UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10−Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2011
[ ]
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 000-53432
TEC TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
|
13-4013027
|
(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
|
|
Xinqiao Industrial Park
Jingde County, Anhui
Province
Shenzhen 242600
Peoples Republic of China
(Address of principal executive offices, Zip Code)
(+86) 755 8323-2722
(Registrants telephone
number, including area code)
_____________________________________________________
(Former
name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the 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 Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [_] No [_]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer [_]
|
Accelerated filer [_]
|
Non-accelerated filer (Do not check if a smaller reporting
company)
|
Smaller reporting company [X]
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The number of shares outstanding of each of the issuers
classes of common stock, as of May 17, 2011 is as follows:
Class of Securities
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Shares Outstanding
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Common Stock, $0.001 par value
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30,181,552
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TEC TECHNOLOGY, INC.
|
|
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TABLE OF CONTENTS
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|
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PART I
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FINANCIAL INFORMATION
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|
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Item 1.
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Financial Statements
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1
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Item 2.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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2
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Item 3.
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Quantitative and Qualitative
Disclosures About Market Risk
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9
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Item 4.
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Controls and Procedures
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9
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PART II
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OTHER
INFORMATION
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Item 1.
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Legal Proceedings
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9
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Item 1A.
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Risk Factors
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9
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Item 2.
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Unregistered Sales of Equity
Securities and Use of Proceeds
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10
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Item 3.
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Defaults Upon Senior Securities
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10
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Item 4.
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(Removed and Reserved)
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10
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Item 5.
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Other Information
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10
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Item 6.
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Exhibits
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10
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
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CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
(UNAUDITED)
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MARCH 31, 2011 AND 2010
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Page(s)
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CONSOLIDATED BALANCE SHEETS
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F - 1
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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
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F - 2
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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F - 3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F - 4 - F - 24
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1
TEC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
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March 31, 2011
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|
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December 31, 2010
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(Unaudited)
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(Audited)
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ASSETS
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Current assets
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|
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Cash and cash equivalents
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$
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2,892,784
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$
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2,526,710
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Restricted cash
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167,119
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1,164,598
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Accounts receivable, net of allowance
for doubtful accounts
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14,692,527
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|
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14,356,352
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Inventory
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5,522,898
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5,235,074
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Deposits and prepaid expenses
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2,849,447
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5,439,579
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Other receivables
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1,969,602
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1,626,039
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Taxes recoverable
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-
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2,389
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Total current assets
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28,094,377
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30,350,741
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Property and equipment
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|
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Property and equipment, net of accumulated
depreciation
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3,826,560
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3,790,765
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Land use rights, net of accumulated
amortization
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7,872,717
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2,071,771
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Construction in progress
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606,487
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473,355
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12,305,764
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6,335,891
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Total assets
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$
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40,400,141
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$
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36,686,632
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities
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Accounts payable
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$
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7,618,618
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$
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8,313,633
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Other payables and accrued expenses
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8,406,685
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3,494,358
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Taxes payables
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183,672
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44,608
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Customer deposits
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19,961
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80,331
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Short term borrowings
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11,940,090
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12,938,582
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28,169,026
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24,871,512
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Commitments and contingencies
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-
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-
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Stockholders' equity
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Preferred stock: 10,000,000
authorized, none issued and outstanding $0.001 par value
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|
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Common stock: 300,000,000 authorized $0.001 par value
30,181,552 shares issued and outstanding March 31, 2011 and December 31,
2010, respectively
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$
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30,182
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$
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30,182
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Additional paid in capital
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1,105,454
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1,024,891
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Retained earnings
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10,330,352
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10,077,006
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Accumulated other comprehensive
income
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765,127
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683,041
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Total stockholders' equity
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12,231,115
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11,815,120
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Total liabilities and stockholders'
equity
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$
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40,400,141
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$
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36,686,632
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See accompanying notes of these consolidated financial
statements
F - 1
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Three months
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Three months
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ended
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ended
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March 31, 2011
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March 31, 2010
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(Unaudited)
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(Unaudited)
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Revenues
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$
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3,425,125
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$
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5,176,934
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Cost of goods sold
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2,415,828
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3,512,060
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Gross profit
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1,009,297
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1,664,874
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Selling and marketing expenses
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(207,807
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)
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(303,334
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)
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General and administrative expenses
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(225,657
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)
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(274,350
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)
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Net income from operations
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575,833
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1,087,190
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Other income (expenses)
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Interest expense
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(245,913
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)
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(386,510
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)
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Net other income (expenses)
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(245,913
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)
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(386,510
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)
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Net income before provision for income taxes
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329,920
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700,680
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Provision for income taxes
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(49,488
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)
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(107,531
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)
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Net income
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280,432
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593,149
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Other comprehensive income (loss)
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Foreign currency translation gain (loss)
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82,086
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(65,032
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)
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Comprehensive income
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$
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362,518
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$
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528,117
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Weighted average numbers of common shares
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Basic
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30,181,882
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19,194,421
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Diluted
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30,181,882
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19,194,421
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Earnings per share
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Basic
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$
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0.01
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$
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0.04
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Diluted
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$
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0.01
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$
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0.04
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See accompanying notes of these consolidated financial
statements
F - 2
TEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three months
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Three months
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ended
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ended
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March 31, 2011
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March 31, 2010
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(Unaudited)
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(Unaudited)
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Cash flows from operating activities
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Net income for the period
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$
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280,432
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$
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593,149
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Adjustments to reconcile net income
to net cash provided by operating activites:
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Depreciation
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79,619
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61,436
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Amortization of
land use rights
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10,932
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10,564
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Stock based compensation
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27,086
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-
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Changes in operating assets and
liabilities
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Decrease in restricted cash
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997,479
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-
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(Increase)
decrease in inventory
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(287,824
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)
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1,072,342
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(Increase) decrease in deposits
and prepaid expenses
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(1,034,252
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)
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1,246,049
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Increase in
accounts receivable
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(336,175
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)
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(2,627,649
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)
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(Increase) decrease in other
receivables
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(303,563
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)
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1,634,022
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Decrease in
taxes recoverable
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2,389
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|
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4,889
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Increase in taxes payable
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139,064
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558,130
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(Decrease)
increase in accounts payable
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(695,015
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)
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396,317
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Decrease in customer deposits
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(60,370
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)
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(52,946
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)
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Increase in
other payables and accrued expenses
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4,912,327
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878,554
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Net cash provided by operating activities
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3,732,129
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3,774,857
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Cash flows from investing activities
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|
|
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Purchases of property and
equipment
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(91,561
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)
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(49,109
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)
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Payment for
construction in progress
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(133,132
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)
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-
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Payment for purchase of land use
rights
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(2,152,912
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)
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-
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Net cash used in investing activities
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(2,377,605
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)
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(49,109
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)
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Cash flows from financing activities
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Repayment of
short term borrowings
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(1,080,620
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)
|
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(740,984
|
)
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Net cash used in financing activities
|
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(1,080,620
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)
|
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(740,984
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)
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Effects on exchange rate changes on cash
|
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141,295
|
|
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(65,966
|
)
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Increase in cash and cash equivalents
|
|
415,199
|
|
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2,918,798
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Cash and cash equivalents, beginning of
period
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|
2,526,710
|
|
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161,133
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Cash and cash equivalents, end of period
|
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2,941,909
|
|
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3,079,931
|
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Supplementary disclosures of cash flow
information:
|
|
|
|
|
|
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Cash paid for interest
|
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897,620
|
|
|
385,693
|
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Cash paid for income taxes
|
|
2,196,414
|
|
|
107,304
|
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Non cash transactions
|
|
|
|
|
|
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Issuance of warrant
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62,200
|
|
|
-
|
|
Transfer from deposits and prepaid expenses to land
use rights
|
|
|
|
|
|
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- Acquisition of land use rights
|
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3,628,868
|
|
|
-
|
|
Additional paid in capital
|
|
|
|
|
|
|
- debts taken up former directors
|
|
80,563
|
|
|
-
|
|
See accompanying notes of these consolidated financial
statements
F - 3
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS ORGANIZATION
|
|
|
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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 the Companys 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 365th 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 owning 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. STT
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.
|
|
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2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
|
2.1
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FISCAL YEAR
|
|
|
|
|
|
The Company has adopted December 31 as its fiscal year
end.
|
F - 4
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
2.2
|
REPORTING ENTITIES
|
|
|
|
|
|
The accompanying consolidated financial statements
include the following entities:
|
Name of
|
|
Place of
|
|
Date of
|
|
Percentage of
|
|
Principal activity
|
subsidiary
|
|
incorporation
|
|
incorporation
|
|
interest
|
|
|
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 10, 2010. The business combination were accounted for as entities in
is acquisition was accounted for as entities under common control because
the majority shareholders of TECT and ATEC were the same
people.
|
F - 6
TEC TECHNOLOGY, INC.
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 the Companys 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, ZTEC and STT. 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 wholly owned
subsidiaries 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 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.
|
|
|
|
|
|
Prior to the acquisition of ATEC by TECT, neither TECT
nor HGHN has active business operations. For reporting purposes, the
Company has assumed that Mr. Lu exercised his option immediately and thus
HGHN, TECT and ATEC are effectively under same control of Mr. Lu when the
Company acquired ATEC. The acquisition transactions between (i) HGHN and
TECT and (ii) TECT and ATEC are 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 acquirer
and HGHN and TECT as the acquired party 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 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 stock exchange
transaction.
|
|
|
|
|
|
HGHN, TECT, ATEC, ZTEC and STT are hereafter referred to
as the Company.
|
|
|
|
|
|
Interim results are not necessarily indicative of results
for a full year. The information included in this interim report should be
read in conjunction with the information included in the Companys annual
report on Form 10-K for the fiscal year ended December 31, 2010.
|
|
|
|
|
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 - 6
TEC TECHNOLOGY, INC.
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. For international
sales, the revenue recognition criteria are generally satisfied under Free
on Board (FOB) and Cost Insurance Freight (CIF) terms, in which the
Companys responsibility ends once the goods clear the port of
shipment.
|
|
|
|
|
|
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 $128,510 and $56,444 for the three months ended March 31, 11
and 2010, respectively.
|
|
|
|
|
2.8
|
ADVERTISING
|
|
|
|
|
|
Advertising costs are expensed as incurred and
totaled$4,530 and $308 for the three months March 31, 2011 and 2010,
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 $0 as incurred for the three months ended March 31, 2011and
2010, respectively. The costs for development of new products and
substantial enhancements to existing products are expensed as incurred
until technological feasibility has been established, at which time any
additional costs would be capitalized.
|
|
|
|
|
2.10
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
Cash and cash equivalents comprise cash in bank and on
hand, demand deposits with banks and other financial institutions, and
short-term, highly liquid investments which are readily convertible into
known amounts of cash and which are subject to an insignificant risk of
changes in value, and have a short maturity of generally within three
months when acquired.
|
F - 7
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.11
|
FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE
INCOME
|
|
|
|
|
|
The reporting currency of the Company is United States
Dollars ($). 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 $765,127 as of March 31, 2011 and
$683,041 as of December 31, 2010. The balance sheet amounts with the
exception of equity at March 31, 2011 and December 31, 2010 were
translated at RMB6.57 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 three months years ended March 31, 2011 and March 31, 2010
were RMB6.59 to $1.00 and RMB6.82 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 - 8
TEC TECHNOLOGY, INC.
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 March 31,
2011 and December 31, 2010, the Company determined no impairment charges
were necessary.
|
F - 9
TEC TECHNOLOGY, INC.
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 March 31, 2011 and December 31, 2010.
|
|
|
|
|
2.21
|
INCOME TAXES
|
|
|
|
|
|
The Company accounts for income taxes under the
provisions of Topic 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 March 31, 2011 and December 31, 2010.
|
|
|
|
|
|
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 - 10
TEC TECHNOLOGY, INC.
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.
|
|
|
|
|
|
Topic 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. Topic 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 nil% of sales income for product warranties for the three months
ended March 31, 2011 and March 31, 2010. The product warranty reserve was
$nil as of March 31, 2011 and December 31, 2010.
|
|
|
|
|
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 - 11
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.25
|
ECONOMIC, POLITICAL AND BUSINESS RISK
|
|
|
|
|
|
The Company's 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 March 31, 2011 and December 31, 2010 amounted to $2,805,813 and
$2,088,297, 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:
|
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
62.30%
|
|
|
31.41%
|
|
|
Customer B
|
|
20.00%
|
|
|
-
|
|
|
Customer C
|
|
15.74%
|
|
|
-
|
|
|
Customer D
|
|
0.91%
|
|
|
-
|
|
|
Customer E
|
|
0.80%
|
|
|
-
|
|
|
Customer F
|
|
-
|
|
|
29.05%
|
|
|
Customer G
|
|
-
|
|
|
28.76%
|
|
|
Customer H
|
|
-
|
|
|
5.07%
|
|
|
Customer I
|
|
-
|
|
|
4.31%
|
|
|
|
|
99.75%
|
|
|
98.60%
|
|
F - 12
TEC TECHNOLOGY, INC.
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:
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
37.16%
|
|
|
31.46%
|
|
|
Customer B
|
|
17.21%
|
|
|
9.89%
|
|
|
Customer C
|
|
11.33%
|
|
|
12.57%
|
|
|
Customer D
|
|
11.29%
|
|
|
16.73%
|
|
|
Customer E
|
|
7.69%
|
|
|
7.82%
|
|
|
|
|
84.68%
|
|
|
78.47%
|
|
|
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 three months ended March 31, 2011 and March 31,
2010, basic and diluted earnings per share amount to $0.01 and $0.04,
respectively.
|
F - 13
TEC TECHNOLOGY, INC.
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 March 31, 2011 or
December 31, 2010, 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 periods ended March 31,
2011 or March 31, 2010.
|
|
|
|
|
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, HGHN 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 30
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 expires 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 - 14
TEC TECHNOLOGY, INC.
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 - 14
TEC TECHNOLOGY, INC.
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 - 16
TEC TECHNOLOGY, INC.
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 three months ended March 31, 2011 and 2010.
|
|
|
|
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
is 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, 2013. Therefore, the
provision for income tax of the companys subsidiary ATEC is 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 three months ended March 31, 2011 and 2010.
|
|
|
|
The following table reconciles the U.S statutory rates to
the companys effective tax rate for the March 31,
2011:
|
|
|
|
2011
|
|
|
|
|
$
|
|
|
U.S. Statutory rates
|
|
34%
|
|
|
Foreign income not recognized in USA
|
|
(34)%
|
|
|
Hong Kong profits tax
|
|
16.5%
|
|
|
Offshore income not recognized in Hong Kong
|
|
(16.5)%
|
|
|
China Enterprise income taxe rate for high
technology
|
|
15%
|
|
|
|
|
15%
|
|
Provision for income taxes is as
follows:
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
|
March 21, 2011
|
|
|
March 21, 2010
|
|
|
Income tax
|
|
|
|
|
|
|
|
HGHN - US corporate tax
|
$
|
-
|
|
$
|
-
|
|
|
TECT - Hong Kong profits tax
|
|
-
|
|
|
-
|
|
|
ATEC - China EIT
|
|
49,488
|
|
|
107,531
|
|
|
ZTEC and STT - China EIT
|
|
-
|
|
|
-
|
|
|
Deferred tax
|
|
-
|
|
|
-
|
|
|
|
$
|
49,488
|
|
$
|
107,531
|
|
F - 17
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,2011
|
|
|
December 31, 2010
|
|
|
Cash and bank balances
|
$
|
2,941,909
|
|
$
|
2,526,710
|
|
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 $117,994 and $1,164,598 as of March 31, 2011 and December 31,
2010, 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 additional allowance for doubtful debt has been
recorded for the three months ended March 31, 2011. Bad debts written off
for the three months ended March 31, 2011 and December 31, 2010 are
$0.
|
|
|
|
Aging of accounts receivable is as
follows:
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
within 3 months
|
$
|
9,962,175
|
|
$
|
13,658,262
|
|
|
over 3 months and within 6 months
|
|
2,363,383
|
|
|
356,438
|
|
|
over 6 months and within 1 year
|
|
2,335,770
|
|
|
343,298
|
|
|
over 1 year
|
|
101,199
|
|
|
68,354
|
|
|
|
|
14,762,527
|
|
|
14,426,352
|
|
|
Less: Allowance for doubtful accounts
|
|
(70,000
|
)
|
|
(70,000
|
)
|
|
|
$
|
14,692,527
|
|
$
|
14,356,352
|
|
|
Accounts receivable includes the amounts of $2,737,072
(12.31.2010: $3,151,959) that were factored to the Industrial and
Commercial Bank, PRC for collection.
|
|
|
8.
|
INVENTORY
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Raw materials
|
$
|
1,792,321
|
|
$
|
2,590,642
|
|
|
Work in progress
|
|
3,730,577
|
|
|
2,644,432
|
|
|
Finished goods
|
|
-
|
|
|
-
|
|
|
|
$
|
5,522,898
|
|
$
|
5,235,074
|
|
F - 17
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.
|
DEPOSITS AND PREPAID
EXPENSES
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Guarantee and utility deposits
|
$
|
1,318,904
|
|
$
|
828,170
|
|
|
Deposit for acquistion of land use rights
|
|
-
|
|
|
518,753
|
|
|
Land levelling, design fees and stamp duty
prepaid expenses
|
|
-
|
|
|
3,110,145
|
|
|
Prepaid expenses
|
|
318,916
|
|
|
91,091
|
|
|
Advances to suppliers and services
providers
|
|
842,535
|
|
|
874,436
|
|
|
Advances to builders
|
|
17,503
|
|
|
-
|
|
|
Prepayment for purchase of property and
equipment
|
|
21,145
|
|
|
2,269
|
|
|
Advances to logistic service providers
|
|
330,444
|
|
|
14,715
|
|
|
|
$
|
2,849,447
|
|
$
|
5,439,579
|
|
|
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.
|
|
|
10.
|
OTHER RECEIVABLES
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Due from employees
|
$
|
1,102,585
|
|
$
|
963,416
|
|
|
Due from third parties
|
|
865,550
|
|
|
661,156
|
|
|
Others
|
|
1,467
|
|
|
1,467
|
|
|
|
$
|
1,969,602
|
|
$
|
1,626,039
|
|
|
Due from third parties are unsecured advances, interest
free and without fixed terms of repayment and are for 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 the business transactions.
|
|
|
11.
|
TAXES RECOVERABLE
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
VAT recoverable
|
$
|
-
|
|
$
|
2,389
|
|
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.
|
PROPERTY AND EQUIPMENT
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Buildings
|
$
|
2,682,941
|
|
$
|
2,584,596
|
|
|
Plant and machinery
|
|
1,240,762
|
|
|
1,351,729
|
|
|
Furniture, fixtures and office equipment
|
|
304,799
|
|
|
123,716
|
|
|
Motor vehicles
|
|
245,555
|
|
|
294,812
|
|
|
|
|
4,474,057
|
|
|
4,354,853
|
|
|
Less: Accumulated depreciation
|
|
(647,497
|
)
|
|
(564,088
|
)
|
|
Net book value
|
$
|
3,826,560
|
|
$
|
3,790,765
|
|
|
Depreciation expense was $79,619 and $61,436 for the
three months ended March 31, 2011 and 2010, respectively.
|
|
|
13.
|
LAND USE RIGHTS
|
|
|
|
Private ownership of land is not permitted in the PRC.
The Company has leased three lots of land at Xinqiao Industrial Park,
Jingde Country, Anhui Province. The total cost of these land use rights of
ATEC was $2,112,867 and the leases expire in 2056, 2058 and 2058
respectively. The Company has leased additional lots of land at Songxi
Village, Xindeng Town, Fuyang City, Hangzhou City, Zhejiang Province. The
total cost of these land use rights of ZTEC was $5,781,780 and the leases
expire in 2061.
|
|
|
|
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.
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
7,990,837
|
|
$
|
2,178,255
|
|
|
Less: Accumulated amortization
|
|
(118,120
|
)
|
|
(106,484
|
)
|
|
Net book value
|
$
|
7,872,717
|
|
$
|
2,071,771
|
|
|
Amortization expense was $10,932 and $10,564 for the
three months ended March 31, 2011 and 2010, respectively.
|
|
|
14.
|
CONSTRUCTION IN
PROGRESS
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
Construction of office building and
workshops
|
$
|
606,487
|
|
$
|
473,355
|
|
F - 19
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.
|
OTHER PAYABLES AND ACCRUED
EXPENSES
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Due to former sole stockholder and his
affiliates
|
$
|
3,545,146
|
|
$
|
2,789,568
|
|
|
Due to third parties
|
|
4,692,314
|
|
|
603,824
|
|
|
Due to employees
|
|
3,893
|
|
|
8,359
|
|
|
Accrued expenses
|
|
165,332
|
|
|
92,607
|
|
|
|
$
|
8,406,685
|
|
$
|
3,494,358
|
|
|
Due to former sole stockholder and his affiliates, due to
third parties and employees are unsecured, interest free and without a
fixed term of repayment and are for unspecific business
purposes.
|
|
|
16.
|
TAXES PAYABLE
|
|
|
|
March 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Enterprise income tax payable
|
$
|
49,619
|
|
$
|
42,557
|
|
|
City maintenance and construction levies payable
|
|
-
|
|
|
-
|
|
|
VAT payable
|
|
127,153
|
|
|
-
|
|
|
Individual income tax payable
|
|
-
|
|
|
2,051
|
|
|
Education levies and stamp duty payable
|
|
6,900
|
|
|
-
|
|
|
|
$
|
183,672
|
|
$
|
44,608
|
|
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
|
|
|
March 31, 2011
|
|
|
|
December 31, 2010
|
|
|
Industrial and Commercial Bank, Longshou
Branch, PRC
|
*
|
4.86% - 5.31%
|
|
|
From January 22, 2011 to June
5, 2011
|
|
$
|
3,873,490
|
|
*
|
$
|
3,864,182
|
|
|
China Merchant Bank, Heifei branch, PRC
|
+
|
6.12%
|
|
|
October 29, 2011
|
|
|
1,522,400
|
|
+
|
|
1,512,400
|
|
|
China Everbright Bank, Heifei branch, PRC
|
|
5.56%
|
|
|
November 22, 2011
|
|
|
4,566,000
|
|
|
|
4,537,200
|
|
|
Huishang Bank, Xuancheng branch, PRC
|
*
|
5.84%
|
|
|
February 10, 2011
|
|
|
1,978,600
|
|
*
|
|
3,024,800
|
|
|
|
|
|
|
|
|
|
$
|
11,940,490
|
|
|
$
|
12,938,582
|
|
* secured by land use rights
+ secured by third partys
guarantee
F - 20
TEC TECHNOLOGY, INC.
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 March 31, 2011 and December 31, 2010, customer deposits amounted to
$19,961 and $80,331, respectively.
|
|
|
19.
|
COMMON STOCK
|
|
|
|
The Company has authorized preferred stock of 10,000,000
shares with a par value of $0.001. As of March 31, 2011 and December 31,
2010, 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.
|
|
|
|
On May 4, 2010, the Company issued 19,194,421 shares of
common stock to the shareholders of TECT. The total consideration for the
19,194,421 shares was 10,000 shares of TECT, which is all the issued and
outstanding capital stock of TEC.
|
|
|
|
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.
|
|
|
|
As of March 31, 2011, and December 31, 2010, the Company
has outstanding 30,181,552 issued common shares with a par value of $0.001
per share respectively.
|
|
|
20.
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
Total lease expenses for the three months ended March 31,
2011 and 2010 was $10,975 and $12,095, respectively.
|
|
|
|
The future minimum lease payments as of March 31, 2011
and December 31, 2010 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 March 31, 2011 and December 31, 2010, 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:
|
|
|
|
March 31, 2010
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Liquidated damages for
|
|
|
|
|
|
|
|
- investment relation service with CCG
|
$
|
90,000
|
|
$
|
90,000
|
|
F - 21
TEC TECHNOLOGY, INC.
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 a
third party for the purchase of 80,000 shares of the Companys common
stock at an exercise price of $2.00 per share. The warrant vests in four
equal installations on June 30
th
, September 30
th
,
December 31
st
of 2010 and March 31, 2011. The warrant expires
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 $27,086 in stock based
compensation expense for the three months ended March 31, 2011. As of
March 31, 2011 and December 31, 2010, the prepaid compensation expense
amount was $66,714 and $31,600, respectively
|
|
|
|
Number of shares
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
entitled to purchase
|
|
|
|
|
|
Expiration date
|
|
|
Issued June 15, 2010
|
|
80,000
|
|
$
|
2.00
|
|
|
June 15, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2011
|
|
80,000
|
|
$
|
2.00
|
|
|
|
|
|
Warrants exercised
|
|
-
|
|
|
2.00
|
|
|
|
|
|
Warrants expired
|
|
-
|
|
|
2.00
|
|
|
|
|
|
Total outstanding as of March 31, 2011
|
|
80,000
|
|
|
2.00
|
|
|
June 15, 2015
|
|
Utilizing the Black Scholes
option-pricing model, the share based compensation expense for the three months
ended March 31, 2011 and 2010; the amounts were $27,086 and $nil, respectively.
F - 23
TEC TECHNOLOGY, INC.
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 shall have a term of 5 years and
expires on June 15, 2015 and contains $90,000 liquidated damages provision
for breach of such exclusivity. As of March 31, 2011 and 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 other members of management) 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:
|
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Domestic sales
|
|
|
|
|
|
|
|
Communication towers
|
|
2,133,866
|
|
$
|
1,504,623
|
|
|
Electricity supply towers
|
|
570,347
|
|
|
465,539
|
|
|
|
|
2,704,213
|
|
|
1,970,162
|
|
|
Export sales
|
|
|
|
|
|
|
|
Communication towers
|
|
712,478
|
|
|
-
|
|
|
Electricity supply towers
|
|
-
|
|
|
160,636
|
|
|
|
|
712,478
|
|
|
160,636
|
|
|
Technical service income
|
|
8,434
|
|
|
-
|
|
|
|
$
|
3,425,125
|
|
$
|
2,130,798
|
|
24.
|
RELATED PARTIES TRANSACTIONS
|
|
|
|
In addition to the transactions and balances as disclosed
elsewhere in these consolidated financial statements, 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, former stockholder and his affiliates
|
Included in other payable, due to former stockholder and
its affiliates are $3,545,146 and $2,789,568 as of March 31, 2011 and
December 31, 2010, respectively. The amounts are unsecured, interest free
and have no fixed term of repayment.
|
F - 24
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
|
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 in our Annual Report on Form
10-K for the year ended December 31, 2010, 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:
-
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;
-
TEC HK refers to TEC Technology Limited, a Hong Kong limited company;
-
TEC Tower refers to Anhui TEC Tower Co., Ltd., a PRC limited company;
-
ZTEC refers to Zhejiang TEC Tower Co., Ltd., a PRC limited company;
-
STT refers to Shuncheng Taida Technology Co., Ltd., a PRC limited
company;
-
Hong Kong refers to the Hong Kong Special Administrative Region of the
Peoples Republic of China;
-
PRC and China refer to the Peoples Republic of China;
-
SEC refers to the Securities and Exchange Commission;
-
Exchange Act refers the Securities Exchange Act of 1934, as amended;
-
Securities Act refers to the Securities Act of 1933, as amended;
-
Renminbi and RMB refer to the legal currency of China; and
-
U.S. dollars, dollars and $ refer to the legal currency of the
United States.
Overview of Our Business
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.
2
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, we have not yet 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.
First Quarter Financial Performance Highlights
The following summarizes certain key financial information for
the first quarter of 2011:
-
Revenue
: Revenue was $3.4 million for the three months ended
March 31, 2011, a decrease of $1.8 million, or 31.6%, from $5.2 million for
the same period last year.
-
Gross Profit and Margin
: Gross profit was $1.0 million for
the three months ended March 31, 2011, a decrease of $0.7 million, or 41.2%,
from $1.7 million for the same period last year. Gross margin was 29.5% for
the three months ended March 31, 2011 as compared to 32% for the same period
last year.
-
Net Income:
Net income was $0.3 million for the three months
ended March 31, 2011, a decrease of $0.3 million, or 50%, from $0.6 million
for the same period of last year.
-
Fully Diluted Net Income Per Share
: Fully diluted net income
per share for the three months ended March 31, 2011 was $0.01, as compared to
$0.04 for the same period last year.
Results of Operations
Comparison of Three Months Ended March 31, 2011 and March
31, 2010
The following table shows key components of our results of
operations during the three months ended March 31, 2011 and 2010, in both
dollars and as a percentage of our total sales.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Dollars
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Revenues
|
|
Revenues
|
$
|
3,425
|
|
|
100%
|
|
$
|
5,177
|
|
|
100%
|
|
Cost of good sold
|
|
2,416
|
|
|
70.5%
|
|
|
3,512
|
|
|
67.8%
|
|
Gross profit
|
|
1,009
|
|
|
29.5%
|
|
|
1,665
|
|
|
32.2%
|
|
Selling and marketing expenses
|
|
(208
|
)
|
|
6.1%
|
|
|
(303
|
)
|
|
5.8%
|
|
General and administrative expenses
|
|
(226
|
)
|
|
6.5%
|
|
|
(274
|
)
|
|
5.3%
|
|
Net income from operations
|
|
576
|
|
|
16.9%
|
|
|
1,087
|
|
|
21.1%
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(246
|
)
|
|
7.2%
|
|
|
(387
|
)
|
|
7.5%
|
|
Net other income (expenses)
|
|
(246
|
)
|
|
7.2%
|
|
|
(387
|
)
|
|
7.5%
|
|
Net income before provision for income taxes
|
|
330
|
|
|
9.7%
|
|
|
701
|
|
|
13.6%
|
|
Provision for income taxes
|
|
(49
|
)
|
|
1.4%
|
|
|
(108
|
)
|
|
2.1%
|
|
Net income
|
|
280
|
|
|
8.3%
|
|
|
593
|
|
|
11.5%
|
|
Foreign currency translation adjustment
|
|
82
|
|
|
2.4%
|
|
|
(65
|
)
|
|
1.3%
|
|
Comprehensive income
|
$
|
363
|
|
|
10.7%
|
|
$
|
528
|
|
|
10.2%
|
|
Revenues
. Our revenues are mainly generated from
sales of our tower products. Our revenues decreased $1.8 million, or 31.6%, to
$3.4 million for the three months ended March 31, 2011 from $5.2 million during
the same period in 2010. For the three month period ended March 31, 2011,
approximately 17% of our revenues were generated from sales to customers in the
energy industry and approximately 83% were generated from sales to
communications industry customers. The period-over-period decrease in revenues
resulted mainly from a decrease of approximately 79% in sales revenue generated by sales of
energy transmission towers compared to the same period in 2010, and a decrease
of approximately 63% in sales revenue generated by sales of communications towers. In the
first quarter of 2011, the price of tower products in China markedly decreased
due to the rising steel prices, competition, decreased demand and other factors.
We also reserved capacity and inventory for anticipated orders from overseas
customers which may require immediate production and delivery. As overseas
orders generally tend to offer higher prices, we made a strategic decision to
forego some domestic orders with comparatively lower prices in the first quarter
2011 and redeployed personnel and resources to maintain our production lines,
train new employees and prepare for the anticipated overseas orders. Because our
targeted overseas customers decided to postpone the production and delivery of
products, our sales and revenues decreased in the three months ended March 31,
2011 as compared to the same period last year. The first quarter has
historically been our slowest quarter, and management anticipates our revenues
to increase in the coming quarters in 2011.
3
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 decreased $1.1 million, or 31.4%, to
$2.4 million in the three months ended March 31, 2011, from $3.5 million during
the same period in 2010. The decrease in cost of goods sold was mainly due to
the decrease in sales volume and revenues. As a percentage of revenues, our cost
of goods sold increased to 70.5% in the three months ended March 31, 2011 from
67.8% for the same period last year mainly because the price of steel, which is
our primary raw material, increased. Some orders produced during this quarter
were priced in the previous fiscal quarter prior to the increase in the cost of
raw materials, so previously priced orders did not reflect the increased cost of
raw materials, compressed our margins and resulted in an increased percentage of
cost of goods sold. We are closely monitoring our pricing policy in an effort to
reduce the risk of inflation and fluctuation of raw material prices.
Gross Profit
. Our gross profit is equal to the
difference between our revenue and our cost of goods sold. Our gross profit
decreased $0.7 million, or 41.2%, to $1.0 million in the three months ended
March 31, 2011, from $1.7 million during the same period in 2010. The decreased
amount was mainly due to the decrease of sales and revenues. Gross profit as a
percentage of revenue (gross margin) was 29.5% and 32.2% for three months ended
March 31, 2011 and 2010, respectively. The decrease in gross margin was mainly
due to the increased price of steel.
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.
Our selling and marketing expenses decreased $0.1 million, or 33.3%, to $0.2
million in the three months ended March 31, 2011, from $0.3 million during the
same period in 2010. Such decrease was largely attributable to reduced
operations in our sales and marketing department.
General and Administrative Expenses
. General and
administrative expenses consist primarily of compensation and benefits to our
general management, finance and administrative staff, professional advisor fees,
bad debts reserve and other expenses incurred in connection with general
operations. Our general and administrative expenses decreased $0.1 million, or
33.3%, to $0.2 million in the three months ended March 31, 2011, from $0.3
million during the same period in 2010. Such decrease was attributable to
decline in scale of operation.
Interest Expense
.
Interest expense
decreased $0.2 million, or 50%, to $0.2 million for the three months ended March
31, 2011, from $0.4 million during the same period in 2010. Such increase was
mainly due to the decrease in our outstanding short term loans.
Income before Income Taxes
. Our income before
income taxes decreased $0.4 million, or 57.1%, to $0.3 million in the three
months ended March 31, 2011, from $0.7 million during the same period in 2010,
as a result of the factors described above.
Income Taxes
. Our income tax provisions decreased
$0.06 million, or 60%, to $0.05 million in the three months ended March 31,
2011, from $0.1 million during the same period in 2010, mainly due to decrease
in taxable income.
Net Income
. We generated a net income of $0.3
million in the three months ended March 31, 2011, a decrease of $0.3 million, or
50%, from $0.6 million during the same period in 2010, as a cumulative effect of
all factors discussed above.
4
Liquidity and Capital Resources
As of March 31, 2011, we had cash and cash equivalents of
approximately $2.9 million, primarily consisting of cash on hand and demand
deposits. The following table provides detailed information about our net cash
flow for the three months ended March 31, 2011 and 2010.
Cash Flow
(All amounts in thousands of U.S. dollars)
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by operating activities
|
$
|
3,732
|
|
$
|
3,775
|
|
Net cash (used in) investing activities
|
|
(2,378
|
)
|
|
(49
|
)
|
Net cash (used in) financing activities
|
|
(1,081
|
)
|
|
(741
|
)
|
Effects of exchange rate change in cash
|
|
141
|
|
|
(66
|
)
|
Net increase in cash and cash equivalents
|
|
415
|
|
|
2,919
|
|
Cash and cash equivalents at beginning of the period
|
|
2,527
|
|
|
161
|
|
Cash and cash equivalent at end of the
period
|
$
|
2,942
|
|
$
|
3,080
|
|
Operating Activities
Net cash provided by operating activities was $3.7 million
for the three months ended March 31, 2011, as compared to $3.8 million for the
same period in 2010. The slight decrease in net cash provided by operating activities
was primarily attributable to the outflow associated with increase in deposits and prepaid expenses and inventory levels which
more than offset the cash inflow associated with the increase in other payable and
decrease in restricted cash in the first quarter of 2011 as compared
to the same period in 2010. We increased our inventory reserve level in
anticipation of the increased orders in the coming quarters. In addition, our
strategic decision to reduce our production this quarter by turning down
comparatively lower margin domestic orders also contributed to the increased
inventory.
Investing Activities
Net cash used in investing activities for the three months
ended March 31, 2011 was $2.4 million, as compared to $0.05 million net cash
used in investing activities during the same period in 2010. We spent
approximately $2.2 million as installment payment for land use right in the
first quarter of 2011. We also invested in construction of our Anhui
administration office and upgraded our production facilities.
Financing Activities
Net cash used in financing activities for the three months
ended March 31, 2011 was $1.1 million, as compared to $0.7 million for the same
period in 2010. The increase in net cash used in financing activities was mainly
attributable to a $0.4 million increase in repayment of short term borrowings.
Loan Commitments
As of March 31, 2011, we did not hold any long-term loans. Our
short-term bank loans, totaling $11.9 million, are as follows:
|
|
Amount
|
|
|
Interest
|
|
|
|
|
|
|
|
Bank
|
|
(in millions)*
|
|
|
Rate
|
|
|
Maturity Date
|
|
|
Duration
|
|
Industrial and Commercial Bank, Longshou
Branch
|
$
|
0.3
|
|
|
6.06%
|
|
|
March 22, 2012
|
|
|
12 months
|
|
Industrial and Commercial Bank, Longshou Branch
|
|
0.4
|
|
|
6.16%
|
|
|
September 16, 2011
|
|
|
6 months
|
|
Industrial and Commercial Bank, Longshou
Branch
|
|
0.8
|
|
|
6.16%
|
|
|
September 16, 2011
|
|
|
6 months
|
|
Industrial and Commercial Bank, Longshou Branch
|
|
0.3
|
|
|
6.67%
|
|
|
March 21, 2012
|
|
|
12 months
|
|
Industrial and Commercial Bank, Longshou
Branch
|
|
0.9
|
|
|
6.67%
|
|
|
March 23, 2012
|
|
|
12 months
|
|
Industrial and Commercial Bank, Longshou Branch
|
|
1.2
|
|
|
5.10%
|
|
|
June 5, 2011
|
|
|
6 months
|
|
Huishang Bank, Xuancheng Branch
|
|
2.0
|
|
|
7.88%
|
|
|
February 16, 2012
|
|
|
12 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
|
$
|
11.9
|
|
|
|
|
|
|
|
|
|
|
* Calculated based on the exchange rate of $1 = RMB 6.57
5
Capital Expenditures
Our capital expenditures for the three months ended March 31,
2011 and 2010 were $2.4 million and $0.05 million, respectively, representing
the total amount of investment activities.
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 to 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.
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.
We issued a warrant to CCG Investor Relations Partners LLC, or
CCG, our investor relations firm, for the purchase of 80,000 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. The warrant expires on June 15, 2015 and has fully vested. The letter
agreement contains a $90,000 liquidated damage provision for breach of
exclusivity.
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 the slowest
quarter because fewer projects are undertaken during and around the Chinese
spring festival.
6
Critical Accounting Policies
See Item 7, Managements Discussion and Analysis of Results of
Operations and Financial Condition in the Companys Annual Report on Form 10-K
for the fiscal year ended December 31, 2010, for a discussion of the Company's
critical accounting policies.
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.
7
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.
8
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
|
Not Applicable.
ITEM 4.
|
CONTROLS AND PROCEDURES.
|
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer
to controls and other procedures designed to ensure that information required to
be disclosed in the reports we file or submit under the Securities Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As required by Rule 13a-15(e), our management has carried out
an evaluation, with the participation and under the supervision of our Chief
Executive Officer, Mr. Chun Lu, and Chief Financial Officer, Mr. Yuhua Yang, of
the effectiveness of the design and operation of our disclosure controls and
procedures, as of March 31, 2011. Based upon, and as of the date of this
evaluation, Messrs. Lu and Yang, determined that, because of the material
weaknesses described in Item 9A Controls and Procedures of our Annual Report
on Form 10-K for the year ended December 31, 2010, which we are still in the
process of remediating as of March 31, 2011, our disclosure controls and
procedures were not effective. Investors are directed to Item 9A of our Annual
Report on Form 10-K for the year ended December 31, 2010 for the description of
these weaknesses.
Changes in Internal Control over Financial Reporting
We regularly review our system of internal control over
financial reporting and make changes to our processes and systems to improve
controls and increase efficiency, while ensuring that we maintain an effective
internal control environment. Changes may include such activities as
implementing new, more efficient systems, consolidating activities, and
migrating processes.
During its evaluation of the effectiveness of internal control
over financial reporting as of December 31, 2010, our management concluded that
we still need to hire qualified accounting personnel and enhance the
supervision, monitoring and review of the 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. We are 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, we plan to establish an audit
committee and appoint qualified committee members to strengthen our internal
control over financial reporting.
Other than the foregoing changes, there were no changes in our
internal controls over financial reporting during the first quarter of fiscal
2011 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1.
|
LEGAL PROCEEDINGS.
|
From time to time, we may become involved in various lawsuits
and legal proceedings, which arise, in the ordinary course of business. 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.
Not Applicable.
9
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS.
|
None.
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
None.
ITEM 4.
|
(REMOVED AND RESERVED).
|
ITEM 5.
|
OTHER INFORMATION.
|
We have no information to disclose that was required to be in a
report on Form 8-K during the period covered by this report, but was not
reported. There have been no material changes to the procedures by which
security holders may recommend nominees to our board of directors.
The following exhibits are filed as part of this report or
incorporated by reference:
10
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: May 20, 2011
|
TEC TECHNOLOGY, INC.
|
|
|
|
|
By:
|
/s/ Chun
Lu
|
|
|
Chun Lu, Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
|
By:
|
/s/ Yuhua
Yang
|
|
|
Yuhua Yang, Chief Financial Officer
|
|
|
(Principal Financial Officer and
Principal
|
|
|
Accounting Officer)
|
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