Overview
The Company currently leases its facilities to produce boric acid inthe Peoples Republic of China ("PRC") and plans to expand its manufacturing facilities through a Joint Venture ("JV") to produce up to 30,000 tonnes of lithium carbonate annually for the electric vehicle battery market inChina , subject to funding. OnDecember 31, 2018 (the "Closing Date"), we entered into a Share Exchange Agreement and Plan of Reorganization, as amendedJanuary 24, 2019 (the "Share Exchange Agreement") withMid-Heaven Sincerity International Resources Investment Co., Ltd (Mid-heaven BVI) and its shareholdersMao Zhang, Jian Zhang , andYing 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") andQinghai Mid-Heaven Sincerity Salt-Lake R&D Co., Ltd ("Salt-Lake ") owns 100% ofQing Hai Mid-Heaven Boron & Lithium Technology Company, Ltd. ("Technology"). OnNovember 4, 2021 , Mr.Jimin Zhang purchased 106,001,971 shares of common stock of the Company at$.001 per share (80,625,099 shares fromMao Zhang , 22,165,012 shares fromJian Zhang , and 3,211,860 shares fromYing Zhao ). After giving effect to the purchases, Mr.Jimin Zhang now holds, directly or indirectly, a total of 152,769,779 shares of Common Stock which represents approximately 82% of the Company's issued and outstanding Common Stock. The main operating entity, Technology was incorporated onDecember 18, 2018 . The business of Technology was carved out of the business ofQinghai Zhongtian Boron & Lithium Mining Co., Ltd ("Qinghai Mining") onDecember 20, 2018 .Qinghai Mining was foundedMarch 6, 2001 , and manufactured and sold boric acid and related compounds for industrial and consumer usage. Technology obtains its brine exclusively from Qinghai Mining and currently leases its facilities to third parties to produce boric acid and related compounds. Technology previously purchased ore from Qinghai Mining; however, Qinghai Mining ceased ore production due to environmental protection restriction from the government. In order to maintain the normal operation of the Company; inJuly 2021 ,Technology Company entered a processing contract to provide boric acid commissioned processing service at processing fee ofRMB 2,000 ($308 ) per ton with borax provided by the customer. OnAugust 31, 2021 , two parties signed the supplement agreement, the final settlement price increased toRMB 2450 ($375 ) per ton due to increased costs. InSeptember 2021 ,Technology Company entered a new agreement with the same customer,Technology Company would no longer provide the processing services and agreed to lease its boric acid manufacturing facility, equipment, auxiliary equipment, necessary utilities, and workers to produce the boric acid. The customer is required to payRMB 400,000 ($63,000 ) per month for facility usage fee to Technology, orRMB 500,000 ($78,700 ) per month if the customer wants to use the Company's low-grade abandoned slag. InApril 2022 , Technology, together with Qinghai Mining entered a new Cooperation Agreement with a contractor (or lessee) for leasing out manufacturing facility, equipment, auxiliary equipment and necessary utilities for a term of five years fromApril 1, 2022 toMarch 31, 2027 , monthly leasing fee ofRMB 500,000 ($78,700 ); of which,RMB 200,000 ($31,500 ) pays to Technology, andRMB 300,000 ($47,200 ) pays to Qinghai Mining. Technology owns the equipment and machinery; Qinghai Mining owns the land and plant and will provide the silicic acid and slag to the contractor at no charge. InDecember 2019 , a novel strain of coronavirus (COVID-19) was reported and theWorld Health Organization declared the outbreak to constitute a "Public Health Emergency of International Concern." This contagious disease outbreak, which continues to spread to additional countries, and disrupts supply chains and affecting production and sales across a range of industries as a result of quarantines, facility closures, and travel and logistics restrictions in connection with the outbreak. The COVID-19 outbreak impacted the Company's operations for the first quarter of 2020. However, as a result of PRC government's effort on disease control, most cities inChina were reopened inApril 2020 , the outbreak inChina is under the control, and the Company's production and sales has been gradually increasing sinceApril 2020 . FromApril 2020 toJanuary 2022 , there were some new COVID-19 cases discovered in a few provinces ofChina , however, the number of new cases is not significant due to the PRC government's strict control. SinceFebruary 2022 , the COVID-19 case bounced again in many cities ofChina including a few new cases inQinghai Province which does not have material impact on the Company's operations. 25
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OnMarch 27, 2020 (PRC time), Technology entered into an Investment Cooperation Agreement, Memorandum of Cooperation and Licensing Agreement with Xi'anJinzang Membrane Environmental Protection Technology Co., Ltd. ("Xi'an Jinzang") to produce up to 30,000 tonnes of battery grade lithium carbonate annually, subject to funding. OnApril 15, 2020 , the parties formed a JV companyQinghai Zhonglixinmo Technology Co., Ltd ("Qinghai Zhongli" or JV) to process brine supplied by Technology. Technology owns 51% of the JV and Xi' Jinzang owns the remaining 49%. The JV cooperation agreement calls for a capital contribution ofRMB 140 million ($19,746,000 ), to be paid in three phases according to the project construction progress:RMB 36 million ($5,077,000 ) to be paid within 10 days from the date of registration and establishment of the JV,RMB 72 million ($10,155,000 ) to be paid beforeJuly 31, 2020 , andRMB 32 million ($4,513,000 ) to be paid beforeOctober 31,2020 . The JV's shareholders are required to contribute capital in accordance with their respective shareholding ratio. The capital contribution amount and timing can be adjusted upon both parties' mutual consent. Each party made an initial capital contribution ofRMB 5 million ($0.71 million ) inApril 2020 . As of the date of this report, the parties have not made all capital contributions on the dates due, pending financing by the Company, as the capital contribution amount and timing can be adjusted anytime upon both parties' mutual consent. During the construction and operation of the project, all parties agree to actively raise construction funds by means of bank loans, self-owned funds, etc. if the funds are not raised in time, the term of paid in capital can be extended accordingly upon agreement of all parties. OnMay 9 , 20222, JV changed its name toQinghai Zhongli Technology Co., Ltd. While we have commenced limited lithium production and had revenue through our JV, we have not established a mechanism where we can withdraw funds from the JV to support our operations. While our JV has commenced limited production, our JV partner, while a minority owner, has substantial influence on the ability of the JV to declare cash dividends. Until we establish a services agreement with the JV or some other agreement where we can receive funds from the operations of the JV, we will not receive funds in order to support our operations. While we expect to make suitable arrangements, there can be no guaranty that such arrangement will provide sufficient amounts of cash to support our operations. Even though our financial statements indicate that we are receiving revenues due to GAAP accounting, we do are not at this time able to use these funds for our operations.
While our JV has produced lithium and we are commencing sales, we have not received final approval to sell our product from the local Chinese authorities.
We are able to sell limited amounts of lithium prior to receiving final authorization by local and provincial authorities because we are producing lithium through the testing process of the JV's manufacturing process. While we believe we will be able to produce lithium commercially upon receipt of final approval and the payment of fees and taxes required to commence production, there can be no assurance that we will receive this approval and commence commercial production of lithium. Going Concern
The accompanying consolidated financial statements ("CFS") were prepared assuming the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the accompanying CFS, the Company had net loss of$0.37 million and net income of$ 0.19 million for the six months endedJune 30, 2022 and 2021, respectively; the Company had net loss of$0.20 million and net income of$0.30 million for the three months endedJune 30, 2022 and 2021, respectively; the Company stopped producing and selling boron acid starting inSeptember 2021 due to decreased mine production resulting from rectifying the mines in the area by the authority for environment protection, which raise substantial doubt about the Company's ability to continue as a going concern. Because the Company ceased obtaining ore for the production of boric acid from its affiliate, the Company leased out the boric acid manufacturing facility, equipment and auxiliary equipment for a monthly fee to provide interim cash flow and maintain revenues from boric acid operations. The Company plans to produce lithium carbonate that can be sold for the electric vehicle battery use and is currently at test production stage. The Company expects to generate additional revenues and cash flow once it receives government approval of the official production process, and the Company will source all material that will be used for both boric acid and lithium carbonate production from Qinghai Mining once the brine processing process receives approval from the relevant governmental authorities, the Company submitted application toEnvironment Protection Department in the beginning of 2022. SinceMay 2022 , the Company began to trial producing lithium phosphate and lithium carbonate products. Management also intends to raise additional funds by way of a private or public offerings, by obtaining loans from banks or form other sources of debt or equity capital. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds on reasonable terms and conditions, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering. 26
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The CFS do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern. Related Party Transactions Due from related parties, net Technology purchased raw material boron rock from Qinghai Mining (owned by three former major shareholders of the Company); in addition, Technology received no-interest short-term advances from Qinghai Mining from time to time for daily operational needs. As ofJune 30, 2022 andDecember 31, 2021 , due fromQinghai Mining was$0 (a 100% bad debt allowance was recorded for due fromQinghai Mining of$4.5 million due to the concern of its ability to repay the debt because it ceased production of boron ore sold to us). Qinghai Technology purchased boron ore at a cost of$0 and$648,840 from Qinghai Mining during the six months endedJune 30, 2022 and 2021, respectively. Qinghai Technology purchased boron ore at a cost of$0 and$387,582 from Qinghai Mining during the three months endedJune 30, 2022 and 2021, respectively. Qinghai Mining was no longer of the Company's related party sinceNovember 2021 as a result of all of the Qinghai Mining's shareholders disposed all of their shares in the Company to Mr.Jimin Zhang (see Note 1). Due to related parties Technology uses equipment that belongs toQinghai Province Dachaidan Zhongtian Resources Development Co., Ltd ("Zhongtian Resources") for production which is owned by our former Chairman and his brotherwho were two major shareholders of the Company in 2021. The depreciation of these fixed assets had an impact on the production costs of boric acid of Technology and was included in the Company's cost of sales. The depreciation of these fixed assets for the six months endedJune 30, 2022 and 2021 was$2,427 and$10,122 , respectively. The depreciation of these fixed assets for the three months endedJune 30, 2022 and 2021 was$0 and$4,536 , respectively. Due to Zhongtian Resources resulting from using its equipment and payment of worker's compensation made by Zhongtian Resource for Technology was$91,459 and$96,274 atJune 30, 2022 andDecember 31, 2021 , respectively; however, Technology, Qinghai Mining and Zhongtian agreed to use the creditor's rights of Technology to Qinghai Mining to offset the debts of Technology to Zhongtian, accordingly, due to Zhongtian Resource was$0 as ofJune 30, 2022 andDecember 31, 2021 . Starting inApril 2022 , technology was no longer bear the depreciation cost due to it leased all the production facility and equipment to a third party processing company under a new Cooperation Agreement that was entered together with Qinghai Mining. Technology sold boric acid toQinghai Dingjia Zhixin Trading Co., Ltd ("Dingjia") which is 90% owned by the son of the Company's major shareholder and Chairman. AtJune 30, 2022 andDecember 31, 2021 , payable to Dingjia was$20,185 and$21,248 , respectively; however, Technology, Qinghai Mining and Dingjia agreed to use the creditor's rights of Technology to Qinghai Mining to offset the debts of Technology to Dingjia, accordingly, due to Dingjia was$0 as ofJune 30, 2022 andDecember 31, 2021 . During the first quarter of 2021, Qinghai Zhongli and Xi'an Jinzang entered three loan contracts for Qinghai Zhongli borrowingRMB 4 million ($596,000 ) with an annual interest of 6.8% from Xi'an Jinzang. The funds were used for the production and operation activities and construction ofAdsorption Station of Qinghai Zhongli. Qinghai Zhongli was to repayRMB 2.5 million ($372,500 ) with accrued interest byJune 30, 2021 and repay the remainingRMB 1.5 million ($223,500 ) with accrued interest byDecember 31, 2021 . A late fee of 1/1000 of outstanding balance per day will be charged if Qinghai Zhongli is not able to repay the loan on time. Qinghai Zhongli did not repay theRMB 4.0 million ($596,000 ) atJune 30, 2022 ; in addition, Qinghai Zhongli borrowed additionalRMB 2 million ($298,000 ) with same terms during the second quarter of 2021 under the oral agreement. Qinghai Zhongli borrowed additionalRMB 2 million ($298,000 ) with the same terms during the third quarter of 2021 under the oral agreement. In January andFebruary 2022 , Qinghai Zhongli entered two borrowing agreements with same lender forRMB 1 million ($149,000 ) with maturity date onJuly 30, 2022 andRMB 2 million ($298,000 ) with maturity date onDecember 31, 2022 , respectively, both loans have 10% annual interest. Qinghai Zhongli only receivedRMB 2 million ($298,000 ) during the first quarter of 2022. Qinghai Zhongli recorded$104,077 and$55,679 capitalized interest on CIP ofAdsorption Station Project as ofJune 30, 2022 andDecember 31, 2021 . In addition, atJune 30, 2022 andDecember 31, 2021 , the Company had$1,510,591 and$1,473,591 due to a major shareholder and Chief Executive Officer of the Company, resulting from certain of the Company's operating expenses such as legal and audit fees that were paid by him on behalf of the Company. This short-term advance bore no interest, and payable upon demand. AtJune 30, 2022 andDecember 31, 2021 , Qinghai Zhongli had$2,813 and$499 due a senior officer of Qinghai Zhongli, resulting from Qinghai Zhongli's expenses paid by him. This short-term advance bore no interest, and was payable upon demand. 27
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The following table summarized the due from (to) related parties as of
Related party name 2022 2021 Qinghai Mining including$1.77 million sale of CIP (Test and Due from Experimental Plant I)$ 5,306,777 $ 5,567,440 Due to Qinghai Mining (1,013,226 ) (1,047,820 ) Less: bad debt allowance (4,293,551 ) (4,519,619 ) Due from, net (current and noncurrent) $ - $ - Xi'an Jinzang (NCI of the JV) Due to with 6.8% interest$ 1,615,184 $ 1,310,444 Due to Senior officer 2,813 499 Due to A major shareholder (CEO) 1,510,591 1,473,591 Due to, total$ 3,128,588 $ 2,758,534
Significant Accounting Policies
While our significant accounting policies are more fully described in Note 2 to our CFS, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis. Basis of Presentation
Our CFS are prepared in accordance with accounting principles generally accepted
in
Principles of Consolidation For the six and three months endedJune 30, 2022 and 2021, the accompanying CFS include the accounts of the Company's US parent, and Mid-heaven BVI and its subsidiaries, Sincerity,Salt-Lake , Technology and Qinghai Zhongli, which are collectively referred to as the "Company." 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. 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$19,221 and$20,233 atJune 30, 2022 andDecember 31, 2021 , respectively. Revenue Recognition The Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation. Revenues from product sales are recognized when the customer obtains control of the Company's product, which occurs 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. The Company also temporarily provided boric acid commissioned processing service with boron material provided by the customer; the Company recognizes revenue when the final products are picked up by the customer at the Company's warehouse, where the control transfers to the customer. 28
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Starting inSeptember 2021 , Technology stopped processing service and leased out its boric acid manufacturing facility, equipment and auxiliary equipment to a customer. The facility leasing revenue is recorded on monthly basis. 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 used 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'sChina subsidiaries is the Chinese Yuan Renminbi ("RMB"). The accounts of theChina subsidiaries were translated into USD in accordance with FASB ASC Topic 830, "Foreign Currency Matters." According to FASB ASC Topic 830, all assets and liabilities were translated at the exchange rate on the balance sheet date; stockholders' equity was translated at the historical rates and statement of operations items were translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with FASB ASC Topic 220, "Comprehensive Income." Noncontrolling Interests The Company follows FASB ASC Topic 810, "Consolidation," governing the accounting for and reporting of noncontrolling interests ("NCIs") in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability, that increases and decreases in the parent's ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to NCI even when such allocation might result in a deficit balance. The net income (loss) attributed to NCIs was separately designated in the accompanying statements of operation and comprehensive income (loss). Losses attributable to NCIs in a subsidiary may exceed an NCIs interests in the subsidiary's equity. The excess attributable to NCIs is attributed to those interests. NCIs shall continue to be attributed their share of losses even if that attribution results in a deficit NCIs balance. OnApril 15, 2020 , Technology and Xi'an Jinzang formed a JV companyQinghai Zhongli to process brine supplied by Technology. Technology owns 51% of the JV and Xi'an Jinzang owns the remaining 49%. During the six months endedJune 30, 2022 and 2021, the Company had loss of$52,543 and$39,920 that were attributable to the NCI. During the three months endedJune 30, 2022 and 2021, the Company had loss of$44,554 and$29,987 that was attributable to the NCI.
Recent Accounting Pronouncements
InJune 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 afterDecember 15, 2022 . Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . The Company is currently evaluating the impact that the standard will have on its CFS. InJanuary 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. As a smaller reporting company, the standard will be effective for the Company for interim and annual reporting periods beginning afterDecember 15, 2022 , with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its CFS. 29
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InAugust 2020 , the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06"), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revises the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer's own stock and classified in stockholders' equity, by removing certain criteria required for equity classification; and (3) revises the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. ForSEC filers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning afterDecember 15, 2021 including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020 . For all other entities, ASU 2020-06 is effective for fiscal years beginning afterDecember 15, 2023 , including interim periods within those fiscal years. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. The Company is currently evaluating the impact that ASU 2020-06 may have on its CFS. Results of Operations
Six Months Ended
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. 2022 % of Sales 2021 % of Sales Boronic acid sales $ - - %$ 4,007,849 100.0 % Plant rental revenue 309,844 100.0 % - - % Total revenue 309,844 100.0 % 4,007,849 100.0 % Boronic acid costs - - % 3,292,926 82.2 % Plant rental costs 349,342 112.7 % - - % Total cost of revenue 349,342 112.7 % 3,292,926 82.2 % Gross profit (loss) (39,498 ) (12.7 )% 714,923 17.8 % Selling expenses - - % 46,057 1.1 % General and administrative expenses 514,659 166.1 % 531,953 13.3 % Total operating expenses 514,659 166.1 % 578,010 14.4 % Income (loss) from operations (554,157 ) (178.9 )% 136,913 3.4 % Other income 116,231 37.5 % 103,132 2.6 % Income (loss) before income taxes (437,926 ) (141.3 )% 240,045 6.0 % Income tax (benefit) expense (17,666 ) (5.7 )% 91,947 2.3 % Income (loss) before noncontrolling interest (420,260 ) (135.6 )% 148,098 3.7 % Less: loss attributable to noncontrolling interest (52,543 ) (17.0 )% (39,920 ) (1.0 )% Net loss to the Company$ (367,717 ) (118.6 )%$ 188,018 4.7 % Revenue Revenue for the six months endedJune 30, 2022 and 2021 was$309,844 and$4,007,849 , respectively, a decrease of$3,698,005 or 92.3% from 2021. Starting in the third quarter 2021, we no longer produce boronic acid but only provide the processing service; starting in the fourth quarter 2021, we stopped ore processing due to increased cost but only leased our facilities to a third partywho imports boron ore and process it for sale by themselves. InApril 2022 , Technology, together with Qinghai Mining entered a new Cooperation Agreement with a contractor (or lessee) for leasing out manufacturing facility, equipment, auxiliary equipment and necessary utilities for a term of five years fromApril 1, 2022 toMarch 31, 2027 , monthly leasing fee ofRMB 500,000 ($78,700 ); of which,RMB 200,000 ($31,500 ) pays to Technology, andRMB 300,000 ($47,200 ) pays to Qinghai Mining. Technology owns the equipment and machinery; Qinghai Mining owns the land and plant and will provide the silicic acid and slag to the contractor at no additional charge. 30
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Table of Contents Cost of revenue Cost of revenue ("COR") for the six months endedJune 30, 2022 and 2021 was$349,342 and$3,292,926 , respectively, a decrease of$2,943,584 or 89.4% from 2021. The decrease was mainly due to decreased sales and production. The overall COR as a percentage of revenue was 112.7% for the six months endedJune 30, 2022 compared with 82.2% for 2021. Gross profit (loss) Gross loss for the six months endedJune 30, 2022 was$39,498 compared to gross profit of$714,923 for the six months endedJune 30, 2021 , respectively, a decrease of gross profit of$754,421 or 105.5%. The blended loss margin was 12.7 % for the six months endedJune 30, 2022 compared to profit margin of 17.8% for the six months endedJune 30, 2021 . Operating expenses Selling expenses consist mainly of salespersons' salaries and freight out. Selling expense was$0 for the six months endedJune 30, 2022 , compared to$46,057 for the six months endedJune 30, 2021 , a decrease of$46,057 or 100.0%, mainly due to no boronic acid sales incurred during the six months endedJune 30, 2022 . General and administrative expenses consist mainly of salary, R&D, office, welfare, business meeting, maintenance, bad debt expense and utilities. General and administrative expenses were$514,659 for the six months endedJune 30, 2022 , compared to$531,953 for the six months endedJune 30, 2021 , a decrease of$17,294 or 3.3%, mainly resulting from decreased business entertainment expense by$64,724 and decreased maintenance expense by$5,332 , which was partly offset by increased workshop shut-down cost by$53,100 .
R&D costs for the six months ended
Other income Other income was$116,231 for the six months endedJune 30, 2022 , compared to$103,132 for the six months endedJune 30, 2021 , an increase of$13,099 or 12.7%. For the six months endedJune 30, 2022 , other income mainly consisted of subsidy income of$101,488 , interest income of$1,499 and other income of$13,565 offset with financial expense of$321 . For the six months endedJune 30, 2021 , other income mainly consisted of subsidy income of$101,672 , interest income$1,176 and other income of$675 , but offset with financial expense of$391 . 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. Net income (loss) We had net loss of$367,717 for the six months endedJune 30, 2022 , compared to net income of$188,018 for the six months endedJune 30, 2021 , an increase in net loss by$555,735 or 295.6%. The increase in our net loss mainly resulted from decreased gross profit which was partly offset by decreased operating expense and increased other income as described above. 31
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Three Months Ended
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. 2022 % of Sales 2021 % of Sales Boronic acid sales $ - - %$ 2,179,469 100.0 % Plant rental revenue 309,844 100.0 % - - % Total revenue 309,844 100.0 % 2,179,469 100.0 % Boronic acid costs - - % 1,596,808 73.3 % Plant rental costs 349,342 112.7 % - - % Total cost of revenue 349,342 112.7 % 1,596,808 73.3 % Gross profit (39,498 ) (12.7 )% 582,661 26.7 % Selling expenses - - % 23,002 1.1 % General and administrative expenses 206,011 66.5 % 257,582 11.8 % Total operating expenses 206,011 66.5 % 280,584 12.9 % Income (loss) from operations (245,509 ) (79.2 )% 302,077 13.9 % Other income 63,595 20.5 % 52,167 2.4 % Income (loss) before income taxes (181,914 ) (58.7 )% 354,244 16.3 % Income tax (benefit) expense (17,666 ) (5.7 )% 80,489 3.7 % Income (loss) before noncontrolling interest (164,248 ) (53.0 )% 273,755 12.6 % Less: loss attributable to noncontrolling interest (44,554 ) (14.4 )% (29,987 ) (1.3 )% Net loss to the Company$ (119,694 ) (38.6 )%$ 303,742 13.9 % Revenue Revenue for the three months endedJune 30, 2022 and 2021 was$309,844 and$2,179,469 , respectively, a decrease of$1,869,625 or 85.8% from 2021. Starting in the third quarter 2021, we no longer produce boron acid but only provide the processing service; starting in the fourth quarter 2021, we stopped ore processing due to increased cost but only lease our facilities to a third party which imports boron ore and process it for sale by themselves. InApril 2022 , Technology, together with Qinghai Mining entered a new Cooperation Agreement with a contractor (or lessee) for leasing out manufacturing facility, equipment, auxiliary equipment and necessary utilities for a term of five years fromApril 1, 2022 toMarch 31, 2027 , with a monthly leasing fee ofRMB 500,000 ($78,700 ); of which,RMB 200,000 ($31,500 ) pays to Technology, andRMB 300,000 ($47,200 ) pays to Qinghai Mining. Technology owns the equipment and machinery;Qinghai Mining owns the land and plant and will provide the silicic acid and slag to the contractor at no additional charge. Cost of revenue Cost of revenue ("COR") for the three months endedJune 30, 2022 and 2021 was$349,342 and$1,596,808 , respectively, a decrease of$1,247,466 or 78.1% from 2021. The decrease was mainly due to decreased sales and production. The overall COR as a percentage of revenue was 112.7% for the three months endedJune 30, 2022 compared with 73.3% for 2021. The cost for processing revenue as a percentage of revenue was 95.1% in 2022, the cost for plant rental revenue as a percentage of revenue was 148.2% in 2022, and the cost for material sale revenue as a percentage of revenue was 101.3% in 2022. Gross profit (loss) Gross loss for the three months endedJune 30, 2022 was$39,498 compared to gross profit of$582,661 for the three months endedJune 30, 2021 , a decrease of gross profit of$622,519 or 106.8%. The blended loss margin was 12.7% for the three months endedJune 30, 2022 compared to profit margin of 26.7% for the three months endedJune 30, 2021 . 32
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Table of Contents Operating expenses Selling expenses consist mainly of salespersons' salaries and freight out. Selling expense were$0 for the three months endedJune 30, 2022 , compared to$23,002 for the three months endedJune 30, 2021 , a decrease of$23,002 or 100.0%, mainly due to no boronic acid sales incurred during the three months endedJune 30, 2022 . General and administrative expenses consist mainly of salary, R&D, office, welfare, business meeting, maintenance, bad debt expense and utilities. General and administrative expenses were$206,011 for the three months endedJune 30, 2022 , compared to$257,582 for the three months endedJune 30, 2021 , a decrease of$51,571 or 20.0%, mainly resulting from decreased business entertainment expense by$59,620 , which was partly offset by increased welfare expense by$9,173 .
R&D costs for the three months ended
Other income Other income was$63,595 for the three months endedJune 30, 2022 , compared to$52,167 for the three months endedJune 30, 2021 , an increase of$11,428 or 21.9% from 2021. For the three months endedJune 30, 2022 , other income mainly consisted of subsidy income of$49,680 , interest income of$625 and other income of$13,565 , but offset with financial expense of$275 . For the three months endedJune 30, 2021 , other income mainly consisted of subsidy income of$50,935 , interest income of$699 and other income of$735 , offset by financial expense of$202 . 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. Net income (loss) We had net loss of$119,694 for the three months endedJune 30, 2022 , compared to net income of$303,742 for the three months endedJune 30, 2021 , an increase in net loss by$423,436 or 139.4% from 2021. The increase in our net loss mainly resulted from decreased gross profit which was partly offset by decreased operating expense and increased other income as described above.
Liquidity and Capital Resources
As ofJune 30, 2022 , we had cash and equivalents of$634,901 . Working capital deficit was$4,192,464 atJune 30, 2022 . The ratio of current assets to current liabilities was 0.25:1 atJune 30, 2022 .
The following is a summary of cash provided by or used in each of the indicated
types of activities during six months ended
2022 2021 Cash provided by (used in): Operating activities$ (496,212 ) $ 1,741,547 Investing activities (502,107 ) (1,347,055 ) Financing activities 422,723 906,989 Net cash used in operating activities was$496,212 for the six months endedJune 30, 2022 , compared to net cash provided by operating activities of$1,741,547 for the six months endedJune 30, 2021 . The increase of$2,237,759 cash outflow from operating activities for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 was principally attributable to increased cash outflow from inventory by$1,132,777 , increased cash outflow from taxes payable by$111,084 , decreased cash inflow from unearned revenue by$575,912 , decreased cash inflow from advances to suppliers by$170,667 , decreased cash inflow from accounts receivable by$239,472 and decreased net income by$568,358 , which was partly offset by decreased cash outflow from accounts payable by$179,234 , and increased cash inflow on accrued liability and other payables by$354,222 . Net cash used in investing activities was$502,107 for the six months endedJune 30, 2022 , compared to$1,347,055 for the six months endedJune 30, 2021 . Net cash used in investing activities in 2022 mainly consisted of purchase of property and equipment of$502,107 . Net cash used in investing activities in 2021 mainly consisted of purchase of property and equipment of$146,967 , purchase of intangible asset of$54,413 , and$1,145,675 payment for constructing the absorption station. 33
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Net cash provided by financing activities was$422,723 for the six months endedJune 30, 2022 , compared to$906,989 for the six months endedJune 30, 2021 . The net cash provided by financing activities in 2022 consisted of amount due to other related parties of$422,723 , include loans from Xi'an Jinzang described below. The net cash provided by financing activities in 2021 consisted of amount due to other related parties of$1,175,728 include loans from Xi'an Jinzang described below, but partly offset by increase in due from Qinghai Mining of$268,739 . During the first quarter of 2021, Qinghai Zhongli and Xi'an Jinzang entered three loan contracts for Qinghai Zhongli borrowingRMB 4 million ($596,000 ) with an annual interest of 6.8% from Xi'an Jinzang. The fund was used for the production and operation activities and construction ofAdsorption Station Project of Qinghai Zhongli. Qinghai Zhongli was to repayRMB 2.5 million ($372,500 ) with accrued interest byJune 30, 2021 and repay the remainingRMB 1.5 million ($223,500 ) with accrued interest byDecember 31, 2021 . A late fee of 1/1000 of outstanding balance per day will be charged if Qinghai Zhongli is not able to repay the loan on time. Qinghai Zhongli did not repay theRMB 4.0 million ($596,000 ) atJune 30, 2022 ; in addition, Qinghai Zhongli borrowed additionalRMB 2 million ($298,000 ) with the same terms during the second quarter of 2021 under the oral agreement. Qinghai Zhongli borrowed additionalRMB 2 million ($298,000 ) with the same terms during the third quarter of 2021 under the oral agreement. Qinghai Zhongli borrowed additionalRMB 3 million ($472,575 ) with the same terms during the first quarter of 2022 under the oral agreement, but Qinghai Zhongli only receivedRMB 2 million ($298,000 ).Qinghai Zhongli recorded$104,077 and$55,679 capitalized interest on CIP of Adsorption Station as ofJune 30, 2022 andDecember 31, 2021 . Dividend Distribution We are a US holding company that conducts substantially all of our business through our wholly owned and other consolidated operating entities inChina . We rely in part on dividends paid by our subsidiaries inChina 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 inChina 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 inChina . 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. Appropriation to such reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year. The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory reserve. 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. 34
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