The financial statements and supplementary
data required by this item are included in a separate section of this Report. See “Index to Consolidated Financial Statements”
on Page F-1.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2019 AND 2018
(Expressed in U.S. dollars)
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
issued
|
|
Number
of shares
outstanding
|
|
Number
of treasury
stock
|
|
Amount
|
|
Treasury
stock
|
|
Additional
paid-in
capital
|
|
Retained
earnings
unappropriated
|
|
Retained
earnings
appropriated
|
|
Accumulated
other
comprehensive
Income
(loss)
|
|
Total
|
BALANCE AT
JANUARY 1, 2018
|
|
|
9,410,588
|
|
|
|
9,360,758
|
|
|
|
49,830
|
|
|
$
|
23,525
|
|
|
$
|
(554,870
|
)
|
|
$
|
94,524,608
|
|
|
$
|
255,572,431
|
|
|
$
|
24,233,544
|
|
|
$
|
8,162,958
|
|
|
$
|
381,962,196
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,641,006
|
)
|
|
|
(18,641,006
|
)
|
Issuance of stock options to employees and directors
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
496,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
496,200
|
|
Net loss for year ended
December 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(69,963,986
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(69,963,986
|
)
|
BALANCE AT
DECEMBER 31, 2018
|
|
|
9,410,588
|
|
|
|
9,360,758
|
|
|
|
49,830
|
|
|
$
|
23,525
|
|
|
$
|
(554,870
|
)
|
|
$
|
95,020,808
|
|
|
$
|
185,608,445
|
|
|
$
|
24,233,544
|
|
|
$
|
(10,478,048
|
)
|
|
$
|
293,853,404
|
|
BALANCE AT
JANUARY 1, 2019
|
|
|
9,410,588
|
|
|
|
9,360,758
|
|
|
|
49,830
|
|
|
$
|
23,525
|
|
|
$
|
(554,870
|
)
|
|
$
|
95,020,808
|
|
|
$
|
185,608,445
|
|
|
$
|
24,233,544
|
|
|
$
|
(10,478,048
|
)
|
|
$
|
293,853,404
|
|
Translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,013,759
|
)
|
|
|
(5,013,759
|
)
|
Shares issued from treasury stock for services
|
|
|
—
|
|
|
|
4,000
|
|
|
|
(4,000
|
)
|
|
|
—
|
|
|
|
44,541
|
|
|
|
(22,941
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,600
|
|
Cashless exercise of stock options
|
|
|
151,856
|
|
|
|
151,856
|
|
|
|
—
|
|
|
|
379
|
|
|
|
—
|
|
|
|
(379
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of stock options to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,900
|
|
Net loss for year ended December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,800,045
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,800,045
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2019
|
|
|
9,562,444
|
|
|
|
9,516,614
|
|
|
|
45,830
|
|
|
$
|
23,904
|
|
|
$
|
(510,329
|
)
|
|
$
|
95,043,388
|
|
|
$
|
159,808,400
|
|
|
$
|
24,233,544
|
|
|
$
|
(15,491,807
|
)
|
|
$
|
263,107,100
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
GULF RESOURCES, INC.
|
AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Expressed in U.S. dollars)
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(25,800,045
|
)
|
|
$
|
(69,963,986
|
)
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Interest on capital lease obligation
|
|
|
144,881
|
|
|
|
159,839
|
|
Amortization of prepaid land leases
|
|
|
—
|
|
|
|
761,713
|
|
Depreciation and amortization
|
|
|
14,060,927
|
|
|
|
17,443,318
|
|
Allowance for obsolete and slow-moving inventories
|
|
|
—
|
|
|
|
21,248
|
|
Write-off / Impairment loss on property, plant and equipment
|
|
|
—
|
|
|
|
1,397,313
|
|
Write-off of Prepaid land lease
|
|
|
—
|
|
|
|
4,004,788
|
|
Loss on demolition of factories
|
|
|
—
|
|
|
|
18,644,473
|
|
Impairment for goodwill
|
|
|
—
|
|
|
|
27,966,050
|
|
Unrealized translation difference
|
|
|
(421,657
|
)
|
|
|
(1,315,454
|
)
|
Deferred tax asset
|
|
|
2,746,770
|
|
|
|
(13,087,855
|
)
|
Stock-based compensation expense-options
|
|
|
45,900
|
|
|
|
496,200
|
|
Shares issued from treasury stock for services
|
|
|
21,600
|
|
|
|
—
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,070,180
|
)
|
|
|
30,241,680
|
|
Other receivables
|
|
|
11,794
|
|
|
|
(11,289
|
)
|
Inventories
|
|
|
(700,476
|
)
|
|
|
1,192,262
|
|
Prepayment and deposits
|
|
|
14,166
|
|
|
|
(81,469
|
)
|
Payable and accrued expenses
|
|
|
(102,963
|
)
|
|
|
(106,163
|
)
|
Retention payable
|
|
|
—
|
|
|
|
(597,991
|
)
|
Taxes payable
|
|
|
(374,575
|
)
|
|
|
175,994
|
|
Operating lease
|
|
|
114,746
|
|
|
|
—
|
|
Net cash (used in) provided by operating activities
|
|
|
(15,309,112
|
)
|
|
|
17,340,671
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Additions of prepaid land leases
|
|
|
—
|
|
|
|
(680,975
|
)
|
Purchase of property, plant and equipment
|
|
|
(60,611,949
|
)
|
|
|
(35,273,307
|
)
|
Net cash used in investing activities
|
|
|
(60,611,949
|
)
|
|
|
(35,954,282
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayment of finance lease obligation
|
|
|
(275,509
|
)
|
|
|
(294,295
|
)
|
Net cash used in financing activities
|
|
|
(275,509
|
)
|
|
|
(294,295
|
)
|
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
|
|
(2,500,379
|
)
|
|
|
(10,999,918
|
)
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(78,696,949
|
)
|
|
|
(29,907,824
|
)
|
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
|
|
178,998,935
|
|
|
|
208,906,759
|
|
CASH AND CASH EQUIVALENTS - END OF YEAR
|
|
$
|
100,301,986
|
|
|
$
|
178,998,935
|
|
GULF RESOURCES, INC.
|
AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
|
(Expressed in U.S. dollars)
|
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating right-of-use assets obtained in exchange for lease obligations
|
|
$
|
8,241,818
|
|
|
$
|
—
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of Property, plant and equipment included in Retention payable
|
|
$
|
3,515,132
|
|
|
$
|
—
|
|
Par value of common stock issued upon cashless exercise of options
|
|
$
|
379
|
|
|
$
|
—
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Basis of Presentation and Consolidation
|
The accompanying audited consolidated financial
statements have been prepared by Gulf Resources, Inc. (“Gulf Resources”). a Nevada corporation and its subsidiaries
(collectively, the “Company”).
The consolidated financial statements include
the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the
British Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”).
HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited (“SCHC”) which owns 100% of Shouguang Yuxin Chemical
Industry Co., Limited (“SYCI”) and Daying County Haoyuan Chemical Company Limited (“DCHC”). All
material intercompany transactions have been eliminated on consolidation.
The Company manufactures and trades bromine
and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited (“SCHC”) and manufactures
chemical products for use in the oil industry, pesticides, paper manufacturing industry and for human and animal antibiotics through
its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”) in the People’s Republic
of China (“PRC”). DCHC was established to further explore and develop natural gas and brine resources (including bromine
and crude salt) in the PRC. DCHC’s business commenced trial operation in January 2019 but suspended production temporarily
in May 2019 as required by the government to obtain project approval (see Note 1 (b)(iii)).
(i) Bromine and Crude Salt Segments
On September 1, 2017, the Company received
notification from the Government of Yangkou County, Shouguang City of PRC that production at all its factories should be halted
with immediate effect in order for the Company to perform rectification and improvement in accordance with the county’s new
safety and environmental protection requirements.
The Company worked closely with the county
authorities to develop rectification plans for both its bromine and crude salt businesses and agreed on a plan in October 2017.
In the fiscal year ended December 31, 2018, the Company incurred $16,243,677 in the rectification and improvements of plant and
equipment of the bromine and crude salt factories resulting in a cumulative amount of $34,182,329 incurred as of December 31, 2018
recorded in the plant, property and equipment in the consolidated balance sheet. No such costs were incurred in the year ended
December 31, 2019 and the Company does not expect to incur any additional capital expenditures in the rectification of its bromine
and crude salt factories in respect of meeting the county’s new safety and environmental protection requirement.
In the first quarter of 2018, six out of
its ten bromine factories completed their rectification process within factory areas (i.e. excluding crude salt field area) and
were approved and scheduled for production commencement by April 2018 as verbally indicated by the local government. The remaining
four factories were still undergoing rectification at that time. Three factories (Factory no. 3, Factory no. 4 and Factory no.
11) had to be demolished in September 2018 as required by the government and rectification for Factory no. 10 was completed in
November 2018.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
In 2018, the Shandong Provincial government
required the local government to conduct “four rating and one comprehensive evaluation” for all of the chemical companies
within its jurisdiction. This has delayed the production commencement schedule of the six bromine and crude salt factories in which
rectification work was completed. On June 29 2018, the Company received a formal notice (dated June 25, 2018) jointly issued by
various provincial government agencies in Shandong Province (the “Notice”) forwarded by the Weifang City Special Operations
Leading Group Office of Safe Production, Transformation and Upgrading of Chemical Industry. In the Notice, the provincial government
agencies set forth further requirements and procedures covering the following four aspects for the chemical industrial enterprises:
project approval, planning approval, land use rights approval and environmental protection assessment approval. Those standards
and procedures apply to all chemical industrial enterprises in Shandong Province including the Company’s bromine plants that
have not completed project approval procedures, planning approval procedures, land use rights approval procedures and environmental
protection assessment procedures. The Company believes that the government will not grant approval to the Company to allow its
bromine and crude salt plants to resume operations until the Company has fully complied with the aforesaid rules set forth in the
Notice.
The Shouguang City Bromine Association,
on behalf of all the bromine plants in Shouguang, has started discussions with the local government agencies. The local governmental
agencies confirmed the facts that their initial requirements for the bromine industry did not include the project approval, the
planning approval and the land use rights approval and that those three additional approvals were new requirements of the provincial
government. The Company understood from the local government that it has been coordinating with several government agencies to
solve these three outstanding approval issues in a timely manner and that all the affected bromine plants are not allowed to commence
production prior to obtaining those approvals. In April 2019, Factory No.1, Factory No.5 and Factory No.7 (Factory no. 5 is considered
part of Factory no.7 and both are managed as one factory since 2010) restarted operations upon receipt of verbal notification from
local government of Yangkou County. On May 7, 2019, the Company renamed its Subdivision Factory No. 1 to Factory No. 4; and Factory
No. 5 (which was previously considered part of Factory No. 7) to Factory No. 7.
On November 25, 2019, the government of
Shouguang City issued a notice ordering all bromine facilities in Shouguang City, including the Company’s bromine facilities,
including Factory No.1 and Factory No.7, to temporarily stop production from December 16, 2019 to February 10, 2020. Subsequently,
due to an outbreak of a novel coronavirus (COVID-19) in China, the local government ordered these bromine facilities to postpone
the commencement of production. On February 27, 2020, the Company received an approval issued by the local governmental authority
which allows the Company to resume production after the winter temporary closure. It received another approval from the Shouguang
Yangkou People’s Government dated March 5, 2020 to resume production at its bromine factories No.1, No. 4, No.7 and No. 9
in order to meet the needs of bromide products for epidemic prevention and control. Company factories No.7 and No.1 had started
trial production in the middle of March, 2020, and these two factories started its commercial production on April 3,2020.
The Company is not certain when the issuance
of the approval documents will be effected. The Company believes that this is another step by the government to improve the environment.
It further believes the goal of the government is not to close all plants, but rather to codify the regulations related to project
approval, land use, planning approval and environmental protection assessment approval so that illegal plants are not able to open
in the future and so that plants close to population centers do not cause serious environmental damage. In addition, the Company
believes that the Shandong provincial government wants to assure that each of its regional and county governments has applied the
Notice in a consistent manner.
The Company believes the issues related
to the remaining bromine and crude salt factories including No.2, No.8, No.10 which have passed inspection are almost resolved.
The Company is actively working with the local government to obtain the documentation for approval of project, planning, land use
rights and environmental protection evaluation.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(ii) Chemical Segment
On November 24, 2017, the Company received
a letter from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants
located in the second living area of the Qinghe Oil Extraction to the Bohai Marine Fine Chemical Industrial Park (“Bohai
Park”). This is because the two plants are located in a residential area and their production activities will impact the
living environment of the residents. This is as a result of the country’s effort to improve the development of the chemical
industry, manage safe production and curb environmental pollution accidents effectively, and ensure the quality of the living environment
of residents. All chemical enterprises which do not comply with the requirements of the safety and environmental protection regulations
will be ordered to shut down.
The Company believes this relocation process
will cost approximately $60 million in total. The Company incurred relocation costs comprising prepaid land lease and professional
fees related to the design of the new chemical factory in the amount of $10,320,017 and 10,489,930, which were recorded in the
prepaid land leases and property, plant and equipment in the consolidated balance sheets as of December 31, 2019 and December 31,
2018.
The Company does not anticipate that the
Company’s new chemical factory to be significantly impacted by the Notice. The Company has secured from the government the
land use rights for its chemical plants located at the Bohai Park and presented a completed construction design draft and other
related documents to the local authorities for approval. On January 6 , 2020, the Company received the environmental protection
approval by the government of Shouguang City, Shandong Province for the proposed Yuxin Chemical factory. The environmental protection
approval was the last approval required before commencing construction. With this approval, Gulf Resources plans to begin construction
in May 2020.
(iii) Natural Gas Segment
In January 2017, the Company completed
the first brine water and natural gas well field construction in Daying located in Sichuan Province and commenced trial production
in January 2019. On May 29, 2019, the Company received a verbal notice from the government of Tianbao Town ,Daying County, Sichuan
Province, whereby the Company is required to obtain project approval for its well located in Daying, including the whole natural
gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve
the related land issue. Until these approvals have been received, the Company has to temporarily halt trial production at its natural
gas well in Daying. At present, some documents have been submitted and the Company is still waiting for approval.
The Company’s consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The
Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under
the circumstances. The most significant accounting estimates with regard to these consolidated financial statements
that require the most significant and subjective judgments include, but are not limited to, useful lives of property, plant and
equipment, recoverability of long-lived assets, determination of impairment losses, assessment of market value of inventories and
provision for inventory obsolescence, allowance for doubtful accounts, recognition and measurement of deferred income taxes, valuation
allowance for deferred tax assets, and assumptions used for the valuation of share based payments. Accordingly, actual
results may differ significantly from these estimates under different assumptions or conditions.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
|
(d)
|
Cash and Cash Equivalents
|
Cash and cash equivalents consist of all
cash balances and highly liquid investments with original maturities of three months or less. Because of short maturity of these
investments, the carrying amounts approximate their fair values.
|
(e)
|
Accounts receivable and Allowance for Doubtful Accounts
|
Accounts receivable is stated at cost,
net of allowance for doubtful accounts. The normal credit term extended to customers ranges between 90 and 240 days. The company
reviews all receivables that exceed the term. The Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectability of trade and other receivables. A considerable amount of judgment is required in assessing the
amount of allowance and the Company considers the historical level of credit losses. The Company makes judgments about the credit
worthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level
of credit losses in the future. If the financial condition of the customer begins to deteriorate, resulting in their inability
to make payments within credit term provided, a larger allowance may be required.
As of December 31, 2019 and December 31,
2018, There were no allowances for doubtful accounts. No allowances for doubtful accounts were charged to the consolidated statements
of loss for years ended December 31, 2019 and 2018.
|
(f)
|
Concentration of Credit Risk
|
The Company is exposed to credit risk in
the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the
Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial
Bank of China Limited, China Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise
protected. The Company placed $100,301,986 and $178,998,935 with these institutions as of December 31, 2019 and 2018, respectively. The
Company has not experienced any losses in such accounts in the PRC.
Concentrations of credit risk with respect
to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However,
such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial
condition and extends credit terms as and when appropriate.
Accounts receivable of $4,877,106 as of
December 31, 2019 was fully collected in the period January through March in 2020.
Inventories are stated at the lower of
cost, determined on a first-in first-out cost basis, or net realizable value. Costs of work-in-progress and finished goods comprise
direct materials, direct labor and an attributable portion of manufacturing overhead. Net realizable value is based on estimated
selling price less costs to complete and selling expenses.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
|
(h)
|
Property, Plant and Equipment
|
Property, plant and equipment are stated
at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures
for betterment of existing facilities or equipment are capitalized and depreciated, when available for intended use, using the
straight-line method at rates sufficient to depreciate such costs less 5% residual value over the estimated productive lives. All
other ordinary repair and maintenance costs are expensed as incurred.
Mineral rights are recorded at cost less
accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent
term under the units of production method, whichever is shorter.
Construction in process primarily represents
direct costs of construction of property, plant and equipment. Costs incurred are capitalized and transferred to property, plant
and equipment upon completion and depreciation will commence when the completed assets are placed in service.
The Company’s depreciation and amortization
policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:
|
|
Useful life
(in years)
|
Buildings (including salt pans)
|
|
8 - 20
|
Plant and machinery (including protective shells, transmission channels and ducts)
|
|
3 - 8
|
Motor vehicles
|
|
5
|
Furniture, fixtures and equipment
|
|
3-8
|
Property, plant and equipment under the
finance lease are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of
the lease, which is 20 years.
Producing oil and gas properties are depreciated
on a unit-of-production basis over the proved developed reserves. Common facilities that are built specifically to service production
directly attributed to designated oil and gas properties are depreciated based on the proved developed reserves of the respective
oil and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas
properties are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant
development projects are not depreciated until commercial production commences and the reserves related to those costs are excluded
from the calculation of depreciation.
|
(i)
|
Asset Retirement Obligation
|
The Company follows Financial Accounting
Standards Board Accounting Standards Codification (“FASB ASC”), which established a uniform methodology for accounting
for estimated reclamation and abandonment costs. FASB ASC 410 requires the fair value of a liability for an asset retirement obligation
to be recognized in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred.
When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference
between the liability and the amount of cash paid, a gain or loss upon settlement is recorded.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Currently, there are no reclamation or
abandonment obligations associated with the land being utilized for exploitation by the bromine and crude salt factories. Also,
for the two chemical plants that are to be relocated, currently, there are no obligations to restore the land to its original condition.
|
(j)
|
Recoverability of Long-lived Assets
|
In accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35”Impairment or Disposal
of Long-lived Assets”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets
are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that
indicate possible impairment.
The Company determines the existence of
such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount
to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount
of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying
amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of
the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the
carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.
For the year ended December 31, 2019, the
Company determined that there were no events or circumstances indicating possible impairment of its long-lived assets.
Upon the receipt of the closure notice
from the People’s Government of Yangkou Town, Shouguang City in September 2018 (See Note 1(b)), the Company demolished the
affected factories. As a result, the Company wrote off net book value of the affected factories’ property, plant and equipment
in the amount of $18,644,473 which was recorded in the loss on demolition of factories in the consolidated statements of loss for
the fiscal year ended December 31, 2018. The Company will negotiate with the local villages over compensation for the payment already
made for the land leases and mineral rights of these factories. However, the Company is uncertain of the amount that it could recover
and when this could be accomplished. Therefore, the Company wrote off the mineral rights of the affected factories of $1,284,832
included in the write-off/impairment on property, plant and equipment in the consolidated statements of loss for the fiscal year
ended December 31, 2018 and $52,926 of prepaid land lease recorded in other operating loss in the consolidated statements of loss
for fiscal year ended December 31, 2018. The Company incurred dismantling fees in the amount of $273,757 recorded in other operating
loss in the consolidated statements of loss for fiscal year ended December 31, 2018. In addition, the Company recorded a write-off
of $112,481 included in the write-off/impairment of property, plant and equipment for certain wells and equipment damaged by flood
from a typhoon that occurred in August 2018.
Pursuant to the relevant laws and regulations
in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization.
The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required
contributions under the retirement plans are charged to the consolidated statement of loss on an accrual basis when they are due.
The Company’s contributions totaled $1,035,687 and $1,216,096 for the years ended December 31, 2019 and 2018, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
The Company follows FASB ASC 805 “Business
Combinations” that certain mineral rights are considered tangible assets and that mineral rights should be accounted for
based on their substance. Mineral rights are included in property, plant and equipment.
The Company determines if an arrangement
is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating
lease liabilities in the consolidated balance sheets. Finance leases are included in finance lease ROU assets and finance lease
liabilities in the consolidated balance sheets.
ROU assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease
payments arising from the lease. Operating lease and finance lease ROU assets and liabilities are recognized at January 1, 2019
based on the present value of lease payments over the lease term discounted using the rate implicit in the lease. In cases where
the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available
at commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line
basis over the lease term.
The Company has elected not to recognize
operating lease ROU assets and liabilities arising from short-term lease.
|
(n)
|
Basic and Diluted Earnings per Share of Common Stock
|
Basic earnings per common share are based
on the weighted average number of shares outstanding during the periods presented. Diluted earnings per share are computed
using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential
common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the
exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock
equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 103,392 and 51,747
shares for the years ended December 31, 2019 and 2018, respectively. These awards could be dilutive in the future if the market
price of the common stock increases and is greater than the exercise price of these awards.
Because the Company reported a net loss
for the years ended December 31, 2019 and 2018, common stock equivalents including stock options and warrants were anti-dilutive,
therefore the amounts reported for basic and diluted loss per share were the same.
|
(o)
|
Reporting Currency and Translation
|
The financial statements of the Company’s
foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the
functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
As such, the Company uses the “current
rate method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”.
The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet
date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets
of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive income/(loss).
The consolidated statement of income/(loss) and comprehensive income/(loss) is translated at average rates during the reporting
period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income/(loss)
for the reporting periods as part of general and administrative expense. Included in the general and administrative expense is
a foreign exchange gain of $421,657 and $1,315,454 for the years ended December 31, 2019 and 2018. The consolidated statement of
cash flows is translated at the average rate during each quarter, with the exception of issuance of shares and payment of dividends
which are translated at historical rates.
All of the Company’s operations and
assets are located in PRC. The Company may be adversely affected by possible political or economic events in this country. The
effect of these factors cannot be accurately predicted.
Net revenue is net of discount and value
added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized at a point time when the control
of the promised goods is transferred to the customers in an amount that reflects the consideration that the Company expects to
receive from the customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control
of the product is deemed to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers
have no rights to return the goods upon acknowledgement of receipt of goods. Revenue from contracts with customers is disaggregated
in Note 15.
The Company accounts for income taxes in
accordance with the Income Taxes Topic of the FASB ASC, which requires the use of the liability method of accounting for deferred
income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary
differences between the tax basis of assets and liabilities and their reported amounts at each period end. Deferred tax assets
and liabilities are measured using tax rates that are expected to apply to taxable income for the years in which those tax assets
and liabilities are expected to be realized or settled. The deferred income tax effects of a change in tax rates are recognized
in the period of enactment. If it is more likely than not that some portion or all of a deferred tax asset will not be realized,
a valuation allowance is recognized. The guidance also provides criteria for the recognition, measurement, presentation and disclosures
of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not”
that the position is sustainable based solely on its technical merits. Interests and penalties associated with unrecognized tax
benefits are included within the (benefit from) provision for income tax in the consolidated statement of profit (loss).
Exploration costs, which included the cost
of researching for appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other
resources, are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all
subsequent costs are capitalized.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
For oil and gas properties, the successful
efforts method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient
quantity of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing
the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged
to expenses. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required
before production would begin and when the major capital expenditure depends upon the successful completion of further exploratory
work remain capitalized and are reviewed periodically for impairment.
The Company accrues for costs relating
to litigation, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities,
when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on
management’s judgment, as appropriate. Revisions to accruals are reflected in earnings (loss) in the period in which different
facts or information become known or circumstances change that affect the Company’s previous assumptions with respect to
the likelihood or amount of loss. Amounts paid upon the ultimate resolution of such liabilities may be materially different from
previous estimates.
|
(u)
|
Stock-based Compensation
|
The Company accounts for stock-based compensation
under the provisions of FASB ASC 718, Compensation Stock Compensation, which requires the measurement and recognition of
compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date.
The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the
straight-line method. In June 2018, the FASB
issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 7I8),
Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to
include share-based payment transactions for acquiring goods and services from nonemployees. Prior to this Update, Topic 718 applied
only to share-based transactions to employees. Consistent with the accounting requirement for employee share-based payment awards,
nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments
that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions
necessary to earn the right to benefit from the instruments have been satisfied. The Company has elected to account for the forfeiture
of stock-based awards as they occur.
|
(v)
|
New Accounting Pronouncements
|
Recent accounting pronouncements adopted
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842). The amendments in this Update specify the accounting for leases. The core principle of Topic 842 is
that a lessee should recognize the assets and liabilities that arise from operating leases. The Company adopted the standard effective
January 1, 2019 under the optional transition method which allows an entity to apply the new lease standard at the adoption date
and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period of adoption. The
Company elected the available practical expedients. As a result of the adoption of this standard, the Company recognized operating
lease ROU assets of $8,817,884, operating lease liabilities of $8,348,453, with the remaining balance paid in the consolidated
financial statements as of and for the year ended December 31, 2019 with no cumulative-effect adjustment to retained earnings as
of January 1, 2019.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
In June 2018, the FASB issued ASU No.2018-07,
Compensation- Stock Compensation (Topic 718). Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this
update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.
Prior to this update, Topic 718 applied only to share-based transactions to employees. Consistent with the accounting requirements
for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date
fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been
rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The amendments
in the Update are effective for public business entities form fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. The Company adopted this standard as of January 1, 2019. This adoption of this standard does not
have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments
in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right
to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets.
For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. The Company is currently evaluating the effect of this on the consolidated financial statements and related disclosure.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 2 – INVENTORIES
Inventories consist of:
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Raw materials
|
|
$
|
20,928
|
|
|
$
|
—
|
|
Finished goods
|
|
|
669,159
|
|
|
|
65,169
|
|
Allowance for obsolete and slow-moving inventory
|
|
|
—
|
|
|
|
(65,169
|
)
|
|
|
$
|
690,087
|
|
|
$
|
—
|
|
NOTE 3 – PREPAID LAND LEASES
The Company has the rights to use certain
parcels of land located in Shouguang, Shandong , PRC, through lease agreements signed with local townships or the government authority.
The production facilities and warehouses of the Company are located on these parcels of land. The lease term ranges from ten to
fifty years. Some of the lease contracts were paid in one lump sum upfront and some are paid annually at the beginning of each
anniversary date. These leases have no purchase option at the end of the lease term and were classified as operating leases prior
to and as of January 1, 2019 when the new lease standard was adopted. Prior to January 2019, the prepaid land lease was amortized
on a straight line basis. As of January 1, 2019, all the leases in which term has commenced and were in use were classified as
operating lease right-of-use assets (“ROU”). See Note 6.
In December 2017, the Company paid a one
lump sum upfront amount of $9,115,276 for a 50-year lease of a parcel of land at Bohai Marine Fine Chemical Industrial Park (“Bohai”)
for the new chemical factory to be built. There is no purchase option at the end of the lease term. This was classified as an operating
lease prior to and as of January 1, 2019. The land use certificate was issued on October 25, 2019. The lease term expires on August
12, 2069. As of December 31, 2019, the construction of the chemical factory has not commenced. The amount paid was recorded as
prepaid land leases, net of current portion in the consolidated balance sheet as of Dec 31, 2019 and 2018. No amortization of this
prepaid land lease was recorded as of December 31, 2019. Amortization will commence when the factory is completed and placed in
service.
During the year ended December 31, 2018,
amortization of prepaid land leases totaled $761,713, which amounts were recorded as direct labor and factory overheads incurred
during plant shutdown.
For parcels of land that are collectively
owned by local townships, the Company cannot obtain land use rights certificates. The parcels of land of which the Company cannot
obtain land use rights certificates cover a total of approximately 38.6 square kilometers with an aggregate carrying value in prepaid
land lease of $599,747 as at December 31, 2018.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment, net consist
of the following:
|
|
December 31,
2019
|
|
December 31,
2018
|
At cost:
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
2,764,462
|
|
|
$
|
2,809,977
|
|
Buildings
|
|
|
59,880,567
|
|
|
|
60,866,462
|
|
Plant and machinery
|
|
|
234,669,007
|
|
|
|
161,178,816
|
|
Motor vehicles
|
|
|
6,129
|
|
|
|
6,230
|
|
Furniture, fixtures and office equipment
|
|
|
3,235,736
|
|
|
|
3,289,010
|
|
Construction in process
|
|
|
1,204,742
|
|
|
|
6,535,808
|
|
Total
|
|
|
301,760,643
|
|
|
|
234,686,303
|
|
Less: Accumulated depreciation and amortization
|
|
|
(146,330,705
|
)
|
|
|
(134,681,628
|
)
|
Impairment
|
|
|
(17,434,989
|
)
|
|
|
(17,722,045
|
)
|
Net book value
|
|
$
|
137,994,949
|
|
|
$
|
82,282,630
|
|
The Company has certain buildings and salt
pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships or
the government authority. The Company has not been able to obtain property ownership certificates over these buildings and salt
pans. The aggregate carrying values of these properties situated on parcels of the land are $ 19,894,947 and $20,409,998 as at
December 31, 2019 and December 31, 2018, respectively.
During the year ended December 31, 2019,depreciation
and amortization expense totaled $13,991,583 of which $ 10,796,085, $848,345 and $2,347,153 were recorded in direct labor and factory
overheads incurred during plant shutdown, administrative expenses and cost of net revenue.
During the year ended December 31, 2018,
depreciation and amortization expense totaled $17,176,306, of which $16,209,588 and $966,718 were recorded in direct labor and
factory overheads incurred during plant shutdown and administrative expenses, respectively in the consolidated statement of income
(loss).
NOTE 5 –FINANCE LEASE RIGHT-OF-USE
ASSETS
Property, plant and equipment under finance
leases, net consist of the following:
|
|
December 31,
2019
|
|
December 31,
2018
|
At cost:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
117,956
|
|
|
$
|
119,899
|
|
Plant and machinery
|
|
|
2,157,848
|
|
|
|
2,193,375
|
|
Total
|
|
|
2,275,804
|
|
|
|
2,313,274
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,096,278
|
)
|
|
|
(2,062,517
|
)
|
Net book value
|
|
$
|
179,526
|
|
|
$
|
250,757
|
|
The above buildings erected on parcels
of land located in Shouguang, PRC, are collectively owned by local townships. The Company has not been able to obtain
property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying
parcels of land.
During the year ended December 31, 2019,
depreciation and amortization expense totaled $69,344, respectively, which was recorded in direct labor and factory overheads incurred
during plant shutdown.
During the year ended December 31, 2018,
depreciation and amortization expense totaled $267,012, respectively, which was recorded in direct labor and factory overheads
incurred during plant shutdown.
NOTE 6 – OPERATING LEASE RIGHT–OF-USE
ASSETS
As of December 31, 2019, the total operating
lease ROU assets was $8,817,884.
The total operating lease cost for the
years ended December 31, 2019 and 2018 was $889,683 and $1,046,486.
The Company has the rights to use certain
parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships or the government authority
(See Note 3). For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates.
The parcels of land of which the Company cannot obtain land use rights certificates covers a total of approximately 38.6 square
kilometers with an aggregate operating lease right-of-use assets amount of $8,326,861 as at December 31, 2019.
NOTE 7 –PAYABLE AND ACCRUED EXPENSES
Payable and accrued expenses consist of
the following:
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Salary payable
|
|
$
|
310,097
|
|
|
$
|
241,343
|
|
Social security insurance contribution payable
|
|
|
105,750
|
|
|
|
140,326
|
|
Other payable-related party (see Note 8)
|
|
|
89,424
|
|
|
|
90,900
|
|
Deposit on subscription of a subsidiary’s share
|
|
|
144,798
|
|
|
|
—
|
|
Accrued expense for construction
|
|
|
97,913
|
|
|
|
104,246
|
|
Accrued expense-others
|
|
|
358,066
|
|
|
|
328,443
|
|
Total
|
|
$
|
1,106,048
|
|
|
$
|
905,258
|
|
The deposit on subscription of a subsidiary’s
share of $144,798 as of December 31, 2019 relates to sale of non-controlling interests in DCHC.
NOTE 8 – RELATED PARTY TRANSACTIONS
During the fiscal years 2019 and 2018,
the Company borrowed $419,995 and $355,212, and fully repaid later during the same period, from Jiaxing Lighting Appliance Company
Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, has a 100% equity interest.
The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand. There was no balance owing to Jiaxing
Lighting as of December 31, 2019 and 2018.
On September 25, 2012, the Company purchased
five floors of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd.
(the “Seller”) at a cost of approximately $5.7 million in cash, of which Mr. Ming Yang, the Chairman of the Company,
had a 99% equity interest in the Seller. During the first quarter of 2018, the Company entered into an agreement with the Seller,
a related party, to provide property management services for an annual amount of approximately $89,425 for five years from January
1, 2018 to December 31, 2022. The expense associated with this agreement for the year ended December 31, 2019 was approximately
$89,425.The expense associated with this agreement for the year ended December 31, 2018 was approximately $90,897.
NOTE 9 – TAXES PAYABLE
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Land use tax payable
|
|
$
|
779,623
|
|
|
$
|
1,188,687
|
|
NOTE 10 –LEASE LIABILITIES-FINANCE
AND OPERATING LEASE
The components of finance lease liabilities
were as follows:
|
|
Imputed
|
|
December 31,
|
|
December 31,
|
|
|
Interest rate
|
|
2019
|
|
2018
|
Total finance lease liability
|
|
6.7%
|
|
$
|
2,104,278
|
|
|
$
|
2,267,025
|
|
Less: Current portion
|
|
|
|
|
(198,506
|
)
|
|
|
(197,480
|
)
|
Finance lease liability, net of current portion
|
|
|
|
$
|
1,905,772
|
|
|
$
|
2,069,545
|
|
Interest expenses from finance lease obligations
amounted to $144,880 and $159,839 for the years ended December 31, 2019 and 2018, respectively, which were charged to the consolidated
statement of loss.
The components of operating lease liabilities
as follows:
|
|
Imputed
|
|
December 31,
|
|
December 31,
|
|
|
Interest rate
|
|
2019
|
|
2018
|
Total Operating lease liabilities
|
|
4.89%
|
|
$
|
8,348,453
|
|
|
$
|
—
|
|
Less: Current portion
|
|
|
|
|
(416,604
|
)
|
|
|
—
|
|
Operating lease liabilities, net of current portion
|
|
|
|
$
|
7,931,849
|
|
|
$
|
—
|
|
The weighted average remaining operating
lease term at December 31, 2019 was 22.3 years and the weighted average discounts rate was 4.89%, This discount rates used are
based on the base rate quoted by the People’s Bank of China and vary with the remaining term of the lease.
Maturities of lease liabilities were as
follows:
|
|
Finance lease
|
|
Operating Lease
|
Payable within:
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
269,049
|
|
|
$
|
772,866
|
|
the next 13 to 24 months
|
|
|
269,049
|
|
|
|
786,584
|
|
the next 25 to 36 months
|
|
|
269,049
|
|
|
|
637,294
|
|
the next 37 to 48 months
|
|
|
269,049
|
|
|
|
644,149
|
|
the next 49 to 60 months
|
|
|
269,049
|
|
|
|
641,946
|
|
thereafter
|
|
|
1,614,295
|
|
|
|
11,442,172
|
|
Total
|
|
|
2,959,540
|
|
|
|
14,925,011
|
|
Less: Amount representing interest
|
|
|
(855,262
|
)
|
|
|
(6,576,558
|
)
|
Present value of net minimum lease payments
|
|
$
|
2,104,278
|
|
|
$
|
8,348,453
|
|
NOTE 11 ––EQUITY
Reverse Stock Split and Authorized Shares
On January 27, 2020, the Company completed
a 1-for-5 reverse stock split of the company’s common stock, such that for each five shares outstanding prior to the stock
split there was one share outstanding after the reverse stock split. All shares of common stock referenced in this report have
been adjusted to reflect the stock split figures.
There is no change to the authorized shares
of the Company' common stock which remain at 80,000,000.
Retained Earnings - Appropriated
In accordance with the relevant PRC regulations
and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit
after tax to the following reserve:
Statutory Common Reserve Funds
SCHC, SYCI and DCHC are required each year
to transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common
Reserve Funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any
loss incurred or to increase share capital. Except for the reduction of losses incurred, any other application should
not result in this reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of December
31, 2019 for SCHC, SYCI and DCHC is 16%, 14% and 0% of its registered capital respectively.
Retained earnings - Unappropriated
SCHC transferred approximately $84 million
( equivalent to RMB590 million) from its undistributed profit to its paid in capital during the year ended December 31, 2019.
NOTE 12 – TREASURY STOCK
In January 2019, the Company issued 4,000
shares of common stock from the treasury shares to one of its consultants. The shares were valued at the closing market price on
the date of the agreement and recorded as general and administrative expense in the consolidated statement of loss and comprehensive
loss for the year ended December 31, 2019. The shares issued were deducted from the treasury shares at weighted average cost and
the excess of the cost over the closing market price was charged to additional paid-in-capital.
On September 13, 2019, the Company received
a staff deficiency notice from The Nasdaq Stock Market informing the Company that it has failed to comply with Nasdaq’s shareholder
approval requirements relating to shares issued to this consultant. A total of 8,000 restricted shares issued to this consultant
from treasury will be canceled. On January 14, 2020, the Company reissued the shares from the 2019 Omnibus Equity Incentive Plan
adopted by the board of directors of the Company and approved by the stockholders at the annual stockholders meeting held on December
18, 2019.
On January 23, 2020, the Company received
a letter from the Nasdaq Stock Market Listing Qualifications Staff (the “Staff”) notifying that the Company has regained
compliance with the shareholder approval requirements set forth in Nasdaq Listing Rule 5635(c) in connection with shares issued
to a consultant based on the Staff’s review of the Company’s submitted materials.
NOTE 13 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended
and Restated 2007 Equity Incentive Plan approved in 2011(“Plan”), the aggregate number shares of the Company’s
common stock available for grant of stock options and issuance is 868,398 shares. On October 5, 2015, during the annual meeting
of the Company’s stockholders, the aggregate number of shares reserved and available for grant and issuance pursuant to the
Plan was increased to 2,068,398. As of December 31, 2019, the number of shares of the Company’s common stock available for
issuance under the Plan is 990,198.
The fair value of each option award is
estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity
in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted,
volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical
option exercise pattern.
On December 3, 2018, the Company granted
to 17 members of the management staff options to purchase 99,400 shares of the Company’s common stock, at an exercise price
of $3.565 per share and the options vested immediately. The options were valued at $121,000 fair value, with assumed 39.91% volatility,
a four-year expiration term with an expected tenor of 1.64 years, a risk free rate of 2.78% and no dividend yield.
On December 3, 2018, the Company granted
to our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer options to purchase 240,000 shares of the Company’s
common stock, at an exercise price of $3.565 per share and the options vested immediately. The options were valued at $354,700
fair value, with assumed 41.72% volatility, a four-year expiration term with an expected tenor of 2.62 years, a risk free rate
of 2.83% and no dividend yield.
On December 3, 2018, the Company granted
to four independent directors and a consultant options to purchase 16,000 shares of the Company’s common stock at an
exercise price of $3.565 per share and the options vested immediately. The options were valued at $20,500 fair value, with assumed
38.87% volatility, a three-year expiration term with expected tenor of 1.97 years, a risk free rate of 2.82% and no dividend yield.
On April 1, 2019, the Company granted to
one employee options to purchase 30,000 shares of the Company’s common stock, at an exercise price of $4.55 per share and
the options vested immediately. The options were valued at $45,900 fair value, with assumed 45.26% volatility, a four-year expiration
term with an expected tenor of 1.60 years, a risk free rate of 2.37% and no dividend yield.
For the year ended December 31, 2019 and
2018, total compensation costs for options issued recorded in the consolidated statement of loss were $45,900 and $496,200. There
were no related tax benefits as a full valuation allowance was recorded in the years ended December 31, 2019 and 2018.
The following table summarizes all Company
stock option transactions between January 1, 2019 and December 31, 2019.
|
|
Number of Option
and Warrants
Outstanding and exercisable
|
|
Weighted- Average Exercise price of Option
and Warrants
|
|
Range of
Exercise Price per Common Share
|
Balance, January 1, 2019
|
|
|
503,600
|
|
|
|
$4.85
|
|
|
|
$3.55 - $24
|
|
Granted and vested
|
|
|
30,000
|
|
|
|
$4.55
|
|
|
|
$4.55
|
|
Exercised
|
|
|
(379,400)
|
|
|
|
$3.65
|
|
|
|
$3.57 - $4.56
|
|
Expired/cancelled
|
|
|
(19,100)
|
|
|
|
$11.20
|
|
|
|
$7.20 - $24.00
|
|
Balance, December 31, 2019
|
|
|
135,100
|
|
|
|
$7.21
|
|
|
|
$3.57 - $9.9
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
Weighted Average Remaining
|
|
|
Outstanding at December 31, 2019
|
|
Range of
Exercise Prices
|
|
Contractual Life
(Years)
|
Exercisable and outstanding
|
|
135,100
|
|
$3.57 - $9.9
|
|
1.55
|
All options exercisable and outstanding
at December 31, 2019 are fully vested. As of December 31, 2019, there was no unrecognized compensation cost related to outstanding
stock options,
The aggregate intrinsic value of options
outstanding and exercisable as of December 31, 2019 was $0. The aggregate intrinsic value is calculated as the difference between
the exercise price of the underlining options and the stock price of $2.55 and $3.90 for the Company's common stock on December
31, 2019 and 2018.
The aggregate intrinsic value of options
exercised during the years ended December 31, 2019 and 2018 was $922,429 and $119,059.
During the year ended December 31, 2019,
151,856 shares of common stock were issued upon cashless exercise of 379,400 options.
NOTE 14 – INCOME TAXES
The Company utilizes the asset and liability
method of accounting for income taxes in accordance with FASB ASC 740-10. If it is more likely than not that some portion or all
of a deferred tax asset will not be realized, a valuation allowance is recognized.
Gulf Resources, Inc. may be subject to
the United States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company
had no US taxable income for the years ended December 31, 2019 and 2018, and management believes that its earnings are permanently
invested in the PRC.
|
(b)
|
British Virgin Islands (“BVI”)
|
Upper Class Group Limited, a subsidiary
of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income
or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the years ended December 31, 2019
and 2018.
HKJI, a subsidiary of Upper Class Group
Limited, was incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income
arising in or derived from Hong Kong. No provision for income tax has been made as it has no taxable income for the
years ended December 31, 2019 and 2018. The applicable statutory tax rates for the years ended December 31, 2019 and
2018 are 16.5%. There is no dividend withholding tax in Hong Kong.
Enterprise income tax (“EIT”)
for SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC, SYCI and
DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Local Income Tax Law.
The PRC tax losses may be carried forward to be utilized against future taxable profit for ten years for High-tech enterprises
and small and medium-sized enterprises of science and technology and for five years for other companies. Tax losses of the operating
subsidiaries of the Company may be carried forward for five years.
On February 22, 2008, the Ministry of Finance
(“MOF”) and the State Administration of Taxation (“SAT”) jointly issued CaiShui [2008] Circular 1 (“Circular
1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008
to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned
by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.
As of December 31, 2019 and December 31,
2018, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject
to WHT are $124,616,722 and $240,563,868, respectively. Since the Company intends to reinvest its earnings to further expand its
businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding
companies in the foreseeable future. Accordingly, as of December 31, 2019 and December 31, 2018, the Company has not recorded any
WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject to WHT in
China. As of December 31, 2019 and December 31, 2018, the unrecognized WHT are $5,254,560 and $11,035,843, respectively.
NOTE 14 – INCOME TAXES – Continued
The Company’s income tax returns
are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may
examine the Company’s income tax returns filed in the United States for three years from the date of filing. The Company’s
US income tax returns since 2016 are currently subject to examination.
Inland Revenue Department of Hong Kong
(“IRD”) may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing.
For the years 2012 through 2018, HKJI did not report any taxable income. It did not file any income tax returns during these years
except for 2014 and 2018. For companies which do not have taxable income, IRD typically issues notification to companies requiring
them to file income tax returns once in every four years. The tax returns for 2014 and 2018 are currently subject to examination.
The components of the provision for income
tax (expense) income tax benefit from continuing operations are:
|
|
Years Ended
December 31,
|
|
|
2019
|
|
2018
|
Current taxes – PRC
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred taxes – PRC
|
|
|
5,865,830
|
|
|
|
13,302,779
|
|
Change in valuation allowance
|
|
|
(8,672,817
|
)
|
|
|
(214,924
|
)
|
|
|
$
|
(2,806,987
|
)
|
|
$
|
13,087,855
|
|
The effective income tax benefit (expense)
rate differs from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
|
|
Years Ended
December 31,
|
Reconciliations
|
|
2019
|
|
2018
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Non-taxable & Non deductible items
|
|
|
1
|
%
|
|
|
(9
|
%)
|
Change in valuation allowance
|
|
|
(38
|
%)
|
|
|
—
|
|
Effective income tax benefit (expense) rate
|
|
|
(12
|
%)
|
|
|
16
|
%
|
As of December 31, 2019 and 2018, the Company
had a US federal net operating loss (“NOL”) of approximately $2,100,000 and $566,000. The NOL can be carried forward
up to 20 years from the year the losses were recorded. The timing and manner in which the Company can utilize operating loss carryforwards
in any year may be limited by provisions of the Internal Revenue Code regarding changes in ownership of corporations. Such limitation
may have an impact on the ultimate realization of its carry forwards and future tax deductions. In addition, since the Company
intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend
to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, a 100% deferred tax asset
valuation allowance was recorded for these net operating losses.
Significant components of the Company’s
deferred tax assets and liabilities at December 31, 2019 and December 31, 2018 are as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
—
|
|
|
$
|
16,292
|
|
Impairment on property, plant and equipment
|
|
|
2,974,542
|
|
|
|
3,696,332
|
|
Impairment on prepaid land lease
|
|
|
826,673
|
|
|
|
840,284
|
|
Exploration costs
|
|
|
1,784,583
|
|
|
|
1,813,965
|
|
Compensation costs of unexercised stock options
|
|
|
171,672
|
|
|
|
194,016
|
|
PRC tax losses
|
|
|
18,737,005
|
|
|
|
12,663,985
|
|
US federal net operating loss
|
|
|
432,000
|
|
|
|
119,000
|
|
Total deferred tax assets
|
|
|
24,926,475
|
|
|
|
19,343,874
|
|
Valuation allowance
|
|
|
(8,985,833
|
)
|
|
|
(313,016
|
)
|
Net deferred tax asset
|
|
$
|
15,940,642
|
|
|
$
|
19,030,858
|
|
The increase in valuation allowance for
the year ended December 31, 2019 is $8,672,817.
The increase in valuation allowance for
the year ended December 31, 2018 is $214,924.
The increase in valuation allowance in
the year ended December 31, 2019 is mainly attributable to valuation allowance recorded for the deferred tax assets related to
a portion of the PRC tax losses that more likely than not will expire before it could be utilized and the exploration costs which
more likely than not will not be realized.
There were no unrecognized tax benefits
and accrual for uncertain tax positions as of December 31, 2019 and 2018.
There were no amounts accrued for penalties
and interest for the years ended December 31, 2019 and 2018. There were no change in unrecognized tax benefits during the years
ended December 31, 2019 and 2018.
NOTE 15 – BUSINESS SEGMENTS
An operating segment’s performance
is primarily evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs
and other income not associated with the operations of the segment. These corporate costs are separately stated below and also
include costs that are related to functional areas such as accounting, treasury, information technology, legal, human resources,
and internal audit. The Company believes that segment operating income, as defined above, is an appropriate measure for evaluating
the operating performance of its segments. All the customers are located in PRC.
Year Ended
December 31, 2019
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
10,022,027
|
|
|
$
|
522,758
|
|
|
$
|
—
|
|
|
$
|
51,736
|
|
|
$
|
10,596,521
|
|
|
$
|
—
|
|
|
$
|
10,596,521
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from operations before income tax expense
|
|
|
(15,609,979
|
)
|
|
|
(4,446,900
|
)
|
|
|
(2,823,298
|
)
|
|
|
(188,949
|
)
|
|
|
(23,069,126
|
)
|
|
|
(225,257
|
)
|
|
|
(23,294,383
|
)
|
Income tax (expense) benefit
|
|
|
(3,181,343
|
)
|
|
|
(247,250
|
)
|
|
|
621,606
|
|
|
|
—
|
|
|
|
(2,806,987
|
)
|
|
|
—
|
|
|
|
(2,806,987
|
)
|
Loss from operations after
income tax (expense) benefit
|
|
|
(18,791,322
|
)
|
|
|
(4,694,150
|
)
|
|
|
(2,201,692
|
)
|
|
|
(188,949
|
)
|
|
|
(25,876,113
|
)
|
|
|
(225,257
|
)
|
|
|
(26,101,370
|
)
|
Total assets
|
|
|
142,568,684
|
|
|
|
23,352,060
|
|
|
|
111,506,728
|
|
|
|
1,732,380
|
|
|
|
279,159,852
|
|
|
|
91,133
|
|
|
|
279,250,985
|
|
Depreciation and amortization
|
|
|
9,625,334
|
|
|
|
3,833,288
|
|
|
|
459,613
|
|
|
|
142,692
|
|
|
|
14,060,927
|
|
|
|
—
|
|
|
|
14,060,927
|
|
Capital expenditures
|
|
|
57,607,104
|
|
|
|
3,004,845
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,611,949
|
|
|
|
—
|
|
|
|
60,611,949
|
|
Year Ended
December 31, 2018
|
|
Bromine *
|
|
Crude
Salt *
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
—
|
|
|
$
|
1,981,573
|
|
|
$
|
613,368
|
|
|
$
|
—
|
|
|
$
|
2,594,941
|
|
|
$
|
—
|
|
|
$
|
2,594,941
|
|
Net revenue (intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) from operations before income taxes benefit
|
|
|
(40,504,752
|
)
|
|
|
(8,336,305
|
)
|
|
|
(34,757,750
|
)
|
|
|
(204,517
|
)
|
|
|
(83,803,324
|
)
|
|
|
250,793
|
|
|
|
(83,552,531
|
)
|
Income taxes benefit
|
|
|
10,304,897
|
|
|
|
1,902,111
|
|
|
|
880,847
|
|
|
|
—
|
|
|
|
13,087,855
|
|
|
|
—
|
|
|
|
13,087,855
|
|
Income (loss) from operations after
income taxes benefit
|
|
|
(30,199,855
|
)
|
|
|
(6,434,194
|
)
|
|
|
(33,876,903
|
)
|
|
|
(204,517
|
)
|
|
|
(70,715,469
|
)
|
|
|
250,793
|
|
|
|
(70,464,676
|
)
|
Total assets
|
|
|
115,233,773
|
|
|
|
37,254,518
|
|
|
|
144,172,070
|
|
|
|
1,883,419
|
|
|
|
298,543,780
|
|
|
|
3,010
|
|
|
|
298,546,790
|
|
Depreciation and amortization
|
|
|
11,979,985
|
|
|
|
4,983,636
|
|
|
|
479,697
|
|
|
|
—
|
|
|
|
17,443,318
|
|
|
|
—
|
|
|
|
17,443,318
|
|
Capital expenditures
|
|
|
31,904,288
|
|
|
|
2,145,440
|
|
|
|
1,192,963
|
|
|
|
30,616
|
|
|
|
35,273,307
|
|
|
|
—
|
|
|
|
35,273,307
|
|
* Certain common production overheads,
operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments
in SCHC were split by reference to the average selling price and production volume of the respective segment.
|
|
Years Ended
December 31,
|
Reconciliations
|
|
2019
|
|
2018
|
Total segment operating loss
|
|
$
|
(23,069,126
|
)
|
|
$
|
(83,803,324
|
)
|
Corporate costs
|
|
|
(646,914
|
)
|
|
|
(1,064,661
|
)
|
Unrealized gain on translation of intercompany balance
|
|
|
421,657
|
|
|
|
1,315,454
|
|
Loss from operations
|
|
|
(23,294,383
|
)
|
|
|
(83,552,531
|
)
|
Other income, net of expense
|
|
|
301,325
|
|
|
|
500,690
|
|
Loss before taxes
|
|
$
|
(22,993,058
|
)
|
|
$
|
(83,051,841
|
)
|
The following table shows the major customer(s)
(10% or more) for the year ended December 31, 2019.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
Crude Salt
(000’s)
|
|
Chemical Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage of
Total
Revenue (%)
|
|
1
|
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
2,203
|
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
2,378
|
|
|
|
22.6
|
%
|
|
2
|
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
1,629
|
|
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
1,783
|
|
|
|
16.9
|
%
|
|
3
|
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
1,539
|
|
|
$
|
192
|
|
|
$
|
—
|
|
|
$
|
1,731
|
|
|
|
16.4
|
%
|
|
4
|
|
|
Dongying Bomeite Chemical Company Limited
|
|
$
|
1,098
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,098
|
|
|
|
10.4
|
%
|
|
5
|
|
|
Shandong Shouguang Shenrunfa Ocean Chemical Company Limited
|
|
$
|
1,297
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,297
|
|
|
|
12.3
|
%
|
The following table shows the major customer(s)
(10% or more) for the year ended December 31, 2018.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
Crude
Salt
(000’s)
|
|
Chemical
Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage
of
Total
Revenue (%)
|
|
1
|
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
656
|
|
|
$
|
155
|
|
|
$
|
811
|
|
|
|
31
|
%
|
|
2
|
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
—
|
|
|
$
|
783
|
|
|
$
|
—
|
|
|
$
|
783
|
|
|
|
30
|
%
|
|
3
|
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
543
|
|
|
$
|
—
|
|
|
$
|
543
|
|
|
|
21
|
%
|
NOTE 16– CUSTOMER CONCENTRATION
The Company sells a substantial portion
of its products to a limited number of customers. During the year ended December 31, 2019, the Company sold 78.6% of its products
to its top five customers, respectively. As of December 31, 2019, amounts due from these customers were $4,877,106.
During the year ended December 31, 2018,
the Company sold 90% of its products to its top five customers, respectively. At December 31, 2018, amount due from these customers
were $0.
NOTE 17– MAJOR SUPPLIERS
During the year ended December 31, 2019,
the Company purchased 100% of its raw materials from its top five suppliers. As of December 31, 2019, amounts due to
those suppliers were $0. During the year ended December 31, 2018, the Company did not purchase any raw materials.
NOTE 18 – FAIR VALUE OF FINANCIAL
INSTRUMENTS
The carrying values of financial instruments,
which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term
nature of these instruments. There were no material unrecognized financial assets and liabilities as of December 31,
2019 and 2018.
NOTE 19 – CAPITAL COMMITMENT AND
OTHER SERVICE CONTRACTUAL OBLIGATIONS
The following table sets forth the Company’s
contractual obligations as of December 31, 2019:
|
|
Property Management Fees
|
|
Capital Expenditure
|
Payable within:
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
89,425
|
|
|
$
|
25,801
|
|
the next 13 to 24 months
|
|
|
89,425
|
|
|
|
—
|
|
the next 25 to 36 months
|
|
|
89,425
|
|
|
|
—
|
|
the next 37 to 48 months
|
|
|
89,425
|
|
|
|
—
|
|
Total
|
|
$
|
357,700
|
|
|
$
|
25,801
|
|
NOTE 20 –LOSS CONTINGENCIES
On or about August 3, 2018, written decisions
of administration penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo
Tu Zi Fa Gao Zi [2018] No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu
Zi Fa Gao Zi [2018] No. 296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company
Limited (“SCHC”) by Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as
respondent respectively thereof. The Decisions challenged the land use of Factory nos. 2, 9, 7, 4, 8 and 10, respectively, and
alleged, among other things, that SCHC had illegally occupied and used the land in the total area of approximately 52,674 square
meter, on which Factory nos. 2, 9, 7, 4, 8 and 10 were built, respectively. The Written Decisions ordered SCHC, among other things,
to return the land subject to the Written Decisions to its respective legal owner, restore the land to its original state, and
demolish or confiscate all the buildings and facilities thereon and pay monetary penalty of approximately RMB 1.3 million ($184,000)
in the aggregate. Each of the Written Decisions shall be executed within 15 days upon serving on SCHC. Additional interest penalty
shall be imposed at a daily rate of 3% in the event that SCHC does not make the monetary penalty payment in a timely manner. Subsequently,
the Bureau filed enforcement actions to the People’s Court of Shouguang City, Shandong Province (the “Court”),
naming SCHC as enforcement respondent and alleged, among other things, that SCHC failed to perform its obligations under each of
the Written Decisions within the specified timeframe. The enforcement proceedings sought court orders to enforce the Written Decisions.
On May 5, 2019, written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 384, (2019) Lu 0783 Xing
Shen No. 385, (2019) Lu 0783 Xing Shen No. 389, (2019) Lu 0783 Xing Shen No. 390, (2019) Lu 0783 Xing Shen No. 393, and (2019)
Lu 0783 Xing Shen No. 394, respectively (together, the “Court Rulings”) were made by the Court in favor of the Bureau.
The Court orders, among other relief, to enforce each of the Written Decisions, to return each subject land to its legal owner
and demolish or confiscate the buildings and facilities thereon and restore the land to its original state within 10 days from
the service of the Court Rulings on SCHC. The Court Rulings became enforceable immediately upon service on SCHC on May 5, 2019.
In the last twenty years, there were no
government regulations requiring bromine manufacturers to obtain land use and planning approval document. As such, the Company
believes most of the bromine manufacturers in Shouguang City do not have land use and planning approval documents and lease their
land parcels from the village associations. They are facing the same issues in connection with land use and planning as the Company.
The Company is in the process of resolving
the issues in connection with SCHC’s land use and planning diligently. The Company has been in discussions closely with the
local government authorities with the help from Shouguang City Bromine Association to seek reliefs and, based on verbal confirmation
by local government authorities, believes the administrative penalties imposed by the Bureau according to the Written Decisions
are being re-assessed by local government authorities and may be revoked. The Company has obtained one confirmation from the local
government authorities that the administrative penalty imposed on Factory No. 7 , Factory No. 8 and Factory No.10 are being revoked
which are waiting for the Court formal approval ,and production of Factory No. 7 was allowed to resume in April 2019. In addition,
on August 28, 2019, the People’s Government of Shandong Province, issued a regulation titled “Investment Project Management
Requirements of Chemical Companies in Shandong Province” permitting the construction of facilities on existing sites or infrastructure
of bromine manufacturing and other chemical industry-related types of projects (clause 11 of section 3).The Company believes that
the goal of the government is to standardize and regulate the industry and not to demolish the facilities or penalize the manufacturers.
As of the date of this report, the Company has not been notified by the local government that it will take any measure to enforce
the administrative penalties. Based on information known to date, the Company believes that it is remote that the Written Decisions
or Court Rulings will be enforced within the expected timeframe and a material penalty or costs and expenses against the Company
will result. However, there can be no assurance that there will not be any further enforcement action, the occurrence of which
may result in further liabilities, penalties and operational disruption.
In view of the above facts and circumstances,
the Company believes that it is not necessary to accrue for any estimated losses or impairment as of December 31, 2019.
NOTE 21 - SUBSEQUENT EVENT
In January 2020, the Company obtained the
environmental protection assessment approval performed by the government of Shouguang City, Shandong Province for the proposed
new Yuxin chemical factory. With this approval, the Company is permitted to construct our new chemical factory and the Company
plans to begin construction in May 2020.
In January 2020, an outbreak of a novel
coronavirus (COVID-19) surfaced in Wuhan, China. The outbreak in China caused the Chinese government to require businesses to close
and to restrict certain travel within the country. In cooperation with the government authorities, the Company’s operations
in China extended their winter temporary shut down by approximately three weeks. As of the date of this filing, the Company has
been allowed to resume production at its bromine factories No. 1, No. 4, No. 7 and No. 9, and the Company has been in preparation
process for resuming production at those factories. The Company does not believe that the COVID-19 had material adverse impact
on the Company’s operating results as of the end of fiscal 2019. The Company’s bromine factories No.7 and No.1 started
trial production in the middle of March 2020, and commenced commercial production on April 3, 2020.
On March 11, 2020, the World Health
Organization (WHO) officially declared COVID-19 a pandemic, pointing to the over 118,000 cases of COVID-19 illness in over
110 countries and territories around the world and the sustained risk of further global spread. On April 8, 2020, WHO
reported that there were more than 1.3 million of confirmed cases of COVID-19 including 79,235 deaths globally. Given this
fact, the duration and intensity of the impact of the COVID-19 and resulting disruption to the Company’s operations is
uncertain . While our operations are currently not materially affected, it is
unknown whether or how they may be affected if such a pandemic persists for an extended period. While not yet quantifiable,
the Company expects this situation will not have a material adverse impact on its operating results in the first quarter of
2020 and continues to assess the financial impact for the remainder of the year.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
(Expressed in U.S. dollars)
SCHEDULE I – PARENT ONLY FINANCIAL
INFORMATION
The following presents condensed parent
company only financial information of Gulf Resources, Inc.
Condensed Balance Sheets
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Prepayments and deposits
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Current Assets
|
|
|
—
|
|
|
|
—
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
Interests in subsidiaries
|
|
|
200,057,813
|
|
|
|
230,229,081
|
|
Amounts due from group companies
|
|
|
63,546,235
|
|
|
|
64,017,517
|
|
Total non-current assets
|
|
|
263,604,048
|
|
|
|
294,246,598
|
|
Total Assets
|
|
$
|
263,604,048
|
|
|
|
294,246,598
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
$
|
354,247
|
|
|
$
|
250,493
|
|
Amounts due to group companies
|
|
|
142,701
|
|
|
|
142,701
|
|
Total Current Liability
|
|
|
496,948
|
|
|
|
393,194
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
496,948
|
|
|
$
|
393,194
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
PREFERRED STOCK; $0.001 par value; 1,000,000 shares authorized; none outstanding
|
|
$
|
—
|
|
|
$
|
—
|
|
COMMON STOCK; $0.0005 par value; 80,000,000 shares authorized; 9,562,444 and 9,410,588 shares issued; and 9,516,614 and 9,360,758 shares outstanding as of December 31, 2019 and December 31, 2018
|
|
|
23,904
|
|
|
|
23,525
|
|
Treasury stock; 45,830 and 49,830 shares as of December 31, 2019 and December 31, 2018 at cost
|
|
|
(510,329
|
)
|
|
|
(554,870
|
)
|
Additional paid-in capital
|
|
|
95,043,388
|
|
|
|
95,020,808
|
|
Retained earnings unappropriated
|
|
|
159,808,400
|
|
|
|
185,608,445
|
|
Retained earnings appropriated
|
|
|
24,233,544
|
|
|
|
24,233,544
|
|
Cumulative translation adjustment
|
|
|
(15,491,807
|
)
|
|
|
(10,478,048
|
)
|
Total Stockholders’ Equity
|
|
|
263,107,100
|
|
|
|
293,853,404
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
263,604,048
|
|
|
$
|
294,246,598
|
|
Condensed Statements of Loss
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
(642,151
|
)
|
|
$
|
(1,061,674
|
)
|
TOTAL OPERATING EXPENSES
|
|
|
(642,151
|
)
|
|
|
(1,061,674
|
)
|
OTHER EXPENSES
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(385
|
)
|
|
|
(500
|
)
|
TOTAL OTHER EXPENSES
|
|
|
(385
|
)
|
|
|
(500
|
)
|
TOTAL EXPENSES
|
|
|
(642,536
|
)
|
|
|
(1,062,174
|
)
|
Equity in net Loss of subsidiaries
|
|
|
(25,157,509
|
)
|
|
|
(68,901,812
|
)
|
LOSS BEFORE INCOME TAXES
|
|
|
(25,800,045
|
)
|
|
|
(69,963,986
|
)
|
INCOME TAXES
|
|
|
—
|
|
|
|
—
|
|
NET LOSS
|
|
$
|
(25,800,045
|
)
|
|
$
|
(69,963,986
|
)
|
Condensed Statements of Cash Flows
|
|
Years Ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(25,800,045
|
)
|
|
$
|
(69,963,986
|
)
|
Adjustments to reconcile net Loss to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Equity Loss in unconsolidated subsidiaries
|
|
|
25,157,509
|
|
|
|
68,901,812
|
|
Stock-based compensation expense-options
|
|
|
45,900
|
|
|
|
496,200
|
|
Shares issued from treasury stock for services
|
|
|
21,600
|
|
|
|
—
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
103,754
|
|
|
|
4,888
|
|
Net cash used in operating activities
|
|
|
(471,282
|
)
|
|
|
(561,086
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances from group companies
|
|
|
471,282
|
|
|
|
561,086
|
|
Net cash provided by financing activities
|
|
|
471,282
|
|
|
|
561,086
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
—
|
|
|
|
—
|
|
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
|
|
—
|
|
|
|
—
|
|
CASH AND CASH EQUIVALENTS - END OF YEAR
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(i)
|
Basis of presentation
|
In the condensed parent-company-only
financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company’s share of net loss of its subsidiaries is included in condensed
statements of loss using the equity method. These condensed parent-company-only financial statements should be read in connection
with the consolidated financial statements and notes thereto.
As of December 31, 2019, the
Company itself has no purchase commitment, capital commitment and operating lease commitment.
|
(ii)
|
Restricted Net Assets
|
Schedule I of Rule 5-04 of Regulation
S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above
test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of
net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may
not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of
a third party (i.e., lender, regulatory agency, foreign government, etc.).
The condensed parent company
financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets
of the subsidiaries of Gulf Resources, Inc. exceed 25% of the consolidated net assets of Gulf Resources, Inc. The ability of the
Company’s Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies
and availability of cash balances of the Chinese operating subsidiaries. Because a significant portion of the Company’s operations
and revenues are conducted and generated in China, a significant portion of the revenues being earned and currency received are
denominated in RMB. RMB is subject to the exchange control regulation in China, and, as a result, the Company may be unable to
distribute any dividends outside of China due to PRC exchange control regulations that restrict the Company’s ability to
convert RMB into US Dollars.