XNAS:TRIT Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

 

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________ to ___________.

Commission File Number 001-34427


 

Tri-Tech Holding Inc.

 (Exact name of registrant as specified in its charter)


Cayman Islands   Not Applicable
(State or other jurisdiction of   (I.R.S. employer
incorporation or organization)   identification number)

 

16th Floor of Tower B, Renji Plaza

101 Jingshun Road, Chaoyang District

Beijing 100102 China

(Address of principal executive offices and zip code)

+86 (10) 5732-3666

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  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.

 

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  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The Company is authorized to issue 30,000,000 ordinary shares, $0.001 par value per share. As of May 14, the Company has 8,212,406 ordinary shares outstanding, excluding 21,100 treasury shares.

 

 
 

 

TRI-TECH HOLDING INC.

FORM 10-Q

INDEX

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS ii
PART I. FINANCIAL INFORMATION I-1
  Item 1. Financial Statements I-1
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations I-1
  Item 3. Quantitative and Qualitative Disclosures about Market Risk I-17
  Item 4. Controls and Procedures I-17
PART II. OTHER INFORMATION II-1
  Item 1. Legal Proceedings II-1
  Item 1A. Risk Factors II-1
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds II-1
  Item 3. Defaults Upon Senior Securities II-1
  Item 4. Mine Safety Disclosures. II-1
  Item 5. Other Information II-1
  Item 6. Exhibits II-1
FINANCIAL STATEMENTS F-1

 

i
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to projected growth, trends and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond the control of the Company. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to the following:

 

the timing of the development of future products;

 

projections of revenue, earnings, capital structure and other financial items;

 

statements of the Company’s plans and objectives;

 

statements regarding the capabilities of its business operations;

 

statements of expected future economic performance;

 

statements regarding competition in its market; and

 

assumptions underlying statements regarding the Company or its business.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update this forward-looking information. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Report. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

  

ii
 

 

PART I.          FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

See the financial statements following the signature page of this report, which are incorporated herein by reference.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The actual results could differ materially from those described herein.

 

Company Overview

 

Tri-Tech Holding Inc. (the “Company” or “we”) is a leading provider of integrated solutions, products and technologies to water resource management and environmental protection industries. The Company has successfully implemented projects in both Chinese and overseas markets such as India, the Middle East and North America.

 

The Company aims to provide tailored solutions to complex environmental challenges faced by both public and private sectors in China and beyond. Its clientele consists of a combination of government agencies, municipalities, and industrial entities located in China, India, the Middle East and North America. To maintain a leading position in its domestic market, the Company’s strategy is to reinforce customer recognition and to offer diversified proprietary products to exceed the expectations of its expanding client base. For its domestic market, the Company incorporated a new wholly-owned subsidiary, Xushui Tri-Tech Sheng Tong Investment Co., Ltd (“Xushui”) in Hebei Province on March 8, 2012. Internationally, the Company continues to further its geographic reach in India, the Middle East and North America in the wastewater treatment and water processing industries.

 

The Company’s principal executive offices are located at the 16th Floor of Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 China. The telephone number at this address is +86 (10) 5732-3666. Its ordinary shares are traded on the NASDAQ Capital Market under the symbol “TRIT.”

 

The Company’s website, www.tri-tech.cn, provides a variety of information. Its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) are available, as soon as practicable after filing, under the investor relations tab on its website, or by a direct link to its filings on the SEC’s website.

 

Principal Products, Services and Their Markets

 

The Company operates in three segments: (i) Water, Wastewater Treatment and Municipal Infrastructure, (ii) Water Resource Management System and Engineering Services, and (iii) Industrial Pollution Control and Safety. Through its subsidiaries, VIE affiliates and joint venture partnership, the Company provides proprietary and third-party products, integrated systems and other services for the purposes of water resource monitoring, development, utilization and protection. The Company designs water works and customized facilities for reclaiming and reusing water, sewage treatment and solid waste disposal for China’s municipalities. These systems combine process equipment, software, controls and instruments, information management systems, resource planning and local and distant networking hardware that includes sensors, control systems, programmable logic controllers, and supervisory control and data acquisition systems. The Company designs systems that track natural waterway levels for drought control, monitor groundwater quality and manage water resources. It also provides systems for volatile organic compound (“VOC”) abatement, odor control, water and wastewater treatment, water recycling facilities design, project engineering, procurement and construction for petroleum refineries, petrochemical and power plants as well as safe and clean production technologies for oil and gas field exploration and pipelines. With the acquisitions of J&Y and Yuanjie Water, the Company expanded its product lines by adding thermal seawater desalination systems, zero liquid discharge (“ZLD”) systems, and secondary water supply systems targeting high-rise buildings.

 

Core Technologies and Solutions

 

ZLD Solution for Industrial Wastewater Treatment. The ZLD systems provide an optimal solution for wastewater treatment as no liquid pollutants are discharged into environment and water is completely recycled. Solid by-products can be produced by treating wastewater with liquid evaporation concentration (mechanical vapor compression- horizontal spraying film evaporator) and crystallization (forced circulation crystallization system), which are key components of the ZLD solution. The Company can tailor ZLD solutions to its customers’ individual needs and requirements, and ensure reliability of technology and stability of system operation. Besides desalination, the technologies can also be used to treat high-concentration wastewater such as landfill leachate and high-salinity wastewater. The industries and companies served by the technologies include oil and gas exploration companies, petrochemical refineries and fertilizer plants, coal-fired and thermal power plants, pulp and paper mills, municipal water treatment facilities, and pharmaceutical and food-processing companies.

 

I-1
 

 

Seawater Desalination Solution. There is a growing market for the business of seawater desalination due to fresh water resource shortage. The Company is capable of providing tailored seawater desalination solutions for different types of customers. These solutions include the thermal seawater desalination technology featuring low temperature multi-effect evaporation and multi-flash evaporation, typically for projects with easy access to low-cost heat source such as superheated vapor and hot liquid, and the membrane seawater desalination technology for projects with easy access to cheap electrical power. The Company also specializes in small skid-mounted seawater desalination units such as the mechanical vapor compression-spraying film evaporator.

 

VOC Treatment. In the industrial production process, some plants produce large volumes of volatile organic gases that are hazardous to the environment if discharged untreated. The Company’s thermal oxidation technology thoroughly treats these toxic, harmful and non-recyclable organic waste gases. The Company developed different thermal oxidation technologies such as regenerative thermal oxidizer (“RTO”), thermal oxidizer (“TO”), regenerative catalytic oxidizer (“RCO”) and catalytic oxidizer (“CO”) based on specific parameters for different waste gases.

 

Forward Osmosis Technology. The forward osmosis technology can turn muddy contaminated water into pure and potable water. It can also be used to treat industrial wastewater which contains toxic wastes that are not readily degradable. The Company’s products do not have the clogging or fouling problems seen in the reverse osmosis technology.

 

Flash Flood Disaster Warning Information Dissemination System. The disaster warning information dissemination platform is a part of the flash flood monitoring and warning system. As the center of information distribution, it is the most important part of the integrated system. The platform accurately and timely transmits disaster warning information to areas threatened by flash flood through early warning programs and channels which receive instructions from county-level flood control offices, allowing them to take necessary precautionary measures to minimize casualties and property losses. The platform can be used to receive feedback from early warning stations to monitor the effectiveness of information dissemination.

 

Business Segments

 

The Company’s business segments are grouped according to the types of services provided and the types of clients served. The total sales and costs are accordingly divided into three segments. The Company assesses each segment’s performance based on net revenue and gross profit on contribution margin. More detailed descriptions of the three reportable operating segments follow:

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

This segment focuses on municipal water supply and distribution, wastewater treatment and gray water recycling, through the procurement and construction of proprietary build-transfer processing equipment and processing control systems. The Company also provides municipal facilities engineering and operation management services for related infrastructure construction projects. This segment has historically provided the majority of its contract revenues. Representative projects in the China market include the expansion phase of the water treatment plant for the City of Ordos valued at approximately $20 million, which started in June 2011 and is expected to be completed by June 30, 2012, and the recycled water quality upgrade project for Tianjin Airport Economic Zone with a total contract value of $1.46 million, which started in June 2011 and is expected to be operational by July 2012. Representative international projects include three Indian engineering-procurement-construction (“EPC”) contracts for sewage collection and treatment plants in three municipalities with a total contract value of $39 million, which started in November 2011 and are expected to be completed by the end of 2013.

 

Segment 2: Water Resource Management System and Engineering Service

 

This segment involves projects relating to water resource management, flood control and forecasting, irrigation systems, and similar ventures through system integration of proprietary and third-party hardware and software products. For government agencies, the Company designs systems that track natural waterway levels for drought control, monitor groundwater quality, and generally manage water resources. Representative projects include flash flood early warning and hydrologic monitoring projects for multiple counties of Hubei, Liaoning, Fujian, Hunan, Henan and Hebei provinces, with a total contract value of $7.92 million, which commenced in the first quarter of 2012 and is expected to be completed at different points in time from June to September, 2012.

 

I-2
 

 

Segment 3: Industrial Pollution Control and Safety

 

This segment focuses on industrial wastewater treatment for industrial safety and emergency response in the petroleum and power industries using a variety of technologies such as ZLD, seawater desalination, and air pollution and odor control. Projects in this segment include traditional engineering, procurement and construction of equipment and modules, and operation and maintenance of wastewater treatment plant. For petroleum refineries, petrochemical factories and power plants, the Company provides systematic solutions for volatile organic compound abatement, odor control, water and wastewater treatment, and water recycling. The Company also provides safe and clean production technologies for oil and gas field exploration and pipeline transportation. Representative projects include the Dawangdian Industrial Park wastewater plant and pipeline project in Xushui County of Hebei Province, with a total contract value of $7.9 million, which is expected to be delivered by November 2012; the seawater desalination project for the Utility Plant of Qatar Petrochemical Co. Ltd. in Qatar, with a contract value of $8.3 million, which started in December 2011 and is expected to be delivered by November 2012; the Wuhan natural gas distribution network control system project, with a contract value of $1.5 million, which began in January 2012 and is expected to be completed by May 2013; and the water processing unit project for a steel plant in Mexico to be completed and delivered by early April 2013.

 

Revenues by Segment

 

In the three months ended March 31, 2012, our total revenues were $19.2 million, including $8.4 million from Segment 1, $6.2 million from Segment 2, and $4.6 million from Segment 3. The table below shows the performance of each business segment for the first quarter of 2012. Segment 1 contributed 43.7% of the total revenues; Segment 2 contributed 32.5%; and Segment 3 contributed the remaining 23.8%.

 

   Three Months Ended March 31, 2012 
   Segment 1   %   Segment 2   %   Segment 3   %   Total   % 
System Integration  $8,406,973    100.0%  $5,953,277    95.2%  $4,172,412    91.5%  $18,532,662    96.4%
Hardware Products  $    %  $301,313    4.8%  $387,337    8.5%  $688,650    3.6%
Software Products  $    %  $    %  $    %  $    %
Total Revenues  $8,406,973    43.7%  $6,254,590    32.5%  $4,559,749    23.8%  $19,221,312    100%

 

Backlog and Pipeline for 2012

 

The Company’s backlog represents the amount of contract work remaining to be completed, that is, revenues from existing contracts and work in progress expected to be recorded in 2012 and onwards, based on the assumption that these projects will be completed on time according to the project schedules. As of March 31, 2012, the Company had a total backlog of $86.7 million, including $49.3 million in Segment 1, $14.2 million in Segment 2 and $23.2 million in Segment 3.

 

As of March 31, 2012, we expected potential projects in the pipeline with a total contract value of $150.2 million, of which approximately $80.2 million is in Segment 1, $11.1 million in Segment 2, and $58.9 million in Segment 3.

 

With a strong backlog, the Company anticipates that its revenues will reach a range between $103 million and $128 million, and its net income between $9.7 million and $12.1 million, in 2012.

 

Macro-Economic Factors and Business Trends

 

China’s gross domestic product (“GDP”) maintained moderate but steady growth in the first quarter of 2012. According to the China State Bureau of Statistics, China’s GDP for the three months ended March 31, 2012 reached RMB 10.8 trillion (or $1.7 trillion), an increase of 8.1% over the same period in 2011 and an increase of 1.8% over the fourth quarter in 2011. Even though the growth rate continued to slow, the economy is still growing and the growth rate of the first quarter of 2012 did exceed the GDP target of 7.5% the Chinese government previously set for 2012.

 

In addition, industrial production growth (“IPG”) and fixed asset investment (“FAI”) in China remained robust during the first three months of 2012. IPG rate was 11.6% for the three months ended March 31, 2012. The paid-in FAI for the same period totaled RMB 4.8 trillion (or $759.8 billion), an increase of 20.9% over the same period in 2011. In particular, FAI in infrastructure involving the production and distribution of electricity, gas and water reached RMB 211.9 billion (or $33.6 billion), an increase of 18.4%, and FAI in other infrastructure reached RMB 671.9 billion (or $106.7 billion), a decrease of 2.1%. By region, FAI for East China, Central China and West China were 18.9%, 27.1% and 26.9%, respectively, for the first quarter in 2012. The total budget for 61,778 new projects was RMB 3.6 trillion (or $576.8 billion), an increase of 23% over the same period in 2011.

 

The government gradually focuses on the quality improvement of economic growth and the adaptation to a sustainable economic development. According to the National Bureau of Statistics, the overall Chinese economy will stay healthy and maintain a moderate momentum during the upcoming quarters. The economic sentiment indicators and other leading indicators in March showed the Chinese economy is firming up, and March was a turning point which saw new issuance of loans and the rebound of production activities. The investment in new projects in Central and West China is likely to maintain a rapid increase in 2012.

 

The China’s water industry will continue to be impacted by the government’s monetary and fiscal policies. As local governments continue to exercise fiscal restraint, funding from the central government and demand from the private sector will be the main driving force behind the growth of water infrastructure construction. As China continues to focus on environmental protection, demands for better products and services increase and opportunities abound for the water industry.

 

I-3
 

 

We believe our business is well positioned to meet and capture the market demand driven by government’s environmental protection policies, and we are likely to continue our stable growth during the remaining quarters of 2012 and beyond.

 

New Business Opportunities

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

According to the 12th Five Year Plan for Environmental Protection, the infrastructure investment in environmental protection will be RMB3.4 trillion during the plan period. The central government will continue to increase spending in the treatment of urban wastewater and solid waste according to the Draft Plan of 2012 National Economy and Social Development submitted by the National Development and Reform Commission to the National People’s Congress in early March, 2012. The central government will budget RMB14.5 billion in 2012, an increase of 230% over RMB4.39 billion in 2011, to fund sewage and solid waste treatment infrastructure and sewage pipeline construction for counties and townships. The pollution-free treatment rates for urban sewage and solid waste will increase to 83% and 79%, respectively, by the end of 2012.

 

Recently, the Ministry of Environmental Protection proposed a series of technical specifications to retrofit and upgrade wastewater treatment plants, as a result of which the minimum wastewater treatment rate needs to be 75%, forcing all existing wastewater treatment plants to upgrade. These regulations will be officially issued after a period of public opinion solicitation. According to the 12th Five Year Plan, the daily treatment capacity of wastewater treatment plants will need to be 50 million tons after the upgrade by the end of 2015. In addition, the new National Sanitary Standards for Drinking Water will begin to be imposed on all drinking water facilities starting July 1, 2012, which demands that all drinking water must meet 106 points of specifications.

 

We believe these regulations impose standards higher than the existing capacity of many wastewater treatment plants and waste processing plants, which will need equipment and technology upgrades to satisfy the new regulations. The gap between the increasing demands of the regulations and the plants’ existing capacity and capability gives us tremendous opportunities during the 12th Five Year Plan period in the wastewater treatment and water processing segment.

 

Segment 2: Water Resources Management Systems and Engineering Services

 

In March 2012, seven ministries of the Chinese central government jointly issued a Proposal on Further Financial Services to China’s Water Conservancy Development (the “Proposal”). According to the Proposal, multiple funding channels, including government financial aid, bank credit, capital markets and private capital, will be available to water conservancy projects. The Proposal demonstrates the government’s initiative in implementing the Circular 1 on Water Conservancy promulgated last year. With the multiple funding channels, the number of water conservancy construction projects in the next several years will probably be higher than previously expected.

 

Following the Proposal, the Ministry of Water Resources recently released a notice to push forward water conservancy construction projects nationwide. We believe this will accelerate the launching speed of projects. According to Circular 1 issued in 2011, RMB4 trillion will be spent in the next 10 years, as the policy specifies.

 

The government has expedited the review and approval process for water conservancy projects. The budget from the central government for water conservancy projects is RMB68.3 billion in 2012, an increase of 87% over 2011. The NDRC has approved 46 key projects in 2011 with a total value of RMB184.2 billion, an increase of 175% year-over-year. The construction of these projects has commenced in 2012.

 

With continued government policy support and fund allocation to water conservancy demonstrate, we believe China’s water conservation industry will witness a boom in 2012. As a leading solution provider in the industry, we are seeing unprecedented growth in this segment of our business.

 

Segment 3: Industrial Pollution Control and Safety

 

During the 12th Five Year Plan period, $536 billion is projected to be invested in environmental protection, of which $69 billion will be invested in industrial wastewater treatment. According to the Five Year Plan, the Chinese government is surveying the implementation of the ZLD standard for industrial wastewater treatment and expects to issue policies to encourage compliance with the ZLD standard. In anticipation of such policies, we see tremendous potential for industrial pollution treatment in the coal chemical industry. Chinese government has set the goal of oil self-sufficiency at 80% by 2030, for which more efficient coal consumption and reduced reliance on oil will be important component parts. The projected fast growth of the coal chemical industry will intensify the demand for ZLD and drive the wastewater treatment industry, particularly in North and Northwest China. In addition, we also see opportunities of ZLD application to industrial wastewater treatment in oversea markets such as Mexico and Canada.

 

I-4
 

 

According to government statistics, the daily capacity of seawater desalination is growing at a rate between 10% to 30% per annum. Presently, the annual sales of seawater desalination units have amounted to billions of dollars. The Middle East holds 50% of the world capacity with daily output of 11 million cubic meters of fresh water. The Middle East and the U.S. are the regions where desalination enjoys the fastest growth. The Company expects to play a role in this potentially vast market by leveraging its existing technologies in industrial water treatment. The Company is continuing to expand its business reach in seawater desalination and industrial water treatment businesses in several overseas markets.

 

Strategies for Growth

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

We continue to expand our geographic reach beyond China and into other overseas regions including North America, South Asia and the Middle East. We also expect our diversification into multiple type of customers, partnerships with large multinationals and contract with favorable terms, which we believe will be a primary source of growth in revenues over the next several years.

 

We have evolved from simply providing construction services for wastewater plants to being capable of implementing complete municipal wastewater treatment facility systems such as treatment plants, wastewater piping and pump stations. The extended capability will further ensure our competitive edge in the market.

 

Following the successful bid for municipal sewage system projects in India, and as the projects implementation progresses, we have been strategically focusing on the municipal wastewater treatment market and are pursuing broader business initiatives in municipal water supply, municipal solid waste disposal, and industrial water and wastewater treatment. We believe there are ample opportunities to generate substantial revenues from this region over the next three to five years.

 

We are also leveraging our technology such as high-rising building water system for use in residential communities, hotels, and office buildings which are in need of water purification and treatment systems. These types of modular water treatment systems are in high demand throughout the PRC, India and the Middle East.

 

Segment 2: Water Resources Management Systems and Engineering Services

 

In this segment, we are gradually transforming into a full-service solution provider for large-scale river basin projects. Based on the general direction of water conservancy in China, the PRC government’s decision to initiate new programs and to allocate significant investment to water resource management systems particularly to the flash flood monitoring and forecasting program presents us with significant business opportunities in the next several years.

 

With a good track record for winning projects during 2011, we continued our strong momentum and recorded a dramatic growth rate in the first quarter of 2012. The total contract value for this segment we secured in the first quarter exceeded that awarded in all quarters of 2011 combined. We expect to stay competitive in this segment and continue our growth of market share and increased backlog in the upcoming quarters in the PRC as we actively seek to participate in new project bids.

 

In addition, we are actively implementing a market survey and valuation as several national programs, including National Drought and Flood Control Command System Phase II, National Small River Hydrologic Monitoring and Forecasting Project and National Water Resources Monitoring Capability Project, are about to be launched, and we intend to participate in these projects.

 

At the same time, we continue to invest resources to the development of water quantity- and quality-monitoring technologies and to upgrade our proprietary products. We also actively develop partnerships with manufacturers of hydrological instruments and sensors, in preparation of our water resource monitoring network projects.

 

Segment 3: Industrial Pollution Control and Safety

 

We expect significant market opportunity for industrial wastewater treatment in industrial parks as these parks promote the low carbon footprint concepts and comply with regulatory pollution control standards.

 

We recently secured a build-transfer contract for the construction of a wastewater treatment plant and a wastewater pipeline network in Dawangdian Industrial Park in Xushui County, Hebei Province. The aggregate budget of the projects is approximately $7.9 million. We will participate in civil construction, equipment procurement, installation, treatment process calibration, operator training and trial operation for the plant and wastewater pipelines. The projects are scheduled to be completed by November 2012.

 

I-5
 

 

We are also strengthening our industrial pollution services for the energy sector including the oil and petrochemical companies.

 

We continue to expand our business in safety controls in the fields of oil and natural gas production. Through BSST, one of our affiliates, we recently secured a $1.5 million strategic collaboration agreement with Wuhan Natural Gas High-Pressure Pipeline Co. (“NGHP”). The agreement outlines a framework for an automated control system for natural gas plants, terminal stations and distribution pipelines in the city of Wuhan, Hubei Province. All projects and services stated in the agreement are expected to be completed by May 2013. This also marks BSST’s successful move into the urban natural gas distribution infrastructure market.

 

The need for desalinated water for energy-producing facilities along the coast of China and throughout Asia represents a large and potentially lucrative market for our technologies. Our J&Y Water Division, serving as a business development platform and technical support source to domestic and overseas projects, ensures the technical feasibility of our global operations. J&Y Water Division also allows us to leverage our technologies such as ZLD and thermal technologies for seawater desalination to explore the Indian, Middle Eastern and North American markets.

 

We were recently awarded a contract from a Mexican water company to provide a ZLD solution for a Mexican steel plant. The successful bid perfectly fits our strategy of business development in overseas markets as we actively market our technologies such as ZLD for industrial wastewater treatment and seawater desalination.

 

Funding for Continuous Growth

 

Funding is critical to maintaining our growth momentum, especially as we explore potential projects using the build-transfer business model. We are actively working with local Chinese banks for possible financial support. In addition to the credit line we renewed with Bank of Hangzhou totaling $12.7 million, we continue to work with other major Chinese banks to secure more lines of credit as we need to finance more project opportunities in the future. In September 2011, we secured a credit line of $9.6 million from CITIC Bank. We secured a credit line of $6.4 million from ICBC Bank in February 2012, which is currently used to fund our operations. The credit lines provide us the liquidity to expand and grow our operations in a non-dilutive manner, to increase our financial flexibility and to optimize the efficiency of our capital structure. We also explore other project financing approaches to dovetail our build-transfer business model.

 

Competition

 

We operate in a highly competitive industry characterized by rapid technological development and evolving industrial standards. Given the stimulus initiatives in China, we expect the competition to intensify as more companies enter the market, notwithstanding relatively high barriers to entry in the form of the need for technical expertise and funding.

 

We compete primarily on the basis of customer recognition, industry reputation, product innovation and a competitive pricing structure. Through mergers and acquisitions, we are able to offer advanced technologies at an attractive price when competing with domestic and international rivals. Due to our nationwide distribution and customer service network and knowledge of the local market, we enjoy an advantage in China over international competitors who typically appoint only one distributor in the Chinese market responsible for selling and servicing their products. In addition, we provide a more comprehensive set of products than most of our international or local competitors. If competition in the industry increases, we could see these advantages decrease or disappear. In order to maintain and enhance our competitive advantage, we must continue to focus on competitive pricing, technological innovation, our leading position in terms of the market trends, as well as the improvement of our proprietary products.

 

Through Yanyu, one of our VIEs, we were recognized as an AAA-level manufacturer and vendor by the China Water Engineering Association in 2011. The recognition helps us gain reputation and visibility in the marketplace and may make us eligible to compete for projects in locations that have different access thresholds for contract bidders. Presently, only three entities in China have received such recognition.

 

Although we believe our competitive strengths provide us with advantages over many of our competitors, some of our international competitors have better brand recognition, longer operating histories, longer or more established relationships with their customers, stronger research and development capabilities and greater marketing budgets and other resources. Most of our international competitors are substantially larger and have greater access to capital than we do. Some of our domestic competitors have stronger customer bases, better access to government authorities and stronger industry-based background. In areas such as the ZLD solution and seawater desalination, we anticipate we will face fierce competition from multi-national competitors.

 

Principal Suppliers

 

Our suppliers vary from project to project. Often, they are specifically appointed by the clients. Most of the materials or equipment we purchase are not unique and are easily available in the market. The prices for those purchases, although increasing, are relatively consistent and predictable. A specific supplier might constitute a significant percentage of our total purchases at a certain time for a large contract. The dependence on a specific supplier usually ends when the project is completed. We do not rely on any single supplier in the long term.

 

I-6
 

 

As planned, we have deployed ERP modules to centralize our supply chain management for some of our subsidiaries. In addition, we are furthering the deployment of the ERP modules to integrate all subsidiaries.

 

Customers and Marketing/Distribution Methods

 

We operate on a project basis, and this particular nature does not usually allow us to create a long-term relationship with our customers. We negotiate with various government agencies, municipalities, industrial enterprises and/or their prime contractors in order to secure and undertake our various contracts. Our major customers usually account for a certain percentage of our total sales. Our top five customers collectively represented approximately 53.0% and 82.9% of our total revenue for the three months ended March 31, 2012 and 2011, respectively. Although we are dependent on our large clients to a certain degree, unlike other commercial businesses, collectability of accounts receivables are relatively secure because our client base consists primarily of government agencies or large state-owned enterprises.

 

Patents and Proprietary Rights

 

As of March 31, 2012, we owned 11 product patents and 39 software copyrights.

 

Government Regulation and Approval

 

As described in greater detail above in the discussion of our business segments, government policies and initiatives in the various industries we serve have a considerable impact on our potential for growth. We generally undertake projects for government entities and enterprises, and must complete the projects in accordance with the terms of the contracts in which we enter with those entities.

 

Employees

 

As of March 31, 2012, we had a total headcount of 390, of which 164 (42%) were in technical support and project management, 86 (22%) in sales, 13 (3%) in research and development, 41 (11%) in finance, and the remaining 86 (22%) in general and administrative functions. The increase of our headcount was mainly in the project management department, which grew by 42, and the general and administrative department, which grew by 21. In the sales department, headcount increased by 8. In the research and development department, headcount decreased by 13. Total headcount increased by 59 from that on December 31, 2011. Our teams are very stable compared to our peers.

 

Research and Development

 

We focus our research and development efforts on improving our development efficiency and the quality of our products and services. Some of the technical support team regularly participates in research and development programs. There are five major on-going software research and development projects and one hardware research and development project. The development phase projects are expected to be completed in 2012.

 

As our research and development base, Tianjin Baoding Environmental Technology Co., Ltd. (“Baoding”) focuses on technology development, software development, pilot testing, manufacturing and pre-installation/pre-assembly of our proprietary products. The Baoding research, development and production facility construction officially started in June 2011. Part I of phase one of the construction is for the odor control system manufacturing and automatic control box assembly workshops, which has been completed. Part II of phase one construction is in process, and is to be completed around August 2012. Phase two and phase three are scheduled to be completed by the end of 2013.

 

Properties

 

Our primary office location is the 15th and 16th Floor of Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 China. The rental space for the two floors is 908 square meters for the 15th floor and 986 square meters for the 16th floor. The lease contract for this location is from September 1, 2010 to August 31, 2013. We also have a 1,300 square meter rental office in Tianjin, located at Huayuan Property Management Zone, 4th Floor, Kaide A Complex, 7 Rongyuan Road, Tianjin, with a rental term that runs until December 2014. In addition, we have three other rental office locations in various areas of Beijing, for which the lease contracts expire at various points in time no later than August 26, 2012.

 

I-7
 

 

Baoding, one of the Company’s subsidiaries, is located at West Tianbao Road, Baodi Economic Development Zone in Tianjin. The subsidiary occupies an area of 158,954 square meters and has a 50-year land use right starting on January 18, 2011.

 

Results of Operations

 

Overview for the Three Months Ended March 31, 2012 and 2011

 

Our operating revenues are primarily derived from system design and integration, hardware product design and manufacturing and sales. Our first quarter results reflected stable growth. Highlights of our financial results during the three months ended March 31, 2012 include:

 

·Total revenues increased to $19,221,312 in the first quarter of 2012, an increase of $1,668,101, or 9.5%, from $17,553,211 in the same period 2011. This increase is primarily attributable to the following factors:
oSystems integration revenue increased from $15,870,494 in the first quarter of 2011 to $18,532,662 in the same period in 2012, an increase of $2,662,168, or 16.8%.
oHardware products revenue totaled $688,650 in the first quarter of 2012, a decrease of $994,067, or 59.1%, from $1,682,717 in the first quarter of 2011.
·Total cost of revenues increased by $1,460,781 from $12,543,031 in the first quarter of 2011 to $14,003,812 in the first quarter of 2012, an 11.6% increase compared with the same period in 2011. This increase is attributable to the increase of cost in system integration by $1,933,468 and the decrease by $472,687 in hardware product cost.
·Total operating expenses were $3,761,223 for the first quarter of 2012, or 19.6% of total revenues, compared with $2,420,952, or 13.8% of total revenues, in the same period of 2011. This represents an increase of $1,340,271, or 55.4%.
·Operating income decreased to $1,456,277 in the first quarter of 2012, by 43.8%, from $2,589,228 in the first quarter of 2011, representing 7.6% and 14.8% of total revenues in the first quarter of 2012 and 2011, respectively.
·Net income attributable to TRIT decreased to $1,438,125, or by 15.4%, for the first quarter of 2012, from $1,698,981 for the first quarter of 2011.

 

The following are the operating results for the three months ended March 31, 2012 and 2011:

 

   Three Months Ended
March 31, 2012($)
   % of
Sales
   Three Months Ended
March 31, 2011($)
   % of
Sales
   Change ($)   Change (%) 
Revenues   19,221,312    100%   17,553,211    100%   1,668,101    9.5%
Cost of Revenues   14,003,812    72.9%   12,543,031    71.5%   1,460,781    11.6%
Selling and Marketing Expenses   838,993    4.4%   314,173    1.8%   524,820    167%
General and Administrative Expenses   2,853,360    14.8%   2,066,794    11.8%   786,566    38.1%
Research and Development   68,870    0.4%   39,985    0.2%   28,885    72.2%
Total Operating Expenses   3,761,223    19.6%   2,420,952    13.8%   1,340,271    55.4%
Operating Income   1,456,277    7.6%   2,589,228    14.8%   (1,132,951)   (43.8)%
Other Income (Expenses)   290,905    1.5%   (4,067)   0%   294,972    (7,252.8)%
Income before Provision for Income Taxes and Noncontrolling Interests Income   1,747,182    9.1%   2,585,161    14.7%   (837,979)   (32.4)%
Provision for Income Taxes   314,493    1.6%   405,636    2.3%   (91,143)   (22.5)%
Net Income before Allocation to Noncontrolling Interests   1,432,689    7.5%   2,179,525    12.4%   (746,836)   (34.3)%
Less: Net Income Attributable to Noncontrolling Interests   (5,436)   0%   480,544    2.7%   (485,980)   (101.1)%
Net Income Attributable to TRIT   1,438,125    7.5%   1,698,981    9.7%   (260,856)   (15.4)%

 

Revenues

 

Our revenues are subject to value added tax (“VAT”), business tax, urban maintenance and construction tax and additional education surcharges. Among the above taxes, VAT has been deducted from the calculation of revenues.

 

Our total revenues for the first quarter of 2012 were $19,221,312, an increase of $1,668,101, or 9.5%, compared with the same period last year. This increase is primarily attributable to an increase in the system integration category, from $15,870,494 in the first quarter of 2011 to $18,532,662 in the same period for 2012, or an increase of 16.8%. Revenue from Segment 1, water, wastewater treatment and municipal infrastructure, continued to be very strong, constituting 43.7% of total revenues. Revenue from Segment 2, water resource management and engineering, totaled $6,254,590, or 32.5% of total revenues. Revenue from Segment 3, industrial pollution control and safety, totaled $4,559,749, constituting 23.8% of total revenues for the first quarter, mostly in the system integration category.

 

I-8
 

 

Cost of Revenues

 

Total cost of revenues was $14,003,812 for the first quarter of 2012, an increase of $1,460,781, or 11.6%, from $12,543,031 in the first quarter of 2011. The system integration category, which was the largest contributor to the revenue increase, was also the largest contributor to the increase in the cost of revenues, totaling $13,584,217. The cost of revenues increase in the system integration category was $1,933,468, or 16.6%, from $11,650,749 in the first quarter of 2011 to $13,584,217 in the first quarter of 2012. The increase is mainly a result of the increase in total revenues.

 

Cost of revenues is based on total actual costs incurred plus estimated costs to completion applied to the percentage of completion as measured at different stages. It includes material costs, equipment costs, transportation costs, processing costs, packaging costs, quality inspection and control, outsourced construction service fees and other costs that directly relate to the execution of the services and delivery of projects. Cost of revenues also includes freight charges, purchasing and receiving costs and inspection costs when they are incurred.

 

Our gross margin decreased from 28.5% in the first quarter of 2011 to 27.1% in the first quarter of 2012. The most important reason is that 20.7% of our total revenues for this quarter was from the Indian project, which has a relatively low gross margin.

 

Our strategy is to carefully choose more higher-margin projects. In the next two to three years, we will continue to look for ways to minimize the negative impact on our gross margin through optimizing product and system design, leveraging purchasing bargaining power, and exploring supply chain financing and local equipment sourcing.

 

Selling and Marketing Expenses

 

Selling and marketing expenses consist primarily of compensation costs, marketing costs, travel expenses and business entertainment expenses. In the first quarter of 2012, total selling and marketing expenses increased by $524,820, or 167.0%, from $314,173 in the first quarter of 2011 to $838,993 in the same period of 2012. This was a result of increases in compensation-related expenses of $196,675, or 169.8%, from $115,825 in the first quarter of 2011 to $312,500 in the same period of 2012, other selling expenses of $279,899, or 343.5%, from $81,479 in the first quarter of 2011 to $361,378 in the same period of 2012, and a decrease in travel expenses of $9,368, or 14.1%, from $66,271 in the first quarter of 2011 to $56,903 in the same period of 2012, and. The entertainment expenses increased by $57,615, or 113.9%, from $50,597 in the first quarter of 2011 to $108,212 in the same period of 2012.

 

Selling and marketing expenses for the three months ended March 31, 2012 took up approximately 4.4% of total revenues. We anticipate it to continue to increase during the remaining quarters of the year.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of compensation costs, rental expenses, professional fees, and other overhead expenses. General and administrative expenses increased by $786,566, or 38.1%, from $2,066,794 in the first quarter of 2011 to $2,853,360 in the first quarter of 2012. Of this increase, $144,112 was for officers’ salaries, which increased from $167,464 in the first quarter of 2011 to $311,576 in the first quarter of 2012. Salaries for mid-level management, technical support team, and other office staff increased by $99,086, or 18.7%, from $530,917 in the first quarter of 2011 to $630,003 in the first quarter of 2012. Other human resource expenses, such as endowment and social insurance, increased by 71.1% and 69.1%, respectively, to $89,182 and $135,391, in the first quarter of 2012. Rent increased by $64,224, or 35.0%, from $183,287 in the first quarter of 2011 to $ 247,511 in the first quarter of 2012 due to office relocation. Professional fees increased by $69,877, or 38%, from $183,886 to $253,763, which was mainly for audit and legal services. Amortization of intangible assets and software increased by $68,923, from $145,016 in the first quarter of 2011 to $213,939 in the same period of 2012. This increase was due to the purchase of some major software and intangible assets in our acquired subsidiaries and the amortization of land use rights. Depreciation expense increased by $10,712, or 17.6%, from $60,831 in the first quarter of 2011 to $71,543 in the first quarter of 2012. Other general and administrative expenses increased by $237,270, or 35.8%, from $663,182 to $900,452 in the first quarter of 2012. Those are mainly for office expenses, utilities, travel, communication and other services. General and administrative expenses increased by $295,344 in the first quarter of 2012 due to the acquisition of J&Y, and Yuanjie in June 2011 and August 2011, respectively.

 

General and administrative expenses for the three months ended March 31, 2012 took up approximately 14.8% of total revenues. We anticipate it to continue to increase but at a lower speed in the future.

 

Provision for Income Tax

 

We provide for deferred income taxes using the asset and liability method. Under this method, we recognize deferred income taxes for tax credits, net operating losses available for carry-forwards and significant temporary differences. We classify deferred tax assets and liabilities as current or non-current based upon the classification of the related asset or liability in the financial statements or the expected timing of their reversal if they do not relate to a specific asset or liability. We provide a valuation allowance to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.

 

I-9
 

 

Our operations are subject to income and transaction taxes of the PRC since most of our business activities take place in China. Significant estimates and judgments are required in determining our provision for income taxes. Some of these estimates are based on interpretations of existing tax law or regulations, as well as predictions related to future changes in these law and regulations. The ultimate amount of tax liability may be uncertain as a result. We do not anticipate any events which could change these uncertainties.

 

We, including our subsidiaries and contractually-controlled affiliates, are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdictions in which each entity is domiciled. According to the New Enterprise Income Tax Law in China, the unified enterprise income tax (“EIT”) rate is 25%. However, five of our subsidiaries are eligible for certain favorable tax policies for being high-tech companies.

 

   EIT 
   Three Months Ended March
31,
 
   2012   2011 
   %   % 
TTB (Tax rate is 15% if passing the high-tech enterprise qualification review, the probability of which is very high)   15    7.5 
BSST   15    15 
Yanyu   15    15 
Tranhold   25    25 
TTA   25    25 
Baoding   15    15 
Yuanjie   15     
Buerjin   25     
Xushui   25     
Consolidated Effective EIT   18    16 

 

The favorable income tax treatment for TTB at 7.5% expired at the end of 2011. Afterwards, the EIT rate could be either 15%, if TTB qualifies as a high-tech company, or 25%, if it does not so qualify. We believe TTB will continue to qualify as a high-tech company. The provision for income tax for the first quarter of 2012 was $314,493.

 

We have not recorded tax provision for U.S. tax purposes as they have no assessable profits arising in or derived from the United States and we intend to permanently reinvest accumulated earnings in the PRC operations.

 

Net Income before Income Taxes

 

In the quarter ended March 31, 2012, our net income before provision for income taxes was $1,747,182, a decrease of $837,979, or 32.4%, compared to $2,585,161 in the same period in 2011. Our provision for income taxes decreased by $91,143, from $405,636 in the first quarter of 2011 to $314,493 in the same period in 2012. In the first quarter of 2012, net income attributable to shareholders of TRIT was $1,438,125, a decrease of $260,856, or 15.4%, from $1,698,981 for the same period in 2011.

 

Liquidity and Capital Resources

 

As highlighted in the consolidated statements of cash flows, our liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) financing activities, and (iv) investing activities.

 

Consolidated cash flows for the three months ended March 31, 2012 and 2011 were as follow:

 

   Three Months Ended March
31,
     
   2012($)   2011($)   Change($) 
Net Cash Used in Operating Activities   8,012,462    196,061    7,816,401 
Net Cash Used in Investing Activities   94,569    888,552    (793,983)
Net Cash Provided by Financing Activities   3,317,057    442,696    2,874,361 
Effects of Exchange Rate Changes on Cash and Cash Equivalents   394,818    93,690    301,128 
Net Decrease in Cash and Cash Equivalents   (4,395,156)   (548,227)   (3,846,929)
Cash and Cash Equivalents, Beginning of Period   11,935,746    23,394,995    (11,459,249)
Cash and Cash Equivalents, End of Period   7,540,590    22,846,768    (15,306,178)

 

I-10
 

 

Cash and Cash Equivalents

 

At March 31, 2012, our cash and cash equivalents amounted to $7,540,590. The restricted cash as of March 31, 2012 and December 31, 2011 amounted to $4,352,776 and $4,629,878, respectively, which are not included in the total of cash and cash equivalents. The restricted cash consisted of deposits as collaterals for the issuance of letters of credit. Our subsidiaries that own these deposits do not have material cash obligations to any third parties. Therefore, the restriction does not impact our liquidity.

 

Operating Activities

 

Net cash used for operating activities was $8,012,462 for the three months ended March 31, 2012, compared with $196,061 in the same period 2011. The increase of $7,816,401 in operating cash outflow was mainly attributable to our rapid growth at the infant stage, and aggressive market expansion. This outflow was attributed to the cash outflow in accounts receivables and unbilled receivables. Net accounts receivable increased from $19.9 million on March 31, 2011 to $22.9 million on March 31, 2012, an increase of $3 million. Unbilled receivables increased from $7.3 million on December 31, 2011 to $20.2 million on December 31, 2012, an increase of $12.9 million. There is a lag between revenue recognition and cash collection for the build-and-transfer projects in the first half of 2012. This increase is expected, since it is common that most of the cash collection happens in the second half of the year.

 

   March 31, 2012 ($)
(unaudited)
   December 31, 2011
($)
   Change
($)
   Change
(%)
 
Cash   7,540,590    11,935,746    (4,395,156)   (36.8)
Restricted cash   1,804,942    2,087,920    (282,978)   (13.6)
Accounts receivable and notes receivable   23,702,397    20,507,146    3,195,251    15.6 
Allowance for doubtful accounts   (772,746)   (619,062)   (153,684)   24.8 
Net Accounts receivable   22,929,651    19,888,084    3,041,567    15.3 
Unbilled revenue   20,194,207    7,254,830    12,939,377    178.4 

 

Investing Activities

 

Net cash used for investing activities was $94,569 during the three months ended March 31, 2012, a decrease of $793,983 from $888,552 in the same period of 2011. This decrease was mainly due to the collection of the restricted cash.

 

Financing Activities

 

The cash provided by financing activities was $3,317,057 in the three months ended March 31, 2012, compared to $442,696 in the same period of 2011. The increase was due to increase of the short-term bank borrowing.

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

Net cash gain due to currency exchange was $394,818 in the three months ended March 31, 2012, an increase of $301,128 compared to the gain of $93,690 in the same period of 2011.

 

Restricted Net Assets

 

Our ability to pay dividends is primarily dependent on receiving distributions of funds from our subsidiaries, which is restricted by certain regulatory requirements. Relevant Chinese statutory laws and regulations permit payments of dividends by our Chinese subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries are required to set aside at least 10% of their after-tax profit after deducting any accumulated deficit based on PRC accounting standards each year to our general reserves until the accumulated amount of such reserves reach 50% of our registered capital. These reserves are not distributable as cash dividends. Our off-shore subsidiaries, TIS and Tri-Tech International Investment, Inc. (“TTII), do not have material cash obligations to third parties. Therefore, the dividend restriction does not impact our liquidity. There is no significant difference between accumulated profit calculated pursuant to PRC accounting standards and that pursuant to U.S. GAAP. As of March 31, 2012 and December 31, 2011, restricted retained earnings were $1,866,994 for both, and restricted net assets were $4,553,729 and $4,553,729, respectively. Unrestricted retained earnings as of March 31, 2012 and December 31, 2011 were $21,120,511 and $19,682,386, respectively, which were the amounts available for distribution in the form of dividends or for reinvestment.

 

I-11
 

 

Working Capital and Cash Flow Management

 

As of March 31, 2012, our working capital was $8,290,262, with current assets totaling $70,119,152 and current liabilities totaling $61,828,890. Of the current assets, cash and cash equivalents was $7,540,590.

 

However, we may require additional cash to undertake larger projects or to complete strategic acquisitions in the future. In the event our current capital is insufficient to fund these and other business plans, we may take the following actions to meet such working capital needs:

 

·We may look into the possibility of optimizing our funding structure by obtaining short- and/or long-term debt through commercial loans. We are actively exploring opportunities with other major Chinese banks, such as ICBC and CITIC Bank, and we expect to acquire additional lines of credit to enable us to gain more project opportunities in the future. Other financing instruments into which we are currently looking include supply chain financing, project financing, trust fund financing and capital leasing.

 

·We may improve our collection of accounts receivable. Most of our clients are central, provincial and local governments. We believe that our clients are in good financial positions. Therefore, good collectability from relatively high accounts receivables is expected. The accounts receivable collection should catch up with our rapid growth in the near future. Given the interest rates in the long-term contracts, it is possible that some clients might choose to pay the contract fees before the due date.

 

Segment Information

 

We have three reportable operating segments. The segments are grouped with reference to the types of goods and services provided and the types of clients that use such goods and services. Total sales and costs are divided among these three segments. We assess each segment’s performance based on net revenue and gross profit on contribution margin.

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

The following are the operating results for the three months ended March 31, 2012 and 2011 for Segment 1:

 

   Three months ended March 31         
   2012($)   2011($)   Change($)   Change (%) 
Revenues   8,406,973    12,904,386    (4,497,413)   (34.9)%
Cost of Revenues   5,924,264    9,621,997    (3,697,733)   (38.4)%
Operating Expenses:                   %
Selling and Marketing Expenses   225,626    109,058    116,568    106.9%
General and Administrative Expenses   1,530,415    741,138    789,277    106.5%
Research and Development   5,751    -    5,751    -
Total Operating Expenses   1,761,792    850,196    911,596    107.2%
Other income (expenses)   347,415    (5,653)   353,068    (6,245.7)%
Income before Provision for Income Taxes   1,068,332    2,426,540    (1,358,208)   (56.0)%

 

Revenues for Segment 1 were $8,406,973 for the three months ended March 31, 2012, a decrease of $4,497,413, or 34.9%, from $12,904,386 in the same period of 2011. This decrease was mainly attributable to the Ordos drinking water plant project. In the first quarter of 2011, we recognized revenue of $12.3 million on Ordos, and we recognized revenue $3.1 million in the first quarter of 2012 on the same project. Although we recognized revenue of $3.99 million on the Indian project in the first quarter of 2012, the revenue increase from the Indian project did not entirely offset the revenue decrease from Ordos.

 

Cost of revenues for Segment 1 was $5,924,264 in the first quarter of 2012, a decrease of $3,697,733, or 38.4%, from that of $9,621,997 in the first quarter of 2011. Since the Company recognizes revenue following the percentage-of-completion method, measured by different stages of completion, the decrease in cost of revenue was mainly due to the decrease of revenue recognized according to completion stage during the periods.

 

Total operating expenses in Segment 1 were $1,761,792, an increase of $911,596, or 107.2%, compared with $850,196 in the first quarter of 2011. The selling and marketing expenses increased from $109,058 in the first quarter of 2011 to $225,626 in the same period 2012, an increase of $116,568, or 106.9%. The increase was mainly due to the increase in headcount and travel expenses. The general and administrative expenses for the first quarter of 2012 were $1,530,415, an increase of $789,277, or 106.5%, compared with $741,138 for the same period in 2011. The increase was caused by the increase in salaries, rent and professional service expenses.

 

I-12
 

 

Other income was $347,415 in the first quarter of 2012, a $353,068 increase compared to other expense of $5,653 in the same period of 2011. The increase was mainly due to unrecognized financing income in the first quarter of 2012.

 

Income before provision for income taxes was $1,068,332 in the quarter ended March 31, 2012, a decrease of $1,358,208, or 56.0%, from that of $2,426,540 in the same period in 2011. The gross margin for this segment was 29.5%.

 

Segment 2: Water Resource Management System and Engineering Services

 

The following are the operating results for the three months ended March 31, 2012 and 2011 for Segment 2:

 

   Three months ended March 31         
   2012($)   2011($)   Change($)   Change (%) 
Revenues   6,254,590    1,641,059    4,613,531    281.1%
Cost of Revenues   4,521,154    868,608    3,652,546    420.5%
Operating Expenses:                   %
Selling and Marketing Expenses   426,290    150,728    275,562    182.8%
General and Administrative Expenses   622,294    495,238    127,056    25.7%
Research and Development   63,119    39,985    23,134    57.9%
Total Operating Expenses   1,111,703    685,951    425,752    62.1%
Other expenses   (40,916)   (65)   (40,851)   62,847.7%
Income before Provision for Income Taxes   580,817    86,435    494,382    572.0%

 

In Segment 2, revenues were $6,254,590 for the three months ended March 31, 2012, an increase of $4,613,531, or 281.1%, from $1,640,059 in the same period of 2011. Revenues in this segment increased significantly since Yanyu won a large number of contracts in 2011 and 2012, and the revenue stream from projects awarded in 2011 and 2012 started to be recognized in the first quarter of 2012. Cost of revenues in Segment 2 was $4,521,154 in the quarter ended March 31, 2012, an increase of $3,652,546, or 420.5%, from $868,608 in the same period of 2011. This increase was mainly due to the increase of projects.

 

Total operating expenses in Segment 2 were $1,111,703, an increase of $425,752, or 62.1%, compared with $685,951 in the first quarter of 2011. The selling and marketing expenses increased from $150,728 in the first quarter of 2011 to $426,690 in the first quarter of 2012, an increase of $275,562, or 182.8%. The increase was mainly due to the increases in headcount and travel expenses. The general and administrative expenses for the first quarter of 2012 were $622,294, an increase of $127,056, or 25.7%, compared with $495,238 for the same period in 2011.

 

Other expenses were $40,916 in the quarter ended March 31, 2012, an increase of $40,851 from $65 in the same period of 2011. The increase was mainly due to interest expense in the first quarter of 2012.

 

Income before provision for income taxes were $580,817 in the quarter ended March 31, 2012, an increase of $494,832 from $86,435 in the same period of 2011. The gross margin for this segment was 27.7%.

 

Segment 3: Industrial Pollution Control and Safety

 

The following are the operating results for the three months ended March 31, 2012 and 2011 for Segment 3:

 

   Three months ended March 31         
   2012($)   2011($)   Change($)   Change (%) 
Revenues   4,559,749    3,007,766    1,551,983    51.6%
Cost of Revenues   3,558,394    2,052,426    1,505,968    73.4%
Operating Expenses:                   %
Selling and Marketing Expenses   187,077    54,387    132,690    244.0%
General and Administrative Expenses   700,651    830,418    (129,767)   (15.6)%
Research and Development               %
Total Operating Expenses   887,728    884,805    2,923    0.3%
Other (expenses) income   (15,594)   1,651    (17,245)   (1.044.5)%
Income before Provision for Income Taxes   98,033    72,186    25,847    35.8%

 

Revenues in Segment 3 were $4,559,749 for the three months ended March 31, 2012, an increase of $1,551,983, or 51.6%, from $3,007,766 in the same quarter of 2011. The increase was mainly due to the Qatar project, the Canadian project and the Mexican project. Cost of revenues for the first quarter was $3,558,394, an increase of $1,505,968, or 73.4%, from $2,052,426 in the first quarter of 2011. The increase was mainly due to the increase of projects including the Qatar project, the Canadian project and the Mexican project.

 

I-13
 

 

Total operating expenses were $887,728, an increase of $2,923, or 0.3%, from $884,805 in the first quarter of 2011. Selling and marketing expenses increased by $132,690 compared to the first quarter of 2011. General and administrative expenses decreased from $830,418 in the first quarter of 2011 to $700,651, a decrease of $129,767, or 15.6%. Income before provision for income taxes for the first quarter 2012 was $98,033, compared to $72,186 for the same period of 2011, an increase of $25,847, or 35.8%. The gross margin for this segment was 22.0%.

 

Assets attributable to each segment as of March 31, 2012 and December 31, 2011 are shown below:

 

Segment Assets  Segment 1   Segment 2   Segment 3   Total 
As of March 31, 2012  $87,478,382   $32,906,620   $27,048,708   $147,433,710 
As of December 31, 2011  $84,910,147   $26,081,474   $27,659,057   $138,650,678 

 

Contractual Obligations and Commercial Commitments

 

Operating Leases

 

As of March 31, 2012, we had commitments under certain operating leases, which require annual minimum rental payments as follows:

 

For the Years Ended December 31,  Amount 
2012  $610,384 
2013   471,053 
2014   154,535 
Total  $1,235,972 

 

Our leased properties are principally located in Beijing and are used for administration and research and development purposes. The terms of these operating leases vary from one to five years. Pursuant to the lease terms, when the contracts expire, we have the right to extend them with new negotiated prices. The leases are renewable subject to negotiation. Rental expenses were $247,511 and $183,287 for the quarter ended March 31, 2012 and 2011, respectively.

 

Product Warranties

 

Our warranty policy generally is to replace parts at no additional charge if they become defective within one year after deployment. Historically, failure of product parts due to materials used or workmanship has not been significant. We have not incurred any material unexpected costs associated with servicing warranties. We continuously evaluate and estimate our potential warranty obligations, and record the related warranty obligation when the estimated amount becomes material at the time revenue is recorded.

 

Capital Expenditures

 

In the past, the capital expenditures were mainly for purchases of computers and other office equipment to support our daily business activities. Our capital expenditures will increase in the near term as our business continues to grow and as the construction of our research and development facilities in Tianjin progresses. The construction of the research and development center consists of three phases. Phase one has been completed. Phases two and three of the construction are planned to be completed by the end of 2013. The total capital investment is expected to be $20 million.

 

Seasonality

 

The Company’s operating revenues normally tend to fluctuate due to different project stages and U.S. GAAP requirements on revenue recognition. As the scope of our business extended to the civil construction activities, certain destructive weather conditions that tend to occur during the winter often impact the progress of our projects. Certain weather conditions, including severe winter storms, may result in the temporary suspension of outdoor operations, which can significantly affect the operating results of the affected regions. The operating results for the first quarter often reflect the business slowdown for the Chinese traditional holidays, the Spring Festival, which could last anywhere from 7 days up to one month.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements for the quarter ended March 31, 2012 or 2011.

 

I-14
 

 

Taxation

 

Pursuant to the new EIT Law and supplementary regulations, only high-tech companies that have been re-certified as such under the new criteria are granted the preferential enterprise income tax rate of 15%. According to an approval from the Beijing State Tax Bureau of Xicheng District, TTB received a preferential income tax rate of 7.5% from January 1, 2009 to December 31, 2011. Thereafter, the EIT rate could be either 15%, if TTB qualifies as a high-tech company, or 25%, if it does not so qualify. We believe TTB will continue to qualify as a high-tech company.

 

Sales tax varies from 3% to 5% depending on the nature of the revenue, and VAT is 17%. For revenues generated from those parts of our software solutions which are recognized by and registered with government authorities and meet government authorities’ requirements to be treated as software products, we are entitled to receive a refund of 14% on the total VAT paid at a rate of 17%. Revenues from software products other than the above are subject to full VAT at 17%. In addition, we are currently exempted from sales tax for revenues generated from development and transfer of tailor-made software solutions for clients. Further, revenues from consulting services are subject to a 5% sales tax. Qualified to issue VAT invoices, we need to maintain a certain amount of revenue that is taxable by VAT. As such, we may have to refuse some of the tax exemption benefits in our tailor-made software development business and pay VAT for those parts of the revenue in order to maintain minimum VAT revenue thresholds. This practice may cease to apply if more of the software products become recognized and registered as software products in the PRC.

 

Significant Accounting Policies

 

Estimates and Assumptions

 

The preparation of financial statements requires management to make numerous estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have financial impacts on recognition and disclosure of assets, liabilities, equity, revenues and expenses. However, we believe that these estimates used in preparing our financial statements are based on our best professional judgment, and are reasonable and prudent.

 

The most complex and subjective estimates and assumptions that present the greatest amount of uncertainty relate to the recognition of revenue under the percentage of completion method recording, business combination, the allowance for doubtful accounts, long term contract collectability, impairment of fixed assets and intangible assets, and income tax. We evaluate all of these estimates and judgments on an on-going basis. Below are the most critical estimates and assumptions we make in preparing the consolidated financial statements.

 

Revenue Recognition

 

Our revenues consist primarily of three categories: (i) System Integration, (ii) Hardware Product Sales, and (iii) Software Product Sales. The Company recognizes revenue when the consideration to be received is fixed or determinable, products delivered, or services rendered, and collectability ensured.

 

For system integration, sales contracts are structured with fixed price. The contract periods range from two months to approximately three years in length. We recognize revenue of these contracts following the percentage-of-completion method, measured by different stages in accordance with ASC 605-35, “Construction-Type and Production-Type Contracts.” Only if the actual implementation status meets the established stages of completion will we recognize the relevant portion of the revenue. There are four major stages for the system integration revenue recognition: (a) the completion of project design, (b) the delivery of products, (c) the completion of debugging, and (d) inspection and acceptance.

 

For hardware product sales, we recognize revenue only when all products are delivered and the acceptance confirmations are signed by the customers, according to ASC 605-10, “Revenue Recognition.” We are not obligated for any repurchase or return of the goods.

 

We also sell software products. These software product sales do not include any additional services such as maintenance or technical support. We recognize revenue under ASC 985-605, “Software Revenue Recognition” according to the acceptance of delivery revenue recognition method. At the end of each reporting period, we recognize the contract amount as revenue only if all software products have been delivered and the customer acceptance confirmation has been signed.

 

If unapproved change orders or claims occur in the future, in accounting for contracts, we follow paragraphs 30 and 31 of ASC 605-35-25, “Construction-Type and Production-Type Contracts.” We recognize revenue from unapproved change orders or claims only to the extent that contract costs relating to the unapproved change orders or claims have been incurred, and only if it is probable that such unapproved change orders or claims will result in additional contract revenue and the amount of such additional revenue can be reliably estimated. To date, we have not experienced any unapproved change orders in our ordinary business operation.

 

I-15
 

 

We present all sales revenue net of VAT. Our products sold in China are generally subject to Chinese VAT of 17% of the sales price, except for certain proprietary software sales which will only be subject to an effective tax rate of 3%. The VAT payable may be offset by VAT paid by us on purchased raw materials and other materials included in the cost of projects or producing the finished product.

 

We record revenue in excess of billings as “unbilled revenue”. For revenues accounted for under this account, we expect the amounts to be collected within one year. For those with collection periods in excess of one year, we classify them under “long-term unbilled revenue” on the consolidated balance sheets.

 

The Company obtained several contracts with a billing cycle of over three years in the past two years. The discounted revenues from those contracts are recorded and the discount rate is the 3-year nominal interest rate of 5.4%, set by the People’s Bank of China, China’s central bank. For the contract where a discount rate is specified, such specified rate is applied. These projects are funded by local governments with central government project appropriations, so the Company does not ascribe any collection risk on such projects.

 

Accounts Receivable

 

Given the characteristics of the clientele, we are confident that our accounts receivable are of good quality even though our accounts receivable days are relatively long compared with companies in other industries. Our finance team is constantly monitoring the accounts receivable quality and the process and assumptions used in bad debt provision. In case of any event that indicates accounts receivable quality deterioration, management will reassess the bad debt provision within the period such event occurs.

 

We recognize accounts receivable initially at fair value less an allowance for doubtful accounts. We make an allowance for doubtful accounts based on the aging of accounts receivable and on any specifically identified accounts receivable that may become uncollectible. We maintain allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments in the relevant time periods. We review the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, the customer’s historical payment history and current credit-worthiness and current economic trends. The amount of the provision, if any, is recognized in the consolidated statement of operations within “general and administrative expenses.”

 

While the collection period for some of the long-term contracts, such as the build-and-transfer projects, can be as long as two years, given that our clients are primarily government agencies supported by provincial budgets and large state-owned enterprises with sufficient liquidity, we believe the collectability of accounts receivable is secure, long-term or short-term.

 

Impairment of Assets and Intangible Assets

 

We monitor the carrying value of our long-lived assets for potential impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. To the extent the estimated undiscounted future cash inflows attributable to the asset, less estimated undiscounted future cash outflows, are less than the carrying amount, we recognize an impairment loss in an amount equal to the difference between the carrying value of such assets and fair value. No impairment indicator is noted in the prior or current periods.

 

We evaluate the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. Estimating future cash flows require significant judgment, and projections may vary from the cash flows eventually realized which could impact our ability to accurately assess whether an asset has been impaired.

 

For goodwill, we assess for impairment at period end or whenever events or changes indicate that, more likely than not, the carrying value of goodwill has been impaired. We use the income approach to estimate the fair value of the goodwill. The income approach is based on the long-term projected future cash flows of the operating segments. We discount the estimated cash flows to present value using a weighted-average cost of capital that considers factors such as the timing of the cash flows and the risks inherent in those cash flows. We believe that this approach is the most reasonable because it provides a fair value estimate based upon the operating segments’ expected long-term performance considering the economic and market conditions that generally affect our business.

 

PRC Value-Added Tax

 

Our products sold in China are generally subject to a Chinese VAT at a rate of 17%. Proprietary software sales are subject to business tax of 5%. The VAT may be offset by VAT we pay on raw materials and other materials included in the cost of producing our finished product. Accrued VAT payables from Yanyu, Tranhold and BSST are subject to urban maintenance and construction tax and additional education fees, which are accounted for as 0.5% of the total sales value.

 

I-16
 

 

PRC Business Tax

 

Revenues from services provided by TTB, Yanyu, Tranhold and BSST are mostly subject to a Chinese business tax of 5% and surtax of 0.5%. One of the projects in Tianjin is subject to a 3% business tax. We pay business tax on gross revenues generated from our shipping agency services minus the costs of services, which are paid on behalf of our customers.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As of March 31, 2012, the Company carried out an evaluation, under the supervision of and with the participation of management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the three month ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

I-17
 

 

PART II.             OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

   (a) None.

 

   (b) The section entitled “Use of Proceeds” from the registration statement filed on January 8, 2010, as amended (the “Registration Statement”) is incorporated herein by reference. The effective date of the Registration Statement is April 14, 2010, and the Commission file number assigned to the Registration Statement is 333-164273. The Registration Statement registers the offering of up to 2,366,833 ordinary shares (subject to amendment in accordance with the Securities Act of 1933 and the rules and regulations promulgated thereunder) (the “Offering”). As of March 31, 2012, the Company has spent proceeds from the Offering in accordance with the following chart:

 

Description of Use  Proposed
Expenditure
Amount
   Actual Expenditures
Through March 31,
2012
     
Working Capital  $18,973,000   $18,973,000    100.00%
Mergers & Acquisitions   6,120,000    3,485,585    56.95%
New Product Development   3,366,000    2,727,150    81.02%
Sales & Marketing   2,142,000    2,142,000    100.00%
Total  $30,601,000   $27,327,735    89.30%

 

(c)        None.

 

Item 3. Defaults Upon Senior Securities

 

 None.

 

Item 4. Mine Safety Disclosures.

           

Not applicable.

           

Item 5. Other Information

 

 None.

 

Item 6. Exhibits

 

The following exhibits are filed herewith:

 

Exhibit    
Number   Document
     
3(i).1   Amended and Restated Articles of Association of the Registrant (1)
     
3(ii).1   Amended and Restated Memorandum of Association of the Registrant (1)
     
4.1   Specimen Share Certificate (1)
     
10.1   Translation of Form of Employment Agreement between Registrant and Executive Officer of the Registrant (1)
     
10.2   Translation of Exclusive Technical and Consulting Service Agreement for Tranhold (1)

 

II-1
 

 

10.3   Translation of Management Fee Payment Agreement for Tranhold (1)
     
10.4   Translation of Proxy Agreement for Tranhold (1)
     
10.5   Translation of Equity Interest Pledge Agreement for Tranhold (1)
     
10.6   Translation of Exclusive Equity Interest Purchase Agreement for Tranhold (1)
     
10.7   Translation of Exclusive Technical and Consulting Service Agreement for Yanyu (1)
     
10.8   Translation of Management Fee Payment Agreement for Yanyu (1)
     
10.9   Translation of Proxy Agreement for Yanyu (1)
     
10.10   Translation of Equity Interest Pledge Agreement for Yanyu (1)
     
10.11   Translation of Exclusive Equity Interest Purchase Agreement for Yanyu (1)
     
10.14   Translation of Operating Agreement for Yanyu (1)
     
10.15   Translation of Operating Agreement for Tranhold (1)
     
10.16   Translation of Exclusive Technical and Consulting Service Agreement for BSST (2)
     
10.17   Translation of Management Fee Payment Agreement for BSST (2)
     
10.18   Translation of Operating Agreement for BSST (2)
     
10.19   Translation of Equity Interest Pledge Agreement for BSST (2)
     
10.20   Translation of Exclusive Equity Interest Purchase Agreement for BSST (2)
     
10.21   Translation of Proxy Agreement for BSST (2)
     
10.22   2011 Stock Option Plan (3)
     
21.1   Subsidiaries of the Registrant (5)
     
31.1   Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (5)
     
31.2   Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (5)
     
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (5)
     
32.2   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (5)
     
99.2   Audit Committee Charter (6)
     
101.INS   XBRL Instance Document (7)
     
101.SCH   XBRL Taxonomy Extension Schema Document (7)
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document (7)
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document (7)
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document (7)

 

II-2
 

 

101.DEF   XBRL Taxonomy Extension Definition Linkbase Document (7)

 

  (1) Incorporated by reference to the registrant’s registration statement on Form S-1, File no. 333-158393, filed on April 3, 2009, as amended.
  (2) Incorporated by reference to the registrant’s Form 10-K, SEC Accession No. 0001193125-11-080197, filed on March 29, 2011.
  (3) Incorporated by reference to the registrant’s Form 10-K, SEC Accession No. 0001144204-12-017170, filed on March 26, 2012.
  (4) Incorporated by reference to the registrant’s Form 10-Q, SEC Accession No. 0001144204-11-064756, filed on November 15, 2011.
  (5) Filed herewith.
  (6) Incorporated by reference to the registrant’s Form 10-K, SEC Accession No. 0001193125-10-065797, filed on March 24, 2010.
  (7) Furnished herewith.  In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

II-3
 

 

SIGNATURE

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Tri-Tech Holding Inc.
     
May 14, 2012 By: /s/ Peter Dong
    Peter Dong
    Chief Financial Officer
    (Principal Financial and Accounting Officer) and
    Duly Authorized Officer

 

II-4
 

  

TRI-TECH HOLDING INC. AND SUBSIDIARIES

 

Consolidated Financial Statements

 

For the quarters ended March 31, 2012 and 2011

 

 
 

 

TRI-TECH HOLDING INC. AND SUBSIDIARIES

Index to Financial Statements

 

  Page
CONSOLIDATED BALANCE SHEETS F-2
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-5 – F-24

 

F-1
 

 

TRI-TECH HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2012   December 31, 
   (Unaudited)   2011 
ASSETS          
Current assets          
Cash  $7,540,590   $11,935,746 
Restricted cash   1,804,942    2,087,920 
Accounts and notes receivable, net of allowance for doubtful accounts of $772,746 and $619,062 as of March 31, 2012 and December 31 2011, respectively   22,929,651    19,888,084 
Unbilled revenue   20,194,207    7,254,830 
Other receivables   3,970,446    2,761,548 
Inventories   6,947,919    7,705,752 
Deposits on projects   1,542,465    1,212,691 
Prepayments to suppliers and subcontractors   5,188,932    4,908,697 
Total current assets   70,119,152    57,755,268 
Long-term unbilled revenue   55,815,367    59,298,740 
Plant and equipment, net   1,485,412    1,436,838 
Construction in progress   4,612,933    4,566,934 
Intangible assets, net   11,406,325    11,609,662 
Long-term investment   5,409     
Long-term restricted cash   2,547,834    2,541,958 
Goodwill   1,441,278    1,441,278 
Total Assets  $147,433,710   $138,650,678 
LIABILITIES AND EQUITY          
Current liabilities          
Accounts payable  $4,421,362   $11,401,187 
VIE notes payable   1,118,059    1,176,197 
Costs accrual on projects   28,962,105    19,402,047 
Advance from customers   1,255,283    1,886,607 
Other payables   12,525,641    10,784,132 
Accrued liabilities   334,653    379,357 
Payable on investment consideration   812,841    895,000 
Income taxes payable       154,519 
Deferred income taxes   964,393    358,519 
Short-term bank borrowing (including VIE short-term borrowing of the consolidated VIEs without recourse to Tri-Tech Holdings of $2,696,488 and $2,296, 895 as of March 31, 2012 and December 31, 2011, respectively)   11,434,553    8,010,365 
Total current liabilities   61,828,890    54,447,930 
Noncurrent deferred income taxes   3,168,670    3,455,823 
Total Liabilities   64,997,560    57,903,753 
Equity          
Tri-Tech Holding Inc. shareholders' equity          
Ordinary shares ($0.001 par value, 30,000,000 shares authorized; 8,203,299 and 8,203,299 shares issued as of March 31, 2012 and  December 31,2011, respectively)   8,203    8,203 
Additional paid-in-capital   48,863,220    48,772,307 
Statutory reserves   1,866,994    1,866,994 
Retained earnings   21,120,511    19,682,386 
Treasury shares (21,100 shares in treasury as of March 31, 2012 and December 31,2011, respectively)   (193,750)   (193,750)
Accumulated other comprehensive income   4,772,534    4,593,046 
           
Total Tri-Tech Holding Inc. shareholders' equity   76,437,712    74,729,186 
Noncontrolling interests   5,998,438    6,017,739 
Total shareholders' equity   82,436,150    80,746,925 
Total liabilities and equity  $147,433,710   $138,650,678 

 

See notes to consolidated financial statements

 

F-2
 

 

TRI-TECH HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

   For The Three Months Ended March 31, 
   2012   2011 
   (Unaudited)   (Unaudited) 
Revenues:          
System integration  $18,532,662   $15,870,494 
Hardware products   688,650    1,682,717 
Total revenues   19,221,312    17,553,211 
Cost of revenues          
System integration   13,584,217    11,650,749 
Hardware products   419,595    892,282 
Total cost of revenues   14,003,812    12,543,031 
Gross profit   5,217,500    5,010,180 
Operating expenses:          
Selling and marketing expenses   838,993    314,173 
General and administrative expenses   2,853,360    2,066,794 
Research and development expenses   68,870    39,985 
Total operating expenses   3,761,223    2,420,952 
Income from operations   1,456,277    2,589,228 
Other income (expenses):          
Other income (expense)   672,495    (18,229)
Interest income   41,774    14,162 
Interest expense   (435,773)    
Investment gain   5,409     
Fair value change on contingent investment consideration   7,000     
Total other income (expenses), net   290,905    (4,067)
Income before provision for income taxes   1,747,182    2,585,161 
Provision for income taxes   314,493    405,636 
Net income   1,432,689    2,179,525 
Less: Net (loss) income attributable to non-controlling interests   (5,436)   480,544 
Net income attributable to Tri-Tech Holding Inc. shareholders  $1,438,125   $1,698,981 
Net income   1,432,689    2,179,525 
Other comprehensive income          
Foreign currency translation adjustment   193,353    513,497 
Comprehensive income   1,626,042    2,693,022 
Less: Comprehensive income attributable to non-controlling interests   8,429    454,234 
Comprehensive income attributable to Tri-Tech Holding Inc.  $1,617,613   $2,238,788 
Net income attributable to Tri-Tech Holding Inc. shareholders per share:          
Basic  $0.18   $0.21 
Diluted  $0.17   $0.21 
Weighted average number of ordinary shares outstanding:          
Basic   8,208,480    8,055,720 
Diluted   8,317,224    8,155,222 

 

See notes to consolidated financial statements

 

F-3
 

 

TRI-TECH HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For The Three Months Ended March 31, 
   2012   2011 
   (Unaudited)   (Unaudited) 
Cash flows from operating activities:          
Net income  $1,432,689   $2,179,525 
Adjustments to reconcile net income to net cash used in operating activities:          
Amortization of option share-based compensation   90,913    87,131 
Depreciation and amortization   285,479    187,395 
Provision for doubtful accounts   152,717    133,808 
Fair value change on contingent investment consideration   (7,000)    
Gain on investment in joint venture   (5,409)    
Deferred income taxes   314,493    405,636 
Changes in operating assets and liabilities:          
Accounts and notes receivable   (3,160,643)   2,802,576 
Unbilled revenue   (8,837,581)   (12,074,559)
Other receivables   (1,258,278)   (162,855)
Inventories   762,767    (72,988)
Prepaid expenses   (133,743)    
Prepayments   (267,700)   (1,692,754)
Accounts payable   (5,294,693)   8,738,957 
Notes payable   (59,248)    
Cost accrual on projects   10,693,084     
Customer deposits   (634,643)   541,104 
Other payables   (1,856,643)   (1,096,557)
Accrued liabilities   (74,183)   (113,534)
Taxes payable   (154,840)   (58,946)
Net cash used in operating activities   (8,012,462)   (196,061)
Cash flows from investing activities:          
Restricted cash   280,518    (592,554)
Payable on investment consideration   (75,159)    
Payment of loan to joint venture   (250,000)    
Payment to purchase plant and equipment   (118,550)   (25,664)
Payment to purchase intangible assets       (162,156)
Addition of construction in progress   (41,125)   (108,178)
Collection of loan to third-party companies   300,000     
Payment of loan to third-party companies   (190,253)    
Net cash used in investing activities   (94,569)   (888,552)
Cash flows from financing activities:          
Proceeds from exercising options into ordinary shares       454,009 
Proceeds from short-term bank borrowing   3,408,695     
Payment of installment of purchasing vehicle       (11,313)
Proceeds from loan from third-party companies   215,620     
Payment of loan from third-party companies   (307,258)    
Net cash provided by financing activities   3,317,057    442,696 
Effect of exchange rate fluctuation on cash and cash equivalents   394,818    93,690 
Net decrease in cash and cash equivalents   (4,395,156)   (548,227)
Cash and cash equivalents, beginning of period  $11,935,746   $23,394,995 
Cash and cash equivalents, end of period  $7,540,590   $22,846,768 
Supplemental disclosure of cash flow information:          
Income taxes paid  $154,361   $75,646 
Interest paid on debt  $151,606   $ 

 

See notes to consolidated financial statements

 

F-4
 

 

1.Company Background

 

Tri-Tech Holding Inc. (“TRIT”), incorporated in the Cayman Islands, through its subsidiaries and contractually-controlled variable interest entities (“VIE”) (collectively the “Company”), provides self-manufactured, proprietary or third-party products, system integration and other services in the following three segments: Water, Wastewater Treatment and Municipal Infrastructure, Water Resource Management System and Engineering Service, and Industrial Pollution Control and Safety.

 

TRIT currently has twelve subsidiaries, VIEs and joint venture partnership: (1) Tri-Tech International Investment, Inc. (“TTII”), (2) Tri-Tech (Beijing) Co., Ltd. (“TTB”), (3) Beijing Satellite Science & Technology Co. (“BSST”), (4) Tianjin Baoding Environmental Technology Co., Ltd. (“Baoding”), (5) Tranhold Environmental (Beijing) Tech Co., Ltd. (“Tranhold”), (6) Beijing Yanyu Water Tech Co., Ltd. (“Yanyu”), (7) Tri-Tech Infrastructure LLC, a Delaware limited liability company (“TIS”), (8) Ordos Tri-Tech Anguo Investment Co., Ltd. (“TTA”), (9) Beijing Huaxia Yuanjie Water Technology Co., Ltd (“Yuanjie”), (10) Buerjin Tri-Tech Industrial Co. Ltd. (“Buerjin”), (11) Tri-Tech Infrastructure (India) Pvt., Ltd. (“TII”), and (12) Xushui Tri-Tech Sheng Tong Investment Co.,Ltd (“Xushui”). The corporate structure is as follow:

 

 

Through a series of contractual agreements entered into in 2008 and 2010, the Company is deemed to be the sole indirect interest holder of Tranhold and BSST, and the indirect interest holder of 92.86% equity ownership in Yanyu. According to the provisions of ASC 810, “Consolidation”, Tranhold, Yanyu and BSST are consolidated in the Company’s financial statements. For BSST, the Company also applied the consolidation procedures required by ASC 805 “Business Combinations”.

 

To expand its technical and geological market profile, on June 9, 2011, the Company acquired the total operating assets of J&Y International Inc. (“J&Y”), inclusive of its technical know-how, design prints, etc. J&Y subsequently became the J&Y Water Division of the Company’s US subsidiary, TIS, according to the terms. J&Y’s business, including design and production of industrial chemical water recovery, desalination plants, domestic and industrial wastewater treatment systems and reverse osmosis filtration systems, are integrated into that of TIS.

 

F-5
 

 

On June 18, 2011, TTB entered into an investment agreement with Yuanjie and Yuanjie’s original shareholder to increase the capital investment in Yuanjie. The total investment from TTB was RMB10,990,500, or approximately $1,704,085, and TRIT acquired 51% of control over Yuanjie after increasing its capital investment in Yuanjie.

 

On August 23, 2011, Buerjin was established for projects in the Xinjiang province, especially in Buerjin County. The registered capital amount is RMB10,000,000, or $1,573,589, and RMB6,000,000, or $937,690, has been paid in. The Company has 80% of control over this newly established subsidiary.

 

On March 8, 2012, Xushui was established in Hebei Province. The registered capital amount is RMB15,000,000, or $2,372,104. TTB has 100% of control over Xushui. RMB3,000,000, or $474,421, has been paid.

 

The Company’s principal geographic market is the People’s Republic of China (“PRC”). As PRC laws and regulations prohibit or restrict non-PRC companies to engage in certain government-related businesses, the Company provides its services in the PRC through Tranhold and Yanyu, both Chinese legal entities holding qualifications and permits necessary to conduct government-related services in the PRC. In order to avoid any restrictions that Tranhold or Yanyu might encounter during future business development, the Company concluded that TTII does not have parent-subsidiary relationship with either Tranhold or Yanyu.

 

By November 28, 2008, the Company had completed two stages of reorganization. The Company first recalled its shares from the original shareholders of Tranhold and Yanyu. These shareholders are major shareholders, directors, executives officers and key employees of the Company. From a legal perspective, Tranhold and Yanyu returned to their status prior to the acquisitions in 2007. Concurrently, on November 28, 2008, the Company signed and executed with Tranhold and Yanyu a series of contractual agreements with a 25-year, renewable term. These contractual agreements require the pledge of the original shareholders’ equity interests and share certificates of the VIEs. At any time during the agreement period, the Company has absolute rights to acquire any portion of the equity interests of those VIEs under no-cost conditions. In addition, the Company has absolute rights to appoint directors and officers of those VIEs and to obtain the profits from those VIEs.

 

2.Summary of Significant Accounting Policies

 

Principles of consolidation and basis of presentation

 

The accompanying consolidated balance sheet as of December 31, 2011, which has been derived from audited financial statements, and the unaudited interim consolidated financial statements as of March 31, 2012 and for the three month periods ended March 31, 2012 and 2011 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, previously filed with the SEC.

 

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of March 31, 2012, its consolidated results of operations and cash flows for the three month periods ended March 31, 2012 and 2011, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

The Company compiles its daily financial records in accordance with the generally accepted accounting principles of the PRC (“PRC GAAP”) and converts its financial statements according to the US GAAP when reporting.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates used in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

 

F-6
 

 

Certain of the Company’s accounting policies require higher degrees of professional judgment than others in their application. These include the recognition of revenue under the percentage of completion method, the allowance for doubtful accounts, long term contract collectability, impairment of fixed assets and intangible assets, income tax and contingent investment payables. Management evaluates all of its estimates and judgments on an on-going basis.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are composed primarily of time deposits and investments in money market accounts and are stated at cost which approximates fair value.

 

Restricted Cash

 

The current restricted cash balance at March 31, 2012 and December 31, 2011 was $1,804,942 and $2,087,920, respectively. The long-term restricted cash balance at March 31, 2012 and December 31, 2011 was $2,547,834 and $2,541,958 respectively. The restricted cash was deposited as collateral in exchange of the issuance of letters of credit.

 

Accounts and Notes Receivable

 

Accounts and notes receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company makes an allowance for doubtful accounts based on the aging of accounts receivable and on any specifically identified accounts receivable that may become uncollectible.

 

Inventories

 

The Company values inventory at the lower of cost or net realizable value and determines inventory using the weighted average cost method. Inventory consists of raw materials, finished goods, and work-in-progress, which includes the cost of direct labor, materials and direct overhead costs related to the projects.

 

Long-term Unbilled Receivables

 

The Company obtained several Build-Transfer (“BT”) contracts with billing cycles of over three years in recent years. Due to the nature of the BT projects, the related revenue has been discounted and recorded as long-term unbilled receivables and the discount rate is the 3-year nominal interest rate of 5.4%, set by the People’s Bank of China, the PRC’s central bank. For the contract that a specific discount rate is agreed in the contract, that specific rate is applied. These projects are funded by local governments with central government project appropriation, so the Company does not have any collection risk on such projects.

 

Plant and Equipment

 

The Company states plant and equipment at cost less accumulated depreciation. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets with a 3%-5% estimated residual value.

 

Estimated useful lives of the Company’s assets are as follows:

 

Asset   Useful Life
Buildings and improvements   40-50 years
Transportation equipment   5-10 years
Machinery   10 years
Office equipment   5 years
Furniture   5 years

 

The Company eliminates the cost and related accumulated depreciation of assets sold or otherwise retired from the accounts and includes any gain or loss in the statement of income as an offset or increase to other income (expense) for the period. The Company charges maintenance, repairs and minor renewals directly to expenses as incurred, and capitalize major additions and betterment to buildings and equipment.

 

F-7
 

 

Valuation of Long-Lived Assets

 

The Company reviews the carrying value of its long-lived assets, including plant and equipment, and finite life intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated undiscounted future cash inflows attributable to the asset, less estimated undiscounted future cash outflows, are less than the carrying amount, the Company recognizes an impairment loss in an amount equal to the difference between the carrying value of such assets and fair value. No impairment indicator is noted in the prior or current years. The Company reports assets for which there is a committed disposition plan, whether through sale or abandonment, at the lower of carrying value or fair value less costs to sell. No such assets are identified in prior and current years.

 

The Company evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances revised estimates of useful lives.

 

Intangible Assets

 

The Company amortizes acquired intangible assets with definite lives on a straight-line basis over their expected useful economic lives. The company also performs impairment test if events or changes in circumstances indicate that the assets might be impaired.

 

    Useful Life
Proprietary technology relating to sewage, municipal solid waste treatment and tail gas purification   20 years
Proprietary technology relating to low energy consumption data transmission system   20 years
Large region environmental management system   10 years
Mobile web management system   10 years
Database management system   10 years
Pollution reduction checking assistant   10 years
Water pollution control infrastructure   10 years
Software-gas flow   20 years
Software-oil mixing   20 years
Software-crude blending   10 years
Customer relationship   5 years
Land use right   50 years
Know-how   8-10 years
Contract backlog   1 year

 

F-8
 

 

Goodwill

 

Goodwill represents the excess of the fair value of consideration transferred (plus the fair value of the non-controlling interest, if any) over fair value of the net assets acquired (including recognized intangibles). Goodwill is not amortized; rather, impairment tests are performed at least annually or more frequently if circumstances indicate impairment may have occurred. If impairment exists, goodwill is immediately written down to fair value and the loss is recognized in the consolidated income statements. The Company assesses impairment at period end or whenever events or changes indicate that, more likely than not, the carrying value of goodwill has been impaired. The Company uses the income approach to estimate the fair value of the reporting unit of the goodwill. The income approach is based on the long-term projected future cash flows of the operating segments. The Company discounts the estimated cash flows to present value using a weighted-average cost of capital that considers factors such as the timing of the cash flows and the risks inherent in those cash flows.

 

 Revenue Recognition

 

The Company’s revenues consist primarily of three categories: (i) System Integration, (ii) Hardware Product Sales, and (iii) Software Product Sales. The Company recognizes revenue when there is evidence of arrangement, the consideration to be received is fixed or determinable, products delivered, or services rendered, and collectability ensured.

 

For System Integration, sales contracts are usually structured with fixed price or fixed unit price. The contract periods range from two months to approximately three years in length. The Company recognizes revenue from these contracts following the percentage-of-completion method, measured by different stages of completion in accordance with ASC 605-35, “Construction-Type and Production-Type Contracts”. Only if the actual implementation status meets the established stage will the Company recognize the relevant portion of the revenue. There are four major stages for the System Integration revenue recognition: (a) the completion of project design, (b) the delivery of products, (c) the completion of debugging, and (d) inspection and acceptance. For BT projects, such as the Ordos drinking water plant project, the Company recognizes the project revenue using the man-power hours as the measurement for percentage of completion.

 

For Hardware Product Sales, the Company recognizes the revenue only when all products are delivered and the acceptance confirmations are signed by the customers, according to ASC 605-10, “Revenue Recognition”. The Company is not obligated for any repurchase or return of the goods.

 

The Company also sells software products. These software product sales do not include any additional services such as maintenance or technical support. The Company recognizes revenue under ASC 985-605, “Software Revenue Recognition” according to acceptance of delivery revenue recognition method. At the end of each reporting period, the Company recognizes the contract amount as revenue only if all software products have been delivered and the customer acceptance confirmation has been signed.

 

Provided unapproved change orders or claims occur in the future, in accounting for contracts, we follow Paragraphs 30 and 31 of ASC 605-35-25, “Construction-Type and Production-Type Contracts”. The Company recognizes revenue from unapproved change orders or claims only to the extent that contract costs relating to the unapproved change orders or claims have been incurred, and only if it is probable that such unapproved change orders or claims will result in additional contract revenue and the amount of such additional revenue can be reliably estimated. Until today, no unapproved change order has been experienced in the ordinary business operation.

 

The Company presents all sales revenue net of a value-added tax (“VAT”). The Company’s products sold in China are generally subject to a Chinese VAT of 17% of the sales price, except for certain proprietary software sales which will only be subject to an effective tax rate of 3%. The VAT payable may be offset by VAT paid by the Company on purchased raw materials and other materials included in the cost of projects or producing the finished product.

 

The Company records revenue in excess of billings as “unbilled revenue”. For revenues accounted for under this account, we expect the amounts to be collected within one year. For those with a collection period longer than one year, we classify them under “Long-term unbilled revenue” on the consolidated balance sheets.

 

Research and Development (R&D)

 

Research and development expenses include salaries for R&D staff, consultant fees, supplies and materials, as well as other overhead such as depreciation, facilities, utilities, and other R&D related expenses. The Company expenses costs for the development of new software products and substantial enhancements to existing software products as incurred until technological feasibility has been established, at which time any additional costs are capitalized. The management of the Company is responsible for assessing the establishment of technological feasibility in accordance with ASC 985-20, “Costs of Software to Be Sold, Leased, or Marketed”.

 

F-9
 

 

Foreign Currency Translation

 

The Company uses the United States dollar (“USD”) as its reporting currency. The functional currency of TRIT, TTII and TIS is USD, the functional currency of TRIT’s subsidiaries in China are Renminbi (“RMB”). The Company translates monetary assets and liabilities denominated in currencies other than United States dollars into USD at the exchange rate ruling at the balance sheet date. The Company converts non-USD transactions during the year into USD with the prevailing exchange rate on the transaction dates.

 

The Chinese subsidiaries of TRIT maintain their financial records in RMB. The value of the assets and liabilities were converted with the exchange rate on the balance sheet date; and their revenue and expenses with a weighted average exchange rate for the reporting period. The Company reflects translation adjustments as “Accumulated other comprehensive income (loss)” in shareholders’ equity.

 

Transaction gains and losses that arise from exchange rate fluctuations on transactions in a currency other than the functional currency are recognized as foreign currency transaction gain or loss in the result of operations as incurred.

 

Translation adjustments amounted to $4,772,534 and $4,593,046 as of March 31, 2012 and December 31, 2011, respectively. The Company translated balance sheet amounts with the exception of equity at March 31, 2012 at RMB6.2943 to US$1.00 as compared to RMB6.3009 to US$1.00 at December 31, 2011. The Company stated equity accounts at their historical rate. The average translation rates applied to income statement accounts for the three-month periods ended March 31, 2012 and 2011 were RMB6.3074 and RMB6.5832 to US$1.00, respectively.

 

Income Taxes

 

The Company provides for deferred income taxes using the asset and liability method. Under this method, the Company recognizes deferred income taxes for tax credits and net operating losses available for carry-forwards and significant temporary differences. The Company classifies deferred tax assets and liabilities as current or non-current based upon the classification of the related asset or liability in the financial statements or the expected timing of their reversal if they do not relate to a specific asset or liability. The Company provides a valuation allowance to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.

 

The Company adopted Financial Accounting Standards Board (“FASB”) accounting standard codification 740 (ASC 740), as of January 1, 2007. The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that the Company believes is more than 50% likely to be realized on examination. For tax positions not meeting the “more likely than not” test, the Company does not record it as a tax benefit. The Company also adopts ASC 740 guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. It had no effect on the Company’s financial statements as of March 31, 2012 and December 31, 2011. The Company did not have any significant unrecognized uncertain tax positions as of March 31, 2012 and December 31, 2011. 

 

The Company’s operations are subject to income and transaction taxes in China since most of the business activities take place in China. Significant estimates and judgments are required in determining the Company’s provision for income taxes. Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result. The Company does not anticipate any events which could change these uncertainties.

 

Share-based Compensation

 

The Company adopted the fair value recognition provisions of ASC 718, “Compensation—Stock Compensation” and ASC 505-50, “Equity-Based Payments to Non-Employees”.

 

The Company recognizes compensation expense for all share-based payment awards made to the employees and directors. The fair value of share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires considerable judgment, including estimating expected volatility, expected term and risk-free rate. The expected term is based upon the period of time for which the share option is expected to be outstanding. The expected volatility of the share options is based upon the historical volatility of our share price. The risk-free interest rate assumption is based upon China international bond rates for a comparable period. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past.

 

F-10
 

 

Earnings per Share

 

Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares (convertible preferred stock, forward contract, warrants to purchase ordinary share, contingently issuable shares, ordinary share options and warrants and their equivalents using the treasury stock method) were exercised or converted into ordinary shares. The Company excludes potential ordinary shares in the diluted EPS computation in periods of losses from continuing operations, as their effect would be anti-dilutive.

 

The Company has granted 525,500 options to our key employees and 185,000 warrants to the placement agent in our IPO and to our investor relations consultant, all of which are included when calculating the diluted earnings per share. As of March 31, 2012, 170,000 warrants had been exercised at a price equal to $8.10 per share.

 

During the first financing after IPO, the Company has also agreed to issue the underwriters a warrant to purchase a number of ordinary shares equal to an aggregate of 10% of the ordinary shares sold in the offering, excluding over-allotments. The warrants will have an exercise price equal to 145% of the offering price. Accordingly, in April 2010, the Company issued 214,275 warrants with exercise price per share of $20.30. These warrants have anti-dilutive effect due to the fact that the weighted average exercise price per share of these warrants is higher than the weighted average market price per share of ordinary share during the three-month periods ended March 31, 2012 and 2011.

 

Comprehensive Income

 

Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners. The Company has chosen to report comprehensive income in the statements of income and comprehensive income.

 

Financial Instruments

 

The Company carries financial instruments, which consists of cash and cash equivalents, accounts receivable, accounts payable, short-term bank borrowings and other payables at cost, which approximate fair value due to the short-term nature of these instruments. The Company does not use derivative instruments to manage risks.

 

Segments

 

The Company identifies segments by reference to its internal organization structure and the factors that management uses to make operating decisions and assess performance.

 

Recently Issued Accounting Pronouncements

 

In the first quarter of 2012, no new ASUs were issued by the Financial Accounting Standards Board (“FASB”).

 

3.Business Combinations

 

J&Y International Inc.

 

To expand its technical and geological market profile, on June 9, 2011, the Company acquired the total operating assets of J&Y International Inc. (“J&Y”), a water treatment company based in Wisconsin, USA, inclusive of its technology know-how, design prints, etc. The total purchase price was estimated to be $1,500,000 in the form of cash and ordinary shares as of the acquisition date, of which $488,000 payment in cash and 35,974 ordinary shares, at the price on the trading day prior to the closing at $7.61 per share with a total amount of $277,000, should be paid and issued at closing. The remaining payment of $735,000 subject to adjustment was deferred and paid by the issuance of ordinary shares, including:

  1) $200,000 payable upon a specific contract granted. In November 2011, the Company earned the specific contract. By the date of issuing financial statements, the $200,000 payable has not been paid yet. The Company paid the amount in April 2012.
  2) $200,000 payable upon a specific contract completion and receipt of payment excluding retainer. The contract is expected to complete by the end of year 2012.
  3) In the event the specific contract is not granted, the shares in 1) and 2) shall not be issued;
  4) $335,000 payable based on the specific threshold of performance EBITDA generated in connection with a specific contract. By the date of issuing financial statements, the amount was not paid. The amount will be subject to the performance EBITDA.

 

F-11
 

 

  5) If the seller sells the issued shares at a price less than $7.61 within one calendar year after the expiration of the restriction period, the Company shall pay the seller shortfall in cash as the make good amount.

 

The above contingent consideration was classified as a liability as of June 9, 2011, the closing date. The fair value of the contingent consideration as of March 31, 2012 and December 31, 2011was estimated at $888,000 and $895,000 pursuant to the official appraisal reports from an assessment agency. $75,159 was paid during the three-month period ended March 31, 2012, therefore the outstanding contingent consideration payable as of March 31, 2012 and December 31, 2011 was $812,841 and $895,000, respectively.

 

4.Variable Interest Entities

 

VIEs are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. TRIT is deemed to have a controlling financial interest and be the primary beneficiary of the entities mentioned in Note 1 above, because it has both of the following characteristics:

 

1. power to direct activities of a VIE that most significantly impact the entity’s economic performance, and

 

2. obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE.

 

TRIT’s VIEs include: Tranhold, Yanyu and BSST. TRIT is involved in each VIE and understands the purpose and design of these entities. It also performs a significant role in these entities’ ongoing business. It is obligated to absorb losses of the VIE entities as well as benefit from them. Therefore, the VIEs are consolidated in the Company’s 2011 and 2010 consolidated financial statements. These VIEs are continually monitored by the Company to determine if any events have occurred that could cause its primary beneficiary status to change.

 

On July 26, 2010, the Company signed and executed with BSST a series of contractual agreements with a 25-year, renewable term. These contractual agreements require the pledge of the original shareholders’ equity interests and share certificates of the VIEs. At any time during the agreement period, the Company has absolute rights to acquire any portion of the equity interests of those VIEs under no-cost conditions. On August 6, 2010, the effective date of the agreements, the Company became the primary beneficiary of BSST. At the same time, the Company paid the consideration of $3.8 million, including $1,447,000 in cash and 260,000 in the Company’s ordinary shares at the market value of $8.98 per share in the amount of $2,334,800. The Company will expand its market in the petrochemical industries through BSST since it is a consulting, engineering, design, system integration and project management services company specializing in the fields of control and instrument automation, safety and emergency response for the oil, gas and petrochemical industries.

 

These agreements consist of the following:

 

Exclusive Technical and Consulting Service Agreement — Each of Yanyu, Tranhold and BSST has entered into an Exclusive Technical and Consulting Service Agreement with TTB, which agreement provides that TTB will be the exclusive provider of technical and consulting services to Yanyu, Tranhold and BSST, as appropriate, and that each of them will in turn pay 90% of its profits (other than net profits allocable to the State-Owned Entities (“SOE”) Shareholder of Yanyu) to TTB for such services. In addition to such payment, Yanyu, Tranhold and BSST agree to reimburse TTB for TTB’s expenses (other than TTB’s income taxes) incurred in connection with its provision of services under the agreement. Payments will be made on a quarterly basis, with any overpayment or underpayment to be reconciled once each of Tranhold’s, Yanyu’s and BSST’s annual net profits, as applicable, are determined at its fiscal year end. Any payment from TTB to TTII would need to comply with applicable Chinese laws affecting payments from Chinese companies to non-Chinese companies. Although based on this agreement TTB is only entitled to 90% of net profits (other than net profits allocable to the SOE Shareholder of Yanyu), TTB also entitled the remaining share of the net profits of the VIEs through dividends per the Proxy Agreement as discussed below. The Company relies on dividends paid by TTB for its cash needs, and TTB relies on payments from Yanyu, Tranhold and BSST to be able to pay such dividends to the Company.

 

Management Fee Payment Agreement — Each of the shareholders of Yanyu, Tranhold and BSST (other than Beijing Yanyu Communications Telemetry United New Technology Development Department, a Chinese State Owned Entity (the “SOE Shareholder”) of Yanyu) has entered into a Management Fee Payment Agreement, which provides that, in the event TTB exercises its rights to purchase the equity interests of the Yanyu or Tranhold or BSST shareholders (other than those owned by the SOE Shareholder of Yanyu) under the Equity Interest Purchase Agreements, such shareholders shall pay a Management Fee to TTB in an amount equal to the amount of the Transfer Fee received by the such shareholders under the Equity Interest Purchase Agreement.

 

F-12
 

 

Proxy Agreement -- Each of the shareholders of Yanyu, Tranhold and BSST (other than the SOE Shareholder of Yanyu) has executed a Proxy Agreement authorizing TTB to exercise any and all shareholder rights associated with his ownership in Yanyu or Tranhold or BSST, as appropriate, including the right to attend shareholders’ meetings, the right to execute shareholders’ resolutions, the right to sell, assign, transfer or pledge any or all of the equity interest in Yanyu or Tranhold or BSST, as appropriate, and the right to vote such equity interest for any and all matters.

 

Equity Interest Pledge Agreement -- TTB and the shareholders of each of Tranhold, BSST and Yanyu, (other than the SOE Shareholder of Yanyu) have entered in Equity Interest Pledge Agreements, pursuant to which each such shareholder pledges all of his shares of Tranhold, Yanyu or BSST, as appropriate, to TTB. If Tranhold, Yanyu or BBST or any of its respective shareholders (other than the SOE Shareholder of Yanyu) breaches its respective contractual obligations, TTB, as pledgee, will be entitled to certain rights, including the right to foreclose on the pledged equity interests. Such Tranhold, BSST and Yanyu shareholders have agreed not to dispose of the pledged equity interests or take any actions that would prejudice TTB’s interest. According to this agreement, TTB has absolute rights to obtain any and full dividends related to the equity interest pledged during the term of the pledge.

 

Exclusive Equity Interest Purchase Agreement -- Each of the shareholders of Tranhold, Yanyu and BSST (other than the SOE Shareholder of Yanyu) has entered into an Exclusive Equity Interest Purchase Agreement, which provides that TTB will be entitled to acquire such shares from the current shareholders upon certain terms and conditions, if such a purchase is or becomes allowable under PRC laws and regulations. The Exclusive Equity Interest Purchase Agreement also prohibits the current shareholders of each of Tranhold, Yanyu and BSST, (other than the SOE Shareholder of Yanyu) from transferring any portion of their equity interests to anyone other than TTB. TTB has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee that it will do so or will be permitted to do so by applicable law at such time as it may wish to do so.

 

Operating Agreements -- TTB, Tranhold, Yanyu and each of their respective shareholders (other than the SOE Shareholder of Yanyu) have entered into an Operating Agreement on July 3, 2009, TTB, BSST and each of their respective shareholders have entered into an Operating Agreement on July 26, 2010, which requires TTB to guarantee the obligations of each of Tranhold, Yanyu and BSST in their business arrangements with third parties. Each of Tranhold, Yanyu and BSST, in return, agrees to pledge its accounts receivable and all of its assets to TTB. Moreover, each of Tranhold, Yanyu and BSST, agrees that without the prior consent of TTB, such company will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. Pursuant to these operating agreements, TTB provides guidance and instructions on each of Tranhold, Yanyu and BSST’s daily operations and financial affairs. The contracting shareholders of each of Tranhold, Yanyu and BSST, must designate the candidates recommended by TTB as their representatives on their respective boards of directors. TTB has the right to appoint and remove senior executives of each of Tranhold, Yanyu and BSST.

 

Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs.

 

The Company is the primary beneficiary of Tranhold, Yanyu and BSST, VIEs. Accordingly, the assets and liabilities of VIEs are included in the accompanying consolidated balance sheets.

 

The total assets and liabilities of our consolidated VIEs as of March 31, 2012 and December 31, 2011 are shown as below, which exclude intercompany balances that are eliminated among the VIEs.

 

F-13
 

 

   March 31, 2012   December 31, 
   (Unaudited)   2011 
ASSETS          
Current assets          
Cash  $1,745,984   $4,414,701 
Restricted cash   974,942    1,192,134 
Accounts and notes receivable, net   25,498,079    19,310,636 
Unbilled revenue   5,477,181    4,361,317 
Other receivables   10,242,549    8,790,816 
Inventories   5,255,063    5,950,510 
Deposits on projects   1,315,723    983,013 
Prepayments to suppliers and subcontractors   2,293,538    1,387,119 
Total current assets    52,803,059    46,390,246 
Long-term unbilled revenue   2,156,926    2,154,667 
Plant and equipment, net   518,163    511,160 
Intangible assets, net   4,038,629    4,138,012 
Long-term investment   5,855,566    5,855,566 
Long-term restricted cash   30,073    26,834 
Total Assets  $65,402,416   $59,076,485 
LIABILITIES AND EQUITY          
Current liabilities          
Accounts payable   9,357,320    1,394,883 
Notes payable   1,118,059    1,176,197 
Costs accrual on projects   9,492,257    8,104,579 
Customer deposits   1,147,133    1,920,597 
Other payables   22,435,397    19,944,048 
Income taxes payable   443,334    10,096 
Deferred income taxes       328,419 
Short-term bank borrowing   2,696,488    2,296,895 
Total current liabilities    46,689,988    35,175,714 
Total Liabilities  $46,689,988   $35,175,714 

 

For the three-month period ended March 31, 2012, the financial performance of the VIEs reported in the consolidated statements of income and comprehensive income includes sales of approximately US$10,770,629, cost of sales of approximately US$8,428,174, operating expenses of approximately US$1,900,044 and net income of approximately US$244,380.

 

5.Restricted Cash

 

As of March 31, 2012, the Company has made deposits several times totaling $4,352,776 as collateral in exchange of the issuance of letters of credit. Letters of credit aggregating $1,804,942 will expire within the next 12 months. The remaining balance of $2,547,834 expires in 2013, and is classified under long-term restricted cash.

 

6.Accounts and Notes Receivable, Net

 

Based on the Company’s assessment, management believes the net balance on each balance sheet date herein was collectable. The gross balance and bad debt provision as of March 31, 2012 and December 31, 2011 are as the following:

 

F-14
 

 

   March 31, 2012   December 31, 
   (Unaudited)   2011 
Accounts receivable, gross  $23,611,839   $20,507,146 
Less bad debt provision   (772,746)   (619,062)
Notes receivable   90,558     
Accounts and notes receivable, net  $22,929,651   $19,888,084 

 

The Company records revenue from system integration contracts using the percentage-of-completion method. As of March 31, 2012 and December 31, 2011, the Company had $22,827,425 and $19,826,397 respectively, of accounts receivables using the percentage-of-completion method. All of the Company’s accounts receivable as of March 31, 2012 is expected to be collected within the next twelve months.

 

The allowance is based on the age of receivables and a specific identification of receivables considered at risk of collection. The following analysis details the changes in the Company’s allowances for doubtful accounts:

 

   March 31, 2012
(Unaudited)
   December 31,
2011
 
Balance at beginning of the period  $619,062   $427,020 
Increase in allowances during the period   153,886    219,456 
Reversal in allowances during the period   (202)   (27,135)
Write-offs during the period       (279)
Balance at the end of the period  $772,746   $619,062 

 

7.Unbilled Revenue

 

For revenues accounted for under this account, we expect the amounts to be collected within one year. For those with a collection period longer than one year, we classify them under “Long-term unbilled revenue” on the consolidated balance sheets.

 

The unbilled revenue as of March 31, 2012 and December 31, 2011 are as the following:

 

   March 31, 2012   December 31, 
   (Unaudited)   2011 
Current unbilled revenue  $20,194,207   $7,254,830 
Long-term unbilled revenue   55,815,367    59,298,740 
Total unbilled revenue  $76,009,574   $66,553,570 

 

As of March 31, 2012, $7,943,695, or 39% of the current unbilled revenue, and $48,484,117, or 87% of the long-term unbilled revenue was related to the Ordos project. The remaining balance was for various other on-going projects. All of the balances are considered collectible.

 

8.Other Receivables

 

Other receivables consisted of the following:

  

   March  31, 2012   December 31, 
   (Unaudited)   2011 
Advances to staff  $1,508,415   $772,770 
Loan to third-party companies   1,446,751    1,207,119 
Rental Deposit   190,720    186,710 
Loan to joint venture   250,000     
Other   574,560    594,949 
Total  $3,970,446   $2,761,548 

 

F-15
 

 

Advances to staff were mainly for staff with long term assignment overseas for sales and project related work.

 

Loans to third-party companies were made to business partners for working capital purpose. $500,000 is for short-term of six months with 6% annualized interest rate, the interest income for the three-month period ended March 31, 2012 was $25,726. $667,270 is for one year with annualized interest rate of 12%, the interest income for the three-month period ended March 31, 2012 was $55,403. The remaining $190,649 is for six months with annualized interest rate of 12%, the interest income for the three-month period ended March 31, 2012 was $7,703.

 

On February 23, 2012, a loan of $250,000 was made to TII, a joint venture that the Company has 30% shareholding, for working capital purpose. The loan is for short-term of six months without interest rate.

 

9.Inventories

 

Inventories consisted of the following:

 

   March 31, 2012
(Unaudited)
   December 31,
2011
 
Raw materials  $2,350,061   $1,835,715 
Finished goods   1,497,642    589,887 
Project work-in-progress   3,100,216    5,280,150 
Total  $6,947,919   $7,705,752 

  

The Company reviews its inventory periodically for possible obsolete goods and to determine if any reserves are necessary for potential obsolescence. As of March 31, 2012 and December 31, 2011, the Company determined that no reserves were necessary.

 

10.Deposits on Projects

 

Deposits on Projects consisted of the following:

 

   March 31, 2012
(Unaudited)
   December 31,
2011
 
Current:          
Contract deposit  $661,869   $659,568 
Bidding deposit   880,596    553,123 
Total  $1,542,465   $1,212,691 

 

Contract deposits are paid to customers for the promise that the service or products will be properly and timely provided. Bidding deposits are paid as a deposit for involving in the bidding process. All of the deposits will be utilized within one year.

 

11.Plant and Equipment, Net

 

Plant and equipment consist of the following:

 

   March 31, 2012
(Unaudited)
   December 31,
2011
 
Transportation equipment  $941,920   $857,812 
Office equipment   460,492    435,952 
Furniture   414,711    402,842 
Buildings   271,801    271,515 
Machinery and equipment   137,360    137,217 
Total plant and equipment   2,226,284    2,105,338 
Less accumulated depreciation   (740,872)   (668,500)
Plant and equipment, net  $1,485,412   $1,436,838 

 

The depreciation expense for the quarters ended March 31, 2012 and 2011 amounted to $71,543 and $60,831, respectively.

 

F-16
 

 

12.Construction in Progress

 

The construction in progress account captures the balance of construction in progress for the Company’s Baoding research, development and production base in Baodi, Tianjin area. Baoding focuses on technology development, software development, pilot testing, manufacturing and pre-installation/pre-assembly preparation of its proprietary products. The construction of the Baoding research, development and production facility officially started in June 2011. As of March 31 2012, the construction in progress of the Baoding facility totaled at $4,612,933. No remaining commitment for the facility as of March 31, 2012 and December 31, 2011.

 

13.Intangible Assets, Net

 

Intangible assets mainly consist of patents, software, customer lists, land use right and know-how. The patents were invested as capital contribution by the shareholders of Tranhold and Yanyu, and were recorded at the appraisal value as stipulated by the local regulatory authority. According to ASC 845-10-S99, transfers of nonmonetary assets to a company by its promoters or shareholders in exchange for shares prior to or at the time of the company’s initial public offering normally should be recorded at the transferors’ historical cost basis determined under US GAAP. The net book value of the patents invested by the majority shareholders of Yanyu was $488,251 as of March 31, 2012, which only accounted for 0.3% of its total assets as of March 31, 2012. Therefore, the effect from the inclusion of the contributed patents at its fair value instead of historical cost was immaterial. Software was purchased from third parties at the acquisition cost.

 

All the intangible assets have definite lives, and are amortized on a straight-line basis over their expected useful economic lives. The original costs and accumulated amortization as of March 31, 2012 and December 31, 2011 are as follows:  

 

   March 31, 2012   December 31, 
   (Unaudited)   2011 
Patents  $2,023,495   $2,021,375 
Software   2,881,973    2,878,954 
Customer list   1,281,101    1,280,378 
Land use right   5,730,184    5,724,181 
Know-how   1,219,050    1,218,496 
Contract backlog   58,783    58,722 
Total intangible assets   13,194,586    13,182,106 
Less accumulated amortization   (1,788,261)   (1,572,444)
Intangible assets, net  $11,406,325   $11,609,662 

 

In November 2010, $5,284,854 was paid for a land use right, the amount of which was recorded as long-term prepayment on land use right purchased as of December 31, 2010. On January 18, 2011, the land use right was transferred and accepted by the Company, and the amount started to be included in intangible assets. The amortization of the land use right for 50 years started in January 2011.

 

The amortization expense for the quarters ended March 31, 2012 and 2011 amounted to $213,939 and $145,016, respectively.

 

The amortization expense for the following five years and thereafter is expected to be as follows:

 

For the Years Ended December 31,  Amount 
2012  $635,096 
2013   820,668 
2014   820,668 
2015   820,668 
2016   613,615 
Thereafter   7,695,610 
Total  $11,406,325 

 

F-17
 

 

14.Investment in Joint Venture

 

On October 18, 2011, TIS entered into an agreement to establish a joint venture, Tri-Tech Infrastructure (India), Pvt. Ltd., with Allied Energy Systems Pvt. Ltd., for the purpose of market development in India.

 

On October 19, 2011, the capital injection in the amount of India National Rupee (“INR”) 300,000, or US$6,985, was made to the joint venture. Total registered capital of the joint venture is INR1,000,000, or $20,833. TIS takes up 30% of the ownership. Equity method is adopted for the long-term investment.

 

For the year ended December 31, 2011, net loss for the India joint venture was INR3,385,463, or $66,017. TIS should bear the net loss of INR1,015,639, or $19,805. Since the net loss is more than the long-term investment, only $6,985 was offset and the remaining loss of $12,820 will be net-off against earnings in the future.

 

For the quarter ended March 31, 2012, net profit for the India joint venture was INR3,053,119, or $60,762. TIS should earn the net profit of INR915,936, or $18,229. After net off $12,820 of the loss brought forward from prior year, $5,409 was recognized as gain on investment in the joint venture for the quarter ended March 31, 2012.

 

15.Accounts Payable and Costs Accrual on Projects

 

This account contains the accounts payable to suppliers and accruals of costs incurred in the projects in accordance with the percentage of completion method.

 

Accounts payable and project accruals based on progress consisted of the following:

 

   March 31, 2012
(Unaudited)
   December 31,
2011
 
Accounts payable  $4,421,362   $11,401,187 
Costs accrual on projects   28,962,105    19,402,047 
Total  $33,383,467   $30,803,234 

 

Of the total accounts payable, 45%, or $1,997,343, was related to building new factories and warehouses in Tianjin. The remaining balance was for various other on-going projects.

 

Of the total costs accrual on projects, 43%, or $12,470,384, was related to the Ordos projects, which was also the main reason for the increase of the ending balance, and 16%, or $4,634,730 was related to the India projects. The remaining balance was for various other on-going projects.

 

16.Other Payables

 

Other payables consisted of non-project related payables and other tax payables as shown below:

 

   March 31, 2012
(Unaudited)
   December 31,
2011
 
Loan from third-party companies  $1,205,104   $972,196 
Loan from noncontrolling interest investor   6,713,100    6,557,548 
Others   535,787    187,038 
Non-project related payables   8,453,991    7,716,782 
           
Value-added tax payable   2,450,316    1,367,517 
Business tax payable   1,458,897    1,228,441 
Others   162,437    471,392 
Other taxes payable   4,071,650    3,067,350 
           
Total Other Payables  $12,525,641   $10,784,132 

  

Of the loan from third-party companies, $738,311 was with interest of 1.0% per month and due before the end of 2012. The accrued interest expense was $29,305 as of March 31, 2012. The remaining $437,488 was non-interest bearing, and will due before the end of 2012.

 

F-18
 

 

Of the loan from noncontrolling interest investor, $5,957,770 was principal amount for short-term loan from the minority interest investor from TTA, with interest of 1.5% per month due on June 30, 2012. The accrued interest expense was $755,330 as of March 31, 2012. The purpose of this short-term loan was mainly to reduce temporary operational cash pressure.

 

17.Short-term Bank Borrowings

 

The below table presents the short-term bank borrowing interest rates and the amount borrowed as of March 31, 2012 and December 31, 2011.

 

Bank Name  Interest
rate
   Terms   As of March 31,
2012
(Unaudited)
   As of December
31, 2011
 
   7.216%   04/15/2011 - 04/14/2012    556,059    555,476 
Bank of Hangzhou    7.216%   06/27/2011 - 06/26/2012    953,243    952,245 
    7.216%   07/27/2011 - 07/26/2012    790,001    789,174 
Citic Bank   8.528%   09/27/2011 - 09/27/2012   $4,766,217   $4,761,225 
Bank of Hangzhou   7.872%   11/30/2011 - 11/29/2012    953,243    952,245 
Industrial and Commercial Bank of China Limited   7.320%   02/13/2012 - 08/10/2012    397,185     
Bank of Hangzhou   7.872%   03/20/2012 - 03/19/2013    635,496     
Industrial and Commercial Bank of China Limited   6.560%   03/31/2012 - 03/29/2013    2,383,109     
Total short-term bank borrowings          $11,434,553   $8,010,365 

  

$556,059 of the short-term bank borrowings was due on April 14, 2012, and was fully repaid by the Company in April.

 

18.Income Taxes

 

We are subject to income taxes on the entity level for income arising in or derived from the tax jurisdictions in which each entity is domiciled. According to the New Enterprise Income Tax Law (“NEITL”) in China, unified Enterprise Income Tax rate is 25%. However, five of our eight subsidiaries and VIEs in China are subject to certain favorable tax policies as high-tech companies. The effective income tax rate for the three-month ended March 31, 2012 was 18%.

 

The Company has not recorded tax provision for U.S. tax purposes as it has no assessable profits arising in or derived from the United States and intends to reinvest accumulated earnings in its PRC operations.

 

The applicable statutory tax rates for our subsidiaries and VIEs in the PRC are as follows:

 

   Three Months Ended March 31,
(Unaudited)
 
   2012   2011 
   %   % 
TTB (Tax rate is 15% if passing the high-tech enterprise qualification review, and the  probability is very high )   15    7.5 
BSST   15    15 
Yanyu   15    15 
Tranhold   25    25 
TTA   25    25 
Baoding   15    15 
Yuanjie   15     
Buerjin   25     
Xushui   25     
Consolidated Effective Income Tax Rate   18    16 

 

F-19
 

 

The provision for income tax expense (benefit) from operations consists of the following:

 

   Three Months Ended March 31, 
   (Unaudited) 
   2012   2011 
Current:          
PRC  $   $ 
Deferred:          
PRC   314,493    405,636 
Total income tax expense  $314,493   $405,636 

 

Significant components of the Company’s deferred tax liabilities are as follows:

 

  

March 31, 2012

(Unaudited)

   December 31, 2011 
Current:          
Deferred income taxes:          
Revenue recognition based on percentage of completion   964,393    358,519 
Total net deferred tax liabilities  $964,393   $358,519 
Long-term:          
Noncurrent deferred income taxes:          
Revenue recognition based on percentage of completion   2,665,513    2,930,427 
Intangible assets valuation in business combination   503,157    525,396 
Total net deferred tax liabilities  $3,168,670   $3,455,823 

 

Income tax reconciliation for the three months ended March 31, 2012 and 2011 are as follows:

 

   Three Months Ended March 31, 
   2012   2011 
   (Unaudited)   (Unaudited) 
PRC statutory tax rate   25%   25%
Taxable income  $1,747,182   $2,585,161 
Computed expected income tax expense   436,796    646,290 
Effect of preferential tax rates   (122,303)   (240,654)
Income tax expense  $314,493   $405,636 

 

19.Warrants

 

As of March 31, 2012 and December 31, 2011, the Company has 229,274 warrants outstanding for ordinary shares. None of these warrants were exercised by March 31, 2012. During the quarters ended March 31, 2012 and 2011, the Company recorded no warrant expenses as general and administrative expenses.

 

20.Options Issued to Employees

 

TRIT’s 2009 Share Incentive Plan approved by its shareholders permits the Company to offer up to 525,500 shares, options and other securities to its employees and directors. On September 9, 2009, TRIT granted 525,500 share options with an exercise price equal to $6.75 to its senior management and employees. The options will vest on a schedule spanning 5 years contingent upon continuous service and will have 10-year contractual terms from September 9, 2009. The options will vest over five years at a rate of 20% per year, with the first 20% vesting on September 9, 2010. Certain options provide for accelerated vesting upon a change in control (as defined in the employee share option plan).

 

F-20
 

 

The fair value of options on the grant-date of September 9, 2009 was $3.53 per share, which was estimated by using the Black-Scholes Model. The total fair value of the options was $1,855,015. 210,200 and 210,200 options were vested as of March 31, 2012 and December 31, 2011, respectively. 93,700 and 93,700 options were exercised as of March 31, 2012 and December 31, 2011, respectively. 3,600 and 0 options were forfeited during the quarters ended March 31, 2012 and 2011, respectively. A total of 9,000 and 5,400 options were forfeited as of March 31, 2012 and December 31, 2011, respectively.

 

The Company recognized compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The total option compensation expenses recognized were $ 90,913 and 87,131 for quarters ended March 31, 2012 and 2011, respectively. Another $888,176 will be recognized as general and administrative expense over the 891 days thereafter.

 

The following table summarizes the outstanding options, related weighted average fair value and life information as of March 31, 2012.

 

    Options Outstanding   Options Exercisable 
Exercise
Price Per
Share
   Number outstanding
as of March 31,2012
   Weighted
Average
Fair
Value
   Weighted
average
Remaining
Life (Years)
   Number Exercisable
as of March 31,2012
   Weighted
Average Exercise
Price
 
                      
$6.75    422,800   $3.53    2.44    112,900   $6.75 

 

A summary of option activity under the employee share option plan as of March 31, 2012 and changes during the year then ended is presented below:

 

Options  Number of
shares
   Exercise
Price
   Remaining
Life(Years)
   Aggregated
Intrinsic Value
 
Outstanding as of January 01, 2012   426,400   $6.75    2.69   $ 
Granted during the period                   
Exercised during the period                   
Forfeited during the period   (3,600)               
Outstanding as of March 31, 2012   422,800   $6.75    2.44   $219,856 

 

A summary of unvested options under the employee share option plan as of March 31, 2012 and changes during the year then ended is presented below:

 

Options  Number of Shares   Fair Value 
Unvested as of January 01, 2012   309,900   $3.53 
Granted during the period         
Exercised during the period       3.53 
Forfeited during the period   (3,600)     
Unvested as of March 31, 2012   306,300   $3.53 
           
Expected to vest thereafter   306,300   $3.53 

 

F-21
 

 

21. Net Income per Ordinary Share

 

The following table presents a reconciliation of basic and diluted net income per share:

 

   Three Months Ended March 31, 
   (Unaudited) 
   2012   2011 
         
Net income attributable to Tri-Tech Holding Inc  $1,438,125   $1,698,981 
Weighted-average shares of ordinary share used to compute basic net income per share   8,208,480    8,055,720 
Effect of dilutive ordinary share equivalents:          
Dilutive effect of warrants       2,666 
Dilutive effect of employee stock options   108,744    96,836 
Shares used in computing diluted net income per ordinary share   8,317,224    8,155,222 
           
Basic net income per ordinary share  $0.18   $0.21 
Diluted net income per ordinary share  $0.17   $0.21 

 

The dilutive effect comes from 422,800 and 431,800 options to employees for quarters ended March 31, 2012 and 2011, respectively, and 30,207 shares issuable as one of the consideration of business acquisition with J&Y for the quarter ended March 31, 2012. All warrants are having anti-dilutive effect due to the fact that the weighted average exercise price per share of these warrants is higher than the weighted average market price per share of ordinary shares during the quarter ended March 31, 2012.

 

22.Certain Significant Risks and Uncertainty

 

The Company’s substantial operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC and by the general state of the PRC economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and West Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.  

 

The Company has two major customers who collectively represented approximately 37.1 % of the Company’s revenue for the quarter ended March 31, 2012. One is for India projects, the unbilled revenue with this customer was $5,981,973 and $1,991,902 as of March 31, 2012 and December 31, 2011, respectively. The other is for a BT project in Ordos, the unbilled revenue balance was $56,427,812 and $52,511,711 as of March 31, 2012 and December 31, 2011, respectively. No other customers represented more than 10% of the Company’s sales for the quarters ended March 31, 2012 and 2011.

 

The five major customers represented approximately 53.0 % of the Company’s sales for the quarter ended March 31, 2012.

 

Our suppliers vary from project to project. Many times, they are specifically appointed by the clients. Most of the material or equipment we purchase is non-unique and easily available in the market. The prices for those purchases, although increasing, are relatively consistent and predictable. A specific supplier might take up a significant percentage of our total purchase at a certain time for a large contract. However, the dependence on a specific supplier usually ends when the project is completed. We do not rely on any single supplier for our long-term needs.

 

23.Social Security Plan

 

The Company’s subsidiaries and VIEs in China are required to participate in the social security plan operated by the local municipal government. The Company is required to contribute approximately 20% of its payroll costs, subject to certain caps with reference to average municipal salary, to the employees’ social security fund. The Company charges contributions to its income statement as they become payable in accordance with the local government requirements. The aggregate contributions of the Company to the employees’ social security plan amounted to $89,182 and $52,136 for the three months periods ended March 31, 2012 and 2011, respectively.

 

F-22
 

 

24.Statutory Reserves

 

The laws and regulations of the PRC provide that before a Chinese enterprise distributes profits to its shareholders, it must first satisfy all tax liabilities, provide for losses in previous years, and make appropriation, in proportions determined at the discretion of the board of directors, to the statutory reserves. The statutory reserves include the surplus reserve fund and the collective welfare fund. These statutory reserves represent restricted retained earnings.

 

TTII’s subsidiary and VIEs in China are required to transfer 10% of its net income, as determined in accordance with the PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of their respective registered capital.

 

The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

 

 As stipulated by the relevant laws and regulations applicable to PRC foreign-invested enterprises, the foreign invested PRC companies are required to make appropriations from net income as determined under PRC GAAP to non-distributable reserves which include a general reserve, an enterprise expansion reserve and an employee welfare and bonus reserve.

 

Wholly-foreign-owned PRC companies are not required to make appropriations to the enterprise expansion reserve but appropriations to the general reserve are required to be made at not less than 10% of the profit after tax as determined under PRC GAAP.

 

The employee welfare and bonus reserve is determined by the respective company’s board of directors. The general reserve is used to offset future extraordinary losses. The subsidiaries and VIEs may, upon a resolution passed by the shareholders, convert the general reserve into capital. The employee welfare and bonus reserve is used for the collective welfare of the employees of the subsidiaries and VIEs. The enterprise expansion reserve is used for the expansion of the subsidiaries’ operations and can be converted to capital subject to approval by the relevant authorities. These reserves represent appropriations of retained earnings determined according to PRC law.

 

As of March 31, 2012 and December 31, 2011, the statutory reserve was both $1,866,994.

 

25.Commitments and Contingencies

 

Operating Leases

 

As of March 31, 2012, the Company had commitments under certain operating leases, requiring annual minimum rentals as follows:

 

For the Years Ended December 31,  Amount 
2012  $610,384 
2013   471,053 
2014   154,535 
Total  $1,235,972 

 

The leased properties are principally located in the PRC and are used for administration and research and development purposes. The terms of these operating leases vary from one to five years. Pursuant to the contracts, when they expire, we have the rights to extend them with new negotiated prices. Rental expenses were $247,511 and $183,287 for the quarters ended March 31, 2012 and 2011, respectively.

 

Product Warranties

 

The Company’s warranty policy generally is to replace parts if they become defective within one year after deployment at no additional charge. Historically, failure of product parts due to materials or workmanship has not been significant. The Company has not incurred any material unexpected costs associated with servicing its warranties. The Company continuously evaluates and estimates its potential warranty obligations, and records the related warranty obligation when the estimated amount becomes material at the time revenue is recorded.

 

F-23
 

 

26. Segment Information

 

The Company has three reportable operating segments. The segments are grouped with references to the types of services provided and the types of clients that use those services. As TTB and its subsidiaries and VIEs conduct business under the three segments, the total sales and costs are divided accordingly into three segmental portions. The Company’s Chief Executive Officer is the chief operating decision maker, and he assesses each segment’s performance based on net revenues and gross profit on contribution margin. The three reportable operating segments are:

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

Municipal water supply and distribution, wastewater treatment and gray water reuse engineering, procurement, and construction (EPC), build-transfer (BT); proprietary process control systems, process equipment integrated, and proprietary odor control systems, and other municipal facilities engineering, operation management, and related infrastructure construction projects.

 

Segment 2: Water Resource Management System and Engineering Service

 

Water resources protection and allocation, flood control and forecasting, irrigation systems, related system integration, proprietary hardware and software products, etc.   

 

Segment 3: Industrial Pollution Control and Safety

 

Provide systems for volatile organic compounds (VOC) abatement, odor control, water and wastewater treatment, water recycling facilities design, engineering, procurement and construction for oil, gas, petrochemical and power industries, safety and clean production technologies for oil, gas exploration and pipeline.

 

For the Three Months Ended March 31, 2012 and 2011(Unaudited)
   Segment 1   Segment 2   Segment 3   Total 
   2012   2011   2012   2011   2012   2011   2012   2011 
Revenues  $8,406,973    12,904,386    6,254,590    1,641,059    4,559,749    3,007,766   $19,221,312    17,553,211 
Cost of revenues   5,924,264    9,621,997    4,521,154    868,608    3,558,394    2,052,426    14,003,812    12,543,031 
Operating expenses:                                        
Selling and marketing expenses   225,626    109,058    426,290    150,728    187,077    54,387    838,993    314,173 
General and administrative expenses   1,530,415    741,138     622,294    495,238    700,651    830,418    2,853,360    2,066,794 
Research and development   5,751        63,119    39,985            68,870    39,985 
Total operating expenses   1,761,792    850,196    1,111,703    685,951    887,728    884,805    3,761,223    2,420,952 
Other income (expenses), net   347,415    (5,653)   (40,916)   (65)   (15,594)   1,651    290,905    (4,067)
Income before income taxes  $1,068,332    2,426,540    580,817    86,435    98,033    72,186   $1,747,182    2,585,161 

 

Assets by Segment

 

The Company evaluates its assets by segment to generate information needed for internal control, resource allocation and performance assessment. This information also helps management to establish a basis for asset realization, determine insurance coverage, assess risk exposure, and meet requirements for external financial reporting.

 

Segment assets of the Company are as follows:

 

Segment Assets  Segment 1   Segment 2   Segment 3   Total 
As of  March 31, 2012  $87,478,382   $32,906,620   $27,048,708   $147,433,710 
As of December 31, 2011  $84,910,147   $26,081,474   $27,659,057   $138,650,678 

 

27. Subsequent Events

 

According to the terms of acquisition agreement with J&Y International Inc., 30,207 shares were issued to J&Y’s original shareholder, as part of the consideration on April 16, 2012, at a price of $7.61,

 

F-24

XNAS:TRIT Quarterly Report 10-Q Filling

XNAS:TRIT Stock - Get Quarterly Report SEC Filing of XNAS:TRIT stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

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XNAS:TRIT Quarterly Report 10-Q Filing - 3/31/2012
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