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: June 30, 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
|
(I.R.S. Employer Identification No.)
|
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[ x ] No[ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and 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 August 15, 2011 is as follows:
Class of Securities
|
Shares Outstanding
|
Common Stock, $0.001 par value
|
30,181,552
|
|
TEC TECHNOLOGY, INC.
|
|
Quarterly Report on Form 10-Q
|
Three and
Six Months Ended June 30, 2011
|
i
PART I
FINANCIAL INFORMATION
ITEM 1.
|
FINANCIAL STATEMENTS.
|
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
|
CONSOLIDATED QUARTERLY FINANCIAL STATEMENTS
(UNAUDITED)
|
JUNE 30, 2011 AND 2010
|
1
TEC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,698,412
|
|
$
|
2,526,710
|
|
Restricted cash
|
|
109,466
|
|
|
1,164,598
|
|
Accounts receivable, net of allowance
for doubtful accounts
|
|
16,456,571
|
|
|
14,356,352
|
|
Inventory
|
|
6,923,196
|
|
|
5,235,074
|
|
Deposits and prepaid expenses
|
|
3,085,776
|
|
|
5,439,579
|
|
Other receivables
|
|
2,769,207
|
|
|
1,626,039
|
|
Taxes recoverable
|
|
1,294
|
|
|
2,389
|
|
Total current assets
|
|
32,043,922
|
|
|
30,350,741
|
|
Property and equipment
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation
|
|
3,818,984
|
|
|
3,790,765
|
|
Land use rights, net of accumulated amortization
|
|
7,990,892
|
|
|
2,071,771
|
|
Construction in progress
|
|
935,947
|
|
|
473,355
|
|
|
|
12,745,823
|
|
|
6,335,891
|
|
Total assets
|
$
|
44,789,745
|
|
$
|
36,686,632
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Accounts payable
|
$
|
7,713,005
|
|
$
|
8,313,633
|
|
Other payables and accrued expenses
|
|
5,253,965
|
|
|
3,494,358
|
|
Taxes payables
|
|
91,026
|
|
|
44,608
|
|
Customer deposits
|
|
33,339
|
|
|
80,331
|
|
Short term borrowings
|
|
19,136,662
|
|
|
12,938,582
|
|
|
|
32,227,997
|
|
|
24,871,512
|
|
Commitments and contingencies
|
|
-
|
|
|
-
|
|
Stockholders' equity
|
|
|
|
|
|
|
Preferred stock: 10,000,000 authorized,
none issued and outstanding $0.001 par value
|
|
|
|
|
|
|
Common stock: 300,000,000 authorized $0.001 par value
30,181,552 shares issued and outstanding
June 30, 2011 and December 31, 2010, respectively
|
$
|
30,182
|
|
$
|
30,182
|
|
Additional paid in capital
|
|
1,105,454
|
|
|
1,024,891
|
|
Retained earnings
|
|
10,443,848
|
|
|
10,077,006
|
|
Accumulated other comprehensive income
|
|
982,264
|
|
|
683,041
|
|
Total stockholders' equity
|
|
12,561,748
|
|
|
11,815,120
|
|
Total liabilities and stockholders' equity
|
$
|
44,789,745
|
|
$
|
36,686,632
|
|
See accompanying notes of these consolidated financial statements
F - 1
TEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
Three months
|
|
|
Three months
|
|
|
Six months
|
|
|
Six months
|
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues
|
$
|
4,770,019
|
|
$
|
9,427,220
|
|
$
|
8,195,144
|
|
$
|
14,606,979
|
|
Cost of goods sold
|
|
3,368,433
|
|
|
6,443,918
|
|
|
5,784,261
|
|
|
9,957,895
|
|
Gross profit
|
|
1,401,586
|
|
|
2,983,302
|
|
|
2,410,883
|
|
|
4,649,084
|
|
Selling and marketing expenses
|
|
(418,562
|
)
|
|
(486,367
|
)
|
|
(626,369
|
)
|
|
(789,867
|
)
|
General and administrative expenses
|
|
(632,421
|
)
|
|
(363,402
|
)
|
|
(893,192
|
)
|
|
(644,948
|
)
|
Net income from operations
|
|
350,603
|
|
|
2,133,533
|
|
|
891,322
|
|
|
3,214,269
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant
|
|
216,987
|
|
|
179,417
|
|
|
216,987
|
|
|
179,417
|
|
Other income
|
|
-
|
|
|
13,694
|
|
|
|
|
|
13,695
|
|
Interest expense
|
|
(414,264
|
)
|
|
(292,217
|
)
|
|
(660,177
|
)
|
|
(679,560
|
)
|
Net other income (expenses)
|
|
(197,277
|
)
|
|
(99,106
|
)
|
|
(443,190
|
)
|
|
(486,448
|
)
|
Net income before provision for income taxes
|
|
153,326
|
|
|
2,034,427
|
|
|
448,132
|
|
|
2,727,821
|
|
Provision for income taxes
|
|
(31,802
|
)
|
|
(209,868
|
)
|
|
(81,290
|
)
|
|
(386,861
|
)
|
Net income
|
|
121,524
|
|
|
1,824,559
|
|
|
366,842
|
|
|
2,340,960
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
217,077
|
|
|
20,048
|
|
|
299,163
|
|
|
40,986
|
|
Comprehensive income
|
$
|
338,601
|
|
$
|
1,844,607
|
|
$
|
666,005
|
|
$
|
2,381,946
|
|
Weighted average numbers of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
30,181,882
|
|
|
22,856,798
|
|
|
30,181,882
|
|
|
22,856,798
|
|
Diluted
|
|
30,181,882
|
|
|
22,859,798
|
|
|
30,181,882
|
|
|
22,856,798
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.01
|
|
$
|
0.08
|
|
$
|
0.01
|
|
$
|
0.10
|
|
Diluted
|
$
|
0.01
|
|
$
|
0.08
|
|
$
|
0.01
|
|
$
|
0.10
|
|
See accompanying notes of these consolidated financial statements
F - 2
TEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six months
|
|
|
Six months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income for the period
|
$
|
366,842
|
|
$
|
2,340,960
|
|
Adjustments to reconcile net
income to net cash (used in) provided by operating activities:
|
|
|
|
|
Depreciation
|
|
167,769
|
|
|
129,824
|
|
Loss on disposal
of property and equipment
|
|
534
|
|
|
-
|
|
Amortization of land use rights
|
|
21,993
|
|
|
21,127
|
|
Stock based compensation
|
|
93,800
|
|
|
-
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
Decrease in restricted
cash
|
|
1,055,132
|
|
|
-
|
|
Increase in inventory
|
|
(1,688,122
|
)
|
|
(2,716,346
|
)
|
(Increase)/decrease
in deposits and prepaid expenses
|
|
(1,275,095
|
)
|
|
635,351
|
|
Increase in accounts receivable
|
|
(2,100,219
|
)
|
|
(8,703,430
|
)
|
(Increase) decrease
in other receivables
|
|
(2,104,730
|
)
|
|
2,119,014
|
|
Decrease in taxes recoverable
|
|
1,095
|
|
|
4,889
|
|
Increase/(decrease)
in taxes payable
|
|
46,418
|
|
|
(919,366
|
)
|
(Decrease) increase in accounts
payable
|
|
(600,628
|
)
|
|
7,410,164
|
|
Decrease in customer
deposits
|
|
(46,992
|
)
|
|
(51,711
|
)
|
Increase in other payables and accrued
expenses
|
|
1,759,607
|
|
|
1,885,976
|
|
Net cash (used in) provided by operating activities
|
|
(4,302,596
|
)
|
|
2,156,452
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchases of property
and equipment
|
|
(91,561
|
)
|
|
(455,446
|
)
|
Proceeds from sale of property and
equipment
|
|
5,345
|
|
|
|
|
Payment for construction
in progress
|
|
(462,592
|
)
|
|
-
|
|
Payment for purchase of land use
rights
|
|
(2,188,275
|
)
|
|
-
|
|
Net cash used in investing activities
|
|
(2,737,083
|
)
|
|
(455,446
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
Common stock issued
|
|
-
|
|
|
10,987
|
|
Additional paid in capital raised
|
|
-
|
|
|
10,521
|
|
Proceeds from short term
borrowings
|
|
7,000,447
|
|
|
|
|
Repayment of short term borrowings
|
|
(1,098,370
|
)
|
|
(176,384
|
)
|
Net cash provided by (used in) financing activities
|
|
5,902,077
|
|
|
(154,876
|
)
|
Effects on exchange rate changes on cash
|
|
1,309,304
|
|
|
789
|
|
Increase in cash and cash equivalents
|
|
171,702
|
|
|
1,546,919
|
|
Cash and cash equivalents, beginning of period
|
|
2,526,710
|
|
|
161,133
|
|
Cash and cash equivalents, end of period
|
|
2,698,412
|
|
|
1,708,052
|
|
Supplementary disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
897,620
|
|
|
679,560
|
|
Cash paid for income taxes
|
|
2,196,414
|
|
|
386,861
|
|
Non cash financing activities
|
|
|
|
|
|
|
Issuance of warrant
|
|
94,120
|
|
|
-
|
|
Capital contributed by directors through
assumption of debt
|
|
80,563
|
|
|
-
|
|
Non cash investing activities
|
|
|
|
|
|
|
Transfer from deposits and prepaid expenses
to acquire land use rights
|
|
|
|
|
|
|
- Acquisition of land use rights
|
|
3,628,868
|
|
|
-
|
|
See accompanying notes of these consolidated financial statements
F - 3
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS ORGANIZATION
|
|
|
|
|
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.
|
|
|
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
|
2.1
|
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 subsidiary
|
Place of
incorporation
|
Date of
incorporation
|
Percentage
of interest
|
Principal activity
|
TEC Technology Limited
|
Hong Kong
|
November 11, 2009
|
100% directly
|
Investment holding
|
Anhui TEC Tower Co ., Limited
|
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 ., Limited
|
People's Republic of China
|
December 7, 2009
|
90% directly
|
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., Limited
|
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 - 5
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 our 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, TECTbecame 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 our common stock currently owned by Mr. Wong for an
aggregate exercise price of $1,000,000. Mr. Lu may exercise this option,
in whole but not in part, during the period commencing on the 365
th
day following of the date of the option agreement and ending on
the second anniversary of the date thereof.
|
|
|
|
|
|
Prior to the acquisition of ATEC by TECT, neither TECT
nor HGHN has active business operatons. 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 reponsibility 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 $226,765 and $149,852 for the three months June 30, 2011
and 2010, respectively. Shipping and handling costs amounted to $355,866
and $289,572 for the six months ended June 30, 2011 and June 30, 2010.
|
|
|
|
|
2.8
|
ADVERTISING
|
|
|
|
|
|
Advertising costs are expensed as incurred and totaled
$0 and $1,539 for the three months June 30, 2011 and 2010, respectively.
Advertising costs are expensed as incurred and totaled $0 and $2,582 for
the six months June 30, 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 $0 as incurred for the three months ended June 31, 2011
and 2010 and for the six months ended June 30, 2011and 2010, respectively.The
costs for development of new products and substantial enhancements to
existing products are expensed as incurred until technological feasibility
has been established, at which time any additional costs would be capitalized.
|
|
|
|
|
2.10
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
Cash and cash equivalents comprise cash in bank and
on hand, demand deposits with banks and other financial institutions,
and short-term, highly liquid investments which are readily convertible
into known amounts of cash and which are subject to an insignificant risk
of changes in value, and have a short maturity of generally within three
months when acquired.
|
F - 7
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.11
|
FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE
INCOME
|
|
|
|
|
|
The reporting currency of the Company is United States
Dollars ($). 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 $982,264 as of June 30, 2011 and
$683,041 as of December 31, 2010. The balance sheet amounts with the exception
of equity as of June 30, 2011 and December 31, 2010 were translated at
RMB6.46 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 six
months ended June 30, 2011 and June 30, 2010 were RMB6.55 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 statements 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 is 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 INTANGBLE 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 June 30, 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 he composition of accounts
receivable and analyzes historical bad debts, customers 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 June 30, 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 June 30, 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
0% of sales income for product warranties for the six months ended June
30, 2011 and June 30, 2010. The product warranty reserve was $0 as of
June 30, 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 June 30, 2011 and December 31, 2010 amounted to $2,659,363
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
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
47.21%
|
|
|
41.18%
|
|
|
53.55%
|
|
|
37.71%
|
|
|
Customer B
|
|
15.73%
|
|
|
-
|
|
|
15.73%
|
|
|
-
|
|
|
Customer C
|
|
27.04%
|
|
|
-
|
|
|
15.67%
|
|
|
-
|
|
|
Customer D
|
|
-
|
|
|
-
|
|
|
8.41%
|
|
|
-
|
|
|
Customer E
|
|
9.46%
|
|
|
-
|
|
|
5.48%
|
|
|
-
|
|
|
Customer F
|
|
0.51%
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Customer G
|
|
-
|
|
|
38.60%
|
|
|
-
|
|
|
24.85%
|
|
|
Customer H
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10.33%
|
|
|
Customer I
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10.22%
|
|
|
Customer J
|
|
-
|
|
|
12.44%
|
|
|
-
|
|
|
8.01%
|
|
|
Customer K
|
|
-
|
|
|
2.91%
|
|
|
-
|
|
|
-
|
|
|
Customer L
|
|
-
|
|
|
2.35%
|
|
|
-
|
|
|
-
|
|
|
|
|
99.95%
|
|
|
97.48%
|
|
|
98.84%
|
|
|
91.12%
|
|
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:
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
26.91%
|
|
|
31.46%
|
|
|
Customer B
|
|
13.38%
|
|
|
9.89%
|
|
|
Customer C
|
|
10.30%
|
|
|
-
|
|
|
Customer D
|
|
9.79%
|
|
|
16.73%
|
|
|
Customer E
|
|
9.69%
|
|
|
12.57%
|
|
|
Customer F
|
|
-
|
|
|
7.82%
|
|
|
|
|
70.07%
|
|
|
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 June 30, 2011 and 2010, basic
and diluted earnings per share amount to $0.01 and $0.04, respectively.
For the six months ended June 30, 2011 and 2010, basic and diluted earnings
per share amount to $0.01 and $0.04, respectively.
|
|
|
|
F - 14
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 June 30, 2011 or December 31, 2010, nor gains
or losses are reported in the statement of income and 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 June 30, 2011 or June 30, 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 - 15
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 - 15
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 six months ended June 30, 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 six months ended June 30, 2011 and 2010.
|
|
|
|
The following table reconciles the U.S statutory rates
to the companys effective tax rate for the June 30, 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
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
Income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HGHN - US corporate tax
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
TECT - Hong Kong profits tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
ATEC - China EIT
|
|
31,802
|
|
|
209,868
|
|
|
81,290
|
|
|
386,861
|
|
|
ZTEC and STT - China EIT
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Deferred tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
31,802
|
|
$
|
209,868
|
|
$
|
81,290
|
|
$
|
386,861
|
|
F - 17
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.
|
CASH AND CASH EQUIVALENTS
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Cash and bank balances
|
$
|
2,698,412
|
|
$
|
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 $109,466 and $1,164,598 as of June 30, 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 and six months ended June 30, 2011and 2010. Bad debts
written off for the three months and six months ended June 30, 2011 and
2010 are $0.
|
|
|
|
Aging of accounts receivable is as follows:
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
within 3 months
|
$
|
10,636,788
|
|
$
|
13,658,262
|
|
|
over 3 months and within 6 months
|
|
3,897,660
|
|
|
356,438
|
|
|
over 6 months and within 1 year
|
|
1,909,187
|
|
|
343,298
|
|
|
over 1 year
|
|
100,936
|
|
|
68,354
|
|
|
|
|
16,544,571
|
|
|
14,426,352
|
|
|
Less: Allowance for doubtful accounts
|
|
(70,000
|
)
|
|
(70,000
|
)
|
|
|
$
|
16,474,571
|
|
$
|
14,356,352
|
|
Accounts receivable includes the amounts
of $5,557,348 (12.31.2010: $3,151,959) that were factored to the Industrial
and Commercial Bank, PRC and China Construction Bank, PRC for collection.
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
1,788,574
|
|
$
|
2,590,642
|
|
|
Consumables
|
|
52,678
|
|
|
-
|
|
|
Work in progress
|
|
5,081,944
|
|
|
2,644,432
|
|
|
|
$
|
6,923,196
|
|
$
|
5,235,074
|
|
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.
|
DEPOSITS AND PREPAID EXPENSES
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Guarantee and utility deposits
|
$
|
961,562
|
|
$
|
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
|
|
332,523
|
|
|
91,091
|
|
|
Advances to suppliers and services providers
|
|
710,935
|
|
|
874,436
|
|
|
Prepayment for purchase of property and equipment
|
|
744,885
|
|
|
2,269
|
|
|
Advances to logistic service providers
|
|
335,871
|
|
|
14,715
|
|
|
|
$
|
3,085,776
|
|
$
|
5,439,579
|
|
|
Guarantee deposits are provided to financial institutions
in return for the 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,
|
|
|
10.
|
OTHER RECEIVABLES
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Due from employees
|
$
|
1,366,369
|
|
$
|
963,416
|
|
|
Due from third parties
|
|
1,402,838
|
|
|
661,156
|
|
|
Others
|
|
-
|
|
|
1,467
|
|
|
|
$
|
2,769,207
|
|
$
|
1,626,039
|
|
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. Due from third parties are unsecured
advances, interest free and without fixed terms of repayment and are for specific
business purposes.
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
VAT recoverable
|
$
|
1,294
|
|
$
|
2,389
|
|
F - 19
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12.
|
PROPERTY AND EQUIPMENT
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Buildings
|
$
|
2,727,010
|
|
$
|
2,584,596
|
|
|
Plant and machinery
|
|
1,271,792
|
|
|
1,351,729
|
|
|
Furniture, fixtures and office equipment
|
|
309,805
|
|
|
123,716
|
|
|
Motor vehicles
|
|
257,376
|
|
|
294,812
|
|
|
|
|
4,565,983
|
|
|
4,354,853
|
|
|
Less: Accumulated depreciation
|
|
(746,999
|
)
|
|
(564,088
|
)
|
|
Net book value
|
$
|
3,818,984
|
|
$
|
3,790,765
|
|
Depreciation expense was $87,718 and
$69,326 for the three months ended June 30, 2011 and 2010, respectively. Depreciation
expense was $167,769 and $129,824 for the six months ended June 30, 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.
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Cost
|
$
|
8,122,093
|
|
$
|
2,178,255
|
|
|
Less: Accumulated amortization
|
|
(131,201
|
)
|
|
(106,484
|
)
|
|
Net book value
|
$
|
7,990,892
|
|
$
|
2,071,771
|
|
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.
Amortization expense was $10,932 and
$10,564 for the three months ended June 30, 2011 and 2010, respectively. Amortization
expense was $10,932 and $10,564 for the six months ended June 30, 2011 and 2010,
respectively
14.
|
CONSTRUCTION IN PROGRESS
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
Construction of office building and workshops
|
$
|
935,947
|
|
$
|
473,355
|
|
F - 20
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15.
|
OTHER PAYABLES AND ACCRUED EXPENSES
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Due to former sole stockholder and his affiliates
|
$
|
3,249,273
|
|
$
|
2,789,568
|
|
|
Due to third parties
|
|
1,701,897
|
|
|
603,824
|
|
|
Due to employees
|
|
198,104
|
|
|
8,359
|
|
|
Accrued expenses
|
|
104,691
|
|
|
92,607
|
|
|
|
$
|
5,253,965
|
|
$
|
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.
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Enterprise income tax payable
|
$
|
31,921
|
|
$
|
42,557
|
|
|
VAT payable
|
|
52,800
|
|
|
-
|
|
|
Individual income tax payable
|
|
6,305
|
|
|
2,051
|
|
|
|
$
|
91,026
|
|
$
|
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
|
|
|
June 30, 2011
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial and Commercial Bank,
|
|
|
|
|
From September 16,
|
|
|
|
|
|
|
|
|
|
|
Longshou Branch, PRC
|
|
6.06% - 6.66%
|
|
|
2011 to March 23, 2012
|
|
$
|
3,937,115
|
|
*
|
|
$
|
3,864,182
|
|
|
China Merchant Bank, Heifei branch, PRC
|
|
6.94%
|
|
|
October 29, 2011
|
|
|
1,547,000
|
|
+
|
|
|
1,512,400
|
|
|
China Everbright Bank, Heifei branch, PRC
|
|
5.56%
|
|
|
November 22, 2011
|
|
|
4,641,000
|
|
|
|
|
4,537,200
|
|
|
Huishang Bank, Xuancheng branch, PRC
|
|
7.88%
|
|
|
February 16, 2011
|
|
|
2,011,100
|
|
*
|
|
|
3,024,800
|
|
|
Huishang Bank, Xuancheng branch, PRC
|
|
8.20%
|
|
|
April 11, 2012
|
|
|
4,641,000
|
|
*
|
|
|
-
|
|
|
China Construction Bank, Jingde branch, PRC
|
|
5.85%
|
|
|
November 3, 2011
|
|
|
2,359,447
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
19,136,662
|
|
|
|
$
|
12,938,582
|
|
|
*
|
secured by land use rights
|
|
+
|
secured by third partys guarantee
|
F - 21
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 June 30, 2011 and December 31, 2010, customer deposits amounted
to $33,339 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 June 30, 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 June 30, 2011 and 2010 was $20,183 and $3,225, respectively. Total
lease expenses for the six months ended June 30, 2011 and 2010 was $23,633
and $5,343, respectively.
|
|
|
|
|
The future minimum lease payments as of June
30, 2011 and December 31, 2010 were $0.
|
|
|
|
|
From time to time and in the ordinary course
of business, the Company may be subject to various claims, charges, and
litigation. As of June 30, 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 are listed below:
|
|
|
|
June 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Liquidated damages for
- investment relation service with CCG
|
$
|
90,000
|
|
$
|
90,000
|
|
F - 22
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
th
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 $93,800
and recognized $93,800 in stock based compensation expense for the six
months ended June 30, 2011. As of June 30, 2011 and December 31, 2010,
the prepaid compensation expense amount was $0 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 June 30, 2011
|
|
80,000
|
|
$
|
2.00
|
|
|
|
|
|
Warrants exercised
|
|
-
|
|
|
2.00
|
|
|
|
|
|
Warrants expired
|
|
-
|
|
|
2.00
|
|
|
|
|
|
Total outstanding as of June 30, 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 June
30, 2011 and 2010; the amounts were $39,628 and $0, respectively. The share
based compensation expense for the six months ended June 30, 2011 and 2010;
the amounts were $93,800 and $0, 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 June 30, 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
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication towers
|
$
|
2,702,957
|
|
$
|
3,935,310
|
|
$
|
4,837,967
|
|
$
|
7,077,759
|
|
|
Electricity supply towers
|
|
2,064,890
|
|
|
5,150,696
|
|
|
2,629,828
|
|
|
6,925,361
|
|
|
|
|
4,767,847
|
|
|
9,086,006
|
|
|
7,467,795
|
|
|
14,003,120
|
|
|
Export sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication towers
|
|
-
|
|
|
223,727
|
|
|
716,702
|
|
|
236,098
|
|
|
Electricity supply towers
|
|
2,053
|
|
|
117,487
|
|
|
2,044
|
|
|
367,761
|
|
|
|
|
2,053
|
|
|
341,214
|
|
|
718,746
|
|
|
603,859
|
|
|
Technical service income
|
|
119
|
|
|
-
|
|
|
8,603
|
|
|
-
|
|
|
|
$
|
4,770,019
|
|
$
|
9,427,220
|
|
$
|
8,195,144
|
|
$
|
14,606,979
|
|
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, the Company entered into and closed
a share purchase agreement with Mr. Michael Anthony, the CEO of the Company
at the time, and certain accredited purchasers signatory thereto, pursuant
to which the Company sold an aggregate of 10,880,000 shares of common
stock of the Company for a total of $225,000. Simultaneously with and
as a condition to the closing of the share purchase agreement, the Company
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 $3,429,273 and
$2,789,568 as of June 30, 2011 and December 31, 2010, respectively. The
amounts are unsecured, interest free and has 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.
Second Quarter Financial Performance Highlights
The following summarizes certain key financial information for
the second quarter of 2011:
-
Revenues
: Revenues were $4.77 million for the three months
ended June 30, 2011, a decrease of $4.66 million, or 49.4%, from $9.43 million
for the same period last year.
-
Gross Profit and Margin
: Gross profit was $1.40 million for
the three months ended June 30, 2011, a decrease of $1.58 million, or 53.0%,
from $2.98 million for the same period last year. Gross margin was 29.38% for
the three months ended June 30, 2011, as compared to 31.65% for the same
period last year.
-
Net Income:
Net income was $121,524 for the three months
ended June 30, 2011, a decrease of $1.70 million, or 93%, from $1.82 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 June 30, 2011 was $0.01, as compared to
$0.08 for the same period last year.
Results of Operations
Comparison of Three Months Ended June 30, 2011 and June
30, 2010
The following table shows key components of our results of
operations during the three months ended June 30, 2011 and 2010, in both dollars
and as a percentage of our revenues.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Dollars
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Revenues
|
|
Revenues
|
$
|
4,770,019
|
|
|
100%
|
|
$
|
9,427,220
|
|
|
100%
|
|
Cost of good sold
|
|
3,368,433
|
|
|
70.62%
|
|
|
6,443,918
|
|
|
68.35%
|
|
Gross profit
|
|
1,401,586
|
|
|
29.38%
|
|
|
2,983,302
|
|
|
31.65%
|
|
Selling and marketing expenses
|
|
(418,562
|
)
|
|
(8.77%
|
)
|
|
(486,367
|
)
|
|
(5.16)%
|
|
General and administrative expenses
|
|
(632,421
|
)
|
|
(13.26%
|
)
|
|
(363,402
|
)
|
|
(3.85)%
|
|
Net income from operations
|
|
350,603
|
|
|
7.35%
|
|
|
2,133,533
|
|
|
22.63%
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant
|
|
216,987
|
|
|
4.55%
|
|
|
179,417
|
|
|
1.90%
|
|
Other income
|
|
-
|
|
|
-
|
|
|
13,694
|
|
|
0.15%
|
|
Interest expense
|
|
(414,264
|
)
|
|
(8.68%
|
)
|
|
(292,217
|
)
|
|
(3.10)%
|
|
Net other income (expenses)
|
|
(197,277
|
)
|
|
(4.14%
|
)
|
|
(99,106
|
)
|
|
(1.05)%
|
|
Net income before provision for income taxes
|
|
153,326
|
|
|
3.21%
|
|
|
2,034,427
|
|
|
21.58%
|
|
Provision for income taxes
|
|
(31,802
|
)
|
|
(0.67%
|
)
|
|
(209,868
|
)
|
|
(2.23)%
|
|
Net income
|
|
121,524
|
|
|
2.55%
|
|
|
1,824,559
|
|
|
19.35%
|
|
Foreign currency translation gain
|
|
217,077
|
|
|
4.55%
|
|
|
20,048
|
|
|
0.21%
|
|
Comprehensive income
|
$
|
338,601
|
|
|
7.10%
|
|
$
|
1,844,607
|
|
|
19.57%
|
|
Revenues
. Our revenues are mainly generated from
sales of our tower products. Our revenues decreased $4.66 million, or 49.4%, to
$4.77 million for the three months ended June 30, 2011 from $9.43 million during
the same period in 2010. For the three month period ended June 30, 2011,
approximately 43.3% of our revenues were generated from sales to customers in
the energy industry and approximately 56.7% were generated from sales to
communications industry customers. The period-over-period decrease in revenues resulted mainly from a
decrease of approximately 60.8% in sales revenue generated by sales of energy
transmission towers compared to the same period in 2010, and a decrease of
approximately 35.0% in sales revenue generated by sales of communications
towers. In the second 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 second 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 June 30, 2011 as compared to the same period
last year. We expect to start generating revenues from our overseas orders in
the third quarter of 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 $3.07 million, or
47.73%, to $3.37 million in the three months ended June 30, 2011, from $6.44
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 70.62% in the three months ended
June 30, 2011 from 68.35% for the same period last year, mainly because of the
continuing increase of the price of steel, which is our primary raw material.
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 and gross margin
. Our gross profit
is equal to the difference between our revenue and our cost of goods sold. Our
gross profit decreased $1.58 million, or 53.02%, to $1.4 million in the three
months ended June 30, 2011, from $2.98 million during the same period in 2010.
The decrease was mainly due to the decrease of sales and revenues. Gross profit
as a percentage of revenue (gross margin) was 29.38% and 31.65% for three months
ended June 30, 2011 and 2010, respectively. The decrease in gross margin was
mainly due to the increased price of steel as discussed above.
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 $67,805, or 13.94%, to $418,562 in
the three months ended June 30, 2011, from $486,367 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 increased $269,019, or
74.03%, to $632,421 in the three months ended June 30, 2011, from $363,402
during the same period in 2010. Such increase was mainly attributable to
expenses associated with being a public company.
Interest expense
.
Interest expense
increase $122,047, or 41.76%, to $414,264 for the three months ended June 30,
2011, from $292,217 during the same period in 2010. Such increase was mainly due
to the increase in our outstanding short term loans and annual interest
rate.
Income before income taxes
. Our income before
income taxes decreased $1.88 million, or 92.46%, to $153,326 in the three months
ended June 30, 2011, from $2.03 million during the same period in 2010, as a
result of the factors described above.
Provision for income taxes
. Our income tax
provisions decreased $178,066, or 84.84%, to $31,802 in the three months ended
June 30, 2011, from $209,868 during the same period in 2010, mainly due to
decrease in taxable income.
Net income
. We generated a net income of $121,524
in the three months ended June 30, 2011, a decrease of $1.70 million, or 93.33%,
from $1.82 million during the same period in 2010, as a cumulative effect of all
factors discussed above.
Comparison of Six Months Ended June 30, 2011 and June 30,
2010
The following table shows key components of our results of
operations during the six months ended June 30, 2011 and 2010, in both dollars
and as a percentage of our revenues.
4
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2011
|
|
|
June 30, 2010
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Dollars
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Revenues
|
|
Revenues
|
$
|
8,195,144
|
|
|
100%
|
|
$
|
14,606,979
|
|
|
100%
|
|
Cost of good sold
|
|
5,784,261
|
|
|
70.58%
|
|
|
9,957,895
|
|
|
68.17%
|
|
Gross profit
|
|
2,410,883
|
|
|
29.42%
|
|
|
4,649,084
|
|
|
31.83%
|
|
Selling and marketing expenses
|
|
(626,369
|
)
|
|
(7.64%
|
)
|
|
(789,867
|
)
|
|
(5.41)%
|
|
General and administrative expenses
|
|
(893,192
|
)
|
|
(10.90%
|
)
|
|
(644,948
|
)
|
|
(4.42)%
|
|
Net income from operations
|
|
891,322
|
|
|
10.88%
|
|
|
3,214,269
|
|
|
22.01%
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant
|
|
216,987
|
|
|
2.65%
|
|
|
179,417
|
|
|
1.23%
|
|
Other income
|
|
-
|
|
|
-
|
|
|
13,695
|
|
|
0.09%
|
|
Interest expense
|
|
(660,177
|
)
|
|
(8.06%
|
)
|
|
(679,560
|
)
|
|
(4.65)%
|
|
Net other income (expenses)
|
|
(443,190
|
)
|
|
(5.14%
|
)
|
|
(486,448
|
)
|
|
(3.33)%
|
|
Net income before provision for income taxes
|
|
448,132
|
|
|
5.47%
|
|
|
2,727,821
|
|
|
18.67%
|
|
Provision for income taxes
|
|
(81,290
|
)
|
|
(0.99%
|
)
|
|
(386,861
|
)
|
|
(2.65)%
|
|
Net income
|
|
366,842
|
|
|
4.48%
|
|
|
2,340,960
|
|
|
16.03%
|
|
Foreign currency translation gain
|
|
299,163
|
|
|
3.65%
|
|
|
40,096
|
|
|
0.27%
|
|
Comprehensive income
|
$
|
666,005
|
|
|
8.13%
|
|
$
|
2,381,056
|
|
|
16.30%
|
|
Revenues
. Our revenues decreased $6.41 million,
or 43.89%, to $8.20 million for the six months ended June 30, 2011 from $14.61
million during the same period in 2010. For the six month period ended June 30,
2011, approximately 32.12% of our revenues were generated from sales to
customers in the energy industry and approximately 67.78% were generated from
sales to communications industry customers. The period-over-period decrease in
revenues resulted mainly from a decrease of approximately 63.91% in sales
revenue generated by sales of energy transmission towers compared to the same
period in 2010, and a decrease of approximately 24.05% in sales revenue
generated by sales of communications towers. In the first half 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 half of 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 six months ended June 30, 2011 as compared to the
same period last year.
Cost of goods sold
. Our cost of goods sold
decreased $4.17 million, or 41.87%, to $5.78 million in the six months ended
June 30, 2011, from $9.96 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
70.58% in the six months ended June 30, 2011 from 68.17% for the same period
last year, mainly because the price of steel
increased. We are closely monitoring our pricing policy in an effort to reduce
the risk of inflation and fluctuation of raw material prices.
Gross profit and gross margin
. Our gross profit
decreased $2.24 million, or 48.17%, to $2.41 million in the six months ended
June 30, 2011, from $4.65 million during the same period in 2010. The decrease
was mainly due to the decrease of sales and revenues. Gross profit as a
percentage of revenue (gross margin) was 29.42% and 31.83% for six months ended
June 30, 2011 and 2010, respectively. The decrease in gross margin was mainly
due to the increased price of steel as discussed above.
Selling and marketing expenses
. Our selling and
marketing expenses decreased $163,498, or 20.25%, to $626,369 in the six months
ended June 30, 2011, from $789,867 during the same period in 2010. Such decrease
was largely attributable to reduced operations in our sales and marketing
department.
General and administrative expenses
. Our general
and administrative expenses decreased $248,244, or 38.49%, to $893,192 in the
six months ended June 30, 2011, from $644,948 during the same period in 2010.
Such increase was primarily attributable to expenses associated with being a
public company.
Interest expense
.
Interest expense
decreased $19,383, or 2.85%, to $660,177 for the six months ended June 30, 2011,
from $679,560 during the same period in 2010. Such decrease was mainly due to
the lower interest expenses in the first quarter of 2011. Our total outstanding short-term bank loan was $11.9
million and $19.0 million as of March 31, 2011 and June 30, 2011,
respectively.
5
Income before income taxes
. Our income before
income taxes decreased $2.28 million, or 83.57%, to $448,132 in the six months
ended June 30, 2011, from $2.73 million during the same period in 2010, as a
result of the factors described above.
Provision for income taxes
. Our income tax
provisions decreased $305,571, or 84.33%, to $81,290 in the six months ended
June 30, 2011, from $386,861 during the same period in 2010, mainly due to
decrease in taxable income.
Net income
. We generated a net income of $366,842
in the six months ended June 30, 2011, a decrease of $1.97 million, or 84.33%,
from $2.34 million during the same period in 2010, as a cumulative effect of all
factors discussed above.
Liquidity and Capital Resources
As of June 30, 2011, we had cash and cash equivalents of
approximately $2.70 million, primarily consisting of cash on hand and demand
deposits. The following table provides a summary of our net cash flows from
operating, investing, and financing activities.
Cash Flow
|
|
Six Months Ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash (used in) provided by operating
activities
|
$
|
(4,302,596
|
)
|
$
|
2,156,452
|
|
Net cash (used in) investing activities
|
|
(2,737,083
|
)
|
|
(455,446
|
)
|
Net cash provided by (used in) financing
activities
|
|
5,902,077
|
|
|
(154,876
|
)
|
Effects of exchange rate changes in cash
|
|
1,309,304
|
|
|
789
|
|
Net increase in cash and cash equivalents
|
|
171,702
|
|
|
1,546,919
|
|
Cash and cash equivalents at beginning of the period
|
|
2,526,710
|
|
|
161,133
|
|
Cash and cash equivalent at end of the
period
|
$
|
2,698,412
|
|
$
|
1,708,052
|
|
Operating Activities
Net cash used in operating activities was $4.30 million for the
six months ended June 30, 2011, as compared to net cash provided by operating
activities of $2.16 million for the same period in 2010. The increase in net
cash used in operating activities was primarily attributable to the outflow
associated with increase in accounts receivable, other receivables, inventory and
deposits and prepaid expenses levels which more than offset the cash inflow
associated with the increase in other payable and accrued expenses and decrease
in restricted cash in the six months ended June 30, 2011. 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
period by turning down comparatively lower margin domestic orders also
contributed to the increased inventory.
Investing Activities
Net cash used in investing activities for the six months ended
June 30, 2011 was $2.74 million, as compared to $455,446 during the same period
in 2010. We spent approximately $2.18 million as installment payment for land
use right and approximately $462,592 in construction of our Zhejiang facilities
and Anhui administration office, and upgrade of our production facilities.
Financing Activities
Net cash provided by financing activities for the six months
ended June 30, 2011 was $5.90 million, as compared to net cash used in financing
activities of $154,876 for the same period in 2010. The increase in net cash
provided by financing activities was mainly attributable to a $5.90 million
increase in net short term borrowings.
6
Loan Commitments
As of June 30, 2011, we did not hold any long-term loans. Our
short-term bank loans, totaling $19.0 million, are as follows:
Bank
|
|
Amount
|
|
|
Interest
|
|
|
Maturity Date
|
|
|
Duration
|
|
|
|
(in millions)*
|
|
|
Rate
|
|
|
|
|
|
|
|
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
|
|
|
6.44%
|
|
|
December 15, 2011
|
|
|
6 months
|
|
Huishang Bank, Xuancheng
Branch
|
|
2.0
|
|
|
7.88%
|
|
|
February 16, 2012
|
|
|
12 months
|
|
Huishang Bank, Xuancheng Branch
|
|
4.6
|
|
|
8.20%
|
|
|
April 11, 2012
|
|
|
12 months
|
|
China Merchants Bank, Hefei
Branch
|
|
1.5
|
|
|
6.94%
|
|
|
October 29, 2011
|
|
|
12 months
|
|
China Construction Bank, Jingde Branch
|
|
2.4
|
|
|
5.85%
|
|
|
May 3, 2011
|
|
|
6 months
|
|
China Everbright Bank, Hefei
Branch
|
|
4.6
|
|
|
5.56%
|
|
|
November 22, 2011
|
|
|
12 months
|
|
Total
|
$
|
19.0
|
|
|
|
|
|
|
|
|
|
|
* Calculated based on the exchange rate of $1 = RMB 6.46*
Capital Expenditures
Our capital expenditures for the six months ended June 30, 2011
and 2010 were approximately $6.37 million and $0.46 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 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.
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.
Critical Accounting Policies
Critical accounting policies are those we believe are most
important to portraying our financial conditions and results of operations and
also require the greatest amount of subjective or complex judgments by
management. Judgments and uncertainties regarding the application of these
policies may result in materially different amounts being reported under various conditions or using different assumptions. There have
been no material changes to the critical accounting policies previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended December
31, 2010.
7
Recent Accounting Pronouncements
See Note 3 to our unaudited consolidated financial statements
included elsewhere in this report.
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 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 June 30, 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 June 30, 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 second quarter of 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.
8
Not Applicable.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS.
|
None.
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
None.
ITEM 4.
|
(REMOVED AND RESERVED).
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ITEM 5.
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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:
* Furnished herewith
9
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: August 15, 2011
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TEC TECHNOLOGY, INC.
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|
|
|
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By:
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/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)
|
10
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