Overview
The Company currently produces 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. We sold our plate heat exchangers and heat pump operations onSeptember 30, 2019 . 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"). The Acquisition was structured as a tax-free reorganization. As a result of the Share Exchange Agreement, Mid-heaven BVI's shareholders own approximately 57% of the combined company. For accounting purposes, the transaction was accounted for as a reverse acquisition of the Company by Mid-heaven BVI. The main operating entity, 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 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 fulfil 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. OnSeptember 30, 2019 ,Heat HP, Inc. andHeat PHE, Inc , our wholly owned subsidiaries, sold their respective equity interests in Jinhui,SmartHeat Investment , SmartHeat Trading, SmartHeat Pump and Heat Exchange for$353 . The equity interests were sold to individuals and businesses in the PRC. Each subsidiary was sold for nominal cash consideration as below and, as the transactions were structured as purchases of equity interests, the subsidiary companies retained all liabilities when sold.
SmartHeat Heat Exchange Equipment Co -
On
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 . SinceApril 2020 and to date, there were some new COVID-19 cases discovered in a few provinces ofChina , 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. 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. Related Party Transactions Due from related parties Technology purchased raw material boron rock from Qinghai Mining (owned by three 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, 2021 andDecember 31, 2020 , due from Qinghai Mining was$3.48 million 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$648,840 and$594,526 from Qinghai Mining during the six months endedJune 30, 2021 and 2020, respectively. Qinghai Technology purchased boron ore at a cost of$387,582 and$480,998 from Qinghai Mining during the three months endedJune 30, 2021 and 2020, respectively. OnJuly 1, 2019 , Technology and Qinghai Mining entered a boron ore purchase contract for a term of one year. Qinghai Mining was to supply Qinghai Technology boron ore based on Qinghai Technology's monthly production plan atRMB 62 ($9.10 ) per tonne. The price was adjustable if there is a significant fluctuation of the market price for the boron ore. In the fourth quarter of 2019, this price was adjusted toRMB 70.46 ($10.21 ) per tonne. In the first quarter of 2020, Technology and Qinghai Mining entered a new purchase contract, the price for boron ore was adjusted toRMB 77.5 ($11.10 ) per tonne, and the price for slag wasRMB 30 ($4.41 ) per tonne. The new purchase contract will be in effect until a replacement contact with new purchase price is entered. InSeptember 2020 , Technology sold the Test and Experimental PlantI to Qinghai Mining at cost ofRMB 11.41 million ($1.77 million ). The payment term is five years with annual interest of 4.75%. The first payment of$340,552 is dueSeptember 30, 2021 . Qinghai Mining guarantees payment with its accounts receivable, and has the right to repay the purchase price in full any time before the maturity date. 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 Chairman and his brotherwho 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 six months endedJune 30 , 2021and 2020 was$10,122 and$12,620 , respectively. The depreciation of these fixed assets for the three months endedJune 30 , 2021and 2020 was$4,536 and$6,357 , respectively. Due to Zhongtian Resources resulting from using its equipment and payment of worker's compensation made by Zhongtian Resource for Technology was$90,245 and$79,309 atJune 30, 2021 andDecember 31, 2020 , respectively. 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. For the six months endedJune 30, 2021 and 2020, the Company's sales to Dingjia was$0 and$101,560 , respectively. For the three months endedJune 30, 2021 and 2020, the Company's sales to Dingjia was$0 and$101,560 , respectively. AtJune 30, 2021 andDecember 31, 2020 , outstanding payable to Dingjia was$20,970 and$20,762 , respectively. 26
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During the first quarter of 2021, Qinghai Zhongli and Xi'an Jinzang entered three loan contracts for Qinghai Zhongli borrowingRMB 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 of Qinghai Zhongli. The Company was to repayRMB 2.5 million ($380,442 ) with accrued interest byJune 30, 2021 and repay the remainingRMB 1.5 million ($228,266 ) with accrued interest byDecember 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 theRMB 2.5 million ($380,442 ) atJune 30, 2021 ; in addition, the Company borrowed additionalRMB 2 million ($309,593 ) with same terms during the second quarter of 2021 under the oral agreement. The Company recorded$16,539 capitalized interest on CIP as ofJune 30, 2021 . In addition, atJune 30, 2021 andDecember 31, 2020 , the Company had$1,236,591 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
Related party name 2021 2020 Qinghai Mining including$1.77 Due from million sale of CIP$ 4,613,977 $ 3,457,488 Due to Qinghai Mining (1,129,136 ) (350,438 ) Due from Xi'an Jinzang (NCI of the JV) -
76,630
Due from, net (current and noncurrent)$ 3,484,841 $ 3,183,680 Due to Dingjia$ 20,970 $ 20,762 Xi'an Jinzang (NCI of the JV) with Due to 6.8% interest 945,317 - Due to Zhongtian Resources 90,245 79,309 Due to A major shareholder 1,236,591 1,014,591 Due to, total$ 2,293,123 $ 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
Principles of Consolidation For the six and three months endedJune 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. 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$19,969 and$19,770 atJune 30, 2021 andDecember 31, 2020 . 27
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Table of Contents 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'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 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 and three months endedJune 30, 2021 , the Company had loss of$39,920 and$29,987 that were attributable to the NCI. During the six and three months endedJune 30, 2020 , the Company had loss of$2,745 and$2,745 that were 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 28
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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. InMarch 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. 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. 2021 % of Sales 2020 % of Sales Sales$ 4,007,849 $ 3,329,890 Cost of sales 3,292,926 82.2 % 2,904,535 87.2 % Gross profit 714,923 17.8 % 425,355 12.8 % Selling expenses 46,057 1.1 % 85,549 2.6 % General and administrative expenses 531,953 13.3 % 613,995 18.4 % Total operating expenses 578,010 14.4 % 699,544 21.0 % Income (loss) from operations 136,913 3.4 % (274,189 ) (8.2 )% Other income 103,132 2.6 % 109,483 3.3 % Income (loss) before income taxes 240,045 6.0 % (164,706 ) (4.9 )% Income tax expense 91,947 2.3 % 25,933 0.8 % Income (loss) before noncontrolling interest 148,098 3.7 % (190,639 ) (5.7 )% Less: loss attributable to noncontrolling interest (39,920 ) (1.0 )% (2,745 ) (0.1 )% Net income (loss) to the Company$ 188,018 4.7 %$ (187,894 ) (5.6 )% 29
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Table of Contents Sales Sales for the six months endedJune 30, 2021 and 2020 was$4,007,849 and$3,329,890 , respectively, an increase of$677,959 or 20.4%. The increase in sales was mainly due to an 8% increase in sales quantity, a 2% increase in average unit selling price and a 10% increase due to change in exchange rate. In the comparable period of 2020, due to the outbreak of COVID-19 and related logistic restriction, our sales decreased, especially in the first quarter of 2020. Cost of sales Cost of sales ("COS") for the six months endedJune 30, 2021 and 2020 was$3,292,926 and$2,904,535 , respectively, an increase of$388,391 or 13.4%. The increase was mainly due to increased sales and production. The COS as a percentage of sales was 82.2% for the six months endedJune 30, 2021 compared with 87.2% 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 six months endedJune 30, 2021 and 2020 was$714,923 and$425,355 , respectively, an increase of$289,568 or 68.1%. The profit margin was 17.8% for the six months endedJune 30, 2021 compared to 12.8% for the six months endedJune 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$46,057 for the six months endedJune 30, 2021 , compared to$85,549 for the six months endedJune 30, 2020 , a decrease of$39,492 or 46.2%, mainly resulting from decreased salespersons' salaries by$40,980 resulting from restructure of our sales department for improving its efficiency and cost-saving which was partly offset by increased other selling expenses by$1480 . General and administrative expenses consist mainly of salary, R&D, office, welfare, business meeting, maintenance, and utilities. General and administrative expenses were$531,953 for the six months endedJune 30, 2021 , compared to$613,995 for the six months endedJune 30 2020 , a decrease of$82,042 or 13.4%, mainly resulting from decreased officer salary expense by$240,000 , which was partly offset by increased business entertainment expense by$65,470 increased R&D Expense by$25,120 , increased vehicle expense by$16,330 , increased consulting expense by$10,480 , increased office expense by$9,230 , increased welfare expense by$8,470 and increased other G&A expenses by$22,860 . Other income Other income was$103,132 for the six months endedJune 30, 2021 , compared to$109,483 for the six months endedJune 30, 2020 , a decrease of$6,351 or 5.8%. For the six months endedJune 30, 2021 , other income mainly consisted of subsidy income of$101,672 and interest income$1,176 . For the six months endedJune 30, 2020 , other income mainly consisted of subsidy income of$95,635 and other non-operating income of$13,405 . 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 income of$188,018 for the six months endedJune 30, 2021 , compared to net loss of$187,894 for the six months endedJune 30, 2020 , an increase in net income by$375,912 or 200.1%. The increase in our net income mainly resulted from increased sales and decreased operating expenses as described above. 30
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Table of Contents Results of Operations
Three Months Ended
The following table sets forth the consolidated results of our operations for the periods indicated as a percentage of net sales, certain columns may not add due to rounding. 2021 % of Sales 2020 % of Sales Sales$ 2,179,469 $ 2,319,392 Cost of sales 1,596,808 73.3 % 1,973,791 85.1 % Gross profit 582,661 26.7 % 345,601 14.9 % Selling expenses 23,002 1.1 % 29,344 1.3 % General and administrative expenses 257,582 11.8 % 326,993 14.1 % Total operating expenses 280,584 12.9 % 356,337 15.4 % Income (loss) from operations 302,077 13.9 % (10,736 ) (0.5 )% Other income 52,167 2.4 % 76,658 3.3 % Income before income taxes 354,244 16.3 % 65,922 2.8 % Income tax expense 80,489 3.7 % 25,933 1.1 % Income before noncontrolling interest 273,755 12.6 % 39,989 1.7 % Less: loss attributable to noncontrolling interest (29,987 ) (1.3 )% (2,745 ) (0.1 )% Net income$ 303,742 13.9 %$ 42,734 1.8 % Sales Sales for the three months endedJune 30, 2021 and 2020 was$2,179,469 and$2,319,392 , respectively, a decrease of$139,923 or 6.0%. The decrease in sales was mainly due to a decreased sales quantity of 16% 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. but was partly offset by a 3% increase in average unit selling price and a 7% increase due to change in exchange rate. Cost of sales Cost of sales ("COS") for the three months endedJune 30, 2021 and 2020 was$1,596,808 and$1,973,791 , respectively, a decrease of$376,983 or 19.1%. The decrease was mainly due to decreased sales and production. The COS as a percentage of sales was 73.3% for the three months endedJune 30, 2021 compared with 85.1% for 2020. The decrease in COS as a percentage of sales was mainly due to decreased average cost of production. In the second quarter of 2020, we had abnormal high COS as a percentage of sales resulting from delayed factory reopening due to COVID-19, and extra cost spent for to cultivating the concentration level of master liquid pool which was drought due to the longer period of shutdown of the machine. Gross profit Gross profit for the three months endedJune 30, 2021 and 2020 was$582,661 and$345,601 , respectively, an increase of$237,060 or 68.6%. The profit margin was 26.7% for the three months endedJune 30, 2021 compared to 14.9% for the three months endedJune 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$23,002 for the three months endedJune 30, 2021 , compared to$29,344 for the three months endedJune 30, 2020 , a decrease of$6,342 or 21.6%, mainly resulting from decreased freight expense by$7,605 which was partly offset by increased other selling expenses by$1,260 . General and administrative expenses consist mainly of salary, R&D, office, welfare, business meeting, maintenance, and utilities. General and administrative expenses were$257,582 for the three months endedJune 30, 2021 , compared to$326,993 for the three months ended June 30 2020, a decrease of$69,411 or 21.2%, mainly resulting from decreased salary expense by$120,000 and decreased other G&A expenses by$11,050 , which was partly offset by increased business entertainment expense by$61,640 . 31
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Table of Contents Other income Other income was$52,167 for the three months endedJune 30, 2021 , compared to$76,658 for the three months endedJune 30, 2020 , a decrease of$24,491 or 31.9%. For the three months endedJune 30, 2021 , other income mainly consisted of subsidy income of$50,935 and interest income of$699 . For the three months endedJune 30, 2020 , other income mainly consisted of subsidy income of$48,494 and non-operating income of$27,754 . 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 We had net income of$303,742 for the three months endedJune 30, 2021 , compared to$42,734 for the three months endedJune 30, 2020 , an increase of$261,008 or 610.8%. The increase in our net income mainly resulted from increased gross profit and decreased operating expenses as described above.
Liquidity and Capital Resources
As ofJune 30, 2021 , we had cash and equivalents of$2,285,657 . Working capital was$46,179 atJune 30, 2021 . The ratio of current assets to current liabilities was 1.01:1 atJune 30, 2021 .
The following is a summary of cash provided by or used in each of the indicated
types of activities during six months ended
2021 2020 Cash provided by (used in): Operating activities$ 1,741,547 $ 960,967 Investing activities (1,347,055 ) (289,423 ) Financing activities 906,989 327,119 Net cash provided by operating activities was$1,741,547 for the six months endedJune 30, 2021 , compared to$960,967 for the six months endedJune 30, 2020 . The increase of cash inflow from operating activities the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 was principally attributable to increased cash inflow from unearned revenue by$551,716 , increased cash inflow form taxes payable by$38,117 , increased cash inflow from accounts receivable by$77,444 , and decreased cash outflow from advance to suppliers by$180,536 , which was partly offset by decreased cash inflow from inventory by$91,401 . Net cash used in investing activities was$1,347,055 for the six months endedJune 30, 2021 , compared to$289,423 for the six months endedJune 30, 2020 . 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 for preliminarily extract lithium ion from brine for further concentration and purification. Net cash used in investing activities in 2020 was mainly consisted of purchase of property and equipment of$287,221 . Net cash provided by financing activities was$906,989 for the six months endedJune 30, 2021 , compared to$327,119 for the six months endedJune 30, 2020 . 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 . The net cash provided by financing activities in 2020 consisted of capital contribution from noncontrolling interest Qinghai Zhongli by$711,044 , and increase in amount due to other related parties of$256,233 , but partly offset by increase in due from Qinghai Mining of$640,158 . During the first quarter of 2021, Qinghai Zhongli and Xi'an Jinzang entered three loan contracts for Qinghai Zhongli borrowingRMB 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 of Qinghai Zhongli. The Company was to repayRMB 2.5 million ($380,442 ) with accrued interest byJune 30, 2021 and repay the remainingRMB 1.5 million ($228,266 ) with accrued interest byDecember 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 theRMB 2.5 million ($380,442 ) atJune 30, 2021 ; in addition, the Company borrowed additionalRMB 2 million ($309,593 ) with same terms during the second quarter of 2021 under the oral agreement. The Company recorded$16,539 capitalized interest on CIP as ofJune 30, 2021 . 32
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Table of Contents 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. 33
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