XNAS:THTI THT Heat Transfer Technology Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012

[  ] 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 [  ] Smaller reporting company [X]
 (Do not check if a smaller reporting company)  

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, 2012 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, 2012

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures. 30

PART II
OTHER INFORMATION

Item 1. Legal Proceedings 30
Item 1A. Risk Factors. 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Mine Safety Disclosures. 31
Item 5. Other Information. 31
Item 6. Exhibits 31

i


PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

THT HEAT TRANSFER TECHNOLOGY, INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

  Pages(s)
Condensed Consolidated Statements of Income and Comprehensive Income 1
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 6-22

THT Heat Transfer Technology, Inc.

Condensed Consolidated Financial Statements
For the three and six months ended
June 30, 2012 and 2011
(Stated in US dollars)


THT Heat Transfer Technology, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the three and six months ended June 30, 2012 and 2011
(Stated in US Dollars)

 

  Three months ended     Six months ended  

 

  June 30,     June 30,  

 

  (unaudited)     (unaudited)  

 

  2012     2011     2012     2011  

 

                       

Sales revenue

$ 11,195,347   $ 14,179,746   $ 22,644,772   $ 28,232,666  

Cost of sales

  (6,380,265 )   (8,102,332 )   (13,223,900 )   (16,112,561 )

 

                       

Gross profit

  4,815,082     6,077,414     9,420,872     12,120,105  

 

                       

Operating expenses

                       

     Administrative expenses

  787,362     1,027,211     2,040,191     1,740,142  

     Research and development expenses

  245,297     437,173     499,280     784,662  

     Selling expenses

  1,953,179     1,524,185     4,207,776     3,224,048  

 

                       

 

  2,985,838     2,988,569     6,747,247     5,748,852  

 

                       

Income from operations

  1,829,244     3,088,845     2,673,625     6,371,253  

Interest income

  4,463     10,030     12,741     23,916  

Other income - Note 15

  137,735     847,930     367,196     852,687  

Finance costs - Note 16

  (501,762 )   (209,389 )   (903,212 )   (401,986 )

 

                       

Income before income taxes and noncontrolling interests

  1,469,680     3,737,416     2,150,350     6,845,870  

Income taxes - Note 8

  (34,934 )   (493,072 )   (110,898 )   (917,538 )

 

                       

Net income before noncontrolling interests

$ 1,434,746   $ 3,244,344   $ 2,039,452   $ 5,928,332  

 

                       

Net loss/(income) attributable to noncontrolling interests

  4,964     69,061     (42,563 )   41,650  

 

                       

Net income attributable to THT Heat Transfer Technology, Inc. common stockholders

$ 1,439,710   $ 3,313,405   $ 1,996,889   $ 5,969,982  

 

                       

Net income before noncontrolling interests

  1,434,746     3,244,344     2,039,452     5,928,332  

Other comprehensive income

                       

     Foreign currency translation adjustments

  36,825     820,461     386,572     984,986  

 

                       

Comprehensive income

  1,471,571     4,064,805     2,426,024     6,913,318  

Comprehensive loss/(income) attributable to noncontrolling interests

  5,267     70,705     (38,693 )   43,423  

 

                       

Comprehensive income attributable to THT Heat Transfer Technology, Inc. common stockholders

$ 1,476,838   $ 4,135,510   $ 2,387,331   $ 6,956,741  

 

                       

Earnings per share attributable to THT Heat Transfer Technology, Inc. common stockholders - Note 17

               

 

                       

- Basic and diluted

$ 0.07   $ 0.16   $ 0.10   $ 0.29  

 

                       

Weighted average number of shares outstanding

               

- Basic and diluted

  20,453,500     20,453,500     20,453,500     20,453,500  

See the accompanying notes to condensed consolidated financial statements.

- 1 -


THT Heat Transfer Technology, Inc.
Condensed Consolidated Balance Sheets
As of June 30, 2012 and December 31, 2011
(Stated in US Dollars)

    June 30,     December 31,  
    2012     2011  
    (Unaudited)        
             
ASSETS            
   Current assets            
          Cash and cash equivalents $ 4,779,267   $ 7,340,068  
          Restricted cash - Note 4   1,737,917     1,725,546  
          Trade receivables, net - Note 5   36,596,851     33,573,223  
          Counter guarantee receivable - Note 12   237,300     235,676  
          Bills receivable   871,479     1,415,890  
          Other receivables, prepayments and deposits, net - Note 6   10,451,175     7,859,563  
          Inventories, net - Note 7   33,083,705     32,531,053  
          Deferred tax assets   259,867     251,561  
             
   Total current assets   88,017,561     84,932,580  
   Retention receivable   896,432     1,184,382  
   Counter guarantee receivable - Note 13   237,300     235,676  
   Property, plant and equipment, net - Note 9   7,686,131     7,703,607  
   Deposit for acquisition of property, plant and equipment   -     345,658  
   Land use rights - Note 10   1,014,831     1,019,045  
   Deposits for land use rights – Note 10   6,064,997     4,389,330  
             
TOTAL ASSETS $ 103,917,252   $ 99,810,278  

See the accompanying notes to condensed consolidated financial statements.

- 2 -


THT Heat Transfer Technology, Inc.
Condensed Consolidated Balance Sheets (Cont’d)
As of June 30, 2012 and December 31, 2011
(Stated in US Dollars)

    June 30,     December 31,  
    2012     2011  
    (Unaudited)        
             
LIABILITIES AND EQUITY            
             
LIABILITIES            
   Current liabilities            
       Trade payables $ 5,468,426   $ 6,619,676  
       Other payables and accrued expenses - Note 11   19,114,552     15,853,810  
       Income tax payable   183,759     1,389,140  
       Short-term bank loans - Note 12   17,876,600     16,183,051  
       Current maturities of long-term loan - Note 13   1,898,400     1,885,404  
             
   Total current liabilities   44,541,737     41,931,081  
   Long-term loan - Note 13   1,898,400     2,828,106  
             
TOTAL LIABILITIES   46,440,137     44,759,187  
             
COMMITMENTS AND CONTINGENCIES - Note 20            
             
STOCKHOLDERS’ EQUITY            
   Preferred stock : par value of $0.001 per share            

Authorized 10,000,000 shares; none issued and outstanding

           
   Common stock : par value $0.001 per share - Note 14            

Authorized 190,000,000 shares; issued and outstanding 20,453,500 shares as of June 30, 2012 and December 31, 2011

  20,454     20,454  
   Additional paid-in capital   27,396,455     27,396,455  
   Statutory reserve   3,204,407     2,979,827  
   Accumulated other comprehensive income   4,112,319     3,721,877  
   Retained earnings   23,270,152     21,497,843  
             
Total THT Heat Transfer Technology, Inc. stockholders’ equity   58,003,787     55,616,456  
Non-controlling interests   (526,672 )   (565,365 )
             
TOTAL EQUITY   57,477,115     55,051,091  
             
TOTAL LIABILITIES AND EQUITY $ 103,917,252   $ 99,810,278  

See the accompanying notes to condensed consolidated financial statements.

- 3 -


THT Heat Transfer Technology, Inc.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2012 and 2011
(Stated in US Dollars)

  Six months ended June 30,
  2012 2011
  (unaudited) (unaudited)
Cash flows from operating activities            

Net income before non-controlling interests

$ 2,039,452 $ 5,928,332

Adjustments to reconcile net income attributable to THT Heat Technology, Inc. common stockholders to net cash used in operating activities:

       

Depreciation and amortization

583,931 458,112

Deferred taxes

  (6,568 )   (12,966 )

Provision for (reversal of) doubtful debts of trade receivables

366,946 (259,317 )

Reversal of doubtful debts of other receivables, prepayment and deposits

  (8,663 )   -  

Changes in operating assets and liabilities:

           

Trade receivables

  (3,157,390 )   (6,769,184 )

Bills receivable

  553,821     (1,531,856 )

Other receivables, prepayments and deposits

  (2,328,441 )   (5,542,299 )

Inventories

  (328,210 )   2,439,777  

Retention receivable

  295,927     (573,026 )

Counter guarantee receivable

  -     213,780  

Trade payables

  (1,196,122 )   (674,622 )

Other payables and accrued expenses

  2,950,862     (3,382,611 )

Income tax payable

  (1,214,189 )   (427,104 )
             
Net cash flows used in operating activities   (1,448,644 )   (10,132,984 )

See the accompanying notes to condensed consolidated financial statements.

- 4 -


THT Heat Transfer Technology, Inc.
Condensed Consolidated Statements of Cash Flows (Cont’d)
For the six months ended June 30, 2012 and 2011
(Stated in US Dollars)

    Six months ended June 30,  
    2012     2011  
    (unaudited)     (unaudited)  
Cash flows from investing activities            
       Prepayment for land use rights   (1,644,371 )   (1,943,381 )
       Deposit for acquisition of property, plant and equipment   -     (510,742 )
       Payments to acquire property, plant and equipment   (154,348 )   (408,414 )
             
Net cash flows used in investing activities   (1,798,719 )   (2,862,537 )
             
Cash flows from financing activities            
     Proceeds from bank loans   12,648,000     11,614,362  
     Repayment of bank loans   (11,067,000 )   (10,689,000 )
     Repayment of long-term loan   (948,600 )   (1,679,700 )
     Increase in restricted cash   (476 )   (880,939 )
             
Net cash flows provided (used in) financing activities   631,924     (1,635,277 )
             
Effect of foreign currency translation on cash and cash equivalents   54,638     1,343,166  
             
Net decrease in cash and cash equivalents   (2,560,801 )   (13,287,632 )
             
Cash and cash equivalents - beginning of period   7,340,068     18,438,430  
             
Cash and cash equivalents - end of period $ 4,779,267   $ 5,150,798  
             
Supplemental disclosures for cash flow information:            
     Cash paid for:            
           Interest $ 894,678   $ 327,999  
           Income taxes $ 1,340,178   $ 1,357,609  

See the accompanying notes to condensed consolidated financial statements.

- 5 -


THT Heat Transfer Technology, Inc.
Notes to Condensed 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 the surviving corporation pursuant to the Reincorporation Merger as detailed below. The Company’s shares are quoted for trading on the Nasdaq Global Market in the United States.

   

Reincorporation Merger

   

On November 24, 2009, BTHC VIII, Inc. ("BTHC") entered into an Agreement and Plan of Merger (the "Merger Agreement") with THT, a Nevada corporation and wholly-owned subsidiary of BTHC. Pursuant to the Merger Agreement, BTHC agreed to merge with and into THT, with THT continuing as the surviving entity (the "Reincorporation Merger"). The Reincorporation Merger became effective on November 30, 2009 (the "Effective Time").

   

As a result of the Reincorporation Merger, the legal domicile of the Surviving Corporation is Nevada. The Merger Agreement and Reincorporation Merger were duly approved by the written consent of stockholders of BTHC owning at least a majority of the outstanding shares of BTHC's common stock, dated September 16, 2009.

   

Pursuant to the terms of the Merger Agreement, (i) BTHC merged into THT, with THT being the surviving corporation, and BTHC thereby changed its name to THT Heat Transfer Technology, Inc.; (ii) from and after the Effective Time, THT possesses all of the rights, privileges, powers, and franchises of BTHC, and BTHC's debts and liabilities became the debts and liabilities of THT; (iii) BTHC's existing Board of Directors and officers became the Board of Directors and officers of the Surviving Corporation; and (iv) the Articles of Incorporation and By-laws of THT now govern the Surviving Corporation.

   

The Reincorporation Merger did not result in any change in headquarters, business, jobs, management, location of any of offices or facilities, number of employees, assets, liabilities or net worth (other than as a result of the costs incident to the Reincorporation Merger, which are immaterial). Management, including all directors and officers, remain the same in connection with the Reincorporation Merger. There were no substantive changes in the employment agreements for executive officers or in other direct or indirect interests of the current directors or executive officers as a result of the Reincorporation Merger.

   

As a result of the Reincorporation Merger, each outstanding share of BTHC's common stock, par value $0.001 per share, was automatically converted into one share of THT's common stock, par value $0.001 per share. Each outstanding certificate representing shares of BTHC's common stock is deemed, without any action by BTHC's stockholders, to represent the same number of shares of THT's common stock.

   

Reorganization

   

Before the Reincorporation Merger and on June 30, 2009, BTHC entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Megaway International Holdings Limited, a British Virgin Islands corporation ("Megaway"), and its sole shareholder, Wisetop International Holdings Limited, a British Virgin Islands corporation ("Wisetop"). Pursuant to the Share Exchange Agreement, Megaway became a wholly-owned subsidiary of the Company and Wisetop was issued 14,800,000 shares of the Company's common stock, which, after giving effect to the Cancellation Agreement disclosed below, constituted 92.5% of the Company’s issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement, in exchange for 100% of the issued and outstanding shares of Megaway.

- 6 -


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

1.

Corporate information (Cont’d)

   

Megaway was dormant since its incorporation until it acquired 100% of the outstanding capital stock of Star Wealth International Holdings Limited ("Star Wealth"), a Hong Kong corporation on May 5, 2009. Star Wealth was also dormant since its incorporation until it acquired 100% of the equity interest of Siping City Juyuan Hanyang Plate Heat Exchanger Co., Ltd. (“Siping Juyuan”), a PRC corporation, on May 10, 2009.

   

On May 10, 2009, Star Wealth entered into an equity transfer agreement with all of the shareholders of Siping Juyuan to acquire their entire interests in Siping Juyuan at a total cash consideration of RMB60,000,000 ($8,795,075). The equity transfer agreement was approved by the local government of the People’s Republic of China (the “PRC”) on May 31, 2009.

   

Siping Juyuan has a 75% directly owned subsidiary, Beijing Juyuan Hanyang Heat Exchange Equipment Co. Ltd (“Beijing Juyuan”).

   

As a condition precedent to the consummation of the Share Exchange Agreement, on June 30, 2009, the Company entered into a cancellation agreement, or the Cancellation Agreement, with Mr. Gerald Pascale, who was the major stockholder of the Company immediately before the Share Exchange Agreement and served as the Company’s sole director and officer from February 12, 2009 until June 30, 2009 when he was replaced by Guohong Zhao (“Mr. Zhao”), a founder of Siping Juyuan, whereby Mr. Pascale agreed to the cancellation of 4,805,387 shares of the Company’s common stock owned by him.

   

Mr. Zhao was appointed as the Company’s director and chief executive officer effective upon the closing of the above reverse acquisition. In addition, the Company’s executive officers were replaced by the executive officers of Siping Juyuan upon the closing of the reverse acquisition.

   

On June 30, 2009, Mr. Zhao entered into an option agreement with Ms. Jinghua Zhao, the sole shareholder of Wisetop, pursuant to which Mr. Zhao was granted an option, exercisable after 180 days, to acquire all of the equity interests of Wisetop owned by Ms. Jinghua Zhao at an exercise price of $3,246,160. This option expires on June 30, 2011. On May 16, 2011, an amendment was signed by both parties extending the exercise period until June 30, 2012. Mr. Zhao exercised these options in 2011.

   

Also on June 30, 2009, Wisetop entered into separate option agreements with the other original stockholders of Siping Juyuan, pursuant to which such stockholders were granted options, exercisable after 90 days, to purchase an aggregate of 10,240,786 shares of the Company’s common stock owned by Wisetop at total exercise price of $7,291,440. The stockholders exercised these options on December 17, 2010.

   

On November 30, 2010, Juyuan Heat Equipment (Tianjin) Co., Ltd. (“Tianjin Juyuan”) was established in the PRC, of which Siping Juyuan and Mr. Zhao contributed $1,467,555 and $37,630 respectively to its registered capital, representing 99.5% and 0.5% equity interest in Tianjin Juyuan respectively. On September 22, 2011, Tianjin Juyuan was formally dissolved with the approval of the Tianjin Industrial and Commercial Administrative Bureau Baodi Branch.

   
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.

- 7 -


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

2.

Description of business (Cont’d)

   

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 Juyuan Hanyang Pressure Vessels Co., Ltd (“Juyuan Hanyang Pressure Vessels”)

   
3.

Summary of significant accounting policies

   

Basis of presentation and consolidation

   

The accompanying unaudited condensed 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 condensed 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, 2011 filed with the SEC in the Company’s Form 10-K on March 30, 2012.

   

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 three-month and six-month periods 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 condensed 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.

   

Concentration of credit risk

   

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash and cash equivalents, restricted cash, trade receivables and other receivables. As of June 30, 2012 and December 31, 2011, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade and other receivables.

- 8 -


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

3.

Summary of significant accounting policies (Cont’d)

   

Concentration of credit risk (cont’d)

   

During the three-month and six-month periods ended June 30, 2012 and 2011, the customers which represented 10% or more of the Company's condensed consolidated sales revenue are as follows:


      Three months ended     Six months ended  
      June 30     June 30  
      Unaudited     (Unaudited)  
      2012     2011     2012     2011  
                           
  Customer A   1,607,107     -   $ 1,616,085     -  
  Customer B   611,112     2,052,165     1,189,128   $ 2,052,165  
  Customer C   -     1,797,945     -     1,797,945  
  Customer D   -     1,579,205     -     1,579,205  

As of June 30, 2012 and December 31, 2011, the Company did not have any balance of gross trade receivable due from individual customer that represented 10% or more of the Company’s gross trade receivables.

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. Except for long-term loan disclosed as below, the carrying amounts of other financial assets and liabilities approximated their fair values due to short maturities or the applicable interest rates approximated the current market rates:

      As of     As of  
      June 30, 2012     December 31, 2011  
      Carrying     Fair value     Carrying     Fair value  
      amount           amount        
                           
  Long terms loans $ 3,796,800   $ 3,838,541   $ 4,713,510   $ 4,755,538  

Noncontrolling interests

Noncontrolling interest on the condensed consolidated balance sheets resulted from the consolidation of 75% owned subsidy, Beijing Juyuan.

The schedule below illustrates the movements in the noncontrolling interests:

      Six months ended June 30,  
      (Unaudited)  
      2012     2011  
               
  Balance at beginning of period $ (565,365 ) $ (61,891 )
  Net income/(loss) attributable to non-controlling interests   42,563     (41,650 )
  Foreign currency translation adjustments   (3,870 )   (1,773 )
               
  Balance at end of period $ (526,672 ) $ (105,314 )

- 9 -


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

3.

Summary of significant accounting policies (Cont’d)

   

Recently issued accounting pronouncements

   

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements”. The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of ASU 2011-03 has no material impact on the Company’s condensed consolidated financial statements.

   

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The FASB and the International Accounting Standard Board (IASB) works together to ensure that fair value has the same meaning in U.S. GAAP and IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU update will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments in this ASU update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this ASU update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of ASU 2011-04 has no material impact on the Company’s condensed consolidated financial statements.

   

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”. In this ASU updated, the entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, ASU 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” was issued. The amendments in this Update supersede certain pending paragraphs in Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The amendments will be temporary to allow the Board time to re-deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements for public, private, and non-profit entities. The amendments in this ASU update are to be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application by public entities is permitted. The adoption of ASU 2011-05 has no material impact on the Company’s condensed consolidated financial statements.

- 10 -


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

3.

Summary of significant accounting policies (Cont’d)

   

Recently issued accounting pronouncements

   

In September 2011, the FASB issued ASU 2011-08, “Intangibles - Goodwill and Other (Topic 350)”. The amendments in this update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this ASU update has no material impact on the Company’s condensed consolidated financial statements

   

In September 2011, the FASB issued ASU 2011-09, “Compensation - Retirement Benefits - Multiemployer Plans (Subtopic 715 –80)”. The amendments in this update require additional disclosures about an employer's participation in a multiemployer plan. ASU 2011-09 is effective for annual periods for fiscal years ending after December 15, 2011, and early adoption is permitted. ASU 2011-09 should be applied retrospectively for all prior periods presented. The adoption of this ASU update has no material impact on the Company’s condensed consolidated financial statements.

   

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210)”. The objective of this ASU is to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this Update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either Section 210-20-45 or Section 815-10-45. An entity is required to apply the amendments retrospectively for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The management is assessing the impact of this ASU on the Company’s condensed consolidated financial statements.

   

In July 2012, the FASB issued ASU 2012-02 on impairment testing for indefinite-lived intangible assets. This ASU amends FASB Codification Topic 350, Intangibles-Goodwill and Other to allow, but not require, an entity, when performing its annual or more frequent indefinite-lived intangible asset impairment test, to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. ASU2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is currently evaluating ASU 2012-02. The adoption of this ASU will not have a material impact on the Company’s condensed consolidated financial statements.

- 11 -


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

4.

Restricted cash


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Bank deposits held as collateral for performance bonds issued by the banks to customers $ 1,737,917   $ 1,725,546  

When the Company’s customers request to receive performance bonds issued by the banks in relation to the Company’s performance under the sales contracts, the Company has to place deposits with banks equal to 100% of the bonds amount at the time of issuance.

5.

Trade receivables, net


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Trade receivables $ 39,004,809   $ 35,600,032  
  Less : Allowance for doubtful accounts   (2,407,958 )   (2,026,809 )
               
    $ 36,596,851   $ 33,573,223  

As of June 30, 2012 and December 31, 2011, the Company’s trade receivables of $9,492,000 and $5,421,295, respectively, were pledged as collateral under certain loan and guarantee arrangements (Note 12).

An analysis of the allowance for doubtful accounts for the six months ended June 30, 2012 and 2011 is as follows :-

      Six months ended,  
      June 30  
      (Unaudited)  
      2012     2011  
               
  Balance at beginning of period $ 2,026,809   $ 1,353,375  
  Addition/(reversal) of bad debt expense, net   366,946     (259,317 )
  Translation adjustments   14,203     23,418  
               
  Balance at end of period $ 2,407,958   $ 1,117,476  

6.

Other receivables, prepayments and deposits, net


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Advances to staff $ 3,164,117   $ 2,201,875  
  Deposits for public bid   1,375,494     953,444  
  Prepayments to suppliers   5,177,882     3,284,002  
  VAT receivable   81,827     1,199,778  
  Other receivables   716,449     293,224  
               
      10,515,769     7,932,323  
  Less : Allowance for doubtful accounts   (64,594 )   (72,760 )
               
    $ 10,451,175   $ 7,859,563  

- 12 -


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

6.

Other receivables, prepayments and deposits, net (Cont’d)

   

The advances to staff mainly represent staff drawings for handling selling and logistic activities for the Company in the ordinary course of business.

   

Reversal of allowance for doubtful accounts of $8,663 was recognized during the six months ended June 30, 2012 and no further allowance for doubtful accounts was recognised for the six months ended June 30, 2011.

   
7.

Inventories, net

   

      June 30,     December 31,   
      2012     2011  
      (Unaudited)        
               
  Raw materials $ 4,694,946   $ 6,198,179  
  Work-in-progress   28,326,136     25,791,085  
  Finished goods   81,926     560,959  
               
      33,103,008     32,550,223  
  Allowance for obsolete inventories   (19,303 )   (19,170 )
               
    $ 33,083,705   $ 32,531,053  

No further allowance for obsolete inventories was recognized during the six months ended June 30, 2012 and 2011.

As of June 30, 2012 and December 31, 2011, inventories with a value of $3,480,400 and $3,456,574 respectively, were pledged under floating charge for certain loan agreement (Note 13).

8.

Income tax

   

United States

   

The Company is subject to the United States Federal and state income tax at a statutory rate of 34%. No provision for the U.S. Federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods.

   

The Company has not recognized a deferred tax liability for the undistributed earnings of its non-U.S. subsidiaries as of June 30, 2012 because the Company currently does not expect those unremitted earnings to reverse and become taxable to the Company in the foreseeable future. A deferred tax liability will be recognized when the Company no longer plans to permanently reinvest undistributed earnings. Calculation of related unrecognized deferred tax liability is not practicable.

   

BVI

   

Megaway was incorporated in the BVI and, under the current laws of the BVI, is not subject to income taxes.

- 13 -


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

8.

Income tax (Cont;d)

   

HK

   

Star Wealth was incorporated in Hong Kong and is subject to Hong Kong profits tax at a tax rate of 16.5%. No provision for Hong Kong profits tax has been made as Star Wealth had no taxable income during the reporting periods.

   

PRC

   

Siping Juyuan, and Beijing Juyuan are subject to PRC enterprise income tax (“EIT”) at the statutory rate of 25%. As Siping Juyuan was qualified as a “High-tech Enterprise”, it was entitled to a preferential EIT rate of 15% during the reporting periods. Beijing Juyuan, being a Sino-foreign joint venture enterprise, is entitled to two years’ EIT exemption from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by a 50% tax reduction for the immediate next three calendar years (“Tax Holiday”). The Tax Holiday commenced in the fiscal year 2008 and Beijing Juyuan was subject to EIT at the rate of 12.5% for both the periods ended June 30, 2012 and 2011 respectively.

   

Siping Juyuan was also entitled to a special tax concession (“Tax Concession”) because it employed the required number of handicapped staff according to the relevant PRC tax rules. In particular, this Tax Concession entitled Siping Juyuan a refund of value-added tax paid during the reporting periods (Note 15).

   
9.

Property, plant and equipment, net


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
  Cost            
     Buildings $ 6,175,872   $ 6,133,593  
     Plant and machinery   4,784,834     4,275,088  
     Office equipment   742,289     715,153  
     Motor vehicles   390,727     388,052  
               
      12,093,722     11,511,886  
  Accumulated depreciation   (4,407,591 )   (3,808,279 )
               
  Net $ 7,686,131   $ 7,703,607  

During the reporting periods, depreciation is included in :-

      Six months ended June 30,  
      (Unaudited)  
      2012     2011  
               
  Cost of sales and overheads of inventories $ 270,119   $ 210,267  
  Research and development expenses   136,535     119,235  
  Administrative expenses   166,045     117,762  
               
    $ 572,699   $ 447,264  

As of June 30, 2012 and December 31, 2011, plant and equipment with net book values of $599,196 and $706,695 (Note 13), and buildings with net book values of $4,876,151 and $4,972,769 respectively, were pledged as collateral under certain loan arrangements (Note 12).

- 14 -


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

10.

Land use rights


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Land use rights $ 1,114,417   $ 1,106,788  
  Accumulated amortization   (99,586 )   (87,743 )
               
    $ 1,014,831   $ 1,019,045  

The Company obtained the right from the relevant PRC land authority for a period of fifty years to use the land on which the Company’s office premises, production facilities and warehouse are situated. As of June 30, 2012 and December 31, 2011, the land use rights were pledged as collateral under certain loan arrangements (Note 12).

During the six months ended June 30, 2012 and 2011, amortization amounted to $11,232 and $10,848 respectively. The estimated amortization expense for each of the five succeeding years from 2012 is approximately $22,000 each year.

The Company had paid the deposits for land use rights of RMB38.3 million (approximately $6 million) as of June 30, 2012. The land is intended for future manufacturing facilities expansion. The Company has obtained the land use rights certificate on July 10, 2012.

11.

Other payables and accrued expenses


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Accrued audit fee $ 105,000   $ 105,000  
  Receipt in advance from customers   10,599,654     11,003,379  
  Pension payable   636,096     631,506  
  Salaries payable   354,885     417,726  
  VAT payable   182,395     -  
  Advances from third parties   2,454,060     58,026  
  Security deposit received for project bids   808,708     2,656  
  Other payables and accrued expenses   3,973,754     3,635,517  
               
    $ 19,114,552   $ 15,853,810  

Pension payable represents accrued staff medical, industry injury claims, labor and unemployment insurances, all of which are third parties insurance and the insurance premiums are based on certain percentage of salaries. The obligations of the Company are limited to those premiums contributed by the Company. Advances from third parties was unsecured, interest-free and repayable within twelve months from balance sheet date.

Included in other payables as of June 30, 2012 and December 31, 2011 was an amount of $3,260,502 and $3,237,831 respectively, representing governmental financial support received for the Company’s efficient heat exchange equipment manufacture project (the “Project”). The Project will be subject to the government’s inspection and whether the government support is repayable or not is subject to the inspection results.

- 15 -


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

12.

Short-term bank loans


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Secured bank loans $ 15,503,600   $ 13,826,296  
  Unsecured bank loans   2,373,000     2,356,755  
               
    $ 17,876,600   $ 16,183,051  

All bank loans are repayable within one year and carry annual interest from 100% to 120% of the benchmark interest rate published by the People’s Bank of China (the “PBOC”).

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

      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Trade receivables (Note 5) $ 9,492,000   $ 5,421,295  
  Property, plant and equipment (Note 9)   4,876,151     4,972,769  
  Land use rights (Note 10)   1,014,831     1,019,045  
               
    $ 15,382,982   $ 11,413,109  

The unsecured bank loans as of June 30, 2012 and December 31, 2011 were guaranteed by Mr. Zhao and certain third parties. The third parties received 2% of the loan balance as compensation for acting as guarantors for the Company. The Company also made the counter guarantee deposits to the guarantors of $237,300 and $235,676 as of June 30, 2012 and December 31, 2011, respectively. These deposits will be returned to the Company upon the Company’s settlement of the loans.

13.

Long-term loan

The loan is borrowed from a financial institution, bearing interest at an annual rate of 15% over the benchmark rate of the PBOC for the three-year long-term loans and guaranteed by a third party.

The loan was secured by the following assets of the Company :-

      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Property, plant and equipment (Note 9) $ 599,196   $ 706,695  
  Inventories (Note 7)   3,480,400     3,456,574  
               
    $ 4,079,596   $ 4,163,269  

- 16 -


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

13.

Long-term loan (Cont’d)

   

As a condition to the guarantees for the loans, the Company paid 2.5% of the loan balance to the third party as compensation for acting as guarantor for the Company and made the counter guarantee deposits to the guarantor of $237,300 and $235,676 as of June 30, 2012 and December 31, 2011, respectively. These deposits will be returned to the Company upon the Company’s settlement of the loans.

   

During the six months ended June 30, 2012, there was no other covenant requirement under the bank loans granted to the Company except that the inventory level cannot be lower than RMB 22 million (approximately $3.5 million) during the loan period.

   

There was no other covenant requirement under the bank loans agreement for the six months ended June 30, 2012 and 2011.

   

Maturities of the loans as of June 30, 2012 are as follow :-


  Year      
  2012 $ 949,200  
  2013   1,898,400  
  2014   949,200  
         
    $ 3,796,800  

14.

Common stock

   

On November 2, 2010, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with several accredited investors (the “Investors”) pursuant to which the Company agreed to issue and sell to the Investors 4,453,500 shares of the Company’s common stock, representing approximately 21.8% of the issued and outstanding capital stock of the Company on a fully-diluted basis as of and immediately after consummation of the transactions contemplated by the Securities Purchase Agreement, for an aggregate purchase price of approximately $14,251,200, or $3.20 per share (the “Placement Price”). Before the deduction of fair value of the escrow arrangement (Note 18), the Company received approximately $13,390,000 in net proceeds after deducting the issuance costs.

   

In connection with the offering of shares under the private placement, 222,675 warrants were issued to the financial advisor on December 7, 2010, as partial compensation for services, to purchase an aggregate of 222,675 shares of common stock of the Company, representing 5% of the offered shares. The warrants have a term of three years and are exercisable from the first anniversary of the issuance and have an exercise price of $3.84. The fair value of the warrants at date of issue was $396,939 as of grant date. At June 30, 2012, all the issued share warrants were still outstanding.

   

In connection with its entry into the Securities Purchase Agreement, the Company also entered into a make good escrow arrangement with Wisetop, the Investors and other parties, details of which are set out in Note 18 to the condensed consolidated financial statements.

- 17 -


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

15.

Other income


      Three months ended     Six months ended  
      June 30,     June 30,  
      (Unaudited)     (Unaudited)  
      2012     2011     2012     2011  
                           
  Refund of value-added tax under Tax Concession $ 126,810   $ 147,419   $ 126,810   $ 147,419  
  Government grants   10,925     542,089     10,925     542,696  
  Sales of scrap materials   -     158,351     -     158,351  
  Service income for installation of equipment   -     -     229,461     -  
  Others, net   -     71     -     4,221  
                           
    $ 137,735   $ 847,930   $ 367,196   $ 852,687  

16.

Finance costs


      Three months ended     Six months ended  
      June 30,     June 30,  
      (Unaudited)     (Unaudited)  
      2012     2011     2012     2011  
                           
  Interest expense $ 498,625   $ 162,658   $ 894,678   $ 327,999  
  Bank charges and net exchange loss   3,137     46,731     8,534     73,987  
                           
    $ 501,762   $ 209,389   $ 903,212   $ 401,986  

- 18 -


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

17.

Earnings per share

   

The basic earnings per share is calculated using the net income attributable to the Company’s common stockholders and the weighted average number of shares outstanding during the reporting periods.

   

During the reporting periods, certain share-based awards were not included in the computation of diluted earnings per share because they were anti-dilutive. Accordingly, the basic and diluted earnings per share are the same.

   
18.

Make good escrow agreement

   

In connection with its entry into the Securities Purchase Agreement, on November 2, 2010, the Company entered into a make good escrow agreement (the “Make Good Escrow Agreement”) with Wisetop (the “Pledgor”), the Investors, Infinity I-China Fund (Cayman) L.P. and the escrow agent, pursuant to which the Pledgor agreed to certain “make good” provisions in the event that the Company does not meet certain income thresholds for fiscal years 2010 and/or 2011. Pursuant to the Make Good Escrow Agreement, the Pledgor established an escrow account and delivered to the escrow agent certificates evidencing 2,000,000 shares of the Company’s common stock held by the Pledgor (the “Escrow Shares”) along with blank stock powers, to be held for the benefit of the Investors.

   

If the Company fails to report After Tax Net Income (“ATNI”) in the Annual Report of at least $8 million (the “2010 Guaranteed ATNI”) under U.S. GAAP for the fiscal year ended December 31, 2010, as filed with the Securities Exchange Commission (the “SEC”) on Form 10-K, the escrow agent shall transfer the 2010 Make Good Shares to the Investors on a pro rata basis for no consideration other than payment of their respective investment amount paid to the Company at the closing of the private placement (the “Closing”) and without any need for action or notice by or on behalf of any investor. The 2010 Make Good Shares are calculated based on the following formula, as equitably adjusted for any stock splits, stock combinations, stock dividends or similar transactions: ((2010 Guaranteed ATNI - 2010 audited ATNI)/$8 million) multiplied by 50% of the Escrow Shares.

   

If the Company fails to report ATNI in the Annual Report of at least $12 million (the “2011 Guaranteed ATNI”) under U.S. GAAP for the fiscal year ending December 31, 2011, as filed with the SEC on Form 10-K, the escrow agent shall transfer the 2011 Make Good Shares to the Investors on a pro rata basis for no consideration other than payment of their respective investment amount paid to the Company at the Closing and without any need for action or notice by or on behalf of any investor. The 2011 Make Good Shares are calculated based on the following formula, as equitably adjusted for any stock splits, stock combinations, stock dividends or similar transactions: ((2011 Guaranteed ATNI - 2011 audited ATNI)/$12 million) multiplied by 50% of the Escrow Shares.

   

If prior to the second anniversary of the filing of either of the 2010 Annual Report or 2011 Annual Report (as applicable), the Company or their auditors report or recognize that the financial statements contained in such report are subject to amendment or restatement such that the Company would recognize or report adjusted ATNI of less than either of the 2010 Guaranteed ATNI or the 2011 Guaranteed ATNI (as applicable), then notwithstanding any prior return of 2010 Make Good Shares and 2011 Make Good Shares to the Pledgor, the Pledgor shall, within 10 business days following the earlier of the filing of such amendment or restatement or recognition, deliver the relevant 2010 Make Good Shares and 2011 Make Good Shares to the Investors without any further action on the part of the Investors.

- 19 -


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

18.

Make good escrow agreement (Cont’d)

   

If the 2010 audited ATNI is equal to or greater than the 2010 Guaranteed ATNI, no transfer of the 2010 Make Good Shares shall be required by the Pledgor to the Investors and 50% of the Escrow Shares shall be promptly returned to the Pledgor without the need of any approval or consent thereto by any investor. The remaining 50% of the Escrow Shares shall continue to be held in escrow by the escrow agent. If the 2011 audited ATNI is equal to or greater than the 2011 Guaranteed ATNI, no transfer of the 2011 Make Good Shares shall be required by the Pledgor to the Investors and the remaining 50% of the Escrow Shares shall be promptly returned to the Pledgor without the need of any approval or consent thereto by any investor.

   

Pursuant to ASC 718-10-S99-2, the SEC staff generally believes that escrow arrangement, which is in substance an inducement made to facilitate the transaction on behalf of the issuer, should be recognized and measured according to its nature and reflected as a reduction of the proceeds allocated to the newly-issued securities. The Company considers the aforementioned escrow arrangement as an inducement to facilitate the private placement on behalf of the Company rather than as compensatory and accordingly, adopted ASC 718-10-S99-2 to recognize this arrangement. The management estimated the probability of the Company not achieving the 2010 Guaranteed ATNI and 2011 Guaranteed ATNI to be 10% (the “Probability %”) and calculated the fair value of the escrow arrangement with reference to the Probability % and the Placement Price. The calculated fair value of $640,000 was deducted from the placement proceeds with a corresponding credit in additional paid-in capital, resulting in no net change in the Company’s equity.

   

As the target was met for 2010 Guaranteed ATNI, 50% of the Escrow Shares or 1,000,000 shares were returned to stockholders in 2011. As the Company did not meet the 2011 Guaranteed ATNI, the pledgor is required to transfer the 2011 Make Good Shares to the investors on a pro-rata basis.

   
19.

Defined contribution plan

   

Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate of 30.6% to 31.2% of employees’ salaries and wages to a defined contribution retirement scheme organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees in the PRC. The only obligation of the Company with respect to the retirement scheme is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the condensed consolidated statements of income and comprehensive income. The Company contributed $70,004 and $266,643 for the six months ended June 30, 2012 and June 30, 2011, respectively.

- 20 -


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

20.

Commitments and contingencies

   

As of June 30, 2012 and December 31, 2011, the Company had the following commitments that were contracted for but not provided in the condensed consolidated financial statements.


      June 30,     December 31,  
      2012     2011  
      (Unaudited)        
               
  Plant and machineries $ -   $ 317,342  

Contingencies

As of June 30, 2012 and December 31, 2011, the Company had contingencies arising from the division of Old Juyuan Company into Siping Juyuan, New Juyuan Company and Juyuan Hanyang Pressure Vessels. According to the division agreement of Old Juyuan Company (“Division Agreement”), all parties to the Division Agreement undertook joint and several liabilities for the indebtedness of Old Juyuan Company.

In accordance with ASC 450 “Contingencies”, the Company records a liability in the condensed consolidated financial statements for these contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.

The Company’s loss in respect of this undertaking is possible but not known or probable. Accordingly, no liability was recognized as of June 30, 2012 and December 31, 2011 respectively. The Company believes that a reasonable estimate of the possible loss range from $Nil to approximately $1,731,000 as of June 30, 2012 (December 31, 2011: from $Nil to approximately $1,741,000)

In accordance with the PRC tax regulations, the Company’s sales are subject to value added tax (“VAT”) at 17% upon the issuance of VAT invoices to its customers. When preparing these financial statements, the Company recognized revenue when goods were delivered, and made full tax provision in accordance with relevant national and local laws and regulations of the PRC.

The Company follows the practice of reporting its revenue for PRC tax purposes when invoices are issued. In the local statutory financial statements prepared under the PRC GAAP, the Company recognized revenue on an “invoice basis” instead of when goods are delivered. Accordingly, despite the fact that the Company has made full tax provision in these condensed consolidated financial statements, the Company may be subject to a penalty for the deferred reporting of tax obligations. The exact amount of penalty cannot be estimated with any reasonable degree of certainty. The management considers it is very unlikely that the tax penalty will be imposed.

The Company’s operations are subject to the laws and regulations in the PRC relating to the generation, storage, handling, emission, transportation and discharge of certain materials, substances and waste into the environment, and various other health and safety matters. Governmental authorizes have the power to enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company must devote substantial financial resources to ensure compliance and believes that it is in substantial compliance with all the applicable laws and regulations.

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

20.

Commitments and contingencies (Cont’d)

   

The Company is currently not involved in any environmental remediation and has not accrued any amounts for environmental remediation relating to its operations. Under existing legislation, management believes that there are no probable liabilities that will have a material adverse effect on the financial position, operating results or cash flows of the Company.

   
21.

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, 2012 and 2011 were as follows :-


      Six months ended June 30,  
      2012     %     2011     %  
      (Unaudited)           (Unaudited)        
                           
  Plate heat exchanger $ 9,019,461     40   $ 15,399,087     55  
  Heat exchange unit   7,316,155     32     6,464,889     23  
  Air-cooled heat exchanger   990,022     5     1,586,064     6  
  Shell-and-tube heat exchanger   2,096,900     9     3,357,126     12  
  Others   3,222,234     14     1,425,500     4  
                           
    $ 22,644,772     100   $ 28,232,666     100  

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

   
22.

Related party transactions

   

Apart from the transactions as disclosed in Note 12 to the condensed consolidated financial statements, the Company had no other material transactions carried out with its related parties during the reporting periods.

   
23.

Subsequent events

   

The Company has evaluated all events or transactions that occurred through the date the condensed consolidated financial statements were issued, and has determined that there were no material recognizable nor subsequent events or transactions which would require recognition or disclosure in the condensed consolidated financial statements.

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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, 2011, 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.

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 2012:

  • Sales revenue: Sales revenue decreased by $2.98 million, or 21.05%, to $11.20 million for the three months ended June 30, 2012, from $14.18 million for the same period in 2011.

  • Gross profit: Gross profit decreased by $1.26 million, or 20.77%, to $4.82 million for the three months ended June 30, 2012, from $6.08 million for the same period in 2011. As a percentage of sales revenue, gross profit increased by 0.15% to 43.01% for the three months ended June 30, 2012, from 42.86% for the same period in 2011.

  • Net income attributable to stockholders: Net income attributable to our stockholders decreased by $1.87 million, or 56.55%, to $1.44 million for the three months ended June 30, 2012, from $3.31 million for the same period in 2011.

  • Fully diluted net income per share: Fully diluted net income per share was $0.07 for the three months ended June 30, 2012, as compared to $0.16 for the same period in 2011.

Results of Operations

Comparison of Three Months Ended June 30, 2012 and 2011

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

    Three Months Ended              
    June 30,   $      %  
    2012     2011     Change     Change  
Sales revenue $  11,195,347   14,179,746   $  (2,984,399 )   (21.05 )
Cost of sales   (6,380,265 )   (8,102,332 )   (1,722,067 )   (21.25 )
Gross profit   4,815,082     6,077,414     (1,262,332 )   (20.77 )
Operating expenses:                        
       Administrative expenses   787,362     1,027,211     (239,849 )   (23.35 )
       Research and development expenses   245,297     437,173     (191,876 )   (43.89 )
       Selling expenses   1,953,179     1,524,185     428,994     28.15  
Total operating expenses   2,985,838     2,988,569     (2,730 )   (0.09 )
Income from operations   1,829,244     3,088,845     (1,259,601 )   (40.78 )
Interest income   4,463     10,030     (5,567 )   (55.50 )
Other income   137,735     847,930     (710,195 )   (83.76 )
Finance costs   (501,762 )   (209,389 )   (292,373 )   139.63  
Income before income taxes and noncontrolling interests   1,469,680     3,737,416     (2,267,736 )   (60.68 )
Income taxes   (34,934 )   (493,072 )   458,138     (92.92 )
Net income before noncontrolling interests   1,434,746     3,244,344     (1,809,598 )   (55.78 )
Net loss attributable to noncontrolling interests   4,964     69,061     (64,097 )   (92.81 )
Net income attributable to THT common stockholders $  1,439,710    $ 3,313,405   $  (1,873,695 )   (56.55 )

Sales revenue. Our sales revenue is generated from sales of heat exchange products. Sales revenue decreased by $2.98 million, or 21.05%, to $11.20 million for the three months ended June 30, 2012, from $14.18 million for the same period in 2011. Our sales volume in the three months ended June 30, 2012 amounted to 483 units, a decrease of 509 units, from 992 units for the same period in 2011. Such decrease was mainly due to the decreased sales revenue from plate heat exchangers and air coolers in the 2012 period as compared with the 2011 period. Sales revenue from plate heat exchangers decreased by $5.88 million, or 60.08%, to $3.90 million for the three months ended June 30, 2012, from $9.78 million for the same period in 2011. Sales from air coolers decreased $0.65 million, or 56.16%, to $0.51 million for the three months ended June 30, 2012, from $1.16 million for the same period in 2011. The decrease was caused by decreased demand of our products as a result of an overall slowdown in China’s economy. Although sales revenue from heat exchange units, shell-and-tube heat exchangers and other products increased, the increase was not enough to offset the decreased sales revenue from plate heat exchangers and air coolers.

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The following table shows our sales revenue by product for the three months ended June 30, 2012 and 2011:

    Three Months Ended June 30,  
    2012     2011  
  $     %   $     %  
Plate heat exchanger $  3,904,772     34.88   $  9,780,986     68.98  
Heat exchange unit   3,645,234     32.56     2,211,923     15.60  
Air-cooled heat exchanger   507,782     4.54     1,158,247     8.17  
Shell-and-tube heat exchanger   1,259,196     11.25     492,401     3.47  
Others   1,878,363     16.77     536,189     3.78  
TOTAL $  11,195,347     100%   $  14,179,746     100%  

Cost of sales. Our cost of sales is primarily comprised of the costs of our raw materials, labor and factory overhead. Our cost of sales decreased by $1.72 million, or 21.25%, to $6.38 million for the three months ended June 30, 2012, from $8.10 million for the three months ended June 30, 2011. The decrease in the cost of sales was generally in line with the decrease in our sales revenue. Cost of sales as a percentage of sales revenue were 56.99% and 57.14% for the three months ended June 30, 2012 and 2011, respectively, a decrease of 0.15 percentage points. The decrease was mainly attributable to the decrease in the labor costs and raw material costs.

Gross profit. Our gross profit is equal to the difference between our sales revenue and our cost of sales. Our gross profit decreased by $1.26 million, or 20.77%, to $4.82 million for the three months ended June 30, 2012, from $6.08 million for the same period in 2011. The decrease in our gross profit was mainly attributable to decreased sales revenue from plate heat exchangers and air coolers. Although the average unit selling price of our products increased 35.00% in the three months ended June 30, 2012 in comparison with the same period in 2011, gross profit margin for the three months ended June 30, 2012 increased to 43.01% from 42.86% for the same period in 2011. The increase in our gross profit margin was mainly attributable to the decrease in labor costs and raw material costs as noted above.

Administrative expenses. Our administrative expenses consist of the costs associated with staff and support personnel who manage our business activities. Our administrative expenses decreased by $0.24 million, or 23.35%, to $0.79 million for the three months ended June 30, 2012, from $1.03 million for the same period in 2011. As a percentage of sales revenue, administrative expenses decreased to 7.03% for the three months ended June 30, 2012, as compared to 7.24% for the same period in 2011. The decrease in administrative expenses was primarily due to a decrease in labor insurance costs. The labor insurance decreased by $0.195 million, or 97.50%, to $5,000 for the three months ended June 30, 2012, from $0.20 million for the same period in 2011. The decrease in labor insurance was mainly due to the slowdown in China’s economic growth which led to job cuts.

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 decreased by $0.19 million, or 43.89%, to $0.25 million for the three months ended June 30, 2012, from $0.44 million for the same period in 2011. The decrease in research and development expenses was mainly attributable to the decrease in the costs of raw materials used in R&D and the seasonality investment.

Selling expenses. Our selling expenses include sales commissions, 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 increased by $0.43 million, or 28.15%, to $1.95 million for the three months ended June 30, 2012, from $1.52 million for the same period in 2011. As a percentage of sales revenue, selling expenses increased to 17.45% for the three months ended June 30, 2012, as compared to 10.75% for the same period in 2011. The increase was mainly attributable to the increased travelling expenses of our sales personnel. Traveling expense increased by $0.22 million, or 34.48%, to $0.86 million for the six months ended June 30, 2012, from $0.64 million for the same period in 2011. The increase in travelling expenses was mainly due to our efforts to expand our market share.

Income before income taxes and noncontrolling interests. Income before income taxes and noncontrolling interests decreased by $2.27 million, or 60.68%, to $1.47 million for the three months ended June 30, 2012, from $3.74 million for the same period in 2011. Such decrease was mainly attributable to the decrease in our gross profit.

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Income taxes. Our income taxes decreased to $0.03 million for the three months ended June 30, 2012, from $0.49 million for the same period in 2011, as a result of the decreased taxable income.

Net income attributable to common stockholders. As a result of the cumulative effect of the foregoing factors, our net income attributable to common stockholders decreased by $1.87 million, or 56.55%, to $1.44 million for the three months ended June 30, 2012, from $3.31 million for the same period in 2011. As a percentage of sales revenue, our net income attributable to common stockholders was 12.86% and 23.37% for the three months ended June 30, 2012 and 2011, respectively.

Comparison of Six Months Ended June 30, 2012 and June 30, 2011

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

    Six Months Ended June 30,   $      %  
    2012     2011     Change     Change  
Sales revenue $  22,644,772   $  28,232,666   $  (5,587,894 )   (19.79 )
Cost of sales   (13,223,900 )   (16,112,561 )   (2,888,661 )   (17.93 )
Gross profit   9,420,872     12,120,105     (2,699,233 )   (22.27 )
Operating expenses:                        
       Administrative expenses   2,040,191     1,740,142     300,049     17.24  
       Research and development expenses   499,280     784,662     (285,382 )   (36.37 )
       Selling expenses   4,207,776     3,224,048     983,728     30.51  
Total operating expenses   6,747,247     5,748,852     998,395     17.37  
Income from operations   2,673,625     6,371,253     (3,697,628 )   (58.04 )
Interest income   12,741     23,916     (11,175 )   (46.73 )
Other income   367,196     852,687     (485,491 )   (56.94 )
Finance costs   (903,212 )   (401,986 )   (501,226 )   124.69  
Income before income taxes and noncontrolling interests   2,150,350     6,845,870     (4,695,520 )   (68.59 )
Income taxes   (110,898 )   (917,538 )   806,640     (87.91 )
Net income before noncontrolling interests   2,039,452     5,928,332     (3,888,880 )   (65.60 )
Net loss attributable to noncontrolling interests   (42,563 )   41,650     (84,213 )   (202.19 )
Net income attributable to THT common stockholders $  1,996,889   $  5,969,982   $  (3,973,093 )   (66.55 )

Sales revenue. Our sales revenue decreased by $5.59 million, or 19.79%, to $22.64 million for the six months ended June 30, 2012, from $28.23 million for the same period in 2011. Our sales volume in the six months ended June 30, 2012 amounted to 1,093 units, a decrease of 827 units, from 1,920 units for the same period in 2011. Such decrease was mainly due to the decreased sales revenue from plate heat exchangers, shell-and-tube heat exchangers and air coolers in the 2012 period as compared with the 2011 period. Sales revenue from plate heat exchangers decreased by $6.38 million, or 41.43%, to $9.02 million for the six months ended June 30, 2012 from $15.40 million for the same period in 2011. Sales revenue from air coolers decreased $6.00 million, or 37.58%, to $0.99 million for the six months ended June 30, 2012 from $1.59 million for the same period in 2011. Sales revenue from shell-and-tube heat exchangers decreased by $1.26 million, or 37.54%, to $2.10 million for the six months ended June 30, 2012, from $3.36 million for the same period in 2011. The decrease was caused by decreased demand for our products as a result of fewer projects around the Chinese spring festival and overall slowdown of China’s economy. Although sales revenue from heat exchange units and other products increased, the increase was not enough to offset the decreased sales revenue from plate heat exchangers, shell-and-tube heat exchangers and air coolers.

The following table shows our sales revenue by product for the six months ended June 30, 2012 and 2011:

    Six Months Ended June 30,  
    2012     2011  
  $     %   $     %  
Plate heat exchanger $  9,019,461     39.83   $  15,399,087     54.54  
Heat exchange unit   7,316,155     32.31     6,464,889     22.90  
Air-cooled heat exchanger   990,022     4.37     1,586,064     5.62  
Shell-and-tube heat exchanger   2,096,900     9.26     3,357,126     11.89  
Others   3,222,234     14.23     1,425,500     5.05  
TOTAL $  22,644,772     100%   $  28,232,666     100%  

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Cost of sales. Our cost of sales decreased by $2.89 million, or 17.93%, to $13.22 million for the six months ended June 30, 2012, from $16.11 million for the six months ended June 30, 2011. The decrease in the cost of sales was generally in line with the decrease in our sales revenue. Cost of sales as a percentage of sales revenue were 58.40% and 57.07% for the six months ended June 30, 2012 and 2011, respectively, an increase of 1.33 percentage points. The increase was mainly attributable to the increased total labor costs and raw material costs in the first half of 2012.

Gross profit. Our gross profit decreased by $2.70 million, or 22.27%, to $9.42 million for the six months ended June 30, 2012, from $12.12 million for the same period in 2011. The decrease in our gross profit was mainly attributable to decreased sales revenue from plate heat exchangers, shell-and-tube heat exchangers and air coolers. Although the average unit selling price of our products increased 24.29% in the six months ended June 30, 2012 in comparison with the same period in 2011, gross profit margin for the six months ended June 30, 2012 dropped to 41.60% from 42.93% for the same period in 2011. The decrease in our gross profit margin was mainly attributable to the increase in labor costs and raw material costs as noted above.

Administrative expenses. Our administrative expenses increased by $0.30 million, or 17.24%, to $2.04 million for the six months ended June 30, 2012, from $1.74 million for the same period in 2011. As a percentage of sales revenue, administrative expenses increased to 9.01% for the six months ended June 30, 2012, as compared to 6.16% for the same period in 2011. The increase in administrative expenses was primarily due to an increase of allowance for doubtful accounts. Allowance for doubtful accounts increased by $0.65 million to $0.36 million in the six months ended June 30, 2012 compared with a reversal of allowance for doubtful accounts of $0.29 million for the same period in 2011. The increase in the allowance for doubtful accounts was mainly due to our policies for bad debt reserves. We record 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.

Research and development expenses. Our research and development expenses decreased by $0.29 million, or 36.37%, to $0.50 million for the six months ended June 30, 2012, from $0.78 million for the same period in 2011. The decrease in research and development expenses was mainly attributable to the decrease in the costs of raw materials used in R&D and the seasonality investment.

Selling expenses. Our selling expenses increased by $0.98 million, or 30.51%, to $4.21 million for the six months ended June 30, 2012, from $3.22 million for the same period in 2011. As a percentage of sales revenue, selling expenses increased to 18.58% for the six months ended June 30, 2012, as compared to 11.42% for the same period in 2011. The increase was mainly attributable to the increased travelling expenses of our sales personnel. Traveling expense increased by $0.57 million, or 31.67%, to $2.37 million for the six months ended June 30, 2012, from $1.80 million for the same period in 2011. The increase in travelling expenses was mainly due to our efforts to expand our market share.

Income before income taxes and noncontrolling interests. Income before income taxes and noncontrolling interests decreased by $4.70 million, or 68.59%, to $2.15 million for the six months ended June 30, 2012, from $6.85 million for the same period in 2011. Such decrease was mainly attributable to decreased gross profit and increased total expenses.

Income taxes. Our income taxes decreased to $0.11 million for the six months ended June 30, 2012, from $0.92 million for the same period in 2011, as a result of decreased taxable income.

Net income attributable to common stockholders. As a result of the cumulative effect of the foregoing factors, our net income attributable to common stockholders decreased by $3.97 million, or 66.55%, to $2.00 million for the six months ended June 30, 2012, from $5.97 million for the same period in 2011. As a percentage of sales revenue, our net income attributable to common stockholders was 8.82% and 21.15% for the six months ended June 30, 2012 and 2011, respectively.

Liquidity and Capital Resources

As of June 30, 2012, we had cash and cash equivalents of $4.78 million, primarily consisting of cash on hand and demand deposits. We can use our land as collateral to borrow approximately $7.91 million. In addition, we have an approximately $3.16 million credit line from Bank of Communications. We anticipate that cash on hand and borrowing capacity under our bank loans will be sufficient to satisfy our ongoing obligations.

- 27 -


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 a reversal of allowance of $0.29 million in the six months ended June 30, 2011 to $0.36 million in the same period in 2012. 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,  
    2012     2011  
Net cash used in operating activities $  (1,448,644 ) $  (10,132,984 )
Net cash used in investing activities   (1,798,719 )   (2,862,537 )
Net cash provide for (used in) financing activities   631,924     (1,635,277 )
Effects of exchange rate change in cash   54,638     1,343,166  
Net decrease in cash and cash equivalents   (2,560,801 )   (13,287,632 )
Cash and cash equivalents at beginning of the period   7,340,068     18,438,430  
Cash and cash equivalent at end of the period $  4,779,267   $  5,150,798  

Operating Activities

Net cash used in operating activities was $1.45 million for the six months ended June 30, 2012, compared with $10.13 million for the same period in 2011. The decrease in net cash used in operating activities was mainly attributable to the fact that collections from trade customers were relatively high in the 2012 period which was a result of installment payments being made by our customers, credit sales granted to customers decreasing as a result of decreased turnover, and other receivables prepayment and deposits decreasing due to reduced cash advances to staff and prepayment to trade suppliers for the six months period ended in June 30, 2012.

Investing Activities

Net cash used in investing activities was $1.80 million for the six months ended June 30, 2012, compared with $2.86 million in the same period in 2011. The net cash used in investing activities during the six months ended June 30, 2012 was primarily used for the purchase of equipment.

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Financing Activities

Net cash used in financing activities was $0.63 million for the six months ended June 30, 2012, compared with $1.64 million for the same period in 2011. The decrease in net cash used in financing activities resulted from a decrease in restricted cash in the amount of $0.88 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. On July 10, 2012, we obtained the land use right certificate from the Chinese government for a parcel of land with 100,247 square meters. We plan to construct a new plant on the land. The table below sets forth the breakdown of our capital expenditures by use for the periods indicated.

    Six Months Ended June 30,  
    2012     2011  
Construction costs $  -   $  187,246  
Purchase of equipment   154,348     221,168  
Prepayment for land use right   1,644,371     1,943,381  
Total capital expenditures $  1,798,719   $  2,351,795  

We estimate that our total capital expenditures in fiscal year 2012 will reach approximately $3 million to buy the equipment for necessary products used in the nuclear power industry.

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

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

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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 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 Chief Financial Officer, Mr. Jianjun He, of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2012. Based upon, and as of the date of this evaluation, Messrs. Zhao and He 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, 2011, which we are still in the process of remediating as of June 30, 2012, our disclosure controls and procedures were not effective. Investors are directed to Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2011 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, 2011, 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, 2011, our management has identified the steps necessary to address the material weaknesses, and in the second quarter of 2012, 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 2012 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 affect on our business, cash flows, financial condition or operating results.

ITEM 1A. RISK FACTORS.

Our auditor, like other independent registered public accounting firms operating in China, is not inspected by the U.S. Public Company Accounting Oversight Board, or the PCAOB, and as such, our investors currently do not have the benefits of PCAOB oversight.

Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the PCAOB and are required by U.S. law to undergo regular inspections by the PCAOB to assess their compliance with U.S. law and professional standards in connection with their audits of public company financial statements filed with the SEC.

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As our auditors are located in Hong Kong, a special administrator region of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, there is no guarantee that the PCAOB will be allowed to inspect the audit work and practices of our auditors, like other registered audit firms operating in China, in the future.

This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating audits and quality control procedures of any auditors operating in China, including our auditor. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We have not sold any equity securities during the second quarter of 2012 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during second quarter.

No repurchases of our common stock were made during the second quarter of 2012.

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 2012, 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, 2012 THT HEAT TRANSFER TECHNOLOGY, INC.
     
  By: /s/ Guohong Zhao
    Guohong Zhao, Chief Executive Officer
    (Principal Executive Officer)
     
  By: /s/ Jianjun He
    Jianjun He, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

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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).

- 33 -


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