Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which include, but are not limited to, statements concerning our projected revenues, expenses, gross profit and income, mix of revenue, demand for our products, the benefits and potential applications for our products, the need for additional capital, our ability to obtain and successfully perform additional new contract awards and the related funding and profitability of such awards, the competitive nature of our business and markets and product qualification requirements of our customers. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Such factors include, but are not limited to the following:
Additionally, this report contains statistical data that we obtained from various publicly available government publications and industry-specific third party reports. Statistical data in these publications also include projections based on a number of assumptions. The markets for PHEs, PHE Units, heat meters and heat pumps may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our common stock. In addition, the changing nature of our customers’ industries results in uncertainties in any projections or estimates relating to the growth prospects or future condition of our markets. 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.
Unless otherwise indicated, information in this report 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 market data from independent industry publications cited in this report was prepared on our or our affiliates’ behalf.
Additional information on the various risks and uncertainties potentially affecting our operating results are discussed in this report and other documents we file with the Securities and Exchange Commission, or the SEC, or available upon written request to our corporate secretary at: A-1, 10, Street 7, Shenyang Economic and Technological Development Zone, Shenyang, China 110141. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements.
As used in this report, “SmartHeat,” “Company,” “we,” “our” and similar terms refer to SmartHeat Inc. and its subsidiaries, unless the context indicates otherwise.
Our functional currency is the US Dollar, or USD, while the functional currency of our subsidiaries in China are denominated in Chinese Yuan Renminbi, or RMB, the national currency of the People’s Republic of China, which we refer to as the PRC or China, and the functional currency of our subsidiary in Germany is denominated in Euros, or EUR. The functional currencies of our foreign operations are translated into USD for balance sheet accounts using the current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the average exchange rate during the fiscal year. See Note 2 of the consolidated financial statements included herein.
Effective February 7, 2012, we implemented a one-for-ten reverse stock split of our common stock. Unless otherwise indicated, all share amounts and per share prices in this report were retroactively adjusted to reflect the effect of this reverse stock split. See Note 1 of the consolidated financial statements included herein.
Part I – Financial Information
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements SMARTHEAT INC. AND SUBSIDIARIES SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
| | SEPTEMBER 30, 2016 | | | DECEMBER 31, 2015 | |
| | (UNAUDITED) | | | | |
ASSETS | | | | | | |
| | | | | | |
CURRENT ASSETS | | | | | | |
Cash and equivalents | | $ | 1,200,820 | | | $ | 1,736,971 | |
Accounts receivable, net | | | 542,589 | | | | 673,186 | |
Retentions receivable, net | | | - | | | | 15,183 | |
Advances to suppliers, net | | | - | | | | 6,070 | |
Other receivables (net), prepayments and deposits | | | 400,989 | | | | 1,356,767 | |
Inventories, net | | | 713,864 | | | | 3,053,189 | |
Taxes receivable | | | 6,907 | | | | 7,986 | |
Notes receivable - bank acceptances | | | 14,975 | | | | 162,327 | |
| | | | | | | | |
Total current assets | | | 2,880,144 | | | | 7,011,679 | |
| | | | | | | | |
NONCURRENT ASSETS | | | | | | | | |
Long term investment | | | 367,529 | | | | - | |
Property and equipment, net | | | 23,375 | | | | 916,245 | |
Intangible assets, net | | | - | | | | 423,505 | |
| | | | | | | | |
Total noncurrent assets | | | 390,904 | | | | 1,339,750 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 3,271,048 | | | $ | 8,351,429 | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| | | | | | | | |
CURRENT LIABILITIES | | | | | | | | |
Accounts payable | | $ | 362,438 | | | $ | 224,389 | |
Advances from customers | | | 1,203,231 | | | | 1,156,178 | |
Taxes payable | | | 18,147 | | | | 32,507 | |
Accrued liabilities and other payables | | | 6,771,917 | | | | 3,577,891 | |
| | | | | | | | |
Total current liabilities | | | 8,355,733 | | | | 4,990,965 | |
| | | | | | | | |
CREDIT LINE PAYABLE | | | 2,875,335 | | | | 2,455,335 | |
| | | | | | | | |
DEFERRED TAX LIABILITY | | | - | | | | 15,238 | |
| | | | | | | | |
TOTAL LIABILITIES | | | 11,231,068 | | | | 7,461,538 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | |
STOCKHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
Common stock, $0.001 par value; 75,000,000 shares authorized, 8,283,399 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | | | 8,283 | | | | 8,283 | |
Paid-in capital | | | 85,924,857 | | | | 98,435,254 | |
Statutory reserve | | | 780,682 | | | | 780,682 | |
Shares to be issued | | | 80,000 | | | | - | |
Accumulated other comprehensive income | | | 15,071,470 | | | | 12,495,370 | |
Accumulated deficit | | | (115,444,137 | ) | | | (118,011,345 | ) |
Dividend | | | (75,000 | ) | | | - | |
| | | | | | | | |
Total Company stockholders' deficit | | | (13,653,845 | ) | | | (6,291,756 | ) |
| | | | | | | | |
NONCONTROLLING INTEREST | | | 5,693,825 | | | | 7,181,647 | |
| | | | | | | | |
TOTAL EQUITY (DEFICIT) | | | (7,960,020 | ) | | | 889,891 | |
| | | | | | | | |
TOTAL LIABILITIES AND EQUITY | | $ | 3,271,048 | | | $ | 8,351,429 | |
SMARTHEAT INC.INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| | NINE MONTHS ENDED SEPTEMBER 30, | | | THREE MONTHS ENDED SEPTEMBER 30, | |
| | 2016 | | | 2015 | | | 2016 | | | 2015 | |
| | (UNAUDITED) | | | (UNAUDITED) | |
| | | | | | | | | | | | |
Net sales | | $ | 57,719 | | | $ | 242,780 | | | $ | 21,902 | | | $ | 200,357 | |
Cost of sales | | | 346,830 | | | | 2,439,656 | | | | 14,251 | | | | 365,166 | |
| | | | | | | | | | | | | | | | |
Gross profit (loss) | | | (289,111 | ) | | | (2,196,876 | ) | | | 7,651 | | | | (164,809 | ) |
| | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Selling | | | 152,836 | | | | 362,354 | | | | 49,497 | | | | 89,817 | |
General and administrative | | | 545,164 | | | | 934,818 | | | | 94,756 | | | | 212,760 | |
Provision (Reversal of provision) for bad debts | | | - | | | | 117,679 | | | | - | | | | (57,808 | ) |
| | | | | | | | | | | | | | | | |
Total operating expenses (income) | | | 698,000 | | | | 1,414,851 | | | | 144,253 | | | | 244,769 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | (987,111 | ) | | | (3,611,727 | ) | | | (136,602 | ) | | | (409,578 | ) |
| | | | | | | | | | | | | | | | |
Non-operating income (expenses) | | | | | | | | | | | | | | | | |
Interest income | | | 2,829 | | | | 4,622 | | | | 905 | | | | 1,043 | |
Interest expense | | | (262,375 | ) | | | (269,147 | ) | | | (92,925 | ) | | | (97,174 | ) |
Financial expense | | | (164,007 | ) | | | (69,454 | ) | | | (78,046 | ) | | | (19,430 | ) |
Other income (expenses), net | | | 163,280 | | | | 10,271 | | | | 160,796 | | | | 6,574 | |
| | | | | | | | | | | | | | | | |
Total non-operating expenses, net | | | (260,273 | ) | | | (323,708 | ) | | | (9,270 | ) | | | (108,987 | ) |
| | | | | | | | | | | | | | | | |
Loss before income tax (benefit) | | | (1,247,384 | ) | | | (3,935,435 | ) | | | (145,872 | ) | | | (518,565 | ) |
| | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | (10,154 | ) | | | 29,979 | | | | (3,016 | ) | | | (4,020 | ) |
| | | | | | | | | | | | | | | | |
Loss from continuing operations | | | (1,237,230 | ) | | | (3,965,414 | ) | | | (142,856 | ) | | | (514,545 | ) |
| | | | | | | | | | | | | | | | |
Cumulative foreign currency translation gain / loss on disposed entities | | | 682,036 | | | | 11,915,632 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Loss from operations of discontinued entities, net of tax | | | (5,221,481 | ) | | | (1,799,033 | ) | | | (3,465,934 | ) | | | (458,994 | ) |
| | | | | | | | | | | | | | | | |
Loss on disposal of discontinued entities, net of tax | | | (2,764,701 | ) | | | (47,151,307 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Net loss including noncontrolling interest | | | (8,541,376 | ) | | | (41,000,122 | ) | | | (3,608,790 | ) | | | (973,539 | ) |
| | | | | | | | | | | | | | | | |
Less: loss attributable to noncontrolling interest from continuing operations | | | (1,461,163 | ) | | | (499 | ) | | | (696,143 | ) | | | (160 | ) |
| | | | | | | | | | | | | | | | |
Less: loss attributable to noncontrolling interest from discontinued operations, net of tax | | | (22,085 | ) | | | (21,588 | ) | | | (3,022 | ) | | | (5,503 | ) |
| | | | | | | | | | | | | | | | |
Net loss to SmartHeat Inc. | | | (7,058,128 | ) | | | (40,978,035 | ) | | | (2,909,625 | ) | | | (967,876 | ) |
| | | | | | | | | | | | | | | | |
Other comprehensive item | | | | | | | | | | | | | | | | |
Foreign currency translation loss attributable to discontinued operations | | | (7,651 | ) | | | (316,168 | ) | | | (1,181 | ) | | | (22,405 | ) |
Foreign currency translation gain (loss) attributable to SmartHeat Inc. | | | 2,583,659 | | | | (564,159 | ) | | | (26,398 | ) | | | (284,173 | ) |
Foreign currency translation loss attributable to noncontrolling interest | | | (4,482 | ) | | | (3,828 | ) | | | (1,159 | ) | | | (7,505 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive loss attributable to SmartHeat Inc. | | $ | (4,482,120 | ) | | $ | (41,858,362 | ) | | $ | (2,937,204 | ) | | $ | (1,274,454 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive loss attributable to noncontrolling interest | | $ | (1,487,730 | ) | | $ | (25,915 | ) | | $ | (700,324 | ) | | $ | (13,168 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted weighted average shares outstanding | | | 8,283,399 | | | | 6,783,399 | | | | 8,283,399 | | | | 6,783,399 | |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per share from continuing operations | | $ | 0.03 | | | $ | (0.58 | ) | | $ | 0.07 | | | $ | (0.08 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per share from discontinued operations | | $ | (0.88 | ) | | $ | (5.46 | ) | | $ | (0.42 | ) | | $ | (0.07 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted net loss per share | | $ | (0.85 | ) | | $ | (6.04 | ) | | $ | (0.35 | ) | | $ | (0.15 | ) |
| | NINE MONTHS ENDED SEPTEMBER 30, | | | THREE MONTHS ENDED SEPTEMBER 30, | |
| | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| | (Unaudited) | | | (Unaudited) | |
| | | | | | | | | | | | |
Net sales | | $ | 3,172,560 | | | $ | 4,115,782 | | | $ | 1,711,793 | | | $ | 2,494,351 | |
Cost of sales | | | 4,613,092 | | | | 3,160,146 | | | | 1,591,692 | | | | 1,346,561 | |
| | | | | | | | | | | | | | | | |
Gross income (loss) | | | (1,440,532 | ) | | | 955,636 | | | | 120,101 | | | | 1,147,790 | |
| | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
Selling | | | 1,194,681 | | | | 1,221,154 | | | | 376,412 | | | | 431,154 | |
General and administrative | | | 2,763,787 | | | | 3,399,885 | | | | 1,448,733 | | | | 1,189,422 | |
Provision (reversal of provision) for bad debts | | | 117,679 | | | | (2,169,462 | ) | | | (812,230 | ) | | | (162,248 | ) |
Provision (reversal of provision) for advance to suppliers | | | - | | | | 2,320,557 | | | | - | | | | (265 | ) |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 4,076,147 | | | | 4,772,134 | | | | 1,012,915 | | | | 1,458,063 | |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (5,516,679 | ) | | | (3,816,498 | ) | | | (892,814 | ) | | | (310,273 | ) |
| | | | | | | | | | | | | | | | |
Non-operating income (expenses) | | | | | | | | | | | | | | | | |
Interest income | | | 5,382 | | | | 16,392 | | | | 1,159 | | | | 6,622 | |
Interest expense | | | (269,147 | ) | | | (146,584 | ) | | | (97,174 | ) | | | (61,431 | ) |
Financial expense | | | (70,365 | ) | | | (88,662 | ) | | | (19,785 | ) | | | (40,326 | ) |
Other income, net | | | 79,071 | | | | 658,008 | | | | 18,953 | | | | 211,539 | |
| | | | | | | | | | | | | | | | |
Total non-operating income (expenses), net | | | (255,059 | ) | | | 439,154 | | | | (96,847 | ) | | | 116,404 | |
| | | | | | | | | | | | | | | | |
Loss before income tax (benefit) | | | (5,771,738 | ) | | | (3,377,344 | ) | | | (989,661 | ) | | | (193,869 | ) |
| | | | | | | | | | | | | | | | |
Income tax expense (benefit) | | | (7,291 | ) | | | 63,309 | | | | (16,122 | ) | | | (12,184 | ) |
| | | | | | | | | | | | | | | | |
Loss from continuing operations | | | (5,764,447 | ) | | | (3,440,653 | ) | | | (973,539 | ) | | | (181,685 | ) |
| | | | | | | | | | | | | | | | |
Cumulative foreign currency translation gain on disposed entities | | | 11,915,632 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Loss from operations of discontinued entities, net of tax | | | - | | | | (3,716,589 | ) | | | - | | | | (75,352 | ) |
| | | | | | | | | | | | | | | | |
Loss on disposal of discontinued entities, net of tax | | | (47,151,307 | ) | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Net loss including noncontrolling interest | | | (41,000,122 | ) | | | (7,157,242 | ) | | | (973,539 | ) | | | (257,037 | ) |
| | | | | | | | | | | | | | | | |
Less: income (loss) attributable to noncontrolling interest from continuing operations | | | (22,087 | ) | | | (25,632 | ) | | | (5,663 | ) | | | 4,457 | |
| | | | | | | | | | | | | | | | |
Less: income (loss) attributable to noncontrolling interest from discontinued operations, net of tax | | | - | | | | (1,423,456 | ) | | | - | | | | (11,248 | ) |
| | | | | | | | | | | | | | | | |
Net loss to SmartHeat Inc. | | | (40,978,035 | ) | | | (5,708,154 | ) | | | (967,876 | ) | | | (250,246 | ) |
| | | | | | | | | | | | | | | | |
Other comprehensive item | | | | | | | | | | | | | | | | |
Foreign currency translation loss attributable to discontinued operations | | | - | | | | (729,354 | ) | | | - | | | | (214,435 | ) |
Foreign currency translation loss attributable to SmartHeat Inc. | | | (876,533 | ) | | | 88,873 | | | | (306,309 | ) | | | 82,762 | |
Foreign currency translation gain (loss) attributable to noncontrolling interest | | | (7,622 | ) | | | (2,219 | ) | | | (7,774 | ) | | | (128 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive loss attributable to SmartHeat Inc. | | $ | (41,854,568 | ) | | $ | (6,348,635 | ) | | $ | (1,274,185 | ) | | $ | (381,919 | ) |
| | | | | | | | | | | | | | | | |
Comprehensive loss attributable to noncontrolling interest | | $ | (29,709 | ) | | $ | (1,451,307 | ) | | $ | (13,437 | ) | | $ | (6,919 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted weighted average shares outstanding | | | 6,783,399 | | | | 6,364,338 | | | | 6,783,399 | | | | 6,579,003 | |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per share from continuing operations | | $ | (0.85 | ) | | $ | (0.54 | ) | | $ | (0.14 | ) | | $ | (0.03 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted loss per share from discontinued operations | | $ | (5.19 | ) | | $ | (0.36 | ) | | $ | - | | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | |
Basic and diluted net loss per share | | $ | (6.04 | ) | | $ | (0.90 | ) | | $ | (0.14 | ) | | $ | (0.04 | ) |
SMARTHEAT INC.INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
| | NINE MONTHS ENDED SEPTEMBER 30, | |
| | 2016 | | | 2015 | |
| | (UNAUDITED) | |
| | | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Loss including noncontrolling interest | | $ | (8,541,376 | ) | | $ | (41,000,122 | ) |
Adjustments to reconcile loss including noncontrolling interest to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 300,114 | | | | 346,304 | |
Provision for bad debts | | | 619,298 | | | | 116,821 | |
Provision for inventory impairment | | | 1,689,812 | | | | 2,156,811 | |
Provision for advance to suppliers | | | 1,393 | | | | - | |
Provision for fixed assets impairment | | | 194,670 | | | | - | |
Provision for intangible assets impairment | | | 311,369 | | | | - | |
Changes in warranty reserves | | | - | | | | 2,777 | |
Gain on debt waiver | | | - | | | | (8,790,015 | ) |
Loss on sale of equity interest of subsidiaries | | | 2,082,665 | | | | 44,025,690 | |
Changes in deferred tax | | | (15,108 | ) | | | (37,211 | ) |
(Increase) decrease in assets and liabilities: | | | | | | | | |
Accounts receivable | | | 448,431 | | | | 609,977 | |
Retentions receivable | | | 24,121 | | | | 71,755 | |
Advances to suppliers | | | 4,578 | | | | (24,675 | ) |
Other receivables, prepayments and deposits | | | (226,613 | ) | | | (1,409,203 | ) |
Inventories | | | 39,934 | | | | (160,135 | ) |
Taxes receivable | | | (15,619 | ) | | | 77,326 | |
Accounts payable | | | (74,590 | ) | | | (273,624 | ) |
Advances from customers | | | 80,154 | | | | 164,892 | |
Accrued liabilities and other payables | | | 2,147,964 | | | | 1,743,767 | |
| | | | | | | | |
Net cash used in operating activities | | | (928,803 | ) | | | (2,378,865 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Change in restricted cash | | | - | | | | 52,603 | |
Cash disposed from equity interest sale of subsidiaries | | | (132,631 | ) | | | (9,490,641 | ) |
Acquisition of property and equipment | | | (347 | ) | | | (12,197 | ) |
Notes receivable | | | 145,062 | | | | - | |
| | | | | | | | |
Net cash provided by (used in) investing activities | | | 12,084 | | | | (9,450,235 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
Change in credit line payable | | | 420,000 | | | | 110,000 | |
| | | | | | | | |
Net cash provided by financing activities | | | 420,000 | | | | 110,000 | |
| | | | | | | | |
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND EQUIVALENTS | | | (39,432 | ) | | | (125,578 | ) |
| | | | | | | | |
NET DECREASE IN CASH AND EQUIVALENTS | | | (536,151 | ) | | | (11,844,678 | ) |
| | | | | | | | |
CASH AND EQUIVALENTS, BEGINNING OF PERIOD | | | 1,736,971 | | | | 13,682,624 | |
| | | | | | | | |
CASH AND EQUIVALENTS, END OF PERIOD | | $ | 1,200,820 | | | $ | 1,837,946 | |
| | | | | | | | |
Supplemental cash flow data: | | | | | | | | |
Income tax paid | | $ | - | | | $ | - | |
Interest paid | | $ | - | | | $ | - | |
SMARTHEAT INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYNINE MONTHS ENDED SEPTEMBER 30, 2015 AND YEARS ENDED DECEMBER 31, 2014 AND 2013
| | Common stock | | | | | | | | | | | | | | | | | | | |
| | Shares | | | Amount | | | Paid in capital | | | Statutory reserves | | | Accumulated other comprehensive income | | | Accumulated deficit | | | Total | | | Noncontrolling interest | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2013 | | | 5,733,399 | | | $ | 5,733 | | | $ | 103,607,559 | | | $ | 5,396,014 | | | $ | 11,273,497 | | | $ | (11,771,349 | ) | | $ | 108,511,454 | | | $ | 1,057,872 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for debt repayment | | | 200,000 | | | | 200 | | | | 119,800 | | | | - | | | | - | | | | - | | | | 120,000 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for loan amendment fee | | | 100,000 | | | | 100 | | | | 59,900 | | | | - | | | | - | | | | - | | | | 60,000 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for equity interest sale consent | | | 100,000 | | | | 100 | | | | 29,900 | | | | - | | | | - | | | | - | | | | 30,000 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sale of 40% equity interest and deconsolidation | | | - | | | | - | | | | (16,423,553 | ) | | | (9,537 | ) | | | (4,924,845 | ) | | | (5,187,502 | ) | | | (26,545,437 | ) | | | 27,127,137 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for year | | | - | | | | - | | | | - | | | | - | | | | - | | | | (49,669,341 | ) | | | (49,669,341 | ) | | | (5,812,244 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Transfer to statutory reserves | | | - | | | | - | | | | - | | | | 2,580 | | | | - | | | | (2,580 | ) | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation gain (loss) | | | - | | | | - | | | | - | | | | - | | | | 2,642,617 | | | | - | | | | 2,642,617 | | | | (31,371 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 | | | 6,133,399 | | | | 6,133 | | | | 87,393,605 | | | | 5,389,057 | | | | 8,991,269 | | | | (66,630,772 | ) | | | 35,149,293 | | | | 22,341,394 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued to officers and directors | | | 250,000 | | | | 250 | | | | 67,050 | | | | - | | | | - | | | | - | | | | 67,300 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for loan extension fee | | | 400,000 | | | | 400 | | | | 39,800 | | | | - | | | | - | | | | - | | | | 40,200 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for year | | | - | | | | - | | | | - | | | | - | | | | - | | | | (9,567,988 | ) | | | (9,567,988 | ) | | | (3,317,826 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Transfer to statutory reserves | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation loss | | | - | | | | - | | | | - | | | | - | | | | (441,701 | ) | | | - | | | | (441,701 | ) | | | (15,828 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2014 | | | 6,783,399 | | | | 6,783 | | | | 87,500,456 | | | | 5,389,057 | | | | 8,549,568 | | | | (76,198,760 | ) | | | 25,247,104 | | | | 19,007,740 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sale of 100% equity interest in certain subsidiaries | | | - | | | | - | | | | 16,423,553 | | | | - | | | | 4,849,732 | | | | (3,288,258 | ) | | | 17,985,027 | | | | (18,789,406 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for year | | | - | | | | - | | | | - | | | | - | | | | - | | | | (40,978,035 | ) | | | (40,978,035 | ) | | | (22,087 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification of statutory reserves of disposed entities to retained earnings as a result of 100% equity interest sale | | | - | | | | - | | | | - | | | | (4,608,375 | ) | | | - | | | | 4,608,375 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation loss | | | - | | | | - | | | | - | | | | - | | | | (876,533 | ) | | | - | | | | (876,533 | ) | | | (7,622 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2015 | | | 6,783,399 | | | $ | 6,783 | | | $ | 103,924,009 | | | $ | 780,682 | | | $ | 12,522,767 | | | $ | (115,856,678 | ) | | $ | 1,377,563 | | | $ | 188,625 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 20152016 (UNAUDITED) AND DECEMBER 31, 20142015
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, through its operating subsidiaries in China and Germany, designed, manufactured, sold and serviced plate heat exchangers (“PHEs”), PHE Units, which combine PHEs with various pumps, temperature sensors, valves and automated control systems, heat meters and heat pumps for use in commercial and residential buildings.
On August 23, 2013, the Company formed two new wholly-owned subsidiaries in the State of Nevada, Heat HP Inc., and HEAT PHE Inc. On the same date, the Company’s United States (“US”) parent entered into Assignment Agreements with Heat HP Inc. and Heat PHE Inc., respectively. Under the Assignment Agreements, the Company transferred 100% of its right, title and interest in certain subsidiaries to Heat HP Inc. and Heat PHE Inc. The reorganization was performed so the Company’s subsidiaries would be organized along their respective operating segments with Heat HP holding those subsidiaries that operated in the heat pumps and related products segment and Heat PHE holding those subsidiaries that operated in the plate heating equipment, meters and related products segment.
After the assignment, Heat HP Inc. owned 100% of SmartHeat (China) Investment Co., Ltd. (“SmartHeat Investment”), SmartHeat (Shanghai) Trading Co., Ltd. (“SmartHeat Trading”), Beijing SmartHeat Jinhui Energy Technology Co., Ltd. (“Jinhui”), SmartHeat Deutschland GmbH (“SmartHeat Germany”), and 98.8% of SmartHeat (Shenyang) Heat Pump Technology Co., Ltd. (“SmartHeat Pump”).
After the assignment, Heat PHE Inc. owned 100% of SmartHeat Taiyu (Shenyang) Energy Technology Co., Ltd. (“Taiyu”), SanDeKe Co., Ltd., (“SanDeKe”), SmartHeat Siping Beifang Energy Technology Co., Ltd. (“SmartHeat Siping”), SmartHeat (Shenyang) Energy Equipment Co., Ltd. (“SmartHeat Energy”), and 51% of Hohhot Ruicheng Technology Co., Ltd. (“Ruicheng”).
On August 23, 2013, the Company entered into a Stock Pledge Agreement with Northtech Holdings Inc. (“Northtech”). The Company delivered share certificates to Northtech representing 55% of Heat HP Inc. and Heat PHE Inc. to perfect the security interest in each of the Company’s directly and wholly-owned subsidiaries granted to Northtech as collateral security for all of the obligations of the Company to Northtech.
In December 2013, SmartHeat US parent incorporated SmartHeat Heat Exchange Equipment Co. (“Heat Exchange”) in China with registered capital of $3.00 million for manufacturing and sale of PHE and PHE related products.
On December 30, 2013, the Company, closed the transaction contemplated by the Equity Interest Purchase Agreement (“EIPA”) dated October 10, 2013, whereby the buyers purchased 40% of the Company’s equity interests in the following PHE segment subsidiaries: Taiyu; SmartHeat Siping; SmartHeat Energy; Ruicheng; and XinRui (collectively, the “Target Companies”). The purchase price was RMB 5 million ($0.82 million). XinRui was 46% owned by SmartHeat US parent prior to the 40% equity interest sale.
On November 28, 2014, the Company entered into an Amended and Restated EIPA, which amended and restated the EIPA dated October 10, 2013 between the Company and the buyers. Under the terms of the Amended EIPA, the buyers agreed to purchase the remaining 60% of the Company’s equity interests in the Target Companies effective as of December 31, 2014 (the “Closing Date”). The purchase price for the remaining 60% consists of: (i) RMB 8.5 million ($1.4 million) and (ii) the forgiveness of all net indebtedness of $11.75 million owed to the Target Companies by SmartHeat and each of its other subsidiaries as of December 31, 2014 subject to termination provisions as set forth in EIPA.
The effectiveness of the transaction was subject to the following conditions: (i) approval of its shareholders and (ii) receipt by the Board of Directors (“BOD” or the “Board”) of the Company of an opinion that the purchase and sale transaction was fair to the shareholders of SmartHeat from a financial point of view. The parties executed a mutual release to be delivered at the closing which provided, in part, for the target companies to forgive all net indebtedness of $11.75 million from SmartHeat and all of its other subsidiaries. In the event that the conditions were not met prior to December 31, 2014, the consideration and all documents were to be deposited into escrow and released when the conditions were satisfied; provided that if the conditions were not satisfied on or before March 31, 2015, either party was able to terminate the Amended EIPA and the funds and documents were to be returned to the depositing party. The termination deadline of the Amended EIPA was extended to May 15, 2015.
On May 11, 2015, the Company’s stockholders approved the sale of all of the remaining interests, constituting 100% of its ownership interests, (the “Stock Sale”) of certain subsidiaries of the Company as described above, all of the conditions precedents to the Stock Sale were satisfied. The parties executed a mutual release which became effective and provided, in part, that the Target Companies forgave all net indebtedness from SmartHeat and all of its other subsidiaries owed to the Target Companies. The consideration and all documents relating to the transaction were released from escrow upon the satisfaction of the foregoing conditions. The Stock Sale was effective on December 31, 2014.
The buyers consisted of 25 natural persons, all of whom are PRC citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajun Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively. Huajun Ai, Wen Sha, Jun Wang and Xudong Wang are also principals in Northtech.
On January 20, 2016, SmartHeat Pump entered and closed a Share Purchase Agreement with a series of buyers to sell 85% of the equity shares of SmartHeat Germany for Euro 170,000 ($185,400). The purchasing price of Euro 170,000 was returned to the buyers and subsequently paid into SmartHeat Germany as reserve by the buyers. The buyers are not related parties of the Company. SmartHeat Germany had continuous loss and the management decided to sell it at a minimal or no cost due to its higher operating cost.
During the nine months ended September 30, 2016, SmartHeat Pump decided to file for bankruptcy protection in China due to the slowdown of the business. SmartHeat Pump is preparing bankruptcy documents to be filed with the proper authorities in China, and expects the bankruptcy process to last for a few years before obtaining the final approval. Accordingly, the Company reclassified SmartHeat Pump business as discontinued operations and made an impairment reserve for its assets including accounts receivable, other receivables, advance to suppliers, inventory, deferred tax assets, fixed assets and intangible assets (See Note 19).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
The consolidated interim financial information as of September 30, 20152016 and for the nine and three months ended September 30, 20152016 and 2014,2015, were prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with US GAAP are not included. The interim consolidated financial information should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2014,2015, previously filed with the SEC.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of September 30, 2015,2016, its consolidated results of operations for the nine and three months ended September 30, 20152016 and 2014,2015, and its consolidated cash flows for the nine months ended September 30, 20152016 and 2014,2015, as applicable, were made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Principles of Consolidation
For the nine and three months ended September 30, 2015,2016, the accompanying consolidated financial statements include the accounts of SmartHeat’s US parent, its subsidiaries Heat HP and Heat PHE, and their subsidiaries SanDeKe, Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Germany (until January 20, 2016), SmartHeat Pump, and Heat Exchange, which are collectively referred to as the “Company.” For the nine and three months ended September 30, 2014, the accompanying consolidated financial statements include the accounts of SmartHeat’s US parent, its subsidiaries Heat HP and Heat PHE, and their subsidiaries Taiyu, SanDeKe, SmartHeat Siping, Jinhui, SmartHeat Investment, SmartHeat Energy, SmartHeat Trading, SmartHeat Germany, SmartHeat Pump, and Heat Exchange. All significant intercompany accounts and transactions were eliminated in consolidation.
Going Concern
The Company has incurred significant recurring losses from operations in the past several years, including a net loss from continuing operations of $5.77$1.24 million for the nine months ended September 30, 2015.2016. In addition, the Company recognized a loss of $35.24$2.08 million (after net with cumulative foreign currency translation gain / loss on disposed entities) from the 100%85% equity interest sale on the entities sold, including foreign currency translation gain of $11.92 million.SmartHeat Germany. These conditions raise a substantial doubt about the Company's ability to continue as a going concern. However, since demand in China for heat pump products is increasing, the Company will put more resources and efforts to grow its heat pump business after completing the operational restructuring due to disposing of its PHE business. The Company expects to be able to obtain necessary bank loans for expanding the HP business.
Cost Method Investee
After the 40%85% equity interest sale on December 30, 2013, the CompanySmartHeat Germany on January 20, 2016, SmartHeat Pump owned 30.6%remaining 15% of Ruicheng (See Note 9) and 27.6% of XinRui for the nine and three months ended September 30, 2014,SmartHeat Germany, which arewere accounted for under the equitycost method of accounting (FASB ASC Subtopic 323-30)325-20). The investment was recorded at the original cost, dividends are the basis for recognition of earnings. The investor recognizes as income dividends received that are distributed from net accumulated earnings of the investee. Dividends received in excess of earnings are considered a return of investment and are recorded as reductions of cost of the investment.
Noncontrolling Interest
The Company follows Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which established new standards governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the investment increasedloss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs, previously referred to as minority interests, be treated as a separate component of equity, not as a liability, as was previously the case, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements. Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.
On July 27, 2012, the Company entered into a secured, revolving credit facility under the terms of a Secured Credit Agreement with income and decreasedNorthtech Holdings Inc., a British Virgin Islands business corporation (“Northtech”) for dividends and losses accrued by the Company.Company’s working capital needs. On December 31, 2014,28, 2015, the Company soldentered into the remaining 60% equityFourth Amendment to the Credit and Security Agreement dated July 27, 2012, as first amended on December 21, 2012 and subsequently amended on August 23, 2013, and July 14, 2014, between the Company and Northtech (see Note 12). Under the Fourth Amendment, SmartHeat paid loan repayment of $1,000,000, represented by such number of shares of Series A Preferred Stock of Heat HP convertible into 20% of the issued and outstanding Common Stock of Heat HP on fully diluted basis, with a conversion, redemption and liquidation value of $1,000,000, and a 10% cumulative dividend accruing and payable quarterly ($25,000 per quarter). Accordingly, Northtech became the 20% noncontrolling interest on Ruicheng and XinRui.of Heat HP Inc.
Use of Estimates
In preparing the financial statements in conformity with 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 period. 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.
Cash and Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of September 30, 2015 and December 31, 2014, the Company maintained restricted cash deposits in several bank accounts for the purposes described below.
| | 2015 | | | 2014 | |
| | (In millions) | |
Support of performance guarantee | | $ | 0.01 | | | $ | 0.41 | |
Support of bank acceptance | | | - | | | | 0.70 | |
Support of letter of credit | | | - | | | | 0.21 | |
Financial product * | | | - | | | | 8.59 | |
Total restricted cash - current | | $ | 0.01 | | | $ | 9.91 | |
Performance guarantee - noncurrent | | $ | - | | | $ | 0.12 | |
* Financial product mainly consisted of one certificate of deposit from a commercial bank in the PRC for RMB 40 million ($6.54 million), which was entered into on November 27, 2014 with maturity on January 7, 2015. The financial product had an expected annual interest rate of 4.5%.
The following table presents in US dollars (“USD”) the amount of cash and equivalents held by the Company as of September 30, 20152016 and December 31, 2014,2015, based on the jurisdiction of deposit. The Company’s US parent holds cash and equivalents in US bank accounts denominated in USD.
| | United States | | | China | | | Germany | | | Total | |
September 30, 2015 | | $ | 15,943 | | | $ | 1,632,022 | | | $ | 189,981 | | | $ | 1,837,946 | |
December 31, 2014 | | $ | 68,103 | | | $ | 13,118,523 | | | $ | 495,998 | | | $ | 13,682,624 | |
| | United States | | | China | | | Germany | | | Total | |
September 30, 2016 | | $ | - | | | $ | 1,200,820 | | | $ | - | | | $ | 1,200,820 | |
December 31, 2015 | | $ | 6,822 | | | $ | 1,575,771 | | | $ | 154,378 | | | $ | 1,736,971 | |
Accounts and Retentions Receivable, net
The Company maintains 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 $1.46$1.30 million and $39.26$1.41 million at September 30, 20152016 and December 31, 2014,2015, respectively.
At September 30, 20152016 and December 31, 2014,2015, the Company had retentions receivable from customers for product quality assurance of $0.17$0.15 million and $3.64$0.17 million, respectively. The retention rate varies from 5% to 20% of the sales price with variable terms from three to 24 months depending on the shipping date, and for PHE Units, the customer acceptance date of the products and the number of heating seasons that the warranty period covers. The Company had allowances of $0.14$0.15 million and $2.33$0.16 million at September 30, 20152016 and December 31, 2014,2015, respectively.
Accounts receivable is net of unearned interest of $26,558 at December 31, 2014. Unearned interest is imputed interest on accounts receivable of disposed entities with due dates over one year from the invoice date discounted at the Company’s borrowing rate of 6.15% at December 31, 2012. The Company did not record additional unearned interest after December 31, 2012 due from long-term accounts receivable.
The Company records 50% and 100% of accounts receivable aged over 180 and 360 days, respectively, from the payment due date as bad debt allowance. Management of the Company’s subsidiaries further analyzeanalyzes each individual customer for which it was taken a bad debt allowance to further assess the likelihood of collectability. Customers which are either state-owned or have a history of support from the state, or larger companies with long operating histories, that management of the Company’s subsidiaries believe the chance of non-payment will be remote, are excluded for the purpose of calculating bad debt allowance.
Advances to Suppliers, net
The Company makes advances to certain vendors to purchase raw material and equipment for production. The advances are interest-free and unsecured. As of September 30, 20152016 and December 31, 2014,2015, the Company had allowances for advances to suppliers of $2.33$2.22 million and $5.17$2.29 million, respectively.
Inventories, net
Inventories are valued at the lower of cost or market, with cost determined on a moving weighted-average basis. The difference is recorded as a cost of goods sold, if the current market value is lower than their historical cost. In addition, the Company makes an inventory impairment provision analysis at each period end for inventory held over 360 days. Cost of work in progress and finished goods comprises direct material, direct labor and an allocated portion of production overheads.
Certain raw materials, such as stainless steel products, plates, shims, gaskets, and pump valves, require longer than normal procurement periods, or “lead times,” with some procurement periods running longer than six months. To guarantee availability of raw materials for production and sales, the Company’s subsidiaries, based on historical sales patterns, estimate and purchase material for the upcoming periods.
As part of inventory impairment analysis, the Company performs an evaluation of raw materials stored over one year and not anticipated to be consumed, and an evaluation of potential impairment to the quality of these raw materials. If management anticipates that obsolete raw materials in inventory can be utilized and will be consumed within the next six months through new customer orders or substitute orders, no impairment is recorded. The Company collects information about delayed and canceled contracts and meets with affected customers to discuss their financing situation and their projections of future orders. Finished goods manufactured for delayed and canceled contracts that the Company does not expect to be reinstated and contracts for which the Company has been unable to find substitute customers become impaired. Following the completion of the impairment analysis, the Company had inventory impairment allowance of $6.84 million and $5.30 million as of September 30, 2016 and December 31, 2015, respectively. The Company recorded inventory impairment provision of $1.69 million and $2.16 million for the nine months ended September 30, 2016 and 2015, respectively, which was included in the cost of sales. The Company recorded inventory impairment provision of $1.37 and $0.11 million for the three months ended September 30, 2016 and 2015, respectively, which was included in the cost of sales.
Property and Equipment, net
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 as follows:
Buildings | 20 years |
Vehicles | 5 years |
Office equipment | 5 years |
Production equipment | 5-10 years |