UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2019.
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-34246
LITHIUM & BORON TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
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Nevada |
98 -0514768 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
60 East Ren-Min Road
Dachaidan
(Da Qaidam Administrative Committee)
XaiXi, Qinghai Province 817000
(Address of principal executive offices)
Registrant’s telephone number, including area code:
+86 (097) 782-8122
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, par value $0.001 |
LBTI |
OTCQB PINK |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☑ No ☐
Indicate by check mark 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, as amended (“Exchange Act”) 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 past 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”, “smaller reporting company”, and “emerging growth company”, in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☑ |
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(Do not check if smaller reporting company) |
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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 Act).
Yes ☐ No ☑
The aggregate market value of voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold on June 30, 2019, was $0.0001 per share. Accordingly, effective as of June 30, 2019, the registrant’s aggregate market value was less than $50 million and the registrant qualifies for “smaller reporting company” status under Rule 12b-2 of the Exchange Act and is subject to the disclosure requirements and filing deadlines for smaller reporting companies.
As of April 14, 2020 there were 185,986,370 shares of common stock outstanding.
TABLE OF CONTENTS
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PART I |
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Item 1. |
1 |
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Item 1A. |
13 |
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Item 1B. |
29 |
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Item 2. |
30 |
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Item 3. |
30 |
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Item 4. |
30 |
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PART II |
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Item 5. |
31 |
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Item 6. |
31 |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
32 |
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Item 7A. |
39 |
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Item 8. |
39 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
39 |
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Item 9A. |
39 |
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Item 9B. |
41 |
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PART III |
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Item 10. |
42 |
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Item 11. |
48 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
49 |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
51 |
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Item 14. |
52 |
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PART IV |
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Item 15. |
53 |
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Item 16. |
56 |
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NOTE ABOUT FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K, references to “Lithium & Boron Technology,” the “Company,” “we,” “us,” “our” and words of similar import refer to Lithium & Boron Technology, Inc., unless the context requires otherwise.
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this report. These factors include, among others:
● our ability to raise capital to develop our lithium hydroxide and lithium carbonate business;
● successful commercialization of our pilot brine-based boron and lithium extraction process;
● anticipated timing and results of construction and development of additional brine-based extraction plants;
● estimates of the mineral resources and mineral reserves on the properties of our sole supplier of lithium and boron raw materials;
● demand for lithium and anticipated growth in the electric vehicle market;
● estimates of and unpredictable changes to the market prices for lithium and boric acid ;
● ability of our sole supplier to maintain mining, environmental and other permits or approvals;
● the impact of increasing competition in the lithium hydroxide, lithium carbonate and boric acid production businesses;
● compliance with environmental laws and regulations and changes thereto;
● government regulation of mining and extraction operations and treatment under governmental and taxation regimes;
● declines in general economic conditions in the markets where we may compete; and,
● accuracy of current budget and construction estimates.
You should read any other cautionary statements made in this Annual Report as being applicable to all related forward-looking statements wherever they appear in this Annual Report. We cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. You should read this Annual Report completely. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
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 upon written request to our corporate secretary at: 60 East Ren-Min Road, Dachaidan, (Da Qaidam Administrative Committee), XaiXi, Qinghai Province, China 817000. 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.
Our functional currency is the U.S. 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
PART I
Item 1. Business
General
We are a boric acid manufacturing company in the PRC. Our strategy is to expand our existing boric acid manufacturing facilities to produce lithium hydroxide and lithium carbonate for the rapidly growing electric vehicle ("EV") battery market in China. We have entered into a joint venture with Xi'an Jinzang Membrane Environmental Protection Technology Co., Ltd. (Xi’an Lithium Tech) who will provide us with the technology to produce battery grade lithium hydroxide and lithium carbonate. According to Fastmarkets, the average weekly March 2020 price for battery grade lithium carbonate on the London Metal Exchange CIF China was approximately $7,900 per ton and approximately $9,200 per ton for lithium hydroxide. We source our ore and brine exclusively from our affiliated company located in nearby Dachaidan Lake and its surrounding areas.
We currently operate our production facility through our wholly owned subsidiary, Qing Hai Mid-Heaven Boron & Lithium Technology Company, Ltd. (“Qinghai Technology”). Qinghai Technology manufactures and sells boric acid and related compounds for industrial and consumer use. We purchase and process mineral rich ore and brine exclusively from our affiliated mining company Qing Hai Mid-Heaven Boron & Lithium Mining Company, Ltd. (“Qinghai Mining”) and are one of the leading producers of boric acid in China with a production capacity of approximately 15,000 tons per year of boric acid or approximately 62% of the output in the in Qinghai Province and 10.7% of total production in China in 2019 according to an annual report published by the China Inorganic Salts Industry Association (CISIA). Our boric acid is sold to industries located throughout the PRC. We have a unique “one step production” methodology in China which we believe gives us a significant advantage over our competitors.
Our Strategy
We believe that growth in the Electric Vehicle (“EV”) industry will drive significant growth in the demand for lithium hydroxide and lithium carbonate. Xi’an Lithium Tech successfully completed a brine extraction project where it used its membrane extraction technology to produce lithium carbonate and lithium hydroxide.
Under the terms of the joint venture Xi'an Lithium Tech. will provide us with their innovative membrane extraction technology and we will provide the raw materials to produce up to 20,000 tons of battery grade lithium hydroxide and 10,000 tons of lithium carbonate annually, subject to funding. We believe that Xi’an Lithium Tech. possesses the best technology available to assist us to economically and efficiently produce battery grade lithium for China’s rapidly growing market.
Qinghai Technology plans to process through the joint venture the deposits of lithium harvested from brine sourced out of Dachaidan Lake and its surrounding areas. We plan to leverage our position as leading producer of boric acid and boron in the Qinghai-Tibetan Plateau in China, our knowledge of mineral processing of boric acid, boron and related minerals, our supply and sales chain and the technology gained from the joint venture to produce lithium hydroxide and lithium carbonate for batteries used in China’s rapidly growing EV industry. We will need to obtain additional funding for all phases of these development projects.
We believe our current production experience, exclusive access to local natural resources, and current financial condition uniquely position us to transition our business into being a unique, profitable, pure-play source of lithium to the China markets.
Our Headquarters in HaiXi
(Source: Qinghai Technology)
Our Boron and Lithium Business
Boron
Qinghai Technology has the production capacity of approximately 15,000 tons of boric acid and related chemicals per year by using the traditional extraction processes of crushing ore and processing the resultant dust through its facilities. We believe our facility produced approximately 10% of the total national output in the PRC in 2019 according to an annual report produced by the CISA. We plan to expand our current boric acid processing production capacity.
China and the US are the largest consumers of boric acid. The major end users of boric acid are manufacturers of ceramic and tiles and fiberglass which accounts for nearly 50% of the global consumption of boric acid. Pharmaceuticals, agriculture, cosmetics, and wood preservation industries are the other end users of our boric acid. The global boric acid market is anticipated to grow at a compound annual growth rate (CAGR) of 5.55% during the period from 2018 to-2022.(Source: Tecnivo “Huge Demand in Boric Acid Compound Market 2019-2025”) There is a limited set of competitors in the boric acid and boron market because supplies are very limited which consist of Borax Morarji, Gujarat Boron Derivatives Private, Mizushima Ferroalloy, Russian Bor, Rio Tinto Group, Searles Valley Minerals and Tomiyama Pure. (Source: Tecnivo “Top 6 Vendors in the Global Boric Acid Market from 2016 to 2020”). We also plan to improve our production process to produce boron for will be hardened steel used in nuclear plants, heavy machinery cars, trucks and aircraft.
Qinghai Technology has historically sold all material it has produced, and we believe the trend will continue. In 2019, Qinghai Technology produced approximately 12,000 tons of boric acid from operations. It expects to sell all of the boric acid it produces in 2020. In addition, we believe that margins and purity will improve due to our continuous improvement program to the lower cost of production, improve reclamation processes and reduce of hazardous waste material. Qinghai Technology’s boric acid in 2019 sold for an average of approximately RMB 3,841 (USD 557) per ton.
Qinghai Technology uses the one-step method to produce boric acid. Boron ore is mixed with sulfuric acid, processed through a mixing process and heated until boric acid powder is produced. Qinghai Technology obtains sulfuric acid in both pure form and recycled sulfuric acid disposed as a hazardous waste product by industrial users.
The 2019 consumption of boric acid in the Chinese market was approximately 550,000 tons per year with a market value of 1.7 billion yuan, or approximately $247 million with imports consisting of approximately 234,000 tons. (Source: Annual Report by CISIA). We currently distribute or boric acid through the following industrial distribution channels: Sichuan Dawei (四川达威), Del Bor Industry (德尔硼业), which account for our largest customers (16% and 14% of our total sales, respectively).
Qinghai Technology’s Boric Acid Manufacturing Plant – HaiXi
(Source: Qinghai Technology)
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Lithium
Our Lithium business will be designed to produce lithium hydroxide and lithium carbonate for the EV battery markets in China. We believe that when we establish our brine extraction manufacturing facilities through our joint venture with Xi’an Lithium Tech. that we will be a competitive, low-cost producer or lithium hydroxide and lithium carbonate for use by battery manufactures in China. Most of our local competitors obtain raw materials typically consisting of spodumene (lithium ore) from outside of China in order to produce lithium carbonate. We believe we will be one of the few local China based lithium hydroxide and lithium carbonate producers with a local supply of raw materials making us a pure-play China based lithium hydroxide and lithium carbonate producer for the local EV battery market.
Production of battery grade lithium carbonate is a priority for China’s national industrial policy and is in line with the Qinghai province's economic development policy. Source: Qing Hai Province government’s guide document (2018 No 41)“The guideline for improvement of Lithium Industry in Qing Hai Province” issued by Qing Hai Province Government Office) It plays an important role and practical significance for promoting the development of the local economy and the extension of the industrial chain. We believe our lithium hydroxide and lithium carbonate project will receive favorable tax incentives and be able to operate at high margins. We have inexpensive sources of electricity, coal, natural gas resources and labor resources to produce our products. Brine processing technology is also more environmentally friendly and reliable than processing ore obtained from traditional strip-mining methods which reduces our expenses for reclamation.
Qinghai Mining plans to transport evaporated brine from its brine pools to our processing plant. We will use a proprietary membrane extraction technology developed by our joint venture partner to extract lithium carbonate and lithium hydroxide from brine. We believe this process will be more economical and efficient than other existing extraction technologies.
Lithium is typically extracted from the mineral spodumene and from brine-lakes, salt-pan deposits or salt flats. We believe that the extraction process of lithium from brine lakes requires less energy and lower production costs than spodumene ore deposits.
Local Brine Pool - - source of lithium and boron raw materials owned by Qinghai Mining
(Source – Qinghai Mining)
If we are successful in our funding efforts, we plan to locate the joint venture operations in a new, nearby facility located in the Boric Chemical Industrial Zone in Haixi. As a qualified business under the China Government’s strategy of Develop-the-West, 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%. The facilities will house brine processing plants expected to produce up to 20,000 tons of battery grade lithium hydroxide and 10,000 tons of lithium carbonate annually.
We received all of our environmental permits from Haixi Environmental Protection Bureau on April 2, 2011 (Xihuanzi (2011)( No. 63) and production permits to commence our new brine processing business in HaiXi) We plan to initially establish a joint venture producing 3,000 tons of lithium carbonate and lithium hydroxide annually will require initial funding of approximately $40,000,000 divided equally between the partners. We and Xi’an Lithium Tech. will hold 51% and 49% of the joint venture, respectively. The joint venture will require additional equity, debt and/or bank financing of approximately $320 million USD to reach full production capacity of 20,000 tons of battery grade lithium hydroxide and 10,000 tons of lithium carbonate annually. According to Fastmarkets, the average weekly March 2020 price for battery grade lithium carbonate on the London Metal Exchange CIF China was approximately $7,900 per ton and approximately $9,200 per ton for lithium hydroxide.
Proposed New Manufacturing Facility for Joint Venture.
(Source: Qinghai Technology)
Qinghai Mining
Qinghai Technology purchases all of its lithium and boron based raw materials consisting of ore and brine from our affiliated company Qinghai Mining. Our Chairman and the General Manager of Qinghai Technology owns approximately 76% of Qinghai Mining and one of our principal stockholders and brother of our Chairman, Mr. Jian Zhang, owns approximately 21%.Qinghai Mining.
Qinghai Technology has signed an exclusive agreement with Qinghai Mining to purchase all of the boron and minerals produced by them. Under the terms of the agreement.….
Mid -Haven Mining has the exclusive right to mine minerals, including boron and lithium ore and brine, from an area of approximately 35 square kilometers in Dichaidan (Haixi) in the Qinghai Province which is in the heart of the Quinghai-Tibet Plateau. The area is rich in boron, lithium, magnesium and bromide found in local ore deposits and in mineral rich brine pools. -Haven Mining has mining rights until 2034 for existing properties with an option to extend an additional 20 years. The properties are reviewed every five years to ensure compliance with the mining rights.
Topographical map of HaiXi and Lake Dichaidan the location of the brine pools.
(Source Google Maps & Qinghai Mining)
Competition
The global lithium market consists of producers primarily located in the Americas, Asia and Australia. Our competitors supplying lithium compounds include Livent Corporation, Sociedad Quimica y Minera de Chile S.A., Sichuan Tianqi Lithium, and Jiangxi Ganfeng Lithium. Competition in the lithium market is largely based on product quality, product diversity, reliability of supply and customer service. In china our principal competitors are the Yahua Group, Tainqui Lithium and Gangfen Lithium
Expansion of our Production Capacities
Global electric vehicle sales grew from 1.2 million units in 2012 to 3.0 million units in 2017, representing a CAGR of 19%, and is expected to reach 8.6 million units by 2022, representing a CAGR of 23%, according to CRU International Limited. The Chinese government has also been focusing on developing the new-energy vehicle industry and has introduced generous incentives to encourage purchases of electric vehicles. From 2016 to 2017, the demand for lithium-based batteries shifted from a focus on quantity to quality and we believe there is a shortage in supply of high quality lithium batteries but an excess supply of low quality lithium batteries.
We plan to further modernize and expand our facilities, plant and brine extraction process at of Qinghai Technology to increase lithium hydroxide and lithium carbonate production to 30,000 tons per year . In order to reach these production targets, we, our joint venture partner and our subsidiaries will embark on a capital improvement project to raise approximately $360,000,000 in equity, debt, bank funding and government subsidies in order to commence full production in the Boron Chemical Industrial Zone in HaiXi.
Qinghai Technology and Qinghai Mining have received all necessary commercial, environmental and water extraction rights for the commercialization of lithium carbonate and boric acid from Dichaidan Lake.
As a qualified business under the China Government’s strategy of Develop-the-West, , 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%.
Our History
We were originally incorporated as Pacific Goldrim Resources, Inc.on August 4, 2006, in the State of Nevada and, at that time, had little or no operations. On April 14, 2008 we changed our name to Smartheat Inc. and acquired all of the equity interests in Shenyang Taiyu Machinery & Electronic Equipment Co., Ltd. (“Taiyu”), at that time a leading developer of plate heat exchangers and heat pumps in China. In December of 2014, we sold Taiyu to members of our former management team. Since that time the company serviced existing customers, sold existing inventory and wound down its heat pump business operations after filing for bankruptcy protection in the PRC in 2016.
On December 31, 2018, we acquired as our wholly owned subsidiary, Mid-Heaven Sincerity International Resources Investment Co., Ltd, and its wholly owned subsidiary Qinghai Technology in exchange for 141,919,034 shares of our Common Stock in a tax-free reorganization. We sold the remainder of our prior business operations during the 2019 fiscal year. On October 22, 2019 we changed our name to Lithium & Boron Technology, Inc.
We were originally formed as a state owned entity in 1954 producing boron related products and filed for bankruptcy in 2000. Our Chief Executive Officer purchased the assets of the company and founded Qing-Hai Zhong Tian Boron & Lithium Mining Co., Ltd on March 6, 2001. Qinghai Technology was spun out of Qing-Hai Zhong Tian Boron & Lithium Mining Co., Ltd on December 20, 2018 and Qing-Hai Zhong Tian Boron & Lithium Mining Co., Ltd changed its name to Qing Hai Mid-Heaven Boron & Lithium Mining Company, Ltd.
Our current corporate structure is set forth in the following diagram:
Regulation
We are subject to the following regulations of the SEC and applicable securities laws, rules and regulations:
Smaller Reporting Company
We are subject to the reporting requirements of Section 13 of the Exchange Act, and subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation will relieve us of some of the informational requirements of Regulation S-K applicable to larger companies
Sarbanes/Oxley Act
We are also subject to the Sarbanes/Oxley Act of 2002. The Sarbanes/Oxley Act created an independent accounting oversight board to oversee the conduct of auditors of public companies and strengthen auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; auditor attestation to management’s conclusions about internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act will substantially increase our legal and accounting costs.
Exchange Act Reporting Requirements
Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to stockholders at special or annual meetings thereof or pursuant to a written consent will require us to provide our stockholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our stockholders.
We are also required to file Annual Reports on SEC Form 10-K and Quarterly Reports on SEC Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on SEC Form 8-K.
Laws of the Peoples Republic of China
Our subsidiaries located in China are subject to national, provincial and local laws of the PRC. The legal system in China is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. In 1979, China began to promulgate a comprehensive system of laws and has since introduced many laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investment. Progress has been made in the promulgation of laws and regulations dealing with economic and commercial matters, but these recently enacted laws and regulations may not cover all aspects of business activities in China sufficiently. In particular, because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties, which may limit legal protections available to our subsidiaries. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, there may be certain instances when we may not be aware of our subsidiaries violation of these policies and rules until sometime after such violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
The PRC government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. Our subsidiaries’ ability to enforce commercial claims or to resolve commercial disputes under these laws and regulations is unpredictable, however, because the implementation, interpretation and enforcement of these laws and regulations is limited and, given their relative newness, involve uncertainties. For example, contracts governed by PRC law tend to contain less detail than those under U.S. law and generally are not as comprehensive in defining the rights and obligations of the contracting parties. Consequently, contracts in China are more vulnerable to disputes and legal challenges than those in the U.S. In addition, contract interpretation and enforcement in China is not as developed as in the U.S., and the result of any contract dispute is subject to significant uncertainties. Our subsidiaries currently are not subject to any contract dispute, but we cannot assure you that our subsidiaries will not be subject to future contract disputes with our suppliers, franchisees and other customers under contracts governed by PRC law, and if such disputes arise, we cannot assure you that our subsidiaries will prevail.
Industry Polices
Foreign investors and foreign-funded enterprises investing in China are required to comply with the Catalog for Guiding on Foreign Investments in Industries (《外商投資產業指導目錄》) which was initially promulgated by the National Planning Commission (國家計劃委員會), the State Economic and Trade Commission (國家經濟 貿易委員會) and the Ministry of Foreign Trade and Economic Cooperation (對外貿易經濟合作部) on June 28, 1995 and subsequently amended on December 31, 2001, March 11, 2002, November 30, 2004, October 31, 2007, December 24, 2011 and March 10, 2015. The latest amendment was made on June 28, 2017 and came into effect on July 28, 2017. The catalog for guiding on foreign investments has served as domestic management and guidance on foreign investments for a long time. It classifies industries into three basic types: Encouraged, Restricted and Prohibited. The Catalogue divides industries into three categories: “encouraged,” “restricted,” and “eliminated” for investment. Industries not listed in the Catalogue are generally deemed as falling into a fourth category, “permitted.”.
Domestic industry development mainly follows the guidance on relevant industry structures introduced by the NDRC. According to the Notice of the National Development and Reform Commission [2017] No. 1 —— Guiding Catalog of Key Products and Services for Strategic Emerging Industries (2016) (《國家發展和改革委員會公告2017年第1號——戰略性新興產業重點產品和服務指導目錄(2016版）》) promulgated and implemented by the National Development and Reform Commission on January 25, 2017 lithium and boron extracting from carbonate-type brine rich in lithium and boron fall into the key products and services in strategic emerging industries. According to the Guiding Catalog for Industrial Restructuring (2011 Edition) (《產業結構調整指導目錄（2011年本）》), which was promulgated by the National Development and Reform Commission on March 27, 2011, with the latest amendment on February 16, 2013, and was implemented on May 1, 2013, exploration and comprehensive use of scarce chemical mineral resources, such as lithium and boron fall into the state-encouraged industries.
Regulations on Tax
Our business operations are governed primarily by tax laws in the PRC. A description of the material tax consequences applicable to holders of our common shares may be found in the section titled “Item 10. Additional Information.-E. Taxation.” For more information regarding the impact of the PRC Enterprise Income Tax Law, see “Risk Factors — Under the Enterprise Income Tax Law, we may be classified as a “Resident Enterprise” of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.”
Foreign Exchange Regulation
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.
In July 2014, SAFE decided to further reform the foreign exchange administration system in order to satisfy and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas, or Circular 36, on August 4, 2014. This circular suspends the application of Circular 142 in certain areas and allows a foreign-invested enterprise registered in such areas to use the Renminbi capital converted from foreign currency registered capital for equity investments within the PRC.
On March 30, 2015, SAFE released the Notice on the Reform of the Management Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or Circular 19, which has made certain adjustments to some regulatory requirements on the settlement of foreign exchange capital of foreign-invested enterprises, lifted some foreign exchange restrictions under Circular 142, and annulled Circular 142 and Circular 36. However, Circular 19 continues to, prohibit foreign-invested enterprises from, among other things, using Renminbi fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises.
On June 19, 2016, SAFE issued the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, which took effect on the same day. Compared to Circular 19, Circular 16 not only provides that, in addition to foreign exchange capital, foreign debt funds and proceeds remitted from foreign listings should also be subject to the discretional foreign exchange settlement, but also lifted the restriction, that foreign exchange capital under the capital accounts and the corresponding Renminbi capital obtained from foreign exchange settlement should not be used for repaying the inter-enterprise borrowings (including advances by the third party) or repaying the bank loans in Renminbi that have been sub-lent to the third party.
SAFE Circular 37
In July 2014, SAFE issued SAFE Circular 37, which supersedes SAFE Circular 75, and requires that PRC citizens or residents must register with the relevant local SAFE branch before making capital contribution to any offshore entity directly established or indirectly controlled by that PRC citizen or resident for the purpose of investment or financing and with onshore or offshore assets or equity interests legally owned by that PRC citizen or resident. In addition, the SAFE registrations are required to be updated with local SAFE branch with respect to that offshore special purpose company in connection with the change of its basic information, such as its company name, business term, shareholding by individual PRC citizens or residents, merger, or division and, with respect to the individual PRC citizens or residents in case of any increases or decreases of capital in that offshore special purpose company, or share.
Share Option Rules
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers. We will make efforts to comply with these requirements.
Regulation of Dividend Distribution
The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Equity Joint Venture Law and its implementation regulations. Under these laws, rules and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of such reserves reaches 50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal liability in the case of serious violations.
In addition, according to the PRC Social Insurance Law, employers in China must provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
PRC Laws and Regulations on Hazardous Chemicals
1. Administrative Measures for the Registration of Hazardous Chemicals (《危險化學品登記管理辦法)
According to the Administrative Measures for the Registration of Hazardous Chemicals (《危險化學品登記管理辦法》) promulgated by the State Administration of Work Safety of the People’s Republic of China (中華人民共和國國家安全生產監督管理總局) on July 1 , 2012 and effective from August 1 , 2012, a newly established production enterprise of hazardous chemicals shall proceed with the hazardous chemicals registration procedure before the completion and acceptance of the project. The Hazardous Chemicals Registration Certificate (危險化學品登記證) is valid for three years. The Hazardous Chemicals Registration Certificate (危險化學品登記證) should set out details such as the nature of the enterprise (hazardous chemicals producer, hazardous chemicals exporter or a hazardous chemicals producer and exporter), the registered products and the validity period. An enterprise which engages in the production and storage of hazardous chemicals and an enterprise using such quantities of hyper-toxic and other hazardous chemicals which constitute a material source of danger shall register the hazardous chemicals according to the national laws. The Registration Center for Chemicals under the State Administration of Work Safety shall undertake the specific work and technical management of registration of hazardous chemicals throughout the country. Hazardous chemicals registration offices or hazardous chemicals registration centers established by work safety supervision and administration departments under people’s governments of all provinces, autonomous regions and municipalities directly under the Central Government shall undertake the specific work and technical management of registration of hazardous chemicals within their respective administrative regions.
2. Regulations on Safety Management of Hazardous Chemicals (《危險化學品安全管理條例》)
The Regulations on Safety Management of Hazardous Chemicals (《危險化學品安全管理條例》) were promulgated by the State Council on January 26, 2002 and latest amended on December 7, 2013, which stipulate the administrative and supervisory rules for safety production, storage, use, operation and transportation of hazardous chemicals. Hazardous chemicals include hyper-toxic and other hazardous chemicals that are toxic, corrosive, explosive, flammable or accelerative, and that damage human health, facilities and environment. The relevant governmental authorities will promulgate and adjust the Catalog of Hazardous Chemicals from time to time. An enterprise which engages in the production of hazardous chemicals must obtain the Safety Production Permit for Hazardous Chemicals (危險化學品安全生產許可證) prior to the commencement of production. An enterprise producing hazardous chemicals listed in the Catalog of the Industrial Products that are subject to the production licensing system shall obtain the Production License for Industrial Products pursuant to the Regulations of the People’s Republic of China on Administration of Production Licensing of Industrial Products (《中華人民共和國工業產品生產許可證管理條例》). The safety conditions of newly built, altered or expanded construction projects for the production and storage of hazardous chemicals are subject to the scrutiny of the work safety administrative department. In the event that the enterprise undertaking such construction projects fails to meet the safety conditions, the relevant work safety administrative department shall order such enterprise to cease operation and rectify within the specified period. An enterprise which engages in the operation including storage and operation of hazardous chemicals must obtain the Operation Permit for Hazardous Chemicals prior to the commencement of production. If an enterprise engaging in the production of hazardous chemicals which is established according to the laws sells its hazardous chemicals produced by itself in the factory, there is no need to obtain the Operation Permit for Hazardous Chemicals (危險化學品經營許可). If a chemical enterprise uses hazardous chemicals for production and the quantities reaches the prescribed threshold, the enterprise shall obtain the Permits for Safety Use of Hazardous Chemicals (危險化學品安全使用許可證) pursuant to the Regulations on Safety Management of Hazardous Chemicals (《危險化學品安全管理條例》), save for those enterprises that belong to enterprises engaging in the production of hazardous chemicals. An enterprise which engages in road transportation of hazardous chemicals should comply with provisions of laws and administrative regulations on road transport, obtain the license for road transportation of hazardous chemicals, and proceed with registration procedures with the Administrative Department of Industry and Commerce (工商行政管理部門). An enterprise engaging in road transportation of hazardous chemicals should be equipped with full-time safety management personnel
3. Regulations of the People’s Republic of China on Administration of Production Licensing of Industrial Products (《中華人民共和國工業產品生產許可證管理條例》) and the Decision of the State Council on Adjusting the Catalog for Managing the Production License for Industrial Products and Piloting the Simplified Approval Procedure (《國務院關於調整工業產品生產許可證管理目錄和試行簡化審批程序的決定》)
The Regulations of the People’s Republic of China on Administration of Production Licensing of Industrial Products (《中華人民共和國工業產品生產許可證管理條例》) were promulgated by the State Council and became effective on September 1, 2005, and the Decision of the State Council on Adjusting the Catalog for Managing the Production License for Industrial Products and Piloting the Simplified Approval Procedure (《國務院關於調整工業產品生產許可證管理目錄和試行簡化審批程序的決定》) was promulgated by the State Council and became effective on June 24, 2017. According to the aforesaid regulations and Catalog, an enterprise which engages in the production of hazardous chemicals needs to obtain the Production License for Industrial Products (工業生產許可證).
4. Regulations on Safety Production Permit (《安全生產許可證條例》) and Measures for Implementation of 4. Safety Production Permit of Hazardous Chemicals Production Enterprises(《危險化學品生產企業安全生產許可證實施辦法》)
The Regulations on Safety Production Permit (《安全生產許可證條例》) were promulgated by the State Council and became effective on January 13, 2004 and were latest revised on July 29, 2014. The Measures for Implementation of Safety Production Permit of Hazardous Chemicals Production Enterprises (《危險化學品生產企業安全生產許可證實施辦法》) were promulgated by the State Administration of Work Safety of the PRC and became effective on December 1, 2011 and were revised on May 27, 2015 and March 6, 2017. According to the aforesaid regulations and measures, an enterprise which engages in the production of final products or intermediate products listed in the Catalog of Hazardous Chemicals (危險化學品目錄) must obtain the Safety Production Permit for Hazardous Chemicals (危險化學品安全生產許可證) prior to the commencement of production of hazardous chemicals.
PRC Laws and Regulations Relating to Environmental Protection
The Company may generate pollutants in its course of production, and shall be strictly abide by the environmental protection laws and regulations in the PRC.
1. Environmental Protection Law of the People’s Republic of China (《中華人民共和國環境保護法》)
According to the Environmental Protection Law of the People’s Republic of China (《中華人民共和國環境保護法》) promulgated by the SCNPC on December 26, 1989 and effective on the same day, and amended on April 24, 2014, the construction of any project that causes pollution to the environment must comply with the regulations on environment protection relating to the construction projects. The environmental protection facilities for construction projects shall be designed, constructed and put into operation simultaneously with the main works. The PRC government implements a system for administering licenses for the discharge of pollutants under the provisions of the laws. Enterprises, units and other production operators under the licensing management for pollutant discharge should only discharge pollutants which satisfy the requirements of pollutant discharge license. Those which have not yet obtained the pollutant discharge license may not discharge pollutants. Pollutant-discharging enterprises, units and other production operators shall pay sewage fees pursuant to the relevant provisions of the State.
2. Law of the People’s Republic of China on Environmental Impact Assessment (《中華人民共和國環境影響評價法》)
According to the Law of the People’s Republic of China on Environmental Impact Assessment (《中華人民共和國環境影響評價法》) promulgated by the SCNPC on October 28, 2002 and latest amended on July 2, 2016, construction entities shall implement the following procedures for their construction projects in accordance with Classification of Construction Project Lists for Environmental Impact Assessments (建設項目環境影響評價分類管理名錄) promulgated by the Ministry of Environmental Protection: (i) in case the environmental impact is significant, full assessment reports of environmental impacts shall be prepared; (ii) in case the environmental impact is mild, reports containing environmental impact analyzes and specific assessments shall be prepared; and (iii) in case the environmental impact is minimal, environmental impacts registration forms shall be submitted without any assessments. The project in case construction may not proceed its environmental impact assessment documents fail to pass the review of the competent authority in accordance with the laws and regulations or which are disapproved after review.
3. Law of the People’s Republic of China on Prevention and Control of Water Pollution (《中華人民共和國水污染防治法》)
According to the Law of the People’s Republic of China on Prevention and Control of Water Pollution (《中華人民共和國水污染防治法》) promulgated by the SCNPC on May 15, 1996 and latest amended on June 27, 2017, an environmental impact assessment must be conducted lawfully in respect of all projects involving the construction, alternation or expansion of water facilities which discharge pollutions directly or indirectly into water. Facilities for prevention and control of water pollution of construction projects must be designed, constructed and put into use or operation simultaneously with the main facility.
4. Law of the People’s Republic of China on Prevention and Control of Atmospheric Pollution (《中華人民共和國大氣污染防治法》)
According to the Law of the People’s Republic of China on Prevention and Control of Atmospheric Pollution (《中華人民共和國大氣污染防治法》) promulgated by the SCNPC on September 5, 1987 and latest amended on August 29, 2015, when construction projects have an impact on atmospheric environment, enterprises and public institutions shall conduct environmental impact assessments and publish the environmental impact assessment documents according to the law; when discharging pollutants to the atmosphere, they shall conform to the atmospheric pollutant discharge standards and abide by the total quantity control requirements for the discharge of key atmospheric pollutants.
Our Offices
Our principal offices are located at 60 East Ren-Min Road, Dachaidan (Da Qaidam Administrative Committee) XaiXi, Qinghai Province 817000. Our telephone number is +86 (097) 782-8122. Our website is www.lithiumborontech.com. Copies of our annual, quarterly and current reports and any amendments thereto filed with or furnished to the SEC are available free of charge through our website as soon as reasonably practicable after such reports are available on the SEC website at www.sec.gov. Furthermore, a copy of this Annual Report is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Employees
Quig Hai Tech employs approximately 153 people of whom 106 are outsourced and the remainder are direct employees. . Some of our employees are provided living facilities through government sponsored programs. We also provide meals for our employees.
Item 1A. Risk Factors
RISKS RELATING TO OUR INDUSTRY AND BUSINESS
We will require additional financing to implement our business plan, which may not be available on favorable terms or at all, and we may have to accept financing terms that would place restrictions on us.
We believe that we and our joint venture partner Xi’an Lithium Tech must raise not less than $40,000,000 in addition to current cash on hand to be able to execute the first stage of our business plan to move forward with our planned joint venture in order to build initial production capacity of lithium hydroxide and lithium carbonate to 3,000 tons per year. We believe that we must raise through equity, debt or bank financing not less than $320,000,000 in addition to current cash on hand to be able to execute our entire business plan to build our production capacity of lithium carbonate and lithium hydroxide to 30,000 tons per year. We may not be able to obtain equity or debt financing on acceptable terms or at all to implement our growth strategy. As a result, adequate capital may not be available to finance our current development plan, take advantage of business opportunities or respond to competitive pressures. If we are unable to raise additional funds, we may be forced to curtail or even abandon our business plan.
Until such time, if ever, as we can generate substantial product income, we expect to finance our cash needs through a combination of equity offerings, debt financings and cash flow. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common stockholders. In addition, the terms of any future financings may impose restrictions on our right to declare dividends or on the manner in which we conduct our business. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, declaring dividends, or making acquisitions or significant asset sales.
We cannot be assured that our joint venture with Xi'an Jinzang Membrane Environmental Protection Technology Co., Ltd. (Xi’an Lithium Tech.) will successfully produce the quantity or quality of lithium hydroxide or lithium carbonate we expect.
Xi’an Lithium Tech. will be enhancing existing technology it possesses in order to assist us to process brine into lithium hydroxide and lithium carbonate. We can not assure you that this technology will be able to produce these products in the quality or quantity needed to make the venture successful or profitable. If we fail to develop production facilities to make lithium hydroxide and lithium carbonate as planned it will have substantial negative impact on our business and operations and leave the company with substantial amounts of debt which could threaten the viability of the company as a going concern. You could lose part or all of your investment.
We are heavily exposed to the market forces in the boric acid, boron and lithium industries, including the current and expected supply and demand of boric acid and lithium.
We are heavily exposed to the market forces in the boric acid and lithium industry, including the current and expected supply and demand of boric acid and lithium which is primarily based on resource availability, the competitive landscape of the boric acid and lithium industry, discovery of new mines, demand in end markets for products in which boric acid and lithium are used, technological developments, government policies as well as global and regional economic conditions.
The demand for boric acid, boron lithium are dependent on factors such as use of the compounds in end markets, new technological developments resulting in product or technology substitutions and general economic conditions.
The demand for our boric acid and boron is primarily driven by demand for construction material such as fiberglass, glass and boron steel used in nuclear reactors and ultra-high strength industrial and military applications. Demand for boric acid is dependent on the PRC’s construction industry’s demand for fiberglass and glass. The demand for boron is subject to general economic conditions for heavy industry’s use of high strength steel.
We are exposed to market fluctuations of boric acid, boron and lithium compounds.
Changes in current and expected supply and demand volumes impact the current and expected future prices of boric acid, boron and lithium compounds. Declines in boric acid, boron and lithium compounds could materially and adversely affect our business, financial condition and results of operations. There is no assurance that a fall in prices of boric acid, boron and lithium compounds will not occur. Furthermore, as a result of boric acid, boron and lithium compounds declines, we may decide to reduce sales volumes of our products.
New legislation or changes in the PRC regulatory requirements regarding the end markets of our products may affect our business operations and prospects. Our products are used in the production of, or are incorporated into final products that are sold into a number of end markets, including battery-related and industrial and construction material. New legislation or changes in the PRC regulatory requirements regarding these end markets may affect our business, financial condition, results of operations and growth prospects. For example, the PRC government has promulgated, amended and updated a number of legislation in relation to the electric vehicles market. We may need to change or adapt our business focuses from time to time in response to the new rules and regulations regarding the end markets of our products, but we may not be able to do so timely and efficiently. Any new legislation or changes in the PRC regulatory requirements could materially and adversely affect our business, financial condition and results of operations.
Our business, results of operations and financial condition may be adversely affected by public health epidemics, including the coronavirus or COVID-19.
Our business, results of operations and financial condition may be adversely affected if a public health epidemic, including the coronavirus or COVID-19 interferes with the ability of us, our employees, workers, contractors, suppliers, customers and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business. We maintain offices in HaiXi with employees and workers upon whom we rely to, among other things, identify sources of supply in China, conduct factory inspections, place orders for merchandise, perform factory monitoring with respect to production, quality control and other requirements, and arrange shipping. A public health epidemic, including the coronavirus, poses the risk that we or our employees, workers, contractors, suppliers, customers and other business partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. We face similar risks if a public health epidemic, including the coronavirus, affects other geographic areas where our employees, workers, contractors, suppliers, customers and other business partners are located.
We depend on our affiliate Qinghai Mining for all of our supply of boron and lithium; are subject to uncertainties surrounding their estimated resource and reserves as our raw material, and the volume and grade of lithium and boron raw material we produce may not conform to current estimates, and we may not be able to secure sufficient lithium and boron resource supply to meet our production needs.
We purchase all of our lithium and boron exclusively from our affiliate Qinghai Mining. Our largest stockholder and Chairman of the Board owns substantially all of Qinghai Mining. While we believe that our supply contract with Qinghai Mining has been negotiated on an arms-length basis, there is an inherent conflict of interest due to his ownership in both companies. We can not assure you that a conflict of interest may arise that will favor Qinghai Mining over Qinghai Technology and us.
Our estimated resources and supply of lithium, boric acid and boron from Qinghai Mining are based on a number of assumptions in accordance with relevant industry standards. There can be no assurance that our estimated supplies of lithium and boron resources will prove to be accurate or that Qinghai Mining will be able to mine or process our lithium resources as our raw material will be provided to us at a cost that will enable us to make a profit. Estimated resources and reserves of lithium and boron are inherently prone to variability. They involve expressions of judgment with regard to the presence and grade of brine and the ability to economically extract and process the brine. These judgments are based on a variety of factors, such as knowledge, experience and industry practice. The accuracy of these estimates may be affected by many factors, including the quality of the extraction, sampling results, analysis of the samples, the procedures adopted, and experience of the persons making the estimates. Brine extracted may be different from the estimated resources and reserves of lithium and boron in various ways, such as quality, volume, mining costs or processing costs. In addition, spodumene and brine may not ultimately be extracted at a profit. We record our lithium resources located in the PRC according to the Chinese National Standard.
If we encounter conditions different from those estimated based on historical examinations, such as governmental policies on export and tax rate, geopolitical relationships, natural disasters, transportation disruptions, we may have to adjust our production plans which could materially and adversely affect our business, financial condition and results of operations and reduce the estimated amount of resources and reserves available for production and expansion plans.
We face competition in our business.
The global lithium and boron compounds is a relatively orderly market protected by significant barriers to entry. The global lithium and boron compounds and metals market is dominated by a limited number of lithium companies. Our existing competitors endeavor to increase their market shares through measures, such as continued research and development efforts, optimized production process and active marketing campaigns. We expect to face competition from both existing and new competitors as we expand our business into new business lines and product categories. Competitive pressure could also have an adverse impact on the demand for and pricing of our products, which in turn affects our growth and market share. If we fail to compete effectively, we may be unable to build our lithium business and retain or expand our market share, which would have a material adverse effect on our business, results of operations and financial condition. We may not be successful in expanding our operations, managing our growth effectively or opening our new facilities in a timely manner.
We are undertaking future expansion projects based on our future business planning. The success of our future expansion projects depends on a few factors beyond our control, such as the progress of the construction conducted by the third party construction companies, local laws and regulations, government support, including in the form of tax breaks, and customer demand for our expanded production capacity. In addition, the integration of future expansion projects into our existing operations may be subject to unforeseeable delays, which may, among other things, increase our integration costs, strain our production capacity at other locations, decrease our production efficiency and cause delays in delivery of customer orders. Furthermore, as we expand our business operations in the future organically or by acquisition, we expect to incur additional depreciation and operational expenses. The depreciation and operational expenses can increase as a percentage of our revenue in the future and adversely affect our profitability if we cannot manage our growth effectively. Accordingly, we may not be able to achieve the expansion of our operations or the management of our growth in a timely or cost- effective manner. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures which could have a material adverse effect on our results of operation and prospects
The mining rights that Qinghai Mining hold equity interests in have a limited life and these operations will entail costs and risks regarding monitoring, rehabilitation and compliance with environmental standards which could increase our costs.
The mines that Qinghai Mining holds in the PRC have limited lives and will eventually be depleted. We may need to replenish our lithium and boron supply sources from time to time in order to enhance our existing needs. Due to the limited supply of lithium and boron supply sources, there is no assurance that we will be able to acquire new and valuable lithium and boron supplies or resources, or that the actual production results may match the expected results. In the event of the closure of Qinghai Mining, we need to perform certain procedures to remedy and rehabilitate the environmental and social impact that the mining operations have had on local communities. We may experience a difficult closure, the consequences of which range from increased closure costs, handover delays and conflicts with local communities in relation to ongoing monitoring and environmental rehabilitation costs and damage to our reputation if desired outcomes cannot be achieved. In the event of a difficult closure, our business, financial condition and results of operations could be materially and adversely affected. Moreover, we have not made any provision for restoration or rehabilitation costs. Only mines that have commenced exploitation incur restoration or rehabilitation costs.
We may not possess all the licenses required to operate our business, or may fail to maintain the licenses we currently hold. This could subject us to fines and other penalties, which could have a material adverse effect on our results of operations.
In addition to a mining registration certificate held by Qinghai Mining and business certificate held by Qinghai Technology, they are required to hold a variety of other permits, licenses and certificates to conduct their business in China. They may not possess or receive all the permits, licenses and certificates required for our business or for which application has been made. In addition, there may be circumstances under which the approvals, permits, licenses or certificates granted by the governmental agencies are subject to change without substantial notice in advance. If we fail to obtain or to maintain such permits, licenses or certificates or renewals are granted with onerous conditions, we could be subject to fines and other penalties and be limited in the number or the quality of the products that we would be able to offer. As a result, our business, result of operations and financial condition could be materially and adversely affected.
We are subject to extensive environmental, chemical manufacturing, health and safety laws and regulations and production standards, and our compliance with these laws, regulations and standards may be onerous and costly.
Our business and/or operational activities, such as manufacturing and sale of our lithium hydroxide and lithium carbonate, boric acid and boron products, storage of raw materials, transportation and exportation of our products and certain other activities are affected by laws and regulations, administrative determinations, court decisions and similar constraints, especially the extensive environmental, chemical manufacturing, health and safety laws and regulations and stringent standards of lithium compounds which are promulgated by the PRC Government and the governments of overseas jurisdictions in which we operate. For example, we are required to obtain and maintain valid licenses and certificates, including, among other things, those required for our production of lithium and boron products.
Qinghai Technology and Qinghai Mining are also required to comply with the restrictions and conditions imposed by various government authorities in order to conduct our business. If they fail to comply with any of the regulations or to satisfy any of the conditions required for the maintenance of our licenses and certificates, such licenses and certificates could be temporarily suspended or even revoked, rejected upon renewal or delayed for renewal, upon expiry of their original terms, which could materially and adversely affect our business, financial condition and results of operations. Meanwhile, to comply with the extensive environmental laws and regulations relating to air and water quality, waste management and public health and safety in the PRC, they must obtain the approval for the environmental impact assessment reports and the environmental acceptance approval of our projects in construction and mines, and undergo annual inspection of production facilities by relevant PRC authorities to ensure the safety of our equipment. If they fail to obtain such environmental approval or complete the annual inspection, our projects may be suspended and the relevant authorities may suspend our operation of the production facilities and may impose a fine on us or them.
Given the magnitude, complexity and continuous amendments to these laws and regulations, compliance therewith may be onerous and may involve substantial financial resources as well as other resources to establish efficient compliance and monitoring systems. The liabilities, costs, obligations and requirements associated with these laws and regulations may therefore be substantial and may delay the commencement of, or cause interruptions to, our operations. Non-compliance with the laws and regulations applicable to our operations may even result in substantial penalties or fines, suspension or revocation of our relevant licenses, termination of government contracts or suspension of their operations. Such events could impact on our results of operations, financial condition and reputation, all of which could adversely affect our ability to be profitable and attract new customers.
In addition, the environmental, chemical manufacturing, health and safety laws and regulations, administrative determinations and court decisions in the PRC which we are subject to continue to evolve, which may involve stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed mines or production facilities as well as a heightened degree of responsibility for companies and their officers, directors and employees. Any changes or amendments to such laws or regulations may cause us to incur additional capital expenditures, costs that may not be able to be passed on to customers, or other obligations or liabilities, which could decrease our capital and our ability to pursue developments in other areas. In the event that we fail to comply with applicable laws and regulations or fail to maintain, renew or obtain the necessary licenses or certificates, our qualification to conduct our various businesses may be adversely affected, which may adversely affect our business, financial condition and results of operations.
Our businesses are subject to operational difficulties, occupational and environmental hazards and other risks, which could damage our reputation, subject us to liability claims and result in substantial costs.
Our production businesses are exposed to various risks, including operational and transportation- related risks, as well as occupational and environmental hazards. We may experience various types of operational difficulties in connection with our production operations. Some of our raw materials and chemicals are hazardous (i.e., toxic or flammable) and their storage and usage in the production process involve inherent risks. Accidents could materially disrupt our production and may give rise to personal injuries and environmental hazards. Our operations may also be subject to production difficulties such as capacity constraints, mechanical and system failures, construction and upgrade delays and delays in the delivery of machinery, any of which could cause suspension of production and reduced output. Scheduled and unscheduled maintenance programs may also affect our production output. Any significant manufacturing disruption could adversely affect our ability to make and sell products, which could have a material adverse effect on our business, financial condition and results of operations.
Our production operations are dependent on our access to adequate transportation channels.
We rely on a combination of rail, sea and road transportation both in the PRC to deliver our products to customers. However, there can be no assurance that the existing or planned transportation systems will be sufficient to meet our transportation requirements. Any shortage, disruption or limitation of transportation capacity may limit the volume of products delivered to customers and may cause us to accumulate inventories and scale back production. Furthermore, any disruption to, or decrease in, the availability or capacity in the transportation networks, such as due to an earthquake, major rail or highway accidents, strikes, seasonal congestion during holidays, or any significant rise in transportation costs, could materially and adversely affect our ability to deliver our products to customers and have a material adverse effect on our overall production business and results of operations.
Due to the nature of our business, we engage in certain inherently risky and hazardous activities, including, among other things, operations at height or on dangerous terrains, underground excavation and construction, use of heavy machinery, handling and discharge of hazardous chemicals such as flammable and explosive materials, production of lithium concentrate through facilities.
As a result, we are subject to risks associated with these activities, including, among other things, geological catastrophes, toxic gas and liquid leakages, equipment failures, industrial accidents, fires, explosions and underground water leakages. These risks and hazards have in some cases resulted in personal injury and fatal casualties, damage to or destruction of properties or production facilities, and pollution and other environmental damages. Any of these consequences, if significant, could result in business interruption, legal liability and damage to our reputation and corporate image. In addition, we may also be subject to claims resulting from subsequent use by the customers or other third parties of the facilities and the products we produced. We normally seek to lower our exposure to potential claims associated with our businesses through contractual limitations on liability, indemnities from customers, subcontractors and suppliers, and insurance. These measures, however, may not always be effective due to various factors, many of which may be out of our control. The occurrence of any of these risks may harm our business operations and reputation, which could inhibit our ability to take on other contracts or otherwise grow our businesses.
We are exposed to credit risk of our customers and failure to collect our trade and bills receivables in a timely manner may affect our financial condition and results of operations.
Historically, we have not experienced material collection issues in connection with our trade receivables. Should the credit worthiness of our customers deteriorate, or should a significant number of our customers fail to settle their trade and bills receivables in full for any reason, we may incur impairment losses and our results of operations and financial position could be materially and adversely affected. In addition, there may be a risk of delay in payment by our customers from their respective credit period, which in turn may also result in an impairment loss provision. There is no assurance that we will be able to fully recover our trade and bills receivables from the customers or that they will settle our trade and bills receivables in a timely manner. In the event that settlements from customers are not made on a timely manner, or at all, our financial position and results of operations may be materially and adversely affected.
We may not be adequately insured against losses and liabilities arising from various operational risks and hazards that we are subject to.
We face various operational risks in connection with our businesses, including production interruptions caused by operational errors, electricity outages, the failure of equipment and other risks; operating limitations imposed by environmental or other regulatory requirements; social, political and labor unrest; environmental or industrial accidents; catastrophic events such as fires, earthquakes, explosions, floods or other natural disasters; and risks related to the complicated geological structure of our mine and geological disasters that occur during the mining process such as mine collapses. These risks can result in, among other things, damage to, and destruction of, mineral properties or production facilities; personal injury or loss of life; environmental damage; delays in mining; monetary losses; and legal liability. The occurrence of any of these events may result in the interruption of our operations and subject us to significant losses or liabilities. We may not have adequate or any insurance coverage on the above operational risks. We maintain property insurance, product liability insurance, employee insurance and overseas investment insurance for our business operations.]There can be no assurance that our insurance coverage would be sufficient in case of such major accidents. In the event that we incur substantial losses or liabilities and our insurance is unavailable or inadequate to cover such losses or liabilities, our business, financial condition and results of operations could be materially and adversely affected.
We may not achieve optimal results in investments in our new plant and facilities and may encounter difficulties in integrating and developing the investments in the new plant and production lines successfully.
As part of our expansion plan, we plan to increase our mineral resources through investments in a new brine processing plant which we plan to house in up to three new buildings. We do not have specific timetables for these plans, and we cannot be certain that we will be able to fund or create additional capacity on a profitable basis. We may encounter intense competition during the expansion process, and we may fail to implement our plans. In addition, we must receive various governmental and regulatory approvals and/or permits in order to develop new production resources, which approval may not be forthcoming, or which may cause significant delay and have a material adverse effect on our overall production business and results of operations.
Our failure to maintain an effective quality control system may result in a material adverse effect on our business, reputation, financial condition and results of operations.
The quality of our products is critical to the success of our business. These factors depend significantly on the effectiveness of our quality control system, which in turn, depends on a number of factors, including the design of the system, the machineries used, the quality of our staff and related training programs and our ability to ensure that our employees adhere to our quality control policies and guidelines. We are required to comply with specific guidelines based on PRC’s product safety and restricted and hazardous materials laws and regulations. We cannot assure you that our quality control system will continue to be effective and in compliant with relevant laws and regulations and standards. Any significant failure in or deterioration of the efficacy of our quality control systems could result in us losing accreditations and requisite certifications or qualifications, which could in turn have a material adverse effect on our business, reputation, financial condition and results of operations.
We depend on Qinghai Mining and a limited number of major suppliers for a substantial portion of our key raw materials.
The unavailability or increase in price of such raw materials could materially and adversely affect our business, financial condition and results of operations. We purchase all of our lithium and boron brine and materials from Qinghai Mining. A substantial portion of raw materials from a limited number of major suppliers. In 2019, our five largest suppliers accounted for approximately 27%, 17%, 13%, 6% and 1% of our total amount of purchases, respectively. The concentration of our purchases among a limited number of major suppliers exposes us to a variety of risks that could have a material adverse impact on our revenue and profitability. If we are unable to purchase sufficient amounts of raw materials from these suppliers, or the quality of such raw materials decreases, or could only purchase such raw materials at a premium, the overall productivity and profitability of our operations would be materially and adversely affected, and therefore our business, financial condition and results of operations could be materially and adversely affected.
We entered into long-term offtake agreements with Qinghai Mining in to ensure sufficient and stable supply of raw materials for our business. We may face risks related to lowered liquidity during certain periods, due to the long-term offtake agreements that occupy our working capital which could instead be used to finance our expansion. We cannot assure you that we will not experience any higher needs of liquidity during the terms of the long-term offtake agreements and that our business, financial position, results of operations and prospects and working capital will not be affected.
Our operations depend on a stable, timely and adequate supply of energy, power and raw materials at commercially reasonable prices.
In addition to lithium and boron raw materials we purchase from Qinghai Mining, we depend on the supply of energy, power and other raw materials such as electricity, water, oil, and chemicals in order to maintain our production processes. Our production volume and production costs are dependent on our ability to source such materials at acceptable prices and maintain a stable supply. The prices for these raw materials are subject to price volatility attributable to a number of factors which may be beyond our control, including inflation, supplier capacity constraints, general economic conditions, commodity price fluctuations, demand from other industries for the same materials, the availability of complementary and substitute materials, and local and national regulatory requirements. Furthermore, there can be no assurance that shortages of energy or water will not occur in the future or that we will be able to pass on any cost increases in raw materials, energy or water to our customers. Significant fluctuations in such costs may have a material effect on our profitability if we are unable to adjust the price of our products accordingly. In particular, increases in energy and raw material prices that we are unable to pass onto our consumers will reduce our profit margins. Moreover, if the supply of such materials is affected by natural disasters, adverse weather conditions, suppliers’ equipment failures, disruptions in transport or other inclement factors, we may not be able to locate alternative sources of supply in sufficient quantities, of suitable quality and/or at acceptable prices. Any such events may have a material adverse effect on our business, financial condition and results of operations.
Our success as a manufacturing company producing lithium hydroxide, lithium carbonate, boric acid and related products depends to a great extent on our research and development capabilities of our joint venture and our ability to secure capital for the implementation of our new brine processing plants.
Our success as a lithium and boron-based products manufacturing company is dependent on the ability of our joint venture to develop and implement more efficient production capabilities based on mineral rich brine. We and our joint venture partner made, and expect to make, significant investments research and development of this production process, in particular, to improve the quality of our products and expand our new product offerings in the lithium market. We plan to initially establish a joint venture producing 3,000 tons of lithium carbonate and lithium hydroxide annually will require initial funding of approximately $40,000,000 divided equally between the partners. We and Xi’an Lithium Tech. will hold 51% and 49% of the joint venture, respectively. The joint venture will require additional equity, debt and/or bank financing of approximately $320 million USD to reach full production capacity of 20,000 tons of battery grade lithium hydroxide and 10,000 tons of lithium carbonate annually. We believe the research and development and financing efforts are crucial factors for our future growth and prospects.
We cannot assure you that our future product research and development projects and financing efforts will be successful or be completed within the anticipated time frame or budget, or that our newly developed products will achieve wide market acceptance. Even if such products can be successfully commercialized, there is no guarantee that they will be accepted by our customers and achieve anticipated sales target or in a profitable manner. In addition, we cannot assure you that our existing or potential competitors will not develop products which are similar or superior to our products or are more competitively priced. As it is often difficult to project the time frame for developing new products and the duration of market window for these products, there is a substantial risk that we may have to abandon a potential product that is no longer commercially viable, even after we have invested significant resources in the development of such product and our facilities. If we fail in our product launching efforts, our business, prospects, financial condition and results of operations may be materially and adversely affected.
Our business is capital intensive, the sources of our future financing can be uncertain, and our working capital can be unstable during certain quarters.
We operate in a capital-intensive industry that requires substantial capital and other long-term expenditures, including expenditures for the purchase of machinery. To the extent that we expand or add new manufacturing facilities, we expect to fund the related financial commitments and other capital and operating expenses from a combination of cash on hand, cash generated from operations, banking facilities and proceeds from future offerings. We expect to have sufficient cash and/or committed financing to meet our obligations as they are due. However, no assurance can be given that we will be able to generate sufficient cash from our operations or obtain the necessary financing or that such financing will be at interest rates and on other terms that are reasonable to us or consistent with our expectations. To the extent we cannot finance our expansion or acquisitions at reasonable rates or at all in the future, our business may be harmed. In addition, part of our expansion require us to procure raw materials, as a result, during certain quarters we may incur higher working capital needs that may affect our working capital operation. We cannot assure that we will not experience any higher working capital needs in the future, and our business, financial position, results of operations and prospects and working capital may be affected.
Short-term orders from customers and counterparty risks may adversely affect our businesses.
Our lithium and boron business is characterized by short-term orders from our major customers. We primarily rely on ongoing communication with our customers in order to predict the future volume of purchase orders. We cannot guarantee that our existing customers will continue to place orders with us in the future or will place orders of no less than the current volume of lithium and boron products. A variety of conditions, both specific to an individual customer and generally affecting the customer’s industry, can cause a customer to reduce or delay orders previously anticipated by us, which could adversely impact our business. Given the volatility of short-term orders, we may experience a material change in our revenue.
While we generally evaluate our customers’ credit in accordance with our internal risk management criteria, such as credit history and likelihood of default, we have limited access to information about our customers and may encounter difficulties in the collection of receivables from certain customers or in certain geographical areas that we have less experience in our dealings. We cannot guarantee that all of our customers will fully perform their obligations under their respective contracts with us, and the deterioration of any customers’ credit or payment conditions may result in those customers’ defaulting on their contractual obligations, which could materially and adversely affect our business, financial condition and results of operations.
Inadequate contributions to various employee benefits plans as required by PRC regulations may subject us to penalties.
Companies operating in the PRC are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where they operate their businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Our inadequate contributions to the national standard of certain employee benefit plans and in complying with applicable PRC labor-related laws may subject us to late payment penalties. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.
We are exposed to foreign currency exchange fluctuations.
Changes in the value of foreign currencies could increase our Renminbi costs for, or reduce our Renminbi revenues from, our foreign operations, or affect the prices of our exported products and the prices of our imported equipment and materials. Any increased costs or reduced revenues as a result of foreign currency exchange fluctuations could adversely affect our margins. On July 21, 2005, the PRC Government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. On May 18, 2007, the PBOC enlarged, effective on May 21, 2007, the floating band for the trading prices in the inter-bank spot exchange market of Renminbi against the U.S. dollar from 0.3 percent. to 0.5 percent. around the central parity rate. This allows the Renminbi to fluctuate against the U.S. dollar by up to 0.5 percent. above or below the central parity rate published by the PBOC. The floating band was further widened to 1.0 percent. on April 16, 2012. On August 11, 2015, the PBOC announced to improve the central parity quotations of Renminbi against the U.S. dollar by authorizing market-makers to provide central parity quotations to the China Foreign Exchange Trading Center daily before the opening of the interbank foreign exchange market with reference to the interbank foreign exchange market closing rate of the previous day, the supply and demand for foreign exchange as well as changes in major international currency exchange rates. Following the announcement by the PBOC on August 11, 2015, Renminbi depreciated significantly against the U.S. dollar. In January and February 2016, Renminbi experienced further fluctuation in value against the U.S. dollar. The PRC Government may adopt further reforms of our exchange rate system in the future. These changes in policy have resulted in fluctuations of the Renminbi against the U.S. dollar. There can be no assurance that such exchange rate will remain stable against the U.S. dollar or other foreign currencies in the market. At present, there remains significant international pressure on the PRC Government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar or other foreign currencies. Fluctuations in exchange rates may adversely affect the value, translated or converted into foreign currencies, of our net assets, earnings, the value of our common stock and our ability to declared dividends.
We may be involved in legal or other proceedings arising out of our operations from time to time and may face significant liabilities as a result.
We may be involved from time to time in disputes with various parties involved in our business operations, including but not limited to our customers, suppliers, employees, logistics service providers, insurers, banks and regulatory entities. These disputes may lead to legal or other proceedings, which may result in damages to our reputation, substantial costs and diversion of our resources and management’s attention. In addition, we may encounter additional compliance issues in the course of our operations, which may subject us to administrative proceedings and unfavorable results and result in liabilities and delays relating to our production or product launch schedules. We cannot assure you as to the outcome of such legal proceedings, and any negative outcome may materially and adversely affect our business, financial condition and results of operations.
Our success depends upon our key personnel.
Any failure to attract and retain necessary talents may materially and adversely affect our business, prospects, financial condition and results of operations. Our success depends, to a significant extent, on the capability, expertise and continued services of our senior management team. We rely on the expertise and experience of our key executives in developing business strategies, product development, business operation and maintaining relationships with customers. If we lose the services of any of our key executives, we may not be able to find a suitable replacement with comparable knowledge and experience, and our business, prospects, financial condition and results of operations may be materially and adversely affected. Our success also depends on our ability to attract and retain talented personnel. We may not be able to attract or retain all the key personnel we need. We may also need to offer better remuneration and other benefits to attract and retain key personnel and therefore cannot assure you that we will have the resources to fully achieve our staffing needs or that our costs and expenses will not increase significantly as a result of increased talent acquisition and retention cost. Our failure to attract and retain competent personnel, and any increase in staffing costs to retain such personnel may have a negative impact on our ability to maintain our competitive position and to grow our business. If this occurs, our business, financial condition and results of operations may be materially and adversely affected.
We may inadvertently infringe third-party intellectual property rights, which could negatively impact our business and financial results.
We are not aware of, nor have we received any claims from third parties for, any violations or infringements of intellectual property rights of third parties by us as of the date of this Annual Report. Nevertheless, there can be no assurance that as we develop new product designs and production methods, we would not inadvertently infringe the intellectual property rights of others or others would not assert infringement claims against us or claim that we have infringed their intellectual property rights. Claims against us, even if untrue or baseless, could result in significant costs, legal or otherwise, cause product shipment delays, require us to develop non-infringing products, enter into licensing agreements or may be a distraction to our management. Licensing agreements, if required, may not be available on terms acceptable to us or at all. In the event of a successful claim of intellectual property rights infringement against us and our failure or inability to develop non-infringing products or to license the infringed intellectual property rights in a timely or cost-effective basis, our business and/or financial results will be negatively impacted.
Our businesses are vulnerable to downturns in the general economy.
The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and the global economy has continued to face new challenges, including the escalation of the European sovereign debt crisis in 2011 and the slowdown of the Chinese economy since 2012. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States. There have also been concerns over unrest in the Middle East and Africa, which have resulted in volatility in commodity prices and other markets, over the possibility of a war involving Iran, and over the withdrawal of the United Kingdom from the European Union. The above unfavorable financial or economic conditions may adversely affect the demand for lithium concentrate and lithium compounds. Furthermore, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, unemployment, consumer confidence, asset values, capital market volatility and liquidity issues may create difficult operating conditions in the future. In addition, the PRC Government has from time to time adjusted our monetary, fiscal and other policies and measures to manage the rate of growth of the economy or control the overheating of the general economy or certain industries or markets. As a result, the general economy in the PRC, the world or in any particular industry in which we operate or which we serve may grow at a lower-than-expected rate or even experience a downturn. This in turn could materially and adversely affect our businesses, financial condition and results of operations.
Our business, financial condition and results of operations may be materially and adversely affected in the event of fire, breakdown, failure of our equipment and machinery, power shortage, labor strikes, acts of war, political unrest, outbreak of a contagious or epidemic disease and natural disasters.
Our revenue is dependent on the uninterrupted operation of Qinghai Technology’s manufacturing facilities and the mining facilities and resources of Qinghai Mining, our affiliated company. Their business operations are subject to risks beyond our control including, among others, fire, breakdown, failure of our equipment and machinery, power shortage, water supply shortage, labor strikes, acts of war, political unrest and outbreak of a contagious or epidemic disease and natural disasters. Any or a combination of these could cause material damage to, or the loss of, our operational facilities. The time required to rectify such problems could be lengthy and could result in significant increases in costs or reduction in sales. Frequent or prolonged occurrences of any of the aforesaid events may have a material and adverse effect on our business, financial condition and results of operations. In addition, we conduct our operations under a variety of geographical and other conditions, including on difficult terrain, under harsh conditions and deliver our materials to locations where availability of labor may be affected, and on sites which may previously have been exposed to environmental hazards. Such conditions may result in personal injuries or fatalities or have a negative effect on our work performance and efficiency.
RISKS RELATING TO DOING BUSINESS IN THE PRC
The economic, political and social conditions in the PRC, as well as government policies, laws and regulations, could affect our business, financial condition and results of operations. A majority of our business operations are in the PRC and especially our production operations. Accordingly, our results of operations and prospects are, to a significant degree, subject to economic, political and legal developments in the PRC. The economy of the PRC differs from the economies of most developed countries in many respects, including the extent of government involvement, its level of development, its growth rate and its control over foreign exchange. The PRC’s economy has been transitioning from a planned economy to a more market-oriented economy. In recent years, the Chinese Government has implemented measures emphasizing market forces for economic reform, the reduction of State ownership of productive assets and the establishment of sound corporate governance in business enterprises. However, a significant portion of productive assets in the PRC is still owned by the Chinese Government. The Chinese Government continues to play a significant role in regulating industrial development. It also exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policies and providing preferential treatments to particular industries or companies. All of these factors could affect the economic conditions in the PRC and, in turn, our business.
Adverse developments in the PRC’s economy or an economic slowdown in the PRC may reduce the demand for our products and services and have a material adverse effect on our business, financial condition, results of operations and prospects.
We conduct our business and generate our revenues in the PRC. As a result, economic developments in the PRC have a significant effect on our business, financial condition and results of operations, as well as our prospects. In recent years, the PRC has been one of the world’s fastest growing economies in terms of GDP growth. However, the global financial crisis that unfolded in 2008 and continued in the past few years has led to a marked slowdown in the economic growth of the PRC. For example, the GDP growth rate of the PRC decreased from 14.2% in 2007 to 6.9% in 2015, and further slowed down to 6.1% in 2019 (Source CNBC https://www.cnbc.com/2020/01/17/china-gdp-for-full-year-and-q4-2019.html). The global economy may continue to deteriorate in the future and continue to have an adverse impact on the PRC’s economy. Any significant slowdown in the PRC’s economy could have a material adverse effect on our business and operations.
Uncertainties with respect to the PRC’s legal system could limit the legal protections available to you and us.
Holders of our shares of common stock Shares may not be able to enforce their rights successfully as shareholders in the PRC according to the PRC Company Law. Our operating subsidiaries are incorporated under and governed by the laws of the PRC. The PRC’s legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. In 1979, the Chinese government began to promulgate a comprehensive system of laws and regulations governing economic matters in general, such as foreign investment, corporate organization and governance, commerce, taxation and trade. As a significant part of our business is conducted in the PRC, our operations are principally governed by Chinese laws and regulations. However, since the PRC’s legal system continues to evolve rapidly, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. Furthermore, certain important aspects of PRC corporate law are different from the corporate laws of common law jurisdictions such as the United States, particularly with respect to investor protection, such as shareholder class action suits and measures protecting non-controlling shareholders; restrictions on directors; disclosure requirements; different rights of classes of shareholders; general meeting procedures and disbursement of dividends. Intellectual property rights and confidentiality protections in the PRC may not be as effective as in the United States or other countries. In addition, we cannot predict the effect of future developments in the PRC’s legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in the PRC may be protracted and result in substantial costs and diversion of our resources and management attention.
Under the PRC Enterprise Income Tax Law, we may not be classified as a “high and new-technology enterprise” of the PRC. Such classification could result in unfavorable tax consequences.
Our company enjoys a preferential enterprise income tax rate of 15% according to tax regulation [2011 No.58], which gives preferential enterprise income tax rate for companies in some preferential industries in western provinces. Pursuant to the PRC Enterprise Income Tax Law (中華人民共和國企業所得稅法).There is no assurance that Qinghai Mining and Qinghai Technology will remain qualified as a high and new-technology enterprise so as to enjoy the high and new-technology enterprise rate after the expiration of the Certificate of High and New- Technology Enterprise, in which case Qinghai Mining and Qinghai Technology will be subject to the normal enterprise income tax rate of 25% as for all PRC enterprises. The effective tax rate will therefore significantly increase and may materially and adversely affect Qinghai Mining and Qinghai Technology’s profitability, which may have a material adverse effect on our business, results of operations and financial condition. Also, there can be no assurance that the PRC Enterprise Income Tax Law, its application or its interpretation will not continue to change, in which case the effective income tax rate of Qinghai Mining and Qinghai Technology may increase significantly.
It may be difficult to effect service of process upon us or our Directors or executive officers who reside in the PRC or to enforce against them in the PRC any judgments obtained from non-Chinese courts.
Most of our Directors and executive officers reside within the PRC, and most of our assets and substantially all of the assets of those persons are located within the PRC. It may not be possible for investors to effect service of process upon us or those persons inside the PRC or to enforce against us or them in the PRC any judgments obtained from non-Chinese courts. The PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts in the United States or most other western countries. Therefore recognition and enforcement in the PRC of judgments of a court in any of these jurisdictions in relation to any matter may be difficult or impossible.
The Chinese government’s control over foreign currency conversion may adversely affect our business and results of operations and our ability to remit dividends.
Conversion and remittance of foreign currencies are subject to the Chinese foreign exchange regulations. It cannot be guaranteed that under a certain exchange rate, we shall have sufficient foreign exchange to meet our foreign exchange needs. Under the Chinese current foreign exchange control system, foreign exchange transactions under the current account conducted by us, including the payment of dividends, do not require advance approval from the SAFE, but we are required to present relevant documentary evidence of such transactions and conduct such transactions at designated foreign exchange banks within the PRC that have the licenses to carry out foreign exchange business. Foreign exchange transactions under the capital account, however, normally need to be approved by or registered with the SAFE or its local branch unless otherwise permitted by law. The Chinese government may also at its discretion restrict access in the future to foreign currencies for current account transactions. Any insufficiency of foreign exchange may restrict our ability to obtain sufficient foreign exchange for dividend payments to shareholders or satisfy any other foreign exchange obligation. If we fail to obtain approvals from the SAFE to convert RMB into any foreign exchange for any of the above purposes, our potential offshore capital expenditure plans and even our business may be materially and adversely affected.
The enforcement of Chinese labor contract law, social insurance law and other labor related regulations may materially affect our business, financial condition and results of operations.
Pursuant to Chinese Labor Contract Law, or the Labor Contract law, effective in January 2008 and amended in July 2013, and its implementation rules that became effective in September 2008, employers are subject to strict requirements in terms of signing labor contracts, minimum wages, paying remuneration, overtime working hours limitations, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that we decide to terminate the employment of some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations. In addition, as our operating results vary due to the seasonality of our products and are historically stronger in the second half of the year, these seasonality fluctuations may affect our related labor arrangements and our production employees of our PRC subsidiaries may have to work overtime to satisfy customer demand during periods of increased production activity. If we were found to be in violation with the overtime working hours limitations as stipulated in the PRC Labor Law, it may subject us to a fine that ranges from RMB100 to RMB500 per person from local government authorities and we may be requested to take rectification measures to reduce the overtime working hours of our production employees. On October 28, 2010, the Standing Committee of the National People’s Congress promulgated Chinese Social Insurance Law, or the Social Insurance Law, which became effective on July 1, 2011. According to the Social Insurance Law, employees must participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together with their employees or separately, pay the social insurance premiums for such employees. As the interpretation and implementation of the Labor Contract Law, the Social Insurance Law and other labor related regulations (the “labor-related laws and regulations”) are still evolving, we cannot assure you that our employment practice do not and will not violate labor-related laws and regulations in the PRC, which may subject us to labor disputes or government investigations. If we are deemed to have violated relevant labor-related laws and regulations, we could be required to provide additional compensation to our employees and our business, financial condition and results of operations could be materially and adversely affected.
Present or future environmental, safety and occupational health laws and regulations in the PRC may have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to certain PRC laws and regulations relating to environmental, safety and occupational health matters. Under these laws and regulations, we are required to maintain safe production conditions and to protect the occupational health of our employees. While we have conducted periodic inspections of our operating facilities and carry out equipment maintenance on a regular basis to ensure that our operations are in compliance with applicable laws and regulations, we cannot assure you that we will not experience any material accidents or worker injuries in the course of our manufacturing process in the future. In addition, our manufacturing process produces pollutants such as wastewater, noise, smoke and dust. The discharge of wastewater and other pollutants from our manufacturing operations into the environment may give rise to liabilities that may require us to incur costs to remedy such discharge. We cannot assure you that all situations that will give rise to material environmental liabilities will be discovered or any environmental laws adopted in the future will not materially increase our operating costs and other expense. Should the PRC impose stricter environmental protection standards and regulations in the future, we cannot assure you that we will be able to comply with such new regulations at reasonable costs, or at all. Any increase in production costs resulting from the implementation of additional environmental protection measures and/or failure to comply with new environmental laws or regulations may have a material adverse effect on our business, financial condition or results of operations.
Inflation in the PRC could negatively affect our profitability and growth.
Economic growth in the PRC has, during certain periods, been accompanied by periods of high inflation, and the Chinese government has implemented various policies from time to time to control inflation. For example, the Chinese government introduced measures in certain sectors to avoid overheating of the Chinese economy, including increasing interest rates and capital reserve thresholds at Chinese commercial banks. The effects of the stimulus measures implemented by the Chinese government since the global economic crisis that commenced in 2008 and the continued growth in the overall economy since then have resulted in sustained inflationary pressures. If these inflationary pressures continue and are not mitigated by Chinese government measures, our cost of sales will likely increase and our profitability could be materially reduced, as there is no assurance that we would be able to pass any cost increases onto our customers.
PRC regulations relating to the establishment of offshore special purpose companies by PRC domestic residents may subject our PRC resident beneficial owners to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 (the “SAFE Notice”) requires PRC residents to register with local branches of SAFE regarding their direct establishment or indirect control of an offshore entity, for overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle” (the “SPV”). SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. Under the SAFE Notice, failure to comply with the registration procedures set forth above could result in liability under Chinese law for foreign exchange evasion and may result in penalties and legal sanctions, including fines, the imposition of restrictions on a Chinese subsidiary’s foreign exchange activities and its ability to distribute dividends to the SPV, its ability to pay the SPV proceeds from any reduction in capital, share transfer or liquidation in respect of the Chinese subsidiary and the SPV’s ability to contribute additional capital into or provide loans to the Chinese subsidiary. After consultation with China counsel, we do not believe that any of our PRC domestic resident stockholders are subject to the SAFE registration requirement. However, we cannot provide any assurances that all our stockholders who are PRC residents will not be required to make or obtain any applicable registrations or approvals required by these SAFE regulations in the future. The failure or inability of our PRC resident stockholders to comply with the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign-exchange-dominated loans to our company.
As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
We may be subject to fines and legal sanctions by SAFE or other PRC government authorities if we or our employees who are PRC citizens fail to comply with PRC regulations relating to employee stock options granted by offshore listed companies to PRC citizens.
On March 28, 2007, SAFE promulgated the Operating Procedures for Foreign Exchange Administration of Domestic Individuals Participating in Employee Stock Ownership Plans and Stock Option Plans of Offshore Listed Companies, or Circular 78. Under Circular 78, Chinese citizens who are granted share options by an offshore listed company are required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with SAFE and complete certain other procedures, including applications for foreign exchange purchase quotas and opening special bank accounts. We and our Chinese employees who have been granted share options are subject to Circular 78. Failure to comply with these regulations may subject us or our Chinese employees to fines and legal sanctions imposed by SAFE or other PRC government authorities and may prevent us from further granting options under our share incentive plans to our employees. Such events could adversely affect our business operations.
Our business and financial performance may be materially adversely affected if the PRC regulatory authorities determine that our acquisition of Mid-Heaven Sincerity International Resources Investment Co., Ltd constitutes a Round-trip Investment without the PRC Ministry of Commerce (“MOFCOM”) approval.
On August 8, 2006, six PRC regulatory agencies promulgated the Regulation on Merger and Acquisition of Domestic Companies by Foreign Investors (the “2006 M&A Rules”), which became effective on September 8, 2006. According to the 2006 M&A Rules, a “Round-trip Investment” is defined as having taken place when a PRC business that is owned, directly or indirectly, by PRC individual(s) is sold to a non-PRC entity that is established or controlled, directly or indirectly, by those same PRC individual(s) and their PRC affiliates. Under the 2006 M&A Rules, any Round-trip Investment must be approved by the MOFCOM. The application of the 2006 M&A Rules with respect to the definition of Round-trip Investment remains unclear with no consensus currently existing among the leading PRC law firms regarding the definition, scope of the applicability of the MOFCOM approval.
We acquired 100% capital stock of Mid-Heaven Sincerity International Resources Investment Co., Ltd (the “MHS Acquisition”), Qinghai Technology was a PRC business whose stockholders were PRC individuals and a PRC entity, of which Mr. Mao, our current Chairman, was the controlling stockholder. The PRC regulatory authorities may take the view that the MHS Acquisition could be part of a Round-trip Investment. We have consulted the PRC legal counsel of Qinghai Technology who believes that the MHS Acquisition did not violate any PRC law, which would include the 2006 M&A Rules. We, however, cannot assure you that the PRC regulatory authorities, MOFCOM, may take the same view as the PRC legal counsel. If the PRC regulatory authorities take the view that the MHS Acquisition constitutes a Round-trip Investment under the 2006 M&A Rules, we cannot be assured that we may be able to obtain the approval required from MOFCOM.
If the PRC regulatory authorities take the view that the MHS Acquisition constitutes a Round-trip Investment without MOFCOM approval, they could invalidate our acquisition and ownership of . Additionally, the PRC regulatory authorities may take the view that the MHS Acquisition constitutes a transaction which requires the prior approval of the China Securities Regulatory Commission, or CSRC, before MOFCOM approval is obtained. We believe that if this takes place, we may be able to find a way to re-establish control of Qinghai Technology’s business operations through a series of contractual arrangements rather than an outright purchase of Qinghai Technology. We cannot assure you that such contractual arrangements will be protected by PRC law or that we can receive as complete or effective economic benefit and overall control of Qinghai Technology’s business than if the Company had direct ownership of Qinghai Technology. In addition, we cannot assure you that such contractual arrangements can be successfully effected under PRC law. If we cannot obtain MOFCOM or CSRC approval if required by the PRC regulatory authorities to do so, and if we cannot put in place or enforce relevant contractual arrangements as an alternative and equivalent means of control of Qinghai Technology, our corporate structure the control asserted by the shareholders in the United States will be materially adversely affected.
Risks Related to an Investment in our Stock.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to annually furnish a report by our management on our internal control over financial reporting. Such report must contain, among other matters, an assessment by our principal executive officer and our principal financial officer on the effectiveness of our internal control over financial reporting, including a statement as to whether our internal control over financial reporting is effective as of the end of our fiscal year. This assessment must include disclosure of any material weakness in our internal control over financial reporting identified by management. Performing the system and process documentation and evaluation needed to comply with Section 404 are both costly and challenging. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. We cannot provide assurance that we will not fail to achieve and maintain an effective internal control environment on an ongoing basis, which may cause investors to lose confidence in our reported financial information and have a material adverse effect on the price of our common stock.
We are responsible for the indemnification of our officers and directors.
Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against costs and expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf. Consequently, we may be required to expend substantial funds to satisfy these indemnity obligations.
We may not pay any cash dividends in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay, or may be unable to pay, any dividends. We intend to retain all earnings for our company’s operations.
The market price for our common stock may be volatile and subject to wide fluctuations, which may adversely affect the price at which you can sell our shares.
The market price for our common stock may be volatile and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operations results; |
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filing of a class action lawsuit against us and certain of our current and former officers; |
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changes in financial estimates by securities research analysts; |
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conditions in foreign or domestic fertilizer and agricultural markets; |
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changes in the economic performance or market valuations of other companies in the same industry; |
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announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments; |
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addition or departure of key personnel; |
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fluctuations of exchange rates between the RMB and the U.S. dollar; |
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intellectual property litigation; |
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general economic or political conditions in the PRC; and |
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Other events or factors, many of which are beyond our control. |
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of companies. These market fluctuations may also materially and adversely affect the market price of our stock, regardless of our actual operating performance.
We will require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.
We will need to obtain additional equity or debt financing to fund future capital expenditures. Additional equity will result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:
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limit our ability to pay dividends or require us to seek consent for the payment of dividends; |
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increase our vulnerability to general adverse economic and industry conditions; |
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require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and |
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limit our flexibility in planning for, or reacting to, changes in our business and our industry. |
We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
The interests of our controlling shareholder who exerts significant influence over us may conflict with ours.
As of February 2019, our largest shareholder, Mao Zhang, directly and indirectly owned 45.08% of our issued and outstanding common stock. Mr. Zhang is also the controlling stockholder of Qinghai Mining and its General Manager. The interests of Mr Zhang and Qinghai Mining may conflict or even compete with our interests and those of our public shareholders. Mr Zhang may take actions that are in the interest of Qinghai Mining, its stockholders and other related entities to our detriment. For example, Mr. Zhang may seek to influence Qing Hi Tech’s purchasing and pricing of brine, payments to Qinghai Mining’s officers and directors which will impact its margins and capital expenditure programs and thus may adversely affect our future prospects and financial condition.
In addition, Qinghai Mining is our exclusive source of raw and supplemental materials necessary for our operations. It would be difficult, if not impossible, to find an alternative source for the raw materials that we receive from Qinghai Mining. Our cost of operations would substantially increase if Qinghai Mining are unable to continue providing such raw materials to us.
We have a limited public market for our shares of common stock and you may not be able to resell our shares at or above the price you paid, or at all.
There is a limited public market for our common stock in the OTC (Pink) market. We intend to apply for quotation on the OTCBB or OTCBB through a market maker; however, there can be no assurance that our common stock will ever be quoted on any quotation service. In order to be eligible for trading on the OTCBB we must a market maker file an application with FINRA to have our common stock quoted on the OTCBB and remain current in our filings with the Securities and Exchange Commission. In order to be eligible for the OTCQB we must have a minimum bid price of $0.01, have at least 50 beneficial stockholders, each owning at least 100 shares, have a freely traded public float of at least 10% of our issued and outstanding shares of Common Stock or qualify from an exemption thereof and pay initial listing fees. We cannot assure you that an active public market for our common stock will develop or that the market price of our shares will not decline below the public offering price. The public offering price of our shares may not be indicative of prices that will prevail in the trading market following the offering.
Because we are subject to the “Penny Stock” rules, the level of trading activity in our stock may be reduced.
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any listed, trading equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules which may increase the difficulty Purchasers may experience in attempting to liquidate such securities.
Provisions in the Nevada Revised Statutes and our Bylaws could make it very difficult for an investor to bring any legal actions against our directors or officers for violations of their fiduciary duties or could require us to pay any amounts incurred by our directors or officers in any such actions.
Members of our board of directors and our officers will have no liability for breaches of their fiduciary duty of care as a director or officer, except in limited circumstances, pursuant to provisions in the Nevada Revised Statutes and our Bylaws as authorized by the Nevada Revised Statutes. Specifically, Section 78.138 of the Nevada Revised Statutes provides that a director or officer is not individually liable to the company or its shareholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless it is proven that (1) the director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer and (2) his or her breach of those duties involved intentional misconduct, fraud or a knowing violation of law. This provision is intended to afford directors and officers protection against and to limit their potential liability for monetary damages resulting from suits alleging a breach of the duty of care by a director or officer. Accordingly, you may be unable to prevail in a legal action against our directors or officers even if they have breached their fiduciary duty of care. In addition, our Bylaws allow us to indemnify our directors and officers from and against any and all costs, charges and expenses resulting from their acting in such capacities with us. This means that if you were able to enforce an action against our directors or officers, in all likelihood, we would be required to pay any expenses they incurred in defending the lawsuit and any judgment or settlement they otherwise would be required to pay. Accordingly, our indemnification obligations could divert needed financial resources and may adversely affect our business, financial condition, results of operations and cash flows, and adversely affect prevailing market prices for our common stock.
Future sales of substantial amounts of the shares of common stock by existing stockholders could adversely affect the price of our common stock.
If our existing shareholders sell substantial amounts of the shares following this offering, the market price of our common stock could fall. Such sales by our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we deem appropriate. The shares of common stock offered in this offering will be eligible for immediate resale in the public market without restrictions. All remaining shares, which are currently held by our existing shareholders, may be sold in the public market in the future subject to the lock-up agreements and the restrictions contained in Rule 144 under the Securities Act. If any existing shareholders sell a substantial number of shares, the prevailing market price for our shares could be adversely affected.
The financial and operational projections that we may make from time to time are subject to inherent risks.
The projections that we provide herein or our management may provide from time to time (including, but not limited to, those relating to potential peak sales amounts, timelines, production and supply matters, commercial launch dates, and other financial or operational matters) reflect numerous assumptions made by management, including assumptions with respect to our specific as well as general business, regulatory, economic, market and financial conditions and other matters, all of which are difficult to predict and many of which are beyond our control. Accordingly, there is a risk that the assumptions made in preparing the projections, or the projections themselves, will prove inaccurate. There may be differences between actual and projected results, and actual results may be materially different from than those contained in the projections. The inclusion of the projections in this prospectus should not be regarded as an indication that we, our management, or their representatives considered or consider the projections to be a guaranteed prediction of future events, and the projections should not be relied upon as such.
Our management collectively owns a substantial majority of our common stock.
Collectively, our officers, our directors and other stockholders own or exercise voting and investment control of approximately 91% of our outstanding common stock. As a result, investors may be prevented from affecting matters involving our company, including:
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the composition of our Board of Directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers; |
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any determinations with respect to mergers or other business combinations; |
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our acquisition or disposition of assets; and |
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our corporate financing activities. |
Furthermore, this concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our stockholders. This significant concentration of share ownership may also adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in a company that is controlled by a small number of stockholders.
If securities or industry analysts do not publish research or reports about us, our business or our market, or if they make and then change their recommendations regarding our common stock adversely, the price of our common stock and trading volume could decline.
The trading market for our common stock, should it develop, may be influenced by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our common stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover us was to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the price of our common stock or trading volume to decline.
Item 1B. Unresolved Staff Comments
Not required.
Item 2. Properties
There is no private ownership of land in China. All land is owned by the PRC government on behalf of all Chinese citizens or collectively owned by farmers. Land use rights can be granted or transferred with or without consideration upon approval by the PRC State Land Administration Bureau or its authorized branches.
Our principal executive offices are located at 60 East Ren-Min Road, Dachaidan, (Da Qaidam Administrative Committee), XaiXi, Qinghai Province 817000. The office space is approximately 1950 square meters. We have the land use rights to use 9,670 square meters, for a term of 50 years until 31/03/2029 for a yearly payment of RMB 40,516.
Through Qinghai Technology, we own the land use rights for an approximately 1,950 square meters (20,990 square feet) in our production facilities that manufacture and store boric acid and related products.
Item 3. 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. Aside from the proceeding described 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 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock has traded on the over the counter market since November 9, 2012. Previously our common stock was listed on the NASDAQ Global Select Market under the symbol “HEAT” and had been trading on NASDAQ since January 29, 2009. The following table sets forth the range of the high and low bid prices of our common stock for each quarter in the years ended December 31, 2015 and 2016. These bid prices were obtained from OTC Markets, Inc. All prices listed herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.
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2019 |
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2018 |
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First Quarter (through March 31) |
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.01 |
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.00007 |
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.05 |
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.0001 |
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Second Quarter (through June 30) |
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.0005 |
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.00001 |
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.0005 |
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.0001 |
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Third Quarter (through September 30) |
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.001 |
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.00001 |
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.001 |
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.0001 |
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Fourth Quarter (through December 31) |
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.56 |
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.0001 |
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.01 |
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.0001 |
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Holders of Record
On June 30, 2019, there were approximately 56 shareholders of record based on information provided by our transfer agent. Many of our shares of common stock are held in street or nominee name by brokers and other institutions on behalf of shareholders and we are unable to estimate the total number of shareholders represented by these record holders.
Dividend Policy
We have not paid and do not expect to declare or pay any cash dividends on our common stock in the foreseeable future, and we currently intend to retain future earnings, if any, to finance the expansion of our business. The decision whether to pay cash dividends on our common stock will be made by our Board of Directors, in their discretion, and will depend on our financial condition, operating results, capital requirements and other factors deemed relevant by our Board of Directors.
Our ability to pay dividends may be affected by the complex currency and capital transfer regulations in China that restrict the payment of dividends to us by our subsidiaries in China. PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Our subsidiaries in China also are required to set aside at least 10% of net income after taxes based on PRC accounting standards each year to statutory surplus reserves until the cumulative amount of such reserves reaches 50% of registered capital. These reserves are not distributable as cash dividends. Our subsidiaries in China also may allocate a portion of their after-tax profits to their staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. If any of our subsidiaries incur debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us.
In addition, Circular 75 requires PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of China. If the PRC subsidiaries of an offshore parent company do not report the need for their PRC investors to register to the local SAFE authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company. Although we believe that our subsidiaries in China are in compliance with these regulations, should these regulations or the interpretation of them by PRC courts or regulatory agencies change, we may not be able to pay dividends outside of China.
Item 6. Selected Financial Data
Not required.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Safe Harbor Declaration
The comments made throughout this Annual 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 plan to expand our existing manufacturing facilities through a joint venture to produce lithium carbonate and lithium hydroxide for electric vehicle battery market in China. The Company has collaborated with its 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. We formerly sold plate heat exchangers and heat pumps and sold those operations on September 30, 2019.
On December 31, 2018 (the "Closing Date"), we entered into a Share Exchange Agreement and Plan of Reorganization, as amended January 24, 2019 (the “Share Exchange Agreement”) with Mid-Heaven Sincerity International Resources Investment Co., Ltd (Mid-heaven BVI) and its shareholders Mao Zhang, Jian Zhang, and Ying Zhao, constituting all of the shareholders of Mid-heaven BVI (the “Mid-heaven Shareholders”). Pursuant to the terms of the Share Exchange Agreement, the shareholders of Mid-heaven BVI delivered all of the issued and outstanding shares of capital stock of Mid-Heaven BVI to SmartHeat, for 106,001,971 shares of our Common Stock. Mid-heaven BVI, through two subsidiaries, Qinghai Mid-Heaven Sincerity Technology Co., Ltd (“Sincerity”) and Qinghai Mid-Heaven Sincerity Salt-Lake R&D Co., Ltd (“Salt-Lake”) owns 100% of Qing Hai Mid-Heaven Boron & Lithium Technology Company, Ltd. (“Qinghai Technology”).
The Acquisition was structured as a tax-free reorganization. As a result of the share exchange agreement, Mid-heaven BVI’s shareholders own approximately 57% of the combined company. For accounting purposes, the transaction was accounted for as a reverse acquisition of the Company by Mid-heaven BVI.
The main operating entity, Qinghai Technology was incorporated December 18, 2018. The business of Qinghai Technology was carved out of the business of Qinghai Zhongtian Boron & Lithium Mining Co., Ltd (“Qinghai Mining”) on December 20, 2018. Qinghai Mining was founded March 6, 2001, and manufactures and wholesales boric acid and related compounds for industrial and consumer usage. Qinghai Technology obtains its raw material minerals exclusively from Qinghai Mining and currently processes boric acid by crushing and processing ore.
On September 30, 2019, Heat HP, Inc. and Heat PHE, Inc, our wholly owned subsidiaries, sold their respective equity interests in Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange for $353. The equity interests were sold to individuals and businesses in the PRC. Each subsidiary was sold for nominal cash consideration as below and, as the transactions were structured as purchases of equity interests, the subsidiary companies retained all liabilities when sold.
SmartHeat Jinhui (Beijing) Energy Technology Ltd - 100 RMB
SmartHeat (China) Investment Ltd - 400 RMB
SmartHeat (Shanghai) Trading Co., Ltd - 400 RMB
SmartHeat (Shenyang) Heat Pump Technology Co., Ltd - 400 RMB
SanDeKe Co., Ltd - 600 RMB
SmartHeat Heat Exchange Equipment Co - 600 RMB
On October 23, 2019, we filed a certificate of amendment to its certificate of incorporation to change its name from “SmartHeat, Inc.” to “Lithium & Boron Technology, Inc.” to better reflect the operations of the Company
In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” This contagious disease outbreak, which continues to spread to additional countries all over the world, and is disrupting supply chains and affecting production and sales across a range of industries in China as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak, as well as the worldwide adverse effect to workforces, economies and financial markets, potentially leading to a global economic downturn. Therefore, the Company expects this matter to negatively impact its operating results. However, the related financial impact and duration cannot be reasonably estimated at this time.
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 December 31, 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 $0.55 million and $(3.88) million, respectively, which included $54,976 net due to Qinghai Mining after the Debt Offset Agreement disclosed below. purchased $1.42 million and $1.78 million boron ore from Qinghai Mining during the years ended December 31, 2019 and 2018, respectively.
On July 1, 2019, Qinghai Technology and Qinghai Mining entered a boron ore purchase contract for a term of one year. Qinghai Mining is to supply Qinghai Technology boron ore based on Qinghai Technology’s monthly production plan at a price of RMB 62 ($8.77) per ton. The price is adjustable in the future if there is a significant fluctuation of the market price for the boron ore. In the 4th quarter of 2019, this price was adjusted to RMB 70.46 ($10.21) per ton.
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 years ended December 31, 2019 and 2018 was $34,650 and $36,741, respectively. Due to Zhongtian Resources resulting from using its equipment and payment of worker’s compensation made by Zhongtian Resource for Qinghai Technology was $49,125 and $0.11 million at December 31, 2019 and 2018, respectively.
Qinghai Technology previously purchased raw material from DaChaiDan SanXin Industrial Company Ltd (“SanXin”). Outstanding payable to SanXin at December 31, 2019 and 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 years ended December 31, 2019 and 2018, the Company’s sales to Dingjia was $149,142 and $1.53 million, respectively. At December 31, 2019 and 2018, outstanding receivables from (payable to) Dingjia was $(0.06) 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 December 31, 2019 and 2018, the Company had $573,263 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 December 31, 2019 and 2018, respectively:
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|
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|
2019 |
|
|
2018 |
|
||
|
|
Related party name |
|
|
|
|
|
|
|
|
|
Due from (to) |
Dingjia |
|
$ |
(56,144 |
) |
|
$ |
4,058,148 |
|
|
Due from (to) |
Qinghai Mining |
|
|
554,527 |
|
|
|
(3,878,896 |
) |
|
Due to |
Zhongtian Resources |
|
|
(49,125 |
) |
|
|
(106,345 |
) |
|
Due to |
SanXin (debts assumed by Qinghai Mining) |
|
|
- |
|
|
|
(127,883 |
) |
|
Due to |
A major shareholder |
|
|
(573,263 |
) |
|
|
(255,233 |
) |
|
Due from (to), net |
|
$ |
(124,005 |
) |
|
$ |
(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.
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 year ended December 31, 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(up to the disposition date); and Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake and Qinghai Technology, which are collectively referred to as the “Company.” For the year ended December 31, 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 December 31,2019 and 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 receipts of the goods by customer. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not affected by the income tax holiday.
Deferred Income
Deferred income consists primarily of government grants and subsidies for supporting the Company’s technology innovation and transformation of boric acid, lithium and magnesium sulfate projects. The Company uses most of the subsidies to purchase machinery and equipment. Deferred income is amortized to revenue (other income) over the life of the assets for which the grant and subsidy was used for. Subsidies for declared project fund require government inspection to ensure proper use of the funds for the designated project.
Foreign Currency Translation and Comprehensive Income (Loss)
The accounts of the US parent company are maintained in USD. The functional currency of the Company’s China subsidiaries is the Chinese Yuan Renminbi (“RMB”). The accounts of the China subsidiaries were translated into USD in accordance with FASB ASC Topic 830, “Foreign Currency Matters.” According to FASB ASC Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders’ equity was translated at the historical rates and statement of operations items were translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, “Comprehensive Income.”
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.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the fair value hierarchy. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The adoption of this standard is not expected to have a material impact on the Company’s CFS.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on its CFS.
Results of Operations
Years Ended December 31, 2019 Compared to Years Ended December 31, 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.
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2019 |
% of Sales |
2018 |
% of Sales |
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|
Sales |
$ | 6,742,474 | $ | 6,029,147 | ||||||||||||
|
Cost of goods sold |
5,647,314 | 83.8 |
% |
5,147,641 | 85.4 |
% |
||||||||||
|
Gross profit |
1,095,160 | 16.2 |
% |
881,506 | 14.6 |
% |
||||||||||
|
Selling expenses |
363,282 | 5.4 |
% |
294,892 | 4.9 |
% |
||||||||||
|
General and administrative expenses |
1,192,066 | 17.7 |
% |
254,865 | 4.2 |
% |
||||||||||
|
Total operating expenses |
1,555,348 | 23.1 |
% |
549,757 | 9.1 |
% |
||||||||||
|
Income (loss) from operations |
(460,188 | ) | (6.8 |
%) |
331,749 | 5.5 |
% |
|||||||||
|
Other income |
403,233 | 6.0 |
% |
229,069 | 3.8 |
% |
||||||||||
|
Income (loss) before income taxes |
(56,955 |
) |
(0.8 |
%) |
560,818 | 9.3 |
% |
|||||||||
|
Income tax expense |
127,155 | 1.9 |
% |
84,123 | 1.4 |
% |
||||||||||
|
Income (loss) from continuing operations |
(184,110 | ) | (2.7 |
%) |
476,695 | 7.9 |
% |
|||||||||
|
Gain on disposal of discontinued operations, net of tax |
5,666,187 | 84.0 |
% |
- | - |
% |
||||||||||
|
Gain from operations of discontinued entities, net of tax |
1,625,683 | 24.1 |
% |
- | - |
% |
||||||||||
|
Net income |
$ | 7,107,760 | 105.4 |
% |
$ | 476,695 | 7.9 |
% |
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Sales
Sales for the years ended December 31, 2019 and 2018 was $6,742,474 and $6,029,147, respectively, an increase of $713,327 or 11.8%. For the years ended December 31, 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 $149,142 and $1,526,296, 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, starting from 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 range from $7.3 to $14.6 for each ton.
Cost of sales
Cost of sales (“COS”) for the years ended December 31, 2019 and 2018 was $5,647,314 and $5,147,641, respectively, an increase of $499,673 or 9.7%. The increase was mainly due to the increase of sales. The COS as a percentage of sales was 83.8% for the year ended December 31, 2019 compared with 85.4% 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 cost control by rearrange and optimize each department’s personnel including outsourcing the production task of Plant II and III, and decrease the rate of waste on packaging material.
Gross profit
The gross profit for the years ended December 31, 2019 and 2018 was $1,095,160 and $881,506, respectively, an increase of $213,654 or 24.2%. The profit margin was 16.2% for the year ended December 31, 2019 compared to 14.6% for the year ended December 31, 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 $363,282 for the year ended December 31, 2019, compared to $294,892 for the year ended December 31, 2018, an increase of $68,390 or 23.2%, mainly resulting from increased freight out expense of $28,880 and increased salespersons’ salaries of $39,510.
General and administrative expenses consist mainly of R&D, office, welfare, business meeting, maintenance, and utilities. General and administrative expenses were $1,192,066 for the year ended December 31, 2019, compared to $254,865 for the year ended December 31 2018, an increase of $937,201 or 367.7%, mainly resulting from increased workshop repair and maintenance expense of $47,372, safety production expenses of $12,655, increased director fee of $50,000, increased three senior officers salary of $480,000, increased audit fee of $110,000, increased legal and professional fee of $249,600, and increased registration fee of $15,000, which was partly offset by decreased R&D expense of $43,800.
Other income
Other income was $403,233 for the year ended December 31, 2019, compared to $229,069 for the year ended December 31, 2018, an increase of $174,164 or 76.0%. For the year ended December 31, 2019, other income mainly consisted of subsidy income of $410,672. For the year ended December 31, 2018, other income mainly consisted of subsidy income of $237,252.
Government provides grants and subsidies to support the Company’s technology innovation and transformation of boric acid, lithium and magnesium sulfate projects. The Company uses most of the subsidies to purchase machinery and equipment, which is amortized to revenue (other income) over the life of the assets for which the grant and subsidy was used for. Subsidies for declared project fund require government inspection to ensure proper use of the funds for the designated project.
Income (loss) from continuing operations
Income (loss) from continuing operations was $184,110 loss for the year ended December 31, 2019, compared to $476,695 income for the year ended December 31, 2018. The $660,805 or 138.6% increase in loss from continuing operations was mainly due to increased G&A expense as described above.
Gain on disposal of discontinued operations
Gain from disposal of subsidiaries was $5,666,187 for the year ended December 31, 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, the buyers assumed all the liabilities of these disposed entities.
Gain from operations of discontinued entities
Gain from operations of discontinued entities was $1,625,683, consisted of $215,835 loss from operations from Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange, and $1,841,518 reversal of other payable to SmartHeat Germany (our former subsidiary which was sold in January 2016) due to time barred for the year ended December 31, 2019.
Net income
We had a net income of $7,107,760 for the year ended December 31, 2019, compared to $476,695 for the year ended December 31, 2018, an increase of net income by $6,631,065 or 1,391.0%. The increase in our net income mainly resulted from gain from discontinued operations and increased other income, despite we had increased G&A expense as described above.
Liquidity and Capital Resources
As of December 31, 2019, we had cash and equivalents of $0.16 million. Working capital was $0.66 million at December 31, 2019. The ratio of current assets to current liabilities was 1.34:1 at December 31, 2019.
The following is a summary of cash provided by or used in each of the indicated types of activities during years ended December 31, 2019 and 2018:
|
2019 |
2018 |
|||||||
|
Cash provided by (used in): |
||||||||
|
Operating activities |
$ | 344,170 | $ | (2,374,622 |
) |
|||
|
Investing activities |
(149,928 |
) |
160,244 | |||||
|
Financing activities |
$ | (190,985 | ) | $ | 2,377,523 | |||
Net cash provided by operating activities was $344,170 for the year ended December 31, 2019, compared to $2,374,622 net cash used in operating activities for the year ended December 31, 2018. The increase of cash inflow from operating activities for 2019 was principally attributable to decreased cash outflow from inventory by $1,481,736, and increased cash inflow from accounts payable by $1,224,276.
Net cash used in investing activities was $149,928 for the year ended December 31, 2019 compared to $160,244 net cash provided by investing activities for the year ended December 31, 2018. The net cash used in investing activities in 2019 consisted of cash disposed at disposal of subsidiaries of $149,928. The net cash provided by investing activities in 2018 consisted of cash received from acquisition of SmartHeat Inc. of $163,145, but partly offset with cash paid for purchase of equipment of $2,901.
Net cash used in financing activities was $190,985 for the year ended December 31, 2019, compared to $2,377,523 net cash provided by financing activities for the year ended December 31, 2018. The net cash used in financing activities in 2019 consisted of decrease in due to related parties of $190,985. The net cash provide in financing activities in 2018 consisted of increase in due to related parties of $2,377,523.
Dividend Distribution
We are a US holding company that conducts substantially all of our business through our wholly owned and other consolidated operating entities in China. We rely in part on dividends paid by our subsidiaries in China for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, PRC regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Our PRC subsidiaries also are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to a statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of registered capital. These reserves are not distributable as cash dividends. In addition, our PRC subsidiaries, at their discretion, may allocate a portion of their after-tax profit to their staff welfare and bonus fund, which may not be distributed to equity owners except in the event of liquidation. Moreover, if any of our subsidiaries incur debt on its own behalf in the future, the instruments governing the debt may restrict such subsidiary’s ability to pay dividends or make other distributions to us. Any limitation on the ability of one of our subsidiaries to distribute dividends and other distributions to us could materially and adversely limit our ability to make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties other than as described following under “Contractual Obligations.” We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required.
Item 8. Financial Statements and Supplementary Data
Our financial statements, together with the report thereon, appear in a separate section of this Annual Report beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, our principal executive officer and acting 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 December 31, 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 U.S. GAAP expertise. We lack sufficient personnel with the appropriate level of knowledge, experience and training in U.S. GAAP for the preparation of financial statements in accordance with U.S. 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 U.S. GAAP holds a license such as Certified Public Accountant in the U.S., nor have any attended U.S. institutions or extended educational programs that would provide enough of the relevant education relating to U.S. GAAP.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
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● |
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
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● |
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP, and the receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
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● |
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Therefore, internal control over financial reporting determined to be effective provides only reasonable assurance regarding the reliability of financial reporting and the preparations of financial statements for external purposes in accordance with generally accepted accounting principles.
Our management carried out an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2019, because of a material weakness related to our internal level of U.S. GAAP expertise. We lack sufficient personnel with the appropriate level of knowledge, experience and training in U.S. GAAP for the preparation of financial statements in accordance with U.S. 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 U.S. GAAP holds a license such as Certified Public Accountant in the U.S., nor have any attended U.S. institutions or extended educational programs that would provide enough of the relevant education relating to U.S. GAAP.
In order to mitigate the foregoing material weakness, we engaged an outside accounting consultant to assist us in the preparation of our financial statements to ensure that these financial statements are prepared in conformity to U.S. GAAP. Our outside accounting consultant is a Certified Public Accountant in the U.S. and has significant experience in the preparation of financial statements in conformity with U.S. GAAP. Our Chief Financial Officer and internal accounting personnel consult with our outside accounting consultant on an ongoing basis with regards to our treatment and conversion of financials from PRC GAAP to U.S. GAAP. We believe that the engagement of this outside accounting consultant lessens the possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis, and we will continue to monitor the effectiveness of this action and make any changes that our management deems appropriate. We expect to continue to rely on this outside consulting arrangement to supplement our current internal accounting staff for the foreseeable future.
Our Board of Directors and management are evaluating remediation measures that we will undertake to address this material weakness and will continue this evaluation in order to implement a comprehensive remediation plan. We expect that this plan will include but not be limited to (a) appointing a principal accounting officer with extensive U.S. GAAP training and experience, (b) hiring accounting personnel with appropriate knowledge and experience in U.S. GAAP and (c) providing more training on U.S. GAAP to accounting and other relevant personnel responsible for the preparation of books, records and financial statements. In the interim, our Chief Financial Officer has attended U.S. GAAP training courses conducted by our outside Sarbanes-Oxley consultant and intends to continue attending training courses in U.S. GAAP. Until such time as we hire qualified accounting staff and train our current accounting staff with the requisite U.S. GAAP experience, however, it is unlikely we will be able to remediate this material weakness in our internal control over financial reporting.
We believe that the foregoing steps will remediate the material weakness identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal year ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the names of our directors, executive officers and their ages, positions and biographical information as of the date of this report. Our executive officers are appointed by, and serve at the discretion of, our Board of Directors. Our directors hold office for one-year terms or until their successors have been elected and qualified. There are no family relationships between any of our directors, executive officers or other key personnel and any other of our directors, executive officers or key personnel. There are no arrangements or understandings between any of our directors or executive officers and any other persons pursuant to which such director or executive officer was selected in that capacity.
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Name |
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Age |
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Position |
|
Mao Zhang |
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74 |
|
Chairman of Board of Directors; General Manager of Qinghai Technology |
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Jimin Zhang |
|
54 |
|
Chief Executive Officer and Director |
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Xudong Wang |
45 |
Chief Financial Officer |
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Kenneth Scipta |
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77 |
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Director |
|
Xing Hai Li |
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57 |
|
Director |
|
Liguo Zhang |
|
52 |
|
Director |
Mao Zhang, is the Chairman of the Board of our company and General Manager of Qinghai Technology. Mr. Zhang has been the General Manager of Qing Hai Mid-Heaven Boron & Lithium Mining Company, Ltd. (“Qing Hai Mining”) Since its inception on March 6, 2001. Mr. Zhang also serves as the Vice Chairman of the Boron Chemical Branch of China Inorganic Salts Industry Association. Mr. Zhang was selected to serve as a director on our Board due to his broad industry experience and prior leadership experience at Qinghai Technology.
Jimin Zhang, is the Chief Executive Officer and a director of our company. For the past five years Mr. Zhang has been the managing director of the Zhang’s family office. Since March of 2018, Mr. Zhang served as a financial and operations consultant to Qing Hai Mining and supervised the carve out of Qinghai Technology o from Qing Hai Mining. Mr. Zhang is the Managing Director of Northtech Holdings, Inc., the former majority stockholder and former creditor of our company. Mr. Zhang was selected to serve as a director on our Board due to his financial industry experience and experience as an investor.
Xudong (Rhett) Wang, from December 2018 Mr. Wang has served as the Chief Financial Officer of our company. From February 2010 – December of 2018, Mr. Wang served and Chief financial officer and Vice President of SmarHeat Taiyu (Shenyang) Energy Technology Ltd. Mr. Wang formerly served as the Chief Financial officer of a NASDAQ listed company. Mr. Wang received a bachelor’s degree in economics from the Shandong Finance University and a Masters of Business Administration from Hamburg University, Germany.
Xing Hai Li, serves as a director of our company. For the past five years Mr. Li has been a professor at Central South University of China’s School of Metallurgy and Environment where he has published numerous articles on materials, lithium ion batteries, metallurgical engineering, electrochemistry and conductivity. Mr. Li was selected to serve as a director on our Board due to his broad industry experience and expertise in the lithium production methods.
Liguo Zhang, serves as a director of our company. For the past five years Mr. Zhang has served as a managing partner of the Guo Feng Law Firm where he practices corporate and securities law. Mr. Zhang was selected to serve as a director on our Board due to his experience with the corporate and securities laws in the PRC and his legal experience relating to mining, real estate and chemical production.
Kenneth Scipta, director, was appointed to our Board of Directors and as Chairman of our Audit Committee on July 10, 2012 and as our President on November 29, 2016. Mr. Scipta, a certified public accountant, has over 35 years of relevant accounting experience, and has served on several boards of directors. From 1993 to 1996, Mr. Scipta was the President and a board member of Mid-West Springs Manufacturing Company, a NASDAQ traded company, where he was responsible for day to day operations, planning, administration and financial reporting. Upon Mr. Scipta’s resignation he assumed the duties of president of the special products division, which included catalog sales, die springs and the development of international sales. Previously, from 1979-1993, Mr. Scipta served in various positions such as president, vice president of finance and vice president of sales and marketing for Mid-West’s primary subsidiary. From 1998 to 2006, Mr. Scipta was the chief executive officer and a board member of First National Entertainment Company, a multi-million-dollar company traded on NASDAQ. Mr. Scipta was selected to serve as a director on our Board due to his prior experience as our audit committee chairman, qualification as a certified public accountant and financial leadership experience.
Legal Proceedings
During the past ten years, none of our directors or executive officers has been:
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The subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; |
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Convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
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Subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in an type of business, securities or banking activities; |
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Found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, that has not been reversed, suspended, or vacated; |
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Subject of, or a party to, any order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of a federal or state securities or commodities law or regulation, respecting financial institutions or insurance companies, law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
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Subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
None of our directors, officers or affiliates, or any beneficial owner of 5% or more of our common stock, or any associate of such persons, is an adverse party in any material proceeding to, or has a material interest adverse to, us or any of our subsidiaries.
Audit Committee and Audit Committee Financial Expert
We have established a separately designated standing audit committee in accordance with Section 3(a)(58)(A) of the Exchange Act. Our Audit Committee consists of Messrs. Scipta, Li, and Liguo Zhang, each of whom is an independent director. Mr. Scipta, Chairman of the Audit Committee, is an “audit committee financial expert” as defined under Item 407(d) of Regulation S-K. The purpose of the Audit Committee is to represent and assist our Board of Directors in its general oversight of our accounting and financial reporting processes, audits of the financial statements and internal control and audit functions. As more fully described in its charter, a copy of which is available on our website at www.smartheatinc.com, the functions of the Audit Committee include the following:
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Appointment of independent auditors, determination of their compensation and oversight of their work; |
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● |
Review the arrangement for and scope of the audit by independent auditors; |
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Review the independence of the independent auditors; |
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Consider the adequacy and effectiveness of the internal controls over financial reporting; |
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● |
Pre-approve audit and non-audit services; |
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● |
Establish procedures regarding complaints relating to accounting, internal accounting controls, or auditing matters; |
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Review and approve any related party transactions; |
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● |
Discuss with management our major financial risk exposures and our risk assessment and risk management policies; and |
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● |
Discuss with management and the independent auditors our draft quarterly interim and annual financial statements and key accounting and reporting matters. |
Code of Ethics
Our Board of Directors has adopted a Code of Conduct, which applies to all of our directors, officers and employees that constitutes our “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act. The purpose of the Code of Conduct is to promote honest and ethical conduct. The Code of Conduct is posted on our website located at www.smartheatinc.com and is available in print, without charge, upon written request to Lithium & Boron Technology, Inc. 60 East Ren-Min Road, Dachaidan, (Da Qaidam Administrative Committee), XaiXi, Qinghai Province 817000. We intend to disclose any future amendments to our Code of Conduct, and any waivers of provisions of the Code of Conduct required to be disclosed under the rules of the SEC, on our website.
Corporate Governance Guidelines
The Board has adopted corporate governance guidelines to assist and guide its members in the exercise of its responsibilities. These guidelines should be interpreted in accordance with any requirements imposed by applicable federal or state law or regulation and our certificate of incorporation and bylaws. Our corporate governance guidelines are available on our website. Although these corporate governance guidelines have been approved by the Board, it is expected that these guidelines will evolve over time as customary practice and legal requirements change. In particular, those guidelines that encompass legal, regulatory or exchange requirements as they currently exist will be deemed to be modified as and to the extent that such legal, regulatory or exchange requirements are modified. In addition, the guidelines may also be amended by the Board at any time as it deems appropriate.
Board and Committee Meetings
The Board meets on a regularly scheduled basis during the year to review significant developments affecting us and to act on matters requiring their approval. It also holds special meetings when important matters require action between scheduled meetings. Members of senior management regularly attend meetings to report on and discuss their areas of responsibility. During 2019, the Board held four meetings. The Board has three standing committees:
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the audit committee, which held four meetings in 2019; |
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the compensation committee, which held no meetings in 2019; and |
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● |
the nominating and corporate governance committee, which held no meetings in 2019. |
Each of the incumbent directors of the Board attended at least 75% of the aggregate of all meetings of the Board and meetings of committees of our Board upon which they served (during the periods that they served) during 2019.
Annual Meeting Attendance
It is our policy that members of our Board are encouraged to attend annual meetings of our stockholders.
Committees
Our bylaws provide that the Board may delegate responsibility to committees. The Board has three standing committees: an audit committee, a compensation committee, and a nominating and corporate governance committee. The Board has also adopted a written charter for each of the three standing committees. Each committee charter is available in the corporate governance section of our website at http://ir.hubspot.com/investors/corporate-governance.
Audit Committee
Messrs. Scipta, Li, and Liguo Zhang currently serve on the audit committee, which is chaired by Mr. Scipta. The Board has determined that each member of the audit committee is “independent” for audit committee purposes as that term is defined under Rule 10A-3 of the Exchange Act. Mr. Scipta meets the requirements for financial literacy under the applicable rules and regulations of the SEC. The Board has designated Mr. Scipta as an “audit committee financial expert,” as defined under the applicable rules of the SEC.
The audit committee’s responsibilities include:
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overseeing the work of our independent registered public accounting firm; |
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● |
approving the hiring, discharging and compensation of our independent registered public accounting firm; |
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● |
approving engagements of the independent registered public accounting firm to render any audit or permissible non-audit services; |
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● |
reviewing the qualifications and independence of the independent registered public accounting firm; |
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● |
monitoring the rotation of partners of the independent registered public accounting firm on our engagement team as required by law; |
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● |
reviewing our consolidated financial statements and reviewing our critical accounting policies and estimates; |
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● |
reviewing the adequacy and effectiveness of our internal controls; and |
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● |
reviewing and discussing with management and the independent registered public accounting firm the results of our annual audit and our interim consolidated financial statements. |
The audit committee met four times during the fiscal year ended December 31, 2018. The audit committee operates under a written charter adopted by the Board of Directors.
Compensation Committee
Messrs. Scipta, Li, and Liguo Zhang currently serve on the compensation committee, which is chaired by Mr. Li. The Board has determined that each member of the compensation committee is “independent” as that term is defined in the applicable SEC. The compensation committee’s responsibilities include:
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● |
reviewing and approving corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers; |
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● |
evaluating the performance of our executive officers in light of established goals and objectives; |
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reviewing and recommending compensation of our executive officers based on its evaluations; |
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● |
reviewing and recommending compensation of our directors; and |
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● |
administering the issuance of stock options and other awards under our stock plans. |
The compensation committee did not meet in 2018. The compensation committee operates under a written charter adopted by the Board of Directors.
Nominating and Corporate Governance Committee
Messrs. Scipta, Li, and Liguo Zhang currently serve on the nominating and corporate governance committee, which is chaired by Mr. Zhang. The Board has determined that each member of the nominating and corporate governance committee is “independent” as that term is defined in the applicable SEC. The nominating and corporate governance committee’s responsibilities include:
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● |
evaluating and making recommendations regarding the organization and governance of the board of directors and its committees; |
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● |
assessing the performance of members of the board of directors and making recommendations regarding committee and chair assignments; |
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● |
reviewing and making recommendations with regard to our corporate succession plans for our chief executive officer and other executive officers; |
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● |
recommending desired qualifications for board of directors’ membership and conducting searches for potential members of the board of directors; and |
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● |
reviewing and making recommendations with regard to our corporate governance guidelines. |
The nominating and corporate governance committee did not meet during the fiscal year ended December 31, 2018. The nominating and corporate governance committee operates under a written charter adopted by the Board.
Identifying and Evaluating Director Nominees
The Board is responsible for selecting its own members. The Board delegates the selection and nomination process to the nominating and corporate governance committee, with the expectation that other members of the Board, and of management, will be requested to take part in the process as appropriate.
Generally, the nominating and corporate governance committee identifies candidates for director nominees in consultation with management, through the use of search firms or other advisors, through the recommendations submitted by stockholders or through such other methods as the nominating and corporate governance committee deems to be helpful to identify candidates. Once candidates have been identified, the nominating and corporate governance committee confirms that the candidates meet all of the minimum qualifications for director nominees established by the nominating and corporate governance committee. The nominating and corporate governance committee may gather information about the candidates through interviews, detailed questionnaires, comprehensive background checks or any other means that the nominating and corporate governance committee deems to be appropriate in the evaluation process. The nominating and corporate governance committee then meets as a group to discuss and evaluate the qualities and skills of each candidate, both on an individual basis and taking into account the overall composition and needs of the Board. Based on the results of the evaluation process, the nominating and corporate governance committee recommends candidates for the Board’s approval as director nominees for election to the Board.
Procedures for Submitting Stockholder Proposals
Requirements for Stockholder Proposals to be Brought Before the Annual Meeting. For nominations of persons for election to our Board or other proposals to be considered at an annual meeting of stockholders, a stockholder must give written notice to our Secretary Lithium & Boron Technology, Inc. 60 East Ren-Min Road, Dachaidan, (Da Qaidam Administrative Committee), XaiXi, Qinghai Province 817000, not later than the close of business 90 days, nor earlier than the close of business 120 days, prior to the first anniversary of the date of the preceding year’s annual meeting. However, the bylaws also provide that in the event the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice must be delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Any nomination must include all information relating to the nominee that is required to be disclosed in solicitations of proxies for election of directors in election contests or is otherwise required under Regulation 14A of the Exchange Act, the person’s written consent to be named in the proxy statement and to serve as a director if elected and such information as we might reasonably require to determine the eligibility of the person to serve as a director. As to other business, the notice must include a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest of such stockholder (and the beneficial owner) in the proposal. The proposal must be a proper subject for stockholder action. In addition, to make a nomination or proposal, the stockholder must be of record at the time the notice is made and must provide certain information regarding itself (and the beneficial owner), including the name and address, as they appear on our books, of the stockholder proposing such business, the number of shares of our capital stock which are, directly or indirectly, owned beneficially or of record by the stockholder proposing such business or its affiliates or associates (as defined in Rule 12b-2 promulgated under the Exchange Act) and certain additional information.
The advance notice requirements for the Annual Meeting are as follows: a stockholder’s notice shall be timely if delivered to our Secretary at the address set forth above not later than the close of business on the later of the 90th day prior to the scheduled date of the Annual Meeting or the 10th day following the day on which public announcement of the date of the Annual Meeting is first made or sent by us.
Requirements for Stockholder Proposals to be Considered for Inclusion in the Company’s Proxy Materials. In addition to the requirements stated above, any stockholder who wishes to submit a proposal for inclusion in our proxy materials must comply with Rule 14a-8 promulgated under the Exchange Act. For such proposals to be included in our proxy materials relating to our 2020 annual meeting of stockholders, all applicable requirements of Rule 14a-8 must be satisfied and we must receive such proposals no later than July 1, 2020. Such proposals must be delivered to our Secretary, Lithium & Boron Technology, Inc. 60 East Ren-Min Road, Dachaidan, (Da Qaidam Administrative Committee), XaiXi, Qinghai Province 817000.
Procedures for Shareholder Recommendations of Nominees to the Board of Directors
During 2019, there were no material changes to the procedures described in our Proxy Statement relating to the 2020 Annual Meeting of Shareholders by which shareholders may recommend nominees to our Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Commission and to provide us with copies of those filings. Based solely on our review of the copies received by us and on the written representations of certain reporting persons, we believe that all such Section 16(a) filing requirements were timely met during 2018.
Item 11. Executive Compensation
As a “smaller reporting company,” we have elected to follow the scaled disclosure requirements for smaller reporting companies with respect to the disclosures required by Item 402 of Regulation S-K. Under such scaled disclosure, we are not required to provide a Compensation Discussion and Analysis, Compensation Committee Report and certain other tabular and narrative disclosures relating to executive compensation.
Executive Compensation
The following table sets forth information concerning the compensation for the years ended December 31, 2018 and 2017, of each of our named executive officers.
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Summary Compensation Table |
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Name and Principal Position |
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Year |
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Salary |
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Bonus |
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Stock Awards |
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Option Awards |
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Nonequity Incentive Plan Compensation |
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Nonqualified Deferred Compensation Earnings |
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All Other Compensation |
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Total |
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($) |
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($) |
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($)(1) |
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($)(1) |
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($) |
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($) |
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($) |
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($) |
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Kenneth Scipta |
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2019 |
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10,000 |
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10,000 |
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Yingkai Wang |
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2018 |
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21,242 |
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- |
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- |
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- |
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- |
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- |
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- |
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21,242 |
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2018 |
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21,242 |
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- |
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- |
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- |
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- |
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- |
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- |
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21,242 |
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Jimin Zhang |
2019 |
120,000 |
120,000 |
* |
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Xudong Wang |
2019 |
120,000 |
120,000 |
* |
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Mao Zhang |
2019 |
240,000 |
240,000 |
* |
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No outstanding equity awards are held or granted to any of our named executive officers at December 31, 2019.
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Accrued but not paid. |
Agreements with Personnel
Mr. Scipta was compensated $10,000 per year as President and $30,000 as director and chairman of our audit committee in 2018. Mr. Scipta will be compensated $30,000 per year as a director in 2019.
Mr. Scipta resigned as President and Mr. Wang resigned as principal accounting officer on December 20, 2018.
Each of Jimin Zhang and Xudong Wang will be compensated $10,000 per month in their respective roles as Chief Executive Officer and Chief Financial Officer. Mao Zhang will be compensated $240,000 per year as our General Manager of Qinghai Technology. Each of our officers is an at will employee.
We currently do not have any defined pension plan for our named executive officers. We shall provide to our officers all the necessary insurances and social welfares, including but not limited to medical, work injury, maternity, retirement and unemployment insurance and housing fund, according to our policies and the relevant laws and regulations of local governmental authorities and the PRC.
We currently do not have nonqualified defined contribution or other plans that provides for the deferral of compensation for our named executive officers nor do we currently intend to establish any such plan.
Grants of Plan-Based Awards
On May 25, 2010, our shareholders approved the 2010 Equity Incentive Plan authorizing the issuance of up to 100,000 shares of our common stock. The Compensation Committee administers the Plan and may grant awards, including restricted shares, incentive stock options and nonqualified stock options, under the Plan to our officers, directors and employees pursuant to the guidelines set forth in the Plan.
Change-In-Control and Separation Agreements
We do not have any existing arrangements providing for payments or benefits in connection with the resignation, severance, retirement or other termination of any of our named executive officers, or a change in control of the company or a change in the named executive officer’s responsibilities following a change in control.
Compensation of Directors
The following table sets forth information concerning the compensation of our directors for the year ended December 31, 2019.
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Director Compensation Table for 2019 |
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Fees Earned or Paid in Cash |
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Option Awards |
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All Other Compensation |
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Total |
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Name |
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($) |
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($) |
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($) |
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($) |
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Kenneth Scipta |
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30,000 |
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- |
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- |
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30,000 |
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Our independent directors receive cash compensation, paid in equal quarterly installments, for their service. In addition, at the discretion of the non-interested members of the Compensation Committee, independent directors are eligible to receive bonuses for service to our company outside the normal duties as a director and grants of options to purchase our common stock under the 2010 Equity Incentive Plan. All directors are eligible to receive reimbursement of expenses incurred with respect to attendance at board meetings and meetings of committees thereof, which is not included in the above table. We do not maintain a medical, dental or retirement benefits plan for the directors.
The directors may determine remuneration to be paid to the directors with interested members refraining from voting. The Compensation Committee will assist the directors in reviewing and approving the compensation structure for the directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following sets forth information as of April 7, 2020, regarding the number of shares of our common stock beneficially owned by (i) each person that we know beneficially owns more than 5% of our outstanding common stock, (ii) each of our named executive officers, (iii) each of our directors and (iv) all of our named executive officers and directors as a group.
The amounts and percentages of our common stock beneficially owned are reported on the basis of SEC rules governing the determination of beneficial ownership of securities. Under the SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within 60 days through the exercise of any stock option, warrant or other right. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.
Unless otherwise indicated, each of the shareholders named in the table below, or his or her family members, has sole voting and investment power with respect to such shares of our common stock. Except as otherwise indicated, the address of each of the shareholders listed below is: c/o.: SmartHeat 60 East Ren-Min Road, Dachaidan, (Da Qaidam Administrative Committee), XaiXi, Qinghai Province, China 817000.
As of April 7, 2020, there were 185,986,370 shares of our common stock issued and outstanding.
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Name of beneficial owner |
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Number of shares |
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Percent of class |
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5% Shareholders |
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Northtech Holdings Inc. Mill Mall 5, Wickhams Cay 1 P.O. Box 3085 Road Town, Tortola British Virgin Islands |
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46,456,488 |
(1) |
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24.98 |
% |
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Directors and Named Executive Officers |
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|
Mr. Mao Zhang |
|
|
83,836,959 |
(2) |
|
|
45.08 |
% |
|
Mr. Jimin Zhang |
|
|
65,053,341 |
(3) |
|
|
34.00 |
% |
|
Mr. Jian Zhang |
|
|
22,165,012 |
|
|
|
11.92 |
% |
|
Mr. Xing Hai Li |
|
|
0 |
|
|
|
|
|
|
Mr. Liguo Zhang |
|
|
0 |
|
|
|
|
|
|
Kenneth Scipta |
|
|
50,000 |
|
|
|
* |
% |
|
|
|
|
|
|
|
|
|
|
|
All Directors and Named Executive Officers as a Group (2 Persons) |
|
|
171,105,312 |
|
|
|
90.92 |
% |
* Represents less than 1% of shares outstanding.
(1) Mr. Jimin Zhang our Chief Executive Officer and director is the managing director of Northtech Holdings, Inc. and holds the voting power and dispositive power over the shares of our common stock held by Northtech Holdings, Inc.
(2) Includes 3,211,860 shares of our common stock held by Mr. Zhang’s wife Ying Zhao.
(3) Includes 46,456,504 shares of our common stock held by Northtech Holdings Inc.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information regarding all equity compensation plans, including individual compensation arrangements, under which our common stock is authorized for issuance as of December 31, 2018.
|
Equity Compensation Plan Information |
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category |
|
(a) Number of Securities to be Issued Upon Exercise of Outstanding Options |
|
|
(b) Weighted- Average Exercise Price of Outstanding Options |
|
|
(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) |
|
|||
|
Equity compensation plans approved by security holders |
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
2010 Equity Incentive Plan |
|
|
- |
|
|
|
- |
|
|
|
0 |
|
|
Equity compensation plans not approved by security holders |
|
|
None |
|
|
|
None |
|
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
0 |
|
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
On July 27, 2012, we entered into a secured revolving credit facility under the terms of a Secured Credit Agreement with Northtech Holdings, Inc., an entity owned by certain members of the Company’s former management, Jun Wang, our former Chief Executive Officer, Xudong Wang, our former Vice President of Strategy and Development, and Wen Sha, our former Vice President of Marketing. Huajun Ai, our current Corporate Secretary, is also a part owner of Northtech. As amended on December 21, 2012, the Credit Agreement provides for borrowings of up to $2,500,000 with any amounts borrowed maturing on April 30, 2014. Borrowings under the Credit Agreement are secured by 55% of the equity interest in each of our wholly-, directly-owned subsidiaries and are repayable, at our option, in shares of our common stock. On December 21, 2012, we elected to repay $1,301,300 of the $1,384,455 outstanding under the Credit Agreement with 1,300,000 restricted shares of our common stock, 22.67% of our total issued and outstanding shares of Common Stock, as authorized by the Credit Agreement and approved by our shareholders.
On December 31, 2014, the Company closed the transactions contemplated by the Equity Interest Purchase Agreement discussed above (See Sale of Equity Interests). The buyers consist of a group of 25 natural persons, all of whom are PRC. citizens, including Wen Sha, Jun Wang and Xudong Wang, managers of the Company’s subsidiaries engaged in the PHE segment of its business, and Huajuan Ai and Yingkai Wang, the Company’s Corporate Secretary and Acting Chief Accountant, respectively.
Mr. Mao Zhang serves as our Chairman and holds approximately 45% of our outstanding common stock. Mr. Zhang also owns approximately 75% of Qinghai Mining and serves as its general manager. Mr. Jian Zhang, a stockholder holding approximately 12% of the common stock of our company owns 21% of Qinghai Mining.
Except as disclosed above, there were no transactions with any related persons (as that term is defined in Item 404 in Regulation S-K) during 2017 or 2016, or any currently proposed transaction, in which we were or are to be a participant and the amount involved was in excess of $120,000 and in which any related person had a direct or indirect material interest.
Our written policy for related party transactions provides that we will enter into or ratify a transaction with a related party only when our Board of Directors, acting through the Audit Committee, determines that the transaction is in the best interests of the company and our shareholders. The policy requires the review and approval by our Audit Committee for any transaction in which (i) the aggregate amount involved will or may be expected to exceed $120,000 in any fiscal year, (ii) we are a participant and (iii) any related person has or will have a direct or indirect interest. Related persons include our executive officers, directors, director nominees, persons known to be the beneficial owner of more than 5% of our outstanding common stock or immediate family members of any of the foregoing persons. In determining whether to approve or ratify a transaction with a related party, the Audit Committee will take into account, among other relevant factors, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances. If advance approval of a transaction is not feasible, the Audit Committee may approve and ratify the transaction in accordance with the policy. Any member of the Audit Committee who is a related party with respect to a transaction under review may not participate in the deliberations or vote on the approval of the transaction.
Mao Zhang also owns approximately 75% of Qinghai Mining and serves as its general manager. Mr. Jian Zhang, a stockholder holding approximately 12% of the common stock of our company owns 21% of Qinghai Mining.
Qinghai Technology purchases raw material boron rock from Qinghai Mining, and receives no-interest short-term advances from Qinghai Mining from time to time. As of December 31, 2019 and 2018, due from (to) Qinghai Mining (was $0.55 million and $(3.88) million, respectively.
Qinghai Technology uses certain equipment that belong to Qinghai Province DaChaiDan ZhongTian Resources Development Co., Ltd (“Zhongtian Resources”, owned by two major shareholders of the Company) for its production.
Qinghai Technology previously purchased raw material sulfuric acid from DaChaiDan SanXin Industrial Company Ltd (“SanXin”) for production. Outstanding payable balance to SanXin at December 31, 2018 and 2017 was $133,000 million and $120,000 million, respectively. SanXin is a non-related party company; however, Qinghai Mining assumed all the payables that Qinghai Technology owed to SanXin at December 31, 2018 and 2017 according to a Debt Offset Agreement between the Company, Qinghai Mining and SanXin.
Qinghai Technology sold boric acid to Qinghai Dingjia Zhixin Trading Co., Ltd (“Dingjia”, 90% owned by the son of the Company’s Chairman and majority stockholder). For the years ended December 31, 2019 and 2018, the Company’s sales to Dingjia was $149,142 and $1,526,296, respectively. At December 31, 2019 and 2018, outstanding receivables from (payable to) Dingjia was $(0.06) million and $4.06 million, respectively.
Qinghai Technology, Qinghai Mining, Zhongtian Resources and Dingjia entered a Debt Offset Agreement, in which, Qinghai Mining assumed all the outstanding payable balance of Qinghai Technology to Zhongtian at December 31, 2018, and Qinghai Technology transferred all the outstanding receivable balance from Dingjia to Qinghai Mining. With execution of the Debt Offset Agreement, the Company had $54,976 net due to Qinghai Mining at December 31,2019 and 2018.
Qinghai Technology purchases all of its ore from which it produces boric acid and plans to purchase all of its brine for the production of lithium hydroxide and lithium carbonate and boric acid, Qinghai Technology and Qinghai Mining entered into an agreement on January 1, 2019. The agreement provides for the purchase of all of the ore produced by Qinghai Mining with a grade of not less than 5% at a price of RMB 60 per ton subject to a maximum of 5% annually. In the 4th quarter of 2019, this price was adjusted to RMB 70.46 ($10.21) per ton. The agreement may be modified by the parties in writing. A copy of the agreement is included in this 10-K as Exhibit 10.24 and is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
Our Audit Committee selected MJF & Associates, APC (“MJF & Associates”) as the independent registered certified public accounting firm to audit the books and accounts of our company and subsidiaries for the fiscal year ending December 31, 2018. MJF & Associates has served as our independent accountant since January 12, 2015. After the resignation of MJG & Associates, our Audit Committee selected Prager Metis as the independent registered certified public accounting firm to audit the books and accounts of our company and subsidiaries for the fiscal year ending December 31, 2019.The following table presents the aggregate fees billed for professional services rendered by MJF & Associates for the years ended December 31, 2018 and 2019.
|
2018 |
2019 |
|||||||
|
Audit Fees |
$ | 55,000 | $ | 177,500 | ||||
|
Audit-related fees |
$ | 85,000 | ||||||
|
Tax fees |
- | |||||||
|
All other fees |
- | |||||||
|
Total |
$ | 135,000 | $ | 177,500 | ||||
In the above table, “audit fees” are fees billed for services provided related to the audit of our annual financial statements, quarterly reviews of our interim financial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements for those fiscal periods. “Audit-related fees” are fees not included in audit fees that are billed by the independent accountant for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. “Tax fees” are fees billed by the independent accountant for professional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the independent accountant for products and services not included in the foregoing categories.
Audit Committee’s Pre-Approval Policy
The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax services and other services. The Audit Committee has adopted a written policy for the pre-approval of services provided by the independent accountants, under which policy the Audit Committee generally pre-approves services for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. For each proposed service, the independent accountant is required to provide detailed back-up documentation at the time of approval. The Audit Committee may delegate pre-approval authority to one or more of its members. Such a member must report any decisions to the Audit Committee at the next scheduled meeting.
PART IV
Item 15. Exhibits, Financial Statement Schedules
Documents filed as part of this Form 10-K
Financial Statements. See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item.
Financial Statements Schedules. All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this report.
Exhibits.
EXHIBIT INDEX
|
Exhibit No. |
|
Description |
|
2.1 |
|
|
|
2.2 |
|
|
|
2.3 |
|
|
|
2.4 |
|
|
|
3.1 |
|
|
|
3.2 |
|
|
|
3(ii).2 |
|
|
|
3.3 |
|
|
|
3.4 |
|
|
|
3.5 |
|
|
|
3.6 |
|
|
|
3.7 |
|
|
|
3.8 |
|
|
|
3.9 |
|
|
|
3.10 |
|
|
|
3.11 |
|
|
|
3.12 |
|
Certificate of Incorporation of Midheaven Sincerity International Resources Investment Co., Ltd |
|
4.1 |
|
|
|
4.2 |
|
Form of Share Certificate of Midheaven Sincerity International Resources Investment Co. Ltd |
|
10.1# |
|
|
|
10.2# |
|
|
|
10.3 |
|
|
|
10.4 |
|
|
|
10.5 |
|
|
|
10.6 |
|
|
|
10.7 |
|
|
|
10.8 |
|
|
|
10.9 |
|
|
|
10.10# |
|
|
|
10.11 |
|
|
|
10.12 |
|
|
|
10.13 |
|
|
|
10.14 |
|
|
|
10.15 |
|
|
|
10.16 |
|
|
|
10.17 |
|
|
|
10.18 |
|
|
21.1† |
|
|
|
24.1† |
|
|
|
31.1† |
|
|
|
31.2† |
|
|
|
32.1‡ |
|
|
|
32.2‡ |
|
|
|
101.INS |
|
XBRL Instance Document |
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
# Indicates management contract or compensatory plan, contract or arrangement.
† Filed herewith.
‡ Furnished herewith.
ITEM 16. FORM 10-K SUMMARY.
Not applicable.
Pursuant to the requirements of Section 13 or 15(d) 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: April 14, 2020 |
By: |
/s/ Jimin Zhang |
|
|
|
Jimin Zhang Chief Executive Officer (Principal Executive Officer) |
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jimin Zhang, and his attorney-in-fact for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jimin Zhang |
|
Chief Executive Officer and Director |
|
|
|
Jimin Zhang |
|
(Principal Executive Officer) |
|
April 14, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Xudong Wang |
|
Acting Chief Accountant |
|
|
|
Xudong Wang |
|
(Principal Financial and Accounting Officer) |
|
April 14, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Mao Zhang |
|
Director |
|
April 14, 2020 |
|
Mao Zhang |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Kenneth Scipta |
|
Director |
|
April 14, 2020 |
|
Kenneth Scipta |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Xing Hai Li |
|
Director |
|
April 14, 2020 |
|
Xing Hai Li |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Liguo Zhang |
|
Director |
|
April 14, 2020 |
|
Liguo Zhang |
|
|
|
|
Lithium & Boron Technology, Inc. and Subsidiaries
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Audit Committee, Board of Directors and Management
Lithium & Boron Technology, Inc.
Opinion on the financial statements
We audited the accompanying consolidated balance sheet of Lithium & Boron Technology, Inc. (the “Company”) as of December 31, 2019 and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for year then ended and the related notes (collectively referred to as “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019, and the results of its income and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis of Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor since 2019.
/s/ Prager Metis, CPA’s LLC
Las Vegas, Nevada
April 14, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lithium & Boron Technology Inc. (formerly “Smartheat Inc”)
Opinion on the financial statements
We audited the accompanying consolidated balance sheet of Lithium & Boron Technology Inc. (formerly “Smartheat Inc”) (“the Company”) as of December 31, 2018, and the related consolidated statements of income and comprehensive income, stockholders’ deficit, and cash flows for the year then ended and the related notes (collectively referred to as “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018, and the consolidated results of its operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis of Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014. The financial statements from 2008 to 2013 were audited by a related firm.
/s/ MJF & Associates, APC
Los Angeles, California
July 12, 2019
515 S. Flower Street, Suite 1800, Los Angeles, CA 90071 Telephone: (213) 626-2701 Fax: (866) 510-6726
LITHIUM & BORON TECHNOLOGY, INC
CONSOLIDATED BALANCE SHEETS
|
DECEMBER 31, 2019 |
DECEMBER 31, 2018 |
|||||||
|
ASSETS |
||||||||
|
CURRENT ASSETS |
||||||||
|
Cash and equivalents |
$ | 160,024 | $ | 163,145 | ||||
|
Accounts receivable, net |
577,387 | 512,380 | ||||||
|
Notes receivable |
79,478 | 111,473 | ||||||
|
Other receivables |
354 | 154,719 | ||||||
|
Advances to suppliers |
7,490 | 113,705 | ||||||
|
Inventories, net |
1,802,647 | 1,735,374 | ||||||
|
Total current assets |
2,627,380 | 2,790,796 | ||||||
|
NONCURRENT ASSETS |
||||||||
|
Property and equipment, net |
1,403,681 | 1,749,060 | ||||||
|
Construction in progress |
1,635,912 | 1,662,847 | ||||||
|
Total noncurrent assets |
3,039,593 | 3,411,907 | ||||||
|
TOTAL ASSETS |
$ | 5,666,973 | $ | 6,202,703 | ||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
||||||||
|
CURRENT LIABILITIES |
||||||||
|
Accounts payable |
$ | 332,706 | $ | 1,172,001 | ||||
|
Unearned revenue |
117,188 | 1,151,253 | ||||||
|
Accrued liabilities and other payables |
1,095,698 | 6,698,604 | ||||||
|
Taxes payable |
295,255 | 228,547 | ||||||
|
Advance from related parties, net |
124,006 | 310,209 | ||||||
|
Total current liabilities |
1,964,853 | 9,560,614 | ||||||
|
DEFERRED INCOME |
1,360,626 | 1,504,400 | ||||||
|
TOTAL LIABILITIES |
3,325,479 | 11,065,014 | ||||||
|
COMMITMENTS AND CONTINGENCIES |
||||||||
|
STOCKHOLDERS' EQUITY (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 (deficiency) |
(6,666,351 | ) | (7,645,727 | ) | ||||
|
Statutory reserve |
71,252 | 780,682 | ||||||
|
Accumulated other comprehensive loss |
(14,600 | ) | (11,951 | ) | ||||
|
Retained earnings |
8,765,225 | 1,828,717 | ||||||
|
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) |
2,341,494 | (4,862,311 | ) | |||||
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
$ | 5,666,973 | $ | 6,202,703 | ||||
LITHIUM & BORON TECHNOLOGY, INC
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
|
YEARS ENDED DECEMBER 31 |
||||||||
|
2019 |
2018 |
|||||||
|
Sales |
$ | 6,593,332 | $ | 4,502,851 | ||||
|
Sales - related party |
149,142 | 1,526,296 | ||||||
|
Total sales |
6,742,474 | 6,029,147 | ||||||
|
Cost of sales |
5,647,314 | 5,147,641 | ||||||
|
Gross profit |
1,095,160 | 881,506 | ||||||
|
Operating expenses |
||||||||
|
Selling |
363,282 | 294,892 | ||||||
|
General and administrative |
1,192,066 | 254,865 | ||||||
|
Total operating expenses |
1,555,348 | 549,757 | ||||||
|
Income (loss) from operations |
(460,188 | ) | 331,749 | |||||
|
Non-operating income |
||||||||
|
Financial expense |
(7,439 | ) | (8,183 | ) | ||||
|
Subsidy income |
410,672 | 237,252 | ||||||
|
Total non-operating income, net |
403,233 | 229,069 | ||||||
|
Income (loss) before income tax |
(56,955 | ) | 560,818 | |||||
|
Income tax expense |
127,155 | 84,123 | ||||||
|
Income (loss) from continuing operations |
(184,110 | ) | 476,695 | |||||
|
Gain on disposal of discontinued operations, net of tax |
5,666,187 | - | ||||||
|
Gain from operations of discontinued entities, net of tax |
1,625,683 | - | ||||||
|
Net income |
7,107,760 | 476,695 | ||||||
|
Other comprehensive item |
||||||||
|
Foreign currency translation gain attributable to discontinued operations |
118,877 | - | ||||||
|
Foreign currency translation loss attributable to Lithium & Boron Technology, Inc. |
(121,526 | ) | (158,530 | ) | ||||
|
Comprehensive income |
$ | 7,105,111 | $ | 318,165 | ||||
|
Basic and diluted weighted average shares outstanding |
185,968,370 | 106,221,057 | ||||||
|
Basic and diluted earnings per share from continuing operations |
$ | (0.00 | ) | $ | 0.00 | |||
|
Basic and diluted earnings per share from discontinued operations |
$ | 0.04 | $ | - | ||||
LITHIUM & BORON TECHNOLOGY, INC
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2019 AND 2018
|
Common Stock |
Paid-in capital |
Statutory |
Accumulated other comprehensive |
Retained | ||||||||||||||||||||||||
|
Shares |
Amount |
(deficiency) |
reserves |
loss |
earnings |
Total |
||||||||||||||||||||||
|
Balance at January 1, 2018 |
106,001,971 | $ | 106,002 | $ | 1,346,346 | $ | - | $ | 146,579 | $ | 1,352,022 | $ | 2,950,949 | |||||||||||||||
|
Recapitalization on reverse merger |
79,966,399 | 79,966 | (8,992,073 | ) | 780,682 | - | - | (8,131,425 | ) | |||||||||||||||||||
|
Net income |
- | - | - | - | - | 476,695 | 476,695 | |||||||||||||||||||||
|
Foreign currency translation loss |
- | - | - | - | (158,530 | ) | - | (158,530 | ) | |||||||||||||||||||
|
Balance at December 31, 2018 |
185,968,370 | 185,968 | (7,645,727 | ) | 780,682 | (11,951 | ) | 1,828,717 | (4,862,311 | ) | ||||||||||||||||||
|
Net income |
- | - | - | - | - | 7,107,760 | 7,107,760 | |||||||||||||||||||||
|
Transfer to statutory reserves |
- | - | - | 71,252 | - | (71,252 | ) | - | ||||||||||||||||||||
|
Dividend accrued |
- | - | - | - | - | (100,000 | ) | (100,000 | ) | |||||||||||||||||||
|
Disposal of subsidiaries |
- | - | 979,376 | (780,682 | ) | - | - | 198,694 | ||||||||||||||||||||
|
Foreign currency translation loss |
- | - | - | - | (2,649 | ) | - | (2,649 | ) | |||||||||||||||||||
|
Balance at December 31, 2019 |
185,968,370 | $ | 185,968 | $ | (6,666,351 | ) | $ | 71,252 | $ | (14,600 | ) | $ | 8,765,225 | $ | 2,341,494 | |||||||||||||
LITHIUM & BORON TECHNOLOGY, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
YEARS ENDED DECEMBER 31 |
||||||||
|
2019 |
2018 |
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
|
Net income |
$ | 7,107,760 | $ | 476,695 | ||||
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
|
Depreciation and amortization |
311,057 | 322,486 | ||||||
|
Provision for bad debts |
30,113 | - | ||||||
|
Gain on sale of subsidiaries |
(5,666,187 | ) | - | |||||
|
Changes in deferred income |
(120,752 | ) | (191,918 | ) | ||||
|
(Increase) decrease in assets and liabilities: |
||||||||
|
Accounts receivable |
38,153 | (67,984 | ) | |||||
|
Other receivables |
10,255 | - | ||||||
|
Advances to suppliers |
57,583 | 54,869 | ||||||
|
Inventories |
(139,944 | ) | (1,621,680 | ) | ||||
|
Accounts payable |
112,809 | (1,111,467 | ) | |||||
|
Unearned revenue |
118,363 | (376,214 | ) | |||||
|
Accrued liabilities and other payables |
(1,610,721 | ) | 11,873 | |||||
|
Taxes payable |
95,681 | 128,718 | ||||||
|
Net cash provided by (used in) operating activities |
344,170 | (2,374,622 | ) | |||||
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
|
Purchase of property and equipment |
- | (2,901 | ) | |||||
|
Cash received from acquisition of Smartheat Inc. |
- | 163,145 | ||||||
|
Cash disposed at disposal of subsidiaries |
(149,928 | ) | - | |||||
|
Net cash provided by (used in) investing activities |
(149,928 | ) | 160,244 | |||||
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
|
Advance from (to) related parties |
(190,985 | ) | 2,377,523 | |||||
|
Net cash provided by (used in) financing activities |
(190,985 | ) | 2,377,523 | |||||
|
EFFECT OF EXCHANGE RATE CHANGE ON CASH AND EQUIVALENTS |
(6,378 | ) | - | |||||
|
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS |
(3,121 | ) | 163,145 | |||||
|
CASH AND EQUIVALENTS, BEGINNING OF YEAR |
163,145 | - | ||||||
|
CASH AND EQUIVALENTS, END OF YEAR |
$ | 160,024 | $ | 163,145 | ||||
|
Supplemental cash flow data: |
||||||||
|
Income tax paid |
$ | - | $ | - | ||||
|
Interest paid |
$ | - | $ | - | ||||
LITHIUM & BORON TECHNOLOGY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019 AND 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 &Lithium Mining Co., Ltd (“Qinghai Mining”) on December 20, 2018. Qinghai Mining was founded March 6, 2001 and engaged in manufacture and wholesale of boric acid and related compounds for industrial and consumer usage. Qinghai Technology obtains its raw material minerals exclusively from Qinghai Mining and currently processes boric acid by crushing and processing ore.
On September 30, 2019, Heat HP, Inc. and Heat PHE, Inc, wholly owned subsidiaries of the Company, sold all of their respective equity interests in Jinhui, SmartHeat Investment, SmartHeat Trading, SmartHeat Pump and Heat Exchange for $353 (Note 20). 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”).
The CFS include the financial statements of the Company and its subsidiaries. All significant intercompany transactions and balances were eliminated in consolidation.
Principles of Consolidation
For the year ended December 31, 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 (up to the disposition date); and Mid-heaven BVI and its subsidiaries, Sincerity, Salt-Lake and Qinghai Technology, which are collectively referred to as the “Company.” For the year ended December 31, 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 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 December 31, 2019 and 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 |
||||||||||
|
December 31, 2019 |
- | $ | 160,024 | $ | 160,024 | |||||||
|
December 31, 2018 |
- | $ | 163,145 | $ | 163,145 | |||||||
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 December 31, 2019 and 2018, respectively. At December 31, 2019, Qinghai Technology had $0.58 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 December 31, 2019 and 2018, the Company had retentions receivable from customers for product quality assurance of nil and $0.14 million, respectively. 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 December 31, 2019 and 2018, respectively.
Advances to Suppliers, net
The Company makes advances to certain vendors to purchase raw material, tools and equipment for production. The advances are interest-free and unsecured. As of December 31, 2019 and 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.
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 December 31, 2019 and 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 years ended December 31, 2019 and 2018 were $551 and $44,320, 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 December 31, 2019 and 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.
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 receipts of the goods by customers. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not affected by the income tax holiday.
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.
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 December 31, 2019 and 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.
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.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the fair value hierarchy. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistent application among reporting entities. The guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is evaluating the impact this update will have on its CFS.
3. INVENTORIES, NET
Inventories at December 31, 2019 and 2018, respectively, were as follows:
|
2019 |
2018 |
|||||||
|
Raw materials |
$ | 311,049 | $ | 5,626,039 | ||||
|
Finished goods |
1,491,598 | 2,503,571 | ||||||
|
Total |
1,802,647 | 8,129,610 | ||||||
|
Less: inventory impairment allowance |
- | (6,394,236 |
) |
|||||
|
Inventories, net |
$ | 1,802,647 | $ | 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 December 31,2019 and 2018, the Company had notes receivable of $79,478 and $111,473, respectively; and at December 31, 2019, the Company had $1.08 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.
5. OTHER RECEIVABLES (NET), PREPAYMENTS AND DEPOSITS
Other receivables, prepayments and deposits consisted of the following at December 31, 2019 and 2018:
|
2019 |
2018 |
|||||||
|
Advances to unrelated third-party companies |
$ | - | $ | 3,471,902 | ||||
|
Advances to employees |
- | 327,067 | ||||||
|
Other |
354 | 208,671 | ||||||
|
Total |
354 | 4,007,640 | ||||||
|
Less: allowances |
- | (3,852,921 |
) |
|||||
|
Other receivables (net), prepayments and deposits |
$ | 354 | $ | 154,719 | ||||
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 December 31, 2019 and 2018, respectively:
|
2019 |
2018 |
|||||||
|
Structures and improvements |
$ | 450,136 | $ | 457,547 | ||||
|
Production equipment |
2,451,859 | 3,374,314 | ||||||
|
Equipment upgrade |
248,692 | 252,787 | ||||||
|
Office equipment |
- | 188,021 | ||||||
|
Vehicles |
- | 172,422 | ||||||
|
Total |
3,150,687 | 4,445,091 | ||||||
|
Less: impairment of fixed assets |
- | (189,412 |
) |
|||||
|
Less: accumulated depreciation |
(1,747,006 |
) |
(2,506,619 |
) |
||||
|
Property and equipment, net |
$ | 1,403,681 | $ | 1,749,060 | ||||
Depreciation for the years ended December 31, 2019 and 2018 was $311,057 and $322,486, respectively.
7. CONSTRUCTION IN PROGRESS (“CIP”)
As of December 31, 2019 and 2018, the Company had CIP of $1,635,912 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, in 2019, the existing coal-supported boiler in Plant I was determined failure to meet the environment protection standard, and 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. Due to various factors including the Coronavirus outbreak, the government-implemented project of installation and connection of the natural gas pipeline keeps delaying, the Company is actively to seek alternative way for replacing the initial plan of coal-convert-to-natural gas boiler, but instead consider to construct the natural gas station locally. The Company expects to resume the construction of Plant I no later than the end of 2020.
8. TAXES PAYABLE
Taxes payable consisted of the following December 31,2019 and 2018, respectively:
|
2019 |
2018 |
|||||||
|
Other |
$ | 29,350 | $ | 53,112 | ||||
|
VAT |
265,905 | 175,435 | ||||||
|
Taxes payable |
$ | 295,255 | $ | 228,547 | ||||
9. ACCRUED LIABILITIES AND OTHER PAYABLES
Accrued liabilities and other payables consisted of the following at December 31,2019 and 2018, respectively:
|
2019 |
2018 |
|||||||
|
Advances from third parties |
$ | 1,049 | $ | 3,120,967 | ||||
|
Subsidy payable |
- | 291,410 | ||||||
|
Other |
534,275 | 520,613 | ||||||
|
Accrued expenses |
560,374 | 2,765,614 | ||||||
|
Total accrued liabilities and other payables |
$ | 1,095,698 | $ | 6,698,604 | ||||
Advances from third parties were short term, non-interest-bearing and due on demand.
December 31, 2019 and 2018, other mainly was dividend payable to Northtech of $400,000 and $300,000, respectively; and payable for professional fee and other miscellaneous expenses of $134,275 and $220,613, respectively.
As of December 31 2018, the Company had $291,410, government subsidy for Magnesium-rich waste liquid high value utilization project, which was recorded as subsidy payable.
As of December 31, 2019, accrued expenses mainly consisted of accrued payroll expense of $920,374 for Qinghai Technology including $480,000 accrued salary for three senior officers. 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.
During the 4th quarter of 2019, the Company wrote-off $1,841,518 payable to a former subsidiary (was sold in January 2016) due to the time barred of the outstanding balance, and recorded as gain from discontinued entities.
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 December 31, 2019 and 2018, due from (to) Qinghai Mining (representing the net amount of intercompany transactions between Qinghai Technology and Qinghai Mining due to carve out) was $0.55 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 $1.42 million and $1.78 million boron ore from Qinghai Mining during the years ended December 31, 2019 and 2018, respectively.
On July 1, 2019, Qinghai Technology and Qinghai Mining entered a boron ore purchase contract for a term of one year. Qinghai Mining is to supply Qinghai Technology boron ore based on Qinghai Technology’s monthly production plan at a price of RMB 62 ($8.77) per ton. The price is adjustable in the future if there is a significant fluctuation of the market price for the boron ore. In the 4th quarter of 2019, this price was adjusted to RMB 70.46 ($10.21) per ton.
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 years ended December 31, 2019 and 2018 was $34,650 and $36,741, respectively. Due to Zhongtian Resources resulting from using its equipment and payment of worker’s compensation made by Zhongtian Resource for Qinghai Technology was $49,125 and $0.11 million at December 31, 2019 and 2018, respectively.
Qinghai Technology previously purchased raw material from DaChaiDan SanXin Industrial Company Ltd (“SanXin”). The outstanding payable to SanXin at December 31, 2019 and 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 years ended December 31, 2019 and 2018, the Company’s sales to Dingjia was $149,142 and $1.53 million, respectively. At December 31, 2019 and 2018, outstanding receivables from (payable to) Dingjia was $(0.06) 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 December 31, 2019 and 2018, the Company had $573,263 and $255,233 due to another major shareholder of the Company, resulting from certain Company operating expenses of US parent company such as legal and audit fees that were paid by this major shareholder on behalf of the Company. This short term advance bore no interest, and was payable upon demand.
The following table summarized the due from (to) related parties as of December 31, 2019 and 2018, respectively:
|
|
|
|
2019 |
|
|
2018 |
|
||
|
|
Related party name |
|
|
|
|
|
|
|
|
|
Due from (to) |
Dingjia |
|
$ |
(56,144 |
) |
|
$ |
4,058,148 |
|
|
Due from (to) |
Qinghai Mining |
|
|
554,527 |
|
|
|
(3,878,896 |
) |
|
Due to |
Zhongtian Resources |
|
|
(49,125 |
) |
|
|
(106,345 |
) |
|
Due to |
SanXin (debts assumed by Qinghai Mining) |
|
|
- |
|
|
|
(127,883 |
) |
|
Due to |
A major shareholder |
|
|
(573,263 |
) |
|
|
(255,233 |
) |
|
Due from (to), net |
|
$ |
(124,005 |
) |
|
$ |
(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 December 31, 2019 is:
|
Government subsidy amount |
Project completion date |
Useful life in years |
Accumulated amortization |
Net |
|||||||||||||
|
Technology upgrade for using lean ore to produce magnesium sulfate |
$ | 315,358 |
8/1/2013 |
10 | $ | 202,355 | $ | 113,003 | |||||||||
|
Technical transformation for boric acid and magnesium sulfate produced from low grade ore |
71,672 |
5/1/2015 |
10 | 33,447 | 38,225 | ||||||||||||
|
Project of comprehensive utilization of DaChaiDan Solid Boron Mine |
1,433,445 |
1/1/2018 |
10 | 286,689 | 1,146,756 | ||||||||||||
|
Project of high value utilization of magnesium-rich waste liquid |
65,939 |
7/9/2019 |
10 | 3,297 | 62,642 | ||||||||||||
|
Total |
$ | 1,886,414 | $ | 525,788 | $ | 1,360,626 | |||||||||||
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 | |||||||||||
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 years ended December 31, 2019 and 2018, respectively:
|
Years Ended December 31, |
||||||||
|
2019 |
2018 |
|||||||
|
Technology upgrade for using lean ore to produce magnesium sulfate |
$ | 31,892 | $ | 33,245 | ||||
|
Technical transformation for boric acid and magnesium sulfate produced from low grade ore |
7,249 | 7,555 | ||||||
|
Project of production of high purity boric acid from lean ore |
- | 45,335 | ||||||
|
Project of comprehensive utilization of DaChaiDan Solid Boron Mine |
144,959 | 151,117 | ||||||
|
Project of high value utilization of magnesium-rich waste liquid |
226,572 | - | ||||||
|
Total |
$ | 410,672 | $ | 237,252 | ||||
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 issued 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 issued 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.
14. DEFERRED TAX ASSETS
As of December 31, 2019 and 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) |
554,484 | 2,282,517 | ||||||
|
Deferred tax asset – noncurrent (NOL of PRC subsidiaries) |
- | 4,905,775 | ||||||
|
Less: valuation allowance |
(554,484 |
) |
(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 $554,484 at December 31, 2019. Management believes the realization of benefits from these losses remains uncertain due to the parent Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance was provided.
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. For the year ended December 31, 2019, Qinghai Technology filed its own income tax return. However, for the year ended December 31, 2018, Qinghai Technology and Qinghai Mining filed a combined income tax return in PRC, which had $0 income tax due to a 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 $560,818 for the year ended December 31, 2018. Qinghai Technology used the Separate Return Method (“SRM”) under ASC 740-10-30-27 to allocate its income tax expenses. Under the SRM, Qinghai Technology calculated its tax provision as if it were filing its own tax return based on the pre-tax accounts. For the year ended December 31, 2018, Qinghai Technology calculated its income tax expense of $84,123; under the SRM, 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%.
The following is a reconciliation of the difference between the actual provision for income taxes and the (benefit) provision computed by applying the federal statutory rate on income before income taxes for the years ended December 31, 2019 and 2018, respectively:
|
2019 |
2018 |
|||||||
|
Tax at US federal statutory rates |
(11,961 |
) |
117,772 | |||||
|
Foreign income taxed at different rates |
33,908 | 22,433 | ||||||
|
Tax holiday in PRC |
(84,770 |
) |
(56,082 |
) |
||||
|
Valuation allowance |
189,978 | - | ||||||
|
Tax expense per financial statements |
127,155 | 84,123 | ||||||
The income tax expense for the years ended December 31, 2019 and 2018, respectively, consisted of the following:
|
2019 |
2018 |
|||||||
|
Income tax expense – current |
$ | 127,155 | $ | 84,123 | ||||
|
Income tax benefit – deferred |
- | - | ||||||
|
Total income tax benefit, net |
$ | 127,155 | $ | 84,123 | ||||
16. MAJOR CUSTOMERS AND VENDORS
For the year ended December 31, 2019, there were two customers accounted for 16% and 14% of Company’s total sales. Accounts receivable from those major customers was $243,975 and $0 as of December 31, 2019 and 2018, respectively. Four customers accounted for 25%, 18%,14% and 11%, respectively, of the Company’s sales for the year ended December 31, 2018.
The Company purchased its main raw material boron ore from Qinghai Mining during the years ended December 31, 2019 and 2018.The Company purchased its 2nd major raw material sulfuric acid from one major vendor, which accounted for 65% and 99% of the total sulfuric acid purchase during the years ended December 31, 2019 and 2018. Accounts payable to this major vendor was $0 as of December 31, 2019 and 2018.
17. STATUTORY RESERVES AND RESTRICTED NET ASSETS
The Company’s ability to pay dividends primarily depends on the Company receiving funds from its subsidiaries. PRC laws and regulations permit payments of dividends by the Company’s PRC subsidiaries only out of the subsidiary’s retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. The results of operations reflected in the financial statements prepared in accordance with US GAAP differ from those reflected in the statutory financial statements of the Company’s PRC subsidiaries.
In accordance with the PRC Regulations on Enterprises with Foreign Investment and their articles of association, a foreign-invested enterprise (“FIE”) established in the PRC is required to provide certain statutory reserves, which are appropriated from net profit as reported in the FIE’s PRC statutory accounts. An FIE is required to allocate at least 10% of its annual after-tax profit to the surplus reserve until such reserve has reached 50% of its respective registered capital based on the FIE’s PRC statutory accounts. Appropriations to other funds are at the discretion of the BOD for all FIEs. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Additionally, shareholders of an FIE are required to contribute capital to satisfy the registered capital requirement of the FIE. Until such contribution of capital is satisfied, the FIE is not allowed to repatriate profits to its shareholders, unless otherwise approved by the State Administration of Foreign Exchange. Sincerity, incorporated on July 9, 2018 in China as a wholly foreign-owned enterprise (“WFOE”) with registered capital of $1.00 million, has 10 years from the incorporation date to fulfill the registered capital requirement.
Additionally, in accordance with the Company Laws of the PRC, a domestic enterprise is required to provide surplus reserve at least 10% of its annual after-tax profit until such reserve has reached 50% of its respective registered capital based on the enterprise’s PRC statutory accounts. A domestic enterprise is also required to provide discretionary surplus reserve, at the discretion of the BOD, from the profits determined in accordance with the enterprise’s PRC statutory accounts. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. Qinghai Technology was established as domestic enterprises and therefore are subject to the above-mentioned restrictions on distributable profits.
As a result of these PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside prior to payment of dividends as general reserve fund, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company as a dividend.
18. 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.
19. 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.
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 presents the components of discontinued operations reported in the consolidated statements of operations:
|
2019 |
2018 |
|||||||
|
Sales |
$ | - | $ | 19,189 | ||||
|
Cost of sales |
- | 39,223 | ||||||
|
Operating expenses |
217,289 | 238,918 | ||||||
|
(Loss) income before income taxes |
(215,835 | ) | 43,649 | |||||
|
Income tax (benefit) expense |
- | - | ||||||
|
(Loss) income from discontinued operations |
$ | (215,835 | ) | $ | 43,649 | |||
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 |
In addition, during the 4th quarter of 2019, the Company wrote-off $1,841,518 payable to a former subsidiary (was sold in January 2016) due to the time barred of the outstanding balance, and recorded as gain from discontinued entities.
21. SUBSEQUENT EVENTS
The Company follows the guidance in FASB ASC 855-10 for the disclosure of subsequent events. The Company evaluated subsequent events through the date the financial statements were issued and determined the Company has the following material subsequent events:
In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” This contagious disease outbreak, which continues to spread to additional countries, and is disrupting supply chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. Therefore, the Company expects this matter to negatively impact its operating results. However, the related financial impact and duration cannot be reasonably estimated at this time.
On March 27, 2020 (PRC time), Qinghai Technology entered into an Investment Cooperation Agreement, Memorandum of Cooperation and Licensing Agreement with Xi'an Jinzang Membrane Environmental Protection Technology Co., Ltd. (Xi’an Jinzang) to produce up to 20,000 tons of battery grade lithium hydroxide and 10,000 tons of lithium carbonate annually, subject to funding. The parties will form a joint venture company to process brine supplied by Qinghai. Qinghai will own 51% of the joint venture and Xi’ Jinzang will own the remaining 49%. The agreements set forth various funding requirements, licensing arrangements and project milestones by the parties. LBTI expects that a total of $40 million will be required to meet the initial annual production target of 3,000 tons of lithium hydroxide by the second quarter of 2021. The joint venture will require additional funding of approximately $320 million to reach full production capacity. The agreements outline additional responsibilities of the parties to contribute mineral resources and technology to the joint venture as well as arrangements for corporate governance, liability for breaches of the agreements, confidentiality provisions and mutual covenants, representations and warranties.