China Information Security Technology, Inc. Announces Second Quarter 2010 Results

Income from Operations

Income from operations increased $3.53 million, or 41.1%, to $12.13 million for the three months ended June 30, 2010, from $8.60 million in the corresponding period in 2009. Income from operations as a percentage of revenue increased to 36.2% during the three months ended June 30, 2010, from 33.3% in 2009.

Income Tax Expense

Income tax expense for the three months ended June 30, 2010 was $2.16 million, up from $1.09 million for the same period in 2009.

The Company's subsidiaries, ISS, Zhongtian and Huipu are all governed by the Income Tax Laws of the PRC and are subject to the PRC's enterprises income tax, or EIT, at a rate of 22% of assessable profits in 2010, compared to 20% for the same period in 2009, an increase of 2%.

Bocom, and the Company's VIE, iASPEC (inclusive of Geo), as High-Tech Enterprises, are subject to EIT at a rate of 15% of assessable profits. After offsetting accumulated losses from prior years, Geo had no assessable profit subject to EIT for the three months ended June 30, 2010. In addition, as a software company, IST was entitled to a two-year exemption from EIT followed by a 50% tax exemption for the next 3 years. Year 2010 is the fourth year that IST is entitled to the tax holiday and will be subject to a favorable tax rate of 11%.

Net Income Attributable to the Company

As a result of the factors described above, net income increased $1.55 million, or 19.9%, to $9.35 million during the three months ended June 30, 2010, from $7.79 million for the same period in 2009.

Cash and Cash Equivalents

As of June 30, 2010, the Company had $23.54 million in cash and restricted cash, as compared to $19.34 million in the same period one year ago.

During the three months ended June 30, 2010, net cash provided by operating activities improved significantly to $14.80 million, as compared with $5.48 million in the same period a year ago. During the current quarter, accounts receivable balance increased by $0.50 million, as compared with an increase of $11.39 million during the second quarter of 2009.

    Recent Developments
    -- May 18, 2010 - China Information Security Technology PGIS System Plays
       Critical Role in Public Security Management at the Shanghai World Expo
    -- June 14, 2010 - China Information Security Technology Wins Intelligent
       Traffic Management Contract for the 16th Asian Games in Guangzhou,
       China

2010 Outlook

For fiscal year 2010, the Company reaffirms its guidance with projected revenue to $141-146 million and adjusted net income to $35.5-39.5 million, excluding any non-cash expenses as a result of employee stock awards, amortization of intangible assets associated with acquisitions, and changes in fair value of contingent considerations.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude non-cash charges. China Information Security believes that these non- GAAP financial measures are useful to investors because they exclude non-cash charges that China Information Security's management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of China Information Security. Accordingly, management excludes the expense arising from certain non-cash charges when making operational decisions. China Information Security believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Information Security's financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Information Security's performance using the same methodology and information as that used by China Information Security's management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non-GAAP financial measure. However, China Information Security's management compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.



             Q2 2010 Reconciliation of Operating, Net Income and EPS
         to Exclude SBC, Amortization of Intangible Assets and Contingent
                                  Consideration

                                 3 Mos.      3 Mos.      6 Mos.      6 Mos.
                                 Ended       Ended       Ended       Ended
                               30-Jun-10   30-Jun-09   30-Jun-10   30-Jun-09

    Operating income           12,126,944   8,597,615  18,690,373  12,766,965
    Stock based compensation
     (SBC)                             --          --          --     183,600
    Amortization                  427,391     437,704     927,048     865,710

    Operating income (without
     SBC and amortization)     12,554,335   9,035,319  19,617,421  13,816,275

    Net income Attributable to
     the Company                9,352,069   7,797,830  15,633,177  11,554,823
    Stock based compensation
     (SBC)                             --          --          --     183,600
    Amortization                  427,391     437,704     927,048     865,710
    Change in fair value of
     contingent consideration*     94,829          --    (700,268)         --

    Net income (without SBC,
     amortization and
     contingent consideration)  9,874,289   8,235,534  15,859,957  12,604,133

    Weighted Average Number of
     Shares Outstanding
    Basic                                      51,450,623    47,536,883    51,332,698    47,528,503
        Diluted                                        51,450,623    47,536,883    51,332,698    47,528,503

        Earnings  per  hare  (without
          SBC,  amortization  and
          contingent  consideration)            $0.19              $0.17              $0.31              $0.27
        Basic                                                      $0.19              $0.17              $0.31              $0.27

        *  Represents  a  gain  from  the  change  of  fair  value  of  the  contingent
            consideration  for  the  acquisition  of  Huipu  as  at  06/30/2010,  according
            to  FASB  ASC  805  -  Business  Combinations

 

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