TRITF Tri Tech Holding Inc (CE)

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 successfully implemented 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:

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.

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

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.

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:

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 20 1 2

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

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

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

Revenues

Our total revenues for the second quarter of 2013 were $ 16,284,617 , a decrease of 29.3%, compared with the amount for the same period last year. Revenue from the Ordos project decreased from $1,855,180 for the period ended June 30, 2012 to $848,403 in the same period 2013 because the project was primarily completed; India projects didn’t recognize revenue in the second quarter of 2013, mainly because the customer underestimated of the construction environment and there were redesigns, while in the same period of 2012, India projects recognized a revenue of $4.0 million. In order to reduce cash flow pressures, we evaluated the projects we planned to bid on and elected not to bid on domestic BT projects, which typically require significant investments and feature slower client payment periods.

For the six months ended June 30, 2013, total revenues reached $26,763,445, a decrease of 36.7%, compared with the amount for the same period last year. System integration constituted 83.2% of the total revenue. Hardware product sales revenue constituted the remaining 16.8%. The six-month decrease was mainly due to the Company’s shift away from BT projects and the delay in the India projects.

Cost of Revenues

Cost of revenues is based on total actual costs incurred plus estimated costs to completion applied to the 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 revenues also includes freight charges, purchasing and receiving costs and inspection costs when they are incurred.

Total cost of revenues was $ 12,657,369 for the second quarter of 2013, a decrease of 26.5% from $17,216,468 in the second quarter of 2012. Based on the decline of the gross margin, the decrease of cost was mainly caused by the decrease of revenue.

Total cost of revenues was $ 20,801,504 for the first six months of 2013, a decrease of 33.4% from $31,220,280 in the second quarter of 2012. Based on the decline of the gross margin, the decrease of six months cost was also mainly caused by the decrease of revenue.

Our gross margin decreased from 25.3% in the second quarter of 2012 to 22.3% in the second quarter of 2013. This decrease was largely a result of increases in material and equipment costs and labor subcontracting costs. Shifting from BT projects, which usually have higher gross margins, also contributed the lower gross margin in the second quarter.

Our gross margin decreased from 26.1% for the six months ended of 2012 to 22.3% in the same period 2013. This decrease for six months was also a result of increases in material and equipment costs, labor subcontracting costs and shifting from BT projects.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of compensation, marketing, travel and business entertainment expenses. In the second quarter of 2013, total selling and marketing expenses decreased by 9.1%, from $935,853 in the second quarter of 2012 to $850,551 in the same period of 2013. The compensation-related expenses increased by 17.6% from $396,291 in the second quarter of 2012 to $466,200 in the same period of 2013 due to the compensation for laying off selling and marketing employees. Traveling expenses, entertainment expenses and other expenses declined by $155,211 because of budget controls; therefore, the total selling and marketing expenses decreased.

For the six months ended June 30, 2013, total selling and marketing expenses increased by 6.8%, from $1,774,846 in the same period of 2012 to $1,895,077 in the same period of 2013. The compensation-related expenses increased by 37.3% from $708,791 for the six months ended June 30, 2012 to $973,222 in the same period of 2013, mainly attributable to the compensation expense for laying off selling and marketing employees.

Selling and marketing expenses for the three months ended and six months ended June 30, 2013 constituted approximately 5.2% and 7.1% of total revenues.

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 decreased by $604,506 from $3,247,546 in the second quarter of 2012 to $2,643,040 in the second quarter of 2013. Of this decrease, $26,206 was for officers’ salaries. Salaries for mid-level management, technical support team, and other office staff decreased by $78,792 from the amount in the second quarter of 2012 to the amount in the second quarter of 2013. Rental expenses decreased by $25,426 from the amount in the second quarter of 2012 to the amount in the second quarter of 2013, because the Company stopped to rent some of the office space in Beijing. Other general and administrative expenses decreased by $383,380 from the amount in the second quarter of 2012 to the amount in the second quarter of 2013, including mainly office expenses, utilities, travel, communication, other services support and bad debt expenses. We had a $96,954 non-cash option expense as a part of other general and administrative expense in the second quarter 2013 and $439,675 in the same period of 2012, which also contributed to the decrease of general and administrative expense.

General and administrative expenses decreased by $558,855 from $6,100,906 for the six months ended June 30, 2012 to $5,542,051 in the same period of 2013. The officers’ salaries increased by 0.7% from the amount for the six months ended June 30, 2012 to the amount in the same period of 2013. Salaries for mid-level management, technical support team, and other office staff increased by 3.6% from the amount for the six months ended June 30, 2012 to the amount in the same period of 2013. Rental expense increased by $24,014 from the amount for the six months ended June 30, 2012 to the amount in the same period of 2013. Other general and administrative expenses decreased by $549,209 from the amount for the six months ended June 30, 2012 to the amount in the same period of 2013, including mainly office expenses, utilities, travel, communication, other services support and bad debt expenses. We had a $235,158 non-cash option expense as a part of other general and administrative expense for the six months ended June 30, 2013 and $530,588 in the same period of 2012, which also attributed to the increase of general and administrative expense.

General and administrative expenses for the three months and six months ended June 30, 2013 constituted approximately 16.2% and 20.7% 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 that are likely to 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%. Though the Company has one subsidiary, TIS, which based its location in the US, 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 applicable statutory tax rates for our subsidiaries and VIEs in the PRC are as follows:

The Company’s provision for income tax expense from continuing operations for the first three months of 2013 and 2012 were $99,644 and $287,062 respectively.

The Company’s provision for income tax expense from continuing operations for the first six months of 2013 and 2012 were $154,393 and $601,555 respectively.

Net (Loss) Income before Income Taxes

In the second quarter ended June 30, 2013, our net loss before provision for income taxes was $715,779, a decrease of $2,310,568 compared to that of $1,594,789 in the same period in 2012. The Company’s provision for income taxes decreased by 65.3%, from the amount in the second three months of 2012 to the amount in the same period in 2013. In the second period ended June 30, 2013, net loss attributable to the shareholders of TRIT was $ 602,020, a decrease of 143.9%, from net income of $1,370,887 for the same period in 2012, mainly due to the significant decline of revenues.

For the six months ended June 30, 2013, our net loss before provision for income taxes was $1,908,287, a decrease of $5,250,258 compared to net income of $3,341,971 in the same period in 2012. The Company’s provision for income taxes decreased by 74.3%, from the amount in the first six months of 2012 to the amount in the same period in 2013. For the six months ended June 30, 2013, net loss attributable to the shareholders of TRIT was $2,062,680, a decrease of 175.3%, from net income of $2,740,416 for the same period in 2012, mainly due to the significant decline of revenue.

Liquidity and Capital Resources

As highlighted in the consolidated statements of cash flows, our 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.

Consolidated cash flows for the six months ended June 30, 2013 and 2012 were as follows:

Cash and Cash Equivalents

As of June 30, 2013, our cash and cash equivalents amounted to $ 5,506,711 . The restricted cash as of June 30, 2013 and December 31, 2012 amounted to $ 16,678,766 and $7,816,967, respectively, which are not included in the total amount of cash and cash equivalents. The restricted cash consisted of deposits as collateral for the issuance of letters of credit. Our subsidiaries that own these deposits do not have material cash obligations to any third parties. Therefore, the restriction does not impact our liquidity.

Operating Activities

Net cash used in operating activities was $8,470,131 for the six months ended June 30, 2013, compared with net cash used in operating activities of $ 8,297,972 in the same period in 2012. The increase of $ 172,159 in operating cash outflow was due to the received payment of $11.5 million from Ordos project in March 2013 and reduced by the prepayments to various suppliers for projects. Net accounts and notes receivable increased from $18,598,110 as of December 31, 2012 to $23,473,583 as of June 30, 2013, an increase of 26.2%. Current unbilled receivables increased from $27,954,525 as of December 31, 2012 to $32,346,776 as of June 30, 2013, an increase of 15.7%.

Investing Activities

Net cash used in investing activities was $ 400,352 during the six months ended June 30, 2013, an decrease of $ 506,741 from net cash provided by investing activities of $ 106,389 in the same period of 2012. The decrease was attributed to the payments for the constructions of Baoding and less acquired funds from investing activities. Currently we have no further plans to add capital expenditures.

Financing Activities

The cash provided by financing activities was $6,288,392 for the six months ended June 30, 2013, compared to cash provided by financing activities of $5,409,603 in the same period of 2012. The increase was due to the proceeds from bank borrowings, loan from third-party companies and noncontrolling shareholders.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

Net effect of exchange rate changes was a loss of $ 9,855 in the six months ended June 30, 2013 and a gain of $408,797 in the same period of 2012, respectively.

Restricted Net Assets

Our ability to pay dividends is primarily dependent on receiving distributions of funds from our subsidiaries, VIEs and other affiliated entities, which is restricted by certain regulatory requirements. Relevant Chinese statutory laws and regulations permit payments of dividends by our Chinese affiliates only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, our PRC affiliates are required to set aside at least 10% of their after-tax profit after deducting any accumulated deficit based on PRC accounting standards each year to our general reserves until the accumulated amount of such reserves reach 50% of our registered capital. These reserves are not distributable as cash dividends. Our off-shore subsidiaries, TIS and Tri-Tech International Investment, Inc. (“TTII ” ), do not have material cash obligations to third parties. Therefore, the dividend restriction does not impact our liquidity. There is no significant difference between accumulated profit calculated pursuant to PRC accounting standards and our accumulated profit calculated pursuant to U.S. GAAP. As of June 30, 2013 and December 31, 2012, restricted retained earnings were $2,246,910 for both, and restricted net assets were $1,878,976 and $4,878,975, respectively. Unrestricted retained earnings as of June 30, 2013 and December 31, 2012 were $15,337,603 and $17,038,396, respectively, which were the amounts available for distribution in the form of dividends or for reinvestment.

Working Capital and Cash Flow Management

As of June 30, 2013, our working capital was $ 22,327,840 , with current assets totaling $106,325,297 and current liabilities totaling $83,997,457.

We believe our current assets are sufficient to meet our capital requirements for the next 12 months. However, we may require additional cash to undertake larger projects or to complete strategic acquisitions in the future. In the event our current capital is insufficient to fund these and other business plans, we may take the following actions to meet such working capital needs:

We plan to sell our real property in Baoding, along with all construction including the costs of construction and operation expended since acquisition for approximately $18 million. We acquired this property on November 26, 2010. The sale is expected to close before the end of 2013 and we expect to break even on the sale. We expect to use these funds to support our operating cash flow and to repay the corporate bond from financing cash flow.

Segment Information

We have three reportable operating segments. The segments are grouped according to the types of goods and services provided and the types of clients that use such goods and services. Total sales and costs are divided among these three segments. We assess each segment’s performance based on net revenue and gross profit on contribution margin.

Segment 1: Water, Wastewater Treatment and Municipal Infrastructure

The following are the operating results for the three months ended June 30, 2013 and 2012 for Segment 1:

The following are the operating results for the first six months of 2013 and 2012 for Segment 1:

Segment 2: Water Resource Management System and Engineering Services

The following are the operating results for the three months ended June 30, 2013 and 2012 for Segment 2:

The following are the operating results for the first six months of 2013 and 2012 for Segment 2:

Segment 3: Industrial Pollution Control and Safety Water Resource

The following are the operating results for the three months ended June 30, 2013 and 2012 for Segment 3:

The following are the operating results for the first six months of 2013 and 2012 for Segment 3:

Assets attributable to each segment as of June 30, 2013 and 2012 are shown below:

Our 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 the lease terms, when the contracts expire, we have the right to extend them with new negotiated prices. The leases are renewable subject to negotiation. Rental expenses were $254,380 and $279,806 for the quarters ended June 30, 2013 and 2012, respectively.

Product Warranties

Our 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 used or workmanship has not been significant. We have not incurred any material unexpected costs associated with servicing warranties. We continuously evaluate and estimate our potential warranty obligations, and record 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 $427,757 and $406,300 on such capital expenditures during the six months ended June 30, 2013 and 2012, respectively. The increase was due to the construction progress of Baoding.

In relation to the construction of our R&D building in Baodi, Tianjin, and the Company committed to pay the construction suppliers an approximate amount of $6.5 million in September 2013 for the undergoing contracts.

Seasonality

The Company’s operating revenues normally tend to fluctuate due to different project stages and U.S. GAAP requirements for revenue recognition. As the scope of our business extended to the civil construction activities, certain destructive weather conditions that tend to occur during the winter often impact the progress of our projects. 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.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements for the three months ended June 30, 2013 or 2012.