UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
December 31, 2010
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to
_____________
Commission File No.
000-53432
TEC TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
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13-4013027
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(State or other jurisdiction of incorporation or
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(I.R.S. Employer Identification No.)
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organization)
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Xinqiao Industrial Park
Jingde County, Anhui
Province
Shenzhen 242600
Peoples Republic of China
(Address of principal executive offices)
(+86) 755 8323-2722
(Registrants
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Exchange
Act:
Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [
] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [
] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files)
Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer [ ]
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Accelerated Filer [ ]
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Non-Accelerated Filer [ ]
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(Do not check if a
smaller reporting company)
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Smaller reporting company
[X]
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Indicate by check mark whether registrant is a shell company (as
defined in Rule 12b-2 of the Act)
Yes [
] No [X]
As of June 30, 2010 (the last business day of the registrants
most recently completed second fiscal quarter), the aggregate market value of
the shares of the registrants common stock held by non-affiliates (based upon
the closing price of such shares as quoted on the OTC Bulletin Board maintained
by the Financial Industry Regulatory Authority) was approximately $28.9 million.
Shares of the registrants common stock held by each executive officer and
director and each person who owns 10% or more of the outstanding common stock
have been excluded from the calculation in that such persons may be deemed to be
affiliates of the registrant. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
There were a total of 30,181,552 shares of the registrants
common stock outstanding as of March 30, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Annual Report on Form 10-K
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For the
Fiscal Year Ended December 31, 2010
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TABLE OF CONTENTS
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as believe, expect, anticipate, project,
target, plan, optimistic, intend, aim, will or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning 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; as well as all
assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including
those identified in Item 1A, Risk Factors included herein, as well as
assumptions, which, if they were to ever materialize or prove incorrect, could
cause the results of the Company to differ materially from those expressed or
implied by such forward-looking statements.
Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, except as required by law, to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.
Use of Terms
Except where the context otherwise requires and for the
purposes of this report only:
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the Company, we, us, and our refer to the
combined business of TEC Technology, Inc., a Delaware corporation, and its
consolidated subsidiaries, TEC HK, TEC Tower, ZTEC and STT;
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TEC HK refers to TEC Technology Limited, a Hong Kong
limited company;
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TEC Tower refers to Anhui TEC Tower Co., Ltd., a PRC
limited company;
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ZTEC refers to Zhejiang TEC Tower Co., Ltd., a PRC
limited company;
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STT refers to Shuncheng Taida Technology Co., Ltd., a
PRC limited company;
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Hong Kong refers to the Hong Kong Special
Administrative Region of the Peoples Republic of China;
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PRC and China refer to the Peoples Republic of
China;
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SEC refers to the Securities and Exchange Commission;
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Exchange Act refers the Securities Exchange Act of
1934, as amended;
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Securities Act refers to the Securities Act of 1933, as
amended;
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Renminbi and RMB refer to the legal currency of
China; and
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U.S. dollars, dollars and $ refer to the legal
currency of the United States.
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1
PART I
ITEM 1.
BUSINESS.
Business Overview
Through our indirect Chinese subsidiaries, we are primarily
engaged in the design, production and sale of transmission towers and related
products used in high voltage electric power transmission and wireless
communications. We sell our tower products to prime contractors on large
transmission projects for electric utility companies or telecommunications
service providers, who are developing and constructing projects for end
customers. Our electric transmission towers currently support 35kv, 110kv,
220kv, and 500kv transmission lines and we plan to build towers that support
Ultra High Voltage (UHV) tower lines of 750+kv DC or 1000+kv AC transmission
lines. Our wireless communication towers include single-tube towers, 4-strut
towers and roof top towers for the 2G, 3G, and microwave market. We plan to
expand our business in the near future to enter the communication base station
system integration market and to offer tower installation and maintenance
services. Our towers are primarily made of steel, but some contain aluminum or
other alloy materials.
Our revenues currently are, and historically have been,
generated from the sale of our tower products. In the future, we expect to offer
installation and technical services that we believe will generate an additional
revenue stream, however, to date, we have not generated material revenues from
such services.
Our headquarters are located in Anhui Province in southeastern
China and our international sales network is primarily operated from our branch
offices in the Shenzhen Special Economic Zone and Beijing.
Our Corporate History and Background
We were originally organized under the laws of the State of
Florida on July 22, 1988 under the name Sea Green, Inc. On June 3, 1998, we
changed our name to Americom Networks Corp. and on July 10, 1998, we changed our
name to Americom Networks International, Inc. From our inception until we ceased
active business operations in May 1999, we engaged in various business endeavors
and pursued several lines of business including the development and marketing of
telecommunications systems to high-volume users for use or resale.
On February 6, 2008, we effected a redomestication from Florida
to Delaware by merging with Americom Networks International, Inc., a corporation
that we established in the State of Delaware solely to effect the
reincorporation.
On August 15, 2008, we changed our name to Highland Ridge, Inc.
and our primary business became the search for a potential merger candidate or a
business to acquire.
On May 4, 2010, we completed a reverse acquisition transaction
through a share exchange with TEC HK and its sole shareholder, Mr. Hua Peng
Phillip Wong, pursuant to which we acquired 100% of the issued and outstanding
capital stock of TEC HK in exchange for 19,194,421 shares of our common stock,
which constituted 63.6% of our issued and outstanding capital stock on a fully-diluted
basis as of and immediately after the consummation of the reverse acquisition.
For accounting purposes, the share exchange was treated as a reverse acquisition,
with TEC HK as the accounting acquirer and TEC Technology, Inc. as the acquired
party.
As a result of the reverse acquisition of TEC HK, our business
became the business of TEC HK and its subsidiaries, namely, the design,
production and sale of transmission towers and related products used in high
voltage electric power transmission and wireless communications. On June 9,
2010, we changed our name to TEC Technology, Inc. to more accurately reflect our
new business operations.
Our Corporate Structure
All of our business operations are conducted through our
Chinese operating subsidiaries, TEC Tower, ZTEC and STT. The chart below
presents our current corporate structure.
2
Our Products
Our electric transmission and wireless communications product
lines include angle steel towers, steel pipe towers and transmission cable
towers, constructed primarily of steel, aluminum or other alloy materials.
Electric Transmission Towers
Our electric transmission towers currently support 35kv, 110kv,
220kv and 500kv, and we have recently applied certifications to produce towers
for the 750kv electric transmission lines. We plan to develop towers that
support Ultra High Voltage (UHV) tower lines of 1000+kv AC transmission lines as
the market evolves beyond testing phases.
Wireless Communications Towers
Our wireless communications towers include single-tube towers,
4-strut towers and roof top towers for the 2G, 3G, and microwave market.
We are also in the early stages of developing expertise to
produce wireless communication base stations, which typically include towers,
air conditioning units, transformers, equipment procurement, power connection,
site survey, installation, and after-sales services. Once we are able to develop
this full product and service offering, we plan to expand our business by
offering services to customers under separate tower maintenance contracts.
Profit margins from base station contracts are typically higher than margins
from product sales, however, to be fully engaged in the base station business we
will have to develop or acquire additional capabilities in terms of design,
procurement, and services.
3
In the future we expect to expand our business to offer tower
installation and maintenance services.
Our Raw Materials and Suppliers
The major raw materials for our tower products are angle iron,
plate, steel beams, bolts and welding wire. We acquire our primary raw materials
from a variety of sources. We have some long-term steel purchase contracts in
order to reduce the negative effects of steel price fluctuation, but we also
have some short-term contracts or make one-time purchases to take advantage of
favorable pricing. Our primary suppliers are Jiangyin Jincheng Steel Co., Ltd.,
Hangzhou Fuyang Fuhao Hot Dip Galvanizing Co., Ltd. and Hangzhou Fangshun
Materials Co., Ltd., whose purchases accounted for approximately 14.61%, 11.94%
and 10.47% of our cost of raw materials for the year ended December 31, 2010,
respectively.
Our Customers and Marketing Efforts
Our direct customers typically are specialized construction
companies which serve as a prime contractor and builder on transmission projects
constructed for our ultimate end customers, electric utility companies and
telecommunication service providers. We usually obtain our customers by
succeeding in a competitive bidding process where subcontracts are awarded to
companies, like us, which submit the most favorable bids on a transmission
project. We have found that a successful bid is usually predicated on a variety
of factors including pricing, terms of delivery, product design and quality,
industry experience and reputation and time to delivery, among other factors.
During fiscal year 2010, our three largest customers were
Shenzhen ZTE Kangxun Electronics Co., Ltd., Shanxi Jinneng Steel Structure Co.,
Ltd. and Inner Mongolia Hengxin Tower Co., Ltd., whose purchases accounted for
approximately 24.89% , 18.83% and 11.77% of our revenue for the year ended
December 31, 2010, respectively. No other customer accounted for more than 10%
of our total revenue in 2010.
The electric utility companies and telecommunication companies
that use our tower products in their transmission facilities are mainly located
in Shanxi Province and the Inner Mongolia Autonomous Region in northern China,
and in Guangdong Province and Guizhou Province in heavily populated southern
China, and include ZTE Corporation, the State Grid Corp of China, the China
Southern Grid, Huawei Technologies Co. Ltd. and Reliance Communications, among
others.
We have also made efforts in some overseas markets where our
products have developed positive brand recognition. We believe that we are one
of only a few PRC-based electric transmission tower companies selling products
abroad. In India and Southeast Asia, we currently partner with large contractors
such as Huawei and ZTE Corporation to perform contracts in these markets, and in
Africa, we have independently established sales centers to directly serve this
market.
We generally seek to obtain certifications from main
contractors in these overseas markets and then bid on their particular projects.
We currently hold certifications from Huawei, ZTE Corporation, Nokia Ericsson,
and Reliance, which allow us to bid as subcontractors on their projects. The
table below is a sampling of our overseas projects:
Region
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Contract Details
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India
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We manufactured and delivered 691 nos. of 403B steel
tower with India Reliance Telecom Company in 2008 and expect to conduct
more direct sales in India.
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Southeast Asia
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In 2009, we supplied transmission products to Multi-Link
Engineering of Malaysia for transmission projects in Papua New Guinea. We
plan to conduct more direct sales in Southeast Asia in the future.
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Africa
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We have performed on contracts for steel tower
manufacturing and machining in Africa, cooperating with Huawei Company for
sale to Zambia, Tanzania and Uganda. We have also supplied $7.3 million of
tower equipment to ZTE Corporation for 2G/3G infrastructure development in
Ethiopia. We plan to extend our sales network to South Africa.
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Hong Kong
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We have cooperated with OMAX GLOBAL in Hong Kong in the
production of communication towers in Hong Kong.
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When we successfully bid on a transmission project and secure a
sub-contract for the purchase of our tower products, we are expected to promptly
deliver to the prime contractor and/or end-customer, an acceptable tower design
plan, as well as a supply and construction schedule, usually ranging from one to
six months. During this time, we assemble and procure the raw materials that are
needed in the tower manufacturing process from our raw material inventory and,
occasionally, by special order from third party vendors. The steel used in our
towers must be galvanized prior to the preparation of each piece for the tower
parts so we usually outsource this process to specialized galvanization
companies. Upon completing the components, we then test-assemble a percentage of
the towers ordered. If the pieces connect according the specifications, we then
load the components onto trucks or trains and ship them to the customers
installation site. We plan to expand our business to offer the installation and
service of our towers with end users.
4
Competition
The domestic electric transmission tower products and service
market is highly competitive and fragmented. We believe that no single company
in China holds more than a 3% market share. We believe that successful companies
in the domestic electric transmission market compete effectively based on
product and customer certification, delivery scheduling and capacity, pricing
and customer retention. Competition in the domestic and international wireless
communication market is based primarily on subcontracting from large equipment
providers, such as Huawei and Nokia Ericsson.
Our primary competition comes from domestic companies such as
Meteno Communication Technologies, Qixing Tower and Nanjing Daji Towers. Meteno
Communication Technologies works solely with wireless communication towers and
Qixing Tower participates in the wireless communication market. Additional
competition comes from large international companies such as Valmont Industries,
Inc. (NYSE:VMI)
that are both larger than us in terms of assets and sales
volume and possess greater name recognition, assets, personnel, sales, and
financial resources. However, these competitors generally have higher prices for
their products, and most of them do not have distribution networks in China that
are as developed as ours.
We believe that the quality of our product and service
offerings and our relatively low labor costs enable us to compete favorably in
the market for electric and wireless transmission towers and distinguish us from
many of our competitors, especially our international competitors. Although we
generally win contracts by our delivery schedule and reputation in the market,
our pricing is competitive. Our focus on quality and service allows us to bid
for most projects, but through a lack of sufficient working capital, we
sometimes elect to abstain from bidding during the third and fourth quarters
which are generally busier. We also sometimes work with Qixing Tower and Nanjing
Daji Towers on larger projects where they serve as the primary contractor.
Research and Development
Our research and development activities focus on developing
innovative tower products. As of December 31, 2010, we had 16 employees
dedicated to research and development. We expect to engage in continuous
research and development, to enhance our product and service offerings in our
core areas. In addition, we plan to expand our research and development team to
support our planned entry into the communication base station and electric
system market.
Intellectual Property
We currently hold exclusive licenses for five patents, three
of which are licensed from Anhui University of Technology and Science and the
other two from the Hangzhou Tianye Communication Equipment Co., Ltd. The table
below summarizes our exclusive licenses:
Description
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Licensor
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Scope
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Term
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valve spring disassembly device
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Anhui University of Technology
and Science
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Exclusive license for five (5)
years granted June 17, 2009
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10 years
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mechanical lift
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Anhui University of Technology and Science
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Exclusive license for five (5) years granted
June 17, 2009
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10 years
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U-shape bolt disassembly device
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Anhui University of Technology
and Science
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Exclusive license for five (5)
years granted May 27, 2009
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10 years
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main distribution frame test scheduling module
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Hangzhou Tianye Communication Equipment Co.,
Ltd.
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Exclusive license for five (5) years granted
April 2, 2008
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10 years
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security unit of main distribution frame
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Hangzhou Tianye Communication
Equipment Co., Ltd.
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Exclusive license for five (5)
years granted December 6, 2008
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10 years
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5
We expect to renew our licenses as they expire. We also own our
domain name,
tectower.com
, which has been registered since August 14,
2007.
Employees
As of December 31, 2010, we employed a total of 323 employees.
The following table sets forth the number of our employees by function.
Function
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Number of Employees
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Sales and Marketing Department
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33
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Procurement Department
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3
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Technical and Research and Development
Department
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16
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Management, Financial, and Administrative Office
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44
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Production and Quality Control
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227
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Total
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323
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Approximately 295 of our employees are located in our executive
offices in Anhui, 8 employees are located in Shenzhen, 2 employees are located
in Beijing, 10 employees are located in Zhejiang, and 10 employees are located
in overseas.
Our employees in China participate in a state pension plan
organized by Chinese municipal and provincial governments. We are required to
contribute monthly to the plan at the rate of 23% of an employees average
monthly salary. In addition, we are required by Chinese law to cover employees
in China with various types of social insurance. We believe that we are in
material compliance with the relevant PRC employment laws.
Insurance
We do not have any business liability, interruption or
litigation insurance coverage for our operations in China. Insurance companies
in China offer limited business insurance products. While business interruption
insurance is available to a limited extent in China, we have determined that the
risks of interruption, cost of such insurance and the difficulties associated
with acquiring such insurance on commercially reasonable terms make it
impractical for us to have such insurance. Therefore, we are subject to business
and product liability exposure. See Item 1A, Risk Factors Risks Related to
Our Business We have limited insurance coverage in China.
Regulation
Because our primary operating subsidiaries are located in
China, we are subject to Chinas national and local laws, including those
outlined below. We believe that we are in material compliance with all
registrations and requirements for the issuance and maintenance of all licenses
required by the governing bodies, and that all license fees and filings are
current.
Environmental Matters
We are subject to various governmental regulations related to
environmental protection. Our manufacturing facilities are subject to various
pollution control regulations with respect to noise, water and air pollution and
the disposal of waste and hazardous materials, including, Chinas Environmental
Protection Law, Chinas Law on the Prevention and Control of Water Pollution and
its implementing rules, Chinas Law on the Prevention and Control of Air
Pollution and its implementing rules, Chinas Law on the Prevention and Control
of Solid Waste Pollution, and Chinas Law on the Prevention and Control of Noise
Pollution. We are subject to periodic inspections by local environmental
protection authorities. Our operating subsidiaries have received certifications
from the relevant PRC government agencies in charge of environmental protection
indicating that their business operations are in material compliance with the
relevant PRC environmental laws and regulations. We are not currently subject to
any pending actions alleging any violations of applicable PRC environmental
laws.
6
Foreign Currency Exchange
All of our sales revenue and expenses are denominated in RMB. Under the PRC foreign currency exchange regulations applicable to us, RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, employee salaries (even if employees are
based outside of China), and payment for equipment purchases outside of China, without the approval of the State Administration of Foreign Exchange of the People's Republic of China, or SAFE, by complying with certain procedural requirements.
Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of SAFE. In particular, if our PRC operating subsidiaries borrow foreign
currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government
authorities, including the Ministry of Commerce, or MOFCOM, or their respective local branches. These limitations could affect our PRC operating subsidiaries' ability to obtain foreign exchange through debt or equity financing. In the event of
a liquidation of our PRC subsidiaries, SAFE approval is required before the remaining proceeds can be expatriated from China.
Taxation
On March 16, 2007, the National People's Congress of China passed a new Enterprise Income Tax Law, or EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Before the
implementation of the EIT Law, foreign invested enterprises, or FIEs, established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an earned income tax, or EIT, rate of 33.0%, which included a
30.0% state income tax and a 3.0% local income tax. The EIT Law and its implementing rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Despite these changes, the
EIT Law gives FIEs established before March 16, 2007, or Old FIEs, a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which
enjoyed tax rates lower than 25% under the original EIT law will be subject to gradually increased EIT rates over a 5-year period until their tax rate reaches 25%. In addition, the Old FIEs that are eligible for other preferential tax treatments by
the PRC government under the original EIT law are allowed to continue enjoying their preference until these preferential treatment periods expire. Since January 2010, TEC Tower has qualified as a government recognized High- and New-Technology
Enterprise and was subject to a reduced EIT rate of 15% for 2010.
In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with " de facto management bodies" within China is considered a resident enterprise and will normally be subject to an
EIT of 25% on its global income. The implementing rules define the term " de facto management bodies" as " an establishment that exercises, in substance, overall management and control over the production, business, personnel,
accounting, etc., of a Chinese enterprise." If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization's global income will be subject to PRC income tax of 25%. For
detailed discussion of PRC tax issues related to resident enterprise status, see Item 1A, " Risk Factors - Risks Related to Doing Business in China - Under the New Enterprise Income Tax Law, we may be classified as a ‘resident
enterprise' of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.
In addition, the EIT Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of
such enterprises'shareholder has a tax treaty with China that provides for a different withholding arrangement. TEC Tower and STT are considered FIEs and are directly held by our subsidiary in Hong Kong. According to a 2006 tax treaty between
the Mainland and Hong Kong, dividends payable by an FIE in China to the company in Hong Kong who directly holds at least 25% of the equity interests in the FIE will be subject to a no more than 5% withholding tax. We expect that such 5% withholding
tax will apply to dividends paid to TEC HK by TEC Tower and STT, but this treatment will depend on our status as a non-resident enterprise.
Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in
China are generally required to pay value added tax, or VAT, at a rate of 17.0% of the gross sales proceeds
received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to some or all of the refund of VAT that it has already paid or borne.
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Dividend Distributions
Substantially all of our sales are earned by our PRC subsidiaries. However, PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to its offshore parent company. PRC legal restrictions permit payments of
dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at
least 10% of their annual after-tax profits determined in accordance with PRC GAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be
used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends.
Circular 75
In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75, which required PRC
residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity financing outside of China on the strength of domestic PRC
assets originally held by those residents. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any
security interest in any assets located in China to guarantee offshore obligations.
In the case of an SPV which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006. Failure
to comply with the requirements of Circular 75 may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPV's affiliates being impeded or
prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.
As we stated under Item 1A, " Risk factors—Risks Related to Doing Business in China—Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC
resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into PRC subsidiaries, limit our PRC subsidiaries' ability to distribute profits to us or otherwise materially adversely affect
us," we have asked our stockholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests
in our PRC subsidiaries. However, many of the terms and provisions in Circular 75 remain unclear and implementation by central SAFE and local SAFE branches of Circular 75 has been inconsistent since their adoption. Therefore, we cannot predict how
Circular 75 will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries' ability to conduct foreign exchange activities, such as the remittance of dividends and foreign
currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.
Mergers and Acquisitions
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the 2006 M&A Rule, which became effective on September 8, 2006. According to the 2006 M&A
Rule, a " Round-trip Investment" is defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC
individual(s). Under the 2006 M&A Rules, any Round-trip Investment must be approved by MOFCOM and any indirect arrangement or series of arrangements which achieves the same end result without the approval of MOFCOM is a violation of PRC law.
On May 4, 2010, our Chairman and CEO, Mr. Chun Lu, entered into an option agreement with Mr. Hua Peng Phillip Wong, pursuant to which Mr. Lu was granted an option to acquire 17,797,372 shares our common stock currently owned by Mr. Wong for an
exercise price of $1,000,000. Mr. Lu may exercise this option, in whole but not in part, during the period commencing on the 365
th
day following of the date of the option agreement and ending on the second anniversary of the date thereof. After Mr. Lu exercises this option, he will
be our controlling stockholder. His acquisition of our equity interest, or the
Acquisition, is required to be registered with the competent administration of
industry and commerce authorities, or AIC, in Beijing. Mr. Lu will also be
required to make filings with the Beijing SAFE, to register the Company and its
non-PRC subsidiaries to qualify them as SPVs, pursuant to Circular 75.
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As we stated under Item 1A, Risk factorsRisks Related to
Doing Business in ChinaOur business and financial performance may be materially
adversely affected if the PRC regulatory authorities determine that our
acquisition of TEC HK constitutes a Round-trip Investment without MOFCOM
approval, the PRC regulatory authorities may take the view that the Acquisition
and the reverse acquisition of TEC HK are part of an overall series of
arrangements which constitute a Round-trip Investment because at the end of
these transactions Mr. Lu will become the majority owner and effective
controlling party of a foreign entity that acquired ownership of our Chinese
subsidiaries. The PRC regulatory authorities may also take the view that the
registration of the Acquisition with the relevant AIC in Beijing and the filings
with the Beijing SAFE may not be evidence that the Acquisition has been properly
approved because the relevant parties did not fully disclose to the AIC, SAFE or
MOFCOM the overall restructuring arrangements, the existence of the reverse
acquisition of TEC HK and its link with the Acquisition. If the PRC regulatory
authorities take the view that the Acquisition constitutes a Round-trip
Investment without MOFCOM approval, they could invalidate our acquisition and
ownership of our Chinese subsidiaries. We believe that if this takes place, we
may be able to find a way to re-establish control of our Chinese subsidiaries
business operations through a series of contractual arrangements rather than an
outright purchase of our Chinese subsidiaries, but we cannot assure you that
such contractual arrangements will be protected by PRC law or that we can
receive as complete or effective economic benefit and overall control of our
Chinese subsidiaries business than if the Company had direct ownership of our
Chinese subsidiaries. In addition, we cannot assure you that such contractual
arrangements can be successfully effected under PRC law.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below, together with all
of the other information included in this report, before making an investment
decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could suffer. In that case, the trading price
of our common stock could decline, and you may lose all or part of your
investment. You should read the section entitled Special Note Regarding Forward
Looking Statements above for a discussion of what types of statements are
forward-looking statements, as well as the significance of such statements in
the context of this report.
RISKS RELATED TO OUR BUSINESS
Our products often are subject to customer testing,
inspection and approval.
We frequently supply our tower design services and tower
products to prime contractors under subcontractor agreements which incorporate
terms of the prime contract and often include the testing, inspection and
approval requirements that are a precondition of payment to us by the prime
contractor and/or the end-customer. Although we endeavor to satisfy the
requirements of each of these contracts to which we are a party, no assurance
can be given that the necessary approval of our products and services will be
granted on a timely basis or at all, and that we will receive any payments due
to us. In some cases, we may be dependent on subcontractors to complete other
portions of these projects which may also delay payments to us. Any failure to
obtain these approvals and payments may have a material adverse effect on our
business and future financial performance
In order to grow at the pace expected by management, we
will require additional capital to support our long-term growth strategies. If
we are unable to obtain additional capital in future years, we may be unable to
proceed with our plans and we may be forced to curtail our operations.
Our working capital requirements and the cash flow provided by
future operating activities, if any, will vary greatly from quarter to quarter,
depending on the volume of business during the period and payment terms with our
customers. We will require additional working capital to support our long-term
growth strategies, which includes identifying suitable targets for horizontal or
vertical mergers or acquisitions so as to enhance the overall productivity and
benefit from economies of scale. However, due to the uncertainty arising out of
domestic and global economic conditions and the ongoing tightening of domestic
credit markets, we may not be able to generate adequate cash flows or obtain
adequate levels of additional
financing, whether through equity financing, debt financing or other sources. Even if we are able to get additional financing, it might not be on terms that are favorable to the Company. Furthermore, additional financings could result in significant
dilution to our earnings per share or the issuance of securities with rights superior to our current outstanding securities, including registration rights. If we are unable to raise additional financing, we may be unable to implement our long-term
growth strategies, develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis, if at all. In addition, a lack of additional financing could force us to substantially
curtail operations.
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Our business could be adversely affected by reduced levels of cash, whether from operations or from borrowings.
Historically, our principal sources of funds have been cash flows from operations and borrowings from banks and other institutions. Our commercial short term bank loans totaled $12.9 million as of December 31, 2010. Our operating and financial
performance may generate less cash and result in our failing to comply with our credit agreement covenants. We were in material compliance with these covenants in 2010, however, our ability to remain compliant in the future will depend on our future
financial performance and may be affected by events beyond our control. There can be no assurance that we will generate sufficient earnings and cash flow to remain in compliance with the credit agreement, or that we will be able to obtain future
amendments to the credit agreement to avoid a default. In the event of a default, there can be no assurance that we could negotiate a new credit agreement or that we could obtain a new credit agreement with satisfactory terms and conditions within a
reasonable time period.
Our business and operations will suffer if prime contractors or end- customers prove to be not creditworthy.
In our industry, companies such as ours that are subcontractors on large transmission construction projects are often subject to the terms of a prime contract, including payment terms. We sometimes do not receive full payment on a project until the
prime contractor is paid by the end-customer. Consequently, we extend credit to some of our customers while generally requiring no collateral. Generally, our customers pay in installments, with a portion of the payment upfront, a portion of the
payment upon receipt of our products by our customers and before the installation, and a portion of the payment after the installation of our products and upon satisfaction of our customer. Sometimes, a small portion of the payment will not be paid
until after a certain period following the installation. We perform ongoing credit evaluations of our customers' financial condition and generally have no difficulties in collecting our payments. However, if we encounter future problems
collecting amounts due from our clients or if we experience delays in the collection of amounts due from our clients, our liquidity could be negatively affected. In order to reduce collection risks, we have turned down some opportunities that we
believed carried unfavorable payment terms. Our customers are primarily large enterprises with strong recurring cash flow. We believe that we will be able to collect current amounts due from our customers.
If our suppliers fail to perform their contractual obligations, our ability to provide services and products to our customers, as well as our ability to obtain future business, may be harmed.
Many of our products include parts and raw materials procured from other companies upon which we rely to provide a portion of the products that we provide to our customers. There is a risk that we may have disputes with our suppliers, including
disputes regarding the quality and timeliness of parts and raw materials provided by these suppliers. A failure by one or more of our suppliers to satisfy the agreed-upon contracts may materially and adversely impact our ability to perform our
obligations to our customers, could expose us to liability and could have a material adverse effect on our ability to compete for future contracts and orders.
Because steel is a key material in our business operations, we are subject to the fluctuations in the steel and iron ore market
The primary raw material for our products is steel. Steels prices have fluctuated greatly in recent years. We have taken measures to offset the negative effect of price fluctuations, and entered into long-term supplier relationship with some steel
producers at variable prices relative to the market price. However, we cannot predict the future trends of steel prices, and large swings in steel price might greatly affect our profitability.
10
Our success relies on our managements ability to
understand the electric transmission and wireless communication industries.
We target the rapidly evolving electric transmission and
wireless communication markets for tower and related products and services. As
such, it is critical that our management is able to understand industry trends
and make good strategic business decisions. If our management is unable to
identify industry trends and act in response to such trends in a way that is
beneficial to us, our business will suffer.
If we are unable to respond to the rapid changes in our
industries and changes in our customers requirements and preferences, our
business, financial condition and results of operations could be adversely
affected.
If we are unable, for technological, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions or customer
requirements, we could lose customers and market share. The electric
transmission and wireless communication industries are characterized by fairly
rapid technological change. Changes in customer requirements and preferences,
the frequent introduction of new products and services embodying new
technologies and the emergence of new industry standards and practices could
render our existing products, services and systems obsolete. The nature of
products and services in the electric transmission and wireless communication
industries and their rapid evolution will require that we continually improve
the performance, features and reliability of our products and services. Our
success will depend, in part, on our ability to:
-
enhance our existing products and services;
-
anticipate changing customer requirements by designing, developing, and
launching new products and services that address the increasingly
sophisticated and varied needs of our current and prospective customers; and
-
respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
The development of additional products and services involves
significant technological and business risks and requires substantial
expenditures and lead time. If we fail to introduce products with new
technologies and standards in a timely manner, or adapt our products to these
new technologies and standards, our business, financial condition and results of
operations could be adversely affected. We cannot assure you that even if we are
able to introduce new products or adapt our products to new technologies and
standards that our products will gain acceptance among our customers. In
addition, from time to time, we or our competitors may announce new products,
product enhancements or technological innovations that have the potential to
replace or shorten the life cycles of our existing products and that may cause
customers to refrain from purchasing our existing products, resulting in
inventory obsolescence.
Management has determined that there is a material
weakness in our internal controls over financial reporting which even if quickly
remedied, could weaken the markets confidence in our financial statements and
lead to fluctuations in our stock price.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002,
the SEC adopted rules requiring public companies to include a report of
management on the companys internal controls over financial reporting in their
annual reports, including Form 10-K. In addition, the independent registered
public accounting firm auditing a companys financial statements must also
attest to and report on the operating effectiveness of our internal controls. We
are subject to the requirement to provide management report on the companys
controls over financial reporting and a report of our management for the 2010
fiscal year is included under Item 9A of this annual report. The auditor
attestation is not required as we are currently a smaller reporting company. The
portion of this process completed thus far has revealed material weaknesses in
internal controls that will require remediation. See Item 9A. Control and
Procedures. The remediation process may also be expensive and time consuming,
and even though the management is committed to improving its internal controls,
management can give no assurance that the remediation effort will be completed
on time or be effective. In addition, management can give no assurance that
additional material weaknesses in internal controls will not be discovered.
Management also can give no assurance that the process of evaluation and the
auditors attestation will be completed on time, when required. The disclosure
of a material weakness, even if quickly remedied, could weaken the markets
confidence in our financial statements and lead to fluctuations in our stock
price, especially if a restatement of financial statements for past periods is
required. In addition, if we are unable to adequately design our internal
control
systems, or prepare an " internal control report" to the satisfaction of our auditors, our auditors may issue a qualified opinion on our financial statements.
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We may not be able to maintain or improve our competitive position in the electric transmission and wireless communication industries, and we expect this competition to continue to be intense.
China's electric transmission and wireless communication industries are large and established, though rapidly evolving. Our primary competition comes from domestic companies such as Meteno Communication Technologies, Qixing Tower, and Nanjing
Daji Towers. Additional competition comes from large international companies such as Valmont Industries, Inc. (NYSE:VMI). Some of our international competitors are larger than us and possess greater name recognition, assets, personnel, sales and
financial resources. These entities may be able to respond more quickly to changing market conditions by developing new products and services that meet customer requirements or are otherwise superior to our products and services and may be able to
more effectively market their products than we can because they have significantly greater financial, technical and marketing resources than we do. They may also be able to devote greater resources than we can to the development, promotion and sale
of their products. Increased competition could require us to reduce our prices, result in our receiving fewer customer orders, and result in our loss of market share. We cannot assure you that we will be able to distinguish ourselves in a
competitive market. To the extent that we are unable to successfully compete against existing and future competitors, our business, operating results and financial condition could be materially adversely affected.
If we are unable to attract and retain senior management and qualified technical and sales personnel, our operations, financial condition and prospects will be materially adversely affected.
Our future success depends in part on the contributions of our management team and key technical and sales personnel and our ability to attract and retain qualified new personnel. In particular, our success depends on the continuing employment of
our Chief Executive Officer, Mr. Chun Lu, our Vice President of Sales and Marketing, Mr. Debin Chen, and our Chief Technology Officer, Mr. Baojia He.
There is significant competition in our industry for qualified managerial, technical and
sales personnel and we cannot assure you that we will be able to retain our key senior managerial, technical and sales personnel or that we will be able to attract, integrate and retain other such personnel that we may require in the future. If we
are unable to attract and retain key personnel in the future, our business, operations, financial condition, results of operations and prospects could be materially adversely affected.
Management's estimates and assumptions affect reported amounts of expenses and changes in those estimates could impact operating results.
We recognize export tax refund as assets for the expected future tax consequences of events which are included in the financial statements or tax returns. In assessing the whether tax refund assets are realizable, management makes certain
assumptions about whether the tax refunds assets will be realized. We expect the tax refund assets currently recorded to be fully realizable, however there can be no assurance that changes in government policies could lead to uncertainties in the
future.
We have limited insurance coverage in China.
We do not have any business liability, interruption or litigation insurance coverage for our operations in China. While business interruption insurance and other types of insurance are available to a limited extent in China, we have determined that
the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, our existing insurance coverage may not be
sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our
own funds, which could have a material adverse effect on our business, financial condition and results of operations.
Our limited ability to protect our licensed intellectual property, and the possibility that this technology could inadvertently infringe technology owned by others, may adversely affect our ability to compete.
We currently hold exclusive licenses for five patents, three of which are licensed from Anhui University of Technology and Science and the other two from the Hangzhou Tianye Communication Equipment Co., Ltd. A successful challenge to the
ownership of this technology by third parties could materially damage our business prospects. Our competitors may assert that the technologies or products infringe on their patents or proprietary rights. We may be required to obtain from others
licenses that may not be available on commercially reasonable terms, if at all. Problems with intellectual property rights could increase the cost of our products or delay or preclude our new product development and commercialization. If
infringement claims against us or our licensors are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our technology license
positions or to defend against infringement claims.
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Environmental regulations impose substantial costs and limitations on our operations.
We are subject to various national and local environmental laws and regulations in China concerning issues such as air emissions, wastewater discharges, and solid waste management and disposal. These laws and regulations can restrict or limit our
operations and expose us to liability and penalties for non-compliance. While we believe that our facilities are in material compliance with all applicable environmental laws and regulations, the risks of substantial unanticipated costs and
liabilities related to compliance with these laws and regulations are an inherent part of our business. It is possible that future conditions may develop, arise or be discovered that create new environmental compliance or remediation liabilities and
costs. While we believe that we can comply with existing environmental legislation and regulatory requirements and that the costs of compliance have been included within budgeted cost estimates, compliance may prove to be more limiting and costly
than anticipated.
Our business and reputation as a provider of transmission and communication towers may be adversely affected by product defects or performance.
We believe that we offer high quality products that are reliable and competitively priced. If our products do not perform to specifications, we might be required to redesign or recall those products or pay substantial damages. Such an event could
result in significant expenses, disrupt sales and affect our reputation and that of our products. In addition, product defects could result in substantial product liability. We do not have product liability insurance. If we face significant
liability claims, our business, financial condition, and results of operations would be adversely affected.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business
operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative
publicity by investors, financial commentators and regulatory agencies, such as the United States Securities and Exchange Commission. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities
and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative
publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions
and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and our stock price. If we become the
subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time
consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely and your investment in our stock could be rendered worthless.
RISKS RELATED TO DOING BUSINESS IN CHINA
Changes in China's political or economic situation could harm us and our operating results.
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Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or
damage our operations and profitability. Some of the things that could have this effect are:
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Level of government involvement in the economy;
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Control of foreign exchange;
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Methods of allocating resources;
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Balance of payments position;
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International trade restrictions; and
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International conflict.
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. For example, state-owned enterprises still constitute a large portion of the Chinese
economy, and weak corporate governance and the lack of a flexible currency exchange policy still prevail in China. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy
was similar to those of the OECD member countries.
Future government regulations or other standards could have an adverse effect on our operations.
Our operations are subject to a variety of laws, regulations and licensing requirements of national and local authorities in the PRC. We are required to obtain licenses or permits from the PRC central government and from Anhui province, where we
operate, and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. In the event that these laws,
regulations and/or licensing requirements change, we may be required to modify our operations or to utilize resources to maintain compliance with such rules and regulations. In addition, new regulations may be enacted that could have an adverse
effect on us.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business through our subsidiaries in the PRC. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested
enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws,
regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In
addition, all of our executive officers and directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to
affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.
You may have difficulty enforcing judgments against
us.
Most of our assets are located outside of the United States and all of our current operations are conducted in the PRC. In addition, all of our directors and officers are nationals and residents of countries other than the United States. A
substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce
in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located
outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition and enforcement of foreign
judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the
PRC
Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So
it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
14
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and
regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and
regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our
part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies,
could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Future inflation in China may inhibit our ability to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8% . These factors have
led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government
to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
Restrictions on currency exchange may limit our ability to receive and use our sales effectively.
The majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or
other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction
that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account
items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value
of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the
relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People's Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may
appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
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Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability
and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our
ability to convert RMB into foreign currencies.
Restrictions under PRC law on our PRC subsidiaries' ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay
dividends to you, and otherwise fund and conduct our business.
Substantially all of our sales are earned by our PRC subsidiaries. However, as discussed more fully under Item 1, " Business - Regulation - Dividend Distributions," PRC regulations restrict the ability of our PRC subsidiaries
to make dividends and other payments to their offshore parent company. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that
could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to
inject capital into PRC subsidiaries, limit our PRC subsidiaries' ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75. Circular 75 requires
PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an SPV for the purpose of engaging in an equity financing outside of China. See Item 1, " Business - Regulation - Circular
75" for a detailed discussion of Circular 75 and its implementation.
We have asked our stockholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE as currently required in connection with their equity interests in us and our acquisitions of equity interests in our PRC
subsidiaries. However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE
will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries' ability to conduct foreign exchange activities, such as the remittance of
dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.
Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of TEC HK constitutes a Round-trip Investment without MOFCOM approval.
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, referred to as the 2006 M&A Rule, which regulate " Round-trip Investments," defined as
having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). See Item 1, " Business - Regulation -
Mergers and Acquisitions" for a detailed discussion of the 2006 M&A Rule.
The PRC regulatory authorities may take the view that Mr. Chun Lu's acquisition of our equity interest (following exercise of his option) and the reverse acquisition of TEC HK are part of an overall series of arrangements which constitute a
Round-trip Investment because at the end of these transactions, Mr. Lu will become the majority owner and effective controlling party of a foreign entity that acquired ownership of our Chinese subsidiaries. The PRC regulatory authorities may also
take the view that the registration of the Acquisition with the relevant AIC in Beijing and the filings with the Beijing SAFE may not be evidence that the Acquisition has been properly approved because the relevant parties did not fully disclose to
the AIC, SAFE or MOFCOM the overall restructuring arrangements, the existence of the reverse acquisition and its link with the Acquisition. If the PRC regulatory authorities take the view that the Acquisition constitutes a Round-trip Investment
under the 2006 M&A Rule, we cannot assure you we may be able to obtain the approval required from MOFCOM.
16
If the PRC regulatory authorities take the view that the Acquisition constitutes a Round-trip Investment without MOFCOM approval, they could invalidate our acquisition and ownership of our Chinese subsidiaries. Additionally, the PRC regulatory
authorities may take the view that the Acquisition constitutes a transaction which requires the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained. We believe that if this takes place, we may be
able to find a way to re-establish control of our Chinese subsidiaries' business operations through a series of contractual arrangements rather than an outright purchase of our Chinese subsidiaries, but we cannot assure you that such
contractual arrangements will be protected by PRC law or that we can receive as complete or effective economic benefit and overall control of our Chinese subsidiaries' business than if the Company had direct ownership of our Chinese
subsidiaries. In addition, we cannot assure you that such contractual arrangements can be successfully effected under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, and if we cannot put
in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of our Chinese subsidiaries, our business and financial performance will be materially adversely affected.
Under the New Enterprise Income Tax Law, we may be classified as a " resident enterprise" of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.
The EIT Law and its implementing rules became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with " de facto management bodies" within China is considered a " resident enterprise,"
meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as " substantial and overall management and control over the
production and operations, personnel, accounting, and properties" of the enterprise.
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto
Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction
and controlled by a Chinese enterprise or group will be classified as a " non-domestically incorporated resident enterprise" if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii)
its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its
directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends
to its non-PRC stockholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a " resident enterprise" for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could
follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing
proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as " tax-exempt
income," we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of
outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new " resident enterprise" classification could
result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of
" resident enterprise" treatment for the 2011 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.
If we were treated as a " resident enterprise" by PRC tax authorities, we would be subject to taxation in both the U.S. and China, and our PRC tax may not be creditable against our U.S. tax.
17
We face uncertainty from China's Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises'share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.
The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which was effective retroactively to
January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign
companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located
in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese
resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no
reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC's " substance-over-form"
principle and deny the existence of the offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For example, while the term "indirectly transfer" is not defined, it is understood
that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or
formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any
formal declarations with regard to how to decide " abuse of form of organization" and " reasonable commercial purpose," which can be utilized by us to balance if our Company complies with the Circular 698. As a result, we may
become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our
financial condition and results of operations.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute,
for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of
unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these
practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be
held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial
condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY
Our common stock is quoted on the OTCQB Marketplace which may have an unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the OTCQB Marketplace. The OTCQB Marketplace is a significantly more limited market than the New York Stock Exchange or NASDAQ. The quotation of our shares on the OTCQB may result in a less liquid market available for
existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future. We plan to list our common stock as
soon as practicable. However, we cannot assure you that we will be able to meet the initial listing standards of any stock exchange, or that we will be able to maintain any such listing.
18
We may be subject to penny stock regulations and
restrictions and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define
so-called penny stocks to be an equity security that has a market price less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exemptions. Our common stock is a penny stock and is subject to
Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited
investors (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. As a result, this rule may
affect the ability of broker-dealers to sell our securities and may affect the
ability of purchasers to sell any of our securities in the secondary market,
thus possibly making it more difficult for us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. Disclosure is
also required to be made about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stock.
There can be no assurance that our common stock will qualify
for exemption from the Penny Stock Rule. In any event, even if our common stock
were exempt from the Penny Stock Rule, we would remain subject to Section
15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any
person from participating in a distribution of penny stock, if the SEC finds
that such a restriction would be in the public interest.
We do not intend to pay dividends for the foreseeable
future.
For the foreseeable future, we intend to retain any earnings to
finance the development and expansion of our business, and we do not anticipate
paying any cash dividends on our common stock. Accordingly, investors must be
prepared to rely on sales of their common stock after price appreciation to earn
an investment return, which may never occur. Investors seeking cash dividends
should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our board of directors and will depend
on our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
Certain provisions of our Certificate of Incorporation
may make it more difficult for a third party to effect a change-of-control.
Our Certificate of Incorporation authorizes our board of
directors to issue up to 10,000,000 shares of preferred stock. The preferred
stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by our board of directors without further action by the
stockholders. These terms may include voting rights including the right to vote
as a series on particular matters, preferences as to dividends and liquidation,
conversion rights, redemption rights and sinking fund provisions. The issuance
of any preferred stock could diminish the rights of holders of our common stock,
and therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of our
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent our stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially and
negatively affect the market price of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2.
PROPERTIES.
There is no private ownership of land in China and all urban
land ownership is held by the government of the PRC, its agencies and
collectives. Land use rights can be obtained from the government for a period of
up to 50 years for industrial usage, 40 years for commercial usage and 70 years for
residential usage, and are typically renewable. Land use rights can be
transferred upon approval by the land administrative authorities of the PRC
(State Land Administration Bureau) upon payment of the required land transfer
fee.
19
We have the following PRC land use rights to three parcels of
land located at Xinqiao Industrial Park, Jingde County, Anhui Province, and PRC:
Land Certificate No.
|
Area (M
2
)
|
Usage
|
Construction Area (M
2
)
|
Expiration Date
|
Jing Guo Yong (2006) No. 0141
|
44,038
|
Industrial
|
11,543.18
|
April 27, 2056
|
Jing Guo Yong (2008) No. 0536
|
66,696
|
Industrial
|
Under construction
|
December 29, 2058
|
Jing Guo Yong (2008) No. 0537
|
66,677
|
Industrial
|
Under construction
|
December 29, 2058
|
The land use right covered by Land Certificate No. Jing Guo
Yong (2006) No. 0141 has been mortgaged as a part of our RMB 6,300,000 revolving
line of credit from the Industrial and Commercial Bank of China, Longshou
Sub-branch, Xuancheng Branch, that expires on October 7, 2011.
In 2011, we acquired the following land use rights to a parcel
located at Song XiCun, XinDen County, FuYang City, Hangzhou, Zhejiang Province,
PRC. We will build a facility for tower production and zinc galvanizing and
expect the facility to commence operations in late 2011.
Land Certificate No.
|
Area (M
2
)
|
Usage
|
Construction Area (M
2
)
|
Expiration Date
|
Fu Guo Yong (2011) No. 000896
|
75,531
|
Industrial
|
75,531
|
February 5, 2061
|
Our principal executive offices and base of operations are
located in southeastern China in Anhui Province. We own the following real
estate property certificates for land located at Xinqiao Industrial Park,
Jingyang Township, Anhui Province, PRC:
Certificate No.
|
Area(M
2
)
|
Structure
|
Floor
|
Usage
|
Fang Di Quan Jing Fang Zi No. 000489
|
1,255.29
|
Complex
|
One
|
Office, residence
and others
|
Fang Di Quan Jing Fang Zi No. 04122
|
10,287.89
|
Steel frame
|
One
|
Factory
|
We also use approximately 1,290 square feet of office space,
for our Shenzhen Branch Office, leased for and on behalf of the Company by Mr.
Huang Liang, Shenzhen Branch Representative, pursuant to a lease agreement,
dated August 12, 2010. Under the lease agreement, Mr. Huang is obligated to pay
a monthly sum of RMB 18,254.1 (approximately $2,700), which the Company
reimburses to him. The lease agreement expires on August 19, 2011 and Mr. Huang
has the option to renew the lease one month prior to the lease expiration date.
We intend to renew the lease at that time in TEC Towers name. We believe that
all leased space is in good condition and that the property is adequately
insured by the owner.
We also use approximately 960 square feet of office space, for
our Beijing Branch Office, leased for and on behalf of the Company by Ms. Liu
Hong Ying, Beijing Branch Representative pursuant to a lease agreement, dated
December 9, 2010, between Ms. Liu and Mr. Han Yu. Under the lease agreement, Ms.
Liu is obligated to pay a monthly sum of RMB 5,500 approximately $811), which
the Company reimburses to her. The lease agreement expires on December 9, 2011
and Ms. Liu has the option to renew the lease 30 days prior to the lease
expiration date. We intend to renew the lease at that time in TEC Towers name.
We believe that all leased space is in good condition and that the property is
adequately insured by the owner.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits
and legal proceedings, which arise, in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these,
or other matters, may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse affect on our business, financial condition or operating
results.
20
ITEM 4. (REMOVED AND
RESERVED).
PART II
ITEM 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Market Information
Our common stock is quoted under the symbol HGHN on the OTCQB
Marketplace.
The prices below reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
|
|
Closing
Bid Prices
(1)
|
|
|
|
High
|
|
|
Low
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
1
st
Quarter
|
$
|
1.10
|
|
$
|
0.30
|
|
2
nd
Quarter
|
|
6.00
|
|
|
1.10
|
|
3
rd
Quarter
|
|
10.00
|
|
|
3.00
|
|
4
th
Quarter
|
|
10.00
|
|
|
2.00
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
1
st
Quarter
|
|
0.35
|
|
|
0.35
|
|
2
nd
Quarter
|
|
0.35
|
|
|
0.35
|
|
3
rd
Quarter
|
|
0.35
|
|
|
0.35
|
|
4
th
Quarter
|
|
0.40
|
|
|
0.30
|
|
______________________
(1)
|
The above table sets forth the range of high and low
closing bid prices per share of our common stock as reported by
www.quotemedia.com for the periods indicated.
|
Holders
As of March 30, 2011, there were approximately 180 stockholders
of record of our common stock. This number does not include shares held by
brokerage clearing houses, depositories or others in unregistered form.
Dividends
We have never declared or paid a cash dividend. Any decisions
regarding dividends will be made by our board of directors. We currently intend
to retain and use any future earnings for the development and expansion of our
business and do not anticipate paying any cash dividends in the foreseeable
future. Our board of directors has complete discretion on whether to pay
dividends, subject to the approval of our stockholders. Even if our board of
directors decides to pay dividends, the form, frequency and amount will depend
upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that the
board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation
Plans
See Item 12, Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters Securities Authorized for
Issuance Under Equity Compensation Plans.
Recent Sales of Unregistered Securities
We have not sold any equity securities during the fiscal year
ended December 31, 2010 that were not previously disclosed in a quarterly report
on Form 10-Q or a current report on Form 8-K that was filed during the 2010
fiscal year.
21
Purchases of Equity Securities
No repurchases of our common stock were made during the fourth
quarter of 2010.
ITEM 6. SELECTED FINANCIAL
DATA.
Not Applicable.
ITEM 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS.
|
The following managements discussion and analysis should be
read in conjunction with our financial statements and the notes thereto and the
other financial information appearing elsewhere in this report. In addition to
historical information, the following discussion contains certain
forward-looking information. See Special Note Regarding Forward Looking
Statements above for certain information concerning those forward looking
statements. Our financial statements are prepared in U.S. dollars and in
accordance with U.S. GAAP.
Overview
Through our indirect Chinese subsidiaries, we are primarily
engaged in the design, production and sale of transmission towers and related
products used in high voltage electric power transmission and wireless
communications. We sell our tower products to prime contractors on large
transmission projects for electric utility companies or telecommunications
service providers, who are developing and constructing projects for end
customers. Our electric transmission towers currently support 35kv, 110kv,
220kv, and 500kv transmission lines and we plan to build towers that support
Ultra High Voltage (UHV) tower lines of 750+kv DC or 1000+kv AC transmission
lines. Our wireless communication towers include single-tube towers, 4-strut
towers and roof top towers for the 2G, 3G, and microwave market. We plan to
expand our business in the near future to enter the communication base station
system integration market and to offer tower installation and maintenance
services. Our towers are primarily made of steel, but some contain aluminum or
other alloy materials.
Our revenues currently are, and historically have been,
generated from the sale of our tower products. In the future, we expect to offer
installation and maintenance services that we believe will generate an
additional revenue stream, however, to date we have generated no material
revenues from such services.
Our headquarters are located in Anhui Province in southeastern
China and our international sales network is primarily operated from our branch
offices in the Shenzhen Special Economic Zone and Beijing.
2010 Financial Performance Highlights
We experienced strong growth in revenues, gross profit, and net
income, primarily as a result of the rapid growth in our production and sales
volume. The following summarizes certain key financial information for the 2010
fiscal year:
-
Revenues
: Our revenues were $32.2 million for the 2010 fiscal
year, an increase of $9.8 million, or 45.5%, from $22.4 million for fiscal
year 2009.
-
Gross Profit and Margin
: Gross profit was $10.7 million for
the 2010 fiscal year as compared to $7.2 million for fiscal year 2009. Gross
margin was 33.2% for the 2010 fiscal year as compared to 32.3% for fiscal year
2009.
-
Net Income
: Net income was $5.7 million for the 2010 fiscal
year, an increase of $1.5 million, or approximately 40.5%, from $4.2 million
for fiscal year 2009.
-
Fully diluted net income per share
: Fully diluted net income
per share was approximately $0.22 for the 2010 fiscal year, as compared to
approximately $0.22 for fiscal year 2009, despite an increase of 19,194,421
shares on fully diluted basis.
22
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following
factors:
-
Growth in the Chinese Economy
. We operate our manufacturing
facilities in China and derive a majority of our revenues from sales to
customers in China. Economic conditions in China, therefore, affect virtually
all aspects of our operations, including the demand for our products, the
availability and prices of our raw materials and our other expenses. Despite
the global economic turmoil which resulted in a slowing of its growth rate,
China experienced significant economic growth in recent years. China appears
to be emerging from the economic slowdown and is expected to experience
continued growth in all areas of investment and consumption.
-
Product Development and Brand Recognition
. We believe that in
order to compete effectively in our market, we need to constantly improve the
quality of our products and deliver new products with innovative features. As
such, we face the challenge of expanding our research and development
capacity. We need to maintain a strong and sufficient research and development
team and identify the right directions for our research and development. We
also face the long-term challenge of developing our brand recognition. We plan
to focus on building a reputation for quality and excellent customer service
within our industry instead of advertising. We believe that our sales and
service team is key in developing the companys brand recognition and value.
-
Growth of Transmission Projects
. Sales of our tower products
depend on the continued private and governmental investment in transmission
projects both in China and in emerging overseas markets. Growth in the
domestic market relies primarily on Chinas continued investment in the
electric transmission industry in accordance with its 12
th
5-Year
Plan. So far China has invested over $100 billion in electric transmission
infrastructure and we believe approximately 25% of which was spent on towers
and related products and services. We expect this investment to continue for
the next 5-7 years. Chinas wireless communications market has also grown
considerably in the past decade, with an estimated 800 million mobile phone
users in China as of December 31, 2010. Continued growth in the wireless
communications market will depend on the success of planned service provider
infrastructure investment of over $60 billion in the next five years, with the
bulk of this amount expected to be allocated to tower and base station
development. Continued growth in transmission projects in the developing
overseas electric transmission and wireless communication markets will
similarly depend on continued investments in these overseas markets. We
believe that if planned investments in electric and wireless communications
projects in China and abroad continue to be implemented, we will realize
increased opportunities to sell our tower products and planned maintenance
services.
Taxation
We are subject to United States tax at a tax rate of 34%. No
provision for income taxes in the United States has been made as we have no
income taxable in the United States.
TEC HK was incorporated in Hong Kong and under the current laws
of Hong Kong, is subject to Profits Tax of 16.5% . No provision for Hong Kong
Profits Tax has been made as TEC HK had no taxable income.
Under the EIT Law, ZTEC and STT are subject to an EIT rate of
25.0% . Since January 2010, TEC Tower has qualified as a government recognized
High- and New-Technology Enterprise and has since been enjoying a reduced EIT
rate of 15%. See Item 1, Business Regulation Taxation for a detailed
description of the EIT Law and tax regulations applicable to our Chinese
subsidiaries.
Results of Operations
Comparison of Years Ended December 31, 2010 and December
31, 2009
The following table sets forth key components of our results of
operations during the fiscal years ended December 31, 2010 and 2009, both in
dollars and as a percentage of our revenues.
23
(All amounts, other than percentages, in thousand of U.S. dollars)
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Dollars
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Revenues
|
|
Revenues
|
$
|
32,241
|
|
|
100.0%
|
|
$
|
22,381
|
|
|
100.0%
|
|
Cost of goods sold
|
|
21,549
|
|
|
66.8%
|
|
|
15,150
|
|
|
(67.9%
|
)
|
Gross profit
|
|
10,693
|
|
|
33.2%
|
|
|
7,231
|
|
|
32.1%
|
|
Selling and marketing expenses
|
|
1,394
|
|
|
4.3%
|
|
|
300
|
|
|
(1.3%
|
)
|
General and administrative expenses
|
|
1,846
|
|
|
5.6%
|
|
|
1,025
|
|
|
(4.5%
|
)
|
Net income from operations
|
|
7,453
|
|
|
23.3%
|
|
|
5,906
|
|
|
26.3%
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant
|
|
191
|
|
|
0.6%
|
|
|
107
|
|
|
0.4%
|
|
Other income
|
|
15
|
|
|
0.0%
|
|
|
100
|
|
|
0.4%
|
|
Interest expense
|
|
(896
|
)
|
|
(2.8%
|
)
|
|
(480
|
)
|
|
(2.2%
|
)
|
Net other income (expenses)
|
|
(690
|
)
|
|
(2.2%
|
)
|
|
(272
|
)
|
|
(1.4%
|
)
|
Net income before provision for income taxes
|
|
6,763
|
|
|
21.1%
|
|
|
5,634
|
|
|
24.9%
|
|
Provision for income taxes
|
|
(1,024
|
)
|
|
(3.1%
|
)
|
|
(1,479
|
)
|
|
(6.7%
|
)
|
Net income
|
|
5,739
|
|
|
18.0%
|
|
|
4,154
|
|
|
18.2%
|
|
Foreign currency translation adjustment
|
|
355
|
|
|
1.2%
|
|
|
55
|
|
|
0.4%
|
|
Comprehensive income
|
$
|
6,094
|
|
|
19.2%
|
|
$
|
4,209
|
|
|
18.6%
|
|
Revenues
. Our revenues are mainly generated from sales of our tower
products. Our revenues increased $9.8 million, or 93.8%, to $32.2 million for
the fiscal year December 31, 2010 from $22.4 million during the 2009 fiscal year.
Such increase was primarily due to an increase in sales volume. In 2010, approximately
56.3% of our revenues was generated from sales to customers in the power and energy
industries and approximately 41.7% from sales to customers in the communication
industry. As compared to 2009, revenues generated from sales to customers in power
and energy industries and communication industry increased by approximately 66%
and 17.6%, respectively. We benefited from the increase in infrastructure investment
by local governments in China. In addition, our newly established sales team in
Beijing also contributed to increase in sales to customers in power and energy
industries.
Cost of goods sold
. Our cost of goods sold
includes the direct costs of our raw materials, primarily steel, as well as the
cost of labor and overhead. Our cost of goods sold increased $6.3 million, or
41.4%, to $21.5 million in the fiscal year ended December 31, 2010, from $15.2
million during fiscal year 2009. The increase in cost of goods sold was
generally in line with our increased sales volume and revenues. As a percentage
of revenues, our cost of goods sold decreased from 67.9% in fiscal year 2009 to
66.8% in fiscal year 2010. The modest decrease of percentage of cost of goods
sold was mainly due to our cost control efforts.
Gross profit
. Our gross profit is equal to the
difference between our revenues and our cost of goods sold. Our gross profit
increased $3.5 million, or 48.6%, to $10.7 million in 2010, from $7.2 million in
2009. Gross profit as a percentage of revenues (gross margin) was 33.2% and
32.1% for fiscal years ended December 31, 2010 and 2009, respectively.
Selling and marketing expenses
. Our selling and
marketing expenses consist primarily of compensation and benefits to our sales
and marketing staff, sales commission, cost of advertising, promotion, business
travel, after-sale support, transportation costs and other sales related costs.
In the fiscal year ended December 31, 2010, our selling and marketing expenses
rose to $1.4 million, or 367%, from $299,986 during the 2009 fiscal year. The
increase in selling and marketing expenses was largely attributable to our
increased international marketing efforts, costs associated with newly
established sales team in Beijing, as well as higher transportation costs driven
by high oil prices. In addition, a large portion of the transportation costs
related to sales in December 2009 was paid in early 2010 whereas most of
transportation costs associated with sales in December 2010 was paid before the
end of 2010 due to shorter collection cycles imposed by transportation
companies.
General and administrative expenses
. Our general
and administrative expenses consist primarily of compensation and benefits to
our general management, finance and administrative staff, professional advisor
fees, doubtful debts reserve of $0.07 million, stock base compensation of $0.2
million and other expenses incurred in connection with general operations. In
the fiscal year ended December 31, 2010, our general and administration expenses
increased to $1.8 million, or 80%, from $1.0 million during fiscal year 2009.
The increase in costs was attributable to business expansion and increased professional fees associated with our public reporting company
status, an increase in doubtful debt reserve and costs associated with warrants
issuable to CCG for their investor relationship services.
24
Interest expense
.
Interest expense
increased $416,938, to $896,464, or 87.5%, in the fiscal year ended December 31,
2010, from $479,526 during the 2009 fiscal year. Such increase in interest
expense was mainly due to increase in short term discounts interest of trade
bills.
Net Income before Provision for Income Taxes
. Our
net income before provision for income taxes increased by $1.2 million, or
21.4%, to $6.8 million in the fiscal year ended December 31, 2010, from $5.6
million during fiscal year 2009, as a result of the factors described above.
Provision for Income Taxes
. Our income tax
provision decreased by $0.5 million, or 33.3%, to $1.0 million in the fiscal
year ended December 31, 2010, from $1.5 million during the 2009 fiscal year.
Since January 2010, TEC Tower has qualified as a government recognized High- and
New-Technology Enterprise and has since been enjoying a tax rate reduction from
25% to 15%.
Net Income
. As a result of the factors described
above, we generated a net income of $5.7 million in the fiscal year ended
December 31, 2010, an increase of $1.5 million, or 40.5%, from $4.2 million
during the 2009 fiscal year, mainly as a result of the increase in sales volume
as discussed above.
Liquidity and Capital Resources
As of December 31, 2010, we had cash and cash equivalents of
$2.5 million, including restricted cash of $1.2 million. The following table
sets forth a summary of our cash flows for the periods indicated:
Cash Flows
(All amounts in thousand of U.S. dollars)
|
|
Fiscal Year Ended
|
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Net cash provided by (used in) operating activities
|
$
|
3,009
|
|
$
|
(7,237
|
)
|
Net cash used in investing activities
|
|
(1,079
|
)
|
|
(3,604
|
)
|
Net cash (used in) provided by financing activities
|
|
(189
|
)
|
|
9,968
|
|
Effects of exchange rate change in cash
|
|
621
|
|
|
315
|
|
Increase (decrease) in cash and cash equivalents
|
|
2,362
|
|
|
(558
|
)
|
Cash and cash equivalents at beginning of the year
|
|
165
|
|
|
723
|
|
Cash and cash equivalents at end of the year
|
|
2,527
|
|
|
165
|
|
Operating Activities
Net cash provided by operating activities was $3.0 million for
the fiscal year ended December 31, 2010, as compared to $7.2 million net cash
used in operating activities for the 2009 fiscal year. The increase in net cash
provided by operating activities was primarily attributable to a $1.6 million
increase in net income, a $1.8 million decrease in inventory, a $3.3 million
increase in accounts payable, a $3.7 million decrease in other receivables in
2010 as compared to 2009. We made a strategic decision to reduce our inventory
level and tightened our collection policy to improve our cash position.
Investing Activities
Net cash used in investing activities for the fiscal year ended
December 31, 2010 was $1.1 million, as compared to $3.6 million net cash used in
investing activities during the 2009 fiscal year.
Our main uses of cash for investing activities in 2010 were
acquisitions of property and equipment and construction in progress. In 2010, we
spent approximately $0.6 million in the purchase of property and equipments. In
addition, we invested approximately $0.5 million in capital improvement to
Jingde plants infrastructure.
25
Our main uses of cash for investing activities in 2009 were
acquisitions of equipment and land use rights. In 2009, we spent approximately
$2.0 million in the purchase of property and equipments and $1.6 million in the
purchase of land use right to expand our production capabilities.
Financing Activities
Net cash used in financing activities for the fiscal year ended
December 31, 2010 was $189,204, as compared to $10.0 million net cash provided
by financing activities during the 2009 fiscal year. During the 2009 fiscal
year, we borrowed an additional $10.0 million in short term loans. Our short
term loan level remained the same in 2010, and the $189,204 outflow was due to
the change in exchange rate between RMB and U.S. dollar.
Loan Commitments
As of December 31, 2010, we did not hold any long-term loans.
The amount, interest rate, maturity date and duration of each of our short-term
bank loans were as follows:
|
|
Amount
|
|
Interest
|
|
|
|
|
Bank
|
|
(in millions)*
|
|
Rate
|
|
Maturity Date
|
|
Duration
|
Industrial and Commercial Bank, Longshou
Branch
|
$
|
0.3
|
|
4.86%
|
|
January 22, 2011
|
|
6 months
|
Huishang Bank, Xuancheng Branch
|
|
3.0
|
|
5.84%
|
|
February 10, 2011
|
|
12 months
|
Industrial and Commercial Bank, Longshou
Branch
|
|
0.4
|
|
4.86%
|
|
March 16, 2011
|
|
6 months
|
Industrial and Commercial Bank, Longshou Branch
|
|
0.8
|
|
4.86%
|
|
March 16, 2011
|
|
6 months
|
Industrial and Commercial Bank, Longshou
Branch
|
|
0.3
|
|
5.31%
|
|
March 21, 2011
|
|
12 months
|
Industrial and Commercial Bank, Longshou Branch
|
|
0.9
|
|
5.31%
|
|
April 1, 2011
|
|
12 months
|
Industrial and Commercial Bank, Longshou
Branch
|
|
1.2
|
|
5.10%
|
|
June 5, 2011
|
|
6 months
|
China Merchants Bank, Hefei Branch
|
|
1.5
|
|
6.12%
|
|
October 29, 2011
|
|
12 months
|
China Everbright Bank, Hefei Branch
|
|
4.5
|
|
5.56%
|
|
November 22, 2011
|
|
12 months
|
Total
|
$
|
12.9
|
|
|
|
|
|
|
* Calculated based on the exchange rate of $1 = RMB 6.61
We have a RMB 30,000,000 (approximately $4.5 million) revolving
line of credit with the Hefei Sipailou Branch of China Merchants Bank. We have
utilized RMB 10,000,000 (approximately $1.5 million) of the line of credit as of
the date of this report. This revolving line of credit is guaranteed by Anhui
Dexin Guarantee Co., Ltd., an unaffiliated company. The crediting agreement will
terminate on November 28, 2011.
We have a RMB 30,000,000 (approximately $4.5 million) revolving
line of credit with the China Merchants Bank, Hefei Branch. We have utilized RMB
30,000,000 (approximately $4.5 million) of the line of credit as of the date of
this report. This revolving line of credit is guaranteed by Zhongfui Trust
Guarantee Co., Ltd., an unaffiliated company, our CEO and chairman Mr. Lu and
his spouse. The crediting agreement will terminate on November 22, 2011.
We also maintain a RMB 16,000,000 (approximately $2.4 million)
revolving line of credit with the Longshou Sub-branch of Xuancheng Branch of the
Industrial and Commercial Bank of China. This line of credit is secured by TEC
Towers land use rights. We have utilized RMB 8,000,000 (approximately $1.2
million) of the line of credit as of the date of this report. This line of
credit expired on March 21, 2012.
Capital Expenditures
Our capital expenditures for fixed assets for the fiscal years
ended December 31, 2010 and 2009 were approximately $1.1 million and $3.6
million, respectively.
To date, we have financed our operations primarily through cash
flows from operations, augmented by short-term bank loans and equity
contributions by our stockholders. We believe that our cash on hand and cash
flow from operations will meet a portion of our present cash needs and we will
require additional cash resources, including equity investment, to meet our
expected capital expenditures and working capital requirements for the next 12
months. We may, however, in the future, require additional cash resources due to
changed business conditions, implementation of our strategy expand our marketing
efforts and increase brand awareness, or acquisitions we may decide to pursue.
If our own financial resources are
insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence
of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at
all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
26
Obligations under Material Contracts
In addition to the loan obligations disclosed above, we entered into a financial advisory agreement, dated May 4, 2010, with JW Junwei Financial Group, or Junwei. Pursuant to the agreement, which is for a five-year term, Junwei is obligated to
provide us with financial advisory services over the term of the agreement and we are obligated to issue an aggregate of 500,000 shares of our common stock to Junwei in five equal 100,000 share portions for no cash consideration, commencing on
December 31, 2010 and ending on December 31, 2014. The agreement contains an exclusivity provision whereby we have agreed to engage Junwei as our exclusive financial advisor for two years and also contains a $1 million liquidated damages
provision for breach of such exclusivity. Junwei has agreed to waive the equity compensation and liquidated damage under this agreement. As of the date of this report, the Company has not issued any shares and paid any liquidated damage to Junwei in
connection with such agreement.
CCG Investor Relations Partners LLC, CCG, our investor relations firm, is entitled to purchase up to 80,000 shares of fully-paid and non-assessable shares of our common stock, at a price of $2.00 per share, pursuant to the terms and conditions
of a letter agreement, dated June 20, 2010, between the Company and CCG. CCG's right to exercise its warrant will vest in four equal portions, with the first portion vesting on June 20, 2010, and the remaining portions vesting on September 30,
2010, December 31, 2010 and March 31, 2011, respectively and contains $90,000 liquidated damages provision for breach of such exclusivity. The warrant expires on June 15, 2015. In the event that the agreement is terminated prior to the vesting
date, such portion of the warrant shall not vest and the holder of the warrant shall not be entitled to exercise such unvested portion of the warrant.
Inflation
Inflation and changing prices have not had a material effect
on our business, and we do not expect that inflation or changing prices will
materially affect our business in the foreseeable future. However, our management
will closely monitor price changes in the Chinese economy and our industry and
continually maintain effective cost controls in operations.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital
expenditures, or capital resources that are material to an investment in our securities.
Seasonality
Our operating results and operating cash flows historically have been subject to seasonal variations. Our revenues usually increase over each quarter of the calendar year with the first quarter usually being the slowest quarter because fewer
projects are undertaken during and around the Chinese spring festival.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes
thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an
understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management's difficult,
subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from managements current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements:
27
Use of Estimates
The preparation of consolidated financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Revenue Recognition
The Companys revenue recognition policies are in compliance
with ASC 605. Sales revenue is recognized when all of the following have
occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the price is fixed or
determinable, and (iv) the ability to collect is reasonably assured. These
criteria are generally satisfied at the time of shipment when risk of loss and
title passes to the customer.
Technical consulting service income is recognized when the
relevant service is rendered.
Government grants represent local authority grants to the
company for infrastructure development and the revenue is recognized on cash
basis when the local authority approves the grant to the company.
The Company recognizes revenue when the goods are delivered and
title has passed. Sales revenue represents the invoiced value of goods, net of a
value-added tax (VAT). All of the Companys products that are sold in the PRC
are subject to a Chinese value-added tax at a rate of 17% of the gross sales
price or at a rate approved by the Chinese local government. This VAT liability
may be offset by the VAT paid by the Company on raw materials and other
materials included in the cost of producing their finished product.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and any accumulated impairment losses. .
Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets.
Assets Classifications
|
Estimated useful life
|
|
|
Buildings
|
50 years
|
|
|
Plant and machinery
|
5 years
|
|
|
Furniture, fixtures and office equipment
|
5 years
|
|
|
Motor vehicles
|
5 years
|
An item of property and equipment is removed from the accounts
upon disposal or when no future economic benefits are expected to arise from the
continued use of the asset. Any gain or loss arising on the sale or disposal of
the asset (calculated as the difference between the net disposal proceeds and
the carrying amount of the item) is included in the consolidated statement of
income in the period the item is sold or otherwise disposed. Maintenance and
repairs of property and equipment are charged to operations when incurred.
Expenditures for maintenance and repairs are charged to expense as incurred,
whereas major betterments are capitalized as additions to property and
equipment. The Company reviews its property and equipment whenever events or
changes in circumstances indicate that the carrying value of certain assets
might not be recoverable. In these instances, the Company recognizes an
impairment loss when it is probable that the estimated cash flows are less than
the carrying value of the asset. To date, no such impairment losses have been
recorded.
28
Construction in Progress
Construction in progress represents direct costs of construction as well as acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when
substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use.
Impairment of Long-Lived Assets and Intangible Assets
In accordance with ASC Topic 360," Property, Plant and Equipment" , long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be
recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the
asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of December 31, 2010 and December 31, 2009, the
Company determined no impairment charges were necessary.
Inventory
Inventory consists primarily of raw materials, work in progress, and finished goods. Raw materials are stated at cost. Cost comprises direct materials and, where applicable direct labor costs and applicable overhead costs that have been incurred in
bringing the inventory to its present location and condition. Finished goods are stated at the lower of cost (determined on first in first out method) and net realizable value.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.
The Company provides for inventory losses based on obsolescence and levels in excess of forecasted demand In these cases, inventory is reduced to estimated realizable value based on historical usage and expected demand. Inherent in the
Company's estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for the Company's products, and technical obsolescence of products.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic
trends and changes in customer payment patterns and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are primarily on a specific identification basis.
The standard credit period of the Company's most of clients is three months. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of December 31, 2010 and
December 31, 2009. There was no allowance for doubtful accounts as of December 31, 2010 and December 31, 2009.
Income Taxes
The Company accounts for income taxes under the provisions of ASC 740 " Accounting for Income Taxes" . Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using the tax bases of assets and liabilities using the enacted taxes rates in effect in the years in which the differences are expected to reverse.
Provision for income taxes consist of taxes currently due plus deferred taxes. Since the Company had no operations within the United States there is no provision for US income taxes and there are no deferred tax amounts as of December 31, 2010 and
December 31, 2009.
Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items
credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are
offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
29
The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax
is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the
computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against
which deductible temporary differences can be utilized.
Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items
credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to
settle its current tax assets and liabilities on a net basis.
ASC 740 also prescribes a more-likely-than-not threshold for financial statements recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense.
Product Warranties
Substantially all of the Company's products are covered by a standard warranty of 1 to 2 years for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the software or products or, if
those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company provides nil% of sales income for product warranties for the years ended December 31, 2010 and December 31, 2009 in the warranty reserve to reflect
estimated material and labor costs of maintenance for potential or actual product issues but for which the Company expects to incur an obligation. The product warranty reserve was $nil as of December 31, 2010 and December 31, 2009.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (" Paragraph
820-10-35-37" ) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands
disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques
used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three
(3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting.
Level 3 Pricing inputs that are generally observable inputs and not corroborated by market data.
The carrying amounts of the Company's financial assets and liabilities, such as cash and accrued expenses, approximate their fair values because of the short maturity of these instruments.
The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value as of
December 31, 2010 or December 31, 2009, nor gains or losses are reported in the statement of income and other comprehensive income that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held
at the reporting date for the fiscal years ended December 31, 2010 or December 31, 2009.
30
Accumulated Other Comprehensive Income
ASC Topic 220 " Comprehensive Income" establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders' equity of a
business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation
adjustments.
Recent Accounting Pronouncements
In January 2010, FASB issued ASU No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes
of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company adopted this
standard and has determined the standard does not have material effect on the Company's consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, an entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling
financial interest in the subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. In contrast, an entity is required to account
for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about
the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective for beginning in the first interim or annual reporting period ending on or after December 31, 2009. The Company does not expect the adoption of this
ASU to have a material impact on its consolidated financial statements In January 2010, FASB issued ASU No. 2010-02 - Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification. The amendments in this
Update affect accounting and reporting by an entity that experiences a decrease in ownership in a subsidiary that is a business or nonprofit activity. The amendments also affect accounting and reporting by an entity that exchanges a group of assets
that constitutes a business or nonprofit activity for an equity interest in another entity. The amendments in this update are effective beginning in the period that an entity adopts SFAS No. 160, " Non-controlling Interests in Consolidated
Financial Statements - An Amendment of ARB No. 51." If an entity has previously adopted SFAS No. 160 as of the date the amendments in this update are included in the Accounting Standards Codification, the amendments in this update are
effective beginning in the first interim or annual reporting period ending on or after December 15, 2009. The amendments in this update should be applied retrospectively to the first period that an entity adopted SFAS No. 160. The Company adopted
this standard and has determined the standard does not have material effect on the Company's consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06 - Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. 2) Activity in Level 3 fair value measurements. In the
reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net
number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and
valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair
value measurements that fall in either Level 2 or Level 3.The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
The Company is currently evaluating the impact of this ASU, however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
31
In February 2010, the FASB issued Accounting Standards Update 2010-09, " Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements," or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement that,
for listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the disclosure requirement
has been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010.
In April 2010, the FASB issued Accounting Standards Update 2010-13, " Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the
Underlying Equity Security Trades," or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial porting of
the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as
equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the adoption of ASU 2010-17 to have a significant impact on its
consolidated financial statements.
In April 2010, the FASB issued Accounting Standard Update 2010-17, " Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition" or ASU 2010-17 . This Update provides guidance on the recognition of
revenue under the milestone method, which allows a vendor to adopt an accounting policy to recognize all of the arrangement consideration that is contingent on the achievement of a substantive milestone (milestone consideration) in the period the
milestone is achieved. The pronouncement is effective on a prospective basis for milestones achieved in fiscal years and interim periods within those years, beginning on or after June 15, 2010. The adoption of ASU 2010-17 does not have any
significant impacts on the consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20, " Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses." This update amends codification topic 310 on receivables to improve the disclosures that an
entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and
provide certain new disclosures about its financing receivables and related allowance for credit losses. This guidance is being phased in, with the new disclosure requirements for period end balances effective as of December 31, 2010, and the new
disclosure requirements for activity during the reporting period are effective March 31, 2011. The troubled debt restructuring disclosures in this ASU have been delayed by ASU 2011-01 " Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update No. 2010-20," which was issued in January 2011.
In December 2010, the FASB issued Accounting Standards Update 2010-28 which amend " Intangibles- Goodwill and Other" (Topic 350). The ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting entities, they are required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors
indicating that impairment may exist. The qualitative factors are consistent with the existing guidance in Topic 350, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances
changes that would more likely than not reduce the faire value of a reporting unit below its carrying amount. ASU 2010-28 is effective for fiscal years, and interim periods within those years beginning after December 15, 2010. Early adoption is not
permitted. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU will have a material impact on its consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update 2010-29 which address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations (Topic 805). This ASU
specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. This ASU also
expands the supplemental pro forma disclosures under Topic 805 to include a
description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the
reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2010. Early adoption is permitted. The Company is currently evaluating the
impact of this ASU and expected the adoption of this ASU will have an impact on
its future business combination.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA.
The full text of our audited consolidated financial statements
as of December 31, 2010 and 2009 begins on page F-1 of this report.
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE.
|
None.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and
Procedures
Our management, with the participation of our chief executive
officer and chief financial officer, Mr. Chun Lu and Mr. Yuhua Yang,
respectively, evaluated the effectiveness of our disclosure controls and
procedures. The term disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports, such as this report, that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Based on that evaluation, Mr. Lu and Mr. Yang concluded
that because of the material weakness in internal control over financial
reporting described below, our disclosure controls and procedures were not
effective as of December 31, 2010.
(b) Managements Annual Report on Internal Control over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in accordance with
U.S. GAAP, and includes those policies and procedures that:
|
(1)
|
pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of
our assets;
|
|
|
|
|
(2)
|
provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are
being made only in accordance with the authorization of our management and
directors; and
|
|
|
|
|
(3)
|
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
|
33
During its evaluation of the effectiveness of internal control
over financial reporting as of December 31, 2010, the management concluded that
the Company still needs to hire qualified accounting personnel and enhances the
supervision, monitoring and reviewing of financial statements preparation
processes. Although our accounting staff is professional and experienced in
accounting requirements and procedures generally accepted in the PRC, management
has determined that they require additional training and assistance in U.S.
GAAP. The Company is actively searching for additional personnel with relevant
accounting experience, skills and knowledge in the preparation of financial
statements in accordance with of U.S. GAAP and financial reporting disclosure
requirements under SEC rules. In addition, The Company plans to establish an
audit committee and appoint qualified committee members to strength the
companys internal control over financial reporting.
Management is committed to improving its internal control over
financial reporting and will continue to work to put effective controls in
place. Our management is not aware that the material weakness in our internal
control over financial reporting causes them to believe that any material
inaccuracies or errors existed in our financial statement as of December 31,
2010. The reportable conditions and other areas of our internal control over
financial reporting identified by us as needing improvement have not resulted in
a material restatement of our financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies and procedures may deteriorate.
Because the Company is a smaller reporting company, this annual
report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by our registered public
accounting firm.
(c) Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over
financial reporting during the fourth quarter of fiscal year 2010 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
We have no information to disclose that was required to be disclosed
in a report on Form 8-K during fourth quarter of fiscal year 2010, but was not
reported.
PART III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following sets forth information about our directors and
executive officers as of the date of this report:
Name
|
Age
|
Position
|
Chun Lu
|
37
|
Chairman, Chief
Executive Officer and President
|
Yuhua Yang
|
35
|
Chief Financial Officer
|
Debin Chen
|
40
|
Vice President of
Sales and Marketing
|
Jianming Wang
|
35
|
Chief Operating Officer
|
Baojia He
|
59
|
Chief Technology
Officer
|
Xiaoxiang Liu
|
41
|
Director
|
Wei Zhang
|
42
|
Director
|
Mr. Chun Lu
. Mr. Lu has been our Chairman since May 4,
2010 and has served as the President of TEC Tower since its inception in 2006.
Prior to joining us, Mr. Lu was the general manager at Hangzhou Tianye
Communication Equipment Co.
from January 2002 to March 2006.
Mr. Lu holds a bachelor's degree from Zhejiang Industrial and Commerce University in International Trade. Mr. Lu has not held any other public company directorships during the past five years.
34
Mr. Yuhua Yang
. Mr. Yang has served as our Chief Financial Officer since May 4, 2010 and has served as the Director of Finance of TEC Tower since February 2010. Prior to joining us, Mr. Yang worked as the chief accountant at Yancheng Casing
Co. from December 2003 to February 2010. Mr. Yang holds a bachelor's degree from the College of Finance and Economy at Lianyungang City, majoring in Taxation.
Mr. Debin Chen
. Mr. Chen has served as our Vice President of Sales and Marketing since May 4, 2010 and has served in the same capacity for TEC Tower since September 2009. Prior to joining us, Mr. Chen served as the country manager, Bolivia
and regional sales manager, North and South America for Huawei from June 1996 to July 2009. We believe that Mr. Chen's strong overseas sales experience will help drive our overseas operations. Mr. Chen holds a Bachelor's degree from
Chengdu University of Science and Technology in Machinery Design and Manufacture.
Jianming Wang
. Mr. Wang has served as our Chief Operating Officer since May 4, 2010 and has served in the same capacity for TEC Tower since December 2009. Prior to joining us, Mr. Wang worked at Huawei, from 2001 through 2009, as Service
Sales Director of Sub-Saharan Region, Service Director of MTN Key Accounts, and Director of Global Service Sales. Mr. Wang earned a Bachelor's degree from Zhejiang University in Office Automation and an MBA from University of Pretoria.
Mr. Baojia He
. Mr. He has served as our Chief Technology Officer since May 4, 2010 and has served as the Vice President of Research and Development of TEC Tower since 2007. Prior to joining us, Mr. He served as the Vice President of
Technology at Jiangsu Taihu Tower from March 2005 to April 2007
.
Mr. Xiaoxiang Liu
.
Mr. Liu has served as our Director since May 2010 and has served as the General Manager of TEC Tower since 2008 and TEC Tower's Chief Administrative Officer since May 4, 2010. Prior to joining us, Mr. Liu
served as the president of Jingde County Branch of Industrial Commercial and Business Bank from August 2005 and December 2007, and as a customer manager at the same branch from July 2003 to August 2005. Mr. Liu holds a bachelor's degree in
Economics from the Open University of China in 2004 and is a member of the Anhui Abacus Association. Mr. Liu has not held any other public company directorships during the past five years.
Mr. Wei Zhang
. Mr. Zhang has served as our Director
since May 2010 and has provided consulting services to TEC Tower since its inception
in 2006. Prior to joining us, Mr. Zhang worked from 2000 and 2009, as a service
manager for the Beijing Chaowai Railway. Mr. Zhang holds a bachelor's degree
in Business Administration from the Peking University. Mr. Zhang has not held
any other public company directorships during the past five years.
Directors are elected until their successors are duly elected and qualified.
Except as set forth in our discussion below in Item 13, " Certain Relationships and Related Transactions, and Director Independence - Transactions with Related Persons," none of our directors, director nominees or executive officers
has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.
Director Qualifications
Our board of directors has identified particular qualifications, attributes, skills and experience that are important to be represented on our board as a whole, in light of our current needs and business priorities. We are a U.S. public company that
offers tower products to end users in the electric transmission and wireless communications industry in China. Therefore, the board believes that a diversity of professional experiences in tower construction and the electric transmission and
wireless communications industry, specific knowledge of key geographic growth areas, and knowledge of U.S. capital markets and of U.S. accounting and financial reporting standards should be represented on the board.
Set forth below is a summary of some of the specific qualifications, attributes, skills and experiences of our directors.
35
Chun Lu
-
Co-founder of TEC Tower and Chairman and Chief Executive Officer of TEC
Tower since its inception
-
Holds a bachelors degree in International Trade
-
Mr. Lu contributes invaluable long-term knowledge of the Companys
business and operations and extensive experience in the communications and
power equipment market
Xiaoxiang Liu
-
Holds a bachelors degree in Economics
-
Experience in finance and banking as head of a bank
-
Member of the Anhui Abacus Association
-
Mr. Lius extensive experience in the industrial financial market and
strong knowledge of the banking industry makes him a key member of our
management staff and a valuable member of our board of directors
Wei Zhang
-
Holds a bachelors degree in Business Administration
-
Mr. Zhang contributes his extensive knowledge and hands-on experience in
the power utility industry to the Board
Family Relationships
There are no family relationships among any of our officers or
directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or
executive officers has, during the past ten years:
-
been convicted in a criminal proceeding or been subject to a pending
criminal proceeding (excluding traffic violations and other minor offences);
-
had any bankruptcy petition filed by or against the business or property of
the person, or of any partnership, corporation or business association of
which he was a general partner or executive officer, either at the time of the
bankruptcy filing or within two years prior to that time;
-
been subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction or federal or
state authority, permanently or temporarily enjoining, barring, suspending or
otherwise limiting, his involvement in any type of business, securities,
futures, commodities, investment, banking, savings and loan, or insurance
activities, or to be associated with persons engaged in any such activity;
-
been found by a court of competent jurisdiction in a civil action or by the
SEC or the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not been reversed,
suspended, or vacated;
-
been the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not subsequently reversed,
suspended or vacated (not including any settlement of a civil proceeding among
private litigants), relating to an alleged violation of any federal or state
securities or commodities law or regulation, any law or regulation respecting
financial institutions or insurance companies including, but not limited to, a
temporary or permanent injunction, order of disgorgement or restitution, civil
money penalty or temporary or permanent cease-and-desist order, or removal or
prohibition order, or any law or regulation prohibiting mail or wire fraud or
fraud in connection with any business entity; or
-
been the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any
registered entity (as defined in Section 1(a)(29) of the Commodity Exchange
Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association,
entity or organization that has disciplinary authority over its members or
persons associated with a member.
36
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive
officers, directors and beneficial owner of more than 10% of a registered class
of our equity securities to file with the SEC statements of ownership and
changes in ownership. The same persons are required to furnish us with copies of
all Section 16(a) forms they file. In fiscal year 2010, Form 3s for Chun Lu,
Yuhua Yang, Xiaoxiang Liu, Wei Zhang and Hua Peng Phillip Wong were filed late
due to administrative oversight. In making these statements, we have relied upon
examination of the copies of all Section 16(a) forms provided to us and the
written representations of our executive officers, directors and beneficial
owner of more than 10% of a registered class of our equity securities.
Code of Ethics
On May 4, 2010, our board of directors adopted a code of ethics
that applies to all of our directors, officers and employees, including our
principal executive officer, principal financial officer, and principal
accounting officer. The code of ethics addresses, among other things, honesty
and ethical conduct, conflicts of interest, compliance with laws, regulations
and policies, including disclosure requirements under the federal securities
laws, confidentiality, trading on inside information, and reporting of
violations of the code. A copy of the code of ethics has been filed as Exhibit
14 to our current report on Form 8-K filed on May 10, 2010.
Material Changes to Director Nomination Procedures
There have been no material changes to the procedures by which
stockholders may recommend nominees to our board of directors since such
procedures were last disclosed.
Audit Committee and Audit Committee Financial Expert
We do not have an audit committee or an audit committee
financial expert serving on the audit committee. Our entire board of directors
currently is responsible for the functions that would otherwise be handled by an
audit committee. However, we intend to establish an audit committee of the board
of directors in the near future. We envision that the audit committee will be
primarily responsible for reviewing the services performed by our independent
auditors, evaluating our accounting policies and our system of internal
controls. Upon the establishment of an audit committee, the board will determine
whether any of the directors qualify as an audit committee financial expert.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table Fiscal Years Ended December 31,
2010 and 2009
The following table sets forth information concerning all cash
and non-cash compensation awarded to, earned by or paid to the named persons for
services rendered in all capacities during the noted periods. No other executive
officer received total annual salary and bonus compensation in excess of
$100,000 during the noted periods.
Name and Principal Position
|
Fiscal
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
Chun Lu,
Chairman and CEO
(1)
|
2010
|
6,968
|
|
|
|
|
6,968
|
2009
|
3,167
|
-
|
-
|
-
|
-
|
3,167
|
Jiao Jiaojiao,
Former CEO and President
(2)
|
2010
|
|
|
|
|
|
0
|
2009
|
|
|
|
|
|
0
|
Michael Anthony,
Former CEO and President
(3)
|
2010
|
|
-
|
-
|
-
|
-
|
0
|
2009
|
|
-
|
-
|
-
|
-
|
0
|
(1)
|
On May 4, 2010, we acquired TEC HK in a reverse
acquisition transaction that was structured as a share exchange and in
connection with that transaction, Mr. Lu became our Chief Executive
Officer. Prior to the effective date of the reverse acquisition, Mr. Lu
served in the same capacities with TEC Tower. The annual, long term and
other compensation shown in this table include the amount Mr. Lu received
from TEC Tower prior to the consummation of the reverse acquisition.
|
|
|
(2)
|
Ms. Jiao resigned as our Chief Executive Officer on May
4, 2010 in connection with the reverse acquisition of TEC.
|
|
|
(3)
|
Mr. Michael Anthony served as our President and sole
director from October 13, 2007 until his resignation and appointment of
Ms. Jiao on January 13, 2010.
|
37
Employment Agreements
All our employees, including Mr. Chun Lu, our Chairman and
Chief Executive Officer, Mr. Yuhua Yang, our Chief Financial Officer, Mr. Debin
Chen, our Vice President of Sales and Marketing, Mr. Baojia He, our Chief
Technology Officer, and Mr. Jianming Wang, Chief Operating Officer, have
executed our employment agreement. Our employment agreements with our executives
provide the amount of each executive officers salary and establish their
eligibility to receive a bonus. Mr. Lu currently receives an annual salary of
RMB 47,100 (approximately $6,968), Mr. Yang currently receives an annual salary
of RMB 25,387 (approximately $3,756), Mr. Chen currently receives an annual
salary of RMB163,194 (approximately $24,143), Mr. He currently receives an
annual salary of RMB99,146 (approximately $14,668) and Mr. Wang currently
receives an annual salary of RMB112,153 (approximately $16,592).
Other than the salary and necessary social benefits required by
the government, which are defined in the employment agreement, we currently do
not provide other benefits to the officers at this time. Our executive officers
are not entitled to severance payments upon the termination of their employment
agreements or following a change in control.
We have not provided retirement benefits (other than a state
pension scheme in which all of our employees in China participate) or severance
or change of control benefits to our named executive officers.
Outstanding Equity Awards at Fiscal Year End
For the year ended December 31, 2010, no director or executive
officer has received compensation from us pursuant to any compensatory or
benefit plan. There is no plan or understanding, express or implied, to pay any
compensation to any director or executive officer pursuant to any compensatory
or benefit plan.
Compensation of Directors
No member of our board of directors received any compensation
for his services as a director during the year ended December 31, 2010.
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth information regarding beneficial
ownership of our common stock as of March 30, 2010 (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of our officers and directors; and (iii) by all of our officers and directors as
a group. Unless otherwise specified, the address of each of the persons set
forth below is in care of the Company, Xinqiao Industrial Park, Jingde County,
Anhui Province, 242600, Peoples Republic of China.
Name and Address of Beneficial
Owner
|
Office, If Any
|
Title of Class
|
Amount and
Nature
of
Beneficial
Ownership
(1)
|
Percent
of
Class
(2)
|
Officers and Directors
|
Chun Lu
|
Chairman and Chief Executive Officer
|
Common Stock
|
0
|
*
|
Yuhua Yang
|
Chief Financial Officer
|
Common Stock
|
0
|
*
|
38
Debin Chen
|
VP of Sales and Marketing
|
Common Stock
|
0
|
*
|
Jianming Wang
|
Chief Operating Officer
|
Common Stock
|
0
|
*
|
Baojia He
|
Chief Technology Officer
|
Common Stock
|
0
|
*
|
Xiaoxiang Liu
|
Director
|
Common Stock
|
0
|
*
|
Wei Zhang
|
Director
|
|
0
|
*
|
All officers and directors as a group
(7 persons named above)
|
|
Common Stock
|
0
|
*
|
5% Security Holders
|
Hua Peng Phillip Wong
|
|
Common Stock
|
17,797,372
(3)
|
58.97%
|
AMTT Digital A Limited
|
|
Common Stock
|
4,130,000
|
13.68%
|
Jian Wu
|
|
Common Stock
|
4,130,000
(4)
|
13.68%
|
Ying Liu
|
|
Common Stock
|
2,490,129
|
8.25%
|
* Less than 1%
(1)
|
Beneficial Ownership is determined in accordance with the
rules of the SEC and generally includes voting or investment power with
respect to securities. Each of the beneficial owners listed above has
direct ownership of and sole voting power and investment power with
respect to the shares of our common stock.
|
|
|
(2)
|
A total of 30,181,552 shares of our common stock are
considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of March
30, 2010. For each beneficial owner above, any options exercisable within
60 days have been included in the denominator.
|
|
|
(3)
|
The shares held by Mr. Wong are subject to an option
agreement, dated May 4, 2010, which gives our Chief Executive Officer, Mr.
Lu, an option to acquire 17,797,372 shares our common stock currently
owned by Mr. Wong. For details regarding this option agreement, see
Changes in Control below.
|
|
|
(4)
|
Includes 4,130,000 shares held by AMTT Digital A Limited,
a company owned and controlled by Mr. Wu.
|
Changes in Control
On May 4, 2010, our Chairman and Chief Executive Officer, Mr.
Chun Lu, entered into an option agreement with Hua Peng Phillip Wong, pursuant
to which Mr. Lu was granted an option to acquire all of the shares of our common
stock currently owned by Mr. Wong for an exercise price of $1,000,000. Mr. Lu
may exercise this option, in whole but not in part, during the period commencing
on the 365th day following of the date of the option agreement and ending on the
second anniversary of the date thereof. After Mr. Lu exercises this option, he
will be our controlling stockholder. We are not aware of any other arrangements
which if consummated may result in a change of control of our Company.
Securities Authorized for Issuance Under Equity Compensation
Plans
We do not have any compensation plans in effect under which our
equity securities are authorized for issuance.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
The following includes a summary of transactions since the
beginning of the 2009 year, or any currently proposed transaction, in which we
were or are to be a participant and the amount involved exceeded or exceeds the
lesser of $120,000 or one percent of the average of our total assets at year end
for the last two completed fiscal years, and in which any related person had or
will have a direct or indirect material interest (other than compensation
described under Executive Compensation). We believe the terms obtained or
consideration that we paid or received, as applicable, in connection with the
transactions described below were comparable to terms available or the amounts
that would be paid or received, as applicable, in arms-length transactions.
-
On January 13, 2010, we entered into and closed a share purchase agreement
with Michael Anthony, our CEO at the time, and certain accredited purchasers
signatory thereto, pursuant to which we sold an aggregate of 10,880,000 shares
of our common stock to the purchasers for a total of $225,000. Simultaneously
with and as a condition to the closing of the share purchase agreement, we
re-purchased 10,880,000 common shares from
Corporate Services International Profit Sharing and Century Capital Partners,
LLC, which are both beneficially owned by Mr. Anthony, for an aggregate purchase
price of $225,000.
39
-
Prior to our reverse acquisition of TEC HK, TEC Tower was still a private
company and loaned funds to certain of its officers, directors and control
persons from time to time. Such amounts were unsecured, interest free and
had no fixed term of repayment. As at December 31, 2009, the following amounts
were due and payable to TEC Tower: $908,593 was due from Mr. Lu, TEC Towers
Chairman; $308,534 was due from Mr. Lus wife, Ms. Zhu Yi Ping; and $2,105,010
due from Anhui TaiKe Real Estate Co., Limited, an entity owned and controlled
by Mr. Lu. As of May 4, 2010, all such amounts were repaid to us in full in
connection with the closing of the reverse acquisition. We understand that
the Company and its subsidiaries would have been prohibited from making each
of the foregoing loans under Section 402 of the Sarbanes Oxley Act of 2002
and confirm that the Company will comply with the requirements of such act
going forward.
-
On May 4, 2010, we entered into a financial advisory agreement with Junwei.
Pursuant to the agreement, which is for a five-year term, Junwei is obligated
to provide us with financial advisory services over the term of the agreement
and we are obligated to issue an aggregate of 500,000 shares of our common
stock to Junwei in five equal 100,000 share portions for no cash consideration,
commencing on December 31, 2010 and ending on December 31, 2014. The agreement
contains an exclusivity provision whereby we have agreed to engage Junwei
as our exclusive financial advisor for two years and also contains a $1 million
liquidated damages provision for breach of such exclusivity. Junwei has agreed
to waive the equity compensation and no shares have been issued to Junwei
as of the date of this report. Mr. Jian Wu, who is the beneficial owner of
11.38% of our total outstanding shares of common stock, is the chairman and
shareholder of Junwei.
Except as set forth in our discussion above, none of our
directors, director nominees or executive officers has been involved in any
transactions with us or any of our directors, executive officers, affiliates or
associates which are required to be disclosed pursuant to the rules and
regulations of the SEC.
Director Independence
We currently do not have any independent directors, as the term
independent is defined by the rules of the Nasdaq Stock Market.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES.
Independent Auditors Fees
The following is a summary of the fees billed to the Company
for professional services rendered for the fiscal years ended December 31, 2010
and 2009:
|
|
Year
Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Audit Fees
|
$
|
55,000
|
|
$
|
-
|
|
Audit-Related Fees
|
|
16,000
|
|
|
-
|
|
Tax Fees
|
|
0
|
|
|
-
|
|
All Other Fees
|
|
8,300
|
|
|
-
|
|
TOTAL
|
$
|
79,300
|
|
$
|
-
|
|
Audit Fees consisted of fees billed for professional services
rendered by the principal accountant for the audit of our annual financial
statements and review of the financial statements included in our Form 10-K and
10-Q or services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements.
Audit-Related Fees consisted of fees billed for assurance and
related services by the principal accountant that were reasonably related to the
performance of the audit or review of our financial statements and are not
reported under the paragraph captioned Audit Fees above.
40
Tax Fees consisted of fees billed for professional services
rendered by the principal accountant for tax returns preparation.
All Other Fees consisted of fees billed for products and
services provided by the principal accountant, other than the services reported
above under other captions of this Item 14.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit
services performed by our auditors must be approved in advance by our board of
directors to assure that such services do not impair the auditors independence
from us. In accordance with its policies and procedures, our board of directors
pre-approved the audit service performed by Madsen & Associates CPAs, Inc.
for our financial statements as of and for the year ended December 31, 2010.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this
annual report on Form 10-K. Financial statement schedules have been omitted
since they are either not required, not applicable, or the information is
otherwise included.
Exhibit List
The following exhibits are filed as part of this report or incorporated
by reference:
Exhibit No.
|
|
Description
|
2.1
|
|
Share Exchange
Agreement, dated May 4, 2010, among the Company, TEC Technology Limited
and its shareholders (incorporated by reference to Exhibit 2.2 of the
current report on Form 8-K filed by the Company on May 10, 2010)
|
3.1*
|
|
Certificate
of Incorporation of the Company, as amended to date
|
3.2
|
|
Amended and Restated
Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Companys 10-Q filed on September 22, 2008)
|
10.1
|
|
Side Letter, dated May 4, 2010,
among the Company, Wong Hua Peng Phillip and certain transferees (incorporated
by reference to Exhibit 10.4 of the current report on Form 8-K filed by
the Company on May 10, 2010)
|
10.2
|
|
Stock Purchase
Agreement, dated January 13, 2010, by and among the Company, Michael Anthony
and the accredited investors signatory thereto (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
on January 13, 2010)
|
10.3
|
|
Repurchase Agreement, dated January
13, 2010, among the Company, Corporate Services International Profit Sharing
and Century Capital Partners, LLC (incorporated by reference to Exhibit
10.2 to the Companys Current Report on Form 8-K filed on January
13, 2010)
|
10.4
|
|
English Translation
of Equity Transfer Agreement, dated February 22, 2010, between Chun Lu
and TEC Technology Limited (incorporated by reference to Exhibit 10.3
of the current report on Form 8-K filed by the Company on May 10, 2010)
|
10.5
|
|
English Translation of Procurement
Contract, dated June 23, 2009, between Anhui TEC Tower Co. Ltd. and ZTE
(Shenzhen) Kangxun Telecom Co., Ltd. (incorporated by reference to Exhibit
10.10 of the current report on Form 8-K filed by the Company on May 10,
2010)
|
10.6
|
|
English Translation
of Technology Transfer (Patent Exploitation License) Contract (Valve Spring),
dated June 25, 2009, between Anhui TEC Tower Co. Ltd. and Anhui University
of Technology and Science
|
41
Exhibit No.
|
|
Description
|
|
|
(incorporated
by reference to Exhibit 10.11 of the current report on Form 8-K filed
by the Company on May 10, 2010)
|
10.7
|
|
English Translation of Technology
Transfer (Patent Exploitation License) Contract (Mechanical Lift), dated
June 25, 2009, between Anhui TEC Tower Co. Ltd. and Anhui University of
Technology and Science (incorporated by reference to Exhibit 10.12 of
the current report on Form 8-K filed by the Company on May 10, 2010)
|
10.8
|
|
English Translation
of Technology Transfer (Patent Exploitation License) Contract (U-Shape
Bolt), dated June 25, 2009, between Anhui TEC Tower Co. Ltd. and Anhui
University of Technology and Science (incorporated by reference to Exhibit
10.13 of the current report on Form 8-K filed by the Company on May 10,
2010)
|
10.9
|
|
English Translation of Technology
Transfer (Patent Exploitation License) Contract (MDF Test Module), dated
June 25, 2009, between Anhui TEC Tower Co. Ltd. and Hangzhou Tianye Communication
Equipment Co. Ltd. (incorporated by reference to Exhibit 10.14 of the
current report on Form 8-K filed by the Company on May 10, 2010)
|
10.10
|
|
English Translation
of Technology Transfer (Patent Exploitation License) Contract (MDF Security
Unit), dated June 25, 2009, between Anhui TEC Tower Co. Ltd. and Hangzhou
Tianye Communication Equipment Co. Ltd. (incorporated by reference to
Exhibit 10.15 of the current report on Form 8-K filed by the Company on
May 10, 2010)
|
10.11
|
|
English Translation of Loan
Contract, dated February 8, 2010, between Anhui TEC Tower Co. Ltd. and
Huishang Bank, Xuancheng Branch (incorporated by reference to Exhibit
10.6 of the current report on Form 8-K filed by the Company on May 10,
2010)
|
10.12
|
|
English Translation
of Loan Contract, dated November 23, 2009, between Anhui TEC Tower Co.
Ltd. and China Everbright Bank (incorporated by reference to Exhibit 10.5
of the current report on Form 8-K filed by the Company on May 10, 2010)
|
10.13
|
|
English Translation of Crediting
Agreement, dated September 27, 2009, between Anhui TEC Tower Co. Ltd.
and China Merchants Bank, Hefei Sipailou Branch (incorporated by reference
to Exhibit 10.7 of the current report on Form 8-K filed by the Company
on May 10, 2010)
|
10.14
|
|
English Translation
of Lease Agreement, dated August 31, 2009, between Mr. Chen and Mr. Jie
Ding (incorporated by reference to Exhibit 10.16 of the current report
on Form 8-K filed by the Company on May 10, 2010)
|
10.15
|
|
English Translation of Labor
Contract, dated January 1, 2010, between Anhui TEC Tower Co. Ltd. and
Chun Lu (incorporated by reference to Exhibit 10.8 of the current report
on Form 8-K filed by the Company on May 10, 2010)
|
10.16
|
|
English Translation
of Labor Contract, dated September 9, 2009, between Anhui TEC Tower Co.
Ltd. and Debin Chen (incorporated by reference to Exhibit 10.9 of the
current report on Form 8-K filed by the Company on May 10, 2010)
|
14
|
|
Code of Ethics of the Company
adopted on May 4, 2010 (incorporated by reference to Exhibit 14 of the
current report on Form 8-K filed by the Company on May 10, 2010)
|
21
|
|
Subsidiaries
of the Company (incorporated by reference to Exhibit 21 of the current
report on Form 8-K/A filed by the Company on June 24, 2010)
|
31.1*
|
|
Certifications
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2*
|
|
Certifications
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1*
|
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
32.2*
|
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
*Filed herewith
42
SIGNATURES
In accordance with section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereto duly authorized individual.
Date: April 5, 2011
TEC TECHNOLOGY, INC.
|
By:
|
/s/ Chun Lu
|
|
|
Chun Lu
|
|
|
Chief Executive Officer
|
|
|
|
|
By:
|
/s/ Yuhua Yang
|
|
|
Yuhua Yang
|
|
|
Chief Financial Officer
|
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
Date
|
|
|
|
|
/s/ Chun Lu
|
|
Chairman and Chief Executive
Officer
|
April 5, 2011
|
Chun Lu
|
|
(Principal Executive Officer)
|
|
|
|
|
|
/s/ Yuhua Yang
|
|
Chief Financial Officer
|
April 5, 2011
|
Yuhua Yang
|
|
(Principal Financial and
Accounting Officer)
|
|
|
|
|
|
/s/ Xiaoxiang Liu
|
|
Director
|
April 5, 2011
|
Xiaoxiang Liu
|
|
|
|
|
|
|
|
/s/ Wei Zhang
|
|
Director
|
April 5, 2011
|
Wei Zhang
|
|
|
|
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2010 AND DECEMBER 31, 2009
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
|
|
Madsen & Associates CPAs,
Inc.
|
|
684 East Vine
Street #3, Murray, UT 84107
|
PHONE: (801) 268-2632 FAX: (801) 268-3978
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
TEC TECHNOLOGY,
INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of
TEC Technology, Inc. and Subsidiaries (the Company) as of December 31, 2010 and
December 31, 2009 and the consolidated statements of income and comprehensive
income, the consolidated statements of stockholders equity and the consolidated
statements of cash flows for the years ended December 31, 2010 and December 31,
2009. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with standards of the
Public Company Accounting Oversight Board (PCAOB). Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used, significant estimates made by management and evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements
referred to above present fairly, in all material aspects, the consolidated
financial position of the Company as of December 31, 2010 and December 31, 2009,
and the consolidated results of its operations and cash flows for the years
ended December 31, 2010 and December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
Madsen & Associates CPAs, Inc.
/s/ Madsen & Associates CPAs, Inc.
Salt Lake City, Utah
March 28, 2011
F-1
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2010 AND
DECEMBER 31, 2009
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
2,526,710
|
|
$
|
164,927
|
|
Restricted cash
|
|
1,164,598
|
|
|
-
|
|
Accounts receivable,
net of allowance for doubtful accounts
|
|
14,356,352
|
|
|
8,791,842
|
|
Inventory
|
|
5,235,074
|
|
|
7,066,787
|
|
Deposits and prepaid
expenses
|
|
5,439,579
|
|
|
2,716,237
|
|
Other receivables
|
|
1,626,039
|
|
|
4,175,590
|
|
Taxes recoverable
|
|
2,389
|
|
|
4,889
|
|
Total current assets
|
|
30,350,741
|
|
|
22,920,272
|
|
Property and equipment
|
|
|
|
|
|
|
Property and equipment, net of
accumulated depreciation
|
|
3,790,765
|
|
|
3,353,841
|
|
Land use rights, net of
accumulated amortization
|
|
2,071,771
|
|
|
2,051,837
|
|
Construction in progress
|
|
473,355
|
|
|
-
|
|
|
|
6,335,891
|
|
|
5,405,678
|
|
Total assets
|
$
|
36,686,632
|
|
$
|
28,325,950
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable
|
$
|
8,313,633
|
|
$
|
5,012,224
|
|
Other payables and accrued expenses
|
|
3,494,358
|
|
|
3,624,919
|
|
Taxes payables
|
|
44,608
|
|
|
1,306,915
|
|
Customer deposits
|
|
80,331
|
|
|
113,867
|
|
Short term borrowings
|
|
12,938,582
|
|
|
12,733,709
|
|
|
|
24,871,512
|
|
|
22,791,634
|
|
Commitments and
contingencies
|
|
-
|
|
|
-
|
|
Stockholders' equity
|
|
|
|
|
|
|
Preferred stock:
10,000,000 authorized, none issued and outstanding $0.001 par value
|
|
|
|
|
|
|
Common stock: 300,000,000 authorized
$0.001 par value 30,181,552 and 19,194,421 shares issued and outstanding
December 31, 2010 and December 31, 2009, respectively
|
$
|
30,182
|
|
$
|
19,195
|
|
Additional paid in
capital
|
|
1,024,891
|
|
|
849,278
|
|
Retained earnings
|
|
10,077,006
|
|
|
4,337,943
|
|
Accumulated other
comprehensive income
|
|
683,041
|
|
|
327,900
|
|
Total stockholders' equity
|
|
11,815,120
|
|
|
5,534,316
|
|
Total liabilities and
stockholders' equity
|
$
|
36,686,632
|
|
$
|
28,325,950
|
|
See accompanying notes to consolidated financial statements
F-2
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND DECEMBER 31, 2009
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
32,241,333
|
|
$
|
22,380,597
|
|
Cost of goods sold
|
|
21,548,571
|
|
|
15,149,926
|
|
Gross profit
|
|
10,692,762
|
|
|
7,230,671
|
|
Selling and marketing expenses
|
|
1,393,886
|
|
|
299,986
|
|
General and administrative expenses
|
|
1,845,865
|
|
|
1,024,515
|
|
Net income from operations
|
|
7,453,011
|
|
|
5,906,170
|
|
Other income (expenses)
|
|
|
|
|
|
|
Government grant
|
|
190,758
|
|
|
107,011
|
|
Other income
|
|
15,469
|
|
|
100,085
|
|
Interest expense
|
|
(896,464
|
)
|
|
(479,526
|
)
|
Net other income (expenses)
|
|
(690,237
|
)
|
|
(272,430
|
)
|
Net income before provision for income taxes
|
|
6,762,774
|
|
|
5,633,740
|
|
Provision for income taxes
|
|
(1,023,711
|
)
|
|
(1,479,397
|
)
|
Net income
|
|
5,739,063
|
|
|
4,154,343
|
|
Other comprehensive gain
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
355,141
|
|
|
54,900
|
|
Comprehensive income
|
$
|
6,094,204
|
|
$
|
4,209,243
|
|
Weighted average numbers of shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
26,519,175
|
|
|
19,194,421
|
|
Diluted
|
|
26,519,175
|
|
|
19,194,421
|
|
Earnings per share
|
|
|
|
|
|
|
Basic
|
$
|
0.22
|
|
$
|
0.22
|
|
Diluted
|
$
|
0.22
|
|
$
|
0.22
|
|
See accompanying notes to consolidated financial statements
F-3
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND
DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred stock
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Par
value : $0.001
|
|
|
Par
value : $0.001
|
|
|
Additional
|
|
|
Retained
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in capital
|
|
|
earnings
|
|
|
income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
January 1, 2009
|
|
-
|
|
$
|
-
|
|
|
19,194,421
|
|
$
|
19,195
|
|
$
|
849,278
|
|
$
|
183,600
|
|
$
|
273,000
|
|
$
|
1,325,073
|
|
Net income for the year
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,154,343
|
|
|
-
|
|
|
4,154,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
54,900
|
|
|
54,900
|
|
Balance as of
December 31, 2009
|
|
-
|
|
|
-
|
|
|
19,194,421
|
|
|
19,195
|
|
|
849,278
|
|
|
4,337,943
|
|
|
327,900
|
|
|
5,534,316
|
|
Recapitalization - reverse
merger acquisition of HGHN
|
|
-
|
|
|
-
|
|
|
10,987,131
|
|
|
10,987
|
|
|
(10,987
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance of
warrant
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
186,600
|
|
|
-
|
|
|
-
|
|
|
186,600
|
|
Net income for the year
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,739,063
|
|
|
-
|
|
|
5,739,063
|
|
Foreign currency
translation gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
355,141
|
|
|
355,141
|
|
Balance as of December 31, 2010
|
|
-
|
|
$
|
-
|
|
|
30,181,552
|
|
$
|
30,182
|
|
$
|
1,024,891
|
|
$
|
10,077,006
|
|
$
|
683,041
|
|
$
|
11,815,120
|
|
See accompanying notes to consolidated financial statements
F-4
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2010 AND DECEMBER 31, 2009
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
5,739,063
|
|
$
|
4,154,343
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
266,127
|
|
|
163,600
|
|
Amortization of
land use rights
|
|
42,494
|
|
|
33,008
|
|
Allowance for doubtful
debts
|
|
70,000
|
|
|
-
|
|
Stock
based compensation
|
|
155,000
|
|
|
-
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Increase in
restricted cash
|
|
(1,164,598
|
)
|
|
-
|
|
Decrease (increase) in inventory
|
|
1,831,713
|
|
|
(4,389,695
|
)
|
Decrease in
deposits and prepaid expenses
|
|
(2,723,342
|
)
|
|
(2,070,898
|
)
|
Decrease in accounts receivable
|
|
(5,634,510
|
)
|
|
(7,258,771
|
)
|
Decrease
(increase) in other receivables
|
|
2,549,551
|
|
|
(2,345,441
|
)
|
Decrease in taxes recoverable
|
|
2,500
|
|
|
87,262
|
|
(Decrease)
increase in taxes payable
|
|
(1,262,307
|
)
|
|
1,306,915
|
|
Decrease in accounts payable
|
|
3,301,409
|
|
|
4,423,394
|
|
Decrease in
customer deposits
|
|
(33,536
|
)
|
|
(247,921
|
)
|
Decrease in other payables and
accrued expenses
|
|
(130,561
|
)
|
|
(1,092,891
|
)
|
Net cash provided by (used in) operating
activities
|
|
3,009,003
|
|
|
(7,237,095
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
(605,968
|
)
|
|
(1,960,684
|
)
|
Payment for construction in
progress
|
|
(473,355
|
)
|
|
-
|
|
Purchases of
land use rights
|
|
-
|
|
|
(1,643,546
|
)
|
Net cash used in investing activities
|
|
(1,079,323
|
)
|
|
(3,604,230
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
Repayment of long term loan
|
|
-
|
|
|
(264,060
|
)
|
Proceeds from
short term borrowings
|
|
3,327,280
|
|
|
15,953,625
|
|
Repayment of short term
borrowings
|
|
(3,516,484
|
)
|
|
(5,721,151
|
)
|
Net cash (used in) provided by financing
activities
|
|
(189,204
|
)
|
|
9,968,414
|
|
Effects of exchange rate changes in cash
|
|
621,307
|
|
|
314,696
|
|
Increase (decrease) in cash and cash
equivalents
|
|
2,361,783
|
|
|
(558,215
|
)
|
Cash and cash equivalents, beginning of year
|
|
164,927
|
|
|
723,142
|
|
Cash and cash equivalents, end of year
|
|
2,526,710
|
|
|
164,927
|
|
Supplementary disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
897,620
|
|
|
479,526
|
|
Cash paid for income taxes
|
|
2,196,414
|
|
|
1,341,481
|
|
Non cash financing activities
|
|
|
|
|
|
|
Issuance of warrant
|
|
186,600
|
|
|
-
|
|
See accompanying notes to consolidated financial statements
F-5
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Highland Ridge, Inc. (formerly known as
Sea Green, Inc., Americom Networks Corp. and Americom Networks International,
Inc.) was incorporated on July 22, 1988 in the State of a Delaware, United
States of America. On June 9, 2010, the Company changed its name from Highland
Ridge, Inc. to TEC Technology, Inc. (the Company or HGHN).
On May 4, 2010, the Company completed a
reverse acquisition transaction pursuant to a share exchange agreement among the
Company, TEC Technology Limited, a Hong Kong limited company (TECT) and TECTs
sole stockholder, Mr. Hua Peng Phillip Wong, whereby the Company acquired 100%
of the issued and outstanding capital stock of TECT in exchange for 19,194,421
shares of its common stock, which constituted 63.6% of the Companys issued and
outstanding capital stock on a fully-diluted basis as of and immediately after
the consummation of reverse acquisition. As a result of the acquisition of TECT,
the Company now owns all of the issued and outstanding capital stock of TECT,
which in turn owns Anhui TEC Tower Co., Ltd. (ATEC) and Shuncheng Taida
Technology Co., Ltd. (STT). ATEC currently owns 90% of Zhejiang TEC Tower Co.,
Ltd. (ZTEC). For accounting purposes, the share exchange transaction with TECT
was treated as a reverse acquisition and recapitalization of TECT, with TECT as
the acquirer and HGHN as the acquired party. Upon completion of the exchange,
TECT became a wholly owned subsidiary of HGHN. On the same date, Mr. Chun Lu,
Chairman of the Board and Chief Executive Officer of HGHN, entered into an
option agreement with TECT and Mr. Hua Peng Phillip Wong, the Companys
controlling stockholder, pursuant to which Mr. Lu was granted an option to
acquire 17,797,372 shares of our common stock currently owned by Mr. Wong for an
aggregate exercise price of $1,000,000. Mr. Lu may exercise this option, in
whole but not in part, during the period commencing on the 365
th
day
following of the date of the option agreement and ending on the second
anniversary of the date thereof. The accounting treatment for this transaction
is essentially recapitalization of TECT with HGHNs common stock.
TECT was organized as a private
corporation, under the Companies Laws of the Hong Kong on November 11, 2009. It
was principally established to serve as an investment holding company and its
operation are carried out in Hong Kong.
On February 22, 2010, TECT entered into
an equity transfer agreement with Mr. Chun Lu, the sole shareholder of ATEC. The
transfer was approved by the Department of Commerce of Anhui Province on March
2, 2010. This business combination was accounted for as entities under common
control because the majority shareholders of TECT and ATEC were the same
person.
ATEC is a private corporation,
incorporated under the laws of the Peoples Republic of China (PRC) on July 3,
2007. ATECs principal activities are the development and manufacturing of
mobile communication steel towers, microwave towers, angle steel towers, steel
pipe towers and transmission cable towers.
ZTEC was established on December 7,
2009 as a PRC limited company with ATEC owing 90% of equity interest and Ms.
Yiping Zhu, an individual, owning the remaining 10% equity interest. ZTECs
production facility is still under construction and it has not yet commenced
operations. ZTECs main business will include the development and manufacturing
of mobile communication steel towers, microwave towers, angle steel towers,
steel pipe towers and transmission cable towers.
STT was incorporated in the PRC on
January 20, 2010. STD has not commenced operations and its main business will
include engineering consultancy and design of mobile communication steel towers,
microwave towers, angle steel towers, steel pipe towers and transmission cable
towers.
As a result of the reverse acquisition
of TECT, the Company entered into new businesses. The Company is primarily
engaged, through its indirect Chinese subsidiaries, in the design, production
and sale of transmission towers and related products used in high voltage
electric power transmission and wireless communications..
The Companys headquarter is located at
Xinqiao Industrial Park, Jingde Country, Anhui Province, 242600, PRC.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The Company has adopted December 31 as
its fiscal year end.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
|
F-6
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated
financial statements include the following entities:
Name of subsidiary
|
|
Place of incorporation
|
|
Date of incorporation
|
|
Percentage of interest
|
|
Principal activity
|
|
|
|
|
|
|
|
|
|
TEC Technology Limited
|
|
Hong Kong
|
|
November 11, 2009
|
|
100% directly
|
|
Investment holding
|
|
|
|
|
|
|
|
|
|
Anhui TEC Tower Co., Ltd.
|
|
People's Republic of China
|
|
April 19, 2006
|
|
100% directly
|
|
Development,manufacturing and
selling of mobile communication steel towers, microwave towers, angle
steel towers, steel pipe towers, transmission cable towers,
telecommunication equipment, scrap and provision for technical consulting
service
|
|
|
|
|
|
|
|
|
|
Zhejiang TEC Tower Co., Ltd.
|
|
People's Republic of
China
|
|
December 7, 2009
|
|
90% indirectly
|
|
The company has not
commenced its business of development and manufacturing of mobile
communication steel towers, microwave towers, angle steel towers, steel
pipe towers and transmission cable towers
|
|
|
|
|
|
|
|
|
|
Shuncheng Taida Technology Co.,
Ltd.
|
|
People's Republic of
China
|
|
January 20, 2010
|
|
100% directly
|
|
The company has not
commenced its business of engineering consultancy and design of mobile
communication steel towers, microwave towers, angle steel towers, steel
pipe towers and transmission cable towers
|
|
2.3
|
BASIS OF CONSOLIDATION AND PRESENTATION
|
The consolidated financial statements
are prepared in accordance with generally accepted accounting principles in the
United States of America (US GAAP). In the opinion of management, the
accompanying balance sheets, and statements of income, and cash flows include
all adjustments, consisting only of normal recurring items, considered necessary
to give a fair presentation of operating results for the periods presented. All
material inter-company transactions and balances have been eliminated in
consolidation.
On February 22, 2010, TECT entered
into an equity transfer agreement with Mr. Chun Lu, the sole shareholder of
ATEC. The transfer was approved by the Department of Commerce of Anhui Province
on March 2, 2010. This acquisition was accounted for as a reverse merger with
TECT being the legal acquirer. The accounting treatment for this transaction is
essentially recapitalization of ATEC with TECTs common stock.
F-7
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.3
|
BASIS OF CONSOLIDATION AND PRESENTATION (CONTINUED)
|
|
|
|
|
|
On May 4, 2010, the Company completed a reverse acquisition
transaction pursuant to a share exchange agreement among the Company, TECT
and TECTs sole stockholder, Mr. Hua Peng Phillip Wong, whereby the
Company acquired 100% of the issued and outstanding capital stock of TECT
in exchange for 19,194,421 shares of its common stock, which constituted
63.6% of the Companys issued and outstanding capital stock on a
fully-diluted basis as of and immediately after the consummation of
reverse acquisition. As a result of the acquisition of TECT, the Company
now owns all of the issued and outstanding capital stock of TECT, which in
turn owns ATEC and STT. ATEC owns 90% equity interest in ZTEC. For
accounting purposes, the share exchange transaction with TECT was treated
as a reverse acquisition and recapitalization of TECT, with TECT as the
acquirer and the HGHN as the acquired party. Upon completion of the share
exchange, TECT became a wholly owned subsidiary of HGHN. On the same date,
Mr. Chun Lu, Chairman of the Board and Chief Executive Officer of HGHN,
entered into an option agreement with TECT and Mr. Hua Peng Phillip Wong,
the Companys controlling stockholder, pursuant to which Mr. Lu was
granted an option to acquire 17,797,372 shares the Companys common stock
owned by Mr. Wong for an aggregate exercise price of $1,000,000. Mr. Lu
may exercise this option, in whole but not in part, during the period
commencing on the 365
th
day following of the date of the option
agreement and ending on the second anniversary of the date thereof.
|
|
|
|
|
|
Prior to the acquisition of ATEC by TECT, neither TECT nor HGHN had
active business operations. For reporting purposes, the Company has
assumed that Mr. Lu has exercised his option immediately and thus HGHN,
TECT and ATEC were effectively under the common control of Mr. Lu when the
Company acquired TECT. The acquisition transactions between (i) HGHN and
TECT and (ii) TECT and ATEC are therefore accounted for as reverse
mergers.
|
|
|
|
|
|
For accounting purposes, the combination of the company and TECT was
accounted for as a reverse merger with ATEC as the accounting acquirer and
HGHN and TECT as the accounting acquiree and the acquisition of ZTEC and
STT was accounted for under the acquisition method with TECT as the
immediate parent corporation of both companies for legal purposes and the
Company as the ultimate parent corporation. Accordingly, the Companys
financial statements have been prepared on a consolidated basis for the
periods presented and the consolidated balance sheets, consolidated
statements of income and other comprehensive income, stockholders equity
and cash flows were presented as if the recapitalization had occurred at
the beginning of the earliest period presented and the operations of the
accounting acquired party from the date of share exchange transaction.
|
|
|
|
|
|
HGHN, TECT, ATEC, ZTEC and STT are hereafter collectively referred to
as the Company.
|
|
|
|
|
2.4
|
USE OF ESTIMATES
|
|
|
|
|
|
The preparation of consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from
those estimates.
|
|
|
|
|
2.5
|
ECONOMIC AND POLITICAL RISK
|
|
|
|
|
|
The Companys business operations are conducted in the PRC and are
subject to special considerations and risks not typically associated with
companies in North America and Western Europe. Chinas political, economic
and legal environments may influence the Companys business, financial
condition and results of operations, including adverse effects by changes
in governmental policies in laws and regulations, anti- inflationary
measures, and rates and methods of taxation.
|
F-8
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.6
|
REVENUE RECOGNITION
|
|
|
|
|
|
The Companys revenue recognition policies are in compliance with ASC
605. Sales revenue is recognized when all of the following have occurred:
(i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the price is fixed or
determinable, and (iv) the ability to collect is reasonably assured. These
criteria are generally satisfied at the time of shipment when risk of loss
and title passes to the customer.
|
|
|
|
|
|
Technical consulting service income is recognized when the relevant
service is rendered.
|
|
|
|
|
|
Government grants represent local authority grants to the company for
infrastructure development and the revenue is recognized on cash basis
when the local authority approves the grant to the company.
|
|
|
|
|
|
The Company recognizes revenue when the goods are delivered and title
has passed. Sales revenue represents the invoiced value of goods, net of a
value-added tax (VAT). All of the Companys products that are sold in the
PRC are subject to a Chinese value-added tax at a rate of 17% of the gross
sales price or at a rate approved by the Chinese local government. This
VAT liability may be offset by the VAT paid by the Company on raw
materials and other materials included in the cost of producing their
finished product.
|
|
|
|
|
2.7
|
SHIPPING AND HANDLING
|
|
|
|
|
|
Shipping and handling costs related to costs of goods sold are
included in cost of sales and selling and marketing expenses which totaled
$755,840 and $231,555 for the years ended December 31, 2010 and December
31, 2009, respectively.
|
|
|
|
|
2.8
|
ADVERTISING
|
|
|
|
|
|
Advertising costs are expensed as incurred and totaled $43,550 and
$2,913 for the years ended December 31, 2010 and December 31, 2009,
respectively.
|
|
|
|
|
2.9
|
RESEARCH AND DEVELOPMENT COSTS
|
|
|
|
|
|
Research and development costs include costs incurred to develop new
products and are charged to operations when incurred. These costs totaled
$0 and $6,507 as incurred for the years ended December 31, 2010 and
December 31, 2009, respectively. The costs for development of new products
and substantial enhancements to existing products are expensed as incurred
until technological feasibility has been established, at which time any
additional costs would be capitalized.
|
|
|
|
|
2.10
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
Cash and cash equivalents comprise cash in bank and on hand, demand
deposits with banks and other financial institutions, and short-term,
highly liquid investments which are readily convertible into known amounts
of cash and which are subject to an insignificant risk of changes in
value, and have a short maturity of generally within three months when
acquired.
|
F-9
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.11
|
FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
The reporting currency of the Company is the U.S. dollars. The
functional currency of the Company is United States Dollars ($) and the
functional currency of its subsidiaries ATEC, ZTEC, STT and TECT is
Chinese Renminbi (RMB).
|
|
|
|
|
|
For those entities whose functional currency is other than the U.S.
dollars, all assets and liabilities are translated into U.S. dollars at
the exchange rate on the balance sheet date; shareholders equity is
translated at historical rates and items in the statements of income and
of cash flows are translated at the average rate for the period. Because
cash flows are translated based on the average translation rate, amounts
related to assets and liabilities reported in the statement of cash flows
will not necessarily agree with changes in the corresponding balances in
the balance sheet. Translation adjustments resulting from this process are
included in accumulated other comprehensive income in the statement of
shareholders equity. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of operations as
incurred.
|
|
|
|
|
|
Foreign currency translation gain included in accumulated other
comprehensive income amounted to $683,041 as of December 31, 2010 and
$327,900 as of December 31, 2009. The balance sheet amounts with the
exception of equity at December 31, 2010 and December 31, 2009 were
translated at RMB6.61 to $1.00 and RMB6.82 to $1.00, respectively. The
average translation rates applied to the statements of income and of cash
flows for the years ended December 31, 2010 and December 31, 2009 were
RMB6.78 to $1.00 and RMB6.81 to $1.00, respectively.
|
|
|
|
|
2.12
|
BUSINESS COMBINATION
|
|
|
|
|
|
The Company adopted the accounting pronouncements relating to business
combinations (primarily contained in ASC Topic 805 Business
Combinations), including assets acquired and liabilities assumed arising
from contingencies. These pronouncements established principles and
requirements for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any non-controlling interest in the acquire as well as
provides guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature and
financial effects of the business combination. In addition, these
pronouncements eliminate the distinction between contractual and
non-contractual contingencies, including the initial recognition and
measurement criteria and require an acquirer to develop a systematic and
rational basis for subsequently measuring and accounting for acquired
contingencies depending on their nature. Our adoption of these
pronouncements will have an impact on the manner in which we account for
any future acquisitions.
|
|
|
|
|
2.13
|
NON-CONTROLLING INTEREST IN CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
The Company adopted the accounting pronouncement on non-controlling
interests in consolidated financial statements, which establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. This guidance is
primarily contained in ASC Topic Consolidation. The adoption of this
standard has not had material impact on our consolidated financial
statements.
|
F-10
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.14
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
Property and equipment are stated at cost less accumulated
depreciation and any accumulated impairment losses. .
|
|
|
|
|
|
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets.
|
|
Assets
Classifications
|
|
Estimated useful life
|
|
|
|
|
|
|
|
Buildings
|
|
50 years
|
|
|
Plant and machinery
|
|
5 years
|
|
|
Furniture, fixtures and office equipment
|
|
5 years
|
|
|
Motor vehicles
|
|
5 years
|
|
|
|
An item of property and equipment is removed from the accounts upon
disposal or when no future economic benefits are expected to arise from
the continued use of the asset. Any gain or loss arising on the sale or
disposal of the asset (calculated as the difference between the net
disposal proceeds and the carrying amount of the item) is included in the
consolidated statement of income in the period the item is sold or
otherwise disposed. Maintenance and repairs of property and equipment are
charged to operations when incurred. Expenditures for maintenance and
repairs are charged to expense as incurred, whereas major betterments are
capitalized as additions to property and equipment. The Company reviews
its property and equipment whenever events or changes in circumstances
indicate that the carrying value of certain assets might not be
recoverable. In these instances, the Company recognizes an impairment loss
when it is probable that the estimated cash flows are less than the
carrying value of the asset. To date, no such impairment losses have been
recorded.
|
|
|
|
|
2.15
|
LAND USE RIGHTS
|
|
|
|
|
|
Land use rights represent acquisition of land use rights of industrial
land from local government and are amortized on the straight line over
their respective lease periods. The lease period of agriculture land is 50
years.
|
|
|
|
|
2.16
|
CONSTRUCTION IN PROGRESS
|
|
|
|
|
|
Construction in progress represents direct costs of construction as
well as acquisition and design fees incurred. Capitalization of these
costs ceases and the construction in progress is transferred to property,
plant and equipment when substantially all the activities necessary to
prepare the assets for their intended use are completed. No depreciation
is provided until construction is completed and the asset is ready for its
intended use.
|
|
|
|
|
2.17
|
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS
|
|
|
|
|
|
In accordance with ASC Topic 360, Property, Plant and Equipment,
long-lived assets to be held and used are analyzed for impairment whenever
events or changes in circumstances indicate that the related carrying
amounts may not be recoverable. The Company reviews the carrying amount of
its long-lived assets, including intangibles, for impairment, each
reporting period. An asset is considered impaired when estimated future
cash flows are less than the carrying amount of the asset. In the event
the carrying amount of such asset is considered not recoverable, the asset
is adjusted to its fair value. Fair value is generally determined based on
discounted future cash flow. As of December 31, 2010 and December 31,
2009, the Company determined no impairment charges were necessary.
|
F-11
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.18
|
CAPITALIZED INTERNAL-USE SOFTWARE
|
|
|
|
|
|
The Company capitalizes certain costs incurred to purchase or create
internal-use software in accordance with ASC Topic 350-40, Internal Use
Software
. To date, such costs have included external direct costs
of materials and services incurred in the implementation of internal-use
software and are included within computer hardware and software. Once the
capitalization criteria have been met, such costs are classified as
software and are amortized on a straight-line basis over five years once
the software has been put into use. Subsequent additions, modifications,
or upgrades to internal-use software are capitalized only to the extent
that they allow the software to perform a task it previously did not
perform. Software maintenance and training costs are expensed in the
period in which they are incurred.
|
|
|
|
|
2.19
|
INVENTORY
|
|
|
|
|
|
Inventory consists primarily of raw materials, work in progress, and
finished goods. Raw materials are stated at cost. Cost comprises direct
materials and, where applicable, direct labor costs and applicable
overhead costs that have been incurred in bringing the inventory to its
present location and condition. Finished goods are stated at the lower of
cost (determined on first in first out method) and net realizable value.
|
|
|
|
|
|
Net realizable value is the estimated selling price in the ordinary
course of business, less estimated costs of completion and the estimated
costs necessary to make the sale.
|
|
|
|
|
|
The Company provides for inventory losses based on obsolescence and
levels in excess of forecasted demand In these cases, inventory is reduced
to estimated realizable value based on historical usage and expected
demand. Inherent in the Companys estimates of market value in determining
inventory valuation are estimates related to economic trends, future
demand for the Companys products, and technical obsolescence of products.
|
|
|
|
|
2.20
|
ACCOUNTS RECEIVABLE
|
|
|
|
|
|
The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment
patterns and changes in customer payment patterns to evaluate the adequacy
of these reserves. Reserves are primarily on a specific identification
basis.
|
|
|
|
|
|
The standard credit period of the Companys most of clients is three
months. Management evaluates the collectability of the receivables at
least quarterly. The estimated average collection period was 90 days as of
December 31, 2010 and 2009. There was no allowance for doubtful accounts
as of December 31, 2010 and 2009.
|
|
|
|
|
2.21
|
INCOME TAXES
|
|
|
|
|
|
The Company accounts for income taxes under the provisions
of ASC740
Accounting for Income Taxes.
Under ASC 740, deferred
tax assets and liabilities are determined based on the difference between
the financial statement carrying amounts and tax bases of assets and
liabilities using the tax bases of assets and liabilities using the
enacted taxes rates in effect in the years in which the differences are
expected to reverse.
|
|
|
|
|
|
Provision for income taxes consist of taxes currently due plus deferred
taxes. Since the Company had no operations within the United States there is
no provision for US income taxes and there are no deferred tax amounts as of
December 31, 2010 and 2009.
|
|
|
|
|
|
Deferred income taxes are calculated at the tax rates that
are expected to apply to the period when the asset is realized or the
liability is settled. Deferred tax is charged or credited in the income
statement, except when it related to items credited or charged directly to
equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they relate to income
taxes levied by the same taxation authority and the Company intends to
settle its current tax assets and liabilities on a net basis.
|
F-12
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.21
|
INCOME TAXES (CONTINUED)
|
|
|
|
|
|
The provision for income tax is based on the results for the year as
adjusted for items, which are non- assessable or disallowed. It is
calculated using tax rates that have been enacted or substantively enacted
at the balance sheet date. Deferred tax is accounted for using the balance
sheet liability method in respect of temporary differences arising from
differences between the carrying amount of assets and liabilities in the
financial statements and the corresponding tax basis used in the
computation of assessable tax profit. In principle, deferred tax
liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary
differences can be utilized.
|
|
|
|
|
|
Deferred income taxes are calculated at the tax rates that are
expected to apply to the period when the asset is realized or the
liability is settled. Deferred tax is charged or credited in the income
statement, except when it related to items credited or charged directly to
equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they relate to income
taxes levied by the same taxation authority and the Company intends to
settle its current tax assets and liabilities on a net basis.
|
|
|
|
|
|
ASC 740 also prescribes a more-likely-than-not threshold for financial
statements recognition and measurement of a tax position taken, or
expected to be taken, in a tax return. ASC 740 also provide guidance
related to, among other things, classification, accounting for interest
and penalties associated with tax positions, and disclosure requirements.
Any interest and penalties accrued related to unrecognized tax benefits
will be recorded in tax expense.
|
|
|
|
|
2.22
|
RELATED PARTIES
|
|
|
|
|
|
Parties are considered to be related to the company if the company has
the ability, directly or indirectly, to control the party, or exercise
significant influence over the party in making financial and operating
decisions, or where the company and the party are subject to common
control. Related parties may be individuals (being members of key
management personnel, significant shareholders and/or their close family
members) or other entities which are under the significant influence of
related parties of the company.
|
|
|
|
|
2.23
|
PRODUCT WARRANTIES
|
|
|
|
|
|
Substantially all of the Companys products are covered by a standard
warranty of 1 to 2 years for products. In the event of a failure of
products covered by this warranty, the Company must repair or replace the
software or products or, if those remedies are insufficient, and at the
discretion of the Company, provide a refund. The Company provides 0% of
sales income for product warranties for the years ended December 31, 2010
and 2009 in the warranty reserve to reflect estimated material and labor
costs of maintenance for potential or actual product issues but for which
the Company expects to incur an obligation. The product warranty reserve
was $0 as of December 31, 2010 and 2009.
|
|
|
|
|
2.24
|
WEIGHTED AVERAGE NUMBER OF SHARES
|
|
|
|
|
|
On May 4, 2010, the Company entered into a share exchange agreement
which has been accounted for as a reverse merger since there has been a
change of control. The Company computes the weighted-average number of
common shares outstanding in accordance with ASC Topic 805 Business
Combination which states that in calculating the weighted average shares
when a reverse merger takes place in the middle of the year, the number of
common shares outstanding from the beginning of that period to the
acquisition date shall be computed on the basis of the weighted average
number of common shares of the legal acquiree (the accounting acquirer)
outstanding during the period multiplied by the exchange ratio established
in the merger agreement. The number of common shares outstanding from the
acquisition date to the end of that period shall be the actual number of
common shares of the legal acquirer (the accounting acquiree) outstanding
during that period.
|
F-13
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.25
|
ECONOMIC, POLITICAL AND BUSINESS RISK
|
|
|
|
|
|
The Companys operations are carried out in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environment in the PRC,
and by the general state of the PRC's economy. The Company's operations in
the PRC are subject to specific considerations and significant risks not
typically associated with companies in North America and Western Europe.
The Company's results may be adversely affected by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
|
|
|
|
|
2.26
|
CONCENTRATIONS OF CREDIT RISK
|
|
|
|
|
|
Cash includes demand deposits in accounts maintained at banks within
the Peoples Republic of China. Total cash in these banks as of December
31, 2010 and 2009 amounted to $2,088,297 and $138,251, of which no
deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any risks on its
cash in bank accounts.
|
|
|
|
|
|
Accounts receivable are derived from revenue earned from customers
located primarily in the Peoples Republic of China. We perform ongoing
credit evaluations of customers and have not experienced any material
losses to date.
|
|
|
|
|
|
The Company had 5 major customers whose revenue individually
represented the following percentages of the Companys total revenue:
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
24.15%
|
|
|
50.98%
|
|
|
Customer B
|
|
17.98%
|
|
|
28.45%
|
|
|
Customer C
|
|
11.42%
|
|
|
-
|
|
|
Customer D
|
|
8.75%
|
|
|
-
|
|
|
Customer E
|
|
5.38%
|
|
|
-
|
|
|
Customer F
|
|
-
|
|
|
-
|
|
|
Customer G
|
|
-
|
|
|
10.08%
|
|
|
Customer H
|
|
-
|
|
|
4.06%
|
|
|
Customer I
|
|
-
|
|
|
2.54%
|
|
|
|
|
67.68%
|
|
|
79.43%
|
|
F-14
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.26
|
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
|
|
|
|
|
|
The company had 5 major customers whose accounts receivable balance
individually represented of the Companys total accounts receivable as
follows:
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
31.46%
|
|
|
31.00%
|
|
|
Customer B
|
|
16.73%
|
|
|
-
|
|
|
Customer C
|
|
12.57%
|
|
|
-
|
|
|
Customer D
|
|
7.82%
|
|
|
-
|
|
|
Customer E
|
|
9.89%
|
|
|
31.71%
|
|
|
Customer F
|
|
-
|
|
|
24.55%
|
|
|
Customer G
|
|
-
|
|
|
5.83%
|
|
|
Customer H
|
|
-
|
|
|
4.36%
|
|
|
|
|
78.47%
|
|
|
62.71%
|
|
|
2.27
|
EARNINGS PER SHARE
|
|
|
|
|
|
As prescribed in ASC Topic 260
Earning per Share
, Basic
Earnings per Share (EPS) is computed by dividing net income available to
common stockholders by the weighted average number of common stock shares
outstanding during the year. Diluted EPS is computed by dividing net
income available to common stockholders by the weighted-average number of
common stock shares outstanding during the year plus potential dilutive
instruments such as stock options and warrants. The effect of stock
options on diluted EPS is determined through the application of the
treasury stock method, whereby proceeds received by the Company based on
assumed exercises are hypothetically used to repurchase the Companys
common stock at the average market price during the period.
|
|
|
|
|
|
For the years ended December 31, 2010 and 2009, basic and diluted
earnings per share amount to $0.22 and $0.22, respectively.
|
F-15
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.28
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
|
|
|
|
|
The Company follows paragraph 825-10-50-10 of the FASB Accounting
Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting Standards
Codification (Paragraph 820-10-35-37) to measure the fair value of its
financial instruments. Paragraph 820-10-35-37 establishes a framework for
measuring fair value in accounting principles generally accepted in the
United States of America (U.S. GAAP), and expands disclosures about fair
value measurements. To increase consistency and comparability in fair
value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to
valuation techniques used to measure fair value into three (3) broad
levels. The fair value hierarchy gives the highest priority to quoted
prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three (3) levels of
fair value hierarchy defined by Paragraph 820-10-35-37 are described
below:
|
|
|
|
|
|
Level 1 Quoted market prices available in active markets for identical
assets or liabilities as of the reporting date.
|
|
|
|
|
|
Level 2 Pricing inputs other than quoted prices in active markets
included in Level 1, which are either directly or indirectly observable as
of the reporting.
|
|
|
|
|
|
Level 3 Pricing inputs that are generally observable inputs and not
corroborated by market data.
|
|
|
|
|
|
The carrying amounts of the Companys financial assets and
liabilities, such as cash and accrued expenses, approximate their fair
values because of the short maturity of these instruments.
|
|
|
|
|
|
The Company does not have any assets or liabilities measured at fair
value on a recurring or a non-recurring basis, consequently, the Company
did not have any fair value adjustments for assets and liabilities
measured at fair value as of December 31, 2010 or December 31, 2009, nor
gains or losses are reported in the statement of income and other
comprehensive income that are attributable to the change in unrealized
gains or losses relating to those assets and liabilities still held at the
reporting date for the fiscal years ended December 31, 2010 or December
31, 2009.
|
|
|
|
|
2.29
|
STOCK-BASED COMPENSATION
|
|
|
|
|
|
The Company adopted ASC Topic 718, Compensation Stock Compensation
and ASC Topic 505-50 Equity Based Payments to Non-Employees using the
fair value method. Under ASC Topic 718 and ASC Topic 505-50, stock
compensation expenses is measured at the grant date on the value of the
option or restricted stock and is recognized as expenses, less expected
forfeitures, over the requisite service period, which is generally the
vesting period.
|
|
|
|
|
|
On June 15, 2010, the Company issued a warrant to purchase 80,000
shares at a price of $2.00 per share. The warrant vests in four equal
installments on June 20
th
, September 30
th
,
December 31
st
2010 and March 31
st
of 2011. In the
event that the agreement is terminated prior to the vesting date, such
portion of the warrant shall not vest and the holder of the warrant shall
not be entitled to exercise such unvested portion of the warrant. The
warrant will expire on June 15, 2015.
|
|
|
|
|
2.30
|
RETIREMENT BENEFIT COSTS
|
|
|
|
|
|
PRC state managed retirement benefit programs are defined contribution
programs and the payments to these programs are charged as expenses when
employees have rendered service entitling them to the contribution.
|
F-16
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.31
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
ASC Topic 220
Comprehensive Income
establishes standards for
reporting and displaying comprehensive income and its components in
financial statements. Comprehensive income is defined as the change in
stockholders equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
The comprehensive income for all periods presented includes both the
reported net income and net change in cumulative translation adjustments.
|
|
|
|
3.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
|
|
|
|
In January 2010, FASB issued ASU No. 2010-01, Accounting for
Distributions to Shareholders with Components of Stock and Cash. The
amendments in this Update clarify that the stock portion of a distribution
to shareholders that allows them to elect to receive cash or stock with a
potential limitation on the total amount of cash that all shareholders can
elect to receive in the aggregate is considered a share issuance that is
reflected in EPS prospectively and is not a stock dividend for purposes of
applying Topics 505 and 260 (Equity and Earnings Per Share). The
amendments in this update are effective for interim and annual periods
ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company adopted this standard and has determined
the standard does not have material effect on the Companys consolidated
financial statements.
|
|
|
|
|
In January 2010, FASB issued ASU No. 2010-02 regarding
accounting and reporting for decreases in ownership of a subsidiary. Under
this guidance, an entity is required to deconsolidate a subsidiary when
the entity ceases to have a controlling financial interest in the
subsidiary. Upon deconsolidation of a subsidiary, and entity recognizes a
gain or loss on the transaction and measures any retained investment in
the subsidiary at fair value. In contrast, an entity is required to
account for a decrease in its ownership interest of a subsidiary that does
not result in a change of control of the subsidiary as an equity
transaction. This ASU clarifies the scope of the decrease in ownership
provisions, and expands the disclosures about the deconsolidation of a
subsidiary or de-recognition of a group of assets. This ASU is effective
for beginning in the first interim or annual reporting period ending on or
after December 31, 2009. The Company does not expect the adoption of this
ASU to have a material impact on its consolidated financial statements In
January 2010, FASB issued ASU No. 2010-02 Accounting and Reporting for
Decreases in Ownership of a Subsidiary a Scope Clarification. The
amendments in this Update affect accounting and reporting by an entity
that experiences a decrease in ownership in a subsidiary that is a
business or nonprofit activity. The amendments also affect accounting and
reporting by an entity that exchanges a group of assets that constitutes a
business or nonprofit activity for an equity interest in another entity.
The amendments in this update are effective beginning in the period that
an entity adopts SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51. If an entity has
previously adopted SFAS No. 160 as of the date the amendments in this
update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or
annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first
period that an entity adopted SFAS No. 160. The Company adopted this
standard and has determined the standard does not have material effect on
the Companys consolidated financial statements.
|
|
|
|
|
In January 2010, FASB issued ASU No. 2010-06 Improving
Disclosures about Fair Value Measurements. This update provides amendments
to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers
in and out of Levels 1 and 2. A reporting entity should disclose
separately the amounts of significant transfers in and out of Level 1 and
Level 2 fair value measurements and describe the reasons for the
transfers. 2) Activity in Level 3 fair value measurements. In the
reconciliation for fair value measurements using significant unobservable
inputs (Level 3), a reporting entity should present separately information
about purchases, sales, issuances, and settlements (that is, on a gross
basis rather than as one net number). This update provides amendments to
Subtopic 820-10 that clarify existing disclosures as follows: 1) Level of
disaggregation. A reporting entity should provide fair value measurement
disclosures for each class of assets and liabilities. A class is often a
subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities. 2)
Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used
to measure fair value for both recurring and nonrecurring fair value
measurements. Those disclosures are required for fair value measurements
that fall in either Level 2 or Level 3.The new disclosures and
clarifications of existing disclosures are effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company is currently
evaluating the impact of this ASU, however, the Company does not expect
the adoption of this ASU to have a material impact on its consolidated
financial statements.
|
F-17
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.
|
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
|
|
|
|
In February 2010, the FASB issued Accounting Standards Update 2010-09,
Subsequent Events (Topic 855): Amendments to Certain Recognition and
Disclosure Requirements, or ASU 2010-09. ASU 2010-09 primarily rescinds
the requirement that, for listed companies, financial statements clearly
disclose the date through which subsequent events have been evaluated.
Subsequent events must still be evaluated through the date of financial
statement issuance; however, the disclosure requirement has been removed
to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.
|
|
|
|
In April 2010, the FASB issued Accounting Standards Update 2010-13,
CompensationStock Compensation (Topic 718): Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the
Market in Which the Underlying Equity Security Trades, or ASU 2010-13.
ASU 2010-13 provides amendments to Topic 718 to clarify that an employee
share-based payment award with an exercise price denominated in currency
of a market in which a substantial porting of the entitys equity
securities trades should not be considered to contain a condition that is
not a market, performance, or service condition. Therefore, an entity
would not classify such an award as a liability if it otherwise qualifies
as equity. The amendments in this Update are effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December 15, 2010. The Company does not expect the adoption of ASU 2010-17
to have a significant impact on its consolidated financial statements.
|
|
|
|
In April 2010, the FASB issued Accounting Standard Update 2010-17,
Revenue RecognitionMilestone Method (Topic 605): Milestone Method of
Revenue Recognition or ASU 2010-17
.
This Update provides guidance
on the recognition of revenue under the milestone method, which allows a
vendor to adopt an accounting policy to recognize all of the arrangement
consideration that is contingent on the achievement of a substantive
milestone (milestone consideration) in the period the milestone is
achieved. The pronouncement is effective on a prospective basis for
milestones achieved in fiscal years and interim periods within those
years, beginning on or after June 15, 2010. The adoption of ASU 2010-17
does not have any significant impacts on the consolidated financial
statements.
|
|
|
|
In July 2010, the FASB issued ASU 2010-20, Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit
Losses. This update amends codification topic 310 on receivables to
improve the disclosures that an entity provides about the credit quality
of its financing receivables and the related allowance for credit losses.
As a result of these amendments, an entity is required to disaggregate by
portfolio segment or class certain existing disclosures and provide
certain new disclosures about its financing receivables and related
allowance for credit losses. This guidance is being phased in, with the
new disclosure requirements for period end balances effective as of
December 31, 2010, and the new disclosure requirements for activity during
the reporting period are effective March 31, 2011. The troubled debt
restructuring disclosures in this ASU have been delayed by ASU 2011-01
Deferral of the Effective Date of Disclosures about Troubled Debt
Restructurings in Update No. 2010-20, which was issued in January 2011.
|
|
|
|
In December 2010, the FASB issued Accounting Standards Update 2010-28
which amend Intangibles- Goodwill and Other (Topic 350). The ASU
modifies Step 1 of the goodwill impairment test for reporting units with
zero or negative carrying amounts. For those reporting entities, they are
required to perform Step 2 of the goodwill impairment test if it is more
likely than not that a goodwill impairment exists. An entity should
consider whether there are any adverse qualitative factors indicating that
impairment may exist. The qualitative factors are consistent with the
existing guidance in Topic 350, which requires that goodwill of a
reporting unit be tested for impairment between annual tests if an event
occurs or circumstances changes that would more likely than not reduce the
faire value of a reporting unit below its carrying amount. ASU 2010-28 is
effective for fiscal years, and interim periods within those years
beginning after December 15, 2010. Early adoption is not permitted. The
Company is currently evaluating the impact of this ASU; however, the
Company does not expect the adoption of this ASU will have a material
impact on its consolidated financial statements.
|
|
|
|
In December 2010, the FASB issued Accounting Standards Update 2010-29
which address diversity in practice about the interpretation of the pro
forma revenue and earnings disclosure requirements for business
combinations (Topic 805). This ASU specifies that if a public entity
presents comparative financial statements, the entity should disclose
revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of
the beginning of the comparable prior annual reporting period only. This
ASU also expands the supplemental pro forma disclosures under Topic 805 to
include a description of the nature and amount of material, nonrecurring
pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. ASU 2010-29 is
effective prospectively for business combinations for which the
acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. Early adoption
is permitted. The Company is currently evaluating the impact of this ASU
and expected the adoption of this ASU will have an impact on its future
business combination.
|
F-18
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
|
INCOME TAXES
|
|
|
|
No provision for income taxes in the United States has been made as
the Company has no income taxable in the United States.
|
|
|
|
No Hong Kong corporate income tax has been provided in the financial
statements, as TECT did not have any assessable profits for the years
ended December 31, 2010 and December 31, 2009.
|
|
|
|
Beginning January 1, 2008, the new Enterprise Income Tax (EIT) law
replaced the existing laws for Domestic Enterprises (DEs) and Foreign
Invested Enterprises (FIEs). The new standard EIT rate of 25% replaced
the 33% rate currently applicable to both DEs and FIEs. The Company is
currently evaluating the impact that the new EIT will have on its
financial condition. Beginning January 1, 2008, China unified the
corporate income tax rule on foreign invested enterprises and domestic
enterprises. The unified corporate income tax rate is 25%.
|
|
|
|
Provision for income tax of the companys subsidiary ATEC was made at
the unified EIT rate of 25% for the year ended December 31, 2010 but ATEC
is entitled to a refund of 10% according to local preferential tax policy
for manufacturing of high technology products for the three years from
January 1, 2010 to December 31, 2012. Therefore, the provision for income
tax of the companys subsidiary ATEC was made at the local preferential
EIT rate of 15% for the year ended December 31, 2010.
|
|
|
|
The companys subsidiaries ZTEC and STT have not commenced their
business, therefore no provision for income taxes has been made for the
years ended December 31, 2010 and December 31, 2009.
|
|
|
|
The following table reconciles the U.S statutory rates to the
companys effective tax rate for the year ended December 31, 2010:
|
|
|
|
2010
|
|
|
|
|
$
|
|
|
U.S. Statutory rates
|
|
34%
|
|
|
Foreign income not recognized in USA
|
|
(34
|
)
|
|
Hong Kong profits tax
|
|
16.50
|
|
|
Offshore income not recognized in Hong Kong
|
|
(16.50
|
)
|
|
China Enterprise income taxe rate for high
technology
|
|
15
|
|
|
|
|
15%
|
|
|
Provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Income tax
|
|
|
|
|
|
|
|
HGHN - US corporate tax
|
$
|
-
|
|
$
|
-
|
|
|
TECT - Hong Kong profits tax
|
|
-
|
|
|
-
|
|
|
ATEC - China EIT
|
|
1,023,711
|
|
|
1,479,397
|
|
|
ZTEC and STT - China EIT
|
|
-
|
|
|
-
|
|
|
Deferred tax
|
|
-
|
|
|
-
|
|
|
|
$
|
1,023,711
|
|
$
|
1,479,397
|
|
F-19
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
|
CASH AND CASH EQUIVALENTS
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash and bank balances
|
$
|
2,526,710
|
|
$
|
161,133
|
|
6.
|
RESTRICTED CASH
|
|
|
|
The Companys restricted cash consists of bank time deposits in the
bank as security deposits for the completion of certain projects of the
company. The Company is required to keep certain amounts on deposit that
are subject to withdrawal restrictions. Restricted cash amounted to
$1,164,598 and $0 as of December 31, 2010 and 2009, respectively.
|
|
|
7.
|
ACCOUNTS RECEIVABLE
|
|
|
|
The Company has performed an analysis on all of its accounts
receivable and determined that all amounts are probable of collection
within one year. As such, all trade receivables are reflected as a current
asset and no allowance for doubtful debt has been recorded of $70,000 and
$0 as of December 31, 2010 and 2009. Bad debts written off for the years
ended December 31, 2010 and 2009 was $0.
|
|
|
|
Aging of accounts receivable is as follows:
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
within 3 months
|
$
|
13,658,262
|
|
$
|
8,398,448
|
|
|
over 3 months and within 6 months
|
|
356,438
|
|
|
152,797
|
|
|
over 6 months and within 1 year
|
|
343,298
|
|
|
240,597
|
|
|
over 1 year
|
|
68,354
|
|
|
-
|
|
|
|
|
14,426,352
|
|
|
8,791,842
|
|
|
Less: Allowance for doubtful accounts
|
|
(70,000
|
)
|
|
-
|
|
|
|
$
|
14,356,352
|
|
$
|
8,791,842
|
|
Accounts receivable includes the
amounts of $3,151,959 (2009: $1,333,972) that was factored to the Industrial and
Commercial Bank, PRC for collection.
8.
|
INVENTORY
|
|
|
|
2010 2009 Raw materials $ 2,590,642 $ 3,949,512 Work in progress
2,644,432 129,726 Finished goods - 2,987,549 $ 5,235,074 $ 7,066,787
|
F-20
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.
|
DEPOSITS AND PREPAID EXPENSES
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Guarantee and utility deposits
|
$
|
828,170
|
|
$
|
1,341,572
|
|
|
Deposit for acquistion of land use rights
|
|
518,753
|
|
|
-
|
|
|
Land leveling, design fees and stamp duty
prepaid expenses
|
|
3,110,145
|
|
|
-
|
|
|
Prepaid expenses
|
|
91,091
|
|
|
-
|
|
|
Advances to suppliers and services
providers
|
|
874,436
|
|
|
1,351,157
|
|
|
Prepayment for purchase of property and equipment
|
|
2,269
|
|
|
13,570
|
|
|
Advances to logistic service providers
|
|
14,715
|
|
|
9,938
|
|
|
|
$
|
5,439,579
|
|
$
|
2,716,237
|
|
Guarantee deposits are provided to
financial institutions in return for issuance of a corporate guarantee to
financiers. Advances to suppliers are down payments or deposits for inventory
purchases. ZTEC acquired land use rights of new land in the PRC and paid
deposits for the acquisition of land use rights, ZTEC also prepaid land
leveling, design fees and stamp duty fees. The inventory and services are
normally delivered and rendered within one to two months after the payments have
been made.
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Due from former sole stockholder and his
affiliates
|
$
|
-
|
|
$
|
3,322,137
|
|
|
Loan due from third parties
|
|
-
|
|
|
195,111
|
|
|
Due from employees
|
|
963,416
|
|
|
655,238
|
|
|
Due from third parties
|
|
661,156
|
|
|
-
|
|
|
Others
|
|
1,467
|
|
|
3,104
|
|
|
|
$
|
1,626,039
|
|
$
|
4,175,590
|
|
Due from former sole stockholder and
his affiliates and loan due from third parties are unsecured advances, interest
free and without fixed terms of repayment and are for the specific business
purposes. Due from employees are the amounts advanced for business transactions
on behalf of the company and will be reconciled on the completion of business
transactions.
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
VAT recoverable
|
$
|
2,389
|
|
$
|
2,711
|
|
|
Individual income tax recoverable
|
|
-
|
|
|
2,178
|
|
|
Taxes recoverable
|
$
|
2,389
|
|
$
|
4,889
|
|
F-21
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
12.
|
PROPERTY AND EQUIPMENT
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
$
|
2,584,596
|
|
$
|
2,425,451
|
|
|
Plant and machinery
|
|
1,351,729
|
|
|
1,062,185
|
|
|
Furniture, fixtures and office equipment
|
|
123,716
|
|
|
61,455
|
|
|
Motor vehicles
|
|
294,812
|
|
|
87,257
|
|
|
|
|
4,354,853
|
|
|
3,636,348
|
|
|
Less: Accumulated depreciation
|
|
(564,088
|
)
|
|
(282,507
|
)
|
|
Net book value
|
$
|
3,790,765
|
|
$
|
3,353,841
|
|
Depreciation expense was $266,127 and
$163,600 for the years ended December 31, 2010 and 2009, respectively.
Private ownership of land is not
permitted in the PRC. The Company has acquired the land use rights to three
parcels located at Xinqiao Industrial Park, Jingde Country, Anhui Province. The
total cost of these land use rights of ATEC was $2,112,867 and the land use
rights will expire in 2056, 2058 and 2058, respectively.
Land use rights are amortized on the
straight line basis over their respective lease periods. The lease period of
land use rights located in an industrial park zone is 50 years.
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
2,178,255
|
|
$
|
2,112,867
|
|
|
Less: Accumulated amortization
|
|
(106,484
|
)
|
|
(61,030
|
)
|
|
Net book value
|
$
|
2,071,771
|
|
$
|
2,051,837
|
|
Amortization expense was $42,494 and
$42,231 for the years ended December 31, 2010 and 2009, respectively.
14.
|
CONSTRUCTION IN PROGRESS
|
|
|
|
2010
|
|
|
2009
|
|
|
Construction of office building
|
$
|
473,355
|
|
$
|
-
|
|
F-22
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.
|
OTHER PAYABLES AND ACCRUED EXPENSES
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Due to former sole stockholder and his
affiliates
|
$
|
2,789,568
|
|
$
|
-
|
|
|
Land use rights payable
|
|
-
|
|
|
1,350,146
|
|
|
Due to third parties
|
|
603,824
|
|
|
2,197,461
|
|
|
Due to employees
|
|
8,359
|
|
|
18,015
|
|
|
Accruals
|
|
92,607
|
|
|
27,596
|
|
|
Others
|
|
-
|
|
|
31,701
|
|
|
|
$
|
3,494,358
|
|
$
|
3,624,919
|
|
Due to former sole stockholder and his
affiliates, due to third parties and employees were unsecured, interest free and
without a fixed term of repayment and were for unspecific business purposes.
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Enterprise income tax payable
|
$
|
42,557
|
|
$
|
1,290,966
|
|
|
City maintenance and construction levies payable
|
|
-
|
|
|
7,157
|
|
|
Individual income tax payable
|
|
2,051
|
|
|
-
|
|
|
Education levies and stamp duty payable
|
|
-
|
|
|
8,792
|
|
|
|
$
|
44,608
|
|
$
|
1,306,915
|
|
17.
|
SHORT TERM BORROWINGS
|
There are no provisions in the
Companys bank borrowings that would accelerate repayment of debt as a result of
a change in credit ratings or a material adverse change in the Companys
business. Under certain agreements, the Company has the option to retire debt
prior to maturity, either at par or at a premium over par.
|
|
|
Interest rate
|
|
Maturity date
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Industrial and Commercial Bank, Longshou Branch, PRC
|
|
4.86% - 5.31%
|
|
From January 22,
2011 to June 5, 2011
|
$ 3,864,182
|
*
|
$ 4,041,585
|
|
Huishang Bank, Hefei branch, PRC
|
|
|
|
|
-
|
|
2,200,500
|
|
China Merchant Bank, Heifei branch, PRC
|
|
6.12%
|
|
October 29, 2011
|
1,512,400
|
+
|
1,173,600
|
|
China Everbright Bank, Heifei branch, PRC
|
|
5.56%
|
|
November 22, 2011
|
4,537,200
|
|
4,401,000
|
|
Huishang Bank, Xuancheng branch, PRC
|
|
5.84%
|
|
February 10,
2011
|
3,024,800
|
*
|
682,304
|
|
The Economic Standing Committee of Jinde County, PRC
|
|
|
|
|
-
|
|
234,720
|
|
|
|
|
|
|
$ 12,938,582
|
|
$ 12,733,709
|
* secured by land use rights
+
secured by third partys guarantee
F-23
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
|
CUSTOMER DEPOSITS
|
|
|
|
Customer deposits represent amounts advanced by customers for orders
of product. The products normally are shipped within three months after
receipt of the advance payment and the related sale is recognized in
accordance with the Companys revenue recognition policy. As of December
31, 2010 and 2009, customer deposits amounted to $80,331 and $113,867,
respectively.
|
|
|
19.
|
SHAREHOLDERS EQUITY
|
|
|
|
The Company has authorized Preferred stock of 10,000,000 shares with a
par value of $0.001. As of December 31, 2010 and 2009, the company has not
issued any preferred shares.
|
|
|
|
The Company has authorized common stock of 300,000,000 shares with a
par value of $0.001. As of December 31, 2010 and 2009, the company had
issued and outstanding 30,181,552 and 19,194,421 shares, respectively.
|
|
|
|
On May 4, 2010, the Company issued 19,194,421 shares of common stock
to the sole shareholder of TECT in exchange for 10,000 shares of TECT,
which was all the issued and outstanding capital stock of TECT.
|
|
|
|
As a result of the reverse merger, the equity account of the Company,
prior to the share exchange date, has been retroactively restated so that
the ending outstanding share balance as of the share exchange date is
equal to the number of post share-exchange shares.
|
|
|
20.
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
Total lease expenses for the years ended December 31, 2010 and 2009
was $22,309 and $0, respectively.
|
|
|
|
The future minimum lease payments as of December 31, 2010 and 2009
were $nil.
|
|
|
|
From time to time and in the ordinary course of business, the Company
may be subject to various claims, charges, and litigation. As of December
31, 2010 and 2009, the Company did not have any pending claims, charges,
or litigation that it expects would have a material adverse effect on its
consolidated balance sheets, consolidated statements of income or cash
flows.
|
|
|
|
The Company has entered into two separate agreements that would
require the Company to pay liquidated damages if the Company failed to
perform under the agreements. The amount of the potential damages is
listed below:
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Liquidated damages for
|
|
|
|
|
|
|
|
- investment relation service with CCG
|
$
|
90,000
|
|
$
|
-
|
|
F-24
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21.
|
STOCK OPTIONS & WARRANTS
|
The Company accounts for its stock
options and warrants in accordance with ASC Topic 718, Compensation Stock
Compensation and ASC Topic 505-50 Equity Based Payments to Non-Employees
which were adopted by the Company on June 15, 2010. The company issued a warrant
to CCG Investor Relations Partners LLC (CCG), an investor relations firm, for
the purchase of 80,000 shares of the Companys common stock at an exercise price
of $2.00 per share. The warrant vested in four equal installations on June
20
th
, September 30
th
, December 31
st
of 2010 and
March 31, 2011. The warrant will expire on June 15, 2015.
The Company determines the estimated
fair value of share-based awards using the Black-Scholes option-pricing model.
The Black-Scholes model is affected by the Companys stock price as well as by
assumptions regarding certain complex and subjective variables. These variables
include, but are not limited to; the Companys expected stock price volatility
over the term of the awards and the actual and projected option exercise
behaviors. The Company calculated a stock based compensation of $186,600 and
recognized $155,000 in stock based compensation expense for the year ended
December 31, 2010. As of December 31, 2010, the prepaid compensation expense
amount was $31,600.
|
|
|
Number of shares entitled to
purchase
|
|
|
Exercise Price
|
|
|
Expiration date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued on June 15, 2010
|
|
80,000
|
|
$
|
2.00
|
|
|
June 15, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2010
|
|
80,000
|
|
$
|
2.00
|
|
|
|
|
|
Warrants exercised
|
|
-
|
|
|
2.00
|
|
|
|
|
|
Warrants expired
|
|
-
|
|
|
2.00
|
|
|
|
|
|
Total outstanding as of December 31, 2010
|
|
80,000
|
|
|
2.00
|
|
|
June 15, 2010
|
|
Utilizing the Black Scholes
option-pricing model, the share based compensation expenses for the years ended
December 31, 2010 and 2009 were $155,000 and $0, respectively.
F-25
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22.
|
OBLIGATION UNDER MATERIAL CONTRACTS
|
|
|
|
CCG was issued a warrant to purchase up to 80,000 shares of the
Companys stock, at a price of $2.00 per share, pursuant to the terms and
conditions of a letter agreement, dated June 20, 2010, between the Company
and CCG. CCG's right to exercise its warrant will vest in four equal
portions, with the first portion vesting on June 20, 2010, and the
remaining portions vesting on September 30, 2010, December 31, 2010 and
March 31, 2011, respectively. The warrant has a term of 5 years and will
expire on June 15, 2015. The agreement contains a $90,000 liquidated
damage provision for breach of such exclusivity. As of December 31, 2010,
CCG had not exercised the warrant.
|
|
|
23.
|
PRODUCT LINE INFORMATION
|
|
|
|
The Company sells towers, which are used by customers in various
industries. The production process, class of customer, selling practice
and distribution process are the same for all towers. The Companys chief
operating decision-makers (i.e., chief executive officer and his direct
reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by product lines
for purposes of allocating resources and evaluating financial performance.
There are no segment managers who are held accountable for operations,
operating results and plans for levels or components below the
consolidated unit level. The Company considers itself to be operating
within one reportable segment. The Company does not have long-lived assets
located in foreign countries. The Company's net revenue from external
customers by main product lines is as follows:
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Domestic sales
|
|
|
|
|
|
|
|
Communication towers
|
$
|
9,539,546
|
|
$
|
11,410,377
|
|
|
Electricity supply towers
|
|
17,439,897
|
|
|
10,029,740
|
|
|
Telecommunication equipment
|
|
1,740,173
|
|
|
-
|
|
|
Scrap
|
|
587,276
|
|
|
-
|
|
|
|
|
29,306,892
|
|
|
21,440,117
|
|
|
Export sales
|
|
|
|
|
|
|
|
Communication towers
|
|
2,176,167
|
|
|
30,770
|
|
|
Electricity supply towers
|
|
715,589
|
|
|
909,710
|
|
|
|
|
2,891,756
|
|
|
940,480
|
|
|
Technical service income
|
|
42,685
|
|
|
-
|
|
|
|
$
|
32,241,333
|
|
$
|
22,380,597
|
|
Certain reclassifications have been
made in the prior year amounts for comparability with the current year amounts.
F-26
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24.
|
RELATED PARTIES TRANSACTIONS
|
In addition to the transactions and
balances as disclosed elsewhere in these consolidated financial statements,
during the years, the company had no other significant related party
transactions.
On January 13, 2010, we entered into
and closed a share purchase agreement with Michael Anthony, our CEO at the time,
and certain accredited purchasers signatory thereto, pursuant to which we sold
an aggregate of 10,880,000 shares of our common stock for a total of $225,000.
Simultaneously with and as a condition to the closing of the share purchase
agreement, we re-purchased 10,880,000 common shares from Corporate Services
International Profit Sharing and Century Capital Partners, LLC, which are both
beneficially owned by Mr. Anthony, for an aggregate purchase price of
$225,000.
|
Name of related
party
|
Nature of transactions
|
|
Mr. Chun Lu, CEO, chairman and his affiliates
|
* Included in other payable, due from former
stockholder and its affiliates was $2,789,568 as of December 31, 2010. The
amount is unsecured, interest free and has no fixed term of repayment.
* Included in other receivables, due from former stockholder and his
affiliates is $3,322,137 as of December 31, 2009. The amount is unsecured,
interest free and has no fixed term of repayment
|
*
|
Prior to our reverse acquisition of HGHN, ATEC was a private company
and loaned funds to certain of its former officers, directors and control
persons from time to time. Such amounts were unsecured, interest free and
had no fixed term of repayment. As of December 31, 2009, the following
amounts were due and payable to ATEC: $908,593 was due from Mr. Lu, ATECs
Chairman; $308,534 was due from Mr. Lus wife, Ms. Yi Ping Zhu; and
$2,105,010 due from Anhui TaiKe Real Estate Co., Limited, an entity owned
and controlled by Mr. Lu. As of May 4, 2010, all such amounts were repaid
to Company.
|
F-27
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
2.1
|
|
Share Exchange
Agreement, dated May 4, 2010, among the Company, TEC Technology Limited
and its shareholders (incorporated by reference to Exhibit 2.2 of the
current report on Form 8-K filed by the Company on May 10, 2010)
|
3.1*
|
|
Certificate
of Incorporation of the Company, as amended to date
|
3.2
|
|
Amended and
Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2
to the Companys 10-Q filed on September 22, 2008)
|
10.1
|
|
Side Letter, dated May 4, 2010,
among the Company, Wong Hua Peng Phillip and certain transferees (incorporated
by reference to Exhibit 10.4 of the current report on Form 8-K filed by
the Company on May 10, 2010)
|
10.2
|
|
Stock Purchase
Agreement, dated January 13, 2010, by and among the Company, Michael Anthony
and the accredited investors signatory thereto (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
on January 13, 2010)
|
10.3
|
|
Repurchase Agreement, dated
January 13, 2010, among the Company, Corporate Services International
Profit Sharing and Century Capital Partners, LLC (incorporated by reference
to Exhibit 10.2 to the Companys Current Report on Form 8-K filed
on January 13, 2010)
|
10.4
|
|
English Translation
of Equity Transfer Agreement, dated February 22, 2010, between Chun Lu
and TEC Technology Limited (incorporated by reference to Exhibit 10.3
of the current report on Form 8-K filed by the Company on May 10, 2010)
|
10.5
|
|
English Translation of Procurement
Contract, dated June 23, 2009, between Anhui TEC Tower Co. Ltd. and ZTE
(Shenzhen) Kangxun Telecom Co., Ltd. (incorporated by reference to Exhibit
10.10 of the current report on Form 8-K filed by the Company on May 10,
2010)
|
10.6
|
|
English Translation
of Technology Transfer (Patent Exploitation License) Contract (Valve Spring),
dated June 25, 2009, between Anhui TEC Tower Co. Ltd. and Anhui University
of Technology and Science (incorporated by reference to Exhibit 10.11
of the current report on Form 8-K filed by the Company on May 10, 2010)
|
10.7
|
|
English Translation of Technology
Transfer (Patent Exploitation License) Contract (Mechanical Lift), dated
June 25, 2009, between Anhui TEC Tower Co. Ltd. and Anhui University of
Technology and Science (incorporated by reference to Exhibit 10.12 of
the current report on Form 8-K filed by the Company on May 10, 2010)
|
10.8
|
|
English Translation
of Technology Transfer (Patent Exploitation License) Contract (U-Shape
Bolt), dated June 25, 2009, between Anhui TEC Tower Co. Ltd. and Anhui
University of Technology and Science (incorporated by reference to Exhibit
10.13 of the current report on Form 8-K filed by the Company on May 10,
2010)
|
10.9
|
|
English Translation of Technology
Transfer (Patent Exploitation License) Contract (MDF Test Module), dated
June 25, 2009, between Anhui TEC Tower Co. Ltd. and Hangzhou Tianye Communication
Equipment Co. Ltd. (incorporated by reference to Exhibit 10.14 of the
current report on Form 8-K filed by the Company on May 10, 2010)
|
10.10
|
|
English Translation
of Technology Transfer (Patent Exploitation License) Contract (MDF Security
Unit), dated June 25, 2009, between Anhui TEC Tower Co. Ltd. and Hangzhou
Tianye Communication Equipment Co. Ltd. (incorporated by reference to
Exhibit 10.15 of the current report on Form 8-K filed by the Company on
May 10, 2010)
|
10.11
|
|
English Translation of Loan
Contract, dated February 8, 2010, between Anhui TEC Tower Co. Ltd. and
Huishang Bank, Xuancheng Branch (incorporated by reference to Exhibit
10.6 of the current report on Form 8-K filed by the Company on May 10,
2010)
|
10.12
|
|
English Translation
of Loan Contract, dated November 23, 2009, between Anhui TEC Tower Co.
Ltd. and China Everbright Bank (incorporated by reference to Exhibit 10.5
of the current report on Form 8-K filed
|
Exhibit No.
|
|
Description
|
|
|
by the Company
on May 10, 2010)
|
10.13
|
|
English Translation of Crediting
Agreement, dated September 27, 2009, between Anhui TEC Tower Co. Ltd.
and China Merchants Bank, Hefei Sipailou Branch (incorporated by reference
to Exhibit 10.7 of the current report on Form 8-K filed by the Company
on May 10, 2010)
|
10.14
|
|
English Translation
of Lease Agreement, dated August 31, 2009, between Mr. Chen and Mr. Jie
Ding (incorporated by reference to Exhibit 10.16 of the current report
on Form 8-K filed by the Company on May 10, 2010)
|
10.15
|
|
English Translation of Labor
Contract, dated January 1, 2010, between Anhui TEC Tower Co. Ltd. and
Chun Lu (incorporated by reference to Exhibit 10.8 of the current report
on Form 8-K filed by the Company on May 10, 2010)
|
10.16
|
|
English Translation
of Labor Contract, dated September 9, 2009, between Anhui TEC Tower Co.
Ltd. and Debin Chen (incorporated by reference to Exhibit 10.9 of the
current report on Form 8-K filed by the Company on May 10, 2010)
|
14
|
|
Code of Ethics of the Company
adopted on May 4, 2010 (incorporated by reference to Exhibit 14 of the
current report on Form 8-K filed by the Company on May 10, 2010)
|
21
|
|
Subsidiaries
of the Company (incorporated by reference to Exhibit 21 of the current
report on Form 8-K/A filed by the Company on June 24, 2010)
|
31.1*
|
|
Certifications
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2*
|
|
Certifications
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1*
|
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
32.2*
|
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
*Filed herewith
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