AS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON MARCH
24, 2009
REGISTRATION
NO. 333-154415
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1/A
AMENDMENT
NO. 3
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:
Robert
Newman, Esq.
The
Newman Law Firm, PLLC
14
Wall Street, 20th
Floor
New
York, NY 10005
(212)
618 1968
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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o
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Accelerated
Filer
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o
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Non-accelerated
filer
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o
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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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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, MARCH 24, 2009
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 Nasdaq Global Market under the symbol “HEAT.”
The closing price of our common stock on the Nasdaq Global Market
on March 20, 2009 was $6.10 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 preliminary prospectus is March 24, 2009.
TABLE
OF CONTENTS
ABOUT
THIS PROSPECTUS
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3
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PROSPECTUS
SUMMARY
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3
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RISK
FACTORS
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4
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FORWARD-LOOKING
STATEMENTS
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16
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AVAILABLE
INFORMATION
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17
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USE
OF PROCEEDS
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17
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MARKET
FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
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18
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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19
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OUR
BUSINESS
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26
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OUR
PROPERTY
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33
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LEGAL
PROCEEDINGS
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33
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MANAGEMENT
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34
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
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37
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EXECUTIVE
COMPENSATION
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38
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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40
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SELLING
SHAREHOLDERS
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42
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PLAN
OF DISTRIBUTION
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47
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DESCRIPTION
OF SECURITIES
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49
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INTEREST
OF NAMED EXPERTS
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49
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LEGAL
MATTERS
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50
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INDEMNIFICATION
OF DIRECTORS AND OFFICERS
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51
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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
4.
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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 March 20,
2009.
RISK
FACTORS
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.
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 particular, an economic
slowdown in the domestic economy may result in reduced orders for PHEs from the
steel processing and petrochemical sectors and lower orders for PHE Units from
the HVAC sector. To date, the Company has not been adversely affected
by these trends and given the current demand visibility we do not currently
foresee weakening in the demand for our products in the next
year. However, the 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
ten largest customers accounted for 32% of our revenues for the year ended
December 31, 2008. Our largest customer accounted for 6% of our revenues in the
year ended December 31, 2008. 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 our 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 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
Our
common stock price is subject to significant volatility, which could result in
substantial losses for investors.
During
the nine month period ended January 28, 2009, the high and low bid prices of our
common stock on the Over-The-Counter Bulletin Board ("OTCBB") were $6.50 per
share and $2.00 per share, respectively. We began trading on the Nasdaq Stock
Market on January 29, 2009 and were subsequently listed on the Nasdaq Global
Market on March 10, 2009. The high and low sales prices of our common stock were
$7.50 and $4.11, from January 29, 2009 to March 20, 2009. Prices for
our shares are determined in the marketplace and may accordingly be influenced
by many factors, including, but not limited to:
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the
depth and liquidity of the market for the
shares;
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quarter-to-quarter
variations in our operating
results;
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announcements
about our performance as well as the announcements of our competitors
about the performance of their
businesses;
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investors'
evaluations of our future prospects and the food industry
generally,
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changes
in earnings estimates by, or failure to meet the expectations of,
securities analysts;
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our
dividend policy; and
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general
economic and market conditions.
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In
addition, the stock market often experiences significant price fluctuations that
are unrelated to the operating performance of the specific companies whose stock
is traded. These market fluctuations could adversely affect the trading price of
our shares.
The price
at which investors purchase shares of our common stock may not be indicative of
the price that will prevail in the trading market. Investors may be unable to
sell their shares of common stock at or above their purchase price, which may
result in substantial losses.
Shares
of our common stock lack a significant trading market.
On
April 22, 2008, shares of our common stock began trading on the OTCBB. On
January 29, 2009, shares of our common stock began trading on the Nasdaq Stock
Market and were subsequently listed on the Nasdaq Global Market on March 10,
2009. Since April 22, 2008, our average daily trading volume has been less than
10,000 shares per day. As with most initial listings on the Nasdaq Stock Market,
it will take time for a significant active trading market in our common stock to
develop. There can be no assurance that a significant active trading market in
our common stock will develop, or if such a market develops, that it will be
sustained.
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 50% of the equity in
Beijing YSKN Machinery & Electronic Equipment Co., Ltd ("YSKN"), a company
which is the record holder of 28.16% 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 of 1933, as amended (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 -
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;
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our
ability to attract and retain quality employees;
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our
ability to pursue strategic acquisitions and alliances;
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competition
in our industry in China;
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general
economic and business conditions in the regions in which we sell our
products;
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relevant
government policies and regulations relating to our industry;
and
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market
acceptance of our products.
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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 publicly
available government publications. 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
This
prospectus is part of a Registration Statement on Form S-1 we have filed with
the SEC. We have not included in this prospectus all of the information
contained in the registration statement and you should refer to our registration
statement and its exhibits for further 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
On
April 22, 2008, our common stock became eligible for quotation on the OTCBB
under the symbol "SMHT." The following table set forth the range of the high and
low bid prices per share of our common stock for each quarter (or portion
thereof) beginning on April 22, 2008 and ending on March 9, 2009 as reported by
the OTC Bulletin Board. These quotations represent inter-dealer prices, without
retail mark-up, markdown, or commission and may not represent actual
transactions..
|
|
High
|
|
|
Low
|
|
Second
Quarter 2008 (April 22, 2008 - June 30, 2008)
|
|
$
|
4.60
|
|
|
$
|
2.00
|
|
Third
Quarter 2008 (through September 30, 2008)
|
|
$
|
4.75
|
|
|
$
|
4.50
|
|
Fourth
Quarter 2008 (through December 31, 2008)
|
|
$
|
6.50
|
|
|
$
|
2.25
|
|
First
Quarter 2009 (January 1, 2009 through January 28,
2009)
|
|
$
|
6.20
|
|
|
$
|
5.50
|
|
On
January 29, 2009, our common stock commenced trading on the Nasdaq Stock Market
under the symbol "HEAT" and were subsequently listed on the Nasdaq Global Market
on March 10, 2009. The high and low sales prices of our common stock
from January 29, 2009 through March 20, 2009 were $7.50 and $4.11, respectively.
On March 20, 2009, the closing sales price of our common stock was
$6.10.
Holders
As
of March 10, 2009, there were 149 shareholders of record of our common
stock. Since some of our shares of common stock are held in street or
nominee name, it is believed that there are a substantial number of additional
beneficial owners of our common stock.
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. Our quarterly revenues may fluctuate significantly due to the seasonal
nature of central heating services in the PRC, whereas, the equipment used in
residential building s must be delivered and installed prior to the beginning of
the heating season in late fall. Additionally, 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. In particular, our 2009 sales
may be affected by weaker demand from steel processing, petrochemical and HVAC
sectors. To date, we have not been adversely affected by these
trends. Moreover, the PRC government has recently passed an economic stimulus
package and we believe that our sales will benefit from an increase in
government spending on infrastructure as provided in this
package. However, 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 2 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
Our
financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America.
Principle
of Consolidation
The
accompanying consolidated financial statements include the accounts of
SmartHeat, SanDeKe, Taiyu, Taiyu’s 55% owned subsidiary, Qingdao Yushi Heat
Power Equipment Co., Ltd ("Yushi") which also disposed by the Company in August,
2008. Yushi is engaged in manufacturing and selling of heat power equipment. For
purposes of this Annual Report, the "Company" refers collectively to SmartHeat,
SanDeKe, 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, allowance for doubtful accounts, and the
reserve for obsolete and slow-moving inventories. Actual results could differ
from those estimates.
Accounts
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
|
Vehicles
|
5
years
|
Office
Equipment
|
5
years
|
Production
Equipment
|
5
- 10 years
|
Revenue
Recognition
Our
revenue recognition policies are in compliance with Securities and Exchange
Commission (SEC) Staff Accounting Bulletin (“SAB”) 104. Sales revenue is
recognized when products are delivered, and for PHE and PHE units, when customer
acceptance occurs, the price is fixed or determinable, 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.
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
Accounting
for Financial Guarantee Insurance Contracts
In May
2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60.” The scope of this
Statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This Statement
also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s financial statements.
The
Hierarchy of Generally Accepted Accounting Principles
In May
2008, 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 adoption will not have an impact on
the Company’s financial statements.
Disclosures
about Derivative Instruments and Hedging Activities
In
March 2008, 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.
Fair
value of measurements
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements.”
SFAS 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures.. The three levels are defined as
follow:
|
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
As of
December 31, 2008, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair
value.
Non-Controlling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51
In
December 2007, 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. The Company expects SFAS 160 will
have an impact on accounting for business combinations once adopted but the
effect is dependent upon acquisitions at that time.
Business
Combinations
In
December 2007, 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 the Company is a calendar year-end company and 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.
Accounting
for Non-Refundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities
In
June 2007, 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. EITF 07-03
is effective for fiscal years beginning after December 15, 2008. Management
is currently evaluating the effect of this pronouncement on our financial
statements.
Results
of Operations
Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007
The
following table sets forth the results of our operations for the years indicated
as a percentage of net sales:
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
% of Sales
|
|
Sales
|
|
|
32,676,082
|
|
|
|
|
|
|
13,273,151
|
|
|
|
|
Cost
of sales
|
|
|
21,717,735
|
|
|
|
66.0
|
%
|
|
|
8,667,353
|
|
|
|
65.0
|
%
|
Gross
Profit
|
|
|
10,958,347
|
|
|
|
34.0
|
%
|
|
|
4,605,798
|
|
|
|
35.0
|
%
|
Operating
Expenses
|
|
|
3,416,670
|
|
|
|
10.0
|
%
|
|
|
2,369,090
|
|
|
|
18.0
|
%
|
Income
from Operation
|
|
|
7,541,677
|
|
|
|
23.0
|
%
|
|
|
2,236,708
|
|
|
|
17.0
|
%
|
Other
Income (Expenses), net
|
|
|
93,289
|
|
|
|
0.3
|
%
|
|
|
24,957
|
|
|
|
0.2
|
%
|
Net
Income
|
|
|
6,335,340
|
|
|
|
19.0
|
%
|
|
|
2,087,891
|
|
|
|
16.0
|
%
|
Sales. Net sales for 2008
were approximately $32.68 million, while our net sales in 2007 were
approximately $13.27 million, an increase in revenues of $19.40 million, or
146%. Approximately $14.76 million of the increase in sales was
attributable to an increase in our sales volume with selling price determined
based on our standard profit margin rate, of which, $10.57 million of increased
sales was from our existing customers and $4.19 million of increased sales was
from the new customers. We have a strict review process for approving each sales
contract, especially with respect to the determination of selling
price. Sales price under each contract is determined in proportion to
our estimated cost in order to ensure our gross profit. Our selling
price varies on each sale which mainly depends on each customer’s specific needs
and our negotiation of the contract amount and term. At September 23, 2008, we
acquired SanDeKe Co., Ltd (“SanDeKe”) which brought us additional $1.98 million
sales for 2008. We have also increased the number of our branch
offices and sales representatives throughout China to develop new customers in
more regions. These new regions’ developments that occurred during 2008
accounted for approximately $2.07 million of the increase in our
revenues. In addition, we’ve increased our sales of heat meters by
approximately $0.52 million due to increased demand. As we continue
to expand our customer base and increase our sales volume, we become less
dependent on these customers for revenue. 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 2008 was approximately $21.72 million, while our
cost of sales in 2007 was approximately $8.67 million, an increase of $13.05
million, or 151%. Cost of sales mainly consisted of the cost of
materials and labor, as well as factory overhead costs, with material costs
accounting for 70% or more of our total cost of sales. The increase
in cost of sales can be attributed to the increase of production and sales
volume in 2008. Cost of sales as a percentage of sales was
approximately 66% for 2008 and 65% for 2007. The slight increase in cost of
sales was mainly due to relatively high cost of plate heat exchanger from
SanDeKe. SanDeKe only produces plate heat exchanger which normally
has relatively higher cost of sales as a percentage of sales comparing with
assembled heat exchange unit and meter. Even though raw materials are
major components in the determination of our cost of sales, a change in the
pricing of our raw materials would not adversely impact our
revenue. We utilize a common pricing strategy in our industry,
adjusting the price of our product as the cost of raw materials
changes. As a result, we generally increase our sales price when raw
material prices increase and decrease our sales price to remain competitive when
raw material prices decrease. We believe our cost of sales will
remain stable as a result of our current pricing strategy and the continued
improvement in the efficiency of our manufacturing facility.
Gross
Profit. Gross profit was $10.96 million for 2008, as compared
to $4.61 million for 2007, representing gross margins of approximately 34% and
35% for 2008 and 2007, respectively. The increase in our gross
profits but slight decrease in gross profit margin was mainly due to the
increase of cost of goods sold as percentage of sales while the company’s sales
activities increased.
Operating
Expenses. Operating expenses consisted of selling, general and
administrative expenses totaled approximately $3.42 million for 2008, as
compared to $2.37 million for 2007, an increase of approximately $1.05 million
or 44%. The increase in operating expenses was mainly due to a
proportional increase in payroll, insurance, employee welfare and travel
expenses with our increased sales and production; as well as the increase in
audit, legal, consulting and filing expenses in connection with the Company of
being public in US since April of 2008.
Net Income. Our
net income for 2008 was $6.34 million as compared to approximately $2.09 million
for 2007, an increase of $4.25 million or 203%. 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.
Liquidity
and Capital Resources
As of
December 31, 2008, we had cash and cash equivalents of approximately $1.44
million. Working capital was approximately $13.64 million at December 31,
2008. The ratio of current assets to current liabilities was 2.90:1 at December
31, 2008.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during years ended December 31, 2008 and
2007:
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
Operating
Activities
|
|
$
|
(761,033
|
)
|
|
$
|
(2,041
|
)
|
Investing
Activities
|
|
|
(507,110
|
)
|
|
|
(1,045,195
|
)
|
Financing
Activities
|
|
|
2,307,620
|
|
|
|
1,216,723
|
|
Net
cash flow used in operating activities was $761,033 in 2008, as compared to net
cash flow used in operating activities of $2,041 in 2007. The increase in net
cash flow used in operating activities in 2008 was mainly due to $2.39 million
cash paid for accounts payable as we’ve increased our purchase due to increased
production, less unearned revenue received from customers for approximately
$2.99 million and increases in our accounts receivables and retention
receivables of approximately $5.02 million. Our net income has increased
rapidly compared to 2007 which brought more cash to the company, but at the same
time, our accounts receivable have increased which held back our cash inflows.
The significant increase in accounts receivable was due to the rapid increase in
our sales with most of our accounts receivables aging within one year from the
sales recognition date. Our inventory generally decreases in the
latter part of the year as a significant share of PHE Unit deliveries must be
completed by the beginning of heating season in late fall, which brought us
about $2.41 million cash inflow.
Net
cash flow used in investing activities was $507,110 in 2008, as compared to net
cash used in investing activities of $1,045,195 in 2007. The decrease
of net cash flow used in investing activities in year 2008 was mainly due to
less cash spend for acquisition of manufacturing equipment, office equipment and
furniture during the year.
Net
cash flow provided by financing activities was $2,307,620 in 2008 as compared to
net cash provided by financing activities of $1,216,723 in 2007. The increase of
net cash flow provided by financing activities in 2008 was mainly due to net
proceeds of $5,100,000 from the shares issued despite repayments of $2.79 for
the loans from third parties and shareholders during the year.
Our
products are generally paid for within one year from the date of sale; 30% of
the purchase price is due upon the placement of an order, 30% is due on delivery
and 30% is due within few months after the customer’s acceptance depending on
the actual terms negotiated with the customer. The final 10% of the
purchase price may remain outstanding for up to 24 months as a quality assurance
and is accounted for in our financial statements as Retentions Receivable.
Indirect sales through distributors are usually paid in full on delivery.
Our accounts receivable turnover and inventory turnover are relatively low, and
days sales outstanding ratio relatively high. Consequently, collection on our
sales is rather slow and capital is tied up in inventories which may result in
pressure on cash flows. For 2008, we had accounts receivable turnover of 3.6,
with days sales outstanding of 136 and inventory turnover of 3.1 on an
annualized basis. For 2007, we had accounts receivable turnover of
2.8, with days sales outstanding of 167 and inventory turnover of 1.09 on an
annualized basis.
We are
in the manufacturing and processing business. We purchase substantial
amounts of raw materials before the high season (mid-April to mid-October)
starts to meet production needs. There is no concern about inventory
obsolescence since our product can be sold for a profit without time limitation
as long as there is continued demand. Additionally, we have increased
our sales force for developing new customers, which we believe will reduce
on-hand inventory levels and increase inventory turnover going
forward. Therefore, we believe the potential risks and uncertainties
associated with lower inventory turnover are limited.
90% of
the purchase price for our products can be collected within one year of sale;
however, it may take up to 24 months to receive payment of the remaining 10% of
the purchase price on each sale. This is the normal practice in the
heating manufacturing business. In addition, we sometimes request our
customers to deposit 5%-10% of the sales price on high value products like
assembled heat exchanger unit and main part of plate heat exchanger into
designated bank accounts as restricted cash for securing the payment after the
quality assurance (warranty) period expires. Based on our historical
experience, default on payment from our customers is very
rare. Therefore, we believe the potential risks and uncertainty
associated with high days outstanding of receivable are also very
limited.
Recent
Developments
There
have been no material trends, events or transactions that have arisen subsequent
to December 31, 2008 that have affected our financial condition and results of
operations.
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.
Contractual
Obligations
The
Company was obligated for the following short term loans payable as of December
31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
Short
term loan with a commercial bank in the PRC for 6,000,000 RMB. This loan
was entered into on Apr 28, 2007 and is due on Apr 12, 2008. This loan was
renewed on Apr 12, 2008 with new maturity date on June 13, 2009. This loan
currently bears interest at 7.159% per annum. The Company
pledged its building in the value of approximately RMB 12,430,950 or
approximately $1,818,000 for this loan.
|
|
$
|
877,886
|
|
|
$
|
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 was due on
Jun 24, 2008. This loan born 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. 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. The Company
repaid RMB 2,600,000 in 2008 and had RMB 7,700,000 outstanding as of
December 31, 2008.
|
|
|
1,126,621
|
|
|
|
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. These loans
were due on various dates in year 2008. These loans bore variable interest
at 8.591% per annum for 2008 and 6.903% per annum for 2007. The
loans were paid in full at December 31, 2008.
|
|
|
-
|
|
|
|
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. This loan was paid in full at December 31, 2008.
|
|
|
-
|
|
|
|
692,293
|
|
|
|
|
|
|
|
|
|
|
The
Company entered into a one year loan on July 1, 2008 with another third
party company in the PRC for total of 3,000,000 RMB. This loan is due on
June 30, 2009 with interest rate of 8.591% per annum.
|
|
|
438,943
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,443,450
|
|
|
$
|
4,619,856
|
|
OUR
BUSINESS
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 an authorized dealer of Sondex PHEs for the
industrial and energy sectors in China. Our Sondex distribution territory is
northern and eastern China..
Our
Products
PHEs
A
plate heat exchanger (“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. Plates come in a
variety of sizes and wave patterns, have large heat transfer surfaces and high
thermal conductivity. 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. Because of the
larger heat transfer surface area of the PHE, and despite its relatively small
size, PHEs have higher heat transfer coefficient than the traditional
shell-and-tube heat exchangers..
Heat
exchangers were first invented in the mid 1920s to control pressure and
temperature during industrial production. Later innovations in heat transfer
technology, including the development of PHEs, led to higher heat recovery rates
leading to greater savings in fuel consumption and reductions in related
pollution. In the diagram, cold and hot fluids (red and blue arrows) enter heat
exchanger from opposite ends and flow in opposite directions through the plate
heat exchanger maximizing heat transfer from one fluid to the other. Plate heat
exchangers can be taken apart and plates can be added to increase heat transfer
area. This flexibility translates into lower expenditures on installation and
equipment purchases.
DIAGRAM
OF PLATE HEAT EXCHANGER
We are
an authorized dealer of Sondex PHEs for the industrial and energy sectors in
China. Our Sondex distribution territory is northern and eastern
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 design of our PHEs is done in-house by our
engineers utilizing a combination of software provided by Sondex and our
proprietary in-house designed 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.
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, 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 in 2007.
SMARTHEAT’S
PLATE HEAT EXCHANGER UNIT
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 made the use of heat meters compulsory in
China. As of January 2003, heat meters were required by law
nationally for new construction and the law was extended in April of 2008 by the
Energy Conservation Law, Article 38, to existing buildings being
retrofitted.
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.
SMARTHEAT’S
HEAT METERS
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.
PHEs
are replacing the less efficient shell-and-tube heat exchanges. PHEs can be
installed in existing buildings and facilities as well as in new ones since they
are smaller than 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.
The
global market for heat transfer products and compact PHE Units in 2007 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 SanDeKe, a PHE manufacturing
company located in Pudong district, Shanghai. SanDeKe 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
SanDeKe 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 our 10 largest customers accounting for over 32%
of our total sales of $32,676,082 in the fiscal year ended
2008. Our 10 largest customers and our respective revenue from them
during 2008 are as follows:
Customer Name
|
|
Sales
|
|
|
% of Sales 2008
|
|
Shanghai
Guoshe Electromechanical Engineering CO., LTD
|
|
$ |
1,800,104 |
|
|
|
6 |
% |
Dalkai(
Jiamusi ) City Heat CO., LTD
|
|
|
1,787,756 |
|
|
|
5 |
% |
Shanghai
Langu mechanical engineering CO., LTD
|
|
|
1,085,753 |
|
|
|
3 |
% |
Eerduosi
Dongsheng District House Property Bureau
|
|
|
1,012,013 |
|
|
|
3 |
% |
Urumqu
Heat Head Office
|
|
|
939,388 |
|
|
|
3 |
% |
Dalkai
Sunny( Harbin ) thermoelectricity Co., LTD
|
|
|
828,572 |
|
|
|
3 |
% |
China
Precision Machinery Import and Export CO., LTD
|
|
|
789,433 |
|
|
|
2 |
% |
CPCC
Shengli Oil Field
|
|
|
753,611 |
|
|
|
2 |
% |
Jiangxi
Saiwei LDK SolarEnergy Hightech Co., LTD
|
|
|
748,237 |
|
|
|
2 |
% |
Wuhu
Qiaohong International CO., LTD
|
|
|
675,776 |
|
|
|
2 |
% |
Total
|
|
$ |
10,420,642 |
|
|
|
32 |
% |
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 an approximate 10% warranty hold-back that remains unpaid
and outstanding for 3 to 24 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 six
registered patents in China for both PHE products and heat
meters. Four of our patents expire in 2014, one expires in 2016 and
the last expires in 2017.
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 2007 and 2008 were
$343,800 and $1,020,000, respectively. We plan to spend approximately $300,000
in 2009 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 through April
1, 2009. We have applied for a renewal of this license. We
currently anticipate that we will have a renewed license in place before April
1, 2009. The Safety Bureau conducts site visits and inspections of
documents on a periodic basis to verify adherence to the
standards.
Legislation
has been passed requiring the installation of heat meters. As of
January 2003, heat meters were required by law nationally for new construction
and the law was extended in April of 2008 by the Energy Conservation Law,
Article 38, to existing buildings being retrofitted.
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 is 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. We
believe the quality of our PHEs is considered on par with Alfa Laval's, as are
our prices. 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 one of our
largest customers in 2008, 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 because of the
legislation requiring heat meters for all residential and commercial
spaces. 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 sales in the third and fourth calendar quarters.
Our quarterly revenues may fluctuate significantly due to the seasonal nature of
central heating services in China, whereas, the equipment used in residential
buildings must be delivered and installed prior to the beginning of the heating
season in late fall.
Employees
As of
December 31, 2008, we had 210 full-time employees.
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
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 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
December 31, 2008, the directors and executive officers of SmartHeat
were:
Name
|
|
Age
|
|
Position
|
Jun
Wang
|
|
41
|
|
Chairman
of the Board of Directors, President & Chief Executive
Officer
|
Zhijuan
Guo
|
|
44
|
|
Chief
Financial Officer and Treasurer
|
Huajun
Ai
|
|
38
|
|
Corporate
Secretary
|
Frederic
Rittereiser
|
|
72
|
|
Director
|
Arnold
Staloff
|
|
64
|
|
Director
|
Weiguo
Wang
|
|
44
|
|
Director
|
Wenbin
Lin
|
|
64
|
|
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. Messrs. Rittereiser,
Staloff, Wang and Lin were appointed as directors on June 19, 2008.
Biographies
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. 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 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. Additionally, Mr. Staloff served on the Board of
Directors of Lehman Brothers Derivative Products Inc. from 1998 until 2008 and
Lehman Brothers Financial Products Inc. from 1994 until 2008. 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 PRC, 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 December 31, 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, 2008 and 2007 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
|
|
2008
|
|
|
18,000 |
|
|
|
— |
|
|
|
18,000 |
|
President
and Chief Executive Officer
|
|
2007
|
|
|
18,000 |
|
|
|
— |
|
|
|
18,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhijuan
Guo
|
|
2008
|
|
|
10,684 |
|
|
|
— |
|
|
|
10,684 |
|
Treasurer
and Chief Financial Officer
|
|
2007
|
|
|
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, 2008, there were no outstanding equity awards held by executive
officers of our company.
Stock
Incentive Plans
We had
no stock incentive plan during 2006, 2007 or 2008.
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 March 20, 2009 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 March 20, 2009.
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 it 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. ShenYang ZhiCe Investment Co. is owned by Ms. Huiqin Wang,
Ms. Dongmei Li and Mr. Zhaohui Lin, with each of them having a voice in
the voting and disposition of the shares held by ShenYang ZhiCe Investment
Co. Ms. Li and Mr. Lin are adult children of Wenbin Lin, a
director of SmartHeat. Neither Mr. Wenbin Lin nor SmartHeat
have any interest in, or other relationship with, ShenYang ZhiCe
Investment Co.
|
|
|
|
(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 at a purchase price of $3.50 per unit (each unit consisting of one
share of common stock, and a warrant to purchase 15% of one share of common
stock at an exercise price of $6.00 per share). 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 the 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. The private placement was completed in two closings on July 7,
2008 and August 22, 2008.
The
selling shareholders may sell all, some or none of their shares in this
offering. See “Plan of Distribution.”
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 March 20, 2009, 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
March 20, 2009.
|
|
Beneficial Ownership
Before Offering
|
|
Shares of Common
Stock Included
|
|
|
Beneficial Ownership
After the Offering
|
Shareholder
|
|
Number
|
|
Percentage *
|
|
in Prospectus
|
|
|
Number
|
|
Percentage *
|
Allied
Diesel Service Inc. Employee Profit Sharing Plan #2 (i)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Barson,
Kalman A. Roth IRA
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Berkowitz,
Daniel IRA, Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Berlinger,
Michael A.
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Chasanoff,
Teddy
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Choudhary,
Chirag (ii)
|
|
|
2,550
|
|
|
|
|
2,550
|
|
|
|
0
|
|
|
Clarke,
Kevin IRA, Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Clemente,
Ann V.
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Domaco
Venture Capital Fund Partnership (iii)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Elias
Sayour Foundation Inc. (iv)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Engelbert,
Marc
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Eximius
bvba (v)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Falda,
Evie and David
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Funcorp
Associates Ltd. (vi)
|
|
|
23,000
|
|
|
|
|
23,000
|
|
|
|
0
|
|
|
G
& S I Fund LP (vii)
|
|
|
69,000
|
|
|
|
|
69,000
|
|
|
|
0
|
|
|
Geri
Investments N.V. (viii)
|
|
|
34,500
|
|
|
|
|
34,500
|
|
|
|
0
|
|
|
Gibralt
Capital Corporation (ix)
|
|
|
81,650
|
|
|
|
|
81,650
|
|
|
|
0
|
|
|
Gross,
John
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Grossman,
Andrew Profit Sharing Plan, Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Harmon
Corporation A.V.V. (x)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Hight,
Norton and Joan
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Hight,
Randall W.
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Hou,
Yuzhen
|
|
|
69,000
|
|
|
|
|
69,000
|
|
|
|
0
|
|
|
Jaigobind,
Ramnarain (xi)
|
|
|
12,031
|
|
|
|
|
12,031
|
|
|
|
0
|
|
|
Kelly,
Maura
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Knox,
Thomas
|
|
|
57,500
|
|
|
|
|
57,500
|
|
|
|
0
|
|
|
La
legetaz Private Foundation (xii)
|
|
|
34,500
|
|
|
|
|
34,500
|
|
|
|
0
|
|
|
Lazar,
Ronald M. IRA, Pershing LLC as Custodian (xiii)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Lord,
Eric (xiv)
|
|
|
2,278
|
|
|
|
|
2,278
|
|
|
|
0
|
|
|
Luvera,
Florence E.
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Mangan,
Kevin (xv)
|
|
|
216
|
|
|
|
|
216
|
|
|
|
0
|
|
|
Model,
Wolfe F.
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Monte,
Barney (xvi)
|
|
|
4,000
|
|
|
|
|
4,000
|
|
|
|
0
|
|
|
Palmero,
Nancy and Herman
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Pirasteh,
Ross
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Polak,
Anthony G. (xvii)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Polak,
Anthony G. IRA, Pershing LLC as Custodian (xvii)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Polak,
Jack IRA, Pershing LLC as Custodian (xviii)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Quinn,
David L. and Tracy
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
RL
Capital Partners, LP (xix)
|
|
|
34,500
|
|
|
|
|
34,500
|
|
|
|
0
|
|
|
Roman,
Steve
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Rothschild,
Jonathan
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Shapiro,
Sandra G. and Robert S.
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Shearer,
C. Robert
|
|
|
17,250
|
|
|
|
|
17,250
|
|
|
|
0
|
|
|
Stadtmauer,
Gary
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Stadtmauer,
Murray and Clare
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Stadtmauer,
Rhea D. and Maiman, Janice
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Staloff,
Arnold
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Strong
Growth Capital Ltd (xx)
|
|
|
977,500
|
|
3.9%
|
|
|
977,500
|
|
|
|
0
|
|
|
Sun
Fun Investing Inc. (xxi)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Swerdloff,
David IRA, Pershing LLC as Custodian
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
The
USX China Fund (xxii)
|
|
|
23,000
|
|
|
|
|
23,000
|
|
|
|
0
|
|
|
Tornay,
Suellyn P.
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
White
Sand Investor Group, L.P. (xxiii)
|
|
|
16,100
|
|
|
|
|
16,100
|
|
|
|
0
|
|
|
William
H. Peterson Living Trust (xxiv)
|
|
|
11,500
|
|
|
|
|
11,500
|
|
|
|
0
|
|
|
Four
Tong Investments Ltd (xxv)
|
|
|
91,000
|
|
|
|
|
91,000
|
|
|
|
0
|
|
|
Maxim
Group LLC (xxvi)
|
|
|
10,000
|
|
|
|
|
10,000
|
|
|
|
0
|
|
|
Rodman
& Renshaw LLC (xxvii)
|
|
|
25,425
|
|
|
|
|
25,425
|
|
|
|
0
|
|
|
Seaboard
Securities Inc. (xxviii)
|
|
|
1,000
|
|
|
|
|
1,000
|
|
|
|
0
|
|
|
* Less
than 1%, unless otherwise specified
|
(i)
|
Ralph
A. Darienzo, Sr. and Ralph A. Darienzo, Jr., trustees of the Allied Diesel
Service Inc. Employee Profit Sharing Plan #2, and Ronald Lazar (a
registered representative of Maxim Group, LLC, a registered broker-dealer
and FINRA member firm), investment advisor to the Plan, have voting
and dispositive control over the shares held by the Allied Diesel Service
Inc. Employee Profit Sharing Plan #2.
|
|
|
|
|
(ii)
|
Chirag
Choudhary is a registered representative of Rodman & Renshaw LLC, a
registered broker-dealer and FINRA member firm. Mr. Choudhary acquired his
shares from Rodman & Renshaw LLC as compensation for placement agent
services.
|
|
|
|
|
(iii)
|
Jack
Polak, father of Anthony Polak (a registered representative of Maxim
Group, LLC, a registered broker-dealer and FINRA member firm) and general
partner of Domaco Company, parent of the Domaco Venture Capital Fund, has
voting and dispositive control over the shares held by Domaco Venture
Capital Fund.
|
|
|
|
|
(iv)
|
Paul
Sayour and Mary Jane Josen, trustees of the Elias Sayour Foundation, Inc.,
have shared voting and dispositive control over the shares held by the
Elias Sayour Foundation, Inc.
|
|
|
|
|
(v)
|
Jos
Moons, manager and owner of Eximius bvba, has sole voting and dispositive
power with respect to the shares of our common stock that are beneficially
owned by Eximius bvba.
|
|
|
|
|
(vi)
|
Herman
J. Behr (Managing Director), Gisele M. Sjak Shie (Managing Director),
Raoul A. Behr (Managing Director), Randolph K. Arends (Attorney-in-fact
A), Reginald D. Schotborgh (Attorney-in-fact A), Godefridus H.J. Konings
(Attorney-in-fact B), Gustaaf J. Barhorst (Attorney-in-fact B), and Remir
F. Sinlae (Attorney-in-fact B) have joint voting and investment power with
respect to these shares of common stock under the following two
restrictions: Any Managing Director or any Attorney-in-fact A can act
jointly with any other Managing Director, Attorney-in-fact A or
Attorney-in-fact B. Any Attorney-in-fact B must act jointly with any
Managing Director or any Attorney-in-fact A, but may not act jointly with
any other Attorney-in-fact B.
|
|
|
|
|
(vii)
|
Charles
E. Shearer and Michael Gray are members of Gray & Shearer Capital
Management LLC, the general partner of G&S I Fund LP, and have shared
voting and dispositive power with respect to the shares of our common
stock that are beneficially owned by G&S I Fund LP.
|
|
|
|
|
(viii)
|
Marimus
J. Dekver, director of Geri Investments N.V., has voting and dispositive
control over the shares held by Geri Investments N.V.
|
|
|
|
|
(ix)
|
Sam
Belzberg has voting and dispositive power with respect to the shares of
our common stock that are beneficially owned by Gibralt Capital
Corporation.
|
|
|
|
|
(x)
|
Herman
J. Behr (Managing Director), Gisele M. Sjak Shie (Managing Director),
Raoul A. Behr (Managing Director), Randolph K. Arends (Attorney-in-fact
A), Reginald D. Schotborgh (Attorney-in-fact A), Godefridus H.J. Konings
(Attorney-in-fact B), Gustaaf J. Barhorst (Attorney-in-fact B), and Remir
F. Sinlae (Attorney-in-fact B) have joint voting and investment power with
respect to these shares of common stock under the following two
restrictions: Any Managing Director or any Attorney-in-fact A can act
jointly with any other Managing Director, Attorney-in-fact A or
Attorney-in-fact B. Any Attorney-in-fact B must act jointly with any
Managing Director or any Attorney-in-fact A, but may not act jointly with
any other Attorney-in-fact B.
|
|
|
|
|
(xi)
|
Ramnarain
Jaigobind is a registered representative of Rodman & Renshaw LLC, a
registered broker-dealer and FINRA member firm. Mr. Jaigobind acquired his
shares from Rodman & Renshaw LLC as compensation for placement agent
services.
|
|
(xii)
|
Herman
J. Behr (Managing Director), Gisele M. Sjak Shie (Managing Director),
Raoul A. Behr (Managing Director), Randolph K. Arends (Attorney-in-fact
A), Reginald D. Schotborgh (Attorney-in-fact A), Godefridus H.J. Konings
(Attorney-in-fact B), Gustaaf J. Barhorst (Attorney-in-fact B), and Remir
F. Sinlae (Attorney-in-fact B) have joint voting and investment power with
respect to these shares of common stock under the following two
restrictions: Any Managing Director or any Attorney-in-fact A can act
jointly with any other Managing Director, Attorney-in-fact A or
Attorney-in-fact B. Any Attorney-in-fact B must act jointly with any
Managing Director or any Attorney-in-fact A, but may not act jointly with
any other Attorney-in-fact B.
|
|
|
|
|
(xiii)
|
Ronald
Lazar is a registered representative of Maxim Group, LLC, a registered
broker-dealer and FINRA member firm. Mr. Lazar purchased his shares in the
ordinary course of business and, at the time of purchase, had no
agreements or understandings, directly or indirectly, with any person to
distribute the shares.
|
|
|
|
|
(xiv)
|
Eric
Lord is a registered representative of Rodman & Renshaw LLC, a
registered broker-dealer and FINRA member firm. Mr. Lord acquired his
shares from Rodman & Renshaw LLC as compensation for placement agent
services.
|
|
|
|
|
(xv)
|
Kevin
Mangan is a registered representative of Rodman & Renshaw LLC, a
registered broker-dealer and FINRA member firm. Mr. Mangan acquired his
shares from Rodman & Renshaw LLC as compensation for placement agent
services.
|
|
|
|
|
(xvi)
|
Barney
Monte is a registered representative of Rodman & Renshaw LLC, a
registered broker-dealer and FINRA member firm. Mr. Monte acquired his
shares from Rodman & Renshaw LLC. as compensation for
placement agent services
|
|
|
|
|
(xvii)
|
Anthony
G. Polak is a registered representative of Maxim Group, LLC, a registered
broker-dealer and FINRA member firm. Mr. Polak purchased his shares in the
ordinary course of business and, at the time of purchase, had no
agreements or understandings, directly or indirectly, with any person to
distribute the shares.
|
|
|
|
|
(xviii)
|
Jack
Polak is father of Anthony Polak (a registered representative of Maxim
Group, LLC, a registered broker-dealer and FINRA member
firm).
|
|
|
|
|
(xix)
|
Ronald
M. Lazar and Anthony G. Polak are managing members of RL Capital
Management LLC, the general partner of RL Capital Partners, LP, and have
voting and dispositive control over the shares held by RL Capital
Partners, LP. Messrs. Lazar and Polak are registered representatives of
the Maxim Group, LLC, a registered broker-dealer and FINRA member firm. RL
Capital Partners, LP purchased its shares in the ordinary course of
business and, at the time of purchase, had no agreements or
understandings, directly or indirectly, with any person to distribute the
shares.
|
|
|
|
|
(xx)
|
Lee
Ming has sole voting and dispositive power with respect to the shares of
our common stock that are beneficially owned by Strong Growth Capital
Ltd.
|
|
|
|
|
(xxi)
|
Wim
C. Odems, managing director of Trufima International Corporation Ltd.,
owner of Sun Fun Investing Inc., has voting and dispositive power with
respect to the shares of our common stock that are beneficially owned by
Sun Fun Investing Inc.
|
|
|
|
|
(xxii)
|
Stephen
L. Parr, Managing Member of Parr Financial Group, LLC, investment adviser
to the USX China Fund, has voting and dispositive power with respect to
the shares of our common stock that are beneficially owned by the USX
China Fund.
|
|
|
|
|
(xxiii)
|
Elliott
Donnelley II has sole voting and dispositive power with respect to the
shares of our common stock that are beneficially owned by White Sand
Investor Group, LP.
|
|
|
|
|
(xxiv)
|
William
H. Peterson, trustee of the William H. Peterson Living Trust, has voting
and dispositive control over the shares of our common stock that are
beneficially owned by William H. Peterson Living Trust.
|
|
|
|
|
(xxv)
|
Wei
Li has sole voting and dispositive power with respect to the shares of our
common stock that are beneficially owned by Four Tong Investments
LLC. Four Tong Investments LLC is a broker-dealer that received
its warrants as compensation for placement agent
services.
|
|
(xxvi)
|
Michael
Rabinowitz has sole voting and dispositive power with respect
to the shares of common stock that are beneficially owned by Maxim Group,
LLC. Maxim Group, LLC is a broker-dealer that received its warrants as
compensation for placement agent services from Rodman & Renshaw
LLC.
|
|
|
|
|
(xxvii)
|
Thomas
G. Pinou has sole voting and dispositive power with respect to the shares
of common stock that are beneficially owned by Rodman & Renshaw LLC.
Rodman & Renshaw is a broker-dealer that received its warrants as
compensation for placement agent services.
|
|
|
|
|
(xxviii)
|
Anthony
DiGiovanni Sr. has voting and dispositive power with respect to the shares
of common stock that are beneficially owned by Seaboard Securities Inc.
Seaboard Securities Inc. is a broker-dealer that received its warrants as
compensation for placement agent
services.
|
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.
There can
be no assurance that any selling shareholder will sell any or all of the shares
of common stock registered pursuant to the shelf registration statement of which
this prospectus is a part.
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
The
following description of our securities and provisions of our articles of
incorporation and bylaws is only a summary. You should refer to our
articles of incorporation, a copy of which has been incorporated by reference as
an exhibit to the Form SB-2 we filed with the SEC on December 22, 2006, and
bylaws, a copy of which has been incorporated by reference as an exhibit to the
Form 8-K we filed with the SEC on October 16, 2008. The following
discussion is qualified in its entirety by reference to such
exhibits.
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
March 20, 2009, 24,179,900 shares of common stock were issued
and outstanding and held of record by 149 shareholders. An additional 393,000
shares are reserved for issuance upon the exercise of outstanding
warrants. The warrants are immediately exercisable, expire on the
third anniversary of their issuance and entitle their holders to purchase up to
393,000 shares of our common stock at an initial exercise price of $6.00 per
share. We have also reserved an additional 20,000 shares for issuance upon the
exercise of outstanding stock options granted to two of our
directors. Each option vests in one-third increments on the first
three anniversaries of the grant date, entitles the holder to purchase 10,000
shares of our common stock at an exercise price of $4.60 per share and
expires on the fifth anniversary of the grant date.
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
On
April 22, 2008, shares of our common stock began trading on the OTCBB under the
trading symbol "SMHT." On January 29, 2009, shares of our common stock began
trading on the Nasdaq Stock Market under the trading symbol "HEAT" and were
subsequently listed on the Nasdaq Global Market on March 10,
2009. Since April 22, 2008, our average daily trading volume has been
less than 10,000 shares per day. As with most initial listings on the Nasdaq
Stock Market, it will take time for a significant active trading market in our
common stock to develop. There can be no assurance that a significant active
trading market in our common stock will develop, or if such a market develops,
that it will be sustained.
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
Holland & Hart LLP.
CHANGE
IN THE COMPANY'S INDEPENDENT ACCOUNTANT
On April
14, 2008, we dismissed Dale Matheson Carr Hilton Labonte LLP ("DMCHL") as our
independent accountants. DMCHL had previously been engaged as the
principal accountant to audit our financial statements. The reason
for the dismissal of DMCHL is that, following the consummation of the Share
Exchange on April 14. 2008, (i) the former stockholders of Taiyu own a
significant amount of the outstanding shares of our common stock and (ii) our
primary business became the business previously conducted by
Taiyu. The independent registered public accountant of Taiyu for US
accounting purposes was the firm of Goldman Parks Kurland Mohidin LLP
("GPKM"). We believe that it is in our best interest to have GPKM
continue to work with our business, and we therefore retained GPKM as our new
principal independent registered accounting firm, effective as of April 15,
2008. GPKM is located at 16133 Ventura Blvd., Suite 880, Encino, CA
91436. The decision to change accountants was approved by our board
of directors on April 14, 2008.
The
report of DMCHL on our financial statements for the period from August 4, 2006
(inception) through our fiscal year ended October 31, 2007 did not contain an
adverse opinion or disclaimer of opinion, nor was it qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report was
qualified as to our ability to continue as a going concern.
From our
inception through April 15, 2008, there were no disagreements with DMCHL on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of DMCHL,
would have caused it to make reference to the matter in connection with its
reports.
From our
inception through April 14, 2008, we did not consult GPKM regarding either: (i)
the application of accounting principles to a specific completed or contemplated
transaction, or the type of audit opinion that might be rendered on our
financial statements; or (ii) any matter that was the subject of a disagreement
as described in Item 304(a)(1)(iv) of Regulation S-K.
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, 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, and
is therefore unenforceable.
SMARTHEAT
CORPORATION
Consolidated
Financial Statements
For
the Years Ended December 31, 2008, 2007
INDEX TO FINANCIAL
STATEMENTS
|
|
Page
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
F-3
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
F-4
|
|
|
|
|
|
|
Consolidated
Statement of Stockholders’ Equity
(Deficit)
|
|
|
F-5
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
F-6
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-7
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
shareholders of SmatHeat, Inc.,
fka
(Shenyang Taiyu Machinery & Electronic Equipment Co., Ltd.)
We
have audited the consolidated balance sheets of SmartHeat, Inc, fka (Shenyang
Taiyu Machinery & Electronic Equipment Co., ltd.) and Subsidiary (the
“Company”) as of December 31, 2008 and 2007 and the related consolidated
statements of income and other comprehensive income, shareholders’
equity and cash flows for each of the two years ended December 31, 2008 and
2007. 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 consolidated financial position of the Company as of
December 31, 2008 and 2007, and the consolidated results of its operations and
its cash flows for the years ended December 31, 2008 and 2007 in conformity with
U.S. generally accepted accounting principles.
Goldman
Parks Kurland Mohidin LLP
Encino,
California
March
11, 2009
SMARTHEAT,
INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
AS OF
DECEMBER 31, 2008
|
|
|
AS OF
DECEMBER 31, 2007
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
& cash equivalents
|
|
$ |
1,435,212 |
|
|
$ |
393,147 |
|
Restricted
cash
|
|
|
462,048 |
|
|
|
537,098 |
|
Accounts
receivable, net
|
|
|
11,390,169 |
|
|
|
4,762,822 |
|
Retentions
receivable
|
|
|
290,852 |
|
|
|
191,319 |
|
Advances
to suppliers
|
|
|
412,524 |
|
|
|
158,750 |
|
Other
receivables, prepayments and deposits
|
|
|
698,834 |
|
|
|
766,231 |
|
Inventories
|
|
|
6,107,583 |
|
|
|
7,928,408 |
|
Due
from related party
|
|
|
- |
|
|
|
118,560 |
|
Note
receivable
|
|
|
14,631 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
20,811,853 |
|
|
|
14,856,335 |
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
219,472 |
|
|
|
- |
|
Accounts
receivable, net
|
|
|
310,810 |
|
|
|
949,998 |
|
Retentions
receivable
|
|
|
166,912 |
|
|
|
169,309 |
|
Intangible
assets, net
|
|
|
1,155,131 |
|
|
|
534,208 |
|
Property
and equipment, net
|
|
|
2,436,553 |
|
|
|
2,040,809 |
|
|
|
|
|
|
|
|
|
|
Total
noncurrent assets
|
|
|
4,288,878 |
|
|
|
3,694,324 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
25,100,731 |
|
|
$ |
18,550,659 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,210,906 |
|
|
$ |
3,128,585 |
|
Unearned
revenue
|
|
|
850,408 |
|
|
|
3,125,406 |
|
Taxes
payable
|
|
|
1,327,775 |
|
|
|
503,010 |
|
Accrued
liabilities and other payables
|
|
|
1,330,812 |
|
|
|
807,700 |
|
Due
to related party
|
|
|
- |
|
|
|
445,990 |
|
Due
to minority shareholder
|
|
|
5,303 |
|
|
|
- |
|
Loans
payable
|
|
|
2,443,450 |
|
|
|
4,619,856 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
7,168,654 |
|
|
|
12,630,547 |
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAX LIABILITY
|
|
|
38,854 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY
INTEREST
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 75,000,000 shares authorized, 24,179,900 and
18,500,000 shares issued and outstanding at December 31, 2008 and December
31, 2007, respectively
|
|
|
24,180 |
|
|
|
18,500 |
|
Paid
in capital
|
|
|
8,223,453 |
|
|
|
3,102,132 |
|
Statutory
reserve
|
|
|
1,150,542 |
|
|
|
506,532 |
|
Accumulated
other comprehensive income
|
|
|
984,629 |
|
|
|
473,859 |
|
Retained
earnings
|
|
|
7,510,419 |
|
|
|
1,819,089 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
17,893,223 |
|
|
|
5,920,112 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
25,100,731 |
|
|
$ |
18,550,659 |
|
SMARTHEAT,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
|
|
FOR THE YEARS ENDED
DECEMBER 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
32,676,082 |
|
|
$ |
13,273,151 |
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
21,717,735 |
|
|
|
8,667,353 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
10,958,347 |
|
|
|
4,605,798 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
1,564,977 |
|
|
|
1,681,624 |
|
General
and administrative expenses
|
|
|
1,851,693 |
|
|
|
687,466 |
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
3,416,670 |
|
|
|
2,369,090 |
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
7,541,677 |
|
|
|
2,236,708 |
|
|
|
|
|
|
|
|
|
|
Non-operating
income (expenses)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
405,266 |
|
|
|
175,084 |
|
Interest
expense
|
|
|
(314,192 |
) |
|
|
(230,905 |
) |
Other
income
|
|
|
11,738 |
|
|
|
45,126 |
|
Other
expenses
|
|
|
(13,709 |
) |
|
|
(16,939 |
) |
Exchange
loss
|
|
|
(12,044 |
) |
|
|
- |
|
Subsidy
income
|
|
|
16,230 |
|
|
|
52,591 |
|
|
|
|
|
|
|
|
|
|
Total
non-operating income
|
|
|
93,289 |
|
|
|
24,957 |
|
|
|
|
|
|
|
|
|
|
Income
before income tax
|
|
|
7,634,966 |
|
|
|
2,261,665 |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
1,293,660 |
|
|
|
175,647 |
|
|
|
|
|
|
|
|
|
|
Income
after income tax
|
|
|
6,341,306 |
|
|
|
2,086,018 |
|
|
|
|
|
|
|
|
|
|
Less:
minority interest
|
|
|
5,966 |
|
|
|
(1,873 |
) |
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
6,335,340 |
|
|
|
2,087,891 |
|
|
|
|
|
|
|
|
|
|
Other
comprehensive item
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
510,770 |
|
|
|
333,449 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
$ |
6,846,110 |
|
|
$ |
2,421,340 |
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
22,176,322 |
|
|
|
18,500,000 |
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
22,176,432 |
|
|
|
18,500,000 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.29 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.29 |
|
|
$ |
0.11 |
|
SMARTHEAT
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
Common stock
|
|
|
Paid in
|
|
|
Statutory
|
|
|
Other
comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
reserves
|
|
|
income
|
|
|
earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
18,500,000 |
|
|
$ |
18,500 |
|
|
$ |
1,806,405 |
|
|
$ |
211,701 |
|
|
$ |
38,741 |
|
|
$ |
113,767 |
|
|
$ |
2,189,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
18,500,000 |
|
|
$ |
18,500 |
|
|
$ |
2,181,782 |
|
|
$ |
296,364 |
|
|
$ |
140,410 |
|
|
$ |
861,716 |
|
|
$ |
3,498,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
dividend declared
|
|
|
- |
|
|
|
- |
|
|
|
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
|
|
|
18,500,000 |
|
|
|
18,500 |
|
|
|
3,102,132 |
|
|
|
506,532 |
|
|
|
473,859 |
|
|
|
1,819,089 |
|
|
|
5,920,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
on reverse acquisition
|
|
|
4,049,900 |
|
|
|
4,050 |
|
|
|
-4,050 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued
|
|
|
1,630,000 |
|
|
|
1,630 |
|
|
|
5,119,758 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,121,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the period
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,335,340 |
|
|
|
6,335,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense related to stock options
|
|
|
- |
|
|
|
- |
|
|
|
5,613 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to statutory reserves
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
644,010 |
|
|
|
- |
|
|
|
-644,010 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
510,770 |
|
|
|
- |
|
|
|
510,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
24,179,900 |
|
|
$ |
24,180 |
|
|
$ |
8,223,453 |
|
|
$ |
1,150,542 |
|
|
$ |
984,629 |
|
|
$ |
7,510,419 |
|
|
$ |
17,893,223 |
|
SMARTHEAT,
INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
FOR THE YEARS ENDED
DECEMBER 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
6,335,340 |
|
|
$ |
2,087,891 |
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
252,598 |
|
|
|
104,055 |
|
Unearned
interest on accounts receivable
|
|
|
(127,819 |
) |
|
|
(122,379 |
) |
Stock
option compensation expense
|
|
|
5,613 |
|
|
|
- |
|
Decrease
in deferred tax liability
|
|
|
(163 |
) |
|
|
- |
|
Minority
interest
|
|
|
5,966 |
|
|
|
(1,873 |
) |
(Increase)
decrease in current assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(4,943,868 |
) |
|
|
(2,526,521 |
) |
Retentions
receivable
|
|
|
(74,797 |
) |
|
|
70,446 |
|
Advances
to suppliers
|
|
|
62,759 |
|
|
|
(45,386 |
) |
Other
receivables, prepayments and deposits
|
|
|
182,577 |
|
|
|
(327,734 |
) |
Inventory
|
|
|
2,405,678 |
|
|
|
(2,184,063 |
) |
Receivables
from related party
|
|
|
- |
|
|
|
(86,242 |
) |
Increase
(decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(2,389,649 |
) |
|
|
979,881 |
|
Unearned
revenue
|
|
|
(2,993,636 |
) |
|
|
1,265,085 |
|
Taxes
payable
|
|
|
779,408 |
|
|
|
326,053 |
|
Accrued
liabilities and other payables
|
|
|
(261,040 |
) |
|
|
513,507 |
|
Payables
to related party
|
|
|
- |
|
|
|
(54,761 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(761,033 |
) |
|
|
(2,041 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase
in restricted cash
|
|
|
(108,040 |
) |
|
|
(135,915 |
) |
Cash
purchased at acquisition
|
|
|
55,426 |
|
|
|
- |
|
Acquisition
of property & equipment
|
|
|
(439,861 |
) |
|
|
(909,280 |
) |
Note
receivable
|
|
|
(14,635 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(507,110 |
) |
|
|
(1,045,195 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change
in due to minority shareholders
|
|
|
(663 |
) |
|
|
- |
|
Change
in due from / (to) shareholder
|
|
|
(343,913 |
) |
|
|
(558,243 |
) |
Short
term loans
|
|
|
(2,447,804 |
) |
|
|
1,774,966 |
|
Capital
contribution
|
|
|
5,100,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
2,307,620 |
|
|
|
1,216,723 |
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
|
|
2,588 |
|
|
|
21,365 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH & CASH EQUIVALENTS
|
|
|
1,042,065 |
|
|
|
190,852 |
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
393,147 |
|
|
|
202,295 |
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, END OF YEAR
|
|
$ |
1,435,212 |
|
|
$ |
393,147 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash flow data:
|
|
|
|
|
|
|
|
|
Income
tax paid
|
|
$ |
660,127 |
|
|
$ |
134,033 |
|
Interest
paid
|
|
$ |
274,969 |
|
|
$ |
280,719 |
|
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 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, thermometer 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 April 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.
Pursuant to Securities and Exchange Commission ("SEC") rules, the merger or
acquisition of a private operating company into a non-operating public shell
with nominal net assets is considered a capital transaction in substance, rather
than a business combination. Accordingly, for accounting purposes, the
transaction was treated as a reverse acquisition and a recapitalization, and
pro-forma information is not presented. Transaction costs incurred in the
reverse acquisition were 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.
On
September 25, 2008, the Company entered into a Share Exchange Agreement (the
"Agreement") between Asialink (Far East) Limited ("Asialink") and the Company
providing for the acquisition by the Company from Asialink of all of the
outstanding capital stock of SanDeKe Co., Ltd., a Shanghai based manufacturer of
heat plate exchangers ("SanDeKe"). The purchase price for the SanDeKe shares was
$741,516, of which $222,455 was payable within 15 days after the signature date
of the Agreement, $370,758 is payable within 15 days after all necessary
documents have been filed with government agencies, and $148,303 of which is
payable within 15 days after the purchase has been approved and registered by
the government agencies. Under the terms of the Agreement, two of the
shareholders of SanDeKe agreed not to compete with the business of SanDeKe for a
period of four years after the completion of the purchase.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of
SmartHeat, SanDeKe, Taiyu, Taiyu’s 55% owned subsidiary, Qingdao Yushi Heat
Power Equipment Co., Ltd ("Yushi") which also disposed by the Company in August,
2008. Yushi is engaged in manufacturing and selling of heat power equipment. For
purposes of this Annual Report, the "Company" refers collectively to SmartHeat,
SanDeKe, 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 (“US GAAP”), 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, allowance for
doubtful accounts, and the reserve for obsolete and slow-moving inventories.
Actual results could differ from those estimates.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
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, 2008 the Company maintained total restricted
cash of $681,520 in several bank accounts, represented cash deposits from
customers for securing the payment from customers after the warranty period
expires while incentivizing the Company to fulfill its obligation during the
warranty period, of which, $462,048 was the cash that will be release to the
Company within one year. As of December 31, 2007, the Company maintained
restricted cash of $537,098 in several bank accounts, of which, approximately
$4,900 was collateralized for certain letters of credit that were issued by
several banks to the Company; and approximately $532,000 was cash deposits from
customers for securing the payment from customers after the warranty period
expires while incentivizing the Company to fulfill its obligation during the
warranty period. Restricted cash was held in an interest bearing bank
account.
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 $629,687 and $330,518 at December 31,
2008 and 2007, respectively.
At
December 31, 2008 and 2007, the Company had retentions receivable from customers
for product quality assurance in the amount of $457,764 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 depending on the shipping date of the
products and the number of heating seasons that the warranty period
covers.
Accounts
receivable is net of unearned interest of $28,526 and $148,421 at December 31,
2008 and 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.
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
|
Vehicles
|
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.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
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, 2008 and
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.
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 Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (“SAB”) 104. Sales revenue
is recognized when products are delivered and for PHE and PHE units, when
customer acceptance occurs, the price is fixed or determinable, 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.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
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 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 $95,638 and $383,177 for 2008 and 2007,
respectively.
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 are 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. Cash flows from operating, investing and financing
activities exclude the effect of the acquisition of SanDeKe.
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.
The
following table presents a reconciliation of basic and diluted earnings per
share:
|
|
For the Years
Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
6,335,340 |
|
|
$ |
2,087,891 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
22,176,322 |
|
|
|
18,500,000 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Unexercised
warrants and options
|
|
|
110 |
|
|
|
— |
|
Weighted
average shares outstanding - diluted
|
|
|
22,176,432 |
|
|
|
18,500,000 |
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic
|
|
$ |
0.29 |
|
|
$ |
0.11 |
|
Earnings
per share - diluted
|
|
$ |
0.29 |
|
|
$ |
0.11 |
|
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Fair
Value of Financial Instruments
SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” requires 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.
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.
Stock-Based
Compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.” The
Company recognizes in the statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to employees and
non-employees.
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.
Registration
Rights Agreement
The
Company accounts for payment arrangements under registration rights agreement in
accordance with FASB Staff Position EITF 00-19-2, which requires that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting for Contingencies.
New
Accounting Pronouncements
Accounting
for Financial Guarantee Insurance Contracts
In May
2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60.” The scope of this
Statement is limited to financial guarantee insurance (and reinsurance)
contracts, as described in this Statement, issued by enterprises included within
the scope of Statement 60. Accordingly, this Statement does not apply to
financial guarantee contracts issued by enterprises excluded from the scope of
Statement 60 or to some insurance contracts that seem similar to financial
guarantee insurance contracts issued by insurance enterprises (such as mortgage
guaranty insurance or credit insurance on trade receivables). This Statement
also does not apply to financial guarantee insurance contracts that are
derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have an impact on the Company’s financial
statements.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
The
Hierarchy of Generally Accepted Accounting Principles
In May
2008, 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 adoption will not have an impact on
the Company’s financial statements.
Disclosures
about Derivative Instruments and Hedging Activities
In
March 2008, 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.
Fair
value of measurements
On
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,”
SFAS 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measurements. The three levels are defined as
follow:
|
·
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
As of
December 31, 2008, the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair
value.
Non-Controlling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51
In
December 2007, 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. The Company expects SFAS 160 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
DECEMBER
31, 2008 AND 2007
Business
Combinations
In
December 2007, 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 the Company is a calendar year-end company and 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.
Accounting
for Non-Refundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities
In
June 2007, 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. EITF 07-03
is effective for fiscal years beginning after December 15, 2008. Management
is currently evaluating the effect of this pronouncement on our financial
statements.
3.
INVENTORIES
Inventories
at December 31, 2008 and December 31, 2007 were as
follows:
|
|
2008
|
|
|
2007
|
|
Raw
materials
|
|
$ |
4,411,298 |
|
|
$ |
3,865,575 |
|
Work
in process
|
|
|
652,472 |
|
|
|
48,627 |
|
Finished
Goods
|
|
|
1,043,813 |
|
|
|
4,014,206 |
|
Total
|
|
$ |
6,107,583 |
|
|
$ |
7,928,408 |
|
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
4.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
Building
|
|
$ |
1,818,827 |
|
|
$ |
1,624,651 |
|
Production
equipment
|
|
|
441,065 |
|
|
|
298,242 |
|
Office
equipment
|
|
|
231,975 |
|
|
|
156,368 |
|
Vehicles
|
|
|
300,956 |
|
|
|
134,724 |
|
|
|
|
2,792,823 |
|
|
|
2,213,985 |
|
Less:
Accumulated depreciation
|
|
|
(356,270 |
) |
|
|
(173,176 |
) |
|
|
$ |
2,436,553 |
|
|
$ |
2,040,809 |
|
Depreciation
expense for 2008 and 2007 was approximately $168,000 and $45,000,
respectively.
5.
OTHER RECEIVABLES, PREPAYMENTS AND DEPOSITS
Other
receivables, prepayments and deposits consisted of the following at December 31,
2008 and December 31, 2007, respectively:
|
|
2008
|
|
|
2007
|
|
Cash
advance to third parties
|
|
$ |
89,628 |
|
|
$ |
474,631 |
|
Deposit
for public bid
|
|
|
353,399 |
|
|
|
130,724 |
|
Prepayment
for freight and related insurance expenses
|
|
|
95,888 |
|
|
|
68,683 |
|
Deposits
|
|
|
42,783 |
|
|
|
15,346 |
|
Advance
to employees
|
|
|
117,136 |
|
|
|
76,847 |
|
Total
|
|
$ |
698,834 |
|
|
$ |
766,231 |
|
Cash
advance to third parties was the short term cash advances to customers and
vendors with quick repayment usually within three to six
months. Deposits for public bidding represented the deposits for
bidding the contracts, the deposit will be returned to the Company after the
bidding process is completed unusually within three to four months from the
payment date. Prepayment for freight and /or related insurance
expenses represented prepaid shipping and freight insurance expenses for
customers and is generally repaid upon customer receipt of
products. Deposits mainly consisted of deposits for rents and
utilities. Cash advance to employees mainly represented short term loan to
employees and advance to employees for business trip and related expenses. Other
receivables, prepayments and deposits are reimbursed or settled within 12
months.
6.
RELATED PARTY TRANSACTIONS
Due
from Related Party
Due
from related party of $118,560 at December 31, 2007 arose from sales to the
shareholder of $174,901 during 2007. Due from related party was paid
in full in November 2008.
Due to Related Party
Due to
related party represented advance from the same shareholder with variable
interest rate tied to the bank interest rate, 8.591% per annum for 2008 and
6.903% per annum for 2007, principal and interest were payable on demand, this
advance was paid in full by September 30, 2008. During 2008 and 2007,
the Company recorded interest expense to this shareholder of approximately
$6,500 and $63,000, respectively.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
7.
INTANGIBLE ASSETS
Intangible
assets mainly consisted of land use rights, computer software, know-how
technology, customer list and covenant not to compete. 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 approximately $440,000 (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 the following at December 31, 2008 and 2007,
respectively:
|
|
2008
|
|
|
2007
|
|
Land
use right
|
|
$ |
519,369 |
|
|
$ |
486,618 |
|
Know-how
technology
|
|
|
266,808 |
|
|
|
- |
|
Customer
list
|
|
|
191,652 |
|
|
|
- |
|
Covenant
not to compete
|
|
|
104,258 |
|
|
|
- |
|
Software
|
|
|
190,166 |
|
|
|
140,476 |
|
|
|
|
1,272,253 |
|
|
|
627,094 |
|
Less:
accumulated amortization
|
|
|
(117,122 |
) |
|
|
(92,886 |
) |
|
|
$ |
1,155,131 |
|
|
$ |
534,208 |
|
Amortization
expense of intangible assets for 2008 and 2007 was approximately $63,000 and
$52,000, respectively. Annual amortization expense for the next five years is
expected to be as follows: $180,000, $180,000, $180,000, $180,000 and
$140,000.
8.
MAJOR CUSTOMERS AND VENDORS
Five
major customers accounted for 20% and 51% of the Company’s net revenue for 2008
and 2007, respectively. For 2008, each customer accounted for about
6%, 5%, 3%, 3% and 3% of the sales. For 2007, each customer accounted
for about 21%, 9%, 8%, 7% and 6% of the sales. At December 31, 2008
and 2007, the total receivable balance due from these five customers was
approximately $5,073,000 and $2,824,000, respectively.
One
major vendor provided 7% and 22% of the Company’s purchases of raw materials for
2008 and 2007, respectively. The Company had approximately $19,101
and $0 in accounts payable to this vendor at December 31, 2008 and 2007,
respectively.
9.
TAXES PAYABLE
Taxes
payable consisted of the following at December 31, 2008 and December 31,
2007:
|
|
2008
|
|
|
2007
|
|
Income
tax payable
|
|
$ |
723,958 |
|
|
$ |
74,981 |
|
Value
added tax payable
|
|
|
597,676 |
|
|
|
421,009 |
|
Other
taxes payable
|
|
|
6,141 |
|
|
|
7,020 |
|
|
|
$ |
1,327,775 |
|
|
$ |
503,010 |
|
10.
ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued
liabilities and other payables consisted of the following at December 31, 2008
and December 31, 2007:
|
|
2008
|
|
|
2007
|
|
Advance
from third parties
|
|
$ |
453,625 |
|
|
$ |
139,945 |
|
Payable
for purchase consideration of SanDeKe
|
|
|
741,516 |
|
|
|
- |
|
Other
Payables
|
|
|
99,418 |
|
|
|
667,755 |
|
Accrued
liabilities
|
|
|
36,253 |
|
|
|
- |
|
Total
|
|
$ |
1,330,812 |
|
|
$ |
807,700 |
|
Advance
from third parties represented short term, non interest bearing advances from
third parties. Other payables mainly consisted of payables for the Company’s
miscellaneous expenses including postage, business insurance, employee benefits,
etc. Accrued liabilities mainly consisted of accrued interest, payroll, and
utility.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
11.
LOANS PAYABLE - SHORT TERM
The
Company is obligated for the following short term loans payable as of December
31, 2008 and December 31, 2007:
|
|
2008
|
|
|
2007
|
|
Short
term loan with a commercial bank in the PRC for 6,000,000 RMB. This loan
was entered into on Apr 28, 2007 and was due on Apr 12, 2008. This loan
was renewed on Apr 12, 2008 with new maturity date on June 13, 2009. This
loan currently bears interest at 7.159% per annum. The Company
pledged its building in the value of approximately RMB 12,430,950 or
approximately $1,818,000 for this loan.
|
|
$
|
877,886
|
|
|
$
|
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 was due on
Jun 24, 2008. This loan born 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. 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. The Company
repaid RMB 2,600,000 in 2008 and had RMB 7,700,000 outstanding as of
December 31, 2008.
|
|
|
1,126,621
|
|
|
|
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. These loans
were due on various dates in year 2008. These loans bore variable interest
at 8.591% per annum for 2008 and 6.903% per annum for 2007. The
loans were paid in full at December 31, 2008.
|
|
|
-
|
|
|
|
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 bore no interest. Imputed interest on
the loan was immaterial. This loan became payable on demand after Aug 31,
2006. This loan was paid in full at December 31, 2008.
|
|
|
-
|
|
|
|
692,293
|
|
|
|
|
|
|
|
|
|
|
The
Company entered into a one year loan on July 1, 2008 with another third
party company in the PRC for total of 3,000,000 RMB. This loan is due on
June 30, 2009 with interest rate of 8.591% per annum.
|
|
|
438,943
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,443,450
|
|
|
$
|
4,619,856
|
|
12.
DEFERRED TAX LIABILITY
Deferred
tax liability represented differences between the tax bases and book bases of
property and equipment and intangible assets arising from the acquisition of
SanDeKe.
13.
MINORITY INTEREST AND DUE TO MINORITY SHAREHOLDER
Minority
interest represented a 45% interest in Yushi. At August 31, 2008, the Company
liquidated Yushi and planned to distribute the remaining assets of $5,303 to its
minority shareholders. At August 31, 2008, minority interest was zero due to the
liquidation of Yushi; at December 31, 2007, minority interest was zero as
minority’s share of cumulative losses exceeded its equity interest in Yushi.
Minority’s share of income for 2008 was $5,966 as the forgiveness of the
accounts payable by Taiyu, minority’s share of loss for 2007 were limited to
$1,873.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
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.
Taiyu,
as a manufacturing business, is subject to a 15% income tax rate. Taiyu 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 was
applicable previously, the applicable rates shall gradually increase over a
five-year period as follows:
Year
|
|
Tax Rate
|
|
2007
|
|
|
15
|
%
|
2008
|
|
|
18
|
%
|
2009
|
|
|
20
|
%
|
2010
|
|
|
22
|
%
|
2011
|
|
|
24
|
%
|
2012
|
|
|
25
|
%
|
SanDeKe
is subject to an 18% income tax rate after 7% reduction in federal income tax
rate given by federal government. SanDeKe, is also exempt from income tax for
two years starting from the 1st profitable year, and is entitled to a 50%
discount on the 18% income tax rate for 2010 through 2012.
The
Company's net income will be lower by approximately $91,000 or $0,004 earnings
per share had SanDeKe not been exempted from income tax for 2008. The Company's
net income would have been lower by approximately $175,000 or $0.01 earnings per
share had Taiyu not been subject to a 50% discount on the 15% income tax rate
for 2007.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the year ended December 31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
US
statutory rates
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
Tax
rate difference
|
|
|
(16.4
|
)%
|
|
|
(1
|
)%
|
Effect
of tax holiday
|
|
|
(1.2
|
)%
|
|
|
(25
|
)%
|
Valuation
allowance
|
|
|
0.5
|
%
|
|
|
-
|
|
Tax
per financial statements
|
|
|
16.9
|
%
|
|
|
8.0
|
%
|
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
DECEMBER
31, 2008 AND 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.
STOCKHOLDERS’ EQUITY
Common
Stock with Warrants Issued for Cash
In
August 2008, the Company closed a private placement offering of Units pursuant
to which SmartHeat sold an aggregate of 1,630,000 Units at an offering price of
$3.50 per Unit for aggregate gross proceeds of approximately $5.7 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 1,630,000 million
shares of common stock and warrants to purchase 244,500 shares of Common Stock.
In connection with the private placement offering, the Company paid commission
of approximately $340,000 and issued warrants to purchase 148,500 shares of
common stock to its placement agents. The warrants are immediately exercisable
and expire on the third anniversary of their issuance. The warrants require the
Company to settle in its own shares. There is no provision for cash
settlement, except in lieu of fractional shares. Net proceeds of
approximately $5.1 million have been received by the Company. The value of
warrants was determined by using the Black-Scholes pricing model with the
following assumptions: discount rate – 2.76%;
dividend yield – 0%;
expected volatility – 15%
and term of 3 years. The value of the warrant was $70,246. There were
no warrants exercised from the grant date to December 31, 2008.
Stock
Options to Independent Directors
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.
Based
on the fair value method under SFAS No. 123 (Revised) “Share Based Payment”
(“SFAS 123(R)”), the fair value of each stock option granted is estimated on the
date of the grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model has assumptions for risk free interest rates,
dividends, stock volatility and expected life of an option grant. The risk free
interest rate is based upon market yields for United States Treasury debt
securities at a maturity near the term remaining on the option. Dividend rates
are based on the Company’s dividend history. The stock volatility factor is
based on the historical volatility of the Company’s stock price. The expected
life of an option grant is based on management’s estimate. The fair value of
each option grant to independent directors is calculated by the Black-Scholes
method and is recognized as compensation expense over the vesting period of each
stock option award. For stock options issued, the fair value was estimated at
the date of grant using the following range of assumptions:
The
options vest over a period of three years and have a life of 5 years, volatility
of 15%, risk free interest rate of 2.76%, and dividend yield of 0%. No estimate
of forfeitures was made as the Company has a short history of granting
options.
The
Company recorded $5,613 of compensation expense for stock options to its
independent directors for the year ended December 31, 2008. There were no
options exercised during 2008.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Following
is a summary of the warrant activity:
|
|
Number of
Shares
|
|
|
Average
Exercise
Price per Share
|
|
|
Weighed
Average
Remaining
Contractual
Term in Years
|
|
Outstanding
at December 31, 2007
|
|
|
-
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
393,000
|
|
|
|
6.00
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
393,000
|
|
|
|
6.00
|
|
|
|
2.51
|
|
Exercisable
at December 31, 2008
|
|
|
393,000
|
|
|
|
|
|
|
|
2.51
|
|
Following
is a summary of the option activity:
|
|
Number of
Shares
|
|
|
Average
Exercise
Price per Share
|
|
|
Weighed
Average
Remaining
Contractual
Term in Years
|
|
Outstanding
at December 31, 2007
|
|
|
-
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2007
|
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
20,000
|
|
|
|
4.60
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
20,000
|
|
|
|
4.60
|
|
|
|
4.54
|
|
Exercisable
at December 31, 2008
|
|
|
20,000
|
|
|
|
|
|
|
|
4.54
|
|
17.
COMMITMENTS
Employment
Agreements
On
January 1, 2008, the Company 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 the Company. 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, currently $18,000 per annum. In addition, Mr. Jun
Wang shall be entitled to overtime pay in accordance with the applicable
law.
On
January 1, 2008, The Company 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 with current salary of $10,684 per annum.
Lease
agreements
The
Company leased several offices for its sales representative in different cities
under various one-year, non-cancellable, and renewable operating lease
agreements.
At
December 31, 2008, future minimum rental payments required under these operating
leases are as follows:
Year
Ending December 31,
|
|
Amount
|
|
2009
|
|
$
|
87,000
|
|
2010
|
|
|
87,000
|
|
Total
|
|
$
|
174,000
|
|
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Total
rental expense for the years ended December 31, 2008 and 2007 was approximately
$87,000 and $52,000, respectively.
18.
CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in 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 expense 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.
The
Company is required to file the Registration Statement with the SEC within 60
days of the closing of the private placement offering. The Registration
Statement must be declared effective by the SEC within 180 days of the final
closing of the offering. Subject to certain grace periods, the Registration
Statement must remain effective and available for use until the Investors can
sell all of the securities covered by the Registration Statement without
restriction pursuant to Rule 144. If the Company fails to meet the filing or
effectiveness requirements of the Registration Statement, SmartHeat is required
to pay liquidated damages of 2% of the aggregate purchase price paid by such
Investor for any Registrable Securities then held by such Investor on the date
of such failure and on each anniversary of the date of such failure until
such failure is cured. Given the length of time it took the last
investor in the private placement to complete his paperwork, the Company
believes that the last closing under the private placement did not occur until
September 23rd or 24th and that the 180 day period for effectiveness of the
registration statement under the Registration Rights Agreement will not end
until March 23rd. At March 10, 2009, the registration statement has
not declared effective yet.
19.
ACQUISITION OF SANDEKE CO., LTD.
On
September 25, 2008, the Company entered into a Share Exchange Agreement
("Agreement") for the acquisition by the Company of all of the outstanding
capital stock of SanDeKe. The purchase price for the SanDeKe shares was
$741,516, of which $222,455 was payable within 15 days after the signature date
of the Agreement, $370,758 is payable within 15 days after all necessary
documents have been filed with government agencies, and $148,303 of which is
payable within 15 days after the purchase has been approved and registered by
the government agencies. Under the terms of the Agreement, two of the
shareholders of SanDeKe have agreed not to compete with the business of SanDeKe
for a period of four years after the completion of the purchase. At
March 10, 2009, the Company has not paid the purchase consideration
yet.
The
operating results of SanDeKe are included in the accompanying consolidated
statements of income from the acquisition date. For convenience of reporting the
acquisition for accounting purposes, September 1, 2008 has been designated as
the acquisition date.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition. The fair value of
the net assets acquired exceeded the total consideration for the acquisition by
approximately $117,000 (RMB 800,000). The excess (negative goodwill) was
allocated on a pro rata basis to long-lived assets.
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
Cash
|
|
$
|
59,245
|
|
Accounts
receivable
|
|
|
489,527
|
|
Advance
to suppliers
|
|
|
329,951
|
|
Other
receivables
|
|
|
128,646
|
|
Inventory
|
|
|
92,370
|
|
Property
and equipment
|
|
|
73,324
|
|
Intangible
assets
|
|
|
563,567
|
|
Accounts
payable
|
|
|
(332,276
|
)
|
Advance
from customers
|
|
|
(557,216
|
)
|
Deferred
tax liability
|
|
|
(39,076
|
)
|
Other
current liabilities
|
|
|
(66,546
|
)
|
Purchase
price
|
|
$
|
741,516
|
|
The
intangible asset consisted of know-how technology is amortized over 5 years, the
customer list is amortized over 5 years and covenants not to compete, is
amortized over 4 years.
The
pro forma financial information of the consolidated operations of the Company as
if the acquisition of SanDeKe had occurred as of the beginning of the year is
presented below:
For the year ended
December 31, 2008
|
|
SmartHeat
and
subsidiaries
|
|
|
SanDeKe
|
|
|
Pro forma
Adjustments
|
|
|
Pro forma
Consolidated
|
|
Net
revenue
|
|
$
|
32,676,082
|
|
|
$
|
2,135,837
|
|
|
$
|
-
|
|
|
$
|
34,811,919
|
|
Cost
of revenue
|
|
|
21,717,735
|
|
|
|
1,752,951
|
|
|
|
-
|
|
|
|
23,470,686
|
|
Gross
profit
|
|
|
10,958,347
|
|
|
|
382,886
|
|
|
|
-
|
|
|
|
11,341,233
|
|
Selling
expense
|
|
|
1,564,977
|
|
|
|
(607)
|
|
|
|
-
|
|
|
|
1,564,370
|
|
General
& administrative expense
|
|
|
1,851,117
|
|
|
|
286,591
|
|
|
|
78,131
|
|
|
|
2,215,839
|
|
Total
operating expenses
|
|
|
3,416,094
|
|
|
|
285,984
|
|
|
|
78,131
|
|
|
|
3,780,209
|
|
Income
(loss) from operations
|
|
|
7,542,253
|
|
|
|
96,902
|
|
|
|
(78,131
|
)
|
|
|
7,561,024
|
|
Non-operating
income (expenses), net
|
|
|
93,288
|
|
|
|
(401
|
)
|
|
|
-
|
|
|
|
92,887
|
|
Income
(loss) before income tax
|
|
|
7,634,966
|
|
|
|
96,501
|
|
|
|
(78,131
|
)
|
|
|
7,653,337
|
|
Income
tax
|
|
|
1,293,660
|
|
|
|
163
|
|
|
|
-
|
|
|
|
1,293,823
|
|
Minority
interest
|
|
|
5,966
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,966
|
|
Net
income (loss)
|
|
$
|
6,335,340
|
|
|
$
|
96,339
|
|
|
$
|
(78,131
|
)
|
|
$
|
6,353,548
|
|
a)
|
Pro
forma adjustment is to record additional amortization expense of $76,835
and depreciation expense of $1,296 for the increase in basis of the
intangible assets and decrease in basis of the fixed assets as a result of
the purchase.
|
For the year ended
December 31, 2007
|
|
Taiyu
|
|
|
SanDeKe
|
|
|
Pro forma
Adjustments
|
|
|
Pro forma
Consolidated
|
|
Net
revenue
|
|
$
|
13,273,151
|
|
|
$
|
2,334,369
|
|
|
$
|
-
|
|
|
$
|
15,607,520
|
|
Cost
of revenue
|
|
|
8,667,353
|
|
|
|
2,059,235
|
|
|
|
-
|
|
|
|
10,726,588
|
|
Gross
profit
|
|
|
4,605,798
|
|
|
|
275,134
|
|
|
|
-
|
|
|
|
4,880,932
|
|
Selling
expense
|
|
|
1,681,624
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,681,624
|
|
General
& administrative expense
|
|
|
687,466
|
|
|
|
283,689
|
|
|
|
107,693
|
|
|
|
1,078,848
|
|
Total
operating expenses
|
|
|
2,369,090
|
|
|
|
283,689
|
|
|
|
107,693
|
|
|
|
2,760,472
|
|
Income
from operations
|
|
|
2,236,708
|
|
|
|
(8,555
|
)
|
|
|
(107,693
|
)
|
|
|
2,120,460
|
|
Non-operating
income, net
|
|
|
24,957
|
|
|
|
(1,519
|
)
|
|
|
-
|
|
|
|
23,438
|
|
Income
before income tax
|
|
|
2,261,665
|
|
|
|
(10,074)
|
|
|
|
(107,693
|
)
|
|
|
2,143,898
|
|
Income
tax
|
|
|
175,647
|
|
|
|
2,960
|
|
|
|
-
|
|
|
|
178,607
|
|
Minority
interest
|
|
|
(1,873
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,873
|
)
|
Net
income
|
|
$
|
2,087,891
|
|
|
$
|
(13,033
|
)
|
|
$
|
(107,693
|
)
|
|
$
|
1,967,165
|
|
SMARTHEAT
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
a)
|
Pro
forma adjustment is to record additional amortization expense of $105,012
and depreciation expense of $2,681 for the increase in basis of the
intangible assets and decrease in basis of the fixed assets as a result of
the purchase.
|
SMARTHEAT
INC.
2,023,000
SHARES OF COMMON STOCK
PRELIMINARY
PROSPECTUS
MARCH
23, 2009
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 Company in
connection with the offering described in the registration
statement.
SEC
Registration Fee
|
|
$
|
346.00
|
|
Accounting
Fees and Expenses
|
|
$
|
|
|
Legal
Fees and Expenses
|
|
$
|
|
|
Total
|
|
$
|
|
|
Item
14. Indemnification of Directors and Officers
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 for 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 April
14, 2008, pursuant to the terms of a Share Exchange Agreement dated April 14,
2008, by and among SmartHeat, Taiyu and the Taiyu Shareholders, each of whom is
a non-US person (as contemplated by Rule 902 under the Securities Act), all of
the equitable and legal rights, title and interests in and to Taiyu's share
capital in the amount of RMB25,000,000 (approximately $3,571,939 based on an
exchange rate of US$1.00 = RMB6.999) were exchanged for an aggregate of
18,500,000 shares of SmartHeat common stock. These issuances were exempt from
registration requirements under Regulation S under the Securities
Act.
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 to each of
the following persons:
G
& S I Fund LP
C.
Robert Shearer
Nancy
Palmero and Herman Palmero
Thomas
Knox
Arnold
Staloff
Domaco
Venture Capital Fund Partnership
Marc
Engelbert
Andrew
Grossman Profit Sharing Plan, Pershing LLC as Custodian
Norton
Hight & Joan Hight
Randall
W. Hight
Maura
Kelly
Wolfe
F. Model
Anthony
G. Polak
IRA
FBO Anthony G. Polak, Pershing LLC as Custodian
IRA
FBO Jack Polak, Pershing LLC as Custodian
Jonathan
Rothschild
Elias
Sayour Foundation Incorporated
Gary
Stadtmauer
Rhea
D. Stadtmauer and Janice Maiman
Teddy
Chasanoff
Ross
Pirasteh
Sandra
G. Shapiro & Robert S. Shapiro
John
Gross
Murray
Stadtmauer & Clare Stadtmauer
IRA
FBO Ronald M. Lazar Pershing As Custodian
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IRA
FBO Kevin Clarke, Pershing LLC as Custodian
RL
Capital Partners, LP
Geri
Investments N.V.
IRA
FBO Daniel Berkowitz Pershing LLC as Custodian
Harmon
Corporation A.V.V.
Funcorp
Associates Ltd.
La
legetaz Private Foundation
Evie
Falda & David Falda,
Ann
V. Clemente
William
H. Peterson Living Trust
Allied
Diesel Service Inc. Employee Profit Sharing
Plan
#2
Florence
E. Luvera
Kalman
A. Barson (Roth IRA)
Steve
Roman
Suellyn
P. Tornay
Eximius
bvba
IRA
FBO David Swerdloff Pershing LLC as Custodian
Michael
A. Berlinger
Sun
Fun Investing Inc.
Strong
Growth Capital Ltd
Yuzhen
Hou
The
USX China Fund
White
Sand Investor Group, L.P.
Gibralt
Capital Corporation
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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 $6.00 per
share (the "Warrants"). The Units sold represent an aggregate of 1,620,000
million shares of Common Stock and Warrants to purchase 243,000 shares of Common
Stock. The offering and sale of the Units was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act and Regulation D and Regulation S promulgated by the SEC thereunder. We
compensated three placement agents that assisted in the sale of the Units in
this private placement offering by (i) paying them cash equal to 6.5% of the
gross proceeds from the sales of Units placed and (ii) issuing them Warrants to
purchase that number of shares of Common Stock equal to 10% of the Units placed
as follows:
Placement
Agent
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Cash
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Warrants
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Rodman
& Renshaw, LLC
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$
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23,888
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56,500
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Maxim
Group LLC
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$
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104,650
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—
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Four
Tong Investments Ltd.
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$
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207,025
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91,000
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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 additional 10,000 Units at an offering price of $3.50 per
Unit for gross proceeds of approximately $35,000 to David L. Quinn and Tracy
Quinn. 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:
(a) Exhibits
Exhibit
Number
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Description
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2.1
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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 (Commission File No. 000-53052) filed on
April 18, 2008)
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2.2
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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 (Commission File No. 000-53052) filed on April 18,
2008)
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2.3
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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 (Commission File No. 000-53052) filed on April
18, 2008)
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3(i)
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Articles of
Incorporation (Incorporated herein by reference to Exhibit 3.2 to the
Company's Form SB-2 (Commission File No. 333-139649) filed on
December 22, 2006)
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3(ii)
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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 (Commission
File No. 000-53052) filed on October 16, 2008)
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4.1
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Specimen
Stock Certificate (incorporated by reference to Exhibit 10.13 of Amendment
No. 2 to SmartHeat's Registration Statement on Form S-1/A (Commission File
No. 333-154415), filed with the SEC on February 4,
2009)
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4.2
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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 (Commission
File No. 000-53052) filed on July 11, 2008)
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5.1
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Opinion
of Holland & Hart LLP
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10.1
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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 (Commission File No. 000-53052) filed on April
18, 2008)
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10.2
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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 (Commission File No. 000-53052) filed on April
18, 2008)
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10.3
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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 (Commission File No. 000-53052) filed on April
18, 2008)
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10.4
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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 (Commission File No.
000-53052) filed on April 18, 2008)
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10.5
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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 (Commission File No.
000-53052) filed on April 18, 2008)
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10.6
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Form
of Purchase Order (Incorporated herein by reference to Exhibit 10.6 to the
Current Report on Form 8-K (Commission File No. 000-53052) filed on April
18, 2008)
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10.7
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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 (Commission File No. 000-53052) filed on April 18,
2008)
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10.8
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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 (Commission File No. 000-53052) filed on April 18,
2008)
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10.9
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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 (Commission
File No. 000-53052) filed on April 18, 2008)
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10.10
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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 (Commission File No. 000-53052) filed on April 18,
2008)
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10.11
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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 (Commission File No. 000-53052) filed on April 18,
2008)
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10.12
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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
(Commission File No. 000-53052) filed on July 11, 2008)
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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 (incorporated by reference to
Exhibit 10.13 of Amendment No. 1 to SmartHeat's Registration Statement on
Form S-1/A (Commission File No. 333-154415), filed with the SEC on
December 12, 2008)
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21
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List
of subsidiaries of the Company (incorporated by reference to Exhibit 21 of
SmartHeat's Registration Statement on Form S-1 (Commission File No.
333-154415), filed with the SEC on October 17, 2008)
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23.1
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Consent
of Holland & Hart LLP (included in Exhibit
5.1)
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23.2
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Consent
of Goldman Parks Kurland Mohidin, LLP, independent registered public
accounting firm
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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:
March 24, 2009
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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 (Principal Executive
Officer)
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Date:
March 24, 2009
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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 (Principal Accounting
Officer)
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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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March
24, 2009
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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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March
24, 2009
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Zhijuan
Guo
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*
|
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Director
|
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March
24, 2009
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Frederick
Rittereiser
|
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*
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Director
|
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March
24, 2009
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Arnold
Staloff
|
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*
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Director
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March
24, 2009
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Weiguo
Wang
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* |
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Director
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March
24, 2009
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Wenbin
Lin
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*
By:
/s/
Jun Wang
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Jun
Wang
Attorney
in Fact
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