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
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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:
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 )
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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.
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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.
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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.
2019 % of Sales 2018 % of Sales
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 %
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.
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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.
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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 ) $ 2,377,523Net 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.
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