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TRI-TECH HOLDING, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described herein. Factors Affecting the Company's Results of Operations - Generally The Company believes the most significant factors that directly or indirectly affect its sales revenues and net income include: • the changes in the macro-economic environment, government strategies and policies, industrial development and planning in the countries and regions where the Company has business presence; 9 • the amount of spending by Chinese and foreign governments in water resource management, including surface and groundwater monitoring, flood control and mitigation, flood forecasting, water quality monitoring and assessment, and water resource management decision making systems; • the amount of investment by Chinese and foreign governments in municipal wastewater management, including sewer pipelines and sewage treatment, water reuse and odor control; • the approved and promoted new environmental laws and regulations by Chinese and foreign governments which require investment in pollution control by the private sector companies; • the Company's capabilities and competencies including innovative technologies and applications, industrial experience and customer base, core competitive advantages, market shares and revenues; • the availability and required terms of funding for the Company's working capital; • restrictions on foreign ownership and investments and stringent foreign exchange controls; • import and export requirements; • currency exchange rate fluctuations; and • different employee/employer relationships in the jurisdictions within which we conduct our business, existence of and regulation on workers' councils and labor unions. Significant 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, the Company believes that these estimates used in preparing its financial statements are based on its best professional judgment, and 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, business combination, the allowance for doubtful accounts, long term contract collectability, impairment of fixed assets and intangible assets, and income tax. The Company evaluates all of these estimates and judgments on an on-going basis. Below are the most critical estimates and assumptions the Company makes in preparing the consolidated financial statements. Consolidation of Variable Interest Entities ("VIE") VIEs are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest, such as through voting rights, right to receive the expected residual returns of the entity or obligation to absorb the expected losses of the entity. The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. TRIT is deemed to have a controlling financial interest and be the primary beneficiary of the entities mentioned in Note 1 above, because it has both of the following characteristics: 1. power to direct activities of a VIE that most significantly impact the entity's economic performance, and 2. obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE. TRIT's VIEs include: Tranhold, Yanyu and, prior to its deconsolidation, BSST. TRIT is involved in each VIE and understands the purpose and design of these entities. It also performs a significant role in these entities' ongoing business. It is obligated to absorb losses of the VIE entities as well as benefit from them. Therefore, the VIEs are consolidated in the Company's December 31, 2011 and 2010 consolidated financial statements. These VIEs are continually monitored by the Company to determine if any events have occurred that could cause its primary beneficiary status to change. 10 On July 26, 2010, the Company signed and executed with BSST a series of contractual agreements with a 25-year, renewable term. These contractual agreements require the pledge of the original shareholders' equity interests and share 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. On August 6, 2010, the effective date of the agreements, the Company became the primary beneficiary of BSST. At the same time, the Company paid the consideration of $3.8 million, including $1,447,000 in cash and 260,000 in the Company's ordinary shares at the market value of $8.98 per share in the amount of $2,334,800. The Company will expand its market in the petrochemical industries through BSST since it is a consulting, engineering, design, system integration and project management services company specializing in the fields of control and instrument automation, safety and emergency response for the oil, gas and petrochemical industries. These agreements of Tranhold, BSST and Yanyu consist of the following: Exclusive Technical and Consulting Service Agreement - Each of Yanyu, Tranhold and BSST 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, Tranhold and BSST, 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, Tranhold and BSST 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, Yanyu's and BSST'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, Tranhold and BSST to be able to pay such dividends to the Company. Management Fee Payment Agreement- Each of the shareholders of Yanyu, Tranhold and BSST (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 or BSST 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, Tranhold and BSST (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 or BSST, 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 or BSST, 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, BSST 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, Yanyu or BSST, as appropriate, to TTB. If Tranhold, Yanyu or BBST 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 the pledged equity interests. Such Tranhold, BSST 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, Yanyu and BSST (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, Yanyu and BSST, (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 wishto do so. 11 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, TTB, BSST and each of their respective shareholders have entered into an Operating Agreement on July 26, 2010, which requires TTB to guarantee the obligations of each of Tranhold, Yanyu and BSST in their business arrangements with third parties. Each of Tranhold, Yanyu and BSST, in return, agrees to pledge its accounts receivable and all of its assets to TTB. Moreover, each of Tranhold, Yanyu and BSST, 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, Yanyu and BSST's daily operations and financial affairs. The contracting shareholders of each of Tranhold, Yanyu and BSST, 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, Yanyu and BSST. The following is a summary of the currently effective contracts by and among TTB, Zhi Shui Yuan and the shareholders of Zhi Shui Yuan. Exclusive Business Cooperation AgreementZhi Shui Yuan and TTB has entered into an Exclusive Business Cooperation Agreement with TTB on March 25, 2014, under which BBT has the exclusive right to provide, among other things, technical support, business support and related consulting services to Zhi Shui Yuan and Zhi Shui Yuan agrees to accept all the consultation and services provided by TTB. Without TTB's prior written consent, Zhi Shui Yuan is prohibited from engaging any third party to provide any of the services under this agreement. In addition, TTB exclusively owns all intellectual property rights arising out of or created during the performance of this agreement. Zhi Shui Yuan agrees to pay a monthly service fee to TTB at an amount determined solely by TTB after taking into account factors including the complexity and difficulty of the services provided, the time consumed, the seniority of TTB's employees providing services to Zhi Shui Yuan, the value of services provided, the market price of comparable services and the operating conditions of Zhi Shui Yuan. Exclusive Option Agreements TTB, Zhi Shui Yuan and each of its respective shareholders have entered into an Exclusive Option Agreement on March 25, 2014, under which each of the shareholders irrevocably granted TTB or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law, all or part of his equity interests in Zhi Shui Yuan. In addition, TTB has the option to acquire the equity interests of Zhi Shui Yuan for a specified price equal to the loan provided by TTB to the individual shareholders. If the lowest price permitted under PRC law is higher than the above price, the lowest price permitted under PRC law shall apply. TTB or its designated representative(s) has sole discretion as to when to exercise such options, either in part or in full. Without TTB's prior written consent, Zhi Shui Yuan's shareholders shall not sell, transfer, mortgage, or otherwise dispose any equity interests in Zhi Shui Yuan. Loan Agreements Pursuant to the loan agreements dated January 14, 2014 between TTB and each individual shareholder of Zhi Shui Yuan, TTB provided loans with an aggregate amount of RMB2 million to the individual shareholders of Zhi Shui Yuan for the sole purpose of providing capital for Zhi Shui Yuan. The loans can only be repaid by transferring the individual shareholders' equity interest in Zhi Shui Yuan to TTB or its designated person pursuant to the Exclusive Option Agreements. The loan shall be interest-free, unless the transfer price exceeds the principal of the loan when each individual shareholder of Zhi Shui Yuan transfers his equity interests in Zhi Shui Yuan to TTB or TTB's designated person(s). Such excess over the principal of the loan shall be deemed the interest of the loan to the extent permitted under PRC law. Equity Interest Pledge AgreementsUnder the equity interest pledge agreements dated March 25, 2014 between TTB, Zhi Shui Yuan and each of the shareholders of Zhi Shui Yuan, the shareholders pledged all of their equity interests in Zhi Shui Yuan to TTB to guarantee Zhi Shui Yuan's and Zhi Shui Yuan's shareholders' performance of their obligations under the contractual arrangements including, but not limited to the service fees due to TTB. If Zhi Shui Yuan or any of Zhi Shui Yuan's shareholders breaches its contractual obligations under the contractual arrangements, TTB, as the pledgee, will be entitled to certain rights and entitlements, including receiving proceeds from the auction or sale of whole or part of the pledged equity interests of Zhi Shui Yuan in accordance with legal procedures. TTB has the right to receive dividends generated by the pledged equity interests during the term of the pledge. If any event of default as provided in the contractual arrangements occurs, TTB, as the pledgee, will be entitled to dispose of the pledged equity interests in accordance with PRC laws and regulations. The pledge will become effective on the date when the pledge of equity interests contemplated in these agreements are registered with the relevant local administration for industry and commerce and will remain binding until Zhi Shui Yuan and its shareholders discharge all their obligations under the contractual arrangements. 12 Powers of Attorney Pursuant to the powers of attorney dated March 25, 2014 issued by each of the shareholders of Zhi Shui Yuan, the shareholders of Zhi Shui Yuan each irrevocably appointed TTB as the attorney-in-fact to act on their behalf on all matters pertaining to Zhi Shui Yuan and to exercise all of their rights as a shareholder of Zhi Shui Yuan, including but not limited to attend shareholders' meetings, vote on their behalf on all matters of Zhi Shui Yuan requiring shareholders' approval under PRC laws and regulations and the articles of association of Zhi Shui Yuan, designate and appoint directors and senior management members. TTB may assign its rights under this power of attorney to any other person or entity at its sole discretion without prior notice to the shareholders of Zhi Shui Yuan. Spousal Consent Letters Ms. Liu Jing, the spouse of Mr. Zhao Wanzong, and Ms. Zhang Haifang, the spouse of Mr. Dong Pengyu, executed spousal consent letters on March 25, 2014. Pursuant to the spousal consent letters, each of Ms. Liu Jing and Ms. Zhang Haifang (i) undertook not to make any assertions in connection with the equity interests in Zhi Shui Yuan held by her spouse; (ii) confirmed that her spouse can perform the equity interest pledge agreements, the exclusive option agreements, the power of attorney and the loan agreements and to further amend or terminate such documents absent authorization or consent from her; (iii) undertook to execute all necessary documents and take all necessary actions to ensure appropriate performance of the equity interest pledge agreements, the exclusive option agreements, the power of attorney and the loan agreements; and (iv) agreed and undertook to be bound by the equity interest pledge agreements, the exclusive option agreements, the power of attorney, the loan agreements and the exclusive business cooperation agreement and comply with the obligations thereunder as an equity holder of Zhi Shui Yuan if she obtain any equity interests in Zhi Shui Yuan held by her spouse for any reason. Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company's general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company's general assets; rather, they represent claims against the specific assets of the consolidated VIEs.The Company is the primary beneficiary of Tranhold, Yanyu and BSST, VIEs. Accordingly, the assets and liabilities of VIEs are included in the accompanying consolidated balance sheets. On November 11, 2013, Guang (Gavin) Cheng, took possession of BSST's chops and other materials without the Company's permission. Guang (Gavin) Cheng is the former CEO of the Company, a current member of the board and current Legal Representative of BSST. On November 27, 2013, Guang (Gavin) Cheng's representative met with the Chairperson of the Company, Warren Zhao. The agent informed Mr. Zhao that Mr. Cheng intended to challenge the validity of the contractual relationship by which the Company controlled BSST. Because the Board of Directors concluded at a meeting held on December 11, 2013 that Mr. Cheng's actions constituted a breach of his duty of loyalty to the Company, they voted to remove Mr. Cheng from all positions from which the Board of Directors could remove Mr. Cheng and to recommend that shareholders of the Company replace Mr. Cheng on the Board of Directors at the next annual shareholder meeting. In addition, the Board of Directors suspended Mr. Cheng's ability to act on behalf of the Company. As a result of the foregoing and subsequent events demonstrating loss of the ability to unilaterally control BSST, the Company has deconsolidated BSST, effective as of November 27, 2013. Revenue Recognition The Company's revenues consist primarily of two categories: (i) system integration and (ii) hardware products. 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 prices. The contract periods range from two months to approximately three years in length. The Company recognizes revenue from these contracts following the percentage-of-completion method, measured by milestones in accordance with ASC 605-35, "Construction-Type and Production-Type Contracts." Only if the actual implementation status meets the established milestone will the Company 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. 13 For hardware product sales, the Company recognizes revenue only when all products are delivered and the acceptance confirmations are signed by the customers, according to ASC 605-10, "Revenue Recognition." The Company is not obligated for any repurchase or return of the goods. If unapproved change orders or claims occur in the future, in accounting for contracts, the Company follows Paragraphs 30 and 31 of ASC 605-35-25, "Construction-Type and Production-Type Contracts." The Company recognizes 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, the Company has not experienced any unapproved change orders in its ordinary business operation. The Company presents all sales revenue net of a value-added tax ("VAT"). The Company's products sold in China are generally subject to a 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 the Company on purchased raw materials and other materials included in the cost of projects or producing the finished product. The Company records revenues in excess of billings as "unbilled revenue." For revenues accounted for under this account, the Company expects the amounts to be collected within one year. For those with collection periods in excess of one year, the Company classifies 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 on such projects. Business Combination The Company completed one business acquisition in 2012, which was accounted for using the purchase method of accounting in accordance with USGAAP regarding business combinations. The fair value of net assets acquired and the results of the acquired businesses are included in the Consolidated Financial Statements from the acquisition dates forward. This guidance required the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the reporting period. Estimates were used in accounting for, among other things, the fair value of acquired net operating assets, property and equipment, intangible assets and related deferred tax assets and liabilities, useful lives of plant and equipment and amortizable lives for acquired intangible assets. Any excess of the purchase consideration over the identified fair value of the assets and liabilities acquired was recognized as goodwill. Future adjustments to the estimates used in determining the fair values of the Company's acquired assets and assumed liabilities could impact its consolidated operating results or financial condition. Deferred tax liability and asset were recognized for the deferred tax consequences of differences between the tax bases and the recognized values of assets acquired and liabilities assumed in a business combination in accordance with guidance regarding accounting for income taxes. Accounts Receivable Being a project-based company with long lead time periods of 6 months to 2 or even 3 years, the Company's accounts receivable period is 157 days. Given the characteristics of the clientele, the Company is confident that its accounts receivable are of good quality even though its accounts receivable days are relatively long compared with companies in other industries. In case of any event that indicates accounts receivable quality deterioration, management will reassess the bad debt provision within the period such event occurs. The Company recognizes accounts receivable initially at fair value less an allowance for doubtful accounts. It makes an allowance for doubtful accounts based on aging of accounts receivable and on any specifically identified accounts receivable that may become uncollectible. The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make required payments in the relevant time periods. It reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers 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." 14 Impairment of Assets and Intangible Assets The Company monitors the carrying value of its 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, the Company recognizes an impairment loss in an amount equal to the difference between the carrying value of such assets and fair value. No impairment loss was recorded in the prior or current periods. The Company evaluates the periods of depreciation and amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. Estimating future cash flows requires significant judgment, and projections may vary from the cash flows eventually realized which could impact the Company's ability to accurately assess whether an asset has been impaired. For goodwill, the Company assesses impairment at period end or whenever events or changes indicate that, more likely than not, the carrying value of goodwill has been impaired. The Company uses 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 operating segments. The Company discounts 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. The Company believes 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 the Company's business. PRC Value-Added Tax The Company's products sold in China are generally subject to a Chinese VAT at a rate of 17%. The VAT may be offset by VAT it pays on raw materials and other materials included in the cost of producing its 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 as0.5% of the total sales value. PRC Business Tax 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%. The Company pays business tax on gross revenues minus the costs of services, which are paidon behalf of its customers. Income Taxes We are subject to income taxes on the entity level for income arising in or derived from the tax jurisdictions in which each entity is domiciled. According to the New Enterprise Income Tax Law ("NEITL") in China, unified Enterprise Income Tax rate is 25%. However, five of our eight subsidiaries and VIEs in China are subject to certain favorable tax policies as high-tech companies. The applicable statutory tax rate for our subsidiaries in India is 42.024%. The Company has not recorded tax provision for U.S. tax purposes as it has no assessable profits arising in or derived from the United States and intends to reinvest accumulated earnings in its PRC operations. The Company's revenues are subject to VAT, sales tax, urban maintenance and construction tax and additional education fees. Among the above taxes, VAT has already been deducted from the calculation of revenue. 15 Results of Operations Overview for 2013 and 2012 The operating revenues are primarily derived from system design and integration, hardware product design and manufacturing and sales. The revenues declined from 2012 to 2013. BSST was consolidated from January 1, 2013 to November 27, 2013. Key metrics for 2013 include the following: · Total revenues decreased by 39.5% in 2013 from the same period of 2012. This decrease is primarily attributable to the progress of the Ordos and India projects. Revenues from the Ordos project decreased by $5.6 million. For the Xushui project, 65% of the total contract amount was recognized as revenue in 2012 while only 20% was recognized in 2013, which led to a decrease of $7.0 million as compared with 2012. For the India Projects, only 5% of the total contract amount was recognized in 2013 while 25% of the contract amount was recognized in 2012, which led to a decrease of $7.0 million. The Ordos project is nearly complete, resulting in lower revenues from the project in 2013. The India projects, on the other hand, received later-than-anticipated Indian government approvals, which led to slower progress and, as a result, lower revenues, than expected. · Total cost of revenues decreased by 36.5% from 2012 to 2013. This decrease is due to the decrease of related revenue. · Total operating expenses were $20,373,754 for 2013, an increase of 11.3%, compared with the amount in 2012. Due to the deconsolidation of BSST, the Company provided bad debt on other receivables related to BSST in general and administration expenses, so the total operating expenses increased. · Operating loss was $11,458,511 in 2013, comparing with operating income of $810,846 in 2012. The decrease was due to the decreased revenue, cost and increased operating expenses mentioned above. · Net loss attributable to TRIT was $13,933,160 for 2013, including net loss of BSST of $1,071,399 from January 1 to November 27, 2013. The loss on deconsolidation of BSST was $3,781,800 for 2013. Net loss attributable to TRIT was $2,264,075 for 2012. The following are the operating results for 2013 and 2012: Results of Operation Year Ended Year Ended December 31,2013 % of December 31,2012 % of Change ($) Sales ($) Sales Change ($) (%) Revenue 43,934,506 100.0 % 72,629,552 100.0 % (28,695,046 ) (39.5 )% Cost of Revenues 35,019,263 79.7 % 55,129,518 75.9 % (20,110,255 ) (36.5 )% Gross Margin 8,915,243 20.3 % 17,500,034 24.1 % (8,584,791 ) 49.1 % Selling and Marketing Expenses 3,141,502 7.2 % 4,148,861 5.7 % (1,007,359 ) (24.3 )% General and Administrative Expenses 15,400,013 35.1 % 13,987,293 19.3 % 1,412,720 10.1 % Research and Development Expenses 1,832,239 4.2 % 174,726 0.2 % 1,657,513 948.6 % Total Operating Expenses 20,373,754 46.4 % 18,310,880 25.2 % 2,062,874 11.3 % Operating Loss (11,458,511 ) (26.1 )% (810,846 ) (1.1 )% (10,647,665 ) 1,313.2 % Other Expenses (3,167,754 ) (7.2 )% (132,613 ) (0.2 )% (3,035,141 ) 2,288.7 % Loss before Provision for Income Taxes (14,626,265 ) (33.3 )% (943,459 ) (1.3 )% (13,682,806 ) 1,450.3 % Provision for Income Taxes 206,659 0.5 % 1,808,415 2.5 % (1,601,756 ) (88.6 )% Net Loss (14,832,924 ) (33.8 )% (2,751,873 ) (3.8 )% (12,081,051 ) 439.0 % Less: Net Loss Attributable to Noncontrolling Interests (899,764 ) (2.0 )% (487,799 ) (0.7 )% (411,965 ) 84.5 % Net Loss Attributable to TRIT (13,933,160 ) (31.7 )% (2,264,074 (3.1 )% (11,669,086 ) 515.4 % 16 Revenue The Company's revenue for the year ended December 31, 2013 was $43,934,506, a decrease of 39.5%, compared with $72,629,552 in 2012. This decrease is primarily attributable to the decrease in the system integration category revenue, which decreased from $67,961,198 for the year ended December 31, 2012 to $37,159,081 in 2013. The Ordos project, which belongs to system integration category, decreased from $6,838,176 for the year ended December 31, 2012 to $1,416,790 in 2013 because the project was primarily completed. Similarly the Xushui project decreased from $10,056,749 for the year ended December 31, 2012 to $3,287,959 in 2013 because it was primarily completed. Revenue of the India projects decreased by $7,838,746 from 2012 to 2013 because of the delay caused because the client failed to prepare the land for us to begin in a timely fashion, resulting in redesign and the project delay. In the beginning of 2014, the land issue was addressed and we expect significant progress of India projects in 2014. Prior to its deconsolidation, BSST's revenue from January 1, 2013 to November 27, 2013 contributed $9,040,834 of the total revenue for 2013. BSST contributed $8,465,764 of the revenue for 2012. Cost of Revenue Cost of revenue is based on total actual costs incurred plus estimated costs to completion applied to percentage of completion as measured at different stages. It includes material costs, equipment costs, transportation costs, processing costs, packaging costs, quality inspection and control, outsourced construction service fees and other costs that directly relate to the execution of the services and delivery of projects. Cost of revenue also includes freight charges, purchasing and receiving costs and inspection costs when they are incurred. Cost of revenue was $35,019,263 in the year ended December 31, 2013, a decrease of 36.5%, from $55,129,518 in the same period of 2012. The system integration category, which was the largest contributor to the revenue decrease, decreased by 43.2%, from $51,800,856 for the year ended December 31, 2012 to $29,413,109 in the same period of 2013. Based on the moderate decline of the gross margin from 2012 to 2013, the decrease of cost was mainly caused by the decrease of revenue. The rate of cost decrease was slower than the rate of revenue decrease because the BT projects (Xushui and Ordos) which have a lower cost rate were nearly completed. Prior to its deconsolidation, BSST's cost of revenue from January 1, 2013 to November 27, 2013 contributed $8,004,905 of the total costs for 2013. BSST contributed $2,113,758 of the cost of revenue for 2012. Gross Margin The Company's gross margin decreased from 24.1% in 2012 to 20.3% in 2013. (Such results include BSST's financial result from January 1 to November 27, 2013 and whole year of 2012.) This decrease was largely a result of increases in material and equipment costs and labor subcontracting costs. The BT projects (Xushui and Ordos) which featured higher gross margin were nearly completed also contributed to the lower gross margin. Operating Expenses The Company's total operating expenses increased to $20,373,754 in the year ended December 31, 2013 from $18,310,880 in the same period of 2012, an increase of 11.3%. The increase was attributed to growth in selling and marketing expenses; general and administration expenses and research and development expenses. Due to the deconsolidation of BSST, the Company recorded bad debt in general and administration expenses, so the total operating expenses increased. Prior to its deconsolidation, BSST's operating expenses from January 1, 2013 to November 27, 2013 contributed $2,028,471 of the operating expenses for 2013. BSST contributed $2,226,788 of the operating expenses for 2012. 17 Selling and Marketing Expenses Selling and marketing expenses decreased from $4,148,861 in the year ended December 31, 2012 to $3,141,502 in the same period of 2013, a decrease of 24.3%. Decreased headcount of our sales force contributed to the decrease of every related expense such as travel expenses, compensation-related expenses and entertainment expenses. Prior to its deconsolidation, BSST's selling and marketing expenses from January 1, 2013 to November 27, 2013 contributed $571,839 of the selling and marketing expenses for 2013. BSST contributed $681,941 of the selling and marketing expenses for 2012. General and Administrative Expenses General and administrative expenses consist primarily of compensation costs, rental expenses, professional fees, and other overhead expenses. General and administrative expenses increased from $13,987,293 in 2012 to $15,400,013 in 2013, an increase of 10.1%. Prior to its deconsolidation, BSST's general and administrative expenses from January 1, 2013 to November 27, 2013 contributed $1,278,601 of the general and administrative expenses for 2013. BSST contributed $1,544,847 of the general and administrative expenses for 2012. The salaries, human resource expenses, endowment and other social insurance all decreased from 2012 to the same period 2013 because of the downsizing, the decrease ranged from 6.6% to 25.5%. $184,280 was for Rent decreased by 17.1%, from 2012 to 2013 due to office relocation. Professional fees decreased by 61.1%, from $2,458,774 to $955,266, which was mainly for the decreased project consulting service fee. Amortization expense of intangible assets and software decreased by 3.5%, from $907,548 in 2012 to $876,139 in the same period of 2013. Depreciation expense increased by 18.8%, from $309,387 in 2012 to $367,614 in 2013. Other general and administrative expenses increased by 87.6%, from $4,291,150 to $8,050,302 in 2013, including office expenses, utilities, travel, communication, other services support option expense and mainly because of the bad debt expense related to BSST due to its deconsolidation. We had a $427,004 non-cash option expense as a part of other general and administrative expense in 2013. The bad debt expenses of $1,718,041 which came from WFOE previously recorded as amount due from BSST was considered here and recorded as bad debt due to BSST control issue, it also attributed to the increase of general and administrative expense. General and administrative expenses for 2013 and 2012 were approximately 35.1% and 19.3% of total revenues, respectively. Provision for Income Tax The Company provides for deferred income taxes using the asset and liability method. Under this method, it recognizes deferred income taxes for tax credits, net operating losses available for carry-forwards and significant temporary differences. The Company classifies deferred tax assets and liabilities as current or non-current based upon the classification of the related asset or liability in the financial statements or the expected timing of their reversal if they do not relate to a specific asset or liability. The Company provides a valuation allowance to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized. The Company's operations are subject to income and transaction taxes in China since most of the business activities take place in China. Significant estimates and judgments are required in determining the Company's provision for income taxes. Some of these estimates are based on interpretations of existing tax law or regulations, as well as the prediction on future changes on these law and regulations. The ultimate amount of tax liability may be uncertain as a result. The Company does not anticipate any events which could change these uncertainties. The Company and its subsidiaries and VIEs are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdictions in which each entity is domiciled. According to the New Enterprise Income Tax Law ("NEITL") in China, the unified enterprise income tax ("EIT") rate is 25%. However, five of its subsidiaries and VIEs are certified high-tech companies and are taxed based on certain favorable tax policies. The applicable statutory tax rate for our subsidiaries in India is 42.024%. The Company has not recorded tax provision for U.S. tax purposes as it has no assessable profits arising in or derived from the United States and intends to reinvest accumulated earnings in its PRC operations. 18 The applicable statutory tax rates for our subsidiaries and VIEs in the PRC are as follows: For The Years Ended December 31, 2013 2012 TTB 15 % 15 %BSST (deconsolidated on November 27, 2013) 15 % 15 % Yanyu 15 % 15 % Tranhold 25 % 25 % TTA 25 % 25 % Baoding 15 % 15 % Yuanjie 15 % 15 % Buerjin 25 % 25 % Xushui 25 % 25 %Consolidated(2) Effective Income Tax Rate -1% (1) -192% (1) (1) Despite the overall loss after consolidation, a few companies were still profitable during 2013, and income tax was accrued.Therefore, the calculation of consolidated effective enterprise income tax rate is based on the following: Consolidated effective enterprise income tax rate = provision for income tax (sum of accrued tax for profitable companies) / loss before income tax and non-controlling interests. (2) BSST was considered here and consolidated from January 1, 2013 to November 27, 2013. For the year ended December 31, 2013, BSST's tax rate was included through the date of deconsolidation. The Company's provision for income tax expense from continuing operations for 2013 and 2012 were $206,659 and $1,808,415, respectively. The Company's total net deferred tax liabilities were $5,546,466 and $5,482,576 as of December 31, 2013 and 2012, respectively. Loss before Income Taxes In the year ended December 31, 2013, the Company's net loss before provision for income taxes was $14,626,265, an increase of $13,682,807 compared to that in 2012. The Company's provision for income taxes decreased by 88.6%, from $1,808,415 in 2012 to $206,659 in 2013. Some of the entities were income tax free in 2013 because of loss while the others were taxable, so the total income taxes in 2013 showed a significant decrease. In the year ended December 31, 2013, net loss attributable to the shareholders of TRIT was $13,933,160, a decrease of 515.4%, from net income of $2,264,074 for the year ended December 31, 2012. Prior to its deconsolidation, BSST's loss before income taxes from January 1, 2013 to November 27, 2013 contributed $1,088,532 of loss before income taxfor 2013. BSST contributed $187,825 of loss before income tax for 2012. Segment Information The Company has three reportable operating segments. The segments are grouped based on the types of services provided and the types of clients that use those services. Total sales and costs are divided among these three segments. The Company's Chief Executive Officer is the chief operating decision-maker. He assesses each segment's performance based on net revenue and gross profit on contribution margin. Segment 1: Water, Wastewater Treatment and Municipal Infrastructure For Segment 1, revenue and cost declined by 70.7% and 72.7%, respectively, from 2012 to 2013, mainly caused by nearly completed Ordos project and delayed India projects; total operating expenses increased by 30.5% from 2012 to 2013; and there was a significant decrease for profit before income tax. The following are the operating results in 2013 and 2012 for Segment 1: 19 For Years ended December 31, 2013 ($) 2012($) Change($) Change (%) Revenues 7,611,026 25,980,724 (18,369,698 ) (70.7 ) % Cost of Revenues 5,576,866 20,448,709 (14,871,843 ) (72.7 ) % Operating Expenses: Selling and Marketing Expenses 906,804 1,346,688 (439,884 ) (32.7 ) % General and Administrative Expenses 10,130,000 7,274,903 2,855,097 39.2 % Research and Development Expenses 354,247 104,648 249,599 238.5 % Total Operating Expenses 11,391,051 8,726,239 2,664,812 30.5 % Other (Expenses) Income (2,717,771 ) 120,686 (2,838,457 ) (2,351.9 ) % Loss before Provision for Income Taxes (12,074,662 ) (3,073,538 ) (9,001,124 ) (292.9 ) % Segment 2: Water Resource Management System and Engineering Service For Segment 2, revenue and cost increased by 20.8% and 16.8%, respectively, from 2012 to 2013; total operating expenses increased by 6.4% from 2012 to 2013; and there was a significant decrease for profit before income tax. Yanyu recognized its research and development expenses from inventory because its research project was completed in the end of 2013. The following are the operating results in 2012 and 2013 for Segment 2: For Years ended December 31, 2013($) 2012($) Change($) Change (%) Revenues 17,673,756 22,306,044 (4,632,288 ) (20.8 ) % Cost of Revenues 13,717,600 16,487,906 (2,770,306 ) (16.8 ) % Operating Expenses: Selling and Marketing Expenses 1,549,653 1,903,564 (353,911 ) (18.6 ) % General and Administrative Expenses 2,272,520 2,840,874 (568,354 ) (20.0 ) % Research and Development Expenses 1,299,961 70,078 1,229,883 1,755.0 % Total Operating Expenses 5,122,134 4,814,516 307,618 6.4 % Other Expenses (355,385 ) (232,095 ) (123,290 ) 53.1 % (Loss) Income before Provision for Income Taxes (1,521,363 ) 771,527 (2,292,890 ) (297.2 ) % Segment 3: Industrial Pollution Control and Safety For Segment 3, revenue and cost decreased by 23.4% and 13.6%, respectively, from 2012 to 2013; total operating expenses decreased by 19.1% from 2012 to 2013; and there was a decrease for profit before income tax. BSST belongs to Segment 3. The following chart compares BSST's financial results for the years ended December 31, 2013 and 2012; provided, however, that for the year ended December 31, 2013 BSST's financial results before deconsolidation do not appear in the table. BSST for Periods Ended December 31, December 31, 2013($) 2012($) Change($) Change (%) Revenues 9,040,834 8,465,764 575,070 6.8 % Cost of Revenues 8,004,905 6,352,006 1,652,899 26.0 % Operating Expenses: Selling and Marketing Expenses 571,839 681,941 (110,102 ) (16.1 ) % General and Administrative Expenses 1,278,601 1,544,847 (266,246 ) (17.2 ) % Research and Development Expenses 178,031 - 178,031 100.0 % Total Operating Expenses 2,028,471 2,226,788 (198,317 ) (8.9 ) % Other Income (Expenses) (95,990 ) (74,795 ) (21,195 ) 28.3 % (Loss) Income before Provision for Income Taxes (1,088,532 ) (187,825 ) (900,707 ) 479.5 % * Although results are for the year ended December 31, 2013, BSST's results after deconsolidation on November 27, 2013 do not appear in this chart. 20 The following are the operating results in 2013 and 2012 for Segment 3, which results include BSST's operating results for 2012 and through the date of its deconsolidation on November 27, 2013 but not afterward: For Years ended December 31, 2013 ($) 2012($) Change($) Change (%) Revenues 18,649,724 24,342,784 (5,693,060 ) (23.4 ) % Cost of Revenues 15,724,797 18,192,903 (2,468,106 ) (13.6 ) % Operating Expenses:Selling and Marketing Expenses 685,045 898,609 (213,564 ) (23.8 ) % General and Administrative Expenses 2,997,492 3,871,516 (874,024 ) (22.6 ) % Research and Development Expenses 178,031 - - - % Total Operating Expenses 3,860,568 4,770,125 (909,557 ) (19.1 ) % Other Expenses (94,600 ) (21,203 ) (73,397 ) 346.2 % (Loss) Income before Provision for Income Taxes (1,030,241 ) 1,358,553 (2,388,794 ) (175.8 ) % Assets attributable to each segment as of December 31, 2013 and 2012 are shown below: Segment Assets Segment 1 Segment 2 Segment 3 TotalAs of December 31, 2013(1) $ 63,328,422 $ 32,178,589 $ 41,292,878 $ 136,799,889 As of December 31, 2012 $ 89,062,709 $ 30,058,569 $ 37,556,788 $ 156,678,066 (1) BSST was consolidated from January 1, 2013 to November 27, 2013. Because the segment assets are as of December 31 of each presented year, all 2012 numbers include BSST's assets, and all 2013 numbers exclude such assets. Liquidity and Capital Resources As highlighted in the consolidated statements of cash flows, the Company's liquidity and available capital resources are impacted by four key components: (i) cash and cash equivalents, (ii) operating activities, (iii) financing activities and (iv) investing activities. Statement of Consolidated Cash Flows for the years ended December 31, 2013 and 2012 is as follows: For the Years Ended December 31, 2013 ($) 2012 ($) Change ($)Net Cash Used in Operating Activities (1,095,647 ) (20,254,517 ) 19,158,870 Net Cash Provided by (Used in) Investing Activities 9,658,275 (1,155,435 ) 10,813,710 Net Cash (Used in) Provided by Financing Activities (12,026,709 ) 18,138,246 (30,164,955 ) Effects of Exchange Rate Changes on Cash and Cash Equivalents (662,023 ) (565,383 ) (96,640 ) Net Decrease in Cash and Cash Equivalents (4,126,104 ) (3,837,089 ) (289,015 ) Cash and Cash Equivalents, Beginning of Period 8,098,657 11,935,746 (3,837,089 ) Cash and Cash Equivalents, End of Period 3,972,553 8,098,657 (4,126,104 ) 21 Cash and Cash Equivalents At December 31, 2013, the Company's cash and cash equivalents (BSST was deconsolidated since November 27, 2013 therefore not included) amounted to $3,972,553. It decreased by 50.9%, from $8,098,657 on December 31, 2012, mainly due to the implementation of current projects. The current portion of restricted cash (BSST was deconsolidated since November 27, 2013 therefore not included) as of December 31, 2013 and 2012 amounted to $3,221,411 and $4,352,443, respectively, which is not included in the total of cash and cash equivalents. The cash equivalent and restricted cash balance of BSST as of November 27, 2013 was $409,459 and 90,623, respectively. The restricted cash was on deposit as collateral for the issuance of letters of credit on projects. Our subsidiaries that own the deposits do not have material cash obligations to any third parties. Therefore, the restriction does not impact the liquidity of the Company. Operating Activities Net cash used in operating activities decreased by $19,158,870 to $1,095,647 in the year ended December 31, 2013, from $20,254,517 in the same period of 2012. Net accounts receivable increased from $18,598,110 on December 31, 2012 to $19,830,742 on December 31, 2013, an increase of 6.6%. Allowance for doubtful accounts increased by 205.8% from December 31, 2012 to December 31, 2013 due to the deconsolidation of BSST and the bad debt of Buerjin project. Allowance caused by BSST deconsolidation was $1,718,041, mainly came from the amount due from BSST to other internal companies. . Allowance related to Buerjin project was $1,603,351 during the year 2013, because the Company saw a breach of certain payment and under the mutual agreement, and finally decided to stop the project. Currently the Company doesn't expect any repaid debt or future revenues from Buerjin project. Current unbilled receivables decreased by $13,847,894from $27,954,525 on December 31, 2012 to $14,106,631 on December 31, 2013, which decreased mainly from the billing of Ordos project. The remaining was mainly caused by the decreased inventory and prepayments to suppliers, due to thetotal revenue decline. Investing Activities Net cash provided by investing activities was $9,658,275 in the year ended December 31, 2013, compared to net cash used in investing of $1,155,435 in the same period of 2012. The increase was mainly due to the received cash from Baoding's selling property. Compared to what was required in 2012, we required much less investment in 2013, and at the end of 2013, the Company did not have further plans to invest in such property. Financing Activities The cash used in financing activities was $12,026,709 in 2013, compared to $18,138,246 provided by financing activities in the same period of 2012. For the year ended December 31, 2013, the Company repaid $10,661,106 bank loans and further raised $9,357,830 bank loans. The Company also repaid corporate bonds in August 2013 that used $8,204,936 cash. In addition of bank loans and corporate bonds, we borrowed loans from third party companies for an aggregated amount of $9,573,959. Effect of Change in Exchange Rate Changes on Cash and Cash Equivalents Net cash loss due to currency exchange was $662,023 in the year ended December 31, 2013, compared to a loss of $565,383 in the same period of 2012. Restricted Net Assets Although we do not anticipate paying dividends in the foreseeable future, our ability to pay dividends is primarily dependent on our receiving distributions of funds from our subsidiaries and VIEs (BSST was consolidated as of December 31, 2012 and was deconsolidated beginning on November 27, 2013), which is restricted by certain regulatory requirements. Relevant PRC statutory laws and regulations permit payments of dividends by our PRC subsidiaries and VIEs only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiaries and VIEs are required to, and have, set aside at least 10% of their after-tax profit, after deducting any accumulated deficit, based on PRC accounting standards each year to its general reserves until the accumulated amount of such reserves reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Our off-shore subsidiaries, including TIS and TTII do not have material cash obligations to third parties. Therefore, the dividend restriction does not impact the liquidity of the companies. There is no significant difference between accumulated profit calculated pursuant to PRC accounting standards and those reflected in the financial statements prepared in accordance with U.S. GAAP. As of December 31, 2013 and 2012, restricted retained earnings were $2,292,259 and $2,246,910, respectively, and restricted net assets were $1,924,325 and $4,878,975, respectively. The unrestricted retained earnings as of December 31, 2013 and 2012 were $3,025,095 and $17,038,396, respectively, which were the amounts ultimately available for distribution if we were to pay dividends; however, the Company does not have any current plans to pay dividends. 22 Working Capital and Cash Flow Management As of December 31, 2013, the Company's working capital was $23,505,777, with current assets totaling $88,361,017 and current liabilities totaling $64,855,240. Of the current assets, cash and cash equivalents was $3,972,553. However, the Company incurred net losses of $14,832,924 and $2,751,873 for the years ended December 31, 2013 and 2012, respectively. In addition, net cash used in operating activities was $1,095,647 and $20,254,517 for the years ended December 31, 2013 and 2012, respectively. Management Actions and Plans In the future, the Company plans to take the following actions to meet working capital needs: • We plan to look into the possibility of optimizing our funding structure by obtaining short- and/or long-term debt through commercial loans. We are actively exploring opportunities with major Chinese and American banks to obtain such commercial loans. Given the negative recent developments affecting the Company, such as its suspension and subsequent delisting from the NASDAQ Capital Market, decreased revenues and increased net losses, the Company has faced difficulties in securing loans in the same amounts and on the same terms as it was able to achieve in the past. The Company's difficulty in obtaining bank financing has brought additional pressure on cash flow. Other financing instruments into which we are currently looking include supply chain financing, project financing, trust fund financing and capital leasing. The Company expects the further communication efforts with financing institutions previously made fund available to the Company; furthermore, the Company expects to develop other venues of funding through a variety of different financing institutions. • We continue to focus on our collection of accounts receivable. Most of our clients are central, provincial and local governments. As the changes of Chinese economy and the adjustments of Chinese fiscal policy, some local governments, for example Ordos government, met some fiscal challenges which brought some risks for the Company to get the clients' payment on schedule. • Currently the Company is considering to realign the business focus and to dispose unprofitable business to ease the cash flow pressure. The Baoding land and property deal and the selling of Yuanjie were all important actions of cash flow improvement and cash flow risk management. The Company will continue to evaluate its ongoing lines of business and employees serving such lines of business to determine areas that may be streamlined or divested if necessary. • The Company also plans to get some financial assistance from third parties or individuals with higher interests to meet urgent cash demands. We believe that our existing balances of cash and cash equivalents and amounts expected to be provided by operating activities will provide us with sufficient financial resources to meet our cash requirements for operations, working capital, and capital expenditures for the next twelve months. However, in the event of unforeseen circumstances, unfavorable market developments or unfavorable results from operations, there can be no assurance that the above actions could be successfully implemented as expected, and cash flows may be adversely affected. Contractual Obligations and Commercial Commitments Operating Leases As of December 31, 2013, the Company had commitments under certain operating leases, which require annual minimum rental payments as follows: For the Years Ending December 31, Amount 2014(1) $ 529,307 2015(1) 458,555 2016(1) 98,184 Total $ 1,086,046 23 (1) BSST moved out of the Company's primary office since April 30, 2014 and since that day, BSST began to use its separate office which is not included. The Company terminated its previous office site and stopped paying rental fees regarding such lease; therefore, it was not included in the above tables. The Company's leased properties are principally located in Beijing and are used for administration and research and development purposes. The terms of these operating leases vary from one to five years. Pursuant to lease terms, when the contracts expire, the Company has the right to extend them with new negotiated prices. The leases are renewable subject to negotiation. Rental expenses were $895,754 and $1,080,036 for the years ended December 31, 2013 and 2012, respectively. For BSST, rental expenses were $130,880 and $143,606 for the period of January 1 to November 27, 2013 and year ended December 31, 2012, respectively. Product Warranties The Company's warranty policy generally is to replace parts at no additional charge if they become defective within one year after deployment. Historically, failure of product parts due to materials or workmanship has not been significant. The Company has not incurred any material unexpected costs associated with servicing warranties. It continuously evaluates and estimates its potential warranty obligations, and records the related warranty obligation when the estimated amount becomes material at the time revenue is recorded. Capital Expenditures In the past, the capital expenditures were mainly for purchases of computers and other office equipment to support our daily business activities. The Company spent $680,390 and $1,586,581 on such capital expenditures during 2013 and 2012, respectively. The decrease was due to the construction progress of Baoding, it was almost completed and ready for sale. The deal should have been completed by the end of 2013, but the government registration fell behind schedule. The Company has confidence to close it by the end of 2014. In relation to the sale of the land and real property in Baoding, The buyer assumed the Company's contractual liabilities to two major construction suppliers in the amount of $4.7 million which is inclusive in the total acquisition price. Seasonality The Company's operating revenues normally tend to fluctuate due to different project stages and U.S. GAAP requirements on revenue recognition. As the scope of its business extended to the civil construction activities, certain weather conditions, including severe winter storms, may result in the temporary suspension of outdoor operations, which can significantly affect the operating results of the affected regions. The operating results for the first quarter often reflect the business slowdown for the Chinese traditional holidays, the Spring Festival, which could last anywhere from 7 days up to one month. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements for either year 2013 or 2012. 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%. According to an approval from the Beijing State Tax Bureau of Xicheng District, TTB received a preferential income tax rate of 7.5% from January 1, 2009 to December 31, 2011. Its income tax rate is 15% from 2012 onwards, for so long as it retains high technology certification and the applicable rate remains 15%. 24 Sales tax varies from 3% to 5% depending on the nature of the revenue, and VAT is 17%. For revenues generated from those parts of the Company's software solutions which are recognized by and registered with government authorities and meet government authorities' requirements to be treated as software products, the Company is entitled to receive a refund of 14% on the total VAT paid at a rate of 17%. Revenues from software products other than the above are subject to full VAT at 17%. In addition, the Company is 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. Qualified to issue VAT invoices, the Company needs to maintain a certain amount of revenue that is taxable by VAT. As such, the Company may have to refuse some of the tax exemption benefits in its tailor-made software development business and pay VAT for those parts of the revenue in order to maintain minimum VAT revenue thresholds. This practice may cease to apply if more of the software products become recognized and registered as software products in the PRC. |