smartheat-prer14a033015.htm


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

 
SCHEDULE 14A


 
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

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Soliciting Material Pursuant to Section 240.14a-12

SmartHeat Inc.
(Name of Registrant as Specified in Its Charter)

                                                                                                                   
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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Copies of all communications to:
Robert Newman, Esq.
Newman & Morrison LLP
44 Wall Street, 12th Floor
New York, NY  10005
Tel. (212) 248-1001    Fax: (212) 202-6055
 
 
 

 
 
SMARTHEAT INC.
c/o Huajun Ai: Corporate Secretary
A-1, 10, Street 7
Shenyang Economic and Technological Development Zone
Shenyang, China 110141
 
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE RECONVENED  ON APRIL 6, 2015
 
NOTICE IS HEREBY GIVEN that the Special Meeting of the Stockholders of SmartHeat Inc., a Nevada corporation (the “Company”), held on March 30, 2015, will be reconvened on April 6, 2015 at 4:00 pm local time at the Airport Club, Frankfurt Airport Center 1, Hugo-Eckener-Ring, 60549 Frankfurt am Main, Germany  for the purposes of considering and acting upon the following proposals:
 
1.  
To authorize the sale of  shares (the “Stock Sale”) of certain subsidiaries of Company pursuant to the terms of a certain Equity Interest Purchase Agreement (the  “EIPA”) dated October 10, 2013, as amended and restated on November 28, 2014 and amended on  March 19, 2015 (the “Amended EIPA”), by and among Heat PHE, Inc. (“Heat PHE”), a Nevada corporation and wholly owned subsidiary of the Company, as Seller, and Hongjun Zhang, on behalf of all of several individuals ( “Buyers”) identified in Buyers’ Response to RFP submitted to the Company on September 10, 2013 and as revised and accepted by Company on September 23, 2013, as more fully described in the enclosed Proxy Statement;
2.  
To consider and vote upon one or more adjournments of the Special Meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal 1;
3.  
To transact such other business as may properly come before the Special Meeting.

Any action on the items of business described above may be considered at the Special Meeting at the time and on the date specified above or at any time and date to which the Special Meeting may be properly adjourned or postponed.

You are entitled to vote only if you were a SmartHeat stockholder as of the close of business on December 15, 2014(the “Record Date”). You are entitled to attend the Special Meeting only if you were a SmartHeat stockholder as of the close of business on the Record Date or hold a valid proxy for the Special Meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis. You should be prepared to present photo identification for admittance. If you are not a stockholder of record but hold shares through a broker, bank, trustee, or nominee (i.e., in street name), you should provide proof of beneficial ownership as of the Record Date, such as your most recent account statement prior to the Record Date, a copy of the voting instruction card provided by your broker, bank, trustee, or nominee, or similar evidence of ownership.
 
If you do not provide photo identification or comply with the other procedures outlined above, you will not be admitted to the Special Meeting. For security reasons, you and your bags will be subject to search prior to your admittance to the meeting. Please let us know if you plan to attend the meeting by marking the appropriate box on the enclosed proxy card if you requested to receive printed proxy materials, or, if you vote by telephone or over the Internet, by indicating your plans when prompted.
 
The Special Meeting will reconvene and continued on April 6, 2015 promptly at 4:00 pm (local time). Check-in will begin at 3:30 pm (local time), and you should allow ample time for the check-in procedures.
  
Your vote is very important. Whether or not you plan to attend the Special Meeting, we encourage you to read this Proxy Statement and submit your proxy or voting instructions as soon as possible. For specific instructions on how to vote your shares, please refer to the instructions on the Notice of Internet Availability of Proxy Materials (Notice) you received in the mail, the section entitled Questions and Answers About the Proxy Materials and the Special Meeting beginning on page 13 of this Proxy Statement or, if you requested to receive printed proxy materials, your enclosed proxy card.

By Order of the Board of Directors,



Mr. Oliver Bialowons
Director and President

This notice of Special Meeting and Proxy Statement and form of proxy are being distributed and made available on or about _________ __, 2015.
 
 
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PROXY STATEMENT

SPECIAL MEETING OF STOCKHOLDERS
TO BE RECONVENED  ON APRIL 6, 2015
 
This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Smartheat Inc. (“Smartheat”, the “Company”, “us”, “our”, or “we”) for use at the Special Meeting of Stockholders to be reconvened on April 6, 2015, 4:00 pm local time at the Airport Club, Frankfurt Airport Center 1, Hugo-Eckener-Ring, 60549 Frankfurt am Main, Germany  (the “Special Meeting”), including any adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of Meeting and Proxy.
  
The address and telephone number of the Company are c/o the Corporate Secretary who maintains the Company’s corporate records at:
 
A-1, 10, Street 7
Shenyang Economic and Technological Development Zone
Shenyang, China 110141
+86 (24) 2519-7699
 
The Proxy Statement and form of proxy are being distributed and made available on or about _________ __, 2015.

The costs of preparing, assembling and mailing this Proxy Statement and the other material enclosed and all clerical and other expenses of solicitation will be paid by Smartheat. In addition to the solicitation of proxies by use of the mails, directors, officers and employees of Smartheat, without receiving additional compensation, may solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. Smartheat also will request brokerage houses and other custodians, nominees and fiduciaries to forward soliciting material to the beneficial owners of Common Stock held of record by such custodians and will reimburse such custodians for their expenses in forwarding soliciting materials.
 
Neither the United States Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of the EIPA or the Amended EIPApassed upon the merits or fairness of the transactions contemplated thereby or passed upon the adequacy or accuracy of the disclosure in this Proxy Statement. Any representation to the contrary is a criminal offense.

 
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GENERAL INFORMATION – THE SPECIAL MEETING OF STOCKHOLDERS
 
General
 
The enclosed proxy is solicited on behalf of the Board of Directors of Company for use at the Special Meeting to be held at 4:00 pm local time at the Airport Club, Frankfurt Airport Center 1, Hugo-Eckener-Ring, 60549 Frankfurt am Main, Germany on April 6, 2015.
 
The Company maintains its corporate records at the office of its Secretary located at A-1, 10, Street 7,Shenyang Economic and Technological Development Zone, Shenyang, China 110141, phone number +86 (24) 2519-7699.

This Proxy Statement and the accompanying proxy card will first made available on or about _________ __, 2015 to all stockholders entitled to vote at the Special Meeting.
 
Outstanding Stock and Voting Rights
 
Only stockholders of record at the close of business on December 15, 2014 (the “Record Date”) are entitled to notice of and to vote at the Special Meeting. As of the Record Date, there were issued and outstanding 6,783,399 shares of the Company’s Common Stock, $0.001 par value per share (the “Common Stock”), the Company’s only outstanding class of voting securities. Each share of Common Stock entitles the holder thereof to cast one vote on each matter submitted to a vote at the Special Meeting.
 
Voting Procedures; Quorum
 
At the Special Meeting, provided a quorum is present, the approval of the Stock Sale pursuant to the Amended EIPA requires the affirmative vote of a majority of the shares of the Common Stock outstanding at the close of business on the Record Date.

The approval of necessary adjournments requires the affirmative vote of a majority of the shares of the Company's Common Stock present in person or by proxy and entitled to vote at the Special Meeting.
 
As of the Record Date, the directors and executive officers of the Company and their affiliates owned approximately 4.4 % of the shares entitled to vote at the Special Meeting.  

All other matters to come before the Special Meeting will be decided by the affirmative vote of a majority of the shares of Common Stock present in person or represented by proxy at the Special Meeting and entitled to vote on the matter presented in person or by proxy, provided a quorum is present. A quorum is present if at least a majority of the shares of Common Stock outstanding as of the Record Date are present in person or represented by proxy at the Special Meeting. It is currently anticipated that votes will be counted and certified by an Inspector of Election (the “Inspector”) who is expected to be either an officer of the Company or its counsel. In accordance with Nevada law, abstentions will be treated as present for purposes of determining the presence of a quorum.
  
The Inspector will treat shares that are voted WITHHELD or ABSTAIN as being present and entitled to vote for purposes of determining the presence of a quorum but will not be treated as votes in favor of approving any matter submitted to the stockholders for a vote. When proxies are properly dated, executed and returned, the shares represented by such proxies will be voted at the Special Meeting in accordance with the instructions of the stockholder. If no specific instructions are given on such proxies, the shares will be voted:
 
·
FOR the approval of the Stock Sale;
 
·
FOR the approval of one or more adjournments of the Special Meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal 1; and
 
·
Upon such other business as may properly come before the Special Meeting or any adjournment or postponement thereof in the discretion of the proxies, but will not be voted other than as provided for the matters set forth above.
 
 
 
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If you hold shares beneficially in street name and do not provide your broker with voting instructions, your shares may constitute “broker non-votes.” Broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. These matters are referred to as “non-routine” matters. All of the matters scheduled to be voted on at the Special Meeting are “non-routine.” In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are not considered votes cast on that proposal. Thus, broker non-votes will not affect the outcome of any matter being voted on at the meeting, assuming that a quorum is obtained.

Abstentions are considered votes cast and thus will have the same effect as votes “Against” each of the matters scheduled to be voted on at the Special Meeting.

Proposal 1. Stock Sale:  A properly executed ballot marked ABSTAIN with respect to this proposal will not be counted, although it will be counted for purposes of determining whether there is a quorum. Abstentions will have the same effect as a vote against this proposal. Broker non-votes will be deemed not entitled to vote on the subject matter as to which the non-vote is indicated. Broker non-votes also have the same effect as a vote against this proposal.

Proposal 2. Approval of Possible Adjournments of the Special Meeting: A properly executed ballot marked ABSTAIN with respect to this proposal will not be counted, although it will be counted for purposes of determining whether there is a quorum. Since abstentions are not considered votes cast, they will have no effect on the outcome of this proposal. Brokers have discretion to vote on behalf of beneficial owners with respect to this proposal; as a result, there will be no “broker non-votes” on this item.
 
Other than the relationship of Proposal 2 to Proposal 1 as described herein, none of the proposals is conditioned on the outcome of any other proposal.
 
Revocability of Proxies
 
The enclosed proxies will be voted in accordance with the instructions thereon. Unless otherwise stated, all shares represented by such proxy will be voted as instructed. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its use by delivering to the Secretary of the Company a written notice of revocation or a duly executed proxy bearing a later date. Any stockholder who has executed a proxy but is present at the Special Meeting, and who wishes to vote in person, may do so by revoking his or her proxy as described in the preceding sentence. Shares represented by valid proxies in the form enclosed, received in time for use at the Special Meeting and not revoked at or prior to the Special Meeting, will be voted at the Special Meeting.
 
The entire cost of soliciting proxies, including the costs of preparing, assembling, printing and mailing this Proxy Statement, the proxy and any additional soliciting material furnished to stockholders, will be borne by the Company. Arrangements will be made with brokerage houses, banks and other custodians, nominees and fiduciaries to send proxies and proxy materials to the beneficial owners of stock, and the Company expects to reimburse such persons for their reasonable out-of-pocket expenses. Proxies may also be solicited by directors, officers or employees of the Company in person or by telephone, telegram or other means. No additional compensation will be paid to such individuals for these services.
 
Solicitation of Proxies
 
The Company will bear the entire cost of soliciting proxies from its stockholders. In addition to solicitation of proxies by mail, the Company will request that banks, brokers, and other record holders send proxies and proxy material to the beneficial owners of the Company's Common Stock and secure their voting instructions. The Company will reimburse the record holders for their reasonable expenses in taking those actions. If necessary, the Company may use several of its regular employees, who will not be specially compensated, to solicit proxies from the Company's stockholders, either personally or by telephone, facsimile, letter or other electronic means.
 
 
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Voting
 
Each stockholder is entitled to one vote for each share held on the close of business on the Record Date, on each matter properly submitted for the vote of stockholders at the Special Meeting. The right to vote is exercisable, in person or by properly executed proxy as described further below.
 
If you are a stockholder of record as of the Record Date, you may vote in person at the Special Meeting or vote by proxy using the proxy card. Whether or not you plan to attend the Special Meeting, the Company urges you to vote by proxy to ensure your vote is counted. You may still attend the Special Meeting and vote in person if you have already voted by proxy. To vote in person, you may come to the Special Meeting and the Company will give you a ballot when you arrive. To vote using the proxy card, simply complete, sign and date the proxy card (which is enclosed if you received this Proxy Statement by mail or that you may request or that the Company may elect to deliver at a later time), and return it promptly in the envelope provided. If you return your signed proxy card to the Company before the Special Meeting, the Company will vote your shares as you direct.
 
For Shares Registered in the Name of a Broker or Bank
 
Most beneficial owners whose stock is held in street name receive instructions for granting proxies from their banks, brokers or other agents, rather than the Company’s proxy card. If your shares are held in an account with a broker or bank please follow the instructions provided by such broker or bank.
 
Fairness Opinion
 
A fairness opinion regarding the proposed Stock Sale will not be completed and available for review by stockholders prior to the stockholder  meeting and vote. As a condition of the completion of the transaction, a fairness opinion is required to be delivered to the Company to the effect that the sale of the remaining 60% of the Target Companies (constituting all of our remaining equity interests in the Target Companies) is fair to the stockholders of the Company from a financial point of view.
 
MATTERS BEING SUBMITTED TO A VOTE OF SMARTHEAT’S STOCKHOLDERS
 
Proposal 1: Stock Sale
 
At the Special Meeting, Company stockholders will be asked to approve the Stock Sale.
 
The terms of, reasons for and other aspects of the Stock Sale are described in detail in the other sections in this Proxy Statement.
 
You should note that the Company is seeking approval of the Stock Sale because such Stock Sale might be deemed under Nevada law to be a sale of substantially all of the Company’s assets. If stockholders do not approve the Stock Sale, or if the Stock Sale does not otherwise close, the Company may continue to explore additional alternatives to the Stock Sale or resubmit the Stock Sale in the same or revised form to the stockholders for approval at a future date.
  
The Buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajun Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively. Huajun Ai, Wen Sha, Jun Wang and Xudong Wang are also principals in Northtech Holdings Inc.  See the section captioned “Interests of Certain Persons in the Stock Sale”.
 
THE COMPANY’S BOARD OF DIRECTORS RECOMMENDS THAT COMPANY STOCKHOLDERS VOTE FOR  PROPOSAL 1 TO APPROVE THE STOCK SALE.
 
 
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Proposal 2: Approval of Possible Adjournments of the Special Meeting
 
If the Company fails to receive a sufficient number of votes to approve Proposal 1 at the Special Meeting, the Company may propose to adjourn the Special Meeting on one or more occasions, each for a period of not more than 30 days, for the purpose of soliciting additional proxies to approve Proposal 1. The Company currently does not intend to propose adjournment at the Special Meeting if there are sufficient votes to approve Proposal 1.

You should note that in the absence of a quorum of shares present in person or represented by proxy at the meeting, the bylaws of the Company, as amended (the “Bylaws”) provide that the chairperson of the meeting may adjourn the meeting. The presentation of this Proposal 2 to the stockholders of the Company is not intended to, and does not, prevent the chairperson of the meeting from adjourning the Special Meeting in the manner set forth in the Company’s Bylaws under such circumstances. In addition, this Proposal 2 does not prevent the meeting from otherwise being adjourned or postponed in accordance with the requirements of the Nevada Revised Statutes, our Articles of Incorporation or the Bylaws of the Company.
 
THE COMPANY’S BOARD OF DIRECTORS RECOMMENDS THAT COMPANY STOCKHOLDERS VOTE FOR  PROPOSAL 2 TO ADJOURN THE SPECIAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF PROPOSAL 1.
 
 SUMMARY OF THE PROXY STATEMENT
 
This summary highlights selected information from this Proxy Statement and may not contain all of the information that is important to you. You should read carefully this entire Proxy Statement and the documents referred to in this Proxy Statement for a more complete description of the matters on which you are being asked to vote. A copy of the EIPA and Amended EIPA, are attached respectively as  Annex A  and  Annex B  to this Proxy Statement. You are encouraged to read the Amended EIPA as it is the legal document that governs the Stock Sale. This summary is qualified in its entirety by the Amended EIPA and the more detailed information appearing elsewhere in this document. This summary includes page references in parentheses to direct you to a more complete description of the topics presented in this summary.

The Company

SmartHeat, Inc.

We are a U.S. holding company with no material assets other than the ownership interests through our subsidiaries Heat PHE and Heat HP of our foreign subsidiaries that design, manufacture and sell plate heating equipment (PHEs) and heat pumps (HPs) in the People’s Republic of China (“PRC”) and Germany.

Heat PHE

Heat PHE was formed in Nevada on August 23, 2013 and is our wholly owned subsidiary and, at that time, we entered into an assignment agreement (“PHE Assignment Agreement”) with Heat PHE to reorganize the business into a separate segment holding those subsidiaries that operated in the plate heating equipment, meters and related products.
 
Under the PHE Assignment Agreement, the Company agreed to transfer, and in the case of indirectly owned subsidiaries, cause to be transferred, to Heat PHE the following subsidiaries of the Company:

SmartHeat Taiyu (Shenyang) Energy Technology Co., Ltd.
SanDeKe Co., Ltd.
SmartHeat (Shenyang) Energy Equipment Co., Ltd.
SmartHeat Siping Beifang Energy Technology Co., Ltd.
Hohhot Ruicheng Technology Co., Ltd.
 
 
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As of December 31, 2014, our Heat PHE subsidiaries contain approximately 92.21% of the assets and approximately 86.81% of the liabilities of the Company, excluding the inter-segment transactions.

A PHE is a device that transfers heat from one fluid to another fluid across large metal plates. PHE products are used in the industrial, residential and commercial sectors to make energy use more efficient and to reduce pollution by reducing the need for coal fired boilers. The subsidiaries of Heat PHE design, manufacture, sell and service PHEs, PHE Units, which combine PHEs with various pumps, temperature sensors, valves and automated control systems, heat meters and heat pumps for use in commercial and residential buildings. They also design, manufacture and sell spiral heat exchangers and tube heat exchangers. Their products and used in a variety of industrial processes where heat transfer is required.  Applications include energy conversion for heating, ventilation and air conditioning, and industrial use in petroleum refining, petrochemicals, metallurgy, food and beverage and chemical processing. The subsidiaries of Heat PHE sell their products under the SmartHeat and Taiyu brand names and also sell PHEs under the Sondex brand name as an authorized dealer of Sondex PHEs in China .
 
Heat HP

Our wholly owned subsidiary Heat HP holds those subsidiaries that manufacture and distribute heat pumps and related products.

Heat HP was formed in Nevada on August 23, 2013 and is our wholly owned subsidiary and, at that time, we entered into an assignment agreement (“HP Assignment Agreement”) with Heat HP to reorganize the business into a separate segment holding those subsidiaries that operated in the heat pump related products.  Under the HP Assignment Agreement, the Company agreed to transfer, and in the case of indirectly owned subsidiaries, cause to be transferred, to Heat HP the following subsidiaries of the Company:
 
SmartHeat (China) Investment Co., Ltd.
SmartHeat (Shenyang) Heat Pump Technology Co., Ltd.
SmartHeat Deutschland GmbH
SmartHeat (Shanghai) Trading Co., Ltd.
Beijing SmartHeat Jinhui Energy Technology Co., Ltd.

As of December 31, 2014, our Heat HP subsidiaries contain approximately 6.73% of the assets and approximately 5.54% of the liabilities of the Company, excluding the inter-segment transactions.

Our heat pump systems provide heating, cooling and hot water for residential and commercial buildings and process heat for industrial applications by moving heat between two locations using small amounts of electricity. In a typical system, heat pumps draw heat from outside air or ground to warm the inside of a home or office building. Many heat pumps have reversible cycles, too, using the same system to cool the inside of a building by transferring heat outside. Heat pumps replace conventional energy sources such as oil, gas and coal with the energy stored in water, soil and air or heat recovered from wastewater or exhaust air. By transferring heat between locations, rather than burning fuel to create a heat source, heat pumps are extremely efficient energy transfer systems. Commercial users install heat pump systems not only to reduce energy consumption but also carbon dioxide, or CO2, emissions, a trend that is encouraged by policymakers in China. The advantages of heat pumps in terms of energy efficiency, operating cost, CO2 emission reduction and their ability to provide heating and cooling in one machine has made them the leading energy source for new buildings in Germany and Austria, and has replaced conventional fossil fuel based technology in these countries to a large degree. As the PRC government continues to focus on emissions reduction and energy conservation, we believe there are opportunities for incremental growth in the rapidly growing heat pump market in China. We also anticipate expanding sales of heat pumps manufactured in China under EU design standards to the European market. Heat pumps accounted for 13% and 12% of our sales in 2013 and 2012, respectively.
 
 
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If the Stock Sale is consummated, we will continue to own Heat PHE and Heat HP and, indirectly, their respective remaining subsidiaries:
 
Subsidiaries of Heat HP Inc. are:

SmartHeat (China) Investment Co., Ltd.
SmartHeat (Shenyang) Heat Pump Technology Co., Ltd.
SmartHeat Deutschland GmbH
SmartHeat (Shanghai) Trading Co., Ltd.
Beijing SmartHeat Jinhui Energy Technology Co., Ltd.

Subsidiaries of Heat PHE Inc. after the Stock Sale are:

SanDeKe Co., Ltd.
SmartHeat Heat Exchange Equipment Co., Ltd.

Subsidiaries of Heat PHE Inc. that are being sold pursuant to the Amended EIPA in connection with the Stock Sale (the “Target Companies”) are:

SmartHeat Taiyu (Shenyang) Energy;
SmartHeat Siping Beifang Energy Technology Co., Ltd.;
SmartHeat (Shenyang Energy Equipment) Co. Ltd.;
Hohot Ruicheng Technology Co., Ltd.; and
Urumchi XinRui Technology Limited Liability Company

Seller:
 
Heat PHE Inc.
A-1, 10, Street 7
Shenyang Economic and Technological Development Zone
Shenyang, China 110141
+86 (24) 2519-7699

Buyers:
 
The Buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajuan Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively.  Huajuan Ai, Wen Sha, Jun Wang and Xudong Wang are also stockholders in Northtech Holdings Inc.

Principal Provisions of the Amended and Restated Equity Interest Purchase Agreement (page___ and Annex B)
 
Under the terms of the EIPA, Buyers purchased 40% of Heat PHE’s equity interests in the Target Companies.  The purchase price was RMB 5,000,000, which was paid at the closing on December 30, 2013.
 
On November 28, 2014, Heat PHE entered into an Amended EIPA which amended the EIPA. Under the terms of the Amended EIPA Buyers have agreed to purchase the remaining 60% of Target Companies (constituting all of our remaining equity interests in the Target Companies). The purchase price for the remaining 60% consists of: (i) consideration of RMB 8,500,000 and (ii) the forgiveness of all net indebtedness owing to Target Companies by SmartHeat and each of its other subsidiaries as of December 31, 2014 which was $8.79 million as of December 31, 2014.

The effectiveness of the transaction is subject to the following conditions: (i) approval of its stockholders and (ii) receipt by the Board of Directors of the Company of an opinion that the Stock Sale is fair to the stockholders of SmartHeat from a financial point of view. The parties will execute a mutual release to be effective as of the Closing which will provide, in part, for the Target Companies to forgive all net indebtedness from SmartHeat and all of its other subsidiaries owing to the Target Companies as of the effective date of the Closing. On December 24, 2014, the consideration and all documents were deposited into escrow and will be released when the conditions have been satisfied; provided that if the conditions are not satisfied on or before March 31, 2015, either party may terminate the Amended EIPA and the funds and documents will be returned to the depositing party. On March 19, 2015 the Amended EIPA was amended to extend the termination date to April 15, 2015.

 
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Following the Stock Sale, Company’s Board of Directors plans to explore strategic alternatives to deploy the proceeds of the Stock Sale, which may include repayment of indebtedness, expansion of our heat pump business in the United States, Europe and China, future acquisitions, a merger or joint ventures with another company, or other actions to redeploy capital. It is unlikely, however, that the Company will make a distribution of cash to our stockholders.

A copy of the EIPA and the Amended EIPA are attached respectively as Annex A and Annex B to this Proxy Statement. The description of the Amended EIPA herein is qualified in its entirety by reference to the Amended EIPA. We encourage you to read the Amended EIPA in its entirety.

The Stock Sale will result in an expected a loss of $35.27 million from the 100% equity interest sale of the sold entities consisting of a $44.06 million loss on sale resulting from the difference of the total selling price and the net assets of sold entities, netted with the $8.79 million due to the forgiveness of all net indebtedness owing to the Target Companies by SmartHeat and each of its other subsidiaries. The Company determined that the restated carrying values of the assets and liabilities being sold are appropriate and comply with GAAP.  Please refer to Footnotes 1 and 2 on pages F- 8 and F- 9, F-27 and F-30. 
 
Reasons for the Stock Sale (page __)

The Company’s Board of Directors determined that the terms of the Amended EIPA and the transactions contemplated by the Amended EIPA, including without limitation, the sale of the remaining 60% of our equity interest in Target Companies are advisable and in the best interests of the Company and its stockholders, and has approved the Stock Sale and the transactions contemplated by the Amended EIPA.

Both positive and negative factors, together with the background of the transaction set forth below, comprise the Board of Directors’ material considerations in entering into the Amended EIPA. The principal negative factors considered by the Board of Directors was that the Company would be required by generally accepted accounting principles to recognize a substantial loss resulting from the difference between the values at which the net assets of the Target Companies were recorded on the books of the Target Companies and the consideration which the Company would receive. This expected one-time net loss, as of December 31, 2014, was approximately $35.27 million.  For a description of the other factors that the Board of Directors considered in entering into the Amended EIPA, please see the discussion below under the heading “The Stock Sale.”

Use of Proceeds (page __)

A subsidiary of Heat PHE, and not the Company’s stockholders, will receive all of the net proceeds from the Stock Sale. Following the Stock Sale, the Company’s Board of Directors plans to explore strategic alternatives to deploy the proceeds of the Stock Sale, which may include repayment of indebtedness, expansion of our heat pump business in the United States, Europe and China, future acquisitions, a merger or joint venture with another company, or other actions to redeploy capital. It is unlikely, however, that the Company will make a distribution of cash to our stockholders.

Although the Board of Directors and management have had preliminary discussions regarding potential uses of our capital following the Stock Sale, the Board of Directors intends to continue to review anticipated liabilities and potential strategic uses of capital in connection with the continuation of the Company as a going concern. Factors considered by the Board of Directors in reaching this determination are stated below under the heading “The Stock Sale - - Reasons for the Stock Sale.”  Accordingly, we cannot specify with certainty the amount of net proceeds, if any, we will use for any particular use or the timing in respect thereof. Consequently, you should not vote in favor of the Stock Sale based upon any assumptions regarding the amount or timing of any potential usages of capital or distributions to stockholders.

The Buyers and the Company have agreed in the Amended EIPA to provide relief of all of the intercompany debt of Heat HP as of December 31, 2014 which was $8.79 million as of December 31, 2014.
 
Recommendations to the Company’s Stockholders (page __)

The Company’s Board of Directors has determined that the sale of substantially all of the Company’s assets pursuant to the Stock Sale is advisable in the best interests of the Company and the Company’s stockholders.  Factors considered by the Board of Directors in reaching this determination are stated below under the heading "The Stock Sale -- Reasons for the Stock Sale."  The Company’s Board of Directors has approved the Stock Sale, and recommends that the stockholders of the Company vote in favor of the Amended EIPA and the transactions contemplated by the Amended EIPA, and in favor of any necessary adjournments. Certain of the Company’s former officers, who are significant stockholders, have interests in the Stock Sale that are different from the other holders of the shares of the Company’s Common Stock. See the section captioned “Interests of Certain Persons in the Stock Sale”.
 
 
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Conditions to the Stock Sale (page __)

The obligations of each of Buyers and Heat PHE for the effectiveness of the Stock Sale require the satisfaction of specified conditions set forth in the Amended EIPA, including the approval of the Amended EIPA and related agreements by Company’s stockholders holding a majority of the outstanding shares of Common Stock and receipt by the Board of Directors of the Company of an opinion that the purchase and sale transaction is fair to the stockholders of SmartHeat from a financial point of view. For a description of the closing conditions, please see the discussion below under the headings “Principal Provisions of the Equity Interest Purchase Agreement.”
 
Interests of Certain Persons in the Stock Sale (page __)
 
Buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajun Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively. Huajun Ai, Wen Sha, Jun Wang and Xudong Wang are also principals in Northtech Holdings Inc.
 
Risk Factors (page __)
 
In evaluating the Stock Sale, in addition to the other information contained in this Proxy Statement, you should carefully consider the risk factors relating to the Stock Sale and our Company discussed herein.

RISK FACTORS

When you decide whether to vote for approval of the Stock Sale, you should consider the following factors in conjunction with the other information included in this Proxy Statement. We also ask you to refer to the risk factors set forth in our 2013 Annual Report on Form 10-K, as amended, which are incorporated by reference herein.

If the Stock Sale is not consummated, we will continue to seek other financing alternatives and operate for as long as possible.
 
If the Stock Sale is not consummated we will continue to seek additional financing option and operate for as long as possible. If we are unable to find alternatives to finance and expand our PHE segment and we continue to operate at a loss we will need to consider options in bankruptcy as we will have not enough operating cash to continue our business.
 
We cannot be sure if or when the Stock Sale will be completed.
 
The effectiveness  of the Stock Sale is subject to the satisfaction or waiver of various conditions, including the authorization of the Stock Sale by our stockholders and receipt of a fairness opinion to the effect that the sale of the remaining 60% of the Target Companies (constituting all of our remaining equity interests in the Target Companies) is fair to the stockholders of the Company from a financial point of view. We cannot guarantee that the conditions set forth in the Amended EIPA will be satisfied. If we are unable to satisfy such conditions in the Buyer’s favor or if other mutual conditions are not satisfied, the Stock Sale will not be complete.
 
If the Stock Sale is not completed, our board of directors, in discharging its fiduciary obligations to our stockholders, will evaluate other strategic alternatives that may be available. Such other strategic alternatives may not be as favorable to our stockholders as the Stock Sale. Any future sale of substantially all of our assets or other transactions may be subject to further stockholder approval.

While the Stock Sale is pending, it creates uncertainty about our future that could have a material adverse effect on our business, financial condition and results of operations.
 
 
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While the Stock Sale is pending, it creates uncertainty about our future. As a result of this uncertainty, our current or potential business partners may decide to delay, defer or cancel entering into new business arrangements with us pending completion or termination of the Stock Sale. In addition, while the Stock Sale is pending, we are subject to a number of risks, including:
 
 
·  the diversion of management and employee attention from our day-to-day business;
 
·  the potential disruption to business partners and other service providers; and
 
·  the possible inability to respond effectively to competitive pressures, industry developments and future opportunities.

The occurrence of any of these events individually or in combination could have a material adverse effect on our business, financial condition and results of operation.
 
In addition, pending the completion of the Stock Sale, we may be unable to attract and retain key personnel and our management’s focus and attention and employee resources may be diverted from operational matters during the pendency of the Stock Sale.

In the event that the Stock Sale is not completed, the announcement of the termination of the Amended EIPA may also adversely affect the trading price of our Common Stock, our business or our relationships with lenders, customers, suppliers and employees.
 
Our former officers and current executive officers and managers of the Company’s subsidiaries have interests in the Stock Sale other than, or in addition to, the interests of our stockholders generally.
 
Buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajun Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively. Huajun Ai, Wen Sha, Jun Wang and Xudong Wang are also principals in Northtech Holdings Inc. Our board of directors was aware of these interests and considered them, among other matters, in approving the Amended EIPA.
 
We will continue to incur the expenses of complying with public company reporting requirements following the closing of the Stock Sale.
 
After the Stock Sale, we will continue to be required to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), even though compliance with such reporting requirements is economically burdensome.
 
If the Stock Sale is not completed and the Amended EIPA is terminated, there may not be any other offers from potential acquirers.
 
If the Stock Sale is not completed and the Amended EIPA is terminated, we may seek another purchaser for our assets. There can be no assurances that we would be able to enter into meaningful discussions or to otherwise complete any transaction with any other party who may have an interest in purchasing our assets on terms acceptable to us. Additionally, the inability to complete the Stock Sale could make potential acquirers more reluctant to engage in a transaction with us.
  
We may be exposed to litigation related to the Stock Sale from the holders of our Common Stock.
 
Transactions such as the Stock Sale are often subject to lawsuits by stockholders. Because the holders of our Common Stock will not receive any consideration from the Stock Sale, it is possible that they may sue the Company or its board of directors.
 
We will incur a substantial one-time loss for financial reporting purposes as a result of the Stock Sale.

The Stock Sale will result in an expected a loss of  $35.27 million from the 100% equity interest sale of the sold entities consisting of a $44.06 million loss on sale resulting from the difference of the total selling price and the net assets of sold entities, netted with the $8.79 million due to the forgiveness of all net indebtedness owing to the Target Companies by SmartHeat and each of its other subsidiaries. The Company determined that the restated carrying values of the assets and liabilities being sold are appropriate and comply with GAAP. Please refer to Footnotes 1 and 2 on pages F- 8 and F- 9, F-27 and F-30  and Principal Provisions of the Amended and Restated Equity Interest Purchase Agreement beginning on page [__] 
  
We will incur significant expenses in connection with the Stock Sale.
 
We expect to pay legal fees, accounting fees and proxy filing costs whether or not the Stock Sale closes. Any significant expenses or payment obligations incurred by us in connection with the Stock Sale could adversely affect our financial condition and cash position.
 
 
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The Company’s stockholders will not receive any of the proceeds of the Stock Sale.
 
If the Stock Sale is consummated, the cash purchase price will be paid directly to a subsidiary of Heat PHE located in China.  None of the net proceeds of the purchase price will be received by the Company’s stockholders, unless the Board of Directors ultimately proposes a distribution to the stockholders.
 
QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS AND THE SPECIAL MEETING

Q: Why am I receiving these materials?
 
A: Our Board of Directors has delivered printed proxy materials to you, in connection with the solicitation of proxies for use at the Special Meeting of Stockholders, which will take place on April 6, 2015, at 4:00 pm local time at the Airport Club, Frankfurt Airport Center 1, Hugo-Eckener-Ring, 60549 Frankfurt am Main, Germany. As a stockholder, you are invited to attend the Special Meeting and are requested to vote on the items of business described in this Proxy Statement.

Q: What information is contained in this Proxy Statement?

A: The information in this Proxy Statement relates to the proposals to be voted on at the Special Meeting, the voting process, the compensation of our directors and most highly paid executive officers, corporate governance, and certain other required information.

Q: What items of business will be voted on at the Special Meeting?

A: The items of business scheduled to be voted on at the Special Meeting are:
 
1.  
To authorize the Stock Sale, which might be deemed under Nevada law to be the sale of substantially all the assets of the Company;
 
2.  
To consider and vote upon one or more adjournments of the Special Meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal 1;
     
3.  
To transact such other business as may properly come before the Special Meeting.
 
 
Q: How does the Board of Directors recommend that I vote?

A: Our Board of Directors recommends that you vote your shares “For” each of the 3 proposals scheduled to be voted upon at the Special Meeting.
 
Q: Will the Company Provide the Stockholders a Copy of the Fairness Opinion Prior to the Vote?

A: A fairness opinion regarding the proposed Stock Sale will not be completed and available for review by stockholders prior to the shareholder meeting and vote. As a condition of the effectiveness of the transaction, the Company must receive a fairness opinion to the effect that the sale of the remaining 60% of the Target Companies (constituting all of our remaining equity interests in the Target Companies) is fair to the stockholders of the Company from a financial point of view.
 
 
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Q: What shares can I vote?
 
A: Each share of SmartHeat Common Stock issued and outstanding as of the close of business on the Record Date for the Special Meeting of Stockholders is entitled to be voted on all items being voted on at the Special Meeting. You may vote all shares owned by you as of the Record Date, including (1) shares held directly in your name as the stockholder of record, and (2) shares held for you as the beneficial owner in street name through a broker, bank, trustee, or other nominee. On the Record Date we had 6,783,399 shares of Common Stock issued and outstanding.
  
Q: How many votes am I entitled to per share?

A: Each holder is entitled to one vote for each share of Common Stock held as of the Record Date.

Q: What is the difference between holding shares as a stockholder of record and as a beneficial owner?

A: Most SmartHeat stockholders hold their shares as a beneficial owner through a broker or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially.

Stockholder of Record

If your shares are registered directly in your name with our transfer agent, Interwest Transfer Company, Inc., you are considered, with respect to those shares, the  stockholder of record,  and the Notice was sent directly to you by SmartHeat. As the  stockholder of record,  you have the right to grant your voting proxy directly to SmartHeat or to vote in person at the Special Meeting. If you requested to receive printed proxy materials, SmartHeat has enclosed or sent a proxy card for you to use. You may also vote on the Internet or by telephone, as described in the Notice and below under the heading “How can I vote my shares without attending the Special Meeting?”

Beneficial Owner

If your shares are held in an account at a brokerage firm, bank, broker-dealer, trust, or other similar organization, like the vast majority of our stockholders, you are considered the  beneficial owner  of shares held  in street name,  and the Notice was forwarded to you by that organization. As the beneficial owner, you have the right to direct your broker, bank, trustee, or nominee how to vote your shares, and you are also invited to attend the Special Meeting.
 
Since a beneficial owner is not the stockholder of record, you may not vote your shares in person at the Special Meeting unless you obtain a “legal proxy” from the broker, bank, trustee, or nominee that holds your shares giving you the right to vote the shares at the meeting. If you do not wish to vote in person or you will not be attending the Special Meeting, you may vote by proxy. You may vote by proxy over the Internet or by telephone, as described in the Notice and below under the heading “How can I vote my shares without attending the Special Meeting?”

Q: How can I contact SmartHeat’s transfer agent?

A: Contact our transfer agent by either writing to Interwest Transfer Company, Inc., 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117, or by telephoning 801-272-9294.

Q: How can I attend the Special Meeting?

A: You are entitled to attend the Special Meeting only if you were a SmartHeat stockholder as of the Record Date or you hold a valid proxy for the Special Meeting. Since seating is limited, admission to the meeting will be on a first-come, first-served basis. You must present photo identification for admittance. If you are not a stockholder of record but hold shares as a beneficial owner in street name, you must also provide proof of beneficial ownership as of the Record Date, such as your most recent account statement prior to the Record Date, a copy of the voting instruction card provided by your broker, bank, trustee, or nominee, or other similar evidence of ownership.
 
 
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If you do not provide photo identification or comply with the other procedures outlined above, you will not be admitted to the Special Meeting. For security reasons, you and your bags will be subject to search prior to your admittance to the meeting.

Please let us know if you plan to attend the meeting by marking the appropriate box on the enclosed proxy card, or, if you vote by telephone or Internet, by indicating your plans when prompted.

The meeting will continue promptly at 4:00 pm (Local time) on April 6, 2015. Check-in will begin at 3:30 pm (Local time), and you should allow ample time for the check-in procedures.
 
Q: How can I vote my shares in person at the Special Meeting?

A: Shares held in your name as the stockholder of record may be voted by you in person at the Special Meeting. Shares held beneficially in street name may be voted by you in person at the Special Meeting only if you obtain a legal proxy from the broker, bank, trustee, or nominee that holds your shares giving you the right to vote the shares. Even if you plan to attend the Special Meeting, we recommend that you also submit your proxy or voting instructions as described below so that your vote will be counted if you later decide not to attend the meeting.

Q: How can I vote my shares without attending the Special Meeting?
 
A: Whether you hold shares directly as the stockholder of record or beneficially in street name, you may direct how your shares are voted without attending the Special Meeting. If you are a stockholder of record, you may vote by proxy. You can vote by proxy over the Internet by following the instructions provided in the Notice, or, if you requested to receive printed proxy materials, you can also vote by mail or telephone pursuant to instructions provided on the proxy card. If you hold shares beneficially in street name, you may also vote by proxy over the Internet by following the instructions provided in the Notice, or, by following the voting instruction card provided to you by your broker, bank, trustee, or nominee.

Q: Can I change my vote or revoke my proxy?

A: You may change your vote at any time prior to the taking of the vote at the Special Meeting. If you are the stockholder of record, you may change your vote by (1) granting a new proxy bearing a later date (which automatically revokes the earlier proxy) using any of the methods described above (and until the applicable deadline for each method), (2) providing a written notice of revocation to SmartHeat’s Corporate Secretary at A-1, 10, Street 7, Shenyang Economic and Technological Development Zone, Shenyang China 110141, prior to your shares being voted, or (3) attending the Special Meeting and voting in person. Attendance at the meeting will not cause your previously granted proxy to be revoked unless you specifically so request. For shares you hold beneficially in street name, you may change your vote by submitting new voting instructions to your broker, bank, trustee, or nominee following the instructions they provided, or, if you have obtained a legal proxy from your broker, bank, trustee, or nominee giving you the right to vote your shares, by attending the Special Meeting and voting in person.

Q: Is my vote confidential?

A: Proxy instructions, ballots, and voting tabulations that identify individual stockholders are handled in a manner that protects your voting privacy. Your vote will not be disclosed either within SmartHeat or to third parties, except: (1) as necessary to meet applicable legal requirements, (2) to allow for the tabulation of votes and certification of the vote, and (3) to facilitate a successful proxy solicitation. Occasionally, stockholders provide on their proxy card written comments, which are then forwarded to SmartHeat management.
 
Q: How many shares must be present or represented to conduct business at the Special Meeting?

A: The quorum requirement for holding the Special Meeting and transacting business is that a majority of the voting power of the issued and outstanding Common Stock of SmartHeat as of the Record Date must be present in person or represented by proxy. Both abstentions and broker non-votes (described below) are counted for the purpose of determining the presence of a quorum.
 
 
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Q: How are votes counted?

A:  For all items of business, you may vote “For,” “Against,” or “Abstain.” If you elect to “Abstain,” the abstention has the same effect as a vote “Against.”

If you provide specific instructions with regard to certain items, your shares will be voted as you instruct on such items. If no instructions are indicated, the shares will be voted as recommended by the Board of Directors.

Q: What is the voting requirement to approve each of the proposals?

A: For Proposals 2 and 3, the affirmative “For” vote of a majority of those shares present in person or represented by proxy and entitled to vote on them at the Special Meeting is required for approval.

For Proposal 1, the affirmative vote of a majority of share outstanding is required. If you hold shares beneficially in street name and do not provide your broker with voting instructions, your shares may constitute “broker non-votes.” Broker non-votes occur on a matter when a broker is not permitted to vote on that matter without instructions from the beneficial owner and instructions are not given. These matters are referred to as “non-routine” matters. All of the matters scheduled to be voted on at the Special Meeting are “non-routine.”  In tabulating the voting result for any particular proposal, shares that constitute broker non-votes are not considered votes cast on that proposal. Thus, broker non-votes will not affect the outcome of any matter being voted on at the meeting, assuming that a quorum is obtained.

Abstentions are considered votes cast and thus will have the same effect as votes “Against” each of the matters scheduled to be voted on at the Special Meeting.

Q: What happens if additional matters are presented at the Special Meeting?

A: Other than the items of business described in this Proxy Statement, we are not aware of any other business to be acted upon at the Special Meeting. If you grant a proxy, the person named as proxy holder, Huajun Ai, Oliver Bialowons, and either of them, will have the discretion to vote your shares on any additional matters properly presented for a vote at the meeting.
 
Q: Who will serve as inspector of elections?

A: The inspector of elections will be either the Company’s counsel or an officer of the Company.

Q: Who will bear the cost of soliciting votes for the Special Meeting?
 
A: SmartHeat will pay the entire cost of preparing, assembling, printing, mailing, and distributing these proxy materials and soliciting votes. If you choose to vote over the Internet, you are responsible for Internet access charges you may incur. If you choose to vote by telephone, you are responsible for telephone charges you may incur. In addition to the mailing of these proxy materials, the solicitation of proxies or votes may be made in person, by telephone, or by electronic communication by our directors, officers, and personnel, who will not receive any additional compensation for such solicitation activities.
 
 
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Q: Where can I find the voting results of the Special Meeting?

A: We will disclose voting results on a Form 8-K filed with the SEC within four business days after the Special Meeting, which will also be available on our website.

QUESTIONS AND ANSWERS ABOUT THE STOCK SALE
 
Q: WHY IS SMARTHEAT PROPOSING TO ENTER INTO THE STOCK SALE?
 
A: After due consideration of all other alternatives reasonably available to the Company, the Board of Directors concluded that the completion of the Stock Sale was the best alternative improve the financial position and operating results of the Company.  The Company requires significant additional funds and cash flow to pay creditors and to support its operations. Despite multiple efforts, the Company has been unable to obtain capital resources under its current circumstances.  The Company has not been able to attract purchasers for its Heat HP segment that would generate sufficient funds to supply additional cash flow to support the Heat PHE operations. However, the Stock Sale substantially eliminates our losses from Heat PHE operations and strengthens our balance sheet. .  

Following the Stock Sale, the Company’s Board of Directors plans to explore strategic alternatives to deploy the proceeds of the Stock Sale, which may include repayment of indebtedness, expansion of its Heat HP heat pump products into markets located in the United States, China and Europe, future acquisitions, a merger or joint venture with another company, or other actions to redeploy capital. It is unlikely, however, that the Company will make a distribution of cash to our stockholders.  Buyers and Company agreed to amend the EIPA to provide for, in part, relief of all of the intercompany debt of Heat HP which was $8.79 million as of December 31, 2014 and to provide for the payment of the full purchase price at the closing. Such amendment has the effect of significantly improving the Company’s balance sheet.
 
Q: WHAT WILL SMARTHEAT RECEIVE FOR THE STOCK BEING SOLD IN THE STOCK SALE?
 
A: Pursuant to the terms of the EIPA, Buyers purchased 40% of the Company’s equity interests in Target Companies for RMB 5,000,000 (which was paid on December 30, 2013). The sale of the Company's remaining interest in Target Companies is expected to result in cash proceeds to the Company of an additional RMB 8,500,000 plus the release and discharge of all net indebtedness owing by the Company and its subsidiaries to the Target Companies as of December 31, 2014, which was $8.79 million as of December 31, 2014. A subsidiary of Heat PHE located in China received the proceeds of the Stock Sale.
 
 Q: WHAT HAPPENS IF THE EQUITY INTEREST SALE IS NOT COMPLETED?
 
A: As a condition to closing of Buyers’ purchase of the remaining 60% equity interest (constituting all of our remaining equity interests in Target Companies), approval of a majority of Company’s stockholders is required and a fairness opinion is required to be received  to the effect that the sale of the remaining 60% of Target Companies (constituting all of our remaining equity interests in Target Companies) is fair to the stockholders of the Company from a financial point of view. In the event such approval or fairness opinion is not obtained or waived by March 31, 2015, the funds held in escrow will be released to the depositing parties and either party may terminate the Amended EIPA. On March 19, 2015 the Amended EIPA was amended to extend the termination date to April 15, 2015. If the Stock Sale is not completed, the Company will continue to seek other strategic options, including, without limitation, sale of the Target Companies or other assets of the Company, future acquisitions, a merger with another company, or other actions to raise capital.  Management believes that the Company would continue to operate at a significant loss until another alternative to the Stock Sale is identified and implemented.  If the Company continues to operate at a loss and becomes insolvent, it may be forced to resort to bankruptcy protection. In such event, it is extremely unlikely that the Company will be able to satisfy all of its liabilities and obligations, and there would therefore be no continuing operation of the Heat PHE and Heat HP segments and no funds available for distribution to the stockholders.
 
 
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Q: WILL ANY DISTRIBUTIONS BE MADE TO SMARTHEAT’S STOCKHOLDERS?
 
A: The Board of Directors intends to continue to review anticipated liabilities and potential strategic uses of capital in connection with the operation of Heat HP as a going concern. Following the Stock Sale, the Company’s Board of Directors plans to explore strategic alternatives to deploy the proceeds of the Stock Sale, which may include repayment of indebtedness, expansion of its Heat HP heat pump products into markets located in the United States, China and Europe, future acquisitions, a merger or joint venture with another company, or other actions to redeploy capital. Accordingly, we cannot specify with certainty the amount of net proceeds, if any, we will use for any particular use or the timing in respect thereof. Consequently, you should not vote in favor of the Stock Sale based upon any assumptions regarding the amount or timing of any potential usages of capital or distributions to stockholders.
 
Q: WHAT HAPPENS IF SMARTHEAT’S STOCKHOLDERS DO NOT APPROVE THE EQUITY INTEREST SALE?
 
A: As a condition to closing of the purchase of the remaining 60% equity interest, approval of a majority of the Company’s stockholders is required. In the event such approval  is not obtained or waived by March 31, 2015, by either party the funds held in escrow will be released to the depositing parties and either party may terminate the Amended EIPA.  If the Stock Sale is not completed, the Company will continue to seek other strategic options, including, without limitation, future acquisitions, a merger or joint venture with another company, or other actions to raise capital.  Management believes the Company will continue to operate at a significant loss until another alternative to the Stock Sale is identified and implemented.  If the Company continues to operate at a loss and becomes insolvent, it may be forced to resort to bankruptcy protection. In such event, it is extremely unlikely that the Company will be able to satisfy all of its liabilities and obligations, and there would therefore be no continuing operation of the Company and no funds available for distribution to the stockholders.

Q: AM I ENTITLED TO APPRAISAL RIGHTS?
 
A: No.  The Company’s stockholders are not entitled to appraisal rights in connection with the Stock Sale.

PROPOSALS TO BE VOTED ON
 
PROPOSAL NUMBER 1

APPROVAL OF THE STOCK SALE
 
At the Special Meeting, our stockholders are being asked to approve the Stock Sale, which might be deemed under applicable Nevada law to be a sale of substantially all of the assets of the Company, to Buyers as described in the Amended EIPA, in the form of Annex B attached to the Proxy Statement.  Stockholders are also being asked to consider and vote upon Proposal 2, which provides for one or more adjournments of the Special Meeting to solicit additional proxies in the event there are not sufficient votes in favor of Proposal 1 at the Special Meeting.
 
At the Special Meeting, the proxies granted by stockholders will be voted FOR the approval of the Stock Sale described below and FOR a possible adjournment of the Special Meeting, unless a proxy specifies that it is to be voted against the Stock Sale and/or against any possible adjournments.
 
Approval of Proposal 1 requires approval of majority of shares outstanding.

OUR BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE STOCK SALE DESCRIBED BELOW.

The following information is provided with respect to the Stock Sale:
 
 
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FORWARD-LOOKING INFORMATION
 
This Proxy Statement contains statements that may constitute "forward-looking statements." Generally, forward-looking statements include words or phrases such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "could," "may," "might," "should," "will," the negative of such terms, and words and phrases of similar import. For example, our statements about our reasons for the Stock Sale, our expected completion of the Stock Sale and our use of the proceeds thereof, all involve forward-looking statements.  Such statements are based on management's current expectations and are subject to a number of risks and uncertainties, including, but not limited to, the difficulty inherent in operating in a rapidly evolving market, market and economic conditions, the impact of competitive products, product demand and market acceptance risks, changes in product mix, our ability to improve our margins, costs and availability of raw materials, fluctuations in operating results, delays in development of highly complex products, risks from uncertainties regarding litigation or mediation, our ability to continue as a going concern, risk of customer contract or sales order cancellations or reductions in volume, failure to meet the conditions necessary to complete the Stock Sale, risks inherent with each of the possible strategic alternatives to deploy the proceeds of the Stock Sale as well as other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the “SEC”). These risks and uncertainties could cause our actual results to differ materially from those described in our forward-looking statements. Any forward-looking statement represents our expectations or forecasts only as of the date it was made and should not be relied upon as representing its expectations or forecasts as of any subsequent date. Except as required by law, we undertake no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, even if our expectations or forecasts change.

THE STOCK SALE
 
This section of the Proxy Statement describes material aspects of the proposed Stock Sale by Heat PHE, a subsidiary of the Company, through the Stock Sale, and certain related transactions. While the Company believes that the description covers the material terms of the Stock Sale, this summary may not contain all of the information that is important to you. You should carefully read this entire Proxy Statement and the other documents referred to in this Proxy Statement for a more complete understanding of the Stock Sale and related transactions of the Company.
 
The Company’s Board of Directors is recommending that the Stock Sale be approved by its stockholders at the Special Meeting. A copy of the Amended EIPA,  setting forth the terms and conditions of the Stock Sale is attached as  Annex B  to this Proxy Statement.

On September 18, 2013, the Board of Directors of the Company authorized the execution of the EIPA with Buyers, which was entered into as of October 10, 2013. Pursuant to the terms of the EIPA, Buyers acquired 40% ownership interest in substantially all of the subsidiaries of Heat PHE (which may be deemed to constitute substantially all of the assets of the Company under Nevada law).
  
In consideration for the acquisition of shares pursuant to the EIPA, Buyers paid to a subsidiary of the Company:
 
·
RMB 5,000,000 for 40% of the equity interests of Target Companies

In consideration for the acquisition of shares pursuant to the Amended EIPA, Buyers paid to a subsidiary of the Company:
 
·
RMB 8,500,000  for remaining 60% equity interest (constituting control and all of our remaining equity interests in Target Companies) in Target Companies.
 ·
Forgiveness and release of  intercompany debt as of December 31, 2014, which was $8.79 million as of December 31, 2014, owed to Target Companies.
 
There is no assurance that the Stock Sale will be completed. Certain material terms of the Amended EIPA and features of the Stock Sale are summarized below.  Stockholders should read the Amended EIPA in its entirety.
 
 
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Background of the Company

We were incorporated in the State of Nevada on August 4, 2006, under the name Pacific Goldrim Resources, Inc., as an exploration stage corporation with minimal operations, to engage in the exploration for silver, lead and zinc. On April 14, 2008, we changed our name to SmartHeat Inc. and entered into a Share Exchange Agreement (the “Share Exchange Agreement”), to acquire Shenyang Taiyu Machinery & Electronic Equipment Co., Ltd., subsequently renamed SmartHeat Taiyu (Shenyang) Energy Technology Co., Ltd. (“Taiyu”), a privately held Sino-foreign joint venture company formed under the laws of the PRC on July 24, 2002, and engaged in the design, manufacture, sale and service of PHE products in China.

We are a U.S. holding company with no material assets other than the ownership interests of our foreign subsidiaries that design, manufacture and sell PHEs and related systems in the People’s Republic of China (“PRC”) and Germany. A PHE is a device that transfers heat from one fluid to another fluid across large metal plates. PHE products are used in the industrial, residential and commercial sectors to make energy use more efficient and to reduce pollution by reducing the need for coal fired boilers. The subsidiaries of Heat PHE design, manufacture, sell and service PHEs, PHE Units, which combine PHEs with various pumps, temperature sensors, valves and automated control systems, heat meters and heat pumps for use in commercial and residential buildings. They also design, manufacture and sell spiral heat exchangers and tube heat exchangers. Their products and related systems are an increasingly important element in providing a clean technology solution to energy consumption and air pollution problems in China and are commonly used in a wide variety of industrial processes where heat transfer is required. Common applications include energy conversion for heating, ventilation and air conditioning, and industrial use in petroleum refining, petrochemicals, metallurgy, food and beverage and chemical processing. The subsidiaries of Heat PHE sell their products under the SmartHeat and Taiyu brand names and also sell PHEs under the Sondex brand name as an authorized dealer of Sondex PHEs in China.

Our wholly owned subsidiary Heat HP holds those subsidiaries that manufacture and distribute heat pumps and related products.

Background of the Transaction

During the final quarter of 2011 and the first four months of 2012 management met with various investment bankers, strategic consulting firms and banks seeking advice regarding financing, mergers, divestitures, asset sales, and other potential restructuring transactions. On April 23, 2012 we entered into a Restructuring Agreement, subject to Board approval, appointing Nimbus as a restructuring advisor to our Board of Directors. On May 15, 2012, Arnold Staloff, director and chairman of the Audit Committee resigned.

On May 24, 2012 and May 25, 2012, our Board of Directors held meetings in Hong Kong. The Compensation Committee recommended, and the Board of Directors approved, the appointment of Oliver Bialowons as a director to fill the vacancy created by the resignation of Mr. Staloff.  Mr. Jun Wang, our former Chairman and Chief Executive Officer, discussed the downturn in business, the liquidity issues of the Company and recommended the appointment of Nimbus as a restructuring advisor to the Board of Directors whereby our Board of Directors ratified the Restructuring Agreement and the appointment of Nimbus. The Board of Directors then considered various factors impacting the financial condition of the Company and the need for immediate financing in order to preserve the financial viability of the public holding company. Mr. Wang indicated that he had formed a group of investors through a British Vergin Island special purpose vehicle called Northtech, Inc. (“NorthTech”) led by him and including Mr. Sha, Mr. Xudong Wang and Ms. Jane Ai, our corporate secretary that would be willing to provide short term interim financing to our public holding company. Mr. Wang and our former senior management team consisting of Mr. Wen Sha, our former Chief Operating Officer, Ms. Zhijuan Guo, Chief Financial Officer and Mr. Xudong Wang our former Vice President of Strategy and Development, resigned. Mr. Sha and Mr. Wang continued as managers of the subsidiaries. Mr. Jun Wang also resigned from the Board of Directors and as our Chief Executive Officer in order to facilitate consideration by the Board of this financing option free of the issue of conflict of interest. Moreover, he indicated that our public holding company would be best served by an executive officer with experience in restructuring in order to evaluate strategic options for the Company. Jun Wang continues to serve in his positions as General Manager of certain of our subsidiaries.  Mr. Wang then recommended to the Board of directors that Oliver Bialowons be appointed as President of our Company. The Board of Directors approved the appointment of Mr. Bialowons as President and instructed Nimbus to begin a search for a Chief Financial Officer for our Company.
 
 
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To address our immediate cash needs, the Board of Directors approved borrowing up to $1,000,000 to fund ordinary course operating expenses under a binding commitment letter for a Revolving Line of Credit, subject to an acceptable fairness opinion, negotiation of final terms and the execution of a definitive agreement. The Board of Directors directed Nimbus to determine if alternative sources of lending existed by conducting a market canvas which was  completed by July 31, 2012.  In the event that Nimbus was not able to find a lender on better terms than presented by NorthTech, Nimbus was instructed to negotiate the definitive terms of a secured revolving line of credit with NorthTech subject to approval of our President.

On May 30, 2012, after we announced the management restructuring and secured revolving credit agreement, NASDAQ announced that it was suspending the trading of our Common Stock until all requests for further information from NASDAQ had been fully satisfied.  Our Common Stock did not trade on NASDAQ after that time. Notwithstanding the fact that the Company supplied to NASDAQ all information that was requested, the trading suspension resulted in a formal suspension on November 9, 2012 and to our ultimate delisting on August 19, 2013. The suspension and delisting of our Common Stock significantly curtailed our borrowing and financing options in connection with our restructuring efforts.

At a Board of Directors meeting held on June 28, 2012, our Board of Directors considered the issues facing the public holding company resulting from NASDAQ’s suspension of trading of our Common Stock, the continued liquidity needs, the inability to dividend income from the subsidiaries while they were operating at a loss and the resultant need to restructure the public holding company.  Nimbus updated the members of the Board of Directors on the conditions leading to the liquidity situation, the current financial condition of the company and the likely unavailability of funds to upstream to the public holding company for at least the next year and recommended that the public holding company enter into the secured revolving credit agreement and increase the amount to $2,000,000.  Nimbus reviewed the terms of the proposed secured revolving credit agreement with the Board of Directors and the various risks if the public holding company did not address its current liquidity issues.  The Board of Directors approved the secured revolving credit agreement with Northtech and instructed Nimbus to explore additional options to permit the subsidiaries to upstream cash upon attaining profitability or obtain alternative sources of financing to replace the revolving credit facility and/or provide liquidity in the event that the subsidiaries did not become profitable.

In addition the Board of Directors reviewed the credentials of Michael Wilhelm and Kenneth Scipta and recommended that Nominating Committee interview the candidates for the positions of Chief Financial Officer and Chairman of the Audit Committee, respectively.  On July 10, 2012, our Nominating and Corporate Governance Committee approved appointment of Michael Wilhelm as our Chief Financial Officer and Kenneth Scipta to chair our Audit Committee.

On July 27, 2012, we entered into the secured revolving credit facility under the terms of a Secured Credit Agreement with Northtech Holdings Inc.

On August 31, 2012, a putative class action lawsuit which purported to allege federal securities law claims against the Company and certain of its former offers and directors, was filed in the United States District Court for the Southern District of New York.The suit named, among others, our Chief Financial Officer Michael Wilhelm. The allegations against Mr. Wilhelm were frivolous and unfounded and were subsequently dismissed, but they did result in his decision to resign as our Chief Financial Officer in February 20, 2013.

On November 21, 2012 we received a fairness opinion as to the fairness of the terms of the Credit and Security Agreement. On November 19, 2012, our Board of Directors, after review, approved the conclusions that the Credit and Security Agreement was fair to the Company.

On December 11, 2012, we held our 2012 Annual Meeting of our stockholders.  Our stockholders approved the initial restructuring actions taken by the Company in fiscal year 2012 consisting of:
 
 
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•  The replacement of Jun Wang and Arnold Staloff on our Board of Directors with Oliver Bialowons and Kenneth Scipta, respectively;
•  The appointment of Oliver Bialowons as our President;
•  The appointment of Michael Wilhelm as our Chief Financial Officer;
•  The retention of Nimbus as restructuring advisor to the Board of Directors; and
•  The execution of the Credit and Security Agreement and the amendments thereto.
 
On December 14, 2012, our Board of Directors met to review the results of the Annual Meeting and to discuss the continuing difficulties encountered by the business of the subsidiaries and the liquidity issues facing the public holding company. The members of the Board of Directors discussed the possibility of a going concern qualification being included in audited financial statements of the Company for the in fiscal year 2012. In order to conserve cash disbursements for the year and to improve the financial position of the Company at year end, the Board of Directors made the determination that it was in the best interests of the Company to repay substantially all of the outstanding balance under the Credit and Security Agreement in restricted shares of our Common Stock valued for the purpose of the exchange at a price of $1.00 per share prior to the close of the 2012 fiscal year. This transaction improved the balance sheet by exchanging debt for equity and resulted in a non-cash profit of $768,300 being the difference between the exchange rate of $1.00 per share and the actual market price of $0.41 at which the Company shares of Common Stock traded on the date of the exchange.

The Board of Directors also proposed that the Company negotiate with Northtech to amend the Credit Agreement by increasing the line of credit to $2,500,000 and adjusting the minimum and maximum share price for conversion of shares to a collar of between $0.50 and $3.50 per share. The Credit and Security Agreement was amended on December 21, 2012 after the exchange was completed at $1.00 per share.

On February 20, 2013, Michael Wilhelm resigned as our Chief Financial Officer.

On June 7, 2013, Yingkai Wang was appointed as Acting Chief Accountant of SmartHeat, Inc.

On June 25, 2013, our Board of Directors met to discuss the continued deterioration of the financial condition of the public holding company and the progress of the restructuring and financing efforts. Nimbus outlined the continued pressing need for alternative sources of financing as the Company’s subsidiaries require additional working capital to fund registered capital, accounts receivable, and research and development costs related to the Company’s plate heating business. Nimbus further noted that additional funds were needed to expand the Company’s business from eastern to western China where customer demand for the Company’s products was shifting. Nimbus advised the members of the Board of Directors to approve a canvas of the market for additional sources of financing aside from Northtech which was approved. With respect to the market canvas, we circulated a Request for Stalking Horse Restructuring Proposals in both the United States and the People’s Republic of China for the purchase of all, or a part of, or a joint venture investment in or with, the Company or any one or more of its directly or indirectly owned subsidiaries. This Request for Stalking Horse Restructuring Proposals was publicly announced in a press release on Form 8-K filed on August 26, 2013. In addition to the Request for Stalking Horse Restructuring Proposals, we retained a third-party firm in each of these respective markets to conduct a market canvas to seek proposals. In addition, the Board of Directors approved an amendment to the credit and security agreement lowering the interest rate to 10% per annum and permitting the company to incur an additional $2,000,000 in subordinated debt. On August 23, 2013, the amendment was executed by Northtech and us.  Borrowings under the Line of Credit Agreement as of September 30, 2014 were $2,449,335 and the Company was in default of the provisions thereof although no notice of default has been received.

The Board of Directors also approved an offer to be made to accredited investors who are currently stockholders of the Company to purchase Exchangeable Subordinated Notes in denominations of $100,000 bearing interest at the rate of 10% per annum, due on June 30, 2015, and exchangeable, at the option of the Company, for restricted common shares at an exchange rate of $0.50 per share. The Exchangeable Subordinated Notes were subordinated to the indebtedness owed to Northtech but otherwise were substantially similar to the terms under which the Company was borrowing from Northtech. The Company concluded the offering prior to the Annual Meeting of Stockholders on December 10, 2013.
 
 
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The Board of Directors considered a recommendation by Nimbus to reorganize its lines of businesses into two segments, heat pumps and PHEs, in order to provide better visibility and accountability for these businesses, additional options for financing and to facilitate further expansion of the heat pump business.

On August 13, 2013 our Board of Directors approved the segmentation of our businesses into the Smartheat PHE segment, consisting of PHEs, PHE Units, heat meters and related products, and the Smartheat Heat Pump segment consisting of heat pumps and related products. The segmentation was completed prior to the end of the third fiscal quarter of 2013.

On September 17th and 18th, 2013, our Board of Directors met to further consider the deterioration of our financial condition and alternatives available after Nimbus had directed third party investment firms to solicit levels of interest in purchasing all or part of the assets of the Company and/or its subsidiaries. These firms had contacted approximately 275 potential investors approximately evenly divided between the United States and China. Only one potential offer was received -- an offer to purchase certain of the PHE related businesses. The investor group offered approximately 11 million RMB or $1.8 million for these PHE businesses plus assumption of related liabilities.   The Board of Directors made the determination that the proposal could be accepted, subject to negotiation of acceptable terms and execution of definitive agreements, if Buyers would offer a minimum of $2,000,000 (the approximate market value of the Company at that time) measured by the market price and number of shares of Common Stock plus a premium and approved a price of 13.5 RMB.  In addition, Buyers were required to agree that we could use the proposal and agreement to solicit other buyers for the PHE assets in a stalking horse process, subject to a breakup fee of 600,000 RMB (approximately 4.4% of the cash consideration).  In effect the proposal would be used by the Company as a Stalking Horse to determine if a better offer could be found and evaluate the fairness of the price received. The market canvas and stalking horse process, together with the offering of Exchangeable Subordinated Notes to accredited investors who were our stockholders was disclosed in the Company’s current report on Form 8K filed on September 30, 2013.
 
The EIPA related to the proposal was negotiated and executed on October 10, 2013 with the terms further described below. A Form 8K was filed along with the complete EIPA on October 15, 2013. The EIPA was negotiated with Buyers under the direction of Oliver Bialowons, President of the Company, with the support and assistance of the Company’s professional advisers.  Direct negotiations were conducted in the Chinese language through Henry Lu, the Managing Director of Nimbus Capital Limited, a Hong Kong registered company with Hongjun Zhang, representative of Buyers.  Nimbus Capital is the China side adviser retained by the Company to solicit restructuring proposals in China.  It was through these efforts in China that the proposal from Buyers was developed.  Nimbus Capital is affiliated with Nimbus through a mutual cooperation arrangement whereby each provides support services for the other in their respective jurisdictions.

In the case of the EIPA and the Amended EIPA, the principal issues which Mr. Bialowons directed Mr. Lu to negotiate were the following:

● price and premium
● transaction structure
● break up price
● representations
● conditions
● indemnification
● certainty
 
Price and Premium.  The goal was to obtain the highest total consideration available, including payment in the most tax efficient form.  After analysis, it was determined that the most effective means to avoid tax leakage was to sell stock and  receive the proceeds in China with the  most likely purpose of reinvesting the proceeds in the Company’s heat pump business.  In response to  Buyers’ initial proposal, the Board established a minimum cash proceeds  of $2,000,000 plus assumption of all liabilities, known or unknown, absolute or contingent, relating to the Target Companies.  This represented a premium of approximately 10% to the Buyers’ initial proposal, and a small premium to the Company’s overall market capitalization.  Ultimately, cash proceeds of RMB 13,500,000  was negotiated, equivalent to approximately USD $2,200,000 when the EIPA was signed on October 10, 2013.  This represented a premium of approximately 22% over the market capitalization of the Company on the date of signing.  In negotiating the Amended EIPA the parties agreed to remove the put option of the Company in exchange for the purchase by Buyers of the Company’s remaining 60% equity interests in the Target Companies for a purchase price of RMB 8,500,000 or approximately $1,387,870 plus the forgiveness of debt as of December 31, 2014, which was valued at approximately $8,790,000 as of December 31, 2014.When added to the initial payment of RMB 5,000,000 ($815,000) paid for the initial 40% , this yields a total purchase price of approximately $10,992,870 as of December 31, 2014.  Based on a closing price of $.30 per share as reported by NASDAQ on October 10, 2013 and 6,033,399 shares outstanding on that date, this purchase price represented a premium of approximately 6 times the total market capitalization of the Company on the date of signing.

The Stock Sale will result in an expected a loss of $35.27 million from the 100% equity interest sale of the sold entities consisting of a $44.06 million loss on sale resulting from the difference of the total selling price and the net assets of sold entities, netted with the $8.79 million due to the forgiveness of all net indebtedness owing to the Target Companies by SmartHeat and each of its other subsidiaries. The Company determined that the restated carrying values of the assets and liabilities being sold are appropriate and comply with GAAP. Please refer to Footnotes 1 and 2 on  pages  F- 8 and F- 9, F-27 and F-30and Principal Provisions of the Amended and Restated Equity Interest Purchase Agreement beginning on page [__] 

As discussed further in “Reasons for the Stock Sale,” on page 26, the Company believes the Stock Sale is fair and reasonable to the Company.  The Board of Directors believes that the process of selling the Target Companies was comprehensive, open to all potential buyers and investors, transparent, void of any self-interest or self-dealing and fair. Doing nothing was not an option since the Company was operating at a loss and its lines of credit were approaching their limit.  A formal process was conducted over a six month period during which time the Board publicly requested "proposals for purchase of all or part of, or joint venture investment in or with, the Company or one or more of its directly or indirectly owned subsidiaries." The Company retained investment bankers to conduct a broad market canvas both in the U.S.A. and in China.  Several hundred potential buyers were contacted directly, and many more were made aware of the solicitation of bids through public announcements.  A stalking horse bid process was then used, which is a process commonly recognized as a means to get the best price and terms for the sale of distressed assets (i.e., assets generating negative cash flows).  The proposed sale terms were made publicly available and competing bids were solicited. All information (including the details of the stalking horse bid and sale process) was made publicly available and a second canvass of potential buyers was conducted.  Information concerning the stalking horse process was publicly reported in the financial press (such as "Smartheat gets bid for plate heat exchange unit", The Deal Pipeline, October 2, 2013).  The Board believes, in the exercise of its business judgment, that it did everything reasonable to do, and everything that a prudent person should do, to maximize the consideration received by the Company for the Target Companies.

 
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Transaction Structure.  The transaction was structured by the Company as a sale of stock.  This was the most tax efficient structure but, more importantly, it assured the Company that all indebtedness and guarantees -- which included substantially all of the debt for borrowed money, and all guarantees issued by, all of the Company’s Chinese subsidiaries-- and other liabilities and obligation of the Target Companies, whether known or unknown, contingent or absolute, would be transferred to Buyers.

Break-up Price.  Fundamental to the restructuring process and the Board’s valuation was a stalking horse process used to determine the value of the businesses to be sold.  Initially bids were publicly solicited, and the proposal from Buyers was the only proposal received by the Company during this initial aspect of the process.  As part of the EIPA, the Board required the ability to rescind the sale to Buyers and accept a higher bid.  The Company was initially able to negotiate what in effect was a break up fee of RMB 600,000 (approximately $100,000) -- which was approximately 5% of the total cash price and a much smaller percentage of the total consideration.  Following the initial closing on the sale of a 40% interest, the Company conducted a re-solicitation of proposals using the EIPA as a stalking horse.  This re-solicitation was reported in a Form 8-K filing on January 3, 2014.  As noted elsewhere in this Proxy Statement, no other proposals were subsequently received by the Company.  The Board of Directors evaluated the termination of the breakup fee in the Amended EIPA.  The Board determined that the removal of the break up fee gives the Company even more flexibility in the event another purchaser is identified with a superior proposal.

Representations.  Typically an agreement for the sale of a business (particularly a stock sale) contains multiple representations and warranties concerning the business, each with the potential to give rise to post-closing claims.  Through the process of negotiating the EIPA and the Amended EIPA, the Company was able to eliminate substantially all representations and warranties.  As a result, Buyers are acquiring the Target Companies substantially “as is” without the right to assert post-closing claims.
 
Conditions. Typically an agreement for the sale of a business contains multiple conditions to closing, each with the potential to give rise to the ability of one of the parties to walk away from the transaction.  Through the process of negotiating the EIPA and Amended EIPA, the Company was able to eliminate substantially all conditions to closing favoring Buyers.  The Amended EIPA contains two important conditions favoring the Company, namely, requirements for shareholder approval and receipt of a fairness opinion to the effect that the sale of the remaining 60% of the Target Companies (constituting all of our remaining equity interests in the Target Companies) is fair to the stockholders of the Company from a financial point of view.  These conditions allow the Company to terminate the sale transaction if a better offer can be identified.

Indemnification.  Typically an agreement for the sale of a business contains provisions for post-closing indemnification, each with the potential to give rise to the ability of a buyer to claw-back part or all of the purchase price.  Neither the EIPA nor the Amended EIPA contain any provision for such post-closing indemnification.

Certainty.  The Company wanted assurance that Buyers had the financial ability to close and would close without attempting to renegotiate the price or other terms and conditions.  To provide that assurance, the transaction was structured as an “as is” transaction with no “material adverse change” closing condition.  In addition, a minority 40% interest was sold to Buyers initially to assure their financial ability and commitment to completion.

 The Buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajuan Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively.  Huajun Ai, Wen Sha, Jun Wang and Xudong Wang are also principals in Northtech Holdings Inc.
 
 
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On December 7, 2013 our offer to sell Exchangeable Subordinated Notes expired without any subscriptions being received by the Company.

On December 10, 2013 we held a stockholder meeting at which our stockholders approved the amendments to the Credit and Security Agreement dated July 27, 2012, by and between the Company and Northtech Holdings, Inc. (“Northtech”), executed on December 21, 2012, and July 27, 2013 and, in an advisory vote, approved the restructuring actions undertaken by the Company in fiscal year 2013.

On December 20, 2013, the Board of Directors approved the sale of 40% of the Target Companies in our PHE segment pursuant to the terms of the EIPA.

On December 30, 2013 we closed the transactions contemplated by the EIPA and transferred 40% of the stock of the Target Companies to the Buyers.

Between December 30, 2013 and February 28, 2014, we conducted a re-canvas of the market and surveyed the Company’s major stockholders in an effort to attract a better price or competing proposal to the terms of the EIPA.

As of February 28, 2014, we receive no competing offers through the stalking horse process and the Company let its option to re-purchase the equity interest of the Target Companies expired un-exercised.

On March 27, 2014, we received notice pursuant to the EIPA that Buyers thereunder would exercise their option to purchase an additional 40% of the Target Companies, subject to satisfaction of the conditions set forth in the EIPA which included, without limitation, receipt by Buyers and seller of a fairness opinion to the effect that the sale of the additional 40% of the Target Companies is fair to the stockholders of the Company from a financial point of view and approval of the sale of the additional equity interests by a majority of our stockholders.  The Amended EIPA now provides that a fairness opinion will be required for the entire 60% of the Target Companies (constituting all of our remaining equity interests in the Target Companies) that will be sold. The fairness opinion regarding the proposed Stock Sale will not be completed and available for review by stockholders prior to the shareholder meeting and vote.

On September 18, 2014, the Audit Committee of the Board of Directors of the Company concluded that the financial statements contained in the Company’s Annual Reports on Form 10-K for the fiscal year ended on December 31, 2013 and Quarterly Reports on Form 10-Q for the three and six months ended March 31, June 30, 2014 should no longer be relied upon and on September 19, 2014 filed an 8-K with the Securities and Exchange Commission reporting that event.

On September 30, 2014 the Company held its Annual Meeting. Mr. Bialowons reviewed the restructuring efforts undertaken by the Board.  In particular, he summarized the Stalking Horse Process which resulted in the negotiation and execution of the Equity Interest Purchase Agreement previously reported to shareholders.  Mr. Bialowons noted that a Stalking Horse Process is generally believed to be the most transparent restructuring process that a Company can utilize and one that is generally believed to yield the best consideration obtainable under all relevant circumstances.  Mr. Bialowons further noted that a vote to approve the Equity Interest Purchase Agreement and the sale of the Target Companies referenced therein (which constituted substantially all of the Company's PHE business segment) had been withdrawn from submission to shareholders for a vote at this time, and will be submitted for a vote at a subsequent special meeting, for two reasons:  first, the Board determined that the Company should make a final attempt to negotiate better terms from the Buyers; and, second, that the vote should be delayed until the Company has restated its financial statements for 2013 to reflect the accounting impact of the proposed sale in 2013 rather than in 2014.  This restatement results from the inability of the Company to date during 2014 to obtain a higher price for the Target Companies than that set forth in the Equity Interest Purchase Agreement entered into in October, 2013.  The restatement in 2013 also enables the Company to put the accounting impact of the proposed sale into the past, where the Board believes that it should be recognized, and enable the Company to move forward as a smaller, but more profitable Company.  In fact, the Company expects to record a small profit in its Heat Pump segment for the quarter ending September 30, 2014.
 
 
25

 
 
In October of 2014, Mr. Bialowons directed Mr. Lu to commence discussion with Mr. Zhang to amend the EIPA in order to forgive intercompany debt of SmartHeat to the Target Companies as of December 31, 2014, which was $8.79 million as of December 31, 2014, following the completion of the Stock Sale.  Mr. Lu and Mr. Zhang discussed additional changes to the EIPA that would be required by the Buyers in order to provide for the forgiveness of intercompany debt which included, but are not limited to:

·  
Purchase of the entire remaining 60% in equity interests in exchange for the right to purchase the remaining 20% of the Target Companies;
·  
Exchanges of mutual releases;
·  
Forgiveness of debt;
·  
Closing the transaction on or before December 31, 2014;
·  
Establishment of escrow process to in the event that the requisite shareholder vote and fairness opinion could not be delivered by the closing date; provided that such conditions be satisfied or waived prior to March 31, 2015;
·  
Removal of the breakup fee; and
·  
Provisions that either party could terminate the agreement should such conditions not be met by March 31, 2015.
 
On October 22, 2014, the Board of Directors considered the proposed terms of the amended EIPA and directed Mr. Bialowons to continue the negotiations through Mr. Lu. Negotiations continued through October to mid-November.

On November 28, 2014, the EIPA was amended to provide for, in part, the purchase of the remaining 60% of all equity interests (constituting all of our remaining equity interests in the Target Companies) in consideration of a purchase price of RMB 8,500,000 and the forgiveness and release of all intercompany debt owed to the Target Companies as of December 31, 2014, which was $8.79 million as of December 31, 2014.

On December 31, 2014, the transaction contemplated by the Amended and Restated Equity Interest Purchase Agreement (the “Amended Equity Interest Purchase Agreement”) dated November 28, 2014 closed. The Buyers purchased the remaining 60% of the Company’s equity interests in the Target Companies .  The purchase price for the remaining 60% consists of: (i) consideration of RMB 8,500,000 and (ii) the forgiveness of all net indebtedness owing to the Target Companies by SmartHeat and each of its subsidiaries as of December 31, 2014.  The effectiveness of the transaction is subject to the following conditions: (i) approval of its shareholders and (ii) receipt by the Board of Directors of the Company of an opinion that the purchase and sale transaction is fair to the stockholders of SmartHeat from a financial point of view. Since the conditions were not met prior to December 31, 2014, the consideration and all documents will be held in escrow and will be released when the conditions have been satisfied; provided that if the conditions are not satisfied on or before March 31, 2015, either party may terminate the Amended EIPA and the funds and documents will be returned to the depositing party. A mutual release will be delivered upon the breaking of escrow providing for, in part, the Target Companies to forgive all net indebtedness from SmartHeat and all of its subsidiaries.

On December 31, 2014 and February 5, 2015, respectively, the Company provided stockholders with notices of a Special Meeting to be held on February 10, 2015 to vote on authorizing the Stock Sale, any adjournment thereof and such other business as properly considered at the meeting.

On February 10, 2015 at 1:30 p.m., local China time, the stockholders present at the meeting, constituting a quorum of 3,593,455 shares (constituting approximately 53% of the shares of outstanding and entitled to vote as of the record date), elected to adjourn the meeting to no later than March 30, 2015, China local time, in order to permit the Company to conduct proxy solicitations for the matters under consideration.
 
On March 19, 2015 the Amended EIPA was amended to extend the termination date to April 15, 2015.
 
On March 30, 2015, the stockholders present at the meeting, constituting a quorum of 3,593,455 shares (constituting approximately 53% of the shares of outstanding and entitled to vote as of the record date), elected to adjourn the meeting to no later than April 6, 2015, China local time, in order to permit the Company to conduct proxy solicitations for the matters under consideration.
 
Reasons for the Stock Sale

The following discussion of the reasons for the Stock Sale contains a number of forward-looking statements that reflect the current views of the Company with respect to future events that may have an effect on its financial performance.  There can be no assurance that the benefits of the transaction considered by the Board of Directors will be achieved through completion of the Stock Sale.  See “Risk Factors.”  Forward-looking statements are subject to risks and uncertainties.  Actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.  Cautionary statements that identify important factors that could cause or contribute to differences in results and outcomes include those discussed in “Forward-Looking Information” and “Risk Factors.”

The Company’s Board of Directors has determined that the terms of the EIPA and the Amended EIPA and the transactions contemplated by the EIPA and Amended EIPA and related agreements are advisable and in the best interests of the Company and its stockholders, and has approved the Stock Sale and the transactions contemplated by the EIPA and the Amended EIPA.

In reaching its determination, the Company’s Board of Directors considered a number of positive factors, including the following:

·
conclusion of the Board of Directors that the Company would not be able to continue to operate effectively in light of the significant losses that it and the subsidiaries were incurring and expected to continue to incur under its present corporate structure pursuing its existing business endeavors, nor would it be able to raise the capital necessary in a timely manner to permit it to pursue development of its business strategy in light of the Company’s precarious cash flow position;
 
 
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·
failure of the market canvas to identify alternative financing sources to Northtech and the failure of the use of the EIPA and Amended EIPA as a stalking horse to attract other buyout proposals and our inability to attract third parties to invest in the Company;
 
·
difficulties encountered by the public holding company in upstreaming funds by way of dividends to our public holding company due to transfer restrictions imposed by the Chinese government, registered capital requirements of the operating subsidiaries, and working capital needs of the subsidiaries;
 
·
amount of the cash and non-cash consideration to be received;
 
·
sale of the Heat Pump segment would not provide sufficient working capital to return our PHE segment to profitability;
 
·
terms and conditions of the EIPA and Amended EIPA and the financial ability of the Buyers to pay the cash consideration payable at the closing, which led the Company’s directors to conclude that it was reasonably likely that the Stock Sale  would be completed and that as a result entering into the EIPA and Amended EIPA would improve the ability of the Company to pay, or provide for the payment of, the liabilities owed to its creditors to a greater extent and explore strategic alternatives to deploy the proceeds of the Stock Sale, which may include repayment of indebtedness,  future acquisitions, a merger or joint venture with another company, or other actions to redeploy capital, including, without limitation, sale of the public company into which the net proceeds may be retained;
 
·
unsuccessful results of efforts to solicit other competing indications of interest from third parties regarding a strategic partnership or a potential purchase of the Company or some or all of its assets from other potential bidders;
 
·
failure of the offering to attract any of our stockholders who were accredited investors to purchase the exchangeable debentures;
 
·
substantial indebtedness, and third party guarantees by, Target Companies that will be assumed by Buyers in concurrent with the equity purchase; and
 
·
 cancelation of intercompany debt owed to Target Companies.

The Company’s Board of Directors also considered a number of potentially negative factors in its deliberations concerning the Stock Sale. The potentially negative factors considered by the Board of Directors included:

·
net loss of approximately $35.27 million as of December 31, 2014 expected to be incurred in connection with the Stock Sale;
 
·
 
potential negative impact of stockholder confusion after announcement of the proposed Stock Sale;

·
potential negative impact of stockholder confusion after announcement of the proposed Stock Sale;
 
·
 
potential negative reaction of the investment community after announcement of the proposed Stock Sale;
 
·
cash proceeds from the Stock Sale would be insufficient to enable the Company to make a cash distribution to stockholders as a result of the Stock Sale; and

·
other risks and uncertainties discussed above under “Risk Factors.”
 
The foregoing positive and negative factors together with the background of the transaction set forth above comprise the Board of Directors’ material considerations in entering into the EIPA and Amended EIPA.

The Company’s Board of Directors retained Nimbus in 2012 to act as restructuring advisor. Nimbus assisted the Company by retaining third party advisors to conduct a market canvas for lenders, soliciting purchasers for our Company or its assets, obtaining third party financing, and conducting the stalking horse process.  Nimbus also advised our Board of Directors with respect to the restructuring efforts.
 
 
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The Board of Directors did not ask a transaction adviser to deliver a “fairness opinion” at the time that the EIPA was executed confirming that the consideration to be paid by the Buyers is fair from a financial point of view to the Company’s stockholders; however, the EIPA and Amended EIPA provides that the Closing would occur only after completing a stalking horse auction process and the effectiveness of the transaction cannot take place without a favorable fairness opinion delivered to the Buyers and the Company as  to the effectiveness of the transaction.  A fairness opinion regarding the proposed Stock Sale will not be completed and available for review by stockholders prior to the shareholder meeting and vote.  The Board of Directors reached such a conclusion independently and determined that, under the circumstances, the Stock Sale was in the best interests of the Company’s stockholders and at the time of the effectiveness  of the transaction would occur only if such fairness opinion were obtained. In the Board of Director’s judgment, it was difficult to value a business that had been losing money and that needed an infusion of cash to expand its selling area if it were to regain profitability, particularly when a significant portion of its assets were intangibles and the businesses were burdened by guarantees that were difficult to quantify.  The Company had been searching for an equity investment for 15 months without success.  Moreover, even in the event that such cash infusion could be found, it was not certain that such cash infusion would be sufficient to increase sales, whether or not such sales would be profitable,  and, if generated, whether or not  the profits from such increased sales would be sufficient to return the Company to profitability.  For this reason, the Board relied on an initial auction process followed by a stalking horse bidding process and a continuing right to terminate the EIPA and the Amended EIPA until stockholder approval and a fairness opinion to the effect that the sale of the remaining 60% of the Target Companies (constituting all of our remaining equity interests in the Target Companies) is fair to the stockholders of the Company from a financial point of view are obtained. The Company’s Board of Directors also determined that the costs of obtaining such additional “fairness opinion,” from a transaction adviser or any other third party used in connection with its decision, would be disproportionately higher than any corresponding benefit that would be realized by obtaining such an opinion prior to the stockholders’ vote. By deferring receipt of a fairness opinion after the stockholders’ vote but before effectiveness of the transaction, the Company was able to defer the expenditure of funds related to the fairness opinion until after, and only if, shareholder approval is obtained and the Board was able to hold this event as a condition to the effectiveness of the transaction in the event that a better proposal could be identified.
 
The Company mandated that the transaction be structured as a stock sale to minimize tax liabilities and so that all liabilities related to the Target Companies, including the subsidiaries’ debt for borrowed money, would transfer to Buyers. Based on the factors listed above, the Board of Directors determined that a sale of stock would likely return the greatest value to the Company, and that no other alternatives had the likelihood of achieving success in meeting the Company’s goals, including allocation of proceeds to our Heat Pump segment.  The Board of Directors also considered that the sale of the Heat Pump segment would not provide sufficient working capital to return our PHE segment to profitability. There can be no assurance that the per share market price of the Company’s Common Stock following the Stock Sale will equal or exceed the price or prices at which the Common Stock has recently If the Stock Sale is not completed, the Board of Directors will explore what, if any, alternatives are available for the future of the Company. The Board of Directors does not believe, however, that there are viable alternatives to the Stock Sale.
 
The foregoing discussion of these factors is not meant to be exhaustive, but includes the material factors considered by the Board of Directors. The Board of Directors did not quantify or attach any particular weight to the various factors that they considered in reaching their determination that the terms of the Stock Sale are fair to and in the best interests of the Company and its stockholders. Rather, the Board of Directors viewed its recommendation as being based upon its business judgment in light of the Company’s financial position and the totality of the information presented and considered, and the overall effect of the Stock Sale on the stockholders of the Company compared to continuing the business of the Company as is or seeking other potential parties to effect an investment in or other business combination or acquisition transaction with the Company.

Regulatory Matters

Other than the change in registration of ownership which must be filed and accepted by the State Administration for Industry and Commerce of China, the Company is not aware of any regulatory or governmental approvals required to complete the Stock Sale.
 
 
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Use of Proceeds

A subsidiary of Heat PHE, and not the Company’s stockholders, will receive all of the net proceeds from the Stock Sale. Following the Stock Sale, the Company’s Board of Directors plans to explore strategic alternatives to deploy the proceeds of the Stock Sale, which may include expansion of our heat pump business in the United States, Europe and China future acquisitions, a merger with another company, or other actions to redeploy capital. It is unlikely, however, that the Company will make a distribution of cash to our stockholders.

Although the Board of Directors and management have had preliminary discussions regarding potential uses of our capital following the Stock Sale, the Board of Directors intends to continue to review anticipated liabilities and potential strategic uses of capital in connection with the continuation of the Company as a going concern. Accordingly, we cannot specify with certainty the amount of net proceeds, if any, we will use for any particular use or the timing in respect thereof. Consequently, you should not vote in favor of the Stock Sale based upon any assumptions regarding the amount or timing of any potential usages of capital or distributions to stockholders.

Appraisal Rights
 
Under Nevada law, the Company’s stockholders do not have appraisal rights as a result of the Stock Sale.

Votes Required for the Stock Sale

The affirmative vote of the holders of a majority of the outstanding shares of the Company’s Common Stock as of the Record Date is required to approve the Stock Sale.

THE COMPANY’S BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE STOCK SALE.
 
PRINCIPAL PROVISIONS OF THE EQUITY INTEREST PURCHASE AGREEMENT

The following describes the principal provisions of the Amended EIPA. The text of the EIPA and the Amended EIPA are respectively attached as  Annex A  and  Annex B  to, and is incorporated by reference into, this Proxy Statement. You are encouraged to carefully read the EIPA in its entirety. Capitalized terms in the following descriptions have the meanings set forth in the EIPA.

The Amended EIPA provides that the Buyers will purchase what might be deemed under Nevada law to be substantially all of our assets:

Divested Interests

Under the EIPA, the Buyers initially purchased 40% of the equity interests (the “First 40% Interest”) of the following entities (collectively referred to as “Target Companies”):

·
Taiyu (Shenyang) Energy, organized in the People’s Republic of China (“Taiyu”);
·
Siping Beifang Energy Technology Co., Ltd., organized in the People’s Republic of China (“Siping”);
·
Shenyang Energy Equipment Co. Ltd., incorporated in the People’s Republic of China (“Shenyang”);
·
Hohot Ruicheng Technology Co., Ltd., organized in the People’s Republic of China (“Ruicheng”); and
·
Urumchi XinRui Technology Limited Liability Company, organized in the People’s Republic of China (“XinRui”).

Under the terms of the Amended EIPA, the Buyers must purchase the remaining 60% of the Target Companies (constituting all of our remaining equity interests in the Target Companies) (the “Second 60% Interest”) on or prior to December 31, 2014.
 
 
29

 
 
Consideration

The purchase price received by Heat PHE, Inc. for the First 40% Interest was RMB 5,000,000.

The purchase price to be received by Heat PHE, Inc. for the Second 60% Interest (the controlling interest) is RMB 8,500,000 plus the forgiveness and release of  intercompany debt owed to the Target Companies at the close of the Company’s fiscal year ending 2014.
 
Change of Registration

·
Heat PHE, Inc. will cause Target Companies to file the applicable registration change with the State Administration for Industry and Commerce.
 
·
Target Companies will pay all costs related to the registration change. The taxes incurred from the transfer of the equity interests shall be undertaken by each tax obligor, respectively.

Representations and Warranties

Heat PHE, Inc. made the following representations and warranties:

·
The equity interests in Target Companies is “as is” without any other representations, warranties or covenants except as provided in the Amended EIPA.
 
·
Heat PHE, Inc. has good and marketable title to the equity interests of Target Companies, free and clear of all encumbrances, subject to liens incurred by Heat PHE, Inc. pursuant to the Credit and Security Agreement between the Company and Northtech Holdings, Inc., dated July 27, 2012, as amended, and subject to any transfer requirements in the People’s Republic of China.
 
·
Heat PHE, Inc. is duly organized and validly existing under the laws of the State of Nevada, and Target Companies are registered under the proper governmental authorities as required under the laws of the People’s Republic of China.
 
·
Heat PHE, Inc. has the full right, power and authority to enter into the EIPA and to perform all of its obligations thereunder.
 
·
The execution and performance of the Amended EIPA will not breach any other signed material contract or agreement to which Heat PHE, Inc. is a party.
 
·
The representative who has executed the Amended EIPA on behalf of Heat PHE, Inc. has been duly authorized to execute this Agreement.

The Buyers made the following representations and warranties:

·
Buyers are a group of individual citizens of the People’s Republic of China.
 
·
Buyers have the full right, power and authority to enter into the Amended EIPA and to perform all of their obligations hereunder.
 
 
30

 
 
·
The execution of the Amended EIPA does not breach any other signed material contract or Agreement to which Buyers are a party.
 
·
The representative of Buyers who has executed the Amended EIPA are duly authorized to execute  the Amended EIPA.
 
·
Buyers have been given full opportunity to review all documents requested to evaluate the transaction and acknowledge that they have been given sufficient information to make the investment decision in Target Companies. Buyers acknowledge that the sale of Target Companies is “as is.”

Conditions Precedent

The effectiveness of the transaction is subject to the following conditions precedent:

·
Approval by a majority of the Company’s stockholders present and voting; and
 
·
Receipt by the Board of a Fairness Opinion to the effect that the sale of the remaining 60% of the Target Companies (constituting all of our remaining equity interests in the Target Companies) is fair to the stockholders of the Company from a financial point of view.

Closing

The Closing shall take place on or before December 31, 2014 electronically, or at such other place or by such other means as agreed by the Parties after the satisfaction of the conditions to closing in the Amended EIPA.  At each Closing, Heat PHE, Inc. will deliver to the Buyers evidence of the transfer of the specified equity interest in the Target Companies and Buyers need to deliver to Heat PHE, Inc.’s China subsidiary, SmartHeat Heat Exchange Equipment Co. Ltd., the consideration by wire transfer of immediately available funds.  At the Closing the parties shall exchange mutual releases.

If the conditions precedent have not been satisfied on or before the Closing Date, the parties have agreed that the Purchase Price and all documents required to be delivered at the Closing will be deposited in escrow to be released when the conditions have been met. In the event that the conditions are not met on or prior to March 31, 2015, either party has the right to terminate the Amended EIPA.  On March 19, 2015 the Amended EIPA was amended to extend the termination date to April 15, 2015.
 
Dispute Resolution

The Amended EIPA provides for the following method of dispute resolution:

·
The Amended EIPA is governed by the laws of the People’s Republic of China.
 
·
The Parties will use good faith efforts to settle disputes by mediation before the Hong Kong International Arbitration Centre (HKIAC) under the then-current version of HKIAC’s Commercial Mediation Rules. Three mediators shall be appointed, one by Heat PHE, Inc., one by Buyers, and one who shall be selected by the Parties mutual agreement.
 
·
If the mediation is concluded without the dispute being resolved, the parties may, at their option refer the dispute to arbitration at HKIAC in accordance with International Arbitration Rules.

Accounting Treatment
 
Following the closing of the Stock Sale, which is expected to occur after the closing conditions are met, the Company’s balance sheet will no longer reflect the assets and liabilities of the Target Subsidiaries, but will instead reflect the amounts received at the Closings and the assets and liabilities of Heat HP subsidiaries, Heat PHE subsidiaries (SanDeKe Co., Ltd. and SmartHeat Heat Exchange Equipment Co., Ltd.) and the parent company. 

The Stock Sale will result in an expected a loss of $35.27 million from the 100% equity interest sale of the sold entities consisting of a $44.06 million loss on sale resulting from the difference of the total selling price and the net assets of sold entities, netted with the $8.79 million due to the forgiveness of all net indebtedness owing to the Target Companies by SmartHeat and each of its other subsidiaries. The Company determined that the restated carrying values of the assets and liabilities being sold are appropriate and comply with GAAP. Under GAAP, assts are required to be recorded at fair value if fair value is less than the cost of the asset based on carrying value. As of Decembe31, 2013 the Company conducted a line by line detail analysis of each current account to insure that each asset account was recorded at fair value and adequate reserves were provided, including reserves for accounts receivable other receivables/payments, advances to supplies and inventory. The Company also performed a test of recoverability of long-lived assets to be held and used by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of the asset exceeded it estimated undiscounted future cash flow, an impairment charge was recognized based on thee excess of the carrying amount over the fair value.  Fair value was determined using the asset’s expected future discounted cash flow or market value, if readily determinable.  The Company concluded that the long-lived assets of sold entities were fully impaired and wrote off all noncurrent assets of the sold entities as of December 31, 2013.  Please also refer to Footnotes 1 and 2 of pages F- 8 and F- 9, F-27 and F-30.  
 
 
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Interests of Certain Persons in the Stock Sale.
 
Buyers consist of a group of 25 natural persons, all of whom are P.R.C. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajun Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively. Huajun Ai, Wen Sha, Jun Wang and Xudong Wang are also principals in Northtech Holdings Inc.
 
INFORMATION ABOUT SMARTHEAT INC.

BUSINESS
 
General
 
We are a U.S. holding company with no material assets other than the ownership interests of our foreign subsidiaries that design, manufacture and sell PHEs, heat pumps, and related systems in the People’s Republic of China (“PRC”) and Germany. A PHE is a device that transfers heat from one fluid to another fluid across large metal plates. PHE products are used in the industrial, residential and commercial sectors to make energy use more efficient and to reduce pollution by reducing the need for coal fired boilers. Our subsidiaries design, manufacture, sell and service PHEs, PHE Units, which combine PHEs with various pumps, temperature sensors, valves and automated control systems, heat meters and heat pumps for use in commercial and residential buildings. They also design, manufacture and sell spiral heat exchangers and tube heat exchangers. Their products and related systems are an increasingly important element in providing a clean technology solution to energy consumption and air pollution problems in China and are commonly used in a wide variety of industrial processes where heat transfer is required. Common applications include energy conversion for heating, ventilation and air conditioning (“HVAC”), and industrial use in petroleum refining, petrochemicals, metallurgy, food and beverage and chemical processing. Our subsidiaries sell their products under the SmartHeat and Taiyu brand names and also sell PHEs under the Sondex brand name as an authorized dealer of Sondex PHEs in China.
 
Our History

We were incorporated in the State of Nevada on August 4, 2006, under the name Pacific Goldrim Resources, Inc., as an exploration stage corporation with minimal operations, to engage in the exploration for silver, lead and zinc. On April 14, 2008, we changed our name to SmartHeat Inc. and entered into a Share Exchange Agreement (the “Share Exchange Agreement”), to acquire Shenyang Taiyu Machinery & Electronic Equipment Co., Ltd., subsequently renamed SmartHeat Taiyu (Shenyang) Energy Technology Co., Ltd. (“Taiyu”), a privately held Sino-foreign joint venture company formed under the laws of the PRC on July 24, 2002, and engaged in the design, manufacture, sale and service of PHE products in China. The Share Exchange Agreement was entered into by SmartHeat, Taiyu and the stockholders of Taiyu. At the closing of the Share Exchange Agreement, all of the equitable and legal rights, title and interests in and to Taiyu’s share capital of Yuan 25,000,000 were exchanged for 1,850,000 shares of SmartHeat Common Stock (the “Share Exchange”). We received PRC government approval on May 28, 2008, of our subscription for 71.6% of the registered capital of Taiyu, and approval on June 3, 2009, of the transfer of the remaining 28.4% ownership of Taiyu from the original joint venture stockholders who had received shares of our Common Stock in the Share Exchange. As a result of the Share Exchange and subsequent transactions contemplated by the Share Exchange Agreement, and receipt of the above PRC government approvals, Taiyu became our wholly foreign-owned enterprise, or WFOE.

Prior to our acquisition of Taiyu, we had no interest in any property, but had the right to conduct exploration activities on 13 mineral title cells covering 27,027 hectares (66,785 acres) in the Slocan Mining Division of southeastern British Columbia, Canada. In connection with the acquisition of Taiyu, we transferred all of our pre-closing assets and liabilities (other than the obligation to pay a $10,000 fee to our audit firm) to a wholly owned subsidiary, PGR Holdings, Inc., a Nevada corporation (“SplitCo”), under the terms of an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations dated April 14, 2008. We sold all of the outstanding capital stock of SplitCo to Jason Schlombs, our former director and officer and one of our major stockholders, pursuant to a Stock Purchase Agreement dated April 14, 2008, in exchange for the return of his 250,000 shares of our Common Stock to us for cancellation.
 
 
32

 
 
As an expansion of our business following our acquisition of Taiyu, we acquired and established strategic subsidiaries in China and Germany. On September 25, 2008, we acquired SanDeKe Co., Ltd., or SanDeKe, a Shanghai-based manufacturer of PHEs. On June 16, 2009, we completed an asset purchase transaction with Siping Beifang Heat Exchanger Manufacture Co., Ltd., or Siping Beifang, to set up a new manufacturing facility under our newly incorporated subsidiary, SmartHeat Siping Beifang Energy Technology Co., Ltd., or SmartHeat Siping. On August 14, 2009, we formed Beijing SmartHeat Jinhui Energy Technology Co., Ltd., or Jinhui, a joint venture in Beijing of which we own 52%, to provide consulting services and expand our sales of PHEs into new industries and regions of China. On April 7, 2010, we formed SmartHeat (China) Investment Co., Ltd., or SmartHeat Investment, as an investment holding company in Shenyang for our investment in and establishment of new companies and businesses in China. On April 12, 2010, SmartHeat Investment formed SmartHeat (Shenyang) Energy Equipment Co., Ltd., or SmartHeat Energy, as its wholly owned subsidiary for the research, development, manufacturing and sales of energy products. On May 6, 2010, we formed SmartHeat (Shanghai) Trading Co., Ltd., or SmartHeat Trading, through a nominee, Cleantech Holdings Inc., a British Virgin Islands company, or Cleantech Holdings, to market and expand sales of our branded products in China. Effective as of November 9, 2011, we terminated the nominee-owner relationship and acquired direct control over SmartHeat Trading. On December 2, 2010, we formed Hohhot Ruicheng Technology Co., Ltd., or Ruicheng, a joint venture in Hohhot City, China, for the design and manufacture of heat meters, of which we acquired 51% of the equity interest on January 7, 2011. On March 1, 2011, we entered into a purchase agreement to acquire 95% of the equity interests in Shenyang Bingchuan Refrigerating Machine Limited Company, a Shenyang-based state-owned heat pump manufacturer and designer subsequently renamed SmartHeat (Shenyang) Heat Pump Technology Co., Ltd., or SmartHeat Pump. On November 1, 2011, we increased the registered capital of SmartHeat Pump and thereby increased our ownership percentage to 98.8%. On March 3, 2011, we completed the acquisition of Gustrower Warmepumpen GmbH, subsequently renamed SmartHeat Deutschland GmbH, or SmartHeat Germany, a designer and manufacturer of high efficiency heat pumps in Germany, to extend our clean technology heating solutions into the rapidly growing heat pump markets in Europe and China. We subsequently transferred ownership of SmartHeat Germany to SmartHeat Pump. On April 10, 2012, we established a new joint venture named Urumchi XinRui Technology Limited Liability Company (“XinRui”), of which we acquired 46%.
 
Our Business Segments

On August 23, 2013, the Company formed two new wholly-owned subsidiaries in the state of Nevada, Heat HP, Inc.(“Heat HP”) and Heat PHE, Inc. (“Heat PHE”), in order to reorganize the Company’s ownership structure over its subsidiaries. On August 23, 2013, the Company entered into an assignment agreement (“Assignment Agreement”)with each of Heat HP and Heat PHE which effected the reorganization.  The reorganization was performed so the Company’s subsidiaries would be organized along their respective operating segments with Heat HP holding those subsidiaries that operated in the heat pumps and related products segment and Heat PHE holding those subsidiaries that operated in the plate heating equipment, meters and related products segment.  The Company initially presented its financial results for the quarter ended March 31, 2013, in accordance with these operating segments and has continued segment reporting since that time.

Under the Assignment Agreement with Heat HP, the Company agreed to transfer, and in the case of indirectly owned subsidiaries, cause to be transferred, to Heat HP the following subsidiaries of the Company:

Heat HP
SmartHeat (China) Investment Co., Ltd.
SmartHeat (Shenyang) Heat Pump Technology Co., Ltd.
SmartHeat Deutschland GmbH
SmartHeat (Shanghai) Trading Co., Ltd.
Beijing SmartHeat Jinhui Energy Technology Co., Ltd.
 
Under the Assignment Agreement with Heat PHE, the Company agreed to transfer, and in the case of indirectly owned subsidiaries, cause to be transferred, to Heat PHE the following subsidiaries of the Company:

Heat PHE
SmartHeat Taiyu (Shenyang) Energy Technology Co., Ltd.
SanDeKe Co., Ltd.
SmartHeat (Shenyang) Energy Equipment Co., Ltd.
SmartHeat Siping Beifang Energy Technology Co., Ltd.
Hohhot Ruicheng Technology Co., Ltd.
 
 
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Our Corporate Structure

Our corporate structure as of the date of this report is set forth in the following diagram. SanDeKe and SmartHeat Investment are WFOEs authorized by their respective business licenses to operate our businesses in China. SmartHeat Deutschland GmbH is wholly owned by Heat HP Inc. We own 52%,  30.6% and 27.6%, respectively, of the equity interests in our PRC-based joint venture companies, Jinhui,  Ruicheng and XinRui. SmartHeat Energy is a wholly owned subsidiary of SmartHeat Investment. Taiyu owns 98.8% of the equity interests of SmartHeat Pump. Prior to November 9, 2011, we had no direct ownership interest in SmartHeat Trading; instead, we controlled and were entitled to 100% of the profit or loss of SmartHeat Trading under contractual arrangements. Effective as of November 9, 2011, we terminated the nominee-owner relationship and acquired direct control over SmartHeat Trading.
 
GRAPHIC
 
*On August 23, 2013, SmartHeat entered into Assignments agreements with each of Heat HP and Heat PHE in order to reorganize the structure of its subsidiaries.  Under the Assignment Agreements SmartHeat agreed to be transfer, and in the case of indirectly owned subsidiaries, cause to be transferred, certain subsidiaries to each of Heat HP and Heat PHE. Further, under the Assignment Agreements, SmartHeat agreed to cause its directly and indirectly owned subsidiaries to record these transfers with the applicable government agency in the People’s Rpublic of China, and in the case of SmartHeat Germany, in Germany. The restructured entity is reflected above after giving effect to the sale of 40% of the Company’s ownership interests in SmartHeat Taiyu (Shenyang) Energy; SmartHeat Siping Beifang Energy Technology Co., Ltd.; SmartHeat (Shenyang) Energy Equipment Co. Ltd.; Hohot Ruicheng Technology Co., Ltd.; and Urumchi XinRui Technology Limited Liability Company on December 31, 2014.

(1) We hold through 98.8% of the equity interest in SmartHeat Pump, with the remaining 1.2% of the equity interest held by Shenyang Economic and Technological Development Zone State-owned Assets Management Co., Ltd.

(2) We control 52% of Jinhui pursuant to a joint venture agreement entered into with the minority owner, Beijing Jun Tai Heng Rui Investment Consultancy Co. Ltd.

(3) We control 30.6% of Ruicheng pursuant to a joint venture agreement entered into with the minority owners, Hohhot Chengfa Heating Co. Ltd. and Beijing Taiyu Huineng Machinery and Electronic Equipment Co. Ltd. and our sale of 40% of our equity interests to the Chinese buying group.
 
 
 
34

 

Form of Proxy Card
 
GRAPHIC
 
35

 

GRAPHIC
 
36

 
 
 
FINANCIAL STATEMENTS
 
Additionally, the following pro forma financial statements of the Company are included on the pages indicated at the end of this Proxy Statement:
 
 
Page
F-1
   
F-2
   
F-3
   
F-4
   
F-5
   
F-6
   
F-7
   
F-8
   
Report of MJF on 2014 audited financial statements
F-20
   
Report of GKM on 2013 audited financial statements
F-21
   
F-22
   
F-23
   
F-24
   
Smartheat Inc. Consolidated Statements of Stockholders’ Equity years ended December 31, 2014 and 2013
F-25
   
F-26
 
 
37

 
 
BASIS OF UNAUDITED PRO FORMA FINANCIAL INFORMATION
 
On December 30, 2013, the Company, closed the transaction contemplated by the Equity Interest Purchase Agreement, dated October 10, 2013, whereby the buyers purchased 40% of the Company’s equity interests in the following PHE segment subsidiaries: SmartHeat Taiyu (Shenyang) Energy; SmartHeat Siping Beifang Energy Technology Co., Ltd.; SmartHeat (Shenyang Energy Equipment) Co. Ltd.; Hohot Ruicheng Technology Co., Ltd.; and Urumchi XinRui Technology Limited Liability Company (collectively, the “Target Companies”). The purchase price was RMB 5,000,000.  Hohot Ruicheng Technology Co., Ltd. was 51% owned and Urumchi XinRui Technology Limited Liability Company (“XinRui”) was 46% owned by SmartHeat US parent company prior to 40% equity interest sell.
 
On November 28, 2014, the Company entered into an Amended and Restated EIPA, which amended and restated the EIPA dated October 10, 2013 between the Company and the buyers. Under the terms of the Amended EIPA, the buyers have agreed to purchase the remaining 60% of the Company’s equity interests in the Target Companies effective as of December 31, 2014 (the “Closing Date”). The purchase price for the remaining 60% consists of: (i) consideration of RMB8.5 million and (ii) the forgiveness of all net indebtedness owing to the Target Companies by SmartHeat and each of its other subsidiaries as of December 31, 2014. The effectiveness of the transaction is subject to the following conditions: (i) approval of SmartHeat’s shareholders and (ii) receipt by the Board of Directors (“BOD” or the “Board”) of SmartHeat of an opinion that the purchase and sale transaction is fair to the shareholders of SmartHeat from a financial point of view. The parties executed a mutual release delivered at the closing which provided, in part, for the Companies to forgive all net indebtedness from SmartHeat and all of itsother subsidiaries. In the event that the conditions are not met prior to December 31, 2014, the consideration and all documents will be deposited into escrow and released when the conditions have been satisfied; provided that if the conditions are not satisfied on or before March 31, 2015, either party may terminate the Amended EIPA and the funds and documents will be returned to the depositing party.
 
As of  December 31, 2014, the Company evaluated it is highly probably the shareholders will approve the additional 60% equity sale, and accordingly, the pro forma consolidated financial statements reflecting the total of 100% equity interest sale of Target Companies were presented as set forth below.  The transaction will result in an expected a loss of $35.27 million from the sale of the 100% equity interest of the sold entities, consisting of a $44.06 million loss on sale resulting from the difference of the total selling price and the net assets of sold entities, netted off with the $8.79 million the forgiveness of all net indebtedness owing to the sold entities by SmartHeat and each of its other subsidiaries.  The loss is not reflected in the unaudited pro forma statements of operations because it is a material non-recurring charge directly related to the transaction that will be included in our results within the 12 months after the transaction.
 
The following unaudited pro forma consolidated statements of operations present SmartHeat Inc. for the year ended December 31, 2014 and 2013, as if the 100% equity sale occurred  on January 1, 2013 and 2014, respectively, for the purpose of the statements of operations. The accompanying unaudited pro forma consolidated balance sheet presents the accounts of SmartHeat Inc. as if the 100% equity sale occurred on December 31, 2014.  The loss is not reflected in the unaudited pro forma statements of operations because it is a material non-recurring charge directly related to the transaction that will be included in our results within the 12 months after the transaction.
 
 
 
F-1

 
 
SMARTHEAT INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
REFLECTING THE SALE OF CERTAIN ENTITIES OF PHE SEGMENT
 
   
AS OF DECEMBER 31, 2014
 
   
Company Historical (1)
   
Sales of PHE segment (2)
   
Pro Forma adjustments
 
Company Pro Forma
 
                           
ASSETS
                         
                           
CURRENT ASSETS
                         
     Cash & equivalents
  $ 13,682,624     $ 9,490,641     $ -       $ 4,191,983  
     Restricted cash
    9,913,104       9,847,182                 65,922  
     Accounts receivable, net
    16,052,184       18,437,984       3,829,234   a, b     1,443,434  
     Retentions receivable, net
    1,309,057       1,206,786                 102,271  
     Advances to suppliers, net
    2,417,949       3,012,776       (609,745 b     (1,204,572 )
     Other receivables (net), prepayments and deposits
    5,068,411       26,902,540       22,677,382   a, b     843,253  
     Inventories, net
    49,349,195       42,233,818                 7,115,377  
     Taxes receivable
    325,252       303,108                 22,144  
     Notes receivable - bank acceptances
    2,271,131       2,271,131                 -  
                                   
        Total current assets
    100,388,907       113,705,966       25,896,871         12,579,812  
                                   
NONCURRENT ASSETS
                                 
     Long term investment
    29,540       -       (29,540 ) b     -  
     Restricted cash
    123,002       123,002                 -  
     Construction in progress
    84,533       84,533                 -  
     Property and equipment, net
    1,995,520       757,330                 1,238,190  
     Intangible assets, net
    576,999       -                 576,999  
                                   
       Total noncurrent assets
    2,809,594       964,865       (29,540       1,815,189  
                                   
TOTAL ASSETS
  $ 103,198,501     $ 114,670,831     $ 25,867,331       $ 14,395,001  
                                   
                                   
LIABILITIES AND STOCKHOLDERS' EQUITY
                   
                                   
CURRENT LIABILITIES
                                 
     Accounts payable
  $ 7,384,756     $ 8,106,600     $ 1,467,290   a, b   $ 745,446  
     Advances from customers
    2,714,603       1,992,933       (609,745 b     111,925  
     Taxes payable
    196,246       183,185                 13,061  
     Accrued liabilities and other payables
    19,319,461       31,649,373       14,860,195   a, b     2,530,283  
     Notes payable - bank acceptances
    1,401,530       1,401,530                 -  
     Loans payable
    25,111,702       25,111,702                 -  
                                   
         Total current liabilities
    56,128,298       68,445,323       15,717,740         3,400,715  
                                   
CREDIT LINE PAYABLE
    2,749,335       -                 2,749,335  
                                   
LONG-TERM LOAN
    -       -                 -  
                                   
DEFERRED TAX LIABILITY
    66,024       -                 66,024  
                                   
COMMITMENTS AND CONTINGENCIES
                           
                                   
STOCKHOLDERS' EQUITY
                                 
     Common stock
    6,783       -                 6,783  
     Paid-in capital
    87,500,456       59,341,363       77,326,388   b     105,485,481  
     Statutory reserve
    5,389,057       4,608,375       4,608,375   b     5,389,057  
     Accumulated other comprehensive income
    8,549,568       7,065,900       7,065,900   b     8,549,568  
     Accumulated deficit
    (76,198,760 )     (43,579,536 )     (78,851,072 ) a, b     (111,470,296 )
                                   
         Total Company stockholders' equity
    25,247,104       27,436,102       10,149,591         7,960,593  
                                   
         NONCONTROLLING INTEREST
    19,007,740       18,789,406                 218,334  
                                   
         TOTAL EQUITY
    44,254,844       46,225,508       10,149,591         8,178,927  
                                   
TOTAL LIABILITIES AND EQUITY
  $ 103,198,501     $ 114,670,831     $ 25,867,331       $ 14,395,001  
 
(1) Source: unaudited financial statements of SmartHeat Inc. as of December 31, 2014, as included in this proxy.
 
(2) Source: unaudited financial statements of disposed entities of SmartHeat Inc. as of December 31, 2014, as included in this proxy.
 
(a) To reflect the effect of forgiveness of all net indebtedness owing to Target Companies by SmartHeat and each of its other subsidiaries.
 
(b) To reflect the sale of 100% equity interest on Target companies, and loss on the sale.
 
(c) The table below reconciles the intercompany pro forma adjustments in the Company’s pro forma balance sheet related to other receivables (net), prepayments and deposits in the amount of $22,677,382, and accrued liabilities and other payables in the amount of $14,860,195, with the related party amount disclosed in Note 6 for $22,353,558 and Note 12 for $16,327,639 in the historical financial statements of the Target Companies as of December 31, 2014.
 
 
Other receivables of Target Companies
 
$
16,327,639
 
Elimination of other payables of remaining entities to Target Companies
   
22,353,558
 
Waiver of receivables of remaining entities from Target Companies per selling agreement of the forgiveness of all net indebtedness owing to Target Companies by SmartHeat and each of its other subsidiaries
   
(16,003,815
)
Total pro forma adjustments for other receivables
 
$
22,677,382
 
 
Other payables of Target Companies
 
$
22,353,558
 
Elimination of other receivables of remaining entities from Target Companies
   
16,327,639
 
Pro forma adjustment to eliminate other payable of RMB 8.5 million that holding company received from buyer as deposit for the sale on December 24, 2014 to reflect the sale of additional 60% equity interest was effective on December 31, 2014
   
(1,389,116
)
Waiver of payables of remaining entities to Target Companies per selling agreement of the forgiveness of all net indebtedness owing to Target Companies by SmartHeat and each of its other subsidiaries
   
(22,431,886
Total pro forma adjustments for other payables
 
$
14,860,195
 
 
 
F-2

 
 
SMARTHEAT INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
REFLECTING THE SALE OF CERTAIN ENTITIES OF PHE SEGMENT
 
   
YEAR ENDED DECEMBER 31, 2014
 
   
Company Historical (1)
   
Sales of PHE segment (2)
   
Pro Forma adjustments
 
Company Pro Forma
 
                           
Net sales
  $ 34,075,959     $ 28,480,330     $ 1,489,420   a   $ 7,085,049  
Cost of goods sold
    32,941,074       28,657,177       1,489,420   a     5,773,317  
                                   
Gross loss
    1,134,885       (176,847 )     -         1,311,732  
                                   
Operating expenses
                                 
     Selling
    6,563,729       4,748,596                 1,815,133  
     General and administrative
    7,767,391       3,221,930                 4,545,461  
     Provision for bad debts
    (4,663,703 )     (2,241,241 )               (2,422,462 )
     Provision for advance to supplier
    3,470,029       1,143,178                 2,326,851  
                                   
     Total operating expenses
    13,137,446       6,872,463       -         6,264,983  
                                   
Loss from operations
    (12,002,561 )     (7,049,310 )     -         (4,953,251 )
                                   
Non-operating income (expenses)
                                 
     Investment income (loss)
    2,808       -                 2,808  
     Interest income
    161,123       142,154                 18,969  
     Interest expense
    (1,792,765 )     (1,578,275 )               (214,490 )
     Financial expense
    (284,387 )     (132,823 )               (151,564 )
     Gain on issuance of stock
    130,000       -                 130,000  
     Foreign exchange transaction gain (loss)
    (3,785 )     (3,785 )               -  
     Other income, net
    952,470       401,389                 551,081  
                                   
     Total non-operating expenses, net
    (834,536 )     (1,171,340 )     -         336,804  
                                   
Loss before income tax
    (12,837,097 )     (8,220,650 )     -         (4,616,447 )
Income tax expense
    48,717       -                 48,717  
                                   
Net loss before noncontrolling interest
    (12,885,814 )     (8,220,650 )     -         (4,665,164 )
Less: loss attributable to noncontrolling interest
    (3,317,826 )     (3,288,260 )               (29,566 )
                                   
Net loss to SmartHeat Inc.
    (9,567,988 )     (4,932,390 )     -         (4,635,598 )
                                   
Basic and diluted weighted average shares outstanding
    6,564,084       -       -         6,564,084  
                                   
Basic and diluted loss per share
  $ (1.46 )     -       -       $ (0.71 )
 
(1) Source: unaudited financial statements of SmartHeat Inc. as of and for the year ended December 31, 2014, as included in this proxy.
 
(2) Source: unaudited financial statements of disposed entities of SmartHeat Inc. for the year ended December 31, 2014, as included in this proxy.
 
(a) To include the inter-company sales between disposed entities and other subsidiaries of SmartHeat Inc.
(b) The transaction will result in an expected loss of $35.27 million from the 100% equity interest sale of the entities to be sold consisting of a $44.06 million loss on sale resulting from the difference of the total selling price and the net assets of sold entities, netted off with the $8.79 million the forgiveness of all net indebtedness owing to the sold entities by SmartHeat and each of its other subsidiaries.  The loss is not reflected in the unaudited pro forma statements of operations because it is a material non-recurring charge directly related to the transaction that will be included in our results within the 12 months after the transaction.
 
 
 
F-3

 
 
SMARTHEAT INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
REFLECTING THE SALE OF CERTAIN ENTITIES OF PHE SEGMENT
 
 
 
   
YEAR ENDED DECEMBER 31, 2013
 
   
Company Historical (1)
   
Sales of PHE segment (2)
   
Pro Forma adjustments
 
Company Pro Forma
 
                           
Net sales
 
$
44,709,526
   
$
38,915,416
   
$
1,974,163
 
a
 
$
7,768,273
 
Cost of goods sold
   
40,401,380
     
35,659,348
     
1,974,163
 
a
   
6,716,195
 
                                   
Gross profit (loss)
   
4,308,146
     
3,256,068
     
-
       
1,052,078
 
                                   
Operating expenses
                                 
     Selling
   
6,864,060
     
5,084,636
               
1,779,424
 
     General and administrative
   
10,400,323
     
5,582,360
               
4,817,963
 
     Long-lived assets impairment
   
13,730,849
     
13,730,849
               
-
 
     Impairment of long term investment
   
908,084
     
-
     
-
       
908,084
 
     Provision for bad debts
   
24,980,195
     
24,638,062
               
342,133
 
     Provision for advance to supplier
   
1,666,906
 
   
(682,973
)
             
2,349,879
 
                                   
     Total operating expenses
   
58,550,417
     
48,352,934
     
-
       
10,197,483
 
                                   
Loss from operations
   
(54,242,271
)
   
(45,096,866
)
   
-
       
(9,145,405
)
                                   
Non-operating income (expenses)
                                 
     Investment income (loss)
   
153,237
     
-
               
153,237
 
     Interest income
   
159,972
     
79,704
               
80,268
 
     Interest expense
   
(1,816,457
)
   
(1,758,210
)
             
(58,247
)
     Financial expense
   
(249,681
)
   
(73,567
)
             
(176,114
)
     Foreign exchange transaction gain
   
(9,495
)
   
(9,478
)
             
(17
)
     Loss on sale of equity interest
   
(842,491
)
   
-
               
(842,491
)
     Other income, net
   
1,314,945
     
470,730
               
844,215
 
                                   
     Total non-operating expenses, net
   
(1,289,970
)
   
(1,290,821
)
             
851
 
                                   
Loss before income tax
   
(55,532,241
)
   
(46,387,687
)
   
-
       
(9,144,554
)
Income tax expense (benefit)
   
(50,657
)
   
26,725
               
(77,382
)
                                   
Net loss before noncontrolling interest
   
(55,481,584
)
   
(46,414,412
)
   
-
       
(9,067,172
)
Less: loss attributable to noncontrolling interest
   
(5,812,243
)
   
(5,798,050
)
             
(14,193
)
                                   
Net loss to SmartHeat Inc.
   
(49,669,341
)
   
(40,616,362
)
             
(9,052,979
)
                                   
Basic and diluted weighted average shares outstanding
   
5,870,111
      -       -        
5,870,111
 
                                   
Basic and diluted loss per share
 
$
(8.46
)
    -       -      
$
(1.54
)
 
(1) Source:  audited financial statements of SmartHeat Inc. as of and for the year ended December 31, 2013, as filed in the Form 10-K/A filed with the SEC on October 24, 2014.
(2) Source:  unaudited financial statements of disposed entities of SmartHeat Inc. for the year ended December 31, 2013, as included in this proxy.
   
(a) To include the inter-company sales between disposed entities and other subsidiaries of SmartHeat Inc.
     
 
 
F-4

 
 
SMARTHEAT TAIYU (SHENYANG) ENERGY TECHNOLOGY CO., LTD
SMARTHEAT SIPING BEIFANG ENERGY TECHNOLOGY CO., LTD
SMARTHEAT (SHENYANG) ENERGY EQUIPMENT CO., LTD
COMBINED BALANCE SHEETS
(UNAUDITED)
 
   
December 31, 2014
   
December 31, 2013
 
ASSETS
           
             
CURRENT ASSETS
           
     Cash & equivalents
  $ 9,490,641     $ 9,283,788  
     Restricted cash
    9,847,182       2,345,258  
     Accounts receivable, net
    18,437,984       14,822,112  
     Retentions receivable, net
    1,206,786       4,141,585  
     Advances to suppliers, net
    3,012,776       4,848,270  
     Other receivables (net), prepayments and deposits
    26,902,540       26,344,942  
     Inventories, net
    42,233,818       48,787,876  
     Taxes receivable
    303,108       968,124  
     Notes receivable - bank acceptances
    2,271,131       2,529,954  
                 
        Total current assets
    113,705,966       114,071,909  
                 
NONCURRENT ASSETS
               
     Restricted cash
    123,002       123,398  
     Construction in progress
    84,533       -  
     Property and equipment, net
    757,330       -  
     Intangible assets, net
    -       10,320,173  
                 
       Total noncurrent assets
    964,865       10,443,571  
                 
TOTAL ASSETS
  $ 114,670,831     $ 124,515,480  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
         
                 
CURRENT LIABILITIES
               
     Accounts payable
  $ 8,106,600     $ 7,474,235  
     Advance from customers
    1,992,933       1,875,894  
     Taxes payable
    183,185       130,379  
     Accrued liabilities and other payables
    31,649,373       30,938,077  
     Notes payable - bank acceptances
    1,401,530       2,590,025  
     Loans payable
    25,111,702       24,462,299  
                 
         Total current liabilities
    68,445,323       67,470,909  
                 
LONG-TERM LOAN
    -       2,132,231  
                 
STOCKHOLDERS' EQUITY
               
                 
     Paid-in capital
    59,341,363       59,341,363  
     Statutory reserve
    4,608,375       4,608,375  
     Accumulated other comprehensive income
    7,065,900       7,517,274  
     Accumulated deficit
    (43,579,536 )     (38,647,146 )
                 
         Total Companies stockholders' equity
    27,436,102       32,819,866  
                 
         NONCONTROLLING INTEREST
    18,789,406       22,092,474  
                 
         TOTAL EQUITY
    46,225,508       54,912,340  
                 
TOTAL LIABILITIES AND EQUITY
  $ 114,670,831     $ 124,515,480  
 
 
F-5

 
 
SMARTHEAT TAIYU (SHENYANG) ENERGY TECHNOLOGY CO., LTD
SMARTHEAT SIPING BEIFANG ENERGY TECHNOLOGY CO., LTD
SMARTHEAT (SHENYANG) ENERGY EQUIPMENT CO., LTD
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
 
   
YEARS ENDED DECEMBER 31,
 
   
2014
   
2013
 
             
Net sales
  $ 28,480,330     $ 38,915,416  
Cost of goods sold
    28,657,177       35,659,348  
                 
Gross profit (loss)
    (176,847 )     3,256,068  
                 
Operating expenses
               
     Selling
    4,748,596       5,084,636  
     General and administrative
    3,221,930       5,582,360  
     Long-lived assets impairment
            13,730,849  
     Provision for bad debts
    (2,241,241 )     24,638,062  
     Provision for advance to supplier
    1,143,178       (682,973 )
                 
     Total operating expenses
    6,872,463       48,352,934  
                 
Income (loss) from operations
    (7,049,310 )     (45,096,866 )
                 
Non-operating income (expenses)
               
     Interest income
    142,154       79,704  
     Interest expense
    (1,578,275 )     (1,758,210 )
     Financial expense
    (132,823 )     (73,567 )
     Foreign exchange transaction gain
    (3,786 )     (9,478 )
     Other income (expense), net
    401,390       470,730  
                 
     Total non-operating expenses, net
    (1,171,340 )     (1,290,821 )
                 
Loss before income tax
    (8,220,650 )     (46,387,687 )
Income tax expense
    -       26,725  
                 
Net loss before noncontrolling interest
    (8,220,650 )     (46,414,412 )
Less: Loss attributable to noncontrolling interest
    (3,288,260 )     (5,798,050 )
                 
Net loss to SmartHeat Inc. - disposed entities
    (4,932,390 )     (40,616,362 )
                 
Other comprehensive item
               
     Foreign currency translation gain (loss) attributable to SmartHeat Inc.
    (451,374 )     (2,427,319 )
                 
     Foreign currency translation gain (loss) attributable to noncontrolling interest
    (14,808 )     18,939  
                 
Comprehensive loss attributable to SmartHeat Inc.
  $ (5,383,764 )   $ (43,043,681 )
                 
Comprehensive income (loss) attributable to noncontrolling interest
  $ (3,303,068 )   $ (5,779,111 )
 
 
F-6

 
 
SMARTHEAT TAIYU (SHENYANG) ENERGY TECHNOLOGY CO., LTD
SMARTHEAT SIPING BEIFANG ENERGY TECHNOLOGY CO., LTD
SMARTHEAT (SHENYANG) ENERGY EQUIPMENT CO., LTD
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
YEARS ENDED DECEMBER 31,
 
   
2014
   
2013
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
            Loss including noncontrolling interest
  $ (8,220,650 )   $ (46,414,412 )
            Adjustments to reconcile loss including noncontrolling
            interest to net cash used in operating activities:
               
            Depreciation and amortization
    165,388       1,458,014  
            Long-lived assets impairment
    -       13,730,849  
            Provision for bad debts
    (2,241,241 )     24,638,062  
            Provision for inventory impairment
    6,770,654       5,934,938  
            Provision for advance to suppliers
    1,143,178       (682,973 )
            Change in warranty reserves
    38,884       -  
            Loss (gain) on disposal of fixed assets
    (46,340 )     19,133  
            Unearned interest on accounts receivable
    -       26,755  
                         (Increase) decrease in assets and liabilities:
               
                                   Accounts receivable
    4,840,601       (898,871 )
                                   Retentions receivable
    732,665       60,346  
                                   Advances to suppliers
    667,674       (1,645,706 )
                                   Other receivables, prepayments and deposits
    (4,728,835 )     (4,461,236 )
                                   Inventories
    (417,824 )     (2,271,248 )
                                   Taxes payable
    711,616       (1,520,422 )
                                   Accounts payable
    (517,744 )     1,156,897  
                                   Advance from customers
    (2,842,438 )     (2,795,259 )
                                   Accrued liabilities and other payables
    3,306,816       11,447,934  
                 
            Net cash used in operating activities
    (637,596 )     (2,217,199 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
                                   Change in restricted cash
    (7,480,980 )     (1,518,908 )
                                   Cash received from sale of disposed property & equipment
    19,534       -  
                                   Cash disposed from equity interest sale
    -       (399,241 )
                                   Government refund of land use right
    10,322,150       -