CTCI ADVANCED SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS MARCH 31, 2018 AND 2017 Notice to readers This English version handbook is a summary translation of the Chinese version. If there is any discrepancy between the English version and Chinese version, the Chinese version shall prevail. 1
Current assets CTCI ADVANCED SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) March 31, 2018 March 31, 2017 Assets Notes Amount % Amount % 1100 Cash and cash equivalents $ 600,675 42 $ 414,424 39 1110 Financial assets at fair value through profit or loss - current 47,167 3 57,393 5 1120 Financial assets at fair value through other comprehensive income 69,677 5 - - 1125 Available-for-sale financial assets - current - - 95,256 9 1140 Contract assets 463,975 33 - - 1150 Notes receivable, net 373-38 - 1170 Accounts receivable, net 108,245 8 176,404 17 1180 Accounts receivable - related parties, net 22,340 2 188,675 18 1200 Other receivables 3,886-32,008 3 1220 Current income tax assets 3,021-3,419-130X Inventories, net 4,799-3,194-1410 Prepayments 11,147 1 7,949 1 11XX Total current assets 1,335,305 94 978,760 92 Non-current assets 1600 Property, plant and equipment, net 69,464 5 70,736 7 1840 Deferred income tax assets 11,133 1 11,758 1 1900 Other non-current assets 3,556-3,341-15XX Total non-current assets 84,153 6 85,835 8 1XXX Total assets $ 1,419,458 100 $ 1,064,595 100 (Continued) 2
CTCI ADVANCED SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) March 31, 2018 March 31, 2017 Liabilities and Equity Notes Amount % Amount % Current liabilities 2130 Contract liabilities $ 357,187 25 $ - - 2150 Notes payable - - 5-2170 Accounts payable 419,335 30 235,194 22 2180 Accounts payable - related parties 1,350-1,658-2200 Other payables 49,122 4 46,164 5 2230 Current income tax liabilities 17,378 1 10,498 1 2300 Other current liabilities - - 214,481 20 21XX Total current liabilities 844,372 60 508,000 48 Non-current liabilities 2570 Deferred income tax liabilities 73-62 - 2600 Other non-current liabilities 17,071 1 16,368 1 25XX Total non-current liabilities 17,144 1 16,430 1 2XXX Total liabilities 861,516 61 524,430 49 Equity attributable to owners of the parent Share capital 3110 Common stock 234,915 16 234,915 22 Capital surplus 3200 Capital surplus 104,593 7 104,546 10 Retained earnings 3310 Legal reserve 125,432 9 118,442 11 3320 Special reserve 22,317 2 18,274 2 3350 Unappropriated retained earnings 93,847 7 87,743 8 Other equity interest 3400 Other equity interest ( 23,162) ( 2 ) ( 23,755) ( 2) 31XX Total equity attributable to owners of the parent 557,942 39 540,165 51 3XXX Total equity 557,942 39 540,165 51 Significant contingent liabilities and unrecognised contract commitments 3X2X Total liabilities and equity $ 1,419,458 100 $ 1,064,595 100 The accompanying notes are an integral part of these consolidated financial statements. 3
CTCI ADVANCED SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT FOR EARNINGS PER SHARE AMOUNTS) For the three-month periods ended March 31 2018 2017 Items Notes Amount % Amount % 4000 Operating revenue $ 368,859 100 $ 180,745 100 5000 Operating costs ( 320,467 ) ( 87) (( 126,221) ( 70 ) 5950 Gross profit, net 48,392 13 54,524 30 Operating expenses 6100 Selling expenses ( 3,675 ) ( 1) (( 5,208) ( 3 ) 6200 General and administrative expenses ( 19,396 ) ( 5) (( 19,725) ( 11 ) 6300 Research and development expenses ( 3,499 ) ( 1) (( 1,903) ( 1 ) 6450 Expected credit impairment gain ( 10 ) - - - 6000 Total operating expenses ( 26,580 ) ( 7) (( 26,836) ( 15 ) 6900 Operating income 21,812 6 27,688 15 Non-operating income and expenses 7010 Other income 1,021-1,109 1 7020 Other gains and losses ( 1,792 ) - (( 7,067) ( 4 ) 7000 Total non-operating income and expenses ( 771 ) - (( 5,958) ( 3 ) 7900 Profit before income tax 21,041 6 21,730 12 7950 Income tax expense ( 2,682 ) ( 1) (( 3,889) ( 2 ) 8200 Profit for the year $ 18,359 5 $ 17,841 10 Other comprehensive income Income that will not be reclassified to profit or loss 8316 Unrealised gain or loss on financial assets at fair value through other comprehensive income ( 1,206 ) - $ - 8349 Income tax of item that will not be reclassified to profit or loss 370 - - - 8310 Total loss that will not be reclassified to profit or loss ( 836 ) - ( - - Income that will be reclassified to profit or loss 8361 Cumulative translation differences of foreign operations 377 - (( 11,37) ( 1 ) 8362 Unrealized losses on valuation of available-for-sale financial assets - - (( 308) - 8399 Income tax of items that will be reclassified to profit or loss - - ( 7-8360 Total loss that will be reclassified to profit or loss 377 ( - (( 1,438) ( 1 ) 8500 Total comprehensive income for the year $ 17,900 5 $ 16,403 9 Gross profit attributable to: 8610 Owners of the parent $ 18,359 5 $ 17,841 10 Comprehensive income attributable to: 8710 Owners of the parent $ 17,900 5 $ 16,403 9 9750 Basic earnings per share (in dollars) $ 0.78 $ 0.76 9850 Diluted earnings per share (in dollars) $ 0.78 $ 0.76 The accompanying notes are an integral part of these consolidated financial statements. 4
CTCI ADVANCED SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) Notes Common stock Additional Paid-in Capital Equity attributable to owners of the parent Capital Surplus Retained Earnings Other Equity Interest Unrealized gains or losses on fair value Cumulative through other Translation comprehensive Employee Unappropriated Differences income Gain on Sale Stock Legal Special Retained of Foreign financial of Assets Warrants Reserve Reserve Earnings operations assets Unrealized Gain or Loss on Available-f or-sale Financial Assets Total equity Three month period ended March 31, 2017 Balance at January 1, 2017 $ 234,915 $ 83,785 $ 154 $ 20,607 $ 118,442 $ 18,274 $ 69,902 ($ 1,527 ) $ - ($ 20,790 ) $ 523,762 Profit for the period - - - - - - 17,841 - - - 17,841 Other comprehensive loss for the period - - - - - - - ( 1,137 ) - ( 301 ) ( 1,438 ) Balance at March 31, 2017 $ 234,915 $ 83,785 $ 154 $ 20,607 $ 118,442 $ 18,274 $ 87,743 ( 2,664 ) - ($ 21,091 ) $ 540,165 Three month period ended March 31, 2018 Balance at January 1, 2018 $ 234,915 $ 104,392 $ 154 $ - $ 125,432 $ 22,317 $ 75,136 ($ 1,769 ) $ - ($ 20,582 ) $ 539,995 Effect of retrospective application and retrospective restatement - - - - - - - - ( 20,582 ) 20,582 - ) Balance at January 1, 2018 after restatement 234,915 104,392 154-125,432 22,317 75,136 ( 1,769 ) ( 20,582 ) - 539,995 Profit for the period - - - - - - 18,359 - - - 18,359 Other comprehensive income for the period - - - - - - 352 377 ( 1,188 ) - ( 459 ) Exercise of employee stock options - - - 47 - - - - - 47 Balance at March r 31, 2018 $ 234,915 $ 104,392 $ 154 $ 47 $ 125,432 $ 22,317 $ 93,847 ($ 1,392 ) ($ 21,770 ) $ - $ 557,942 ) The accompanying notes are an integral part of these consolidated financial statements. 5
CTCI ADVANCED SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) Notes Three months ended March 31, 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax $ 21,041 $ 21,730 Adjustments Adjustments to reconcile profit (loss) Reversal of doubtful accounts - 86 Expected credit impairment gain 10 - Depreciation on property, plant and equipment 901 955 Net income on financial asset held for trading - ( 49 ) Net income on financial assets and liabilities at fair value through profit or loss ( 132 ) - Compensation cost of Share-based payment 47 - Interest income ( 991 ) ( 1,074 ) Adjustments in exchange rate for financial instruments of foreign bonds - 2,549 Investment in foreign bonds measured at fair value through other comprehensive income-adjustments for exchange rate change ( 423 ) - Changes in operating assets and liabilities Changes in operating assets Financial assets at fair value through profit or loss 33,017 10,204 Current contract assets ( 62,291 ) - Notes receivable, net ( 373 ) 89 Accounts receivable, net 3,042 ( 5,429 ) Accounts receivable - related parties, net 97,160 188,901 Other receivables 4,670 3,339 Inventories 2,076 2,447 Prepayments ( 3,601 ) 381 Changes in operating liabilities Current contract liabilities ( 56,027 ) - Notes payable ( 547 ) ( 29 ) Accounts payable 49,277 ( 51,571 ) Accounts payable - related parties 315 1,633 Other payables ( 46,560 ) ( 50,872 ) Other current liabilities - ( 7,850 ) Net defined benefit liabilities ( 92 ) ( 15 ) Cash (outflow) inflow generated from operations 40,519 115,425 Interest received 1,239 960 Income tax paid ( 17 ) - Net cash flows (used in) from operating activities 41,795 116,385 (Continued) 6
CTCI ADVANCED SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS) Notes Three months ended March 31, 2018 2017 CASH FLOWS FROM INVESTING ACTIVITIES Other receivables $ - ($ 30,000 ) Acquisition of property, plant and equipment ( 438 ) ( 95 ) Increase in refundable deposits ( 33 ) ( 25 ) Net cash flows from (used in) investing activities ( 471 ) 30,120 CASH FLOWS FROM FINANCING ACTIVITIES Iecrease (decrease) in guarantee deposits received 222 - Net cash flows used in financing activities 222 - Effect of exchange rate changes on cash and cash equivalents 372 ( 1,107 ) Net (decrease) increase in cash and cash equivalents 41,918 85,158 Cash and cash equivalents at beginning of year 558,757 329,266 Cash and cash equivalents at end of year $ 600,675 $ 414,424 The accompanying notes are an integral part of these consolidated financial statements. 7
CTCI ADVANCED SYSTEMS INC. AND SUBSIDIARIES CONSOLIDATED NOTES TO FINANCIAL STATEMENTS MARCH 31, 2017 AND 2016 (EXPRESSED IN THOUSANDS OF NEW TAIWAN DOLLARS, EXCEPT AS OTHERWISE INDICATED) 1. HISTORY AND ORGANISATION CTCI Advanced Systems Inc. (the Company ) was incorporated under the provisions of the Company Law of the Republic of China (R.O.C.) on August 3, 1987, and started its operations on August 26, 1987. The Company s common stock has been listed on the GreTai Securities Market since February 25, 2002. The main activities of the Company and its subsidiaries (collectively referred herein as the Group ) are engineering research, plan, design, purchase, integration, manufacture, installation, adjustment, maintanence, and operation in separation and integration of different software and hardware within control systems, sales of computers and computer peripherals, water treatment and detection and analysis of environmental pollution consultancy service, wholesaling of telecommunications equipment and information software. CTCI Corporation, which is the ultimate holding company, owns 48.72% of the Company. 2. THE DATE OF AUTHORISATION FOR ISSUANCE OF THE CONSOLIDATED FINANCIAL STATEMENTS AND PROCEDURES FOR AUTHORISATION These consolidated financial statements were authorised for issuance by the Board of Directors on May 2, 2018. 3. APPLICATION OF NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS Effect of the adoption of new issuances of or amendments to International Financial Reporting Standards ( IFRS ) as endorsed by the Financial Supervisory Commission ( FSC ) New standards, interpretations and amendments endorsed by FSC effective from 2018 are as follows: 8
Effective Date by International Accounting New Standards, Interpretations and Amendments Standards Board Amendments to IFRS 2, Classification and measurement of sharebased payment transactions January 1, 2018 Amendments to IFRS 4, Applying IFRS 9 Financial instruments with January 1, 2018 IFRS 4 Insurance contracts IFRS 9, Financial instruments January 1, 2018 IFRS 15, Revenue from contracts with customers January 1, 2018 Amendments to IFRS 15, Clarifications to IFRS 15 Revenue from January 1, 2018 contracts with customers Amendments to IAS 7, Disclosure initiative January 1, 2017 Amendments to IAS 12, Recognition of deferred tax assets for January 1, 2017 unrealised losses Effective Date by International Accounting New Standards, Interpretations and Amendments Standards Board Amendments to IAS 40, Transfers of investment property January 1, 2018 IFRIC 22, Foreign currency transactions and advance consideration January 1, 2018 Annual improvements to IFRSs 2014-2016 cycle- Amendments to January 1, 2018 IFRS 1, First-time adoption of International Financial Reporting Standards Annual improvements to IFRSs 2014-2016 cycle- Amendments to January 1, 2017 IFRS 12, Disclosure of interests in other entities Annual improvements to IFRSs 2014-2016 cycle- Amendments to IAS January 1, 2018 28, Investments in associates and joint ventures 9
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. Compliance statement The consolidated financial statements of the Group have been prepared in accordance with the Regulations Governing the Preparation of Financial Reports by Securities Issuers, International Financial Reporting Standards, International Accounting Standards, IFRIC Interpretations, and SIC Interpretations as endorsed by the FSC (collectively referred herein as the IFRSs ). 5. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND KEY SOURCES OF ASSUMPTION UNCERTAINTY The preparation of these consolidated financial statements requires management to make critical judgements in applying the Group s accounting policies and make critical assumptions and estimates concerning future events. Assumptions and estimates may differ from the actual results and are continually evaluated and adjusted based on historical experience and other factors. 6. DETAILS OF SIGNIFICANT ACCOUNTS (1) Cash and cash equivalents March 31, 2018 December 31, 2017 March 31, 2017 Cash: Cash on hand and petty cash (revolving funds) $ 2,339 $ 1,579 $ 1,294 Checking accounts and demand deposits 187,570 112,805 63,317 Cash equivalents: - Time deposits 410,766 444,373 349,813 Total $ 600,675 $ 558,757 $ 414,424 A. The Group transacts with a variety of financial institutions all with high credit quality to disperse credit risk, so it expects that the probability of counterparty default is remote. B. The Group has no cash and cash equivalents pledged to others. 10
(2) Accounts receivable March 31, 2018 Accounts receivable $ 109,091 Less: Allowance for bad debts ( 846) 108,245 Accounts receivable-related parties 22,340 Net $ 130,585 Current March 31, 2018 Up to 30 days $ 72,365 31 to 90 days $ 51,343 91 to 180 days $ 5,627 Over 180 days $ 1,250 $ 130,585 (3) Operating revenue For the three-month For the three-month periods ended periods ended March 31, 2018 March 31, 2017 Sales revenue $ 14,061 $ 23,004 Service revenue 354,798 157,741 $ 368,859 $ 180,745 (4) Major service contracts Contract Estimated incurred to Estimated recognized Contract no. amount total cost total costs completion year gain (loss) Remark 1 $ 2,208,669 $ 1,333,445 100.00% 2018 $ 875,224 2 1,961,822 1,858,592 0.60% 2024 619 3 892,350 896,067 86.73% 2021 ( 3,717) 4 761,959 741,789 100.00% 2018 20,170 5 529,246 670,690 83.94% 2021 ( 141,444) 6 521,031 490,201 2.19% 2019 677 7 415,065 400,090 70.69% 2020 10,585 8 322,107 294,048 99.91% 2018 28,034 7. RELATED PARTY TRANSACTIONS (1) Parent and ultimate controlling party The Company is controlled by CTCI Corporation, which owns 48.72% of the Company s shares. 11
The remaining 51.28% of the shares are widely held. The parent and ultimate parent of the Company is CTCI Corporation. (2) Names of related parties and relationship CTCI Corporation CTCI Foundation Names of related parties Cinda Engineering & Construction Pvt., Ltd. CTCI Machinery Corporation ECOVE Waste Management Corporation CTCI Smart Engineering Corporation HD Resources Management Corporation CTCI Resources Engineering Inc. ZHEJIANG Boretech Environmental Engineering Co., Ltd. Boretech Resource Recovery Engineering Co., Ltd. All directors, general manager and key management (3) Significant related party transactions and balances A. Operating revenue: Relationship with the Group The Company s parent and ultimate parent company Entity has significant effect on the Company s ultimate parent company Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Fellow subsidiary Other associate Other associate The Company s key management and governing body For the three-month periods ended March 31 2018 2017 CTCI Corporation $ 41,947 $ 55,051 Other related parties 10,226 4,746 $ 52,173 $ 59,797 8. PLEDGED ASSETS None. 12
9. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNISED CONTRACT COMMITMENTS In addition to the commitments stated in Note 6(22), as of March 31, 2018, the Group had the following commitments and contingent liabilities: (1) The Group issued letters of guarantee for service contracts with several banks. The letters of guarantee issued amounted to $903,496. (2) The Group had issued promissory notes for service contracts amounting to $248,844 (3) The Group had outstanding commitments on purchase inventory contracts amounting to $211,102. (4) The Group had outstanding commitments on service subcontracts, net of prepaid and accrued payables, for next year amounting to $112,672. (5) The Group leased offices from others for operation. The leasing term lasts 1~5 years. For the years ended March 31, 2017 and 2016, the recognised rental expense was $3,666 and $3,070, respectively. (6) A. On May 17, 2005, the Company ordered a set of LED hardware for the travelers information of MRT Sinzhung/Luzhou line and PIDS hardware & software from Giantek Technology Corp. (hereafter GTC) and made a prepayment at $2,700 thousand. Because GTC repeatedly delayed its obligation to deliver the goods, the Company expressed its intention to terminate the contract in writing to GTC and cash the promissory note of the performance bond amounting to $2,700 thousand. The Company also filed a counterclaim concerning this case, asking a remedy for the prepayment and another placement of order totaling $12,072 thousand from GTC. GTC later sued the Company on the ground of unjust enrichment for the return of the performance bond of $2,700 thousand accompanying with the interest. The Company s assigned attorney indicated that if the court decided in favor of GTC with an affirmed verdict, the Company is obliged to return the performance bond of $2,700 thousand to GTC. However, in case GTC loses the case, the Company earns the interest of the performance bond $2,700 thousand. As for the counterclaim, in case the court decides in favor of the Company, the Company will be awarded with the indemnity under the court s decision. If the Company loses the case, the Company s loss due to another placement of order cannot be compensated. On July 24, 2009, Taiwan Taipei District Court ordered the Company to pay GTC $2,700 thousand along with statutory interest and dismissed the Company s counterclaim. After discussing with the assigned attorney, the Company appealed on the ground of illegality as the first instance s decision is a chance verdict. On July 13, 2010, Taiwan High Court dismissed the request filed by GTC concerning unjust enrichment of $2,700 and ordered GTC to pay $7,538 thousand to the Company. On August 12, 2010, GTC then appealed to the third instance court. On August 13, 2010, the Company also appealed because the court dismissed the Company s request for partial compensation, which is against the laws based on the attorney s opinion as the Company had made prepayment of $2,700 thousand and incurred additional cost of $4,593 thousand for the software R&D of MRT 13
Sinzhung/Luzhou line. On December 9, 2010, the Supreme Court revoked the second instance s decision excluding the provisional execution. On July 21, 2015, Taiwan High court ordered GTC to pay $7,248 thousand and interest calculated from October 21, 2008 till the debt is repaid at 5% per annum. In August 2015, both parties individually appealed to the third instance court for the unfavorable part of the decision. On March 2, 2016, the Supreme Court ruled a retrial, and currently the Taiwan High court is deliberating on the case. Although the court has not yet rendered the final decision, the Company has recognised the probable loss of $2,700 thousand. 10. SIGNIFICANT DISASTER LOSS None. 11. SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE (1) Details of the appropriation of 2017 earnings as proposed and approved by the Board of Directors on March 7, 2018 are provided in Note 6(14). (2) On December 14, 2017, the Board of Directors resolved to issue 600 units of employee stock options in several instalments. Every unit grants the right to purchase one thousand common shares of the Company. Since 600 thousand common shares in total is expected to be issued from exercised stock options, the issuance of shares was approved by the competent authority on January 9, 2018. (3) Please refer to Note 6(20) for the information on the effect of amendments to the Income Tax Act which was promulgated by the President of the Republic of China in February 2018. 12. OTHERS 14