Overview
The Company currently produces boric acid in the PRC and plans to expand its
manufacturing facilities through a JV to produce up to 30,000 tonnes of lithium
carbonate for the electric vehicle battery market in China, subject to funding.
We formerly sold plate heat exchangers and heat pumps and sold those operations
on September 30, 2019.
On December 31, 2018 (the "Closing Date"), we entered into a Share Exchange
Agreement and Plan of Reorganization, as amended January 24, 2019 (the "Share
Exchange Agreement") with Mid-Heaven Sincerity International Resources
Investment Co., Ltd (Mid-heaven BVI) and its shareholders Mao Zhang, Jian Zhang,
and Ying Zhao, constituting all of the shareholders of Mid-heaven BVI (the
"Mid-heaven Shareholders"). Pursuant to the terms of the Share Exchange
Agreement, the shareholders of Mid-heaven BVI delivered all of the issued and
outstanding shares of capital stock of Mid-Heaven BVI to SmartHeat, for
106,001,971 shares of our Common Stock. Mid-heaven BVI, through two
subsidiaries, Qinghai Mid-Heaven Sincerity Technology Co., Ltd ("Sincerity") and
Qinghai Mid-Heaven Sincerity Salt-Lake R&D Co., Ltd ("Salt-Lake") owns 100% of
Qing Hai Mid-Heaven Boron & Lithium Technology Company, Ltd. ("Qinghai
Technology").
The Acquisition was structured as a tax-free reorganization. As a result of the
share exchange agreement, Mid-heaven BVI's shareholders own approximately 57% of
the combined company. For accounting purposes, the transaction was accounted for
as a reverse acquisition of the Company by Mid-heaven BVI.
The main operating entity, Qinghai Technology was incorporated on December 18,
2018. The business of Qinghai Technology was carved out of the business of
Qinghai Zhongtian Boron & Lithium Mining Co., Ltd ("Qinghai Mining") on December
20, 2018. Qinghai Mining was founded March 6, 2001, and manufactures and
wholesales boric acid and related compounds for industrial and consumer usage.
Qinghai Technology obtains its raw material minerals exclusively from Qinghai
Mining and currently processes boric acid by crushing and processing ore.
On September 30, 2019, Heat HP, Inc. and Heat PHE, Inc, our wholly owned
subsidiaries, sold their respective equity interests in Jinhui, SmartHeat
Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange for $353. The
equity interests were sold to individuals and businesses in the PRC. Each
subsidiary was sold for nominal cash consideration as below and, as the
transactions were structured as purchases of equity interests, the subsidiary
companies retained all liabilities when sold.
SmartHeat Jinhui (Beijing) Energy Technology Ltd - 100 RMB
SmartHeat (China) Investment Ltd - 400 RMB
SmartHeat (Shanghai) Trading Co., Ltd - 400 RMB
SmartHeat (Shenyang) Heat Pump Technology Co., Ltd - 400 RMB
SanDeKe Co., Ltd - 600 RMB
SmartHeat Heat Exchange Equipment Co - 600 RMB
On October 23, 2019, we filed a certificate of amendment to its certificate of
incorporation to change its name from "SmartHeat, Inc." to "Lithium & Boron
Technology, Inc." to better reflect the operations of the Company.
In December 2019, a novel strain of coronavirus (COVID-19) was reported in
Wuhan, China. The World Health Organization declared the outbreak to constitute
a "Public Health Emergency of International Concern." This contagious disease
outbreak, which continues to spread to additional countries, and disrupts supply
chains and affecting production and sales across a range of industries as a
result of quarantines, facility closures, and travel and logistics restrictions
in connection with the outbreak. The COVID-19 outbreak impacted the Company's
operations for the first quarter of 2020. The Company had less production in
the first quarter of 2020; the Company's factory was reopened one month later
than originally planned, and it did not resume the production one week after the
factory reopened due to the shortage of master liquid pool resulting from the
longer period of shutdown of the machine. The cost of our coal increased during
the first quarter of 2020 due to the overall lockdown in China. The Company's
sales also decreased for the first quarter of 2020 due to logistics restrictions
put into place to curb travel. To facilitate sales, the Company reduced the
selling price by RMB 50 ($7) per ton to certain customers. The number of
transportation vehicles has increased to meet the market's shipping needs since
April 2020. In addition, the Company was able to procure sulfuric acid, a major
raw material, from a local supplier at lower prices than usual due to excess
supplies on the market. The Company's production and sales has been gradually
increasing since April 2020.
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On March 27, 2020 (PRC time), Qinghai Technology entered into an Investment
Cooperation Agreement, Memorandum of Cooperation and Licensing Agreement with
Xi'an Jinzang Membrane Environmental Protection Technology Co., Ltd. (Xi'an
Jinzang) to produce up to 30,000 tonnes of battery grade lithium carbonate
annually, subject to funding. On April 15, 2020, the parties formed a JV company
Qinghai Zhonglixinmo Technology Co., Ltd (Qinghai Zhongli or JV) to process
brine supplied by Qinghai Technology. Qinghai Technology owns 51% of the JV and
Xi' Jinzang owns the remaining 49%. The JV cooperation agreement calls for a
capital contribution of RMB 140 million ($19,746,000), which shall be paid in
three phases according to the project construction progress: RMB 36 million
($5,077,000) to be paid within 10 days from the date of registration and
establishment of the JV, RMB 72 million ($10,155,000) to be paid before July 31,
2020, and RMB 32 million ($4,513,000) to be paid before October 31,2020. All
shareholders shall pay the capital in accordance with their respective
shareholding ratio. The capital contribution amount and timing of making the
capital contribution can be adjusted upon both parties' mutual consent. Each
party made an initial capital contribution of RMB 5 million ($0.71 million) in
April 2020 and as of this report date. The Company promises and guarantees that,
during the existence of the project company, it will provide the JV with lithium
bearing brine resources for free. During the construction and operation of the
project, all parties agree to actively raise construction funds by means of bank
loans, self-owned funds, etc. if the funds are not raised in time, the term of
paid in capital can be extended accordingly upon consensus of all parties.
Related Party Transactions
Qinghai Technology purchased raw material boron rock from Qinghai Mining (owned
by three major shareholders of the Company); in addition, Qinghai Technology
sometimes received no-interest short-term advances from Qinghai Mining for daily
operational needs. As of June 30, 2020 and December 31, 2019, due from Qinghai
Mining (was the net amount of intercompany transactions between Qinghai
Technology and Qinghai Mining due to carve out) was $1.18 million and $0.55
million, respectively. Qinghai Technology purchased $594,526 and $619,984 boron
ore from Qinghai Mining during the six months ended June 30, 2020 and 2019,
respectively. Qinghai Technology purchased $480,998 and $427,414 boron ore from
Qinghai Mining during the three months ended June 30, 2020 and 2019,
respectively.
On July 1, 2019, Qinghai Technology and Qinghai Mining entered a boron ore
purchase contract for a term of one year. Qinghai Mining is to supply Qinghai
Technology boron ore based on Qinghai Technology's monthly production plan at a
price of RMB 62 ($8.77) per tonne. The price is adjustable in the future if
there is a significant fluctuation of the market price for the boron ore. In the
fourth quarter of 2019, this price was adjusted to RMB 70.46 ($10.21) per tonne.
In the first quarter of 2020, Qinghai Technology and Qinghai Mining entered a
new purchase contract, the price for boron ore was adjusted to RMB 77.5 ($11.10)
per tonne, and the price for slag was RMB 30 ($4.23) per tonne. This purchase
contract will be in effect until a replacement contact with new purchase price
is entered.
Qinghai Technology used equipment that belongs to Qinghai Province DaChaiDan
ZhongTian Resources Development Co., Ltd ("Zhongtian Resources", and is owned by
the Chairman and his brother who ae also two major shareholders of the Company)
for production. The depreciation of these fixed assets had an impact on the
production costs of boric acid of the Company and was included in the Company's
cost of sales. The depreciation of these fixed assets for the six months ended
June 30, 2020 and 2019 was $12,620 and $17,599, respectively. The depreciation
of these fixed assets for the three months ended June 30, 2020 and 2019 was
$6,357 and $8,615, respectively. Due to Zhongtian Resources resulting from using
its equipment and payment of worker's compensation made by Zhongtian Resource
for Qinghai Technology was $60,945 and $49,125 at June 30, 2020 and December 31,
2019, respectively.
Qinghai Technology sold boric acid to Qinghai Dingjia Zhixin Trading Co., Ltd
("Dingjia"), 90% owned by the son of the Company's major shareholder (also the
Chairman of the Company). For the six months ended June 30, 2020 and 2019, the
Company's sales to Dingjia was $101,560 and $95,555, respectively. For the three
months ended June 30, 2020 and 2019, the Company's sales to Dingjia was $101,560
and $37,176, respectively. At June 30, 2020 and December 31, 2019, outstanding
payable to Dingjia was $0.02 million and $0.06 million, respectively.
In addition, at June 30, 2020 and December 31, 2019, the Company had $851,091
and $573,263 due to another major shareholder of the Company (also the Company's
CEO), resulting from the certain of the Company's operating expenses such as
legal and audit fees that were paid by this major shareholder on behalf of the
Company. This short term advance bore no interest, and payable upon demand.
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The following table summarized the due from (to) related parties as of June 30,
2020 and December 31, 2019, respectively:
2020 2019
Related party name
Due from Qinghai Mining $ 2,375,544 $ 1,173,881
Due to Qinghai Mining (1,193,253 ) (619,354 )
Due from, net $ 1,182,291 $ 554,527
Due to Dingjia $ 21,339 $ 56,144
Due to Zhongtian Resources 60,945 49,125
Due to A major shareholder 851,091 573,264
Due to, total
$ 933,375 $ 678,533
Going Concern
The accompanying consolidated financial statements ("CFS") were
prepared assuming the Company will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of
liabilities in the normal course of business.
As reflected in the accompanying CFS, the Company had net loss of $187,894 and
$139,276 for the six months ended June 30, 2020 and 2019, respectively, the
Company had net income of $42,734 and net loss of $43,590 for the three months
ended June 30, 2020 and 2019, respectively, which raise substantial doubt about
the Company's ability to continue as a going concern.
In addition to current boric acid production business, the Company plans to
produce lithium carbonate for the electric vehicle battery through a recently
established JV from brine that is provided by Qinghai Technology for free. The
cost for the brine is immaterial as it was mainly pumped out from the nearby
Salt Lake. Management also intends to raise additional funds by way of a private
or public offering, or by obtaining loans from banks or others. While the
Company believes in the viability of its strategy to generate sufficient revenue
and in its ability to raise additional funds on reasonable terms and conditions,
there can be no assurances to that effect. The ability of the Company to
continue as a going concern is dependent upon the Company's ability to further
implement its business plan and generate sufficient revenue and its ability to
raise additional funds by way of a public or private offering. The CFS do not
include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary if the Company is unable to continue as a going concern.
Significant Accounting Policies
While our significant accounting policies are more fully described in Note 2 to
our CFS, we believe the following accounting policies are the most critical to
aid you in fully understanding and evaluating this management discussion and
analysis.
Basis of Presentation
Our CFS are prepared in accordance with accounting principles generally accepted
in the United States of America, or US GAAP.
Principles of Consolidation
For the six and three months ended June 30, 2020, the accompanying CFS include
the accounts of the Company's US parent, and Mid-heaven BVI and its
subsidiaries, Sincerity, Salt-Lake, Qinghai Technology and Qinghai Zhongli,
which are collectively referred to as the "Company." For the six and three
months ended June 30, 2019, the accompanying CFS include the accounts of the
Company's US parent, and its subsidiaries Heat HP and Heat PHE, and their
subsidiaries SanDeKe, Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat
Pump, and Heat Exchange, and Mid-heaven BVI and its subsidiaries, Sincerity,
Salt-Lake and Qinghai Technology, which are collectively referred to as the
"Company." All significant intercompany accounts and transactions were
eliminated in consolidation.
Use of Estimates
In preparing the financial statements in conformity with US GAAP, management
makes estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Significant estimates, required by
management, include the recoverability of long-lived assets, allowance for
doubtful accounts, and the reserve for obsolete and slow-moving inventories.
Actual results could differ from those estimates.
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Accounts Receivable
We maintain reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Based on historical collection activity, we had bad
debt allowance for accounts receivable of $0 at June 30, 2020 and December
31,2019.
Revenue Recognition
The Company recognizes revenues when its customer obtains control of promised
goods or services, in an amount that reflects the consideration which it expects
to receive in exchange for those goods. The Company recognizes revenues
following the five step model prescribed under ASU No. 2014-09: (i) identify
contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenues
when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized when the customer obtains control of
the Company's product, which occurs at a point in time, typically upon receipts
of the goods by customer. Sales and purchases are recorded net of VAT collected
and paid as the Company acts as an agent for the government. VAT taxes are not
affected by the income tax holiday.
Deferred Income
Deferred income consists primarily of government grants and subsidies for
supporting the Company's technology innovation and transformation of boric acid,
lithium and magnesium sulfate projects. The Company uses most of the subsidies
to purchase machinery and equipment. Deferred income is amortized to revenue
(other income) over the life of the assets for which the grant and subsidy was
used for. Subsidies for declared project fund require government inspection to
ensure proper use of the funds for the designated project.
Foreign Currency Translation and Comprehensive Income (Loss)
The accounts of the US parent company are maintained in USD. The functional
currency of the Company's China subsidiaries is the Chinese Yuan Renminbi
("RMB"). The accounts of the China subsidiaries were translated into USD in
accordance with FASB ASC Topic 830, "Foreign Currency Matters." According to
FASB ASC Topic 830, all assets and liabilities were translated at the exchange
rate on the balance sheet date; stockholders' equity was translated at the
historical rates and statement of operations items were translated at
the average exchange rate for the period. The resulting translation adjustments
are reported under other comprehensive income in accordance with FASB ASC Topic
220, "Comprehensive Income."
Noncontrolling Interests
The Company follows FASB ASC Topic 810, "Consolidation," governing the
accounting for and reporting of noncontrolling interests ("NCIs") in partially
owned consolidated subsidiaries and the loss of control of subsidiaries. Certain
provisions of this standard indicate, among other things, that NCIs (previously
referred to as minority interests) be treated as a separate component of equity,
not as a liability, that increases and decreases in the parent's ownership
interest that leave control intact be treated as equity transactions rather than
as step acquisitions or dilution gains or losses, and that losses of a
partially-owned consolidated subsidiary be allocated to NCIs even when such
allocation might result in a deficit balance.
The net income (loss) attributed to NCIs was separately designated in the
accompanying statements of operation and comprehensive income (loss). Losses
attributable to NCIs in a subsidiary may exceed an NCI's interests in the
subsidiary's equity. The excess attributable to NCIs is attributed to those
interests. NCIs shall continue to be attributed their share of losses even if
that attribution results in a deficit NCI balance.
On April 15, 2020, Qinghai Technology and Xi'an Jinzang formed a joint venture
company Qinghai Zhongli to process brine supplied by Qinghai Technology. Qinghai
Technology owns 51% of the JV and Xi' Jinzang owns the remaining 49%. During the
six and three months ended June 30, 2020, the Company had loss of $2,745 that
were attributable to the noncontrolling interest.
Impairment of Long-Lived Assets
Long-lived assets, which include tangible assets, such as property and
equipment, goodwill and other intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable.
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Recoverability of long-lived assets to be held and used is measured by comparing
the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized based on the excess of the carrying amount over the fair value ("FV")
of the assets. FV generally is determined using the asset's expected future
discounted cash flows or market value, if readily determinable.
Effective January 1, 2020, the Company adopted ASU No. 2017-04, Simplifying the
Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. A
goodwill impairment will now be the amount by which a reporting unit's carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit
Losses (Topic 326), which requires entities to measure all expected credit
losses for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. This
replaces the existing incurred loss model and is applicable to the measurement
of credit losses on financial assets measured at amortized cost. This guidance
is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2022. Early application will be permitted for all
entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. The Company is currently evaluating the
impact that the standard will have on its CFS.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for
Income Taxes, which simplifies the accounting for income taxes, eliminates
certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects
of the current guidance to promote consistent application among reporting
entities. The guidance is effective for fiscal years beginning after
December 15, 2020, and interim periods within those fiscal years, with early
adoption permitted. Upon adoption, the Company must apply certain aspects of
this standard retrospectively for all periods presented while other aspects are
applied on a modified retrospective basis through a cumulative-effect adjustment
to retained earnings as of the beginning of the fiscal year of adoption. The
Company is evaluating the impact this update will have on its CFS.
Results of Operations
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The following table sets forth the consolidated results of our operations for
the periods indicated as a percentage of net sales, certain columns may not add
due to rounding.
2020 % of Sales 2019 % of Sales
Sales $ 3,329,890 $ 3,208,755
Cost of sales 2,904,535 87.2 % 2,700,173 84.2 %
Gross profit 425,355 12.8 % 508,582 15.8 %
Selling expenses 85,549 2.6 % 222,214 6.9 %
General and administrative
expenses 613,995 18.4 % 484,357 15.1 %
Total operating expenses 699,544 21.0 % 706,571 22.0 %
Loss from operations (274,189 ) (8.2 )% (197,989 ) (6.2 )%
Other income 109,483 3.3 % 93,848 2.9 %
Loss before income taxes (164,706 ) (4.9 )% (104,141 ) (3.3 )%
Income tax expense 25,933 0.8 % 32,522 1.0 %
Loss from continuing operations (190,639 ) (5.7 )% (136,663 ) (4.3 )%
Loss from operations of
discontinued entities, net of
tax - - % (2,613 ) (0.1 )%
Loss before noncontrolling
interest (190,639 ) (5.7 )% (139,276 ) (4.4 )%
Less: loss attributable to
noncontrolling interest from
continuing operation (2,745 ) (0.1 )% - - %
Net loss $ (187,894 ) (5.6 )% $ (139,276 ) (4.4 )%
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Sales
Sales for the six months ended June 30, 2020 and 2019 was $3,329,890 and
$3,208,755, respectively, an increase of $121,135 or 3.8%. For the six months
ended June 30, 2020 and 2019, the Company's sales to Dingjia, a related party
company 90% owned by the son of the major shareholder of the Company (also the
Chairman of the Company), was $101,560 and $95,555, respectively. Due to the
outbreak of COVID19 and related logistic restriction, our sales was decreased
during the first quarter of 2020; to facilitate sales, we reduced our selling
price by RMB 50 ($7) per ton to certain customers, and we developed new
customers during the second quarter of 2020, which mitigated the decreased sales
from the first quarter, and resulted an overall increased sales by 3.8% compared
to the six months ended June 30, 2019.
Cost of sales
Cost of sales ("COS") for the six months ended June 30, 2020 and 2019 was
$2,904,535 and $2,700,173, respectively, a increase of $204,362 or 7.6%. The
increase was mainly due to increased sales. The COS as a percentage of sales was
87.2% for the six months ended June 30, 2020 compared with 84.2% for 2019. The
increase in COS as a percentage of sales was mainly due to increased average
cost of production. Due to COVID19 outbreak, our factory was reopened one month
later than originally planned, and we did not resume the production one week
after the factory reopened due to the drought of master liquid pool resulting
from the longer period of shutdown of the machine, we spent additional days and
had extra acid and mineral consumption to cultivate the concentration level of
master liquid pool. In addition, the coal purchase cost increased by 20% during
the six months ended June 30, 2020 compared to the comparable period of 2019.
Gross profit
The gross profit for the six months ended June 30, 2020 and 2019 was $425,355
and $508,582, respectively, a decrease of $83,227 or 16.4%. The profit margin
was 12.8% for the six months ended June 30, 2020 compared to 15.8% for the six
months ended June 30, 2019, the decrease in profit margin was mainly due to
decreased sales price per ton and increase production cost per ton.
Operating expenses
Selling expenses consist mainly of salespersons' salaries and freight out.
Selling expense were $85,549 for the six months ended June 30, 2020, compared to
$222,214 for the six months ended June 30, 2019, a decrease of $136,665 or
61.5%, mainly resulting from decreased freight out expense of $47,144 and
decreased salespersons' salaries of $61,568.
General and administrative expenses consist mainly of salary, R&D, office,
welfare, business meeting, maintenance, and utilities. General and
administrative expenses were $613,995 for the six months ended June 30, 2020,
compared to $484,357 for the six months ended June 30 2019, an increase of
$129,638 or 26.8%, mainly resulting from increased officer salary of
$240,000,which was partly offset by decreased professional fee of $78,000 and
other G&A expenses of $30,000.
Other income
Other income was $109,483 for the six months ended June 30, 2020, compared to
$93,848 for the six months ended June 30, 2019, an increase of $15,635 or 16.7%.
For the six months ended June 30, 2020, other income mainly consisted of subsidy
income of $95,635 and other income of $13,405. For the six months ended June 30,
2019, other income mainly consisted of subsidy income of $93,647.
Government provides grants and subsidies to support the Company's technology
innovation and transformation of boric acid, lithium and magnesium sulfate
projects. The Company uses most of the subsidies to purchase machinery and
equipment, which is amortized to revenue (other income) over the life of the
assets for which the grant and subsidy was used for. Subsidies for declared
project fund require government inspection to ensure proper use of the funds for
the designated project.
Loss from continuing operations
Loss from continuing operations was $190,639 loss for the six months ended June
30, 2020, compared to $136,663 for the six months ended June 30, 2019. The
$53,976 or 39.5% increase in loss from continuing operations was mainly due to
increased cost of sales by $204,362 despite we have increased sales by $115,130
and decreased operating expenses by $7,027.
Loss from operations of discontinued entities
Loss from operations of discontinued entities was $2,613 for the six months
ended June 30, 2019, which was the operations from Jinhui, SmartHeat Investment,
SmartHeat Trading, SmartHeat Pump and Heat Exchange, the Company sold these
entities on September 30, 2019.
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Net loss
We had a net loss of $187,894 for the six months ended June 30, 2020, compared
to $139,276 for the six months ended June 30, 2019, an increase of net loss by
$48,618 or 34.9%. The increase in our net loss mainly resulted from the reasons
described above.
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
The following table sets forth the consolidated results of our operations for
the periods indicated as a percentage of net sales, certain columns may not add
due to rounding.
2020 % of Sales 2019 % of Sales
Sales $ 2,319,392 $ 1,823,004
Cost of sales 1,973,791 85.1 % 1,476,114 81.0 %
Gross profit 345,601 14.9 % 346,890 19.0 %
Selling expenses 29,344 1.3 % 121,812 6.7 %
General and administrative
expenses 326,993 14.1 % 281,884 15.4 %
Total operating expenses 356,337 15.4 % 403,696 22.1 %
Loss from operations (10,736 ) (0.5 )% (56,806 ) (3.1 )%
Other income 76,658 3.3 % 45,544 2.5 %
Income (loss) before income
taxes 65,922 2.8 % (11,262 ) (0.6 )%
Income tax expense 25,933 1.1 % 32,522 1.8 %
Income (loss) from continuing
operations 39,989 1.7 % (43,784 ) (2.4 )%
Income from operations of
discontinued entities, net of
tax - - % 194 (0.01 )%
Income (loss) before
noncontrolling interest 39,989 1.7 % (43,590 ) (2.4 )%
Less: loss attributable to
noncontrolling interest from
continuing operation (2,745 ) (0.1 )% - - %
Net income (loss) $ 42,734 1.8 % $ (43,590 ) (2.4 )%
Sales
Sales for the three months ended June 30, 2020 and 2019 was $2,319,391 and
$1,823,004, respectively, an increase of $496,388 or 27.2%. For the three months
ended June 30, 2020 and 2019, the Company's sales to Dingjia, a related party
company 90% owned by the son of the major shareholder of the Company (also the
Chairman of the Company), was $101,560 and $37,176, respectively. The increase
in sales for the three months ended June 30, 2020 was mainly due to reducing our
selling price by RMB 50 ($7) per ton to attract certain major customers, and our
effort of developing new customers.
Cost of sales
Cost of sales ("COS") for the three months ended June 30, 2020 and 2019 was
$1,973,791 and $1,476,114, respectively, an increase of $497,677 or 33.7%. The
increase was mainly due to increased sales. The COS as a percentage of sales was
85.1% for the three months ended June 30, 2020 compared to 81.0% for 2019. The
increase in COS as a percentage of sales was mainly due to increased production
cost and increased coal purchase price due to the impact of COVID-19 outbreak.
Gross profit
The gross profit for the three months ended June 30, 2020 and 2019 was $345,601
and $346,890, respectively, a decrease of $1,289 or 0.4%. The profit margin was
14.9% for the three months ended June 30, 2020 compared to 19.0% for the three
months ended June 30, 2019, the decrease in profit margin was mainly due to the
decrease of selling price and increased production cost.
Operating expenses
Selling expenses consist mainly of salespersons' salaries and freight out.
Selling expense were $29,344 for the three months ended June 30, 2020, compared
to $121,812 for the three months ended June 30, 2019, a decrease of $92,468 or
75.9%, mainly resulting from decreased freight out expense of $20,883 and
decreased salespersons' salaries of $54,609.
General and administrative expenses consist mainly of bad debt expense, R&D,
office, welfare, business meeting, maintenance, and utilities. General and
administrative expenses were $326,993 for the three months ended June 30, 2020,
compared to $281,884 for the three months ended June 30 2019, an increase of
$45,109 or 16.0%, mainly resulting from increased officer salary expense by
$120,000, which was partly offset by decreased professional fee of $48,000 and
other G&A expenses of $25,000.
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Other income
Other income was $76,658 for the three months ended June 30, 2020, compared to
$45,544 for the three months ended June 30, 2019, an increase of $31,114 or
68.3%. For the three months ended June 30, 2020, other income mainly consisted
of subsidy income of $48,494 and other income of $27,754. For the three months
ended June 30, 2019, other income mainly consisted of subsidy income of $46,587.
Government provides grants and subsidies to support the Company's technology
innovation and transformation of boric acid, lithium and magnesium sulfate
projects. The Company uses most of the subsidies to purchase machinery and
equipment, which is amortized to revenue (other income) over the life of the
assets for which the grant and subsidy was used for. Subsidies for declared
project fund require government inspection to ensure proper use of the funds for
the designated project.
Income (Loss) from continuing operations
Income from continuing operations was $39,989 for the three months ended June
30, 2020, compared to loss of $43,784 for the three months ended June 30, 2019.
The $83,773 or 191.3% increase in income from continuing operations was mainly
due to increased other income, and decreased selling expense which was partly
offset by increased G&A expense as described above.
Income from operations of discontinued entities
Income from operations of discontinued entities was $194 for the three months
ended June 30, 2019, which was the operations from Jinhui, SmartHeat Investment,
SmartHeat Trading, SmartHeat Pump and Heat Exchange, the Company sold these
entities on September 30, 2019.
Net (income) loss
We had a net income of $42,734 for the three months ended June 30, 2020,
compared to loss of $43,590 for the three months ended June 30, 2019, an
increase of net income by $86,324 or 198%. The increase in our net income mainly
resulted from increased other income and decreased selling expense which was
partly offset by increased G&A expense as described above.
Liquidity and Capital Resources
As of June 30, 2020, we had cash and equivalents of $1.15 million. Working
capital was $0.79 million at June 30, 2020. The ratio of current assets to
current liabilities was 1.26:1 at June 30, 2020.
The following is a summary of cash provided by or used in each of the indicated
types of activities during six months ended June 30, 2020 and 2019:
2020 2019
Cash provided by (used in):
Operating activities $ 958,765 $ 182,084
Investing activities (287,221 ) -
Financing activities $ 327,119 $ (122,786 )Net cash provided by operating activities was $958,765 for the six months ended
June 30, 2020, compared to $182,084 for the six months ended June 30, 2019. The
increase of cash inflow from operating activities for 2020 was principally
attributable to increased cash inflow from inventory by $899,713, which was
partly offset by decreased cash inflow from advances to suppliers by $136,198.
Net cash used in investing activities was $287,221 for the six months ended June
30, 2020, compared to $0 in investing activities for the six months ended June
30, 2019. Net cash used in investing activities in 2020 was mainly consist of
purchase of property and equipment.
Net cash provided by financing activities was $327,119 for the six months ended
June 30, 2020, compared to $122,786 net cash used in financing activities for
the six months ended June 30, 2019. The net cash provided by financing
activities in 2020 consisted of capital contribution from noncontrolling
interest of Qinghai Zhongli by $711,044, and increase in amount owing to other
related parties of $256,233, but partly offset by increase in due from Qinghai
Mining of $640,158. The net cash used in financing activities in 2019 consisted
of decrease in due from Qinghai Mining of $3,224,026 but partly offset by
decreased amount owing to other related parties of $3,346,812.
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Table of Contents
Dividend Distribution
We are a US holding company that conducts substantially all of our business
through our wholly owned and other consolidated operating entities in China. We
rely in part on dividends paid by our subsidiaries in China for our cash needs,
including the funds necessary to pay dividends and other cash distributions to
our shareholders, to service any debt we may incur and to pay our operating
expenses. The payment of dividends by entities organized in China is subject to
limitations. In particular, PRC regulations currently permit payment of
dividends only out of accumulated profits as determined in accordance with
accounting standards and regulations in China. Our PRC subsidiaries also are
required to set aside at least 10% of their after-tax profit based on PRC
accounting standards each year to a statutory surplus reserve fund until the
accumulative amount of such reserve reaches 50% of registered capital. These
reserves are not distributable as cash dividends. In addition, our PRC
subsidiaries, at their discretion, may allocate a portion of their after-tax
profit to their staff welfare and bonus fund, which may not be distributed to
equity owners except in the event of liquidation. Moreover, if any of our
subsidiaries incur debt on its own behalf in the future, the instruments
governing the debt may restrict such subsidiary's ability to pay dividends or
make other distributions to us. Any limitation on the ability of one of our
subsidiaries to distribute dividends and other distributions to us could
materially and adversely limit our ability to make investments or acquisitions
that could be beneficial to our businesses, pay dividends or otherwise fund and
conduct our business.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties other than as described
following under "Contractual Obligations." We have not entered into any
derivative contracts that are indexed to our shares and classified as
stockholders' equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
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LITHIUM & BORON TECHNOLOGY, INC. 
