China Information Security Announces Strong First Quarter 2008 Results

SHENZHEN, China , May 13 /Xinhua-PRNewswire-FirstCall/ -- China Information Security Technology, Inc. (OTC Bulletin Board: CIFS) ("China Information Security," "CIST" or the "Company"), a leading provider of Information Security and 3S (Geographic Information System -- GIS, Remote Sensing -- RS, and Global Positioning System -- GPS) services in China , today announced strong financial results for the first quarter ended March 31, 2008 .

"We are pleased to see such strong momentum in our operations in the first quarter, as we reaped the benefits of our expanded product portfolio and further geographic reach," commented Mr. Jiang Huai Lin , CEO of China Information Security. "At this point, we remain confident in achieving our financial goals for the year 2008. With the rapid expansion of our customer base and the successful integration of newly acquired businesses, we should be able to strengthen our competitive position and increase our market share."

For the three months ended March 31, 2008 , revenues grew 180% to $14.4 million, compared to $5.1 million in the same period of 2007. The increase was primarily due to the Company's market expansion, development of new product lines and procurement of several large-scale system integration projects. Financial results of ISDT and Bocom Technology were consolidated starting from November 1, 2007 and February 1, 2008 , respectively. They contributed $3.0 million and $0.8 million to revenues for the three months ended March 31, 2008 , respectively.

Gross profit for the first quarter of 2008 grew 91% year over year to $6.1 million, compared to the same period of 2007, representing a 42% gross margin. The Company's gross margin declined mainly due to higher costs for procured hardware and other subcontracting costs related to the implementation of several large-scale system integration projects.

Administrative expenses increased to $1.4 million in the first quarter of 2008, from $0.5 million in the same period last year. The increase was attributable to an increase in the Company's administrative staff and increased administrative costs due to the expansion of the Company's operations.

Selling expenses for the quarter ended March 31, 2008 were around $0.4 million and remained stable as a percentage of revenues.

Income from operations grew 65.5% to $4.1 million in the first quarter of 2008, representing an operating margin of 28.6%, as compared to $2.5 million and 48.4% in the same period of 2007. The improvement was a result of the strong increase in the Company's revenues. However, the operating margin declined due to higher costs for procured hardware and other subcontracting costs related to the implementation of several large-scale system integration projects, and increased operating expenses due to market expansion.

The Company's subsidiaries, IST, ISDT and Bocom Technology, and its VIE, iASPEC, are subject to EIT at a rate of 18% of assessable profits in 2008. In addition, IST is a Foreign Investment Enterprise engaged in the technology industry which entitles it to a two-year exemption from EIT followed by a 50% tax exemption for the next three years. Income tax expenses for the three months ended March 31, 2008 was $0.2 million.

Net income grew 85.3% to $4.0 million in the first quarter of 2008, or $0.09 per basic and diluted share, compared to $2.1 million during the same period of 2007.*

Financial Condition

As of March 31, 2008 , the Company had $23.6 million in cash and cash equivalents, total current assets of $58.1 million and total assets of $107.2 million. The Company's stockholders' equity increased to $80.3 million, from $74.0 million as of December 31, 2007 .

Recent Developments

(1) Corporate Governance

In April 2008 , China Information Security established three committees -- audit, compensation and nominating to comply with all NASDAQ listing requirements. Mr. Sean Shao , CFO of NYSE listed Trina Solar , was retained as the independent director who will lead as Chairman of the Audit Committee.

(2) Completed Geo Acquisition

On April 1, 2008 , iASPEC closed the acquisition of 57% of the total equity interest in Wuda Geoinformatics Co., Ltd. ("Geo"), a leading provider of GIS software products and integrated solutions in China .

(3) Reincorporation

In April 2008 , China Public Security Technology ("CPST") merged into China Information Security Technology, Inc., a Nevada corporation, with CIST being the surviving corporation. The symbol for CIST's common stock on the OTC Bulletin Board has been changed to "CIFS.OB".

(4) iASPEC's Establishment of Two New Subsidiaries

On April 11, 2008 , iASPEC established two subsidiaries in Shenzhen , PRC, Shenzhen iASPEC Information Security Technology, Co., Ltd. and Shenzhen iASPEC Intelligent Systems, Co., Ltd., each with registered paid-in capital of RMB5,000,000 (approximately $712,000). The two new subsidiaries are to be engaged in the provision of computer networks and intelligence control and security surveillance systems, as well as in the sale of computer hardware and software.

Outlook for 2008

The Company plans to leverage its strength and brand recognition in Guangdong Province in order to win business across China . The Company intends to manage its national operations from six centers located in Guangzhou , Beijing , Shanghai , Wuhan , Chongqing and Xi'an .

Management expects that the acquisitions of ISDT, Bocom Technology, and Geo will also accelerate the Company's geographic expansion, enhance its technological capabilities or competitive advantages, provide licensing and recurring revenue opportunities, and serve to fulfill its planned expansion into civil-use GIS markets. Furthermore, the Company expects to capitalize on its strong R&D capability and outstanding contract win ratio, to seize contract opportunities during Phase II of China's "Golden Shield Project" nationwide.

"The market for security information technology continues to increase at a very rapid rate," said Mr. Lin. "With our technological capabilities, diverse and growing range of products, high barriers to entry and dedicated employees, we believe that we are well positioned to execute on our business plan and to create long term value for our stockholders."

Fiscal Year 2008 Guidance

The Company is maintaining its 2008 financial guidance for pro forma revenues of $85 million, and pro forma net income of $27 million, which excludes any non-cash charges as a result of employee stock option grants in 2007 and 2008 and amortization of intangible assets associated with the recent acquisitions of ISDT, Bocom Technology and Geo.

Non-GAAP Financial Measures

The Company uses non-GAAP financial measures in this press release due to the inclusion of financial information of iASPEC which is considered to be the Company's "Predecessor" for these purposes. Effective as of July 1, 2007 , iASPEC became the Company's variable interest entity, or VIE, whose operation results began to be reflected in the financial data starting from July 1, 2007 . Therefore, the accompanying financial data for the three months ended March 31, 2008 , reflect the results of operations of CIST, its subsidiaries and its VIE, while the financial data for the three months ended March 31, 2007 only reflects the results of operations of CIST and its subsidiaries. We have provided non-GAAP financial measures through the reallocation of net related party revenues from iASPEC before it became a consolidated entity, which is not in accordance with US GAAP. The reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the following section. The Company's management believes that these non-GAAP financial measures are necessary because the abnormally high financial ratios calculated using GAAP would be misleading to investors and would not reflect the substance of the Company's performance.

About China Information Security Technology, Inc.

Through its wholly-owned Chinese subsidiary, China Information Security is focused on the development and implementation of large scale, high-tech information security and 3S ("Geographic Information System -- GIS, Remote Sensing -- RS, and Global Positioning System -- GPS") related projects. The Company provides a broad portfolio of fully integrated solutions and services, including security information technology (First Responder Coordination Platform, Intelligent Border Control System and Residence Card Information Management System), 3S (GIS, RS and GPS), and Product Sales and Services. Through its exclusive contractual arrangement with iASPEC Software Company Limited (iASPEC), China Information Security has the licenses to numerous registered and copyrighted software applications in China . In addition, iASPEC is considered the Company's variable interest entity, and its financial data and information is consolidated into the Company's accounts. To learn more about the Company, please visit the corporate website at .

Safe Harbor Statement

This press release may contain certain "forward-looking statements" relating to the business of China Information Security Technology, Inc., and its subsidiary companies. All statements, other than statements of historical fact included herein are "forward-looking statements" including statements regarding the general ability of the Company to achieve its commercial objectives; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. These forward-looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involve known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website ( ). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

SOURCE China Information Security Technology, Inc.