Trunkbow International (TBOW) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2013

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-35058

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED

(Exact name of small business issuer as specified in its charter)

Nevada	75-3552213
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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)

+ (86) 10-85712518

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 during the past 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. Yes x 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 (§232.405 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 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 “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer¨	Accelerated filer¨
Non-accelerated filer¨	Smaller Reporting Companyx

(Do not check if a smaller reporting company)

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

The number of shares outstanding of each of the issuer’s classes of common equity, as of November 11, 2013 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	36,807,075

Table of Contents	Page
PART I: FINANCIAL INFORMATION	3
Item 1 Financial statements
Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	3
Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)	4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)	5
Notes to Consolidated Financial Statements (Unaudited)	6
Item 2 Management Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3 Quantitative and Qualitative Disclosure about Market Risk	37
Item 4 Controls and Procedures	37
PART II : OTHER INFORMATION	37
Item 1 Legal Proceedings	37
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3 Defaults Upon Senior Securities	37
Item 4 Mine Safety Disclosures	37
Item 5 Other Information	37
Item 6 Exhibits	38
SIGNATURES	39

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PART I.FINANCIAL STATEMENTS

TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,		December 31,
	2013		2012
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents*	$	1,926,440	$	783,074
Accounts receivable, net*		50,803,056		46,240,651
Advances to suppliers, net		9,527,310		12,478,788
Prepayments		401,534		496,372
Other current assets*		1,866,047		9,717,929
Loans to third parties		9,459,944		4,787,116
Due from directors*		417,132		9,350
Inventories*		8,569,191		5,506,740
Assets held for sale		3,925,051		3,817,913
Deferred tax asset		1,095,268		942,028
Total current assets		87,990,973		84,779,961
Property and equipment, net*		36,294,169		30,425,160
Land use right, net		5,902,259		5,831,641
Intangible assets, net		1,129,774		271,894
Long-term prepayment*		262,544		368,985
TOTAL ASSETS	$	131,579,719	$	121,677,641
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable*	$	1,556,525	$	2,655,395
Accrued expenses and other current liabilities*		4,016,408		3,983,227
Short-term loans		17,855,772		11,175,196
Due to directors*		98,269		106,141
Taxes payable*		7,228,616		6,857,978
Total current liabilities		30,755,590		24,777,937
Deferred revenue		1,548,139		1,505,881
Total liabilities		32,303,729		26,283,818
COMMITMENTS AND CONTINGENCIES
Stockholders’ equity
Preferred Stock: par value $0.001, authorized 10,000,000 shares, none issued and outstanding at September 30, 2013 and December 31, 2012, respectively		0		0
Common Stock: par value $0.001, authorized 190,000,000 shares, 36,807,075 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively		36,807		36,807
Additional paid-in capital		39,671,966		39,671,966
Appropriated retained earnings		6,461,938		6,461,938
Unappropriated retained earnings		46,973,689		45,713,187
Accumulated other comprehensive income		6,131,590		3,509,925
Total stockholders’ equity		99,275,990		95,393,823
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	131,579,719	$	121,677,641

*The assets of the VIEs can be used only to settle the obligations of the VIEs. Conversely, liabilities recognized as of consolidating VIEs do not represent additional claims on the Company’s assets. (Note 26).

See notes to consolidated financial statements

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TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenues	$	6,242,978		$	9,048,886		$	13,639,958		$	21,817,127
Less: Business tax and surcharges		105,292			168,007			278,372			406,000
Net revenues		6,137,686			8,880,879			13,361,586			21,411,127
Cost of revenues		704,206			1,898,626			4,685,009			3,968,955
Gross profit		5,433,480			6,982,253			8,676,577			17,442,172
Operating expenses
Selling and distribution expenses		344,884			662,343			1,336,439			2,535,720
General and administrative expenses		933,426			2,087,644			5,632,776			5,898,692
Reversal of allowance of doubtful debts		(1,000,000	)		0			(1,000,000	)		0
Research and development expenses		439,415			517,891			1,371,204			1,576,808
		717,725			3,267,878			7,340,419			10,011,220
Income from operations		4,715,755			3,714,375			1,336,158			7,430,952
Other income (expenses)
Interest income		609			58,734			3,250			174,305
Interest expense		(301,172	)		(297,059	)		(917,438	)		(733,193	)
Refund of value-added tax		234,195			6,597			1,001,738			1,549,765
Government grants		35,975			178,478			117,369			300,427
Other income		5,128			37,160			27,061			92,710
Other expenses		(4,925	)		0			(44,823	)		(12,391	)
		(30,190	)		(16,090	)		187,157			1,371,623
Income before income tax expense		4,685,565			3,698,285			1,523,315			8,802,575
Income tax expense		574,035			516,246			262,813			1,104,951
Net income		4,111,530			3,182,039			1,260,502			7,697,624
Foreign currency translation fluctuation		723,427			(163,043	)		2,621,665			360,261
Comprehensive income	$	4,834,957		$	3,018,996		$	3,882,167		$	8,057,885
Weighted average number of common shares outstanding
Basic		36,807,075			36,807,075			36,807,075			36,807,075
Diluted		36,807,075			36,807,075			36,807,075			36,813,912
Earnings per share
Basic	$	0.11		$	0.09		$	0.03		$	0.21
Diluted	$	0.11		$	0.09		$	0.03		$	0.21

See notes to consolidated financial statements

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TRUNKBOW INTERNATIONAL HOLDINGS LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
	2013			2012
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net income	$	1,260,502		$	7,697,624
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		809,238			739,581
Provision for doubtful debts		988,194			1,908,674
Impairment of intangible assets		252,716			0
Deferred taxes		(123,524	)		(175,335	)
Changes in operating assets and liabilities:
Accounts receivable		(4,223,484	)		(5,778,091	)
Advances to suppliers		2,036,269			3,017,886
Prepayments		107,350			(1,311,965	)
Other current assets		7,857,901			(2,920,921	)
Due from directors		(402,211	)		713,968
Inventories		(2,870,036	)		(728,629	)
Long-term prepayments		115,274			2,225,864
Accounts payable		(1,158,100	)		(17,497	)
Accrued expenses and other current liabilities		592,835			386,447
Amounts due to directors		(10,709	)		(2,251	)
Taxes payable		175,868			(710,814	)
Deferred revenue		0			1,503,640
Net cash flows provided by operating activities		5,408,083			6,548,181
Cash flows from investing activities
Acquisition of property and equipment and intangible assets		(5,536,811	)		(18,819,394	)
Collection of loans to third parties		1,206,292			0
Payment on loans to third parties		(5,524,817	)		(791,390	)
Cash advance received from sale of property		1,238,460			0
Net cash flows used in investing activities		(8,616,876	)		(19,610,784	)
Cash flows from financing activities
Proceeds from bank loans		12,778,679			7,267,819
Repayment of bank loans		(6,494,650	)		0
Proceeds from loans from third parties		193,007			0
Repayment of loans from third parties		(2,101,875	)		0
Net cash flows provided by financing activities		4,375,161			7,267,819
Effect of exchange rate fluctuation on cash and cash equivalents		(23,002	)		(5,666	)
Net increase (decrease) in cash and cash equivalents		1,143,366			(5,800,450	)
Cash and cash equivalents – beginning of the year		783,074			6,139,589
Cash and cash equivalents – end of the period	$	1,926,440		$	339,139
Supplemental disclosure of cash flow information
Cash paid for interest	$	1,140,070		$	733,193
Cash paid for income taxes	$	685,628		$	1,619,878

See notes to consolidated financial statements

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 entities (“VIEs”). 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. Beijing Delixunda Technology Co., Ltd (“Delixunda”) was established as a limited liability company on December 1, 2009 in Beijing, the PRC. Delixunda is a telecom value-added service licensed company and is engaged in research and development and sales of value-added application platforms for mobile operators. 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. In March 2011, a series of agreements were entered into amongst Trunkbow Shandong, Delixunda and its controlling shareholders, providing Trunkbow Shandong the ability to control Delixunda, including its financial interest. As a result of these contractual arrangements, which assigned all of Trunkbow Technologies and Delixunda’s 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 and Delixunda’s operations and Trunkbow Shandong’s ability to extract the profits from the operation of Trunkbow Technologies and Delixunda, and assume the Trunkbow Technologies and Delixunda’s 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, and Delixunda from March 10, 2011, consistent with the provisions of FASB Accounting Standards Codification (“ASC”) 810-10.

The Company, its subsidiaries and VIEs are collectively referred to as the “Group.”

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2.— LIQUIDITY AND FINANCIAL CONDITION

The Company’s cash flows provided by operations amounted to $5.41 million for the nine months ended September 30, 2013. The Company had

working capital of approximately $57.24 million as of September 30, 2013. The Company has historically financed its operations principally from cash flows

generated from operating activities and external financing.

As of September 30, 2013, Trunkbow had signed up four agreements in relation to capital expenditure on Guangzhou, Shanghai and Huzhou data

centers, and our R&D center. The total capital expenditure of these four centers is approximately $83.9-90.9 million of which $40-60 million will be paid within

the next year. As of September 30, 2013, Trunkbow has invested $22.4 million. The Company expects to finance these projects principally from cash collection

from our accounts receivables, loans to third parties, advance to suppliers and also from bank loans.

Management believes, based on the Company’s historical ability to fund operations using internally generated cash flow and external financings that

the Company’s currently available cash and funds it expects to generate from operations and through potential short term loans financing from banks will enable

it to operate the business and satisfy short term obligations through at least the next twelve months. Notwithstanding, the Company still has substantial

obligations as described herein and there is no assurance that unforeseen circumstances would not have a material adverse effect on the Company’s financial

condition.

If the Company is unable to generate sufficient operating cash flows obtain financing or raise additional capital, or encounters unforeseen

circumstances that place constraints on its capital resources, management will be required to take various measures to conserve liquidity. Such measures could

include, but not necessarily be limited to, curtailing the Company’s business development activities and controlling overhead expenses. There is a material risk,

and management cannot provide any assurances, that the Company will be able to raise additional capital if needed. The Company has not received any

commitments for new financing, and cannot provide any assurance that new financing will be available to the Company on acceptable terms, if at all. The

failure of the Company to fund its obligations when needed would have a material adverse effect on its business and results of operations.

3.— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) Basis of presentation

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission, and include the accounts of the Company, and its subsidiaries and VIEs, Trunkbow, Trunkbow Hong Kong, Trunkbow Shandong, Trunkbow Shenzhen, Trunkbow Technologies and Delixunda. Delixunda is being consolidated from March 10, 2011 (the date of acquisition). Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s financial statements and related notes as contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair presentation of consolidated financial position as of September 30, 2013 and consolidated results of operations, and cash flows for interim periods presented, have been made. The interim results of operations are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

b) Principles of Consolidation

The consolidated financial statements include the financial statements of the Company, all the subsidiaries and VIEs of the Company. All transactions and balances between the Company and its subsidiaries and VIEs 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 accounting principles generally accepted in the United States of America (“US 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 (“$”), and the functional currency of Trunkbow Hong Kong is Hong Kong dollars (“HK$”). The functional currency of the Company’s PRC subsidiaries and VIEs 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 VIEs, 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.

The exchange rates applied are as follows:

	September 30, 2013		December 31, 2012
RMB exchange rate		6.1364		6.3086

	2013		2012
Average RMB exchange rate for the three months ended September 30,		6.1654		6.3257
Average RMB exchange rate for the nine months ended September 30,		6.2174		6.3180

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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.

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:

	Years
Motor vehicles	4 – 8
Furniture and office equipment	5
Electronic equipment	3 – 5
Telecommunication equipment	3 – 5
Leasehold 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.

Impairment of long-lived assets

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, 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 nine and three months ended September 30, 2013 and the year ended December 31, 2012.

j) Land use right, net

Land use rights are recorded at cost less accumulated amortization. Amortization is provided on a straight-line basis over the estimated useful lives which are generally 50 years and represent the shorter of the estimated usage periods or the terms of the agreements.

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k) Intangible assets

Intangible assets acquired by the company and have finite useful lives are measured at cost less accumulated amortization and accumulated impairment loss.

l) Fair value measurement

The Group’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, advance to suppliers, prepayment, other current assets, accounts payable, accrued expenses and other current liabilities. The carrying values of these financial instruments approximate fair values due to their short maturities.

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 17.

m) 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.

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. 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, provides installation and training to customers, and 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:

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(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.

Some of our contracts include postcontract customer support for a period of twelve months or less. We recognize postcontract customer support revenue together with the initial licensing fee on delivery of the software because all of the following conditions are met:

a.The postcontract customer support fee is included with the initial licensing fee.

b.The postcontract customer support included with the initial license is for one year or less.

c.The estimated cost of providing postcontract customer support during the arrangement is insignificant.

d.Unspecified upgrades or enhancements offered during postcontract customer support arrangements historically have been and are expected to continue to be minimal and infrequent.

Sales of software

The Group enters into contracts directly with the mobile operators or through the resellers where resellers designated by the mobile operators have well-developed operation teams to support local operations so as to enable 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.

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.

Some of our contracts include postcontract customer support for a period of twelve months or less. We recognize postcontract customer support revenue together with the initial licensing fee on delivery of the software because all of the following conditions are met:

a.The postcontract customer support fee is included with the initial licensing fee.

b.The postcontract customer support included with the initial license is for one year or less.

c.The estimated cost of providing postcontract customer support during the arrangement is insignificant.

d.Unspecified upgrades or enhancements offered during postcontract customer support arrangements historically have been and are expected to continue to be minimal and infrequent.

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) the vender’s fee is fixed or determinable; and (iv) collectability being probable. We recognize revenue under ASC 985-605-25 because:

(i)It is our customary practice to have a signed written agreement between us and our customers.

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(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 by 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.

It is the Company’s policy to recognize revenue as collected on certain contracts where the Company can not conclude that collection of the sale is reasonably assured.

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.

n) Government grants

Government grants are recognized where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it is recognized as deferred income and released to income in equal annual amounts over the expected useful life of the related asset.

Where the Group receives non-monetary grants, the asset and that grant are recorded at nominal amounts and released to profit or loss over the expected useful life of the relevant asset by equal annual installment.

o) Cost of revenues

Cost of revenues primarily includes cost of equipment and software purchased from third parties and labor costs.

p) 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.

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.

11

Major Customers

The Group had sales to two customers that accounted for approximately 83.1% of revenues during the three months ended September 30, 2013 and three customers who accounted for approximately 90.8% of revenues during the three months ended September 30, 2012. These customers accounted for approximately 27.4% and 34.8% of accounts receivable balance as of September 30, 2013 and December 31, 2012, respectively.

The Group had sales to two customers that accounted for approximately 70.3% of revenues during the nine months ended September 30, 2013 and three customers who accounted for approximately 72.4% of revenues during the nine months ended September 30, 2012. These customers accounted for approximately 27.4% and 43.8% of accounts receivable balance as of September 30, 2013 and December 31, 2012, respectively.

Major Suppliers

The Group had purchases from one and three vendors that accounted for approximately 90.5% and 76.5% of purchases during the three month ended September 30, 2013 and 2012, respectively. These vendors accounted for nil and 35.6% of accounts payable balance as of September 30, 2013 and December 31, 2012.

The Group had purchases from two vendors that accounted for approximately 90.7% and 60.9% of purchases during the nine months ended September, 2013 and 2012, respectively. These vendors accounted for nil and 35.6% of accounts payable balance as of September 30, 2013 and December 31, 2012.

q) Research and development expenses

Research and development costs are incurred in the development of technologies in mobile value added service platforms and mobile payment systems, 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.

r) 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.

s) 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.

Value added taxes and surcharges

The Company’s PRC subsidiaries and VIEs are subject to value-added tax (“VAT”) on sales. The VAT is 6% or 17% on different types of revenues. The tax rate is 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. The tax rate on service revenue is 6%.

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.

The Company’s PRC subsidiaries and VIEs are also subject to VAT surcharges on the revenues.

12

t) 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 nine months ended September 30, 2013 and 2012 and the year ended December 31, 2012, 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.

The Company’s subsidiaries and VIEs 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 nine months ended September 30, 2013 and 2012 and the year ended December 31, 2012 of the Company’s subsidiaries and VIEs remain open in the relevant taxing jurisdictions.

u) 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.

v) Appropriated Retained Earnings

The income from the Company’s subsidiaries and VIEs 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 VIEs 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.

The 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.

w) 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.

x) 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.

y) Recently issued accounting standards

The FASB has issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this standard is not expected to have a material impact on the consolidated financial position and results of operations.

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4.— ACCOUNTS RECEIVABLE, NET

At September 30, 2013 and December 31, 2012, accounts receivable consisted of:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Accounts receivable	$	56,957,805	$	51,240,651
Less: Allowance for doubtful debts		6,154,749		5,000,000
	$	50,803,056	$	46,240,651

The Group has recognized an allowance of approximately $6.15 million for doubtful receivables that are over one year as of September 30, 2013. The Group has not had any write-off of trade receivables during the years presented. $10,323,522 was subsequently collected by November 14, 2013. In addition, $17,819,525 of accounts receivable as of December 31, 2012 and $17,398,424 as of September 30, 2013 from 6 customers from sales arising in 2011 and 2012 has been pledged for the short-term bank loans from China Everbright Bank. $1,000,000 allowance was reversed for the three months ended September 30, 2013, compared with provision of $495,404 for the same period in 2012. The allowance for doubtful debts changed $1,154,749 and $1,911,553 for the nine months ended September 30, 2013 and 2012, respectively.

The following analysis details the changes in the Group’s allowances for doubtful accounts:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Balance at beginning of the period	$	5,000,000	$	943,619
Increase (reversal) in allowances during the period		1,154,749		4,056,381
Balance at the end of the period	$	6,154,749	$	5,000,000

5.— ADVANCES TO SUPPLIERS

At September 30, 2013 and December 31, 2012, advances to suppliers consisted of:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Advances to suppliers	$	12,134,702	$	15,015,009
Less: Allowance for doubtful debts		2,607,392		2,536,221
	$	9,527,310	$	12,478,788

Advances to suppliers represent prepayments to the Group’s suppliers for the purchase of third party software and hardware to be used in our MVAS/MPS platforms.

As of September 30, 2013, the Group has recognized an allowance of approximately $2.6 million for advances that are over one year.

6.— PREPAYMENTS

Prepayments at September 30, 2013 and December 31, 2012 are summarized as follows:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Prepaid royalties		0		284,718
Other prepaid expenses		401,534		211,654
	$	401,534	$	496,372

Prepaid royalties represented prepayment to Sony Music Entertainment China Holdings Limited for music license used in MPS and MVAS. The license expired in March 2013.

Other prepaid expenses included prepaid property management fees, remodeling expenses, office rental and other operating expenses.

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7.— OTHER CURRENT ASSETS

Loans receivable and other current assets at September 30, 2013 and December 31, 2012 are summarized as follows:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Deposits	$	358,500	$	408,817
Staff advances		1,507		594
Advance to cloud APP agreement		386,521		2,800,117
Advance to a cloud medical project		1,119,519		6,508,401
	$	1,866,047	$	9,717,929

Advance for cloud APP agreement represents a contribution per two cooperative agreements the Company entered into with a marketing company to start a music applet development project in December 2011 and January 2012. The contracts, in the amount of $2,000,000 and $800,000, respectively, call for 50% revenue sharing with a minimum guarantee of a 5% and 10% return, respectively. The terms of the agreements are nine months starting on January 1, 2012. As of September 30, 2013, the Company has received $2.41 million of the $2.8 million. We expect to collect the rest by the end of year 2013.

Advance to a cloud medical project represents our advance to a HIS, Health Information System. The contract was cancelled in August 2013 and we received $5.39 million during the three months ended September 30, 2013, and $0.33 million subsequently as of November 14, 2013. We expect to collect the rest by the end of year 2013.

8.— LOANS TO THIRD PARTIES

	September 30,		December 31,
	2013		2012
	(Unaudited)
Loans to third parties	$	9,459,944	$	4,787,116

Loans to third parties as of September 30, 2013 and December 31, 2012 consisted primarily of $3.59 million of payment to China Telecom Jinan Branch for the purchase of MPS hardware and software for the roll-out of MPS systems and application in Jinan City, Shandong Province. According to the agreement with China Telecom, Trunkbow will share monthly function fees based on 3% of total principal with China Telecom on the MPS systems and application for consecutive twelve months from January 2012 to January 2013. The revenue recognized during the three months ended September 30, 2013 and 2012 was nil and $255,962, respectively. Interest income recognized during the three months ended September 30, 2013 and 2012 was nil and $57,039, respectively. The revenue recognized during the nine months ended September 30, 2013 and 2012 was $23,880 and $777,926, respectively. Interest income recognized during the nine months ended September 30, 2013 and 2012 was nil and $166,994, respectively. Among the $3.59 million, $1.14 million has been collected as of November 14, 2013.

Loans to third parties as of September 30, 2013 also consisted $5.87 million interest free loans to third parties. The term of the loans varies from three months to one year. The loans were mainly made related to our IDC centers and other projects. Among the $5.87 million, $3.13 million has been collected as of November 14, 2013.

9.— AMOUNT DUE FROM (TO) DIRECTORS

At September 30, 2013 and December 31, 2012, amount due from (to) directors consisted of:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Amount due from directors	$	417,132	$	9,350

Amount due from directors represented advance to the directors for expenses paid on behalf of the Company. The amount has been subsequently repaid by the directors.

	September 30,		December 31,
	2013		2012
	(Unaudited)
Amount due to directors	$	98,269	$	106,141

Amount due to directors represented prepayment by the directors for expenses on behalf of the Company. The amount has been subsequently repaid to the directors.

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10.— INVENTORIES

At September 30, 2013 and December 31, 2012, inventories consisted of:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Hardware
-System integration hardware	$	4,837,218	$	378,638
-Point of sale systems		69,386		1,653,158
Projects in progress		3,662,587		3,474,944
	$	8,569,191	$	5,506,740

The point of sale systems were purchased from VeriFone, a related party of the Company.

11. - ASSETS HELD FOR SALE

At September 30, 2013 and December 31, 2012, assets held for sale consisted of:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Accounts receivable	$	673,959	$	655,563
Property and equipment, net		3,251,092		3,162,350
	$	3,925,051	$	3,817,913

Assets held for sale represented communication equipment located in Northeast China and related accounts receivable generated from its operation. A third party intended to purchase the assets at a price of approximately $4.15 million (approximately RMB25.4 million). The transaction is expected to finish in the end of 2013. An advance of $1.25 million has been received as of September 30, 2013. Another $1.63 million has been received subsequently as of November 13, 2013.

12.— PROPERTY AND EQUIPMENT, NET

Property and equipment of the Group mainly consists of telecommunication equipment, motor vehicles and electronic equipment.

Property and equipment as of September 30, 2013 and December 31, 2012 are summarized as follows:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Motor vehicles	$	735,754	$	718,803
Furniture and office equipment		130,443		124,863
Electronic equipment		481,289		449,328
Telecommunication equipment		3,727,893		2,990,737
Leasehold improvement		62,764		61,050
		5,138,143		4,344,781
Less: Accumulated depreciation		1,565,562		944,380
Construction in progress		11,449,071		10,896,681
Projects in progress		21,272,517		16,128,078
	$	36,294,169	$	30,425,160

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Depreciation expense for the three months ended September 30, 2013 and 2012 was $168,201 and $282,080, respectively.

Depreciation expense for the nine months ended September 30, 2013 and 2012 was $587,177 and $640,692, respectively.

Construction in progress represented phase payment on construction materials to a contractor for the construction of the R&D center in Jinan.

Projects in progress represents projects under construction or installation. These projects will generate shared revenue after completion for a consecutive period from 5 to 10 years. The cost of these projects mainly include hardware, labor and outsourcing costs.

13.— LAND USE RIGHT, NET

	September 30,		December 31,
	2013		2012
	(Unaudited)
Land use right	$	6,191,668	$	6,022,660
Less: Accumulated amortization		289,409		191,019
	$	5,902,259	$	5,831,641

Trunkbow Shandong acquired the land use right for the construction of the R&D center in Jinan. The land use right expires in June 2061. The amortization of land use right for the three months ended September 30, 2013 and 2012 was $30,864 and $30,081. The amortization of land use right for the nine months ended September 30, 2013 and 2012 was $91,818 and $90,356, respectively. The estimated amortization expense is RMB761,160 (approximately $122,424) for each of the five succeeding fiscal years. The land use right has been pledged for the bank facility of $16,296,200 granted by China Everbright Bank.

14.— INTANGIBLE ASSETS, NET

At September 30, 2013 and December 31, 2012, intangible assets consisted of:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Software	$	1,241,844	$	3,242
License		42,370		41,214
Domain name		0		249,062
		1,284,214		293,518
Less: Accumulated amortization		154,440		21,624
	$	1,129,774	$	271,894

Amortization expense for the three months ended September 30, 2013 and 2012 was $63,754 and $2,841, respectively.

Amortization expense for the nine months ended September 30, 2013 and 2012 was $130,487 and $8,533, respectively.

15.— LONG-TERM PREPAYMENT

At September 30, 2013 and December 31, 2012, long-term prepayment consisted of:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Prepaid membership fee		207,867		223,856
Other prepaid expenses		54,677		145,129
	$	262,544	$	368,985

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16.— ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The breakdowns of accrued expenses and other current liabilities as of September 30, 2013 and December 31, 2012 are as follows:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Accrued payroll	$	451,437	$	334,654
Advance from customers		1,967,095		252,988
Loans from third parties		195,554		2,085,138
Payables to staff		299,580		235,479
Accrued expenses		721,125		540,399
Professional fees payable		142,877		521,759
Others		238,740		12,810
	$	4,016,408	$	3,983,227

Advance from customers included a $1.25 million advance related to assets held for sale.

17.— SHORT-TERM LOAN

	September 30,		December 31,
	2013		2012
	(Unaudited)
Agriculture Bank of China	$	0	$	2,686,808
China Merchants Bank		0		792,569
China Everbright Bank		16,226,152		7,695,819
China Construction Bank		1,629,620		0
	$	17,855,772	$	11,175,196

Among the short-term loan of $2,686,808 as of December 31, 2012 from Agriculture Bank of China, $1,585,138 was repaid on March 3, 2013, and $1,101,671 was repaid on March 20, 2013. The interest expense related to the short term loan for the three months ended September 30, 2013 and 2012 was nil and $164,579, respectively. The interest expense related to the short term loan for the nine months ended September 30, 2013 and 2012 was $28,627 and $488,613, respectively.

The short-term loan of $792,569 as of December 31, 2012 from China Merchants Bank was repaid on January 12, 2013. The interest expense related to the short term loan for the three months ended September 30, 2013 and 2012 was nil and $12,803, respectively. The interest expense related to the short term loan for the nine months ended September 30, 2013 and 2012 was $2,429 and $12,803, respectively.

On December 27, 2012, Trunkbow Shandong obtained a RMB 100,000,000 (approximately $16,296,200) total bank facility from China Everbright Bank. $4,908,415 of the total facility was received on December 27, 2012, $8,384,421 on January 15, 2013, and $2,933,316 on July 12. Among the $16,296,200, $3,845,903 is due on December 25, 2013, $1,062,512 due on December 26, 2013, $8,384,421 on October 14, 2013, and $2,933,316 on June 26, 2014. The loans are personally guaranteed by Mr. Wanchun Hou and Mr. Qiang Li, and secured by Trunkbow Shandong’s accounts receivable of RMB101,216,256 (approximately $16,376,180), and secured by Trunkbow Shandong’s future revenue of RMB48,430,000 (approximately $7,892,250) from contracts of Shanghai data center and also pledged by Trunkbow Shandong’s land use rights. Interest on the bank facility is a floating lending rate, 15% over the PBOC benchmark rate. The interest expense related to the loan for the three months ended September 30, 2013 and 2012 was $286,461 and nil, respectively. The interest expense related to the loan for the nine months ended September 30, 2013 and 2012 was $871,775 and nil, respectively.

Trunkbow Shenzhen obtained a loan of RMB15,000,000 (approximately $2,444,430) from China Construction Bank. $1,629,620 of the loan was received on September 30, 2013. The loan is due on September 26, 2014. The loan is guaranteed by Trunkbow Shandong and personally guaranteed by Mr. Qiang Li. The interest rate is 7.2%. The interest expense related to the loan for the three months ended September 30, 2013 and 2012 was both nil. The interest expense related to the loan for the three months ended September 30, 2013 and 2012 was both nil.

18

18.— TAXES PAYABLE

	September 30,		December 31,
	2013		2012
	(Unaudited)
Value Added Tax Payable	$	3,196,431	$	2,629,583
Income Tax Payable		3,640,057		3,835,663
Others		392,128		392,732
	$	7,228,616	$	6,857,978

19.— INCOME TAXES

(1) Corporation Income Tax (“CIT”)

(i) The Company was 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 in the United States for the nine and three months ended September 30, 2013. 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. Taxable profits are subject to Hong Kong profits tax on corporations at the rate of 16.5%. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

(ii)PRC subsidiaries and VIEs

The subsidiaries and VIEs incorporated in the PRC are generally subject to a corporate income tax rate of 25% commencing January 1, 2008 except for those subsidiaries and VIEs 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% is applicable for the years ended December 31, 2011, 2012 and 2013.

In March 2012, Trunkbow Shandong was recognized as New and High-Tech Enterprise. Under the Enterprise Income Tax Law effective from January 1, 2008, Trunkbow Shandong will be entitled to the 15% of preferential tax rate for the years ended December 31, 2014, 2015 and 2016.

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, it is entitled to a preferential income tax rate of 15% in 2007. According to the pronouncement of the 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%.

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On June 8, 2011, Trunkbow Shenzhen was certified as a software enterprise by Shenzhen Technology, Industry, Commerce and Information 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 Shenzhen was 2012. On May 10, 2013, Trunkbow Shenzhen obtained the official approval from the tax bureau of Shenzhen City Futian District on the preferential tax exemption.

Pursuant to the aforementioned taxation laws, Trunkbow Shenzhen was exempt from income tax for the years ended December 31, 2012 and 2013, and thereafter, a half tax rate of 12.5% is applicable for the years ended December 31, 2014, 2015 and 2016.

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 the 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 in net operation loss as of September 30, 2013 and no income tax provision was recorded.

Delixunda

Delixunda was registered in Beijing, the PRC. The applicable income tax rate for Delixunda was 0% for the three months ended September 30, 2013. Delixunda had a net operating loss as of September 30, 2013, and no income tax provision was recorded.

(2)Deferred tax asset

	September 30,		December 31,
	2013		2012
	(Unaudited)
Deferred tax asset	$	1,095,268	$	942,028

Deferred tax asset as of September 30, 2013 and December 31, 2012 represented the deferred income tax asset arising from the allowance for doubtful debts of $8,762,141 and $7,536,221, respectively.

(3) The following is a reconciliation of tax computed by applying the statutory income tax rate to PRC operations to income tax expenses for the three and nine months ended September 30, 2013 and 2012, respectively:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
PRC statutory tax rate		25	%		25	%		25	%		25	%
Accounting income before tax	$	4,994,269		$	4,445,489			2,774,024			10,596,714
Computed expected income tax expenses		1,248,567			1,111,373			693,506			2,649,179
Accumulated loss from subsidiaries and VIEs		18,461			63,665			142,965			70,211
Add: Prior year adjustment		0			(2,637	)		0			36,591
Non taxable income		58,548			0			250,434			0
Less: tax exemption		634,445			656,155			323,224			1,651,030
Income tax expenses	$	574,035		$	516,246		$	262,813		$	1,104,951

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20.— STOCKHOLDERS’ EQUITY

Preferred stock

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 September 30, 2013.

Common Stock

Pursuant to the terms of the Exchange Agreement, in February 2010 the 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.

Pursuant to the Purchase Agreement entered into concurrently with the 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.

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 were $18,109,988 after deduction of $1,400,000 of underwriter’s commission, and $490,012 of legal and professional fees.

Warrants

In connection with the February 2010 offering, we issued warrants (the “February 2010 Offering Warrants”) to purchase 3,005,519 shares of common stock at an exercise price of $2.00. The warrants have a five year term and are exercisable 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.

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 years
Risk-free interest rate per annum		2.218	%
Fair value of underlying common shares (per share)	$	1.95

As of September 30, 2013, no warrants had been exercised at $2.00 per share.

On February 8, 2011, in connection with our IPO in February 2011, the Company granted Roth Capital Partners, LLC warrants (the “Roth Capital Warrants”) to purchase up to a total of 200,000 shares of our common stock as partial underwriting compensation. The warrants have a term of three years and an exercise price of $6, 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 until August 7, 2011, except as provided in FINRA Rule 5110(g)(2). 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.

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The estimated fair values of the warrants issued to Roth were determined at February 8, 2011 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: $1.68.

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		59.5	%
Expected dividends yield		0	%
Time to maturity		3 years
Risk-free interest rate per annum		1.745	%
Fair value of underlying common shares (per share)	$	4.85

In accordance with ASC Topic 340 subtopic 10 section S99-1, specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. In accordance with the SEC accounting and reporting manual “cost of issuing equity securities are charged directly to equity as deduction of the fair value assigned to share issued.” Accordingly, we concluded that the Roth Capital Warrants are directly attributable to the February 2011 financing. If we had not issued the Roth Capital Warrants, we would have had to pay the same amount of cash as the fair value. Therefore, we deducted the total fair value of the Roth Capital Warrants of $336,000 as from the fair value assigned to the common stock. The Roth Capital Warrants met the scope exceptions of ASC Topic 815 as they were deemed to be indexed to the Company’s own stock, and were eligible to be classified as equity.

As of September 30, 2013, no warrants had been exercised by Roth Copital Partners, LLC.

On July 11, 2011, the Company issued China High Growth Capital LTD warrants to purchase up to a total of 250,000 shares of our common stock as compensation for business development and consulting services. The warrant, which was exercisable at issuance, has a term of five years and an exercise price of $2 per share. 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.

The estimated fair value of the warrant issued to China High Growth Capital LTD was determined at July 11, 2011 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: $1.40.

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		59.5	%
Expected dividends yield		0	%
Time to maturity		5 years
Risk-free interest rate per annum		2.294	%
Fair value of underlying common shares (per share)	$	2.44

The China High Growth Capital LTD Warrants are directly attributable to compensation for business development and consulting services for a period from July 1, 2011 to October 31, 2011. If we had not issued the China High Growth Capital LTD Warrants, we would have had to pay the same amount of cash as the fair value. Total fair value of the China High Growth Capital LTD Warrants is $350,000. Therefore, we recorded $350,000 as general and administration expenses during the year ended December 31, 2012.

As of September 30, 2013, no warrants had been exercised by China High Growth Capital LTD.

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21.— REVENUES AND COST OF REVENUES

The following consolidated result of operations includes the results of operations of the Company, all the subsidiaries and our VIEs, Trunkbow Technologies and Delixunda.

For the three and nine months ended September 30, 2013 and 2012, revenues and cost of revenues consisted of:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Gross Revenues
System integration	$	207,224	$	3,227,887	$	3,166,594	$	5,175,519
Software sales		5,455,169		5,067,874		8,001,325		13,607,610
Maintenance service		66,237		127,410		180,993		290,068
Shared revenue		514,348		625,715		2,291,046		2,743,930
		6,242,978		9,048,886		13,639,958		21,817,127
Less:
Business tax and surcharges		105,292		168,007		278,372		406,000
Cost of Revenues
Equipment costs		583,350		1,819,820		4,231,994		3,704,258
Labor Costs		120,856		78,806		453,015		264,697
		704,206		1,898,626		4,685,009		3,968,955
Gross profit	$	5,433,480	$	6,982,253	$	8,676,577	$	17,442,172

22.— 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 September 30, 2013, 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:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
MVAS Technology Platforms
Gross Revenues	$	5,515,839	$	8,462,642	$	8,828,755	$	15,681,812
Business tax and surcharges		93,152		133,039		165,613		219,682
Cost of Revenues		329,908		1,824,784		1,173,090		2,872,057
	$	5,092,779	$	6,504,819		7,490,052		12,590,073
Mobile Payment Solutions
Gross Revenues	$	727,139	$	586,244	$	4,811,203	$	6,135,315
Business tax and surcharges		12,140		34,968		112,759		186,318
Cost of Revenues		374,298		73,842		3,511,919		1,096,898
	$	340,701	$	477,434	$	1,186,525	$	4,852,099

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23.— 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. PRC 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 $108,308 and $146,973 for the three months ended September 30, 2013 and 2012, respectively. The total amounts for such employee benefits, which were expensed as incurred, were $445,160 and $555,745 for the nine months ended September 30, 2013 and 2012, respectively.

24.— COMMITMENTS AND CONTINGENCIES

Commitments

Leasing Arrangements

The Group has entered into commercial leases for offices and vehicles with a term expiring in December 2015. 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 Rental
	(Unaudited)
Three months ending December 31, 2013	$	99,146
Year ending December 31, 2014		437,535
Year ending December 31, 2015		182,483
Total	$	719,164

Capital Commitment

1) Construction of R&D center

We paid out phase payments of RMB66,050,000 (approximately $10.8 million) to the contractor for our new R&D center in Jinan during the year ended December 31, 2011. We expect to make further payments as the construction progresses, although the timing and amount of such payments have not been agreed with the contractor as of the date hereof. The building is estimated to be substantially completed by the end of 2014, and the overall budget for the construction is between $23 - $30 million.

2) Guangzhou data center

On February 17, 2012, Trunkbow Shandong entered into a framework agreement with China Communications Services Corporation, Limited ("CCSC") for the construction, management and operation of a cloud data center in Guangzhou, China. Construction on the facility began in the second quarter, with the first phase scheduled for completion by the end of 2012. Under the agreement, Trunkbow will invest RMB72 million (approximately $11.7 million) in the project. Trunkbow invested $4.8 million as of September 30, 2013.

3) Shanghai data center

On June 6, 2012, Trunkbow Shandong entered into a cooperation agreement with Shanghai Telecommunication Engineering Co., Ltd ("STE") for the construction, management and operation of a cloud data center to be located in Shanghai, China. Under the agreement, Trunkbow will invest RMB180 million (approximately $28 million). Trunkbow invested $1.6 million as of September 30, 2013.

4) Huzhou data center

On October 10, 2012, Trunkbow Shandong entered into a framework agreement with Shanghai Telecommunication Engineering Co., Ltd ("STE") for the construction of a cloud data center in Huzhou, Zhejiang Province. Trunkbow invested $5.2 million as of September 30, 2013. Total construction cost is RMB130 million (approximately $21.2 million).

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Contingencies

1) Lawsuit

On November 8, 2012, a putative class action lawsuit was filed by a purported Trunkbow shareholder in District Court, Clark County, Nevada, captioned Hansen v. Trunkbow, et al., Case No. A-12-671652-C. The complaint named as defendants several directors and officers of Trunkbow, namely, Wanchun Hou, Qiang Li, Jihong Bao, Xin Wang, Albert Liu, Regis Kwong, Kokhui Tan, Iris Geng, Tingjie Lv, Zhaoxing Huang and Dong Li (the “Individual Defendants”). Although Trunkbow was included among the defendants listed in the caption, the complaint did not assert a cause of action against the Company. The plaintiff in Hansen seeks recovery on behalf of all Trunkbow shareholders for alleged breaches of fiduciary duties by the Individual Defendants in connection with the Proposed Transaction in which the Chairman of Trunkbow’s Board of Directors, Wanchun Hou, and Trunkbow’s CEO, Qiang Li, have offered to acquire all of the outstanding shares of the Company’s common stock not currently owned by them. On November 14, 2012, another putative class action lawsuit was filed by a purported Trunkbow shareholder in District Court, Clark County, Nevada, captioned Robert Davis v. Hou, et al., Case No. A-12-671946-C. Trunkbow is named as a defendant in this action, along with each of the Individual Defendants named in the Hanson complaint. The plaintiff in Davis seeks recovery on behalf of all Trunkbow shareholders for alleged breaches of fiduciary duties by the Individual Defendants in connection with the Proposed Transaction, and for aiding and abetting such alleged breaches by Trunkbow. The plaintiffs in both cases allege that the share price proposed by Hou and Li is inadequate in light of the Company’s intrinsic value and anticipated future growth. Among other things, the plaintiffs in both actions seek to enjoin the Proposed Transaction until such time as the Individual Defendants have acted in accordance with their fiduciary duties. Only the Company has been served in the actions, but it need not respond to the complaints until after a transaction agreement has been signed, if that occurs, and an amended complaint has been filed.

2) Land use right

Trunkbow Shandong obtained the land use right on July 6, 2011. As of September 30, 2013, Trunkbow Shandong has made phase payments of $11.2 million on the construction materials but the construction work has not yet started as of November 12, 2013. According to the Decree No. 53 promulgated by Ministry of Land and Resources of the People’s Republic of China, local governments have the right to rescind the land use right without compensation if the land is left idle for two years starting from the date the land is acquired. We expect to start the construction as soon as the winter ends. The Group has not received any notification from the government that the land use right has been rescinded.

25.— EARNINGS PER SHARE

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Numerator:
Net income	$	4,111,530	$	3,182,039	$	1,260,502	$	7,697,624
Denominator:
Weighted average number of common shares outstanding - Basic		36,807,075		36,807,075		36,807,075		36,807,075
Effect of dilutive securities - Warrant		0		0		0		6,837
Weighted average number of common shares outstanding - Diluted		36,807,075		36,807,075		36,807,075		36,813,912
Earnings per share
-Basic	$	0.11	$	0.09	$	0.03	$	0.21
-Diluted	$	0.11	$	0.09	$	0.03	$	0.21

For the three months ended September 30, 2013, the Roth Capital Warrants, the China High Growth Capital LTD warrants and the February 2010 warrants were not included in the calculation of diluted earnings per share because the effect was anti-dilutive, as the exercise price of $6, $2 and $2, respectively, was higher than the average stock price of $0.87 for the three months ended September 30, 2013.

For the nine months ended September 30, 2013, the Roth Capital Warrants, the China High Growth Capital LTD warrants and the February 2010 warrants were not included in the calculation of diluted earnings per share because the effect was anti-dilutive, as the exercise price of $6, $2 and $2, respectively, was higher than the average stock price of $1.06 for the nine months ended September 30, 2013.

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For the three months ended September 30, 2012, the Roth Capital Warrants, the China High Growth Capital LTD warrants and the February 2010 warrants were not included in the calculation of diluted earnings per share because the effect was anti-dilutive, as the exercise price of $6, $2 and $2, respectively, was higher than the average stock price of $1.01 for the three months ended September 30, 2012.

For the and nine months ended September 30, 2012, the Roth Capital Warrants were not included in the calculation of diluted earnings per share because the effect was anti-dilutive, as the exercise price of $6 was higher than the average stock price for the nine months ended September 30, 2012.

26.— RELATED PARTY TRANSACTIONS

(1) Guarantee by related parties

The loan from China Everbright Bank was guaranteed by Mr. Wanchun Hou and Mr. Qiang Li. The loan from China Construction Bank was guaranteed by Mr. Qiang Li.

(2) Vehicle rental from related parties

Trunkbow (Asia Pacific) Investment Holdings Limited, our wholly owned Hong Kong subsidiary, entered into a vehicle rental agreement with Mr. Qiang Li for consecutive twelve months starting from January 1, 2013. Monthly rental fee is $12,000 on four cars owned by Mr. Li and $36,000 was paid to Mr. Li as deposit. Rental expense for the three months ended September 30, 2013 and 2012 was both $36,000. Rental expense for the nine months ended September 30, 2013 and 2012 was both $108,000.

27.— VARIABLE INTEREST ENTITIES

To satisfy PRC laws and regulations, the Company conducts certain business in the PRC through two variable interest entities. 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 subsidiaries 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.

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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.

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 10, 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 service to individual clients. In addition, the pledges supporting these contractual arrangements have not been registered as required by PRC law, which could also result in the invalidation of these arrangements under PRC law.

As a result of these contractual arrangements, we are considered to be the primary beneficiary of Trunkbow Technologies and Delixunda; we consolidate the results of operations, assets and liabilities of Trunkbow Technologies and Delixunda 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 and Delixunda may not be as effective in providing us with control over the Trunkbow Technologies and Delixunda as direct ownership. We rely on these contractual rights to effect control and management of the VIEs, which exposes it to the risk of potential breach of contract by the shareholders of Trunkbow Technologies and Delixunda for a number of reasons. For example, their interests as shareholders of Trunkbow Technologies and Delixunda 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 or Delixunda.

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 VIEs, 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 any of our VIEs 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 any of our VIEs 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 VIEs which we control through contractual agreements in the form of variable interest entities. 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.

27

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.

Summary information regarding consolidated VIEs is as follows:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Assets:
Cash and cash equivalents	$	13,417	$	69,558
Accounts receivable		2,761,587		2,606,362
Other current assets		67,995		60,357
Inventories		236,343		362,478
Due from directors		2,320		2,257
Property and equipment, net		140,352		159,701
Long-term prepayment		428		1,664
Total Assets	$	3,222,442	$	3,262,377
Liabilities:
Accounts payable	$	623,174	$	541,630
Accrued expenses and other current liabilities		1,609,094		1,473,539
Due to directors		151,324		146,883
Taxes payable		1,786,857		1,699,564
Total Liabilities	$	4,170,449	$	3,861,616

The assets of the VIEs can be used only to settle the obligations of the VIEs. Conversely, liabilities recognized as of consolidating VIEs do not represent additional claims on the Company’s assets.

For the three months ended September 30, 2013, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes revenues of $242,640, cost of revenues of $155,320, operating expenses of $179,132 and net loss of $91,789. For the nine months ended September 30, 2013, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes revenue of $1,309,634, cost of revenues of $884,563, operating expenses of $752,572 and net loss of $327,628.

For the three months ended September 30, 2012, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes revenues of $80,639, cost of revenues of $60,592, operating expenses of $275,242 and net loss of $255,149. For the nine months ended September 30, 2012, the financial performance of VIEs reported in the consolidated statements of income and comprehensive income includes revenues of $467,397, cost of revenues of $346,322, operating expenses of $372,116 and net loss of $252,288.

28.— SUBSEQUENT EVENTS

Bank loans:

As part of the total bank facility obtained from China Everbright Bank on December 27, 2012, Trunkbow Shandong further received RMB22,080,000(approximately $3.60 million) on October 14, 2013, RMB21,880,000 (approximately $3.57 million) on October 14, 2013, and RMB7,920,000(approximately $1.29 million) on October 16, 2013. The loans are due on April 10, 2014, April 12, 2014,and April 10, 2014, respectively. The loans are secured by its accounts receivable of RMB64.97 (approximately $10.59 million), and also personally guaranteed by Mr. Wanchun Hou and Mr. Qiang Li. Interest rate on the loans is 6.9%.

28

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Introductory Note

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

Special Note Regarding Forward Looking Statements

This Quarterly Report contains forward-looking statements and information relating to Trunkbow that are based on the beliefs of our management, as well as assumptions made by and information currently available to us. Such statements should not be unduly relied upon. When used in this Quarterly Report, forward-looking statements include, but are not limited to, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as well as statements regarding new and existing products, technologies and opportunities, statements regarding market and industry segment growth and demand and acceptance of new and existing products, any projections of sales, earnings, revenue, margins or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements regarding future economic conditions or performance, uncertainties related to conducting business in China, any statements of belief or intention, any of the factors mentioned in the “Risk Factors” section of the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 2, 2013, and any statements or assumptions underlying any of the foregoing. These statements reflect our current view concerning future events and are subject to risks, uncertainties and assumptions. There are important factors that could cause actual results to vary materially from those described in this Report as anticipated, estimated or expected, including, but not limited to, competition in our industry and the impact of such competition on pricing, revenues and margins, volatility in the securities market due to the general economic downturn; SEC regulations which affect trading in the securities of “penny stocks,” and other risks and uncertainties. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward- looking statements, even if new information becomes available in the future. Depending on the market for our stock and other conditional tests, a specific safe harbor under the Private Securities Litigation Reform Act of 1995 may be available. Notwithstanding the above, Section 27A of the Securities Act of 1933, as amended (the “Securities Act” ) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act” ) expressly state that the safe harbor for forward-looking statements does not apply to companies that issue penny stock. Because we may from time to time be considered to be an issuer of penny stock, the safe harbor for forward-looking statements may not apply to us at certain times.

Overview

We provide technology platform solutions for mobile telecom operators in the People’s Republic of China. Our patented platforms provide a comprehensive solution for Chinese telecom operators to deliver and manage the distribution of various mobile value added service (“MVAS”) applications to their subscribers. The Trunkbow brand is regarded by the telecom operators as a well-managed, trusted provider of technology solutions. Our R&D focused business model provides us with a defensible market position as a technology provider to the telecom operators.

Currently we have filed a more than 217 patent applications, of which 89 have been granted by the National Intellectual Property Administration of the PRC. In 2010, we began the process of filing for international and U.S. patents in order to protect our intellectual properties globally.

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

29

How We Generate Revenue

Our customers are primarily telecom service providers in the PRC, including local branches of China’s three major cellular carriers, China Telecom, China Unicom and China Mobile. Collectively, these carriers provide services to greater than 1 billion cellular subscribers. Revenues generated directly by sales to China Telecom, China Unicom and China Mobile accounted for approximately 16.9%, 1.1%, and 0%, and 35%, 11% and 5%, respectively, for the nine months ended September 30, 2013 and 2012. When we include resale of our products to these carriers through intermediaries (i.e., direct and indirect sales to these carriers), then revenues generated from sales to these three carriers accounted for approximately 18.9%, 25.3%, and 29.4%, and 51%, 23% and 9%, respectively, for the nine months ended September 30, 2013 and 2012. The revenues for the nine months ended September 30, 2013 slightly increased when compared to the nine months ended September 30, 2012.

Results of Operations

Net Revenues:

	Three Months Ended September 30,				% of
	2013		2012		change
	(Unaudited)		(Unaudited)
System integration	$	207,224	$	3,227,887		(93.6	)%
Software sales		5,455,169		5,067,874		7.6	%
Maintenance service		66,237		127,410		(48.0	)%
Shared revenue		514,348		625,715		(17.8	)%
Total revenues		6,242,978		9,048,886		(31.0	)%
Less:
Business tax and surcharges		105,292		168,007		(37.3	)%
Net revenues	$	6,137,686	$	8,880,879		(30.9	)%

Net revenues were $6.14 million for the third quarter of 2013, a decrease of $2.74 million, or 30.9%, compared with net revenues of $8.88 million in the same period of 2012. The decrease in net revenues was primarily attributable to the decrease in the system integration. System integration revenues decreased $3.02 million for the third quarter of 2013 compared to the same period in 2012, due to the decrease in MVAS systems related to phone call and SMS management. Software sales increased $0.39 million, or 7.6%, from our number change notification system. Maintenance service revenue decreased to $0.07 million, from $0.13 million in the third quarter of 2012, mainly from less services provided to the carrier on network maintaining. Shared revenue decreased $0.11 million, or 17.8%, from $0.63 million for the third quarter of 2012 to $0.51 million in the same period of 2013, due to the increase in shared revenue from MPS.

	Nine Months EndedSeptember 30,				% of
	2013		2012		change
	(Unaudited)		(Unaudited)
System integration	$	3,166,594	$	5,175,519		(38.8)	%
Software sales		8,001,325		13,607,610		(41.2)	%
Maintenance service		180,993		290,068		(37.6)	%
Shared revenue		2,291,046		2,743,930		(16.5)	%
Total revenues		13,639,958		21,817,127		(37.5)	%
Less:
Business tax and surcharges		278,372		406,000		(31.4)	%
Net revenues	$	13,361,586	$	21,411,127		(37.6)	%

Net revenues were $13.36 million for the nine months ended September 30, 2013, a decrease of $8.05 million, or 37.6%, compared with net revenues of $21.41 million in the same period of 2012. The decrease in net revenues was primarily attributable to the reduction of system integration and software sales. System integration revenues decreased $2.01 million for the nine months ended September 30, 2013 compared to the same period in 2012, mainly due to decrease in MVAS systems related to mobile newspaper, phone call and SMS management. Software sales decreased $5.61 million, or 41.2%, due to the decrease in MVAS systems related to phone call and SMS management and mobile business card and decrease in MPS software sales. Maintenance service revenue decreased to $0.18 million, from $0.29 million in the nine months ended September 30, 2012, mainly from less services provided to the carrier on network maintaining. Shared revenue decreased $0.45 million, or 16.5%, from $2.74 million for the nine months ended September 30, 2012 to $2.29 million in the same period of 2013, caused by less revenue shared from mobile payment.

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	Three Months EndedSeptember 30,				% of
	2013		2012		change
	(Unaudited)		(Unaudited)
MVAS Technology Platforms
Gross Revenues	$	5,515,839	$	8,462,642		(34.8)	%
Business tax and surcharges		93,152		133,039		(30.0)	%
Cost of Revenues		329,908		1,824,784		(81.9)	%
	$	5,092,779	$	6,504,819		(21.7)	%
Mobile Payment Solutions
Gross Revenues	$	727,139	$	586,244		24.0	%
Business tax and surcharges		12,140		34,968		(65.3)	%
Cost of Revenues		374,298		73,842		406.9	%
	$	340,701	$	477,434		(28.6)	%

Revenue from MVAS decreased $2.95 million or 34.8% to $5.52 million from the third quarter of 2013, compared with $8.46 million in the same period of 2012. The decrease in MVAS revenue was primarily caused by the reduction on MVAS software sales related to phone call and SMS management and mobile business card. Revenue from our MPS offerings increased 24.0% to $0.73 million for the third quarter of 2013, compared with $0.59 million in the same period of 2012. The increase in MPS revenue was due to growth of the MPS software sales. For the third quarter of 2013, MPS and MVAS accounted for 88.4%, 11.6% of gross revenues, respectively.

	Nine Months EndedSeptember 30,				% of
	2013		2012		change
	(Unaudited)		(Unaudited)
MVAS Technology Platforms
Gross Revenues	$	8,828,755	$	15,681,812		(43.7)	%
Business tax and surcharges		165,613		219,682		(24.6)	%
Cost of Revenues		1,173,090		2,872,057		(59.2)	%
	$	7,490,052	$	12,590,073		(40.5)	%
Mobile Payment Solutions
Gross Revenues	$	4,811,203	$	6,135,315		(21.6)	%
Business tax and surcharges		112,759		186,318		(39.5)	%
Cost of Revenues		3,511,919		1,096,898		220.2	%
	$	1,186,525	$	4,852,099		(75.5)	%

Revenue from MVAS decreased $6.85 million or 43.7% to $8.83 million from the nine months ended September 30, 2013, compared with $15.68 million in the same period of 2012. The decrease in MVAS revenue was primarily caused by the reduction on MVAS software sales related to phone call and SMS management and mobile business card. Revenue from our MPS offerings decreased 21.6% to $4.81 million for the nine months ended September 30, 2013, compared with $6.14 million in the same period of 2012. The decrease in MPS revenue was caused by the MPS software sales. For the nine months ended September 30, 2013, MPS and MVAS accounted for 64.7%, and 35.3% of gross revenues, respectively.

Cost of revenues:

	Three Months EndedSeptember 30,				% of
	2013		2012		change
	(Unaudited)		(Unaudited)
Equipment costs	$	583,350	$	1,819,820		(67.9)	%
Labor Costs		120,856		78,806		53.4	%
	$	704,206	$	1,898,626		(62.9)	%

Cost of revenues includes equipment hardware costs and labor costs. The equipment hardware mostly were servers, terminals and other hardware components related to the system platform. The decrease in cost of revenue was due to reduction in sales of MVAS integretion, which involves higher equipment costs.

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	Nine Months Ended September 30,				% of
	2013		2012		change
	(Unaudited)		(Unaudited)
Equipment costs	$	4,231,994	$	3,704,258		14.2	%
Labor Costs		453,015		264,697		71.1	%
	$	4,685,009	$	3,968,955		18.0	%

Cost of revenues includes equipment hardware costs and labor costs. The equipment hardware include servers, network equipment, safety equipment and storage equipment. The increase in cost of revenue was attributed to sales of mobile payment hardware, which involves higher equipment costs.

Gross profit:

	Three Months Ended September 30,
	2013						2012
	MVAS			MPS			MVAS			MPS
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Gross Revenues	$	5,515,839			727,139		$	8,462,642		$	586,244
Business tax and surcharges		93,152			12,140			133,039			34,968
Cost of Revenues		329,908			374,298			1,824,784			73,842
Gross profit	$	5,092,779			340,701		$	6,504,819		$	477,434
Gross margin		93.9	%		47.7	%		78.1	%		86.6	%

 Gross profit was $5.43 million for the third quarter of 2013, a decrease of $1.55 million, or 22.2%, compared with $6.98 for the same period of 2012. The gross margin was 88.5% for the third quarter of 2013, compared with 78.6% for the same period of 2012. The increase in gross margin was due to the decrease of revenues from system integration, which involves higher hardware costs. The gross profit and the gross margin for the MVAS and MPS were $5.09 million or 93.9% and $0.34 million or 47.7%, respectively, for the three months ended September 30, 2013 and $6.50 million or 78.1% and $0.48 million or 86.6%, respectively, for the three months ended September 30, 2012. The increase of gross margin in MVAS was related to reduction of the system integration sales, which carries a lower gross margin than the average level. The decrease of gross margin in MPS was mainly caused by the increase of revenue from system integration.

	Nine Months Ended September 30,
	2013						2012
	MVAS			MPS			MVAS			MPS
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Gross Revenues	$	8,828,755		$	4,811,203		$	15,681,812		$	6,135,315
Business tax and surcharges		165,613			112,759			219,682			186,318
Cost of Revenues		1,173,090			3,511,919			2,872,057			1,096,898
Gross profit	$	7,490,052		$	1,186,525		$	12,590,073		$	4,852,099
Gross margin		86.5	%		25.3	%		81.4	%		81.6	%

Gross profit was $8.68 million for the nine months ended September 30, 2013, a decrease of $8.77 million, or 50.3%, compared with $17.44 million for the same period of 2012. The gross margin was 64.9% for the nine months ended September 30, 2013, compared with 81.5% for the same period of 2012. The decrease in gross margin was due to the decrease of software sales. The gross profit and the gross margin for the MVAS and MPS were $7.49 million or 86.5% and $1.19 million or 25.3%, respectively, for the nine months ended September, 2013 and $12.59 million or 81.4% and $4.85 million or 81.6%, respectively, for the nine months ended September 30, 2012. The decrease of gross margin in MPS was related to the sales of MPS hardwares, which carries a lower gross margin than the average level.

32

Operating expenses:

	Three Months Ended September 30,											% of
	2013						2012					change
	(Unaudited)			% of net revenues			(Unaudited)		% of net revenues
Selling and distribution expenses	$	344,884			5.6	%	$	662,343		7.5	%		(47.9	)%
General and administration expenses		933,426			15.2	%		2,087,644		23.5	%		(55.3	)%
Reversal of allowance for doubtful debts		(1,000,000	)		-16.3	%		0		0.0	%		N/A
Research and development expenses		439,415			7.2	%		517,891		5.8	%		(15.2	)%
	$	717,725			11.7	%	$	3,267,878		36.8	%		(78.0	)%

Operating expenses including selling and distribution, general and administrative expenses and R&D, was $0.72 million for the third quarter of 2013, decreased $2.55 million, or 78.0%, compared with $3.27 million for the same period of 2012.

Selling and distribution expenses: Selling and distribution expenses decreased $0.32 million or by 47.9%, to $0.34 million for the three months ended September 30, 2013 from $0.66 million for the same period of 2012. Our selling and distribution expenses primarily consist of staff salaries and welfare, travel and communication expenses, office rental and related expenses, and entertainment expenses. For the three months ended September 30, 2013, the decrease in selling and distribution expenses was mainly due to less advertisement and promotion expenses, profited from promotions in prior periods.

General and administrative expenses: General and administrative expenses decreased $1.16 million or by 55.3%, to $0.93 million for the three months ended September 30, 2013 as compared to $2.09 million for the same period in 2012. Our general and administrative expenses primarily consist of salaries and welfare for management, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance, utilities and other office expenses. The decrease was attributed to decreases of $0.22 million in travel expenses and $0.13 million in consulting fees, and $0.50 million in allowance for doubtful debts.

Research and development expenses: Research and development expenses slightly decreased $0.08 million or by 15.2%, from $0.52 million for the three months ended September 30, 2012 to $0.44 million for the same period of 2013. Our research and development expenses primarily consist of salaries and welfare for the research and development staff, office utilities and supplies allocated to our research and development department. The decrease in the research and development expenses for the nine months ended September 20, 2013 was related to less hardware used in research projects and reduction in staff benefit due to cost control.

	Nine Months Ended September 30,											% of
	2013						2012					change
	(Unaudited)			% of net revenues			(Unaudited)		% of net revenues
Selling and distribution expenses	$	1,336,439			10.0	%	$	2,535,720		11.8	%		(47.3)	%
General and administrative expenses		5,632,776			42.2	%		5,898,692		27.5	%		(4.5)	%
Reversal of allowance for doubtful debts		(1,000,000	)		-7.5	%		0		0.0	%		N/A
Research and development expenses		1,371,204			10.3	%		1,576,808		7.4	%		(13.0)	%
	$	7,340,419			55.0	%	$	10,011,220		46.7	%		(26.7)	%

Operating expenses including selling and distribution, general and administrative expenses and R&D, was $7.34 million for the nine months ended September 30, 2013, decreased $2.67 million, or 26.7%, compared with $10.01 million for the same period of 2012.

Selling and distribution expenses: Selling and distribution expenses decreased $1.20 million or by 47.3%, to $1.34 million for the nine months ended September 30, 2013 from $2.54million for the same period of 2012. Our selling and distribution expenses primarily consist of staff salaries and welfare, travel and communication expenses, office rental and related expenses, and entertainment expenses. For the nine months ended September 30, 2013, the decrease in selling and distribution expenses was mainly due reduction in staff benefit, business entertainment, and advertisement and promotion expenses due to cost control.

General and administrative expenses: General and administrative expenses decreased $0.27 million or by 4.5%, to $5.63 million for the nine months ended September 30, 2013 as compared to $5.90 million for the same period in 2012. Our general and administrative expenses primarily consist of salaries and welfare for management, accounting and administrative personnel, office rentals, depreciation of office equipment, professional service fees, maintenance, utilities and other office expenses. The decrease in general and administrative expenses was mainly due to reduction of $0.43 million in travel and business entertainment, net off by an increase of $0.25 million in impairment of intangible assets.

Research and development expenses: Research and development expenses slightly decreased $0.21 million or by 13.0%, from $1.58 million for the nine months ended September 30, 2012 to $1.37 million for the same period of 2013. Our research and development expenses primarily consist of salaries and welfare for the research and development staff, office utilities and supplies allocated to our research and development department. The decrease in the research and development expenses for the nine months ended September 20, 2013 was related to less hardware used in research projects and reduction in staff benefit due to cost control.

Other income (expenses): Other income (expenses) mainly includes interest income, interest expense, government grants and VAT refund. Other expenses for the three months ended September 30, 2013 amounted to $0.03 million, comparing with $0.02 million for the three months ended September 30, 2012. The interest expense was both $0.30 million for the three months ended September 30, 2013 and 2012. Refund of value-added tax was $0.24 million for the three months ended September 30, 2013, compared with 0.01 million for the same period in 2012.

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Income before income tax expense: Income before income tax expense increased $0.99 million, or 26.7%, from $3.70 million for the three months ended September 30, 2012 to $4.69 million for the three months ended September 30, 2013, mainly due to the decrease in both gross profit and operating expenses.

Income before income tax expense decreased $7.28 million, or 82.7%, from $8.80 million for the nine months ended September 30, 2012 to $1.52 million for the nine months ended September 30, 2013, mainly due to the decrease in gross profit.

Liquidity and Capital Resources

Dividends

We are a holding company and conduct our operations primarily through our subsidiaries and VIEs in the PRC. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries and VIEs. The VIEs’ earnings are transferred to our subsidiaries in the form of payments under the technology support and related consulting agreements. If our subsidiaries incur debt on their own behalf, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with accounting standards and regulations applicable to such subsidiaries. As of September 30, 2013, our PRC subsidiaries and VIEs had aggregate unappropriated earnings of approximately $55.23 million (based on an exchange rate of 6.1364 as of September 30, 2013) 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.

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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:

Trunkbow International Holdings Limited Summary Cash Flows

	Nine Months Ended September 30,
	2013			2012
	(Unaudited)			(Unaudited)
Net cash flows provided by operating activities	$	5,408,083		$	6,548,181
Net cash flows used in investing activities		(8,616,876	)		(19,610,784	)
Net cash flows provided by financing activities		4,375,161			7,267,819
Effect of foreign currency fluctuation on cash and cash equivalents		(23,002	)		(5,666	)
Net increase in cash and cash equivalents		1,143,366			(5,800,450	)
Cash and cash equivalents – beginning of year		783,074			6,139,589
Cash and cash equivalents – end of the period	$	1,926,440		$	339,139

The Company’s cash flows provided by operations amounted to $5.41 million for the nine months ended September 30, 2013. The Company had working capital of approximately $57.24 million as of September 30, 2013. The Company has historically financed its operations principally from cash flows generated from operating activities and external financing.

As of September 30, 2013, Trunkbow had signed up four agreements in relation to capital expenditure on Guangzhou, Shanghai and Huzhou data centers, and our R&D center. The total capital expenditure of these four centers is approximately $83.9-90.9 million of which $40-60 million will be paid within the next year. As of September 30, 2013, Trunkbow has invested $22.4 million. The Company expects to finance these projects principally from cash collection from our accounts receivables, loans to third parties, advance to suppliers and also from bank loans.

Management believes, based on the Company’s historical ability to fund operations using internally generated cash flow and external financings that the Company’s currently available cash and funds it expects to generate from operations and through potential short term loans financing from banks will enable it to operate the business and satisfy short term obligations through at least the next twelve months. Notwithstanding, the Company still has substantial obligations as described herein and there is no assurance that unforeseen circumstances would not have a material adverse effect on the Company’s financial condition.

If the Company is unable to generate sufficient operating cash flows obtain financing or raise additional capital, or encounters unforeseen circumstances that place constraints on its capital resources, management will be required to take various measures to conserve liquidity. Such measures could include, but not necessarily be limited to, curtailing the Company’s business development activities and controlling overhead expenses. There is a material risk, and management cannot provide any assurances, that the Company will be able to raise additional capital if needed. The Company has not received any commitments for new financing, and cannot provide any assurance that new financing will be available to the Company on acceptable terms, if at all. The failure of the Company to fund its obligations when needed would have a material adverse effect on its business and results of operations.

Our liquidity needs include (i) net cash used in operating activities that consists of (a) cash required to fund the initial build-out and continued expansion of our systems and platforms and (b) our working capital needs, which include deposits and advanced payment for hardware and software, payment of our operating expenses and financing of our accounts receivable; and (ii) net cash used in investing activities that consist of the payment for acquisitions of hardware and software in form of loan.

We lease offices and vehicles under lease agreements with a term expiring in April 2014. The leases may be cancelled by either party with 30-days prior written notice.

Future minimum rental payments under this operating lease are as follows:

	Office Rental
	(Unaudited)
Three months ending December 31, 2013	$	99,146
Year ending December 31, 2014		437,535
Year ending December 31, 2015		182,483
Total	$	719,164

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We do not have other leasing commitments other than those for office and vehicle rentals.

Operating Activities

Net cash flows provided by operating activities for the nine months ended September 30, 2013 was $5.41 million as compared with $6.55 million for the nine months ended September 30, 2012, for a net decrease of $1.14 million.

The decrease in cash flows provided by operating cash flow was mainly due to the reduction in net income, inventory, long-term prepayment, accounts payable and deferred revenue, and increase on other current assets, accounts receivable, and prepayment. Net income decreased $6.44 million for the nine months ended September 30, 2013, comparing with the same period in 2012. Cash provided by other current assets increased $10.78 million from the collection on advance to certain projects and advance to medical cloud projects. Collection on accounts receivable and reduced payment on prepayment increase cash inflows, while payment on accounts payable and long-term prepayment decreased the cash provided by operating activities. Cash used in advance to suppliers increased, due to more prepayment on projects. Cash used in inventory increased by $2.14 million because of purchase of hardware. No deferred revenue was received during the nine months ended September 30, 2013.

Investing Activities

Our main use of investing activities during the nine months ended September 30, 2013 was on acquisition of property and equipment and loans to third parties related to our IDC centers. The main cash received from investing activities was from advance cash receipt from sale of property and also collection on loans to third parties.

Financing Activities

Net cash flows provided by financing activities for the nine months ended September 30, 2013 was $4.38 million as compared with $7.27 million for the nine months ended September 30, 2012. The cash provided for the nine months ended September 30, 2013 and 2012 were mainly from the short term bank loans and also loans from third parties. We received $12.78 million of short-term bank loan and repaid $6.49 million during the nine months ended September 30, 2013. We also received $0.19 million of loans from third parties and repaid $2.10 million of these loans.

Recent Developments

On June 28, 2013, we received a letter from the Nasdaq Stock Market LLC (“Nasdaq”), which stated that, based upon the closing bid price for the last 30 consecutive business days, we no longer meet the requirement set forth in Nasdaq Rule 5550(a)(2), which requires listed securities to maintain a minimum bid price of $1 per share. On October 3, 2013, we received a letter from the Nasdaq, which stated that, for the last 10 consecutive business days, from September 29, 2013 through October 2, 2013, the closing bid price of the Company’s common stock has been at $1.00 per share or greater. Accordingly, the Company regained compliance with Listing Rule 5450(a)(1).

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness, as of September 30, 2013, of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting.

There has been no change in our internal control over financial reporting during the third fiscal quarter of 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

Neither we nor our subsidiaries are currently a party to any material legal proceedings.

ITEM 1.A. RISK FACTORS

Not applicable to smaller reporting companies.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None.

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ITEM 6.EXHIBITS

Exhibit No.	Description
31.1*	Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation
101.DEF*	XBRL Taxonomy Extension Definition
101.LAB*	XBRL Taxonomy Extension Labels
101.PRE*	XBRL Taxonomy Extension Presentation

*Filed herewith.

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SIGNATURES

Pursuant to the requirements 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
	LIMITED
Date: November 14, 2013	By:	/s/ Qiang Li
	Name:	Qiang Li
	Title:	Chief Executive Officer (Principal Executive Officer)

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EXHIBIT INDEX

Exhibit No.	Description
31.1*	Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*	XBRL Instance
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation
101.DEF*	XBRL Taxonomy Extension Definition
101.LAB*	XBRL Taxonomy Extension Labels
101.PRE*	XBRL Taxonomy Extension Presentation

*Filed herewith.

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