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 its
selling price by RMB 50 ($7) per tonne 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. There was also a delay by the government's planned
installation and connection of a natural gas pipeline necessary to implement a
Coal-to-Gas conversion project resulted from various factors including the
Coronavirus outbreak. Since April 2020, 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, except
with respect to the increase in the average cost of sales as disclosed in
Results of Operations - Cost of Sales below, the Company does not believe the
new cases would have a significant impact on the Company's operations.
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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. 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 September 30, 2020 and December 31, 2019, due from
Qinghai Mining (was the net amount of intercompany transactions between Qinghai
Technology and Qinghai Mining) was $3.16 million and $0.55 million,
respectively. Qinghai Technology purchased $1,188,802 and $1,113,250 boron ore
from Qinghai Mining during the nine months ended September 30, 2020 and 2019,
respectively. Qinghai Technology purchased $594,276 and $518,870 boron ore from
Qinghai Mining during the three months ended September 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 ($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, 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 ($4.41) per tonne. This purchase
contract will be in effect until a replacement contact with new purchase price
is entered.
In September 2020, Qinghai Technology sold the Test and Experimental Plant I to
Qinghai Mining at cost of RMB 11.41 million ($1.63 million) (see Note 7). The
payment term is five years with annual interest of 4.75%. The first payment of
$323,050 is due September 30, 2021. Qinghai Mining uses its accounts receivable
as the pledge for the repayment, and has the right to repay the purchase price
in full any time before the maturity date.
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 nine months ended
September 30, 2020 and 2019 was $19,547 and $25,658, respectively. The
depreciation of these fixed assets for the three months ended September 30, 2020
and 2019 was $6,927 and $8,059, respectively. Due to Zhongtian Resources
resulting from using its equipment and payment of worker's compensation made by
Zhongtian Resource for Qinghai Technology was $69,871 and $49,125 at September
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 nine months ended September 30, 2020 and 2019,
the Company's sales to Dingjia was $202,130 and $112,855, respectively. For the
three months ended September 30, 2020 and 2019, the Company's sales to Dingjia
was $100,570 and $17,300, respectively. At September 30, 2020 and December 31,
2019, outstanding payable to Dingjia was $19,893 and $56,144, respectively.
In addition, at September 30, 2020 and December 31, 2019, the Company had
$939,591 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 September
30, 2020 and December 31, 2019, respectively:
2020 2019
Related party name
Due from Qinghai Mining $ 3,534,790 $ 1,173,881
Due to Qinghai Mining (374,840 ) (619,354 )
Due from, net $ 3,159,950 $ 554,527
Due to Dingjia $ 19,893 $ 56,144
Due to Zhongtian Resources 69,871 49,125
Due to A major shareholder 939,591 573,264
Due to, total
$ 1,029,355 $ 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 $275,929 and
$88,035 for the nine and three months ended September 30, 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 Qinghai Technology for free. The
cost for the brine is immaterial as it is pumped out directly from the nearby
Salt Lake without any charge. 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 nine and three months ended September 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 nine and three
months ended September 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 September 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 non-controlling
interests (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 non-controlling interests 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. 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, 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
nine and three months ended September 30, 2020, the Company had loss of $8,554
and $5,809 that were attributable to the noncontrolling interest.
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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 FASB 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
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 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 $ 5,660,182 $ 5,092,082
Cost of sales 5,031,305 88.9 % 4,233,772 83.1 %
Gross profit 628,877 11.1 % 858,310 16.9 %
Selling expenses 125,407 2.2 % 279,755 5.5 %
General and administrative
expenses 922,681 16.3 % 550,506 10.8 %
Total operating expenses 1,048,088 18.5 % 830,261 16.3 %
Income (loss) from
operations (419,211 ) (7.4 %) 28,049 0.6 %
Other income 181,845 3.2 % 361,434 7.1 %
Income (loss) before income
taxes (237,366 ) (4.2 %) 389,483 7.6 %
Income tax expense 47,117 0.8 % 106,127 2.1 %
Income (loss) from
continuing operations (284,483 ) (5.0 % 283,356 5.6 %
Gain on disposal of
discontinued operation, net
of tax 5,666,187 111.3 %
Loss from operations of
discontinued entities, net
of tax - - % (215,835 ) (4.2 %)
Income (loss) before
noncontrolling interest (284,483 ) (5.0 %) 5,733,708 112.6 %
Less: loss attributable to
noncontrolling interest from
continuing operation (8,554 ) (0.1 %) - - %
Net income (loss) $ (275,929 ) (4.9 %) $ 5,733,708 112.6 %
Sales
Sales for the nine months ended September 30, 2020 and 2019 was $5,660,182 and
$5,092,082, respectively, an increase of $568,100 or 11.2%. For the nine months
ended September 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 $202,130 and $112,855, 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 tonne to certain customers, and we developed
new customers during the second and third quarter of 2020, which mitigated the
decreased sales from the first quarter. In addition, in September 2020, we
increased our selling price by RMB 50-150 ($7.3 - $22) per tonne due to
increased market prices, these factors resulted an overall increased sales by
11.2% for the nine months ended September 30, 2020 compared to the nine months
ended September 30, 2019.
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Cost of sales
Cost of sales for the nine months ended September 30, 2020 and 2019 was
$5,031,305 and $4,233,772, respectively, an increase of $797,533 or 18.8%. The
increase was mainly due to increased sales. The cost of sales as a percentage of
sales was 88.9% for the nine months ended September 30, 2020 compared with 83.1%
for 2019. The increase in cost of sales as a percentage of sales was mainly due
to increased average cost of production. Due to COVID-19 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, from July to
September 2020, we started acquiring 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. However, since we are in the beginning
and testing stage for using the Tibet boron rock, increased output has not yet
occurred thus causing a higher cost per tonne refined.
Gross profit
Gross profit for the nine months ended September 30, 2020 and 2019 was $628,877
and $858,310, respectively, a decrease of $229,433 or 26.7%. The profit margin
was 11.1% for the nine months ended September 30, 2020 compared to 16.9% for the
nine months ended September 30, 2019, the decrease in profit margin was mainly
due to increase production cost per tonne as described above.
Operating expenses
Selling expenses consist mainly of salespersons' salaries and freight out.
Selling expense were $125,407 for the nine months ended September 30, 2020,
compared to $279,755 for the nine months ended September 30, 2019, a decrease of
$154,348 or 55.2%, mainly resulting from decreased freight out expense of
$56,000 and decreased salespersons' salaries of $98,500.
General and administrative expenses consist mainly of salary, R&D, office,
welfare, business meeting, maintenance, and utilities. General and
administrative expenses were $922,681 for the nine months ended September 30,
2020, compared to $550,506 for the nine months ended September 30 2019, an
increase of $372,175 or 67.6%, mainly resulting from increased officer salary of
$360,000.
Other income
Other income was $181,845 for the nine months ended September 30, 2020, compared
to $361,434 for the nine months ended September 30, 2019, a decrease of $179,589
or 49.7%. For the nine months ended September 30, 2020, other income mainly
consisted of subsidy income of $143,726 and other income of $39,651. For the
nine months ended September 30, 2019, other income mainly consisted of subsidy
income of $365,327.
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
Loss from continuing operations was $284,483 loss for the nine months ended
September 30, 2020, compared to net income of $283,356 for the nine months ended
September 30, 2019. The $567,839 or 200.4% increase in loss from continuing
operations was mainly due to decreased gross profit by $229,433 and increased
operating expense by $217,827.
Gain on disposal of discontinued entities
Gain from disposal of subsidiaries was $5,666,187 for the nine months ended
September 30, 2019. 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.
Loss from operations of discontinued entities
Loss from operations of discontinued entities was $215,835 for the nine months
ended September 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 $275,929 for the nine months ended September 30, 2020,
compared to net income $5,733,708 for the nine months ended September 30, 2019,
an increase of net loss by $6,009,637 or 104.8%. The increase in our net loss
mainly resulted from the reasons described above.
Three Months Ended September 30, 2020 Compared to Three Months Ended September
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 $ 2,330,292 $ 1,883,327
Cost of sales 2,126,770 91.3 % 1,533,599 81.4 %
Gross profit 203,522 8.7 % 349,728 18.6 %
Selling expenses 39,858 1.7 % 85,568 4.5 %
General and administrative
expenses 308,686 13.2 % 159,339 8.5 %
Total operating expenses 348,544 14.9 % 244,907 13.0 %
Income (loss) from
operations (145,022 ) (6.2 )% 104,821 5.6 %
Other income 72,362 3.1 % 268,880 14.3 %
Income (loss) before income
taxes (72,660 ) (3.1 )% 373,701 19.9 %
Income tax expense 21,184 0.9 % 73,605 3.9 %
Income (loss) from
continuing operations (93,844 ) (4.0 )% 300,096 16.0 %
Gain on disposal of
discontinued operations, net
of tax 5,666,187 300.9 %
Income (loss) from
operations of discontinued
entities, net of tax - - % (93,299 ) (5.0 )%
Income (loss) before
noncontrolling interest (93,844 ) (4.0 )% 5,872,984 (311.9 )%
Less: loss attributable to
noncontrolling interest from
continuing operation (5,809 ) (0.2 )% - - %
Net income (loss) $ (88,035 ) (3.8 )% $ 5,872,984 (311.9 )%
Sales
Sales for the three months ended September 30, 2020 and 2019 was $2,330,292 and
$1,883,327, respectively, an increase of $446,965 or 23.7%. For the three months
ended September 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 $100,570 and $17,300, respectively. The
increase in sales for the three months ended September 30, 2020 was mainly due
to our effort of developing new customers and increased selling price by RMB
50-150 ($7.3 - $22) per tonne due to increased market prices in September 2020.
Cost of sales
Cost of sales ("COS") for the three months ended September 30, 2020 and 2019 was
$2,126,770 and $1,533,599, respectively, an increase of $593,171 or 38.7%. The
increase was mainly due to increased sales. The COS as a percentage of sales was
91.3% for the three months ended September 30, 2020 compared to 81.4% for 2019.
The increase in COS as a percentage of sales was mainly due to increased
production cost. From July to September 2020, we started trying 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. However,
since we are in the beginning and testing stage for trying the Tibet boron rock,
the significant increased output has not yet appeared.
Gross profit
Gross profit for the three months ended September 30, 2020 and 2019 was $203,522
and $349,728, respectively, a decrease of $146,206 or 41.8%. The profit margin
was 8.7% for the three months ended September 30, 2020 compared to 18.6% for the
three months ended September 30, 2019, the decrease in profit margin was mainly
due to increased production cost.
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Operating expenses
Selling expenses consist mainly of salespersons' salaries and freight out.
Selling expense were $39,858 for the three months ended September 30, 2020,
compared to $85,568 for the three months ended September 30, 2019, a decrease of
$45,710 or 53.4%, mainly resulting from decreased freight out expense of $9,800
and decreased salespersons' salaries of $38,500, but partly offset with
decreased certain other selling expenses.
General and administrative expenses consist mainly of bad debt expense, R&D,
office, welfare, business meeting, maintenance, and utilities. General and
administrative expenses were $308,686 for the three months ended September 30,
2020, compared to $159,339 for the three months ended September 30 2019, an
increase of $149,347 or 93.7%, mainly resulting from increased officer salary
expense by $120,000, and other G&A expenses of $30,000.
Other income
Other income was $72,362 for the three months ended September 30, 2020, compared
to $268,880 for the three months ended September 30, 2019, a decrease of
$196,518 or 73.1%. For the three months ended September 30, 2020, other income
mainly consisted of subsidy income of $48,091 and other income of $26,246. For
the three months ended September 30, 2019, other income mainly consisted of
subsidy income of $271,680.
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
Loss from continuing operations was $93,844 for the three months ended September
30, 2020, compared to income of $300,096 for the three months ended September
30, 2019. The $393,940 or 131.3% increase in loss from continuing operations was
mainly due to decreased gross profit, decreased other income, and increased G&A
expenses as described above.
Gain on disposal of discontinued operations
Gain from disposal of subsidiaries was $5,666,187 for the three months ended
September 30, 2019, resulting from the disposal of equity interests in Jinhui,
SmartHeat Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange.
Loss from operations of discontinued entities
Loss from operations of discontinued entities was $93,299 for the three months
ended September 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 loss of $88,035 for the three months ended September 30, 2020,
compared to net income of $5,872,984 for the three months ended September 30,
2019, an increase of net loss by $5,961,019 or 101.5%. The increase in our net
loss mainly resulted from the reasons described above.
Liquidity and Capital Resources
As of September 30, 2020, we had cash and equivalents of $1.17 million. Working
capital was $1.10 million at September 30, 2020. The ratio of current assets to
current liabilities was 1.34:1 at September 30, 2020.
The following is a summary of cash provided by or used in each of the indicated
types of activities during nine months ended September 30, 2020 and 2019:
2020 2019
Cash provided by (used in):
Operating activities $ 1,145,326 $ 269,320
Investing activities (333,480 ) (149,928 )
Financing activities $ 171,568 $ 62,933
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Net cash provided by operating activities was $1,145,326 for the nine months
ended September 30, 2020, compared to $269,320 for the nine months ended
September 30, 2019. The increase of cash inflow from operating activities for
2020 was principally attributable to increased cash inflow from inventory by
$1,313,682, which was partly offset by decreased cash inflow from advances to
suppliers by $137,761, decreased cash inflow from accounts payable by $205,772
and decreased cash inflow from unearned revenue by $130,573.
Net cash used in investing activities was $333,480 for the nine months ended
September 30, 2020, compared to $149,928 for the nine months ended September 30,
2019. Net cash used in investing activities in 2020 was mainly consist of
purchase of property and equipment. Net cash used in investing activities in
2019 was mainly consist of cash disposed at disposal of subsidiaries.
Net cash provided by financing activities was $171,568 for the nine months ended
September 30, 2020, compared to $62,933 for the nine months ended September 30,
2019. The net cash provided by financing activities in 2020 consisted of capital
contribution from noncontrolling interest of Qinghai Zhongli by $715,130, and
increase in amount owing to other related parties of $348,724, but partly offset
by increase in due from Qinghai Mining of $892,286. The net cash used in
financing activities in 2019 consisted of decrease in due from Qinghai Mining of
$1,348,508, but partly offset by decreased amount owing to other related parties
of $1,285,575.
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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