AS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 2008
REGISTRATION
NO. 333-_______
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
SmartHeat
Inc.
(Name
of
Registrant as specified in its charter)
Nevada
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000-53052
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98
-0514768
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(State
or other jurisdiction
of
incorporation)
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(Commission
File Number)
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(IRS
Employer
Identification
No.)
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A-1,
10, Street 7
Shenyang
Economic and Technological Development Zone
Shenyang,
China 110027
+86
(24) 2519-7699
(Address
and telephone number of principal executive offices and principal place of
business)
Mr.
Jun Wang
Chief
Executive Officer
SmartHeat
Inc.
A-1,
10, Street 7
Shenyang
Economic and Technological Development Zone
Shenyang,
China 110027
+86
(24) 2519-7699
(Name,
address and telephone number of agent for service)
Copies
to:
William
Uchimoto, Esq.
Buchanan
Ingersoll & Rooney PC
1835
Market Street, 14th
Floor
Philadelphia,
PA 19103
(215)
665-8700
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
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¨
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Accelerated
Filer
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¨
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Non-accelerated
filer
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¨
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Smaller
reporting company
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x
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(Do
not check if a smaller reporting company)
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Calculation
of Registration Fee
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Title of Each Class of
Securities To Be Registered
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Amount
To Be
Registered
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Proposed
Maximum
Offering
Price
Per Unit
(1)(2)
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Proposed
Maximum
Aggregate
Offering
Price
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Amount of
Registration
Fee
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Common
Stock offered by our selling shareholders (2) |
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1,630,000
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$
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4.35
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$
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$
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Common
Stock underlying warrants
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393,000
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$
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$
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$
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Total
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2,023,000
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$
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$
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(1)
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The
shares being registered for resale by selling shareholders were issued
pursuant to a private placement of securities completed on August
22, 2008
and/or are issuable upon the exercise of certain warrants of the
Registrant.
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(2)
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Estimated
pursuant to Rule 457(c) under the Securities Act of 1933 solely for
the
purpose of calculating the amount of the registration fee, based
on the
average of the bid and ask prices per share of the Registrant’s common
stock on October 14, 2008, as reported on the OTC Bulletin
Board.
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The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the United States Securities and Exchange
Commission, acting pursuant to said section 8(a), may
determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these securities in
any
state where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS; SUBJECT TO COMPLETION, October 17, 2008
SMARTHEAT
INC.
2,023,000
Shares of Common Stock
The
selling shareholders identified in this prospectus may offer and sell up to
an
aggregate of 2.023,000 shares of our common stock which we have issued to them,
or which we may issue to them upon the exercise of certain warrants issued
to
them. All of the shares and warrants were issued to the selling shareholders
in
a private placement transaction completed prior to the filing of the
registration statement of which this prospectus is a part.
We
are
not selling any shares of our common stock in this offering and will not receive
any proceeds from this offering. We may receive proceeds on exercise of
outstanding warrants for shares of common stock covered by this prospectus
if
the warrants are exercised for cash.
The
selling shareholders may offer the shares covered by this prospectus at fixed
prices, at prevailing market prices at the time of sale, at varying prices
or
negotiated prices, in negotiated transactions, or in trading markets for our
common stock. We will bear all costs associated with this
registration.
Our
common stock trades on the OTC Bulletin Board under the symbol “SMHT.” The
closing price of our common stock on the OTC Bulletin Board on October 15,
2008
was $4.70 per share.
You
should consider carefully the risk factors beginning on page 4 of this
prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved these securities or determined that this prospectus is accurate or
complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is October 17, 2008.
TABLE
OF CONTENTS
ABOUT
THIS PROSPECTUS
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2
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PROSPECTUS
SUMMARY
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2
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RISK
FACTORS
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4
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FORWARD-LOOKING
STATEMENTS
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15
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AVAILABLE
INFORMATION
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16
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USE
OF PROCEEDS
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16
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MARKET
FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
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17
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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18
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OUR
BUSINESS
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29
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OUR
PROPERTY
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35
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LEGAL
PROCEEDINGS
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35
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MANAGEMENT
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36
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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39
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EXECUTIVE
COMPENSATION
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40
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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42
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SELLING
SHAREHOLDERS
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44
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PLAN
OF DISTRIBUTION
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45
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DESCRIPTION
OF SECURITIES
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47
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INTEREST
OF NAMED EXPERTS
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47
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LEGAL
MATTERS
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47
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INDEMNIFICATION
OF DIRECTORS AND OFFICERS
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48
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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You
may
only rely on the information contained in this prospectus or that we have
referred you to. We have not authorized anyone to provide you with different
information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to
sell
or a solicitation of an offer to buy any common stock in any circumstances
in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under
any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained
by
reference to this prospectus is correct as of any time after its
date.
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement we filed with the Securities
and
Exchange Commission ("SEC"). You should rely only on the information provided
in
this prospectus and incorporated by reference in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in or incorporated by reference into this prospectus. The selling shareholders
are offering to sell, and seeking offers to buy, shares of common stock only
in
jurisdictions where offers and sales are permitted. The information in this
prospectus is accurate only as of the date of this prospectus, regardless of
the
time of delivery of this prospectus or of any sale of common stock. The rules
of
the SEC may require us to update this prospectus in the future.
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus
and does not contain all of the information you should consider in making your
investment decision. Before investing in the securities offered hereby, you
should read the entire prospectus, including our financial statements and
related notes included in this prospectus and the information set forth under
the headings “Risk Factors” and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In this prospectus, the terms
“SmartHeat,” “we,” “us,” and “our” refer to SmartHeat Inc.
Our
Company
We
are a
leading provider
of plate heat exchanger products to China's industrial, residential and
commercial markets. We
design, manufacture, sell, and service plate heat exchangers ("PHEs"), units
which combine plate heat exchangers with various pumps, temperature sensors,
valves, and automated control systems ("PHE Units"), and heat meters for a
broad
range of industries, including petroleum refining, petrochemicals, power
generation, metallurgy, food & beverage and chemical processing. We sell
PHEs under the Sondex brand and PHE Units designed by our engineers and
assembled with Sondex plates under our Taiyu brand name. We are one of three
authorized dealers of Sondex PHEs for the industrial and energy sectors in
China. Our Sondex distribution territory is North China.
We
were
incorporated in the State of Nevada on August 4, 2006 under the name Pacific
Goldrim Resources, Inc. as an exploration stage corporation that intended to
engage in the exploration of silver, lead and zinc.. On April 14, 2008 we
changed our name to SmartHeat Inc, and acquired all of the equity interests
in
Shenyang Taiyu Machinery & Electronic Equipment Co,, Ltd. ("Taiyu"), a
privately held company formed under the laws of the People's Republic of China
("China") engaged in the design, manufacture, sale, and servicing of plate
heat
exchange products in China. The acquisition of Taiyu's equity interests was
accomplished pursuant to the terms of a Share Exchange Agreement dated April
14,
2008 (the "Share Exchange Agreement") by and among SmartHeat, Taiyu and all
of
the shareholders of Taiyu (the "Taiyu Shareholders"). At the closing under
the
Share Exchange Agreement, all of the equitable and legal rights, title and
interests in and to Taiyu's share capital in the amount of Yuan 25,000,000
were
exchanged for an aggregate of 18,500,000 shares of SmartHeat common stock (the
"Share Exchange"). As a result of the Share Exchange, Taiyu became a
wholly-owned subsidiary of SmartHeat.
Prior
to
our acquisition of Taiyu, we were in the development stage and had minimal
business operations. We had no interest in any property, but had the right
to
conduct exploration activities on thirteen (13) mineral title cells covering
270,27 hectares (667,85 acres) in the Slocan Mining Division of southeastern
British Columbia, Canada. In connection with the acquisition of Taiyu, the
Company transferred all of its pre-closing assets and liabilities (other than
the obligation to pay a $10,000 fee to the Company's audit firm) to a wholly
owned subsidiary, PGR Holdings, Inc., a Nevada corporation ("SplitCo"), under
the terms of an Agreement of Conveyance, Transfer and Assignment of Assets
and
Assumption of Obligations dated April 14, 2008 (the "Transfer Agreement").
The
Company also sold all of the outstanding capital stock of SplitCo to Jason
Schlombs (the former director and officer, and a major shareholder, of the
Company) pursuant to a Stock Purchase Agreement dated April 14, 2008 (the
"Split-Off Agreement") in exchange for the surrender of 2,500,000 shares of
the
Company's common stock held by Mr. Schlombs (the "Split-Off').
Our
principal offices are located at A-1, 10, Street 7, Shenyang Economic and
Technological Development Zone, Shenyang, China 110027. Our telephone number
is
+86 (24) 2519-7699.
The
Offering
Common
stock outstanding before the offering
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24,179,900
shares
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Common
stock offered by selling shareholders
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Up
to 2,023,000 shares
The
maximum number of shares to be sold by the selling shareholders,
2,023,000
shares, represents 8.23% of our outstanding stock, assuming full
exercise
of the warrants
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Common
stock to be outstanding after the offering
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Up
to 24,572,900 shares
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Use
of proceeds
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We
will not receive any proceeds from the sale of the common stock.
However,
we may receive proceeds from the exercise of the warrants. See "Use
of
Proceeds" for a complete description.
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Risk
Factors
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The
purchase of our common stock involves a high degree of risk. You
should
carefully review and consider "Risk Factors" beginning on page
3.
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The
above
information regarding common stock to be outstanding after the offering is
based
on 24,179,900 shares of common stock outstanding as of October 16,
2008.
Our
business and an investment in our securities are subject to a variety of risks.
The following risk factors describe the most significant events, facts or
circumstances that could have a material adverse effect upon our business,
financial condition, results of operations, ability to implement our business
plan, and the market price for our securities. Many of these events are outside
of our control. The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we currently believe
are immaterial may also materially and adversely affect our business, financial
condition or results of operations. In that case, the trading price of our
common stock could decline and investors in our common stock could lose all
or
part of their investment.
Risks
Related to Our Business
Our
relationship with Sondex has substantially contributed to our business and
its
growth. We could be adversely affected if that relationship
terminated
We
are
one of three authorized dealers appointed by Sondex A/S for PHEs for the
industrial and energy sectors in China. Our territory is North China. Sondex
is
one of the world's leading PHE manufacturers. Our sales of Sondex PHEs have
contributed to our reputation for the high quality of the products we
manufacture and sell. If our relationship with Sondex were to terminate, our
business, revenues, and results of operations could be adversely
affected.
The
markets we serve are subject to seasonality and cyclical demand, which could
harm our business and make it difficult to project long-term
performance
Demand
for our products depends in large part upon the level of capital and maintenance
expenditures of our customers and the end users. These expenditures have
historically been cyclical in nature and vulnerable to economic downturns.
Decreased capital and maintenance spending by our customers could have a
material adverse effect on the demand for our products and our business,
financial condition and results of operations. In addition, this historically
cyclical nature of the demand for our products limits our ability to make
accurate long-term predictions about our performance. Changing world economic
and political conditions may also reduce the willingness of our customers and
prospective customers to purchase our products and services. The seasonality
of
our business results in significant operational challenges to our production
and
inventory control functions.
We
derive a substantial part of our revenues from several major customers. If
we
lose any of these customers or they reduce the amount of business they do with
us, our revenues may be seriously affected
Our
five
largest customers accounted for 48.5% of our revenues for the year ended
December 31, 2007 and our ten largest customers accounted for 64.5% of our
revenues for the year ended December 31, 2007. Our largest customer accounted
for 21% of our revenues in the year ended December 31, 2007. These customers
may
not maintain the same volume of business with us in the future. If we lose
any
of these customers or they reduce the amount of business they do with us, our
revenues may be seriously affected.
We
cannot be certain that our product innovations and marketing successes will
continue
We
believe that our past performance has been based on, and our future success
will
depend, in part, upon our ability to continue to improve our existing products
through product innovation and to develop, market and produce new products.
We
cannot assure you that we will be successful in introducing, marketing and
producing any new products or product innovations, or that we will develop
and
introduce in a timely manner innovations to our existing products which satisfy
customer needs or achieve market acceptance. Our failure to develop new products
and introduce them successfully and in a timely manner could harm our ability
to
grow our business and could have a material adverse effect on our business,
results of operations and financial condition.
Our
technology may not satisfy the changing needs of our
customers
With
any
technology, including the technology of our current and proposed products,
there
are risks that the technology may not successfully address all of our customers'
needs. While we have already established successful relationships with our
customers, their needs may change or vary. This may affect the ability of our
present or proposed products to address all of our customers' ultimate
technology needs in an economically feasible manner.
We
may not be able to keep pace with rapid technological changes and competition
in
our industry
While
we
believe that we have hired or engaged personnel and outside consultants who
have
the experience and ability necessary to keep pace with advances in technology,
and while we continue to seek out and develop "next generation" technology
through our research and development efforts, there is no guarantee that we
will
be able to keep pace with technological developments and market demands in
this
evolving industry and market. In addition, our industry is highly competitive.
Although we believe that we have developed strategic relationships to best
penetrate the China market, we face competition from other manufacturers of
product similar to our products. Some of our competitors' advantages over us
in
both the areas of products, marketing, and services include the
following:
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Substantially
greater revenues and financial resources;
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Stronger
brand names and consumer recognition;
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The
capacity to leverage marketing expenditures across a broader portfolio
of
products;
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Pre-existing
relationships with potential customers;
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More
resources to make acquisitions;
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Lower
labor and development costs; and
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Broader
geographic presence.
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We
will
face different market dynamics and competition if we expand our market to other
countries. In some international markets, our future competitors would have
greater brand recognition and broader distribution than we have. We may not
be
as successful as our competitors in generating revenues in international markets
due to our inability to provide products that are attractive to the market
in
other countries, the lack of recognition of our brand, and other factors. As
a
result, any international expansion efforts could be more costly and less
profitable than our efforts in the domestic market in China.
If
we are not as successful as our competitors in our target markets, our sales
could decline, our margins could be negatively impacted and we could lose market
share, any of which could materially harm our
business
We
depend
on a limited number of suppliers of components for our products and if we are
unable to obtain these components when needed, we would experience delays in
manufacturing our products and our financial results could be adversely
affected.
We
acquire most of the components for the manufacture of our products from a
limited number of suppliers. In order for us to have our products manufactured,
these components must be available at the right level of quality and at the
right price. Suppliers of some of these components require us to place orders
with significant lead-time to assure supply in accordance with our requirements.
Certain of these suppliers are currently the sole source of one or more
components upon which we are dependent and alternative sources would not be
available for those components unless we were to redesign our products. Other
components could be obtained from alternative suppliers without redesign, but
only at higher prices than we currently pay or for delivery later than required
by our production schedule. We rely on Sondex for parts for our PHE products
and
PHE Units. If we were unable to obtain adequate supplies of parts from Sondex
at
commercially reasonable prices, our operations could be interrupted. We maintain
a relatively small inventory of component parts for resale and our parts
services business would suffer if the supply of replacement parts was reduced
or
terminated by our suppliers. If suppliers are not able to provide these critical
components on the dates and at the prices scheduled, we may not be able to
promptly and cost-effectively manufacture our products to meet customer orders
which could harm our credibility and the market acceptance and sales of our
products. Increased costs associated with supplied materials or components
could
increase our costs and reduce our profitability if we are unable to pass these
cost increases on to our customers.
We
are a major purchaser of certain goods and raw materials that we use in the
manufacturing process of our products, and price changes for the commodities
we
depend on may adversely affect our profitability
Our
profitability generally depends upon the margin between the cost to us of
certain goods used in the manufacturing process, such as plates, pumps, water
tanks, sensors and controlling systems and other raw materials as well as our
fabrication costs associated with converting such goods and raw materials
compared to the selling price of our products, and the overall supply of raw
materials. It is our intention to base the selling prices of our products upon
the associated raw materials costs to us. However, we may not be able to pass
all increases in raw material costs and ancillary acquisition costs associated
with taking possession of the raw materials through to our customers. Although
we are currently able to obtain adequate supplies of raw materials, it is
impossible to predict future availability. With the rapid growth of China's
economy, the demand for certain raw materials is great while the supply may
be
more limited. This may affect our ability to secure the necessary raw materials
in a cost-effective manner for production of our products at the volume of
purchase orders that we anticipate receiving. The inability to offset price
increases of raw material by sufficient product price increases, and our
inability to obtain raw materials, would have a material adverse effect on
our
consolidated financial condition, results of operations and cash
flows.
Our
products may contain defects, which could adversely affect our reputation and
cause us to incur significant costs
Despite
testing, defects may be found in existing or new products. Any such defects
could cause us to incur significant return and exchange costs, re-engineering
costs, divert the attention of our engineering personnel from product
development efforts, and cause significant customer relations and business
reputation problems. Any such defects could force us to undertake a product
recall program, which could cause us to incur significant expenses and could
harm our reputation and that of our products. If we deliver products with
defects, our credibility and the market acceptance and sales of our products
could be harmed.
Due
to the nature of our business and products, we may be liable for damages based
on product liability and warranty claims
Due
to
the high pressures and temperatures at which many of our products are used
and
the fact that some of our products are relied upon by our customers or end
users
in their facilities or operations, or are manufactured for relatively broad
consumer use, we face an inherent risk of exposure to claims in the event that
the failure, use or misuse of our products results, or is alleged to result,
in
bodily injury, property damage or economic loss. We believe that we meet or
exceed existing professional specification standards recognized or required
in
the industries in which we operate. We have been subject to claims in the past,
none of which have had a material adverse effect on our financial condition
or
results of operations, and we may be subject to claims in the future. Although
we currently maintain product liability coverage, which we believe is adequate
for the continued operation of our business, such insurance may become difficult
to obtain or may become unobtainable in the future on terms acceptable to us
and
may not cover warranty claims. A successful product liability claim or series
of
claims against us, including one or more consumer claims purporting to
constitute class actions, in excess of our insurance coverage or a significant
warranty claim or series of claims against us could materially decrease our
liquidity and impair our financial condition.
We
may experience delays in launching our products, which would negatively impact
our position in the marketplace
We
may
experience delays in bringing new products to market, due to design,
manufacturing or distribution problems. Such delays could adversely affect
our
ability to compete effectively and may adversely affect our relationship with
our customers. Any such delays would adversely affect our revenues and our
ability to become profitable.
If
we are not able to manage our growth, we may not remain
profitable
Our
success will depend on our ability to expand and manage our operations and
facilities. There can be no assurance that we will be able to manage our growth,
meet the staffing requirements for our business or for additional collaborative
relationships or successfully assimilate and train new employees. In addition,
to manage our growth effectively, we may be required to expand our management
base and enhance our operating and financial systems. If we continue to grow,
there can be no assurance that the management skills and systems currently
in
place will be adequate or that we will be able to manage any additional growth
effectively. Failure to achieve any of these goals could have a material adverse
effect on our business, financial condition or results of
operations.
Our
business could be subject to environmental
liabilities
As
is the
case with manufacturers of similar products, we use certain hazardous substances
in our operations. Currently we do not anticipate any material adverse effect
on
our business, revenues or results of operations, as a result of compliance
with
Chinese environmental laws and regulations. However, the risk of environmental
liability and charges associated with maintaining compliance with environmental
laws is inherent in the nature of our business, and there is no assurance that
material environmental liabilities and compliance charges will not arise in
the
future.
If
we lose our key personnel or are unable to attract and retain additional
qualified personnel, the quality of our services may decline and our business
may be adversely impacted
We
rely
heavily on the expertise, experience and continued services of our senior
management, including our president and chief executive officer. Loss of their
services could adversely impact our ability to achieve our business objectives.
We believe our future success will depend upon our ability to retain these
key
employees and our ability to attract and retain other skilled personnel. The
rapid growth of the economy in China has caused intense competition for
qualified personnel. We cannot guarantee that any employee will remain employed
by us for any definite period of time or that we will be able to attract, train
or retain qualified personnel in the future and the loss of personnel could
have
a material adverse effect on our business and company. Qualified employees
periodically are in great demand and may be unavailable in the time frame
required to satisfy our customers' requirements. We need to employ additional
personnel to expand our business. There is no assurance that we will be able
to
attract and retain sufficient numbers of highly skilled employees in the future.
The loss of personnel or our inability to hire or retain sufficient personnel
at
competitive rates could impair the growth of our business.
If
we fail to establish and maintain an effective system of internal control,
we
may not be able to report our financial results accurately or to prevent fraud.
Any inability to report and file our financial results accurately and timely
could harm our business and adversely impact the trading price of our common
stock
We
are
required to establish and maintain internal controls over financial reporting,
disclosure controls, and to comply with other requirements of the Sarbanes-Oxley
Act and the rules promulgated by the SEC thereunder. Our management, including
our Chief Executive Officer and Chief Financial Officer, cannot guarantee that
our internal controls and disclosure controls will prevent all possible errors
or all fraud. A control system, no matter how well conceived and operated,
can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system must reflect
the fact that there are resource constraints and the benefit of controls must
be
relative to their costs. Because of the inherent limitations in all control
systems, no system of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the Corporation have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Further, controls can be circumvented by individual acts
of
some persons, by collusion of two or more persons, or by management override
of
the controls. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be
no
assurance that any design will succeed in achieving its stated goals under
all
potential future conditions. Over time, a control may become inadequate because
of changes in conditions or the degree of compliance with policies or procedures
may deteriorate. Because of inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and may not be
detected.
We
may need additional capital to execute our business plan and fund operations
and
may not be able to obtain such capital on acceptable terms or at
all
Capital
requirements are difficult to plan in our rapidly changing industry. Although
we
currently expect to have sufficient funding for the next 12 months, we expect
that we will need additional capital to fund our future growth.
Our
ability to obtain additional capital on acceptable terms or at all is subject
to
a variety of uncertainties, including:
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Investors'
perceptions of, and demand for, companies in our industry;
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Investors'
perceptions of, and demand for, companies operating in
China;
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Conditions
of the U.S. and other capital markets in which we may seek to raise
funds;
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Our
future results of operations, financial condition and cash flows;
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Governmental
regulation of foreign investment in companies in particular countries;
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Economic,
political and other conditions in the United States, China, and other
countries; and
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Governmental
policies relating to foreign currency borrowings.
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We
may be
required to pursue sources of additional capital through various means,
including joint venture projects and debt or equity financings. There is no
assurance that we will be successful in locating a suitable financing
transaction in a timely fashion or at all. In addition, there is no assurance
that we will be successful in obtaining the capital we require by any other
means. Future financings through equity investments are likely to be dilutive
to
our existing stockholders. Also, the terms of securities we may issue in future
capital transactions may be more favorable for our new investors. Newly issued
securities may include preferences, superior voting rights, the issuance of
warrants or other derivative securities, and the issuances of incentive awards
under equity employee incentive plans, which may have additional dilutive
effects. Further, we may incur substantial costs in pursuing future capital
and/or financing, including investment banking fees, legal fees, accounting
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities
we
may issue, such as convertible notes and warrants, which will adversely impact
our financial condition.
If
we
cannot raise additional funds on favorable terms or at all, we may not be able
to carry out all or parts of our strategy to maintain our growth and
competitiveness or to fund our operations. If the amount of capital we are
able
to raise from financing activities, together with our revenues from operations,
is not sufficient to satisfy our capital needs, even to the extent that we
reduce our operations accordingly, we may be required to cease
operations.
We
may be subject to claims that we have infringed the proprietary rights of
others, which could require us to obtain a license or change our
designs
Although
we do not believe that any of our products infringe the proprietary rights
of
others, there is no assurance that infringement or invalidity claims (or claims
for indemnification resulting from infringement claims) will not be asserted
or
prosecuted against us or that any such assertions or prosecutions will not
materially adversely affect our business. Regardless of whether any such claims
are valid or can be successfully asserted, defending against such claims could
cause us to incur significant costs and could divert resources away from our
other activities. In addition, assertion of infringement claims could result
in
injunctions that prevent us from distributing our products. If any claims or
actions are asserted against us, we may seek to obtain a license to the
intellectual property rights that are in dispute. Such a license may not be
available on reasonable terms, or at all, which could force us to change our
designs.
Risks
Related to Doing Business in China
We
are subject to economic and political risks in China over which we have little
or no control and may be unable to alter our business practice in time to avoid
the possibility of reduced revenues
Our
business is conducted in China. Doing business outside the United States,
particularly in China, subjects us to various risks, including changing economic
and political conditions, major work stoppages, exchange controls, currency
fluctuations, armed conflicts and unexpected changes in United States and
foreign laws relating to tariffs, trade restrictions, transportation
regulations, foreign investments and taxation. We have no control over most
of
these risks and may be unable to anticipate changes in international economic
and political conditions and, therefore, unable to alter out business practice
in time to avoid the possibility of reduced revenues.
Substantially
all of our assets are located in China and all of our revenue is derived from
our operations in China. Accordingly, our results of operations and prospects
are subject, to a significant extent, to the economic, political and legal
developments in China
While
China's economy has experienced significant growth in the past twenty years,
such growth has been uneven, both geographically and among various sectors
of
the economy. The Chinese government has implemented various measures to
encourage economic growth and guide the allocation of resources. Some of these
measures benefit the overall economy of China, but they may also have a negative
effect on us. For example, our operating results and financial condition may
be
adversely affected by the government control over capital investments or changes
in tax regulations. The economy of China has been changing from a planned
economy to a more market-oriented economy. In recent years China has implemented
measures emphasizing the utilization of market forces for economic reform and
the reduction of state ownership of productive assets, and the establishment
of
corporate governance in business enterprises. However, a substantial portion
of
productive assets in China are still owned by the government. In addition,
the
government continues to play a significant role in regulating industry
development by imposing industrial policies. It also exercises significant
control over China's economic growth through the allocation of resources, the
control of payment of foreign currency-denominated obligations, the setting
of
monetary policy and the provision of preferential treatment to particular
industries or companies.
We
may have difficulty establishing adequate management, legal and financial
controls in China
China
historically has not adopted a Western style of management and financial
reporting concepts and practices, or modern banking, computer or other control
systems. We may have difficulty in hiring and retaining a sufficient number
of
qualified employees to work in China. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards.
Our
bank accounts are not insured or protected against
loss
We
maintain our cash with various banks and trust companies located in China.
Our
cash accounts are not insured or otherwise protected. Should any bank or trust
company holding our cash deposits become insolvent, or if we are otherwise
unable to withdraw funds, we would lose the cash on deposit with that particular
bank or trust company.
As
we have limited business insurance coverage in China, any loss which we suffer
may not be insured or may be insured to only a limited
extent
The
insurance industry in China is still in an early state of development and
insurance companies located in China offer limited business insurance products.
In the event of damage or loss to our properties, our insurance may not provide
as much coverage as if we were insured by insurance companies in the United
States.
Tax
laws and regulations in China are subject to substantial revision, some of
which
may adversely affect our profitability
The
Chinese tax system is in a state of flux, and it is anticipated that China's
tax
regime will be altered in the coming years. Tax benefits that we presently
enjoy
may not be available in the wake of these changes, and we could incur tax
obligations to our government that are significantly higher than anticipated.
These increased tax obligations could negatively impact our financial condition
and our revenues, gross margins, profitability and results of operations may
be
adversely affected as a result.
Certain
tax exemptions that we presently enjoy in China are scheduled to expire over
the
next several years
As
a
substantial portion of our operations are located in a privileged economic
zone,
we are entitled to certain tax benefits. When these exemptions expire, our
income tax expenses will increase, reducing our net income below what it would
be if we continued to enjoy these exemptions.
We
may face judicial corruption in China
Another
obstacle to foreign investment in China is corruption. There is no assurance
that we will be able to obtain recourse in any legal disputes with suppliers,
customers or other parties with whom we conduct business, if desired, through
China's poorly developed and sometimes corrupt judicial systems.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may
decrease
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies
may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common
stock.
China
could change its policies toward private enterprise or even nationalize or
expropriate private enterprises
Our
business is subject to significant political and economic uncertainties and
may
be affected by political, economic and social developments in China. Over the
past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic
decentralization. The Chinese government may not continue to pursue these
policies or may significantly alter them to our detriment from time to time
with
little, if any, prior notice.
Uncertainties
with respect to the Chinese legal system could limit legal protections available
to us
Our
operating subsidiary, which conducts most of its operations in China, is
generally subject to laws and regulations applicable to foreign investment
in
China. The Chinese legal system is based on written statutes, and prior court
decisions may be cited for reference but have no precedential value. Since
1979,
legislation and regulations have significantly enhanced the protections afforded
to various forms of foreign investments in China. However, since these laws
and
regulations are relatively new and the legal system in China continues to
rapidly evolve, the interpretations of many laws, regulations and rules are
not
always uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit legal protections available to us. In addition,
any litigation in China may be protracted and result in substantial costs and
diversion of resources and management attention.
Limitations
on the ability of our operating subsidiary to make payments to us could have
a
material adverse effect on our ability to conduct our business and fund our
operations
We
are a
holding company and conduct substantially all of our business through our
operating subsidiary in China. We will of necessity rely on dividends paid
by
our subsidiaries for our cash needs, including the funds necessary to pay
dividends and other cash distributions to our shareholders, to service any
debt
we may incur and to pay our operating expenses. The payment of dividends by
entities organized in China is subject to limitations. In particular,
regulations in China currently permit payment of dividends only out of
accumulated profits as determined in accordance with Chinese accounting
standards and regulations. Our Chinese subsidiary is also required to set aside
at least 10% of its after-tax profit based on Chinese accounting standards
each
year to its general reserves until the accumulative amount of such reserves
reaches 50% of its registered capital. These reserves are not distributable
as
cash dividends. In addition, it is required to allocate a portion of its
after-tax profit to its staff welfare and bonus fund at the discretion of its
board of directors. Moreover, if our subsidiary incurs debt on its own behalf
in
the future, the instruments governing the debt may restrict its ability to
pay
dividends or make other distributions to us. Any limitation on the ability
of
our subsidiary to distribute dividends and other distributions to us could
materially and adversely limit our ability to make investments or acquisitions
that could be beneficial to our businesses, pay dividends or otherwise fund
and
conduct our business.
Recent
Chinese regulations relating to the establishment of offshore special purpose
companies by Chinese residents and registration requirements for employee stock
ownership plans or share option plans may subject our China resident
shareholders to personal liability and limit our ability to acquire Chinese
companies or to inject capital into our operating subsidiaries in China, limit
our subsidiaries’ ability to distribute profits to us, or otherwise materially
and adversely affect us
The
State
Administration of Foreign Exchange (SAFE) issued a public notice in October
2005, requiring PRC residents, including both legal persons and natural persons,
to register with the competent local SAFE branch before establishing or
controlling any company outside of China, referred to as an “offshore special
purpose company,” for the purpose of acquiring any assets of or equity interest
in PRC companies and raising funds from overseas. In addition, any PRC resident
that is the shareholder of an offshore special purpose company is required
to
amend his or her SAFE registration with the local SAFE branch, with respect
to
that offshore special purpose company in connection with any increase or
decrease of capital, transfer of shares, merger, division, equity investment
or
creation of any security interest over any assets located in China. To further
clarify the implementation of Circular 75, the SAFE issued Circular 124 and
Circular 106 on November 24, 2005 and May 29, 2007, respectively. Under Circular
106, PRC subsidiaries of an offshore special purpose company are required to
coordinate and supervise the filing of SAFE registrations by the offshore
holding company’s shareholders who are PRC residents in a timely manner. If
these shareholders fail to comply, the PRC subsidiaries are required to report
to the local SAFE authorities. If the PRC subsidiaries of the offshore parent
company do not report to the local SAFE authorities, they may be prohibited
from
distributing their profits and proceeds from any reduction in capital, share
transfer or liquidation to their offshore parent company and the offshore parent
company may be restricted in its ability to contribute additional capital into
its PRC subsidiaries. Moreover, failure to comply with the above SAFE
registration requirements could result in liabilities under PRC laws for evasion
of foreign exchange restrictions. Some of our PRC resident beneficial owners
have not registered with the local SAFE branch as required under SAFE
regulations. The failure or inability of these PRC resident beneficial owners
to
comply with the applicable SAFE registration requirements may subject these
beneficial owners or us to fines, legal sanctions and restrictions described
above.
On
March 28, 2007, SAFE released detailed registration procedures for employee
stock ownership plans or share option plans to be established by overseas listed
companies and for individual plan participants. Any failure to comply with
the
relevant registration procedures may affect the effectiveness of our employee
stock ownership plans or share option plans and subject the plan participants,
the companies offering the plans or the relevant intermediaries, as the case
may
be, to penalties under PRC foreign exchange regime. These penalties may subject
us to fines and legal sanctions, prevent us from being able to make
distributions or pay dividends, as a result of which our business operations
and
our ability to distribute profits to you could be materially and adversely
affected.
In
addition, the National Development and Reform Commission ("NDRC") promulgated
a
rule in October 2004, or the NDRC Rule, which requires NDRC approvals for
overseas investment projects made by PRC entities. The NDRC Rule also provides
that approval procedures for overseas investment projects of PRC individuals
must be implemented with reference to this rule. However, there exist extensive
uncertainties in terms of interpretation of the NDRC Rule with respect to its
application to a PRC individual’s overseas investment, and in practice, we are
not aware of any precedents that a PRC individual’s overseas investment has been
approved by the NDRC or challenged by the NDRC based on the absence of NDRC
approval. Our current beneficial owners who are PRC individuals did not apply
for NDRC approval for investment in us. We cannot predict how and to what extent
this will affect our business operations or future strategy. For example, the
failure of our shareholders who are PRC individuals to comply with the NDRC
Rule
may subject these persons or our PRC subsidiary to certain liabilities under
PRC
laws, which could adversely affect our business.
Regulation
of loans and direct investment by offshore holding companies to Chinese entities
may delay or prevent us from making loans or additional capital contributions
to
our operating subsidiaries, which could materially and adversely affect our
liquidity and our ability to fund and expand our business
As
an
offshore holding company of our Chinese operating subsidiaries, we may need
to
make loans to them, or we may need to make additional capital contributions
to
them.
Any
loans
to our operating subsidiaries are subject to Chinese regulations. For example,
loans by us to our subsidiaries in China, which are foreign-invested
enterprises, to finance their activities cannot exceed statutory limits and
must
be registered with the SAFE.
We
may
also decide to finance our subsidiaries by means of capital contributions.
These
capital contributions must be approved by the PRC Ministry of Commerce or its
local counterpart. We cannot assure you that we will be able to obtain these
government approvals on a timely basis, if at all, with respect to future
capital contributions by us to our subsidiaries. If we fail to receive such
approvals, our ability to use the proceeds of this offering and to capitalize
our PRC operations may be negatively affected, which could adversely affect
our
liquidity and our ability to fund and expand our business.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively
The
Renminbi is currently convertible under the “current account,” which includes
dividends, trade and service-related foreign exchange transactions, but not
under the “capital account,” which includes foreign direct investment and loans.
Currently, our Chinese subsidiary may purchase foreign currencies for settlement
of current account transactions, including payments of dividends to us, without
the approval of the State Administration of Foreign Exchange, or SAFE. However,
the relevant Chinese government authorities may limit or eliminate their ability
to purchase foreign currencies in the future. Since a significant amount of
our
future revenues will be denominated in Renminbi, any existing and future
restrictions on currency exchange may limit our ability to utilize revenues
generated in Renminbi to fund our business activities outside China that are
denominated in foreign currencies.
Foreign
exchange transactions by our Chinese subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require
the
approval of or need to register with Chinese governmental authorities, including
SAFE. In particular, if our Chinese subsidiaries borrow foreign currency loans
from us or other foreign lenders, these loans must be registered with SAFE,
and
if we finance our Chinese subsidiaries by means of additional capital
contributions, these capital contributions must be approved by certain
government authorities, including the NDRC, the Ministry of Commerce, or MOFCOM,
or their respective local counterparts. These limitations could affect the
ability of our Chinese subsidiaries to obtain foreign exchange through debt
or
equity financing.
We
face risks associated with currency exchange rate fluctuations; any adverse
fluctuation may adversely affect our operating
margins
Almost
all of
our
revenues are denominated in Renminbi. Conducting business in currencies other
than US dollars subjects us to fluctuations in currency exchange rates that
could have a negative impact on our reported operating results. Fluctuations
in
the value of the US dollar relative to other currencies impact our revenues,
cost of revenues and operating margins and result in foreign currency
translation gains and losses. If the exchange rate of the Renminbi is affected
by lowering its value as against the US dollar, our reported profitability
when
stated in US dollars will decrease. Historically, we have not engaged in
exchange rate hedging activities and have no current intention of doing so.
We
may not be able to adequately protect our technology and other proprietary
rights
Our
success will depend in part on our ability to obtain and protect our products,
methods, processes and other technologies, to preserve our trade secrets, and
to
operate without infringing on the proprietary rights of third parties both
domestically and abroad. We have patents and patent applications pending in
China, and have worked and continue to work closely with Chinese patent
officials to preserve our intellectual property rights. Despite these efforts,
any of the following occurrences may reduce the value of our intellectual
property:
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Our
applications for patents and trademarks relating to our business
may not
be granted and, if granted, may be challenged or invalidated;
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Issued
patents and trademarks may not provide us with any competitive advantages;
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Our
efforts to protect our intellectual property rights may not be effective
in preventing misappropriation of our technology;
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Our
efforts may not prevent the development and design by others of products
or technologies similar to or competitive with, or superior to those
we
develop; or
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Another
party may obtain a blocking patent and we would need to either obtain
a
license or design around the patent in order to continue to offer
the
contested feature or service in our products.
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It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in
China
Our
executive officers and several of our directors, including the chairman of
our
Board of Directors, are Chinese citizens. It may be difficult, if not
impossible, to acquire jurisdiction over these persons in the event a lawsuit
is
initiated against us and/or our officers and directors by a stockholder or
group
of stockholders in the United States. Also, because our operating subsidiaries
and assets are located in China, it may be extremely difficult or impossible
for
you to access those assets to enforce judgments rendered against us or our
directors or executive offices by United States courts. In addition, the courts
in China may not permit the enforcement of judgments arising out of United
States federal and state corporate, securities or similar laws. Accordingly,
United States investors may not be able to enforce judgments against us for
violation of United States securities laws.
Risks
Related to Our Securities
Shares
of our common stock lack a significant trading market
Our
shares are not eligible for trading on any national securities exchange. Prices
for the shares of our common stock are quoted in the over-the-counter market
on
the OTC Bulletin Board, but there has been no meaningful volume in the trading
of our shares and the market for our shares is highly illiquid. Although we
have
applied for the listing of our common stock on the NASDAQ Stock Market, there
is
no assurance that our application will be granted. There is no assurance that
an
active trading market in our common stock will ever develop, or, if such a
market develops, that it will be sustained. In addition, there is a greater
chance for market volatility for securities that quoted are on the OTC Bulletin
Board as opposed to securities that trade on a national exchange. This
volatility may be caused by a variety of factors, including the lack of readily
available quotations, the absence of consistent administrative supervision
of
"bid" and "ask" quotations and generally lower trading volume. As a result,
an
investor may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the common stock, or to obtain coverage
for significant news events concerning us, and the common stock would become
substantially less attractive for margin loans, for investment by financial
institutions, as consideration in future capital raising transactions or other
purposes.
Our
director and Chief Executive Officer has a substantial ownership interest in
one
of our major stockholders which gives him significant influence over certain
major decisions on which our stockholders may vote and may discourage an
acquisition of us
Mr.
Jun
Wang, our director and Chief Executive Officer, owns of 50% of the equity in
Beijing YSKN Machinery & Electronic Equipment Co., Ltd ("YSKN"), a company
which is the record holder of 30.19% of our outstanding common stock. Mr. Wang
has substantial influence over the actions of that substantial stockholder.
As a
result, Mr. Wang has significant influence over all corporate actions requiring
stockholder approval, irrespective of how the Company's other stockholders
may
vote, including the following actions:
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electing
or defeating the election of our directors;
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amending
or preventing amendment of our certificate of incorporation or bylaws;
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effecting
or preventing a merger, sale of assets or other corporate transaction;
and
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controlling
the outcome of any other matter submitted to the shareholders for
vote.
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The
interests of Mr. Wang may differ from the interests of other stockholders.
This
may discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Because
we obtained our present operations by means of a "reverse acquisition," we
may
not be able to attract the attention of major brokerage
firms
There
may
be risks associated with our use of a "reverse acquisition" to obtain our
present operations. Securities analysts of major brokerage firms may not provide
coverage of us since there is no incentive to brokerage firms to recommend
the
purchase of our common stock. No assurance can be given that brokerage firms
will, in the future, want to conduct any secondary offerings on our
behalf.
Future
sales of shares of our common stock by our stockholders could cause our stock
price to decline
We
cannot
predict the effect, if any, that market sales of shares of our common stock
or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time. If our stockholders sell substantial amounts
of our common stock in the public market upon the effectiveness of a
registration statement, or upon the expiration of any holding period under
Rule
144, such sales could create a circumstance commonly referred to as an
"overhang" and in anticipation of which the market price of our common stock
could fall. The existence of an overhang, whether or not sales have occurred
or
are occurring, also could make more difficult our ability to raise additional
financing through the sale of equity or equity-related securities in the future
at a time and price that we deem reasonable or appropriate. The 18,500,000
shares of common stock we issued in the share exchange with the former
shareholders of Taiyu will be freely tradable upon the earlier of (i)
effectiveness of a registration statement covering such shares; and (ii) the
date on which such shares may be sold without registration pursuant to Rule
144
under the Securities Act and the sale of such shares could have a negative
impact on the price of our common stock.
We
may issue additional shares of our capital stock or debt securities to raise
capital or complete acquisitions, which would reduce the equity interest of
our
stockholders
Our
articles of incorporation authorize the issuance of up to 75,000,000 shares
of
common stock, par value $.001 per share. There are approximately 50,408,000
authorized and unissued shares of our common stock which have not been reserved
and are available for future issuance. Although we have no commitments as of
the
date of this offering to issue our securities, we may issue a substantial number
of additional shares of our common stock, to complete a business combination
or
to raise capital. The issuance of additional shares of our common
stock:
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may
significantly reduce the equity interest of our existing stockholders;
and
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may
adversely affect prevailing market prices for our common stock.
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We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our common
stock
We
have
never paid cash dividends on our common stock and do not anticipate doing so
in
the foreseeable future. We presently do not intend to pay dividends in the
foreseeable future. Our management intends to follow a policy of retaining
all
of our earnings to finance the development and execution of our strategy and
the
expansion of our business. In addition, the payment of dividends is limited
by
Chinese law. See "RISK FACTORS - Risks Relating to Doing Business in China
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Limitations
on the ability of our operating subsidiary to make payments to us could have
a
material adverse effect on our ability to conduct our business and fund our
operations."
FORWARD-LOOKING
STATEMENTS
This
prospectus contains forward-looking statements that reflect our current
expectations and views of future events. The forward looking statements are
contained principally in the sections entitled “Prospectus Summary,” “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Business.” Known and unknown risks, uncertainties
and other factors, including those listed under “Risk Factors,” may cause our
actual results, performance or achievements to be materially different from
those expressed or implied by the forward-looking statements.
You
can
identify some of these forward-looking statements by words or phrases such
as
“may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,”
“believe,” “is/are likely to,” “potential,” “continue” or other similar
expressions. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
that we believe may affect our financial condition, results of operations,
business strategy and financial needs. These forward-looking statements include
statements relating to:
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our
goals and strategies;
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our
expansion plans;
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our
future business development, financial conditions and results of
operations;
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the
expected growth of the market for PHE products and heat meters in
China;
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our
expectations regarding demand for our products;
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our
expectations regarding keeping and strengthening our relationships
with
key customers;
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our
ability to stay abreast of market trends and technological advances;
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our
ability to effectively protect our intellectual property rights and
not
infringe on the intellectual property rights of others;
|
|
|
|
|
|
|
|
our
ability to attract and retain quality employees;
|
|
|
|
|
|
|
|
our
ability to pursue strategic acquisitions and alliances;
|
|
|
|
|
|
|
|
competition
in our industry in China;
|
|
|
|
|
|
|
|
general
economic and business conditions in the regions in which we sell
our
products;
|
|
|
|
|
|
|
|
relevant
government policies and regulations relating to our industry; and
|
|
|
|
|
|
|
|
market
acceptance of our products.
|
These
forward-looking statements involve various risks and uncertainties. Although
we
believe that our expectations expressed in these forward-looking statements
are
reasonable, our expectations may later be found to be incorrect. Our actual
results could be materially different from our expectations. Important risks
and
factors that could cause our actual results to be materially different from
our
expectations are generally set forth in “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” “Business,” and
other sections in this prospectus. You should read thoroughly this prospectus
and the documents that we refer to with the understanding that our actual future
results may be materially different from and worse than what we expect. We
qualify all of our forward-looking statements by these cautionary statements.
Other sections of this prospectus include additional factors which could
adversely impact our business and financial performance.
This
prospectus contains statistical data that we obtained from various government
and private publications. We have not independently verified the data in these
reports. Statistical data in these publications also include projections based
on a number of assumptions. The market for the PHEs, PHE Units, and heat meters
may not grow at the rate projected by market data, or at all. The failure of
this market to grow at the projected rate may have a material adverse effect
on
our business and the market price of our securities. In addition, the rapidly
changing nature of our customers' industries results in significant
uncertainties in any projections or estimates relating to the growth prospects
or future condition of our market. Furthermore, if any one or more of the
assumptions underlying the market data is later found to be incorrect, actual
results may differ from the projections based on these assumptions. You should
not place undue reliance on these forward-looking statements.
Unless
otherwise indicated, information in this prospectus concerning economic
conditions and our industry is based on information from independent industry
analysts and publications, as well as our estimates. Except where otherwise
noted, our estimates are derived from publicly available information released
by
third party sources, as well as data from our internal research, and are based
on such data and our knowledge of our industry, which we believe to be
reasonable. None of the independent industry publication market data cited
in
this prospectus was prepared on our or our affiliates’ behalf.
The
forward-looking statements made in this prospectus relate only to events or
information as of the date on which the statements are made in this prospectus.
Except as required by law, we undertake no obligation to update or revise
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise, after the date on which the statements are made
or
to reflect the occurrence of unanticipated events. You should read this
prospectus and the documents that we refer to in this prospectus and have filed
as exhibits to the registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future results may be
materially different from what we expect.
AVAILABLE
INFORMATION
We
file
annual, quarterly, and special reports, proxy statements, and other information
with the SEC. You may read and copy any document we file at the SEC’s public
reference room at 100 F Street, N.E., Washington, D.C. 20549. Copies of
these materials may also be obtained from the SEC at prescribed rates by writing
to the Public Reference Section of the SEC, 100 F Street, N.E., Washington,
D.C.
20549. You may obtain information about the operation of the SEC public
reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. Our
filings are also available to the public from commercial document retrieval
services and at the website maintained by the SEC at http://www.sec.gov.
Our
Web
site address is http://www.smartheatinc.com.
The
information on our Web site is not incorporated into this
prospectus.
USE
OF PROCEEDS
We
will
not receive any proceeds from sale of the shares of common stock covered by
this
prospectus by the selling shareholders. We will, however, receive proceeds
on
exercise of outstanding warrants for shares of common stock covered by this
prospectus if the warrants are exercised for cash. The warrants may expire
without having been exercised. Even if some or all of these warrants are
exercised, we cannot predict when they will be exercised and when we would
receive the proceeds. We intend to use any proceeds we receive upon exercise
of
the warrants for general working capital and other corporate
purposes.
MARKET
FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Market
Information
Our
common stock is not listed on any stock exchange but has traded on the OTC
Bulletin Board under the symbol “SMHT” since April 22, 2008. The following table
set forth the range of the high and low bid prices per share of our common
stock
for each of the following periods as reported by the OTC Bulletin Board: from
April 22, 2008 through June 30, 2008 and from July 1, 2008 through October
16,
2008. These quotations represent inter-dealer prices, without retail mark-up,
markdown, or commission and may not represent actual transactions. The last
price of our common stock as reported on the OTC Bulletin Board on October
15,
2008 was $4.70 per share.
|
|
High
|
|
Low
|
|
April
22, 2008 through June 30, 2008
|
|
$
|
4.60
|
|
$
|
4.50
|
|
July
1, 2008 through October 16, 2008
|
|
$
|
4.75
|
|
$
|
4.00
|
|
Holders
Dividend
Policy
We
have
not paid any cash dividends on our common stock to date, and we have no
intention of paying cash dividends in the foreseeable future. Whether we will
declare and pay dividends in the future will be determined by our board of
directors at their discretion, subject to certain limitations imposed under
Nevada corporate law. In addition, our ability to pay dividends may be affected
by the foreign exchange controls in China. See "RISK FACTORS - Limitation
on the ability of our operating subsidiary to make payments to us could have
a
material adverse effect on our ability to conduct our business and fund our
operations."
The
timing, amount and form of dividends, if any, will depend on, among other
things, our results of operations, financial condition, cash requirements and
other factors deemed relevant by our board of directors.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Safe
Harbor Declaration
The
comments made throughout this prospectus should be read in conjunction with
our
financial statements and the notes thereto, and other financial information
appearing elsewhere in this document. In addition to historical information,
the
following discussion and other parts of this document contain certain
forward-looking information. When used in this discussion, the words,
"believes," "anticipates," "expects," and similar expressions are intended
to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from projected results, due to a number of factors beyond our control. SmartHeat
does not undertake to publicly update or revise any of its forward-looking
statements, even if experience or future changes show that the indicated results
or events will not be realized. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Readers are also urged to carefully review and consider our discussions
regarding the various factors, which affect company business, included in this
section and elsewhere in this prospectus.
Overview
We
were
incorporated in the State of Nevada on August 4, 2006 under the name Pacific
Goldrim Resources, Inc. as an exploration stage corporation that intended to
engage in the exploration of silver, lead and zinc. On April 14, 2008 we changed
our name to SmartHeat Inc. and acquired all of the equity interests in Taiyu.
Prior
to
our acquisition of Taiyu, we were in the development stage and had minimal
business operations. We had no interest in any property, but had the right
to
conduct exploration activities on thirteen (13) mineral title cells covering
270.27 hectares (667.85 acres) in the Slocan Mining Division of southeastern
British Columbia, Canada. In connection with the acquisition of Taiyu, we
transferred our prior assets and liabilities to a wholly owned subsidiary and
sold all of the outstanding capital stock of that subsidiary to our former
director and officer in exchange for 2,500,000 shares of our common
stock.
Taiyu
was
formed in July 2002 under the laws of China and is headquartered in Shenyang
City, Liaoning Province, China. As a result of our acquisition of Taiyu, we
are
a leading provider of plate heat exchange products to China's industrial,
residential, and commercial markets, specializing in the manufacturing, sale,
research, and servicing of PHEs, PHE Units and heat meters for a broad range
of
industries such as petroleum refinement, petrochemicals, power generation,
metallurgy, food & beverage, and chemical processing. We sell PHEs under the
Sondex brand and PHE Units that are designed by us and using PHEs that are
assembled with Sondex plates under our Taiyu brand name.
Our
revenue is subject to fluctuations due to the timing of sales of high-value
products, the impact of seasonal spending patterns, the timing and size of
projects our customers perform, changes in overall spending levels in the
industry and other unpredictable factors that may affect customer ordering
patterns. Any significant delays in the commercial launch or any lack or delay
of commercial acceptance of new products, unfavorable sales trends in existing
product lines, or impacts from the other factors mentioned above, could
adversely affect our revenue growth or cause a sequential decline in quarterly
revenue. Due to the possibility of fluctuations in our revenue and net income
or
loss, we believe that quarterly comparisons of our operating results are not
a
good indication of future performance.
While
our significant accounting policies are more fully described in Note 1 to our
consolidated financial statements, we believe that the following accounting
policies are the most critical to aid you in fully understanding and evaluating
this management discussion and analysis.
Basis
of Presentation
The
audited financial statements as of December 31, 2007 and 2006 that are presented
are those of Taiyu rather than SmartHeat because Taiyu is our operating
business, and SmartHeat's acquisition of Taiyu was deemed completed on April
14,
2008. The financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America. Our acquisition
of Taiyu has been accounted for as a recapitalization of Taiyu as Taiyu’s
shareholders are the majority shareholders of SmartHeat.
Principle
of Consolidation
The
accompanying consolidated financial statements include the accounts of Taiyu
and
its 55% owned subsidiary, Qingdao Yushi Heat Power Equipment Co., Ltd ("Yushi").
Yushi is engaged in manufacturing and selling of heat power equipment. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
Accounts
and Retentions Receivable
Our
policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves. Accounts receivable are net of unearned
interest. Unearned interest represents imputed interest on accounts receivable
with due dates over one year from the invoice date discounted at our borrowing
rate for the year.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method with a 10% salvage value and estimated lives ranging from 5 to 20 years
as follows:
Building
|
20
years
|
Vehicle
|
5
years
|
Office
Equipment
|
5
years
|
Production
Equipment
|
5
-
10 years
|
Revenue
Recognition
Our
revenue recognition policies are in compliance with SEC Staff Accounting
Bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of SmartHeat exist
and collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are recorded as unearned
revenue.
Foreign
Currency Translation and Comprehensive Income (Loss)
Our
functional currency is the Chinese yuan renminbi (“RMB”). For financial
reporting purposes, RMB has been translated into United States dollars ("USD")
as the reporting currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Revenues and expenses are translated
at the average rate of exchange prevailing during the reporting period.
Translation adjustments arising from the use of different exchange rates from
period to period are included as a component of shareholders' equity as
"Accumulated other comprehensive income." Gains and losses resulting from
foreign currency transactions are included in income. There has been no
significant fluctuation in exchange rate for the conversion of RMB to USD after
the balance sheet date.
We
use
Statement of Financial Accounting Standards ("SFAS") No. 130, “Reporting
Comprehensive Income.” Comprehensive income is comprised of net income and all
changes to the statements of shareholders’ equity, except those due to
investments by shareholders, changes in paid-in capital and distributions to
shareholders.
Recent
Accounting Pronouncements
Business
Combinations
In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No.
141 (Revised 2007), Business Combinations. SFAS No. 141R will significantly
change the accounting for business combinations. Under SFAS No. 141R, an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS No. 141R will change the accounting treatment for
certain specific items, including:
|
· |
Acquisition
costs will be generally expensed as
incurred;
|
|
· |
Noncontrolling
interests (formerly known as “minority interests” – see SFAS No. 160
discussion below) will be valued at fair value at the acquisition
date;
|
|
· |
Acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
· |
In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition
date;
|
|
· |
Restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date;
and
|
|
· |
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS
No.
141R also includes a substantial number of new disclosure requirements. SFAS
No.
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is prohibited. Accordingly,
since we are a calendar year-end company we will continue to record and disclose
business combinations following existing generally accepted accounting
principles until January 1, 2009. We expect SFAS No. 141R will have an impact
on
accounting for business combinations once adopted but the effect is dependent
upon acquisitions at that time.
Noncontrolling
Interests in Consolidated Financial Statements – An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51." SFAS No. 160
establishes new accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent’s equity. The amount of net income attributable to
the noncontrolling interest will be included in consolidated net income on
the
face of the income statement. SFAS No. 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest.
In
addition, this statement requires that a parent recognize a gain or loss in
net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS No. 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling
interest. SFAS No. 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Like SFAS No.
141R
discussed above, earlier adoption is prohibited. We have not completed our
evaluation of the potential impact, if any, of the adoption of SFAS No. 160
on
our consolidated financial position, results of operations and cash
flows.
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements required under the accounting pronouncements, but does
not change existing guidance as to whether or not an instrument is carried
at
fair value. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. SFAS No. 157 is effective
for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Earlier application is
encouraged, provided that the reporting entity has not yet issued financial
statements for fiscal year, including financial statements for an interim period
within the fiscal year. We are currently evaluating the impact, if any, that
SFAS No. 157 will have on our financial statements.
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106, and
132R
In
September 2006, the FASB issued SFAS, No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan as
an
asset or liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income. Additionally, SFAS No. 158 requires
employers to measure the funded status of a plan as of the date of its year-end
statement of financial position. The new reporting requirements and related
new
footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending
after December 15, 2006. We adopted the provisions of SFAS No. 158 for the
year
end 2006, and the effect of recognizing the funded status in accumulated other
comprehensive income was not significant. The new measurement date requirement
applies for fiscal years ending after December 15, 2008.
Fair
Value Option for Financial Assets and Financial
Liabilities
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an Amendment of FASB
Statement No. 115.” The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective
is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity’s first
fiscal year that begins after November 15, 2007. We are analyzing the potential
accounting treatment.
Considering
the Effects of Prior Year Misstatements in Current Year Financial
Statements
In
September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements,” which provides interpretive guidance on the consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. We adopted SAB No. 108 in the
fourth quarter of 2006 with no impact on our financial statements.
Results
of Operations.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
Year
Ended December 31
|
|
|
|
2007
|
|
2006
|
|
|
|
$
|
|
%
of Sales
|
|
$
|
|
%
of Sales
|
|
Sales
|
|
|
13,273,151
|
|
|
|
|
|
8,205,166
|
|
|
|
|
Cost
of sales
|
|
|
(8,667,353
|
)
|
|
65.0
|
%
|
|
(5,710,540
|
)
|
|
70.0
|
%
|
Gross
Profit
|
|
|
4,605,798
|
|
|
35.0
|
%
|
|
2,494,626
|
|
|
30.0
|
%
|
Operating
Expenses
|
|
|
(2,369,090
|
)
|
|
18.0
|
%
|
|
(1,642,721
|
)
|
|
20.0
|
%
|
Income
from Operation
|
|
|
2,236,708
|
|
|
17.0
|
%
|
|
851,905
|
|
|
10.0
|
%
|
Other
Income (Expenses), net
|
|
|
24,957
|
|
|
0.2
|
%
|
|
39,587
|
|
|
0.5
|
%
|
Net
Income
|
|
|
2,087,891
|
|
|
16.0
|
%
|
|
832,612
|
|
|
10.0
|
%
|
Sales. Net
sales for 2007 were approximately $13.27 million, while our net sales in 2006
were approximately $8.21 million, an increase in revenues of $5.06 million,
or
62%. The increase was due to growing demand for our products
resulting from rapid increase in newly-built residential communities in Shenyang
City and the surrounding area. We also increased the number of our
sales representatives to develop new customers in more cities in China. We
believe that our sales will continue to grow because we are strengthening our
sales efforts by hiring more sales personnel, increasing the sales channels,
and
improving the quality of our products.
Cost
of Sales. Cost
of sales for 2007 were approximately $8.67 million, while our cost of sales
in
2006 were approximately $5.71 million, an increase of $2.96 million, or
52%. The increase in cost of sales can be attributed to the increase
of production and sales activities in 2007. Cost of sales as a
percentage of sales was approximately 65% for 2007 and 70% for
2006. The decrease in cost of sales as a percentage of sales in 2007
was mainly due to economies of scale, with a higher production volume resulting
in a lower cost of each product manufactured. We believe that our
cost of sales will continue to remain stable as we improve the efficiency of
our
manufacturing facility.
Gross
Profit. Gross
profit was $4.61 million for 2007, as compared to $2.49 million for 2006,
representing gross margins of approximately 35% and 30% for 2007 and 2006,
respectively. The increase in our gross profits and gross profit
margin was mainly due to the increase of sales activities and to the economies
of scale discussed above.
Operating
Expenses. Operating
expenses consisted of selling, general and administrative expenses totaled
approximately $2.37 million for 2007, as compared to $1.64 million for 2006,
an
increase of approximately $726,000 or 44%. The increase in operating
expenses was mainly due to proportional increase in after-sale service, payroll,
insurance and travel expenses with our increased sales and
production.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
For
the Quarter Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
%
of sales
|
|
$
|
|
%
of sales
|
|
Sales
|
|
|
5,558,232
|
|
|
|
|
|
1,159,098
|
|
|
|
|
Cost
of Sales
|
|
|
(4,115,200
|
)
|
|
74.0
|
|
|
(756,368
|
)
|
|
65.0
|
|
Gross
Profit
|
|
|
1,443,032
|
|
|
26.0
|
|
|
402,730
|
|
|
35.0
|
|
Operating
Expenses
|
|
|
(572,932
|
)
|
|
10.0
|
|
|
(409,079
|
)
|
|
35.0
|
|
Income
from Operations
|
|
|
870,100
|
|
|
16.0
|
|
|
(6,349
|
)
|
|
(0.6
|
)
|
Other
Income (Expenses), net
|
|
|
23,383
|
|
|
0.4
|
|
|
48,737
|
|
|
4.0
|
|
Net
Income
|
|
|
732,412
|
|
|
13.0
|
|
|
3,219
|
|
|
0.3
|
|
Sales. Our
net sales for the three months ended June 30, 2008 were approximately $5.56
million while our net sales in same period for 2007 were approximately $1.16
million, an increase in revenues of $4.4 million, or about 380%. The
increase was primarily due to the expansion of our sales force, growth of our
existing sales channels to develop new customers and the extension of our
customer base into new regions in China. We believe that our sales will continue
to grow as we strengthen our sales efforts by hiring more sales personnel,
expanding sales channels, and improving the quality of our
products.
Cost
of Sales. Our
cost of sales for the three months ended June 30, 2008 were approximately $4.12
million while our cost of sales for the same period in 2007, were approximately
$0.76 million, an increase of $3.36 million, or 444%. The increase in
cost of sales is attributed to increases in our production and sales during
the
period. Cost of sales as a percentage of sales was approximately 74% for
the second fiscal quarter of 2008 and 65% for the same period in 2007. The
increase in cost of sales as a percentage of sales for the second quarter of
2008 was mainly due to increases in the costs of new hired employees for our
quality control, engineering and manufacturing departments, and increase in
raw
materials purchase price as a result of overall increases throughout
China.
Gross
Profit. Gross
profit was $1.44 million for the quarter ended June 30, 2008 as compared to
$0.4
million for the same period in 2007, representing gross margins of approximately
26% and 35% for the second quarter of 2008 and 2007,
respectively. The increase in our gross profits was mainly due to the
significant increase in our sales; while the decrease in our gross profit margin
was mainly due to increased cost of manufacturing through increased cost of
labor and depreciation expense for new acquired manufacturing equipment. In
addition, we had more sales on (flat) plate heat exchanger than assembled heat
exchanger units during the quarter ended June 30, 2007. Assembled heat exchanger
units have a relatively higher profit margin than (flat) plate heat exchangers
as more profits can be added on to the parts that are used for the assembly
of
the whole unit. We believe our gross profit margin will increase due to the
economies of scale as we continue to increase our production, improve efficiency
on cost control and increase the sales of assembled heat exchanger
units.
Operating
Expenses. Operating
expenses, consisting of selling, general and administrative expenses, totalled
approximately $0.57 million for the three months ended June 30, 2008 as compared
to $0.41 million for the same period in 2007, an increase of approximately
$0.16
million or 40%. The increase in operating expenses was mainly due to
proportional increases in after-sale service, payroll, insurance and travel
expenses, coupled with our increased sales and production.
Net
Income. Our
net income for the three month period ended June 30, 2008 was approximately
$0.73 million as compared to $3,219 for the same period in 2007, an increase
of
$729,193 or 22753%. This increase is attributable to economies of
scale combined with rapid growth in revenue and efficiency of operations. Our
management believes that net income will continue to increase as we continue
to
increase our sales, offer better quality products and control our manufacturing
costs.
Six
Months Ended June 30, 2008 Compared to the Six Months Ended June 30,
2007
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
For
the Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
$
|
|
%
of Sales
|
|
$
|
|
%
of Sales
|
|
Sales
|
|
|
8,637,283
|
|
|
|
|
|
2,457,967
|
|
|
|
|
Cost
of sales
|
|
|
(6,228,156
|
)
|
|
72.0
|
|
|
(1,598,789
|
)
|
|
65.0
|
|
Gross
Profit
|
|
|
2,409,127
|
|
|
28.0
|
|
|
859,178
|
|
|
35.0
|
|
Operating
Expenses
|
|
|
(1,054,498
|
)
|
|
12.0
|
|
|
(783,735
|
)
|
|
32.0
|
|
Income
from Operation
|
|
|
1,354,629
|
|
|
16.0
|
|
|
75,443
|
|
|
3.0
|
|
Other
Income (Expenses), net
|
|
|
115,074
|
|
|
1.3
|
|
|
140,285
|
|
|
6.0
|
|
Net
Income
|
|
|
1,203,675
|
|
|
14.0
|
|
|
165,088
|
|
|
7.0
|
|
Sales. Our
net sales for six months ended June 30, 2008 were approximately $8.64 million
while our net sales for the same period in 2007 were approximately $2.46
million, an increase in revenues of $6.18 million, or 251%. The
increase was due to growing demand for our product resulting from rapid increase
in newly-built residential communities in Shenyang City and surrounding
areas. We also increased the number of our sales representatives to
develop new customers in more cities in China. We believe that our sales will
continue to grow because we are strengthening our sales efforts by hiring more
sales personnel, increasing the sales channels, and improving the quality of
our
products.
Cost
of Sales. Our
cost of sales for six months ended June 30, 2008 were approximately $6.23
million while our cost of sales for the same period in 2007 were approximately
$1.6 million, an increase of $4.63 million, or 290%. The increase in
cost of sales is attributed to the increase of production and sales activities
in 2008. Cost of sales as a percentage of sales was approximately 72%
for the six months ended June 30, 2008 and 65% for the same period in
2007. The increase in cost of sales as a percentage of sales for six
months ended June 30, 2008 was mainly due to an increase in the costs of new
hired employees for our quality control, engineering and manufacturing
departments, and an increase in raw materials purchase price as a result of
overall increases throughout China.
Gross
Profit. Gross
profit was $2.41 million for six months ended June 30, 2008 as compared to
$0.86
million for the same period in 2007, representing gross margins of approximately
28% and 35% for six months ended June 30, 2008 and 2007,
respectively. The increase in our gross profits due to the increase
of sales activities and decrease in gross profit margin was mainly due to the
increase in manufacturing cost discussed above. We believe our gross profit
margin will increase due to the economy of scale as we will increase our
production and improving our efficiency on cost control.
Operating
Expenses. Operating
expenses consisted of selling, general and administrative expenses totalled
approximately $1.05 million for six months ended June 30, 2008 as compared
to
$0.78 million for the same period in 2007, an increase of approximately $270,763
or 35%. The increased in operating expenses was mainly due to
increase in rental expense as we leased new offices for our representatives
in
the major cities of China, after-sale service, payroll, insurance and travel
expenses coupled with our increased sales and production.
Net
Income. Our
net income for six months ended June 30, 2008 was $1.20 million as compared
to
approximately $165,088 for the same period in 2007, an increase of $1.04 million
or 629%. This increase is attributable to economy of scale combined
with rapid growth in revenue and efficiency of operations. Our management
believes that net income will continue to increase as we continue to increase
our sales, offer better quality products and control our manufacturing
costs.
Liquidity
and Capital Resources
The
following is a summary of cash provided by or used in each of the indicated
types of activities during year ended December 31, 2007 and 2006:
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Cash
provided by (used in):
|
|
|
|
|
|
Operating
Activities
|
|
$
|
3,047
|
|
$
|
(51,587
|
)
|
Investing
Activities
|
|
|
(909,280
|
)
|
|
(889,490
|
)
|
Financing
Activities
|
|
|
1,075,719
|
|
|
967,328
|
|
Net
cash
flow provided by operating activities was $3,047 in fiscal 2007, as compared
to
net cash flow used in operating activities of $51,587 in fiscal 2006. The
increase in net cash flow from operating activities in fiscal 2007 was mainly
due to a decrease in inventory, increase in customer deposits, tax and other
payables. In addition, our net income has increased rapidly compared
to 2006 which brought more cash to the company, but at the same time, our
accounts receivable have increased which held back our cash
inflows.
Net
cash
flow used in investing activities was $909,280 for fiscal 2007, as compared
to
net cash used in investing activities of $889,490 in fiscal 2006. The
increase of net cash flow used in investing activities in fiscal 2007 was mainly
due to acquisition of manufacturing equipment and other office equipment and
furniture during the year.
Net
cash
flow provided by financing activities was $1,075,719 in fiscal 2007 as compared
to net cash provided by financing activities of $967,328 for fiscal 2006. The
increase of net cash flow provided by financing activities in fiscal 2007 was
mainly due to increased short term loans with banks and other third
parties.
As
of
June 30, 2008, we had cash and cash equivalents of approximately $207,495.
Working capital was approximately $4.74 million at June 30, 2008. The ratio
of current assets to current liabilities was 1.36:1 at June 30, 2008.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during the six months ended June 30, 2008 and
2007:
|
|
For
the Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
|
Operating
Activities
|
|
$
|
442,015
|
|
$
|
998,953
|
|
Investing
Activities
|
|
|
(388,681
|
)
|
|
(1,080,443
|
)
|
Financing
Activities
|
|
|
(258,014
|
)
|
|
1,315,429
|
|
Net
cash
flow provided by operating activities was $442,015 for six month ended June
30,
2008, as compared to net cash flow provided by operating activities of $998,953
for six month ended June 30, 2007. The decrease in net cash flow from operating
activities for six month ended June 30, 2008 was mainly due to increase in
advance to suppliers and other receivables, decrease in customer
deposits. In addition, our net income for six month ended June 30,
2008 has increased rapidly compared to the same period of 2007, bringing more
cash in to the Company, while at the same time our accounts receivables have
increased significantly, reducing our cash inflows.
Net
cash
flow used in investing activities was $388,681 for six month ended June 30,
2008, as compared to net cash used in investing activities of $1,080,443 in
the
same period of 2007. The decrease of net cash flow used in investing
activities in six month ended June 30, 2008 was mainly due to the completion
of
construction in progress that was commenced in 2007 and a decrease in restricted
cash that was pledged for the guarantee of certain contracts execution and
completion.
Net
cash
flow used in financing activities was $258,014 for the six months ended June
30,
2008 as compared to net cash provided by financing activities of $1,315,429
for
the same period of 2007. The decrease of net cash inflow provided by financing
activities for the six months ended June 30, 2008 was mainly due to decreased
short term loans with banks and other third parties.
Off-Balance
Sheet Arrangements
We
have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as shareholder’s equity or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We
do not have any variable interest in any unconsolidated entity that provides
financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
The
Company was obligated for the following short term loans payable as of December
31, 2007:
|
|
Balance at
December 31, 2007
(US$)
|
|
Short term
loan with China CITIC Bank in the PRC for 6, 000,000 RMB, or
$822,526. This loan was entered into on Apr 28, 2007 and is due
on Apr 12, 2008. This loan bears interest at 7.029% per
annum.
|
|
$
|
822,526
|
|
|
|
|
|
|
Short
term loan with Citibank (China) Co., Ltd with branch in the PRC for
10,200,000 RMB. This loan was entered into on Jun 25, 2007 and
is due on Jun 24, 2008. This loan bears interest at 5.265% per
annum.
|
|
|
1,302,333
|
|
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 and
2007
with a third party company in the PRC for total of 10,300,000
RMB. Some of the loans will mature on various dates in year
2008 and some of the loans are payable on demand. These loans
bear interest at 6.903% per annum.
|
|
|
1,412,003
|
|
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 with
another
third party company in the PRC for total of 2,850,000 RMB, or
$390,700. These loans are due on various dates in year
2008. These loans bear interest at 6.903% per
annum.
|
|
|
390,701
|
|
|
|
|
|
|
The
Company entered into a short term loan with another third party company
in
the PRC for 5,050,000 RMB. This loan was entered into on Aug
31, 2005 and was due on Aug 31, 2006. This loan bears no
interest. Imputed interest on the loan was
immaterial. This loan became payable on demand after Aug 31,
2006.
|
|
|
692,293
|
|
|
|
$
|
4,619,856
|
|
The
Company was obligated for the following short term loans payable as of June
30,
2008:
|
|
Balance at
June 30, 2008
(US$)
|
|
The Company
entered into a short term loan with a commercial bank in the PRC
for
6,000,000 RMB, or $822,526. This loan was entered into on April 28,
2007
and was due on April 12, 2008. This loan bears interest at 7.029%
per
annum. This loan was renewed on April 12, 2008 with new maturity
date of
June 13, 2009.
|
|
$
|
874,763
|
|
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 and
2007
with a third party company in the PRC for total of 10,300,000 RMB
or
$1,412,003. Some of the loans will mature on various dates in year
2008
and some of the loans are payable on demand. These loans bear variable
interest at 8.591% per annum for 2008 and 6.903% per annum for 2007.
|
|
|
1,233,999
|
|
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 with
another
third party company in the PRC for total of 2,850,000 RMB, or $390,700.
These loans are due on various dates in year 2008. These loans bear
variable interest at 8.591% per annum for 2008 and 6.903% per annum
for
2007.
|
|
|
414,834
|
|
|
|
|
|
|
The
Company entered into a short term loan with another third party company
in
the PRC for 5,050,000 RMB or $625,759. This loan was entered into
on Aug
31, 2005 and was due on Aug 31, 2006. This loan bears no interest.
Imputed
interest on the loan was immaterial. This loan became payable on
demand
after Aug 31, 2006.
|
|
|
736,259
|
|
|
|
|
|
|
The
Company entered into a short term loan on June 30, 2008 with another
third
party company in the PRC for total of 10,000,000 RMB, or $1,458,000.
This
loan is due on Sept. 30, 2008 with interest rate of 10% per
annum.
|
|
|
1,434,062
|
|
|
|
|
|
|
|
|
$
|
4,693,917
|
|
Recent
Accounting Pronouncements
The
Hierarchy of Generally Accepted Accounting Principles
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States. SFAS 162 will not
have an impact on the Company’s financial statements.
Disclosures
about Derivative Instruments and Hedging Activities
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a)
how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
Non-Controlling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51." SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a non-controlling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent’s equity. The amount of net income attributable to
the non-controlling interest will be included in consolidated net income on
the
face of the income statement. SFAS 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest.
In
addition, this statement requires that a parent recognize a gain or loss in
net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the non-controlling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. SFAS
160
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Based on current conditions, the
Company does not expect the adoption of SFAS 160 to have a significant impact
on
its results of operations or financial position.
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations." SFAS 141R will significantly change the accounting for business
combinations. Under SFAS 141R, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS 141R will change
the
accounting treatment for certain specific items, including:
|
·
|
Acquisition
costs will be generally expensed as
incurred;
|
|
·
|
Non-controlling
interests (formerly known as “minority interests” - see SFAS 160
discussion above) will be valued at fair value at the acquisition
date;
|
|
·
|
Acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition
date;
|
|
·
|
Restructuring
costs associated with a business combination will be generally expensed
subsequent to the acquisition date;
and
|
|
·
|
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS
141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. The
Company expects SFAS 141R will have an impact on accounting for business
combinations once adopted but the effect is dependent upon acquisitions at
that
time.
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106, and
132R
In
September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan as
an
asset or liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income. Additionally, SFAS 158 requires
employers to measure the funded status of a plan as of the date of its year-end
statement of financial position. The new reporting requirements and related
new
footnote disclosure rules of SFAS 158 are effective for fiscal years ending
after December 15, 2006. The Company adopted the provisions of SFAS 158 for
the
year end 2006, and the effect of recognizing the funded status in accumulated
other comprehensive income was not significant. The new measurement date
requirement applies for fiscal years ending after December 15,
2008.
Accounting
for Non-Refundable Advance Payments for Goods or Services Received for Use
in
Future Research and Development Activities
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities,” which addresses whether non-refundable
advance payments for goods or services that used or rendered for research and
development activities should be expensed when the advance payment is made
or
when the research and development activity has been
performed. Management is currently evaluating the effect of this
pronouncement on our financial statements.
We
are a
leading provider
of plate heat exchanger products to China's industrial, residential and
commercial markets. We
design, manufacture, sell, and service plate heat exchangers ("PHEs"), units
which combine plate heat exchangers with various pumps, temperature sensors,
valves, and automated control systems ("PHE Units"), and heat meters for a
broad
range of industries. We sell PHEs under the Sondex brand and PHE Units that
are
designed by our engineers and assembled with Sondex plates under our Taiyu
brand
name.
Our
Products
PHEs
A
PHE is
a device which transfers energy, usually in the form of heat, from one fluid
to
another across a solid surface. PHEs are constructed through the use of
specifically manufactured stainless steel, titanium, and nickel plates welded
together. The quantity and size of the plates used along with the total size
of
the PHE varies according to particular application requirements but generally
do
not exceed the size of a large refrigerator. PHEs were first invented in the
mid
1920s to control pressure and temperature, and to increase energy efficiency
in
industrial use. Because of the larger heat transfer surface area of the PHE,
its
heat transfer efficiency is superior to the shell-and-tube heat exchanger which
has been the most commonly used commercial heat transfer product to date.
We
are
one of three authorized dealers of Sondex PHEs for the industrial and energy
sectors in China. Our Sondex distribution territory is North
China.
As an
authorized dealer of Sondex PHEs in China, we import finished stainless steel
plates from Sondex and assemble customized PHEs based on our clients'
specifications. All PHE design is done in-house by our engineers
utilizing Sondex tailored software. In the initial year of our
operations, the PHE was the cornerstone of our product line. As an
authorized Sondex dealer, we have established a reputation as a high quality
provider of PHEs in China. In May 2003, we began to sell customized
PHE Units containing Sondex plates. While our direct third-party
sales of PHEs have declined in recent years, the quantity of Sondex plates
we
supply has continued to grow as they are incorporated in the PHE Units we
sell.
PHE
Units
PHE
Units
are mainly used in petroleum refining, chemicals and petrochemicals, energy
generation, HVAC, steel, medical, electronics, food & beverage processing
and other manufacturing sectors to reduce energy waste through heat recovery,
improve temperature and pressure controls and cool equipment. PHE Units are
built by integrating PHEs with various pumps, temperature sensors, valves,
and
automated control systems to form a "unit" which is used along with other units
to form a "PHE network" installed in the local district heating systems. We
specialize in making PHE Units for HVAC systems in residential and commercial
buildings.
We
began
designing, manufacturing and selling our branded PHE Units in May
2003. Our PHE Units are designed in-house by our system engineers
employing online customized CAD design software based on Solid Works software
which is integrated with our real-time enterprise resource planning system
databases. This advanced design platform provides the following
benefits:
|
·
|
We
can provide accurate price quotes instantly;
|
|
|
|
|
·
|
Our
purchasing function is immediately notified of any additional material
orders needed; and
|
|
|
|
|
·
|
Our
manufacturing operations are able to schedule production so that
goods are
delivered on a just-in-time basis.
|
The
production and sale of PHE Units have been central to our growth. PHE
Units require a comparatively higher level of technical skill and knowledge
of
the application markets and this is reflected in the price. In the
recent years, PHE Unit sales have contributed significantly to our revenue
growth and high margins. Less than five years after entering the
market, we have emerged as a leading domestic producer of PHE Units, with a
market share of approximately 8% in China.
Heat
Meters
While
heating companies in many western countries have long used meters to measure
customer heat usage and invoice customers, Chinese residents and commercial
customers are largely billed based on the square footage of their utilized
space. Meters indicate heat in legal heat units and the calibration
of meters in many countries is regulated by government agencies and subject
to
local or national guidelines. Due to rising energy costs and the
increased sensitivity to environmental issues, Chinese government and local
utility companies have recently made the use of heat meters compulsory in
several cities in China. As of January 2007, heat meters are required
by law in the cities of Tianjin, Xingtai, Chengde, and Handan.
Using
our
established relationships with provincial governments and utility companies
throughout China, we introduced our patented heat meters to the market during
the second quarter of 2006. Sales to date have been
insignificant. However, we plan to work with the various government
entities to establish a national heating standard and become an active
participant in China's heat meter market in the coming years.
Market
Overview
Heat
transfer technology was introduced to China in the 1960's from Russia, mainly
for applications in the petroleum industry. Foreign manufacturers
began to sell in China on a large commercial scale in the 1980's and have since
dominated the Chinese market. As domestic producers sprang up in the
late 1980's and 1990's they began to take an increasingly larger share of the
market. The past decade has seen the rise of many domestic
manufacturers along with joint venture operations between local and
international firms. Today the market is split between domestic
firms, foreign JVs and direct imports.
Today,
heat exchangers are used in heat and power generation, HVAC and refrigeration,
chemicals & petrochemicals, steel & metallurgy, aeronautics, textiles,
food and beverage processing and various other manufacturing
industries. Heat transfer equipment is also being employed in new
energy applications such as wind, solar, biomass and waste disposal.
PHE
technology is replacing the less efficient shell-and-tube heat exchange
technology which is still being used in older buildings and manufacturing
facilities in China. PHEs can be installed in these old buildings and facilities
as well as in new ones since they are smaller than the traditional heat
exchangers and can fit within existing installations.
PHEs
are
used in a wide range of industries with the principal demand originating in
the
petroleum refining, petrochemicals, power generation, metallurgy, food &
beverage, and chemical processing industries.
Within
the PHE industry, manufacturers are differentiated primarily based upon their
reputation and the technology, improved efficiency, and durability of their
products. Given the growing importance of energy conservation and
waste reduction, PHEs are likely to play an increasingly important role in
many
industries.
China
Heat Association believes that the domestic market for PHEs was approximately
$2.4 billion in 2007 and that it is expected to grow at an annual rate of about
30% until 2010 due to the continuation of industrialization and urbanization
trends in China. China Heat Association also believes that the domestic
market for PHE Units was approximately $139 million in 2007 and it is expected
to grow at an annual rate of 70% until 2010.
According
to China's Ministry of Construction data, 2007 domestic demand for PHE Units
in
China was estimated at $139 million and, combined with the replacement of shell
and tube heat exchangers, is expected to increase by approximately 70% annually
through 2010.
The
global market for heat transfer products and compact PHE Units in 2006
was
approximately $12 billion and $2.3 billion, respectively according to Alfa
Laval, a leading manufacturer in our industry. Large international
PHE producers include: Alfa Laval, Sondex, GEA, Tranter SWEP, Danfoss, and
Hisaka Works.
New
environmental policies and regulations are also expected to have a positive
impact on the demand for PHE products.
Production
Until
recently, we conducted all of our manufacturing activities at our Shenyang
plant. On September 25, 2008 we acquired San De Ke, a PHE
manufacturing company located in Pudong district, Shanghai. San De Ke leases
a
manufacturing facility and business offices.
We
generally operate on an 8 hour shift, with the exception of the high season
from
May to November, during which we may operate the plant for 11-12 hours a
day. Production is driven by orders from clients and is scheduled on
a just-in-time delivery basis. Our Shenyang facility currently has
the capacity to produce 10 PHEs, 3 PHE Units, and 50 heat meters per day and
our
San De Ke facility has the capacity to produce 17 PHEs per day.
Marketing
Since
our
entry into the market for PHE Units in May 2003, the Taiyu brand name has been
promoted in conjunction with quality production and first-rate service by means
of our successful track record, industry trade fairs and establishing and
maintaining positive relationships with local governments in Beijing, Shenyang,
Urumqi, Shandong, Jiangsu and Shanghai. We attend the bi-annual HVAC
trade fair in Shanghai and Chinese environmental protection forums and we visit
the local utilities companies, oil refiners, steel and food & beverage
companies. Marketing costs are generally funded through working
capital and expensed as incurred.
Suppliers
Plates
Plates are
supplied by Sondex under the terms of our Sondex authorized dealer
arrangement. We generally order stainless steel plates 2-3 months in
advance based on production needs and forecasted sales. Plate
purchases generally constitute 40% of our total annual raw material
purchases. While we are an authorized dealer, annual or quarterly
purchasing prices are not fixed and fluctuate according to Sondex's most recent
pricing list.
Components
Components
generally include pumps, valves, pipes, and electronic meters purchased from
a
variety of international (Siemens, Wilo A.G., Honeywell) and domestic suppliers
who have been certified to meet Taiyu's quality
specifications. Components are ordered on an as needed
basis. Plates and components together constituted approximately 98%
of raw material purchases in 2007.
Customers
We
sell
both directly through our sales force and through a network of 29 national
distributors located throughout China. Our customer base consists
mainly of large companies with the 10 largest customers accounting for over
60%
of our total sales. The 10 largest customers and respective revenues
during 2007 are as follows:
Customer
Name
|
|
Sales ($000s) 2007
|
|
% of Sales 2007
|
|
Dalkia (Jiamusi) Heat & Power
|
|
$
|
2,790
|
|
|
21.0
|
%
|
Urumqi
Heat Power Co. Ltd
|
|
|
1,256
|
|
|
9.5
|
%
|
Sinopec
Shenli Oil Field
|
|
|
892
|
|
|
6.7
|
%
|
Shenyang
Huanggu Thermo Electric Heating Inc.
|
|
|
848
|
|
|
6.4
|
%
|
Northern
United Electric Co. Ltd., Qingshan
|
|
|
634
|
|
|
4.8
|
%
|
YSKN
(Beijing) Machinery & Elec Dev. Co.
|
|
|
527
|
|
|
4.0
|
%
|
Shenyang
Power Co., Ltd., No.3
|
|
|
452
|
|
|
3.4
|
%
|
Tianjin
Binhai Machinery & Elec Equip Co. Ltd
|
|
|
423
|
|
|
3.2
|
%
|
Shenyang
Longyan Heating Co., Ltd
|
|
|
373
|
|
|
2.8
|
%
|
Yingkou
Development and Construction Co. Ltd
|
|
|
362
|
|
|
2.7
|
%
|
Sales
to Top 10 Customers
|
|
$
|
8,557
|
|
|
64.5
|
%
|
Total
Sales
|
|
$
|
13,273
|
|
|
|
|
Each
sale
can range from $2,500 to $500,000 and up depending on the client's
needs. Contract implementation generally takes one to six
months. Outstanding receivables are collected upon completion of work
with the exception of a 10% warranty hold-back that remains unpaid and
outstanding for 12-18 months following delivery and contract
completion. All of our work is performed based on written contracts
and there are no oral contracts. Historically, the Company has not
had any uncollected warranty hold-backs.
Intellectual
Property
We
use
the Taiyu brand name on all the PHE Units and heat meters we sell. We
have registered and received approval from the China Trademark Bureau for this
trade name. We believe that the Taiyu brand name is recognized in
China's heating industry for quality and efficiency. We have five
registered patents in China for both PHE products and heat meters.
These
patents are integral to our ability to create and design PHEs and PHE
Units. To the extent third parties utilize such patents in their
work, we do not receive royalties or licensing fees from any such third
parties.
Research
and Development
To
maintain our competitive edge in the marketplace and keep pace with new
technologies, constant research and development work is required to find
improved efficiencies in design, cost, and energy capture. While the
core technology for plate production remains with Sondex, our competitive
advantage in the market stems from our engineering and system design
capabilities.
Research
and development costs are funded through working capital and expensed as
incurred. Research and development costs for 2006 and 2007 were
$168,700 and $343,800, respectively. We plan to spend approximately $110,000
in
2008 on identifying new industry applications for PHEs, improving the accuracy
of heat meters, designing heat meters for industrial usage, developing
multifunctional PHE units and modifying PHE designs to meet the current market
demand.
While
we
have no formal written alliances with the universities, we work with several
professors who are heat transfer experts on an individual consulting
basis.
Governmental
and Environmental Regulation
While
our
PHE & PHE Units business and products are not subject to any material
regulation by the Chinese government or other national agency, we have obtained
National Safety Certification for our PHE products and we are an ISO 9000
certified manufacturer. The National Safety Certification is not
required for either production or sale of PHE products. However,
obtaining this certification confirms our commitment to safety and
quality. For companies in industries utilizing high temperatures or
pressure in their production processes, the certification is of critical
importance in choosing a PHE provider. Of over 500 companies selling
PHEs in China, we believe that only 30 companies have obtained this
certification.
Our
heat
meters require a license for production and sale. We obtained this
license on August 12, 2005. The license is valid for 3 years through
August 11, 2008 at which time it will need to be renewed. The Safety
Bureau conducts site visits and inspections of documents on a periodic basis
to
verify adherence to the standards.
Legislation
has been passed in four cities requiring the installation of heat meters. While
there is no national or other legislation requiring heat meters in the rest
of
China, expected legislation in the coming year mandating such would likely
impact National certification standards. We plan to work with both
the National and local governments in establishing those standards.
Our
business and company registrations are in compliance with the laws and
regulations of the municipal governments of Shenyang and China.
We
are
subject to China's National Environmental Protection Law as well as local laws
regarding pollutant discharge, air, water, and noise pollution, with which
we
comply. The cost of compliance with these regulations are not
material.
Competition
The
Company competes only in the domestic Chinese market. We believe our
competitive advantages lie in our superior engineering and design skills, our
affiliation with Sondex, the longevity and efficiency of the Sondex plates
we
use, our just-in-time delivery and the reliable after sale service we provide
through our local service centers.
PHEs
Alfa
Laval has the largest market share in mainland China. An assortment
of other foreign producers hold an aggregate market share of 20%, and the rest
of the market is divided among multiple domestic producers. While we
believe the quality or our PHEs is considered on par with Alfa Laval's, our
prices are approximately 15% lower. In comparison with the other
domestic producers, our prices are approximately 15% higher.
PHE
Units
According
to data from the China Heating Association, we were the leading producer and
seller of PHE Units in China in 2007, representing 8% of the market, followed
by
Danfoss, and Accessen (a Sino-US JV established by Denmark's Accessen and
utilizing Alfa Laval plates as well as their own plates in their PHE
Units). Danfoss competes directly with us for the local heat and
power companies' contracts in larger cities, while Accessen targets the
petrochemical, metallurgy and HVAC sectors.
As
the
majority of projects are awarded on a bid basis, prices among leading
competitors are difficult to assess. For certain projects, we do not
bid, but negotiate directly with the customers. We have done prior
projects with some of the customers we negotiate with, including our largest
customer in 2007, Dalkia, a JV between Dalkia and the local government in
Heilongjiang province. Dalkia is the leading provider of energy
services in Europe, active in multiple energy projects in China and is a
subsidiary of Veolia EDF.
Heat
Meters
The
market for heat meters is extremely fragmented with multiple overseas and
domestic producers and no established leaders. Currently, the
industry lacks National product standards which will be needed if legislation
requiring heat meters for all residential and commercial spaces is passed during
2008-2010. Two of our goals for the near future are to become an
integral player in the establishment of national heat meter standards and a
leading supplier of heat meters in China.
Seasonality
We
typically experience stronger third and fourth calendar quarters and weaker
first and second calendar quarters due to the seasonal related fluctuations
in
sales volumes. Customer demand for heat exchange products is also
influenced by weather.
Employees
As
of
October 6, 2008, we had 180 full-time employees. We plan to hire an
additional 20 employees during 2008.
We
maintain strong ties with our employees and staff and retention is
stable. Our employee contracts adhere to both State and Provincial
employment and all social security regulations. All compensation
including social insurance is paid in a timely manner to authorities and
employees. There have been no disputes and there are no collective
bargaining agreements.
Our
sales
personnel are eligible to receive annual bonuses based on pre-established sales
targets. Production employees are also eligible for annual bonuses
based on product quality ratios, customer complaint ratios, new product
invention, and product inventory.
Our
Corporate History
We
were
incorporated in the State of Nevada on August 4, 2006 under the name Pacific
Goldrim Resources, Inc. as an exploration stage corporation that intended to
engage in the exploration of silver, lead and zinc. On April 14, 2008, we
changed our name to SmartHeat Inc. and acquired all of the equity interests
in
Shenyang Taiyu Machinery & Electronic Equipment Co., Ltd. ("Taiyu"), a
privately held company which conducts the business operations described above.
Prior
to
our acquisition of Taiyu, we were in the development stage and had minimal
business operations. We had no interest in any property, but had the right
to
conduct exploration activities on thirteen (13) mineral title cells covering
270.27 hectares (667.85 acres) in the Slocan Mining Division of southeastern
British Columbia, Canada. In connection with the acquisition of Taiyu, we
transferred our pre-acquisition assets and liabilities (other than our liability
for the fees of our prior auditor of up to $10,000) to a wholly owned subsidiary
and sold all of the outstanding capital stock of that subsidiary to our former
director and officer in exchange for 2,500,000 shares of our common
stock.
Taiyu
was
formed in July 2002 under the laws of China and is headquartered in Shenyang
City, Liaoning Province, China. Our acquisition of Taiyu was accomplished
pursuant to a share exchange with the former shareholders of Taiyu. Under the
terms of the share exchange, the former shareholders of Taiyu received an
aggregate of 18,500,000 shares of the Company's common stock in exchange for
all
of their equitable and legal rights, title and interests in and to Taiyu's
share
capital.
On
September 25, 2008, we acquired all of the outstanding capital stock of San
De
Ke. San De Ke has an annual production capacity of approximately 4,000 PHEs.
In
2007, San De Ke's unaudited revenue was approximately US$2.59 million. San
De Ke
was founded in October 2004 to capitalize and expand on the increasing need
for
energy saving and environmentally friendly products within China. Its client
base spans a wide range of industries including manufacturing, consumer,
chemical, and energy.
Our
Corporate Information
Our
principal executive offices are located at A-1, 10, Street 7, Shenyang Economic
and Technological Development Zone, Shenyang, China 110027. Our telephone number
is 86 (24) 2519-7699. Our website is http://www.smartheatinc.com. The
information contained on our website is not a part of this
prospectus.
OUR
PROPERTY
Our
headquarters and manufacturing facilities are located in Shenyang's Economic
and
Technological Development Zone, Shenyang City, Liaoning Province,
PRC. We own two buildings which include our office headquarters and
primary manufacturing facilities. We have been granted the right to
use the land in Shenyang by the Municipal administration of state-owned land
through June 2055.
In
addition to the two buildings in Shenyang, we own four vehicles, two dual beam
cranes and other special equipment.
San
De Ke
is located in Shanghai, Pudong District, PRC. San De Ke leases a 1,500 square
meter manufacturing facility and 200 square meters of office space.
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 have an adverse affect on our
business, financial conditions, or operating results. We are
currently not aware of any such legal proceedings or claims that will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
MANAGEMENT
Executive
Officers and Directors
As
of
October 16, 2008, the directors and executive officers of SmartHeat
were:
Name
|
Age
|
Position
|
Jun
Wang
|
40
|
Chairman
of the Board of Directors, President & Chief Executive
Officer
|
Zhijuan
Guo
|
43
|
Chief
Financial Officer and Treasurer
|
Huajun
Ai
|
37
|
Corporate
Secretary
|
Frederic
Rittereiser
|
71
|
Director
|
Arnold
Staloff
|
63
|
Director
|
Weiguo
Wang
|
43
|
Director
|
Wenbin
Lin
|
63
|
Director
|
Our
directors hold office for one-year terms and until their successors have been
elected and qualified. Our officers are elected annually by the board
of directors and serve at the discretion of the board. Messers. Rittereiser,
Staloff, Wang and Lin were appointed as directors on June 19, 2008.
Jun
Wang, Chairman of the Board of Directors, President &
CEO
Mr.
Wang
is one of the original founders of Taiyu in 2002. Prior to that, from
2000 to 2002, he was the Vice General Manager of Beijing HotNet
Company. From 1996 to 1999, he was a sales manager for Honeywell
International Inc. From 1994 to 1996, he was a sales manager for Alfa
Laval. Mr. Wang obtained his Master's degree in Engineering from
Tsinghua University in 1989.
Zhijuan
Guo, CFO & Treasurer
Ms.
Guo
was appointed Chief Financial Officer of Taiyu in 2002. Prior to that
time, from December, 2000 to June, 2002, she served as the Production Planning
Director of Shenyang Thermoelectric Co. Ltd. From March, 1999 to
November, 2000, she served as Auditing Director of Shenyang Dongyu Group
Corp. From July, 1993 to February, 1999, Ms. Guo served as Finance
Manager of Shenyang Dongyu Real Estate Development Company. Ms. Guo
obtained her MBA degree from Shenyang NorthEastern University in
2001.
Huajun
Ai, Corporate Secretary
Ms.
Ai
joined Taiyu in 2002 as Corporate Secretary. Prior to that time, from
December, 2000 to October, 2002, she served as an accountant at Shenyang Dongyu
International Trade Co., Ltd. Prior to that time, from July, 1994 to
November, 2000 Ms. Ai served as an accountant at Northeast Jincheng Industrial
Corp. Ms. Ai obtained her Bachelor's degree in Foreign Trade
Accounting from Shenyang North Eastern University in 1994.
Frederic
Rittereiser, Director
Mr.
Rittereiser has served on the Board of Directors of AgFeed Industries, Inc.
since 2007. From October 1996 until retiring in 2002, Mr. Rittereiser served
as
Chairman of the Board and Chief Executive Officer of Ashton Technology Group,
Inc., a company that develops and commercializes online transaction systems
for
the financial industry. Mr. Rittereiser has been appointed to each of the Audit
Committee, Compensation Committee and Nominating and Corporate Governance
Committee of SmartHeat.
Arnold
Staloff, Director
Mr.
Staloff has served on the Boards of Directors of Lehman Brothers Derivative
Products Inc. since 1998, Lehman Brothers Financial Products Inc. since 1994,
Exchange Lab Inc. since 2001, AgFeed Industries, Inc. since 2007 and Shiner
International Inc. since 2007. From December 2005 to May 2007, Mr. Staloff
served as Chairman of the Board of SFB Market Systems, Inc., a New Jersey-based
company that provides technology solutions for the management and generation
of
options series data. From March 2003 to December 2005, Mr. Staloff was an
independent consultant. From June 1990 to March 2003, Mr. Staloff served as
President and Chief Executive Officer of Bloom Staloff Corporation, an equity
and options market-making firm and foreign currency options floor broker. Mr.
Staloff holds a Bachelor of Business Administration from the University of
Miami. Mr. Staloff has been appointed to each of the Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee of
SmartHeat.
Weiguo
Wang, Director
Dr.
Wang
serves as Assistant Secretary General of the China Standardization Committee
on
Boilers and Pressure Vessels, a position he has held since March 2005.
Additionally, Dr. Wang has served as a Director of the China Special Equipment
Inspection and Research Agency since January 2007 and Deputy General Manager
of
Boilers Standard (Beijing) Technology Services Center Co., Ltd. since March
2004. From July 2001 to December 2003, Dr. Wang was a teacher at Tianjin
University, China. Mr. Wang holds a Bachelor’s degree in Mechanics, a Master’s
degree in Fluid Mechanics and a PhD in Fluid Mechanics, all from Beijing
University. Dr. Wang has been appointed to each of the Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee of
SmartHeat.
Wenbin
Lin, Director
Mr.
Lin
is one of the original founders of Taiyu in 2002. From December 2003 to October
2004, Mr. Lin served as Deputy Chairman and General Manager of Shenyang Huanggu
Thermoelectricity Heating Inc. From November 2002 to December 2003, Mr. Lin
served as Chairman and General Manager of Shenyang Heat Power Co. Ltd. From
September 1999 to May 2002, Mr. Lin served as Chairman of Shenyang
Thermoelectric Corp. From January 1991 to August 1999, Mr. Lin held a variety
of
positions within the government of Shenyang City in the People's Republic of
China ("China"), including Director of the Economic Development & Reform
Commission from February 1998 to August 1999, Director of Shenyang City’s
Economics & Trade Commission from May 1995 to January 1998 and Deputy
Director for the Economic Planning Commission from January 1991 to April 1995.
Mr. Lin holds a Bachelor’s degree in Press Machinery from China's Anshan Steel
Technical College. Mr. Lin has been appointed to each of the Compensation
Committee and Nominating and Corporate Governance Committee of
SmartHeat.
Family
relationships
None.
Involvement
in certain legal proceedings
No
bankruptcy petition has been filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time. No director has been
convicted in a criminal proceeding and is not subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses).
No
director has been subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking
activities.
No
director has been found by a court of competent jurisdiction (in a civil
action), the SEC or the Commodity Futures Trading Commission to have violated
a
federal or state securities or commodities law, that has not been reversed,
suspended, or vacated.
The
Board of Directors and Committees
Subject
to certain exceptions, under the listing standards of NASDAQ, a listed company’s
board of directors must consist of a majority of independent directors.
Currently, our board of directors has determined that each of Messrs.
Rittereiser and Staloff and Dr. Wang is an “independent” director as defined by
the listing standards of NASDAQ currently in effect and approved by the SEC
and
all applicable rules and regulations of the SEC. We have established the
following standing committees of the board: Audit, Compensation and Corporate
Governance and Nominating. All members of the Audit Committee and a majority
of
the members of the Compensation and Nominating and Corporate Governance
Committees satisfy the “independence” standards applicable to members of each
such committee. The board of directors made this affirmative determination
regarding these directors’ independence based on discussion with the directors
and on its review of the directors’ responses to a standard questionnaire
regarding employment and compensation history; affiliations, family and other
relationships; and transactions with the Company. The board of directors
considered relationships and transactions between each director or any member
of
his immediate family and the Company and its subsidiaries and affiliates. The
purpose of the board of director’s review with respect to each director was to
determine whether any such relationships or transactions were inconsistent
with
a determination that the director is independent under the NASDAQ rules. Mr.
Lin
is not deemed an independent director within the meaning of applicable NASDAQ
and SEC rules; however, the Board of Directors has determined that, in light
of
the relative newness of SmartHeat as a public company and the unique
circumstances relating to conducting our operations in China, it is advisable
and in the best interests of SmartHeat and its shareholders that Mr. Lin be
appointed to each of the Compensation Committee and Nominating and Corporate
Governance Committee of SmartHeat.
Audit
Committee
We
established our Audit Committee in June 2008. The Audit Committee consists
of
Messrs. Rittereiser and Staloff and Dr. Wang, each of whom is an independent
director. Mr. Staloff, Chairman of the Audit Committee, is an “audit committee
financial expert” as defined under Item 407(d) of Regulation S-K. The purpose of
the Audit Committee is to represent and assist our board of directors in its
general oversight of our accounting and financial reporting processes, audits
of
the financial statements and internal control and audit functions. The Audit
Committee’s responsibilities include:
|
·
|
The
appointment, replacement, compensation, and oversight of work of
the
independent auditor, including resolution of disagreements between
management and the independent auditor regarding financial reporting,
for
the purpose of preparing or issuing an audit report or performing
other
audit, review or attest services.
|
|
·
|
Reviewing
and discussing with management and the independent auditor various
topics
and events that may have significant financial impact on our company
or
that are the subject of discussions between management and the independent
auditors.
|
The
board
of directors has adopted a written charter for the Audit Committee. A copy
of
the Audit Committee Charter is posted on our website at: www.smartheatinc.
com.
Compensation
Committee
We
established our Compensation Committee in June 2008. The Compensation Committee
consists of Messrs. Rittereiser and Staloff and Dr. Wang, each of whom is an
independent director, and Mr. Lin. Dr. Wang is the Chairman of the Compensation
Committee. The Compensation Committee is responsible for the design, review,
recommendation and approval of compensation arrangements for our directors,
executive officers and key employees, and for the administration of our equity
incentive plans, including the approval of grants under such plans to our
employees, consultants and directors. The Compensation Committee also reviews
and determines compensation of our executive officers, including our Chief
Executive Officer. The board of directors has adopted a written charter for
the
Compensation Committee. A current copy of the Compensation Committee Charter
is
posted on our website at: www.smartheatinc.com.
Nominating
and Corporate Governance Committee
We
established our Nominating and Corporate Governance Committee in June 2008.
The
Nominating and Corporate Governance Committee consists Messrs. Rittereiser
and
Staloff and Dr. Wang, each of whom is an independent director, and Mr. Lin.
Mr.
Rittereiser is the Chairman of the Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee assists in the
selection of director nominees, approves director nominations to be presented
for shareholder approval at our annual general meeting and fills any vacancies
on our board of directors, considers any nominations of director candidates
validly made by shareholders, and reviews and considers developments in
corporate governance practices. The board of directors has adopted a written
charter for the Nominating and Corporate Governance Committee. A current copy
of
the Nominating and Corporate Governance Committee Charter is posted on our
website at: www.smartheatinc.com.
Code
of Conduct
Our
board
of directors has adopted a Code of Conduct, which applies to all directors,
officers and employees. The purpose of the Code is to promote honest and ethical
conduct. The Code is posted on our website located at www.smartheatinc.com,
and is
available in print, without charge, upon written request to SmartHeat at A-1,
10, Street 7, Shenyang Economic and Technological Development Zone, Shenyang,
China 110027. We intend to post promptly any amendments to or waivers of the
Code on our website.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Beijing
YSKN Machinery & Electronic Equipment Co., Ltd ("YSKN") holds 6,808,000
shares, approximately 30.19%, of our common stock. YSKN was one of our sales
agents in 2006 and 2007 and one of our suppliers in 2006. Sales
through YSKN amounted to $226,105 and $174,901 in 2006 and 2007,
respectively. During 2006 we purchased raw material from YSKN in the
amount of $215,031. Our sales agency relationship with YSKN ceased on April
14,
2008. As of October 16, 2008, we do not owe any amounts to YSKN. YSKN
is owned by Messrs. Jun Wang, our Chairman of the Board, President and CEO,
and
Fang Li, each holding 50% of the equitable and legal rights, title and interests
in and to the share capital of YSKN.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth information concerning the compensation for the
years
ended December 31, 2007 and 2006 of the principal executive officer, principal
financial officer, in addition to our three most highly compensated officers
whose annual compensation exceeded $100,000, and up to two additional
individuals for whom disclosure would have been required but for the fact that
the individual was not serving as an executive officer of the registrant at
the
end of the last fiscal year.
Name
and
Principal
Position
|
|
Year
|
|
Salary
($) (1)
|
|
Other
Annual Compensation ($)
|
|
Total
($) (1)
|
|
Jun
Wang
|
|
|
2007
|
|
|
18,000
|
|
|
—
|
|
|
18,000
|
|
President
and Chief Executive Officer
|
|
|
2006
|
|
|
18,000
|
|
|
|
|
|
18,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhijuan
Guo
|
|
|
2007
|
|
|
10,684
|
|
|
|
|
|
10,684
|
|
Treasurer
and Chief Financial Officer
|
|
|
2006
|
|
|
10,684
|
|
|
|
|
|
10,684
|
|
(1) based
on
an exchange rate of RMB7.3 = US$1.00
Narrative
Disclosure to Summary Compensation Table.
Employment
Agreements
On
January 1, 2008, Taiyu entered into a three year employment agreement with
Mr.
Jun Wang, which agreement may be renewed at the end of the initial term upon
mutual agreement between Mr. Jun Wang and Taiyu. Either party shall
give written notice to the other party of its intention not to renew the
agreement at least 30 days prior to the end of the initial
term. Pursuant to the terms of the employment agreement, Mr. Jun Wang
shall receive a salary in an amount that is not less than the lowest minimum
wage per month paid in Shenyang and shall be based on the uniform wage and
incentive system in Shenyang. In addition, Mr. Jun Wang shall be entitled to
overtime pay in accordance with the applicable law.
On
January 1, 2008, Taiyu entered into a three year employment agreement with
Ms.
Zhijuan Guo, at terms identical to the terms of the employment agreement with
Mr. Jun Wang.
Outstanding
Equity Awards at Fiscal Year-End
As
of
December 31, 2007, there were no outstanding equity awards held by executive
officers of our company.
Stock
Incentive Plans
We
had no
stock incentive plan during 2006 or 2007.
Director
Compensation
On
June
19, 2008, Messrs. Rittereiser, Staloff and Dr. Wang joined the board of
directors as independent directors, satisfying the definition of “independence”
as defined in Rule 4200 of the NASDAQ Rules. Additionally, Mr. Lin joined
the board of directors on June 19, 2008. Mr. Lin is not an "independent"
director. We agreed to pay the following annual compensation to our independent
directors. Mr. Staloff is entitled to receive $50,000 in cash per year, paid
in
equal quarterly installments. This fee includes $10,000 for serving as Chairman
of the audit committee. Mr. Rittereiser is entitled to receive $40,000 in
cash per year, paid in equal quarterly installments. Mr. Wang is entitled
to receive $12,000 in cash per year, paid in equal quarterly installments.
In
addition, on July 17, 2008, each of Messrs. Staloff and Rittereiser were awarded
options to purchase 10,000 shares of our common stock, expiring on July 17,
2013, at an exercise price of $4.60 per share, with a three year
vesting schedule.
Section
16 Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires our officers and directors and persons who own more than ten percent
(10%) of our common stock to file with the SEC initial reports of ownership
and
reports of changes in ownership of our common stock. Such officers, directors
and ten percent (10%) shareholders are also required by applicable SEC rules
to
furnish to us copies of all forms filed with the SEC pursuant to Section 16(a)
of the Exchange Act. Based solely on our review of copies of forms filed
pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended,
and written representations from certain reporting persons, we believe that
during fiscal 2008 all reporting persons timely complied with all filing
requirements applicable to them.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following tables set forth certain information as of October
16, 2008
regarding the number of shares of common stock beneficially owned by (i) each
person or entity known to us to own more than 5% of our common stock; (ii)
our
named executive officers; (iii) our directors; and (iv) all of our executive
officers and directors as a group.
Unless
otherwise indicated, each of the shareholders named in the table below has
sole
voting and investment power with respect to such shares of common
stock. Except as otherwise indicated, the address of each of the
shareholders listed below is: c/o Shenyang Taiyu Electronic & Machinery Co.,
Ltd., A-1, 10, Street 7, Shenyang Economic and Technological Development Zone,
Shenyang, China 110027.
Except
as
otherwise noted, the individual or his or her family members had sole voting
and
investment power with respect to such shares. The percentages of beneficial
ownership set forth below are based on 24,179,900 shares of our common stock
issued and outstanding as of October 16, 2008.
Name
of Beneficial Owner
|
|
Number of
Shares
Beneficially
Owned
(1)
|
|
Percentage
Beneficially
Owned
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
Beijing
YSKN Machinery & Electronic Equipment Co., Ltd
(2)
Rm
1106, Huapu International Plaza No.19,
Chaowai
Street, Chaoyang District
Beijing,
China
|
|
|
6,808,000
|
|
|
28.16
|
%
|
Yang
In Cheol(3)
#630-5,
Namchon-Dong
Namdong-Yu
Incheon,
South Korea 302-405
|
|
|
3,848,000
|
|
|
15.9
|
%
|
ShenYang
ZhiCe Investment Co., Ltd(4)
No.
1 Yuebin Street
Shenhe
District
Shenyang,
China 110027
|
|
|
2,960,000
|
|
|
12.42
|
%
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
|
Jun
Wang, Chairman of the Board, President and CEO
(2)
|
|
|
3,404,000
|
|
|
14.08
|
%
|
Zhijuan
Guo, CFO
|
|
|
0
|
|
|
—
|
|
Frederic
Rittereiser, Director
|
|
|
0
|
|
|
—
|
|
Arnold
Staloff, Director
|
|
|
11,500
|
|
|
*
|
|
Weiguo
Wang, Director
|
|
|
0
|
|
|
—
|
|
Wenbin
Lin, Director
|
|
|
473,600
|
(5)
|
|
1.96
|
%
|
All
Directors and named Executive Officers as a group
(6 persons)
|
|
|
3,889,100
|
|
|
16.08
|
%
|
*
|
|
Less
than 1% of shares outstanding.
|
(1)
|
|
The
shares of our common stock beneficially owned are reported on the
basis of
regulations of the SEC governing the determination of beneficial
ownership
of securities. Under the rules of the SEC, a person is deemed to
be a
“beneficial owner” of a security if that person has or shares voting
power, which includes the power to vote, or direct the voting of,
such
security, or investment power, which includes the power to dispose
of, or
to direct the disposition of, such security. A person is also deemed
to be
a beneficial owner of any securities of which that person has a right
to
acquire beneficial ownership within 60 days. Securities that can be
so acquired are deemed to be outstanding for purposes of computing
such
person’s ownership percentage, but not for purposes of computing any other
person’s percentage. Under these rules, more than one person may be deemed
beneficial owner of the same securities and a person may be deemed
to be a
beneficial owner of securities as to which such person has no economic
interest. Except as otherwise indicated in these footnotes, each
of the
beneficial owners has, to our knowledge, sole voting and investment
power
with respect to the indicated shares of common
stock.
|
(2)
|
|
The
information for YSKN and Mr. Jun Wang is derived from Amendment No.
1 to
Schedule 13D, dated June 30, 2008, which was filed with the SEC to
report the shares beneficially owned by such persons as of May 7,
2008.
The Schedule 13D states that YSKN has sole power to vote and dispose
of 6,808,000 shares owned by YSKN and that Messrs. Wang and Li each
hold 50% of the equitable and legal rights, title and interests in
and to
the share capital of YSKN and, as a result of such ownership each
of
Messrs. Wang and Li has shared power to vote and dispose of the shares
owned directly by YSKN.
|
|
|
|
(3)
|
|
The
information for Yang In Cheol is derived from a Schedule 13G, dated
April 25, 2008, which was filed with the SEC to report the shares
beneficially owned by him as of April 14, 2008. The Schedule 13G
states that Yang In Cheol has sole power to vote and dispose of
3,848,000 shares owned by him.
|
|
|
|
(4)
|
|
The
information for ShenYang ZhiCe Investment Co., Ltd is derived from
a
Schedule 13G, dated April 25, 2008, which was filed with the SEC to
report the shares beneficially owned by him as of April 14, 2008.
The
Schedule 13G states that ShenYang ZhiCe Investment Co., Ltd has sole
power to vote and dispose of 2,960,000 shares owned by it.
|
|
|
|
(5)
|
|
Includes
473,600 shares beneficially owned by Mr. Lin's spouse through her
ownership of 16% equity interest in ShenYang ZhiCe Investment Co.,
Ltd.,
which holds an aggregate of 2,960,000 shares of common stock of SmartHeat.
Mr. Lin disclaims beneficial ownership of these
shares
|
SELLING
SHAREHOLDERS
The
shares of common stock included in this prospectus (including shares issuable
pursuant to the terms of outstanding warrants) were issued in a private
placement transaction pursuant to which we sold an aggregate of 1,630,000 shares
of our common stock and warrants to purchase 244,500 additional shares of our
common stock. In addition, this prospectus includes 148,500 shares of our common
stock which are issuable pursuant to the terms of outstanding warrants we issued
to the placement agents in that private placement transaction The warrants
are
immediately exercisable, expire on the third anniversary of their issuance
and
entitle their holders, in the aggregate, to purchase up to 393,000 shares of
our
common stock at an initial exercise price of $6.00 per share. The original
issuance of the shares of common stock and warrants was exempt from the
registration requirements of the Securities Act of 1933, as amended.
The
table
below lists the selling shareholders and other information regarding the
beneficial ownership of the shares of common stock by each of the selling
shareholders. The second column lists the number and percentage of shares of
common stock beneficially owned by each selling shareholder, based on its
ownership of shares and warrants, as of October 16, 2008, assuming exercise
of
all of the warrants held by the selling shareholders on that date, without
regard to any limitations on exercise. The third column lists the shares of
common stock being offered by this prospectus by the selling shareholders.
Each
selling shareholder’s percentage of ownership in the following table is based on
24,179,900 shares of common stock outstanding as of October 16, 2008.
|
|
Beneficial Ownership
Before Offering
|
|
Shares of Common
Stock Included
|
|
Beneficial Ownership
After the Offering
|
|
Shareholder
|
|
Number
|
|
Percentage*
|
|
in Prospectus
|
|
Number
|
|
Percentage*
|
|
G
& S I Fund LP
|
|
|
69,000
|
|
|
|
|
|
69,000
|
|
|
0
|
|
|
|
|
C.
Robert Shearer
|
|
|
17,250
|
|
|
|
|
|
17,250
|
|
|
0
|
|
|
|
|
Nancy
Palmero and Herman Palmero
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Thomas
Knox
|
|
|
57,500
|
|
|
|
|
|
57,500
|
|
|
0
|
|
|
|
|
Arnold
Staloff
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Domaco
Venture Capital Fund Partnership
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Marc
Engelbert
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Andrew
Grossman Profit Sharing Plan, Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Norton
Hight & Joan Hight
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Randall
W. Hight
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Maura
Kelly
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Wolfe
F. Model
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Anthony
G. Polak
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
IRA
FBO Anthony G. Polak, Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
IRA
FBO Jack Polak, Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Jonathan
Rothschild
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Elias
Sayour Foundation Incorporated
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Gary
Stadtmauer
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Rhea
D. Stadtmauer and Janice Maiman
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Teddy
Chasanoff
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Ross
Pirasteh
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Sandra
G. Shapiro & Robert S. Shapiro
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
John
Gross
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Murray
Stadtmauer & Clare Stadtmauer
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
IRA
FBO Ronald M. Lazar Pershing As Custodian
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
IRA
FBO Kevin Clarke, Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
RL
Capital Partners, LP
|
|
|
34,500
|
|
|
|
|
|
34,500
|
|
|
0
|
|
|
|
|
Geri
Investments N.V.
|
|
|
34,500
|
|
|
|
|
|
34,500
|
|
|
0
|
|
|
|
|
IRA
FBO Daniel Berkowitz Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Harmon
Corporation A.V.V.
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Funcorp
Associates Ltd.
|
|
|
23,000
|
|
|
|
|
|
23,000
|
|
|
0
|
|
|
|
|
La
legetaz Private Foundation
|
|
|
34,500
|
|
|
|
|
|
34,500
|
|
|
0
|
|
|
|
|
Evie
Falda & David Falda,
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Ann
V. Clemente
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
William
H. Peterson Living Trust
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Allied
Diesel Service Inc. Employee Profit Sharing Plan #2
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Florence
E. Luvera
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Kalman
A. Barson (Roth IRA)
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Steve
Roman
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Suellyn
P. Tornay
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Eximius
bvba
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
IRA
FBO David Swerdloff Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Michael
A. Berlinger
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Sun
Fun Investing Inc.
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Strong
Growth Capital Ltd
|
|
|
977,500
|
|
|
3.9
|
%
|
|
977,500
|
|
|
0
|
|
|
|
|
Yuzhen
Hou
|
|
|
69,000
|
|
|
|
|
|
69,000
|
|
|
0
|
|
|
|
|
The
USX China Fund
|
|
|
23,000
|
|
|
|
|
|
23,000
|
|
|
0
|
|
|
|
|
White
Sand Investor Group, L.P.
|
|
|
16,100
|
|
|
|
|
|
16,100
|
|
|
0
|
|
|
|
|
Gibralt
Capital Corporation
|
|
|
81,650
|
|
|
|
|
|
81,650
|
|
|
0
|
|
|
|
|
David
L. Quinn and Tracy Quinn
|
|
|
11,500
|
|
|
|
|
|
11,500
|
|
|
0
|
|
|
|
|
Rodman
& Renshaw LLC
|
|
|
56,500
|
|
|
|
|
|
56,500
|
|
|
0
|
|
|
|
|
Four
Tong Investments Ltd
|
|
|
91,000
|
|
|
|
|
|
91,000
|
|
|
0
|
|
|
|
|
Seaboard
Securities
|
|
|
1,000
|
|
|
|
|
|
1,000
|
|
|
0
|
|
|
|
|
*
Less
than 1%, unless otherwise specified
PLAN
OF DISTRIBUTION
The
selling shareholders identified in this prospectus may offer and sell up to
an
aggregate of 2,023,000 shares of our common stock which we have issued to them,
or which we may issue to them upon the exercise of certain warrants issued
to
them. The selling shareholders may sell all or a portion of their shares through
public or private transactions at prevailing market prices or at privately
negotiated prices.
All
of
the shares and warrants described above were previously issued in a private
placement transaction completed prior to the filing of the registration
statement of which this prospectus is a part.
The
selling shareholders may sell all or a portion of the shares of common stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
common stock are sold through underwriters or broker-dealers, the selling
shareholders will be responsible for underwriting discounts or commissions
or
agent’s commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
|
·
|
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
|
|
·
|
in
the over-the-counter market;
|
|
·
|
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
|
|
·
|
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
sales
pursuant to Rule 144;
|
|
·
|
broker-dealers
may agree with the selling securityholders to sell a specified number
of
such shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
If
the
selling shareholders effect such transactions by selling shares of common stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling shareholders or commissions from
purchasers of the shares of common stock for whom they may act as agent or
to
whom they may sell as principal (which discounts, concessions or commissions
as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales
of
the shares of common stock or otherwise, the selling shareholders may enter
into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in positions they
assume. The selling shareholders may also sell shares of common stock short
and
deliver shares of common stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales.
The
selling shareholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
The
selling shareholders may pledge or grant a security interest in some or all
of
the warrants or shares of common stock owned by them and, if they default in
the
performance of their secured obligations, the pledgees or secured parties may
offer and sell the shares of common stock from time to time pursuant to this
prospectus or any amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act amending, if necessary, the list
of
selling shareholders to include the pledgee, transferee or other successors
in
interest as selling shareholders under this prospectus. The selling shareholders
also may transfer and donate the shares of common stock in other circumstances
in which case the transferees, donees, pledgees or other successors in interest
will be the selling beneficial owners for purposes of this
prospectus.
The
selling shareholders and any broker-dealer participating in the distribution
of
the shares of common stock may be deemed to be “underwriters” within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of
the
shares of common stock is made, a prospectus supplement, if required, will
be
distributed which will set forth the aggregate amount of shares of common stock
being offered and the terms of the offering, including the name or names of
any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling shareholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under
the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In addition,
in
some states the shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
The
selling shareholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules
and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
shares of common stock by the selling shareholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in
the
distribution of the shares of common stock to engage in market-making activities
with respect to the shares of common stock. All of the foregoing may affect
the
marketability of the shares of common stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
common stock.
We
have
agreed to pay all expenses of the registration of the shares of common stock
including, without limitation, SEC filing fees and expenses of compliance with
state securities or “blue sky” laws; provided, however, that a selling
shareholder will pay all underwriting discounts and selling commissions, if
any.
We will indemnify the selling shareholders against liabilities, including some
liabilities under the Securities Act, in accordance with our agreement to
register the shares, or the selling shareholders will be entitled to
contribution. We may be indemnified by the selling shareholders against civil
liabilities, including liabilities under the Securities Act, that may arise
from
any written information furnished to us by the selling shareholder specifically
for use in this prospectus, in accordance with the related registration rights
agreements, or we may be entitled to contribution.
Once
sold
under the registration statement of which this prospectus is a part, the shares
of common stock will be freely tradable in the hands of persons other than
our
affiliates.
DESCRIPTION
OF SECURITIES
Authorized
Capital Stock
The
total
number of stock authorized that may be issued by us is 75,000,000 shares of
common stock with a par value of $0.001 per share. We have no other
authorized class of stock.
Capital
Stock Issued and Outstanding
As
of
October 16, 2008 24,179,900 shares of common stock were issued and
outstanding and held of record by 238 stockholders. In addition, there
were outstanding warrants and options exercisable for a aggregate of 393,000
shares of common stock.
Description
of Common Stock
The
holders of common stock are entitled to one vote per share. Our
Articles of Incorporation does not provide for cumulative voting. The
holders of common stock are entitled to receive ratably such dividends, if
any,
as may be declared by our board of directors out of legally available funds;
however, the current policy of our board of directors is to retain earnings,
if
any, for operations and growth. Upon liquidation, dissolution or
winding-up, the holders of common stock are entitled to share ratably in all
assets that are legally available for distribution. The holders of
common stock have no preemptive, subscription, redemption or conversion
rights.
Market
Information
Our
common stock is currently approved for quotation on the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc. under the
symbol SMHT.OTCBB, but there is currently no active trading market. We
have applied for the listing of our common stock on the NASDAQ Capital Market,
although there is no assurance that our application will be
approved.
INTEREST
OF NAMED EXPERTS
No
expert
or counsel named in this registration statement as having prepared or certified
any part of this statement or having given an opinion upon the validity of
the
securities being registered or upon
other
legal matters in connection with the registration or offering of the common
stock was employed on a contingency basis, or had, or will receive, in
connection with the offering, a substantial interest, direct or indirect, in
the
registrant. Nor was any such person connected with the registrant as a promoter,
managing or principal underwriter, voting trustee, director, officer, or
employee.
The
audited financial statements of Shenyang Taiyu Machinery & Electronic
Equipment Co., Ltd as of December 31, 2007 were audited by Goldman, Parks,
Kurland, Mohidin LLP, an independent registered public accounting firm, to
the
extent set forth in its report and are included herein in reliance upon the
authority of this firm as experts in accounting and auditing.
LEGAL
MATTERS
The
validity of our common stock offered hereby will be passed upon for us by Buchanan
Ingersoll & Rooney, PC.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Nevada Revised Statutes provide that a director or officer is not individually
liable to the corporation or its shareholders or creditors for any damages
as a
result of any act or failure to act in his capacity as a director or officer
unless it is proven that his act or failure to act constituted a breach of
his
fiduciary duties as a director or officer and his breach of those duties
involved intentional misconduct, fraud or a knowing violation of law. The
Articles of Incorporation or an amendment thereto may, however, provide for
greater individual liability. Furthermore, directors may be jointly and
severally liable for the payment of certain distributions in violation of
Chapter 78 of the Nevada Revised Statutes.
This
provision is intended to afford directors and officers protection against and
to
limit their potential liability for monetary damages resulting from suits
alleging a breach of the duty of care by a director or officer. As a consequence
of this provision, shareholders of our company will be unable to recover
monetary damages against directors or officers for action taken by them that
may
constitute negligence or gross negligence in performance of their duties unless
such conduct meets the requirements of Nevada law to impose such liability.
The
provision, however, does not alter the applicable standards governing a
director’s or officer’s fiduciary duty and does not eliminate or limit the right
of our company or any shareholder to obtain an injunction or any other type
of
non-monetary relief in the event of a breach of fiduciary duty.
The
Nevada Revised Statutes also provide that under certain circumstances, a
corporation may indemnify any person for amounts incurred in connection with
a
pending, threatened or completed action, suit or proceeding in which he is,
or
is threatened to be made, a party by reason of his being a director, officer,
employee or agent of the corporation or serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, if such person (a) is
not
liable for a breach of fiduciary duty involving intentional misconduct, fraud
or
a knowing violation of law or such greater standard imposed by the corporation’s
articles of incorporation; or (b) acted in good faith and in a manner which
he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Additionally, a
corporation may indemnify a director, officer, employee or agent with respect
to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, if such person (a) is not liable
for a breach of fiduciary duty involving intentional misconduct, fraud or a
knowing violation of law or such greater standard imposed by the corporation’s
articles of incorporation; or (b) acted in good faith and in a manner which
he
reasonably believed to be in or not opposed to the best interests of the
corporation, however, indemnification may not be made for any claim, issue
or
matter as to which such a person has been adjudged by a court to be liable
to
the corporation or for amounts paid in settlement to the corporation, unless
the
court determines that the person is fairly and reasonably entitled to indemnity
for such expenses as the court deems proper. To the extent that a director,
officer, employee or agent of a corporation has been successful on the merits
or
otherwise in defense of any action, suit or proceeding referred to above, or
in
defense of any claim, issue or matter therein, the corporation shall indemnify
him against expenses, including attorneys’ fees, actually and reasonably
incurred by him in connection with the defense.
Our
By-Laws provide, among other things, that a director, officer, employee or
agent
of the corporation will be indemnified against all expense, liability, and
loss
(including attorneys’ fees, judgments, fines, taxes, penalties and amounts paid
or to be paid in settlement) reasonably incurred or suffered in connection
with
any threatened, pending, or completed action suit, or proceeding, whether civil,
criminal, administrative, or investigative provided that he or she either is
not
liable pursuant to Nevada Revised Statutes 78.138 (relating to liability of
directors and officers to the corporation in certain instances) or acted in
good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation and, in the case of a criminal proceeding, had
no
reasonable cause to believe that his or her conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended, may be provided for directors, officers, employees, agents or persons
controlling an issuer pursuant to the foregoing provisions, the opinion of
the
SEC is that such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is therefore
unenforceable.
INDEX
TO FINANCIAL STATEMENTS
|
|
|
Page
|
|
|
|
|
Audited
Financial Statements of Shenyang Taiyu Machinery & Electronic
Equipment Co., Ltd
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
|
|
Consolidated
Balance Sheet as of December 31, 2007
|
|
F-3
|
|
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the Years
Ended
December 31, 2007 and 2006
|
|
F-4
|
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended December 31, 2007
and 2006
|
|
F-5
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007
and
2006
|
|
F-6
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-7
|
|
|
|
|
Unaudited
Financial Statements of SmartHeat Inc.
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of June 30, 2008 (unaudited)
|
|
F-20
|
|
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income for the Three
and Six
Months Ended June 30, 2008 and 2007 (unaudited)
|
|
F-21
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Six Months Ended June 30, 2008
and 2007
(unaudited)
|
|
F-22
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
|
F-23
|
|
|
|
|
Proforma
Financial Statements for SmartHeat Inc. and Shenyang Taiyu Machinery
&
Electronic Equipment Co., Ltd
|
|
|
|
|
|
|
|
Pro
Forma Combined Balance Sheet as of December 31, 2006
(unadited)
|
|
F-37
|
|
|
|
|
|
Pro
Forma Combined Statements of Operation for the Year Ended December
31,
2007 (unaudited)
|
|
F-39
|
|
|
|
|
|
Notes
to Pro Forma Combined Financial Statements
|
|
F-40
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
shareholders of Shenyang Taiyu Machinery & Electronic Equipment Co.,
Ltd.
We
have
audited the balance sheet of Shenyang Taiyu Machinery & Electronic Equipment
Co., Ltd and Subsidiary (the “Company”) as of December 31, 2007 and the related
statements of income and other comprehensive income, shareholders’
equity and cash flows for each of the two years ended December 31, 2007 and
2006. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2007, and the results of its operations and its cash flows for the years
ended
December 31, 2007 and 2006 in conformity with U.S. generally accepted accounting
principles.
Goldman
Parks Kurland Mohidin LLP
Encino,
California
March
25,
2008
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD
AND
SUBSIDIARY
CONSOLIDATED
BALANCE SHEET
AS
OF DECEMBER 31, 2007
ASSETS
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
Cash
& cash equivalents
|
|
$
|
393,147
|
|
Restricted
cash
|
|
|
537,098
|
|
Accounts
receivable, net
|
|
|
4,762,822
|
|
Retentions
receivable
|
|
|
191,319
|
|
Inventories
|
|
|
7,928,408
|
|
Advances
to suppliers
|
|
|
158,750
|
|
Other
receivables
|
|
|
766,231
|
|
Due
from related party
|
|
|
118,560
|
|
|
|
|
|
|
Total
current assets
|
|
|
14,856,335
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
2,040,809
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
949,998
|
|
Retentions
receivable
|
|
|
169,309
|
|
Intangible
assets, net
|
|
|
534,208
|
|
|
|
|
|
|
Total
noncurrent assets
|
|
|
1,653,515
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
18,550,659
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Accounts
payable
|
|
$
|
3,128,585
|
|
Customer
deposits
|
|
|
3,125,406
|
|
Tax
payable
|
|
|
503,010
|
|
Other
payables
|
|
|
807,700
|
|
Due
to related party
|
|
|
445,990
|
|
Loan
payable
|
|
|
4,619,856
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
12,630,547
|
|
|
|
|
|
|
CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
-
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
Paid
in capital
|
|
|
3,120,632
|
|
Statutory
reserve
|
|
|
506,532
|
|
Accumulated
other comprehensive income
|
|
|
473,859
|
|
Retained
earnings
|
|
|
1,819,089
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
5,920,112
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
18,550,659
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD
AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
13,273,151
|
|
$
|
8,205,166
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
(8,667,353
|
)
|
|
(5,710,540
|
)
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,605,798
|
|
|
2,494,626
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
(1,681,624
|
)
|
|
(1,181,230
|
)
|
General
and administrative expenses
|
|
|
(687,466
|
)
|
|
(461,491
|
)
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
(2,369,090
|
)
|
|
(1,642,721
|
)
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,236,708
|
|
|
851,905
|
|
|
|
|
|
|
|
|
|
Non-operating
income
|
|
|
|
|
|
|
|
Interest
income
|
|
|
175,084
|
|
|
96,346
|
|
Interest
expense
|
|
|
(230,905
|
)
|
|
(81,039
|
)
|
Other
income
|
|
|
45,126
|
|
|
25,740
|
|
Other
expenses
|
|
|
(16,939
|
)
|
|
(1,460
|
)
|
Subsidy
income
|
|
|
52,591
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
non-operating income
|
|
|
24,957
|
|
|
39,587
|
|
|
|
|
|
|
|
|
|
Income
before income tax
|
|
|
2,261,665
|
|
|
891,492
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(175,647
|
)
|
|
(72,564
|
)
|
|
|
|
|
|
|
|
|
Income
after income tax
|
|
|
2,086,018
|
|
|
818,928
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1,873
|
|
|
13,684
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
2,087,891
|
|
|
832,612
|
|
|
|
|
|
|
|
|
|
Other
comprehensive item
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
333,449
|
|
|
101,669
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
2,421,340
|
|
$
|
934,281
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD
AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31,2007 AND 2006
|
|
Paid in
capital
|
|
Statutory
reserves
|
|
Other
comprehensive
income
|
|
Retained
earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
$
|
1,824,905
|
|
$
|
211,701
|
|
$
|
38,741
|
|
$
|
113,767
|
|
$
|
2,189,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contribution
|
|
|
375,377
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
375,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
832,612
|
|
|
832,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to statutory reserves
|
|
|
-
|
|
|
84,663
|
|
|
-
|
|
|
(84,663
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
-
|
|
|
-
|
|
|
101,669
|
|
|
-
|
|
|
101,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
2,200,282
|
|
|
296,364
|
|
|
140,410
|
|
|
861,716
|
|
|
3,498,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
reclassification
|
|
|
920,350
|
|
|
-
|
|
|
-
|
|
|
(920,350
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year
|
|
|
-
|
|
|
-
|
|
|
|
|
|
2,087,891
|
|
|
2,087,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to statutory reserves
|
|
|
-
|
|
|
210,168
|
|
|
-
|
|
|
(210,168
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
-
|
|
|
-
|
|
|
333,449
|
|
|
-
|
|
|
333,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$
|
3,120,632
|
|
$
|
506,532
|
|
$
|
473,859
|
|
$
|
1,819,089
|
|
$
|
5,920,112
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD
AND
SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,087,891
|
|
$
|
832,612
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
104,055
|
|
|
67,621
|
|
Unearned
interest on accounts receivable
|
|
|
(122,379
|
)
|
|
81,778
|
|
Minority
interest
|
|
|
(1,873
|
)
|
|
(13,684
|
)
|
(Increase)
decrease in current assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,526,521
|
)
|
|
(1,207,427
|
)
|
Retentions
receivable
|
|
|
70,446
|
|
|
(119,285
|
)
|
Advances
to suppliers
|
|
|
(45,386
|
)
|
|
776,981
|
|
Other
receivables
|
|
|
(327,734
|
)
|
|
19,506
|
|
Inventory
|
|
|
(2,184,063
|
)
|
|
(2,849,317
|
)
|
Restricted
cash
|
|
|
(135,915
|
)
|
|
159,464
|
|
Increase
(decrease) in current liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
979,881
|
|
|
1,336,090
|
|
Unearned
revenue
|
|
|
1,265,085
|
|
|
1,097,472
|
|
Tax
payable
|
|
|
326,053
|
|
|
(105,052
|
)
|
Other
payables
|
|
|
513,507
|
|
|
(128,346
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used) in operating activities
|
|
|
3,047
|
|
|
(51,587
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Acquisition
of property & equipment
|
|
|
(909,280
|
)
|
|
(115,929
|
)
|
Construction
in progress
|
|
|
-
|
|
|
(773,561
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(909,280
|
)
|
|
(889,490
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Due
from / (to) shareholder
|
|
|
(699,247
|
)
|
|
(329,947
|
)
|
Short
term loan
|
|
|
1,774,966
|
|
|
921,937
|
|
Capital
contribution
|
|
|
-
|
|
|
375,338
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
1,075,719
|
|
|
967,328
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
|
|
21,366
|
|
|
7,302
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH & CASH EQUIVALENTS
|
|
|
169,486
|
|
|
26,251
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
202,295
|
|
|
168,742
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, END OF YEAR
|
|
$
|
393,147
|
|
$
|
202,295
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash flow data:
|
|
|
|
|
|
|
|
Income
tax paid
|
|
$
|
134,033
|
|
$
|
73,164
|
|
Interest
paid
|
|
$
|
280,719
|
|
$
|
41,892
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Shenyang
Taiyu Machinery and Electronic Equipment Co., Ltd. (the “Company” or “Taiyu”)
was incorporated in the Liaoning Province, People’s Republic of China (“PRC”) in
July, 2002. Taiyu is engaged in the manufacturing and sale of plate
heat exchangers and various packages, thermo meter testing devices and heat
usage calculators. The Company is an authorized OEM of the SONDEX
brand; SONDEX is the second largest plate heat exchanger manufacturer in
the
world.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principle
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its 55% owned subsidiary, Qingdao Yushi Heat Power Equipment
Co.,
Ltd (Yushi). Yushi is engaged in manufacturing and selling of heat
power equipment. All significant inter-company accounts and transactions
have
been eliminated in consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly
liquid
investments with an original maturity of three months or less to be cash
equivalents. As of December 31, 2007, the Company maintained
restricted cash of $537,098 in several bank accounts, of which, $4,973 was
collateralized for certain letters of credit, $532,125 was pledged for the
guarantee of certain contacts execution and completion.
Accounts
and Retentions Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable
and analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves. Based on historical
collection activity, the Company had allowance of $330,518 at December 31,
2007.
At
December 31, 2007, the Company had retentions receivable from customers for
product quality assurance in the amount of $360,628. The retention
rate varies from 5% to 20% of the sales price with variable terms from 3
months
to 2 years.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
receivable is net of unearned interest of $148,421 at December 31,
2007. Unearned interest represents imputed interest on accounts
receivable with due dates over one year from the invoice date discounted
at the
Company's borrowing rate which was 7.04 % in 2006 and 2007.
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals
and
betterments are capitalized. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using
the straight-line method with a 10% salvage value and estimated lives ranging
from 5 to 20 years as follows:
Building
|
|
|
20
years
|
|
Vehicle
|
|
|
5
years
|
|
Office
Equipment
|
|
|
5
years
|
|
Production
Equipment
|
|
|
5-10
years
|
|
Land
Use Right
Right
to
use land is stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over 50 years.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets,
are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge
is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily
determinable. Based on its review, the Company believes that, as of
December 31, 2007, there were no significant impairments of its long-lived
assets.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes are recognized
for the tax consequences in future years of differences between the tax bases
of
assets and liabilities and their financial reporting amounts at each period
end
based on enacted tax laws and statutory tax rates applicable to the periods
in
which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount expected to be realized.
The
Company does not have any significant deferred tax asset or liability that
relate to tax jurisdictions not covered by the tax holiday.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for
Uncertainty in Income Taxes, on January 1, 2007. As a result of the
implementation of FIN 48, the Company made a comprehensive review of its
portfolio of tax positions in accordance with recognition standards established
by FIN 48. As a result of the implementation of Interpretation 48,
the Company recognized no material adjustments to liabilities or stockholders
equity. When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position
taken
or the amount of the position that would be ultimately sustained. The
benefit of a tax position is recognized in the financial statements in the
period during which, based on all available evidence, management believes
it is
more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that
is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with
tax
positions taken that exceeds the amount measured as described above is reflected
as a liability for unrecognized tax benefits in the accompanying balance
sheets
along with any associated interest and penalties that would be payable to
the
taxing authorities upon examination.
Interest
associated with unrecognized tax benefits are classified as interest expense
and
penalties are classified in selling, general and administrative expenses
in the
statements of income. The adoption of FIN 48 did not have a material impact
on
the Company’s financial statements.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with Securities
and
Exchange Commission (SEC) Staff Accounting Bulletin (“SAB”)
104. Sales revenue is recognized at the date of shipment to customers
when a formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company exist
and
collectibility is reasonably assured. Payments received before all of
the relevant criteria for revenue recognition are recorded as unearned
revenue.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sales
revenue represents the invoiced value of goods, net of value-added tax
(“VAT”). All of the Company’s products that are sold in the PRC are
subject to Chinese value-added tax of 17% of the gross sales
price. This VAT may be offset by VAT paid by the Company on raw
materials and other materials included in the cost of producing their finished
product. The Company recorded VAT payable and VAT receivable net of
payments in the financial statements. The VAT tax return is filed
offsetting the payables against the receivables.
VAT
payable on sales and VAT on purchases was $2,317,620 and $1,524,804 for the
year
ended December 31, 2007 and $1,425,993 and $1,202,313 for the year ended
December 31, 2006, respectively. Sales and purchases are recorded net
of VAT collected and paid as the Company acts as an agent for the
government. VAT taxes are not affected by the income tax
holiday.
Sales
returns and allowances was $ 0 for both 2007 and 2006. The Company does not
provide unconditional right of return, price protection or any other concessions
to its customers.
The
Company provides free after-sale service for a period of one
year. During 2007 and 2006, the Company recorded $383,177 and
$76,023, of such expenses, respectively, which is included in selling
expenses.
Cost
of Goods Sold
Cost
of
goods sold consists primarily of material costs, direct labor, and manufacturing
overhead which are directly attributable to the production of products.
Write-down of inventories to lower of cost or market is also recorded in
cost of
goods sold.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does
not
require collateral or other security to support these receivables. The Company
conducts periodic reviews of its clients' financial condition and customer
payment practices to minimize collection risk on accounts
receivable.
The
operations of the Company are located in the PRC. Accordingly, the
Company's business, financial condition, and results of operations may be
influenced by the political, economic, and legal environments in the PRC,
as
well as by the general state of the PRC economy.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company's operations is calculated based upon the local
currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic
and Diluted Net Income per Share
The
Company is a limited liability company formed under the laws of the PRC.
Like
limited liability companies (LLC) in the United States, limited
liability companies in the PRC do not issue shares to the
owners. The owners however, are called shareholders. Ownership interest is
determined in proportion to capital contributed. Accordingly,
earnings per share data are not presented.
Fair
Value of Financial Instruments
SFAS
No.
107, “Disclosures about Fair Value of Financial Instruments,” requires that the
Company disclose estimated fair values of financial instruments. The
carrying amounts reported in the statements of financial position for current
assets and current liabilities qualifying as financial instruments are a
reasonable estimate of fair value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB has been translated into United States dollars ("USD") as the
reporting currency. Assets and liabilities are translated at the exchange
rate
in effect at the balance sheet date. Revenues and expenses are translated
at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period
to
period are included as a component of stockholders' equity as "Accumulated
other
comprehensive income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
The
Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
“Reporting Comprehensive Income”. Comprehensive income is comprised of net
income and all changes to the statements of stockholders’ equity, except those
due to investments by stockholders, changes in paid-in capital and distributions
to stockholders.
Segment
Reporting
SFAS
No.
131, "Disclosures about Segments of an Enterprise and Related Information"
requires use of the “management approach” model for segment
reporting. The management approach model is based on the way a
company's management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure,
or any
other manner in which management disaggregates a company.
SFAS
131
has no effect on the Company's financial statements as substantially all
of the
Company's operations are conducted in one industry segment. All of
the Company's assets are located in the PRC.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New
Accounting Pronouncements
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction
at
the acquisition-date fair value with limited exceptions. SFAS 141R will change
the accounting treatment for certain specific items, including:
|
·
|
Acquisition
costs will be generally expensed as
incurred;
|
|
·
|
Noncontrolling
interests (formerly known as “minority interests” – see SFAS 160
discussion below) will be valued at fair value at the acquisition
date;
|
|
·
|
Acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition
date;
|
|
·
|
Restructuring
costs associated with a business combination will be generally
expensed
subsequent to the acquisition date;
and
|
|
·
|
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS
141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition
date is
on or after the beginning of the first annual reporting period beginning
on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. We
expect SFAS 141R will have an impact on accounting for business combinations
once adopted but the effect is dependent upon acquisitions at that
time.
Noncontrolling
Interests in Consolidated Financial Statements –
An
Amendment of ARB No. 51
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain
or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Like SFAS 141R discussed above, earlier adoption is prohibited. We have not
completed our evaluation of the potential impact, if any, of the adoption
of
SFAS 160 on our consolidated financial position, results of operations and
cash
flows.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements,” which establishes a framework for measuring fair value, and
expands disclosures about fair value measurements required under the accounting
pronouncements, but does not change existing guidance as to whether or not
an
instrument is carried at fair value. Additionally, it establishes a fair
value
hierarchy that prioritizes the information used to develop those assumptions.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity
has
not yet issued financial statements for fiscal year, including financial
statements for an interim period within the fiscal year. The Company is
currently evaluating the impact, if any, that SFAS No. 157 will have on its
financial statements.
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106, and 132R
In
September 2006, the FASB, issued SFAS, No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an Amendment of FASB
Statements No. 87, 88, 106, and 132R,” which requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan
as an
asset or liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income. Additionally, SFAS No. 158 requires
employers to measure the funded status of a plan as of the date of its year-end
statement of financial position. The new reporting requirements and related
new
footnote disclosure rules of SFAS No. 158 are effective for fiscal years
ending
after December 15, 2006. We adopted the provisions of SFAS No. 158 for the
year
end 2006, and the effect of recognizing the funded status in accumulated
other
comprehensive income was not significant. The new measurement date requirement
applies for fiscal years ending after December 15, 2008.
Fair
Value Option for Financial Assets and Financial Liabilities
In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115.” The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective
is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007. The
Company is analyzing the potential accounting treatment.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMER
31, 2007 and 2006
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Considering
the Effects of Prior Year Misstatements in Current Year Financial
Statements
In
September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”), which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. The Company
adopted SAB 108 in the fourth quarter of 2006 with no impact on its financial
statements.
3.
INVENTORIES
Inventories
at December 31, 2007 were as follows:
Raw
materials
|
|
$
|
3,865,575
|
|
Work
in process
|
|
|
48,627
|
|
Finished
Goods
|
|
|
4,014,206
|
|
Total
|
|
$
|
7,928,408
|
|
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at December 31, 2007:
Building
|
|
$
|
1,624,651
|
|
Production
equipment
|
|
|
298,242
|
|
Office
equipment
|
|
|
156,368
|
|
Vehicles
|
|
|
134,724
|
|
|
|
|
2,213,985
|
|
Less:
Accumulated depreciation
|
|
|
(173,176
|
)
|
|
|
$
|
2,040,809
|
|
Depreciation
expense for the years ended December 31, 2007 and 2006 was $51,488 and $48,953,
respectively.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
5.
MINORITY INTEREST
Minority
interest represented 45% interest in Yushi. At December 31, 2007, minority
interest was zero as the minority’s share of cumulative losses exceeded its
equity interest in Yushi. Minority’s share of loss for the year ended December
31, 2007 was limited to $1,873.
6.
OTHER RECEIVABLES
Other
receivables consisted of cash advances to vendors, prepayment and deposits
for
freight insurance expense and bid, and cash advance to its employees for
normal
business purposes such as travelling expense.
7.
RELATED PARTY TRANSACTIONS
Due
from Related Party
Due
from
related party of $118,560 represent short term advance to one of the Company’s
shareholder in the amount of $13,074 at December 31, 2007; and accounts
receivables from this shareholder in the amount of $105,486 at December 31,
2007
resulting from sales to this shareholder of $174,901 for 2007 and $226,104
for
2006, respectively.
Due
to Related Party
Due
to
related party consisted of the balance of advance from same shareholder at
December 31, 2007 of $106,123 with interest rate of 6.903% per annum, principal
and interest payable upon request. During 2007 and 2006, the Company
recorded interest expense to this shareholder of $63,513 and $55,545,
respectively. Due to related party also consisted of accounts payable
arising from purchase of goods and technical support from same shareholder
in
the amount of $339,867. Purchase from this shareholder during 2007
and 2006 were $0 and $215,031, respectively.
8.
INTANGIBLE ASSETS
Intangible
assets mainly consisted of Land Use Right and working software. All land
in the
PRC is government owned and can not be sold to any individual or company.
However, the government grants the user a “land use right” (the Right) to use
the land. The Company acquired land use rights during 2005 for
$439,850. The Company has the right to use the land for 50 years and
is amortizing the Right on a straight-line basis for 50
years. Intangible assets consisted of following at December 31,
2007:
Land
use right
|
|
$
|
486,618
|
|
Software
|
|
|
140,476
|
|
|
|
|
627,094
|
|
Less:
accumulated amortization
|
|
|
(92,886
|
)
|
|
|
$
|
534,208
|
|
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
Amortization
expense for 2007 and 2006 was $52,567 and $18,669, respectively. Amortization
expense for the next five years is expected to be as follows: $11,323, $11,323,
$11,323, $11,323 and $11,323, respectively.
9.
MAJOR
CUSTOMERS AND
VENDORS
Five
major customers accounted for 51% and 53% of the Company’s net revenue for years
2007 and 2006, respectively. For year 2007, each customer accounted
for about 21%, 9%, 8%, 7% & 6% of the sales. For year 2006, each
customer accounted for about 19%, 11%, 10%, 8% and 5% of the
sales. At December 31, 2007, the total receivable balance due from
these five customers was $2,824,396
One
major
vendor provided 22% and 33% of the Company’s purchase of raw materials for 2007
and 2006. The Company did not have accounts payable to this vendor at
December 31, 2007.
10.
TAX PAYABLE
Tax
payable consisted of the following at December 31, 2007:
Income
tax payable
|
|
$
|
74,981
|
|
Value
added tax payable
|
|
|
421,009
|
|
Other
taxes payable
|
|
|
7,020
|
|
|
|
$
|
503,010
|
|
11.
OTHER PAYABLES
Other
payable mainly consisted of short term, non interest bearing advances from
third
parties and payables for the Company’s miscellaneous expenses.
12.
LOAN PAYABLE –
SHORT TERM
The
Company is obligated for the following short term loans payable as of December
31, 2007:
|
|
Balance at
December
31, 2007
|
|
Short
term loan with a commercial bank in the PRC for 6,000,000 RMB,
or
$822,526. This loan was entered into on Apr 28, 2007 and is due
on Apr 12,
2008. This loan bears interest at 7.029% per annum.
|
|
$
|
822,526
|
|
|
|
|
|
|
Short
term loan with a foreign commercial bank with branch in the PRC
for
10,200,000 RMB. This loan was entered into on Jun 25, 2007 and
is due on
Jun 24, 2008. This loan bears interest at 5.265% per
annum.
|
|
|
1,302,333
|
|
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
|
|
Balance at
December
31, 2007
|
|
The
Company entered into a series of short term loans during 2006 and
2007
with a third party company in the PRC for total of 10, 300,000
RMB. Some
of the loans will mature on various dates in year 2008 and some
of the
loans are payable on demand. These loans bear interest at 6.903%
per
annum.
|
|
|
1,412,003
|
|
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 with
another
third party company in the PRC for total of 2,850,000 RMB, or
$390,700. These loans are due on various dates in year 2008.
These loans bear interest at 6.903% per annum.
|
|
|
390,701
|
|
|
|
|
|
|
The
Company entered into a short term loan with another third party
company in
the PRC for 5,050,000 RMB. This loan was entered into on Aug
31, 2005 and was due on Aug 31, 2006. This loan bears no interest.
Imputed
interest on the loan was immaterial. This loan became payable
on demand after Aug 31, 2006. .
|
|
|
692,293
|
|
|
|
|
|
|
|
|
$
|
4,619,856
|
|
13.
INCOME TAXES
The
Company is governed by the Income Tax Law of the PRC concerning privately-run
enterprises, which are generally subject to tax at a statutory rate of 33%
on
income reported in the statutory financial statements after appropriated
tax
adjustments.
The
Company as a manufacturing business is subject to a 15% income tax
rate. The Company was exempted from income tax for two years staring
from the 1st
profitable year since incorporation, and was subject to 50% discount of 15%
income tax rate for 2005 through 2007. Net income for the years ended
December 31, 2007 and 2006 would have been lower by $175,000 and $82,000,
respectively, if the Company did not benefit the from 50% income tax
discount.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the year ended December 31, 2007:
US
statutory rates
|
|
|
34
|
%
|
Tax
rate difference
|
|
|
(1
|
)%
|
Effect
of tax holiday
|
|
|
(25
|
)%
|
Tax
per financial statements
|
|
|
8
|
%
|
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 and 2006
14.
STATUTORY RESERVES
Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company
is
now only required to maintain one statutory reserve by appropriating from
its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company is now only required to transfer 10% of its net income, as determined
under PRC accounting rules and regulations, to a statutory surplus reserve
fund
until such reserve balance reaches 50% of the Company’s registered
capital.
The
surplus reserve fund is non-distributable other than during liquidation and
can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par
value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
Common
Welfare Fund
Common
welfare fund is a voluntary fund that the Company can elect to transfer 5%
to
10% of its net income to this fund. The Company did not make any
contribution to this fund for the year ended December 31, 2007.
This
fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. This fund is non-distributable other
than
upon liquidation.
Pursuant
to the "Circular of the Ministry of Finance (MOF) on the Issue of Corporate
Financial Management after the Corporate Law Enforced" (No.67 [2006]), effective
on April 1, 2006, issued by the MOF, companies transferred the balance of
SCWF
(Statutory Common Welfare Fund) as of December 31, 2005 to Statutory Surplus
Reserve. Any deficit in the SCWF was charged in turn to Statutory Surplus
Reserve, additional paid-in capital and undistributed profit of previous
years.
If a deficit still remains, it should be transferred to retained earnings
and be
reduced to zero by a transfer from after tax profit of following years. At
December 31, 2005, the Company did not have a deficit in the SCWF.
15. SHAREHOLDERS’
EQUITY
The
Company was formed in July 2002 with paid in capital of $1,824,905 (RMB
15,000,000).
On
September 13, 2006, the shareholders injected $375,377 (RMB 3,000,000) cash
to
the Company as paid in capital. Thus, the Company’s paid in capital
was increased to $2,200,282 (RMB 18,000,000) as of December 31,
2006.
On
May
25, 2007, the shareholders approved an increased in the Company’s paid in
capital by additional $920,350 (RMB 7,000,000) by a transfer from retained
earnings.
SHENYANG
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD AND
SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMER
31, 2007 and 2006
16.
CONTINGENCIES
The
Company sold goods to its customers and received Commercial Notes from the
customers in lieu of the payments for accounts receivable. The
Company discounts the Notes with the bank or endorses the Notes to vendors,
which could be for payment of their own obligations or get cash from the
third
parties. Most of the Commercial Notes have maturity of less than six
months.
At
December 31, 2007, the Company is contingently liable to vendors for endorsed
notes receivable amounting to $77,196.
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The
Company’ s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law.
In
China, foreign exchange transactions are required by law to be transacted
only
by authorized financial institutions. Remittances in currencies other than
RMB
may require certain supporting documentation in order to affect the
remittance.
SMARTHEAT
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
AS OF
JUNE 30,
2008
|
|
AS OF
DECEMBER
31, 2007
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
& cash equivalents
|
|
$
|
207,495
|
|
$
|
393,147
|
|
Restricted
cash
|
|
|
807,709
|
|
|
537,098
|
|
Accounts
receivable, net
|
|
|
7,954,078
|
|
|
4,762,822
|
|
Retentions
receivable
|
|
|
26,552
|
|
|
191,319
|
|
Advances
to suppliers
|
|
|
2,111,461
|
|
|
158,750
|
|
Other
receivables
|
|
|
1,100,950
|
|
|
766,231
|
|
Inventories
|
|
|
5,474,046
|
|
|
7,928,408
|
|
Due
from related party
|
|
|
224,710
|
|
|
118,560
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
17,907,001
|
|
|
14,856,335
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
ASSETS
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
2,133,803
|
|
|
2,040,809
|
|
Construction
in progress
|
|
|
40,696
|
|
|
-
|
|
Accounts
receivable, net
|
|
|
-
|
|
|
949,998
|
|
Retentions
receivable
|
|
|
-
|
|
|
169,309
|
|
Intangible
assets, net
|
|
|
620,801
|
|
|
534,208
|
|
|
|
|
|
|
|
|
|
Total
noncurrent assets
|
|
|
2,795,300
|
|
|
3,694,324
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
20,702,301
|
|
$
|
18,550,659
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
4,724,904
|
|
$
|
3,128,585
|
|
Unearned
revenue
|
|
|
1,565,208
|
|
|
3,125,406
|
|
Tax
payable
|
|
|
362,121
|
|
|
503,010
|
|
Other
payables
|
|
|
1,294,697
|
|
|
807,700
|
|
Due
to related party
|
|
|
526,772
|
|
|
445,990
|
|
Loans
payable
|
|
|
4,693,917
|
|
|
4,619,856
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
13,167,619
|
|
|
12,630,547
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 75,000,000 shares authorized, 22,549,900
and
18,500,000 shares issued and outstanding at June 30, 2008 and December
31,
2007, respectively
|
|
|
22,550
|
|
|
18,500
|
|
Paid
in capital
|
|
|
3,098,082
|
|
|
3,102,132
|
|
Statutory
reserve
|
|
|
627,722
|
|
|
506,532
|
|
Accumulated
other comprehensive income
|
|
|
884,755
|
|
|
473,859
|
|
Retained
earnings
|
|
|
2,901,573
|
|
|
1,819,089
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
7,534,682
|
|
|
5,920,112
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
20,702,301
|
|
$
|
18,550,659
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SMARTHEAT
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
(Unaudited)
|
|
FOR THE SIX MONTHS
ENDED JUNE 30,
|
|
FOR THE THREE
MONTHS
ENDED JUNE 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net
sales
|
|
$
|
8,637,283
|
|
$
|
2,457,967
|
|
$
|
5,558,232
|
|
$
|
1,159,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
6,228,156
|
|
|
1,598,789
|
|
|
4,115,200
|
|
|
756,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,409,127
|
|
|
859,178
|
|
|
1,443,032
|
|
|
402,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
608,028
|
|
|
484,893
|
|
|
410,607
|
|
|
267,682
|
|
General
and administrative expenses
|
|
|
446,470
|
|
|
298,842
|
|
|
162,325
|
|
|
141,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,054,498
|
|
|
783,735
|
|
|
572,932
|
|
|
409,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
1,354,629
|
|
|
75,443
|
|
|
870,100
|
|
|
(6,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
260,683
|
|
|
164,421
|
|
|
113,545
|
|
|
95,396
|
|
Interest
expense
|
|
|
(163,040
|
)
|
|
(87,966
|
)
|
|
(96,412
|
)
|
|
(57,854
|
)
|
Other
income
|
|
|
8,290
|
|
|
12,000
|
|
|
6,116
|
|
|
10,923
|
|
Subsidy
income
|
|
|
9,141
|
|
|
51,830
|
|
|
134
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating income
|
|
|
115,074
|
|
|
140,285
|
|
|
23,383
|
|
|
48,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax
|
|
|
1,469,703
|
|
|
215,728
|
|
|
893,483
|
|
|
42,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
266,028
|
|
|
52,486
|
|
|
161,071
|
|
|
39,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
after income tax
|
|
|
1,203,675
|
|
|
163,242
|
|
|
732,412
|
|
|
3,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
minority interest
|
|
|
-
|
|
|
(1,846
|
)
|
|
-
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,203,675
|
|
|
165,088
|
|
|
732,412
|
|
|
3,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive item
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
410,896
|
|
|
77,254
|
|
|
168,802
|
|
|
39,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$
|
1,614,571
|
|
$
|
242,342
|
|
$
|
901,214
|
|
$
|
43,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
|
|
20,213,419
|
|
|
18,500,000
|
|
|
21,926,838
|
|
|
18,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share
|
|
$
|
0.06
|
|
$
|
0.01
|
|
$
|
0.03
|
|
$
|
0.00
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SMARTHEAT
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
FOR THE SIX MONTHS
ENDED JUNE 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,203,675
|
|
$
|
165,088
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
104,038
|
|
|
46,166
|
|
Unearned
interest on accounts receivable
|
|
|
(22,366
|
)
|
|
(117,709
|
)
|
Minority
interest
|
|
|
-
|
|
|
(1,846
|
)
|
(Increase)
decrease in current assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,803,120
|
)
|
|
3,199,540
|
|
Retentions
receivable
|
|
|
346,914
|
|
|
(1,695,964
|
)
|
Advances
to suppliers
|
|
|
(1,888,198
|
)
|
|
(317,223
|
)
|
Other
receivables
|
|
|
(277,990
|
)
|
|
(146,098
|
)
|
Inventory
|
|
|
2,874,481
|
|
|
(1,066,714
|
)
|
Increase
(decrease) in current liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,358,223
|
|
|
579,464
|
|
Unearned
revenue
|
|
|
(1,709,100
|
)
|
|
339,079
|
|
Tax
payable
|
|
|
(167,960
|
)
|
|
(297,687
|
)
|
Other
payables
|
|
|
423,418
|
|
|
312,857
|
|
|
|
|
|
|
|
|
|
Net
cash provided by provided by operating activities
|
|
|
442,015
|
|
|
998,953
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(229,833
|
)
|
|
(787,349
|
)
|
Acquisition
of property & equipment
|
|
|
(119,299
|
)
|
|
(20,517
|
)
|
Construction
in progress
|
|
|
(39,549
|
)
|
|
(272,577
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(388,681
|
)
|
|
(1,080,443
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Due
from / (to) shareholder
|
|
|
(44,862
|
)
|
|
(58,055
|
)
|
Short
term loan
|
|
|
(213,152
|
)
|
|
1,373,484
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(258,014
|
)
|
|
1,315,429
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
|
|
19,028
|
|
|
22,221
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
|
|
(185,652
|
)
|
|
1,256,160
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
393,147
|
|
|
202,295
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
207,495
|
|
$
|
1,458,455
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash flow data:
|
|
|
|
|
|
|
|
Income
tax paid
|
|
$
|
197,756
|
|
$
|
86,544
|
|
Interest
paid
|
|
$
|
87,887
|
|
$
|
53,909
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
SmartHeat
Inc., formerly known as Pacific Goldrim Resources, Inc. (the “Company” or
“SmartHeat”), was incorporated on August 4, 2006 in the State of Nevada. The
Company is engaged in the manufacturing and sale of plate heat exchangers and
various packages, thermo meter testing devices and heat usage calculators
through its wholly owned operating subsidiary in China.
On
April
14, 2008, the Company entered into a Share Exchange Agreement with Shenyang
Taiyu Machinery and Electronic Equipment Co., Ltd. ("Taiyu") and the Taiyu
Shareholders. The Company issued 18,500,000 shares of its common stock to
the
shareholder of Taiyu in exchange for all of the equitable and legal rights,
title and interests in and to Taiyu's share capital in the amount of RMB
25,000,000. Concurrent with the share exchange, one of SmartHeat’s shareholders
cancelled 2,500,000 shares out of 6,549,900 of total issued and outstanding
shares of SmartHeat pursuant to the Split-Off Agreement dated Aril 14, 2008.
As
a result of the share exchange and the cancellation of the 2,500,000 shares
of
the Company's common stock, there are 22,549,900 shares of the Company's
common
stock issued and outstanding, approximately 82.04% of which are held by the
former Taiyu Shareholders. The shareholders of the Company
immediately prior to the completion of these transactions hold the remaining
17.96% of the issued and outstanding share capital of SmartHeat. Taiyu became
a
wholly-owned subsidiary of SmartHeat.
Prior
to
the acquisition of Taiyu, the Company was a non-operating public shell
corporation. Pursuant to Securities and Exchange Commission ("SEC") rules,
the
merger or acquisition of a private operating company into a non-operating
public
shell corporation with nominal net assets is considered a capital transaction
in
substance, rather than a business combination. Accordingly, for accounting
purposes, the transaction has been treated as a reverse acquisition and a
recapitalization, and pro-forma information is not presented. Transaction
costs
incurred in the reverse acquisition have been charged to expense.
Taiyu
was
incorporated in the Liaoning Province, People’s Republic of China (“PRC” or
"China") in July, 2002. Taiyu is engaged in the manufacturing and sale of
plate
heat exchangers and various packages, thermo meter testing devices and heat
usage calculators. The Company is an authorized dealer of the SONDEX brand;
SONDEX is the second largest plate heat exchanger manufacturer in the
world.
The
unaudited financial statements have been prepared by the Company
pursuant to the rules and regulations of the SEC. The information
furnished herein reflects all adjustments (consisting of normal recurring
accruals and adjustments) which are, in the opinion of management, necessary
to
fairly present the operating results for the respective periods. Certain
information and footnote disclosures normally present in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules
and
regulations. These financial statements should be read in conjunction with
the 2007 audited financial statements and footnotes included in the
Company’s audited financial statements. The results for the six
months ended June 30, 2008 are not necessarily indicative of the results
to be
expected for the full year ending December 31, 2008.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of
SmartHeat, Taiyu, and Taiyu’s 55% owned subsidiary, Qingdao Yushi Heat Power
Equipment Co., Ltd ("Yushi"). Yushi is engaged in manufacturing and selling
of
heat power equipment. For purposes of this Quarterly Report, the "company"
refers collectively to SmartHeat, Taiyu and Yushi. All significant inter-company
accounts and transactions have been eliminated in consolidation.
Use
of Estimates
In
preparing the financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities at the dates of the financial
statements, as well as the reported amounts of revenues and expenses during
the
reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual
results could differ from those estimates.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all highly
liquid
investments with an original maturity of three months or less to be cash
equivalents. As of June 30, 2008 and December 31, 2007, the Company maintained
restricted cash of $807,709 and $537,098, respectively, in several bank
accounts, which was pledged for the guarantee of certain contracts execution
and
completion.
Accounts
and Retentions Receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns
to
evaluate the adequacy of these reserves. Based on historical collection
activity, the Company had allowances of $351,507 and $330,518 at June 30,
2008
and December 31, 2007, respectively.
At
June
30, 2008 and December 31, 2007, the Company had retentions receivable from
customers for product quality assurance in the amount of $26,552 and $360,628,
respectively. The retention rate varies from 5% to 20% of the sales price
with
variable terms from 3 months to two years.
Accounts
receivable is net of unearned interest of $134,831 and $148,421 at June 30,
2008
and December 31, 2007, respectively. Unearned interest represents imputed
interest on accounts receivable with due dates over one year from the invoice
date discounted at the Company's borrowing rate which was 7.04 % in 2008
and
2007.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
Inventories
Inventories
are valued at the lower of cost or market with cost determined on a moving
weighted average basis. Cost of work in progress and finished goods comprises
direct material, direct production cost and an allocated portion of production
overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals
and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method with a 10% salvage value and estimated lives ranging from 5 to 20
years
as follows:
Building
|
|
|
20
years
|
|
Vehicle
|
|
|
5
years
|
|
Office
Equipment
|
|
|
5
years
|
|
Production
Equipment
|
|
|
5-10
years
|
|
Land
Use Right
Right
to
use land is stated at cost less accumulated amortization. Amortization is
provided using the straight-line method over 50 years.
Impairment
of Long-Lived Assets
Long-lived
assets, which include property, plant and equipment and intangible assets,
are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge
is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the assets. Fair value is generally determined using the asset’s
expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company believes that, as of June 30, 2008 and December
31, 2007, there were no significant impairments of its long-lived
assets.
Income
Taxes
The
Company utilizes Statement of Financial Accounting Standards ("SFAS") No.
109,
“Accounting for Income Taxes,” which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that
have been included in the financial statements or tax returns. Under this
method, deferred income taxes are recognized for the tax consequences in
future
years of differences between the tax bases of assets and liabilities and
their
financial reporting amounts at each period end based on enacted tax laws
and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established,
when
necessary, to reduce deferred tax assets to the amount expected to be
realized.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
The
Company does not have any significant deferred tax asset or liability that
relates to tax jurisdictions not covered by the tax holiday.
The
Company adopted the provisions of the Financial Accounting Standards Board's
("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
on
January 1, 2007. As a result of the implementation of FIN 48, the Company
made a
comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by FIN 48. As a result of the implementation
of Interpretation 48, the Company recognized no material adjustments to
liabilities or shareholders’ equity. When tax returns are filed, it is highly
certain that some positions taken would be sustained upon examination by
the
taxing authorities, while others are subject to uncertainty about the merits
of
the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial
statements in the period during which, based on all available evidence,
management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with
other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more
than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken
that
exceeds the amount measured as described above is reflected as a liability
for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination.
Interest
associated with unrecognized tax benefits is classified as interest expense
and
penalties are classified as selling, general and administrative expense in
the
statements of income. The adoption of FIN 48 did not have a material impact
on
the Company’s financial statements.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin 104. Sales revenue is recognized at the date of shipment
to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectibility is reasonably assured. Payments received before all of
the
relevant criteria for revenue recognition are recorded as unearned
revenue.
Sales
revenue represents the invoiced value of goods, net of value-added tax ("VAT").
All of the Company’s products that are sold in the PRC are subject to Chinese
value-added tax of 17% of the gross sales price. This VAT may be offset by
VAT
paid by the Company on raw materials and other materials included in the
cost of
producing their finished product. The Company recorded VAT payable and VAT
receivable net of payments in the financial statements. The VAT tax return
is
filed offsetting the payables against the receivables.
Sales
and
purchases are recorded net of VAT collected and paid as the Company acts
as an
agent for the government. VAT taxes are not affected by the income tax
holiday.
Sales
returns and allowances were $0 for both the six and three months ended June
30,
2008 and 2007. The Company does not provide unconditional right of return,
price
protection or any other concessions to its customers. The Company provides
free
after-sale service for a period of one year. After-sale expense was $32,323
and
$46,997 for the six months ended June 30, 2008 and 2007 and $8,126 and $26,127
for the three months ended June 30, 2008 and 2007,
respectively.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
Cost
of Goods Sold
Cost
of
goods sold consists primarily of material costs, direct labor, and manufacturing
overhead which are directly attributable to the production of products.
Write-down of inventories to lower of cost or market is also recorded in
cost of
goods sold.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable and other receivables. The Company does
not
require collateral or other security to support these receivables. The Company
conducts periodic reviews of its clients' financial condition and customer
payment practices to minimize collection risk on accounts
receivable.
The
operations of the Company are located in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced
by
the political, economic, and legal environments in the PRC, as well as by
the
general state of the PRC economy.
Statement
of Cash Flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company's operations is calculated based upon the local currencies. As a
result,
amounts related to assets and liabilities reported on the statement of cash
flows may not necessarily agree with changes in the corresponding balances
on
the balance sheet.
Basic
and Diluted Earnings per Share (EPS)
Basic
EPS
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
similarly computed, except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares
were
dilutive. Diluted net earnings per share are based on the assumption that
all
dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to have been exercised at the beginning
of the
period (or at the time of issuance, if later), and as if funds obtained thereby
were used to purchase common stock at the average market price during the
period.
Fair
Value of Financial Instruments
SFAS
No.
107, “Disclosures about Fair Value of Financial Instruments,” requires that the
Company disclose estimated fair values of financial instruments. The carrying
amounts reported in the statements of financial position for current assets
and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the RMB (RMB). For financial reporting
purposes, RMB has been translated into United States dollars (USD) as the
reporting currency. Assets and liabilities are translated at the exchange
rate
in effect at the balance sheet date. Revenues and expenses are translated
at the
average rate of exchange prevailing during the reporting period. Translation
adjustments arising from the use of different exchange rates from period
to
period are included as a component of shareholders' equity as "Accumulated
other
comprehensive income". Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in exchange rate for the conversion of RMB to USD after the balance sheet
date.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
The
Company uses SFAS No. 130, “Reporting Comprehensive Income.” Comprehensive
income is comprised of net income and all changes to the statements of
shareholders’ equity, except those due to investments by shareholders, changes
in paid-in capital and distributions to shareholders.
Segment
Reporting
SFAS
No.
131, "Disclosures about Segments of an Enterprise and Related Information"
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company's management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company.
SFAS
131
has no effect on the Company's financial statements as substantially all
of the
Company's operations are conducted in one industry segment. All of the Company's
assets are located in the PRC.
The
Hierarchy of Generally Accepted Accounting Principles
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP)
in
the United States (the GAAP hierarchy). SFAS 162 will not have an impact
on the Company’s financial statements.
Disclosures
about Derivative Instruments and Hedging Activities
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a)
how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. Based on current conditions, the Company does not expect the
adoption of SFAS 161 to have a significant impact on its results of operations
or financial position.
Non-Controlling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51." SFAS 160
establishes new accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary.
Specifically, this statement requires the recognition of a non-controlling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent’s equity. The amount of net income attributable to
the non-controlling interest will be included in consolidated net income
on the
face of the income statement. SFAS 160 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation
are
equity transactions if the parent retains its controlling financial interest.
In
addition, this statement requires that a parent recognize a gain or loss
in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the non-controlling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its non-controlling interest. SFAS
160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Based on current conditions, the
Company does not expect the adoption of SFAS 160 to have a significant impact
on
its results of operations or financial position.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations." SFAS 141R will significantly change the accounting for business
combinations. Under SFAS 141R, an acquiring entity will be required to recognize
all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value with limited exceptions. SFAS 141R will change
the
accounting treatment for certain specific items, including:
|
·
|
Acquisition
costs will be generally expensed as
incurred;
|
|
·
|
Non-controlling
interests (formerly known as “minority interests” - see SFAS 160
discussion above) will be valued at fair value at the acquisition
date;
|
|
·
|
Acquired
contingent liabilities will be recorded at fair value at the acquisition
date and subsequently measured at either the higher of such amount
or the
amount determined under existing guidance for non-acquired
contingencies;
|
|
·
|
In-process
research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition
date;
|
|
·
|
Restructuring
costs associated with a business combination will be generally
expensed
subsequent to the acquisition date;
and
|
|
·
|
Changes
in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense.
|
SFAS
141R
also includes a substantial number of new disclosure requirements. SFAS 141R
applies prospectively to business combinations for which the acquisition
date is
on or after the beginning of the first annual reporting period beginning
on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, since
we are a calendar year-end company we will continue to record and disclose
business combinations following existing GAAP until January 1, 2009. The
Company expects SFAS 141R will have an impact on accounting for business
combinations once adopted but the effect is dependent upon acquisitions at
that
time.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
Amendment of FASB Statements No. 87, 88, 106, and 132R
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an Amendment of FASB Statements
No. 87, 88, 106, and 132R,” which requires employers to recognize the
underfunded or overfunded status of a defined benefit postretirement plan
as an
asset or liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes occur through
accumulated other comprehensive income. Additionally, SFAS 158 requires
employers to measure the funded status of a plan as of the date of its year-end
statement of financial position. The new reporting requirements and related
new
footnote disclosure rules of SFAS 158 are effective for fiscal years ending
after December 15, 2006. The Company adopted the provisions of SFAS 158 for
the
year end 2006, and the effect of recognizing the funded status in accumulated
other comprehensive income was not significant. The new measurement date
requirement applies for fiscal years ending after December 15,
2008.
Accounting
for Non-Refundable Advance Payments for Goods or Services Received for Use
in
Future Research and Development Activities
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in
Future
Research and Development Activities,” which addresses whether non-refundable
advance payments for goods or services that used or rendered for research
and
development activities should be expensed when the advance payment is made
or
when the research and development activity has been
performed. Management is currently evaluating the effect of this
pronouncement on our financial statements.
3.
INVENTORIES
Inventories
at June 30, 2008 and December 31, 2007 were as follows:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Raw
materials
|
|
$
|
4,729,093
|
|
$
|
3,865,575
|
|
Work
in process
|
|
|
486,057
|
|
|
48,627
|
|
Finished
Goods
|
|
|
258,896
|
|
|
4,014,206
|
|
Total
|
|
$
|
5,474,046
|
|
$
|
7,928,408
|
|
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at June 30, 2008 and December 31,
2007:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Building
|
|
$
|
1,727,829
|
|
$
|
1,624,651
|
|
Production
equipment
|
|
|
324,360
|
|
|
298,242
|
|
Office
equipment
|
|
|
202,132
|
|
|
156,368
|
|
Vehicles
|
|
|
143,280
|
|
|
134,724
|
|
|
|
|
2,397,601
|
|
|
2,213,985
|
|
Less:
Accumulated depreciation
|
|
|
(263,798
|
)
|
|
(173,176
|
)
|
|
|
$
|
2,133,803
|
|
$
|
2,040,809
|
|
Depreciation
expense for the six months ended June 30, 2008 and 2007 was $77,379 and $29,308;
$39,420 and $15,039 for the three months ended June 30, 2008 and 2007,
respectively.
5.
CONSTRUCTION IN PROGRESS
The
Company is in the process of constructing a warehouse for storage of the
inventory. Total construction cost is about $48,000. At June 30, 2008, the
Company had paid $40,696 for the construction.
6.
OTHER RECEIVABLES
Other
receivables consisted of cash advances to vendors, prepayment and deposits
for
freight insurance expense, guarantee deposits for public bidding, and cash
advances to employees for normal business purposes such as travel expenses.
7.
RELATED PARTY TRANSACTIONS
Due
from Related Party
Due
from
related party consisted of purchase deposits and a short term advance to
one of
the Company’s shareholders of $224,710 and $118,560 at June 30, 2008 and
December 31, 2007, respectively.
Due
to Related Party
Due
to
related party represented an advance from the same shareholder with a variable
interest rate tied to the bank interest rate (8.591% at June 30, 2008 and
6.903%
per annum as of December 31, 2007); principal and interest are payable on
demand. At June 30, 2008 and December 31, 2007, the amount due to this
shareholder was $526,772 and $445,990, respectively. For the six months ended
June 30, 2008 and 2007, respectively, the Company recorded interest expense
to
this shareholder of $5,903 and $28,167; and for the three months ended June,
30,
2008 and 2007, respectively, the Company recorded interest expense to this
shareholder of $2,995 and $14,157.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
8.
INTANGIBLE ASSETS
Intangible
assets mainly consisted of land use rights and computer software. All land
in
the PRC is government owned and cannot be sold to any individual or company.
However, the government grants the user a “land use right” to use the land. The
Company acquired land use rights during 2005 for $439,850 (RMB 3,549,682).
The
Company has the right to use the land for 50 years and is amortizing such
rights
on a straight-line basis for 50 years. Intangible assets consisted of following
at June 30, 2008 and December 31, 2007:
|
|
June 30,
2008
|
|
December
31, 2007
|
|
Land
use right
|
|
$
|
517,522
|
|
$
|
486,618
|
|
Software
|
|
|
175,696
|
|
|
140,476
|
|
|
|
|
693,218
|
|
|
627,094
|
|
Less:
accumulated amortization
|
|
|
(72,417
|
)
|
|
(92,886
|
)
|
|
|
$
|
620,801
|
|
$
|
534,208
|
|
Amortization
expense for the six months ended June 30, 2008 and 2007 was $26,320 and $10,896,
$16,185 and $5,477 for the three months ended June 30, 2008 and 2007,
respectively. Annual amortization expense for the next five years is expected
to
be as follows: $41,000, $41,000, $41,000, $11,000 and $11,000.
9.
MAJOR
CUSTOMERS AND
VENDORS
One
major
customer accounted for 19% and 28% of the Company’s net revenue for the six
months ended June 30, 2008 and 2007, respectively. One major customer accounted
for 12% and four major customers accounted for 53% of the Company’s revenue for
the three months ended June 30, 2008 and 2007, respectively. At June 30,
2008,
the total receivable balance due from this customer was $1,754,049.
Two
major
vendors provided 44% and one major vendor provided 20% of the Company’s
purchases of raw materials for the six months ended June 30, 2008 and 2007,
respectively. Two major vendors provided 27% and one major vendor provided
68%
of the Company’s purchases of raw materials for the three months ended June 30,
2008 and 2007, respectively. For the six months ended June 30, 2008, each
customer accounted for about 10% each of the total purchases. At June 30,
2008,
total payable to these two major vendors was $690,395.
10.
TAX PAYABLE
Tax
payable consisted of the following at June 30, 2008 and December 31, 2007:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Income
tax payable
|
|
$
|
149,995
|
|
$
|
74,981
|
|
Value
added tax payable
|
|
|
227,569
|
|
|
421,009
|
|
Other
taxes payable (receivable)
|
|
|
(15,443
|
)
|
|
7,020
|
|
|
|
$
|
362,121
|
|
$
|
503,010
|
|
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
11.
OTHER PAYABLES
Other
payables mainly consisted of short term, non interest bearing advances from
third parties and payables for the Company’s miscellaneous expenses.
12.
LOANS PAYABLE - SHORT TERM
The
Company is obligated for the following short term loans payable as of June
30,
2008 and December 31, 2007:
|
|
Balance
at
June
30,
2008
|
|
Balance
at
December
31,
2007
|
|
Short
term loan with a commercial bank in the PRC for 6,000,000 RMB,
or
$822,526. This loan was entered into on Apr 28, 2007 and is due
on Apr 12,
2008. This loan bears interest at 7.029% per annum. This loan was
renewed
on Apr 12, 2008 with new maturity date of June 13, 2009.
|
|
$
|
874,763
|
|
$
|
822,526
|
|
|
|
|
|
|
|
|
|
Short
term loan with a foreign commercial bank with branch in the PRC
for
10,200,000 RMB, or $1,398,295. This loan was entered into on Jun
25, 2007
and is due on Jun 24, 2008. This loan bears interest at 5.265%
per annum.
This loan was repaid in June 2008.
|
|
|
—
|
|
|
1,302,333
|
|
|
|
|
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 and
2007
with a third party company in the PRC for total of 10,300,000 RMB
or
$1,412,003. Some of the loans will mature on various dates in year
2008
and some of the loans are payable on demand. These loans bear variable
interest at 8.591% per annum for 2008 and 6.903% per annum for
2007.
|
|
|
1,233,999
|
|
|
1,412,003
|
|
|
|
|
|
|
|
|
|
The
Company entered into a series of short term loans during 2006 with
another
third party company in the PRC for total of 2,850,000 RMB, or $390,700.
These loans are due on various dates in year 2008. These loans
bear
variable interest at 8.591% per annum for 2008 and 6.903% per annum
for
2007.
|
|
|
414,834
|
|
|
390,701
|
|
|
|
|
|
|
|
|
|
The
Company entered into a short term loan with another third party
company in
the PRC for 5,050,000 RMB or $625,759. This loan was entered into
on Aug
31, 2005 and was due on Aug 31, 2006. This loan bears no interest.
Imputed
interest on the loan was immaterial. This loan became payable on
demand
after Aug 31, 2006.
|
|
|
736,259
|
|
|
692,293
|
|
|
|
|
|
|
|
|
|
The
Company entered into a short term loan on June 30, 2008 with another
third
party company in the PRC for total of 10,000,000 RMB, or $1,458,000.
This
loan is due on Sept. 30, 2008 with interest rate of 10% per
annum.
|
|
|
1,434,062
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,693,917
|
|
$
|
4,619,856
|
|
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
13.
MINORITY INTEREST
Minority
interest represented 45% interest in Yushi. At June 30, 2008 and December
31,
2007, minority interest was zero as the minority’s share of cumulative losses
exceeded its equity interest in Yushi. Minority’s share of loss for the six
months ended June 30, 2008 and 2007 were limited to $0 and $1,846, respectively.
14.
INCOME TAXES
The
Company is governed by the Income Tax Law of the PRC concerning privately-run
enterprises, which are generally subject to tax at a statutory rate of 25%
on
income reported in the statutory financial statements after appropriated
tax
adjustments.
The
Company, as a manufacturing business, is subject to a 15% income tax rate.
The
Company was exempted from income tax for two years starting from the 1st
profitable year since incorporation, and was entitled to a 50% discount on
the
15% income tax rate for 2005 through 2007. According to the new income tax
law
that became effective January 1, 2008, for those enterprises to which the
15%
tax rate applicable previously, the applicable rates shall be gradually increase
over a five-year period as follows:
Year
|
|
Tax
Rate
|
|
2007
|
|
|
15
|
%
|
2008
|
|
|
18
|
%
|
2009
|
|
|
20
|
%
|
2010
|
|
|
22
|
%
|
2011
|
|
|
24
|
%
|
2012
|
|
|
25
|
%
|
For
the
six and three months ended June 30, 2008 and 2007, the Company’s effective
income tax rate differs from US statutory rate due to the effect of tax
holiday.
15.
STATUTORY RESERVES
Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company
is
now only required to maintain one statutory reserve by appropriating from
its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus
Reserve Fund
The
Company is now only required to transfer 10% of its net income, as determined
under PRC accounting rules and regulations, to a statutory surplus reserve
fund
until such reserve balance reaches 50% of the Company’s registered capital.
The
surplus reserve fund is non-distributable other than during liquidation and
can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share
capital by issuing new shares to existing shareholders in proportion to their
shareholding or by increasing the par
value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
Common
Welfare Fund
The
common welfare fund is a voluntary fund that provides that the Company can
elect
to transfer 5% to 10% of its net income to this fund. This fund can only
be
utilized on capital items for the collective benefit of the Company’s employees,
such as construction of dormitories, cafeteria facilities, and other staff
welfare facilities. This fund is non-distributable other than upon liquidation.
16.
COMMITMENTS
The
Company leased several offices for its sales representative in different
cities
under various one-year, non-cancellable, and renewable operating lease
agreements.
Future
minimum rental payments required under these operating leases are as
follows:
Year
Ending June 30,
|
|
Amount
|
|
2009
|
|
$
|
46,000
|
|
2010
|
|
|
21,000
|
|
Total
|
|
$
|
67,000
|
|
Total
rental expense for the six months ended June 30, 2008 and 2007 was approximately
$32,000 and $19,000, and approximately $25,000 and $17,000 for the three
months
ended June 30, 2008 and 2007, respectively.
17.
CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The
Company’ s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law.
In
China, foreign exchange transactions are required by law to be transacted
only
by authorized financial institutions. Remittances in currencies other than
RMB
may require certain supporting documentation in order to affect the
remittance.
18.
SUBSEQUENT EVENTS
On
July
7, 2008, the Company completed a closing of a private placement offering
of
Units pursuant to which SmartHeat sold an aggregate of 1,620,000 Units at
an
offering price of $3.50 per Unit for aggregate gross proceeds of approximately
$5.67 million. Each "Unit" consists of one share of SmartHeat's common stock
and
a three year warrant to purchase 15% of one share of common stock at an exercise
price of $6.00 per share. The Units sold represent
an aggregate of 1,620,000 million shares of common stock and warrants to
purchase 243,000 shares of Common Stock. The warrants are immediately
exercisable and expire on the third anniversary of their issuance. In connection
with the private placement offering, the Company paid commissions and fees
totaling $311,675 and issued warrants to purchase 147,500 shares of common
stock.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
In
addition, the Company has agreed to file a registration statement with the
SEC
within 60 days of the final closing of this offering to permit resale of
the
shares and the common stock issuable upon the exercise of the warrants, make
it
effective within 180 days of the completion of the offering and to keep the
registration statement effective subject to certain allowable grace periods
as
defined in the registration rights agreement. If the Company fails to file
the
registration statements by the date required or fails to keep the registration
agreement effective, it will be obligated to pay liquidated damages equal
to 2%
of the aggregate purchase price of the shares for each year.
On
July
17, 2008, the Company granted non-statutory stock options to each of its
two
independent US directors. The terms of each option are: 10,000 shares at
an
exercise price per share of $4.60, with a life of five years and vesting
over
three years as follows: 3,333 shares shall vest on July 17, 2009; 3,333 shares
shall vest on July 17, 2010; and 3,334 shares shall vest on July 17, 2011,
subject in each case to the director continuing to be associated with the
Company as a director.
SMARTHEAT
INC. (FKA: PACIFIC GOLDRIM RESOURCES, INC.)
AND
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD.
Pro
forma Combined Balance Sheet
As
of December 31, 2007
(unaudited)
|
|
SmartHeat
|
|
Taiyu
|
|
Pro
forma
|
|
Pro
forma
|
|
|
|
(1)
|
|
(2)
|
|
Adjustments
|
|
Combined
|
|
|
|
(historical)
|
|
(historical)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,632
|
|
$
|
393,147
|
|
$
|
(7,632
|
)(b)
|
$
|
393,147
|
|
Restricted
cash
|
|
|
|
|
|
537,098
|
|
|
|
|
|
537,098
|
|
Accounts
receivable, net
|
|
|
|
|
|
4,762,822
|
|
|
|
|
|
4,762,822
|
|
Retentions
receivable
|
|
|
|
|
|
191,319
|
|
|
|
|
|
191,319
|
|
Inventory
|
|
|
|
|
|
7,928,408
|
|
|
|
|
|
7,928,408
|
|
Advances
to suppliers
|
|
|
|
|
|
158,750
|
|
|
|
|
|
158,750
|
|
Other
receivables
|
|
|
|
|
|
766,231
|
|
|
|
|
|
766,231
|
|
Due
from related parties
|
|
|
|
|
|
118,560
|
|
|
|
|
|
118,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
7,632
|
|
|
14,856,335
|
|
|
(7,632
|
)
|
|
14,856,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
|
|
|
2,040,809
|
|
|
|
|
|
2,040,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
|
|
|
949,998
|
|
|
|
|
|
949,998
|
|
Retentions
receivable
|
|
|
|
|
|
169,309
|
|
|
|
|
|
169,309
|
|
Intangible
assets, net
|
|
|
|
|
|
534,208
|
|
|
|
|
|
534,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
NONCURRENT ASSETS
|
|
|
|
|
|
1,653,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,632
|
|
$
|
18,550,659
|
|
$
|
(7,632
|
)
|
$
|
18,550,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
272
|
|
$
|
3,128,585
|
|
$
|
(272
|
)(b)
|
$
|
3,128,585
|
|
Customer
deposits
|
|
|
|
|
|
3,125,406
|
|
|
|
|
|
3,125,406
|
|
Other
payables
|
|
|
|
|
|
807,700
|
|
|
|
|
|
807,700
|
|
Tax
payable
|
|
|
|
|
|
503,010
|
|
|
|
|
|
503,010
|
|
Due
to related party
|
|
|
|
|
|
445,990
|
|
|
|
|
|
445,990
|
|
Loan
payable
|
|
|
|
|
|
4,619,856
|
|
|
|
|
|
4,619,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
272
|
|
|
12,630,547
|
|
|
(272
|
)
|
|
12,630,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
6,549
|
|
|
|
|
|
16,000
|
(a)
|
|
22,549
|
|
Additional
paid in capital
|
|
|
38,426
|
|
|
3,120,632
|
|
|
(60,975
|
)(a)
|
|
3,098,083
|
|
Statutory
reserve
|
|
|
(37,615
|
)
|
|
506,532
|
|
|
37,615
|
|
|
506,532
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
473,859
|
|
|
|
|
|
473,859
|
|
Retained
earnings
|
|
|
|
|
|
1,819,089
|
|
|
|
|
|
1,819,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
7,360
|
|
|
5,920,112
|
|
|
(7,360
|
)
|
|
5,920,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
7,632
|
|
$
|
18,550,659
|
|
$
|
(7,632
|
)
|
$
|
18,550,659
|
|
(1) |
Source: unaudited
financial statements of SmartHeat Inc. (FKA: Pacific Goldrim
Resources, Inc.) as of January 31, 2008 as filed in Quarterly Report
on
Form 10QSBfiled with the SEC on March 04,
2008.
|
(2) |
Source: audited
financial statements of Taiyu Machinery & Electronic Equipment Co.,
Ltd. as of December 31, 2007 included in this
8-K.
|
(a) |
After
cancellation of 2,500,000 shares by the old shareholders of Smartheat
and
issuance of 18,500,000 shares to the shareholder of Taiyu, total
shares outstanding after the reverse merger is
22,549,900.
|
(b) |
Spinoff
of Smartheat's assets and liabilities to shareholder as consideration
of
cancellation of shares.
|
See
accompanying notes to pro forma combined financial statements
SMARTHEAT
INC. (FKA: PACIFIC GOLDRIM RESOURCES, INC.)
AND
TAIYU MACHINERY & ELECTRONIC EQUIPMENT CO., LTD.
Pro
forma Combined Statement of Operations
As
of December 31, 2007
(unaudited)
|
|
SmartHeat
|
|
Taiyu
|
|
Pro
forma
|
|
Pro
forma
|
|
|
|
(1)
|
|
(2)
|
|
Adjustments
|
|
Combined
|
|
|
|
(historical)
|
|
(historical)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
-
|
|
$
|
13,273,151
|
|
$
|
-
|
|
$
|
13,273,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenue
|
|
|
-
|
|
|
8,667,353
|
|
|
|
|
|
8,667,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
-
|
|
|
4,605,798
|
|
|
-
|
|
|
4,605,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
-
|
|
|
1,681,624
|
|
|
|
|
|
1,681,624
|
|
General
and administrative expenses
|
|
|
30,456
|
|
|
687,466
|
|
|
|
|
|
717,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
30,456
|
|
|
2,369,090
|
|
|
-
|
|
|
2,399,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(30,456
|
)
|
|
2,236,708
|
|
|
-
|
|
|
2,206,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
175,084
|
|
|
|
|
|
175,084
|
|
Interest
expense
|
|
|
|
|
|
(230,905
|
)
|
|
|
|
|
(230,905
|
)
|
Other
income
|
|
|
|
|
|
45,126
|
|
|
|
|
|
45,126
|
|
Other
expenses
|
|
|
|
|
|
(16,939
|
)
|
|
|
|
|
(16,939
|
)
|
Subsidy
income
|
|
|
|
|
|
52,591
|
|
|
|
|
|
52,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-operating income
|
|
|
-
|
|
|
24,957
|
|
|
-
|
|
|
24,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income tax
|
|
|
(30,456
|
)
|
|
2,261,665
|
|
|
|
|
|
2,231,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
-
|
|
|
(175,647
|
)
|
|
|
|
|
(175,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
after income tax
|
|
|
(30,456
|
)
|
|
2,086,018
|
|
|
|
|
|
2,055,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
-
|
|
|
1,873
|
|
|
|
|
|
1,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
(30,456
|
)
|
$
|
2,087,891
|
|
$
|
-
|
|
$
|
2,057,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
6,549,900
|
|
|
|
|
|
|
|
|
22,549,900
|
|
(1) |
Source: audited
financial statements of SmartHeat Inc. (FKA: Pacific Goldrim
Resources, Inc.) as of October 31, 2007 as filed in annual Report
on Form
10KSB filed with the SEC on January 29,
2008.
|
(2) |
Source: audited
financial statements of Taiyu Machinery & Electronic Equipment Co.,
Ltd. as of December 31, 2007 included in this
8-K.
|
See
accompanying notes to pro forma combined financial statements
SmartHeat,
Inc. and
Taiyu
Machinery & Electronic Equipment Co., Ltd.
Notes
to Pro forma Consolidated Financial Statements
NOTE
1 -
BASIS OF PRESENTATION
Pursuant
to a share exchange agreement dated April 14, 2008, between SmartHeat Inc.
("SmartHeat"), formerly known as Pacific Goldrim Resources, Inc, and Taiyu
Machinery & Electronic Equipment Co., Ltd. ("Taiyu"), SmartHeat issued
18,500,000 shares of its common stock to acquire Taiyu. Concurrent with the
share exchange agreement, one of SmartHeat’s shareholders cancelled 2,500,000
shares out of 6,549,900 of total issued and outstanding shares of
SmartHeat.
The
accompanying pro forma consolidated balance sheet presents the accounts of
SmartHeat and Taiyu as if the acquisition of Taiyu by SmartHeat occurred
on
December 31, 2007. The accompanying pro forma consolidated statements
of operations present the accounts of SmartHeat and Taiyu for the year ended
December 31, 2007 as if the acquisition occurred on January 1, 2007 for income
statement purpose. For accounting purposes, the transaction is being accounted
for as a recapitalization of Taiyu as Taiyu’s shareholders will own the majority
of the shares and will exercise significant influence over the operating
and
financial policies of the consolidated entity.
The
following adjustments would be required if the acquisition occurred as indicated
above:
a. |
Recapitalization
of Taiyu to account for issuance of an aggregate of 18,500,000
shares of
SmartHeat to the shareholders of Taiyu, the
total issued and outstanding shares after the reverse merger
were
22,549,900;
|
b. |
Cancellation
of 2,500,000 shares of SmartHeat common stock owed by major shareholder,
officers of Goldrim and public
float as part of the transaction. The assets and liabilities
of SmartHeat
were
spun off to the shareholder as consideration of the cancellation
of
2,500,000
shares owned by the
shareholder.
|
No
dealer, salesman or any other person has been authorized to give any information
or to make any representations other than those contained in this prospectus
in
connection with the offer made by the prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by SmartHeat Inc. This prospectus does not constitute an offer to sell or
solicitation of an offer to buy any securities in any jurisdiction in which
such
offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it
is
unlawful to make such offer or solicitation. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstance, create
any
implication that there has been no change in the affairs of SmartHeat Inc.
or
that the information contained herein is correct as of any time subsequent
to
the date hereof.
SMARTHEAT
INC.
2,023,000
SHARES OF COMMON STOCK
PRELIMINARY
PROSPECTUS
Part
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following is an estimate of the expenses which will be incurred by the Company
in connection with the issuance and distribution of the securities being
registered.
The
following table sets forth the estimated costs and expenses of the Registrant
in
connection with the offering described in the registration
statement.
SEC
Registration Fee
|
|
$
|
|
|
Printing
Expenses
|
|
$
|
|
|
Accounting
Fees and Expenses
|
|
$
|
|
|
Legal
Fees and Expenses
|
|
$
|
|
|
Miscellaneous
|
|
$
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
Section
78.138 of the Nevada Revised Statutes provides that a director or officer is
not
individually liable to the corporation or its shareholders or creditors for
any
damages as a result of any act or failure to act in his capacity as a director
or officer unless it is proven that (1) his act or failure to act constituted
a
breach of his fiduciary duties as a director or officer and (2) his breach
of
those duties involved intentional misconduct, fraud or a knowing violation
of
law.
This
provision is intended to afford directors and officers protection against and
to
limit their potential liability for monetary damages resulting from suits
alleging a breach of the duty of care by a director or officer. As a consequence
of this provision, shareholders of our company will be unable to recover
monetary damages against directors or officers for action taken by them that
may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within one of the foregoing exceptions. The provision,
however, does not alter the applicable standards governing a director’s or
officer’s fiduciary duty and does not eliminate or limit the right of our
company or any shareholder to obtain an injunction or any other type of
non-monetary relief in the event of a breach of fiduciary duty.
Item
15. Recent Sales of Unregistered Securities
On
August
8, 2006, we issued 2,500,000 shares of common stock to Mr. Jason Schlombs in
consideration of $ 0.001 per share or a total of $2,500 in a transaction exempt
from the registration requirements of the Securities Act pursuant to Regulation
S promulgated by the SEC thereunder.
On
August
25, 2006, we issued 4,000,000 shares of common stock to 15 individuals for
consideration of $0.0075 per share for a total of $30,000 in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Regulation S promulgated by the SEC thereunder.
On
August
31, 2006, we issued 49,900 shares of common stock to 18 individuals in
consideration of $0.25 per share for a total of $12,475 in a transaction exempt
from the registration requirements of the Securities Act pursuant to Regulation
S promulgated by the SEC thereunder.
On
July
7, 2008, we sold an aggregate of 1,620,000 Units at an offering price of $3.50
per Unit for aggregate gross proceeds of approximately $5.67 million. Each
"Unit" consisted of one share of our common stock and a three year warrant
to
purchase 15% of one share of our common stock at an exercise price of $6.00
per
share (the "Warrants"). The Units sold represent an aggregate of 1,620,000
million shares of Common Stock and Warrants to purchase 243,000 shares of Common
Stock. The offering and sale of the Units was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act and Regulation D and Regulation S promulgated by the SEC thereunder. We
compensated three placement agents that assisted in the sale of the Units in
this private placement offering by (i) paying them cash equal to 6.5% of the
gross proceeds from the sales of Units placed and (ii) issuing them Warrants
to
purchase that number of shares of Common Stock equal to 10% of the Units placed
as follows:
Placement
Agent
|
|
Cash
|
|
Warrants
|
|
Rodman
& Renshaw, LLC
|
|
$
|
23,888
|
|
|
56,500
|
|
Maxim
Group LLC
|
|
$
|
104,650
|
|
|
—
|
|
Four
Tong Investments Ltd.
|
|
$
|
207,025
|
|
|
91,000
|
|
The
Warrants granted to these placement agents had the same terms and conditions
as
the Warrants granted in the offering.
On
August
22, 2008, we sold an 10,000 Units at an offering price of $3.50 per Unit for
gross proceeds of approximately $35,000. The offering and sale of the Units
was
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act and Regulation D promulgated by the SEC
thereunder. We
paid
Seaboard Securities $2,275 and issued to Seaboard Securities Warrants to
purchase 1,000 shares of our common stock in connection with this transaction.
Item
16. Exhibits and Financial Statement Schedules
The
following is a complete list of Exhibits filed as part of this Registration
Statement, which are incorporated herein:
Number
|
Description
|
|
|
2.1
|
Share
Exchange Agreement and Plan of Reorganization by and among SmartHeat
Inc.
("SmartHeat"), Shenyang Taiyu Electronic & Machinery Co., Ltd.
("Taiyu") and all of the shareholders of Taiyu (the "Taiyu Shareholders")
dated April 14, 2008 (Incorporated herein by reference to Exhibit
2.1 to
the Current Report on Form 8-K filed on April 18, 2008)
|
|
|
2.2
|
Articles
of Exchange between Taiyu and SmartHeat, dated April 14, 2008
(Incorporated herein by reference to Exhibit 2.2 to the Current Report
on
Form 8-K filed on April 18, 2008)
|
|
|
2.3
|
Articles
of Merger between Pacific Goldrim Resources, Inc. and SmartHeat,
dated
April 14, 2008 (Incorporated herein by reference to Exhibit 2.3 to
the
Current Report on Form 8-K filed on April 18, 2008)
|
|
|
3(i)
|
Certificate
of Incorporation (Incorporated herein by reference to Exhibit 3.2
to the
Company's Form SB-2 filed on December 22,
2006)
|
3(ii)
|
Amended
and Restated By-Laws adopted April 15, 2008 (Incorporated herein
by
reference to Exhibit 3(ii) to the Current Report on Form 8-K filed
on October 16, 2008)
|
|
|
4.1
|
Specimen
Stock Certificate (to be filed by amendment).
|
|
|
4.2
|
Form
of Common Stock Purchase Warrant forming part of Units sold, and
also
issued as compensation to selected dealers in our private placement
offering that had a final closing in August 2008. (Incorporated herein
by
reference to Exhibit 10.13 to the Current Report on Form 8-K filed
on July
11, 2008)
|
|
|
5.1
|
Opinion
of Buchanan Ingersoll & Rooney, PC (to be filed by
amendment)
|
|
|
10.1
|
English
Translation of Employment Agreement between Taiyu and Jun Wang, dated
January 1, 2008 (Incorporated herein by reference to Exhibit 10.1
to the
Current Report on Form 8-K filed on April 18, 2008)
|
|
|
10.2
|
English
Translation of Employment Agreement between Taiyu and Zhijuan Guo,
dated
January 1, 2008 (Incorporated herein by reference to Exhibit 10.2
to the
Current Report on Form 8-K filed on April 18, 2008)
|
|
|
10.3
|
Certificate
of Appointment by Sondex A/S of Taiyu as Authorized Dealer in China,
dated
March 2006 and letter naming Taiyu as Dealer of North China,
dated May 5, 2006 (Incorporated herein by reference to Exhibit 10.3
to the
Current Report on Form 8-K filed on April 18, 2008)
|
|
|
10.4
|
Form
of Purchase Order for with Sondex A/S (Incorporated herein by reference
to
Exhibit 10.4 to the Current Report on Form 8-K filed on April 18,
2008)
|
|
|
10.5
|
English
Translation of Sales Contract between Taiyu and Dalkia (Jiamusi)
Urban
Heating Company Ltd, dated June 18, 2007 (Incorporated herein by
reference
to Exhibit 10.5 to the Current Report on Form 8-K filed on April
18,
2008)
|
|
|
10.6
|
Form
of Purchase Order (Incorporated herein by reference to Exhibit 10.6
to the
Current Report on Form 8-K filed on April 18, 2008)
|
|
|
10.7
|
English
Translation of Loan Agreement with Citibank (China) Co., Ltd., dated
June
25, 2007 (Incorporated herein by reference to Exhibit 10.7 to the
Current
Report on Form 8-K filed on April 18, 2008)
|
|
|
10.8
|
English
Translation of Loan Agreement with China CITIC Bank, dated April
17, 2007
(Incorporated herein by reference to Exhibit 10.8 to the Current
Report on
Form 8-K filed on April 18, 2008)
|
|
|
10.9
|
Resignation
Letter from Jason Schlombs, dated April 15, 2008 (Incorporated herein
by
reference to Exhibit 10.9 to the Current Report on Form 8-K filed
on April
18, 2008)
|
|
|
10.10
|
Agreement
of Conveyance, Transfer and Assignment of Assets and Assumption of
Obligations between SmartHeat and Goldrim Holding, Inc., dated April
14,
2008 (Incorporated herein by reference to Exhibit 10.10 to the Current
Report on Form 8-K filed on April 18,
2008)
|
10.11
|
Stock
Purchase Agreement between Jason Schlombs and SmartHeat, dated April
14,
2008 (Incorporated herein by reference to Exhibit 10.11 to the Current
Report on Form 8-K filed on April 18, 2008)
|
|
|
10.12
|
Form
of Registration Rights Agreement in connection with Units sold in
our
private placement offering completed in August 2008 (Incorporated
herein
by reference to Exhibit 10.13 to the Current Report on Form 8-K filed
on
July 11, 2008)
|
|
|
10.13
|
English
Translation of Share Exchange Agreement dated September 25, 2008
between
the Company and Asialink (Far East) Limited
|
|
|
21
|
Subsidiaries
|
|
|
23.1
|
Consent
of Buchanan Ingersoll & Rooney, PC (to be included in Exhibit 5.1,
filed by amendment)
|
|
|
23.2
|
Consent
of Goldman Parks Kurland Mohidin, LLP, independent registered public
accounting firm
|
Item
17. Undertakings
The
undersigned Registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2)
That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
That,
for the purpose of determining liability under the Securities Act of 1933 to
any
purchaser:
(i) If the undersigned Registrant is relying on Rule 430B:
(A) Each prospectus filed by the Registrant pursuant to Rule 424(b)(3) shall
be
deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or
(b)(7) as part of a registration statement in reliance on Rule 430B relating
to
an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose
of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement
as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter,
such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall
be
deemed to be the initial bona fide offering thereof, Provided however, that
no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of
the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made
in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date;
or
(ii) If the undersigned Registrant is subject to Rule 430C, each prospectus
filed pursuant to Rule 424(b) as part of a registration statement relating
to an
offering, other than registration statements relying on Rule 430B or other
than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of
and
included in the registration statement as of the date it is first used after
effectiveness. Provided however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made
in a
document incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as
to a
purchaser with a time of contract of sale prior to such first use, supersede
or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such date of first use.
(5)
That,
for the purpose of determining liability of the undersigned Registrant under
the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities, the undersigned Registrant undertakes that in a primary offering
of
securities of the undersigned Registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities
to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned Registrant will be
a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned Registrant
relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned Registrant or used or referred to by the undersigned
Registrant;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned Registrant or its
securities provided by or on behalf of the undersigned Registrant;
and
(iv) Any other communication that is an offer in the offering made by the
undersigned Registrant to the purchaser.
(6)
Insofar as indemnification for liabilities arising under the Securities Act
of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be governed
by
the final adjudication of such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing this Registration Statement on Form S-1 and authorized
this Registration Statement to be signed on its behalf by the undersigned,
in
Shenyang, China, on the date indicated below.
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SMARTHEAT
INC
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Date:
October 17, 2008
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By:
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/s/
Jun Wang
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Jun
Wang
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Chief
Executive Officer
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Date:
October 17, 2008
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By:
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/s/
Zhijuan Guo
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Zhijuan
Guo
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Chief
Financial Officer
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KNOW
ALL
MEN BY THESE PRESENTS, that each of the undersigned directors of
SmartHeat Inc. hereby constitutes and appoints Jun Wang, his true and
lawful attorney-in-fact and agent, with full power of substitution, for him
and
on his behalf and in his name, place and stead, in any and all capacities,
to
sign, execute and file any and all amendments to this Form S-1, with all
exhibits thereto, and other documents in connection therewith, with the SEC,
granting unto said attorney-in-fact full power and authority to do so and
perform each and every act and thing requisite and necessary to be done in
and
about the premises in order to effectuate the same as full to all intents and
purposes as he himself might or could do if personally present, thereby
ratifying and confirming all that said attorneys-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be
done.
In
accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
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Title
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Date
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/s/
Jun Wang
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Chairman
of the Board, President & Chief Executive Officer
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October
17, 2008
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Jun
Wang
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/s/
Zhijuan Guo
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Chief
Financial Officer and Treasurer
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October
17, 2008
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Zhijuan
Guo
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/s/
Frederick Rittereiser
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Director
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October
17, 2008
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Frederick
Rittereiser
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/s/
Arnold Staloff
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Director
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October
17, 2008
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Arnold
Staloff
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/s/
Weiguo Wang
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Director
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October
17, 2008
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Weiguo
Wang
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Exhibit
Number
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Description
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10.13
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English
Translation of Share Exchange Agreement dated September 25, 2008
between
the Company and Asialink (Far East) Limited
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21
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Subsidiaries
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23.2
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Consent
of Goldman Parks Kurland Mohidin,
LLP
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