Smart Powerr Corp.: Form 10-Q for the period ended Jun 30, 2025

This Report and other reports filed by the Company from time to time with the SEC (collectively the “filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by the Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “may”, “will”, “should”, “would”, “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the statements in the section “results of operations” below), and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes the expectations reflected in the forward-looking statements are based on reasonable assumptions, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Report, which attempts to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

Our financial statements are prepared in US Dollars and in accordance with accounting principles generally accepted in the United States. See “Foreign Currency Translation and Comprehensive Income (Loss)” below for information concerning the exchange rates at which Renminbi (“RMB”) were translated into US Dollars (“USD”) at various pertinent dates and for pertinent periods.

Overview

RESULTS OF OPERATIONS

Comparison of Operating Results for the years ended June 30, 2025 and 2024

The following table sets forth our operating results for the designated periods, expressed as a percentage of net sales.

SALES.

Total sales for the six months ended June 30, 2025, amounted to $82,839. The company signed an Operation and Maintenance Contract for a power station. The contract has total amount RMB1.8 million (US$0.2 million), starting from March 1, 2025 to February 28, 2035 for 10 years with a third party. The Company recognized the revenue based on the time period.

COST OF SALES.

Cost of sales (“COS”) for the six months ended June 30, 2025, was $47,418.

GROSS PROFIT.

For the six months ended June 30, 2025, the gross margin was 43%.

OPERATING EXPENSES.

Operating expenses consisted of general and administrative expenses (“G&A”) totaling $2,223,109 for the six months ended June 30, 2025, compared to $559,237 for the six months ended June 30, 2024. This represented an increase of $1,663,876 or 298% year-over-year. The increase was mainly attributable to an increase in financing costs of $948,648 and share-based compensation of $831,520.

NET NON-OPERATING INCOME (EXPENSES).

Net non-operating expenses consisted of gain or loss from note conversion, interest income, interest expenses, and other miscellaneous expenses. For the six months ended June 30, 2025, net non-operating income were $93,159 compared to non-operating expenses of $116,141 for the six months ended June 30, 2024. The primary reason was the provision of financial support to other companies, which generated interest income of $98,999, coupled with the reversal of a $200,000 provision for impaired prepayments, offsetting by the interest expenses of $251,414.

INCOME TAX EXPENSE.

Income tax expense was $34,747 for the six months ended June 30, 2025, compared with income tax expense of $14,176 for the six months ended June 30, 2024. The consolidated effective income tax rate for the three months ended June 30, 2025, and 2024 were 0% and 1.6%, respectively. In 2025, Management concluded that the realizability of related tax benefits from these losses was uncertain due to the continuing operating losses at the US parent company. Accordingly, a 100% valuation allowance was provided against the deferred tax asset.

NET LOSS.

Net loss for the six months ended June 30, 2025, was $2,129,276 compared to loss of $689,554 for the six months ended June 30, 2024, representing an increase in net loss of $1,439,722. The increase in net loss was mainly driven by rising operating expenses and the reversal of impairment provision, as previously discussed.

LIQUIDITY AND CAPITAL RESOURCES

Comparison of six months ended June 30, 2025, and 2024

As of June 30, 2025, the Company maintained cash and equivalents of $131.11 million, other current assets (excluding cash and equivalents) of $0.23 million, current liabilities of $12.74 million, and working capital of $118.6 million, with a current ratio of 10.31:1 and a debt-to-equity ratio of 0.12:1.

The following is a summary of cash flows provided by or used in each of the indicated types of activities, for the six- months periods ended June 30, 2025, and 2024:

Net cash generated from operating activities was $64.63 million for the six months ended June 30, 2025, compared to $0.18 million for the six months ended June 30, 2024. The increase in net cash inflow for the six months ended June 30, 2025, was mainly driven by the recovery of $65.6 million in advance payments to suppliers, which generated cash inflows.

Net cash provided by investing activities was $55.20 million and $68.56 million respectively for the six months ended June 30, 2025, and 2024. For the six months ended June 30, 2025, repayments of short-term loans decreased by $13.36 million. As of June 30, 2025, the Company had recovered a short-term loan of $55,660,131 (RMB406.3 million) from Xi’an Yingtai Energy Conservation Technology Co., Ltd (“Xi’an Yingtai”), an unrelated party of the Company.

Net cash provided by financing activities was $9.87 million during the six months ended June 30, 2025, primarily attributable to proceeds from equity issuance.

We believe that inflation did not have or is not expected to have a significant adverse impact on our operating results in 2025.

Going Concern

The Company’s financial statements are prepared assuming that the Company will continue as a going concern.

The Company incurred an operating loss of $2.19 million, and reported net loss of $2.13 million for six months ended June 30, 2025. As the Company implements its future business plan, it may continue to incur operating losses and generate negative operating cash flows. In 2025, the Company collected back $65.6 million advance to supplier and had positive operating cash flow during the six months ended June 30, 2025. At the end of June 30, 2025, the Company had accumulated deficit balance of $64.19 million and cash balance of $131.1 million. The Company has collected back RMB405.8 million in accounts receivable and recovered RMB476 million in supplier advances and raised capital through of common stock issuance during the first quarter of 2025.

The Company’s ability to continue as a going concern is dependent upon the successful execution of its business strategy to eventually achieve profitable operations. The accompanying financial statements do not include any adjustments that would be necessary if the Company is unable to continue as a going concern.

Transfers of Cash to and from Our Subsidiaries

The PRC maintains currency controls and capital transfer regulations that require us to comply with certain requirements on capital movement of. The Company may transfer USD cash to its PRC subsidiaries through following channels: (i) an equity investment (by increasing the Company’s registered capital in a PRC subsidiary), or (ii) a stockholder loan. The Company’s PRC subsidiaries have not transferred any earnings or cash to the Company to date. The Company’s business is primarily conducted through its subsidiaries. The Company functions as a holding entity and its material assets consist solely of the equity interests in its PRC-based subsidiaries. The Company relies on dividends distribution from its subsidiaries to meet its working capital and cash needs, including the funds necessary: (i) to pay dividends or cash distributions to its stockholders, (ii) to service any debt obligations and (iii) to pay operating expenses. Under applicable PRC laws and regulations (noted below), the Company’s PRC subsidiaries are legally required to allocate 10% of annual after-tax income into general reserve fund, prior to payment of dividends. These requirements, combined with other regulatory constraints, materially limit the subsidiaries’ ability to distribute a portion of net assets as dividends to the parent company.

With respect to transferring cash from the Company to its subsidiaries, to increase the Company’s registered capital in a PRC subsidiary, requires submission of the filing to local commerce department, while a stockholder loan requires a filing with the state administration of foreign exchange or its local bureau.

With respect to dividends distribution, we note the following:

1. PRC regulations currently only permit the payment of dividends out of accumulated profits, as determined in accordance with accounting standards and PRC regulations (an in-depth description of the PRC regulations is set forth below);

2. Under Chinese Accounting Standards (CAS) and the PRC Company Law, our PRC subsidiaries are required to allocate, at least 10% of their annual after-tax net income, to statutory surplus reserves until the cumulative reserve balance reaches 50% of their registered capital;

3. Such reserves may not be distributed as cash dividends;

4. Our PRC subsidiaries may also allocate a portion of their after-tax profits to their staff welfare funds and bonus funds; except in the event of a liquidation, these funds can not be distributed to stockholders; the Company does not participate in a Joint Welfare Fund;

5. The incurrence of debt, particularly the instruments governing such debt, may restrict a subsidiary’s ability to pay dividends to stockholders or make other cash distributions; and

6. The Company is subject to covenants and consent requirements.

If, due to the aforementioned reasons, our subsidiaries are unable to pay dividends and/or make other cash payments to the Company when needed, the Company’s ability to conduct operations, make investments, engage in acquisitions, or undertake other working capital-dependent initiatives, may be materially and adversely affected. However, our operations and business, including investment and/or acquisitions by our subsidiaries in China, will not be affected as long as the capital flows remain within PRC.

PRC Regulations

In accordance with 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 statutory reserves, which are appropriated from net profit, as reported in the FIE’s PRC statutory financial accounts. A FIE is required to allocate at least 10% of its annual after-tax profit to the surplus reserve until such reserve balance reaches 50% of its respective registered capital (based on the FIE’s PRC statutory accounts). The aforementioned reserves may only be used for specific purposes and may not be distributed as cash dividends. Until such contribution of capital is satisfied, the FIE is not allowed to repatriate profits to its stockholders, unless approved by the State Administration of Foreign Exchange. Once this requirement is satisfied, the remaining funds may be appropriated at the discretion of the FIE’s board of directors. Our subsidiary, Shanghai TCH, qualifies as a FIE and is therefore subject to the aforementioned regulations on distributable profits.

Additionally, in accordance with PRC corporate law, a domestic enterprise is required to maintain a surplus reserve of 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. The aforementioned reserves can only be used for specific purposes and may not be distributed as cash dividends. Xi’an TCH, Huahong, Zhonghong and Erdos TCH were established as domestic enterprises; therefore, each is subject to the above-mentioned restrictions on distributable profits.

As a result of PRC laws and regulations that require annual appropriations of 10% of after-tax income to be set aside, prior to payment of dividends, in a 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 or otherwise.

Chart of the Company’s Statutory Reserve

Pursuant to PRC corporate law, effective January 1, 2006, the Company is required to appropriate a statutory reserve from its after-tax profit before declaring or paying dividends. The statutory reserve is restricted retained earnings. Our restricted and unrestricted retained earnings under US GAAP are classified as below:

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. 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 CFS. 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.

CONTRACTUAL OBLIGATIONS

The Company’s contractual obligations as of June 30, 2025, are as follows:

The Company believes it has sufficient cash as of June 30, 2025, and a sufficient channel to obtain any loans that may be necessary to meet its working capital needs from commercial institutions. Historically, we have been able to obtain loans or otherwise achieve our financing objectives due to the Chinese government’s support for energy-saving businesses with stable cash inflows, good credit ratings and history. In November 2024, we paid the Entrusted loan principal of $10,548,957 (RMB77 million), with interest still outstanding.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.

Exchange Rate Risk

Our operations are conducted mainly in the PRC. As such, our earnings are subject to movements in foreign currency exchange rates when transactions are denominated in RMB, which is our functional currency. Accordingly, our operating results are affected by changes in the exchange rate between the U.S. dollar and those currencies.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer (together, the “Certifying Officers”), to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Certifying Officers, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. The Company maintains disclosure controls and procedures which are designed to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports 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 its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) at the end of the period covered by this Report. Based upon that evaluation, our CEO and CFO concluded that, as of June 30, 2025, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

With the participation of the Company’s management, including its CEO and CFO, the Company also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended as of June 30, 2025, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on such evaluation, management concluded that, as of the end of the period covered by this Report, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this Report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

We are a smaller reporting company and accordingly we are not required to provide information required by this Item. Moreover, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K as of and for the year ended December 31, 2024. An investment in our common stock involves various risks. When considering an investment in our company, you should consider carefully all of the risk factors described in our most recent Form 10-K and the registration statement as referenced above. If any of those risks, incorporated by reference in this Form 10-Q, occur, the market price of our shares of common stock could decline and investors could lose all or part of their investment. These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial. All of these could adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in our company.