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TRIT Chart: Huge 3 day run w/ 3 big upper tails on the last 3 candles........how high can TRIT run?.......hit 2.80 resistance zone and pulled back......unless TRIT closes above Jan. levels it will pull back......look for MA(200) @ 1.73 for support........
TRIT set up for a bear attack.......expect a Bearish reversal pattern to form heading into the weekly close.........$$$
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TRIT is a leading provider of integrated solutions for China’s water environmental protection industry, including the water pollution remediation, software and engineering industries. We combine software and hardware to monitor and manage China’s natural and municipal water resources. We provide two lines of service: (i) Wastewater and Tail Gas Treatment and (ii) Water Resource Management. Our customers are mostly local and regional government bodies in China and since we began providing these services in 2002, we have implemented more than 250 projects in provinces, municipalities, autonomous regions and special administrative regions throughout China:
Through our Wastewater and Tail Gas Treatment segment, we design sewage treatment and odor control systems for municipal supplies. These systems, which coordinate technological solutions (software, management information systems, enterprise resource planning and local and wide area networking) with hardware (sensors, distributed control systems, programmable logic controllers, supervisory control and data acquisition systems and mechatronics), allow our clients to monitor and control numerous variables in the sewage treatment and odor control processes. Our goal in this regard is to be a total solution provider for our clients, allowing them to engage us to design processes and systems that work seamlessly to manage the process from the initial intake of raw sewage through the return of water to consumers for reuse.
Through our Water Resource Management segment, we assist the government in monitoring natural waterways. We provide systems that combine technological solutions (software, geological information systems, management information systems, enterprise resource planning and local, wireless and wide area networking) with hardware (sensors, supervisory control and data acquisition systems and mechatronics) to track water levels for drought and flood control, monitor groundwater quality and assist the government in planning its water resource use and management
Our Industry
Water Resource and Pollution Control in China
China’s environmental infrastructure in general, and its water infrastructure in particular, are under great stress. China has a smaller water supply than the United States but approximately five times as many people. China faces water scarcity, frequent floods in the south and east and droughts in the north and west, serious water pollution and heavy strains on the environment. Water usage in China has quintupled since 1949. In short, China struggles to procure, clean and provide enough potable water for a growing population.
As a result of the high population density in China, the poor ratio of available water supply to demand, and the further regional imbalances in available water resources, China faces serious challenges in managing its supply of usable water.
To address these challenges, the Chinese government has enacted stricter environmental standards and invested significantly in water treatment projects to promote sustainable economic growth to provide the population with affordable, purified water. We believe the following factors, among others, may present an opportunity for companies that assist the Chinese government in its goals to increase access to usable water, reduce the effects of droughts and alleviate flooding:
• China possesses approximately 7% of the earth’s total fresh water supply, similar to Canada. China, however, has approximately 40 times more people than Canada.
• Approximately 300 million Chinese citizens have no access to clean water.
• Over 70 million Chinese citizens drink water that does not meet current World Health Organization standards.
• Chinese citizens have access to approximately one-quarter the per-person supply of water available on average around the world. China has one of the 15 lowest per capita water supplies in the world.
• Per capita water availability in north China is only 757 cubic meters per year, less than one-fourth of per capita availability in south China, one-eleventh of the world average. The Food and Agriculture Organization of the United Nations regards a per capita water level of less than 1,000 cubic meters per year as a severe constraint on socio-economic development and environmental protection.
• Almost 90% of underground water in Chinese cities is affected by pollution.
• Approximately 80% of China’s rivers fail to meet standards for fishing.
• According to China’s Ministry of Environmental Protection (“MEP”), over 70% of China’s lakes and 5 out of 7 major river systems are so polluted that they are not suitable for human contact.
• Almost all of China’s rivers are considered polluted to some degree.
• Southern China has access to over 80% of China’s water supply.
• Approximately 400 of China’s 660 cities are affected by water shortages. Of those, over 100—including large cities like Beijing and Tianjin—are facing serious water shortages.
• Southwest China is reported to be experiencing its worst drought in a hundred years. Additionally, the North China Plain has seen seven consecutive years of drought, and its water table is falling at approximately five feet per year.
• China’s industrial water use is comparatively inefficient: to generate RMB10,000 in gross domestic product, China uses three times more water than the world average and seven times more than the United States.
• China recycles or reuses only 60% to 65% of water used by industry, compared with 80% to 85% in most developed countries.
• In 2006, China treated in some form only 56 percent of 53.7 billion tons of waste water; the rest was discharged without any treatment.
• In November 2000, the State Council notified all cities with a population greater than 100,000 to build one or more wastewater treatment facilities by 2005.
• The World Bank estimates that China’s water crisis currently costs China approximately 2.3% of its gross domestic product, of which 1.3% is attributable to water scarcity and 1% is a direct result of water pollution.
As a result of this increased demand for resources, the Chinese government has increased its financial investment in environmental protection legislation and increased environmental standards. Between 1995 and 2000, China invested approximately $47.4 billion in environmental protection. From 2000 through 2005, the investment grew to approximately $92.1 billion. From 2005 through 2010, China’s environmental investment is expected to be approximately $184.2 billion. This growth represents a cumulative annual growth rate of approximately 14.5%. Of the estimated $184.2 billion to be spent on environmental protection, approximately $39.5 billion is expected to be used for water resource management, urban water management, wastewater treatment, sewage reuse and water treatment.
China’s economy has historically been a planned economy, and its environmental protection policies have also been planned, in a series of five-year plans. According to The National Eleventh Five-Year Plan for Environmental Protection (2006-2010) (the “11th Plan”), China’s current environmental priorities are (i) to shift focus from economic growth without regard to environmental protection to placing equal emphasis on economic growth and environmental protection; (ii) to synchronize environmental protection and economic development, rather than allowing environmental protections to lag behind economic development and (iii) to shift from primarily administrative methods to protect the environment to implementing a more comprehensive legal, economic, technical and administrative framework to address environmental issues.
China failed to meet many of the environmental protection targets set in the National Tenth Five-Year Plan for Environmental Protection (2001-2005) (the “10th Plan”), despite devoting more than 1% of China’s gross domestic product in environmental protections for the first time. For example, the 10th Plan set a target of 10% reduction in sulphur dioxide, but China actually experienced an increase of 27.8%. Similarly, key water resources met only 60% of the targets set for pollution during the 10th Plan.
To this end, the 11th Plan provides that China will need to dedicate an estimated 1.35% of its gross domestic product, or approximately RMB1.4 trillion (approximately $205 billion), to environmental protection. China’s MEP projects growth of 15% per year in the environmental industry. While the 11th Plan does not prescribe amounts to be spent for particular projects or in individual sectors, it does state that the water pollution control will be the top priority for China’s environmental investment.
In order to reduce total chemical oxygen demand (“COD”) by 10% during the period, the 11th Plan estimates that engineering measures must be taken to reduce COD by 4 million tons. The 11th Plan anticipates that COD may be reduced by 3 million tons by increasing urban waste water treatment capacity by 45 million tons per day and by 1 million tons through industrial waste water treatment. These treatment plans anticipate that, by 2010, all cities in China will have sewage treatment facilities to allow at least 70% of urban sewage to be treated, with total urban sewage treatment capacity to reach 100 million tons per day. Such capacity increases will require China to construct new sewage treatment facilities and to strengthen the monitoring and supervision of existing and new facilities. The 11th Plan states that such plants will install real time on-line monitoring devices. Monitoring stations for water environmental quality will be expected to meet scientific standards. China plans, in particular, to focus on the enhancement of real time monitoring the pollution of trans-province and trans-boundary waters or estuaries; early warning systems for pollution accidents; and routine monitoring of surface water, drinking water sources and coastal sea waters. By 2010, the 11th Plan anticipates that, of such monitoring stations, 90% will meet government standards in east China, 80% in central China and 60% in west China.
According to the 2009 Chinese Government Annual Report announced by Primer Wen Jiabao, the Chinese government will continue to focus its efforts on environmental protection in 2010. To improve its environmental management, and municipal sewage and solid waste treatment in key areas, China will increase its daily sewage treatment capacity by 15 million cubic meters and its daily solid waste treatment capacity by 0.06 million tons in 2010. Based on an average construction unit cost of RMB 1300 per cubic meter of treatment capacity, we believe that total spending on sewage treatment will reach RMB 19.5 billion.
The Ministry of Environmental Protection of China stated that the Chinese government will invest RMB 3.1 trillion in the environmental protection sector during the 12th 5-year plan (2011-2015), including RMB 1 trillion in construction of treatment facilities. Governmental spending will be twice as much as that during the 11th 5-year plan (2006-2010). The total volume of investment in the environmental protection sector is expected to exceed RMB 1.1 trillion in 2010. Given the favorable policies, we believe that the environmental protection industry in China will maintain an annual growth rate between 15% and 20% for the next 5 years.
China’s Economic Development
China’s population of approximately 1.3 billion people is expected to grow by almost 9 million people per year. The country’s gross national product has grown at a rate of approximately 9% for more than 25 years, making it the fastest growth rate for a major economy in recorded history and securing China’s place as the world’s third largest economy. In the same 25 year period, China has moved more than 300 million people out of poverty and quadrupled the average Chinese person’s income. The potential of this market is noted by the fact that 400 of the world’s largest 500 companies have invested in China.
The financial crisis started in the second half of 2008 and soon became a global economic crisis as financial markets around the world deteriorated. The crisis eventually spread to other sectors such as manufacturing.
In 2010, the Chinese government is posed with the difficult task of maintaining China’s economy in the midst of the global economic financial crisis. China’s economy experienced overall growth of only 8.7% in 2009, its lowest growth rate in eight years, down from growth rates of 9.6% in 2008 and 13% in 2007. The global financial crisis has significantly decreased demand for Chinese exports, resulting in factory closures and significant unemployment. This 8.7% growth rate is well above the 7.2% rate predicted by the World Bank and also exceeds the 8% rate the Chinese government had predicted and said would be necessary to avoid significant further unemployment. While China’s growth rate has fallen, China’s growth rate remains well above the World Bank’s forecast for decline of 1.5% for the world economy in 2009.
According to China’s National Bureau of Statistics, China’s GDP for 2009 reached RMB 33.54 trillion (or $4.92 trillion), an increase of 8.7% over the same period in 2008. The growth rates for the first, second, third and fourth quarters of 2009 were 6.2%, 7.9%, 9.1% and 10.7% respectively, over the same periods in 2008. The overall fixed asset investment (“FAI”) in 2009 rose by 30.1%. In the same period, fixed asset investment in water resources, environment and public works management increased by 45.1%.
According to the 2009 Chinese Government Annual Report announced by Primer Wen Jiabao, China’s expected GDP growth of approximately 8% for 2010 and the government intends to apply active fiscal policies and appropriate expansionary monetary policies by increasing the government deficit by about RMB 1.05 trillion in incurring an additional RMB 7.5 trillion in bank loans.
Based on the data shown above, we believe that our company is likely to continue to grow in 2010 because our business is poised to directly benefit from China’s investment in its water and environmental protection infrastructure.
China’s Technology Industry
The Chinese government began to focus upon technology and science shortly after the formation of the PRC. From 1949 to 1977, the Chinese government directly controlled all research, development and engineering activities through its State Development Planning Commission and State Science and Technology Commission. In the 1980s, China began to implement market-oriented economic reforms designed to improve the Chinese science and technology industry, among other priorities. During this period, China further reduced the central government’s control over the operation of research oriented businesses. In the 1990s, Chinese policymakers again attempted to enhance the development of high technology businesses by experimenting with additional reduction of governmental control while also providing new forms of ownership for these businesses. In addition, in 1992, the Chinese government liberalized market access by adopting policies that favored foreign investment in high technology businesses. By the end of the 1990s, the Chinese government had abandoned most of its control over many high technology businesses and adopted a progressive tax structure designed to further encourage the financial development of these businesses. These policies positively impacted the development of Chinese software and engineering businesses.
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| March 31, 2010 | December 31, 2009 | |||||
| (Unaudited) | ||||||
| ASSETS | ||||||
| Current Assets | ||||||
| Cash | $ | 7,202,236 | $ | 7,171,464 | ||
| Restricted cash | — | 1,501,128 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $62,448 and $56,491 as of March 31, 2010 and December 31, 2009, respectively | 3,568,779 | 4,338,239 | ||||
| Unbilled revenue | 6,471,224 | 3,952,763 | ||||
| Other receivables | 359,784 | 273,602 | ||||
| Inventories | 1,989,636 | 1,573,324 | ||||
| Deposits on projects | 978,687 | 585,153 | ||||
| Prepayments to suppliers and subcontractors | 3,088,153 | 1,898,900 | ||||
| Total current assets | 23,658,499 | 21,294,573 | ||||
| Long-term unbilled revenue | 1,724,331 | 1,723,852 | ||||
| Plant and equipment, net | 432,226 | 374,009 | ||||
| Proprietary technology, net | 1,073,497 | 797,854 | ||||
| $ | 26,888,553 | $ | 24,190,288 | |||
| LIABILITIES AND EQUITY | ||||||
| Current liabilities | ||||||
| Accounts payable and cost accrual on projects | $ | 3,912,821 | $ | 3,367,056 | ||
| Customer deposits | 628,796 | 494,047 | ||||
| Billings in excess of revenue | — | 8,650 | ||||
| Other payables | 120,228 | 8,633 | ||||
| Accrued liabilities | 72,433 | 103,190 | ||||
| Deferred income taxes | — | 141,478 | ||||
| Income taxes payable | 239,106 | 144,232 | ||||
| Total current liabilities | 4,973,384 | 4,267,286 | ||||
| Long-term liabilities | 47,277 | 58,171 | ||||
| 5,020,661 | 4,325,457 | |||||
| Equity | ||||||
| Tri-Tech Holding Inc. shareholders’ equity | ||||||
| Common stock ($0.001 par value, 30,000,000 shares authorized;, 5,389,000 and 5,255,000 shares issued as of March 31,2010 and December 31, 2009, respectively; as of March 31, 2010, 340,000 shares issued were held in escrow. (See note 12)) | 5,389 | 5,255 | ||||
| Additional paid-in-capital | 14,128,162 | 12,942,650 | ||||
| Statutory reserves | 50,655 | 50,655 | ||||
| Retained earnings | 7,150,957 | 6,333,343 | ||||
| Accumulated other comprehensive income | 374,567 | 377,097 | ||||
| Total Tri-Tech Holding Inc. shareholders’ equity | 21,709,730 | 19,709,000 | ||||
| Noncontrolling Interests | 158,162 | 155,831 | ||||
| Total equity | 21,867,892 | 19,864,831 | ||||
| $ | 26,888,553 | $ | 24,190,288 | |||
See notes to consolidated financial statements
F-1
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
| For The Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenues: | ||||||||
| System integration | $ | 3,508,085 | $ | 1,319,603 | ||||
| Hardware products | 347,081 | 1,097,155 | ||||||
| Software products | 382,948 | 434,049 | ||||||
| Total revenues | 4,238,114 | 2,850,807 | ||||||
| Cost of revenues: (exclusive of depreciation and amortization shown separately below) | ||||||||
| System integration | 2,151,215 | 883,633 | ||||||
| Hardware products | 309,740 | 887,880 | ||||||
| Software products | 10,283 | 10,211 | ||||||
| Total cost of revenues(exclusive of depreciation and amortization shown separately below) | 2,471,238 | 1,781,724 | ||||||
| Operating expenses: | ||||||||
| Depreciation and amortization expense | 40,442 | 21,583 | ||||||
| Selling and Marketing expenses | 202,194 | 104,306 | ||||||
| General and Administrative expenses | 696,508 | 279,049 | ||||||
| Total operating expenses | 939,144 | 404,938 | ||||||
| Income from operations | 827,732 | 664,145 | ||||||
| Other income (expenses): | ||||||||
| Other expense | (4,850 | ) | (390 | ) | ||||
| Interest income | 9,694 | 435 | ||||||
| Interest expense | (1,629 | ) | — | |||||
| Tax rebates | 56,965 | — | ||||||
| Total other income (expenses), net | 60,180 | 45 | ||||||
| Income before provision for income taxes and noncontrolling interests income | 887,912 | 664,190 | ||||||
| Provision for income taxes | 67,773 | 63,563 | ||||||
| Net income before allocation to noncontrolling interests | 820,139 | 600,627 | ||||||
| Less: Net income attributable to noncontrolling interests | 2,525 | 375 | ||||||
| Net income attributable to Tri-Tech Holding Inc | $ | 817,614 | $ | 600,252 | ||||
| Other comprehensive income | ||||||||
| Foreign currency translation adjustment | (2,724 | ) | 13,208 | |||||
| Comprehensive income | $ | 817,415 | $ | 613,835 | ||||
| Less: Comprehensive income attributable to noncontrolling interests | 2,331 | 349 | ||||||
| Comprehensive income attributable to Tri-Tech Holding Inc. | $ | 815,084 | $ | 613,486 | ||||
| Net income attributable to Tri-Tech Holding Inc. per share: | ||||||||
| Basic | $ | 0.16 | $ | 0.17 | ||||
| Diluted | $ | 0.15 | $ | 0.17 | ||||
| Weighted Average number of common shares outstanding: | ||||||||
| Basic | 5,269,011 | 3,555,000 | ||||||
| Diluted | 5,559,260 | 3,555,000 | ||||||
See notes to consolidated financial statements
F-2
TRI-TECH HOLDING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For The Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| Cash flows from operating activities: | ||||||||
| Net income before allocation to noncontrolling interests | $ | 820,139 | $ | 600,627 | ||||
| Adjustments to reconcile net income before noncontrolling interests to net cash provided by (used in ) operation activities: | ||||||||
| Amortization of option expenses | 91,480 | — | ||||||
| Amortization of warrants | 8,766 | — | ||||||
| Depreciation and amortization | 40,442 | 21,748 | ||||||
| Provision for doubtful accounts | 5,940 | 10,178 | ||||||
| Deferred income taxes | (149,838 | ) | 42,668 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Restricted cash | 1,501,414 | — | ||||||
| Accounts receivable | 764,660 | 258,395 | ||||||
| Unbilled revenue | | (2,517,140 | ) | (744,534 | ) | |||
| Other receivables | (479,436 | ) | 51,281 | |||||
| Inventories | (359,426 | ) | (368,318 | ) | ||||
| Prepayments and deferred expenses | | (1,164,248 | ) | 340,332 | ||||
| Accounts payable | 488,386 | 256,795 | ||||||
| Customer deposits | 134,600 | 167,149 | ||||||
| Billings in excess of revenue | (8,652 | ) | — | |||||
| Other payables | 175,051 | (23,449 | ) | |||||
| Accrued liabilities | (30,782 | ) | — | |||||
| Taxes payable | 94,825 | 189,667 | ||||||
| Net cash (used in) provided by operating activities | (583,819 | ) | 802,539 | |||||
| Cash flows from investing activities: | ||||||||
| Payment to purchase plant and equipment | (80,766 | ) | (950 | ) | ||||
| Payment to purchase intangible asset | (292,959 | ) | — | |||||
| Payment of installment of vehicle purchase | (10,909 | ) | — | |||||
| Short-term loan to third parties | — | (213,584 | ) | |||||
| Net cash used in investing activities | (384,634 | ) | (214,534 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from exercise of warrants into common stock | 1,085,400 | — | ||||||
| Net cash provided by financing activities | 1,085,400 | — | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (86,175 | ) | (171,539 | ) | ||||
| Net increase in cash and cash equivalents | 30,772 | 416,466 | ||||||
| Cash and cash equivalents, beginning of period | 7,171,464 | 732,418 | ||||||
| Cash and cash equivalents, end of period | $ | 7,202,236 | $ | 1,148,884 | ||||
| Supplemental Data: | ||||||||
| Income taxes paid | $ | 122,786 | $ | — | ||||
| Interest paid on debt | $ | 1,629 | $ | — | ||||
See notes to consolidated financial statements
F-3
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements
March 31, 2010 and 2009
1. Background
Tri-Tech Holding Inc. (“TRIT”) was incorporated in the Cayman Islands on January 7, 2009 as a limited liability company and is authorized to issue 30,000,000 common shares, with a par value of $0.001. TRIT issued 50,000 common shares (or 3,555,000 common shares after 71.1-for-1 stock split which was completed on May 22, 2009) to shareholders of Tri-Tech International Investment, Inc. (“TTII”) for their respective interests in TTII. TTII was incorporated in the British Virgin Islands on November 24, 2005 as a limited liability company. TTII has subsidiaries and variable interest entities (“VIEs”) in the People’s Republic of China (the “PRC”) as discussed below. TRIT and its subsidiaries and variable interest entities together are referred to as the “Company”. Through its subsidiaries and VIEs in PRC, the Company provides self-manufactured, proprietary or third-party products, system integration and other services in the fields of environmental protection and water resource monitoring, development, utilization and protection.
On September 9, 2009, the Company completed its initial public offering (“IPO”) of 1,700,000 common shares at $6.75 per share.
Tri-Tech (Beijing) Co., Ltd. (“TTB”) was incorporated in the PRC on February 6, 2006. It is wholly-owned by TTII. It is a wholly foreign-owned high-tech enterprise, primarily engaged in water resource protection including the utilization and development of technology and product sales, and the development of new industries and applications.
Tranhold Environmental (Beijing) Tech Co., Ltd. (“Tranhold”) was established on June 6, 2003. It was a wholly-owned subsidiary of TTII until it was converted into a VIE controlled by TTB on November 28, 2008. (refer to the section “Reorganization and Acquisition”). Tranhold specializes in environmental technology research and development, environmental engineering design and building for major industrial sectors such as the petrochemical, pharmaceutical and municipal industries. It also provides water and wastewater treatment process control systems, process tail gas purification and other air pollution control systems and related integration solutions. Tranhold participated in the compilation of “ The Technical Guidelines of Municipal Sewage Treatment Plant Operation, Management and Safety ” for the Ministry of Construction of the People’s Republic of China.
Beijing Yanyu Water Tech Co., Ltd. (“Yanyu”) was established on March 29, 2002. It was a wholly-owned subsidiary of TTII until it was converted into a VIE controlled by TTB on November 28, 2008. (refer to the section “Reorganization and Acquisition”). Yanyu specializes in research and development, production, system integration, and consulting services in the fields of water resource protection and allocation, flood control and forecasting, irrigation systems, and municipal water supply and distribution systems. Yanyu participated in the compilation of “ Technical Standards of Automatic Hydrologic Measuring and Report Systems (SL61-2003) ” and “Technical Guidelines of Automatic Hydrologic Measuring and Reporting Systems – General Devices (GB/T)” for the Ministry of Water Resources of the PRC.
We recently formed Tri-Tech Infrastructure LLC. (“TIS”), our wholly-owned subsidiary in the U.S. to develop opportunities in the United States.
F-4
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements—(Continued)
March 31, 2010 and 2009
Reorganization and Acquisition
On October 24, 2007, TTII and its wholly owned subsidiary TTB entered a sales and purchase agreement with the existing shareholders of Tranhold (the “Tranhold Original Shareholders”). Pursuant to the agreement, TTII issued 50,000 shares (equivalent to 1,777,500 common shares of TRIT after stock split) of its stock to the Tranhold Original Shareholders for 100% equity ownership of Tranhold. The total number of shares outstanding was 50,000 shares (equivalent to 1,777,500 common shares of TRIT after stock split). As a result of this transaction, the Tranhold Original Shareholders were able to exercise control of TTII. The purchase of Tranhold and the issuance of TTII’s common stock were accounted for as a reverse acquisition and as a recapitalization under common control. The assets and liabilities transferred were accounted for at historical cost. The consolidated financial statements have been presented as if the reorganization occurred at the beginning of 2007.
On December 31, 2007, TTII and its wholly owned subsidiary TTB completed a sales and purchase agreement with certain existing shareholders of Yanyu (the “Yanyu Original Shareholders”). Pursuant to the agreement, TTII issued 50,000 shares (equivalent to 1,777,500 common shares of TRIT after stock split) of its common stock to the Yanyu Original Shareholders for 92.86% equity ownership of Yanyu. Based on Statement of Financial Accounting Standards No. 141, “ Business Combinations ”, TTII is determined to be the acquirer. The allocation of the purchase price of Yanyu was based on the fair value of Yanyu as of December 31, 2007.
| December 31, 2007 | ||||
| Current Assets | $ | 1,836,705 | ||
| Plant and equipment, net | 44,298 | |||
| Intangible assets | 587,058 | |||
| Liabilities assumed | (902,018 | ) | ||
| Total purchase price | $ | 1,566,043 | ||
The fair value of the assets and liabilities of Yanyu approximated the book value as of December 31, 2007.
As a result of these transactions, Tranhold and Yanyu became the subsidiaries of TTII.
The Company’s principal geographic market is mainly in the People’s Republic of China (“PRC”). As PRC laws and regulations prohibit or restrict other than PRC companies to engage in certain government-related businesses, the Company provides its services in the PRC through Tranhold and Yanyu, Chinese legal entities, which hold the qualifications and permits necessary to conduct government-related services in the PRC. In order to avoid any restrictions that Tranhold or Yanyu might encounter during future business development, the Company concluded that TTII and Tranhold or Yanyu should not have a parent-subsidiary relationship.
By November 28, 2008, the Company had completed two steps of reorganization. The Company first recalled its shares from the original shareholders of Tranhold and Yanyu. These shareholders are major shareholders, directors, corporate level executives and key employees of the Company. Legally, Tranhold and Yanyu returned to their legal status prior to the acquisitions in 2007. Concurrently, on November 28, 2008,
F-5
Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements—(Continued)
March 31, 2010 and 2009
the Company signed and executed with Tranhold and Yanyu a series of contractual agreements with a 25-year, renewable term. These contractual agreements require the pledge of the original shareholders’ equity interests and stock certificates of the VIEs. At any time during the agreement period, the Company has absolute rights to acquire any portion of the equity interests of those VIEs under no-cost conditions. In addition, the Company has absolute rights to appoint directors and officers of those VIEs and to obtain the profits from those VIEs. These agreements consist of the following agreements (Operating Agreements subsequently entered):
Exclusive Technical and Consulting Service Agreement . Each of Yanyu and Tranhold has entered into an Exclusive Technical and Consulting Service Agreement with TTB, which agreement provides that TTB will be the exclusive provider of technical and consulting services to Yanyu and Tranhold, as appropriate, and that each of them will in turn pay 90% of its profits (other than net profits allocable to the State-Owned Entities (“SOE”) Shareholder of Yanyu) to TTB for such services. In addition to such payment, Yanyu and Tranhold agree to reimburse TTB for TTB’s expenses (other than TTB’s income taxes) incurred in connection with its provision of services under the agreement. Payments will be made on a quarterly basis, with any overpayment or underpayment to be reconciled once each of Tranhold’s and Yanyu’s annual net profits, as applicable, are determined at its fiscal year end. Any payment from TTB to TTII would need to comply with applicable Chinese laws affecting payments from Chinese companies to non-Chinese companies. Although based on this agreement TTB is only entitled to 90% of net profits (other than net profits allocable to the SOE Shareholder of Yanyu), TTB also entitled the remaining share of the net profits of the VIEs through dividends per the Proxy Agreement as discussed below. The Company relies on dividends paid by TTB for its cash needs, and TTB relies on payments from Yanyu and Tranhold to be able to pay such dividends to the Company.
Management Fee Payment Agreement . Each of the shareholders of Yanyu and Tranhold (other than Beijing YanYu Communications Telemetry United New Technology Development Department, a Chinese State Owned Entity (the “SOE Shareholder”) of Yanyu) has entered into a Management Fee Payment Agreement, which provides that, in the event TTB exercises its rights to purchase the equity interests of the Yanyu or Tranhold shareholders (other than those owned by the SOE Shareholder of Yanyu) under the Equity Interest Purchase Agreements, such shareholders shall pay a Management Fee to TTB in an amount equal to the amount of the Transfer Fee received by the such shareholders under the Equity Interest Purchase Agreement.
Proxy Agreement . Each of the shareholders of Yanyu and Tranhold (other than the SOE Shareholder of Yanyu) has executed a Proxy Agreement authorizing TTB to exercise any and all shareholder rights associated with his ownership in Yanyu or Tranhold, as appropriate, including the right to attend shareholders’ meetings, the right to execute shareholders’ resolutions, the right to sell, assign, transfer or pledge any or all of the equity interest in Yanyu or Tranhold, as appropriate, and the right to vote such equity interest for any and all matters.
Equity Interest Pledge Agreement . TTB and the shareholders of each of Tranhold and Yanyu (other than the SOE Shareholder of Yanyu) have entered in Equity Interest Pledge Agreements, pursuant to which each such shareholder pledges all of his shares of Tranhold or Yanyu, as appropriate, to TTB. If Tranhold or Yanyu or any of its respective shareholders (other than the SOE Shareholder of Yanyu) breaches its respective contractual obligations, TTB, as pledgee, will be entitled to certain rights, including the right to foreclose on
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements—(Continued)
March 31, 2010 and 2009
the pledged equity interests. Such Tranhold and Yanyu shareholders have agreed not to dispose of the pledged equity interests or take any actions that would prejudice TTB’s interest. According to this agreement, TTB has absolute rights to obtain any and full dividends related to the equity interest pledged during the term of the pledge.
Exclusive Equity Interest Purchase Agreement . Each of the shareholders of Tranhold and Yanyu (other than the SOE Shareholder of Yanyu) has entered into an Exclusive Equity Interest Purchase Agreement, which provides that TTB will be entitled to acquire such shares from the current shareholders upon certain terms and conditions, if such a purchase is or becomes allowable under PRC laws and regulations. The Exclusive Equity Interest Purchase Agreement also prohibits the current shareholders of each of Tranhold and Yanyu (other than the SOE Shareholder of Yanyu) from transferring any portion of their equity interests to anyone other than TTB. TTB has not yet taken any corporate action to exercise this right of purchase, and there is no guarantee that it will do so or will be permitted to do so by applicable law at such time as it may wish to do so.
Operating Agreements . TTB, Tranhold, Yanyu and each of their respective shareholders (other than the SOE Shareholder of Yanyu) have entered into an Operating Agreement on July 3, 2009, which requires TTB to guarantee the obligations of each of Tranhold and Yanyu in their business arrangements with third parties. Each of Tranhold and Yanyu, in return, agrees to pledge its accounts receivable and all of its assets to TTB. Moreover, each of Tranhold and Yanyu agrees that without the prior consent of TTB, such company will not engage in any transactions that could materially affect its assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of its assets or intellectual property rights in favor of a third party or transfer of any agreements relating to its business operation to any third party. Pursuant to these operating agreements, TTB provides guidance and instructions on each of Tranhold’s and Yanyu’s daily operations and financial affairs. The contracting shareholders of each of Tranhold and Yanyu must designate the candidates recommended by TTB as their representatives on their respective boards of directors. TTB has the right to appoint and remove senior executives of each of Tranhold and Yanyu.
The Company provided advances to its VIEs totaling $1,495,046 during the quarters ended March 31, 2010. The Company’s accumulated outstanding advances to Tranhold and Yanyu, respectively, were $6,589,299 and $805,157 as of March 31, 2010.
Except as disclosed above, there are no arrangements that could require the Company to provide financial support to the VIEs, including events or circumstances that could expose the Company to a loss. As stated in the disclosure of various agreements between the Company and its VIEs in note 1 under Reorganization and Acquisition, the Company has rights to acquire any portion of the equity interests of those VIEs under no-cost conditions. Also the Company may allocate its available funds to its VIEs for business purposes. There are no fixed terms of such arrangement.
In January 2010, Yanyu acquired 5 software products, which include BlueSky (large region environmental management system), Skylon MCMS V1.0 (mobile web management system), Skylon DLMS V1.0 (database management system), pollution reduction checking assistant, water pollution control infrastructure, and hired its associated software R&D persons, simultaneously. This purchase involves $293,000. This is attributable to Segment 2 (“Water Resource Management”). Through this purchase, we will
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Tri-Tech Holding Inc. and Subsidiaries
Notes To Consolidated Financial Statements—(Continued)
March 31, 2010 and 2009
strengthen our service and provide better products for our customer, which integrates the acquired software products with our existing products and services. The customers are similar type of our previous customers of central and local government administrations, such as environmental protection department, hydrology department and other public utility. The Company intends to start the promotion and marketing campaign for these products. The actual payment is recorded as the cost of software for the acquired software.
Based on these agreements and according to the provisions of Financial Accounting Standards Board Interpretation No. 46R, “Consolidation of Variable Interest Entities” (or “FIN 46R”ASC NO.810), Tranhold and Yanyu are considered two variable interest entities (“VIEs”), and the Company is the primary beneficiary. Accordingly, Tranhold and Yanyu have continued to be consolidated in the Company’s financial statements.
It is the Company’s general belief that the creditors and the other beneficial interest holder of Tranhold and Yanyu have no recourse to the general credit of the Company.
No change occurred in the controlling interests before and after the Company entered into agreements with these VIEs.
VIE relationship is a combination of entities under common control, and all assets and liabilities are reported at their historical cost basis.
The following are major categories of the Assets and Liabilities of the VIEs:
| Yanyu | Tranhold | |||||||
| March 31, 2010 | March 31, 2010 | |||||||
| (Unaudited) | ||||||||
| Current assets | $ | 3,158,698 | $ | 11,877,539 | ||||
| Plant and equipment, net | 26,565 | 400,143 | ||||||
| Intangible assets | 822,062 | 251,435 | ||||||
| Long-term unbilled revenue | — | 1,128,862 | ||||||
| Liabilities assumed | (2,032,915 | ) | (6,132,997 | ) | ||||
| Total shareholders’ equity | $ | 1,974,410 | $ | 7,524,982 | ||||
| Yanyu | Tranhold | |||||||
| December 31, 2009 | December 31, 2009 | |||||||
| Current assets | $ | 3,010,585 | $ | 11,133,068 | ||||
| Plant and equipment, net | 27,660 | 343,011 | ||||||
| Intangible assets | 544,279 | 253,575 | ||||||
| Long-term unbilled revenue | — | 1,128,548 | ||||||
| Liabilities assumed | $ | (1,604,509 | ) | $ | (5,336,339 | ) | ||
| Total shareholders’ equity | $ | 1,978,015 | $ | 7,521,863 | ||||
