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EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - Trunkbow International Holdings Ltdv221204_ex32-2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - Trunkbow International Holdings Ltdv221204_ex31-1.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - Trunkbow International Holdings Ltdv221204_ex32-1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - Trunkbow International Holdings Ltdv221204_ex31-2.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: March 31, 2011
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-53934
 
TRUNKBOW INTERNATIONAL HOLDINGS LIMITED
(Exact name of small business issuer as specified in its charter)

Nevada
 
75-3552213
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
 
Unit 1217-1218, 12F of Tower B, Gemdale Plaza,
No. 91 Jianguo Road, Chaoyang District, Beijing, 100022
People’s Republic of China
(Address of principal executive offices, Zip Code)
 
+ (86) 10-85712518
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 larger accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “ small 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 May 9, 2011 is as follows:

 
Class of Securities
 
Shares Outstanding
 
 
Common Stock, $0.001 par value
 
36,507,075
 

 
 

 


Contents
 
Page(s)
     
PART I: FINANCIAL INFORMATION
 
   
Item 1 Financial statements
   
Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
 
1
Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
 
2
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)
 
3
Notes to Consolidated Financial Statements (Unaudited)
 
4-20
Item 2 Management Discussion and Analysis of Financial Condition and Results of Operations
 
21
Item 3 Quantitative and Qualitative Disclosure about Market Risk
 
27
Item 4 Controls and Procedures
 
27
PART II : OTHER INFORMATION
   
Item 1 Legal Proceedings
 
27
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
 
28
Item 3 Defaults Upon Senior Securities
 
28
Item 5 Other Information
 
28
Item 6 Exhibits
 
28
SIGNATURES
 
29

 
 

 
 
PART I: FINANCIAL STATEMENTS
 
TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 23,182,244     $ 10,259,750  
Restricted deposit
    365,848       362,987  
Accounts receivable
    27,097,934       25,658,184  
Advances to suppliers
    6,681,027       6,881,368  
Loans receivable and other current assets, net
    8,208,461       3,900,168  
Due from directors
    233,812       79,256  
Inventories
    4,249,817       3,681,450  
Total current assets
    70,019,143       50,823,163  
Property and equipment, net
    670,682       483,376  
Intangible assets, net
    41,133       1,385  
Long-term prepayment
    426,586       358,397  
TOTAL ASSETS 
  $ 71,157,544     $ 51,666,321  
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
  $ 139,689     $ 853,762  
Accrued expenses and other current liabilities
    777,193       593,846  
Short-term loan
    1,829,240       1,814,937  
Taxes payable
    2,806,674       3,718,963  
Total current liabilities
    5,552,796       6,981,508  
Other non-current liabilities
    139,861       138,767  
Total liabilities  
    5,692,657       7,120,275  
COMMITMENTS AND CONTINGENCIES
               
Stockholders’ equity
               
Preferred Stock: par value $0.001, authorized 10,000,000 shares, none issued and outstanding at March 31, 2011 and December 31, 2010, respectively
    -       -  
Common Stock: par value $0.001, authorized 190,000,000 shares, 36,507,075 and 32,472,075 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively
    36,507       32,472  
Additional paid-in capital
    38,722,266       21,384,050  
Appropriated retained earnings
    2,428,847       2,428,847  
Unappropriated retained earnings
    23,478,680       20,125,001  
Accumulated other comprehensive income
    798,587       575,676  
Total stockholders’ equity
    65,464,887       44,546,046  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 
  $ 71,157,544     $ 51,666,321  
 
See notes to consolidated financial statements

 
1

 

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

   
Three Months Ended March 31,
 
  
 
2011
   
2010
 
  
 
(Unaudited)
   
(Unaudited)
 
Revenues
  $ 5,102,342     $ 4,031,752  
Less: Business tax and surcharges
    121,424       128,937  
Net revenues
    4,980,918       3,902,815  
Cost of revenues
    551,833       179,548  
Gross margin
    4,429,085       3,723,267  
Operating expenses
               
Selling and distribution expenses
    436,608       195,655  
General and administrative expenses
    1,214,622       640,890  
Research and development expenses
    329,514       111,257  
  
    1,980,744       947,802  
Income from operations
    2,448,341       2,775,465  
Other income (expenses)
               
Interest income
    13,203       939  
Interest expense
    (33,252 )     (126,782 )
Refund of value-added tax
    1,307,836       -  
Other Income
    23,555       -  
Other expenses
    (17,651 )     (6,808 )
  
    1,293,691       (132,651 )
Income before income tax expense
    3,742,032       2,642,814  
Income tax expense
    388,353       -  
Net income
    3,353,679       2,642,814  
Foreign currency translation fluctuation
    222,911       96,200  
Comprehensive income
  $ 3,576,590     $ 2,739,014  
Weighted average number of common shares outstanding
               
Basic
    34,980,519       26,591,223  
Diluted
    36,008,635       26,591,223  
Earnings per share
               
Basic
  $ 0.10     $ 0.10  
Diluted
  $ 0.09     $ 0.10  

See notes to consolidated financial statements

 
2

 

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
   
Three Months Ended March 31,
 
  
 
2011
   
2010
 
  
 
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities
           
Net income
  $ 3,353,679     $ 2,642,814  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
    48,887       5,974  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,233,721 )     2,266,860  
Advance to suppliers
    253,787       (3,601,374 )
Loans receivable and other current assets
    (4,264,360 )     (5,641,425 )
Due from directors
    (153,455 )     174,236  
Inventories
    (537,690 )     (193,873 )
Long-term prepayment
    (65,164 )     (587,808 )
Accounts payable
    (718,578 )     (234,881 )
Accrued expenses and other current liabilities
    178,116       11,274  
Taxes payable
    (938,693 )     99,536  
Net cash flows provided by (used in) operating activities
    (4,077,192 )     (5,058,667 )
Cash flows from investing activities
               
Acquisition of property and equipment and intangible assets
    (231,921 )     (170,348 )
Acquisition of Delixunda Company (net of cash acquired)
    (37,690 )     -  
Net cash flows used in investing activities
    (269,611 )     (170,348 )
Cash flows from financing activities
               
Proceeds from issuance of common stock (net of finance costs)
    17,342,251       20,073,720  
Repayment of loans from third parties
    -       (146,284 )
Proceeds from issuance of contingently convertible notes
    -       (5,000,000 )
Net cash flows provided by financing activities
    17,342,251       14,927,436  
Effect of exchange rate fluctuation on cash and cash equivalents
    (72,954 )     94,440  
Net increase in cash and cash equivalents
    12,922,494       9,792,861  
Cash and cash equivalents – beginning of the year
    10,259,750       3,305,473  
Cash and cash equivalents – end of the period
  $ 23,182,244     $ 13,098,334  
Supplemental disclosure of cash flow information
               
Cash paid for interest
  $ 33,252     $ 126,782  
Cash paid for income taxes
  $ -     $ -  
Supplemental disclosure of noncash financing activities
               
Issuance of 30,000 common shares at $5.00 each for the legal fee
  $ 150,000     $ -  
 
See notes to consolidated financial statements

 
3

 

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
1 — ORGANIZATION AND PRINCIPAL ACTIVITIES
 
Trunkbow International Holdings Limited (formerly named as Bay Peak 5 Acquisition Corp. (“BP5”)) (the “Company”), was incorporated in the State of Nevada on September 3, 2004. The Company was formed as part of the implementation of the Chapter 11 reorganization plan (the “Visitalk Plan”) of visitalk.com, Inc. (“Visitalk.com”), a former provider of VOIP services. The Visitalk Plan was deemed effective by the Bankruptcy Court on September 17, 2004 (the “Effective Date”). On September 22, 2004, Visitalk.com was merged into VCC, which was authorized as the reorganized debtor under the Visitalk Plan.
 
In February 2010, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Trunkbow International Holdings Limited, a company organized under the laws of the British Virgin Islands (“Trunkbow”), the shareholders of Trunkbow (the “Shareholders”), who together own shares constituting 100% of the issued and outstanding ordinary shares of Trunkbow (the “Trunkbow Shares”), and the principal shareholder of the Company (“Principal Shareholder”). Pursuant to the terms of the Exchange Agreement, the Shareholders transferred to the Company all of the Trunkbow Shares in exchange for the issuance of 19,562,888 (the “Shares”) shares of our common stock (the “Share Exchange”). As a result of the Share Exchange, Trunkbow became our wholly owned subsidiary. After giving effect to the Share Exchange, the sale of common stock in the February 2010 Offering (defined below) and the BP5 Warrant Financing referred to below (i) existing shareholders of Trunkbow owned approximately 60.25% of the Company’s outstanding Common Stock, (ii) purchasers of Common Stock in the Offering owned approximately 26.01% of the Company’s outstanding Common Stock (including 7.7% owned by VeriFone, Inc.), (iii) the holders of BP5 Warrants owned approximately 8.54% of the Company’s outstanding Common Stock and (iv) the pre-existing shareholders of BP5 owned approximately 5.2% of the Company’s outstanding Common Stock.
 
Concurrent with the Share Exchange, (i) we entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors (the “Investors”) for the sale of an aggregate of 8,447,575 shares (the “Investor Shares”) and 1,689,515 warrants (the “Investor Warrants”), for aggregate gross proceeds equal to $16,895,150 (the “February 2010 Offering”) and (ii) certain holders of outstanding warrants of the Company issued to creditors and claimants of visitalk.com., in accordance with the Visitalk Plan, referred to herein as the “BP5 Warrant Investors” exercised the 2,774,500 warrants owned by them for an aggregate exercise price of $5.5 million and received warrants to purchase an aggregate of 554,900 shares of Common Stock (“BP5 Warrant Financing”).
 
The Company’s wholly owned subsidiary, Trunkbow, was established in the British Virgin Islands (“BVI”) on July 17, 2009, with no significant business operations and assets other than holding of equity interests in its subsidiaries and contractually controlled entities. Trunkbow’s wholly owned subsidiary, Trunkbow (Asia Pacific) Investment Holdings Limited (“Trunkbow Hong Kong”) was established as an Investment Holding Company in Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”) on July 9, 2004.
 
Trunkbow Hong Kong established two wholly foreign owned subsidiaries in the PRC, Trunkbow Asia Pacific (Shandong) Company, Limited (“Trunkbow Shandong”) which was established on December 10, 2007 in Jinan, Shandong Province and Trunkbow Asia Pacific (Shenzhen) Company, Limited (“Trunkbow Shenzhen”) which was established on June 7, 2007 in Shenzhen, Guangdong Province. Both subsidiaries are principally engaged in research and development of application platforms for mobile operators in China.

 
4

 

Trunkbow Technologies (Shenzhen) Company, Limited (“Trunkbow Technologies”) was established as a limited liability company on December 4, 2001 in Shenzhen, Guangdong Province, the PRC. Trunkbow Technologies was formerly engaged in research and development of application platforms for mobile operators in China as well as wireless application systems for the international market. In December 2007, a series of agreements were entered into amongst Trunkbow Shandong, Trunkbow Technologies and its Control shareholders, providing Trunkbow Shandong the ability to control Trunkbow Technologies, including its financial interest.  As a result of these contractual arrangements, which assigned all of Trunkbow Technologies’ equity owners’ rights and obligations to Trunkbow Shandong resulting in the equity owners lacking the ability to make decisions that have a significant effect on Trunkbow Technologies’ operations and Trunkbow Shandong’s ability to extract the profits from the operation of Trunkbow Technologies, and assume the Trunkbow Technologies’ residual benefits. Because the Trunkbow Shandong and its indirect parent are the sole interest holders of Trunkbow Technologies, the Company consolidates Trunkbow Technologies from its inception consistent with the provisions of FASB Accounting Standards Codification (“ASC”) 810-10.

On March 10, 2011, we entered into a series of contractual arrangements with Beijing Delixunda Technology Co., Ltd (“Delixunda”) and its shareholders. Delixunda is a telecom value-added service licensed company and was established as a limited liability company on December 1, 2009 in Beijing, the PRC. As a result of the contractual arrangements with Delixunda, we indirectly own the telecom value-added service license, which would enable us to offer telecom wireless value-added content service to individual clients.

The Company, its subsidiaries and contractually controlled entities are collectively referred to as the “Group.”
 
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
a)
Change of reporting entity and basis of presentation
 
As a result of the Share Exchange on February 10, 2010, the former Trunkbow shareholders owned a majority of the common stock of the Company. The transaction was regarded as a reverse merger whereby Trunkbow was considered to be the accounting acquirer as its shareholders retained control of the Company after the Share Exchange, although the Company is the legal parent company. The share exchange was treated as a recapitalization of the Company. As such, Trunkbow (and its historical financial statements) is the continuing entity for financial reporting purposes. Pursuant to the terms of the Share Exchange, BP5 was delivered with no assets and no liabilities at time of closing. Following the Share Exchange, the company changed its name from Bay Peak 5 Acquisition Corp. to Trunkbow International Holdings Limited. The financial statements have been prepared as if Trunkbow had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.

The accompanying unaudited interim consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission, and include the accounts of the Company, and its subsidiaries and contractually controlled entities, Trunkbow, Trunkbow Hong Kong, Trunkbow Shandong, Trunkbow Shenzhen, Trunkbow Technologies and Delixunda. Delixunda has being consolidated from March 10, 2011 (the date of acquisition). Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s financial statements and related notes as contained in Form 10-K for the year ended December 31, 2010.
 
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation of consolidated financial position as of March 31, 2011 and consolidated results of operations, and cash flows for interim periods presented, have been made. The interim results of operations are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

 
5

 

b)
Principles of Consolidation
 
The consolidated financial statements include the financial statements of the Company, all the subsidiaries and contractually controlled entities of the Company. All transactions and balances between the Company and its subsidiaries and contractually controlled entities have been eliminated upon consolidation.
 
c)
Reclassification
 
The comparative figures have been reclassified to conform to current year presentation.
 
d)
Use of estimates
 
The preparation of financial statements in conformity with U.S. GAAP 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 revenue and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ from those estimates.
 
e)
Foreign currency translation
 
The functional currency of the Company is United States dollars (“US$”), and the functional currency of Trunkbow Hong Kong is Hong Kong dollars (“HK$”). The functional currency of the Company’s PRC subsidiaries and contractually controlled entities is the Renminbi (“RMB”), and the PRC is the primary economic environment in which the Company operates.
 
For financial reporting purposes, the financial statements of the Company’s PRC subsidiaries and contractually controlled entities, which are prepared using the RMB, are translated into the Company’s reporting currency, the United States Dollar. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’ equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.
 
The exchange rates applied are as follows: 
   
March 31,
 
  
 
2011
   
2010
 
March 31 RMB exchange rate
    6.5601       6.8361  
Average RMB exchange rate for the three months ended March 31
    6.5804       6.8360  

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income of the consolidated financial statements for the respective periods.
 
f)
Cash and cash equivalents
 
Cash and cash equivalents represent cash on hand and deposits held at call with banks. The Group considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
  
g)
Accounts receivable
 
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. The allowance for doubtful accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable. The Group determines the allowance based on aging data, historical collection experience, customer specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Group did not have any off-balance-sheet credit exposure relating to its customers, suppliers or others. As of March 31, 2011 and December 31, 2010, management has determined that no allowance for doubtful accounts is required.

 
6

 

h)
Inventory
 
Inventories represent hardware and equipment and are stated at the lower of cost or market value, determined using the specific identification method.
 
i)
Property and equipment, net
 
Furniture and office equipment, electronic equipment and motor vehicles are recorded at cost less accumulated depreciation. Depreciation is calculated on the straight-line method after taking into account their respective estimated residual values over the following estimated useful lives:
 
   
Years
 
Motor vehicles
  5  
Furniture and office equipment
  5  
Electronic equipment
  3 – 5  
Telecommunication equipment
  3 – 5  
Leasehold improvements
  3  
 
Depreciation expense is included in cost of revenues, selling and distribution expenses, and general and administrative expenses.
 
When furniture and office equipment, electronic equipment and motor vehicles are retired or otherwise disposed of, resulting gain or loss is included in net income or loss in the year of disposition for the difference between the net book value and proceeds received thereon. Maintenance and repairs which do not improve or extend the expected useful lives of the assets are charged to expenses as incurred.
 
Impairment of long-lived assets
 
In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment — Overall, long-lived assets, such as property, plant and equipment, and purchased intangible asset subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Group first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairment of long-lived assets was recognized for the three months ended March 31, 2011 and 2010 and the year ended December 31, 2010.
 
j)
Fair value measurement
 
The Group applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC Subtopic 820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
 
ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

ASC Subtopic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 
7

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group has the ability to access at the measurement date.
 
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
 
Level 3 inputs are unobservable inputs for the asset or liability.
 
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
 
A discussion of the valuation technique used to measure the fair value of the warrant is provided in Note 17.
 
The Group did not have any nonfinancial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010.
 
k)
Revenue recognition
 
The Group derives revenues from the MVAS Technology Platform and Mobile Payment Solutions in the form of providing system integration, sales of software, patent licensing, maintenance services and revenue sharing for the two services.
 
System integration
 
For the system integration, the Group signs contracts with telecommunication and mobile operators and system integrators to install and integrate the Group’s software with the hardware and software purchased from third-party suppliers.
 
Deliverables of system integration include: software, hardware, integration, installation, and training. No Post-Contract Customer Support (PCS) arrangement is included in system integration. The provision of services is substantially completed, i.e., when the Group purchases the hardware and software from third-party suppliers, integrates them together with the Group’s programs and software, and provides installation and training to customers, customers sign the final acceptance confirmation.
 
System integration includes a significant software portion. The software is not regarded as incidental to the provision of services as a whole because the marketing of such services focuses on the internally developed technologies included in the software. Therefore, ASC 985-605, “Software Revenue Recognition”, is applicable for these services. The Group cannot establish vendor-specific objective evidence of the fair values of the deliverables; therefore, according to ASC 985-605, revenue is recognized when the last deliverable in the arrangement is delivered and when all of the following criteria have been met:
 
(1)
Persuasive evidence of an arrangement exists;
 
(2) 
Delivery has occurred;
 
(3) 
The vendor’s fee is fixed or determinable; and
 
(4) 
Collectability is probable.
 
Sales of software
 
The Group enters into contracts with the mobile operators or the resellers to provide software that enables the mobile operators to provide mobile payment and value-added service to the end-users.

The Group recognize revenue in accordance with ASC 985-605, (formerly Statement of Position (“SOP”) 97-2 Software Revenue Recognizes, as amended and interpreted by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, with respect to certain transactions), as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants and Staff Accounting Bulletin No. 104, Revenue Recognition, that provides further interpretive guidance for public companies on the recognition, presentation and disclosure of revenue in financial statements. No PCS arrangement is included in software sales.

 
8

 

The Group generally recognizes revenue from software and system services when all of the following criteria have been met, which is symbolized by the issuance of the final acceptance:
 
(1)
Persuasive evidence of an arrangement exists;
 
(2) 
Delivery has occurred;
 
(3) 
The vendor’s fee is fixed or determinable; and
 
(4) 
Collectability is probable.
 
Patent licensing
 
The Group enters into contracts with local system integrators who further contract with telecommunication and mobile operators, and provides these system integrators with our patents which permit the system integrators to use the Group’s patents. The system integrators pay the Group a one-time license fee for obtaining the programs and technologies. According to the contracts, these integrators are responsible for the construction and maintenance of the system platform while the Group assists these integrators during construction in form of providing technologies and programs. No PCS is offered in the patent licensing arrangement. When the construction of system platform is completed, these integrators perform examination and sign the final acceptance.
 
Patent licensing revenues are recognized when all revenue recognition criteria according to ASC 985-605-25 have been met, which is symbolized by the issuance of the final acceptance. Such criteria include: (i) persuasive evidence that an arrangement exists; (ii) delivery having occurred; (iii) whether the vender’s fee is fixed or determinable; and (iv) collectability being probable. We recognize revenue under ASC 985-605-25 because:
 
(i)           It is our customary practice to have a signed written agreement between us and our customers.
 
(ii)          According to these contracts, the integrators are responsible for the construction and maintenance of the system platform while we assist the integrators during construction by providing technologies and programs. Codes and programs were delivered to the integrators during the construction of the system platform. At the same time, we are obligated to provide training and support until the whole platform, including hardware incorporated with our codes and programs, is confirmed and accepted by the integrators. Revenue is recognized upon the final acceptance being signed by the integrators.
 
(iii)         It is our policy to not provide customers the right to any adjustments or refund of any portion of their license fees paid, acceptance provisions, cancellation privileges, or rights of return.
 
(iv)        Collectability is assessed on a customer-by-customer basis. The Company typically sells to customers for whom there is a history of successful collection, and new customers are subject to a credit review process that evaluates the customer’s ability to pay.
 
Maintenance services
 
Revenue derived from technical support contracts primarily includes telephone consulting, on-site support, product updates, and releases of new versions of products previously purchased by the customers, as well as error reporting and correction services. Maintenance contracts are typically sold for a separate fee with initial contractual period of one year with renewal for additional periods thereafter. Technical support service revenue is recognized ratably over the term of the service agreement.
 
Revenue sharing
 
We have three to five year contractual agreements with mobile carriers on deploying or managing the mobile value added service platforms or mobile payment platforms. We are obligated to provide maintenance services on the platforms and consulting services to the end-users, and also provide training to the mobile carriers’ employees.

 
9

 

We share revenues with the mobile carriers based upon 10% to 60% of the fees billed to the end-users. The fees billed to the end-users and subject to revenue sharing include monthly functional fees and telephone bills. Revenue is recognized monthly upon the receipt of the sales and usage reports provided by the mobile carriers. Revenue is reported on a net basis since the mobile carriers act as principal when providing services to the end-users.
 
Royalty income
 
Other than the one-time license fee, the Group also receives royalties for each end-user subscribed to the services. Royalty revenue is recognized when earned and collectability is reasonably assured, based upon the receipt of reports from mobile carriers.
 
l)
Cost of revenues

Cost of revenues primarily includes cost of equipment and software purchased from third parties and labor costs.
 
m)
Concentration  risk

Credit risk

Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Group places their cash and cash equivalents with financial institutions with high-credit ratings and quality.
 
The Group conducts credit evaluations of customers and generally does not require collateral or other security from customers. The Group establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk of specific customers. The amount of receivables ultimately not collected by the Group has generally been consistent with management’s expectations and the allowance established for doubtful accounts.
 
Major Customers
The Group had sales to four and two customers that accounted for approximately 84.2 % and 95.0% of revenues during the three months ended March 31, 2011 and 2010, respectively. These customers accounted for approximately 18.2% and 44.5% of accounts receivable balance as of March 31, 2011 and 2010, respectively.

Major Suppliers
The Group had purchases from three and two vendors that accounted for approximately 86.1% and 90.0% of purchases during the three month ended March 31, 2011 and 2010, respectively. These vendors accounted for nil of accounts payable balance as of March 31, 2011 and 2010, respectively.
 
n) 
Research and development expenses
 
Research and development costs are incurred in the development of technologies in mobile value added service platforms and mobile payment systems, including significant improvements and refinements to existing products and services. The Group applies ASC985-20, “Costs of Computer Software to Be Sold, Leased, or Marketed”. In particular, nearly all of the research and development expenditure incurred since the Group’s formation has been to establish the technological feasibility of the Group’s software and techniques. As a result, all research and development costs are expensed as incurred.
 
o) 
Operating leases
 
Leases where substantially all the rewards and risks of ownership of assets remain with the lesser are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods.

 
10

 

p)
Taxation
 
Income taxes
 
The Group follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between of the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the income statement in the period that includes the enactment date. The Group had no deferred tax assets and liabilities recognized for any of March 31, 2011 and December 31, 2010.
 
Value added taxes
 
The Company’s PRC subsidiaries and contractually controlled entities are subject to value-added tax (“VAT”) on sales. For Trunkbow Technologies and Trunkbow Shandong, the VAT is calculated at a rate of 17% on revenues from sales of hardware and software as well as the installation and system integration services which are deemed as mixed-sale of goods and thus subject to VAT. Trunkbow Shenzhen is a small scale tax payer and the VAT is calculated at a rate of 3% on revenues.
 
Pursuant to the policies issued by Ministry of Finance, State Taxation Administration and General Administration of Customs for Encouraging Software Industry and Integrated Circuits Industry issued in 2000, an enterprise classified as a “software enterprise” will be entitled to a rebate of its net VAT liability to the extent that it exceeds 3% of the actual VAT burden relating to self-developed software product sales.

Business tax and surcharges
 
The Company’s PRC subsidiaries and contractually controlled entities are also subject to a 5% business tax and related surcharges on the revenues earned from providing technical services.
 
q) 
Uncertain tax positions
 
ASC 740-10-25 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. For the three months ended March 31, 2011 and 2010 and the year ended December 31, 2010, the Group did not have any interest and penalties associated with tax positions and the Group did not have any significant unrecognized uncertain tax positions.
 
The Company’s subsidiaries and contractually controlled entities are subject to taxation in PRC and other tax jurisdictions. There is no ongoing examination by taxing authorities at this time. Various tax years during the three months ended March 31, 2011 and 2010 and the year ended December 31, 2010 of the Company’s subsidiaries and contractually controlled entities remain open in the relevant taxing jurisdictions.

r) 
Earnings per share
 
Earnings per share is calculated in accordance with ASC 260, “Earnings Per Share”. Basic earnings per share is computed by dividing income attributable to holders of common stock by the weighted average number of common shares considered to be outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of outstanding common stock warrants is reflected in the diluted earnings per share by application of the treasury stock method when the impact is dilutive.
 
s) 
Appropriated Retained Earnings
 
The income from the Company’s subsidiaries and indirectly controlled subsidiary is distributable to its owners after transfer to statutory reserves as required by relevant PRC laws and regulations and the Company’s Articles of Association. As stipulated by the relevant laws and regulations in the PRC, the Company’s subsidiaries and contractually controlled entities are required to maintain a statutory surplus reserve fund which is non-distributable to shareholders. Appropriations to such reserve are 10% of net profit after taxation determined in accordance with generally accepted accounting principles of the PRC.

 
11

 

The statutory surplus reserve fund is established for the purpose of offsetting accumulated losses, enlarging productions or increasing share capital. The appropriation may cease to apply if the balance of the fund is equal to 50% of the entity’s registered capital.
 
t) 
Comprehensive income
 
Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented on the accompanying consolidated balance sheets are the cumulative foreign currency translation adjustments.
 
u) 
Commitments and contingencies
 
In the normal course of business, the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, product and environmental liability, and tax matters. In accordance with ASC 450-20, “Accounting for Contingencies”, the Group records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Historically, the Group has not experienced any material service liability claims.
 
v) 
Recently enacted accounting standards
 
None.
 
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
 
3 — RESTRICTED DEPOSIT
 
  
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Restricted deposit
  $ 365,848     $ 362,987  

The restricted deposit as of March 31, 2011 and December 31, 2010 was security deposit for the short-term loan with balance of $1,829,240 and $1,814,937, respectively.
 
4 — ACCOUNTS RECEIVABLE
 
At March 31, 2011 and December 31, 2010, accounts receivable consisted of:

  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Accounts receivable
  $ 27,097,934     $ 25,658,184  

The Group has not recognized an allowance for doubtful receivables because there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral or other credit enhancements over these balances. The Group didn’t write-off of trade receivables during the periods presented. $6,029,503 was subsequently collected by May 10, 2011.
 
5 — ADVANCE TO SUPPLIERS

At March 31, 2011 and December 31, 2010, advance to suppliers consisted of:
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Advances to suppliers
  $ 6,681,027     $ 6,881,368  

 
12

 

Advances to suppliers represent prepayment to the Group’s distributors for the purchase of third party software and hardware to be used in our MVAS/MPS platforms.
 
6 — LOANS RECEIVABLE AND OTHER CURRENT ASSETS, NET
 
Loans receivable and other current assets at December 31, 2010 and 2009 are summarized as follows:
 
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Prepaid advertisement
  $ 487,797     $ 483,983  
Deposits
    4,628,663       49,199  
Loans to third parties
    2,613,849       3,187,190  
Staff advances
    270,151       257,974  
Prepaid expenses
    162,608       210,791  
Others
    45,393       77,943  
  
    8,208,461       4,267,080  
Less: Allowance for doubtful debt
    -       366,912  
  
  $ 8,208,461     $ 3,900,168  

Prepaid advertisement is amortized as the expense incurred. Advertising expense incurred for the three months ended March 31, 2011 and 2010 were nil for both periods.

The deposits mainly include office rental deposits and bidding deposit for potential project. The project biding deposit with the amount of $4,573,101 has been subsequently returned.

Loans to third party represent loans to the Company’s distributors. As part of the support for our MVAS/MPS deployment, the Company advanced funds in the form of loan to the distributors for the purchase of third party software and hardware. Once the hardware and software is delivered to the carriers, the distributors will get paid and repay the loan to us. $366,912 was written off during the first quarter of 2011.  As of May 9, 2011, $2,217,514 of loans to third parties was subsequently collected.
 
7 — AMOUNT DUE FROM DIRECTORS

At March 31, 2011 and December 31, 2010, amount due from directors consisted of:
 
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Amount due from Directors
  $ 233,812     $ 79,256  

Amount due from directors represented advance to the directors for expenses to be paid on behalf of the company.
 
8 — INVENTORIES
 
At March 31, 2011 and December 31, 2010, inventories consisted of:
 
   
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
System integration hardware
  $ 2,990,857     $ 825,818  
Point of sale systems
    1,258,960       2,855,632  
    $ 4,249,817     $ 3,681,450  

 
13

 

The point of sale systems were purchased from VeriFone, a related party of the Company.
 
9 — PROPERTY AND EQUIPMENT, NET
 
Property and equipment of the Group mainly consists of furniture and office equipment and electronic equipment located in the PRC.
 
Property and equipment as of March 31, 2011 and December 31, 2010 are summarized as follows:
 
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
   
 
 
Motor vehicles
  $ 261,848     $ 51,386  
Furniture and office equipment
    105,786       103,242  
Electronic equipment
    307,228       285,288  
Telecommunication equipment
    116,072       115,165  
Leasehold improvement
    58,710       58,250  
      849,644       613,331  
Less: Accumulated depreciation
    178,962       129,955  
    $ 670,682     $ 483,376  

Depreciation expense for the three months ended March 31, 2011 and 2010 was $47,835 and $5,974, respectively.

10 — INTANGIBLE ASSETS, NET

At March 31, 2011 and December 31, 2010, intangible assets consisted of:

  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Software
  $ 3,117     $ 1,943  
License
    39,634       -  
      42,751       1,943  
Less: Accumulated amortization
    1,618       558  
    $ 41,133     $ 1,385  

11 — LONG-TERM PREPAYMENT
 
At March 31, 2011 and December 31, 2010, long-term prepayment consisted of:

  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Office rental
  $ 36,521     $ 45,689  
Prepaid membership fee
    263,885       268,711  
Prepaid land evaluation
    121,377       37,993  
Others
    4,803       6,004  
    $ 426,586     $ 358,397  

 
14

 

12 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
The breakdowns of accrued expenses and other current liabilities as of March 31, 2011 and December 31, 2010 are as follows:
 
  
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Accrued payroll
  $ 176,419     $ 177,290  
Advance from customers
    251,973       75,622  
Loans from third parties
    38,109       37,811  
Advances to staff
    53,352       143,341  
Accrued expenses
    81,000       94,060  
Others
    176,340       65,722  
    $ 777,193     $ 593,846  

Loans from third parties are short-term and non-interest bearing.

13 — SHORT-TERM LOAN
 
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Short-term loan
  $ 1,829,240     $ 1,814,937  

The short-term loan as of March 31, 2011 and December 31, 2010 was borrowed from China Bohai Bank, guaranteed by Trunkbow Shandong, Mr. Wanchun Hou and Mr. Qiang Li, and collateralized by a restricted deposit of $365,848 and $362,987, respectively. The loan is due on May 5, 2011 with floating lending rate, 125% of People’s Bank of China benchmark rate (7.58% as of March 31, 2011). The interest expense related to the short term loan was $ 33,252 for the three months ended March 31, 2011.

14 — TAXES PAYABLE
 
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Value Added Tax Payable
  $ 1,007,362     $ 2,152,999  
Income Tax Payable
    1,689,787       1,290,066  
Others
    109,525       275,898  
    $ 2,806,674     $ 3,718,963  

15 — OTHER NON-CURRENT LIABILITIES
  
  
 
March 31,
2011
   
December 31,
2010
 
   
(Unaudited)
       
Other non-current liabilities
  $ 139,861     $ 138,767  

Other non-current liabilities represented government subsidy. Such subsidy is not treated as taxable income and must be used for funding its software research and development.

 
15

 

16 — INCOME TAXES
 
Corporation Income Tax (“CIT”)
 
(i)          The Company is incorporated in the state of Nevada. Under the current law of Nevada, the Company is not subject to state corporation income tax. The Company became a holding company and does not conduct any substantial operations of its own after the Share Exchange. No provision for federal corporate income tax has been made in the financial statements as the Company has no taxable income for the three months ended March 31, 2011. And earnings in the PRC are intended to be permanently reinvested in the PRC operation.

Trunkbow was established in the British Virgin Islands on July 17, 2009. Under the current laws of the British Virgin Islands, Trunkbow is not subject to tax on income or capital gains. In addition, upon payments of dividends by Trunkbow, no British Virgin Islands withholding tax is imposed.

Trunkbow Hong Kong was incorporated in Hong Kong on July 9, 2004. Trunkbow Hong Kong did not earn any income that was derived in Hong Kong for the three months ended March 31, 2011, and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

 (ii)
PRC subsidiaries and contractually controlled entities
 
The subsidiaries and contractually controlled entities incorporated in the PRC are generally subject to a corporate income tax rate of 25% commencing January 1, 2008 except for those subsidiaries and contractually controlled entities that enjoy tax holidays or preferential tax treatment, as discussed below.
 
Trunkbow Shandong
 
Trunkbow Shandong, a PRC company, is a wholly foreign-owned entity under PRC law and is governed by the income tax law of the PRC and is subject to PRC enterprise income tax. The statutory income tax rate commencing January 1, 2008 was 25%.
 
On October 16, 2009, Trunkbow Shandong was certified as a software enterprise by Shandong Economic and Information Technology Committee. Pursuant to the PRC tax laws, newly established and certified software enterprises are entitled to tax preferential policies of full exemption from income tax for the first two years and a 50% reduction for the next three years, commencing from the first profit-making year after offsetting all tax losses carried forward from the previous five years. The first profit making year for Trunkbow Shandong was 2009. On January 7, 2010, Trunkbow Shandong obtained the official approval from the tax bureau of Shandong Province Jinan City High-tech Industry Development Zone on the preferential tax exemption.
 
Pursuant to the aforementioned taxation laws, Trunkbow Shandong was exempt from income tax for the years ended December 31, 2009 and 2010, and thereafter, a half tax rate of 12.5% will be enacted for the years ended December 31, 2011, 2012 and 2013.

Trunkbow Shenzhen
 
Trunkbow Shenzhen, a PRC company, is a wholly foreign-owned entity under PRC law. Because it was incorporated in Shenzhen, a special economic zone in the PRC, it is entitled to a preferential income tax rate of 15% in 2007. According to the pronouncement of the tax bureau, for companies established after March 16, 2007, the income tax rate will be immediately raised to the unified tax rate of 25% started from January 1, 2008. As Trunkbow Shenzhen was established on September 7, 2007, the income tax rate from year 2008 on was 25%. Trunkbow Shenzhen experienced net operating loss for the three months ended March 31, 2011, and no income tax provision was recorded.
 
Trunkbow Technologies
 
Trunkbow Technologies was registered in Shenzhen, a special economic zone in the PRC, which is entitled to preferential income tax rates of 18% and 15% in 2008 and 2007 respectively. According to the pronouncement of the tax bureau, for companies established before March 16, 2007, the income rate will gradually increase to 25% within 4 years, 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012. Trunkbow Technologies experienced net operating losses for the three months ended March 31, 2011.

 
16

 
 
Delixunda

Delixunda was registered in Beijing, the PRC. The applicable income tax rate for Delixunda was 25% for the three months ended March 31, 2011. Delixunda had a net operating loss for the three months ended March 31, 2011, and no income tax provision was recorded.

The following is a reconciliation of tax computed by applying the statutory income tax rate to PRC operations to income tax expenses for the three months ended March 31, 2011 and 2010 respectively:
 
   
Three Months Ended March 31,
 
    
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
PRC statutory tax rate
    25 %     25 %
Accounting income before tax
  $ 4,228,937     $ 2,801,152  
Computed expected income tax expenses
    1,057,234       700,288  
Loss from subsidiaries and contractually controlled entity
    52,319       22,974  
Less: tax exemption
    721,201       723,262  
Income tax expenses
  $ 388,353     $ -  

17 — STOCKHOLDERS’ EQUITY
 
Preferred stock
 
The Company authorized 10,000,000 shares of preferred stock, with a par value of $.001 per share, but no preferred shares were issued and outstanding as of March 31, 2011.

Common stock

Pursuant to the terms of the Share Exchange Agreement in February 2010, Trunkbow shareholders transferred to the Company all of the Trunkbow shares in exchange for the issuance of 19,562,888 shares of the Company’s common stock. Accordingly, the Company reclassified its common stock and additional paid-in-capital accounts for the year ended December 31, 2009.
 
Pursuant to the Purchase Agreement entered into concurrently with the Share Exchange Agreement, an aggregate of 8,447,575 shares and 1,689,515 warrants were sold for aggregate gross proceeds equal to $16,895,150. Certain holders of outstanding warrants of the Company issued to creditors and claimants of visitalk.com, Inc. in accordance with such company’s Chapter 11 reorganization plan exercised the 2,774,500 warrants owned by them for an aggregate exercise price of $5.5 million and received warrants to purchase an aggregate of 554,900 shares of Common Stock.
 
On February 3, 2011, the Company announced its initial public offering of 4,000,000 shares of Common Stock priced at $5.00 per share. The shares began trading on February 3, 2011, on the NASDAQ Global Market under the ticker symbol “TBOW”. The net proceeds were $18,109,988 after deduction of $1,400,000 of underwriter’s commission, and $490,012 of legal and professional fees.

Warrants
 
In connection with the February 2010 offering, we issued warrants (the “February 2010 Offering Warrants”) to purchase 2,905,419 shares of common stock at an exercise price of $2.00. The warrants have a five year term and are exercisable immediately. The exercise price and number of shares of Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.
 
No fractional shares will be issued upon exercise of the warrants. If, upon exercise of a warrant, a holder would be entitled to receive a fractional interest in a share, we will pay to the holder cash equal to such fraction multiplied by the then fair market value of one full share.

 
17

 
 
The estimated fair values of the warrants issued to investors were determined at February 10, 2010 using Binominal Option Pricing Model. The fair values of the warrants are summarized as follows:
 
Fair value of warrant per share (US$) at date of issuance: $1.18
 
Key assumptions adopted in Binomial Option Pricing Model for the estimation of the fair value of the warrants outstanding were summarized as follows:

Expected volatility
    73 %
Expected dividends yield
    0 %
Time to maturity
 
5 years
 
Risk-free interest rate per annum
    2.218 %
Fair value of underlying common shares (per share)
  $ 1.95  
  
As of March 31, 2011, 5,000 warrants had been exercised at $2.00 per share.

On February 8, 2011, in connection with our IPO in February 2011, the Company granted Roth Capital Partners, LLC warrants (the “Roth Capital Warrants”) to purchase up to a total of 200,000 shares of our common stock as partial underwriting compensation. The warrants have a term of three years and an exercise price of $6, provide for cashless exercise at all times and, in accordance with FINRA Rule 5110(g)(1), may not be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such warrant by any person until August 7, 2011, except as provided in FINRA Rule 5110(g)(2). The exercise price and number of shares of Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.

The estimated fair values of the warrants issued to Roth were determined at February 8, 2011 using Binominal Option Pricing Model. The fair values of the warrants are summarized as follows:
 
Fair value of warrant per share (US$) at date of issuance: $1.68.
 
Key assumptions adopted in Binomial Option Pricing Model for the estimation of the fair value of the warrants outstanding were summarized as follows:

Expected volatility
    59.5 %
Expected dividends yield
    0 %
Time to maturity
 
3 years
 
Risk-free interest rate per annum
    1.745 %
Fair value of underlying common shares (per share)
  $ 1.68  

In accordance with ASC Topic 340 subtopic 10 section S99-1, specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. In accordance with the SEC accounting and reporting manual “cost of issuing equity securities are charged directly to equity as deduction of the fair value assigned to share issued.” Accordingly, we concluded that the Roth Capital Warrants are directly attributable to the February 2011 financing. If we had not issued the Roth Capital Warrants, we would have had to pay the same amount of cash as the fair value. Therefore, we deducted the total fair value of the Roth Capital Warrants of $336,000 as from the fair value assigned to the common stock. The Roth Capital Warrants met the scope exceptions of ASC Topic 815 as they were deemed to be indexed to the Company’s own stock, and were eligible to be classified as equity.

Escrow shares
 
In connection with the Share Exchange Agreement, Chief Honor Investments Limited and Capital Melody Limited (collectively referred to as “Controlling Stockholders”) entered into an Investor Side Letter Agreement with certain investors (“Investors”). Pursuant to the side letter, a) the Controlling Stockholders agree to deliver to the Investors, as a group, an aggregate of 337,500 shares of Common Stock of the Company, if the Company fails to achieve at least $8,000,000 in consolidated net income in accordance with the U.S. generally accepted accounting principles as set forth in the final audit for Trunkbow’s consolidated group for the fiscal year ending December 31, 2009; b) If the Company’s consolidated net income per share for the year ended December 31, 2010 (the “Actual 2010 EPS”) is not at least $0.37 on a fully diluted basis then the Controlling Stockholders shall deliver additional shares, on a pro rata basis to each Investor, with the maximum aggregate number of 8,437,500 shares; c) if the Company fails to cause its Common Stock to be listed on the NASDAQ Stock market, the NYSE Amex or the New York Stock Exchange within twelve months of the effective date of the Form 10 registration statement, each of the Controlling Shareholders agrees that they shall immediately issue and deliver to the Investors, as a group, an aggregate of 675,000 shares of Common Stock of the Company, to be divided among each Investor on a pro rata basis as partial liquidated damages and not as a penalty.

 
18

 
 
The purpose of the Investor Side Letter Agreement was an inducement made to facilitate the respective offerings, and not part of a compensatory arrangement to management. The escrow shares will not be released or cancelled due to the discontinued employment of any management of the Company.

Because the 2009 performance threshold has been met, $8.20 million achieved by Trunkbow’s consolidated group.  The 2010 performance threshold has also been met, net income per share was $0.44 and Common Stock was listed on the NASDAQ Stock market. The escrow shares have been released to the Group.

18 — REVENUES AND COST OF REVENUES
 
The following consolidated result of operations includes the results of operations of the Company, all the subsidiaries and our contractually controlled entity, Trunkbow Technologies (Shenzhen) Company, Limited and Beijing Delixunda Technology Company, Limited. And Delixunda has being consolidated from March 10, 2011 (the date of acquisition).

For the three months ended March 31, 2011 and 2010, revenues and cost of revenues consisted of:
 
   
Three Months Ended March 31,
 
  
 
2011
   
2010
 
  
 
(Unaudited)
   
(Unaudited)
 
Gross Revenues
           
System integration
  $ 482,704     $ -  
Software sales
    3,606,930       3,831,781  
Maintenance service
    734,758       189,253  
Shared revenue
    277,950       10,718  
  
    5,102,342       4,031,752  
Less:
               
Business tax and surcharges
    121,424       128,937  
Cost of Revenues
               
Equipment costs
    435,581       -  
Labor Costs
    116,252       179,548  
  
    551,833       179,548  
Gross margin
  $ 4,429,085     $ 3,723,267  
 
19 — SEGMENT INFORMATION
 
ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Group’s chief operating decision maker is the Chief Executive Officer, who reviews consolidated results of operations prepared in accordance with U.S. GAAP when making decisions about allocating resources and assessing performance of the Group; hence, the Group has only one operating segment.

 
19

 
 
The Group operates in the PRC and all of the Group’s long-lived assets are located in the PRC. As of March 31, 2011, the Company provides two products and services: MVAS Technology Platforms and Mobile Payment Solutions. MVAS Technology Platforms enable the operators to offer mobile value added services to end-users through our major products including Caller Color Ring Back Tone, Number Change Notification and Color Numbering. Mobile Payment Solutions allows RF-SIM (radio frequency SIM) enabled mobile phones worldwide to be utilized as payment tools and authentication devices, and also enables the end-user to consolidate a variety of functions and services into one phone.
 
We do not track our assets by operating segments. Consequently, it is not practical to show assets by operating segments results.
 
The gross revenues and cost of revenues consist of the following products and services:
 
   
Three Months Ended March 31,
 
  
 
2011
   
2010
 
  
 
(Unaudited)
   
(Unaudited)
 
MVAS Technology Platforms
           
Gross Revenues
  $ 3,672,734     $ 3,970,313  
Business tax and surcharges
    84,479       125,865  
Cost of Revenues
    464,300       170,213  
  
  $ 3,123,955     $ 3,674,235  
Mobile Payment Solutions
               
Gross Revenues
  $ 1,429,608     $ 61,439  
Business tax and surcharges
    36,945       3,072  
Cost of Revenues
    87,533       9,335  
  
  $ 1,305,130     $ 49,032  

20 — EMPLOYEE DEFINED CONTRIBUTION PLAN
 
Full time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were $132,985 and $55,524 for the three months ended March 31, 2011 and 2010, respectively.
 
21 — COMMITMENTS AND CONTINGENCIES
 
Commitments
 
Leasing Arrangements
 
The Group has entered into commercial leases for offices with a term expiring in April 2014. The lease may be cancelled by either party with 30-days prior written notice. Future minimum rental payments under this operating lease are as follows:
 
  
 
Office Rental
 
   
(Unaudited)
 
Nine months ending December 31, 2011
  $ 190,249  
Year ending December 31, 2012
    198,125  
Year ending December 31, 2013
    34,399  
Year ending December 31, 2014
    1,550  
Total
  $ 424,323  
 
 
20

 

Contingencies
 
Contingencies through March 31, 2011 have been considered by the Company and none were noted which were required to be disclosed.
 
22 — EARNINGS PER SHARE
 
   
Three Months Ended March 31,
 
    
2011
   
2010
 
    
(Unaudited)
   
(Unaudited)
 
Numerator:
           
Net income
  $ 3,353,679     $ 2,642,814  
Denominator:
 
 
   
 
 
Weighted average number of common shares outstanding
 
 
   
 
 
-Basic
    34,980,519       26,591,223  
-Diluted
    36,008,635       26,591,223  
Earnings per share
 
 
   
 
 
-Basic
  $ 0.10     $ 0.10  
-Diluted
  $ 0.09     $ 0.10  

All share and per share data have been retroactively adjusted to reflect the recapitalization of the Company after the share exchange agreement on February 2010.

For the three months ended March 31, 2011, the Roth Capital Warrants were not included in the calculation of diluted earnings per share because the effect was anti-dilutive, as the exercise price of $6 was higher than the average stock price of $4.64 for the three months ended March 31, 2011.

For the three months ended March 31, 2010, the February 2010 Offering Warrants were not included in the calculation of diluted earnings per share because the effect is anti-dilutive, as the Company was not traded in the public market and the February 2010 offering price was $2 per share which equals to the exercise price of the February 2010 Offering Warrants.
 
23 — RELATED PARTY TRANSACTIONS

On March 10, 2011, we entered into a series of contractual arrangements with Delixunda and its shareholders, Mr. Xin Wang, our Chief Technology Officer and Director and another employee of the Company. Through these arrangements, we contractually control Delixunda.

24 — SUBSEQUENT EVENTS
 
1)
Further investment in Trunkbow Shandong
 
On April 1 and April 21, 2011, Trunkbow Hongkong further invested $3,220,000 into Trunkbow Shandong.
 
2) 
Subsequent collection
 
Up to May 10, 2011, $6,029,503 has been subsequently collected on accounts receivable, and $2,217,514 on loans to third parties.
 
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Introductory Note
 
Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q (this “Report”) to the “Company,” “Trunkbow,” “we,” “us” or “our” are references to the combined business of Trunkbow International Holdings Limited and its consolidated subsidiaries. References to “China” or “PRC” are references to the People’s Republic of China. References to “RMB” are to Renminbi, the legal currency of China, and all references to “$” and dollars are to the United States dollar, the legal currency of the United States.

 
21

 
 
Special Note Regarding Forward Looking Statements
 
This Quarterly Report contains forward-looking statements and information relating to Trunkbow that are based on the beliefs of our management, as well as assumptions made by and information currently available to us.  Such statements should not be unduly relied upon.  When used in this Quarterly Report, forward-looking statements include, but are not limited to, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as well as 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, any statements of belief or intention, any of the factors mentioned in the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 31, 2011, and any statements or assumptions underlying any of the foregoing.  These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions.  There are important factors that could cause actual results to vary materially from those described in this Report as anticipated, estimated or expected, including, but not limited to, competition in our industry and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; SEC regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties.  Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future.  Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available.  Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act” ) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act” ) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock.  Because we may from time to time be considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.
 
Overview
 
We provide technology platform solutions for mobile telecom operators in the People’s Republic of China. Our patented platforms provide a comprehensive solution for Chinese telecom operators to deliver and manage the distribution of various mobile value added service (“MVAS”) applications to their subscribers. The Trunkbow brand is regarded by the telecom operators as a well managed, trusted provider of technology solutions. Our R&D focused business model provides us with a defensible market position as a technology provider to the telecom operators.
 
Currently we have filed a more than 164 patent applications, of which 50 have been granted by the National Intellectual Property Administration of the PRC. We have recently begun the process of filing for international and U.S. patents in order to protect our intellectual properties globally.
 
The primary geographic focus of our operations is in the PRC, where we derive substantially all of our revenues. We conduct our business operations through our wholly owned subsidiaries Trunkbow Asia Pacific (Shenzhen) Limited and Trunkbow Asia Pacific (Shandong) Limited. Both companies are registered in PRC as Wholly Owned Foreign Enterprises.
 
How We Generate Revenue
 
Our customers are primarily telecom service providers in the PRC, including local branches of China’s three major cellular carriers, China Telecom, China Unicom and China Mobile. Collectively, these carriers provide services to greater than 800 million cellular subscribers. Revenues generated directly by sales to China Telecom, China Unicom and China Mobile accounted for approximately 6%, 1% and nil, and 2%, 3% and nil, respectively, for the three months ended March 31, 2011 and 2010. When we include resale of our products to these carriers through intermediaries (i.e., direct and indirect sales to these carriers), then revenues generated from sales to these three carriers accounted for approximately 6%, 85% and 9%, and 27%, 15% and 58%, respectively, for the three months ended March 31, 2011 and 2010. The increase in revenues for the three months ended March 31, 2011 when compared to the three months ended March 31, 2010 was attributable to the deployment of our Mobile Payment Solutions. Our revenues from Mobile Payment Solutions were $1.88 million and $0.06 million for the three months ended March 31, 2011 and 2010.

 
22

 
 
Results of Operations
 
Comparison of Three Months Ended March 31, 2011 and 2010
 
Net Revenues:
 
   
Three Months Ended March 31,
   
% of
 
  
 
2011
   
2010
   
change
 
  
 
(Unaudited)
   
(Unaudited)
       
 
                 
System integration
  $ 482,704     $ -       100.0 %
Software sales
    3,606,930       3,831,781       -5.9 %
Maintenance service
    734,758       189,253       288.2 %
Shared revenue
    277,950       10,718       2493.3 %
Total revenues
    5,102,342       4,031,752       26.6 %
Less:
                       
Business tax and surcharges
    121,424       128,937       -5.8 %
Net revenues
  $ 4,980,918     $ 3,902,815       27.6 %
 
Net revenues increased $1.08 million, or 27.6%, from $3.90 million for the three months ended March 31, 2010 to $4.98 million for the three months ended March 31, 2011. System integration revenues increased $0.48 million, from nil for the three months ended March 31, 2010 to $0.48 million for the three months ended March 31, 2011, due to sales of eBook readers. Software sales decreased $0.22 million, or 5.9%, to $3.61 million for the three months ended March 31, 2011 from $3.83 million for the three months ended March 31, 2010, due to less demand from our customers. Maintenance service revenue increased $0.55 million, or 288.2%, from $0.19 million for the three months ended March 31, 2010 to $0.73 million for the three months ended March 31, 2011, mainly from the services provided to China Unicom with respect to the optimization of their network. Shared revenue increased $0.27 million, or 2493.3%, from $0.01 million for the three months ended March 31, 2010 to $0.28 million for the three months ended March 31, 2011, due to shared revenue from mobile payment.
 
   
Three Months Ended March 31,
   
% of
 
  
 
2011
   
2010
   
change
 
  
 
(Unaudited)
   
(Unaudited)
       
MVAS Technology Platforms
 
 
   
 
   
 
 
Gross Revenues
  $ 3,672,734     $ 3,970,313       -7.5 %
Business tax and surcharges
 
84,479
   
125,865
      -32.9 %
Cost of Revenues
 
464,300
     
170,213
      172.8 %
 
  $ 3,123,955     $ 3,674,235       -15.0 %
Mobile Payment Solutions
 
 
   
 
   
 
 
Gross Revenues
  $ 1,429,608     $ 61,439       2226.9 %
Business tax and surcharges
 
36,945
   
3,072
      1102.6 %
Cost of Revenues
 
87,533
   
9,335
      837.7 %
  
  $ 1,305,130     $ 49,032       2561.8 %
 
Revenue from our MPS offerings increased 2226.9% to $1.4 million, primarily driven by an increase in the range of products and services offered, as well as expansion into new geographic regions through partnerships with China’s leading mobile network operators. Revenue from MVAS decreased 7.5% to $3.7 million from the first quarter of 2011, compared with $4.0 million in the first quarter of 2010. The decrease in MVAS revenue was primarily related to reduced demand from our customers. For the first three months of 2011, MPS and MVAS accounted for 28.0% and 72.0% of gross revenues, respectively. The shift in MPS revenue was mainly contributed from our MPS revenue increment both from one time sales and shared revenue.
 
Cost of revenues:
 
 
Three Months Ended March 31,
   
% of 
 
  
2011
 
2010
   
change
 
  
(Unaudited)
 
(Unaudited)
       
                   
Equipment costs
  $ 435,581     $ -       100.0 %
Labor Costs
    116,252       179,548       -35.3 %
Total cost of revenues
  $ 551,833     $ 179,548       207.3 %
 
 
23

 
 
Cost of revenues includes equipment hardware costs and labor costs. The increase in cost of revenue was primarily driven by increased sales, greater scale and the sales of eBook readers.
 
Gross Margin:
 
   
Three Months Ended March 31,
 
  
 
2011
 
2010
 
  
 
MVAS
   
MPS
   
MVAS
   
MPS
 
    
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
 
       
 
 
   
 
Gross Revenues
    3,672,734     $ 1,429,608     $ 3,970,313     $ 61,439  
Business tax and surcharges
    84,479       36,945       125,865       3,072  
Cost of Revenues
    464,300       87,533       170,213       9,335  
Gross margin
    3,123,955     $ 1,305,130     $ 3,674,235     $ 49,032  
 
 
 
   
 
   
 
   
 
 
Gross margin rate
    87.1 %     93.7 %     95.6 %     84.0 %
 
Gross margin increased $0.71 million, or 19.0%, from $3.72 million for the three months ended March 31, 2010 to $4.43 million for the three months ended March 31, 2011. The gross margin rate decreased by 6.5%, to 88.9% for the three months ended March 31, 2011 from 95.4% for the three months ended March 31, 2010. The decrease in gross margin was due to sales of lower-margin eBook readers, which carry margins well below the corporate average. The gross margin and the gross margin rate for the MVAS and MPS were $3.12 million or 87.1% and $1.31 million or 93.7%, respectively, for the three months ended March 31, 2011 and $3.67 million or 95.6% and $0.05 million or 84.0%, respectively, for the three months ended March 31, 2010. The increase of gross margin rate in MPS was contributed from more sales of software to China Unicom.
 
Operating expenses:
 
   
Three Months Ended March 31,
 
    
2011
 
2010
 
      
(Unaudited)
   
% of
   
(Unaudited)
   
% of
 
            
net revenues
         
net revenues
 
 
   
 
         
 
       
Selling and distribution expenses
    $ 436,608       8.8 %   $ 195,655       5.0 %
General and administrative expenses
      1,214,622       24.4 %     640,890       16.4 %
Research and development expenses
      329,514       6.6 %     111,257       2.9 %
  
    $ 1,980,744       39.8 %   $ 947,802       24.3 %
 
Operating expenses including selling, general and administrative expenses and R&D, increased $1.03 million, or 109.0%, from $0.95 million for the three months ended March 31, 2010 to $1.98 million for the three months ended March 31, 2011.
 
Selling and distribution expenses: Selling and distribution expenses increased $0.24 million or by 123.2%, to $0.44 million for the three months ended March 31, 2011 from $0.20 million for the same period of 2010. Our selling and distribution expenses primarily consist of staff salaries and welfare, travel and communication expenses, office rental and related expenses, and entertainment expenses. For the three months ended March 31, 2011, the increase in our selling and distribution expenses was mainly due to the recruitment of more senior sales people from 48 as of March 31, 2010 to 73 as of March 31, 2011, which raised our salaries and welfare expenses from $0.04 million for the three months ended March 31, 2010 to $0.16 million for the three months ended March 31, 2011. Recruitment of more sales people and establishment of branch offices in more regions resulted in higher selling and distribution expenses.

 
24

 
 
General and administrative expenses: General and administrative expenses increased $0.57 million or by 89.5%, to $1.21 million for the three months ended March 31, 2011 as compared to $0.64 million for the same period in 2010. Our general and administrative expenses primarily consist of salaries and welfare for management, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance, utilities and other office expenses.  The increase in our general and administrative expenses was mainly due to the following reasons: (1) the increase in professional services charges related to being a US public company, including but not limited to legal, accounting, internal control enhancement etc., for approximately of $0.28 million; and (2) the increase of staff salary, travelling expenses and other general office supplies in relation to the expansion of our business, for about $0.29 million.
 
Research and development expenses: Research and development expenses increased $0.22 million or by 196.2%, to $0.33 million for the three month ended March 31, 2011 from $0.11 million for the same period of 2010. Our research and development expenses primarily consist of salaries and welfare for the research and development staff, office utilities and supplies allocated to our research and development department. The increase of the research and development expenses for the three months ended March 31, 2011 was mainly due to the expansion of our R&D function which resulted in an increase of the salary expenses and other general administrative expense and suppliers. For the three months ended March 31, 2011 and 2010, we spent $0.33 million and $0.11 million on research and development expenses, of which $0.17 million and $0.06 million was attributable to MVAS and $0.16 million and $0.05 million was attributable to MPS.
 
Other income:  Other income increased $1.33 million from nil for the three months ended March 31, 2010 to $1.33 million for the three months ended March 31, 2011 mainly due to a VAT rebate from the tax bureau. Pursuant to the policies issued by Ministry of Finance, State Taxation Administration and General Administration of Customs for Encouraging Software Industry and Integrated Circuits Industry issued in 2000, an enterprise classified as a “software enterprise” will be entitled to a rebate of its net VAT liability to the extent that it exceeds 3% of the actual VAT burden relating to self-developed software product sales.
 
Earnings before interest and taxes (EBIT):  EBIT increased $1.01 million, or 36.3%, from $2.77 million for the three months ended March 31, 2010 to $3.78 million for the three months ended March 31, 2011. EBIT margin rate increased 4.8% from 71.0% for the three months ended March 31, 2010 to 75.8% for the three months ended March 31, 2011, through our continuous revenue growth associated with the MVAS, and the VAT rebate from the tax bureau during the three months ended March 31, 2011.
 
Liquidity and Capital Resources
 
In summary, our cash flows were as follows:
 
Trunkbow International Holdings Limited Summary Cash Flows

   
Three Months Ended March 31,
 
     
2011
    
2010
 
     
(Unaudited)
    
(Unaudited)
 
Net cash flows used in operating activities
 
$
(4,077,192
)  
$
(5,058,667
)
Net cash flows used in investing activities
   
(269,611
)  
 
(170,348
)
Net cash flows provided by financing activities
   
17,342,251
   
 
14,927,436
 
Effect of foreign currency fluctuation on cash and cash equivalents
   
(72,954
)  
  
94,440
 
Net increase in cash and cash equivalents
   
12,922,494
      
9,792,861
 
Cash and cash equivalents – beginning of year
   
10,259,750
     
3,305,473
 
Cash and cash equivalents – end of the period
 
$
23,182,244
   
$
13,098,334
 
 
Our cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months. As of March 31, 2011, we had cash and cash equivalents of $23.18 million. We believe that our existing cash and cash equivalents will be sufficient to fund our operating activities, capital expenditures and other obligations for at least the next twelve months.

 
25

 
 
Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out and continued expansion of our systems and platforms and (b) our working capital needs, which include deposits and advanced payment for hardware and software, payment of our operating expenses and financing of our accounts receivable; and (ii) net cash used in investing activities that consist of the payment for acquisitions of hardware and software in form of loan.
 
We lease office space under a lease agreement with a term expiring in April 2014. The lease may be cancelled by either party with 30-days prior written notice.
 
Future minimum rental payments under this operating lease are as follows:
 
  
Office Rental
 
Nine months ending December 31, 2011
  $ 190,249  
Year ending December 31, 2012
    198,125  
Year ending December 31, 2013
    34,399  
Year ending December 31, 2014
    1,550  
Total
  $ 424,323  
 
 We do not have other commitments besides the commitment in office rental.
 
Operating Activities
 
Net cash flows used in operating activities for the three months ended March 31, 2011 was $4.08 million as compared with $5.06 million used in operating activities for the three months ended March 31, 2010, for a net decrease of $0.98 million. This decrease was mainly due to the significant decrease in the change of advance to suppliers and other current assets and accounts payable, offsetting by the increase in the change of accounts receivable, for the three months ended March 31, 2011, compared with the same period of 2010.
 
The decrease in operating cash outflows was attributable to a substantial decrease in cash out flows from advance to suppliers and loan receivable and other current assets. An increase of $3.6 million in advance to suppliers was noted as of March 31, 2010, when compared to the balance as of December 31, 2009. For the three months ended March 31, 2011, there was no material fluctuation on the advance to suppliers, the decrease of $0.25 million represented cash inflow status in advance to suppliers. $4.57 million of project bidding deposit was paid in March 2011 for a potential project and caused significant increase in other current asset when compared the balance as of March 31, 2011 to December 31, 2010. The bidding deposit was subsequently repaid in April. The other significant amount in loan receivable and other current asset, loans to third parties increased and caused cash outflow by $5.64 million as of March 31, 2010 compared to December 31, 2009. While there was $0.23 million decrease in loans to third parties, the change in loans to third parties contributed the $0.21 cash inflow for the three months ended March 31, 2011. With the collection of advance to suppliers and other current assets, the cash used in operating activities was reduced significantly. Up to May 10, 2011, $4.52 million has been collected on advance to suppliers and loan to third parties as of March 31, 2011.
 
The decrease in operating cash outflows was offset by the increase in accounts receivable. The increase in the change of accounts receivable caused the operating cash outflows $1.23 million, mainly caused by the increase of revenue of $1.07 million, from $4.03 million to $5.10 million for the three months ended March 31, 2010 and 2011, respectively. Up to May 10, 2011, $6.0 million has been collected on the accounts receivable as of March 31, 2011.
 
Investing Activities
 
Our main use of investing activities during the three months ended March 31, 2011 and 2010 were on acquisition of property and equipment and acquisition of Delixunda Company. The acquisitions granted us the telecom value-added service license, which would enable us to offer telecom wireless value-added content service to individual clients.

 
26

 
 
Financing Activities
 
Net cash flows provided by financing activities for the three months ended March 31, 2011 was $17.37 million as compared with $14.93 million provided by financing activities for the three months ended March 31, 2010.
 
The cash provided by financing activities for the three months ended March 31, 2011 included the net proceeds from the February 2011 initial public offering of $17.34 million.
 
Recent Developments
 
1)
Acquisition of Delixunda
 
We entered into a series of contractual arrangements with Beijing Delixunda Technology Co., Ltd. (“Delixunda”) and its shareholders on March 10, 2011. Delixunda is a telecom value-added service licensed company and was established as a limited liability company on December 1, 2009 in Beijing, the PRC. Delixunda has no operations prior to February 10th, 2011. As a result of the contractual arrangements with Delixunda, we indirectly own the telecom value-added service license, which would enable us to offer telecom wireless value-added content service to individual clients.
 
2)
Subsequent collection
 
Up to May 10, 2011, the Company has been subsequently collected $6,029,503 on accounts receivable and $2,217,514 on loans to third parties.
 
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable for smaller reporting companies.
 
ITEM 4 CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of September 30, 2010, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls over Financial Reporting.
 
There has been no change in our internal control over financial reporting during the third fiscal quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II  OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
We are not currently a party to any material legal proceedings.
 
ITEM 1A.  RISK FACTORS
 
Not applicable to smaller reporting companies.

 
27

 
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
On February 2, 2011, we commenced an initial public offering of 4,000,000 shares of common stock at a public offering price of $5.00 per share for gross proceeds of $20,000,000 and net proceeds are $18,109,988 after deduction of $1,400,000 of underwriter’s commission, and $490,012 of legal and professional fees. The initial public offering closed on February 8, 2011.
 
There were no payments, direct or indirect, made to any directors, officers, or their associates; to persons owning 10% percent or more of any class of our equity securities; or affiliates of the issuer; or direct or indirect payments to others.
 
We offered the shares sold in the initial public offering pursuant to a Registration Statement on Form S-1, as amended (No. 333-169942) (the “Registration Statement”) filed with the SEC, which was declared effective by the SEC on February 2, 2011. We used approximately $1 million of net proceeds to build out the basic mobile payment platforms in Zhejiang Province, Xinjiang Province, Shanxi Province,  have set aside approximately $14 million for investments in infrastructure roll out in Shandong Province and Henan Provinces and also for further expansion of capacity of the system as user base increases in each province. We expect to use the remainder of the net proceeds for general working capital, including increased corporate governance costs.
 
The initial public offering was underwritten by Roth Capital Partners, LLC, who acted as sole book-runner, and Merriman Capital, Inc. who acted as co-manager.
 
Also on February 2, 2011, we filed a prospectus for certain of our stockholders to register for resale 13,223,162 shares of our common stock and 2,905,419 shares of our common stock underlying warrants held by those selling stockholders, pursuant to the Registration Statement. We will not receive any of the proceeds from the sale of the shares of common stock by the selling stockholders. We will receive approximately $5,810,838 in proceeds if the selling stockholders were to exercise all 2,905,419 warrants to purchase shares of our common stock to be sold hereunder. As of March 31, 2011, we have received $10,000 from the exercise of such warrants, of which all of such amount was used for working capital. The shares of common stock and common stock underlying warrants will be sold by the selling stockholders from time to time on a continuous basis.
 
ITEM 3.   DEFAULT UPON SENIOR SECURITIES
 
None.
 
ITEM 4.  [REMOVED AND RESERVED]
 
ITEM 5.  OTHER INFORMATION
 
None.

ITEM 6.  EXHIBITS

Exhibit
No.
 
Description
31.1
 
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer, 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 Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
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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.

 
TRUNKBOW INTERNATIONAL HOLDINGS LIMITED
     
Date: May 10, 2011
By:
/s/ Li Qiang
   
Li Qiang
   
Chief Executive Officer (Principal Executive Officer)
     
Date: May 10, 2011
By:
/s/ Ye Yuan Jun
   
Ye Yuan Jun
   
Chief Financial Officer and Controller (Principal Financial Officer)
 
 
29

 

EXHIBIT INDEX

Exhibit
No.
 
Description
31.1
 
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer, 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 Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
30