Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
We are a holding company which conducts operations
through our wholly-owned China-based subsidiaries. Our business is conducted and reported in four segments, namely, bromine,
crude salt, chemical products and natural gas.
Through our wholly-owned subsidiary, SCHC, we
produce and trade bromine and crude salt. We are one of the largest producers of bromine in China, as measured by production output.
Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine also is used to
form intermediary chemical compounds such as Tetramethylbenzidine. Bromine is commonly used in brominated flame retardants,
fumigants, water purification compounds, dyes, medicines and disinfectants. Crude salt is the principal material in alkali
production as well as chlorine alkali production and is widely used in the chemical, food and beverage, and other industries.
Through our wholly-owned subsidiary, SYCI, we
manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, papermaking
chemical agents, inorganic chemicals and materials that are used for human and animal antibiotics.
Our wholly-owned subsidiary, DCHC, was established
to explore and develop natural gas and brine resources (including bromine and crude salt) in Sichuan Province, China.
As disclosed in the Company’s Current Report
on Form 8-K filed on September 8, 2017, the Company received, on September 1, 2017, letters from the Yangkou County, Shouguang City government
addressed to each of its subsidiaries, SCHC and SYCI, which stated that in an effort to improve the safety and environmental protection
management level of chemical enterprises, the plants are requested to immediately stop production and perform rectification and improvements
in accordance with the country’s new safety and environmental protection requirements. In the Company’s press release of
August 11, 2017 and on its conference call of August 14, 2017, the Company addressed concerns that increased government enforcement of
stringent environmental rules that were adopted in early 2017 to insure corporations bring their facilities up to necessary standards
so that pollution and other negative environmental issues are limited and remediated, could have an impact on our business in both the
short and long-term. The Company also expressed that although it believed its facilities were fully compliant at the time, the Company
did not know how its facilities would fare under the new rules. Teams of inspectors from the government were sent to many provinces to
inspect all mining and manufacturing facilities. The local government requested that facilities be closed, so that the facilities could
undergo the inspection and analysis in the most efficient manner by inspectors’ team. As a result, our facilities were closed on
September 1, 2017.
The Company believes that this is another step
by the government to improve the environment. It further believes the goal of the government is not to close all plants, but rather to
codify the regulations related to project approval, land use, planning approval and environmental protection assessment approval so that
illegal plants are not able to open in the future and so that plants close to population centers do not cause serious environmental damage.
In addition, the Company believes that the Shandong provincial government wants to assure that each of its regional and county governments
has applied the Notice in a consistent manner.
The Shouguang City Bromine Association, on
behalf of all the bromine plants in Shouguang, started discussions with the local government agencies. The local governmental
agencies confirmed the facts that their initial requirements for the bromine industry did not include the project approval, the
planning approval and the land use rights approval and that those three additional approvals were new requirements of the provincial
government. The Company understood from the local government that it has been coordinating with several government agencies to solve
these three outstanding approval issues in a timely manner and that all the affected bromine plants will not be allowed to commence
production prior to obtaining those approvals.
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 have passed inspection and could resume operations. In April
2019, Factory No. 1 and No. 7 resumed operations.
On February 28, 2020, the Company announced that
it received an approval from the government to resume bromine production after winter temporary closure. Subsequently, it received another
approval from the Shouguang Yangkou People’s Government dated on March 5, 2020 to resume production at its bromine factories No.1,
No. 4, No.7 and No. 9 in order to meet the needs of bromide products for epidemic prevention and control. With these two approvals, the
Company was allowed to resume production at all four bromine factories.
The Company is still waiting for governmental
approval for factories No.2, No.8, and No.10. To its knowledge, the government is currently completing its planning process for all mining
areas including that for prevention of flood. As a result, the Company may be required to make some modifications to our current wells
and aqueducts prior to commencement of operations of these factories to satisfy the local government's requirements. The Company expects
to receive approvals for these factories in the second half of 2021 due to the COVID-19 impact. However, there is no assurance that we will be able to obtain the approvals necessary to operate those factories from the government.
On November 24, 2017, Gulf Resources received
a letter from the People’s Government of Yangkou County, Shouguang City notifying the Company that due to the new standards and
regulations relating to safety production and environmental pollution, from certain local governmental departments, such as the municipal
environmental protection department, the security supervision department and the fire department, its chemical enterprises would have
to be relocated to a new industrial park called Bohai Marine Fine Chemical Industry Park. Although our chemical companies were
in compliance with regulations, they were also close to a residential area. As a result, the government determined we should relocate
to the Bohai park. Chemical companies that are not being asked to move into the park are being permanently closed. Since our factories
closed, the Company has secured from the government the land use rights for its chemical plant On January 6, 2020, the Company received
the environmental protection approval by the government of Shouguang City, Shandong Province for the proposed Yuxin Chemical factory.
The Company began the construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020.
The construction is expected to take approximately one year, and an additional six months to complete the equipment installation and testing.
The Company expects to begin trial production at the beginning of 2022.
In January 2017, the Company completed the first
brine water and natural gas well field construction in Sichuan Province and announced the commencement of trial production. The Company
has been working with Xinan Shiyou Daxue (Southwest Petroleum University) and developed a solution to DHCH’s technical drilling
problem. In resolving the problem, the Company purchased customized equipment for its natural gas project. The installation of such equipment,
including providing piping and electricity, was completed in July 2018. The Company completed the test production at its first natural
gas well in Sichuan Province and commenced trial production in January 2019. Later 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 entire 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.
As a result of our acquisitions of SCHC and SYCI,
our historical consolidated financial statements and the information presented below reflects the accounts of SCHC, SYCI and DCHC,
the consolidated financial statements and the information presented below as of and for the year ended December 31, 2020. The following
discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
On January 28, 2020 we completed a 1-for-5 reverse
stock split of our 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.
RESULTS OF OPERATIONS.
Year ended December 31, 2020 as compared to
year ended December 31, 2019
|
|
Years ended
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Percent Change
Increase/
(Decrease)
|
Net Revenue
|
|
$
|
28,207,024
|
|
|
$
|
10,596,521
|
|
|
|
166
|
%
|
Cost of Net Revenue
|
|
$
|
(19,415,034
|
)
|
|
$
|
(5,430,269
|
)
|
|
|
258
|
%
|
Gross Profit
|
|
$
|
8,791,990
|
|
|
$
|
5,166,252
|
|
|
|
70
|
%
|
Sales, Marketing and Other Operating Expense
|
|
$
|
(42,663
|
)
|
|
$
|
(12,434
|
)
|
|
|
243
|
%
|
Direct labor and factory overheads incurred during plant shutdown
|
|
$
|
(8,170,390
|
)
|
|
$
|
(15,175,280
|
)
|
|
|
(46
|
%)
|
General and Administrative Expenses
|
|
$
|
(10,239,943
|
)
|
|
$
|
(13,272,921
|
)
|
|
|
(23
|
%)
|
Other Operating Expense
|
|
$
|
(22,386
|
)
|
|
$
|
—
|
|
|
|
—
|
|
Loss from Operations
|
|
$
|
(9,683,392
|
)
|
|
$
|
(23,294,383
|
)
|
|
|
(58
|
%)
|
Other Income, Net
|
|
$
|
154,877
|
|
|
$
|
301,325
|
|
|
|
(49
|
%)
|
Loss before Taxes
|
|
$
|
(9,528,515
|
)
|
|
$
|
(22,993,058
|
)
|
|
|
(59
|
%)
|
Income Tax Benefit (Expense)
|
|
$
|
1,108,471
|
|
|
$
|
(2,806,987
|
)
|
|
|
139
|
%
|
Net loss
|
|
$
|
(8,420,044
|
)
|
|
$
|
(25,800,045
|
)
|
|
|
(67
|
%)
|
Net Revenue The table below
shows the changes in net revenue in the respective segment of the Company for the fiscal year 2020 compared to the same period in 2019:
|
|
Net Revenue by Segment
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Percent Increase (Decrease)
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
of Net Revenue
|
Segment
|
|
|
|
% of total
|
|
|
|
% of total
|
|
|
Bromine
|
|
$
|
25,184,808
|
|
|
|
89
|
%
|
|
$
|
10,022,027
|
|
|
|
95
|
%
|
|
|
151
|
%
|
Crude Salt
|
|
|
3,022,216
|
|
|
|
11
|
%
|
|
|
522,758
|
|
|
|
4
|
%
|
|
|
478
|
%
|
Chemical Products
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas
|
|
|
—
|
|
|
|
—
|
|
|
|
51,736
|
|
|
|
1
|
%
|
|
|
(100
|
%)
|
Total sales
|
|
$
|
28,207,024
|
|
|
|
100
|
%
|
|
$
|
10,596,521
|
|
|
|
100
|
%
|
|
|
166
|
%
|
|
|
Years Ended December 31
|
|
Percent Change
|
Bromine and crude salt segments product sold in tonnes
|
|
2020
|
|
2019
|
|
Increase
|
Bromine (excluded volume sold to SYCI)
|
|
|
5,957
|
|
|
|
2,320
|
|
|
|
157
|
%
|
Crude Salt
|
|
|
174,722
|
|
|
|
24,441
|
|
|
|
615
|
%
|
|
|
Year Ended
|
|
Percentage
|
Natural gas segments product sold in cubic metre
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Change
Decrease
|
Natural Gas
|
|
|
—
|
|
|
|
349,900
|
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bromine segment
Net revenue from our bromine segment increased
by 151% to $25,184,808 for the year ended December 31, 2020 compared to $10,022,027 for the year ended December 31, 2019.
Crude salt segment
Net revenue from our crude salt segment
increased by 478% to $3,022,216 for the year ended December 31, 2020 compared $522,758 for the same period in 2019. This increase is
due to the fact that only two plants were restarted in 2019 and were in production for only four months, but three plants were
restarted in 2020 and were in production for 10 months.
Chemical products segment
For the year ended December 31, 2020 and December
31, 2019, the net revenue for the chemical products segment was $0 due to the closure of our chemical factories since September 1, 2017.
As a result there were no chemical products for sale for the years ended December 31, 2020 and 2019.
Natural gas segment
For the year ended December 31, 2020, the net
revenue for the natural gas was $0.
For the year ended December 31, 2019, the net
revenue for the natural gas was $51,736.
Cost of Net Revenue
|
|
Cost of Net Revenue by Segment
|
|
% Change
|
|
|
Year Ended
|
|
Year Ended
|
|
of Cost of
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Net Revenue
|
Segment
|
|
|
|
% of total
|
|
|
|
% of total
|
|
|
Bromine
|
|
$
|
15,950,812
|
|
|
|
82
|
%
|
|
$
|
4,815,890
|
|
|
|
89
|
%
|
|
|
231
|
%
|
Crude Salt
|
|
|
3,464,222
|
|
|
|
18
|
%
|
|
|
564,091
|
|
|
|
10
|
%
|
|
|
514
|
%
|
Chemical Products
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas
|
|
|
—
|
|
|
|
—
|
|
|
|
50,288
|
|
|
|
1
|
%
|
|
|
(100
|
%)
|
Total
|
|
$
|
19,415,034
|
|
|
|
100
|
%
|
|
$
|
5,430,269
|
|
|
|
100
|
%
|
|
|
257
|
%
|
Cost of net revenue reflects
mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity,
depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was
$19,415,034 for the year ended December 31, 2020, an increase of $13,984,765(or 257%) as compared to the same period in 2019 As a
percentage of sales, cost of net revenue was 69% in fiscal year 2020 versus 51% in fiscal year 2019.
Bromine production capacity and utilization
of our factories
The table below represents the annual capacity
and utilization ratios for all of our bromine producing properties:
|
|
Annual Production Capacity (in tonnes)
|
|
Utilization
Ratio (i)
|
Fiscal year 2019
|
|
|
31,506
|
|
|
|
19
|
%
|
Fiscal year 2020
|
|
|
31,506
|
|
|
|
25
|
%
|
Variance of the fiscal year 2020 and 2019
|
|
|
0
|
|
|
|
6
|
%
|
|
(i)
|
Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes.
|
Our utilization ratio was 25% for the year ended
December 31, 2020. an increase of 6% compared to that for the year ended December 31, 2019 because four plants resumed production in the
year ended December 31, 2020 compared to two plants in operations in the year ended December 31, 2019.
Bromine segment
For the year ended December 31, 2020 the cost
of net revenue for the bromine segment was $15,950,812.
For the year ended December 31, 2019 the cost
of net revenue for the bromine segment was $4,815,890.
As a percentage of sales, cost of net revenue
of the bromine segment was 63% in fiscal year 2020 versus 48% in fiscal year 2019.
Crude salt segment
For the year ended December 31, 2020 the cost
of net revenue for the crude salt segment was $3, 464,222.The cost of net revenue for our crude salt segment for the year ended December
31, 2019 was $564,091.
As a percentage of sales, cost of net revenue
of the crude salt segment was 115% in fiscal year 2020 versus 108% in fiscal year 2019.
Chemical products segment
Cost of net revenue for our chemical products
segment for the fiscal year 2020 and 2019 was $0.
Natural gas segment
Cost of net revenue for our natural gas segment
for the year ended December 31, 2020 and 2019 was $0 and $50,288.
Gross Profit. Gross profit was $8,791,990,
or 31%, of net revenue for the year ended December 31, 2020 compared to $5,166,252, or 49%, of net revenue for the same period in 2019.
|
|
Gross Profit (Loss) by Segment
|
|
% Point Change
|
|
|
Year Ended
|
|
Year Ended
|
|
of Gross
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Profit Margin
|
Segment
|
|
|
|
Gross Profit (loss) Margin
|
|
|
|
Gross Profit (loss) Margin
|
|
|
Bromine
|
|
$
|
9,233,996
|
|
|
|
37
|
%
|
|
$
|
5,206,136
|
|
|
|
52
|
%
|
|
|
(15
|
%)
|
Crude Salt
|
|
|
(442,006
|
)
|
|
|
(15
|
%)
|
|
|
(41,332
|
)
|
|
|
(8
|
%)
|
|
|
(7
|
%)
|
Chemical Products
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Natural Gas
|
|
|
—
|
|
|
|
—
|
|
|
|
1,448
|
|
|
|
3
|
%
|
|
|
(3
|
%)
|
Total Gross Profit
|
|
$
|
8,791,990
|
|
|
|
31
|
%
|
|
$
|
5,166,252
|
|
|
|
49
|
%
|
|
|
(18
|
%)
|
Bromine segment
For the year ended December 31, 2020, the gross
profit margin for our bromine segment was 37%. This 15% decrease was primarily attributable to the increase in factory overhead per unit
produced due to depreciation charges of plant and equipment that were placed in service in March and April in 2020 and the lower average
selling price of bromine of $4,228 per ton in the year ended December 31, 2020 compared to $4,319 per ton in the year ended December
31, 2019.
For the year ended December 31, 2019, the
gross profit margin for our bromine segment was 52%.
Crude salt segment
For the year ended December 31, 2020, the gross
loss margin for our crude salt segment was 15%, compared to 8% in the year ended December 31, 2019. This 7% decrease was primarily attributable
to the lower selling price of crude salt offset by the lower allocation of depreciation charges for plant and equipment put into use
in March and April 2020 resulting from higher volume of production crude salt in the year ended December 31, 2020 compared to the previous
year.
Direct labor and factory overheads incurred
during plant shutdown. On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang
City of PRC stating that production at all its bromine and crude salt and chemical factories should be halted immediately in order
for the Company to perform rectification and improvement in accordance with the county’s new safety and environmental protection
requirements. 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 Plant to Bohai
Park. As such, direct labor and factory overhead costs (including depreciation of plant and machinery) related to factories that have
not resumed production of a total amount of $8,170,390 and $15,175,280 for fiscal years 2020 and 2019 were presented as operating expenses
instead of in cost of revenue. The decrease in the direct labor and factory overheads incurred during plant shutdown in the year
ended December 31, 2020 compared to the same period in 2019 was due to five plants not in operation in 2019, but only three were not in
operation in 2020.
General and Administrative Expenses. General
and administrative expenses were $10,239,943 for the year ended December 31, 2020, a decrease of $3,032,978 (or 23%) as compared to$13,272,921
for the same period in 2019. This decrease was primarily attributable to repairs costs incurred for damages to the factories caused by
the flooding resulting from Typhoon Lekima in fiscal year 2019.
Loss from Operations. Loss from
operations was $9,683,392 for the fiscal year 2020, compared to a loss of $23,294,383 in the same period in 2019.
|
|
Income (loss) from Operations by Segment
|
|
|
Year ended December 31, 2020
|
|
|
Year ended December 31, 2019
|
Segment:
|
|
|
|
% of total
|
|
|
|
|
% of total
|
Bromine
|
|
$
|
1,616,542
|
|
|
|
(33
|
%)
|
|
$
|
(15,609,979
|
)
|
|
|
68
|
%
|
Crude Salt
|
|
$
|
(3,589,494
|
)
|
|
|
73
|
%
|
|
$
|
(4,446,900
|
)
|
|
|
19
|
%
|
Chemical Products
|
|
$
|
(2,745,297
|
)
|
|
|
56
|
%
|
|
$
|
(2,823,298
|
)
|
|
|
12
|
%
|
Natural Gas
|
|
$
|
(204,514
|
)
|
|
|
4
|
%
|
|
$
|
(188,949
|
)
|
|
|
1
|
%
|
Loss from operations before corporate costs
|
|
$
|
(4,922,763
|
)
|
|
|
100
|
%
|
|
$
|
(23,069,126
|
)
|
|
|
100
|
%
|
Corporate costs
|
|
$
|
(2,928,603
|
)
|
|
|
|
|
|
$
|
(646,914
|
)
|
|
|
|
|
Unrealized gain (loss) on translation of intercompany balance
|
|
$
|
(1,832,026
|
)
|
|
|
|
|
|
$
|
421,657
|
|
|
|
|
|
Loss from operations
|
|
$
|
(9,683,392
|
)
|
|
|
|
|
|
$
|
(23,294,383
|
)
|
|
|
|
|
Bromine segment
Income from operations from our bromine segment
was $1,616,542 for the fiscal year 2020, compared to a loss of $15,609,979 in the same period in 2019.
Crude salt segment
Loss from operations from our crude salt segment
was $3,589,494 for fiscal year 2020, compared to a loss of $4,446,900 in the same period in 2019.
Chemical products segment
Loss from operations from our chemical products
segment was $2,745,297 for the fiscal year 2020, compared to a loss of $2,823,298 in the same period in 2019.
Natural gas segment
Loss from operations from our natural gas segment
was $204,514 for the fiscal year 2020, compared to a loss of $188,949 in the same period in 2019.
Other Income, Net. Other income,
net, which represent bank interest income, net of finance lease interest expense was $154,877 for the fiscal year 2020, a decrease of
$146,448 (or approximately 49%) as compared to the same period in 2019.
Net Income (loss). Net loss was
$8,420,044 for the fiscal year 2020, compared to net loss of $25,800,045 in the same period in 2019. This decrease in the net loss was
mainly attributable to the commencement of production and sales at four plants in 2020, resulting in less losses than in 2019.
Effective Tax Rate. Our effective
income tax (expense) benefit rate for the fiscal years 2020 and 2019 were 12% and (12%) respectively. The effective tax rate for the fiscal
years 2020 was lower than the PRC statutory income tax rate of 25% mainly due to a non-deductible item in connection with the unrealized
exchange loss and an increase in valuation allowance recorded for deferred tax assets arising from net operating losses of the parent
company.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2020, cash and cash equivalents
were $94,222,538 as compared to $100,301,986 as of December 31, 2019. The components of this decrease of $6,079,448 are reflected
below.
Statement of Cash Flows
|
|
|
Years Ended December 31
|
|
|
2020
|
|
2019
|
Net cash (used in) provided by operating activities
|
|
$
|
9,305,627
|
|
|
$
|
(15,309,112
|
)
|
Net cash used in investing activities
|
|
$
|
(21,719,369
|
)
|
|
$
|
(60,611,949
|
)
|
Net cash used in financing activities
|
|
$
|
(264,976
|
)
|
|
$
|
(275,509
|
)
|
Effects of exchange rate changes on cash and cash equivalents
|
|
$
|
6,599,270
|
|
|
$
|
(2,500,379
|
)
|
Net decrease in cash and cash equipment
|
|
$
|
(6,079,448
|
)
|
|
$
|
(78,696,949
|
)
|
For the fiscal years 2020 and 2019, we met our
working capital and capital investment requirements by using cash flows from operations and cash on hand.
Net Cash Provided by Operating Activities
During the year ended December 31, 2020, cash
flows provided by operating activities of approximately $8.3 million was mainly due to non-cash adjustments related to depreciation and
amortization of property, plant and equipment of $16.0 million, unrealized translation loss of $1.8 million and stock-based compensation
expense of $2.4 million reduced by net loss of $8.4 million.
During the year ended December 31, 2019, cash
flow used in operating activities of approximately $15 million was mainly due to a net loss of $25.8 million, an increase in accounts
receivable of $5.07 million, reduced by a non-cash adjustment related to a decrease in deferred tax assets of $2.7 million and to depreciation
and amortization of property, plant and equipment.
Accounts receivable
Cash collections on our accounts receivable had
a major impact on our overall liquidity. The following table presents the aging analysis of our accounts receivable as of December 31,
2020 and 2019.
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
% of total
|
|
|
|
% of total
|
Aged 1-30 days
|
|
$
|
3,801,417
|
|
|
|
58
|
%
|
|
$
|
—
|
|
|
|
—
|
|
Aged 31-60 days
|
|
|
2,720,381
|
|
|
|
42
|
%
|
|
|
—
|
|
|
|
—
|
|
Aged 61-90 days
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Aged 91-120 days
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Aged 121-150 days
|
|
|
—
|
|
|
|
—
|
|
|
|
506,703
|
|
|
|
10
|
%
|
Aged 151-180 days
|
|
|
—
|
|
|
|
—
|
|
|
|
2,368,495
|
|
|
|
49
|
%
|
Aged 181-210 days
|
|
|
—
|
|
|
|
—
|
|
|
|
2,001,908
|
|
|
|
41
|
%
|
Aged 211-240 days
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
6,521,798
|
|
|
|
100
|
%
|
|
$
|
4,877,106
|
|
|
|
100
|
%
|
The overall accounts receivable balance as of
December 31, 2020 increased by $1,644,692, as compared to those of December 31, 2019. We have policies in place to ensure that sales are
made to customers with an appropriate credit history. We perform ongoing credit evaluation on the financial condition of our customers.
All receivables were collected in the January through March in 2021.
Inventory
Our inventory consists of the following:
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
% of total
|
|
|
|
% of total
|
Raw materials
|
|
$
|
21,484
|
|
|
|
5
|
%
|
|
$
|
20,928
|
|
|
|
3
|
%
|
Finished goods
|
|
|
398,125
|
|
|
|
95
|
%
|
|
|
669,159
|
|
|
|
97
|
%
|
Total
|
|
$
|
419,609
|
|
|
|
100
|
%
|
|
$
|
690,087
|
|
|
|
100
|
%
|
The net inventory level as of December 31, 2020
decreased by $270,478, as compared to the net inventory level as of December 31, 2019.
Raw materials increased by $556 as of December
31, 2020 as compared to December 31, 2019.
Finished goods decreased by $271,034 as of
December 31, 2020 as compared to December 31, 2019.
Net Cash Used In Investing Activities
For the fiscal year 2020, we used approximately
$22 million to acquire property, plant and equipment for the chemical factory.
For the fiscal year 2019, we used approximately
$61 million to acquire property, plant and equipment for the bromine and crude salt factories.
Net Cash Used In Financing Activities
We have no major financing activities for the
year ended December 31, 2020.
We believe that our available funds and cash flows
generated from operations will be sufficient to meet our anticipated ongoing operating needs for the next twelve months.
We had available cash of approximately $94 million
at December 31, 2020, all of which is in highly liquid current deposits which earn no or little interest. We do not anticipate paying
cash dividends in the foreseeable future.
We intend to continue to focus our efforts on
the activities of SCHC, SYCI and DCHC as these segments continue to expand within the Chinese market.
We may not be able to identify, successfully integrate
or profitably manage any businesses or business segment we may acquire, or any expansion of our business. An expansion may involve a number
of risks, including possible adverse effects on our operating results, diversion of management’s attention, inability to retain
key personnel, risks associated with unanticipated events and the financial statement effect of potential impairment of acquired intangible
assets, any of which could have a materially adverse effect on our condition and results of operations. In addition, if competition
for acquisition candidates or operations were to increase, the cost of acquiring businesses could increase materially. We may effect an
acquisition with a target business which may be financially unstable, under-managed, or in its early stages of development or growth.
Our inability to implement and manage our expansion strategy successfully may have a material adverse effect on our business and future
prospects.
Contractual Obligations and Commitments
We have no significant contractual obligations
not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. Additional
information regarding our contractual obligations and commitments at December 31, 2020 is provided in the notes to our consolidated financial
statements. See “Notes to Consolidated Financial Statements, Note 19 - Capital Commitment and Other Service Contractual Obligations.”
Material Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet
arrangements falling within the definition of Item 303(a) of Regulation S-K.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared
in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which requires us to make judgments,
estimates and assumptions. See “Note 1 – Nature of Business and Summary of Significant Accounting Policies,” in Notes
to the Consolidated Financial Statements, which is included in “Item 8. Financial Statements and Supplementary Data,” which
describes our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The methods,
estimates and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as
a result of the need to make estimates regarding matters that are inherently uncertain.
Our most critical estimates include:
|
·
|
allowance for doubtful accounts, which impacts revenue;
|
|
·
|
the valuation of inventory, which impacts gross margins;
|
|
·
|
impairment of long-lived assets;
|
|
·
|
the valuation and recognition of share-based compensation, which impacts operating expenses; and
|
|
·
|
the recognition and measurement of deferred income taxes, which impact our provision for taxes.
|
Allowance for Doubtful Accounts
We makes estimates of the uncollectibility of
accounts receivable, especially analyzing accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts. Credit
evaluations are undertaken for all major sale transactions before shipment is authorized. On a quarterly basis, we evaluate aged items
in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If management were
to make different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could
result.
Inventory Valuation
Inventory is stated at the lower of cost or market,
with cost determined on a first-in first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference
between its cost and the estimated market value based upon assumptions about future demand. We evaluate the inventory carrying value for
potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. If actual future demand or market conditions
are less favorable than those projected by management, additional inventory write-downs may be required in the future, which could have
a material adverse effect on our results of operations.
Depreciation of 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 using the straight-line method at rates sufficient to depreciate such
costs 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. In some situations, the life of the asset may be extended
or shortened if circumstances arise that would lead us to believe that the estimated life of the asset has changed. The life of leasehold
improvements may change based on the extension of lease contracts with our landlords. Changes in the estimated lives of assets will result
in an increase or decrease in the amount of depreciation recognized in future periods.
Impairment of Long Lived Assets
We periodically evaluate whether events or circumstances
have occurred that indicate long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such
events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will
be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected
undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s
carrying value over its fair value is recorded.
Valuation Allowance on Deferred Tax Assets
We evaluate our deferred income tax assets to
determine if valuation allowances are required or should be adjusted. A valuation allowance is established against our deferred tax assets
based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This
assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the
duration of statutory carry forward periods, our experience with expiring unused tax attributes and tax planning alternatives. In making
such judgments, significant weight is given to evidence that can be objectively verified.
Stock-based compensation
We account for stock-based compensation in accordance
with the fair value recognition provisions of U.S. GAAP. We use the Black-Scholes model which requires the input of highly subjective
assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising
them, the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete
their vesting requirements. The assumptions for expected volatility and expected term are the two assumptions that significantly affect
the grant date fair value. Changes in expected risk-free rate of return do not significantly impact the calculation of fair value, and
determining this input is not highly subjective.
We use annualized historical stock price volatility
which is deemed to be appropriate to serve as the expected volatility of our stock price and is assumed to be constant and prevailing.
The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected life is based
on historical option exercise pattern.
Recent Accounting Pronouncements
See “Note 1 – Nature of Business and
Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and
Supplementary Data for a full description of recent accounting pronouncements including the respective expected dates of adoption and
effects on the consolidated financial statements.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data
required by this item are included in a separate section of this Report. See “Index to Consolidated Financial Statements”
on Page F-1.
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 and 2019
C O N T E N T S
|
PAGE
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-2
|
|
|
CONSOLIDATED BALANCE SHEETS
|
F-3
|
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
F-4
|
|
|
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
F-5
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
F6 – F-7
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-8 – F-29
|
|
|
FINANCIAL STATEMENT SCHEDULE:
|
|
|
|
SCHEDULE I – PARENT ONLY FINANCIAL INFORMATION
|
S-1 – S-2
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
Gulf Resources, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Gulf Resources, Inc. and Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements
of comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31,
2020, and the related notes and schedules (collectively referred to as the consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019,
and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2020, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide
a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below
are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and
(2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of Long-Lived Assets
As discussed in Note 2(j) to the consolidated
financial statements, long-lived assets 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.
Management did not carry out an impairment assessment on its long-lived assets as it determined that there were no such events or changes
in circumstances indicating possible impairment.
The principal considerations for our determination
that performing procedures relating to the impairment of long-lived assets is a critical audit matter are the use of significant judgment
and subjective factors in management’s assessment of any changes in events or circumstances that may affect the carrying amount
of its long-lived assets.
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures
included the following:
|
·
|
Reviewing the sales volume and average selling prices of bromine and crude salt against past results and
current market conditions;
|
|
·
|
Evaluating assumptions used in management’s projection of future income to determine whether they
reflect any indication of change in events or circumstances that may affect the carrying amount of its long-lived assets; and
|
|
·
|
Conducting inquiries of management on any adverse trend that may affect the carrying amount of long-lived
assets.
|
Deferred Tax Asset Valuation Allowance
As discussed in Note 14 to the consolidated financial
statements, the Company recognized a valuation allowance to the extent that more likely than not some portion or all of the deferred tax
assets will not be realized.
The principal considerations for our determination
that performing procedures relating to the realization of the deferred tax assets is a critical audit matter are the use of significant
judgment by management when assessing the forecast of future taxable income and the assumption that there is no change in future tax regulations,
all of these which may be affected by future market or economic conditions, regulatory and political changes. This required a high degree
of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s assessment and evaluation
of the amount of valuation allowances required to offset the deferred tax assets.
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures
included the following:
|
·
|
Evaluating the reasonableness of key assumptions and estimates used by management in the taxable income
projection in the light of its past performances, existing operating capabilities, requirements and plans;
|
|
·
|
Evaluating the reasonableness of assumption used in the carryforward of losses and the timing of reversal
taking into consideration the existing tax law; and
|
|
·
|
Testing the completeness, accuracy, and relevance of underlying data in the projection.
|
Loss Contingencies
As discussed in Notes 2(t) and 20 to the consolidated
financial statements, the Company accrues for loss contingencies relating to legal matters when such liabilities become probable and reasonably
able to be estimated. In August 2018, written decisions of administrative penalty (“Written Decisions”) were served by the
Shouguang City Natural Resources and Planning Bureau (“Bureau”) on the Company challenging the land use of six of its bromine
and crude salt factories. In May 2019, written decisions of administrative ruling (“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 lessor 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. As described by management, the Company believes that the likelihood of the enforcement of
the Written Decisions and Court Rulings is remote and therefore did not accrue for any estimated losses or impairment losses related to
property, plant and equipment, finance lease right-of-use assets and operating lease right-of-use assets.
The principal consideration for our determination
that performing procedures relating to the loss contingency arising from the Written Decisions and Court Rulings is a critical audit
matter is the highly complex, judgmental and subjective process involved in management’s assessment of the likelihood of the enforcement
of the Written Decisions and related Court Rulings. This required a high degree of auditor judgment and an increased extent of effort
when performing audit procedures to evaluate management’s assessment and conclusion.
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures
included the following:
|
·
|
Gaining an understanding of the matter by reviewing the documentation related to the Written Decisions
and Court Rulings;
|
|
·
|
Gaining an understanding of the matter by reviewing documentation that management received from the Bureau
and the local city government in respect of the commencement of production of the bromine and crude salt factories;
|
|
·
|
Gaining an understanding of the latest progress of the matter by visiting the Bureau’s office in
Shouguang City to conduct an interview with the officer-in-charge;
|
|
·
|
Obtaining and evaluating the legal representation letters from external legal counsels for significant
legal actions; and
|
|
·
|
Evaluating the sufficiency of the loss contingencies disclosures.
|
/s/ Morison Cogen LLP
We have served as the Company’s auditor
since 2011.
Blue Bell, Pennsylvania
April 8,
2021
GULF RESOURCES, INC.
|
|
AND SUBSIDIARIES
|
|
CONSOLIDATED BALANCE SHEETS
|
|
(Expressed in U.S. dollars)
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
94,222,538
|
|
|
$
|
100,301,986
|
|
Accounts receivable
|
|
|
6,521,798
|
|
|
|
4,877,106
|
|
Inventories, net
|
|
|
419,609
|
|
|
|
690,087
|
|
Prepayments and deposits
|
|
|
6,146,461
|
|
|
|
1,332,970
|
|
Prepaid land leases
|
|
|
—
|
|
|
|
—
|
|
Other receivables
|
|
|
559
|
|
|
|
559
|
|
Total Current Assets
|
|
|
107,310,965
|
|
|
|
107,202,708
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
148,947,689
|
|
|
|
137,994,949
|
|
Finance lease right-of use assets
|
|
|
186,272
|
|
|
|
179,526
|
|
Operating lease right-of –use assets
|
|
|
8,868,661
|
|
|
|
8,817,884
|
|
Prepaid land leases, net of current portion
|
|
|
10,134,004
|
|
|
|
9,115,276
|
|
Deferred tax assets
|
|
|
18,590,227
|
|
|
|
15,940,642
|
|
Total non-current assets
|
|
|
186,726,853
|
|
|
|
172,048,277
|
|
Total Assets
|
|
$
|
294,037,818
|
|
|
$
|
279,250,985
|
|
Commitment and Contingencies
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Payable and accrued expenses
|
|
$
|
5,081,701
|
|
|
$
|
1,106,048
|
|
Retention payable
|
|
|
-
|
|
|
|
3,805,483
|
|
Taxes payable-current
|
|
|
1,326,179
|
|
|
|
779,623
|
|
Finance lease liability, current portion
|
|
|
217,070
|
|
|
|
198,506
|
|
Operating lease liabilities, current portion
|
|
|
477,350
|
|
|
|
416,604
|
|
Total Current Liabilities
|
|
|
7,102,300
|
|
|
|
6,306,264
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
Finance lease liability, net of current portion
|
|
|
1,888,903
|
|
|
|
1,905,772
|
|
Operating lease liabilities, net of current portion
|
|
|
8,022,342
|
|
|
|
7,931,849
|
|
Total Non-Current Liabilities
|
|
|
9,911,245
|
|
|
|
9,837,621
|
|
Total Liabilities
|
|
|
17,013,545
|
|
|
|
16,143,885
|
|
|
|
|
|
|
|
|
|
|
Commitment and Contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
PREFERRED STOCK; $0.001 par value; 1,000,000 shares authorized; none outstanding
|
|
|
|
|
|
|
|
|
COMMON STOCK; $0.0005 par value; 80,000,000 shares authorized; 10,043,307and 9,563,257 shares issued; and 9,997,477 and 9,517,427 shares outstanding as of December 31, 2020 and December 31, 2019
|
|
|
24,139
|
|
|
|
23,904
|
|
Treasury stock; 45,830 and 45,830 shares as of December 31, 2020 and December 31, 2019 at cost
|
|
|
(510,329
|
)
|
|
|
(510,329
|
)
|
Additional paid-in capital
|
|
|
97,435,316
|
|
|
|
95,043,388
|
|
Retained earnings unappropriated
|
|
|
151,388,356
|
|
|
|
159,808,400
|
|
Retained earnings appropriated
|
|
|
24,233,544
|
|
|
|
24,233,544
|
|
Accumulated other comprehensive income (loss)
|
|
|
4,453,247
|
|
|
|
(15,491,807
|
)
|
Total Stockholders’ Equity
|
|
|
277,024,273
|
|
|
|
263,107,100
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
294,037,818
|
|
|
$
|
279,250,985
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
GULF RESOURCES, INC.
|
AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
(Expressed in U.S. dollars)
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
NET REVENUE
|
|
$
|
28,207,024
|
|
|
$
|
10,596,521
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
Cost of net revenue
|
|
|
(19,415,034
|
)
|
|
|
(5,430,269
|
)
|
Sales, marketing and other operating expenses
|
|
|
(42,663
|
)
|
|
|
(12,434
|
)
|
Direct labor and factory overheads incurred during plant shutdown
|
|
|
(8,170,390
|
)
|
|
|
(15,175,280
|
)
|
General and administrative expenses
|
|
|
(10,239,943
|
)
|
|
|
(13,272,921
|
)
|
Other operating expense
|
|
|
(22,386
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,890,416
|
)
|
|
|
(33,890,904
|
)
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(9,683,392
|
)
|
|
|
(23,294,383
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(136,430
|
)
|
|
|
(145,445
|
)
|
Interest income
|
|
|
291,307
|
|
|
|
446,770
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(9,528,515
|
)
|
|
|
(22,993,058
|
)
|
|
|
|
|
|
|
|
|
|
INCOME TAX (EXPENSE) BENEFIT
|
|
|
1,108,471
|
|
|
|
(2,806,987
|
)
|
NET LOSS
|
|
$
|
(8,420,044
|
)
|
|
$
|
(25,800,045
|
)
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS):
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(8,420,044
|
)
|
|
$
|
(25,800,045
|
)
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
- Foreign currency translation adjustments
|
|
|
19,945,054
|
|
|
|
(5,013,759
|
)
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
11,525,010
|
|
|
$
|
(30,813,804
|
)
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED LOSS PER SHARE
|
|
$
|
(0.87
|
)
|
|
$
|
(2.73
|
)
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES:
|
|
|
9,650,619
|
|
|
|
9,465,432
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2020 AND 2019
(Expressed in U.S. dollars)
|
|
Common
stock
|
|
Treasury
stock
|
|
Additional
paid-in
capital
|
|
Retained
earnings
unappropriated
|
|
Retained
earnings
appropriated
|
|
Accumulated
other
comprehensive
Income(loss)
|
|
Total
|
|
|
|
Number
of shares
issued
|
|
Number
of shares
outstanding
|
|
Number
of treasury
stock
|
|
Amount
|
|
BALANCE
AT JANUARY 1, 2019
|
|
|
9,411,401
|
|
|
|
9,361,571
|
|
|
|
49,830
|
|
|
$
|
23,525
|
|
|
$
|
(554,870
|
)
|
|
$
|
95,020,808
|
|
|
$
|
185,608,445
|
|
|
$
|
24,233,544
|
|
|
$
|
(10,478,048
|
)
|
|
$
|
293,853,404
|
|
Currency translation
adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,013,759
|
)
|
|
|
(5,013,759
|
)
|
Shares issued from treasury
stock for services
|
|
|
—
|
|
|
|
4,000
|
|
|
|
(4,000
|
)
|
|
|
—
|
|
|
|
44,541
|
|
|
|
(22,941
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,600
|
|
Cashless
exercise of stock options
|
|
|
151,856
|
|
|
|
151,856
|
|
|
|
—
|
|
|
|
379
|
|
|
|
—
|
|
|
|
(379
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of stock options
to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,900
|
|
Net
loss for year ended December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,800,045
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,800,045
|
)
|
BALANCE
AT DECEMBER 31, 2019
|
|
|
9,563,257
|
|
|
|
9,517,427
|
|
|
|
45,830
|
|
|
$
|
23,904
|
|
|
$
|
(510,329
|
)
|
|
$
|
95,043,388
|
|
|
$
|
159,808,400
|
|
|
$
|
24,233,544
|
|
|
$
|
(15,491,807
|
)
|
|
$
|
263,107,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AT JANUARY 1, 2020
|
|
|
|
9,563,257
|
|
|
|
9,517,427
|
|
|
|
45,830
|
|
|
$
|
23,904
|
|
|
$
|
(510,329
|
)
|
|
$
|
95,043,388
|
|
|
$
|
159,808,400
|
|
|
$
|
24,233,544
|
|
|
$
|
(15,491,807
|
)
|
|
$
|
263,107,100
|
|
Restricted
shares issued for services
|
|
|
|
480,050
|
|
|
|
480,050
|
|
|
|
—
|
|
|
|
235
|
|
|
|
—
|
|
|
|
2,391,928
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,392,163
|
|
Currency translation
adjustment
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,945,054
|
|
|
|
19,945,054
|
|
Net
loss for year ended December 31, 2020
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,420,044
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,420,044
|
)
|
BALANCE
AT DECEMBER 31, 2020
|
|
|
|
10,043,307
|
|
|
|
9,997,477
|
|
|
|
45,830
|
|
|
$
|
24,139
|
|
|
$
|
(510,329
|
)
|
|
$
|
97,435,316
|
|
|
$
|
151,388,356
|
|
|
$
|
24,233,544
|
|
|
$
|
4,453,247
|
|
|
$
|
277,024,273
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
GULF RESOURCES, INC.
|
AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(Expressed in U.S. dollars)
|
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,420,044
|
)
|
|
$
|
(25,800,045
|
)
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Interest on capital lease obligation
|
|
|
135,936
|
|
|
|
144,881
|
|
Depreciation and amortization
|
|
|
15,987,860
|
|
|
|
14,060,927
|
|
Unrealized translation difference
|
|
|
1,832,026
|
|
|
|
(421,657
|
)
|
Deferred tax asset
|
|
|
(1,108,471
|
)
|
|
|
2,746,770
|
|
Stock-based compensation expense
|
|
|
2,392,163
|
|
|
|
45,900
|
|
Shares issued from treasury stock for services
|
|
|
—
|
|
|
|
21,600
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,161,704
|
)
|
|
|
(5,070,180
|
)
|
Other receivables
|
|
|
—
|
|
|
|
11,794
|
|
Inventories
|
|
|
292,101
|
|
|
|
(700,476
|
)
|
Prepayment and deposits
|
|
|
(6,925
|
)
|
|
|
14,166
|
|
Accounts and Other payable and accrued expenses
|
|
|
342,790
|
|
|
|
(102,963
|
)
|
Taxes payable
|
|
|
(449,915
|
)
|
|
|
(374,575
|
)
|
Prepaid land leases
|
|
|
(372,259
|
)
|
|
|
—
|
|
Operating lease
|
|
|
(157,931
|
)
|
|
|
114,746
|
|
Net cash provided by (used in) operating activities
|
|
|
9,305,627
|
|
|
|
(15,309,112
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(21,719,369
|
)
|
|
|
(60,611,949
|
)
|
Net cash used in investing activities
|
|
|
(21,719,369
|
)
|
|
|
(60,611,949
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Repayment of finance lease obligation
|
|
|
(264,976
|
)
|
|
|
(275,509
|
)
|
Net cash used in financing activities
|
|
|
(264,976
|
)
|
|
|
(275,509
|
)
|
|
|
|
|
|
|
|
|
|
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
|
|
6,599,270
|
|
|
|
(2,500,379
|
)
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(6,079,448
|
)
|
|
|
(78,696,949
|
)
|
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
|
|
100,301,986
|
|
|
|
178,998,935
|
|
CASH AND CASH EQUIVALENTS - END OF YEAR
|
|
$
|
94,222,538
|
|
|
$
|
100,301,986
|
|
GULF RESOURCES, INC.
|
AND SUBSIDIARIES
|
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
|
(Expressed in U.S. dollars)
|
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest on finance lease obligation
|
|
$
|
136,774
|
|
|
$
|
149,286
|
|
Operating right-of-use assets obtained in exchange for lease obligations
|
|
$
|
—
|
|
|
$
|
8,241,818
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchase of Property, plant and equipment included in Payable and
accrued expenses
|
|
$
|
3,537,644
|
|
|
$
|
3,515,132
|
|
Par value of common stock issued upon cashless exercise of options
|
|
$
|
—
|
|
|
$
|
379
|
|
The accompanying notes are an integral part of
these consolidated financial statements.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(a)
|
Basis of Presentation and Consolidation
|
The accompanying audited consolidated financial
statements have been prepared by Gulf Resources, Inc. (“Gulf Resources”). a Nevada corporation and its subsidiaries (collectively,
the “Company”).
The consolidated financial statements include
the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the British
Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”). HKJI
owns 100% of Shouguang City Haoyuan Chemical Company Limited (“SCHC”) which owns 100% of Shouguang Yuxin Chemical Industry
Co., Limited (“SYCI”) and Daying County Haoyuan Chemical Company Limited (“DCHC”). All material intercompany
transactions have been eliminated on consolidation.
The Company manufactures and trades bromine and
crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited (“SCHC”) and manufactures
chemical products for use in the oil industry, pesticides, paper manufacturing industry and for human and animal antibiotics through its
wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”) in the People’s Republic of China (“PRC”).
DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt) in the PRC. DCHC’s
business commenced trial operation in January 2019 but suspended production temporarily in May 2019 as required by the government to obtain
project approval (see Note 1 (b)(iii)).
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 year of 2020 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 No.2, No.8 and No.10.
(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 have passed inspection and could resume operations. In April
2019, Factory No. 1 and No. 7 resumed operations.
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, 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.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(ii) Chemical Segment
On November 24, 2017, the Company received a letter
from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants located in
the second living area of the Qinghe Oil Extraction to the Bohai Marine Fine Chemical Industrial Park (“Bohai Park”).
This is because the two plants are located in a residential area and their production activities could 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 did not comply with the requirements of the safety and environmental protection regulations were 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 from 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 June 2020.
The Company believes this relocation process will
cost approximately $64 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 payments and deposits for the construction of the new factory building in the
amount of $33,496,295 and $10,320,017, which were recorded in the prepaid land leases, prepayments and deposits and property, plant and
equipment in the consolidated balance sheets as of December 31, 2020 and 2019.
(iii) Natural Gas Segment
In January 2017, the Company completed the first
brine water and natural gas well field construction in Tianbao Town, Daying County, 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 the entire natural gas and brine water project, including approvals for
land use, safety production inspection, and environmental protection assessment. 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 new Chinese government 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 government has finalized the land and resource planning for Sichuan Province.
The Company’s consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The most
significant accounting estimates with regard to these consolidated financial statements that require the most significant and subjective
judgments include, but are not limited to, useful lives of property, plant and equipment, recoverability of long-lived assets, determination
of impairment losses, assessment of market value of inventories and provision for inventory obsolescence, allowance for doubtful accounts,
recognition and measurement of deferred income taxes, valuation allowance for deferred tax assets, and assumptions used for the valuation
of share based payments. Accordingly, actual results may differ significantly from these estimates under different assumptions
or conditions.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
|
(d)
|
Cash and Cash Equivalents
|
Cash and cash equivalents consist of all cash
balances and highly liquid investments with original maturities of three months or less. Because of short maturity of these investments,
the carrying amounts approximate their fair values.
|
(e)
|
Accounts receivable and Allowance for Doubtful Accounts
|
Accounts receivable is stated at cost, net of
allowance for doubtful accounts. The normal credit term extended to customers ranges between 90 and 240 days. The company reviews all
receivables that exceed the term. The Company establishes an allowance for doubtful accounts based on management’s assessment of
the collectability of trade and other receivables. A considerable amount of judgment is required in assessing the amount of allowance
and the Company considers the historical level of credit losses. The Company makes judgments about the credit worthiness of each customer
based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future.
If the financial condition of the customer begins to deteriorate, resulting in their inability to make payments within credit term provided,
an allowance may be required.
As of December 31, 2020 and December 31, 2019,
There were no allowances for doubtful accounts. No allowances for doubtful accounts were charged to the consolidated statements of comprehensive
income (loss) for years ended December 31, 2020 and 2019.
|
(f)
|
Concentration of Credit Risk
|
The Company is exposed to credit risk in the normal
course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash
and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited, China
Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise protected. The Company placed $94,222,538
and $100,301,986 with these institutions as of December 31, 2020 and 2019, respectively. The Company has not experienced any
losses in such accounts in the PRC.
Concentrations of credit risk with respect to
accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such
concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition
and extends credit terms as and when appropriate.
Accounts receivable of $6,521,798 as of December
31, 2020 was fully collected in the period January through February in 2021.
Inventories are stated at the lower of cost, determined
on a first-in first-out cost basis, or net realizable value. Costs of work-in-progress and finished goods comprise direct materials, direct
labor and an attributable portion of manufacturing overhead. Net realizable value is based on estimated selling price less costs to complete
and selling expenses.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
|
(h)
|
Property, Plant and Equipment
|
Property, plant and equipment are stated at cost
less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment
of existing facilities or equipment are capitalized and depreciated, when available for intended use, using the straight-line method at
rates sufficient to depreciate such costs less 5% residual value over the estimated productive lives. All other ordinary repair and maintenance
costs are expensed as incurred.
Mineral rights are recorded at cost less accumulated
depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under
the units of production method, whichever is shorter.
Construction in process primarily represents direct
costs of construction of property, plant and equipment. Costs incurred are capitalized and transferred to property, plant and equipment
upon completion and depreciation will commence when the completed assets are placed in service.
The Company’s depreciation and amortization
policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:
|
|
Useful life
(in years)
|
Buildings (including salt pans)
|
|
8 - 20
|
Plant and machinery (including protective shells, transmission channels and ducts)
|
|
3 - 8
|
Motor vehicles
|
|
5
|
Furniture, fixtures and equipment
|
|
3-8
|
Property, plant and equipment under the finance
lease are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which
is 20 years.
Producing oil and gas properties are depreciated
on a unit-of-production basis over the proved developed reserves. Common facilities that are built specifically to service production
directly attributed to designated oil and gas properties are depreciated based on the proved developed reserves of the respective oil
and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas properties
are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant development projects
are not depreciated until commercial production commences and the reserves related to those costs are excluded from the calculation of
depreciation.
|
(i)
|
Asset Retirement Obligation
|
The Company follows Financial Accounting Standards
Board Accounting Standards Codification (“FASB ASC”), which established a uniform methodology for accounting for estimated
reclamation and abandonment costs. FASB ASC 410 requires the fair value of a liability for an asset retirement obligation to be recognized
in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is
initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset.
To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Currently, there are no reclamation or abandonment
obligations associated with the land being utilized for exploitation by the bromine and crude salt factories. Also, for the two chemical
plants that are to be relocated, currently, there are no obligations to restore the land to its original condition.
|
(j)
|
Recoverability of Long-lived Assets
|
In accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35”Impairment or Disposal of Long-lived
Assets”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate.
The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.
The Company determines the existence of such impairment
by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount
of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the
discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such
assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold
or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to
their estimated salvage value in connection with the decision to dispose of such assets.
For the year ended December 31, 2020 and 2019,
the Company determined that there were no events or circumstances indicating possible impairment of its long-lived assets.
Pursuant to the relevant laws and regulations
in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization.
The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required contributions
under the retirement plans are charged to the consolidated statement of comprehensive income (loss) on an accrual basis when they are
due. The Company’s contributions totaled $295,252 and $1,035,687 for the years ended December 31, 2020 and 2019, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
The Company follows FASB ASC 805 “Business
Combinations” that certain mineral rights are considered tangible assets and that mineral rights should be accounted for based on
their substance. Mineral rights are included in property, plant and equipment.
The Company determines if an arrangement is a
lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities
in the consolidated balance sheets. Finance leases are included in finance lease ROU assets and finance lease liabilities in the consolidated
balance sheets.
ROU assets represent the Company’s right
to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising
from the lease. Operating lease and finance lease ROU assets and liabilities are recognized at January 1, 2019 based on the present value
of lease payments over the lease term discounted using the rate implicit in the lease. In cases where the implicit rate is not readily
determinable, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the
present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has elected not to recognize operating
lease ROU assets and liabilities arising from short-term lease.
|
(n)
|
Basic and Diluted Earnings per Share of Common Stock
|
Basic earnings per common share are based on the
weighted average number of shares outstanding during the periods presented. Diluted earnings per share are computed using weighted
average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would
have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding
stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from
the calculation of number of dilutive common stock equivalents amounted to 71,327 and 103,392 shares for the years ended December 31,
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.
Because the Company reported a net loss for the
years ended December 31, 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.
|
(o)
|
Reporting Currency and Translation
|
The financial statements of the Company’s
foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional
currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
As such, the Company uses the “current rate
method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”.
The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date.
The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s
PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive income (loss). The statement of
comprehensive income (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.
All of the Company’s operations and assets
are located in PRC. The Company may be adversely affected by possible political or economic events in this country. The
effect of these factors cannot be accurately predicted.
Net revenue is net of discount and value added
tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized at a point time when the control of the
promised goods is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the
customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product is deemed
to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no rights to return
the goods upon acknowledgement of receipt of goods. Revenue from contracts with customers is disaggregated in Note 15.
The Company accounts for income taxes in accordance
with the Income Taxes Topic of the FASB ASC, which requires the use of the liability method of accounting for deferred income taxes. Under
this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax
basis of assets and liabilities and their reported amounts at each period end. Deferred tax assets and liabilities are measured using
tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized
or settled. The deferred income tax effects of a change in tax rates are recognized in the period of enactment. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The guidance also provides
criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax
position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical
merits. Interests and penalties associated with unrecognized tax benefits are included within the (benefit from) provision for income
tax in the consolidated statement of comprehensive income (loss).
Exploration costs, which included the cost of
researching for appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other resources,
are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs are
capitalized.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
For oil and gas properties, the successful efforts
method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient quantity
of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing the reserves and
the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expenses. Exploratory
wells that discover potentially economic reserves in areas where major capital expenditure will be required before production would begin
and when the major capital expenditure depends upon the successful completion of further exploratory work remain capitalized and are reviewed
periodically for impairment.
The Company accrues for 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 reasonably able to be estimated. Such estimates may be based on advice from third parties or on management’s
judgment, as appropriate. Revisions to accruals are reflected in income (loss) in the period in which different facts or information become
known or circumstances change that affect the Company’s previous assumptions with respect to the likelihood or amount of loss. Amounts
paid upon the ultimate resolution of such liabilities may be materially different from previous estimates.
|
(u)
|
Stock-based Compensation
|
The Company accounts for stock-based compensation
under the provisions of FASB ASC 718, Compensation Stock Compensation, which requires the measurement and recognition of compensation
expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates
the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. In June 2018,
the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 7I8),
Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. Prior to this Update, Topic 718 applied only to share-based
transactions to employees. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based
payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an entity is obligated
to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit
from the instruments have been satisfied. The Company has elected to account for the forfeiture of stock-based awards as they occur.
|
(v)
|
New Accounting Pronouncements
|
Recent accounting pronouncements adopted
There were no recent accounting pronouncements
adopted for the year ended December 31, 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 consolidated financial statements and related disclosure.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 2 – INVENTORIES
Inventories consist of:
|
|
December 31,
2020
|
|
December 31,
2019
|
|
|
|
|
|
Raw materials
|
|
$
|
21,484
|
|
|
$
|
20,928
|
|
Finished goods
|
|
|
398,125
|
|
|
|
669,159
|
|
|
|
$
|
419,609
|
|
|
$
|
690,087
|
|
The was no allowance for slow-moving inventories
as of December 31, 2020 and 2019.
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 $9,746,108 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 December 31
2020 and 2019. As of December 31, 2020, the prepaid land lease increased to $10,134,004 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 be completed around June 2021.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment, net consist of
the following:
|
|
December 31,
2020
|
|
December 31,
2019
|
At cost:
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
2,955,780
|
|
|
$
|
2,764,462
|
|
Buildings
|
|
|
64,024,667
|
|
|
|
59,880,567
|
|
Plant and machinery
|
|
|
258,400,710
|
|
|
|
234,669,007
|
|
Motor vehicles
|
|
|
6,553
|
|
|
|
6,129
|
|
Furniture, fixtures and office equipment
|
|
|
3,318,564
|
|
|
|
3,235,736
|
|
Construction in process
|
|
|
12,095,565
|
|
|
|
1,204,742
|
|
Total
|
|
|
340,801,839
|
|
|
|
301,760,643
|
|
Less: Accumulated depreciation and amortization
|
|
|
(173,212,554
|
)
|
|
|
(146,330,705
|
)
|
Impairment
|
|
|
(18,641,596
|
)
|
|
|
(17,434,989
|
)
|
Net book value
|
|
$
|
148,947,689
|
|
|
$
|
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 $19,302,600 and $19,894,947 as at December 31, 2020 and December 31, 2019,
respectively.
During the year ended December 31, 2020, depreciation
and amortization expense totaled $15,982,485 of which $5,512,920, $815,605 and $9,653,960 were recorded in direct labor and factory overheads
incurred during plant shutdown, administrative expenses and cost of net revenue respectively.
During the year ended December 31, 2019, depreciation
and amortization expense totaled $13,991,583 of which $ 10,796,085, $848,345 and $2,347,153 were recorded in direct labor and factory
overheads incurred during plant shutdown, administrative expenses and cost of net revenue respectively.
There were no impairment losses recorded in the
years ended December 31, 2020 and 2019. The increase in the impairment of $1,206,607 from $17,434,989 at December 30, 2019 was due to
currency translation adjustment.
NOTE 5 –FINANCE LEASE RIGHT-OF-USE ASSETS
Property, plant and equipment under finance leases,
net consist of the following:
|
|
December 31,
2020
|
|
December 31,
2019
|
At cost:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
126,120
|
|
|
$
|
117,956
|
|
Plant and machinery
|
|
|
2,307,184
|
|
|
|
2,157,848
|
|
Total
|
|
|
2,433,304
|
|
|
|
2,275,804
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,247,032
|
)
|
|
|
(2,096,278
|
)
|
Net book value
|
|
$
|
186,272
|
|
|
$
|
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 year ended December 31, 2020, depreciation
and amortization expense totaled $5,375, respectively, which was recorded in direct labor and factory overheads incurred during plant
shutdown.
During the year ended December 31, 2019, depreciation
and amortization expense totaled $69,344, respectively, which was recorded in direct labor and factory overheads incurred during plant
shutdown.
NOTE 6 – OPERATING LEASE RIGHT–OF-USE
ASSETS
As of December 31, 2020, the total operating lease
ROU assets was $8,868,661.
The total operating lease cost for the years ended
December 31, 2020 and 2019 was $927,745 and $889,683.
The Company has the rights to use certain parcels
of land located in Shouguang, the PRC, through lease agreements signed with local townships or the government authority (See Note 3).
For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels
of land of which the Company cannot obtain land use rights certificates covers a total of approximately 38.6 square kilometers with an
aggregate operating lease right-of-use assets amount of $8,357,900 as at December 31, 2020.
NOTE 7 –PAYABLE AND ACCRUED EXPENSES
Payable and accrued expenses consist of the following:
|
|
December 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Accounts payable
|
|
$
|
479,958
|
|
|
$
|
-
|
|
Salary payable
|
|
|
320,549
|
|
|
|
310,097
|
|
Social security insurance contribution payable
|
|
|
49,167
|
|
|
|
105,750
|
|
Other payable-related party (see Note 8)
|
|
|
95,616
|
|
|
|
89,424
|
|
Deposit on subscription of a subsidiary’s share
|
|
|
153,260
|
|
|
|
144,798
|
|
Accrued expense for construction
|
|
|
3,537,644
|
|
|
|
97,913
|
|
Accrued expense-others
|
|
|
445,507
|
|
|
|
358,066
|
|
Total
|
|
$
|
5,081,701
|
|
|
$
|
1,106,048
|
|
The deposit on subscription of a subsidiary’s
share of $153,260 as of December 31, 2020 relates to sale of non-controlling interests in DCHC.
NOTE 8 – RELATED PARTY TRANSACTIONS
During the fiscal years 2020 and 2019, the Company
borrowed $0 and $419,995 from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder
and the Chairman of the Company, has a 100% equity interest. The amounts due to Jiaxing Lighting were unsecured, interest free and repayable
on demand.
There was no balance owing to Jiaxing Lighting
as of December 31, 2020 and 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 $95,613 for five years from January 1, 2018 to December 31, 2022. The expense
associated with this agreement for the year ended December 31, 2020 was $90,510. The expense associated with this agreement for the year
ended December 31, 2019 was $90,516. Amount owing to the Seller as of December 31, 2020 and 2019 was $95,616 and $89,424.
NOTE 9 – TAXES PAYABLE
|
|
December 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Land use tax payable
|
|
$
|
833,576
|
|
|
$
|
779,623
|
|
Value added tax and other taxes payable
|
|
|
492,603
|
|
|
|
-
|
|
|
|
$
|
1,326,179
|
|
|
$
|
779,623
|
|
NOTE 10 –LEASE LIABILITIES-FINANCE AND OPERATING
LEASE
The components of finance lease liabilities were
as follows:
|
|
Imputed
|
|
December 31,
|
|
December 31,
|
|
|
Interest rate
|
|
2020
|
|
2019
|
Total finance lease liability
|
|
6.7%
|
|
$
|
2,105,973
|
|
|
$
|
2,104,278
|
|
Less: Current portion
|
|
|
|
|
(217,070
|
)
|
|
|
(198,506
|
)
|
Finance lease liability, net of current portion
|
|
|
|
$
|
1,888,903
|
|
|
$
|
1,905,772
|
|
Interest expenses from capital lease obligations
amounted to $135,936 and $144,880 for the years ended December 31, 2020 and 2019, respectively, which were charged to the consolidated
statement of comprehensive income (loss).
The components of operating lease liabilities
as follows:
|
|
Discount
|
|
December 31,
|
|
December 31,
|
|
|
rate
|
|
2020
|
|
2019
|
Total Operating lease liabilities
|
|
4.89%
|
|
$
|
8,499,692
|
|
|
$
|
8,348,453
|
|
Less: Current portion
|
|
|
|
|
(477,350
|
)
|
|
|
(416,604
|
)
|
Operating lease liabilities, net of current portion
|
|
|
|
$
|
8,022,342
|
|
|
$
|
7,931,849
|
|
The weighted average remaining operating lease
term at December 31, 2020 was 21.3 years and the weighted average discounts rate was 4.89%, This discount rates used are based on the
base rate quoted by the People’s Bank of China and vary with the remaining term of the lease. Lease payments for the years ended
December 31, 2020 and 2019, respectively, were $765,288 and $784,540.
Maturities of lease liabilities were as follows:
|
|
Finance lease
|
|
Operating Lease
|
Payable within:
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
287,669
|
|
|
$
|
841,021
|
|
the next 13 to 24 months
|
|
|
287,669
|
|
|
|
681,399
|
|
the next 25 to 36 months
|
|
|
287,669
|
|
|
|
688,729
|
|
the next 37 to 48 months
|
|
|
287,669
|
|
|
|
686,373
|
|
the next 49 to 60 months
|
|
|
287,669
|
|
|
|
694,187
|
|
thereafter
|
|
|
1,438,345
|
|
|
|
11,539,854
|
|
Total
|
|
|
2,876,690
|
|
|
|
15,131,563
|
|
Less: Amount representing interest
|
|
|
(770,717
|
)
|
|
|
(6,631,871
|
)
|
Present value of net minimum lease payments
|
|
$
|
2,105,973
|
|
|
$
|
8,499,692
|
|
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.
Issuance of 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 year ended December 31, 2020, the Company
granted in the aggregate, 480,050 restricted shares of common stock to a consultant, the company's directors, officers and an employee.
The restricted shares award were granted under the 2019 Omnibus Equity Incentive Plan (See Note 13) and vested immediately. The fair value
of the award on the date of grant was $2,350,250 which was expensed in full during the year ended December 31, 2020.
Retained Earnings - Appropriated
In accordance with the relevant PRC regulations
and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit after
tax to the following reserve:
Statutory Common Reserve Funds
SCHC, SYCI and DCHC are required each year to
transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common Reserve
Funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any loss incurred
or to increase share capital. Except for the reduction of losses incurred, any other application should not result in this
reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of December 31, 2020 for SCHC, SYCI
and DCHC is 16%, 14% and 0% of its registered capital respectively.
Retained earnings - Unappropriated
SCHC transferred approximately $84 million ( equivalent
to RMB590 million) from its undistributed profit to its paid in capital during the year ended December 31, 2019.
NOTE 12 – TREASURY STOCK
In January 2019, the Company issued 4,000 shares
of common stock from the treasury shares to one of its consultants. The shares were valued at $21,600 based on the closing market price
on the date of the agreement and recorded as general and administrative expense in the consolidated statement of comprehensive income
(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
deficiency notice from The Nasdaq Stock Market informing the Company that it 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 the 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 December 31, 2020, the number of shares of the Company’s common stock available
for grant of stock options and issuance under the 2019 Plan is 515,648 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.
On April 1, 2019, the Company granted to one employee
options to purchase 30,000 shares of the Company’s common stock, at an exercise price of $4.55 per share and the options vested
immediately. The options were valued at $45,900 fair value, with assumed 45.26% volatility, a four-year expiration term with an expected
tenor of 1.60 years, a risk free rate of 2.37% and no dividend yield.
For the year ended December 31, 2020 and 2019,
total compensation costs for options issued recorded in the consolidated statement of comprehensive income (loss) were $0 and $45,900.
There were no related tax benefits as a full valuation allowance was recorded in the years ended December 31, 2020 and 2019.
NOTE 13 – STOCK-BASED COMPENSATION –
Continued
The following table summarizes all Company stock
option transactions between January 1, 2020 and December 31, 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 - $9.9
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
(13,500)
|
|
|
|
$8.20
|
|
|
|
$7.20-$9.90
|
|
Balance, December 31, 2020
|
|
|
121,600
|
|
|
|
$7.09
|
|
|
|
$3.57 - $7.27
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
Weighted Average Remaining
|
|
|
Outstanding at December 31, 2020
|
|
Range of
Exercise Prices
|
|
Contractual Life
(Years)
|
Exercisable and outstanding
|
|
121,600
|
|
$3.57 - $7.27
|
|
0.65
|
All options exercisable and outstanding at December
31, 2020 are fully vested. As of December 31, 2020, there was no unrecognized compensation cost related to outstanding stock options,
The aggregate intrinsic value of options outstanding
and exercisable as of December 31, 2020 and 2019 was $3,330 and $0. The aggregate intrinsic value is calculated as the difference between
the exercise price of the underlining options and the stock price of $4.12 and $2.55 for the Company's common stock on December 31, 2020
and 2019.
The aggregate intrinsic value of options exercised
during the years ended December 31, 2020 and 2019 was $0 and $922,429.
During the year ended December 31, 2020 and 2019,
0 and 151,856 shares of common stock were issued upon cashless exercise of 0 and 379,400 options.
NOTE 14 – INCOME TAXES
The Company utilizes the asset and liability method
of accounting for income taxes in accordance with FASB ASC 740-10. If it is more likely than not that some portion or all of a deferred
tax asset will not be realized, a valuation allowance is recognized.
Gulf Resources, Inc. may be subject to the United
States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable
income for the years ended December 31, 2020 and 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 years ended December 31, 2020 and 2019.
HKJI, a subsidiary of Upper Class Group Limited, was
incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived
from Hong Kong. No provision for income tax has been made as it has no taxable income for the years ended December 31, 2020
and 2019. The applicable statutory tax rates for the years ended December 31, 2020 and 2019 are 16.5%. There is no dividend
withholding tax in Hong Kong.
Enterprise income tax (“EIT”) for
SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC, SYCI and DCHC
are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Local Income Tax Law. The PRC
tax losses may be carried forward to be utilized against future taxable profit for ten years for High-tech enterprises and small and medium-sized
enterprises of science and technology and for five years for other companies. Tax losses of the operating subsidiaries of the Company
may be carried forward for five years.
On February 22, 2008, the Ministry of Finance
(“MOF”) and the State Administration of Taxation (“SAT”) jointly issued CaiShui [2008] Circular 1 (“Circular
1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign
investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after
January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.
As of December 31, 2020 and 2019, the accumulated
distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $126,643,733
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 December 31, 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 December 31, 2020 and December 31, 2019,
the unrecognized WHT are $5,288,346 and $5,254,560, respectively.
NOTE 14 – INCOME TAXES – Continued
The Company’s income tax returns are subject
to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s
income tax returns filed in the United States for three years from the date of filing. The Company’s US income tax returns since
2017 are currently subject to examination.
Inland Revenue Department of Hong Kong (“IRD”)
may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing. For the years 2012 through
2018, HKJI did not report any taxable income. It did not file any income tax returns during these years except for 2014 and 2018. For
companies which do not have taxable income, IRD typically issues notification to companies requiring them to file income tax returns once
in every four years. The tax returns for 2014 and 2018 are currently subject to examination.
The components of the provision for income tax
benefit (expense) from continuing operations are:
|
|
Years Ended
December 31,
|
|
|
2020
|
|
2019
|
Current taxes – PRC
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred taxes – PRC entities
|
|
|
1,108,471
|
|
|
|
5,546,825
|
|
Deferred taxes –US entity
|
|
|
607,643
|
|
|
|
319,005
|
|
Change in valuation allowance
|
|
|
(607,643
|
)
|
|
|
(8,672,817
|
)
|
|
|
$
|
1,108,471
|
|
|
$
|
(2,806,987
|
)
|
The effective income tax benefit (expense) rate
differs from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
|
|
Years Ended
December 31,
|
Reconciliations
|
|
2020
|
|
2019
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Non-taxable (non-deductible) items
|
|
|
(5
|
%)
|
|
|
1
|
%
|
Change in valuation allowance
|
|
|
(8
|
%)
|
|
|
(38
|
%)
|
Effective income tax benefit (expense) rate
|
|
|
12
|
%
|
|
|
(12
|
%)
|
As of December 31, 2020 and 2019, the Company had a US Federal net
operating loss carry forwards of approximately $4,900,000 and $2,100,000 which are allowed for an indefinite carry forward period but
limited to 80% of each subsequent year's net income. The timing and manner in which the Company can utilize operating loss carry forwards
in any year may be limited by provisions of the Internal Revenue Code regarding changes in ownership of corporations. Such limitation
may have an impact on the ultimate realization of its carry forwards and future tax deductions. In addition, since the Company intends
to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare
dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, a 100% deferred tax asset valuation allowance
was recorded for these net operating losses.
Significant components of the Company’s
deferred tax assets and liabilities at December 31, 2020 and December 31, 2019 are as follows:
|
|
December 31,
|
|
December 31,
|
|
|
2020
|
|
2019
|
Deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
—
|
|
|
$
|
—
|
|
Impairment on property, plant and equipment
|
|
|
2,907,548
|
|
|
|
2,974,542
|
|
Impairment on prepaid land lease
|
|
|
883,884
|
|
|
|
826,673
|
|
Exploration costs
|
|
|
1,908,087
|
|
|
|
1,784,583
|
|
Compensation costs of unexercised stock options
|
|
|
74,883
|
|
|
|
171,672
|
|
PRC tax losses
|
|
|
21,643,028
|
|
|
|
18,737,005
|
|
US federal net operating loss
|
|
|
1,045,503
|
|
|
|
432,000
|
|
Total deferred tax assets
|
|
|
28,462,933
|
|
|
|
24,926,475
|
|
Valuation allowance
|
|
|
(9,872,706
|
)
|
|
|
(8,985,833
|
)
|
Net deferred tax asset
|
|
$
|
18,590,227
|
|
|
$
|
15,940,642
|
|
The increase in valuation allowance for the year
ended December 31, 2020 is $886,873.
The increase in valuation allowance for the year
ended December 31, 2019 is $8,672,817.
The increase in valuation allowance in the year
ended December 31, 2019 is mainly attributable to valuation allowance recorded for the deferred tax assets related to a portion of the
PRC tax losses that more likely than not will expire before it could be utilized and the exploration costs which more likely than not
will not be realized.
There were no unrecognized tax benefits and accrual
for uncertain tax positions as of December 31, 2020 and 2019.
There were no amounts accrued for penalties and
interest for the years ended December 31, 2020 and 2019.
There were no change in unrecognized tax benefits
during the years ended December 31, 2020 and 2019.
NOTE 15 – BUSINESS SEGMENTS
An operating segment’s performance is primarily
evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs and other income
not associated with the operations of the segment. These corporate costs are separately stated below and also include costs that are related
to functional areas such as accounting, treasury, information technology, legal, human resources, and internal audit. The Company believes
that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of its segments. All
the customers are located in PRC.
Year Ended
December 31, 2020
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural
Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
25,184,808
|
|
|
$
|
3,022,216
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28,207,024
|
|
|
$
|
—
|
|
|
$
|
28,207,024
|
|
Net revenue
(intersegment)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from operations before income tax expense
|
|
|
1,616,542
|
|
|
|
(3,589,494
|
)
|
|
|
(2,745,297
|
)
|
|
|
(204,514
|
)
|
|
|
(4,922,763
|
)
|
|
|
(4,760,629
|
)
|
|
|
(9,683,392
|
)
|
Income tax (expense) benefit
|
|
|
(404,135
|
)
|
|
|
890,331
|
|
|
|
622,275
|
|
|
|
—
|
|
|
|
1,108,471
|
|
|
|
—
|
|
|
|
1,108,471
|
|
Loss from operations after
income tax (expense) benefit
|
|
|
1,212,407
|
|
|
|
(2,699,163
|
)
|
|
|
(2,123,022
|
)
|
|
|
(204,514
|
)
|
|
|
(3,814,292
|
)
|
|
|
(4,760,629
|
)
|
|
|
(8,574,921
|
)
|
Total assets
|
|
|
140,043,211
|
|
|
|
31,602,967
|
|
|
|
120,746,404
|
|
|
|
1,636,467
|
|
|
|
294,029,049
|
|
|
|
8,769
|
|
|
|
294,037,818
|
|
Depreciation and amortization
|
|
|
10,714,004
|
|
|
|
4,672,181
|
|
|
|
459,558
|
|
|
|
142,117
|
|
|
|
15,987,860
|
|
|
|
—
|
|
|
|
15,987,860
|
|
Capital expenditures
|
|
|
3,157,669
|
|
|
|
646,752
|
|
|
|
17,914,948
|
|
|
|
—
|
|
|
|
21,719,369
|
|
|
|
—
|
|
|
|
21,719,369
|
|
Year Ended
December 31, 2019
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural
Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
10,022,027
|
|
|
$
|
522,758
|
|
|
$
|
—
|
|
|
$
|
51,736
|
|
|
$
|
10,596,521
|
|
|
$
|
—
|
|
|
$
|
10,596,521
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loss from operations before income tax expense
|
|
|
(15,609,979
|
)
|
|
|
(4,446,900
|
)
|
|
|
(2,823,298
|
)
|
|
|
(188,949
|
)
|
|
|
(23,069,126
|
)
|
|
|
(225,257
|
)
|
|
|
(23,294,383
|
)
|
Income tax (expense) benefit
|
|
|
(3,181,343
|
)
|
|
|
(247,250
|
)
|
|
|
621,606
|
|
|
|
—
|
|
|
|
(2,806,987
|
)
|
|
|
—
|
|
|
|
(2,806,987
|
)
|
Loss from operations after
income tax (expense) benefit
|
|
|
(18,791,322
|
)
|
|
|
(4,694,150
|
)
|
|
|
(2,201,692
|
)
|
|
|
(188,949
|
)
|
|
|
(25,876,113
|
)
|
|
|
(225,257
|
)
|
|
|
(26,101,370
|
)
|
Total assets
|
|
|
142,568,684
|
|
|
|
23,352,060
|
|
|
|
111,506,728
|
|
|
|
1,732,380
|
|
|
|
279,159,852
|
|
|
|
91,133
|
|
|
|
279,250,985
|
|
Depreciation and amortization
|
|
|
9,625,334
|
|
|
|
3,833,288
|
|
|
|
459,613
|
|
|
|
142,692
|
|
|
|
14,060,927
|
|
|
|
—
|
|
|
|
14,060,927
|
|
Capital expenditures
|
|
|
57,607,104
|
|
|
|
3,004,845
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,611,949
|
|
|
|
—
|
|
|
|
60,611,949
|
|
* Certain common production overheads, operating
and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were
split by reference to the average selling price and production volume of the respective segment.
|
|
Years Ended
December 31,
|
Reconciliations
|
|
2020
|
|
2019
|
Total segment operating loss
|
|
$
|
(4,922,763
|
)
|
|
$
|
(23,069,126
|
)
|
Corporate costs
|
|
|
(2,928,603
|
)
|
|
|
(646,914
|
)
|
Unrealized gain (loss) on translation of intercompany balance
|
|
|
(1,832,026
|
)
|
|
|
421,657
|
|
Loss from operations
|
|
|
(9,683,392
|
)
|
|
|
(23,294,383
|
)
|
Other income, net of expense
|
|
|
154,877
|
|
|
|
301,325
|
|
Loss before taxes
|
|
$
|
(9,528,515
|
)
|
|
$
|
(22,993,058
|
)
|
The following table shows the major customers
(10% or more) for the year ended December 31, 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
|
|
$
|
4,901
|
|
|
$
|
1,062
|
|
|
$
|
—
|
|
|
$
|
5,963
|
|
|
|
21.2
|
%
|
2
|
|
Shandong Brother Technology Limited
|
|
$
|
3,188
|
|
|
$
|
1,083
|
|
|
$
|
—
|
|
|
$
|
4,271
|
|
|
|
15.2
|
%
|
3
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
3,683
|
|
|
$
|
876
|
|
|
$
|
—
|
|
|
$
|
4,559
|
|
|
|
16.2
|
%
|
4
|
|
Shandong Shouguang Shenrunfa Ocean Chemical Company Limited
|
|
$
|
3,320
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,320
|
|
|
|
11.8
|
%
|
5
|
|
Dongying Bomeite Chemical Company Limited
|
|
$
|
2,970
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,970
|
|
|
|
10.5
|
%
|
.
The following table shows the major customers
(10% or more) for the year ended December 31, 2019.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
Crude Salt
(000’s)
|
|
Chemical Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage of
Total
Revenue (%)
|
1
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
2,203
|
|
|
$
|
175
|
|
|
$
|
—
|
|
|
$
|
2,378
|
|
|
|
22.6
|
%
|
2
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
1,629
|
|
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
1,783
|
|
|
|
16.9
|
%
|
3
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
1,539
|
|
|
$
|
192
|
|
|
$
|
—
|
|
|
$
|
1,731
|
|
|
|
16.4
|
%
|
4
|
|
Shandong Shouguang Shenrunfa Ocean Chemical Company Limited
|
|
$
|
1,297
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,297
|
|
|
|
12.3
|
%
|
5
|
|
Dongying Bomeite Chemical Company Limited
|
|
$
|
1,098
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,098
|
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16– CUSTOMER CONCENTRATION
The Company sells a substantial portion of its
products to a limited number of customers. During the year ended December 31, 2020, the Company sold 74.9% of its products to its top
five customers, respectively. As of December 31, 2020, amounts due from these customers were $5,417,101.
The Company sells a substantial portion of its
products to a limited number of customers. During the year ended December 31, 2019, the Company sold 78.6% of its products to its top
five customers, respectively. As of December 31, 2019, amounts due from these customers were $4,877,106.
NOTE 17– MAJOR SUPPLIERS
During the year ended December 31, 2020, the Company
purchased 100% of its raw materials from its top five suppliers. As of December 31, 2020, amounts due to those suppliers were
$479,958.
During the year ended December 31, 2019, the Company
purchased 100% of its raw materials from its top five suppliers. As of December 31, 2019, amounts due to those suppliers were
$0.
NOTE 18 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments,
which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term
nature of these instruments. There were no material unrecognized financial assets and liabilities as of December 31, 2020 and
2019.
NOTE 19 – CAPITAL COMMITMENT AND OTHER SERVICE
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company’s
contractual obligations as of December 31, 2020:
|
|
Property Management Fees
|
|
Capital Expenditure
|
Payable within:
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
95,613
|
|
|
$
|
12,037,298
|
|
the next 13 to 24 months
|
|
|
95,613
|
|
|
|
1,195,950
|
|
the next 25 to 36 months
|
|
|
—
|
|
|
|
—
|
|
the next 37 to 48 months
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
191,226
|
|
|
$
|
13,233,248
|
|
NOTE 20 –LOSS CONTINGENCIES
On or about August 3, 2018, written decisions
of administration penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo Tu Zi Fa
Gao Zi [2018] No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu Zi Fa Gao Zi [2018]
No. 296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company Limited (“SCHC”)
by Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as respondent respectively thereof. The
Decisions challenged the land use of Factory nos. 2, 9, 7, 4, 8 and 10, respectively, and alleged, among other things, that SCHC had illegally
occupied and used the land in the total area of approximately 52,674 square meter, on which Factory nos. 2, 9, 7, 4, 8 and 10 were built,
respectively. The Written Decisions ordered SCHC, among other things, to return the land subject to the Written Decisions to its respective
legal owner, restore the land to its original state, and demolish or confiscate all the buildings and facilities thereon and pay monetary
penalty of approximately RMB 1.3 million ($184,000) in the aggregate. Each of the Written Decisions shall be executed within 15 days upon
serving on SCHC. Additional interest penalty shall be imposed at a daily rate of 3% in the event that SCHC does not make the monetary
penalty payment in a timely manner. Subsequently, the Bureau filed enforcement actions to the People’s Court of Shouguang City,
Shandong Province (the “Court”), naming SCHC as enforcement respondent and alleged, among other things, that SCHC failed to
perform its obligations under each of the Written Decisions within the specified timeframe. The enforcement proceedings sought court orders
to enforce the Written Decisions. On May 5, 2019, written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 384,
(2019) Lu 0783 Xing Shen No. 385, (2019) Lu 0783 Xing Shen No. 389, (2019) Lu 0783 Xing Shen No. 390, (2019) Lu 0783 Xing Shen No. 393,
and (2019) Lu 0783 Xing Shen No. 394, respectively (together, the “Court Rulings”) were made by the Court in favor of the
Bureau. The Court orders, among other relief, to enforce each of the Written Decisions, to return each subject land to its legal 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 regularly 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 December 31, 2020.
NOTE 21 - SUBSEQUENT EVENT
On November 30, 2020, Gulf Resources announced
that the government of Shouguang City, ordered that all bromine facilities be temporarily closed from December 25, 2020 until February
19, 2021. The Company believed the seasonal closure ordered by the government was part of governmental action plan to curb air pollution
in the winter and improve the comprehensive development efficiency of brine resources. On February 19, 2021, as planned, the Company reopened
its four operating bromine and crude salt factories.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)
SCHEDULE I – PARENT ONLY FINANCIAL INFORMATION
The following presents condensed parent company
only financial information of Gulf Resources, Inc.
Condensed Balance Sheets
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Prepayments and deposits
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Current Assets
|
|
|
—
|
|
|
|
—
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
Interests in subsidiaries
|
|
|
214,505,860
|
|
|
|
200,057,813
|
|
Amounts due from group companies
|
|
|
62,987,953
|
|
|
|
63,546,235
|
|
Total non-current assets
|
|
|
277,493,813
|
|
|
|
263,604,048
|
|
Total Assets
|
|
$
|
277,493,813
|
|
|
$
|
263,604,048
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
$
|
326,839
|
|
|
$
|
354,247
|
|
Amounts due to group companies
|
|
|
142,701
|
|
|
|
142,701
|
|
Total Current Liability
|
|
|
469,540
|
|
|
|
496,948
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
469,540
|
|
|
$
|
496,948
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
PREFERRED STOCK; $0.001 par value; 1,000,000 shares authorized; none outstanding
|
|
$
|
—
|
|
|
$
|
—
|
|
COMMON STOCK; $0.0005 par value; 80,000,000 shares authorized; 10,043,307and 9,563,257 shares issued; and 9,997,477 and 9,517,427 shares outstanding as of December 31, 2020 and December 31, 2019
|
|
|
24,139
|
|
|
|
23,904
|
|
Treasury stock; 45,830 and 45,830 shares as of December 31, 2020 and December 31, 2019 at cost
|
|
|
(510,329
|
)
|
|
|
(510,329
|
)
|
Additional paid-in capital
|
|
|
97,435,316
|
|
|
|
95,043,388
|
|
Retained earnings unappropriated
|
|
|
151,388,356
|
|
|
|
159,808,400
|
|
Retained earnings appropriated
|
|
|
24,233,544
|
|
|
|
24,233,544
|
|
Cumulative translation adjustment
|
|
|
4,453,247
|
|
|
|
(15,491,807
|
)
|
Total Stockholders’ Equity
|
|
|
277,024,273
|
|
|
|
263,107,100
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
277,493,813
|
|
|
$
|
263,604,048
|
|
Condensed Statements of Comprehensive Loss
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
(2,922,671
|
)
|
|
$
|
(642,151
|
)
|
TOTAL OPERATING EXPENSES
|
|
|
(2,922,671
|
)
|
|
|
(642,151
|
)
|
OTHER EXPENSES
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(369
|
)
|
|
|
(385
|
)
|
TOTAL OTHER EXPENSES
|
|
|
(369
|
)
|
|
|
(385
|
)
|
TOTAL EXPENSES
|
|
|
(2,923,040
|
)
|
|
|
(642,536
|
)
|
Equity in net Loss of subsidiaries
|
|
|
(5,497,004
|
)
|
|
|
(25,157,509
|
)
|
LOSS BEFORE INCOME TAXES
|
|
|
(8,420,044
|
)
|
|
|
(25,800,045
|
)
|
INCOME TAXES
|
|
|
—
|
|
|
|
—
|
|
NET LOSS
|
|
$
|
(8,420,044
|
)
|
|
$
|
(25,800,045
|
)
|
Condensed Statements of Cash Flows
|
|
Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(8,420,044
|
)
|
|
$
|
(25,800,045
|
)
|
Adjustments to reconcile net Loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Equity Loss in unconsolidated subsidiaries
|
|
|
5,497,004
|
|
|
|
25,157,509
|
|
Stock-based compensation expense-options
|
|
|
2,350,250
|
|
|
|
45,900
|
|
Shares issued from treasury stock for services
|
|
|
—
|
|
|
|
21,600
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
14,508
|
|
|
|
103,754
|
|
Net cash used in operating activities
|
|
|
(558,282
|
)
|
|
|
(471,282
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances from group companies
|
|
|
558,282
|
|
|
|
471,282
|
|
Net cash provided by financing activities
|
|
|
558,282
|
|
|
|
471,282
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
—
|
|
|
|
—
|
|
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
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CASH AND CASH EQUIVALENTS - END OF YEAR
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$
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$
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(i)
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Basis of presentation
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In the condensed parent-company-only
financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries
since the date of acquisition. The Company’s share of net loss of its subsidiaries is included in condensed statements of comprehensive
loss using the equity method. These condensed parent-company-only financial statements should be read in connection with the consolidated
financial statements and notes thereto.
As of December 31, 2020, the Company
itself has no purchase commitment, capital commitment and operating lease commitment.
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(ii)
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Restricted Net Assets
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Schedule I of Rule 5-04 of Regulation
S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test,
restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets
of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred
to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender,
regulatory agency, foreign government, etc.).
The condensed parent company financial
statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries
of Gulf Resources, Inc. exceed 25% of the consolidated net assets of Gulf Resources, Inc. The ability of the Company’s Chinese operating
subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the
Chinese operating subsidiaries. Because a significant portion of the Company’s operations and revenues are conducted and generated
in China, a significant portion of the revenues being earned and currency received are denominated in RMB. RMB is subject to the exchange
control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange
control regulations that restrict the Company’s ability to convert RMB into US Dollars.