Review of Financial Reporting Nio Security
Publisert: 9. mars 2012
Sist endret: 21. april 2017
Our reference: 11/6354
Filing code: 732
In accordance with the Securities Trading Act section 15-1 subsection (3), the Financial Supervisory Authority of Norway (Finanstilsynet) has reviewed certain accounting topics related to the 2010 financial statements of Nio Security, Inc. (Nio) which have been prepared according to US Generally Accepted Accounting Standards (US GAAP). Reference is made to previous correspondence, most recently the issuer's reply of 7 February 2012.
Below is a summary of the topics addressed by the review. The review is hereby considered closed.
2. Segment reporting
Finanstilsynet raised a question with respect to the segment disclosures in the financial statements for 2010. Finanstilsynet's question was based on the fact that Nio disclosed that it has a single segment but makes other disclosures regarding the two main products of the company and that Nio also markets these products to several countries.
Nio explained that it operates only within one segment which is the video surveillance space in the security industry. Nio has two main products, CloseView and SteadyEye, which perform different tasks, but both products are based on the same hardware platform. In Nio's opinion, it would be misleading to split this into two or more segments. Nio has stated that the split between the products in the board of directors report has been discussed in order to give additional information to the readers.
ASC 280-10-50-1 defines an operating segment as a component that engages in business activities from which it may earn revenues and incur expenses; its operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and its discrete financial information is available. Finanstilsynet has received the monthly and quarterly reporting that Nio provides to the CEO, the chief operating decision maker as defined in ASC 280. These reports include a detailed listing of all amounts invoiced during the period. This report is also broken down first between Europe and the US, then by revenue category. In addition, on a monthly basis, the CEO also receives both a detailed balance sheet and a detailed income statement on a consolidated basis and broken down into the US and Norway.
Information is not provided on a product basis in the internal reporting. With respect to whether or not the two products represent segments, Finanstilsynet has noted for the record that no information is provided to the CEO and has no further comments in this regard.
With respect to the geographic reporting included in the internal reporting, Nio is of the opinion that Norway and the US are not two operating segments as defined by ASC 280-10-50-1. The company has stated that the balance sheet and income statement for both Norwegian operations and US operations that are provided to the Chief Operating Decision Maker on a weekly basis are only provided for administrative purposes and are not used in allocating resources or assessing performance.
Finanstilsynet is of the opinion that it is presumed that information provided to a Chief Operating Decision maker is used in allocating resources and assessing performance. Consequently, it appears that the operations in Norway and US would represent two operating segments as defined by ASC 280. On the other hand, it also appears that when applying the aggregation criteria in ASC 280-10-55-7A-C that it would be appropriate to aggregate the Norway and US operations into one reportable segment. Nio has explained that the products sold in Norway and the US are identical in nature and production processes. In addition, the products are sold to customers that are similar. Norway and the US also have in general similar regulatory environments as it relates to surveillance cameras. Finanstilsynet is of the opinion that there are two operating segments, but that it appears reasonable that these could be aggregated into one reportable segment. Finanstilsynet notes the company's presentation of segments and has no further comments in this regard.
Finanstilsynet has also raised a question regarding the lack of entity-wide information as required by ASC 280-10-50-40 through 42.
Paragraph 40 requires an entity to report the revenues from external customers for each product and service or each group of similar products and services unless it is impracticable to do so. According to the board of directors report, the Nio has two main products, CloseView and SteadyEye. In addition, the report provided to the CEO and CFO provides sales split into retail sales, license fees, services and shipping. It appears that it would be necessary to provide the amount of revenue to external customers for CloseView and SteadyEye and possibly also for the other revenue breakdowns provided in the reporting to the CEO and CFO. Nio's opinion is that it has only one type of revenue and a revenue breakdown is not deemed critical. Nio has confirmed that it will consider including a split of revenue by product, including comparative figures, in future financial reporting. Finanstilsynet notes this for the record and has no further comment in this regard.
Paragraph 41 requires entity to report the following geographic information unless it is impracticable to do so or it is included in the segment reporting:
a. Revenues from external customers from the country of domicile and from all foreign countries in total. If revenues from external customers attributed to an individual foreign country are material, those revenues shall be disclosed separately.
b. Long-lived assets in the entity's country of domicile and located in all foreign countries in total in which the public entity holds assets. If assets in an individual foreign country are material, those assets shall be disclosed separately.
Nio has stated that geographical concentrations were disclosed in the board of directors report for 2010. Nio has submitted a listing of revenue by country for 2010. Based on this, US, Norway and the UK are material countries representing, 63%, 15% and 18%, respectively. Nio has confirmed that it will disclose the 2010 revenue for each of these three countries in the financial statements for 2011 and assess what disclosures are required related to revenue for 2011. Finanstilsynet notes this for the record and has no further comments in this regard.
Nio has stated that all of their assets are located in the US and will disclose this in future financial statements. Finanstilsynet notes this and has no further comments with regard to reporting of long-lived assets by geographic location.
3. Discontinued operations
Finanstilsynet raised a question with respect to the classification of the Tempest line as discontinued operations in the 2010 financial statements.
On 1 August 2007, Nio acquired 100% of the outstanding shares of Tempest Microsystems, Inc. (Tempest). Tempest offered a range of digital video recorders for the security industry based on a PC platform. In January 2010 the Tempest line was discontinued. In the 2009 financial statements, Tempest was not classified as discontinued operations in accordance with Accounting Standards Codification (ASC) 260. When issuing the 2010 financial statements, it was concluded that the operations related to Tempest should have been presented as discontinued operations in the 2009 financial statements. In the 2010 financial statements, the comparative financial statements for 2009 have been restated to present the operations related to Tempest as discontinued operations in accordance with ASC 260.
In accordance with ASC 250-10-50-7, when financial statements are restated to correct an error, the entity shall disclose that its previously issued financial statements have been restated, along with a description of the nature of the error. In addition, the effect of the correction on each financial statement line items and any per-share amounts affected should be presented. These disclosures were not provided in the 2010 financial statements.
The income statement for 2010 did not include basic and diluted per-share amounts for income from continuing operations and discontinued operations on the face of the income statement as required by ASC 260-10-45-2 and ASC 260-10-45-3. In addition, the 2010 financial statements did not include amounts of revenue and pretax profit or loss reported in discontinued operations as required ASC 205-20-50-1c. The missing information was relevant only for the 2009 figures and not applicable for the 2010 figures. Comparatives for 2009 are not required in future financial reporting as the company has historically provided only one year of comparative information.
Finanstilsynet is of the opinion that the 2009 comparatives in the 2010 financial statements should have included these disclosures to be in accordance with US GAAP. The discontinuation of Tempest was a material transaction. As such, all related disclosure requirements should have been provided. Nio has confirmed that it will include all required disclosures in the event of correction of errors or classification as discontinued operations in future financial reporting. Finanstilsynet notes this for the record and has no further comments.
4. Loan agreement with major shareholders
Finanstilsynet requested information regarding the disclosure in Note 9 regarding loans of NOK 9.46 million which were primarily with major shareholders and whether the loans are to related parties. Nio has confirmed that NOK 5 million is to related parties. The financial statements for 2010 do not include the required disclosures related to loans with related parties as required by ASC 850-10-50-1.
Nio has stated that there are five loans with three different related parties. The loans have terms through 1 February 2011 and have interest rates ranging from 15-20%. Interest expense of $117,477 was incurred on these loans in 2010.
Nio has included these disclosures in the third quarter report for 2011 and has confirmed that these disclosures for 2010 and 2011 will be included in the 2011 financial statements, including interest rate, interest expense recorded in the Statement of Comprehensive Loss, manner of settlement and any other disclosures as required by ASC 850-10-50-1. Finanstilsynet notes this for the record and has no further comments in this regard.
5. Other income
According to the Statement of Operations and Comprehensive Loss, there is other income of $75,708 in 2010 and $315,887 in 2009. The 2010 financial statements do not include an explanation of these amounts. Nio has stated in its letter of 6 July 2011 that other income includes the following:
|Settlement agreements with creditors
|Loss on disposal of assets
|VAT reserve adjustments
Nio will include a specification of these amounts in the 2011 financial statements. Finanstilsynet notes this for the record and has no further comments in this regard.
6. Revenue recognition policy
The 2010 financial statements do not include a revenue recognition policy. Nio has stated that its policy is straight-forward and not complex in nature. Nio recognizes revenue based upon the shipment of its goods to customer.
Nio has agreed to provide a revenue recognition policy in its next and future financial reporting. Nio's comments concerning the revenue recognition policy have been noted for the record, and Finanstilsynet has no further comments in this regard.
7. Cash flow statement
As confirmed in the company's letter dated 6 July 2011, the amount reflected in the Statement of cash flow related to loans is $1,568,932 and is net of a repayment of $52,070. According to ASC 230-10-45-7, “Generally, information about the gross amounts of cash receipts and cash payments during a period is more relevant than information about the net amounts of cash receipts and payments." Further, ASC 230-10-45-8 states that certain items with quick turnover, large amounts and short maturities may be presented net when knowledge of the gross cash receipts and payments related to them is not necessary to understand the entity's operating, investing and financing activities. Paragraph 45-9 specifies that debt with a maturity of three months or less would qualify for net reporting. The company agrees with Finanstilsynet that drawdown and repayments on long term loans should not be presented net in the cash flow statement.
Nio will present new loans and repayments of loans gross in future periodic reporting. Nio's comments concerning the cash flow statement have been noted for the record, and Finanstilsynet has no further comments in this regard.
8. Parent company financial statements
As communicated in Finanstilsynet’s Circular 10/2011, the annual financial statements must contain audited financial statements of the parent company and for the consolidated group. The Balance Sheet, Statement of Operations and Comprehensive Loss and Statement of Cash Flows include a column for “Parent Only” that has a footnote that states “The parent only columns for 2010 and 2009 are for illustrative purposes and report the balance sheet of the parent only, ignoring assets and liabilities of the subsidiary required under accounting guidance.” In addition, the notes to the financial statements appear to cover the consolidated accounts and not the parent company. In addition, the audit report for 2010 does not include a statement that the parent company financial statements have been audited.
Nio has confirmed that it will provide full financial statements for the parent company including all required note disclosures. Finanstilsynet has noted this for the record and has no further comments in this regard.
Nio has confirmed that the auditors have applied the necessary audit procedures on both the parent and consolidated financial statements to issue an audit report and will arrange for the auditors to include a statement in the 2011 audit report which will state that the parent company financial statements have been audited. Nio's comments concerning the parent company auditors report have been noted for the record, and Finanstilsynet has no further comments in this regard.
9. Quarterly reporting
In the Q1 2011 Interim report, the cash flow statement includes only a sum line for cash flow used in investing activities and cash flow from financing activities. In addition, the equity statement is only provided for total equity.
Finanstilsynet expects the company to present a more detailed cash flow statement that at least details significant transactions and a reconciliation of equity with the same number of columns as in the equity statement in its annual financial statements in future interim reporting. The company has stated that it will amend the cash flow statement and the equity statement in their next quarterly reporting in order to give more relevant, reliable comparative and understandable information to the readers. Finanstilsynet has noted that the company has included an expanded cash flow statement and a rollforward of equity by category in the footnotes to their third quarter report. Finanstilsynet is of the opinion that the rollforward of equity by category should have been in the main equity statement and expects the company to position it as a main statement in future quarterly reporting. Nio's comments concerning the quarterly reporting have been noted for the record, and Finanstilsynet has no further comments in this regard.
Finanstilsynet has not considered whether the above matters are subject to the securities legislation's provisions regarding the requirement to disclose inside information in accordance with the Securities Trading Act section 5-2 subsection (1) and section 3-2. Finanstilsynet expects the undertaking to consider its requirement to disclose inside information on a continuous basis.
Finanstilsynet has forwarded a copy of this letter to the issuer's appointed auditor and to Oslo Børs.
On behalf of Finanstilsynet
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