UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
_______________________
(Mark One)
[ X ]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2010
OR
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 001-34812
______________________
THT HEAT TRANSFER TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
_______________________
Nevada | 20-5463509 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
THT Industrial Park, | |
No. 5 Nanhuan Road, Tiexi District | |
Siping, Jilin Province | |
People's Republic of China | 136000 |
(Address of principal executive offices) | (Zip Code) |
86-434-3265241
(Registrant's telephone number, including area code)
_______________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 [ ] 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 “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] | Smaller reporting company [ X ] |
(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 ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 16,000,000 shares of common stock, par value $0.001 per share, outstanding on August 13, 2010.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION | 1 | |
Item 1. | Financial Statements (unaudited) | 1 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 21 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 33 |
Item 4. | Controls and Procedures | 33 |
PART II —OTHER INFORMATION | 33 | |
Item 1. | Legal Proceedings | 33 |
Item 1A. | Risk Factors | 33 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 |
Item 3. | Defaults Upon Senior Securities | 33 |
Item 4. | (Removed and Reserved) | 34 |
Item 5. | Other Information | 34 |
Item 6. | Exhibits | 34 |
i
PART I — FINANCIAL INFORMATION
THT Heat Transfer Technology, Inc.
Condensed Consolidated Financial Statements
For the three and six months ended
June 30, 2010 and 2009
(Stated in US dollars)
1
THT Heat Transfer Technology, Inc.
Condensed Consolidated Financial Statements
Three and six months ended June 30, 2010 and 2009
Index to Condensed Consolidated Financial Statements
Pages | |
Condensed Consolidated Statements of Income and Comprehensive Income | 3 |
Condensed Consolidated Balance Sheets | 4 - 5 |
Condensed Consolidated Statements of Cash Flows | 6 |
Notes to Condensed Consolidated Financial Statements | 7 - 20 |
2
THT Heat Transfer Technology, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the three and six months ended June 30, 2010 and 2009
(Unaudited)
(Stated in US Dollars)
Three months ended June 30, | Six months ended June 30, | |||||||||||
(unaudited) | (unaudited) | |||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||
Sales revenue - Note 19 | $ | 12,176,674 | $ | 10,130,142 | $ | 22,305,963 | $ | 14,325,687 | ||||
Cost of sales | (6,832,994 | ) | (5,654,306 | ) | (12,715,884 | ) | (8,073,938 | ) | ||||
Gross profit | 5,343,680 | 4,475,836 | 9,590,079 | 6,251,749 | ||||||||
Operating expenses | ||||||||||||
Administrative expenses | 1,005,291 | 845,795 | 1,784,635 | 1,386,880 | ||||||||
Research and development expenses | 188,581 | 174,668 | 362,034 | 361,589 | ||||||||
Selling expenses | 1,341,283 | 1,147,991 | 2,839,139 | 1,992,481 | ||||||||
2,535,155 | 2,168,454 | 4,985,808 | 3,740,950 | |||||||||
Income from operations | 2,808,525 | 2,307,382 | 4,604,271 | 2,510,799 | ||||||||
Interest income | 2,686 | 4,815 | 7,236 | 10,922 | ||||||||
Other income - Note 15 | 78,647 | 74,845 | 164,251 | 156,891 | ||||||||
Interest expense | (128,833 | ) | (130,887 | ) | (260,642 | ) | (289,774 | ) | ||||
Income before income taxes | 2,761,025 | 2,256,155 | 4,515,116 | 2,388,838 | ||||||||
Income taxes - Note 9 | (407,048 | ) | (307,755 | ) | (725,099 | ) | (331,472 | ) | ||||
Net income before noncontrolling interests | 2,353,977 | 1,948,400 | 3,790,017 | 2,057,366 | ||||||||
Net loss (income) attributable to noncontrolling interests | 37,573 | (250 | ) | 100,959 | 28,997 | |||||||
Net income attributable to THT Heat Transfer | $ | 2,391,550 | $ | 1,948,150 | $ | 3,890,976 | $ | 2,086,363 | ||||
Net income before noncontrolling interests | $ | 2,353,977 | $ | 1,948,400 | $ | 3,790,017 | $ | 2,057,366 | ||||
Other comprehensive income (loss) | ||||||||||||
Foreign currency translation adjustments | 42,423 | (1,026 | ) | 112,918 | (26,644 | ) | ||||||
Comprehensive income | 2,396,400 | 1,947,374 | 3,902,935 | 2,030,722 | ||||||||
Comprehensive loss (income) attributable | 37,634 | (261 | ) | 100,333 | 29,419 | |||||||
Comprehensive income attributable to THT Heat | $ | 2,434,034 | $ | 1,947,113 | $ | 4,003,268 | $ | 2,060,141 | ||||
Earnings per share attributable to THT Heat Transfer | ||||||||||||
- Basic and diluted | $ | 0.15 | $ | 0.13 | $ | 0.24 | $ | 0.14 | ||||
Weighted average number of shares outstanding | ||||||||||||
- Basic and diluted | 16,000,000 | 14,813,187 | 16,000,000 | 14,806,630 |
See the accompanying notes to condensed consolidated financial statements
3
THT Heat Transfer Technology, Inc.
Condensed Consolidated Balance Sheets
As of June 30, 2010 and December 31, 2009
(Stated in US Dollars)
June 30, | December 31, | |||||
2010 | 2009 | |||||
(Unaudited) | ||||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 2,898,064 | $ | 5,379,627 | ||
Restricted cash - Note 5 | 1,505,841 | 1,376,114 | ||||
Counter guarantee receivable - Note 13 | 205,622 | - | ||||
Trade receivables, net - Note 6 | 21,903,635 | 14,882,408 | ||||
Bills receivable | 608,839 | 487,803 | ||||
Other receivables, prepayments and deposits, net - Note 7 | 6,723,693 | 6,312,268 | ||||
Inventories, net - Note 8 | 7,504,737 | 10,158,203 | ||||
Deferred tax assets | 145,845 | 96,858 | ||||
Total current assets | 41,496,276 | 38,693,281 | ||||
Retention receivable | 373,537 | 795,144 | ||||
Counter guarantee receivable - Note 13 | - | 204,762 | ||||
Property, plant and equipment, net - Note 10 | 6,628,964 | 6,416,112 | ||||
Land use rights | 983,906 | 990,181 | ||||
TOTAL ASSETS | $ | 49,482,683 | $ | 47,099,480 |
See the accompanying notes to condensed consolidated financial statements
4
THT Heat Transfer Technology, Inc.
Condensed Consolidated Balance Sheets (Cont'd)
As of June 30, 2010 and December 31, 2009
(Stated in US Dollars)
June 30, | December 31, | |||||
2010 | 2009 | |||||
(Unaudited) | ||||||
LIABILITIES AND EQUITY | ||||||
LIABILITIES | ||||||
Current liabilities | ||||||
Trade payables | $ | 1,611,763 | $ | 1,900,599 | ||
Other payables and accrued expenses - Note 11 | 11,976,447 | 12,634,290 | ||||
Income tax payable | 743,972 | 474,492 | ||||
Short-term bank loans - Note 12 | 5,874,923 | 5,850,348 | ||||
Current maturities of long-term loan - Note 13 | 2,496,842 | 1,755,104 | ||||
Total current liabilities | 22,703,947 | 22,614,833 | ||||
Long-term loan - Note 13 | - | 1,608,846 | ||||
TOTAL LIABILITIES | 22,703,947 | 24,223,679 | ||||
COMMITMENTS AND CONTINGENCIES- Note 18 | ||||||
STOCKHOLDERS' EQUITY | ||||||
Preferred stock : par value of $0.001 per share | ||||||
Common stock : par value $0.001 per share - Note 14 | ||||||
Authorized 190,000,000 shares; issued and outstanding | 16,000 | 16,000 | ||||
Additional paid-in capital | 14,010,700 | 14,010,700 | ||||
Statutory reserve | 1,308,646 | 863,304 | ||||
Accumulated other comprehensive income | 831,176 | 718,884 | ||||
Retained earnings | 10,471,268 | 7,025,634 | ||||
Total THT Heat Transfer Technology, Inc. stockholders' equity | 26,637,790 | 22,634,522 | ||||
Noncontrolling interests | 140,946 | 241,279 | ||||
TOTAL EQUITY | 26,778,736 | 22,875,801 | ||||
TOTAL LIABILITIES AND EQUITY | $ | 49,482,683 | $ | 47,099,480 |
See the accompanying notes to condensed consolidated financial statements
5
THT Heat Transfer Technology, Inc.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2010 and 2009
(Unaudited)
(Stated in US Dollars)
Six months ended June 30, | ||||||
(unaudited) | ||||||
2010 | 2009 | |||||
Cash flows from operating activities | ||||||
Net income attributable to THT Heat Transfer | $ | 3,890,976 | $ | 2,086,363 | ||
Adjustments to reconcile net income attributable to | ||||||
Depreciation and amortization | 413,989 | 366,652 | ||||
Deferred taxes | (48,395 | ) | (18,194 | ) | ||
Allowance for doubtful debts | 322,632 | 100,748 | ||||
Noncontrolling interests | (100,959 | ) | (28,997 | ) | ||
Changes in operating assets and liabilities :- | ||||||
Restricted cash | - | (457,687 | ) | |||
Trade receivables | (7,254,730 | ) | (4,769,933 | ) | ||
Bills receivable | (118,532 | ) | 81,024 | |||
Other receivables, prepayments and deposits | (383,440 | ) | (5,667,701 | ) | ||
Inventories | 2,685,825 | 3,252,708 | ||||
Retention receivable | 423,322 | (34,383 | ) | |||
Trade payables | (295,684 | ) | (806,594 | ) | ||
Other payables and accrued expenses | (708,197 | ) | (1,424,719 | ) | ||
Income tax payable | 266,464 | 349,666 | ||||
Net cash flows used in operating activities | (906,729 | ) | (6,971,047 | ) | ||
Cash flows from investing activities | ||||||
Cash acquired from reverse acquisition | - | 1,000 | ||||
Payments to acquire property, plant and equipment | (569,010 | ) | (327,394 | ) | ||
Proceeds from sale of property, plant and equipment | 10,241 | - | ||||
Net cash flows used in investing activities | (558,769 | ) | (326,394 | ) | ||
Cash flows from financing activities | ||||||
Proceeds from bank loans | 2,926,200 | 8,790,600 | ||||
Repayment of bank loans | (2,926,200 | ) | (11,722,000 | ) | ||
Repayment of long-term loan | (877,868 | ) | (293,140 | ) | ||
(Increase) decrease in restricted cash | (123,473 | ) | 732,550 | |||
Decrease in bills payable | - | (732,550 | ) | |||
Net cash flows used in financing activities | (1,001,341 | ) | (3,224,540 | ) | ||
Effect of foreign currency translation on cash and cash equivalents | (14,724 | ) | (12,102 | ) | ||
Net decrease in cash and cash equivalents | (2,481,563 | ) | (10,534,083 | ) | ||
Cash and cash equivalents - beginning of period | 5,379,627 | 12,579,087 | ||||
Cash and cash equivalents - end of period | $ | 2,898,064 | $ | 2,045,004 | ||
Supplemental disclosures for cash flow information | ||||||
Cash paid for :- | ||||||
Interest | $ | 246,999 | $ | 289,774 | ||
Income taxes | $ | 616,073 | $ | - |
See Notes to Condensed Consolidated Financial Statements
6
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
1. | Corporate information |
THT Heat Transfer Technology, Inc. (the “Company” or “THT” or the “Surviving Corporation”) is the surviving corporation pursuant to the Reincorporation Merger as detailed below. | |
| |
Reincorporation Merger | |
| |
On November 24, 2009, BTHC VIII, Inc. ("BTHC") entered into an Agreement and Plan of Merger (the "Merger Agreement") with THT, a Nevada corporation and wholly-owned subsidiary of BTHC. Pursuant to the Merger Agreement, BTHC agreed to merge with and into THT, with THT continuing as the surviving entity (the "Reincorporation Merger"). The Reincorporation Merger became effective on November 30, 2009 (the "Effective Time"). | |
| |
As a result of the Reincorporation Merger, the legal domicile of the Surviving Corporation is now Nevada. The Merger Agreement and Reincorporation Merger were duly approved by the written consent of stockholders of BTHC owning at least a majority of the outstanding shares of BTHC's common stock, dated September 16, 2009. | |
| |
Pursuant to the terms of the Merger Agreement, (i) BTHC merged into THT, with THT being the surviving corporation, and BTHC thereby changed its name to THT Heat Transfer Technology, Inc.; (ii) from and after the Effective Time, THT possesses all of the rights, privileges, powers, and franchises of BTHC, and BTHC's debts and liabilities became the debts and liabilities of THT; (iii) BTHC's existing Board of Directors and officers became the Board of Directors and officers of the Surviving Corporation; and (iv) the Articles of Incorporation and Bylaws of THT now govern the Surviving Corporation. | |
| |
The Reincorporation Merger did not result in any change in headquarters, business, jobs, management, location of any of offices or facilities, number of employees, assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation Merger, which are immaterial). Management, including all directors and officers, remain the same in connection with the Reincorporation Merger. There were no substantive changes in the employment agreements for executive officers or in other direct or indirect interests of the current directors or executive officers as a result of the Reincorporation Merger. | |
| |
As a result of the Reincorporation Merger, each outstanding share of BTHC's common stock, par value $0.001 per share, was automatically converted into one share of THT's common stock, par value $0.001 per share. Each outstanding certificate representing shares of BTHC's common stock is deemed, without any action by BTHC's stockholders, to represent the same number of shares of THT's common stock. |
7
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
1. | Corporate information (Cont'd) |
| |
Reorganization | |
| |
Before the Reincorporation Merger and on June 30, 2009, BTHC entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Megaway International Holdings Limited, a British Virgin Islands corporation ("Megaway"), and its sole shareholder, Wisetop International Holdings Limited, a British Virgin Islands corporation ("Wisetop"). Pursuant to the Share Exchange Agreement, Megaway became a wholly-owned subsidiary of the Company and Wisetop was issued 14,800,000 shares of the Company's common stock, which, after giving effect to the Cancellation Agreement disclosed below, constituted 92.5% of the Company's issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement, in exchange for 100% of the issued and outstanding shares of Megaway. | |
| |
Megaway was dormant since its incorporation until it acquired 100% of the outstanding capital stock of Star Wealth International Holdings Limited ("Star Wealth"), a Hong Kong corporation on May 5, 2009. Star Wealth was also dormant since its incorporation until it acquired 100% of the equity interest of Siping City Juyuan Hanyang Plate Heat Exchanger Co., Ltd. (“Siping Juyuan”), a PRC corporation, on May 10, 2009. | |
| |
On May 10, 2009, Star Wealth entered into an equity transfer agreement with all of the shareholders of Siping Juyuan to acquire their entire interests in Siping Juyuan at a total cash consideration of RMB60,000,000 ($8,795,075). The equity transfer agreement was approved by the local government of the People's Republic of China (the “PRC”) on May 31, 2009. | |
| |
Siping Juyuan was established in the PRC on May 31, 2006 following the division (the “Division”) of Siping City Juyuan Heat Exchange Equipment Co., Ltd. (“Old Juyuan Company”) into three companies, namely Siping Juyuan, Siping City Juyuan Heat Exchange Equipment Co., Ltd. (“New Juyuan Company”) and Siping City Juyuan Hanyang Pressure Vessels Co., Ltd (“Juyuan Hanyang Pressure Vessels”). | |
| |
Siping Juyuan has a 75% directly owned subsidiary, Beijing Juyuan Hanyang Heat Exchange Equipment Co. Ltd (“Beijing Juyuan”). | |
| |
As a condition precedent to the consummation of the Share Exchange Agreement, on June 30, 2009, the Company entered into a cancellation agreement, or the Cancellation Agreement, with Mr. Gerald Pascale, who was the major stockholder of the Company immediately before the Share Exchange Agreement and served as the Company's sole director and officer from February 12, 2009 until June 30, 2009 when he was replaced by Guohong Zhao (“Mr. Zhao”), a founder of Siping Juyuan, whereby Mr. Pascale agreed to the cancellation of 4,805,387 shares of the Company's common stock owned by him. | |
| |
Mr. Zhao was appointed as the Company's director and chief executive officer effective upon the closing of the above reverse acquisition. In addition, the Company's executive officers were replaced by the executive officers of Siping Juyuan upon the closing of the reverse acquisition. |
8
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
1. | Corporate information (Cont'd) |
| |
On June 30, 2009, Mr. Zhao entered into an option agreement with Ms. Jinghua Zhao, the sole shareholder of Wisetop, pursuant to which Mr. Zhao was granted an option, exercisable after 180 days, to acquire all of the equity interests of Wisetop owned by Ms. Jinghua Zhao at an exercise price of $3,246,160. This option expires on June 30, 2011. | |
| |
Also on June 30, 2009, Wisetop entered into separate option agreements with the other original stockholders of Siping Juyuan, pursuant to which such stockholders were granted options, exercisable after 90 days, to purchase an aggregate of 10,240,786 shares of the Company's common stock owned by Wisetop at total exercise price of $7,291,440. These options also expire on June 30, 2011. | |
| |
After Mr. Zhao and the other original stockholders exercise these options, they will be the Company's controlling stockholders holding 92.5% equity interest. | |
| |
2. | Description of business |
| |
The Company is a holding company whose primary business are conducted through its subsidiaries, namely Siping Juyuan which is located in the Jilin Province and Beijing Juyuan which is located in Beijing City of the PRC. The Company is engaged in the manufacturing and trading of plate heat exchangers and various related products. | |
| |
3. | Basis of presentation |
| |
After the consummation of the reorganization detailed in note 2 above, Mr. Zhao and the other original stockholders of Siping Juyuan maintain control over Siping Juyuan by virtue of the option agreements. Accordingly, accounting for recapitalization is adopted for the preparation of these condensed consolidated financial statements. These financial statements, issued under the name of the Company, represent the continuation of the financial statements of Siping Juyuan. | |
| |
The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with the Company's consolidated financial statements and accompanying notes thereto for the year ended December 31, 2009 filed with the SEC in the Company's Form 10-K on March 31, 2010. | |
| |
In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three and six month periods have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year. |
9
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
4. | Summary of significant accounting policies |
| |
Basis of consolidation | |
| |
The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated on consolidation. | |
| |
Concentration of credit risk | |
| |
Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents, restricted cash, trade receivables and other receivables. As of June 30, 2010, substantially all of the Company's cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade receivables, the Company extends credit based on an evaluation of the customer's financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables. | |
| |
During the three-month and six-month periods ended June 30, 2010 and 2009, the Company did not have any customers which represented 10% or more of the Company's condensed consolidated sales revenue. | |
| |
As of June 30, 2010 and December 31, 2009, the Company did not have any balance of gross trade receivable due from individual customer that represented 10% or more of the Company's gross trade receivables. | |
| |
Fair value of financial instruments | |
| |
Accounting Standards Codification (“ASC”) Topic 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which fair value option was not elected. The carrying amounts of the Company's financial assets and liabilities approximate their fair values due to short maturities or the applicable interest rates approximate the current market rates. |
10
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
4. | Summary of significant accounting policies (cont'd) |
| |
Recently issued accounting pronouncements | |
| |
In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements”. ASU 2009-13 requires companies to allocate revenue in multiple-element arrangements based on an element's estimated selling price if vendor-specific or other third party evidence of value is not available. ASU 2009-13 is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The adoption of ASU 2009-13 is not expected to have a material effect on the Company's financial statements. | |
| |
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”, that expands the required disclosures about fair value measurements. This guidance provides for new disclosures requiring the Company to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. This guidance also provides clarification of existing disclosures requiring the Company to (i) determine each class of assets and liabilities based on the nature and risks of the investments rather than by major security type and (ii) for each class of assets and liabilities, disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption of ASU 2010-06 has no material impact on the Company's financial statements. |
11
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
4. | Summary of significant accounting policies (cont'd) |
In April, 2010, the FASB issued ASU 2010-13, "Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force". ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently evaluating the impact of the adoption of ASU 2010-13 on its financial statements. | |
5. | Restricted cash |
June 30, | December 31, | ||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Bank deposits held as collateral for performance bonds issued by the banks to customers | $ | 1,505,841 | $ | 1,376,114 |
When the Company's customers request to receive performance bonds issued by the banks in relation to the Company's performance under the sales contracts, the Company has to place deposits with banks equal to 100% of the bonds amount at the time of issuance.
6. | Trade receivables, net |
June 30, | December 31, | ||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Trade receivables | $ | 22,828,233 | $ | 15,480,623 | |||
Less : Allowance for doubtful accounts | (924,598 | ) | (598,215 | ) | |||
$ | 21,903,635 | $ | 14,882,408 |
12
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
6. | Trade receivables, net (cont'd) |
An analysis of the allowance for doubtful accounts for the six months ended June 30, 2010 and 2009 is as follows :- |
Six months ended June 30, | |||||||
(Unaudited) | |||||||
2010 | 2009 | ||||||
Balance at beginning of period | $ | 598,215 | $ | 422,560 | |||
Addition of bad debt expense, net | 322,632 | 100,748 | |||||
Translation adjustments | 3,751 | (624 | ) | ||||
Balance at end of period | $ | 924,598 | $ | 522,684 |
7. | Other receivables, prepayments and deposits |
June 30, | December 31, | ||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Other receivables | $ | 385,226 | $ | 342,880 | |||
Advances to staff | 985,006 | 384,060 | |||||
Prepayments to suppliers | 4,841,206 | 5,149,200 | |||||
Deposits for public bid | 580,270 | 503,860 | |||||
6,791,708 | 6,380,000 | ||||||
Less : Allowance for doubtful accounts | (68,015 | ) | (67,732 | ) | |||
$ | 6,723,693 | $ | 6,312,268 |
The advances to staff mainly represent staff drawings for handling selling and logistic activities for the Company in the ordinary course of business.
No allowance for doubtful accounts was recognized during the three and six month periods ended June 30, 2010 and 2009.
13
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
8. | Inventories, net |
June 30, | December 31, | ||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Raw materials | $ | 3,789,221 | $ | 2,517,879 | |||
Work-in-progress | 2,270,047 | 7,647,868 | |||||
Finished goods | 1,463,390 | 10,301 | |||||
7,522,658 | 10,176,048 | ||||||
Less : Provision for obsolete inventories | (17,921 | ) | (17,845 | ) | |||
$ | 7,504,737 | $ | 10,158,203 |
No provision for obsolete inventories was recognized during the three and six month periods ended June 30, 2010 and 2009. | |
| |
9. | Income tax |
| |
United States | |
| |
The Company is subject to the United States Federal and state income tax at a statutory rate of 34%. No provision for the U.S. Federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods. The Company has not recognized a deferred tax liability for the undistributed earnings of its non-U.S. subsidiaries as of June 30, 2010 and December 31, 2009 respectively, because the Company currently does not expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company no longer plans to permanently reinvest undistributed earnings. Calculation of related unrecognized deferred tax liability is not practicable. | |
| |
BVI | |
| |
Megaway was incorporated in the BVI and, under the current laws of the BVI, is not subject to income taxes. | |
| |
Hong Kong | |
| |
Star Wealth was incorporated in Hong Kong and is subject to Hong Kong profits tax at a tax rate of 16.5%. No provision for Hong Kong tax has been made as Star Wealth has no taxable income during the reporting periods. |
14
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
9. | Income tax (cont'd) |
| |
PRC | |
| |
Pursuant to the new China enterprise income tax (“EIT”) law, commencing from January 1, 2008, Siping Juyuan and Beijing Juyuan were subject to PRC EIT at the statutory rate of 25%. | |
| |
As Siping Juyuan was qualified as a “High-tech Enterprise”, it was entitled to a preferential EIT rate of 15%. Beijing Juyuan, being a Sino-foreign joint venture enterprise, was entitled to two years' EIT exemption, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by a 50% tax reduction for the immediate next three calendar years (“Tax Holiday”). The Tax Holiday commenced in the fiscal year of 2008 and Beijing Juyuan was subject to EIT at the rate of 12.5% and 0% during the six months ended June 30, 2010 and 2009 respectively. | |
| |
Siping Juyuan was also entitled to a special tax concession (“Tax Concession”) because it employed the required number of handicapped staff according to the relevant PRC tax rules. In particular, this Tax Concession entitled Siping Juyuan refund of value-added tax paid during the reporting periods (Note 15). | |
| |
In July 2006, the FASB issued ASC 740 (previously Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”). This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company's tax positions and considered that no additional provision for uncertainty in income taxes was necessary as of June 30, 2010 and December 31, 2009. | |
10. | Property, plant and equipment, net |
June 30, | December 31, | ||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Cost | |||||||
Buildings | $ | 3,550,442 | $ | 3,535,590 | |||
Plant and machinery | 3,060,837 | 2,975,905 | |||||
Office equipment | 528,225 | 382,851 | |||||
Motor vehicles | 263,792 | 274,265 | |||||
7,403,296 | 7,168,611 | ||||||
Accumulated depreciation | (2,252,457 | ) | (1,861,540 | ) | |||
Construction in progress | 1,478,125 | 1,109,041 | |||||
Net | $ | 6,628,964 | $ | 6,416,112 |
As of June 30, 2010 and December 31, 2009, property, plant and equipment with net book values of $2,909,070 and $2,972,439, respectively, were pledged as collateral under certain loan arrangements (Note 12).
15
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
11. | Other payables and accrued expenses |
June 30, | December 31, | ||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Receipt in advance from customers | 6,224,156 | 8,453,347 | |||||
Pension payable | 359,005 | 281,381 | |||||
Salaries payable | 240,590 | 225,092 | |||||
VAT tax payable | 1,786,767 | 396,244 | |||||
Other payables and accrued expenses | 3,365,929 | 3,278,226 | |||||
$ | 11,976,447 | $ | 12,634,290 |
Pension payable represents accrued staff medical, industry injury claims, labor and unemployment insurances, all of which are third parties insurance and the insurance premiums are based on certain percentage of salaries. The obligations of the Company are limited to those premiums contributed by the Company. | |
| |
Included in other payables as of June 30, 2010 and December 31, 2009 was an amount of $1,072,173 and $1,721,465, respectively, representing governmental financial support received for the Company's efficient heat exchange equipment manufacture project. The project will be subject to the government's inspection and whether the government support is repayable or not is subject to the inspection results. | |
12. | Short-term bank loans |
June 30, | December 31, | ||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Secured bank loans | $ | 2,937,462 | $ | 2,925,174 | |||
Unsecured bank loans | 2,937,461 | 2,925,174 | |||||
$ | 5,874,923 | $ | 5,850,348 |
All bank loans are repayable within one year and carry annual interest at 100% of the benchmark interest rate published by the People's Bank of China (the “PBOC”).
16
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
12. | Short-term bank loans (cont'd) |
The secured bank loans were secured by the following assets of the Company :- |
June 30, | December 31, | ||||||
2010 | 2009 | ||||||
(Unaudited) | |||||||
Buildings (Note 10) | $ | 2,739,975 | $ | 2,804,052 | |||
Construction in progress (Note 10) | 169,095 | 168,387 | |||||
Land use rights | 983,906 | 990,181 | |||||
$ | 3,892,976 | $ | 3,962,620 |
The unsecured bank loans as of June 30, 2010 and December 31, 2009 were guaranteed by Mr. Zhao and a non-related party who did not receive any compensation for acting as guarantors for the Company. | |
| |
During the reporting periods, there was no covenant requirement under the bank loans granted to the Company. | |
| |
13. | Long-term loan |
| |
The loan is borrowed from a non-financial institution, bearing interest at an annual rate of 106% of the benchmark rate of the PBOC for three-year to five-year long-term loans and guaranteed by a third party. | |
| |
The Company paid a counter guarantee of $205,622 and $204,762 as of June 30, 2010 and December 31, 2009, respectively, to the non-financial institution. | |
| |
The outstanding principal balance of the long-term loan as of June 30. 2010 will mature prior to the period ending June 30, 2011. | |
| |
14. | Common stock |
| |
On June 30, 2009, the Company issued 14,800,000 common shares at par value of $0.001 each to the then stockholders of Megaway in exchange of 100% of the outstanding capital stock of Megaway. | |
| |
The common stock reflects the recapitalization as if it occurred as of the beginning of the first period presented. |
17
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
15. | Other income |
Three months ended June 30, | Six months ended June 30, | ||||||||||||
(unaudited) | (unaudited) | ||||||||||||
2010 | 2009 | 2010 | 2009 | ||||||||||
Refund of value-added tax under Tax Concession | $ | 77,913 | $ | 74,845 | $ | 156,188 | $ | 156,891 | |||||
Other income | 734 | - | 8,063 | - | |||||||||
$ | 78,647 | $ | 74,845 | $ | 164,251 | $ | 156,891 |
16. | Earnings per share |
| |
During the reporting periods, the Company had no dilutive instruments. Accordingly, the basic and diluted earnings per share are the same. | |
| |
The per share data reflects the recapitalization as if it occurred as of the beginning of the first period presented. | |
| |
17. | Defined contribution plan |
| |
Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate of 30.6% to 31.2% of employees' salaries and wages to a defined contribution retirement scheme organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company's employees in the PRC. The only obligation of the Company with respect to retirement scheme is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the statements of income. The Company contributed and accrued $72,405 and $122,744 for the six months ended June 30, 2010 and 2009, respectively. | |
| |
18. | Commitments and contingencies |
| |
Capital commitment | |
| |
As of June 30, 2010 and December 31, 2009, the Company had capital commitments amounting to $528,452 and $551,304 respectively, in respect of the construction of the Company's campus and factory which were contracted for but not provided in the financial statements. | |
| |
Contingencies | |
| |
As of June 30, 2010 and December 31, 2009, the Company had contingencies arising from the division of Old Juyuan Company into Siping Juyuan, New Juyuan Company and Juyuan Hanyang Pressure Vessels. According to the division agreement of Old Juyuan Company (“Division Agreement”), all parties to the Division Agreement undertook joint and several liabilities for the indebtedness of Old Juyuan Company. |
18
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
18. | Commitments and contingencies (cont'd) |
| |
Contingencies (cont'd) | |
| |
In accordance with ASC Topic 450, “Contingencies”, the Company records a liability in the consolidated financial statements for these contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded. | |
| |
The Company's loss is possible but not known or probable, accordingly no liability in respect of this undertaking was recognized as of June 30, 2010 and December 31, 2009. The Company believes that a reasonable estimate of the possible loss ranged from $nil to $1,509,245 as of June 30, 2010. | |
| |
19. | Segment information |
| |
The Company is solely engaged in the manufacturing and trading of plate heat exchangers and various related products. Since the nature of the products, their production processes, and their distribution methods are substantially similar, they are considered as a single reportable segment. | |
| |
The Company's sales revenues by products for the six months ended June 30, 2010 and 2009 were as follows :- |
Six months ended June 30, | |||||||||||||
(unaudited) | |||||||||||||
2010 | % | 2009 | % | ||||||||||
Plate heat exchanger | $ | 12,357,301 | 55 | $ | 9,690,436 | 68 | |||||||
Heat exchange unit | 5,616,629 | 25 | 1,137,330 | 8 | |||||||||
Air-cooled heat exchanger | 3,032,531 | 14 | 676,477 | 5 | |||||||||
Shell-and-tube heat exchanger | 247,368 | 1 | 1,761,800 | 12 | |||||||||
Others | 1,052,134 | 5 | 1,059,644 | 7 | |||||||||
$ | 22,305,963 | 100 | $ | 14,325,687 | 100 |
All of the Company's long-lived assets and revenues classified based on the customers are located in the PRC.
19
THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)
20. | Related party transactions |
Apart from the transactions as disclosed in note 12 to the condensed consolidated financial statements, the Company had no other material transactions carried out with related parties during the reporting periods. | |
21. | Subsequent events |
On July 7, 2010, the Company completed the registration of its common stock with par value of $0.001 per share pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended, in connection with the listing of the Company's common stock on the NASDAQ Stock Market LLC effective July 8, 2010. The common stock was quoted on the OTC Bulletin Board under the symbol “THTI” as of June 30, 2010. | |
The Company evaluated all other events or transactions that occurred through the date the financial statements were issued and has determined that there is no material recognizable nor subsequent events or transactions which would require recognition or disclosure in the financial statements. |
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that constitute “forward looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements. These statements appear in a number of places in this document and include statements regarding the intent, belief or expectation of our company, its directors or its officers with respect to events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Quarterly Report on Form 10-Q are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. These risks and uncertainties include, but are not limited to, the factors mentioned in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2009, and other risks mentioned in this Form 10-Q or in our other reports filed with the Securities and Exchange Commission (the “SEC”) since the filing date of our Annual Report on Form 10-K for the year ended December 31, 2009.
Although these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by law, we undertake no responsibility or obligation to update publicly these forward-looking statements, but may do so in the future in written or oral statements. Investors should take note of any future statements made by us or on our behalf.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes that appear in Part I, Item 1, “Financial Statements,” of this Quarterly Report. Our unaudited consolidated financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion and analysis covers the Company's unaudited consolidated results of operations for the three months and six months periods ended June 30, 2010 and 2009.
Use of Defined Terms
Except as otherwise indicated by the context, references to:
- “Beijing Juyuan” refers to Beijing Juyuan Hanyang Heat Exchange Equipment Co., Ltd., a PRC corporation and our indirect, 75%-owned subsidiary;
- “BVI” refers to the British Virgin Islands;
- “China,” “Chinese” and “PRC,” refer to the People's Republic of China;
- “Exchange Act” refers to the Securities Exchange Act of 1934, as amended.
- “Megaway” refers to Megaway International Holdings Limited, a BVI corporation and our direct, wholly owned subsidiary, and/or its direct and indirect subsidiaries, as the case may be;
- “RMB” refers to Renminbi, the legal currency of China;
- “Securities Act” refers to the Securities Act of 1933, as amended;
21
- “Siping Juyuan” refers to Siping City Juyuan Hanyang Plate Heat Exchanger Co. Ltd., a PRC corporation and our indirect, wholly-owned subsidiary;
- “Star Wealth” refers to Star Wealth International Holdings Limited, a Hong Kong corporation and our indirect, wholly-owned subsidiary;
- “THT,” “the Company,” “we,” “us,” or “our,” refers to the combined business of THT Heat Transfer Technology, Inc., and its wholly-owned subsidiaries, Megaway, Star Wealth, Siping Juyuan and 75%-owned subsidiary Beijing Juyuan, but do not include the stockholders of THT Heat Transfer Technology, Inc.;
- “U.S. dollar,” “$” and “US$” refer to the legal currency of the United States; and
- “Wisetop” refers to Wisetop International Holdings Limited, a BVI corporation.
Overview
We are a leading total solution provider in the heat exchange industry. A heat exchanger is a device built for efficient heat transfer from one medium to another, whether the media are separated by a solid wall so that they never mix, or the media are in direct contact. Through our Chinese operating subsidiary, Siping Juyuan, we design, manufacture and sell plate heat exchangers, shell-and-tube heat exchangers, heat exchanger units and other heat exchanger products with total heat exchange solution.
Our products and heat exchange solutions are sold to customers in the chemical industry, metallurgical industry, and shipbuilding industry. Our products are also used with heating, ventilating and air conditioning, or HVAC, systems and district heating (i.e., a system for distributing heat generated in a centralized location for residential and commercial heating requirements such as space heating and water heating). Our products include plate heat exchangers, shell & tube heat exchangers, air cooled heat exchangers, welded plate heat exchangers, heat exchanger units, plate and shell heat exchangers.
22
Second quarter Financial Performance Highlights
During the second quarter of 2010, we focused primarily on analyzing the needs of our customers, providing optimized design based on analysis and simulation, offering high quality heat exchange products, and continuously assisting our customers in improving heat exchange process.
The following are some financial highlights for the second quarter of 2010:
- Sales Revenue:Sales revenue increased $2.05 million, or 20.21%, to $12.18 million for the second quarter of 2010 from $10.13 million for the same period of last year.
- Gross Profit:Gross profit was 43.89% for the second quarter of 2010, compared with 44.19% for the same period in 2009.
- Net Income attributable to THT common stockholders:Net income increased $0.44 million, or 22.79%, to $2.39 million for the second quarter of 2010, from $1.95 million for the same period of last year.
- Basic and fully diluted net income per share:Basic and fully diluted net income per share was $0.15 for the second quarter of 2010, compared with $0.13 for the same period last year.
Results of Operations
Results of operations for the three months ended June 30, 2010 as compared with the three months ended June 30, 2009.
Three Months Ended | ||||||||||||
June 30, | ||||||||||||
(unaudited) | ||||||||||||
2010 | 2009 | $ Change | % Change | |||||||||
(In thousands, except percentages) | ||||||||||||
Statement of Operations data | ||||||||||||
Sales revenue | $ | 12,177 | $ | 10,130 | $ | 2,047 | 20.21 | % | ||||
Cost of sales | 6,833 | 5,654 | 1,179 | 20.85 | % | |||||||
Gross profit | 5,344 | 4,476 | 868 | 19.39 | % | |||||||
Operating expenses: | ||||||||||||
Research and development expenses | 189 | 175 | 14 | 8.00 | % | |||||||
Selling expenses | 1,341 | 1,148 | 193 | 16.81 | % | |||||||
Administrative expenses | 1,005 | 846 | 159 | 18.79 | % | |||||||
Total operating expenses | 2,535 | 2,169 | 366 | 16.93 | % | |||||||
Income from operations | 2,809 | 2,307 | 502 | 21.76 | % | |||||||
Interest income | 3 | 5 | (2 | ) | (40 | )% | ||||||
Interest expenses | (129 | ) | (131 | ) | 2 | (1.53 | )% | |||||
Other income | 78 | 75 | 3 | 4.00 | % | |||||||
Income before income taxes | 2,761 | 2,256 | 505 | 22.38 | % | |||||||
Income taxes | (407 | ) | (308 | ) | 99 | 32.14 | % | |||||
Net income before noncontrolling interests | 2,354 | 1,948 | 406 | 20.84 | % | |||||||
Net loss attributable to noncontrolling interests | 38 | - | 38 | - | % | |||||||
Net income attributable to THT Heat Transfer Technology Inc. common stockholders | $ | 2,392 | 1,948 | 444 | 22.79 | % |
Sales Revenue
Our sales revenue is generated from sales of heat exchange products. Sales revenue for the three months ended June 30, 2010 amounted to $12.18 million, which is $2.05 million or 20.21% more than that of the same period in 2009, where we had revenue of $10.13 million. The increase was primarily attributed to the strong growth in market demand driven by the fast economic growth in China. Our sales volume for the three months ended June 30, 2010 amounted to 1,036 units, an increase of 406 units, as compared with 630 units for the three month period ended June 30, 2009. Sales revenue from products designed for use in the heating industry increased approximately $1.51 million, or 38.72% to approximately $5.41 million in the three months ended June 30, 2010 from approximately $3.90 for the same period in 2009. Sales revenue from products designed for use in petrochemical industry increased $0.76 million, or 15.20% to $5.76 million in the three months ended June 30, 2010 from $5.00 million in the same period of 2009. In particular, sales revenue from air-cooled heat exchangers and weld plate heat exchangers, two major products used in the petrochemical industry, was $2.04 million for the three month period ended June 30, 2010, an increase of $0.91 million or 80.53%, as compared with $1.13 million for the three month period ended June 30, 2009.
Cost of Sales
Cost of sales, which consist of raw materials, direct labor and manufacturing overhead expenses, was $6.83 million for the three month period ended June 30, 2010, an increase of $1.18 million or 20.85%, as compared with $5.65 million for the three month period ended June 30, 2009. The increase in cost of sales was mainly attributable to the significant increase in our sales volume and our sales revenue in the second quarter of 2010. Cost of sales as a percentage of total revenues were 56.11% and 55.81% for the three month periods ended June 30, 2010 and 2009, respectively, with an increase of 0.3 percentage points. Increase in cost of sales as a percentage of sales was mainly due to higher direct labour costs brought about by a general increase in factory wages in the second quarter of 2010.
23
Gross Profit
Our gross profit is equal to the difference between our sales revenue and our cost of sales. Our gross profit increased $0.87 million, or 19.39%, to $5.34 million for the three months ended June 30, 2010 from $4.48 million for the same period in 2009. Gross profit as a percentage of sales revenue was 43.89% for the three months ended June 30, 2010 as compared to 44.19% during the same period in 2009. The increase in our gross profit in dollar terms was mainly attributable to the significant increase in our sales revenue in the second quarter of 2010.
Administrative Expenses
Our administrative expenses increased $0.16 million, or 18.79%, to $1.01 million for the three months ended June 30, 2010 from $0.85 million for the same period in 2009. The increase was mainly attributable to the expansion of our management team and the increased professional expense associated with being a public company. As a result of the expansion of our management team, the salary of management team and administration staff increased $0.16 million, or 123.08% to $0.29 million in the three months ended June 30, 2010 from $0.13 million in the same period in 2009. Travel expense increased $0.09 million, or 180% to $0.14 million in 2010 from $0.05 million in 2009.
Research and Development Expenses
Our research and development expenses consist of the costs associated with R&D personnel and expense in R&D projects. Our R&D expenses increased $0.01 million, or 8.00%, to $0.19 million for the three months ended June 30, 2010 from $0.18 million for the same period in 2009.
Selling Expenses
Our selling expenses include sales commissions, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, after-sale support services and other sales related costs. Our selling expenses increased $0.19 million, or 16.81%, to $1.34 million for the three months ended June 30, 2010 from $1.15 million for the same period in 2009. The increase was mainly attributable to the significant increase in travel expense and transportation costs. Because of OUR market expansion, our travel expense increased $0.72 million, or 120%, to $1.32 million for the three months ended June 30, 2010 from $0.60 million for the same period in 2009.
Total Operating Expenses
Our total expenses increased $0.37 million, or 16.93%, to $2.54 million for the three months ended June 30, 2010 from $2.17 million for the same period in 2009.
Income before Income Taxes
Income before income taxes was $2.76 million for the three months ended June 30, 2010, compared with income before income taxes of $2.26 million for the same period in 2009. The increase of income before income tax was mainly attributable to the significant increase in our sales revenue. Income before income taxes as a percentage of sales revenue increased to 22.67% for the three months ended June 30, 2010, as compared to 22.27% for the same period in 2009 due to the factors described above.
Income Taxes
Our income taxes increased to $0.41 million during the three months ended June 30, 2010 from $0.31 million during the same period in 2009.
24
Net Income Before Noncontrolling Interests
Our net income before noncontrolling interests was $2.35 million during the three months ended June 30, 2010, compared with $1.95 million during the same period in 2009, as a result of the factors described above.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests was $0.04 million during the three months ended June 30, 2010 compared with net loss of $3,000 during the same period in 2009.
Net Income Attributable to Common Stockholders
Net income attributable to our common stockholders was $2.39 million during the three months ended June 30, 2010, compared with net income of $1.95 million during the same period in 2009.
Results of operations for the six months ended June 30, 2010 as compared with the six months ended June 30, 2009.
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| (unaudited) | |||||||||||
| 2010 | 2009 | $ | Change | % Change | |||||||
| (In thousands, except percentages) | |||||||||||
Statement of Operations data | ||||||||||||
Sales revenue | $ | 22,306 | $ | 14,326 | $ | 7,980 | 55.70 | % | ||||
Cost of sales | (12,716 | ) | (8,074 | ) | 4,642 | 57.49 | % | |||||
| ||||||||||||
Gross profit | 9,590 | 6,252 | 3,338 | 53.39 | % | |||||||
Operating expenses: | ||||||||||||
Research and development expenses | 362 | 362 | - | - | % | |||||||
Selling expenses | 2,839 | 1,992 | 847 | 42.52 | % | |||||||
Administrative expenses | 1,785 | 1,387 | 398 | 28.70 | % | |||||||
| ||||||||||||
Total operating expenses | 4,986 | 3,741 | 1,245 | 33.28 | % | |||||||
| ||||||||||||
Income from operations | 4,604 | 2,511 | 2,093 | 83.35 | % | |||||||
Interest income | 7 | 11 | (4 | ) | (36.36 | ) % | ||||||
Interest expenses | (260 | ) | (290 | ) | (30 | ) | (10.34 | ) % | ||||
Other income | 164 | 156 | 8 | 5.13 | % | |||||||
| ||||||||||||
Income before income taxes | 4,515 | 2,388 | 2,127 | 89.07 | % | |||||||
Income taxes | (725 | ) | (331 | ) | (394 | ) | 119.03 | % | ||||
Net income before noncontrolling interests | 3,790 | 2,057 | 1,733 | 84.25 | % | |||||||
Net (income) loss attributable to noncontrolling interests | 101 | 29 | 72 | 248.28 | % | |||||||
Net income attributable to THT Heat Transfer Technology Inc. common stockholders | $ | 3,891 | 2,086 | 1,805 | 86.53 | % |
Sales Revenue
Sales revenue for the six months ended June 30, 2010 amounted to $22.31 million, which is $7.98 million or 55.70% more than that of the same period in 2009, where we had revenue of $14.33 million. The increase was primarily attributed to the strong growth in market demand driven by the fast economic growth in China. Our sales volume for the six months ended June 30, 2010 amounted to 1586 units, an increase of 729 units, as compared with 857 units for the six month period ended June 30, 2009. Sales revenue from products designed for use in the heating industry increased $5.18 million, or 122.46% to $9.41 million in the six months ended June 30, 2010 from $4.23 million in the same period in 2009. Sales revenue from products designed for use in petrochemical industry increased $2.71 million, or 40.33 % to $9.43 million in the six months ended June 30, 2010 from $6.72 million in the same period of 2009 driven mostly by higher sales of air-cooled heat exchanger and weld plate heat exchanger products, which accounted for sales revenue of $3.53 million for the six month period ended June 30, 2010, an increase of $2.40 million or 212.39%, as compared with $1.13 million for the six month period ended June 30, 2009.
25
Cost of Sales
Cost of sales was $12.72 million for the six month period ended June 30, 2010, an increase of $4.64 million or 57.49%, as compared with $8.07 million for the six month period ended June 30, 2009. The increase in cost of sales was mainly attributable to the significant increase in our sales volume and our sales revenue in the second quarter of 2010. Cost of sales as a percentage of total revenues were 57.01% and 56.36% for the six month periods ended June 30, 2010 and 2009, respectively, with an increase of 0.65 percentage points. Increase in cost of sales as a percentage of sales was mainly due to higher direct labour costs brought about by a general increase in factory wages in the second quarter of 2010.
Gross Profit
Our gross profit is equal to the difference between our sales revenue and our cost of sales. Our gross profit increased $3.34 million, or 53.39%, to $9.59 million for the six months ended June 30, 2010 from $6.25 million for the same period in 2009. Gross profit as a percentage of sales revenue was 42.99% for the six months ended June 30, 2010 as compared to 43.64% during the same period in 2009. The increase in our gross profit in dollar terms was mainly attributable to the significant increase in our sales revenue in the second quarter of 2010.
Administrative Expenses
Our administrative expenses increased $0.40 million, or 28.70%, to $1.79 million for the six months ended June 30, 2010 from $1.39 million for the same period in 2009. The increase was mainly attributable to the expansion of our management team and the increased professional expense associated with being a public company. As a result of the expansion of our management team, the salary of management team and administration staff increased $0.11 million, or 45.83 % to $0.35 million for the six months ended June 30, 2010 from $0.24 million for the same period in 2009. Travel expense increased $0.07 million, or 70% to $0.17 million for the six months ended June 30, 2010 from $0.10 million for the same period in 2009.
Research and Development Expenses
Our R&D expenses remained the same at $0.36 million for the six months ended June 30, 2010 and for the same period in 2009.
Selling Expenses
Our selling expenses increased $0.85 million, or 42.52%, to $2.84 million for the six months ended June 30, 2010 from $1.99 million for the same period in 2009. The increase was mainly attributable to the significant increase in travel expense and transportation costs. Because of our market expansion, our travel expense increased $0.69 million, or 62.73%, to $1.79 million for the six months ended June 30, 2010 from $1.10 million for the same period in 2009. Along with significant growth of our sales volume, our transportation costs increased $0.06 million, or 42.86%, to $0.20 million for the six months ended June 30, 2010 from $0.14 million for the same period in 2009.
26
Total Operating Expenses
Our total expenses increased $1.25 million, or 33.28%, to $4.99 million for the six months ended June 30, 2010 from $3.74 million for the same period in 2009.
Income before Income Taxes
Income before income taxes was $4.52 million for the six months ended June 30, 2010, compared with $2.39 million for the same period in 2009. The increase of income before income tax was mainly attributable to the significant increase in our sales revenue. Income before income taxes as a percentage of sales revenue increased to 20.24% for the six months ended June 30, 2010, as compared to 16.67% for the same period in 2009 due to the factors described above.
Income Taxes
Our income taxes increased to $0.73 million during the six months ended June 30, 2010 from $0.33 million during the same period in 2009.
Net Income Before Noncontrolling Interests
Our net income before noncontrolling interests was $3.79 million during the six months ended June 30, 2010, compared with $2.06 million during the same period in 2009, as a result of the factors described above.
Net Loss Attributable to Noncontrolling Interests
Net loss attributable to noncontrolling interests was $0.10 million during the six months ended June 30, 2010 compared with $0.03 million attributable to noncontrolling interests during the same period in 2009.
Net Income Attributable to Common Stockholders
Net income attributable to our common stockholders was $3.89 million during the six months ended June 30, 2010, compared with net income of $2.09 million during the same period in 2009.
Taxation
United States
THT is subject to the United States Federal and state income tax at a statutory rate of 34%. No provision for the U.S. Federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods. The Company has not recognized a deferred tax liability for the undistributed earnings of its non-U.S. subsidiaries as of June 30, 2010 and December 31, 2009 respectively, because the Company currently does not expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company no longer plans to permanently reinvest undistributed earnings. Calculation of related unrecognized deferred tax liability is not practicable.
British Virgin Islands
Megaway was incorporated in the BVI and under the current laws of the BVI, is not subject to income taxes.
Hong Kong
Star Wealth was incorporated in Hong Kong and is subject to Hong Kong profits tax at a tax rate of 16.5% . No provision for Hong Kong tax has been made as Star Wealth has no taxable income in Hong Kong during the reporting period.
27
PRC
A company registered in China is subject to national and local income taxes within China at the applicable tax rate on the taxable income as reported in its PRC statutory financial statements in accordance with relevant income tax laws. Under the Provisional Taxation Regulation of the People's Republic of China effective before January 1, 2008, income tax was generally payable by enterprises at a rate of 33% of their taxable income.
In 2007, China passed the New Enterprise Income Tax (“EIT”) Law and its implementing rules, both of which became effective on January 1, 2008. The New EIT Law significantly curtails tax incentives granted to foreign-invested enterprises under the previous law. The New EIT Law, however, (i) reduces the statutory rate of enterprise income tax from 33% to 25%, (ii) permits companies to continue to enjoy their existing tax incentives, adjusted by certain transitional phase-out rules, and (iii) introduces new tax incentives, subject to various qualification criteria.
Substantially all of our income may be derived from dividends we receive from our PRC operating subsidiaries described above. The New EIT Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes. We expect that such 10% withholding tax will apply to dividends paid to us by our PRC subsidiaries, but this treatment will depend on our status as a non-resident enterprise. For detailed discussion of PRC tax issues related to resident enterprise status, see “Risk Factors — Risks Related to Doing Business in China — Under the New EIT Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders” in our Annual Report on Form 10-K for the year ended December 31, 2009.
Siping Juyuan was entitled to a special tax concession, or the Tax Concession, because it employed the required number of handicapped staff according to the relevant PRC tax rules. In particular, this Tax Concession entitled Siping Juyuan to a refund of value-added tax paid during the reporting period.
Beijing Juyuan, being a sino-foreign joint venture enterprise, was entitled to two years' EIT exemption, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by a 50% tax reduction for the immediate next six calendar years, or the Tax Holiday. The Tax Holiday commenced in the fiscal year of 2008.
Pursuant to the New EIT Law, commencing from January 1, 2008, Siping Juyuan and Beijing Juyuan were subject to PRC EIT at the statutory rate of 25%. As Siping Juyuan was qualified as a “High-tech Enterprise”, it was entitled to a preferential EIT rate of 15%. Beijing Juyuan was subject to EIT at the rate of 12.5% during the Tax Holiday.
We incurred income taxes of $0.41 million for the three-month period ended June 30, 2010, an increase of $0.10 million or 32.14% from the taxes we incurred in the same 2009 period, which were $0.31 million. This increase in taxes was due to our higher revenues and operating profits.
Foreign Currency Translation Gains
Exchange Rates
The financial records of Siping Juyuan and Beijing Juyuan are maintained in RMB. In order to prepare our financial statements, we have translated amounts in RMB into amounts in U.S. dollars. The amounts of our assets and liabilities on our balance sheets are translated using the closing exchange rate as of the date of the balance sheet. Revenues, expenses, gains and losses are translated using the average exchange rate prevailing during the period covered by such financial statements. Adjustments resulting from the translation, if any, are included in our cumulative other comprehensive income (loss) in our stockholders' equity section of our balance sheet. All other amounts that were originally booked in RMB and translated into U.S. dollars were translated using the closing exchange rate on the date of recognition. Consequently, the exchange rates at which the amounts in those comparisons were computed varied from year to year.
28
We had a foreign currency translation gain of $42,423for the three month period ended June 30, 2010 as compared with $1,026 currency translation loss in the same period ended June 30, 2009. We use period-end exchange rates in translating our assets and liabilities denominated in Renminbi into U.S. dollars and average exchange rates for the period to translate our income and expenses. At June 30, 2010, the period end exchange rate was RMB1 to US$0.14687 and the average exchange rate for the period was RMB1 to US$0.14631. At June 30, 2009, the period end exchange rate was RMB1 to US$0.14650 and the average exchange rate for the three months ended June 30, 2009 was RMB1 to US$0.14651. The average exchange rate for the second quarter in 2010 compared with the second quarter in 2009 (RMB1 to US$0.14631 and RMB1 to US$0.14651, respectively) increased approximately 0.14% .
Our sales revenue increased by RMB 54.68 million or 55.92% compared with the same period in 2009 and our operating expenses increased by RMB 8.54 million or 33.46% compared with the same period in 2009. As the Renminbi increased in value against the U.S. dollar during the period, our reported sales revenues and operating expenses were affected, increasing 55.70% and 33.28%, respectively, in U.S. dollar terms, as follows:
Six Months Ended June 30 | ||||||||||||||||||||||||||||||
(in thousands, except percentages) | 2010 | 2009 | Change | % | ||||||||||||||||||||||||||
| US$ | Average | RMB | US$ | Average | RMB | US$ | RMB | US$ | RMB | ||||||||||||||||||||
| Rate | Rate | ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||
Revenue | 2,2306 | 0.14631 | 152,457 | 14,326 | 0.14651 | 97,782 | 7,980 | 54,675 | 55.70 | 55.92 | ||||||||||||||||||||
Total operating expenses | 4,986 | 0.14631 | 34,078 | 3,741 | 0.14651 | 25,534 | 1,245 | 8,544 | 33.28 | 33.46 |
Liquidity and Capital Resources
As of June 30, 2010, we had cash and cash equivalents of $2.90 million. The following table sets forth a summary of our cash flows for the periods indicated:
Six months Ended June 30, | ||||||
2010 | 2009 | |||||
(in thousands) | ||||||
Net cash used in operating activities | (907 | ) | (6,971 | ) | ||
Net cash used in investing activities | (559 | ) | (326 | ) | ||
Net cash used in financing activities | (1,001 | ) | (3,225 | ) | ||
Effect of exchange rate changes on cash and cash equivalents | (15 | ) | (12 | ) | ||
Net decrease in cash and cash equivalents | (2,482 | ) | (10,534 | ) | ||
Cash and cash equivalents at the beginning of period | 5,380 | 12,579 | ||||
Cash and cash equivalents at the end of period | 2,898 | 2,045 |
The Company currently generates its cash flow through operations which it believes will be sufficient to sustain the current level of operations for at least the next twelve months.
Operating Activities
Net cash used in operating activities was $0.91 million in the six months ended June 30, 2010, compared with net cash used in operating activities of $6.97 million in the same period in fiscal year 2009. The cash outflow in operating activities during the six months ended June 30, 2010 was mainly due to prepayment for purchase of raw materials in the amount of $6.97 million in anticipation of the production requirements for the upcoming third quarter; and more income tax paid as our net income increased. Our accounts receivables increased was mainly attributable to our sales revenue increased 55.70 as compared with the same period of 2009.
29
Investing Activities
Net cash used in investing activities increased to $0.56 million in the six months ended June 30, 2010, compared with $0.33 million in the same period in fiscal year 2009. The net cash used in investing activities during the period ended June 30, 2010 was primarily used for the purchase of additional machineries and equipment.
Financing Activities
Net cash used in financing activities was $1.00 million in the six months ended June 30, 2010, compared with net cash used in financing activities of $3.23 million in the same period in fiscal year 2009. The decrease in cash outflow was because we repaid $0.88 million of long-term loan in the first half of 2010 and $0.29 million of long-term loan in 2009. We also repaid $2.93 million bank loan in 2010 and $11.7 million in 2009.
Capital Expenditures
The capital expenditures in the six months ended June 30, 2010 and 2009 are set out as below. Our capital expenditures were used primarily for construction of our new plant which had been completed in 2009 and purchase of equipment to expand our production capacity. The table below sets forth the breakdown of our capital expenditures by use for the periods indicated.
Six months Ended June 30, | ||||||
2010 | 2009 | |||||
(in thousands) | ||||||
Construction costs | $ | 334 | $ | 68 | ||
Purchase of equipment | $ | 235 | $ | 259 | ||
Total capital expenditures | $ | 569 | $ | 327 |
We estimate that our total capital expenditures in fiscal year 2010 will reach $3.66 million: $0.73 million of which will be used to fund construction costs and $2.93 million will be used for new equipment purchases.
Obligations Under Material Contracts
We are party to the following loan agreements:
- Commission Loan Agreement, dated July 24, 2008, among Siping Juyuan, Siping City Fu Guo Investment and Development Co., Ltd. and Siping City Credit Association Union, pursuant to which Siping City Credit Association Union, entrusted by Siping City Fu Guo Investment and Development Co., Ltd., provided a loan with a total amount of RMB 28,000,000 (approximately $4,102,000). The agreement is for a term of three years, from June 27, 2008 to June 26, 2011. The first interest rate is 6% above the lending rate over the same period published by the PRC; annual interest rate is 8.0136%. The interest rate is adjusted on June 21 every year; the adjusted interest rate is 6% above the lending rate of the same category over the same period published by the PRC. The loan balance of RMB 17,000,000 (approximately $2,497,000) has not yet been repaid.
- Loan Agreement, dated December 14, 2009, between Siping Juyuan and Siping Branch of Agriculture Bank of China, pursuant to which Siping Branch of Agriculture Bank of China provided a loan with a total amount of RMB 20,000,000 (approximately $2,937,000). The agreement is for a term from December 14, 2009 to December 13, 2010. The interest rate is based on the benchmark interest rate published by the PRC.
30
- Loan Agreement, dated May 31, 2009, between Siping Juyuan and Bank of Communications, Changchun Branch, pursuant to which Changchun Branch of Bank of Communications provided a loan with a total amount of RMB 20,000,000 (approximately $2,937,000). The agreement is for a term from May 31, 2010 to May 20, 2011. The interest rate is based on the benchmark interest rate published by the PRC.
Critical Accounting Policies
Basis of consolidation
The condensed consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated on consolidation.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents, restricted cash, trade receivables and other receivables. As of June 30, 2010, substantially all of the Company's cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade receivables, the Company extends credit based on an evaluation of the customer's financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables.
During the three-month and six-month periods ended June 30, 2010 and 2009, the Company did not have any customers which represented 10% or more of the Company's condensed consolidated sales revenue.
As of June 30, 2010 and December 31, 2009, the Company did not have any balance of gross trade receivable due from individual customer that represented 10% or more of the Company's gross trade receivables.
Fair value of financial instruments
Accounting Standards Codification ("ASC") Topic 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which fair value option was not elected. The carrying amounts of the Company's financial assets and liabilities approximate their fair values due to short maturities or the applicable interest rates approximate the current market rates.
31
Recently issued accounting pronouncements
In October 2009, the FASB issued Accounting Standards Update ("ASU") 2009-13, "Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements". ASU 2009-13 requires companies to allocate revenue in multiple-element arrangements based on an element's estimated selling price if vendor-specific or other third party evidence of value is not available. ASU 2009-13 is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The adoption of ASU 2009-13 is not expected to have a material effect on the Company's financial statements.
In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements", that expands the required disclosures about fair value measurements. This guidance provides for new disclosures requiring the Company to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. This guidance also provides clarification of existing disclosures requiring the Company to (i) determine each class of assets and liabilities based on the nature and risks of the investments rather than by major security type and (ii) for each class of assets and liabilities, disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption of ASU 2010-06 has no material impact on the Company's financial statements.
In April, 2010, the FASB issued ASU 2010-13, "Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force." ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal year, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently evaluating the impact of the adoption of ASU 2010-13 on its financial statements.
Off-Balance Sheet Transactions
We do not have any off-balance sheet arrangements.
Seasonality
Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, Messrs. Guohong Zhao and Jianjun He, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management is not aware of any material weakness in our internal control over financial reporting which causes them to believe that any material inaccuracies or errors existed in our financial statements as of June 30, 2010. The reportable conditions and other areas of our internal control over financial reporting identified by us as needing improvement have not resulted in a material restatement of our financial statements. Nor are we aware of any instance where such reportable conditions or other identified areas of weakness have resulted in a material misstatement or omission in any report we have filed with or submitted to the Commission.
Changes in Internal Control over Financial Reporting
There are no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
33
Item 4. (Removed and Reserved)
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
EXHIBITS.
*Filed herewith.
34
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.
DATED: August 16, 2010
THT HEAT TRANSFER TECHNOLOGY, INC.
/s/ Jianjun He
Jianjun He
Chief Financial Officer
(Principal Financial Officer)
35
EXHIBIT INDEX
*Filed herewith.