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TRIT > SEC Filings for TRIT > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for TRI-TECH HOLDING, INC.


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The actual results could differ materially from those described herein.

Company Overview

Tri-Tech Holding Inc. (the "Company" or "we") is a leading provider of integrated solutions, products and technologies to water resource management and environmental protection industries. The Company has successfullyimplemented projects throughout the world, including China, India, the Middle East and North America.

The Company aims to provide tailored solutions to complex environmental challenges faced by both public and private sectors in China and beyond. Its client consists of a combination of government agencies, municipalities, and industrial entities.

The Company's principal executive offices are located at the 16th Floor of Tower B, Renji Plaza, 101 Jingshun Road, Chaoyang District, Beijing 100102 China. The telephone number at this address is +86 (10) 5732-3666. Its ordinary shares are traded on the NASDAQ Capital Market under the symbol "TRIT." The Company's website (www.tri-tech.cn), which is not incorporated herein, provides a variety of information including current, quarterly and annual reports.

Principal Products, Services and Their Markets

The Company operates in three segments: (i) Water, Wastewater Treatment and Municipal Infrastructure ("WWTM"), (ii) Water Resource Management System and Engineering Services ("WRME"), and (iii) Industrial Pollution Control and Safety ("IPCS"). Through its subsidiaries, variable interest entities ("VIE") and joint venture partnership, the Company:

Provides proprietary and third-party products, integrated systems and other services forthe purposes of water resource monitoring, development, utilization and protection;

Designs water works and customized facilities for reclaiming and reusing water and sewage treatment for China's municipalities;

Design mechanical vapor compression ("MVC") systems for seawater desalination and industrial zero liquid discharge ("ZLD");

Designs systems that track natural waterway levels for flood and drought control, monitor groundwater quality, manage water resources and irrigation systems; and

Provides systems for volatile organic compound ("VOC") abatement, odor control, water and wastewater treatment, water recycling facilities design, project engineering, procurement and construction for petroleum refineries, petrochemical and power plants as well as safe and clean production technologies for oil and gas field exploration and pipelines.

Business Segments

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure ("WWTM")

In WWTM, the Company focuses on providing solutions to municipal water, wastewater treatment and gray water recycling. The Company's services include engineering, procurement and implementation, and operation management.

Segment 2: Water Resource Management System and Engineering Service ("WRME")

WRME involves projects relating to water resource management, flood control and forecasting, irrigation systems, and similar ventures through system integration of proprietary and third-party hardware and software products. For government agencies, the Company designs systems that track natural waterway levels for drought control, monitor groundwater quality, and generally manage water resources and irrigation systems.

Segment 3: Industrial Pollution Control and Safety Water Resource ("IPCS")

Equipped with a variety of technologies and products, such as ZLD, multi-effect evaporation, and multi-flash evaporation, IPCS focuses on industrial water, wastewater treatment and seawater desalination for industrial production and pollution control in the petroleum and power industries. Projects in this segment include traditional Engineering Procurement Construction ("EPC") of equipment and modules, and the operation and maintenance of industrial wastewater treatment plants. For petroleum refineries, petrochemical factories and power plants, the Company provides systematic solutions for VOC abatement, odor control, water and wastewater treatment, and water recycling. The Company also provides safe and clean production technologies for oil and gas field exploration and pipeline transportation.

Critical Accounting Policies

Estimates and Assumptions

The preparation of financial statements requires management to make numerous estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have financial impacts on recognition and disclosure of assets, liabilities, equity, revenues and expenses. However, we believe that these estimates used in preparing our financial statements, which are based on our best professional judgment, are reasonable and prudent.

The most complex and subjective estimates and assumptions that present the greatest amount of uncertainty relate to the recognition of revenue under the percentage of completion method, recording business combinations, the allowance for doubtful accounts, long term contract collectability, impairment of fixed assets and intangible assets, and income taxes. We evaluate all of these estimates and judgments on an on-going basis.Below are the most critical estimates and assumptions we make in preparing the consolidated financial statements.

Revenue Recognition

Our revenues consist primarily of three categories: (i) System Integration, (ii) Hardware Product Sales, and (iii) Software Product Sales. The Company recognizes revenue when the consideration to be received is fixed or determinable, products delivered, or services rendered, and collectability ensured.

For system integration, sales contracts are structured with fixed price. The contract periods range from two months to approximately three years in length. We recognize revenue of these contracts following the percentage-of-completion method, measured by different stages in accordance with ASC 605-35, "Construction-Type and Production-Type Contracts." Only if the actual implementation status meets the established stages of completion will we recognize the relevant portion of the revenue. There are four major stages for the system integration revenue recognition: (a) the completion of project design, (b) the delivery of products, (c) the completion of debugging, and (d) inspection and acceptance.

For hardware product sales, we recognize revenue only when all products are delivered and the acceptance confirmations are signed by the customers, according to ASC 605-10, "Revenue Recognition." We are not obligated for any repurchase or return of the goods.

We also sell software products. These software product sales do not include any additional services such as maintenance or technical support. We recognize revenue under ASC 985-605, "Software Revenue Recognition" according to the acceptance of delivery revenue recognition method. At the end of each reporting period, we recognize the contract amount as revenue only if all software products have been delivered and the customer acceptance confirmation has been signed.

If unapproved change orders or claims occur in the future, in accounting for contracts, we follow paragraphs 30 and 31 of ASC 605-35-25, "Construction-Type and Production-Type Contracts." We recognize revenue from unapproved change orders or claims only to the extent that contract costs relating to the unapproved change orders or claims have been incurred, and only if it is probable that such unapproved change orders or claims will result in additional contract revenue and the amount of such additional revenue can be reliably estimated. To date, we have not experienced any unapproved change orders in our ordinary business operation.

We present all sales revenue net of a value-added tax ("VAT"). Our products sold in China are generally subject to Chinese VAT of 17% of the sales price, except for certain proprietary software sales, which will only be subject to an effective tax rate of 3%. The VAT payable may be offset by VAT paid by us on purchased raw materials and other materials included in the cost of projects or producing the finished product.

We record revenue in excess of billings as "unbilled revenue". For revenues accounted for under this account, we expect the amounts to be collected within one year. For those with collection periods in excess of one year, we classify them under "long-term unbilled revenue" on the consolidated balance sheets.

The Company obtained several contracts with a billing cycle of over three years in the past two years. The discounted revenues from those contracts are recorded and the discount rate is the 3-year nominal interest rate of 5.4%, set by the People's Bank of China, China's central bank. For the contract where a discount rate is specified, such specified rate is applied. These projects are funded by local governments with central government project appropriations, so the Company does not ascribe any collection risk to such projects.

Accounts Receivable

Given the characteristics of our client base, we are confident that our accounts receivable are of good quality even though our accounts receivable days are relatively long compared with companies in other industries. Our finance team is constantly monitoring the accounts receivable quality and the process and assumptions used in bad debt provision. In case of any event that indicates accounts receivable quality deterioration, management will reassess the bad debt provision within the period such event occurs.

We recognize accounts receivable initially at face value, less an allowance for doubtful accounts. We provide an allowance for doubtful accounts based on the aging of accounts receivable and on any specifically identified accounts receivable that may become uncollectible. We maintain allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments in the relevant time periods. We review the accounts receivable on a periodic basis and make general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider many factors, including the age of the balance, the customer's historical payment history and current credit-worthiness and current economic trends. The amount of the provision, if any, is recognized in the consolidated statement of operations within "general and administrative expenses."

While the collection period for some of the long-term contracts, such as the build-and-transfer projects, can be as long as two years, given that our clients are primarily government agencies supported by provincial budgets and large state-owned enterprises with sufficient liquidity, we believe the collectability of accounts receivable is secure, long-term or short-term.

Impairment of Assets and Intangible Assets

We monitor the carrying value of our long-lived assets for potential impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. To the extent the estimated undiscounted future cash inflows attributable to the asset, less estimated undiscounted future cash outflows, are less than the carrying amount, we recognize an impairment loss in an amount equal to the difference between the carrying value of such assets and fair value. No impairment indicator is noted in the prior or current periods.

We evaluate the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. Estimating future cash flows require significant judgment, and projections may vary from the cash flows eventually realized which could impact our ability to accurately assess whether an asset has been impaired.

For goodwill, we assess for impairment annually or whenever events or changes indicate that, more likely than not, the carrying value of goodwill has been impaired. We use the income approach to estimate the fair value of the goodwill. The income approach is based on the long-term projected future cash flows of the reporting units. We discount the estimated cash flows to present value using a weighted-average cost of capital that considers factors such as the timing of the cash flows and the risks inherent in those cash flows. We believe that this approach is the most reasonable because it provides a fair value estimate based upon the operating segments' expected long-term performance considering the economic and market conditions that generally affect our business.

Taxation

Pursuant to the new EIT Law and supplementary regulations, only high-tech companies that have been re-certified as such under the new criteria are granted the preferential enterprise income tax rate of 15%. TTB received a preferential income tax rate of 7.5% from January 1, 2009 to December 31, 2011, after which the EIT rate became 15% as TTB continues to qualify as a high-tech company.

For revenues generated from those parts of our software solutions which are recognized by and registered with government authorities and meet government authorities' requirements to be treated as software products, we are entitled to receive a refund of 14% on the total VAT paid at a rate of 17%, for an effective rate of 3%. Revenues from software products other than the above are subject to full VAT at 17%. In addition, we are currently exempted from sales tax for revenues generated from development and transfer of tailor-made software solutions for clients. Further, revenues from consulting services are subject to a 5% sales tax.

PRC Value-Added Tax

Our products sold in China are generally subject to a Chinese VAT at a rate of 17%. Proprietary software sales are subject to business tax of 5%. The VAT may be offset by VAT we pay on raw materials and other materials included in the cost of producing our finished product. Accrued VAT payables from Yanyu, Tranhold and BSST are subject to urban maintenance and construction tax and additional education fees, which are accounted for as 0.5% of the total sales value.

PRC Business Tax

Part of revenues from services provided by TTB, Yanyu, Tranhold and BSST are mostly subject to a Chinese business tax of 5% and surtax of 0.5%. One of the projects in Tianjin is subject to a 3% business tax. We pay business tax on gross revenues generated from our shipping agency services minus the costs of services, which are paid on behalf of our customers. The business tax was terminated in some provinces or categories of China from September 2012. Accordingly, some the Company's revenues subjected to business tax will incur a 6% VAT.

Recently Issued Accounting Pronouncements

The FASB has issued Accounting Standards Update (ASU) No. 2013-04 through No. 2013-08. None of the standards is expect to have a material impact on the Company's consolidated financial position or results of operations.

Revenues by Segment

During the three months ended June 30, 2013, Segment 1 contributed 14.2% of the total revenues; Segment 2 contributed 26.6%; and Segment 3 contributed the remaining 59.2%. During the six months ended 30, 2013, Segment 1 contributed 15.8% of the total revenues; Segment 2 contributed 35.1%%; and Segment 3 contributed the remaining 49.1%.

The following table provides revenue percentage for each segment and category for the three months ended June 30, 2013.

                                                                  Three Months Ended June 30, 2013
                            Segment 1:            %     Segment 2:            %     Segment 3:            %        Total:              %
System Integration          $ 2,309,189       100.0 %   $ 3,120,332        72.2 %   $ 7,692,731        79.7 %   $ 13,122,252        80.6 %
Hardware Products           $         -           -     $ 1,204,186        27.8 %   $ 1,958,179        20.3 %   $  3,162,365        19.4 %
Total Revenues              $ 2,309,189       100.0 %   $ 4,324,518       100.0 %   $ 9,650,910       100.0 %   $ 16,284,617       100.0 %

The following table provides revenue percentage for each segment and category for the six months ended June 30, 2013.

                                                                    Six Months Ended June 30, 2013
                             Segment 1:            %     Segment 2:            %      Segment 3:            %        Total:              %
System Integration           $ 4,235,869       100.0 %   $ 7,467,130        79.4 %   $ 10,556,411        80.4 %   $ 22,259,410        83.2 %
Hardware Products            $         -           -     $ 1,937,785        20.6 %   $  2,566,250        19.6 %   $  4,504,035        16.8 %
Total Revenues               $ 4,235,869       100.0 %   $ 9,404,915       100.0 %   $ 13,122,661       100.0 %   $ 26,763,445       100.0 %

Please refer to Note 31 in our accompanying financial statements for more detailed discussion of the comparable numbers for the three and six months ended June 30, 2013 and 2012.

Backlog and Pipeline

The Company's backlog represents the amount of contract work remaining to be completed, that is, revenues from existing contracts and work in progress expected to be recognized in current period, based on the assumption that these projects will be completed on time according to the project schedules. The Company evaluates the ongoing projects regularly and updates the schedules as appropriate.

The following table provides backlog by segments for as of June 30, 2013 and December 31, 2012, respectively.

                                             June 30, 2013                           December 31, 2012
                                  USD Million      % of Total Backlog       USD Million       % of Total Backlog       % Change
Segment 1:                                36.6                    66.4 %            38.7                     64.4 %          (5.6 )%
Segment 2:                                 6.3                    11.4 %             6.7                     11.1 %          (6.0 )%
Segment 3:                                12.3                    22.3 %            14.7                     24.5 %         (16.3 )%
Total                                     55.2                   100.0 %            60.1                    100.0 %          (8.2 )%

Pipeline represents the values of projects we have been actively pursuing. The pipeline as of June 30, 2013 and December 31, 2012 was as below:

                                                June 30, 2013                             December 31, 2012
                                    USD Million       % of Total Pipeline       USD Million        % of Total Pipeline        % Change
Segment 1:                                  20.3                      29.4 %            50.7                       57.6 %          (60.0 )%
Segment 2:                                  18.5                      26.8 %             2.5                        2.8 %          640.0 %
Segment 3:                                  30.3                      43.8 %            34.8                       39.6 %          (12.9 )%
Total                                       69.1                     100.0 %            88.0                      100.0 %          (21.5 )%

Having a dynamic nature, the values of secured projects move from pipeline into backlog and backlog to revenue based on percentage of completion, sometimes simultaneously. The backlog decreased by $5.0 million from December 31, 2012 to June 30, 2013, because of the projects' progress in the second quarter of 2013. Being rigorous in project selection also narrowed down the number of candidate projects.

Review of Strategies

In the second quarter, the Company maintained on its course to improve the productivity of the employees, the efficiency of the management, and cash flows from operations. We revised the employee compensation structure to tie wages even more clearly to achievement of assigned goals. We simplified the chain of command and workflow to reduce the number of steps required to make and implement business decisions. We reduced headcount and consolidated compatible business units. We overhauled the project selection criteria to avoid projects with unacceptable uncertainties or unfavorable payment terms in order to control sales related costs and to ease pressures on the cash flows.

Customers and Marketing/Distribution Methods

The Company has three customers who represented 13%, 12% and 11% of the Company's revenue for the quarter ended June 30, 2013, respectively. The Company has one customer who represented over 10% of the Company's revenue for the six months ended June 30, 2013. Although we are dependent on our large clients to a certain degree, we believe that collectability of accounts receivables is relatively secure because our client base consists primarily of government agencies or large state-owned enterprises.

Employees

As of June 30, 2013, the Company had 373 full-time and no part-time employees, of which 66 focused on projects. Of all employees 36% were in technical services, 13% were in sales, 10% were in manufacturing, 9% were in research and development, 9% were in accounting and finance, and the remaining 23% were in general and administrative services. In wake of the Company's financial performance, further downsizing and business consolidation can be expected. .

Results of Operations

Overview for the Three and Six Months Ended June 30, 2013 and 2012

Key metrics for the second quarter of 2013 include the following:

Total revenues were $16,284,617 in the second quarter of 2013, a decrease of 29.3% from $23,040,534 in the same period of 2012. This decrease is primarily attributable to the progress of Ordos and India projects. Ordos project had approached the end, while the India projects got their permission for India government late and progressed more slowly than expected. The Ordos project is nearly complete, resulting in lower revenues from the project in the second quarter 2013. The India projects, on the other hand, revised the project plan per the customer's request and the revision had not yet received government permission, which led to slower progress and, as a result, lower revenues than expected.

Total cost of revenues decreased by 26.5%, from $17,216,468 in the second quarter of 2012 to $12,657,369 in the second quarter of 2013. This decrease is due to the decrease of related revenue and inflation in raw materials and labor costs.

Total operating expenses were $3,676,503 for the second quarter of 2013, a decrease of 12.4%, compared with the amount in the same period of 2012. Given this initial success in the beginning of 2013, the Company continues to exert control over operating expenses.

Operating loss was $49,255 in the second quarter of 2013, comparing with operating income of $1,629,139 in the second quarter of 2012, representing 0.3% and 7.1% of total revenues in the second quarter of 2013 and 2012, respectively. The decrease was due to the decreased revenue.

Net loss attributable to TRIT for the second quarter of 2013 and net income attributed to TRIT in the same period of 2012 were $602,020 and $1,370,887, respectively.

The following are the operating results for the three months ended June 30, 2013 and 2012:

                                                  Three Months Ended        % of         Three Months Ended        % of           Change
                                                  June 30, 2013 ($)        Sales          June 30, 2012($)        Sales            ($)           Change (%)
Revenue                                                    16,284,617        100.0 %              23,040,534        100.0 %      (6,755,917 )          (29.3 )%
Cost of Revenues                                           12,657,369         77.7 %              17,216,468         74.7 %      (4,559,099 )          (26.5 )%
Selling and Marketing Expenses                                850,551          5.2 %                 935,853          4.1 %         (85,302 )           (9.1 )%
General and Administrative Expenses                         2,643,040         16.2 %               3,247,546         14.1 %        (604,506 )          (18.6 )%
Research and Development Expenses                             182,912          1.1 %                  11,528          0.1 %         171,384          1,486.7 %
Total Operating Expenses                                    3,676,503         22.6 %               4,194,927         18.2 %        (518,424 )          (12.4 )%
Operating (Loss) Income                                       (49,255 )       (0.3 )%              1,629,139          7.1 %      (1,678,394 )         (103.0 )%
Other Expenses                                               (666,524 )       (4.1 )%                (34,350 )       (0.1 )%       (632,174 )        1,840.4 %
(Loss) Income before Provision for Income
Taxes                                                        (715,779 )       (4.4 )%              1,594,789          6.9 %      (2,310,568 )         (144.9 )%
Provision for Income Taxes                                     99,644          0.6 %                 287,062          1.2 %        (187,418 )          (65.3 )%
Net (Loss) Income                                            (815,423 )       (5.0 )%              1,307,727          5.7 %      (2,123,150 )         (162.4 )%
Less: Net Loss Attributable to Noncontrolling
Interests                                                    (213,403 )       (1.3 )%                (63,160 )       (0.3 )%       (150,243 )          237.9 %
Net (Loss) Income Attributable to TRIT                       (602,020 )       (3.7 )%              1,370,887          5.9 %      (1,972,907 )         (143.9 )%

Total revenues were $26,763,445 for the six months ended June 30, 2013, a decrease of 36.7% from $42,261,846 in the same period of 2012.

Total cost of revenues decreased by 33.4%, from $31,220,280 for the six months ended June 30, 2012 to $20,801,504 for the six months ended June 30, 2013.

Total operating expenses were $7,629,202 for the six months ended June 30, 2013, a decrease of 4.1%, compared with the amount in the same period of 2012. The Company will continue to exert control over operating expenses.

Operating loss was $1,667,261 for the six months ended June 30, 2013, comparing with operating income of $3,085,416 for the six months ended June 30, 2012, representing 6.2% and 7.3% of total revenues for the six months ended June 30, 2013 and 2012, respectively.

Net loss attributable to TRIT for the six months ended June 30,2013 and net income attributed to TRIT in the same period of 2012 were $1,700,793 and $2,809,012, respectively.

The following are the operating results for the six months ended June 30, 2013 and 2012:

                                                 Six Months Ended        % of         Six Months Ended       % of
                                                 June 30, 2013 ($)       Sales        June 30, 2012($)       Sales        Change ($)        Change (%)
Revenue                                                  26,763,445       100.0 %            42,261,846       100.0 %      (15,498,401 )          (36.7 )%
Cost of Revenues                                         20,801,504        77.7 %            31,220,280        73.9 %      (10,418,776 )          (33.4 )%
Selling and Marketing Expenses                            1,895,077         7.1 %             1,774,846         4.2 %          120,231              6.8 %
. . .
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