Trunkbow International Holdings Ltd - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - Trunkbow International Holdings Ltd	v320712_ex32-1.htm
EX-32.2 - EXHIBIT 32,2 - Trunkbow International Holdings Ltd	v320712_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - Trunkbow International Holdings Ltd	v320712_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Trunkbow International Holdings Ltd	v320712_ex31-1.htm

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

FORM 10-Q

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

For the quarterly period ended: June 30, 2012

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

Commission File Number: 001-35058

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED

(Exact name of small business issuer as specified in its charter)

Nevada

75-3552213

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

Unit 1217-1218, 12F of Tower B, Gemdale Plaza,
No. 91 Jianguo Road, Chaoyang District, Beijing
People’s Republic of China, 100022

(Address of principal executive offices, Zip Code)

+ (86) 10-85712518

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller Reporting Company x

(Do not check if a smaller reporting company)

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

The number of shares outstanding of each of the issuer’s classes of common equity, as of August 14, 2012 is as follows:

	Class of Securities		Shares Outstanding
	Common Stock, $0.001 par value		36,807,075

Table of Contents		Page

PART I: FINANCIAL INFORMATION		1
Item 1 Financial statements
Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011		1
Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)		2
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)		3
Notes to Consolidated Financial Statements (Unaudited)		4
Item 2 Management Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3 Quantitative and Qualitative Disclosure about Market Risk		33
Item 4 Controls and Procedures		34
PART II : OTHER INFORMATION		34
Item 1 Legal Proceedings		34
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3 Defaults Upon Senior Securities		34
Item 4 Mine Safety Disclosures		34
Item 5 Other Information		34
Item 6 Exhibits		34
SIGNATURES		35

PART I. FINANCIAL STATEMENTS

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

	June 30,		December 31,
	2012		2011
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents*	$	1,761,952	$	6,139,589
Accounts receivable, net*		40,543,632		41,147,767
Advances to suppliers		18,073,192		13,270,125
Prepayment		2,383,080		316,258
Other current assets*		8,264,374		4,040,152
Due from directors*		58,746		758,033
Inventories*		15,071,705		11,297,513
Deferred tax asset		294,971		117,952
Total current assets		86,451,652		77,087,389
Property and equipment, net*		15,505,240		11,561,034
Land use right, net		5,886,649		5,905,583
Intangible assets, net		277,372		33,958
Long-term prepayment*		732,102		2,733,363
TOTAL ASSETS	$	108,853,015	$	97,321,327
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable*	$	1,192,587	$	2,238,179
Accrued expenses and other current liabilities*		2,476,767		2,216,128
Short-term loan		14,221,687		6,460,945
Due to directors*		9,022		11,959
Taxes payable*		2,225,332		4,209,907
Total current liabilities		20,125,395		15,137,118
Deferred revenue		1,504,521		0
Total liabilities		21,629,916		15,137,118
COMMITMENTS AND CONTINGENCIES
Stockholders’ equity
Preferred Stock: par value $0.001, authorized 10,000,000 shares, none issued and outstanding at June 30, 2012 and December 31, 2011, respectively		0		0
Common Stock: par value $0.001, authorized 190,000,000 shares, 36,807,075 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively		36,807		36,807
Additional paid-in capital		39,671,966		39,671,966
Appropriated retained earnings		4,504,667		4,504,667
Unappropriated retained earnings		39,505,014		34,989,429
Accumulated other comprehensive income		3,504,645		2,981,340
Total stockholders’ equity		87,223,099		82,184,209
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	108,853,015	$	97,321,327

*The assets of the VIEs can be used only to settle the obligations of the VIEs. Conversely, liabilities recognized as of consolidating VIEs do not represent additional claims on the Company’s assets. (Note 24).

See notes to consolidated financial statements

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues	$	5,970,028		$	9,116,501		$	12,768,241		$	14,218,843
Less: Business tax and surcharges		121,442			182,131			237,993			303,555
Net revenues		5,848,586			8,934,370			12,530,248			13,915,288
Cost of revenues		730,993			3,032,705			2,070,329			3,584,538
Gross profit		5,117,593			5,901,665			10,459,919			10,330,750
Operating expenses
Selling and distribution expenses		848,355			531,534			1,873,377			968,142
General and administrative expenses		2,650,377			1,292,934			3,811,048			2,507,557
Research and development expenses		508,055			306,565			1,058,917			636,078
		4,006,787			2,131,033			6,743,342			4,111,777
Income from operations		1,110,806			3,770,632			3,716,577			6,218,973
Other income (expenses)
Interest income		59,939			59,538			115,571			72,741
Interest expense		(257,125	)		(17,644	)		(436,134	)		(50,896	)
Refund of value-added tax		1,543,168			0			1,543,168			1,307,836
Government grants		82,322			4,740,134			121,949			4,740,134
Other income		39,699			16,272			55,550			39,827
Other expenses		(1,580	)		(56,514	)		(12,391	)		(74,165	)
		1,466,423			4,741,786			1,387,713			6,035,477
Income before income tax expense		2,577,229			8,512,418			5,104,290			12,254,450
Income tax expense		268,133			550,637			588,705			938,990
Net income		2,309,096			7,961,781			4,515,585			11,315,460
Foreign currency translation fluctuation		63,853			891,136			523,305			1,114,047
Comprehensive income	$	2,372,949		$	8,852,917		$	5,038,890		$	12,429,507
Weighted average number of common shares outstanding
Basic		36,807,075			36,548,833			36,807,075			35,791,274
Diluted		36,807,075			37,833,947			36,817,330			37,004,380
Earnings per share
Basic	$	0.06		$	0.22		$	0.12		$	0.32
Diluted	$	0.06		$	0.21		$	0.12		$	0.31

See notes to consolidated financial statements

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2012			2011
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income	$	4,515,585		$	11,315,460
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		424,579			120,811
Provision for doubtful debts		1,409,544			0
Deferred taxes		(176,193	)		0
Changes in operating assets and liabilities:
Accounts receivable		(517,391	)		(6,089,127	)
Advance to suppliers		(4,710,326	)		2,300,085
Prepayment		(2,064,673	)		(1,115,745	)
Other current assets		(1,781,594	)		0
Due from directors		704,615			(472,823	)
Inventories		(3,695,227	)		(878,441	)
Long-term prepayment		2,020,458			73,957
Accounts payable		(1,061,293	)		(512,573	)
Accrued expenses and other current liabilities		245,133			513,165
Amounts due to directors		(3,022	)		0
Taxes payable		(2,014,109	)		298,166
Deferred revenue		1,504,569			0
Net cash flows provided by (used in) operating activities		(5,199,345	)		5,552,935
Cash flows from investing activities
Acquisition of property and equipment and intangible assets		(4,470,890	)		(10,662,365	)
Collection (payment) on loans to third parties		(2,415,229	)		2,851,284
Acquisition of land use right		0			(5,809,561	)
Acquisition of Delixunda Company (net of cash acquired)		0			(37,924	)
Net cash flows used in investing activities		(6,886,119	)		(13,658,566	)
Cash flows from financing activities
Proceeds from issuance of common stock (net of finance costs)		0			17,542,251
Proceeds from (repayment of ) bank loan		7,715,760			(1,834,890	)
Net cash flows provided by financing activities		7,715,760			15,707,361
Effect of exchange rate fluctuation on cash and cash equivalents		(7,933	)		445,587
Net increase in cash and cash equivalents		(4,377,637	)		8,047,317
Cash and cash equivalents – beginning of the year		6,139,589			10,259,750
Cash and cash equivalents – end of the period	$	1,761,952		$	18,307,067
Supplemental disclosure of cash flow information
Cash paid for interest	$	436,134		$	50,896
Cash paid for income taxes	$	1,718,131		$	58,171
Supplemental disclosure of noncash financing activities
Issuance of 30,000 common shares at $5.00 each for the legal fee	$	0		$	150,000

See notes to consolidated financial statements

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. — ORGANIZATION AND PRINCIPAL ACTIVITIES

Trunkbow International Holdings Limited (formerly named as Bay Peak 5 Acquisition Corp. (“BP5”)) (the “Company”), was incorporated in the State of Nevada on September 3, 2004. The Company was formed as part of the implementation of the Chapter 11 reorganization plan (the “Visitalk Plan”) of visitalk.com, Inc. (“Visitalk.com”), a former provider of VOIP services. The Visitalk Plan was deemed effective by the Bankruptcy Court on September 17, 2004 (the “Effective Date”). On September 22, 2004, Visitalk.com was merged into VCC, which was authorized as the reorganized debtor under the Visitalk Plan.

In February 2010, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Trunkbow International Holdings Limited, a company organized under the laws of the British Virgin Islands (“Trunkbow”), the shareholders of Trunkbow (the “Shareholders”), who together own shares constituting 100% of the issued and outstanding ordinary shares of Trunkbow (the “Trunkbow Shares”), and the principal shareholder of the Company (“Principal Shareholder”). Pursuant to the terms of the Exchange Agreement, the Shareholders transferred to the Company all of the Trunkbow Shares in exchange for the issuance of 19,562,888 (the “Shares”) shares of our common stock (the “Share Exchange”). As a result of the Share Exchange, Trunkbow became our wholly owned subsidiary. After giving effect to the Share Exchange, the sale of common stock in the February 2010 Offering (defined below) and the BP5 Warrant Financing referred to below (i) existing shareholders of Trunkbow owned approximately 60.25% of the Company’s outstanding Common Stock, (ii) purchasers of Common Stock in the Offering owned approximately 26.01% of the Company’s outstanding Common Stock (including 7.7% owned by VeriFone, Inc.), (iii) the holders of BP5 Warrants owned approximately 8.54% of the Company’s outstanding Common Stock and (iv) the pre-existing shareholders of BP5 owned approximately 5.2% of the Company’s outstanding Common Stock.

Concurrent with the Share Exchange, (i) we entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors (the “Investors”) for the sale of an aggregate of 8,447,575 shares (the “Investor Shares”) and 1,689,515 warrants (the “Investor Warrants”), for aggregate gross proceeds equal to $16,895,150 (the “February 2010 Offering”) and (ii) certain holders of outstanding warrants of the Company issued to creditors and claimants of visitalk.com., in accordance with the Visitalk Plan, referred to herein as the “BP5 Warrant Investors” exercised the 2,774,500 warrants owned by them for an aggregate exercise price of $5.5 million and received warrants to purchase an aggregate of 554,900 shares of Common Stock (“BP5 Warrant Financing”).

The Company’s wholly owned subsidiary, Trunkbow, was established in the British Virgin Islands (“BVI”) on July 17, 2009, with no significant business operations and assets other than holding of equity interests in its subsidiaries and variable interest entities (“VIEs”). Trunkbow’s wholly owned subsidiary, Trunkbow (Asia Pacific) Investment Holdings Limited (“Trunkbow Hong Kong”) was established as an Investment Holding Company in Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”) on July 9, 2004.

Trunkbow Hong Kong established two wholly foreign owned subsidiaries in the PRC, Trunkbow Asia Pacific (Shandong) Company, Limited (“Trunkbow Shandong”) which was established on December 10, 2007 in Jinan, Shandong Province and Trunkbow Asia Pacific (Shenzhen) Company, Limited (“Trunkbow Shenzhen”) which was established on June 7, 2007 in Shenzhen, Guangdong Province. Both subsidiaries are principally engaged in research and development of application platforms for mobile operators in China.

Trunkbow Technologies (Shenzhen) Company, Limited (“Trunkbow Technologies”) was established as a limited liability company on December 4, 2001 in Shenzhen, Guangdong Province, the PRC. Trunkbow Technologies was formerly engaged in research and development of application platforms for mobile operators in China as well as wireless application systems for the international market. Beijing Delixunda Technology Co., Ltd (“Delixunda”) was established as a limited liability company on December 1, 2009 in Beijing, the PRC. Delixunda is a telecom value-added service licensed company and is engaged in research and development and sales of value-added application platforms for mobile operators. In December 2007, a series of agreements were entered into amongst Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders, providing Trunkbow Shandong the ability to control Trunkbow Technologies, including its financial interest. In March 2011, a series of agreements were entered into amongst Trunkbow Shandong, Delixunda and its controlling shareholders, providing Trunkbow Shandong the ability to control Delixunda, including its financial interest. As a result of these contractual arrangements, which assigned all of Trunkbow Technologies and Delixunda’s equity owners’ rights and obligations to Trunkbow Shandong resulting in the equity owners lacking the ability to make decisions that have a significant effect on Trunkbow Technologies and Delixunda’s operations and Trunkbow Shandong’s ability to extract the profits from the operation of Trunkbow Technologies and Delixunda, and assume the Trunkbow Technologies and Delixunda’s residual benefits. Because Trunkbow Shandong and its indirect parent are the sole interest holders of Trunkbow Technologies, the Company consolidates Trunkbow Technologies from its inception, and Delixunda from March 10, 2011, consistent with the provisions of FASB Accounting Standards Codification (“ASC”) 810-10.

The Company, its subsidiaries and VIEs are collectively referred to as the “Group.”

2. — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission, and include the accounts of the Company, and its subsidiaries and VIEs, Trunkbow, Trunkbow Hong Kong, Trunkbow Shandong, Trunkbow Shenzhen, Trunkbow Technologies and Delixunda. Delixunda is being consolidated from March 10, 2011 (the date of acquisition). Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s financial statements and related notes as contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation of consolidated financial position as of June 30, 2012 and consolidated results of operations, and cash flows for interim periods presented, have been made. The interim results of operations are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company, all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs have been eliminated upon consolidation.

c)	Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ from those estimates.

d)	Foreign currency translation

The functional currency of the Company is United States dollars (“$”), and the functional currency of Trunkbow Hong Kong is Hong Kong dollars (“HK$”). The functional currency of the Company’s PRC subsidiaries and VIEs is the Renminbi (“RMB”), and the PRC is the primary economic environment in which the Company operates.

For financial reporting purposes, the financial statements of the Company’s PRC subsidiaries and VIEs, which are prepared using the RMB, are translated into the Company’s reporting currency, the United States Dollar. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’ equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.

The exchange rates applied are as follows:

	June 30, 2012		December 31, 2011
RMB exchange rate		6.3143		6.3585

	2012		2011
Average RMB exchange rate for the three months ended June 30,		6.3194		6.4999
Average RMB exchange rate for the six months ended June 30,		6.3141		6.5399

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income of the consolidated financial statements for the respective periods.

e)	Cash and cash equivalents

Cash and cash equivalents represent cash on hand and deposits held at call with banks. The Group considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

f)	Accounts receivable

Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. The allowance for doubtful accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable. The Group determines the allowance based on aging data, historical collection experience, customer specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Group did not have any off-balance-sheet credit exposure relating to its customers, suppliers or others.

g)	Inventory

Inventories represent hardware and equipment and are stated at the lower of cost or market value, determined using the specific identification method.

Property and equipment, net

Furniture and office equipment, electronic equipment and motor vehicles are recorded at cost less accumulated depreciation. Depreciation is calculated on the straight-line method after taking into account their respective estimated residual values over the following estimated useful lives:

	Years
Motor vehicles	4 – 8
Furniture and office equipment	5
Electronic equipment	3 – 5
Telecommunication equipment	3 – 5
Leasehold improvements	3

Depreciation expense is included in cost of revenues, selling and distribution expenses, and general and administrative expenses.

When furniture and office equipment, electronic equipment and motor vehicles are retired or otherwise disposed of, resulting gain or loss is included in net income or loss in the year of disposition for the difference between the net book value and proceeds received thereon. Maintenance and repairs which do not improve or extend the expected useful lives of the assets are charged to expenses as incurred.

Impairment of long-lived assets

Long-lived assets, such as property, plant and equipment, and purchased intangible asset subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Group first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairment of long-lived assets was recognized for the six and three months ended June 30, 2012 and the year ended December 31, 2011.

Land use right, net

Land use rights are recorded at cost less accumulated amortization. Amortization is provided on a straight-line basis over the estimated useful lives which are generally 50 years and represent the shorter of the estimated usage periods or the terms of the agreements.

Intangible assets

Intangible assets acquired by the company and have finite useful lives are measured at cost less accumulated amortization and accumulated impairment loss.

Fair value measurement

The Group’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, advance to suppliers, prepayment, other current assets, accounts payable, accrued expenses and other current liabilities. The carrying values of these financial instruments approximate fair values due to their short maturities.

The Group applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC Subtopic 820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.

ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

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

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group has the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

A discussion of the valuation technique used to measure the fair value of the warrant is provided in note 17.

Revenue recognition

The Group derives revenues from the MVAS Technology Platform and Mobile Payment Solutions in the form of providing system integration, sales of software, patent licensing, maintenance services and revenue sharing for the two services.

System integration

For the system integration, the Group signs contracts with telecommunication and mobile operators and system integrators to install and integrate the Group’s software with the hardware and software purchased from third-party suppliers.

Deliverables of system integration include: software, hardware, integration, installation, and training.. The provision of services is substantially completed, i.e., when the Group purchases the hardware and software from third-party suppliers, integrates them together with the Group’s programs and software, provides installation and training to customers, and customers sign the final acceptance confirmation.

System integration includes a significant software portion. The software is not regarded as incidental to the provision of services as a whole because the marketing of such services focuses on the internally developed technologies included in the software. Therefore, ASC 985-605, “Software Revenue Recognition”, is applicable for these services. The Group cannot establish vendor-specific objective evidence of the fair values of the deliverables; therefore, according to ASC 985-605, revenue is recognized when the last deliverable in the arrangement is delivered and when all of the following criteria have been met:

(1) Persuasive evidence of an arrangement exists;

(2) Delivery has occurred;

(3) The vendor’s fee is fixed or determinable; and

(4) Collectability is probable.

Some of our contracts include postcontract customer support for a period of twelve months or less. We recognize postcontract customer support revenue together with the initial licensing fee on delivery of the software because all of the following conditions are met:

a. The postcontract customer support fee is included with the initial licensing fee.

b. The postcontract customer support included with the initial license is for one year or less.

c. The estimated cost of providing postcontract customer support during the arrangement is insignificant.

d. Unspecified upgrades or enhancements offered during postcontract customer support arrangements historically have been and are expected to continue to be minimal and infrequent.

Sales of software

The Group enters into contracts directly with the mobile operators or through the resellers where resellers designated by the mobile operators have well-developed operation teams to support local operations so as to enable the mobile operators to provide mobile payment and value-added service to the end-users.

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

The Group generally recognizes revenue from software and system services when all of the following criteria have been met, which is symbolized by the issuance of the final acceptance:

(1) Persuasive evidence of an arrangement exists;

(2) Delivery has occurred;

(3) The vendor’s fee is fixed or determinable; and

(4) Collectability is probable.

a. The postcontract customer support fee is included with the initial licensing fee.

b. The postcontract customer support included with the initial license is for one year or less.

c. The estimated cost of providing postcontract customer support during the arrangement is insignificant.

d. Unspecified upgrades or enhancements offered during postcontract customer support arrangements historically have been and are expected to continue to be minimal and infrequent.

Patent licensing

The Group enters into contracts with local system integrators who further contract with telecommunication and mobile operators, and provides these system integrators with our patents which permit the system integrators to use the Group’s patents. The system integrators pay the Group a one-time license fee for obtaining the programs and technologies. According to the contracts, these integrators are responsible for the construction and maintenance of the system platform while the Group assists these integrators during construction in form of providing technologies and programs. No PCS is offered in the patent licensing arrangement. When the construction of system platform is completed, these integrators perform examination and sign the final acceptance.

Patent licensing revenues are recognized when all revenue recognition criteria according to ASC 985-605-25 have been met, which is symbolized by the issuance of the final acceptance. Such criteria include: (i) persuasive evidence that an arrangement exists; (ii) delivery having occurred; (iii) the vender’s fee is fixed or determinable; and (iv) collectability being probable. We recognize revenue under ASC 985-605-25 because:

(i) It is our customary practice to have a signed written agreement between us and our customers.

(ii) According to these contracts, the integrators are responsible for the construction and maintenance of the system platform while we assist the integrators during construction by providing technologies and programs. Codes and programs were delivered to the integrators during the construction of the system platform. At the same time, we are obligated to provide training and support until the whole platform, including hardware incorporated with our codes and programs, is confirmed and accepted by the integrators. Revenue is recognized upon the final acceptance being signed by the integrators.

(iii) It is our policy to not provide customers the right to any adjustments or refund of any portion of their license fees paid, acceptance provisions, cancellation privileges, or rights of return.

(iv) Collectability is assessed on a customer-by-customer basis. The Company typically sells to customers for whom there is a history of successful collection, and new customers are subject to a credit review process that evaluates the customer’s ability to pay.

Maintenance services

Revenue derived from technical support contracts primarily includes telephone consulting, on-site support, product updates, and releases of new versions of products previously purchased by the customers, as well as error reporting and correction services. Maintenance contracts are typically sold for a separate fee with initial contractual period of one year with renewal for additional periods thereafter. Technical support service revenue is recognized ratably over the term of the service agreement.

Revenue sharing

We have three to five year contractual agreements with mobile carriers on deploying or managing the mobile value added service platforms or mobile payment platforms. We are obligated to provide maintenance services on the platforms and consulting services to the end-users, and also provide training to the mobile carriers’ employees.

We share revenues with the mobile carriers based upon 10% to 60% of the fees billed to the end-users. The fees billed to the end-users and subject to revenue sharing include monthly functional fees and telephone bills. Revenue is recognized monthly upon the receipt of the sales and usage reports provided by the mobile carriers. Revenue is reported on a net basis since the mobile carriers act as principal when providing services to the end-users.

Royalty income

Other than the one-time license fee, the Group also receives royalties for each end-user subscribed to the services. Royalty revenue is recognized when earned and collectability is reasonably assured, based upon the receipt of reports from mobile carriers.

Government grants

Government grants are recognized where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it is recognized as deferred income and released to income in equal annual amounts over the expected useful life of the related asset.

Where the Group receives non-monetary grants, the asset and that grant are recorded at nominal amounts and released to profit or loss over the expected useful life of the relevant asset by equal annual installment.

Cost of revenues

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

Concentration risk

Credit risk

Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Group places their cash and cash equivalents with financial institutions with high-credit ratings and quality.

The Group conducts credit evaluations of customers and generally does not require collateral or other security from customers. The Group establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk of specific customers. The amount of receivables ultimately not collected by the Group has generally been consistent with management’s expectations and the allowance established for doubtful accounts.

Major Customers

The Group had sales to three customers that accounted for approximately 66.5% of revenues during the six months ended June 30, 2012 and three customers who accounted for approximately 67.0% of revenues during the six months ended June 30, 2011. These customers accounted for approximately 30.6% and 34.5% of accounts receivable balance as of June 30, 2012 and December 31, 2011, respectively.

The Group had sales to three customers that accounted for approximately 75.0% of revenues during the three months ended June 30, 2012 and two customers who accounted for approximately 90.8% of revenues during the three months ended June 30, 2011. These customers accounted for approximately 22.7% and 30.0% of accounts receivable balance as of June 30, 2012 and December 31, 2011, respectively.

Major Suppliers

The Group had purchases from two vendors that accounted for approximately 59.3% and 70.8% of purchases during the six months ended June 30, 2012 and 2011, respectively. These vendors accounted for nil of accounts payable balance as of June 30, 2012 and December 31, 2011.

The Group had purchases from two vendors that accounted for approximately 56.5% and 77.4% of purchases during the three month ended June 30, 2012 and 2011, respectively. These vendors accounted for nil of accounts payable balance as of June 30, 2012 and December 31, 2011.

Research and development expenses

Research and development costs are incurred in the development of technologies in mobile value added service platforms and mobile payment systems, including significant improvements and refinements to existing products and services. The Group applies ASC985-20, “Costs of Computer Software to Be Sold, Leased, or Marketed”. In particular, nearly all of the research and development expenditure incurred since the Group’s formation has been to establish the technological feasibility of the Group’s software and techniques. As a result, all research and development costs are expensed as incurred.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lesser are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods.

Taxation

Income taxes

The Group follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between of the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the income statement in the period that includes the enactment date.

Value added taxes

The Company’s PRC subsidiaries and VIEs are subject to value-added tax (“VAT”) on sales. For Trunkbow Technologies and Trunkbow Shandong, the VAT is calculated at a rate of 17% on revenues from sales of hardware and software as well as the installation and system integration services which are deemed as mixed-sale of goods and thus subject to VAT. Trunkbow Shenzhen is a small scale tax payer and the VAT is calculated at a rate of 3% on revenues.

Pursuant to the policies issued by Ministry of Finance, State Taxation Administration and General Administration of Customs for Encouraging Software Industry and Integrated Circuits Industry issued in 2000, an enterprise classified as a “software enterprise” will be entitled to a rebate of its net VAT liability to the extent that it exceeds 3% of the actual VAT burden relating to self-developed software product sales.

Business tax and surcharges

The Company’s PRC subsidiaries and VIEs are also subject to a 5% business tax and related surcharges on the revenues earned from providing technical services.

Uncertain tax positions

ASC 740-10-25 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. For the three months ended June 30, 2012 and 2011 and the year ended December 31, 2011, the Group did not have any interest and penalties associated with tax positions and the Group did not have any significant unrecognized uncertain tax positions.

The Company’s subsidiaries and VIEs are subject to taxation in PRC and other tax jurisdictions. There is no ongoing examination by taxing authorities at this time. Various tax years during the three months ended June 30, 2012 and 2011 and the year ended December 31, 2011 of the Company’s subsidiaries and VIEs remain open in the relevant taxing jurisdictions.

Earnings per share

Earnings per share is calculated in accordance with ASC 260, “Earnings Per Share”. Basic earnings per share is computed by dividing income attributable to holders of common stock by the weighted average number of common shares considered to be outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of outstanding common stock warrants is reflected in the diluted earnings per share by application of the treasury stock method when the impact is dilutive.

Appropriated Retained Earnings

The income from the Company’s subsidiaries and VIEs is distributable to its owners after transfer to statutory reserves as required by relevant PRC laws and regulations and the Company’s Articles of Association. As stipulated by the relevant laws and regulations in the PRC, the Company’s subsidiaries and VIEs are required to maintain a statutory surplus reserve fund which is non-distributable to shareholders. Appropriations to such reserve are 10% of net profit after taxation determined in accordance with generally accepted accounting principles of the PRC.

The statutory surplus reserve fund is established for the purpose of offsetting accumulated losses, enlarging productions or increasing share capital. The appropriation may cease to apply if the balance of the fund is equal to 50% of the entity’s registered capital.

Comprehensive income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented on the accompanying consolidated balance sheets are the cumulative foreign currency translation adjustments.

Commitments and contingencies

In the normal course of business, the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, product and environmental liability, and tax matters. In accordance with ASC 450-20, “Accounting for Contingencies”, the Group records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Historically, the Group has not experienced any material service liability claims.

Recently issued accounting standards

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

3. — ACCOUNTS RECEIVABLE, NET

At June 30, 2012 and December 31, 2011, accounts receivable consisted of:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Accounts receivable	$	42,903,400	$	42,091,386
Less: Allowance for doubtful debt		2,359,768		943,619
	$	40,543,632	$	41,147,767

The Group has recognized an allowance of $2,359,768 for a doubtful receivable that is over one year. The Group has not had any write-off of trade receivables during the years presented. $3,353,139 was subsequently collected by August 14, 2012. The accounts receivable of Trunkbow Shandong arising from all sales contracts or in kind from April 1, 2010 to December 30, 2013 have been pledged for the short-term bank loan of $4,751,120 due on November 30, 2012, $1,742,078 on December 28, 2012, and $791,853 on January 11, 2013.

4. — ADVANCES TO SUPPLIERS

At June 30, 2012 and December 31, 2011, advances to suppliers consisted of:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Advances to suppliers	$	18,073,192	$	13,270,125

Advances to suppliers represent prepayments to the Group’s suppliers for the purchase of third party software and hardware to be used in our MVAS/MPS platforms.

5. — PREPAYMENT

Prepayments at June 30, 2012 and December 31, 2011 are summarized as follows:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Prepaid advertisement	$	0	$	267,359
Prepaid VAT		310,017		0
Prepaid insurance		92,500		0
Prepaid royalties		1,856,421		0
Other prepaid expenses		124,142		48,899
	$	2,383,080	$	316,258

Prepaid royalties represented prepayment to Sony Music Entertainment China Holdings Limited for music license used in MPS and MVAS. The license will expire in March 2013.

Prepaid advertisement is amortized as the expense incurred. The balance as of December 31, 2011 was expensed during the three months ended March 31, 2012.

Prepaid VAT represented the payment of VAT-input over VAT-output.

Prepaid insurance is amortized within one year. Insurance expense for the three months ended June 30, 2012 and 2011 were $46,250 for both periods. Insurance expense for the six months ended June 30, 2012 and 2011 were $92,500 for both periods.

Other prepaid expenses included prepaid property management fees, remodeling expenses, office rental and other operating expenses.

6. — OTHER CURRENT ASSETS

Loans receivable and other current assets at June 30, 2012 and December 31, 2011 are summarized as follows:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Deposits	$	198,353	$	150,234
Loans to third parties		5,265,825		2,830,856
Staff advances		133		259,008
Advance to cloud APP agreement		2,800,063		800,054
		8,264,374		4,040,152

Loans to third parties as of June 30, 2012 and December 31, 2011 consisted primarily of $3.48 million and $2.67 million of payment to China Telecom Jinan Branch for the purchase of MPS hardware and software for the roll-out of MPS systems and application in Jinan City, Shandong Province. According to the agreement with China Telecom, Trunkbow will share monthly function fees based on 3% of total principal with China Telecom on the MPS systems and application for consecutive twelve months from January 2012 to December 2012. The principal will be repaid in December 2012. The revenue and interest income recognized during the six months ended June 30, 2012 was $521,964 and $109,955. The revenue and interest income recognized during the three months ended June 30, 2012 was $384,611 and $57,098. Loans to third parties as of June 30, 2012 also consisted of 1.3 million of payment to a third party for a network project that we plan to cooperate and share revenue with. The loan is interest free. Due date of the loan is September 30, 2012.

Advance for cloud APP agreement represents a contribution per two cooperative agreements the Company entered into with a marketing company to start a music applet development project in December 2011 and January 2012. The contracts, in the amount of $2,000,000 and $800,063, respectively, call for 50% revenue sharing with a minimum guarantee of a 5% and 10% return, respectively. The terms of the agreements are nine months starting on January 1, 2012. In addition, the Company is guaranteed to receive its initial contribution of $2,800,063 at the end of the contract term.

7. — AMOUNT DUE FROM (TO) DIRECTORS

At June 30, 2012 and December 31, 2011, amount due from (to) directors consisted of:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Amount due from Directors	$	58,746	$	758,033

Amount due from directors represented advance to the directors for expenses paid on behalf of the Company.

	June 30,		December 31,
	2012		2011
	(Unaudited)
Amount due to Directors	$	9,022	$	11,959

Amount due to directors represented prepayment by the directors for expenses on behalf of the Company.

8. — INVENTORIES

At June 30, 2012 and December 31, 2011, inventories consisted of:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Hardware
-System integration hardware	$	103,439	$	95,354
-Point of sale systems		2,058,028		2,856,892
Project in progress		12,910,238		8,345,267
	$	15,071,705	$	11,297,513

The point of sale systems were purchased from VeriFone, a related party of the Company.

9. — PROPERTY AND EQUIPMENT, NET

Property and equipment of the Group mainly consists of furniture and office equipment and electronic equipment located in the PRC.

Property and equipment as of June 30, 2012 and December 31, 2011 are summarized as follows:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Motor vehicles	$	615,815	$	454,309
Furniture and office equipment		124,750		109,140
Electronic equipment		460,671		426,580
Telecommunication equipment		4,105,771		189,659
Leasehold improvement		60,995		60,572
		5,368,002		1,240,260
Less: Accumulated depreciation		746,538		385,242

Construction in progress		10,883,776		10,706,016
	$	15,505,240	$	11,561,034

Depreciation expense for the three months ended June 30, 2012 and 2011 was $278,770 and $59,555, respectively.

Depreciation expense for the six months ended June 30, 2012 and 2011 was $358,612 and $107,322, respectively.

Construction in progress represented phase payment on construction materials to a contractor for the construction of the R&D center in Jinan.

10. — LAND USE RIGHT, NET

	June 30,		December 31,
	2012		2011
	(Unaudited)

Land use right	$	6,017,223	$	5,975,395

Less: Accumulated amortization		130,574		69,812
	$	5,886,649	$	5,905,583

Trunkbow Shandong acquired the land use right for the construction of the R&D center in Jinan. The land use right expires in June 2061. The amortization of land use right for the six months ended June 30, 2012 and 2011 was $60,275 and $9,742, respectively. The amortization of land use right for the three months ended June 30, 2012 and 2011 was $30,112 and $9,742. The estimated amortization expense is RMB761,160 (approximately $120,549) for each of the five succeeding fiscal years. The land use right has been pledged for the short-term bank loan of $4,751,120 due on November 30, 2012, $1,742,078 on December 28, 2012, and $791,853 on January 11, 2013.

11. — INTANGIBLE ASSETS, NET

At June 30, 2012 and December 31, 2011, intangible assets consisted of:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Software	$	3,239	$	3,216
License		41,176		40,890
Domain name		248,868		0
		293,283		44,106
Less: Accumulated amortization		15,911		10,148
	$	277,372	$	33,958

Amortization expense for the three months ended June 30, 2012 and 2011 was $2,844 and $2,754, respectively.

Amortization expense for the six months ended June 30, 2012 and 2011 was $5,692 and $3,806, respectively.

12. — LONG-TERM PREPAYMENT

At June 30, 2012 and December 31, 2011, long-term prepayment consisted of:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Office rental	$	0	$	8,191
Prepaid membership fee		238,084		250,758
Deposits		159,565		158,456
Prepaid royalties		0		1,857,011
Other prepaid expenses		334,453		458,947
	$	732,102	$	2,733,363

13. — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The breakdowns of accrued expenses and other current liabilities as of June 30, 2012 and December 31, 2011 are as follows:

	June 30,		December 31,
	2012		2011
	(Unaudited)

Accrued payroll	$	327,504	$	477,091
Advance from customers		399		25,717
Loans from third parties		118,778		39,317
Payables to staff		358,372		160,006
Accrued expenses		455,684		357,481
Professional fees payable		263,116		231,454
Royalties payable		925,021		925,062
Others		27,893		0
	$	2,476,767	$	2,216,128

14. — SHORT-TERM LOAN

	June 30,		December 31,
	2012		2011
	(Unaudited)

China Minsheng Banking Corporation Limited		7,285,051		6,460,945
Agriculture Bank of China		6,936,636		0
	$	14,221,687	$	6,460,945

Total loan facility from China Minsheng Banking Corporation Limited is RMB50,000,000 (approximately $7,918,534) with 8.856% of annual interest rate. $7,285,051 of the total facility was received as of June 30, 2012. Among the $7,285,051, $4,751,120 is due on November 30, 2012, $1,742,078 on December 28, 2012, and $791,853 on January 11, 2013. The loan is guaranteed by Mr. Wanchun Hou and his spouse, Mr. Qiang Li and his spouse, and also pledged by Mr. Qiang Li’s personal properties, Trunkbow Shandong’s land use rights and Trunkbow Shandong’s accounts receivable as disclosed in note 3 and 10. The interest expense related to the loan for the three months ended June 30, 2012 and 2011 was $162,953 and nil. The interest expense related to the loan for the six months ended June 30, 2012 and 2011 was $324,034 and nil.

On March 2, 2012, Trunkbow Shandong obtained a RMB 70,000,000 (approximately $11,078,579) total bank facility from Agriculture Bank of China. $6,936,636 of the total facility was received as of June 30, 2012. Among the $6,936,636, $2,818,998 is due on September 1, 2012, $2,850,672 on October 25, 2012, $435,519 on October 12, 2012, and $831,446 on December 18, 2012. The loan is secured by a transfer with full recourse of its accounts receivable of $7,781,514, and $4,117,638 of the loan is guaranteed by Mr. Wanchun Hou and Mr. Qiang Li. Interest on the bank facility is a floating lending rate, 25% over the PBOC benchmark rate. The interest expense related to the loan for the three months ended June 30, 2012 and 2011 was $94,172 and nil. The interest expense related to the loan for the six months ended June 30, 2012 and 2011 was $112,100 and nil.

15. — TAXES PAYABLE

	June 30,		December 31,
	2012		2011
	(Unaudited)

Value Added Tax Payable	$	0	$	968,363
Income Tax Payable		2,121,626		3,056,321
Others		103,706		185,223
	$	2,225,332	$	4,209,907

16. — INCOME TAXES

Corporation Income Tax (“CIT”)

(i) The Company was incorporated in the state of Nevada. Under the current law of Nevada, the Company is not subject to state corporation income tax. The Company became a holding company and does not conduct any substantial operations of its own after the Share Exchange. No provision for federal corporate income tax has been made in the financial statements as the Company has no taxable income in the United States for the six and three months ended June 30, 2012. Earnings in the PRC are intended to be permanently reinvested in the PRC operation.

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

Trunkbow Hong Kong was incorporated in Hong Kong on July 9, 2004. Taxable profits are subject to Hong Kong profits tax on corporations at the rate of 16.5%. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

(ii)

PRC subsidiaries and VIEs

The subsidiaries and VIEs incorporated in the PRC are generally subject to a corporate income tax rate of 25% commencing January 1, 2008 except for those subsidiaries and VIEs that enjoy tax holidays or preferential tax treatment, as discussed below.

Trunkbow Shandong

Trunkbow Shandong, a PRC company, is a wholly foreign-owned entity under PRC law and is governed by the income tax law of the PRC and is subject to PRC enterprise income tax. The statutory income tax rate commencing January 1, 2008 was 25%.

On October 16, 2009, Trunkbow Shandong was certified as a software enterprise by Shandong Economic and Information Technology Committee. Pursuant to the PRC tax laws, newly established and certified software enterprises are entitled to tax preferential policies of full exemption from income tax for the first two years and a 50% reduction for the next three years, commencing from the first profit-making year after offsetting all tax losses carried forward from the previous five years. The first profit making year for Trunkbow Shandong was 2009. On January 7, 2010, Trunkbow Shandong obtained the official approval from the tax bureau of Shandong Province Jinan City High-tech Industry Development Zone on the preferential tax exemption.

Pursuant to the aforementioned taxation laws, Trunkbow Shandong was exempt from income tax for the years ended December 31, 2009 and 2010, and thereafter, a half tax rate of 12.5% is applicable for the years ended December 31, 2011, 2012 and 2013.

In March 2012, Trunkbow Shandong was recognized as New and High-Tech Enterprise. Under the Enterprise Income Tax Law effective from January 1, 2008, Trunkbow Shandong will be entitled to the 15% of preferential tax rate for the years ended December 31, 2014, 2015 and 2016.

Trunkbow Shenzhen

Trunkbow Shenzhen, a PRC company, is a wholly foreign-owned entity under PRC law. Because it was incorporated in Shenzhen, a special economic zone in the PRC, it is entitled to a preferential income tax rate of 15% in 2007. According to the pronouncement of the tax bureau, for companies established after March 16, 2007, the income tax rate will be immediately raised to the unified tax rate of 25% started from January 1, 2008. As Trunkbow Shenzhen was established on September 7, 2007, the income tax rate from year 2008 on was 25%.

On June 8, 2011, Trunkbow Shenzhen was certified as a software enterprise by Shenzhen Technology, Industry, Commerce and Information Committee. Pursuant to the PRC tax laws, newly established and certified software enterprises are entitled to tax preferential policies of full exemption from income tax for the first two years and a 50% reduction for the next three years, commencing from the first profit-making year after offsetting all tax losses carried forward from the previous five years. Trunkbow Shenzhen was in net operation loss as of June 30, 2012 and no income tax provision was recorded.

Trunkbow Technologies

Trunkbow Technologies was registered in Shenzhen, a special economic zone in the PRC, which is entitled to preferential income tax rates of 18% and 15% in 2008 and 2007 respectively. According to the pronouncement of the tax bureau, for companies established before March 16, 2007, the income rate will gradually increase to 25% within 4 years, 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012. Trunkbow Technologies was in net operation loss as of June 30, 2012 and no income tax provision was recorded.

Delixunda

Delixunda was registered in Beijing, the PRC. The applicable income tax rate for Delixunda was 25% for the three months ended June 30, 2012. Delixunda had a net operating loss for the three months ended June 30, 2012, and no income tax provision was recorded.

(1) Deferred tax asset

	June 30,		December 31,
	2012		2011
	(Unaudited)

Deferred tax asset	$	294,971	$	117,952

Deferred tax asset as of June 30, 2012 and December 31, 2011 represented the deferred income tax asset arising from the allowance for doubtful debt of $2,359,768 and $943,619, respectively.

(2) The following is a reconciliation of tax computed by applying the statutory income tax rate to PRC operations to income tax expenses for the three and six months ended June 30, 2012 and 2011, respectively:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

PRC statutory tax rate		25	%		25	%		25	%		25	%
Accounting income before tax	$	3,289,492		$	9,053,421			6,151,225			13,282,358
Computed expected income tax expenses		822,373			2,263,355			1,537,806			3,320,590
Accumulated loss from subsidiaries and VIEs		4,668			27,022			6,546			79,341
Add: Prior year adjustment		39,228			0			39,228			0
Less: tax exemption		598,136			1,739,740			994,875			2,460,940
Income tax expenses	$	268,133		$	550,637		$	588,705		$	938,991

17. — STOCKHOLDERS’ EQUITY

Preferred stock

The Company authorized 10,000,000 shares of preferred stock, with a par value of $.001 per share, but no preferred shares were issued and outstanding as of June 30, 2012.

Common stock

Pursuant to the terms of the Exchange Agreement, in February 2010 the Shareholders transferred to the Company all of the Trunkbow Shares in exchange for the issuance of 19,562,888 shares of the Company’s common stock. Accordingly, the Company reclassified its common stock and additional paid-in-capital accounts for the year ended December 31, 2009.

Pursuant to the Purchase Agreement entered into concurrently with the Exchange Agreement, an aggregate of 8,447,575 shares and 1,689,515 warrants were sold for aggregate gross proceeds equal to $16,895,150. Certain holders of outstanding warrants of the Company issued to creditors and claimants of visitalk.com, Inc. in accordance with such company’s Chapter 11 reorganization plan exercised the 2,774,500 warrants owned by them for an aggregate exercise price of $5.5 million and received warrants to purchase an aggregate of 554,900 shares of Common Stock.

On February 3, 2011, the Company announced its initial public offering of 4,000,000 shares of Common Stock priced at $5.00 per share. The shares began trading on February 3, 2011, on the NASDAQ Global Market under the ticker symbol “TBOW”. The net proceeds were $18,109,988 after deduction of $1,400,000 of underwriter’s commission, and $490,012 of legal and professional fees.

Warrants

In connection with the February 2010 offering, we issued warrants (the “February 2010 Offering Warrants”) to purchase 3,005,519 shares of common stock at an exercise price of $2.00. The warrants have a five year term and are exercisable immediately. The exercise price and number of shares of Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.

No fractional shares will be issued upon exercise of the warrants. If, upon exercise of a warrant, a holder would be entitled to receive a fractional interest in a share, we will pay to the holder cash equal to such fraction multiplied by the then fair market value of one full share.

The estimated fair values of the warrants issued to investors were determined at February 10, 2010 using Binominal Option Pricing Model. The fair values of the warrants are summarized as follows:

Fair value of warrant per share (US$) at date of issuance: $1.18

Key assumptions adopted in Binomial Option Pricing Model for the estimation of the fair value of the warrants outstanding were summarized as follows:

Expected volatility		73	%
Expected dividends yield		0	%
Time to maturity		5 years
Risk-free interest rate per annum		2.218	%
Fair value of underlying common shares (per share)	$	1.95

As of June 30, 2012, 305,000 warrants had been exercised at $2.00 per share.

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

The estimated fair values of the warrants issued to Roth were determined at February 8, 2011 using Binominal Option Pricing Model. The fair values of the warrants are summarized as follows:

Fair value of warrant per share (US$) at date of issuance: $1.68.

Key assumptions adopted in Binomial Option Pricing Model for the estimation of the fair value of the warrants outstanding were summarized as follows:

Expected volatility		59.5	%
Expected dividends yield		0	%
Time to maturity		3 years
Risk-free interest rate per annum		1.745	%
Fair value of underlying common shares (per share)	$	4.85

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

On July 11, 2011, the Company issued China High Growth Capital LTD warrants to purchase up to a total of 250,000 shares of our common stock as compensation for business development and consulting services. The warrant, which was exercisable at issuance, has a term of five years and an exercise price of $2 per share. The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.

The estimated fair value of the warrant issued to China High Growth Capital LTD was determined at July 11, 2011 using Binominal Option Pricing Model. The fair values of the warrants are summarized as follows:

Fair value of warrant per share (US$) at date of issuance: $1.40.

Key assumptions adopted in Binomial Option Pricing Model for the estimation of the fair value of the warrants outstanding were summarized as follows:

Expected volatility		59.5	%
Expected dividends yield		0	%
Time to maturity		5 years
Risk-free interest rate per annum		2.294	%
Fair value of underlying common shares (per share)	$	2.44

The China High Growth Capital LTD Warrants are directly attributable to compensation for business development and consulting services for a period from July 1, 2011 to October 31, 2011. If we had not issued the China High Growth Capital LTD Warrants, we would have had to pay the same amount of cash as the fair value. Total fair value of the China High Growth Capital LTD Warrants is $350,000. Therefore, we recorded $350,000 as general and administration expenses during the year ended December 31, 2011.

As of June 30, 2012, no warrants had been exercised by China High Growth Capital LTD.

Escrow shares

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

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

Because the above conditions have been met, the escrow shares were released to the Controlling Stockholders in the third quarter of 2011.

18. — REVENUES AND COST OF REVENUES

The following consolidated result of operations includes the results of operations of the Company, all the subsidiaries and our VIEs, Trunkbow Technologies and Delixunda. Delixunda has been consolidated from March 10, 2011 (the date of acquisition).

For the three and six months ended June 30, 2012 and 2011, revenues and cost of revenues consisted of:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Gross Revenues
System integration	$	471,492	$	6,912,819	$	1,947,632	$	7,395,523
Software sales		3,865,760		1,758,687		8,539,736		5,365,617
Maintenance service		93,461		139,873		162,658		874,631
Shared revenue		1,539,315		305,122		2,118,215		583,072
		5,970,028		9,116,501		12,768,241		14,218,843
Less:
Business tax and surcharges		121,442		182,131		237,993		303,555
Cost of Revenues
Equipment costs		638,821		2,908,913		1,884,438		3,344,494
Labor Costs		92,172		123,792		185,891		240,044
		730,993		3,032,705		2,070,329		3,584,538
Gross profit	$	5,117,593	$	5,901,665	$	10,459,919	$	10,330,750

19. — SEGMENT INFORMATION

ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Group’s chief operating decision maker is the Chief Executive Officer, who reviews consolidated results of operations prepared in accordance with U.S. GAAP when making decisions about allocating resources and assessing performance of the Group; hence, the Group has only one operating segment.

The Group operates in the PRC and all of the Group’s long-lived assets are located in the PRC. As of June 30, 2012, the Company provides two products and services: MVAS Technology Platforms and Mobile Payment Solutions. MVAS Technology Platforms enable the operators to offer mobile value added services to end-users through our major products including Caller Color Ring Back Tone, Number Change Notification and Color Numbering. Mobile Payment Solutions allows RF-SIM (radio frequency SIM) enabled mobile phones worldwide to be utilized as payment tools and authentication devices, and also enables the end-user to consolidate a variety of functions and services into one phone.

We do not track our assets by operating segments. Consequently, it is not practical to show assets by operating segments results.

The gross revenues and cost of revenues consist of the following products and services:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
MVAS Technology Platforms
Gross Revenues	$	4,823,256	$	8,615,110	$	7,219,170	$	12,287,844
Business tax and surcharges		70,352		163,196		86,643		247,675
Cost of Revenues		473,290		2,835,532		1,047,273		3,299,831
	$	4,279,614	$	5,616,382		6,085,254		8,740,338
Mobile Payment Solutions
Gross Revenues	$	1,146,772	$	501,391	$	5,549,071	$	1,930,999
Business tax and surcharges		51,090		18,935		151,350		55,880
Cost of Revenues		257,703		197,173		1,023,056		284,707
	$	837,979	$	285,283	$	4,374,665	$	1,590,412

20. — EMPLOYEE DEFINED CONTRIBUTION PLAN

Full time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were $177,086 and $68,153 for the three months ended June 30, 2012 and 2011, respectively. The total amounts for such employee benefits, which were expensed as incurred, were $409,025 and $201,138 for the six months ended June 30, 2012 and 2011, respectively.

21. — COMMITMENTS AND CONTINGENCIES

Commitments

Leasing Arrangements

The Group has entered into commercial leases for offices and vehicles with a term expiring in April 2014. The lease may be cancelled by either party with 30-days prior written notice. Future minimum rental payments under this operating lease are as follows:

	Office Rental
	(Unaudited)
Six months ending December 31, 2012	$	241,325
Year ending December 31, 2013		241,189
Year ending December 31, 2014		90,304
Total	$	572,818

Capital Commitment

Construction of R&D center

We paid out the first phase payment to the contractor for our new R&D center in Jinan during the year ended December 31, 2011. We expect to make further payments as the construction progresses, although the timing and amount of such payments have not been agreed with the contractor as of the date hereof. The building is estimated to be completed by the end of 2013, and the overall budget for the construction is between $23 – $30 million.

Guangzhou data center

Trunkbow Shandong has entered into a framework agreement with China Communications Services Corporation, Limited ("CCSC") for the construction, management and operation of a cloud data center in Guangzhou, China. Construction on the facility began in the second quarter, with the first phase scheduled for completion by the end of 2012. Under the agreement, Trunkbow will invest approximately RMB72 million (US$11.3 million) in the project. Trunkbow has secured a RMB72 million commercial loan to fund the development and initial operation of the facility.

Shanghai data center

Trunkbow Shandong has entered into a cooperation agreement with Shanghai Telecommunication Engineering Co., Ltd ("STE") for the construction, management and operation of a cloud data center to be located in Shanghai, China. Under the agreement, Trunkbow will invest approximately RMB180 million (US$28 million). The Company has applied for a government-backed bank loan to finance the construction.

22. — EARNINGS PER SHARE

		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Numerator:
Net income	$	2,309,096	$	7,961,781		4,515,585		11,315,460
Denominator:
Weighted average number of common shares outstanding - Basic		36,807,075		36,548,833		36,807,075		35,791,274
Effect of dilutive securities - Warrant		0		1,285,114		10,255		1,213,106
Weighted average number of common shares outstanding - Diluted		36,807,075		37,833,947		36,817,330		37,004,380
Earnings per share
-Basic	$	0.06	$	0.22	$	0.12	$	0.32
-Diluted	$	0.06	$	0.21	$	0.12	$	0.31

For the three months ended June 30, 2012, the Roth Capital Warrants, the China High Growth Capital LTD warrants and the February 2010 warrants were not included in the calculation of diluted earnings per share because the effect was anti-dilutive, as the exercise price of $6, $2 and $2, respectively, was higher than the average stock price of $1.49 for the three months ended June 30, 2012.

For the and six months ended June 30, 2012, the Roth Capital Warrants were not included in the calculation of diluted earnings per share because the effect was anti-dilutive, as the exercise price of $6 was higher than the average stock price for the six months ended June 30, 2012.

For the three and six months ended June 30, 2011, the Roth Capital Warrants were not included in the calculation of diluted earnings per share because the effect was anti-dilutive, as the exercise price of $6 was higher than the average stock price of $4.11 for the three months ended June 30, 2011.

23. — RELATED PARTY TRANSACTIONS

(1) Purchase from related parties

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

(2) Guarantee and pledge of assets by related parties

The loan from China Minsheng Banking Corporation Limited was guaranteed by Mr. Wanchun Hou and his spouse, Mr. Qiang Li and his spouse, and also pledged by Mr. Qiang Li’s personal properties, Trunkbow Shandong’s land use right and Trunkbow Shandong’s accounts receivable. The pledge value of Mr. Li’s personal properties is RMB 3,930,000 (approximately $621,983).

The loan from Agriculture Bank of China was guaranteed by Mr. Wanchun Hou and Mr. Qiang Li.

(3) Vehicle rental from related parties

Trunkbow (Asia Pacific) Investment Holdings Limited, our wholly owned Hong Kong subsidiary, entered into a vehicle rental agreement with Mr. Qiang Li for consecutive twelve months starting from January 1, 2012. Monthly rental fee is $12,000 on four cars owned by Mr. Li and $36,000 was paid to Mr. Li as deposit. Rental expense for the three months ended June 30, 2012 was $36,000. Rental expense for the six months ended June 30, 2012 was $72,000.

24. — VARIABLE INTEREST ENTITIES

To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through two variable interest entities.

In December 2007, a series of agreements were entered into amongst Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders, providing Trunkbow Shandong the ability to control Trunkbow Technologies, including its financial interest.

Resulting from the contractual arrangements between Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders, the Company includes the assets, liabilities, revenues and expenses of Trunkbow Technologies in its consolidated financial statements. The contractual arrangements with Trunkbow Technologies are summarized below:

Exclusive Business Cooperation Agreements. Pursuant to Exclusive Business Cooperation Agreements entered into amongst Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders in December 2007, Trunkbow Shandong has the exclusive right to provide to our PRC operating subsidiaries complete technical support, business support and related consulting services, which include, among other things, technical services, business consultations, equipment or property leasing, marketing consultancy and product research. Each of our PRC operating subsidiaries has agreed to pay an annual service fee to Trunkbow Shandong equal to 100% of its audited total amount of operational income each year. Each of our PRC operating subsidiary has also agreed to pay a monthly service fee to Trunkbow Shandong equal to 100% of the net income generated on a monthly basis. The payment and terms of payment are fixed to ensure that Trunkbow Shandong obtains 100% of the net income for that month, although adjustments may be made upon approval by Trunkbow Shandong to provide for operational needs. If at year end, after an audit of the financial statements of any of our PRC operating subsidiaries, there is determined to be any shortfall in the payment of 100% of the annual net income, such PRC operating subsidiary must pay such shortfall to Trunkbow Shandong. Each agreement has a ten-year term, subject to renewal and early termination in accordance with the terms therein.

Exclusive Option Agreements. Under Exclusive Option Agreements entered into amongst Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders in December 2007, each of the PRC Shareholders irrevocably granted to Trunkbow Shandong or its designated person an exclusive option to purchase, to the extent permitted by PRC law, a portion or all of their respective equity interest in any PRC Operating Subsidiary for a purchase price of RMB10 or a purchase price to be adjusted to be in compliance with applicable PRC laws and regulations. Trunkbow Shandong or its designated person has the sole discretion to decide when to exercise the option, whether in part or in full. Each of these agreements has a ten-year term, subject to renewal at the election of Trunkbow Shandong.

Share Pledge Agreements. Under the Share Pledge Agreements entered into by and among Trunkbow Shandong, our PRC operating subsidiaries and each of Mr. Wanchun Hou, Mr. Qiang Li and Mr. Liangyao Xie, (the “PRC Shareholders”) in December 2007, the PRC Shareholders pledged, all of their equity interests in PRC Operating Subsidiaries to guarantee our PRC operating subsidiaries’ performance of its obligations under the Exclusive Business Cooperation Agreement. If the PRC operating subsidiaries or any of the PRC Shareholders breaches its/his/her respective contractual obligations under this agreement, or upon the occurrence of one of the events regarded as an event of default under each such agreement, Trunkbow Shandong, as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interests. The PRC Shareholders agreed not to dispose of the pledged equity interests or take any actions that would prejudice Trunkbow Shandong’s interest, and to notify Trunkbow Shandong of any events or upon receipt of any notices which may affect Trunkbow Shandong’s interest in the pledge. Each of the equity pledge agreements will be valid until all the payments due under the Exclusive Business Cooperation Agreement have been fulfilled.

Powers of Attorney. The PRC Shareholders each executed a power of attorney in December 2007, to appoint Trunkbow Shandong as their exclusive attorneys-in-fact to vote on their behalf on all matters with respect to our PRC operating subsidiaries that require shareholder approval. The term of each power of attorney is valid so long as such shareholder is a shareholder of the respective PRC operating subsidiary.

We entered into a series of contractual arrangements with Beijing Delixunda Technology Co., Ltd. (“Delixunda”) and its shareholders on March 10, 2011. Delixunda is a telecom value-added service licensed company and was established as a limited liability company on December 1, 2009 in Beijing, the PRC. Delixunda has no operations prior to February 10, 2011. As a result of the contractual arrangements with Delixunda, we indirectly own the telecom value-added service license, which would enable us to offer telecom wireless value-added service to individual clients. In addition, the pledges supporting these contractual arrangements have not been registered as required by PRC law, which could also result in the invalidation of these arrangements under PRC law.

As a result of these contractual arrangements, we are considered to be the primary beneficiary of Trunkbow Technologies and Delixunda; we consolidate the results of operations, assets and liabilities of Trunkbow Technologies and Delixunda in our financial statements. Although we have been advised by our PRC legal counsel that each contract under these contractual arrangements is valid and binding under current PRC laws and regulations, our contractual arrangements with Trunkbow Technologies and Delixunda may not be as effective in providing us with control over the Trunkbow Technologies and Delixunda as direct ownership. We rely on these contractual rights to effect control and management of the VIEs, which exposes it to the risk of potential breach of contract by the shareholders of Trunkbow Technologies and Delixunda for a number of reasons. For example, their interests as shareholders of Trunkbow Technologies and Delixunda and our interests may conflict and we may fail to resolve such conflicts; the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith. If any of the foregoing were to happen, we may have to rely on legal or arbitral proceedings to enforce our contractual rights, including specific performance or injunctive relief, and claiming damages. Such arbitral and legal proceedings may cost substantial financial and other resources, and result in disruption of our business, and we cannot assure that the outcome will be in our favor. Apart from the above risks, there are no significant judgments or assumptions regarding enforceability of the contractual agreements with Trunkbow Technologies or Delixunda.

In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in the PRC if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. At present, the equity interest pledge agreement has not been registered with the relevant PRC authorities, which will affect our ability to enforce its provisions prior to such registration. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be materially and adversely affected. If the applicable PRC authorities invalidate our contractual arrangements for violation of PRC laws, rules and regulations, in such an event, we would lose control of the VIE resulting in its deconsolidation in financial reporting and loss in our market valuation.

In addition, if any of our VIEs or all or part of its assets become subject to court injunctions or asset freezes or liens or rights of third-party creditors, we may be unable to continue some of our businesses, which could adversely affect our business, financial condition and results of operations. If any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of its assets. The occurrence of any of these events may hinder our ability to operate business, which could in turn materially harm our business and ability to generate revenues and cause the market price of our ordinary shares to decline significantly.

Most of our operations are conducted through our affiliated companies, including our VIEs which we control through contractual agreements in the form of variable interest entities. Current regulations in the PRC permit our PRC subsidiaries to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these PRC affiliates to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations.

Under PRC law, our subsidiary may only pay dividends after 10% of its after-tax profits have been set aside as reserve funds, unless such reserves have reached at least 50% of its registered capital. Such cash reserve may not be distributed as cash dividends.

The PRC Income Tax Law also imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprise without any establishment or place within China or if the received dividends have no connection with such foreign investors’ establishment or place within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

Summary information regarding consolidated VIEs is as follows:

	June 30,		December 31,
	2012		2011
	(Unaudited)
Assets:
Cash and cash equivalents	$	167,968	$	206,492
Accounts receivable		2,734,130		2,719,991
Other current assets, net		19,218		9,431
Inventories		119,654		134,126
Due from directors		2,644		3,103
Property and equipment, net		182,718		108,740
Long-term prepayment		3,880		7,431
Total Assets	$	3,230,212	$	3,189,314

Liabilities:
Accounts payable	$	287,418	$	180,338
Accrued expenses and other current liabilities		1,065,677		1,235,494
Due to directors		146,683		55,319
Short-term loan
Taxes payable		1,731,066		1,721,633
Total Liabilities	$	3,230,844	$	3,192,784

The assets of the VIEs can be used only to settle the obligations of the VIEs. Conversely, liabilities recognized as of consolidating VIEs do not represent additional claims on the Company’s assets.

For the three months ended June 30, 2012, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes revenues of $164,778, cost of revenues of $141,224, operating expenses of $41,161 and net loss of $18,989. For the six months ended June 30, 2012, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes $382,287, cost of revenues of $285,731, operating expenses of $92,403 and net income of $2,861.

For the three months ended June 30, 2011 the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes revenues of $58,937, cost of revenues of $16,348, operating expenses of $110,207 and net loss of $65,756. For the six months ended June 30, 2011 the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes revenues of $109,315, cost of revenues of $16,348, operating expenses of $245,813 and net loss of $153,057.

25. — SUBSEQUENT EVENTS

The Company has evaluated subsequent events from the balance sheet date through the date that the financial statements are issued and material subsequent event is as follows:

(1) Short-term loan

On July 13, 2012, Trunkbow Shandong obtained a RMB 15,000,000 (approximately $2,375,560) total bank facility from China Merchants Bank. $791,853 of the total facility was received as of July 13, 2012, and the balance of the loan is due on January 12, 2013. The loan is personally guaranteed by Mr. Wanchun Hou and Mr. Qiang Li. Interest on the bank facility is a floating lending rate, 30% over the PBOC benchmark rate.

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

Introductory Note

Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q (this “Report”) to the “Company,” “Trunkbow,” “we,” “us” or “our” are references to the combined business of Trunkbow International Holdings Limited and its consolidated subsidiaries. References to “China” or to the People’s Republic of China “PRC” are references. References to “RMB” are to Renminbi, the legal currency of China, and all references to “$” and dollars are to the United States dollar, the legal currency of the United States.

Special Note Regarding Forward Looking Statements

This Quarterly Report contains forward-looking statements and information relating to Trunkbow that are based on the beliefs of our management, as well as assumptions made by and information currently available to us. Such statements should not be unduly relied upon. When used in this Quarterly Report, forward-looking statements include, but are not limited to, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as well as statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China, any statements of belief or intention, any of the factors mentioned in the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 30, 2012, and any statements or assumptions underlying any of the foregoing. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions. There are important factors that could cause actual results to vary materially from those described in this Report as anticipated, estimated or expected, including, but not limited to, competition in our industry and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; SEC regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future. Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available. Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act” ) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act” ) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. Because we may from time to time be considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

Overview

We provide technology platform solutions for mobile telecom operators in the People’s Republic of China. Our patented platforms provide a comprehensive solution for Chinese telecom operators to deliver and manage the distribution of various mobile value added service (“MVAS”) applications to their subscribers. The Trunkbow brand is regarded by the telecom operators as a well-managed, trusted provider of technology solutions. Our R&D focused business model provides us with a defensible market position as a technology provider to the telecom operators.

Currently we have filed a more than 164 patent applications, of which 50 have been granted by the National Intellectual Property Administration of the PRC. In 2010, we began the process of filing for international and U.S. patents in order to protect our intellectual properties globally.

The primary geographic focus of our operations is in the PRC, where we derive substantially all of our revenues. We conduct our business operations through our wholly owned subsidiaries Trunkbow Asia Pacific (Shenzhen) Limited and Trunkbow Asia Pacific (Shandong) Limited. Both companies are registered in PRC as Wholly Owned Foreign Enterprises.

How We Generate Revenue

Our customers are primarily telecom service providers in the PRC, including local branches of China’s three major cellular carriers, China Telecom, China Unicom and China Mobile. Collectively, these carriers provide services to greater than 1 billion cellular subscribers. Revenues generated directly by sales to China Telecom, China Unicom and China Mobile accounted for approximately 13%, 5% and nil, and 5%, 2% and nil, respectively, for the six months ended June 30, 2012 and 2011. When we include resale of our products to these carriers through intermediaries (i.e., direct and indirect sales to these carriers), then revenues generated from sales to these three carriers accounted for approximately 40%, 26% and 7%, and 5%, 32% and 63%, respectively, for the six months ended June 30, 2012 and 2011. The revenues for the six months ended June 30, 2012 slightly increased when compared to the six months ended June 30, 2011. Our revenues from Mobile Payment Solutions were $5.55 million and $1.93 million for the six months ended June 30, 2012 and 2011, respectively.

Results of Operations

Net Revenues:

	Three Months Ended June 30,				% of
	2012		2011		change
	(Unaudited)		(Unaudited)

System integration	$	471,492	$	6,912,819		(93.2	)%
Software sales		3,865,760		1,758,687		119.8	%
Maintenance service		93,461		139,873		(33.2	)%
Shared revenue		1,539,315		305,122		404.5	%
Total revenues		5,970,028		9,116,501		(34.5	)%
Less:
Business tax and surcharges		121,442		182,131		(33.3	)%
Net revenues	$	5,848,586	$	8,934,370		(34.5	)%

Net revenues were $5.85 million for the second quarter of 2012, a decrease of $3.09 million, or 34.5%, compared with net revenues of $8.93 million in the same period of 2011. The decrease in net revenues was primarily attributable to the significant reduction of the system integration. System integration revenues decreased $6.44 million for the second quarter of 2012 compared to the same period in 2011, mainly due to lower sales of MVAS platforms including mobile newspaper and other system hardware. Software sales increased $2.11 million, or 119.8%, due to new roll-out of MVAS platforms including business operator and SMS/phone-call management. Maintenance service revenue decreased to $0.09 million, from $0.14 million in the second quarter of 2011, mainly from less services provided to mainly from the services provided to the carrier on network testing. Shared revenue increased $1.23 million, or 404.5%, from $0.31 million for the second quarter of 2011 to $1.54 million in the same period of 2012, driven by shared revenue from mobile payment.

	Six Months Ended June 30,				% of
	2012		2011		change
	(Unaudited)		(Unaudited)

System integration	$	1,947,632	$	7,395,523		(73.7	)%
Software sales		8,539,736		5,365,617		59.2	%
Maintenance service		162,658		874,631		(81.4	)%
Shared revenue		2,118,215		583,072		263.3	%
Total revenues		12,768,241		14,218,843		(10.2	)%
Less:
Business tax and surcharges		237,993		303,555		(21.6	)%
Net revenues	$	12,530,248	$	13,915,288		(10.0	)%

Net revenues were $12.53 million for the six months ended June 30, 2012, a decrease of $1.39 million, or 10.0%, compared with net revenues of $13.92 million in the same period of 2011. The decrease in net revenues was primarily attributable to the rapid growth of the system integration. System integration revenues decreased $5.45 million for the six months ended June 30, 2012 compared to the same period in 2011, mainly due to less demand on MVAS platforms including platforms and maintenance services. Software sales increased $3.17 million, or 59.2%. Maintenance service revenue decreased to $0.16 million, from $0.87 million in the six months ended June 30, 2011, mainly from less services provided to mainly from the services provided to the carrier on network testing. Shared revenue increased $1.54 million, or 263.3%, from $0.58 million for the six months ended June 30, 2011 to $2.12 million in the same period of 2012, driven by shared revenue from mobile payment.

	Three Months Ended June 30,				% of
	2012		2011		change
	(Unaudited)		(Unaudited)

MVAS Technology Platforms
Gross Revenues	$	4,823,256	$	8,615,110		(44.0	)%
Business tax and surcharges		70,352		163,196		(56.9	)%
Cost of Revenues		473,290		2,835,532		(83.3	)%
	$	4,279,614	$	5,616,382		(23.8	)%
Mobile Payment Solutions
Gross Revenues	$	1,146,772	$	501,391		128.7	%
Business tax and surcharges		51,090		18,935		169.8	%
Cost of Revenues		257,703		197,173		30.7	%
	$	837,979	$	285,283		193.7	%

Revenue from MVAS decreased $3.79 million or 44% to $4.82 million from the second quarter of 2012, compared with $8.62 million in the same period of 2011. The decrease in MVAS revenue was primarily caused by less demand on MVAS including platforms and maintenance services. Revenue from our MPS offerings increased 128.7% to $1.15 million for the second quarter of 2012, compared with $0.50 million in the same period of 2011. The increase in MPS revenue was driven by the MPS software sales and shared revenue. For the second quarter of 2012, MPS and MVAS accounted for 19.2%, 80.8% of gross revenues, respectively. The shift to MPS revenue was mainly contributed from our MPS revenue increment from geographic expansion.

	Six Months Ended June 30,				% of
	2012		2011		change
	(Unaudited)		(Unaudited)

MVAS Technology Platforms
Gross Revenues	$	7,219,170	$	12,287,844		(41.2	)%
Business tax and surcharges		86,643		247,675		(65.0	)%
Cost of Revenues		1,047,273		3,299,831		(68.3	)%
	$	6,085,254	$	8,740,338		(30.4	)%
Mobile Payment Solutions
Gross Revenues	$	5,549,071	$	1,930,999		187.4	%
Business tax and surcharges		151,350		55,880		170.8	%
Cost of Revenues		1,023,056		284,707		259.3	%
	$	4,374,665	$	1,590,412		175.1	%

Revenue from MVAS decreased $5.07 million or 41.2% to $7.22 million from the six months ended June 30, 2012, compared with $12.29 million in the same period of 2011. The decrease in MVAS revenue was primarily caused by less demand on MVAS including platforms and maintenance services. Revenue from our MPS offerings increased 187.4% to $5.5 million for the six months ended June 30, 2012, compared with $1.93 million in the same period of 2011. The increase in MPS revenue was driven by the MPS software sales and shared revenue. For the six months ended June 30, 2012 of 2012, MPS and MVAS accounted for 43.5%, and 56.5% of gross revenues, respectively. The shift to MPS revenue was mainly contributed from our MPS revenue increment from geographic expansion.

Cost of revenues:

	Three Months Ended June 30,				% of
	2012		2011		change
	(Unaudited)		(Unaudited)

Equipment costs	$	638,821	$	2,908,913		(78.0	)%
Labor Costs		92,172		123,792		(25.5	)%
	$	730,993	$	3,032,705		(75.9	)%

Cost of revenues includes equipment hardware costs and labor costs. The equipment hardware mostly were servers, terminals and eBook readers and other hardware components related to the system platform. The decrease in cost of revenue was primarily related to the significant reduction in the system integration, which consumed significant hardware costs.

	Six Months Ended June 30,				% of
	2012		2011		change
	(Unaudited)		(Unaudited)

Equipment costs	$	1,884,438	$	3,344,494		(43.7	)%
Labor Costs		185,891		240,044		(22.6	)%
	$	2,070,329	$	3,584,538		(42.2	)%

Gross profit:

	Three Months Ended June 30,
	2012						2011
	MVAS			MPS			MVAS			MPS
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Gross Revenues	$	4,823,256		$	1,146,772		$	8,615,110		$	501,391
Business tax and surcharges		70,352			51,090			163,196			18,935
Cost of Revenues		473,290			257,703			2,835,532			197,173
Gross profit	$	4,279,614		$	837,979		$	5,616,382		$	285,283

Gross margin		90.0	%		76.5	%		66.5	%		59.1	%

Gross profit was $5.11 million for the second quarter of 2012, a decrease of $0.78 million, or 13.3%, compared with $5.90 for the same period of 2011. The gross margin was 87.5% for the second quarter of 2012, an increase of 21.4%, compared with 66.1% for the same period of 2011. The increase in gross margin was due to the decrease of revenues from system integration, which involves significantly higher hardware costs. The gross profit and the gross margin for the MVAS and MPS were $4.28 million or 90.0% and $1.15 million or 76.5%, respectively, for the three months ended June 30, 2012 and $5.62 million or 66.5% and $0.28 million or 59.1%, respectively, for the three months ended June 30, 2011. The increase of gross profit and gross margin in MPS was also related to the system integration which carries a lower gross margin than the average level.

	Six Months Ended June 30,
	2012						2011
	MVAS			MPS			MVAS			MPS
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Gross Revenues	$	7,219,170		$	5,549,071		$	12,287,844		$	1,930,999
Business tax and surcharges		86,643			151,350			247,675			55,880
Cost of Revenues		1,047,273			1,023,056			3,299,831			284,707
Gross profit	$	6,085,254		$	4,374,665		$	8,740,338		$	1,590,412

Gross margin		85.3	%		81.0	%		72.6	%		84.8	%

Gross profit was $10.46 million for the six months ended June 30, 2012, an increase of $0.13 million, or 1.3%, compared with $10.33 for the same period of 2011. The gross margin was 83.5% for the six months ended June 30, 2012, an increase of 9.3%, compared with 74.2% for the same period of 2011. The increase in gross margin was due to the decrease of revenues from system integration, which involves significantly higher hardware costs. The gross profit and the gross margin for the MVAS and MPS were $6.09 million or 85.3% and $4.37 million or 81.0%, respectively, for the six months ended June 30, 2012 and $8.74 million or 72.6% and $1.59 million or 84.8%, respectively, for the six months ended June 30, 2011. The increase of gross margin in MPS was also related to the system integration which carries a lower gross margin than the average level.

Operating expenses:

	Three Months Ended June 30,										% of
	2012					2011					change
	(Unaudited)		% of net revenues			(Unaudited)		% of net revenues

Selling and distribution expenses	$	848,355		14.5	%	$	531,534		5.9	%		59.6	%
General and administrative expenses		2,650,377		45.3	%		1,292,934		14.5	%		105.0	%
Research and development expenses		508,055		8.7	%		306,565		3.4	%		65.7	%
	$	4,006,787		68.5	%	$	2,131,033		23.8	%		88.0	%

Operating expenses including selling and distribution, general and administrative expenses and R&D, was $4.01 million for the second quarter of 2012, increased $1.88 million, or 88.0%, compared with $2.13 million for the same period of 2011.

Selling and distribution expenses: Selling and distribution expenses increased $0.32 million or by 59.6%, to $0.85 million for the three months ended June 30, 2012 from $0.53 million for the same period of 2011. Our selling and distribution expenses primarily consist of staff salaries and welfare, travel and communication expenses, office rental and related expenses, and entertainment expenses. For the three months ended June 30, 2012, the increase in selling and distribution expenses was mainly due to the recruitment of more sales people on mobile payment service line for our merchant acquisition, which raised our salaries and welfare expenses by $0.14 million when compared the three months ended June 30, 2012 to the same period in 2011. Recruitment of more sales people and establishment of branch offices in more regions also resulted in higher selling and distribution expenses. Meanwhile, our advertisement and promotion expenses also increased in line with our merchant acquisition efforts.

General and administrative expenses: General and administrative expenses increased $1.36 million or by 105%, to $2.65 million for the three months ended June 30, 2012 as compared to $1.29 million for the same period in 2011. Our general and administrative expenses primarily consist of salaries and welfare for management, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance, utilities and other office expenses. The increase in general and administrative expenses was mainly due to allowance for a doubtful debt of $1.41 million, provided for a customer’s receivable that is over one year.

Research and development expenses: Research and development expenses increased $0.20 million or by 65.7%, from $0.31 million for the three months ended June 30, 2011 to $0.51 million for the same period of 2012. Our research and development expenses primarily consist of salaries and welfare for the research and development staff, office utilities and supplies allocated to our research and development department. The increase of the research and development expenses for the second quarter of 2012 was mainly due to recruitment of more engineers, raises in salaries and relevant welfare and related expenses related to the research and development in mobile payment services.

	Six Months Ended June 30,										% of
	2012					2011					change
	(Unaudited)		% of net revenues			(Unaudited)		% of net revenues

Selling and distribution expenses	$	1,873,377		15.0	%	$	968,142		7.0	%		93.5	%
General and administrative expenses		3,811,048		30.4	%		2,507,557		18.0	%		52.0	%
Research and development expenses		1,058,917		8.5	%		636,078		4.6	%		66.5	%
	$	6,743,342		53.9	%	$	4,111,777		29.6	%		64.0	%

Operating expenses including selling and distribution, general and administrative expenses and R&D, was $6.74 million for the six months ended June 30, 2012, increased $2.63 million, or 64%, compared with $4.11 million for the same period of 2011.

Selling and distribution expenses: Selling and distribution expenses increased $0.91 million or by 93.5%, to $1.87 million for the six months ended June 30, 2012 from $0.97 million for the same period of 2011. Our selling and distribution expenses primarily consist of staff salaries and welfare, travel and communication expenses, office rental and related expenses, and entertainment expenses. For the six months ended June 30, 2012, the increase in selling and distribution expenses was mainly due to the recruitment of more sales people on mobile payment service line for our merchant acquisition, which raised our salaries and welfare expenses by $0.36 million when compared the six months ended June 30, 2012 to the same period in 2011. Recruitment of more sales people and establishment of branch offices in more regions also resulted in higher selling and distribution expenses. Meanwhile, our advertisement and promotion expenses also increased in line with our merchant acquisition efforts.

General and administrative expenses: General and administrative expenses increased $1.30 million or by 52%, to $3.81 million for the six months ended June 30, 2012 as compared to $2.51 million for the same period in 2011. Our general and administrative expenses primarily consist of salaries and welfare for management, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance, utilities and other office expenses. The increase in general and administrative expenses was mainly due to allowance for a doubtful debt of $1.41 million, provided for a customer’s receivable that is over one year.

Research and development expenses: Research and development expenses increased $0.42 million or by 66.5%, from $0.64 million for the six months ended June 30, 2011 to $1.06 million for the same period of 2012. Our research and development expenses primarily consist of salaries and welfare for the research and development staff, office utilities and supplies allocated to our research and development department. The increase of the research and development expenses for the first half of 2012 was mainly due to recruitment of more engineers, raises in salaries and relevant welfare and related expenses related to the research and development in mobile payment services.

Other income (expenses): Other income (expenses) mainly includes interest income, interest expense, government grants and VAT refund. Other income decreased $3.28 million from $4.74 million for the three months ended June 30, 2011 to $1.47 million for the three months ended June 30, 2012 due to lack of government grants during the three months ended June 30, 2012. The government grants for the three months ended June 30, 2011 was $4.74 million.

Other income decreased $4.65 million from $6.04 million for the six months ended June 30, 2011 to $1.39 million for the six months ended June 30, 2012 due to lack of government grants during the six months ended June 30, 2012. The government grants for the six months ended June 30, 2011 was $4.74 million.

Income before income tax expense: Income before income tax expense decreased $5.94 million, or 69.7%, from $8.51 million for the three months ended June 30, 2011 to $2.58 million for the three months ended June 30, 2012, mainly due to the decrease of other income from government grants, as well as allowance for a doubtful debt.

Income before income tax expense decreased $7.15 million, or 58.3%, from $12.25 million for the six months ended June 30, 2011 to $5.10 million for the six months ended June 30, 2012, mainly due to the decrease of other income from government grants, as well as allowance for a doubtful debt.

Liquidity and Capital Resources

Dividends

We are a holding company and conduct our operations primarily through our subsidiaries and VIEs in the PRC. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries and VIEs. The VIEs’ earnings are transferred to our subsidiaries in the form of payments under the technology support and related consulting agreements. If our subsidiaries incur debt on their own behalf, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with accounting standards and regulations applicable to such subsidiaries. As of June 30, 2012, our PRC subsidiaries and VIEs had aggregate unappropriated earnings of approximately $49.58 million (based on an exchange rate of 6.3143 as of June 30, 2012 ) that were available for distribution. These unappropriated earnings are considered to be indefinitely reinvested, and will be subject to PRC dividend withholding taxes upon distribution.

Under PRC law, each of our PRC subsidiaries must set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of our PRC subsidiaries with foreign investments must also set aside a portion of its after-tax profits to fund an employee welfare fund at the discretion of the board. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, companies may not distribute the reserve funds as cash dividends except upon a liquidation of these subsidiaries. In addition, dividend payments from our PRC subsidiaries could be delayed as we may only distribute such dividends upon completion of annual audits of the subsidiaries.

As an offshore holding company, we may rely principally on dividends from our subsidiaries in the PRC for our cash requirements, including to pay dividends or make other distributions to our shareholders or to service our debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in the PRC is subject to limitations. In particular, the PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in the PRC is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends.

If our subsidiaries in the PRC incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends or other payments to us could materially adversely limit our ability to grow, make investments or acquisitions, pay dividends and otherwise fund and conduct our business.

Government Control of Currency Conversion

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Nevada holding company primarily relies on dividend payments from our wholly-owned PRC subsidiaries in the PRC to fund any cash and financing requirements we may have.

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, our wholly owned PRC subsidiaries may pay dividends in foreign currency to us without pre-approval from SAFE. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. With the prior approval from SAFE, cash generated from the operations of our PRC subsidiary may be used to pay off debt they owe to entities outside the PRC in a currency other than the Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.

Cash Flows

In summary, our cash flows were as follows:

Trunkbow International Holdings Limited Summary Cash Flows

	Six Months Ended June 30,
	2012			2011
	(Unaudited)			(Unaudited)

Net cash flows provided by (used in) operating activities	$	(5,199,345	)	$	5,552,935
Net cash flows used in investing activities		(6,886,119	)		(13,658,566	)
Net cash flows provided by financing activities		7,715,760			15,707,361
Effect of foreign currency fluctuation on cash and cash equivalents		(7,933	)		445,587
Net increase in cash and cash equivalents		(4,377,637	)		8,047,317
Cash and cash equivalents – beginning of year		6,139,589			10,259,750
Cash and cash equivalents – end of the period	$	1,761,952		$	18,307,067

Our cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months. As of June 30, 2012, we had cash and cash equivalents of $1.76 million. We are confident on collections of outstanding accounts receivable. We believe that our existing cash and cash equivalents will be sufficient to fund our operating activities, capital expenditures and other obligations for at least the next twelve months.

Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out and continued expansion of our systems and platforms and (b) our working capital needs, which include deposits and advanced payment for hardware and software, payment of our operating expenses and financing of our accounts receivable; and (ii) net cash used in investing activities that consist of the payment for acquisitions of hardware and software in form of loan.

We lease offices and vehicles under lease agreements with a term expiring in April 2014. The leases may be cancelled by either party with 30-days prior written notice.

Future minimum rental payments under this operating lease are as follows:

	Office Rental
	(Unaudited)
Six months ending December 31, 2012	$	241,325
Year ending December 31, 2013		241,189
Year ending December 31, 2014		90,304
Total	$	572,818

We do not have other commitments other than those for office and vehicle rentals.

Operating Activities

Net cash flows used in operating activities for the six months ended June 30, 2012 was $5.20 million as compared with $5.55 million provided by operating activities for the six months ended June 30, 2011, for a net decrease of $10.75 million.

The increase in operating cash outflows was attributable to a substantial increase in cash out flows from advances to suppliers. An increase of $4.80 million in advances to suppliers was noted as of June 30, 2012, when compared to the balance as of December 31, 2011.

Investing Activities

Our main use of investing activities during the six months ended June 30, 2012 was acquisition of property and equipment and intangible assets of $4.47 million, mainly for the purchase of MPS hardware and software for the roll-out of MPS systems and application.

Financing Activities

Net cash flows provided by financing activities for the six months ended June 30, 2012 was $7.72 million as compared with $15.71 million provided by financing activities for the six months ended June 30, 2011.

The cash provided by financing activities for the six months ended June 30, 2011 included the net proceeds from the February 2011 initial public offering of $17.34 million. The cash provided for the six months ended June 30, 2012 was from the short-term bank loans.

Recent Developments

(1) Subsequent collection on accounts receivable

Up to August 14, 2012, we have subsequently collected $3.35 million of the accounts receivable.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of June 30, 2012, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting.

There has been no change in our internal control over financial reporting during the first fiscal quarter of 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Neither we nor our subsidiaries are currently a party to any material legal proceedings.

ITEM 1. A. RISK FACTORS

Not applicable to smaller reporting companies.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.		Description
31.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation
101.DEF*		XBRL Taxonomy Extension Definition
101.LAB*		XBRL Taxonomy Extension Labels
101.PRE*		XBRL Taxonomy Extension Presentation

* To be filed by amendment.

SIGNATURES

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

	TRUNKBOW INTERNATIONAL HOLDINGS
	LIMITED

Date: August 14, 2012	By:	/s/ Qiang Li
	Name: Qiang Li
	Title: Chief Executive Officer (Principal Executive Officer)

EXHIBIT INDEX

Exhibit No.		Description
31.1		Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		XBRL Instance
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation
101.DEF*		XBRL Taxonomy Extension Definition
101.LAB*		XBRL Taxonomy Extension Labels
101.PRE*		XBRL Taxonomy Extension Presentation

* To be filed by amendment.

Trunkbow International Holdings Ltd - FORM 10-Q - August 14, 2012

Attached files

Trunkbow International Holdings Ltd Reports