SUBSCRIBE TO TMCnet
TMCnet - World's Largest Communications and Technology Community

TMCNet:  TRUNKBOW INTERNATIONAL HOLDINGS LTD - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

[November 15, 2012]

TRUNKBOW INTERNATIONAL HOLDINGS LTD - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(Edgar Glimpses Via Acquire Media NewsEdge) Introductory Note Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q (this "Report") to the "Company," "Trunkbow," "we," "us" or "our" are references to the combined business of Trunkbow International Holdings Limited and its consolidated subsidiaries. References to "China" or to the People's Republic of China "PRC" are references. References to "RMB" are to Renminbi, the legal currency of China, and all references to "$" and dollars are to the United States dollar, the legal currency of the United States.


Special Note Regarding Forward Looking Statements This Quarterly Report contains forward-looking statements and information relating to Trunkbow that are based on the beliefs of our management, as well as assumptions made by and information currently available to us. Such statements should not be unduly relied upon. When used in this Quarterly Report, forward-looking statements include, but are not limited to, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions, as well as statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China, any statements of belief or intention, any of the factors mentioned in the "Risk Factors" section of the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on March 30, 2012, and any statements or assumptions underlying any of the foregoing. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions. There are important factors that could cause actual results to vary materially from those described in this Report as anticipated, estimated or expected, including, but not limited to, competition in our industry and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; SEC regulations which affect trading in the securities of "penny stocks," and other risks and uncertainties. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future. Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available.

Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the "Securities Act" ) and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act" ) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock.

Because we may from time to time be considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

Overview We provide technology platform solutions for mobile telecom operators in the People's Republic of China. Our patented platforms provide a comprehensive solution for Chinese telecom operators to deliver and manage the distribution of various mobile value added service ("MVAS") applications to their subscribers.

The Trunkbow brand is regarded by the telecom operators as a well-managed, trusted provider of technology solutions. Our R&D focused business model provides us with a defensible market position as a technology provider to the telecom operators.

Currently we have filed a more than 164 patent applications, of which 50 have been granted by the National Intellectual Property Administration of the PRC. In 2010, we began the process of filing for international and U.S. patents in order to protect our intellectual properties globally.

The primary geographic focus of our operations is in the PRC, where we derive substantially all of our revenues. We conduct our business operations through our wholly owned subsidiaries Trunkbow Asia Pacific (Shenzhen) Limited and Trunkbow Asia Pacific (Shandong) Limited. Both companies are registered in PRC as Wholly Owned Foreign Enterprises.

29 How We Generate Revenue Our customers are primarily telecom service providers in the PRC, including local branches of China's three major cellular carriers, China Telecom, China Unicom and China Mobile. Collectively, these carriers provide services to greater than 1 billion cellular subscribers. Revenues generated directly by sales to China Telecom, China Unicom and China Mobile accounted for approximately 35%, 11% and 5%, and 6%, 1% and nil, respectively, for the nine months ended September 30, 2012 and 2011. When we include resale of our products to these carriers through intermediaries (i.e., direct and indirect sales to these carriers), then revenues generated from sales to these three carriers accounted for approximately 51%, 23% and 9%, and 25%, 27% and 45%, respectively, for the nine months ended September 30, 2012 and 2011. The revenues for the nine months ended September 30, 2012 slightly increased when compared to the nine months ended September 30, 2011. Our revenues from Mobile Payment Solutions were $6.14 million and $2.11 million for the nine months ended September 30, 2012 and 2011, respectively.

Results of Operations Net Revenues: Three Months Ended September 30, % of 2012 2011 change (Unaudited) (Unaudited) System integration $ 3,227,887 $ 3,219,453 (0.3 )% Software sales 5,067,874 1,384,216 266.1 % Maintenance service 127,410 265,606 (52.0 )% Shared revenue 625,715 896,052 (30.2 )% Total revenues 9,048,886 5,765,327 57.0 % Less: Business tax and surcharges 168,007 169,089 (0.6 )% Net revenues $ 8,880,879 $ 5,596,238 58.7 % Net revenues were $8.88 million for the third quarter of 2012, an increase of $3.28 million, or 58.7%, compared with net revenues of $5.60 million in the same period of 2011. The increase in net revenues was primarily attributable to the significant increase of the software sales. System integration revenues slightly increased $0.08 million for the third quarter of 2012 compared to the same period in 2011. Software sales increased $3.68 million, or 266.1%, due to roll-out of new MVAS systems related to phone call and SMS management.

Maintenance service revenue decreased to $0.13 million, from $0.27 million in the third quarter of 2011, mainly from less services provided to the carrier on network testing. Shared revenue decreased $0.27 million, or 30.2%, from $0.90 million for the third quarter of 2011 to $0.63 million in the same period of 2012, due to reduction of shared revenue from MVAS.

Nine Months Ended September 30, % of 2012 2011 change (Unaudited) (Unaudited) System integration $ 5,175,519 $ 10,614,976 (51.2 )% Software sales 13,607,610 6,749,833 101.6 % Maintenance service 290,068 1,140,236 (74.6 )% Shared revenue 2,743,930 1,479,125 85.5 % Total revenues 21,817,127 19,984,170 9.2 % Less: Business tax and surcharges 406,000 472,644 (14.1 )% Net revenues $ 21,411,127 $ 19,511,526 9.7 % 30 Net revenues were $21.41 million for the nine months ended September 30, 2012, an increase of $1.90 million, or 9.7%, compared with net revenues of $19.51 million in the same period of 2011. The increase in net revenues was primarily attributable to the growth of software sales. System integration revenues decreased $5.44 million for the nine months ended September 30, 2012 compared to the same period in 2011, mainly due to reduced demand on MPS platforms. Software sales increased $6.86 million, or 101.6%, mainly attributed from MVAS software sales including our logistics tracking system and new MVAS systems related to phone call and SMS management. Maintenance service revenue decreased to $0.29 million, from $1.14 million in the nine months ended September 30, 2011, mainly from less services provided to mainly from the services provided to the carrier on network testing. Shared revenue increased $1.26 million, or 85.5%, from $1.48 million for the nine months ended September 30, 2011 to $2.74 million in the same period of 2012, driven by shared revenue from mobile payment.

Three Months Ended September 30, % of 2012 2011 change (Unaudited) (Unaudited) MVAS Technology Platforms Gross Revenues $ 8,462,642 $ 3,658,955 131.3 % Business tax and surcharges 133,039 122,622 8.5 % Cost of Revenues 1,824,784 718,637 153.9 % $ 6,504,819 $ 2,817,696 130.9 % Mobile Payment Solutions Gross Revenues $ 586,244 $ 2,106,372 (72.2 )% Business tax and surcharges 34,968 46,467 (24.7 )% Cost of Revenues 73,842 555,347 (86.7 )% $ 477,434 $ 1,504,558 (68.3 )% Revenue from MVAS increased $4.80 million or 131.3% to $8.46 million from the third quarter of 2012, compared with $3.66 million in the same period of 2011.

The increase in MVAS revenue was primarily caused by the growth on MVAS software sales related to phone call and SMS management. Revenue from our MPS offerings decreased 72.2% to $0.59 million for the third quarter of 2012, compared with $2.11 million in the same period of 2011. The decrease in MPS revenue was due to reduction of the MPS system integration and software sales. For the third quarter of 2012, MPS and MVAS accounted for 6.5%, 93.5% of gross revenues,respectively.

Nine Months Ended September 30, % of 2012 2011 change (Unaudited) (Unaudited) MVAS Technology Platforms Gross Revenues $ 15,681,812 $ 15,946,799 (1.7 )% Business tax and surcharges 219,682 370,298 (40.7 )% Cost of Revenues 2,872,057 4,018,468 (28.5 )% $ 12,590,073 $ 11,558,033 8.9 % Mobile Payment Solutions Gross Revenues $ 6,135,315 $ 4,037,371 52.0 % Business tax and surcharges 186,318 102,346 82.0 % Cost of Revenues 1,096,898 840,054 30.6 % $ 4,852,099 $ 3,094,971 56.8 % Revenue from MVAS slightly decreased $0.26 million or 1.7% to $15.68 million from the nine months ended September 30, 2012, compared with $15.95 million in the same period of 2011. Revenue from our MPS offerings increased 52.0% to $6.14 million for the nine months ended September 30, 2012, compared with $4.04 million in the same period of 2011. The increase in MPS revenue was driven by the MPS shared revenue and software sales. For the nine months ended September 30, 2012, MPS and MVAS accounted for 28.1%, and 71.9% of gross revenues, respectively.

31 Cost of revenues: Three Months Ended September 30, % of 2012 2011 change (Unaudited) (Unaudited) Equipment costs $ 1,819,820 $ 983,004 85.1 % Labor Costs 78,806 290,980 (72.9 )% $ 1,898,626 $ 1,273,984 49.0 % Cost of revenues includes equipment hardware costs and labor costs. The equipment hardware mostly were servers, terminals and other hardware components related to the system platform. The increase in cost of revenue was in line with the increase in revenue.

Nine Months Ended September 30, % of 2012 2011 change (Unaudited) (Unaudited) Equipment costs $ 3,704,258 $ 4,327,498 (14.4 )% Labor Costs 264,697 531,024 (50.2 )% $ 3,968,955 $ 4,858,522 (18.3 )% Cost of revenues includes equipment hardware costs and labor costs. The equipment hardware mostly were servers, terminals and other hardware components related to the system platform. The decrease in cost of revenue was primarily related to the significant reduction in the system integration, which consumed significant hardware costs.

Gross profit: Three Months Ended September 30, 2012 2011 MVAS MPS MVAS MPS (Unaudited) (Unaudited) (Unaudited) (Unaudited) Gross Revenues $ 8,462,642 $ 586,244 $ 3,658,955 $ 2,106,372 Business tax and surcharges 133,039 34,968 122,622 46,467 Cost of Revenues 1,824,784 73,842 718,637 555,347 Gross profit $ 6,504,819 $ 477,434 $ 2,817,696 $ 1,504,558 Gross margin 78.1 % 86.6 % 79.7 % 73.0 % Gross profit was $6.98 million for the third quarter of 2012, an increase of $2.66 million, or 61.5%, compared with $4.32 for the same period of 2011. The gross margin was 78.6% for the third quarter of 2012, an increase of 1.4%, compared with 77.2% for the same period of 2011. The decrease in gross margin was due to the increase of revenues from system integration, which involves significantly higher hardware costs. The gross profit and the gross margin for the MVAS and MPS were $6.50 million or 78.1% and $0.48 million or 86.6%, respectively, for the three months ended September 30, 2012 and $2.82 million or 79.7% and $1.50 million or 73.0%, respectively, for the three months ended September 30, 2011. The increase of gross margin in MPS was related to the software sales which carries a higher gross margin than the average level.

32 Nine Months Ended September 30, 2012 2011 MVAS MPS MVAS MPS (Unaudited) (Unaudited) (Unaudited) (Unaudited) Gross Revenues $ 15,681,812 $ 6,135,315 $ 15,946,799 $ 4,037,371 Business tax and surcharges 219,682 186,318 370,298 102,346 Cost of Revenues 2,872,057 1,096,898 4,018,468 840,054 Gross profit $ 12,590,073 $ 4,852,099 $ 11,558,033 $ 3,094,971 Gross margin 81.4 % 81.6 % 74.2 % 78.7 % Gross profit was $17.44 million for the nine months ended September 30, 2012, an increase of $2.78 million, or 19.0%, compared with $14.65 for the same period of 2011. The gross margin was 81.5% for the nine months ended September 30, 2012, an increase of 6.4%, compared with 75.1% for the same period of 2011. The increase in gross margin was due to the increase of software sales and decrease of revenues from system integration, which involves significantly higher hardware costs. The gross profit and the gross margin for the MVAS and MPS were $12.59 million or 81.4% and $4.85 million or 81.6%, respectively, for the nine months ended September, 2012 and $11.56 million or 74.2% and $3.09 million or 78.7%,, respectively, for the nine months ended September 30, 2011. The increase of gross margin in MVAS was related to the software sales which carries a higher gross margin than the average level.

Operating expenses: Three Months Ended September 30, % of 2012 2011 change (Unaudited) % of (Unaudited) % of net revenues net revenues Selling and distribution expenses $ 662,343 7.5 % $ 700,242 12.5 % (5.4 )% General and administrative expenses 2,087,644 23.5 % 2,109,943 37.7 % (1.1 )% Research and development expenses 517,891 5.8 % 390,834 7.0 % 32.5 % $ 3,267,878 36.8 % $ 3,201,019 57.2 % 2.1 % Operating expenses including selling and distribution, general and administrative expenses and R&D, was $3.27 million for the third quarter of 2012, increased $0.07 million, or 2.1%, compared with $3.20 million for the same period of 2011.

Selling and distribution expenses: Selling and distribution expenses decreased $0.04 million or by 5.4%, to $0.66 million for the three months ended September 30, 2012 from $0.70 million for the same period of 2011. Our selling and distribution expenses primarily consist of staff salaries and welfare, travel and communication expenses, office rental and related expenses, and entertainment expenses. For the three months ended September 30, 2012, the decrease in selling and distribution expenses was mainly due to less advertisement and promotion expenses, profited from promotions in prior periods.

General and administrative expenses: General and administrative expenses decreased $0.02 million or by 1.1%, to $2.09 million for the three months ended September 30, 2012 as compared to $2.11 million for the same period in 2011. Our general and administrative expenses primarily consist of salaries and welfare for management, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance, utilities and other office expenses. Although allowance for doubtful accounts increased $0.5 million, the general and administrative expenses slightly decreased. It was mainly due to the reason that more professional expenses were spent related to being a new public company in 2011.

33 Research and development expenses: Research and development expenses increased $0.13 million or by 32.5%, from $0.39 million for the three months ended September 30, 2011 to $0.52 million for the same period of 2012. Our research and development expenses primarily consist of salaries and welfare for the research and development staff, office utilities and supplies allocated to our research and development department. The increase of the research and development expenses for the third quarter of 2012 was mainly due to recruitment of more engineers, raises in salaries and relevant welfare and related expenses related to the research and development in mobile payment services.

Nine Months Ended September 30, % of 2012 2011 change (Unaudited) % of (Unaudited) % of net revenues net revenues Selling and distribution expenses $ 2,535,720 11.8 % $ 1,668,383 8.6 % 52.0 % General and administrative expenses 5,898,692 27.5 % 4,617,500 23.7 % 27.7 % Research and development expenses 1,576,808 7.4 % 1,026,913 5.3 % 53.5 % $ 10,011,220 46.7 % $ 7,312,796 37.5 % 36.9 % Operating expenses including selling and distribution, general and administrative expenses and R&D, was $10.0 million for the nine months ended September 30, 2012, increased $2.7 million, or 36.9%, compared with $7.31 million for the same period of 2011.

Selling and distribution expenses: Selling and distribution expenses increased $0.87 million or by 52%, to $2.54 million for the nine months ended September 30, 2012 from $1.67 million for the same period of 2011. Our selling and distribution expenses primarily consist of staff salaries and welfare, travel and communication expenses, office rental and related expenses, and entertainment expenses. For the nine months ended September 30, 2012, the increase in selling and distribution expenses was mainly due to the recruitment of more sales people on mobile payment service line for our merchant acquisition, which raised our salaries and welfare expenses by $0.31 million when compared the nine months ended September 30, 2012 to the same period in 2011. Recruitment of more sales people and establishment of branch offices in more regions also resulted in higher selling and distribution expenses.

Meanwhile, our advertisement and promotion expenses also increased in line with our merchant acquisition efforts.

General and administrative expenses: General and administrative expenses increased $1.28 million or by 27.7%, to $5.90 million for the nine months ended September 30, 2012 as compared to $4.62 million for the same period in 2011. Our general and administrative expenses primarily consist of salaries and welfare for management, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance, utilities and other office expenses. The increase in general and administrative expenses was mainly due to allowance for doubtful accounts, net off by decrease of professional expenses of $0.56 million. The allowance for doubtful accounts of $2.9 million was provided for accounts receivable that is over one year. The decrease of professional expenses was due to the reason that more professional expenses were spent related to being a new public company in 2011.

Research and development expenses: Research and development expenses increased $0.55 million or by 53.5%, from $1.03 million for the nine months ended September 30, 2011 to $1.58 million for the same period of 2012. Our research and development expenses primarily consist of salaries and welfare for the research and development staff, office utilities and supplies allocated to our research and development department. The increase of the research and development expenses for the first half of 2012 was mainly due to recruitment of more engineers, raises in salaries and relevant welfare and related expenses related to the research and development in mobile payment services.

Other income (expenses): Other income (expenses) mainly includes interest income, interest expense, government grants and VAT refund. Other expenses for the three months ended September 30, 2012 amounted to $0.02 million, comparing with income of 0.01 million for the three months ended September 30, 2011 due to increase of interest expense during the three months ended September 30, 2012.

The interest expense for the three months ended September 30, 2011 was $0.3million.

34 Other income decreased $4.68 million from $6.05 million for the nine months ended September 30, 2011 to $1.37 million for the nine months ended September 30, 2012 due to lack of government grants during the nine months ended September 30, 2012. The government grants for the nine months ended September 30, 2011 was $4.74 million.

Income before income tax expense: Income before income tax expense increased $2.56 million, or 226.2%, from $1.13 million for the three months ended September 30, 2011 to $3.70 million for the three months ended September 30, 2012, mainly due to the increase of gross profit.

Income before income tax expense decreased $4.59 million, or 34.3%, from $13.39 million for the nine months ended September 30, 2011 to $8.80 million for the nine months ended September 30, 2012, mainly due to the decrease of other income from government grants, as well as allowance for a doubtful accounts.

Liquidity and Capital Resources Dividends We are a holding company and conduct our operations primarily through our subsidiaries and VIEs in the PRC. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries and VIEs. The VIEs' earnings are transferred to our subsidiaries in the form of payments under the technology support and related consulting agreements. If our subsidiaries incur debt on their own behalf, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with accounting standards and regulations applicable to such subsidiaries. As of September 30, 2012, our PRC subsidiaries and VIEs had aggregate unappropriated earnings of approximately $53.67 million (based on an exchange rate of 6.3265 as of September 30, 2012) that were available for distribution. These unappropriated earnings are considered to be indefinitely reinvested, and will be subject to PRC dividend withholding taxes upon distribution.

Under PRC law, each of our PRC subsidiaries must set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of our PRC subsidiaries with foreign investments must also set aside a portion of its after-tax profits to fund an employee welfare fund at the discretion of the board. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, companies may not distribute the reserve funds as cash dividends except upon a liquidation of these subsidiaries. In addition, dividend payments from our PRC subsidiaries could be delayed as we may only distribute such dividends upon completion of annual audits of the subsidiaries.

As an offshore holding company, we may rely principally on dividends from our subsidiaries in the PRC for our cash requirements, including to pay dividends or make other distributions to our shareholders or to service our debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in the PRC is subject to limitations. In particular, the PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in the PRC is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends.

If our subsidiaries in the PRC incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends or other payments to us could materially adversely limit our ability to grow, make investments or acquisitions, pay dividends and otherwise fund and conduct our business.

Government Control of Currency Conversion The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Nevada holding company primarily relies on dividend payments from our wholly-owned PRC subsidiaries in the PRC to fund any cash and financing requirements we may have.

35 Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements.

Therefore, our wholly owned PRC subsidiaries may pay dividends in foreign currency to us without pre-approval from SAFE. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of the PRC to pay capital expenses such as the repayment of loans denominated in foreign currencies. With the prior approval from SAFE, cash generated from the operations of our PRC subsidiary may be used to pay off debt they owe to entities outside the PRC in a currency other than the Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.

Cash Flows In summary, our cash flows were as follows:

[ Back To Technology News's Homepage ]

OTHER NEWS PROVIDERS







Technology Marketing Corporation

800 Connecticut Ave, 1st Floor East, Norwalk, CT 06854 USA
Ph: 800-243-6002, 203-852-6800
Fx: 203-866-3326

General comments: tmc@tmcnet.com.
Comments about this site: webmaster@tmcnet.com.

STAY CURRENT YOUR WAY

© 2014 Technology Marketing Corporation. All rights reserved | Privacy Policy