Six Months Ended June 30, 2020 Financial Highlights (all comparisons to the six months ended June 30, 2019 unless noted)

Revenues increased by 16.80% from $8.73 million to $10.19 million, which resulted from: 1) Greater sales force allocation into new target markets and existing markets; 2) More project sales were generated for the six months ended June 30, 2020.

Cost of revenues increased by 6.13% from $4.50 million to $4.78 million due to the increase of revenues.

Gross profit increased by 28.18% to $5.41 million compared to $4.22 million for the same period in 2019, while the gross profit margin was 53.11%, compared to 48.39% for the same period in 2019. The increase was due to higher revenue generated per unit of waste water processed for certain projects related to the treatment of leachate from landfill, where the Company believes it possesses technology advantages in this specific field.

Operation expense decreased by 16.79% from $5.45 million to $4.53 million, and the percentage of operation expense compared to revenue decreased from 62.44% to 44.48%.

Income from operations increased from loss from operations of $1.23 million to income from operations of $0.88 million, due to the increase in gross margin and decrease in selling, general and administrative expenses.

"2021 will be our year of management efficiency." commented Mr. Yuebiao Li, the Company's Chairman and Chief Executive Officer, " We plan to improve management efficiency and remain committed to research and development of DTRO technology as well as expanding the application of DTRO technology in new markets，we believe we will soon see new revenue streams generating from those markets."

Operating Results for Six Months Ended June 30, 2020

Revenues

We derive our revenues from (1) sale of products such as reverse osmosis and nano-filtration membrane equipment and wastewater treatment equipment ("product revenues"); (2) sale of wastewater treatment projects ("project revenues"); and (3) providing wastewater treatment services to landfill leachates, briny wastewater from industrial parks and coal mines ("service revenues"). Revenues consist of the invoiced value for the sales, net of value-added tax ("VAT"), business tax, applicable local government levies, rebates, discounts and returns.

For the six months ended June 30, 2020, revenues increased by $1.47 million, or 16.80%, to $10.19 million from $8.73 million for the same period last year. This increase was mainly caused by the increase in project sales.

Our project revenues are recognized when our performance obligation under the terms of a contract with the customer are satisfied and control of the products has been transferred to the customer, which normally occurs (i) when customer-issued formal acceptance is obtained or (ii) the Company has demonstrated the equipment meets the agreed-upon criteria per the contract when formal acceptance is not available.

Our service revenues are recognized as the performance obligations are satisfied over time, because our customers simultaneously receive and consume benefits as the services are provided by us. Specifically, the revenues have been recognized based on the volume of wastewater purified multiplied by negotiated contract billing rates.

Cost of revenues

Cost of revenues consist primarily of (i) materials and equipment costs, (ii) compensation and related overhead expenses for personnel involved in the customization of our products, delivery, installation and maintenance and services, (iii) contractor costs, and (iv) depreciation of equipment used in operations.

Cost of revenues increased by $0.28 million, or 6.13%, to $4.78 million for the six months ended June 30, 2020 from $4.50 million for the same period last year. As a percentage of revenues, cost of revenues was 46.89% for the six months ended June 30, 2020, compared to 51.61% for the same period last year. The increase of cost of revenues was due to the increase of revenues.

Gross profit and gross margin

Gross profit increased slightly by $1.19 million, or 28.18%, to $5.41 million for the six months ended June 30, 2020 from $4.22 million for the same period last year. In addition, gross margin increased to 53.11% for the six months ended June 30, 2020 from 48.39% for the same period last year. The increase in gross margin was due to the facts that: (1) higher revenue generated per unit of waste water processed for certain projects related to the treatment of leachate from landfill, where the Company believes it possesses technology advantages in this specific field; (2) more membrane column products were sold for the six months ended June 30, 2020, which had a higher gross margin.

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") decreased by $0.91 million, or 16.79%, to $4.53 million for the six months ended June 30, 2020 from $5.45 million for the same period last year. The decrease was partially due to the decrease in R&D expense, travelling expense, business and entertainment expenses.

R&D expenses decreased by 46.78% for the six months ended June 30, 2020 due to decreased R&D investments into coal mine wastewater and municipal wastewater. Research and development expenses accounted for 29.42% of the selling, general and administrative expenses for the six months ended June 30, 2020, compared with 47.98% for the same period of 2019.

Operating income (loss) and operating margin

Income from operations increased by $2.11 million, to an income of $0.88 million for the six months ended June 30, 2020 from loss of $1.23 million for the same period last year. Operating margin was positive 8.63% for the six months ended June 30, 2020, compared to negative 14.04% for the same period last year.

The significant increase in operating income and operating margin mainly resulted from the increase in revenues, the increase in gross margin, and decrease in expenses for the six months ended June 30, 2020.

Income Taxes

Provision for income taxes was $0.26 million for the six months ended June 30, 2020, an increase of $0.20 million, or 343.39%, from $0.06 million for the same period of last year. We were entitled to a preferential enterprise income tax ("EIT") rate of 15% in 2020 and 2019. The standard enterprise income tax rate in China is 25%.

Net Income (loss)

Net income was $0.65 million for the six months ended June 30, 2020, compared to net loss of 0.98 million for the same period last year. Earnings per basic and diluted share was $0.06 for the six months ended June 30, 2020, compared to a loss per share of $0.09 for the same period last year.

Financial Conditions

As of June 30, 2020, the Company had cash of $9.47 million, compared to $9.94 million at December 31, 2019. Total working capital was $1.25 million as of June 30, 2020, compared to $1.34 million at the end of 2019.

Net cash used in operating activities was $3.92 million for the six months ended June 30, 2020, compared to net cash used in operating activities of $1.10 million for the same period last year. Net cash used in investing activities was $2.83 million for the six months ended June 30, 2020, compared to $1.07 million for the same period last year. Net cash provided by financing activities was $2.47 million for the six months ended June 30, 2020, compared to $0.93 million for the same period of last year.

Recent Developments

In January 2020, the Company and Yantai Caijin Investment Holding Co., Ltd invested an additional RMB 20,000,000 (approximately $2,873,000) and RMB 30,000,000 (approximately $4,310,000), respectively, in Yantai Jincai Environmental Protection Technology Co., Ltd. The equity interest of Yantai Jincai Environmental Protection Technology Co., Ltd owned by the Company remained at 40%.

On May 29, 2020, the Company and Yantaishi Zhengda Urban Construction Progress Co., Ltd. established Yantai Jinyu Eco-Technology Co., Ltd. ("Yantai Jinyu"), an environmental technology development company. The Company holds 40% equity interest in Yantai Jinyu and intends to invest RMB 20,000,000 (approximately $2,798,000) capital in Yantai Jinyu. The investment was not paid as of June 30, 2020.

The outbreak of the COVID-19 pandemic in China starting from the end of 2019 has posed limitations to the Company's normal operating routine. The Company followed the restrictive measures implemented in China, by suspending onsite operation until February 2020, when the Company started to gradually resume normal operation. The Company has experienced suspension of operations, interruption of supply chains and decline in demand by the Company's customers. Currently, there are still sporadic new COVID-19 pandemic cases in China, but the overall epidemic situation is under control. Our Company has resumed to normal operations, Due to the high uncertainty of the evolving situation, the Company has limited visibility on the full impact brought upon by the COVID-19 pandemic and the related financial impact cannot be estimated at this time.

• Newater Technology Inc.