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EX-32.1 - EXHIBIT 32.1 - THT Heat Transfer Technology, Inc.exhibit32-1.htm
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EX-31.1 - EXHIBIT 31.1 - THT Heat Transfer Technology, Inc.exhibit31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - THT Heat Transfer Technology, Inc.Financial_Report.xls

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: September 30, 2011

[   ] 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 Identification No.)
incorporation or organization)  

THT Industrial Park
No. 5 Nanhuan Road, Tiexi District
Siping, Jilin Province 136000
People’s Republic of China
(Address of principal executive offices, Zip Code)

86-434-3265241
(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 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 [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 “smaller reporting company” in Rule 12b-2 of the Exchange Act.

  Large accelerated filer [   ] Accelerated filer [   ]
  Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]                 No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of November 15, 2011 is as follows:

  Class of Securities   Shares Outstanding  
  Common Stock, $0.001 par value   20,453,500  


THT HEAT TRANSFER TECHNOLOGY, INC.

Quarterly Report on Form 10-Q
Three and Nine Months Ended September 30, 2011

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Item 4. Controls and Procedures 11

PART II
OTHER INFORMATION

Item 1. Legal Proceedings 12
Item 1A. Risk Factors 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. (Removed and Reserved) 12
Item 5. Other Information 12
Item 6. Exhibits 12


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

 

THT Heat Transfer Technology, Inc.

Condensed Consolidated Financial Statements
For the three and nine months ended
September 30, 2011 and 2010
(Stated in US dollars)


 


THT Heat Transfer Technology, Inc.
Condensed Consolidated Financial Statements
Three and nine months ended September 30, 2011 and 2010

Index to Condensed Consolidated Financial Statements

  Pages
Condensed Consolidated Statements of Income and Comprehensive Income F-1
Condensed Consolidated Balance Sheets F-2 - F-3
Condensed Consolidated Statements of Cash Flows F-4
Notes to Condensed Consolidated Financial Statements F-5 - F-22


THT Heat Transfer Technology, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the three and nine months ended September 30, 2011 and 2010
(Unaudited)
(Stated in US Dollars)


 

    Three months ended     Nine months ended  
    September 30,     September 30,  
    (unaudited)     (unaudited)  
    2011     2010     2011     2010  
                         
Sales revenue $ 10,309,768   $ 12,776,866   $ 38,542,434   $ 35,082,829  
Cost of sales   (5,799,160 )   (7,212,523 )   (21,911,721 )   (19,928,407 )
                         
Gross profit   4,510,608     5,564,343     16,630,713     15,154,422  
                         
Operating expenses                        
   Administrative expenses   1,645,904     1,641,745     3,386,046     3,426,380  
   Research and development expenses   365,037     301,465     1,149,699     663,499  
   Selling expenses   2,300,748     1,814,635     5,524,796     4,653,774  
                         
    4,311,689     3,757,845     10,060,541     8,743,653  
                         
Income from operations   198,919     1,806,498     6,570,172     6,410,769  
Interest income   10,568     3,473     34,484     10,709  
Other income - Note 16   62,275     137,066     914,962     301,317  
Finance costs - Note 17   (360,702 )   (170,089 )   (762,688 )   (430,731 )
                         
(Loss)/ income before income taxes   (88,940 )   1,776,948     6,756,930     6,292,064  
Income taxes - Note 8   (89,283 )   (324,299 )   (1,006,821 )   (1,049,398 )
                         
Net (loss)/ income before noncontrolling interests   (178,223 )   1,452,649     5,750,109     5,242,666  
Net loss attributable to noncontrolling interests   300,336     106,186     341,986     207,145  
                         
Net income attributable to THT Heat Transfer Technology, Inc. common stockholders $ 122,113   $ 1,558,835   $ 6,092,095   $ 5,449,811  
                         
Net (loss)/ income before noncontrolling interests $ (178,223 ) $ 1,452,649   $ 5,750,109   $ 5,242,666  
Other comprehensive income                        
   Foreign currency translation adjustments   466,534     471,314     1,451,520     584,232  
                         
Comprehensive income   288,311     1,923,963     7,201,629     5,826,898  
Comprehensive loss attributable to noncontrolling interests   306,588     105,460     350,011     205,793  
                         
Comprehensive income attributable to THT Heat Transfer Technology, Inc. common stockholders $ 594,899   $ 2,029,423   $ 7,551,640   $ 6,032,691  
                         
Earnings per share attributable to THT Heat Transfer Technology, Inc. common stockholders - Note 18                
- Basic and diluted $ 0.01   $ 0.10   $ 0.30   $ 0.34  
                         
Weighted average number of shares outstanding                        
- Basic and diluted   20,453,500     16,000,000     20,453,500     16,000,000  

See the accompanying notes to condensed consolidated financial statements

F- 1


THT Heat Transfer Technology, Inc.
Condensed Consolidated Balance Sheets
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)


 

    September 30,     December 31,  
    2011     2010  
    (Unaudited)        
             
ASSETS            
   Current assets            
             Cash and cash equivalents $ 3,304,397   $ 18,438,430  
             Restricted cash - Note 4   3,074,119     1,677,566  
             Trade receivables, net - Note 5   32,182,855     25,651,880  
             Counter guarantee receivable - Note 14   -     212,372  
             Bills receivable   932,202     469,161  
             Other receivables, prepayments and deposits, net - Note 6   14,655,589     6,197,565  
             Inventories, net - Note 7   22,494,102     13,705,690  
             Deferred tax assets   204,991     163,239  
             
   Total current assets   76,848,255     66,515,903  
   Retention receivable   1,341,201     1,409,057  
   Counter guarantee receivable - Note 13   234,300     -  
   Property, plant and equipment, net - Note 9   7,094,221     6,797,947  
   Deposit for acquisition of property, plant and equipment   543,888     -  
   Land use rights - Note 10   1,018,646     1,005,428  
   Prepayment for land use rights - Note 10   4,344,210     -  
             
TOTAL ASSETS $ 91,424,721   $ 75,728,335  

See the accompanying notes to condensed consolidated financial statements.

F- 2


THT Heat Transfer Technology, Inc.
Condensed Consolidated Balance Sheets (Cont’d)
As of September 30, 2011 and December 31, 2010
(Stated in US Dollars)


 

    September 30,     December 31,  
    2011     2010  
    (Unaudited)        
             
LIABILITIES AND EQUITY            
             
LIABILITIES            
   Current liabilities            
       Trade payables $ 3,224,080   $ 2,803,874  
       Other payables and accrued expenses - Note 11   15,871,756     13,364,671  
       Income tax payable   842,430     1,380,979  
       Short-term bank loans - Note 12   13,745,600     10,618,610  
       Current maturities of long-term bank loan - Note 13   937,200     -  
       Current maturities of other long-term loan - Note 14   -     1,668,639  
             
   Total current liabilities   34,621,066     29,836,773  
   Long-term bank loan - Note 13   3,748,800     -  
             
TOTAL LIABILITIES   38,369,866     29,836,773  
             
COMMITMENTS AND CONTINGENCIES - Note 21            
             
STOCKHOLDERS’ EQUITY            
   Preferred stock : par value of $0.001 per share            
       Authorized 10,000,000 shares; none issued and outstanding            
   Common stock : par value $0.001 per share - Note 15            
       Authorized 190,000,000 shares; issued and outstanding            
       20,453,500 shares as of September 30, 2011 and            
       December 31, 2010   20,454     20,454  
   Additional paid-in capital   27,396,455     27,396,455  
   Statutory reserve   2,734,693     1,902,632  
   Accumulated other comprehensive income   3,421,495     1,961,950  
   Retained earnings   19,931,996     14,671,962  
             
Total THT Heat Transfer Technology, Inc. stockholders’ equity   53,505,093     45,953,453  
Noncontrolling interests   (450,238 )   (61,891 )
             
TOTAL EQUITY   53,054,855     45,891,562  
             
TOTAL LIABILITIES AND EQUITY $ 91,424,721   $ 75,728,335  

See the accompanying notes to condensed consolidated financial statements

F- 3


THT Heat Transfer Technology, Inc.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2011 and 2010
(Unaudited)
(Stated in US Dollars)

 

    Nine months ended  
    September 30,  
    (unaudited)  
    2011     2010  
Cash flows from operating activities            
   Net income attributable to THT Heat Transfer Technology, Inc. common stockholders $ 6,092,095   $ 5,449,811  
   Adjustments to reconcile net income attributable to THT Heat Transfer Technology, Inc. 
      common stockholders to net cash used in operating activities :-
       
           Depreciation and amortization   700,559     628,463  
           Deferred taxes   (36,313 )   (97,095 )
           Gain on disposal of property, plant and equipment   -     (750 )
           (Reversal of)/provision for doubtful debts   (107,156 )   942,092  
           Noncontrolling interests   (380,322 )   (207,145 )
   Changes in operating assets and liabilities :-            
         Trade receivables   (5,569,580 )   (10,381,628 )
         Bills receivable   (441,918 )   297,761  
         Other receivables, prepayments and deposits   (8,086,432 )   (2,321,298 )
         Inventories   (8,247,187 )   (1,507,684 )
         Retention receivable   107,951     192,528  
         Counter guarantee receivable   (15,370 )   -  
         Trade payables   331,533     228,367  
         Other payables and accrued expenses   2,021,271     1,395,201  
         Income tax payable   (570,290 )   601,300  
             
Net cash flows used in operating activities   (14,201,159 )   (4,780,077 )
             
Cash flows from investing activities            
   Prepayment for land use rights   (4,274,681 )   -  
   Deposit for acquisition of property, plant and equipment   (535,183 )   -  
   Payments to acquire property, plant and equipment   (777,035 )   (775,109 )
   Proceeds from sale of property, plant and equipment   -     10,270  
             
Net cash flows used in investing activities   (5,586,899 )   (764,839 )
             
Cash flows from financing activities            
   Proceeds from bank loans   22,142,022     5,868,200  
   Repayment of bank loans   (14,764,422 )   (2,934,100 )
   Repayment of long-term loan   (1,690,700 )   (880,230 )
   Restricted cash   (1,325,172 )   (244,315 )
             
Net cash flows provided by financing activities   4,361,728     1,809,555  
             
Effect of foreign currency translation on cash and cash equivalents   292,297     63,082  
             
Net decrease in cash and cash equivalents   (15,134,033 )   (3,672,279 )
Cash and cash equivalents - beginning of period   18,438,430     5,379,627  
             
Cash and cash equivalents - end of period $ 3,304,397   $ 1,707,348  
             
Supplemental disclosures for cash flow information            
   Cash paid for :-            
         Interest $ 643,909   $ 384,787  
       Income taxes $ 1,630,578   $ 658,930  

See the accompanying notes to condensed consolidated financial statements

F- 4


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. The Company’s shares are quoted for trading on the Nasdaq Global Market in the United States.

   

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.

   

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.

F- 5


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

1.

Corporate information (Cont’d)

   

Reorganization (cont’d)

   

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 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.

   

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 expired on June 30, 2011. On May 16, 2011, an amendment to the option agreement was signed by both parties extending the exercise period until June 30, 2012.

   

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. The stockholders exercised these options on December 17, 2010.

   

After Mr. Zhao exercises the above option, he together with the other original stockholders will be the Company’s controlling stockholders holding 92.5% equity interest.

   

On November 30, 2010, Juyuan Heat Equipment (Tianjin) Co., Ltd. (“Tianjin Juyuan”) was established in the PRC, of which Siping Juyuan and Mr. Zhao contributed $1,467,555 and $37,630 respectively to its registered capital, representing 99.5% and 0.5% equity interest in Tianjin Juyuan respectively. On September 22, 2011, Tianjin Juyuan was formally dissolved with the approval of the Tianjin Industrial and Commercial Administrative Bureau Baodi Branch.

F- 6


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

2.

Description of business

   

The Company is a holding company whose primary business is 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.

   

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”)

   
3.

Summary of significant accounting policies

   

Basis of presentation and consolidation

   

After the consummation of the reorganization detailed in note 1 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 (“U.S. GAAP”) 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, 2010 filed with the SEC in the Company’s Form 10-K on March 28, 2011.

   

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-month period 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.

   

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.

F- 7


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

3.

Summary of significant accounting policies (Cont’d)

   

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 September 30, 2011 and December 31, 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 and other receivables.

   

During the three-month and nine-month periods ended September 30, 2011 and 2010, the Company did not have any customers which represented 10% or more of the Company's condensed consolidated sales revenue.

   

As of September 30, 2011 and December 31, 2010, 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. Except for long-term loan disclosed as below, the carrying amounts of other financial assets and liabilities approximated their fair values due to short maturities or the applicable interest rates approximated the current market rates:


As of
September 30, 2011
As of
December 31, 2010
  Carrying     Fair value     Carrying     Fair value  
  amount           amount        
                       
4,686,000 $ 4,758,032   $ -   $ -  

  Noncontrolling interests
   
  Noncontrolling interest on the condensed consolidated balance sheets resulted from the consolidation of 75% and 99.5% owned subsidiaries, Beijing Juyuan and Tianjin Juyuan, respectively. Upon dissolution of Tianjin Juyuan, noncontrolling interest of $89 was reversed during the nine months ended September 30, 2011. The schedule below illustrates the movements in the noncontrolling interests:

      Nine months ended  
      September 30,  
      (Unaudited)  
      2011     2010  
               
  Balance at beginning of period $ (61,891 ) $ 241,279  
  Net loss attributable to noncontrolling interests   (341,986 )   (207,145 )
  Dissolution of subsidiary - Note 23   (38,336 )   -  
  Foreign currency translation adjustments   (8,025 )   1,352  
               
  Balance at end of period $ (450,238 ) $ 35,486  

F- 8


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

3.

Summary of significant accounting policies (Cont’d)

   

Recently issued accounting pronouncements

   

In July 2010, the FASB issued ASU 2010-20 “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. The objective of ASU 2010-20 is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. Under ASU 2010-20, an entity is required to provide disclosures so that financial statement users can evaluate the nature of the credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed to arrive at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. ASU 2010-20 is applicable to all entities, both public and non-public and is effective for interim and annual reporting periods ending on or after December 15, 2010. Comparative disclosure for earlier reporting periods that ended before initial adoption is encouraged but not required. However, comparative disclosures are required to be disclosed for those reporting periods ending after initial adoption.

   

The FASB issued Accounting Standards Update (ASU) No. 2011-01, “Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20”. The amendments in this Update temporarily delay the effective date of the disclosure about troubled debt restructurings in ASU 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructuring for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is effective for interim and annual periods ending after June 15, 2011. The adoption of this ASU has no material impact on the Company’s financial statements.

   

The FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring”. The amendments to Topic 310 clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties. A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debts in foreseeable future without the modification. In addition, the amendments to Topic 310 clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a troubled debt restructuring. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies – Loss Contingencies. The ASU is effective for interim and annual periods beginning on or after June 15, 2011. The adoption of this ASU has no material impact on the Company’s financial statements.

F- 9


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

3.

Summary of significant accounting policies (Cont’d)

   

Recently issued accounting pronouncements (cont’d)

   

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRSs”). The FASB and the International Accounting Standard Board (IASB) works together to ensure that fair value has the same meaning in U.S. GAAP and IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this ASU explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The management is assessing the impact of this ASU on the Company’s financial statements.

   

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. In this ASU, the entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU are to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application by public entities is permitted. The management is assessing the impact of this ASU on the Company’s financial statements.

F- 10


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)



4. Restricted cash

      September 30,     December 31,  
      2011     2010  
      (Unaudited)        
               
  Bank deposits held as collateral for performance bonds issued by the banks to customers $ 3,074,119   $ 1,677,566  

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.

   
5.

Trade receivables, net


      September 30,     December 31,  
      2011     2010  
      (Unaudited)        
               
  Trade receivables $ 33,467,528   $ 27,005,255  
  Less : Allowance for doubtful accounts   (1,284,673 )   (1,353,375 )
               
    $ 32,182,855   $ 25,651,880  

As of September 30, 2011 and December 31, 2010, the Company’s trade receivables of $15,802,167 and $5,922,542, respectively, were pledged as collateral under certain loan and guarantee arrangements (Note 12).

An analysis of the allowance for doubtful accounts for the nine months ended September 30, 2011 and 2010 is as follows :-

      Nine months ended  
      September 30,  
      (Unaudited)  
      2011     2010  
               
  Balance at beginning of period $ 1,353,375   $ 598,215  
  (Reversal of)/provision for doubtful accounts   (107,157 )   942,092  
  Translation adjustments   38,455     29,062  
               
  Balance at end of period $ 1,284,673   $ 1,569,369  

F- 11


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

6. Other receivables, prepayments and deposits

      September 30,     December 31,  
      2011     2010  
      (Unaudited)        
               
  Advances to staff $ 2,759,903   $ 689,392  
  Deposits for public bid   1,315,375     897,729  
  Prepayments to suppliers   10,266,888     4,511,729  
  Other receivables   385,758     168,964  
               
      14,727,924     6,267,814  
  Less : Allowance for doubtful accounts   (72,335 )   (70,249 )
               
    $ 14,655,589   $ 6,197,565  

The advances to staff mainly represent staff drawings for handling selling and logistic activities for the Company in the ordinary course of business.

   

No further allowance for doubtful accounts was recognized during the nine months ended September 30, 2011 and 2010.

   
7.

Inventories


      September 30,     December 31,  
      2011     2010  
      (Unaudited)        
               
  Raw materials $ 5,412,920   $ 3,065,946  
  Work-in-progress   17,079,656     10,658,253  
  Finished goods   20,585     -  
               
      22,513,161     13,724,199  
  Allowance for obsolete inventories   (19,059 )   (18,509 )
               
    $ 22,494,102   $ 13,705,690  

No further allowance for obsolete inventories was recognized during the nine months ended September 30, 2011 and 2010.

F- 12


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

 

8.

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 September 30, 2011 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.

   

HK

   

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 profits tax has been made as Star Wealth had no taxable income during the reporting periods.

   

PRC

   

Siping Juyuan, Beijing Juyuan and Tianjin Juyuan are subject to PRC enterprise income tax (“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% during the reporting periods. Beijing Juyuan, being a Sino-foreign joint venture enterprise, is 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 2008 and Beijing Juyuan was subject to EIT at the rate of 12.5% for both the periods ended September 30, 2011 and 2010 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 a refund of value-added tax paid during the reporting periods (Note 16).

F- 13


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

9. Property, plant and equipment, net

      September 30,     December 31,  
      2011     2010  
      (Unaudited)        
  Cost            
     Buildings $ 3,961,311   $ 3,847,047  
     Plant and machinery   3,740,030     3,239,819  
     Office equipment   704,799     612,154  
     Motor vehicles   385,787     318,934  
               
      8,791,927     8,017,954  
  Accumulated depreciation   (3,538,688 )   (2,761,361 )
  Construction in progress   1,840,982     1,541,354  
               
  Net $ 7,094,221   $ 6,797,947  
               
  During the reporting periods, depreciation is included in :-            
               
      Nine months ended  
      September 30,  
      (Unaudited)  
      2011     2010  
               
  Cost of sales and overheads of inventories $ 324,592   $ 184,899  
  Research and development expenses   179,339     86,067  
  Administrative expenses   180,249     132,629  
               
    $ 684,180   $ 403,595  

As of September 30, 2011 and December 31, 2010, property, plant and equipment with net book values $3,225,468 and $2,931,629, respectively, were pledged as collateral under certain loan arrangements (Note 12).

F- 14


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

10. Land use rights

      September 30,     December 31,  
      2011     2010  
      (Unaudited)        
               
  Land use rights $ 1,100,328   $ 1,068,589  
  Accumulated amortization   (81,682 )   (63,161 )
               
    $ 1,018,646   $ 1,005,428  

The Company obtained the right from the relevant PRC land authority for a period of fifty years to use the land on which the Company’s office premises, production facilities and warehouse are situated. As of September 30, 2011 and December 31, 2010, the land use rights were pledged as collateral under certain loan arrangements (Note 12).

   

During the nine months ended September 30, 2011 and 2010, amortization amounted to $16,379 and $15,633 respectively. The estimated amortization expense for each of the five succeeding years from 2010 is approximately $22,000 each year.

   

The Company made a prepayment for land use rights of RMB27.8million (approximately $4.3 million) during the nine months ended September 30, 2011, which has been reflected on the accompanying condensed consolidated balance sheet as of September 30, 2011. The area is approximately 152,246 square meters and is intended for future manufacturing facilities expansion.

   
11.

Other payables and accrued expenses


      September 30,     December 31,  
      2011     2010  
      (Unaudited)        
               
  Accrued audit fee $ 8,000   $ 71,840  
  Receipt in advance from customers   11,915,087     7,896,814  
  Pension payable   810,680     546,436  
  Salaries payable   565,181     283,300  
  Other payables and accrued expenses   2,572,808     4,566,281  
               
    $ 15,871,756   $ 13,364,671  

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 September 30, 2011 and December 31, 2010 was an amount of $2,404,699 and $2,243,561 respectively, representing governmental financial support received for the Company’s efficient heat exchange equipment manufacture project (the “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.

F- 15


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

12. Short-term bank loans

      September 30,     December 31,  
      2011     2010  
      (Unaudited)        
               
  Secured bank loans $ 13,745,600   $ 7,584,721  
  Unsecured bank loans   -     3,033,889  
               
    $ 13,745,600   $ 10,618,610  

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”) or at a fixed rate of 5.56% per annum.

The secured bank loans were secured by the following assets of the Company :-

     
September 30,
December 31,
 
     
2011
2010
 
     
(Unaudited)
 
               
  Trade receivables (Note 5) $ 15,802,167   $ 5,922,542  
  Property, plant and equipment (Note 9)   3,225,468     2,931,629  
  Land use rights (Note 10)   1,018,646     1,005,428  
               
    $ 20,046,281   $ 9,859,599  

The unsecured bank loans as of December 31, 2010 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 bank loan

   

The loan is interest bearing at an annual rate of 115% of the benchmark rate of the PBOC for one-year to three-year long-term loans and guaranteed by a third party, who received $115,275 from the Company for acting as guarantor. The Company paid a counter guarantee of $234,300 as of September 30, 2011, to the third party.

   

Maturities of the bank loan as of September 30, 2011 are as follow :-


  Year      
  2012 $ 937,200  
  2013   1,874,400  
  2014   1,874,400  
         
    $ 4,686,000  

F- 16


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

14.

Other 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 $212,372 as of December 31, 2010, to the third party. Due to maturity of loan, the counter guarantee was released as at September 30, 2011.

   

The outstanding principal balance of the long-term loan as of September 30, 2011 became due and was settled by September 30, 2011.

   
15.

Common stock

   

On November 2, 2010, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with several accredited investors (the “Investors”) pursuant to which the Company agreed to issue and sell to the Investors 4,453,500 shares of the Company’s common stock, representing approximately 21.8% of the issued and outstanding capital stock of the Company on a fully-diluted basis as of and immediately after consummation of the transactions contemplated by the Securities Purchase Agreement, for an aggregate purchase price of approximately $14,251,200, or $3.20 per share (the “Placement Price”). Before the deduction of fair value of the escrow arrangement (Note 19), the Company received approximately $13,390,000 in net proceeds after deducting the issuance costs.

   

In connection with the offering of shares under the private placement, 222,675 warrants were issued to the financial advisor on December 7, 2010, as partial compensation for services, to purchase an aggregate of 222,675 shares of common stock of the Company, representing 5% of the offered shares. The warrants have a term of three years and are exercisable from the first anniversary of the issuance and have an exercise price of $3.84. The fair value of the warrants at date of issue was $396,939 as appraised by an independent qualified valuer. At September 30, 2011, all the issued share warrants were still outstanding.

   

In connection with its entry into the Securities Purchase Agreement, the Company also entered into a make good escrow arrangement with Wisetop, the Investors and other parties, details of which are set out in note 19 to the condensed consolidated financial statements.

   
16.

Other income


      Three months ended     Nine months ended  
      September 30,     September 30,  
      (Unaudited)     (Unaudited)  
      2011     2010     2011     2010  
                           
  Refund of value-added tax under tax Concession $ 57,684   $ 66,743   $ 205,103   $ 222,931  
  Government grants   3,554     -     546,250     -  
  Sales of scrap materials   1,037     -     159,388     -  
  Others, net   -     70,323     4,221     78,386  
                           
    $ 62,275   $ 137,066   $ 914,962   $ 301,317  

F- 17


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

17. Finance costs

      Three months ended     Nine months ended  
      September 30,     September 30,  
      (Unaudited)     (Unaudited)  
      2011     2010     2011     2010  
                           
  Interest expense $ 315,910   $ 124,119   $ 643,909   $ 384,761  
  Bank charges and net exchange loss   44,792     45,970     118,779     45,970  
                           
    $ 360,702   $ 170,089   $ 762,688   $ 430,731  

18.

Earnings per share

   

The basic earnings per share is calculated using the net income attributable to the Company’s common stockholders and the weighted average number of shares outstanding during the reporting periods.

   

During the reporting periods, certain share-based awards were not included in the computation of diluted earnings per share because they were anti-dilutive. Accordingly, the basic and diluted earnings per share are the same.

   
19.

Make good escrow agreement

   

In connection with its entry into the Securities Purchase Agreement, on November 2, 2010, the Company entered into a make good escrow agreement (the “Make Good Escrow Agreement”) with Wisetop (the “Pledgor”), the Investors, Infinity I-China Fund (Cayman) L.P. and the escrow agent, pursuant to which the Pledgor agreed to certain “make good” provisions in the event that the Company does not meet certain income thresholds for fiscal years 2010 and/or 2011. Pursuant to the Make Good Escrow Agreement, the Pledgor established an escrow account and delivered to the escrow agent certificates evidencing 2,000,000 shares of the Company’s common stock held by the Pledgor (the “Escrow Shares”) along with blank stock powers, to be held for the benefit of the Investors.

   

If the Company fails to report After Tax Net Income (“ATNI”) in the Annual Report of at least $8 million (the “2010 Guaranteed ATNI”) under U.S. GAAP for the fiscal year ended December 31, 2010, as filed with the Securities Exchange Commission (the “SEC”) on Form 10-K, the escrow agent shall transfer the 2010 Make Good Shares to the Investors on a pro rata basis for no consideration other than payment of their respective investment amount paid to the Company at the closing of the private placement (the “Closing”) and without any need for action or notice by or on behalf of any investor. The 2010 Make Good Shares are calculated based on the following formula, as equitably adjusted for any stock splits, stock combinations, stock dividends or similar transactions: ((2010 Guaranteed ATNI - 2010 audited ATNI)/$8 million) multiplied by 50% of the Escrow Shares.

F- 18


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

19.

Make good escrow agreement (Cont’d)

   

If the Company fails to report ATNI in the Annual Report of at least $12 million (the “2011 Guaranteed ATNI”) under U.S. GAAP for the fiscal year ending December 31, 2011, as filed with the SEC on Form 10-K, the escrow agent shall transfer the 2011 Make Good Shares to the Investors on a pro rata basis for no consideration other than payment of their respective investment amount paid to the Company at the Closing and without any need for action or notice by or on behalf of any investor. The 2011 Make Good Shares are calculated based on the following formula, as equitably adjusted for any stock splits, stock combinations, stock dividends or similar transactions: ((2011 Guaranteed ATNI - 2011 audited ATNI)/$12 million) multiplied by 50% of the Escrow Shares.

   

If prior to the second anniversary of the filing of either of the 2010 Annual Report or 2011 Annual Report (as applicable), the Company or their auditors report or recognize that the financial statements contained in such report are subject to amendment or restatement such that the Company would recognize or report adjusted ATNI of less than either of the 2010 Guaranteed ATNI or the 2011 Guaranteed ATNI (as applicable), then notwithstanding any prior return of 2010 Make Good Shares and 2011 Make Good Shares to the Pledgor, the Pledgor shall , within 10 business days following the earlier of the filing of such amendment or restatement or recognition, deliver the relevant 2010 Make Good Shares and 2011 Make Good Shares to the Investors without any further action on the part of the Investors.

   

If the 2010 audited ATNI is equal to or greater than the 2010 Guaranteed ATNI, no transfer of the 2010 Make Good Shares shall be required by the Pledgor to the Investors and 50% of the Escrow Shares shall be promptly returned to the Pledgor without the need of any approval or consent thereto by any investor. The remaining 50% of the Escrow Shares shall continue to be held in escrow by the escrow agent. If the 2011 audited ATNI is equal to or greater than the 2011 Guaranteed ATNI, no transfer of the 2011 Make Good Shares shall be required by the Pledgor to the Investors and the remaining 50% of the Escrow Shares shall be promptly returned to the Pledgor without the need of any approval or consent thereto by any investor.

   

Pursuant to ASC 718-10-S99-2, the SEC staff generally believes that escrow arrangement, which is in substance an inducement made to facilitate the transaction on behalf of the issuer, should be recognized and measured according to its nature and reflected as a reduction of the proceeds allocated to the newly-issued securities. The Company considers the aforementioned escrow arrangement as an inducement to facilitate the private placement on behalf of the Company rather than as compensatory and accordingly, adopted ASC 718-10-S99-2 to recognize this arrangement. The management estimated the probability of the Company not achieving the 2010 Guaranteed ATNI and 2011 Guaranteed ATNI to be 10% (the “Probability %”) and calculated the fair value of the escrow arrangement with reference to the Probability % and the Placement Price. The calculated fair value of $640,000 was deducted from the placement proceeds with a corresponding credit in additional paid-in capital, resulting in no net change in the Company’s equity.

   

As the target was met for 2010 Guaranteed ATNI, 50% of the Escrow Shares or 1,000,000 shares were returned to stockholders during the three months ended March 31, 2011. The remaining 50% of the Escrow Shares will be released in the following year if the 2011 Guaranteed ATNI is also met.

F- 19


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

20.

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 the 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 condensed consolidated statements of income and comprehensive income. The Company contributed $420,281 and $277,242 for the nine months ended September 30, 2011 and 2010, respectively.

   
21.

Commitments and contingencies


  Capital commitment   September 30,     December 31,  
      2011     2010  
      (Unaudited)        
               
  Land use rights $ 135,035   $ -  
  Construction in progress   357,772     447,210  
               
    $ 492,807   $ 447,210  

As of September 30, 2011 and December 31, 2010, the Company had capital commitments in respect of acquisition of land use rights and the construction of the Company’s campus and factory that were contracted for but not provided in the condensed consolidated financial statements.

Contingencies

As of September 30, 2011 and December 31, 2010, 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.

In accordance with ASC 450 “Contingencies”, the Company records a liability in the condensed 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 in respect of this undertaking is possible but not known or probable. Accordingly, no liability was recognized as of September 30, 2011 and December 31, 2010 respectively. The Company believes that a reasonable estimate of the possible loss ranges from $Nil to approximately $1,731,000 as of September 30, 2011 (December 31, 2010: from $Nil to approximately $1,681,000)

F- 20


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

21.

Commitments and contingencies (Cont’d)

   

Contingencies (Cont’d)

   

In accordance with the PRC tax regulations, the Company’s sales are subject to value added tax (“VAT”) at 17% upon the issuance of VAT invoices to its customers. When preparing these financial statements, the Company recognized revenue when goods were delivered, and made full tax provision in accordance with relevant national and local laws and regulations of the PRC.

   

The Company follows the practice of reporting its revenue for PRC tax purposes when invoices are issued. In the local statutory financial statements prepared under the PRC GAAP, the Company recognized revenue on an “invoice basis” instead of when goods are delivered. Accordingly, despite the fact that the Company has made full tax provision in these condensed consolidated financial statements, the Company may be subject to a penalty for the deferred reporting of tax obligations. The exact amount of penalty cannot be estimated with any reasonable degree of certainty. The management considers it is very unlikely that the tax penalty will be imposed.

   
22.

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 under ASC 280 “Segment Reporting”.

   

The Company’s sales revenues by products for the nine months ended September 30, 2011 and 2010 were as follows :-


      Nine months ended September 30,  
      2011     %     2010     %  
      (Unaudited)           (Unaudited)        
                           
  Plate heat exchanger $ 20,009,468     52   $ 20,017,975     57  
  Heat exchange unit   7,860,800     20     7,666,681     22  
  Air-cooled heat exchanger   2,640,027     7     3,688,726     11  
  Shell-and-tube heat exchanger   4,137,442     11     2,162,102     6  
  Others   3,894,697     10     1,547,345     4  
                           
    $ 38,542,434     100   $ 35,082,829     100  

All of the Company’s long-lived assets and revenues classified based on the customers are located in the PRC.

   
23.

Dissolution of Subsidiary

   

As discussed in Note 1, on September 22, 2011, the subsidiary, Tianjin Juyuan was formally dissolved with the approval of the Tianjin Industrial and Commercial Administrative Bureau Baodi Branch. As Tianjin Juyuan did not commence business before its dissolution, there is no significant impact on the condensed consolidated financial statement.

F- 21


THT Heat Transfer Technology, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)


 

24.

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 its related parties during the reporting periods.

   
25.

Subsequent events

   

The Company has evaluated all events or transactions that occurred through the date the condensed consolidated financial statements were issued, and has determined that there were no material subsequent events or transactions which would require recognition or disclosure in the condensed consolidated financial statements.

F- 22