ITEM 1. BUSINESS.
Business Overview
We are primarily engaged in the design, production and sale of transmission towers and related products used in high voltage electric power transmission and wireless communications. We sell our tower products to prime contractors on large transmission projects for electric utility companies or telecommunications service providers, who are developing and constructing projects for end customers. Our electric transmission towers currently support 35kv, 110kv, 220kv, and 500kv transmission lines and we plan to build towers that support Ultra High Voltage (UHV) tower lines of 750+kv DC or 1000+kv AC transmission lines. Our wireless communication towers include single-tube towers, 4-strut towers and roof top towers for the 2G, 3G, and microwave market. We plan to expand our business in the near future to enter the communication base station system integration market and to offer tower installation and maintenance services. Our towers are primarily made of steel, but some contain aluminum or other alloy materials.
Our revenues currently are, and historically have been, generated from the sale of our tower products. In the future, we expect to offer installation and technical services that we believe will generate an additional revenue stream, however, to date, we have not generated material revenues from such services.
Our headquarters are located in Anhui Province in southeastern China and our international sales network is primarily operated from our branch offices in the Shenzhen Special Economic Zone and Beijing.
Our Corporate History and Background
We were originally organized under the laws of the State of Florida on July 22, 1988 under the name Sea Green, Inc. On June 3, 1998, we changed our name to Americom Networks Corp. and on July 10, 1998, we changed our name to Americom Networks International, Inc. From our inception until we ceased active business operations in May 1999, we engaged in various business endeavors and pursued several lines of business including the development and marketing of telecommunications systems to high-volume users for use or resale.
On February 6, 2008, we effected a redomestication from Florida to Delaware by merging with Americom Networks International, Inc., a corporation that we established in the State of Delaware solely to effect the reincorporation.
On August 15, 2008, we changed our name to Highland Ridge, Inc. and our primary business became the search for a potential merger candidate or a business to acquire.
On May 4, 2010, we completed a reverse acquisition transaction through a share exchange with TEC HK and its sole shareholder, Mr. Hua Peng Phillip Wong, pursuant to which we acquired 100% of the issued and outstanding capital stock of TEC HK in exchange for 19,194,421 shares of our common stock, which constituted 63.6% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the reverse acquisition. For accounting purposes, the share exchange was treated as a reverse acquisition, with TEC HK as the accounting acquirer and TEC Technology, Inc. as the acquired party.
As a result of the reverse acquisition of TEC HK, our business became the business of TEC HK and its subsidiaries, namely, the design, production and sale of transmission towers and related products used in high voltage electric power transmission and wireless communications. On June 9, 2010, we changed our name to TEC Technology, Inc. to more accurately reflect our new business operations.
On November 30, 2011, we dissolved our indirect, wholly owned PRC subsidiary, Shuncheng Taida Technology Co., Ltd.
Our Corporate Structure
All of our business operations are conducted through our Chinese operating subsidiaries, TEC Tower and ZTEC. The chart below presents our current corporate structure.
Our Products
Our electric transmission and wireless communications product lines include angle steel towers, steel pipe towers and transmission cable towers, constructed primarily of steel, aluminum or other alloy materials.
Electric Transmission Towers
Our electric transmission towers currently support 35kv, 110kv, 220kv and 500kv, and we have recently applied certifications to produce towers for the 750kv electric transmission lines. We plan to develop towers that support Ultra High Voltage (UHV) tower lines of 1000+kv AC transmission lines as the market evolves beyond testing phases.
Wireless Communications Towers
Our wireless communications towers include single-tube towers, 4-strut towers and roof top towers for the 2G, 3G, and microwave market.
We are also in the early stages of developing expertise to produce wireless communication base stations, which typically include towers, air conditioning units, transformers, equipment procurement, power connection, site survey, installation, and after-sales services. Once we are able to develop this full product and service offering, we plan to expand our business by offering services to customers under separate tower maintenance contracts. Profit margins from base station contracts are typically higher than margins from product sales, however, to be fully engaged in the base station business we will have to develop or acquire additional capabilities in terms of design, procurement, and services.
In the future we expect to expand our business to offer tower installation and maintenance services.
Our Raw Materials and Suppliers
The major raw materials for our tower products are angle iron, plate, steel beams, bolts and welding wire. We acquire our primary raw materials from a variety of sources. We have some long-term steel purchase contracts in order to reduce the negative effects of steel price fluctuation, but we also have some short-term contracts or make one-time purchases to take advantage of favorable pricing. Our primary suppliers are Zhejiang Shenghua Products Co., Ltd., Nanjing Fei Ke Steel Co., Limited, Nanjing Gang Feng Industrial Co., Limited and Tonglu Huayang Fasterner Co., Limited whose purchases accounted for approximately 27.4%, 11.59%, 10.16% and 8.76% of our cost of raw materials for the year ended December 31, 2011, respectively.
Our Customers and Marketing Efforts
Our direct customers typically are specialized construction companies which serve as a prime contractor and builder on transmission projects constructed for our ultimate end customers, electric utility companies and telecommunication service providers. We usually obtain our customers by succeeding in a competitive bidding process where subcontracts are awarded to companies, like us, which submit the most favorable bids on a transmission construction project. We have found that a successful bid is usually predicated on a variety of factors including pricing, terms of delivery, product design and quality, industry experience and reputation and time to delivery, among other factors.
During fiscal year 2011, our three largest customers were Electrical Interconnection SA ESP Columbia, Myanmar Economic Corporation, Burma, and Shanxi Jinneng Steel Structure Co., Ltd, whose purchases accounted for approximately 17.04%, 13.40% and 12.94% of our revenue for the year ended December 31, 2011, respectively. No other customer accounted for more than 10% of our total revenue in 2011.
The electric utility companies and telecommunication companies of China that use our tower products in their transmission facilities mainly include ZTE Corporation, the State Grid Corp of China, the China Southern Grid and Huawei Technologies Co. Ltd. Geographically, our major Chinese clients are mainly located in Shanxi Province, Gansu Province and the Inner Mongolia Autonomous Region in northern China, in Yunnan Province and Guizhou Province in southern China; and in Zhejiang Province in eastern China.
We have also made efforts in some overseas markets where our products have developed positive brand recognition. We believe that we are one of only a few PRC-based electric transmission tower companies selling products abroad. We mainly target three overseas markets, namely Asia Pacific, Africa and Latin America and established overseas sales offices in 25 countries. In Columbia and Burma, we currently partner with large contractors such as Huawei Technologies Co. Ltd. and ZTE Corporation to perform contracts in these markets, and in Africa, we have independently established sales centers to directly serve this market.
We generally seek to obtain certifications from main contractors in these overseas markets and then bid on their particular projects. We currently hold certifications from Huawei Technologies Co. Ltd., ZTE Corporation, Nokia Ericsson, and Reliance, which allow us to bid as subcontractors on their projects. The table below is a sampling of our overseas projects:
When we successfully bid on a transmission project and secure a sub-contract for the purchase of our tower products, we are expected to promptly deliver to the prime contractor and/or end-customer, an acceptable tower design plan, as well as a supply and construction schedule, usually ranging from one to six months. During this time, we assemble and procure the raw materials that are needed in the tower manufacturing process from our raw material inventory and, occasionally, by special order from third party vendors. The steel used in our towers must be galvanized prior to the preparation of each piece for the tower parts so we usually outsource this process to specialized galvanization companies. Upon completing the components, we then test-assemble a percentage of the towers ordered. If the pieces connect according the specifications, we then load the components onto trucks or trains and ship them to the customer’s installation site. Through vertical integration of manufacturing process, we expect to enjoy competitive advantages from cost reduction in transportation and galvanization costs. We plan to expand our business to offer the installation and service of our towers with end users. Competition
The domestic electric transmission tower products and service market is highly competitive and fragmented. We believe that no single company in China holds more than a 3% market share. We believe that successful companies in the domestic electric transmission market compete effectively based on product and customer certification, delivery scheduling and capacity, pricing and customer retention. Competition in the domestic and international wireless communication market is based primarily on subcontracting from large equipment providers, such as Huawei and Nokia Ericsson.
Our primary competition comes from domestic companies such as Meteno Communication Technologies, Qixing Tower and Nanjing Daji Towers. Meteno Communication Technologies works solely with wireless communication towers and Qixing Tower participates in the wireless communication market. Additional competition comes from large international companies such as Valmont Industries, Inc. (NYSE:VMI) that are both larger than us in terms of assets and sales volume and possess greater name recognition, assets, personnel, sales, and financial resources. However, these competitors generally have higher prices for their products, and most of them do not have distribution networks in China that are as developed as ours. Competitive price for high quality goods, short delivery time, after sales service and sound customer relationship are our competitive advantages over our competitors. We also held numerous certificates of supplier issued by national power companies in various countries.
We believe that the quality of our product and service offerings and our relatively low labor costs enable us to compete favorably in the market for electric and wireless transmission towers and distinguish us from many of our competitors, especially our international competitors. Although we generally win contracts by our delivery schedule and reputation in the market, our pricing is competitive. Our focus on quality and service allows us to bid for most projects, but through a lack of sufficient working capital, we sometimes elect to abstain from bidding during the third and fourth quarters which are generally busier. We also sometimes work with Qixing Tower and Nanjing Daji Towers on larger projects where they serve as the primary contractor.
Research and Development
Our research and development activities focus on developing innovative tower products. As of December 31, 2011, we had 16 employees dedicated to research and development. We expect to engage in continuous research and development, to enhance our product and service offerings in our core areas. In addition, we plan to expand our research and development team to support our planned entry into the communication base station and electric system market. In 2011 and 2010, our research and development expenses were $0 and $0, respectively.
Intellectual Property
We currently hold exclusive licenses for five patents, three of which are licensed from Anhui University of Technology and Science and the other two from the Hangzhou Tianye Communication Equipment Co., Ltd. The table below summarizes our exclusive licenses:
We expect to renew our licenses as they expire. We also own our domain name, tectower.com, which has been registered since August 14, 2007.
In addition, TEC Towner owns the following technologies that are used in our operations:
Instrumentation Mold for Corner Cutting Die
Inner and External Shovel Molding Instrumentation
Open & Close Co-angle molding Instrumentation
Material Injection Tooling Instrumentation
Double Punching & Stamping molding Instrumentation
Matter and Procedure for Bending Device with Board Assembly System
Angle Blending with Foddering between the molding Instrumentation
Semi-Automatic Flat steel Blending Molding System
Steel Channel Empty Capacity Molding System
Employees
As of December 31, 2011, we employed a total of 323 employees. The following table sets forth the number of our employees by function.
Approximately 230 of our employees are located in our executive offices in Anhui, 5 employees are located in Shenzhen, 3 employees are located in Beijing, 67 employees are located in Zhejiang, and 18 employees are located in overseas.
Our employees in China participate in a state pension plan organized by Chinese municipal and provincial governments. We are required to contribute monthly to the plan at the rate of 23% of an employee’s average monthly salary. In addition, we are required by Chinese law to cover employees in China with various types of social insurance. We believe that we are in material compliance with the relevant PRC employment laws.
Insurance
We do not have any business liability, interruption or litigation insurance coverage for our operations in China. Insurance companies in China offer limited business insurance products. While business interruption insurance is available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, we are subject to business and product liability exposure. See Item 1A
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. You should read the section entitled “Special Note Regarding Forward Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.
RISKS RELATED TO OUR BUSINESS
Our products often are subject to customer testing, inspection and approval.
We frequently supply our tower design services and tower products to prime contractors under subcontractor agreements which incorporate terms of the prime contract and often include the testing, inspection and approval requirements that are a precondition of payment to us by the prime contractor and/or the end-customer. Although we endeavor to satisfy the requirements of each of these contracts to which we are a party, no assurance can be given that the necessary approval of our products and services will be granted on a timely basis or at all, and that we will receive any payments due to us. In some cases, we may be dependent on subcontractors to complete other portions of these projects which may also delay payments to us. Any failure to obtain these approvals and payments may have a material adverse effect on our business and future financial performance
In order to grow at the pace expected by management, we will require additional capital to support our long-term growth strategies. If we are unable to obtain additional capital in future years, we may be unable to proceed with our plans and we may be forced to curtail our operations.
Our working capital requirements and the cash flow provided by future operating activities, if any, will vary greatly from quarter to quarter, depending on the volume of business during the period and payment terms with our customers. We will require additional working capital to support our long-term growth strategies, which includes identifying suitable targets for horizontal or vertical mergers or acquisitions so as to enhance the overall productivity and benefit from economies of scale. However, due to the uncertainty arising out of domestic and global economic conditions and the ongoing tightening of domestic credit markets, we may not be able to generate adequate cash flows or obtain adequate levels of additional financing, whether through equity financing, debt financing or other sources. Even if we are able to get additional financing, it might not be on terms that are favorable to the Company. Furthermore, additional financings could result in significant dilution to our earnings per share or the issuance of securities with rights superior to our current outstanding securities, including registration rights. If we are unable to raise additional financing, we may be unable to implement our long-term growth strategies, develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures on a timely basis, if at all. In addition, a lack of additional financing could force us to substantially curtail operations.
Our business could be adversely affected by reduced levels of cash, whether from operations or from borrowings.
Historically, our principal sources of funds have been cash flows from operations and borrowings from banks and other institutions. Our commercial short term bank loans totaled $20.3 million as of December 31, 2011. While our current bank loan agreements do not contain any specific credit agreement covenants, there can be no assurance that we will generate sufficient earnings and cash flow to repay our bank loans when they mature. In the event of a default, there can be no assurance that we could negotiate a new credit agreement or that we could obtain a new credit agreement with satisfactory terms and conditions within a reasonable time period.
Our business and operations will suffer if prime contractors or end- customers prove to be not creditworthy.
In our industry, companies such as ours that are subcontractors on large transmission construction projects are often subject to the terms of a prime contract, including payment terms. We sometimes do not receive full payment on a project until the prime contractor is paid by the end-customer. Consequently, we extend credit to some of our customers while generally requiring no collateral. Generally, our customers pay in installments, with a portion of the payment upfront, a portion of the payment upon receipt of our products by our customers and before the installation, and a portion of the payment after the installation of our products and upon satisfaction of our customer. Sometimes, a small portion of the payment will not be paid until after a certain period following the installation. We perform ongoing credit evaluations of our customers’ financial condition and generally have no difficulties in collecting our payments. However, if we encounter future problems collecting amounts due from our clients or if we experience delays in the collection of amounts due from our clients, our liquidity could be negatively affected. In order to reduce collection risks, we have turned down some opportunities that we believed carried unfavorable payment terms. Our customers are primarily large enterprises with strong recurring cash flow. We believe that we will be able to collect current amounts due from our customers.
If our suppliers fail to perform their contractual obligations, our ability to provide services and products to our customers, as well as our ability to obtain future business, may be harmed.
Many of our products include parts and raw materials procured from other companies upon which we rely to provide a portion of the products that we provide to our customers. There is a risk that we may have disputes with our suppliers, including disputes regarding the quality and timeliness of parts and raw materials provided by these suppliers. A failure by one or more of our suppliers to satisfy the agreed-upon contracts may materially and adversely impact our ability to perform our obligations to our customers, could expose us to liability and could have a material adverse effect on our ability to compete for future contracts and orders.
Because steel is a key material in our business operations, we are subject to the fluctuations in the steel and iron ore market
The primary raw material for our products is steel. Steels prices have fluctuated greatly in recent years. We have taken measures to offset the negative effect of price fluctuations, and entered into long-term supplier relationship with some steel producers at variable prices relative to the market price. However, we cannot predict the future trends of steel prices, and large swings in steel price might greatly affect our profitability.
Our success relies on our management’s ability to understand the electric transmission and wireless communication industries.
We target the rapidly evolving electric transmission and wireless communication markets for tower and related products and services. As such, it is critical that our management is able to understand industry trends and make good strategic business decisions. If our management is unable to identify industry trends and act in response to such trends in a way that is beneficial to us, our business will suffer.
If we are unable to respond to the rapid changes in our industries and changes in our customers’ requirements and preferences, our business, financial condition and results of operations could be adversely affected.
If we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements, we could lose customers and market share. The electric transmission and wireless communication industries are characterized by fairly rapid technological change. Changes in customer requirements and preferences, the frequent introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our existing products, services and systems obsolete. The nature of products and services in the electric transmission and wireless communication industries and their rapid evolution will require that we continually improve the performance, features and reliability of our products and services. Our success will depend, in part, on our ability to:
enhance our existing products and services;
anticipate changing customer requirements by designing, developing, and launching new products and services that address the increasingly sophisticated and varied needs of our current and prospective customers; and
respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
The development of additional products and services involves significant technological and business risks and requires substantial expenditures and lead time. If we fail to introduce products with new technologies and standards in a timely manner, or adapt our products to these new technologies and standards, our business, financial condition and results of operations could be adversely affected. We cannot assure you that even if we are able to introduce new products or adapt our products to new technologies and standards that our products will gain acceptance among our customers. In addition, from time to time, we or our competitors may announce new products, product enhancements or technological innovations that have the potential to replace or shorten the life cycles of our existing products and that may cause customers to refrain from purchasing our existing products, resulting in inventory obsolescence.
We may not be able to maintain or improve our competitive position in the electric transmission and wireless communication industries, and we expect this competition to continue to be intense.
China’s electric transmission and wireless communication industries are large and established, though rapidly evolving. Our primary competition comes from domestic companies such as Meteno Communication Technologies, Qixing Tower, and Nanjing Daji Towers. Additional competition comes from large international companies such as Valmont Industries, Inc. (NYSE:VMI). Some of our international competitors are larger than us and possess greater name recognition, assets, personnel, sales and financial resources. These entities may be able to respond more quickly to changing market conditions by developing new products and services that meet customer requirements or are otherwise superior to our products and services and may be able to more effectively market their products than we can because they have significantly greater financial, technical and marketing resources than we do. They may also be able to devote greater resources than we can to the development, promotion and sale of their products. Increased competition could require us to reduce our prices, result in our receiving fewer customer orders, and result in our loss of market share. We cannot assure you that we will be able to distinguish ourselves in a competitive market. To the extent that we are unable to successfully compete against existing and future competitors, our business, operating results and financial condition could be materially adversely affected.
If we are unable to attract and retain senior management and qualified technical and sales personnel, our operations, financial condition and prospects will be materially adversely affected.
Our future success depends in part on the contributions of our management team and key technical and sales personnel and our ability to attract and retain qualified new personnel. In particular, our success depends on the continuing employment of our Chief Executive Officer, Mr. Chun Lu, our Vice President of Sales and Marketing, Mr. Debin Chen, and our Chief Technology Officer, Mr. Baojia He. There is significant competition in our industry for qualified managerial, technical and sales personnel and we cannot assure you that we will be able to retain our key senior managerial, technical and sales personnel or that we will be able to attract, integrate and retain other such personnel that we may require in the future. If we are unable to attract and retain key personnel in the future, our business, operations, financial condition, results of operations and prospects could be materially adversely affected.
Management's estimates and assumptions affect reported amounts of expenses and changes in those estimates could impact operating results.
We recognize an export tax refund as an asset for the expected future tax consequences of events which are included in the financial statements or tax returns. In assessing the whether tax refund assets are realizable, management makes certain assumptions about whether the tax refunds assets will be realized. We expect the tax refund assets currently recorded to be fully realizable, however there can be no assurance that changes in government policies could lead to uncertainties in the future.
We have limited insurance coverage in China.
We do not have any business liability, interruption or litigation insurance coverage for our operations in China. While business interruption insurance and other types of insurance are available to a limited extent in China, we have determined that the risks of interruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Therefore, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.
Our limited ability to protect our licensed intellectual property, and the possibility that this technology could inadvertently infringe technology owned by others, may adversely affect our ability to compete.
We currently hold exclusive licenses for five patents, three of which are licensed from Anhui University of Technology and Science and the other two from the Hangzhou Tianye Communication Equipment Co., Ltd. A successful challenge to the ownership of this technology by third parties could materially damage our business prospects. Our competitors may assert that the technologies or products infringe on their patents or proprietary rights. We may be required to obtain from others licenses that may not be available on commercially reasonable terms, if at all. Problems with intellectual property rights could increase the cost of our products or delay or preclude our new product development and commercialization. If infringement claims against us or our licensors are deemed valid, we may not be able to obtain appropriate licenses on acceptable terms or at all. Litigation could be costly and time-consuming but may be necessary to protect our technology license positions or to defend against infringement claims.
Environmental regulations impose substantial costs and limitations on our operations.
We are subject to various national and local environmental laws and regulations in China concerning issues such as air emissions, wastewater discharges, and solid waste management and disposal. These laws and regulations can restrict or limit our operations and expose us to liability and penalties for non-compliance. While we believe that our facilities are in material compliance with all applicable environmental laws and regulations, the risks of substantial unanticipated costs and liabilities related to compliance with these laws and regulations are an inherent part of our business. It is possible that future conditions may develop, arise or be discovered that create new environmental compliance or remediation liabilities and costs. While we believe that we can comply with existing environmental legislation and regulatory requirements and that the costs of compliance have been included within budgeted cost estimates, compliance may prove to be more limiting and costly than anticipated.
Our business and reputation as a provider of transmission and communication towers may be adversely affected by product defects or performance.
We believe that we offer high quality products that are reliable and competitively priced. If our products do not perform to specifications, we might be required to redesign or recall those products or pay substantial damages. Such an event could result in significant expenses, disrupt sales and affect our reputation and that of our products. In addition, product defects could result in substantial product liability. We do not have product liability insurance. If we face significant liability claims, our business, financial condition, and results of operations would be adversely affected.
We have identified material weaknesses in our internal control over financial reporting. If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results and prevent fraud. As a result, current and potential stockholders could lose confidence in our financial statements, which would harm the trading price of our common stock.
Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated filers or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation report of their auditors in annual reports.
A report of our management is included under Item 9A “Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive a positive attestation from our independent auditors.
During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2011, management identified a material weakness relating to our lack of sufficient accounting personnel with an appropriate understanding of U.S. GAAP. We are undertaking remedial measures, which measures will take time to implement and test, to address this material weakness. There can be no assurance that such measures will be sufficient to remedy the material weakness identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A “Controls and Procedures” for more information.
RISKS RELATED TO DOING BUSINESS IN CHINA
Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.
Most of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including:
the degree of government involvement;
the level of development;
the growth rate;
the control of foreign exchange;
the allocation of resources;
an evolving regulatory system; and
a lack of sufficient transparency in the regulatory process.
While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. The Chinese economy has also experienced certain adverse effects due to the recent global financial crisis. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.
The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the Chinese government. The continued control of these assets and other aspects of the national economy by the Chinese government could materially and adversely affect our business. The Chinese government also exercises significant control over Chinese economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our businesses.
Future government regulations or other standards could have an adverse effect on our operations.
Our operations are subject to a variety of laws, regulations and licensing requirements of national and local authorities in the PRC. We are required to obtain licenses or permits from the PRC central government and from Anhui province, where we operate, and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. In the event that these laws, regulations and/or licensing requirements change, we may be required to modify our operations or to utilize resources to maintain compliance with such rules and regulations. In addition, new regulations may be enacted that could have an adverse effect on us.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business through our subsidiaries in the PRC. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to FIEs. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations, and rules are not always uniform, and enforcement of these laws, regulations, and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese operations and subsidiaries.
You may have difficulty enforcing judgments against us.
Most of our assets are located outside of the United States and all of our current operations are conducted in the PRC. In addition, all of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, all of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the PRC would recognize or enforce judgments of U.S. courts. Our counsel as to PRC law has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. Courts in China may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates basic principles of PRC law or national sovereignty, security, or the public interest. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Future inflation in China may inhibit our ability to conduct business in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -0.8% . These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products and our company.
Restrictions on currency exchange may limit our ability to receive and use our sales effectively.
The majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that FIEs may only buy, sell or remit foreign currencies after providing valid commercial documents, at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. The Chinese regulatory authorities may impose more stringent restrictions on the convertibility of the RMB.
In addition, the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, issued by SAFE and effective as of August 29, 2008, or Circular 142, regulates the conversion by FIEs of foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-dominated capital of a FIE may only be used for purposes within the business scope approved by the relevant government authority and may not be used to make equity investments in PRC, unless specifically provided otherwise. SAFE further strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-dominated capital of a FIE. The use of such RMB may not be changed without approval from SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Any violation of Circular 142 may result in severe penalties, including substantial fines.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Restrictions under PRC law on our PRC subsidiaries’ ability to make dividends and other distributions could materially and adversely affect our ability to grow, make investments or acquisitions that could benefit our business, pay dividends to you, and otherwise fund and conduct our business.
Substantially all of our sales are earned by our PRC subsidiaries. However, as discussed more fully under Item 1 “Business -Regulation-Dividend Distributions,” PRC regulations restrict the ability of our PRC subsidiaries to make dividends and other payments to their offshore parent company. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into PRC subsidiaries, limit our PRC subsidiaries' ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, SAFE issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, generally referred to as Circular 75. Circular 75 requires PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an SPV for the purpose of engaging in an equity financing outside of China. See Item 1 “Business-Regulation-Circular 75” for a detailed discussion of Circular 75 and its implementation.
We have asked our stockholders, who are PRC residents as defined in Circular 75, to register with the relevant branch of SAFE as currently required in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that they can obtain the above SAFE registrations required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC resident beneficial holders.
In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of TEC HK constitutes a Round-trip Investment without MOFCOM approval.
On August 8, 2006, six PRC regulatory agencies promulgated the M&A Rule, which regulates “Round-trip Investments,” defined as having taken place when a PRC business that is owned by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s). See Item 1 “Business- Regulation-Mergers and Acquisitions” for a detailed discussion of the M&A Rule.
The PRC regulatory authorities may take the view that Mr. Chun Lu’s acquisition of our equity interest (following exercise of his option), or the Acquisition, and the reverse acquisition of TEC HK are part of an overall series of arrangements which constitute a Round-trip Investment because at the end of these transactions, Mr. Lu will become the majority owner and effective controlling party of a foreign entity that acquired ownership of our Chinese subsidiaries. The PRC regulatory authorities may also take the view that the registration of the Acquisition with the relevant AIC in Beijing and the filings with the Beijing SAFE may not be evidence that the Acquisition has been properly approved because the relevant parties did not fully disclose to the AIC, SAFE or MOFCOM the overall restructuring arrangements, the existence of the reverse acquisition and its link with the Acquisition. If the PRC regulatory authorities take the view that the Acquisition constitutes a Round-trip Investment under the M&A Rule, we cannot assure you we may be able to obtain the approval required from MOFCOM.
If the PRC regulatory authorities take the view that the Acquisition constitutes a Round-trip Investment without MOFCOM approval, they could invalidate our acquisition and ownership of our Chinese subsidiaries. We believe that if this takes place, we may be able to find a way to re-establish control of our Chinese subsidiaries’ business operations through a series of contractual arrangements rather than an outright purchase of our Chinese subsidiaries, but we cannot assure you that such contractual arrangements will be protected by PRC law or that we can receive as complete or effective economic benefit and overall control of our Chinese subsidiaries’ business than if the Company had direct ownership of our Chinese subsidiaries. In addition, we cannot assure you that such contractual arrangements can be successfully effected under PRC law. If we cannot obtain MOFCOM approval if required by the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of our Chinese subsidiaries, our business and financial performance will be materially adversely affected.
Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.
On March 16, 2007, the National People’s Congress of China passed the EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. See Item 1 “Business-Regulation-Taxation” for a detailed discussion of the EIT Law.
It remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries may qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 5% or 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 5% or 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our stock.
We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.
The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which was effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For example, while the term "indirectly transfer" is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our disclosure.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States, however, substantially all of our operations are located in China. Since substantially all of our operations and business takes place in China, it may be more difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review of the China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local regulator.
RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY
Our common stock is quoted on the OTCQB Market which may have an unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the OTCQB Market maintained by OTC Markets Group Inc.. The OTCQB Market is a significantly more limited market than the New York Stock Exchange or NASDAQ. The quotation of our shares on the OTCQB Market may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-term adverse impact on our ability to raise capital in the future. We plan to list our common stock as soon as practicable. However, we cannot assure you that we will be able to meet the initial listing standards of any stock exchange, or that we will be able to maintain any such listing.
We are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define so-called “penny stocks” to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. Our common stock is a “penny stock” and is subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market, thus possibly making it more difficult for us to raise additional capital.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
Certain provisions of our Articles of Incorporation may make it more difficult for a third party to effect a change-of-control.
Our Articles of Incorporation authorize our board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our board of directors without further action by the stockholders. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES.
There is no private ownership of land in China and all urban land ownership is held by the government of the PRC, its agencies and collectives. Land use rights can be obtained from the government for a period of up to 50 years for industrial usage, 40 years for commercial usage and 70 years for residential usage, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment of the required land transfer fee.
We have the following PRC land use rights to three parcels of land located at Xinqiao Industrial Park, Jingde County, Anhui Province, PRC:
In 2011, we acquired the following land use rights to a parcel located at Song XiCun, XinDen County, FuYang City, Hangzhou, Zhejiang Province, PRC. We have built a facility for tower production and zinc galvanizing and the facility commenced operations in March 2012.
Our principal executive offices and base of operations are located in southeastern China in Anhui Province. We own the following real estate property certificates for land located at Xinqiao Industrial Park, Jingyang Township, Anhui Province, PRC:
We also use approximately 1,290 square feet of office space, for our Shenzhen Branch Office, leased for and on behalf of the Company by Mr. Huang Liang, Shenzhen Branch Representative, pursuant to a lease agreement, dated August 12, 2010. Under the lease agreement, Mr. Huang is obligated to pay a monthly sum of RMB 18,254 (approximately $2,820), which the Company reimburses to him. The original expiration date of the lease agreement is August 19, 2011 and no new lease agreement was signed. The lease agreement is currently extended automatically until a verbal notice of termination from either party. We intend to renew the lease at that time in TEC Tower’s name. We believe that all leased space is in good condition and that the property is adequately insured by the owner.
We also use approximately 15,000 square feet of office space, for our Beijing Branch Office, leased for and on behalf of the Company by Ms. Liu Hong Ying, Beijing Branch Representative, pursuant to a lease agreement, dated December 9, 2010, between Ms. Liu and Mr. Han Yu. Under the lease agreement, Ms. Liu is obligated to pay a monthly sum of RMB 5,500 approximately $850), which the Company reimburses to her. The original expiration date of the lease agreement is December 9, 2011 and no new lease agreement was signed. The lease agreement is currently extended automatically until a verbal notice of termination from either party. We believe that all leased space is in good condition and that the property is adequately insured by the owner.
We also leased approximately 960 square feet of office space for our Zhejiang Corporate Human Resource and Training Center, pursuant to a lease agreement, dated April 5, 2011 with China Rail Five Bureau. Under the lease agreement, we are obligated to pay an annual rent of RMB 500,000 (approximately $77,250) for the year 2011, RMB 550,000 (approximately $84,975) for the year 2012 and RMB 605,000 (approximately $93,472) for the year 2013. The lease agreement expires on April 5, 2014 and we have the option to renew the lease three months prior to the expiration date. We believe that all leased space is in good condition and that the property is adequately insured by the owner.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is quoted under the symbol “HGHN” on the OTCQB Marketplace maintained by Pink OTC Markets Inc.
The prices below reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
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(1)
The above table sets forth the range of high and low closing bid prices per share of our common stock as reported by www.quotemedia.com for the periods indicated.
Holders
As of April 12, 2012, there were approximately 180 stockholders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Dividends
We have never declared or paid a cash dividend. Any decisions regarding dividends will be made by our board of directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our stockholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have any compensation plans in effect under which our equity securities are authorized for issuance.
Recent Sales of Unregistered Securities
We have not sold any equity securities during the fiscal year ended December 31, 2011 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the 2011 fiscal year.
Purchases of Equity Securities
No repurchases of our common stock were made during the 2011 fiscal year .
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See “Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements. Our financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.
Overview
We are primarily engaged in the design, production and sale of transmission towers and related products used in high voltage electric power transmission and wireless communications. We sell our tower products to prime contractors on large transmission projects for electric utility companies or telecommunications service providers, who are developing and constructing projects for end customers. Our electric transmission towers currently support 35kv, 110kv, 220kv, and 500kv transmission lines and we plan to build towers that support Ultra High Voltage (UHV) tower lines of 750+kv DC or 1000+kv AC transmission lines. Our wireless communication towers include single-tube towers, 4-strut towers and roof top towers for the 2G, 3G, and microwave market. We plan to expand our business in the near future to enter the communication base station system integration market and to offer tower installation and maintenance services. Our towers are primarily made of steel, but some contain aluminum or other alloy materials.
Our revenues currently are, and historically have been, generated from the sale of our tower products. In the future, we expect to offer installation and technical services that we believe will generate an additional revenue stream, however, to date, we have not generated material revenues from such services.
Our headquarters are located in Anhui Province in southeastern China and our international sales network is primarily operated from our branch offices in the Shenzhen Special Economic Zone and Beijing and our senior and middle management training centre is established in Zhejiang Province in southeastern China.
Financial Performance Highlights
The following summarizes certain key financial information for the year ended December 31, 2011.
Revenues: Our revenues were $32.9 million for the year ended December 31, 2011, a increase of $0.7 million, or 2.2%, from $32.2 million for the year ended December 31, 2010.
Gross profit and margin: Gross profit was $8.6 million for the year ended December 31, 2011 as compared to $10.7 million for the year ended December 31, 2010. Gross margin was 26.0% and 33.2% for the years ended December 31, 2011 and 2010.
Net income: Net income was $2.7 million for the year ended December 31, 2011, a decrease of $3.0 million, or approximately 52.63%, from $5.7 million for the year ended December 31, 2010.
Fully diluted net income per share: Fully diluted net income per share was approximately $0.09 for the year ended December 31, 2011, as compared to approximately $0.22 for the year ended December 31, 2010.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
Growth in the Chinese economy. We operate our manufacturing facilities in China and derive a majority of our revenues from sales to customers in China. Economic conditions in China, therefore, affect virtually all aspects of our operations, including the demand for our products, the availability and prices of our raw materials and our other expenses. Despite the global economic turmoil which resulted in a slowing of its growth rate, China experienced significant economic growth in recent years. China appears to be emerging from the economic slowdown and is expected to experience continued growth in all areas of investment and consumption
Product development and brand recognition. We believe that in order to compete effectively in our market, we need to constantly improve the quality of our products and deliver new products with innovative features. As such, we face the challenge of expanding our research and development capacity. We need to maintain a strong and sufficient research and development team and identify the right directions for our research and development. We also face the long-term challenge of developing our brand recognition. We plan to focus on building a reputation for quality and excellent customer service within our industry instead of advertising. We believe that our sales and service team is key in developing the company’s brand recognition and value.
Growth of transmission projects. Sales of our tower products depend on the continued private and governmental investment in transmission projects both in China and in emerging overseas markets. Growth in the domestic market relies primarily on China’s continued investment in the electric transmission industry in accordance with its 12th 5-Year Plan. So far, China has invested over $100 billion in electric transmission infrastructure and we believe approximately 25% of which was spent on towers and related products and services. We expect this investment to continue for the next 5-7 years. China’s wireless communications market has also grown considerably in the past decade, with an estimated 800 million mobile phone users in China as of December 31, 2011. Continued growth in the wireless communications market will depend on the success of planned service provider infrastructure investment of over $60 billion in the next five years, with the bulk of this amount expected to be allocated to tower and base station development. Continued growth in transmission projects in the developing overseas electric transmission and wireless communication markets will similarly depend on continued investments in these overseas markets. We believe that if planned investments in electric and wireless communications projects in China and abroad continue to be implemented, we will realize increased opportunities to sell our tower products and planned maintenance services.
Taxation
We are subject to United States tax at a tax rate of 34%. No provision for income taxes in the United States has been made as we have no income taxable in the United States.
TEC HK was incorporated in Hong Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5% . No provision for Hong Kong Profits Tax has been made as TEC HK had no taxable income.
Under the EIT Law, ZTEC is subject to an EIT rate of 25.0% . Since January 2010, TEC Tower has qualified as a government recognized High- and New-Technology Enterprise and has since been enjoying a reduced EIT rate of 15%. See Item 1 “Business-Regulation-Taxation” for a detailed description of the EIT Law and tax regulations applicable to our Chinese subsidiaries.
Results of Operations
The following table sets forth key components of our results of operations during the fiscal years ended December 31, 2011 and 2010, both in dollars and as a percentage of our revenues.
Revenues. Our revenues are mainly generated from sales of our tower products. Our revenues increased by $0.7 million, or 0.02%, to $32.9 million for the year ended December 31, 2011 from $32.2 million for the year ended December 31, 2010. The slight increase of our reviews was mainly attributable to the increased selling prices of our products. Even though our sales volume decreased by 1,536 tons or 0.05% to 28,280 tons in 2011 from 29,816 tons in 2010 as a result of change in our marketing strategy to focus on higher margin overseas sales and deemphasize sales of comparatively lower margin products, our average selling price increased by $150/ton to $1,151.9/ton in 2011 from $1,001.9/ton in 2010 to offset the price inflation of operating costs including wages cost, energy cost, transportation and steel price fluctuation. In 2011, approximately 74.5% of our revenues were generated from sales to customers in the energy industry and approximately 24.5% were generated from sales to customers in the communication industry. As we emphasized overseas sales efforts, revenues generated from sales of energy transmission towers increased approximately 35.1% while sales of communications towers decreased approximately 31.2% as compared to 2010, respectively. 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 by $2.8 million, or 13.0%, to $24.3 million for the year ended December 31, 2011, from $21.5 million for the year ended December 31, 2010. The increase in cost of goods sold was mainly due to the significant increase in per ton price of steel and galvanization cost per ton in year 2011. As a percentage of revenues, our cost of goods sold increased to 74.0% in 2011 from 66.8% in 2010 as our revenues in 2011 increased only by 0.02% . According to Shanghai Nonferrous Metals Net, in 2011 the price of our major raw material, steel, fluctuated in the range from $554 per ton to $760 per ton as follows:
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 is equal to the difference between our revenue and our cost of goods sold. Our gross profit decreased by $2.1 million, or 20%, to $8.6 million for the year ended December 31, 2011, from $10.7 million for the year ended December 31, 2010. The decrease was mainly due to the decrease of sales revenues in 2011 as accompanied by the increase of cost of goods sold. As a result, our gross profit as a percentage of revenues (gross margin) decreased to 26.0% in 2011 as compared to 33.2% in 2010.
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 by $0.7 million, or 51.8%, to $2.1 million for the year ended December 31, 2011, from $1.4 million for the year ended December 31, 2010. Such increase was mainly attributable to the increased shipping costs of our overseas sales.
General and administrative expenses. Our general and administrative expenses consist primarily of compensation and benefits to our general management, finance and administrative staff, professional advisor fees, bad debts reserve and other expenses incurred in connection with general operations. Our general and administrative expenses increased by $0.7 million, or 33.8%, to $2.5 million for the year ended December 31, 2011, from $1.8 million for the year ended December 31, 2010. Such increase was primarily attributable to increased labor costs and bad and doubtful debts allowance of $0.04 million and allowance for obsolete inventory of $0.2 million.
Government grant. Government grants are financial incentives offered by the local government to conduct business in certain areas. Our government income was approximately $0.22 million for the year ended December 31, 2011, as compared to approximately $0.19 million for the year ended December 31, 2010. Government grant for 2011 includes $211,047 as investment incentive for investing in Jinde County, Anhui Province and $8,497 as government subsidies. Government grant for 2010 consisted of $164,182 as investment incentive for investing in Jinde County, Anhui Province, $10,325 as government subsidies, and $16,225 as research allowance. No present or future obligation arises from the receipt of such government grants.
Interest expense. Interest expense increased by $0.4 million, or 39.5%, to $1.3 million for the year ended December 31, 2011, from $0.9 million for the year ended December 31, 2010. Such increase was mainly due to the increase in our outstanding short term loans and annual interest rates.
Income before income taxes. Our income before income taxes decreased by $3.8 million, or 55.9%, to $3.0 million for the year ended December 31, 2011, from $6.8 million for the year ended December 31, 2010, as a result of the factors described above.
Provision for income taxes. Our income tax provisions decreased by $0.5 million, or 52.8%, to $0.5 million for the year ended December 31, 2011, from $1.0 million for the year ended December 31, 2010, mainly due to the decrease in taxable income in 2011.
Net income. We generated a net income of $2.5 million for the year ended December 31, 2011, a decrease of $3.2 million, or 56.7%, from $5.7 million for the year ended December 31, 2010, as a cumulative effect of all factors discussed above.
Liquidity and Capital Resources
During the years ended December 31, 2011 and 2010, we entered into factoring agreements with three banks to factor some of the accounts receivable of the Company. These receivables are factored to the bank “with recourse”, which means that we have pledged these receivable as collateral for the banks to advance funds to the Company under a line of credit arrangement. As of December 31, 2011, accounts receivable in an amount of $6,603,143 was factored to the Industrial and Commercial Bank to secure banking loan facilities. We continue to carry the receivables on our balance sheet as we did not satisfy the sale criteria of ASC 860-10-40-5. We have effective control over factored portion of accounts receivable.
As of December 31, 2011, we had cash and cash equivalents of $2.6 million and restricted cash of $0.02 million. The following table sets forth a summary of our cash flows for the periods indicated:
Cash Flows
Operating Activities Net cash used in operating activities was $3.6 million for the year ended December 31, 2011, as compared to $3.0 million net cash provided by operating activities for the year ended December 31, 2010. The increase in net cash used in operating activities was primarily attributable to the cash outflow associated with decreased accounts payables and decreased net income in 2011. Due to the tightening lending policies in China, some of our suppliers required shorter payment terms and as a result, our accounts payables decreased by approximately $1.7 million in 2011.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2011 was $5.5 million, as compared to $1.1 million for the year ended December 31, 2010. During 2011, we invested approximately $2.5 million when making an installment payment for land use right and approximately $3.0 million for construction of our Zhejiang facilities and Anhui administration office, and the upgrade of production facilities.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2011 was $8.8 million, as compared to $0.2 million net cash used in financing activities for the year ended December 31, 2010. The increase in net cash provided by financing activities was mainly attributable to increased net short term borrowings in 2011.
Loan Commitments
As of December 31, 2011, we did not have any long-term loans. Our short-term bank loans, totaling $20.33 million, were as follows:
* Calculated based on the exchange rate of $1 = RMB 6.36
We maintain a RMB 50,000,000 (approximately $7.85 million) revolving line of credit with Huishang Bank, Sub-branch of Xuancheng Branch. This line of credit is secured by TEC Tower’s land use rights in Zhejiang, our restricted cash and third party’s guarantee. We have utilized RMB 50,000,000 (approximately $7.85 million) of the line of credit as of the date of this report.
We maintain a RMB 15,000,000 (approximately $2.36 million) revolving line of credit with China Merchant Bank, Hefei Branch. This line of credit is secured by our restricted cash and third party’s guarantee. We have utilized RMB 15,000,000 (approximately $2.36 million) of the line of credit as of the date of this report.
We maintain a RMB 30,000,000 (approximately $4.71 million) line of credit with Bank of Import and Export of China, Anhui Province. This line of credit is secured by third party’ guarantee. We have utilized RMB 30,000,000 (approximately $4.71 million) of the line of credit as of the date of this report.
We also maintain a RMB 17,440,000,000 (approximately $2.75 million) revolving line of credit with China Construction Bank, Jindge Branch . This line of credit is secured by our restricted cash and accounts receivable. We have utilized RMB 17,440,000 (approximately $2.75 million) of the line of credit as of the date of this report.
The above loan agreements contained regular provisions requiring timely repayment of principals and accrued interests, payment of default interest in the event of default without specific financial covenants. We believe we are in material compliance with the terms of these loan agreements.
Capital Expenditures
Our capital expenditures for the years ended December 31, 2011 and 2010 were $5.5 million and $1.1 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 being the slowest quarter because fewer projects are undertaken during and around the Chinese spring festival.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:
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”). All material inter-company transactions and balances have been eliminated in consolidation.
On February 22, 2010, TECT entered into an equity transfer agreement with Mr. Chun Lu, the sole shareholder of ATEC. The transfer was approved by the Department of Commerce of Anhui Province on March 2, 2010. This acquisition was accounted for as a reverse merger with TECT being the legal acquirer. The accounting treatment for this transaction is essentially recapitalization of ATEC with TECT’s common stock.
On May 4, 2010, the Company completed a reverse acquisition transaction pursuant to a share exchange agreement among the Company, TECT and TECT’s 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 Company’s common stock, which constituted 63.6% of the Company’s 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 Company’s controlling stockholder, pursuant to which Mr. Lu was granted an option to acquire 17,797,372 shares the Company’s 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 Company’s 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. STT was dissolved on November 30, 2011.
TEC US, TECT, ATEC, and ZTEC are hereafter collectively referred to as the Company.
USE OF ESTIMATES
The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
ECONOMIC AND POLITICAL 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.
REVENUE RECOGNITION
The Company’s revenue recognition policies are in compliance with ASC 605. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.
Technical consulting service income is recognized when the relevant service is rendered.
Government grants represent local authority grants to the company for infrastructure development and the revenue is recognized on cash basis when the local authority approves the grant to the company. The Company recognize government grants when (i) the company have meet all criteria pursuant to the terms of the policies and terms of the grant that are established by the local government; (ii) the company receive notification from the local government that we have satisfied all of the requirements to receive the government grants; (iii) and received by 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 Company’s 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.
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.
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, and TECT is the Chinese Renminbi (RMB).
For those entities whose functional currency is other than the U.S. dollars, all assets and liabilities are translated of at historical exchange 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 $1,179,599 as of December 31, 2011 and $683,041 as of December 31, 2010. The balance sheet amounts with the exception of equity at December 31, 2011 and December 31, 2010 were translated at RMB6.36 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 years ended December 31, 2011 and December 31, 2010 were RMB6.47 to $1.00 and RMB6.78 to $1.00, respectively.
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.
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.
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.
An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the sale or disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statement of income in the period the item is sold or otherwise disposed. Maintenance and repairs of property and equipment are charged to operations when incurred. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded.
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 year.
CONSTRUCTION IN PROGRESS
Construction in progress represents direct costs of construction as well as acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use.
IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGBLE ASSETS
In accordance with ASC Topic 360,”Property, Plant and Equipment”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of December 31, 2010 and December 31, 2009, the Company determined no impairment charges were necessary.
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.
INVENTORY
Inventory consists primarily of raw materials, work in progress, and finished goods. Raw materials are stated at cost. Cost comprises direct materials and, where applicable direct labor costs and applicable overhead costs that have been incurred in bringing the inventory to its present location and condition. Finished goods are stated at the lower of cost (determined on first in first out method) and net realizable value.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.
The Company provides for inventory losses based on obsolescence and levels in excess of forecasted demand In these cases, inventory is reduced to estimated realizable value based on historical usage and expected demand. Inherent in the Company’s estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for the Company’s products, and technical obsolescence of products.
ACCOUNTS RECEIVABLE
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews he composition of accounts receivable and analyzes historical bad debts, customers concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are primarily on a specific identification basis.
The standard credit period of the Company’s most of clients is three months. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of December 31, 2011 and December 31, 2010. Bad debts written off for the years ended December 31, 2011 and December 31, 2010 are $67,545 and $0, respectively and included in administrative expenses. The Company has recorded allowances for doubtful debts in the amount of $40,000 and $70,000, respectively for the years ended December 31, 2011 and December 31, 2010 and included in administrative expenses.
INCOME TAXES
The Company accounts for income taxes under the provisions of ASC740 “Accounting for Income Taxes”. Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using the tax bases of assets and liabilities using the enacted taxes rates in effect in the years in which the differences are expected to reverse.
Provision for income taxes consist of taxes currently due plus deferred taxes. Since the Company had no operations within the United States there is no provision for US income taxes and there are no deferred tax amounts as of December 31, 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.
The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
ASC 740 also prescribes a more-likely-than-not threshold for financial statements recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provide guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense.
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.
PRODUCT WARRANTIES
Substantially all of the Company’s products are covered by a standard warranty of 1 to 2 years for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the software or products or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company provides 0% of sales income for product warranties for the years ended December 31, 2011 and December 31, 2010 in the warranty reserve to reflect estimated material and labor costs of maintenance for potential or actual product issues but for which the Company expects to incur an obligation. The product warranty reserve was $nil as of December 31, 2011 and December 31, 2010. The Company has not experienced any warranty losses in the past.
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.
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 Company’s common stock at the average market price during the period.
For the years ended December 31, 2011 and December 31, 2010, basic and diluted earnings per share amount to $0.09 and $0.22, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting.
Level 3 Pricing inputs that are generally observable inputs and not corroborated by market data.
The carrying amounts of the Company’s financial assets and liabilities, such as cash and accrued expenses, approximate their fair values because of the short maturity of these instruments.
The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value as of December 31, 2011 or December 31, 2010, nor gains or losses are reported in the statement of income and other comprehensive income that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the fiscal years ended December 31, 2011 or December 31, 2010.
STOCK-BASED COMPENSATION
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 30th, September 30th, December 31st 2010 and March 31st 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.
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.
ACCUMULATED OTHER COMPREHENSIVE INCOME
ASC Topic 220 “Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income for all periods presented includes both the reported net income and net change in cumulative translation adjustments.
Recent Accounting Pronouncements
In January 2011, the FASB issued an Accounting Standard Update (ASU”) No, 2011-01, Receivables Topic 310):Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, as presented in proposed Accounting Standards Update, Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors. The amendments in this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in Update 2010-20. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this Update temporarily defer that effective date, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring, the Board proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted. The Company does not expect the adoption of ASU 2011-01 to have a significant impact on its consolidated financial statements.
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 transferor’s 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 these 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 does not expect the adoption of ASU 2011-04 to have a 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.
In July 2011, the FASB issued accounting guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The guidance expands disclosures for the allowance for credit losses and financing receivables by requiring entities to disclose information at disaggregated levels. It also requires disclosure of credit quality indicators, past due information and modifications of financing receivables. The Company does not expect the adoption of this guidance to have a significant impact on its consolidated financial statements.
In September 2011, the FASB issued Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU No. 2011-08), which amends ASC 350 to first assess qualitative factors before performing the quantitative goodwill impairment testing. The ASU provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative analysis indicate it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test, which is required under current U.S. GAAP, would not be necessary. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a significant impact on its consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The full text of our audited consolidated financial statements as of December 31, 2011 and 2010 begins on page of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. 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) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011. Based on that evaluation, the management concluded that, because of the material weakness in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of December 31, 2011.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
(1)
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
(3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on that evaluation, our management concluded that our internal controls over financial reporting as of December 31, 2011 were not effective due to the following material weakness:
Our internal audit function is significantly deficient due to insufficient qualified resources and appropriate system to perform such function. Therefore, our ability to prevent and control lapses and errors in our accounting function could not be rendered effectively.
Our current accounting staff is relatively inexperienced with respect to U.S. GAAP and needs substantial training to meet the higher demands of being a U.S. public company.
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 strength our internal control over financial reporting.
Management is committed to improving its internal control over financial reporting and will continue to work to put effective controls in place. Our management does not believe that the material weakness in our internal control over financial reporting had caused our financial statements for the year ended December 31, 2011 to contain a material misstatement.
Because the Company is a smaller reporting company, this annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm.
Changes in Internal Controls 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.
Other than in connection with the implementation of the remedial measures described above, there have been no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
We have no information to disclose that was required to be disclosed in a report on Form 8-K during fourth quarter of fiscal year 2011, but was not reported.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following sets forth information about our directors and executive officers as of the date of this report:
Mr. Chun Lu. Mr. Lu has been our Chairman since May 2010 and has served as the President of TEC Tower since its inception in 2006. Prior to joining us, Mr. Lu was the general manager at Hangzhou Tianye Communication Equipment Co. from January 2002 to March 2006. Mr. Lu holds a bachelor’s degree from Zhejiang Industrial and Commerce University in International Trade. Mr. Lu has not held any other public company directorships during the past five years.
Dr. Peter Lim Boon-Lum. Dr. Lim has served as our Chief Financial Officer since April 10, 2012. Prior to that, Dr. Lim was our Vice President for Investment Relations since January 2011. Prior to joining us, Dr. Lim worked as the CEO and Technical Director of AEI PTE LTD and AEI Group of Company since January 2010. Since July 2006, Dr. Lim also worked as an executive officer and board member for various companies, including Layer 1 PTE LTD, Dorado-Network PTE LTD and Equine Technology SDN BHD. Dr Lim holds Ph.D, MEng and BEng(Hons) degrees from National University of Singapore (NUS), and is also a member of Singapore Institute of Management (SIM), IEEE and SCASST. Dr Lim is also a Green Mark Manager accredited by BCA Singapore.
Jianming Wang. Mr. Wang has served as our Chief Operating Officer since May 2010 and has served in the same capacity for TEC Tower since December 2009. Prior to joining us, Mr. Wang worked at Huawei, from 2001 through 2009, as Service Sales Director of Sub-Saharan Region, Service Director of MTN Key Accounts, and Director of Global Service Sales. Mr. Wang earned a Bachelor’s degree from Zhejiang University in Office Automation and an MBA from University of Pretoria.
Mr. Baojia He. Mr. He has served as our Chief Technology Officer since May 2010 and has served as the Vice President of Research and Development of TEC Tower since 2007. Prior to joining us, Mr. He served as the Vice President of Technology at Jiangsu Taihu Tower from March 2005 to April 2007.
Mr. Xiaoxiang Liu. Mr. Liu became a member of our Board of Directors in May 2010 and has served as the General Manager of TEC Tower since 2008 and TEC Tower's Chief Administrative Officer since May 4, 2010. Prior to joining us, Mr. Liu served as the president of Jingde County Branch of Industrial Commercial and Business Bank from August 2005 to December 2007, and as a customer manager at the same branch from July 2003 to August 2005. Mr. Liu holds a bachelor's degree in Economics from the Open University of China in 2004 and is a member of the Anhui Abacus Association. Mr. Liu has not held any other public company directorships during the past five years.
Mr. Wei Zhang. Mr. Zhang became a member of our Board of Directors in May 2010 and has provided consulting services to TEC Tower since its inception in 2006. Prior to joining us, Mr. Zhang worked from 2000 and 2009, as a service manager for the Beijing Chaowai Railway. Mr. Zhang holds a bachelor's degree in Business Administration from the Peking University. Mr. Zhang has not held any other public company directorships during the past five years.
Directors are elected until their successors are duly elected and qualified.
Except as set forth in our discussion below in Item 13 “Certain Relationships and Related Transactions, and Director Independence-Transactions with Related Persons,” none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.
Director Qualifications
Directors are responsible for overseeing our business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on our Board of Directors that are applicable to all directors and that there are other skills and experience that should be represented on the Board as a whole, but not necessarily by each director. The Board considers the qualifications of directors and director candidates individually and in the broader context of the Board’s overall composition and our current and future needs.
Qualifications for All Directors
In its assessment of each potential candidate, including those recommended by stockholders, the Board considers the nominee’s judgment, integrity, experience, independence, understanding of our business or other related industries and such other factors the Board determines are pertinent in light of the current needs of the Board. The Board also takes into account the ability of a director to devote the time and effort necessary to fulfill his or her responsibilities to the Company.
The Board requires that each director be a recognized person of high integrity with a proven record of success in his or her field. Each director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications required of all directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work collegially.
The Board does not have a specific diversity policy, but considers diversity of race, ethnicity, gender, age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view contribute to a more effective decision-making process.
Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole
The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the Board as a whole, in light of our current needs and business priorities. We are a U.S. public company that offers tower products to end users in the electric transmission and wireless communications industry in China. Therefore, the Board believes that a diversity of professional experiences in tower construction and the electric transmission and wireless communications industry, specific knowledge of key geographic growth areas, and knowledge of U.S. capital markets and of U.S. accounting and financial reporting standards should be represented on the Board.
Summary of Qualifications of Directors
Set forth below is a narrative disclosure that summarizes some of the specific qualifications, attributes, skills and experiences of our directors. For more detailed information, please refer to the biographical information for each director set forth above.
Chun Lu. Mr. Lu is the co-founder of TEC Tower and has served as the Chairman and Chief Executive Officer of TEC Tower since its inception. He contributes invaluable long-term knowledge of our business and operations and extensive experience in the communications and power equipment market
Xiaoxiang Liu. Mr. Liu has experience in finance and banking as head of a bank. He dolds a bachelor’s degree in Economics and is a member of the Anhui Abacus Association. His extensive experience in the industrial financial market and strong knowledge of the banking industry makes him a key member of our management staff and a valuable member of our Board.
Wei Zhang. Mr. Zhang contributes his extensive knowledge and hands-on experience in the power utility industry to the Board.
We believe that our Board would benefit from the services of an individual with knowledge of U.S. capital markets and U.S. accounting standards.
Family Relationships
There are no family relationships among any of our officers or directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities to file with the SEC statements of ownership and changes in ownership. The same persons are required to furnish us with copies of all Section 16(a) forms they file. In fiscal year 2011, all of such forms were timely filed.
In making these statements, we have relied upon examination of the copies of all Section 16(a) forms provided to us and the written representations of our executive officers, directors and beneficial owner of more than 10% of a registered class of our equity securities.
Code of Ethics
On May 4, 2010, our board of directors adopted a code of ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer, and principal accounting officer. The code of ethics addresses, among other things, honesty and ethical conduct, conflicts of interest, compliance with laws, regulations and policies, including disclosure requirements under the federal securities laws, confidentiality, trading on inside information, and reporting of violations of the code. A copy of the code of ethics has been filed as Exhibit 14 to our current report on Form 8-K filed on May 10, 2010.
Board Composition and Committees
The board of directors is currently composed of three members, Mr. Chun Lu, Mr. Xiaoxiang Liu and Mr. Wei Zhang. All board action requires the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
We currently do not have standing audit, nominating or compensation committees. Our entire board of directors handles the functions that would otherwise be handled by each of the committees. We intend, however, to establish an audit committee, a nominating committee and a compensation committee of the board of directors as soon as practicable. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls. The nominating committee would be primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The nominating committee would also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures. The compensation committee will be primarily responsible for reviewing and approving our salary and benefit policies (including stock options), including compensation of executive officers.
None of our directors is an audit committee financial expert. Upon the establishment of an audit committee, the board will determine whether any of the directors qualify as an audit committee financial expert.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table - Fiscal Years Ended December 31, 2011 and 2010
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000.
(1)
On May 4, 2010, we acquired TEC HK in a reverse acquisition transaction that was structured as a share exchange and in connection with that transaction, Mr. Lu became our Chief Executive Officer, effective immediately. Prior to the effective date of the reverse acquisition, Mr. Lu served in the same capacity with TEC Tower. The annual, long term and other compensation shown in this table include the amount Mr. Lu received from TEC Tower prior to the consummation of the reverse acquisition.
Employment Agreements
Our subsidiary, TEC Tower entered into an employment agreement with Mr. Chun Lu, our Chairman and Chief Executive Officer,. The employment agreement provides the amount of salary and establishes Mr. Lu’s eligibility to receive a bonus. Mr. Lu currently receives an annual salary of RMB 60,000 (approximately $9,274).
Other than the salary and necessary social benefits required by the government, which are defined in the employment agreement, we currently do not provide other benefits to the officers at this time. Our executive officers are not entitled to severance payments upon the termination of their employment agreements or following a change in control.
We have not provided retirement benefits (other than a state pension scheme in which all of our employees in China participate) or severance or change of control benefits to our named executive officers.
Outstanding Equity Awards at Fiscal Year End
For the year ended December 31, 2011, no director or executive officer has received compensation from us pursuant to any compensatory or benefit plan. There is no plan or understanding, express or implied, to pay any compensation to any director or executive officer pursuant to any compensatory or benefit plan.
Compensation of Directors
No member of our Board of Directors received any compensation for his services as a director during the year ended December 31, 2011.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of our common stock as of April 12, 2012 (i) by each person who is known by us to beneficially own more than 5% of our common stock; (ii) by each of our officers and directors; and (iii) by all of our officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, Xinqiao Industrial Park, Jingde County, Anhui Province, 242600, People’s Republic of China.
* Less than 1%
(1)
Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power with respect to the shares of our common stock.
(2)
A total of 30,181,552 shares of our common stock are considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) as of April 12, 2012. For each beneficial owner above, any options exercisable within 60 days have been included in the denominator.
(3)
The shares held by Mr. Wong are subject to an option agreement, dated May 4, 2010, which gives our Chief Executive Officer, Mr. Lu, an option to acquire 17,797,372 shares our common stock currently owned by Mr. Wong. For details regarding this option agreement, see “Changes in Control” below.
(4)
Includes 4,130,000 shares held by AMTT Digital A Limited, a company owned and controlled by Mr. Wu.
Changes in Control
On May 4, 2010, our Chairman and Chief Executive Officer, Mr. Chun Lu, entered into an option agreement with Hua Peng Phillip Wong, pursuant to which Mr. Lu was granted an option to acquire all of the shares of our common stock currently owned by Mr. Wong for an exercise price of $1,000,000. Mr. Lu may exercise this option, in whole but not in part, during the period commencing on the 365th day following of the date of the option agreement and ending on the second anniversary of the date thereof. After Mr. Lu exercises this option, he will be our controlling stockholder. We are not aware of any other arrangements which if consummated may result in a change of control of our Company.
Securities Authorized for Issuance Under Equity Compensation Plans
We do not have any compensation plans in effect under which our equity securities are authorized for issuance.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
The following includes a summary of transactions since the beginning of the 2011 fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest (other than compensation described under Item 11 “Executive Compensation”).
We have borrowed money from time to time from Mr. Lu, our chief executive officer. Such borrowings do not bear interest, are unsecured and have no stated maturity date. As of December 31, 2011, we owed him $4,103,965 in connection with these borrowings.
Except as set forth in our discussion above, none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
Director Independence
We currently do not have any independent directors, as the term “independent” is defined by the rules of the Nasdaq Stock Market.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Independent Auditors’ Fees
The following is a summary of the fees billed to the Company for professional services rendered for the fiscal years ended December 31, 2011 and 2010:
“Audit Fees” consisted of fees billed for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-K and 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
“Audit-Related Fees” consisted of fees billed for assurance and related services by the principal accountant that were reasonably related to the performance of the audit or review of our financial statements and are not reported under the paragraph captioned “Audit Fees” above.
“Tax Fees” consisted of fees billed for professional services rendered by the principal accountant for tax returns preparation.
“All Other Fees” consisted of fees billed for products and services provided by the principal accountant, other than the services reported above under other captions of this Item 14.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our board of directors to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our board of directors pre-approved the audit service performed by Madsen & Associates CPA’s, Inc. for our financial statements as of and for the year ended December 31, 2011.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
Date: April 16, 2012
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Chun Lu
Chairman and Chief Executive Officer
April 16, 2012
Chun Lu (Principal Executive Officer)
/s/ Peter Lim Boon-Lum Chief Financial Officer (Principal Financial and Accounting Officer) April 16, 2012
Peter Lim Boon-Lum
/s/ Xiaoxiang Liu
Director April 16, 2012
Xiaoxiang Liu
/s/ Wei Zhang
Director April 16, 2012
Wei Zhang
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS END DECEMBER 31, 2011 AND DECEMBER 31, 2010
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of TEC Technology, Inc. and Subsidiaries (the Company) as of December 31, 2011 and December 31, 2010 and the consolidated statements of income and comprehensive income, the consolidated statements of stockholders’ equity and the consolidated statements of cash flows for the years ended December 31, 2011 and December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (“PCAOB”). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used, significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above present fairly, in all material aspects, the consolidated financial position of the Company as of December 31, 2011 and December 31, 2010, and the consolidated results of its operations and cash flows for the years ended December 31, 2011 and December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
Madsen & Associates CPA’s, Inc.
Salt Lake City, Utah
April 10, 2012
F - 1
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2011 AND DECEMBER 31, 2010
F - 2
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31 2011 AND DECEMBER 31,
See accompanying notes of these consolidated financial statements
F - 3
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31,
F - 4
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 2011 AND DECEMBER 31 2010
See accompanying notes of these consolidated financial statements
F - 5
TEC TECHNOLOGY, INC. AND SUBSIDIARIES
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 US”). 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 TECT’s 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 Company’s common stock, which constituted 63.6% of the Company’s 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 Company’s controlling stockholder, pursuant to which Mr. Lu was granted an option to acquire 17,797,372 shares of the Company’s 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 People’s Republic of China (“PRC”) on July 3, 2007. ATEC’s 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. ZTEC’s production facility is still under construction and it has not yet commenced operations. ZTEC’s 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. STT deregistered on November 30, 2011. 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.
On December 5, 2011, the Company passed a resolution concerning a change of the Company’s domicile from Delaware to Nevada (the “Reincorporation”), to be accomplished by (i) incorporating a new wholly-owned subsidiary of the Company in Nevada to be named TEC Technology, Inc. (“TEC Nevada”) and (ii) merging the Company with and into TEC Nevada, with TEC Nevada, with TEC Nevada continuing as the surviving entity, pursuant to the terms set forth in an agreement and plan of merger to be entered between the Company and TEC Nevada (Plan of Merger).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1
FISCAL YEAR
The Company has adopted December 31 as its fiscal year end.
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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:
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”). All material inter-company transactions and balances have been eliminated in consolidation.
On February 22, 2010, TECT entered into an equity transfer agreement with Mr. Chun Lu, the sole shareholder of ATEC. The transfer was approved by the Department of Commerce of Anhui Province on March 2, 2010. This acquisition was accounted for as a reverse merger with TECT being the legal acquirer. The accounting treatment for this transaction is essentially recapitalization of ATEC with TECT’s common stock.
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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 TECT’s 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 Company’s common stock, which constituted 63.6% of the Company’s 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 Company’s controlling stockholder, pursuant to which Mr. Lu was granted an option to acquire 17,797,372 shares the Company’s 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 365th 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 Company’s 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.
STT deregistered on November 30, 2011.
TEC US, TECT, ATEC, and ZTEC are hereafter collectively referred to as the Company.
2.4
USE OF ESTIMATES
The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
2.5
ECONOMIC AND POLITICAL RISK
The 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.6 REVENUE RECOGNITION
The Company’s revenue recognition policies are in compliance with ASC 605. Sales revenue is recognized when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price is fixed or determinable, and (iv) the ability to collect is reasonably assured. These criteria are generally satisfied at the time of shipment when risk of loss and title passes to the customer.
Technical consulting service income is recognized when the relevant service is rendered.
Government grants are is recognized upon (i) the Company having substantially accomplished what must be done pursuant to the terms of the policies and terms of the grant that are established by the local government ; and (ii) the Company receives notification from the local government that the Company has satisfied all of the requirements to receive the government grants; and (iii) the amounts are received.
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 Company’s 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 $1,568,865 and $755,840 for the years ended December 31, 2011 and December 31, 2010, respectively.
2.8 ADVERTISING
Advertising costs are expensed as incurred and totaled $7,215 and $43,550 for the years ended December 31, 2011 and December 31, 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 and $0 as incurred for the years ended December 31, 2011 and December 31, 2010, respectively. The costs for development of new products and substantial enhancements to existing products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized.
2.10 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash in bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments which are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.11
FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE INCOME
The reporting currency of the Company is United States Dollars ($). The functional currency of the Company is United States Dollars ($) and the functional currency of its subsidiaries ATEC, ZTEC, and TECT is the Chinese Renminbi (RMB).
For those entities whose functional currency is other than the U.S. dollars, all assets and liabilities are translated at historical exchange 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 $1,228,817 as of December 31, 2011 and $683,041 as of December 31, 2010. The balance sheet amounts with the exception of equity at December 31, 2011 and December 31, 2010 were translated at RMB6.36 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 years ended December 31, 2011 and December 31, 2010 were RMB6.47 to $1.00 and RMB6.78 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.
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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.
An item of property and equipment is removed from the accounts upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the sale or disposal of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statement of income in the period the item is sold or otherwise disposed. Maintenance and repairs of property and equipment are charged to operations when incurred. Expenditures for maintenance and repairs are charged to expense as incurred, whereas major betterments are capitalized as additions to property and equipment. The Company reviews its property and equipment whenever events or changes in circumstances indicate that the carrying value of certain assets might not be recoverable. In these instances, the Company recognizes an impairment loss when it is probable that the estimated cash flows are less than the carrying value of the asset. To date, no such impairment losses have been recorded.
2.15 LAND USE RIGHTS
Land use rights represent acquisition of land use rights of industrial land from local government and are amortized on the straight line over their respective lease periods. The lease period of agriculture land is 50 years.
2.16 CONSTRUCTION IN PROGRESS
Construction in progress represents direct costs of construction as well as acquisition and design fees incurred. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until construction is completed and the asset is ready for its intended use.
2.17 IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLE ASSETS
In accordance with ASC Topic 360,”Property, Plant and Equipment”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company reviews the carrying amount of its long-lived assets, including intangibles, for impairment, each reporting period. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is considered not recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flow. As of December 31, 2011 and December 31, 2010, the Company determined no impairment charges were necessary.
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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 Company’s estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for the Company’s products, and technical obsolescence of products.
2.20
ACCOUNTS RECEIVABLE
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews he composition of accounts receivable and analyzes historical bad debts, customers concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are primarily on a specific identification basis.
The standard credit period of the Company’s most of clients is three months. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of December 31, 2011 and December 31, 2010. Bad debts written off for the years ended December 31, 2011 and December 31, 2010 are $67,545 and $0, respectively and included in administrative expenses. The Company has recorded allowances for doubtful debts in the amount of $40,000 and $70,000, respectively for the years ended December 31, 2011 and December 31, 2010 and included in administrative expenses.
2.21
INCOME TAXES
The Company accounts for income taxes under the provisions of ASC740 “Accounting for Income Taxes”. Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using the tax bases of assets and liabilities using the enacted taxes rates in effect in the years in which the differences are expected to reverse.
Provision for income taxes consist of taxes currently due plus deferred taxes. Since the Company had no operations within the United States there is no provision for US income taxes and there are no deferred tax amounts as of December 31, 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.21
INCOME TAXES (CONTINUED)
The provision for income tax is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred income taxes are calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
ASC 740 also prescribes a more-likely-than-not threshold for financial statements recognition and measurement of a tax position taken, or expected to be taken, in a tax return. ASC 740 also provide guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. Any interest and penalties accrued related to unrecognized tax benefits will be recorded in tax expense.
2.22
RELATED PARTIES
Parties are considered to be related to the company if the company has the ability, directly or indirectly, to control the party, or exercise significant influence over the party in making financial and operating decisions, or where the company and the party are subject to common control. Related parties may be individuals (being members of key management personnel, significant shareholders and/or their close family members) or other entities which are under the significant influence of related parties of the company.
2.23
PRODUCT WARRANTIES
Substantially all of the Company’s products are covered by a standard warranty of 1 to 2 years for products. In the event of a failure of products covered by this warranty, the Company must repair or replace the software or products or, if those remedies are insufficient, and at the discretion of the Company, provide a refund. The Company provides 0% of sales income for product warranties for the years ended December 31, 2011 and December 31, 2010 in the warranty reserve to reflect estimated material and labor costs of maintenance for potential or actual product issues but for which the Company expects to incur an obligation. The product warranty reserve was $0 as of December 31, 2011 and December 31, 2010. The Company has not experienced any warranty losses in the past.
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.
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
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 People’s Republic of China. Total cash in these banks as of December 31, 2011 and December 31, 2010 amounted to $2,575,714 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 People’s 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 Company’s total revenue:
The company had 5 major customers whose accounts receivable balance individually represented of the Company’s total accounts receivable as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Company’s common stock at the average market price during the period.
For the years ended December 31, 2011 and December 31, 2010, basic and diluted earnings per share amount to $0.08 and $0.22, 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.
The carrying amounts of the Company’s financial assets and liabilities, such as cash and accrued expenses, approximate their fair values because of the short maturity of these instruments.
The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value as of December 31, 2011 or December 31, 2010, nor gains or losses are reported in the statement of income and other comprehensive income that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the fiscal years ended December 31, 2011 or December 31, 2010.
2.28
STOCK-BASED COMPENSATION
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 30th, September 30th, December 31st 2010 and March 31st 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NEW ACCOUNTING PRONOUNCEMENTS
The Company does not expect any recent accounting pronouncements to have a material effect on the Company’s financial position, results of operations, or cash flows.
In January 2011, the FASB issued an Accounting Standard Update (ASU”) No, 2011-01, Receivables Topic 310):Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, to be concurrent with the effective date of the guidance for determining what constitutes a troubled debt restructuring, as presented in proposed Accounting Standards Update, Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings by Creditors. The amendments in this Update apply to all public-entity creditors that modify financing receivables within the scope of the disclosure requirements about troubled debt restructurings in Update 2010-20. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this Update temporarily defer that effective date, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring, the Board proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted. The Company does not expect the adoption of ASU 2011-01 to have a significant impact on its consolidated financial statements.
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 transferor’s 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 these 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 does not expect the adoption of ASU 2011-04 to have a significant impact on its consolidated financial statements.
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.
NEW 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.
In July 2011, the FASB issued accounting guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. The guidance expands disclosures for the allowance for credit losses and financing receivables by requiring entities to disclose information at disaggregated levels. It also requires disclosure of credit quality indicators, past due information and modifications of financing receivables. The Company does not expect the adoption of this guidance to have a significant impact on its consolidated financial statements.
In September 2011, the FASB issued Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU No. 2011-08), which amends ASC 350 to first assess qualitative factors before performing the quantitative goodwill impairment testing. The ASU provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative analysis indicate it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test, which is required under current U.S. GAAP, would not be necessary. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a significant impact on its consolidated financial statements.
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.
INCOME TAXES
No provision for income taxes in the United States has been made as the Company has no income taxable in the United States.
No Hong Kong corporate income tax has been provided in the financial statements, as TECT did not have any assessable profits for the years ended December 31, 2011 and December 31, 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. 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 company’s subsidiary ATEC is made at the unified EIT rate of 25% for the year ended December 31, 2010 but ATEC is entitled to a refund of 10% according to local preferential tax policy for manufacturing of high technology products for the three years from January 1, 2010 to December 31, 2013. Therefore, the provision for income tax of the company’s subsidiary ATEC is made at the local preferential EIT rate of 15% for the year ended December 31, 2011.
The company’s subsidiaries ZTEC and STT have not commenced their business; therefore no provision for income taxes has been made for the years ended December 31, 2011 and December 31, 2010.
The following table reconciles the U.S statutory rates to the company’s effective tax rate for the year ended December 31, 2011:
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CASH AND CASH EQUIVALENTS
6.
RESTRICTED CASH
The Company’s 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 $217,884 and $1,164,598 as of December 31, 2011 and December 31, 2010, respectively.
7.
ACCOUNTS RECEIVABLE
The Company has performed an analysis on all of its accounts receivable and determined that all amounts are probable of collection within one year. The Company has recorded allowances for doubtful debts in the amount of $40,000 and $70,000, respectively for the years ended December 31, 2011 and December 31, 2010 and included in administrative expenses. As such, all accounts receivables are reflected as a current asset and allowance for doubtful debt has been recorded of $110,000 and $70,000 as of December 31, 2011 and December 31, 2010. Bad debts written off for the years ended December 31, 2011 and December 31, 2010 are $67,545 and $0, respectively and included in administrative expenses.
Aging of accounts receivable is as follows:
During the years ended December 31, 2011 and 2010, the Company entered into factoring agreements with three banks to factor some of the accounts receivable of the Company. These receivables are factored to the bank “with recourse”, which means that the company has pledged these factored receivable as collateral for the banks to advance funds to the Company under a line of credit arrangement. As of December 31, 2011, accounts receivable includes the amounts of $6,603,143 (2010: $3,151,959) that was factored to the Industrial and Commercial Bank, PRC for collection.
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVENTORY
9. DEPOSITS AND PREPAID EXPENSES
Guarantee deposits are provided to financial institutions in return for issuance of a corporate guarantee to financiers. 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. Advances to suppliers as service providers are down payments or deposits for inventory purchases and provision of services. The inventory and services are normally delivered and rendered within one to two months after the payments have been made.
10. OTHER RECEIVABLES
Due from employees are the amounts advanced for business transactions on behalf of the company and will be reconciled on the completion of business transactions.
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. TAXES RECOVERABLE
12. PROPERTY AND EQUIPMENT
Depreciation expense was $356,292 and $266,127 for the years ended December 31, 2011 and December 31, 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 $5,886,384 and the land use right will expire in 2061.
Land use rights are amortized on the straight line basis over their respective lease periods. The lease period of land use rights located in an industrial park zone is 50 years.
Amortization expense was $44,504 and $42,494 for the years ended December 31, 2011 and December 31, 2010, respectively. .
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. CONSTRUCTION IN PROGRESS
15. OTHER PAYABLES AND ACCRUED EXPENSES
Due to third parties and employees are unsecured, interest free and without a fixed term of repayment and are for unspecific business purposes.
16.
DUE TO RELATED PARTIES
Due to Chairman and his affiliates are unsecured, interest free and without a fixed term of repayment and are for unspecific business purposes.
17.
TAXES PAYABLE
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18.
CUSTOMER DEPOSITS
Customer deposits represent amounts advanced by customers for orders of product. The products normally are shipped within three months after receipt of the advance payment and the related sale is recognized in accordance with the Company’s revenue recognition policy. As of December 31, 2011 and December 31, 2010, customer deposits amounted to $763,520 and $80,331, respectively.
19.
SHORT TERM BORROWINGS
There are no provisions in the Company’s bank borrowings that would accelerate repayment of debt as a result of a change in credit ratings or a material adverse change in the Company’s business. Under certain agreements, the Company has the option to retire debt prior to maturity, either at par or at a premium over par.
* secured by land use rights
+ secured by third party’s guarantee
^ secured by restricted cash and accounts receivable
20.
COMMON STOCK
The Company has authorized Preferred “B” stock of 10,000,000 shares with a par value of $0.001. As of December 31, 2011 and December 31, 2010, the company has not issued any preferred shares.
The Company has authorized common stock of 300,000,000 shares with a par value of $0.001.
On May 4, 2010, the Company issued 19,194,421 shares of common stock to the 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 December 31, 2011, and December 31, 2010, the Company has outstanding 30,181,552 issued common shares with a par value of $0.001 per share respectively.
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21.
COMMITMENTS AND CONTINGENCIES
Total lease expenses for the years ended December 31, 2011 and December 31, 2010 was $122,397 and $22,309, respectively.
The future minimum lease payments as of December 31, 2011 were as follows:
From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. As of December 31, 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 amounts of the potential damages are listed below:
22.
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 Company’s 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 Company’s stock price as well as by assumptions regarding certain complex and subjective variables. These variables include, but are not limited to; the Company’s 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 and $155,000 in stock based compensation expense for the years ended December 31, 2011 and December 31, 2010. As of December 31, 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 per share
- Strike price of $2.00
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22.
STOCK OPTIONS & WARRANTS (CONTINUED)
The value of the warrants was based on the Company’s common stock price of $3.50 on the date the warrants were issued. The warrants were valued at $248,800 when they vested in four equal installations on June 30, September 30, December 31 of 2010 and March 31, 2011.
Utilizing the Black Scholes option-pricing model, the share based compensation expense for the years ended December 31, 2011 and 2010 were $93,800 and $155,000, respectively.
23. OBLIGATION UNDER MATERIAL CONTRACTS
CCG Investor Relations Partners LLC, CCG, an investor relations firm was issued a warrant to purchase up to 80,000 shares of the Company’s stock, at a price of $2.00 per share, pursuant to the terms and conditions of a letter agreement, dated June 20, 2010, between the Company and CCG. CCG’s right to exercise its warrant will vest in four equal portions, with the first portion vesting on June 20, 2010, and the remaining portions vesting on September 30, 2010, December 31, 2010 and March 31, 2011, respectively. The warrant shall have a term of 5 years and expires on June 15, 2015 and contains $90,000 liquidated damages provision for breach of such exclusivity. As of December 31, 2011, CCG had not exercised the warrant and had not purchased any shares of the Company’s stock.
24. 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 Company’s chief operating decision-makers (i.e. chief executive officer and his direct reports) review financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by product lines for purposes of allocating resources and evaluating financial performance. There are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. The Company considers itself to be operating within one reportable segment. The Company does not have long-lived assets located in foreign countries. The Company’s net revenue from external customers by main product lines is as follows:
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TEC TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25.
RELATED PARTIES TRANSACTIONS
In addition to the transactions and balances as disclosed elsewhere in these consolidated financial statements, during the years, the company had no other significant related party transactions.
On January 13, 2010, we entered into and closed a share purchase agreement with Michael Anthony, our CEO at the time, and certain accredited purchasers signatory thereto, pursuant to which we sold an aggregate of 10,880,000 shares of our common stock for a total of $225,000. Simultaneously with and as a condition to the closing of the share purchase agreement, we re-purchased 10,880,000 common shares from Corporate Services International Profit Sharing and Century Capital Partners, LLC, which are both beneficially owned by Mr. Anthony, for an aggregate purchase price of $225,000.
Name of related party
Nature of transactions
Mr. Chun Lu, CEO, Chairman and his affiliates
Included in due to related parties, due to Chairman and his affiliates is $4,103,965 and $2,789,568 as of December 31, 2011 and December 31, 2010, respectively. The amount is unsecured, interest free and has no fixed term of repayment.
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EXHIBIT INDEX
*Filed herewith