Overview

The Company currently produces 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 a total of 106,001,971 shares of
common stock of the Company at a purchase price of $.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 manufactures and wholesales boric acid and
related compounds for industrial and consumer usage. Technology obtains its
brine exclusively from Qinghai Mining and currently processes boric acid by
crushing and processing ore from third party suppliers. Technology previously
purchased ore from Qinghai Mining; however, Technology recently shifted
suppliers to third parties in order to fulfill what management believes will be
a short term reliance on ore for the production of boric acid. Management of
Technology expects that it will source all material and compounds 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 expected to receive the approval in the
end of 2021.



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.  Since
April 2020 and to date, there were some new COVID-19 cases discovered in a few
provinces of China, and we do not believe the number of new cases is significant
to our operations due to PRC government's strict control but have noted its
impact where applicable in this report.



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.



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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. In September 2021, Technology Company
entered a new agreement with the same customer, the Company provided boric acid
manufacturing facility, equipment, auxiliary equipment, necessary utilities, and
workers to the customer for them to produce the boric acid by themselves. The
customer was required to pay RMB 400,000 ($61,680) per month for facility usage
fee to the Company, or RMB 500,000 ($77,090) per month if the customer wants to
use the Company's low-grade abandoned slag.



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 $3.17 million
and $0.28 million for the nine months ended September 30, 2021 and 2020,
respectively; the Company had net loss of $3.35 million and $88,035 for the
three months ended September 30, 2021 and 2020, respectively; the Company
stopped produce and selling boron acid starting from 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 in order 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 which is expected  by late fourth quarter 2021 or
early first quarter 2022. 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.



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 September 30, 2021 and December 31, 2020, due from
Qinghai Mining was $0 (a 100% bad debt allowance was recorded for due from
Qinghai Mining due to the concern of its ability to repay the debt because it
ceased production of boron ore sold to us) and $3.11 million, respectively (the
net amount of intercompany transactions between Technology and Qinghai Mining).
Qinghai Technology purchased boron ore at a cost of $725,052 and $1,188,802 from
Qinghai Mining during the nine months ended September 30, 2021 and 2020,
respectively. Qinghai Technology purchased boron ore at a cost of $76,212 and
$594,276 from Qinghai Mining during the three months ended September 30, 2021
and 2020, respectively.



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 Chairman and his brother who are two major shareholders of the
Company. The depreciation of these fixed assets had an impact on the production
costs of boric acid of the Company and was included in the Company's cost of
sales. The depreciation of these fixed assets for the nine months ended
September 30, 2021and 2020 was $12,504 and $19,547, respectively. The
depreciation of these fixed assets for the three months ended September 30,
2021and 2020 was $2,382 and $6,927, respectively. Due to Zhongtian Resources
resulting from using its equipment and payment of worker's compensation made by
Zhongtian Resource for Technology was $92,269 and $79,309 at September 30, 2021
and December 31, 2020, respectively.



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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. For the nine months ended September 30, 2021 and 2020, the Company's
sales to Dingjia was $0 and $202,130, respectively. For the three months ended
September 30, 2021 and 2020, the Company's sales to Dingjia was $0 and $100,570,
respectively. At September 30, 2021 and December 31, 2020, outstanding payable
to Dingjia was $20,888 and $20,762, respectively.



During the first quarter of 2021, Qinghai Zhongli and Xi'an Jinzang entered
three loan contracts for Qinghai Zhongli borrowing RMB 4 million ($619,185) 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 of
Qinghai Zhongli. The Company was to repay RMB 2.5 million ($380,442) with
accrued interest by June 30, 2021 and repay the remaining RMB 1.5 million
($228,266) with accrued interest by December 31, 2021. A late fee of 1/1000 of
outstanding balance per day will be charged if the Company is not able to repay
the loan on time. The Company did not repay the RMB 2.5 million ($380,442) at
June 30, 2021; in addition, the Company borrowed additional RMB 2 million
($309,593) with same terms during the second quarter of 2021 under the oral
agreement. The Company borrowed additional RMB 2 million ($308,385) with the
same terms during the third quarter of 2021 under the oral agreement. The
Company recorded $33,595 capitalized interest on CIP of Adsorption Station
Project as of September 30, 2021.



In addition, at September 30, 2021 and December 31, 2020, the Company had
$1,316,591 and $1,014,591 due to another 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.

The following table summarized the due from (to) related parties as of September 30, 2021 and December 31, 2020, respectively:





                         Related party name                         2021            2020
                         Qinghai Mining including $1.77
                         million sale of CIP (Test and
Due from                 Experimental Plant I)                  $  4,542,738     $ 3,457,488
Due to                   Qinghai Mining                           (1,027,241 )      (350,438 )
Due from Xi'an Jinzang
(NCI of the JV)                                                            -          76,630
Bad debt allowance                                                (3,515,497 )             -
Due from, net (current
and noncurrent)                                                 $          -     $ 3,183,680

Due to                   Dingjia                                $     20,888     $    20,762
                         Xi'an Jinzang (NCI of the JV) with
Due to                   6.8% interest                             1,267,136               -
Due to                   Zhongtian Resources                          92,269          79,309
Due to                   A major shareholder (CEO)                

1,316,591       1,014,591
Due to, total                                                   $  2,696,884     $ 1,114,662

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 nine and three months ended September 30, 2021 and 2020, 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.



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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 $19,891 and $19,770 at September 30,
2021 and December 31, 2020, 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 at a point in time, typically upon receipts
of the goods by customer. Sales and purchases are recorded net of VAT collected
and paid as the Company acts as an agent for the government. VAT taxes are not
affected by the income tax holiday.



Deferred Income



Deferred income consists primarily of government grants and subsidies for
supporting the Company's technology innovation and transformation of boric acid,
lithium and magnesium sulfate projects. The Company 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."



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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 nine and three months ended
September 30, 2021, the Company had loss of $58,417 and $18,497 that were
attributable to the NCI. During the nine and three months ended September 30,
2020, the Company had loss of $8,554 and $5,809 that were 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.



In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic
848) ("ASU 2020-04"). ASU 2020-04 contains practical expedients for reference
rate reform related activities that impact debt, leases, derivatives and other
contracts. The guidance in ASU 2020-04 is optional and may be elected over time
as reference rate reform activities occur. The Company continues to evaluate the
impact of the guidance and may apply the elections as applicable as changes in
the market occur.



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.



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Results of Operations

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020





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.



                                       2021          % of Sales          2020          % of Sales
Sales                              $  5,464,652                       $ 5,660,182
Cost of sales                         4,205,605             77.0 %      5,031,305             88.9 %
Gross profit                          1,259,047             23.0 %        628,877             11.1 %
Selling expenses                         53,418              1.0 %        125,407              2.2 %
General and administrative
expenses                              4,410,803             80.7 %        922,681             16.3 %
Total operating expenses              4,464,221             81.7 %      1,048,088             18.5 %
Income (loss) from operations        (3,205,174 )          (58.7 )%      (419,211 )           (7.4 )%
Other income                            147,010              2.7 %        181,845              3.2 %
Income (loss) before income
taxes                                (3,058,164 )          (56.0 )%      (237,366 )           (4.2 )%
Income tax expense                      166,839              3.0 %         47,117              0.8 %
Income (loss) before
noncontrolling interest              (3,225,003 )          (59.0 )%      (284,483 )           (5.0 )%
Less: loss attributable to
noncontrolling interest                 (58,417 )           (1.1 )%        (8,554 )           (0.1 )%
Net loss to the Company            $ (3,166,586 )          (57.9 )%   $  (275,929 )           (4.9 )%




Sales



Sales for the nine months ended September 30, 2021 and 2020 was $5,464,652 and
$5,660,182, respectively, a decrease of $195,530 or 3.5%. The decrease in sales
was mainly due to an 26% decrease in sales quantity, which was partly offset by
a 4% increase in average unit selling price and a 18.5% increase due to change
in exchange rate.



Cost of sales



Cost of sales ("COS") for the nine months ended September 30, 2021 and 2020 was
$4,205,605 and $5,031,305, respectively, a decrease of $825,700 or 16.4%. The
decrease was mainly due to decreased sales and production. The COS as a
percentage of sales was 77.0% for the nine months ended September 30, 2021
compared with 88.9% for 2020. The decrease in COS as a percentage of sales was
mainly due to decreased average cost of production. In the comparable period of
2020, we had abnormal high COS as a percentage of sales; due to COVID19
outbreak, our factory was reopened one month later than originally planned, and
we did not resume the production one week after the factory reopened due to the
drought of master liquid pool resulting from the longer period of shutdown of
the machine, we spent additional days and had extra acid and mineral consumption
to cultivate the concentration level of master liquid pool.



Gross profit



Gross profit for the nine months ended September 30, 2021 and 2020 was
$1,259,047 and $628,877, respectively, an increase of $630,170 or 100.2%. The
profit margin was 23.0% for the nine months ended September 30, 2021 compared to
11.1% for the nine months ended September 30, 2020, the increase in profit
margin was mainly due to decreased production cost as described above.



Operating expenses



Selling expenses consist mainly of salespersons' salaries and freight out.
Selling expense were $53,418 for the nine months ended September 30, 2021,
compared to $125,407 for the nine months ended September 30, 2020, a decrease of
$71,989 or 57.4%, mainly resulting from decreased salespersons' salaries by
$54,620 resulting from restructure of our sales department for improving its
efficiency and cost-saving and decreased freights expense by $18,900, which was
partly offset by increased other selling expenses by $1,530.



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 $4,410,803 for the nine months ended September
30, 2021, compared to $922,681 for the nine months ended September 30 2020, a
decrease of $3,488,122 or 378.0%, mainly resulting from increased bad debt
expense by $3,523,085, which was partly offset by decreased maintenance fee by
$44,080.



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Other income



Other income was $147,010 for the nine months ended September 30, 2021, compared
to $181,845 for the nine months ended September 30, 2020, a decrease of $34,835
or 19.2%. For the nine months ended September 30, 2021, other income mainly
consisted of subsidy income of $152,963, interest income of $2,998, but offset
with financial expense of $3,914 and other expenses of $5,037. For the nine
months ended September 30, 2020, other income mainly consisted of subsidy income
of $143,726 and other income of $39,651.



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 loss



We had net loss of $3,166,586 for the nine months ended September 30, 2021,
compared to net loss of $275,929 for the nine months ended September 30, 2020,
an increase in net loss by $2,890,657 or 1,047.6%. The increase in our net loss
mainly resulted from increased bad debt expense described above.



Results of Operations

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020





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.



                                       2021          % of Sales          2020          % of Sales
Sales                              $  1,456,803                       $ 2,330,292
Cost of sales                           912,679             62.6 %      2,126,770             91.3 %
Gross profit                            544,124             37.4 %        203,522              8.7 %
Selling expenses                          7,361              0.5 %         39,858              1.7 %
General and administrative
expenses                              3,878,850            266.3 %        308,686             13.2 %
Total operating expenses              3,886,211            266.8 %        348,544             14.9 %
Loss from operations                 (3,342,087 )         (229.4 )%      (145,022 )           (6.2 )%
Other income                             43,878              3.0 %         72,362              3.1 %
Loss before income taxes             (3,298,209 )         (226.4 )%       (72,660 )           (3.1 )%
Income tax expense                       74,892              5.1 %         21,184              0.9 %
Loss before noncontrolling
interest                             (3,373,101 )         (231.5 )%       (93,844 )           (4.0 )%
Less: loss attributable to
noncontrolling interest                 (18,497 )           (1.3 )%        (5,809 )           (0.2 )%
Net loss                           $ (3,354,604 )         (230.2 )%   $   (88,035 )           (3.8 )%




Sales



Sales for the three months ended September 30, 2021 and 2020 was $1,456,803 and
$2,330,292, respectively, a decrease of $873,489 or 37.5%. The decrease in sales
was mainly due to a decreased sales quantity of 76.0% resulting from 1) less
boric acid inventory carried over from prior periods, and 2) temporary decreased
mine production resulting from rectifying the mines in the area by the authority
for environment protection, 3) In July and August 2021, the remaining stock of
boric acid was sold out, which resulting in September 2021, no boric acid was
available for sale; however, the decrease in sales quantity was partly offset by
a 19.0% increase in average unit selling price and a 19.5% increase due to
change in exchange rate.



Cost of sales



Cost of sales ("COS") for the three months ended September 30, 2021 and 2020 was
$912,679 and $2,126,770, respectively, a decrease of $1,214,091 or 57.1%. The
decrease was mainly due to decreased sales and production. The COS as a
percentage of sales was 62.6% for the three months ended September 30, 2021
compared with 91.3% for 2020. The decrease in COS as a percentage of sales was
mainly due to decreased average cost of production. From July to September 2020,
we started acquiring boron rock from Tibet to produce boric acid to increase our
productivity. The Tibet boron rock has higher grade of the mineral deposit and
thus the high unit cost, which resulted the increased raw material cost of boric
acid production for the quarter ending September 30, 2020; we stopped purchasing
boron rock form Tibet from October 2020 due to its higher cost.



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Gross profit



Gross profit for the three months ended September 30, 2021 and 2020 was $544,124
and $203,522, respectively, an increase of $340,602 or 167.4%. The profit margin
was 37.4% for the three months ended September 30, 2021 compared to 8.7% for the
three months ended September 30, 2020, the increase in profit margin was mainly
due to decreased production cost as described above.



Operating expenses



Selling expenses consist mainly of salespersons' salaries and freight out.
Selling expense were $7,361 for the three months ended September 30, 2021,
compared to $39,858 for the three months ended September 30, 2020, a decrease of
$32,497 or 81.5%, mainly resulting from decreased freight expense by $19,140,
decreased sales person salary expense by $11,700 and decreased other selling
expenses by $1,660.



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 $3,878,850 for the three months ended September
30, 2021, compared to $308,686 for the three months ended September 30 2020, an
increase of $3,570,164 or 1,256.6%, mainly resulting from increased bad debt
expense by $3,523,085 for due from Qinghai Mining due to its stoppage of boron
ore production which it used to sell to us, and it caused concern of its ability
to generate revenue and make repayment to us, increased business entertainment
expense by $5,160, increased advisory expense by $8,740, increased vehicle
expense by $10,390 and increased other G&A expenses by $22,740.



Other income



Other income was $43,878 for the three months ended September 30, 2021, compared
to $72,362 for the three months ended September 30, 2020, a decrease of $28,484
or 39.4%. For the three months ended September 30, 2021, other income mainly
consisted of subsidy income of $51,291 and interest income of $1,822, but offset
with financial expense of $3,523 and other expense of $5,712. For the three
months ended September 30, 2020, other income mainly consisted of subsidy income
of $48,091 and other income of $26,246.



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 loss



We had net loss of $3,354,604 for the three months ended September 30, 2021,
compared to $88,035 for the three months ended September 30, 2020, an increase
of $3,266,569 or 3,710.5%. The increase in our net loss mainly resulted from
increased operating expenses including bade debt expense as described above.

Liquidity and Capital Resources

As of September 30, 2021, we had cash and equivalents of $2,192,191. Working capital deficit was $2,149,187 at September 30, 2021. The ratio of current assets to current liabilities was 0.56:1 at September 30, 2021.

The following is a summary of cash provided by or used in each of the indicated types of activities during nine months ended September 30, 2021 and 2020:





                                  2021            2020
Cash provided by (used in):
Operating activities          $  1,547,843     $ 1,145,326
Investing activities            (1,602,291 )      (333,480 )
Financing activities             1,271,273         171,568




Net cash provided by operating activities was $1,547,843 for the nine months
ended September 30, 2021, compared to $1,145,326 for the nine months ended
September 30, 2020. The increase of cash inflow from operating activities the
nine months ended September 30, 2021 compared to the nine months ended September
30, 2020 was principally attributable to decreased cash outflow from unearned
revenue by $57,718, increased cash inflow form taxes payable by $57,643,
increased cash inflow from accounts receivable by $60,602, and decreased cash
outflow from advance to suppliers by $196,564.



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Net cash used in investing activities was $1,602,291 for the nine months ended
September 30, 2021, compared to $333,480 for the nine months ended September 30,
2020. Net cash used in investing activities in 2021 mainly consisted of purchase
of property and equipment of $175,156, purchase of intangible asset of $50,759,
and $1,376,376 payment for constructing the adsorption station. Net cash used in
investing activities in 2020 was mainly consisted of purchase of property and
equipment of $301,080 and construction in progress of $32,400.



Net cash provided by financing activities was $1,271,273 for the nine months
ended September 30, 2021, compared to $171,568 for the nine months ended
September 30, 2020. The net cash provided by financing activities in 2021
consisted of amount due to other related parties of $1,584,374, include loans
from Xi'an Jinzang described below, but partly offset by increase in due from
Qinghai Mining of $313,101. The net cash provided by financing activities in
2020 consisted of capital contribution from noncontrolling interest Qinghai
Zhongli by $715,130, and increase in amount due to other related parties of
$348,724, but partly offset by increase in due from Qinghai Mining of $892,286.



During the first quarter of 2021, Qinghai Zhongli and Xi'an Jinzang entered
three loan contracts for Qinghai Zhongli borrowing RMB 4 million ($619,185) 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 of
Qinghai Zhongli. The Company was to repay RMB 2.5 million ($380,442) with
accrued interest by June 30, 2021 and repay the remaining RMB 1.5 million
($228,266) with accrued interest by December 31, 2021. A late fee of 1/1000 of
outstanding balance per day will be charged if the Company is not able to repay
the loan on time. The Company did not repay the RMB 2.5 million ($380,442) at
June 30, 2021; in addition, the Company borrowed additional RMB 2 million
($309,593) with same terms during the second quarter of 2021 under the oral
agreement. The Company borrowed additional RMB 2 million ($308,385) with the
same terms during the third quarter of 2021 under the oral agreement. The
Company recorded $33,595 capitalized interest on CIP of adsorption station as of
September 30, 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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