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: September 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 242600
Peoples Republic of China
(Address of principal executive offices, Zip Code)
(86) 563 8023488
(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 November 10, 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 Nine Months Ended September 30,
2011
|
|
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1.
|
Financial Statements
|
1
|
Item 2.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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2
|
Item 3.
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Quantitative and Qualitative
Disclosures About Market Risk
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8
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Item 4.
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Controls and Procedures
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8
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PART II
OTHER INFORMATION
Item 1.
|
Legal Proceedings
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9
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Item 1A.
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Risk Factors
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9
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Item 2.
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Unregistered Sales of Equity
Securities and Use of Proceeds
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9
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Item 3.
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Defaults Upon Senior Securities
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9
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Item 4.
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(Removed and Reserved)
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9
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Item 5.
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Other Information
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9
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Item 6.
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Exhibits
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9
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i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TEC TECHNOLOGY, INC.
QUARTERLY FINANCIAL REPORT
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
1
TEC TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
PAGE
|
CONSOLIDATED BALANCE SHEETS
|
F - 1
|
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
F - 2
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
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F - 3
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F - 4 - F - 25
|
TEC TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
|
|
September 30, 2011
|
|
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December 31, 2010
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
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Current assets
|
|
|
|
|
|
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Cash and cash
equivalents
|
$
|
3,375,312
|
|
$
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2,526,710
|
|
Restricted cash
|
|
69,291
|
|
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1,164,598
|
|
Accounts receivable,
net of allowance for doubtful accounts
|
|
20,179,785
|
|
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14,356,352
|
|
Inventory
|
|
6,113,015
|
|
|
5,235,074
|
|
Deposits and prepaid
expenses
|
|
4,092,188
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|
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5,439,579
|
|
Other receivables
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2,803,897
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|
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1,626,039
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Taxes recoverable
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17,391
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|
|
2,389
|
|
Total current assets
|
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36,650,879
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|
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30,350,741
|
|
Property and equipment
|
|
|
|
|
|
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Property and equipment, net of
accumulated depreciation
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3,885,813
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|
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3,790,765
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Land use rights, net of
accumulated amortization
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8,057,124
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|
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2,071,771
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Construction in progress
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2,258,450
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|
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473,355
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|
|
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14,201,387
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|
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6,335,891
|
|
Total assets
|
$
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50,852,266
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|
$
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36,686,632
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current liabilities
|
|
|
|
|
|
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Accounts payable
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$
|
7,056,658
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$
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8,313,633
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Other payables and accrued expenses
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4,683,755
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|
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3,494,358
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Taxes payables
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|
420,762
|
|
|
44,608
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|
Customer deposits
|
|
1,140,085
|
|
|
80,331
|
|
Short term borrowings
|
|
23,428,713
|
|
|
12,938,582
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|
|
|
36,729,973
|
|
|
24,871,512
|
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Commitments and
contingencies
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
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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 as of September 30, 2011 and December 31, 2010, respectively
|
$
|
30,182
|
|
$
|
30,182
|
|
Additional paid in capital
|
|
1,105,454
|
|
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1,024,891
|
|
Retained earnings
|
|
11,852,910
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|
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10,077,006
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Accumulated other comprehensive income
|
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1,133,747
|
|
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683,041
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Total stockholders'
equity
|
|
14,122,293
|
|
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11,815,120
|
|
Total liabilities and stockholders'
equity
|
$
|
50,852,266
|
|
$
|
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
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|
|
Three months
|
|
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Nine months
|
|
|
Nine months
|
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
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September 30, 2011
|
|
|
September 30, 2010
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues
|
$
|
11,364,648
|
|
$
|
7,285,615
|
|
$
|
19,559,792
|
|
$
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21,892,594
|
|
Cost of goods sold
|
|
8,418,882
|
|
|
5,355,307
|
|
|
14,203,143
|
|
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15,313,202
|
|
Gross profit
|
|
2,945,766
|
|
|
1,930,308
|
|
|
5,356,649
|
|
|
6,579,392
|
|
Selling and marketing expenses
|
|
(438,939
|
)
|
|
(337,423
|
)
|
|
(1,065,308
|
)
|
|
(1,127,290
|
)
|
General and administrative
expenses
|
|
(378,165
|
)
|
|
(293,389
|
)
|
|
(1,271,357
|
)
|
|
(938,337
|
)
|
Net income from operations
|
|
2,128,662
|
|
|
1,299,496
|
|
|
3,019,984
|
|
|
4,513,765
|
|
Other income
(expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant
|
|
1,421
|
|
|
10,798
|
|
|
218,408
|
|
|
190,215
|
|
Other income
|
|
2,123
|
|
|
-
|
|
|
2,123
|
|
|
13,695
|
|
Interest expense
|
|
(465,391
|
)
|
|
(299,865
|
)
|
|
(1,125,568
|
)
|
|
(979,425
|
)
|
Net other income
(expenses)
|
|
(461,847
|
)
|
|
(289,067
|
)
|
|
(905,037
|
)
|
|
(775,515
|
)
|
Net income before provision for income
taxes
|
|
1,666,815
|
|
|
1,010,429
|
|
|
2,114,947
|
|
|
3,738,250
|
|
Provision for income
taxes
|
|
(257,753
|
)
|
|
(151,535
|
)
|
|
(339,043
|
)
|
|
(538,396
|
)
|
Net income
|
|
1,409,062
|
|
|
858,894
|
|
|
1,775,904
|
|
|
3,199,854
|
|
Other comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
(loss)
|
|
151,543
|
|
|
12,462
|
|
|
450,706
|
|
|
(177,290
|
)
|
Comprehensive income
|
$
|
1,560,605
|
|
$
|
871,356
|
|
$
|
2,226,610
|
|
$
|
3,022,564
|
|
Weighted average numbers of common
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
30,181,882
|
|
|
25,298,383
|
|
|
30,181,882
|
|
|
25,298,383
|
|
Diluted
|
|
30,181,882
|
|
|
25,298,383
|
|
|
30,181,882
|
|
|
25,298,383
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.05
|
|
$
|
0.03
|
|
$
|
0.06
|
|
$
|
0.13
|
|
Diluted
|
$
|
0.05
|
|
$
|
0.03
|
|
$
|
0.06
|
|
$
|
0.13
|
|
See accompanying notes of these consolidated financial
statements
F - 2
TEC TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine months
|
|
|
Nine months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
Net income for the period
|
$
|
1,775,904
|
|
$
|
3,199,854
|
|
Adjustments to
reconcile net income to net cash (used in) provided by operating
activites:
|
|
|
|
|
|
|
Depreciation
|
|
259,193
|
|
|
207,350
|
|
Loss on disposal of property and equipment
|
|
537
|
|
|
-
|
|
Amortization of
land use rights
|
|
33,745
|
|
|
31,779
|
|
Stock based compensation
|
|
93,800
|
|
|
-
|
|
Changes in operating assets and
liabilities
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
1,095,307
|
|
|
-
|
|
Increase in
inventory
|
|
(877,941
|
)
|
|
(958,677
|
)
|
Increase/(decrease) in deposits and prepaid expenses
|
|
(2,281,507
|
)
|
|
1,471,962
|
|
Increase in
accounts receivable
|
|
(5,823,433
|
)
|
|
(7,678,771
|
)
|
(Increase) decrease in other receivables
|
|
(1,177,858
|
)
|
|
59,733
|
|
Increase in taxes
recoverable
|
|
(15,002
|
)
|
|
(6,336
|
)
|
Increase/(decrease) in taxes payable
|
|
376,154
|
|
|
(862,532
|
)
|
(Decrease)
increase in accounts payable
|
|
(1,259,975
|
)
|
|
4,360,248
|
|
Increase/(decrease) in customer deposits
|
|
1,059,754
|
|
|
(81,279
|
)
|
Increase in other
payables and accrued expenses
|
|
1,189,397
|
|
|
1,955,393
|
|
Net cash (used in) provided
by operating activities
|
|
(5,551,925
|
)
|
|
1,698,724
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
(239,580
|
)
|
|
(622,961
|
)
|
Proceeds from
disposal of property and equipment
|
|
5,379
|
|
|
-
|
|
Payment for construction in progress
|
|
(1,775,312
|
)
|
|
(36,959
|
)
|
Purchases of land
use rights
|
|
(2,174,130
|
)
|
|
-
|
|
Net cash used in investing
activities
|
|
(4,183,643
|
)
|
|
(659,920
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
Common
stock issued
|
|
-
|
|
|
10,987
|
|
Contribution of paid in
capital
|
|
-
|
|
|
58,321
|
|
Proceeds
from short term borrowings
|
|
18,050,799
|
|
|
-
|
|
Repayment of short term
borrowings
|
|
(8,146,100
|
)
|
|
(1,124,474
|
)
|
Net cash provided by (used
in) financing activities
|
|
9,904,699
|
|
|
(1,055,166
|
)
|
Effects on exchange rate changes on cash
|
|
679,471
|
|
|
84,800
|
|
Increase in cash and cash
equivalents
|
|
848,602
|
|
|
68,438
|
|
Cash and cash equivalents, beginning of
period
|
|
2,526,710
|
|
|
164,927
|
|
Cash and cash equivalents,
end of period
|
|
3,375,312
|
|
|
233,365
|
|
Supplementary disclosures of cash flow
information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
1,125,568
|
|
|
979,425
|
|
Cash paid for income taxes
|
|
2,196,414
|
|
|
1,392,926
|
|
Non cash transactions:
|
|
|
|
|
|
|
Issuance of warrant
|
|
94,120
|
|
|
-
|
|
Acquisition of land use
rights from deposits and prepaid expenses
|
|
3,659,766
|
|
|
-
|
|
Capital contributed by directors
assuming debts of Company
|
|
80,563
|
|
|
-
|
|
See accompanying notes of these consolidated financial
statements
F - 3
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS ORGANIZATION
|
|
|
|
TEC Technology, Inc. (formerly known as Highland Ridge,
Inc., Sea Green, Inc., Americom Networks Corp. and Americom Networks
International, Inc.) was incorporated on July 22, 1988 in the State of
Delaware, United States of America. (the Company or TEC Holding). On
June 9, 2010, the Company changed its name from Highland Ridge, Inc. to
TEC Technology, Inc.
|
|
|
|
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 the Companys common stock, which
constituted 63.6% of the Companys issued and outstanding capital stock on
a fully-diluted basis as of and immediately after the consummation of
reverse acquisition. As a result of the acquisition of TECT, the Company
now owns all of the issued and outstanding capital stock of TECT, which in
turn owns 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 TEC US as the
acquired party. Upon completion of the exchange, TECT became a wholly
owned subsidiary of TEC US. On the same date, Mr. Chun Lu, Chairman of the
Board and Chief Executive Officer of TEC US, 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.
|
|
|
|
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 operations
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.
|
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:
|
|
|
|
|
Place of
|
|
|
Date of
|
|
|
Percentage
|
|
|
|
|
|
Name
of subsidiary
|
|
|
incorporation
|
|
|
incorporation
|
|
|
of interest
|
|
|
Principal activity
|
|
|
TEC Technology Limited
|
|
|
Hong Kong
|
|
|
November 11, 2009
|
|
|
100% directly
|
|
|
Investment
holding.
|
|
|
Anhui TEC Tower Co., Ltd.
|
|
|
People's Republic of China
|
|
|
April 19, 2006
|
|
|
100% directly
|
|
|
Development,manufacturing and selling of mobile
communication steel towers, microwave towers, angle steel towers, steel
pipe towers, transmission cable towers, telecommunication equipment, scrap
and provision for technical consulting service.
|
|
|
Zhejiang TEC Tower Co., Ltd.
|
|
|
People's Republic of
China
|
|
|
December 7, 2009
|
|
|
90% indirectly
|
|
|
The company has not commenced its business of development
and manufacturing of mobile communication steel towers, microwave towers,
angle steel towers, steel pipe towers and transmission cable towers.
|
|
|
Shuncheng Taida Technology Co., Ltd.
|
|
|
People's Republic of China
|
|
|
January 20, 2010
|
|
|
100% directly
|
|
|
The company has not commenced its business of engineering
consultancy and design of mobile communication steel towers, microwave
towers, angle steel towers, steel pipe towers and transmission cable
towers.
|
|
|
2.3
|
BASIS OF CONSOLIDATION AND PRESENTATION
|
|
|
|
|
|
The consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United
States of America (US GAAP). In the opinion of management, the
accompanying balance sheets, and statements of income, and cash flows
include all adjustments, consisting only of normal recurring items,
considered necessary to give a fair presentation of operating results for
the periods presented. All material inter- company transactions and
balances have been eliminated in consolidation.
|
|
|
|
|
|
On February 22, 2010, TECT entered into an equity
transfer agreement with Mr. Chun Lu, the sole shareholder of ATEC. The
transfer was approved by the Department of Commerce of Anhui Province on
March 2, 2010. The business combination was accounted for as entities
under common control because the majority shareholders of TECT and ATEC
were the same people.
|
F - 4
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.3
|
BASIS OF CONSOLIDATION AND PRESENTATION
(CONTINUED)
|
|
|
|
|
|
On May 4, 2010, the Company completed a reverse
acquisition transaction pursuant to a share exchange agreement among the
Company, TECT and TECTs sole stockholder, Mr. Hua Peng Phillip Wong,
whereby the Company acquired 100% of the issued and outstanding capital
stock of TECT in exchange for 19,194,421 shares of the Companys common
stock, which constituted 63.6% of the Companys issued and outstanding
capital stock on a fully-diluted basis as of and immediately after the
consummation of reverse acquisition. As a result of the acquisition of
TECT, the Company now owns all of the issued and outstanding capital stock
of TECT, which in turn owns ATEC and STT. ATEC owns 90% equity interest in
ZTEC. For accounting purposes, the share exchange transaction with TECT
was treated as a reverse acquisition and recapitalization of TECT, with
TECT as the acquirer and TEC US as the acquired party.
|
|
|
|
|
|
Upon completion of the share exchange, TECT became a
wholly owned subsidiary of TEC US. On the same date, Mr. Chun Lu, Chairman
of the Board and Chief Executive Officer of TEC US, entered into an option
agreement with TECT and Mr. Hua Peng Phillip Wong, the Companys
controlling stockholder, pursuant to which Mr. Lu was granted an option to
acquire 17,797,372 shares the Companys common stock owned by Mr. Wong for
an aggregate exercise price of $1,000,000. Mr. Lu may exercise this
option, in whole but not in part, during the period commencing on the 365
th
day following of the date of the option agreement and ending
on the second anniversary of the date thereof.
|
|
|
|
|
|
Prior to the acquisition of ATEC by TECT, neither TECT
nor TEC US had active business operations. For reporting purposes, the
Company has assumed that Mr. Lu has exercised his option immediately and
thus TEC US, TECT and ATEC were effectively under common control of Mr. Lu
when the Company acquired ATEC. The acquisition transactions between (i)
TEC US and TECT and (ii) TECT and ATEC are therefore accounted for as
reverse mergers.
|
|
|
|
|
|
For accounting purposes, the combination of the company
and TECT was accounted for as a reverse merger with ATEC as the accounting
acquirer and TEC US and TECT as the accounting acquiree and the
acquisition of ZTEC and STT was accounted for under the acquisition method
with TECT as the immediate parent corporation of both companies for legal
purposes and the Company as the ultimate parent corporation. Accordingly
the Companys financial statements have been prepared on a consolidated
basis for the periods presented and the consolidated balance sheets,
consolidated statements of income and other comprehensive income,
stockholders equity and cash flows were presented as if the
recapitalization had occurred at the beginning of the earliest period
presented and the operations of the accounting acquired party from the
date of share exchange transaction.
|
|
|
|
|
|
TEC US, TECT, ATEC, ZTEC and STT are hereafter
collectively 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 the Company 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, 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.
|
F - 9
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.6
|
REVENUE RECOGNITION
|
|
|
|
|
|
The Companys revenue recognition policies are in
compliance with ASC 605. Sales revenue is recognized when all of the
following have occurred: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered, (iii) the price
is fixed or determinable, and (iv) the ability to collect is reasonably
assured. These criteria are generally satisfied at the time of shipment
when risk of loss and title passes to the customer. For international
sales, the revenue recognition criteria are generally satisfied under Free
on Board (FOB) and Cost Insurance Freight (CIF) terms, in which the
Companys responsibility ends once the goods clear the port of
shipment.
|
|
|
|
|
|
Technical consulting service income is recognized when
the relevant service is rendered.
|
|
|
|
|
|
Government grants represent local authority grants to the
company for infrastructure development and the revenue is recognized on
cash basis when the local authority approves the grant to the
company.
|
|
|
|
|
|
The Company recognizes revenue when the goods are
delivered and title has passed. Sales revenue represents the invoiced
value of goods, net of a value-added tax (VAT). All of the Companys
products that are sold in the PRC are subject to a Chinese value-added tax
at a rate of 17% of the gross sales price or at a rate approved by the
Chinese local government. This VAT liability may be offset by the VAT paid
by the Company on raw materials and other materials included in the cost
of producing their finished product.
|
|
|
|
|
2.7
|
SHIPPING AND HANDLING
|
|
|
|
|
|
Shipping and handling costs related to costs of goods
sold are included in cost of sales and selling and marketing expenses
which totaled $212,124 and $282,189 for the three months ended September
30, 2011 and 2010, respectively. Shipping and handling costs amounted to
$577,229 and $567,990 for the nine months ended September 30, 2011 and
2010.
|
|
|
|
|
2.8
|
ADVERTISING
|
|
|
|
|
|
Advertising costs are expensed as incurred and totaled
$6,915 and $1,206 for the three months ended September 30, 2011 and 2010,
respectively. Advertising costs are expensed as incurred and totaled
$6,918 and $3,788 for the nine months ended September 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 $0 as incurred for the three months ended September 30, 2011
and 2010 and for the nine months ended September 30, 2011 and 2010,
respectively. The costs for development of new products and substantial
enhancements to existing products are expensed as incurred until
technological feasibility has been established, at which time any
additional costs would be capitalized.
|
|
|
|
|
2.10
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
Cash and cash equivalents comprise cash in bank and on
hand, demand deposits with banks and other financial institutions, and
short-term, highly liquid investments which are readily convertible into
known amounts of cash and which are subject to an insignificant risk of
changes in value, and have a short maturity of generally within three
months when acquired.
|
F - 9
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.11
|
FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE
INCOME
|
|
|
|
|
|
The reporting currency of the Company is United States
Dollars ($). 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 $1,133,747 as of September 30, 2011
and $683,041 as of December 31, 2010. The balance sheet amounts with the
exception of equity as of September 30, 2011 and December 31, 2010 were
translated at RMB6.40 to $1.00 and RMB6.61 to $1.00, respectively. The
average translation rates applied to the statements of income and of cash
flows for the nine months ended September 30, 2011 and September 30, 2010
were RMB6.51 to $1.00 and RMB6.80 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 - 9
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 are amortized on the straight
line over their respective lease periods. The lease period of agriculture
land is 50 years.
|
|
|
|
|
2.16
|
CONSTRUCTION IN PROGRESS
|
|
|
|
|
|
Construction in progress represents direct costs of
construction as well as acquisition and design fees incurred.
Capitalization of these costs ceases and the construction in progress is
transferred to property, plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are
completed. No depreciation is provided until construction is completed and
the asset is ready for its intended use.
|
|
|
|
|
2.17
|
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE
ASSETS
|
|
|
|
|
|
In accordance with ASC Topic 360, Property, Plant and
Equipment, long-lived assets to be held and used are analyzed for
impairment whenever events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. The Company reviews the
carrying amount of its long-lived assets, including intangibles, for
impairment, each reporting period. An asset is considered impaired when
estimated future cash flows are less than the carrying amount of the
asset. In the event the carrying amount of such asset is considered not
recoverable, the asset is adjusted to its fair value. Fair value is
generally determined based on discounted future cash flow. As of September
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 the composition of
accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns and changes in customer payment
patterns to evaluate the adequacy of these reserves. Reserves are
primarily on a specific identification basis.
|
|
|
|
|
|
The standard credit period of the Companys most of
clients is three months. Management evaluates the collectability of the
receivables at least quarterly. The estimated average collection period
was 90 days as of September 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 September 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 nine months
ended September 30, 2011 and 2010. The product warranty reserve was $0 as
of September 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
|
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 September 30, 2011 and December 31, 2010 amounted to $3,348,408 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
|
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
Customer A
|
|
65.53%
|
|
|
-
|
|
|
37.92%
|
|
|
-
|
|
|
Customer B
|
|
17.77%
|
|
|
20.23%
|
|
|
32.90%
|
|
|
31.91%
|
|
|
Customer C
|
|
11.07%
|
|
|
-
|
|
|
13.03%
|
|
|
-
|
|
|
Customer D
|
|
4.88%
|
|
|
-
|
|
|
6.85%
|
|
|
-
|
|
|
Customer E
|
|
0.75%
|
|
|
-
|
|
|
3.55%
|
|
|
-
|
|
|
Customer F
|
|
-
|
|
|
45.42%
|
|
|
-
|
|
|
20.42%
|
|
|
Customer G
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18.11%
|
|
|
Customer H
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6.90%
|
|
|
Customer I
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6.84%
|
|
|
Customer J
|
|
-
|
|
|
17.19%
|
|
|
-
|
|
|
-
|
|
|
Customer K
|
|
-
|
|
|
5.26%
|
|
|
-
|
|
|
-
|
|
|
Customer L
|
|
-
|
|
|
4.57%
|
|
|
-
|
|
|
-
|
|
|
|
|
100.00%
|
|
|
92.67%
|
|
|
94.25%
|
|
|
84.18%
|
|
F - 12
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.25
|
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:
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Customer A
|
|
30.88%
|
|
|
-
|
|
|
Customer B
|
|
21.41%
|
|
|
31.46%
|
|
|
Customer C
|
|
12.24%
|
|
|
-
|
|
|
Customer D
|
|
7.45%
|
|
|
16.73%
|
|
|
Customer E
|
|
6.44%
|
|
|
12.57%
|
|
|
Customer E
|
|
-
|
|
|
9.89%
|
|
|
Customer F
|
|
-
|
|
|
7.82%
|
|
|
|
|
78.42%
|
|
|
78.47%
|
|
|
2.26
|
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 September 30, 2011 and 2010,
basic and diluted earnings per share amount to $0.05 and $0.03,
respectively. For the nine months ended September 30, 2011 and 2010, basic
and diluted earnings per share amount to $0.06 and $0.13,
respectively.
|
|
|
|
|
2.27
|
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.
|
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
|
|
|
|
|
2.27
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
|
|
|
|
|
|
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 September 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 September 30, 2011
or 2010.
|
|
|
|
|
2.28
|
STOCK-BASED COMPENSATION
|
|
|
|
|
|
The Company adopted ASC Topic 718, Compensation Stock
Compensation and ASC Topic 505-50 Equity Based Payments to
Non-Employees using the fair value method. Under ASC Topic 718 and ASC
Topic 505-50, stock compensation expenses is measured at the grant date on
the value of the option or restricted stock and is recognized as expenses,
less expected forfeitures, over the requisite service period, which is
generally the vesting period.
|
|
|
|
|
|
On June 15, 2010, the Company issued, a warrant to
purchase 80,000 shares at a price of $2.00 per share. The warrant vests in
four equal installments on June 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.
|
|
|
|
|
2.29
|
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.
|
|
|
|
|
2.30
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
ASC Topic 220
Comprehensive Income
establishes
standards for reporting and displaying comprehensive income and its
components in financial statements. Comprehensive income is defined as the
change in stockholders equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner
sources. The comprehensive income for all periods presented includes both
the reported net income and net change in cumulative translation
adjustments.
|
3.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
|
|
|
In April 2011, the FASB issued ASU No. 2011-03,
Transfers and Servicing (Topic 860): Reconsideration of Effective
Control for Repurchase Agreements
(ASU 2011-03), intended to improve
financial reporting of repurchase agreements and refocus the assessment of
effective control on a transferors contractual rights and obligations
rather than practical ability to perform those rights and obligations. The
guidance in ASU 2011-03 is effective for the first interim or annual
period beginning on or after December 15, 2011.The Company does not expect
the adoption of ASU 2011-03 to have a significant impact on its
consolidated financial statements.
|
|
|
|
In May 2011, the FASB issued ASU No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs
(ASU 2011-04). ASU 2011-04
represents the converged guidance of the FASB and the International
Accounting Standards Board (IASB) on fair value measurement. A variety of
measures are included in the update intended to either clarify existing
fair value measurement requirements, change particular principles
requirements for measuring fair value or for disclosing information about
fair value measurements. For many of requirements, the FASB does not
intend to change the application of existing requirements under Accounting
Standards Codification (ASC) Topic 820, Fair Value Measurements. ASU
2011-04 is effective for interim and annual periods beginning after
December 15, 2011 and early application is not permitted. The Company is
evaluating the impact adoption of ASU 2011-04 and does not expect the
adoption of ASU 2011-04 will have significant impact on its consolidated
financial statements.
|
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.
|
RECENT ACCOUNTING PRONOUNCEMENTS
(CONTINUED)
|
|
|
|
In June 2011, the FASB issued ASU No. 2011-05,
Presentation of Comprehensive Income
(ASU 2011-05), intended to
increase the prominence of items reported in other comprehensive income
and to facilitate convergence of accounting guidance in this area with
that of the IASB. The amendments require that all non-owner changes in
stockholders equity be presented in a single continuous statement of
comprehensive income or in two separate but consecutive statements.
Amendments under ASU 2011-05 for public entities should be applied
retrospectively for fiscal years, and interim periods within those years,
beginning December 15, 2011. The Company is evaluating the impact adoption
of ASU 2011-05 and does not expect the adoption of ASU 2011-05 will have
significant impact on its 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 nine months ended September 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
was made at the unified EIT rate of 25% for the year ended December 31,
2010 but ATEC is entitled to a refund of 10% according to local
preferential tax policy for manufacturing of high technology products for
the three years from January 1, 2010 to December 31, 2013. Therefore, the
provision for income tax of the companys subsidiary ATEC was made at the
local preferential EIT rate of 15% for the year ended December 31,
2010.
|
|
|
|
The companys subsidiaries ZTEC and STT have not
commenced their business, therefore no provision for income taxes has been
made for the nine months ended September 30, 2011 and 2010.
|
|
|
|
The following table reconciles the U.S statutory rates to
the companys effective tax rate for the September 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
|
%
|
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
|
INCOME TAXES (CONTINUED)
|
|
|
|
Provision for income taxes is as
follows:
|
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
Income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HGHN - US corporate tax
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
TECT - Hong Kong
profits tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
ATEC - China EIT
|
|
257,753
|
|
|
151,535
|
|
|
339,043
|
|
|
538,396
|
|
|
ZTEC and STT - China
EIT
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Deferred tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
$
|
257,753
|
|
$
|
151,535
|
|
$
|
339,043
|
|
$
|
538,396
|
|
5.
|
CASH AND CASH
EQUIVALENTS
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Cash and bank balances
|
$
|
3,375,312
|
|
$
|
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 $69,291 and $1,164,598 as of September 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 the nine months ended September 30, 2011
and 2010. Bad debts written off for the three months and nine months ended
September 30, 2011 and 2010 were $0.
|
|
|
|
Aging of accounts receivable is as
follows:
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
within 3 month
|
$
|
11,792,292
|
|
$
|
13,658,262
|
|
|
over 3 months and
within 6 months
|
|
4,348,792
|
|
|
356,438
|
|
|
over 6 months and
within 1 year
|
|
3,997,459
|
|
|
343,298
|
|
|
over 1 year
|
|
111,242
|
|
|
68,354
|
|
|
|
|
20,249,785
|
|
|
14,426,352
|
|
|
Less: Allowance for
doubtful accounts
|
|
(70,000)
|
|
|
(70,000)
|
|
|
|
$
|
20,179,785
|
|
$
|
14,356,352
|
|
Accounts receivable includes the
amounts of $8,911,822 (12.31.2010: $3,151,959) that were factored to the
Industrial and Commercial Bank, PRC and China Construction Bank, PRC for
collection.
F - 18
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8.
|
INVENTORY
|
|
|
|
Inventory consists of the
followings:
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Raw materials
|
$
|
3,626,144
|
|
$
|
2,590,642
|
|
|
Consumables
|
|
237,475
|
|
|
-
|
|
|
Work in progress
|
|
2,249,396
|
|
|
2,644,432
|
|
|
|
$
|
6,113,015
|
|
$
|
5,235,074
|
|
9.
|
DEPOSITS AND PREPAID
EXPENSES
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Guarantee and utility
deposits
|
$
|
1,410,970
|
|
$
|
828,170
|
|
|
Deposit for acquistion of land use rights
|
|
-
|
|
|
518,753
|
|
|
Land levelling, design fees
and stamp duty prepaid expenses
|
|
494,685
|
|
|
3,110,145
|
|
|
Prepaid expenses
|
|
514,101
|
|
|
91,091
|
|
|
Advances to suppliers and
services providers
|
|
1,313,279
|
|
|
874,436
|
|
|
Prepayment for purchase of property and
equipment
|
|
20,025
|
|
|
2,269
|
|
|
Advances to logistic service
providers
|
|
339,128
|
|
|
14,715
|
|
|
|
$
|
4,092,188
|
|
$
|
5,439,579
|
|
|
Guarantee deposits are provided to financial institutions
in return for issuance of a corporate guarantee to financiers. Advances to
suppliers are down payments or deposits for inventory purchases. The
inventory and services are normally delivered and rendered within one to
two months after the payments. ZTEC acquired land use rights for new land
in the PRC and paid deposits for the acquisition of land use rights, ZTEC
also prepaid land leveling, design fees and stamp duty fees.
|
|
|
10.
|
OTHER RECEIVABLES
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Due from employees
|
$
|
1,401,277
|
|
$
|
963,416
|
|
|
Due from third parties
|
|
1,401,153
|
|
|
661,156
|
|
|
Others
|
|
1,467
|
|
|
1,467
|
|
|
|
$
|
2,803,897
|
|
$
|
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.
|
F - 21
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
VAT recoverable
|
$
|
17,391
|
|
$
|
2,389
|
|
12.
|
PROPERTY AND EQUIPMENT
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Buildings
|
$
|
2,669,359
|
|
$
|
2,584,596
|
|
|
Plant and machinery
|
|
1,493,790
|
|
|
1,351,729
|
|
|
Furniture, fixtures and
office equipment
|
|
151,558
|
|
|
123,716
|
|
|
Motor vehicles
|
|
417,102
|
|
|
294,812
|
|
|
|
|
4,731,809
|
|
|
4,354,853
|
|
|
Less: Accumulated depreciation
|
|
(845,996
|
)
|
|
(564,088
|
)
|
|
Net book value
|
$
|
3,885,813
|
|
$
|
3,790,765
|
|
|
Depreciation expense was $91,613 and $77,164 for the
three months ended September 30, 2011 and 2010, respectively. Depreciation
expense was $259,193 and $207,350 for the nine months ended September 30,
2011 and 2010, respectively.
|
|
|
13.
|
LAND USE RIGHTS
|
|
|
|
Private ownership of land is not permitted in the PRC.
The Company has acquired the land use rights to three parcels located at
Xinqiao Industrial Park, Jingde Country, Anhui Province. The total cost of
these land use rights of ATEC was $2,112,867 and the land use rights will
expire in 2056, 2058 and 2058, respectively. The Company has acquired the
land use right to an additional parcel located 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 land use right will
expire in 2061.
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Cost
|
$
|
8,200,846
|
|
$
|
2,178,255
|
|
|
Less: Accumulated amortization
|
|
(143,722
|
)
|
|
(106,484
|
)
|
|
Net book value
|
$
|
8,057,124
|
|
$
|
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 $11,068 and $10,593 for the
three months ended September 30, 2011 and 2010, respectively. Amortization
expense was $33,745 and $31,779 for the nine months ended September 30,
2011 and 2010, respectively.
|
F - 21
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14.
|
CONSTRUCTION IN
PROGRESS
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Construction of office
building and workshops
|
$
|
2,258,450
|
|
$
|
473,355
|
|
15.
|
OTHER PAYABLES AND ACCRUED
EXPENSES
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Due to former sole
stockholder and his affiliates
|
$
|
2,319,114
|
|
$
|
2,789,568
|
|
|
Due to third parties
|
|
1,088,772
|
|
|
603,824
|
|
|
Due to construction material
and building service providers
|
|
542,548
|
|
|
-
|
|
|
Due to employees
|
|
178,168
|
|
|
8,359
|
|
|
Accrued expenses
|
|
555,153
|
|
|
92,607
|
|
|
|
$
|
4,683,755
|
|
$
|
3,494,358
|
|
|
Due to former sole stockholder and his affiliates, due to
third parties and employees are unsecured, interest free and without a
fixed term of repayment and are for unspecific business
purposes.
|
|
|
16.
|
TAXES PAYABLE
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
Enterprise income tax payable
|
$
|
253,548
|
|
$
|
42,557
|
|
|
VAT payable
|
|
163,984
|
|
|
-
|
|
|
Individual income tax payable
|
|
3,230
|
|
|
2,051
|
|
|
|
$
|
420,762
|
|
$
|
44,608
|
|
F - 21
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
|
|
|
September 30, 2011
|
|
|
|
December 31, 2010
|
|
|
Industrial and Commercial Bank,
Longshou Branch, PRC
|
|
6.06% -
6.71%
|
|
|
From December 15,
2011 to March 23, 2012
|
|
$
|
3,905,000
|
*^
|
|
$
|
3,864,182
|
|
|
China Merchant Bank, Heifei branch, PRC
|
|
6.94%
|
|
|
October 29, 2011
|
|
|
1,562,000
|
+
|
|
|
1,512,400
|
|
|
China Merchant Bank, Heifei
branch, PRC
|
|
5.56%
|
|
|
November 22, 2011
|
|
|
-
|
|
|
|
4,537,200
|
|
|
China Merchant Bank, Heifei branch, PRC
|
|
7.32%
|
|
|
February 10, 2012
|
|
|
2,343,000
|
^
|
|
|
-
|
|
|
China Everbright Bank, Heifei
branch, PRC
|
|
5.56%
|
|
|
November 22, 2011
|
|
|
4,686,000
|
+
|
|
|
-
|
|
|
Huishang Bank, Xuancheng branch, PRC
|
|
7.88%
|
|
|
February 16, 2011
|
|
|
-
|
|
|
|
3,024,800
|
|
|
Huishang Bank, Xuancheng branch,
PRC
|
|
7.88%
|
|
|
February 16, 2012
|
|
|
2,030,600
|
*
|
|
|
-
|
|
|
Huishang Bank, Xuancheng branch, PRC
|
|
8.20%
|
|
|
April 11, 2012
|
|
|
4,686,000
|
*
|
|
|
-
|
|
|
Huishang Bank, Xuancheng branch,
PRC
|
|
8.53%
|
|
|
August 5, 2012
|
|
|
1,093,400
|
*
|
|
|
-
|
|
|
China Construction Bank, Jingde branch, PRC
|
|
5.85%
|
|
|
November 3, 2011
|
|
|
2,382,325
|
^
|
|
|
-
|
|
|
China Construction Bank, Jingde
branch, PRC
|
|
6.10%
|
|
|
January 8, 2012
|
|
|
740,388
|
^
|
|
|
-
|
|
|
|
|
|
|
|
|
|
$
|
23,428,713
|
|
|
$
|
12,938,582
|
|
* secured by land use rights
+
secured by third partys guarantee
^ secured by accounts receivable
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 September 30, 2011 and December 31, 2010, customer deposits amounted to
$1,140,085 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 September 30, 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 sole shareholder of TECT in exchange for 10,000 shares
of TECT, which was all the issued and outstanding capital stock of
TECT.
|
|
|
|
As a result of the reverse merger, the equity account of
the Company, prior to the share exchange date, has been retroactively
restated so that the ending outstanding share balance as of the share
exchange date is equal to the number of post share-exchange
shares.
|
|
|
|
As of each of September 30, 2011, and December 31, 2010,
the Company had outstanding 30,181,552 shares of issued common stock, with
a par value of $0.001 per share.
|
F - 21
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20.
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
Total lease expenses for the three months ended September
30, 2011 and 2010 was $20,140 and $10,966, respectively. Total lease
expense for the nine months ended September 30, 2011 and 2010 was $43,620
and $22,309, respectively.
|
|
|
|
The future minimum lease payments as of September 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 September 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 is
listed below:
|
|
|
|
September 30, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Liquidated damages for
|
|
|
|
|
|
|
|
- investment relation service with CCG
|
$
|
90,000
|
|
$
|
90,000
|
|
21.
|
STOCK OPTIONS & WARRANTS
|
|
|
|
The Company accounts for its stock options and warrants
in accordance with ASC Topic 718, Compensation Stock Compensation and
ASC Topic 505-50 Equity Based Payments to Non-Employees which were
adopted by the Company on June 15, 2010. The company issued a warrant to
CCG Investor Relations Partners LLC (CCG), an investor relations firm,
for the purchase of 80,000 shares of the Companys common stock at an
exercise price of $2.00 per share. The warrant vested in four equal
installations on June 30 , September 30, December 31 of 2010 and March 31,
2011. The warrant will expire on June 15, 2015.
|
|
|
|
The Company determines the estimated fair value of
share-based awards using the Black-Scholes option-pricing model. The
Black-Scholes model is affected by the Companys stock price as well as by
assumptions regarding certain complex and subjective variables. These
variables include, but are not limited to; the Companys expected stock
price volatility over the term of the awards and the actual and projected
option exercise behaviors. The Company calculated a stock based
compensation of $93,800 and recognized $93,800 in stock based compensation
expense for the nine months ended September 30, 2011. As of September 30,
2011 and December 31, 2010, the prepaid compensation expense amount was $0
and $31,600, respectively.
|
|
|
|
The initial value of the warrants was determined using
the Black-Scholes model using the following
assumptions:
|
|
.
|
Expected volatility of 125%
|
|
.
|
Risk-free interest rate of 3%
|
|
.
|
Year to maturity of 5 years
|
|
.
|
Market price at issuance date of $3.50
|
|
.
|
Strike price of $2.00
|
The value of the warrants was
based on the Companys common stock price of $3.50 on the date the
warrants were issued. The warrants were valued at $186,000 when they
vested in four equal installations on June 30 , September 30, December 31
of 2010 and March 31, 2011.
|
F - 24
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21.
|
STOCK OPTIONS & WARRANTS
(CONTINUED)
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
|
|
|
entitled to purchase
|
|
|
Exercise Price
|
|
|
Expiration date
|
|
|
Issued on June 15, 2010
|
|
80,000
|
|
$
|
2.00
|
|
|
June 15, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2011
|
|
80,000
|
|
$
|
2.00
|
|
|
|
|
|
Warrants exercised
|
|
-
|
|
|
2.00
|
|
|
|
|
|
Warrants expired
|
|
-
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding as of
September 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 September 30,
2011 and 2010; the amounts were $0 and $0, respectively. The share based
compensation expense for the nine months ended September 30, 2011 and 2010
were $93,800 and $0, respectively.
|
|
|
22.
|
OBLIGATION UNDER MATERIAL CONTRACTS
|
|
|
|
CCG was issued a warrant to purchase up to 80,000 shares
of the Companys stock, at a price of $2.00 per share, pursuant to the
terms and conditions of a letter agreement, dated June 20, 2010, between
the Company and CCG. CCG's right to exercise its warrant will vest in four
equal portions, with the first portion vesting on June 20, 2010, and the
remaining portions vesting on September 30, 2010, December 31, 2010 and
March 31, 2011, respectively. The warrant has a term of 5 years and will
expire on June 15, 2015. The warrant contains a $90,000 liquidated damage
provision for breach of such exclusivity. As of September 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
|
|
|
Nine months ended
|
|
|
Nine months ended
|
|
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication towers
|
$
|
2,049,173
|
|
$
|
1,550,889
|
|
$
|
6,887,140
|
|
$
|
8,628,648
|
|
|
Electricity supply
towers
|
|
1,827,445
|
|
|
4,882,728
|
|
|
4,457,273
|
|
|
11,808,089
|
|
|
|
|
3,876,618
|
|
|
6,433,617
|
|
|
11,344,413
|
|
|
20,436,737
|
|
|
Export sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication towers
|
|
17,647
|
|
|
814,393
|
|
|
734,349
|
|
|
1,050,491
|
|
|
Electricity supply
towers
|
|
7,416,327
|
|
|
37,605
|
|
|
7,418,371
|
|
|
405,366
|
|
|
|
|
7,433,974
|
|
|
851,998
|
|
|
8,152,720
|
|
|
1,455,857
|
|
|
Technical service income
|
|
54,056
|
|
|
-
|
|
|
62,659
|
|
|
-
|
|
|
|
$
|
11,364,648
|
|
$
|
7,285,615
|
|
$
|
19,559,792
|
|
$
|
21,892,594
|
|
F - 24
TEC TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 during the reporting
periods.
|
|
|
|
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
the Companys common stock 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, CEO, Chairman and
his affiliates
|
Included in other payable, due to former stockholder and
its affiliates were $2,319,114 and $2,789,568 as of September 30, 2011 and
December 31, 2010, respectively. The amounts are unsecured, interest free
and have no fixed term of repayment.
|
F - 25
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.
Third Quarter Financial Performance Highlights
The following summarizes certain key financial information for
the third quarter of 2011:
-
Revenues
: Revenues were $11.36 million for the three months
ended September 30, 2011, an increase of $4.07 million, or 55.83%, from $7.29
million for the same period last year.
-
Gross Profit and Margin
: Gross profit was $2.94 million for
the three months ended September 30, 2011, an increase of $1.01 million, or
52.33%, from $1.93 million for the same period last year. Gross margin was
25.92% for the three months ended September 30, 2011, as compared to 26.49%
for the same period last year.
-
Net Income:
Net income was $1.36 million for the three
months ended September 30, 2011, an increase of $0.50 million, or 58.14%, from
$0.86 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 September 30, 2011 was $0.05, as compared
to $0.03 for the same period last year.
Results of Operations
Comparison of Three Months Ended September 30, 2011
and September 30, 2010
The following table shows key components of our results of
operations during the three months ended September 30, 2011 and 2010, in both
dollars and as a percentage of our revenues.
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Dollars
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Revenues
|
|
Revenues
|
$
|
11,364,648
|
|
|
100.00%
|
|
$
|
7,285,615
|
|
|
100.00%
|
|
Cost of good sold
|
|
8,418,882
|
|
|
74.08%
|
|
|
5,355,307
|
|
|
73.51%
|
|
Gross profit
|
|
2,945,766
|
|
|
25.92%
|
|
|
1,930,308
|
|
|
26.49%
|
|
Selling and marketing expenses
|
|
(438,939
|
)
|
|
(3.86%
|
)
|
|
(337,423
|
)
|
|
(4.63%
|
)
|
General and administrative
expenses
|
|
(378,165
|
)
|
|
(3.33%
|
)
|
|
(293,389
|
)
|
|
(4.03%
|
)
|
Net income from operations
|
|
2,128,662
|
|
|
18.73%
|
|
|
1,299,496
|
|
|
17.84%
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant
|
|
1,421
|
|
|
0.01%
|
|
|
10,798
|
|
|
0.15%
|
|
Other
income
|
|
2,123
|
|
|
0.02%
|
|
|
-
|
|
|
-
|
|
Interest expense
|
|
(465,391
|
)
|
|
(4.09%
|
)
|
|
(299,865
|
)
|
|
(4.12%
|
)
|
Net other income (expenses)
|
|
(461,847
|
)
|
|
(4.06%
|
)
|
|
(289,067
|
)
|
|
(3.97%
|
)
|
Net income before provision for income taxes
|
|
1,666,815
|
|
|
14.67%
|
|
|
1,010,429
|
|
|
13.87%
|
|
Provision for income taxes
|
|
(257,753
|
)
|
|
(2.71%
|
)
|
|
(151,535
|
)
|
|
(2.08%
|
)
|
Net income
|
|
1,409,062
|
|
|
11.96%
|
|
|
858,894
|
|
|
11.79%
|
|
Foreign currency translation
gain
|
|
151,543
|
|
|
1.33%
|
|
|
12,462
|
|
|
0.17%
|
|
Comprehensive income
|
$
|
1,560,605
|
|
|
13.29%
|
|
$
|
871,356
|
|
|
11.96%
|
|
Revenues
. Our revenues are mainly generated from
sales of our tower products. Our revenues increased $4.08 million, or 55.96%, to
$11.36 million for the three months ended September 30, 2011 from $7.29 million
during the same period in 2010. For the three month period ended September 30,
2011, approximately 81.34% of our revenues were generated from sales to
customers in the energy industry and approximately 18.19% were generated from
sales to communications industry
customers. The period-over-period increase in revenues resulted mainly from an increase of approximately 87.87% in revenues generated by sales of energy transmission towers
as compared to the same period in 2010 which more than offset a decrease of
approximately 18.79% in revenues generated by sales of communications towers. In this quarter, we benefited from our strategic efforts in expanding international markets as generated approximately $7.4 million from overseas orders for energy
transmission towers.
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 increased $1.01 million, or 18.88%, to $8.42 million
in the three months ended September 30, 2011, from $5.36 million during the same period in 2010. We believe the dollar increase in cost of goods sold was generally in line with the increase in sales volume and revenues. As a percentage of
revenues, our cost of goods sold increased slightly to 74.08% in the three months ended September 30, 2011 from 73.51% for the same period last year.
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 increased $1.01 million, or 52.61%, to $2.94 million in the three months ended
September 30, 2011, from $1.93 million during the same period in 2010. The dollar increase was mainly due to the increase of sales volume and revenues. Gross profit as a percentage of revenue (gross margin) was 25.92% and 26.49% for three months
ended September 30, 2011 and 2010, respectively. Although our overseas orders generally had higher gross margins, gross margins for our domestic orders remained
constrained due to continuing increases of steel prices, which is our primary raw
material, and market competition.
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 increased $0.10 million, or 30.09%, to $0.44 million in the three months ended September 30, 2011, from $0.34 million during the same period in 2010.
Such increase was largely attributable to increased sales volume and our continuing marketing efforts.
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 $0.09 million, or 31.03%, to $0.38 million in the three months ended September 30, 2011, from $0.29 million during the same period
in 2010. Such increase was mainly attributable to increased labor costs.
Interest expense
.
Interest expense increased $0.16 million, or 55.33%, to $0.46 million for the three months ended September 30, 2011, from $0.30 million 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 increased $0.66 million, or 64.96%, to $1.67 million for the three months ended September 30, 2011, from $1.01 million during the same period in 2010, as a result
of the factors described above.
Provision for income taxes
. Our income tax provisions increased $0.16 million, or 106.67%, to $0.26 million for the three months ended September 30, 2011, from $0.15 million during the same period in 2010, mainly due to
increase in taxable income.
Net income
. We generated a net income of $1.41 million in the three months ended September 30, 2011, an increase of $0.55 million, or 63.95%, from $0.86 million during the same period in 2010, as a cumulative effect of all
factors discussed above.
Comparison of Nine Months Ended September 30, 2011 and September 30, 2010
The following table shows key components of our results of operations during the nine months ended September 30, 2011 and 2010, in both dollars and as a percentage of our revenues.
4
|
|
Nine Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
September 30, 2011
|
|
|
September 30, 2010
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Percent of
|
|
|
|
Dollars
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Revenues
|
|
Revenues
|
$
|
19,559,792
|
|
|
100.00%
|
|
$
|
21,892,594
|
|
|
100.00%
|
|
Cost of good sold
|
|
14,203,143
|
|
|
72.61%
|
|
|
15,313,202
|
|
|
69.95%
|
|
Gross profit
|
|
5,356,649
|
|
|
27.39%
|
|
|
6,579,392
|
|
|
30.05%
|
|
Selling and marketing expenses
|
|
(1,065,308
|
)
|
|
(5.45%
|
)
|
|
(1,127,290
|
)
|
|
(5.15%
|
)
|
General and administrative
expenses
|
|
(1,271,357
|
)
|
|
(6.50%
|
)
|
|
(938,337
|
)
|
|
(4.29%
|
)
|
Net income from operations
|
|
3,019,984
|
|
|
15.44%
|
|
|
4,513,765
|
|
|
20.62%
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grant
|
|
218,408
|
|
|
1.12%
|
|
|
190,215
|
|
|
0.87%
|
|
Other
income
|
|
2,123
|
|
|
0.01%
|
|
|
13,695
|
|
|
0.06%
|
|
Interest expense
|
|
(1,125,568
|
)
|
|
(5.75%
|
)
|
|
(979,425
|
)
|
|
(4.47%
|
)
|
Net other income (expenses)
|
|
(905,037
|
)
|
|
(4.62%
|
)
|
|
(775,515
|
)
|
|
(3.54%
|
)
|
Net income before provision for income taxes
|
|
2,114,947
|
|
|
10.82%
|
|
|
3,738,250
|
|
|
17.08%
|
|
Provision for income taxes
|
|
(339,043
|
)
|
|
(1.73%
|
)
|
|
(538,396
|
)
|
|
(2.46%
|
)
|
Net income
|
|
1,775,904
|
|
|
9.09%
|
|
|
3,199,854
|
|
|
14.62%
|
|
Foreign currency translation
gain
|
|
450,706
|
|
|
2.30%
|
|
|
(177,290
|
)
|
|
(0.81%
|
)
|
Comprehensive income
|
$
|
2,236,610
|
|
|
11.39%
|
|
$
|
3,022,564
|
|
|
13.81%
|
|
Revenues
. Our revenues decreased $2.33 million,
or 10.64%, to $19.56 million for the nine months ended September 30, 2011 from
$21.89 million during the same period in 2010. For the nine month period ended
September 30, 2011, approximately 60.71% of our revenues were generated from
sales to customers in the energy industry and approximately 38.96% were
generated from sales to communications industry customers. The decrease was
mainly concentrated in the first half of 2011 and mostly resulted for lower
sales volume. Revenues generated
by sales of energy transmission towers and sales of communications towers
decreased approximately 2.76% and 21.26% as compared to the same period in 2010,
respectively.
Cost of goods sold
. Our cost of goods sold
decreased $1.11 million, or 7.25%, to $14.20 million in the nine months ended
September 30, 2011, from $15.31 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 in the first two quarters of 2011. As a percentage of revenues, our
cost of goods sold increased to 72.61% in the nine months ended September 30,
2011 from 69.9% 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 fluctuations of raw material prices.
Gross profit and gross margin
. Our gross profit
decreased $1.22 million, or 18.58%, to $5.36 million in the nine months ended
September 30, 2011, from $6.58 million during the same period in 2010. The
decrease was mainly due to the decrease of sales revenues in the first two
quarters of 2011. Gross profit as a percentage of revenue (gross margin) was
27.39% and 30.1% for nine months ended September 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 $0.06 million, or 5.53%, to $1.07 million in the
nine months ended September 30, 2011, from $1.13 million during the same period
in 2010. Such decrease was largely attributable to reduced operations in our
sales and marketing department in the first two quarters of 2011.
General and administrative expenses
. Our general
and administrative expenses increased $0.33 million, or 35.11%, to $1.30 million
for the nine months ended September 30, 2011, from $0.94 million during the same
period in 2010. Such increase was primarily attributable to expenses associated
with being a public company and increased labor costs.
Interest expense
. Interest expense increased
$0.55 million, or 48.67%, to $1.13 million for the nine months ended September
30, 2011, from $0.98 million 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 $1.62 million, or 43.42%, to $2.11 million for the nine
months ended September 30, 2011, from $3.74 million during the same period in
2010, as a result of the factors described above.
5
Provision for income taxes
. Our income tax
provisions decreased $0.20 million, or 37.03%, to $0.34 million for the nine
months ended September 30, 2011, from $0.54 million during the same period in
2010, mainly due to decrease in taxable income in the first two quarters of
2011.
Net income
. We generated a net income of $1.78
million for the nine months ended September 30, 2011, a decrease of $1.42
million, or 44.37%, from $3.20 million during the same period in 2010, as a
cumulative effect of all factors discussed above.
Liquidity and Capital Resources
As of September 30, 2011, we had cash and cash equivalents of
approximately $3.38 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
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash (used in) provided
by operating activities
|
$
|
(5,551,925
|
)
|
$
|
1,698,724
|
|
Net cash (used in) investing activities
|
|
(4,183,643
|
)
|
|
(659,920
|
)
|
Net cash provided by (used
in) financing activities
|
|
9,904,699
|
|
|
(1,055,166
|
)
|
Effects of exchange rate change in cash
|
|
579,411
|
|
|
84,800
|
|
Net increase in cash and cash
equivalents
|
|
848,602
|
|
|
68,438
|
|
Cash and cash equivalents at beginning of the
period
|
|
2,526,710
|
|
|
164,927
|
|
Cash and cash equivalent at
end of the period
|
$
|
3,375,312
|
|
$
|
233,365
|
|
Operating Activities
Net cash used in operating activities was $5.55 million for the
nine months ended September 30, 2011, as compared to $1.70 million net cash
provided by operating activities for the same period in 2010. The increase in
net cash used in operating activities was primarily attributable to the cash outflow
associated with increased accounts payables and decreased net income in the
nine months ended September 30, 2011. Due to the tightening of lending policy in
China, some of our suppliers required shorter payment terms.
Investing Activities
Net cash used in investing activities for the nine months ended
September 30, 2011 was $4.18 million, as compared to $0.66 million during the
same period in 2010. During the nine months ended September 30, 2011, we
invested
approximately $2.18 million in the form of an installment payment for land use right and
approximately $1.78 million for construction of our Zhejiang facilities and
Anhui administration office, and upgrade of production facilities.
Financing Activities
Net cash provided by financing activities for the nine months
ended September 30, 2011 was $9.90 million, as compared to $1.06 million net
cash used in financing activities for the same period in 2010. The increase in
net cash provided by financing activities was mainly attributable to increased
net short term borrowings.
6
Loan Commitments
As of September 30, 2011, we did not hold any long-term loans.
Our short-term bank loans, totaling $23.43 million, are as follows:
|
|
Amount
|
|
|
Interest
|
|
|
|
|
|
|
|
Bank
|
|
(in millions)*
|
|
|
Rate
|
|
|
Maturity Date
|
|
|
Duration
|
|
Industrial and Commercial
Bank, Longshou Branch
|
$
|
0.31
|
|
|
6.06%
|
|
|
March 22, 2012
|
|
|
12 months
|
|
Industrial and Commercial Bank, Longshou
Branch
|
|
0.31
|
|
|
6.71%
|
|
|
March 19, 2012
|
|
|
6 months
|
|
Industrial and Commercial
Bank, Longshou Branch
|
|
0.78
|
|
|
6.71%
|
|
|
March 19, 2012
|
|
|
6 months
|
|
Industrial and Commercial Bank, Longshou
Branch
|
|
0.31
|
|
|
6.67%
|
|
|
March 21, 2012
|
|
|
12 months
|
|
Industrial and Commercial
Bank, Longshou Branch
|
|
0.94
|
|
|
6.67%
|
|
|
March 23, 2012
|
|
|
12 months
|
|
Industrial and Commercial Bank, Longshou
Branch
|
|
1.25
|
|
|
6.44%
|
|
|
December 15, 2011
|
|
|
6 months
|
|
Huishang Bank, Xuancheng
Branch
|
|
2.03
|
|
|
7.88%
|
|
|
February 16,
2012
|
|
|
12 months
|
|
Huishang Bank, Xuancheng Branch
|
|
4.69
|
|
|
8.20%
|
|
|
April 11, 2011
|
|
|
12 months
|
|
Huishang Bank, Xuancheng
Branch
|
|
1.09
|
|
|
7.88%
|
|
|
August 5, 2012
|
|
|
12 months
|
|
China Merchants Bank, Hefei Branch
|
|
1.56
|
|
|
6.94%
|
|
|
October 29, 2011
|
|
|
12 months
|
|
China Merchants Bank, Hefei
Branch
|
|
2.34
|
|
|
7.32%
|
|
|
February 10,
2011
|
|
|
12 months
|
|
China Construction Bank, Jingde Branch
|
|
2.39
|
|
|
5.85%
|
|
|
May 3, 2011
|
|
|
6 months
|
|
China Construction Bank,
Jingde Branch
|
|
0.74
|
|
|
6.10%
|
|
|
November 3, 2011
|
|
|
6 months
|
|
China Everbright Bank, Hefei Branch
|
|
4.69
|
|
|
5.56%
|
|
|
January 8, 2012
|
|
|
6 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
23.43
|
|
|
|
|
|
|
|
|
|
|
___________
* Calculated based on the exchange rate of $1 =
RMB 6.40
Capital Expenditures
Our capital expenditures for the nine months ended September
30, 2011 and 2010 were $4.18 million and $0.66 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
In April 2011, the FASB issued ASU No. 2011-03,
Transfers
and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase
Agreements
(ASU 2011-03), intended to improve financial reporting of
repurchase agreements and refocus the assessment of effective control on a
transferors contractual rights and obligations rather than practical ability to
perform those rights and obligations. The guidance in ASU 2011-03 is effective
for the first interim or annual period beginning on or after December 15,
2011.The Company does not expect the adoption of ASU 2011-03 to have a
significant impact on its consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04,
Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs
(ASU 2011-04). ASU 2011-04 represents the converged guidance of
the FASB and the International Accounting Standards Board (IASB) on fair value
measurement. A variety of measures are included in the update intended to either
clarify existing fair value measurement requirements, change particular
principles requirements for measuring fair value or for disclosing information
about fair value measurements. For many of requirements, the FASB does not
intend to change the application of existing requirements under Accounting
Standards Codification (ASC) Topic 820, Fair Value Measurements. ASU 2011-04 is
effective for interim and annual periods beginning after December 15, 2011 and
early application is not permitted. The Company is evaluating the impact
adoption of ASU 2011-04 and does not expect the adoption of ASU 2011-04 will
have significant impact on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
Presentation
of Comprehensive Income
(ASU 2011-05), intended to increase the prominence
of items reported in other comprehensive income and to facilitate convergence of
accounting guidance in this area with that of the IASB. The amendments require
that all non-owner changes in stockholders equity be presented in a single
continuous statement of comprehensive income or in two separate but consecutive
statements. Amendments under ASU 2011-05 for public entities should be applied
retrospectively for fiscal years, and interim periods within those years,
beginning December 15, 2011. The Company is evaluating the impact adoption of
ASU 2011-05 and does not expect the adoption of ASU 2011-05 will have
significant impact on its consolidated financial statements.
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 September 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 September 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.
8
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 third 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.
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).
|
ITEM 5.
|
OTHER INFORMATION.
|
We have no information to disclose that was required to be in a
report on Form 8-K during the period covered by this report, but was not
reported. There have been no material changes to the procedures by which
security holders may recommend nominees to our board of directors.
The following exhibits are filed as part of this report or
incorporated by reference:
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: November 17, 2011
|
TEC TECHNOLOGY, INC.
|
|
|
|
|
By:
|
/s/
Chun Lu
|
|
|
Chun Lu, Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
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By:
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/s/
Yuhua Yang
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Yuhua Yang, Chief Financial Officer
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(Principal Financial Officer and
Principal
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Accounting Officer)
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EXHIBIT INDEX
Telidyne (CE) (USOTC:TLDN)
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Telidyne (CE) (USOTC:TLDN)
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