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Lithium & Boron Technology, Inc. – ‘10-Q’ for 9/30/19

On:  Thursday, 11/14/19, at 2:50pm ET   ·   For:  9/30/19   ·   Accession #:  1185185-19-1598   ·   File #:  1-34246

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

11/14/19  Lithium & Boron Technology, Inc.  10-Q        9/30/19   83:4.8M                                   Federal Filings, LLC/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    590K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     30K 
 3: EX-31.2     Certification -- §302 - SOA'02                      HTML     30K 
 4: EX-32.1     Certification -- §906 - SOA'02                      HTML     26K 
54: R1          Document And Entity Information                     HTML     54K 
24: R2          Consolidated Balance Sheets                         HTML    114K 
33: R3          Consolidated Balance Sheets (Parentheticals)        HTML     31K 
82: R4          Consolidated Statements of Operations and           HTML    100K 
                Comprehensive Income (Unaudited)                                 
55: R5          Consolidated Statements of Cash Flows (Unaudited)   HTML     95K 
25: R6          Statements of Changes in Consolidated               HTML     63K 
                Stockholders' Equity (Deficit) (Unaudited)                       
34: R7          1. Organization and Description of Business         HTML     33K 
83: R8          2. Summary of Significant Accounting Policies       HTML     76K 
53: R9          3. Inventories, Net                                 HTML     36K 
12: R10         4. Notes Receivable - Bank Acceptances              HTML     27K 
39: R11         5. Other Receivables (Net), Prepayments and         HTML     38K 
                Deposits                                                         
69: R12         6. Property and Equipment, Net                      HTML     45K 
60: R13         7. Construction in Progress                         HTML     26K 
11: R14         8. Taxes Payable                                    HTML     32K 
38: R15         9. Accrued Liabilities and Other Payables           HTML     38K 
68: R16         10. Related Party Transactions                      HTML     49K 
59: R17         11. Deferred Income                                 HTML     68K 
13: R18         12. Other Income                                    HTML     56K 
37: R19         13. Conversion of Credit Line Payable (Related      HTML     29K 
                Party Transaction)                                               
80: R20         14. Deferred Tax Asset                              HTML     43K 
51: R21         15. Income Taxes                                    HTML     69K 
27: R22         16. Statutory Reserves and Restricted Net Assets    HTML     29K 
36: R23         17. Commitments                                     HTML     26K 
79: R24         18. Contingencies                                   HTML     27K 
50: R25         19. Reverse Merger                                  HTML     54K 
26: R26         20. Disposal of Subsidiaries                        HTML     38K 
35: R27         21. Subsequent Events                               HTML     26K 
78: R28         Accounting Policies, by Policy (Policies)           HTML    155K 
52: R29         2. Summary of Significant Accounting Policies       HTML     40K 
                (Tables)                                                         
57: R30         3. Inventories, Net (Tables)                        HTML     38K 
65: R31         5. Other Receivables (Net), Prepayments and         HTML     38K 
                Deposits (Tables)                                                
40: R32         6. Property and Equipment, Net (Tables)             HTML     45K 
14: R33         8. Taxes Payable (Tables)                           HTML     32K 
58: R34         9. Accrued Liabilities and Other Payables (Tables)  HTML     36K 
66: R35         10. Related Party Transactions (Tables)             HTML     41K 
41: R36         11. Deferred Income (Tables)                        HTML     67K 
15: R37         12. Other Income (Tables)                           HTML     55K 
56: R38         14. Deferred Tax Asset (Tables)                     HTML     45K 
67: R39         15. Income Taxes (Tables)                           HTML     65K 
48: R40         19. Reverse Merger (Tables)                         HTML     54K 
75: R41         20. Disposal of Subsidiaries (Tables)               HTML     43K 
28: R42         1. Organization and Description of Business         HTML     55K 
                (Details)                                                        
19: R43         2. Summary of Significant Accounting Policies       HTML     52K 
                (Details)                                                        
49: R44         2. Summary of Significant Accounting Policies       HTML     32K 
                (Details) - Schedule of Cash and Cash Equivalents                
76: R45         2. Summary of Significant Accounting Policies       HTML     41K 
                (Details) - Schedule of Estimated Useful Lives of                
                Property, Plant and Equipment                                    
29: R46         3. INVENTORIES, NET (Details) - Schedule of         HTML     36K 
                Inventories                                                      
20: R47         4. Notes Receivable - Bank Acceptances (Details)    HTML     29K 
47: R48         5. OTHER RECEIVABLES (NET), PREPAYMENTS AND         HTML     41K 
                DEPOSITS (Details) - Schedule of Receivables,                    
                Prepayments and Deposits                                         
77: R49         6. Property and Equipment, Net (Details)            HTML     26K 
72: R50         6. Property and Equipment, Net (Details) -          HTML     48K 
                Schedule of Property, Plant and Equipment                        
63: R51         7. Construction in Progress (Details)               HTML     25K 
18: R52         8. TAXES PAYABLE (Details) - Schedule of Taxes      HTML     32K 
                Payable                                                          
43: R53         9. Accrued Liabilities and Other Payables           HTML     43K 
                (Details)                                                        
71: R54         9. Accrued Liabilities and Other Payables           HTML     35K 
                (Details) - Schedule of Accrued Liabilities and                  
                Other Payables                                                   
62: R55         10. Related Party Transactions (Details)            HTML     78K 
17: R56         10. Related Party Transactions (Details) -          HTML     41K 
                Schedule of Related Party Transactions                           
42: R57         11. DEFERRED INCOME (Details) - Schedule of Other   HTML     49K 
                Nonoperating Income, by Component                                
70: R58         12. Other Income (Details) - Schedule of Other      HTML     41K 
                Nonoperating Income (Expense)                                    
64: R59         13. Conversion of Credit Line Payable (Related      HTML     55K 
                Party Transaction) (Details)                                     
22: R60         14. Deferred Tax Asset (Details)                    HTML     25K 
32: R61         14. Deferred Tax Asset (Details) - Schedule of      HTML     52K 
                Deferred Tax Liability                                           
74: R62         15. Income Taxes (Details)                          HTML     76K 
46: R63         15. Income Taxes (Details) - Schedule of Effective  HTML     42K 
                Income Tax Rate Reconciliation                                   
21: R64         15. Income Taxes (Details) - Schedule of            HTML     34K 
                Components of Income Tax Expense                                 
31: R65         16. Statutory Reserves and Restricted Net Assets    HTML     31K 
                (Details)                                                        
73: R66         17. Commitments (Details)                           HTML     30K 
45: R67         19. Reverse Merger (Details)                        HTML     34K 
23: R68         19. Reverse Merger (Details) - Business             HTML     39K 
                Acquisition, Pro Forma Information                               
30: R69         20. Disposal of Subsidiaries (Details)              HTML     29K 
44: R70         20. Disposal of Subsidiaries (Details) - Disposal   HTML     66K 
                Groups, Including Discontinued Operations                        
61: XML         IDEA XML File -- Filing Summary                      XML    156K 
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81: ZIP         XBRL Zipped Folder -- 0001185185-19-001598-xbrl      Zip    140K 


‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Note about Forward-Looking Statements
"Financial Statements
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures about Market Risk
"Controls and Procedures
"Legal Proceedings
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults Upon Senior Securities
"Mine Safety Disclosures
"Other Information
"Exhibits
"Exhibit Index
"Signatures

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 C:  <>  <> 

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 September 30, 2019

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
Town
Xai Xi County, Qing Hai 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 ☒

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  ☒

 

As of November 13, 2019 there were 185,986,370 shares of common stock outstanding.  

 

 

 

 

Lithium & Boron Technology, Inc.

 

Table of Contents

 

 

 

Page

Note about Forward-Looking Statements

3

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

5

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

Item 4.

Controls and Procedures

32

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

33

 

 

 

 

Exhibit Index

33

 

 

 

 

Signatures

34

 

 

 

 

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.

 

3

Table of Contents

 

As used in this report, “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.

 

Effective February 7, 2012, we implemented a one-for-ten reverse stock split of our common stock. Unless otherwise indicated, all share amounts and per share prices in this report were retroactively adjusted to reflect the effect of this reverse stock split. See Note 1 of the consolidated financial statements included herein.

 

4

Table of Contents

 

Part I – Financial Information

 

Item 1. Financial Statements

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED BALANCE SHEETS

 

   

SEPTEMBER 30, 2019

   

DECEMBER 31, 2018

 

ASSETS

  (UNAUDITED)          
                 

CURRENT ASSETS

               

     Cash and equivalents

  $ 329,498     $ 163,145  

     Accounts receivable, net

    363,395       512,380  

     Notes receivable

    270,162       111,473  

     Other receivables

    1,212       154,719  

     Advances to suppliers

    10,541       113,705  

     Inventories, net

    1,851,338       1,735,374  
                 

        Total current assets

    2,826,146       2,790,796  
                 

NONCURRENT ASSETS

               

     Property and equipment, net

    1,459,858       1,749,060  

     Construction in progress

    1,613,546       1,662,847  
                 

       Total noncurrent assets

    3,073,404       3,411,907  
                 

TOTAL ASSETS

  $ 5,899,550     $ 6,202,703  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

               
                 

CURRENT LIABILITIES

               

     Accounts payable

  $ 380,340     $ 1,172,001  

     Unearned revenue

    64,360       1,151,253  

     Accrued liabilities and other payables

    2,471,893       6,698,604  

     Taxes payable

    280,733       228,547  

     Advance from related parties, net

    375,782       310,209  
                 

         Total current liabilities

    3,573,108       9,560,614  
                 

DEFERRED INCOME

    1,388,539       1,504,400  
                 

TOTAL LIABILITIES

    4,961,647       11,065,014  
                 

COMMITMENTS AND CONTINGENCIES

               
                 

STOCKHOLDERS' DEFICIT

               

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

    (6,666,351 )     (7,645,727 )

Statutory reserve

    -       780,682  

Accumulated other comprehensive loss

    (69,139 )     (11,951 )

Retained earnings

    7,487,425       1,828,717  
                 

         TOTAL STOCKHOLDERS' EQUITY (DEFICIT)

    937,903       (4,862,311 )
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

  $ 5,899,550     $ 6,202,703  

 

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

5

Table of Contents

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

   

NINE MONTHS ENDED

SEPTEMBER 30

   

THREE MONTHS ENDED

SEPTEMBER 30

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Sales

  $ 4,979,227     $ 3,069,297     $ 1,866,027     $ 1,002,677  

Sales - related party

    112,855       955,087       17,300       513,973  
                                 

Total sales

    5,092,082       4,024,384       1,883,327       1,516,650  
                                 

Cost of sales

    4,233,772       3,413,678       1,533,599       1,390,412  
                                 

Gross profit

    858,310       610,706       349,728       126,238  
                                 

Operating expenses

                               

     Selling

    279,755       203,628       85,568       72,367  

     General and administrative

    550,506       214,794       159,339       32,116  
                                 

     Total operating expenses

    830,261       418,422       244,907       104,483  
                                 

Income from operations

    28,049       192,284       104,821       21,755  
                                 

Non-operating income

                               

     Financial income (expense)

    (3,893 )     -       (2,800 )     -  

     Subsidy income

    365,327       192,114       271,680       45,358  
                                 

     Total non-operating income, net

    361,434       192,114       268,880       45,358  
                                 

Income before income tax

    389,483       384,398       373,701       67,113  
                                 

Income tax expense

    106,127       57,660       73,605       10,067  
                                 

Income from continuing operations

    283,356       326,738       300,096       57,046  
                                 

Gain on disposal of discontinued operations, net of tax

    5,666,187       -       5,666,187       -  
                                 

Loss from operations of discontinued entities, net of tax

    (215,835 )     -       (93,299 )     -  
                                 

Net income

    5,733,708       326,738       5,872,984       57,046  
                                 

Other comprehensive item

                               

Foreign currency translation gain attributable to discontinued operations

    118,877       -       112,142       -  

Foreign currency translation loss attributable to Lithium & Boron Technology, Inc.

    (176,065 )     (165,066 )     (166,446 )     (118,311 )
                                 
                                 

Comprehensive income (loss)

  $ 5,676,520     $ 161,672     $ 5,818,680     $ (61,265 )
                                 
                                 

Basic and diluted weighted average shares outstanding

    185,968,370       106,001,971       185,968,370       106,001,971  
                                 

Basic and diluted earnings per share from continuing operations

  $ 0.00     $ 0.00     $ 0.00     $ 0.00  
                                 

Basic and diluted earnings per share from discontinued operations

  $ 0.03     $ -     $ 0.03     $ -  

 

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

6

Table of Contents

 

LITHIUM & BORON TECHNOLOGY, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   

NINE MONTHS ENDED SEPTEMBER 30

 
   

2019

   

2018

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 5,733,708     $ 326,738  

Adjustments to reconcile loss to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    235,286       245,489  

Provision for bad debts

    30,113       -  

Gain on sale of subsidiaries

    (5,666,187 )     -  

Changes in deferred income

    (73,532 )     (146,099 )

(Increase) decrease in assets and liabilities:

               

Accounts receivable

    52,587       (124,603 )

Other receivables

    10,255       -  

Advances to suppliers

    54,710       10,407  

Inventories

    (216,528 )     (1,420,471 )

Accounts payable

    166,955       (1,271,652 )

Unearned revenue

    66,269       (150,481 )

Accrued liabilities and other payables

    (209,794 )     10,815  

Taxes payable

    85,478       74,577  
                 

Net cash provided by (used in) operating activities

    269,320       (2,445,280 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchase of property and equipment

    -       (2,945 )

Cash disposed at disposal of subsidiaries

    (149,928 )     -  
                 

Net cash used in investing activities

    (149,928 )     (2,945 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Advance from related parties

    62,933       2,448,225  
                 

Net cash provided by financing activities

    62,933       2,448,225  
                 

EFFECT OF EXCHANGE RATE CHANGE ON CASH AND EQUIVALENTS

    (15,972 )     -  
                 

NET INCREASE IN CASH AND EQUIVALENTS

    166,353       -  
                 

CASH AND EQUIVALENTS, BEGINNING OF PERIOD

    163,145       -  
                 

CASH AND EQUIVALENTS, END OF PERIOD

  $ 329,498     $ -  
                 

Supplemental cash flow data:

               

Income tax paid

  $ -     $ -  

Interest paid

  $ -     $ -  

 

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

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LITHIUM & BORON TECHNOLOGY, INC

STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)

NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(UNAUDITED)

 

   

Common Stock

                   

Accumulated other

                 
   

Shares

   

Amount

   

Paid-in capital

   

Statutory reserves

   

comprehensive loss

   

Retained earnings

   

Total

 

Balance at January 1, 2019

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

Net loss for the quarter

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

Dividend accrued

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

Foreign currency translation loss

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

Balance at March 31, 2019

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

Net loss for the quarter

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

Dividend accrued

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

Foreign currency translation gain

    -       -       -       -       41,990       -       41,990  
                                                         

Balance at June 30, 2019

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

Net income for the quarter

    -       -       -       -       -       5,872,984       5,872,984  
                                                         

Disposal of subsidiaries

    -       -       979,376       (780,682 )     -       -       198,694  
                                                         

Dividend accrued

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

Foreign currency translation loss

    -       -       -       -       (54,304 )     -       (54,304 )
                                                         

Balance at September 30, 2019

    185,968,370     $ 185,968     $ (6,666,351 )   $ -     $ (69,139 )   $ 7,487,425     $ 937,903  

 

   

Common Stock

                    Accumulated other                  
   

Shares

   

Amount

    Paid-in capital    

Statutory reserves

   

 comprehensive income

   

Retained earnings

   

Total

 

Balance at January 1, 2018

    106,001,971     $ 106,002     $ 1,346,346     $ -     $ 146,579     $ 1,352,022     $ 2,950,949  
                                                         

Net income for the quarter

    -       -       -       -       -       70,243       70,243  
                                                         

Foreign currency translation gain

    -       -       -       -       116,339       -       116,339  
                                                         

Balance at March 31, 2018

    106,001,971       106,002       1,346,346       -       262,918       1,422,265       3,137,531  
                                                         

Net income for the quarter

    -       -       -       -       -       199,450       199,450  
                                                         

Foreign currency translation loss

    -       -       -       -       (163,094 )     -       (163,094 )
                                                         

Balance at June 30, 2018

    106,001,971       106,002       1,346,346       -       99,824       1,621,715       3,173,887  
                                                         

Net income for the quarter

    -       -       -       -       -       57,046       57,046  
                                                         

Foreign currency translation loss

    -       -       -       -       (118,311 )     -       (118,311 )
                                                         

Balance at September 30, 2018

    106,001,971     $ 106,002     $ 1,346,346     $ -     $ (18,487 )   $ 1,678,761     $ 3,112,622  

 

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

 

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LITHIUM & BORON TECHNOLOGY, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019 (UNAUDITED) AND DECEMBER 31, 2018

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Lithium & Boron Technology, Inc., (the “Company” or “Lithium Tech”), formerly known as SmartHeat, Inc. (“SmartHeat”), was incorporated August 4, 2006, in the State of Nevada. The Company currently produces boric acid in the People Republic of China (“PRC”) and plans to expand its manufacturing facilities to produce lithium carbonate for the electric vehicle battery market in China. The Company has collaborated with a director to develop a prototype production line that can produce boric acid and lithium carbonate from local brines pool and may also initiate production of lithium carbonate from existing ore deposits it purchases from an affiliated mining company.

 

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

 

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

 

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

 

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

 

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

 

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

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

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

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

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

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

 

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

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

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

 

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The CFS include the financial statements of the Company and its subsidiaries. All significant intercompany transactions and balances were eliminated in consolidation.

 

The interim consolidated financial information as of September 30, 2019 and for the nine and three-month periods ended September 30, 2019 and 2018 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, 2018, previously filed with the SEC.

 

In the opinion of management, all adjustments (which include all significant normal and recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of September 30, 2019 and December 31, 2018, its consolidated results of operations and cash flows for nine and three months ended September 30, 2019 and 2018, as applicable, were made.

 

Principles of Consolidation 

 

For the nine 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.” For the nine months ended September 30, 2018, the accompanying CFS consist of the accounts of Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake and Qinghai Technology as a result of reverse merger of SmartHeat with Mid-heaven BVI. All significant intercompany accounts and transactions were eliminated in consolidation.

 

Noncontrolling Interest 

 

The Company follows Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” which established new standards 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, as was previously the case, 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 the NCI even when such allocation might result in a deficit balance. This standard also required changes to certain presentation and disclosure requirements. Losses attributable to the NCI in a subsidiary may exceed the NCI’s interests in the subsidiary’s equity. The excess attributable to the NCI is attributed to those interests. The NCI shall continue to be attributed its share of losses even if that attribution results in a deficit NCI balance.

 

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

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.  

 

The following table presents in US dollars (“USD”) the amount of cash and equivalents held by the Company as of September 30, 2019 and December 31, 2018, respectively, based on the jurisdiction of deposit. The Company’s US parent holds cash and equivalents in US bank accounts denominated in USD.

 

   

United States

   

China

   

Total

 

September 30, 2019

    -     $ 329,498     $ 329,498  

December 31, 2018

    -     $ 163,145     $ 163,145  

 

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Accounts and Retentions 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 nil and $1.78 million at September 30, 2019 and December 31, 2018. At September 30, 2019, Qinghai Technology had $0.27 million accounts receivable with aging over one-year, the Mining company agreed to take the full responsibility of payment if these accounts receivable cannot be collected.

 

At September 30, 2019 and December 31, 2018, the Company had retentions receivable from customers for product quality assurance of nil and $0.14 million. The retention rate varied from 5% to 20% of the sales price with variable terms from three to 24 months depending on the shipping date, and for PHE Units, the customer acceptance date of the products and the number of heating seasons that the warranty period covers. The Company had allowance for these retentions of nil and $0.14 million at September 30, 2019 and December 31, 2018.

 

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 September 30, 2019 and December 31, 2018, the Company had allowance for advances to suppliers of nil and $2.16 million.

 

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.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory,” which requires that inventory within the scope of the guidance be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted ASU 2015-11 effective January 1, 2017 and it did not have a material effect on the Company’s CFS. 

 

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.

 

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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. Based on its review, the Company believes that, as of September 30, 2019 and December 31, 2018, there was no significant impairments of its long-lived assets.

 

Research and Development Costs

 

Research and development (“R&D”) costs are expensed as incurred and included in general and administrative (“G&A”) expenses. These costs primarily consist of cost of materials used, salaries paid for the Company’s development department and fees paid to third parties. R&D costs for the nine months ended September 30, 2019 and 2018 were $554 and $43,191, respectively. R&D costs for the three months ended September 30, 2019 and 2018 were $465 and $2,132, respectively.

 

Income Taxes

 

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

 

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

 

Under the provisions of ASC Topic 740, when tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified in selling, general and administrative expenses in the statement of income.  At September 30, 2019 and December 31, 2018, the Company did not take any uncertain positions that would necessitate recording a tax related liability.  

 

Revenue Recognition

 

In May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).

 

The new revenue standards became effective for the Company January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.

 

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Under the new revenue standards, 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 delivery to the 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.

 

Cost of Sales

 

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

 

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. 

 

Concentration of Credit Risk

 

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

 

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

 

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

 

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.

 

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. 

 

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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.”

 

Fair Value (“FV”) of Financial Instruments

 

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

 

Fair Value Measurements and Disclosures

 

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

 

  

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

  

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

  

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

 

As of September 30, 2019 and December 31, 2018, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at FV. 

 

Leases

 

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

 

Segment Reporting

 

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

 

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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 fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this standard on its CFS.

 

In June 2018, the FASB issued ASU 2018-07, "Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The new guidance is effective for SEC filers for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early adoption is permitted. The Company is evaluating the effects of the adoption of this guidance and currently believes it will impact the accounting of the share-based awards granted to non-employees.

 

3. INVENTORIES, NET

 

Inventories at September 30, 2019 and December 31, 2018, respectively, were as follows: 

 

   

2019

   

2018

 

Raw materials

  $ 488,828     $ 5,626,039  

Finished goods

    1,362,510       2,503,571  

Total

    1,851,338       8,129,610  

Less: inventory impairment allowance

    -       (6,394,236

)

Inventories, net

  $ 1,851,338     $ 1,735,374  

  

4. NOTES RECEIVABLE – BANK ACCEPTANCES

 

The Company sold goods to its customers and received notes (bank acceptances) from them in lieu of payments. 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, have the bank acceptance cashed out from 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 September 30, 2019 and December 31, 2018, the Company had notes receivable of $270,162 and $111,473, respectively; and at September 30, 2019, the Company had $1.36 million notes receivable that were endorsed to its vendors, in lieu of payment. The Company was contingently liable for these notes receivable until it is paid or matured.

 

5. OTHER RECEIVABLES (NET), PREPAYMENTS AND DEPOSITS

 

Other receivables, prepayments and deposits consisted of the following at September 30, 2019 and December 31, 2018:

 

   

2019

   

2018

 

Advances to unrelated third-party companies

  $ -     $ 3,471,902  

Advances to employees

    -       327,067  

Other

    1,212       208,671  

Total

    1,212       4,007,640  

Less: allowances

    -       (3,852,921

)

Other receivables (net), prepayments and deposits

  $ 1,212     $ 154,719  

 

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Advances to unrelated third-party companies were short-term unsecured advances. 

 

Advances to employees were short-term loans to employees and advances for business trips and related expenses, with no interest, payable upon demand.

 

6. PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following at September 30, 2019 and December 31, 2018, respectively:

 

   

2019

   

2018

 

Structures and improvements

  $ 443,982     $ 457,547  

Production equipment

    2,418,338       3,374,314  

Equipment upgrade

    245,292       252,787  

Office equipment

    -       188,021  

Vehicles

    -       172,422  

Total

    3,107,612       4,445,091  

Less: impairment of fixed assets

    -       (189,412

)

Less: accumulated depreciation

    (1,647,754

)

    (2,506,619

)

Property and equipment, net

  $ 1,459,858     $ 1,749,060  

 

Depreciation for the nine months ended September 30, 2019 and 2018 was $235,286 and $245,489, respectively.

 

Depreciation for the three months ended September 30, 2019 and 2018 was $76,141 and $78,024, respectively.

 

7. CONSTRUCTION IN PROGRESS (“CIP”)

 

As of September 30, 2019 and December 31, 2018, the Company had CIP of $1,613,546 and $1,662,847, respectively. The CIP was mainly for Test and Experimental Plant I, which does not have any production currently; the Company intends to transform the plant as a pilot plant for pure boric acid and lithium carbonate production. However, the CIP was delayed due to the Company is waiting for the installation and connection of the natural gas pipeline by the authority as a result of implementing the Coal-to-Gas conversion project by the authority for environmental protection purpose.

 

8. TAXES PAYABLE

 

Taxes payable consisted of the following September 30, 2019 and December 31,2018, respectively:

 

   

2019

   

2018

 

Other

  $ 32,968     $ 53,112  

VAT

    247,765       175,435  

Taxes payable

  $ 280,733     $ 228,547  

   

9. ACCRUED LIABILITIES AND OTHER PAYABLES

 

Accrued liabilities and other payables consisted of the following at September 30, 2019 and December 31, 2018, respectively:

 

   

2019

   

2018

 

Advances from third parties

  $ 1,842,087     $ 3,120,967  

Subsidy payable

    -       291,410  

Other

    567,396       520,613  

Accrued expenses

    62,410       2,765,614  

Total accrued liabilities and other payables

  $ 2,471,893     $ 6,698,604  

 

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

 

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At September 30, 2019 and December 31, 2018, other mainly was dividend payable to Northtech of $375,000 and $300,000, respectively.

 

As of September 30, 2019 and December 31, 2018, the Company had $0 and $291,410, respectively, for the government subsidy for Magnesium-rich waste liquid high value utilization project, and was recorded as other payable; during the three months ended September 30, 2019, the Company completed the project and passed the government’s inspection, the Company reclassified $65,000 equipment cost of this government subsidy payable to deferred income and amortizes it over 10 years, and reclassified $0.22 million subsidy payable as other income.

 

As of September 30, 2019, accrued expenses mainly consisted of accrued payroll expense of $62,410 for Qinghai Technology. As of December 31, 2018, accrued expenses mainly consisted of accrued property and land rental fee of $2.38 million for SmartHeat Pump and accrued payroll of $0.38 million.

 

10. RELATED PARTY TRANSACTIONS

 

Qinghai Technology purchased raw material boron rock from Qinghai Mining (owned by three major shareholders of the Company); in addition, Qinghai Technology sometimes received no-interest short-term advances from Qinghai Mining for daily operation needs. As of September 30, 2019 and December 31, 2018, due from (to) Qinghai Mining (representing the net amount of intercompany transactions between Qinghai Technology and Qinghai Mining due to carve out) was $0.18 million and $(3.88) million, respectively, which included $54,976 net due to Qinghai Mining after the Debt Offset Agreement disclosed below. Qinghai Technology purchased of $1,113,250 and $518,870 boron ore from Qinghai Mining during the nine and three months ended September 30, 2019.

 

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 ton. The price is adjustable in the future if there is a significant fluctuation of the market price for the boron ore.

 

Qinghai Technology used equipment that belongs to Qinghai Province DaChaiDan ZhongTian Resources Development Co., Ltd (“Zhongtian Resources”, owned by 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, 2019 and 2018 was $25,658 and $26,533, respectively. The depreciation of these fixed assets for the three months ended September 30, 2019 and 2018 was $8,059 and $7,434, respectively. Due to Zhongtian Resources resulting from using its equipment was $25,658 and $0.11 million at September 30, 2019 and December 31, 2018, respectively.

 

Qinghai Technology previously purchased raw material from DaChaiDan SanXin Industrial Company Ltd (“SanXin”). The outstanding payable to SanXin at September 30, 2019 and December 31, 2018 was $0 and $0.13 million, respectively. SanXin is a non-related party company; however, Qinghai Mining assumed the payables as of December 31, 2018 that Qinghai Technology owed to SanXin under a Debt Offset Agreement between the Company, Qinghai Mining and SanXin entered into in June 2019.

 

Qinghai Technology sold boric acid to Qinghai Dingjia Zhixin Trading Co., Ltd (“Dingjia”, 90% owned by the son of the Company’s major shareholder). For the nine months ended September 30, 2019 and 2018, the Company’s sales to Dingjia was $112,855 and $955,087, respectively. For the three months ended September 30, 2019 and 2018, the Company’s sales to Dingjia was $17,300 and $513,973, respectively. At September 30, 2019 and December 31, 2018, outstanding receivables from (payable to) Dingjia was $(0.08) million and $4.06 million, respectively.

 

Qinghai Technology, Qinghai Mining, Zhongtian Resources and Dingjia entered a Debt Offset Agreement, in which, Qinghai Mining assumed the outstanding payable balance of Qinghai Technology as of December 31, 2018 to Zhongtian, and Qinghai Technology transferred the outstanding receivable balance as of December 31, 2018 from Dingjia to Qinghai Mining. With execution of the Debt Offset Agreement entered in June 2019, the Company had $54,976 net due to Qinghai Mining at December 31, 2018.

 

In addition, at September 30, 2019 and December 31, 2018, the Company had $456,263 and $255,233 due to another major shareholder of the Company, 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 was payable upon demand.

 

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The following table summarized the due from (to) related parties as of September 30, 2019 and December 31, 2018, respectively:

 

     

2019

   

2018

 
 

Related party name

               

Due from (to)

Dingjia

  $ (75,499

)

  $ 4,058,148  

Due from (to)

Qinghai Mining

    181,638       (3,878,896

)

Due to

Zhongtian Resources

    (25,658

)

    (106,345

)

Due to

SanXin (debts assumed by Qinghai Mining)

    -       (127,883

)

Due to

A major shareholder

    (456,263

)

    (255,233

)

Due from (to), net

  $ (375,782

)

  $ (310,209

)

 

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 September 30, 2019 is:

 

   

Government

subsidy

amount

 

Project

completion

date

 

Useful life

in years

   

 

Accumulated

amortization

   

Net

 
                                   

Technology upgrade for using lean ore to produce magnesium sulfate

  $ 311,046  

8/1/2013

    10     $ 191,812     $ 119,234  

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

    70,693  

5/1/2015

    10       31,223       39,470  

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

    1,413,847  

1/1/2018

    10       247,423       1,166,424  

Project of high value utilization of magnesium-rich waste liquid

    65,037  

7/9/2019

    10       1,626       63,411  

Total

  $ 1,860,623               $ 472,084     $ 1,388,539  

 

The detail of deferred income for the Company’s special projects at December 31, 2018 is as following:

 

   

Government

subsidy

amount

 

Project

completion

date

 

Useful life

in years

   

Accumulated

amortization

   

Net

 
                                   

Technology upgrade for using lean ore to produce magnesium sulfate

  $ 320,550  

8/1/2013

    10     $ 173,631     $ 146,919  

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

    72,852  

5/1/2015

    10       26,712       46,140  

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

    1,457,046  

1/1/2018

    10       145,705       1,311,341  

Total

  $ 1,850,449               $ 346,049     $ 1,504,400  

 

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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 nine and three months ended September 30, 2019 and 2018, respectively:

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Technology upgrade for using lean ore to produce magnesium sulfate

  $ 24,073     $ 25,308  

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

    5,471       5,752  

Project of production of high purity boric acid from lean ore

    -       -  

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

    109,424       115,039  

Development of 1,000 tons battery-grade lithium carbonate

    -       46,015  

Project of high value utilization of magnesium-rich waste liquid

    226,359       -  

Total

  $ 365,327     $ 192,114  

 

   

Three Months Ended September 30,

 
   

2019

   

2018

 

Technology upgrade for using lean ore to produce magnesium sulfate

  $ 7,851     $ 8,044  

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

    1,784       1,828  

Project of production of high purity boric acid from lean ore

    -       -  

Project of comprehensive utilization of DaChaiDan Solid Boron Mine

    35,686       35,486  

Development of 1,000 tons battery-grade lithium carbonate

    -       -  

Project of high value utilization of magnesium-rich waste liquid

    226,359       -  

Total

  $ 271,680     $ 45,358  

 

13. CONVERSION OF CREDIT LINE PAYABLE (RELATED PARTY TRANSACTION)

 

On June 14, 2018, the Company entered into the Sixth Amendment to the Credit and Security Agreement dated July 27, 2012, as amended, between the Company and Northtech, as described below:

 

In October 2017, The Company entered into negotiations with Northtech to restructure the Credit Agreement. On October 31, 2017 the Credit Line was not extended, and the parties continued negotiations.  The parties agreed that Northtech will convert all outstanding interest and principal due under the Credit Agreement into the Company's common stock at a $.065 per share, a premium of $.0649 to the 30 average closing price of the Company's common stock of $.0001 per share.  In addition, the parties agreed to reduce the maximum credit line under the Credit Agreement to $1,000,000 and extended the maturity date to December 31, 2018. Further conversion of any outstanding principal and interest under the Credit Agreement will be based on conversion price subject to a minimum of $.065 per share and a maximum of $.50 per share.

 

As a result of the entering into the Sixth Amendment, the Company issued Northtech 71,283,000 restricted shares of common stock (66,316,601 shares on December 28, 2018 due to the maximum limit of 75,000,000 authorized for issuance at December 31, 2018, and 4,966,399 shares on March 20, 2019). Upon the issuance of the common stock to Northtech, the total interest and principal of $4,633,395 due to Northtech was reduced to zero.

  

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14. DEFERRED TAX ASSETS

 

As of September 30, 2019 and December 31, 2018, respectively, deferred tax assets (liabilities) consisted of the following:

 

   

2019

   

2018

 

Deferred tax asset - current (bad debt allowance for accounts receivable)

  $ -     $ 653,737  

Deferred tax asset - current (bad debt allowance for retention receivable)

    -       36,201  

Deferred tax asset - current (inventory impairment provision)

    -       1,592,875  

Deferred tax asset – current (bad debt allowance for other receivables)

    -       435,900  

Deferred tax asset – current (allowance for advance to supplier)

    -       541,194  

Deferred tax asset – noncurrent (NOL of US parent company)

    2,215,731       2,282,517  

Deferred tax asset – noncurrent (NOL of PRC subsidiaries)

    -       4,905,775  

Less: valuation allowance

    (2,215,731

)

    (10,448,199

)

Deferred tax assets, net

  $ -     $ -  

 

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

 

15. 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 President of the United States signed H.R. 1 (the “Tax Reform”). The Tax Reform Law, effective for tax years beginning on or after January 1, 2018, except for certain provisions, resulted in changes to existing United States 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 Company. The Company will continue to analyze the provisions of the Tax Reform Law to assess the impact on the Company’s CFS.

 

The US parent company, was incorporated in the US and has net operating losses (“NOL”) for income tax purposes, the NOL arising in tax years beginning after 2017 may reduce 80% of a taxpayer’s taxable income, and be carried forward indefinitely. The US parent Company has NOL carry forwards for income taxes of approximately $2.22 million at September 30, 2019. Management believes the realization of benefits from these losses remains uncertain due to the SU parent Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.

 

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

 

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

 

Qinghai Technology was carved out of Qinghai Mining on December 20, 2018. However, for the nine and three months ended September 30, 2019 and 2018, Qinghai Technology and Qinghai Mining still filed a combined income tax return in PRC, which had $0 income tax due to combined taxable loss.

 

As a result of carving out from Qinghai Mining and operating as an independent corporation, Qinghai Technology as a standalone entity had taxable income of $707,514 and $490,704 for the nine and three months ended September 30, 2019, and taxable income $384,398 and $67,113 for the nine and three months ended September 30, 2018. Qinghai Technology used the Separate Return Method under ASC 740-10-30-27 to allocate its income tax expenses.  Under the Separate Return Method, Qinghai Technology calculated its tax provision as if it were filing its own tax return based on the pre-tax accounts.  For the nine and three months ended September 30, 2019, Qinghai Technology calculated its income tax expense of $106,127 and $73,605, respectively; for the nine and three months ended September 30, 2018, Qinghai Technology calculated its income tax expense of $57,660 and $10,067, under the Separate Return Method, and credited it to due to related party – Qinghai Mining. As a qualified business under the China Government’s strategy of Develop-the-West, from January 1, 2011 through December 31, 2012, all the qualified business including Qinghai Technology is subject to a reduced income tax rate of 15% compared to a national customary rate of 25%.  

 

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The following table reconciles the US statutory rates to the Company’s effective tax rate for the nine months ended September 30, 2019 and 2018, respectively:

 

   

2019

   

2018

 

US statutory benefit rates

    21.0

%

    21.0

%

Tax rate difference

    4.0

%

    4.0

%

Tax holiday in PRC

    -

%

    (10.0

)%

Valuation allowance

    (23.2

)%

    -

%

Tax expense per financial statements

    1.8

%

    15.0

%

 

The income tax expense for the nine months ended September 30, 2019 and 2018, respectively, consisted of the following:

 

   

2019

   

2018

 

Income tax expense – current

  $ 106,127     $ 57,660  

Income tax benefit – deferred

    -       -  

Total income tax benefit, net

  $ 106,127     $ 57,660  

 

The following table reconciles the US statutory rates to the Company’s effective tax rate for the three months ended September 30, 2019 and 2018, respectively:

 

   

2019

   

2018

 

US statutory benefit rates

    21.0

%

    21.0

%

Tax rate difference

    4.0

%

    4.0

%

Tax holiday in PRC

    -

%

    (10.0

)%

Valuation allowance

    (23.8

)%

    -

%

Tax expense per financial statements

    1.2

%

    15.0

%

 

The income tax expense for the three months ended September 30, 2019 and 2018, respectively, consisted of the following:

 

   

2019

   

2018

 

Income tax expense – current

  $ 73,605     $ 10,067  

Income tax benefit – deferred

    -       -  

Total income tax benefit, net

  $ 73,605     $ 10,067  

  

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.

 

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

 

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

 

17. COMMITMENTS

 

Capital Contribution

 

Sincerity with registered capital of $1.00 million and Salt-Lake incorporated in China on September 6, 2018 with registered capital of RMB 6 million ($0.88 million) 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. REVERSE MERGER 

 

On December 31, 2018 (the "Closing Date"), the Company entered into a Share Exchange Agreement and Plan of Reorganization with 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 Agreement, the shareholders of Mid-heaven BVI delivered all of the issued and outstanding shares of capital stock of Mid-heaven BVI to the Company, for 106,001,971 shares of the Company’s Common Stock. Mid-heaven, through two subsidiaries, owns 100% of 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 following unaudited pro forma consolidated results of operations for the Company and Mid-heaven BVI for the nine and three months ended September 30, 2018 presents the Company and Mid-heaven BVI’s operations as if the acquisitions occurred January 1, 2018.  The pro forma results are not necessarily indicative of the actual results that would have occurred had the acquisitions been completed as of the beginning of the periods presented, nor are they necessarily indicative of future consolidated results.

 

   

Nine Months Ended September 30, 2018

 
   

Mid-heaven BVI

   

Lithium Tech

   

Total

 

Net sales

  $ 4,024,384     $ 19,931     $ 4,044,315  

Net income (loss)

    326,738       (71,104

)

    255,634  

Basic and diluted weighted average shares outstanding

    106,001,971       8,683,399       114,685,370  

Basic and diluted net earnings (loss) per share

  $ 0.00     $ (0.01

)

  $ 0.00  

 

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Three Months Ended September 30, 2018

 
   

Mid-heaven BVI

   

Lithium Tech

   

Total

 

Net sales

  $ 1,516,650     $ -     $ 1,516,650  

Net income

    57,046       169,521       226,567  

Basic and diluted weighted average shares outstanding

    106,001,971       8,683,399       114,685,370  

Basic and diluted net earnings per share

  $ 0.00     $ 0.02     $ 0.00  

 

20. DISPOSAL OF SUBSIDIARIES

 

On September 30, 2019, Heat HP, Inc. and Heat PHE, Inc, wholly owned subsidiaries of the Company, sold all of their respective equity interests in Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump, SanDeKe and SmartHeat Exchange for $353.  The transactions were structured as purchases of equity interests, the subsidiary companies retained all liabilities when purchased.

 

The following table summarizes the carrying value of the assets and liabilities disposed at the closing date. The excess of the selling price over the carrying value of the net assets disposed was recorded as gain from disposal of subsidiaries of $5,666,187.

 

 

Cash

  $ 149,929  

Other receivables, net

    89,635  

Inventory, net

    42,415  

Advance to suppliers, net

    46,775  

Fixed assets, net

    9,338  

Accounts payable

    (910,999 )

Unearned revenue

    (1,116,980 )

Taxes payable

    (24,280 )

Accrued expenses and other payables

    (3,951,667 )

Selling price

    (353 )

Gain on sale

  $ 5,666,187  

 

 

21. SUBSEQUENT EVENTS

 

The Company evaluated all events that occurred subsequent to September 30, 2019 through the date the CFS were issued, no material subsequent event was identified.

 

 

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

 

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

 

Safe Harbor Declaration

 

The comments made throughout this Quarterly Report should be read in conjunction with our Financial Statements and the Notes thereto, and other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain certain forward-looking information. When used in this discussion, the words, “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of factors beyond our control. We do not undertake to publicly update or revise any of our forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are also urged to carefully review and consider our discussions regarding the various factors that affect our business, which are described in this section and elsewhere in this report.

 

Overview

 

We currently produce boric acid in the Peoples Republic of China (PRC) and plans to expand our existing manufacturing facilities to produce lithium carbonate for electric vehicle battery market in China. The Company has collaborated with its director to develop a prototype production line that is capable of producing boric acid and lithium carbonate from local brines pool and may also initiate production of lithium carbonate from existing ore deposits it purchases from an affiliated mining company. We formerly sold plated heat exchangers and heat pumps and sold these remaining operations on September 30, 2019 as discontinued operations.

 

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 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 located in the PRC. Each subsidiary was sold for nominal cash consideration as below and, as the transactions were structured as purchases of equity interests, the subsidiary companies retained all liabilities when 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

 

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Table of Contents

 

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 operation needs. As of September 30, 2019, and December 31, 2018, due from (to) Qinghai Mining (was the net amount of intercompany transactions between Qinghai Technology and Qinghai Mining due to carve out) was $0.18 million and $(3.88) million, respectively, which included $54,976 net due to Qinghai Mining after the Debt Offset Agreement disclosed below. Qinghai Technology purchased of $1,113,250 and $518,870 boron ore from Qinghai Mining during the nine and three months ended September 30, 2019.

 

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 ton. The price is adjustable in the future if there is a significant fluctuation of the market price for the boron ore.

 

Qinghai Technology used equipment that belongs to Qinghai Province DaChaiDan ZhongTian Resources Development Co., Ltd (“Zhongtian Resources”, owned by 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, 2019 and 2018 was $25,658 and $26,563, respectively. The depreciation of these fixed assets for the three months ended September 30, 2019 and 2018 was $8,059 and $7,434, respectively. Due to Zhongtian Resources resulting from using its equipment was $25,658 and $0.11 million at September 30, 2019 and December 31, 2018, respectively.

 

Qinghai Technology purchased raw material from DaChaiDan SanXin Industrial Company Ltd (“SanXin”). Outstanding payable to SanXin at September 30, 2019 and December 31, 2018 was $0 and $0.13 million, respectively. SanXin is a non-related party company; however, Qinghai Mining assumed the payables as of December 31, 2018 that Qinghai Technology owed to SanXin under a Debt Offset Agreement between the Company, Qinghai Mining and SanXin entered into in June 2019.

 

Qinghai Technology sold boric acid to Qinghai Dingjia Zhixin Trading Co., Ltd (“Dingjia”, 90% owned by the son of the Company’s major shareholder). For the nine months ended September 30, 2019 and 2018, the Company’s sales to Dingjia was $112,855 and $955,087, respectively. For the three months ended September 30, 2019 and 2018, the Company’s sales to Dingjia was $17,300 and $513,973, respectively. At September 30, 2019 and December 31, 2018, outstanding receivables from (payable to) Dingjia was $(0.08) million and $4.06 million, respectively.

 

Qinghai Technology, Qinghai Mining, Zhongtian Resources and Dingjia entered a Debt Offset Agreement, in which, Qinghai Mining assumed the outstanding payable balance of Qinghai Technology as of December 31, 2018 to Zhongtian, and Qinghai Technology transferred the outstanding receivable balance as of December 31, 2018 from Dingjia to Qinghai Mining. With execution of the Debt Offset Agreement entered June 2019, the Company had $54,976 net due to Qinghai Mining at December 31, 2018.

 

In addition, at September 30, 2019 and December 31, 2018, the Company had $456,263 and $255,233 due to another major shareholder of the Company, resulting from the certain of the Company’s operating expenses such as legal and audit fees that were paid by this major shareholder on behalf of the Company. This short term advance bore no interest, and payable upon demand.

 

The following table summarized the due from (to) related parties as of September 30, 2019 and December 31, 2018, respectively:

 

     

2019

   

2018

 
 

Related party name

               

Due from (to)

Dingjia

  $ (75,499

)

  $ 4,058,148  

Due from (to)

Qinghai Mining

    181,638       (3,878,896

)

Due to

Zhongtian Resources

    (25,658

)

    (106,345

)

Due to

SanXin (debts assumed by Qinghai Mining)

    -       (127,883

)

Due to

A major shareholder

    (456,263

)

    (255,233

)

Due from (to), net

  $ (375,782

)

  $ (310,209

)

 

Significant Accounting Policies

 

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

 

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Table of Contents

 

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 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.” For the nine months ended September 30, 2018, the accompanying CFS consist of the accounts of Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake and Qinghai Technology as a result of reverse merger of SmartHeat with Mid-heaven BVI. All significant intercompany accounts and transactions were eliminated in consolidation. 

 

Use of Estimates

 

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

 

Accounts Receivable

 

We maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Based on historical collection activity, we had bad debt allowance for accounts receivable of nil and $1.78 million at September 30, 2019 and December 31, 2018, respectively.

 

Revenue Recognition

 

In May 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).

 

The new revenue standards became effective for the Company January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.

 

Under the new revenue standards, 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 delivery to the 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. 

 

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Table of Contents

 

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.”

 

Impairment of Long-Lived Assets

 

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

 

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

 

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 for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adopting this standard on its CFS.

 

In June 2018, the FASB issued ASU 2018-07, "Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. An entity should apply the requirements of ASC 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based payment awards. The new guidance is effective for SEC filers for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, 2019 (i.e., January 1, 2020, for calendar year entities). Early adoption is permitted. The Company is evaluating the effects of the adoption of this guidance and currently believes it will impact the accounting of the share-based awards granted to non-employees. 

 

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Table of Contents

 

Results of Operations

 

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

 

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.

 

   

2019

   

% of Sales

   

2018

   

% of Sales

 

Sales

  $ 5,092,082             $ 4,024,384          

Cost of goods sold

    4,233,772       83.1

%

    3,413,678       84.8

%

Gross profit

    858,310       16.9

%

    610,706       15.2

%

Selling expenses

    279,755       5.5

%

    203,628       5.1

%

General and administrative expenses

    550,506       10.8

%

    214,794       5.3

%

Total operating expenses

    830,261       16.3

%

    418,422       10.4

%

Income from operations

    28,049       0.6

%

    192,284       4.8

%

Other income

    361,434       7.1

%

    192,114       4.8

%

Income before income taxes

    389,483       7.6

%

    384,398       9.6

%

Income tax expense

    106,127       2.1

%

    57,660       1.4

%

Income from continuing operations

    283,356       5.6

%

    326,738       8.2

%

Gain on disposal of discontinued operations, net of tax

    5,666,187       111.3

%

    -       -

%

Loss from operations of discontinued entities, net of tax

    (215,835

)

    (4.2

)%

    -       -

%

Net income

  $ 5,733,708       112.6

%

  $ 326,738       8.2

%

 

Sales

 

Sales for the nine months ended September 30, 2019 and 2018 was $5,092,082 and $4,024,384, respectively, an increase of $1,067,698 or 26.5%. For the nine months ended September 30, 2019 and 2018, the Company’s sales to Dingjia, a related party company 90% owned by the son of the major shareholder of the Company, was $112,855 and $955,087, respectively. The increase of overall sales was due to decrease of the VAT rate from 16% to 13% starting April 1, 2019, which resulted in increased sales orders. In addition, we enhanced our sales force and sales channels to increase the sales to third party customers in 2019. Moreover, during the 3rd quarter of 2019, we promoted boric acid products by taking preferential pricing method for some of our long-term customers, which resulted in an average discount of $7.3 to $14.6 for each ton.

 

Cost of sales

 

Cost of sales (“COS”) for the nine months ended September 30, 2019 and 2018 was $4,233,772 and $3,413,678, respectively, an increase of $820,094 or 24.0%. The increase was mainly due to the increase of sales. The COS as a percentage of sales was 83.1% for the nine months ended September 30, 2019 compared with 84.8% for 2018. The decrease in COS as a percentage of sales was mainly due to 1) increased sales, 2) decreased freight-in costs for the raw materials as a result of outsourcing the freight service instead of having own transportation team and trucks, and 3) improved the overall budget and cost control.

 

Gross profit

 

The gross profit for the nine months ended September 30, 2019 and 2018 was $858,310 and $610,706, respectively, an increase of $247,604 or 40.5%. The profit margin was 16.9% for the nine months ended September 30, 2019 compared to 15.2% for the nine months ended September 30, 2018, the increase in profit margin was mainly due to the reasons described above.

 

Operating expenses

 

Selling expenses consist mainly of salespersons’ salaries and freight out. Selling expense were $279,755 for the nine months ended September 30, 2019, compared to $203,628 for the nine months ended September 30, 2018, an increase of $76,127 or 37.4%, mainly resulting from increased freight out expense of $45,596 and increased salespersons’ salaries of $40,471.

 

General and administrative expenses consist mainly of R&D, office, welfare, business meeting, maintenance, and utilities. General and administrative expenses were $550,506 for the nine months ended September 30, 2019, compared to $214,794 for the nine months ended September 30, 2018, an increase of $335,712 or 156.3%, mainly resulting from increased maintenance expenses of $50,500, increased director fee of $10,000, increased audit fee of $110,000, increased legal and professional fee of $183,030, and increased registration fee of $15,000, which was partly offset by decreased R&D expense of $40,500.

 

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Other income

 

Other income was $361,434 for the nine months ended September 30, 2019, compared to $192,114 for the nine months ended September 30, 2018, an increase of $169,320 or 88.1%. For the nine months ended September 30, 2019, other income mainly consisted of subsidy income of $365,327. For the nine months ended September 30, 2018, other income mainly consisted of subsidy income of $192,114.

 

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 from continuing operations

 

Income from continuing operations was $283,356 for the nine months ended September 30, 2019, compared to $326,738 for the nine months ended September 30, 2018. The $43,382 or 13.3% decrease in income from continuing operations was mainly due to increased G&A expense as describe above.

 

Gain on disposal of discontinued operations

 

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.

 

Net income

 

We had a net income of $5,733,708 for the nine months ended September 30, 2019, compared to $326,738 for the nine months ended September 30, 2018, an increase of net income by $5,406,970 or 1,654.8%. The increase in our net income mainly resulted from gain from disposal of discontinued operations as describe above.

 

Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018

 

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.

 

   

2019

   

% of Sales

   

2018

   

% of Sales

 

Sales

  $ 1,883,327             $ 1,516,650          

Cost of goods sold

    1,533,599       81.4

%

    1,390,412       91.7

%

Gross profit

    349,728       18.6

%

    126,238       8.3

%

Selling expenses

    85,568       4.5

%

    72,367       4.8

%

General and administrative expenses

    159,339       8.5

%

    32,116       2.1

%

Total operating expenses

    244,907       13.0

%

    104,483       6.9

%

Income from operations

    104,821       5.6

%

    21,755       1.4

%

Other income

    268,880       14.3

%

    45,358       3.0

%

Income before income taxes

    373,701       19.8

%

    67,113       4.4

%

Income tax expense

    73,605       3.9

%

    10,067       0.7

%

Income from continuing operations

    300,096       15.9

%

    57,046       3.7

%

Gain on disposal of discontinued operations, net of tax

    5,666,187       300.9

%

    -       -

%

Loss from operations of discontinued entities, net of tax

    (93,299

)

    (5.0

)%

    -       -

%

Net income

  $ 5,872,984       311.9

%

  $ 57,046       3.7

%

 

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Sales

 

Sales for the three months ended September 30, 2019 and 2018 was $1,883,327 and $1,516,650, respectively, an increase of $366,677 or 24.2%. For the three months ended September 30, 2019 and 2018, the Company’s sales to Dingjia, a related party company 90% owned by the son of the major shareholder of the Company, was $17,300 and $513,973, respectively. The increase in the sales was due to our promotion of boric acids product by taking preferential pricing method for some of our long-term customers, which resulted an average discount of $7.3 to $14.6 for each ton.

 

Cost of sales

 

COS for the three months ended September 30, 2019 and 2018 was $1,533,599 and $1,390,412, respectively, an increase of $143,187 or 10.3%. The increase was mainly due to the increase of sales. The COS as a percentage of sales was 81.4% for the three months ended September 30, 2019 compared to 91.7% for the three months ended September 30, 2018, the decrease in COS as a percentage of sales was mainly due to 1) increased sales, 2) decreased freight-in costs for the raw materials as a result of outsourcing the freight service instead of having own transportation team and trucks, and 3) improved the overall budget and cost control.

 

Gross profit

 

The gross profit for the three months ended September 30, 2019 and 2018 was $349,728 and $126,238, respectively, an increase of $223,490 or 177.0%. The profit margin was 19.0% for the three months ended September 30, 2019 compared to 8.3% for the three months ended September 30, 2018. The increase of profit margin was due to the reasons described above.

 

Operating expenses

 

Selling expenses consist mainly of salaries and freight out. Selling expense were $85,568 for the three months ended September 30, 2019, compared to $72,367 for the three months ended September 30, 2018, an increase of $13,201 or 18.2%, mainly resulting from increased freight out expense of $6,557 and increase salary expenses of $9,410.

 

General and administrative expenses consist mainly of R&D, office, welfare, business meeting, maintenance, and utilities. General and administrative expenses were $ 159,339 for the three months ended September 30, 2019, compared to $32,116 for the three months ended September 30, 2018, an increase of $127,223 or 396.1%, mainly resulting from increased legal expenses of $30,000, increased audit expense of $40,000, increased professional fee of $47,000, increased consulting fee of $8,700.

 

Other income

 

Other income was $268,880 for the three months ended September 30, 2019, compared to $45,358 for the three months ended September 30, 2018, an increase of $223,522 or 492.8%. For the three months ended September 30, 2019, other income mainly consisted of subsidy income of $271,680. For the three months ended September 30, 2018, other income mainly consisted of subsidy income of $45,358.

 

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 from Continuing operations

 

Income from continuing operations was $300,096 for the three months ended September 30, 2019, compared to $57,046 for the three months ended September 30, 2018. The $243,050 or 426.1% increase in income from continuing operations was mainly due to increased sales and increased Subsidy income, which was partly offset by increased G&A expense as describe 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.

 

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Net Income

 

We had net income of $5,872,984 for the three months ended September 30, 2019, compared to $57,046 for the three months ended September 30, 2018, an increase of net income by $5,815,938 or 10,195.2%. The increase in our net income mainly resulted from increased sales and disposal of discontinued operations as describe above.

 

Liquidity and Capital Resources

 

As of September 30, 2019, we had cash and equivalents of $0.33 million. Working capital deficit was $0.75 million at September 30, 2019. The ratio of current assets to current liabilities was 0.79:1 at September 30, 2019

 

The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 2019 and 2018:

 

   

2019

   

2018

 

Cash provided by (used in):

               

Operating activities

  $ 269,320     $ (2,445,280

)

Investing activities

    (149,928 )     (2,945

)

Financing activities

  $ 62,933     $ 2,448,225  

 

Net cash provided by operating activities was $269,320 for the nine months ended September 30, 2019, compared to $2,445,280 for the nine months ended September 30, 2018. The increase of cash inflow from operating activities for 2019 was principally attributable to decreased cash outflow from inventory by $1,203,943, and increased cash inflow from accounts payable by $1,438,607.

 

Net cash used in investing activities was $149,928 for the nine months ended September 30, 2019 compared to $2,945 for the nine months ended September 30, 2018. The net cash used in investing activities in 2019 consisted of cash disposed at disposal of subsidiaries of $149,928. The net cash used in investing activities in 2018 consisted of acquisition of equipment of $2,945.

 

Net cash provided by financing activities was $62,933 for the nine months ended September 30, 2019, compared to $2,448,225 for the nine months ended September 30, 2018. The net cash provided by financing activities in 2019 consisted of increase in due to related party of $62,933. The net cash provide in financing activities in 2018 consisted of increase in due to related party of $2,448,225. 

 

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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Table of Contents

 

Contingencies

 

The Company’s former operations were conducted in the PRC and were 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.

  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, our principal executive officer and principal financial officer, respectively, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, 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 September 30, 2019, 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.

 

32

Table of Contents

 

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, 2018, as amended, which could materially affect our business.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

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

 

 

EXHIBIT INDEX

 

Exhibit No.

 

Document Description

31.1 †

 

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

31.2 †

 

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

32.1 ‡

 

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

101.INS†

 

XBRL Instance Document

101.SCH†

 

XBRL Schema Document

101.CAL†

 

XBRL Calculation Linkbase Document

101.DEF†

 

XBRL Definition Linkbase Document

101.LAB†

 

XBRL Label Linkbase Document

101.PRE†

 

XBRL Presentation Linkbase Document

 

Filed herewith

‡ Furnished herewith

 

33

Table of Contents

 

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:  November 14, 2019

By:

/s/ Jimin Zhang

 

 

 

Mr. Jimin Zhang

Chief Executive Officer

(Principal Executive Officer and Duly Authorized Signatory)

 

 

 

34
 

 

 


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
12/15/22
1/1/20
12/15/19
Filed on:11/14/19
11/13/19
10/23/198-K
For Period end:9/30/19
7/1/19
6/30/1910-Q
4/1/19
3/31/1910-Q
3/20/19
1/24/19
1/1/19
12/31/1810-K,  8-K,  8-K/A
12/28/18
12/20/18
12/18/18
12/15/18
9/30/1810-Q
9/6/18
7/9/18
6/30/1810-Q
6/14/184,  8-K,  8-K/A
3/31/1810-Q
1/1/18
10/31/17
1/1/17
12/31/1210-K,  NT 10-K
7/27/128-K
2/7/12
1/1/11
8/4/06
3/6/01
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