UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 20102011
[ ]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: 000-53432
TEC TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 13-4013027 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
Xinqiao Industrial Park
Jingde County
Anhui Province 242600Shenzhen 242600
People’s Republic of China
(Address of principal executive offices, Zip Code)
(+86) 755 8323-2722(86) 563 8023488
(Registrant’s telephone number, including area code)
_______________________________________________________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
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 [ ][X] 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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]
The number of shares outstanding of each of the issuer’s classes of common stock, as of November 15, 201010, 2011 is as follows:
Class of Securities | Shares Outstanding | |||
Common Stock, $0.001 par value | 30,181,552 |
TEC TECHNOLOGY, INC.
Quarterly Report on Form 10-Q |
Three and Nine Months Ended September 30, 2011 |
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Financial Statements | 1 | |
2 | ||
8 | ||
8 |
PART II
OTHER INFORMATION
Item 1. | Legal Proceedings | 9 |
9 | ||
9 | ||
9 | ||
9 | ||
9 | ||
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TEC TECHNOLOGY, INC. AND SUBSIDIARIESCONSOLIDATED QUARTERLY FINANCIAL STATEMENTS (UNAUDITED)REPORT
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 20092011
1
TEC TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F - 1 | |
F - 2 | |
F - 3 | |
F - 4 | |
TEC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
| September 30, 2010 | December 31, 2009 | September 30, 2011 | December 31, 2010 | ||||||||
| (Unaudited) | (audited) | (Unaudited) | (Audited) | ||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 233,365 | $ | 164,927 | $ | 3,375,312 | $ | 2,526,710 | ||||
Restricted cash | 69,291 | 1,164,598 | ||||||||||
Accounts receivable, net of allowance for doubtful accounts | 16,414,916 | 8,791,842 | 20,179,785 | 14,356,352 | ||||||||
Inventory | 8,025,464 | 7,066,787 | 6,113,015 | 5,235,074 | ||||||||
Deposits and prepaid expenses | 1,244,275 | 2,716,237 | 4,092,188 | 5,439,579 | ||||||||
Other receivables | 3,742,625 | 3,802,358 | 2,803,897 | 1,626,039 | ||||||||
Taxes recoverable | 11,225 | 4,889 | 17,391 | 2,389 | ||||||||
Total current assets | 29,671,870 | 22,547,040 | 36,650,879 | 30,350,741 | ||||||||
Property and equipment | ||||||||||||
Property and equipment, net of accumulated depreciation | 3,781,980 | 3,353,841 | 3,885,813 | 3,790,765 | ||||||||
Other assets | ||||||||||||
Land use rights, net of accumulated amortization | 2,061,456 | 2,051,837 | 8,057,124 | 2,071,771 | ||||||||
Construction in progress | 36,959 | - | 2,258,450 | 473,355 | ||||||||
Long term accounts receivable, net of allowance for doubtful accounts | 55,697 | - | ||||||||||
| 2,154,112 | 2,051,837 | 14,201,387 | 6,335,891 | ||||||||
Total assets | $ | 35,607,962 | $ | 27,952,718 | $ | 50,852,266 | $ | 36,686,632 | ||||
| ||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| ||||||||||||
Current liabilities | ||||||||||||
Accounts payable | $ | 9,372,472 | $ | 5,012,224 | $ | 7,056,658 | $ | 8,313,633 | ||||
Other payables and accrued expenses | 5,207,080 | 3,251,687 | 4,683,755 | 3,494,358 | ||||||||
Taxes payable | 444,383 | 1,306,915 | ||||||||||
Taxes payables | 420,762 | 44,608 | ||||||||||
Customer deposits | 32,588 | 113,867 | 1,140,085 | 80,331 | ||||||||
Short term borrowings | 11,609,235 | 12,733,709 | 23,428,713 | 12,938,582 | ||||||||
| 26,665,758 | 22,418,402 | 36,729,973 | 24,871,512 | ||||||||
Commitments and contingencies | - | - | - | - | ||||||||
| ||||||||||||
Stockholders' equity | ||||||||||||
Preferred "B" stock: 10,000,000 authorized, none issued and outstanding $0.001 par value | ||||||||||||
Common stock: 300,000,000 authorized $0.001 par value 30,181,552 and 19,194,421 shares issued and outstanding September 30, 2010 and December 31, 2009 respectively | $ | 30,182 | $ | 19,195 | ||||||||
Preferred stock: 10,000,000 authorized, none issued and outstanding $0.001 par value | ||||||||||||
Common stock: 300,000,000 authorized $0.001 par value 30,181,552 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively | $ | 30,182 | $ | 30,182 | ||||||||
Additional paid in capital |
| 1,009,926 | 951,605 | 1,105,454 | 1,024,891 | |||||||
Retained earnings |
| 7,521,814 | 4,235,616 | 11,852,910 | 10,077,006 | |||||||
Accumulated other comprehensive income |
| 380,282 | 327,900 | 1,133,747 | 683,041 | |||||||
Total stockholders' equity | 8,942,204 | 5,534,316 | 14,122,293 | 11,815,120 | ||||||||
Total liabilities and stockholders' equity | $ | 35,607,962 | $ | 27,952,718 | $ | 50,852,266 | $ | 36,686,632 |
2See accompanying notes of these consolidated financial statements
F - 1
TEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three months | Three months | Nine months | Nine months | Three months | Three months | Nine months | Nine months | |||||||||||||||||
ended | ended | ended | ended | ended | ended | ended | ended | |||||||||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||
Revenues | $ | 7,285,615 | $ | 6,736,629 | $ | 21,892,594 | $ | 13,144,149 | $ | 11,364,648 | $ | 7,285,615 | $ | 19,559,792 | $ | 21,892,594 | ||||||||
Cost of goods sold | 5,355,307 | 4,655,139 | 15,313,202 | 8,866,788 | 8,418,882 | 5,355,307 | 14,203,143 | 15,313,202 | ||||||||||||||||
Gross profit | 1,930,308 | 2,081,490 | 6,579,392 | 4,277,361 | 2,945,766 | 1,930,308 | 5,356,649 | 6,579,392 | ||||||||||||||||
Selling and marketing expenses | (337,423 | ) | (30,860 | ) | (1,127,290 | ) | (126,089 | ) | (438,939 | ) | (337,423 | ) | (1,065,308 | ) | (1,127,290 | ) | ||||||||
General and administrative expenses | (293,389 | ) | (224,525 | ) | (938,337 | ) | (581,233 | ) | (378,165 | ) | (293,389 | ) | (1,271,357 | ) | (938,337 | ) | ||||||||
Net income from operations | 1,299,496 | 1,826,105 | 4,513,765 | 3,570,039 | 2,128,662 | 1,299,496 | 3,019,984 | 4,513,765 | ||||||||||||||||
Other income (expenses) | ||||||||||||||||||||||||
Government grant | 10,798 | 43,920 | 190,215 | 106,930 | 1,421 | 10,798 | 218,408 | 190,215 | ||||||||||||||||
Other income | - | 12,631 | 13,695 | 41,969 | 2,123 | - | 2,123 | 13,695 | ||||||||||||||||
Interest expense | (299,865 | ) | (137,192 | ) | (979,425 | ) | (392,644 | ) | (465,391 | ) | (299,865 | ) | (1,125,568 | ) | (979,425 | ) | ||||||||
Net other income (expenses) | (289,067 | ) | (80,641 | ) | (775,515 | ) | (243,745 | ) | (461,847 | ) | (289,067 | ) | (905,037 | ) | (775,515 | ) | ||||||||
Net income before provision for income taxes | 1,010,429 | 1,745,464 | 3,738,250 | 3,326,294 | 1,666,815 | 1,010,429 | 2,114,947 | 3,738,250 | ||||||||||||||||
Provision for income taxes | (151,535 | ) | (450,585 | ) | (538,396 | ) | (847,396 | ) | (257,753 | ) | (151,535 | ) | (339,043 | ) | (538,396 | ) | ||||||||
Net income | 858,894 | 1,294,879 | 3,199,854 | 2,478,898 | 1,409,062 | 858,894 | 1,775,904 | 3,199,854 | ||||||||||||||||
Other comprehensive gain | ||||||||||||||||||||||||
Foreign currency translation gain | 12,462 | (40,527 | ) | (177,290 | ) | (57,274 | ) | |||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||
Foreign currency translation gain (loss) | 151,543 | 12,462 | 450,706 | (177,290 | ) | |||||||||||||||||||
Comprehensive income | $ | 871,356 | $ | 1,254,352 | $ | 3,022,564 | $ | 2,421,624 | $ | 1,560,605 | $ | 871,356 | $ | 2,226,610 | $ | 3,022,564 | ||||||||
Weighted average numbers of common shares | ||||||||||||||||||||||||
Basic | 25,298,383 | 19,194,421 | 25,298,383 | 19,194,421 | 30,181,882 | 25,298,383 | 30,181,882 | 25,298,383 | ||||||||||||||||
Diluted | 25,298,383 | 19,194,421 | 25,298,383 | 19,194,421 | 30,181,882 | 25,298,383 | 30,181,882 | 25,298,383 | ||||||||||||||||
Earnings per share | ||||||||||||||||||||||||
Basic | $ | 0.03 | $ | 0.07 | $ | 0.13 | $ | 0.13 | $ | 0.05 | $ | 0.03 | $ | 0.06 | $ | 0.13 | ||||||||
Diluted | $ | 0.03 | $ | 0.07 | $ | 0.13 | $ | 0.13 | $ | 0.05 | $ | 0.03 | $ | 0.06 | $ | 0.13 |
3See accompanying notes of these consolidated financial statements
F - 2
TEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine months | Nine months | Nine months | Nine months | ||||||||
| ended | ended | ended | ended | ||||||||
| September 30, 2010 | September 30, 2009 | September 30, 2011 | September 30, 2010 | ||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 3,199,854 | $ | 2,478,898 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activites: | ||||||||||||
Net income for the period | $ | 1,775,904 | $ | 3,199,854 | ||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activites: | ||||||||||||
Depreciation | 207,350 | 105,510 | 259,193 | 207,350 | ||||||||
Amortization of intangible assets | 31,779 | 31,665 | ||||||||||
Loss on disposal of property and equipment | 537 | - | ||||||||||
Amortization of land use rights | 33,745 | 31,779 | ||||||||||
Stock based compensation | 93,800 | - | ||||||||||
Changes in operating assets and liabilities | ||||||||||||
Decrease in restricted cash | 1,095,307 | - | ||||||||||
Increase in inventory | (958,677 | ) | (2,155,676 | ) | (877,941 | ) | (958,677 | ) | ||||
Decrease (increase) in deposits and prepaid expenses | 1,471,962 | (1,715,679 | ) | |||||||||
Increase/(decrease) in deposits and prepaid expenses | (2,281,507 | ) | 1,471,962 | |||||||||
Increase in accounts receivable | (7,678,771 | ) | (6,763,709 | ) | (5,823,433 | ) | (7,678,771 | ) | ||||
Decrease (increase) in other receivables | 59,733 | (1,597,108 | ) | |||||||||
Increase) decrease in taxes recoverable | (6,336 | ) | 92,151 | |||||||||
(Decrease) increase in taxes payable | (862,532 | ) | 400,893 | |||||||||
Increase in accounts payable | 4,360,248 | 4,955,165 | ||||||||||
Decrease in customer deposits | (81,279 | ) | (342,875 | ) | ||||||||
(Increase) decrease in other receivables | (1,177,858 | ) | 59,733 | |||||||||
Increase in taxes recoverable | (15,002 | ) | (6,336 | ) | ||||||||
Increase/(decrease) in taxes payable | 376,154 | (862,532 | ) | |||||||||
(Decrease) increase in accounts payable | (1,259,975 | ) | 4,360,248 | |||||||||
Increase/(decrease) in customer deposits | 1,059,754 | (81,279 | ) | |||||||||
Increase in other payables and accrued expenses | 1,955,393 | (20,126 | ) | 1,189,397 | 1,955,393 | |||||||
Net cash provided by (used in) operating activities | 1,698,724 | (4,530,891 | ) | |||||||||
Net cash (used in) provided by operating activities | (5,551,925 | ) | 1,698,724 | |||||||||
Cash flows from investing activities | ||||||||||||
Purchases of property and equipment | (622,961 | ) | (382,679 | ) | ||||||||
Purchase of property and equipment | (239,580 | ) | (622,961 | ) | ||||||||
Proceeds from disposal of property and equipment | 5,379 | - | ||||||||||
Payment for construction in progress | (36,959 | ) | - | (1,775,312 | ) | (36,959 | ) | |||||
Purchases of land use rights | - | (1,643,546 | ) | (2,174,130 | ) | - | ||||||
Net cash used in investing activities | (659,920 | ) | (2,026,225 | ) | (4,183,643 | ) | (659,920 | ) | ||||
Cash flows from financing activities | ||||||||||||
Common stock issued | 10,987 | - | - | 10,987 | ||||||||
Provision for income taxes | 58,321 | 117,909 | ||||||||||
Contribution of paid in capital | - | 58,321 | ||||||||||
Proceeds from short term borrowings | - | 6,007,365 | 18,050,799 | - | ||||||||
Repayment of short term borrowings | (1,124,474 | ) | - | (8,146,100 | ) | (1,124,474 | ) | |||||
Net cash (used in) provided by financing activities | (1,055,166 | ) | 6,125,274 | |||||||||
Net cash provided by (used in) financing activities | 9,904,699 | (1,055,166 | ) | |||||||||
Effects on exchange rate changes on cash | 84,800 | (144,558 | ) | 679,471 | 84,800 | |||||||
Increase (decrease) in cash and cash equivalents | 68,438 | (576,400 | ) | |||||||||
Increase in cash and cash equivalents | 848,602 | 68,438 | ||||||||||
Cash and cash equivalents, beginning of period | 164,927 | 704,854 | 2,526,710 | 164,927 | ||||||||
Cash and cash equivalents, end of period | $ | 233,365 | $ | 128,454 | 3,375,312 | 233,365 | ||||||
Supplementary disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 979,425 | $ | 392,643 | 1,125,568 | 979,425 | ||||||
Cash paid/(refunded) for income taxes | $ | 1,392,926 | $ | (514,573 | ) | |||||||
Cash paid for income taxes | 2,196,414 | 1,392,926 | ||||||||||
Non cash transactions: | ||||||||||||
Issuance of warrant | 94,120 | - | ||||||||||
Acquisition of land use rights from deposits and prepaid expenses | 3,659,766 | - | ||||||||||
Capital contributed by directors assuming debts of Company | 80,563 | - |
4See accompanying notes of these consolidated financial statements
F - 3
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | BUSINESS ORGANIZATION |
TEC Technology, Inc. (formerly known as Highland Ridge, Inc. | |
On May 4, 2010, the Company | |
| |
| |
TECT was organized as a private corporation, under the Companies Laws of the Hong Kong on November 11, 2009. It was principally established to serve as an investment holding company and its operations are carried out in Hong Kong. On February 22, 2010, TECT entered into an equity transfer agreement with Mr. Chun Lu, the sole shareholder of ATEC. The transfer was approved by the Department of Commerce of Anhui Province on March 2, 2010. This business combination was accounted for as entities under common control because the majority shareholders of TECT and ATEC were the same person. | |
ATEC is a private corporation, incorporated under the laws of the People’s Republic of China (“PRC”) on July 3, 2007. ATEC’s principal activities are the development and manufacturing of mobile communication steel towers, microwave towers, angle steel towers, steel pipe towers and transmission cable towers. | |
ZTEC | |
| |
|
|
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
2.1 | FISCAL YEAR | |
The Company has adopted December 31 as its fiscal year end. |
F - 4
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
2.2 | REPORTING ENTITIES | |
The accompanying consolidated financial statements include the following entities: |
Place of | Date of | Percentage | ||||||||||||
Name of subsidiary | incorporation | incorporation | of interest | Principal activity | ||||||||||
TEC Technology Limited | Hong Kong | November 11, 2009 | 100% directly | Investment holding. | ||||||||||
Anhui TEC Tower | People's Republic of China | April 19, 2006 | 100% directly | Development,manufacturing and selling of mobile communication steel towers, microwave towers, angle steel towers, steel pipe towers, transmission cable towers, telecommunication equipment, scrap and provision for technical consulting service. | ||||||||||
Zhejiang TEC Tower Co., Ltd. | People's Republic of China | December 7, 2009 | 90% | The company has not commenced its business of development and manufacturing of mobile communication steel towers, microwave towers, angle steel towers, steel pipe towers and transmission cable | ||||||||||
Shuncheng Taida Technology Co., | People's Republic of China | January 20, 2010 | 100% directly | The company has not commenced its business of engineering consultancy and design of mobile communication steel towers, microwave towers, angle steel towers, steel pipe towers and transmission cable |
6towers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.3 | BASIS OF CONSOLIDATION AND PRESENTATION | |
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). In the opinion of management, the accompanying balance sheets, and statements of income, and cash flows include all adjustments, consisting only of normal recurring items, considered necessary to give a fair presentation of operating results for the periods presented. All material | ||
On February 22, 2010, |
F - 4
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
2.3 | BASIS OF CONSOLIDATION AND PRESENTATION (CONTINUED) | |
| ||
Upon completion of the share exchange, TECT became a | ||
Prior to the acquisition of ATEC by TECT, neither TECT nor TEC | ||
For accounting purposes, the combination of the | ||
| ||
Interim results are not necessarily indicative of results for a full year. The information included in this interim report should be read in conjunction with the information included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, |
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.4 | USE OF ESTIMATES | ||
The preparation of consolidated financial statements requires | |||
2.5 | ECONOMIC, POLITICAL AND | ||
The |
F - 9
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
2.6 | REVENUE RECOGNITION | |
The Company’s revenue recognition policies are in compliance with ASC 605. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer. For international sales, the revenue recognition criteria are generally satisfied under Free on Board (“FOB”) and Cost Insurance Freight (“CIF”) terms, in which the Company’s responsibility ends once the goods clear the port of shipment. | ||
Technical consulting service income is recognized when the relevant service is rendered. | ||
Government grants represent local authority grants to the company for infrastructure development and the revenue is recognized on cash basis when the local authority approves the grant to the company. | ||
The Company recognizes revenue when the goods are delivered and title has passed. Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT liability may be offset by the VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product. | ||
2.7 | SHIPPING AND HANDLING | |
Shipping and handling costs related to costs of goods sold are included in cost of sales and selling and marketing expenses which totaled | ||
2.8 | ADVERTISING | |
Advertising costs are expensed as incurred and totaled | ||
2.9 | RESEARCH AND DEVELOPMENT COSTS | |
Research and development costs include costs incurred to develop new products and are charged to operations when incurred. These costs totaled | ||
2.10 |
| |
|
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS | ||
Cash and cash equivalents comprise cash in bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments |
September 30, 2010 | December 31, 2009 | ||||||
Cash and bank balances | $ | 233,365 | $ | 164,927 |
F - 9
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
2.11 | FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME | |
The reporting currency of the Company is | ||
For those entities whose functional currency is other than the U.S. dollars, all assets and liabilities are translated into U.S. dollars at the exchange rate on the balance sheet date; shareholders’ equity is translated at historical rates and items in the statements of income and of cash flows are translated at the average rate for the period. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported in the statement of cash flows will not necessarily agree with changes in the corresponding balances in the balance sheet. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. | ||
Foreign currency translation gain included in accumulated other comprehensive income amounted to | ||
BUSINESS COMBINATION | ||
The Company adopted the accounting pronouncements relating to business combinations (primarily contained in ASC Topic 805 “Business Combinations”), including assets acquired and liabilities assumed arising from contingencies. These pronouncements established principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquire as well as provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. In addition, these pronouncements eliminate the distinction between contractual and |
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.13 | NON-CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS | |
The Company adopted the accounting pronouncement on non-controlling interests in consolidated financial statements, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance is primarily contained in ASC Topic |
F - 9
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
PROPERTY AND EQUIPMENT | ||
Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. .. | ||
Depreciation is calculated on a straight-line basis over the estimated useful |
Assets Classifications | Estimated useful life | |
Buildings | 50 years | |
Plant and machinery | 5 years | |
Furniture, fixtures and office equipment | 5 years | |
Motor vehicles | 5 years |
Any gain or loss arising on the sale or disposal of the asset is included in the income statement in the period the item is sold or otherwise disposed. Maintenance and repairs of property and equipment are charged to operations when incurred.
September 30, 2010 | December 31, 2009 | ||||||
Buildings | $ | 2,520,130 | $ | 2,425,451 | |||
Plant and machinery | 1,385,166 | 1,062,185 | |||||
Furniture, fixtures and office equipment | 64,673 | 61,455 | |||||
Motor vehicles | 289,340 | 87,257 | |||||
4,259,309 | 3,636,348 | ||||||
Less: Accumulated depreciation | (477,329 | ) | (282,507 | ) | |||
Net book value | $ | 3,781,980 | $ | 3,353,841 |
Depreciation expense was $77,164 and $41,965 for the three months ended September 30, 2010 and September 30, 2009, respectively. Depreciation expense was $207,350 and $105,510 for the nine months ended September 30, 2010 and September 30, 2009, respectively.
Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the sale or disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statements of income in the period the item is sold or otherwise disposed. Maintenance and repairs of property and equipment are charged to operations when incurred. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded. | ||
2.15 | LAND USE RIGHTS | |
| ||
| ||
|
September 30, 2010 | December 31, 2009 | ||||||
Cost | $ | 2,156,075 | $ | 2,112,867 | |||
Less: Accumulated amortization | (94,619 | ) | (61,030 | ) | |||
Net book value | $ | 2,061,456 | $ | 2,051,837 |
| ||
CONSTRUCTION IN PROGRESS | ||
Construction in progress represents direct costs of construction as well as acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use. | ||
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS | ||
In accordance with ASC Topic 360, |
F - 9
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
CAPITALIZED INTERNAL-USE SOFTWARE | ||
The Company capitalizes certain costs incurred to purchase or create internal-use software in accordance with ASC Topic 350-40, “Internal Use Software |
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.19 | INVENTORY | |
Inventory consists primarily of raw materials, work in progress, and finished goods. Raw materials are stated at cost. Cost comprises direct materials and, where applicable direct labor costs and applicable overhead costs that have been incurred in bringing the inventory to its present location and condition. Finished goods are stated at the lower of cost (determined on first in first out method) |
September 30, 2010 | December 31, 2009 | ||||||
Raw materials | $ | 5,799,803 | $ | 3,949,512 | |||
Work in progress | 2,225,661 | 129,726 | |||||
Finished goods | - | 2,987,549 | |||||
$ | 8,025,464 | $ | 7,066,787 |
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. | ||
The Company provides for inventory losses based on obsolescence and levels in excess of forecasted | ||
2.20 | ACCOUNTS RECEIVABLE | |
The Company | ||
September 30, 2010 | December 31, 2009 | ||||||
within 3 months | $ | 11,373,774 | $ | 8,398,448 | |||
over 3 months and within 6 months | 3,931,291 | 152,797 | |||||
over 6 months and within 1 year | 1,109,851 | 240,597 | |||||
over 1 year | 55,697 | - | |||||
16,470,613 | 8,791,842 | ||||||
Less: reclassified as long term accounts receivable | (55,697 | ) | - | ||||
$ | 16,414,916 | $ | 8,791,842 |
Accounts receivable includes the amounts of $3,134,274 (12.31.2009: $1,333,972) that were factored to the Industrial and Commercial Bank, PRC for collection.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010 | December 31, 2009 | ||||||
Guarantee deposits | $ | 432,648 | $ | 1,334,237 | |||
Advances to suppliers | 782,817 | 1,351,157 | |||||
Prepayment for purchase of property and equipment | 2,246 | 13,570 | |||||
Advances to logistic service providers | 14,566 | 9,938 | |||||
Utility deposits | - | 7,335 | |||||
Prepaid expenses | 11,526 | - | |||||
Others | 472 | - | |||||
$ | 1,244,275 | $ | 2,716,237 |
The standard credit period of | ||
September 30, 2010 | December 31, 2009 | ||||||
Due from former sole stockholder and his affiliates | $ | 2,264,074 | $ | 2,948,905 | |||
Loan due from third parties | - | 195,111 | |||||
Due from employees | 949,242 | 655,238 | |||||
Due from third parties | 529,309 | - | |||||
Others | - | 3,104 | |||||
$ | 3,742,625 | $ | 3,802,358 |
Amounts due from the former sole stockholder and his affiliates and amounts due from third parties are unsecured advances, interest free and without fixed terms of repayment and are for specific business purposes. Amounts due from employees are the amounts advanced for business transactions on behalf of the Company and will be reconciled on the completion of business transactions.
INCOME TAXES | ||
September 30, 2010 | December 31, 2009 | ||||||
VAT recoverable | $ | 11,225 | $ | 2,711 | |||
Individual income tax recoverable | - | 2,178 | |||||
Taxes recoverable | $ | 11,225 | $ | 4,889 |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010 | December 31, 2009 | |||||||
Due to former sole stockholder and his affiliates | $ | 4,223,561 | $ | - | ||||
Loans due to third parties and local province government | 823,350 | 1,350,146 | ||||||
Due to potential investors | - | 880,200 | ||||||
Due to employees | - | 18,015 | ||||||
Wages accruals | 109,126 | - | ||||||
Accruals | 7,675 | 49,754 | ||||||
Others | 43,368 | 953,572 | ||||||
$ | 5,207,080 | $ | 3,251,687 |
Amounts due to former sole stockholder and his affiliates and amounts due to third parties and local provincial government are unsecured, short term loans, interest free and without a fixed term of repayment and are for business purposes.
September 30, 2010 | December 31, 2009 | ||||||
Enterprise income tax payable | $ | 436,436 | $ | 1,290,966 | |||
City maintenance and construction levies payable | - | 7,157 | |||||
Individual income tax payable | 5,653 | - | |||||
Education levies payable | 2,294 | 8,792 | |||||
$ | 444,383 | $ | 1,306,915 |
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
| ||
The Company accounts for income taxes under the provisions of | ||
Provision for income taxes consist of taxes currently due plus deferred taxes. Since the Company had no operations within the United States there is no provision for US income taxes and there are no deferred tax amounts as of September 30, 2011 and December 31, 2010. |
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. |
F - 10
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
2.21 | INCOME TAXES (CONTINUED) | |
The provision for income tax is based on the results for the year as adjusted for items, which are | ||
Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. | ||
Topic ASC 740 also prescribes a more-likely-than-not threshold for financial statements recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Topic ASC 740 also provide guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense. | ||
2.22 | RELATED PARTIES | |
Parties are considered to be related to the company if the company has the ability, directly or indirectly, to control the party, or exercise significant influence over the party in making financial and operating decisions, or where the company and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities which are under the significant influence of related parties of the company. | ||
2.23 | PRODUCT WARRANTIES | |
Substantially all of the Company’s products are covered by a standard warranty of 1 to 2 years for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the software or products or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company | ||
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| ||
|
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| ||
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| ||
|
Three months ended | Three months ended | Nine months ended | Nine months ended | ||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | ||
Customer A | 20.23% | 81.63% | 31.91% | 56.84% | |
Customer B | 45.42% | - | 20.42% | 26.51% | |
Customer C | - | - | 18.11% | - | |
Customer D | - | - | 6.90% | - | |
Customer E | - | - | 6.84% | - | |
Customer F | - | - | - | 6.92% | |
Customer G | - | - | - | 3.52% | |
Customer H | - | - | - | 2.47% | |
Customer I | 17.19% | - | - | - | |
Customer J | 5.26% | - | - | - | |
Customer K | 4.57% | - | - | - | |
Customer L | - | 12.18% | - | - | |
Customer M | - | 4.81% | - | - | |
Customer N | - | 1.38% | - | - | |
92.67% | 100.00% | 84.18% | 96.26% |
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.24 |
|
September 30, 2010 | December 31, 2009 | ||||||
Customer A | 26.72% | - | |||||
Customer B | 26.38% | 31.00% | |||||
Customer C | 21.00% | 31.71% | |||||
Customer D | 10.09% | - | |||||
Customer E | 3.76% | 24.55% | |||||
Customer F | - | 5.83% | |||||
Customer G | - | 4.36% | |||||
87.95% | 97.45% |
WEIGHTED AVERAGE NUMBER OF SHARES | ||
On May 4, 2010, the Company entered into a |
F - 11
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
2.25 | CONCENTRATIONS OF CREDIT RISK | |
Cash includes demand deposits in accounts maintained at banks within the People’s Republic of China. Total cash in these banks as of September 30, 2011 and December 31, 2010 amounted to $3,348,408 and $2,088,297, 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. | ||
Accounts receivable are derived from revenue earned from customers located primarily in the People’s Republic of China. We perform ongoing credit evaluations of customers and have not experienced any material losses to date. | ||
The Company had 5 major customers whose revenue individually represented the following percentages of the Company’s total revenue: |
Three months ended | Three months ended | Nine months ended | Nine months ended | ||||||||||
September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | ||||||||||
Customer A | 65.53% | - | 37.92% | - | |||||||||
Customer B | 17.77% | 20.23% | 32.90% | 31.91% | |||||||||
Customer C | 11.07% | - | 13.03% | - | |||||||||
Customer D | 4.88% | - | 6.85% | - | |||||||||
Customer E | 0.75% | - | 3.55% | - | |||||||||
Customer F | - | 45.42% | - | 20.42% | |||||||||
Customer G | - | - | - | 18.11% | |||||||||
Customer H | - | - | - | 6.90% | |||||||||
Customer I | - | - | - | 6.84% | |||||||||
Customer J | - | 17.19% | - | - | |||||||||
Customer K | - | 5.26% | - | - | |||||||||
Customer L | - | 4.57% | - | - | |||||||||
100.00% | 92.67% | 94.25% | 84.18% |
F - 12
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
2.25 | CONCENTRATIONS OF CREDIT RISK (CONTINUED) | |
The company had 5 major customers whose accounts receivable balance individually represented of the Company’s total accounts receivable as follows: |
September 30, 2011 | December 31, 2010 | ||||||
Customer A | 30.88% | - | |||||
Customer B | 21.41% | 31.46% | |||||
Customer C | 12.24% | - | |||||
Customer D | 7.45% | 16.73% | |||||
Customer E | 6.44% | 12.57% | |||||
Customer E | - | 9.89% | |||||
Customer F | - | 7.82% | |||||
78.42% | 78.47% |
2.26 | EARNINGS PER SHARE | |
As prescribed in ASC Topic 260 “Earning per Share”, | ||
For the three months ended September 30, | ||
2.27 | FAIR VALUE OF FINANCIAL INSTRUMENTS | |
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below: | ||
Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date. | ||
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting. | ||
Level 3 Pricing inputs that are generally observable inputs and not corroborated by market data. |
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) | |
2.27 | FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) | |
The carrying amounts of the Company’s financial assets and liabilities, such as cash and accrued expenses, approximate their fair values because of the short maturity of these instruments. | ||
The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value as of September 30, 2011 or December 31, 2010, nor gains or losses are reported in the statement of income and comprehensive income that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the fiscal periods ended September 30, 2011 or 2010. | ||
2.28 | STOCK-BASED COMPENSATION | |
The Company adopted ASC Topic 718, “Compensation – Stock Compensation” and ASC Topic 505-50 “Equity – Based Payments to Non-Employees” using the fair value method. Under ASC Topic 718 and ASC Topic 505-50, stock compensation expenses is measured at the grant date on the value of the option or restricted stock and is recognized as expenses, less expected forfeitures, over the requisite service period, which is generally the vesting period. | ||
On June 15, 2010, the Company issued, a warrant to purchase 80,000 shares at a price of $2.00 per share. The warrant vests in four equal installments on June 30th, September 30th, December 31st2010 and March 31stof 2011. In the event that the agreement is terminated prior to the vesting date, such portion of the warrant shall not vest and the holder of the warrant shall not be entitled to exercise such unvested portion of the warrant. The warrant expires on June 15, 2015. | ||
2.29 | RETIREMENT BENEFIT COSTS | |
PRC state managed retirement benefit programs are defined contribution programs and the payments to these programs are charged as expenses when employees have rendered service entitling them to the contribution. | ||
2.30 | ACCUMULATED OTHER COMPREHENSIVE INCOME | |
ASC Topic 220 “Comprehensive Income”establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments. |
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS | |
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20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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In April | |
In |
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. | RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) |
In June 2011, the FASB issued ASU No. 2011-05,Presentation of Comprehensive Income(ASU 2011-05), intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB. The amendments require that all non-owner changes in stockholders’ equity be presented in a |
4. | INCOME TAXES |
| |
No Hong Kong corporate income tax has been provided in the financial statements, as | |
Beginning January 1, 2008, the new Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic Enterprises (“DEs”) and Foreign Invested Enterprises (“FIEs”). The new standard EIT rate of 25% replaced the 33% rate currently applicable to both DEs and FIEs. The Company is currently evaluating the impact that the new EIT will have on its financial condition. Beginning January 1, 2008, China unified the corporate income tax rule on foreign invested enterprises and domestic enterprises. The unified corporate income tax rate is 25%. | |
Provision for income tax of the | |
The | |
The following table reconciles the U.S statutory rates to the |
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
$ | ||||
U.S. Statutory rates | % | |||
Foreign income not recognized in USA | ||||
Hong Kong profits tax | 16.5 | % | ||
Offshore income not recognized in Hong Kong | (16.5) | % | ||
China Enterprise income taxe rate for high technology | % | |||
15 | % |
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | INCOME TAXES (CONTINUED) |
Provision for income taxes is as follows: |
Three months ended | Three months ended | Nine months ended | Nine months ended | ||||||||||
September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | ||||||||||
Income tax | |||||||||||||
HGHN - US corporate tax | $ | - | $ | - | $ | - | $ | - | |||||
TECT - Hong Kong profits tax | - | - | - | - | |||||||||
ATEC - China EIT | 257,753 | 151,535 | 339,043 | 538,396 | |||||||||
ZTEC and STT - China EIT | - | - | - | - | |||||||||
Deferred tax | - | - | - | - | |||||||||
$ | 257,753 | $ | 151,535 | $ | 339,043 | $ | 538,396 |
5. | CASH AND CASH EQUIVALENTS |
September 30, 2011 | December 31, 2010 | ||||||
Cash and bank balances | $ | 3,375,312 | $ | 2,526,710 |
6. | RESTRICTED CASH |
The Company’s restricted cash consists of bank time deposits in the bank as security deposits for the completion of certain projects of the company. The Company is required to keep certain amounts on deposit that are subject to withdrawal restrictions. Restricted cash amounted to $69,291 and $1,164,598 as of September 30, 2011 and December 31, 2010, respectively. |
Provision
7. | ACCOUNTS RECEIVABLE |
The Company has performed an analysis on all of its accounts receivable and determined that all amounts are probable of collection within one year. As such, all trade receivables are reflected as a current asset and no additional allowance for doubtful debt has been recorded for the three months and the nine months ended September 30, 2011 and 2010. Bad debts written off for the three months and nine months ended September 30, 2011 and 2010 were $0. | |
Aging of accounts receivable is as follows: |
September 30, 2011 | December 31, 2010 | ||||||
within 3 month | $ | 11,792,292 | $ | 13,658,262 | |||
over 3 months and within 6 months | 4,348,792 | 356,438 | |||||
over 6 months and within 1 year | 3,997,459 | 343,298 | |||||
over 1 year | 111,242 | 68,354 | |||||
20,249,785 | 14,426,352 | ||||||
Less: Allowance for doubtful accounts | (70,000) | (70,000) | |||||
$ | 20,179,785 | $ | 14,356,352 |
Accounts receivable includes the amounts of $8,911,822 (12.31.2010: $3,151,959) that were factored to the Industrial and Commercial Bank, PRC and China Construction Bank, PRC for income taxes is as follows:collection.
Three months ended | Three months ended | Nine months ended | Nine months ended | ||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | ||||||||||
Income tax | |||||||||||||
TEC - Hong Kong profits tax | $ | - | $ | - | $ | - | $ | - | |||||
ATEC - China EIT | 151,535 | 450,585 | 538,396 | 847,396 | |||||||||
ZTEC and STD - China EIT | - | - | - | - | |||||||||
Deferred tax | - | - | - | - | |||||||||
$ | 151,535 | $ | 450,585 | $ | 538,396 | $ | 847,396 |
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. | INVENTORY |
Inventory consists of the followings: |
September 30, 2011 | December 31, 2010 | ||||||
Raw materials | $ | 3,626,144 | $ | 2,590,642 | |||
Consumables | 237,475 | - | |||||
Work in progress | 2,249,396 | 2,644,432 | |||||
$ | 6,113,015 | $ | 5,235,074 |
9. | DEPOSITS AND PREPAID EXPENSES |
| September 30, 2011 | December 31, 2010 | |||||
Guarantee and utility deposits | $ | 1,410,970 | $ | 828,170 | |||
Deposit for acquistion of land use rights | - | 518,753 | |||||
Land levelling, design fees and stamp duty prepaid expenses | 494,685 | 3,110,145 | |||||
Prepaid expenses | 514,101 | 91,091 | |||||
Advances to suppliers and services providers | 1,313,279 | 874,436 | |||||
Prepayment for purchase of property and equipment | 20,025 | 2,269 | |||||
Advances to logistic service providers | 339,128 | 14,715 | |||||
$ | 4,092,188 | $ | 5,439,579 |
Guarantee deposits are provided to financial institutions in return for issuance of a corporate guarantee to financiers. Advances to suppliers are down payments or deposits for inventory purchases. The inventory and services are normally delivered and rendered within one to two months after the payments. ZTEC acquired land use rights for new land in the PRC and paid deposits for the acquisition of land use rights, ZTEC also prepaid land leveling, design fees and stamp duty fees. | |
10. | OTHER RECEIVABLES |
September 30, 2011 | December 31, 2010 | ||||||
Due from employees | $ | 1,401,277 | $ | 963,416 | |||
Due from third parties | 1,401,153 | 661,156 | |||||
Others | 1,467 | 1,467 | |||||
$ | 2,803,897 | $ | 1,626,039 |
Due from employees are the amounts advanced for business transactions on behalf of the Company and will be reconciled on the completion of the business transactions. Due from third parties are unsecured advances, interest free and without fixed terms of repayment and are for specific business purposes. |
F - 21
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. | TAXES RECOVERABLE |
September 30, 2011 | December 31, 2010 | ||||||
VAT recoverable | $ | 17,391 | $ | 2,389 |
12. | PROPERTY AND EQUIPMENT |
September 30, 2011 | December 31, 2010 | ||||||
Buildings | $ | 2,669,359 | $ | 2,584,596 | |||
Plant and machinery | 1,493,790 | 1,351,729 | |||||
Furniture, fixtures and office equipment | 151,558 | 123,716 | |||||
Motor vehicles | 417,102 | 294,812 | |||||
4,731,809 | 4,354,853 | ||||||
Less: Accumulated depreciation | (845,996 | ) | (564,088 | ) | |||
Net book value | $ | 3,885,813 | $ | 3,790,765 |
Depreciation expense was $91,613 and $77,164 for the three months ended September 30, 2011 and 2010, respectively. Depreciation expense was $259,193 and $207,350 for the nine months ended September 30, 2011 and 2010, respectively. | |
13. | LAND USE RIGHTS |
Private ownership of land is not permitted in the PRC. The Company has acquired the land use rights to three parcels located at Xinqiao Industrial Park, Jingde Country, Anhui Province. The total cost of these land use rights of ATEC was $2,112,867 and the land use rights will expire in 2056, 2058 and 2058, respectively. The Company has acquired the land use right to an additional parcel located at Songxi Village, Xindeng Town, Fuyang City, Hangzhou City, Zhejiang Province. The total cost of these land use rights of ZTEC was $5,781,780 and the land use right will expire in 2061. |
September 30, 2011 | December 31, 2010 | ||||||
Cost | $ | 8,200,846 | $ | 2,178,255 | |||
Less: Accumulated amortization | (143,722 | ) | (106,484 | ) | |||
Net book value | $ | 8,057,124 | $ | 2,071,771 |
Land use rights are amortized on the straight line basis over their respective lease periods. The lease period of land use rights located in an industrial park zone is 50 years. | |
Amortization expense was $11,068 and $10,593 for the three months ended September 30, 2011 and 2010, respectively. Amortization expense was $33,745 and $31,779 for the nine months ended September 30, 2011 and 2010, respectively. |
F - 21
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. | CONSTRUCTION IN PROGRESS |
September 30, 2011 | December 31, 2010 | ||||||
Construction of office building and workshops | $ | 2,258,450 | $ | 473,355 |
15. | OTHER PAYABLES AND ACCRUED EXPENSES |
September 30, 2011 | December 31, 2010 | ||||||
Due to former sole stockholder and his affiliates | $ | 2,319,114 | $ | 2,789,568 | |||
Due to third parties | 1,088,772 | 603,824 | |||||
Due to construction material and building service providers | 542,548 | - | |||||
Due to employees | 178,168 | 8,359 | |||||
Accrued expenses | 555,153 | 92,607 | |||||
$ | 4,683,755 | $ | 3,494,358 |
Due to former sole stockholder and his affiliates, due to third parties and employees are unsecured, interest free and without a fixed term of repayment and are for unspecific business purposes. | |
16. | TAXES PAYABLE |
September 30, 2011 | December 31, 2010 | ||||||
Enterprise income tax payable | $ | 253,548 | $ | 42,557 | |||
VAT payable | 163,984 | - | |||||
Individual income tax payable | 3,230 | 2,051 | |||||
$ | 420,762 | $ | 44,608 |
F - 21
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. | SHORT TERM BORROWINGS |
There are no provisions in the Company’s bank borrowings that would accelerate repayment of debt as a result of a change in credit |
| Interest rate | Maturity date | September 30, 2011 | December 31, 2010 | ||||||||||
Industrial and Commercial Bank, Longshou Branch, PRC | 6.06% - 6.71% | From December 15, 2011 to March 23, 2012 | $ | 3,905,000 | *^ | $ | 3,864,182 | |||||||
China Merchant Bank, Heifei branch, PRC | 6.94% | October 29, 2011 | 1,562,000 | + | 1,512,400 | |||||||||
China Merchant Bank, Heifei branch, PRC | 5.56% | November 22, 2011 | - | 4,537,200 | ||||||||||
China Merchant Bank, Heifei branch, PRC | 7.32% | February 10, 2012 | 2,343,000 | ^ | - | |||||||||
China Everbright Bank, Heifei branch, PRC | 5.56% | November 22, 2011 | 4,686,000 | + | - | |||||||||
Huishang Bank, Xuancheng branch, PRC | 7.88% | February 16, 2011 | - | 3,024,800 | ||||||||||
Huishang Bank, Xuancheng branch, PRC | 7.88% | February 16, 2012 | 2,030,600 | * | - | |||||||||
Huishang Bank, Xuancheng branch, PRC | 8.20% | April 11, 2012 | 4,686,000 | * | - | |||||||||
Huishang Bank, Xuancheng branch, PRC | 8.53% | August 5, 2012 | 1,093,400 | * | - | |||||||||
China Construction Bank, Jingde branch, PRC | 5.85% | November 3, 2011 | 2,382,325 | ^ | - | |||||||||
China Construction Bank, Jingde branch, PRC | 6.10% | January 8, 2012 | 740,388 | ^ | - | |||||||||
| $ | 23,428,713 | $ | 12,938,582 |
* secured by land use rights
September 30, 2010 | December 31, 2009 | ||||||
Loan from Industrial and Commercial Bank, Jingde Country Branch, PRC | $ | 4,124,235 | $ | 4,041,585 | |||
Interest rate 7.47% per annum with personal guarantees of Messr. ChunLu and YiPing Zhu | |||||||
Huishang Bank, Hefei branch, PRC | - | 2,200,500 | |||||
China Merchant Bank, Heifei branch, PRC | - | 1,173,600 | |||||
China Everbright Bank, Heifei branch, PRC | 4,491,000 | 4,401,000 | |||||
Interest rate 5.31% per annum with corporate and personal guarantees of Zhongrung Trust Investment Co Ltd and Messr. ChunLu andYiPing Zhu | |||||||
Huishang Bank, Xuancheng branch, PRC | 2,994,000 | 682,304 | |||||
The Economic Standing Committee of Jinde Country, PRC | - | 234,720 | |||||
$ | 11,609,235 | $ | 12,733,709 |
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS+ secured by third party’s guarantee
^ secured by accounts receivable
CUSTOMER DEPOSITS | |
Customer deposits represent amounts advanced by customers for orders of product. The products normally are shipped within three months after receipt of the advance payment and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of September 30, 2011 and December 31, 2010, customer deposits amounted to $1,140,085 and $80,331, respectively. | |
19. | COMMON STOCK |
The Company has authorized Preferred | |
The Company has authorized common stock of 300,000,000 shares with a par value of $0.001. | |
On May 4, 2010, the Company issued 19,194,421 shares of common stock to the sole shareholder of TECT in exchange for 10,000 shares of TECT, which was all the issued and outstanding capital stock of TECT. | |
As a result of the reverse merger, the equity account of the Company, prior to the share exchange date, has been retroactively restated so that the ending outstanding share balance as of the share exchange date is equal to the number of post share-exchange shares. | |
As of each of September 30, 2011, and December 31, 2010, the Company had outstanding 30,181,552 shares of issued common stock, with a par value of $0.001 per share. |
F - 21
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. | COMMITMENTS AND CONTINGENCIES |
Total lease expenses for the three months ended September 30, 2011 and 2010 was $20,140 and | |
The future minimum lease payments as of September 30, | |
From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. As of September 30, | |
The Company has entered into two separate agreements that would require the Company to pay liquidated damages if the Company failed to perform under the agreements. The amount of the potential damages is listed below: |
September 30, 2011 | December 31, 2010 | ||||||
Liquidated damages for | |||||||
- investment relation service with CCG | $ | 90,000 | $ | 90,000 |
21. | STOCK OPTIONS & WARRANTS |
The Company accounts for its stock options and warrants in accordance with ASC Topic 718, “Compensation – Stock Compensation” and ASC Topic 505-50 “Equity – Based Payments to Non-Employees” which were adopted by the Company on June 15, 2010. The company issued a warrant to CCG Investor Relations Partners LLC (“CCG”), an investor relations firm, for the purchase of 80,000 shares of the Company’s common stock at an exercise price of $2.00 per share. The warrant vested in four equal installations on June 30 , September 30, December 31 of 2010 and March 31, 2011. The warrant will expire on June 15, 2015. | |
The Company determines the estimated fair value of share-based awards using the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company’s stock price as well as by assumptions regarding certain complex and subjective variables. These variables include, but are not limited to; the Company’s expected stock price volatility over the term of the awards and the actual and projected option exercise behaviors. The Company calculated a stock based compensation of $93,800 and recognized $93,800 in stock based compensation expense for the nine months ended September 30, 2011. As of September 30, 2011 and December 31, 2010, the prepaid compensation expense amount was $0 and $31,600, respectively. | |
The initial value of the warrants was determined using the Black-Scholes model using the following assumptions: |
. | Expected volatility of 125% | |
. | Risk-free interest rate of 3% | |
. | Year to maturity of 5 years | |
. | Market price at issuance date of $3.50 | |
. | Strike price of $2.00 |
The value of the warrants was based on the Company’s common stock price of $3.50 on the date the warrants were issued. The warrants were valued at $186,000 when they vested in four equal installations on June 30 , September 30, December 31 of 2010 and March 31, 2011. |
F - 24
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. | STOCK OPTIONS & WARRANTS (CONTINUED) |
Number of shares | ||||||||||
entitled to purchase | Exercise Price | Expiration date | ||||||||
Issued on June 15, 2010 | 80,000 | $ | 2.00 | June 15, 2015 | ||||||
Balance as of September 30, 2011 | 80,000 | $ | 2.00 | |||||||
Warrants exercised | - | 2.00 | ||||||||
Warrants expired | - | 2.00 | ||||||||
Total outstanding as of September 30, 2011 | 80,000 | 2.00 | June 15, 2015 |
Utilizing the Black Scholes option-pricing model, the share based compensation expense for the three months ended September 30, 2011 and 2010; the amounts were $0 and $0, respectively. The share based compensation expense for the nine months ended September 30, 2011 and 2010 were $93,800 and $0, respectively. | |
22. | OBLIGATION UNDER MATERIAL CONTRACTS |
CCG was issued a warrant to purchase up to 80,000 shares of the Company’s stock, at a price of $2.00 per share, pursuant to the terms and conditions of a letter agreement, dated June 20, 2010, between the Company and CCG. CCG's right to exercise its warrant will vest in four equal portions, with the first portion vesting on June 20, 2010, and the remaining portions vesting on September 30, 2010, December 31, 2010 and March 31, 2011, respectively. The warrant has a term of 5 years and will expire on June 15, 2015. The warrant contains a $90,000 liquidated damage provision for breach of such exclusivity. As of September 30, 2011 and December 31, 2010, CCG had not exercised the warrant. | |
23. | PRODUCT LINE INFORMATION |
The Company sells towers, which are used by customers in various industries. The production process, class of customer, selling practice and distribution process are the same for all towers. The Company’s chief operating decision-makers (i.e. chief executive officer and |
Three months ended | Three months ended | Nine months ended | Nine months ended | ||||||||||
September 30, 2010 | September 30, 2009 | September 30, 2010 | September 30, 2009 | ||||||||||
Domestic sales | |||||||||||||
Communication towers | $ | 1,550,889 | $ | 5,576,419 | $ | 8,628,648 | $ | 7,888,561 | |||||
Electricity supply towers | 4,882,728 | 360,203 | 11,808,089 | 4,315,236 | |||||||||
Export sales | |||||||||||||
Communication towers | 814,393 | 30,766 | 1,050,491 | 30,766 | |||||||||
Electricity supply towers | 37,605 | 769,241 | 405,366 | 909,586 | |||||||||
$ | 7,285,615 | $ | 6,736,629 | $ | 21,892,594 | $ | 13,144,149 |
Three months ended | Three months ended | Nine months ended | Nine months ended | ||||||||||
September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | ||||||||||
Domestic sales | |||||||||||||
Communication towers | $ | 2,049,173 | $ | 1,550,889 | $ | 6,887,140 | $ | 8,628,648 | |||||
Electricity supply towers | 1,827,445 | 4,882,728 | 4,457,273 | 11,808,089 | |||||||||
3,876,618 | 6,433,617 | 11,344,413 | 20,436,737 | ||||||||||
Export sales | |||||||||||||
Communication towers | 17,647 | 814,393 | 734,349 | 1,050,491 | |||||||||
Electricity supply towers | 7,416,327 | 37,605 | 7,418,371 | 405,366 | |||||||||
7,433,974 | 851,998 | 8,152,720 | 1,455,857 | ||||||||||
Technical service income | 54,056 | - | 62,659 | - | |||||||||
$ | 11,364,648 | $ | 7,285,615 | $ | 19,559,792 | $ | 21,892,594 |
F - 24
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RELATED PARTIES TRANSACTIONS | |
| |
In addition to the transactions and balances as disclosed elsewhere in these consolidated financial statements, | |
| |
|
24
Name of related party | Nature of transactions | |
Mr. Chun Lu, CEO, Chairman and his affiliates | Included in other payable, due to former stockholder and its affiliates were $2,319,114 and $2,789,568 as of September 30, 2011 and December 31, 2010, respectively. The amounts are unsecured, interest free and have no fixed term of repayment. |
F - 25
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS. |
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains forward-looking statements contained herein include “forward-looking statements” within the meaning of such term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” in our Current Report on Form 8-K, filed with the SEC on May 10, 2010. In some cases, you can identify forward-looking statements by termsWe use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,“anticipate,” “may,“project,” “target,” “plan,” “potential,“optimistic,” “predict,“intend,” “project,“aim,” “should,” “will,” “would” and“will” or similar expressions which are intended to identify forward-looking statements. Forward-lookingSuch statements reflect our current views with respect toinclude, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future eventsoperations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and are based on assumptions and subject toinvolve risks and uncertainties. Given these uncertainties, you should not place undue relianceincluding those identified in Item 1A “Risk Factors” included in our Annual Report on theseForm 10-K for the year ended December 31, 2010, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.
Also,Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements represent our estimates and assumptionsmade in this report speak only as of the date hereof. Excepthereof and we disclaim any obligation, except as required by law, we assume no obligation to updateprovide updates, revisions or amendments to any forward-looking statements publicly,to reflect changes in our expectations or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.future events.
Use of Terms
Except aswhere the context otherwise indicated by the contextrequires and for the purposes of this report only, references in this report to:only:
“we,the “Company,” “we,” “us,” “our,” “our Company,” or “the Company” areand “our” refer to the combined business of TEC Technology, Inc. (formerly Highland Ridge, Inc.), a Delaware corporation, and its consolidated subsidiaries, – TEC HK, TEC Tower, ShunchengZTEC and ZTEC;STT;
“TEC” areTEC HK” refers to our subsidiary TEC Technology Limited, a Hong Kong limited company;
“TEC Tower” arerefers to our subsidiary Anhui TEC Tower Co., Ltd., a PRC limited company;
“Shuncheng” areZTEC” refers to our subsidiaryZhejiang TEC Tower Co., Ltd., a PRC limited company;
“STT” refers to Shuncheng Taida Technology Co., Ltd., a PRC limited company;
“ZTEC” are to our subsidiary Zhejiang TEC Tower Co., Ltd., a PRC limited company;
“Hong Kong” arerefers to the Hong Kong Special Administrative Region of the People’s Republic of China;
“PRC,” “China,”PRC” and “Chinese,” are“China” refer to the People’s Republic of China;
“SEC” refers to the Securities and Exchange Commission;
“Exchange Act” refers the Securities Exchange Act of 1934, as amended;
“Securities Act” refers to the Securities Act of 1933, as amended;
“Renminbi” and “RMB” arerefer to the legal currency of China; and
“U.S. dollars,” “dollars” and “$” arerefer to the legal currency of the United States;
“SEC” are to the Securities and Exchange Commission;
“Securities Act” are to the Securities Act of 1933, as amended; and
Overview of our Business
Through our indirect Chinese subsidiary, TEC Tower, weWe are primarily engaged in the design, production and sale of transmission towers and related products used in high voltage electric power transmission and wireless communications. We sell our tower products to prime contractors on large transmission projects for electric utility companies or telecommunications service providers, who are developing and constructing projects for end customers. Our electric transmission towers currently support 35kv, 110kv, 220kv, and 500kv transmission lines and we plan to build towers that support Ultra High Voltage (UHV) tower lines of 750+kv DC or 1000+kv AC transmission lines. Our wireless communication towers include single-tube towers, 4-strut towers and roof top towers for the 2G, 3G, and microwave market. We plan to expand our business in the near future to enter the communication base station system integration market and to offer tower installation and maintenance services. Our towers are primarily made of steel, but some contain aluminum or other alloy materials.
252
Our revenues currently are, and historically have been, generated from the sale of our tower products. In the future, we expect to offer installation and maintenancetechnical services that we believe will generate an additional revenue stream,stream; however, to date we have not yet generated no material revenues from such services.
Our headquarters are located in Anhui Province in southeastern China and our international sales network is primarily operated from our branch officeoffices in the Shenzhen Special Economic Zone.Zone and Beijing.
Overview of Quarterly ResultsThird Quarter Financial Performance Highlights
The following summarizes certain key financial information for the third quarter.quarter of 2011:
RevenueRevenues: Revenue was $7.29Revenues were $11.36 million for the three months ended September 30, 2010,2011, an increase of $0.55$4.07 million, or 8.1%55.83%, from $6.74$7.29 million for the same period last year.
Gross Profit and Margin: Gross profit was $1.93$2.94 million for the three months ended September 30, 2010, a decrease2011, an increase of $0.15$1.01 million, or 7.3%52.33%, from $2.08$1.93 million for the same period last year. Gross margin was 26.5%25.92% for the three months ended September 30, 20102011, as compared to 30.9%26.49% for the same period last year, a 4.4% drop.year.
Net Income:Net income was $0.86$1.36 million for the three months ended September 30, 2010, a decrease2011, an increase of $0.43$0.50 million, or approximately 33.7%58.14%, from $1.29$0.86 million for the same period of last year.
Fully diluted net income per share: Fully diluted net income per share for the three months ended September 30, 20102011 was approximately $0.03, based on 25,298,383 weighted average number of common shares outstanding,$0.05, as compared to approximately $0.07$0.03 for the same period last year, based on 19,194,421 weighted average number of common shares outstanding.year.
Results of Operations
Comparison of Three Months Ended September 30, 20102011 and September 30, 20092010
The following table shows key components of our results of operations during the three months ended September 30, 20102011 and 2009,2010, in both dollars and as a percentage of our total sales.revenues.
Three Months Ended | Three Months Ended | |||||||||||
September 30, 2010 (unaudited) | September 30, 2009 (unaudited) | |||||||||||
Dollars | Percent of | Dollars | Percent of | |||||||||
(in millions) | Revenues | (in millions) | Revenues | |||||||||
Revenues | $ | 7.29 | 100.0% | $ | 6.74 | 100.0% | ||||||
Cost of goods sold | 5.36 | 73.5% | 4.66 | 69.1% | ||||||||
Gross profit | 1.93 | 26.5% | 2.08 | 30.9% | ||||||||
Selling and marketing expenses | (0.34 | ) | (4.6% | ) | (0.03 | ) | (0.5% | ) | ||||
General and administrative expenses | (0.29 | ) | (4.0% | ) | (0.22 | ) | (3.3% | ) | ||||
Net income from operations | 1.30 | 17.8% | 1.83 | 27.1% | ||||||||
Other income (expenses) | ||||||||||||
Government grant | 0.01 | 0.1% | 0.04 | 0.7% | ||||||||
Other income | 0.00 | 0.0% | 0.01 | 0.2% | ||||||||
Interest expense | (0.30 | ) | (4.1% | ) | (0.14 | ) | (2.0% | ) | ||||
Net other income (expenses) | (0.29 | ) | (4.0% | ) | (0.08 | ) | (1.2% | ) | ||||
Net income before provision for income taxes | 1.01 | 13.9% | 1.75 | 25.9% | ||||||||
Provision for income taxes | (0.15 | ) | (2.1% | ) | (0.45 | ) | (6.7% | ) | ||||
Net income | 0.86 | 11.8% | 1.29 | 19.2% | ||||||||
Foreign currency translation adjustment | 0.01 | 0.2% | (0.04 | ) | (0.6% | ) |
26
| Three Months Ended | Three Months Ended | ||||||||||
| September 30, 2011 | September 30, 2010 | ||||||||||
| Percent of | Percent of | ||||||||||
| Dollars | Revenues | Dollars | Revenues | ||||||||
Revenues | $ | 11,364,648 | 100.00% | $ | 7,285,615 | 100.00% | ||||||
Cost of good sold | 8,418,882 | 74.08% | 5,355,307 | 73.51% | ||||||||
Gross profit | 2,945,766 | 25.92% | 1,930,308 | 26.49% | ||||||||
Selling and marketing expenses | (438,939 | ) | (3.86% | ) | (337,423 | ) | (4.63% | ) | ||||
General and administrative expenses | (378,165 | ) | (3.33% | ) | (293,389 | ) | (4.03% | ) | ||||
Net income from operations | 2,128,662 | 18.73% | 1,299,496 | 17.84% | ||||||||
Other income (expenses) | ||||||||||||
Government grant | 1,421 | 0.01% | 10,798 | 0.15% | ||||||||
Other income | 2,123 | 0.02% | - | - | ||||||||
Interest expense | (465,391 | ) | (4.09% | ) | (299,865 | ) | (4.12% | ) | ||||
Net other income (expenses) | (461,847 | ) | (4.06% | ) | (289,067 | ) | (3.97% | ) | ||||
Net income before provision for income taxes | 1,666,815 | 14.67% | 1,010,429 | 13.87% | ||||||||
Provision for income taxes | (257,753 | ) | (2.71% | ) | (151,535 | ) | (2.08% | ) | ||||
Net income | 1,409,062 | 11.96% | 858,894 | 11.79% | ||||||||
Foreign currency translation gain | 151,543 | 1.33% | 12,462 | 0.17% | ||||||||
Comprehensive income | $ | 1,560,605 | 13.29% | $ | 871,356 | 11.96% |
Revenues. Our revenues are mainly generated from sales of our tower products..products. Our revenues increased $0.55$4.08 million, or 8.1%55.96%, to $7.29$11.36 million for the three months ended September 30, 20102011 from $6.74$7.29 million during the same period in 2009.2010. For the three month period ended September 30, 2010, 68%2011, approximately 81.34% of revenue cameour revenues were generated from sales to customers in the energy industry and 32%approximately 18.19% were generated from sales to communications industry customers. The year-over-yearperiod-over-period increase in revenuerevenues resulted mainly from an increase by 498%of approximately 87.87% in sales revenuerevenues generated by sales of energy transmission towers as compared to the same period in 2009,2010 which more than offset a decrease of 61%approximately 18.79% in sales revenuerevenues generated by sales of communications towerstowers. In this quarter, we benefited from our strategic efforts in expanding international markets as well as a modest decrease in our per unit pricing.generated approximately $7.4 million from overseas orders for energy transmission towers.
3
Cost of goods sold. Our cost of goods sold includes the direct costs of our raw materials, primarily steel, as well as the cost of labor and overhead. Our cost of goods sold increased $0.70$1.01 million, or 15.0%18.88%, to $5.36$8.42 million in the three months ended September 30, 2010,2011, from $4.66$5.36 million during the same period in 2009. The2010. We believe the dollar increase resulted from higher raw material costsin cost of goods sold was generally in line with the increase in sales volume and increased sales volume.revenues. As a percentage of revenues, our cost of goods sold increased approximately 4.4%slightly to 73.5% for74.08% in the three months ended September 30, 20102011 from 69.1% during73.51% for the same period in 2009. Our raw material costs increased during the period outpacing the pricing increases on tower sales. Since the price of tower products is based on the cost-plus structure, we expect that the increase in the cost of raw materials will be passed onto customers in the future.last year.
Gross profit and gross margin. Our gross profit is equal to the difference between our revenue and our cost of goods sold. Our gross profit decreased $0.15increased $1.01 million, or 7.3%52.61%, to $1.93$2.94 million in the three months ended September 30, 2010,2011, from $2.08$1.93 million during the same period in 2009.2010. The dollar increase was mainly due to the increase of sales volume and revenues. Gross profit as a percentage of revenue (gross margin) was 26.5%25.92% and 30.9%26.49% for three months ended September 30, 2011 and 2010, and 2009, respectively. Gross profit decreased mainlyAlthough our overseas orders generally had higher gross margins, gross margins for our domestic orders remained constrained due to increased costcontinuing increases of goods soldsteel prices, which is our primary raw material, and a decrease in per unit price of our tower products from the same period last year.market competition.
Selling and marketing expenses. Our selling and marketing expenses consist primarily of compensation and benefits to our sales and marketing staff, sales commission, cost of advertising, promotion, business travel, after-sale support, transportation costs and other sales related costs. InOur selling and marketing expenses increased $0.10 million, or 30.09%, to $0.44 million in the three months ended September 30, 2010, our selling and marketing expenses rose to2011, from $0.34 million from $0.03 million during the same period in 2009. The2010. Such increase in costs was largely attributable to compensationincreased sales volume and related start up costs associated with the establishment and expansion of our sales team in Shenzhen targeting international emerging markets.continuing marketing efforts.
General and administrative expenses. General and administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional advisor fees, bad debts reserve and other expenses incurred in connection with general operations. In the three months ended September 30, 2010, ourOur general and administrationadministrative expenses rose to $0.29increased $0.09 million, or 30.7%, from $0.22 million during the same period in 2009. The increase in costs was attributable to increased professional fees associated with our public reporting company status.
Interest expense.Interest expense increased $0.16 million, to $0.30 million, or 119%, for the three months ended September 30, 2010, from $0.14 million during the same period in 2009, mainly because our outstanding borrowings in third quarter of 2010 were higher than in the same period of 2009. In addition, interest expense during the third quarter of 2010 also included the costs of loan guarantees given by us for the benefit of third parties.
Income before Income Taxes. Our income before income taxes decreased by $0.74 million, or 42.1%31.03%, to $1.01$0.38 million in the three months ended September 30, 2010,2011, from $1.75$0.29 million during the same period in 2009.2010. Such increase was mainly attributable to increased labor costs.
Interest expense.Interest expense increased $0.16 million, or 55.33%, to $0.46 million for the three months ended September 30, 2011, from $0.30 million during the same period in 2010. Such increase was mainly due to the increase in our outstanding short term loans and annual interest rate.
Income Taxesbefore income taxes. Our income before income taxes increased $0.66 million, or 64.96%, to $1.67 million for the three months ended September 30, 2011, from $1.01 million during the same period in 2010, as a result of the factors described above.
Provision for income taxes. Our income tax provisions decreased by $0.30increased $0.16 million, or 66.4%106.67%, to $0.26 million for the three months ended September 30, 2011, from $0.15 million during the same period in 2010, mainly due to increase in taxable income.
Net income. We generated a net income of $1.41 million in the three months ended September 30, 2010,2011, an increase of $0.55 million, or 63.95%, from $0.45$0.86 million during the same period in 2009. Since January 2010, TEC has qualified as a government recognized high-tech enterprise and has since been enjoying a tax rate reduction from 25% to 15%.cumulative effect of all factors discussed above.
Net Income. In the three months ended September 30, 2010, our net income was $0.86 million, a decrease of $0.43 million, or 33.7%, from $1.29 million during the same period in 2009. This decrease was primarily attributable to a combination of higher cost of goods sold and increased expenses from selling and marketing to international emerging markets.
27
Comparison of Nine Months Ended September 30, 20102011 and September 30, 20092010
The following table shows key components of our results of operations during the nine months ended September 30, 20102011 and 2009,2010, in both dollars and as a percentage of our total sales.revenues.
Nine Months Ended | Nine Months Ended | |||||||||||
September 30, 2010 (unaudited) | September 30, 2009 (unaudited) | |||||||||||
Dollars | Percent of | Dollars | Percent of | |||||||||
(in millions) | Revenues | (in millions) | Revenues | |||||||||
Revenues | $ | 21.89 | 100.0% | $ | 13.14 | 100.0% | ||||||
Cost of goods sold | 15.31 | 69.9% | 8.87 | 67.5% | ||||||||
Gross profit | 6.58 | 30.1% | 4.28 | 32.5% | ||||||||
Selling and marketing expenses | (1.13 | ) | (5.1% | ) | (0.13 | ) | (1.0% | ) | ||||
General and administrative expenses | (0.94 | ) | (4.3% | ) | (0.58 | ) | (4.4% | ) | ||||
Net income from operations | 4.51 | 20.6% | 3.57 | 27.2% | ||||||||
Other income (expenses) | ||||||||||||
Government grant | 0.19 | 0.9% | 0.11 | 0.8% | ||||||||
Other income | 0.01 | 0.1% | 0.04 | 0.3% | ||||||||
Interest expense | (0.98 | ) | (4.5% | ) | (0.39 | ) | (3.0% | ) | ||||
Net other income (expenses) | (0.78 | ) | (3.5% | ) | (0.24 | ) | (1.9% | ) | ||||
Net income before provision for income taxes | 3.74 | 17.1% | 3.33 | 25.3% | ||||||||
Provision for income taxes | (0.54 | ) | (2.5% | ) | (0.85 | ) | (6.4% | ) | ||||
Net income | 3.20 | 14.6% | 2.48 | 18.9% | ||||||||
Foreign currency translation adjustment | (0.18 | ) | (0.8% | ) | (0.06 | ) | (0.4% | ) | ||||
Comprehensive income | $ | 3.02 | 13.8% | $ | 2.42 | 18.4% |
4
| Nine Months Ended | Nine Months Ended | ||||||||||
| September 30, 2011 | September 30, 2010 | ||||||||||
| Percent of | Percent of | ||||||||||
| Dollars | Revenues | Dollars | Revenues | ||||||||
Revenues | $ | 19,559,792 | 100.00% | $ | 21,892,594 | 100.00% | ||||||
Cost of good sold | 14,203,143 | 72.61% | 15,313,202 | 69.95% | ||||||||
Gross profit | 5,356,649 | 27.39% | 6,579,392 | 30.05% | ||||||||
Selling and marketing expenses | (1,065,308 | ) | (5.45% | ) | (1,127,290 | ) | (5.15% | ) | ||||
General and administrative expenses | (1,271,357 | ) | (6.50% | ) | (938,337 | ) | (4.29% | ) | ||||
Net income from operations | 3,019,984 | 15.44% | 4,513,765 | 20.62% | ||||||||
Other income (expenses) | ||||||||||||
Government grant | 218,408 | 1.12% | 190,215 | 0.87% | ||||||||
Other income | 2,123 | 0.01% | 13,695 | 0.06% | ||||||||
Interest expense | (1,125,568 | ) | (5.75% | ) | (979,425 | ) | (4.47% | ) | ||||
Net other income (expenses) | (905,037 | ) | (4.62% | ) | (775,515 | ) | (3.54% | ) | ||||
Net income before provision for income taxes | 2,114,947 | 10.82% | 3,738,250 | 17.08% | ||||||||
Provision for income taxes | (339,043 | ) | (1.73% | ) | (538,396 | ) | (2.46% | ) | ||||
Net income | 1,775,904 | 9.09% | 3,199,854 | 14.62% | ||||||||
Foreign currency translation gain | 450,706 | 2.30% | (177,290 | ) | (0.81% | ) | ||||||
Comprehensive income | $ | 2,236,610 | 11.39% | $ | 3,022,564 | 13.81% |
Revenues. Our revenues increased $8.75decreased $2.33 million, or 66.6%10.64%, to $21.89$19.56 million for the nine months ended September 30, 20102011 from $13.14$21.89 million during the same period in 2009. Our revenue increased primarily because our sales volume increased. Approximately 56% of our revenue for2010. For the nine month period ended September 30, 2010 was from customers in the power and energy industries, with 44%2011, approximately 60.71% of our revenues were generated from sales to customers in the communications industry. Revenue from power and energy industry customers increasedand approximately 38.96% were generated from sales to communications industry customers. The decrease was mainly concentrated in the first half of 2011 and mostly resulted for lower sales volume. Revenues generated by 133% fromsales of energy transmission towers and sales of communications towers decreased approximately 2.76% and 21.26% as compared to the same period in 2009, communications towers by 21% largely due to increased sales volume during the 2010, period.respectively.
Cost of goods sold. Our cost of goods sold increased $6.44decreased $1.11 million, or 72.7%7.25%, to $15.31$14.20 million in the nine months ended September 30, 2010,2011, from $8.87$15.31 million during the same period in 2009.2010. The decrease in cost of goods sold was mainly due to the decrease in sales volume and revenues in the first two quarters of 2011. As a percentage of revenue,revenues, our cost of goods sold increased from 67.5%to 72.61% in the nine months ended September 30, 2009, to2011 from 69.9% duringfor the same period in 2010. The increase in cost of goods sold relative to revenue waslast year, mainly due to a downward shift inbecause the per unit price of products soldsteel increased. We are closely monitoring our pricing policy in an effort to customers inreduce the PRC power industry in the second quarter,risk of inflation and the inclusionfluctuations of labor and overhead costs for undelivered orders at the end of the third quarter.raw material prices.
Gross profit and gross margin. Our gross profit increased $2.30decreased $1.22 million, or 53.8%18.58%, to $6.58$5.36 million in the nine months ended September 30, 2010,2011, from $4.28$6.58 million during the same period in 2009.2010. The decrease was mainly due to the decrease of sales revenues in the first two quarters of 2011. Gross profit as a percentage of revenue (gross margin) was 30.1%27.39% and 32.5%30.1% for nine months ended September 30, 20102011 and 2009,2010, respectively. The increase in the gross profit resulted from increased sales to both PRC and international customers. The 2.4% reductiondecrease in gross margin resulted from a decrease inwas mainly due to the per unit pricingincreased price of our products in domestic market during the second quarter and an increase in raw material costs and labor and overhead costs for work-in-progress orders in the third quarter of 2010.steel as discussed above.
Selling and marketing expenses. In the nine months ended September 30, 2010, ourOur selling and marketing expenses rose to $1.13decreased $0.06 million, or 794%, from $0.13 million during the same period in 2009. The increase in costs was largely attributable to start up costs and compensation associated with the establishment and expansion of our sales team in Shenzhen.
General and administrative expenses. In the nine months ended September 30, 2010, our general and administration expenses rose to $0.94 million, or 61.4%, from $0.58 million during the same period in 2009. The increase in costs was attributable to business expansion and increased professional fees associated with our public reporting company status during the 2010 period.
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Interest expense.Interest expense increased $0.59 million, to $0.98 million, or 149.4%, in the nine months ended September 30, 2010, from $0.39 million during the same period in 2009, due to higher short-term loan balances for the nine months ended September 30, 2010 as compared to the same period in 2009.
Income before Income Taxes. Our income before income taxes increased by $0.41 million, or 12.4%5.53%, to $3.74$1.07 million in the nine months ended September 30, 2010,2011, from $3.33$1.13 million during the same period in 2009.2010. Such decrease was largely attributable to reduced operations in our sales and marketing department in the first two quarters of 2011.
General and administrative expenses. Our general and administrative expenses increased $0.33 million, or 35.11%, to $1.30 million for the nine months ended September 30, 2011, from $0.94 million during the same period in 2010. Such increase was primarily attributable to expenses associated with being a public company and increased labor costs.
Interest expense. Interest expense increased $0.55 million, or 48.67%, to $1.13 million for the nine months ended September 30, 2011, from $0.98 million during the same period in 2010. Such increase was mainly due to the increase in our outstanding short term loans and annual interest rate.
Income Taxesbefore income taxes. Our income before income taxes decreased $1.62 million, or 43.42%, to $2.11 million for the nine months ended September 30, 2011, from $3.74 million during the same period in 2010, as a result of the factors described above.
5
Provision for income taxes. Our income tax provisions decreased by $0.31$0.20 million, or 36.5%37.03%, to $0.54$0.34 million infor the nine months ended September 30, 2010,2011, from $0.85$0.54 million during the same period in 2009. Since January 2010, TEC has qualified as a government recognized high-tech enterprise and has since been enjoying a tax rate reduction from 25%mainly due to 15%.decrease in taxable income in the first two quarters of 2011.
Net Incomeincome. As a result of the factors described above, weWe generated a net income of $3.20$1.78 million infor the nine months ended September 30, 2010, an increase2011, a decrease of $0.72$1.42 million, or 29.1%44.37%, from $2.48$3.20 million during the same period in 2009. This increase was primarily attributable to the reasons described2010, as a cumulative effect of all factors discussed above.
Liquidity and Capital Resources
As of September 30, 2010,2011, we had cash and cash equivalents of approximately $0.23$3.38 million, primarily consisting of cash on hand and demand deposits. The following table provides a summary of our net cash flows from operating, investing, and financing activities.
Cash Flow(all amounts in millions U.S. dollars)
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2010 | 2009 | 2011 | 2010 | |||||||||
Net cash provided by (used in) operating activities | $ | 1.70 | $ | (4.53 | ) | |||||||
Net cash used in investing activities | (0.66 | ) | (2.03 | ) | ||||||||
Net cash (used in) provided by operating activities | $ | (5,551,925 | ) | $ | 1,698,724 | |||||||
Net cash (used in) investing activities | (4,183,643 | ) | (659,920 | ) | ||||||||
Net cash provided by (used in) financing activities | (1.06 | ) | 6.13 | 9,904,699 | (1,055,166 | ) | ||||||
Effects of exchange rate change in cash | 0.085 | (0.14 | ) | 579,411 | 84,800 | |||||||
Net increase (decrease) in cash and cash equivalents | 0.068 | (0.58 | ) | |||||||||
Net increase in cash and cash equivalents | 848,602 | 68,438 | ||||||||||
Cash and cash equivalents at beginning of the period | 0.16 | 0.70 | 2,526,710 | 164,927 | ||||||||
Cash and cash equivalent at end of the period | $ | 0.23 | $ | 0.13 | $ | 3,375,312 | $ | 233,365 |
Operating Activities
Net cash provided byused in operating activities was $1.70$5.55 million for the nine months ended September 30, 2010,2011, as compared to $4.53$1.70 million net cash used inprovided by operating activities for the same period in 2009.
2010. The changeincrease in net cash fromused in operating activities from period to period was primarily attributable to a $3.2 million decrease in deposits and prepaid expenses, a $1.7 million decrease in other receivables and a $20 million increase in otherthe cash outflow associated with increased accounts payables and accrued expenses fordecreased net income in the nine month periodmonths ended September 30, 2010 as compared2011. Due to the same periodtightening of lending policy in 2009.China, some of our suppliers required shorter payment terms.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 20102011 was $0.66$4.18 million, as compared to $2.03$0.66 million net cash used in investing activities during the same period in 2009. The change in net cash used in investing activities was mainly attributable to our purchase of $1.64 million in land use rights which occurred in 2009. Our investment in equipment increased from $0.38 million to $0.62 million for2010. During the nine month periodmonths ended September 30, 2010 to further augment our production capabilities. In addition,2011, we madeinvested approximately $0.037$2.18 million in capital improvement tothe form of an installment payment for land use right and approximately $1.78 million for construction of our Jingde plant infrastructure in the third quarterZhejiang facilities and Anhui administration office, and upgrade of 2010.production facilities.
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Financing Activities
Net cash used inprovided by financing activities for the nine months ended September 30, 20102011 was $1.06$9.90 million, as compared to $6.13$1.06 million net cash used in financing activities for the same period in 2010. The increase in net cash provided by financing activities during the same period in 2009. During the first three quarters of 2009, we borrowed an additional $6.0 million inwas mainly attributable to increased net short term loans, while during the first three quarters of 2010, our short-term debt was temporally reduced by $1.12 million, mainly in the third quarter.borrowings.
6
Loan Commitments
As of September 30, 2010,2011, we did not hold any long-term loans. Our short-term bank loans, totaling $11.6$23.43 million, are as follows:
Amount | Interest | Amount | Interest | |||||||||||||||||||||
Bank | (in millions) | Rate | Maturity Date | Duration | (in millions)* | Rate | Maturity Date | Duration | ||||||||||||||||
China Everbright Bank, Hefei Branch | $ | 4.5 | 5.31% | November 25, 2010 | 12 months | |||||||||||||||||||
Industrial and Commercial Bank, Longshou Branch | 1.2 | 4.86% | December 2, 2010 | 6 months | $ | 0.31 | 6.06% | March 22, 2012 | 12 months | |||||||||||||||
Industrial and Commercial Bank, Longshou Branch | 0.3 | 5.31% | December 9, 2010 | 12 months | 0.31 | 6.71% | March 19, 2012 | 6 months | ||||||||||||||||
Industrial and Commercial Bank, Longshou Branch | 0.3 | 4.86% | January 22, 2011 | 6 months | 0.78 | 6.71% | March 19, 2012 | 6 months | ||||||||||||||||
Industrial and Commercial Bank, Longshou Branch | 1.1 | 4.86% | March 16, 2011 | 6 months | 0.31 | 6.67% | March 21, 2012 | 12 months | ||||||||||||||||
Industrial and Commercial Bank, Longshou Branch | 0.3 | 5.31% | March 21, 2011 | 12 months | 0.94 | 6.67% | March 23, 2012 | 12 months | ||||||||||||||||
Industrial and Commercial Bank, Longshou Branch | 0.9 | 5.31% | April 1, 2011 | 12 months | 1.25 | 6.44% | December 15, 2011 | 6 months | ||||||||||||||||
Huishang Bank, Xuancheng Branch | 3.0 | 5.84% | February 10, 2011 | 12 months | 2.03 | 7.88% | February 16, 2012 | 12 months | ||||||||||||||||
Huishang Bank, Xuancheng Branch | 4.69 | 8.20% | April 11, 2011 | 12 months | ||||||||||||||||||||
Huishang Bank, Xuancheng Branch | 1.09 | 7.88% | August 5, 2012 | 12 months | ||||||||||||||||||||
China Merchants Bank, Hefei Branch | 1.56 | 6.94% | October 29, 2011 | 12 months | ||||||||||||||||||||
China Merchants Bank, Hefei Branch | 2.34 | 7.32% | February 10, 2011 | 12 months | ||||||||||||||||||||
China Construction Bank, Jingde Branch | 2.39 | 5.85% | May 3, 2011 | 6 months | ||||||||||||||||||||
China Construction Bank, Jingde Branch | 0.74 | 6.10% | November 3, 2011 | 6 months | ||||||||||||||||||||
China Everbright Bank, Hefei Branch | 4.69 | 5.56% | January 8, 2012 | 6 months | ||||||||||||||||||||
Total | $ | 11.6 | $ | 23.43 |
We have a___________
* Calculated based on the exchange rate of $1 = RMB 10,000,000 (approximately $1,464,129) revolving line of credit with the Hefei Sipailou Branch of China Merchants Bank, pursuant to a credit agreement, dated September 27, 2009. This revolving line of credit is guaranteed by Anhui Sea-Converge Guarantee Co., Ltd., an unaffiliated company. The crediting agreement will terminate on September 27, 2010.
We also maintain a RMB 6,300,000 revolving line of credit with the Longshou Sub-branch of Xuancheng Branch of Industrial and Commercial Bank of China, pursuant to a Collateral Agreement between TEC Tower and the bank. The line of credit is secured by TEC Tower’s land use rights. To date, we have only utilized RMB 2,000,000 (approximately $292,826) of the line of credit. The line of credit will terminate on October 7, 2011.6.40
Capital Expenditures
Our capital expenditures for fixed assets for the nine months ended September 30, 2011 and 2010 were $4.18 million and 2009 were $0.66 million, and $2.03 million, respectively. Our capital expenditures duringrespectively, representing the third quartertotal amount of 2010 consisted solely of capital expenditures relating to the construction of additional production lines, as compared the second quarter of 2009, when we purchased and acquired land use right.investment activities.
To date, we have financed our operations primarily through cash flows from operations, augmented by short-term bank loans and equity contributions by our stockholders. We believe that our cash on hand and cash flow from operations will meet a portion of our present cash needs and we will require additional cash resources including equity investment, to meet our expected capital expenditures and working capital requirements for the next 12 months. We may, however, in the future, require additional cash resources due to changed business conditions, implementation of our strategy to expand our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
Obligations under Material Contracts
In addition to the loan obligations disclosed above, we entered in to a financial advisory agreement, dated May 4, 2010, with JW Junwei Financial Group, or Junwei. Pursuant to the agreement, we are obligated to deliver 500,000 shares of our common stock which is for a five-year term, Junwei is obligated to provide the Company with financial advisory services over the term of the agreement and we are obligated to issue an aggregate of 500,000 shares of our common stock to Junwei in five equal 100,000 share portions for no cash consideration, commencing on December 31, 2010 and ending on December 31, 2014. The agreement contains an exclusivity provision whereby we have agreed to engage Junwei as our exclusive financial advisor for two years and also contains a $1 million liquidated damages provision for breach of such exclusivity.
CCG Investor Relations Partners LLC, CCG, our investor relations firm, is entitled to purchase up to 80,000 shares of fully-paid and non-assessable shares of our common stock, at a price of $2.00 per share, pursuant to the terms and conditions of a letter agreement, dated June 20, 2010, between the Company and CCG. CCG's right to exercise its warrant will vest in four equal portions, with the first portion vesting on June 20, 2010, and the remaining portions vesting on September 30, 2010, December 31, 2010 and March 31, 2011, respectively. The warrant is exercisable on or before June 16, 2015.
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Inflation
Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and our industry and continually maintain effective cost controls in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.
Seasonality
Our operating results and operating cash flows historically have been subject to seasonal variations. Our revenues usually increase over each quarter of the calendar year with the first quarter usually the slowest quarter because fewer projects are undertaken during and around the Chinese spring festival.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates, and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operations. Critical accounting policies are those thatwe believe are most important to the portrayal ofportraying our financial conditionconditions and results of operations and also require management’s difficult,the greatest amount of subjective or complex judgment, often as ajudgments by management. Judgments and uncertainties regarding the application of these policies may result ofin materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments usedpreviously disclosed in the preparation of our financial statements:
Revenue recognition.Our revenue recognition policies are in compliance with ASC 605. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer. We recognize revenue when the goods are delivered and title has passed. Sales revenue represents the invoiced value of goods, net of a value-added tax, or VAT. All of our products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17% of the gross sales price or at a rate approved by the Chinese local government. This VAT may be offset by the VAT paid by the CompanyAnnual Report on raw materials and other materials included in the cost of producing their finished product.
Non-Controlling Interest in Consolidated Financial Statements.We adopted the accounting pronouncement on non-controlling interests in consolidated financial statements, which establishes accounting and reporting standardsForm 10-K for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance is primarily contained in ASC Topic “Consolidation.” It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated financial statements. The adoption of this standard has not had material impact on our consolidated financial statements.fiscal year ended December 31, 2010.
Allowance for doubtful accounts.We reduce gross trade accounts receivable by an allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We review our allowance for doubtful accounts on a regular basis and all past due balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
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Impairment of long-lived assets.We review the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow.
Property, plant and equipment, net.Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Any gain or loss arising on the sale or disposal of the asset is included in the income statement in the period the item is sold or otherwise disposed. Maintenance and repairs of property and equipment are charged to operations when incurred. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. We review our property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, we recognize an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded.
Research and development costs.Research and development costs include costs incurred to develop new products and are charged to operations when incurred. The costs for development of new products and substantial enhancements to existing products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized.
Foreign currency translation.Our reporting currency is U.S. dollars; however our functional currency is RMB. For those entities whose functional currency is other than the U.S. dollars, all assets and liabilities are translated into U.S. dollars at the exchange rate on the balance sheet date; shareholders’ equity is translated at historical rates and items in the statements of income and of cash flows are translated at the average rate for the period. Because cash flows are translated based on the average translation rate, amounts related to assets and liabilities reported in the statement of cash flows will not necessarily agree with changes in the corresponding balances in the balance sheet. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Recent Accounting Pronouncements
In January 2010,April 2011, the FASB issued ASU No. 2010-01, Accounting2011-03,Transfers and Servicing (Topic 860): Reconsideration of Effective Control for DistributionsRepurchase Agreements(ASU 2011-03), intended to Shareholders with Componentsimprove financial reporting of Stockrepurchase agreements and Cash. The amendments in this Update clarify thatrefocus the stock portionassessment of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be appliedcontrol on a retrospective basis.transferor’s contractual rights and obligations rather than practical ability to perform those rights and obligations. The Company adopted this standard and has determined the standard does not have material effect on our consolidated financial statements.
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In January 2010, FASB issuedguidance in ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU2011-03 is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements In January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company adopted this standard and has determined the standard does not have material effect on our consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement that, for listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the disclosure requirement has been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010.
In April 2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial porting of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The2011.The Company does not expect the adoption of ASU 2010-172011-03 to have a significant impact on its consolidated financial statements.
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In April 2010,May 2011, the FASB issued Accounting Standard Update 2010-17, “Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition” or ASU 2010-17 No. 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs(ASU 2011-04). This Update providesASU 2011-04 represents the converged guidance on the recognition of revenue under the milestone method, which allows a vendor to adopt an accounting policy to recognize all of the arrangement consideration that is contingentFASB and the International Accounting Standards Board (IASB) on the achievementfair value measurement. A variety of a substantive milestone (milestone consideration)measures are included in the periodupdate intended to either clarify existing fair value measurement requirements, change particular principles requirements for measuring fair value or for disclosing information about fair value measurements. For many of requirements, the milestone is achieved. The pronouncementFASB does not intend to change the application of existing requirements under Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and early application is not permitted. The Company is evaluating the impact adoption of ASU 2011-04 and does not expect the adoption of ASU 2011-04 will have significant impact on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,Presentation of Comprehensive Income(ASU 2011-05), intended to increase the prominence of items reported in other comprehensive income and to facilitate convergence of accounting guidance in this area with that of the IASB. The amendments require that all non-owner changes in stockholders’ equity be presented in a prospective basissingle continuous statement of comprehensive income or in two separate but consecutive statements. Amendments under ASU 2011-05 for milestones achieved inpublic entities should be applied retrospectively for fiscal years, and interim periods within those years, beginning on or after JuneDecember 15, 2010.2011. The Company is evaluating the impact adoption of ASU 2010-172011-05 and does not expect the adoption of ASU 2011-05 will have any significant impactsimpact on theits consolidated financial statements.
See Note 3 to our unaudited consolidated financial statements included elsewhere in this report.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not Applicable.
ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information that would be required to be disclosed in the reports we file or submit under the Exchange Act reports is recorded, processed, summarized and reported within the time periodperiods specified in the SEC’s rules and forms of the SEC and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-1513a-15(e), our management has carried out an evaluation, with the participation and under the Exchange Act, our management, includingsupervision of our Chief Executive Officer, Mr. Chun Lu, and Chief Financial Officer, Mr. Yuhua Yang, evaluatedof the effectiveness of the design and operation of our disclosure controls and procedures, as of September 20, 2010.30, 2011. Based on our assessment,upon, and as of the date of this evaluation, Messrs. Lu and Yang, determined that, because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2010, which we are still in the process of remediating as of September 20, 2010, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed,30, 2011, our disclosure controls and procedures were effectivenot effective. Investors are directed to satisfyItem 9A of our Annual Report on Form 10-K for the objectivesyear ended December 31, 2010 for which they are intended.the description of these weaknesses.
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
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During its evaluation of the quarter ended September 20,effectiveness of internal control over financial reporting as of December 31, 2010, our management concluded that we still need to hire qualified accounting personnel and enhance the supervision, monitoring and review of the financial statements preparation processes. Although our accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP. We are actively searching for additional personnel with relevant accounting experience, skills and knowledge in the preparation of financial statements in accordance with of U.S. GAAP and financial reporting disclosure requirements under SEC rules. In addition, we plan to establish an audit committee and appoint qualified committee members to strengthen our internal control over financial reporting.
Other than the foregoing changes, there were no changes in our internal controlcontrols over financial reporting identified in connection with the evaluation performed during the period covered by this reportthird quarter of 2011 that hashave materially affected, or isare reasonably likely to materially affect our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1. | LEGAL PROCEEDINGS. |
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
ITEM 1A. | RISK FACTORS. |
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. (REMOVED AND RESERVED).
ITEM 4. | (REMOVED AND RESERVED). |
ITEM 5. OTHER INFORMATION.
ITEM 5. | OTHER INFORMATION. |
We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6. EXHIBITS.
ITEM 6. | EXHIBITS. |
The following exhibits are filed as part of this report:report or incorporated by reference:
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November | TEC TECHNOLOGY, INC. | |
By: | /s/ Chun Lu | |
Chun Lu, Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ Yuhua Yang | |
Yuhua Yang, Chief Financial Officer | ||
(Principal Financial Officer and Principal | ||
Accounting Officer) |
By:/s/ Chun Lu EXHIBIT INDEX
By:/s/ Yuhua Yang Yuhua Yang, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)