U.S. SECURITIES AND EXCHANGE COMMISSION




Washington, D.C. 20549




FORM 10-K/A


(Amendment No. 2)




(MARK ONE)




x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the Fiscal Year Ended December 31, 2010
  OR
 
  ̈
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For the Transition Period from _______________ to _________________




Commission file number: 000-53934




TRUNKBOW INTERNATIONAL HOLDINGS LIMITED




(Exact name of Registrant as Specified in Its Charter)




NEVADA

26-3552213(State or Other Jurisdiction

(I.R.S. Employer Identification No.)of Incorporation or Organization)
 
 Unit 1217-1218, 12F of Tower B, Gemdale Plaza,

No. 91 Jianguo Road Chaoyang District, Beijing,

People’s Republic of China

100022(Address of principal executive offices)

(Zip Code)




Registrant’s telephone number, including area code:




(86) 10-8571-2518




Securities Registered Pursuant To Section 12 (B) Of The Act:




Common Stock, Par Value $0.001 Per Share




Securities Registered Pursuant To Section 12 (G) Of The Act:




Name of each exchange on which registered: The NASDAQ Stock Market LLC




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ̈  Yes  x   No




Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   ̈  Yes  x  No




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes     ̈  No




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No  ̈




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated

filer  ̈

Accelerated

filer  ̈

Non-accelerated  filer  ̈

(Do not check if a smaller reporting company)

Smaller reporting

company x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ̈  Yes   x  No




The aggregate market value of the shares of common stock, par value $0.001 per share, of the registrant held by non-affiliates on June 30, 2010 was zero.




There
were 36,807,075 shares of common stock of the registrant outstanding as of March 20, 2011.







Explanatory Note




This
Amendment No. 2   to the Annual Report on Form 10-K filed by Trunkbow International, Inc., a Nevada
corporation (“we,” “our,” “us,” or the “Company”), on March 29, 2011 is being
filed to (i) amend Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation (ii)
amend Item 8 – Financial Statements and Supplementary Data and (iii) include updated Exhibit 31 and 32 certifications
for our principal executive and financial officers.





Except
as specifically referenced herein, this Amendment No. 2  to the Annual Report on Form 10-K/A does not reflect any event
occurring subsequent to March 29, 2011, the filing date of the original report, and no other changes have been made to
the report.







PART I


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 The following discussion and analysis of the financial condition and results of our operations should be read in conjunction with our financial statements and the notes to those statements. This discussion contains forward-looking statements reflecting our management’s current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed on page 18 entitled “Risk Factors” and elsewhere in this Form 10-K.
 
 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. We believe that the Trunkbow brand is regarded by the telecom operators as a well managed, trusted provider of technology solutions. Our research and development focused business model provides us with a defensible market position as a technology provider to the telecom operators.
 
 As of December 31, 2010, our technology is the subject of 164 filed patent applications, of which 50 have been granted by the National Intellectual Property Administration of the People’s Republic of China. We have recently begun 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 primarily 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.
 
 Overview
 
 Our History and Corporate Structure
 
 We were incorporated as a “shell” company with nominal assets under the name Bay Peak 5 Acquisition Corp. We were incorporated in the State of Nevada on September 3, 2004 as a wholly owned subsidiary of Visitalk Capital Corporation (“VCC”). We were formed as part of the implementation of the Chapter 11 reorganization plan (the “Visitalk Plan”) of visitalk.com, Inc. (“Visitalk.com”), a former provider of VOIP services. The Visitalk Plan was deemed effective by the Bankruptcy Court on September 17, 2004 (the “Effective Date”). On September 22, 2004, Visitalk.com was merged into VCC, which was authorized as the reorganized debtor under the Visitalk Plan.
 
 On July 28, 2008, pursuant to Stock Purchase Agreements (“SPAs”), we sold 5,971,898 shares of common stock to two parties unaffiliated with us (the “Purchasing Shareholders”) for a total payment of $51,000, or approximately $.008 per share (the “Change of Control Transactions”). On August 29, 2008, the SPAs were approved by our shareholders at a special shareholders’ meeting and all the closing conditions of the SPAs were met. After the Change of Control Transactions, including the impact of a related master settlement agreement, these newly issued shares represented 85.5% ownership of us. One of the parties, Bay Peak, LLC (“Bay Peak”), had contacts with various companies and individuals in Asia, in particular the PRC. Cory Roberts, the managing member of Bay Peak, was appointed to our Board of Directors and elected President in conjunction with the Change of Control Transactions. Mr. Roberts resigned as a member of our Board of Directors on March 30, 2011. On August 28, 2008, shareholders authorized adopting the name of Bay Peak 5 Acquisition Corp. Also on August 28, 2008, shareholders ratified a one-for-seven reverse stock split (the “First Reverse Split”), which was implemented on January 6, 2010 and in January 2010, authorized a further reverse split of 4.14 for 1, which was implemented on January 27, 2010 (the “Second Reverse Split”).
 
 Effective as of September 24, 2008, we entered into a Plan and Agreement of Merger (the “Plan and Agreement of Merger”) with VT Dutch Services, also a subsidiary of VCC, pursuant to which VT Dutch Services merged with and into us. Pursuant to the merger, holders of shares of common stock of VT Dutch Services received the identical number and class of our stock as they held in VT Dutch Services, and holders of warrants of VT Dutch Services received the identical number and class of our warrants as they held in VT Dutch Services. In connection with the Plan and Agreement of Merger, VT Dutch Services also changed its name to “Bay Peak 5 Acquisition Corp.” All shares of common stock of BP5 held prior to the consummation of the transactions contemplated by the Plan and Agreement of Merger were cancelled. The sole purpose of the merger was to change the corporate domicile of VT Dutch Services from Arizona to Nevada and to effect a name change of VT Dutch Services.
  1
 
 
 In February 2010 we entered into the Share Exchange Agreement with Trunkbow BVI and the shareholders of Trunkbow BVI (the “Shareholders”), who together owned shares constituting 100% of the issued and outstanding ordinary shares of Trunkbow BVI (the “Trunkbow BVI Shares”), and Bay Peak, our former principal shareholder. Pursuant to the terms of the Share Exchange Agreement, the Shareholders transferred to us all of the Trunkbow BVI Shares in exchange for the issuance of 19,562,888 (the “Shares”) shares of our common stock (the “Share Exchange”). As a result of the Share Exchange, Trunkbow BVI became our wholly owned subsidiary. After giving effect to the Share Exchange, the sale of common stock in the February 2010 Offering and the BP5 Warrant Financing (as defined below) (i) existing shareholders of Trunkbow BVI owned approximately 60.25% of our outstanding common stock, (ii) purchasers of common stock in the February 2010 Offering owned approximately 26.01% of our outstanding common stock (including 7.7% owned by VeriFone, Inc.), (iii) the holders of BP5 warrants owned approximately 8.54% of our outstanding common stock and (iv) the pre-existing shareholders of BP5 owned approximately 5.2% of our outstanding common stock.
 
 We were founded in 2001 by former Silicon Valley engineers with extensive experience in the telecom industry. We have been able to develop first to market application platforms that enable telecom operators to generate significant new revenue streams by leveraging our extensive knowledge of the mobile network technology. Since our inception, we have invested significant time and resources to develop cutting edge technology solutions for our customers. We were the first to create and develop a Color Ring Back Tone (“CRBT”) application platform for Shandong Unicom in 2003. Since then, this innovative service solution has become the third largest revenue contributor for China Mobile after voice and Short Message Service (“SMS”).
 
 Concurrent with the Share Exchange, (i) we entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors (the “Investors”) for the sale of an aggregate of 8,447,575 shares (the “Investor Shares”) and 1,689,515 warrants (the “Investor Warrants”), for aggregate gross proceeds equal to $16,895,150 (the “February 2010 Offering”) and (ii) certain holders of our outstanding warrants issued to creditors and claimants of Visitalk.com, in accordance with the Visitalk Plan, referred to herein as the “BP5 Warrant Investors” exercised the 2,774,500 warrants owned by them for an aggregate exercise price of $5.5 million and received warrants to purchase an aggregate of 554,900 shares of common stock (“BP5 Warrant Financing”).
 
 We believe that we have a competitive advantage over our primary competitors by our proven track record of innovation. We believe Chinese telecom operators continue to utilize our technology platforms because of our superior technological solutions and unique product offerings.
 
 Our organizational structure is as follows:
 
 2
 
 
 
 
 (1)
Trunkbow International Holdings Limited (“Trunkbow BVI”) was established in the British Virgin Islands (“BVI”) on July 17, 2009. Trunkbow BVI itself has no significant business operations and assets other than holding of equity interests in its subsidiaries through a series of reorganization activities described below (the “Reorganization”).
 (2)
Trunkbow (Asia Pacific) Investment Holdings Limited (“Trunkbow Hong Kong”) was established as an Investment Holding Company in Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”) on July 9, 2004. As part of the reorganization, on September 16, 2009, the entire issued share capital Trunkbow Hong Kong was transferred to Trunkbow BVI.
 (3)
Trunkbow Asia Pacific (Shandong) Company, Limited (“Trunkbow Shandong”) was established as a wholly foreign owned enterprise on December 10, 2007 in Jinan, Shandong Province, the PRC by Trunkbow Hong Kong. It is principally engaged in research and development of application platforms for mobile operators in the PRC.
 (4)
Trunkbow Asia Pacific (Shenzhen) Company, Limited (“Trunkbow Shenzhen”) was established as a wholly foreign owned enterprise on June 7, 2007 in Shenzhen, Guangdong Province, the PRC by Trunkbow Hong Kong. It is principally engaged in research and development of application platforms for mobile operators in the PRC.
 (5)
Trunkbow Technologies (Shenzhen) Company, Limited (“Trunkbow Technologies”) was established as a limited liability company on December 4, 2001 in Shenzhen, Guangdong Province, the PRC. Trunkbow Technologies was formerly engaged in research and development of application platforms for mobile operators in China as well as wireless application systems for the international market. Trunkbow Technologies no longer accounts for any of our new business, currently represents less than 10% of our current revenues and is being operationally wound down.
  3
 
  (6)
We entered into a series of contractual arrangements with Beijing Delixunda Technology Co., Ltd. (“Delixunda”) and its shareholders on March 10, 2011. Delixunda is a telecom value-added service licensed company and was established as a limited liability company on December 1, 2009 in Beijing, the PRC. Delixunda has no operations prior to February 10th, 2011. As a result of the contractual arrangements with Delixunda, we indirectly own the telecom value-added service license, which would enble us to offer telecom wireless value-added conten service to individual clients.
 
 How We Generate Revenue
 
 We develop wireless enablement platforms targeted at cellular carriers and provide them with constantly improving interactive delivery vehicles to improve cellular performance and end-user functionality. We leverage our patented technology platforms to help telecom operators in China to increase their per subscriber revenue and reduce subscriber churn. We generate revenues through direct and indirect revenue sharing agreements with the relevant provincial branch of the telecom operators, one-time service and product sales, and maintenance fees. We charge a one time licensing fee and an annual maintenance fee of approximately 5 – 10% of the initial system purchasing amount. We also have monthly revenue sharing contracts in place with resellers and directly with the relevant provincial branch of the telecom providers for up to a 50% share in the revenue generated through our proprietary applications platforms. In addition to one-time sales and revenue sharing, we also generate revenue through transaction fees for our Mobile Payment System solution.
 
 Our current MVAS Application Platform solutions generate revenue through one time sales and recurring revenues. For our Caller Color Ring Back Tone (“Caller CRBT”) and Color Numbering solution, we have revenue sharing agreements with resellers and directly with telecom providers to receive up to 50% of the subscription revenues generated for up to 5 years and then renewable upon expiration. For our Number Change Notification (“NCN”) solution, we receive revenues from one-time system sales and maintenance fees.
 
 For our Mobile Payment System solution, we generate both one-time and recurring revenues.
 
 We generate non-recurring revenues in the following ways:
 •
System sales to telecom providers which enables the mobile payment function on their network;
 •
System sales to telecom providers that enables various MPS compatible SIM and mobile payment functions for their corporate clients; and
 •
Revenue share on the MPS compatible SIM cards that are sold to the telecom providers.
 
 We generate recurring revenues in the following ways:
 •
Up to a 50% share of the monthly function fee charged by the telecom providers;
 •
0.1 – 0.5% of total transaction cost on purchases made through the mobile payment application; and
 •
Monthly rental revenues on POS (Point of Sales) machines deployed by Trunkbow.
 
 We operate under exclusive patent licensing and revenue sharing agreements for Caller CRBT in three provinces with local branches of China Telecom, two provinces with local branches of China Mobile and two provinces with local branches of China Unicom, Number Change Notification in two provinces with local branches of China Unicom and two provinces with local branches of China Telecom, and Mobile Payment System in four provinces with local branches of China Telecom. These agreements typically have a one to five year term. In addition, we have sold over 10 different other platform services to the mobile operators over the past years.
 
 In determining development priorities, we conduct research efforts which include client input, market analysis, economic considerations, revenue potential and technical feasibility. Only when these factors each rise above a predefined threshold will a true development undertaking ensue. As an ISO 9000 certified business entity, which is a family of standards for quality management systems that is maintained by the International Organization for Standardization, and in keeping with this practice, all projects must adhere to a pre-defined regimen of development and only ends when acceptance by the client is gained.
  4
 
 
 Our business has grown rapidly since inception and we anticipate that our business will continue to grow at a rapid pace in the next three to five years. We expect that our growth will be driven by the broad adoption of our Caller CRBT and Mobile Payment services, geographic expansion and the introduction of new products and services.
 
 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 700 million cellular subscribers. For the fiscal years ended December 31, 2009 and 2008, revenues generated directly by sales to China Telecom, China Unicom and China Mobile accounted for approximately 3%, 6% and nil, and 4%, 95% and nil, respectively, of our total revenues, and 7%, 5% and nil, and 3%, 6% and nil, respectively, for the year ended December 31, 2010 and 2009. When we include resales 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 for the fiscal years ended December 31, 2009 and 2008 accounted for approximately 42%, 15% and 42%, and 4%, 95% and nil, respectively, of our total revenues, and 16%, 47% and 28%, and 42%, 15% and 42%, respectively, for the year ended December 31, 2010 and 2009. The significant increase in revenues generated from sales to China Mobile for 2009 as compared to 2008 is attributable to the sale in 2009 of two platforms to two resellers that provided an air-charge system to China Mobile in two provinces. The large variations in revenues attributable to China Unicom and China Mobile during 2008 and 2009 are mainly attributable to a reorganization of China Unicom which resulted in that company’s CDMA segment being spun-off into China Telecom and the remaining company being merged with China Netcom. Even though our relationship with these three continues to expand, it is important to understand the complexity of these relationships. The significant increase in revenues generated from sales to China Unicom for 2010 as compared to 2009 is contributed from the sale in 2010 of the deployment of our systems including Caller CRBT, Color Numbering, Mobile Business Card and Mobile Payment.
 
 To be accepted as an approved vendor of services to any of these carriers, a company must first gain approval at a corporate level by successfully completing a series of tests of its technology. Once completed, the next step is to gain contracted business from each operating unit. Each of the 30 provinces, municipalities and autonomous regions contains its own self sufficient cellular operating unit with separate P&L responsibility. In other words, with 30 regions, there are 30 separate operating companies per cellular carrier. This model is replicated in each of the three major carriers, resulting in a total of ninety potential clients within China.
 
 The PRC government has mandated that these mobile payment services and MVAS functions must be available to all provinces over the next five years. With such services currently available in 13 provinces, the 17 remaining provinces will be seeking them from the market with Trunkbow being a major incumbent; fully vetted at a corporate level and with patented technology.
 
 While we were initially focused exclusively on the PRC market, we have built a product set for the global sector. To this end, we are now actively positioning our product sets with carriers in the US and Europe, and we are entering the global market with a well accepted product set and excellent credentials.
 
 Seasonality
 
 Our quarterly operating results have varied significantly in the past and are likely to continue to vary significantly in the future. Historically, we have generally experienced a slowdown or decrease in generating revenues in the first and fourth quarter of the year due to the Chinese Lunar New Year as a majority of the businesses in the PRC shut down for a month long holiday and slow down for a month prior to the New Year celebration. We believe that this fluctuation will gradually subside as we increase our recurring revenue streams.
 
 Results of Operations
 
 Fiscal
Years Ended December 31, 2010 versus 2009 (2009 Financial Information is Unaudited
 
 Net Revenues:  Net revenues increased $10.96 million, or 81.6%, from $13.43 million for the year ended December 31, 2009 to $24.39 million for the year ended December 31, 2010. Software sales increased $10.69 million, or 252.6%, from $4.23 million for the year ended December 31, 2009 to $14.92 million for the year ended December 31, 2010, mainly due to increased sales in Mobile Payment by $8.85 million and MVAS software of Caller CRBT, NCN and Color Numbering by $2.52 million in additional provinces. Our net revenues shifted to more software sales and less system integration sales during 2010. System integration revenues increased $0.87 million, from $8.5 million for the year ended December 31, 2009 to $9.37 million for the year ended December 31, 2010, due to the change in demand of our customers for the various components of our services. And our company’s competitive edge is in R&D. So the increase in Software sales is more than System integration revenues.
  5
 
 
 We started to deploy MPS platforms with our customers from the third quarter of 2009. We generated revenues of $12.66 million and $12.18 million, $10.14 million and $3.33 million, from MVAS and MPS solutions for the year ended December 31, 2010 and 2009. MPS solutions have become a significant revenue segment, representing 49% and 25% for the year ended December 31, 2010 and 2009.
 
 Gross Margin:  Gross margin increased $8.25 million, or 73.6%, from $11.21 million for the year ended December 31, 2009 to $19.46 million for the year ended December 31, 2010. The increase in gross margin was due to revenue growth associated with the software sales. Gross margin rate decreased by 3.7% from 83.5% for the year ended December 31, 2009 to 79.8% for the year ended December 31, 2010. The decrease in gross margin rate was due to the sale of point of sale system, of which gross margin rate was 23.6%. The increase in business tax and surcharges in line with the increase of revenues also cut down the gross margin.
 
 The gross margin or the gross margin rate for the MVAS and MPS was $11.2 million or 90.9% and $8.27 million or 68.5%, respectively, for the year ended December 31, 2010, and $8.64 million or 85.5% and $2.57 million or 77.2%, respectively, for the year ended December 31, 2009.
 
 Operating expenses:  Operating expenses, including selling, general and administrative expenses and R&D increased $2.84 million, or 99.9%, from $2.85 million for the year ended December 31, 2009 to $5.69 million for the year ended December 31, 2010. The increase in operating expenses was related to the expansion of administrative and R&D departments with recruitment of more employees, related office expenses, as well as the addition of public company related expenses.
 
 Interest expenses:  Interest expenses increased $0.15 million, or 234.26%, from $0.07 million for the year ended December 31, 2009 to $0.22 million for the year ended December 31, 2010 due to an increase in interest expenses from the contingently convertible notes with an annual interest rate of 12% and short-term loans with an annual interest rate of 6.6375%.
 
 Research and Development: For the year ended December 31, 2010 and 2009, we spent $1.2 million and $0.44 million on research and development expenses, of which $0.61 million and $0.34 million was attributable to MVAS and $0.59 million and $0.1 million was attributable to MPS.
 
 Income from Operations: Income from operations increased $5.4 million, or 64.6%, from $8.36 million for the year ended December 31, 2009 to $13.76 million for the year ended December 31, 2010, principally due to revenue growth associated with our geographic expansion into additional provinces. Income from operations margin rate decreased 5.8% from 62.2% for the year ended December 31, 2009 to 56.4% for the year ended December 31, 2010, mainly caused by the excessive increase of cost and expenses over the growth of revenue.
 
 Critical Accounting Policies and Estimates.  We prepare our financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among other things, assets and liabilities, contingent assets and liabilities and revenues and expenses. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from what we expect. This is especially true with some accounting policies that require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our audited consolidated financial statements because they involve the greatest reliance on our management’s judgment.
 
 Revenue Recognition.  We derive revenues from our MVAS Technology Platforms and Mobile Payment Solutions in the form of providing system integration, sales of software, patent licensing and maintenance services. With respect to the system integration, we sign contracts with telecommunication and mobile operators and system integrators to install and integrate the Group’s software with the hardware and software purchased from third-party suppliers. Deliverables of system integration include: software, hardware, integration, installation and training. No Post-Contract Customer Support (PCS) arrangement is included in system integration. Revenue is recognized when the last deliverable in the arrangement is delivered and when all of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the vendor’s fee is fixed or determinable; and (4) collectability is probable.
  6
 
 
 With respect to the sales of software, revenue is recognized when the last deliverable in the arrangement is delivered and when all of the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the vendor’s fee is fixed or determinable; and (4) collectability is probable.
 
 With respect to patent licensing, we enter into contracts with local system integrators who further contract with telecommunication and mobile operators, and provide these system integrators with our patents which permit the system integrators to use our patents. The system integrators pay the Group a one-time license fee for obtaining the programs and technologies. Patent licensing revenues are recognized when all revenue recognition criteria according to ASC 985-605 have been met.
 
 Revenue derived from technical support contracts primarily includes telephone consulting, on-site support, product updates, and releases of new versions of products previously purchased by the customers, as well as error reporting and correction services. Maintenance contracts are typically sold for a separate fee with initial contractual period of one year with renewal for additional periods thereafter. Technical support service revenue is recognized ratably over the term of the service agreement.
 
 Accounts Receivable.  We sell our products and services to telecommunication and mobile operators directly or through resellers. We do not require collateral from our customers.
 
 We perform ongoing credit evaluations of our customers and review the composition of accounts receivable, analyze historical bad debts, customer concentration, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate if allowance for doubtful accounts is needed.
 
 Recently issued accounting pronouncements
 
 The FASB issued ASU 2010-13, Compensation — Stock Compensation (ACS Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-J. The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.
 
 The amendments in the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. The amendments are to be applied by recording a cumulative-effect adjustment to beginning retained earnings. We are currently evaluating the impact of adopting this update on our consolidated financial statements.
 
 Foreign Currency Translation
 
 Our functional currency is the renminbi (“RMB”) which is not freely convertible into foreign currencies. We maintain our financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the date of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
  7
 
 
 For financial reporting purposes, our financial statements, which are prepared using the functional currency, have been translated into U.S. dollars. Assets and liabilities are translated at the exchange rates at the balance sheet date and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation adjustment of other comprehensive income, a component of stockholders’ equity.
 
 The exchange rates applied are as follows:
 
 December 31,2010


2009Year end RMB exchange rate
6.6118


6.8372Average RMB exchange rate
6.7788


6.8409
 
 There is no significant fluctuation in exchange rate for the conversion of RMB to U.S. dollars after the balance sheet date.
 
 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 December 31, 2010, our PRC subsidiaries and VIEs had aggregate unappropriated earnings of approximately $21.1 million 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.
 
 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:
 
 Years Ended December 31,2010


2009UnauditedNet cash flows used in operating activities

$
(8,637,933
)

$
(1,305,453
)Net cash flows used in investing activities


(999,465
)


(825,535
)Net cash flows provided by financing activities


16,333,451



5,046,382Effect of foreign currency fluctuation on cash and cash equivalents


258,224



(100,880
)Net increase (decrease) in cash and cash equivalents

$
6,954,277


$
2,814,514Cash and cash equivalents – beginning of year

$
3,305,473


$
490,959Cash and cash equivalents – end of year

$
10,259,750


$
3,305,473
 8
 
 
 Operating Activities
 
 Net cash flows used in operating activities for the year ended December 31, 2010 was $8.64 million as compared with $1.35 million used in operating activities for the year ended December 31, 2009, for a net increase of $7.28 million. This increase was mainly due to the significant increase in the change of accounts receivable, loans receivable and other current assets and inventory, offset by the effect of an increase in changes of tax payable and net income during the year ended December 31, 2010.
 
 The increase in the change of accounts receivable caused the operating cash flows to be out about $14.48 million. It’s mainly because of the increasing revenue, which increased by $11.38 million, from $13.47 million to $24.84 million for the year ended December 31, 2009 and 2010, respectively, while our revenue only increased by $0.55 million, when compared the data from year ended December 31, 2009 to year ended December 31, 2008.
 
 The decrease in operating cash flows was also attributable to a substantial increase in cash out flows from advances to suppliers of $6.88 million as of December 31, 2010 when compared to December 31, 2009, due to large demand of third party software and hardware to be used in our MVAS and MPS platform deployment in 2011, and also due to the fact that we obtained lower price through large purchase. While there was no material change in advance to suppliers as of December 31, 2009 when compared to December 31, 2008, there was no material effect on the cash flow by advance to suppliers for the year ended December 31, 2009.
 
 The inventory balance increased significantly by $3.37 million from $0.31 million as of December 31, 2009 to $3.68 million as of December 31, 2010, due to the purchase of point of sale systems from Verifone, related to the deployment of our mobile payment platforms.
 
 The increase in operating cash flows was attributable to a substantial increase in tax payable of $2.05 million as of December 31, 2010 when compared to December 31, 2009, due to our large gross margin which caused significant portion of value added tax output not offset by value added tax input.
 
 Investing Activities
 
 For the year ended December 31, 2010, our main use of investing activities was for loans to third parties. The cash payments used in investing activities was netted against the collections from amounts due from directors.
 
 Financing Activities
 
 Net cash flows provided by financing activities for the year ended December 31, 2010 was $16.33 million as compared with $4.95 million provided by financing activities for the year ended December 31, 2009.
 
 Of the $5 million contingently convertible notes as of December 31, 2009, $2 million was repaid in cash to the convertible note holders in February and March 2010, and $3 million was converted to 1,500,000 shares of common stock at $2.00 per share as a result of the share exchange and the February 2010 Offering.
 
 The cash provided by financing activities for the year ended December 31, 2010 included the net proceeds from the February 2010 Offering of $17.07 million and the short-term loan of $1.77 million, offset by the repayment of $2 million contingently convertible notes.
 
 Restricted Net Assets
 
 As a result of these PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as general reserve fund, our PRC operating entities are restricted in their ability to transfer a portion of their net assets to us. Amounts restricted include paid-in capital and statutory reserve funds of our PRC operating subsidiaries as determined pursuant to PRC generally accepted accounting principles, totaling approximately US$24.4 million as of December 31, 2010.
 
 Operating lease commitment
 
 We lease office space under a lease agreement with a term expiring in April 2014. The lease may be cancelled by either party with 30-days prior written notice.
  9
 
  Future minimum rental payments under this operating lease are as follows:
 
 Office RentalYear ending December 31, 2011


227,946Year ending December 31, 2012


155,897Year ending December 31, 2013


28,025Year ending December 31, 2014


6,171Total

$
418,039
 
 We do not have other commitments besides the commitment in office rental.
 
 Off-Balance Sheet Arrangements
 
 We currently have no off-balance sheet arrangements.
 
 Inflation
 
 Inflation has not historically been a significant factor impacting our financial results.
  Item 8.
Financial Statements and Supplementary Financial Data
 
 Consolidated Financial Statements
 
 The financial statements required by this item begin on page F-1 hereof.
  10
 
  PART IV
  Item 1.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 Exhibit

Number

Description2.1

Share Exchange Agreement, dated as of January 27, 2010(1)3.1

Amended Articles of Incorporation(1)3.2

Bylaws(1)4.1

Form of Investor Warrant(1)4.2

Registration Rights Agreement, dated as of February 10, 2010(1)4.3

Specimen Common Stock Certificate(5)4.4

Form of Underwriter Warrant(5)10.1

Subscription Agreement, dated as of February 10, 2010(1)10.2

Make Good Escrow Agreement(1)10.3

Form of Director Repayment Agreement(1)10.4

Exclusive Business Cooperation Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd. and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.5

Exclusive Option Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Wanchun Hou and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.6

Exclusive Option Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Qiang Li and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.7

Exclusive Option Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Liangyao Xie and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.8

Loan Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd. and Wanchun Hou(2)10.9

Loan Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd. and Qiang Li(2)10.10

Loan Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd. and Liangyao Xie(2)10.11

Power of Attorney of Wanchun Hou in favor of Trunkbow Asia Pacific (Shandong) Co., Ltd.(2)10.12

Power of Attorney of Qiang Li in favor of Trunkbow Asia Pacific (Shandong) Co., Ltd.(2)10.13

Power of Attorney of Liangyao Xie in favor of Trunkbow Asia Pacific (Shandong) Co., Ltd.(2)10.14

Share Pledge Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Wanchun Hou and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.15

Share Pledge Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Qiang Li and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.16

Share Pledge Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Liangyao Xie and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.17

Nominee Letter to Wanchun Hou(2)10.18

Nominee Letter to Qiang Li(2)10.19

Nominee Letter to Liangyao Xie(2)14.1

Code of Ethics(3)
 11
 
  21.1

Subsidiaries of Trunkbow Holdings International Limited(1)31.1*

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 *
Filed herewith.
  (1)
Incorporated herein by reference to the Registration Statement on Form 10 filed by Trunkbow on June 4, 2010.
  (2)
Incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form S-1/A filed by Trunkbow on December 15, 2010.
  (3)
Incorporated herein by reference to Amendment No. 4 to the Registration Statement on Form S-1/A filed by Trunkbow on January 18, 2011.
  12
 
  SIGNATURES
  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
  TRUNKBOW INTERNATIONAL HOLDINGS LIMITEDMarch 21, 2012

By:
/s/ Li Qiang(Date Signed)

Li Qiang, Chief Executive Officer
  Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
 
 Signature

Capacity

Date/s/ Dr. Hou WanChun

Chairman of the Board of Directors

March 21, 2012Dr. Hou WanChun/s/ Li Qiang

Chief Executive Officer and Director (Principal Executive Officer)

March
21, 2012Li Qiang/s/ Ye Yuan Jun

Chief Financial Officer (Principal Accounting Officer)

March
21, 2012Ye Yuan Jun/s/ Bao Jihong

Director

March 21, 2012Bao Jihong/s/ Wang Xin

Director

March
21, 2012Wang Xin/s/ Albert Liu

Director

March 21, 2012Albert Liu/s/ Regis Kwong

Director

March 21, 2012Regis Kwong/s/ Dr. Tan Kok Hui

Director

March 21, 2012Dr. Tan Kok Hui/s/ Iris Geng

Director

March 21, 2012Iris Geng/s/ Dr. Lv Ting Jie

Director

March 21, 2012Dr. Lv Ting Jie/s/ Huang Zhaoxing

Director

March 21, 2012Huang Zhaoxing/s/ Li Dong

Director

March 21, 2012Li Dong
  
  Exhibit Index
 
 Exhibit

Number

Description2.1

Share Exchange Agreement, dated as of January 27, 2010(1)3.1

Amended Articles of Incorporation(1)3.2

Bylaws(1)4.1

Form of Investor Warrant(1)4.2

Registration Rights Agreement, dated as of February 10, 2010(1)4.3

Specimen Common Stock Certificate(5)4.4

Form of Underwriter Warrant(5)10.1

Subscription Agreement, dated as of February 10, 2010(1)10.2

Make Good Escrow Agreement(1)10.3

Form of Director Repayment Agreement(1)10.4

Exclusive Business Cooperation Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd. and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.5

Exclusive Option Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Wanchun Hou and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.6

Exclusive Option Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Qiang Li and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.7

Exclusive Option Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Liangyao Xie and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.8

Loan Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd. and Wanchun Hou(2)10.9

Loan Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd. and Qiang Li(2)10.10

Loan Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd. and Liangyao Xie(2)10.11

Power of Attorney of Wanchun Hou in favor of Trunkbow Asia Pacific (Shandong) Co., Ltd.(2)10.12

Power of Attorney of Qiang Li in favor of Trunkbow Asia Pacific (Shandong) Co., Ltd.(2)10.13

Power of Attorney of Liangyao Xie in favor of Trunkbow Asia Pacific (Shandong) Co., Ltd.(2)10.14

Share Pledge Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Wanchun Hou and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.15

Share Pledge Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Qiang Li and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.16

Share Pledge Agreement among Trunkbow Asia Pacific (Shandong) Co., Ltd., Liangyao Xie and Trunkbow Technologies (Shenzhen) Co., Ltd.(2)10.17

Nominee Letter to Wanchun Hou(2)10.18

Nominee Letter to Qiang Li(2)10.19

Nominee Letter to Liangyao Xie(2)14.1

Code of Ethics(3)21.1

Subsidiaries of Trunkbow Holdings International Limited(1)31.1*

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
  *
Filed herewith.
  (1)
Incorporated herein by reference to the Registration Statement on Form 10 filed by Trunkbow on June 4, 2010.
  (2)
Incorporated herein by reference to Amendment No. 2 to the Registration Statement on Form S-1/A filed by Trunkbow on December 15, 2010.
  (3)
Incorporated herein by reference to Amendment No. 4 to the Registration Statement on Form S-1/A filed by Trunkbow on January 18, 2011.






REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Shareholders of
Trunkbow International Holdings Limited



We have audited the accompanying
consolidated balance sheet of Trunkbow International Holdings Limited (“the Company”) as of December 31, 2010, and
the related consolidated statement of income and comprehensive income, changes in stockholders’ equity and cash flows for
the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express
an opinion on these financial statements based on our audit.



We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.



In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2010, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.







March 31, 2011 except for Note 24, as to which
the date is December 30, 2011 New York, New York



F-1
  TRUNKBOW INTERNATIONAL HOLDINGS LIMITED
 CONSOLIDATED BALANCE SHEETS
 
 December 31,2010


2009ASSETS




UnauditedCurrent assetsCash and cash equivalents

$
10,259,750


$
3,305,473Restricted deposit


362,987



—Accounts receivable


25,658,184



10,455,284Advances to suppliers


6,881,368



7,580Loans receivable and other current assets, net


3,900,168



1,078,075Due from directors


79,256



2,088,168Inventories


3,681,450



307,182Total current assets


50,823,163



17,241,762Property and equipment, net


484,761



39,817Long-term prepayment


358,397



—TOTAL ASSETS

$
51,666,321


$
17,281,579LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilitiesAccounts payable

$
853,762


$
331,654Accrued expenses and other current liabilities


593,846



603,266Short-term loan


1,814,937



—Due to directors


—



24,430Contingently convertible notes


—



5,000,000Taxes payable


3,718,963



1,561,599Total current liabilities


6,981,508



7,520,949Other non-current liabilities


138,767



—Total liabilities


7,120,275



7,520,949COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS’ EQUITYPreferred Stock: par value USD0.001, authorized 10,000,000 shares, none issued and outstanding at December 31, 2010 and 2009


—



—Common Stock: par value USD0.001, authorized 190,000,000 shares, issued and outstanding 32,472,075 shares at December 31, 2010 and 19,562,888 at December 31, 2009


32,472



19,563Additional paid-in capital


21,384,050



1,323,239Appropriated retained earnings


2,428,847



1,010,486Unappropriated retained earnings


20,125,001



8,002,477Accumulated other comprehensive income/(loss)


575,676



(595,135
)Total stockholders’ equity


44,546,046



9,760,630TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
51,666,321


$
17,281,579
 
 See notes to the consolidated financial statements.
 
 F-2
  TRUNKBOW INTERNATIONAL HOLDINGS LIMITED
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
 Years Ended December 31,2010


2009UnauditedRevenues

$
24,843,836


$
13,468,581Less: Business tax and surcharges


455,919



38,624Net revenues


24,387,917



13,429,957Cost of revenues


4,929,974



2,220,577Gross margin


19,457,943



11,209,380Operating expensesSelling and distribution expenses


1,412,499



533,633General and administrative expenses


3,075,833



1,877,732Research and development expenses


1,203,264



435,7125,691,596



2,847,077Income from operations


13,766,347



8,362,303Interest income


(37,204
)


(350
)Interest expense


220,668



66,016Other expenses


41,998



3,655225,462



69,321Income before income tax expense


13,540,885



8,292,982Income tax expense


—



—Net income


13,540,885



8,292,982Foreign currency translation fluctuation


1,170,811



(92,830
)Comprehensive income

$
14,711,696


$
8,200,152Weighted average number of common shares outstandingBasic and diluted


31,022,002



19,562,888Earnings per shareBasic and diluted

$
0.44


$
0.42
 
 See notes to the consolidated financial statements.
 
 F-3
  TRUNKBOW INTERNATIONAL HOLDINGS LIMITED
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Years Ended December 31,2010


2009UnauditedCash flows from operating activitiesNet income

$
13,540,885


$
8,292,982Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization


93,135



20,362Loss on disposal of property and equipment


—



1,281Provision for doubtful debts






366,912Changes in operating assets and liabilities:Accounts receivable


(14,480,828
)


(9,791,845
)Advance to suppliers and other assets


(6,369,759
)


95,224Inventories


(3,280,951
)


(307,017
)Long-term prepayment


(784,576
)


(241,583
)Accounts payable


498,222



(85,218
)Accrued expenses and other current liabilities


118,273



383,859Amount due to directors


(24,641
)


24,417Taxes payable


2,052,307



(64,827
)Net cash flows used in operating activities


(8,637,933
)


(1,305,453
)Cash flows from investing activitiesAcquisition of property and equipment


(449,169
)


(4,729
)Loans to third parties


(2,579,165
)


57,070Collection in (increase in) amount due from directors


2,028,869



(877,876
)Collection in long-term receivables


—



—Net cash flows used in investing activities


(999,465
)


(825,535
)Cash flows from financing activitiesIncrease in restricted deposit


(362,987
)


—Proceeds from issuance of common stock (net of finance costs)


17,073,720



100,000Repayment of loans from third parties


(147,520
)


(53,618
)Repayment of contingently convertible notes


(2,000,000
)


—Proceeds from issuance of contingently convertible notes


—



5,000,000Proceeds from short-term loan


1,770,238



—Net cash flows provided by financing activities


16,333,451



5,046,382Effect of exchange rate fluctuation on cash and cash equivalents


258,224



(100,880
)Net increase in cash and cash equivalents


6,954,277



2,814,514Cash and cash equivalents – beginning of the year


3,305,473



490,959Cash and cash equivalents – end of the year

$
10,259,750


$
3,305,473Supplemental disclosure of cash flow informationCash paid for interest

$
220,668


$
—Cash paid for income taxes

$
—


$
—Supplemental disclosure of noncash financing activitiesConversion of contingently convertible notes to common stock

$
3,000,000


$
—
 
 See notes to the consolidated financial statements
 
 F-4
  TRUNKBOW INTERNATIONAL HOLDINGS LIMITED
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 
 Common stock


Additional

paid-in


Appropriated

retained


Unappropriated

retained


Accumulated

other

comprehensiveShares


Amount


Capital


earnings


earnings


income/(loss)


TotalBalance at January 1, 2009

$
19,562,888


$
19,563


$
1,323,239


$
27,518


$
692,463


$
(502,305
)

$
1,560,478Net income


-



-



-



-



8,292,982



-



8,292,982Appropriation of statutory surplus reserve


-



-



-



982,968



(982,968
)


-



-Foreign currency Translation adjustment


-



-



-



-



-



(92,830
)


(92,830
)Balance
at December 31, 2009 (unaudited)


19,562,888



19,563



1,323,239



1,010,486



8,002,477



(595,135
)


9,760,630Net income


-



-



-



-



13,540,885



-



13,540,885Stock issued in recapitalization


1,687,112



1,687



(1,687
)


-



-



-



-Issue of shares


11,222,075



11,222



20,062,498



-



-



-



20,073,720Appropriation of statutory surplus reserve


-



-



-



1,418,361



(1,418,361
)


-



-Foreign currency Translation adjustment


-



-



-



-



-



1,170,811



1,170,811Balance at December 31, 2010

$
32,472,075


$
32,472


$
21,384,050


$
2,428,847


$
20,125,001


$
575,676


$
44,546,046
 
 See notes to the consolidated financial statements.
 
 F-5
  TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
 1 — ORGANIZATION AND PRINCIPAL ACTIVITIES
 
 Trunkbow International Holdings Limited (formerly named as Bay Peak 5 Acquisition Corp. (“BP5”)) (the “Company”), was incorporated in the State of Nevada on September 3, 2004. The Company was formed as part of the implementation of the Chapter 11 reorganization plan (the “Visitalk Plan”) of visitalk.com, Inc. (“Visitalk.com”), a former provider of VOIP services. The Visitalk Plan was deemed effective by the Bankruptcy Court on September 17, 2004 (the “Effective Date”). On September 22, 2004, Visitalk.com was merged into VCC, which was authorized as the reorganized debtor under the Visitalk Plan.
 
 In February 2010, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Trunkbow International Holdings Limited, a company organized under the laws of the British Virgin Islands (“Trunkbow”), the shareholders of Trunkbow (the “Shareholders”), who together own shares constituting 100% of the issued and outstanding ordinary shares of Trunkbow (the “Trunkbow Shares”), and the principal shareholder of the Company (“Principal Shareholder”). Pursuant to the terms of the Exchange Agreement, the Shareholders transferred to the Company all of the Trunkbow Shares in exchange for the issuance of 19,562,888 (the “Shares”) shares of our common stock (the “Share Exchange”). As a result of the Share Exchange, Trunkbow became our wholly owned subsidiary. After giving effect to the Share Exchange, the sale of common stock in the February 2010 Offering (defined below) and the BP5 Warrant Financing referred to below (i) existing shareholders of Trunkbow owned approximately 60.25% of the Company’s outstanding Common Stock, (ii) purchasers of Common Stock in the Offering owned approximately 26.01% of the Company’s outstanding Common Stock (including 7.7% owned by VeriFone, Inc.), (iii) the holders of BP5 Warrants owned approximately 8.54% of the Company’s outstanding Common Stock and (iv) the pre-existing shareholders of BP5 owned approximately 5.2% of the Company’s outstanding Common Stock.
 
 Concurrent with the Share Exchange, (i) we entered into a securities purchase agreement (the “Purchase Agreement”) with certain investors (the “Investors”) for the sale of an aggregate of 8,447,575 shares (the “Investor Shares”) and 1,689,515 warrants (the “Investor Warrants”), for aggregate gross proceeds equal to $16,895,150 (the “February 2010 Offering”) and (ii) certain holders of outstanding warrants of the Company issued to creditors and claimants of visitalk.com., in accordance with the Visitalk Plan, referred to herein as the “BP5 Warrant Investors” exercised the 2,774,500 warrants owned by them for an aggregate exercise price of $5.5 million and received warrants to purchase an aggregate of 554,900 shares of Common Stock (“BP5 Warrant Financing”).
 
 The Company’s wholly owned subsidiary, Trunkbow, was established in the British Virgin Islands (“BVI”) on July 17, 2009, with no significant business operations and assets other than holding of equity interests in its subsidiaries and variable interest entity (“VIE”). Trunkbow’s wholly owned subsidiary, Trunkbow (Asia Pacific) Investment Holdings Limited (“Trunkbow Hong Kong”) was established as an Investment Holding Company in Hong Kong Special Administrative Region of the People’s Republic of China (the “PRC”) on July 9, 2004.
 
 Trunkbow Hong Kong established two wholly foreign owned subsidiaries in the PRC, Trunkbow Asia Pacific (Shandong) Company, Limited (“Trunkbow Shandong”) which was established on December 10, 2007 in Jinan, Shandong Province and Trunkbow Asia Pacific (Shenzhen) Company, Limited (“Trunkbow Shenzhen”) which was established on June 7, 2007 in Shenzhen, Guangdong Province. Both subsidiaries are principally engaged in research and development of application platforms for mobile operators in China.
 
 Trunkbow Technologies (Shenzhen) Company, Limited (“Trunkbow Technologies”) was established as a limited liability company on December 4, 2001 in Shenzhen, Guangdong Province, the PRC. Trunkbow Technologies was formerly engaged in research and development of application platforms for mobile operators in China as well as wireless application systems for the international market. In December 2007, a series of agreements were entered into amongst Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders, providing Trunkbow Shandong the ability to control Trunkbow Technologies, including its financial interest.  As a result of these contractual arrangements, which assigned all of Trunkbow Technologies’ equity owners’ rights and obligations to Trunkbow Shandong resulting in the equity owners lacking the ability to make decisions that have a significant effect on Trunkbow Technologies’ operations and Trunkbow Shandong’s ability to extract the profits from the operation of Trunkbow Technologies, and assume the Trunkbow Technologies’ residual benefits. Because Trunkbow Shandong and its indirect parent are the sole interest holders of Trunkbow Technologies, the Company consolidates Trunkbow Technologies from its inception consistent with the provisions of FASB Accounting Standards Codification (“ASC”) 810-10.
 
 The Company, its subsidiaries and VIE are collectively referred to as the “Group”.
    F-6
  2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 a)
Change of reporting entity and basis of presentation
 
 As a result of the Share Exchange on February 10, 2010, the former Trunkbow shareholders owned a majority of the common stock of the Company. The transaction was regarded as a reverse merger whereby Trunkbow was considered to be the accounting acquirer as its shareholders retained control of the Company after the Share Exchange, although the Company is the legal parent company. The share exchange was treated as a recapitalization of the Company. As such, Trunkbow (and its historical financial statements) is the continuing entity for financial reporting purposes. Pursuant to the terms of the Share Exchange, BP5 was delivered with no assets and no liabilities at time of closing. Following the Share Exchange, the company changed its name from Bay Peak 5 Acquisition Corp. to Trunkbow International Holdings Limited. The financial statements have been prepared as if Trunkbow had always been the reporting company and then on the share exchange date, had changed its name and reorganized its capital stock.
 
 The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and  include the accounts of the Company, and its subsidiaries and VIE, Trunkbow, Trunkbow Hong Kong, Trunkbow Shandong, Trunkbow Shenzhen and Trunkbow Technologies.
 
 b)
Principles of Consolidation
 
 The consolidated financial statements include the financial statements of the Company, the Company’s subsidiaries and the Company’s VIE. All transactions and balances between the Company and its subsidiaries and VIE  have been eliminated upon consolidation.
 
 c)
Reclassification
 
 The comparative figures have been reclassified to conform to current year presentation.
 
 d)
Use of estimates
 
 The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ from those estimates.
 
 e)
Foreign currency translation
 
 The functional currency of the Company is United States dollars (“US$”), and the functional currency of Trunkbow Hong Kong is Hong Kong dollars (“HK$”). The functional currency of the Company’s PRC subsidiaries and VIE is the Renminbi (“RMB”), and the PRC is the primary economic environment in which the Company operates.
 
 For financial reporting purposes, the financial statements of the Company’s PRC subsidiaries and VIE, which are prepared using the RMB, are translated into the Company’s reporting currency, the United States Dollar. Assets and liabilities are translated using the exchange rate at each balance sheet date. Revenue and expenses are translated using average rates prevailing during each reporting period, and shareholders’ equity is translated at historical exchange rates. Adjustments resulting from the translation are recorded as a separate component of accumulated other comprehensive income in shareholders’ equity.
  F-7
  The exchange rates applied are as follows:
 
 December 31,2010


2009Year end RMB exchange rate
6.6118


6.8372Average RMB exchange rate
6.7788


6.8409
 
 Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income of the consolidated financial statements for the respective periods.
 
 f)
Cash and cash equivalents
 
 Cash and cash equivalents represent cash on hand and deposits held at call with banks. The Group considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
 
 g)
Accounts receivable
 
 Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts as needed. The allowance for doubtful accounts is the Group’s best estimate of the amount of probable credit losses in the Group’s existing accounts receivable. The Group determines the allowance based on aging data, historical collection experience, customer specific facts and economic conditions. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Group did not have any off-balance-sheet credit exposure relating to its customers, suppliers or others. As of December 31, 2010 and December 31, 2009, management has determined that no allowance for doubtful accounts is required.
 
 h)
Inventory
 
 Inventories represent hardware and equipment and are stated at the lower of cost or market value, determined using the specific identification method.
 
 i)
Property and equipment, net
 
 Furniture and office equipment, electronic equipment and motor vehicles are recorded at cost less accumulated depreciation. Depreciation is calculated on the straight-line method after taking into account their respective estimated residual values over the following estimated useful lives:
 
 YearsMotor vehicles

5Furniture and office equipment

5Electronic equipment

3 – 5Telecommunication equipment

3 – 5Leasehold improvements

3
 
 Depreciation expense is included in cost of revenues, selling and distribution expenses, and general and administrative expenses.
 
 When furniture and office equipment, electronic equipment and motor vehicles are retired or otherwise disposed of, resulting gain or loss is included in net income or loss in the year of disposition for the difference between the net book value and proceeds received thereon. Maintenance and repairs which do not improve or extend the expected useful lives of the assets are charged to expenses as incurred.
  F-8
  Impairment of long-lived assets
 
 In accordance with Impairment or Disposal of Long-Lived Assets Subsections of FASB ASC Subtopic 360-10, Property, Plant, and Equipment — Overall, long-lived assets, such as property, plant and equipment, and purchased intangible asset subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Group first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairment of long-lived assets was recognized for the year ended December 31, 2010 and 2009, respectively.
 
 j)
Fair value measurement
 
 The Group applies the provisions of ASC Subtopic 820-10, Fair Value Measurements, for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC Subtopic 820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
 
 ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
 
 ASC Subtopic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
 
 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group has the ability to access at the measurement date.
 
 Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
 
 Level 3 inputs are unobservable inputs for the asset or liability.
 
 The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
 
 A discussion of the valuation technique used to measure the fair value of the warrant is provided in Note 15.
 
 The Group did not have any nonfinancial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2010 and 2009, respectively.
 
 k)
Revenue recognition
 
 The Group derives revenues from the MVAS Technology Platform and Mobile Payment Solutions in the form of providing system integration, sales of software, patent licensing, maintenance services and revenue sharing for the two services.
  F-9
  System integration
 
 For the system integration, the Group signs contracts with telecommunication and mobile operators and system integrators to install and integrate the Group’s software with the hardware and software purchased from third-party suppliers.
 
 Deliverables of system integration include: software, hardware, integration, installation, and training. No Post-Contract Customer Support (PCS) arrangement is included in system integration. The provision of services is substantially completed, i.e., when the Group purchases the hardware and software from third-party suppliers, integrates them together with the Group’s programs and software, and provides installation and training to customers, customers sign the final acceptance confirmation.
 
 System integration includes a significant software portion. The software is not regarded as incidental to the provision of services as a whole because the marketing of such services focuses on the internally developed technologies included in the software. Therefore, ASC 985-605, “Software Revenue Recognition”, is applicable for these services. The Group cannot establish vendor-specific objective evidence of the fair values of the deliverables; therefore, according to ASC 985-605, revenue is recognized when the last deliverable in the arrangement is delivered and when all of the following criteria have been met:
 
 (1)
Persuasive evidence of an arrangement exists;
 (2)
Delivery has occurred;
 (3)
The vendor’s fee is fixed or determinable; and
 (4)
Collectability is probable.
 
 Sales of software
 
 The Group enters into contracts with the mobile operators or the resellers to provide software that enables the mobile operators to provide mobile payment and value-added service to the end-users.
 
 The Group recognize revenue in accordance with ASC 985-605, (formerly Statement of Position (“SOP”) 97-2 Software Revenue Recognition, as amended and interpreted by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, with respect to certain transactions), as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants and Staff Accounting Bulletin No. 104, Revenue Recognition, that provides further interpretive guidance for public companies on the recognition, presentation and disclosure of revenue in financial statements. No PCS arrangement is included in software sales.
 
 The Group generally recognizes revenue from software and system services when all of the following criteria have been met, which is symbolized by the issuance of the final acceptance:
 
 (1)
Persuasive evidence of an arrangement exists;
 (2)
Delivery has occurred;
 (3)
The vendor’s fee is fixed or determinable; and
 (4)
Collectability is probable.
 
 Patent licensing
 
 The Group enters into contracts with local system integrators who further contract with telecommunication and mobile operators, and provides these system integrators with our patents which permit the system integrators to use the Group’s patents. The system integrators pay the Group a one-time license fee for obtaining the programs and technologies. According to the contracts, these integrators are responsible for the construction and maintenance of the system platform while the Group assists these integrators during construction in form of providing technologies and programs. No PCS is offered in the patent licensing arrangement. When the construction of system platform is completed, these integrators perform examination and sign the final acceptance.
 
 Patent licensing revenues are recognized when all revenue recognition criteria according to ASC 985-605-25 have been met, which is symbolized by the issuance of the final acceptance. Such criteria include: (i) persuasive evidence that an arrangement exists; (ii) delivery having occurred; (iii) whether the vender’s fee is fixed or determinable; and (iv) collectibility being probable. We recognize revenue under ASC 985-605-25 because:
 F-10
  (i)            It is our customary practice to have a signed written agreement between us and our customers.
 
 (ii)           According to these contracts, the integrators are responsible for the construction and maintenance of the system platform while we assist the integrators during construction in form of providing technologies and programs. Codes and programs were delivered to the integrators during the construction of the system platform. At the same time, we are obligated to provide training and support until the whole platform, including hardware incorporated with our codes and programs, is confirmed and accepted by the integrators. Revenue is recognized upon the final acceptance being signed by the integrators.
 
 (iii)          It is our policy to not provide customers the right to any adjustments or refund of any portion of their license fees paid, acceptance provisions, cancellation privileges, or rights of return.
 
 (iv)          Collectability is assessed on a customer-by-customer basis. The Company typically sells to customers for whom there is a history of successful collection, and new customers are subject to a credit review process that evaluates the customer’s ability to pay.
 
 Maintenance services
 
 Revenue derived from technical support contracts primarily includes telephone consulting, on-site support, product updates, and releases of new versions of products previously purchased by the customers, as well as error reporting and correction services. Maintenance contracts are typically sold for a separate fee with initial contractual period of one year with renewal for additional periods thereafter. Technical support service revenue is recognized ratably over the term of the service agreement.
 
 Revenue sharing
 
 We have three to five year contractual agreements with mobile carriers on deploying or managing the mobile value added service platforms or mobile payment platforms. We are obligated to provide maintenance services on the platforms and consulting services to the end-users, and also provide training to the mobile carriers’ employees.
 
 We share revenues with the mobile carriers based upon 10% to 60% of the fees billed to the end-users. The fees billed to the end-users and subject to revenue sharing include monthly functional fees and telephone bills. Revenue is recognized monthly upon the receipt of the sales and usage reports provided by the mobile carriers. Revenue is reported on a net basis since the mobile carriers act as principal when providing services to the end-users.
 
 Royalty income
 
 Other than the one-time license fee, the Group also receives royalties for each end-user subscribed to the services. Royalty revenue is recognized when earned and collectability is reasonably assured, based upon the receipt of reports from mobile carriers.
 
 l)
Cost of revenues
 
 Cost of revenues primarily includes cost of equipment and software purchased from third parties and labor costs.
 
 m)
Concentration  risk
 
 Credit risk
 
 Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Group places their cash and cash equivalents with financial institutions with high-credit ratings and quality.
  F-11
  The Group conducts credit evaluations of customers and generally does not require collateral or other security from customers. The Group establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors relevant to determining the credit risk of specific customers. The amount of receivables ultimately not collected by the Group has generally been consistent with management’s expectations and the allowance established for doubtful accounts.
 
 Major Customers
 The Group had sales to three and four customers that accounted for approximately 50.3% and 80.9% of revenues during the years ended December 31, 2010 and 2009, respectively. These customers accounted for approximately 55.7% and 85.2% of accounts receivable balance as of December 31, 2010 and 2009, respectively.
 
 Major Suppliers
 The Group had purchases from two vendors that accounted for approximately 57.2% and 75.1% of purchases during the years ended December 31, 2010 and 2009, respectively. These vendors accounted for approximately nil and 29.8% of accounts payable balance as of December 31, 2010 and 2009, respectively.
  F-12
  n)
Research and development expenses
 
 Research and development costs are incurred in the development of technologies in mobile value added service platform and mobile payment system, including significant improvements and refinements to existing products and services. The Group applies ASC985-20, “Costs of Computer Software to Be Sold, Leased, or Marketed”. In particular, nearly all of the research and development expenditure incurred since the Group’s formation has been to establish the technological feasibility of the Group’s software and techniques. As a result, all research and development costs are expensed as incurred.
 
 o)
Operating leases
 
 Leases where substantially all the rewards and risks of ownership of assets remain with the lesser are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods.
 
 p)
Taxation
 
 Income taxes
 
 The Group follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between of the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in which the differences are expected to reverse. The Group records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized in the income statement in the period that includes the enactment date. The Group had no deferred tax assets and liabilities recognized for any of the year ended December 31, 2010 and 2009, respectively.
 
 Value added taxes
 
 The Company’s PRC subsidiaries and VIE  are subject to value-added tax (“VAT”) on sales. For Trunkbow Technologies and Trunkbow Shandong, the VAT is calculated at a rate of 17% on revenues from sales of hardware and software as well as the installation and system integration services which are deemed as mixed-sale of goods and thus subject to VAT. Trunkbow Shenzhen is a small scale tax payer and the VAT is calculated at a rate of 3% on revenues.
 
 Pursuant to the policies issued by Ministry of Finance, State Taxation Administration and General Administration of Customs for Encouraging Software Industry and Integrated Circuits Industry issued in 2000, an enterprise classified as a “software enterprise” will be entitled to a rebate of its net VAT liability to the extent that it exceeds 3% of the actual VAT burden relating to self-developed software product sales.
 
 Business tax and surcharges
 
 The Company’s PRC subsidiaries and VIE are also subject to business tax at a rate of 5% on technical services revenues.
 
 q)
Uncertain tax positions
 
 ASC 740-10-25 prescribes a more likely than not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. For the year ended December 31, 2010 and 2009, the Group did not have any interest and penalties associated with tax positions and the Group did not have any significant unrecognized uncertain tax positions.
  F-13
  The Company’s subsidiaries and VIE are subject to taxation in PRC and other tax jurisdictions. There is no ongoing examination by taxing authorities at this time. Various tax years during the year ended December 31, 2010 and 2009 of the Company’s subsidiaries and VIE remain open in the relevant taxing jurisdictions.
 
 r)
Earnings per share
 
 Earnings per share is calculated in accordance with ASC 260, “Earnings Per Share”. Basic earnings per share is computed by dividing income attributable to holders of common stock by the weighted average number of common shares considered to be outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of outstanding common stock warrants is reflected in the diluted earnings per share by application of the treasury stock method when the impact is dilutive.
 
 s)
Appropriated Retained Earnings
 
 The income from the Company’s subsidiaries and VIE is distributable to its owners after transfer to statutory reserves as required by relevant PRC laws and regulations and the Company’s Articles of Association. As stipulated by the relevant laws and regulations in the PRC, the Company’s subsidiaries and VIE are required to maintain a statutory surplus reserve fund which is non-distributable to shareholders. Appropriations to such reserve are 10% of net profit after taxation determined in accordance with generally accepted accounting principles of the PRC.
 
 Statutory surplus reserve fund is established for the purpose of offsetting accumulated losses, enlarging productions or increasing share capital. The appropriation may cease to apply if the balance of the fund is equal to 50% of the entity’s registered capital.
 
 t)
Comprehensive income
 
 Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented on the accompanying consolidated balance sheets are the cumulative foreign currency translation adjustments.
 
 u)
Commitments and contingencies
 
 In the normal course of business, the Group is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide range of matters, including, among others, government investigations, product and environmental liability, and tax matters. In accordance with ASC 450-20, “Accounting for Contingencies”, the Group records accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Historically, the Group has not experienced any material service liability claims.
 
 v)
Recently enacted accounting standards
 
 The FASB issued ASU 2010-13, Compensation—Stock Compensation (ACS Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-J. The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.
 
 The amendments in the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. The amendments are to be applied by recording a cumulative-effect adjustment to beginning retained earnings. We are currently evaluating the impact of adopting this update on our consolidated financial statements.
  F-14
  3 — RESTRICTED DEPOSIT
 
 December 31,2010


2009UnauditedRestricted deposit

$
362,987


$
—
 
 The restricted deposit as of December 31, 2010 was security deposit for the short-term loan with balance of $ 1,814,937.
 
 4 — ACCOUNTS RECEIVABLE
 
 At December 31, 2010 and 2009, accounts receivable consisted of:
 December 31,2010


2009UnauditedAccounts receivable

$
25,658,184


$
10,455,284
 
 The Group has not recognized an allowance for doubtful receivables because there has not been a significant change in credit quality and the amounts are still considered recoverable. The Group does not hold any collateral or other credit enhancements over these balances. The Group has not had any write-off of trade receivables during the period presented. $3,863,588 was subsequently collected by March 31, 2011.
 
 5 — ADVANCE TO SUPPLIERS
 
 At December 31, 2010 and 2009, advance to suppliers consisted of:
 December 31,2010


2009UnauditedAdvances to suppliers

$
6,881,368


$
7,580
 
 Advances to suppliers represents prepayment to the Group's distributors for the purchase of third party software and hardware to be used in our MVAS/MPS platforms.
  F-15
 
 6 — LOANS RECEIVABLE AND OTHER CURRENT ASSETS, NET
 
 Loans receivable and other current assets at December 31, 2010 and 2009 are summarized as follows:
 
 December 31,2010


2009UnauditedPrepaid advertisement

$
483,983


$
—Deposits


49,199



18,320Loans to third parties


3,187,190



1,163,600Staff advances


257,974



10,243Prepaid expenses


210,791



241,713Others


77,943



11,111$
4,267,080


$
1,444,987Less: Allowance for doubtful debt


366,912



366,912$
3,900,168


$
1,078,075
 
 Prepaid advertisement is amortized as the expense incurred. Advertising expense for the year ended December 31, 2010 and 2009 were $118,016 and nil, respectively.
 
 Loans to third party represent loans to the Company’s distributors. As part of the support for our MVAS/MPS deployment, the Company advanced funds in the form of loan to the distributors for the purchase of third party software and hardware. Once the hardware and software is delivered to the carriers, the distributors will get paid and repay the loan to us. As of March 31, 2011, $1,527,572 of loans to third parties were subsequently collected.
 
 7 — AMOUNT DUE FROM (TO) DIRECTORS
 
 a) As of December 31, 2010 and 2009, amount due from directors consisted of:
 
 December 31,2010


2009UnauditedAmount due from Directors

$
79,256


$
2,088,168
 
 Amount due from directors represented advance to the directors for expenses to be paid on behalf of the company.
 
 b) At December 31, 2010 and 2009, amount due to directors consisted of:
 
 December 31,2010


2009UnauditedAmount due to Directors

$
—


$
24,430
 
 8 — INVENTORIES
 
 At December 31, 2010 and 2009, inventories consisted of:
 
 December 31,2010


2009UnauditedSystem integration hardware

$
825,818


$
307,182Point of sale systems


2,855,632



-$
3,681,450


$
307,182
  F-16
 
 The point of sale systems were purchased from Verifone, a related party of the Company.
 
 9 — PROPERTY AND EQUIPMENT, NET
 
 Property and equipment of the Group mainly consists of furniture and office equipment and electronic equipment located in the PRC.
 
 Property and equipment as of December 31, 2010 and 2009 are summarized as follows:
 
 December 31,2010


2009UnauditedMotor vehicles

$
51,386


$
—Furniture and office equipment


103,242



47,637Electronic equipment


287,231



63,868Telecommunication equipment


115,165



—Leasehold improvement


58,250



—615,274



111,505Less: Accumulated depreciation


130,513



71,688$
484,761


$
39,817
 
 Depreciation expense for the years ended December 31, 2010 and 2009 was $93,135 and $20,362, respectively.
 
 10 — LONG-TERM PREPAYMENT
 
 December 31,2010


2009UnauditedOffice rental

$
45,689


$
—Prepaid membership fee


268,711



—Others


43,997



—$
358,397


$
—
 
 11 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
 
 The breakdowns of accrued expenses and other current liabilities as of December 31, 2010 and 2009 are as follows:
 
 December 31,2010


2009UnauditedAccrued payroll

$
177,290


$
56,719Advance from customers


75,622



48,265Loans from third parties


37,811



146,259Advances to staff


143,341



93,772Accrued expenses


94,060



166,016Others


65,722



92,235$
593,846


$
603,266
  F-17
 
 Loans from third parties are short-term and non-interest bearing.
 
 12 — SHORT-TERM LOAN
 
 December 31,2010


2009UnauditedShort-term loan

$
1,814,937


$
—
 
 The short-term loan as of December 31, 2010 was borrowed from China Bohai Bank, guaranteed by Trunkbow Shandong, Mr. Wanchun Hou and Mr. Qiang Li, and secured by a restricted deposit of $362,987. The loan is due on May 5, 2011 with floating lending rate, 25% up PBOC benchmark rate. The interest expense related to the short term loan was $93,118 for the year ended December 31, 2010.
 
 13 — CONTINGENTLY CONVERTIBLE NOTES
 
 December 31,2010


2009UnauditedBridgeway Asset Management Limited

$
—


$
1,000,000Bay Peak LLC


—



2,000,000Mengyuan Song


—



2,000,000$
—


$
5,000,000
 
 Among the $5,000,000 contingently convertible notes, $1,000,000 was repaid in cash to Bridgeway in March 2010, $1,000,000 was repaid in cash to Bay Peak LLC in February 2010, and another $1,000,000 was converted to 500,000 shares at $2.00 per share as a result of the share exchange. The convertible notes of $2,000,000 issued to Mengyuan Song were converted to 1,000,000 shares at $2.00 per share in the February 2010 Offering.
 
 The interest expenses related to contingently convertible notes were $126,782 and $66,016 for the years ended December 31, 2010 and 2009, respectively.
 
 14 — TAXES PAYABLE
 
 December 31,2010


2009UnauditedValue Added Tax Payable

$
2,152,999


$
314,326Income Tax Payable


1,290,066



1,247,273Others


275,898



—$
3,718,963


$
1,561,599
 
 15 — OTHER NON-CURRENT LIABILITIES
 
 December 31,2010


2009UnauditedOther non-current liabilities

$
138,767


$
—
  F-18
  Other non-current liabilities represented government subsidy. Such subsidy is not treated as taxable income and must be used for funding its software research and development.
 
 16 — INCOME TAXES
 
 Corporation Income Tax (“CIT”)
 
 (i)           The Company is incorporated in the state of Nevada. Under the current law of Nevada, the Company is not subject to state corporation income tax. The Company became a holding company and does not conduct any substantial operations of its own after the Share Exchange. No provision for federal corporate income tax has been made in the financial statements as the Company has no taxable income for the year ended December 31, 2010. And earnings in the PRC are intended to be permanently reinvested in the PRC operation.
 
 Trunkbow was established in the British Virgin Islands on July 17, 2009. Under the current laws of the British Virgin Islands, Trunkbow is not subject to tax on income or capital gains. In addition, upon payments of dividends by Trunkbow, no British Virgin Islands withholding tax is imposed.
 
 Trunkbow Hong Kong was incorporated in Hong Kong on July 9, 2004. Trunkbow Hong Kong did not earn any income that was derived in Hong Kong for the year ended December 31, 2010 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.
 
 (ii)           PRC subsidiaries and VIE
 
 The subsidiaries and VIE incorporated in the PRC are generally subject to a corporate income tax rate of 25% commencing January 1, 2008 except for those subsidiaries and VIE that enjoy tax holidays or preferential tax treatment, as discussed below.
 
 Trunkbow Shandong
 
 Trunkbow Shandong, a PRC company, is a wholly foreign-owned entity under PRC law and is governed by the income tax law of the PRC and is subject to PRC enterprise income tax. The statutory income tax rate commencing January 1, 2008 was 25%.
 
 On October 16, 2009, Trunkbow Shandong was certified as a software enterprise by Shandong Economic and Information Technology Committee. Pursuant to the PRC tax laws, newly established and certified software enterprises are entitled to tax preferential policies of full exemption from income tax for the first two years and a 50% reduction for the next three years, commencing from the first profit-making year after offsetting all tax losses carried forward from the previous five years. The first profit making year for Trunkbow Shandong was 2009. On January 7, 2010, Trunkbow Shandong obtained the official approval from the tax bureau of Shandong Province Jinan City High-tech Industry Development Zone on the preferential tax exemption.
 
 Pursuant to the aforementioned taxation laws, Trunkbow Shandong was exempt from income tax for the years ended December 31, 2009 and 2010, and thereafter, a half tax rate of 12.5% will be enacted for the years ended December 31, 2011, 2012 and 2013.
 
 Trunkbow Shenzhen
 
 Trunkbow Shenzhen, a PRC company, is a wholly foreign-owned entity under PRC law. Because it was incorporated in Shenzhen, a special economic zone in the PRC, is entitled to preferential income tax rate of 15% in 2007. According to the pronouncement of tax bureau, for companies established after March 16, 2007, the income tax rate will be immediately raised to the unified tax rate of 25% started from January 1, 2008. As Trunkbow Shenzhen was established on September 7, 2007, the income tax rate from year 2008 on was 25%. Trunkbow Shenzhen was in net operation loss for the year ended December 31, 2010 and no income tax provision was recorded.
  F-19
  Trunkbow Technologies
 
 Trunkbow Technologies was registered in Shenzhen, a special economic zone in the PRC, which is entitled to preferential income tax rates of 18% and 15% in 2008 and 2007 respectively. According to the pronouncement of tax bureau, for companies established before March 16, 2007, the income rate will gradually increase to 25% within 4 years, 20% in 2009, 22% in 2010, 24% in 2011 and 25% from 2012. Trunkbow Technologies was not recording a current year tax provision because it was utilizing prior year net operation carryforward.
 
 The following is a reconciliation of tax computed by applying the statutory income tax rate to PRC operations to income tax expenses for years ended December 31, 2010 and 2009 respectively:
 
 Years Ended December 31,2010


2009UnauditedPRC statutory tax rate


25
%


25
%Accounting income before tax

$
14,256,065


$
8,553,059Computed expected income tax expenses


3,564,016



2,138,265Loss from subsidiaries and contractually controlled entity


18,452



349,627Less: tax exemption


3,458,473



2,487,892Less: net operation loss carryforward


123,895



—Income tax expenses

$
—


$
—
 
 17— STOCKHOLDERS’ EQUITY
 
 In a reverse acquisition the historical stockholders’ equity of the accounting acquirer prior to the merger is retroactively reclassified (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any difference in par value of the registrant’s and the accounting acquirer’s stock by an offset in paid in capital.
 
 Common stock
 
 Pursuant to the terms of the Share Exchange Agreement, Trunkbow shareholders transferred to the Company all of the Trunkbow shares in exchange for the issuance of 19,562,888 shares of the Company’s common stock. Accordingly, the Company reclassified its common stock and additional paid-in-capital accounts for the year ended December 31, 2009.
 
 The Company authorized 10,000,000 shares of preferred stock, with a par value of $.001 per share, but no preferred shares were issued and outstanding as of December 31, 2010.
 
 Pursuant to the Purchase Agreement entered into concurrently with the Share Exchange Agreement, an aggregate of 8,447,575 shares and 1,689,515 warrants were sold for aggregate gross proceeds equal to $16,895,150. Certain holders of outstanding warrants of the Company issued to creditors and claimants of visitalk.com, Inc. in accordance with such company’s Chapter 11 reorganization plan exercised the 2,774,500 warrants owned by them for an aggregate exercise price of $5.5 million and received warrants to purchase an aggregate of 554,900 shares of Common Stock.
 
 Net proceeds were approximately $20,100,000 (including the conversion of $3,000,000 from contingently convertible notes to common stock), net of issuance costs of $2,370,431, including (1) placement agent fees of $1,568,091 to Merriman Curhan Ford & Co.; (2) legal and professional fees of $555,510 and (3) other fees directly related to the financing of $246,830.
 
 Warrants
 
 In connection with the February 2010 offering, we issued warrants to purchase 2,805,519 shares of common stock at an exercise price of $2.00. The warrants have a five year term and are excisable immediately. The exercise price and number of shares of Common Stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation.
  F-20
 
 No fractional shares will be issued upon exercise of the warrants. If, upon exercise of a warrant, a holder would be entitled to receive a fractional interest in a share, we will pay to the holder cash equal to such fraction multiplied by the then fair market value of one full share.
 
 The estimated fair values of the warrants issued to investors were determined at February 10, 2010 using Binominal Option Pricing Model. The fair values of the warrants are summarized as follows:
 
 Fair value of warrant per share (US$) at date of issuance: $1.18
 
 Key assumptions adopted in Binomial Option Pricing Model for the estimation of the fair value of the warrants outstanding were summarized as follows:
 
 Expected volatility


73
%Expected dividends yield


0
%Time to maturity

5 yearsRisk-free interest rate per annum


2.218
%Fair value of underlying common shares (per share)

$
1.95
 
 As of December 31, 2010, no outstanding warrants had been exercised.
 
 In connection with our IPO in February 2011, Roth Capital Partners, LLC received warrants to purchase a number of shares of our common stock equal to 5% of the shares of common stock issued in the offering. The warrants have a term of three years, have an exercise price equal to 120% of the public offering price of the common stock, provide for cashless exercise at all times and, in accordance with FINRA Rule 5110(g)(1), may not be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such warrant by any person for a period of 180 days immediately following the effective date of the registration statement, except as provided in FINRA Rule 5110(g)(2).
 
 Escrow shares
 
 In connection with the Share Exchange Agreement, Chief Honor Investments Limited and Capital Melody Limited (collectively referred to as “Controlling Stockholders”) entered into an Investor Side Letter Agreement with certain investors (“Investors”). Pursuant to the side letter, a) the Controlling Stockholders agree to deliver to the Investors, as a group, an aggregate of 337,500 shares of Common Stock of the Company, if the Company fails to achieve at least $8,000,000 in consolidated net income in accordance with the U.S. generally accepted accounting principles as set forth in the final audit for Trunkbow’s consolidated group for the fiscal year ending December 31, 2009; b) If the Company’s consolidated net income per share for the year ended December 31, 2010 (the “Actual 2010 EPS”) is not at least $0.37 on a fully diluted basis then the Controlling Stockholders shall deliver additional shares, on a pro rata basis to each Investor, with the maximum aggregate number of 8,437,500 shares; c) if the Company fails to cause its Common Stock to be listed on the NASDAQ Stock market, the NYSE Amex or the New York Stock Exchange within twelve months of the effective date of the Form 10 registration statement, each of the Controlling Shareholders agrees that they shall immediately issue and deliver to the Investors, as a group, an aggregate of 675,000 shares of Common Stock of the Company, to be divided among each Investor on a pro rata basis as partial liquidated damages and not as a penalty.
 
 The purpose of the Investor Side Letter Agreement was an inducement made to facilitate the respective offerings, and not part of a compensatory arrangement to management. The escrow shares will not be released or cancelled due to the discontinued employment of any management of the Company.
 
 18 — REVENUES AND COST OF REVENUES
 
 The following consolidated result of operations includes the results of operations of the Company, all the subsidiaries and our contractually controlled entity, Trunkbow Technologies (Shenzhen) Company, Limited.
  F-21
 
 For the years ended December 31, 2010 and 2009, revenues and cost of revenues consisted of:
 
 Years Ended December 31,2010


2009UnauditedGross RevenuesSystem integration

$
9,368,839


$
8,496,191Software sales


14,916,350



4,230,450Maintenance service


404,513



672,564Shared revenue


154,134



69,37624,843,836



13,468,581Less:Business tax and surcharges


455,919



38,624Cost of RevenuesEquipment costs


4,182,148



2,040,591Labor Costs


747,826



179,9864,929,974



2,220,577Gross margin

$
19,457,943


$
11,209,380
 
 19 — SEGMENT INFORMATION
 
 ASC 280, Segment Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Group’s chief operating decision maker is the Chief Executive Officer, who reviews consolidated results of operations prepared in accordance with U.S. GAAP when making decisions about allocating resources and assessing performance of the Group; hence, the Group has only one operating segment.
 
 The Group operates in the PRC and all of the Group’s long-lived assets are located in the PRC. As of December 31, 2010, the Company provides two products and services: MVAS Technology Platforms and Mobile Payment Solutions. MVAS Technology Platforms enable the operators to offer mobile value added services to end-users through our major products including Caller Color Ring Back Tone, Number Change Notification and Color Numbering. Mobile Payment Solutions allows RF-SIM (radio frequency SIM) enabled mobile phones worldwide to be utilized as payment tools and authentication devices, and also enables the end-user to consolidate a variety of functions and services into one phone.
 
 We do not track our assets by operating segments. Consequently, it is not practical to show assets by operating segments results.
 
 The gross revenues and cost of revenues consist of the following products and services:
 
 Years Ended December 31,2010


2009UnauditedMVAS Technology PlatformsGross Revenues

$
12,660,109


$
10,135,865Business tax and surcharges


345,628



38,624Cost of Revenues


1,124,594



1,459,980$
11,189,887


$
8,637,261Mobile Payment SolutionsGross Revenues

$
12,183,727


$
3,332,716Business tax and surcharges


110,291



—Cost of Revenues


3,805,380



760,597$
8,268,056


$
2,572,119
  F-22
 
 20 — EMPLOYEE DEFINED CONTRIBUTION PLAN
 
 Full time employees of the Group in the PRC participate in a government mandated defined contribution plan, pursuant to which certain pension benefits, medical care, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the PRC subsidiaries of the Group make contributions to the government for these benefits based on certain percentages of the employees’ salaries. The Group has no legal obligation for the benefits beyond the contributions made. The total amounts for such employee benefits, which were expensed as incurred, were  $255,909 and $212,182 for years ended December 31, 2010 and 2009, respectively.
 
 21 — COMMITMENTS AND CONTINGENCIES
 
 Commitments
 
 Leasing Arrangements
 
 The Group has entered into commercial leases for offices with a term expiring in April 2014. The lease may be cancelled by either party with 30-days prior written notice. Future minimum rental payments under this operating lease are as follows:
 
 Office RentalYear ending December 31, 2011

$
227,946Year ending December 31, 2012


155,897Year ending December 31, 2013


28,025Year ending December 31, 2014


6,171Total

$
418,039
 
 Contingencies
 
 Contingencies through March 31, 2011 have been considered by the Company and none were noted which were required to be disclosed.
 
 22 — EARNINGS PER SHARE
 
 Years Ended December 31,2010


2009UnauditedNumerator:Net income

$
13,540,885


$
8,292,982Denominator:Weighted average number of common shares outstanding-Basic and diluted


31,022,002



19,562,888Earnings per share-Basic and diluted

$
0.44


$
0.42
  F-23
  All share and per share data have been retroactively adjusted to reflect the recapitalization of the Company after the share exchange agreement. As of December 31, 2010, the Company has not traded in the public market, the Company considered the fair value of the warrants per share at date of issuance by using Binominal Option Pricing Model as the market price per share of the common stock which was $1.18, and because this market price is lower than the exercise price per share of the warrants which is $2, there is no dilutive effective on the earnings per share.
 
 23 — RELATED PARTY TRANSACTIONS
 
 1) Purchase from related parties
 Years Ended December 31,2010


2009UnauditedVeriFone Electronic (Beijing) Co., Ltd.

$
5,035,589


$
—
 
 VeriFone invested $5 million in the February 2010 Offering and owns 7.7% of our common stock as of December 31, 2010. We have granted VeriFone the ability to name one of the directors on our Board of Directors so long as it beneficially owns at least 4.99% of our outstanding Common Stock.
 
 Verifone Electronic (Beijing) Co., Ltd is the subsidiary of Verifone in China.
 
 24 — VARIABLE INTEREST ENTITIES
 
 To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through its variable interest entity.
 
 In December 2007, a series of agreements were entered into amongst Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders, providing Trunkbow Shandong the ability to control Trunkbow Technologies, including its financial interest.
 
 Resulting from the contractual arrangements between Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders, the Company includes the assets, liabilities, revenues and expenses of Trunkbow Technologies in its consolidated financial statements.  The contractual arrangements with Trunkbow Technologies are summarized below:
 
 Exclusive Business Cooperation Agreements.Pursuant to Exclusive Business Cooperation Agreements entered into amongst Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders in December 2007, Trunkbow Shandong has the exclusive right to provide to our PRC operating subsidiaries complete technical support, business support and related consulting services, which include, among other things, technical services, business consultations, equipment or property leasing, marketing consultancy and product research. Each of our PRC operating subsidiaries has agreed to pay an annual service fee to Trunkbow Shandong equal to 100% of its audited total amount of operational income each year.  Each of our PRC operating subsidiary has also agreed to pay a monthly service fee to Trunkbow Shandong equal to 100% of the net income generated on a monthly basis. The payment and terms of payment are fixed to ensure that Trunkbow Shandong obtains 100% of the net income for that month, although adjustments may be made upon approval by Trunkbow Shandong to provide for operational needs. If at year end, after an audit of the financial statements of any of our PRC operating subsidiaries, there is determined to be any shortfall in the payment of 100% of the annual net income, such PRC operating subsidiary must pay such shortfall to Trunkbow Shandong. Each agreement has a ten-year term, subject to renewal and early termination in accordance with the terms therein.
 
 Exclusive Option Agreements.Under Exclusive Option Agreements entered into amongst Trunkbow Shandong, Trunkbow Technologies and its controlling shareholders in December 2007, each of the PRC Shareholders irrevocably granted to Trunkbow Shandong or its designated person an exclusive option to purchase, to the extent permitted by PRC law, a portion or all of their respective equity interest in any PRC Operating Subsidiary for a purchase price of RMB10 or a purchase price to be adjusted to be in compliance with applicable PRC laws and regulations. Trunkbow Shandong or its designated person has the sole discretion to decide when to exercise the option, whether in part or in full. Each of these agreements has a ten-year term, subject to renewal at the election of Trunkbow Shandong.
 
 Share Pledge Agreements. Under the Share Pledge Agreements entered into by and among Trunkbow Shandong, our PRC operating subsidiaries and each of Mr. Wanchun Hou, Mr. Qiang Li and Mr. Liangyao Xie, (the “PRC Shareholders”) in December 2007, the PRC Shareholders pledged, all of their equity interests in PRC Operating Subsidiaries to guarantee our PRC operating subsidiaries’ performance of its obligations under the Exclusive Business Cooperation Agreement. If the PRC operating subsidiaries or any of the PRC Shareholders breaches its/his/her respective contractual obligations under this agreement, or upon the occurrence of one of the events regarded as an event of default under each such agreement, Trunkbow Shandong, as pledgee, will be entitled to certain rights, including the right to dispose of the pledged equity interests. The PRC Shareholders  agreed not to dispose of the pledged equity interests or take any actions that would prejudice Trunkbow Shandong's interest, and to notify Trunkbow Shandong of any events or upon receipt of any notices which may affect Trunkbow Shandong's interest in the pledge. Each of the equity pledge agreements will be valid until all the payments due under the Exclusive Business Cooperation Agreement have been fulfilled.
  F-24
 
 Powers of Attorney. The PRC Shareholders each executed a power of attorney in December 2007, to appoint Trunkbow Shandong as their exclusive attorneys-in-fact to vote on their behalf on all matters with respect to our PRC operating subsidiaries that require shareholder approval.  The term of each power of attorney is valid so long as such shareholder is a shareholder of the respective PRC operating subsidiary.
 
 As a result of these contractual arrangements, we are considered to be the primary beneficiary of Trunkbow Technologies; we consolidate the results of operations, assets and liabilities of Trunkbow Technologies in our financial statements. Although we have been advised by our PRC legal counsel that each contract under these contractual arrangements is valid and binding under current PRC laws and regulations, our contractual arrangements with Trunkbow Technologies may not be as effective in providing us with control over the Trunkbow Technologies as direct ownership. We rely on these contractual rights to effect control and management of the VIE, which exposes us to the risk of potential breach of contract by the shareholders of Trunkbow Technologies for a number of reasons. For example, their interests as shareholders of Trunkbow Technologies and our interests may conflict and we  may fail to resolve such conflicts; the shareholders may believe that breaching the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act in bad faith. If any of the foregoing were to happen, we may have to rely on legal or arbitral proceedings to enforce our contractual rights, including specific performance or injunctive relief, and claiming damages. Such arbitral and legal proceedings may cost substantial financial and other resources, and result in disruption of our business, and we cannot assure that the outcome will be in our favor. Apart from the above risks, there are no significant judgments or assumptions regarding enforceability of the contractual agreements with Trunkbow Technologies.
 
 In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in the PRC if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. At present, the equity interest pledge agreement has not been registered with the relevant PRC authorities, which will affect our ability to enforce its provisions prior to such registration. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our VIE, and our ability to conduct our business may be materially and adversely affected. If the applicable PRC authorities invalidate our contractual arrangements for violation of PRC laws, rules and regulations, in such an event, we would lose control of the VIE resulting in its deconsolidation in financial reporting and loss in our market valuation.
 
 In addition, if our VIE or all or part of its assets become subject to court injunctions or asset freezes or liens or rights of third-party creditors, we may be unable to continue some of our businesses, which could adversely affect our business, financial condition and results of operations. If our VIE undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of its assets. The occurrence of any of these events may hinder our ability to operate business, which could in turn materially harm our business and ability to generate revenues and cause the market price of our ordinary shares to decline significantly.
 Most of our operations are conducted through our affiliated companies, including our VIE which we control through contractual agreements in the form of a variable interest entity. Current regulations in the PRC permit our PRC subsidiaries to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these PRC affiliates to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations.
 
 Under PRC law, our subsidiary may only pay dividends after 10% of its after-tax profits have been set aside as reserve funds, unless such reserves have reached at least 50% of its registered capital. Such cash reserve may not be distributed as cash dividends.
 
 The PRC Income Tax Law also imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprise without any establishment or place within China or if the received dividends have no connection with such foreign investors’ establishment or place within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
  F-25
 
 Summary information regarding consolidated VIE is as follows:
 
 December 31,

December 31,2010

2009UnauditedAssets:Cash and cash equivalents

$
904,614


$
392,954Accounts receivable


2,740,005



317,894Loans receivable and other current assets, net


243,449



829,703Inventories


67,202



179,444Due from directors


4,611



-Property and equipment, net


24,980



31,783Total Assets

$
3,984,861


$
1,751,778Liabilities:Accounts payable

$
5,276


$
15,188Accrued expenses and other current liabilities


215,064



434,309Due to directors


15,970



62,527Short-term loan


1,814,937



-Taxes payable


1,758,905



1,604,563Total Liabilities

$
3,810,152


$
2,116,587
 
 The assets of the VIE can be used only to settle the obligations of the VIE. Conversely, liabilities recognized as of consolidating VIE do not represent additional claims on the Company’s assets.
 
 For the fiscal year ended December 31, 2010, the financial performance of VIE reported in the consolidated statements of income and comprehensive income includes revenues of $2,879,686, cost of revenues of $1,781,515, operating expenses of $480,184 and net income of $495,580.
 
 For the fiscal year ended December 31, 2009, the financial performance of VIE reported in the consolidated statements of income and comprehensive income includes revenues of $1,216,120, cost of revenues of $470,844, operating expenses of $2,082,623 and net loss of $1,371,227.
 
 25 —  SUBSEQUENT EVENTS
 
 The Company has evaluated subsequent events from the balance sheet date through the date that the financial statements are issued and material subsequent event is as follows:
 
 On February 3, 2011, the Company announced its initial public offering of 4,000,000 shares of Common Stock priced at $5.00 per share. The shares began trading on February 3, 2011, on the NASDAQ Global Market under the ticker symbol "TBOW". The net proceeds are $18,109,988 after deduction of $1,400,000 of underwriter’s commission, and $490,012 of legal and professional fees.
 
 We entered into a series of contractual arrangements with Beijing Delixunda Technology Co., Ltd. (“Delixunda”)and its shareholders on March 10, 2011. Delixunda is a telecom value-added service licensed company and was established as a limited liability company on December 1, 2009 in Beijing, the PRC. Delixunda has no operations prior to February 10th, 2011. As a result of the contractual arrangements with Delixunda, we indirectly own the telecom value-added service license, which would enable us to offer telecom wireless value-added content service to individual clients.
  F-26