(Expressed in U.S. dollars)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a) Basis of Presentation and Consolidation
The accompanying condensed financial statements
have been prepared by Gulf Resources, Inc. (“Gulf Resources”). a Nevada corporation and its subsidiaries (collectively, the
“Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all
information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance
with accounting principles generally accepted in the United States (“US GAAP”).
In the opinion of management, the unaudited financial
information for the three and six months ended June 30, 2021 presented reflects all adjustments, which are only normal and recurring,
necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should
be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2020. Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal
year.
The preparation of financial statements in conformity
with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements
and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that
the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the
preparation of these condensed financial statements in certain areas, including classification of leases and related party transactions.
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.
(b) Nature of Business
The Company manufactures and trades bromine and
crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC") in the People’s
Republic of China (“PRC”), which is also planning to engage in seawater desalination technology research and service and to
handle the import and export of goods and technologies within the scope permitted by the State. The Company also 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 PRC. DCHC was established to further explore and develop
natural gas and brine resources (including bromine and crude salt) in the PRC. DCHC 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) below).
On March 11, 2020, the World Health Organization
(WHO) officially declared COVID-19 a pandemic. The duration and intensity of the impact of the COVID-19 and resulting disruption to the
Company’s operations and financial position 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 believes
this situation did not have a material adverse impact on its operating results in the second quarter of 2021 and will continue to assess
the financial impact. The virus outbreak slightly delayed the commencement of the operations for Factory No.1, No.4, No.7, No.9, and it
may also delay the approval for the remaining three factories include No.2, No.8 and No.10. It is, however, still unclear how the pandemic
will evolve going forward, and we cannot assure you whether the COVID-19 pandemic will bring about significant negative impact on our
business operations, financial condition and operating results, including but not limited to negative impact to our total revenues.
(i) Bromine and Crude Salt Segments
In February 2019, the Company received a notification
from the local government of Yangkou County that its Factory No. 1, No. 4, No. 7 and No. 9 passed inspection and could resume operations.
In April 2019, Factory No.1 and Factory No.7 resumed operation.
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 the coronavirus
outbreak in China, the local government ordered those bromine facilities to postpone the commencement of production. Subsequently, the
Company received an approval dated February 27, 2020 issued by the local governmental authority which allowed the Company to resume production
after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s Government
dated March 5, 2020 allowing the Company 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 (the “March 2020 Approval”). The Company’s Factories No.
1 and No. 7 commenced trial production in mid-March 2020 and commercial production on April 3, 2020 and its Factories No. 4 and No. 9
commenced commercial production on May 6, 2020.
Pursuant to the notification issued on November
24, 2020 from the government of Shouguang City, all bromine facilities in Shouguang City had to be temporarily closed from December 25,
2020 until February 19, 2021 8:00 AM China Time. To comply with such notification, the Company temporarily stopped production at its bromine
facilities in factory No. 1, No. 4, No. 7 and No. 9 during the aforesaid period and commenced production as scheduled on February 19,
2021.
(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.
In December 2017, the Company secured from the
government the land use rights for its chemical plants located at the Bohai Park and in June 2018, the Company presented a completed construction
design draft and other related documents to the local authorities for approval. 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 the new chemical factory and began the construction in the second quarter of
2020.
The Company believes this relocation process will
cost approximately $67 million in total. The Company incurred relocation costs comprising prepaid land lease, professional fees related
to the design of the new chemical factory, and progress payment and deposit for the construction of the new factory building in the amount
of $41,080,681 and $33,496,295, which were recorded in the prepaid land leases and property, plant and equipment in the consolidated balance
sheets as of June 30, 2021 and December 31, 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. In compliance with
the Chinese government new policies, the Company is also required to obtain an exploration license and a mining license for bromine and
natural gas, respectively. Pursuant to the Opinions of the Ministry of Natural Resources on Several Issues in Promoting the Reform of
Mineral Resources Management (Trial) promulgated by the Ministry of Natural Resources of PRC on January 9, 2020, which came into effect
on May 1, 2020, privately owned enterprises are allowed to participate in the natural gas production. The Company plans to proceed with
its applications for the natural gas and brine project approvals with related government departments until after the governmental planning
has been finalized the land and resource planning for Sichuan Province.
(c) Allowance for Doubtful Accounts
As of June 30, 2021 and December 31, 2020, there
were no allowances for doubtful accounts. No allowances for doubtful accounts were charged to the condensed consolidated statements of
loss for the three-month and six-month periods ended June 30, 2021 and 2020.
(d) 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 $97,058,027
and $94,222,538 with these institutions as of June 30, 2021 and December 31, 2020, respectively. The Company has not experienced
any losses in such accounts in the PRC.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(e) 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:
Basis of Presentation and Summary of
Significant Accounting Policies - Schedule of Property, Plant and Equipment Useful Life
|
Minimum
Maximum
|
|
Useful
life
(in
years)
|
|
Buildings (including salt
pans)
|
|
|
8
- 20
|
|
|
Plant and machinery (including
protective shells, transmission channels and ducts)
|
|
|
3
- 8
|
|
|
Motor vehicles
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 designate 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.
(f) Retirement Benefits
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 condensed consolidated statement of loss on an accrual basis when they are due. The Company’s
contributions totaled $220,968 and $43,838 for the three-month period ended June 30, 2021 and 2020, respectively, and totaled $467,590
and $183,946 for the six-month period ended June 30, 2021 and 2020, respectively.
(g) Revenue Recognition
Net revenue is net of discount and value added
tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized 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 14.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(h) 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 three and six months period ended June
30, 2021 and 2020, the Company determined that there were no events or circumstances indicating possible impairment of its long-lived
assets.
(i) 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 0 and 74,781 shares for the three-month period ended June 30,
2021 and 2020, respectively, and amounted to 31,352 and 94,075 shares for the six-month period ended June 30, 2021 and 2020, 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.
As the Company reported a net loss for the three and six months ended
June 30, 2021 and 2020, 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.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(j) 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 “$”).
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 loss. The statement of loss and
comprehensive loss is translated at average rate during the reporting period. Gains or losses resulting from transactions in currencies
other than the functional currencies are recognized in net loss for the reporting periods as part of general and administrative expense.
The statement of cash flows is translated at average rate during the reporting period, with the exception of the consideration paid for
the acquisition of business which is translated at historical rates.
(k) Foreign Operations
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.
(l) Inventories
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.
(m) Leases
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 does not recognize operating lease
ROU assets and liabilities arising from lease arrangements with lease term of twelve months or less.
(n) Stock-based Compensation
Stock-based awards issued to employees are recorded
at their fair values estimated at grant date using the Black-Scholes model and the portion that is ultimately expected to vest is recognized
as compensation cost over the requisite service period. Consistent with the accounting requirement for employee stock-based awards, nonemployee
stock-based awards are measured at the grant-date fair value of the equity instruments that the Company 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.
(o) Loss Contingencies
The Company accrues for loss contingencies relating
to legal matters, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities, when
such liabilities become probable and could be reasonably estimabled. 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.
(p) Income Tax
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 income (loss).
(q) New Accounting Pronouncements
Recent accounting pronouncements adopted
There were no recent accounting pronouncements adopted during the six
months ended June 30, 2021.
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.
For the Company which is a smaller reporting company, ASU No. 2019-10 extends the effective dates for two years. The Company is currently
evaluating the effect of this on the condensed consolidated financial statements and related disclosure.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 2 – INVENTORIES
Inventories consist of:
Inventories - Schedule of Inventories, Current
|
|
|
June
30,
2021
|
|
December
31,
2020
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
56,267
|
|
|
$
|
21,484
|
|
|
Finished
goods
|
|
|
621,151
|
|
|
|
398,125
|
|
|
Inventory, net
|
|
$
|
677,418
|
|
|
$
|
419,609
|
|
There was no allowance for slow-moving inventories
as of June 30, 2021 and 2020.
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 $9,844,040 for a 50-year lease of a parcel of land at Bohai Marine Fine Chemical Industrial Park (“Bohai”)
for the new chemical factory under construction. 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. The amount paid was recorded as prepaid land leases, net of current portion in the consolidated balance sheet as of June 30 2021
and December 31, 2020. As of June 30, 2021, the prepaid land lease increased to $10,234,582 due to an additional amount paid for stamp
duty and related land use rights fees. Amortization of this prepaid land lease will commence when the chemical factory is built and placed
in service.
The Company began the construction on its new
chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020 and basically completed the civil works by end
of June 2021.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
Property, Plant and Equipment, Net - Schedule of Property, Plant
and Equipment
|
|
|
June
30,
2021
|
|
December
31,
2020
|
|
At cost:
|
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
2,985,480
|
|
|
$
|
2,955,780
|
|
|
Buildings
|
|
|
64,668,005
|
|
|
|
64,024,667
|
|
|
Plant and machinery
|
|
|
260,997,193
|
|
|
|
258,400,710
|
|
|
Motor vehicles
|
|
|
31,724
|
|
|
|
6,553
|
|
|
Furniture, fixtures and office
equipment
|
|
|
3,353,441
|
|
|
|
3,318,564
|
|
|
Construction
in process
|
|
|
23,271,504
|
|
|
|
12,095,565
|
|
|
Total
|
|
|
355,307,347
|
|
|
|
340,801,839
|
|
|
Less: Accumulated depreciation
and amortization
|
|
|
(183,189,944
|
)
|
|
|
(173,212,554
|
)
|
|
Impairment
|
|
|
(18,828,910
|
)
|
|
|
(18,641,596
|
)
|
|
Net book value
|
|
$
|
153,288,493
|
|
|
$
|
148,947,689
|
|
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 $18,587,921 and $19,302,600 as at June 30, 2021 and December 31, 2020,
respectively.
During the three-month period ended June 30, 2021,
depreciation and amortization expense totaled $4,119,073 of which $758,445, $163,868 and $3,196,760 were recorded in direct labor and
factory overheads incurred during plant shutdown, administrative expenses
and cost of net revenue. During the six-month period ended June 30, 2021,depreciation
and amortization expense totaled $8,222,022 of which $2,575,227, $327,101 and $5,319,694 were recorded in direct labor and factory overheads
incurred during plant shutdown, administrative expenses and cost of net
revenue.
During the three-month period ended June 30,
2020, depreciation and amortization expense totaled $4,103,026
of which $1,167,114,
$198,413
and $2,737,500 were
recorded in direct labor and factory overheads incurred during plant shutdown,
administrative expenses and cost of net revenue. During the
six-month period ended June 30, 2020, depreciation and amortization
expense totaled $7,556,589 of which $3,745,884, $399,819 and $3,410,886 were recorded in direct labor and factory overheads incurred
during plant shutdown, administrative expenses and cost of net
revenue.
NOTE 5 –FINANCE LEASE RIGHT-OF-USE ASSETS
Property, plant and equipment under finance leases, net consist of
the following:
Finance Lease Right-Of-Use Assets - Schedule of Property,
Plant and Equipment Under Finance Leases
|
|
|
June
30,
2021
|
|
December
31,
2020
|
|
At cost:
|
|
|
|
|
|
|
|
|
|
Buildings Buildings
|
|
$
|
127,387
|
|
|
$
|
126,120
|
|
|
Plant
and machinery Plant and Machinery
|
|
|
2,330,367
|
|
|
|
2,307,184
|
|
|
Total
|
|
|
2,457,754
|
|
|
|
2,433,304
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(2,272,478
|
)
|
|
|
(2,247,032
|
)
|
|
Net book value
|
|
$
|
185,276
|
|
|
$
|
186,272
|
|
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 three and six months period ended
June 30, 2021, depreciation and amortization expense totaled $1,434
and $2,862, respectively, which was recorded in direct labor and factory overheads incurred during plant shutdown.
During the three and six months period ended
June 30, 2020, depreciation and amortization expense totaled $1,308
and $2,635, respectively, which was recorded in direct labor and factory overheads incurred during plant shutdown.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 6 – OPERATING LEASE RIGHT–OF
USE ASSETS
As of June 30, 2021, the total operating lease
ROU assets was $8,507,190. The total operating lease cost for the three-month period ended June 30, 2021 and 2020 was $241,145 and $216,422.
The total operating lease cost for the six-month
period ended June 30, 2021 and 2020 was $481,295 and $436,109.
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 of aggregate
carrying value of $8,153,080 as at June 30, 2021.
NOTE 7 – ACCOUNTS PAYABLE, OTHER PAYABLE
AND ACCRUED EXPENSES
Accounts payable, other payable and accrued expenses
consist of the following:
Accounts Payable, Other Payable and Accrued
Expenses - Schedule of Accounts Payable and Accrued Liabilities
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2021
|
|
2020
|
|
Accounts payable
|
|
$
|
412,601
|
|
|
$
|
479,958
|
|
|
Salary payable
|
|
|
324,932
|
|
|
|
320,549
|
|
|
Social security insurance
contribution payable
|
|
|
103,191
|
|
|
|
49,167
|
|
|
Other payable-related party
(see Note 8)
|
|
|
48,290
|
|
|
|
95,616
|
|
|
Deposit on subscription
of a subsidiary’s share
|
|
|
154,800
|
|
|
|
153,260
|
|
|
Accrued expense-construction
|
|
|
5,429,903
|
|
|
|
3,537,644
|
|
|
Accrued
expense-others
|
|
|
597,990
|
|
|
|
445,507
|
|
|
Total
|
|
$
|
7,071,707
|
|
|
$
|
5,081,701
|
|
The deposit on subscription of a subsidiary's share of $154,800 as
of June 30, 2021 relates to sale of non-controlling interests in DCHC.
NOTE 8– RELATED PARTY TRANSACTIONS
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 $96,574 for five years from January 1, 2018 to December 31, 2022. The expense
associated with this agreement for the three and six months ended June 30, 2021 was approximately $24,144 and $47,878. The expense associated
with this agreement for the three and six months ended June 30, 2020 was approximately $22,030 and $44,043. The amounting owing for the
property management services as of June 30, 2021 and December 31, 2020 was $48,290 and $95,616 (Note 7). The amount owed as of June 30,
2021 is interest-free, unsecured and payable in January 2022.
NOTE 9– TAXES PAYABLE
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2021
|
|
2020
|
|
Land use tax
payable
|
|
$
|
841,951
|
|
|
$
|
833,576
|
|
|
Value
added tax and other taxes payable
|
|
|
664,820
|
|
|
|
492,603
|
|
|
Land
use tax payable
|
|
$
|
1,506,771
|
|
|
$
|
1,326,179
|
|
NOTE 10 –LEASE LIABILITIES-FINANCE AND OPERATING
LEASE
The components of finance lease liabilities were
as follows:
Lease Liabilities-Finance and Operating
Lease - Schedule of Finance Leased Liabilities
|
|
|
Imputed
|
|
June
30,
|
|
December
31,
|
|
|
|
Interest
rate
|
|
2021
|
|
2020
|
|
Total finance
lease liability
|
|
|
6.7%
|
|
|
$
|
1,907,883
|
|
|
$
|
2,105,973
|
|
|
Less:
Current portion
|
|
|
|
|
|
|
(160,498
|
)
|
|
|
(217,070
|
)
|
|
Finance
lease liability, net of current portion
|
|
|
|
|
|
$
|
1,747,385
|
|
|
$
|
1,888,903
|
|
Interest expenses from capital lease obligations
amounted to $35,659 and $34,747 for the three-month period ended June 30, 2021 and 2020, respectively, which were charged to the condensed
consolidated statement of income (loss). Interest expenses from capital lease obligations amounted to $71,197 and $70,009 for the six-month
period ended June 30, 2021 and 2020, respectively, which were charged to the condensed consolidated statement of income (loss).The remaining
finance lease term at June 30, 2021 was 10 years.
The components of operating lease liabilities
as follows:
Lease Liabilities-Finance and
Operating Lease - Schedule of Operating Leased Liabilities
|
|
|
Imputed
|
|
June
30,
|
|
December
31,
|
|
|
|
Interest
rate
|
|
2021
|
|
2020
|
|
Total Operating
lease liabilities
|
|
|
4.89%
|
|
|
$
|
7,836,144
|
|
|
$
|
8,499,692
|
|
|
Less:
Current portion
|
|
|
|
|
|
|
(470,999
|
)
|
|
|
(477,350
|
)
|
|
Operating
lease liabilities, net of current portion
|
|
|
|
|
|
$
|
7,365,145
|
|
|
$
|
8,022,342
|
|
The weighted average remaining operating lease
term at June 30, 2021 was 21 years and the weighted average discounts
rate was 4.89%.Lease payments for the three-month period ended June 30, 2021 and 2020, respectively, were $575,242 and $522,636. Lease
payments for the six-month period ended June 30, 2021 and 2020, respectively, were $780,193 and $704,301.
Maturities of lease liabilities were as follows:
Lease Liabilities-Finance and Operating
Leases - Schedule of Financing and Operating Lease Maturities
|
|
|
Financial
lease
|
|
Operating
Lease
|
|
Payable within:
|
|
|
|
|
|
|
|
|
|
the next 12
months
|
|
$
|
290,560
|
|
|
$
|
688,245
|
|
|
the next 13 to 24 months
|
|
|
290,560
|
|
|
|
692,220
|
|
|
the next 25 to 36 months
|
|
|
290,560
|
|
|
|
693,269
|
|
|
the next 37 to 48 months
|
|
|
290,560
|
|
|
|
697,562
|
|
|
the next 49 to 60 months
|
|
|
290,560
|
|
|
|
705,813
|
|
|
thereafter
|
|
|
1,162,237
|
|
|
|
11,037,447
|
|
|
Total
|
|
|
2,615,037
|
|
|
|
14,514,556
|
|
|
Less:
Amount representing interest
|
|
|
(707,154
|
)
|
|
|
(6,678,422
|
)
|
|
Present
value of net minimum lease payments
|
|
$
|
1,907,883
|
|
|
$
|
7,836,144
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 11 ––EQUITY
Restricted Shares
A restricted stock award (“RSA”) is an award of common
shares that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and
are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the
shares before the restricted shares vest. Shares of nonvested restricted stock have the same voting rights as common stock, are entitled
to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company expenses the
cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, straight-line
over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based
on the closing price of the Company's common stock on the grant date.
During the three months ended June 30, 2021, the
Company granted in the aggregate, 472,000 restricted shares to a consultant, the company's directors, officers and employees. The restricted
shares award were granted from the 2019 Omnibus Equity Incentive Plan and vested immediately. The fair value of the award on the date
of grant was $3,134,080 which was expensed in full during the three months ended June 30, 2021.
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 June 30, 2021 for SCHC, SYCI and
DCHC is 16%, 14% and 0% of its registered capital respectively.
NOTE 12 – STOCK-BASED COMPENSATION
Pursuant to the Company’s 2019 Omnibus Equity
Incentive Plan adopted and approved in 2019 (“ 2019 Plan”), awards under the 2019 Plan is limited in the aggregate to 2,068,398
shares of our common stock, inclusive of the awards that were previously issued and outstanding under the Company’s 2007 Equity
Incentive Plan, as amended (the “2007 Plan”). Upon adoption and approval of the 2019 Plan, the 2007 Plan was frozen, no new
awards will be granted under the 2007 Plan, and outstanding awards under the 2007 Plan will continue to be governed by the terms and condition
of the 2007 Plan and applicable award agreement. As of June 30, 2021, the number of shares of the Company’s common stock available
for grant of awards under the 2019 Plan is 159,248 shares.
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.
In April 2021, the Company and certain management staff and directors
mutually agreed to cancel certain unexercised stock options previously granted for an aggregate of 115,600 shares of the Company’s
common stock underlying those stock options, having exercise prices at $7.27 per share, without consideration.
For the three months ended June 30, 2021 and 2020,
total compensation costs for options issued recorded in the consolidated statement of loss were $0.
During the three and six months ended June 30, 2021, there were no
options granted to employees or non-employees.
The following table summarizes all Company
stock option transactions between January 1, 2021 and June 30, 2021.
Stock-Based Compensation - Schedule of Stock
Option Activity
|
|
|
Number
of Option
Outstanding and exercisable
|
|
Weighted-
Average Exercise price of Option
|
|
Range
of
Exercise Price per Common Share
|
|
Balance, January 1, 2021
|
|
|
121,600
|
|
|
$
|
7.09
|
|
|
|
$3.57
- $7.27
|
|
|
Exercised during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
during the period
|
|
|
(115,600
|
)
|
|
|
—
|
|
|
$
|
7.27
|
|
|
Balance, June 30, 2021
|
|
|
6,000
|
|
|
$
|
3.57
|
|
|
$
|
3.57
|
|
|
Stock Options Outstanding
and Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Outstanding
at June 30, 2021
|
|
|
|
Range
of
Exercise
Prices
|
|
|
|
Contractual
Life
(Years)
|
|
|
Outstanding and
exercisable
|
|
|
6,000
|
|
|
|
$3.57
|
|
|
|
0.67
|
|
The aggregate intrinsic value of options outstanding and exercisable
as of June 30, 2021 was $4,710.
During the three and six months ended June 30,
2021 and 2020, there were no options exercised.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – INCOME TAXES
The Company utilizes the asset and liability method
of accounting for income taxes in accordance with FASB ASC 740-10.
United States
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 three-month and six-month periods ended June 30, 2021 and 2020, 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 three-month and six-month periods ended June 30, 2021
and 2020.
Hong Kong
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 three-month and six-month periods
ended June 30, 2021 and 2020. The applicable statutory tax rates for the three-month and six-month periods ended June 30, 2021
and 2020 are 16.5%. There is no dividend withholding tax in Hong Kong.
PRC
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 Cai Shui [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 June 30, 2021 and December 31, 2020, the
accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are
$125,637,125 and $126,643,733, 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 June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020, the
unrecognized WHT are $5,227,527 and $5,288,346, respectively.
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
2019, 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 have been examined, and there is no Hong Kong Profits Tax was charged.
The components of the income tax benefit from
continuing operations are:
Income Taxes
- Schedule of Components of Income Tax Expense Benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
Period Ended June 30,
|
|
Six-Month Period
Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Current taxes – PRC
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Deferred taxes
|
|
|
(356,408
|
)
|
|
|
612,354
|
|
|
|
387,229
|
|
|
|
1,739,929
|
|
|
Change
in valuation allowance
|
|
|
—
|
|
|
|
60,279
|
|
|
|
—
|
|
|
|
189,147
|
|
|
Tax Expense Benefit
|
|
$
|
(356,408
|
)
|
|
$
|
672,633
|
|
|
$
|
387,229
|
|
|
$
|
1,929,076
|
|
The
effective income tax rate differs from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows: Income
Taxes - Schedule of Income Tax Rate Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
Period Ended June 30,
|
|
Six-Month
Period Ended June 30,
|
|
Reconciliations
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Statutory income
tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
Non-taxable
& Non-deductible items
|
|
|
(6
|
%)
|
|
|
(2
|
%)
|
|
|
(3
|
%)
|
|
|
—
|
|
|
Change
in valuation allowance
|
|
|
(34
|
%)
|
|
|
—
|
|
|
|
(15
|
%)
|
|
|
—
|
|
|
Effective
tax rate
|
|
|
(15
|
%)
|
|
|
23
|
%
|
|
|
7
|
%
|
|
|
25
|
%
|
Significant components of the Company’s
deferred tax assets and liabilities at June 30, 2021 and December 31, 2020 are as follows:
Income Taxes - Schedule of Deferred
Tax Assets and Liabilities
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2021
|
|
2020
|
|
Deferred
tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
Impairment
on property, plant and equipment
|
|
|
2,731,415
|
|
|
|
2,907,548
|
|
|
Impairment
on prepaid land lease
|
|
|
880,714
|
|
|
|
883,884
|
|
|
Exploration
costs
|
|
|
1,927,260
|
|
|
|
1,908,087
|
|
|
Compensation
costs of unexercised stock options
|
|
|
1,614
|
|
|
|
74,883
|
|
|
PRC
tax losses
|
|
|
22,396,953
|
|
|
|
21,643,028
|
|
|
US
federal net operating loss
|
|
|
1,247,000
|
|
|
|
1,045,503
|
|
|
Total
deferred tax assets
|
|
|
29,184,956
|
|
|
|
28,462,933
|
|
|
Valuation
allowance
|
|
|
(9,930,632
|
)
|
|
|
(9,872,706
|
)
|
|
Net
deferred tax asset
|
|
$
|
19,254,534
|
|
|
$
|
18,590,227
|
|
The increase in valuation allowance for the three-month
period ended June 30, 2021 is $144,890.
The decrease in valuation allowance for the three-month
period ended June 30, 2020 is $60,279.
The increase in valuation allowance for the six-month
period ended June 30, 2021 is $57,926.
The decrease in valuation allowance for the six-month
period ended June 30, 2020 is $189,147.
There were no unrecognized tax benefits and accrual
for uncertain tax positions as of June 30, 2021 and December 31, 2020 and no amounts accrued for penalties and interest for the three
and six months ended June 30, 2021 and 2020.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – 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 (income) 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.
|
Three-Month
Period
Ended
June
30, 2021
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural
Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net
revenue
(external customers)
|
|
$
|
10,025,438
|
|
|
$
|
1,122,570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,148,008
|
|
|
$
|
—
|
|
|
$
|
11,148,008
|
|
Net
revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Income(loss) from operations
before income tax benefit
|
|
|
2,682,233
|
|
|
|
(578,435
|
)
|
|
|
(741,312
|
)
|
|
|
(62,850
|
)
|
|
|
1,299,636
|
|
|
|
(3,682,445
|
)
|
|
|
(2,382,809
|
)
|
|
Income tax benefit
|
|
|
(672,696
|
)
|
|
|
145,070
|
|
|
|
171,146
|
|
|
|
—
|
|
|
|
(356,480
|
)
|
|
|
—
|
|
|
|
(356,480
|
)
|
Income
(loss) from operations after
income tax benefit
|
|
|
2,009,537
|
|
|
|
(433,365
|
)
|
|
|
(570,166
|
)
|
|
|
(62,850
|
)
|
|
|
943,156
|
|
|
|
(3,682,445
|
)
|
|
|
(2,739,289
|
)
|
|
Total assets
|
|
|
138,872,887
|
|
|
|
32,840,392
|
|
|
|
122,381,338
|
|
|
|
1,846,367
|
|
|
|
295,940,984
|
|
|
|
484,076
|
|
|
|
296,425,060
|
|
|
Depreciation and amortization
|
|
|
2,610,442
|
|
|
|
1,403,262
|
|
|
|
68,874
|
|
|
|
37,929
|
|
|
|
4,120,507
|
|
|
|
—
|
|
|
|
4,120,507
|
|
|
Capital expenditures
|
|
|
—
|
|
|
|
—
|
|
|
|
5,806,435
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
5,806,435
|
|
|
Three-Month
Period
Ended
June
30, 2020
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural
Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net
revenue
(external customers)
|
|
$
|
4,487,017
|
|
|
$
|
872,466
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,359,483
|
|
|
$
|
—
|
|
|
$
|
5,359,483
|
|
Net
revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Income(loss) from operations
before income tax benefit
|
|
|
(1,479,084
|
)
|
|
|
(611,472
|
)
|
|
|
(654,652
|
)
|
|
|
(53,270
|
)
|
|
|
(2,798,478
|
)
|
|
|
(155,074
|
)
|
|
|
(2,953,552
|
)
|
|
Income tax benefit
|
|
|
350,708
|
|
|
|
172,849
|
|
|
|
149,076
|
|
|
|
—
|
|
|
|
672,633
|
|
|
|
—
|
|
|
|
672,633
|
|
Income
(loss) from operations after
income tax benefit
|
|
|
(1,128,376
|
)
|
|
|
(438,623
|
)
|
|
|
(505,576
|
)
|
|
|
(53,270
|
)
|
|
|
(2,125,845
|
)
|
|
|
(155,074
|
)
|
|
|
(2,280,919
|
)
|
|
Total assets
|
|
|
115,956,839
|
|
|
|
38,299,428
|
|
|
|
108,862,565
|
|
|
|
1,599,014
|
|
|
|
264,717,846
|
|
|
|
70,367
|
|
|
|
264,788,213
|
|
|
Depreciation and amortization
|
|
|
3,038,936
|
|
|
|
919,003
|
|
|
|
111,797
|
|
|
|
34,598
|
|
|
|
4,104,334
|
|
|
|
—
|
|
|
|
4,104,334
|
|
|
Capital expenditures
|
|
|
—
|
|
|
|
—
|
|
|
|
2,443,931
|
|
|
|
—
|
|
|
|
2,443,931
|
|
|
|
—
|
|
|
|
2,443,931
|
|
* 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 respective segment.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – BUSINESS SEGMENTS – Continued
|
Six-Month
Period
Ended
June
30, 2021
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural
Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net
revenue
(external customers)
|
|
$
|
14,836,428
|
|
|
$
|
1,570,823
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,407,251
|
|
|
$
|
—
|
|
|
$
|
16,407,251
|
|
Net
revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loss from operations before
income tax benefit
|
|
|
1,402,668
|
|
|
|
(1,588,020
|
)
|
|
|
(1,487,781
|
)
|
|
|
(117,637
|
)
|
|
|
(1,790,770
|
)
|
|
|
(3,873,463
|
)
|
|
|
(5,664,233
|
)
|
|
Income tax benefit
|
|
|
(353,828
|
)
|
|
|
397,466
|
|
|
|
343,591
|
|
|
|
—
|
|
|
|
387,229
|
|
|
|
—
|
|
|
|
387,229
|
|
|
Loss
from operations after income tax benefit
|
|
|
1,048,840
|
|
|
|
(1,190,554
|
)
|
|
|
(1,144,190
|
)
|
|
|
(117,637
|
)
|
|
|
(1,403,541
|
)
|
|
|
(3,873,463
|
)
|
|
|
(5,277,004
|
)
|
|
Total assets
|
|
|
138,872,887
|
|
|
|
32,840,392
|
|
|
|
122,381,338
|
|
|
|
1,846,367
|
|
|
|
295,940,984
|
|
|
|
484,076
|
|
|
|
296,425,060
|
|
|
Depreciation and amortization
|
|
|
5,531,131
|
|
|
|
2,480,722
|
|
|
|
137,481
|
|
|
|
75,530
|
|
|
|
8,224,864
|
|
|
|
—
|
|
|
|
8,224,864
|
|
|
Capital expenditures
|
|
|
—
|
|
|
|
—
|
|
|
|
5,806,435
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
5,806,435
|
|
|
Six-Month
Period
Ended
June
30, 2020
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural
Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net
revenue
(external customers)
|
|
$
|
4,949,863
|
|
|
$
|
967,290
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,917,153
|
|
|
$
|
—
|
|
|
$
|
5,917,153
|
|
Net
revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Loss from operations before
income tax benefit
|
|
|
(4,345,522
|
)
|
|
|
(2,125,054
|
)
|
|
|
(1,365,561
|
)
|
|
|
(102,116
|
)
|
|
|
(7,938,253
|
)
|
|
|
149,272
|
|
|
|
(7,788,981
|
)
|
|
Income tax benefit
|
|
|
1,068,146
|
|
|
|
551,245
|
|
|
|
309,685
|
|
|
|
—
|
|
|
|
1,929,076
|
|
|
|
—
|
|
|
|
1,929,076
|
|
|
Loss
from operations after income tax benefit
|
|
|
(3,277,376
|
)
|
|
|
(1,573,809
|
)
|
|
|
(1,055,876
|
)
|
|
|
(102,116
|
)
|
|
|
(6,009,177
|
)
|
|
|
149,272
|
|
|
|
(5,859,905
|
)
|
|
Total assets
|
|
|
115,956,839
|
|
|
|
38,299,428
|
|
|
|
108,862,565
|
|
|
|
1,599,014
|
|
|
|
264,717,846
|
|
|
|
70,367
|
|
|
|
264,788,213
|
|
|
Depreciation and amortization
|
|
|
5,236,780
|
|
|
|
2,027,445
|
|
|
|
225,281
|
|
|
|
69,718
|
|
|
|
7,559,224
|
|
|
|
—
|
|
|
|
7,559,224
|
|
|
Capital expenditures
|
|
|
3,157,669
|
|
|
|
646,752
|
|
|
|
6,055,721
|
|
|
|
—
|
|
|
|
9,860,142
|
|
|
|
—
|
|
|
|
9,860,142
|
|
* 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.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – BUSINESS SEGMENTS –
Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
Period Ended June 30,
|
|
Six-Month Period
Ended June 30,
|
|
Reconciliations
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Total segment
operating loss
|
|
$
|
1,299,636
|
|
|
$
|
(2,798,478
|
)
|
|
$
|
(1,790,770
|
)
|
|
$
|
(7,938,253
|
)
|
|
Corporate costs
|
|
|
(3,193,107
|
)
|
|
|
(136,956
|
)
|
|
|
(3,279,313
|
)
|
|
|
(233,059
|
)
|
|
Unrealized
gain on translation of intercompany balance
|
|
|
(489,338
|
)
|
|
|
(18,118
|
)
|
|
|
(594,150
|
)
|
|
|
382,331
|
|
|
Loss from operations
|
|
|
(2,382,809
|
)
|
|
|
(2,953,552
|
)
|
|
|
(5,664,233
|
)
|
|
|
(7,788,981
|
)
|
|
Other
income, net of expense
|
|
|
36,069
|
|
|
|
36,300
|
|
|
|
71,660
|
|
|
|
75,528
|
|
|
Loss
before taxes
|
|
$
|
(2,346,740
|
)
|
|
$
|
(2,917,252
|
)
|
|
$
|
(5,592,573
|
)
|
|
$
|
(7,713,453
|
)
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended June 30, 2021.
Business Segments - Schedule of
Revenue by Major Customers
|
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
|
|
$
|
1,752
|
|
|
$
|
420
|
|
|
$
|
—
|
|
|
$
|
2,172
|
|
|
|
19.5
|
%
|
|
2
|
|
Shouguang Weidong Chemical
Company Limited
|
|
$
|
1,222
|
|
|
$
|
390
|
|
|
$
|
—
|
|
|
$
|
1,612
|
|
|
|
14.5
|
%
|
|
3
|
|
Shandong Brother Technology
Limited
|
|
$
|
1,196
|
|
|
$
|
313
|
|
|
$
|
—
|
|
|
$
|
1,509
|
|
|
|
13.5
|
%
|
The following table shows the major customer(s)
(10% or more) for the six-month period ended June 30, 2021.
|
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
|
|
$
|
2,648
|
|
|
$
|
589
|
|
|
$
|
—
|
|
|
$
|
3,237
|
|
|
|
19.7
|
%
|
|
2
|
|
Shouguang Weidong Chemical
Company Limited
|
|
$
|
1,925
|
|
|
$
|
498
|
|
|
$
|
—
|
|
|
$
|
2,423
|
|
|
|
14.8
|
%
|
|
3
|
|
Shandong Brother Technology
Limited
|
|
$
|
1,830
|
|
|
$
|
485
|
|
|
$
|
—
|
|
|
$
|
2,315
|
|
|
|
14.1
|
%
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended June 30, 2020.
|
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
|
|
$
|
809
|
|
|
$
|
321
|
|
|
$
|
—
|
|
|
$
|
1,130
|
|
|
21.1
|
%
|
|
2
|
|
Shouguang Weidong Chemical
Company Limited
|
|
$
|
982
|
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
1,233
|
|
|
23
|
%
|
|
3
|
|
Shandong Brother Technology
Limited
|
|
$
|
550
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
850
|
|
|
15.8
|
%
|
|
4
|
|
Shandong Shouguang Shenrunfa
Ocean Chemical Company Limited
|
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
711
|
|
|
13.3
|
%
|
|
5
|
|
Dongying Bomeite Chemical
Company Limited
|
|
$
|
537
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
537
|
|
|
10
|
%
|
The following table shows the major customer(s)
(10% or more) for the six-month period ended June 30, 2020.
|
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
|
|
$
|
879
|
|
|
$
|
321
|
|
|
$
|
—
|
|
|
$
|
1,200
|
|
|
|
20.3
|
%
|
|
2
|
|
Shouguang Weidong Chemical
Company Limited
|
|
$
|
1,047
|
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
1,298
|
|
|
|
21.9
|
%
|
|
3
|
|
Shandong Brother Technology
Limited
|
|
$
|
609
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
909
|
|
|
|
15.4
|
%
|
|
4
|
|
Shandong Shouguang Shenrunfa
Ocean Chemical Company Limited
|
|
$
|
768
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
768
|
|
|
|
13
|
%
|
|
5
|
|
Dongying Bomeite Chemical
Company Limited
|
|
$
|
607
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
607
|
|
|
|
10.3
|
%
|
NOTE 15– CUSTOMER CONCENTRATION
Customer
During the six-month period ended June 30, 2021,
the Company sold 66.4% of its products to its top five customers, respectively. As of June 30, 2021, amounts due from these customers
were $2,878,885.
During the six-month period ended June 30, 2020,
the Company sold 82.4% of its products to its top five customers, respectively. As of June 30, 2020, amounts due from these customers
were $2,488,001.
NOTE 16– MAJOR SUPPLIERS
During the six-month period ended June 30, 2021
the Company purchased 100% of its raw materials from its top five suppliers. As of June 30, 2021, amounts due to those suppliers
were $412,601.
During the six-month period ended June 30, 2020
the Company purchased 100% of its raw materials from its top five suppliers. As of June 30, 2020, amounts due to those suppliers
were $286,401.
NOTE 17 – 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 June 30, 2021 and December
31, 2020.
NOTE 18 – CAPITAL COMMITMENT AND OTHER SERVICE
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company’s
contractual obligations as of June 30, 2021:
Capital Commitment and Other Service
Contractual Obligations - Schedule of Contractual Obligations
|
|
|
Property
Management Fees
|
|
Capital
Expenditure
|
|
Payable within:
|
|
|
|
|
|
|
|
|
|
the next 12
months
|
|
$
|
96,574
|
|
|
$
|
10,371,657
|
|
|
the next 13 to 24 months
|
|
|
96,574
|
|
|
|
761,319
|
|
|
the
next 25 to 36 months
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
193,148
|
|
|
$
|
11,132,976
|
|
NOTE 19 –LOSS CONTINGENCIES
Settled Litigation
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 owners
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, to the Company’s
knowledge, 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. To the Company’s knowledge, the local government has submitted its plan to solve the issues to higher authority and are
waiting for approval from the higher authority.
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. Pursuant to a Written Application dated October 28, 2019 addressed to the Court by the Bureau,
the Bureau withdrew its application for the enforcement proceedings regarding the administrative penalty imposed on Factory No. 7, Factory
No. 8 and Factory No.10. Pursuant to a written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 389 Zhi Yi, dated
November 25, 2020, the Court orders to terminate the enforcement of the case captioned (2019) Lu 0783 Xing Shen No. 389. Production of
Factory No. 7 was allowed to resume in April 2019. The Company received a notification from the Shouguang City Government in February
2019 informing the Company that Factory No. 1, No.4, No. 7 and No. 9 have passed inspection and were approved to resume operation.
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 June 30, 2021.
NOTE 20 - SUBSEQUENT EVENT
None.