Loading...
Docoh

Lithium & Boron Technology (LBTI)

Filed: 13 Aug 20, 5:08pm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended June 30, 2020

OR

 

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

 

Commission file number: 001-34246

 

LITHIUM & BORON TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

98-0514768

(State or other jurisdiction of incorporation

or organization)

(IRS Employer Identification No.)

 

60 East Ren-Min Road
Dachaidan

(Da Qaidam Administrative Committee)
XaiXi, Qinghai Province 817000

(Address of principal executive offices)

 

 +86 (24) 2519-7699

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

  Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001

 

HEAT

 

Grey

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.     YES ☒   NO ☐ 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      YES ☐   NO ☒

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

(do not check if a smaller reporting company)

Smaller reporting company ☒

Emerging Growth Company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES ☐   NO ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

As of August 13, 2020 there were 185,986,370 shares of common stock outstanding. 

 

 

 

 

Lithium & Boron Technology, Inc.

Table of Contents

 

 

 

Page

Note about Forward-Looking Statements

3

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

Item 4.

Controls and Procedures

31

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

32

 

 

 

 

Exhibit Index

32

 

 

 

 

Signatures

33

 


 

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which include, but are not limited to, statements concerning our projected revenues, expenses, gross profit and income, mix of revenue, demand for our products, the benefits and potential applications for our products, the need for additional capital, our ability to obtain and successfully perform additional new contract awards and the related funding and profitability of such awards, the competitive nature of our business and markets and product qualification requirements of our customers. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “potential,” “believes,” “seeks,” “hopes,” “estimates,” “should,” “may,” “will,” “with a view to” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. Such factors include, but are not limited to the following:

 

●  

our goals and strategies;

 

●  

our expansion plans;

 

●  

our future business development, financial conditions and results of operations;

 

●  

our expectations regarding demand for our products;

 

●  

our expectations regarding keeping and strengthening our relationships with key customers;

 

●  

our ability to stay abreast of market trends and technological advances;

 

●  

our ability to protect our intellectual property rights effectively and not infringe on the intellectual property rights of others;

 

●  

our ability to attract and retain quality employees;

 

●  

our ability to pursue strategic acquisitions and alliances;

 

●  

competition in our industry in China;

 

●  

general economic and business conditions in the regions in which we sell our products;

 

●  

relevant government policies and regulations relating to our industry; and

 

●  

market acceptance of our products.

 

Additionally, this report contains statistical data that we obtained from various publicly available government publications and industry-specific third party reports. Statistical data in these publications also include projections based on a number of assumptions. The changing nature of our customers’ industries results in uncertainties in any projections or estimates relating to the growth prospects or future condition of our markets. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.

 

Unless otherwise indicated, information in this report concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. None of the market data from independent industry publications cited in this report was prepared on our or our affiliates’ behalf.

 

Additional information on the various risks and uncertainties potentially affecting our operating results are discussed in this report and other documents we file with the Securities and Exchange Commission, or the SEC, or available upon written request to our corporate secretary at: 60 East Ren-Min Road, Da-Chai Dan Town, Xai Xi County, Qing Hai Province 8100000. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements.

 

 

As used in this report, “LBTI,” “Company,” “we,” “our” and similar terms refer to Lithium & Boron Technology, Inc. and its subsidiaries, unless the context indicates otherwise.

 

Our functional currency is the US Dollar, or USD, while the functional currency of our subsidiaries in China are denominated in Chinese Yuan Renminbi, or RMB, the national currency of the People’s Republic of China, which we refer to as the PRC or China, and the functional currency of our subsidiary in Germany is denominated in Euros, or EUR. The functional currencies of our foreign operations are translated into USD for balance sheet accounts using the current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the average exchange rate during the fiscal year. See Note 2 of the consolidated financial statements included herein.

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED BALANCE SHEETS

 

  

JUNE 30, 2020 (UNAUDITED)

  

DECEMBER 31, 2019

 

ASSETS

        
         

CURRENT ASSETS

        

     Cash and equivalents

 $1,149,639  $160,024 

     Accounts receivable

  258,574   577,387 

     Notes receivable

  255,704   79,478 

     Other receivables

  2,863   354 

     Advances to suppliers, net

  91,409   7,490 

     Due from related parties

  1,182,291   554,527 

     Inventories

  847,623   1,802,647 
         

        Total current assets

  3,788,103   3,181,907 
         

NONCURRENT ASSETS

        

     Long-term prepaid expense

  15,397   - 

     Property and equipment, net

  1,517,966   1,403,681 

     Construction in progress

  1,614,229   1,635,912 
         

       Total noncurrent assets

  3,147,592   3,039,593 
         

TOTAL ASSETS

 $6,935,695  $6,221,500 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

CURRENT LIABILITIES

        

     Accounts payable

 $295,077  $332,706 

     Unearned revenue

  139,512   117,188 

     Accrued liabilities and other payables

  1,325,826   1,095,698 

     Taxes payable

  303,901   295,255 

     Due to related parties

  933,375   678,533 
         

         Total current liabilities

  2,997,691   2,519,380 
         

DEFERRED INCOME

  1,247,828   1,360,626 
         

TOTAL LIABILITIES

  4,245,519   3,880,006 
         

COMMITMENTS AND CONTINGENCIES

        
         

STOCKHOLDERS' EQUITY

        

Common stock, $0.001 par value; 500,000,000 shares authorized, 185,968,370 shares issued and outstanding

  185,968   185,968 

Paid-in capital deficiency

  (6,666,351)  (6,666,351)

Statutory reserve

  135,676   71,252 

Accumulated other comprehensive loss

  (131,562)  (14,600)

Retained earnings

  8,462,907   8,765,225 
         

         TOTAL COMPANY STOCKHOLDERS' EQUITY

  1,986,638   2,341,494 
         

         Noncontrolling interest

  703,538   - 
         

         TOTAL EQUITY

  2,690,176   2,341,494 
         

TOTAL LIABILITIES AND EQUITY

 $6,935,695  $6,221,500 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

  

SIX MONTHS ENDED

JUNE 30,

  

THREE MONTHS ENDED

JUNE 30,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Sales

 $3,228,330  $3,113,200  $2,217,832  $1,785,828 

Sales - related party

  101,560   95,555   101,560   37,176 
                 

Total sales

  3,329,890   3,208,755   2,319,392   1,823,004 
                 

Cost of sales

  2,904,535   2,700,173   1,973,791   1,476,114 
                 

Gross profit

  425,355   508,582   345,601   346,890 
                 

Operating expenses

                

     Selling

  85,549   222,214   29,344   121,812 

     General and administrative

  613,995   484,357   326,993   281,884 
                 

     Total operating expenses

  699,544   706,571   356,337   403,696 
                 

Loss from operations

  (274,189)  (197,989)  (10,736)  (56,806)
                 

Non-operating income

                

     Financial income (expense)

  443   201   410   (1,043)

     Other income

  13,405   -   27,754   - 

     Subsidy income

  95,635   93,647   48,494   46,587 
                 

     Total non-operating income, net

  109,483   93,848   76,658   45,544 
                 

Income (loss) before income tax

  (164,706)  (104,141)  65,922   (11,262)
                 

Income tax expense

  25,933   32,522   25,933   32,522 
                 

Income (loss) from continuing operations

  (190,639)  (136,663)  39,989   (43,784)
                 

Income (loss) from operations of discontinued entities, net of tax

  -   (2,613)  -   194 
                 

Income (loss) before noncontrolling interest

  (190,639)  (139,276)  39,989   (43,590)
                 

Less: loss attributable to noncontrolling interest from continuing operations

  (2,745)  -   (2,745)  - 
                 

Net income (loss) to the Company

  (187,894)  (139,276)  42,734   (43,590)
                 

Other comprehensive item

                

Foreign currency translation gain attributable to discontinued operations

  -   6,735   -   83,880 

Foreign currency translation loss attributable to the Company

  (116,962)  (9,619)  (57,766)  (41,890)

Foreign currency translation gain attributable to noncontrolling interest

  1,542   -   1,542   - 
                 

Comprehensive loss attributable to the Company

 $(304,856) $(142,160) $(15,032) $(1,600)
                 

Comprehensive loss attributable to noncontrolling interest

 $(1,203) $-  $(1,203) $- 
                 

Basic and diluted weighted average shares outstanding

  185,968,370   185,968,370   185,968,370   185,968,370 
                 

Basic and diluted income (loss) per share from continuing operations

 $(0.00) $(0.00) $0.00  $(0.00)
                 

Basic and diluted income (loss) per share from discontinued operations

 $-  $(0.00) $-  $0.00 
                 

Basic and diluted net income (loss) per share

 $(0.00) $(0.00) $0.00  $(0.00)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

  

SIX MONTHS ENDED

JUNE 30,

 
  

2020

  

2019

 
         

CASH FLOWS FROM OPERATING ACTIVITIES:

        

            Loss including noncontrolling interest

 $(190,639) $(139,276)

            Adjustments to reconcile loss including noncontrolling

                 interest to net cash provided by operating activities:

        

            Depreciation

  151,543   159,145 

            Provision for bad debts

  -   4,505 

            Changes in deferred income

  (93,573)  (93,647)

                         (Increase) decrease in assets and liabilities:

        

                                   Accounts receivable

  133,902   1,684 

                                   Other receivables

  (2,526)  10,366 

                                   Advances to suppliers

  (84,597)  51,601 

                                   Inventories

  935,004   35,291 

                                   Construction in progress

  (2,202)  - 

                                   Prepaid expense

  (15,501)  - 

                                   Accounts payable

  (32,999)  (21,538)

                                   Unearned revenue

  24,196   49,058 

                                   Accrued liabilities and other payables

  123,115   76,132 

                                   Taxes payable

  13,042   48,763 
         

            Net cash provided by operating activities

  958,765   182,084 
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

                                   Purchase of property and equipment

  (287,221)  - 
         

            Net cash used in investing activities

  (287,221)  - 
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

                                  Capital contribution from noncontrolling interest

  711,044   - 

                                  Changes in due from related parties

  (640,158)  3,224,026 

                                  Changes in due to related parties

  256,233   (3,346,812)
         

            Net cash provided by (used in) financing activities

  327,119   (122,786)
         

EFFECT OF EXCHANGE RATE CHANGE ON CASH AND EQUIVALENTS

  (9,048)  (1,082)
         

NET INCREASE IN CASH AND EQUIVALENTS

  989,615   58,216 
         

CASH AND EQUIVALENTS, BEGINNING OF PERIOD

  160,024   163,145 
         

CASH AND EQUIVALENTS, END OF PERIOD

 $1,149,639  $221,361 
         

Supplemental cash flow data:

        

   Income tax paid

 $-  $- 

   Interest paid

 $-  $- 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

LITHIUM & BORON TECHNOLOGY, INC

STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)

SIX MONTHS ENDED JUNE 30, 2020 AND 2019

 

  

Common Stock

                         
  

Shares

  

Amount

  

Paid-in capital (deficiency)

  

Statutory reserves

  

Accumulated other comprehensive loss

  

Retained earnings

  

Total

  

Noncontrolling interest

 

Balance at January 1, 2020

  185,968,370  $185,968  $(6,666,351) $71,252  $(14,600) $8,765,225  $2,341,494  $- 
                                 

Net loss

  -   -   -   -   -   (230,628)  (230,628)  - 
                                 

Dividend accrued

  -   -   -   -   -   (25,000)  (25,000)  - 
                                 

Foreign currency translation loss

  -   -   -   -   (59,196)  -   (59,196)  - 
                                 

Balance at March 31, 2020

  185,968,370   185,968   (6,666,351)  71,252   (73,796)  8,509,597   2,026,670   - 
                                 

Net loss

  -   -   -   -   -   42,734   42,734   (2,745)
                                 

Capital contribution

  -   -   -   -   -   -   -   704,741 
                                 

Dividend accrued

  -   -   -   -   -   (25,000)  (25,000)  - 
                                 

Statutory reserve

  -   -   -   64,424   -   (64,424)  -   - 
                                 

Foreign currency translation loss

  -   -   -   -   (57,766)  -   (57,766)  1,542 
                                 

Balance at June 30, 2020

  185,968,370  $185,968  $(6,666,351) $135,676  $(131,562) $8,462,907  $1,986,638  $703,538 

 

  

Common Stock

                     
  

Shares

  

Amount

  

Paid-in capital (deficiency)

  

Statutory reserves

  

Accumulated other comprehensive loss

  

Retained earnings

  

Total

 

Balance at January 1, 2019

  185,968,370  $185,968  $(7,645,727) $780,682  $(11,951) $1,828,717  $(4,862,311)
                             

Net loss

  -   -   -   -   -   (95,686)  (95,686)
                             

Dividend accrued

  -   -   -   -   -   (25,000)  (25,000)
                             

Foreign currency translation loss

  -   -   -   -   (44,874)  -   (44,874)
                             

Balance at March 31, 2019

  185,968,370   185,968   (7,645,727)  780,682   (56,825)  1,708,031   (5,027,871)
                             

Net loss

  -   -   -   -   -   (43,590)  (43,590)
                             

Dividend accrued

  -   -   -   -   -   (25,000)  (25,000)
                             

Foreign currency translation loss

  -   -   -   -   41,990   -   41,990 
                             

Balance at June 30, 2019

  185,968,370  $185,968  $(7,645,727) $780,682  $(14,835) $1,639,441  $(5,054,471)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

LITHIUM & BORON TECHNOLOGY, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020 (UNAUDITED) AND DECEMBER 31, 2019

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Lithium & Boron Technology, Inc., (the “Company” or “Lithium Tech”), formerly known as SmartHeat, Inc. (“SmartHeat”), was incorporated August 4, 2006, in the State of Nevada. The Company currently produces boric acid in the People Republic of China (“PRC”) and plans to expand its manufacturing facilities through a joint venture to produce up to 30,000 tonnes of lithium carbonate for the electric vehicle battery market in China, subject to funding.

 

The Company formerly sold plated heat exchangers and heat pumps and sold these operations on September 30, 2019 recording them as discontinued operations.

 

On December 31, 2018 (the “Closing Date”), the Company entered into and closed a Share Exchange Agreement and Plan of Reorganization, as amended on January 24, 2019 (the “Share Exchange Agreement”) with Mid-Heaven Sincerity International Resources Investment Co., Ltd (Mid-heaven BVI) and its shareholders Mao Zhang, Jian Zhang, and Ying Zhao, constituting all the shareholders of Mid-heaven BVI (the “Mid-heaven Shareholders”). Pursuant to the terms of the Share Exchange Agreement, the shareholders of Mid-Heaven BVI delivered all of the issued and outstanding shares of capital stock of Mid-Heaven BVI to the Company, for 106,001,971 shares of the Company’s Common Stock. Mid-heaven BVI, through two subsidiaries, Qinghai Mid-Heaven Sincerity Technology Co., Ltd (“Sincerity”) and Qinghai Mid-Heaven Sincerity Salt-Lake R&D Co., Ltd (“Salt-Lake”) owns 100% of Qing Hai Mid-Heaven Boron & Lithium Technology Company, Ltd. (“Qinghai Technology”).

 

The Acquisition was structured as a tax-free reorganization. As a result of the share exchange agreement, Mid-heaven BVI’s shareholders own approximately 57% of the combined company.  For accounting purposes, the transaction was accounted for as a reverse acquisition of the Company by Mid-heaven BVI.

 

The main operating entity, Qinghai Technology was incorporated December 18, 2018. The business of Qinghai Technology was carved out of the business of Qinghai Zhongtian Boron & Lithium Mining Co., Ltd (“Qinghai Mining”) on December 20, 2018. Qinghai Mining was founded March 6, 2001 and engaged in manufacture and wholesale of boric acid and related compounds for industrial and consumer usage. Qinghai Technology obtains its raw material minerals exclusively from Qinghai Mining and currently processes boric acid by crushing and processing ore. 

 

On September 30, 2019, Heat HP, Inc. and Heat PHE, Inc, wholly owned subsidiaries of the Company, sold all of their respective equity interests in Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange for $353. The equity interests were sold to individuals and businesses located in the PRC. Each subsidiary was sold for nominal cash consideration as below and, as the transactions were structured as purchases of equity interests, the subsidiary companies retained all liabilities when purchased. Heat HP, Inc. and Heat PHE, Inc. did not have any operations and mainly serve the purpose as holding companies.

 

SmartHeat Jinhui (Beijing) Energy Technology Ltd - 100 RMB ($15)

SmartHeat (China) Investment Ltd - 400 RMB ($56)

SmartHeat (Shanghai) Trading Co., Ltd - 400 RMB ($56)

SmartHeat (Shenyang) Heat Pump Technology Co., Ltd - 400 RMB ($56)

SanDeKe Co., Ltd - 600 RMB ($85)

SmartHeat Heat Exchange Equipment Co - 600 RMB ($85)

 

On October 23, 2019, the Company filed a certificate of amendment to its certificate of incorporation to change its name from “SmartHeat, Inc.” to “Lithium & Boron Technology, Inc.” to better reflect the operations of the Company. The name change became effective October 23, 2019.

  

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization declared the outbreak to constitute a “Public Health Emergency of International Concern.” This contagious disease outbreak, which continues to spread to additional countries, and disrupts supply chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. The COVID-19 outbreak impacted the Company’s operations for the first quarter of 2020.  The Company had less production in the first quarter of 2020; the Company’s factory was reopened one month later than originally planned, and it did not resume the production one week after the factory reopened due to the shortage of master liquid pool resulting from the longer period of shutdown of the machine.  The cost of coal increased during the first quarter of 2020 due to the overall lockdown in China. The Company’s sales also decreased for the first quarter of 2020 due to logistics restrictions put into place to curb travel. To facilitate the sales, the Company reduced the selling price by RMB 50 ($7) per tonne to certain customers.  The availability of transportation vehicles has increased to meet the market’s shipping needs since April 2020.  In addition, the Company was able to procure sulfuric acid, a major raw material, from a local supplier at lower prices than usual due to excess supplies on the market.  The Company’s production and sales has been gradually increasing since April 2020. 

 

 

On March 27, 2020 (PRC time), Qinghai Technology entered into an Investment Cooperation Agreement, Memorandum of Cooperation and Licensing Agreement with Xi'an Jinzang Membrane Environmental Protection Technology Co., Ltd. (Xi’an Jinzang) to produce up to 30,000 tonnes of battery grade lithium carbonate annually, subject to funding. On April 15, 2020, the parties formed a joint venture (“JV”) company Qinghai Zhonglixinmo Technology Co., Ltd (Qinghai Zhongli or JV) to process brine supplied by Qinghai Technology. Qinghai Technology owns 51% of the JV and Xi’ Jinzang owns the remaining 49%. The JV cooperation agreement calls for a capital contribution of RMB 140 million ($19,746,000), which shall be paid in three phases according to the project construction progress: RMB 36 million ($5,077,000) to be paid within 10 days from the date of registration and establishment of the JV, RMB 72 million ($10,155,000) to be paid before July 31, 2020, and RMB 32 million ($4,513,000) to be paid before October 31,2020. All shareholders are required to pay the capital in accordance with their respective shareholding ratio. Each party made an initial capital contribution of RMB 5 million ($0.71 million) in April 2020 and as of this report date. The capital contribution amount and timing of making the capital contribution can be adjusted anytime upon both parties’ mutual consent. The Company promises and guarantees that, during the existence of the project company, it will provide the JV with lithium bearing brine resources for free. During the construction and operation of the project, all parties agree to actively raise construction funds by means of bank loans, self-owned funds, etc. if the funds are not raised in time, the term of paid in capital can be extended accordingly upon consensus of all parties.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Going Concern

 

The accompanying consolidated financial statements (“CFS”) were prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the accompanying CFS, the Company had net loss of $187,894 and $139,276 for the six months ended June 30, 2020 and 2019, respectively; the Company had net income of $42,734 and net loss of $43,590 for the three months ended June 30, 2020 and 2019, respectively, which raise substantial doubt about the Company’s ability to continue as a going concern.

 

In addition to current boric acid production business, the Company plans to produce lithium carbonate for the electric vehicle battery through a recently established JV from brine that is provided by Qinghai Technology for free. The cost for the brine is immaterial as it was mainly pumped out from the nearby Salt Lake. Management also intends to raise additional funds by way of a private or public offering, or by obtaining loans from banks or others.  While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.

 

The consolidated financial statements (“CFS”) do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.  

 

Basis of Presentation

 

The CFS were prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). 

 

The interim consolidated financial information as of June 30, 2020 and for the six and three-month periods ended June 30, 2020 and 2019 were prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, which are normally included in CFS prepared in accordance with U.S. GAAP were not included. The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, previously filed with the SEC.

 

In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of June 30, 2020, its consolidated results of operations for the six and three months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30,2020, as applicable, were made.

 

 

Principles of Consolidation 

 

For the six and three months ended June 30, 2020, the accompanying CFS include the accounts of the Company’s US parent, and Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake, Qinghai Technology and Qinghai Zhongli, which are collectively referred to as the “Company.” For the six and three months ended June 30, 2019, the accompanying CFS include the accounts of the Company’s US parent, and its subsidiaries Heat HP and Heat PHE, and their subsidiaries SanDeKe, Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump, and Heat Exchange and Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake and Qinghai Technology, which are collectively referred to as the “Company.” All significant intercompany accounts and transactions were eliminated in consolidation.

 

Use of Estimates

 

In preparing financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.

 

Cash and Equivalents

 

Cash include cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

 

Accounts Receivable, net

 

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on historical collection activity, the Company had allowance of $0 at June 30, 2020 and December 31, 2019.

 

Advances to Suppliers, net

 

The Company makes advances to certain vendors to purchase raw material, tools and equipment for production. The advances are interest-free and unsecured. As of June 30, 2020, and December 31, 2019, the Company had gross advance to suppliers of $93,940 and $7,490, respectively, and the Company had allowance for advances to suppliers of $2,531 and $0, respectively. In addition, as of June 30, 2020, advances to suppliers also included a prepayment of $28,250 to a third party company for purchasing the equipment and a land use right; total purchase price is $155,378, the remaining $127,128 will be paid within three days after the completion of the land certificate and related deed, or the prepayment will be returned to the Company it failure to obtain the land use certificate and related deed.

 

Inventories, net

 

Inventories are stated at the lower of cost or net realizable value with cost determined on a weighted-average basis. Management compares the cost of inventories with the net realizable value and an allowance is made to write down inventories to market value, if lower.  

 

Property and Equipment, net

 

Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are expensed as incurred; major additions, repairs and betterments that significantly extend original useful lives or improve productivity are capitalized and depreciated over the period benefited. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method with a 3% - 10% salvage value and estimated lives as follows: 

 

Buildings

20 years

Structures and improvements

4-20 years

Vehicles

4-8 years

Office equipment

5 years

Production equipment

3-10 years

Equipment upgrade

5 years

 

 

Depreciation of plant, property and equipment attributable to manufacturing is capitalized as part of inventories, and expensed to cost of sales when inventories are sold. 

 

Impairment of Long-Lived Assets

 

Long-lived assets, which include tangible assets, such as property and equipment, goodwill and other intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable, but at least annually. 

 

Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized based on the excess of the carrying amount over the fair value (“FV”) of the assets. FV generally is determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes that, as of June 30, 2020 and December 31, 2019, there was no significant impairments of its long-lived assets.

 

Effective on January 1, 2020, the Company adopted ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

 

Deferred Income

 

Deferred income consists primarily of government grants and subsidies for supporting the Company’s technology innovation and transformation of boric acid, lithium and magnesium sulfate projects. The Company uses most of the subsidies to purchase machinery and equipment. Deferred income is amortized to revenue (other income) over the life of the assets for which the grant and subsidy was used for. Subsidies for declared project fund require government inspection to ensure proper use of the funds for the designated project.

 

Unearned Revenue

 

The Company records payments received from customers in advance of their orders as unearned revenue. These orders normally are delivered (usually within one month) based upon contract terms and customer demand. 

 

Revenue Recognition

 

The Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive for those goods. The Company recognizes revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

 

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs typically upon receipts of the goods by customers. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not affected by the income tax holiday. 

 

Cost of Sales

 

Cost of sales (“COS”) consists primarily of material costs and direct labor and manufacturing overhead attributable to the production of the products. Write-down of inventory to lower of cost or net realizable value is also recorded in COS. 

 

Research and Development Costs

 

Research and development (“R&D”) costs are expensed as incurred and included in general and administrative (“G&A”) expenses. These costs primarily consist of cost of materials used, salaries paid for the Company’s development department and fees paid to third parties. R&D costs for the six and three months ended June 30, 2020 and 2019 were immaterial.

 

Share-Based Compensation

 

The Company accounts for share-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that share-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.

 

 

The Company accounts for share-based compensation awards to non-employees in accordance with FASB ASC Topic 718 and FASB ASC Subtopic 505-50, “Equity-Based Payments to Non-employees”. Share-based compensation associated with the issuance of equity instruments to non-employees is measured at the fair value of the equity instrument issued or committed to be issued, as this is more reliable than the fair value of the services received. The fair value is measured at the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete.

 

Effective January 1, 2020, the Company adopted ASU 2018-07, "Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The adoption of ASU 2018-07 did not have an impact on the CFS.

 

Income Taxes

 

Income taxes are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

The Company follows ASC Topic 740, which prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 also provides guidance on recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.

 

Under the provisions of ASC Topic 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statement of income.  At June 30, 2020 and December 31, 2019, the Company did not take any uncertain positions that would necessitate recording a tax related liability.  

 

Noncontrolling Interests

 

The Company follows FASB ASC Topic 810, “Consolidation,” governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to NCIs even when such allocation might result in a deficit balance. 

 

The net income (loss) attributed to NCIs was separately designated in the accompanying statements of operations and comprehensive income (loss). Losses attributable to NCIs in a subsidiary may exceed an NCI’s interests in the subsidiary’s equity. The excess attributable to NCIs is attributed to those interests. NCIs shall continue to be attributed their share of losses even if that attribution results in a deficit NCI balance.

 

On April 15, 2020, Qinghai Technology and Xi’an Jinzang formed a JV company Qinghai Zhongli to process brine supplied by Qinghai Technology. Qinghai Technology owns 51% of the JV and Xi’ Jinzang owns the remaining 49%. During the six and three months ended June 30, 2020, the Company had loss of $2,745 attributable to the noncontrolling interest.

 

 

Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within China. Balances at financial institutions within China are not covered by insurance. The Company has not experienced any losses in such accounts.

 

Certain other financial instruments, which subject the Company to concentration of credit risk, consist of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its customers’ financial condition and customer payment practices to minimize collection risk on accounts receivable.

 

The operations of the Company are located primarily in China. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in China, as well as by the general state of the PRC economy.

 

Basic and Diluted Earnings (Loss) per Share (EPS)

 

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted EPS are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to have been exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  

 

Foreign Currency Translation and Comprehensive Income (Loss)

 

The accounts of the US parent company are maintained in USD. The functional currency of the Company’s China subsidiaries is the Chinese Yuan Renminbi (“RMB”). The accounts of the China subsidiaries were translated into USD in accordance with FASB ASC Topic 830, “Foreign Currency Matters.” According to FASB ASC Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholders’ equity was translated at the historical rates and statement of operations items were translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, “Comprehensive Income.”

 

Statement of Cash Flows

 

In accordance with FASB ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts shown on the statement of cash flows may not necessarily agree with changes in the corresponding asset and liability on the balance sheet.

 

Fair Value (“FV”) of Financial Instruments

 

Certain of the Company’s financial instruments, including cash and equivalents, notes receivable, accrued liabilities and accounts payable, carrying amounts approximate their FV due to their short maturities. FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the FV of financial instruments held by the Company. The carrying amounts reported in the balance sheets for current liabilities each qualify as financial instruments and are a reasonable estimate of their FV because of the short period of time between the origination of such instruments and their expected realization and the current market rate of interest.

 

Fair Value Measurements and Disclosures

 

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines FV, and establishes a three-level valuation hierarchy for disclosures of FV measurement that enhances disclosure requirements for FV measures. The three levels are defined as follow:

 

  

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

  

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

  

Level 3 inputs to the valuation methodology are unobservable and significant to the FV measurement.

 

 

Effective January 1, 2020, the Company adopted ASU 2018-13, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the FV hierarchy.

 

As of June 30, 2020 and December 31, 2019, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at FV. 

 

Leases

 

On January 1, 2019, the Company adopted ASU  No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use (ROU) assets on the balance sheet for all leases with terms longer than 12 months and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company concluded the adoption of this ASU did not have a material impact on the Company’s CFS since the Company does not have any lease that is longer than 12 months. 

 

Segment Reporting

 

FASB ASC Topic 280, “Segment Reporting,” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. Management determined the Company’s operations constitute a single reportable segment in accordance with ASC 280. The Company currently operates in one business and industry segment: manufacture and sale of boric acid. 

 

Reclassification

  

Certain prior period balance sheet accounts were reclassified for the purpose of consistency with the current year’s presentation.

 

New Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its CFS.

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on its CFS.

 

3. INVENTORIES, NET 

 

Inventories at June 30, 2020 and December 31, 2019, respectively, were as follows: 

 

  

2020

  

2019

 

Raw materials

 $246,242  $311,049 

Finished goods

  601,381   1,491,598 

Total

 $847,623  $1,802,647 

   

 

4. NOTES RECEIVABLE – BANK ACCEPTANCES

 

The Company sold goods to its customers and received notes (bank acceptances) from them in lieu of payment. These bank acceptances were issued by customers to the Company and would be honored by the applicable bank. The Company may hold a bank acceptance until the maturity for full payment, or have the bank acceptance cashed out by the bank at a discount at an earlier date, or transfer the bank acceptance to its vendors in lieu of payment for their own obligations. As of June 30, 2020 and December 31, 2019, the Company had notes receivable of $255,704 and $79,478, respectively; and at June 30, 2020, the Company had $0.90 million notes receivable that were endorsed to its vendors, in lieu of payment. The Company was contingently liable for these notes receivable until paid.

 

5. OTHER RECEIVABLES

 

Other receivables consisted of the following at June 30, 2020 and December 31, 2019:

 

  

2020

  

2019

 

VAT tax receivable

 $2,509  $- 

Other receivable – sale of discontinued operations

  354   354 

Total

 $2,863  $354 

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following at June 30, 2020 and December 31, 2019, respectively:

 

  

2020

  

2019

 

Structures and improvements

 $443,568  $450,136 

Production equipment

  2,636,087   2,451,859 

Vehicle

  65,286   - 

Equipment

  245,064   248,692 

Total

  3,390,005   3,150,687 

Less: accumulated depreciation

  (1,872,039

)

  (1,747,006

)

Property and equipment, net

 $1,517,966  $1,403,681 

 

Depreciation for the six months ended June 30, 2020 and 2019 was $151,543 and $159,145, respectively.

Depreciation for the three months ended June 30, 2020 and 2019 was $75,197 and $79,170, respectively.

 

7. CONSTRUCTION IN PROGRESS (“CIP”)

 

As of June 30, 2020 and December 31, 2019, the Company had CIP of $1,614,229 and $1,635,912, respectively. The CIP was mainly for Test and Experimental Plant I, which has no production currently; in 2019, due to the existing coal-supported boiler in Plant I not meet the environment protection standard, and the delay of the government’s installing and connecting a natural gas pipeline to implement a Coal-to-Gas conversion project resulting from various factors including the Coronavirus outbreak, the Company plans to sell the Test and Experimental Plant I to Qinghai Mining at cost in the third quarter of 2020.

 

8. TAXES PAYABLE

 

Taxes payable consisted of the following June 30, 2020 and December 31, 2019, respectively:

 

  

2020

  

2019

 

Other

 $34,665  $29,350 

VAT

  269,236   265,905 

Taxes payable

 $303,901  $295,255 

    

 

9. ACCRUED LIABILITIES AND OTHER PAYABLES 

 

Accrued liabilities and other payables consisted of the following at June 30, 2020 and December 31, 2019, respectively:

 

  

2020

  

2019

 

Advances from third parties

 $7,507  $1,049 

Other

  524,248   534,275 

Accrued expenses

  794,071   560,374 

Total accrued liabilities and other payables

 $1,325,826  $1,095,698 

 

Advances from third parties were short term, non-interest-bearing and due on demand.  

  

As of June 30, 2020 and December 31, 2019, other mainly consisted of 1) dividend payable to Northtech of $450,000 and $400,000, respectively; and 2) payables for professional fees and other miscellaneous expenses of $74,248 and $134,275, respectively. 

 

As of June 30, 2020, accrued expenses mainly consisted of accrued salary $794,071 for Qinghai Technology including $720,000 accrued salary for three senior officers. As of December 31, 2019, accrued expenses mainly consisted of accrued payroll expense of $560,374 for Qinghai Technology including $480,000 accrued salary for three senior officers.

 

10. RELATED PARTY TRANSACTIONS

 

Qinghai Technology purchased raw material boron rock from Qinghai Mining (owned by three major shareholders of the Company); in addition, Qinghai Technology sometimes received no-interest short-term advances from Qinghai Mining for daily operational needs. As of June 30, 2020 and December 31, 2019, due from Qinghai Mining (representing the net amount of intercompany transactions between Qinghai Technology and Qinghai Mining) was $1.18 million and $0.55 million, respectively. Qinghai Technology purchased $594,526 and $619,984 boron ore from Qinghai Mining during the six months ended June 30, 2020 and 2019, respectively. Qinghai Technology purchased $480,998 and $427,414 boron ore from Qinghai Mining during the three months ended June 30, 2020 and 2019, respectively.

 

On July 1, 2019, Qinghai Technology and Qinghai Mining entered a boron ore purchase contract for one year. Qinghai Mining is to supply Qinghai Technology boron ore based on Qinghai Technology’s monthly production plan at a price of RMB 62 ($8.77) per tonne. The price is adjustable in the future if there is a significant fluctuation of the market price for the boron ore. In the fourth quarter of 2019, this price was adjusted to RMB 70.46 ($10.21) per tonne. In the first quarter of 2020, Qinghai Technology and Qinghai Mining entered a new purchase contract, the price for boron ore was adjusted to RMB 77.5 ($11.10) per tonne, and the price for slag was RMB 30 ($4.23) per tonne. This purchase contract will be in effect until a replacement contact with new purchase price is entered.

 

Qinghai Technology used equipment for production that belongs to Qinghai Province DaChaiDan ZhongTian Resources Development Co., Ltd (“Zhongtian Resources”, and is owned by the Chairman and his brother who are also two major shareholders of the Company). The depreciation of these fixed assets had an impact on the production costs of boric acid of the Company and was included in the Company’s cost of sales. The depreciation of these fixed assets for the six months ended June 30, 2020 and 2019 was $12,620 and $17,599, respectively. The depreciation of these fixed assets for the three months ended June 30, 2020 and 2019 was $6,357 and $8,615, respectively. Due to Zhongtian Resources resulting from using its equipment and payment of worker’s compensation made by Zhongtian Resource for Qinghai Technology was $60,945 and $49,125 at June 30, 2020 and December 31, 2019, respectively.

 

Qinghai Technology sold boric acid to Qinghai Dingjia Zhixin Trading Co., Ltd (“Dingjia”), 90% owned by the son of the Company’s major shareholder (also the Chairman of the Company). For the six months ended June 30, 2020 and 2019, the Company’s sales to Dingjia was $101,560 and $95,555, respectively. For the three months ended June 30, 2020 and 2019, the Company’s sales to Dingjia was $101,560 and $37,176, respectively. At June 30, 2020 and December 31, 2019, outstanding receivables from (payable to) Dingjia was $(0.02) million and $(0.06) million, respectively.

 

In addition, at June 30, 2020 and December 31, 2019, the Company had $851,091 and $573,264 due to another major shareholder of the Company (also the Company’s CEO), resulting from certain Company operating expenses of the US parent company such as legal and audit fees that were paid by this major shareholder on behalf of the Company. This short term advance bore no interest, and was payable upon demand. 

 

 

The following table summarized the due from (to) related parties as of June 30, 2020 and December 31, 2019, respectively:

 

   

2020

  

2019

 
 

Related party name

        

Due from

Qinghai Mining

 $2,375,544  $1,173,881 

Due to

Qinghai Mining

  (1,193,253)  (619,354)

Due from, net

 $1,182,291  $554,527 
          

Due to

Dingjia

 $21,339  $56,144 

Due to

Zhongtian Resources

  60,945   49,125 

Due to

A major shareholder 

  851,091   573,264 

Due to, total

 $933,375  $678,533 

 

11. DEFERRED INCOME

 

Deferred income consisted mainly of the government subsidy to the Company’s special projects. 

 

The detail of deferred income for the Company’s special projects at June 30, 2020 is:

 

  

Government

subsidy

amount

 

Project

completion

date

 

Useful life

in years

  

 

Accumulated

amortization

  

Net

 
                  

Technology upgrade for using lean ore to produce magnesium sulfate

 $310,756 

8/1/2013

  10  $214,940  $95,817 

Technical transformation for boric acid and magnesium sulfate produced from low grade ore

  70,626 

5/1/2015

  10   36,490   34,136 

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

  1,412,529 

1/1/2018

  10   353,132   1,059,397 

Project of high value utilization of magnesium-rich waste liquid

  64,977 

7/9/2019

  10   6,498   58,478 

Total

 $1,858,888       $611,060  $1,247,828 

 

The detail of deferred income for the Company’s special projects at December 31, 2019 is:

 

  

Government

subsidy

amount

 

Project

completion

date

 

Useful life

in years

  

 

Accumulated

amortization

  

Net

 
                  

Technology upgrade for using lean ore to produce magnesium sulfate

 $315,358 

8/1/2013

  10  $202,355  $113,003 

Technical transformation for boric acid and magnesium sulfate produced from low grade ore

  71,672 

5/1/2015

  10   33,447   38,225 

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

  1,433,445 

1/1/2018

  10   286,689   1,146,756 

Project of high value utilization of magnesium-rich waste liquid

  65,939 

7/9/2019

  10   3,297   62,642 

Total

 $1,886,414       $525,788  $1,360,626 

 

 

12. SUBSIDY INCOME

 

Subsidy income consisted of amortization of deferred income for declared special projects and government’s general incentive fund (recorded as income upon receipt) for the six and three months ended June 30, 2020 and 2019, respectively:

 

  

Six Months Ended June 30,

 
  

2020

  

2019

 

Technology upgrade for using lean ore to produce magnesium sulfate

 $15,643  $16,222 

Technical transformation for boric acid and magnesium sulfate produced from low grade ore

  3,555   3,687 

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

  71,105   73,738 

Project of high value utilization of magnesium-rich waste liquid

  3,271   - 

Subsidy for resuming work

  2,061   - 

Total

 $95,635  $93,647 

 

  

Three Months Ended June 30,

 
  

2020

  

2019

 

Technology upgrade for using lean ore to produce magnesium sulfate

 $7,762  $8,070 

Technical transformation for boric acid and magnesium sulfate produced from low grade ore

  1,764   1,834 

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

  35,283   36,683 

Project of high value utilization of magnesium-rich waste liquid

  1,624   - 

Subsidy for resuming work

  2,061   - 

Total

 $48,494  $46,587 

 

13. DEFERRED TAX ASSETS

 

As of June 30, 2020 and December 31, 2019, respectively, deferred tax assets consisted of the following:

 

  

2020

  

2019

 

Deferred tax asset –NOL of US parent company

 $1,021,364  $941,203 

Less: valuation allowance

  (1,021,364

)

  (941,203

)

Deferred tax assets, net

 $-  $- 

 

The Company recorded a 100% valuation allowance for all deferred tax assets due to the uncertainty of its realization. 

 

14. INCOME TAXES

 

The Company is subject to income taxes by entity on income arising in or derived from the tax jurisdiction in which each entity is domiciled. The Company’s PRC subsidiaries file their income tax returns online with PRC tax authorities.

 

The H.R. 1 (the “Tax Reform”), effective for tax years beginning on or after January 1, 2018, except for certain provisions, resulted in changes to existing U.S. tax law, including various provisions that are expected to impact the Company. The Tax Reform Law reduces the federal corporate tax rate from 35% to 21% effective January 1, 2018 for the U.S. entity of the Company.

 

The US parent company, was incorporated in the US and has net operating losses (“NOL”) for income tax purposes, under the 2018 Tax Reform, the NOL arising in tax years beginning after 2017 may reduce 80% of a taxpayer’s taxable income, and be carried forward indefinitely. The U.S. parent Company has NOL carry forwards for income taxes of approximately $1,021,000 at June 30, 2020. Management believes the realization of benefits from these losses remains uncertain due to the parent Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

 

 

The recently issued Coronavirus Aid, Relief and Economic Security Act (the CARES Act or the Act), provides four relief provisions for corporate taxpayers as follows:

 

1.

Five-year NOL carryback provision: the Act allows for the carryback of losses arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, to each of the five taxable years preceding the taxable year of the loss.

 

2.

Fiscal year NOL carryback fix from the Tax Cuts and Jobs Act (TCJA) of 2017: the Act corrects the language to provide fiscal year taxpayers who had NOLs arising in years that began prior to December 31, 2017 and ended after December 31, 2017 with the ability to carry back those NOLs.

 

3.

Deferral of 80% income limitation on post-2017 NOLs to 2021: the Act suspends this 80% limitation for taxable years beginning before January 1, 2021, and instead allows the full offset of taxable income. For tax years beginning after December 31, 2020, the Act reinstates the 80% limitation.

 

4.

Immediate Alternative Minimum Tax (“AMT”) tax credit refunds: the Act accelerates availability of AMT credits. The full remaining refundable AMT credit amount will be available for a corporation’s first taxable year beginning in 2019. Alternatively, a corporation may elect to use 100% of its AMT credits for its first taxable year beginning in 2018. 

 

The disposed entities - SanDeKe, Jinhui, SmartHeat Investment, SmartHeat Pump, SmartHeat Trading and Heat Exchange are subject to the regular 25% PRC income tax rate.

 

Mid-Heaven BVI is a BVI company, and there is no income tax for companies domiciled in the BVI. Sincerity and Salt-Lake are governed by the Income Tax Law of the PRC concerning privately-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriate tax adjustments. Mid-Heaven BVI, Sincerity and Salt-Lake do not have any operations, and are not expected to have any operations in the future. Qinghai Technology and Qinghai Zhongli enjoys 15% preferential PRC income tax rate.

 

The following is a reconciliation of the difference between the actual provision for income taxes and the (benefit) provision computed by applying the federal statutory rate on income before income taxes for the six months ended June 30, 2020 and 2019, respectively:

 

  

2020

  

2019

 

Tax benefit at U.S. federal statutory rates

 $(34,588

)

 $(21,869

)

Foreign income taxed at different rates

  8,681   3,876 

Tax holiday in PRC

  (21,701)  (21,681)

Utilization of NOL

  -   (154

)

Valuation allowance

  73,541   72,350 

Tax expense per financial statements

 $25,933  $32,522 

 

The income tax expense for the six months ended June 30, 2020 and 2019, respectively, consisted of the following:

 

  

2020

  

2019

 

Income tax expense – current

 $25,933  $32,522 

Income tax benefit – deferred

  -   - 

Total income tax benefit, net

 $25,933  $32,522 

 

The following is a reconciliation of the difference between the actual provision for income taxes and the (benefit) provision computed by applying the federal statutory rate on income before income taxes for the three months ended June 30, 2020 and 2019, respectively:

 

  

2020

  

2019

 

Tax benefit at U.S. federal statutory rates

 $13,844  $(2,364

)

Foreign income taxed at different rates

  11,858   3,726 

Tax holiday in PRC

  (29,644

)

  (24,243

)

Utilization of NOL

  -   7,920 

Valuation allowance

  29,875   47,483 

Tax expense per financial statements

 $25,933  $32,522 

 

 

The income tax expense for the three months ended June 30, 2020 and 2019, respectively, consisted of the following:

 

  

2019

  

2018

 

Income tax expense – current

 $25,933  $32,522 

Income tax benefit – deferred

  -   - 

Total income tax benefit, net

 $25,933  $32,522 

 

15. MAJOR CUSTOMERS AND VENDORS 

 

For the six months ended June 30, 2020, four customers accounted for 15%, 12%, 12% and 10% of Company’s total sales. For the three months ended June 30, 2020, three customers accounted for 15%, 15% and 11% of Company’s total sales. Accounts receivable from those major customers was $240,352 and $243,975 as of June 30, 2020 and December 31, 2019, respectively. Two customers accounted for 17% and 15%, respectively, of the Company’s sales for the six months ended June 30, 2019. Two customers accounted for 15% and 13%, respectively, of the Company’s sales for the three months ended June 30, 2019.

 

Qinghai Technology purchased $594,526 and $619,984 boron ore (the main raw material) from Qinghai Mining during the six months ended June 30, 2020 and 2019, respectively. Qinghai Technology purchased $480,998 and $427,414 boron ore (the main raw material) from Qinghai Mining during the three months ended June 30, 2020 and 2019, respectively.

 

16. STATUTORY RESERVES AND RESTRICTED NET ASSETS

 

The Company’s ability to pay dividends primarily depends on the Company receiving funds from its subsidiaries. PRC laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of the subsidiary’s retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with US GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiaries.

 

In accordance with the PRC Regulations on Enterprises with Foreign Investment and their articles of association, a foreign-invested enterprise (“FIE”) established in the PRC is required to provide certain statutory reserves, which are appropriated from net profit as reported in the FIE’s PRC statutory accounts. An FIE is required to allocate at least 10% of its annual after-tax profit to the surplus reserve until such reserve has reached 50% of its respective registered capital based on the FIE’s PRC statutory accounts. Appropriations to other funds are at the discretion of the BOD for all FIEs. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Additionally, shareholders of an FIE are required to contribute capital to satisfy the registered capital requirement of the FIE. Until such contribution of capital is satisfied, the FIE is not allowed to repatriate profits to its shareholders, unless otherwise approved by the State Administration of Foreign Exchange. Sincerity, incorporated on July 9, 2018 in China as a wholly foreign-owned enterprise (“WFOE”) with registered capital of $1.00 million, has 10 years from the incorporation date to fulfill the registered capital requirement.

 

Additionally, in accordance with the Company Laws of the PRC, a domestic enterprise is required to provide surplus reserve at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide discretionary surplus reserve, at the discretion of the BOD, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Qinghai Technology was established as domestic enterprises and therefore are subject to the above-mentioned restrictions on distributable profits.

 

As a result of these PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company as a dividend.

 

According to Administrative Measures for the Collection and Utilization of Enterprise Work Safety Funds issued by the PRC Ministry of Finance and the State Administration of Work Safety, for the companies with dangerous goods production or storage, the company is required to make a special reverse for the use of enhancing and improving its safe production conditions. Under PRC GAAP, the reserve is recorded as cost of sales; however, under US GAAP, since the expense has not been incurred and the Company already recorded cost of sales for safety related expenses when incurred, this special reserve was recorded as an appropriation of its after-tax income. At June 30, 2020, the Company had $49,729 production safety related reserve, which was included in $135,676 statutory reserve inn the balance sheet,. The reserve is calculated at regressive rates levied on revenue in excess of specific amounts as follows:

 

 

Annual revenue amount

Reserve ratio

Less than RMB 10 million ($1.41 million)

4.0% of annual revenue

Over RMB 10 million ($1.41 million), but less than RMB 100 million ($14.13 million)

2.0% of annual revenue

Over RMB 100 million ($14.13 million), but less than RMB 1 billion ($141.25 million)

0.5% of annual revenue

Over RMB 1 billion ($141.25 million)

0.2% of annual revenue

 

17. COMMITMENTS

 

Capital Contribution

 

Both Sincerity and Salt-Lake were incorporated in China in 2018 with registered capital of $1.00 million and $0.88 million, respectively, they have 10 years from the incorporation date to fulfill the registered capital requirement. Under PRC company law, registered capital must be used in the operations of the domestic company within its approved business scope.

 

18. CONTINGENCIES

 

The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments in China and foreign currency exchange. The Company’s results may be adversely affected by changes in PRC government policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad and rates and methods of taxation, among other things.

 

The Company’s sales, purchases and expense transactions in China are denominated in RMB and all of the Company’s assets and liabilities in China are also denominated in RMB. The RMB is not freely convertible into foreign currencies under the current PRC law. In China, foreign exchange transactions are required by law to be transacted only by authorized financial institutions. Remittances in currencies other than RMB may require certain supporting documentation in order to affect the remittance.  

 

19. SUBSEQUENT EVENTS

 

The Company follows the guidance in FASB ASC 855-10 for the disclosure of subsequent events. The Company evaluated subsequent events through the date the financial statements were issued and determined the Company has no material subsequent events.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

The Company currently produces boric acid in the PRC and plans to expand its manufacturing facilities through a JV to produce up to 30,000 tonnes of lithium carbonate for the electric vehicle battery market in China, subject to funding. We formerly sold plate heat exchangers and heat pumps and sold those operations on September 30, 2019.

 

On December 31, 2018 (the "Closing Date"), we entered into a Share Exchange Agreement and Plan of Reorganization, as amended January 24, 2019 (the “Share Exchange Agreement”) with Mid-Heaven Sincerity International Resources Investment Co., Ltd (Mid-heaven BVI) and its shareholders Mao Zhang, Jian Zhang, and Ying Zhao, constituting all of the shareholders of Mid-heaven BVI (the “Mid-heaven Shareholders”). Pursuant to the terms of the Share Exchange Agreement, the shareholders of Mid-heaven BVI delivered all of the issued and outstanding shares of capital stock of Mid-Heaven BVI to SmartHeat, for 106,001,971 shares of our Common Stock. Mid-heaven BVI, through two subsidiaries, Qinghai Mid-Heaven Sincerity Technology Co., Ltd (“Sincerity”) and Qinghai Mid-Heaven Sincerity Salt-Lake R&D Co., Ltd (“Salt-Lake”) owns 100% of Qing Hai Mid-Heaven Boron & Lithium Technology Company, Ltd. (“Qinghai Technology”).

 

The Acquisition was structured as a tax-free reorganization. As a result of the share exchange agreement, Mid-heaven BVI’s shareholders own approximately 57% of the combined company.  For accounting purposes, the transaction was accounted for as a reverse acquisition of the Company by Mid-heaven BVI.

 

The main operating entity, Qinghai Technology was incorporated on December 18, 2018. The business of Qinghai Technology was carved out of the business of Qinghai Zhongtian Boron & Lithium Mining Co., Ltd (“Qinghai Mining”) on December 20, 2018. Qinghai Mining was founded March 6, 2001, and manufactures and wholesales boric acid and related compounds for industrial and consumer usage. Qinghai Technology obtains its raw material minerals exclusively from Qinghai Mining and currently processes boric acid by crushing and processing ore.

 

On September 30, 2019, Heat HP, Inc. and Heat PHE, Inc, our wholly owned subsidiaries, sold their respective equity interests in Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange for $353. The equity interests were sold to individuals and businesses in the PRC. Each subsidiary was sold for nominal cash consideration as below and, as the transactions were structured as purchases of equity interests, the subsidiary companies retained all liabilities when sold.

 

SmartHeat Jinhui (Beijing) Energy Technology Ltd - 100 RMB

SmartHeat (China) Investment Ltd - 400 RMB

SmartHeat (Shanghai) Trading Co., Ltd - 400 RMB

SmartHeat (Shenyang) Heat Pump Technology Co., Ltd - 400 RMB

SanDeKe Co., Ltd - 600 RMB

SmartHeat Heat Exchange Equipment Co - 600 RMB

 

On October 23, 2019, we filed a certificate of amendment to its certificate of incorporation to change its name from “SmartHeat, Inc.” to “Lithium & Boron Technology, Inc.” to better reflect the operations of the Company.

 

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization declared the outbreak to constitute a “Public Health Emergency of International Concern.” This contagious disease outbreak, which continues to spread to additional countries, and disrupts supply chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. The COVID-19 outbreak impacted the Company’s operations for the first quarter of 2020.  The Company had less production in the first quarter of 2020; the Company’s factory was reopened one month later than originally planned, and it did not resume the production one week after the factory reopened due to the shortage of master liquid pool resulting from the longer period of shutdown of the machine.  The cost of our coal increased during the first quarter of 2020 due to the overall lockdown in China. The Company’s sales also decreased for the first quarter of 2020 due to logistics restrictions put into place to curb travel. To facilitate sales, the Company reduced the selling price by RMB 50 ($7) per ton to certain customers.    The number of transportation vehicles has increased to meet the market’s shipping needs since April 2020.  In addition, the Company was able to procure sulfuric acid, a major raw material, from a local supplier at lower prices than usual due to excess supplies on the market.  The Company’s production and sales has been gradually increasing since April 2020. 

 

 

On March 27, 2020 (PRC time), Qinghai Technology entered into an Investment Cooperation Agreement, Memorandum of Cooperation and Licensing Agreement with Xi'an Jinzang Membrane Environmental Protection Technology Co., Ltd. (Xi’an Jinzang) to produce up to 30,000 tonnes of battery grade lithium carbonate annually, subject to funding. On April 15, 2020, the parties formed a JV company Qinghai Zhonglixinmo Technology Co., Ltd (Qinghai Zhongli or JV) to process brine supplied by Qinghai Technology. Qinghai Technology owns 51% of the JV and Xi’ Jinzang owns the remaining 49%. The JV cooperation agreement calls for a capital contribution of RMB 140 million ($19,746,000), which shall be paid in three phases according to the project construction progress: RMB 36 million ($5,077,000) to be paid within 10 days from the date of registration and establishment of the JV, RMB 72 million ($10,155,000) to be paid before July 31, 2020, and RMB 32 million ($4,513,000) to be paid before October 31,2020. All shareholders shall pay the capital in accordance with their respective shareholding ratio. The capital contribution amount and timing of making the capital contribution can be adjusted upon both parties’ mutual consent. Each party made an initial capital contribution of RMB 5 million ($0.71 million) in April 2020 and as of this report date. The Company promises and guarantees that, during the existence of the project company, it will provide the JV with lithium bearing brine resources for free. During the construction and operation of the project, all parties agree to actively raise construction funds by means of bank loans, self-owned funds, etc. if the funds are not raised in time, the term of paid in capital can be extended accordingly upon consensus of all parties.

 

Related Party Transactions 

 

Qinghai Technology purchased raw material boron rock from Qinghai Mining (owned by three major shareholders of the Company); in addition, Qinghai Technology sometimes received no-interest short-term advances from Qinghai Mining for daily operational needs. As of June 30, 2020 and December 31, 2019, due from Qinghai Mining (was the net amount of intercompany transactions between Qinghai Technology and Qinghai Mining due to carve out) was $1.18 million and $0.55 million, respectively. Qinghai Technology purchased $594,526 and $619,984 boron ore from Qinghai Mining during the six months ended June 30, 2020 and 2019, respectively. Qinghai Technology purchased $480,998 and $427,414 boron ore from Qinghai Mining during the three months ended June 30, 2020 and 2019, respectively.

 

On July 1, 2019, Qinghai Technology and Qinghai Mining entered a boron ore purchase contract for a term of one year. Qinghai Mining is to supply Qinghai Technology boron ore based on Qinghai Technology’s monthly production plan at a price of RMB 62 ($8.77) per tonne. The price is adjustable in the future if there is a significant fluctuation of the market price for the boron ore. In the fourth quarter of 2019, this price was adjusted to RMB 70.46 ($10.21) per tonne. In the first quarter of 2020, Qinghai Technology and Qinghai Mining entered a new purchase contract, the price for boron ore was adjusted to RMB 77.5 ($11.10) per tonne, and the price for slag was RMB 30 ($4.23) per tonne. This purchase contract will be in effect until a replacement contact with new purchase price is entered.

 

Qinghai Technology used equipment that belongs to Qinghai Province DaChaiDan ZhongTian Resources Development Co., Ltd (“Zhongtian Resources”, and is owned by the Chairman and his brother who ae also two major shareholders of the Company) for production. The depreciation of these fixed assets had an impact on the production costs of boric acid of the Company and was included in the Company’s cost of sales. The depreciation of these fixed assets for the six months ended June 30, 2020 and 2019 was $12,620 and $17,599, respectively. The depreciation of these fixed assets for the three months ended June 30, 2020 and 2019 was $6,357 and $8,615, respectively. Due to Zhongtian Resources resulting from using its equipment and payment of worker’s compensation made by Zhongtian Resource for Qinghai Technology was $60,945 and $49,125 at June 30, 2020 and December 31, 2019, respectively.

 

Qinghai Technology sold boric acid to Qinghai Dingjia Zhixin Trading Co., Ltd (“Dingjia”), 90% owned by the son of the Company’s major shareholder (also the Chairman of the Company). For the six months ended June 30, 2020 and 2019, the Company’s sales to Dingjia was $101,560 and $95,555, respectively. For the three months ended June 30, 2020 and 2019, the Company’s sales to Dingjia was $101,560 and $37,176, respectively. At June 30, 2020 and December 31, 2019, outstanding payable to Dingjia was $0.02 million and $0.06 million, respectively.

 

In addition, at June 30, 2020 and December 31, 2019, the Company had $851,091 and $573,263 due to another major shareholder of the Company (also the Company’s CEO), resulting from the certain of the Company’s operating expenses such as legal and audit fees that were paid by this major shareholder on behalf of the Company. This short term advance bore no interest, and payable upon demand.

 

 

The following table summarized the due from (to) related parties as of June 30, 2020 and December 31, 2019, respectively:

 

   

2020

  

2019

 
 

Related party name

        

Due from

Qinghai Mining

 $2,375,544  $1,173,881 

Due to  

Qinghai Mining  (1,193,253)  (619,354)

Due from, net

 $1,182,291  $554,527 
          

Due to

Dingjia

 $21,339  $56,144 

Due to

Zhongtian Resources

  60,945   49,125 

Due to

A major shareholder

  851,091   573,264 

Due to, total

 $933,375  $678,533 

 

Going Concern

 

The accompanying consolidated financial statements (“CFS”) were prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the accompanying CFS, the Company had net loss of $187,894 and $139,276 for the six months ended June 30, 2020 and 2019, respectively, the Company had net income of $42,734 and net loss of $43,590 for the three months ended June 30, 2020 and 2019, respectively, which raise substantial doubt about the Company’s ability to continue as a going concern.

 

In addition to current boric acid production business, the Company plans to produce lithium carbonate for the electric vehicle battery through a recently established JV from brine that is provided by Qinghai Technology for free. The cost for the brine is immaterial as it was mainly pumped out from the nearby Salt Lake. Management also intends to raise additional funds by way of a private or public offering, or by obtaining loans from banks or others. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions, there can be no assurances to that effect.  The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering. The CFS do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.  

 

Significant Accounting Policies

 

While our significant accounting policies are more fully described in Note 2 to our CFS, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis.

 

Basis of Presentation

 

Our CFS are prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP.  

 

Principles of Consolidation

 

For the six and three months ended June 30, 2020, the accompanying CFS include the accounts of the Company’s US parent, and Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake, Qinghai Technology and Qinghai Zhongli, which are collectively referred to as the “Company.” For the six and three months ended June 30, 2019, the accompanying CFS include the accounts of the Company’s US parent, and its subsidiaries Heat HP and Heat PHE, and their subsidiaries SanDeKe, Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump, and Heat Exchange, and Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake and Qinghai Technology, which are collectively referred to as the “Company.” All significant intercompany accounts and transactions were eliminated in consolidation.

 

Use of Estimates

 

In preparing the financial statements in conformity with US GAAP, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Significant estimates, required by management, include the recoverability of long-lived assets, allowance for doubtful accounts, and the reserve for obsolete and slow-moving inventories. Actual results could differ from those estimates.

 

 

Accounts Receivable

 

We maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on historical collection activity, we had bad debt allowance for accounts receivable of $0 at June 30, 2020 and December 31,2019.

 

Revenue Recognition

 

The Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

 

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon receipts of the goods by customer. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not affected by the income tax holiday. 

 

Deferred Income

 

Deferred income consists primarily of government grants and subsidies for supporting the Company’s technology innovation and transformation of boric acid, lithium and magnesium sulfate projects. The Company uses most of the subsidies to purchase machinery and equipment. Deferred income is amortized to revenue (other income) over the life of the assets for which the grant and subsidy was used for. Subsidies for declared project fund require government inspection to ensure proper use of the funds for the designated project.

 

Foreign Currency Translation and Comprehensive Income (Loss)

 

The accounts of the US parent company are maintained in USD. The functional currency of the Company’s China subsidiaries is the Chinese Yuan Renminbi (“RMB”). The accounts of the China subsidiaries were translated into USD in accordance with FASB ASC Topic 830, “Foreign Currency Matters.” According to FASB ASC Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity was translated at the historical rates and statement of operations items were translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, “Comprehensive Income.”

 

Noncontrolling Interests

 

The Company follows FASB ASC Topic 810, “Consolidation,”  governing the accounting for and reporting of noncontrolling interests (“NCIs”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to NCIs even when such allocation might result in a deficit balance. 

 

The net income (loss) attributed to NCIs was separately designated in the accompanying statements of operation and comprehensive income (loss). Losses attributable to NCIs in a subsidiary may exceed an NCI’s interests in the subsidiary’s equity. The excess attributable to NCIs is attributed to those interests. NCIs shall continue to be attributed their share of losses even if that attribution results in a deficit NCI balance.

 

On April 15, 2020, Qinghai Technology and Xi’an Jinzang formed a joint venture company Qinghai Zhongli to process brine supplied by Qinghai Technology. Qinghai Technology owns 51% of the JV and Xi’ Jinzang owns the remaining 49%. During the six and three months ended June 30, 2020, the Company had loss of $2,745 that were attributable to the noncontrolling interest.

 

Impairment of Long-Lived Assets

 

Long-lived assets, which include tangible assets, such as property and equipment, goodwill and other intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

 

 

Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized based on the excess of the carrying amount over the fair value (“FV”) of the assets. FV generally is determined using the asset’s expected future discounted cash flows or market value, if readily determinable. 

 

Effective January 1, 2020, the Company adopted ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its CFS.

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on its CFS.

 

Results of Operations

 

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

 

The following table sets forth the consolidated results of our operations for the periods indicated as a percentage of net sales, certain columns may not add due to rounding.

 

  

2020

  

% of Sales

  

2019

  

% of Sales

 

Sales

 $3,329,890      $3,208,755     

Cost of sales

  2,904,535   87.2

%

  2,700,173   84.2

%

Gross profit

  425,355   12.8

%

  508,582   15.8

%

Selling expenses

  85,549   2.6

%

  222,214   6.9

%

General and administrative expenses

  613,995   18.4

%

  484,357   15.1

%

Total operating expenses

  699,544   21.0

%

  706,571   22.0

%

Loss from operations

  (274,189

)

  (8.2

)%

  (197,989

)

  (6.2

)%

Other income

  109,483   3.3

%

  93,848   2.9

%

Loss before income taxes

  (164,706

)

  (4.9

)%

  (104,141

)

  (3.3

)%

Income tax expense

  25,933   0.8

%

  32,522   1.0

%

Loss from continuing operations

  (190,639

)

  (5.7

)%

  (136,663

)

  (4.3

)%

Loss from operations of discontinued entities, net of tax

  -   -

%

  (2,613

)

  (0.1

)%

Loss before noncontrolling interest

  (190,639)  (5.7

)%

  (139,276)  (4.4

)%

Less: loss attributable to noncontrolling interest from continuing operation

  (2,745)  (0.1

)%

  -   -

%

Net loss

 $(187,894

)

  (5.6

)%

 $(139,276

)

  (4.4

)%

  

 

Sales

 

Sales for the six months ended June 30, 2020 and 2019 was $3,329,890 and $3,208,755, respectively, an increase of $121,135 or 3.8%. For the six months ended June 30, 2020 and 2019, the Company’s sales to Dingjia, a related party company 90% owned by the son of the major shareholder of the Company (also the Chairman of the Company), was $101,560 and $95,555, respectively. Due to the outbreak of COVID19 and related logistic restriction, our sales was decreased during the first quarter of 2020; to facilitate sales, we reduced our selling price by RMB 50 ($7) per ton to certain customers, and we developed new customers during the second quarter of 2020, which mitigated the decreased sales from the first quarter, and resulted an overall increased sales by 3.8% compared to the six months ended June 30, 2019.

 

Cost of sales

 

Cost of sales (“COS”) for the six months ended June 30, 2020 and 2019 was $2,904,535 and $2,700,173, respectively, a increase of $204,362 or 7.6%. The increase was mainly due to increased sales. The COS as a percentage of sales was 87.2% for the six months ended June 30, 2020 compared with 84.2% for 2019. The increase in COS as a percentage of sales was mainly due to increased average cost of production. Due to COVID19 outbreak, our factory was reopened one month later than originally planned, and we did not resume the production one week after the factory reopened due to the drought of master liquid pool resulting from the longer period of shutdown of the machine, we spent additional days and had extra acid and mineral consumption to cultivate the concentration level of master liquid pool. In addition, the coal purchase cost increased by 20% during the six months ended June 30, 2020 compared to the comparable period of 2019. 

 

Gross profit

 

The gross profit for the six months ended June 30, 2020 and 2019 was $425,355 and $508,582, respectively, a decrease of $83,227 or 16.4%. The profit margin was 12.8% for the six months ended June 30, 2020 compared to 15.8% for the six months ended June 30, 2019, the decrease in profit margin was mainly due to decreased sales price per ton and increase production cost per ton.

 

Operating expenses

 

Selling expenses consist mainly of salespersons’ salaries and freight out. Selling expense were $85,549 for the six months ended June 30, 2020, compared to $222,214 for the six months ended June 30, 2019, a decrease of $136,665 or 61.5%, mainly resulting from decreased freight out expense of $47,144 and decreased salespersons’ salaries of $61,568.

 

General and administrative expenses consist mainly of salary, R&D, office, welfare, business meeting, maintenance, and utilities. General and administrative expenses were $613,995 for the six months ended June 30, 2020, compared to $484,357 for the six months ended June 30 2019, an increase of $129,638 or 26.8%, mainly resulting from increased officer salary of $240,000,which was partly offset by decreased professional fee of $78,000 and other G&A expenses of $30,000.

 

Other income

 

Other income was $109,483 for the six months ended June 30, 2020, compared to $93,848 for the six months ended June 30, 2019, an increase of $15,635 or 16.7%. For the six months ended June 30, 2020, other income mainly consisted of subsidy income of $95,635 and other income of $13,405. For the six months ended June 30, 2019, other income mainly consisted of subsidy income of $93,647.

 

Government provides grants and subsidies to support the Company’s technology innovation and transformation of boric acid, lithium and magnesium sulfate projects. The Company uses most of the subsidies to purchase machinery and equipment, which is amortized to revenue (other income) over the life of the assets for which the grant and subsidy was used for. Subsidies for declared project fund require government inspection to ensure proper use of the funds for the designated project.

 

Loss from continuing operations

 

Loss from continuing operations was $190,639 loss for the six months ended June 30, 2020, compared to $136,663 for the six months ended June 30, 2019. The $53,976 or 39.5% increase in loss from continuing operations was mainly due to increased cost of sales by $204,362 despite we have increased sales by $115,130 and decreased operating expenses by $7,027. 

 

Loss from operations of discontinued entities

 

Loss from operations of discontinued entities was $2,613 for the six months ended June 30, 2019, which was the operations from Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange, the Company sold these entities on September 30, 2019.

 

 

Net loss

 

We had a net loss of $187,894 for the six months ended June 30, 2020, compared to $139,276 for the six months ended June 30, 2019, an increase of net loss by $48,618 or 34.9%. The increase in our net loss mainly resulted from the reasons described above. 

 

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

 

The following table sets forth the consolidated results of our operations for the periods indicated as a percentage of net sales, certain columns may not add due to rounding.

 

  

2020

  

% of Sales

  

2019

  

% of Sales

 

Sales

 $2,319,392      $1,823,004     

Cost of sales

  1,973,791   85.1

%

  1,476,114   81.0

%

Gross profit

  345,601   14.9

%

  346,890   19.0

%

Selling expenses

  29,344   1.3

%

  121,812   6.7

%

General and administrative expenses

  326,993   14.1

%

  281,884   15.4

%

Total operating expenses

  356,337   15.4

%

  403,696   22.1

%

Loss from operations

  (10,736

)

  (0.5

)%

  (56,806

)

  (3.1

)%

Other income

  76,658   3.3

%

  45,544   2.5

%

Income (loss) before income taxes

  65,922   2.8

%

  (11,262

)

  (0.6

)%

Income tax expense

  25,933   1.1

%

  32,522   1.8

%

Income (loss) from continuing operations

  39,989   1.7

%

  (43,784

)

  (2.4

)%

Income from operations of discontinued entities, net of tax

  -   -

%

  194   (0.01

)%

Income (loss) before noncontrolling interest

  39,989   1.7

%

  (43,590)  (2.4

)%

Less: loss attributable to noncontrolling interest from continuing operation

  (2,745)  (0.1

)%

  -   -

%

Net income (loss)

 $42,734   1.8

%

 $(43,590

)

  (2.4

)%

 

Sales

 

Sales for the three months ended June 30, 2020 and 2019 was $2,319,391 and $1,823,004, respectively, an increase of $496,388 or 27.2%. For the three months ended June 30, 2020 and 2019, the Company’s sales to Dingjia, a related party company 90% owned by the son of the major shareholder of the Company (also the Chairman of the Company), was $101,560 and $37,176, respectively. The increase in sales for the three months ended June 30, 2020 was mainly due to reducing our selling price by RMB 50 ($7) per ton to attract certain major customers, and our effort of developing new customers.

 

Cost of sales

 

Cost of sales (“COS”) for the three months ended June 30, 2020 and 2019 was $1,973,791 and $1,476,114, respectively, an increase of $497,677 or 33.7%. The increase was mainly due to increased sales. The COS as a percentage of sales was 85.1% for the three months ended June 30, 2020 compared to 81.0% for 2019. The increase in COS as a percentage of sales was mainly due to increased production cost and increased coal purchase price due to the impact of COVID-19 outbreak.

 

Gross profit

 

The gross profit for the three months ended June 30, 2020 and 2019 was $345,601 and $346,890, respectively, a decrease of $1,289 or 0.4%. The profit margin was 14.9% for the three months ended June 30, 2020 compared to 19.0% for the three months ended June 30, 2019, the decrease in profit margin was mainly due to the decrease of selling price and increased production cost.

 

Operating expenses

 

Selling expenses consist mainly of salespersons’ salaries and freight out. Selling expense were $29,344 for the three months ended June 30, 2020, compared to $121,812 for the three months ended June 30, 2019, a decrease of $92,468 or 75.9%, mainly resulting from decreased freight out expense of $20,883 and decreased salespersons’ salaries of $54,609.

 

General and administrative expenses consist mainly of bad debt expense, R&D, office, welfare, business meeting, maintenance, and utilities. General and administrative expenses were $326,993 for the three months ended June 30, 2020, compared to $281,884 for the three months ended June 30 2019, an increase of $45,109 or 16.0%, mainly resulting from increased officer salary expense by $120,000, which was partly offset by decreased professional fee of $48,000 and other G&A expenses of $25,000.

 

 

Other income

 

Other income was $76,658 for the three months ended June 30, 2020, compared to $45,544 for the three months ended June 30, 2019, an increase of $31,114 or 68.3%. For the three months ended June 30, 2020, other income mainly consisted of subsidy income of $48,494 and other income of $27,754. For the three months ended June 30, 2019, other income mainly consisted of subsidy income of $46,587.

 

Government provides grants and subsidies to support the Company’s technology innovation and transformation of boric acid, lithium and magnesium sulfate projects. The Company uses most of the subsidies to purchase machinery and equipment, which is amortized to revenue (other income) over the life of the assets for which the grant and subsidy was used for. Subsidies for declared project fund require government inspection to ensure proper use of the funds for the designated project.

 

Income (Loss) from continuing operations

 

Income from continuing operations was $39,989 for the three months ended June 30, 2020, compared to loss of $43,784 for the three months ended June 30, 2019. The $83,773 or 191.3% increase in income from continuing operations was mainly due to increased other income, and decreased selling expense which was partly offset by increased G&A expense as described above. 

 

Income from operations of discontinued entities

 

Income from operations of discontinued entities was $194 for the three months ended June 30, 2019, which was the operations from Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange, the Company sold these entities on September 30, 2019.

 

Net (income) loss

 

We had a net income of $42,734 for the three months ended June 30, 2020, compared to loss of $43,590 for the three months ended June 30, 2019, an increase of net income by $86,324 or 198%. The increase in our net income mainly resulted from increased other income and decreased selling expense which was partly offset by increased G&A expense as described above.  

 

Liquidity and Capital Resources

 

As of June 30, 2020, we had cash and equivalents of $1.15 million. Working capital was $0.79 million at June 30, 2020. The ratio of current assets to current liabilities was 1.26:1 at June 30, 2020.  

 

The following is a summary of cash provided by or used in each of the indicated types of activities during six months ended June 30, 2020 and 2019:

 

  

2020

  

2019

 

Cash provided by (used in):

        

Operating activities

 $958,765  $182,084 

Investing activities

  (287,221

)

  - 

Financing activities

 $327,119  $(122,786

)

 

Net cash provided by operating activities was $958,765 for the six months ended June 30, 2020, compared to $182,084 for the six months ended June 30, 2019. The increase of cash inflow from operating activities for 2020 was principally attributable to increased cash inflow from inventory by $899,713, which was partly offset by decreased cash inflow from advances to suppliers by $136,198. 

 

Net cash used in investing activities was $287,221 for the six months ended June 30, 2020, compared to $0 in investing activities for the six months ended June 30, 2019. Net cash used in investing activities in 2020 was mainly consist of purchase of property and equipment.

 

Net cash provided by financing activities was $327,119 for the six months ended June 30, 2020, compared to $122,786 net cash used in financing activities for the six months ended June 30, 2019. The net cash provided by financing activities in 2020 consisted of capital contribution from noncontrolling interest of Qinghai Zhongli by $711,044, and increase in amount owing to other related parties of $256,233, but partly offset by increase in due from Qinghai Mining of $640,158. The net cash used in financing activities in 2019 consisted of decrease in due from Qinghai Mining of $3,224,026 but partly offset by decreased amount owing to other related parties of $3,346,812. 

 

 

Dividend Distribution

 

We are a US holding company that conducts substantially all of our business through our wholly owned and other consolidated operating entities in China. We rely in part on dividends paid by our subsidiaries in China for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Our PRC subsidiaries also are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to a statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of registered capital. These reserves are not distributable as cash dividends. In addition, our PRC subsidiaries, at their discretion, may allocate a portion of their after-tax profit to their staff welfare and bonus fund, which may not be distributed to equity owners except in the event of liquidation. Moreover, if any of our subsidiaries incur debt on its own behalf in the future, the instruments governing the debt may restrict such subsidiary’s ability to pay dividends or make other distributions to us. Any limitation on the ability of one of our subsidiaries to distribute dividends and other distributions to us could materially and adversely limit our ability to make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

 

Off-Balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties other than as described following under “Contractual Obligations.” We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, our principal executive officer and principal financial officer, respectively, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, our disclosure controls and procedures were not effective as of such date because of a material weakness identified in our internal control over financial reporting related to our internal level of US GAAP expertise. We lack sufficient personnel with the appropriate level of knowledge, experience and training in US GAAP for the preparation of financial statements in accordance with US GAAP. None of our internal accounting staff, including our Chief Financial Officer, that are primarily responsible for the preparation of our books and records and financial statements in compliance with US GAAP holds a license such as Certified Public Accountant in the US, nor have any attended US institutions or extended educational programs that would provide enough of the relevant education relating to US GAAP.

 

Changes in Internal Control over Financial Reporting.

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended June 20, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We may become involved in various lawsuits and legal proceedings arising in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may have an adverse effect on our business, financial conditions or operating results. Other than the proceedings we have disclosed below, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

Item 1A. Risk Factors

 

You should consider carefully the factors discussed in the “Risk Factors” in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2019, as amended, which could materially affect our business.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

See the Exhibit Index preceding the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

EXHIBIT INDEX

 

Exhibit No.

 

Document Description

31.1 †

 

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 †

 

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 ‡

 

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

101.INS†

 

XBRL Instance Document

101.SCH†

 

XBRL Schema Document

101.CAL†

 

XBRL Calculation Linkbase Document

101.DEF†

 

XBRL Definition Linkbase Document

101.LAB†

 

XBRL Label Linkbase Document

101.PRE†

 

XBRL Presentation Linkbase Document

 

† Filed herewith

‡ Furnished herewith

 

 

SIGNATURES

 

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

 

 

 

LITHIUM & BORON TECHNOLOGY, INC.

 

 

(Registrant)

 

 

 

 

 

Date:  August 13, 2020

By:

/s/ Jimin Zhang

 

 

 

Mr. Jimin Zhang

Chief Executive Officer

(Principal Executive Officer and Duly Authorized Signatory)

 

 

 

 

 

 

33