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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 March 31, 2011
¨ | 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 8,124,433 outstanding ordinary shares, excluding 21,100 treasury shares.
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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. | 22 | ||||
Item 4. |
Controls and Procedures | 22 | ||||
PART II. |
OTHER INFORMATION | 24 | ||||
Item 1. |
Legal Proceedings | 24 | ||||
Item 1A. |
Risk Factors | 24 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 24 | ||||
Item 3. |
Defaults Upon Senior Securities | 24 | ||||
Item 4. |
(Removed and Reserved) | 24 | ||||
Item 5. |
Other Information | 24 | ||||
Item 6. |
Exhibits | 25 |
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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.
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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.
Company Overview
Tri-Tech Holding Inc. (the Company) is a leading provider of integrated solutions to Chinas water resource management and environmental protection industries. Headquartered in Beijing, China, the Company currently has 239 employees among its eight subsidiaries: (1) Tri-Tech International Investment, Inc. (TTII), (2) Tri-Tech (Beijing) Co., Ltd. (TTB), (3) Beijing Satellite Science & Technology Co. (BSST), (4) Ordos Tri-Tech Anguo Investment Co., Ltd. (TTA), (5) Tianjin Baoding Environmental Technology Co., Ltd. (TBD), (6) Tranhold Environmental (Beijing) Tech Co., Ltd. (Tranhold), (7) Beijing Yanyu Water Tech Co., Ltd. (Yanyu) and (8) Tri-Tech Infrastructure LLC, a Delaware limited liability company located in the United States (TIS). Since its incorporation in 2002, the Company has successfully implemented more than 500 projects in 30 provinces, municipalities and autonomous regions throughout China.
The Company aims to provide reliable, workable solutions to complex environmental challenges faced by governments and private enterprises. Its major clients are a combination of government agencies, municipalities, and industrial companies located throughout China. Its strategy for maintaining a leading position in the China market is to earn positive customer recognition, to continually improve its reputation in its industry and to strengthen its relationships with governmental agencies by providing diverse products based on proprietary technology, tailored projects and turnkey solutions to its diversified customer base.
The Companys principal executive offices are located at 16th Floor of Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 China. Its telephone number at this address is +86 (10) 5732-3666. Its ordinary shares are traded on the NASDAQ Capital Market under the symbol TRIT.
The Companys Internet website, www.tri-tech.cn, provides a variety of information about the Company. Its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the United States Securities and Exchange Commission (the SEC) are available, as soon as practicable after filing, at the investor relations page on its website, or by a direct link to its filings on the SECs free website.
Principal Products or Services and Their Markets
The three segments of the Companys business are: (i) Water, Wastewater Treatment and Municipal Infrastructure, (ii) Water Resource Management System and Engineering Services, and (iii) Industrial Pollution Control and Safety. Through its subsidiaries, the Company provides self-manufactured, proprietary and third-party products, system integration and other services in the fields of environmental protection, and water resource monitoring, development, utilization and protection. The Company designs water works and customized facilities for reclaiming and reusing water, sewage treatment and solid waste disposal 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 include sensors, control systems, programmable logic controllers, and supervisory control and data acquisition systems. The Company designs systems that track natural waterway levels for drought control, monitor groundwater quality and assist governmental agencies in managing water resources. It also provides 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.
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The Companys business segments are grouped according to the types of services provided and the types of clients that use those services. The total sales and costs are accordingly divided into three segmented portions. The Company assesses each segments performance based on net revenues and gross profit on contribution margin. More detailed descriptions of the three reportable operating segments follow:
Segment 1: Water, Wastewater Treatment and Municipal Infrastructure
This segment includes projects involving 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. Two of the Companys representative projects in this segment include the Ordos drinking water treatment plan, with a total contract value of $40 million, which was started in August 2010 and is expected to be completed in June 2011, and the Xinjiang Kuitun wastewater treatment project, expected to generate revenues of $6.2 million, which was started in June 2010 and is expected to be completed in September 2011.
Segment 2: Water Resource Management System and Engineering Service
This segment involves projects relating to water resource protection and allocation, flood control and forecasting, irrigation systems, related system integration, proprietary hardware and software products and similar ventures. Representative projects in this segment include the Gansu Longnan disaster alert system project, with a total contract value of $0.7 million, which commenced in May 2010 and is expected to be completed in June 2011; and the Sichuan water resource monitoring system project, with a total contract value of $0.4 million, which began in December 2010 and is expected to conclude in September 2011.
Segment 3: Industrial Pollution Control and Safety
Projects in this segment include systems for VOC abatement; odor control; water and wastewater treatment; the design, engineering, procurement and construction of water recycling facilities for oil, gas, petrochemical and power industries; and safety and clean production technologies for oil and gas exploration and pipeline. A representative project in this segment is the Puguang Industrial Network project in Dazhou city, Sichuan province.
Revenues by Segment
In the quarter ended March 31, 2011, the Company had total revenue of $17.6 million, including $12.9 million in Segment 1, $1.6 million in Segment 2, and $3.0 million in Segment 3. The table presented below shows the performance of each of the business segments for the first quarter of 2011. Segment 1 contributed 73.5% of the total revenues; Segment 2 contributed 9.4%; and Segment 3 contributed the remaining 17.1%.
Quarter Ended March 31, 2011 | ||||||||||||||||||||||||||||||||
Segment 1: | % | Segment 2: | % | Segment 3: | % | Total | % | |||||||||||||||||||||||||
System integration |
$ | 12,904,386 | 100 | % | $ | 125,967 | 7.7 | % | $ | 2,840,141 | 94.4 | % | $ | 15,870,494 | 90.4 | % | ||||||||||||||||
Hardware products |
$ | | 0 | % | $ | 1,515,092 | 92.3 | % | $ | 167,625 | 5.6 | % | $ | 1,682,717 | 9.6 | % | ||||||||||||||||
Software products |
$ | | 0 | % | $ | | 0 | % | $ | | 0 | % | $ | | 0 | % | ||||||||||||||||
Total revenues |
$ | 12,904,386 | 73.5 | % | $ | 1,641,059 | 9.4 | % | $ | 3,007,766 | 17.1 | % | $ | 17,553,211 | 100 | % | ||||||||||||||||
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Backlog and Pipeline for 2011
For the year 2011, with a strong backlog, the Company anticipates that its revenues will reach a range of $69 million to $80 million. Its net income will likely be between $11 million and $12.8 million. Assuming the number of total outstanding shares remains at 8,124,433, excluding the 21,100 shares held in treasury, the Company expects earnings-per-share to range from $1.35 to $1.58. The fully diluted earnings- per-share for the first quarter of 2011 is $0.21.
The Companys backlog represents the amount of contract work remaining to be completed, that is, revenues from existing contracts and work in progress expected to be recognized in 2011, based on the assumption that these projects will be completed on time according to the project schedules. As of March 31, 2011, the Company had a total backlog of $48.3 million, including $40.4 million in Segment 1 and the remaining $7.9 million in Segment 2 ($1 million) and Segment 3 ($6.9 million).
The Company is currently expecting potential projects in the pipeline with a total expected value of $100.6 million, of which approximately $63.0 million is for Segment 1, $26.2 million is for Segment 2 and $11.4 million is for Segment 3.
General Factors Affecting the Companys Results of Operations
The Company believes the most significant factors that directly or indirectly affect its sales revenues and net income include:
| the changes in Chinas macro-economic environment, government strategies and policies, industrial development and planning; |
| the amount of spending by Chinese central and provincial governments in water resource management, including surface and groundwater monitoring, flood control and mitigation, flood forecasting, water quality monitoring and assessment, and water resource management decision making systems; |
| the amount of investment by Chinese central and local governments in municipal wastewater management, including sewer pipelines and sewage treatment, water reuse and odor control; |
| the approved and promoted new government environmental laws and regulations which require Chinese companies to invest in pollution control; |
| the Companys capabilities and competencies including innovative technologies and applications, industrial experience and customer base, core competitive advantages, market shares and revenues; and |
| the availability and required terms of funding for the Companys working capital. |
The Companys business growth has been driven primarily by steadily increasing demand for its products and services. The complexity and scale of the projects have grown from those involving single pieces of equipment to projects involving comprehensive systems as well as general contracting for complete solutions. The Company now undertakes projects to design and build entire treatment plants and complicated flood monitoring and forecasting systems for river basins. Due to Chinas increasing urbanization and growing economy, the Company expects that it will continue to earn a substantial majority of revenues from its products and services in water resource management and municipal wastewater treatment.
The Company is continually focusing its resources on expanding to areas outside of its current bases of operation in China and on increasing its market share in the regions it serves. In addition, the Company will allocate its resources to innovate its technology, to develop applications, to improve its larger project execution capabilities and to market its brand to customers.
Macro-Economic Factors and Business Trends
According to the China State Bureau of Statistics, Chinas gross domestic product (GDP) for the quarter ended March 31, 2011 reached RMB 9.6 trillion (or $1.5 trillion), an increase of 9.7% over the same period in 2010. However, the growth rate decreased by 2.2% compared to the same period in 2010. The rate of increase declined somewhat, indicating a moderate slowing in the rate of expansion of the Chinese economy. Though China is
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affected by the current complex world economic situation, as well as the pressing tasks of the Chinese government to control high energy production capacity, to regulate real estate and to control the escalation of inflation, the Chinese government expects to maintain a growing economy in 2011. GDP growth for 2011 is expected to reach approximately 7%, according to the draft of the 12th Five-Year Plan released in early March 2011. The Company believes the growth rates primarily reflect active industry structural readjustments such as aggressive energy conservation, emission reduction and elimination of backward production capacity.
In addition, industrial production and fixed asset investment (FAI) in China continued to grow during the first quarter of 2011. The industrial production growth rate was 14.4% for the quarter ended March 31, 2011, a 5.2% decrease from the growth rate for the same period in 2010. By region, the industrial production growth rates for East China, Central China and West China in the first quarter of 2011 were 12.9%, 17.1% and 16.6%, respectively. The overall FAI reached RMB 3.9 trillion (or $604.4 billion), an increase of 25% over the same period in 2010. By region, urban FAI for East China, Central China and West China in the first quarter of 2011 was 21.6%, 31.3% and 26.5%, respectively. The high FAI growth rate in the central and west China is an indicator of rapid economic growth in 2011 in these areas, leading to higher industrial growth, energy consumption and pollution. These are the major areas that the Companys marketing force is targeting in the next 2 to 3 years.
According to the notification from the Ministry of Housing and Rural Development, the accelerating municipal solid waste disposal capacity will reach a 74% pollution-free disposal rate throughout China in 2011. The industry needs for municipal solid waste disposal is expected to be released during the next five years. The annual output of municipal solid waste is approximately 300 million tons in China. It is anticipated that investment in municipal solid waste disposal and management will be over RMB 200 billion during the 12th Five Year Plan as the government is paying great importance to the related infrastructure construction. The solid waste pollution-free disposal rate will be taken as an important measure of government officers achievements. It is anticipated that the National Municipal Solid Waste Pollution-Free Disposal Infrastructure Construction Plan (2011-2015) will be approved in 2011. It is believed this will present not only challenges but also vast potential opportunities for growing and strengthening the Company
During the 12th Five-Year Plan (2011-2015), total spending for the environmental protection sector is expected to reach RMB 3.1 trillion (or $470 billion), an increase of 121% over the 11th Five-Year Plan period. Expenditures in the 12th Five-Year Plan are expected to include RMB 1 trillion (or $150 billion) on operating costs for environmental facilities. The total spending is expected to reach 7-8% of GDP in 2015. The CAGR is expected to reach 15-20% for the next 15 to 20 years, according to the Deputy Minister of Environment Protection. The Company expects that the investment in Chinas environmental protection sector will continue to increase.
During the period covered by the 12th Five-Year Plan, the investment in water treatment will be allocated more towards small- to medium-sized towns and counties, according to the Ministry of Housing and Urban-Rural Development. The Company expects to see Chinas investment in wastewater treatment shift increasingly from tier-one cities to tier-two cities and counties in Hubei, Xinjiang, Shanxi Provinces and the Inner Mongolia Autonomous Region. As a result, the Company believes the wastewater treatment market will remain strong. The 12th Five-Year Plan sets a goal of a 67% increase in wastewater treatment capacity. Finally, there are increasing efforts in restoring lakes and rivers.
Circular No. 1 of 2011 issued by the Chinese Central Government states that China will make great efforts to fundamentally improve water conservancy facilities in the next 5 to 10 years. The Central Government earmarked RMB 4 trillion (or $615 billion) over the next 10 years for water conservancy, including facilities of flood control and drought relief, safe drinking water in rural areas, water resources management information systems and other similar projects.
Based on the data shown above, the Company believes it is likely to continue its rapid growth in 2011 and beyond because of the increased government investment commitment in Chinas water and environmental protection infrastructure.
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New Opportunities in Business
Segment 1: Water, Wastewater Treatment and Municipal Infrastructure
It is expected that the Chinese government will issue the following two significant environmental protection policies in the first half of 2011: the Energy Conservation & Environmental Protection Industry Development Plan, and the National 12th-Five Year Environmental Protection Plan. Under these two policies, environmental products and services will become the most government-supported aspects of its financial budget, tax and capital funding. Recently, the China National Development & Reform Committee released its 2011 objectives for resources conservation and environment protection; the main objectives include an 80% municipal wastewater treatment rate and a 74% pollution-free disposal rate for municipal solid waste. Vast development opportunities are anticipated in wastewater treatment, as the major sub-industry of the environment industry.
The Ministry of Housing and Urban-Rural Development has outlined the following key points with regard to the wastewater treatment market in China, including increased wastewater treatment capacity per day in most cities, increased number of cities having wastewater treatment plants. The Company is expanding its geographical reach from its current bases of operations to the rest of China, including Hubei, Shaanxi, Sichuan and Heilongjiang Provinces and the Inner Mongolia and Xinjiang Autonomous Regions.
Due to the shortage of fresh water resources, the Chinese government requires all new power plants in Chinas coastal areas to build seawater desalination plants simultaneously, to provide the processed water for the operation of power plants as well as for adjacent commercial and residential uses. As the deadline for full compliance with the new water standards approaches, the Company is getting more involved in the application of its advanced technologies, such as membrane technology, disinfection and online monitoring, and upgrading, retrofitting or replacing existing treatment facilities to meet the new government requirements.
Segment 2: Water Resource Management Systems and Engineering Services
According to the China water resources construction and management working conference, over RMB 80 billion was spent by the central government in water conservancy. Investment from different resources in water conservancy is expected to be over RMB 200 billion, which is an eight year high. The Ministry of Water Resources issued an urgent notice requesting the central government spending budget on water conservancy from last year must be allocated and the spending rate should be over 90%.
The Assistant Minister of Finance said RMB 128 billion will be spent on water conservancy from the central financial budget in 2011 and over RMB 200 billion will be spent if including spending from local and social finance. In recent years, Chinas spending growth rate for water conservancy has been significantly lower than that of FIA. Upon the issuance of No. 1 Circular on Water Conservancy and related policies, the Company expects that spending on water conservancy in China will continue for a long period.
Based on the data shown above, the Company believes it is likely to continue its growth throughout 2011 and beyond because its business is poised to directly benefit from Chinas increased investment in its water and environmental protection infrastructure as China focuses more on the sustainability of its economic growth.
At the same time, the Company keeps seeking business opportunities for mountain torrent control county projects. In order to continue to pursue these opportunities, its management plans to maintain the Companys existing market share and put together a comprehensive business implementation plan to include internal cash funding for its projects, secure large domestic bank financing, add personnel, establish additional new project offices in strategic geographic locations, increase production capacity of RTU and other equipment, develop a procurement plan, and enter into strategic partnerships with manufacturers where advantageous.
According to the hydrological station construction plan and targets of the MWR 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. The Company therefore expects that more of the government budget will be allocated to water volume and quality monitoring, water quality labs and portable testing devices.
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Segment 3: Industrial Pollution Control and Safety
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. In recent years, 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. The Company believes the energy conservation environmental industry will experience high growth in the next 3 years under policies of expanding domestic demand and consumption.
Strategies for Growth
Segment 1: Water, Wastewater Treatment and Municipal Infrastructure
The Company is continuously working on expanding its geographical reach from its base of operations near Beijing, Tianjin, Hubei, Hunan, Ningxia, Inner Mongolia, Xinjiang, Shaanxi, Sichuan, and Heilongjiang Provinces and Autonomous Regions. Recently, the expansion has reached to Anhui, Shanxi and Shandong Province.
The Company is expanding its capabilities from sub-contracting to prime contracting services. It has grown 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 it continues to grow, the Company intends to focus its business on larger projects and possibly more high quality BT projects.
Segment 2: Water Resources Management Systems and Engineering Services
In this segment, the Company is gradually transforming from a partial solutions provider to a comprehensive total solution provider for larger scale river basin projects. The Chinese governments decision to initiate new programs and allocate significant investment for their implementation offers the Company significant business opportunities. It has been investing resources to develop water quantity and water quality monitoring technologies and upgrade its proprietary products. The Company also introduced overseas advanced hydrological, water quantity and quality monitoring instruments for application development. Its goal is to ensure that it keeps pace with development and automation in the water sector.
Segment 3: Industrial Pollution Control and Safety
The Company is strengthening its industrial pollution services for the energy sector such as the oil and petrochemical industry. While it has previously implemented air pollution control systems for the petrochemical industry, the Company also believes that there are significant business opportunities, such as water and wastewater treatment and process safety, in adjacent industries. With its BSST subsidiary, the Company set up a new business unit in the first quarter of 2011 to focus on the business of water and wastewater treatment in the oil and petrochemical industry.
In addition to the traditional EPC business, the Company started to engage in the BT business model. Its current BT project is the Ordos drinking water treatment plant. The BT model is a contractual arrangement where the project proponent undertakes the financing and construction of a given infrastructure or development facility and after its completion turns it over to the government agency or local government unit, which shall pay the proponent on an agreed schedule its total investment on the project, plus a reasonable rate of return thereon. Under a BT contract, a developer or project company provides the financing for the project and receives in turn a medium- to long-term municipal payment obligation, typically 2 to 3 years in the case of the Companys projects. As the Ordos project progresses, the Company is gaining experiences in the BT project process, and is positioning itself to explore the possibilities of the BT business model in the future, to help cities utilize new strategic and financing paradigms and to implement value-added solutions for the government agencies.
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Potential Acquisitions of Complementary Businesses
In addition to natural business growth, the Company is selectively targeting acquisitions to further enhance its growth. The markets in which it operates are highly fragmented with small competitors. The Company will consider acquiring other companies believed to add significant value to the business. These potential targets may have strong customer relations but limited market access, or they may possess specialized technologies, but their business size might not have reached the point to fully utilize their specialties. When evaluating potential acquisition targets the Company uses a disciplined, conservative approach to ensure the acquisitions are strategic and beneficial to its business.
Competition
The Company operates in a highly competitive industry characterized by rapid technological development and evolving industrial standards. Given the stimulus initiatives in China, it expects the competition to intensify as more companies enter the market, notwithstanding relatively high barriers to entry in the forms of the needs for technical expertise and funding.
The Company competes primarily on the basis of customer recognition and industry reputation, research and development strengths, comprehensive product offerings and a competitive pricing structure. The low cost it has been striving to achieve provides the Company with advantages in competing with international competitors. With local rivals, the Companys superior technology ensures top quality and sustainable services. Its established nationwide distribution and customer service network and knowledge of local markets provide it with an advantage over international competitors who typically appoint only one distributor in the Chinese market who is responsible for selling and servicing their products. In addition, the Company provides a more comprehensive set of products than most of its international or local competitors. In order to maintain and enhance its competitive advantage, the Company must continue to focus on competitive pricing, technological innovation, being at the forefront of the market trends, as well as improving its proprietary manufacturing processes.
As a result of its leading position in the industry, the Company is actively participating in the drafting of industrial standards and guidelines with the China state ministries. The Company has participated in drafting Technical Standards and Guidelines of the Automatic Hydrologic Measuring & Report Systems for the Ministry of Water Resources as well as Technical Guidelines of the Municipal Sewage Treatment Plant Operation, Management and Safety for the Ministry of Construction. In the first quarter of 2011, the Company was invited to participate in the Water Information Forum in Fujian Province held by the Disaster Reduction Committee of the China Hydraulic Engineering Society and the Company displayed its Yanyu mountain torrent monitoring and forecasting products and system platform at the forum.
Although the Company believes that its competitive strengths provide it with advantages over many of its competitors, some of its international competitors have stronger brand names, longer operating histories, longer or more established relationships with their customers, stronger research and development capabilities and greater marketing budgets and other resources. Most of the Companys international competitors are substantially larger and have greater access to capital than the Company does. Some of its domestic competitors have stronger customer bases, better access to government authorities and stronger industry-based background.
Principal Suppliers
The Companys suppliers vary from project to project. Often, they are specifically appointed by the clients. Most of the materials or equipment the Company purchases are not unique and are easily available in the market. The prices for those purchases, although increasing, are relatively consistent and predictable. A specific supplier might occupy a significant percentage of the Companys total purchase at a certain time for a large contract. The dependence on a specific supplier usually ends when the project is completed. The Company does not rely on any single supplier in the long term.
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Customers and Marketing
The Company operates on a project basis, and this particular nature does not usually allow it to create a long term relationship with its customers. The Company negotiates with various government agencies, municipalities, industrial enterprises and/or their prime contractors in order to secure and undertake its various contracts. The Companys major customers usually account for a certain percentage of its total sales. Its top customer represented approximately 70% of the total revenue, and in the same period last year its top five customers represented 68.9% of the total revenue. Although the Company is dependent on its large clients to a certain degree, unlike other commercial businesses, its collectability for accounts receivables are relatively secure due to the nature of its client bases, i.e., government agencies or large state-owned enterprises.
Patents and Proprietary Rights
The Company currently has a total of 23 software copyrights and two product patents in China. Recently, Tri-Tech as a trademark was registered with the Trademark Office of the State Administration for Industry and Commerce of the PRC under category 7- Products: Separators, and category 40 Services: waste and waste management.
Government Regulation and Approvals
As described in greater detail above in the Companys discussion of business segments, government policies and initiatives in the various industries it serves have a considerable impact on the Companys potential for growth. The Company generally undertakes projects for government entities and enterprises and must complete the projects in accordance with the terms of the contracts in which it enters with those entities.
Employees
As of March 31, 2011, the total headcount of the Company was 239, of which 101 (42%) are in technical support project management, 58 (24%) are in the sales department, 19 (8%) are in research and development, 21 (9%) are in the finance department, and 40 (17%) are in general and administrative functions. The Companys teams are very stable compared to its peers. Many of its employees have been with the Company since its inception.
Research and Development
The Company focuses its research and development efforts on improving its development efficiency and the quality of its products and services. Currently, its research and development team consists of 19 experienced researchers, engineers, software developers and programmers. In addition, some of the support employees regularly participate in research and development programs. In the three-month periods ended March 31, 2011 and 2010, the Company spent $39,985 and $59,428, respectively, on research and development activities. There are three major on-going R&D projects related to software product development and product research. The development phase projects are expected to be completed in the second half of 2011.
The development progress for the research and development facility is on schedule. It is for one of the Companys subsidiary, TBD in the Tianjin Baodi Economic Development Area. As the research and development base for the Company, TBD focuses on technology development, software development, pilot testing, pre-installation/pre-assembly and manufacturing of the companys proprietary products. The first two phases of the R&D center are planned to be completed in 2014 with a total capital budget of $18 million for both phases. The R&D center construction phase one ground-breaking ceremony was held on April 29, 2011.
In addition to its current R&D projects, the Company is also pursuing cooperative opportunities with several industrial companies in the U.S. and Europe. The technologies the Company is pursuing include MBR membrane technology, forward osmosis membrane technology, the latest ecological engineering for wastewater treatment and advanced solid-liquid separation technology.
The Company entered into a license agreement for the new forward osmosis (FO) technology with Hydration Technology Innovations, LLC (HTI) in 2010. The Company will construct and operate one or more FO
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pilot units incorporating the licensed technology. The Company is authorized and licensed to construct and operate such pilot units in both municipal and industrial sites for wastewater treatment testing, demonstration and evaluation. The HTI personal hydration products are at the development stage, and design changes for localization are undergoing.
Properties
The Companys primary office location is the 15th and 16th Floor of Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 China. The total rental space for the 2 floors is 908 square meters for the 15th floor and 986 square meters for the 16th floor. The lease contract for this location is from September 1, 2010 to August 31, 2013. The Company also has a 1,300 square meter rental office in Tianjin, located at Huayuan Property Management Zone, 4th Floor, Kaide A Complex, 7 Rongyuan Road, Tianjin, with a rental term to expire in December 2014. In addition, the Company has three other rental office locations in various areas of Beijing, for which the lease contracts expire at various times no later than August 26th, 2012.
TTB entered into a land use right purchase agreement with a local government agency, Tianjin Land Resource Bureau Baodi Branch on November 26, 2010. The agreement was for the land use right of an area of 158,954.2 square meters in exchange for the consideration of RMB 35 million, or $5.3 million. This consideration has been fully paid as of December 31, 2010. The land is located at West of Tianbao Road, Baodi Economic Development Zone in Tianjin. The land use right is for 50 years starting January 18, 2011. The official land use right certificate is under its application process and is expected to be completed in the second quarter of 2011. However, the Tianjin Baodi government has issued a confirmation letter stating that the consideration for the land use right has been paid in full. Therefore, as per the agreement, TTB is authorized to start construction on the land. The Company has confirmed the transfer of the land use right and the acceptance letter was signed on January 18, 2011. The Company has started the amortization of the land use right over the expected duration of 50 years from January 2011 with RMB 180,338, or $27,394 per quarter. The first phase of the construction is in progress and expected to be completed by 2012.
Operating Performance Overview
The Companys 2011 first quarter results reflect a stable growth. Highlights of its financial results include:
| Total revenue increased to $17,553,211 in the first quarter of 2011, an increase of $13,315,097 or 314%, from $4,238,114 in the same period 2010. This increase is primarily attributable to the following factors: |
| Systems integration revenue increased from $3,508,085 in the first quarter of 2010 to a total of $15,870,494 in the same period in 2011, an increase of $12,362,409 or 352.4%. |
| Revenue from hardware products increased to $1,682,717 in the first quarter of 2011, an increase of $1,335,636, or 384.8%, from $347,081 in the first quarter of 2010. |
| The above increases were offset by a decrease of $382,948 in revenue from software products, or 100%, from $382,948 in the first quarter of 2010 to $0 in the same period for 2011. We did not have any software product sales in the first quarter of 2011. Although there were no sales in the software product category, software development related work was done as part of system integration projects; therefore, it was accounted for in system integration revenue category. |
| Total cost of revenue increased by $10,071,793 from $2,471,238 in the first quarter of 2010 to $12,543,031 in the first quarter of 2011, a 407.6% increase compared with the same period in 2010. This increase is attributable to the revenue categories of system integration, 441.6% increase, and hardware products, 188.1% increase. |
| Total operating expenses were $2,420,952 for of the first quarter of 2011, or 13.8% of the total revenue, compared with $939,144, or 22.2% of the total revenue in the same period for 2010. This represents an increase of $1,481,808, or 157.8%. The following factors contributed to the increase of total operating expenses: |
| Selling and marketing expenses increased by $176,033, or 127.4%, from $138,140 in the first quarter of 2010 to $314,173 in the same period for 2011. Such expenses represent 1.8% of the total revenue for the first quarter of 2011 and were primarily due to the growth of the sales force and the implementation of strategic growth plans and initiatives. |
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| General and administrative expenses increased by $1,325,218, or 178.7%, from $741,576 in the first quarter of 2010 to $2,066,794 in the same period for 2011. The general and administrative expenses represent 11.8% and 17.5% of the total revenue in the first quarter of 2011 and 2010, respectively. |
| Research and development expenses decreased by $19,443, or 32.7%, from $59,428 in the first quarter of 2010 to $39,985 in the first quarter of 2011. R&D expenses accounted for 0.2% and 1.4% of the total revenue for the first quarter of 2011 and 2010 respectively. |
| Operating income increased to $2,589,228 in the first quarter of 2011, an increase of 212.8%, from $827,732 in the first quarter of 2010, representing 14.8% and 19.5% of the total revenue in the first quarter of 2011 and 2010 respectively. |
| Other income decreased by $64,247, or 106.8%, from income of $60,180 in the first quarter of 2010, or 1.4% of total revenue, to expense of $4,067 in the first quarter of 2011. |
| Net income attributable to TRIT increased to $1,698,981, or $0.21 per diluted share, for the first quarter of 2011, from $817,614, or $0.15 per diluted share, for the first quarter of 2010. |
Results of Operations
2011 Q1 | % of Sales |
2010 Q1 | % of Sales |
Change | % Change | |||||||||||||||||||
Revenue |
$ | 17,553,211 | 100.0 | % | $ | 4,238,114 | 100.0 | % | $ | 13,315,097 | 314.2 | % | ||||||||||||
Cost of Revenues |
12,543,031 | 71.5 | % | 2,471,238 | 58.3 | % | 10,071,793 | 407.6 | % | |||||||||||||||
Selling and Marketing Expenses |
314,173 | 1.8 | % | 138,140 | 3.3 | % | 176,033 | 127.4 | % | |||||||||||||||
General and Administrative Expenses |
2,066,794 | 11.8 | % | 741,576 | 17.5 | % | 1,325,218 | 178.7 | % | |||||||||||||||
Research and Development |
39,985 | 0.2 | % | 59,428 | 1.4 | % | (19,443 | ) | -32.7 | % | ||||||||||||||
Total Operating Expenses |
2,420,952 | 13.8 | % | 939,144 | 22.2 | % | 1,481,808 | 157.8 | % | |||||||||||||||
Operating Income |
2,589,228 | 14.8 | % | 827,732 | 19.5 | % | 1,761,496 | 212.8 | % | |||||||||||||||
Other (Expenses) Income, net |
(4,067 | ) | 0.0 | % | 60,180 | 1.4 | % | (64,247 | ) | -106.8 | % | |||||||||||||
Income Before Provision for Income Taxes |
2,585,161 | 14.7 | % | 887,912 | 21.0 | % | 1,697,249 | 191.2 | % | |||||||||||||||
Provision for Income Taxes |
405,636 | 2.3 | % | 67,773 | 1.6 | % | 337,863 | 498.5 | % | |||||||||||||||
Less: Net Income Attributable to Non-controlling Interests |
480,544 | 2.7 | % | 2,525 | 0.1 | % | 478,019 | 18931.4 | % | |||||||||||||||
Net Income Attributable to Tri-Tech Holding Inc. |
$ | 1,698,981 | 9.7 | % | $ | 817,614 | 19.3 | % | $ | 881,367 | 107.8 | % |
The Companys revenues are subject to value added tax (VAT), sales tax, urban maintenance and construction tax and additional education fees. Among the above taxes, VAT has already been deducted from the calculation of revenue.
Revenue
In the first quarter of 2011, the Company focused its effort on its existing major projects to achieve stable growth in the sales of hardware products and system integration. The software product related businesses are all conducted as parts of the system integration. Therefore, they are accounted in the system integration category.
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The Companys revenue for the first quarter of 2011 was $17,553,211, an increase of $13,315,097, or 314.2%, compared with the total of $4,238,114 in the first quarter of 2010. This increase is primarily attributable to an increase in the system integration category, from $3,508,085 in the first quarter of 2010 to $15,870,494 in the same period for 2011, or an increase of 352.4% primarily as a result of the Ordos project. Revenue from Segment 1, water and wastewater treatment and municipal infrastructure continued to be very strong, constituting 74% of the total revenue. The Segment 2, water resource management and engineering segment revenue totaled $1,641,059 or 9.4% of the total revenue, mostly in the system integration category. Segment 3, industrial pollution control and safety constituted 17.1% of the total revenue for the first quarter, also mostly in the system integration aspect of the Companys business.
Cost of Revenue
Cost of revenue was $12,543,031 in the first quarter of 2011, an increase of $10,071,793, or 407.6%, from $2,471,238 in the first quarter of 2010. The system integration category, which was the largest contributor to the revenue increase, was also the largest contributor to the increase in the total cost of revenue, totaling $11, 650,749 or 92.9% of the total cost of revenue. The cost of revenue increase in this category, compared to the first quarter of 2010, is by $9,499,534, or 441.6%, from $2,151,215 in the first quarter of 2010 to $11,650,749 in the first quarter of 2011. The increase is mainly the result of the Ordos BT project, which was at 45% completion by end of the first quarter of 2011.
Cost of revenue is based on total actual costs incurred plus estimated costs to completion applied to percentage of completion as measured at different stages. It includes material costs, equipment costs, transportation costs, processing costs, packaging costs, quality inspection and control, outsourced construction service fees and other costs that directly relate to the execution of the services and delivery of projects. Cost of revenue also includes freight charges, purchasing and receiving costs and inspection costs when they are incurred. In the first quarter of 2011, depending on different projects, about 70-90% of the cost was related to equipment purchases. About 5 to 15% was related to outsourced construction services. The remainder was related to other costs directly associated with each specific project.
The Companys gross margin decreased from 41.7% in the first quarter of 2010 to 28.5% in the first quarter of 2011. The major reason is most of the revenue for the first quarter of 2011 is for the Ordos project, which, given the scale of the project, has a relatively low gross margin. At the same time, the Company has been more conservative on the estimates of Ordos project costs. Higher accrued project costs also caused the lower gross margin. Normally, the larger the size of the project, the lower the gross margin will be. The Companys strategy is to carefully choose more high quality BT projects, which means the gross margin is going to remain at the current level. However, in the next two to three years, the Company plans to continuously look for ways to minimize the negative impact on its gross margin through optimizing product and system design, leveraging purchasing bargaining power, and exploring supply chain financing and local equipment sourcing.
Change on Expense Classification
In order to present the financial reports in a more standardized format, to provide more useful financial data to assist investors decision making, and relevant financial analysis, beginning in 2011, the Company started to allocate its depreciation and amortization expenses into the expense categories according to the related functions, such as selling and marketing, general and administration, and research and development. Certain amounts in the same period of last year have been reclassified to conform to the current presentation.
Selling and Marketing Expenses
In the first quarter of 2011, total selling and marketing expenses increased by $176,033 or 127.4% from $138,140 in the first quarter of 2010 to $314,173. This increase was caused by an increase in salary related expenses of $79,382, from $36,443 to $115,825 in the first quarter of 2011, (217.8% increase compared with the first quarter of 2010), travel expenses of $53,157 from $13,114 to $66,271 in the first quarter of 2011 (405.3% increase compared with the first quarter of 2010), and other selling expenses of $46,678 from $34,801 to $81,479 in the first quarter of 2011 (134.1% increase compared with the first quarter of 2010). At the same time, the Companys entertainment expenses decreased by $3,184, or 5.9% compared with the first quarter of 2010.
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General and Administrative Expenses
General and administrative expenses increased by $1,325,218, or 178.7%, from $741,576 in the first quarter of 2010 to $2,066,794 in the first quarter of 2011. Out of this increase, $117,924 was for officers salaries, which increased from $49,540 in the first quarter of 2010 to $167,464 in the first quarter of 2011, an increase of 238%. Mid-level management, technical support team, and other office staff salaries increased by $359,687, or 210.1%, from $171,230 in the first quarter of 2010 to $530,917 in the first quarter of 2011. Other headcount-related expenses, such as endowment and social insurance, increased by 132.7% and 369.8% to $52,136 and $80,076, in the first quarter of 2011. Rent increased by $114,060, or 164.8%, from $69,227 in the first quarter of 2010 to $183,287 in the first quarter of 2011 due to office relocation. Professional fees increased by $137,295, or 294.7%, from $46,591 to $183,886, which was mainly for investor relation services and conferences. Amortization of intangible assets and software increased by $127,454, or 725.7%, from $17,562 to $145,016. This increase was due to the purchase of some major software in BSST and the amortization of land use right for about $9,131 per month. Other G&A expenses increased by $338,125 or 102.7% from $329,128 to $667,253 in the first quarter of 2011. Those are mainly for office expenses, utilities, travel, communication and other services.
Provision for Income Tax
The Company provides for deferred income taxes using the asset and liability method. Under this method, it recognizes deferred income taxes for tax credits, 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 Companys operations are subject to income and transaction taxes in China since most of the business activities take place in China. 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 law or regulations, as well as predictions related to future changes in these law and 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.
The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdictions in which each entity is domiciled. According to the New Enterprise Income Tax Law in China, the unified enterprise income tax (EIT) rate is 25%. However, two of the Companys subsidiaries are eligible for certain favorable tax policies for being high-tech companies.
EIT Rate for the Quarters Ended March 31, (Unaudited) |
||||||||
2011 | 2010 | |||||||
% | % | |||||||
TTB (effective until the end of 2011) |
7.5 | 7.5 | ||||||
BSST |
15 | 25 | ||||||
Yanyu |
25 | 25 | ||||||
Tranhold |
25 | 25 | ||||||
TTA |
25 | | ||||||
TBD |
25 | 25 | ||||||
Consolidated Effective EIT |
16 | 8 |
The favorable income tax treatment for TTB of 7.5% is going to expire at the end of 2011. Afterwards, the EIT rate could be either 15% if TTB passes the qualification of high-tech company, or 25% if it does not pass the qualification. The Company is confident that TTB will qualify as a high-tech company. The provision for income tax for the first quarter of 2011 was $405,636.
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Net Income before Income Taxes
In the quarter ended March 31, 2011, the Companys net income before provision for income taxes was $2,585,161, an increase of $1,697,249, or 191.2%, compared to $887,912 in 2010. The Companys provision for income taxes increased by $337,863, from $67,773 in the first quarter of 2010 to $405,636 in 2011. The increase in income taxes for 2010 was primarily driven by an increase in income from ordinary business operations. In the first quarter of 2011, net income attributable to the shareholders of TRIT was $1,698,981, an increase of $881,367, or 107.8%, from $817,614 for the same period in 2010.
Liquidity and Capital Resources
As highlighted in the consolidated statements of cash flows, the Companys liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) financing activities and (iv) investing activities.
Statement of Consolidated Cash Flows for the Quarters Ended March 31, 2011 and 2010 is as follow:
2011 Q1 | 2010 Q1 | Difference | ||||||||||
($) | ($) | ($) | ||||||||||
Net cash used in operating activities |
(788,615 | ) | (583,819 | ) | (204,796 | ) | ||||||
Net cash used in investing activities |
(295,998 | ) | (373,725 | ) | 77,727 | |||||||
Net cash provided by financing activities |
442,696 | 1,074,491 | (631,795 | ) | ||||||||
Effects of exchange rate changes on cash and cash equivalents |
93,690 | (86,175 | ) | 179,865 | ||||||||
Net (decrease) increase in cash and cash equivalents |
(548,227 | ) | 30,772 | (578,999 | ) | |||||||
Cash and cash equivalents, beginning of period |
23,394,995 | 7,171,464 | 16,223,531 | |||||||||
Cash and cash equivalents, end of period |
22,846,768 | 7,202,236 | 15,644,532 |
Cash and Cash Equivalents
On March 31, 2011, the Companys cash and cash equivalents amounted to $22,846,768. The Company has been conservative in managing its cash flow. The restricted cash as of March 31, 2011 and December 31, 2010 amounted to $2,321,142 and $1,505,617, respectively, which is not included in the total of cash and cash equivalents. The restricted cash consisted of deposits as collaterals for the issuance of letters of credit. The Companys subsidiaries that own these deposits do not have material cash obligations to any third parties. Therefore, the restriction does not impact the liquidity of the Company.
Operating Activities
Net cash used for operating activities was $788,615 for the quarter ended March 31, 2011, compared with that of $583,819 in the quarter ended March 31, 2010. An increase of $204,796 in operating cash outflow was mainly attributable to the lag between revenue recognition and cash collection for the BT project in the first quarter of 2011. This increase is not unexpected, since it is common that most of the cash collection happens in the second half of the year. Given the percentage increase of the total revenue, and considering the fact that no cash has been collected for the Ordos project which consists of close to 70% of the first quarter revenue, the accounts receivable from other projects have been well managed. As the Company focuses more on its newly adapted BT business model, it is believed that it is highly likely the Company is going to face a more critical cash position in the next two quarters. However, the Company is confident that as soon as it passes this rapid takeoff stage, and the cash collection for some major projects begins to catch up, this particular tightness of cash will ease substantially.
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Investing Activities
Net cash used for investing activities was $295,998 in the first quarter of 2011, compared to $373,725 in the same period of 2010. The decrease was due to the conservative strategy of the Company based on the current economic environment. For the remainder of the 2011 year, the Companys investment strategy will be to shift the majority of its capital expenditures to research and development for new technology and products.
Financing Activities
The cash provided by financing activities was $442,696 in the first quarter of 2011, compared to $1,074,491 provided in the same period of 2010. In the first quarter of 2010, the cash inflow was due to the exercise of 134,000 options at strike price of $8.10.
Effect of Exchange Rate Changes on Cash and Cash Equivalents
Net cash gain due to currency exchange was $93,690 in the quarter ended March 31, 2011, an amelioration of $179,865 compared to a loss of $86,175 in the same period of 2010.
Restricted Net Assets
The Companys ability to pay dividends is primarily dependent on its receiving distributions of funds from its subsidiaries, which is restricted by certain regulatory requirements. Relevant Chinese statutory laws and regulations permit payments of dividends by the Companys Chinese subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, the Companys PRC subsidiaries are required to set aside at least 10% of their after-tax profit after deducting any accumulated deficit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. The Companys off-shore subsidiaries, TIS and TTII, do not have material cash obligations to third parties. Therefore, the dividend restriction does not impact the liquidity of the companies. There is no significant difference between accumulated profit calculated pursuant to PRC accounting standards and those pursuant to U.S. GAAP. As of both March 31, 2011 and December 31, 2010, restricted retained earnings was $897,382, and restricted net assets was $3,579,295. Unrestricted retained earnings as of March 31, 2011 and December 31, 2010 were $14,262,605 and $12,563,624, respectively, which were the amounts available for distribution in the form of dividends or for reinvestment.
Working Capital and Cash Flow Management
As of March 31, 2011, the Companys working capital was $28,179,273, including cash and cash equivalents of $22,846,768.
Due to the increase in purchase orders, the Company has experienced tremendous pressure from a shortage in working capital. The Company received net proceeds from its follow-on offering of $30,251,442 in 2010, of which it has used $21,880,000, or 71.5%, on working capital, product research and development, acquisition and sales and marketing.
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However, the Company may require additional cash to undertake new and larger projects or to complete strategic acquisitions in the future. In the event its current capital is insufficient to fund these and other business plans, the Company may take the following actions to meet such working capital needs:
| The Company may look into the possibility of optimizing its funding structure by obtaining short- and/or long-term debt through commercial loans. The Company is actively exploring opportunities with other major Chinese banks, such as ICBC and CITIC Bank, and it expects to acquire additional lines of credit to enable it to gain more project opportunities in the future. Other financing instruments into which it is currently looking include supply chain financing, project financing, trust fund financing and capital leasing. |
| The Company may improve its collection of accounts receivable. Most of its clients are central, provincial and local governments. The Company believes that its clients are in good financial positions. Therefore, it expects good collectability from its relatively high accounts receivable. The accounts receivable collection should catch up with its rapid growth in the near future. Given the interest rate in the long-term contracts, it is possible that some clients might choose to pay the contract fees before its due date. |
Contractual Obligations and Commercial Commitments
Operating Leases
As of March 31, 2011, the Company had commitments under certain operating leases, which require annual minimum rental payments as follows:
2011 |
$ | 514,269 | ||
2012 |
643,821 | |||
2013 |
452,268 | |||
2014 |
111,589 | |||
2015 |
||||
Total |
$ | 1,721,947 | ||
The Companys leased properties are principally located in Beijing and are used for administration and research and development purposes. The terms of these operating leases vary from one to five years. Pursuant to lease terms, when the contracts expire, the Company has the right to extend them with new negotiated prices. The leases are renewable subject to negotiation. Rental expenses were $183,287 and $69,227 for the quarter ended March 31, 2011 and 2010, respectively.
Product Warranties
The Companys warranty policy generally is to replace parts at no additional charge if they become defective within one year after deployment. 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 warranties. It 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.
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Capital Expenditures
In the past, the Companys capital expenditures were mainly for purchases of computers and other office equipment to support its daily business activities. Its capital expenditures may increase in the near term as its business continues to grow and as its R&D center in Tianjin progresses. The R&D center construction consists of 3 phases. The first two phases are going to be from January 2011 to the end of 2013, with an expected total capital investment of $18.2 million.
Seasonality
The Companys operating revenues normally tend to fluctuate due to different project stages and U.S. GAAP requirements on revenue recognition. As the scope of its business extended to the civil construction activities, certain destructive weather conditions that tend to occur during the winter often impact the progress of its projects. Certain weather conditions, including severe winter storms, may result in the temporary suspension of outdoor operations, which can significantly affect the operating results of the affected regions. As expected, the operating results for the first quarter of 2011 are reflecting the business slowdown for the holiday season in China, which usually lasts up to 15 days.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements for the quarter ended March 31, 2011 or 2010.
Taxation
Pursuant to the new EIT Law and 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, and it is subject to a 15% income tax rate from January 1, 2010 to December 31, 2012.
Business tax varies from 3% to 5% depending on the nature of the revenue, and VAT is 17%. For revenues generated from those parts of the Companys software solutions which are recognized by and registered with government authorities and meet government authorities requirements to be treated as software products, the Company is 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, the Company is currently exempted from sales tax for revenues generated from development and transfer of tailor-made software solutions for clients. Further, revenues from consulting services are subject to a 5% sales tax. Qualified to issue VAT invoices, the Company needs to maintain a certain amount of revenue that is taxable by VAT. As such, the Company may have to refuse some of the tax exemption benefits in its 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 the software products become recognized and registered as software products in the PRC.
Segment Information
The Company has 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. The Company assesses each segments performance based on net revenue and gross profit on contribution margin.
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Segment 1: Water, Wastewater Treatment and Municipal Infrastructure
2011 Q1 | 2010 Q1 | Change ($) | Change (%) | |||||||||||||
Revenues |
$ | 12,904,386 | $ | 2,561,051 | $ | 10,343,335 | 403.9 | % | ||||||||
Cost of Revenues |
9,621,997 | 1,531,384 | 8,090,613 | 528.3 | % | |||||||||||
Operating expenses: |
||||||||||||||||
Selling and Marketing Expenses |
109,058 | 75,782 | 33,276 | 43.9 | % | |||||||||||
General and Administrative Expenses |
741,138 | 349,736 | 391,402 | 111.9 | % | |||||||||||
Research and Development |
| | | | ||||||||||||
Total Operating Expenses |
850,196 | 425,518 | 424,678 | 99.8 | % | |||||||||||
Other (Expenses) Income, net |
(5,653 | ) | 2,194 | (7,847 | ) | 357.7 | % | |||||||||
Income before provision for income taxes |
$ | 2,426,540 | $ | 606,343 | $ | 1,820,197 | 300.2 | % |
In Segment 1, revenue was $12,904,386 in the quarter ended March 31, 2011, an increase of $10,343,335, or 403.9%, from $2,561,051 in the same period of 2010. This increase was mainly attributable to the Ordos drinking water plant project progression. In the first quarter of 2011, the Company recognized Ordos revenue of $12.3 million, about 25% of the total contract. In total, the Ordos project has reached approximately 45% completion. The project is expected to be completed by the end of June, 2011. The complete customer acceptance is expected to be on September 30, 2011.
Cost of revenue for Segment 1 was $9,621,997 in the first quarter of 2011, an increase of $8,090,613, or 528.3%, from that of $1,531,384 in the first quarter of 2010. The percentage increase was higher than that in revenues because the revenue generated from system integration increased while the revenue generated from software sales decreased. The Ordos project , which has a relatively low gross margin contributed $9.1 million to the cost of revenue in this segment. The gross margin for Segment 1 is 25.4%.
Total operation expenses in Segment 1 were $850,196, an increase of $424,678, or 99.8%, compared with $425,518 in the first quarter of 2010. The selling and marketing expenses increased from $75,782 in the first quarter of 2010 to $109,058 in the first quarter of 2011, an increase of $33,276, or 43.9%. The increase was mainly the results of the increase of headcount related items and travel expenses. The general and administrative expenses for the first quarter of 2011 were $741,138, an increase of $391,402, or 111.9%, compared with $349,736 for the same period in 2010. This increase was caused by the increase in salaries, rent and professional service expenses.
Other expenses were $5,653 in the quarter ended March 31, 2011, a $7,847 decrease compared to other income of $2,194 in the same period of 2010. The decrease was mainly due to the foreign exchange hedging loss that happened in the first quarter of 2011.
Income before provision for income taxes was $2,426,540 in the quarter ended March 31, 2011, an increase of $1,820,197, or 300.2%, from that of $606,343 in the same period in 2010. Net margin for this segment is 18.8%.
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Segment 2: Water Resource Management System and Engineering Service
Quarters Ended March 31, | Change ($) | Change (%) | ||||||||||||||
2011 | 2010 | |||||||||||||||
Revenues |
$ | 1,641,059 | $ | 1,616,420 | $ | 24,639 | 1.5 | % | ||||||||
Cost of Revenues |
868,608 | 925,391 | (56,783 | ) | -6.1 | % | ||||||||||
Operating Expenses: |
||||||||||||||||
Selling and Marketing Expenses |
150,728 | 62,358 | 88,370 | 141.7 | % | |||||||||||
General and Administrative Expenses |
495,238 | 369,509 | 125,729 | 34.0 | % | |||||||||||
Research and Development |
39,985 | 59,428 | (19,443 | ) | -32.7 | |||||||||||
Total Operating Expenses |
685,951 | 491,295 | 194,656 | 39.6 | % | |||||||||||
Other (Expenses) Income, net |
(65 | ) | 57,986 | (58,051 | ) | -100.1 | % | |||||||||
Income before provision for income taxes |
$ | 86,435 | $ | 257,720 | $ | (171,285 | ) | -66.5 | % |
Segment 2 revenue was $1,641,059 in the quarter ended March 31, 2011, an increase of $24,639, or 1.5%, from $1,616,420 in the same period of 2010. Revenue in this segment remained steady with only moderate growth due to the seasonal slow-down for the holidays and natural climate in winter, since seasonality has the most significant impact on this segment. Within this segment, first quarter revenue was mainly derived from the product sales aspect of the business for $1,515,092.
Cost of revenue in Segment 2 was $868,608 in the quarter ended March 31, 2011, a decrease of $56,783, or 6.1%, from $925,391 in the same period of 2010. The decrease was directly related to the business slow-down of Segment 2, as well as certain cost saving strategies the Company is currently implementing. The gross margin for this segment is 47.1%.
Total operation expenses in Segment 2 were $685,951, an increase of $194,656, or 39.6%, compared with $491,295 in the first quarter of 2010. The selling and marketing expenses increased from $62,358 in the first quarter of 2010 to $150,728 in the first quarter of 2011, an increase of $88,370, or 141.7%. The increase is mainly due to the increase of headcount related items and travel expenses. The general and administrative expenses for the first quarter of 2011 were $495,238, an increase of $125,729, or 34%, compared with $369,509 for the same period in 2010. This increase was caused by the increase in salaries, rent and professional service expenses.
Other expenses were $65 in the quarter ended March 31, 2011, a decrease of $58,051, compared with other income of $57,986 in the same period of 2010. The decrease was primarily due to the tax rebate in software sales which happened in the first quarter of 2010.
Income before provision for income taxes was $86,435 in the quarter ended March 31, 2011, a decrease of $171,285, or 66.5%, compared with $257,720 in the same period of 2010. The decrease was driven by the rapidly increasing selling and marketing expenses, and the increasing headcount related expenses in the G&A department. The net margin in this segment is 5.3%.
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Segment 3: Industrial Pollution Control and Safety
Quarters Ended March 31, | Change ($) | Change (%) | ||||||||||||||
2011 | 2010 | |||||||||||||||
Revenues |
$ | 3,007,766 | $ | 60,643 | $ | 2,947,123 | 4,859.8 | % | ||||||||
Cost of Revenues |
2,052,426 | 14,463 | 2,037,963 | 14,090.9 | % | |||||||||||
Operating Expenses: |
||||||||||||||||
Selling and Marketing Expenses |
54,387 | | 54,387 | |||||||||||||
General and Administrative Expenses |
830,418 | 22,331 | 808,087 | 3,618.7 | % | |||||||||||
Research and Development |
||||||||||||||||
Total Operating Expenses |
884,805 | 22,331 | 862,474 | 3,862.2 | % | |||||||||||
Other Income |
1,651 | | 1,651 | |||||||||||||
Income before provision for income taxes |
$ | 72,186 | $ | 23,849 | $ | 48,337 | 202.7 | % |
In line with its development strategies, the Company has expanded its business in the industrial pollution control and safety field. The revenue in Segment 3 for the quarter ended March 31, 2011 was $3,007,766, an increase of 4,859.8% or $2,947,123, compared to $60,643 in the same quarter in 2010. Revenue for Segment 3 was mainly from the system integration category, which amounted to $2,840,141. The cost of revenue for the first quarter was $2,052,426, an increase of $2,037,963, compared with $14,463 in the first quarter of 2010. Total operating expenses were $884,805, an increase of $862,474 compared with $22,331 in the first quarter of 2010. Selling and marketing expenses increased by $54,387 compared to the first quarter of 2010. General and administrative expenses increased from $22,331 in the first quarter of 2010 to $830,418, an increase of $808,087. Net income for Segment 3 increased from $23,849 in the first quarter of 2010 to $72,186 in the first quarter of 2011, an increase of $48,337 or 202.7%. The gross margin for this segment is 31.8% and net margin is 2.4%.
The gross margin for the above three segments was 25.4%, 47.1%, and 31.8%, respectively, for the first quarter of 2011. The gross margin for the Company as a whole was 28.5% for the first quarter of 2011. The revenues for each segment as a percentage of the total revenue were 73.5%, 9.4% and 17.1%, respectively. Assets attributable to each segment as of March 31, 2011 and December 31, 2010 are shown below:
Segment Assets |
Segment 1 | Segment 2 | Segment 3 | Total | ||||||||||||
As of March 31, 2011 |
$ | 53,224,200 | $ | 16,530,938 | $ | 24,876,849 | $ | 94,631,987 | ||||||||
As of December 31, 2010 |
$ | 44,168,017 | $ | 14,488,083 | $ | 24,106,603 | $ | 82,762,703 |
Significant Accounting Policies
Estimates and Assumptions
The preparation of financial statements requires management to make numerous estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have financial impacts on recognition and disclosure of assets, liabilities, equity, revenues and expenses. However, the Company believes that these estimates used in preparing its financial statements are based on its best professional judgment, and are reasonable and prudent.
The most complex and subjective estimates and assumptions that present the greatest amount of uncertainty relate to the recognition of revenue under the percentage of completion method, business combination, the allowance for doubtful accounts, long term contract collectability, impairment of fixed assets and intangible assets, and income tax. The Company evaluates all of these estimates and judgments on an on-going basis. Below are the most critical estimates and assumptions the Company makes in preparing the consolidated financial statements.
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Revenue Recognition
The Companys revenues consist primarily of three categories: (i) Hardware Product Sales, (ii) Software Product Sales and (iii) System Integration Sales. The Company recognizes revenue when the consideration to be received is fixed or determinable, products delivered or services rendered, and collectability ensured.
For System Integration, sales contracts are structured with fixed price. The contract periods range from two months to approximately three years in length. The Company recognizes revenue of these contracts following the percentage-of-completion method, measured by milestones in accordance with ASC 605-35, Construction-Type and Production-Type Contracts. Only if the actual implementation status meets the established stages of completion will the Company recognize the relevant portion of the revenue. There are four major stages for the System Integration revenue recognition: (a) the completion of project design, (b) the delivery of products, (c) the completion of debugging, and (d) inspection and acceptance. For BT projects, such as the Ordos drinking water plant project, the Company recognizes the project revenue using the man-power hours, which is the primary element of the total project costs, as the measurement for percentage of completion.
For hardware product sales, the Company recognizes revenue only when all products are delivered and the acceptance confirmations are signed by the customers, according to ASC 605-10, Revenue Recognition. The Company is not obligated for any repurchase or return of the goods.
The Company also sells software products. These software product sales do not include any additional services such as maintenance or technical support. The Company recognizes revenue under ASC 985-605, Software Revenue Recognition according to the acceptance of delivery revenue recognition method. At the end of each reporting period, the Company recognizes the contract amount as revenue only if all software products have been delivered and the customer acceptance confirmation has been signed.
If unapproved change orders or claims occur in the future, in accounting for contracts, the Company follows Paragraphs 30 and 31 of ASC 605-35-25, Construction-Type and Production-Type Contracts. The Company recognizes revenue from unapproved change orders or claims only to the extent that contract costs relating to the unapproved change orders or claims have been incurred, and only if it is probable that such unapproved change orders or claims will result in additional contract revenue and the amount of such additional revenue can be reliably estimated. To date, the Company has not experienced any unapproved change orders in its ordinary business operation.
The Company presents all sales revenue net of a VAT. The Companys products sold in China are generally subject to a Chinese VAT of 17% of the sales price, except for certain proprietary software sales which will only be subject to an effective tax rate of 3%. The VAT payable 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, and billings in excess of revenues as billings in excess of revenue. For revenues accounted for under these two accounts, the Company expects the amounts to be collected within one year. For those with collection periods in excess of one year, the Company classifies them under Long-term unbilled revenue on the consolidated balance sheets.
The Company obtained several contracts with a billing cycle of over three years in 2009. Unless the discounted revenue from those contracts is specified, such as the Ordos project, which is 10%, the discount rate used is the 3-year nominal interest rate of 5.4%, set by the Peoples Bank of China, Chinas central bank.
Accounts Receivable
Being a project-based company with long lead time periods of 6 months to 2 or even 3 years, the Companys accounts receivable period is 88 days, or about three months. This is not unusual among the industry peers. Given the characteristics of the clientele, the Company is confident that its accounts receivable are of good quality even though its accounts receivable days are relatively long compared with companies in other industries. The Companys finance team is constantly monitoring the accounts receivable quality and the process and assumptions used in bad debt provision. In case of any event that indicates accounts receivable quality deterioration, management will reassess the bad debt provision within the period such event occurs.
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The Company recognizes accounts receivable initially at fair value less an allowance for doubtful accounts. It makes an allowance for doubtful accounts based on aging of accounts receivable and on any specifically identified accounts receivable that may become uncollectible. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments in the relevant time periods. It reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customers historical payment history and current credit-worthiness and current economic trends. The amount of the provision, if any, is recognized in the consolidated statement of operations within general and administrative expenses.
While the collection period for some of the long-term contracts, such as the BT projects, can be as long as 2 years, given that our clients are primarily government agencies supported by provincial budgets and large sized state-owned enterprises with sufficient liquidity, the Company believes the collectability of accounts receivable is secure, long-term or short-term.
Impairment of Assets and Intangible Assets
The Company monitors the carrying value of its long-lived assets for potential impairment whenever events or changes in circumstances indicate that their carrying amounts 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 evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. Estimating future cash flows require significant judgment, and projections may vary from the cash flows eventually realized which could impact the Companys ability to accurately assess whether an asset has been impaired.
For goodwill, the Company assesses for impairment at period end or whenever events or changes indicate that, more likely than not, the carrying value of goodwill has been impaired. The Company uses the income approach to estimate the fair value of the goodwill. The income approach is based on the long-term projected future cash flows of the operating segments. The Company discounts the estimated cash flows to present value using a weighted-average cost of capital that considers factors such as the timing of the cash flows and the risks inherent in those cash flows. The Company believes that this approach is the most reasonable because it provides a fair value estimate based upon the operating segments expected long-term performance considering the economic and market conditions that generally affect the Companys business.
PRC Value-added Tax
The Companys products sold in China are generally subject to a Chinese VAT at a rate of 17%. Proprietary software sales are subject to business tax of 5%. The VAT may be offset by VAT it pays on raw materials and other materials included in the cost of producing its finished product. Accrued VAT payables from Yanyu, Tranhold and BSST are subject to urban maintenance and construction tax and additional education fees, which are accounted for as 0.5% of the total sales value.
PRC Business Tax
Revenues from services provided by TTB, Yanyu, Tranhold and BSST are mostly subject to a Chinese business tax of 5% and surtax of 0.5%. One of the projects in Tianjin is subject to a 3% business tax. The Company pays business tax on gross revenues generated from its shipping agency services minus the costs of services, which are paid on behalf of its customers.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
Not applicable.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
As of December 31, 2010, the Company carried out an evaluation based on the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and SEC guidance. Based on such assessment, management concluded that its internal control over financial reporting was not effective at that time because of the material weaknesses described below:
| Inadequate U.S. GAAP expertise. The accounting team at that time was professional and experienced in accounting requirements and procedures generally accepted in the PRC, but was less experienced in applying the U.S. GAAP standards and reporting requirements. The staff needed additional training to become experienced in U.S. GAAP. |
| Lack of segregation of duties between functions. Due to the Companys size, segregation of all conflicting duties may not always have been possible and may not have been economically feasible. |
| Communication mechanisms. Even after the centralization of its operating functions to work from its new headquarters in September 2010, the Company still needed to build an effective communication system with clear procedures that would enable it to collect, process and deliver information related to internal controls in a timely and precise fashion. |
In order to correct the foregoing deficiencies, the Company has taken the following remediation measures:
| The Company retained AuditPrep Limited, an outside consulting firm, in March 2011 to perform a review on the disclosure and presentation of the Companys unaudited financial statements for fiscal year 2011 in accordance with U.S. GAAP and SEC regulations. |
| To improve its financial and internal control system, management of the Company started an enterprise resource planning (ERP) integration and upgrade project in December 2010 with UFIDA, Chinas largest ERP system provider. The first phase of the project was completed in the first quarter of 2011. During the project, the Company will maintain the existing ERP system parallel to the new one to ensure accuracy and completeness of the accounting data. |
| The Company set up its internal audit department in June 2010. The person who is currently responsible for such function obtained her CPA Australia certification in 2005. After that, she worked in a consulting firm providing finance services, specialized accounting services and internal audit services. Since joining the Company, she has contributed to the design and implementation of various financial and account management policies and procedures and has provided a series of trainings to different levels of the staff. The management has now completed the internal control system and has started to offer training programs throughout the entire company. |
| The Company retained Friedman LLP, an outside consulting firm, in June 2010 to assist it in devising an effective risk assessment system. The Chief Financial Officer of the Company is directly responsible for overseeing such measures. |
| To the extent practicable in the segregation of duties, the Company designed procedures to enhance the independent performance by separate individuals of different tasks, such as in the custody of assets and the recording of transactions. |
| Management strengthened its communication system through such efforts as developing an Internal Office Automation System and establishing tailor-made procedures and protocols for particular staff members. |
Following completion of the foregoing remediation measures, as of March 31, 2011, 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
22
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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
Other than the changes described above, 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 month period ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our companys internal control over financial reporting.
23
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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 January 8, 2010, as amended (the Registration Statement) is incorporated herein by reference. The effective date of the Registration Statement is April 14, 2010, and the Commission file number assigned to the Registration Statement is 333-164273. The Registration Statement registers the offering of up to 2,366,833 ordinary shares (subject to amendment in accordance with the Securities Act of 1933 and the rules and regulations promulgated thereunder) (the Offering). As of March 31, 2011, the Company has spent proceeds from the Offering in accordance with the following chart: |
Description of Use | Proposed Expenditure Amount |
Actual Expenditures through March 31, 2011 |
||||||||||
Working Capital |
$ | 18,973,000 | $ | 18,223,000 | 96.0 | % | ||||||
Mergers & Acquisitions |
6,120,000 | 1,547,000 | 25.3 | % | ||||||||
New Product Development |
3,366,000 | 539,000 | 16.0 | % | ||||||||
Sales & Marketing |
2,142,000 | 1,571,000 | 73.3 | % | ||||||||
Total |
$ | 30,601,000 | $ | 21,880,000 | 71.5 | % | ||||||
(c) | None |
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | (Removed and Reserved) |
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
The following exhibits are filed herewith:
Exhibit Number |
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) | |
10.17 |
Translation of Exclusive Technical and Consulting Service Agreement for BSST (2) | |
10.18 |
Translation of Management Fee Payment Agreement for BSST (2) | |
10.19 |
Translation of Operating Agreement for BSST (2) | |
10.20 |
Translation of Equity Interest Pledge Agreement for BSST (2) | |
10.21 |
Translation of Exclusive Equity Interest Purchase Agreement for BSST (2) | |
10.22 |
Translation of Proxy Agreement for BSST (2) |
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Table of Contents
21.1 |
Subsidiaries of the Registrant (1) | |
31.1 |
Certifications pursuant to Rule 13a-14(a) or 15(d)-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 15(d)-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) | |
99.1 |
Code of Business Conduct and Ethics (1) | |
99.2 |
Audit Committee Charter (4) |
(1) | Incorporated by reference to the registrants registration statement on Form S-1, File no. 333-158393, filed on April 3, 2009, as amended. |
(2) | Incorporated by reference to the registrants Form 10-K, File no. 001-34427, filed on March 29, 2011. |
(3) | Filed herewith. |
(4) | Incorporated by reference to the registrants Form 10-K, File no. 001-34427, filed on March 24, 2010. |
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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. | ||||
May 16, 2011 | By: | /s/ Peter Dong | ||
Peter Dong | ||||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
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TRI-TECH HOLDING INC. AND SUBSIDIARIES
Consolidated Financial Statements
For the quarters ended March 31, 2011 and 2010
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page | ||
F-1 | ||
F-2 | ||
F-3 | ||
F-4 F-25 |
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2011 (Unaudited) |
December 31, 2010 |
|||||||
ASSETS | ||||||||
Current Assets |
||||||||
Cash |
$ | 22,846,768 | $ | 23,394,995 | ||||
Restricted cash |
2,321,142 | 1,505,617 | ||||||
Notes and Accounts Receivable, net of allowance for doubtful accounts of $565,693 and $427,020 as of March 31, 2011 and December 31, 2010, respectively |
15,275,129 | 18,041,079 | ||||||
Unbilled revenue |
3,037,062 | 3,208,473 | ||||||
Other receivables |
1,601,803 | 1,427,050 | ||||||
Inventories |
6,019,433 | 5,886,619 | ||||||
Deposits on projects |
576,218 | 591,505 | ||||||
Prepayments to suppliers and subcontractors |
3,218,283 | 1,311,844 | ||||||
Total current assets |
54,895,838 | 55,367,182 | ||||||
Long-term unbilled revenue |
28,264,389 | 15,936,739 | ||||||
Plant and equipment, net |
1,128,570 | 1,045,150 | ||||||
Intangible assets, net |
9,749,091 | 4,331,261 | ||||||
Long-term restricted cash |
| 203,418 | ||||||
Long-term prepayment on land use right purchasing |
| 5,284,854 | ||||||
Goodwill |
594,099 | 594,099 | ||||||
Total Assets |
$ | 94,631,987 | $ | 82,762,703 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities |
||||||||
Accounts payable and costs accrual on projects |
$ | 20,653,929 | $ | 11,920,063 | ||||
Customer deposits |
2,211,123 | 1,650,174 | ||||||
Other payables |
1,673,474 | 2,717,502 | ||||||
Accrued liabilities |
162,157 | 294,809 | ||||||
Income taxes payable |
2,012,096 | 1,656,800 | ||||||
Current portion of long-term liabilities |
3,786 | 14,994 | ||||||
Total current liabilities |
26,716,565 | 18,254,342 | ||||||
Noncurrent deferred income taxes |
181,728 | 187,295 | ||||||
Total Liabilities |
26,898,293 | 18,441,637 | ||||||
Equity |
||||||||
Tri-Tech Holding Inc. shareholders equity |
||||||||
Ordinary shares ($0.001 par value, 30,000,000 shares authorized; 8,145,533 and 8,051,833 shares issued as of March 31, 2011 and December 31, 2010, respectively) |
8,146 | 8,052 | ||||||
Additional paid-in-capital |
47,997,554 | 47,278,042 | ||||||
Statutory reserves |
897,382 | 897,382 | ||||||
Retained earnings |
14,262,605 | 12,563,624 | ||||||
Treasury stock (21,100 shares in treasury as of March 31, 2011 and December 31, 2010, respectively) |
(193,750 | ) | (193,750 | ) | ||||
Accumulated other comprehensive income |
2,279,606 | 1,739,799 | ||||||
Total Tri-Tech Holding Inc. shareholders equity |
65,251,543 | 62,293,149 | ||||||
Noncontrolling Interests |
2,482,151 | 2,027,917 | ||||||
Total shareholders equity |
67,733,694 | 64,321,066 | ||||||
Total liabilities and equity |
$ | 94,631,987 | $ | 82,762,703 | ||||
See notes to consolidated financial statements
F-1
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For The Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues: |
||||||||
System integration |
$ | 15,870,494 | $ | 3,508,085 | ||||
Hardware products |
1,682,717 | 347,081 | ||||||
Software products |
| 382,948 | ||||||
Total revenues |
17,553,211 | 4,238,114 | ||||||
Cost of revenues |
||||||||
System integration |
11,650,749 | 2,151,215 | ||||||
Hardware products |
892,282 | 309,740 | ||||||
Cost of software |
| 10,283 | ||||||
Total cost of revenues |
12,543,031 | 2,471,238 | ||||||
Operating expenses: |
||||||||
Selling and marketing expenses |
314,173 | 138,140 | ||||||
General and administrative expenses |
2,066,794 | 741,576 | ||||||
Research and development expenses |
39,985 | 59,428 | ||||||
Total operating expenses |
2,420,952 | 939,144 | ||||||
Income from operations |
2,589,228 | 827,732 | ||||||
Other income (expenses): |
||||||||
Other expense |
(18,229 | ) | (4,850 | ) | ||||
Interest income |
14,162 | 9,694 | ||||||
Interest expense |
| (1,629 | ) | |||||
Tax rebates |
| 56,965 | ||||||
Total other (expenses) income, net |
(4,067 | ) | 60,180 | |||||
Income before provision for income taxes |
2,585,161 | 887,912 | ||||||
Provision for income taxes |
405,636 | 67,773 | ||||||
Net income |
2,179,525 | 820,139 | ||||||
Less: Net income attributable to Non-controlling Interests |
480,544 | 2,525 | ||||||
Net income attributable to Tri-Tech Holding Inc shareholders |
$ | 1,698,981 | $ | 817,614 | ||||
Comprehensive income |
||||||||
Net income |
2,179,525 | 820,139 | ||||||
Foreign currency translation adjustment |
513,497 | (2,724 | ) | |||||
Comprehensive income |
2,693,022 | 817,415 | ||||||
Less: Comprehensive income attributable to non-controlling interests |
454,234 | 2,331 | ||||||
Comprehensive income attributable to Tri-Tech Holding Inc. |
$ | 2,238,788 | $ | 815,084 | ||||
Net income attributable to Tri-Tech Holding Inc. shareholders per share: |
||||||||
Basic |
$ | 0.21 | $ | 0.16 | ||||
Diluted |
$ | 0.21 | $ | 0.15 | ||||
Weighted Average number of Ordinary Shares outstanding: |
||||||||
Basic |
8,055,720 | 5,269,011 | ||||||
Diluted |
8,155,222 | 5,559,260 |
See notes to consolidated financial statements
F-2
Table of Contents
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended March 31, | ||||||||
2011 (Unaudited) |
2010 (Unaudited) |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 2,179,525 | $ | 820,139 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Amortization of option stock-based compensation |
87,131 | 91,480 | ||||||
Amortization of warrants stock-based compensation |
| 8,766 | ||||||
Depreciation and amortization |
187,395 | 40,442 | ||||||
Provision for doubtful accounts |
133,808 | 5,940 | ||||||
Deferred income taxes |
5,567 | (149,838 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Restricted cash |
(592,554 | ) | 1,501,414 | |||||
Notes and accounts receivable |
2,802,576 | 764,660 | ||||||
Unbilled revenue |
(12,074,559 | ) | (2,517,140 | ) | ||||
Other receivables and deposits on projects |
(162,855 | ) | (479,436 | ) | ||||
Inventories |
(72,988 | ) | (359,426 | ) | ||||
Billings in excess of revenue |
| (8,652 | ) | |||||
Prepayments to suppliers and subcontractors |
(1,692,754 | ) | (1,164,248 | ) | ||||
Accounts payable and cost accrual on projects |
8,738,957 | 488,386 | ||||||
Customer deposits |
541,104 | 134,600 | ||||||
Other payables |
(1,096,557 | ) | 175,051 | |||||
Accrued liabilities |
(113,534 | ) | (30,782 | ) | ||||
Income taxes payable |
341,123 | 94,825 | ||||||
Net cash used in operating activities |
(788,615 | ) | (583,819 | ) | ||||
Cash flows from investing activities: |
||||||||
Payment to purchase plant and equipment |
(25,664 | ) | (80,766 | ) | ||||
Payment to purchase intangible assets |
(162,156 | ) | (292,959 | ) | ||||
Addition of Construction in progress |
(108,178 | ) | | |||||
Net cash used in investing activities |
(295,998 | ) | (373,725 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from exercising options into ordinary shares |
454,009 | | ||||||
Proceeds from exercising warrants into ordinary shares |
| 1,085,400 | ||||||
Payment of installment of purchasing vehicle |
(11,313 | ) | (10,909 | ) | ||||
Net cash provided by financing activities |
442,696 | 1,074,491 | ||||||
Effect of exchange rate fluctuation on cash and cash equivalents |
93,690 | (86,175 | ) | |||||
Net (decrease) increase in cash and cash equivalents |
(548,227 | ) | 30,772 | |||||
Cash and cash equivalents, beginning of period |
23,394,995 | 7,171,464 | ||||||
Cash and cash equivalents, end of period |
$ | 22,846,768 | $ | 7,202,236 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Income taxes paid |
$ | 75,646 | $ | 122,786 | ||||
Interest paid on debt |
$ | | $ | 1,629 | ||||
Non-cash investing and financing activities | ||||||||
Non-cash received from exercising of options by offsetting payroll payable |
$ | 178,466 | $ | | ||||
See notes to consolidated financial statements
F-3
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
1. | Company 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 ordinary shares, with a par value of $0.001. TRIT issued 50,000 ordinary shares (3,555,000 ordinary 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 in the Peoples Republic of China (the PRC, or China) as discussed below. TRIT and its subsidiaries together are referred to as the Company (or we). Through its subsidiaries in PRC, the Company provides self-manufactured, proprietary or third-party products, system integration and other services in the following three segments: Water, Wastewater Treatment and Municipal Infrastructure, Water Resource Management System and Engineering Service, and Industrial Pollution Control and Safety.
On September 9, 2009, the Company completed its IPO of 1,700,000 ordinary shares at $6.75 per share.
Tri-Tech (Beijing) Co., Ltd. (TTB) was incorporated in 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.
On November 28, 2008, the Company signed and executed with Tranhold Environmental (Beijing) Co., Ltd. (Tranhold) and Beijing Yanyu Water Tech Co., Ltd. (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 Tranhold and Yanyu. At any time during the agreement period, the Company has absolute rights to acquire any portion of the equity interests of Tranhold and Yanyu (other than 7.14% equity ownership of Yanyu holding by the Beijing Yanyu Communications Telemetry United New Technology Development Department, a Chinese State Owned Entity) under no-cost conditions. In addition, the Company has absolute rights to appoint directors and officers of Tranhold and Yanyu and to obtain the profits from Tranhold and Yanyu (other than net profits allocable to the SOE Shareholder of Yanyu). As a result of these agreements, the Company has successfully become the sole interest holder of Tranhold and the interest holder of 92.86% equity ownership of Yanyu.
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 BSST. At any time during the agreement period, the Company has absolute rights to acquire any portion of the equity interests of BSST under no-cost conditions. On August 6, 2010, the effective date of the Agreement, the Company has successfully become the sole interest holder of BSST. At the same time, the Company paid the consideration of $3.8 million, including: $1,447,000 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.
F-4
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
Based on these agreements the Company is deemed to indirectly to be the sole interest holder of Tranhold and BSST, and the indirect interest holder of 92.86% equity ownership of Yanyu. According to the provisions of ASC 810, Consolidation, Tranhold, Yanyu and BSST are consolidated in the Companys financial statements. For BSST, the Company also applied the consolidation procedures required by ASC 805. Business Combinations.
Tranhold was established on June 6, 2003 in PRC. It was a wholly-owned subsidiary of TTII until it was controlled by TTB on November 28, 2008 through a series of contractual agreements. 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.
Yanyu was established on March 29, 2002 in PRC. It was a wholly-owned subsidiary of TTII until it was controlled by TTB on November 28, 2008 through a series of contractual agreements. 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.
BSST was established on October 11, 1994. It was controlled by TTB since August 6, 2010 through a series of contractual agreements. 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), and first-class qualification of security, ISO9001 Quality Management System Certificate and high-tech enterprise Certificate.
Tri-Tech Infrastructure LLC. (TIS) was established on November 16, 2009, in Delaware, which is a wholly-owned subsidiary of TTII and is aiming for new technology development and opportunities in the United States.
In December 2009, TTB established a wholly-owned subsidiary, Tianjing Baoding Environmental Technology Co., Ltd. (TBD) in PRC. TBD is aiming to build a state-of-art research and development facility in that area to support our technology frontier in the industry. The registered capital of RMB50,000,000, or about $7.6 million, has been paid in full.
In November 2010, TTB established a subsidiary in PRC Ordos Tri-Tech Anguo Investment Co., Ltd. (TTA) with registered capital of RMB100 million, or $15.1 million, in which TTB hold 80% of the controlling interest. The first round of capital injection of RMB40 million from TTB has been made in November 2010. TTA was set up as a subsidiary primarily for our Build and Transfer project in Ordos.
F-5
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
2. | Principles of consolidation and basis of presentation |
Principles of consolidation and basis of presentation
The consolidated interim financial information as of March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010 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 consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have not been included, The interim consolidated 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, 2010, 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 March 31, 2011, its consolidated results of operations and cash flows for the three-month periods ended March 31, 2011 and 2010, 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 Company compiles its daily financial records in accordance with Generally Accepted Accounting Principles of the PRC (PRC GAAP) and converts its financial statements according to the US GAAP when reporting.
Reclassifications
Certain amounts have been reclassified to conform to the current presentation
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 professional judgment than others in their application. These include the recognition of revenue under the percentage of completion method, the allowance for doubtful accounts, long term contract collectability, impairment of fixed assets and intangible assets, and income tax. Management evaluates all of its estimates and judgments on an on-going basis.
F-6
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
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.
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 using the weighted average cost method. Inventory consists of raw materials, finished goods, and work-in-progress, which includes the cost of direct labor, materials and direct overhead costs related to the projects.
Long-term Unbilled Revenue
The Company obtained several Build-Transfer (BT) contracts with billing cycles of over three years in 2010 and 2009. Due to the nature of the BT projects, we discounted the related revenue and recorded as long-term unbilled revenue and the discount rate is the 3-year nominal interest rate of 5.4%, set by the Peoples Bank of China, the PRCs central bank. For the contract that a specific discount rate is agreed in the contract, the specific rate is applied. These projects are funded by local PRC 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 a 3%-5% estimated residual value.
Estimated useful lives of the Companys assets are as follows:
Asset | Useful Life | |
Buildings and improvements | 40 years | |
Transportation equipment | 5-10 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 as an offset or increase to other income (expense) for the period. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred, and capitalize major additions and betterment to buildings and equipment.
F-7
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
Goodwill
Goodwill represents the excess of the fair value of consideration transferred (plus the fair value of the non-controlling interest, if any) over fair value of the net assets acquired (including recognized intangibles) from BSST. Goodwill is not amortized; rather, impairment tests are performed at least annually or more frequently if circumstances indicate impairment may have occurred. If impairment exists, goodwill is immediately written off to its fair value and the loss is recognized in the consolidated income statements. The Company assesses for impairment at period end or whenever events or changes indicate that, more likely than not, the carrying value of goodwill has been impaired. The Company uses the income approach to estimate the fair value of the goodwill. The income approach is based on the long-term projected future cash flows of the operating segments. The Company discounts the estimated cash flows to present value using a weighted-average cost of capital that considers factors such as the timing of the cash flows and the risks inherent in those cash flows.
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 years.
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.
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 | |
Software-Crude Blending |
10 years | |
Customer Relationship |
5 years | |
Land use right |
50 years |
F-8
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
Revenue Recognition
Our revenues consist primarily of three categories: (i) Hardware Product Sales, (ii) Software Product Sales, and (iii) System Integration Sales. The Company recognizes revenue when the consideration to be received is fixed or determinable, products delivered, or services rendered, and collectability ensured.
For System Integration, sales contracts are structured with fixed price. The contract periods range from two months to approximately three years in length. The Company recognizes revenue of these contracts following the percentage-of-completion method, measured by different stages of completion in accordance with ASC 605-35, Construction-Type and Production-Type Contracts. Only if the actual implementation status meets the established milestone will the Company recognize the relevant portion of the revenue. There are four major stages for the System Integration revenue recognition: (a) the completion of project design, (b) the delivery of products, (c) the completion of debugging, and (d) inspection and acceptance. For BT projects, such as the Ordos drinking water plant project, the Company recognizes the project revenue using the man-power hours, which is the primary element of the total project costs, as the measurement for percentage of completion.
For Hardware Product Sales, the Company recognizes the revenue only when all products are delivered and the acceptance confirmations are signed by the customers, according to ASC 605-10, Revenue Recognition. We are not obligated for any repurchase or return of the goods.
The Company also sells software products. These software product sales do not include any additional services such as maintenance or technical support. The Company recognizes revenue under ASC 985-605, Software Revenue Recognition according to acceptance of delivery revenue recognition method. At the end of each reporting period, the Company recognizes the contract amount as revenue only if all software products have been delivered and the customer acceptance confirmation has been signed.
Provided unapproved change orders or claims occur in the future, in accounting for contracts, we follow Paragraphs 30 and 31 of ASC 605-35-25, Construction-Type and Production-Type Contracts. The Company recognizes revenue from unapproved change orders or claims only to the extent that contract costs relating to the unapproved change orders or claims have been incurred, and only if it is probable that such unapproved change orders or claims will result in additional contract revenue and the amount of such additional revenue can be reliably estimated. Until today, we have not experienced any unapproved change orders in our ordinary business operation.
The Company presents all sales revenue net of a value-added tax (VAT). The Companys products sold in China are generally subject to a Chinese VAT of 17% of the sales price, except for certain proprietary software sales which will only be subject to an effective tax rate of 3%. The VAT payable 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 record revenue in excess of billings as unbilled revenue, and billings in excess of revenues as billings in excess of revenue. For revenues accounted for under these two accounts, we expect the amounts to be collected within one year. For those with collective period longer than one year, we classify them under Long-term unbilled revenue on the consolidated balance sheets.
F-9
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
Cost of Revenues
Cost of revenues is based on total actual costs incurred plus estimated costs to completion applied to percentage of completion as measured at different stages. It includes material costs, equipment costs, transportation costs, processing costs, packaging costs, quality inspection and control, outsourced construction services fees and other costs that directly relate to the execution of the services and delivery of projects. Cost of revenues also includes inbound freight charges, purchasing and receiving costs and inspection costs when they incur.
Operating Expenses
Operating expenses include, among other items, salaries, bonuses, and employees social insurance, administrative and sales expenses, travel and entertainment expenses, depreciation of equipment, amortization of intangible assets, office rental expenses, professional service fees, office supplies, research and development expenses, bad debt provision, etc.
Research and Development (R&D)
Research and development expenses include salaries for R&D staff, consultant fees, supplies and materials, as well as other overhead such as depreciation, facilities, utilities, and other R&D related 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 ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed.
Research and development costs were $39,985 and $59,428 during the quarters ended March 31, 2011 and 2010. No research and development expenses were capitalized within these periods. We do not pass along research and development expenses directly or indirectly to our customers.
Foreign Currency Translation
The Company uses the United States dollar (USD) as its reporting currency. The functional currency of TRIT, TTII and TIS is USD, the functional currency of TRITs subsidiaries in China is Renminbi (RMB). The Company translates monetary assets and liabilities denominated in currencies other than United States dollars into USD at the exchange rate ruling at the balance sheet date. The Company converts non-USD transactions during the year into USD with the prevailing exchange rate on the transaction dates.
The Chinese subsidiaries of TRIT maintain their financial records in RMB. We convert their assets and liabilities with the exchange rate on the balance sheet date; and their revenue and expenses using a weighted average exchange rate for the reporting period. The Company reflects translation adjustments as Accumulated other comprehensive income (loss) in shareholders equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions in a currency other than the functional currency are recognized as foreign currency transaction gain or loss in the result of operations as incurred.
Translation adjustments amounted to $2,279,606 and $1,739,799 as of March 31, 2011 and December 31, 2010, respectively. The Company translated balance sheet amounts with the exception of
F-10
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
equity at March 31, 2011 at RMB6.5564 to US$1.00 as compared to RMB6.6227 to US$1.00 at December 31, 2010. The Company stated equity accounts at their historical rate. The average translation rates applied to income statement accounts for the quarters ended March 31, 2011 and 2010 were RMB6.5832 and RMB6.8269 to US$ 1.00, 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) accounting standard codification 740(ASC 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 it as a tax benefit. The company also adopts ASC 740 guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. It had no effect on the Companys financial statements as of March 31, 2011 and December 31, 2010. The Company did not have any significant unrecognized uncertain tax positions as of March 31, 2011 and December 31, 2010.
The Companys operations are subject to income and transaction taxes in China since most of the business activities take place in China. 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.
Earnings per Share
Basic EPS excludes dilution and is computed by dividing net income a attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue ordinary share (convertible preferred stock, forward contract, warrants to purchase ordinary share, contingently issuable shares, ordinary share options and warrants and their equivalents using the treasury stock method) were exercised or converted into ordinary share. The Company excludes potential ordinary 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 391,774 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 March 31, 2011, 170,000 warrants had been exercised at a price equal to $8.10 per share. On March 8, 2011, 93,700 options were exercised at a price of $6.75 per share.
F-11
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
The Company has repurchased aggregation of 21,100 ordinary shares by the end of March 31, 2011. As of March 31, 2011, the total outstanding shares are 8,124,433.
Comprehensive Income
Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners. The Company has chosen to report comprehensive income in the statements of income and comprehensive income.
Financial Instruments
The Company carries 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.
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 the first quarter of 2011, The Financial Accounting Standards Board (FASB) has issued ASU No. 2011-01 through ASU 2011-3, which is not expected to have a material impact on the consolidated financial statements upon adoption.
3. | Restricted Cash |
As of March 31, 2011, the Company has made several time deposits totaling $2,321,142, as collateral in exchange of the issuance of Letters of Credit. These deposits are all with expiration dates within the next 12 months. Specifically, about $0.9 million will expire in the second quarter of 2011; $0.8 million will expire in the third quarter of 2011; and remaining balance of $0.6 million is to expire in the next 12 months.
F-12
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
4. | Notes and Accounts Receivable, Net |
Based on the Companys assessment, management believes the net balance on each balance sheet date herein was collectable. The gross balance and bad debt provision as at March 31, 2011 and December 31, 2010 are as the following:
March 31, 2011 (Unaudited) |
December 31, 2010 |
|||||||
Accounts receivable, gross |
$ | 15,522,049 | $ | 18,468,099 | ||||
Less bad debt provision |
(565,693 | ) | (427,020 | ) | ||||
Notes receivable |
318,772 | | ||||||
Accounts and notes receivable, net |
$ | 15,275,129 | $ | 18,041,079 | ||||
5. | Inventories |
Inventories consisted of the following:
March 31, 2011 (Unaudited) |
December 31, 2010 |
|||||||
Raw materials |
$ | 809,769 | $ | 1,136,981 | ||||
Finished goods |
780,017 | 557,694 | ||||||
Project work-in-progress |
4,429,647 | 4,191,944 | ||||||
Totals |
$ | 6,019,433 | $ | 5,886,619 | ||||
The Company reviews its inventory periodically for possible obsolete goods and to determine if any reserves are necessary for potential obsolescence. As of March 31, 2011 and December 31, 2010, the Company determined that no reserves were necessary.
6. | Deposits on Projects |
Deposits on Projects consisted of the following:
March 31, 2011 (Unaudited) |
December 31, 2010 |
|||||||
Current: |
||||||||
Contract deposit |
$ | 245,747 | $ | 386,000 | ||||
Bidding deposit |
330,470 | 205,505 | ||||||
Totals |
$ | 576,218 | $ | 591,505 | ||||
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. All of the deposits will be utilized within one year.
F-13
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
7. | Plant and Equipment, Net |
Plant and equipment consist of the following:
March 31, 2011 (Unaudited) |
December 31, 2010 |
|||||||
Transportation equipment |
$ | 758,312 | $ | 751,240 | ||||
Office equipment |
415,588 | 384,439 | ||||||
Furniture |
389,144 | 386,728 | ||||||
Total plant and equipment |
1,563,044 | 1,522,407 | ||||||
Less accumulated depreciation |
(543,095 | ) | (477,257 | ) | ||||
Construction in progress |
108,621 | | ||||||
Plant and equipment, net |
$ | 1,128,570 | $ | 1,045,150 | ||||
The depreciation expense for the quarters ended March 31, 2011 and 2010 amounted to $60,831 and $22,704 respectively.
8. | Intangible Assets, Net |
The Intangible Assets mainly consist of patents, software, customer lists and land use right. The patents were invested as capital contribution by the shareholders of Tranhold and Yanyu, and were recorded at the appraisal value as stipulated by the local regulatory authority. Software was purchased from third parties at the acquisition cost.
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 of March 31, 2011 and December 31, 2010 are as follows:
In November 2010, $5,284,854 was paid for a land use right. On January 18, 2011, the land use right was transferred and accepted by the Company. The amortization of the land use right started in January 2011.
March 31, 2011 (Unaudited) |
December 31, 2010 |
|||||||
Patents |
$ | 1,791,606 | $ | 1,773,670 | ||||
Software |
2,766,762 | 2,739,064 | ||||||
Customer list |
663,474 | 656,832 | ||||||
Land use right |
5,501,113 | | ||||||
Total intangible assets |
10,722,955 | 5,169,566 | ||||||
Less accumulated amortization |
(973,864 | ) | (838,305 | ) | ||||
Intangible assets, net |
$ | 9,749,091 | $ | 4,331,261 | ||||
F-14
Table of Contents
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
According to the spirit of 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 $506,685 as of March 31, 2011, which only accounted for 0.5% of its total assets as of March 31, 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 quarters ended March 31, 2011 and 2010 amounted to $126,564 and $11,738 respectively.
The amortization expense from March 31, 2011 for the next five years is expected to be as follows:
For the Year Ending December 31, |
Amount | |||
2011 |
$ | 397,312 | ||
2012 |
529,749 | |||
2013 |
529,749 | |||
2014 |
529,749 | |||
2015 |
474,460 | |||
Thereafter |
7,288,072 | |||
Total |
$ | 9,749,091 | ||
9. | Prepayments to Suppliers and Subcontractors |
Prepayments are money deposited with or advanced to subcontractors for services on contracting projects. Some subcontractors require a certain amount of money to be deposited as a guaranty payment before any services were performed. Prepayments also include money advanced to vendors on future inventory purchases to ensure timely delivery.
10. | Accounts Payable and Costs 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 and project accruals based on progress are consisted of the following:
March 31, 2011 (Unaudited) |
December 31, 2010 |
|||||||
Accounts Payable |
$ | 2,236,401 | $ | 2,721,643 | ||||
Costs Accrued on Projects |
18,417,528 | 9,198,420 | ||||||
Totals |
$ | 20,653,929 | $ | 11,920,063 | ||||
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
11. | Income Taxes |
We are subject to income taxes on entity basis on income arising in or derived from the tax jurisdictions in which each entity is domiciled. According to the New Enterprise Income Tax Law (NEITL) in China, unified Enterprise Income Tax rate is 25%. However, two of six subsidiaries in China are subject to certain favorable tax policies as being a high-tech company. The effective EIT used in first quarter of 2011 is 16%, as projected by our management.
For the Quarters ended March 31, (Unaudited) |
||||||||
2011 % |
2010 % |
|||||||
TTB (effective until the end of 2011) |
7.5 | 7.5 | ||||||
BSST |
15 | 25 | ||||||
Yanyu |
25 | 25 | ||||||
Tranhold |
25 | 25 | ||||||
TTA |
25 | | ||||||
TBD |
25 | 25 | ||||||
Consolidated Effective EIT |
16 | 8 | ||||||
The provision for income tax expense (benefit) from continuing operations consists of the following:
For the Quarters Ended March 31, | ||||||||
2011 (Unaudited) |
2010 (Unaudited) |
|||||||
Current: |
||||||||
PRC |
$ | 411,203 | $ | 67,773 | ||||
Deferred: |
||||||||
PRC |
(5,567 | ) | | |||||
Total income tax expense |
$ | 405,636 | $ | 67,773 | ||||
Significant components of the Companys net deferred tax assets/(liabilities) are as follows:
March 31, (Unaudited) |
December 31, 2010 |
|||||||
Long-term: |
||||||||
Deferred tax liabilities: |
||||||||
Intangible assets valuation in business combination |
$ | 181,728 | $ | 187,295 | ||||
Total net deferred tax liabilities |
$ | (181,728 | ) | $ | (187,295 | ) | ||
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
Income tax reconciliation for the quarters ended March 31, 2011 and 2010 are as follows:
For the Quarters Ended March 31, | ||||||||
2011 (Unaudited) |
2010 (Unaudited) |
|||||||
PRC federal statutory tax rate |
25 | % | 25 | % | ||||
Taxable income |
$ | 2,585,161 | $ | 887,912 | ||||
Computed expected income tax expense |
646,290 | 221,978 | ||||||
Effect of preferential tax rates |
(240,654 | ) | (154,205 | ) | ||||
Income tax expense |
$ | 405,636 | $ | 67,773 | ||||
12. | Ordinary Shares |
At the beginning of 2011, the outstanding ordinary shares of the Company were 8,030,733 and the issued ordinary shares of the Company were 8,051,833. During 2010, the Company repurchased 21,100 ordinary shares in six installments, and recorded as treasury shares at cost method. On March 8, 2011, 93,700 options were exercised at a price equal to $6.75 per share.
By March 31, 2011, the total outstanding ordinary shares of the Company were 8,124,433 and the total issued ordinary shares of the Company were 8,145,533.
13. | Warrants |
(a) 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. 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. During 2009, 170,000 warrants were exercised at a price equal to $8.10 per share.
The fair value of each warrant awarded is estimated on the grant date of using Black-Scholes model that uses the items 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 Ordinary Shares
Pursuant to Paragraph 17 of SFAS123R, Share-Based Payment ASC 718 Compensation stock compensation, the impact of post vesting restrictions can be taken into account in a closed form option
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
pricing model. Pursuant to warrant agreement, until one hundred eighty days after the closing of the initial public offering of the ordinary shares of TRIT, the warrant holders may not sell, transfer, assign, pledge or hypothecate any of its rights pursuant to the warrant. In this respect, we multiplied a restricted stock discount rate by the IPO price of the Company to arrive at fair value of per share price. When determining the restricted stock discount rate, the option-pricing method 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 restricted discount rate for lack of marketability. Based on the analysis, restricted stock discount of 12% was applied on the market price of our ordinary share as of the warrant grant dates. After applying the restricted stock discount, the fair value of the underlying stock was estimated to be $5.94.
(2) Exercise price
The exercise price of the warrant 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 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 ordinary 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 related to 170,000 warrants was $402,900 as an IPO expense. The warrants expense for the investor relations firm related to 7,500 warrants recognized as general and administrative expenses for the quarters ended March 31, 2011 and 2010 was $0 and $8,766, respectively.
During 2009, 170,000 warrants were exercised at a price equal to $8.10 per share.
(b) In connection with the first financing after IPO mentioned in Note 1, the Company has also agreed to issue the underwriters a warrant to purchase a number of ordinary shares equal to an aggregate of 10% of the ordinary shares sold in the offering, excluding over-allotments. The warrants will have an exercise price equal to 145% of the offering price.
According to the above agreement, in April 2010, the Company issued to Brean Murray, Carret & Co., LLC and Newbridge Securities Corporation each 107,137 warrants, as a portion of the commission for the second round of security issuance, at a per share purchase price equal to $20.30. These warrants will expire on the five year anniversary of the base date, which will be April 14, 2015. None of these warrants were exercised by March 31, 2011.
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
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) |
12.20 | |||
Exercise price (USD/share) |
20.30 | |||
Risk free rate |
2.48 | % | ||
Dividend yield |
0.00 | % | ||
Expected term/Contractual Life (No. of Yrs) |
5.0 | |||
Expected volatility |
59.0 | % |
(1) Fair Value of underlying stocks
Pursuant to Paragraph 30-10 in ASC 718-10, Compensation-Stock Compensation, the impact of post vesting restrictions can be taken into account in a closed form option pricing model. The closing price of the Companys stock as of the valuation date was $14.88. Pursuant to warrant agreement, until 360 days after the grant date, the warrant holders may not sell, transfer, assign, pledge or hypothecate any of its rights pursuant to this warrant. In this respect, we applied a restricted stock discount rate to reflect the lack of marketability of the underlying stock during the lock-up period. Restricted stock discount rate was determined by option pricing method. 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 restricted discount rate for lack of marketability. Based on the analysis, restricted stock discount of 18% was applied on the market price of our ordinary share as of the warrant grant dates. After applying the restricted stock discount, the fair value of the underlying stock was estimated to be $12.20.
(2) Strike Price
Exercise price of $20.30 per share was prescribed in warrant agreement.
(3) Life to Expiration
Pursuant to the warrant agreement, the contractual life of the Warrant is five years.
(4) Risk Free Interest Rate
Risk free interest rate of 2.48% was based on the yield to maturity of China international bond with similar life as the Warrants as of the Valuation Date.
(5) Dividend Yield
According to the Management, the expected dividend yield is 0%.
(6) Expected Volatility
As the Company is newly listed company with short trading history, therefore, we considered historical share volatility of comparable companies as a basis for estimate in the Companys share price volatility in the future. Expected volatility for the warrants of 59% was estimated based on historical stock prices of comparable companies for the period similar to the warrant life.
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
The fair value of warrants on the grant date of April 14, 2010 is $4.79. The total fair value of warrants was $1,026,390 which was recognized as an IPO expense against additional paid in capital.
14. | Options Issued to Employees |
TRITs 2009 Stock Incentive plan that was approved by shareholders permits the Company to offer up to 525,500 shares, options and other securities to its employees and director. On September 9, 2009, TRIT granted 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, with the first 20% vesting on September 9, 2010. Certain options provide for accelerated vesting upon a change in control (as defined in the employee share option plan).
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 | % |
(1) Fair Value of Underlying Ordinary Shares
This is based on market price of the Companys ordinary 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.
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
(6) Volatility
The volatility of the underlying ordinary 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. 105,100 options are vested under the employee share option plan as of March 31, 2011 and December 31, 2010, respectively. 93,700 and 0 options are exercised as of March 31, 2011 and December 31 2010, respectively.
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 quarter ended March 31, 2011 was $87,131, and $91,480 were recognized as expenses for the period ended March 31, 2010. Another $1,282,023 will be recognized as general and administrative expense over the next 1,257 days.
15. | Net Income per Ordinary 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 ordinary share were exercised or converted into ordinary share or resulted in the issuance of ordinary share that then shared in the earnings of the entity.
Basic net income per share is computed by dividing net income available to ordinary share holders by the weighted average number of shares of ordinary share outstanding during the period. Diluted income per share is computed by dividing net income by the weighted average number of shares of ordinary share, ordinary share equivalents and potentially dilutive securities outstanding during each period. Potentially dilutive ordinary shares consist of ordinary shares issuable upon the conversion of ordinary share option and warrants (using the treasury stock method). The dilutive effect comes from 525,500 options to employee and 7,500 warrants to investor relations consultant. There are 214,274 warrants to underwriter having anti-dilutive effect due to the fact that the weighted average exercise price per share of these warrants is higher than the weighted average market price per share of ordinary share during the quarter ended March 31, 2011. The following table presents a reconciliation of basic and diluted net income per share:
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
For the Quarters Ended March 31, | ||||||||
2011 (Unaudited) |
2010 (Unaudited) |
|||||||
Net income attributable to Tri-Tech Holding Inc |
$ | 1,698,981 | $ | 817,614 | ||||
Weighted-average shares of ordinary share used to compute basic net income per share |
8,055,720 | 5,269,011 | ||||||
Effect of dilutive ordinary share equivalents: |
||||||||
Dilutive effect of warrants |
2,667 | 84,349 | ||||||
Dilutive effect of employee stock options |
96,836 | 205,900 | ||||||
Shares used in computing diluted net income per ordinary share |
8,155,222 | 5,559,260 | ||||||
Basic net income per ordinary share |
$ | 0.21 | $ | 0.16 | ||||
Diluted net income per ordinary share |
$ | 0.21 | $ | 0.15 |
16. | Commitments and Contingencies |
Operating Leases
As of March 31, 2011, the Company had commitments under certain operating leases, requiring annual minimum rentals as follows:
2011 |
$ | 514,269 | ||
2012 |
643,821 | |||
2013 |
452,268 | |||
2014 |
111,589 | |||
2015 |
| |||
Total |
$ | 1,721,947 | ||
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 vary from one to five years. Pursuant to the contracts, when they expire, we have the rights to extend them with new negotiated prices. Rental expenses were $183,287and $69,227 for the quarters ended March 31, 2011 and 2010, 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.
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
17. | Certain Significant Risks and Uncertainties |
Cash includes cash on hand and demand deposits in accounts maintained with banks. Total cash in these banks as of March 31, 2011 and December 31, 2010 amounted to $22,846,768 and $23,394,995, 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 substantial 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.
The Company has one major customer who represented approximately 70% of the Companys revenue for the quarter ended March 31, 2011. The project is a Build-Transfer project we entered into in 2010 with a local government agency. The long-term unbilled revenue balance with this customer is $22,204,014 and 9,796,657 as of March 31, 2011 and December 31, 2010, respectively. No other customers represented more than 10% of the Companys sales for the quarter ended March 31, 2011. Due to the nature of the BT projects, and the creditability of the government agency, the management believes the risk of the client being insolvent is minor.
The Company has five major customers which in total represented approximately 68.9% of the Companys sales for the quarters ended March 31, 2010.
Our suppliers vary from project to project. Many times, they are specifically appointed by the clients. Most of the material or equipment we purchase is non-unique and easily available in the market. The prices for those purchases, although increasing, are relatively consistent and predictable. A specific supplier might occupy a significant percentage of our total purchase at a certain time for a large contract. The dependence on a specific supplier usually ends when the project is completed. We do not rely on any single supplier for long term.
18. | Social Security Plan |
The Companys subsidiaries in China are required to participate in the social security plan 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 employees social security fund. The Company charges contributions to its income statement as they become payable in accordance with the local government requirements. The aggregate contributions of the Company to the employees social security plan amounted to $52,136 and $22,400 for the quarters ended March 31, 2011 and 2010, respectively.
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
19. | 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.
Segment 3: Industrial Pollution Control and Safety Water Resource
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 quarters ended March 31, 2011 and 2010 (Unaudited) |
||||||||||||||||||||||||||||||||
Segment 1 | Segment 2 | Segment 3 | Total | |||||||||||||||||||||||||||||
2011 Q1 | 2010 Q1 | 2011 Q1 | 2010 Q1 | 2011 Q1 | 2010 Q1 | 2011 Q1 | 2010 Q1 | |||||||||||||||||||||||||
Revenues |
$ | 12,904,386 | $ | 2,561,051 | $ | 1,641,059 | $ | 1,616,420 | $ | 3,007,766 | $ | 60,643 | $ | 17,553,211 | $ | 4,238,114 | ||||||||||||||||
Cost of revenues |
9,621,997 | 1,531,384 | 868,608 | 925,391 | 2,052,426 | 14,463 | 12,543,031 | 2,471,238 | ||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||
Selling and Marketing Expenses |
109,058 | 75,782 | 150,728 | 62,358 | 54,387 | | 314,173 | 138,140 | ||||||||||||||||||||||||
General and Administrative Expenses |
741,138 | 349,736 | 495,238 | 369,509 | 830,418 | 22,331 | 2,066,794 | 741,576 | ||||||||||||||||||||||||
Research and Development |
| | 39,985 | 59,428 | | | 39,985 | 59,428 | ||||||||||||||||||||||||
Total operating expenses |
850,196 | 425,518 | 685,951 | 491,295 | 884,805 | 22,331 | 2,420,952 | 939,144 | ||||||||||||||||||||||||
Other income (expenses), net |
(5,653 | ) | 2,194 | (65 | ) | 57,986 | 1,651 | | (4,067 | ) | 60,180 | |||||||||||||||||||||
Income before income taxes |
$ | 2,426,540 | $ | 606,343 | $ | 86,435 | $ | 257,720 | $ | 72,185 | $ | 23,849 | $ | 2,585,161 | $ | 887,912 | ||||||||||||||||
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2011 and 2010
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:
Segment Assets |
Segment 1 | Segment 2 | Segment 3 | Total | ||||||||||||
As of March 31, 2011 |
$ | 53,224,200 | $ | 16,530,938 | $ | 24,876,849 | $ | 94,631,987 | ||||||||
As of December 31, 2010 |
$ | 44,168,017 | $ | 14,488,083 | $ | 24,106,603 | $ | 82,762,703 |
20. | Subsequent Events |
Management has considered all events occurring through the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.
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