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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10−Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2018

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 001-34812

THT HEAT TRANSFER TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)

Nevada 20-5463509
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  

THT Industrial Park
No. 5 Nanhuan Road, Tiexi District
Siping, Jilin Province 136000
People’s Republic of China
(Address of principal executive offices, Zip Code)

86-434-3265241
(Registrant’s telephone number, including area code) 
_____________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes     [X]           No     [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes     [X]           No     [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ] Accelerated filer [   ]
Non-accelerated filer   [   ]          (Do not check if a smaller reporting company) Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes     [   ]           No      [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of August 14, 2018 is as follows:

Class of Securities Shares Outstanding
Common Stock, $0.001 par value 20,453,500


THT HEAT TRANSFER TECHNOLOGY, INC.
 
Quarterly Report on Form 10-Q
Period Ended June 30, 2018

TABLE OF CONTENTS

PART I   1
FINANCIAL INFORMATION   1
     
  ITEM 1. FINANCIAL STATEMENTS. 1
  ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 11
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 19
  ITEM 4. CONTROLS AND PROCEDURES. 19
       
PART II   20
OTHER INFORMATION   20
     
  ITEM 1. LEGAL PROCEEDINGS. 20
  ITEM 1A. RISK FACTORS. 20
  ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 20
  ITEM 4. MINE SAFETY DISCLOSURES. 20
  ITEM 5. OTHER INFORMATION. 20
  ITEM 6. EXHIBITS. 20


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THT HEAT TRANSFER TECHNOLOGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

  Pages
Consolidated Balance Sheets (Unaudited) 2
Consolidated Statements of Income and Comprehensive Loss (Unaudited) 3
Consolidated Statements of Cash Flows (Unaudited) 4
Notes to Unaudited Consolidated Financial Statements 5-10

1



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

    June 30,     December 31,  
    2018     2017  
    (Unaudited)        
ASSETS            
Current assets            
   Cash and cash equivalents $  2,196,662   $  6,297,546  
   Restricted cash, current   552,258     571,918  
   Trade receivables, net   41,101,495     46,311,537  
   Trade receivables - related party   -     27,676  
   Bills receivable   2,977,268     394,242  
   Other receivables, prepayments and deposits, net   9,337,133     7,371,301  
   Due from related parties   236,755     2,192,446  
   Inventories, net   33,100,234     28,521,552  
Total Current Assets   89,501,805     91,688,218  
             
   Restricted cash, non-current   1,103,790     1,112,408  
   Retention receivables   1,101,224     3,200,117  
   Property, plant and equipment, net   9,145,509     8,825,346  
   Land use rights, net   5,174,474     5,325,127  
   Deferred tax assets   13,303     159,574  
             
TOTAL ASSETS $  106,040,105   $  110,310,790  
             
LIABILITIES AND EQUITY            
Current Liabilities            
   Accounts payable $  7,666,806   $  8,954,475  
   Other payables and accrued liabilities   23,667,920     25,305,594  
   Advance from customers - related parties   4,373,756     -  
   Income tax payable   54,807     55,756  
   Short-term loan   4,834,494     4,918,234  
   Due to related parties   4,045,195     7,207,603  
Total Current Liabilities   44,642,978     46,441,662  
             
TOTAL LIABILITIES   44,642,978     46,441,662  
             
EQUITY            
             
Preferred stock, $.001 par value, 10,000,000 shares authorized, no shares issued and outstanding   -     -  
Common stock, $.001 par value, 190,000,000 shares authorized, 20,453,500 shares issued and outstanding at June 30, 2018 and December 31, 2017   20,454     20,454  
   Additional paid-in capital   27,136,310     27,136,310  
   Statutory reserve   4,270,861     4,270,861  
   Retained earnings   28,156,034     29,486,561  
   Accumulated other comprehensive income   1,089,497     2,202,886  
Total THT Heat Transfer Technology, Inc. shareholders’ equity   60,673,156     63,117,072  
Non-controlling interest   723,971     752,056  
Total Equity   61,397,127     63,869,128  
TOTAL LIABILITIES AND EQUITY $  106,040,105   $  110,310,790  

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

2



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

    For the six months ended June 30,     For the three months ended June 30,  
    2018     2017     2018     2017  
REVENUES                        
     Sales revenue $  18,031,249   $  11,540,890   $  10,819,974   $  7,542,784  
     Sales revenue - related party   107,658     8,232     99,055     -  
          Total Revenues   18,138,907     11,549,122     10,919,029     7,542,784  
                         
COST OF REVENUES   (12,805,226 )   (6,854,567 )   (7,358,409 )   (4,686,741 )
                         
Gross Profit   5,333,681     4,694,555     3,560,620     2,856,043  
                         
Operating Expenses                        
     General and administrative expenses   2,812,850     2,677,819     2,614,706     1,855,218  
     Research and development expenses   969,773     732,575     716,651     414,577  
     Selling expenses   2,753,189     4,774,451     1,232,888     2,552,403  
Total Operating Expenses   6,535,812     8,184,845     4,564,245     4,822,198  
                         
Loss from Operations   (1,202,131 )   (3,490,290 )   (1,003,625 )   (1,966,155 )
                         
Other Income (Expenses)                        
     Interest income   5,940     6,509     2,832     3,239  
     Other income   114,927     50,345     57     7,360  
     Finance costs   (126,387 )   (119,564 )   (62,500 )   (61,352 )
     Investment income   21,288     28,943     4,646     5,469  
     Other expense   (10,803 )   (18,526 )   (9,230 )   (18,526 )
Total Other Income (Expenses)   4,965     (52,293 )   (64,195 )   (63,810 )
                         
Loss before Income Taxes   (1,197,166 )   (3,542,583 )   (1,067,820 )   (2,029,965 )
Income Tax Benefit (Expense)   (149,247 )   473,371     (149,247 )   321,949  
Net Loss   (1,346,413 )   (3,069,212 )   (1,217,067 )   (1,708,016 )
Net loss attributable to non-controlling interest   (15,886 )   -     (14,360 )   -  
Net Loss attributable to THT Heat Transfer Technology, Inc. common shareholders $  (1,330,527 ) $  (3,069,212 ) $  (1,202,707 ) $  (1,708,016 )
                         
Comprehensive Loss                        
Net Loss $  (1,346,413 ) $  (3,069,212 ) $  (1,217,067 ) $  (1,708,016 )
Other Comprehensive Income (Loss)                        
     Foreign currency translation adjustments   (1,125,588 )   1,440,603     (3,433,787 )   975,020  
Comprehensive Loss   (2,472,001 )   (1,628,609 )   (4,650,854 )   (732,996 )
Less: Comprehensive loss attributable to                        
non-controlling interest   (28,085 )   -     (53,628 )   -  
Comprehensive loss attributable to THT Heat Transfer Technology, Inc. common shareholders $ (2,443,916)   $  (1,628,609 ) $ (4,597,226)   $  (732,996 )
                         
Loss per share attributable to THT Heat Transfer Technology, Inc. common shareholders Basic and diluted $  (0.07 ) $  (0.15 ) $  (0.06 ) $  (0.08 )
Weighted average number of shares outstanding Basic and diluted   20,453,500     20,453,500     20,453,500     20,453,500  

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

3



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

    For the Six Months ended June 30,  
    2018     2017  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss $  (1,346,413 ) $  (3,069,212 )
Adjustments to reconcile net loss to net cash used in operating activities:            
Loss on sales of property, plant and equipment   -     336  
Depreciation and amortization   646,782     585,382  
Deferred tax assets   149,247     (473,908 )
Allowance for doubtful accounts   1,006,874     652,766  
Inventory write-down   300,235     -  
Changes in operating assets and liabilities:            
Trade receivables, net   3,702,571     3,564,582  
Trade receivables - related party   28,284     1,130,521  
Bills receivable   (2,692,449 )   (1,382,093 )
Other receivables, prepayments and deposits, net   (2,286,851 )   59,827  
Inventories, net   (5,565,389 )   (3,544,733 )
Retention receivables   2,125,488     847,713  
Due from related parties   -     30,225  
Advance from customers - related parties   4,547,219     -  
Accounts payable   (1,592,133 )   (1,262,249 )
Other payables and accrued liabilities   (1,347,037 )   462,912  
Income tax payable   -     (479,662 )
NET CASH USED IN OPERATING ACTIVITIES   (2,323,572 )   (2,877,593 )
             
CASH FLOWS FROM INVESTING ACTIVITIES            
Proceeds from disposal of property, plant and equipment   1,370,150     324  
Payments to acquire property, plant and equipment   (661,601 )   (437,112 )
Loans made to others   -     (1,742,110 )
Loans made to related party   -     (515,523 )
Repayments from others   -     2,112,475  
Repayments from related parties   624,294     333,125  
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES   1,332,843     (248,821 )
             
CASH FLOWS FROM FINANCING ACTIVITIES            
Proceed from bank loan   -     4,710,080  
Repayment to bank loan   -     (4,664,845 )
Proceeds from related parties   453,282     1,839,765  
Repayments to related parties   (3,631,452 )   (879,638 )
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES   (3,178,170 )   1,005,362  
             
Effect of foreign currency translation on cash, cash equivalents, and restricted cash   39,737     94,061  
             
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH   (4,129,162 )   (2,026,991 )
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD $  7,981,872   $  8,098,630  
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD $  3,852,710   $  6,071,639  
             
Supplementary Disclosures for Cash Flow Information:            
Interest paid $  117,167   $  111,376  
Income taxes paid $  -   $  538,176  
             
Non-cash investing and financing activities:            
Operating expense paid by related party $  -   $  50,902  
Liabilities assumed in connection with purchase of property, plant and equipment $  411,904   $  6,936  
             

Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets   As of June 30,
2018
    As of June 30,
2017
 
Cash and cash equivalents $  2,196,662   $  4,211,863  
Restricted cash, current   552,258     817,637  
Restricted cash, non-current   1,103,790     1,042,139  
Total cash, cash equivalents, and restricted cash at end of period $  3,852,710   $  6,071,639  

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

4



THT Heat Transfer Technology, Inc.
Notes to Unaudited Consolidated Financial Statements
(Unaudited)
(Stated in US Dollars)

1. Corporate information

THT Heat Transfer Technology, Inc. (the “Company” or “THT” or the “Surviving Corporation”) is a Nevada corporation with major operations in the People's Republic of China (the "PRC").

2. Description of business

The Company is a holding company whose primary business are conducted through its subsidiaries, namely Siping Juyuan which is located in the Jilin Province and Beijing Juyuan which is located in Beijing City of the PRC. The Company is engaged in the manufacturing and trading of plate heat exchangers and various related products.

Siping Juyuan was established in the PRC on May 31, 2006 following the division (the “Division”) of Siping City Juyuan Heat Exchange Equipment Co., Ltd. (“Old Juyuan Company”) into three companies, namely Siping Juyuan, Siping City Juyuan Heat Exchange Equipment Co., Ltd. (“New Juyuan Company”) and Siping City JuyuanHanyang Pressure Vessels Co., Ltd (“JuyuanHanyang Pressure Vessels”).

3. Summary of significant accounting policies

Basis of presentation and consolidation and going concern

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with the Company’s consolidated financial statements and accompanying notes thereto for the year ended December 31, 2017 filed with the SEC in the Company’s Form 10-K on April 17, 2018.

In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the six-month period have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year.

The Company has short term loans borrowed from banks and related parties for an aggregated amount of $8.8 million, which requires the Company to secure additional funds given the Company’s current cash position. The Company’s available liquidity as of June 30, 2018 was approximately $5.7 million including cash and cash equivalents, restricted cash, current, and bills receivable. The Company has taken various actions to conserve cash, procure additional financing and improve the liquidity, including reducing capital spending. The Company’s ability in meeting future cash flow requirements is dependent on many events outside of its direct control, including, among other things, successful renewal of bank borrowings and additional financing from banks and related parties.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business.

Certain amounts from prior year have been reclassified to conform to the current year presentation. The reclassification has resulted in no change to the Company’s retained earnings or net income presented.

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated on consolidation.

5


Fair value of financial instruments

Accounting Standards Codification (“ASC”) Topic 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which fair value option was not elected. As of June 30, 2018 and December 31, 2017, the carrying amounts of the Company’s financial assets and liabilities approximated their fair values due to short maturities or the applicable interest rates approximated the current market rates.

Recent accounting pronouncements

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements”, which affects a wide variety of Topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. These amendments represent changes to clarify, correct errors in, or make minor improvements to the Codification, eliminating inconsistencies and providing clarifications in current guidance. Some of the amendments do not require transition guidance and will be effective upon issuance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. The Company is currently evaluating the impact of the adoption of ASU 2018-09 on its consolidated financial statements.

In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases”. These amendments affect narrow aspects of the guidance issued in the amendments in ASU 2016-02 including those regarding residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease, and failed sale and leaseback transactions. For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU 2018-10, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. The Company is currently evaluating the impact of the adoption of ASU 2018-10 on its consolidated financial statements.

In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. The amendments in this ASU affect the guidance issued in ASU 2016-02, “Leases (Topic 842)”, which is not yet effective. The amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments also provide lessors with a practical expedient to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component in certain circumstances. For the entities that have not adopted Topic 842, the effective date for this ASU are the same as those for ASU 2016-02, which is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2018-11 on its consolidated financial statements.

Recently adopted accounting pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (ASC 606)” and issued subsequent amendments to the initial guidance or implementation guidance between August 2015 and November 2017 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, ASU 2017-13, and ASU 2017-14 (collectively, including ASU 2014-09, “ASC 606”). Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Effective January 1, 2018, the Company adopted the standard using the modified retrospective method, which result in an immaterial impact. See Note – 4 Revenue Recognition for further details.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (ASC 230): Restricted Cash” update on the presentation of restricted cash in the statement of cash flows. The new guidance requires an entity to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows, and an entity will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The Company adopted this new accounting standard retrospectively during the six months ended June 30, 2018. As a result of the adoption, net cash provided by investing activities was adjusted to exclude the changes in restricted cash, resulting in a decrease of $329,443 in net cash used in investing activities in the previously-reported amount for the six months ended June 30, 2017. The Company's restricted cash represents cash deposits in bank to pledge the performance bonds issued by the banks when requested by the Company’s customers under their sales contracts, separately from cash and cash equivalents.

4. Revenue Recognition

Adoption of ASU 2014-09 "Revenue from Contracts with Customers (ASC 606)"

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts that were not completed or substantially complete as of January 1, 2018. Results for the reporting period beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company's historic accounting under Topic 605.

Management has determined that the impact of the transition to the new standard is immaterial to the Company’s revenue recognition model since the Company’s revenue recognition is based on point in time transfer of control. Accordingly, the Company has not made any adjustment to the opening retained earnings.

Revenue for sale of products is derived from contracts with customers, which primarily include the sale of heat exchanger products. The Company’s sales arrangements do not contain variable consideration and are short-term in nature. The Company recognizes revenue at a point in time based on management’s evaluation of when all performance obligations under the terms of a contract with the customer are satisfied and control of the products has been transferred to the customer. For vast majority of the Company’s product sales, the performance obligations and control of the products transfer to the customer when products are delivered and customer acceptance is made.

Management has determined after-sale expense was immaterial to the Company’s operations. Accordingly, the Company does not establish provision for estimated warranty liabilities.

Disaggregation of Revenue

In accordance with ASC 606, the Company disaggregates revenue from contracts with customers by products. The Company determined that disaggregating revenue into these categories meets the disclosure objective in ASC 606 which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors. Refer to Note 11 for information regarding revenue disaggregation by product.

Contract Assets and Liabilities

Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process.

Contract liabilities are mainly receipt in advance from customers. As of June 30, 2018, receipt in advance from customers was $19.7 million, which includes advance from related parties for product purchases of $4.4 million, Refer to Note 12 for more information. $4.3 million was recognized as net revenues in the six months ended June 30, 2018 that was included in the balance of receipt in advance from customers as of December 31, 2017. Receipt in advance from customers is included in other payables and accrued liabilities and advance from customers - related parties, based on the customer categories, in the consolidated balance sheets.

5. Trade receivables, net

    June 30,     December 31,  
    2018     2017  
    (Unaudited)        
             
Trade receivables $  53,312,668   $  57,859,135  
Less: Allowance for doubtful accounts   (12,211,173 )   (11,547,598 )
  $  41,101,495   $  46,311,537  

An analysis of the allowance for doubtful accounts for the six months ended June 30, 2018 and 2017 is as follows:

    Six months ended  
    June 30,  
    (Unaudited)  
    2018     2017  
             
Balance at beginning of period $  11,547,598   $  7,976,427  
Adjustment of bad debt expense   894,305     514,540  
Translation adjustments   (230,730 )   203,719  
Balance at end of period $  12,211,173   $  8,694,686  

6


6. Inventories, net

    June 30,     December 31,  
    2018     2017  
    (Unaudited)        
             
Raw materials $  15,760,113   $  9,368,647  
Work-in-progress   6,197,797     4,229,841  
Finished goods   12,973,665     16,492,343  
    34,931,575     30,090,831  
Allowance for obsolete inventories   (1,831,341 )   (1,569,279 )
  $  33,100,234   $  28,521,552  

The Company recognized inventory write-down of $300,235 and $nil for the six months ended June 30, 2018 and 2017.

7. Income tax

The effective tax rate was -14% and 16% for the three-month period ended June 30, 2018 and 2017, respectively. The effective tax rate was -12% and 13% for the six-month period ended June 30, 2018 and 2017, respectively.

The Company assesses the need for any deferred tax asset valuation allowance at the end of each reporting period. The determination of whether a valuation allowance for deferred tax assets is needed is subject to considerable judgment and requires an evaluation of all available positive and negative evidence. The Company’s assessment concluded that maintaining valuation allowance on deferred tax assets was appropriate, as the Company currently believes that it is more likely than not that the deferred tax assets resulted from net operating losses will not be realized.

During the six months ended June 30, 2018, the Company adopted a new tax regulation released by the State Administration of Taxation and Ministry of Finance of the PRC on May 7, 2018, pursuant to which the Company is allowed to deduct the proceeds to purchase property, plant and equipment, excluding building, purchased from January 1, 2018 to December 31, 2020 for tax purpose, given the value of each qualified purchase is below RMB5 million. As a result, the Company recorded $143,554 of deferred tax liability under the new tax regulation for the six months ended June 30, 2018.

For the purpose of presentation of the consolidated balance sheets, certain deferred income tax assets and liability have been offset. As of June 30, 2018 and December 31, 2017, the balance of deferred tax assets was $13,303 and $159,574, respectively.

In December 2017, the Tax Cuts and Jobs Act (the “2017 Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and a recognition of the U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company upon enactment of the 2017 Act. The Company is required to recognize the effect of the 2017 Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the 2017 Act, which allows the Company to recognize the provisional amounts during a measurement period not to extend beyond one year of the enactment date.

The Company recognized provisional tax impacts related to the revaluation of deferred tax assets and liabilities and corresponding valuation allowances in its consolidated financial statements for the six months ended June 30, 2018. The ultimate impact may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the 2017 Act. The Company’s management is in the process of gathering information and evaluating the amount of the one-time transition tax mandated by the 2017 Act, and a reasonable estimate cannot be determined at this point in time. Any adjustments are expected to be completed when the 2017 U.S. corporate income tax return is filed in year 2018 due no later than October 15, 2018.

8. Property, plant and equipment, net

As of June 30, 2018 and December 31, 2017, property, plant and equipment with net book values of $2,937,114 and $3,112,380, respectively, were pledged as collateral under certain loan arrangements (see Note 10).

During the six months ended June, 2018 and 2017, amount recognized for depreciation of property, plant and equipment was $584,419 and $515,084, respectively.

9. Land use rights, net

As of June 30, 2018 and December 31, 2017, land use rights with net book values of $840,351 and $865,825, respectively, were pledged as collateral under certain loan arrangements (see Note 10).

During the six months ended June 30, 2018 and 2017, amount recognized for amortization of land use rights was $62,363 and $57,757, respectively.

7


10. Short-term loans

Short-term bank loans

On August 10, 2017, the Company entered into a one-year loan agreement with Industrial and Commercial Bank of China, pursuant to which the Company obtained a loan in the amount of RMB32,000,000 (approximately $4,806,000), payable on August 9, 2018. The loan carries an interest rate of 4.611% per annum and the interest is payable monthly.

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

    June 30,     December 31,  
    2018     2017  
    (Unaudited)        
             
Property, plant and equipment (Note 8) $  2,937,114   $  3,112,380  
Land use rights (Note 9)   840,351     865,825  
  $  3,777,465   $  3,978,205  

Short-term loans from unrelated party

During the six months ended June 30, 2017, the Company advanced additional funds to a third party individual in the amount of RMB12,000,000, or $1,742,110 and received RMB 14,521,787, or $2,112,475 as repayment for all outstanding advances. The advance bears no interest and is due on demand. The advance was included in other receivables, prepayments and deposits, net  in the consolidated balance sheets.

For the six months ended June 30, 2018 and 2017, the Company included interest expense related to short-term loans of $117,167 and $111,376, respectively, in finance costs in the consolidated statements of income and comprehensive loss.

8


11. Segment information

The Company is solely engaged in the manufacturing and trading of plate heat exchangers and various related products. Since the nature of the products, their production processes, and their distribution methods are substantially similar, they are considered as a single reportable segment under ASC 280 “Segment Reporting”.

The Company’s sales revenues by products for the six months ended June 30, 2018 and 2017 were as follows:

    Six months ended June 30,  
    2018     %     2017     %  
    (Unaudited)           (Unaudited)        
                         
Plate heat exchanger $  9,307,294     51   $  5,818,987     50  
Heat exchange unit   4,270,925     24     2,840,480     25  
Air-cooled heat exchanger   211,574     1     89,905     1  
Shell-and-tube heat exchanger   44,264     -     2,823     -  
Others   4,304,850     24     2,796,927     24  
  $  18,138,907     100   $  11,549,122     100  

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

12. Related party transactions

The related parties consist of the following:

Name of Related Party Nature of Relationship
Guohong Zhao Chairman, Chief Executive Officer and President
Zhigang Xu Interim Chief Financial Officer, Treasurer and Secretary
Fucai Zhan Vice President of R&D and Director
Kai Liu Chief Engineer, Manager of Market development
Others Individuals who have significant influence on the Company
Jilin Tongda Heat Transfer System Integration, Ltd (“Tongda”) The Company has significant influence on Tongda
Liaoning Hongsheng Heat Energy Technology, Ltd (“Hongsheng”) The Company has significant influence on Hongsheng
Siping Juyuan Heat Exchange Service Technology, Co., Ltd. (“Fuwu”) The Company has significant influence on Fuwu

9


Trade receivables – related party

During the six months ended June 30, 2018 and 2017, the Company sold products to Tongda in the amount of $107,658 and $8,232, respectively. The corresponding costs of the related party sales were $78,437 and $3,750, respectively. As of June 30, 2018 and December 31, 2017, the Company had trade receivables from Tongda in the amount of $nil and $27,676, respectively.

Advance from customers - related parties

During the six months ended June 30, 2018, the Company received prepayment from Tongda and Hongsheng in the amount of $3,062,859 and $1,484,360, respectively, for product purchases. As of June 30, 2018 and December 31, 2017, the Company had advance from customers – related parties in the amount of $4,373,756 and $nil, respectively.

Due from related parties

As of June 30, 2018 and December 31, 2017, respectively, the Company had advance to Guohong Zhao in the amount of $13,835 and $14,075 for handling selling and logistic activities for the Company in the ordinary course of business.

As of June 30, 2018 and December 31, 2017, respectively, the Company had advance to Kai Liu in the amount of $11,542 and $11,742 for handling selling and logistic activities for the Company in the ordinary course of business.

During the six months ended June 30, 2018 and 2017, Hongsheng repaid to the Company in the amount of $244,965 and $nil, respectively. As of June 30, 2018 and December 31, 2017, the Company had advance to Hongsheng in the amount of $nil and $239,701, respectively, which was included in due from related parties in the consolidated balance sheets.

During the six months ended June 30, 2018 and 2017, the Company made loans to Tongda in the amount of $nil and $383,825, and Tongda repaid to the Company in the amount of $279,708 and $232,751, respectively. The loans were non-secured, non-interest bearing and due on demand. On December 28, 2016, the Company sold certain used equipment with original cost and net book value of $977,650 and $121,307, respectively, to Tongda in exchange for $1,315,958 including VAT. During the six months ended June 30, 2018, the Company collected $1,370,150 from Tongda for the equipment sold. As of June 30, 2018 and December 31, 2017, the Company had loans to Tongda in the amount of $211,378 and $488,737, respectively, and receivable from Tongda regarding sale of equipment in the amount of $nil and $1,340,710, respectively, both of which were included in due from related parties in the consolidated balance sheets.

During the six months ended June 30, 2018 and 2017, the Company advanced $nil and $131,698, and received repayment of $99,622 and $100,374, respectively, from Fuwu. In addition, Fuwu paid operating expense on behalf of the Company in the amount of $nil and $36,814, respectively, during the six months ended June 30, 2018 and 2017. As of June 30, 2018 and December 31, 2017, the amount due from Fuwu was $nil and $97,481, respectively, which were included in due from related parties in the consolidated balance sheets.

Due to related parties

Due to related parties consist of the following:

    June 30,     December 31,  
    2018     2017  
    (Unaudited)        
Others $  3,943,415   $  7,050,268  
Fucai Zhan   83,093     138,325  
Guohong Zhao   18,687     19,010  
  $  4,045,195   $  7,207,603  

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

During the six months ended June 30, 2018 and 2017, the Company was advanced $453,282 and $1,783,724 from a related party and made repayment of $3,631,452 and $814,628, respectively. During the six months ended June 30, 2018 and 2017, Guohong Zhao paid $nil and $14,088 operating expense on behalf of the Company, respectively.

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

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

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

Use of Terms

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

 

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

  “Megaway” are to Megaway International Holdings Limited, a BVI company;
  “Star Wealth” are to Star Wealth International Holdings Limited, a Hong Kong company;
  “Siping Juyuan” are to Siping City Juyuan Hanyang Plate Heat Exchanger Co. Ltd., a PRC company;
  “Beijing Juyuan” are to Beijing Juyuan Hanyang Heat Exchange Equipment Co., Ltd., a PRC company;
  “BVI” are to the British Virgin Islands;
  “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;
  “PRC” and “China” are to the People’s Republic of China;
  “SEC” are to the Securities and Exchange Commission;
  “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
  “Securities Act” are to the Securities Act of 1933, as amended;
  “Renminbi” and “RMB” are to the legal currency of China; and
  “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States.
  “Center” or “Investor” are to Jilin Province Technology Fund Operation and Service Center, a non-controlling interest that holds 1.18% ownership interest in SipingJuyuan.

Overview of our Business

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

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

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

Second Quarter Financial Performance Highlights

The following summarizes certain key financial information for the second quarter of 2018:

 

Sales revenue: Sales revenue increased by $3.38 million, or 44.76%, to $10.92 million for the three months ended June 30, 2018, from $7.54 million for the same period in 2017.

   

 

Gross profit: Gross profit increased by $0.70 million, or 24.67%, to $3.56 million for the three months ended June 30, 2018, from $2.86 million for the same period in 2017. As a percentage of sales revenue, gross profit decreased by 5.25% to 32.61% for the three months ended June 30, 2018, from 37.86 % for the same period in 2017.

   

 

Net loss attributable to THT Heat Transfer Technology, Inc. common shareholders: Net loss attributable to THT Heat Transfer Technology, Inc. common shareholders decreased by $0.51 million, or 29.58%, to $1.20 million for the three months ended June 30, 2018, from $1.71 million for the same period in 2017.

   

 

Net loss attributable to non-controlling interest: As of June 30, 2018, we had a 98.82% controlling economic interest and 100% voting interest in SipingJuyuan. As of June 30, 2017, we had a 100% controlling economic interest and 100% voting interest in SipingJuyuan. We consolidate SipingJuyuan’s operating results for financial statement purposes. Net loss attributable to non-controlling interest represents the portion of net loss attributable to the Center.

   

 

Fully diluted net loss per share attributable to THT Heat Transfer Technology, Inc. common shareholders: Fully diluted net loss per share attributable to THT Heat Transfer Technology, Inc. common shareholders was $0.06 for the three months ended June 30, 2018, as compared to fully diluted net loss per share attributable to THT Heat Transfer Technology, Inc. common shareholders of $0.08 for the same period in 2017.

Results of Operations

Comparison of Three Months Ended June 30, 2018 and June 30, 2017

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

    Three Months Ended              
    June 30,   $     %  
    2018     2017     Change     Change  
                         
Sales revenue $  10,819,974   $  7,542,784   $  3,277,190     43.45  
Sales revenue-related party   99,055     -     99,055     100  
Total sales revenues   10,919,029     7,542,784     3,376,245     44.76  
Cost of revenues   (7,358,409 )   (4,686,741 )   (2,671,668 )   57.00  
Gross profit   3,560,620     2,856,043     704,577     24.67  
Operating expenses:                        
General and administrative expenses   2,614,706     1,855,218     759,488     40.94  
Research and development expenses   716,651     414,577     302,074     72.86  
Selling expenses   1,232,888     2,552,403     (1,319,515 )   (51.70 )
Total operating expenses   4,564,245     4,822,198     (257,953 )   (5.35 )
                         
Loss from operations   (1,003,625 )   (1,966,155 )   962,530     (48.95 )
Interest income   2,832     3,239     (407 )   (12.57 )
Other income   57     7,360     (7,303 )   (99.23 )
Finance costs   (62,500 )   (61,352 )   (1,148 )   1.87  
Investment income   4,646     5,469     (823 )   (15.05 )
Other expenses   (9,230 )   (18,526 )   9,296     (50.18 )
                         
Loss before income taxes   (1,067,820 )   (2,029,965 )   962,145     (47.40 )
Income tax benefits (expense)   (149,247 )   321,949     (471,196 )   (146.36 )
Net loss   (1,217,067 )   (1,708,016 )   490,949     (28.74 )
Net loss attributable to non-controlling interest   (14,360 )   -     (14,360 )   (100 )
Net loss attributable to THT Heat Transfer Technology, Inc. common shareholders $  (1,202,707 ) $  (1,708,016 ) $  505,309     29.58  

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Sales revenue. Our sales revenue is generated from sales of heat exchange products. Sales revenue increased by $3.38 million, or 44.76%, to $10.92 million for the three months ended June 30, 2018, from $7.54 million for the same period in 2017. Our sales volume in the three months ended June 30, 2018 amounted to 826 units, an increase of 333 units, from 493 units for the same period in 2017. Such increase was mainly due to increased sales revenue from plate heat exchanger and other products. Sales revenue from plate heat exchangers increased by $2.43 million, or 71.00%, to $5.85 million for the three months ended June 30, 2018, from $3.42 million for the same period in 2017. Sales revenues from other products increased by $1 million, or 53.94%, to $3.15 million for the three months ended June 30, 2018, from $2.05 million for the same period in 2017. We sold more plate heat exchanger and other products for the three-month period ended June 30, 2018 due to a rise in demand and market expansion as a result of our marketing effort in the year ended December 31, 2017.

The following table shows our sales revenue by product for the three months ended June 30, 2018 and 2017:

    Three Months Ended June 30,  
    2018     2017  
  $     %   $     %  
Plate heat exchanger $  5,847,833     54   $  3,419,733     46  
Heat exchange unit   1,708,710     16     1,986,238     26  
Air-cooled heat exchanger   211,574     2     89,905     1  
Others   3,150,912     28     2,046,908     27  
TOTAL $  10,919,029     100   $  7,542,784     100  

Cost of revenues. Our cost of revenues is primarily comprised of the costs of our raw materials, labor and factory overhead. Our cost of revenues increased by $2.67 million, or 57.00%, to $7.36 million for the three months ended June 30, 2018, from $4.69 million for the three months ended June 30, 2017. The increase of cost of revenues is mainly due to increase in revenue. Cost of revenues as a percentage of sales revenue were 67.39% and 62.14% for the three months ended June 30, 2018 and 2017, respectively, an increase of 5.26 percentage points. The increase was mainly attributable to increase in percentage of sale of less profitable products in the three months ended June 30, 2018, compared to same period in 2017.

Gross profit. Our gross profit is equal to the difference between our sales revenue and our cost of revenues. Our gross profit increased by $0.70 million, or 24.67%, to $3.56 million for the three months ended June 30, 2018, from $2.86 million for the same period in 2017. The average unit selling price of our products decreased by 13.60%, to $13,219 for the three months ended June 30, 2018 in comparison with $15,300 for the same period of 2017. The average unit cost decreased by 6.30%, to $8,908 for the three months ended June 30, 2018 in comparison with $9,507 for the same period of 2017. As a result of these factors, our gross profit margin for the three months ended June 30, 2018 decreased to 32.61% from 37.86% for the same period of 2017.

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General and administrative expenses. Our general and administrative expenses consist of the costs associated with staff and support personnel who manage our business activities. Our general and administrative expenses increased by $0.75 million, or 40.94%, to $2.61 million for the three months ended June 30, 2018, from $1.86 million for the same period in 2017. As a percentage of sales revenue, general and administrative expenses decreased to 23.95% for the three months ended June 30, 2018, as compared to 24.60% for the same period in 2017. The increase in general and administrative expenses was primarily due to recognition of more bad debt expense and repair and maintenance expense for the three months ended on June 30, 2018.

Research and development expenses. Our research and development expenses consist of the costs associated with research and development personnel and expense in research and development projects. Our research and development expenses increased by $0.30 million, or 72.86%, to $0.71 million for the three months ended June 30, 2018, from $0.41 million for the same period in 2017. The increase in research and development expenses was mainly attributable to more product research and development to accommodate purchase orders for different products we have received for the three months ended June 30, 2018, compared to same period in 2017.

Selling expenses. Our selling expenses include sales commissions, travel cost, the cost of advertising and promotional materials, salaries and fringe benefits of sales personnel, after-sale support services and other sales-related costs. Our selling expenses decreased by $1.32 million, or 52%, to $1.23 million for the three months ended June 30, 2018, from $2.55 million for the same period in 2017. The decrease was mainly attributable to the decreased marketing activities in the three months ended June 30, 2018, as compared to the same period in 2017.

Loss before income taxes. Loss before income taxes decreased by $0.96 million, or 47%, to $1.07 million for the three months ended June 30, 2018, from loss before income taxes of $2.03 million for the same period in 2017. Such decrease was mainly attributable to the increase in our revenue and decrease in operating expenses.

Income taxes benefits (expense). Our income taxes expense increased to $0.15 million for the three months ended June 30, 2018, from income taxes benefits of $0.32 million for the same period in 2017. For the three months ended June 30, 2018, we fully allowed the income tax benefits from net operating loss since we expected a net loss in the foreseeable future and recognized income taxes expense in relation to deferred tax liability from tax deduction of property, plant and equipment purchases pursuant to the new tax regulation released by the State Administration of Taxation and Ministry of Finance of the PRC on May 7, 2018.

Net loss attributable to THT Heat Transfer Technology, Inc. common shareholders: As a result of the cumulative effect of the foregoing factors, our net loss attributable to THT Heat Transfer, Inc. common shareholders decreased by $0.51 million, or 29.58%, to $1.20 million for the three months ended June 30, 2018, from net loss attributable to THT Heat Transfer, Inc. common shareholders of $1.71 million for the same period in 2017. As a percentage of sales revenues, our net loss attributable to THT Heat Transfer, Inc. common shareholders was 11.01% and 22.64% for the three months ended June 30, 2018 and 2017, respectively.

Net loss attributable to non-controlling interest. Non-controlling interest represents the ownership interests the Center holds in SipingJuyuan and the amount recorded as non-controlling interest in our consolidated statements of income and comprehensive loss is computed by multiplying after-tax income for the three months ended June 30, 2018 by the percentage ownership in SipingJuyuan not directly attributable to us. For the three months ended June 30, 2018 and 2017, the weighted average non-controlling interest attributable to ownership interests in SipingJuyuan not directly attributable to us was 1.18% and nil%, respectively.

Comparison of Six Months Ended June 30, 2018 and June 30, 2017

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

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    Six Months Ended              
    June 30,     $     %  
    2018     2017     Change     Change  
                         
Sales revenue $  18,031,249   $  11,540,890   $  6,490,359     56.24  
                         
Sales revenue-related party   107,658     8,232     99,426     1207.80  
                         
Total sales revenues   18,138,907     11,549,122     6,589,785     57.06  
Cost of revenues   (12,805,226 )   (6,854,567 )   (5,950,659 )   86.81  
Gross profit   5,333,681     4,694,555     639,126     13.61  
                         
Operating expenses:                        
General and administrative expenses   2,812,850     2,677,819     135,031     5.04  
Research and development expenses   969,773     732,575     237,198     32.38  
Selling expenses   2,753,189     4,774,451     (2,021,262 )   (42.33 )
Total operating expenses   6,535,812     8,184,845     (1,649,033 )   (20.15 )
                         
Loss from operations   (1,202,131 )   (3,490,290 )   2,288,159     (65.56 )
                         
Interest income   5,940     6,509     (569 )   (8.74 )
Other income   114,927     50,345     64,582     128.28  
Finance costs   (126,387 )   (119,564 )   (6,823 )   5.71  
Investment income   21,288     28,943     (7,655 )   (26.45 )
Other expenses   (10,803 )   (18,526 )   7,723     (41.69 )
                         
Loss before income taxes   (1,197,166 )   (3,542,583 )   2,345,417     (66.21 )
Income tax benefits (expense)   (149,247 )   473,371     (622,618 )   (131.53 )
Net Loss   (1,346,413 )   (3,069,212 )   1,722,799     (56.13 )
Net loss attributable to non-controlling interest   (15,886 )   -     (15,886 )   (100 )
Net loss attributable to THT Heat Transfer Technology, Inc. common shareholders $  (1,330,527 ) $  (3,069,212 ) $  1,738,685     56.65  

Sales revenue. Our sales revenue increased by $6.59 million, or 57.06%, to $18.14 million for the six months ended June 30, 2018, from $11.55 million for the same period in 2017. Our sales volume in the six months ended June 30, 2018 amounted to 1337 units, an increase of 539 units, from 798 units for the same period in 2017. Such increase was mainly due to increased sales revenue from plate heat exchanger, heat exchange unit, and other products in the six months ended June 30, 2018 as compared with the same period in 2017. Sales revenue from plate heat exchangers increased by $3.49 million, or 59.95%, to $9.31 million for the six months ended June 30, 2018, from $5.82 million for the same period in 2017. Sales revenues from heat exchange unit increased by $1.43 million, or 50.36%, to $4.27 million for the six months ended June 30, 2018, from $2.84 million for the same period in 2017. Sales revenues from other products increased by $1.50 million, or 53.91%, to $4.30 million for the six months ended June 30, 2018 from $2.80 million for the same period in 2017. We sold more plate heat exchanger, heat exchange unit and other products for the six-month period ended June 30, 2018 due to a rise in demand and market expansion as a result of our marketing effort in the year ended December 31, 2017.

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The following table shows our sales revenue by product for the six months ended June 30, 2018 and 2017:

    Six Months Ended June 30,  
    2018     2017  
  $     %   $     %  
Plate heat exchanger $  9,307,294     51   $  5,818,987     50  
Heat exchange unit   4,270,925     24     2,840,480     25  
Air-cooled heat exchanger   211,574     1     89,905     1  
Shell-and-tube heat exchanger   44,264     -     2,823     -  
Others   4,304,850     24     2,796,927     24  
TOTAL $  18,138,907     100   $  11,549,122     100  

Cost of revenues. Our cost of revenues increased by $5.95 million, or 86.81%, to $12.80 million for the six months ended June 30, 2018, from $6.85 million for the six months ended June 30, 2017. Cost of revenues as a percentage of sales revenue were 70.60% and 59.35% for the six months ended June 30, 2018 and 2017, respectively, an increase of 11.24 percentage points. The increase in cost of revenues is primarily due to the increase of the quality of our products by applying better material and using upgraded technology during manufacturing process to keep our product competitive against other products in the market and to maintain our increased market shares.

Gross profit. Our gross profit increased by $0.64 million, or 13.61%, to $5.33 million for the six months ended June 30, 2018, from $4.69 million for the same period in 2017. The average unit selling price of our products decreased by 6.26%, to $13,567 for the six months ended June 30, 2018 in comparison with $14,473 for the same period of 2017. The average unit cost increased by 11.5%, to $9,578 for the six months ended June 30, 2018 in comparison with $8,590 for the same period of 2017. As a result of these factors, our gross profit margin for the six months ended June 30, 2018 decreased to 29.40% from 40.65% for the same period in 2017.

General and administrative expenses. Our general and administrative expenses increased by $0.13 million, or 5.04%, to $2.81 million for the six months ended June 30, 2018, from $2.68 million for the same period in 2017. As a percentage of sales revenue, general and administrative expenses decreased to 15.51% for the six months ended June 30, 2018, as compared to 23.19% for the same period in 2017.

Research and development expenses. Our research and development expenses increased by $0.24 million, or 32.38%, to $0.97 million for the six months ended June 30, 2018, from $0.73 million for the same period in 2017. The increase in research and development expenses was mainly attributable to more product research and development due to different purchase order we have received for the six months ended June 30, 2018, compared to same period in 2017.

Selling expenses. Our selling expenses decreased by $2.02 million, or 42.33%, to $2.75 million for the six months ended June 30, 2018, from $4.77 million for the same period in 2017. As a percentage of sales revenue, selling expenses decreased to 15.18% for the six months ended June 30, 2018, as compared to 41.34% for the same period in 2017. The decrease was mainly attributable to the decreased marketing activities in the six months ended June 30, 2018, as compared to the same period in 2017.

Loss before income taxes. Loss before income taxes decreased by $2.34 million, or 66.21%, to $1.20 million for the six months ended June 30, 2018, from $3.54 million for the same period in 2017. Such decrease was mainly attributable to increase in revenue and decrease in operating expense.

Income tax benefits (expense). Our income tax expense increased to $0.15 million for the six months ended June 30, 2018, from income tax benefits of $0.47 million for the same period in 2017. For the six months ended June 30, 2018, we fully allowed the income tax benefits from net operating loss since we expected a net loss in the foreseeable future and recognized income taxes expense in relation to deferred tax liability from tax deduction of property, plant and equipment purchases pursuant to the new tax regulation released by the State Administration of Taxation and Ministry of Finance of the PRC on May 7, 2018.

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Net Loss attributable to THT Heat Transfer Technology, Inc. common shareholders. As a result of the cumulative effect of the foregoing factors, our net loss attributable to THT Heat Transfer, Inc. common shareholders decreased by $1.74 million, or 56.65%, to $1.33 million for the six months ended June 30, 2018, from net loss attributable to THT Heat Transfer, Inc. common shareholders of $3.07 million for the same period in 2017. As a percentage of sales revenues, our net loss attributable to THT Heat Transfer, Inc. common shareholders was 7.34% and 26.58% for the six months ended June 30, 2018 and 2017, respectively.

Net loss attributable to non-controlling interest. Non-controlling interest represents the ownership interests the Center holds in SipingJuyuan and the amount recorded as non-controlling interest in our consolidated statements of income and comprehensive income (loss) is computed by multiplying after-tax income for the six months ended June 30, 2018 by the percentage ownership in SipingJuyuan not directly attributable to us. For the six months ended June 30, 2018 and 2017, the weighted average non-controlling interest attributable to ownership interests in SipingJuyuan not directly attributable to us was 1.18% and nil%, respectively.

Liquidity and Capital Resources

As of June 30, 2018, we had cash and cash equivalents of $2.20 million. We anticipate that cash on hand and borrowing capacity under our bank loans will be sufficient to satisfy our ongoing obligations.

We believe our allowance for doubtful accounts is appropriate. We have an installment payment arrangement with our customers. The current economic slowdown and China’s tightened credit policy led to delayed payments and delayed delivery schedules by our customers, which in turn caused us to increase our allowance for doubtful accounts from $8.69 million in the six months ended June 30, 2017 to $12.21 million in the same period in 2017. To control inflation after a massive stimulus plan, the Chinese government tightened its credit policy. As a result, state-owned banks limited their lending to large state-owned corporations and privately held companies continue to have difficulty accessing capital. Most of our customers have been affected by the tightened credit policy and have limited access to capital. The Company records an allowance for doubtful accounts at a rate of 25% for receivables aged between 1 to 2 years, 50% for receivables aged between 2 to 3 years and 100% for receivables aged over 3 years.

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

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

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

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

Cash Flow

    Six Months Ended June 30,  
    2018     2017  
Net cash used in operating activities $  (2,323,572 ) $  (2,877,593 )
Net cash provided by investing activities   1,332,843     (248,821 )
Net cash provided by (used in) financing activities   (3,178,170 )   1,005,362  
Effect of foreign currency translation on cash, cash equivalents, and restricted cash   39,737     94,061  
Net decrease in cash, cash equivalents, and restricted cash   (4,129,162 )   (2,026,991 )
Cash, cash equivalents, and restricted cash at beginning of the period   7,981,872     8,098,630  
Cash, cash equivalents, and restricted cash at end of the period $  3,852,710   $  6,071,639  

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Operating Activities

Net cash used in operating activities was $2.32 million for the six months ended June 30, 2018, compared to $2.88 million for the same period in 2017. The decrease in net cash used in operating activities was mainly due to the decrease in net loss of $1.72 million, income tax payable of $0.48 million, and increase in allowance for doubtful account of $0.35 million, inventory write-down of $0.3 million, inflow of retention receivable of $1.28 million, and advance from customers - related parties of $4.55 million, offset by the increase in change in outflow of inventories, net of $2.02 million, other receivables, prepayments and deposits of $2.35 million, other payables and accrued expenses of $1.81 million, bills receivable of $1.31 million, deferred tax assets of $0.62 million, and trade receivables-related party of $1.10 million.

Investing Activities

Net cash provided by investing activities was $1.33 million for the six months ended June 30, 2018, compared with net cash used in by investing activities of $0.25 million in the same period in 2017. The increase in net cash provided by investing activities during the six months ended June 30, 2018 was primarily due to increase in proceeds from disposal of property, plant and equipment of $1.37 million and decrease in loans made to others of $1.74 million, offset by decrease in repayments from others of $2.1 million.

Financing Activities

Net cash used in financing activities was $3.18 million for the six months ended June 30, 2018, compared with $1.01 million net cash provided by financing activities for the same period in 2017. The increase in net cash used in financing resulted from a decrease in proceeds from bank loans of $4.71 million and proceeds from related parties of $1.39 million, and increase in repayment to related parties of $2.75 million, offset by decrease in repayment to bank loans of $4.66 million.

Capital Expenditures

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

    Six Months Ended June 30,  
    2018     2017  
Purchase of equipment $  661,601   $  437,112  
Total capital expenditures $  661,601   $  437,112  

We estimate that our total capital expenditures in fiscal year 2018 will reach approximately $0.85 million to buy the equipment for necessary products used in the nuclear power industry.

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Obligations under Material Contracts

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

Seasonality

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

Inflation

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

Off Balance Sheet Arrangements

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

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Mr. Guohong Zhao, and Interim Chief Financial Officer, Mr. Zhigang Xu, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2018. Based upon, and as of the date of this evaluation, Messrs. Zhao and Xu determined that because of the material weaknesses described in Item 9A “Controls and Procedures” of our Annual Report on Form 10-K for the year ended December 31, 2017, which we are still in the process of remediating as of June 30, 2018, our disclosure controls and procedures were not effective.

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Investors are directed to Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2017 for the description of these weaknesses.

Changes in Internal Control over Financial Reporting

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

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2017, our management identified material weakness related to our lack of: (1) sufficient and adequately trained accounting and finance personnel; (2) qualified resources to perform the internal audit functions properly; and (3) an internal audit department which renders ineffective our ability to prevent and detect control lapses and errors in the accounting of certain key areas. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, our management has identified the steps necessary to address the material weaknesses, and in the second quarter of 2018, we continued to implement these remedial procedures.

Other than in connection with the implementation of the remedial measures described above, there were no changes in our internal controls over financial reporting during the second quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, cash flows, financial condition or operating results.

ITEM 1A. RISK FACTORS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the second quarter of 2018, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6. EXHIBITS.

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

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SIGNATURES

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

Date: August 14, 2018 THT HEAT TRANSFER TECHNOLOGY, INC.
     
  By: /s/ Guohong Zhao
    Guohong Zhao, Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Zhigang Xu
    Zhigang Xu, Interim Chief Financial Officer
    (Principal Financial Officer and Principal
    Accounting Officer)


EXHIBIT INDEX

Exhibit No. Description
31.1

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

31.2

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

32.1

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

32.2

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

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