Safe Harbor Declaration
The comments made throughout this Annual Report should be read in conjunction with our Financial Statements and the Notes thereto, and other financial information appearing elsewhere in this document. In addition to historical information, the following discussion and other parts of this document contain certain forward-looking information. When used in this discussion, the words, "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from projected results, due to a number of factors beyond our control. We do not undertake to publicly update or revise any of our forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Readers are also urged to carefully review and consider our discussions regarding the various factors that affect our business, which are described in this section and elsewhere in this report.
Management’s Discussion and Analysis of Financial Condition and Results of
Overview The Company currently leases it 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 Zhangpurchased a total of 106,001,971 shares of common stock of the Company at a purchase price of $.001per 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 Zhangnow 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. QinghaiMining 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 Companyentered 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 Companyentered a new agreement with the same customer, the 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 the Company, 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 Contact 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, 2022to 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. 25
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December 2019, a novel strain of coronavirus (COVID-19) was reported and the World Health Organizationdeclared 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 Chinawere reopened in April 2020, the outbreak in Chinais under the control, and the Company's production and sales has been gradually increasing since April 2020. Since April 2020to January 2022, there were some new COVID-19 cases discovered in a few provinces of China, however, the number of new cases are not significant due to PRC government's strict control. Since February 2022, the COVID-19 case bounced again in many cities of China; however, there are only a few new cases in Qinghai Provincewhich does not impact the Company's operations. 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.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
$0.25 millionand $0.12 millionfor the three months ended March 31, 2022and 2021, respectively; the Company stopped produce and selling boron acid starting from September 2021due 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, 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 Departmentin the beginning of 2022 and is currently under the review. 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. 26
Table of Contents 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
March 31, 2022and December 31, 2021, due from QinghaiMining was $0(a 100% bad debt allowance was recorded for due from QinghaiMining of $4.5 milliondue 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 $0and $261,258from Qinghai Mining during the three months ended March 31, 2022and 2021, 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 former Chairman and his brother whowere 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 the Company and was included in the Company's cost of sales. The depreciation of these fixed assets for the three months ended March 31, 2022and 2021 was $2,427and $5,586, respectively. Amount of due to Zhongtian Resources resulting from using its equipment and payment of worker's compensation made by Zhongtian Resource for Technology was $96,691and $96,274at March 31, 2022and 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 $0as of March 31, 2022and December 31, 2021. 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 three months ended March 31, 2022and 2021, the Company's sales to Dingjia was $0and $0, respectively. At March 31, 2022and December 31, 2021, outstanding payable to Dingjia was $21,340and $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 $0as of March 31, 2022and 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( $630,100) 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 Stationof Qinghai Zhongli. The Company was to repay RMB 2.5 million( $393,812) with accrued interest by June 30, 2021and repay the remaining RMB 1.5 million( $236,287) 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 4.0 million( $630,100) at March 31, 2022; in addition, the Company borrowed additional RMB 2 million( $315,050) with same terms during the second quarter of 2021 under the oral agreement. The Company borrowed additional RMB 2 million( $315,050) with the same terms during the third quarter of 2021 under the oral agreement. In January and February 2022, the Company entered two borrowing agreements with same lender for RMB 1 million( $157,500) with maturity date on July 30, 2022and RMB 2 million( $315,000) with maturity date on December 31, 2022, respectively, both loans have a 10% annual interest rate. The Company only received RMB 2 million( $315,000) during the first quarter of 2022. The Company recorded $80,935and $55,679capitalized interest on CIP of Adsorption Station Projectas of March 31, 2022and December 31, 2021. In addition, at March 31, 2022and December 31, 2021, the Company had $1,510,591and $1,473,591due 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 March 31, 2022and December 31, 2021, the Company had $1,431and $499due to a senior officer of the Company, resulting from the Company's expenses paid by him. This short-term advance bore no interest, and was payable upon demand. 27
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The following table summarized the due from (to) related parties as of
Related party name 2022 2021 Qinghai Mining including
$1.77million sale of CIP (Test and Due from Experimental Plant I) $ 5,610,394 $ 5,567,440Due to Qinghai Mining (1,071,196 ) (1,047,820 ) Less: bad debt allowance (4,539,198 ) (4,519,619 ) Due from, net (current and noncurrent) $ - $ - Xi'an Jinzang (NCI of the JV) Due to with 6.8% interest $ 1,656,185 $ 1,310,444Due to Senior officer 1,431 499 Due to A major shareholder (CEO) 1,510,591 1,473,591 Due to, total $ 3,168,207 $ 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
Principles of Consolidation For the three months ended
March 31, 2022and 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 $20,321and $20,233at March 31, 2022and 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. 28
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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. Starting from
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
Chinasubsidiaries is the Chinese Yuan Renminbi ("RMB"). The accounts of the Chinasubsidiaries 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 QinghaiZhongli to process brine supplied by Technology. Technology owns 51% of the JV and Xi'an Jinzang owns the remaining 49%. During the three months ended March 31, 2022and 2021, the Company had loss of $7,989and $9,933that were attributable to the NCI.
Recent Accounting Pronouncements
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. 29
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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 SECfilers, excluding smaller reporting companies, ASU 2020-06 is effective for fiscal years beginning after December 15, 2021including 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
Three Months Ended
The following table sets forth the consolidated results of our operations for the periods indicated as a percentage of net sales, certain columns may not add due to rounding. 2022 % of Sales 2021 % of Sales Boronic acid sales $ - - %
$ 1,828,380100.0 % Boronic acid costs - - % 1,696,118 92.8 % Gross profit - - % 132,262 7.2 % Selling expenses - - % 23,055 1.3 % General and administrative expenses 308,648 - % 274,371 15.0 % Total operating expenses 308,648 - % 297,426 16.3 % Income (loss) from operations (308,648 ) - % (165,164 ) (9.1 )% Other income 52,636 - % 50,965 2.8 % Income (loss) before income taxes (256,012 ) - % (114,199 ) (6.3 )% Income tax expense - - % 11,458 0.6 % Income (loss) before noncontrolling interest (256,012 ) - % (125,657 ) (6.9 )% Less: loss attributable to noncontrolling interest (7,989 ) - % (9,933 ) (0.6 )% Net loss to the Company $ (248,023 )- % $ (115,724 )(6.3 )% Revenue Revenue for the three months ended March 31, 2022and 2021 was $0and $1,828,380, respectively, a decrease of $1,828,380or 100%. Starting from the third quarter 2021, we were no longer produce the boron acid but only providing the processing service; starting the fourth quarter 2021, we stopped the ore processing due to increased cost but only leasing our facilities out to a third party whoimports boron ore and process it for sale by themselves. However, due to the Chinese New Yearholiday and the lessee did not actually use the Company's facility to produce, the Company did not charge any leasing revenue for the three months ended March 31, 2022. In April 2022, Technology, together with Qinghai Mining entered a new Contact 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, 2022to 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. Cost of revenue Cost of revenue ("COR") for the three months ended March31, 2022 and 2021 was $0and $1,696,118, respectively, a decrease of $1,696,118or 100.0%. The decrease was mainly due to decreased sales and production. The overall COR as a percentage of revenue was 0% for the three months ended March 31, 2022compared with 92.8% for 2021. 30
Table of Contents Gross profit Gross profit for the three months ended
March 31, 2022and 2021 was $0and $132,262, respectively, an decrease of $132,262or 100.0%. The blended profit margin was 0% for the three months ended March 31, 2022compared to 7.2% for the three months ended March 31, 2021. Operating expenses Selling expenses consist mainly of salespersons' salaries and freight out. Selling expense were $0for the three months ended March 31, 2022, compared to $23,055for the three months ended March 31, 2021, a decrease of $23,055or 100.0%, mainly due to no sales incurred during the three months ended Mach 31, 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 $308,648for the three months ended March 31, 2022, compared to $274,371for the three months ended March 31, 2021, an increase of $34,277or 12.5%, mainly resulting from increased maintenance expense by $54,170which was partly offset by decreased vehicle expense by $6,630, decreased business management expense by $5,100and other G&A expenses by $8,150. Other income Other income was $52,636for the three months ended March 31, 2022, compared to $50,965for the three months ended March 31, 2021, an increase of $1,671or 3.3%. For the three months ended March 31, 2022, other income mainly consisted of subsidy income of $51,808, interest income of $874, but offset with financial expense of $46. For the three months ended March 31, 2021, other income mainly consisted of subsidy income of $50,737, interest income of $477, but offset with other expenses of $249. 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 $248,023for the three months ended March 31, 2022, compared to net loss of $115,724for the three months ended March 31, 2021, an increase in net loss by $132,299or 114.3%. The increase in our net loss mainly resulted from increased G&A expense and decreased gross profit as described above.
Liquidity and Capital Resources
March 31, 2022, we had cash and equivalents of $1,110,036. Working capital deficit was $3,816,563at March 31, 2022. The ratio of current assets to current liabilities was 0.27:1 at March 31, 2022.
The following is a summary of cash provided by or used in each of the indicated
types of activities during three months ended
2022 2021 Cash provided by (used in): Operating activities
$ (311,775 ) $ 514,130Investing activities (215,106 ) (684,507 ) Financing activities 377,877 126,738 Net cash used in operating activities was $311,775for the three months ended March 31, 2022, compared to net cash provided by operating activities of $514,130for the three months ended March 31, 2021. The increase of $825,905cash outflow from operating activities for the three months ended March 31, 2022compared to the three months ended March 31, 2021was principally attributable to increased cash outflow from inventory by $657,614, increased cash outflow form taxes payable by $143,468, and decreased cash inflow from unearned revenue by $127,027, which was partly offset by decreased cash outflow from advances to suppliers by $83,584, and decreased cash outflow on other receivable by $23,631. 31
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Net cash used in investing activities was
$215,106for the three months ended March 31, 2022, compared to $684,507for the three months ended March 31, 2021. Net cash used in investing activities in 2022 mainly consisted of purchase of property and equipment of $2,463and $212,643payment for constructing the adsorption station. Net cash used in investing activities in 2021 mainly consisted of purchase of property and equipment of $33,606, and $650,901payment for constructing the absorption station for preliminarily extract lithium ion from brine for further concentration and purification. Net cash provided by financing activities was $377,877for the three months ended March 31, 2022, compared to $126,738for the three months ended March 31, 2021. The net cash provided by financing activities in 2022 consisted of amount due to other related parties of $377,877, include loans from Xi'an Jinzang described below. The net cash provided by financing activities in 2021 consisted of amount owing to other related parties of $747,140include loans from Xi'anJinzang described below, but partly offset by increase in due from QinghaiMining of $620,402. During the first quarter of 2021, Qinghai Zhongli and Xi'an Jinzang entered three loan contracts for Qinghai Zhongli borrowing RMB 4 million( $630,100) 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 Projectof Qinghai Zhongli. The Company was to repay RMB 2.5 million( $393,812) with accrued interest by June 30, 2021and repay the remaining RMB 1.5 million( $236,287) 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 4.0 million( $630,100) at March 31, 2022; in addition, the Company borrowed additional RMB 2 million( $315,050) with the same terms during the second quarter of 2021 under the oral agreement. The Company borrowed additional RMB 2 million( $315,050) with the same terms during the third quarter of 2021 under the oral agreement. The Company borrowed additional RMB 3 million( $472,575) with the same terms during the first quarter of 2022 under the oral agreement, but the Company only received RMB 2 million( $315,050). The Company recorded $80,935and $55,679capitalized interest on CIP of Adsorption Station as of March 31, 2022and 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 Chinafor 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 Chinais 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. 32
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