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EX-31.2 - EXHIBIT 31.2 - THT Heat Transfer Technology, Inc.exhibit31-2.htm
EX-32.1 - EXHIBIT 32.1 - THT Heat Transfer Technology, Inc.exhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - THT Heat Transfer Technology, Inc.exhibit31-1.htm
EX-32.2 - EXHIBIT 32.2 - THT Heat Transfer Technology, Inc.exhibit32-2.htm

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: March 31, 2016

[  ] 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 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 May 16, 2016 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
Period Ended March 31, 2016

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 8
Item 4. Controls and Procedures 8
     
 PART II 
 OTHER INFORMATION 
     
Item 1. Legal Proceedings 9
Item 1A. Risk Factors 9
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Mine Safety Disclosures 9
Item 5. Other Information 9
Item 6. Exhibits 9


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THT HEAT TRANSFER TECHNOLOGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

Contents Page(s)
             Consolidated Balance Sheets F-1
             Consolidated Statements of Income and Comprehensive Income (Loss) F-2
             Consolidated Statements of Cash Flows F-3
             Notes to Consolidated Financial Statements F-4 - F-9

1



THT Heat Transfer Technology, Inc.
Consolidated Balance Sheets
(Stated in US dollars)

 

  March 31,     December 31,  

 

  2016     2015  

 

  (Unaudited)        

ASSETS

           

Current assets

           

Cash and cash equivalents

$  5,560,908   $  9,680,293  

Restricted cash

  798,279     517,073  

Trade receivables, net

  32,132,720     38,058,713  

Bills receivable

  2,205,606     726,224  

Other receivables, prepayments and deposits, net

  9,729,096     10,088,586  

Due from related parties

  30,770     39,552  

Inventories, net

  20,552,235     19,830,029  

Deferred tax assets

  511,044     159,960  

Total Current Assets

  71,520,658     79,100,430  

 

           

Restricted cash, non-current

  369,078     369,263  

Retention receivable

  1,461,908     1,589,313  

Property, plant and equipment, net

  9,371,651     9,666,773  

Land use rights, net

  5,588,959     5,582,690  

TOTAL ASSETS

$  88,312,254   $  96,308,469  

 

           

LIABILITIES & SHAREHOLDERS’ EQUITY

           

Current Liabilities

           

Accounts payable

  7,392,386     7,095,303  

Other payables and accrued liabilities

  18,909,295     19,745,852  

Income tax payable

  -     20,097  

Short-term loans

  674,638     6,176,529  

Current maturity of long-term loan

  542,812     539,233  

Due to related parties

  418,741     415,980  

Total Current Liabilities

  27,937,872     33,992,994  

 

           

TOTAL LIABILITIES

  27,937,872     33,992,994  

 

           

SHAREHOLDERS’ EQUITY

           

Preferred stock, $.001 par value, 10,000,000 shares authorized,
no shares issued and outstanding

       

Common stock, $.001 par value, 190,000,000 shares authorized,
20,453,500 shares issued and outstanding at March 31, 2016 and
December 31, 2015

  20,454     20,454  

Additional paid-in capital

  26,524,324     26,524,324  

Statutory reserve

  3,943,474     3,943,474  

Retained earnings

  27,130,718     29,446,126  

Accumulated other comprehensive income

  2,755,412     2,381,097  

TOTAL SHAREHOLDERS’ EQUITY

  60,374,382     62,315,475  

 

           

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$  88,312,254   $  96,308,469  

The accompanying notes are an integrated part of these unaudited consolidated financial statements

F-1



THT Heat Transfer Technology, Inc.
Consolidated Statements of Income and Comprehensive Income (Loss)
(Stated in US dollars)
(Unaudited)

 

  For the Three Months Ended March 31,  

 

  2016     2015  

 

           

Sales revenue

$  4,100,826   $  8,173,890  

Cost of revenues

  (2,972,726 )   (5,768,410 )

Gross Profit

  1,128,100     2,405,480  

 

           

Operating expenses

           

   General and administrative expenses

  1,941,692     302,018  

   Research and development expenses

  419,857     211,325  

   Selling expenses

  1,407,280     812,557  

Total Operating Expenses

  3,768,829     1,325,900  

 

           

Income from operations

  (2,640,729 )   1,079,580  

 

           

Other Income (Expenses)

           

   Interest income

  3,561     3,356  

   Investment income

  2,861     50,745  

   Finance costs

  (18,574 )   (38,608 )

   Other expense

  (7,646 )   (21,114 )

Total Other Expenses

  (19,798 )   (5,621 )

 

           

 

           

Income (loss) before income taxes

  (2,660,527 )   1,073,959  

Income tax benefits (expenses)

  345,119     (160,050 )

Net Income (Loss)

  (2,315,408 )   913,909  

 

           

Comprehensive Income

           

Net Income (Loss)

  (2,315,408 )   913,909  

Other Comprehensive Income

           

   Foreign currency translation adjustments

  374,315     264,957  

Comprehensive Income (Loss)

  (1,941,093 )   1,178,866  

 

           

Earnings (loss) per share

           

   Basic and diluted

$  (0.11 ) $  0.04  

 

           

Weighted average number of shares outstanding

           

   Basic and diluted

  20,453,500     20,453,500  

The accompanying notes are an integrated part of these unaudited consolidated financial statements

F-2



THT Heat Transfer Technology, Inc.
Consolidated Statements of Cash Flows
(Stated in US dollars)
(Unaudited)

 

  For the Three Months Ended March 31,  

 

  2016     2015  

 

           

CASH FLOWS FROM OPERATING ACTIVITIES

           

Net income (loss)

$  (2,315,408 ) $  913,909  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

       

Depreciation and amortization

  392,601     274,455  

Loss on disposal of property, plant and equipment

  -     16,211  

Deferred tax assets

  (345,119 )   -  

Allowance for doubtful accounts

  1,146,575     (819,888 )

Changes in operating assets and liabilities:

           

Trade receivables

  5,466,851     6,542,633  

Bills receivable

  (1,453,908 )   (1,035,075 )

Other receivables, prepayments and deposits

  (100,870 )   (600,067 )

Due from related parties

  8,918     (4,479 )

Inventories

  (582,305 )   2,330,461  

Retention receivable

  136,022     (278,655 )

Accounts payable

  240,103     (4,059,758 )

Other payables and accrued expenses

  (954,074 )   (4,045,304 )

Income tax payable

  (19,947 )   73,625  

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

  1,619,439     (691,932 )

 

           

CASH FLOWS FROM INVESTING ACTIVITIES

           

Change in restricted cash

  (271,283 )   11,044  

Payments to acquire property, plant and equipment

  (1,608 )   (14,819 )

NET CASH FLOWS USED IN INVESTING ACTIVITIES

  (272,891 )   (3,775 )

 

           

CASH FLOWS FROM FINANCING ACTIVITIES

           

Proceeds from short-term loans

  -     3,758,679  

Repayment of short-term loans

  (5,465,250 )   (6,184,493 )

NET CASH FLOWS USED IN FINANCING ACTIVITIES

  (5,465,250 )   (2,425,814 )

 

           

Effect of foreign currency translation on cash and cash equivalents

  (683 )   29,312  

 

           

NET DECREASE IN CASH AND CASH EQUIVALENTS

  (4,119,385 )   (3,092,209 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

$  9,680,293   $  12,247,508  

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$  5,560,908   $  9,155,299  

 

           

Supplementary Disclosures for Cash Flow Information:

           

Interest paid

$  18,574   $  36,013  

Income taxes paid

$ 21,494   $  65,265  

 

           

Non-cash investing and financing activities:

           

Liabilities assumed in connection with purchase of property, plant and equipment

$  6,381   $  -  

The accompanying notes are an integrated part of these unaudited consolidated financial statements

 F-3



THT Heat Transfer Technology, Inc.
Notes to Unaudited 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 a Nevada corporation with major operations in China.

2. Description of business

The Company is a holding company whose primary business are conducted through its subsidiaries, namely SipingJuyuan 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.

SipingJuyuan 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 SipingJuyuan, Siping City Juyuan Heat Exchange Equipment Co., Ltd. (“New Juyuan Company”) and Siping City JuyuanHanyang Pressure Vessels Co., Ltd (“JuyuanHanyang Pressure Vessels”).

3. Summary of significant accounting policies

Basis of presentation and consolidation

The accompanying unaudited 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 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, 2015 filed with the SEC in the Company’s Form 10-K on March 30, 2016.

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 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-4


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. As of March 31, 2016 and December 31, 2015, the carrying amounts of the Company’s financial assets and liabilities approximated their fair values due to short maturities or the applicable interest rates approximated the current market rates.

Recently issued accounting pronouncements

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments in this ASU add further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. Public entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”. The amendments in this ASU, among other things: (1) clarify the objective of the collectibility criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The effective date of these amendments is at the same date that Topic 606 is effective. Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.

4. Trade receivables, net

    March 31,     December 31,  
    2016     2015  
    (Unaudited)        
             
Trade receivables $  40,506,953   $  45,747,802  
Less: Allowance for doubtful accounts   (8,374,233 )   (7,689,089 )
  $  32,132,720   $  38,058,713  

An analysis of the allowance for doubtful accounts for the three months ended March 31, 2016 and 2015 is as follows:

    Three months ended  
    March 31,  
    (Unaudited)  
    2016     2015  
             
             
Balance at beginning of period $  7,689,089   $  8,512,850  
Adjustment of bad debt expense   625,223     (819,888 )
Translation adjustments   59,921     35,327  
Balance at end of period $  8,374,233   $  7,728,289  

F-5


5. Inventories, net

    March 31,     December 31,  
    2016     2015  
    (Unaudited)        
             
Raw materials $  8,989,520   $  7,920,917  
Work-in-progress   795,963     1,224,069  
Finished goods   10,785,675     10,703,842  
    20,571,158     19,848,828  
Allowance for obsolete inventories   (18,923 )   (18,799 )
  $  20,552,235   $  19,830,029  

No further allowance for obsolete inventories was recognized during the three months ended March 31, 2016 and 2015.

6. Income tax

The effective tax rate is -13% and 15% for the three months periods ended March 31, 2016 and 2015, respectively.

7. Property, plant and equipment, net

As of March 31, 2016 and December 31, 2015, property, plant and equipment with net book values of $5,587,802 and $5,642,506, respectively, were pledged as collateral under certain loan arrangements (see Note 9).

8. Land use rights

As of March 31, 2016 and December 31, 2015, land use rights with net book values of $5,589,006 and $5,582,690 were pledged as collateral under certain loan arrangements (see Note 9).

During the three months ended March 31, 2016 and 2015, amortization amounted to $30,357 and $32,309, respectively.

9. Short-term bank loans

    March 31,     December 31,  
    2016     2015  
    (Unaudited)        
             
Loan from unrelated party $  674,638   $  6,176,529  
  $  674,638   $  6,176,529  

F-6


Short-term loans from unrelated party

In April 2014, the Company obtained a loan, amounting to $6,176,529, from a third party individual. The loan is unsecured, bearing no interest rate and due on demand.

On March 30, 2015, the Company obtained a loan in the amount of RMB 23,094,830 (approximately $3,635,000), bearing no interest rate and due on demand, from a third party individual. On April 2, 2015, the Company repaid the loan in full.

On September 2, 2015, the Company obtained a loan in the amount of RMB 12,000,000 (approximately $1,930,000) from a third party individual. The loan is unsecured, bearing no interest rate and due on demand. In December 2015, the Company repaid the loan in the amount of RMB11, 910, 000 (approximately $1,916,000).

For the three months ended March 31, 2016, the Company has repaid the loan in the amount of RMB 35,740,000 (approximately $5,465,000).

Short-term bank loans

The Company’s bank loans carry annual interest from 100% to 120% of the benchmark interest rate published by the People’s Bank of China (the “PBOC”).

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

    March 31,     December 31,  
    2016     2015  
    (Unaudited)        
             
             
Property, plant and equipment (Note 7)   5,587,802     5,642,506  
Land use rights (Note 8)   5,589,006     5,582,690  
  $ 11,176,808   $  11,225,196  

As of December 31, 2015, the Company has fully repaid the secured short-term bank loans it borrowed in previous years. The related pledge agreements continue to remain effective until September 2018.

10. Current maturity of long-term loans

Long-term loans include the following:

    March 31,     December 31,  
    2016     2015  
    (Unaudited)        
Unsecured loan   542,812     539,233  
Total $  542,812   $  539,233  

In December 2013, the Company obtained a 3-year entrusted loan from a non-financial institution bearing interest at 3% per annum granted by local government. The entrusted unsecured loan will be matured on December 24, 2016.

F-7


11. 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 three months ended March 31, 2016 and 2015 were as follows:

    Three months ended March 31,  
    2016     %     2015     %  
    (Unaudited)           (Unaudited)        
                         
Plate heat exchanger $  1,940,078     48   $  1,792,633     22  
Heat exchange unit   1,519,173     37     3,933,957     48  
Shell-and-tube heat exchanger         -     (16,692 )   -  
Others   641,575     15     2,463,992     30  
  $  4,100,826     100   $  8,173,890     100  

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

12. Related party transactions

The related parties consist of as following:

Name of Related Party Nature of Relationship
Guohong Zhao Chairman, Chief Executive Officer and President
Zhigang Xu Interim Chief Financial Officer, Treasurer and Secretary
Fucai Zan Vice President of R&D and Director
Kai Liu Chief Engineer, Manager of Market development
Zhijun Ma Sales Director
Yongfu Tian Vice Sales Director
Feng Xu Factory Director, Manager of production

F-8


Due from related parties

As of March 31, 2016 and December 31, 2015, respectively, the Company advanced $18,471 and $26,896 to Guohong Zhao for handling selling and logistic activities for the Company in the ordinary course of business.

As of March 31, 2016 and December 31, 2015, respectively, the Company advanced $450 and $886 to Fucai Zan for handling selling and logistic activities for the Company in the ordinary course of business.

As of March 31, 2016 and December 31, 2015, respectively, the Company advanced $11,849 and $11,770 to Kai Liu for handling selling and logistic activities for the Company in the ordinary course of business.

Due to related parties

Due to related parties consist of following:

    March 31,     December 31,  
    2016     2015  
    (Unaudited)        
Zhigang Xu   77,545     77,033  
Fucai Zan   108,562     107,847  
Kai Liu   155,089     154,067  
Yongfu Tian   77,545     77,033  
                                                                        $   418,741   $  415,980  

Amounts owed by the Company represent non-secured and non-interest bearing loans obtained from related parties which are due on demand.

F-9



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

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except where the context otherwise requires and for the purposes of this report only:

“THT,” “Company,” “we,” “us,” or “our” are to the combined business of THT Heat Transfer Technology, Inc., a Nevada corporation, and its consolidated subsidiaries: Megaway, Star Wealth, Siping Juyuan and Beijing Juyuan;

 

“Megaway” are to Megaway International Holdings Limited, a BVI company;

 

“Star Wealth” are to Star Wealth International Holdings Limited, a Hong Kong company;

 

“Siping Juyuan” are to Siping City Juyuan Hanyang Plate Heat Exchanger Co. Ltd., a PRC company;

 

“Beijing Juyuan” are to Beijing Juyuan Hanyang Heat Exchange Equipment Co., Ltd., a PRC company;

 

“BVI” are to the British Virgin Islands;

 

“Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;

 

“PRC” and “China” are to the People’s Republic of China;

 

“SEC” are to the Securities and Exchange Commission;

 

“Exchange Act” are to the Securities Exchange Act of 1934, as amended;

 

“Securities Act” re to the Securities Act of 1933, as amended;

 

“Renminbi” and “RMB” are to the legal currency of China; and

 

“U.S. dollars,” “dollars” and “$” are to the legal currency of the United States.

Overview of our Business

We are a leading total solution provider in the heat exchange industry. Our major products are plate heat exchangers, heat exchanger units, air-cooled heat exchangers and shell-and-tube heat exchangers. Unlike most other heat exchanger manufacturers in China, we not only provide heat exchange products, but also provide total solutions to our customers. As a total solutions provider, we analyze the working condition of our customers, provide optimized designs based on analysis and simulation, offer high quality heat exchange products, and continuously assist our customers in improving the heat exchange process.

Over the past ten years, we have successfully completed over 3,000 projects in more than 15 industries, including metallurgy, heat and power, petrochemical, food and beverage, pharmaceutical and shipbuilding. We have provided heat exchange solutions to Fortune 500 companies, including Shell, BP, BASF, LG, Sinopec and China Shenhua. We have also provided heat exchange products for important Chinese and international projects such as the Beijing 2008 Olympics Wukesong Sports Center, Guangdong Linao nuclear plant and BASF Chemical plant in Germany.

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Our operations are headquartered in Siping, Jilin Province, PRC. Our primary Chinese operating subsidiaries are Siping Juyuan and Beijing Juyuan.

First Quarter Financial Performance Highlights

The following summarizes certain key financial information for the first quarter of 2016:

 

Sales revenue: Sales revenue decreased by $4.07 million, or 49.83%, to $4.10 million for the three months ended March 31, 2016, from $8.17 million for the same period in 2015.

   

 

Gross profit: Gross profit decreased by $1.28 million, or 53.10%, to $1.13 million for the three months ended March 31, 2016, from $2.41 million for the same period in 2015. As a percentage of sales revenue, gross profit decreased by 1.92% to 27.51% for the three months ended March 31, 2016, from 29.43% for the same period in 2015.

   

 

Net income: Net income decreased by $3.23 million, or 353.35%, to $(2.32) million for the three months ended March 31, 2016, from $0.91 million for the same period in 2015.

   

 

Fully diluted net income per share: Fully diluted net income per share was $(0.11) for the three months ended March 31, 2016, as compared $0.04 for the same period in 2015.

Results of Operations

The following table sets forth key components of our results of operations for the periods indicated.

    Three Months Ended              
    March 31,    $     %  
    2016     2015     Change     Change  
Sales revenue $  4,100,826   $  8,173,890   $  (4,073,064 )   (49.83 )
Cost of sales   (2,972,726 )   (5,768,410 )   2,795,684     (48.47 )
Gross profit   1,128,100     2,405,480     (1,277,380 )   (53.10 )
Operating expenses:                        
         Administrative expenses   1,941,692     302,018     1,639,674     542.91  
         Research and development expenses   419,857     211,325     208,532     98.68  
         Selling expenses   1,407,280     812,557     594,723     73.19  
Total operating expenses   3,768,829     1,325,900     2,442,929     184.25  
Income (Loss) from operations (2,640,729 ) 1,079,580 (3,720,309 ) (344.61 )
Interest income   3,561     3,356     205     6.11  
Investment income   2,861     50,745     (47,884 )   (94.36 )
Other expenses   (7,646 )   (21,114 )   (13,468 )   (63,79 )
Finance costs   (18,574 )   (38,608 )   (20,034 )   (51.89 )
Income (loss) before income taxes                        
    (2,660,527 )   1,073,959     (3,734,486 )   (347.73 )
Income taxes benefits (expense)   345,119     (160,050 )   505,169     (315.63 )
Net income (loss)   (2,315,408 )   913,909     (3,229,317 )   (353.35 )

Sales revenue. Our sales revenue is generated from sales of heat exchange products. Sales revenue decreased by $4.07 million, or 49.83%, to $4.10 million for the three months ended March 31, 2016, from $8.17 million for the same period in 2015. Our sales volume in the three months ended March 31, 2016 amounted to 332 units, a decrease of 30 units, from 362 units for the same period in 2015. Such decrease was mainly due to the decreased sales revenue from heat exchanger unit and other products in the three months ended March 31, 2016 as compared with the same period in 2015. Sales revenue from plate heat exchangers increased by $0.15 million, or 8.23%, to $1.94 million for the three months ended March 31, 2016, from $1.79 million for the same period in 2015. Sales revenue from heat exchange unit decreased $2.41 million as compared with the same period in 2015. China’s economic slowdown in 2015 and first quarter of 2016 affected several industries we serve, especially the industries with excessive capacity such as petrochemical, metallurgical and shipbuilding industries. Because of the energy conservation and emission reduction policies adopted in China, many projects in petrochemical industry were suspended and delayed with less orders in the first quarter of 2016. Many orders from shipbuilding industry also declined drastically. Although sales revenue from plate heat exchanger increased, the increase was not enough to offset the decreased sales revenue from heat exchange unit and other products.

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The following table shows our sales revenue by product for the three months ended March 31, 2016 and 2015:

    Three Months Ended March 31,        
    2016     2015  
  $      %   $      %  
Plate heat exchanger $  1,940,078     48   $  1,792,633     22  
Heat exchange unit   1,519,173     37     3,933,957     48  
Shell-and-tube heat exchanger   -     -     (16,692 )   -  
Others   641,575     15     2,463,992     30  
TOTAL $  4,100,826     100   $  8,173,890     100  

Cost of sales. Our cost of sales is primarily comprised of the costs of our raw materials, labor and factory overhead. Our cost of sales decreased by $2.80 million, or 48.47%, to $2.97 million for the three months ended March 31, 2016, from $5.77 million for the three months ended March 31, 2015. The decrease in the cost of sales was generally in line with the decrease in our sales revenue. Cost of sales as a percentage of sales revenue were 72.49% and 70.57% for the three months ended March 31, 2016 and 2015, respectively, an increase of 1.92 percentage points. The increase was mainly attributable to the increase in unit price of raw material and labor hour rate.

Gross profit. Our gross profit is equal to the difference between our sales revenue and our cost of sales. Our gross profit decreased by $1.28 million, or 53.10%, to $1.13 million for the three months ended March 31, 2016, from $2.41 million for the same period in 2015. The decrease in our gross profit was mainly attributable to decrease in sales revenues. As the average unit selling price of our products decreased by 45% in the three months ended March 31, 2016 in comparison with the same period in 2015, gross profit margin for the three months ended March 31, 2016 dropped to 27.51% from 29.43% for the same period in 2015.

Administrative expenses. Our administrative expenses consist of the costs associated with staff and support personnel who manage our business activities. Our administrative expenses increased by $1.64 million, or 542.91%, to $1.94 million for the three months ended March 31, 2016, from $0.30 million for the same period in 2015. As a percentage of sales revenue, administrative expenses increased to 47.35% for the three months ended March 31, 2016, as compared to 3.69% for the same period in 2015. The increase in administrative expenses was primarily because the bad debt expense increased by $645,000 resulting from the increase of uncollected accounts receivable with the slowdown of economy and the increase of other general and administrative expenses, such as SAP system installation fee and employee welfare increase by $1 million for the three months ended March 31, 2016.

Research and development expenses. Our research and development expenses consist of the costs associated with research and development personnel and expense in research and development projects. Our research and development expenses increased by $0.21 million, or 98.68%, to $0.42 million for the three months ended March 31, 2016, from $0.21 million for the same period in 2015. The increase in research and development expenses was mainly attributable to a few new products in the process of research and development.

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 by $0.59 million, or 73.19%, to $1.41 million for the three months ended March 31, 2016, from $0.81 million for the same period in 2015. As a percentage of sales revenue, selling expenses increased to 34.32% for the three months ended March 31, 2016, as compared to 9.94% for the same period in 2015. The increase was mainly due to the increase of products installment expense of $0.45 million and the Company’s effort to develop new customers.

Income before income taxes. Income before income taxes decreased by $3.73 million, or 347.73%, to $(2.66) million for the three months ended March 31, 2016, from $1.07 million for the same period in 2015. Such decrease was mainly attributable to the decrease in sales revenues and increase in operating expenses.

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Income taxes. Our income taxes changed to $(0.35) million income tax benefits for the three months ended March 31, 2016, from $0.16 million income tax expenses for the same period in 2015, as a result of net loss in the quarter ended March 31, 2016.

Net income. As a result of the cumulative effect of the foregoing factors, our net income decreased by $3.23 million, or 353.35%, to $(2.32) million for the three months ended March 31, 2016, from $0.91 million for the same period in 2015. As a percentage of sales revenue, our net income was (0.65) % and 11.18% for the three months ended March 31, 2016 and 2015, respectively.

Liquidity and Capital Resources

As of March 31, 2016, we had cash and cash equivalents of $5.56 million, primarily consisting of cash on hand and demand deposits. We can use our land as collateral to borrow approximately $4.76 million. In addition, we have an approximately $5.98 million credit line from Agriculture Bank of China. We anticipate that cash on hand and borrowing capacity under our bank loans will be sufficient to satisfy our ongoing obligations.

We believe our allowance for doubtful accounts is appropriate. We have an installment payment arrangement with our customers. The current economic slowdown and China’s tightened credit policy led to delayed payments and delayed delivery schedules by our customers, which in turn caused us to increase our allowance for doubtful accounts from $7.73 million in the three months ended March 31, 2015 to $8.37 million in the same period in 2016. To control inflation after a massive stimulus plan, the Chinese government tightened its credit policy. As a result, state-owned banks limited their lending to large state-owned corporations and privately held companies continue to have difficulty accessing capital. Most of our customers have been affected by the tightened credit policy and have limited access to capital. The Company records an allowance for doubtful accounts at a rate of 25% for receivables aged between 1 to 2 years, 50% for receivables aged between 2 to 3 years and 100% for receivables aged over 3 years.

Our allowance of obsolete inventory is also appropriate because we purchase raw materials after we receive purchase orders. Although our customers may delay their payment or delivery schedules, which increase our inventories, they do not cancel their orders so as to cause us to classify the delayed inventories as obsolete inventories.

We expect that the trend of delayed customer payments and delayed delivery schedules will continue in the future. We have been taking the following measures to mitigate the situation: 1) send the collection letters or call the customers to request payment; 2) appoint specialists to visit our customers to collect payment; and 3) file law suits.

PRC legal restrictions permit payments of dividends by our PRC subsidiaries only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. Our PRC subsidiaries are also required under PRC laws and regulations to allocate at least 10% of their annual after-tax profits determined in accordance with PRCGAAP to a statutory general reserve fund until the amounts in said fund reaches 50% of our registered capital. Allocations to these statutory reserve funds can only be used for specific purposes and are not transferable to us in the form of loans, advances, or cash dividends. Given that the Company and the PRC subsidiaries do not intend to pay dividends for the foreseeable future, we consider the impact of restrictions on our liquidity, financial condition and results of operations is not significant.

The following table provides a summary of our net cash flows from operating, investing, and financing activities.

Cash Flow

    Three Months Ended March  
    31,  
    2016     2015  
Net cash provided by (used in) operating activities $  1,619,439   $  (691,932 )
Net cash used in investing activities   (272,891 )   (3,775 )
Net cash used in financing activities   (5,465,250 )   (2,425,814 )
Effects of exchange rate change in cash   (683 )   29,312  
Net decrease in cash and cash equivalents   (4,119,385 )   (3,092,209 )
Cash and cash equivalents at beginning of the period   9,680,293     12,247,508  
Cash and cash equivalent at end of the period $  5,560,908   $  9,155,299  

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Operating Activities

Net cash provided by operating activities was $1.62 million for the three months ended March 31, 2016, compared with $0.69 million used for the same period in 2015. The increase in net cash provided by operating activities was mainly due to the increase of allowance for doubtful account from $(819,888) in 2015 for the three months ended March 31 to $1,146,575 in 2016 for the same period, and the change of accounts payable from $(4,059,758) for the three-months period ended March 31, 2015 to $240,103 for the same period in 2016.

Investing Activities

Net cash used in investing activities was $0.27 million for the three months ended March 31, 2016, compared with $3,775 in the same period in 2015. The increase of net cash provided by investing activities was primarily due to increase in restricted cash of $0.28 million.

Financing Activities

Net cash used in financing activities was $5.47 million for the three months ended March 31, 2016, compared with $2.43 million for the same period in 2015. The increase in net cash used in financing activities resulted from no proceeds from short-term loans for the three months ended March 31, 2016 compared to $3.76 million proceeds from short-term loans for the same period in 2015.

Capital Expenditures

Our capital expenditures were used primarily for the purchase of equipment to expand our production capacity and deposits for land use rights. The table below sets forth the breakdown of our capital expenditures by use for the periods indicated.

    Three Months Ended March 31,  
    2016     2015  
Construction costs   -     8,932  
Purchase of equipment   1,608     5,887  
Total capital expenditures $  1,608   $  14,819  

We estimate that our total capital expenditures in fiscal year 2016 will reach approximately $0.85 million to buy the equipment for necessary products used in the nuclear power industry.

Obligations Under Material Contracts

Except with respect to the loan obligations disclosed above, we have no material obligations to pay cash or deliver cash to any other party.

Seasonality

Our operating results and operating cash flows historically have been subject to seasonal variations. Our revenues usually increase over each quarter of the calendar year with the first quarter usually the slowest quarter because fewer projects are undertaken during and around the Chinese spring festival.

Inflation

Inflation and changing prices have not had a material effect on our business, and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor price changes in the Chinese economy and our industry and continually maintain effective cost controls in operations.

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Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity or capital expenditures, or capital resources that are material to an investment in our securities.

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Recent Accounting Pronouncements

See Note 3 to our unaudited consolidated financial statements included elsewhere in this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Guohong Zhao, and Interim Chief Financial Officer, Mr. Zhigang Xu, of the effectiveness of the design and operation of our disclosure controls and procedures, as of March 31, 2016. Based upon, and as of the date of this evaluation, Messrs. Zhao and Xu determined that because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2015, which we are still in the process of remediating as of March 31, 2016, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2015 for the description of these weaknesses.

Changes in Internal Control over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2015, our management identified material weakness related to our lack of: (1) sufficient and adequately trained accounting and finance personnel; (2) qualified resources to perform the internal audit functions properly; and (3) an internal audit department, which renders ineffective our ability to prevent and detect control lapses and errors in the accounting of certain key areas. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, our management has identified the steps necessary to address the material weaknesses, and in the first quarter of 2016, we continued to implement these remedial procedures.

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Other than in connection with the implementation of the remedial measures described above, there were no changes in our internal controls over financial reporting during the first quarter of 2016 that have materially affected, or are reasonably likely to materially affect, our internal control 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 effect on our business, financial condition, cash flow or operating results.

ITEM 1A. RISK FACTORS.

Not applicable.

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

We have not sold any equity securities during the first quarter of 2016 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the quarter.

No repurchases of our common stock were made during the first quarter of 2016.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the first quarter of 2016, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 16, 2016 THT HEAT TRANSFER TECHNOLOGY, INC.
     
  By: /s/ Guohong Zhao
    Guohong Zhao, Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Zhigang Xu
    Zhigang Xu, Interim Chief Financial Officer
    (Principal Financial Officer and Principal
    Accounting Officer)


EXHIBIT INDEX

Exhibit No.  

Description

31.1

Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101  

Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).