Overview





The Company currently leases its facilities to produce boric acid in the 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 in China, subject to
funding.



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. ("Technology"). On
November 4, 2021, Mr. Jimin Zhang purchased 106,001,971 shares of common stock
of the Company at $.001 per share (80,625,099 shares from Mao Zhang, 22,165,012
shares from Jian Zhang, and 3,211,860 shares from Ying 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 on December 18, 2018. The
business of 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 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; in July 2021, Technology Company
entered a processing contract to provide boric acid commissioned processing
service at processing fee of RMB 2,000 ($308) per ton with borax provided by the
customer. On August 31, 2021, two parties signed the supplement agreement, the
final settlement price increased to RMB 2450 ($375) per ton due to increased
costs. In September 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 pay RMB 400,000 ($63,000) per month for facility
usage fee to Technology, or RMB 500,000 ($78,700) per month if the customer
wants to use the Company's low-grade abandoned slag. In April 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 from April
1, 2022 to March 31, 2027, monthly leasing fee of RMB 500,000 ($78,700); of
which, RMB 200,000 ($31,500) pays to Technology, and RMB 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.



In December 2019, a novel strain of coronavirus (COVID-19) was reported and the
World 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 in China were reopened in
April 2020, the outbreak in China is under the control, and the Company's
production and sales has been gradually increasing since April 2020. From April
2020 to January 2022, there were some new COVID-19 cases discovered in a few
provinces of China, however, the number of new cases is not significant due to
the PRC government's strict control. Since February 2022, the COVID-19 case
bounced again in many cities of China including a few new cases in Qinghai
Province which does not have material impact on the Company's operations.



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On March 27, 2020 (PRC time), Technology entered into an Investment Cooperation
Agreement, Memorandum of Cooperation and Licensing Agreement with Xi'an Jinzang
Membrane Environmental Protection Technology Co., Ltd. ("Xi'an Jinzang") to
produce up to 30,000 tonnes of battery grade lithium carbonate annually, subject
to funding. On April 15, 2020, the parties formed a JV company Qinghai
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 of
RMB 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 before July 31, 2020, and RMB 32 million ($4,513,000)
to be paid before October 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 of RMB 5 million ($0.71
million) in April 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. On May 9,
20222, JV changed its name to Qinghai 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 ended June 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 ended June 30, 2022 and 2021, respectively;
the Company stopped producing and selling boron acid starting in September 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 to Environment Protection
Department in the beginning of 2022. Since May 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.



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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 of June 30, 2022 and December 31, 2021, due from Qinghai
Mining was $0 (a 100% bad debt allowance was recorded for due from Qinghai
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 ended June 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 ended June 30, 2022 and 2021, respectively. Qinghai Mining was no
longer of the Company's related party since November 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 to Qinghai Province Dachaidan Zhongtian
Resources Development Co., Ltd ("Zhongtian Resources") for production which is
owned by our former Chairman and his brother who 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 ended
June 30, 2022 and 2021 was $2,427 and $10,122, respectively. The depreciation of
these fixed assets for the three months ended June 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 at June 30, 2022 and December 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 of
June 30, 2022 and December 31, 2021. Starting in April 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 to Qinghai Dingjia Zhixin Trading Co., Ltd
("Dingjia") which is 90% owned by the son of the Company's major shareholder and
Chairman. At June 30, 2022 and December 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 of
June 30, 2022 and December 31, 2021.



During the first quarter of 2021, Qinghai Zhongli and Xi'an Jinzang entered
three loan contracts for Qinghai Zhongli borrowing RMB 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 of Adsorption Station of
Qinghai Zhongli. Qinghai Zhongli was to repay RMB 2.5 million ($372,500) with
accrued interest by June 30, 2021 and repay the remaining RMB 1.5 million
($223,500) with accrued interest by December 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 the RMB 4.0 million
($596,000) at June 30, 2022; in addition, Qinghai Zhongli borrowed additional
RMB 2 million ($298,000) with same terms during the second quarter of 2021 under
the oral agreement. Qinghai Zhongli borrowed additional RMB 2 million ($298,000)
with the same terms during the third quarter of 2021 under the oral agreement.
In January and February 2022, Qinghai Zhongli entered two borrowing agreements
with same lender for RMB 1 million ($149,000) with maturity date on July 30,
2022 and RMB 2 million ($298,000) with maturity date on December 31, 2022,
respectively, both loans have 10% annual interest. Qinghai Zhongli only received
RMB 2 million ($298,000) during the first quarter of 2022. Qinghai Zhongli
recorded $104,077 and $55,679 capitalized interest on CIP of Adsorption Station
Project as of June 30, 2022 and December 31, 2021.



In addition, at June 30, 2022 and December 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.



At June 30, 2022 and December 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.



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The following table summarized the due from (to) related parties as of June 30, 2022 and December 31, 2021, respectively:





                         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 the United States of America, or US GAAP.





Principles of Consolidation



For the six and three months ended June 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 at June 30, 2022
and December 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.



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Starting in September 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'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."



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.



On April 15, 2020, Technology and Xi'an Jinzang formed a JV company Qinghai
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 ended June 30,
2022 and 2021, the Company had loss of $52,543 and $39,920 that were
attributable to the NCI. During the three months ended June 30, 2022 and 2021,
the Company had loss of $44,554 and $29,987 that was attributable to the NCI.

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. As a smaller reporting
company, the standard will be effective for the Company for interim and annual
reporting periods beginning after December 15, 2022, with early adoption
permitted. The Company is currently evaluating the impact of adopting this
standard on its CFS.



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In August 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. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is
effective for fiscal years beginning after December 15, 2021 including interim
periods within those fiscal years. Early adoption is permitted, but no earlier
than fiscal years beginning after December 15, 2020. For all other entities, ASU
2020-06 is effective for fiscal years beginning after December 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 June 30, 2022 Compared to Six Months Ended June 30, 2021





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 ended June 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 party
who imports boron ore and process it for sale by themselves. In April 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 from April
1, 2022 to March 31, 2027, monthly leasing fee of RMB 500,000 ($78,700); of
which, RMB 200,000 ($31,500) pays to Technology, and RMB 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.



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Cost of revenue



Cost of revenue ("COR") for the six months ended June 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 ended June 30, 2022
compared with 82.2% for 2021.



Gross profit (loss)



Gross loss for the six months ended June 30, 2022 was $39,498 compared to gross
profit of $714,923 for the six months ended June 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 ended June 30, 2022 compared to profit margin of 17.8% for
the six months ended June 30, 2021.



Operating expenses



Selling expenses consist mainly of salespersons' salaries and freight out.
Selling expense was $0 for the six months ended June 30, 2022, compared to
$46,057 for the six months ended June 30, 2021, a decrease of $46,057 or 100.0%,
mainly due to no boronic acid sales incurred during the six months ended June
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 ended June 30,
2022, compared to $531,953 for the six months ended June 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 June 30, 2022 and 2021 were $28,127 and $25,276, respectively.





Other income



Other income was $116,231 for the six months ended June 30, 2022, compared to
$103,132 for the six months ended June 30, 2021, an increase of $13,099 or
12.7%. For the six months ended June 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 ended June 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 ended June 30, 2022, compared to
net income of $188,018 for the six months ended June 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.



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Results of Operations

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021





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 ended June 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. In April 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 from April
1, 2022 to March 31, 2027, with a monthly leasing fee of RMB 500,000 ($78,700);
of which, RMB 200,000 ($31,500) pays to Technology, and RMB 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 ended June 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 ended June 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 ended June 30, 2022 was $39,498 compared to
gross profit of $582,661 for the three months ended June 30, 2021, a decrease of
gross profit of $622,519 or 106.8%. The blended loss margin was 12.7% for the
three months ended June 30, 2022 compared to profit margin of 26.7% for the
three months ended June 30, 2021.



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Operating expenses



Selling expenses consist mainly of salespersons' salaries and freight out.
Selling expense were $0 for the three months ended June 30, 2022, compared to
$23,002 for the three months ended June 30, 2021, a decrease of $23,002 or
100.0%, mainly due to no boronic acid sales incurred during the three months
ended June 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 ended June 30,
2022, compared to $257,582 for the three months ended June 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 June 30, 2022 and 2021 were $23,496 and $25,276, respectively.





Other income



Other income was $63,595 for the three months ended June 30, 2022, compared to
$52,167 for the three months ended June 30, 2021, an increase of $11,428 or
21.9% from 2021. For the three months ended June 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
ended June 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 ended June 30, 2022, compared
to net income of $303,742 for the three months ended June 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 of June 30, 2022, we had cash and equivalents of $634,901. Working capital
deficit was $4,192,464 at June 30, 2022. The ratio of current assets to current
liabilities was 0.25:1 at June 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 June 30, 2022 and 2021:





                                 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 ended June
30, 2022, compared to net cash provided by operating activities of $1,741,547
for the six months ended June 30, 2021. The increase of $2,237,759 cash outflow
from operating activities for the six months ended June 30, 2022 compared to the
six months ended June 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 ended June
30, 2022, compared to $1,347,055 for the six months ended June 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.



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Net cash provided by financing activities was $422,723 for the six months ended
June 30, 2022, compared to $906,989 for the six months ended June 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 borrowing RMB 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 of Adsorption Station
Project of Qinghai Zhongli. Qinghai Zhongli was to repay RMB 2.5 million
($372,500) with accrued interest by June 30, 2021 and repay the remaining RMB
1.5 million ($223,500) with accrued interest by December 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 the RMB 4.0
million ($596,000) at June 30, 2022; in addition, Qinghai Zhongli borrowed
additional RMB 2 million ($298,000) with the same terms during the second
quarter of 2021 under the oral agreement. Qinghai Zhongli borrowed additional
RMB 2 million ($298,000) with the same terms during the third quarter of 2021
under the oral agreement. Qinghai Zhongli borrowed additional RMB 3 million
($472,575) with the same terms during the first quarter of 2022 under the oral
agreement, but Qinghai Zhongli only received RMB 2 million ($298,000). Qinghai
Zhongli recorded $104,077 and $55,679 capitalized interest on CIP of Adsorption
Station as of June 30, 2022 and December 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 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.
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.





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