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EX-10.16 - EXHIBIT 10.16 - Tri-Tech Holding, Inc.v306184_ex10-16.htm

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

þ

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

For the fiscal year ended December 31, 2011

¨

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

For the transition period from              to             .

 

Commission File Number 001-34427

 

TRI-TECH HOLDING INC.

(Exact name of registrant as specified in its charter)

 

Cayman Islands   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification number)

  

16th Floor of Tower B, Renji Plaza,

101 Jingshun Road, Chaoyang District

Beijing 100102 China

(Address of principal executive offices and zip code)

 

+86 (10) 5732-3666

(Registrant’s telephone number, including area code)

 

 

Securities registered under Section 12(b) of the Exchange Act:

Title of each class

 

Name of each exchange on which registered

Ordinary Shares, $0.001 par value per share   NASDAQ Capital Market

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No  þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  þ    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 (§232.45 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  þ    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

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

 

Large accelerated filer   ¨   Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)   Smaller reporting company   þ

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

 

The aggregate market value of the ordinary shares, $0.001 par value per share (“Shares”), of the registrant held by non-affiliates on June 30, 2011 was $38,814,073, based on a closing price of $8.03 per share and 4,833,633 shares held by non-affiliates on that date.

 

The Company is authorized to issue 30,000,000 Shares. As of the date of this report, the Company has issued and outstanding 8,182,199 Shares, excluding 21,100 treasury Shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

This Form 10-K incorporates the registration statement on Form S-1 filed with the Commission on January 8, 2010, as amended (file no. 333-164273) (the “Registration Statement”) and prospectus filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 (the “Securities Act”) on April 16, 2010 (the “Prospectus”). This Form 10-K also incorporates the registration statement on Form S-3 filed with the Commission on July 28, 2011, as amended (file no. 333-175860) (the “Form S-3 Registration Statement”). The Registration Statement, Prospectus and Form S-3 Registration Statement are incorporated by reference into Parts II and III of this Form 10-K.

  

 
 

 

TRI-TECH HOLDING INC.

FORM 10-K

INDEX

 

PART I    
Item 1. Business   I-1
Item 1A. Risk Factors.   I-9
Item 1B. Unresolved Staff Comments.   I-9
Item 2. Properties.   I-9
Item 3. Legal Proceedings.   I-10
Item 4. Mine Safety Disclosures.   I-10
PART II    
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   II-1
Item 6. Selected Financial Data.   II-1
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   II-1
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.   II-11
Item 8. Financial Statements and Supplementary Data.   II-11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.   II-11
Item 9A. Controls and Procedures   II-11
Item 9B. Other Information.   II-12
PART III    
Item 10. Directors, Executive Officers and Corporate Governance.   III-1
Item 11. Executive Compensation.   III-5
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   III-6
Item 13. Certain Relationships and Related Transactions, and Director Independence.   III-8
Item 14. Principal Accountant Fees and Services.   III-8
Item 15. Exhibits, Financial Statement Schedules.   III-9

 

i
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

The Company has made statements in this annual report that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about its plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “we believe,” “we intend,” “may,” “should,” “could” and similar expressions. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

Examples of forward-looking statements include:

 

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

 

statements of the company’s plans and objectives;

 

statements regarding the capabilities and capacities of the company’s business operations;

 

statements of expected future economic performance; and

 

assumptions underlying statements regarding the company or its business.

 

The ultimate correctness of these forward-looking statements depends upon a number of known and unknown risks and events. Many factors could cause the Company’s actual results to differ materially from those expressed or implied in its forward-looking statements. Consequently, you should not place undue reliance on these forward-looking statements.

 

The forward-looking statements speak only as of the date on which they are made, and, except as required by law, the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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

 

ii
 

 

PART I

 

Item 1.Business

 

Overview

 

Tri-Tech Holding Inc. (the “Company” or “we”) is a leading provider of integrated solutions, products and technologies to water resource management and environmental protection industries. Headquartered in Beijing, China, the Company currently has 331 employees. It has successfully implemented projects in both the Chinese and overseas markets such as India, the Middle East and North America.

 

The Company aims to provide reliable, workable solutions to complex environmental challenges faced by both public and private sectors in China and internationally. Its clientele consists of a combination of government agencies, municipalities, and industrial entities located in China, India, the Middle East and North America. To maintain a leading position in its China market, the Company’s strategy is to reinforce customer recognition and to offer diverse proprietary product lines to meet the needs of its expanding client base. With its international presence, the Company focuses on furthering its geographic reach in India, the Middle East and North America in the wastewater treatment and water processing industry.

 

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

 

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

 

Corporate Structure and History

 

The Company operates through its eleven subsidiaries, variable interest entity (“VIE”) affiliates and joint venture partnership: (1) Tri-Tech International Investment, Inc. (“TTII”), (2) Tri-Tech (Beijing) Co., Ltd. (“TTB”), (3) Beijing Satellite Science & Technology Co. (“BSST”), (4) Ordos Tri-Tech Anguo Investment Co., Ltd. (“TTA”), (5) Tianjin Baoding Environmental Technology Co., Ltd. (“Baoding”), (6) Tranhold Environmental (Beijing) Tech Co., Ltd. (“Tranhold”), (7) Beijing Yanyu Water Tech Co., Ltd. (“Yanyu”), (8) Tri-Tech Infrastructure LLC, a Delaware limited liability company located in the United States (“TIS”), (9) Beijing Huaxia Yuanjie Water Technology Co., Ltd. (“Yuanjie”), (10) Buerjin Tri-Tech Industrial Co. Ltd. (“Buerjin”), and (11) Tri-Tech Infrastructure (India) Pvt., Ltd. (“TII”).

 

Incorporated as a holding company in the Cayman Islands, the Company is the sole owner of TTII, which is incorporated in the British Virgin Islands. As TTII’s wholly-owned subsidiary operating in Beijing, China, TTB controls Tranhold, Yanyu and BSST through a series of control agreements. Three entities were formed in early 2010: a wholly-owned subsidiary, TIS, in the United States focusing on business developments in North America; a joint venture partnership, TII, in India focusing on business opportunities in India and the Middle East; and a wholly-owned subsidiary, Baoding, in Tianjin, China focusing on product research and development. Through TTB, the Company formed and owned 80% equity in TTA, a subsidiary for the purpose of investing and building a water treatment plant in Inner Mongolia. Through TTB, the Company acquired 51% equity interest in Yuanjie and extended its reach in the niche market of water treatment for high-rise buildings. Through TTB, the Company formed and owned 80% equity interest in Buerjin for the purpose of investing and building a municipal infrastructure project in Xinjiang in 2011. The Company also acquired the entire operating assets of J&Y International, a U.S.-based water treatment company. Since its inception, the Company has embarked upon a journey to become an integrated solution provider in water treatment and environmental protection in China and overseas.

 

I-1
 

 

 

Bankruptcy and Similar Proceedings

 

The Company has not been subject to any bankruptcy, receivership or similar proceedings.

 

Material Acquisitions and Other Events

 

On June 9, 2011, the Company completed its acquisition of the operating assets of J&Y International Inc. (“J&Y”) for $1.5 million in cash and the Company’s ordinary shares. J&Y, headquartered in Menomonee Falls, Wisconsin, is a water treatment company focusing on the improvement of the environment. J&Y designs and manufactures industrial chemical water recovery systems, desalination plants, domestic and industrial wastewater treatment systems and reverse osmosis filtration systems. After the acquisition, the Company formed J&Y Water Division to operate the acquired assets from J&Y.

 

On June 21, 2011, the Company completed its acquisition of 51% of the equity interest in Yuanjie Water for $1.7 million in cash and intellectual property. Yuanjie Water is a high-tech enterprise engaged in water system integration for large high-rise buildings, including research and development, manufacture, installation and operation of water treatment systems directly for end-users.

 

On August 23, 2011, the Company established Buerjin, in which TTB holds 80% of equity interest. Buerjin invests, builds and operates a municipal infrastructure project in Xinjiang based on the concession build-own-operate-subsidy-transfer (“BOOST”) model.

 

In November 2011, the Company made a capital injection of Indian National Rupee (“INR”) 300,000, or $6,985, in the joint venture TII, formed by the Company and Allied Energy Systems, Pvt Ltd, an Indian company. The total registered capital of TII amounts to INR 1,000,000, or $20,833. In return for this capital contribution, the Company received 30% of equity ownership in TII.

 

I-2
 

 

Principal Products and Services and Their Markets

 

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

 

Core Technologies and Solutions

 

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

 

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

 

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

 

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

 

Business Segments

 

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

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

This segment focuses on municipal water supply and distribution, wastewater treatment and gray water recycling, through the procurement and construction of proprietary build-transfer processing equipment and processing control systems. The Company also provides municipal facilities engineering and operation management services for related infrastructure construction projects. This segment has historically provided the majority of its contract revenues. Representative projects in the China market include the expansion phase of the water treatment plant for the City of Ordos valued at approximately $20 million, which started in June 2011 and is expected to be completed by June 30, 2012, and the recycled water quality upgrade project for Tianjin Airport Economic Zone with a total contract value of $1.46 million, which started in June 2011 and is expected to be operational by July 2012. Representative international projects include three Indian engineering-procurement-construction (“EPC”) contracts for sewage collection and treatment plants in three municipalities with a total contract value of INR 2.06 billion ($39 million), which started in November 2011 and are expected to be completed by the end of 2013; and a water treatment system project for Fairmont Jasper Park Lodge, a Canadian hotel, with a contract value of $690,000, which started in November 2011 and is scheduled for completion in mid-May 2012.

 

I-3
 

 

Segment 2: Water Resource Management System and Engineering Service

 

This segment involves projects relating to water resource management, flood control and forecasting, irrigation systems, and similar ventures through system integration of proprietary and third-party hardware and software products. For government agencies, the Company designs systems that track natural waterway levels for drought control, monitor groundwater quality, and generally manage water resources. Representative projects include flash flood monitoring and forecasting projects for six counties of Anhui, Shandong and Gansu provinces, with a total contract value of $3.2 million, which commenced in May 2011 and have been completed; the flash flood monitoring and forecasting projects in six districts and counties in Heilongjiang Province, with a total contract value of $3.8 million, which commenced in June 2011 and is expected to be completed in June 2012; and flash flood early warning projects in seven counties and district in Hebei and Beijing, with a total contract value of $2.4 million, which began in July 2011 and is expected to be completed in April 2012.

 

Segment 3: Industrial Pollution Control and Safety

  

This segment focuses on industrial wastewater treatment for industrial safety and emergency response in the petroleum and power industries using a variety of technologies such as ZLD, seawater desalination, and air pollution and odor control. Projects in this segment include traditional engineering, procurement and construction of equipment and modules, and operation and maintenance of wastewater treatment plant. For petroleum refineries, petrochemical factories and power plants, the Company provides systematic solutions for volatile organic compound abatement, odor control, water and wastewater treatment, and water recycling. The Company also provides safe and clean production technologies for oil and gas field exploration and pipeline transportation. Representative projects include the seawater desalination project for the Utility Plant of Qatar Petrochemical Co. Ltd. in Qatar, with a contract value of $8.3 million, which started in December 2011 and is expected to be delivered by November 2012; production security system and emergency command and control center construction projects for Shaanxi Yanchang Petroleum (Group) Co., Ltd. with total contract value of $4 million, both of which were started and completed in 2011; and a Wuhan natural gas distribution network control system project, with a contract value of $1.5 million, which began in January 2012 and is expected to be completed by May 2013.

 

Backlog, Pipeline and Guidance for 2012

 

The Company’s backlog represents the amount of contract work remaining to be completed, that is, revenues from existing contracts and work in progress expected to be recorded in 2012 and onwards, based on the assumption that these projects will be completed on time according to the project schedules. As of December 31, 2011, the Company had a total backlog of $94.5 million, including $63.1 million in Segment 1, $16.1 million in Segment 2 and $15.3 million in Segment 3.

 

The Company is currently expecting potential projects in the pipeline with a total expected value of $127.1 million, of which approximately $66.8 million is for Segment 1, $15.7 million for Segment 2 and $44.6 million for Segment 3.

  

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

 

Macro-Economic Factors and Business Trends

 

China’s gross domestic product (“GDP”) continued to maintain stable growth in 2011. According to China’s State Bureau of Statistics, China’s GDP totaled RMB 47.2 trillion (or $7.5 trillion) for 2011, an increase of 9.2% over 2010. The growth rate decreased by 1.1% compared to 2010. The annualized GDP growth rates for the first, second, third and fourth quarters of 2011 were 9.7%, 9.5%, 9.1% and 8.9%, respectively. The declining quarter-to-quarter growth rate throughout 2011 indicated a moderately slowing development pace as an effect of the Chinese government efforts to cool an overheating economy. The Company believes the growth rate primarily reflects a continuous improvement of macroeconomic regulation and control environment resulting from active, stable financial and monetary policies. The year of 2011 was regarded as a good start for China’s economic and social development under the Twelfth Five-Year Plan (2010-2015). With the execution of the Twelfth Five-Year Plan continuing to be the central task in the Chinese economy in 2012, it is expected that the implementation of the projects highlighted in the Plan will help maintain stable economic growth.

 

I-4
 

 

In addition, industrial production growth (“IPG”) and fixed asset investment (“FAI”) in China also showed stable growth during 2011. China’s IPG rate was 13.9% in 2011. The paid-in FAI for 2011 totaled RMB 33.4 trillion (or $5.3 trillion), an increase of 20.3% over 2010. In particular, FAI in infrastructures involving production and distribution of electricity, gas and water reached RMB 1.5 trillion (or $238 billion), and FAI in other infrastructure reached RMB 5.1 trillion (or $810 billion). By region, FAI for East China, Central China and West China in 2011 were 21.3%, 28.8% and 29.2%, respectively. Total budget for 332,931 new projects was RMB 24 trillion (or $3.8 trillion), an increase of 22.5% over 2010.

 

The water treatment sector in India is emerging and will continue to grow in the coming decades. The sector is projected to grow at 18% per annum in the coming decade, with expected investment of $10.2 billion coming from the private sector. Large investments in the design, installation and management of water treatment equipment and facilities are expected in the coming years. Many international companies are entering the Indian market providing services in project construction, equipment distribution and consulting, which intensifies competition and improves the quality of the products and services. The overall water and wastewater sector in India is estimated to be over $12.2 billion, of which the water treatment market is the most attractive part at $1.2 billion. It is estimated that from 2011 to 2013 there will be projects for water supply worth $2.1 billion and projects for wastewater worth $5.7 billion.

   

Based on the data shown above, the Company believes during 2012 China’s economy will continue to grow, albeit at a more moderate rate, and the Company will likely continue its rapid growth.

 

New Opportunities in Business

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

According to the Twelfth Five-Year Plan (“FYP”) on Environmental Protection publicized by the State Council in December 2011, the PRC government will shift its infrastructure investment focus to sewage treatment plants, irrigation systems and other green projects through 2015. From 2011 through 2015, the PRC government estimates a total of about $536 billion of investments for environmental protection and plans to add 42 million tons of daily sewage treatment capacity to meet the urban wastewater treatment rate target of 85% by 2015. The plan also highlighted that water-intensive business will be strictly restrained in order to improve the utilization of water resources and policies will be implemented to encourage and support industrial companies towards wastewater ZLD. According to Pollutant Reduction Responsibility, a document signed by the Ministry of Environmental Protection with provinces and major industrial companies, an additional 1,184 wastewater treatment plants with total daily capacity of 45.7 million tons will be built during the FYP period.

 

The water and wastewater services market in India is expected to witness higher growth as industrial end-users seek cost-effective solutions in the process of expanding the existing systems, installing new waterworks and addressing the mounting pressure from government legislation to reduce environmental pollution. The overall market is estimated to be more than $4 billion per year with an annual growth rate of 10–12%. As only 10% of wastewater is treated today, the potential wastewater treatment market is estimated at $900 million per year with an annual growth rate of 14%.

 

Multilateral and bilateral agency initiatives are now providing substantial funding for infrastructure projects in India. The World Bank currently operates four water supply projects and two sanitation and sewage treatment projects, with a total worth of $700 million. The World Bank’s total commitment to India’s water sector amounts to more than $1.3 billion.

 

The Company prioritizes municipal projects for water treatment, wastewater treatment, and water supply in India and other parts of Asia. The Company will also focus on power sector projects in wastewater treatment, pretreatment packages and water supply and water treatment plant packages for townships.

 

Segment 2: Water Resources Management Systems and Engineering Services

 

2011 was also a good start for implementing the FYP with respect to China’s water resources management. The total spending on water resources management increased significantly, to RMB 345.2 billion (or $54.8 billion). Local investment in water resources management in 2011 doubled over 2010 levels to RMB 231.1 billion (or $36.7 billion). Flood control projects for flash flood forecasting and control, small river improvement and dangerous small reservoir reinforcement have been fully launched and substantially implemented.

 

Particularly, the Ministry of Water Resources established project offices in various areas to supervise the implementation of flash flood forecasting and prevention projects. The Chinese government also continued to increase spending and allocate funding. The Ministry of Finance earmarked RMB 3.8 billion (or $603 million) as central financial subsidy for project construction in 1,100 counties. In September 2011, the Ministry of Finance issued its budget, which allocates the central financial subsidy for projects to be built in 736 counties in 2012. With market opportunities driven by policies and directed investment, the Company will continue to expand its business and bid for projects in 2012.

 

I-5
 

 

Segment 3: Industrial Pollution Control and Safety

 

According to the FYP, pollution will be controlled on multiple levels including the total pollutant emission volume and pollutant concentration. More spending will be allocated to comply with increased standards of pollution reduction. During the FYP period, $536 billion will be invested in environmental protection, of which $69 billion will be invested in industrial wastewater treatment. The Company also sees great potential in the reuse of treated industrial wastewater. Per capita water resource in China is only a quarter of the world average, and industrial water consumption constitutes a quarter of its total water consumption. The reuse of deeply treated industrial wastewater is therefore significant for the purpose of environmental protection. The FYP also emphasizes that the Chinese government is surveying the implantation status of ZLD for industrial wastewater treatment and expects to issue policies to encourage compliance with ZLD standards. In anticipation of such policies, the Company sees tremendous potential for wastewater treatment in the coal chemical industry. Chinese government sets a goal of oil self-sufficiency at 80% by 2030, for which goal the development of coal and the reduced reliance on oil will be important component parts. The projected fast growth of the coal chemical industry will intensify the demand for ZLD and drive the wastewater treatment industry, particularly in North and Northwest China.

 

According to government statistics, the daily capacity of seawater desalination is growing at a rate between 10% to 30% per annum. Presently, the annual sales of seawater desalination units have amounted to billions of dollars. The Middle East holds 50% of the world capacity with daily output of 11 million cubic meters of fresh water. The Middle East and the U.S. are the regions where desalination enjoys the fastest growth.

 

The Company expects to play a role in this potentially vast market by leveraging its existing technologies in water treatment. The Company is now expanding its business reach into seawater desalination and industrial water treatment businesses in several overseas markets.

 

Strategies for Growth

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

The Company is expanding its geographic reach beyond China and into other overseas regions including North America, South Asia and the Middle East. The Company expects its diversification into advanced water technologies, through acquisitions of entities such as Yuanjie Water and J&Y, will be a primary source of growth in contract revenues over the next several years.

 

The Company recently won three engineering-procurement-construction contracts amounting to INR 2.06 billion ($39 million) for three sewage collection systems and sewage treatment plants for the towns of Hajipur, Buxar and Begusarai in the State of Bihar, India. The contracts will be executed primarily through the Company’s Indian joint venture. The Company expects all three projects to be completed by the end of 2013. In India, the Company has been strategically focusing on the municipal wastewater treatment market and is pursuing broader business initiatives in municipal water supply, municipal solid waste disposal, and industrial water and wastewater treatment. The Company believes there are ample opportunities to generate substantial revenues from this region over the next three to five years.

 

Through its U.S.-based subsidiary established through the acquisition of J&Y, the Company recently secured a water treatment system project with Oxford Properties Inc. for a hotel in the Jasper Park Resort in Alberta, Canada. The Company will procure equipment and construct the project, scheduled for completion in mid-May 2012.

 

The Company is also leveraging its technology for use in residential communities, hotels, and office buildings which are in need of water purification and treatment systems. These types of modular water treatment systems are in high demand throughout the PRC, India and the Middle East.

 

Segment 2: Water Resources Management Systems and Engineering Services

 

In this segment, the Company is gradually transforming into a full-service solution provider for large-scale river basin projects. Based on the general direction of water conservancy in China, the PRC government’s decision to initiate new programs and to allocate significant investment to water resource management systems presents the Company with significant business opportunities in the next several years. In particular, the Ministry of Water Resources launched a new round of bidding invitations in September 2011 for its flash flood monitoring program for 500 counties nationwide. The small- to medium-sized river hydrological monitoring system projects will also be part of the nationwide water management program. The Ministry of Water Resources estimates that a total of RMB 16 billion worth of projects in the program will be completed by 2013. The Company will be actively participating in project bids in 2012.

 

I-6
 

 

With a good track record for winning projects during the first round of bidding, the Company continues to actively participate in biddings. The Company expects to stay competitive in this segment and continue its growth of market share in the PRC. The Company has invested resources to develop water quantity- and quality-monitoring technologies and to upgrade its proprietary products. The Company also actively develops partnerships with manufacturers of hydrological instruments and sensors, in preparation of its water resource monitoring network projects.

 

Segment 3: Industrial Pollution Control and Safety

 

The Company is strengthening its industrial pollution services for the energy sector including the oil and petrochemical companies. While the Company has previously implemented air pollution control systems for the petrochemical industry, the Company believes that there are significant business opportunities, such as water and wastewater treatment and safety, in related industries. Through BSST, one of its VIE affiliates, the Company has set up a new business unit in the first quarter of 2011 to focus on the business of water and wastewater treatment specifically for the petrochemical industry. The need for desalinated water for energy-producing facilities along the coast of the PRC and throughout Asia represents a large and potentially lucrative market for the Company’s technologies acquired from J&Y.

 

Following the acquisition of J&Y, the Company undertook corporate reorganization as well as technological integration. The resulting J&Y Water Division, serving as a business development platform and technical support source to domestic and overseas projects, ensures the technical feasibility of the Company’s global operations. J&Y Water Division also allows the Company to leverage its technologies such as ZLD and thermal technologies for seawater desalination to explore the Indian and Middle Eastern markets.

 

The Company is now in the process of aggressively expanding its business reach into seawater desalination and industrial water treatment businesses in several overseas markets.

 

With its proactive business development efforts, the Company has received several inquiries from potential Indian and Middle Eastern customers.

 

Potential Acquisitions of Complementary Businesses

 

In addition to organic business growth, the Company is planning strategic acquisitions to further enhance its growth. In general, the markets in which it operates are highly fragmented with small competitors. The Company will consider acquiring competing companies believed to add significant value to its business. These potential targets may have strong customer relations but limited market access, or they may possess specialized technologies but their business size might not have reached the point to fully utilize their specialties. When evaluating potential acquisition targets, the Company uses a disciplined, conservative approach so that the acquisitions are strategic and beneficial to its business.

 

Funding for Continuous Growth

 

Funding is critical to maintain the Company’s growth rate, especially when it is exploring potential projects using the build-transfer business model. The Company is actively working with local Chinese banks for possible financial support. In addition to the credit line it renewed with Bank of Hangzhou totaling $15 million, it continues to work with other major Chinese banks to secure more lines of credit as necessary to enable it to gain more project opportunities in the future. In September 2011, the Company secured a credit line of $9.6 million from CITIC Bank. The credit lines provide the Company with the liquidity to expand and grow its operation in a non-dilutive manner, to increase its financial flexibility and to optimize the efficiency of its capital structure. The Company also explores other project financing approaches to dovetail with its build-transfer business model.

 

Competition

 

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

 

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

 

I-7
 

 

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

 

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

 

Principal Suppliers

 

The Company’s suppliers vary from project to project. Often, they are specifically chosen by the clients. Most of the materials or equipment the Company purchases are fungible and are easily available in the market. The prices for those purchases, although increasing, are relatively consistent and predictable. A specific supplier might occupy a significant percentage of the Company’s total purchase at a certain time for a large contract. The dependence on a specific supplier usually ends when the project is completed. The Company does not rely on any single supplier over the long term.

 

Customers and Marketing/Distribution Methods

 

The Company operates on a project basis, and this particular nature does not usually allow it to create a long-term relationship with its customers. The Company negotiates with various government agencies, municipalities, industrial enterprises and/or their prime contractors in order to secure and undertake its various contracts. The Company’s major customers usually account for a certain percentage of its total sales. Its top five customers collectively represented approximately 67.7% and 50.2% of its total revenue for the years ended December 31, 2011 and December 31, 2010, respectively. Although the Company is dependent on its large clients to a certain degree, unlike other commercial businesses, collectability of accounts receivables are relatively secure because its client base consists primarily of government agencies or large state-owned enterprises.

 

Patents and Proprietary Rights

 

As of the December 31, 2011, the Company owned 11 product patents and 39 software copyrights.

 

Government Regulation and Approvals

 

As described in greater detail above in the Company’s discussion of business segments, government policies and initiatives in the various industries it serves have a considerable impact on the Company’s potential for growth. The Company generally undertakes projects for government entities and enterprises and must complete the projects in accordance with the terms of the contracts in which it enters with those entities.

 

Employees

 

In 2011, the Company made significant investments to strengthen its technical support team, research and development team, sales team and finance team. As of December 31, 2011, the Company had a total of 331 full time employees, of whom 122 (37%) are in technical support representing an increase of 27 people from 95 in 2010, 26 (8%) are in research and development, an increase of 5 people from 21 in 2010, and 78 (24%) in sales department, an increase of 18 people from 60 in 2010. The headcount for finance increased from 17 to 40, which represents 12% of the Company’s total headcount. The remaining 19%, or 65 employees, are in administration. The Company’s teams are very stable. Many associates have been with the Company since its inception.

 

Research and Development

 

The Company focuses its research and development efforts on improving its development efficiency and the quality of its products and services. Some members of its technical support team regularly participate in research and development programs. There are five major on-going software research and development projects and one hardware research and development project. The development phase projects are expected to be completed by the third quarter of 2012.

 

I-8
 

 

As its research and development base, the Baoding facility focuses on technology development, software development, pilot testing, manufacturing and pre-installation/pre-assembly preparation of its proprietary products. The Baoding research, development and production facility construction officially started in June 2011. Part I of phase one of the construction is for the odor control system manufacturing and automatic control box assembly workshops, which has been mostly completed. The acceptance inspection is scheduled in the first half of 2012. Part II of phase one construction is in process, and is to be completed around May 2012. The design for part II of phase one construction, the main office building and the dormitory, has been submitted for government approval. Phases two and three of the construction are scheduled to be completed by the end of 2013.

 

In addition to its current research and development projects, the Company is also pursuing cooperation opportunities with several specialty industrial companies in the U.S. and Europe. The technologies the Company is pursuing include the membrane bioreactor technology, forward osmosis membrane technology, the latest ecological engineering for wastewater treatment and advanced solid-liquid separation technology.

 

The Company entered into a license agreement with Hydration Technology Innovations, LLC (“HTI”) in 2010 for the new forward osmosis technology. The Company will construct and operate one or more forward osmosis pilot applications with the licensed technology. It is authorized and licensed to construct and operate such pilot applications at both municipal and industrial sites for wastewater treatment testing, demonstration and evaluation. The HTI personal hydration products are at the development stage, and are undergoing design changes for localization.

 

In 2011, the Company focused on the localization of a cutting-edge forward osmosis technology and built an application based upon the results of localization. The application received positive reactions upon its trail.

 

Through Yanyu, one of its VIE affiliates, the Company developed and completed a communication protocol update in 2011 for Remote Terminal Unit (“RTU”) to comply with a set of newly adopted industry standards.

 

Enforceability of Civil Liabilities.

 

The section of the Registration Statement and the Prospectus entitled “Enforceability of Civil Liabilities” is incorporated herein by reference.

 

Item 1A.Risk Factors.

 

The Company is not required to provide the information required by this Item because the Company is a smaller reporting company.

 

Item 1B.Unresolved Staff Comments.

 

None.

 

Item 2.Properties.

 

The Company’s primary office location is 16th Floor of Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 China. The area is 908 square meters for the 15th floor and 986 square meters for the 16th floor. The lease contract for this location is from September 1, 2010 to August 31, 2013. It also has a 1,300 square meter rental office in Tianjin, which is located at 4th Floor, Kaide A Complex, 7 Rongyuan Road, Huayuan Property Management Zone, Tianjin. In addition, it has three other rental office locations in various districts in Beijing, for which the lease contract expires at various times no later than August 26, 2012. Furthermore, the Company also established two offices in the U.S. and a few other offices in different cities across China.

 

Although the Company does not own any real estate property, TTB entered into a land use right purchase agreement with a local government agency, the Baodi Branch of the Tianjin Land Resource Bureau, on November 26, 2010. The agreement was for the land use right of an area of 158,954 square meters in exchange for the consideration of RMB 35 million ($5.3 million). The consideration has been fully paid as of December 31, 2010. The land is located at West Tianbao Road, Baodi Economic Development Zone in Tianjin. The land use right is for 50 years starting on January 18, 2011. The official land use right application process has been completed in June 2011 and the land use right certificate issued in July 2011. We have confirmed the transfer of the land use right, the acceptance letter for which was signed on January 18, 2011. The amortization of the land use right over the expected duration of 50 years has started since January 2011 with RMB 180,338 ($28,378) per quarter. The first phase of construction is in progress and expected to be completed by the end of 2012.

 

I-9
 

 

Item 3.Legal Proceedings.

 

There are no material legal proceedings, regulatory inquiries or investigations pending or threatened against the Company.

 

Item 4.Mine Safety Disclosures.

 

Not applicable.

 

I-10
 

 

PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

(a) None.

 

(b) The section entitled “Use of Proceeds” from the Registration Statement is incorporated herein by reference. The effective date of the Registration Statement is April 14, 2010, and the Commission file number assigned to the Registration Statement is 333-164273. The Registration Statement registers the offering of up to 2,366,833 ordinary shares (subject to amendment in accordance with the Securities Act of 1933 and the rules and regulations promulgated thereunder) (the “Offering”). As of December 31, 2011, the Company has spent proceeds from the Offering in accordance with the following chart:

 

Description of Use  Proposed Expenditures   Actual Expenditures
Through December 31, 2011
   Percentage Used 
Working Capital  $18,973,000   $18,973,000    100.00%
Mergers & Acquisitions   6,120,000    3,485,585    56.95%
New Product Development   3,366,000    2,658,280    78.97%
Sales & Marketing   2,142,000    2,142,000    100.00%
Total  $30,601,000   $27,258,865    89.08%

 

The section entitled “Use of Proceeds” from the Company’s Form S-3 Registration Statement filed on July 28, 2011, as amended, is incorporated herein by reference, which became effective on November 9, 2011 and the Commission file number is 333-175860. The Form S-3 Registration Statement registers the offering of securities up to $100,000,000. As of the date of this report, the Registrant has not yet closed the offering and as a result has not received any proceeds from the offering. After the Registrant receives the proceeds of the offering, it will disclose the required “Use of Proceeds” information in subsequent quarterly and annual reports.

 

(c) None.

 

Item 6.Selected Financial Data.

 

The Company is not required to provide the information required by this Item because the Company is a smaller reporting company.

 

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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

 

Factors Affecting the Company’s Results of Operations – Generally

 

The Company believes the most significant factors that directly or indirectly affect its sales revenues and net income include:

 

the changes in the macro-economic environment, government strategies and policies, industrial development and planning in the countries and regions where the Company has business presence;

 

the amount of spending by Chinese and foreign governments in water resource management, including surface and groundwater monitoring, flood control and mitigation, flood forecasting, water quality monitoring and assessment, and water resource management decision making systems;

 

the amount of investment by Chinese and foreign governments in municipal wastewater management, including sewer pipelines and sewage treatment, water reuse and odor control;

 

the approved and promoted new environmental laws and regulations by Chinese and foreign governments which require investment in pollution control by the private sector companies;

 

the Company’s capabilities and competencies including innovative technologies and applications, industrial experience and customer base, core competitive advantages, market shares and revenues;

 

II-1
 

 

the availability and required terms of funding for the Company’s working capital;

 

restrictions on foreign ownership and investments and stringent foreign exchange controls;

 

import and export requirements;

 

currency exchange rate fluctuations; and

 

different employee/employer relationships in the jurisdictions within which we conduct our business, existence of and regulation on workers’ councils and labor unions.

 

Historically, the Company’s business growth has been driven primarily by an increase in the number of customers and projects. The complexity and scale of the projects have grown from those involving single pieces of equipment to projects involving comprehensive systems as well as general contracting for complete solutions. The Company now undertakes projects to design and build entire treatment plants and complicated flood monitoring and forecasting systems for river basins. Due to China’s increasing urbanization and growing economy, the Company expects that it will continue to earn a substantial majority of revenues from its products and services in water resource management and municipal wastewater treatment.

 

The Company plans to continuously focus its resources on expanding its business to areas outside of its current base of operation in China and on increasing its market share in the regions it serves. In addition, the Company will allocate its resources to innovate its technology, to develop applications, to improve its larger project execution capabilities and to advocate its brand to customers. Through accretive acquisitions, the Company intends to acquire key technologies and qualifications.

 

Significant Accounting Policies

 

Estimates and Assumptions

 

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

 

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

 

Revenue Recognition

 

The Company’s revenues consist primarily of three categories: (i) system integration, (ii) hardware products and (iii) software products. The Company recognizes revenue when the consideration to be received is fixed or determinable, products delivered or services rendered, and collectability ensured.

 

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

 

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

 

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

 

II-2
 

 

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

 

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

 

The Company records revenues in excess of billings as “unbilled revenue.” For revenues accounted for under this account, the Company expects the amounts to be collected within one year. For those with collection periods in excess of one year, the Company classifies them under “long-term unbilled revenue” on the consolidated balance sheets.

 

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

 

Business Combination

 

The Company has completed two business acquisitions in 2011, which were accounted for using the purchase method of accounting in accordance with USGAAP regarding business combinations. The fair value of net assets acquired and the results of the acquired businesses are included in the Consolidated Financial Statements from the acquisition dates forward. This guidance required the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the reporting period. Estimates were used in accounting for, among other things, the fair value of acquired net operating assets, property and equipment, intangible assets and related deferred tax assets and liabilities, useful lives of plant and equipment and amortizable lives for acquired intangible assets. Any excess of the purchase consideration over the identified fair value of the assets and liabilities acquired was recognized as goodwill. Future adjustments to the estimates used in determining the fair values of the Company’s acquired assets and assumed liabilities could impact its consolidated operating results or financial condition.

 

Deferred tax liability and asset were recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with guidance regarding accounting for income taxes.

 

Accounts Receivable

 

Being a project-based company with long lead time periods of 6 months to 2 or even 3 years, the Company’s accounts receivable period is 83 days. This is not unusual among industry peers. Given the characteristics of the clientele, the Company is confident that its accounts receivable are of good quality even though its accounts receivable days are relatively long compared with companies in other industries. In case of any event that indicates accounts receivable quality deterioration, management will reassess the bad debt provision within the period such event occurs.

 

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

 

Impairment of Assets and Intangible Assets

 

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

 

II-3
 

 

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

 

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

 

PRC Value-Added Tax

 

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

 

PRC Business Tax

 

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

 

Results of Operation

 

   2011 ($)   % of Sales   2010 ($)   % of Sales   Change ($)   Change % 
Revenue   85,872,921    100.0%   43,534,717    100.0%   42,338,204    97.3%
Cost of Revenues   64,017,452    74.5%   28,767,744    66.1%   35,249,708    122.5%
Selling and Marketing Expenses   2,164,363    2.5%   1,271,446    2.9%   892,917    70.2%
General and Administrative Expenses   8,772,446    10.2%   4,562,042    10.5%   4,210,404    92.3%
Research and Development   179,396    0.2%   279,477    0.6%   (100,081)   (35.8)%
Total Operating Expenses   11,116,205    12.9%   6,112,965    14.0%   5,003,240    81.8%
Operating Income   10,739,264    12.5%   8,654,008    19.9%   2,085,256    24.1%
Other (expenses) Income, net   (9,836)   (0.0)%   218,184    0.5%   (228,020)   (104.5)%
Income before Provision for Income Taxes   10,729,428    12.5%   8,872,192    20.4%   1,857,236    20.9%
Provision for Income Taxes   1,958,864    2.3%   1,424,858    3.3%   534,006    37.5%
Net Income   8,770,564    10.2%   7,447,334    17.1%   1,323,230    17.8%
Less: Net Income Attributable to Noncontrolling Interests   682,190    0.8%   370,326    0.9%   311,864    84.2%
Net Income Attributable to TRIT   8,088,374    9.4%   7,077,008    16.3%   1,011,366    14.3%

 

The Company’s revenues are subject to VAT, sales tax, urban maintenance and construction tax and additional education fees. Among the above taxes, VAT has already been deducted from the calculation of revenue.

 

Revenue

 

The Company’s revenue for the year ended December 31, 2011 was $85,872,921, an increase of $42,338,204, or 97.3%, compared with $43,534,717 for the same period of 2010. This increase is primarily attributable to an increase in the system integration, or EPC, category, from $38,821,190 for the year ended December 31, 2010 to $82,401,473 in the same period of 2011, an increase of 112.3%. 75% of the first phase and 60% of the second phase of the Ordos project were completed in 2011, which was the main reason for the revenue increase in segment 1. Hardware and software sales accounted for the remaining 4% of the total revenue.

 

II-4
 

 

Revenue by Segment

 

The following chart shows the performance of each of the business segments for the year ended December 31, 2011. Segment 1 contributed 67.7% of the total revenue; segment 2 contributed 15.0%; and segment 3 contributed the remaining 17.3%.

 

   Year Ended December 31, 2011 
   Segment 1   %   Segment 2   %   Segment 3   %   Total   % 
System Integration  $58,025,035    99.8%  $9,633,141    74.5%  $14,743,297    99.4%  $82,401,473    96.0%
Hardware Products  $98,904    0.2%  $3,278,426    25.4%  $83,280    0.6%  $3,460,610    4.0%
Software Products  $    —%   $10,838    0.1%  $    —%   $10,838    —% 
Total Revenues  $58,123,939    67.7%  $12,922,405    15.0%  $14,826,577    17.3%  $85,872,921    100%

 

Cost of Revenue

 

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

 

Cost of revenue was $64,017,452 in the year ended December 31, 2011, an increase of $35,249,708, or 122.5%, from $28,767,744 in the same period of 2010. The system integration category, which was the largest contributor to the revenue increase, was also the largest contributor to the increase in total cost of revenue, by $35,615,462, or 137%, from $26,061,987 in the year ended December 31, 2010 to $61,677,449 in the same period of 2011.

 

Gross Margin

 

The Company’s gross margin decreased from 33.9% in 2010 to 25.5% in 2011. This decrease was a result of several factors, including increases in material and equipment costs and labor subcontracting costs. The rapid expansion into overseas market also had a direct impact on the increase of cost of sales. These factors all contributed to the lower gross margin.

 

Operating Expenses

 

The Company’s total operating expenses increased from $6,112,965 in the year ended December 31, 2010 to $11,116,205 in the same period of 2011, an increase of $5,003,240, or 81.8%. Selling and marketing expenses increased from $1,271,446 in the year ended December 31, 2010 to $2,164,363 in the same period of 2011, an increase of $892,917, or 70.2%. This increase was mainly due to the increase for sales personnel salary, travel, and new market development fees. General and administrative expenses increased from $4,562,042 to $8,772,446, an increase of $4,210,404, or 92.3%. This increase was mainly due to the increase of office staff salary, professional service fees, amortization of intangibles, bad debt provision, and travel and entertainment expenses. Research and development expense decreased by $100,081, from $279,477 in 2010 to $179,396 in 2011.

 

Provision for Income Tax

 

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

 

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

 

The Company and its subsidiaries and VIEs are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdictions in which each entity is domiciled. According to the New Enterprise Income Tax Law (“NEITL”) in China, the unified enterprise income tax (“EIT”) rate is 25%. However, five of its subsidiaries and VIEs are certified high-tech companies and are taxed based on certain favorable tax policies.

 

II-5
 

 

   For the years ended December 31, 
   2011   2010 
   %   % 
TTB   7.5(1)   7.5(1)
BSST   15    15 
Yanyu   15    25 
Tranhold   25    25 
TTA   25    25 
Baoding   15    25 
Yuanjie   15    (2)
Buerjin   25    (2)
Consolidated effective enterprise income tax rate   18    16 

 

(1)The favorable income tax treatment for TTB of 7.5% expired at the end of 2011. Afterwards, the EIT rate is 15% since TTB passed the qualification of high-tech Company.
(2)These entities were not part of the Company in 2010.

 

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

 

   For the Years Ended December 31, 
   2011   2010 
Current:          
PRC  $502,541   $206,403 
Deferred:          
PRC   1,456,323    1,218,455 
Total income tax expense  $1,958,864   $1,424,858 

 

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

 

   December 31,   December 31, 
   2011   2010 
Current:          
Deferred tax liabilities:          
Revenue recognition based on percentage of completion   358,519    276,658 
Total net deferred tax liabilities  $358,519   $276,658 
Long-term:          
Deferred tax liabilities:          
Revenue recognition based on percentage of completion   2,930,427    1,374,181 
Intangible assets valuation in business combination   525,396    187,295 
Total net deferred tax liabilities  $3,455,823   $1,561,476 

 

Income tax reconciliation for the years ended December 31, 2011 and 2010 are as follows:

 

   For the Years Ended December 31, 
   2011   2010 
PRC statutory tax rate   25%   25%
Taxable income  $10,729,428   $8,872,192 
Computed expected income tax expense   2,682,357    2,218,048 
Effect of preferential tax rates   (723,493)   (793,190)
Income tax expense  $1,958,864   $1,424,858 

 

Income before Income Taxes

 

In the year ended December 31, 2011, the Company’s net income before provision for income taxes was $10,729,428, an increase of $1,857,236, or 20.9%, compared to $8,872,192 in 2010. The Company’s provision for income taxes increased by $534,006, from $1,424,858 in 2010 to $1,958,864 in 2011. The increase in income taxes for 2011 was primarily driven by an increase in income from ordinary business operations. In the year ended December 31, 2011, net income attributable to the shareholders of TRIT was $8,088,374, an increase of $1,011,366, or 14.3%, from $7,077,008 for the year ended December 31, 2010.

 

II-6
 

 

Segment Information

 

The Company has three reportable operating segments. The segments are grouped with reference to the types of services provided and the types of clients that use those services. Total sales and costs are divided among these three segments. The Company’s Chief Executive Officer is the chief operating decision-maker. He assesses each segment’s performance based on net revenue and gross profit on contribution margin.

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

   For the Years Ended December 31,         
   2011 ($)   2010 ($)   Change ($)   Change (%) 
Revenue   58,123,939    19,120,807    39,003,132    204.0 
Cost of Revenue   43,367,917    13,231,384    30,136,533    227.8 
Operating Expenses:                    
Selling and Marketing Expenses   594,780    402,782    191,998    47.7 
General and Administrative Expenses   5,366,171    2,102,860    3,263,311    155.2 
Research and Development   129,918    212,911    (82,993)   (39.0)
Total Operating Expenses   6,090,869    2,718,553    3,372,316    124.0 
Other (Expenses) Income, Net   (107,632)   146,588    (254,220)   (173.4)
Income before Provision for Income Taxes   8,557,521    3,317,458    5,240,063    158.0 
Segment Assets   84,910,147    44,168,017    40,742,130    92.2 

 

In Segment 1, revenue was $58,123,939 in the year ended December 31, 2011, an increase of $39,003,132, or 204.0%, from $19,120,807 in the same period of 2010. This resulted from the increases in system integration of $39,704,871 and hardware sales of $92,275, and from the decrease in software sales of $794,014. Cost of revenue for Segment 1 was $43,367,917 in the year ended December 31, 2011, an increase of $30,136,533, or 227.8%, from that of $13,231,384 in the same period of 2010. Operating expenses increased from $2,718,553 in the year ended December 31, 2010 to $6,090,869 for the same period in 2011, an increase of $3,372,316, or 124.0%. Of this increase, selling and marketing expenses increased by $191,998 mainly for headcount-related expenses; general and administrative expenses increased by $3,263,311 mainly for office staff salary and travel expenses; and research and development decreased by $82,993. Income before provision for income taxes increased from $3,317,458 in the year ended December 31, 2010 to $8,557,521 in the same period 2011, an increase of $5,240,063, or 158%. The gross margin for this segment was 25.4%.

 

Segment 2: Water Resource Management System and Engineering Service

 

   For the Years Ended December 31,         
   2011 ($)   2010 ($)   Change ($)   Change (%) 
Revenue   12,922,405    5,462,771    7,459,634    136.6 
Cost of Revenue   9,309,362    3,538,094    5,771,268    163.1 
Operating Expenses:                    
Selling and Marketing Expenses   1,131,134    576,946    554,188    96.1 
General and Administrative Expenses   1,310,332    758,404    551,928    72.8 
Research and Development   49,478    65,042    (15,564)   (23.9)
Total Operating Expenses   2,490,944    1,400,392    1,090,552    77.9 
Other Expenses   (99,581)   (3,989)   (95,592)   2,396.4 
Income before Provision for Income Taxes   1,022,518    520,296    502,222    96.5 
Segment Assets   26,081,474    14,488,083    11,593,391    80.0 

 

Segment 2 revenue was $12,922,405 in the year ended December 31, 2011, an increase of $7,459,634, or 136.6%, from $5,462,771 in the same period of 2010. This resulted from increases in system integration of $6,357,939 and in hardware product sales of $1,608,052, and from a decrease in software sales of $506,357. Cost of revenue in Segment 2 was $9,309,362 in the year ended December 31, 2011, an increase of $5,771,268, or 163.1%, from $3,538,094 in the same period of 2010. Operating expenses increased from $1,400,392 in the year ended December 31, 2010, to $2,490,944 in the same period 2011, an increase of $1,090,552 or 77.9%. This increase was mainly attributable to the increase in selling and marketing expenses by $554,188, mainly for sales staff travel expenses, increase in general and administration expenses by $551,928, mainly for office staff salary, travel and rental expenses, and a decrease in R&D expenses by $15,564. Income before provision for income taxes was $1,022,518 in the year ended December 31, 2011, an increase of $502,222, or 96.5%, compared with $520,296 in the same period of 2010. The gross margin for this segment was 28.0%.

 

II-7
 

 

Segment 3: Industrial Pollution Control and Safety

 

   For the Years Ended December 31,         
   2011 ($)   2010 ($)   Change ($)   Change (%) 
Revenue   14,826,577    18,951,139    (4,124,562)   (21.8)
Cost of Revenue   11,340,173    11,998,266    (658,093)   (5.5)
Operating Expenses:                    
Selling and Marketing Expenses   438,449    291,718    146,731    50.3 
General and Administrative Expenses   2,095,943    1,700,778    395,165    23.2 
Research and Development       1,524    (1,524)   (100.0)
Total Operating Expenses   2,534,392    1,994,020    540,372    27.1 
Other Income   197,377    75,585    121,792    161.1 
Income before Provision for Income Taxes   1,149,389    5,034,438    (3,885,049)   (77.2)
Segment Assets   27,659,057    24,106,603    3,552,454    14.7 

 

Segment 3 revenue was $14,826,577 in the year ended December 31, 2011, a decrease of $4,124,562, or 21.8%, from $18,951,139 in the same period of 2010. This decrease was primarily due to lower sales in this segment. This resulted from decreases in system integration by $2,482,527, in hardware sales by $1,442,035, and in software sales by $200,000. This segment experienced a complete strategic transition during the year, as the Company shifted focus from its traditional services in pollution control projects to industrial wastewater treatment and seawater desalination.

 

Cost of revenue in Segment 3 was $11,340,173 in the year ended December 31, 2011, a decrease of $658,093, or 5.5%, from $11,998,266 in the same period of 2010. Operating expenses increased from $1,994,020 in the year ended December 31, 2010, to $2,534,392 in the same period of 2011, an increase of $540,372, or 27.1%, of which selling and marketing expenses increased by $146,731, mainly for travel and business entertainment, and general and administrative expenses by $395,165, mainly for headcount-related expenses, travel, and intangible asset amortization expenses. Income before provision for income taxes was $1,149,389 in the year ended December 31, 2011, a decrease of $3,885,049, or 77.2%, compared with $5,034,438 in the same period of 2010. The gross margin for this segment was 23.5%.

 

Liquidity and Capital Resources

 

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

 

Statement of Consolidated Cash Flows as of December 31, 2011 and 2010 is as follows:

 

   For the Years Ended December 31,        
   2011($)   2010($)   Change ($)    Change (%) 
Net Cash Used in Operating Activities   21,633,622    9,971,541    11,662,081    117.0 
Net Cash Used in Investing Activities   6,349,161    8,251,791    (1,902,630)   (23.1)
Net Cash Provided by Financing Activities   17,152,767    32,867,900    (15,715,133)   (47.8)
Effects of Exchange Rate Changes on Cash and Cash Equivalents   (629,233)   1,578,963    (2,208,196)   (139.9)
Net (Decrease) Increase in Cash and Cash Equivalents   (11,459,249)   16,223,531    (27,682,780)   (170.6)
Cash and Cash Equivalents, Beginning of Period   23,394,995    7,171,464    16,223,531    226.2 
Cash and Cash Equivalents, End of Period   11,935,746    23,394,995    (11,459,249)   (49.0)

 

Cash and Cash Equivalents

 

At December 31, 2011, the Company’s cash and cash equivalents amounted to $11,935,746. It decreased by $11,459,249, or 49%, from $23,394,995 on December 31, 2010, mainly due to rapid overseas expansion and the implementation of the Ordos projects. The current portion of restricted cash as of December 31, 2011 and 2010 amounted to $2,087,920 and $1,505,617, respectively, which is not included in the total of cash and cash equivalents. The increase was due to the project deposit for the Qatar project in the amount of $830,000. The restricted cash was on deposit as collateral for the issuance of letters of credit. Our subsidiaries and VIEs holding the deposits do not have material cash obligations to any third parties. Therefore, the restriction does not impact the liquidity of the Company.

 

II-8
 

 

Operating Activities

 

Net cash used for operating activities was $21,633,622 in the year ended December 31, 2011, compared with that of $9,971,541 in same period of 2010. An increase of $11,662,081 in operating cash outflow was mainly attributable to the Company’s rapid growth rate at the infant stage, and aggressive market expansion. This outflow was attributable to the increased cash outflow in accounts receivable and unbilled receivables. Net accounts receivable increased from $18,041,079 on December 31, 2010 to $19,888,084 on December 31, 2011, an increase of $1,847,005, or 10%. Current unbilled receivables increased from $3,208,473 on December 31, 2010 to $7,254,830 on December 31, 2011, an increase of $4,046,357, or 126%. The remaining was mainly due to the increased inventory and prepayments to suppliers, due to the total revenue growth.

 

   For the Years Ended December 31,         
   2011 ($)   2010 ($)   Change ($)   Change (%) 
Cash   11,935,746    23,394,995    (11,459,249)   (49.0)
Restricted cash   2,087,920    1,505,617    582,303    38.7 
Accounts receivable third parties   20,507,146    18,468,099    2,039,047    11.0 
Allowance for doubtful accounts   (619,062)   (427,020)   (192,042)   (45.0)
Net Accounts receivable   19,888,084    18,041,079    1,847,005    10.2 
Unbilled revenue   7,254,830    3,208,473    4,046,357    126.1 

 

Investing Activities

 

Net cash used for investing activities was $6,349,161 in the year ended December 31, 2011, compared to $8,251,791 in the same period of 2010. The unusually large amount for investing activities for 2010 was due to the business combination of BSST in August 2010, which has brought the Company revenue of $6,733,646 in 2010; as well as the land use right purchase in 2010. The cash used for investing activities for 2011 was mainly for the acquisitions of J&Y Water Division and Yuanjie Water. The total amount invested to acquire J&Y was estimated to be $1,500,000, and, for Yuanjie, $1,707,706.

 

Financing Activities

 

The cash provided by financing activities was $17,152,767 in the year ended December 31, 2011, compared to $32,867,900 provided in the same period of 2010. The large amount in 2010 was due to the April 2010 follow-on offering, which caused cash inflow of $30,251,442. The $18 million cash inflow in financing activities was mainly from local bank loans. The Company is currently not carrying any long-term debt, but is actively looking for debt financing and project financing opportunities to optimize its funding structure in the future.

 

Effect of Change in Exchange Rate Changes on Cash and Cash Equivalents

  

Net cash loss due to currency exchange was $629,233 in the year ended December 31, 2011, compared to a gain of $1,578,963 in the same period of 2010.

 

Restricted Net Assets

 

Although we do not anticipate paying dividends in the foreseeable future, our ability to pay dividends is primarily dependent on our receiving distributions of funds from our subsidiaries and VIEs, which is restricted by certain regulatory requirements. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiaries and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, our PRC Subsidiaries and VIEs are required to set aside at least 10% of their after-tax profit, after deducting any accumulated deficit, based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends. Our off-shore subsidiaries, including TIS and TTII do not have material cash obligations to third parties. Therefore, the dividend restriction does not impact the liquidity of the companies.  There is no significant difference between accumulated profit calculated pursuant to PRC accounting standards and those reflected in the financial statements prepared in accordance with U.S. GAAP. As of December 31, 2011 and 2010, restricted retained earnings were $1,866,994 and $897,382, respectively, and restricted net assets were $4,553,729 and $3,579,295, respectively. The unrestricted retained earnings as of December 31, 2011 and 2010 were $19,682,386 and $12,563,624, respectively, which were the amounts ultimately available for distribution if we were to pay dividends.

 

Working Capital and Cash Flow Management

  

As of December 31, 2011, the Company’s working capital was $3,307,338, with current assets totaling $57,755,268 and current liabilities totaling $54,447,930. Of the current assets, cash and cash equivalents was $11,935,746.

 

Due to the increase in purchase orders, the Company has experienced tremendous pressure from a shortage in working capital. The Company received net proceeds from its follow-on offering of $30,251,442 in 2010, of which it has used $27,258,865, or 89.08%, on working capital, product research and development, acquisition and sales and marketing.

 

II-9
 

  

Contractual Obligations and Commercial Commitments

 

Operating Leases

 

As of December 31, 2011, the Company had commitments under certain operating leases, which require annual minimum rental payments as follows:

 

For the Years Ended December 31,  Amount 
2012  $674,599 
2013   456,777 
2014   116,114 
Total  $1,247,490 

 

The Company’s leased properties are principally located in Beijing and are used for administration and research and development purposes. The terms of these operating leases vary from one to five years. Pursuant to lease terms, when the contracts expire, the Company has the right to extend them with new negotiated prices. The leases are renewable subject to negotiation. Rental expenses were $714,023 and $415,418 for the years ended December 31, 2011 and 2010, respectively.

 

Product Warranties

 

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

 

Capital Expenditures

  

In the past, the Company’s capital expenditures were mainly on purchases of computers and other office equipment to support its daily business activities. Its capital expenditures may increase in the near term as its business continues to grow and as it expands and improves its financial and accounting systems and infrastructure. The Company spent $2,753,181 and $6,940,687 on such capital expenditures during the years ended December 31, 2011 and 2010, respectively.

 

Seasonality

 

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

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements for either year 2011 or 2010.

 

Taxation

 

Pursuant to the new EIT Law and supplementary regulations, only high-tech companies that have been re-certified as such under the new criteria are granted the preferential enterprise income tax rate of 15%. According to an approval from the Beijing State Tax Bureau of Xicheng District, TTB received a preferential income tax rate of 7.5% from January 1, 2009 to December 31, 2011. Its income tax rate is 15% from 2012 onwards.

 

II-10
 

 

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

 

Item 7A.Quantitative and Qualitative Disclosures about Market Risk.

 

The Company is not required to provide the information required by this Item because the Company is a smaller reporting company.

 

Item 8.Financial Statements and Supplementary Data.

 

The Company’s financial statements and the related notes, together with the report of Marcum Bernstein & Pinchuk LLP and Bernstein & Pinchuk LLP are set forth following the signature pages of this report.

 

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

Not applicable.

 

Item 9A.Controls and Procedures.

 

Regulations under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

The Company conducted an evaluation, with the participation of its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of its disclosure controls and procedures as of December 31, 2011. Based on such evaluation, its Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, the Company’s disclosure controls and procedures were effective.

 

Management’s Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the U.S. generally accepted accounting principles (“U.S. GAAP”).

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

As of December 31, 2011, the Company carried out an evaluation based on the criteria for effective internal control over financial reporting established in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and SEC guidance. Based on such assessment, management concluded that its internal control over financial reporting was effective.

 

II-11
 

 

Changes in Internal Control over Financial Reporting

 

There have been no changes to its internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during the period ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

Item 9B.Other Information.

 

None.

 

II-12
 

 

PART III

 

Item 10.Directors, Executive Officers and Corporate Governance.

 

Executive Officers and Directors

 

The following table sets forth the Company’s executive officers and directors, their ages and the positions held by them:

 

Name   Age   Position
Warren Zhao(1)(7)   46   Chairman of the Board and Joint Chief Executive Officer
Phil Fan(1)(7)   46   President and Director
Gavin Cheng(1)(7)   49   Joint Chief Executive Officer and Director
Peter Dong(1)(6)   43   Chief Financial Officer and Director
Peiyao Zhang(1)(2)(4)(6)   67   Independent Director and Chairman of the Nominating Committee
Eric Hanson(1)(3)(4)(6)   57   Independent Director and Chairman of the Compensation Committee
John McAuliffe(1)(2)(5)   57   Independent Director
Peter Zhuo(1)(2)(3)(5)   40   Independent Director and Chairman of the Audit Committee
Dazhuang Guo(1)(3)(4)(5)   57   Independent Director

 

(1)The individual’s business address is c/o Tri-Tech Holding Inc., 16th Floor, Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 China
(2)Member of Audit Committee.
(3)Member of Compensation Committee.
(4)Member of Nominating Committee.
(5)Class I Director whose term expires in 2013.
(6)Class II Director whose term expires in 2014.
(7)Class III Director whose term expires in 2012.

 

Warren Zhao, Chairman of the Board of Directors and Joint Chief Executive Officer. Mr. Zhao is a founder of one of the Company’s VIEs in 2002. Prior to that, Mr. Zhao established Beijing Tranhold Automatic Control Systems and served as its general manager in 1994. From 1988 to 1993, Mr. Zhao was the manager of the research and development department at Beijing Test Control Technology Institute of Aeronautics Ministry. Mr. Zhao earned his Bachelor’s and Master’s degrees in Engineering from Northwestern Polytechnical University of China. Mr. Zhao has been chosen as a director because he is the leader of the Company and a key experienced member of management.

 

Phil Fan, President and Director. As a founder of one of the Company’s VIEs in 2003, Mr. Fan currently serves as President of the Company. Previously, Mr. Fan provided technical, engineering and management services in several U.S. engineering firms, including Black and Veatch, Parsons Brinckerhoff, Inc. and Chastain-Skillman, Inc. In addition, Mr. Fan worked as the Asia regional sales manager for Met-Pro Corporation. Mr. Fan received his Master’s and Bachelor’s degrees from Hunan University and a Master’s degree from Louisiana State University. Mr. Fan has been a registered Professional Engineer in the United States since 2001. Mr. Fan was chosen as a director because the Company can benefit from his experience and leadership in engineering and business.

 

Gavin Cheng, Joint Chief Executive Officer and Director. Mr. Cheng was appointed as the Company’s Joint Chief Executive Officer on March 13, 2012. Prior to that, Mr. Cheng was the Company’s Co-President since August 19, 2010. Mr. Cheng founded BSST in 1994 and served as its president until BSST was acquired by the Company in 2010. Prior to that, Mr. Cheng worked in research and development and project management at Beijing Test & Control Technology Institute of the Aeronautics Ministry from 1987 to 1993. Mr. Cheng graduated from Nanjing University of Aeronautics and Astronautics in 1987 with Bachelor’s and Master’s degrees in Engineering. Mr. Cheng also received his Executive MBA degree from Peking University in 2001. Mr. Cheng was chosen as a director because of his extensive experience in research and development, corporate development and management.

 

Peter Dong, Chief Financial Officer and Director. Mr. Dong has been CFO of the Company since its inception. From 2001 through 2005, Mr. Dong was the Director of South West Securities Company and Wanlian Securities Company. From 1994 to 2000, Mr. Dong was director of the equity department and asset management department of SinoChem. From 1991 through 1993, Mr. Dong was engaged in the research and development of large testing and controlling systems at Beijing Test Control Technology Institute of Aeronautics Ministry. Mr. Dong earned his Bachelor’s degree in computer science from Nanjing University of Aeronautics and Astronautics and his Master’s degree in Economics from Renmin University of China. Mr. Dong was chosen as a director because of his over 15 years of experience in the investment, financing and management of technology companies.

 

Dr. Peiyao Zhang, Independent Director. Dr. Zhang has been the Company’s Director since 2009. Dr. Zhang served as the Deputy Director of the SINOPEC Petrochemical Science and Engineering Research Institute from 1999 to 2005, where he was responsible for technical license management. Dr. Zhang received his Bachelor’s degree from Tsinghua University in 1967 and Ph.D. degree in chemical engineering from the Sweden Royal Institute of Technology in 1988. Dr. Zhang has been elected as a Director because the Company can benefit from his engineering and leadership experience.

 

III-1
 

 

Peter Zhuo, Independant Director. Mr. Zhuo was elected as a Director of the Company in 2010. Presently, Mr. Zhuo serves as Chief Financial Officer for Jing-Jin Electric Technologies (Beijing) Co., Ltd. He worked as Vice President and Chief Accounting Officer for Vanceinfo Techology inc. (NYSE:VIT), Chief Financial Officer for Ebis Company Limited, a China-based IT company, a controller at Morgan Stanley Properties (China) Co. Ltd, an auditor with Arthur Andersen’s Beijing and Sydney offices, and an auditor for PriceWaterhouseCoopers Beijing office. A China Certified Public Accountant, he has passed the U.S. CPA examination and the Chinese bar examination. He obtained a Master’s degree in law from University of Southern California, Gould School of Law and a Bachelor’s degree from the Central University of Finance & Economics in China. Mr. Zhuo was elected as a Director because of his broad accounting and financial experience.

 

Da-Zhuang Guo, Ph.D. Independant Director. Mr. Guo has served as Director of the Company since 2010. Presently, he also serves as the general manager of Net Beat Group Limited. Dr. Guo was the Asia-Pacific regional manager for Advantica Ltd., the greater China chief representative for LogicaCMG Pty Ltd. Dr. Guo received his Ph.D. degree from the University of Queensland, Australia, and Bachelor’s degree from Beijing University of Chemical Technology. Mr. Guo was elected as a Director because of his industry experience.

 

John McAuliffe, Independent Director. Presently, Mr. McAuliffe is a senior banker at Financial West Securities. He was a Managing Director at the Investment Banking Department of Newbridge Securities Corp., the lead banker for Able Labs, M-Systems, U.S. Teleconstructors, MRV Communications and Videospection. Mr. McAuliffe was head of Institutional Sales and branch manager of H.J. Meyers. Mr. McAuliffe has been an investment banker since 1990, and has participated in and led in excess of 200 financing transactions in his career. Mr. McAuliffe received his Bachelor of Sciences degree from the State University of New York at Brockport. Mr. McAuliffe has been elected as a Director because of his financial experience.

 

Eric R. Hanson, Independent Director. In 1986, Mr. Hanson started U.S. Strategies Corp. and has served as its Chairman and CEO. Mr. Hanson is also the founder and current Chairman of the Rural Broadband Corporation of America. In addition, Mr. Hanson has been involved in financing for more than 80 companies. He has served on the board of numerous public and private companies. Over the years, his charitable involvements range from serving on a metropolitan development board, supporting civic opera, and serving as National Chairman of the National Association on Fetal Alcohol Syndrome. Mr. Hanson serves as Chairman of the US-Panama Business Council and as a member on the International Board for the Irish Chamber Orchestra. Mr. Hanson attended the University of Alabama, Birmingham. Mr. Hanson has been elected as a Director because of his financial experience.

 

Employment Agreements

 

The Company’s employment agreements with its executive officers generally provide for a term of five years with a monthly salary. The agreements also provide that executive officers are to work an average of forty hours per week and are entitled to all legal holidays as well as other paid leave in accordance with PRC labor laws and regulations and the internal work policies. Under these laws and regulations, the employment agreements with the executive officers can be terminated for cause without further compensation to them. The employment agreements also provide for that the Company will pay for all mandatory social security programs for its executive officers in accordance with Chinese regulations. During the term of employment and for two years afterward, the executive officers are subject to non-disclosure agreements.

 

Stock Option Pool

 

The Company’s 2009 Stock Incentive Plan authorizes the issuance of up to 525,500 ordinary shares to its employees and directors. Pursuant to this plan, the Company may grant options to its employees and directors to purchase its ordinary shares. The compensation committee of the board of directors will administer the plan. The exercise price of the options will be equal to the fair market value of the Company’s ordinary shares on the date of grant. In addition, all options under the pool will be vested over five years (20% per year) and the exercise term shall not be longer than ten years. As of the date of this 10-K report, the Company has issued all options available under the 2009 Stock Incentive Plan.

 

At the 2011 annual shareholder meeting, the Company’s 2011 Share Incentive Plan was approved by its shareholders. The total number of shares reserved and available for grant and issuance is 750,000. The form of award can be option or share. The exercise price of the incentive stock option will not be less than the fair market value and nonqualified incentive stock option will not be less than 110% of the fair market value on the date of grant. This plan shall be administered by the Compensation Committee.

 

III-2
 

 

Board of Directors and Board Committees

 

The Company’s board of directors currently consists of nine directors. The directors are divided into three classes, as nearly equal in number as the then total number of directors permits. Class III directors shall face reelection at the Company’s annual general meeting of shareholders in 2012 and every three years thereafter. Class I directors shall face re-election at the annual general meeting of shareholders in 2013 and every three years thereafter. Class II directors shall face re-election at the annual general meeting of shareholders in 2014 and every three years thereafter.

 

If the number of directors changes, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly as possible. Any additional director of a class elected to fill a vacancy resulting from an increase in such class will hold office for a term that coincides with the remaining term of that class. Decreases in the number of directors will not shorten the term of any incumbent director. These provisions could make it more difficult for any third party to gain control of the Company by making it difficult to replace members of the board of directors.

 

A director may vote in respect of any contract or transaction in which he is interested, provided, however that the nature of the interest of any director in any such contract or transaction shall be disclosed by him at or prior to its consideration and any vote on that matter. A general notice or disclosure to the board of directors or otherwise contained in the minutes of a meeting or a written resolution of the board of directors or any committee thereof of the nature of a director’s interest shall be sufficient disclosure and after such general notice it shall not be necessary to give special notice relating to any particular transaction. A director may be counted for a quorum upon a motion in respect of any contract or arrangement which he shall make with the Company, or in which he is so interested and may vote on such motion.

 

There are no membership qualifications for directors. Further, there are no share ownership qualifications for directors unless so fixed by the Company in a general meeting.

 

Mr. Warren Zhao currently holds both the positions of chief executive officer and chairman of the board. These two positions have not been consolidated into one position; Mr. Zhao simply holds both positions at this time. The Company does not have a lead independent director because of the foregoing reason and also because the Company believes its independent directors are encouraged to freely voice their opinions on the board. The Company believes this leadership structure is appropriate because it is a smaller reporting company that first became listed on a public exchange in 2009; as such the Company deems it appropriate to be able to benefit from the guidance of Mr. Zhao as both its principal executive officer and chairman of the Board.

 

The Company’s board of directors plays a significant role in its risk oversight. The board of directors makes all important company decisions. As such, it is important for the Company to have its chief executive officer serve on the board as he plays a key role in the risk oversight. As a smaller reporting company, the Company believes it is appropriate to have the involvement and input of all of its directors in risk oversight matters.

 

Currently, three committees have been established under the board: the audit committee, the compensation committee and the nominating committee. All members of each committee are independent directors. The audit committee is responsible for overseeing the accounting and financial reporting processes of the Company and audits of the financial statements of the Company, including the appointment, compensation and oversight of the work of its independent auditors. The compensation committee of the board reviews and makes recommendations to the board regarding the compensation policies for the officers and all forms of compensation, and also administers the incentive compensation plans and equity-based plans (but the board retains the authority to interpret those plans). The nominating committee of the board is responsible for the assessment of the performance of the board, considering and making recommendations to the board with respect to the nominations or elections of directors and other corporate governance issues. The nominating committee will consider the diversity, age, skills and experience when nominating new directors.

 

There are no other arrangements or understandings pursuant to which the directors are selected or nominated.

 

Duties of Directors

 

Under Cayman Islands law, the directors have a fiduciary duty to the Company. They have to act in good faith in their dealings with or on behalf of the Company and exercise their powers and fulfill the duties of their office honestly. This duty has four essential elements:

 

a duty to act in good faith in the best interests of the Company;
a duty not to personally profit from opportunities that arise from the office of director;
a duty to avoid conflicts of interest; and
a duty to exercise powers for the purpose for which such powers were intended.

 

III-3
 

 

In general, Cayman Islands Law imposes various duties on directors of a company with respect to certain matters of management and administration of the company. In addition to the remedies available under general law, the Cayman Islands Companies Law imposes fines on directors who fail to satisfy some of these requirements. However, in many circumstances, an individual is only liable if he is knowingly guilty of the default or knowingly and willfully authorizes or permits the default. In comparison, under Delaware law, the business and affairs of a corporation are managed by or under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. In addition, under Delaware law, a party challenging the propriety of a decision of the directors bears the burden of rebutting the applicability of the presumptions afforded to directors by the “business judgment rule.” If the presumption is not rebutted, the business judgment rule protects the directors and their decisions, and their business judgments will not be second guessed. If the presumption is rebutted, the directors bear the burden of demonstrating the entire fairness of the relevant transaction. Notwithstanding the foregoing, Delaware courts subject directors’ conduct to enhanced scrutiny in respect of defensive actions taken in response to a threat to corporate control and approval of a transaction resulting in a sale of control of the corporation.

 

Limitation of Director and Officer Liability

 

Pursuant to the Company’s Memorandum and Articles of Association, every director or officer and the personal representatives of the same shall be indemnified and secured harmless out of the assets and funds against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by him or her in or about the conduct of the Company’s business or affairs or in the execution or discharge of his or her duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by him in defending (whether successfully or otherwise) any civil proceedings concerning the Company or its affairs in any court whether in the Cayman Islands or elsewhere. No such director or officer will be liable for: (a) the acts, receipts, neglects, defaults or omissions of any other such director or officer or his or her agent, (b) any loss on account of defect of title to any of the Company’s property, (c) account of the insufficiency of any security in or upon which any of the money shall be invested, (d) any loss incurred through any bank, broker or other similar person, (e) any loss occasioned by any negligence, default, breach of duty, breach of trust, error of judgment or oversight on his or her part, or (f) any loss, damage or misfortune whatsoever which may happen in or arise from the execution or discharge of the duties, powers authorities, or discretions of his or her office or in relation thereto, unless the same shall happen through his or her own dishonesty, gross negligence or willful default.

 

Involvement in Certain Legal Proceedings

 

To the best of the Company’s knowledge, none of its directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in the discussion below in “Related Party Transactions,” none of the directors, director nominees or executive officers has been involved in any transactions with the Company or any of the directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

Promoters and Certain Control Persons

 

The Company did not have any promoters at any time during the past five fiscal years. Except as set forth in the discussion above, none of its directors or officers has been involved in any transactions with the Company or any of its directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

Code of Ethics

 

The Company has adopted a code of ethics and has filed a copy of the Code of Ethics with the Commission in its registration statement on Form S-1, File no. 333-158393, filed on April 3, 2009, as amended.

 

Material Changes in Manner of Recommending Board Nominees

 

None.

 

Audit Committee

 

The board of directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15). The Company has an audit committee, consisting solely of independent directors of the Company, Mr. Peter Zhuo, Mr. John McAuliffe and Dr. Peiyao Zhang. Mr. Zhuo qualifies as the audit committee financial expert. The Company’s audit committee charter is available on the Company’s website, www.tri-tech.cn.

 

III-4
 

 

Item 11.Executive Compensation.

 

Executive Compensation

 

The following table shows the annual compensation paid by the Company for the years ended December 31, 2010 and 2011 to Warren Zhao and Gavin Cheng, the Joint Chief Executive Officers, and Phil Fan, President. No other officer had total compensation during either of the previous two years of more than $100,000.

 

Summary Executive Compensation Table  
Name and principal position  Year   Salary   Bonus   Option Awards   All Other
Compensation
   Total 
Warren Zhao,   2011   $110,000   $   $   $   $110,000 
Joint Chief Executive Officer   2010   $19,627   $90,373   $   $   $110,000 
Gavin Cheng   2011   $110,000   $   $   $   $110,000 
Joint Chief Executive Officer   2010   $10,706   $22,800   $   $   $33,506 
Phil Fan,   2011   $102,000   $   $   $   $102,000 
President   2010   $66,000   $   $   $   $66,000 

 

The employment agreements with Messrs. Zhao, Dong and Fan have been renewed on February 10, 2011 with mutual agreements between the Company and each of them. The employment agreements are scheduled to expire on February 9, 2016. Mr. Cheng’s employment agreement commenced on September 1, 2010 and is scheduled to expire on August 31, 2015.

 

The following table shows outstanding equity awards to Mr. Zhao, the Principal Executive Officer, Mr. Dong, the Principal Financial Officer, and Mr. Fan, President, as of the end of fiscal year 2011.

 

Outstanding Equity Awards at Fiscal Year End

 

Name  Number of
Securities
Underlying
Unexercised
Options
(#)
   Option
Exercise
Price ($)
   Option
Expiration Date
($)
   Equity Incentive Plan
Awards: Number of
Unearned Shares,
Units or Other Rights
that have not Vested
(#)
   Equity Incentive Plan
Awards: Market or
Payout Value of
Unearned Shares,
Units or other Rights
that have not Vested
($)
 
Warren Zhao,
Principal Executive Officer
   126,120(1)  $6.75    September 9, 2019    94,590(1)  $436,060(2)
Peter Dong,
Principal Financial Officer
   63,060(1)  $6.75    September 9, 2019    47,295(1)  $218,030(3)
Phil Fan,
President
   42,040(1)  $6.75    September 9, 2019    31,530(1)  $145,353(4)

 

 

(1)The options granted to Messrs. Zhao, Dong and Fan under an equity incentive plan began to vest on September 9, 2010 at a rate of 20 percent (20%) per year.
(2)$436,060 = 94,590 x $4.61 (closing price on December 30, 2011).
(3)$218,030 = 47,295 x $4.61 (closing price on December 30, 2011).
(4)$145,353 = 31,530 x $4.61 (closing price on December 30, 2011).

 

Director Compensation

 

All Directors hold office until the next Annual Meeting of Shareholders at which their respective class of Directors is re-elected and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the Board of Directors. Employee Directors do not receive any compensation for their services. Non-employee Directors are entitled to receive $10,000 or RMB 48,000 per year for serving as Directors and may receive option or share grants from the Company. In addition, non-employee Directors are entitled to receive compensation for their actual travel expenses for each Board of Directors meeting attended.

 

III-5
 

 

Summary Director Compensation Table
 
Name  Director Fees earned
or paid in cash
   Option Awards(1)   Total(2) 
Warren Zhao(3)  $0   $0   $0 
Phil Fan(3)  $0   $0   $0 
Gavin Cheng(3)  $0   $0   $0 
Peter Dong(3)  $0   $0   $0 
Peiyao Zhang  $7,137   $0   $7,137 
Peter Zhuo  $7,137   $0   $7,137 
Dazhuang Guo  $7,137   $0   $7,137 
Eric Hanson(4)  $833   $0   $833 
John McAuliffe(4)  $1,667   $0   $1,667 
Robert Kraft(5)  $8,333   $0   $8,333 
Xiaoping Zhou(6)  $7,137   $0   $7,137 

 

 

(1)On September 9, 2009, stock options were awarded to Directors as follows: 157,650 stock options were awarded to Warren Zhao, 3,000 options were awarded to Xiaoping Zhou, 3,000 options were awarded to Peiyao Zhang, and 6,000 options were awarded to Robert Kraft, 78,825 options were awarded to Peter Dong and 52,550 options were awarded to Phil Fan. Such options have a grant date fair value of $6.75 per share. Messrs. Kraft and Zhou forfeited their holdings of options due to their departures from the board of directors. As of the date of this report, their holding of options in the number of 6,000 and 3,000 returned to the option pool.
(2)None of the Directors received any ordinary share awards, nonqualified deferred compensation earnings or non-equity incentive plan compensation in fiscal year 2011.
(3)Received payment in his capacity as an officer of the Company and/or subsidiaries/affiliates but did not receive any compensation for serving as a director of the Company.
(4)Messrs. Hanson and McAuliffe became directors on November 30, 2011.
(5)Mr. Kraft ceased to be a director of the Company on October 28, 2011.
(6)Mr. Zhou ceased to be a director of the Company on November 30, 2011.

 

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Securities authorized for issuance under equity compensation plans

 

The following table presents information as of December 31, 2011 with respect to the Company’s ordinary shares that may be issued under the Company’s existing equity compensation plans, including the 2009 Share Incentive Plan and the 2011 Share Incentive Plan. Each of these plans has been approved by the Company’s shareholders. The Company does not maintain any equity incentive plans that have not been approved by shareholders.

 

Plan category  Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights (a)
   Weighted-average
exercise price of
outstanding options,
warrants and rights (b)
   Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a))  (c)
 
Equity compensation approved by security holders   426,400   $6.75    755,400(1)

 

(1) Includes 5,400 options under the 2009 Share Incentive Plan and 750,000 options under the 2011 Share Incentive Plan.

 

Principal Shareholders

 

The following table sets forth information with respect to beneficial ownership of the Company’s ordinary shares as of the date of this report by:

 

Each person who is known by the Company to beneficially own more than 5% of the Company’s outstanding ordinary shares;

 

Each of its Directors and named Executive Officers; and

 

All Directors and named Executive Officers as a group.

 

III-6
 

 

The number and percentage of ordinary shares beneficially owned are based on 8,182,199 ordinary shares outstanding as of the date of this report. Information with respect to the beneficial ownership has been furnished by each Director, Officer or beneficial owner of more than 5% of the Company’s ordinary shares. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of ordinary shares beneficially owned by a person listed below and the percentage ownership of such person, ordinary shares underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of March 26, 2012 are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to this table, or as required by applicable community property laws, all persons listed have sole voting and investment power for all ordinary shares shown as beneficially owned by them. Unless otherwise indicated in the footnotes, the address for each principal shareholder is in the care of Tri-Tech Holding Inc., 16th Floor, Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 P.R.C. As of the date of this annual report, the Company had 16 shareholders of record.

 

Named Executive Officers and Directors 

Amount of

Beneficial Ownership(1)

  

Percentage

Ownership(2)

 
Warren Zhao, Joint Chief Executive Officer and Director(3)   1,218,435    14.9%
Peter Dong, Chief Financial Officer(4)   1,564,405    19.1%
Gavin Cheng, Joint Chief Executive Officer and Director(6)   260,000    3.2%
Phil Fan, President and Director(7)   269,870    3.3%
Peiyao Zhang, Director(8)   1,200    * 
Peter Zhuo, Director       * 
Dazhuang Guo, Director       * 
Eric Hanson, Director       * 
John McAuliffe, Director       * 
All Directors and Executive Officers as a Group(9)   3,255,505    39.8%
Tranhold Investment Inc.   1,155,375    14.1%
Yanyu Investment Inc.   1,284,025    15.7%
David Hu(10)   1,298,300    15.9%
RHJ International SA(11)   715,306    8.7%

 

*Less than 1%.
(1)Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the ordinary shares.
(2)The number of ordinary shares outstanding used in calculating the percentage for each listed person excludes the ordinary shares underlying options held by such person.
(3)Includes (i) the sole power to direct the voting of the 1,155,375 shares held by Tranhold Investment Inc, (ii) the power to direct the voting of 31,530 shares from exercised options, and (iii) vested options to purchase 31,530 ordinary shares.
(4)Includes (i) the sole power to direct the voting of the 248,850 shares held by FLYY Investment Inc., (ii) the shared power to direct the voting of the 1,284,025 ordinary shares held by Yanyu Investment Inc, (iii) the power to direct the voting of 15,765 shares from exercised options, and (iv) vested options to purchase 15,765 ordinary shares.
(6)Includes the shared power to direct the voting of the 260,000 shares held by Main Bright Investments Limited, whch is shared with another person.
(7)Includes (i) the sole power to direct the voting of the 248,850 shares held by Allied Investment Consultation, LLC, (ii) the power to direct the voting of 10,510 shares from exercised options, and (iii) vested options to purchase 10,510 ordinary shares.
(8)Includes (i) the power to direct the voting of 600 shares from exercised options and (ii) vested options to purchase 600 ordinary shares.
(9)One or more of the directors and executive officers have (i) the sole power to direct the voting of (a) the 248,850 shares held by FLYY Investment Inc., (b) the 1,155,375 shares held by Tranhold Investment Inc., (c) the 248,850 shares held by Allied Investment Consultation Inc., and (d) the 260,000 shares held by Main Bright Investments Limited., and (ii) shared power to direct the voting of the 1,284,025 shares held by Yanyu Investment Inc.
(10)Includes (i) the shared power to direct the voting of the 1,284,025 shares held by Yanyu Investment Inc., the voting power of which Mr. Hu shares with 17 other individual owners, and (ii) the power to direct the voting of 14,275 shares from exercised options.
(11)According to Schedule 13G/A filed on February 14, 2012, SEC Accession No. 0001193125-12-061230, RHJ International SA, Kleinwort Benson Group Limited and Kleinwort Benson Investors Dublin Limited share the power to direct the voting and disposition of 715,306 shares.

 

III-7
 

 

Item 13.Certain Relationships and Related Transactions, and Director Independence.

 

Related Party Transactions

 

During the fiscal year ended December 31, 2011, the Company did not conduct any transactions subject to the disclosure requirements under Item 404(a) of Regulation S-K.

 

Promoters and Certain Control Persons

 

The Company did not have any promoters at any time during the past five fiscal years. Except as set forth in the discussion above, none of the Company’s Directors or officers has been involved in any related transactions which are required to be disclosed pursuant to the rules and regulations of the SEC.

 

Director Independence

 

The Board of Directors maintains a majority of independent directors who are deemed to be independent under the definition of independence provided by NASDAQ Stock Market Rule 4200(a)(15).

 

Item 14.Principal Accountant Fees and Services.

 

Marcum Bernstein & Pinchuk LLP, formerly Bernstein and Pinchuk LLP, was appointed by the Company to serve as its independent registered public accounting firm for fiscal year 2011. Audit services provided by Marcum Bernstein & Pinchuk LLP for 2011 included the examination of the consolidated financial statements of the Company and services related to periodic filings made with the SEC. 

  

Fees Paid To Independent Registered Public Accounting Firm

 

Audit Fees

 

During fiscal year 2011, Marcum Bernstein & Pinchuk LLP’s fees for the annual audit of the Company’s financial statements and the quarterly reviews of the financial statements were $170,000. During fiscal year 2010, Bernstein & Pinchuk LLP’s fees for the annual audit of the financial statements and the quarterly reviews of the financial statements were $155,000.

 

Audit Related Fees

 

During fiscal year 2011, the Company has not paid Marcum Bernstein & Pinchuk LLP for audit-related services. During fiscal year 2010, the Company has not paid Bernstein & Pinchuk LLP for audit-related services.

 

Tax Fees

 

The Company has not paid Marcum Bernstein & Pinchuk LLP or Bernstein & Pinchuk LLP for tax services in fiscal years 2011 and 2010.

 

All Other Fees

 

In fiscal 2011, the Company paid Marcum Bernstein & Pinchuk LLP $2,000 in fees for its work in relation to the Company’s filing of registration statement on Form S-8 and $6,400 for its work in relation to the Company’s filing of registration statement on Form S-3 and amendments, collectively. The Company has not paid Bernstein & Pinchuk LLP for any other services in fiscal 2010.

 

Audit Committee Pre-Approval Policies

 

Before Marcum Bernstein & Pinchuk LLP was engaged by the Company to render audit or non-audit services, the engagement was approved by the Company’s audit committee. All services rendered by Marcum Bernstein & Pinchuk LLP have been so approved.

 

III-8
 

 

Item 15.Exhibits, Financial Statement Schedules.

 

The following documents are filed herewith:

 

Exhibit    
Number   Document
     
3(i).1   Articles of Association of the Registrant (1)
     
3(i).2   Amended and Restated Articles of Association of the Registrant (1)
     
3(ii).1   Memorandum of Association of the Registrant (1)
     
3(ii).2   Amended and Restated Memorandum of Association of the Registrant (1)
     
4.1   Specimen Share Certificate (1)
     
10.1   Translation of Form of Employment Agreement between Registrant and Executive Officer of the Registrant (1)
     
10.2   Translation of Exclusive Technical and Consulting Service Agreement for Tranhold (1)
     
10.3   Translation of Management Fee Payment Agreement for Tranhold (1)
     
10.4   Translation of Proxy Agreement for Tranhold (1)
     
10.5   Translation of Equity Interest Pledge Agreement for Tranhold (1)
     
10.6   Translation of Exclusive Equity Interest Purchase Agreement for Tranhold (1)
     
10.7   Translation of Exclusive Technical and Consulting Service Agreement for Yanyu (1)
     
10.8   Translation of Management Fee Payment Agreement for Yanyu (1)
     
10.9   Translation of Proxy Agreement for Yanyu (1)
     
10.10   Translation of Equity Interest Pledge Agreement for Yanyu (1)
     
10.11   Translation of Exclusive Equity Interest Purchase Agreement for Yanyu (1)
     
10.14   Translation of Operating Agreement for Yanyu (1)
     
10.15   Translation of Operating Agreement for Tranhold (1)
     
10.16   2011 Share Incentive Plan (3)
     
21.1   Subsidiaries of the Registrant (2)
     
31.1   Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3)
     
31.2   Certifications pursuant to Rule 13a-14(a) or 15(d)-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (3)
     
32.1   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (4)
     
32.2   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (4)
     
101.INS   XBRL Instance Document(4)
     
101.SCH   XBRL Taxonomy Extension Schema Document(4)
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document(4)
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document(4)
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document(4)
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document(4)

 

 

(1)Incorporated by reference to the registrant’s registration statement on Form S-1, File no. 333-158393, filed on April 3, 2009, as amended.
(2)Incorporated by reference to the registrant’s quarterly report on Form 10-Q, SEC Accession No. 0001144204-11-064756, filed on November 15, 2011.
(3)Filed herewith.
(4)Furnished herewith.

 

III-9
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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, in Beijing, China, on March 26, 2012.

 

  TRI-TECH HOLDING INC.
     
March 26, 2012 By: /s/ WARREN ZHAO
    Warren Zhao
    Chief Executive Officer
    (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on March 26, 2012.

 

Signature   Title
     
/s/ WARREN ZHAO   Joint Chief Executive Officer and Director
Warren Zhao   (Principal Executive Officer)
     
/s/ PETER DONG   Chief Financial Officer and Director
Peter Dong   (Principal Accounting and Financial Officer)
     
/s/ GAVIN CHENG   Joint Chief Executive Officer and Director
Gavin Cheng    
     
/s/ PHIL FAN   President and Director
Phil Fan   (Authorized Representative in the United States)
     
/s/ DA-ZHUANG GUO   Director
Da-Zhuang Guo    
     
/s/ PEIYAO ZHANG   Director
Peiyao Zhang    
     
/s/ PETER ZHUO   Director
Peter Zhuo    
     
/s/ ERIC HANSON   Director
Eric Hanson    
     
/s/ JOHN MCAULIFFE   Director
John McAuliffe    

 

Signature-1
 

  

TRI-TECH HOLDING INC. AND SUBSIDIARIES

 

Financial Statements

 

For the years ended December 31, 2011 and 2010

 

 
 

 

TRI-TECH HOLDING INC. AND SUBSIDIARIES

Index to Financial Statements

 

  Page
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS F-2 – F-3
CONSOLIDATED BALANCE SHEETS F-4
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME F-5
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 – F-32

 

F-1
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Tri-Tech Holding Inc.

 

We have audited the accompanying consolidated balance sheet of Tri-Tech Holding, Inc. and Subsidiaries (the “Company”) as of December 31, 2011, and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of December 31, 2011, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Marcum Bernstein & Pinchuk llp

 

New York, NY

 

March 26, 2012

 

 

 

 

 

 

 

 


NEW YORK OFFICE 7 Penn Plaza Suite 830 New York, New York 10001 Phone 646.442.4845 Fax 646.349.5200 marcumbp.com

 

F-2
 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Tri-Tech Holding Inc.

 

We have audited the accompanying consolidated balance sheet of Tri-Tech Holding Inc. and Subsidiaries (“the Company”) as of December 31, 2010, and the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for the year ended December 31, 2010. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010, and the results of its operations and its cash flows for the year ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Bernstein & Pinchuk LLP

 

New York, NY

 

March 28, 2011

 

 

F-3
 

 

TRI-TECH HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   December 31,   December 31, 
   2011   2010 
ASSETS          
Current assets          
Cash  $11,935,746   $23,394,995 
Restricted cash   2,087,920    1,505,617 
Accounts receivable, net of allowance for doubtful accounts of $619,062 and $427,020 as of December 31, 2011 and 2010, respectively   19,888,084    18,041,079 
Unbilled revenue   7,254,830    3,208,473 
Other receivables   2,761,548    1,427,050 
Inventories   7,705,752    5,886,619 
Deposits on projects   1,212,691    591,505 
Prepayments to suppliers and subcontractors   4,908,697    1,311,844 
Total current assets   57,755,268    55,367,182 
Long-term unbilled revenue   59,298,740    15,936,739 
Plant and equipment, net   1,436,838    1,045,150 
Construction in progress   4,566,934     
Intangible assets, net   11,609,662    4,331,261 
Long-term restricted cash   2,541,958    203,418 
Long-term prepayment on land use right purchasing       5,284,854 
Goodwill   1,441,278    594,099 
Total Assets  $138,650,678   $82,762,703 
LIABILITIES AND EQUITY          
Current liabilities          
Accounts payable  $11,401,187   $2,721,643 
Notes payable   1,176,197     
Costs accrual on projects   19,402,047    9,198,420 
Advance from customers   1,886,607    1,650,174 
Other payables   10,784,132    2,717,502 
Accrued liabilities   379,357    294,809 
Payable on investment consideration   895,000     
Income taxes payable   154,519    5,961 
Deferred income taxes   358,519    276,658 
Short-term bank borrowing   8,010,365     
Current portion of long-term liabilities       14,994 
Total current liabilities   54,447,930    16,880,161 
Noncurrent deferred income taxes   3,455,823    1,561,476 
Total Liabilities   57,903,753    18,441,637 
Equity          
Tri-Tech Holding Inc. shareholders' equity          
Ordinary shares ($0.001 par value, 30,000,000 shares authorized; 8,203,299 and 8,051,833 shares issued as of December 31, 2011 and 2010, respectively)   8,203    8,052 
Additional paid-in-capital   48,772,307    47,278,042 
Statutory reserves   1,866,994    897,382 
Retained earnings   19,682,386    12,563,624 
Treasury shares (21,100 shares in treasury as of December 31, 2011 and 2010, respectively)   (193,750)   (193,750)
Accumulated other comprehensive income   4,593,046    1,739,799 
Total Tri-Tech Holding Inc. shareholders' equity   74,729,186    62,293,149 
Noncontrolling interests   6,017,739    2,027,917 
Total shareholders' equity   80,746,925    64,321,066 
Total liabilities and equity  $138,650,678   $82,762,703 

 

See notes to consolidated financial statements

 

F-4
 

 

TRI-TECH HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

   For The Years Ended December 31 
   2011   2010 
Revenues:          
System integration  $82,401,473   $38,821,190 
Hardware products   3,460,610    3,202,318 
Software products   10,838    1,511,209 
Total revenues   85,872,921    43,534,717 
Cost of revenues          
System integration   61,677,449    26,061,987 
Hardware products   2,338,269    2,665,441 
Cost of software   1,734    40,316 
Total cost of revenues   64,017,452    28,767,744 
Gross profit   21,855,469    14,766,973 
Operating expenses:          
Selling and marketing expenses   2,164,363    1,271,446 
General and administrative expenses   8,772,446    4,562,042 
Research and development expenses   179,396    279,477 
Total operating expenses   11,116,205    6,112,965 
Income from operations   10,739,264    8,654,008 
Other (expenses) income:          
Other income   607,674    7,522 
Interest income   284,950    66,091 
Interest expense   (695,475)   (3,024)
Tax rebates       147,595 
Investment loss   (6,985)    
Fair value change on contingent investment consideration   (200,000)    
Total other (expenses) income, net   (9,836)   218,184 
Income before provision for income taxes   10,729,428    8,872,192 
Provision for income taxes   1,958,864    1,424,858 
Net income   8,770,564    7,447,334 
Less: Net income attributable to non-controlling interests   682,190    370,326 
Net income attributable to Tri-Tech Holding Inc. shareholders  $8,088,374   $7,077,008 
Other comprehensive income          
Foreign currency translation adjustment   3,052,049    1,354,504 
Comprehensive income   11,822,613    8,801,838 
Less: Comprehensive income attributable to non-controlling interests   880,992    362,128 
Comprehensive income attributable to Tri-Tech Holding Inc.  $10,941,621   $8,439,710 
Net income attributable to Tri-Tech Holding Inc. shareholders per share:          
Basic  $0.99   $1.00 
Diluted  $0.98   $0.98 
Weighted average number of ordinary shares outstanding:          
Basic   8,142,867    7,102,436 
Diluted   8,238,291    7,208,969 

 

See notes to consolidated financial statements

 

F-5
 

 

TRI-TECH HOLDING INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

                           Accumulated         
                           other       Total 
   Ordinary share   Additional   Retained earnings   Treasury   comprehensive   Noncontrolling   shareholders’ 
   Shares   Amount   paid-in-capital   Statutory reserves   Unrestricted   shares   Income   interests   equity 
BALANCE, January 1, 2010   5,255,000   $ 5,255   $ 12,942,650   $50,655   $6,333,343   $   $377,097   $155,831   $19,864,831 
Ordinary share issuance   2,626,833    2,627    32,583,615                        32,586,242 
Capital injection by minority shareholder                               1,509,958    1,509,958 
Warrants exercised by Aderson & Strudwick Inc.   170,000    170    1,376,830                        1,377,000 
Warrants share-based payment to Hawk Associates Inc.           3,944                        3,944 
Share-based compensation on option issued to employees           371,003                        371,003 
Treasury shares                       (193,750)           (193,750)
Net income                   7,077,008            370,326    7,447,334 
Transfer to statutory reserve               846,727    (846,727)                
Foreign currency translation adjustment                           1,362,702    (8,198)   1,354,504 
BALANCE, January 1, 2011   8,051,833   $8,052   $ 47,278,042   $897,382   $12,563,624   $(193,750)  $1,739,799   $2,027,917    64,321,066 
Ordinary share issuance in business combination   57,766    57    429,919                        429,976 
Capital injection by minority shareholder                               3,108,830    3,108,830 
Warrants share-based payment to Hawk Associates Inc.           60,962                        60,962 
Share-based compensation on option issued to employees           371,003                        371,003 
Exercise of share-based compensation on option issued to employees   93,700    94    632,381                        632,475 
Net income                   8,088,374            682,190    8,770,564 
Transfer to statutory reserve               969,612    (969,612)                
Foreign currency translation Adjustment                           2,853,247    198,802    3,052,049 
                                              
BALANCE, December 31, 2011   8,203,299   $8,203   $ 48,772,307   $1,866,994   $19,682,386   $(193,750)  $4,593,046   $6,017,739   $80,746,925 

 

See notes to consolidated financial statements

 

F-6
 

 

TRI-TECH HOLDING INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For The Years Ended December 31, 
   2011   2010 
Cash flows from operating activities:          
Net income before allocation to noncontrolling interests  $8,770,564   $7,447,334 
Adjustments to reconcile net income to net cash used in operating activities:          
Amortization of option share-based compensation   371,003    371,003 
Amortization of warrants share-based payments   60,962    3,944 
Depreciation and amortization   773,604    325,256 
Provision for doubtful accounts   163,575    205,781 
Fair value change on contingent investment consideration   200,000     
Loss on disposal of plant and equipment   8,645     
Deferred income taxes   1,423,523    1,067,347 
Loss on investment in joint venture   6,985     
Changes in operating assets and liabilities:          
Accounts receivable   (881,733)   (11,864,811)
Unbilled revenue   (45,295,256)   (13,004,198)
Other receivables   (186,440)   (349,691)
Inventories   (1,021,897)   (232,905)
Prepaid expenses   (157,307)    
Prepayments   (3,225,525)   629,752 
Accounts payable   5,877,391    5,087,655 
Notes payable   1,147,442     
Cost accrual on projects   9,484,981     
Customer deposits   (29,143)   118,217 
Billings in excess of revenue       (8,725)
Other payables   565,736    (188,788)
Accrued liabilities   104,722    163,659 
Taxes payable   204,546    257,629 
Net cash used in operating activities   (21,633,622)   (9,971,541)
Cash flows from investing activities:          
Restricted cash   (2,785,325)   (41,396)
Payment in business acquisition   (488,000)   (1,447,000)
Payment in investment in joint venture   (6,985)    
Cash acquired from business acquisition.   829,802    177,292 
Cash proceeds from disposal of plant and equipment   4,804     
Payment to purchase plant and equipment   (268,532)   (621,327)
Payment to purchase intangible assets   (165,279)   (1,149,112)
Addition of construction in progress   (2,319,370)    
Payment to purchase land use right       (5,170,248)
Loan to third-party companies   (1,150,276)    
Net cash used in investing activities   (6,349,161)   (8,251,791)
Cash flows from financing activities:          
Proceeds from exercising options into ordinary shares   454,009    1,377,000 
Proceeds from short-term bank borrowing   7,814,533     
Proceeds from the issuance of ordinary share       30,251,442 
Capital injection by minority shareholder   1,737,115    1,477,214 
Payment of installment of purchasing vehicle   (15,374)   (44,006)
Payment in repurchase treasury shares       (193,750)
Proceeds from loan from third-party companies   715,776     
Proceeds from loan from noncontrolling interest investor   6,446,708     
Net cash provided by financing activities   17,152,767    32,867,900 
Effect of exchange rate fluctuation on cash and cash equivalents   (629,233)   1,578,963 
Net (decrease) increase in cash and cash equivalents   (11,459,249)   16,223,531 
Cash and cash equivalents, beginning of period  $23,394,995   $7,171,464 
Cash and cash equivalents, end of period  $11,935,746   $23,394,995 
Supplemental disclosure of cash flow information:          
Income taxes paid  $363,486   $200,853 
Interest paid on debt  $189,609   $3,024 
           
Supplemental disclosure of noncash investing activity:          
Addition in land use right by transferring from long-term prepayment  $5,418,963   $ 
Addition in construction in progress by transferring from accounts payable  $2,135,915   $ 
Addition in intangible assets by business acquisition with J&Y International Inc.  $1,280,000   $ 
Contingent consideration payable on business acquisition with J&Y International Inc.  $(895,000)  $ 
Addition in intangible assets by business acquisition with Huaxia Yuanjie Water Technology Co., Ltd  $580,966   $ 
Issued 35,974 ordinary shares as one of the consideration in business acquisition with J&Y International Inc.  $277,000   $ 
Addition in plant and equipment by business acquisition with Huaxia Yuanjie Water Technology Co., Ltd  $256,278   $ 
Issued 21,792 ordinary shares as consideration of purchasing intangible assets  $155,448   $ 
Addition in plant and equipment by transferring from construction in progress  $150,864   $ 
Issued 260,000 ordinary shares as one of the consideration in business acquisition with Beijing Satellite Science & Technology Co. Ltd.  $   $2,334,800 

 

See notes to consolidated financial statements

 

F-7
 

 

1.Company Background

 

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

 

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

 

 

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

 

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

 

F-8
 

 

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

 

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

 

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

 

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

 

2.Summary of Significant Accounting Policies

 

Principles of consolidation and basis of presentation

 

The consolidated financial information as of December 31, 2011 and 2010 and for the years then ended are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto. All material inter-company transactions and balances have been eliminated in the consolidation.

 

The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with these accounting principles requires us 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 period.

 

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

 

Reclassifications

 

Certain amounts have been reclassified to conform to the current presentation.

 

Use of Estimates

 

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

 

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

 

F-9
 

 

Cash and Cash Equivalents

 

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

 

Restricted Cash

 

The current restricted cash balance at December 31, 2011 and 2010 was $2,087,920 and $1,505,617, respectively. The long-term restricted cash balance at December 31, 2011 and 2010 was $2,541,958 and $203,418, respectively. For details, refer to Note 5 of consolidated financial statements.

 

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 Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company makes an allowance for doubtful accounts based on the aging of accounts receivable and on any specifically identified accounts receivable that may become uncollectible.

 

Inventories

 

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

 

Long-term Unbilled Receivables

 

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

 

Plant and Equipment

 

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

 

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

 

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

 

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

 

Valuation of Long-Lived Assets

 

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

 

F-10
 

 

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

 

Intangible Assets

 

The Company amortizes other acquired intangible assets with definite lives on a straight-line basis over their expected useful economic lives. The Company does not amortize intangible assets with an indefinite useful life but subjects them to an impairment test annually or more frequently if events or changes in circumstances indicate that the assets might be impaired.

 

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

 

Business combination

 

For a business combination with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree are recognized at the acquisition date, measured at their fair values as of that date. In a business combination achieved in stages, the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, are recognized at the full amounts of their fair values. In a bargain purchase in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest in the acquiree, that excess in earnings was recognized as a gain attributable to the Company.

 

F-11
 

 

Deferred tax liability and asset were recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with ASC Topic 740, “Income Taxes”.

 

Goodwill

 

Goodwill represents the excess of the fair value of consideration transferred (plus the fair value of the non-controlling interest, if any) over fair value of the net assets acquired (including recognized intangibles). Goodwill is not amortized; rather, impairment tests are performed at least annually or more frequently if circumstances indicate impairment may have occurred. If impairment exists, goodwill is immediately written down to fair value and the loss is recognized in the consolidated income statements. The Company assesses impairment at period end or whenever events or changes indicate that, more likely than not, the carrying value of goodwill has been impaired. The Company uses the income approach to estimate the fair value of the goodwill. The income approach is based on the long-term projected future cash flows of the operating segments. The Company discounts the estimated cash flows to present value using a weighted-average cost of capital that considers factors such as the timing of the cash flows and the risks inherent in those cash flows. The Company performed its impairment test at the end of 2011 and 2010, and determined that there was no impairment of goodwill as of December 31, 2011 and 2010, respectively.

 

 Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

F-12
 

 

Cost of Revenues

 

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

 

Operating Expenses

 

Operating expenses include, among other items, salaries, bonuses, and employees’ social insurance, administrative and sales expenses, travel and entertainment expenses, depreciation of equipment, amortization of intangible assets, office rental expenses, professional service fees, office supplies, research and development expenses, bad debt provision, etc.

 

Research and Development (R&D)

 

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

 

Foreign Currency Translation

 

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

 

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

 

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

 

Translation adjustments amounted to $4,593,046 and $1,739,799 as of December 31, 2011 and 2010, respectively. The Company translated balance sheet amounts with the exception of equity at December 31, 2011 at RMB6.3009 to US$1.00 as compared to RMB6.6227 to US$1.00 at December 31, 2010. The Company stated equity accounts at their historical rate. The average translation rates applied to income statement accounts for the years ended December 31, 2011 and 2010 were RMB6.4588 and RMB6.7695 to US$1.00, respectively.

 

Income Taxes

 

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

 

The Company adopted Financial Accounting Standards Board (“FASB”) accounting standard codification 740 (ASC 740), as of January 1, 2007. The Company recognizes a tax position as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that the Company believes is more than 50% likely to be realized on examination. For tax positions not meeting the “more likely than not” test, the Company does not record it as a tax benefit. The Company also adopts ASC 740 guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. It had no effect on the Company’s financial statements as of December 31, 2011 and 2010. The Company did not have any significant unrecognized uncertain tax positions as of December 31, 2011 and 2010. 

 

F-13
 

 

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

 

Share-based Compensation

 

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

 

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

 

Earnings per Share

 

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

 

The Company has granted 525,500 options to our key employees and 185,000 warrants to the placement agent in our IPO and to our investor relations consultant, all of which are included when calculating the diluted earnings per share. As of December 31, 2011, 170,000 warrants had been exercised at a price equal to $8.10 per share.

 

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

 

The Company has repurchased aggregation of 21,100 ordinary shares during the year ended December 31, 2010.

 

Comprehensive Income

 

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

 

Financial Instruments

 

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

 

Segments

 

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

 

Recently Issued Accounting Pronouncements

 

In December 2011, The FASB issued Accounting Standards Update 2011-12 (ASU 2011-12), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. ASU 2011-12 defers the requirement that companies present reclassification adjustments for each component of AOCI in both net income and OCI on the face of the financial statements. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations

 

F-14
 

  

The FASB has issued Accounting Standards Update (ASU) No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments to the FASB Accounting Standards Codification (Codification) in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Coinciding with the release of ASU No. 2011-11, the IASB has issued Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). This amendment requires disclosures about the offsetting of financial assets and financial liabilities common to those in ASU No. 2011-11. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to simplify how entities test goodwill for impairment. ASU 2011-08 allows entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a greater than 50 percent likelihood exists that the fair value is less than the carrying amount then a two-step goodwill impairment test as described in Topic 350 must be performed. The guidance provided by this update becomes effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This guidance improves the comparability, consistency and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The guidance provided by this update becomes effective for annual periods beginning on or after December 15. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820). This updated accounting guidance establishes common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP and International Financial Reporting Standards (IFRS). This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, while other amendments change a principle or requirement for fair value measurements or disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. The adoption of this standard is not expected to have a material impact on the Company’s (consolidated) financial position and results of operations.

 

The FASB has issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This amendment affects any public entity as defined by Topic 805, Business Combinations that enters into business combinations that are material on an individual or aggregate basis. The comparative financial statements should present and disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The adoption of this standard is not expected to have any impact on the Company’s (consolidated) financial position and results of operations.

 

3.Business Combinations

 

J&Y International Inc.

 

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

 

F-15
 

 

1)    $200,000 payable upon a specific contract granted. In November 2011, the Company earned the specific contract. By the date of issuing financial statements, the $200,000 payable has not been paid yet. The Company plans to pay the amount in the first quarter of year 2012.

 

2)    $200,000 payable upon a specific contract completion and receipt of payment excluding retainer. The contract is expected to complete by the end of year 2012.

 

3)    In the event the specific contract is not granted, the shares in 1) and 2) shall not be issued;

 

4)    $335,000 payable based on the specific threshold of performance EBITDA generated in connection with a specific contract. By the date of issuing financial statements, the amount was not paid. The amount will be subject to the performance EBITDA.

 

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

 

The above contingent consideration was classified as a liability as of June 9, 2011, the closing date. The fair value of the contingent consideration as of June 9, 2011 and December 31, 2011 was estimated at $695,000 and $895,000 pursuant to the official appraisal reports from an assessment agency.

 

As a result of this acquisition, all of J&Y’s original business unit was transferred to the Company, and J&Y was deregistered. The original shareholder of J&Y became an employee of the Company. The Company managed J&Y’s original business in the U.S. market. Thus, the Company will benefit from J&Y’s customer relationship, technological know-how and the potential profit earning ability, which is also the purpose of the transaction. This acquisition was accounted for as a business combination in accordance with ASC Topic 805.

 

The customer relationship and the know-how generated from the J&Y acquisition was appraised and the value was estimated to be $590,000 and $690,000, respectively. The estimated useful life for the customer relationship and the know-how was 5 years and 10 years, respectively. Management expects to realize synergies from combining the operations of the Company and J&Y. None of the goodwill recognized is expected to be deductible for income tax purposes. All of the goodwill was assigned to segment 3, industrial pollution control and safety.

 

The fair values of the assets acquired recognized at the acquisition date of June 9, 2011:

 

   Fair Value
   as of June 09, 2011
Customer relationship  $590,000 
Know-how   690,000 
Deferred tax liabilities   (369,250)
Total identifiable net assets  $910,750 

 

The following table represents the consideration allocation based on estimated fair value at June 9, 2011:

 

Total identifiable net assets  $910,750 
Goodwill   549,250 
Total consideration  $1,460,000 

 

On June 30, 2011, customer relationship and know-how was reported at $570,000 and $700,000 according to the management’s best estimate because the fair value assessment by an independent third party has not been completed. Upon finalizing the valuation procedures, fair value of customer relationship increased by $20,000 and that of know-how decreased by $10,000. That adjustment is measured as the fair value adjustment at the acquisition date less the additional depreciation that would have been recognized had the asset’s fair value at the acquisition date been recognized from that date. The fair value of customer relationship and know-how has now been retrospectively adjusted to represent the fair value of the item of these intangible assets.

 

The amounts of J&Y’s revenue and earnings for the year ended December 31, 2011, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2011, or January 1, 2010, are as follow. The unaudited pro forma financial information presents the result of operation of the Company as if the acquisition of J&Y had occurred as of January 1, 2011. The result includes the impact of preliminary fair value adjustment on intangible assets and the related adjustments on deferred taxes. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations would actually have been had it completed the acquisition on January 1, 2011. In addition, the unaudited pro forma financial information does not attempt to project the future operation results of the combined entity.

 

F-16
 

 

   Revenue  Earnings
Actual amount from June 9 to December 31, 2011 generated from assets purchased from J&Y ( Unaudited )  $   $ 
Supplemental pro forma from January 1 – December 31, 2011  (Unaudited)  $85,907,121    8,721,924 
Supplemental pro forma from January 1 – December 31, 2010  (Unaudited)  $45,193,278   $7,447,936 

 

Supplemental pro forma in revenue:

Revenue   J&Y   TRIT Group   Elimination   Combined  
January 1, 2011–December 31, 2011  (Unaudited)   $ 34,200   $ 85,872,921   $   $ 85,907,121  
January 1, 2010–December 31, 2010  (Unaudited)   $ 1,658,561   $ 43,534,717   $   $ 45,193,278  

 

Supplemental pro forma in earnings:

Earnings   J&Y   TRIT Group   Elimination   Combined  
January 1, 2011–December 31, 2011  (Unaudited)   $ (48,640)   $ 8,770,564   $   $ 8,721,924  
January 1, 2010–December 31, 2010  (Unaudited)   $ 602   $ 7,447,334   $   $ 7,447,936  

 

Huaxia Yuanjie Water Technology Co, Ltd

 

TTB entered into an investment agreement on June 18, 2011 with Yuanjie and Yuanjie’s original shareholder to increase the capital investment in Yuanjie. The total investment was RMB10,990,500, or $1,704,085, among which RMB10,000,500, or $1,550,585, was in cash, and the remaining RMB990,000, or $153,500, were intangible assets. These intangible assets were purchased from an officer/director of Yuanjie with the issuance of the TRIT shares.

 

According to the agreement, the investment from TTB was divided into two phases:

 

1. Cash of RMB5,000,000, or $775,254, was agreed to be paid within five days after the investment contract was executed. The amount was paid in full on July 12, 2011.

 

2. Cash of RMB5,000,500, or $775,331, and intangible assets of RMB990,000, or $153,500, were scheduled to be paid three months after the first payment, on October 12, 2011, subject to any undisclosed potential liability adjustments. The total amounts were paid on December 5, 2011.

 

After the above capital investment, the total registered capital for Yuanjie was RMB21,550,000, or $3,391,084, out of which RMB10,990,500, or $1,704,085, representing 51% of the total investment, was invested by TRIT. According to the article of association, shareholder resolutions will be effective if a simple majority over 50% is reached. The article of association was effective from July 22, 2011. Therefore, Yuanjie was considered as a subsidiary of TRIT as of that day. This transaction was accounted for as a business combination.

 

F-17
 

 

After all the consideration injection, the fair value of Yuanjie's identifiable net asset was:

 

Cash and cash equivalents  $819,406 
Intangible assets, net   727,188 
Plant and equipment, net   253,067 
Other assets   1,505,216 
Deferred tax liabilities   (30,093)
Other liabilities   (517,615)
Total identifiable net assets  $2,757,169 

 

The following table represents the consideration allocation based on fair value on July 22, 2011:

 

Total identifiable net assets attributed to TRIT  $1,406,156 
Noncontrolling interest   1,351,013 
Goodwill   297,929 
Total consideration from WOFE and noncontrolling shareholder  $3,055,098 

 

The unaudited pro forma financial information shown below does not attempt to project the future results of operations of the combined entity.

 

   Revenue   Earnings
Actual amount from July 22 to December 31, 2011 generated from Yuanjie (Unaudited)  $796,818     58,714 
Supplemental pro forma from January 1 – December 31, 2011
(Unaudited)
  $86,554,225     8,777,879 
Supplemental pro forma from January 1 – December 31, 2010
(Unaudited)
  $44,670,385     7,463,545 

 

Supplemental pro forma in revenue:

Revenue   Yuanjie   TRIT Group   Elimination   Combined  
January 1, 2011–December 31, 2011  (Unaudited)   $ 1,478,122   $ 85,076,103   $   $ 86,554,225  
January 1, 2010–December 31, 2010  (Unaudited)   $ 1,135,668   $ 43,534,717   $   $ 44,670,385  

 

Supplemental pro forma in earnings:

Earnings   Yuanjie   TRIT Group   Elimination   Combined  
January 1, 2011–December 31, 2011  (Unaudited)   $ 66,029   $ 8,711,850   $   $ 8,777,879  
January 1, 2010–December 31, 2010  (Unaudited)   $ 16,211   $ 7,447,334   $   $ 7,463,545  

 

A reconciliation of the carrying amount of goodwill is as shown below:

   Carrying amount of goodwill
January 1, 2011  $594,099 
Goodwill from J&Y acquisition   549,250 
Goodwill from Yuanjie acquisition   297,929 
December 31, 2011  $1,441,278 

 

F-18
 

 

4.Variable Interest Entities

 

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

 

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

 

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

 

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

 

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

 

These agreements consist of the following:

 

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

 

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

 

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

 

F-19
 

 

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

 

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

 

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

 

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

 

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

 

The Company reports VIEs’ portion of consolidated net income and shareholders’ equity as noncontrolling interests in the consolidated financial statements.

 

F-20
 

 

The total assets and liabilities of our consolidated VIEs as of December 31, 2011 and 2010 are shown as below, which exclude intercompany balances that are eliminated among the VIEs.

 

   December 31,  December 31,
   2011  2010
ASSETS          
Current assets          
Cash  $4,414,701   $4,260,513 
Restricted cash   1,192,134    1,273,183 
Accounts receivable, net   19,310,636    12,462,880 
Unbilled revenue   4,361,317    2,991,802 
Other receivables   8,790,816    595,611 
Inventories   5,950,510    5,672,929 
Deposits on projects   983,013    440,510 
Prepayments to suppliers and subcontractors   1,387,119    740,804 
Total current assets   46,390,246    28,438,232 
Long-term unbilled revenue   2,154,667    3,488,771 
Plant and equipment, net   511,160    551,055 
Intangible assets, net   4,138,012    4,331,261 
Long-term investment   5,855,566    —   
Long-term restricted cash   26,834    203,418 
Total Assets  $59,076,485   $37,012,737 
LIABILITIES AND EQUITY          
Current liabilities          
Accounts payable   1,394,883    2,445,949 
Notes payable   1,176,197      
Costs accrual on projects   8,104,579    4,152,351 
Customer deposits   1,920,597    1,408,299 
Other payables   19,944,048    1,260,389 
Accrued liabilities   —      47,242 
Income taxes payable   10,096    15,883 
Deferred income taxes   328,419    209,095 
Short-term bank borrowing   2,296,895    —   
Current portion of long-term liabilities   —      14,994 
Total current liabilities   35,175,714    9,554,202 
            Total Liabilities  $35,175,714   $9,554,202 

 

For the year ended December 31, 2011, the financial performance of the VIEs reported in the consolidated statements of income and comprehensive income includes sales of approximately US$62,537,400, cost of sales of approximately US$54,654,896, operating expenses of approximately US$7,325,526 and net income of approximately US$385,755.

 

F-21
 

 

5.Restricted Cash

 

As of December 31, 2011, the Company has made deposits several times totaling $4,629,878 as collateral in exchange of the issuance of letters of credit. Among these letters of credit, a total of $2,087,920 is with expiration dates within the next 12 months. The remaining balance of $2,541,958 is to expire in 2013, which is classified under long-term restricted cash.

 

6.Accounts Receivable, Net

 

Based on the Company’s assessment, management believes the net balance on each balance sheet date herein was collectable. The gross balance and bad debt provision as at December 31, 2011 and 2010 are as the following:

   December 31,  December 31,
   2011  2010
Accounts receivable, gross  $20,507,146   $18,468,099 
Less bad debt provision   (619,062)   (427,020)
Accounts receivable, net  $19,888,084   $18,041,079 

 

The following analysis details the changes in the Company’s allowances for doubtful accounts:

   December 31,
2011
  December 31,
2010
Balance at beginning of the year  $427,020   $56,491 
Increase in allowances during the year   192,321    382,497 
Write-offs during the year   (279)   (11,968)
Balance at the end of the year  $619,062   $427,020 

 

7.Other Receivables

 

Other receivables consisted of the following:

   December 31,  December 31,
   2011  2010
Advances to staff  $772,770   $198,604 
Loan to third-party companies   1,207,119    —   
Rental Deposit   186,710    172,096 
Receivables regarding Ordos Project   —      388,059 
Other   594,949    668,291 
Total  $2,761,548   $1,427,050 

 

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

 

Loans to third-party companies were made to business partners for working capital purpose. $500,000 is for short-term of six months with 6% annualized interest rate, $476,122 is for one year with annualized interest rate of 12%, and the remaining $230,997 is for six months with annualized interest rate of 12%.

 

8.Inventories

 

Inventories consisted of the following:

   December 31,
2011
  December 31,
2010
Raw materials  $1,835,715   $1,136,981 
Finished goods   589,887    557,694 
Project work-in-progress   5,280,150    4,191,944 
Total  $7,705,752   $5,886,619 

 

F-22
 

 

 

The Company reviews its inventory periodically for possible obsolete goods and to determine if any reserves are necessary for potential obsolescence. As of December 31, 2011 and 2010, the Company determined that no reserves were necessary.

 

9.Deposits on Projects

 

Deposits on Projects consisted of the following:

   December 31,
2011
  December 31,
2010
Current:          
Contract deposit  $659,568   $386,000 
Bidding deposit   553,123    205,505 
Totals  $1,212,691   $591,505 

 

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

 

10.Plant and Equipment, Net

 

Plant and equipment consist of the following:

   December 31,
2011
  December 31,
2010
Transportation equipment  $857,812   $751,240 
Office equipment   435,952    384,439 
Furniture   402,842    386,728 
Buildings   271,515    —   
Machinery and equipment   137,217    —   
Total plant and equipment   2,105,338    1,522,407 
Less accumulated depreciation   (668,500)   (477,257)
Plant and equipment, net  $1,436,838   $1,045,150 

 

 The depreciation expense for the years ended December 31, 2011 and 2010 amounted to $145,779 and $137,258, respectively.

 

11.Construction in Progress

 

The construction in progress account captures the balance of construction in progress for the Company’s Baoding research, development and production base in Baodi, Tianjin area. Baoding focuses on technology development, software development, pilot testing, manufacturing and pre-installation/pre-assembly preparation of its proprietary products. The construction of the Baoding research, development and production facility officially started in June 2011. As of December 31 2011, the construction in progress of the Baoding facility totaled at $4,566,934.

 

12.Intangible Assets, Net

 

Intangible assets mainly consist of patents, software, customer lists, land use right and know-how. The patents were invested as capital contribution by the shareholders of Tranhold and Yanyu, and were recorded at the appraisal value as stipulated by the local regulatory authority. According to ASC 845-10-S99, transfers of nonmonetary assets to a company by its promoters or shareholders in exchange for shares prior to or at the time of the company’s initial public offering normally should be recorded at the transferors’ historical cost basis determined under US GAAP. The net book value of the patents invested by the majority shareholders of Yanyu was $499,083 as of December 31, 2011, which only accounted for 0.4% of its total assets as of December 31, 2011. Therefore, the effect from the inclusion of the contributed patents at its fair value instead of historical cost was immaterial. Software was purchased from third parties at the acquisition cost.   

 

F-23
 

 

All the intangible assets have definite lives, and are amortized on a straight-line basis over their expected useful economic lives. The original costs and accumulated amortization as of December 31, 2011 and 2010 are as follows:  

 

   December 31,    December 31,
   2011    2010
Patents  $2,021,375     $1,773,670 
Software   2,878,954      2,739,064 
Customer list   1,280,378      656,832 
Land use right   5,724,181      —   
Know-how   1,218,496      —   
Contract backlog   58,722      —   
     Total intangible assets   13,182,106      5,169,566 
Less accumulated amortization   (1,572,444)     (838,305)
Intangible assets, net  $11,609,662     $4,331,261 

 

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

 

The amortization expense for the years ended December 31, 2011 and 2010 amounted to $627,825 and $187,998, respectively.

 

The amortization expense for the five-year period starting from December 31, 2011 is expected to be as follows:

 

For the Years Ended December 31,  Amount
2012   $853,938 
2013    819,684 
2014    819,684 
2015    819,684 
2016    612,775 
Thereafter    7,683,897 
Total   $11,609,662 

 

13.Investment in Joint Venture

 

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

 

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

 

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

 

F-24
 

 

14.Accounts Payable and Costs Accrual on Projects

 

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

 

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

   December 31,
2011
  December 31,
2010
Accounts payable  $11,401,187   $2,721,643 
Costs accrual on projects   19,402,047    9,198,420 
Total  $30,803,234   $11,920,063 

 

Of the total accounts payable, 38%, or $4,379,115, was related to the Ordos projects, and 21%, or $2,344,086, was related to building new factories and warehouses in Tianjin. The remaining balance was for various other on-going projects.

 

Of the total costs accrual on projects, 38%, or $7,383,278, was related to the Ordos projects, which was also the main reason for the increase of the ending balance. The remaining balance was for various other on-going projects.

 

15.Other Payables

 

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

   December 31,
2011
  December 31,
2010
Loan from third-party companies  $972,196   $206,436 
Loan from noncontrolling interest investor   6,557,548    —   
Others   187,038    117,874 
Non-project related payables   7,716,782    324,310 
           
Value-added tax payable   1,367,517    1,979,499 
Business tax payable   1,228,441    350,475 
Individual income tax payable   13,871    22,891 
Others   457,521    40,327 
Other taxes payable   3,067,350    2,393,192 
           
Total Other Payables  $10,784,132   $2,717,502 

 

Of the loan from third-party companies, $738,061 was with interest of 1.0% per month and due before the end of 2012. The accrued interest expense was $5,376 for the year ended December 31, 2011. The remaining $228,759 was non-interest bearing, and will due before the end of 2012.

 

Of the non-project-related payables, $6,062,626 was principal amount for short-term loan from the minority interest investor from TTA, with interest of 1.5% per month due on June 30, 2012. The accrued interest expense was $494,922 for the year ended December 31, 2011. The purpose of this short-term loan was mainly to reduce temporary operational cash pressure.

F-25
 

 

 

16.Short-term Bank Borrowings

 

The below table presents the short-term bank borrowing interest rates and the amount borrowed as of December 31, 2011 and 2010. All of the bank borrowings will mature by the end of 2012.

 

              As of December 31,  
              2011     2010  
Bank Name   Interest rate   Terms              
Citic Bank   8.528%   09/27/2011 - 09/27/2012   $ 4,761,225   $  
Bank of Hangzhou   7.872%   11/30/2011 - 11/29/2012     952,245      
Bank of Hangzhou   Basic loan rate issued by  PBOC and broke surface 10% every quarter   07/27/2011 - 07/26/2012     789,174    
Bank of Hangzhou   Basic loan rate issued by  PBOC and broke surface 10% every quarter   06/27/2011 - 06/26/2012     952,245      
Bank of Hangzhou   Basic loan rate issued by  PBOC and broke surface 10% every quarter   04/15/2011 - 04/14/2012     555,476    
Total short-term bank borrowings   $ 8,010,365   $  

  

17.Income Taxes

 

We are subject to income taxes on the entity level for income arising in or derived from the tax jurisdictions in which each entity is domiciled. According to the New Enterprise Income Tax Law (“NEITL”) in China, unified Enterprise Income Tax rate is 25%. However, five of our eight subsidiaries and VIEs in China are subject to certain favorable tax policies as high-tech companies. The effective income tax rate for the year ended December 31, 2011 was 18%.

 

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

 

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

 

   For The Years Ended December 31,
   2011  2010
    %    % 
TTB (effective until the end of 2011)   7.5    7.5 
BSST   15    15 
Yanyu   15    25 
Tranhold   25    25 
TTA   25    25 
Baoding   15    25 
Yuanjie   15    —   
Buerjin   25    —   
   Consolidated Effective Income Tax Rate   18    16 

 

F-26
 

 

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

 

   For The Years Ended December 31,
   2011  2010
Current:          
PRC  $502,541   $206,403 
Deferred:          
PRC   1,456,323    1,218,455 
Total income tax expense  $1,958,864   $1,424,858 

 

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

 

   December 31,
2011
  December 31,
2010
Current:          
Deferred tax liabilities:         
Revenue recognition based on percentage of completion   358,519    276,658 
Total net deferred tax liabilities  $358,519   $276,658 
Long-term:          
Deferred tax liabilities:         
Revenue recognition based on percentage of completion   2,930,427    1,374,181 
Intangible assets valuation in business combination   525,396    187,295 
Total net deferred tax liabilities  $3,455,823   $1,561,476 

 

Income tax reconciliation for the years ended December 31, 2011 and 2010 are as follows:

   For The Years Ended
    2011    2010 
PRC statutory tax rate   25%   25%
Taxable income  $10,729,428   $8,872,192 
Computed expected income tax expense   2,682,357    2,218,048 
Effect of preferential tax rates   (723,493)   (793,190)
Income tax expense  $1,958,864   $1,424,858 

 

18.Ordinary Shares

 

At the beginning of 2011, the number of the Company’s outstanding ordinary shares was 8,030,733.

 

On March 8, 2011, 93,700 options were exercised at a price of $6.75 per share.

 

In June 2011, 35,974 shares were issued at $7.61 per share with a total amount of $277,000 as part of the consideration in business combination.

 

F-27
 

 

In June 2011, 21,792 shares were issued at $7.02 per share with a total amount of $152,980 as part of the consideration for purchasing intangible assets.

 

By December 31, 2011, the total number of the Company’s outstanding ordinary shares was 8,182,199.

 

As of December 31, 2011 and 2010, the number of the Company’s treasury stock was 21,100 and 21,100, respectively.

 

19.Warrants

 

As of December 31, 2011 and 2010, the Company has 229,274 and 221,774 warrants outstanding for ordinary shares. None of these warrants were exercised by December 31, 2011. During the years ended December 31, 2011 and 2010, the Company recorded warrants expenses as general and administrative expenses of $60,962 and $3,944, respectively.

 

On February 21, 2011, the Company issued 7,500 warrants to Hawk Associates Inc. in exchange for its investors relation services to be provided during 2011. These warrants can be exercised at a price of $8.10 per share on the base date and will expire on the fifth anniversary of the base date. The fair value of each warrant awarded is $8.09, which was estimated on the grant date using Black-Scholes model based on the items noted in the following table.

 

Fair value per share (USD/share)   13.23 
Exercise price (USD/share)   8.10 
Risk free rate   2.04%
Dividend yield   0.00%
Expected term/Contractual Life (No. of Yrs)   5.0 
Expected volatility   54%

 

20.Options Issued to Employees

 

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

 

The fair value of options on the grant-date of September 9, 2009 was $3.53 per share, which was estimated by using the Black-Scholes Model. The total fair value of the options was $1,855,015. 210,200 and 105,100 options were vested as of December 31, 2011 and 2010, respectively. 93,700 and 0 options were exercised as of December 31, 2011 and 2010, respectively. 5,400 and 0 options were forfeited during the years ended December 31, 2011 and 2010, respectively.

 

The Company recognized compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The total option compensation expense recognized were $371,003 for both years ended December 31, 2011 and 2010. Another $979,089 will be recognized as general and administrative expense over the 982 days thereafter.

 

The following table summarizes the outstanding options, related weighted average fair value and life information as of December 31, 2011.

    Options Outstanding      Options Exercisable  

 

 

Exercise
Price Per
Share 

  Number
outstanding as of
December
31,2011
 

 

 

Fair Value 

   

Remaining Life (Years) 

  Number
Exercisable as of December
31,2011
   

Exercise
Price

 
$ 6.75    426,400   $ 3.53     2.69    116,500   $ 6.75  

 

F-28
 

 

A summary of option activity under the employee share option plan as of December 31, 2011 and changes during the year then ended is presented below:

 

Options  Number of
shares
  Remaining
Life(Years)
  Aggregated
Intrinsic Value
Outstanding as of January 1, 2011   525,500   $3.69   $2,107,255 
Granted during the year   —             
Exercised during the year   (93,700)          
Forfeited during the year   (5,400)          
Outstanding as of December 31, 2011   426,400   $2.69   $—   

 

A summary of unvested options under the employee share option plan as of December 31, 2011 and changes during the year then ended is presented below:

 

Options  Number of Shares  Fair Value
Unvested as of January 1, 2011   420,400   $3.53 
Granted during the year   —        
Vested during the year   (105,100)     
Forfeited during the year   (5,400)     
Unvested as of December 31, 2011   309,900   $3.53 
Expected to vest thereafter   309,900   $3.53 

 

21.Net Income per Ordinary Share

 

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

 

   For The Years Ended December 31,
   2011  2010
Net income attributable to TRIT  $8,088,374   $7,077,008 
Weighted-average shares of ordinary share used to compute basic net income per share   8,142,867    7,102,436 
Effect of dilutive ordinary share equivalents:          
Dilutive effect of warrants   —      2,537 
Dilutive effect of employee share options   83,832    103,996 
Dilutive effect of issuable shares in business acquisition with J&Y International Inc.   11,592    —   
           
Shares used in computing diluted net income per ordinary share   8,238,291    7,208,969 
           
Basic net income per ordinary share  $0.99   $1.00 
Diluted net income per ordinary share  $0.98   $0.98 

 

The dilutive effect comes from 426,400 and 525,500 options to employees for years ended December 31, 2011 and 2010, respectively, and 26,281 shares issuable as one of the consideration of business acquisition with J&Y for the year ended December 31, 2011. All warrants are having anti-dilutive effect due to the fact that the weighted average exercise price per share of these warrants is higher than the weighted average market price per share of ordinary shares during the year ended December 31, 2011.

 

F-29
 

 

22.Certain Significant Risks and Uncertainty

 

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

 

The Company has one major customer who represented approximately 56.2% of the Company’s revenue for the year ended December 31, 2011. The project is a BT project entered into in 2010 with a local government agency. The long-term unbilled revenue balance with this customer was $52,511,711 and $9,769,657 as of December 31, 2011 and 2010, respectively. No other customers represented more than 10% of the Company’s sales for the years ended December 31, 2011 and 2010. Due to the nature of BT projects and the creditability of the government agency, management believes the risk of the client being insolvent is minor. The five major customers represented approximately 67.7% of the Company’s sales for the year ended December 31, 2011.

 

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

 

23.Social Security Plan

 

The Company’s subsidiaries and VIEs in China are required to participate in the social security plan operated by the local municipal government. The Company is required to contribute approximately 20% of its payroll costs, subject to certain caps with reference to average municipal salary, to the employees’ social security fund. The Company charges contributions to its income statement as they become payable in accordance with the local government requirements. The aggregate contributions of the Company to the employees’ social security plan amounted to $195,634 and $131,985 for the years ended December 31, 2011 and 2010, respectively.

 

24.Statutory Reserves

 

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

 

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

 

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

 

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

 

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

 

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

 

F-30
 

 

For the years ended December 31, 2011 and 2010, the Company made $969,612 and $846,727 appropriations to statutory reserves, respectively.

 

25.Commitments and Contingencies

 

Operating Leases

 

As of December 31, 2011, the Company had commitments under certain operating leases, requiring annual minimum rentals as follows:

 

For the Years Ended December 31,    Amount
2012   $ 674,599
2013   456,777
2014   116,114
Total   $ 1,247,490

 

The leased properties are principally located in the PRC and are used for administration and research and development purposes. The terms of these operating leases vary from one to five years. Pursuant to the contracts, when they expire, we have the rights to extend them with new negotiated prices. Rental expenses were $714,023 and $415,418 for the years ended December 31, 2011 and 2010, respectively.

 

Product Warranties

 

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

 

26.Segment Information

 

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

 

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

 

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

 

Segment 2: Water Resource Management System and Engineering Service

 

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

 

Segment 3: Industrial Pollution Control and Safety Water Resource

 

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

 

F-31
 

  

For the Years Ended December 31, 2011 and 2010  
Segment 1   Segment 2   Segment 3   Total  
    2011   2010   2011   2010   2011   2010     2011   2010  
Revenues $ 58,123,939   19,120,807   12,922,405   5,462,771   14,826,577   18,951,139   $ 85,872,921   43,534,717  
Cost of revenues   43,367,917   13,231,384   9,309,362   3,538,094   11,340,173   11,998,266     64,017,452   28,767,744  
Operating expenses:                                    
Selling and marketing expenses     594,780   402,782   1,131,134   576,946   438,449   291,718   2,164,363   1,271,446  
General and administrative expenses   5,366,171   2,102,860   1,310,332   758,404   2,095,943   1,700,778     8,772,446   4,562,042  
Research and development 129,918   212,911   49,478   65,042                  -     1,524   179,396   279,477  
Total operating expenses   6,090,869   2,718,553   2,490,944   1,400,392   2,534,392   1,994,020     11,116,205   6,112,965  
Other (expenses) income, net (107,632)   146,588   (99,581)   (3,989)   197,377   75,585   (9,836)   218,184  
Income before income taxes $ 8,557,521   3,317,458   1,022,518   520,296   1,149,389   5,034,438   $ 10,729,428   8,872,192  

 

Assets by Segment

 

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

 

Segment assets of the Company are as follows:

Segment Assets  Segment 1  Segment 2  Segment 3  Total  
As of December 31, 2011  $84,910,147  $26,081,474   $27,659,057  $138,650,678   
As of December 31, 2010  $44,168,017  $14,488,083   $24,106,603  $82,762,703   

 

F-32