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EX-32.1 - EXHIBIT 32.1 - China TransInfo Technology Corp.exhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - China TransInfo Technology Corp.exhibit31-1.htm
EX-31.2 - EXHIBIT 31.2 - China TransInfo Technology Corp.exhibit31-2.htm
EX-32.2 - EXHIBIT 32.2 - China TransInfo Technology Corp.exhibit32-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10–Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2010

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number: 001-34134

CHINA TRANSINFO TECHNOLOGY CORP.
(Exact Name of Registrant as Specified in Its Charter)

Nevada          87-0616524
(State or other jurisdiction of (I.R.S. Empl. Ident. No.)
incorporation or organization)  

9th Floor, Vision Building,
No. 39 Xueyuanlu, Haidian District,
Beijing, China 100191
(Address of principal executive offices, Zip Code)

(86) 10-51691999
(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 Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]                No [   ]

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

Yes [   ]                No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [   ] Accelerated filer                  [   ]
   
Non-accelerated filer   [   ] Smaller reporting company [X]
(Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]             No [X]

The number of shares outstanding of each of the issuer’s classes of common equity, as of August 13, 2010 is as follows:

Class of Securities Shares Outstanding
Common Stock, $0.001 par value 25,245,069


TABLE OF CONTENTS

    Page 
     
  PART I – Financial Information  
     
Item 1. Financial Statements (unaudited) 1
  Condensed Consolidated Balance Sheet as of June 30, 2010 and December 31, 2009  
Condensed Consolidated Statement of Income  for the Three and Six Months ended June 30, 2010 and June 30, 2009
Condensed Consolidated Statement of Cash Flow for the Six Months ended June 30, 2010 and June 30, 2009
  Notes to Condensed Consolidated Financial Statements  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
     
  PART II – Other Information  
     
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. [Removed and Reserved] 24
Item 5. Other Information 24
Item 6. Exhibits 24

i


PART 1. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

    June 30, 2010     December 31,  
    (Unaudited)     2009  
             
ASSETS            
Cash and cash equivalents $  25,224,837   $  27,400,420  
Restricted cash   2,931,719     1,591,076  
Accounts receivable, net of allowance for doubtful accounts of $45,071            
     and $38,209, respectively   22,330,831     14,968,778  
Inventories   539,611     482,286  
Costs and estimated earnings in excess of billings on incompleted contracts   35,672,455     33,853,708  
Prepaid expenses and other current assets   12,877,524     5,871,997  
Other receivables   10,048,905     8,416,096  
Deferred income tax assets   24,769     28,715  
Total current assets   109,650,651     92,613,076  
Property and equipment, net   10,055,682     10,541,486  
Long-term investments   6,996,939     8,027,122  
Intangible assets, net   5,302,110     4,494,781  
Goodwill   10,020,447     9,979,631  
Other assets   976,674     826,671  
             
Total assets $  143,002,503   $  126,482,767  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Accounts payable $  23,649,449   $  20,728,539  
Short-term borrowings from banks   8,911,650     7,481,700  
Billings in excess of costs and estimated earnings on incompleted contracts   11,100,255     17,021,936  
Accrued expenses and other current liabilities   3,510,331     3,022,140  
Total current liabilities   47,171,685     48,254,315  
Other long-term liabilities   389,756     389,489  
             
Total liabilities   47,561,441     48,643,804  
             
Commitments and contingencies   -     -  
             
Stockholders’ equity            
         Preferred stock, $0.001 par value per share, authorized            
                  10,000,000 shares, no shares issued and            

                  outstanding at June 30, 2010 and December 31, 2009

  -     -  
         Common stock, $0.001 par value per share, authorized            
                   150,000,000 shares, issued and outstanding            
                   25,245,069 and 22,452,745 shares, respectively   25,245     22,453  
         Additional paid-in capital   43,222,562     25,253,666  
         Retained earnings   37,317,279     31,948,323  
         Non-controlling interests   12,419,532     18,499,475  
         Accumulated other comprehensive income   2,456,444     2,115,046  
             
Total stockholders’ equity   95,441,062     77,838,963  
             
Total liabilities and stockholders’ equity $  143,002,503   $  126,482,767  

The company notes are an integral part of the financial statements

1


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Income

    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009  
                         
Net sales $ 24,045,906   $ 9,577,921   $ 48,933,381   $ 16,091,316  
Cost of sales   14,463,937     4,895,845     30,818,236     8,086,742  
Gross profit   9,581,969     4,682,076     18,115,145     8,004,574  
Total operating expenses   4,999,719     1,834,616     9,867,176     3,700,335  
Income from operations   4,582,250     2,847,460     8,247,969     4,304,239  
Non-operating income (expense):                        
     Interest income   46,442     18,744     76,928     32,483  
     Interest expense   (105,457 )   (44,268 )   (203,311 )   (89,989 )
     Subsidy income   727,581     89,982     754,024     119,284  
     Other expense, net   (17,918 )   7,063     (74,829 )   6,868  
Total non-operating income   650,648     71,521     552,812     68,646  

Income before income taxes, non-
   controlling interests, and gain on
   equity investments in affiliates

  5,232,898     2,918,981     8,800,781     4,372,885  
Income taxes   464,027     24,203     839,823     24,082  
Net income before non-controlling
   interests and gain on equity
   investments in affiliates net
   income
  4,768,871     2,894,778     7,960,958     4,348,803  
Gain (loss) on equity investments in
   affiliates due to proportional shares
   of the affiliates net income
  57,206     -     (301,589 )   -  
Net income before non-controlling
   interests
  4,826,077     2,894,778     7,659,369     4,348,803  
Non-controlling interests in net
   income of subsidiary
  1,216,160     95,135     2,290,413     100,474  
Net income $  3,609,917   $  2,799,643   $  5,368,956   $  4,248,329  
 Weighted average number of shares
   outstanding:
                       
       Basic   25,051,414     22,215,551     24,031,595     22,201,432  
       Diluted   25,096,523     22,394,557     24,088,927     22,376,216  
 Earnings per share                        
       Basic $  0.14   $  0.13   $  0.22   $  0.19  
       Diluted $  0.14   $  0.13   $  0.22   $  0.19  
 Comprehensive income                        
     Net income including noncontrolling
       interest
$  4,826,077   $  2,894,778   $  7,659,369   $  4,348,803  
     Translation adjustments   340,372     60,485     341,398     (105,465 )
 Comprehensive income $  5,166,449   $  2,955,263   $  8,000,767   $  4,243,338  
     Comprehensive income attributable
       to noncontrolling interest
$  1,216,160   $  95,135   $  2,290,413   $  100,474  
     Comprehensive income attributable
       to CTFO
$  3,950,289   $  2,860,128   $  5,710,354   $  4,142,864  

The company notes are an integral part of the financial statements

2


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)

  Six Months Ended June 30,
  2010 2009
CASH FLOWS FROM OPERATING ACTIVITIES:            
     Net income $  5,368,956 $  4,248,329
     Adjustments to reconcile net income to net cash provided by            
        operating activities:            
           Non-controlling interests 2,290,413 100,474
           Depreciation and amortization expense   1,021,829     491,752  
           Stock-based compensation 843,481 126,398
           Loss on equity investments in affiliates due to proportional            
                shares of the affiliates net income   301,589    

  -

 
           Loss on disposal of property and equipment 6,370 -
           Allowance for doubtful accounts   6,677     -  
           (Increase) Decrease in assets:    
                   Restricted cash   (1,328,611 )   (371,248 )
                   Accounts receivable (7,277,274 ) (1,452,048 )
                   Inventories   (55,123 )   (38,898 )
                   Prepaid expenses and other current assets (3,950,462 ) 606,919
                   Other receivables   (1,596,043 )   (63,283 )
                   Cost of estimated earnings in excess of billings on
                        incompleted contracts (1,673,328 ) (4,938,381 )
                   Other assets   (2,451,029 )   -  
         Decrease (Increase) in liabilities:    
                   Accounts payable   2,824,509     (882,636 )
                   Billings in excess of costs and estimated on
                         incompleted contracts (5,966,489 ) (365,051 )
                   Accrued expenses and other current liabilities   77,457     (833,370 )
Net cash used in operating activities (11,557,078 ) (3,371,043 )
CASH FLOWS FROM INVESTING ACTIVITIES:            
         Increase in other non-current asset - (38,081 )
         Proceeds from disposal of property and equipment   5,520    

  -

 
         Purchases of property and equipment (420,344 ) (1,204,584 )
         Disposal of property and equipment   11,889     -  
         Payments for acquisition of companies (258,761 ) (475,620 )
         Dividends from subsidiaries and variable interest entity   50,973     -  
         Purchases of intangible assets (888,986 ) (1,414,756 )
Net cash used in investing activities   (1,499,709 )   (3,133,041 )
CASH FLOWS FROM FINANCING ACTIVITIES:    
         Proceeds from short-term borrowings   4,474,045     -  
         Payments of short-term borrowings (3,080,490 ) -
         Non-controlling interest shareholders’ capital contribution   -     87,960  
         Proceeds from issuing common stocks 10,000,000

  -

         Payments to related parties   -     (449,153 )
         Payments of transaction costs related to stock issuance - (32,500 )
         Payments to third parties for stock financing   (610,439 )   -  
Net cash provided by (used in) financing activities 10,783,116 (393,693 )
Effect of foreign currency translation   98,088     (16,643 )
Net decrease in cash and cash equivalents (2,175,583 ) (6,914,420 )
Cash and cash equivalents – beginning of period   27,400,420     16,122,464  
Cash and cash equivalents – end of period $  25,224,837 $  9,208,044
Supplemental disclosures of cash flow information:            
         Interest paid $  90,874 $  89,989
         Income taxes paid $  447,795   $  20,364  

The company notes are an integral part of the financial statement

3


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1.

ORGANIZATION AND BUSINESS OPERATIONS

   

China TransInfo Technology Corp. is a leading provider of end-to-end public transportation information technology systems and related comprehensive technology solutions in China. The Company’s goal is to become the largest provider of transportation information products and related comprehensive technology solutions in China, as well as the largest operator and provider of real-time transportation information to consumers in China. Substantially all of the Company’s operations are conducted through its variable interest entities (“VIE”) that are PRC domestic companies owned principally or entirely by the Company’s PRC affiliates. Through these VIE, the Company is involved in developing multiple applications in transportation, digital city, and land and resource filling systems based on Geographic Information Systems, or GIS, technologies which are used to service the public sector.

   

China TransInfo Technology Corp. and its VIE hereinafter are collectively referred as the “Company.”

   

The Company’s primary focus is on providing transportation solutions. The Company’s major products and services include: Transportation Planning Information System, Pavement Maintenance System, Electronic toll collection, or ETC, Traffic Information Service System, Taxi Security Monitoring, Commanding and Dispatching Platform, GIS-T (Transportation) Middleware, Traffic Flow Surveying Systems, Intelligent Parking System, Red Light Violation Snapshot System, Intelligent Highway Vehicle Monitoring System, Intelligent Public Transport System, TransPLE Passenger Flow Statistic, Detecting and Analysis System, Palmcity Navigation Engine, Comprehensive Location Based Service Platform, Digital City, and 2-D and 3-D GIS. The Company also offers full range solutions for transportation oriented GIS, or GIS-T, covering transportation planning, design, construction, maintenance and operation.

   
2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   

Principles of Consolidation

   

The condensed consolidated financial statements include the accounts of China TransInfo Technology Corp. and its wholly owned subsidiaries, Oriental Intra-Asia Entertainment (Asia Pacific) Limited, Intra-Asia Entertainment (China) Limited and Cabowise, its indirectly owned subsidiary Oriental Intra-Asia, and the its VIE, including the Group Company, PKU, Beijing Tian Hao, Beijing Zhangcheng, Xinjiang Zhangcheng, Zhangcheng Media, China TranWiseway, Dajian Zhitong, Shanghai Yootu, UNISITS, Hangzhou Ziguang Jietong Technology Co., Ltd., Hangzhou UNISITS, Henan Ziguang Jietong Technology Co., Ltd., or Henan UNISITS, and Beijing Ziguang Jinzhidun Information Technology Co., Ltd., or Beijing UNISITS. All material intercompany accounts, transactions, and profits have been eliminated in consolidation.

   

The consolidated financial statements include the accounts of VIE and VIE’s majority owned subsidiaries, which approximates 3% to 70% owned by non-controlling interests.

4


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

   

Principles of Consolidation (continued)

   

The accompanying interim unaudited condensed consolidated financial statements (“Interim Financial Statements”) of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these Interim Financial Statements do not include all of the information and notes required by GAAP for complete financial statements. These Interim Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended December 31, 2009 included in the Company’s Form 10-K. In the opinion of management, the Interim Financial Statements included herein contain all adjustments, including normal recurring adjustments, considered necessary to present fairly the Company’s financial position, the results of operations and cash flows for the periods presented. The operating results and cash flows of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.

   

Use of Estimates

   

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

   

Reclassification

   

Certain reclassification have been made to the prior years’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

   

Research and Development

   

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Such costs related to product development costs are included in research and development expense until the point that technological feasibility is reached, which for the Company's products, is generally shortly before the products are released for the commercial use. Once technological feasibility is reached, such costs are capitalized and amortized to cost of revenue over the estimated lives of the products. The Company capitalized $3,567,740 and $2,676,054 of research and development expenses as of June 30, 2010 and December 31, 2009, respectively, which were included in intangible assets in the Company's condensed consolidated balance sheets.

   

Revenue Recognition

   

The Company recognizes revenue in accordance with ASC 605, Revenue Recognition, when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered.

5


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

   

Revenue Recognition (continued)

   

The Company’s revenue of service fees are primarily fixed price contracts. Revenue on eligible fixed price contracts is recognized on the basis of the estimated percentage-of-completion within the scope of ASC 605 and is consistently applied for all fixed price contracts. Such contracts include services provided for software development projects, IT outsourcing and solutions, system integration, and network integration services at fixed price arrangements with its customers. Progress towards completion is typically measured based on achievement of specified contract milestones, or other measures of progress when available, or based on costs incurred as a proportion of estimated total costs. Profit in a given period is reported at the expected profit margin to be achieved on the overall contract. This method can result in the recognition of unbilled receivables or the deferral of costs or profit on these contracts. The Company did not incur any deferred costs for the quarter ended June 30, 2010 and 2009. Management regularly reviews project profitability and underlying estimates. Revisions to the estimates at completion are reflected in results of operations as a change in accounting estimate in the period in which the facts that give rise to the revision become known by management. Provisions for estimated losses, if any, are recognized in the period in which the loss becomes evident. The provision includes estimated costs in excess of estimated revenue and any profit margin previously recognized. Any advance payments received from its customers prior to recognition of revenue is classified as a current liability as billings in excess of costs and estimated earnings on incompleted contracts.

   

For taxi media advertising revenue, the Company recognizes deferred revenue when cash is received, but the revenue has not yet been earned. The Company recognizes taxi media advertising revenue ratably over the period in which the advertisement is published.

   

Fair Value Measurements

   

The carrying value of cash, accounts receivable, other current liabilities, accounts payable, accrued expenses and other current liabilities approximate the fair values of these instruments due to their short-term nature.

   

Income Taxes

   

The Company adopted ASC 740-10-25 on January 1, 2007, which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company did not recognize any additional liabilities for uncertain tax positions as a result of the implementation of ASC 740-10-25.

6


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

   

Recently Issued Accounting Guidance

   

In May 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, ASC 855 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. In February 2010, Accounting Standards Update (“ASU”) 2010-09, Amendments to Certain Recognition and Disclosure Requirements, was issued to clarify certain questions that arose in practice. ASU 2010-09 amended ASC 855 to, among other things, expressly require Securities and Exchange Commission (“SEC”) filers to evaluate subsequent events through the date the financial statements are issued. ASC 855 was effective for interim or annual financial periods ending after June 15, 2009, and shall be applied prospectively, while ASU 2010-09 was effective upon issuance. Accordingly, the Company adopted ASC 855 in the second quarter of fiscal 2009 and ASU 2010-09 in February 2010. The adoption of ASC 855 and ASU 2010-09 had no impact on the Company’s Interim Financial Statements.

   

In April 2010, the FASB issued an Accounting Standard Update (“ASU”) No. 2010-17, “Revenue Recognition – Milestone Method (Topic 605)”, which provides guidance on defining milestones under Topic 605 and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development deliverables in an arrangement in which one or more payments are contingent upon achieving uncertain future events or circumstances. ASU 2010-17 shall be applied prospectively to milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial position or results of operation.

   

The Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements that may have a material impact on results of operations, financial condition, or cash flows, based on current information.

   
3.

COSTS AND ESTIMATED EARNINGS ON INCOMPLETED CONTRACTS

   

The costs and estimated earnings on incompleted contracts were as follows:


      June 30, 2010     December 31, 2009  
      (Unaudited)        
               
  Costs incurred on incompleted contracts $  96,879,029   $  85,079,704  
  Estimated earnings on incompleted contracts   53,844,603     43,918,724  
  Total   150,723,632     128,998,428  
  Less – billings to date   (126,151,432 )   (112,166,656 )
               
  Costs and estimated earnings on incompleted contracts, net of billings in excess of costs and estimated earnings on incompleted contracts $  24,572,200   $  16,831,772  

7


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

3.

COSTS AND ESTIMATED EARNINGS ON INCOMPLETED CONTRACTS (continued)

   

The costs and estimated earnings on incompleted contracts are included in the accompanying balance sheets under the following captions:


      June 30, 2010     December 31, 2009  
      (Unaudited)        
               
  Costs incurred on estimated earnings in excess of billings on incompleted contracts $  35,672,455   $  33,853,708  
  Billings in excess of costs and estimated earnings on incompleted contracts   (11,100,255 )   (17,021,936 )
               
  Total $  24,572,200   $  16,831,772  

4.

NON-CONTROLLING INTERESTS

   

Non-controlling interests consisted of the following:


                        Adjustments/Net              
      % of Non-     As of     2009     Income of     Foreign     As of  
      controlling   December 31,   Acquisition     Non-controlling     Currency     December  
  Name of Affiliate   Interest     2008     (Fair Value)     Interest     Translation     31, 2009  
                                       
  Beijing PKU   3%   $ 1,188,662   $  -   $  247,525   $  -   $  1,436,187   
  China TranWiseway   30%     286,224     -     (1,498 )   -     284,726  
  Dalian Dajian Zhitong   15%     (9,143 )   -     42,419     -     33,276  
  Unisits   64.83%     -     13,740,228     3,005,058    

  -

    16,745,286  
                                       
  Total       $ 1,465,743   $  13,740,228   $  3,293,504   $

  -

  $  18,499,475  

                        Adjustments/Net              
      % of Non-     As of     2010     Income of     Foreign        
      controlling   December 31,   Acquisition     Non-controlling     Currency     As of June  
  Name of Affiliate   Interest     2009     (Fair Value)     Interest     Translation     30, 2010  
                                       
  Beijing PKU   3%   $  1,436,187   $  -   $  139,463   $ -   $  1,575,650  
  China TranWiseway   30%     284,726     -     66,617     -     351,343  
  Dalian Dajian Zhitong   15%     33,276     -     (18,393 )    -     14,883  
  Unisits   33.98%     16,745,286     (8,370,356 )   2,102,726      -     10,477,656  
                                       
  Total       $  18,499,475   $  (8,370,356 ) $  2,290,413   $ -   $  12,419,532  

On March 22, 2010, the Company entered into equity transfer agreements (“Equity Transfer Agreements”) with several individual shareholders (“Transferors”) of Beijing UNISITS Technology Co. Ltd. (“UNISITS”), pursuant to which the Company acquired 30.85% equity interest in UNISITS from the Transferors. Pursuant to the Equity Transfer Agreements, the Company purchased approximately 16.23 million shares of UNISITS from the Transferors in exchange for RMB 4.41 million (approximately US$0.65 million) in cash (“Cash Consideration”), 40% of which is payable within seven days after the effective date of the Equity Transfer Agreements, and approximately 1.16 million shares of China TransInfo Technology Group Co., Ltd. (the Company’s subsidiary or the “Group”) common stock, which are issuable within 30 days of the effective date of the Equity Transfer Agreements. The Equity Transfer Agreements contain “make good” provisions, under which the Transferors agree to deposit a total of 697,162 shares (60% of total common stock consideration) of the Group’s common stock with an escrow agent designated by the Group that the Transferors will receive as partial consideration for the acquisition. Specifically, if UNISITS’s 2010 after-tax net income under Chinese GAAP is less than RMB 37.50 million (approximately US$5.50 million) or its 2011 after-tax net income under Chinese GAAP is less than RMB 46.88 million (approximately US$6.86 million), then 50% of the shares of the Group’s common stock deposited by the Transferors in escrow will be returned to the Group for cancellation for each applicable year. In addition, for each applicable year as described above, the Group will not be required to pay the remainder of the Cash Consideration, which represents RMB 1.323 million (approximately US$0.19 million), or 30% of the total Cash Consideration, per year if UNISITS fails to meet the respective performance targets.

8


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

4.

NON-CONTROLLING INTERESTS (continued)

   

The Company had previously consolidated the financial statements of UNISITS since September 8, 2009 which the Group acquired 35.17% of the equity interest in UNISITS. As part of this acquisition, the Group and UNISITS entered into Acting in Concert Agreement. The agreement allows the Group to govern the financial and operating policies of UNISITS and therefore to obtain the control of UNISITS. As a result, UNISITS became a variable interest entity of the Group and UNISITS’s financial statements have been included in the Company’s consolidated financial statements since September 8, 2009 in accordance with ASC 810-10-15-3, Consolidation of Entities through Majority of Voting Interest.

 

The Group’s additional 30.85% equity interest purchase has been accounted in accordance with ASC 810-10-45-23. Accordingly, the Group’s purchase of additional equity interest ownership in UNISITS’s interest while the Group retains its controlling financial interest in UNISITS has been accounted for as equity transactions (investments by owners and distributions to owners acting in their capacity as owners). Therefore, no gain or loss has been recognized in consolidated net income or comprehensive income. The carrying amount of the non-controlling interest has been adjusted to reflect the change in its ownership interest in the subsidiary (UNISITS). Any difference between the fair value of the consideration received or paid and the amount by which the non-controlling interest is adjusted shall be recognized in equity attributable to the Group.

 

5.

LONG-TERM INVESTMENTS

 

 

The Company had the following long-term investments accounted under the equity method and cost method :




Type


Equity Investee
June 30, 2010
Equity
Investment
Ownership
Equity Gansu  33.33%
Equity Shanxi 49.00%
Equity ZJUNIS 30.00%
Equity BOTTC 23.17%
Equity CQJK 49.00%
Cost Shandong  5.00%
Cost ZGYM 15.00%

Equity and cost investments in affiliates as of June 30, 2010 consisted of the following:

  Type   Equity
Investee
    Beginning
Equity
Investment
Basis
12/31/2009
    Purchase of
Investments
    Proportional
Share of the
Equity-
Accounted
Affiliate’s
Net
Income
    Foreign
Currency
Translation
Adjustment
    Ending
Equity
Investment
Basis
6/30/2010
 
  Equity   Gansu   $  7,261,227   $  -   $ (908,023 ) $  -   $ 6,353,204  
  Equity   Shanxi     204,971     -     (50,807 )   -     154,164  
  Equity   ZJUNIS     207,168     -     (10,266 )   -     196,902  
  Equity   BOTTC     185,784     -     (61,773 )   -     124,011  
  Equity   CQJK     35,942     -     -     146     36,088  
  Cost   Shandong     110,025     -     -     450     110,475  
  Cost   ZGYM     22,005     -     -     90     22,095  
  Total       $  8,027,122   $ -   $ (1,030,869 ) $  686   $ 6,996,939  

9


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

6.

STOCK-BASED COMPENSATION

   

Stock Warrants

   

On November 30, 2007, the Company issued warrants to CCG Investor Relations Partners LLC, in aggregate, to purchase 50,000 shares of the Company’s common stock in connection with investor relations services, with an exercise price of $5.00 per share. These warrants will expire on November 29, 2010 pursuant to the common stock purchase warrant agreement. The fair market value of these stock warrants was $200,105 and recorded as an increase in Selling, General, and Administrative expenses and Additional Paid-in Capital at the date of grant. The fair market value was estimated on the date of grant using the Black-Scholes option-pricing model in accordance with ASC 718, Compensation-Stock Compensation, using the following assumptions: expected dividend yield 0%, risk-free interest rate of 3.08%, volatility of 148%, and an expected term of three years.

   

A summary of stock warrants for the quarter ended June 30, 2010 is as follows:


                  Weighted-Average        
            Weighted-     Remaining     Aggregate  
            Average     Contractual Term     Intrinsic  
  Stock Options   Shares     Exercise Price     (Months)     Value  
  Outstanding at January 1, 2010   55,555   $  1.80     52     353,885  
  Granted   -     -     -        
  Exercised or converted   50,000     1.80     -        
  Forfeited or expired   -     -     -        
  Outstanding at June 30, 2010   5,555   $  1.80     46   $  20,165  
  Exercisable at June 30, 2010   5,555   $  1.80     46   $  20,165  

Stock Options

The Company issued the following stock options:

 

On January 7, 2008, the Company and Mr. Zhihai Mao, the Chief Financial Officer of the Company, entered into a stock option agreement. Pursuant to the terms of the stock option agreement, Mr. Mao was granted a non-qualified stock option on January 7, 2008 to purchase 200,000 shares of common stock of the Company at an exercise price of $6.70 per share, which was the closing price per share of the Company’s common stock as reported on the OTC Bulletin Board on such date. The option has a term of ten years and expires on January 7, 2018. The option vests in equal installments on a quarterly basis over a three-year period beginning on January 7, 2008.

   

 

On May 1, 2008, the Company entered into separate Stock Option Agreements with each of Mr. Jay Trien and Dr. Zhonsu Chen. Under the terms of the Stock Option Agreements, the Company agreed to grant a stock option to each of Mr. Trien and Dr. Chen for the purchase of 30,000 shares of common stock of the Company at an exercise price of $6.50 per share, which was the closing price per share of the Company’s common stock as reported on the OTC Bulletin Board on such date. The option has a term of five years and expires on May 1, 2013. The option vests in equal installments on a quarterly basis over a three-year period except for 2,500 options which vested immediately on May 1, 2008 for Mr. Trien.

10


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

6.

STOCK-BASED COMPENSATION (continued)

   
 

On September 28, 2008, the Company entered into a Stock Option Agreement with Mr. Ho-Ping Lin. Under the terms of the Stock Option Agreement, the Company agreed to grant a stock option to Mr. Lin for the purchase of 30,000 shares of common stock of the Company at an exercise price of $6.50 per share which was the closing price per share of the Company’s common stock as reported on the OTC Bulletin Board on such date. The option has a term of five years and expires on September 28, 2013. The option vests in equal installments on a quarterly basis over a three-year period.

       
 

On April 29, 2009, the Board of Directors adopted the 2009 Equity Incentive Plan (the “Plan”), which was subsequently approved by shareholders at the Company’s 2009 Annual Shareholder Meeting on May 29, 2009. Under the Plan, the Company issued the following stock options:

       
  o

On June 1, 2009, the Board granted an employee 30,000 stock options with an exercise price of $5.09, which was the closing price per share of the Company’s common stock as reported on the NASDAQ Stock Market on such date. The options have a term of five years and expire on June 1, 2014. The options vest in equal installments on a semi-annual basis over a three-year period. On the same date, the Board of Directors voted to adjust the exercise prices of the stock options which were granted on May 1, 2008 and September 28, 2008 to $5.09 per share and replaced the stock options granted on January 7, 2008 with 150,000 shares of restricted stocks. The incremental compensation cost of the re-priced options and replaced restricted stocks was $27,000, with totaling $8,507 recognized as compensation cost at the date of re-pricing.

       
  o

On November 3, 2009, the Company’s Board of Directors granted non-qualified options under the Company’s 2009 Equity Incentive Plan to the Company’s employees and consultants to purchase 1,791,600 shares of common stock of the Company at an exercise price of $7.69 per share, which was the closing price per share of the Company's common stock as reported on the NASDAQ on such date. The options have a term of five years and expire on November 3, 2014. The options vest in equal installments on an annual basis over a four-year period beginning on November 3, 2009.

       
 

On June 14, 2010, the Company entered into a Stock Option Agreement with Mr. Xingming Zhang. Under the terms of the Stock Option Agreement, the Company agreed to grant a stock option to Mr. Zhang for the purchase of 30,000 shares of common stock of the Company at an exercise price of $6.03 per share which was the closing price per share of the Company’s common stock as reported on the NASDAQ on such date. The option has a term of five years and expires on June 14, 2015. The option vests in equal installments on a quarterly basis over a three-year period.

The Company recorded compensation expense of $843,481 and $126,398 during the six months ended June 30, 2010 and 2009, respectively, in connection with the stock options provided above.

The Company estimated fair value of stock options using a Black-Scholes option pricing valuation model, consistent with the provisions of ASC 718, Compensation- Stock Compensation. Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company’s stock, the risk-free rate and the Company’s dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by grantees, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.

11


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

6.

STOCK-BASED COMPENSATION (continued)

The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option pricing model. No dividends were assumed due to the nature of the Company’s current business strategy. The following table presents the assumptions used for options granted:

  Six months ended June   Year ended December
  30, 2010   31, 2009
Risk-free interest rate 1.48%   1.50% - 1.65%
Expected life (year) 3.5   3.5 – 4.5
Expected volatility 49%   65% - 82%
Weighted average fair value per option $2.23   $3.16

A summary of stock options transactions during the three months ended June 30, 2010 is as follows:

                  Weighted-Average        
            Weighted-     Remaining     Aggregate  
            Average     Contractual Term     Intrinsic  
  Stock Options   Shares     Exercise Price     (Months)     Value  
  Outstanding at January 1, 2010   2,025,600   $  7.50     45   $ 2,437,788  
  Granted   30,000     6.03     36        
  Exercised or converted   -     -     -        
  Forfeited or expired   (54,000 )   7.69     -        
  Outstanding at June 30, 2010   2,001,600   $  7.49     51   $  855,300  
                           
  Non-vested at June 30, 2010   1,819,100   $  7.53     52   $  220,625  
  Exercisable at June 30, 2010   182,500   $  5.09     37   $  634,675  

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based upon the Company’s closing stock price of $5.43 and $8.17 as of June 30, 2010 and December 31, 2009, respectively, which would have been received by the option holders had all warrant holders exercised their warrant awards as of that date. No options were exercised during the six months ended June 30, 2010.

12


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

6.

STOCK-BASED COMPENSATION (continued)

The following table details the Company’s non-vested share awards activity:

            Weighted-  
            Average Grant-  
      Shares     Date Fair Value  
  Balance at December 31, 2009   1,883,100   $  7.51  
  Granted   30,000     6.03  
  Vested   (40,000 )   5.09  
  Cancelled or Forfeited   (54,000 )   7.69  
  Balance at June 30, 2010   1,819,100   $  7.53  

The weighted-average grant-date fair value of non-vested share awards is the quoted market value of the Company’s common stock on the date of grant, as shown in the table above. As of June 30, 2010, total unrecognized compensation costs related to unvested stock options was $4,973,644. Unvested stock options are expected to be recognized over a weighted average period of 3.28 years.

   
7.

EQUITY TRANSACTIONS

   

On February 21, 2010, the Company entered into a Securities Purchase Agreement with SAIF Partners III L.P., pursuant to which the Company sold a total of 1,564,945 shares of common stock, par value $0.001 per share (the "Common Stock"), for an aggregate purchase price of $10,000,000. The shares were priced at $6.39 per share.

   

On April 14, 2010, the Company issued a total of 1,161,931 shares of common stock pursuant to the Equity Transfer Agreements entered with the Transferors of UNISITS on March 22, 2010. 464,769 shares, which is 40% of the total shares issued were delivered to the Transferors and the remaining 697,162 shares were put into escrow account according to the Equity Transfer Agreements.

   
8.

INCOME TAXES

   

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized no increases or decreases in the total amounts of previously unrecognized tax benefits. The Company had no unrecognized tax benefits as of June 30, 2010 and 2009. The Company did not incur any interest and penalties related to potential underpaid income tax expenses and also believed that the adoption of FIN 48 does not have a significant impact on the unrecognized tax benefits during the six months ended June 30, 2010.

   

The Company, through its subsidiaries, is governed by the Income Tax Laws of the PRC. Operations in the United States of America have incurred net accumulated operating losses of approximately $15,000,000 million as of June 30, 2010 for income tax purposes. However, a hundred percent allowance has been created on the deferred tax asset of approximately $4,600,000 million due to uncertainty of its realization.

   

For the six months ended June 30, 2010 and 2009, income tax expenses were as follows:


      Six Months Ended June 30,  
      2010     2009  
                                                    Domestic     Foreign     Domestic     Foreign  
                                      Federal     State     China     Federal     State     China  
  Current $ -   $ -   $ 835,776   $   $ -   $ 14,966  
  Deferred   -     -     4,047             9,116  
    $ -   $ -   $ 839,823   $   $   $ 24,082  

The Group Company, Zhangcheng Media, Xinjiang Zhangcheng, and Dajian Zhitong are charged at the tax rate at 25% on the taxable net income for PRC income tax purposes under the new Enterprise Tax Law in 2009. PKU, China TranWiseway, UNISITS, Beijing UNISITS, and Hangzhou UNISITS are charged at the tax rate at 15% on the taxable net income for PRC income tax purposes in 2010. Beijing Tian Hao, Beijing Zhangcheng and Shanghai Yootu qualify as “new or high-technology enterprise” located in High-Tech Zones in Beijing and Shanghai, and are entitled to tax exemptions or preferential tax rates on the taxable net income for PRC income tax purposes in 2010. Henan UNISITS are subject to a special rate at 2.5% of its taxable revenue in 2010.

13


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

8.

INCOME TAXES (continued)

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting and tax bases of its assets and liabilities. Deferred assets are reduced by a valuation allowance when deemed appropriate.

The tax effects of existing temporary differences that give rise to significant portions of deferred tax assets at June 30, 2010 and December 31, 2009 were as follows:

      Deferred Tax Assets  
      Net operating loss     Valuation     Net deferred tax  
      carryforwards     allowance     assets  
  June 30, 2010:                  
   Foreign:                  
       In RMB ¥  168,151   ¥  -   ¥  168,151  
       Exchange rate   0.1473     0.1473        
       In USD $  24,769   $  -   $  24,769  
   Domestic :                  
       In USD $  4,600,000   $  (4,600,000 ) $  -  
  December 31, 2009:                  
   Foreign:                  
       In RMB ¥  195,740   ¥  -   ¥  195,740  
       Exchange rate   0.1467     0.1467        
       In USD $  28,715   $  -   $  28,715  
   Domestic :                  
       In USD $  4,600,000   $  (4,600,000 ) $  -  

9.

EARNINGS PER SHARE

   

The Company calculates its basic and diluted earnings per share in accordance with ASC 260, Earnings per Share. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive warrants and stock options include non-vested stock granted to employees.


      Three Months Ended June 30,     Six Months Ended June 30,  
      2010     2009     2010     2009  
  Net income $  3,609,917   $  2,799,643   $  5,368,956   $  4,248,329  
  Basic earnings per share:                        
                           
   Basic weighted average share outstanding   25,051,414     22,215,551     24,031,595     22,201,432  
   Basic earnings per common share $  0.14   $  0.13   $  0.22   $  0.19  
  Diluted earnings per share:                        
                           
   Basic weighted average share outstanding   25,051,414     22,215,551     24,031,595     22,201,432  
   Effect of dilutive stock options and                        
   warrants   45,109     179,006     57,332     174,784  
   Diluted weighted average shares                        
   outstanding   25,096,523     22,394,557     24,088,927     22,376,216  
   Diluted earnings per common share $  0.14   $  0.13   $  0.22   $  0.19  

14


CHINA TRANSINFO TECHNOLOGY CORP. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

10.

CONCENTRATION OF RISK

   

Cash

   

The Company maintains cash in US dollar in two commercial banks located in California. Up to $250,000 of the balance in each bank was insured by the U.S. Federal Deposit Insurance Corporation (FDIC). As of June 30, 2010 and December 31, 2009, uninsured balances totaled $764,632 and $1,901,266, respectively.

   

Major Customers

   

The Company had two and two major customers that each represented 10% or more of the Company’s total net sales during the six months ended June 30, 2010 and 2009, respectively. Total net sales were $10,400,274 and $4,240,687 for the six months ended June 30, 2010 and 2009, respectively, and related accounts receivable balance were $1,785,036and $145,328 as of June 30, 2010 and 2009, respectively.

   
11.

SUBSEQUENT EVENTS

   

The Company has evaluated subsequent events through the date the financial statements were issued. Management does not believe any subsequent events have occurred that would require further disclosure or adjustment to the financial statements.

15


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements that are based on the beliefs of our management, and involve risks and uncertainties, as well as assumptions, that, if they ever materialize or prove incorrect, could cause actual results to differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including statements regarding new and existing products, technologies and opportunities; statements regarding market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China; and any statements of belief or intention. As such, they are subject to risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward looking statements. Such risks and uncertainties include any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent SEC filings, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are based on information available to us on the date of this report. We assume no obligation and do not intend to update these forward-looking statements, except as required by law.

Certain Terms

Except where the context otherwise requires and for the purposes of this report only:

  • “China TransInfo,” “the Company,” “we,” “us,” and “our” refer to China TransInfo Technology Corp., its subsidiaries, and, in the context of describing our operations and business, and consolidated financial information, include our VIE Entities;

  • “China,” “Chinese” and “PRC” refer to the People’s Republic of China and do not include Taiwan and special administrative regions of Hong Kong and Macao;

  • “BVI” refers to the British Virgin Islands;

  • “SEC” refers to the United States Securities and Exchange Commission;

  • “Securities Act” refers to the Securities Act of 1933, as amended;

  • “Exchange Act” refers to the Securities Exchange Act of 1934, as amended;

  • “RMB” refers to Renminbi, the legal currency of China;

  • “U.S. dollar,” “$” and “US$” refer to the legal currency of the United States; and

  • “VIE Entities” means our consolidated variable interest entities, including China TransInfo Technology Group Co., Ltd. and its subsidiaries as depicted in our organization chart included in our Annual Report on Form 10-K for the year ended December 31, 2009.

The following discussion and analysis of our financial condition and results of operations includes information with respect to our plans and strategies for our business and should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included herein and our consolidated financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year ended December 31, 2009.

16


Overview of Our Business

We are a leading provider of end-to-end public transportation information technology systems and related comprehensive technology solutions in China. Our goal is to become the largest provider of transportation information products and related comprehensive technology solutions in China, as well as the largest operator and provider of real-time transportation information to consumers in China. Substantially all of our operations are conducted through our VIE Entities that are PRC domestic companies owned principally or entirely by our PRC affiliates. Through our VIEs, we are involved in developing multiple applications in transportation, digital city, and land and resource filling systems based on Geographic Information Systems, or GIS, technologies which are used to service the public sector.

Our primary focus is on providing transportation solutions. Our major products and services include: Transportation Planning Information System, Pavement Maintenance System, Electronic toll collection, or ETC, Traffic Information Service System, Taxi Security Monitoring, Commanding and Dispatching Platform, GIS-T (Transportation) Middleware, Traffic Flow Surveying Systems, Intelligent Parking System, Red Light Violation Snapshot System, Intelligent Highway Vehicle Monitoring System, Intelligent Public Transport System, TransPLE Passenger Flow Statistic, Detecting and Analysis System, Palmcity Navigation Engine, Comprehensive Location Based Service Platform, Digital City, and 2-D and 3-D GIS. We also offer full range solutions for transportation oriented GIS, or GIS-T, covering transportation planning, design, construction, maintenance and operation.

Second Quarter Financial Performance Highlights

We continued to experience strong demand for our products and services during the second quarter of 2010, which resulted in continued growth in our revenues. The transportation information industry in China is in the process of rapid and continuous development with the continuous increase of Chinese government’s and public demand for advanced transportation information products and services to support more effective and efficient transportation networks in China. This trend is supported by the growing amount of governmental spending in the transportation sector. We believe this trend will continue to result in the growth in sales of our transportation products and services.

The following are some of our financial highlights for the second quarter of 2010:

  • Net sales – Our net sales were approximately $24.05 million for the second quarter of 2010, an increase of 151.06% from the same quarter of prior year.

  • Gross Margin – Gross margin was 39.85% for the second quarter of 2010, as compared to 48.88% for the same period in 2009.

  • Operating Profit – Operating profit was approximately $4.58 million for the second quarter of 2010, an increase of 60.92% from $2.85 million of the same quarter of prior year.

  • Net Income – Net income was approximately $3.61 million for the second quarter of 2010, an increase of 28.94% from the same quarter of prior year.

Critical Accounting Estimates

As discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, we consider our estimates on revenue recognition, vendor allowances, amortization of intangibles, and inventory valuation to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements. There have been no significant changes to these estimates in the three months ended June 30, 2010.

Recently Issued Accounting Guidance

See Note 2 to condensed consolidated financial statements included in Item 1, Financial Information, of this Quarterly Report on Form 10-Q.

17


RESULTS OF OPERATIONS

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

The following table sets forth selected items from our unaudited condensed consolidated statements of income by dollar and as a percentage of our net sales for the periods indicated:

      Three Months Ended     Three Months Ended  
      June 30, 2010     June 30, 2009  
            % of           % of  
      Amount     Net Sales     Amount     Net Sales  
 

Net sales

$  24,045,906     100.00%   $  9,577,921     100.00%  
 

Cost of sales

  14,463,937     60.15%     4,895,845     51.12%  
 

Gross profit

  9,581,969     39.85%     4,682,076     48.88%  
 

Selling, general and administrative expenses

  4,999,719     20.79%     1,834,616     19.15%  
 

Income from operations

  4,582,250     19.06%     2,847,460     29.73%  
 

Other income

  650,648     2.71%     71,521     0.75%  
 

Income before income taxes, non-controlling interests, and gain on equity investment in affiliates

  5,232,898     21.76%     2,918,981     30.48%  
 

Income taxes

  464,027     1.93%     24,203     0.26%  
 

 

                       
 

Net income before non-controlling interests and gain on equity investments in affiliates net income

  4,768,871     19.83%     2,894,778     30.22%  
 

Gain on equity investments in affiliates due to proportional shares of the affiliates net income

  57,206     0.24%     0.00     0.00%  
 

Net income before non-controlling interests

  4,826,077     20.07%     2,894,778     30.22%  
 

Non-controlling interests in net income of subsidiary

  1,216,160     5.06%     95,135     0.99%  
 

 

                       
 

Net income

$  3,609,917     15.01%   $  2,799,643     29.23%  

Net Sales – Net sales increased by $14.47 million, or 151.06%, to $24.05 million for the three months ended June 30, 2010, from $9.58 million during the same period of 2009. Approximately 110.90% of this increase is attributable to the increase in transportation revenue that mainly resulted from our expanded business as a result of the acquisition of UNISITS. UNISITS contributed approximately $16.31 million in sales during the three months ended June 30, 2010. Our digital city business decreased by $1.88 million to $1.02 million for the three months ended June 30, 2010, from $2.90 million during the same period of 2009. The decrease was mainly due to the fact that we no longer focus in this area of business.

The following table illustrates the revenues from the major Chinese government sectors and regulated industries in which we sell our products and services for the periods indicated. The table also provides the percentage of total revenues represented by each listed sector.

      Three Months Ended     Three Months Ended  
      June 30, 2010     June 30, 2009  
            % of Net           % of Net  
        Net Sales     Sales     Net Sales       Sales  
  Transportation $  22,584,750     93.93%   $  6,539,204     68.27%  
  Digital City   1,015,250     4.22%     2,902,102     30.30%  
  Land and resources   70,038     0.29%     102,525     1.07%  
  Other   375,868     1.56%     34,090     0.36%  
  Net sales $  24,045,906     100.00%   $  9,577,921     100.00%  

Gross Profit – Our gross profit increased approximately $4.90 million, or 104.65%, to approximately $9.58 million for the three months ended June 30, 2010, from approximately $4.68 million during the same period of 2009. Gross profit as a percentage of net sales was 39.85% for the three months ended June 30, 2010, a decrease of 9.03% from 48.88% during the same period of 2009. Our gross profit increase was mainly attributable to the increase of sales during the three months ended June 30, 2010 in general. However, our gross profit increase underperformed our revenue increase from the same period of 2009 to 2010 by about 46.41%, which was mainly due to the inclusion of the financials of UNISITS whose sales generally involve more hardware components and have much lower margin than the Company’s legacy business during the three months ended June 30, 2010.

18


Selling, General and Administrative Expenses – Selling, general and administrative expenses increased by $3.17 million, or 172.52%, to $5.00 million for the three months ended June 30, 2010, from $1.83 million during the same period of 2009. The increase is due to the following:

  • Our selling expenses including sales representative commissions, promotion fees and marketing expenses, increased approximately $0.15 million, or 48.39%, to $0.46 million for the three months ended June 30, 2010, from $0.31 million during the same period of 2009. As a percentage of revenues, selling expenses decreased to 1.90% for the six months ended June 30, 2010, from 3.22% during the same period of 2009. The increase of selling expenses was mainly attributable to our expanded operations and sales volume as well as the enhanced marketing activities for the three months ended June 30, 2010.
  • Our general and administrative expenses mainly consist of the costs associated with non-cash, share-based compensation and staff and support personnel who manage our business activities, and professional fees paid to third parties, which were approximately $4.54 million (18.89% of total sales) and approximately $1.53 million (15.94% of total sales) for the three months ended June 30, 2010 and 2009, respectively. The increase of administrative expenses was mainly attributable to the increase of staffing, enhanced research and development efforts as well as more professional expenses associated with being a public company.

Income Taxes – For the three months ended June 30, 2010, we recognized income tax expense of $0.46 million and effective tax rate of 8.87% while in the same period of 2009, we recognized income tax benefits of $0.02 million and effective tax rate of negative 0.83% . The increase in the income tax expense mainly resulted from the increased taxable income of UNISITS during the three months ended June 30, 2010.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

The following table sets forth selected items from our unaudited condensed consolidated statements of income by dollar and as a percentage of our net sales for the periods indicated:

      Six Months Ended     Six Months Ended  
      June 30, 2010     June 30, 2009  
            % of           % of  
      Amount     Net Sales     Amount     Net Sales  
 

Net sales

$  48,933,381     100.00%   $  16,091,316     100.00%  
 

Cost of sales

  30,818,236     62.98%     8,086,742     50.26%  
 

Gross profit

  18,115,145     37.02%     8,004,574     49.74%  
 

Selling, general and administrative expenses

  9,867,176     20.16%     3,700,335     23.00%  
 

Income from operations

  8,247,969     16.86%     4,304,239     26.74%  
 

Other income

  552,812     1.13%     68,646     0.43%  
 

Income before income taxes, non-controlling interests, and gain on equity investment in affiliates

  8,800,781     17.99%     4,372,885     27.17%  
 

Income taxes

  839,823     1.72%     24,082     0.15%  
 

 

                       
 

Net income before non-controlling interests and gain on equity investments in affiliates

  7,960,958     16.27%     4,348,803     27.02%  
 

Loss on equity investments in affiliates due to proportional shares of the affiliates net income

  (301,589 )   (0.62% )   0.00     0.00%  
 

Net income before non-controlling interests

  7,659,369     15.65%     4,348,803     27.02%  
 

Non-controlling interests in net income of subsidiary

  2,290,413     4.68%     100,474     0.62%  
 

 

                       
 

Net income

$  5,368,956     10.97%   $  4,238,329     26.34%  

Net Sales – Net sales increased by $32.84 million, or 204.10%, to $48.93 million for the six months ended June 30, 2010, from $16.09 million during the same period of 2009. Approximately 108.95% of this increase is attributable to the increase in transportation revenue mainly resulted from our expanded business and acquisition of UNISITS.

19


UNISITS contributed approximately $32.36 million sales during the six months ended June 30, 2010. Our digital city business decreased by $3.46 million to $1.17 million for the six months ended June 30, 2010, from $4.63 million during the same period of 2009. The decrease was mainly due to the fact that we no longer focus in this area of business.

The following table illustrates the revenues from the major Chinese government sectors and regulated industries in which we sell our products and services for the periods indicated. The table also provides the percentage of total revenues represented by each listed sector.

      Six Months Ended     Six Months Ended  
      June 30, 2010     June 30, 2009  
            % of Net           % of Net  
      Net Sales       Sales     Net Sales       Sales  
  Transportation $  47,053,480     96.15%   $  11,272,032     70.05%  
  Digital City   1,169,884     2.39%     4,632,957     28.79%  
  Land and resources   174,042     0.36%     107,858     0.67%  
  Other   535,975     1.10%     78,469     0.49%  
  Net sales $  48,933,381     100.00%   $  16,091,316     100.00%  

Gross Profit – Our gross profit increased approximately $10.11 million, or 126.31%, to approximately $18.12 million for the six months ended June 30, 2010, from approximately $8.00 million during the same period of 2009. Gross profit as a percentage of net sales was 37.02% for the six months ended June 30, 2010, a decrease of 12.72% from 49.74% during the same period of 2009. Our gross profit increase was mainly attributable to the increase of sales during the six months ended June 30, 2010 in general. However, our gross profit increase underperformed our revenue increase from the same period of 2009 to 2010 by about 77.79%, which was mainly due to the inclusion of the financials of UNISITS whose sales generally involve more hardware components and have much lower margin than the Company’s legacy business during the six months ended June 30, 2010.

Selling, General and Administrative Expenses – Selling, general and administrative expenses increased by $6.17 million, or 166.66%, to $9.87 million for the six months ended June 30, 2010, from $3.70 million during the same period of 2009. The increase is due to the following:

  • Our selling expenses including sales representative commissions, promotion fees and marketing expenses, increased approximately $0.55 million, or 82.09%, to $1.22 million for the six months ended June 30, 2010, from $0.67 million during the same period of 2009. As a percentage of revenues, selling expenses decreased to 2.49% for the six months ended June 30, 2010, from 4.16% during the same period of 2009. The increase of selling expenses was mainly attributable to our expanded operations and sales volume as well as the enhanced marketing activities for the six months ended June 30, 2010.
  • Our general and administrative expenses were approximately $8.65 million (17.68% of total sales) and approximately $3.03 million (18.84% of total sales) for the six months ended June 30, 2010 and 2009, respectively. The increase of administrative expenses was mainly attributable to the increase of staffing, enhanced research and development efforts as well as more professional expenses associated with being a public company.

Income Taxes – For the six months ended June 30, 2010, we recognized income tax expense of $0.84 million and effective tax rate of 9.54% while in the same period of 2009, we recognized income tax expense of $0.02 million and effective tax rate of 0.55% .The increase in the income tax expense mainly resulted from the increased taxable net income of UNISITS during the six months ended June 30, 2010.

Liquidity and Capital Resources

Our principal liquidity requirements are for working capital, capital expenditures and cash dividends. We fund our liquidity requirements primarily through cash on hand, cash flow from operations and borrowings from our revolving credit facility. We believe our cash on hand, future funds from operations and borrowings from our revolving credit facility will be sufficient to fund our cash requirements for at least the next twelve months. There is no assurance, however, that we will be able to generate sufficient cash flow or that we will be able to maintain our ability to borrow under our revolving credit facility.

20


As of June 30, 2010, we had cash and cash equivalents (excluding restricted cash) of approximately $25.22 million and restricted cash of approximately $2.93 million. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.

Cash Flow

  Six Months Ended June 30,
  2010 2009
Net cash used in operating activities $(11,557,078) $(3,371,043)
Net cash used in investing activities (1,499,709) (3,133,041)
Net cash provided by (used in) financing activities 10,783,116 (393,693)
Effect of foreign currency translation 98,088 (16,643)
Net decrease in cash and cash equivalents $(2,175,583) $(6,914,420)

Operating Activities

Net cash used in operating activities was approximately $11.56 million for the six-month period ended June 30, 2010, while for the same period of 2009, we had approximately $3.37 million net cash used in operating activities. The increase of the cash used in operating activities was mainly attributable to the increase of accounts receivable, which was mainly due to the increase in sales and slow seasonal collections during the first six months of 2010. We also experienced the increase in other receivable, which consists mainly of contract bidding and performance bonds that we put into escrow accounts set up by our customers for contract bidding and performance purposes. Such increases were in correlation to the increase of our sales and also negatively impacted our cash from operations. We also had increase in prepaid expenses, which were resulted from more equipment purchases related to our projects. In addition, we had the decrease in billings in excess of costs and estimated earnings on incompleted contracts, which also negatively impacted the cash flow from operations for the six months ended June 30, 2010 compared to the same period of 2009.

Investing Activities

Our primary uses of cash for investing activities are payments for the acquisition of property and equipment, as well as intangible assets.

Net cash used in investing activities for the six-month period ended June 30, 2010 was approximately $1.50 million, which is a decrease of approximately $1.63 million from net cash used in investing activities of approximately $3.13 million for the same period of 2009. The decrease of the cash used in investing activities was mainly due to the fact that we acquired less equipment and intangible assets during the first six months of 2010 as compared to the same period of 2009.

Financing Activities

Net cash provided by financing activities for the six-month period ended June 30, 2010 was approximately $10.78 million, while for the same period of 2009 we had approximately $0.39 million net cash used in financing activities. Such change was mainly attributable to the proceeds of the securities offering of $10 million to SAIF Partners III L.P. during the first quarter of 2010.

Financing AgreementsOn June 21, 2010, our VIE Entity, PKU, entered into a short-term loan agreement with Bank of Beijing, Zhongguancun Branch, or Bank of Beijing, pursuant to which Bank of Beijing has agreed to loan to PKU RMB 30,000,000 (approximately $4,419,000) as working capital. The loan has an annual interest rate based on the benchmark interest rate as of the date of the first withdrawal of the principal and the interests must be paid on a quarterly basis. The loan expires within 12 months after the date of the first withdrawal but can be renewed upon the written consent by Bank of Beijing. Under the terms of the loan agreement, PKU is subject to customary affirmative and negative covenants. The loan may be accelerated and Bank of Beijing may demand immediate payment of the principal and accrued interests upon the occurrence of an event of default which includes, among other things, a failure to make principal or interest payments, a failure to comply with other covenants and certain events of liquidation or bankruptcy. As of June 30, 2010, principal amount of approximately $4.42 million was outstanding. There are no financial covenant requirements under this short-term loan agreement. We expect to renew the loan upon expiration.

21


On June 17, 2008, we entered into a short-term loan agreement with Beijing Bank, Youyi Branch, or Youyi Branch, pursuant to which Youyi Branch has agreed to loan to us RMB 20 million (approximately $2.93 million) for working capital purposes. The loan had an initial annual interest rate of 8.96%, which was floating based on interest rates determined by the People’s Bank of China from time to time. Interest is payable on a quarterly basis commencing September 20, 2008. The loan expired on June 17, 2009 and was renewed on June 22, 2009 for one more year with an initial interest rate of 5.31% per annum, which is also floating based on interest rates determined by the People’s Bank of China from time to time. Under the terms of the loan agreement, we are subject to customary affirmative and negative covenants. The loan may be accelerated and Youyi Branch may demand immediate payment of the principal and accrued interests upon the occurrence of an event of default which includes, among other things, a failure to make principal or interest payments, a failure to comply with other covenants and certain events of bankruptcy. On June 21, 2010, the total amount of the loan was paid off.

On September 29, 2009, PKU entered into a short-term loan agreement with Huaxia Bank, Zhichunlu Branch, or Huaxia Bank, pursuant to which Huaxia Bank has agreed to loan to PKU RMB 30 million (approximately $4.42 million) for working capital purposes. The loan had an initial annual interest rate of 5.31%, which was floating based on interest rates determined by the People’s Bank of China from time to time. Interest is payable on a monthly basis commencing October 20, 2009. The loan expires on September 29, 2010. As of the date of this report, a principal amount of approximately $4.42 million is outstanding. There are no financial covenant requirements under this short-term loan agreement. We expect to renew the loan upon expiration.

Future Capital Requirements – We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. In addition, because substantially all of our revenues are generated from our indirect PRC subsidiary, Oriental Intra-Asia Entertainment (China) Limited, or Oriental Intra-Asia, after it receives payments from our VIE Entities under various services and other arrangements, the ability of Oriental Intra-Asia to make dividends and other payments to us is subject to the PRC dividend restrictions. Current PRC law permits payments of dividend by Oriental Intra-Asia only out of its accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Oriental Intra-Asia is also required under PRC laws and regulations to allocate at least 10% of its annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of Oriental Intra-Asia’s registered capital. Allocations to the statutory reserve fund can only be used for specific purposes and are not transferable to us in the form of loans, advances or cash dividends. As a result, if our existing cash and amount available under existing bank loans insufficient to meet our requirements, we may seek to sell additional equity securities, debt securities or borrow additional funds from lending institutions. We can make no assurances that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute the interests of our current shareholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

Off-Balance Sheet Arrangements and Contractual Obligations – Our material off-balance sheet arrangements are operating lease obligations. We excluded these items from the balance sheet in accordance with generally accepted accounting principles in the United States of America. Operating lease commitments consist principally of leases for our headquarter offices. These leases frequently include options which permit us to extend the terms beyond the initial fixed lease term. With respect to most of those leases, we intend to renegotiate those leases as they expire.

Seasonality – Our results of operations are affected by seasonality and we typically see lower sales during the first half than the second half of a year. Such seasonality is mainly caused by governmental seasonal budgeting activities and behaviors.

22


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

Pursuant to Item 305(e) of Regulation S-K, the Company is not required to provide the information required by this Item as it is a “smaller reporting company.”

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial officer, Mr. Shudong Xia and Mr. Zhihai Mao, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Mr. Shudong Xia and Mr. Zhihai Mao concluded that as of June 30, 2010, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting.

During the fiscal quarter ended June 30, 2010, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

23


PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any legal proceedings or claims that would require disclosure under Item 103 of Regulation S-K. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

ITEM 1A. RISK FACTORS

As a smaller reporting company, the Company is not required to make disclosures under this Item 1A.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We have not sold any unregistered equity securities during the fiscal quarter ended June 30, 2010 that were not previously disclosed in a current report on Form 8-K that was filed during that period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. [REMOVED AND RESERVED.]

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

EXHIBITS.

31.1*

Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2*

Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1*

Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2*

Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

24


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATED: August 16, 2010

CHINA TRANSINFO TECHNOLOGY CORP.

By: /s/ Shudong Xia                               
Shudong Xia
Chief Executive Officer
(Principal Executive Officer)

By: /s/ Zhihai Mao                                
Zhihai Mao
Chief Financial Officer
(Principal Financial Officer)


EXHIBIT INDEX

Exhibit  
Number Description
 

31.1*

Certification of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2*

Certification of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1*

Certification of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2*

Certification of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.