Attached files
Table of Contents
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2010
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File Number 001-34427
Tri-Tech Holding Inc.
(Exact name of registrant as specified in its charter)
Cayman Islands | Not Applicable | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. employer identification number) |
16th Floor of Tower B, Renji Plaza No. 101
Jingshun Road, Chaoyang District
Beijing, Peoples Republic of China 100102
(Address of principal executive offices and zip code)
+86(10) 5732-3666
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. The Company is authorized to issue 30,000,000 ordinary shares, $0.001 par value per share. As of the date of this report, the Company has 8,051,833 issued and outstanding ordinary shares.
Table of Contents
FORM 10-Q
INDEX
ii | ||||||
PART I. |
FINANCIAL INFORMATION | 1 | ||||
Item 1. |
Financial Statements | 1 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 1 | ||||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 19 | ||||
Item 4. |
Controls and Procedures | 19 | ||||
PART II. |
OTHER INFORMATION | 20 | ||||
Item 1. |
Legal Proceedings | 20 | ||||
Item 1A. |
Risk Factors | 20 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 20 | ||||
Item 3. |
Defaults Upon Senior Securities | 20 | ||||
Item 4. |
(Removed and Reserved) | 20 | ||||
Item 5. |
Other Information | 20 | ||||
Item 6. |
Exhibits | 21 |
i
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as look, may, should, might, believe, plan, expect, anticipate, estimate and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to the following:
| the timing of the development of future products; |
| projections of revenue, earnings, capital structure and other financial items; |
| statements of our plans and objectives; |
| statements regarding the capabilities of our business operations; |
| statements of expected future economic performance; |
| statements regarding competition in our market; and |
| assumptions underlying statements regarding us or our business. |
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.
ii
Table of Contents
Item 1. | Financial Statements. |
See the financial statements following the signature page of this report, which are incorporated herein by reference.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described herein.
Overview
We are a leading provider of integrated solutions in China for its water and environmental problems. We are headquartered in Beijing with a current headcount of 220 employees. Our clients are a combination of government agencies, municipalities, and industrial companies and are located throughout China. Since our inception in 2002, we have successfully implemented more than 280 projects in 29 provinces, municipalities and autonomous regions in China.
Through our subsidiary, Tri-Tech (Beijing) Co. Ltd., and contractual arrangements with each of Beijing Yanyu Water Tech Co., Ltd. and Tranhold Environmental (Beijing) Co., Ltd., and Beijing Satellite Science & Technology Co. Ltd. (BSST), our three variable interest entities (VIEs) in China, we provide self-manufactured, proprietary or third-party products, system integration and other services in the fields of environmental protection, and water resource monitoring, development, utilization and protection. We design water work, reclaimed water reuse, customized sewage treatment and solid waste disposal works for Chinas municipalities and larger cities. These systems combine process equipment, software, controls and instruments, information management systems, resource planning and local and distant networking hardware that includes sensors, control systems, programmable logic controllers, and supervisory control and data acquisition systems. We design systems that track natural waterway levels for drought control, monitor groundwater quality and assist governmental agencies in managing water resources. We also provide systems for volatile organic compound (VOC) abatement, odor control, water and wastewater treatment, water recycling facilities design, project engineering, procurement and construction for petroleum refineries, petrochemical and power plants as well as safety and clean production technologies for oil and gas field exploration and pipelines.
For the quarters ended September 30, 2010 and 2009, our total revenues amounted to approximately $16.9 million and $4.9 million, respectively, a 243.5% quarter-over-quarter increase. For the nine months ended September 30, 2010 and 2009, our total revenues amounted to approximately $29.2 million and $10.9 million, respectively, a 167.9% period-over-period increase. Our revenues are subject to value added tax (VAT), business tax, urban maintenance and construction tax and additional education fees. We deduct these amounts from our gross revenues to arrive at our total revenues. Our net income for the quarters ended September 30, 2010 and 2009 was $2.2 million and $1.1 million, respectively, a quarter-over-quarter increase of 109.0%. Our net income for the nine months ended September 30, 2010 and 2009 was $4.5 million and $2.5 million, respectively, a period-over-period increase of 77.5%. Although there are many uncertainties surrounding the macro-economic environment in China, which might affect the overall economic situation during the fourth quarter of 2010, based on our current backlog and pipeline, we have only made slight adjustments to the 2010 guidance we announced early this year. For 2010, we anticipate that our revenues will range between $40.6 million and $50.5 million. We anticipate that our net income will likely reach $7.0 million, adjusted from the previous range between $7.0 million and $9.2 million.
We experienced rapid growth in the sales of hardware products and system integration, in the first nine months of 2010. Depending on the demand of customers and market conditions, we played different roles in the market, such as prime contractor, subcontractor, and hardware, software and service provider. However, with the further development of this market, we expect our sales price and profitability will change due to intense competition in the sales of hardware and software products. In order to maintain our competitive advantages, we will aggregate all our resources to expand our market share of prime contract and subcontract projects.
We generate revenues from services we provide in our three operating segments: (i) water, wastewater treatment and municipal infrastructure, (ii) water resource management systems and engineering services and (iii) industrial pollution control and safety. Total sales and costs are divided amongst these three segments.
1
Table of Contents
Water, Wastewater Treatment and Municipal Infrastructure (Segment 1)
Revenues for this segment were $10.9 million in the quarter ended September 30, 2010, an increase of 185.8% over revenues of $3.8 million in this segment in the quarter ended September 30, 2009. Cost of revenue was $7.9 million in the quarter ended September 30 2010, an increase of 242.3% over cost of revenue of $2.3 million in the quarter ended September 30, 2009. Operating expenses were $1.1 million in the quarter ended September 30 2010, an increase of 186.6% over operating expenses of $0.4 million in the quarter ended September 30, 2009. Net income attributable to Tri-Tech Holding Inc. (TRIT) was $1.5 million in the quarter ended September 30, 2010, an increase of 71% over net income of $0.9 million in the quarter ended September 30 2009.
Water Resource Management Systems and Engineering Services (Segment 2)
Revenues for this segment were $1.2 million in the quarter ended September 30, 2010, an increase of 11.4% over revenues of $1.1 million in this segment in the quarter ended September 30 2009. Cost of revenue was $1.0 million in the quarter ended September 30, 2010, an increase of 43.3% over cost of revenue of $0.7 million in the quarter ended September 30, 2009. Operating expenses were $0.3 million in the quarter ended September 30, 2010, an increase of 51.1% over operating expenses of $0.2 million in the quarter ended September 30, 2009. Net loss attributable to TRIT was $0.06 million in the quarter ended September 30, 2010, a decrease of 132.1% over net income of $0.2 million in the quarter ended September 30 2009.
Industrial Pollution Control and Safety (Segment 3)
This is a new segment for 2010. Revenues for this segment were $4.8 million in the quarter ended September 30, 2010. Cost of revenue was $3.5 million, and net income attributable to TRIT was $0.8 million in the quarter ended September 30, 2010.
Factors Affecting Our Results of Operations Generally
We believe the most significant factors that directly or indirectly affect our sales revenues and net income are:
| The changes in Chinas macro-economic environment, government strategies and policies, industrial development and planning; |
| The amount of the Chinese central and provincial governmental spending in water resources management, including surface and groundwater monitoring, flood control and mitigation, flood forecasting, water quality monitoring and assessment and water resources management decision maker systems; |
| The amount of Chinese central and local governmental investment in municipal wastewater management, including sewer pipelines and sewage treatment, water reuse and odor control; |
| Our comprehensive capabilities and competencies, including evolving technologies and applications, industrial experience and customer base, core competitive advantages, market shares and revenues; and |
| The availability and required terms of funding for our working capital. |
Historically, our business growth has primarily been driven by an increase in the number of our customers and projects. The complexity and scale of our projects have grown from single pieces of equipment, to comprehensive systems, to general contracting for complete solutions. For example, we now undertake projects to design and build entire treatment plants and complicated flood monitoring and forecasting systems for river basins. Due to the increasing urbanization process and growing Chinese economy, we expect that we will continue to earn a substantial majority of our revenues from our water resources management and municipal water, wastewater treatment product and service lines. In the first quarter of 2010, we set up a new segment focusing on industrial pollution control and safety. This segment began to generate considerable revenues during the second quarter. As a result, we plan to continue to focus most of our resources on expanding our business to the larger areas out of our current base of operation in China and increasing our market share in the regions we serve. In addition, we will allocate our resources to innovate our technology, to develop applications, to improve our larger project execution capabilities, especially in industrial pollution control and safety and profitability, and to market our brand to customers. Through a successful secondary public offering on April 20, 2010, we received net proceeds of approximately $30.7 million and used a portion of those net proceeds for working capital, acquisition, product research and development, application expansion and sales and marketing and expect to use the remaining portion for the same general purposes.
2
Table of Contents
Macro-Economic Factors and Business Trends
According to the China State Bureau of Statistics, Chinas GDP totaled RMB 26.9 trillion (or US$4.0 trillion) for the first nine months of 2010, an increase of 10.3% over the same period in 2009. The growth rate increased by 2.5% over the same period in 2009. The GDP growth rate was 11.9% during the first quarter, 10.3% during the second quarter, and 9.6% during the third quarter compared to the same periods in 2009, indicating a moderate slowdown. In addition, industrial production and fixed asset investment (FAI) continued to grow during the first nine months. The industrial production growth rate was 16.3% during the first nine months. The growth rate increased by 7.6% over the same period in 2009. In particular, the industrial production growth rate was 19.6% during the first quarter, 15.9% during the second quarter, and 13.5% during the third quarter, also indicating a slowdown. Foreign direct investment (FDI) increased 15.8% during the first nine months of 2010 compared to the same period in 2009. Thirty-eight out of a total of thirty-nine sectors showed growth during the first nine months in 2010 over the same period in 2009. The overall FAI reached RMB19.2 trillion (or US$2.9 trillion) during the first nine months in 2010, an increase of 24.0% over the same period in 2009. In particular, the urban FAI was RMB16.6 trillion (or US$2.5 trillion), an increase of 24.5% over the same period in 2009
Two major factors caused the slowdown in the economic indicators above: (i) high growth rates resulted in a higher benchmark in 2009, and (ii) the central governments control on overall fixed asset investment caused a decrease in the number of new projects for the first time, especially restricting fixed asset investment in the Two High One Resource sectors of high energy consumption, high pollution, and resource exploration related sectors.
The investment in Chinas environmental protection sectors will continue to increase. Total spending in environmental protection sectors reached 1.35% of the total GDP during the 11th Five-Year Plan. During the 12th FiveYear plan, the spending for environmental sectors is expected to reach RMB31 trillion (or US$4.7 trillion), an increase of 121% over the period covered by 11th Five-Year Plan, including RMB10 trillion (or US$1.5 trillion) spending on the operating costs for environmental facilities. The total spending will reach 7%-8% of GDP in 2015. The CAGR will be 15%-20% for the next 15 to 20 years.
Chinas wastewater treatment business is shifting from tier 1 large cities, such as Shanghai, Beijing, Tianjin, Guangzhou, to tier 2 smaller cities and counties. According to the 12th Five-Year Plan, all counties and towns in China will construct wastewater treatment plants. We believe the wastewater treatment market will continue to be strong. The 12th 5-year plan sets a goal to have a 67% increase in the wastewater treatment capacity. As of the end of 2009, China reached a 73% municipal wastewater treatment rate. Compared to a 90% treatment rate in the developed countries, there will still be space of approximately 20% remaining for growth. In addition, more action will be taken for restoration of lakes and rivers.
According to the latest report from Chinas Ministry of Housing and Urban-Rural Development, 579 of the countrys 655 cities were being served by WWTPs at the end of June; 19 more than in the previous quarter. The total number of wastewater treatment plants serving those cities rose from 1,415 to 1,519, with total city capacity rising from 94.35 million cubic meters per day to 98.42 million cubic meters per day. The figures suggest there is little opportunity for new large-scale municipal plants to be built at present, and that although there continues to be a strong WWTP market, it is taking place mostly at the county level, where the size of potential plants is smaller.
Recently, the National Development and Reform Commission approved an additional 29 projects funded by foreign government loans of $426 million. As of June 30, 2010, a total of 56 projects have been approved to utilize foreign government loans of totaling $1.1 billion. The majority of the projects are water, wastewater treatment and environmental protection related.
Based on the data shown above, although there are many uncertainties in Chinas economy, we still believe that our company is likely to continue to grow in 2010 because our business is poised to directly benefit from Chinas increasingly enhanced investment in its water and environmental protection infrastructure as China is exerting more focus and efforts on sustaining the growth of its economy.
3
Table of Contents
New Opportunities in Our Business
Water, Wastewater Treatment and Municipal Infrastructure
The Ministry of Housing and Urban-Rural Development has outlined the following key points with regard to the wastewater treatment market in China:
| On average there are eight new wastewater treatment plants starting up each week in Chinese cities, adding an extra 313,000 cubic meters per day of capacity per week. |
| 36 large cities have a total of 353 WWTPs with a total capacity of 41 million cubic meters per day (average capacity 116,000 cubic meters per day). |
| 6% of the cities have 23% of the plants, which in turn have 42% of the capacity. |
| 50% of the remaining 76 cities yet to install WWTPs are found in the poorer provinces of Heilongjiang, Jilin and Guangdong, where there are significant shortages of capital. |
| An average of 18 new plants were added at the county level each week during the last quarter, with an average combined capacity of 462,000 cubic meters per day (average capacity 19,000 cubic meters per day). |
We are very actively expanding our geographical reach from our current base of operation to the rest of China, including Hubei, Inner Mongolia, Xinjiang, Shaanxi, Sichuan, and Heilongjiang provinces. Our expansion strategy has had some immediate impacts. So far, we have received a Japanese Yen (JPY) 519 million (approximately $6 million) contract for the upgrade and expansion of a wastewater treatment plant in Kuitun City of Xinjiang Uygur Autonomous Region. The project will be financed by an Official Development Assistance (ODA) Loan under an agreement between Chinas Ministry of Finance and Japans Bank for International Cooperation. As one of eleven Xinjiang Urban Environmental Comprehensive Improvement Projects approved by the Chinese government and funded by a Japanese Yen credit in July 2007. This project covers upgrade work of a central wastewater treatment facility and construction of a companion wastewater treatment plant with a targeted daily capacity of 60,000 cubic meters.
Winning our first project funded by foreign government financial institution indicates we reached a new level and are able to compete and win such high end projects.
Due to the shortage of fresh water sources, the Chinese government requires all new power plants in the coastal areas to build sea water desalination plants simultaneously, to provide the process water to operate the power plants, as well as the water supplying the adjacent commercial and residential users. The sea water desalination market is rapidly growing in China, especially in the Bohai Bay Area, surrounded by major cities, including Tianjin, Tangshan, Dalian, and Qingdao. By the end of 2010, the total capacity of sea water desalination will increase to 500,000 cubic meters per day or 150 million cubic meters a year, becoming the largest sea water desalination industrial base in China. We expect to participate in the potential market by leveraging our existing technologies in water treatment.
Winning our largest project to date of a 96,000 cubic meters per day drinking water treatment plant for the city of Ordos in Inner Mongolia autonomous Region opened up the doors for us to pursue new opportunities in municipal drinking water treatment markets catalyzed by the new Chinese national standards for drinking water (GB5749-2006) promulgated in 2006. The new standards are designed to improve drinking water safety for nearly 1.4 billion people in the following three aspects:
| Compared to the previous standards (GB5749 - 85), the new standards increase the water quality monitoring parameters by 71 items, from 35 to 106 in microbial aspects, disinfection, chemical aspects, radiological aspects, and acceptability aspects. |
| The new standards unify the urban and rural drinking water quality standards. This development is very significant because over 60% of the Chinese population lives in rural areas, compared with less than half in western countries. |
| The new standards adopted the best practices and methodologies from the WHO, European Union, United States, Japan and Russian drinking water quality standards. |
In order for the entire country to fully comply with the new standards by the July 1, 2012 deadline, China must protect and improve the quality of its source water through reclamation of wastewater and reduction of pollutants discharged or percolated to natural water bodies; and application of the most advanced technologies, such as membrane technology, disinfection, and on-line monitoring technologies, to upgrade, retrofit or replace the existing treatment facilities which use more traditional technologies.
4
Table of Contents
Water Resources Management Systems and Engineering Services
Earlier this year, the southern provinces of China were devastated by severe drought. The Ministry of Water Conservancy approved expedited construction of the National Drought and Flood Control Command System (Phase II) which includes information acquisition systems, communication systems, networks systems and decision support systems.
This summer, mountain torrents and debris flow happened in a lot of areas in China. According to the report of the Ministry of Water Conservancy (MWC), the central government has acknowledged the 103 mountain torrents pilot county projects and mandated to expand the pilot areas. Yanyu participated in such pilot projects in 17 pilot counties of these 103 counties. Currently the MWC is planning the national mountain torrent control pilot county projects Phase II.
According to a speech made by officials from the Ministry of Water Resources of China, evaluation of the pilot mountain torrent forecasting program in 103 counties indicated very positive results. Since the implementation of the pilot program in those 103 counties, 329 mountain torrents occurred in 61 of those 103 counties. With the forecasting and broadcasting systems implemented, 930,000 people were evacuated, avoiding approximately 44,000 human life losses or injuries. The Government earmarked significant funding to continue the program throughout the country. Within the next three years, the mountain torrent forecasting and broadcasting systems will be implemented in 1,836 counties in 29 provinces, municipalities and autonomous regions, which cover 4.63 million square kilometers, or 40% of the total land area of China. More than 500 million people will benefit from these systems.
From September, 2010 to June 2011, 500 counties will install and implement the systems. Although we do not know the exact amount of total funding that will come from the government, based on our experience, an average of RMB 3 to 6 million ($0.4 to $0.9 million) for each county is a valid estimate, totaling RMB 150 to 300 million ($22.4 to $44.8 million). We have received contracts in 18 of those 103 counties. All of the systems installed and implemented by us have met the clients requirements and expectations, and have generated positive results.
In order for our company to continue to pursue these opportunities, it is the goal of our management to maintain our existing market share and put together a comprehensive business implementation plan to include internal cash funding for our projects, large domestic bank financing, addition of personnel, additional new project offices in strategic geographic locations, increased production capacity of RTU and other equipment, a procurement plan, and strategic partnerships with manufacturers.
According to the hydrological station construction plan and targets of MWC in the 12th-Five Year Plan, online monitoring for cross-boundary water volume and water quality of all major rivers will be achieved during the 12th-Five Year Period, thus we expect spending will be allocated to water volume and quality monitoring, water quality labs and portable testing devices.
Industrial Pollution Control and Safety
According to the World Bank Group, through its private sector lending arm, the International Finance Corporation (IFC) is currently reviewing options for setting up a fund in China to help water companies to invest in alternative projects. The new area is in reuse water: selling it to industry; to power plants and steel works and the petro-chemical industry. Our management believes there is significant opportunity here. The IFC is understood to be considering a facility that would share risk with Chinese banks willing to lend money to water technology companies who are prepared to invest in improving water efficiency including reuse schemes.
The petroleum and petrochemical industry is an industry with high energy consumption and high pollution. Currently this industry is faced with severe challenges with respect to its efforts to improve energy consumption, mainly due to lagging technologies in China. Since the reform and opening 30 years ago, the Chinese government has attached great importance to energy conservation, emission reduction and waste treatment for this industry. There is RMB 210 billion ($31.3 billion) of the RMB 4 trillion ($0.6 trillion) stimulus package announced by the government at the end of 2008 being spent in energy conservation and emission reduction for the petroleum and petrochemical industry. We believe the energy conservation environmental industry will experience high growth in the next 3 years under policies of expanding domestic demand and consumption.
5
Table of Contents
Early this year we set up a new reportable segment Industrial Pollution Control and Safety. We completed several projects during the second quarter in this segment, such as a turn-key air pollution control project for Interface production facilities in Taicang, Jiangsu Province. Interface is an Atlanta based US company. They are the worldwide leader in design, production and sales of environmentally-responsible modular carpet. Currently we are actively pursuing several large projects in this sector, including a wastewater treatment project for Daqing Refining & Chemical Company, a biofiltration odor control system for Daqing Petrochemical Co. and a VOC abatement project Phase for the Rubber Plant of Yanshan Petrochemical Co.
In order to offer our products, systems and services to different industries by broadly penetrating major industries such as the oil, gas and petrochemical industries, we recently completed our first acquisition of Beijing Satellite Science & Technology Co. Ltd. (BSST). We believe the acquisition of BSST provides a strategic opportunity for us to penetrate the industrial pollution control market in various large industries, especially the automation of safety in production of petroleum and petrochemical industry.
Through our newly-acquired division BSST, we won several contracts from the China Petroleum & Chemical Corporation (SINOPEC), such as a $1.15 million contract for an automated monitoring and communication system and a $1.0 million contract turnkey project of a 800 MHz TETRA Network Communications System for use in natural gas operations in the Puguang gas field in Sichuan Province. In only a month as an affiliate of our company, BSST has already received a contract for a large gas field safety production project. This is an important step in further demonstrating our expanding capabilities in the industrial pollution and safety control market, and it underscores our reasons for the strategic acquisition of BSST. We expect to receive more contracts like this in the future.
Strategies for Growth
Water, Wastewater Treatment and Municipal Infrastructure
We are very actively expanding our geographical reach from our current base of operations to the rest of China, including Hubei, Inner Mongolia, Xinjiang, Shaanxi, Sichuan, and Heilongjiang Provinces. We set up a branch office with 6 full-time employees in Wuhan, the capital of Hubei Province. We are planning to set up sales offices in Chengdu, Sichuan Province; Harbin, Heilongjiang Province; and project offices in Xian, Shaanxi Province; Ordos, Inner Mongolia Autonomous Region; and Urumqi, Xinjiang Uygur Autonomous Region.
We plan to continue to expand our companys capabilities from sub-contracting to prime contracting services. Since our inception, we have grown our company from a provider of system integration and hardware to a company capable of engineering, procurement and construction of municipal water, wastewater and solid waste disposal facilities. As we continue to grow, we intend to focus our business on larger projects.
Water Resources Management Systems and Engineering Services
In a similar manner, we are going to further develop our water resource management services from partial management solutions to comprehensive management of large scale river basin projects. We believe that the Chinese governments decision to initiate new programs and allocate significant investment for their implementation will offer our company significant business opportunities. The severe drought in Southwest China will accelerate investment in water conservancy.
We invested significant resources to develop a large-scale water resources management software platform. The purpose is to consolidate our current independent, specialized software applications and platforms. The new software platform will have a whole set of features for comprehensive data collection, processing, analyzing, searching and reporting systems for real-time rainfall, surface and groundwater quantity and quality, and soil moisture data. We expect to complete the development by the end of 2010.
We also intend to invest resources to develop water quantity and water quality monitoring technologies and upgrade our proprietary products. We plan to introduce foreign advanced hydrological, water quantity and water quality monitoring instruments for application development. We intend to acquire domestic providers of water quantity and quality facilities. With all our resources, we will make sure our company keeps pace with development and automation in the water quantity sector.
6
Table of Contents
Industrial Pollution Control and Safety
We intend to strengthen our companys industrial pollution services by penetrating adjacent industry verticals such as the power generation, oil and petrochemical industries. While we have previously implemented air pollution control systems for the petrochemical industry, we also believe that there are significant business opportunities such as water and wastewater treatment and process safety in the adjacent industries.
With the acquisition of BSST, we will greatly benefit from the valuable market access and the existing client base of BSST in the oil, gas and petrochemical industries.
Potential Acquisitions of Complementary Businesses
In addition to organic growth, we are targeting selected acquisitions to further enhance our growth. In general, our markets are highly fragmented with small competitors. We will consider acquiring companies that we believe will add significant value to our business. These potential targets may have strong customer relationships but limited market access. Similarly, these targets may possess specialized skills, but the businesses have not scaled to the point where they can fully implement such skills. When evaluating targets we use a disciplined, conservative approach to ensure the acquisitions are strategic and beneficial to our business.
Research and Development
We invest significant resources in research and development for new products and advanced treatment processes. We established a new R&D facility, Tianjin Baoding Environmental Technology Ltd. (Tianjin Baoding), in the Tianjin Baodi Economic Development Area. As the R&D base for our company, Tianjin Baoding focuses on research and development, pilot testing, pre-installation and pre-assembly and manufacturing of our companys proprietary products.
In addition, we also established cooperative relationships with several industrial companies in the United States and Europe. The technologies we are pursuing include MBR membrane technology, forward osmosis membrane technology, the latest ecological engineering for wastewater treatment, and advanced solid-liquid separation technology.
Recently, we reached a license agreement for new forward osmosis technology with Hydration Technology Innovations, LLC (HTI). Oregon-based HTI is the worlds only commercial manufacturer of forward osmosis membranes, modules and systems. Tri-Tech will construct and operate one or more FO pilot units incorporating the licensed technology. Tri-Tech is authorized and licensed to construct and operate such pilot units in both municipal and industrial sites for wastewater treatment testing, demonstration and evaluation.
Funding for Continuous Growth
We actively work with local Chinese banks for financial support. Recently, we were granted a total line of credit for RMB100 million (approximately US$15 million) by the Bank of Hangzhou, Beijing Branch. We continue to work with other major Chinese banks and expect to acquire more lines of credit to enable us to bid on more project opportunities going forward. The lines of credit provide us with the ability to expand and grow our business in a non-dilutive manner, strengthen our financial flexibility, and optimize our capital structure.
Management
In order to continue our growth, we need to find the best talents in our industries. Earlier in the year, we appointed three senior executives that substantially strengthen the companys water and wastewater treatment management team. We believe their seasoned experience as well as their outstanding track records and achievements in water and wastewater treatment fields greatly enhance our competitive advantages in local, domestic and international markets. Their appointments reflect the ongoing growth of our company that values talent-oriented vision, advanced technologies and quality management. This underscores our dedication to be a leading solutions provider in the water, wastewater treatment and pollution control markets.
The newly appointed senior executives have already had major impacts on our organization, especially project execution capabilities. Under the leadership of Mr. Weidong Bi, Vice President of Engineering and Project Management, we completed and started to implement new project management procedures to ensure we are able to execute much larger, more complicated projects with good quality, on time and under budget. We continue to recruit the best talents and will appoint additional senior executives later this year.
7
Table of Contents
We added Mr. Gavin Cheng as our co-president; responsible for the companys general operations in China, and Mr. Hongzhi Ma as the deputy general manager of Tri-Techs subsidiary company Beijing Yanyu Water Tech Co., Ltd. (Yanyu). He will be responsible for Yanyus business development of water resource management and environmental business activities.
Mr. Cheng has more than 20 years experience in the fields of production safety and industrial pollution control. Before joining Tri-Tech, he served as president of Beijing Satellite Science & Technology Co. (BSST), which was acquired by Tri-Tech in August 2010.
Mr. Cheng founded BSST in 1994 and has been president since then. From 1987 to 1993, he worked on R&D and project management at the Beijing Test & Control Technology Institute of the Aeronautics Ministry. He graduated from Nanjing University of Aeronautics and Astronautics in 1987 with Bachelor of Engineering and Master of Engineering degrees. He received his Executive MBA from Peking University in 2001.
Mr. Ma is an expert in water resource management and water pollution control with more than 10 years experience. He was a participant in the national key scientific and technological project Research on Carrying Capacity of Water Resources, where he won the second place award for Technology Development at both the provincial and ministerial levels.
We also recently added two senior managers to key management positions. Mr. Cliff Zhu was named general manager of the sales management department, and Ms. Jenny Du was appointed general manager of our marketing and communications department.
Internal Control and SOX 404 Compliance
Our board of directors and management team fully understand the importance of corporate governance. Internal control policies and procedures are very critical for a publicly traded company. Although we are exempt from compliance with Sarbanes-Oxley Section 404 (SOX404), because we are a smaller reporting company. We think internal control compliance will help our company in the long-run. We engaged Friedman LLP to assist us in implementing SOX 404. Friedman LLP worked closely with the companys management to help prepare a SOX 404 compliance program. As part of compliance with SOX 404, together with our external auditor, we examined and reported on the adequacy of our internal financial reporting and control systems after documenting and testing financial reporting and control procedures. In addition, Friedman LLP provided recommendations to our companys management for instituting necessary additional controls to enhance the risk management capability of our companys internal controls over financial reporting. We are pleased to engage Friedman LLP for the important efforts to ensure that our company is in full compliance with SOX 404 requirements. We believe that this necessary undertaking will also enhance shareholder confidence and long-term value in our company.
Backlog
As of October 29, 2010, we had a total backlog of $54.9 million to be most likely collected by the end of 2011, including $50.5 million in water, wastewater treatment and municipal infrastructure, $0.4 million in water resources management systems and engineering services, and $4.0 million in industrial pollution control and safety. Our backlog represents the amounts of contract work remaining to be completed, or in other words, revenue from existing contracts and work in progress expected to be recorded in 2011, based on the assumption that these projects will be accepted by our customers in 2011.
2010 Guidance
As we near the end of 2010, our guidance can be narrowed down to more precise numbers. We anticipate that our revenues will reach approximately $40.6 million, adjusted from the previous range of between $40.6 million and $50.5 million. We anticipate that our net income will likely reach $7.0 million, adjusted from the previous range of between $7.0 million and $9.2 million.
The reason we are projecting more conservative numbers is because we expect two major contracts will be delayed until next spring due to the harsh winter. Xinjiang Kuitun wastewater treatment plant contract of $6.0 million will not realize any revenues in the 4th quarter of 2010 because the clients civil and site construction cannot be completed until next spring. Therefore, our equipment procurement and installation will be delayed accordingly. Due to the harsh winter conditions, we do not expect to record significant revenues from the Ordos drinking water treatment plant contract of $32 million in 4th quarter of 2010.
8
Table of Contents
Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009
Results of Operations
The Quarter
Ended September 30, 2010 ($) |
% of sales |
The Quarter
Ended September 30, 2009 ($) |
% of sales |
Change ($) | Change (%) |
|||||||||||||||||||
Revenue |
$ | 16,869,368 | 100 | % | $ | 4,910,833 | 100 | % | $ | 11,958,535 | 243.5 | % | ||||||||||||
Cost of Revenue (exclusive of depreciation and amortization) |
12,382,112 | 73.4 | % | 2,990,089 | 60.9 | % | 9,392,023 | 314.1 | % | |||||||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Depreciation and Amortization Expenses |
93,968 | 0.6 | % | 30,049 | 0.6 | % | 63,919 | 212.7 | % | |||||||||||||||
Selling and Marketing Expenses |
288,308 | 1.7 | % | 120,918 | 2.5 | % | 167,390 | 138.4 | % | |||||||||||||||
Other General and Administrative Expenses |
1,313,884 | 7.8 | % | 429,580 | 8.7 | % | 884,304 | 205.9 | % | |||||||||||||||
Total Operating Expenses |
1,696,160 | 10.1 | % | 580,547 | 11.8 | % | 1,115,613 | 192.2 | % | |||||||||||||||
Other Income (Expenses), net |
55,655 | 0.3 | % | 46,511 | 0.9 | % | 9,144 | 19.7 | % | |||||||||||||||
Income before provision for income taxes and non-controlling interests income |
2,846,751 | 16.9 | % | 1,386,709 | 28.2 | % | 1,460,042 | 105.3 | % | |||||||||||||||
Provision for Income Taxes |
605,256 | 3.6 | % | 314,371 | 6.4 | % | 290,885 | 92.5 | % | |||||||||||||||
Net Income Attributable to Non-controlling Interests |
(2,203 | ) | 0.0 | % | (1,273 | ) | 0.0 | % | (930 | ) | 73.1 | % | ||||||||||||
Net Income Attributable to TRIT |
2,243,698 | 13.3 | % | 1,073,611 | 21.9 | % | 1,170,087 | 109.0 | % |
Revenue
Our revenue was $16,869,368 in the quarter ended September 30, 2010, an increase of $11,958,535, or 243.5%, compared to revenue of $4,910,833 in the same period of 2009. The increased revenue was primarily driven by an increase in the number and size of our contractual engagements during this period. For example, in the third quarter of 2010, we obtained several contracts with a sales amount exceeding $55.4 million (equal to RMB371 million).
Cost of Revenue
Our cost of revenue was $12,382,112 in the quarter ended September 30, 2010, an increase of $9,392,023, or 314.1%, compared to cost of revenue of $2,990,089 in the quarter ended September 30, 2009. The increase in our cost of revenue resulted directly from the increased amount of projects during the period. The increase in cost of revenue in the quarter ended September 30, 2010 was more than the increase in revenue because during the period, the proportion of revenue attributable to software sales with high gross margin declined. Meanwhile, due to the impact of the Chinese governmental stimulus plan, the basic materials and equipment price escalation caused the increase in costs, which in turn offset the increase of the revenues, resulting in the lower gross margin. The Company plans to minimize the negative impact of the increase in costs through optimization of product and system design, leveraging our purchasing bargain power, and locally sourcing equipment.
As for the existing longer term projects, with a more prudent estimate, the Company foresees the impact being a continuous increase in material costs. Taking these factors into account, the Company is going to adjust its financial forecast in a timely manner to reflect more reliable cost estimates during the course of contract execution.
Operating Expenses
The Companys operating expenses were $1,696,160 in the quarter ended September 30, 2010, an increase of $1,115,613 or 192.2%, compared to operating expenses of $580,547 in the same period of 2009. The increase in operating expenses mainly the result of the rapid growth rate of general and administrative expenses and selling expenses.
9
Table of Contents
In the quarter ended September 30, 2010, our selling expenses were $288,308, an increase of $167,390 or 138.4%, compared to selling expenses of $120,918 in the same period of 2009. Salaries, travelling costs and entertainment expenses increased 65.4%, 212.3% and 106.2%, respectively. The increase in selling expenses was primarily the result of: (i) the increased number of our sales personnel, and (ii) more frequent and longer business travelling needed to acquire an increased number of contracts.
Our general and administrative expenses (including depreciation and amortization expenses and other general and administrative expenses) were $1,407,852 for the quarter ended September 30, 2010; an increase of $948,223, or 206.3%, compared to general and administrative expenses of $459,629 in the quarter ended September 30, 2009. The increase reflected: (i) a $217,549 increase in salaries, (ii) a $51,810 increase in fees for accounting and attorney services, (iii) a $71,002 increase in office rental expenses, (iv) a $63,919 increase in depreciation and amortization, (v) a $93,513 increase in the costs associated with stock options, and, (vi) a $45,239 increase in research and development, (vii) a $405,192 increase in travelling, registration, printing and other expenses. The increased general and administrative expenses primarily resulted from the increase in: (i) the square footage of rental office, (ii) printing expenses, (iii) travelling, and (iv) professional service fees as a publicly traded company.
Other Income (Expenses)
The Companys other income was $55,655 in the quarter ended September 30, 2010, a increase of $9,144, or 19.7%, compared to other income of $46,511 in the same period of 2009.
Net Income before income taxes and non-controlling interest
In the quarter ended September 30, 2010, our income before income taxes and non-controlling interest was $2,846,751, an increase of $1,460,042, or 105.3%, compared to income before income taxes and non-controlling interest of $1,386,709 in the same period of 2009. Our income taxes were $605,256 in the quarter ended September 30, 2010, an increase of $290,885, or 92.5%, compared to income taxes of $314,371 in the same period of 2009. The increase in income taxes for the quarter ended September 30, 2010 was primarily driven by an increase in income from operations for the quarter ended September 30, 2010. In the quarter ended September 30, 2010, net income attributable to the shareholders of TRIT was $2,243,698, an increase of $1,170,087, or 109.0 %, compared to net income attributable to the shareholders of TRIT of $1,073,611 in the same period of 2009.
10
Table of Contents
Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009
Results of Operations
Nine Months Ended September 30, 2010 ($) |
% of sales |
Nine Months ended September 30, 2009 ($) |
% of sales |
Change ($) | Change (%) |
|||||||||||||||||||
Revenue |
$ | 29,210,260 | 100 | % | $ | 10,905,169 | 100 | % | $ | 18,305,091 | 167.9 | % | ||||||||||||
Cost of Revenue (exclusive of depreciation and amortization) |
19,951,909 | 68.3 | % | 6,536,444 | 59.9 | % | 13,415,465 | 205.2 | % | |||||||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Depreciation and Amortization Expenses |
168,576 | 0.6 | % | 75,449 | 0.7 | % | 93,127 | 123.4 | % | |||||||||||||||
Selling and Marketing Expenses |
790,594 | 2.7 | % | 333,565 | 3.1 | % | 457,029 | 137.0 | % | |||||||||||||||
Other General and Administrative Expenses |
2,907,977 | 10.0 | % | 1,036,549 | 9.5 | % | 1,871,428 | 180.5 | % | |||||||||||||||
Total Operating Expenses |
3,867,147 | 13.2 | % | 1,445,563 | 13.3 | % | 2,421,584 | 167.5 | % | |||||||||||||||
Other Income (Expenses), net |
133,348 | 0.5 | % | 65,301 | 0.6 | % | 68,047 | 104.2 | % | |||||||||||||||
Income before provision for income taxes and non-controlling interests income |
5,524,552 | 18.9 | % | 2,988,463 | 27.4 | % | 2,536,089 | 84.9 | % | |||||||||||||||
Provision for Income Taxes |
1,024,676 | 3.5 | % | 450,466 | 4.1 | % | 574,210 | 127.5 | % | |||||||||||||||
Net Income Attributable to Non-controlling Interests |
16,976 | 0.1 | % | 12,452 | 0.1 | % | 4,524 | 36.3 | % | |||||||||||||||
Net Income Attributable to TRIT |
4,482,900 | 15.3 | % | 2,525,545 | 23.2 | % | 1,957,355 | 77.5 | % |
Revenue
Our revenue was $29,210,260 in the nine months ended September 30, 2010, an increase of $18,305,091, or 167.9 %, compared to revenue of $10,905,169 in the same period of 2009. Our increased revenue was primarily driven by an increase in the number and size of our contractual engagements during this period. For example, in the nine months of 2010, we obtained several contracts with a sales amount exceeding $0.9 million (equal to RMB 6 million), $2.6 million (equal to RMB 18 million) and $55.4 million (equal to RMB371 million).
Cost of Revenue
Our cost of revenue was $19,951,909 in the nine months ended September 30, 2010, an increase of $13,415,465, or 205.2 %, compared to cost of revenue of $6,536,444 in the nine months ended September 30, 2009. The increase in our cost of revenue resulted directly from the increased number of projects during the period. The increase in cost of revenue in the nine months ended September 30, 2010 was more than the increase in revenue because, during the period the proportion of revenue attributable to software sales with high gross margin declined; while the proportion of revenue attributable to hardware sales with low gross margin increased. Meanwhile, for our existing longer term projects received during the third quarter, the Company foresees a continuous increase of material costs, resulting in higher overall costs. Taking these factors into account, the Company is going to adjust its financial forecast in a timely manner to reflect more reliable cost estimates during the course of contract execution.
Operating Expenses
Our operating expenses were $3,867,147 in the nine months ended September 30, 2010, an increase of $2,421,584, or 167.5%, compared to operating expenses of $1,445,563 in the same period of 2009. The increase in operating expenses was primarily attributable to the rapid growth of general and administrative expenses and selling expenses.
In the nine months ended September 30, 2010, our selling expenses were $790,594, an increase of $457,029 or 137.0%, compared to selling expenses of $333,565 in the same period of 2009. Salaries, travelling costs and entertainment expenses increased 111.0%, 141.7% and 108.0%, respectively. The increased selling expenses primarily resulted from the: (i) increased number of our sales personnel, and (ii) more frequent and longer business travelling needed to acquire an increased number of contracts.
11
Table of Contents
Our general and administrative expenses (including depreciation and amortization expenses and other general and administrative expenses) were $3,076,553 for the nine months ended September 30, 2010; an increase of $1,964,555, or 176.7%, compared to general and administrative expense of $1,111,998 during the same period of 2009. The increase reflected: (i) a $508,161 increase in salaries, (ii) a $131,805 increase in accounting and attorney services fees, (iii) a $126,812 increase in office rental expenses, (iv) a $93,127 increase in depreciation and amortization, (v) a $286,256 increase in the costs associated with stock options and warrants, and, (vi) a $818,394 increase in travelling, registration, printing and other expenses. The increased general and administrative expenses primarily resulted from the increase in: (i) the square footage of rental office, (ii) printing expenses, (iii) travelling, and (iv) professional service fees as a publicly traded company.
Other Income (Expenses)
Our other income was $133,348 in the nine months ended September 30, 2010, an increase of $68,047, or 104.2%, compared to other income of $65,301 in the same period of 2009.
Net Income before income taxes and non-controlling interest
In the nine months ended September 30, 2010, our income before income taxes and non-controlling interest was $5,524,552, an increase of $2,536,089, or 84.9%, compared to income before income taxes and non-controlling interest of $2,988,463 in the same period of 2009. Our income taxes were $1,024,676 in the nine months ended September 30, 2010, an increase of $574,210, or 127.5%, compared to income taxes of $450,466 in the same period of 2009. The increase in income taxes for the nine months ended September 30, 2010 was primarily driven by an increase in income from operations. In the nine months ended September 30, 2010, net income attributable to the shareholders of TRIT was $4,482,900, an increase of $1,957,355, or 77.5%, compared to net income attributable to the shareholders of TRIT of $2,525,545 in the same period of 2009.
Liquidity and Capital Resources
As highlighted in the consolidated statements of cash flows, Our liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) financing activities, and (iv) investing activities.
Statement of Consolidated Cash Flows
Nine Months Ended September 30, 2010 ($) |
Nine Months Ended September 30, 2009 ($) |
Change ($) |
||||||||||
Net cash used in operating activities |
(6,691,647 | ) | (287,892 | ) | (6,403,755 | ) | ||||||
Net cash used in investing activities |
(1,910,794 | ) | (775,722 | ) | (1,135,072 | ) | ||||||
Net cash provided by financing activities |
31,457,342 | 10,517,170 | 20,940,172 | |||||||||
Effects of exchange rate changes on cash and cash equivalents |
(961,600 | ) | 120,102 | (1,081,702 | ) | |||||||
Increase in cash and cash equivalents |
21,893,301 | 9,573,658 | 12,319,643 | |||||||||
Cash and cash equivalents, beginning of period |
7,171,464 | 732,418 | 6,439,046 | |||||||||
Cash and cash equivalents, end of period |
29,064,765 | 10,306,076 | 18,758,689 |
Cash and cash equivalents
As of September 30, 2010, our cash and cash equivalents amounted to $29,064,765.
Operating activities
Net cash used for operating activities was $6,691,647 in the nine months ended September 30, 2010, compared to $287,892 used in the same period of 2009. A $6,403,755 decrease in cash from operating activities in the quarter ended September 30, 2010 was mainly due to: (i) a $1,961,879 increase in net income before allocation
12
Table of Contents
to non-controlling interests, (ii) a decrease in accounts receivable of $610,436 and a decrease in unbilled revenue of $8,303,765, (iii) a $1,123,091 decrease in other receivables, (iv) a $1,948,268 decrease in prepayment of suppliers, (v) a $6,645,605 increase in accounts payable, and (vi) a $1,006,545 increase in taxes payable.
Investing activities
Net cash used for investing activities was $1,910,794 in the nine months ended September 30, 2010, compared to $775,722 used in the same period of 2009. This significant increase was due to: (i) the purchase of several software products in 2010, amounting to $293,824 in total; (ii) investment in our new subsidiary BSST of $1,447,000; and (iii) purchase of equipment of $312,636.
Financing activities
The cash provided by financing activities was $31,457,342 in the nine months ended September 30, 2010, compared to $10,517,170 provided in the same period of 2009. This was due to: (i) $1,377,000 of cash received from the exercise of warrants into ordinary shares, (ii) $30,666,876 of cash received from the issuance of new ordinary shares, and (iii) $193,750 used to repurchase ordinary shares, and (iv) $392,784 payment of financing expenses to agencies.
Effect of change in exchange rate changes on cash and cash equivalents
Net cash loss due to currency exchange was $961,600 in the nine months ended September 30, 2010, compared to a profit of $120,102 in the same period of 2009.
Working Capital and Cash Flow Management
As of September 30, 2010, our working capital was $43,877,810, including cash and cash equivalents of $29,064,765.
Due to the increase in purchase orders, our company has experienced pressure from a shortage in working capital. We received net proceeds from our follow-on offering of approximately $30.67 million in 2010, which we are using for working capital, product research and development, acquisition and sales and marketing.
However, we may require additional capital to undertake new and larger projects or complete strategic acquisitions in the future. In the event that our current capital is insufficient to fund these or other business purposes, we may take the following actions to meet such working capital needs:
| We can improve our collection of accounts receivable. Most of our clients are central, provincial and local governments. Due to the current situation with the central government stimulus plan and increases in bank liquidity, we believe our clients are in good financial positions. Therefore, we expect to collect more cash from our relatively high accounts receivable, and use the cash collected in our business expansion; |
| We may incur short-and/or long-term debt through commercial loans. As of September 30, 2010, our company had current long-term debt of $25,932, that will be repaid within 7 months and short-term debt of $0. Therefore, we believe we are in a strong position to utilize debt, if deemed appropriate by management. |
Contractual Obligations and Commercial Commitments
Operating Leases
As of September 30, 2010, we had commitments under certain operating leases, requiring annual minimum rental payments as follows:
2010 |
$ | 117,948 | ||
2011 |
559,691 | |||
2012 |
545,030 | |||
2013 |
377,883 | |||
2014 |
107,484 | |||
Total |
$ | 1,708,036 |
13
Table of Contents
The leased properties are principally located in the PRC and are used for administration and research and development purposes. The terms of these operating leases varied from one to five years. Pursuant to contracts, when the contracts expire, we have the right to extend them with new negotiated prices. The leases are renewable subject to negotiation. Rental expenses were $111,034 and $40,032 for the quarters ended September 30, 2010 and September 30, 2009, respectively. Rental expenses were $251,700 and $124,888 for the nine months ended September 30, 2010 and September 30, 2009, respectively.
Product Warranties
Our warranty policy generally is to replace parts if they become defective within one year after deployment at no additional charge. Historically, failure of product parts due to materials or workmanship has not been significant. We have not incurred any material unexpected costs associated with servicing warranties. We continuously evaluate and estimate our potential warranty obligations, and record the related warranty obligation when the estimated amount becomes material at the time revenue is recorded.
Capital Expenditures
In the past, our capital expenditures were used to purchase computers and other office equipment for our business. Our capital expenditures may increase in the near term as our business continues to grow and as we expand and improve our financial and accounting systems and infrastructure. We spent $639,284 and $188,778 on such capital expenditures during the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, we do not have any capital expenditure commitments.
Seasonality
Our sales are not significantly affected by seasonality.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Taxation
Under the current laws of the Cayman Islands, we are not subject to tax on income or capital gains. However, our revenues are primarily derived from payments made by Tranhold and Yanyu to our Chinese subsidiary, TTB. Prior to January 1, 2008, under PRC laws and regulations, a company established in China was typically subject to a state enterprise income tax rate of 30% and a local enterprise tax rate of 3% on its taxable income. PRC laws and regulations also provide foreign-invested enterprises established in certain areas in the PRC with preferential tax treatment. Since January 1, 2008, China has mandated a unified enterprise income tax rate of 25%, with a preferential tax rate of 15% for high-tech companies.
Pursuant to the New EIT Law and the supplementary regulations, only high-tech companies that have been re-certified as such under the new criteria are granted the preferential enterprise income tax rate of 15%. According to an approval from the Beijing State Tax Bureau of Xicheng District, TTB received a preferential income tax rate of 7.5% from January 1, 2009 to December 31, 2011.
BSST was certified as a high-tech enterprise under the new criteria in September 2010, it is subject to 15% income tax rate from January 1, 2010 to December 31, 2012.
Sales tax varies from 3% to 17% depending on the nature of the revenue. For revenues generated from those parts of our software solutions which are recognized by and registered with government authorities and meet government authorities requirements to be treated as software products, we are entitled to receive a refund of 14% on the total VAT paid at a rate of 17%. Revenues from software products other than the above are subject to full VAT at 17%. In addition, we are currently exempted from sales tax for revenues generated from development and transfer of tailor-made software solutions for clients; further, revenues from our consulting services are subject to a 5% sales tax. As a company that qualifies to issue VAT invoices, we need to maintain a certain amount of revenue that is taxable by VAT. As such, we may have to refuse some of the tax exemption benefit in our tailor-made software development business and pay VAT for those parts of the revenue in order to maintain minimum VAT revenue thresholds. This practice may cease to apply if more of our software products are matured, recognized and registered as software products in the PRC.
14
Table of Contents
Segment Information
We have three reportable operating segments. The segments are grouped with reference to the types of services provided and the types of clients that use those services. Total sales and costs are divided among these three segments. We assess each segments performance based on net revenues and gross profit on contribution margin. The three reportable operating segments are:
Segment 1: Water, Wastewater Treatment and Municipal Infrastructure
Municipal water supply and distribution, wastewater treatment and gray water reuse engineering, procurement, and construction (EPC), build and transfer (BT); proprietary process control systems, process equipment integration, and proprietary odor control systems, and other municipal facilities engineering, operation management, and related infrastructure construction projects.
Segment 2: Water Resource Management System and Engineering Service
Water resources protection, planning and allocation, flood control and forecasting, and irrigation systems related system integration, proprietary hardware and software products.
Segment 3: Industrial Pollution Control and Safety
VOC abatement systems, proprietary odor control systems, industrial water and wastewater treatment, water recycling facilities design, EPC for oil, gas, petrochemical and power industries, safety and clean production technologies for oil, gas exploration and pipeline.
Segment 1: Water, Wastewater Treatment and Municipal Infrastructure
The Quarter Ended September 30, 2010 |
The Quarter Ended September 30, 2009 |
Change ($) | Change (%) | |||||||||||||
Revenue |
$ | 10,855,076 | $ | 3,797,872 | $ | 7,057,204 | 185.8 | % | ||||||||
Cost of Revenue (exclusive of depreciation and amortization) |
7,902,411 | 2,308,345 | 5,594,066 | 242.3 | % | |||||||||||
Selling Expenses |
105,024 | 76,301 | 28,723 | 37.6 | % | |||||||||||
Depreciation and Amortization |
18,372 | 17,506 | 866 | 4.9 | % | |||||||||||
Other General and Administrative Expenses |
920,386 | 270,357 | 650,029 | 240.4 | % | |||||||||||
Operating Expenses |
1,043,782 | 364,164 | 679,618 | 186.6 | % | |||||||||||
Other (Loss) Income, net |
71,118 | (2,849 | ) | 73,967 | (2,596.2 | )% | ||||||||||
Income before provision for income taxes and non-controlling interest |
1,980,001 | 1,122,514 | 857,487 | 76.4 | % | |||||||||||
Income Taxes |
495,628 | 243,806 | 251,822 | 103.3 | % | |||||||||||
Net Income Attributable Non-controlling Interest |
| | | |||||||||||||
Net Income Attributable to TRIT |
$ | 1,484,373 | $ | 878,708 | 605,665 | 68.9 | % |
In Segment 1, revenue was $10,855,076 in the quarter ended September 30, 2010, an increase of $7,057,204, or 185.8 %, compared to revenue of $3,797,872 in the same period of 2009. Recently, the Ministry of Environmental Protection of PRC, together with two other governmental agencies issued the First National Census of Pollution Source. This report acknowledged the severe environmental pollution in the PRC and unveiled the fact that the Ministry of Environmental Protection, together with the Ministry of Finance and State Administration of Taxation were discussing the environmental tax issue, which implied that the government will likely increase its environmental protection investment. We believe that such increased investment is likely to provide significant benefits to the Chinese environmental businesses, including our company. During the third quarter, we received and started to execute a $40 million contract for a drinking water treatment plant, resulting in a significant increase in revenues in Segment 1.
15
Table of Contents
Cost of revenue for Segment 1 was $7,902,411 in the quarter ended September 30, 2010, an increase of $5,594,066, or 242.3 %, compared to cost of revenue of $2,308,345 in the same period of 2009. This increase was higher than the increase in revenue because the revenue generated from system integration increased while the revenue generated from software sales decreased. In addition, due to the longer term of this contract, and considering various risk factors, we are taking a more conservative approach by estimating a relatively high cost of revenue for this contract.
In the quarter ended September 30, 2010, selling expenses were $105,024, an increase of $28,723, or 37.6%, compared to selling expenses of $76,301 in the same period of 2009. The increased selling expenses were mainly driven by the increased number of our sales personnel, as well as more frequent and longer business travel necessary to compete for larger contracts.
Depreciation and amortization was $18,372 in the quarter ended September 30, 2010; an increase of $866, or 4.9%, compared to depreciation and amortization of $17,506 in the quarter ended September 30, 2009. The increase in depreciation and amortization resulted from new equipment and vehicle purchases in 2010.
Other general and administrative expenses were $920,386, an increase of $650,029, or 240.4%, compared to other general and administrative expenses of $270,357 in the quarter ended September 30, 2009. Material causes for this increase included: (i) an increase in office rental expenses and (ii) an increase in the costs associated with being a publicly traded company, printing expenses, salary and depreciation and amortization expenses.
Operating expenses in the quarter ended September 30, 2010 were $1,043,782, an increase of $679,618, or 186.8%, compared to operating expenses of $364,164 in the quarter ended September 30, 2009. The primary reasons were: (i) an increase in expenses associated with being a publicly traded company, (ii) increased depreciation and amortization expenses, (iii) an increase in rent expenses, and (iv) an increase in selling expenses.
Other income was $71,118 in the quarter ended September 30, 2010, a $73,967 increase compared to other expense of $2,849 in the same period of 2009. The increase was mainly due to a tax rebate.
Income before provision for income taxes and non-controlling interest was $1,980,001 in the quarter ended September 30, 2010, an increase of $857,487, or 76.4%, compared to income before provision for income taxes and non-controlling interest of $1,122,514 in the same period of 2009.
Income taxes were $495,628 in the quarter ended September 30, 2010, a $251,822 decrease compared to income taxes of $243,806 in the same period of 2009.
Net income attributable to the shareholders of TRIT was $1,484,373 in the quarter ended September 30, 2010, an increase of $605,665, or 68.9%, compared to net income attributable to the shareholders of TRIT of $878,708 in the same period of 2009. The increased net income attributable to the shareholders of TRIT was mainly driven by the increase in revenue. In the future, we intend to continue to improve our profitability by expanding our existing market base and reducing project costs by utilizing locally-made equipment and parts.
Segment 2: Water Resource Management System and Engineering service
The Quarter Ended September 30, 2010 |
The
Quarter Ended September 30, 2009 |
Change ($) | Change (%) | |||||||||||||
Revenue |
$ | 1,239,850 | $ | 1,112,961 | $ | 126,889 | 11.4 | % | ||||||||
Cost of Revenue (exclusive of depreciation and amortization) |
977,190 | 681,743 | 295,447 | 43.3 | % | |||||||||||
Selling Expenses |
102,270 | 44,617 | 57,653 | 129.2 | % | |||||||||||
Depreciation and Amortization |
26,618 | 12,543 | 14,075 | 112.2 | % | |||||||||||
Other General and Administrative Expenses |
197,987 | 159,222 | 38,765 | 24.3 | % | |||||||||||
Operating Expenses |
326,875 | 216,382 | 110,493 | 51.1 | % | |||||||||||
Other (Loss) Income, net |
(541 | ) | 49,360 | (49,901 | ) | (101.1 | )% | |||||||||
Income before provision for income taxes and non-controlling interest |
(64,756 | ) | 264,195 | (328,951 | ) | (124.5 | )% | |||||||||
Income Taxes |
| 70,565 | (70,565 | ) | ||||||||||||
Net income attributable to Non-controlling Interest |
(2,203 | ) | (1,273 | ) | 930 | (73.1 | )% | |||||||||
TRIT Net Income Attributable to TRIT |
$ | (62,553 | ) | $ | 194,903 | $ | (257,456 | ) | (132.1 | )% |
16
Table of Contents
In Segment 2, revenue was $1,239,850 in the quarter ended September 30, 2010, an increase of $126,889 or 11.4 %, compared to revenue of $1,112,961 in the same period of 2009. This increase was driven by the increase in the number of water resource management projects and the size of each project, which resulted from the increase in government spending on water conservancy facilities.
Cost of revenue in Segment 2 was $977,190 in the quarter ended September 30, 2010, an increase of $295,447, or 43.3%, compared to cost of revenue of $681,743 in the same period of 2009. This increase was more than our increase in revenue because: (i) we conducted more projects with lower gross margins; and (ii) we experienced an increase in the cost of our equipment.
Selling expenses were $102,270 in the quarter ended September 30, 2010, an increase of $57,653 or 129.2%, compared to selling expenses of $44,617 in the same period of 2009. The growth rate for selling expenses was higher than the growth rate for revenue. The increase in selling expenses in 2010 consisted of: (i) an increase in travelling cosst, and (ii) an increase in salaries. We expect to secure additional contracts and projects through methods such as rewarding outstanding sales representatives, increasing the number of sales personnel as well as the frequency and time of business travel. These sales methods increase of selling expenses.
Depreciation and amortization in Segment 2 was $26,618 in the quarter ended September 30, 2010, compared to depreciation and amortization of $12,543 in the same period of 2009. The increase in depreciation and amortization resulted from new equipment and vehicle purchases in 2010.
Other general and administrative expenses were $197,987 in the quarter ended September 30, 2010; an increase of $38,765, or 24.3%, compared to other general and administrative expenses of $159,222 in the quarter ended September 30, 2009. The increase in total general and administrative expenses was primarily due to: (i) an increase in expenses associated with being a publicly traded company, and (ii) increased depreciation and amortization expenses.
Operating expenses in the quarter ended September 30, 2010 were $326,875, an increase of $110,493, or 51.1%, compared to operating expenses of $216,382 in the same period of 2009. This increase directly resulted from our increased revenues. To the extent our company continues to increase the number of its projects, we will add administrative personnel as needed.
Other loss was $541 in the quarter ended September 30, 2010; a decrease of $49,901, compared to other income of $49,360 in the quarter ended September 30, 2009. The increase was primarily due to the increased tax rebate in software sales.
Loss before provision for income taxes and non-controlling interest was $64,756 in the quarter ended September 30, 2010, a decrease of $328,951, or 124.5%, compared to income before provision for income taxes and non-controlling interest of $264,195 in the same period of 2009. The decrease was driven by the growth of selling expenses and general and administrative expense.
Income taxes were $0 in the quarter ended September 30, 2010, compared to income taxes of $70,565 in the same period of 2009.
Net loss attributable to non-controlling interest was $2,203 in the quarter ended September 30, 2010, an increase of $930, or 73.1%, compared to non-controlling interest of $1,273 in the same period of 2009.
Net loss attributable to the shareholders of TRIT was $62,553 in the quarter ended September 30, 2010, a decrease of $257,456, or 132.1%, compared to net income attributable to the shareholders of TRIT of $194,903 in the same period of 2009. The decreased net income attributable to the shareholders of TRIT was mainly driven by the increase in revenue, the increase in operating expenses and the increase in income taxes.
17
Table of Contents
Segment 3: Industrial Pollution Control and Safety
The Quarter Ended September 30, 2010 |
The Quarter Ended September 30, 2009 |
Change ($) | Change (%) | |||||||||||||
Revenue |
$ | 4,774,442 | $ | | $ | 4,774,442 | | |||||||||
Cost of Revenue |
3,502,511 | | 3,502,511 | | ||||||||||||
Selling Expenses |
81,014 | | 81,014 | | ||||||||||||
Depreciation and Amortization |
48,978 | | 48,978 | | ||||||||||||
Other General and Administrative Expenses |
195,511 | | 195,511 | | ||||||||||||
Operating Expenses |
325,503 | | 325,503 | | ||||||||||||
Other Income, net |
(14,922 | ) | | (14,922 | ) | | ||||||||||
Income before provision for income taxes and non-controlling interest |
931,506 | | 931,506 | | ||||||||||||
Income Taxes |
109,628 | | 109,628 | | ||||||||||||
Net Income attributable to Non-controlling Interest |
| | | | ||||||||||||
TRIT Net Income Attributable to TRIT |
$ | 821,878 | $ | | $ | 821,878 | |
In line with our development strategies, we have expanded our business to include industrial pollution control and safety. We began operating in this segment for the first time in the quarterly period ended March 31, 2010. In the quarter ended September 30, 2010, we secured additional industrial pollution control projects from Taicang, PetroChina, and ZhongYuan Oil Field. We intend to increase our efforts to develop business in this field and secure more contracts in the future.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A summary of significant accounting policies is included in Note 2 to the unaudited consolidated financial statements for the nine months ended September 30, 2010. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our companys operating results and financial condition.
18
Table of Contents
Recently Issued Accounting Pronouncements
In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted. The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
In May 2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.
In January 2010, the FASB issued the ASU No. 2010-06Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update amends ASC 820 subtopic 10 that requires new disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. This update also amends ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010.
After May 2010, the FASB issued several ASUs-ASU-20 through ASU-26, which do not require adoption until a future date and are not expected to have a material impact on the consolidated financial statements of the Company upon adoption.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Not applicable.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
As of September 30, 2010, our company carried out an evaluation, under the supervision of and with the participation of management, including our companys chief executive officer and chief financial officer, of the effectiveness of the design and operation of our companys disclosure controls and procedures. Based on the foregoing, the chief executive officer and chief financial officer concluded that our companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our companys internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three or nine month periods ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our companys internal control over financial reporting.
19
Table of Contents
Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
Not applicable.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) None
(b) The section entitled Use of Proceeds from our registration statement filed on April 3, 2009, as amended (the Registration Statement) is incorporated herein by reference. The effective date of the Registration Statement is August 10, 2009, and the Commission file number assigned to the Registration Statement is 333-158393. The Registration Statement registers the offering of up to 1,700,000 ordinary shares (subject to amendment in accordance with the Securities Act of 1933 and the rules and regulations promulgated thereunder) (the Offering). As of the date of this report, the Company has spent proceeds from the Offering in accordance with the following chart:
Description of Use |
Proposed Expenditure Amount |
Actual Expenditures through September 30, 2010 |
||||||
Working Capital |
$ | 5,015,000 | $ | 5,390,000 | ||||
New Product Development |
2,006,000 | 2,200,000 | ||||||
Application Expansion |
1,504,500 | 1.600,000 | ||||||
Sales and Marketing |
1,504,500 | 840,000 | ||||||
Total |
$ | 10,030,000 | $ | 10,030,000 |
(c) Our company repurchased 8,200 of our outstanding ordinary shares from the open market during the three months ended September 30, 2010. The Company repurchased all 8,200 of these shares during the month of July, 2010. From commencement of the repurchase plan through the date of this filing, our company has repurchased 21,100 ordinary shares.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
None.
20
Table of Contents
Item 6. | Exhibits |
The following exhibits are filed herewith:
Exhibit |
Document | |
3(i).1 | Articles of Association of the Registrant(1) | |
3(i).2 | Amended and Restated Articles of Association of the Registrant(1) | |
3(ii).1 | Memorandum of Association of the Registrant(1) | |
3(ii).2 | Amended and Restated Memorandum of Association of the Registrant(1) | |
4.1 | Specimen Share Certificate(1) | |
10.1 | Translation of Form of Employment Agreement between Registrant and Executive Officer of the Registrant(1) | |
10.2 | Translation of Exclusive Technical and Consulting Service Agreement for Tranhold(1) | |
10.3 | Translation of Management Fee Payment Agreement for Tranhold(1) | |
10.4 | Translation of Proxy Agreement for Tranhold(1) | |
10.5 | Translation of Equity Interest Pledge Agreement for Tranhold(1) | |
10.6 | Translation of Exclusive Equity Interest Purchase Agreement for Tranhold(1) | |
10.7 | Translation of Exclusive Technical and Consulting Service Agreement for Yanyu(1) | |
10.8 | Translation of Management Fee Payment Agreement for Yanyu(1) | |
10.9 | Translation of Proxy Agreement for Yanyu(1) | |
10.10 | Translation of Equity Interest Pledge Agreement for Yanyu(1) | |
10.11 | Translation of Exclusive Equity Interest Purchase Agreement for Yanyu(1) | |
10.14 | Translation of Operating Agreement for Yanyu(1) | |
10.15 | Translation of Operating Agreement for Tranhold(1) | |
10.16 | Stock Option Plan(1) | |
21.1 | Subsidiaries of the Registrant(2) | |
31.1 | Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(3) | |
31.2 | Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(3) | |
32.1 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(3) | |
32.2 | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(3) |
(1) | Incorporated by reference to the Companys Registration Statement on Form S-1, Registration No. 333-158393. |
(2) | Incorporated by reference to the Companys Registration Statement on Form S-1, Registration No. 333-164273. |
(3) | Filed herewith. |
21
Table of Contents
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Tri-Tech Holding Inc. | ||||
November 15, 2010 | By: | /s/ Peter Dong | ||
Peter Dong | ||||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
22
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
Financial Statements
For the nine months ended September 30, 2010 and 2009
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
ASSETS | ||||||||
Current Assets |
||||||||
Cash |
$ | 29,064,765 | $ | 7,171,464 | ||||
Restricted cash |
166,228 | 1,501,128 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $475,397 and $56,491 as of September 30, 2010 and December 31, 2009, respectively |
13,035,678 | 4,338,239 | ||||||
Unbilled revenue |
6,493,306 | 3,952,763 | ||||||
Other receivables |
1,865,990 | 273,602 | ||||||
Inventories |
4,793,639 | 1,573,324 | ||||||
Deposits on projects |
1,349,567 | 585,153 | ||||||
Prepayments to suppliers and subcontractors |
3,854,546 | 1,898,900 | ||||||
Total current assets |
60,623,719 | 21,294,573 | ||||||
Long-term unbilled revenue |
10,542,372 | 1,723,852 | ||||||
Plant and equipment, net |
786,532 | 374,009 | ||||||
Intangible assets, net |
3,520,141 | 797,854 | ||||||
Long-term deposit on projects |
14,806 | | ||||||
Long-term restricted cash |
19,922 | | ||||||
Goodwill |
397,634 | | ||||||
Total Assets |
$ | 75,905,126 | $ | 24,190,288 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities |
||||||||
Accounts payable and cost accrual on projects |
$ | 12,137,093 | $ | 3,367,056 | ||||
Customer deposits |
1,526,175 | 494,047 | ||||||
Billings in excess of revenue |
| 8,650 | ||||||
Other payables |
1,733,605 | 8,633 | ||||||
Accrued liabilities |
65,948 | 103,190 | ||||||
Deferred income taxes |
| 141,478 | ||||||
Income taxes payable |
1,257,156 | 144,232 | ||||||
Current portion of long-term liabilities |
25,932 | | ||||||
Total current liabilities |
16,745,909 | 4,267,286 | ||||||
Long-term liabilities |
| 58,171 | ||||||
Total Liabilities |
16,745,909 | 4,325,457 | ||||||
Equity |
||||||||
Tri-Tech Holding Inc. shareholders equity |
||||||||
Common stock ($0.001 par value, 30,000,000 shares authorized; 8,051,833 and 5,255,000 shares issued as of September 30,2010 and December 31, 2009, respectively.) |
8,052 | 5,255 | ||||||
Additional paid-in-capital |
47,207,179 | 12,942,650 | ||||||
Statutory reserves |
50,655 | 50,655 | ||||||
Retained earnings |
10,816,243 | 6,333,343 | ||||||
Treasury stock |
(193,750 | ) | | |||||
Accumulated other comprehensive income |
1,046,556 | 377,097 | ||||||
Total Tri-Tech Holding Inc. shareholders equity |
58,934,935 | 19,709,000 | ||||||
Noncontrolling Interests |
224,282 | 155,831 | ||||||
Total equity |
59,159,217 | 19,864,831 | ||||||
Total Liabilities and Equity |
$ | 75,905,126 | $ | 24,190,288 | ||||
See notes to consolidated financial statements
F-1
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
For The Nine Months Ended September 30, |
For The Three Months Ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenues: |
||||||||||||||||
System integration |
$ | 25,331,077 | $ | 7,523,762 | $ | 16,235,860 | $ | 4,145,404 | ||||||||
Hardware products: |
2,873,945 | 1,878,048 | 599,104 | 483,907 | ||||||||||||
Software products revenues: |
1,005,238 | 1,503,359 | 34,404 | 281,522 | ||||||||||||
Total revenues |
29,210,260 | 10,905,169 | 16,869,368 | 4,910,833 | ||||||||||||
Cost of revenues: (exclusive of depreciation and amortization shown separately below) |
||||||||||||||||
System integration |
17,508,023 | 4,907,767 | 11,918,763 | 2,552,799 | ||||||||||||
Hardware products |
2,404,245 | 1,586,613 | 448,163 | 437,290 | ||||||||||||
Cost of software |
39,641 | 42,064 | 15,186 | | ||||||||||||
Total cost of revenues |
19,951,909 | 6,536,444 | 12,382,112 | 2,990,089 | ||||||||||||
Operating expenses: |
||||||||||||||||
Depreciation and amortization expenses |
168,576 | 75,449 | 93,968 | 30,049 | ||||||||||||
Selling and Marketing expenses |
790,594 | 333,565 | 288,308 | 120,918 | ||||||||||||
General and Administrative expenses |
2,907,977 | 1,036,549 | 1,313,884 | 429,580 | ||||||||||||
Total operating expenses |
3,867,147 | 1,445,563 | 1,696,160 | 580,547 | ||||||||||||
Income from operations |
5,391,204 | 2,923,162 | 2,791,096 | 1,340,198 | ||||||||||||
Other income (expenses): |
||||||||||||||||
Other expense |
(45,165 | ) | (4,694 | ) | (24,409 | ) | (3,542 | ) | ||||||||
Interest income |
48,771 | 25,126 | 29,075 | 24,291 | ||||||||||||
Interest expense |
(3,012 | ) | (4,173 | ) | (249 | ) | (514 | ) | ||||||||
Tax rebates |
132,754 | 49,042 | 51,238 | 26,275 | ||||||||||||
Total other income, net |
133,348 | 65,301 | 55,655 | 46,511 | ||||||||||||
Income before provision for income taxes and noncontrolling interests income |
5,524,552 | 2,988,463 | 2,846,751 | 1,386,709 | ||||||||||||
Provision for income taxes |
1,024,676 | 450,466 | 605,256 | 314,371 | ||||||||||||
Net income before allocation to Non-controlling Interests |
4,499,876 | 2,537,997 | 2,241,495 | 1,072,338 | ||||||||||||
Less: Net income attributable to Non-controlling Interests |
16,976 | 12,452 | (2,203 | ) | (1,273 | ) | ||||||||||
Net income attributable to Tri-Tech Holding Inc shareholders |
$ | 4,482,900 | $ | 2,525,545 | $ | 2,243,698 | $ | 1,073,611 | ||||||||
Other comprehensive income |
||||||||||||||||
Foreign currency translation adjustment |
720,934 | 67,115 | 652,949 | 50,372 | ||||||||||||
Comprehensive income |
5,220,810 | 2,605,112 | 2,894,444 | 1,122,710 | ||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
68,451 | 13,158 | 44,417 | (508 | ) | |||||||||||
Comprehensive income attributable to Tri-Tech Holding Inc. shareholders |
$ | 5,152,359 | $ | 2,591,954 | $ | 2,850,027 | $ | 1,123,218 | ||||||||
Net income attributable to Tri-Tech Holding Inc. shareholders per share: |
||||||||||||||||
Basic |
$ | 0.66 | $ | 0.69 | $ | 0.29 | $ | 0.27 | ||||||||
Diluted |
$ | 0.65 | $ | 0.68 | $ | 0.28 | $ | 0.27 | ||||||||
Weighted Average number of Common Shares outstanding: |
||||||||||||||||
Basic |
6,789,604 | 3,679,542 | 7,817,085 | 3,924,565 | ||||||||||||
Diluted |
6,900,253 | 3,689,604 | 7,927,734 | 3,954,422 |
See notes to consolidated financial statements
F-2
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, | ||||||||
2010 (Unaudited) |
2009 (Unaudited) |
|||||||
Cash flows from operating activities: |
||||||||
Net income before allocation to non-controlling interests |
$ | 4,499,876 | $ | 2,537,997 | ||||
Adjustments to reconcile net income before non-controlling interests to net cash (used in) provided by operation activities: |
||||||||
Amortization of option expenses |
277,490 | | ||||||
Amortization of warrants |
3,944 | | ||||||
Depreciation and amortization |
168,576 | 75,942 | ||||||
Provision for doubtful accounts |
256,731 | (11,047 | ) | |||||
Deferred income taxes |
(150,280 | ) | 251,765 | |||||
Changes in operating assets and liabilities: |
||||||||
Restricted cash |
1,438,072 | | ||||||
Accounts receivable |
(7,109,762 | ) | (1,005,397 | ) | ||||
Unbilled revenue |
(11,084,619 | ) | (2,780,854 | ) | ||||
Other receivables |
(1,617,344 | ) | (494,253 | ) | ||||
Inventories |
782,743 | (184,068 | ) | |||||
Prepayments and deferred expenses |
(1,848,967 | ) | 99,301 | |||||
Accounts payable |
7,836,160 | 1,190,555 | ||||||
Customer deposits |
13,059 | (80,481 | ) | |||||
Billings in excess of revenue |
(8,677 | ) | 93,774 | |||||
Other payables |
(1,203,041 | ) | (35,826 | ) | ||||
Accrued liabilities |
(38,591 | ) | (31,738 | ) | ||||
Taxes payable |
1,092,983 | 86,438 | ||||||
Net cash used in operating activities |
(6,691,647 | ) | (287,892 | ) | ||||
Cash flows from investing activities: |
||||||||
Payment in investment in subsidiary |
(1,447,000 | ) | | |||||
Cash acquired from business combination |
175,490 | | ||||||
Payment to purchase plant and equipment |
(312,636 | ) | (188,778 | ) | ||||
Payment to purchase intangible asset |
(293,824 | ) | | |||||
Payment of installment of purchasing vehicle |
(32,824 | ) | | |||||
Loan to other parties |
| (586,944 | ) | |||||
Net cash used in investing activities |
(1,910,794 | ) | (775,722 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from the exercise of warrants into common stock |
1,377,000 | | ||||||
Proceeds from the Issuance of common stock |
30,666,876 | 10,038,847 | ||||||
Payment of financing expenses to agencies |
(392,784 | ) | | |||||
Payment in repurchase treasury stock |
(193,750 | ) | | |||||
Repayment to a third party of an advance |
| (43,911 | ) | |||||
Borrow money from third party |
| 522,234 | ||||||
Net cash provided by financing activities |
31,457,342 | 10,517,170 | ||||||
Effect of exchange rate fluctuation on cash and cash equivalents |
(961,600 | ) | 120,102 | |||||
Net increase in cash and cash equivalents |
21,893,301 | 9,573,658 | ||||||
Cash and cash equivalents, beginning of period |
7,171,464 | 732,418 | ||||||
Cash and cash equivalents, end of period |
$ | 29,064,765 | $ | 10,306,076 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Income taxes paid |
$ | 80,019 | $ | 17,496 | ||||
Interest paid on debt |
$ | 3,012 | $ | 4,173 | ||||
Supplemental disclosure of noncash investing and financing activities Issued 260,000 common shares as one of the consideration to Beijing Satellite Science & Technology Co. Ltd. (see note 1) |
$ | 2,334,800 | $ | |
See notes to consolidated financial statements
F-3
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
1. Background
Tri-Tech Holding Inc. (TRIT) was incorporated in the Cayman Islands on January 7, 2009 as a limited liability company and is authorized to issue 30,000,000 common shares, with a par value of $0.001. TRIT issued 50,000 common shares (or 3,555,000 common shares after 71.1-for-1 stock split which was completed on May 22, 2009) to shareholders of Tri-Tech International Investment, Inc. (TTII) for their respective interests in TTII. TTII was incorporated in the British Virgin Islands on November 24, 2005 as a limited liability company. TTII has subsidiaries and variable interest entities (VIEs) in the Peoples Republic of China (the PRC) as discussed below. TRIT and its subsidiaries and variable interest entities together are referred to as the Company. Through its subsidiaries and VIEs in PRC, the Company provides self-manufactured, proprietary or third-party products, system integration and other services in the fields of environmental protection and water resource monitoring, development, utilization and protection.
On September 9, 2009, the Company completed its IPO of 1,700,000 common shares at $6.75 per share.
In 2010, the Company completed its first financing after IPO. On April 20 2010, the Company successfully issued additional 2,142,750 of the Companys ordinary shares; on May 5, 2010, the Underwriters purchased an aggregate of 224,083 Overallotment Shares. The Offered Shares were sold to the public at a price of $14.00 per share.
Tri-Tech (Beijing) Co., Ltd. (TTB) was incorporated in the PRC on February 6, 2006. It is wholly-owned by TTII. It is a wholly foreign-owned high-tech enterprise, primarily engaged in water resource protection including the utilization and development of technology and product sales, and the development of new industries and applications.
Tranhold Environmental (Beijing) Tech Co., Ltd. (Tranhold) was established on June 6, 2003. It was a wholly-owned subsidiary of TTII until it was converted into a VIE controlled by TTB on November 28, 2008. (refer to the section Reorganization and Acquisition). Tranhold specializes in environmental technology research and development, environmental engineering design and building for major industrial sectors such as the petrochemical, pharmaceutical and municipal industries. It also provides water and wastewater treatment process control systems, process tail gas purification and other air pollution control systems and related integration solutions. Tranhold participated in the compilation of The Technical Guidelines of Municipal Sewage Treatment Plant Operation, Management and Safety for the Ministry of Construction of the Peoples Republic of China.
Beijing Yanyu Water Tech Co., Ltd. (Yanyu) was established on March 29, 2002. It was a wholly-owned subsidiary of TTII until it was converted into a VIE controlled by TTB on November 28, 2008. (refer to the section Reorganization and Acquisition). Yanyu specializes in research and development, production, system integration, and consulting services in the fields of water resource protection and allocation, flood control and forecasting, irrigation systems, and municipal water supply and distribution systems. Yanyu participated in the compilation of Technical Standards of Automatic Hydrologic Measuring and Report Systems (SL61-2003) and Technical Guidelines of Automatic Hydrologic Measuring and Reporting Systems General Devices (GB/T) for the Ministry of Water Resources of the PRC.
F-4
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
We formed Tri-Tech Infrastructure LLC. (TIS) on November 16, 2009, which is our wholly-owned subsidiary in the U.S. to develop opportunities in the United States.
Beijing Satellite Science & Technology Co. (BSST) was established on October 11, 1994. It was a VIE controlled by TTB since August 6, 2010. (refer to the section Reorganization and Acquisition). It is a consulting, engineering, design, system integration and project management services company specializing in the fields of control and instrument automation, safety and emergency response for the oil, gas and petrochemical industries. It held some certificates such as Software Enterprise Cognizance Certificate, Computer Information System Integration Qualification Certificate (Grade 3), first class qualification of security, ISO9001 Quality Management System Certificate and high-tech enterprise Certificate.
Reorganization and Acquisition
On October 24, 2007, TTII and its wholly owned subsidiary TTB entered a sales and purchase agreement with the existing shareholders of Tranhold (the Tranhold Original Shareholders). Pursuant to the agreement, TTII issued 50,000 shares (equivalent to 1,777,500 common shares of TRIT after stock split) of its stock to the Tranhold Original Shareholders for 100% equity ownership of Tranhold. The total number of shares outstanding was 50,000 shares (equivalent to 1,777,500 common shares of TRIT after stock split). As a result of this transaction, the Tranhold Original Shareholders were able to exercise control of TTII. The purchase of Tranhold and the issuance of TTIIs common stock were accounted for as a reverse acquisition and as a recapitalization under common control. The assets and liabilities transferred were accounted for at historical cost.
On December 31, 2007, TTII and its wholly owned subsidiary TTB completed a sales and purchase agreement with certain existing shareholders of Yanyu (the Yanyu Original Shareholders). Pursuant to the agreement, TTII issued 50,000 shares (equivalent to 1,777,500 common shares of TRIT after stock split) of its common stock to the Yanyu Original Shareholders for 92.86% equity ownership of Yanyu. Based on Statement of Financial Accounting Standards No. 141, Business Combinations, TTII is determined to be the acquirer. The allocation of the purchase price of Yanyu was based on the fair value of Yanyu as of December 31, 2007.
December 31, 2007 | ||||
Current Assets |
$ | 1,836,705 | ||
Plant and equipment, net |
44,298 | |||
Intangible assets |
587,058 | |||
Liabilities assumed |
(902,018 | ) | ||
Total purchase price |
$ | 1,566,043 | ||
The fair value of the assets and liabilities of Yanyu approximated the book value as of December 31, 2007.
As a result of these transactions, Tranhold and Yanyu became the subsidiaries of TTII.
F-5
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
The Companys principal geographic market is mainly in the Peoples Republic of China (PRC). As PRC laws and regulations prohibit or restrict other than PRC companies to engage in certain government-related businesses, the Company provides its services in the PRC through Tranhold and Yanyu, Chinese legal entities, which hold the qualifications and permits necessary to conduct government-related services in the PRC. In order to avoid any restrictions that Tranhold or Yanyu might encounter during future business development, the Company concluded that TTII and Tranhold or Yanyu should not have a parent-subsidiary relationship.
By November 28, 2008, the Company had completed two steps of reorganization. The Company first recalled its shares from the original shareholders of Tranhold and Yanyu. These shareholders are major shareholders, directors, corporate level executives and key employees of the Company. Legally, Tranhold and Yanyu returned to their legal status prior to the acquisitions in 2007. Concurrently, on November 28, 2008, the Company signed and executed with Tranhold and Yanyu a series of contractual agreements with a 25-year, renewable term. These contractual agreements require the pledge of the original shareholders equity interests and stock certificates of the VIEs. At any time during the agreement period, the Company has absolute rights to acquire any portion of the equity interests of those VIEs under no-cost conditions. In addition, the Company has absolute rights to appoint directors and officers of those VIEs and to obtain the profits from those VIEs.
On July 26, 2010, the Company signed and executed with Beijing Satellite Science & Technology Co. (BSST) a series of contractual agreements with a 25-year, renewable term. These contractual agreements require the pledge of the original shareholders equity interests and stock certificates of the VIEs. At any time during the agreement period, the Company has absolute rights to acquire any portion of the equity interests of those VIEs under no-cost conditions. On August 6, 2010, the effective date of the Agreement, the Company has successfully become the primary beneficiary of its VIE, BSST, at the same time, the Company paid the consideration of $3.8 million, including: $1,447,000 payment in cash and 260,000 ordinary shares, at the market value of $8.98 per share, with total amount of $2,334,800. The Company will expand market in the petrochemical industries through BSST since it is a consulting, engineering, design, system integration and project management services company specializing in the fields of control and instrument automation, safety and emergency response for the oil, gas and petrochemical industries.
These agreements consist of the following agreements:
Exclusive Technical and Consulting Service Agreement. Each of Yanyu,Tranhold and BSST has entered into an Exclusive Technical and Consulting Service Agreement with TTB, which agreement provides that TTB will be the exclusive provider of technical and consulting services to Yanyu, Tranhold and BSST, as appropriate, and that each of them will in turn pay 90% of its profits (other than net profits allocable to the State-Owned Entities (SOE) Shareholder of Yanyu) to TTB for such services. In addition to such payment, Yanyu, Tranhold and BSST agree to reimburse TTB for TTBs expenses (other than TTBs income taxes) incurred in connection with its provision of services under the agreement. Payments will be made on a quarterly basis, with any overpayment or underpayment to be reconciled once each of Tranholds, Yanyus and BSSTs annual net profits, as applicable, are determined at its fiscal year end. Any payment from TTB to TTII would need to comply with applicable Chinese laws affecting payments from Chinese companies to non-Chinese companies. Although based on this agreement TTB is only entitled to 90% of net profits (other
F-6
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
than net profits allocable to the SOE Shareholder of Yanyu), TTB also entitled the remaining share of the net profits of the VIEs through dividends per the Proxy Agreement as discussed below. The Company relies on dividends paid by TTB for its cash needs, and TTB relies on payments from Yanyu,Tranhold and BSST to be able to pay such dividends to the Company.
Management Fee Payment Agreement. Each of the shareholders of Yanyu, Tranhold and BSST (other than Beijing YanYu Communications Telemetry United New Technology Development Department, a Chinese State Owned Entity (the SOE Shareholder) of Yanyu) has entered into a Management Fee Payment Agreement, which provides that, in the event TTB exercises its rights to purchase the equity interests of the Yanyu or Tranhold or BSST shareholders (other than those owned by the SOE Shareholder of Yanyu) under the Equity Interest Purchase Agreements, such shareholders shall pay a Management Fee to TTB in an amount equal to the amount of the Transfer Fee received by the such shareholders under the Equity Interest Purchase Agreement.
Proxy Agreement. Each of the shareholders of Yanyu, Tranhold and BSST (other than the SOE Shareholder of Yanyu) has executed a Proxy Agreement authorizing TTB to exercise any and all shareholder rights associated with his ownership in Yanyu or Tranhold or BSST, as appropriate, including the right to attend shareholders meetings, the right to execute shareholders resolutions, the right to sell, assign, transfer or pledge any or all of the equity interest in Yanyu or Tranhold or BSST, as appropriate, and the right to vote such equity interest for any and all matters.
Equity Interest Pledge Agreement. TTB and the shareholders of each of Tranhold, BSST and Yanyu, (other than the SOE Shareholder of Yanyu) have entered in Equity Interest Pledge Agreements, pursuant to which each such shareholder pledges all of his shares of Tranhold or Yanyu or BSST, as appropriate, to TTB. If Tranhold or Yanyu or any of its respective shareholders (other than the SOE Shareholder of Yanyu) breaches its respective contractual obligations, TTB, as pledgee, will be entitled to certain rights, including the right to foreclose on the pledged equity interests. Such Tranhold, BSST and Yanyu shareholders have agreed not to dispose of the pledged equity interests or take any actions that would prejudice TTBs interest. According to this agreement, TTB has absolute rights to obtain any and full dividends related to the equity interest pledged during the term of the pledge.
Exclusive Equity Interest Purchase Agreement. Each of the shareholders of Tranhold, Yanyu and BSST (other than the SOE Shareholder of Yanyu) has entered into an Exclusive Equity Interest Purchase Agreement, which provides that TTB will be entitled to acquire such shares from the current shareholders upon certain terms and conditions, if such a purchase is or becomes allowable under PRC laws and regulations. The Exclusive Equity Interest Purchase Agreement also prohibits the current shareholders of each of Tranhold, Yanyu and BSST, (other than the SOE Shareholder of Yanyu) from transferring any portion of their equity interests to anyone other than TTB. TTB has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee that it will do so or will be permitted to do so by applicable law at such time as it may wish to do so.
Operating Agreements. TTB, Tranhold, Yanyu, BSST and each of their respective shareholders (other than the SOE Shareholder of Yanyu) have entered into an Operating Agreement on July 3, 2009, TTB, BSST and each of their respective shareholders have entered into an Operating Agreement on July 26, 2010, which requires TTB to guarantee the obligations of each of Tranhold, Yanyu and BSST in their business arrangements
F-7
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
with third parties. Each of Tranhold, Yanyu and BSST, in return, agrees to pledge its accounts receivable and all of its assets to TTB. Moreover, each of Tranhold, Yanyu and BSST, agrees that without the prior consent of TTB, such company will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. Pursuant to these operating agreements, TTB provides guidance and instructions on each of Tranholds, Yanyus and BSSTs daily operations and financial affairs. The contracting shareholders of each of Tranhold, Yanyu and BSST, must designate the candidates recommended by TTB as their representatives on their respective boards of directors. TTB has the right to appoint and remove senior executives of each of Tranhold, Yanyu and BSST.
The Company provided advances to its VIEs totaling $4,045,214 during the nine months ended September 30, 2010. The Companys accumulated outstanding advances to Tranhold, Yanyu and BSST, respectively, were $4,943,376, $2,589,559 and $6,155,534 as of September 30, 2010.
Except as disclosed above, there are no arrangements that could require the Company to provide financial support to the VIEs, including events or circumstances that could expose the Company to a loss. As stated in the disclosure of various agreements between the Company and its VIEs in Note 1 under Reorganization and Acquisition, the Company has rights to acquire any portion of the equity interests of those VIEs under no-cost conditions. Also the Company may allocate its available funds to its VIEs for business purposes. There are no fixed terms of such arrangement.
Based on these agreements and according to the provisions of ASU 2009-17, Consolidations (ASC Topic 810): Improvements to Financial Reporting by Enterprises Involved with VIEs, codifies Statement No. 167, Amendments to FASB Interpretation No. 46(R), Tranhold, Yanyu and BSST, are considered variable interest entities (VIEs), and the Company is the primary beneficiary. Accordingly, Tranhold and Yanyu, have continued to be consolidated in the Companys financial statements. For BSST, the Company applied the consolidation procedures required by ASC 805-Business Combinations, for the detail disclosure in BSST combination; please refer to Note 2 under Business Combination and Goodwill.
It is the Companys general belief that the creditors and the other beneficial interest holder of Tranhold, Yanyu and BSST have no recourses to the general credit of the Company.
No change occurred in the controlling interests before and after the Company entered into agreements with these VIEs.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated interim financial information as of September 30, 2010 and for the three and nine-month periods ended September 30, 2010 and 2009 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair
F-8
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009, previously filed with the SEC.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Companys consolidated financial position as of September 30, 2010, its consolidated results of operations for the three and nine-month periods ended September 30, 2010 and 2009 and its cash flows for the nine-month periods ended September 30, 2010 and 2009, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The accompanying consolidated financial statements include the accounts of TRIT and its subsidiaries and VIEs. All material inter-company transactions and balances have been eliminated in the consolidation. Please also refer to Note 1 for the discussion on accounting for the reorganization and acquisition.
Pursuant to ASU No. 2009-17 (ASC No. 810), Tranhold, Yanyu and BSST, are VIEs of the Company and the Company is the primary beneficiary of the VIEs. Accordingly, Tranhold and Yanyu have been consolidated in the Companys financial statements. For BSST, the Company applied the consolidation procedures required by ASC 805-Business Combinations.
Based on various VIE agreements, the Company is able to exercise control over the VIEs; and obtain the financial interests such as obtaining periodic income of the VIEs through technical and consulting service arrangements and obtaining the net assets of VIEs through purchase of their equities at essentially no cost basis. The Company therefore concluded that its equities of all VIEs are not noncontrolling interest and therefore are not classified as so. The noncontrolling interest only relates to the SOE Shareholders 7.14% interest in Yanyu. They excise no controls over the VIEs and no financial interests of ownership are due to them either for periodic income or the net assets.
The Company compiles its daily accounts in accordance with generally accepted accounting principles in the PRC (PRC GAAP) and converts its financial statements to make them comply with US GAAP when reporting.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.
Certain of the Companys accounting policies require higher degrees of judgment than others in their application. These include the recognition of revenue and earnings from system integration under the percentage of completion method and the allowance for doubtful accounts. Management evaluates all of its estimates and judgments on an on-going basis.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are composed primarily of time deposits and investments in money market accounts and are stated at cost which approximates fair value.
F-9
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Restricted Cash
In December 2009, the Company made a 3-month time deposit of RMB 10.25 million ($1,501,128) in a bank as collateral in exchange for the issuance of a Letter of Credit facility of RMB 10 million ($1,464,515), with an expiration in three months. However, the Company didnt use the facility for any issuance of Letter of Credit within that period. Correspondingly, the bank released the collateral and the restrictions on cash on March 3, 2010.
In May, 2010, the Company made a 3-month time deposit of RMB 10.25 million $1,509,373) in a bank as collateral in exchange for the issuance of a Letter of Credit facility of RMB 10 million ($1,472,559), with an expiration in three months, the bank released the collateral and the restrictions on cash on August 25, 2010.
The Company made some 3-19 month time deposit of RMB 1.2 million ($186,150) in a bank as collateral in exchange for the Performance Guarantee and Bid Security.
The current restricted cash balance at September 30, 2010 and December 31, 2009 was $166,228 and $1,501,128, respectively. The long-term restricted cash balance at September 30, 2010 and December 31, 2009 was $19,922 and Nil, respectively.
Accounts Receivable
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. The allowance for doubtful accounts is the Companys best estimate of the amount of probable credit losses in the Companys existing accounts receivable. The Company makes an allowance for doubtful accounts based on the aging of accounts receivable and on any specifically identified accounts receivable that may become uncollectible.
Inventories
The Company values inventory at the lower of cost or net realizable value and determines inventory by using the average cost method. Inventory consists of raw materials, finished goods, and work-in-progress, which includes the cost of direct labor, materials and overhead costs related to projects.
F-10
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Long-term unbilled revenue
The Company obtained several contracts with billing cycles of over three years in 2010 and 2009. The discounted revenue is recorded as long-term unbilled revenue and the discount rate is the 3-year nominal interest rate of 5.4%, set by the PRC Central Bank. For the contract that a specific discount rate is agreed in the contract, a 10% of discount rate is applied. These projects are funded by the Government, so the Company does not ascribe any collection risk on such projects.
Plant and equipment
The Company states plant and equipment at cost less accumulated depreciation. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets with 5% residual value.
Estimated useful lives of the Companys assets are as follows:
Asset |
Useful Life | |||
Buildings and improvements |
40 years | |||
Transportation equipment |
5-8 years | |||
Machinery |
10 years | |||
Office equipment |
5 years | |||
Furniture |
5 years |
The Company eliminates the cost and related accumulated depreciation of assets sold or otherwise retired from the accounts and includes any gain or loss in the statement of income. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred, and it capitalizes major additions and betterment to buildings and equipment.
Valuation of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets, including plant and equipment, and finite life intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated undiscounted future cash inflows attributable to the asset, less estimated undiscounted future cash outflows, are less than the carrying amount, the Company recognizes an impairment loss in an amount equal to the difference between the carrying value of such assets and fair value. No impairment indicator is noted in the prior or current periods. The Company reports assets for which there is a committed disposition plan, whether through sale or abandonment, at the lower of carrying value or fair value less costs to sell. No such assets are identified in prior and current periods.
The Company evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances revised estimates of useful lives.
Intangible Assets
The Company amortizes other acquired intangible assets with definite lives on a straight-line basis over their expected useful economic lives. The Company does not amortize intangible assets with an indefinite useful life but subjects them to an impairment test annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. The Company periodically evaluates the recoverability of all intangible assets and takes into account events or circumstances that revised estimates of useful lives or that indicate that impairment exists.
F-11
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Useful Life | ||||
Proprietary technology relating to sewage, municipal solid waste treatment and tail gas purification |
20 years | |||
Proprietary technology relating to low energy consumption data transmission system |
20 years | |||
Large region environmental management system |
10 years | |||
Mobile web management system |
10 years | |||
Database Management System |
10 years | |||
Pollution reduction checking assistant |
10 years | |||
Water pollution control infrastructure |
10 years | |||
Software-Gas Flow |
20 years | |||
Software-Oil Mixing |
20 years | |||
Customer Relationship |
5 years |
Business Combination and Goodwill
On August 6, 2010, the Company has successfully become the primary beneficiary of its VIE, BSST, at the same time, the Company paid the consideration of $3.8 million, including: $1,447,000 payment in cash and 260,000 ordinary shares at the market value of $8.98 per share with a total amount of $2,334,800. Fair value of BSST on August 6, 2010 was $3,384,166, while the Company paid $3,781,800 as consideration. As of September 30, we recognized $397,634 as goodwill. Fair value of BSST on August 6, 2010 is shown as:
BSST | ||||
August 6, 2010 (Unaudited) |
||||
Financial assets |
$ | 2,707,365 | ||
Inventory |
3,876,360 | |||
Property and equipment |
162,173 | |||
Proprietary technology-net |
2,477,851 | |||
Financial liabilities |
(5,839,583 | ) | ||
Liability arising from a contingency |
| |||
Total identifiable net assets |
3,384,166 | |||
The following table represents the consideration allocation based on estimated fair value on August 6, 2010:
Total identifiable net assets |
$ | 3,384,166 | ||
Goodwill |
$ | 397,634 | ||
Total consideration |
$ | 3,781,800 | ||
The goodwill mainly represents the intangibles not qualifying for separate recognition.
A reconciliation of the carrying amount of goodwill is as follows:
Carrying amount of Goodwill | ||||
January 1, 2010 |
$ | | ||
Addition during the 9 months |
397,634 | |||
September 30, 2010 |
$ | 397,634 |
The Company determined there are no circumstances that indicate the Goodwill need to be impaired during the period.
The amounts of BSSTs revenue and earnings included in the Companys consolidated income statement for the nine months ended September 30, 2010, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2010, or January 1, 2009, are as follows.
Revenue | Earnings | |||||||
Actual from August 6 to September 30, 2010 |
$ | 3,641,116 | $ | 244,209 | ||||
Supplemental pro forma from January 1, 2010 September 30, 2010 |
$ | 30,281,207 | $ | 4,352,662 | ||||
Supplemental pro forma for January 1, 2009 September 30, 2009 |
$ | 15,460,671 | $ | 2,570,903 |
Supplemental pro forma in Revenue:
Revenue | BSST | TRIT Group | Elimination | Combined | ||||||||||||
January 1, 2010 September 30, 2010 |
$ | 8,378,423 | $ | 25,569,144 | $ | (3,666,360 | ) | $ | 30,281,207 | |||||||
January 1, 2009 September 30, 2009 |
$ | 6,016,778 | $ | 10,905,169 | $ | (1,461,276 | ) | $ | 15,460,671 | |||||||
Supplemental pro forma in Earnings:
Earnings | BSST | TRIT Group | Elimination | Combined | ||||||||||||
January 1, 2010 September 30, 2010 |
$ | 250,334 | $ | 4,238,691 | $ | (136,363 | ) | $ | 4,352,662 | |||||||
January 1, 2009 September 30, 2009 |
$ | 45,358 | $ | 2,525,545 | $ | | $ | 2,570,903 |
F-12
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Revenue Recognition
Revenues consist primarily of hardware product sales, software product sales, and system integration sales. The Company recognizes revenue when it is probable that the economic benefits will flow to the Company.
Specifically the Company generally provides system integration under short and long-term fixed-price contracts. The contract periods range from two months to approximately three years in length. The Company recognizes income for these contracts following the percentage-of-completion method, measured by contract milestones in accordance with the AICPAs Statement of Position (SOP) 81-1 (ASC No. 605), Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Cost of revenue (exclusive of depreciation and amortization expenses) is based on total actual costs incurred plus estimated costs to completion applied to percentage of completion as measured by contract milestone. Cost of revenues (exclusive of depreciation and amortization expenses) includes direct labor, materials and the applicable share of overhead expense directly related to the execution of services and delivery of projects.
Provided unapproved change orders or claims occur in the future, in accounting for contracts, the Company follows Paragraphs 62 and 65 of the AICPAs Statement of Position 81-1 - Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1) (ASC No. 605). We will recognize as revenues costs associated with unapproved change orders (Paragraph 62 of SOP 81-1) or claims (Paragraph 65 of SOP 81-1) to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion. However, we have not experienced significant unapproved change orders in the past.
The Company recognizes sales of its hardware products upon delivery of goods and passage of title in accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104 (ASC No. 605), Revenue Recognition.
The Company recognizes revenue from the sales of software products, support contracts and services in accordance with SOP No. 97-2 (ASC No.985), Software Revenue Recognition and SOP 81-1 (ASC No. 605). For software sales with no significant post-shipment obligations and no uncertainty about customer acceptance, the Company recognizes revenue on delivery of software to the customer. The Company recognizes revenues for software sales with significant post-shipment obligations, including the production, modification, or customization of software, by the percentage-of-completion method, with progress to completion measured on the basis of milestone completion, labor costs incurred currently versus the total estimated labor cost of performing the contract over its term, or other factors appropriate to the individual contract of sale. For the three and nine months ended September 30 2010 and 2009, no software sales with significant post-shipment obligations occurred.
NO post-contract customer support (PCS) arrangements are included in the software sales.
F-13
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
The Company presents all sales revenue net of a value-added tax (VAT) or a sales tax. The Companys products that are sold in the PRC are generally subject to a Chinese VAT at a rate of 17% or sales tax of 5% of the gross sales price, except for certain proprietary software sales which will only be subject to an effective tax rate of 3%. The VAT may be offset by VAT paid by the Company on purchased raw materials and other materials included in the cost of projects or producing the finished product.
The Company records revenue in excess of billings as unbilled revenue. The Company records billings in excess of revenues as billings in excess of revenue. The Company expects all billed and unbilled amounts to be collected within one year except for the contract mentioned below which has been classified in long-term assets on the consolidated balance sheets as of September 30, 2010 and December 31, 2009.
The Company obtained several contracts with the billing cycle over three years in 2009 and 2010. The discounted revenue is recorded and the discount rate is the 3-year nominal interest rate of 5.4%, set by the PRC Central Bank.
Cost of revenues (exclusive of depreciation and amortization)
Cost of revenues (exclusive of depreciation and amortization) includes material and equipment costs, transportation costs, labor costs, processing costs, packaging costs, quality inspection cost, quality control costs, sales tax. Cost of revenues also includes inbound freight charges, purchasing and receiving costs and inspection costs where those types of costs occur.
Operating expenses
Operating expenses include, among other items, salaries, bonuses, and social insurance of management, administrative and sales personal, traveling costs, entertainment expenses, depreciation of equipment, amortization of intangible assets, office rental expenses, professional service fees, office supplies, R&D expenses and bad debt provision.
Research and Development
Research and development expenses include salaries, consultant fees, supplies and materials, as well as costs related to other overhead such as depreciation, facilities, utilities and other departmental expenses. The Company expenses costs for the development of new software products and substantial enhancements to existing software products as incurred until technological feasibility has been established, at which time any additional costs are capitalized. The management of the Company is responsible for assessing the establishment of technological feasibility in accordance with FAS 86(ASC NO.985), Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.
Research and development costs recorded in general and administrative expenses were $106,791 and $61,552 during the three months ended September 30, 2010 and 2009. The expenses were $199,702 and $169,341 during nine months ended September 30, 2010 and 2009. No research and development expenses were capitalized in that period respectively. We do not pass along research and development expenses directly or indirectly to our customers.
F-14
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Foreign Currency Translation
The Company uses the United States dollar as its reporting and functional currency. The Company translates monetary assets and liabilities denominated in currencies other than United States dollars into United States dollars at the rates of exchange ruling at the balance sheet date. The Company converts transactions in currencies other than United States dollars during the year into United States dollars at the rates of exchange ruling at the transaction dates.
The Company maintains its financial records of its PRC subsidiaries in Renminbi (RMB), their functional currency and the currency of the PRC. The Company translates its balance sheets assets and liabilities into United States dollars at the rates of exchange existing on the balance sheet date and translates its PRC subsidiaries and affiliates statements of operations using a weighted average exchange rate for the same period. The Company reflects translation adjustments as accumulated other comprehensive income (loss) in stockholders equity
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Translation adjustments amounted to $1,046,556 and $377,097 as of September 30, 2010 and December 31, 2009, respectively. The Company translated balance sheet amounts with the exception of equity at September 30, 2010 at RMB6.7011 to US$ 1.00 as compared to RMB 6.8282 to US$ 1.00 at December 31, 2009. The Company stated equity accounts at their historical rate. The average translation rates applied to income statement accounts for the three months ended September 30, 2010 and September 30, 2009 were RMB 6.7725 and RMB 6.8310, respectively. The average translation rates applied to income statement accounts for the nine months ended September 30, 2010 and September 30, 2009 were RMB 6.8068 and RMB6.8320, respectively.
Income Taxes
The Company provides for deferred income taxes using the asset and liability method. Under this method, the Company recognizes deferred income taxes for tax credits and net operating losses available for carry-forwards and significant temporary differences. The Company classifies deferred tax assets and liabilities as current or non-current based upon the classification of the related asset or liability in the financial statements or the expected timing of their reversal if they do not relate to a specific asset or liability. The Company provides a valuation allowance to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company adopted Financial Accounting Standards Board (FASB) Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48 (ASC NO.740)), as of January 1, 2007. The Company recognizes a tax position as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that the Company believes is more than 50% likely to be realized on examination. For tax positions not meeting the more likely than not test, the Company does not record a tax benefit. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no effect on the Companys financial statements. The Company did not have any significant unrecognized uncertain tax positions.
F-15
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
The Companys operations are subject to income and transaction taxes mainly in the PRC. Significant estimates and judgments are required in determining the Companys provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result. The Company does not anticipate any events which could change these uncertainties.
Stock-based Compensation
The Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards, Share-Based Payment (ASC NOs.505,718).
Earnings per Share
Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (convertible preferred stock, forward contract, warrants to purchase common stock, contingently issuable shares, common stock options and warrants and their equivalents using the treasury stock method) were exercised or converted into common stock. The Company excludes potential common shares in the diluted EPS computation in periods of losses from continuing operations, as their effect would be anti-dilutive.
We have granted 525,500 options to our key employees and 177,500 warrants to the placement agent in our IPO and to our investor relations consultant, all of which are included when calculating the diluted earnings per share. As of September 30, 2010, 170,000 warrants had been exercised at a price equal to $8.10 per share.
During the first financing after IPO (refer to Note 1), the company has also agreed to issue the underwriters a warrant to purchase a number of common shares equal to an aggregate of 10% of the common shares sold in the offering, excluding over-allotments. The warrants will have an exercise price equal to 145% of the offering price. As of September 30, 2010, the above mentioned matters have completed.
The Company has repurchased aggregation of 21,100 ordinary shares by the end of September 30, 2010.
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity except those resulting from investments by owners and distributions to owners. The Company has chosen to report comprehensive income (loss) in the statements of income and comprehensive income.
Financial Instruments
The Company carries the carrying value of financial instruments, which consists of cash and cash equivalents, accounts receivable, accounts payable and other payables at cost, which approximates fair value due to the short-term nature of these instruments. The Company does not use derivative instruments to manage risks.
F-16
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Segments
The Company identifies segments by reference to its internal organization structure and the factors that management uses to make operating decisions and assess performance.
Recently Issued Accounting Pronouncements
In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted. The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
In May 2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.
In January 2010, the FASB issued the ASU No. 2010-06Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update amends ASC 820 subtopic 10 that requires new disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. This Update also amends ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010.
After May 2010, FASB issued several ASUs-ASU-20 through ASU-26, which do not require adoption until a future date are not expected to have a material impact on the consolidated financial statement upon adoption.
3. Accounts Receivable, Net
Based on the Companys valuation review, management believes the net balance on each balance sheet date herein was collectable.
F-17
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
The gross accounts receivable and bad debt provision as at September 30 2010 and December 31 2009 are as follows:
September 30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
Accounts receivable, gross |
$ | 13,511,075 | $ | 4,394,730 | ||||
Less bad debt provision |
(475,397 | ) | (56,491 | ) | ||||
Accounts receivable, net |
$ | 13,035,678 | $ | 4,338,239 | ||||
The following analysis details the changes in the Companys allowances for doubtful accounts:
September 30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
Balance at beginning of the year |
$ | 56,491 | $ | 62,286 | ||||
Increase in allowances during the period |
430,874 | 1,380 | ||||||
Write-offs during the period |
(11,968 | ) | (7,175 | ) | ||||
Balance at the end of the year |
$ | 475,397 | $ | 56,491 | ||||
4. Inventories
Inventories consisted of the following:
September 30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
Raw materials |
$ | 1,080,952 | $ | 140,048 | ||||
Finished goods |
616,775 | 360,152 | ||||||
Project work-in-progress |
3,095,912 | 1,073,124 | ||||||
Totals |
$ | 4,793,639 | $ | 1,573,324 | ||||
The Company reviews its inventory periodically for possible obsolete goods and to determine if any reserves are necessary for potential obsolescence. As of September 30, 2010 and December 31, 2009, the Company determined that no more reserves were necessary.
5. Deposits on Projects
Deposits on Projects consisted of the following:
September 30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
Current: |
||||||||
Contract deposit |
$ | 691,466 | $ | 523,505 | ||||
Bidding deposit |
658,101 | 61,648 | ||||||
Totals |
$ | 1,349,567 | $ | 585,153 | ||||
Long-term: |
||||||||
Contract deposit |
$ | 14,806 | $ | | ||||
Bidding deposit |
| | ||||||
Totals |
$ | 14,806 | $ | | ||||
F-18
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Contract deposits are paid to customers for promising the service or products will be properly and timely provided. Bidding deposits are paid as a deposit for involving in the bidding process. The current portion of deposits will be utilized within one year. The deposits to be utilized within two years is reclassified as long term deposit.
6. Plant and Equipment, Net
Plant and equipment consist of the following:
September 30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
Transportation equipment |
$ | 640,253. | $ | 308,042 | ||||
Office equipment |
330,591 | 206,674 | ||||||
Furniture |
224,167 | 13,986 | ||||||
Total plant and equipment |
1,195,011 | 528,702 | ||||||
Less accumulated depreciation |
(408,479 | ) | (154,693 | ) | ||||
Plant and equipment, net |
$ | 786,532 | $ | 374,009 | ||||
The depreciation expense for the three months ended September 30, 2010 and 2009 amounted to $37,085 and $17,330, respectively. The depreciation expense for the nine months ended September 30, 2010 and 2009 amounted to $73,942 and $37,333, respectively.
7. Intangible asset, Net
Intangible asset mainly represents patents, software and customer relationship. Patents were invested as capital contribution by the minority shareholder of Tranhold and the majority shareholder of Yanyu and were recorded at appraisal value as stipulated by local regulatory authority. Software was purchased from third parties at the acquisition cost. In January 2010, Yanyu acquired 5 software products, which include BlueSky (large region environmental management system), Skylon MCMS V1.0 (mobile web management system), Skylon DLMS V1.0 (database management system), pollution reduction checking assistant, water pollution control infrastructure, and hired its associated software R&D persons, simultaneously. This purchase involves $293,000. The actual payment is recorded as the cost of software for the acquired software. The Company added two software of $1,853,427 and customer relationship of $649,147 through consolidating of BSST since August 2010.
F-19
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
All the intangible assets have definite lives, and are amortized on a straight-line basis over their expected useful economic lives. The original costs and accumulated amortization as at September 30 2010 and December 31 2009 are as follows:
September 30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
Intangible asset |
$ | 4,577,680 | $ | 1,425,559 | ||||
Less accumulated amortization |
(1,057,539 | ) | (627,705 | ) | ||||
Intangible asset, net |
$ | 3,520,141 | $ | 797,854 | ||||
According to ASC 845-10-S99, transfers of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the companys initial public offering normally should be recorded at the transferors historical cost basis determined under GAAP. The net book value of the patents invested by the majority shareholders of Yanyu was $522,606 as of September 30, 2010 which only accounted for 0.7% of its total assets as of September 30, 2010; therefore, the effect from the inclusion of the contributed patents at its fair value instead of historical cost was immaterial.
The amortization expense for the three months ended September 30, 2010 and 2009 amounted to $56,883 and $12,718, respectively. The amortization expense for the nine months ended September 30, 2010 and 2009 amounted to $94,634 and $38,116, respectively.
8. Prepayments to suppliers and subcontractors
Prepayments are money deposited with or advanced to subcontractors to perform services on system contracting projects. Some subcontractors require a certain amount of money to be deposited as a guaranty payment for them to start performing the services. Prepayments also include money deposited or advanced to vendors on future inventory purchases to ensure timely delivery.
9. Accounts payable and cost accrual on projects
This account contains the accounts payable to suppliers and accruals of costs incurred in the projects in accordance with the percentage of completion method. Accounts payable to suppliers is $1,294,604 and 933,649 as of September 30, 2010 and December 31, 2009 respectively. Cost accrual on projects is $10,842,489 and $2,433,407 as of September 30, 2010 and December 31, 2009, respectively.
10. Long-term liabilities
Long-term liabilities consisted of the following:
September 30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
Current portion: |
$ | 25,932 | $ | | ||||
Long-term portion: |
| 58,171 | ||||||
Totals |
$ | 25,932 | $ | 58,171 | ||||
F-20
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Company purchased transport equipment payable on installments, pursuant to the payment agreement, the remaining payments totally $25,932 will be repaid within 7 months at $3,705 per month from September 30, 2010, and presented as Current portion of long-term liabilities.
11. Income Taxes
Under the Income Tax Laws of the PRC, before 2008, domestic companies in the PRC were generally subject to an income tax at an effective rate of 33% (30% state income taxes plus 3% local income taxes) on income reported in the statutory financial statements after appropriate tax adjustments, unless (a) the enterprise was located in a specially designated region which allowed enterprises a three-year income tax exemption and a 50% income tax reduction for the following three years or (b) the enterprise was a manufacturing related joint venture with a foreign enterprise or a wholly-owned subsidiary of a foreign enterprise, which was allowed a two-year income tax exemption and a 50% income tax reduction for the following three years.
Under the Income Tax Laws of the Beijing State Administration Taxation of PRC, any enterprise with manufacturing operations in the city of Beijing that is a wholly owned subsidiary of a foreign enterprise is subject to an income tax rate of 24%.
According to an approval document (Taxation Notice No. 201 (2008)) from the Beijing State Tax Bureau of Xicheng District, TTB was granted an income tax exemption in 2007 and 2008 and reduced income tax rates of 10%, 11%, and 12% from 2009 to 2011, on the basis of being a high-tech company.
According to an approval document from the Beijing State Tax Bureau of Haidian District, Tranhold was granted an income tax exemption in 2004 and 2005 and a half reduced income tax rate from the normal rate of 15% from 2006 to 2008, on the basis of being a high-tech company. Before being re-identified as High-technology Enterprise in accordance with new legislation, the income tax rates of Tranhold will be 25% in 2009 and beyond.
According to an approval document from the Beijing State Tax Bureau of Haidian District, Yanyu was granted, on the basis of being a high-tech and software company, an income tax exemption in 2003 and 2004 and a half reduced income tax rate from the normal rate of 15% from 2005 to 2007. Before being re-identified as High-technology Enterprise in accordance with new legislation, the income tax rates of Yanyu will be 25% in 2009 and beyond.
According to an approval document from the Beijing State Tax Bureau of Xicheng District, BSST was granted an income tax exemption in 2009 and an income tax rate of 15% is applied on the basis of being a high-tech company in 2009 and beyond.
Beginning January 1, 2008, the new Enterprise Income Tax (EIT) law replaced the existing laws for Domestic Enterprises (DES) and Foreign Invested Enterprises (FIEs).
The key changes are:
a. | The new standard EIT rate of 25% will replace the 33% rate currently applicable to both DES and FIEs, except for high-tech companies which have a reduced rate of 15%; |
F-21
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
b. | Companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by the local government for a grace period of the next 5 years or until the tax holiday term is completed, whichever is sooner. |
However, on May 27, 2009, TTB received Taxation Notice No. 9 (2009) from the Beijing State Tax Bureau of Xicheng District, which superseded Taxation Notice No. 201 (2008) mentioned above.
According to Taxation Notice No. 9 (2009), TTB is required to pay income at the rate of 25% for the fiscal year ended December 2008. As a result, the Company was required to pay additional $139,562 for the fiscal year ended December 31, 2008.
Pursuant to the Taxation Notice and supplementary regulations, only the high-tech companies re-certified under the new criteria of high-tech enterprise are granted the preferred tax rates.
According to State Tax Notice No. 203 (2009) issued by State Administration of Taxation on April 22, 2009, neither Tranhold nor Yanyu is qualified for preferred tax benefits for high-tech enterprise until they are re-certified as high-tech enterprises under the newly revised criteria for high-tech enterprises. Both Tranhold and Yanyu are currently subject to 25% income tax rate. As a result, the Company accrued $32,925 deferred income tax liability for the fiscal year ended December 31, 2008.
TTB has already certified as a high-tech enterprise under the new criteria in December 2009.
According to Taxation Notice No. 1 (2010) from the Beijing State Tax Bureau of Xicheng, District, TTB is subject to 7.5% income tax rate, from January 1, 2009 to December 31, 2011.
BSST has already certified as a high-tech enterprise under the new criteria in September 2010, it is subject to 15% income tax rate from January 1, 2010 to December 31, 2012.
The Company had paid income taxes $80,019 for the nine months ended September 30, 2010.
Yanyu had accumulated net operating losses of RMB 3,622,268 (approximately $532,154) for income tax purposes as of September 30, 2010. These net operating losses can be carried forward for 5 years to reduce future years PRC taxable income. Tranhold had accumulated net operating losses of RMB 959,403 (approximately $140,947) for income tax purposes as of September 30, 2010. These net operating losses can be carried forward for 5 years to reduce future years PRC taxable income. These carry forwards will expire, if not utilized, beginning in 2011 and continue through 2016.
The Beijing Tax Bureau generally conducts annual audits of income tax by commissioning an accounting firm or tax auditing firm, although the tax bureau will do it by itself when they feel there is need to do so. No tax bureau audits have been performed on the subsidiary or VIEs in the PRC so far. Tax audits by auditing firms for TTB, Tranhold and Yanyu have been performed through, 2009. All subsidiaries and VIEs of the Company file their tax returns in accordance with the audit reports issued by the auditing firm.
F-22
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
The provision for income tax expense (benefit) from continuing operations consists of the following:
For the Three Months Ended September 30, |
||||||||
2010 (Unaudited) |
2009 (Unaudited) |
|||||||
Current: |
||||||||
PRC |
$ | 605,256 | $ | 314,371 | ||||
Deferred: |
||||||||
PRC |
| | ||||||
Total income tax expense (benefit) |
$ | 605,256 | $ | 314,371 | ||||
For the Nine months
Ended September 30, |
||||||||
2010 (Unaudited) |
2009 (Unaudited) |
|||||||
Current: |
||||||||
PRC |
$ | 1,024,676 | $ | 450,466 | ||||
Deferred: |
||||||||
PRC |
| | ||||||
Total income tax expense (benefit) |
$ | 1,024,676 | $ | 450,466 | ||||
Significant components of the Companys net deferred tax assets/(liabilities) are as follows:
September
30, 2010 (Unaudited) |
December 31, 2009 |
|||||||
Deferred tax assets: |
||||||||
Net operating loss carry forwards |
| 140,814 | ||||||
Deferred tax liabilities: |
||||||||
Revenue recognition based on percentage of completion |
| 282,292 | ||||||
Total net deferred tax assets (liabilities) |
$ | | $ | (141,478 | ) | |||
Income Tax Reconciliation for three months ended September 30, 2010 and 2009 are as follows:
For the Three Months Ended September 30, |
||||||||
2010 (Unaudited) |
2009 (Unaudited) |
|||||||
PRC federal statutory tax rate |
25 | % | 25 | % | ||||
Taxable income |
2,846,751 | 1,386,709 | ||||||
Computed expected income tax expense |
711,688 | 346,677 | ||||||
Effect of tax holidays |
(106,432 | ) | (32,306 | ) | ||||
Income tax expense (benefit) |
605,256 | 314,371 | ||||||
F-23
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Income Tax Reconciliation for nine months ended September 30, 2010 and 2009 are as follows:
For the Nine months
Ended September 30, |
||||||||
2010 (Unaudited) |
2009 (Unaudited) |
|||||||
PRC federal statutory tax rate |
25 | % | 25 | % | ||||
Taxable income |
5,524,552 | 2,988,463 | ||||||
Computed expected income tax expense |
1,381,138 | 747,116 | ||||||
Effect of tax holidays |
(356,462 | ) | (296,650 | ) | ||||
Income tax expense (benefit) |
1,024,676 | 450,466 | ||||||
12. Equity
On September 9, 2009, the Company completed its initial public offering (IPO) of 1,700,000 common shares at $6.75 per share. In order to mitigate some of the risk of valuing the Company on a forward-looking basis, each of the founders of TRIT placed into escrow, on a pro rated basis, that number of common shares that was equal to 20% of the number of shares sold in the IPO (Founders Shares) or 340,000 shares. If TRITs 2009 EPS equaled or exceeded $0.7205 (calculated before the effects of the expenses related to Warrants, Options and escrow shares, and with the assumption as indicated above), then the Founders Shares were to be released to the Founders from escrow. Because the Founders Shares were escrowed as a condition of completing the IPO and were to be released to the Founders without regard to the shareholders continued employment if TRIT met the foregoing criteria, we have determined that no compensatory arrangement exists. Accordingly, we have accounted for the escrow shares as an element of the overall transaction and will not recognize any compensation expense upon the return of escrow shares to the Founders. If our Company did not meet the criteria for releasing the Founders Shares, then we were obligated to redeem the Founders Shares without payment, resulting in the reduction of TRIT shares outstanding. Basic EPS was $0.94 for fiscal year 2009, therefore the criteria were met and no accounting treatment was made accordingly.
On April 20 2010, the Company successfully issued additional 2,142,750 of the Companys ordinary shares; on May 5, 2010, the Underwriters purchased an aggregate of 224,083 Overallotment Shares. The Offered Shares were sold to the public at a price of $14.00 per share.
On May 27, 2010, the Company announced the authorization of an ordinary share repurchase plan (the Plan). Under the Plan, the Companys Board of Directors has authorized the repurchase of a number of the Companys ordinary shares with an aggregate value of up to $8 million. In June and July 2010, The Company has authorized Merrill Lynch to repurchase of 21,100 ordinary shares by six times, and a Treasury Stock is recorded at cost method.
The company has also agreed to issue the underwriters a warrant to purchase a number of common shares equal to an aggregate of 10% of the common shares sold in the offering, excluding over-allotments. The warrants will have an exercise price equal to 145% of the offering price. As of September 30, 2010, the above mentioned matters have completed.
F-24
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
The Company has totally issued 260,000 ordinary shares at $8.98 per share with a total amount of $2,334,800 as one of the consideration to BSST, which was completed by September 15.
13. Warrants
On September 9, 2009, the Company issued to Anderson & Strudwick Incorporated 170,000 warrants, as a portion of the placement commission for the IPO. On the same day, the Company issued a total of 7,500 warrants to Hawk Associates Inc., the Companys investor relations consultancy. The Company issued 177,500 warrants as of December 31, 2009 and September 30, 2010. All warrants can be exercised at a price equal to $8.10 per share, at any time on and after 180 days from the grant date. The expiration date for the warrants is September 9, 2014.
As of September 30, 2010, 170,000 warrants had been exercised at a price equal to $8.10 per share, which led to an increase in Common stock by $170 and Additional paid-in-capital by $1,376,830.
The fair value of each warrants award is estimated on the date of grant using a Black Scholes Model that uses the item noted in the following table.
Fair value per share (USD/share) |
5.94 | |||
Exercise price (USD/share) |
8.10 | |||
Risk free rate |
2.74 | % | ||
Dividend yield |
0.00 | % | ||
Expected term/Contractual Life (No. of Yrs) |
5.0 | |||
Expected volatility |
53.0 | % |
(1) | Fair Value of Underlying Common Shares |
With reference to Paragraph 17 ASC 718, a restricted stock discount was applied to price of the Companys common shares to reflect the fact that the warrant holders are restricted from exercising the warrant within 180-days after its vesting date. When determining the restricted stock discount, the Black Scholes option model was used. Under the option-pricing method, the cost of put option, which can hedge the price change before the privately held share can be sold, was considered as a basis to determine the discount for lack of marketability. Based on the analysis, restricted stock discount of 12% was applied on the market price of our common share as of the warrant grant dates.
(2) | Exercise price |
The exercise price of the warrant was determined by the Companys board of directors.
F-25
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
(3) | Risk-free interest rate |
Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the term of the warrants.
(4) | Dividend yield |
Dividend yield of 0% was estimated by management of the Company
(5) | Life to Expiration |
Life to expiration was based on the contractual term of the warrants.
(6) | Volatility |
The volatility of the underlying common shares during the life of the warrants was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the warrants.
The fair value of warrants on the grant date of September 9, 2009 was $2.37 per share. The total fair value of warrants was $420,675.
The warrants expense for the placement agent was $402,900 as an IPO expense. The warrants expense for the investor relations firm recognized as general and administrative expenses for the year ended December 31, 2009 was $13,831, and $3,944 and $0 was recognized as general and administrative expenses for the nine months ended September 30, 2010 and 2009, respectively.
14. Options issued to employees
TRITs 2009 employee share option plan that was approved by shareholders permits the Company to offer up to 525,500 shares, options and other securities to its employees. On September 9, 2009, TRIT granted employee 525,500 stock options with an exercise price equal to $6.75 to its senior management and employees. The options will vest based on 5 years of continuous service and will have 10-year contractual terms from September 9, 2009. The options will vest over five years at a rate of 20% per year beginning in September 2010. Certain options provide for accelerated vesting upon a change in control (as defined in the employee share option plan). The company had issued 525,500 stock options on December 31, 2009 and September 30, 2010.
The fair value of each option award is estimated on the date of grant using a Black Scholes Model that uses the item noted in the following table.
Fair value per share (USD/share) |
6.75 | |||
Exercise price (USD/share) |
6.75 | |||
Risk free rate |
2.74 | % | ||
Dividend yield |
0.00 | % | ||
Expected term/Contractual Life (No. of Yrs) |
6.5 | |||
Expected volatility |
50.0 | % |
F-26
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
(1) | Fair Value of Underlying Common Shares |
This is based on market price of the Companys common shares as of option grant dates.
(2) | Exercise price |
The exercise price of the options was determined by the Companys board of directors.
(3) | Risk-free interest rate |
Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the expected term of the options.
(4) | Dividend yield |
Dividend yield of 0% was estimated by management of the Company.
(5) | Expected term |
As the Company did not have historical share option exercise experience, it estimated the expected term as the average between the vesting term of the options and the original contractual term.
(6) | Volatility |
The volatility of the underlying common shares during the life of the options was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the options.
The fair value of options on the grant-date of September 9, 2009 was $3.53 per share. The total fair value of options was $1,855,015. None of options is vested under the employee share option plan as of December 31, 2009. As of September 30, 2010, 105,100 number of shares are vested.
The Company recognized compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The total option compensation expense recognized for the year ended December 31, 2009 was $114,858, and another $1,740,157 will be recognized as general and administrative expense over the next 1,712 days. $93,513 and $0 were recognized as expenses for the three months ended September 30, 2010 and 2009; $277,490 and $0 were recognized as expenses for the nine months ended September 30, 2010 and 2009.
15. Net Income per Common Share
ASC 260 Earnings Per Share, requires dual presentation of basic and diluted earnings per share (EPS) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
F-27
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive common shares consist of common shares issuable upon the conversion of common stock option (using the treasury stock method). The following table presents a reconciliation of basic and diluted net income per share:
For the three Months
Ended September 30, |
||||||||
2010 (Unaudited) |
2009 (Unaudited) |
|||||||
Net income attributable to Tri-Tech Holding Inc |
$ | 2,243,698 | $ | 1,073,611 | ||||
Weighted-average shares of common stock used to compute basic net income per share |
7,817,085 | 3,924,565 | ||||||
Effect of dilutive common stock equivalents: |
||||||||
Dilutive effect of warrants |
2,628 | 7,069 | ||||||
Dilutive effect of employee stock options |
108,021 | 22,788 | ||||||
Shares used in computing diluted net income per common share |
7,927,734 | 3,954,422 | ||||||
Basic net income per common share |
$ | 0.29 | $ | 0.27 | ||||
Diluted net income per common share |
$ | 0.28 | $ | 0.27 | ||||
For the Nine Months
Ended September 30, |
||||||||
2010 (Unaudited) |
2009 (Unaudited) |
|||||||
Net income attributable to Tri-Tech Holding Inc |
$ | 4,482,900 | $ | 2,525,545 | ||||
Weighted-average shares of common stock used to compute basic net income per share |
6,789,604 | 3,679,542 | ||||||
Effect of dilutive common stock equivalents: |
||||||||
Dilutive effect of warrants |
2,628 | 2,382 | ||||||
Dilutive effect of employee stock options |
108,021 | 7,679 | ||||||
Shares used in computing diluted net income per common share |
6,900,253 | 3,689,603 | ||||||
Basic net income per common share |
$ | 0.66 | $ | 0.69 | ||||
Diluted net income per common share |
$ | 0.65 | $ | 0.68 |
F-28
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
16. Commitments and Contingencies
Operating Leases
As of September 30, 2010, the Company had commitments under certain operating leases, requiring annual minimum rentals as follows:
2010 |
$ | 117,948 | ||
2011 |
559,691 | |||
2012 |
545,030 | |||
2013 |
377,883 | |||
2014 |
107,484 | |||
Total |
$ | 1,708,036 | ||
The leased properties are principally located in the PRC and are used for administration and research and development purposes. The terms of these operating leases varied from one to five years. Pursuant to contracts, when the contracts are expired, we have the rights to extended them with new negotiated prices. The leases are renewable subject to negotiation. Rental expenses were $111,034 and $40,032 for the three months ended September 30, 2010 and September 30, 2009, respectively. Rental expenses were $251,700 and $124,888 for the nine months ended September 30, 2010 and September 30, 2009, respectively.
Product Warranties
The Companys warranty policy generally is to replace parts if they become defective within one year after deployment at no additional charge. Historically, failure of product parts due to materials or workmanship has not been significant. The Company has not incurred any material unexpected costs associated with servicing its warranties. The Company continuously evaluates and estimates its potential warranty obligations, and records the related warranty obligation when the estimated amount becomes material at the time revenue is recorded.
17. Certain Significant Risks and Uncertainties
Cash includes cash on hand and demand deposits in accounts maintained with state owned banks within the PRC. Total cash in these banks at September 30, 2010 and December 31, 2009, amounted to $29,064,765 and $7,171,464, respectively, of which no deposits are covered by insurance. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
The Companys operations are carried out in the PRC. Accordingly, the Companys business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC and by the general state of the PRCs economy. The Companys operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Companys results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
F-29
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
The Company has one major customer who represented approximately 26.0% of the Companys sales for the nine months ended September 30, 2010. The long-term unbilled revenue balance with this customer is $7,724,285 as of September 30, 2010. No other customers represented more than 10% of the Companys sales for the nine months ended September 30, 2010, and no customers represented more than 10% of the Companys sales for the nine months ended September 30, 2009. There is one customer who represented more than 10% of the Companys sales for the third quarter of year 2010, 45.3%. The long-term unbilled revenue balance with this customer is $7,724,285 as of September 30, 2010. There are two customers who represented more than 10% of the Companys sales for the third quarter of year 2009, collectively 32.4%, the accounts receivable balance with the two customers are $1,872,237 as of September 30, 2009.
18. Related Party Transactions
An administrative officer of the Company leased his personal property to Tranhold as its branch office in Beijing. The monthly rent is $4,395, which approximates an average of market price, from January 1, 2009 to December 31, 2010. After the Company moved into the new office since September 2010, such transaction was no longer existed and thus no additional fees needed to pay.
19. Retirement Plan
The Company and its subsidiaries are required to participate in a central pension scheme operated by the local municipal government. The Company is required to contribute approximately 20% of its payroll costs, subject to certain caps with reference to average municipal salary, to the central pension scheme. The Company charges contributions to its income statement as they become payable in accordance with the rules of the scheme. The aggregate contributions of the Company to retirement benefit schemes amounted to $36,577 and $14,498 for the three months ended September 30, 2010 and September 30, 2009;$92,336 and $40,163 for the nine months ended September 30, 2010 and September 30, 2009, respectively.
20. Statutory Reserves
The laws and regulations of the Peoples Republic of China provide that before a Chinese enterprise distributes profits to its shareholders, it must first satisfy all tax liabilities, provide for losses in previous years, and make appropriation, in proportions determined at the discretion of the board of directors, to the statutory reserves. The statutory reserves include the surplus reserve fund and the collective welfare fund. These statutory reserves represent restricted retained earnings.
TTIIs subsidiary and VIEs are required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the Companys registered capital.
The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.
F-30
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
As stipulated by the relevant laws and regulations applicable to PRC foreign investment enterprises, the foreign invested PRC subsidiaries are required to make appropriations from net income as determined under PRC GAAP to non-distributable reserves which include a general reserve, an enterprise expansion reserve and an employee welfare and bonus reserve.
Wholly-foreign-owned PRC subsidiaries are not required to make appropriations to the enterprise expansion reserve but appropriations to the general reserve are required to be made at not less than 10% of the profit after tax as determined under PRC GAAP.
The employee welfare and bonus reserve is determined by the Companys Board of Directors. The general reserve is used to offset future extraordinary losses. The subsidiaries may, upon a resolution passed by the stockholders, convert the general reserve into capital. The employee welfare and bonus reserve is used for the collective welfare of the employees of the subsidiaries. The enterprise expansion reserve is used for the expansion of the subsidiaries operations and can be converted to capital subject to approval by the relevant authorities. These reserves represent appropriations of retained earnings determined according to PRC law.
For the three months and nine months ended September 30, 2010 and 2009, the Company made no appropriations to statutory reserves.
21. Segment and Geographic Information
The Company has three reportable operating segments. The segments are grouped with references to the types of services provided and the types of clients that use those services. As TTB and its subsidiaries conduct services of the three segments, the total sales and costs are accordingly divided into the three segmental portions. The Company assesses each segments performance based on net revenues and gross profit on contribution margin. The three reportable operating segments are:
Segment 1: Water, Wastewater Treatment and Municipal Infrastructure
Municipal water supply and distribution, wastewater treatment and gray water reuse engineering, procurement, and construction (EPC), build and transfer (BT); proprietary process control systems, process equipment integrated, and proprietary odor control systems, and other municipal facilities engineering, operation management, and related infrastructure construction projects.
Segment 2: Water Resource Management System and Engineering Service
Water resources protection and allocation, flood control and forecasting, irrigation systems, related system integration, proprietary hardware and software products, etc.
F-31
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Segment 3: Industrial Pollution Control and Safety
Provide systems for VOC abatement, odor control, water and wastewater treatment, water recycling facilities design, engineering, procurement and construction for oil, gas, petrochemical and power industries; , safety and clean production technologies for oil, gas exploration and pipeline.
For the quarter ended September 30, 2010 (Unaudited) |
||||||||||||||||
Segment 1 Water, Wastewater Treatment and Municipal Infrastructure |
Segment 2 Water Resource Management System and Engineering Service |
Segment 3 Industrial Pollution Control and Safety |
Total | |||||||||||||
Revenues |
$ | 10,855,076 | $ | 1,239,850 | $ | 4,774,442 | $ | 16,869,368 | ||||||||
Cost of revenues (exclusive of depreciation and amortization expenses shown separately below): |
7,902,411 | 977,190 | 3,502,511 | 12,382,112 | ||||||||||||
Operating expenses: |
||||||||||||||||
Depreciation and amortization expenses |
18,372 | 26,618 | 48,978 | 93,968 | ||||||||||||
Other operating expenses |
1,025,410 | 300,257 | 276,525 | 1,602,192 | ||||||||||||
Total operating expenses |
1,043,782 | 326,875 | 325,503 | 1,696,160 | ||||||||||||
Other income (loss), net |
71,118 | (541 | ) | (14,922 | ) | 55,655 | ||||||||||
Income before income taxes and noncontrolling interest |
$ | 1,980,001 | $ | (64,756 | ) | $ | 931,506 | $ | 2,846,751 |
F-32
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
For The Quarter Ended September 30, 2009 (Unaudited) |
||||||||||||
Segment 1 Water, Wastewater Treatment and Municipal Infrastructure |
Segment 2 Water Resource Management System and Engineering Service |
Total | ||||||||||
Revenues |
$ | 3,797,872 | $ | 1,112,961 | $ | 4,910,833 | ||||||
Cost of revenues (exclusive of depreciation and amortization expenses shown separately below): |
2,308,345 | 681,743 | 2,990,088 | |||||||||
Operating expenses: |
||||||||||||
Depreciation and amortization expenses |
17,506 | 12,543 | 30,049 | |||||||||
Other operating expenses |
346,658 | 203,840 | 550,498 | |||||||||
Total operating expenses |
364,164 | 216,383 | 580,547 | |||||||||
Other (expenses) income, net |
(2,849 | ) | 49,360 | 46,511 | ||||||||
Income before income taxes and noncontrolling interest |
$ | 1,122,514 | 264,195 | $ | 1,386,709 |
For the Nine Months ended September 30, 2010 (Unaudited) |
||||||||||||||||
Segment 1 Water, Wastewater Treatment and Municipal Infrastructure |
Segment 2 Water Resource Management System and Engineering Service |
Segment 3 Industrial Pollution Control and Safety |
Total | |||||||||||||
Revenues |
$ | 17,668,651 | $ | 4,909,340 | $ | 6,632,269 | $ | 29,210,260 | ||||||||
Cost of revenues (exclusive of depreciation and amortization expenses shown separately below): |
11,929,209 | 3,110,261 | 4,912,439 | 19,951,909 | ||||||||||||
Operating expenses: |
||||||||||||||||
Depreciation and amortization expenses |
53,315 | 64,358 | 50,903 | 168,576 | ||||||||||||
Other operating expenses |
2,038,115 | 1,192,231 | 468,225 | 3,698,571 | ||||||||||||
Total operating expenses |
2,091,430 | 1,256,589 | 519,128 | 3,867,147 | ||||||||||||
Other income, net |
86,843 | 54,577 | (8,072 | ) | 133,348 | |||||||||||
Income before income taxes and noncontrolling interest |
$ | 3,734,855 | $ | 597,067 | $ | 1,192,630 | $ | 5,524,552 |
F-33
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
For the Nine Months Ended September 30, 2009 (Unaudited) |
||||||||||||
Segment 1 Water, Wastewater Treatment and Municipal Infrastructure |
Segment 2 Water Resource Management System and Engineering Service |
Total | ||||||||||
Revenues |
$ | 6,806,977 | $ | 4,098,192 | $ | 10,905,169 | ||||||
Cost of revenues (exclusive of depreciation and amortization expenses shown separately below): |
3,845,232 | 2,691,212 | 6,536,444 | |||||||||
Operating expenses: |
||||||||||||
Depreciation and amortization expenses |
36,968 | 38,481 | 75,449 | |||||||||
Other operating expenses |
907,244 | 462,870 | 1,370,114 | |||||||||
Total operating expenses |
944,212 | 501,352 | 1,445,563 | |||||||||
Other income, net |
(2,778 | ) | 68,079 | 65,301 | ||||||||
Income before income taxes and noncontrolling interest |
$ | 2,014,755 | $ | 973,708 | $ | 2,988,463 |
F-34
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
September 30, 2010 and 2009
Assets by segment
The Company evaluates its assets by segment to generate information needed for internal control, resource allocation and performance assessment. This information also helps management to establish a basis for asset realization, determine insurance coverage, assess risk exposure, and meet requirements for external financial reporting.
Segment assets of the Company are as follows:
As of September 30,
2010 (Unaudited) |
||||||||||||||||
Segment 1 Water, Wastewater Treatment and Municipal Infrastructure |
Segment 2 Water Resource Management System and Engineering Service |
Segment
3 Industrial Pollution Control and Safety |
Total | |||||||||||||
Segment Assets |
$ | 54,833,587 | $ | 3,737,350 | $ | 17,334,189 | $ | 75,905,126 | ||||||||
As of December 31, 2009 | ||||||||||||||||
Segment 1 Water, Wastewater Treatment and Municipal Infrastructure |
Segment 2 Water Resource Management System and Engineering Service |
Segment
3 Industrial Pollution Control and Safety |
Total | |||||||||||||
Segment Assets |
$ | 10,952,971 | $ | 13,237,317 | $ | | $ | 24,190,288 |
22. Subsequent Event
Management has considered all events and transactions that occurred after September 30, 2010 and through the date of this report, and has determined the following subsequent events require disclosure in the consolidated financial statements during this period.
On October 15, the Company signed an international distribution, services and cooperation agreement with HTI, an Oregon-based manufacturer of the worlds only forward osmosis membranes, modules and systems.
On October 28, the Company signed a letter of intent for a $15 million line of credit with the Beijing Branch of the Bank of Hangzhou.
F-35