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LBTI Lithium & Boron Technology

Filed: 17 May 21, 2:35pm


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 March 31, 2021

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 May 16, 2021 there were 185,986,370 shares of common stock outstanding.

 

 

 

 

Lithium & Boron Technology, Inc.

Table of Contents

 

  

Page

Note about Forward-Looking Statements

 
   

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

30

Item 4.

Controls and Procedures

30
   

PART II. OTHER INFORMATION

   

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 3.

Defaults Upon Senior Securities

31

Item 4.

Mine Safety Disclosures

31

Item 5.

Other Information

31

Item 6.

Exhibits

31
   
 

Exhibit Index

31
   
 

Signatures

32

 

 

 

 

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.

 

 

Item 1. Financial Statements

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED BALANCE SHEETS

 

  

AS OF

MARCH 31,

  

AS OF

DECEMBER 31,

 
  

2021

(UNAUDITED)

  

2020

 

ASSETS

        
         

CURRENT ASSETS

        

     Cash and equivalents

 $922,140  $972,066 

     Accounts receivable, net

  233,609   223,194 

     Prepaid expense

  3,550   - 

     Notes receivable

  73,045   96,367 

     Other receivables

  113,468   60,226 

     Advances to suppliers, net

  359,395   242,311 

     Due from related parties

  2,371,479   1,771,789 

     Inventories

  522,138   1,179,387 
         

        Total current assets

  4,598,824   4,545,340 
         

NONCURRENT ASSETS

        

     Due from related party

  1,401,922   1,411,891 

     Property and equipment, net

  1,422,095   1,488,783 

     Construction in progress

  783,141   141,846 
         

       Total noncurrent assets

  3,607,158   3,042,520 
         

TOTAL ASSETS

 $8,205,982  $7,587,860 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

CURRENT LIABILITIES

        

     Accounts payable

 $422,468  $525,775 

     Unearned revenue

  189,084   64,190 

     Accrued liabilities and other payables

  1,544,513   1,522,347 

     Taxes payable

  190,965   106,651 

     Due to related parties

  1,852,818   1,114,662 
         

       Total current liabilities

  4,199,848   3,333,625 
         

DEFERRED INCOME

  1,194,132   1,253,046 
         

TOTAL LIABILITIES

  5,393,980   4,586,671 
         

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

  198,463   177,843 

Accumulated other comprehensive income

  190,565   223,922 

Retained earnings

  8,167,392   8,328,736 
         

       TOTAL COMPANY STOCKHOLDERS' EQUITY

  2,076,037   2,250,118 
         

       Noncontrolling interest

  735,965   751,071 
         

       TOTAL EQUITY

  2,812,002   3,001,189 
         

TOTAL LIABILITIES AND EQUITY

 $8,205,982  $7,587,860 

 

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

 

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

 

  

THREE MONTHS ENDED MARCH 31,

 
  

2021

  

2020

 
         

Sales

 $1,828,380  $1,010,498 
         

Cost of sales

  1,696,118   930,744 
         

Gross profit

  132,262   79,754 
         

Operating expenses

        

     Selling

  23,055   56,205 

     Bad debts

  -   2,568 

     General and administrative

  274,371   284,434 
         

     Total operating expenses

  297,426   343,207 
         

Loss from operations

  (165,164)  (263,453)
         

Non-operating income

        

     Financial expense

  (189)  - 

     Other expenses

  (60)  (14,349)

     Interest income

  477   33 

     Subsidy income

  50,737   47,141 
         

     Total non-operating income, net

  50,965   32,825 
         

Loss before income tax

  (114,199)  (230,628)
         

Income tax expense

  11,458   - 
         

Loss before noncontrolling interest

  (125,657)  (230,628)
         

Less: loss attributable to noncontrolling interest

  (9,933)  - 
         

Net loss to the Company

  (115,724)  (230,628)
         

Other comprehensive item

        

Foreign currency translation loss attributable to the Company

  (33,357)  (59,196)

Foreign currency translation loss attributable to noncontrolling interest

  (5,173)  - 
         

Comprehensive loss attributable to the Company

 $(149,081) $(289,824)
         

Comprehensive loss attributable to noncontrolling interest

 $(15,106) $- 
         

Basic and diluted weighted average shares outstanding

  185,968,370   185,968,370 
         

Basic and diluted net loss per share

 $(0.00) $(0.00)

 

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

 

 

LITHIUM & BORON TECHNOLOGY, INC

STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(UNAUDITED)

 

  

Common Stock

  

Paid-in capital 

  Statutory   

Accumulated other

comprehensive

  Retained      Noncontrolling 
  

Shares

  

Amount

  

deficiency

  

reserves

  

income (loss)

  

earnings

  

Total

  

interest

 

Balance at January 1, 2021

  185,968,370  $185,968  $(6,666,351) $177,843  $223,922  $8,328,736  $2,250,118  $751,071 
                                 

Net loss

  -   -   -   -   -   (115,724)  (115,724)  (9,933)
                                 

Statutory reserve

  -   -   -   20,620   -   (20,620)  -   - 
                                 

Dividend accrued

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

Foreign currency translation loss

  -   -   -   -   (33,357)  -   (33,357)  (5,173)
                                 

Balance at March 31, 2021

  185,968,370  $185,968  $(6,666,351) $198,463  $190,565  $8,167,392  $2,076,037  $735,965 

 

  

Common Stock

  

Paid-in capital

  Statutory  

Accumulated other

comprehensive

  Retained     
  

Shares

  

Amount

  

deficiency

  

reserves

  

income (loss)

  

earnings

  

Total

 

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 

 

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

 

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

  

THREE MONTHS ENDED MARCH 31,

 
  

2021

  

2020

 
         

CASH FLOWS FROM OPERATING ACTIVITIES:

        

            Loss including noncontrolling interest

 $(125,657) $(230,628)

            Adjustments to reconcile loss including noncontrolling

                 interest to net cash provided by operating activities:

        

            Depreciation

  90,534   76,346 

            Provision for bad debts

  -   2,568 

            Changes in deferred income

  (50,737)  (47,141)

                         (Increase) decrease in assets and liabilities:

        

                                   Accounts receivable

  (12,152)  84,486 

                                   Other receivables

  (56,440)  (19,856)

                                   Advances to suppliers

  (120,386)  (44,268)

                                   Inventories

  657,614   606,756 

                                   Prepaid expense

  (1,542)  (15,618)

                                   Accounts payable

  (77,986)  (192,472)

                                   Unearned revenue

  127,027   (10,102)

                                   Accrued liabilities and other payables

  (2,351)  32,719 

                                   Taxes payable

  86,206   31,882 
         

            Net cash provided by operating activities

  514,130   274,672 
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

                                   Purchase of property and equipment

  (33,606)  - 

                                   Construction in progress

  (650,901)  - 
         

            Net cash used in investing activities

  (684,507)  - 
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

                                  Changes in due from related parties

  (620,402)  (191,744)

                                  Changes in due to related parties

  747,140   112,986 
         

            Net cash provided by (used in) financing activities

  126,738   (78,758)
         

EFFECT OF EXCHANGE RATE CHANGE ON CASH AND EQUIVALENTS

  (6,287)  (5,393)
         

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS

  (49,926)  190,521 
         

CASH AND EQUIVALENTS, BEGINNING OF PERIOD

  972,066   160,024 
         

CASH AND EQUIVALENTS, END OF PERIOD

 $922,140  $350,545 
         

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021 (UNAUDITED) AND DECEMBER 31, 2020

 

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 PRC and plans to expand its manufacturing facilities through a joint venture (“JV”) to produce up to 30,000 tonnes of lithium carbonate annually for the electric vehicle battery market in China, subject to funding.

 

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 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. (“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, Technology was incorporated December 18, 2018. The business of 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 is engaged in the manufacture and wholesale sale of boric acid and related compounds for industrial and consumer usage. Technology obtains its raw material minerals exclusively from Qinghai Mining and currently processes boric acid by crushing and processing ore.  

 

In December 2019, a novel strain of coronavirus (COVID-19) was reported and 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.  However, as a result of PRC government’s effort on disease control, most cities in China were reopened in April 2020, the outbreak in China is under the control; and the Company’s production and sales has started back to normal since April 2020. Since April 2020 to date, there were some new COVID-19 cases discovered in a few provinces of China as of today, however, the number of new cases are not significant due to PRC government’s strict control, and the Company does not believe the new cases would have a significant impact on the Company’s operations in 2021.

 

On March 27, 2020, 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 Zhonglixinmo Technology Co., Ltd (“Qinghai Zhongli” or JV) to process brine supplied by Qinghai Technology. 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), to 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. The JV’s shareholders are required to contribute 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. As of the date of this report, the parties have not made all capital contributions on the dates due, pending financing by the Company, as the capital contribution amount and timing of making the capital contribution can be adjusted anytime upon both parties’ mutual consent. 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 capital contribution can be extended 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 loss of $115,724 and $230,628 for the three months ended March 31, 2021 and 2020, respectively, which raises 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 electric vehicle batteries through a recently established JV from brine that is provided by Technology. The Company will absorb costs for the brine it provides to the JV which is pumped out directly 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 assurance 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.   

 

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 March 31, 2021 and for the three-month periods ended March 31, 2021 and 2020 was 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, 2020, previously filed with the SEC on April 15, 2021.

 

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 March 31, 2021, its consolidated results of operations and cash flows for the three months ended March 31, 2021 and 2020, as applicable, were made.

 

Principles of Consolidation 

 

For the three months ended March 31, 2021, the accompanying CFS include the accounts of the Company’s US parent, and Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake, Technology and Qinghai Zhongli, 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 includes 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 $19,631 and $19,770 at March 31, 2021 and December 31, 2020, respectively.

 

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 March 31, 2021 and December 31, 2020, the Company had gross advance to suppliers of $362,122 and $245,058 respectively, and the Company had allowance for advances to suppliers of $2,727 and $2,747, respectively. In addition, as of March 31, 2021, advances to suppliers also included a prepayment of $30,436 to a third-party company for purchasing equipment and a land use right; total purchase price is $167,395, the remaining $136,959 will be paid within three days after the completion of the land certificate and related deed transfer, or the prepayment will be returned to the Company if failure to obtain the land use certificate and related deed. As of this report date, the Company is still waiting for relevant authorities to process the title transfer of the land use right.

 

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 of the assets. Fair value 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 March 31, 2021 and December 31, 2020, there was no significant impairments of its long-lived assets.

 

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.

 

 

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. 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 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 cost of sales. 

 

Research and Development Costs

 

Research and development (“R&D”) costs are expensed as incurred and included in general and administrative 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 three months ended March 31, 2021 and 2020 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 FASB 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 FASB 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 Company’s 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 FASB 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. FASB 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 FASB 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 operations.  At March 31, 2021 and December 31, 2020, 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 NCI (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 non-controlling interests even when such allocation might result in a deficit balance. 

 

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

 

On April 15, 2020, Technology and Xi’an Jinzang formed a JV, Qinghai Zhongli, to process brine supplied by Technology. Technology owns 51% of the JV and Xi’an Jinzang owns the remaining 49%. During the three months ended March 31, 2021, the Company had loss of $9,933 attributable to the NCI. 

 

Concentration of Credit Risk

 

Cash includes cash on hand and demand deposits in accounts maintained within China. Balances at financial institutions and state-owned banks within the PRC are covered by insurance up to RMB 500,000 (US$77,000) per bank. Any balance over RMB 500,000 ($77,000) per bank in PRC will not be covered. 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 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 fair value due to their short maturities. FASB ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value (“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

 

FASB 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 March 31, 2021 and December 31, 2020, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at FV. 

 

 

Leases

 

The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for the operating lease, the Company generally uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating lease right-of-use (“ROU assets”) assets represent the Company’s right to control the use of an identified asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are generally recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term. The Company will elect the package of practical expedients permitted under the transition guidance to combine the lease and non-lease components as a single lease component for operating leases, and will keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the consolidated statements of income on a straight-line basis over the lease term.

 

ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets.

 

ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

 

Operating leases are included in operating lease ROU assets and operating lease liabilities (current and non-current), on the consolidated balance sheets.  The Company did not have any leases as of March 31, 2021.

 

Related Parties

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all significant related party transactions.

 

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 current 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. The Company plans to expand its manufacturing facilities through a newly formed joint venture with Qinghai Zhongli in which the Company owns 51% to produce lithium carbonate for the electric vehicle battery market in China. Qinghai Zhongli is currently constructing the production workshop but has no production yet.

 

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 January 2017, the FASB issued 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 FV, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its CFS.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.

 

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period.  The Company is currently evaluating the impact that ASU 2020-06 may have on its CFS.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future CFS.

 

3. INVENTORIES, NET 

 

Inventories at March 31, 2021 and December 31, 2020, respectively, were as follows: 

 

  

2021

  

2020

 

Raw materials

 $229,905  $275,416 

Finished goods

  292,233   903,971 

Total

 $522,138  $1,179,387 

 

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 March 31, 2021 and December 31, 2020, the Company had notes receivable of $73,045 and $96,367, respectively; and at March 31, 2021, the Company had $0.84 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 March 31, 2021 and December 31, 2020:

 

  

2021

  

2020

 

VAT receivable

 $102,405  $57,364 

Prepaid rent (short term)

  6,528   2,043 

Other

  4,535   819 

Total

 $113,468  $60,226 

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following at March 31, 2021 and December 31, 2020, respectively:

 

  

2021

  

2020

 

Structures and improvements

 $477,872  $481,270 

Production equipment

  2,887,416   2,880,146 

Vehicle

  75,890   70,836 

Equipment

  265,348   267,235 

Total

  3,706,526   3,699,487 

Less: accumulated depreciation

  (2,284,431

)

  (2,210,704

)

Property and equipment, net

 $1,422,095  $1,488,783 

 

Depreciation for the three months ended March 31, 2021 and 2020 was $90,534 and $76,346, respectively. 

 

7. CONSTRUCTION IN PROGRESS (CIP)

 

As of March 31, 2021 and December 31, 2020, the Company had CIP of $783,141 and $141,846, respectively. The CIP was mainly for Qinghai Zhongli’s Adsorption Station Project, which is the early stage of an integrated lithium carbonate production system. The adsorption station is equipped with a liquid storage tank for the adsorption material to be placed inside, and its function is to preliminarily extract lithium mother solution from brine for initial purification; the lithium mother solution will go into evaporation shed for refining and concentration; and the concentrated mother solution (also called lithium water saturated solution) is then sent to the production workshop for precipitation and drying to form the finished product of lithium carbonate. As of March 31, 2021, the Company spent $783,141 for constructing the adsorption station; as of this report date, the Company completed the construction of two adsorption stations and is currently doing the equipment commissioning for the second absorption station. The Company was committed to pay $203,180 more based on the various construction - related contracts entered as of March 31, 2021.

 

8. TAXES PAYABLE

 

Taxes payable consisted of the following March 31, 2021 and December 31, 2020, respectively:

 

  

2021

  

2020

 

Other

 $22,318  $18,331 

VAT

  168,647   88,320 

Taxes payable

 $190,965  $106,651 

 

9. ACCRUED LIABILITIES AND OTHER PAYABLES 

 

Accrued liabilities and other payables consisted of the following at March 31, 2021 and December 31, 2020, respectively:

 

  

2021

  

2020

 

Advances from third parties

 $23,342  $6,035 

Other

  612,100   561,000 

Accrued salary

  909,071   955,312 

Total

 $1,544,513  $1,522,347 

 

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

 

 

As of March 31, 2021 and December 31, 2020, other mainly consisted of 1) dividend payable to Northtech of $525,000 and $500,000, respectively; and 2) payables for professional fees and other miscellaneous expenses of $87,100 and $61,000, respectively. 

 

As of March 31, 2021, accrued salary of $909,071 included $840,000 accrued salary for the three senior officers. As of December 31, 2020, accrued salary of $955,312 included $840,000 accrued salary for three senior officers.

 

10. RELATED PARTY TRANSACTIONS

 

Due from related parties

 

Technology purchased raw material boron rock from Qinghai Mining (owned by three major shareholders of the Company); in addition, Technology received no-interest short-term advances from Qinghai Mining for daily operational needs. As of March 31, 2021 and December 31, 2020, due from Qinghai Mining was $3.77 million and $3.11 million (the net amount of intercompany transactions between Technology and Qinghai Mining), respectively. Technology purchased boron ore of $261,258 and $113,528 from Qinghai Mining during the three months ended March 31, 2021 and 2020, respectively.

 

On July 1, 2019, Technology and Qinghai Mining entered a boron ore purchase contract for one year. Qinghai Mining is to supply Technology boron ore based on Technology’s monthly production plan at RMB 62 ($9.10) 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, 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 ($4.41) per tonne. This purchase contract will be in effect until a replacement contact with new purchase price is entered.

 

In September 2020, Technology sold the Test and Experimental Plant I to Qinghai Mining at cost of RMB 11.41 million ($1.74 million) (see Note 7). The payment term is five years with annual interest of 4.75%.  The first payment of $334,789 is due September 30, 2021. As of March 31, 2021, the future minimum payments for next five years is: $334,789, $334,789, $334,789, $334,789 and $397,555.  Qinghai Mining guarantees payment with its accounts receivables, and has the right to repay the purchase price in full any time before the maturity date.

 

During the fourth quarter 2020, the Company made a short-term cash advance of RMB 500,000 ($76,630) to Xi’an Jinzang (49% NCI of the JV) with no interest and payable upon demand. Xi’an Jinzang repaid the amount in full in January 2021.

 

Due to related parties

 

Technology used equipment for production that belongs to Qinghai Province Dachaidan Zhongtian Resources Development Co., Ltd (“Zhongtian Resources”, which 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 three months ended March 31, 2021 and 2020 was $5,586 and $6,263, respectively. Due to Zhongtian Resources resulting from using its equipment and payment of worker’s compensation made by Zhongtian Resource for Technology was $84,261 and $79,309 at March 31, 2021 and December 31, 2020, respectively.

 

Technology sold boric acid to Qinghai Dingjia Zhixin Trading Co., Ltd (“Dingjia”) which is 90% owned by the son of the Company’s major shareholder and Chairman. For the three months ended March 31, 2021 and 2020, the Company’s sales to Dingjia was $0, respectively. At March 31, 2021 and December 31, 2020, payable to Dingjia was $20,615 and $20,762 respectively.

 

During the three months ended March 31, 2021, Qinghai Zhongli and Xi’an Jinzang entered three loan contracts for Qinghai Zhongli borrowing RMB 4 million ($608,708) with an annual interest of 6.8% from Xi’an Jinzang. The fund was used for the production and operation activities of Qinghai Zhongli. The Company shall repay RMB 2.5 million ($380,442) with accrued interest by June 30, 2021 and repay the remaining RMB 1.5 million ($228,266) with accrued interest by December 31, 2021. A late fee of 1/1000 of outstanding balance per day will be charged if the Company is not able to repay the loan on time.

 

In addition, at March 31, 2021 and December 31, 2020, the Company had $1,135,591 and $1,014,591 due to another major shareholder of the Company and Chief Executive Officer, resulting from certain Company operating expenses of the US parent company such as legal and audit fees that were paid by him 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 March 31, 2021 and December 31, 2020, respectively:

 

 

Related party name

 2021  2020 

Due from

Qinghai Mining including $1.75 million sale of CIP

 $4,635,533  $3,457,488 

Due to

Qinghai Mining

  (862,132

)

  (350,438

)

Due from Xi'an Jinzang (NCI of the JV)

  -   76,630 

Due from, net (current and noncurrent)

 $3,773,401  $3,183,680 
          

Due to

Dingjia

 $20,615  $20,762 

Due to

Xi'an Jinzang (NCI of the JV) with 6.8% interest

  612,351   - 

Due to

Zhongtian Resources

  84,261   79,309 

Due to

A major shareholder

  1,135,591   1,014,591 

Due to, total

 $1,852,818  $1,114,662 

 

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 March 31, 2021 is:

 

  

Government

subsidy

amount

 

Project

completion

date

 

Useful life

in years

  

Accumulated

amortization

  

Net

 
                  

Technology upgrade for using lean ore to produce magnesium sulfate

 $334,789 

8/1/2013

  10  $256,672  $78,117 

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

  76,088 

5/1/2015

  10   45,019   31,069 

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

  1,521,769 

1/1/2018

  10   494,575   1,027,194 

Project of high value utilization of magnesium-rich waste liquid

  304,354 

7/9/2019

  10   246,602   57,752 

Total

 $2,237,000       $1,042,868  $1,194,132 

 

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

 $337,170 

8/1/2013

  10  $250,068  $87,102 

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

  76,629 

5/1/2015

  10   43,422   33,207 

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

  1,532,591 

1/1/2018

  10   459,778   1,072,813 

Project of high value utilization of magnesium-rich waste liquid

  306,518 

7/9/2019

  10   246,594   59,924 

Total

 $2,252,908       $999,862  $1,253,046 

 

 

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 three months ended March 31, 2021 and 2020, respectively:

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 

Technology upgrade for using lean ore to produce magnesium sulfate

 $8,482  $7,881 

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

  1,928   1,791 

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

  38,554   35,822 

Project of high value utilization of magnesium-rich waste liquid

  1,773   1,647 

Total

 $50,737  $47,141 

 

13. DEFERRED TAX ASSETS

 

As of March 31, 2021 and December 31, 2020, respectively, deferred tax assets consisted of the following:

 

  

2021

  

2020

 

Deferred tax asset –NOL of US parent company

 $1,112,735  $1,081,844 

Less: valuation allowance

  (1,112,735

)

  (1,081,844

)

Deferred tax assets, net

 $-  $- 

 

The Company recorded a 100% valuation allowance for 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 (“NOLs”) for income tax purposes, under the 2018 Tax Reform, the NOLs arising in tax years beginning after 2017 may reduce 80% of a taxpayer’s taxable income, and be carried forward indefinitely. However, the coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) issued in March 2020, provides tax relief to both corporate and noncorporate taxpayers by adding a five-year carryback period and temporarily repealing the 80% limitation for NOLs arising in 2018, 2019 and 2020. The U.S. parent Company has NOLs carry forwards for income taxes of approximately $5.30 million at March 31, 2021. 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. 

 

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. Technology and Qinghai Zhongli have a 15% preferential PRC income tax rate. 

 

The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory rate on income before income taxes for the three months ended March 31, 2021 and 2020, respectively:

 

  

2021

  

2020

 

Tax benefit at U.S. federal statutory rates

 $(23,983

)

 $(48,432

)

Foreign income taxed at different rates

  1,317   (3,177)

Tax holiday in PRC

  (3,290

)

  7,943 

Other

  3,482   - 

Valuation allowance

  33,932   43,666 

Tax expense per financial statements

 $11,458  $- 

 

 

The income tax expense for the three months ended March 31, 2021 and 2020, respectively, consisted of the following:

 

  

2021

  

2020

 

Income tax expense – current

 $11,458  $- 

Income tax benefit – deferred

  -   - 

Total income tax benefit, net

 $11,458  $- 

 

15. MAJOR CUSTOMERS AND VENDORS 

 

The following table sets forth information as to the Company’s major customers that accounted for 10% or more of the Company’s sales for the three months ended March 31, 2021 and 2020.

 

For the Three Months Ended March 31, 2021

 

For the Three Months Ended March 31, 2020

 

Customer

 

Percentage of

Total Sales

 

Customer

 

Percentage of

Total Sales

 

A

  11

%

A

  -

%

B

  11

%

B

  -

%

C

  11

%

C

  -

%

D

  10

%

D

  -

%

E

  -

%

E

  10

%

 

The Company had one customer that accounted for 10% or more of the Company’s accounts receivable as of March 31, 2021 and December 31, 2020. The accounts receivable from this customer was $233,610 and $211,134 as of March 31, 2021 and December 31, 2020, respectively.

 

Technology purchased all of its boron ore raw material of $261,258 and $113,528 from Qinghai Mining during the three months ended March 31, 2021 and 2020, respectively. The following table sets forth information as to the Company’s major suppliers that accounted for 10% or more of the Company’s total purchases for the three months ended March 31, 2021 and 2020.

 

For the Three Months Ended March 31, 2021

 

For the Three Months Ended March 31, 2020

 

Supplier

 

Percentage of

Total Purchases

 

 

 
Supplier
 
 

Percentage of

Total Purchases

 

A

  24

%

A

  32

%

B

  13

%

B

  -

%

C

  12

%

C

  -

%

D

  11

%

D

  14

%

 

The Company had one supplier that accounted for 10% or more of the Company’s accounts payable as of March 31, 2021 and December 31, 2020. The accounts payable from this supplier was $255,716 and $240,504 as of March 31, 2021 and December 31, 2020, 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 have a discretionary surplus reserve, at the discretion of the BOD, from the profits determined in accordance with the enterprise’s PRC statutory accounts. Appropriation to such reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year. The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. 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 March 31, 2021, the Company had $89,307 production safety related reserve, which was included in $198,463 statutory reserve in 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. Managements Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

The Company currently produces boric acid in the Peoples Republic of China (“PRC”) and plans to expand its manufacturing facilities through a Joint Venture (“JV”) to produce up to 30,000 tonnes of lithium carbonate annually for the electric vehicle battery market in China, subject to funding. We 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. (“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, Technology was incorporated on December 18, 2018. The business of 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 is engaged in manufacture and wholesale of boric acid and related compounds for industrial and consumer usage. 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 and 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. However, as a result of PRC government’s effort on disease control, most cities in China were reopened in April 2020, the outbreak in China is under the control, and the Company’s production and sales has gradually increasing since April 2020.  Since April 2020 and to date, there were some new COVID-19 cases discovered in a few provinces of China, and we do not believe that the number of new cases are significant to our operations due to PRC government’s strict control.

 

 

On March 27, 2020 (PRC time), 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 Technology. 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. The JV’s shareholders are required to contribute 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. As of the date of this report, the parties have not made all capital contributions on the dates due, pending financing by the Company, as the capital contribution amount and timing of making the capital contribution can be adjusted anytime upon both parties’ mutual consent. 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 

 

Due from related parties

 

Technology purchases raw material boron rock from Qinghai Mining (owned by three major shareholders of the Company); in addition, Technology received no-interest short-term advances from Qinghai Mining from time to time for daily operational needs. As of March 31, 2021 and December 31, 2020, due from Qinghai Mining was $3.77 million and $3.11 million, respectively (the net amount of intercompany transactions between Technology and Qinghai Mining). Qinghai Technology purchased boron ore at a cost of $261,258 and $113,528 from Qinghai Mining during the three months ended March 31, 2021 and 2020, respectively.

 

On July 1, 2019, 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 ($9.10) 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, 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 ($4.41) per tonne. The new purchase contract will be in effect until a replacement contact with new purchase price is entered.

 

In September 2020, Technology sold the Test and Experimental Plant I to Qinghai Mining at cost of RMB 11.41 million ($1.75 million) (see Note 7). The payment term is five years with annual interest of 4.75%.  The first payment of $334,789 is due September 30, 2021. Qinghai Mining guarantees payment with its accounts receivable , and has the right to repay the purchase price in full any time before the maturity date.

 

Due to related parties

 

Technology uses equipment that belongs to Qinghai Province Dachaidan Zhongtian Resources Development Co., Ltd (“Zhongtian Resources” which is owned by our Chairman and his brother who are 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 three months ended March 31, 2021and 2020 was $5,586 and $6,263, respectively. Due to Zhongtian Resources resulting from using its equipment and payment of worker’s compensation made by Zhongtian Resource for Technology was $84,261 and $79,309 at March 31, 2021 and December 31, 2020, respectively.

 

Technology sold boric acid to Qinghai Dingjia Zhixin Trading Co., Ltd (“Dingjia”) which is 90% owned by the son of the Company’s major shareholder and Chairman. For the three months ended March 31, 2021 and 2020, the Company’s sales to Dingjia was $0, respectively. At March 31, 2021 and December 31, 2020, outstanding payable to Dingjia was $20,615 and $20,762, respectively.

 

During the three months ended March 31, 2021, Qinghai Zhongli and Xi’an Jinzang entered three loan contracts for Qinghai Zhongli borrowing RMB 4 million ($608,708) with an annual interest 6.8% from Xi’an Jinzang. The fund was used for the production and operation activities of Qinghai Zhongli. The Company shall repay RMB 2.5 million ($380,442) with accrued interest by June 30, 2021 and repay the remaining RMB 1.5 million ($228,266) with accrued interest by December 31, 2021. A late fee of 1/1000 of outstanding balance per day will be charged if the Company is not able to repay the loan on time.

 

In addition, at March 31, 2021 and December 31, 2020, the Company had $1,135,591 and $1,014,591 due to another major shareholder and Chief Executive Officer of the Company, resulting from certain of the Company’s operating expenses such as legal and audit fees that were paid by him 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 March 31, 2021 and December 31, 2020, respectively:

 

 

Related party name

 2021  2020 

Due from

Qinghai Mining including $1.75 million sale of CIP

 $4,635,533  $3,457,488 

Due to

Qinghai Mining

  (862,132

)

  (350,438

)

Due from Xi'an Jinzang (NCI of the JV)

  -   76,630 

Due from, net (current and noncurrent)

 $3,773,401  $3,183,680 
          

Due to

Dingjia

 $20,615  $20,762 

Due to

Xi'an Jinzang (NCI of the JV) with 6.8% interest

  612,351   - 

Due to

Zhongtian Resources

  84,261   79,309 

Due to

A major shareholder

  1,135,591   1,014,591 

Due to, total

 $1,852,818  $1,114,662 

 

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 loss of $115,724 and $230,628 for the three months ended March 31, 2021 and 2020, 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 batteries through a recently established JV from brine that is provided by Technology. 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 three months ended March 31, 2021 and 2020, the accompanying CFS include the accounts of the Company’s US parent, and Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake, Technology and Qinghai Zhongli, 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. 

 

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 $19,631 and $19,770 at March 31, 2021 and December 31, 2020.

 

 

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 NCI 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 non-controlling interests in a subsidiary may exceed an non-controlling interest’s interests in the subsidiary’s equity. The excess attributable to non-controlling interests is attributed to those interests. NCIs shall continue to be attributed their share of losses even if that attribution results in a deficit NCIs balance.

 

On April 15, 2020, Technology and Xi’an Jinzang formed a JV company Qinghai Zhongli to process brine supplied by Technology. Technology owns 51% of the JV and Xi’an Jinzang owns the remaining 49%. During the three months ended March 31, 2021, the Company had loss of $9,933 that were attributable to the NCI. 

 

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 January 2017, the FASB issued 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. The guidance should be adopted on a prospective basis. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its CFS.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.

 

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period.  The Company is currently evaluating the impact that ASU 2020-06 may have on its CFS and related disclosures.

 

Results of Operations

 

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

 

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.

 

  

2021

  

% of Sales

  

2020

  

% of Sales

 

Sales

 $1,828,380      $1,010,498     

Cost of sales

  1,696,118   92.8

%

  930,744   92.1

%

Gross profit

  132,262   7.2

%

  79,754   7.9

%

Selling expenses

  23,055   1.3

%

  56,205   5.6

%

General and administrative expenses

  274,371   15.0

%

  287,002   28.4

%

Total operating expenses

  297,426   16.3

%

  343,207   34.0

%

Loss from operations

  (165,164

)

  (9.1

%)

  (263,453

)

  (26.1

%)

Other income

  50,965   2.8

%

  32,825   3.2

%

Loss before income taxes

  (114,199

)

  (6.3

%)

  (230,628

)

  (22.9

%)

Income tax expense

  11,458   0.6

%

  -   -

%

Income (loss) before noncontrolling interest

  (125,657

)

  (6.9

%)

  (230,628

)

  (22.9

%)

Less: loss attributable to noncontrolling interest from continuing operation

  (9,933

)

  (0.6

%)

  -   -

%

Net income (loss)

 $(115,724

)

  (6.3

%)

 $(230,628

)

  (22.9

%)

 

Sales for the three months ended March 31, 2021 and 2020 was $1,828,380 and $1,010,498, respectively, an increase of $817,882 or 80.9%. The increase in sales was mainly due to 66% increase in sales quantity and 1% increase in average unit selling price resulting from increased demand, and 14% increase due to change in exchange rate. In the comparable period of 2020, due to the outbreak of COVID-19 and related logistic restriction, our sales was decreased significantly.

 

 

Cost of sales

 

Cost of sales (“COS”) for the three months ended March 31, 2021 and 2020 was $1,696,118 and $930,774, respectively, an increase of $765,374 or 82.2%. The increase was mainly due to increased sales and production. The COS as a percentage of sales was 92.8% for the three months ended March 31, 2021 compared with 92.1% for 2020. The increase in COS as a percentage of sales was mainly due to increased average cost of production resulting from consumption of remaining Tibet boron rock which was carried over from 2020. From July to September 2020, we tested to acquire boron rock from Tibet to produce boric acid to increase our productivity. The Tibet boron rock has higher grade of the mineral deposit and thus the high unit cost, which resulted the increased raw material cost of boric acid production, we stopped acquiring Tibet boron rock in October due to its higher cost. All the Tibet rock which was purchased previously was consumed during the first quarter of 2021

 

Gross profit

 

Gross profit for the three months ended March 31, 2021 and 2020 was $132,262 and $79,754, respectively, an increase of $52,508 or 65.8%. The profit margin was 7.2% for the three months ended March 31, 2021 compared to 7.9% for the three months ended March 31, 2020, the decrease in profit margin was mainly due to increased production cost as described above.

 

Operating expenses

 

Selling expenses consist mainly of salespersons’ salaries and freight out. Selling expense were $23,055 for the three months ended March 31, 2021, compared to $56,205 for the three months ended March 31, 2020, a decrease of $33,150 or 59.0%, mainly resulting from decreased salespersons’ salaries by $41,700 resulting from restructure of our sales department for improving its efficiency and cost-saving which was partly offset by increased freights expense by $8,000.

 

General and administrative expenses consist mainly of salary, R&D, office, welfare, business meeting, maintenance, and utilities. General and administrative expenses were $274,371 for the three months ended March 31, 2021, compared to $287,002 for the three months ended March 31 2020, a decrease of $12,631 or 4.4%, mainly resulting from decreased maintenance expense by $15,050 and decreased bad debt expense by $2,568, which was partly offset by increased business entertainment expense by $5,600.

 

Other income

 

Other income was $50,965 for the three months ended March 31, 2021, compared to $32,825 for the three months ended March 31, 2020, an increase of $18,140 or 55.3%. For the three months ended March 31, 2021, other income mainly consisted of subsidy income of $50,737. For the three months ended March 31, 2020, other income mainly consisted of subsidy income of $47,141 and non-operating expenses of $14,349.

 

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. 

 

Net loss

 

We had a net loss of $115,724 for the three months ended March 31, 2021, compared to $230,628 for the three months ended March 31, 2020, a decrease of by $114,904 or 49.8%. The decrease in our net loss mainly resulted from increased sales and decreased operating expenses as described above.  

 

Liquidity and Capital Resources

 

As of March 31, 2021, we had cash and equivalents of $922,140. Working capital was $398,976 at March 31, 2021. The ratio of current assets to current liabilities was 1.09:1 at March 31, 2021.  

 

The following is a summary of cash provided by or used in each of the indicated types of activities during three months ended March 31, 2021 and 2020:

 

  

2021

  

2020

 

Cash provided by (used in):

        

Operating activities

 $514,130  $274,672 

Investing activities

  (684,507

)

  - 

Financing activities

  126,738   (78,758

)

 

 

Net cash provided by operating activities was $514,130 for the three months ended March 31, 2021, compared to $274,672 for the three months ended March 31, 2020. The increase of cash inflow from operating activities for 2021 was principally attributable to decreased cash outflow from accounts payable by $114,486 and increased cash inflow from unearned revenue by $137,129, increased cash inflow form taxes payable by $54,324, and decreased net loss by $104,971, despite we had decreased cash form accounts receivable by $96,638 and increased cash outflow from advance to suppliers by $76,118. 

 

Net cash used in investing activities was $684,507 for the three months ended March 31, 2021, compared to $0 for the three months ended March 31, 2020. Net cash used in investing activities in 2021 mainly consisted of purchase of property and equipment of $33,606, and $650,901 payment for constructing the absorption station for preliminarily extract lithium ion from brine for further concentration and purification.

 

Net cash provided by financing activities was $126,738 for the three months ended March 31, 2021, compared to net cash used in financing activities of $78,758 for the three months ended March 31, 2020. The net cash provided by financing activities in 2021 consisted of amount owing to other related parties of $747,140 include loans from Xi’an Jinzang described below, but partly offset by increase in due from Qinghai Mining of $620,402. The net cash used in financing activities in 2020 consisted of increase in due from Qinghai Mining of $191,744 and increase in due to other related parties of $112,986.

 

During the three months ended March 31, 2021, Qinghai Zhongli and Xi’an Jinzang (who is the noncontrolling interest shareholder of Qinghai Zhongli) entered three loan contracts for Qinghai Zhongli borrowing RMB 4 million ($608,708) with an annual interest of 6.8% from Xi’an Jinzang. The fund was used for the production and operation activities of Qinghai Zhongli. The Company shall repay RMB 2.5 million ($380,442) with accrued interest by June 30, 2021 and repay the remaining RMB 1.5 million ($228,266) with accrued interest by December 31, 2021. A late fee of 1/1000 of outstanding balance per day will be charged if the Company is not able to repay the loan on time.

 

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. Appropriation to such reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year. The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. 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.

 

As a smaller reporting company, we are not required to provide the information requested by this Item.

 

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 March 31, 2021, 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 March 31, 2021, 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, 2020, 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.

 

None.

 

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

 

 

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: May 17, 2021

By:

/s/ Jimin Zhang

 
  

Mr. Jimin Zhang

Chief Executive Officer

(Principal Executive Officer and Duly Authorized Signatory)

 

32