 4,144,223 ordinary shares held by Ace Lead Profits Limited, as reported in a Schedule 13D filed with the SEC on June 29, 2021. As set forth therein, Ace Lead Profits Limited is wholly owned and controlled by Baiqing Shao and Baiqing Shao may be deemed to be a beneficial owner of |
| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
The related party relationships and related party transactions are listed as follows:
Party Transactions
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| China Techenergy | $ | 22,579 | $ | 28,778 | ||||
| Shenhua Information | 2,995 | 3,267 | ||||||
| Heilongjiang Ruixing | 1,071 | 1,049 | ||||||
| Hollysys Machine | 1,367 | 965 | ||||||
| Hollycon | - | 79 | ||||||
| Shenzhen HollySys | - | 2 | ||||||
| Beijing IPE | - | 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)
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| China Techenergy | $ | 1,170 | $ | 1,117 | ||||
| Hollysys Machine | 112 | 817 | ||||||
| Shenhua Information | 358 | 353 | ||||||
| Electric Motor | 5 | 11 | ||||||
| Beijing IPE | - | 2 | ||||||
| Hollycon | - | 1 | ||||||
| $ | 1,645 | $ | 2,301 | |||||
Transactions with related parties (in USD Thousands)
Purchases of goods and services from:
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Hollysys Machine | $ | 914 | $ | 555 | $ | 749 | ||||||
| Electric Motor | 50 | 354 | 29 | |||||||||
| Hollycon | - | - | 8 | |||||||||
| Shenhua Information | 368 | - | - | |||||||||
| China Techenergy | 1 | - | - | |||||||||
| $ | 1,333 | $ | 909 | $ | 786 | |||||||
Sales of goods and integrated solutions to:
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| China Techenergy | $ | 21,936 | $ | 3,657 | $ | 10,842 | ||||||
| Shenhua Information | 2,128 | 847 | 765 | |||||||||
| Hollysys Machine | 512 | 235 | 167 | |||||||||
| Hollycon | - | - | 108 | |||||||||
| Beijing IPE | - | - | 7 | |||||||||
| Electric Motor | 1 | - | - | |||||||||
| $ | 24,577 | $ | 4,739 | $ | 11,889 | |||||||
Operating lease income from:
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Hollycon | - | - | 602 | |||||||||
| Hollysys Machine | 41 | 40 | - | |||||||||
| $ | 41 | $ | 40 | $ | 602 | |||||||
Purchases of intangible asset:
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Hollysys Machine | $ | - | $ | - | $ | 1,648 | ||||||
The Company sellsWe sell automation control systems to China Techenergy Co., Ltd. (“China Techenergy”), which isare used for non-safety operations control in the nuclear power industry. China Techenergy is 40% owned by Beijing Hollysys. China Techenergy incorporates the Company’sour 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 isWe are not a party to the integrated sales contracts executed between China Techenergy and its customers. The Company’sOur 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 As of June 30, 2022, the balance due from China Techenergy was $17.5 million, which balance has not been paid off as of the date of this report.
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.
this report.
ITEM 8. | FINANCIAL INFORMATION |
Not applicable.
Historically we haveretained 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.
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.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could restrict our ability to satisfy our liquidity requirements.”
China.”
We
ITEM 9. | THE OFFER AND LISTING |
| Nasdaq Price per Share | ||||||||
| High | Low | |||||||
| Annual Market Prices(1) | ||||||||
| Fiscal Year 2013 | $ | 13.96 | 7.33 | |||||
| Fiscal Year 2014 | $ | 24.94 | 11.79 | |||||
| Fiscal Year 2015 | $ | 26.84 | 17.18 | |||||
| Fiscal Year 2016 | $ | 23.49 | 15.21 | |||||
| Fiscal Year 2017 | $ | 23.21 | 15.25 | |||||
| Quarterly Market Prices | ||||||||
| First Quarter 2016 ended September 30, 2015 | $ | 23.49 | 15.89 | |||||
| Second Quarter 2016 ended December 31, 2015 | $ | 22.60 | 17.34 | |||||
| Third Quarter 2016 ended March 31, 2016 | $ | 21.74 | 15.21 | |||||
| Fourth Quarter 2016 ended June 30, 2016 | $ | 20.80 | 15.95 | |||||
| First Quarter 2017 ended September 30, 2016 | $ | 23.21 | 16.95 | |||||
| Second Quarter 2017 ended December 31, 2016 | $ | 23.09 | 17.89 | |||||
| Third Quarter 2017 ended March 31, 2017 | $ | 19.18 | 16.56 | |||||
| Fourth Quarter 2017 ended June 30, 2017 | 17.28 | 15.25 | ||||||
| Monthly Market Prices | ||||||||
| March 2017 | $ | 18.19 | 16.56 | |||||
| April 2017 | $ | 16.69 | 15.25 | |||||
| May 2017 | $ | 17.19 | 15.56 | |||||
| June 2017 | $ | 17.28 | 16.04 | |||||
| July 2017 | $ | 19.18 | 15.84 | |||||
| August 2017 | $ | 20.50 | 17.79 | |||||
| September 2017 (through September 18, 2017) | $ | 21.15 | 19.86 | |||||
(1) All periods end June 30 of the stated year, unless otherwise noted.
applicable.
ITEM 10. | ADDITIONAL INFORMATION |
Not Applicable
Not Applicable
Not applicable
The Company
a special meeting and subsequent default restrictions for anyone who fails to make the required disclosures; (e) change of the board size to five; and (f) clarification of the procedures for calling a special meeting.
The Company’s Amended and Restated M&A
Hollysys.
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 sharesmake further contributions to be purchased, redeemed or otherwise acquired.
our share capital.
This is not a statutory requirement under the Act and has been imposed pursuant to the terms of the Amended and Restated M&A.
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.
other than with respect to our Amended and Restated Rights Plan. See “—Takeover provisions” below.
The
While the issuance of preferred shares provides us with flexibility in connection with possible acquisitions or other corporate purposes, it could, among other things, have the effect of delaying, deferring or preventing a change of control transaction and could adversely affect the market price of our ordinary shares. We have no current plan to issue any preferred shares.
disclosed publicly under the laws of the BVI or our Amended and Restated M&A.
Authorized Shares
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.
The
Indemnification
unenforceable under the U.S. law.
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.
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 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.
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.
the future.
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:
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) purposes, a beneficial owner of ordinary shares and is:
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 partnershipsTreaty benefits should consult their tax advisors regarding the creditability or deductibility of any PRC taxes imposed on dividends on, or dispositions of, our ordinary shares. This discussion does not apply to investors in this special situation.
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 distributionsany distribution will be included in the gross income of the U.S. holderHolder as dividend income on the date of receipt to the extent that the distribution is paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions will generally be reported to U.S. Holders as dividends. Such dividends will not be eligible for the dividends-received deduction allowed to corporations in respect ofcorporations. Assuming that we are a PFIC, dividends received from other U.S. corporations. Dividends receivedpaid by us will not be eligible for the preferential dividend tax rate otherwise available to certain non-corporate U.S. holders, including individuals,Holders.
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 ofshares. See “—Taxation in China.” For U.S. federal income tax basis on our ordinary shares, and to the extent thatpurposes, the amount of the distribution exceeds tax basis,dividend income will include any amounts withheld in respect of PRC withholding tax. Subject to applicable limitations, which vary depending upon the excessU.S. Holder’s circumstances, PRC taxes withheld from dividend payments (at a rate not exceeding the applicable rate provided in the Treaty) generally will be treated as gain fromcreditable against a U.S. Holder’s U.S. federal income tax liability. The rules governing foreign tax credits are complex and U.S. Holders should consult their tax advisors regarding the dispositioncreditability of those ordinary shares.
of Ordinary Shares
Unearned Income Medicare Contribution
Certain U.S. holders who are individuals, trusts or estates areHolder will generally be required to pay an additional 3.8% Medicarefile IRS Form 8621 with its federal income tax on, among other things, dividends onreturn with respect to us 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 dispositionwith respect to each 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 incomesubsidiaries that is paid on or after July 1, 2014 and (ii)a PFIC, subject 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 shouldcertain exceptions.
making the mark-to-market election discussed above.
Backup withholding is not an additional tax; rather, the U.S. federal income tax liability of persons subjectand may entitle such holder 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 timely furnished to the IRSIRS.
On February 9, 2015, we declarednon-U.S. person, generally on Form 8938, subject to exceptions (including an exception for financial assets held through a special cash dividend of US$0.40 per shareU.S. financial institution). U.S. Holders should consult their tax advisors regarding their reporting obligations with respect to the holders of the Company’s ordinary shares. The record day was February 23, 2015,
Fiscal Year | Announcement Date | Record Date | Payment Date | Dividend Amount (per ordinary share) | ||||
2016 | September 26, 2016 | October 26, 2016 | November 11, 2016 | $0.20 | ||||
2017 | September 25, 2017 | October 16, 2017 | November 06, 2017 | $0.12 | ||||
2018 | September 27, 2018 | October 22, 2018 | November 12, 2018 | $0.18 | ||||
2019 | September 27, 2019 | October 22, 2019 | November 12, 2019 | $0.21 | ||||
2020 | October 5, 2020 | October 22, 2020 | November 20, 2020 | $0.20 | ||||
2021 | March 10, 2022 | April 4, 2022 | April 25, 2022 | $0.32 |
Accordingly, there can be no assurance that dividends in the future will be equal or similar in amount to the amounts already declared and paid in the past or that the Board of Directors will not decide to suspend or discontinue, altogether, the payment of cash dividends in the future.
In accordance with NASDAQ Stock Market Rule 5250(d), we will also post this annual report on Form 20-F on our website at www.hollysys.com. In addition, we will provide hardcopies of our annual report free of charge to shareholders upon request.
Not applicable.
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.
| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS AND USE OF PROCEEDS |
are exercisable.
ITEM 15. | CONTROLS AND PROCEDURES |
2022.
2022.
internal control over financial reporting as of June 30, 2022.
ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
ITEM 16B. | CODE OF ETHICS |
ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Fees
Ernst &Young Hua Ming LLPwas 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-relatedfees 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 feesincurred 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.
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
Union Power | Ernst & Young | |||||||||||
(in USD) | FY2022 | FY2021 | FY2021 | |||||||||
Audit fees (1) | $ | 1,075,000 | $ | 2,800,000 | $ | 1,206,143 | ||||||
Audit-related fees (2) | 500,000 | — | 89,737 | |||||||||
Tax fees (3) | — | — | 31,834 | |||||||||
Total | $ | 1,575,000 | $ | 2,800,000 | $ | 1,327,714 | ||||||
| (1) | Audit 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. |
| (2) | Audit-related fees include fees for services rendered related to our quarterly financial information for the fiscal years ended June 30, 2022 and 2021. |
| (3) | Tax fees were related to the tax service, including tax compliance and tax advice. |
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
We
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
Period | (a) Total number of Shares Purchased | (b) Average Price Paid per Share (in US$) | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
July 1—31, 2021 | — | — | — | — | ||||||||||||
August 1—31, 2021 | — | — | — | — | ||||||||||||
September 1—30, 2021 | — | — | — | — | ||||||||||||
October 1—31, 2021 | — | — | — | — | ||||||||||||
November 1—30, 2021 | — | — | — | — | ||||||||||||
December 1—31, 2021 | — | — | — | — | ||||||||||||
January 1—31, 2022 | — | — | — | — | ||||||||||||
February 1—28, 2022 | — | — | — | — | ||||||||||||
March 1—31, 2022 | 1,055,000 | (1) | 17.16 | — | — | |||||||||||
April 1—30, 2022 | — | — | — | — | ||||||||||||
May 1—31, 2022 | 93,682 | (2) | 14.73 | — | — | |||||||||||
June 1—30, 2022 | 41,736 | (2) | 14.72 | — | — | |||||||||||
Total | 1,190,418 | 16.88 | — | — | ||||||||||||
| (1) | Dr. Changli Wang, the CEO and director of Hollysys, through a special purpose vehicle beneficially owned and funded by him, purchased a total of 1,055,000 ordinary shares of the Company in the open market in compliance with applicable laws and regulations. |
| (2) | Certain members of the senior management of Hollysys purchased ordinary shares of the Company in open market transactions in compliance with applicable laws and regulations. |
ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
None.
ITEM 16G. | CORPORATE GOVERNANCE |
ITEM 16H. | MINE SAFETY DISCLOSURE |
ITEM 16l. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
ITEM 17. | FINANCIAL STATEMENTS |
ITEM 18. | FINANCIAL STATEMENTS |
ITEM 19. | EXHIBITS |
Number | Description | |
| 11.1 | ||
| 12.1 | ||
| 12.2 | ||
| 13.1* | ||
| 13.2* | ||
| 15.1 | ||
| 15.2 | ||
| 99.1 | ||
| 101.INS | Inline XBRL Instant Document—this instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
| 101.SCH | ||
Inline XBRL Taxonomy Extension Schema Document | ||
| 101.CAL | ||
Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| 101.DEF | ||
Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
| 101.LAB | ||
Inline XBRL Taxonomy Extension Label Linkbase Document | ||
| 101.PRE | ||
Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
* Filed with this annual report on Form 20-F
| 104. | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||
| * | Furnished with this annual report on Form 20-F |
HOLLYSYS AUTOMATION TECHNOLOGIES LTD. |
/s/ Changli Wang |
Changli Wang |
Chief Executive Officer |
HOLLYSYS AUTOMATION TECHNOLOGIES LTD.
Index to Consolidated Financial Statements
| F-2 | ||||
| F-6 | ||||
| F-8 | ||||
| F-10 | ||||
| F-12 | ||||
| F-13 |
The
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). 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.
/s/ Union Power HK CPA Limited |
We have served as the Company’s auditor since 2021. |
Hong Kong |
September 22 , 2022 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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.’sCompany’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 overOver Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
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/ | |
We have served as the | |
| Company’s auditor since 2021. Hong Kong September 22 |
F-5 |
| June 30, | ||||||||||
| Notes | 2016 | 2017 | ||||||||
| ASSETS | ||||||||||
| Current assets | ||||||||||
| Cash and cash equivalents | $ | 229,095 | $ | 197,640 | ||||||
| Time deposits with maturities over three months | 42,368 | 96,214 | ||||||||
| Restricted cash | 27,592 | 39,534 | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $42,471 and $48,089 as of June 30, 2016 and 2017, respectively | 4 | 237,179 | 246,552 | |||||||
| 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 | 5 | 189,928 | 162,096 | |||||||
| Other receivables, net of allowance for doubtful accounts of $1,302 and $1,448 as of June 30, 2016 and 2017, respectively | 13,358 | 20,036 | ||||||||
| Advances to suppliers | 11,661 | 9,964 | ||||||||
| Amounts due from related parties | 20 | 28,012 | 34,142 | |||||||
| Inventories | 3 | 36,401 | 45,660 | |||||||
| Prepaid expenses | 569 | 619 | ||||||||
| Income tax recoverable | 4,488 | 5,169 | ||||||||
| Deferred tax assets | 18 | 6,659 | 7,730 | |||||||
| Total current assets | 827,310 | 865,356 | ||||||||
| Non-current assets | ||||||||||
| Restricted cash | 402 | 522 | ||||||||
| Prepaid expenses | 13 | - | ||||||||
| Property, plant and equipment, net | 6 | 79,938 | 80,529 | |||||||
| Prepaid land leases | 7 | 10,773 | 10,206 | |||||||
| Intangible assets, net | 8 | 856 | 1,928 | |||||||
| Investments in equity investees | 10 | 18,714 | 47,242 | |||||||
| Investments in cost investees | 10 | 4,108 | 4,024 | |||||||
| Goodwill | 9 | 59,847 | 47,326 | |||||||
| Deferred tax assets | 18 | 2,195 | 1,121 | |||||||
| Total non-current assets | 176,846 | 192,898 | ||||||||
| Total assets | $ | 1,004,156 | $ | 1,058,254 | ||||||
| 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): | 1 | |||||||||
| Derivative financial liability | 13 | $ | 398 | $ | 487 | |||||
| Short-term bank loans | 12 | 3,051 | 8,121 | |||||||
| Current portion of long-term loans | 13 | 6,833 | 420 | |||||||
| Accounts payable | 106,833 | 122,714 | ||||||||
| Construction costs payable | 647 | 383 | ||||||||
| Deferred revenue | 82,004 | 107,407 | ||||||||
| Accrued payroll and related expenses | 13,193 | 13,600 | ||||||||
| Income tax payable | 4,917 | 3,371 | ||||||||
| Warranty liabilities | 11 | 6,782 | 5,386 | |||||||
| Other tax payables | 18,069 | 10,488 | ||||||||
| Accrued liabilities | 44,041 | 23,950 | ||||||||
| Amounts due to related parties | 20 | 1,645 | 2,301 | |||||||
| Deferred tax liabilities | 18 | 8,913 | 4,350 | |||||||
| Total current liabilities | 297,326 | 302,978 | ||||||||
| Accrued liabilities | - | 2,220 | ||||||||
| Long-term loans | 13 | 20,508 | 20,581 | |||||||
| Deferred tax liabilities | 18 | 59 | 6,689 | |||||||
| Warranty liabilities | 11 | 3,578 | 2,246 | |||||||
| Total non-current liabilities | 24,145 | 31,736 | ||||||||
| Total liabilities | 321,471 | 334,714 | ||||||||
| Commitments and contingencies | 21 | - | - | |||||||
| 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 | 15 | 60 | 60 | |||||||
| Additional paid-in capital | 215,403 | 222,189 | ||||||||
| Statutory reserves | 36,533 | 41,130 | ||||||||
| Retained earnings | 430,627 | 482,999 | ||||||||
| Accumulated other comprehensive income | (8,467 | ) | (22,859 | ) | ||||||
| Total Hollysys Automation Technologies Ltd. stockholders’ equity | 674,156 | 723,519 | ||||||||
| Non-controlling interest | 8,529 | 21 | ||||||||
| Total equity | 682,685 | 723,540 | ||||||||
| Total liabilities and equity | $ | 1,004,156 | $ | 1,058,254 | ||||||
June 30, | ||||||||||||
Notes | 2021 | 2022 | ||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 664,321 | $ | 679,754 | ||||||||
Short-term investments | 48,808 | 12,203 | ||||||||||
Restricted cash | 25,294 | 38,486 | ||||||||||
Accounts receivable, net of allowance for credit losses of $66,839 and $77,603 as of June 30, 2021 and 2022, respectively | 4 | 330,853 | 317,763 | |||||||||
Costs and estimated earnings in excess of billings, net of allowance for credit losses of | 5 | 196,706 | 228,877 | |||||||||
Accounts receivable retention | 6 | 4,943 | 6,005 | |||||||||
Other receivables, net of allowance for credit losses of $16,675 and $12,449 as of June 30, 2021 and 2022, respectively | 18,937 | 26,100 | ||||||||||
Advances to suppliers | 20,140 | 33,851 | ||||||||||
Amounts due from related parties | 22 | 28,243 | 27,360 | |||||||||
Inventories | 3 | 47,912 | 91,243 | |||||||||
Prepaid expenses | 937 | 667 | ||||||||||
Income tax recoverable | 464 | 258 | ||||||||||
Total current assets | 1,387,558 | 1,462,567 | ||||||||||
Non-current assets: | ||||||||||||
Restricted cash | 5,932 | 787 | ||||||||||
Costs and estimated earnings in excess of billings | 1,230 | 3,021 | ||||||||||
Accounts receivable retention | 6 | 4,397 | 6,561 | |||||||||
Prepaid expenses | 1 | 1 | ||||||||||
Property, plant and equipment, net | 7 | 94,046 | 98,249 | |||||||||
Prepaid land leases | 8 | 16,568 | 12,447 | |||||||||
Intangible assets, net | 9 | 1,399 | 10,742 | |||||||||
Investments in equity investees | 11 | 60,166 | 46,581 | |||||||||
Investments in securities | 2,622 | 1,693 | ||||||||||
Goodwill | 10 | 1,598 | 20,539 | |||||||||
Deferred tax assets | 19 | 12,480 | 4,540 | |||||||||
Operating lease right-of-use | 20 | 6,256 | 4,045 | |||||||||
Total non-current assets | 206,695 | 209,206 | ||||||||||
Total assets | $ | 1,594,253 | $ | 1,671,773 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Short-term bank loans | 13 | — | 66 | |||||||||
Current portion of long-term loans | 14 | 15,308 | 15,210 | |||||||||
Accounts payable | 140,235 | 173,953 | ||||||||||
Construction costs payable | 1,292 | 92 | ||||||||||
Deferred revenue | 184,543 | 206,222 | ||||||||||
Accrued payroll and related expenses | 22,077 | 23,535 | ||||||||||
Income tax payable | 3,508 | 4,509 | ||||||||||
Warranty liabilities | 12 | 5,902 | 3,280 | |||||||||
Other tax payables | 6,373 | 11,587 | ||||||||||
Accrued liabilities | 38,633 | 37,282 | ||||||||||
Amounts due to related parties | 22 | 1,661 | 6,299 | |||||||||
Current portion of o ther liability | — | 3 | ||||||||||
Operating lease liabilities | 20 | 3,098 | 2,518 | |||||||||
Total current liabilities | 422,630 | 484,556 | ||||||||||
Non-current liabilities | ||||||||||||
Accrued liabilities | 4,569 | 3,349 | ||||||||||
Long-term loans | 14 | 698 | 434 | |||||||||
Accounts payable | 982 | 1,556 | ||||||||||
Deferred tax liabilities | 19 | 16,829 | 12,966 | |||||||||
Warranty liabilities | 12 | 3,649 | 1,722 | |||||||||
Operating lease liabilities | 20 | 2,928 | 1,282 | |||||||||
Long-term o ther liabilities | — | 80 | ||||||||||
Total non-current liabilities | 29,655 | 21,389 | ||||||||||
Total liabilities | 452,285 | 505,945 | ||||||||||
Commitments and contingencies | 23 | — | — | |||||||||
Stockholders’ equity: | 16 | |||||||||||
Ordinary shares, par value $0.001 per share, 100,000,000 shares authorized; 61,367,337 shares and 61,962,449 shares issued and outstanding as of June 30, 2021 and 2022, respectively | 61 | 62 | ||||||||||
Additional paid-in capital | 233,768 | 243,476 | ||||||||||
Statutory reserves | 64,449 | 77,263 | ||||||||||
Retained earnings | 806,598 | 857,141 | ||||||||||
| Accumulated other comprehensive income (loss) | 32,814 | (12,655 | ) | |||||||||
Total Hollysys Automation Technologies Ltd. stockholders’ equity | 1,137,690 | 1,165,287 | ||||||||||
Non-controlling interests | 4,278 | 541 | ||||||||||
Total equity | 1,141,968 | 1,165,828 | ||||||||||
Total liabilities and equity | $ | 1,594,253 | $ | 1,671,773 | ||||||||
| Year ended June 30, | ||||||||||||||
| Notes | 2015 | 2016 | 2017 | |||||||||||
| 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) | $ | 481,006 | $ | 477,790 | $ | 385,500 | ||||||||
| 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) | 39,762 | 54,546 | 32,665 | |||||||||||
| Revenue from services (including revenue from related parties of $19, nil and nil for the years ended June 30, 2015, 2016 and 2017, respectively) | 10,611 | 11,989 | 13,778 | |||||||||||
| Total net revenues | 531,379 | 544,325 | 431,943 | |||||||||||
| 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) | 300,332 | 310,545 | 277,476 | |||||||||||
| 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) | 12,547 | 24,023 | 9,971 | |||||||||||
| Costs of services rendered | 4,098 | 4,031 | 4,025 | |||||||||||
| Gross profit | 214,402 | 205,726 | 140,471 | |||||||||||
| Operating expenses | ||||||||||||||
| Selling (including expenses from related parties of $914, $517 and nil for the years ended June 30, 2015, 2016 and 2017, respectively) | 26,263 | 25,637 | 24,412 | |||||||||||
| General and administrative | 50,786 | 45,832 | 44,297 | |||||||||||
| Goodwill impairment charge | 1,855 | - | 11,211 | |||||||||||
| Research and development | 35,779 | 36,564 | 30,109 | |||||||||||
| VAT refunds and government subsidies | (30,388 | ) | (22,890 | ) | (29,828 | ) | ||||||||
| Total operating expenses | 84,295 | 85,143 | 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) | 2,601 | 4,061 | 1,722 | |||||||||||
| Foreign exchange loss | (6,765 | ) | (299 | ) | (135 | ) | ||||||||
| Gains on deconsolidation of the Company’s interests in Beijing Hollycon Electronic Technology Co., Ltd (“Hollycon”) | - | - | 14,514 | |||||||||||
| Gains on disposal of a subsidiary | - | - | 628 | |||||||||||
| Gain on disposal of an equity investee | 80 | - | - | |||||||||||
| Share of net (loss) income of equity investees | (2,910 | ) | 7,834 | 3,607 | ||||||||||
| Interest income | 3,686 | 5,858 | 3,687 | |||||||||||
| Interest expenses | (1,821 | ) | (1,404 | ) | (938 | ) | ||||||||
| Dividend income from a cost investee | 249 | 1,109 | - | |||||||||||
| Income before income taxes | 125,227 | 137,742 | 83,355 | |||||||||||
| Income tax expenses | 18 | 26,040 | 14,238 | 14,386 | ||||||||||
| Net income | 99,187 | 123,504 | 68,969 | |||||||||||
| Less: net income attributable to non-controlling interests | 2,660 | 5,033 | 25 | |||||||||||
| Net income attributable to Hollysys Automation Technologies Ltd. | $ | 96,527 | $ | 118,471 | $ | 68,944 | ||||||||
| Other comprehensive income, net of tax of nil | ||||||||||||||
| Translation adjustments | $ | (1,386 | ) | $ | (48,841 | ) | $ | (14,428 | ) | |||||
| Comprehensive income | 97,801 | 74,663 | 54,541 | |||||||||||
| Less: comprehensive income attributable to non-controlling interests | 2,701 | 2,244 | (11 | ) | ||||||||||
| Comprehensive income attributable to Hollysys Automation Technologies Ltd. | $ | 95,100 | $ | 72,419 | $ | 54,552 | ||||||||
| Net income per ordinary share: | ||||||||||||||
| Basic | 19 | $ | 1.65 | $ | 2.00 | $ | 1.15 | |||||||
| Diluted | 19 | $ | 1.61 | $ | 1.97 | $ | 1.14 | |||||||
| Shares used in income per share computation: | ||||||||||||||
| Weighted average number of ordinary shares | 58,612,596 | 59,170,050 | 60,189,004 | |||||||||||
| Weighted average number of diluted ordinary shares | 60,134,203 | 60,611,456 | 61,011,510 | |||||||||||
Year ended June 30, | ||||||||||||||||
Notes | 2020 | 2021 | 2022 | |||||||||||||
Net revenues | ||||||||||||||||
Integrated solutions contracts revenue (including revenue from related parties of $227, $1,446 and $2,288 for the years ended June 30, 2020, 2021 and 2022, respectively) | $ | 414,272 | $ | 460,180 | $ | 573,567 | ||||||||||
Product sales (including revenue from related parties of $3,003, $8,186 and $4,018 for the years ended June 30, 2020, 2021 and 2022, respectively) | 20,144 | 28,667 | 38,486 | |||||||||||||
Revenue from services | 68,911 | 104,619 | 95,409 | |||||||||||||
Total net revenues | 503,327 | 593,466 | 707,462 | |||||||||||||
Costs of integrated solutions contracts (including purchases from related parties of $1,400, $1,860 and $1,214 for the years ended June 30, 2020, 2021 and 2022, respectively) | 281,818 | 336,471 | 422,236 | |||||||||||||
Costs of products sold (including purchases from related parties of $177, $1,198 and $519 for the years ended June 30, 2020, 2021 and 2022, respectively) | 5,456 | 5,293 | 10,247 | |||||||||||||
Costs of services rendered | 25,485 | 33,423 | 35,622 | |||||||||||||
Gross profit | 190,568 | 218,279 | 239,357 | |||||||||||||
Operating expenses | ||||||||||||||||
Selling | 30,642 | 35,197 | 45,301 | |||||||||||||
General and administrative | 39,114 | 69,982 | 80,241 | |||||||||||||
Goodwill impairment charge | 35,767 | — | — | |||||||||||||
Research and development (including research and development from related parties of $655, $212 and $208 for the years ended June 30, 2020, 2021 and 2022, respectively) | 41,876 | 55,954 | 69,580 | |||||||||||||
VAT refunds and government subsidies | (26,259 | ) | (30,099 | ) | (30,309 | ) | ||||||||||
Total operating expenses | 121,140 | 131,034 | 164,813 | |||||||||||||
Income from operations | 69,428 | 87,245 | 74,544 | |||||||||||||
Other income, net (including other income from related parties of $3,414, $2,445 and $2,830 for the years ended June 30, 2020, 2021 and 2022, respectively) | 4,683 | 10,449 | 2,185 | |||||||||||||
| Foreign exchange gain (loss) | 599 | (6,219 | ) | 1,789 | ||||||||||||
Gains on disposal of an investment in an equity investee | 5,763 | — | 7,995 | |||||||||||||
Losses on disposal of subsidiaries | — | — | (3 | ) | ||||||||||||
Gains on disposal of an investment in securities | — | 3,323 | — | |||||||||||||
Impairment loss of investments in cost investees | — | — | (773 | ) | ||||||||||||
Share of net income of equity investees | 3,131 | 604 | 1,838 | |||||||||||||
Interest income | 13,060 | 14,131 | 12,698 | |||||||||||||
Interest expenses | (306 | ) | (553 | ) | (731 | ) | ||||||||||
Dividend income from investments in securities | 1,139 | 912 | 85 | |||||||||||||
Income before income taxes | 97,497 | 109,892 | 99,627 | |||||||||||||
Income tax expenses | 19 | 18,171 | 20,554 | 16,634 | ||||||||||||
Net income | 79,326 | 89,338 | 82,993 | |||||||||||||
Less: Net loss attributable to non-controlling interests | (70 | ) | (371 | ) | (189 | ) | ||||||||||
Net income attributable to Hollysys Automation Technologies Ltd. | $ | 79,396 | $ | 89,709 | $ | 83,182 | ||||||||||
Other comprehensive income, net of tax of nil | ||||||||||||||||
Translation adjustments | $ | (28,313 | ) | $ | 96,577 | $ | (46,590 | ) | ||||||||
Comprehensive income | 51,013 | 185,915 | 36,403 | |||||||||||||
Less: Comprehensive loss attributable to non-controlling interests | (387 | ) | (125 | ) | (1,310 | ) | ||||||||||
Comprehensive income attributable to Hollysys Automation Technologies Ltd. | $ | 51,400 | $ | 186,040 | $ | 37,713 | ||||||||||
Net income per share: | ||||||||||||||||
Basic | 21 | $ | 1.31 | 1.48 | 1.36 | |||||||||||
Diluted | 21 | $ | 1.31 | 1.46 | 1.35 | |||||||||||
Shares used in net income per share computation: | ||||||||||||||||
Basic | 60,478,717 | 60,566,709 | 61,007,806 | |||||||||||||
Diluted | 60,609,242 | 61,513,749 | 61,568,476 |
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 99,187 | $ | 123,504 | $ | 68,969 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation of property, plant and equipment | 8,508 | 6,266 | 8,752 | |||||||||
| Amortization of prepaid land leases | 197 | 281 | 261 | |||||||||
| Amortization of intangible assets | 4,454 | 818 | 623 | |||||||||
| Allowance for doubtful accounts | 17,418 | 10,918 | 9,760 | |||||||||
| Loss on disposal of property, plant and equipment | 598 | 224 | 596 | |||||||||
| Impairment loss on property, plant and equipment | - | - | 361 | |||||||||
| Goodwill impairment charge | 1,855 | - | 11,211 | |||||||||
| Share of net loss (income) of equity investees | 2,910 | (7,834 | ) | (3,607 | ) | |||||||
| Dividends received from a cost investee | (249 | ) | - | - | ||||||||
| Gain on disposal of investment in an equity investee | (80 | ) | - | - | ||||||||
| Gains on deconsolidation of the Company’s interests in HollyCon | - | - | (14,514 | ) | ||||||||
| Gain on disposal of a subsidiary | - | - | (628 | ) | ||||||||
| Share-based compensation expenses | 2,492 | 3,860 | 464 | |||||||||
| Deferred income tax (benefit) expenses | 4,846 | (462 | ) | 2,133 | ||||||||
| Acquisition-related consideration fair value adjustments | (166 | ) | (1,745 | ) | - | |||||||
| Accretion of convertible bond | 192 | 230 | 230 | |||||||||
| Fair value adjustments of a bifurcated derivative | 35 | 93 | 89 | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (7,675 | ) | (16,413 | ) | (23,441 | ) | ||||||
| Costs and estimated earnings in excess of billings | 10,527 | (36,971 | ) | 21,945 | ||||||||
| Inventories | 560 | (4,607 | ) | (10,701 | ) | |||||||
| Advances to suppliers | (3,690 | ) | 2,497 | 881 | ||||||||
| Other receivables | (1,928 | ) | (2,481 | ) | (6,767 | ) | ||||||
| Deposits and other assets | (13,375 | ) | (674 | ) | (12,698 | ) | ||||||
| Due from related parties | (15,205 | ) | 8,226 | (6,819 | ) | |||||||
| Accounts payable | (25,836 | ) | 8,272 | 23,563 | ||||||||
| Deferred revenue | 7,556 | (47,637 | ) | 28,168 | ||||||||
| Accruals and other payables | 6,897 | 5,015 | (21,013 | ) | ||||||||
| Due to related parties | (2,301 | ) | 351 | 801 | ||||||||
| Income tax payable | (6,153 | ) | (4,558 | ) | (1,779 | ) | ||||||
| Other tax payables | (7,622 | ) | (436 | ) | (7,027 | ) | ||||||
| Net cash provided by operating activities | $ | 83,952 | $ | 46,737 | $ | 69,813 | ||||||
| Cash flows from investing activities: | ||||||||||||
| Time deposits placed with banks | (33,416 | ) | (107,118 | ) | (154,810 | ) | ||||||
| Purchases of property, plant and equipment | (4,553 | ) | (7,887 | ) | (3,711 | ) | ||||||
| Proceeds from disposal of investment in an equity investee | 80 | - | - | |||||||||
| Maturity of time deposits | 11,551 | 112,013 | 89,262 | |||||||||
| Proceeds from disposal of property, plant and equipment | 794 | 74 | 64 | |||||||||
| Investment of an equity investee | - | - | (2,654 | ) | ||||||||
| Net cash reduced upon deconsolidation of a subsidiary | - | - | (16,140 | ) | ||||||||
| Acquisition of a subsidiary, net of cash acquired | (14,600 | ) | - | (1,652 | ) | |||||||
| Dividends received from a cost investee | 249 | - | 88 | |||||||||
| Proceeds from sale of shares of a subsidiary | - | 464 | - | |||||||||
| Net cash used in investing activities | $ | (39,895 | ) | $ | (2,454 | ) | $ | (89,553 | ) | |||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from short-term bank loans | 25,074 | 4,138 | 10,061 | |||||||||
| Repayments of short-term bank loans | (12,631 | ) | (17,020 | ) | (4,932 | ) | ||||||
| Proceeds from long-term bank loans | - | 2,606 | 461 | |||||||||
| Repayments of long-term bank loans | (8,813 | ) | (9,681 | ) | (7,350 | ) | ||||||
| Proceeds from convertible bond | 20,000 | - | - | |||||||||
| Convertible bond issuance cost | (349 | ) | - | - | ||||||||
| Proceeds from exercise of options | 1,280 | 5,441 | 6,322 | |||||||||
| Payment of dividends | (23,300 | ) | - | (11,975 | ) | |||||||
| Proceeds from issuance of shares of a subsidiary | - | 7,736 | - | |||||||||
| Net cash (used in) provided by financing activities | $ | 1,261 | $ | (6,780 | ) | $ | (7,413 | ) | ||||
| Effect of foreign exchange rate changes | 357 | (16,242 | ) | (4,302 | ) | |||||||
| Net increase (decrease) in cash and cash equivalents | $ | 45,675 | $ | 21,261 | $ | (31,455 | ) | |||||
| Cash and cash equivalents, beginning of year | 162,159 | 207,834 | 229,095 | |||||||||
| Cash and cash equivalents, end of year | $ | 207,834 | $ | 229,095 | $ | 197,640 | ||||||
| Supplementary disclosures of cash flow information: | ||||||||||||
| Cash paid during the year for: | ||||||||||||
| Interest | $ | 1,855 | $ | 1,048 | $ | 727 | ||||||
| Income tax | $ | 26,183 | $ | 19,099 | $ | 13,918 | ||||||
| Supplementary disclosures of significant non-cash transactions: | ||||||||||||
| Acquisition of property, plant and equipment included in construction costs payable and accrued liabilities | $ | 484 | $ | 4,439 | $ | 7,266 | ||||||
| Issuance of ordinary shares as purchase consideration in connection with the acquisition of Bond Group | $ | 15,231 | $ | 13,336 | $ | - | ||||||
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 79,326 | $ | 89,338 | $ | 82,993 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation of property, plant and equipment | 8,483 | 9,959 | 10,263 | |||||||||
Amortization of prepaid land leases | 384 | 454 | 382 | |||||||||
Amortization of intangible assets | 300 | 316 | 1,356 | |||||||||
Allowance for credit losses | 690 | 8,656 | 16,122 | |||||||||
| Gain on disposal of long-lived assets | (67 | ) | (7 | ) | (75 | ) | ||||||
Impairment loss on property, plant and equipment | 17 | — | — | |||||||||
Goodwill impairment charge | 35,767 | — | — | |||||||||
Share of net income of equity investees | (3,131 | ) | (604 | ) | (1,838 | ) | ||||||
Dividends received from an equity investee | — | 91 | — | |||||||||
Loss on disposal of subsidiaries | — | — | 3 | |||||||||
Impairment loss on investment in a cost investee | 773 | |||||||||||
Gains on disposal of an investment of an equity investee | (5,763 | ) | — | (7,995 | ) | |||||||
Gain on disposal of an investment in securities | — | (3,323 | ) | — | ||||||||
Share-based compensation expenses | 410 | 9,724 | 9,709 | |||||||||
Deferred income tax expenses (benefit) | 6,414 | (5,838 | ) | 4,179 | ||||||||
Accretion of convertible bond | 57 | — | — | |||||||||
| Other income, net | — | (6,724 | ) | — | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable and retention | 30,894 | (88,854 | ) | (11,807 | ) | |||||||
Costs and estimated earnings in excess of billings | 3,186 | 3,049 | (39,839 | ) | ||||||||
Inventories | (6,474 | ) | 4,657 | (40,007 | ) | |||||||
Advances to suppliers | (4,745 | ) | (1,253 | ) | (14,274 | ) | ||||||
Other receivables | (1,897 | ) | 11,183 | (3,425 | ) | |||||||
Prepaid expenses | (19 | ) | (268 | ) | 257 | |||||||
Due from related parties | 11,988 | 6,784 | 4,903 | |||||||||
Accounts payable | 15,010 | 10,178 | 28,470 | |||||||||
Deferred revenue | 1,825 | 31,432 | 19,221 | |||||||||
Accruals and other payable | (1,663 | ) | (966 | ) | (16,417 | ) | ||||||
Due to related parties | (1,819 | ) | (1,915 | ) | 4,638 | |||||||
Income tax payable | 3,335 | 514 | 1,423 | |||||||||
Other tax payables | 2,616 | 2,700 | 5,511 | |||||||||
Net cash provided by operating activities | $ | 175,124 | $ | 79,283 | $ | 54,526 | ||||||
Cash flows from investing activities: | ||||||||||||
Purchases of short-term investments | (426,846 | ) | (147,237 | ) | (64,383 | ) | ||||||
Maturity of short-term investments | 242,174 | 443,095 | 100,562 | |||||||||
Purchases of property, plant and equipment | (8,098 | ) | (18,131 | ) | (26,369 | ) | ||||||
Proceeds from disposal of property, plant and equipment | 983 | 314 | 140 | |||||||||
Investments made in equity investees | — | (9,459 | ) | (1,261 | ) | |||||||
| Proceeds from disposal of a subsidiary | — | — | 3,797 | |||||||||
| Proceeds received from disposal of equity investments | 4,458 | 5,187 | 9,497 | |||||||||
| Acquisition of a subsidiary, net of cash acquired | (251 | ) | (9,406 | ) | (8,726 | ) | ||||||
Proceeds received from investment in equity securities without readily determinable fair value | — | 5,895 | — | |||||||||
Net cash (used in) provided by investing activities | (187,580 | ) | 270,258 | 13,257 | ||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from short-term bank loans | $ | 2,371 | $ | — | $ | 128 | ||||||
Repayments of short-term bank loans | (4,243 | ) | — | (59 | ) | |||||||
Proceeds from long-term bank loans | 15,423 | 520 | 875 | |||||||||
Repayments of long-term bank loans | (437 | ) | (633 | ) | (673 | ) | ||||||
Capital contributions from subsidiaries’ non-controlling interest shareholders | 2,139 | — | — | |||||||||
Payment of dividends | (12,713 | ) | (12,107 | ) | (19,827 | ) | ||||||
Principal repayment of convertible bond | (20,753 | ) | — | — | ||||||||
Proceeds from issuance of shares of a subsidiary | — | 2 | — | |||||||||
Net cash used in financing activities | (18,213 | ) | (12,218 | ) | (19,556 | ) | ||||||
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (8,621 | ) | 39,127 | (24,747 | ) | |||||||
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (39,290 | ) | $ | 376,450 | $ | 23,480 | |||||
Cash, cash equivalents and restricted cash, beginning of year | 358,387 | 319,097 | 695,547 | |||||||||
Cash, cash equivalents and restricted cash, end of year | $ | 319,097 | $ | 695,547 | $ | 719,027 | ||||||
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets: | ||||||||||||
Cash and cash equivalents | 288,782 | 664,321 | 679,754 | |||||||||
Current portion of restricted cash | 8,663 | 25,294 | 38,486 | |||||||||
Non-current portion of restricted cash | 21,652 | 5,932 | 787 | |||||||||
Total cash, cash equivalents and restricted cash | 319,097 | 695,547 | 719,027 | |||||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Interest expense paid | $ | 306 | $ | 553 | $ | 731 | ||||||
Income tax paid | $ | 8,772 | $ | 16,804 | $ | 15,632 | ||||||
Supplemental disclosures of non-cash information: | ||||||||||||
Acquisition of property, plant and equipment included in construction costs payable and accrued liabilities | $ | 6,759 | $ | 477 | $ | 5,987 |
| 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 | |||||||||||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||||||||||||||
| Balance at June 30, 2014 | 57,554,824 | $ | 58 | $ | 173,765 | $ | 23,288 | $ | 252,351 | $ | 39,013 | $ | 488,475 | $ | 3,583 | $ | 492,058 | |||||||||||||||||||
| Share-based compensation | - | - | 2,492 | - | - | - | 2,492 | - | 2,492 | |||||||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of options | 142,500 | - | * | 1,280 | - | - | - | 1,280 | - | 1,280 | ||||||||||||||||||||||||||
| Exercise of share-based compensation on restricted shares issued to directors | 12,500 | - | * | - | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Issuance of Incentive Shares and Premium Shares for Bond Group | 648,697 | - | * | 15,231 | - | - | - | 15,231 | - | 15,231 | ||||||||||||||||||||||||||
| Net income for the year | - | - | - | - | 96,527 | - | 96,527 | 2,660 | 99,187 | |||||||||||||||||||||||||||
| Appropriations to statutory reserves | - | - | - | 7,137 | (7,137 | ) | - | - | - | - | ||||||||||||||||||||||||||
| Dividend paid | - | - | - | - | (23,300 | ) | - | (23,300 | ) | - | (23,300 | ) | ||||||||||||||||||||||||
| Other | - | - | - | (177 | ) | - | - | (177 | ) | (177 | ) | |||||||||||||||||||||||||
| Translation adjustments | - | - | - | - | - | (1,428 | ) | (1,428 | ) | 42 | (1,386 | ) | ||||||||||||||||||||||||
| Balance at June 30, 2015 | 58,358,521 | $ | 58 | $ | 192,768 | $ | 30,248 | $ | 318,441 | $ | 37,585 | $ | 579,100 | $ | 6,285 | $ | 585,385 | |||||||||||||||||||
| Share-based compensation | - | - | 3,860 | - | - | - | 3,860 | - | 3,860 | |||||||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of options | 612,000 | 1 | 5,440 | - | - | - | 5,441 | - | 5,441 | |||||||||||||||||||||||||||
| Issuance of Incentive Shares and Premium Shares for Bond Group | 627,578 | 1 | 13,335 | - | - | - | 13,336 | - | 13,336 | |||||||||||||||||||||||||||
| Net income for the year | - | - | - | - | 118,471 | - | 118,471 | 5,033 | 123,504 | |||||||||||||||||||||||||||
| Appropriations to statutory reserves | - | - | - | 6,285 | (6,285 | ) | - | - | - | - | ||||||||||||||||||||||||||
| Translation adjustments | - | - | - | - | - | (46,052 | ) | (46,052 | ) | (2,789 | ) | (48,841 | ) | |||||||||||||||||||||||
| Balance at June 30, 2016 | 59,598,099 | $ | 60 | $ | 215,403 | $ | 36,533 | $ | 430,627 | $ | (8,467 | ) | $ | 674,156 | $ | 8,529 | $ | 682,685 | ||||||||||||||||||
| Share-based compensation | - | - | 464 | - | - | - | 464 | - | 464 | |||||||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of options | 744,000 | - | * | 6,322 | - | - | - | 6,322 | - | 6,322 | ||||||||||||||||||||||||||
| Net income for the year | - | - | - | - | 68,944 | - | 68,944 | 25 | 68,969 | |||||||||||||||||||||||||||
| Appropriations to statutory reserves | - | - | - | 4,993 | (4,993 | ) | - | - | - | - | ||||||||||||||||||||||||||
| Dividend paid | - | - | - | - | (11,975 | ) | - | (11,975 | ) | - | (11,975 | ) | ||||||||||||||||||||||||
| Deconsolidation of a subsidiary | - | - | - | (396 | ) | 396 | - | - | (8,497 | ) | (8,497 | ) | ||||||||||||||||||||||||
| Translation adjustments | - | - | - | - | - | (14,392 | ) | (14,392 | ) | (36 | ) | (14,428 | ) | |||||||||||||||||||||||
| Balance at June 30, 2017 | 60,342,099 | $ | 60 | $ | 222,189 | $ | 41,130 | $ | 482,999 | $ | (22,859 | ) | $ | 723,519 | $ | 21 | $ | 723,540 | ||||||||||||||||||
* The share capital increase for the issuance
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 | |||||||||||||||||||||||||||||
Balance at June 30, 2019 | 60,342,099 | $ | 60 | $ | 223,634 | $ | 48,698 | $ | 708,515 | $ | (35,521 | ) | $ | 945,386 | $ | 1,774 | $ | 947,160 | ||||||||||||||||||
Issuance of ordinary shares | 195,000 | 1 | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
Share-based compensation | — | — | 410 | — | — | — | 410 | — | 410 | |||||||||||||||||||||||||||
Net income for the year | — | — | — | — | 79,396 | — | 79,396 | (70 | ) | 79,326 | ||||||||||||||||||||||||||
Appropriations to statutory reserves | — | — | — | 725 | (725 | ) | — | — | — | — | ||||||||||||||||||||||||||
Dividend paid | — | — | — | — | (12,713 | ) | — | (12,713 | ) | — | (12,713 | ) | ||||||||||||||||||||||||
Capital contribution from subsidiaries’ non-controlling interest shareholders | — | — | — | — | — | — | — | 3,016 | 3,016 | |||||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | (27,996 | ) | (27,996 | ) | (317 | ) | (28,313 | ) | |||||||||||||||||||||||
Balance at June 30, 2020 | 60,537,099 | $ | 61 | $ | 224,043 | $ | 49,423 | $ | 774,473 | $ | (63,517 | ) | $ | 984,483 | $ | 4,403 | $ | 988,886 | ||||||||||||||||||
Issuance of ordinary shares | 830,238 | — | 1 | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||
Share-based compensation | — | — | 9,724 | — | — | — | 9,724 | — | 9,724 | |||||||||||||||||||||||||||
Net income for the year | — | — | — | — | 89,709 | — | 89,709 | (371 | ) | 89,338 | ||||||||||||||||||||||||||
Appropriations to statutory reserves | — | — | — | 15,026 | (15,026 | ) | — | — | — | — | ||||||||||||||||||||||||||
Dividend paid | — | — | — | — | (12,107 | ) | — | (12,107 | ) | — | (12,107 | ) | ||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | 96,331 | 96,331 | 246 | 96,577 | |||||||||||||||||||||||||||
Effect of change in accounting principle - ASC 326 | — | — | — | — | (30,451 | ) | — | (30,451 | ) | — | (30,451 | ) | ||||||||||||||||||||||||
Balance at June 30, 2021 | 61,367,337 | $ | 61 | $ | 233,768 | $ | 64,449 | $ | 806,598 | $ | 32,814 | $ | 1,137,690 | $ | 4,278 | $ | 1,141,968 | |||||||||||||||||||
Issuance of ordinary shares | 595,112 | 1 | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
Share-based compensation | — | — | 9,709 | — | — | — | 9,709 | — | 9,709 | |||||||||||||||||||||||||||
Net income for the year | — | — | — | — | 83,182 | — | 83,182 | (189 | ) | 82,993 | ||||||||||||||||||||||||||
Appropriations to statutory reserves | — | — | — | 12,812 | (12,812 | ) | — | — | — | — | ||||||||||||||||||||||||||
Dividend paid | — | — | — | — | (19,827 | ) | — | (19,827 | ) | — | (19,827 | ) | ||||||||||||||||||||||||
Capital contribution from subsidiaries’ non-controlling interest shareholders | — | — | — | — | — | — | — | 695 | 695 | |||||||||||||||||||||||||||
Deconsolidation of a subsidiary | — | — | — | 2 | — | — | 2 | (3,122 | ) | (3,120 | ) | |||||||||||||||||||||||||
Translation adjustments | — | — | — | — | — | (45,469 | ) | (45,469 | ) | (1,121 | ) | (46,590 | ) | |||||||||||||||||||||||
Balance at June 30, 2022 | 61,962,449 | $ | 62 | $ | 243,476 | $ | 77,263 | $ | 857,141 | $ | (12,655 | ) | $ | 1,165,287 | $ | 541 | $ | 1,165,828 | ||||||||||||||||||
2022
Philippines.
Generally Accepted Accounting Principles (“GAAP”).
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Current assets | $ | 105 | $ | 14,331 | ||||
| Non-current assets | 69 | 239 | ||||||
| Total assets | 174 | 14,570 | ||||||
| Current liabilities | $ | 270 | $ | 14,178 | ||||
| Total liabilities | 270 | 14,178 | ||||||
| Year ended June 30, | ||||||||
| 2016 | 2017 | |||||||
| Revenue | $ | - | $ | 6,914 | ||||
| Cost of revenue | - | 5,753 | ||||||
| Net (loss) profit | (151 | ) | 494 | |||||
| Net cash provided by operating activities | 71 | 8,721 | ||||||
| Net cash used in investing activities | (71 | ) | (216 | ) | ||||
| Net cash provided by financing activities | $ | 55 | $ | - | ||||
that were included in the consolidated financial statements:
June 30, | ||||||||
2021 | 2022 | |||||||
Current assets | $ | 5,588 | $ | 3,391 | ||||
Non-current assets | 37 | 6 | ||||||
Total assets | 5,625 | 3,397 | ||||||
Current liabilities | $ | 3,230 | $ | 1,547 | ||||
Total liabilities | 3,230 | 1,547 | ||||||
Year ended June 30, | ||||||||
2021 | 2022 | |||||||
Net revenue | $ | 46 | $ | 7 | ||||
Cost of revenue (1) | (2,177 | ) | (1,474 | ) | ||||
Net profit | 2,223 | 1,481 | ||||||
| Net cash used in operating activities | (451 | ) | (323 | ) | ||||
(1) | Cost of revenue is negative because of the reversal of warranties provision which was overprovided in previous years. |
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)
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)
earnings.
Time deposits with original maturities over three months
Time deposits with original maturities over three months
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)
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)
government.
The Company has in recent years extended its service offerings as described below.
Revenue from one-off services: the
Revenue from services covering a period of time: theper share data)
Accounts receivable Revenues are presented net of value-added tax collected on behalf of the government.
billing; and (ii) accounts receivable retention amounts which were held by customers from the VIE (Concord and Bond Groups) upon the issuance of the final completion certificate and completion of the defects liability period.
billings and accounts receivable retention
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 | 30 | |||
Machinery | 5 - 10 years | |||
Software | ||||
| 3 - 10 years | ||||
Vehicles | 5 - 10 years | |||
Electronic and other equipment | 3 - 10 years |
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)
| Category | Estimated useful life | |||
Patents and copyrights | ||||
Hollysys Intelligent.
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
The carrying amount
There are uncertainties surroundingforecasting 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 delaysand the underlying assumptions used in the timing of when thosediscounted cash flows are expectedflow approach to be realized. Further,determine 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 the Bond Group exceededreporting unit. In particular, the fair value estimate was sensitive to significant assumptions, such as forecasted revenue growth rates, gross profit margins and discount rates, which were determined using the Weighted Average Cost of Capital and Capital Asset Pricing Model approach and the selection of comparable companies operating in similar businesses. These significant assumptions were forward looking and could be materially affected by future market or global economic conditions. As a result, the Company recorded a full impairment
reporting unit.
insignificant for the periods presented.
Concord Electrical Contracting Ltd., a Qatar company (“CECL”).
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)
securities
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
There was no impairment loss on The Company will discontinue applying the equity method if an investment (plus additional financial support provided to the investee, if any) has been reduced to zero. When the Company has other investments in cost orits equity-method investee and is not required to advance additional funds to that investee, the Company would continue to report its share of equity method losses in its consolidated statement of comprehensive income after its equity-method investment has been reduced to zero, to the extent of and as an adjustment to the adjusted basis of its other investments in the investee. Such losses are first applied to those investments of a lower liquidation preference before being further applied to the investments of a higher liquidation preference.
per share data)
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 accounts for forfeitures as they occur.
| Level 1 | - | Quoted prices in active markets for identical assets or liabilities. | ||
| Level 2 | - | 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. | ||
| Level 3 | - | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. | ||
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.
The Company does not require collateral or other security to support instruments subject to credit risk.
Recent
In August 2015,for income taxes. This standard removes certain exceptions related to the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-14, which defersapproach for intra period tax allocation, the effective datemethodology for calculating income taxes in an interim period and the recognition of ASU 2014-09Revenue from Contracts with Customers (Topic 606) (" ASU 2014-09") by one year and allows entities the option to early adopt the new revenue standard asdeferred tax liabilities for outside basis differences. It also amends other aspects 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 transferhelp simplify and promote consistent application 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 beGAAP. The guidance was effective for usinterim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted this guidance on July 1, 2018. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with2021, and 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,did not have material impact to the Company’s consolidated financial statements 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.
related disclosures.
June 30, | ||||||||
2021 | 2022 | |||||||
Raw materials | $ | 23,469 | $ | 53,304 | ||||
Work in progress | 12,165 | 16,026 | ||||||
Finished goods | 12,278 | 21,913 | ||||||
| $ | 47,912 | $ | 91,243 | |||||
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.
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.
Components of inventories are as follows:
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Raw materials | $ | 12,975 | $ | 15,781 | ||||
| Work in progress | 12,770 | 19,525 | ||||||
| Finished goods | 10,656 | 10,354 | ||||||
| $ | 36,401 | $ | 45,660 | |||||
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Accounts receivable | $ | 279,650 | $ | 294,641 | ||||
| Allowance for doubtful accounts | (42,471 | ) | (48,089 | ) | ||||
| $ | 237,179 | $ | 246,552 | |||||
June 30, | ||||||||
2021 | 2022 | |||||||
Notes receivable | $ | 54,830 | $ | 68,953 | ||||
Accounts receivable | 342,862 | 326,413 | ||||||
Allowance for credit losses | (66,839 | ) | (77,603 | ) | ||||
| $ | 330,853 | $ | 317,763 | |||||
| June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Balance at the beginning of year | $ | 25,691 | $ | 34,259 | $ | 42,471 | ||||||
| Additions | 13,907 | 12,000 | 7,400 | |||||||||
Deconsolidation of a subsidiary | - | - | (160 | ) | ||||||||
| Written off | (5,499 | ) | (714 | ) | (784 | ) | ||||||
| Translation adjustment | 160 | (3,074 | ) | (838 | ) | |||||||
| Balance at the end of year | $ | 34,259 | $ | 42,471 | $ | 48,089 | ||||||
June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Balance at the beginning of year | $ | 47,162 | $ | 41,618 | $ | 66,839 | ||||||
Adoption of ASU 2016-13 | — | 16,284 | — | |||||||||
Additions | 178 | 7,749 | 15,972 | |||||||||
Written off | (4,399 | ) | (3,965 | ) | (3,852 | ) | ||||||
Translation adjustment | (1,323 | ) | 5,153 | (1,356 | ) | |||||||
Balance at the end of year | $ | 41,618 | $ | 66,839 | $ | 77,603 | ||||||
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Contracts costs incurred plus estimated earnings | $ | 887,037 | $ | 810,327 | ||||
| Less: Progress billings | (690,726 | ) | (639,571 | ) | ||||
| Cost and estimated earnings in excess of billings | 196,311 | 170,756 | ||||||
| Less: Allowance for doubtful accounts | (6,383 | ) | (8,660 | ) | ||||
| $ | 189,928 | $ | 162,096 | |||||
June 30, | ||||||||
2021 | 2022 | |||||||
Contract costs incurred plus estimated earnings | $ | 988,496 | $ | 1,072,872 | ||||
Less: Progress billings | (779,955 | ) | (831,817 | ) | ||||
Cost and estimated earnings in excess of billings | 208,541 | 241,055 | ||||||
Less: Allowance for credit losses | (11,835 | ) | (12,178 | ) | ||||
| $ | 196,706 | $ | 228,877 | |||||
| June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Balance at the beginning of year | $ | 5,839 | $ | 8,850 | $ | 6,383 | ||||||
| Additions | 3,085 | (1,823 | ) | 2,404 | ||||||||
| Written off | (122 | ) | - | - | ||||||||
| Translation adjustment | 48 | (644 | ) | (127 | ) | |||||||
| Balance at the end of the year | $ | 8,850 | $ | 6,383 | $ | 8,660 | ||||||
June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Balance at the beginning of year | $ | 6,981 | $ | 6,150 | $ | 11,835 | ||||||
Adoption of ASU 2016-13 | — | 3,111 | — | |||||||||
Additions (reversals) | (651 | ) | 1,758 | 209 | ||||||||
Translation adjustments | (180 | ) | 816 | 134 | ||||||||
Balance at the end of year | $ | 6,150 | $ | 11,835 | $ | 12,178 | ||||||
Year ended June 30, 2022 | ||||||||||||
PRC | Non-PRC | Total | ||||||||||
Integrated solutions contracts revenue | $ | 483,555 | 90,012 | 573,567 | ||||||||
Product sales | 37,464 | 1,022 | 38,486 | |||||||||
Maintenance service revenue | 89,742 | 1,525 | 91,267 | |||||||||
Extended warranty service revenue | 4,142 | — | 4,142 | |||||||||
Total | $ | 614,903 | 92,559 | 707,462 | ||||||||
June 30, 2021 | June 30, 2022 | |||||||
Contract assets, current | $ | 202,462 | 235,712 | |||||
Contract assets, non-current | 5,627 | 9,582 | ||||||
Contract liabilities | 185,596 | 208,636 | ||||||
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Buildings | $ | 71,037 | $ | 70,029 | ||||
| Machinery | 8,148 | 10,892 | ||||||
| Software | 7,377 | 10,004 | ||||||
| Vehicles | 3,886 | 4,378 | ||||||
| Electronic and other equipment | 23,704 | 29,321 | ||||||
| Construction in progress | 5,753 | 4,113 | ||||||
| $ | 119,905 | $ | 128,737 | |||||
| Less: Accumulated depreciation and impairment | (39,967 | ) | (48,208 | ) | ||||
| $ | 79,938 | $ | 80,529 | |||||
June 30, | ||||||||
2021 | 2022 | |||||||
Buildings | $ | 73,617 | $ | 70,944 | ||||
Machinery | 15,110 | 15,619 | ||||||
Software | 16,294 | 20,293 | ||||||
Vehicles | 4,860 | 4,717 | ||||||
Electronic and other equipment | 41,154 | 45,512 | ||||||
Construction in progress | 22,434 | 27,213 | ||||||
| $ | 173,469 | $ | 184,298 | |||||
Less: Accumulated depreciation and impairment | (79,423 | ) | (86,049 | ) | ||||
| $ | 94,046 | $ | 98,249 | |||||
Buildings with a total carrying value of $3,976 and $3,209$2,687 were pledged to secure lines of credits from various banks in the PRCSingapore and Malaysia as of June 30, 20162021 and 2017, respectively.
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 | |||||||
| Buildings leased to others - at original cost | $ | 10,086 | $ | 13,925 | ||||
| Less: accumulated depreciation | (3,725 | ) | (4,261 | ) | ||||
| Buildings leased to others - net | $ | 6,361 | $ | 9,664 | ||||
June 30, | ||||||||
2021 | 2022 | |||||||
Buildings leased to others - at original cost | $ | 23,491 | $ | 22,664 | ||||
Less: Accumulated depreciation | (7,950 | ) | (8,044 | ) | ||||
Buildings leased to others - net | $ | 15,541 | $ | 14,620 | ||||
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Prepaid land leases | $ | 12,641 | $ | 12,335 | ||||
| Less: Accumulated amortization | (1,868 | ) | (2,129 | ) | ||||
| $ | 10,773 | $ | 10,206 | |||||
June 30, | ||||||||
2021 | 2022 | |||||||
Prepaid land leases | $ | 20,200 | $ | 16,146 | ||||
Less: Accumulated amortization | (3,632 | ) | (3,699 | ) | ||||
| $ | 16,568 | $ | 12,447 | |||||
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).
| Year ending June 30, | ||||
| 2018 | $ | 263 | ||
| 2019 | 263 | |||
| 2020 | 263 | |||
| 2021 | 263 | |||
| 2022 | 263 | |||
| $ | 1,315 | |||
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)
Year ending June 30, | ||||
| 202 3 | $ | 349 | ||
| 202 4 | 349 | |||
| 202 5 | 349 | |||
| 202 6 | 349 | |||
| 202 7 | 349 | |||
| June 30, | ||||||||||||||||||||||||
| 2016 | 2017 | |||||||||||||||||||||||
| Gross carrying value | Accumulated amortization | Net carrying value | Gross carrying value | Accumulated amortization | Net carrying value | |||||||||||||||||||
| Customer relationships | $ | 3,151 | (2,308 | ) | 843 | $ | 3,086 | (2,811 | ) | 275 | ||||||||||||||
| Order backlog | 11,848 | (11,835 | ) | 13 | 11,605 | (11,605 | ) | - | ||||||||||||||||
| Patents and copyrights | - | - | - | 1,695 | (42 | ) | 1,653 | |||||||||||||||||
| $ | 14,999 | (14,143 | ) | 856 | $ | 16,386 | (14,458 | ) | 1,928 | |||||||||||||||
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.
June 30, | ||||||||||||||||||||||||
2021 | 2022 | |||||||||||||||||||||||
Gross carrying value | Accumulated amortization | Net carrying value | Gross carrying value | Accumulated amortization | Net carrying value | |||||||||||||||||||
Patents and copyrights | $ | 2,867 | (1,468 | ) | 1,399 | $ | 14,204 | (3,462 | ) | 10,742 | ||||||||||||||
shares and per share data)
| Year ending June 30, | ||||
| 2018 | $ | 500 | ||
| 2019 | 225 | |||
| 2020 | 225 | |||
| 2021 | 225 | |||
| 2022 | 215 | |||
| $ | 1,390 | |||
Year ending June 30, | ||||
2023 | $ | 1,598 | ||
2024 | 1,435 | |||
2025 | 1,259 | |||
2026 | 1,123 | |||
| 2027 | 1,123 | |||
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Balance at beginning of year | $ | 59,918 | $ | 59,847 | ||||
| Goodwill impairment charge | - | (11,211 | ) | |||||
| Translation adjustment | (71 | ) | (1,310 | ) | ||||
| Balance at the end of year | $ | 59,847 | $ | 47,326 | ||||
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,
Balance as of July 1, 2020 | $ | 1,460 | ||
Translation adjustment | 138 | |||
Balance as of June 30, 2021 | $ | 1,598 | ||
Goodwill upon acquisition | 19,697 | |||
Translation adjustment | (756 | ) | ||
Balance as of June 30, 2022 | $ | 20,539 | ||
noted.
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 timingtheir carrying amounts as of when those cash flows are expected to be realized. Further, the timingJune 30, 2022. Therefore, no further impairment testing for Hollysys Industrial Software and Shandong Lukang was required.
The following long-term investments were accounted for under either the equity method or the cost method as indicated:
| June 30, 2016 | Interest held | Long-term investment, at cost, less impairment | Share of undistributed profits | Advance to investee company | Total | |||||||||||||||
| Equity method | ||||||||||||||||||||
| China Techenergy Co., Ltd. | 40.00 | % | $ | 9,030 | 1,077 | 44 | 10,151 | |||||||||||||
| Beijing Hollysys Electric Motor Co., Ltd. | 40.00 | % | 797 | 3,961 | - | 4,758 | ||||||||||||||
| Beijing IPE Biotechnology Co., Ltd. | 22.02 | % | 1,484 | 2,213 | - | 3,697 | ||||||||||||||
Southcon DevelopmentSdn Bhd. | 30.00 | % | 224 | (116 | ) | - | 108 | |||||||||||||
| Beijing Hollysys Machine Automation Co., Ltd. | 30.00 | % | 452 | (452 | ) | - | - | |||||||||||||
| $ | 11,987 | 6,683 | 44 | 18,714 | ||||||||||||||||
| Cost method | ||||||||||||||||||||
| Shenhua Hollysys Information Technology Co., Ltd. | 20.00 | % | $ | 2,387 | - | - | 2,387 | |||||||||||||
| Heilongjiang Ruixing Technology Co., Ltd. | 6.00 | % | 1,631 | - | - | 1,631 | ||||||||||||||
Zhejiang Sanxin Technology Co., Ltd. | 6.00 | % | 90 | - | - | 90 | ||||||||||||||
| Zhongjijing Investment Consulting Co., Ltd. | 5.00 | % | - | - | - | - | ||||||||||||||
| $ | 4,108 | - | - | 4,108 | ||||||||||||||||
| June 30, 2017 | Interest held | Long-term investment, at cost, less impairment | Share of undistributed profits | Advance to investee company | Total | |||||||||||||||
| Equity method | ||||||||||||||||||||
| Beijing Hollycon Medicine & Technology. Co., Ltd. | 30.00 | % | $ | 22,737 | 1,773 | - | 24,510 | |||||||||||||
| China Techenergy Co., Ltd. | 40.00 | % | 8,847 | 2,503 | 43 | 11,393 | ||||||||||||||
| Beijing Hollysys Electric Motor Co., Ltd. | 40.00 | % | 781 | 4,262 | - | 5,043 | ||||||||||||||
| Beijing IPE Biotechnology Co., Ltd. | 22.02 | % | 1,454 | 2,241 | - | 3,695 | ||||||||||||||
| Shenzhen HollySys Intelligent Technologies Co., Ltd. | 60.00 | % | 2,654 | (159 | ) | - | 2,495 | |||||||||||||
| Southcon Development Sdn Bhd. | 30.00 | % | 210 | (104 | ) | - | 106 | |||||||||||||
| Beijing Hollysys Machine Automation Co., Ltd. | 30.00 | % | 442 | (442 | ) | - | - | |||||||||||||
| $ | 37,125 | 10,074 | 43 | 47,242 | ||||||||||||||||
| Cost method | ||||||||||||||||||||
| Shenhua Hollysys Information Technology Co., Ltd. | 20.00 | % | $ | 2,338 | - | - | 2,338 | |||||||||||||
| Heilongjiang Ruixing Technology Co., Ltd. | 6.00 | % | 1,598 | - | - | 1,598 | ||||||||||||||
| Zhejiang Sanxin Technology Co., Ltd. | 6.00 | % | 88 | - | - | 88 | ||||||||||||||
| Zhongjijing Investment Consulting Co., Ltd. | 5.00 | % | - | - | - | - | ||||||||||||||
| $ | 4,024 | - | - | 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
June 30, 2021 | Interest held | Long-term investment, at cost, less impairment | Share of undistributed profits | Disposal | Advance to investee company | Total | ||||||||||||||||||
Equity method | ||||||||||||||||||||||||
Beijing Hollycon Medicine & Technology Co., Ltd. | 30.00 | % | $ | 23,874 | 5,741 | — | — | 29,615 | ||||||||||||||||
Beijing Hollysys Electric Motor Co., Ltd. | 40.00 | % | 820 | 6,677 | — | — | 7,497 | |||||||||||||||||
Suqian Runhe Emerging Industry Investment Center (limited partnership) | 29.97 | % | 9,754 | (163 | ) | — | — | 9,591 | ||||||||||||||||
China Techenergy Co., Ltd. | 40.00 | % | — | 11,811 | — | — | 11,811 | |||||||||||||||||
Ningbo Hollysys Intelligent Technologies Co., Ltd. | 40.00 | % | 4,369 | (4,369 | ) | — | — | — | ||||||||||||||||
Hunan LingXiang Maglev Technology Co., Ltd. | 17.67 | % | 1,548 | (141 | ) | — | — | 1,407 | ||||||||||||||||
Beijing AIRmaker Technology Co., Ltd. | 20.00 | % | 155 | (18 | ) | — | — | 137 | ||||||||||||||||
Southcon Development Sdn Bhd. | 30.00 | % | 219 | (111 | ) | — | — | 108 | ||||||||||||||||
Beijing Hollysys Machine Automation Co., Ltd. | 30.00 | % | 464 | (464 | ) | — | — | — | ||||||||||||||||
Beijing Jing Yi Intelligent Technologies Innovation Center Co., Ltd. | 46.00 | % | — | — | — | — | — | |||||||||||||||||
| 41,203 | 18,963 | — | — | 60,166 | ||||||||||||||||||||
June 30, 2022 | Interest held | Long-term investment, at cost, less impairment | Share of undistributed profits | Disposal | Advance to investee company | Total | ||||||||||||||||||
Equity method | ||||||||||||||||||||||||
Beijing Hollycon Medicine & Technology Co., Ltd. | 30.00 | % | $ | 8,609 | 5,544 | — | — | 14,153 | ||||||||||||||||
Beijing Hollysys Electric Motor Co., Ltd. | 40.00 | % | 791 | 6,893 | — | — | 7,684 | |||||||||||||||||
Suqian Runhe Emerging Industry Investment Center (limited partnership) | 29.97 | % | 9,410 | (168 | ) | — | — | 9,242 | ||||||||||||||||
China Techenergy Co., Ltd. | 40.00 | % | — | 13,751 | — | — | 13,751 | |||||||||||||||||
Ningbo Hollysys Intelligent Technologies Co., Ltd. | 40.00 | % | 4,215 | (4,215 | ) | — | — | — | ||||||||||||||||
Hunan LingXiang Maglev Technology Co., Ltd. | 17.67 | % | 1,494 | (136 | ) | (1,358 | ) | — | — | |||||||||||||||
Beijing AIRmaker Technology Co., Ltd. | 20.00 | % | 149 | (18 | ) | — | — | 131 | ||||||||||||||||
Southcon Development Sdn Bhd. | 30.00 | % | 211 | (111 | ) | — | — | 100 | ||||||||||||||||
Beijing Hollysys Machine Automation Co., Ltd. | 30.00 | % | 448 | (448 | ) | — | — | — | ||||||||||||||||
Beijing Jing Yi Intelligent Technologies Innovation Center Co., Ltd. | 46.00 | % | — | — | — | — | — | |||||||||||||||||
Beijing Hollysys Digital Technology Co.,Ltd. | 25.00 | % | 1,437 | (1,036 | ) | — | — | 401 | ||||||||||||||||
Shandong MassDatas Development Co., Ltd. | 20.00 | % | 1,195 | (76 | ) | — | — | 1,119 | ||||||||||||||||
| 27,959 | 19,980 | (1,358 | ) | — | 46,581 | |||||||||||||||||||
Shenzhen HollySys Intelligent Technologies Co., Ltd. (“Shenzhen HollySys”) was set up in October 2016. The Company holds a 60% equity interest
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 InformationHunan LingXiang Maglev Technology Co., Ltd. (“Shenhua Information”Hunan LingXiang”), but uses
1) Only one outadopting ASC 321. As 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 that2021 and 2022, the recoverable amountcarrying amounts of investments in equity securities without readily determinable fair values for which the investmentmeasurement alternative was elected were $2,622 and $1,693, respectively, after deductions of $464 and $1,195 of accumulated impairment. There were no unrealized gains (upward adjustments), unrealized losses (downward adjustments and impairment) or net unrealized gains or losses recognized for such equity securities during the years ended June 30, 2021 and 2022. Net realized gains or loss on equity securities sold
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Beginning balance | $ | 10,387 | $ | 10,360 | ||||
Deconsolidation of a subsidiary | - | (227 | ) | |||||
| Expense accrued | 3,876 | 1,547 | ||||||
| Expense incurred | (3,075 | ) | (3,836 | ) | ||||
| Translation adjustment | (828 | ) | (212 | ) | ||||
| $ | 10,360 | $ | 7,632 | |||||
| Less: current portion of warranty liabilities | (6,782 | ) | (5,386 | ) | ||||
| Long-term warranty liabilities | $ | 3,578 | $ | 2,246 | ||||
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, | ||||||||
2021 | 2022 | |||||||
Beginning balance | $ | 10,064 | $ | 9,551 | ||||
Consolidation of subsidiary | — | 145 | ||||||
Expense accrued | 4,431 | 2,595 | ||||||
Expense incurred | (5,639 | ) | (7,064 | ) | ||||
Translation adjustment | 695 | (225 | ) | |||||
| $ | 9,551 | $ | 5,002 | |||||
Less: Current portion of warranty liabilities | (5,902 | ) | (3,280 | ) | ||||
Long-term warranty liabilities | $ | 3,649 | $ | 1,722 | ||||
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.
June 30, | ||||||||||
2021 | 2022 | |||||||||
MYR denominated loans | (i) | 842 | 596 | |||||||
SGD denominated loans | (ii) | 164 | 113 | |||||||
USD denominated loan | (iii) | 15,000 | 14,935 | |||||||
| $ | 16,006 | $ | 15,644 | |||||||
Less: Current portion | (15,308 | ) | (15,210 | ) | ||||||
| $ | 698 | $ | 434 | |||||||
| June 30, | ||||||||||
| 2016 | 2017 | |||||||||
| USD denominated loan | (i) | 4,770 | - | |||||||
| MYR denominated loan | (ii) | 830 | 782 | |||||||
| SGD denominated loan | (iii) | 1,939 | 187 | |||||||
| Convertible Bond | (iv) | 19,802 | 20,032 | |||||||
| $ | 27,341 | $ | 21,001 | |||||||
| Less: current portion | (6,833 | ) | (420 | ) | ||||||
| $ | 20,508 | $ | 20,581 | |||||||
| i. |
The MYR denominated loans are repayable in 3 to 75 installments with the last installment due in For the year ended June 30, The borrowings are secured by the mortgages of buildings |
| ii. |
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 SGD denominated loans are repayable in 10 to 31 installments with the last installment due on March |
| iii. | The USD denominated loan was drawn on April 24, 2020 and is repayable on April 22, 2022.Prior to the repayment dated April 22, 2022, the Company started negotiation with the bank for an extension was granted in August 2022. The loan contract was renewed and the loan term was extended to April 2024. For the year ended June 30, 2022, the effective interest rate was |
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.
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, 20172022 are as follows:
| Year ending June 30, | ||||
| 2018 | $ | 420 | ||
| 2019 | 215 | |||
| 2020 | 20,955 | |||
| 2021 | 90 | |||
| 2022 and onwards | 121 | |||
| $ | 21,801 | |||
Year ending June 30, | ||||
2023 | $ | 15,210 | ||
2024 | 159 | |||
2025 | 107 | |||
2026 | 62 | |||
2027 onwards | 106 | |||
$ | 15,644 | |||
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)
AssetsThere were no assets and liabilities measured at fair value on a recurring basis as of June 30, 2016,2021 and 2017 are stated below:
| June 30, 2016 | ||||||||||||||||
| Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative financial liability (i) | $ | - | $ | - | $ | 398 | $ | 398 | ||||||||
| Total liabilities measured at fair value on a recurring basis | $ | - | $ | - | $ | 398 | $ | 398 | ||||||||
| June 30, 2017 | ||||||||||||||||
| Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative financial liability (i) | $ | - | $ | - | $ | 487 | $ | 487 | ||||||||
| Total liabilities measured at fair value on a recurring basis | $ | - | $ | - | $ | 487 | $ | 487 | ||||||||
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)
| Fair value measurements as of June 30, 2017 using significant unobservable inputs (Level 3) | ||||
| Non-conversion compensation feature related to the Convertible Bond | ||||
| Balance as at June 30, 2016 | $ | 398 | ||
| Change in fair-value (included within other expenses, net) | 89 | |||
| Balance as of June 30, 2017 | $ | 487 | ||
Assets measured at fair value on a nonrecurring basis as of June 30, 2017 are stated below:
| June 30, 2017 | ||||||||||||||||
| Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Retained non-controlling interest in a former subsidiary(i) | $ | - | $ | - | $ | 22,737 | $ | 22,737 | ||||||||
| Goodwill(ii) | - | - | 11,488 | 11,488 | ||||||||||||
| Total assets measured at fair value on a non-recurring basis | $ | - | $ | - | $ | 34,225 | $ | 34,225 | ||||||||
On May 30, 2013, October 29, 2014,
of the Company then issued and outstanding, in each case, without the approval of the Board of Directors, each Right will entitle the holders, other than the acquiring person or group, to buy, at a purchase price of $160, one share of the Class A Preferred Shares of the Company, or, in lieu of a Class A Preferred Share, ordinary shares having a market value at that time of twice the Right’s exercise price. The Board of Directors is entitled to redeem the Rights at $0.001 per Right at any time before the Rights are exercisable.
On September 26, 2016, the Company declared a regular annual cash dividend of $0.20 per share to the holders of the Company’s ordinary shares. The record date was October 26, 2016,22, 2020, and the dividend was paid on November 11, 2016.
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.
Performance
Performance share options
The Company granted 1,476,000share-based compensation awards totaling 90,000 and 478,500, respectively, share options to certain employees under the termspurchase ordinary shares. The exercise price of these options is $11.85 per share.
Share Options | Number of shares | Weighted average exercise price | Weighted average remaining contractual life (years) | Aggregate intrinsic value | ||||||||||||
Outstanding, vested and exercisable at June 30, 2020 | — | — | — | — | ||||||||||||
Granted on November 16, 2020 | 90,000 | 11.85 | 10 | — | ||||||||||||
Granted on March 17, 2021 | 478,500 | 11.85 | 9.95 | 1,165 | ||||||||||||
Outstanding, vested and exercisable at June 30, 2021 | 568,500 | 11.85 | 9.66 | 1,734 | ||||||||||||
| Forfeited | (12,250 | ) | — | — | — | |||||||||||
Outstanding, vested and exercisable at June 30, 2022 | 556,250 | 11.85 | 8.66 | 1,641 | ||||||||||||
Binomial model by applying the assumptions below:
Options Granted on November 16, 2020 | Options Granted on March 17, 2021 | |||||||
Risk-free interest rate (i) | 0.91 | % | 1.62 | % | ||||
Expected dividend yield (ii) | 2.21 | % | 1.83 | % | ||||
Expected life (years) (iii) | 10 Years | 9.66 Years | ||||||
Expected volatility (iv) | 46.98 | % | 47.35 | % | ||||
(i) | Risk-free interest rate is based on the yields of United States Treasury securities with maturities similar to the expected life of the share options in effect at the time of grant. |
(ii) | Expected dividend yield is assumed to be a $0.15 dividend payout. |
(iii) | Expected life of share options is based on management’s estimate on timing of exercise of share options. |
(iv) | Expected volatility is assumed based on the historical volatility of the Company and the Company’s comparable companies in the period equal to the expected life of each grant. |
Performance options granted in 2015 (“2015 Performance Options”)
On May 14, 2015, certain employees of For 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%.
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 | Number of vested options | Months after the grant date | ||||||||||||
| 24 months | 36 months | 48 months | ||||||||||||
| Annual growth rate over 15% but below 20% | 1,160,000 | 348,000 | 348,000 | 464,000 | ||||||||||
| CAGR equals or over 20% but below 25% | Additional 290,000 | - | - | 290,000 | ||||||||||
| CAGR equals 25% or above | Additional 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, 20152021, and 2016, however,2022, 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 | Number of shares | Weighted average exercise price | Weighted average remaining contractual life (years) | Aggregate intrinsic value | ||||||||||||
| Outstanding as at June 30, 2016 | 1,740,000 | 22.25 | 3.87 | - | ||||||||||||
| Forfeited | 1,344,000 | 22.05 | ||||||||||||||
| Outstanding as at June 30, 2017 | 396,000 | 22.05 | 2.87 | - | ||||||||||||
| Vested and expected to vest at June 30, 2017 | 396,000 | 22.05 | 2.87 | - | ||||||||||||
| Exercisable at June 30, 2017 | 198,000 | 22.05 | 2.87 | - | ||||||||||||
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$2,147 and $566 related to 2015 performancethe share options is expected to be recognized over a weighted averageweighted-average vesting period of 0.871.43 and 0.93 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:
During the year ended June 30, 2014,
During the year ended June 30, 2017,
| Number of restricted shares | Weighted average grant-date fair value | |||||||
| Un-vested at June 30, 2016 | 14,375 | 23.95 | ||||||
| Granted | 67,500 | 20.09 | ||||||
| Vested | 18,750 | 23.05 | ||||||
| Un-vested at June 30, 2017 | 63,125 | 20.09 | ||||||
Number of restricted shares | Weighted average grant-date fair value | |||||||
Un-vested at June 30,2020 | 63,125 | 16.06 | ||||||
Granted | 1,434,500 | 11.85 | ||||||
Vested | (177,288 | ) | 13.35 | |||||
Un-vested at June 30,2021 | 1,320,337 | 11.85 | ||||||
| Forfeited | (28,586 | ) | 11.85 | |||||
Vested | (588,710 | ) | 11.85 | |||||
Un-vested at June 30,2022 | 703,041 | 11.85 | ||||||
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)
2022.
2022.
2022.
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
following:
2022.
status.
Further, Hangzhou Hollysys was qualifiedthousands except for the KSE status in 2017number of shares 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.
per share data)
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| PRC | $ | 134,657 | $ | 142,900 | $ | 105,331 | ||||||
| Non-PRC | (9,430 | ) | (5,158 | ) | (22,976 | ) | ||||||
| $ | 125,227 | $ | 137,742 | $ | 83,355 | |||||||
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
PRC | $ | 140,539 | $ | 137,520 | $ | 116,210 | ||||||
Non-PRC | (43,042 | ) | (27,628 | ) | (16,583 | ) | ||||||
| $ | 97,497 | $ | 109,892 | $ | 99,627 | |||||||
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Current income tax expense (benefit) | ||||||||||||
| PRC | 16,074 | 10,590 | 12,911 | |||||||||
| Non-PRC | 5,120 | 4,110 | (658 | ) | ||||||||
| $ | 21,194 | $ | 14,700 | $ | 12,253 | |||||||
| Deferred income tax expense (benefit) | ||||||||||||
| PRC | 5,834 | (196 | ) | 2,616 | ||||||||
| Non-PRC | (988 | ) | (266 | ) | (483 | ) | ||||||
| $ | 4,846 | (462 | ) | 2,133 | ||||||||
| $ | 26,040 | $ | 14,238 | $ | 14,386 | |||||||
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)
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Current income tax expense | ||||||||||||
PRC | 10,369 | 25,634 | 11,839 | |||||||||
Non-PRC | 1,388 | 758 | 616 | |||||||||
| $ | 11,757 | $ | 26,392 | $ | 12,455 | |||||||
| Deferred income tax expense (benefit) | ||||||||||||
PRC | 5,577 | (7,971 | ) | 7,150 | ||||||||
Non-PRC | 837 | 2,133 | (2,971 | ) | ||||||||
| $ | 6,414 | (5,838 | ) | 4,179 | ||||||||
| $ | 18,171 | $ | 20,554 | $ | 16,634 | |||||||
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Income before income taxes | $ | 125,227 | $ | 137,742 | $ | 83,355 | ||||||
| Expected income tax expense at statutory tax rate in the PRC | 31,307 | 34,436 | 20,838 | |||||||||
| Effect of different tax rates in various jurisdictions | 1,286 | 2,109 | 2,627 | |||||||||
| Effect of preferential tax treatment | (12,453 | ) | (12,296 | ) | (10,650 | ) | ||||||
| Effect of non-taxable income | (6,770 | ) | (4,985 | ) | - | |||||||
| Effect of additional deductible research and development expenses | (2,772 | ) | (4,716 | ) | (2,385 | ) | ||||||
| Effect of non-deductible expenses | 8,402 | 5,569 | 4,608 | |||||||||
| Effect of change in tax rate | (4,191 | ) | (6,613 | ) | (4,835 | ) | ||||||
| Change in valuation allowance | 1,475 | 540 | 3,964 | |||||||||
| Tax rate differential on deferred tax items | 3,139 | (587 | ) | 2,056 | ||||||||
| Withholding tax on dividend paid by subsidiaries | 6,028 | 1,252 | (2,799 | ) | ||||||||
| Others | 589 | (471 | ) | 962 | ||||||||
| Total | $ | 26,040 | $ | 14,238 | $ | 14,386 | ||||||
Had the above preferential tax treatment not been available, the tax charge would have been increased by $12,453, $12,296
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Income before income taxes | $ | 97,497 | $ | 109,892 | $ | 99,627 | ||||||
Expected income tax expense at statutory tax rate in the PRC | 24,374 | 33,221 | 24,998 | |||||||||
Effect of different tax rates in various jurisdictions | 3,997 | 4,665 | 3,541 | |||||||||
Effect of preferential tax treatment | (11,797 | ) | (14,334 | ) | (12,707 | ) | ||||||
Effect of non-taxable income | (250 | ) | (4,770 | ) | (74 | ) | ||||||
Effect of additional deductible research and development expenses | (7,241 | ) | (9,838 | ) | (9,398 | ) | ||||||
Effect of non-deductible expenses | 10,661 | 6,644 | 4,020 | |||||||||
| (Over) under provision of income tax in previous years | (6,118 | ) | 2,102 | 1,419 | ||||||||
Change in valuation allowance | 3,746 | 1,718 | 2,124 | |||||||||
Withholding tax on dividends paid by subsidiaries | 799 | — | 3,692 | |||||||||
Others | — | 1,146 | (981 | ) | ||||||||
Total | $ | 18,171 | $ | 20,554 | $ | 16,634 | ||||||
data)
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 | $ | 9,838 | $ | 9,172 | ||||
| Inventory provision | 205 | 179 | ||||||
| Provision for contract loss | 917 | 694 | ||||||
| Long-term assets | 13 | 13 | ||||||
| Deferred revenue | 3,522 | 3,220 | ||||||
| Deferred subsidies | 1,020 | 1,654 | ||||||
| Warranty liabilities | 1,322 | 829 | ||||||
| Recognition of intangible assets | 57 | (2 | ) | |||||
| Accrued payroll | 960 | 998 | ||||||
| Net operating loss carry forward | 6,361 | 9,801 | ||||||
| Valuation allowance | (6,307 | ) | (10,160 | ) | ||||
| Total deferred tax assets, current | $ | 17,908 | $ | 16,398 | ||||
| Deferred tax liabilities, current | ||||||||
| Costs and estimated earnings in excess of billings | $ | (16,068 | ) | $ | (10,071 | ) | ||
| Recognition of intangible assets | (1,060 | ) | - | |||||
| PRC dividend withholding tax | (3,010 | ) | (2,949 | ) | ||||
| Others | (24 | ) | 2 | |||||
| Total deferred tax liabilities, current | $ | (20,162 | ) | $ | (13,018 | ) | ||
| Net deferred tax assets, current | $ | 6,659 | $ | 7,730 | ||||
| Net deferred tax liabilities, current | $ | (8,913 | ) | $ | (4,350 | ) | ||
| Deferred tax assets, non-current | ||||||||
| Long-term assets | $ | 699 | $ | 112 | ||||
| Deferred subsidies | 2,642 | 333 | ||||||
| Net operating loss carryforward | - | 1,573 | ||||||
| Warranty liabilities | 874 | 332 | ||||||
Others | (16 | ) | 192 | |||||
| Total deferred tax assets, non-current | $ | 4,199 | $ | 2,542 | ||||
| Deferred tax liabilities, non-current | ||||||||
| Share of net gains of equity investees | $ | (1,733 | ) | $ | (2,520 | ) | ||
| Property, plant and equipment | - | (38 | ) | |||||
| Intangible assets and other non-current assets | (330 | ) | (5,552 | ) | ||||
| Total deferred tax liabilities, non-current | $ | (2,063 | ) | $ | (8,110 | ) | ||
| Net deferred tax assets-non-current | $ | 2,195 | $ | 1,121 | ||||
| Net deferred tax liabilities-non-current | $ | (59 | ) | $ | (6,689 | ) | ||
June 30, | ||||||||
2021 | 2022 | |||||||
Deferred tax assets | ||||||||
Allowance for doubtful accounts | $ | 12,480 | $ | 12,932 | ||||
Deferred subsidies | 529 | 845 | ||||||
Warranty liabilities | 911 | 773 | ||||||
Inventory provision | 199 | 555 | ||||||
Long-term assets | 622 | 591 | ||||||
Deferred revenue | 105 | 373 | ||||||
Provision for loss contracts | 64 | 1,699 | ||||||
Net operating loss carry forward | 17,290 | 20,351 | ||||||
Valuation allowance | (17,424 | ) | (19,554 | ) | ||||
Others | 214 | — | ||||||
Total deferred tax assets | $ | 14,990 | $ | 18,565 | ||||
Deferred tax liabilities | ||||||||
Property, plant and equipment | $ | (678 | ) | $ | (645 | ) | ||
Costs and estimated earnings in excess of billings | (1,159 | ) | (10,079 | ) | ||||
Share of net losses of equity investees | (1,352 | ) | (1,798 | ) | ||||
PRC dividend withholding tax | (8,829 | ) | (5,198 | ) | ||||
Intangible assets and other non-current assets | (7,321 | ) | (7,390 | ) | ||||
| Others | — | (1,881 | ) | |||||
Total deferred tax liabilities | $ | (19,339 | ) | $ | (26,991 | ) | ||
The valuation allowance is considered on an individual entity basis.
be realized.
2022.
Determining income tax provisions involves judgment on
There wererate. The Company recorded no materialpenalty or interest or penalties incurred for and as of the years ended June 30, 2015, 20162020, 2021 and 2017,2022, respectively.
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Operating lease costs | $ | 1,608 | $ | 2,324 | $ | 3,484 | ||||||
Short-term lease costs | 537 | 1,000 | 191 | |||||||||
Amortization of prepaid land leases | 384 | 454 | 382 | |||||||||
Total lease costs | $ | 2,529 | $ | 3,778 | $ | 4,057 | ||||||
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 2,460 | $ | 4,045 | $ | 3,810 | ||||||
ROU assets obtained in exchange for new operating lease liabilities | 1,614 | 3,011 | 1,554 | |||||||||
Weighted-average remaining lease term (in years): | ||||||||||||
Operating leases | 2.25 | 1.97 | 1.83 | |||||||||
Weighted-average discount rate: | ||||||||||||
Operating leases | 3.76 | % | 4.17 | % | 3.05 | % | ||||||
As of June 30, 2022 | ||||
202 3 | $ | 2,712 | ||
202 4 | 1,136 | |||
202 5 | 195 | |||
202 6 | 102 | |||
| Total minimum lease payments | 4,145 | |||
| Less: imputed interest | 345 | |||
| Total lease liability balance | $ | 3,800 | ||
Year ending June 30, | Minimum lease payments | |||
2023 | $ | 3,501 | ||
2024 | 2,112 | |||
2025 | 1,873 | |||
2026 | 1,929 | |||
2027 | 1,987 | |||
Thereafter | 12,426 | |||
Total minimum lease payments to be received | $ | 23,828 | ||
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Numerator: | ||||||||||||
| Net income attributable to the Company - basic | $ | 96,527 | $ | 118,471 | $ | 68,944 | ||||||
| Net income attributable to the Company - diluted(i) | $ | 96,877 | $ | 119,121 | $ | 69,605 | ||||||
| Denominator: | ||||||||||||
| Weighted average ordinary shares outstanding used in computing basic income per share | 58,612,596 | 59,170,050 | 60,189,004 | |||||||||
| Effect of dilutive securities | ||||||||||||
| Convertible Bond | 644,850 | 776,800 | 784,400 | |||||||||
| Share options | 839,425 | 642,184 | - | |||||||||
| Restricted shares | 37,332 | 22,422 | 38,106 | |||||||||
| Weighted average ordinary shares outstanding used in computing diluted income per share | 60,134,203 | 60,611,456 | 61,011,510 | |||||||||
| Income per share - basic | $ | 1.65 | 2.00 | 1.15 | ||||||||
| Income per share - diluted | $ | 1.61 | 1.97 | 1.14 | ||||||||
(i) For the year ended June 30, 2016 and 2017, interest accretion related to the Convertible Bond
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Numerator: | ||||||||||||
Net income attributable to the Company as reported | $ | 79,396 | $ | 89,709 | $ | 83,182 | ||||||
Less: Earnings allocated to participating securities | (83 | ) | — | — | ||||||||
Net income attributable to common stockholders - basic | $ | 79,313 | $ | 89,709 | $ | 83,182 | ||||||
Add: | ||||||||||||
Effect of Convertible Bond | 93 | — | — | |||||||||
Earnings allocated to participating securities | 83 | — | — | |||||||||
Less: | ||||||||||||
| Earnings reallocated to participating securities considered potentially dilutive securities | (83 | ) | — | — | ||||||||
Net income attributable to common stockholders – diluted | $ | 79,406 | $ | 89,709 | $ | 83,182 | ||||||
Denominator: | ||||||||||||
Weighted average ordinary shares outstanding used in computing basic earnings per share(i) | 60,478,717 | 60,566,709 | 61,007,806 | |||||||||
Effect of dilutive securities | ||||||||||||
Convertible Bond | 130,525 | — | — | |||||||||
| Share options | — | — | 65,337 | |||||||||
Restricted shares | — | 947,040 | 495,333 | |||||||||
Weighted average ordinary shares outstanding used in computing diluted earnings per share | 60,609,242 | 61,513,749 | 61,568,476 | |||||||||
Earnings per share – basic | $ | 1.31 | 1.48 | 1.36 | ||||||||
Earnings per share – diluted | $ | 1.31 | 1.46 | 1.35 | ||||||||
| (i) | Vested and unissued restricted shares of 15,000, 15,000 and 15,000 shares are included in the computation of basic and diluted earnings per share for the years ended June 30, 2020, 2021 and 2022, respectively. |
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.
Name of related parties | Relationship with the Company | ||
| China Techenergy Co., Ltd. (“China Techenergy”) | 40% owned by Beijing Hollysys | ||
| Beijing Hollysys Electric Motor Co., Ltd. (“Electric Motor”) | 40% owned by Beijing Hollysys | ||
| Beijing Hollycon Medicine & Technology. Co., Ltd. (“Hollycon”) | 30% owned by | ||
| Ningbo Hollysys Intelligent Technologies Co., Ltd. (“ | |||
| Beijing Hollysys Digital Technology Co., Ltd. (“Beijing Digital”) | 25% owned by Beijing Hollysys Intelligent Technologies Co., Ltd. (“Hollysys Intelligent”) | ||
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| China Techenergy | $ | 22,579 | $ | 28,778 | ||||
| Shenhua Information | 2,995 | 3,267 | ||||||
| Heilongjiang Ruixing | 1,071 | 1,049 | ||||||
| Hollysys Machine | 1,367 | 965 | ||||||
| Hollycon | - | 79 | ||||||
| Shenzhen HollySys | - | 2 | ||||||
| Beijing IPE | - | 2 | ||||||
| $ | 28,012 | $ | 34,142 | |||||
The Company’s management believes that the collection
June 30, | ||||||||
2021 | 2022 | |||||||
China Techenergy | $ | 19,241 | $ | 17,529 | ||||
Ningbo Hollysys | 11,190 | 286 | ||||||
Hollycon | 64 | 15,066 | ||||||
Beijing Digital | — | 257 | ||||||
Others | 3 | — | ||||||
Allowance for credit losses | (2,255 | ) | (5,778 | ) | ||||
$28,243 | $27,360 | |||||||
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 | |||||||
| China Techenergy | $ | 1,170 | $ | 1,117 | ||||
| Hollysys Machine | 112 | 817 | ||||||
| Shenhua Information | 358 | 353 | ||||||
| Electric Motor | 5 | 11 | ||||||
| Beijing IPE | - | 2 | ||||||
| Hollycon | - | 1 | ||||||
| $ | 1,645 | $ | 2,301 | |||||
Transactions with related parties
Purchases of goods and services from:
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Hollysys Machine | $ | 914 | $ | 555 | $ | 749 | ||||||
| Electric Motor | 50 | 354 | 29 | |||||||||
| Hollycon | - | - | 8 | |||||||||
| Shenhua Information | 368 | - | - | |||||||||
| China Techenergy | 1 | - | - | |||||||||
| $ | 1,333 | $ | 909 | $ | 786 | |||||||
Sales of goods and integrated solutions to:
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| China Techenergy | $ | 21,936 | $ | 3,657 | $ | 10,842 | ||||||
| Shenhua Information | 2,128 | 847 | 765 | |||||||||
| Hollysys Machine | 512 | 235 | 167 | |||||||||
| Hollycon | - | - | 108 | |||||||||
| Beijing IPE | - | - | 7 | |||||||||
| Electric Motor | 1 | - | - | |||||||||
| $ | 24,577 | $ | 4,739 | $ | 11,889 | |||||||
Operating lease income from:
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Hollycon | - | - | 602 | |||||||||
| Hollysys Machine | 41 | 40 | - | |||||||||
| $ | 41 | $ | 40 | $ | 602 | |||||||
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:
| Year ended June 30, | ||||||||||||
| 2015 | 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.
June 30, | ||||||||
2021 | 2022 | |||||||
China Techenergy | $ | 1,028 | $ | 2,012 | ||||
Ningbo Hollysys | 529 | 4,285 | ||||||
Hollycon | 23 | 1 | ||||||
Hunan LingXiang | 81 | — | ||||||
| Others | — | 1 | ||||||
$1,661 | $6,299 | |||||||
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Ningbo Hollysys (i) | $ | 1,838 | $ | 3,051 | $ | 1,164 | ||||||
Hollycon | — | 7 | 569 | |||||||||
| $ | 1,838 | $ | 3,058 | $ | 1,733 | |||||||
| (i) | The Company purchases products from Ningbo Hollysys which are used to provide an integrated automation and control system to its customers. |
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
China Techenergy (i) | $ | 1,711 | $ | 8,458 | $ | 5,118 | ||||||
Hollycon (ii) | 1,302 | 866 | 221 | |||||||||
Ningbo Hollysys (ii) | 179 | 308 | 967 | |||||||||
HuNan LingXiang | 38 | — | — | |||||||||
| $ | 3,230 | $ | 9,632 | $ | 6,306 | |||||||
| (i) | 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’snon-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 third party customers, as if China Techenergy is a consolidated subsidiary. |
| (ii) | The Company sells products to Hollycon and Ningbo Hollysys, which incorporate the Company’s product with their automated systems to provide an integrated automation and control system to their customers. The Company’s pro rata shares of the intercompany profits and losses are eliminated until realized through a sale to third party customers, as if Hollycon and Ningbo Hollysys are consolidated subsidiaries. |
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Ningbo Hollysys (i) | $ | 2,214 | $ | 2,281 | $ | 133 | ||||||
Hollycon (ii) | 880 | 460 | 2,443 | |||||||||
Beijing Digital | — | — | 254 | |||||||||
China Techenergy | 1,122 | — | — | |||||||||
| $ | 4,216 | $ | 2,741 | $ | 2,830 | |||||||
| (i) | The Company entered into an operating lease agreement with Ningbo Hollysys to lease part of a building in Beijing. The lease term is for one year from the commencement date of January 1, 2022 to December 31, 2022. |
| (ii) | The Company entered into an operating lease agreement with Hollycon to lease part of building located in Beijing. The lease term is for one year from the commencement date of January 1, 2022 to December 31, 2022. |
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Ningbo Hollysys (i) | $ | 655 | $ | 212 | $ | 208 | ||||||
| (i) | The Company purchases research and development services from Ningbo Hollysys for research and development projects in the field of intelligent manufacturing. |
Operating lease
The
Future minimum lease payments under non-cancelable operating leases with initial termssubcontracts, mainly for fulfillment of one year
| Years ending June 30, | Minimum lease payments | |||
| 2018 | $ | 2,453 | ||
| 2019 | 1,060 | |||
| 2020 | 263 | |||
| 2021 | 103 | |||
| 2022 and onwards | 63 | |||
| Total minimum lease payments | $ | 3,942 | ||
Years ending June 30, | Minimum payments | |||
202 3 | $ | 218,487 | ||
202 4 | 49,496 | |||
202 5 | 24,246 | |||
202 6 | 11,905 | |||
202 7 | 27,761 | |||
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.
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 | $ | 1,477 | ||
| 2019 | 1,522 | |||
| 2020 | 1,567 | |||
| 2021 | 1,614 | |||
| 2022 | 1,663 | |||
| Total minimum lease payments to be received in the next five years | $ | 7,843 | ||
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.
| Year ended June 30, 2015 | ||||||||||||||||||||
| IA | Rail | M&E | Miscellaneous | Consolidated | ||||||||||||||||
| Revenues from external customers | $ | 213,252 | 193,274 | 110,030 | 14,823 | 531,379 | ||||||||||||||
| Costs of revenue | 119,520 | 97,503 | 93,452 | 6,502 | 316,977 | |||||||||||||||
| Gross profit | $ | 93,732 | 95,771 | 16,578 | 8,321 | 214,402 | ||||||||||||||
| Year ended June 30, 2016 | ||||||||||||||||||||
| IA | Rail | M&E | Miscellaneous | Consolidated | ||||||||||||||||
| Revenues from external customers | $ | 182,901 | 240,310 | 95,277 | 25,837 | 544,325 | ||||||||||||||
| Costs of revenue | 113,314 | 131,043 | 82,900 | 11,342 | 338,599 | |||||||||||||||
| Gross profit | $ | 69,587 | 109,267 | 12,377 | 14,495 | 205,726 | ||||||||||||||
| Year ended June 30, 2017 | ||||||||||||||||||||
| IA | Rail | M&E | Miscellaneous | Consolidated | ||||||||||||||||
| Revenues from external customers | $ | 172,667 | 155,732 | 103,544 | - | 431,943 | ||||||||||||||
| Costs of revenue | 106,583 | 86,128 | 98,761 | - | 291,472 | |||||||||||||||
| Gross profit | $ | 66,084 | 69,604 | 4,783 | - | 140,471 | ||||||||||||||
The Company’s assets are shared among the segments thus no assets have been designated to specific segments.
Year ended June 30, 2020 | ||||||||||||||||
IA | Rail | M&E | Consolidated | |||||||||||||
Revenues from external customers | ||||||||||||||||
Integrated solutions contracts revenue | $ | 207,421 | 145,750 | 61,101 | 414,272 | |||||||||||
Product sales | 15,504 | 4,640 | — | 20,144 | ||||||||||||
Maintenance service revenue | 15,985 | 49,140 | 916 | 66,041 | ||||||||||||
Extended warranty service revenue | 1,061 | 1,809 | — | 2,870 | ||||||||||||
Total | 239,971 | 201,339 | 62,017 | 503,327 | ||||||||||||
Costs of revenue | 154,298 | 107,382 | 51,079 | 312,759 | ||||||||||||
Gross profit | $ | 85,673 | 93,957 | 10,938 | 190,568 | |||||||||||
Year ended June 30, 2021 | ||||||||||||||||
IA | Rail | M&E | Consolidated | |||||||||||||
Revenues from external customers | ||||||||||||||||
Integrated solutions contracts revenue | $ | 291,106 | 100,877 | 68,197 | 460,180 | |||||||||||
Product sales | 22,772 | 5,895 | — | 28,667 | ||||||||||||
Maintenance service revenue | 21,402 | 79,874 | 46 | 101,322 | ||||||||||||
Extended warranty service revenue | 1,772 | 1,525 | — | 3,297 | ||||||||||||
Total | 337,052 | 188,171 | 68,243 | 593,466 | ||||||||||||
Costs of revenue | 227,107 | 90,386 | 57,694 | 375,187 | ||||||||||||
Gross profit | $ | 109,945 | 97,785 | 10,549 | 218,279 | |||||||||||
Year ended June 30, 2022 | ||||||||||||||||
IA | Rail | M&E | Consolidated | |||||||||||||
Revenues from external customers | ||||||||||||||||
Integrated solutions contracts revenue | $ | 380,516 | 109,342 | 83,709 | 573,567 | |||||||||||
Product sales | 31,559 | 6,927 | — | 38,486 | ||||||||||||
Maintenance service revenue | 26,725 | 64,492 | 50 | 91,267 | ||||||||||||
Extended warranty service revenue | 1,118 | 3,024 | — | 4,142 | ||||||||||||
Total | 439,918 | 183,785 | 83,759 | 707,462 | ||||||||||||
Costs of revenue | 294,642 | 98,150 | 75,313 | 468,105 | ||||||||||||
Gross profit | $ | 145,276 | 85,635 | 8,446 | 239,357 | |||||||||||
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)
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Revenues: | ||||||||||||
| PRC | $ | 410,644 | $ | 443,256 | $ | 326,713 | ||||||
| Non-PRC | 120,735 | 101,069 | 105,230 | |||||||||
| $ | 531,379 | $ | 544,325 | $ | 431,943 | |||||||
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Revenues: | ||||||||||||
PRC | $ | 441,305 | $ | 518,170 | $ | 614,903 | ||||||
Non-PRC | 62,022 | 75,296 | 92,559 | |||||||||
| $ | 503,327 | $ | 593,466 | $ | 707,462 | |||||||
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| Long-lived assets other than goodwill and acquired intangible assets | ||||||||
| PRC | $ | 100,454 | $ | 131,625 | ||||
| Non-PRC | 13,079 | 12,029 | ||||||
| $ | 113,533 | $ | 143,654 | |||||
June 30, | ||||||||
2021 | 2022 | |||||||
Long-lived assets other than goodwill and acquired intangible assets | ||||||||
PRC | $ | 163,343 | $ | 159,598 | ||||
Non-PRC | 11,458 | 10,114 | ||||||
| $ | 174,801 | $ | 169,712 | |||||
Purchase price | $ | 20,908 | ||
Less: Final fair value of net assets acquired(see table below) | 1,211 | |||
Excess purchase price over fair value of net assets acquired | 19,697 | |||
Assets Acquired: | ||||
Cash and cash equivalents | $ | 3,018 | ||
Restricted cash | 1 | |||
Accounts receivable, net | 8,776 | |||
Cost and estimated earnings in excess of billings, net | 2,499 | |||
Other receivables, net | 1,221 | |||
Advances to suppliers | 667 | |||
Inventories, net | 6,513 | |||
Income tax recoverable | 25 | |||
Property, plant and equipment, net | 2,886 | |||
Operating lease right-of-use assets | 3 | |||
Intangible assets, net | 11,245 | |||
Investments in equity investees | 1,490 | |||
Total assets acquired | 38,344 | |||
Liabilities Assumed: | ||||
Accounts payable | 11,553 | |||
Deferred revenue | 9,803 | |||
Accrued payroll and related expenses | 1,018 | |||
Warranty liabilities | 145 | |||
Accrued liabilities | 14,614 | |||
Total liabilities assumed | 37,133 | |||
Fair Value of Net Assets Acquired | $ | 1,211 | ||
June 30, 2022 | ||||||||||||||
Asset Class | Amortization Period | Amount Assigned at Acquisition Date | Accumulated Amortization and Foreign Currency Translation | Net Carrying Value | ||||||||||
Intangible assets | 10 Years | $ | 11,245 | $ | (1,394 | ) | $ | 9,851 | ||||||
On July 10, 2017,
this report.
| June 30, | ||||||||
| 2016 | 2017 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 8,571 | $ | 13,103 | ||||
| Amounts due from subsidiaries | 72,303 | 59,920 | ||||||
| Prepaid expenses | 63 | 61 | ||||||
| Total current assets | 80,937 | 73,084 | ||||||
| Investments in subsidiaries | 669,326 | 726,837 | ||||||
| Total assets | $ | 750,263 | $ | 799,921 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accrued payroll and related expense | $ | 9 | $ | 14 | ||||
| Accrued liabilities | 427 | 487 | ||||||
| Amounts due to subsidiaries | 55,869 | 55,869 | ||||||
| Total current liabilities | 56,305 | 56,370 | ||||||
| Long-term loan | 19,802 | 20,032 | ||||||
| Total liabilities | 76,107 | 76,402 | ||||||
| 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 | 60 | 60 | ||||||
| Additional paid-in capital | 215,403 | 222,189 | ||||||
| Retained earnings | �� | 467,160 | 524,129 | |||||
| Accumulated other comprehensive loss | (8,467 | ) | (22,859 | ) | ||||
| Total equity | 674,156 | 723,519 | ||||||
| Total liabilities and equity | $ | 750,263 | $ | 799,921 | ||||
June 30, | ||||||||
2021 | 2022 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 7,824 | $ | 7,500 | ||||
Amounts due from subsidiaries | 53,503 | 53,503 | ||||||
Prepaid expenses | 166 | 202 | ||||||
Total current assets | 61,493 | 61,205 | ||||||
Investment in subsidiaries | 1,221,755 | 1,276,497 | ||||||
Total assets | $ | 1,283,248 | $ | 1,337,702 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accrued liabilities | 5,143 | 98 | ||||||
Amounts due to subsidiaries | 140,415 | 172,317 | ||||||
Total liabilities | 145,558 | 172,415 | ||||||
Equity: | ||||||||
Ordinary shares, par value $0.001 per share, 100,000,000 shares authorized; 61,367,337shares issued and 61,962,449 shares issued and outstanding as of June 30, 2021 and 2022, respectively | 61 | 62 | ||||||
Additional paid-in capital | 233,768 | 243,476 | ||||||
Retained earnings | 871,047 | 934,404 | ||||||
| Accumulated other comprehensive income (loss) | 32,814 | (12,655 | ) | |||||
Total equity | 1,137,690 | 1,165,287 | ||||||
Total liabilities and equity | $ | 1,283,248 | $ | 1,337,702 | ||||
| Year Ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| General and administrative expenses | $ | 3,169 | $ | 4,484 | $ | 1,062 | ||||||
| Loss from operations | (3,169 | ) | (4,484 | ) | (1,062 | ) | ||||||
| Other expense, net | (35 | ) | (93 | ) | (89 | ) | ||||||
| Interest income | 1 | 80 | 4 | |||||||||
| Interest expenses | (463 | ) | (705 | ) | (1,074 | ) | ||||||
| Foreign exchange gains (losses) | 238 | (719 | ) | (740 | ) | |||||||
| Equity in profit of subsidiaries | $ | 99,955 | $ | 124,392 | $ | 71,905 | ||||||
| Income before income taxes | 96,527 | 118,471 | 68,944 | |||||||||
| Income tax expenses | - | - | - | |||||||||
| Net income | 96,527 | 118,471 | 68,944 | |||||||||
| Other comprehensive income, net of tax of nil | ||||||||||||
| Translation adjustment | (1,427 | ) | (46,052 | ) | (14,392 | ) | ||||||
| Comprehensive income | $ | 95,100 | $ | 72,419 | $ | 54,552 | ||||||
Year Ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
General and administrative expenses | $ | 1,344 | $ | 21,090 | $ | 17,223 | ||||||
Loss from operations | (1,344 | ) | (21,090 | ) | (17,223 | ) | ||||||
Interest income | 309 | 117 | — | |||||||||
Interest expenses | (90 | ) | — | — | ||||||||
Foreign exchange (losses) gains | (1,043 | ) | 1,532 | 197 | ||||||||
Share of net income of subsidiaries | $ | 81,564 | $ | 109,150 | $ | 100,208 | ||||||
Income before income taxes | 79,396 | 89,709 | 83,182 | |||||||||
Income tax expenses | — | — | — | |||||||||
Net income | 79,396 | 89,709 | 83,182 | |||||||||
Other comprehensive income, net of tax of nil | ||||||||||||
Translation adjustment | (27,996 | ) | 96,331 | (45,469 | ) | |||||||
Comprehensive income | $ | 51,400 | $ | 186,040 | $ | 37,713 | ||||||
Year ended June 30, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 79,396 | $ | 89,709 | $ | 83,182 | ||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||
Share of net income of subsidiaries | (81,564 | ) | (109,150 | ) | (100,208 | ) | ||||||
Share-based compensation expenses | 410 | 9,724 | 9,709 | |||||||||
Accretion of convertible bond | 57 | — | — | |||||||||
Change in operating assets and liabilities | (142 | ) | 5,065 | 26,820 | ||||||||
Net cash (used in) provided by operating activities | $ | (1,843 | ) | $ | (4,652 | ) | $ | 19,503 | ||||
Cash flows from investing activities: | ||||||||||||
Loans to subsidiaries | (19,775 | ) | — | — | ||||||||
Maturity of short-term investments | — | 11,318 | — | |||||||||
Net cash (used in) provided by investing activities | $ | (19,775 | ) | $ | 11,318 | $ | — | |||||
Cash flows from financing activities: | ||||||||||||
Repayment of convertible bond | (20,753 | ) | — | — | ||||||||
Proceeds of loans from subsidiaries | 20,000 | — | — | |||||||||
Payment of dividends | (12,713 | ) | (12,107 | ) | (19,827 | ) | ||||||
Net cash used in financing activities | $ | (13,466 | ) | $ | (12,107 | ) | $ | (19,827 | ) | |||
Net decrease in cash and cash equivalents | $ | (35,084 | ) | $ | (5,441 | ) | $ | (324 | ) | |||
Cash and cash equivalents, beginning of period | 48,349 | 13,265 | 7,824 | |||||||||
Cash and cash equivalents, end of period | $ | 13,265 | $ | 7,824 | $ | 7,500 | ||||||
CONDENSED STATEMENTS OF CASH FLOWS
| Year ended June 30, | ||||||||||||
| 2015 | 2016 | 2017 | ||||||||||
| Net cash used in operating activities | $ | (397 | ) | $ | (1,697 | ) | $ | (930 | ) | |||
| Net cash (used in) provided by investing activities | (4,402 | ) | $ | 11,390 | $ | (396 | ) | |||||
| Net cash provided by (used in) financing activities | $ | 13,236 | $ | (9,559 | ) | $ | 5,858 | |||||
| Net increase in cash and cash equivalents | $ | 8,437 | $ | 134 | $ | 4,532 | ||||||
| Cash and cash equivalents, beginning of year | $ | - | $ | 8,437 | $ | 8,571 | ||||||
| Cash and cash equivalents, end of year | $ | 8,437 | $ | 8,571 | $ | 13,103 | ||||||