WEB NEWS Comments & Business Outlook
YEARS ENDED DECEMBER 31,
2015
2014
Net sales
$
2,629,500
$
5,219,210
Cost of sales
5,931,602
4,817,390
Gross income (loss)
(3,302,102
)
401,820
Operating expenses
Selling
1,541,933
1,815,133
General and administrative
2,269,603
2,493,529
Provision (reversal of provision) for bad debts
18,369
(4,709,372
)
Provision for advance to suppliers
-
4,613,761
Total operating expenses
3,829,905
4,213,051
Loss from operations
(7,132,007
)
(3,811,231
)
Non-operating income (expenses)
Interest income
6,036
9,408
Interest expense
(372,703
)
(214,490
)
Financial expense
(76,960
)
(151,564
)
Other income, net
120,465
459,827
Total non-operating income (expenses), net
(323,162
)
103,181
Loss before income tax (benefit)
(7,455,169
)
(3,708,050
)
Income tax expense (benefit)
(22,043
)
48,717
Loss from continuing operations
(7,433,126
)
(3,756,767
)
Cumulative foreign currency translation gain on disposed entities
11,915,632
-
Loss from operations of discontinued entities, net of tax
(491,629
)
(9,129,047
)
Loss on disposal of discontinued entities, net of tax
(47,151,307
)
-
Net loss including noncontrolling interest
(43,160,430
)
(12,885,814
)
Less: loss attributable to noncontrolling interest from continuing operations
(21,828
)
(18,665
)
Less: loss attributable to noncontrolling interest from discontinued operations, net of tax
(5,900
)
(3,299,161
)
Net loss to SmartHeat Inc.
(43,132,702
)
(9,567,988
)
Other comprehensive item
Foreign currency translation loss attributable to discontinued operations
(334,658
)
(466,182
)
Foreign currency translation gain (loss) attributable to SmartHeat Inc.
(565,207
)
9,673
Foreign currency translation gain (loss) attributable to noncontrolling interest
6,986,976
(1,020
)
Comprehensive loss attributable to SmartHeat Inc.
$
(44,032,567
)
$
(10,024,497
)
Comprehensive gain (loss) attributable to noncontrolling interest
$
6,959,248
$
(3,318,846
)
Basic and diluted weighted average shares outstanding
6,799,837
6,564,084
Basic and diluted loss per share from continuing operations
$
(1.09
)
$
(0.57
)
Basic and diluted loss per share from discontinued operations
$
(5.25
)
$
(0.89
)
Basic and diluted net loss per share
$
(6.34
)
$
(1.46
)
Comments & Business Outlook
SMARTHEAT INC . AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
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 )
Management Discussion and Analysis
Sales. Net sales in the nine months ended September 30, 2015, were $3.17 million, while net sales in the nine months ended September 30, 2014, were $4.12 million, an overall decrease of $0.94 million or 23%. The 23% decrease in total revenue was due primarily to the decrease in sales of PHEs in the nine months ended September 30, 2015, compared to the same period of 2014.
Net Loss. Our net loss for the nine months ended September 30, 2015 was $40.98 million compared to net loss of $5.71 million for the comparable period of 2014, an increase of $35.27 million or 618%. Net loss as a percentage of sales was 1292% in the nine months ended September 30, 2015, and net loss as a percentage of sales was 139% in the comparable period of 2014. This increase in net loss was mainly attributable to loss on sale of 100% equity interest of certain subsidiaries of $35.24 million in the nine months ended September 30, 2015.
Sales. Net sales in the three months ended September 30, 2015, were $1.71 million, while net sales in the three months ended September 30, 2014, were $2.49 million, an overall decrease of $0.78 million or 31%. The 31% decrease in total revenue was due primarily to the decrease in sales of PHEs from our SanDeKe subsidiary in the three months ended September 30, 2015, compared to the same period of 2014.
Net Loss. Our net loss for the three months ended September 30, 2015, was $0.97 million compared to net loss of $0.25 million for the comparable period of 2014, an increase in net loss of $0.72 million or 288%. Net loss as a percentage of sales was 57% in the three months ended September 30, 2015, and net loss as a percentage of sales was 10% in the comparable period of 2014. This increase in net loss was mainly attributable to decreased sales and increased non-operating expense in the three months ended September 30, 2015.
Deal Flow
Item 1.01 Entry into a Material Definitive Agreement
Comments & Business Outlook
SIX MONTHS ENDED JUNE 30,
THREE MONTHS ENDED JUNE 30,
2015
2014
2015
2014
Net sales
$ 1,460,767
$ 1,621,431
$ 683,589
$ 1,404,769
Cost of sales
3,021,400
1,813,585
1,151,501
1,535,813
Gross loss
(1,560,633 )
(192,154 )
(467,912 )
(131,044 )
Operating expenses
Selling
818,269
790,000
452,877
429,900
General and administrative
1,315,054
2,210,463
222,443
1,014,985
Provision (Reversal of provision) for bad debts
929,909
(2,007,214 )
1,004,606
277,856
Provision for advance to suppliers
-
2,320,822
-
8,803
Total operating expenses
3,063,232
3,314,071
1,679,926
1,731,544
Loss from operations
(4,623,865 )
(3,506,225 )
(2,147,838 )
(1,862,588 )
Non-operating income (expenses)
Interest income
4,223
9,770
1,533
6,728
Interest expense
(171,973 )
(85,153 )
(91,554 )
(49,924 )
Financial expense
(50,580 )
(48,336 )
(19,689 )
(28,916 )
Other income, net
60,118
446,469
28,491
378,988
Total non-operating income (expenses), net
(158,212 )
322,750
(81,219 )
306,876
Loss before income tax
(4,782,077 )
(3,183,475 )
(2,229,057 )
(1,555,712 )
Income tax expense (benefit)
8,831
75,493
(14,527 )
90,029
Loss from continuing operations
(4,790,908 )
(3,258,968 )
(2,214,530 )
(1,645,741 )
Cumulative foreign currency translation gain on disposed entities
11,915,632
-
-
-
Income (loss) from operations of discontinued entities, net of tax
-
(3,641,237 )
-
8,296,056
Loss on disposal of discontinued entities, net of tax
(47,151,307 )
-
-
-
Net income (loss) including noncontrolling interest
(40,026,583 )
(6,900,205 )
(2,214,530 )
6,650,315
Less: loss attributable to noncontrolling interest from continuing operations
(16,424 )
(30,089 )
(7,295 )
(134,376 )
Less: income (loss) attributable to noncontrolling interest from discontinued operations, net of tax
-
(1,412,208 )
-
3,344,189
Net income (loss) to SmartHeat Inc.
(40,010,159 )
(5,457,908 )
(2,207,235 )
3,440,502
Other comprehensive item
Foreign currency translation gain (loss)
attributable to discontinued operations
-
(514,919 )
-
37,916
Foreign currency translation gain (loss)
attributable to SmartHeat Inc.
(570,224 )
6,111
73,039
(133,983 )
Foreign currency translation gain (loss)
attributable to noncontrolling interest
152
(2,091 )
957
66
Comprehensive income (loss) attributable to SmartHeat Inc.
$ (40,580,383 )
$ (5,966,716 )
$ (2,134,196 )
$ 3,344,435
Comprehensive income (loss) attributable to noncontrolling interest
$ (16,272 )
$ (1,444,388 )
$ (6,338 )
$ 3,209,879
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
$ (0.70 )
$ (0.51 )
$ (0.33 )
$ (0.23 )
Basic and diluted earning (loss) per share from discontinued operations
$ (6.95 )
$ (0.35 )
$ -
$ 0.75
Basic and diluted net earning (loss) per share
$ (5.90 )
$ (0.86 )
$ (0.33 )
$ 0.52
Comments & Business Outlook
THREE MONTHS ENDED MARCH 31,
2015
2014
(Unaudited)
Net sales
$ 777,178 $ 216,662
Cost of sales
1,869,899 277,772
Gross loss
(1,092,721 ) (61,110 )
Operating expenses
Selling
365,392 360,100
General and administrative
1,092,611 1,195,478
Reversal of provision for bad debts
(74,697 ) (2,285,070 )
Provision for advance to suppliers
- 2,312,019
Total operating expenses
1,383,306 1,582,527
Loss from operations
(2,476,027 ) (1,643,637 )
Non-operating income (expenses)
Interest income
2,690 3,042
Interest expense
(80,419 ) (35,229 )
Financial expense
(30,891 ) (19,420 )
Other income, net
31,627 67,481
Total non-operating income (expenses), net
(76,993 ) 15,874
Loss before income tax
(2,553,020 ) (1,627,763 )
Income tax expense (benefit)
23,358 (14,536 )
Loss from continuing operations
(2,576,378 ) (1,613,227 )
Cumulative foreign currency translation gain on disposed entities
11,915,632 -
Loss from discontinued operations (including loss on disposal of discontinued entities of $35,235,675 in 2015), net of tax
(47,151,307 ) (11,937,293 )
Net loss including noncontrolling interest
(37,812,053 ) (13,550,520 )
Less: income (loss) attributable to noncontrolling interest from continuing operations
(9,129 ) 104,287
Less: loss attributable to noncontrolling interest from discontinued operations, net of tax
- (4,756,397 )
Net loss to SmartHeat Inc.
(37,802,924 ) (8,898,410 )
Other comprehensive item
Foreign currency translation loss
attributable to discontinued operations
- (552,835 )
Foreign currency translation gain (loss)
attributable to SmartHeat Inc.
(643,263 ) 140,094
Foreign currency translation loss
attributable to noncontrolling interest
(805 ) (2,157 )
Comprehensive loss attributable to SmartHeat Inc.
$ (38,446,187 ) $ (9,311,151 )
Comprehensive loss attributable to noncontrolling interest
$ (9,934 ) $ (4,654,267 )
Basic and diluted weighted average shares outstanding
6,783,399 6,147,288
Basic and diluted loss per share from continuing operations
$ (0.38 ) $ (0.28 )
Basic and diluted loss per share from discontinued operations
$ (6.95 ) $ (1.17 )
Basic and diluted net loss per share
$ (5.57 ) $ (1.45 )
Management Discussion and Analysis
Sales. Net sales in the three months ended March 31, 2015, were $0.78 million, while net sales in the three months ended March 31, 2014, were $0.22 million, an overall increase of $0.56 million or 259%. The 259% increase in total revenue was due primarily to the increase in sales of heat pumps in the three months ended March 31, 2015, compared to the same period of 2014.
Net Loss. Our net loss for the three months ended March 31, 2015, was $37.80 million compared to net loss of $8.90 million for the comparable period of 2014, an increase of $28.90 million or 325%. Net loss as a percentage of sales was 4864% in the three months ended March 31, 2015, and net loss as a percentage of sales was 4107% in the comparable period of 2014. This increase in net loss was mainly attributable to loss on sale of 100% equity interest of certain subsidiaries of $35.24 million in the three months ended March 31, 2015.
Acquisition Activity
Item 2.01 Completion of Acquisition or Disposition of Assets.
SmartHeat Taiyu (Shenyang) Energy;
The Buyers purchased 40% of Heat PHE’s equity interests in the Target Companies for a purchase price of RMB 5,000,000 paid on December 30, 2013. The Buyers purchased the remaining 60% of Target Companies (constituting all of the remaining equity interests in the Target Companies) for purchase price of: (i) RMB 8,500,000 and (ii) the forgiveness of all net indebtedness owing to Target Companies by SmartHeat and each of its other subsidiaries as of December 31, 2014 which was $8.79 million as of December 31, 2014.
The Buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajuan Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively. Huajuan Ai, Wen Sha, Jun Wang and Xudong Wang are also stockholders in Northtech Holdings Inc.
Comments & Business Outlook
SMA RTHEAT INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31,
2014
2013
Net sales
$
34,075,959
$
44,709,526
Cost of sales
32,941,074
40,401,380
Gross income
1,134,885
4,308,146
Operating expenses
Selling
6,563,729
6,864,060
General and administrative
7,767,391
10,400,323
Long-lived assets impairment
-
13,730,849
Impairment of long-term investment
-
908,084
Provision for bad debts
(4,663,703
)
24,980,195
Provision for advance to supplier
3,470,029
1,666,906
Total operating expenses
13,137,446
58,550,417
Loss from operations
(12,002,561
)
(54,242,271
)
Non-operating income (expenses)
Investment income
2,808
153,237
Interest income
161,123
159,972
Interest expense
(1,792,765
)
(1,816,457
)
Financial expense
(284,387
)
(249,681
)
Foreign exchange transaction loss
(3,785
)
(9,495
)
Gain on issuance of stock
130,000
-
Loss on sale of equity interest
-
(842,491
)
Other income, net
952,470
1,314,945
Total non-operating expenses, net
(834,536
)
(1,289,970
)
Loss before income tax
(12,837,097
)
(55,532,241
)
Income tax (benefit) expense
48,717
(50,657
)
Net loss including noncontrolling interest
(12,885,814
)
(55,481,584
)
Less: loss attributable to noncontrolling interest
(3,317,826
)
(5,812,243
)
Net loss to SmartHeat Inc.
(9,567,988
)
(49,669,341
)
Other comprehensive item
Foreign currency translation loss
attributable to SmartHeat Inc.
(441,701
)
(2,282,228
)
Foreign currency translation loss
attributable to noncontrolling interest
(15,828
)
(31,371
)
Comprehensive loss attributable to SmartHeat Inc.
$
(10,009,689
)
$
(51,951,569
)
Comprehensive loss attributable to noncontrolling interest
$
(3,333,654
)
$
(5,843,614
)
Basic and diluted weighted average shares outstanding
6,564,084
5,870,111
Basic and diluted net loss per share
$
(1.46
)
$
(8.46
)
Management Discussion and Analysis
Sales. Net sales in the year ended December 31, 2014, were $34.08 million, consisting of $8.80 million for PHEs, $17.79 million for PHE Units, $1.42 million for heat meters and $6.07 million for HPs, while net sales in the year ended December 31, 2013, were $44.71 million, consisting of $27.39 million for PHEs, $10.49 million for PHE Units, $1.13 million for heat meters and $5.70 million for HPs, an overall decrease of $10.63 million or 24%. The 24% decrease in total revenue was due primarily to the decrease in sales of PHEs and PHE units in the year ended December 31, 2014, compared to the same period of 2013. Sales of HPs in China slightly increased while sales of HPs in Germany decreased by 8% in the year ended December 31, 2014, compared to the same period of 2013. The overall slow-down of the PRC economy and tight fiscal policy including restricted lending practice continued in 2014, which caused decline in new projects among state-owned enterprises and increased peer competition resulted in decreased selling price; despite a portion of the previously canceled or delayed orders were reinstated and performed in the year ending December 31, 2014, we obtained less new sales contracts in 2013 and 2014 for PHE unit which is more commonly used in the real estate industry; the real estate industry is very slow in the PRC in recent years with supply outpacing demand, decreased newly constructed properties put into market, and decreased trading volumes resulting from the slow PRC economy, government control on real estate price increases and tight bank lending policies.
We have a review process for approving each sales contract, including sales price. Sales price is determined under each contract in proportion to our estimated cost in order to ensure our gross profit. Our sales price varies according to each sale depending primarily on each customer’s specific requirements and our negotiation of the contract amount and term.
Investor Alert
Item 8.01. Other Events
The Company has entered into an agreement to settle all claims in a U.S. securities class action lawsuit. No findings of any wrongdoings were ever made against SmartHeat, any current or former officer or director of Smartheat or any of the defendants, and the Company and all other defendants continue to deny any wrongdoing. The default judgment previously entered against James Jun Wang was vacated and was dismissed with prejudice.
Auditor trail
Item 4.01 Changes in Registrant’s Certifying accountant
Acquisition Activity
Item 8.01 Other Events
The buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajuan Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively. Huajuan Ai, Wen Sha, Jun Wang and Xudong Wang are also principals in Northtech Holdings Inc.
Comments & Business Outlook
NINE MONTHS ENDED SEPTEMBER 30,
THREE MONTHS ENDED SEPTEMBER 30,
2014
2013
2014
2013
(UNAUDITED)
(UNAUDITED)
Net sales
$ 20,599,124 $ 27,059,624 $ 9,929,291 $ 13,168,201
Cost of sales
18,790,453 24,213,253 6,089,373 9,948,025
Gross income
1,808,671 2,846,371 3,839,918 3,220,176
Operating expenses
Selling
4,848,177 4,668,946 1,325,121 1,426,415
General and administrative
6,199,365 7,068,639 2,142,832 2,249,965
Provision for bad debts
(2,988,346 ) 21,521,707 411,398 9,233,763
Provision for advance to supplier
122,518 1,571,853 14,248 42,258
Total operating expenses
8,181,714 34,831,145 3,893,599 12,952,401
Loss from operations
(6,373,043 ) (31,984,774 ) (53,681 ) (9,732,225 )
Non-operating income (expenses)
Investment (loss) income
(16,889 ) 17,687 6,002 (21,658 )
Interest income
125,482 45,764 60,899 16,789
Interest expense
(1,300,872 ) (1,288,091 ) (443,726 ) (515,849 )
Financial expense
(318,222 ) (201,092 ) (42,051 ) (50,751 )
Gain on issuance of stock
70,000 - - -
Foreign exchange transaction gain (loss)
3,661 (6,625 ) (1,889 ) (9,964 )
Other income, net
715,950 1,020,770 205,225 286,695
Total non-operating expenses, net
(720,890 ) (411,587 ) (215,540 ) (294,738 )
Loss before income tax
(7,093,933 ) (32,396,361 ) (269,221 ) (10,026,963 )
Income tax (benefit) expense
63,309 (50,393 ) (12,184 ) (5,393 )
Net loss before noncontrolling interest
(7,157,242 ) (32,345,968 ) (257,037 ) (10,021,570 )
Less: loss attributable to noncontrolling interest
(1,449,088 ) (53,296 ) (6,791 ) (5,999 )
Net loss to SmartHeat Inc.
(5,708,154 ) (32,292,672 ) (250,246 ) (10,015,571 )
Other comprehensive item
Foreign currency translation gain (loss)
attributable to SmartHeat Inc.
(642,542 ) 2,036,067 (124,378 ) 485,920
Foreign currency translation gain (loss)
attributable to noncontrolling interest
1,449,088 23,082 1,441,823 5,276
Comprehensive loss attributable to SmartHeat Inc.
$ (6,350,696 ) $ (30,256,605 ) $ (374,624 ) $ (9,529,651 )
Comprehensive loss attributable to noncontrolling interest
$ - $ (30,214 ) $ 1,435,032 $ (723 )
Basic and diluted weighted average shares outstanding
6,490,176 5,776,989 6,737,747 5,875,790
Basic and diluted loss per share
$ (0.88 ) $ (5.59 ) $ (0.04 ) $ (1.70 )
Management Discussion and Analysis
Sales. Net sales in the nine months ended September 30, 2014, were $20.60 million, consisting of $5.91 million for PHEs, $10.44 million for PHE Units, $0.57 million for heat meters and $3.68 million for HPs, while net sales in the nine months ended September 30, 2013, were $27.06 million, consisting of $8.27 million for PHEs, $13.98 million for PHE Units, $0.97 million for heat meters and $3.83 million for HPs, an overall decrease of $6.46 million or 24%. The 24% decrease in total revenue was due primarily to the decrease in sales of PHEs and PHE units in the nine months ended September 30, 2014, compared to the same period of 2013. Sales of HPs in China slightly increased while sales of HPs in Germany decreased by 15% in the nine months ended September 30, 2014, compared to the same period of 2013. The overall slow-down of the PRC economy and tight fiscal policy including restricted lending practice continued in 2014, which caused decline in new projects among state-owned enterprises and increased peer competition, despite a portion of the previously canceled or delayed orders were reinstated and performed in the nine months ending September 30, 2014, we obtained less new sales contracts in 2013 and 2014 for PHE unit which is more commonly used in real estate industry; the real estate industry is very slow in PRC in recent years with supply outpacing demand, decreased newly constructed properties put into market, and decreased trading volumes resulting from slow PRC economy, government control on real estate price increasing and tight bank lending policies.
We have a review process for approving each sales contract, including sales price. Sales price is determined under each contract in proportion to our estimated cost in order to ensure our gross profit. Our sales price varies according to each sale depending primarily on each customer’s specific requirements and our negotiation of the contract amount and term.
Net Loss. Our net loss for the nine months ended September 30, 2014, was $5.71 million compared to net loss of $32.29 million for the same period of 2013, a decrease of $26.58million or 82%. Net loss as a percentage of sales was 28% in the nine months ended September 30, 2014, and net loss as a percentage of sales was 119% in the same period of 2013. This decrease in net loss was attributable to decreased operating expenses including decreased bad debt allowance, and more loss attributable to noncontrolling interest resulting from the sale of 40% equity interest on Taiyu, Siping and Shenyang Energy on December 30, 2013.
Notable Share Transactions
Item 1.01 Entry into a Material Definitive Agreement
The buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajuan Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively. Huajuan Ai, Wen Sha, Jun Wang and Xudong Wang are also principals in Northtech Holdings Inc.
The effectiveness of the transaction is subject to the following conditions: (i) approval of its shareholders and (ii) receipt by the Board of Directors of the Company of an opinion that the purchase and sale transaction is fair to the shareholders of SmartHeat from a financial point of view. The parties will execute a mutual release to be delivered at the closing which will provide, in part, for the Target Companies to forgive all net indebtedness from SmartHeat and all of its subsidiaries. In the event that the conditions are not met prior to December 31, 2014, the consideration and all documents will be deposited into escrow and released when the conditions have been satisfied; provided that if the conditions are not satisfied on or before March 31, 2015, either party may terminate the Amended EIPA and the funds and documents will be returned to the depositing party.
Investor Alert
Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
As previously reported, over the approximately the past two years the Company has engaged in a restructuring process and has sought to obtain funds to provide, among other things, liquidity to the U.S. parent public company. The Company’s efforts culminated in the signing of an Equity Interest Purchase Agreement whereby the buyers agreed to purchase 40% of the Company’s equity interests in certain of its PHE segment for a purchase price of RMB 5,000,000, to be paid on or before December 31, 2013. The Company retained an option to repurchase the equity interests of the subsidiaries sold to the buyers at a purchase price of RMB 5,600,000 which terminated unexercised on February 28, 2014. The buyers exercised their option to purchase an additional 40% equity interest in certain subsidiaries in the PHE segment for an additional purchase price of RMB 6,000,000 on March 27, 2014. The Company has the option to require the buyers to purchase the remaining 20% equity interest for a purchase price of RMB 2,500,000.
Comments & Business Outlook
SIX MONTHS ENDED JUNE 30,
THREE MONTHS ENDED JUNE 30,
2014
2013
2014
2013
(UNAUDITED)
(UNAUDITED)
Net sales
$ 10,669,833 $ 13,891,423 $ 5,709,867 $ 7,722,992
Cost of goods sold
12,701,080 14,265,228 7,337,123 5,320,037
Gross loss (income)
(2,031,247 ) (373,805 ) (1,627,256 ) 2,402,955
Operating expenses
Selling
3,523,056 3,242,531 1,956,545 1,546,589
General and administrative
4,661,513 4,818,674 1,747,185 2,482,031
Provision for bad debts
(3,399,744 ) 12,287,944 (12,149,019 ) 7,524,870
Provision for advance to supplier
108,270 1,529,595 33,480 288,916
Total operating expenses (income)
4,893,095 21,878,744 (8,411,808 ) 11,842,406
Income (loss) from operations
(6,924,342 ) (22,252,549 ) 6,784,552 (9,439,451 )
Non-operating income (expenses)
Investment (loss) income
(22,891 ) 39,345 (19,282 ) 38,784
Interest income
64,583 28,975 36,900 13,585
Interest expense
(857,146 ) (772,242 ) (488,004 ) (428,431 )
Financial expense
(276,171 ) (150,341 ) (224,035 ) (87,442 )
Gain on issuance of stock
70,000 - 70,000 -
Foreign exchange transaction gain
5,550 3,339 2,151 840
Other income, net
510,725 734,075 268,974 423,777
Total non-operating expenses, net
(505,350 ) (116,849 ) (353,296 ) (38,887 )
Income (loss) before income tax
(7,429,692 ) (22,369,398 ) 6,431,256 (9,478,338 )
Income tax (benefit) expense
75,493 (45,000 ) 90,029 (22,556 )
Net income (loss) before noncontrolling interest
(7,505,185 ) (22,324,398 ) 6,341,227 (9,455,782 )
Less: income (loss) attributable to noncontrolling interest
(1,684,289 ) (47,297 ) 3,086,178 (2,555 )
Net income (loss) to SmartHeat Inc.
(5,820,896 ) (22,277,101 ) 3,255,049 (9,453,227 )
Other comprehensive item
Foreign currency translation gain (loss)
attributable to SmartHeat Inc.
(606,266 ) 1,550,147 (43,960 ) 1,361,630
Foreign currency translation gain (loss)
attributable to noncontrolling interest
7,265 17,806 (16,942 ) 15,074
Comprehensive income (loss) attributable to SmartHeat Inc.
$ (6,427,162 ) $ (20,726,954 ) $ 3,211,089 $ (8,091,597 )
Comprehensive income (loss) attributable to noncontrolling interest
$ (1,677,024 ) $ (29,491 ) $ 3,069,236 $ 12,519
Basic and diluted weighted average shares outstanding
6,364,338 5,733,399 6,579,003 5,733,399
Basic and diluted earnings (loss) per share
$ (0.91 ) $ (3.89 ) $ 0.49 $ (1.65 )
Management Discussion and Analysis
Sales. Net sales in the six months ended June 30, 2014, were $10.67 million, consisting of $3.13 million for PHEs, $5.74 million for PHE Units, $0.49 million for heat meters and $1.31 million for HPs, while net sales in the six months ended June 30, 2013, were $13.89 million, consisting of $4.49 million for PHEs, $6.93 million for PHE Units, $0.39 million for heat meters and $2.08 million for HPs, an overall decrease of $3.22 million or 23%. The 23% decrease in total revenue was due primarily to the decrease in sales of PHE units in the six months ended June 30, 2014, compared to the same period of 2013. However, sales of heat meters increased 26% in the six months ended June 30, 2014 compared to the same period of 2013. The overall slow-down of the PRC economy and tight fiscal policy including restricted lending practice continued in 2014, which caused decline in new projects among state-owned enterprises and increased peer competition, despite a portion of the previously canceled or delayed orders were reinstated and performed in the six months ending June 30, 2014, we obtained less new sales contracts in 2013 and 2014 for PHE unit which is more commonly used in real estate industry; the real estate industry is very slow in PRC in recent years with supply outpacing demand, decreased newly constructed properties put into market, and decreased trading volumes resulting from slow PRC economy, government control on real estate price increasing and tight bank lending policies.
We have a review process for approving each sales contract, including sales price. Sales price is determined under each contract in proportion to our estimated cost in order to ensure our gross profit. Our sales price varies according to each sale depending primarily on each customer’s specific requirements and our negotiation of the contract amount and term.
Deal Flow
Item 1.01 Entry into a Material Definitive Agreement
The Amendment modifies the definition of “Average Share Price” in the Credit Agreement to decrease the minimum and maximum values for the “Average Share Price,” by 20% each from $0.50 to $0.40 and from $3.50 to $2.80, respectively. The Amendment also increases the maximum line which may be borrowed under the Credit Agreement from $2,500,000 to $3,250,000 and extends the maturity date for amounts borrowed from April 30, 2014 to January 31, 2015. Further, the parties agreed to submit the Amendment to its shareholders for approval at the Company’s next annual meeting of shareholders.
Also under the terms of the Amendment, and in accordance with Section 2.3(a) of the Credit Agreement, which permits the Company to extend the Initial Maturity Date by a payment to Northtech of an extension fee of 4% of the Maximum Line under the Credit Agreement, Northtech agreed to an extension of the maturity date to October 31, 2015 and the Company issued Northtech 200,000 Restricted Shares of the Company’s Common Stock at $0.50 per share as extension fee under the Credit Agreement.
Comments & Business Outlook
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2014
2013
(UNAUDITED)
Net sales
$ 4,959,966
$ 6,168,431
Cost of goods sold
5,363,957
8,945,191
Gross loss
(403,991 )
(2,776,760 )
Operating expenses
Selling
1,566,511
1,695,942
General and administrative
2,914,327
2,336,643
Provision for bad debts
8,749,275
4,763,074
Provision for advance to supplier
74,790
1,240,679
Total operating expenses
13,304,903
10,036,338
Loss from operations
(13,708,894 )
(12,813,098 )
Non-operating income (expenses)
Investment (loss) income
(3,609 )
561
Interest income
27,683
15,390
Interest expense
(369,142 )
(343,811 )
Financial expense
(52,136 )
(62,899 )
Foreign exchange transaction gain
3,399
2,499
Other income, net
241,751
310,298
Total non-operating expenses, net
(152,054 )
(77,962 )
Loss before income tax
(13,860,948 )
(12,891,060 )
Income tax benefit
(14,536 )
(22,444 )
Net loss before noncontrolling interest
(13,846,412 )
(12,868,616 )
Less: Loss attributable to noncontrolling interest
(4,770,467 )
(44,742 )
Net loss to SmartHeat Inc.
(9,075,945 )
(12,823,874 )
Other comprehensive item
Foreign currency translation gain (loss)
attributable to SmartHeat Inc.
(562,306 )
188,517
Foreign currency translation gain
attributable to noncontrolling interest
24,207
2,732
Comprehensive loss attributable to SmartHeat Inc.
$ (9,638,251 )
$ (12,635,357 )
Comprehensive loss attributable to noncontrolling interest
$ (4,746,260 )
$ (42,010 )
Basic and diluted weighted average shares outstanding
6,147,288
5,733,399
Basic and diluted loss per share
$ (1.48 )
$ (2.24 )
Management Discussion and Analysis
Sales
Net sales in the three months ended March 31, 2014, were $4.96 million, consisting of $1.96 million for PHEs, $2.20 million for PHE Units, $0.22 million for heat meters and $0.57 million for HPs, while net sales in the three months ended March 31, 2013, were $6.17 million, consisting of $2.00 million for PHEs, $3.52 million for PHE Units, $0.15 million for heat meters and $0.49 million for HPs, an overall decrease of $1.21 million or 20%. The 20% decrease in total revenue was due primarily to the decrease in sales of PHE units in the three months ended March 31, 2014, compared to the same period of 2013. However, sales of heat meters increased 47% and sales of HPs increased 16% in the three months ended March 31, 2014 compared to the same period of 2013. The overall slow-down of the PRC economy and tight fiscal policy including restricted lending practice continued in the first quarter of 2014, which caused decline in new projects among state-owned enterprises and increased peer competition, despite a portion of the previously canceled or delayed orders were reinstated and performed in the first quarter of 2014, we obtained less new sales contracts in 2013 and 2014 for PHE unit which is more commonly used in real estate industry, the real estate industry is very slow in PRC in recent years with supply outpacing demand, decreased newly constructed properties put into market, and decreased trading volumes resulting from slow PRC economy, government control on real estate price increasing and tight bank lending policies.
Net Loss
Our net loss for the three months ended March 31, 2014, was $9.08 million compared to net loss of $12.82 million for the same period of 2013, a decrease of $3.75 million or 29%. Net loss as a percentage of sales was 183% in the three months ended March 31, 2014, and net loss as a percentage of sales was 208% in the same period of 2013. This decrease in net loss was attributable to decreased inventory impairment provision and more loss attributable to noncontrolling interest resulting from the sale of 40% equity interest on Taiyu, Siping and Shenyang Energy on December 30, 2013.
Comments & Business Outlook
YEARS ENDED DECEMBER 31,
2013
2012
Net sales
$ 44,709,526 $ 47,850,292
Cost of goods sold
40,401,380 32,481,271
Gross profit
4,308,146 15,369,021
Operating expenses
Selling
6,864,059 9,922,607
General and administrative
10,400,323 12,345,739
Goodwill impairment
- 2,083,586
Provision for bad debts
27,240,939 18,790,256
Provision for advance to supplier
(593,838 ) 2,216,156
Total operating expenses
43,911,483 45,358,344
Loss from operations
(39,603,338 ) (29,989,323 )
Non-operating income (expenses)
Investment income
153,237 142,411
Interest income
159,972 164,454
Interest expense
(1,816,456 ) (1,548,937 )
Financial expense
(249,681 ) (170,220 )
Foreign exchange transaction gain (loss)
(9,495 ) 5,474
Loss on sale of equity interest
(842,491 ) -
Other income, net
1,314,945 2,643,786
Total non-operating income (expenses), net
(1,289,971 ) 1,236,968
Loss before income tax
(40,893,309 ) (28,752,355 )
Income tax (benefit) expense
(50,657 ) 493,624
Net loss before noncontrolling interest
(40,842,652 ) (29,245,979 )
Less: Loss attributable to noncontrolling interest
(319,904 ) (28,897 )
Net loss to SmartHeat Inc.
(40,522,748 ) (29,217,082 )
Other comprehensive item
Foreign currency translation gain (loss)
attributable to SmartHeat Inc.
(2,282,228 ) 153,610
Foreign currency translation gain (loss)
attributable to noncontrolling interest
(31,371 ) 2,532
Comprehensive loss attributable to SmartHeat Inc.
$ (42,804,976 ) $ (29,063,472 )
Comprehensive loss attributable to noncontrolling interest
$ (351,275 ) $ (26,365 )
Basic and diluted weighted average shares outstanding
5,870,111 4,129,400
Basic and diluted loss per share
$ (6.90 ) $ (7.08 )
Management Discussion and Analysis
Sales. Net sales in the year ended December 31, 2013, were $44.71 million, consisting of $27.39 million for PHEs, $10.49 million for PHE Units, $1.13 million for heat meters and $5.70 million for HPs, while net sales in the year ended December 31, 2012, were $47.85 million, consisting of $22.29 million for PHEs, $18.55 million for PHE Units, $3.28 million for heat meters and $3.73 million for HPs, an overall decrease of $3.14 million or 7%. The 7% decrease in total revenue was due primarily to the decrease in sales of PHE unit in the year ended December 31, 2013, compared to 2012. However, sales of PHE, increased 23% in the year ended December 31, 2013 compared to 2012. The overall slow-down of the PRC economy and tight fiscal policy including restricted lending practice continues in 2013, which caused decline in new projects among state-owned enterprises and increased peer competition, despite a portion of the previously canceled or delayed orders were reinstated and performed in 2013, we obtained less new sales contracts in 2013 for PHE unit which is more commonly used in real estate industry, and the real estate industry is very slow in PRC in recent years due to the reasons explained above; however, we got improved sales performance for industrial use of PHE in 2013, which has less impact from tight fiscal policy.
We have a review process for approving each sales contract, including sales price. Sales price is determined under each contract in proportion to our estimated cost in order to ensure our gross profit. Our sales price varies according to each sale depending primarily on each customer’s specific requirements and our negotiation of the contract amount and term.
Net Loss. Our net loss for the year ended December 31, 2013, was $40.53 million compared to net loss of $29.22 million for 2012, an increase of $11.31 million or 39%. Net loss as a percentage of sales was 91% in the year ended December 31, 2013, and net loss as a percentage of sales was 61% in 2012. This increase in net loss was attributable to increased inventory impairment provision, increased provision for bad debts, and increased non-operating expenses as described above.
Deal Flow
Item 8.01 Other Events
the “Equity Interest Purchase Agreement”), whereby the buyers thereunder exercised their option to purchase an additional 40% of the equity interests in the following PHE segment subsidiaries from the Company: SmartHeat Taiyu (Shenyang) Energy; SmartHeat Siping Beifang Energy Technology Co., Ltd.; SmartHeat (Shenyang Energy Equipment) Co. Ltd.; Hohot Ruicheng Technology Co., Ltd.; and Urumchi XinRui Technology Limited Liability Company (collectively, the “Target Companies”). The closing of transaction will be scheduled to occur after satisfaction of the conditions set forth in the Equity Interest Purchase Agreement, including, without limitation, approval of the transaction by a majority of the Company’s shareholders entitled to vote.
On March 26, 2014, the Company gave notice to Northtech Holdings, Inc. (“Northtech”) pursuant to the terms of the Credit and Security Agreement between the Company and Northtech, dated July 27, 2012, as amended (the “Credit Agreement”), extending the maturity date on the Credit Agreement from April 30, 2014 to January 3, 2015. The Company elected to pay the extension fee of 4% by issuing 200,000 shares of its common stock to Northtech. The terms of the Credit Agreement were previously approved by the Company’s shareholders on December 11, 2012.
Share Structure
Item 8.01 Other Events
On March 26, 2014, the Company gave notice to Northtech Holdings, Inc. (“Northtech”) pursuant to the terms of the Credit and Security Agreement between the Company and Northtech, dated July 27, 2012, as amended (the “Credit Agreement”), extending the maturity date on the Credit Agreement from April 30, 2014 to January 3, 2015. The Company elected to pay the extension fee of 4% by issuing 200,000 shares of its common stock to Northtech. The terms of the Credit Agreement were previously approved by the Company’s shareholders on December 11, 2012.
Comments & Business Outlook
SMARTHEAT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
THREE MONTHS ENDED SEPTEMBER 30,
2013
2012
2013
2012
(Unaudited)
(Unaudited)
Net sales
$ 27,059,624 $ 25,368,104 $ 13,168,201 $ 13,639,258
Cost of goods sold
24,213,253 19,393,990 9,948,025 9,657,574
Gross profit
2,846,371 5,974,114 3,220,176 3,981,684
Operating expenses
Selling
4,668,946 9,375,039 1,426,415 2,006,174
General and administrative
7,068,639 8,008,870 2,249,965 2,881,055
Provision for bad debts
21,521,707 6,771,460 9,233,763 538,037
Provision for advance to supplier
1,571,853 - 42,258 -
Total operating expenses
34,831,145 24,155,369 12,952,401 5,425,266
Loss from operations
(31,984,774 ) (18,181,255 ) (9,732,225 ) (1,443,582 )
Non-operating income (expenses)
Investment income (loss)
17,687 1,827 (21,658 ) 1,827
Interest income
45,764 136,222 16,789 25,611
Interest expense
(1,288,091 ) (1,028,605 ) (515,849 ) (400,556 )
Financial expense
(201,092 ) (109,274 ) (50,751 ) (26,259 )
Foreign exchange transaction gain (loss)
(6,625 ) 24,751 (9,964 ) 4,429
Other income, net
1,020,770 1,689,390 286,695 716,178
Total non-operating income (expenses), net
(411,587 ) 714,311 (294,738 ) 321,230
Loss before income tax
(32,396,361 ) (17,466,944 ) (10,026,963 ) (1,122,352 )
Income tax benefit
(50,393 ) (68,802 ) (5,393 ) (24,308 )
Net loss before noncontrolling interest
(32,345,968 ) (17,398,142 ) (10,021,570 ) (1,098,044 )
Less: loss attributable to noncontrolling interest
(53,296 ) (141,619 ) (5,999 ) (26,684 )
Net loss to SmartHeat Inc.
(32,292,672 ) (17,256,523 ) (10,015,571 ) (1,071,360 )
Other comprehensive item
Foreign currency translation gain (loss)
attributable to SmartHeat Inc.
2,036,067 (941,879 ) 485,920 (317,254 )
Foreign currency translation gain (loss)
attributable to noncontrolling interest
23,082 (6,321 ) 5,276 (2,525 )
Comprehensive loss attributable to SmartHeat Inc.
$ (30,256,605 ) $ (18,198,402 ) $ (9,529,651 ) $ (1,388,614 )
Comprehensive loss attributable to noncontrolling interest
$ (30,214 ) $ (147,940 ) $ (723 ) $ (29,209 )
Basic and diluted weighted average shares outstanding
5,776,989 3,955,774 5,875,790 3,955,774
Basic and diluted loss per share
$ (5.59 ) $ (4.36 ) $ (1.70 ) $ (0.27 )
The accompanying notes are an integral part of these consolidated financial statements.
Going Private News
NEW YORK , Sept. 30, 2013 /PRNewswire/ -- SmartHeat Inc., (OTC: HEAT) (website: www.smartheatinc.com), announced today that its Board of Directors has selected a stalking horse proposal, commenced a private offering of securities and selected a record date for its annual meeting.
Stalking Horse Proposal
On June 25, 2013, the Board of Directors of the Company voted to authorize and direct the management of the Company to commence a broad effort to seek additional sources of financing for the Company, as well as other arrangements, to improve the capitalization of the Company, including a private offering to existing stockholders and consideration of strategic alternatives. Pursuant to this authorization, the Company is currently offering its exchangeable notes to existing stockholders who are accredited investors on substantially the same terms as these notes are being issued and sold under the Company's line of credit with Northtech Holdings. The specific terms of this offering were reported in Form 8K filed with the SEC on August 23, 2014. This offering will terminate on December 7, 2014.
The exchangeable notes will not be and have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the Securities Act. This communication shall not constitute an offer to sell or the solicitation of an offer to buy securities nor shall there be any sale of these securities in any state in which such solicitation or sale would be unlawful prior to registration or qualification of these securities under the laws of any such state.
The August Form 8K also reported that the Company had circulated in both the United States and the People's Republic of China a request for restructuring proposals for purchase of all, or part of, or a joint venture investment in or with, the Company or any one or more of its directly or indirectly owned subsidiaries. In addition to this request for proposals, the Company also retained a third party firm in each of these respective markets to conduct a market canvass seeking proposals. Proposals were evaluated by the Board of Directors at a meeting held on September 17th and 18th, 2013, and, after negotiation, a proposal relating to the Company's PHE segment was deemed to be in the best interests of the Company and approved by the Board. The proposal is, in essence, an indication of interest and does not provide specific terms nor does it obligate the Company to sell any of its assets. It is subject to negotiation and execution of a mutually acceptable definitive agreement, including provisions allowing the Company to use the proposal as a stalking horse to seek better terms. If such agreement can be negotiated and executed, the Company intends to submit the matter to the stockholders for approval, along with the rest of its 2013 restructuring actions, at the Annual Meeting scheduled forDecember 10, 2013 (China time). If such definitive agreement is negotiated, the Company presently intends to then seek competing bids with the plan of having a definitive restructuring completed no later than the end of the first quarter of 2014. There is no assurance that any definitive agreement will be negotiated, executed or that the Company's restructuring plan will be approved by its stockholders. Moreover, the Company reserves the right to reject any and all proposals and to discontinue or modify any restructuring plan either before or after it is approved by stockholders.
Record Date for Annual Meeting
On September 17, 2013, the Board of Directors selected a record date of October 15, 2013, to determine the shareholders entitled to vote at the Company's Annual Meeting to be held on December 10, 2013 (US Time).
Deal Flow
(a) Amendment to Credit Agreement
On August 23, 2013, SmartHeat Inc., a Nevada corporation (the “Company”), entered into the August 2013 Amendment (the “Amendment”) to the Credit and Security Agreement dated July 27, 2012, as amended on December 21, 2012 (the “Credit Agreement”), between the Company and Northtech Holdings Inc., a British Virgin Islands business corporation (“Northtech”). Northtech is owned by certain members of the Company’s former management, Jun Wang, Xudong Wang, and Wen Sha. Huajun Ai, the Company’s Corporate Secretary is also a part owner of Northtech.
The Amendment decreases the interest rate payable on borrowings under the Credit Agreement effective January 1, 2013, to 10% annually, compounded and payable quarterly, from 1.25% per month, payable monthly. The Company agreed to pay an amendment fee of 100,000 restricted shares of the Company’s common stock, and to deliver to Northtech share certificates representing 55% of the issued and outstanding shares of Heat HP Inc. (“Heat HP”) and Heat PHE Inc. (“Heat PHE”), discussed further below, to perfect Northtech’s security interest under the Credit Agreement.
Comments & Business Outlook
YEARS ENDED DECEMBER 31,
2012
2011
Net sales
$ 47,850,292 $ 65,221,104
Cost of goods sold
32,481,271 44,559,093
Gross profit
15,369,021 20,662,011
Operating expenses
Selling
9,922,607 9,514,588
General and administrative
12,345,739 17,532,209
Goodwill impairment
2,083,586 8,956,313
Provision for bad debts
21,006,412 7,635,040
Total operating expenses
45,358,344 43,638,150
Loss from operations
(29,989,323 ) (22,976,139 )
Non-operating income (expenses)
Investment income
142,411 -
Interest income
164,454 243,810
Interest expense
(1,548,937 ) (925,250 )
Financial expense
(170,220 ) (150,371 )
Foreign exchange transaction gain (loss)
5,474 (407,880 )
Other income (loss), net
2,643,786 (26,230 )
Total non-operating income (expenses), net
1,236,968 (1,265,921 )
Loss before income tax
(28,752,355 ) (24,242,060 )
Income tax expense
493,624 186,373
Net loss before noncontrolling interest
(29,245,979 ) (24,428,433 )
Less: loss attributable to noncontrolling interest
(28,897 ) (468,247 )
Net loss to SmartHeat Inc.
(29,217,082 ) (23,960,186 )
Other comprehensive item
Foreign currency translation gain
attributable to SmartHeat Inc.
153,610 6,867,626
Foreign currency translation loss
attributable to noncontrolling interest
2,532 81,103
Comprehensive loss attributable to SmartHeat Inc.
$ (29,063,472 ) $ (17,092,560 )
Comprehensive loss attributable to noncontrolling interest
$ (26,365 ) $ (387,144 )
Basic & diluted weighted average shares outstanding
4,129,400 3,867,578
Basic & diluted loss per share
$ (7.08 ) $ (6.20 )
Comments & Business Outlook
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
THREE MONTHS ENDED JUNE 30,
2012
2011
2012
2011
(Unaudited)
(Unaudited)
Net sales
$ 11,728,846 $ 14,970,050 $ 4,982,448 $ 7,077,901
Cost of goods sold
9,736,416 9,762,240 4,535,323 4,432,011
Gross profit
1,992,430 5,207,810 447,125 2,645,890
Operating expenses
Selling
7,368,865 4,202,087 4,995,103 2,272,932
General and administrative
5,480,510 6,819,012 929,452 3,740,566
Provision for bad debts
5,880,728 5,805,672 3,384,837 3,736,818
Total operating expenses
18,730,103 16,826,771 9,309,392 9,750,316
Loss from operations
(16,737,673 ) (11,618,961 ) (8,862,267 ) (7,104,426 )
Non-operating income (expenses)
Interest income
110,611 132,494 62,472 57,160
Interest expense
(628,049 ) (293,235 ) (345,469 ) (163,063 )
Financial expense
(83,015 ) (77,284 ) (31,884 ) (56,857 )
Foreign exchange transaction gain (loss)
20,322 (302,204 ) 36,667 (177,104 )
Other income (expenses)
973,212 324,229 (189,752 ) 291,524
Total non-operating income (expenses), net
393,081 (216,000 ) (467,966 ) (48,340 )
Loss before income tax
(16,344,592 ) (11,834,961 ) (9,330,233 ) (7,152,766 )
Income tax benefit
(44,494 ) (1,328,059 ) (20,390 ) (647,160 )
Net loss before noncontrolling interest
(16,300,098 ) (10,506,902 ) (9,309,843 ) (6,505,606 )
Less: loss attributable to noncontrolling interest
(114,935 ) (134,724 ) (57,145 ) (87,230 )
Net loss to SmartHeat Inc.
(16,185,163 ) (10,372,178 ) (9,252,698 ) (6,418,376 )
Other comprehensive item
Foreign currency translation gain (loss)
attributable to SmartHeat Inc.
(624,625 ) 3,625,300 (894,662 ) 1,832,070
Foreign currency translation loss
attributable to noncontrolling interest
(3,796 ) - (4,813 ) -
Comprehensive loss attributable to SmartHeat Inc.
$ (16,809,788 ) $ (6,746,878 ) $ (10,147,360 ) $ (4,586,306 )
Comprehensive loss attributable to noncontrolling interest
$ (118,731 ) $ (134,724 ) $ (61,958 ) $ (87,230 )
Basic weighted average shares outstanding
3,955,774 3,857,238 3,955,774 3,859,260
Diluted weighted average shares outstanding
3,955,774 3,857,238 3,955,774 3,859,260
Basic loss per share
$ (4.09 ) $ (2.69 ) $ (2.34 ) $ (1.66 )
Diluted loss per share
$ (4.09 ) $ (2.69 ) $ (2.34 ) $ (1.66 )
Deal Flow
Item 1.01 Entry into a Material Definitive Agreement
The text set forth below under Item 2.03 is incorporated into this Item by this reference.
On July 27, 2012, SmartHeat Inc., a Nevada corporation (the “Company”), entered into a secured, revolving credit facility under the terms of a Secured Credit Agreement ( the “Credit Facility” or the “Credit Agreement”) with Northtech Holdings Inc., a British Virgin Islands business corporation (“Northtech”), owned by certain members of the Company’s former management, James Wang, Rhett Wang and Wen Sha. Jane Ai, the Company’s Corporate Secretary is also a part owner of Northtech. The Credit Facility provides for borrowings of up to two million U.S. Dollars ($2,000,000) (the “Committed Amount”). The Company’s Board of Directors has authorized an initial draw under the Credit Facility of $500,000.
Borrowings under the Credit Facility are secured by the Company’s deposit accounts and general intangibles located in the United States, its trademarks in the People’s Republic of China and 35% of its equity interests in each of its wholly-, directly owned subsidiaries. An origination fee of 4% of the Committed Amount was due to Northtech upon the singing of the Credit Agreement. Borrowings will bear interest at a rate of 1.25% per month, payable monthly, and the Credit Facility will mature on April 30, 2012. At the Company’s option, the maturity date of the Credit Facility may be extended for up to 4 successive 9 month periods in exchange for an extension fee of 4% of the Committed Amount for each extension. Generally, borrowings may be prepaid at any time without premium or penalty, provided however that if the Company prepays any amount due under the Credit Facility from the proceeds of another instrument or agreement of indebtedness, the Company shall pay a 10% prepayment fee. All amounts due under the Credit Facility may, at the Company’s option, be paid in either cash or restricted shares of the Company’s common stock. The Credit Agreement shall be submitted to the Company’s stockholders for approval at the Company’s next annual meeting. The foregoing description of the Credit Facility does not purport to be complete and is qualified in its entirety by reference to the Credit Agreement, a copy which is attached as Exhibit 10.12 hereto and is incorporated herein by reference.
CFO Trail
NEW YORK, July 11, 2012 /PRNewswire-Asia / -- SmartHeat Inc., (NASDAQ: HEAT; website: www.smartheatinc.com), announced today that its Board of Directors has appointed Michael Wilhelm as SmartHeat's Chief Financial Officer and Kenneth Scipta as an independent director of the company, who will also serve on the company's audit committee as its chairman.
Mr. Wilhelm is a graduate of Northwestern's Kellogg School of Management with a Masters of Management in Accounting and is an experienced senior financial manager for both public and private companies. Since 1984, Mr. Wilhelm worked in various financial positions for the Proquest Company, a $1 billion publicly traded company, and became its corporate treasurer in 1998. In 2001, Mr. Wilhelm joined the Bowe Bell + Howell Company, a $300 million privately held company which was formed through a leveraged buyout of Proquest. Following the spin-off, Mr. Wilhelm served in multiple capacities for Bell + Howell, including vice president of finance, treasurer and president of its leasing company subsidiary. Following the acquisition of Bell + Howell by Bowe Systec AG, a publicly traded German company, Mike served as chief financial officer for North America and served in this capacity through the eventual sale of the Bell + Howell assets to Versa Capital Management and the court supervised liquidation of Bell + Howell. The Board believes that Mr. Wilhelm's experience in mergers and acquisitions, corporate finance, accounting and auditing will be a valuable addition to SmartHeat's management team.
Mr. Scipta, a certified public accountant, has over 35 years of accounting experience and has served on several boards of directors. From 1993 to 1996, Mr. Scipta was the president and a board member of Mid-West Springs Manufacturing Company, a NASDAQ traded company, where he was responsible for day to day operations, planning, administration and financial reporting. Upon Mr. Scipta's resignation he assumed the duties of president of the special products division, which included catalog sales, die springs and the development of international sales. Previously, from 1979-1993, Mr. Scipta served in various positions such as president, vice president of finance and vice president of sales and marketing for Mid-West's primary subsidiary. The Board has determined that Mr. Scipta is an "audit committee financial expert" as defined under Item 407(d) of Regulation S-K, and qualifies as an independent director, as defined by the listing standards of NASDAQ currently in effect and all applicable rules and regulations of the SEC.
Commenting on these appointments, Mr. Oliver Bialowons, President of SmartHeat, said, "We welcome Mr. Wilhelm to the management team and believe that he will make a substantial contribution to management and SmartHeat's financial reporting. In addition, Mr. Scripta brings a wealth of accounting and public company experience which we expect will be invaluable to the current challenges faced by the company."
Investor Alert
NEW YORK , May 30, 2012 /PRNewswire-Asia / -- SmartHeat Inc., (NASDAQ: HEAT; website: www . smartheatinc . com ) , today announced the resignations of Mr. James Jun Wang , Chairman of the Board of Directors (Board), President and CEO, Mr. Wen Sha , Vice President of Marketing, Mr. Xudong Wang , Vice President of Strategy, and Ms. Zhijuan Guo , Chief Financial Officer. Mr. Jun Wang , Mr. Sha and Mr. Xudong Wang will continue in all of their current roles with SmartHeat's subsidiaries, but will no longer be affiliated with SmartHeat Inc., the U.S. holding company incorporated in Nevada (SmartHeat). Ms. Guo has resigned from all roles and responsibilities with SmartHeat and its subsidiaries.
At a two day Board meeting which ended on May 25, 2012 , Mr. Oliver Bialowons was appointed as a Director and as President of SmartHeat to fill the roles formerly held by Mr. James Wang . Mr. Bialowons is an experienced turnaround executive with more than 20 years of related experience, much of which was in the automobile and aerospace industries. He has served in positions as Managing Director, Chief Operating Officer and Chief Restructuring Officer of several companies. Most recently, he served as COO of neckermann.de GmbH, Managing Director of Bowe Systec AG, and as Chairman and CEO of Bowe Bell + Howell Company, a financially stressed U.S. based manufacturer of industrial logistics equipment with worldwide operations and distribution. He directed a restructuring of the business and an eventual sale of the Bell+Howell business to Bell and Howell, LLC, a portfolio company of Versa Capital Management, LLC. Currently he serves on the Board of Bell and Howell, LLC and is assisting an insolvency receiver in Germany to market a large chain of retail stores in Europe .
The Board directed management to coordinate with SmartHeat's subsidiaries to select SmartHeat's new CFO as soon as possible. Ms. Guo was vital to the timely preparation of SmartHeat's financial statements and regulatory filings, and the Board expressed their gratitude to her for her help. In addition, the Board authorized the commencement of a search to fill the role of Chairman of SmartHeat's Audit Committee. The Board determined not to fill Mr. Sha's or Mr. Xudong Wang 's positions at this time.
The Board approved the retention of Nimbus Restructuring Manager LLC (NRM) as Restructuring Adviser to assist SmartHeat's Board to address its financial and liquidity issues reflected in Note 2, "Cash and Equivalents", in the Notes to Consolidated Financial Statements (Unaudited) included in its Quarterly Report on Form 10-Q for the quarter ended March 31 , 2012. NRM is an affiliate of Nimbus Strategies LLC (a U.S. based strategy consulting firm).
To address SmartHeat's immediate cash needs, the Board approved borrowing up to $1,000,000 to fund ordinary course operating expenses under a binding commitment letter for a Revolving Line of Credit (Revolver), subject to an acceptable fairness opinion, negotiation of final terms and the execution of a definitive agreement. The Revolver has a term of nine months, but is extendable at SmartHeat's option for up to 4 additional nine month terms, and is payable in advance at any time. Borrowings under the Revolver would be secured by a lien on certain of SmartHeat assets and would be convertible, at the option of the lender, into shares of SmartHeat common stock under certain circumstances. The Revolver is subject to a $150,000 termination fee. Mr. James Wang is a principal and director of the lender. Borrowings under the Revolver would accrue cash interest at a rate of 1% per month plus equity consideration targeted to provide additional return equivalent to approximately 0.5% to 0.6% per month, assuming that the term is fully extended.
In connection with the engagement of NRM as Restructuring Agent, the appointment of Oliver Bialowons as President and the Revolver commitment, the Board, subject to the execution of definitive agreements, approved the issuance of an aggregate of approximately 335,000 shares, subject to certain adjustments, of restricted stock for nominal consideration. These shares of restricted stock may not be sold or transferred, except under limited circumstances, and are subject to certain buy back options and other restrictions.
Liquidity Requirements
In connection with the ongoing development and expansion of our business, we may incur significant capital and operational expenses. We believe that we can increase our sales and net income by implementing a growth strategy that focuses on increasing sales of our products in China by targeting high growth end markets and expanding sales of heat pumps in China and Europe. Management anticipates that our existing capital resources, cash flows from operations, collection of our accounts receivable and proceeds from recent short-term loans will satisfy the liquidity requirements of our business for the next 12 months.
Comments & Business Outlook
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31,
2011
2010
Net sales
$ 65,221,104 $ 125,406,862 Cost of goods sold
44,559,093 80,694,945 Gross profit
20,662,011 44,711,917 Operating expenses
Selling
9,514,588 8,559,665 General and administrative
25,167,249 9,461,212 Goodwill impairment
8,956,313 - Total operating expenses
43,638,150 18,020,877 Income (loss) from operations
(22,976,139 ) 26,691,040 Non-operating income (expenses)
Interest income
243,810 433,534 Interest expense
(925,250 ) (131,350 ) Financial expense
(150,371 ) (49,751 ) Foreign exchange transaction gain (loss)
(407,880 ) 33,932 Other income (expense), net
(26,230 ) 174,337 Total non-operating income (expenses), net
(1,265,921 ) 460,702 Income (loss) before income tax
(24,242,060 ) 27,151,742 Income tax expense
186,373 4,533,112 Net income (loss) before noncontrolling interest
(24,428,433 ) 22,618,630 Less: Loss attributable to noncontrolling interest
(468,247 ) (79,813 ) Net income (loss) to SmartHeat Inc.
(23,960,186 ) 22,698,443 Other comprehensive item
Foreign currency translation gain
attributable to SmartHeat Inc.
6,867,626 3,282,273 Foreign currency translation gain
attributable to noncontrolling interest
81,103 11,681 Comprehensive income (loss) attributable to SmartHeat Inc.
$ (17,092,560 ) $ 25,980,716 Comprehensive loss attributable to noncontrolling interest
$ (387,144 ) $ (68,132 ) Basic weighted average shares outstanding
3,867,578 3,341,942
Diluted weighted average shares outstanding
3,867,578 3,345,368 Basic earnings (loss) per share
$ (6.20 ) $ 6.79 Diluted earnings (loss) per share
$ (6.20 ) $ 6.79
Despite a very challenging sales environment caused by a continuation of China's restrictive fiscal policy in 2011, we are encouraged by our fourth quarter results due to our efforts to expand into regional areas of China, the development of our marketing force and our restructuring efforts. If not for one-time impairments to goodwill and inventory taken in the fourth quarter of 2011, our operating loss of $8.82 million for the fourth quarter would have resulted in operating income of approximately $3.77 million compared to operating loss of $2.54 million in the third quarter of 2011.
GeoTeam calculated fourth quarter 2011 non-gaap EPS of $0.55 vs $2.55 in prior year.
Share Structure
Item 5.03 Amendments to Articles of Incorporation of Bylaws; Change in Fiscal Year
On January 19, 2012, the Company filed a Certificate of Amendment to its Articles of Incorporation to effect a one-for-ten reverse split of the Company’s issued and outstanding shares of common stock, par value $.001 per share (the “Common Stock”), effective as of 7:00 a.m. Eastern Standard Time on Monday, February 6, 2012. The Common Stock will commence trading on The NASDAQ Global Select Market on a split-adjusted basis as of the opening of trading on Monday, February 6, 2012. The Common Stock will continue to trade under the ticker symbol “HEAT,” although the letter “D” will be temporarily appended to the ticker symbol for twenty trading days following the reverse split. The Company’s stockholders, at a special meeting of stockholders described below, authorized the Company’s Board of Directors to effect a reverse stock split in a ratio ranging from one-for-three to one-for-ten of all issued and outstanding shares of the Company’s Common Stock.
Following the reverse split, the total number of shares outstanding will be proportionately reduced in accordance with the reverse split. Further, any outstanding options, warrants and rights, if any, as of the effective date that are subject to adjustment will be adjusted accordingly. These adjustments may include adjustments to the number of shares of common stock that may be obtained upon exercise or conversion of these securities, and the applicable exercise or purchase price as well as other adjustments.
There will be no change to the authorized shares or par value of the Common Stock of the Company as a result of the reverse stock split. Any fraction of a share of Common Stock that would otherwise have resulted from the reverse split will be rounded up to the nearest whole number.
Comments & Business Outlook
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
THREE MONTHS ENDED SEPTEMBER 30,
2011
2010
2011
2010
Net sales
$ 31,543,940 $ 83,613,250 $ 16,573,890 $ 51,476,821
Cost of goods sold
21,025,243 54,177,914 11,263,003 33,061,854
Gross profit
10,518,697 29,435,336 5,310,887 18,414,967
Operating expenses
Selling
6,611,522 5,972,651 2,409,435 3,335,303
General and administrative
R&D
598,117 480,572 85,250 259,879
Bad debt
8,913,261 15,744 3,107,589 (38,484 )
G&A expenses
8,550,170 4,126,152 2,244,025 1,840,058
Total operating expenses
24,673,070 10,595,119 7,846,299 5,396,756
Income (loss) from operations
(14,154,373 ) 18,840,217 (2,535,412 ) 13,018,211
Non-operating income (expenses)
Interest income
166,419 322,462 33,925 117,853
Interest expense
(590,242 ) (41,871 ) (297,007 ) (41,871 )
Financial income (expense)
(54,999 ) (36,430 ) 22,285 (17,427 )
Foreign exchange transaction gain (loss)
(439,983 ) 24,652 (137,779 ) 68,323
Other income, net
548,995 134,446 224,766 52,060
Total non-operating income (expenses), net
(369,810 ) 403,259 (153,810 ) 178,938
Income (loss) before income tax
(14,524,183 ) 19,243,476 (2,689,222 ) 13,197,149
Income tax expense (benefit)
(5,159 ) 3,059,182 1,322,900 2,092,876
Net income (loss) before noncontrolling interest
(14,519,024 ) 16,184,294 (4,012,122 ) 11,104,273
Less: Income (loss) attributable to noncontrolling interest
(149,727 ) (16,962 ) (15,003 ) (2,232 )
Net income (loss) to SmartHeat Inc.
(14,369,297 ) 16,201,256 (3,997,119 ) 11,106,505
Other comprehensive item
Foreign currency translation gain
5,717,019 1,931,721 2,091,719 1,418,870
Comprehensive Income (Loss)
$ (8,652,278 ) $ 18,132,977 $ (1,905,400 ) $ 12,525,375
Basic weighted average shares outstanding
38,582,342 32,804,292 38,601,939 32,811,125
Diluted weighted average shares outstanding
38,582,342 32,846,171 38,601,939 32,817,520
Basic earnings (loss) per share
$ (0.37 ) $ 0.49 $ (0.10 ) $ 0.34
Diluted earnings (loss) per share
$ (0.37 ) $ 0.49 $ (0.10 ) $ 0.34
Mr. James Jun Wang, Chairman and Chief Executive Officer of SmartHeat Inc., made the following comments regarding the performance of SmartHeat during the third quarter of 2011: "We experienced an encouraging increase in sales and deliveries in the third quarter of 2011 compared to the second quarter of 2011, and we are well positioned to take advantage of the results of China’s current anti-inflation policies. The slowdown in the heating-supply and other industrial markets in China continued, caused in part by the Chinese government's ongoing tightening of fiscal policy to fight inflation. We are overcoming the postponement and cancellation of some of our plate heat exchanger (PHE) orders in the first half of 2011, however, and maintaining our gross margin by strengthening our sales efforts through the maturation of our sales force, increasing sales channels, improving cost controls, increasing prices and continuing to improve the efficiency of our manufacturing operations, which may include staff reductions in certain plants.
"Despite the challenging sales environment, we are encouraged by the progress of synergization and integration after the acquisition of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited in the first quarter of 2011. We anticipate increased sales in the heat pump sector from both of these companies. Despite the temporary fiscal tightening impacting our customers in China, we expect that the Chinese government will continue to require implementation of energy savings policies to reduce emissions, which we believe will continue to increase the demand for our energy-saving products in all industrial sectors. We are optimistic about taking advantage of West China's economic development and urbanization trends throughout China as well as positioning ourselves as an international forward-thinking 'green' company."
Revised Full Year 2011 Earnings Guidance
Due to the impact of significant drops of sales, impact of rising prices on business and the integration costs of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited Company, two companies acquired by SmartHeat in Q1 2011, the Company is revising its full year 2011
earnings guidance to $18 million to $20 million in net loss
revenue guidance $40 million to $50 million
Investor Alert
Item 3.01 Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard; Transfer of Listing.
On September 29, 2011, SmartHeat Inc. (the “Company”) received a notice from NASDAQ's Listing Qualifications Department indicating that for the last 30 consecutive business days the bid price for the Company’s common stock had closed below the minimum $1.00 per share required for continued listing on The NASDAQ Global Market under NASDAQ Listing Rule 5450(a)(1). The notification letter states that the Company will have 180 calendar days, or until March 27, 2012, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the Company’s common stock must maintain a minimum bid closing price of at least $1.00 per share for a minimum of ten consecutive business days.
If the Company does not regain compliance by March 27, 2012, NASDAQ will provide written notification to the Company that the Company's common stock will be delisted. At that time, the Company may appeal NASDAQ's delisting determination to a NASDAQ Listing Qualifications Panel. Alternatively, the Company may apply to transfer its common stock to The NASDAQ Capital Market if it satisfies all of the requirements, other than the minimum bid price requirement, for initial listing on The NASDAQ Capital Market set forth in Marketplace Rule 5505. If the Company were to elect to apply for such transfer and if it satisfies the applicable requirements and its application is approved, the Company would have an additional 180 days to regain compliance with the minimum bid price requirement while listed on The NASDAQ Capital Market.
The Company intends to actively monitor the bid price for its common stock between now and March 27, 2012, and will consider all available options, including a reverse stock split, to resolve the deficiency and regain compliance with the NASDAQ minimum bid price requirement.
Comments & Business Outlook
Second Quarter 2011 Results
Mr. James Jun Wang , Chairman and Chief Executive Officer of SmartHeat Inc., made the following comments regarding the performance of SmartHeat during the second quarter of 2011: "Even though the first quarter's trend of decreasing sales and deliveries continued in the second quarter of 2011, we are well positioned to take advantage of the results of China's current anti-inflation policies. Our business trend is due to the continued slowdown in the heating-supply and other industrial markets caused in part by the Chinese government's ongoing tightening of fiscal policy to fight inflation. We are overcoming the postponement and cancellation of some of our plate heat exchanger (PHE) orders in the first half of 2011 and maintaining our gross margin by strengthening our sales efforts through the maturation of our sales force, increasing sales channels, improving cost controls, increasing prices and continuing to improve the efficiency of our manufacturing operations, which may include staff reductions in certain plants.
"Despite the drop in sales, we are encouraged by the continued strength of sales of heat meters in the first half of this year. We have been investing and working on integration after the acquisition of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited, and we continue our efforts to expand into international markets where we believe our products have significant advantages over our competitors. We anticipate increased sales in the heat pump sector from both of these companies. Despite the temporary fiscal tightening impacting our customers in China , we expect that the Chinese government will continue to require implementation of energy savings policies to reduce emissions, which we believe will continue to increase the demand for our energy-saving products in all industrial sectors. We are optimistic about taking advantage of West China 's economic development and urbanization trends throughout China as well as positioning ourselves as an international forward-thinking 'green' company."
Financial Summary
In the second quarter of 2011, total sales decreased to $7.08 million compared to $7.89 million in Q1 2011. In the first six months of 2011, total sales decreased to $14.97 million compared to $32.14 million in the same period of 2010. The decrease in sales was primarily due to tightened fiscal policy in China , which has contributed to a general slowdown in many sectors of the Chinese economy and caused a decrease in sales of our PHE Units and PHEs. Some of our customers faced an extended bank loan application process and other state-owned enterprises encountered difficulties in obtaining grants from the government, both of which typically are used to finance the purchase of our products, which resulted in the unexpected cancelation of orders and delays in the performance of PHE Unit and PHE contracts. Although these events caused a decrease in sales, we expect that a portion of the canceled PHE Unit and PHE orders will be reinstated and contracts that have been partially delayed will be performed within this fiscal year or 2012, reducing the impact of the drop in sales over the long term. We are taking steps to increase the sales of our PHE Units and PHEs by continuing our expansion into regional areas of China and are encouraged by our progress in establishing international sales channels in Europe , North and South America , which we expect will meaningfully contribute to revenue in 2012.
Operating loss totaled $7.10 million in Q2 2011, compared with operating loss of $7.41 million in Q1 2011. Our net loss for Q2 2011 was $6.42 million compared to net loss of $6.41 million for Q1 2011. Net loss totaled $10.37 million in the first six months of 2011, compared to net income of $5.07 million for the same period of 2010, a decrease of $15.44 million . This decrease in net income was attributable to the temporary decrease of net sales and increased bad debt allowance reserve.
Last week, China's central bank vowed to "keep reasonable financing scale by utilizing comprehensive combination of fiscal policies." This was acknowledged as the possible inflection point of stringent fiscal policy. The Company believes that the current slowdown in heat-supply and other industrial markets caused by the Chinese government's tightened fiscal policy will be temporary and that the previous expansion and training of the Company's marketing team and other employees should result in improved sales and efficiency of its operations. Nevertheless, the Company expects to institute a rigorous program of cost cutting to continue tight control of its budget and maintain cost-effectiveness and implement additional cost control measures, including a review of the staffing levels in response to the decrease in sales.
Comments & Business Outlook
In the first quarter of 2011 , total sales decreased 16% to $7.89 million compared to $9.39 million in Q1 2010 resulting from a decrease in sales of our PHE Units to our customers that are state-owned enterprises.
Operating loss totaled $4.51 million, compared with operating income of $1.82 million in Q1 2010.
Net loss in the quarter totaled $3.95 million, down from $1.7 million net income ($0.05 per diluted share) in Q1 2010.
Geoteam® Note: 2011 First quarter analyst EPS estimates were $0.05 .
The decrease in sales was primarily due to tightened fiscal policy in China, which impacted state-owned enterprises that are encountering difficulties in obtaining grants from the government and facing an extended bank loan application process. The new fiscal policy resulted in unexpected cancelations of orders and unscheduled delays in the performance of PHE Unit contracts, which decreased revenue from that product line. The company expects that a significant portion of the canceled PHE Unit orders will be reinstated and some of the contracts that have been partially delayed will be performed within this fiscal year or in 2012.
As a result of these delays, we reserved $2.07 million for a bad debt allowance in the first quarter even though we expect a substantial portion of the bad debt to be paid.
Mr. James Jun Wang, Chairman and Chief Executive Officer of SmartHeat Inc., made the following comments regarding the performance of SmartHeat during the first quarter of 2011: “This is the first fiscal quarter in the history of SmartHeat in which we encountered a simultaneous decrease in sales and a net loss. Unfortunately, we are not alone in China with respect to these challenges. Some of our plate heat exchanger (PHE) unit customers postponed or canceled their orders due to the Chinese government’s tightened fiscal policy used to fight inflation. We also faced increased prices of some key materials we use in our manufacturing operations. We expect to overcome these difficulties and maintain our gross margin by strengthening our sales efforts through the maturation of our sales force, increasing sales channels, improving cost controls, increasing prices and continuing to improve the efficiency of our manufacturing operations, which may include staff reductions in certain plants in response to the decrease in revenue from PHE Units.”
“Despite a drop in PHE Unit sales, we are encouraged by the continued strength in sales of heat exchangers and heat meters in this quarter. We also anticipate increased sales in the heat pump sector from our acquisition of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited. In addition, SmartHeat has been selected as the sole supplier of heat exchangers and complete packaged units for a series of projects in North and South America. This program fits with SmartHeat’s energy efficiency mandate because our technology converts waste heat from diesel and gas engine power plants into electricity using no additional fuel and creating no greenhouse gas emissions. Despite the temporary fiscal tightening impacting our PHE Unit customers, we expect that the Chinese government will continue to require implementation of energy savings policies to reduce emissions, which we believe will continue to increase the demand for our energy-saving products in all industrial sectors. We are optimistic about taking advantage of West China’s economic development and urbanization trends throughout China as well as positioning ourselves as a forward-thinking “green” company.”
Revised Full Year 2011 Earnings Guidance
Due to the
impact of China’s tightened fiscal policy on the company’s PHE Unit customers
impact of rising prices on business and the integration costs of Gustrower Warmepumpen GmbH and Shenyang Bingchuan Refrigerating Machine Limited Company, two companies acquired by SmartHeat in Q1 2011,
The company is revising its full year 2011 earnings guidance to
$9.5 million to $14 million in net income and $63 million to $93 million in revenues
reflecting $0.25 - $0.36 earnings per share.
Comments & Business Outlook
Fourth Quarter Highlights and Guidance :
In the fourth quarter of 2010, total sales increased 60.61% to $41.79 million compared to $26.02 million in 4Q09
Net income in the fourth quarter totaled $6.50 million, up 122.26% from $2.92 million in 4Q09
SmartHeat is announcing full year 2011 guidance of $22 - $28 million in net income on $120 - $150 million in revenues, reflecting $0.60 - $0.80 EPS .
Mr. James Jun Wang, Chairman and Chief Executive Officer of Smart Heat Inc., commented: "We maintained the momentum from the first nine months of 2010 and delivered another set of strong results. We thank our hard working employees who are dedicated to executing our operational strategy. We are quite pleased to see the significant payback we expected to receive from investments made to expand our sales and distribution channels ."
Comments & Business Outlook
SHENYANG, China Jan. 18, 2011 /PRNewswire-Asia / -- SmartHeat, Inc. a leading Chinese manufacturer, integrator and designer of PHEs (plate heat exchanger) and PHE Units, announced today that it has signed sales agreements to supply its PHEs to the Tian Wan nuclear power station in Jiangsu, which is owned by the China National Nuclear Corporation, China's biggest state-owned nuclear power manufacturer. SmartHeat won two projects through a public bidding process and expects to deliver the PHEs in October 2012 and June 2013.
James Wang, SmartHeat's Chairman & CEO, commented, "While Tian Wan's initial order of PHEs totaled only $650,000, it represents a major milestone for SmartHeat as we have now entered into the nuclear power sector through the largest state-owned, government-managed, nuclear power producer in China. We believe this order will create additional opportunities to supply heat exchangers and related products to nuclear power stations in China."
Comments & Business Outlook
Third quarter of 2010
Total sales increased 36.05% to $51.48 million compared to $37.84 million in 3Q09.
Net income in the quarter totaled $11.11 million ( $0.34 per diluted share), up 25.07% from $8.88 million ( $0.36 per diluted share) in 3Q09. The higher net income was driven primarily by increased sales from PHEs and PHE units.
Earnings per share decreased by $0.02 per share because of our secondary offering in the third quarter of 2009.
Updates Full Year 2010 Earnings Guidance and Target 2011 Earnings Guidance
SmartHeat is updating its full year 2010 guidance from
$106 - $116 million in revenues to $110 - $120 million in revenues
$ 20 - $22 million in net income to $22 - $24 million in net income.
In addition, SmartHeat is announcing full year 2011 guidance of $ 25 - $30 million in net income on $135 - $160 million in revenues .
Outlook
Mr. James Jun Wang , Chairman and Chief Executive Officer of Smart Heat Inc., commented: "We maintained the momentum from the first half of 2010 and delivered another set of strong results. We thank our hard working employees who are dedicated to executing our operational strategy. We are quite pleased to see the significant business expansion to West China and are very satisfied with the growth across all our existing business lines and the benefits we expect to receive from investments made to expand our sales and distribution channels."
"Government requirements to implement energy savings and emission reduction have increased the demand for our energy-saving products in all industrial sectors. Taking advantage of economic development in West China and urbanization trends throughout China will be continue to be part of our long-term strategy. Based on the successful expansion to West China 's market and some second and third tier cities, SmartHeat is well positioned to reap significant benefits," concluded Mr. Wang.
Deal Flow
Smartheat files Shelf :
We may from time to time, in one or more offerings at prices and on terms that we will determine at the time of each offering, sell common stock, warrants, debt securities, rights or a combination of these securities, or units, for an aggregate initial offering price of up to $100,000,000. This prospectus describes the general manner in which our securities may be offered using this prospectus. Each time we offer and sell securities, we will provide you with a prospectus supplement that will contain specific information about the terms of that offering. Any prospectus supplement may also add, update, or change information contained in this prospectus. You should carefully read this prospectus and the applicable prospectus supplement as well as the documents incorporated or deemed to be incorporated by reference in this prospectus before you purchase any of the securities offered hereby.
"Except as otherwise provided in the applicable prospectus supplement, we intend to use the net proceeds from the sale of the securities covered by this prospectus for capital expenditures and acquisitions of new technologies or businesses. While we have not identified any specific acquisition candidates at this time, we believe that we will require additional financing to complete acquisitions that fit our strategic objectives . The precise amount, use and timing of the application of such proceeds will depend upon our funding requirements and the availability and cost of other capital. Additional information on the use of net proceeds from an offering of securities covered by this prospectus may be set forth in the prospectus supplement relating to the specific offering."
Comments & Business Outlook
2010 second quarter Financial Highlights:
Revenues of $22.77 million , up 82% from 2Q09
Operating income of $4.00 million , up 31% from 2Q09
Net income of $3.39 million up 30% from 2Q09
EPS: $0.10 vs $0.11
Better than Expected Sales from Heat Exchangers
Mr. James Jun Wang , Chairman and Chief Executive Officer of Smart Heat Inc., commented that: "We maintained the momentum from the first quarter of 2010 and delivered another set of strong results. We thank our hard working employees, who are dedicated to executing our operational strategy. We are quite pleased to see the significant business expansion to West China , are very satisfied with the growth across all our existing business lines and the benefits we expect to receive in restructuring our sales and distribution channels."
"Government requirements to implement energy savings and emission reduction have increased the demand of our energy-saving products in all industrial sectors. Taking advantage of economic development in West China and urbanization trends throughout China will continue to be part of our long-term strategy. Based on the successful expansion to West China 's market and some second and third tier cities, SmartHeat is well positioned to reap significant benefits," concluded Mr. Wang.
Outlook
Mr. James Jun Wang , Chairman and Chief Executive Officer of Smart Heat Inc., commented that: "We maintained the momentum from the first quarter of 2010 and delivered another set of strong results. We thank our hard working employees, who are dedicated to executing our operational strategy. We are quite pleased to see the significant business expansion to West China , are very satisfied with the growth across all our existing business lines and the benefits we expect to receive in restructuring our sales and distribution channels."
"Government requirements to implement energy savings and emission reduction have increased the demand of our energy-saving products in all industrial sectors. Taking advantage of economic development in West China and urbanization trends throughout China will continue to be part of our long-term strategy. Based on the successful expansion to West China 's market and some second and third tier cities, SmartHeat is well positioned to reap significant benefits," concluded Mr. Wang.
Research
Smartheat removed from the GeoBargain on the Radar list. 2010 EPS growth is forecasted to come in at 11.1% before picking up again in 2011 to 43.9%. We will revisit as 2011 nears.
Added to GeoBargain on the Radar List on June 20, 2009 @ $7.20
Current Price: $9.43
Reached a high of $18.60 on January 11, 2010.
Comments & Business Outlook
Mr. Wang commented: "Since the beginning of the 2nd half, we have experienced greater customer order flow and willingness among our existing and new customers to increase demand for our energy savings equipment. Our recently completed asset acquisition of one of China's largest PHE manufacturers has not only expanded our production capabilities but also extended our product offerings to new customer segments. We believe SmartHeat's rapid earnings growth momentum will continue well into 2010 as we anticipate broader global economic recovery next year. We are optimistic that SmartHeat is on track to achieve solid 3rd quarter earnings growth and another year of record success in 2009 for our growing list of individual and institutional shareholders ."
FULL YEAR 2009 Guidance Ending December a
Full Year 2009 Guidance Full Year 2008 Reported Period Change
GAAP Revenue
$80.0 million
$32.7 million
144.6%
GAAP Net Income
$15.5 million
$6.3 million
146.0%
GAAP EPS b
$0.64
$0.29
120.7%
Tax Adjusted EPS
$0.51
$0.23
121.7%
Fully Diluted Shares
24,179,900c
22,176,432
9.0%
Source: See Release (PR Newswire August 11, 2009
)
a The above forecasts reflect the Company's current and preliminary views and are therefore subject to change. Please refer to the Company's Safe Harbor Statement (usually in press releases) for the factors that could cause actual results to differ materially from those contained in any forward-looking statement.b c
Comments & Business Outlook
James Jun Wang, CEO of SmartHeat, commented: 'Our first quarter financial results reflected management expectations and the execution of our growth plan as we laid out in early 2009 . As a market leader in the rapidly expanding clean technology energy savings industry in China, SmartHeat intends to further expand our business through both organic growth and strategic acquisitions. SmartHeat is exploring synergistic benefits with several acquisition targets in our industry which may be immediately accretive to our 2009 earnings if we acquire them. Operating in a favorable market environment, SmartHeat is on track to achieve another year of record success in 2009.' We anticipates earnings growth momentum to continue for the rest of 2009.
Source: See Release (May 11, 2009)
Comments & Business Outlook
James Jun Wang, CEO of SmartHeat, commented: 'Our audited 2008 financial results exceeded management's financial performance targets as we laid out in early 2008 . SmartHeat expects to experience significant product sales in 2009 as China has made reduction in air pollution a national priority through stronger environmental protection measures, greater funding efforts and broad mandates for clean technology energy savings equipment use. Based on significantly increased product orders received in the first two months in 2009 compared to the same period in 2008 , SmartHeat anticipates strong product sales and earnings growth in 2009 from all sectors of our customer base: government, industrial, commercial and consumers. We look forward to another year of record earnings in 2009 .'
Source: PR Newswire (March 18, 2009 )
Research
SmartHeat Inc., a market leader in China's clean technology energy savings industry, today announced the signing of a $1.2 million equipment supply contract with Uda Heat Power Company located in Inner Mongolia. This region is one of China's major coal production areas and is heavily polluted due to coal burning.
Source: PR Newswire (February 2, 2009)
