NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(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, 2020 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, 2019 (the “2019 Form 10-K”). .
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"), 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 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 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, 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 May 8, 2020, WHO reported that there were more than 18 million of
confirmed cases of COVID-19 including 702,642 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 believes this situation did not have a material adverse impact on its operating results in the first six months of
2020 and will continue to assess the financial impact for the remainder of the year.
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 No.2, No.8 and No.10.
(i) Bromine and Crude Salt Segments
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 on 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 on March 5, 2020 allowing the Company to resume production at its bromine
factories No.1, No. 4 (which was renamed from Subdivision Factory No. 1), 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.
(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 $60 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 $16,538,768 and $10,320,017, which were recorded in the prepaid land leases and property, plant and equipment
in the consolidated balance sheets as of June 30, 2020 and December 31, 2019.
(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 after the governmental planning has been finalized.
(c) Allowance
for Doubtful Accounts
As of June 30, 2020 and December 31, 2019,
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, 2020 and 2019.
The Company collected from on its accounts
receivable an amount of $1,933,814 from July 1 2020 through August 7, 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 $89,972,591 and $100,301,986 with these institutions as of June 30, 2020 and December 31, 2019, 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, 2020
(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:
|
|
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 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 $43,838and $292,800for the three-month period ended June 30, 2020 and 2019,
respectively, and totaled $183,946 and $603,737 for the six-month period ended June 30, 2020 and 2019, 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 15.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(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, 2020and 2019, 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 to74,781 and 33,981
shares for the three-month period ended June 30, 2020and 2019, respectively, and amounted to 94,075 and50,790 shares for the six-month
period ended June 30, 2020 and 2019, 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, 2020 and 2019, 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, 2020
(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)
Contingencies
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.
(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, 2020.
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, 2020
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 2 – INVENTORIES
Inventories consist of:
|
|
June 30,
2020
|
|
December 31,
2019
|
|
|
|
|
|
Raw materials
|
|
$
|
29,304
|
|
|
$
|
20,928
|
|
Finished goods
|
|
|
494,324
|
|
|
|
669,159
|
|
|
|
$
|
523,628
|
|
|
$
|
690,087
|
|
NOTE 3 – PREPAID LAND LEASES
In December 2017, the Company paid a one
lump sum upfront amount of $8,982,369 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. The amount paid was recorded as prepaid land leases, net of current portion in the consolidated balance sheet as of June
30 2020 and December 31, 2019. As of June 30, 2020, the prepaid land lease increased to $9,349,625 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.
In June 2020, the construction of the new
chemical factory commenced and is expected to complete in May 2021.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
|
|
June 30,
2020
|
|
December 31,
2019
|
At cost:
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
2,724,154
|
|
|
$
|
2,764,462
|
|
Buildings
|
|
|
59,007,466
|
|
|
|
59,880,567
|
|
Plant and machinery
|
|
|
231,247,364
|
|
|
|
234,669,007
|
|
Motor vehicles
|
|
|
6,039
|
|
|
|
6,129
|
|
Furniture, fixtures and office equipment
|
|
|
3,188,556
|
|
|
|
3,235,736
|
|
Construction in process
|
|
|
5,562,402
|
|
|
|
1,204,742
|
|
Total
|
|
|
301,735,981
|
|
|
|
301,760,643
|
|
Less: Accumulated depreciation and amortization
|
|
|
(151,706,607
|
)
|
|
|
(146,330,705
|
)
|
Impairment
|
|
|
(17,180,774
|
)
|
|
|
(17,434,989
|
)
|
Net book value
|
|
$
|
132,848,600
|
|
|
$
|
137,994,949
|
|
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 $18,725,141 and $19,894,947as at June
30, 2020 and December 31, 2019, respectively.
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.
During the three-month period ended June
30, 2019, depreciation and amortization expense totaled $3,586,272 of which $2,019,128, $222,444 and $1,344,700were 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, 2019,depreciation and amortization expense
totaled $6,898,179 of which $5,086,024, $447,274 and $1,364,881 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:
|
|
June 30,
2020
|
|
December 31,
2019
|
At cost:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
116,237
|
|
|
$
|
117,956
|
|
Plant and machinery
|
|
|
2,126,386
|
|
|
|
2,157,848
|
|
Total
|
|
|
2,242,623
|
|
|
|
2,275,804
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,068,330
|
)
|
|
|
(2,096,278
|
)
|
Net book value
|
|
$
|
174,293
|
|
|
$
|
179,526
|
|
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, 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.
During the three and six months period
ended June 30, 2019, depreciation and amortization expense totaled $1,360 and$66,701, 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, 2020
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 6 – OPERATING LEASE RIGHT–OF
USE ASSETS
As of June 30, 2020, the total operating
lease ROU assets was $8,429,714. The total operating lease cost for the three-month period ended June 30, 2020 and 2019 was $216,422and
$225,022.
The total operating lease cost for the
six-month period ended June 30, 2020 and 2019 was $436,109 and $452,241.
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 $7,946,227as at June 30, 2020.
NOTE 7 – ACCOUNTS PAYABLE, OTHER
PAYABLE AND ACCRUED EXPENSES
Accounts payable, other payable and accrued
expenses consist of the following:
|
|
June 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Accounts payable
|
|
$
|
286,401
|
|
|
$
|
—
|
|
Salary payable
|
|
|
289,734
|
|
|
|
310,097
|
|
Social security insurance contribution payable
|
|
|
41,511
|
|
|
|
105,750
|
|
Other payable-related party (see Note 8)
|
|
|
44,060
|
|
|
|
89,424
|
|
Deposit on subscription of a subsidiary’s share
|
|
|
141,250
|
|
|
|
144,798
|
|
Accrued expense-construction
|
|
|
96,485
|
|
|
|
97,913
|
|
Accrued expense-others
|
|
|
187,517
|
|
|
|
358,066
|
|
Total
|
|
$
|
1,086,958
|
|
|
$
|
1,106,048
|
|
The deposit on subscription of a subsidiary's share of $141,250
as of June 30, 2020 relates to sale of non-controlling interests in DCHC.
NOTE 8– RELATED PARTY TRANSACTIONS
During the three months ended June 30,
2020 and June 30, 2019, the Company borrowed $0 and $60,000 from a related company. There was no balance owing to this related
company as of June 30, 2020 and December 31, 2019.
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 $88,121 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, 2020was approximately
$22,030 and $44,043.The expense associated with this agreement for the three and six months ended June 30, 2019was approximately
$22,687 and $45,849.
NOTE 9– TAXES PAYABLE
|
|
June 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Land use tax payable
|
|
$
|
768,254
|
|
|
$
|
779,623
|
|
Value added tax and other taxes payable
|
|
|
316,807
|
|
|
|
—
|
|
|
|
$
|
1,085,061
|
|
|
$
|
779,623
|
|
NOTE 10 –LEASE LIABILITIES-FINANCE
AND OPERATING LEASE
The components of finance lease liabilities
were as follows:
|
|
Imputed
|
|
June 30,
|
|
December 31,
|
|
|
Interest rate
|
|
2020
|
|
2019
|
Total finance lease liability
|
|
|
6.7%
|
|
|
$
|
1,877,985
|
|
|
$
|
2,104,278
|
|
Less: Current portion
|
|
|
|
|
|
|
(137,103
|
)
|
|
|
(198,506
|
)
|
Finance lease liability, net of current portion
|
|
|
|
|
|
$
|
1,740,882
|
|
|
$
|
1,905,772
|
|
Interest expenses from capital lease obligations
amounted to $34,747 and $38,281for the three-month period ended June 30, 2020 and 2019, respectively, which were charged to the
condensed consolidated statement of income (loss). Interest expenses from capital lease obligations amounted to $70,009 and$76,940
for the six-month period ended June 30, 2020 and 2019, respectively, which were charged to the condensed consolidated statement
of income (loss).The remaining finance lease term at June 30, 2020 was 11 years.
The components of operating lease liabilities
as follows:
|
|
Imputed
|
|
June 30,
|
|
December 31,
|
|
|
Interest rate
|
|
2020
|
|
2019
|
Total Operating lease liabilities
|
|
|
4.89%
|
|
|
$
|
7,708,977
|
|
|
$
|
8,348,453
|
|
Less: Current portion
|
|
|
|
|
|
|
(429,771
|
)
|
|
|
(416,604
|
)
|
Operating lease liabilities, net of current portion
|
|
|
|
|
|
$
|
7,279,206
|
|
|
$
|
7,931,849
|
|
The weighted average remaining
operating lease term at June 30, 2020was 22years and the
weighted average discounts rate was 4.89%.Lease payments for the three-month period ended June 30, 2020 and 2019,
respectively, were $522,636 and $543,405. Lease payments for the six-month period ended June 30, 2020 and 2019, respectively,
were $704,301 and $724,144.
Maturities of lease liabilities were as
follows:
|
|
Financial lease
|
|
Operating Lease
|
Payable within:
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
265,126
|
|
|
$
|
772,135
|
|
the next 13 to 24 months
|
|
|
265,126
|
|
|
|
628,001
|
|
the next 25 to 36 months
|
|
|
265,126
|
|
|
|
631,628
|
|
the next 37 to 48 months
|
|
|
265,126
|
|
|
|
632,586
|
|
the next 49 to 60 months
|
|
|
265,126
|
|
|
|
636,503
|
|
thereafter
|
|
|
1,325,634
|
|
|
|
10,704,542
|
|
Total
|
|
|
2,651,264
|
|
|
|
14,005,395
|
|
Less: Amount representing interest
|
|
|
(773,279
|
)
|
|
|
(6,296,418
|
)
|
Present value of net minimum lease payments
|
|
$
|
1,877,985
|
|
|
$
|
7,708,977
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(Expressed in U.S. dollars)
(UNAUDITED)
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 June 30,
2020 for SCHC, SYCI and DCHC is 16%, 14% and 0% of its registered capital respectively.
NOTE 12– TREASURYSTOCK
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 were 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 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, 2020, the number of shares of the Company’s
common stock available for grant of stock options and issuance under the 2019 Plan is 989,698 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.
For the three and six months ended June
30, 2020 and 2019, total compensation costs for options granted recorded in the consolidated statement of loss were $0 and $45,900.
During the three and six months ended June 30, 2020, there were
no options granted to employees or non-employees.
The following table summarizes all
Company stock option transactions between January 1, 2020 and June 30, 2020.
|
|
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, 2020
|
|
|
135,100
|
|
|
$
|
7.21
|
|
|
|
$3.57 - $9.90
|
|
Exercised during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired during the period
|
|
|
(7,500
|
)
|
|
$
|
9.17
|
|
|
|
—
|
|
Balance, June 30, 2020
|
|
|
127,600
|
|
|
$
|
7.09
|
|
|
|
$3.57 - $7.27
|
|
Stock Options and Warrants Outstanding and Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Remaining
|
|
|
Outstanding at June 30, 2020
|
|
Range of
Exercise Prices
|
|
Contractual Life
(Years)
|
Outstanding and exercisable
|
|
127,600
|
|
$3.57 - $7.27
|
|
1.13
|
The aggregate intrinsic value of options outstanding and exercisable
as of June 30, 2020 was $10,710.
During the three months ended June 30,
2020 and 2019, there were 0 and 132,462shares of common stock issued upon cashless exercise of 0 and 330,400 options.
During the six months ended June 30, 2020
and 2019, there were 0 and 151,856 shares of common stock issued upon cashless exercise of 0 and 379,400 options.
The aggregate intrinsic value of options
exercised during the three months ended June 30, 2020 was $0.The aggregate intrinsic value of options exercised during the three
months ended June 30, 2019 was $808,014.
The aggregate intrinsic value of options
exercised during the six months ended June 30, 2020 was $0.The aggregate intrinsic value of options exercised during the six months
ended June 30, 2019 was $922,429.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – INCOME TAXES
The Company utilizes the asset and liability
method of accounting for income taxes in accordance with FASB ASC 740-10.
(a) United
States (“US”)
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, 2020and 2019, 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, 2020 and 2019.
(c) 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, 2020 and 2019. The applicable statutory tax rates for the three-month
and six-month periods ended June 30, 2020 and 2019are 16.5%. There is no dividend withholding tax in Hong Kong.
(d) 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, 2020 and December 31, 2019,
the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject
to WHT are $114,295,118 and $124,616,722, 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, 2020 and December 31, 2019, 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, 2020 and December 31, 2019, the unrecognized WHT are $4,752,714 and $5,254,560, 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 2016are 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:
|
|
Three-Month Period Ended June 30,
|
|
Six-Month Period Ended June 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Current taxes – PRC
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred taxes – PRC
|
|
|
612,354
|
|
|
|
695,988
|
|
|
|
1,739,929
|
|
|
|
2,106,066
|
|
Change in valuation allowance
|
|
|
60,279
|
|
|
|
(330,005
|
)
|
|
|
189,147
|
|
|
|
(344,946
|
)
|
|
|
$
|
672,633
|
|
|
$
|
365,983
|
|
|
$
|
1,929,076
|
|
|
$
|
1,761,120
|
|
The effective income tax rate differs from
the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
|
|
Three-Month Period Ended June 30,
|
|
Six-Month Period Ended June 30,
|
Reconciliations
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Non-taxable income,(Non-deductible expense) and change in valuation allowance
|
|
|
(2
|
%)
|
|
|
8
|
%
|
|
|
—
|
|
|
|
(1
|
%)
|
Effective tax rate
|
|
|
23
|
%
|
|
|
33
|
%
|
|
|
25
|
%
|
|
|
24
|
%
|
Significant components of the Company’s
deferred tax assets and liabilities at June 30, 2020 and December 31,2019are as follows:
|
|
June 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Impairment on property, plant and equipment
|
|
|
2,764,893
|
|
|
|
2,974,542
|
|
Impairment on prepaid land lease
|
|
|
814,620
|
|
|
|
826,673
|
|
Exploration costs
|
|
|
1,758,563
|
|
|
|
1,784,583
|
|
Compensation costs of unexercised stock options
|
|
|
74,883
|
|
|
|
171,672
|
|
PRC tax losses
|
|
|
20,571,271
|
|
|
|
18,737,005
|
|
US federal net operating loss
|
|
|
311,000
|
|
|
|
432,000
|
|
Total deferred tax assets
|
|
|
26,295,230
|
|
|
|
24,926,475
|
|
Valuation allowance
|
|
|
(8,796,686
|
)
|
|
|
(8,985,833
|
)
|
Net deferred tax asset
|
|
$
|
17,498,544
|
|
|
$
|
15,940,642
|
|
The decrease in valuation allowance for
the three-month period ended June 30, 2020 is $60,279.
The increase in valuation allowance for
the three-month period ended June 30, 2019is $330,005.
The decrease in valuation allowance for
the six-month period ended June 30, 2020is $189,147.
The increase in valuation allowance for
the six-month period ended June 30, 2019is $344,946.
There were no unrecognized tax benefits
and accrual for uncertain tax positions as of June 30, 2020 and December 31, 2019 and no amounts accrued for penalties and interest
for the three and six months ended June 30, 2020 and 2019.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
JUNE 30, 2020
(Expressed in U.S. dollars)
(UNAUDITED)
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 (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, 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
|
|
Three-Month
Period Ended
June 30, 2019
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
5,751,164
|
|
|
$
|
245,079
|
|
|
$
|
—
|
|
|
$
|
13,166
|
|
|
$
|
6,009,409
|
|
|
$
|
—
|
|
|
$
|
6,009,409
|
|
Net revenue (intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income(loss) from operations before income tax benefit
|
|
|
(36,713
|
)
|
|
|
(828,736
|
)
|
|
|
(656,424
|
)
|
|
|
(61,401
|
)
|
|
|
(1,583,274
|
)
|
|
|
385,108
|
|
|
|
(1,198,166
|
)
|
Income tax benefit
|
|
|
9,540
|
|
|
|
215,360
|
|
|
|
141,083
|
|
|
|
—
|
|
|
|
365,983
|
|
|
|
—
|
|
|
|
365,983
|
|
Income(loss) from operations after income tax benefit
|
|
|
(27,173
|
)
|
|
|
(613,376
|
)
|
|
|
(515,341
|
)
|
|
|
(61,401
|
)
|
|
|
(1,217,291
|
)
|
|
|
385,108
|
|
|
|
(832,183
|
)
|
Total assets
|
|
|
169,870,183
|
|
|
|
29,241,474
|
|
|
|
128,641,174
|
|
|
|
1,773,689
|
|
|
|
329,526,520
|
|
|
|
37,207
|
|
|
|
329,563,727
|
|
Depreciation and amortization
|
|
|
2,476,960
|
|
|
|
958,352
|
|
|
|
116,240
|
|
|
|
36,080
|
|
|
|
3,587,632
|
|
|
|
—
|
|
|
|
3,587,632
|
|
Capital expenditures
|
|
|
10,857,541
|
|
|
|
644,197
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,501,738
|
|
|
|
—
|
|
|
|
11,501,738
|
|
* 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, 2020
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 15 – BUSINESS SEGMENTS – Continued
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
|
|
Six-Month
Period Ended
June 30, 2019
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
5,751,164
|
|
|
$
|
245,079
|
|
|
$
|
—
|
|
|
$
|
51,736
|
|
|
$
|
6,047,979
|
|
|
$
|
—
|
|
|
$
|
6,047,979
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from operations before income tax benefit
|
|
|
(3,661,727
|
)
|
|
|
(2,240,545
|
)
|
|
|
(1,329,974
|
)
|
|
|
(103,384
|
)
|
|
|
(7,335,630
|
)
|
|
|
(258,566
|
)
|
|
|
(7,594,196
|
)
|
Income tax benefit
|
|
|
906,887
|
|
|
|
568,312
|
|
|
|
285,921
|
|
|
|
—
|
|
|
|
1,761,120
|
|
|
|
—
|
|
|
|
1,761,120
|
|
Loss from operations after Income tax benefit
|
|
|
(2,754,840
|
)
|
|
|
(1,672,233
|
)
|
|
|
(1,044,053
|
)
|
|
|
(103,384
|
)
|
|
|
(5,574,510
|
)
|
|
|
(258,566
|
)
|
|
|
(5,833,076
|
)
|
Total assets
|
|
|
169,870,183
|
|
|
|
29,241,474
|
|
|
|
128,641,174
|
|
|
|
1,773,689
|
|
|
|
329,526,520
|
|
|
|
37,207
|
|
|
|
329,563,727
|
|
Depreciation and amortization
|
|
|
4,595,037
|
|
|
|
2,063,460
|
|
|
|
233,628
|
|
|
|
72,755
|
|
|
|
6,964,880
|
|
|
|
—
|
|
|
|
6,964,880
|
|
Capital expenditures
|
|
|
10,857,541
|
|
|
|
644,197
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,501,738
|
|
|
|
—
|
|
|
|
11,501,738
|
|
* 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, 2020
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 15 – BUSINESS SEGMENTS – Continued
|
|
Three-Month Period Ended June 30,
|
|
Six-Month Period Ended June 30,
|
Reconciliations
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Total segment operating loss
|
|
$
|
(2,798,478
|
)
|
|
$
|
(1,583,274
|
)
|
|
$
|
(7,938,253
|
)
|
|
$
|
(7,335,630
|
)
|
Corporate costs
|
|
|
(136,956
|
)
|
|
|
(162,547
|
)
|
|
|
(233,059
|
)
|
|
|
(302,993
|
)
|
Unrealized gain on translation of intercompany balance
|
|
|
(18,118
|
)
|
|
|
547,655
|
|
|
|
382,331
|
|
|
|
44,427
|
|
Loss from operations
|
|
|
(2,953,552
|
)
|
|
|
(1,198,166
|
)
|
|
|
(7,788,981
|
)
|
|
|
(7,594,196
|
)
|
Other income, net of expense
|
|
|
36,300
|
|
|
|
94,477
|
|
|
|
75,528
|
|
|
|
191,232
|
|
Loss before taxes
|
|
$
|
(2,917,252
|
)
|
|
$
|
(1,103,689
|
)
|
|
$
|
(7,713,453
|
)
|
|
$
|
(7,402,964
|
)
|
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
|
|
Shandong Brother Technology Limited
|
|
$
|
550
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
850
|
|
|
|
15.8
|
%
|
3
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
982
|
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
1,233
|
|
|
|
23
|
%
|
4
|
|
Dongying Bomeite Chemical Company Limited
|
|
$
|
537
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
537
|
|
|
|
10
|
%
|
5
|
|
Shandong Shouguang Shenrunfa Ocean Chemical Company Limited
|
|
$
|
711
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
711
|
|
|
|
13.3
|
%
|
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
|
|
Shandong Brother Technology Limited
|
|
$
|
609
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
909
|
|
|
|
15.4
|
%
|
3
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
1,047
|
|
|
$
|
251
|
|
|
$
|
—
|
|
|
$
|
1,298
|
|
|
|
21.9
|
%
|
4
|
|
Dongying Bomeite Chemical Company Limited
|
|
$
|
607
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
607
|
|
|
|
10.3
|
%
|
5
|
|
Shandong Shouguang Shenrunfa Ocean Chemical Company Limited
|
|
$
|
768
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
768
|
|
|
|
13
|
%
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended June 30, 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
|
|
$
|
1,360
|
|
|
$
|
72
|
|
|
$
|
—
|
|
|
$
|
1,432
|
|
|
|
23.9
|
%
|
2
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
1,100
|
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
1,170
|
|
|
|
19.5
|
%
|
3
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
1,039
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
1,141
|
|
|
|
19
|
%
|
4
|
|
shouguang
Shenrunfa
ocean Chemical Company Limited
|
|
$
|
772
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
772
|
|
|
|
12.9
|
%
|
The following table shows the major customer(s)
(10% or more) for the six-month period ended June 30, 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
|
|
$
|
1,360
|
|
|
$
|
72
|
|
|
$
|
—
|
|
|
$
|
1,432
|
|
|
|
23.9
|
%
|
2
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
1,100
|
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
1,170
|
|
|
|
19.5
|
%
|
3
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
1,039
|
|
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
1,141
|
|
|
|
19
|
%
|
4
|
|
Shouguang
Shenrunfa
ocean Chemical Company Limited
|
|
$
|
772
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
772
|
|
|
|
12.9
|
%
|
NOTE 16– CUSTOMER CONCENTRATION
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.
During the six-month period ended June
30, 2019, the Company sold 84% of its products to its top five customers, respectively. As of June 30, 2019, amounts due from these
customers were $5,663,578.
NOTE 17– MAJOR SUPPLIERS
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.
During the six-month period ended June
30, 2019, the Company purchased 100% of its raw materials from its top five suppliers. As of June 30, 2019, amounts
due to those suppliers were $389,780.
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 June 30, 2020
and December 31, 2019.
NOTE 19 – CAPITAL COMMITMENT AND
OTHER SERVICE CONTRACTUAL OBLIGATIONS
The following table sets forth the Company’s
contractual obligations as of June 30, 2020:
|
|
Property Management Fees
|
|
Capital Expenditure
|
Payable within:
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
88,121
|
|
|
$
|
5,323,609
|
|
the next 13 to 24 months
|
|
|
88,121
|
|
|
|
407,553
|
|
the next 25 to 36 months
|
|
|
88,121
|
|
|
|
—
|
|
Total
|
|
$
|
264,363
|
|
|
$
|
5,731,162
|
|
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
meters, 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, 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.
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 June 30, 2020.