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 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 

For the quarterly period ended June 30, 2021

   
  Or
   
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from _________ to _________

 

Commission File Number: 001-34499

 

GULF RESOURCES, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   13-3637458
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     

Level 11, Vegetable Building, Industrial Park of the East City,

Shouguang City, Shandong, China

  262700
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: +86 (536) 567 0008

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol (s) Name of each exchange on which registered
Common Stock, $0.0005 par value GURE NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer o Accelerated filer o
Non-accelerated Filer x Smaller reporting company x
  Emerging Growth Company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o No x

 

As of August 13, 2021, the registrant had outstanding 10,469,477 shares of common stock.

 

 

Table of Contents

 

Part I – Financial Information  
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 30
Part II – Other Information  
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 31
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Mine Safety Disclosures 31
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures 32

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GULF RESOURCES, INC.  

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. dollars)

 

    June 30, 2021
Unaudited
  December 31, 2020
Audited
Current Assets                
Cash   $ 97,058,027     $ 94,222,538  
Accounts receivable     4,741,259       6,521,798  
Inventories, net     677,418       419,609  
Prepayments and deposits     2,476,867       6,146,461  
Other receivable     1,624       559  
Total Current Assets     104,955,195       107,310,965  
Non-Current Assets                
Property, plant and equipment, net     153,288,493       148,947,689  
Finance lease right-of use assets     185,276       186,272  
Operating lease right-of –use assets     8,507,190       8,868,661  
Prepaid land leases, net of current portion     10,234,582       10,134,004  
Deferred tax assets     19,254,324       18,590,227  
Total non-current assets     191,469,865       186,726,853  
Total Assets   $ 296,425,060     $ 294,037,818  
                 
Liabilities and Stockholders’ Equity                
Current Liabilities                
Accounts, other payable and accrued expenses   $ 7,071,707     $ 5,081,701  
Taxes payable-current     1,506,771       1,326,179  
Finance lease liability, current portion     160,498       217,070  
Operating lease liabilities, current portion     470,999       477,350  
Total Current Liabilities     9,209,975       7,102,300  
Non-Current Liabilities                
Finance lease liability, net of current portion     1,747,385       1,888,903  
Operating lease liabilities, net of current portion     7,365,145       8,022,342  
Total Non-Current Liabilities     9,112,530       9,911,245  
Total Liabilities   $ 18,322,505     $ 17,013,545  
Commitment and Loss 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; 10,515,307 and 10,043,307 shares issued; 10,469,477 and 9,997,477 shares outstanding as of June 30, 2021 and December 31, 2020, respectively     24,375       24,139  
Treasury stock; 45,830 and 45,830  shares as of June 30, 2021 and December 31, 2020 at cost     510,329     510,329
Additional paid-in capital     100,569,160       97,435,316  
Retained earnings unappropriated     146,183,012       151,388,356  
Retained earnings appropriated     24,233,544       24,233,544  
Accumulated other comprehensive loss     7,602,793       4,453,247  
Total Stockholders’ Equity     278,102,555       277,024,273  
Total Liabilities and Stockholders’ Equity   $ 296,425,060     $ 294,037,818  

 

See accompanying notes to the condensed consolidated financial statements.

 

1

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(Expressed in U.S. dollars)

(UNAUDITED)

 

                                 
    Three-Month Period Ended June 30,   Six-Month Period Ended June 30,
    2021   2020   2021   2020
                 
NET REVENUE                                
Net revenue   $ 11,148,008     $ 5,359,483     $ 16,407,251     $ 5,917,153  
                                 
OPERATING INCOME (EXPENSE)                                
Cost of net revenue     (6,915,774 )     (5,022,896 )     (11,097,163 )     (5,944,216 )
Sales, marketing and other operating expenses     (15,625 )     (10,838 )     (25,170 )     (13,081 )
Direct labor and factory overheads incurred during plant shutdown     (1,394,717 )     (1,737,599 )     (4,008,200 )     (5,348,022 )
General and administrative expenses     (5,204,701 )     (1,541,702 )     (6,940,951 )     (2,385,039 )
Other operating income (loss)                       (15,776  
Total operating expense     (13,530,817 )     (8,313,035 )     (22,071,484 )     (13,706,134 )
                                 
LOSS FROM OPERATIONS     (2,382,809 )     (2,953,552 )     (5,664,233 )     (7,788,981 )
                                 
OTHER INCOME (EXPENSE)                                
Interest expense     (39,368 )     (34,888 )     (76,230 )     (70,316 )
Interest income     75,437       71,188       147,890       145,844  
LOSS BEFORE TAXES     (2,346,740 )     (2,917,252 )     (5,592,573 )     (7,713,453 )
                                 
INCOME TAX BENEFIT     (356,480 )     672,633       387,229       1,929,076  
NET LOSS   $ (2,703,220 )   $ (2,244,619 )   $ (5,205,344 )   $ (5,784,377 )
                                 
COMPREHENSIVE LOSS:                                
NET LOSS   $ (2,703,220 )   $ (2,244,619 )   $ (5,205,344 )   $ (5,784,377 )
OTHER COMPREHENSIVE LOSS                                
- Foreign currency translation adjustments     5,334,236       221,869       3,149,546       (4,293,490 )
COMPREHENSIVE LOSS   $ 2,631,016     $ (2,022,750 )   $ (2,055,798 )   $ (10,077,867 )
                                 
LOSS PER SHARE:                                
BASIC AND DILUTED   $ (0.26 )   $ (0.24 )   $ (0.50 )   $ (0.61 )
                                 
WEIGHTED AVERAGE NUMBER OF SHARES:                                
                                 
BASIC AND DILUTED     10,469,477       9,517,427       10,469,477       9,517,427  

 

See accompanying notes to the condensed consolidated financial statements.

 

2

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX-MONTH PERIOD ENDED JUNE 30, 2021

(Expressed in U.S. dollars)

 

                                                                                 
    Common stock                   Accumulated    
    Number   Number   Number           Additional   Retained   Retained   other    
    of shares   of shares   of treasury       Treasury   paid-in   earnings   earnings   comprehensive    
    issued   outstanding   stock   Amount   stock   capital   unappropriated   appropriated   Income(loss)   Total
                                         
BALANCE AT MARCH 31, 2021 (Unaudited)     10,043,307       9,997,477       45,830     $ 24,139     $ (510,329 )   $ 97,435,316     $ 148,886,232     $ 24,233,544     $ 2,268,557     $ 272,337,459  
Restricted shares     472,000       472,000             236             3,133,844                         3,134,080  
Translation adjustment                                                     5,334,236       5,334,236  
Net loss for three-month period ended June 30, 2020                                         (2,703,220 )                 (2,703,220 )
BALANCE AT JUNE 30, 2021 (Unaudited)     10,515,307       10,469,477       45,830     $ 24,375     $ (510,329 )   $ 100,569,160     $ 146,183,012     $ 24,233,544     $ 7,602,793     $ 278,102,555  

 

    Common stock                   Accumulated    
    Number   Number   Number           Additional   Retained   Retained   other    
    of shares   of shares   of treasury       Treasury   paid-in   earnings   earnings   comprehensive    
    issued   outstanding   stock   Amount   stock   capital   unappropriated   appropriated   Income(loss)   Total
                                         
BALANCE AT MARCH 31, 2020 (Unaudited)     9,563,257       9,517,427       45,830     $ 23,904     $ (510,329 )   $ 95,043,388     $ 156,268,642     $ 24,233,544     $ (20,007,166 )   $ 255,051,983  
Translation adjustment                                                     221,869       221,869  
Net loss for three-month period ended June 30, 2020                                         (2,244,619 )                 (2,244,619 )
BALANCE AT JUNE 30, 2020 (Unaudited)     9,563,257       9,517,427       45,830     $ 23,904     $ (510,329 )   $ 95,043,388     $ 154,024,022     $ 24,233,544     $ (19,785,297 )   $ 253,029,232  

 

    Common stock                   Accumulated    
    Number   Number   Number           Additional   Retained   Retained   other    
    of shares   of shares   of treasury       Treasury   paid-in   earnings   earnings   comprehensive    
    issued   outstanding   stock   Amount   stock   capital   unappropriated   appropriated   Income(loss)   Total
                                         
BALANCE AT DECEMBER 31, 2020 (Audited)     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  
Restricted shares     472,000       472,000             236             3,133,844                         3,134,080  
Translation adjustment                                                     3,149,546       3,149,546  
Net loss for six-month period ended June 30, 2021                                         (5,205,344 )                 (5,205,344 )
BALANCE AT JUNE 30, 2021 (Unaudited)     10,515,307       10,469,477       45,830     $ 24,375     $ (510,329 )   $ 100,569,160     $ 146,183,012     $ 24,233,544     $ 7,602,793     $ 278,102,555  

 

    Common stock                   Accumulated    
    Number   Number   Number           Additional   Retained   Retained   other    
    of shares   of shares   of treasury       Treasury   paid-in   earnings   earnings   comprehensive    
    issued   outstanding   stock   Amount   stock   capital   unappropriated   appropriated   Income(loss)   Total
                                         
BALANCE AT DECEMBER 31, 2019 (Audited)     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  
Translation adjustment                                                     (4,293,490 )     (4,293,490 )
Net loss for six-month period ended June 30, 2020                                         (5,784,377 )                 (5,784,377 )
BALANCE AT JUNE 30, 2020 (Unaudited)     9,563,257       9,517,427       45,830     $ 23,904     $ (510,329 )   $ 95,043,388     $ 154,024,022     $ 24,233,544     $ (19,785,297 )   $ 253,029,232  

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in U.S. dollars)

(UNAUDITED)

 

                 
    Six-Month Period Ended June 30,
    2021   2020
         
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss   $ (5,205,344 )   $ (5,784,377 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:                
Interest on finance lease obligation     71,197       70,009  
Depreciation and amortization     8,224,864       7,559,224  
Unrealized exchange gain on translation of inter-company balances     594,150       (382,331 )
Deferred tax asset     (387,230 )     (1,929,553 )
Common stock issued for services     3,134,080        
Issuance of stock options to employee            
Changes in assets and liabilities:                
Accounts receivable     1,839,939       1,807,547  
Inventories     (252,995 )     152,369  
Prepayments and deposits     (98,992 )     32,807  
Other receivables            
Accounts and Other payable and accrued expenses     (785,889 )     (9,284 )
Retention payable            
Taxes payable     190,892       298,599  
Prepaid land leases           (369,066 )
Operating lease     (298,897 )     (268,192 )
Net cash provided by (used in) by operating activities     7,025,775       1,177,752  
                 
CASH FLOWS USED IN INVESTING ACTIVITIES                
Purchase of property, plant and equipment     (5,806,435 )     (9,860,142 )
Net cash used in investing activities     (5,806,435 )     (9,860,142 )
                 
CASH FLOWS USED IN FINANCING ACTIVITIES                
Repayment of finance lease obligation     (296,597 )     (264,976 )
Net cash used in financing activities     (296,597 )     (264,976 )
                 
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS     1,912,746       (1,382,029 )
NET DECREASE IN CASH AND CASH EQUIVALENTS     2,835,489       (10,329,395 )
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD     94,222,538       100,301,986  
CASH AND CASH EQUIVALENTS - END OF PERIOD   $ 97,058,027     $ 89,972,591  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
Cash paid during the periods for:                
Income taxes   $     $  
Operating right-of-use assets obtained in exchange for lease obligations   $     $  
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                

 

 

See accompanying notes to the condensed consolidated financial statements.

 

4

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)           Basis of Presentation and Consolidation

 

The accompanying condensed financial statements have been prepared by Gulf Resources, Inc. (“Gulf Resources”). a Nevada corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“US GAAP”).

 

In the opinion of management, the unaudited financial information for the three and six months ended June 30, 2021 presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the preparation of these condensed financial statements in certain areas, including classification of leases and related party transactions.

 

The consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the British Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”). HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited ("SCHC") which owns 100% of Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”) and Daying County Haoyuan Chemical Company Limited (“DCHC”).  All material intercompany transactions have been eliminated on consolidation.

 

(b)           Nature of Business

 

The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC") in the People’s Republic of China (“PRC”), which is also planning to engage in seawater desalination technology research and service and to handle the import and export of goods and technologies within the scope permitted by the State. The Company also manufactures chemical products for use in the oil industry, pesticides, paper manufacturing industry and for human and animal antibiotics through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI") in PRC. DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt) in the PRC. DCHC commenced trial operation in January 2019 but suspended production temporarily in May 2019 as required by the government to obtain project approval (see Note 1 (b) (iii) below).

 

On March 11, 2020, the World Health Organization (WHO) officially declared COVID-19 a pandemic. The duration and intensity of the impact of the COVID-19 and resulting disruption to the Company’s operations and financial position is uncertain. While our operations are currently not materially affected, it is unknown whether or how they may be affected if such a pandemic persists for an extended period. While not yet quantifiable, the Company believes this situation did not have a material adverse impact on its operating results in the second quarter of 2021 and will continue to assess the financial impact. The virus outbreak slightly delayed the commencement of the operations for Factory No.1, No.4, No.7, No.9, and it may also delay the approval for the remaining three factories include No.2, No.8 and No.10. It is, however, still unclear how the pandemic will evolve going forward, and we cannot assure you whether the COVID-19 pandemic will bring about significant negative impact on our business operations, financial condition and operating results, including but not limited to negative impact to our total revenues. 

 

(i) Bromine and Crude Salt Segments

 

In February 2019, the Company received a notification from the local government of Yangkou County that its Factory No. 1, No. 4, No. 7 and No. 9 passed inspection and could resume operations. In April 2019, Factory No.1 and Factory No.7 resumed operation.

 

On November 25, 2019, the government of Shouguang City issued a notice ordering all bromine facilities in Shouguang City, including the Company’s bromine facilities, including Factory No.1 and Factory No. 7, to temporarily stop production from December 16, 2019 to February 10, 2020. Subsequently, due to the coronavirus outbreak in China, the local government ordered those bromine facilities to postpone the commencement of production. Subsequently, the Company received an approval dated February 27, 2020 issued by the local governmental authority which allowed the Company to resume production after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s Government dated March 5, 2020 allowing the Company to resume production at its bromine factories No.1, No. 4, No.7 and No. 9 in order to meet the needs of bromide products for epidemic prevention and control (the “March 2020 Approval”). The Company’s Factories No. 1 and No. 7 commenced trial production in mid-March 2020 and commercial production on April 3, 2020 and its Factories No. 4 and No. 9 commenced commercial production on May 6, 2020.

 

Pursuant to the notification issued on November 24, 2020 from the government of Shouguang City, all bromine facilities in Shouguang City had to be temporarily closed from December 25, 2020 until February 19, 2021 8:00 AM China Time. To comply with such notification, the Company temporarily stopped production at its bromine facilities in factory No. 1, No. 4, No. 7 and No. 9 during the aforesaid period and commenced production as scheduled on February 19, 2021.

 

(ii) Chemical Segment

 

On November 24, 2017, the Company received a letter from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants located in the second living area of the Qinghe Oil Extraction to the Bohai Marine Fine Chemical Industrial Park (“Bohai Park”). This is because the two plants are located in a residential area and their production activities will impact the living environment of the residents. This is as a result of the country’s effort to improve the development of the chemical industry, manage safe production and curb environmental pollution accidents effectively, and ensure the quality of the living environment of residents. All chemical enterprises which do not comply with the requirements of the safety and environmental protection regulations will be ordered to shut down.

 

In December 2017, the Company secured from the government the land use rights for its chemical plants located at the Bohai Park and in June 2018, the Company presented a completed construction design draft and other related documents to the local authorities for approval. In January 2020, the Company obtained the environmental protection assessment approval performed by the government of Shouguang City, Shandong Province for the proposed new Yuxin chemical factory. With this approval, the Company is permitted to construct the new chemical factory and began the construction in the second quarter of 2020.

 

The Company believes this relocation process will cost approximately $67 million in total. The Company incurred relocation costs comprising prepaid land lease, professional fees related to the design of the new chemical factory, and progress payment and deposit for the construction of the new factory building in the amount of $41,080,681 and $33,496,295, which were recorded in the prepaid land leases and property, plant and equipment in the consolidated balance sheets as of June 30, 2021 and December 31, 2020. 

 

(iii) Natural Gas Segment

 

In January 2017, the Company completed the first brine water and natural gas well field construction in Daying located in Sichuan Province and commenced trial production in January 2019. On May 29, 2019, the Company received a verbal notice from the government of Tianbao Town ,Daying County, Sichuan Province, whereby the Company is required to obtain project approval for its well located in Daying, including the whole natural gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve the related land issue. Until these approvals have been received, the Company has to temporarily halt trial production at its natural gas well in Daying. In compliance with the Chinese government new policies, the Company is also required to obtain an exploration license and a mining license for bromine and natural gas, respectively. Pursuant to the Opinions of the Ministry of Natural Resources on Several Issues in Promoting the Reform of Mineral Resources Management (Trial) promulgated by the Ministry of Natural Resources of PRC on January 9, 2020, which came into effect on May 1, 2020, privately owned enterprises are allowed to participate in the natural gas production. The Company plans to proceed with its applications for the natural gas and brine project approvals with related government departments until after the governmental planning has been finalized the land and resource planning for Sichuan Province.

 

(c)           Allowance for Doubtful Accounts

 

As of June 30, 2021 and December 31, 2020, there were no allowances for doubtful accounts. No allowances for doubtful accounts were charged to the condensed consolidated statements of loss for the three-month and six-month periods ended June 30, 2021 and 2020.

 

(d)           Concentration of Credit Risk

 

The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited, China Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise protected. The Company placed $97,058,027 and $94,222,538 with these institutions as of June 30, 2021 and December 31, 2020, respectively.  The Company has not experienced any losses in such accounts in the PRC.

 

5

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

(e)           Property, Plant and Equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment of existing facilities or equipment are capitalized and depreciated, when available for intended use, using the straight-line method at rates sufficient to depreciate such costs less 5% residual value over the estimated productive lives. All other ordinary repair and maintenance costs are expensed as incurred.

 

Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.

 

Construction in process primarily represents direct costs of construction of property, plant and equipment. Costs incurred are capitalized and transferred to property, plant and equipment upon completion and depreciation will commence when the completed assets are placed in service. 

 

The Company’s depreciation and amortization policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:

 

 

Useful life

(in years)

Buildings (including salt pans)     8 - 20  
Plant and machinery (including protective shells, transmission channels and ducts)     3 - 8  
Motor vehicles Motor Vehicles     5  
Furniture, fixtures and equipment     3-8  

 

Property, plant and equipment under the finance lease are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which is 20 years.

 

Producing oil and gas properties are depreciated on a unit-of-production basis over the proved developed reserves. Common facilities that are built specifically to service production directly attributed to designate oil and gas properties are depreciated based on the proved developed reserves of the respective oil and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas properties are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant development projects are not depreciated until commercial production commences and the reserves related to those costs are excluded from the calculation of depreciation.

 

(f)           Retirement Benefits

 

Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the condensed consolidated statement of loss on an accrual basis when they are due. The Company’s contributions totaled $220,968 and $43,838 for the three-month period ended June 30, 2021 and 2020, respectively, and totaled $467,590 and $183,946 for the six-month period ended June 30, 2021 and 2020, respectively.

 

(g)           Revenue Recognition

 

Net revenue is net of discount and value added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized when the control of the promised goods is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product is deemed to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no rights to return the goods upon acknowledgement of receipt of goods. Revenue from contracts with customers is disaggregated in Note 14.

 

6

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

(h)           Recoverability of Long-lived Assets

 

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35“Impairment or Disposal of Long-lived Assets”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.

 

The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.

 

For the three and six months period ended June 30, 2021 and 2020, the Company determined that there were no events or circumstances indicating possible impairment of its long-lived assets.

 

(i)           Basic and Diluted Earnings per Share of Common Stock

 

Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 0 and 74,781 shares for the three-month period ended June 30, 2021 and 2020, respectively, and amounted to 31,352 and 94,075 shares for the six-month period ended June 30, 2021 and 2020, respectively. These awards could be dilutive in the future if the market price of the common stock increases and is greater than the exercise price of these awards.

 

As the Company reported a net loss for the three and six months ended June 30, 2021 and 2020, common stock equivalents including stock options and warrants were anti-dilutive. Therefore, the amounts reported for basic and diluted loss per share were the same.

 

7

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

(j)           Reporting Currency and Translation

 

The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).

 

As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive loss. The statement of loss and comprehensive loss is translated at average rate during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net loss for the reporting periods as part of general and administrative expense. The statement of cash flows is translated at average rate during the reporting period, with the exception of the consideration paid for the acquisition of business which is translated at historical rates.

 

(k)           Foreign Operations

 

All of the Company’s operations and assets are located in PRC.  The Company may be adversely affected by possible political or economic events in this country.  The effect of these factors cannot be accurately predicted.

 

(l)           Inventories

 

Inventories are stated at the lower of cost, determined on a first-in first-out cost basis, or net realizable value. Costs of work-in-progress and finished goods comprise direct materials, direct labor and an attributable portion of manufacturing overhead. Net realizable value is based on estimated selling price less costs to complete and selling expenses.

 

(m)           Leases

 

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated balance sheets. Finance leases are included in finance lease ROU assets and finance lease liabilities in the consolidated balance sheets.

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease and finance lease ROU assets and liabilities are recognized at January 1, 2019 based on the present value of lease payments over the lease term discounted using the rate implicit in the lease. In cases where the implicit rate is not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

The Company does not recognize operating lease ROU assets and liabilities arising from lease arrangements with lease term of twelve months or less.

 

(n)           Stock-based Compensation

 

Stock-based awards issued to employees are recorded at their fair values estimated at grant date using the Black-Scholes model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period. Consistent with the accounting requirement for employee stock-based awards, nonemployee stock-based awards are measured at the grant-date fair value of the equity instruments that the Company is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.

 

The Company has elected to account for the forfeiture of stock-based awards as they occur.

 

(o)           Loss Contingencies

 

The Company accrues for loss contingencies relating to legal matters, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities, when such liabilities become probable and could be reasonably estimabled. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Revisions to accruals are reflected in earnings (loss) in the period in which different facts or information become known or circumstances change that affect the Company’s previous assumptions with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of such liabilities may be materially different from previous estimates.

 

(p)           Income Tax

 

The Company accounts for income taxes in accordance with the Income Taxes Topic of the FASB ASC, which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their reported amounts at each period end. Deferred tax assets and liabilities are measured using tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The deferred income tax effects of a change in tax rates are recognized in the period of enactment. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The guidance also provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits. Interests and penalties associated with unrecognized tax benefits are included within the (benefit from) provision for income tax in the consolidated statement of income (loss).

 

(q)           New Accounting Pronouncements

 

Recent accounting pronouncements adopted

 

There were no recent accounting pronouncements adopted during the six months ended June 30, 2021.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For the Company which is a smaller reporting company, ASU No. 2019-10 extends the effective dates for two years. The Company is currently evaluating the effect of this on the condensed consolidated financial statements and related disclosure.

 

8

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 2 – INVENTORIES

 

Inventories consist of:

 

    June 30,
2021
  December 31,
2020
         
Raw materials   $ 56,267     $ 21,484  
Finished goods     621,151       398,125  
Inventory, net   $ 677,418     $ 419,609  

 

There was no allowance for slow-moving inventories as of June 30, 2021 and 2020.

 

NOTE 3 – PREPAID LAND LEASES

 

The Company has the rights to use certain parcels of land located in Shouguang, Shandong, PRC, through lease agreements signed with local townships or the government authority. The production facilities and warehouses of the Company are located on these parcels of land. The lease term ranges from ten to fifty years. Some of the lease contracts were paid in one lump sum upfront and some are paid annually at the beginning of each anniversary date. These leases have no purchase option at the end of the lease term and were classified as operating leases prior to and as of January 1, 2019 when the new lease standard was adopted. Prior to January 2019, the prepaid land lease was amortized on a straight line basis. As of January 1, 2019, all the leases in which term has commenced and were in use were classified as operating lease right-of-use assets (“ROU”). See Note 6.

 

In December 2017, the Company paid a one lump sum upfront amount of $9,844,040 for a 50-year lease of a parcel of land at Bohai Marine Fine Chemical Industrial Park (“Bohai”) for the new chemical factory under construction. There is no purchase option at the end of the lease term. This was classified as an operating lease prior to and as of January 1, 2019. The land use certificate was issued on October 25, 2019. The lease term expires on August 12, 2069. The amount paid was recorded as prepaid land leases, net of current portion in the consolidated balance sheet as of June 30 2021 and December 31, 2020. As of June 30, 2021, the prepaid land lease increased to $10,234,582 due to an additional amount paid for stamp duty and related land use rights fees. Amortization of this prepaid land lease will commence when the chemical factory is built and placed in service.

 

The Company began the construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020 and basically completed the civil works by end of June 2021.

 

9

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net consist of the following:

 

    June 30,
2021
  December 31,
2020
At cost:                
Mineral rights   $ 2,985,480     $ 2,955,780  
Buildings     64,668,005       64,024,667  
Plant and machinery     260,997,193       258,400,710  
Motor vehicles     31,724       6,553  
Furniture, fixtures and office equipment     3,353,441       3,318,564  
Construction in process     23,271,504       12,095,565  
Total     355,307,347       340,801,839  
Less: Accumulated depreciation and amortization     (183,189,944 )     (173,212,554 )
     Impairment     (18,828,910 )     (18,641,596 )
Net book value   $ 153,288,493     $ 148,947,689  

 

The Company has certain buildings and salt pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships or the government authority. The Company has not been able to obtain property ownership certificates over these buildings and salt pans. The aggregate carrying values of these properties situated on parcels of the land are $18,587,921 and $19,302,600 as at June 30, 2021 and December 31, 2020, respectively.

 

During the three-month period ended June 30, 2021, depreciation and amortization expense totaled $4,119,073 of which $758,445, $163,868 and $3,196,760 were recorded in direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue. During the six-month period ended June 30, 2021,depreciation and amortization expense totaled $8,222,022 of which $2,575,227, $327,101 and $5,319,694 were recorded in direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue.

 

During the three-month period ended June 30, 2020, depreciation and amortization expense totaled $4,103,026 of which $1,167,114, $198,413 and $2,737,500 were recorded in direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue. During the six-month period ended June 30, 2020, depreciation and amortization expense totaled $7,556,589 of which $3,745,884, $399,819 and $3,410,886 were recorded in direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue.

 

NOTE 5 –FINANCE LEASE RIGHT-OF-USE ASSETS

 

Property, plant and equipment under finance leases, net consist of the following:

 

    June 30,
2021
  December 31,
2020
At cost:                
Buildings Buildings   $ 127,387     $ 126,120  
Plant and machinery Plant and Machinery     2,330,367       2,307,184  
Total     2,457,754       2,433,304  
Less: Accumulated depreciation and amortization     (2,272,478 )     (2,247,032 )
Net book value   $ 185,276     $ 186,272  

 

The above buildings erected on parcels of land located in Shouguang, PRC, are collectively owned by local townships.  The Company has not been able to obtain property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying parcels of land.  

 

During the three and six months period ended June 30, 2021, depreciation and amortization expense totaled $1,434 and $2,862, respectively, which was recorded in direct labor and factory overheads incurred during plant shutdown.

 

During the three and six months period ended June 30, 2020, depreciation and amortization expense totaled $1,308 and $2,635, respectively, which was recorded in direct labor and factory overheads incurred during plant shutdown.

 

10

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 6 – OPERATING LEASE RIGHT–OF USE ASSETS

 

As of June 30, 2021, the total operating lease ROU assets was $8,507,190. The total operating lease cost for the three-month period ended June 30, 2021 and 2020 was $241,145 and $216,422.

 

The total operating lease cost for the six-month period ended June 30, 2021 and 2020 was $481,295 and $436,109.

 

The Company has the rights to use certain parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships or the government authority (See Note 3). For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels of land of which the Company cannot obtain land use rights certificates covers a total of approximately 38.6 square kilometers of aggregate carrying value of $8,153,080 as at June 30, 2021.

 

NOTE 7 – ACCOUNTS PAYABLE, OTHER PAYABLE AND ACCRUED EXPENSES

 

Accounts payable, other payable and accrued expenses consist of the following:

 

    June 30,   December 31,
    2021   2020
Accounts payable   $ 412,601     $ 479,958  
Salary payable     324,932       320,549  
Social security insurance contribution payable     103,191       49,167  
Other payable-related party (see Note 8)     48,290       95,616  
Deposit on subscription of a subsidiary’s share     154,800       153,260  
Accrued expense-construction     5,429,903       3,537,644  
Accrued expense-others     597,990       445,507  
Total   $ 7,071,707     $ 5,081,701  

 

The deposit on subscription of a subsidiary's share of $154,800 as of June 30, 2021 relates to sale of non-controlling interests in DCHC. 

 

NOTE 8– RELATED PARTY TRANSACTIONS

 

On September 25, 2012, the Company purchased five floors of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd. (the “Seller”) at a cost of approximately $5.7 million in cash, of which Mr. Ming Yang, the Chairman of the Company, had a 99% equity interest in the Seller. During the first quarter of 2018, the Company entered into an agreement with the Seller, a related party, to provide property management services for an annual amount of approximately $96,574 for five years from January 1, 2018 to December 31, 2022. The expense associated with this agreement for the three and six months ended June 30, 2021 was approximately $24,144 and $47,878. The expense associated with this agreement for the three and six months ended June 30, 2020 was approximately $22,030 and $44,043. The amounting owing for the property management services as of June 30, 2021 and December 31, 2020 was $48,290 and $95,616 (Note 7). The amount owed as of June 30, 2021 is interest-free, unsecured and payable in January 2022.

 

NOTE 9– TAXES PAYABLE

 

    June 30,   December 31,
    2021   2020
Land use tax payable   $ 841,951     $ 833,576  
Value added tax and other taxes payable     664,820       492,603  
Land use tax payable   $ 1,506,771     $ 1,326,179  

 

NOTE 10 –LEASE LIABILITIES-FINANCE AND OPERATING LEASE

 

The components of finance lease liabilities were as follows:

 

    Imputed   June 30,   December 31,
    Interest rate   2021   2020
Total finance lease liability     6.7%   $ 1,907,883     $ 2,105,973  
Less: Current portion             (160,498 )     (217,070 )
Finance lease liability, net of current portion           $ 1,747,385     $ 1,888,903  

 

Interest expenses from capital lease obligations amounted to $35,659 and $34,747 for the three-month period ended June 30, 2021 and 2020, respectively, which were charged to the condensed consolidated statement of income (loss). Interest expenses from capital lease obligations amounted to $71,197 and $70,009 for the six-month period ended June 30, 2021 and 2020, respectively, which were charged to the condensed consolidated statement of income (loss).The remaining finance lease term at June 30, 2021 was 10 years.

 

The components of operating lease liabilities as follows:

 

    Imputed   June 30,   December 31,
    Interest rate   2021   2020
Total Operating lease liabilities     4.89%   $ 7,836,144     $ 8,499,692  
Less: Current portion             (470,999 )     (477,350 )
Operating lease liabilities, net of current portion           $ 7,365,145     $ 8,022,342  

 

The weighted average remaining operating lease term at June 30, 2021 was 21 years and the weighted average discounts rate was 4.89%.Lease payments for the three-month period ended June 30, 2021 and 2020, respectively, were $575,242 and $522,636. Lease payments for the six-month period ended June 30, 2021 and 2020, respectively, were $780,193 and $704,301.

 

Maturities of lease liabilities were as follows:

 

    Financial lease   Operating Lease
Payable within:                
the next 12 months   $ 290,560     $ 688,245  
the next 13 to 24 months     290,560       692,220  
the next 25 to 36 months     290,560       693,269  
the next 37 to 48 months     290,560       697,562  
the next 49 to 60 months     290,560       705,813  
thereafter     1,162,237       11,037,447  
Total     2,615,037       14,514,556  
Less: Amount representing interest     (707,154     (6,678,422 )
Present value of net minimum lease payments   $ 1,907,883     $ 7,836,144  

 

11

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 11 ––EQUITY

 

Restricted Shares

 

A restricted stock award (“RSA”) is an award of common shares that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of nonvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company's common stock on the grant date.

 

During the three months ended June 30, 2021, the Company granted in the aggregate, 472,000 restricted shares to a consultant, the company's directors, officers and employees. The restricted shares award were granted from the 2019 Omnibus Equity Incentive Plan and vested immediately. The fair value of the award on the date of grant was $3,134,080 which was expensed in full during the three months ended June 30, 2021.

 

Retained Earnings – Appropriated

 

In accordance with the relevant PRC regulations and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit after tax to the following reserve:

 

Statutory Common Reserve Funds

 

SCHC, SYCI and DCHC are required each year to transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common Reserve Funds until the balance reaches 50% of the registered share capital.  This reserve can be used to make up any loss incurred or to increase share capital.  Except for the reduction of losses incurred, any other application should not result in this reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of June 30, 2021 for SCHC, SYCI and DCHC is 16%, 14% and 0% of its registered capital respectively.

 

NOTE 12 – STOCK-BASED COMPENSATION

 

Pursuant to the Company’s 2019 Omnibus Equity Incentive Plan adopted and approved in 2019 (“ 2019 Plan”), awards under the 2019 Plan is limited in the aggregate to 2,068,398 shares of our common stock, inclusive of the awards that were previously issued and outstanding under the Company’s 2007 Equity Incentive Plan, as amended (the “2007 Plan”). Upon adoption and approval of the 2019 Plan, the 2007 Plan was frozen, no new awards will be granted under the 2007 Plan, and outstanding awards under the 2007 Plan will continue to be governed by the terms and condition of the 2007 Plan and applicable award agreement. As of June 30, 2021, the number of shares of the Company’s common stock available for grant of awards under the 2019 Plan is 159,248 shares.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted, volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical option exercise pattern.

 

In April 2021, the Company and certain management staff and directors mutually agreed to cancel certain unexercised stock options previously granted for an aggregate of 115,600 shares of the Company’s common stock underlying those stock options, having exercise prices at $7.27 per share, without consideration.

 

For the three months ended June 30, 2021 and 2020, total compensation costs for options issued recorded in the consolidated statement of loss were $0.

 

During the three and six months ended June 30, 2021, there were no options granted to employees or non-employees.

 

The following table summarizes all Company stock option transactions between January 1, 2021 and June 30, 2021.

 

    Number of Option
Outstanding and exercisable
  Weighted- Average Exercise price of Option   Range of
Exercise Price per Common Share
Balance, January 1, 2021     121,600     $ 7.09       $3.57 - $7.27  
Exercised during the period                  
Expired during the period     (115,600 )         $ 7.27  
Balance, June 30, 2021     6,000     $ 3.57     $ 3.57  

  

Stock Options  Outstanding and Exercisable
                      Weighted Average  
                      Remaining  
      Outstanding at June 30, 2021      

Range of

Exercise Prices

     

Contractual Life

 (Years)

 
Outstanding and exercisable     6,000     $3.57       0.67  

 

The aggregate intrinsic value of options outstanding and exercisable as of June 30, 2021 was $4,710.

 

During the three and six months ended June 30, 2021 and 2020, there were no options exercised. 

 

12

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 13 – INCOME TAXES

 

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.

 

(a) United States (“US”)

Gulf Resources, Inc. may be subject to the United States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the three-month and six-month periods ended June 30, 2021 and 2020, and management believes that its earnings are permanently invested in the PRC.

 

(b) British Virgin Islands (“BVI”)

 

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month and six-month periods ended June 30, 2021 and 2020.

 

(c) Hong Kong

 

HKJI, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong.  No provision for income tax has been made as it has no taxable income for the three-month and six-month periods ended June 30, 2021 and 2020.  The applicable statutory tax rates for the three-month and six-month periods ended June 30, 2021 and 2020 are 16.5%. There is no dividend withholding tax in Hong Kong.

 

(d) PRC

 

Enterprise income tax (“EIT”) for SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.

 

The operating subsidiaries SCHC, SYCI and DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Local Income Tax Law. The PRC tax losses may be carried forward to be utilized against future taxable profit for ten years for High-tech enterprises and small and medium-sized enterprises of science and technology and for five years for other companies. Tax losses of the operating subsidiaries of the Company may be carried forward for five years.

 

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

 

As of June 30, 2021 and December 31, 2020, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $125,637,125 and $126,643,733, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of June 30, 2021 and December 31, 2020, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject to WHT in China. As of June 30, 2021 and December 31, 2020, the unrecognized WHT are $5,227,527 and $5,288,346, respectively.

 

The Company’s income tax returns are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s income tax returns filed in the United States for three years from the date of filing. The Company’s US income tax returns since 2016 are currently subject to examination.

 

Inland Revenue Department of Hong Kong (“IRD”) may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing. For the years 2012 through 2019, HKJI did not report any taxable income. It did not file any income tax returns during these years except for 2014 and 2018. For companies which do not have taxable income, IRD typically issues notification to companies requiring them to file income tax returns once in every four years. The tax returns for 2014 and 2018 have been examined, and there is no Hong Kong Profits Tax was charged.

 

The components of the income tax benefit from continuing operations are:

                                 
    Three-Month Period Ended June 30,   Six-Month Period Ended June 30,
    2021   2020   2021   2020
Current taxes – PRC   $     $     $     $  
Deferred taxes     (356,408 )     612,354       387,229       1,739,929  
Change in valuation allowance           60,279             189,147  
Tax Expense Benefit   $ (356,408 )   $ 672,633     $ 387,229     $ 1,929,076  

        

The effective income tax rate differs from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:  

                         
    Three-Month Period Ended June 30,   Six-Month Period Ended June 30,
Reconciliations   2021   2020   2021   2020
Statutory income tax rate     25 %     25 %     25 %     25 %
Non-taxable & Non-deductible items     (6 %)     (2 %)     (3 %)      
Change in valuation allowance     (34 %)           (15 %)      
Effective tax rate     (15 %)     23 %     7 %     25 %

 

Significant components of the Company’s deferred tax assets and liabilities at June 30, 2021 and December 31, 2020 are as follows:

 

    June 30,   December 31,
    2021   2020
Deferred tax liabilities   $     $  
                 
Deferred tax assets:                
Impairment on property, plant and equipment     2,731,415       2,907,548  
Impairment on prepaid land lease     880,714       883,884  
Exploration costs     1,927,260       1,908,087  
Compensation costs of unexercised stock options     1,614       74,883  
PRC tax losses     22,396,953       21,643,028  
US federal net operating loss     1,247,000       1,045,503  
Total deferred tax assets     29,184,956       28,462,933  
Valuation allowance     (9,930,632 )     (9,872,706 )
Net deferred tax asset   $ 19,254,534     $ 18,590,227  

 

The increase in valuation allowance for the three-month period ended June 30, 2021 is $144,890.

 

The decrease in valuation allowance for the three-month period ended June 30, 2020 is $60,279.

 

The increase in valuation allowance for the six-month period ended June 30, 2021 is $57,926.

 

The decrease in valuation allowance for the six-month period ended June 30, 2020 is $189,147.

 

There were no unrecognized tax benefits and accrual for uncertain tax positions as of June 30, 2021 and December 31, 2020 and no amounts accrued for penalties and interest for the three and six months ended June 30, 2021 and 2020.

 

13

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 14 – BUSINESS SEGMENTS

 

An operating segment’s performance is primarily evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs and other income not associated with the operations of the segment. These corporate costs (income) are separately stated below and also include costs that are related to functional areas such as accounting, treasury, information technology, legal, human resources, and internal audit. The Company believes that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of its segments. All the customers are located in PRC.

 

Three-Month

Period Ended

June 30, 2021

  Bromine*  

Crude

 Salt*

 

Chemical

 Products

  Natural Gas  

Segment

 Total

  Corporate   Total
Net revenue
(external customers)
  $ 10,025,438     $ 1,122,570     $     $     $ 11,148,008     $     $ 11,148,008  
Net revenue
(intersegment)
                                         
Income(loss) from operations before income tax benefit     2,682,233       (578,435 )     (741,312 )     (62,850 )     1,299,636       (3,682,445 )     (2,382,809 )
Income tax benefit     (672,696 )     145,070       171,146             (356,480 )           (356,480 )
Income (loss) from operations after
income tax benefit
    2,009,537       (433,365 )     (570,166 )     (62,850 )     943,156       (3,682,445 )     (2,739,289 )
Total assets     138,872,887       32,840,392       122,381,338       1,846,367       295,940,984       484,076       296,425,060  
Depreciation and amortization     2,610,442       1,403,262       68,874       37,929       4,120,507             4,120,507  
Capital expenditures                 5,806,435                           5,806,435  

 

Three-Month

Period Ended

June 30, 2020

  Bromine*  

Crude

 Salt*

 

Chemical

 Products

  Natural Gas  

Segment

 Total

  Corporate   Total
Net revenue
(external customers)
  $ 4,487,017     $ 872,466     $     $     $ 5,359,483     $     $ 5,359,483  
Net revenue
(intersegment)
                                         
Income(loss) from operations before income tax benefit     (1,479,084 )     (611,472 )     (654,652 )     (53,270 )     (2,798,478 )     (155,074 )     (2,953,552 )
Income tax benefit     350,708       172,849       149,076             672,633             672,633  
Income (loss) from operations after
income tax benefit
    (1,128,376 )     (438,623 )     (505,576 )     (53,270 )     (2,125,845 )     (155,074 )     (2,280,919 )
Total assets     115,956,839       38,299,428       108,862,565       1,599,014       264,717,846       70,367       264,788,213  
Depreciation and amortization     3,038,936       919,003       111,797       34,598       4,104,334             4,104,334  
Capital expenditures                 2,443,931             2,443,931             2,443,931  

 

* Certain common production overheads, operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were split by reference to the average selling price and production volume of respective segment.

 

14

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 14 – BUSINESS SEGMENTS – Continued

 

Six-Month

Period Ended

June 30, 2021

  Bromine*  

Crude

 Salt*

 

Chemical

 Products

  Natural Gas  

Segment

 Total

  Corporate   Total
Net revenue
(external customers)
  $ 14,836,428     $ 1,570,823     $     $     $ 16,407,251     $     $ 16,407,251  
Net revenue
(intersegment)
                                         
Loss from operations before income tax benefit     1,402,668       (1,588,020 )     (1,487,781 )     (117,637 )     (1,790,770 )     (3,873,463 )     (5,664,233 )
Income tax benefit     (353,828 )     397,466       343,591             387,229             387,229  
Loss from operations after income tax benefit     1,048,840       (1,190,554 )     (1,144,190 )     (117,637 )     (1,403,541 )     (3,873,463 )     (5,277,004 )
Total assets     138,872,887       32,840,392       122,381,338       1,846,367       295,940,984       484,076       296,425,060  
Depreciation and amortization     5,531,131       2,480,722       137,481       75,530       8,224,864             8,224,864  
Capital expenditures                 5,806,435                           5,806,435  

 

Six-Month

Period Ended

June 30, 2020

  Bromine*  

Crude

 Salt*

 

Chemical

 Products

  Natural Gas  

Segment

 Total

  Corporate   Total
Net revenue
(external customers)
  $ 4,949,863     $ 967,290     $     $     $ 5,917,153     $     $ 5,917,153  
Net revenue
(intersegment)
                                         
Loss from operations before income tax benefit     (4,345,522 )     (2,125,054 )     (1,365,561 )     (102,116 )     (7,938,253 )     149,272       (7,788,981 )
Income tax benefit     1,068,146       551,245       309,685             1,929,076             1,929,076  
Loss from operations after income tax benefit     (3,277,376 )     (1,573,809 )     (1,055,876 )     (102,116 )     (6,009,177 )     149,272       (5,859,905 )
Total assets     115,956,839       38,299,428       108,862,565       1,599,014       264,717,846       70,367       264,788,213  
Depreciation and amortization     5,236,780       2,027,445       225,281       69,718       7,559,224             7,559,224  
Capital expenditures     3,157,669       646,752       6,055,721             9,860,142             9,860,142  

 

* Certain common production overheads, operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were split by reference to the average selling price and production volume of the respective segment.

 

15

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2021

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 14 – BUSINESS SEGMENTS – Continued 

                                 
    Three-Month Period Ended June 30,   Six-Month Period Ended June 30,
Reconciliations   2021   2020   2021   2020
Total segment operating loss   $ 1,299,636     $ (2,798,478 )   $ (1,790,770 )   $ (7,938,253 )
Corporate costs     (3,193,107 )     (136,956 )     (3,279,313 )     (233,059 )
Unrealized gain on translation of intercompany balance     (489,338 )     (18,118 )     (594,150 )     382,331  
Loss from operations     (2,382,809 )     (2,953,552 )     (5,664,233 )     (7,788,981 )
Other income, net of expense     36,069       36,300       71,660       75,528  
Loss before taxes   $ (2,346,740 )   $ (2,917,252 )   $ (5,592,573 )   $ (7,713,453 )

 

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2021.

 

Number   Customer  

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of Total Revenue (%)

1   Shandong Morui Chemical Company Limited   $ 1,752     $ 420     $     $ 2,172       19.5 %
2   Shouguang Weidong Chemical Company Limited   $ 1,222     $ 390     $     $ 1,612       14.5 %
3   Shandong Brother Technology Limited   $ 1,196     $ 313     $     $ 1,509       13.5 %

 

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2021.

 

Number   Customer  

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%)

1   Shandong Morui Chemical Company Limited   $ 2,648     $ 589     $     $ 3,237       19.7 %
2   Shouguang Weidong Chemical Company Limited   $ 1,925     $ 498     $     $ 2,423       14.8 %
3   Shandong Brother Technology Limited   $ 1,830     $ 485     $     $ 2,315       14.1 %

 

The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2020.

 

Number   Customer  

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

   

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%)

1   Shandong Morui Chemical Company Limited   $ 809     $ 321     $     $ 1,130     21.1 %
2   Shouguang Weidong Chemical Company Limited   $ 982     $ 251     $     $ 1,233     23 %
3   Shandong Brother Technology Limited   $ 550     $ 300     $     $ 850     15.8 %
4   Shandong Shouguang Shenrunfa Ocean Chemical Company Limited   $ 711     $     $     $ 711     13.3 %
5   Dongying Bomeite Chemical Company Limited   $ 537     $     $     $ 537     10 %

 

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2020.

 

Number   Customer  

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%)

1   Shandong Morui Chemical Company Limited   $ 879     $ 321     $     $ 1,200       20.3 %
2   Shouguang Weidong Chemical Company Limited   $ 1,047     $ 251     $     $ 1,298       21.9 %
3   Shandong Brother Technology Limited   $ 609     $ 300     $     $ 909       15.4 %
4   Shandong Shouguang Shenrunfa Ocean Chemical Company Limited   $ 768     $     $     $ 768       13 %
5   Dongying Bomeite Chemical Company Limited   $ 607     $     $     $ 607       10.3 %

 

 

16

 

NOTE 15– CUSTOMER CONCENTRATION

 

During the six-month period ended June 30, 2021, the Company sold 66.4% of its products to its top five customers, respectively. As of June 30, 2021, amounts due from these customers were $2,878,885.

 

During the six-month period ended June 30, 2020, the Company sold 82.4% of its products to its top five customers, respectively. As of June 30, 2020, amounts due from these customers were $2,488,001.

 

NOTE 16– MAJOR SUPPLIERS

 

During the six-month period ended June 30, 2021 the Company purchased 100% of its raw materials from its top five suppliers.  As of June 30, 2021, amounts due to those suppliers were $412,601.

 

During the six-month period ended June 30, 2020 the Company purchased 100% of its raw materials from its top five suppliers.  As of June 30, 2020, amounts due to those suppliers were $286,401.

 

NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying values of financial instruments, which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term nature of these instruments.  There were no material unrecognized financial assets and liabilities as of June 30, 2021 and December 31, 2020.

 

NOTE 18 – CAPITAL COMMITMENT AND OTHER SERVICE CONTRACTUAL OBLIGATIONS

 

The following table sets forth the Company’s contractual obligations as of June 30, 2021:

 

    Property Management Fees   Capital Expenditure
Payable within:                
the next 12 months   $ 96,574     $ 10,371,657  
the next 13 to 24 months     96,574       761,319  
the next 25 to 36 months            
Total   $ 193,148     $ 11,132,976  

 

NOTE 19 –LOSS CONTINGENCIES

 

On or about August 3, 2018, written decisions of administration penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo Tu Zi Fa Gao Zi [2018] No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu Zi Fa Gao Zi [2018] No. 296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company Limited (“SCHC”) by Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as respondent respectively thereof. The Decisions challenged the land use of Factory nos. 2, 9, 7, 4, 8 and 10, respectively, and alleged, among other things, that SCHC had illegally occupied and used the land in the total area of approximately 52,674 square meter, on which Factory nos. 2, 9, 7, 4, 8 and 10 were built, respectively. The Written Decisions ordered SCHC, among other things, to return the land subject to the Written Decisions to its respective legal owner, restore the land to its original state, and demolish or confiscate all the buildings and facilities thereon and pay monetary penalty of approximately RMB 1.3 million ($184,000) in the aggregate. Each of the Written Decisions shall be executed within 15 days upon serving on SCHC. Additional interest penalty shall be imposed at a daily rate of 3% in the event that SCHC does not make the monetary penalty payment in a timely manner. Subsequently, the Bureau filed enforcement actions to the People’s Court of Shouguang City, Shandong Province (the “Court”), naming SCHC as enforcement respondent and alleged, among other things, that SCHC failed to perform its obligations under each of the Written Decisions within the specified timeframe. The enforcement proceedings sought court orders to enforce the Written Decisions. On May 5, 2019, written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 384, (2019) Lu 0783 Xing Shen No. 385, (2019) Lu 0783 Xing Shen No. 389, (2019) Lu 0783 Xing Shen No. 390, (2019) Lu 0783 Xing Shen No. 393, and (2019) Lu 0783 Xing Shen No. 394, respectively (together, the “Court Rulings”) were made by the Court in favor of the Bureau. The Court orders, among other relief, to enforce each of the Written Decisions, to return each subject land to its legal owners and demolish or confiscate the buildings and facilities thereon and restore the land to its original state within 10 days from the service of the Court Rulings on SCHC. The Court Rulings became enforceable immediately upon service on SCHC on May 5, 2019.

 

In the last twenty years, to the Company’s knowledge, there were no government regulations requiring bromine manufacturers to obtain land use and planning approval document. As such, the Company believes most of the bromine manufacturers in Shouguang City do not have land use and planning approval documents and lease their land parcels from the village associations. They are facing the same issues in connection with land use and planning as the Company. To the Company’s knowledge, the local government has submitted its plan to solve the issues to higher authority and are waiting for approval from the higher authority.

 

The Company is in the process of resolving the issues in connection with SCHC’s land use and planning diligently. The Company has been in discussions closely with the local government authorities with the help from Shouguang City Bromine Association to seek reliefs and, based on verbal confirmation by local government authorities, believes the administrative penalties imposed by the Bureau according to the Written Decisions are being re-assessed by local government authorities and may be revoked. Pursuant to a Written Application dated October 28, 2019 addressed to the Court by the Bureau, the Bureau withdrew its application for the enforcement proceedings regarding the administrative penalty imposed on Factory No. 7, Factory No. 8 and Factory No.10. Pursuant to a written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 389 Zhi Yi, dated November 25, 2020, the Court orders to terminate the enforcement of the case captioned (2019) Lu 0783 Xing Shen No. 389. Production of Factory No. 7 was allowed to resume in April 2019. The Company received a notification from the Shouguang City Government in February 2019 informing the Company that Factory No. 1, No.4, No. 7 and No. 9 have passed inspection and were approved to resume operation.

 

In addition, on August 28, 2019, the People’s Government of Shandong Province, issued a regulation titled “Investment Project Management Requirements of Chemical Companies in Shandong Province” permitting the construction of facilities on existing sites or infrastructure of bromine manufacturing and other chemical industry-related types of projects (clause 11 of section 3). The Company believes that the goal of the government is to standardize and regulate the industry and not to demolish the facilities or penalize the manufacturers. As of the date of this report, the Company has not been notified by the local government that it will take any measure to enforce the administrative penalties. Based on information known to date, the Company believes that it is remote that the Written Decisions or Court Rulings will be enforced within the expected timeframe and a material penalty or costs and expenses against the Company will result. However, there can be no assurance that there will not be any further enforcement action, the occurrence of which may result in further liabilities, penalties and operational disruption.

 

In view of the above facts and circumstances, the Company believes that it is not necessary to accrue for any estimated losses or impairment as of June 30, 2021.

 

NOTE 20 - SUBSEQUENT EVENT

 

None.

 

17

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Note Regarding Forward-Looking Statements

 

The discussion below contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act.  We have used words such as “believes,” “intends,” “anticipates,” “expects” and similar expressions to identify forward-looking statements. These statements are based on information currently available to us and are subject to a number of risks and uncertainties that may cause our actual results of operations, financial condition, cash flows, performance, business prospects and opportunities and the timing of certain events to differ materially from those expressed in, or implied by, these statements.  Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances, or for any other reason. 

 

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. SCHC is also planning to be involved in activities related to seawater desalination, seawater desalination technology research and service and to handle the import and export of goods and technologies within the scope permitted by the state.

 

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 and that the Company expected to have a full understanding of the implications within the next two months. 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 can 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, has started discussions with the local government agencies. The local governmental agencies confirmed the facts that their initial requirements for the bromine industry did not include the project approval, the planning approval and the land use rights approval and that those three additional approvals were new requirements of the provincial government. The Company understood from the local government that it has been coordinating with several government agencies to solve these three outstanding approval issues in a timely manner and that all the affected bromine plants are not allowed to commence production prior to obtaining those approvals.

 

18

 

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 can 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 take the steps 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 by the second half of 2021 due to the COVID-19 impact.

 

On November 24, 2017, the Company 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 plants would have to be relocated to a new industrial park called Bohai Marine Fine Chemical Industry Park. Chemical companies that were not being asked to move into the park will be permanently closed. Although our chemical plants 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. Since our chemical factories closed, the Company has secured from the government the land use rights for its chemical plants located at the Bohai Park and presented a completed construction design draft and other related documents to the local authorities for approval. On January 6, 2020, the Company received the environmental protection approval by the government of Shouguang City, Shandong Province for the proposed Yuxin Chemical factory. The Company began the construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020 and basically completed the civil works by end of June 2021 . Equipment installation and testing is expected to take 6 months or somewhat longer if issues occur. Trial production should take another six months.

  

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 has completed the test production at its first natural gas well in Sichuan Province and has 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 whole natural gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve the related land issue. Until these approvals have been received, the Company has to temporarily halt trial production at its natural gas well in Daying.

 

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 condensed consolidated financial statements and the information presented below as of and for the quarter ended June 30, 2021. The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report.

 

19

 

Our current corporate structure chart is set forth in the following diagram:

 

 

 

As a result of our acquisitions of SCHC and SYCI, our historical financial statements and the information presented below reflects the accounts of SCHC, SYCI and DCHC. The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report.

 

20

 

RESULTS OF OPERATIONS

 

The following table presents certain information derived from the condensed consolidated statements of operations, cash flows and stockholders equity for the three-month and six-month periods ended June 30, 2021 and 2020. 

 

Comparison of the Three-Month Period Ended June 30, 2021 and 2020

 

    Three-Month Period
  Ended June 30, 2021
  Three-Month Period
Ended June 30, 2020
  Percent Change
Increase/ (Decrease)
Net revenue   $ 11,148,008     $ 5,359,483       108 %
Cost of net revenue     (6,915,774 )     (5,022,896 )     38 %
Gross profit     4,232,234       336,587       1157 %
Sales, marketing and other operating expenses     (15,625 )     (10,838 )     44 %
Direct labor and factory overheads incurred during plant shutdown     (1,394,717 )     (1,737,599 )     (20 %)
General and administrative expenses     (5,204,701 )     (1,541,702 )     238 %
Loss from operations     (2,382,809 )     (2,953,552 )     (19 %)
Other income     36,069       36,300       (1 %)
Loss before taxes     (2,346,740 )     (2,917,252 )     (20 %)
Income tax benefit     (356,480 )     672,633       (153 %)
Net loss   $ (2,703,220 )   $ (2,244,619 )     20 %

 

Net revenue.  The table below shows the changes in net revenue in the respective segment of the Company for the three-month period ended June 30, 2021 as compared to the same period in 2020:

 

    Net Revenue by Segment    
    Three-Month Period Ended   Three-Month Period Ended   Percent Change
Increase
    June 30, 2021   June 30, 2020   of Net Revenue
Segment       % of total       % of total    
Bromine   $ 10,025,438       89.93 %   $ 4,487,017       83.72 %     123 %
Crude Salt     1,122,570       10.07 %     872,466       16.28 %     29 %
Chemical Products                                
Natural Gas                                
Total sales   $ 11,148,008       %     $ 5,359,483       100 %     108 %

 

Bromine and crude salt segments   Three-Month Period Ended   Percentage Change
product sold in tonnes   June 30, 2021   June 30, 2020   Increase (Decrease)
Bromine     1,805       1,222       48 %
Crude Salt     43,104       53,532       (19 %)

 

Bromine segment

 

For the three-month periods ended June 30, 2021 and 2020, the net revenue for the bromine segment was $10,025,438 and $4,487,017, respectively, due to an increase in selling prices and volume in the second quarter of 2021. 

 

Crude salt segment

 

For the three-month periods ended June 30, 2021 and 2020, the net revenue for the crude salt was $1,122,570 and $872,466 mainly due to an increase in selling prices.. .

 

Chemical products segment

 

For the three-month periods ended June 30, 2021 and 2020, 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 of the closure, there were no chemical products for sale for the three-month period ended June 30, 2021. We are setting up a new factory in Bohai Park.

 

Natural gas segment

 

For the three-month period ended June 30, 2021 and 2020, the net revenue for the natural gas was $0.

 

21

 

Cost of Net Revenue

 

    Cost of Net Revenue by Segment   Percent Change
    Three-Month Period Ended   Three-Month Period Ended   of Cost of
    June 30, 2021   June 30, 2020   Net Revenue
Segment       % of total       % of total    
Bromine   $ 5,553,493       80.3 %   $ 4,269,239       85 %     30 %
Crude Salt     1,362,281       19.7 %     753,657       15 %     81 %
Chemical Products                              
Natural Gas                              
Total   $ 6,915,774       100 %   $ 5,022,896       100 %     38 %

 

Cost of net revenue reflects mainly the raw materials consumed, 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. 

 

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)

Three-month period ended June 30, 2020 31,506     15%  
Three-month period ended June 30, 2021 31,506     23%  
Variance of the three-month period ended June 30, 2021 and 2020     8%  

 

(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 of all the seven factories including those that have not commenced operations.

 

Our utilization ratio was 23% for the three-month period ended June 30, 2021 compared to 15% recorded for the three-month period ended June 30, 2020 mainly due to the overall market environment that has been slowly recovering.

 

Bromine segment

 

For the three-month period ended June 30, 2021 the cost of net revenue for the bromine segment was $5,553,493. This $1,284,254 was primarily due to an increase in manufacturing unit overhead, which was primarily due to an increase in the number of units sold during the three months ended June 30, 2021.

 

For the three-month period ended June 30, 2020 the cost of net revenue for the bromine segment was $4,269,239.

 

Crude salt segment

 

For the three-month period ended June 30, 2021 the cost of net revenue for the crude salt segment was $1,362,281.

 

For the three-month period ended June 30, 2020 the cost of net revenue for the crude salt segment was $753,657.

 

Chemical products segment

 

Cost of net revenue for our chemical products segment for the three-month period ended June 30, 2021 and 2020 was $0.

 

Natural gas segment

 

Cost of net revenue for our natural gas segment for the three-month period ended June 30, 2021 and 2020 was $0.

 

22

 

Gross Profit. Gross profit was $4,232,234, or 38%, of net revenue for three-month period ended June 30, 2021, representing a increase of $3,895,647, as compared to a gross profit of $336,587, or 6%, of net revenue for the same period in 2020.

 

    Gross Profit (Loss) by Segment   % Point Change
    Three-Month Period Ended   Three-Month Period Ended   of Gross
    June 30, 2021   June 30, 2020   Profit Margin
Segment       Gross Profit  Margin       Gross Profit Margin    
Bromine   $ 4,471,945       45 %   $ 217,778       5 %     40 %
Crude Salt     (239,711     (21 %)     118,809       14 %     (35 %)
Chemical Products                                
Natural Gas                              
Total Gross Profit   $ 4,232,234       38 %   $ 336,587       6 %     32 %

 

Bromine segment

 

For the three-month period ended June 30, 2021, the gross profit margin for our bromine segment was 45%. This 40% increase was due to the increase in the selling price and volume of bromine sold in the second quarter of 2021.

 

For the three-month period ended June 30, 2020, the gross profit margin for our bromine segment was 5%.

 

Crude salt segment

 

For the three-month period ended June 30, 2021, the gross loss margin for our crude salt segment was 21%.

 

For the three-month period ended June 30, 2020, the gross profit margin for our crude salt segment was 14%

 

Direct labor and factory overheads incurred during plant shutdown The direct labor and factory overhead costs (including depreciation of plant and machinery) in the amount of $1,394,717 and $1,737,599 incurred for the three-month period end June 30, 2021 and 2020, respectively, were that of the factories that have not resumed operations in the three-month periods ended June 30, 2021 and 2020.

 

On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang City of PRC that stated that production at all its bromine and crude salt and chemical factories should be halted with immediate effect in order for the Company to perform rectification and improvement in accordance with the county’s new safety and environmental protection requirements. 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 a result, direct labor and factory overhead costs (including depreciation of plant and machinery) in the amount of $1,394,717 and $1,737,599 incurred for the three-month periods ended June 30, 2021 and 2020, respectively, of factories that have not resumed production were presented as part of the operating expense.

 

General and Administrative Expenses. General and administrative expenses were $5,204,701 for the three-month period ended June 30, 2019, an increase of $3,662,999 (or 138%) as compared to $1,541,702 for the same period in 2020.

 

Income (loss) from Operations Loss from operations was $2,382,809 for the three-month period ended June 30, 2021, compared to an income of $2,953,552 in the same period in 2020.

 

    Loss from Operations by Segment
    Three-Month Period Ended
June 30, 2021
  Three-Month Period Ended
June 30, 2020
Segment:       % of total       % of total
Bromine   $ 2,682,233       206 %   $ (1,479,084 )     53 %
Crude Salt     (578,435 )     (45 %)     (611,472 )     22 %
Chemical Products     (741,312 )     (57 %)     (654,652 )     23 %
Natural Gas     (62,850 )     (4 %)     (53,270 )     2 %
Loss from operations before corporate costs     1,299,636       100 %     (2,798,478 )     100 %
Corporate costs     (3,193,107 )             (136,956 )        
Unrealized gain on translation of Intercompany balance     (489,338 )             (18,118 )        
Loss from operations   $ (2,382,809 )           $ (2,953,552 )        

 

23

 

Bromine segment

 

Income from operations from our bromine segment was $2,682,233 for the three-month period ended June 30, 2021, compared to loss from operations of $1,479,084 in the same period in 2020.

 

Crude salt segment

 

Loss from operations from our crude salt segment was $578,435 for the three-month period ended June 30, 2021, compared to loss from operations of $611,472 in the same period in 2020.

 

Chemical products segment

 

Loss from operations from our chemical products segment was $741,312 for the three-month period ended June 30, 2021, compared to loss from operations of $654,652 in the same period in 2020.

 

Natural gas segment

 

Loss from operations from our natural gas segment was $62,850 for the three -month period ended June 30, 2021, compared to a loss of $53,270 in the same period in 2020.

 

Other Income, Net Other income, net of $36,069 represented bank interest income, net of capital lease interest expense for the three -month period ended June 30, 2021, an decrease of $231 (or approximately 1%) as compared to the same period in 2020.

 

Net Income (loss) Net loss was $2,703,220 for the three-month period ended June30, 2021, compared to a net loss of $2,244,619 in the same period in 2020.

 

Effective Tax Rate Our effective income tax benefit rate for the three-month period ended June 30, 2021 and 2020 were (15%) and 23% respectively. The effective tax rate for the three-month period ended June 30, 2021 was 38% lower than the PRC statutory income tax rate of 25% mainly due to non-taxable items in connection with the unrealized exchange gain for the Company off set by non-deductible expense.

 

Comparison of the Six-Month Period Ended June 30, 2021 and 2020

 

    Six-Month Period
Ended June 30, 2021
  Six-Month Period
Ended June 30, 2020
  Percent Change
Increase/
(Decrease)
Net revenue   $ 16,407,251     $ 5,917,153       177 %
Cost of net revenue     (11,097,163 )     (5,944,216 )     87 %
Gross profit     5,310,088       (27,063 )     19721 %
Sales, marketing and other operating expenses     (25,170 )     (13,081 )     92 %
Direct labor and factory overheads incurred during plant shutdown     (4,008,200 )     (5,348,022 )     (25 %)
Other operating loss           (15,776 )     (100 %)
General and administrative expenses     (6,940,951 )     (2,385,039 )     191 %
Loss from operations     (5,664,233 )     (7,788,981 )     (27 %)
Other income     71,660       75,528       (5 %)
Loss before taxes     (5,592,573 )     (7,713,453 )     (27 %)
Income tax benefit     387,229       1,929,076       (80 %)
Net loss   $ (5,205,344 )   $ (5,784,377 )     (10 %)

 

24

 

Net revenue.  The table below shows the changes in net revenue in the respective segment of the Company for the six-month period ended June 30, 2021 as compared to the same period in 2020:

 

    Net Revenue by Segment    
    Six-Month Period Ended   Six-Month Period Ended   Percent Increase
    June 30, 2021   June 30, 2020   of Net Revenue
Segment       % of total       % of total    
Bromine   $ 14,836,428       90 %   $ 4,949,863       84 %     200 %
Crude Salt     1,570,823       10 %     967,290       16 %     62 %
Chemical Products                                
Natural Gas                                
Total sales   $ 16,407,251       100 %   $ 5,917,153       100 %     177 %

 

Bromine and crude salt segments   Six-Month Period Ended   Percentage Change
product sold in tonnes   June 30, 2021   June 30, 2020   Increase
Bromine (excluding volume sold to SYCI)     2,759       1,344       105 %
Crude Salt     63,540       58,873       8 %

 

Bromine segment

 

Net revenue from our bromine segment increased to $14,836,428 for the six-month period ended June 30, 2021 compared to $4,949,863 for the same period in 2020 respectively, due to the higher selling price and selling quantity.

 

Crude salt segment

 

Net revenue from our crude salt segment increased to $1,570,823 for the six-month period ended June 30, 2021 compared $967,290 for the same period in 2020, respectively, due to the higher selling price and selling quantity.

 

Chemical products segment

 

For the six-month period ended June 30, 2021 and 2020, the net revenue for the chemical products segment was $0 due to the closure of our chemical factories since September 1, 2017.

 

Natural gas segment

 

For the six-month period ended June 30, 2021 and 2020, the net revenue for the natural gas was $0.

 

Cost of Net Revenue

 

    Cost of Net Revenue by Segment   % Change
    Six-Month Period Ended   Six-Month Period Ended   of Cost of
    June 30, 2021   June 30, 2020   Net Revenue
Segment       % of total       % of total    
Bromine   $ 9,067,539       82 %   $ 4,879,059       82 %     86 %
Crude Salt     2,029,624       18 %     1,065,157       18 %     91 %
Chemical Products                              
Natural Gas                              
Total   $ 11,097,163       100 %   $ 5,944,216       100 %     87 %

 

Cost of net revenue reflects mainly the raw materials consumed-direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. 

 

25

 

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)

Six-month period ended June 30, 2020 31,506     17%  
Six-month period ended June 30, 2021 31,506     27%  
Variance of the six-month period ended June 30, 2021 and 2020     10%  

 

(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 of all the seven factories including those that have not commenced operations.

 

Our utilization ratio was 27% for the six-month period ended June 30, 2021 compared to 17% recorded for the six-month period ended June 30, 2020.

 

Bromine segment

 

For the six-month period ended June 30, 2021 the cost of net revenue for the bromine segment was $9,067,539. This $4,188,480 increase was primarily attributable to the increase in quantity sold leads to higher costs.

 

For the six-month period ended June 30, 2020 the cost of net revenue for the bromine segment was $4,879,059.

 

Crude salt segment

 

For the six-month period ended June 30, 2021 the cost of net revenue for the crude salt segment was $2,029,624.The cost of net revenue for our crude salt segment for the six-month period ended June 30, 2020 was $1,065,157. This $964,467 increase was primarily attributable to the increase in factory overhead per unit produced, which was mainly caused by the increase in depreciation charges of plant and equipment for three factories that resumed operation in the three-month ended June 30, 2020.

 

For the six-month period ended June 30, 2020 the cost of net revenue for the crude salt segment was $1,065,157.

 

Natural gas segment

 

Cost of net revenue for our natural gas segment for the six-month period ended June 30, 2021 and 2020 was $0.

 

Gross Profit. Gross loss was $5,310,088, or 32%, of net revenue for six-month period ended June 30, 2021 compared to $27,063, or 0.5%, of net revenue for the same period in 2020.

 

    Gross Profit (Loss) by Segment   % Point Change
    Six-Month Period Ended   Six-Month Period Ended   of Gross
    June 30, 2021   June 30, 2020   Profit Margin
Segment       Gross Profit (loss) Margin       Gross Profit Margin    
Bromine   $ 5,768,889       39 %   $ 70,804       1 %     38 %
Crude Salt     (458,801 )     (29 %)     (97,867 )     (10 %)     (19 %)
Chemical Products                                
Natural Gas                       %        
Total Gross Profit   $ 5,310,088       32 %   $ (27,063 )     (0.5 %)     32 %

 

Bromine segment

 

For the six-month period ended June 30, 2021, the gross profit margin for our bromine segment was 39%. This 38% increase was due to the higher selling price and selling quantity.

 

For the six-month period ended June 30, 2020, the gross profit margin for our bromine segment was 1%.

 

Crude salt segment

 

For the six-month period ended June 30, 2021, the gross loss margin for our crude salt segment was 29%.

 

For the six-month period ended June 30, 2020 the gross loss margin for our crude salt segment was 10%.

 

Chemical products segment

 

For the six-month period ended June 30, 2021, the gross profit margin for our chemical segment was 0% due to the closure of our plant and factories to perform rectification and improvement. As a result of the course, there were no chemical products for sale for the six-month period ended June 30, 2021.

 

26

 

Direct labor and factory overheads incurred during plant shutdown The direct labor and factory overhead costs (including depreciation of plant and machinery) in the amount of $4,008,200 and $5,348,022 incurred for the six-month period end June 30, 2021 and 2020, respectively, were for factories that have not resumed production in the six-month periods ended June 30, 2021 and 2020. 

 

General and Administrative Expenses. General and administrative expenses were $6,940,951 for the six-month period ended June 30, 2021, a increase of $4,555,912 (or 191%) as compared to$2,385,039 for the same period in 2020.

 

Income (Loss) from Operations. Loss from operations was $5,664,233 for the six-month period ended June 30, 2021, compared to a loss of $7,788,981 in the same period in 2020.

 

    Income(Loss) from Operations by Segment
    Six-Month Period Ended
June 30, 2021
  Six-Month Period Ended
June 30, 2020
Segment:       % of total       % of total
Bromine   $ 1,402,668       (79 %)   $ (4,345,522 )     55 %
Crude Salt     (1,588,020 )     89 %     (2,125,054 )     27 %
Chemical Products     (1,487,781 )     83 %     (1,365,561 )     17 %
Natural Gas     (117,637 )     7 %     (102,116 )     1 %
Loss from operations before corporate costs     (1,790,770 )     100 %     (7,938,253 )     100 %
Corporate costs     (3,279,313 )             (233,059 )        
Unrealized gain on translation of intercompany balance     (594,150 )             382,331          
Loss from operations before taxes   $ (5,664,233 )           $ (7,788,981 )        

 

Bromine segment

 

Income from operations from our bromine segment was $1,402,668 for the six-month period ended June 30, 2021, compared to a loss of $4,345,522 in the same period in 2020.

 

Crude salt segment

 

Loss from operations from our crude salt segment was $1,588,020 for the six-month period ended June 30, 2021, compared to a loss of $2,125,054 in the same period in 2020.

 

Chemical products segment

 

Loss from operations from our chemical products segment was $1,487,781 for the six-month period ended June 30, 2021, compared to a loss of $1,365,561 in the same period in 2020.

 

Natural gas segment

 

Loss from operations from our natural gas segment was $117,637 for the six-month period ended June 30, 2021, compared to a loss of $102,116 in the same period in 2020.

 

Other Income, Net. Other income, net of $71,660 represented bank interest income, net of capital lease interest expense for the six -month period ended June 30, 2021, a decrease of $3,868 (or approximately 5%) as compared to the same period in 2020.

 

Net Income (Loss). Net loss was $5,205,344 for the six-month period ended June 30, 2021, compared to a net loss of $5,784,377 in the same period in 2020.

 

Effective Tax Rate. Our effective income tax benefit rate for the six-month period ended June 30, 2021 and 2020 was 7% and 25%, respectively. The effective tax rate for the three-month period ended June 30, 2021 was 18% lower than the PRC statutory income tax rate of 25% mainly due to non-taxable items in connection with the unrealized exchange gain for the Company off set by non-deductible expense.

 

27

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2021, cash and cash equivalents were $97,058,027 as compared to $94,222,538 as of December 31, 2020. The components of this increase of $2,835,489 are reflected below.

 

Statement of Cash Flows

 

    Six-Month Period Ended June 30,
    2021   2020
Net cash (used in) provided by operating activities   $ 7,025,775     $ 1,177,752  
Net cash used in investing activities     (5,806,435 )     (9,860,142 )
Net cash used in financing activities     (296,597 )     (264,976 )
Effects of exchange rate changes on cash and cash equivalents     1,912,746       (1,382,029 )
Net decrease in cash and cash equivalents   $ 2,835,489     $ (10,329,395 )

     

For the six-month period ended June 30, 2021, we met our working capital and capital investment requirements by using cash on hand.

 

Net Cash (used in) Provided by Operating Activities

 

During the six-month period ended June 30, 2021, cash flow provided by operating activities of approximately $7.02 million was mainly due to a decrease in accounts receivable of $1.8 million, and a non-cash adjustment related to depreciation and amortization of property, plant and equipment, reduced by a net loss of $8.2 million and an adjustment for income tax benefit of $0.4 million.

 

During the six-month period ended June 30, 2020, cash flow provided by operating activities of approximately $1.18 million was mainly due to a decrease in accounts receivable of $1.8 million, and a non-cash adjustment related to depreciation and amortization of property, plant and equipment, reduced by a net loss of $7.6 million and an adjustment for income tax benefit of $1.93million.

 

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 June 30, 2021 and December 31, 2020.

 

    June 30, 2021   December 31, 2020
        % of total       % of total
Aged 1-30 days   $ 3,404,318       72 %   $ 3,801,417       58 %
Aged 31-60 days     1,336,941       28 %     2,720,381       42 %
Aged 61-90 days           %              
Aged 91-120 days                        
Aged 121-150 days                        
Aged 151-180 days                       -49  
Aged 181-210 days                       -41  
Aged 211-240 days                        
Total   $ 4,741,259       100 %   $ 6,521,798       100 %

 

The overall accounts receivable balance as of June 30, 2021 decreased by $1,780,539, as compared to those of December 31, 2020. 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. No allowance for doubtful accounts for the three-month and six-month periods ended June 30, 2021 is required.

 

Inventory

 

Our inventory consists of the following:

 

    June 30, 2021   December 31, 2020
        % of total       % of total
Raw materials   $ 56,267       8 %   $ 21,484       5 %
Finished goods     621,151       92 %     398,125       95 %
Total   $ 677,418       100 %   $ 419,609       100 %

 

The net inventory level as of June 30, 2021 increased by $257,809 (or 61%), as compared to the net inventory level as of December 31, 2020.

 

28

 

Raw materials increased by $34,783 as of June 30, 2021 as compared to December 31, 2020.

 

Our finished goods increased by $223,026 as of June 30, 2021 as compared to December 31, 2020.

 

Net Cash Used in Investing Activities

 

For the six-month period ended June 30, 2021, we used approximately $5.8 million to acquire property, plant and equipment.

 

For the six-month period ended June 30, 2020, we used approximately $9.9 million to acquire property, plant and equipment.

 

Net Cash Used in Financing Activities

 

For the six-month period ended June 30, 2021 and 2020, we used $0.3 million to repay finance lease obligation. 

 

We believe that our available funds and cash flows generated from operations will be sufficient to meet our anticipated ongoing operating needs and our obligations as they full due in the next twelve (12) months.

 

We had available cash of approximately $97 million at June 30, 2021, all 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, risks associated with the COVID-19 pandemic 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 June 30, 2018 is provided in the notes to our consolidated financial statements. See “Notes to Condensed Consolidated Financial Statements, Note 17 – Capital Commitment and Operating Lease Commitments”.

 

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 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. We base its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions. We have identified the following critical accounting policies and estimates used by us in the preparation of our financial statements: accounts receivable and allowance for doubtful accounts, leases, property, plant and equipment, recoverability of long lived assets, revenue recognition, income taxes, loss contingencies, and stock-based compensation. These policies and estimates are described in the Company’s 2019 Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

29

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q.

 

(b) Changes in internal controls

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On or about August 3, 2018, written decisions of administration penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo Tu Zi Fa Gao Zi [2018] No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu Zi Fa Gao Zi [2018] No. 296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company Limited (“SCHC”) by Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as respondent respectively thereof. The Decisions challenged the land use of Factory nos. 2, 9, 7, 4, 8 and 10, respectively, and alleged, among other things, that SCHC had illegally occupied and used the land in the total area of approximately 52,674 square meters, on which Factory nos. 2, 9, 7, 4, 8 and 10 were built, respectively. The Written Decisions ordered SCHC, among other things, to return the land subject to the Written Decisions to its respective legal owner, restore the land to its original state, and demolish or confiscate all the buildings and facilities thereon and pay monetary penalty of approximately RMB 1.3 million ($184,000) in the aggregate. Each of the Written Decisions shall be executed within 15 days upon serving on SCHC. Additional interest penalty shall be imposed at a daily rate of 3% in the event that SCHC does not make the monetary penalty payment in a timely manner. Subsequently, the Bureau filed enforcement actions to the People’s Court of Shouguang City, Shandong Province (the “Court”), naming SCHC as enforcement respondent and alleged, among other things, that SCHC failed to perform its obligations under each of the Written Decisions within the specified timeframe. The enforcement proceedings sought court orders to enforce the Written Decisions. On May 5, 2019, written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 384, (2019) Lu 0783 Xing Shen No. 385, (2019) Lu 0783 Xing Shen No. 389, (2019) Lu 0783 Xing Shen No. 390, (2019) Lu 0783 Xing Shen No. 393, and (2019) Lu 0783 Xing Shen No. 394, respectively (together, the “Court Rulings”) were made by the Court in favor of the Bureau. The Court orders, among other relief, to enforce each of the Written Decisions, to return each subject land to its legal owner and demolish or confiscate the buildings and facilities thereon and restore the land to its original state within 10 days from the service of the Court Rulings on SCHC. The Court Rulings became enforceable immediately upon service on SCHC on May 5, 2019.

 

In the last twenty years, to the Company’s knowledge, there were no government regulations requiring bromine manufacturers to obtain land use and planning approval document. As such, the Company believes most of the bromine manufacturers in Shouguang City do not have land use and planning approval documents and lease their land parcels from the village associations. They are facing the same issues in connection with land use and planning as the Company.

 

The Company is in the process of resolving the issues in connection with SCHC’s land use and planning diligently. The Company has been in discussions 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.

 

30

 

Item 1A. Risk Factors

 

This information has been omitted based on the Company’s status as a smaller reporting company.

 

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.

Description

 

31.1                          Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                          Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  

32.1                          Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101                          The following financial statements from Gulf Resources, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Other Comprehensive Income (Loss); (iii) the Consolidated Statements of Changes in Equity; (iv) the Consolidated Statement of Cash Flows; and, (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.
   
104 Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

  

31

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GULF RESOURCES, INC.
     
Dated: August 13, 2021 By: /s/ Xiaobin Liu
    Xiaobin Liu
    Chief Executive Officer
    (principal executive officer)
     
Dated: August 13, 2021 By: /s/ Min Li
    Min Li
    Chief Financial Officer
    (principal financial and accounting officer)

 

32

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