The financial statements and supplementary data
required by this item are included in a separate section of this Report. See “Index to Consolidated Financial Statements”
on Page F-1.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
The accompanying notes are an integral part of
these consolidated financial statements.
GULF RESOURCES, INC. |
AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) |
(Expressed in U.S. dollars) |
|
|
Years Ended December 31, |
|
|
2021 |
|
2020 |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest on finance lease obligation |
|
$ |
136,709 |
|
|
$ |
136,774 |
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of property, plant
and equipment included in payables and accrued expenses |
|
$ |
— |
|
|
$ |
3,537,644 |
|
The accompanying notes are an integral part of
these consolidated financial statements.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Presentation and Consolidation
The accompanying audited consolidated financial
statements have been prepared by Gulf Resources, Inc. (“Gulf Resources”), a Nevada corporation and its subsidiaries (collectively,
the “Company”).
The consolidated financial statements include
the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the British
Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”). HKJI
owns 100% of Shouguang City Haoyuan Chemical Company Limited (“SCHC”) which owns 100% of Shouguang Yuxin Chemical Industry
Co., Limited (“SYCI”) and Daying County Haoyuan Chemical Company Limited (“DCHC”). All material intercompany
transactions have been eliminated on consolidation.
(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”) and manufactures
chemical products for use in the oil industry, pesticides, paper manufacturing industry and for human and animal antibiotics through its
wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”) in the People’s Republic of China (“PRC”).
DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt) in the PRC. DCHC’s
business commenced trial operation in January 2019 but suspended production temporarily in May 2019 as required by the government to obtain
project approval (see Note 1 (b)(iii)).
On March 11, 2020, the World Health Organization (WHO) officially declared
COVID-19 a pandemic. The duration and intensity of the impact of the COVID-19 and resulting disruption to the Company’s operations
and financial position is uncertain. While our operations are currently not materially affected, it is unknown whether or how they may
be affected if such a pandemic persists for an extended period. While not yet quantifiable, the Company believes this situation did not
have a material adverse impact on its operating results in the year of 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 No.2, No.8 and No.10.
(i) Bromine and Crude Salt Segments
In February 2020, 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 November 25, 2019, the government of Shouguang
City issued a notice ordering all bromine facilities in Shouguang City, including the Company’s bromine facilities, including Factory
No.1 and Factory No. 7, to temporarily stop production from December 16, 2019 to February 10, 2020. Subsequently, due to the coronavirus
outbreak in China, the local government ordered those bromine facilities to postpone the commencement of production. Subsequently, the
Company received an approval dated on February 27, 2020 issued by the local governmental authority which allowed the Company to resume
production after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s
Government dated on March 5, 2020 allowing the Company to resume production at its bromine factories No.1, No. 4, No.7 and No. 9 in order
to meet the needs of bromide products for epidemic prevention and control (the “March 2020 Approval”). The Company’s
Factories No. 1 and No. 7 commenced trial production in mid-March 2020 and commercial production on April 3, 2020 and its Factories No.
4 and No. 9 commenced commercial production on May 6, 2020.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(ii) Chemical Segment
On November 24, 2017, the Company received a letter
from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants located in
the second living area of the Qinghe Oil Extraction to the Bohai Marine Fine Chemical Industrial Park (“Bohai Park”).
This is because the two plants are located in a residential area and their production activities will impact the living environment of
the residents. This is as a result of the country’s effort to improve the development of the chemical industry, manage safe production
and curb environmental pollution accidents effectively, and ensure the quality of the living environment of residents. All chemical enterprises
which do not comply with the requirements of the safety and environmental protection regulations will be ordered to shut down.
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 $64 million in total. The Company incurred relocation costs comprising prepaid land lease, professional fees related
to the design of the new chemical factory, and progress payments and deposits for the construction of the new factory building in the
amount of $45,584,344 and $33,496,295, which were recorded in the prepaid land leases, prepayments and deposits and property, plant and
equipment in the consolidated balance sheets as of December 31, 2021 and 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 the governmental planning has been finalized.
(c)
Use of Estimates
The Company’s consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The most
significant accounting estimates with regard to these consolidated financial statements that require the most significant and subjective
judgments include, but are not limited to, useful lives of property, plant and equipment, recoverability of long-lived assets, determination
of impairment losses, assessment of market value of inventories and provision for inventory obsolescence, allowance for doubtful accounts,
recognition and measurement of deferred income taxes, valuation allowance for deferred tax assets, and assumptions used for the valuation
of share based payments. Accordingly, actual results may differ significantly from these estimates under different assumptions
or conditions.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(d)
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash
balances and highly liquid investments with original maturities of three months or less. Because of short maturity of these investments,
the carrying amounts approximate their fair values.
(e)
Accounts receivable and Allowance for Doubtful Accounts
Accounts receivable is stated at cost, net of
allowance for doubtful accounts. The normal credit term extended to customers ranges between 90 and 240 days. The company reviews all
receivables that exceed the term. The Company establishes an allowance for doubtful accounts based on management’s assessment of
the collectability of trade and other receivables. A considerable amount of judgment is required in assessing the amount of allowance
and the Company considers the historical level of credit losses. The Company makes judgments about the credit worthiness of each customer
based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future.
If the financial condition of the customer begins to deteriorate, resulting in their inability to make payments within credit term provided,
an allowance may be required.
As of December 31, 2021 and December 31,
2020, using the ending exchange rate, there was $72,984 and $0
allowances for doubtful accounts; those corresponding amounts of allowances for doubtful accounts were charged to the
consolidated statements of comprehensive income (loss) for years ended December 31, 2021 and 2020.
(f)
Concentration of Credit Risk
The Company is exposed to credit risk in the normal
course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash
and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited, China
Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise protected. The Company placed $95,767,263
and $94,222,538 with these institutions as of December 31, 2021 and 2020, respectively. The Company has not experienced any
losses in such accounts in the PRC.
Concentrations of credit risk with respect to
accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such
concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition
and extends credit terms as and when appropriate.
(g)
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.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(h)
Property, Plant and Equipment
Property, plant and equipment are stated at cost
less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment
of existing facilities or equipment are capitalized and depreciated, when available for intended use, using the straight-line method at
rates sufficient to depreciate such costs less 5% residual value over the estimated productive lives. All other ordinary repair and maintenance
costs are expensed as incurred.
Mineral rights are recorded at cost less accumulated
depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under
the units of production method, whichever is shorter.
Construction in process primarily represents direct
costs of construction of property, plant and equipment. Costs incurred are capitalized and transferred to property, plant and equipment
upon completion and depreciation will commence when the completed assets are placed in service.
The Company’s depreciation and amortization
policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:
Nature of Business and Summary of
Significant Accounting Policies - Schedule of Property, Plant and Equipment Useful Life
| |
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 designated oil and gas properties are depreciated based on the proved developed reserves of the respective oil
and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas properties
are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant development projects
are not depreciated until commercial production commences and the reserves related to those costs are excluded from the calculation of
depreciation.
(i)
Asset Retirement Obligation
The Company follows Financial Accounting Standards
Board Accounting Standards Codification (“FASB ASC”), which established a uniform methodology for accounting for estimated
reclamation and abandonment costs. FASB ASC 410 requires the fair value of a liability for an asset retirement obligation to be recognized
in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is
initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset.
To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Currently, there are no reclamation or abandonment
obligations associated with the land being utilized for exploitation by the bromine and crude salt factories. Also, for the two chemical
plants that are to be relocated, currently, there are no obligations to restore the land to its original condition.
(j)
Recoverability of Long-lived Assets
In accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35”Impairment or Disposal of Long-lived
Assets”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate.
The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.
The Company determines the existence of such impairment
by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount
of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the
discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such
assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold
or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to
their estimated salvage value in connection with the decision to dispose of such assets.
For the year ended December 31, 2021 and 2020,
the Company determined that there were no events or circumstances indicating possible impairment of its long-lived assets.
(k)
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 consolidated statement of comprehensive income (loss) on an accrual basis when they are
due. The Company’s contributions totaled $950,505 and $295,252 for the years ended December 31, 2021 and 2020, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(l)
Mineral Rights
The Company follows FASB ASC 805 “Business
Combinations” that certain mineral rights are considered tangible assets and that mineral rights should be accounted for based on
their substance. Mineral rights are included in property, plant and equipment.
(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 has elected not to recognize operating
lease ROU assets and liabilities arising from short-term lease.
(n)
Basic and Diluted Earnings per Share of Common Stock
Basic earnings per common share are based on the
weighted average number of shares outstanding during the periods presented. Diluted earnings per share are computed using weighted
average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would
have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding
stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from
the calculation of number of dilutive common stock equivalents amounted to 0 and 71,327 shares for the years ended December 31, 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.
Because the Company reported a net loss for the
years ended December 31, 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.
(o)
Reporting Currency and Translation
The financial statements of the Company’s
foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional
currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
As such, the Company uses the “current rate
method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”.
The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date.
The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s
PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive income (loss). The statement of
comprehensive income (loss) is translated at average rate during the reporting period. Gains or losses resulting from transactions in
currencies other than the functional currencies are recognized in net loss for the reporting periods as part of general and administrative
expense. The statement of cash flows is translated at average rate during the reporting period, with the exception of the consideration
paid for the acquisition of business which is translated at historical rates.
(p)
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.
(q)
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 at a point time when the control of the
promised goods is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the
customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product is deemed
to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no rights to return
the goods upon acknowledgement of receipt of goods. Revenue from contracts with customers is disaggregated in Note 15. Payments are typically received from customers within 90 days from
invoicing and recognition of revenue in accordance to the credit terms extended to customers by the Company.
(r)
Income Taxes
The Company accounts for income taxes in accordance
with the Income Taxes Topic of the FASB ASC, which requires the use of the liability method of accounting for deferred income taxes. Under
this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax
basis of assets and liabilities and their reported amounts at each period end. Deferred tax assets and liabilities are measured using
tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized
or settled. The deferred income tax effects of a change in tax rates are recognized in the period of enactment. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The guidance also provides
criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax
position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical
merits. Interests and penalties associated with unrecognized tax benefits are included within the (benefit from) provision for income
tax in the consolidated statement of comprehensive income (loss).
(s)
Exploration Costs
Exploration costs, which included the cost of
researching for appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other resources,
are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs are
capitalized.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
For oil and gas properties, the successful efforts
method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient quantity
of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing the reserves and
the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expenses. Exploratory
wells that discover potentially economic reserves in areas where major capital expenditure will be required before production would begin
and when the major capital expenditure depends upon the successful completion of further exploratory work remain capitalized and are reviewed
periodically for impairment.
(t)
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 reasonably able to be estimated. Such estimates may be based on advice from third parties or on management’s
judgment, as appropriate. Revisions to accruals are reflected in income (loss) in the period in which different facts or information become
known or circumstances change that affect the Company’s previous assumptions with respect to the likelihood or amount of loss. Amounts
paid upon the ultimate resolution of such liabilities may be materially different from previous estimates.
(u)
Stock-based Compensation
The Company accounts for stock-based compensation
under the provisions of FASB ASC 718, Compensation Stock Compensation, which requires the measurement and recognition of compensation
expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates
the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. In June 2018,
the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 7I8), Improvements to Nonemployee Share-Based
Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring
goods and services from nonemployees. Prior to this Update, Topic 718 applied only to share-based transactions to employees. Consistent
with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic
718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered
or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied.
The Company has elected to account for the forfeiture of stock-based awards as they occur.
(v)
New Accounting Pronouncements
Recent accounting pronouncements adopted
There were no recent accounting pronouncements
adopted for the year ended December 31, 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 consolidated financial statements and related disclosure.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 2 – INVENTORIES
Inventories consist of:
Inventories - Schedule of Inventories, Current
| |
December 31, 2021 | |
December 31, 2020 |
| |
| |
|
Raw materials | |
$ | 42,553 | | |
$ | 21,484 | |
Finished goods | |
| 648,558 | | |
| 398,125 | |
Inventory, net | |
$ | 691,111 | | |
$ | 419,609 | |
There was no allowance for slow-moving inventories
as of December 31, 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 $9,974,704 for a 50-year lease of a parcel of land at Bohai Marine Fine Chemical Industrial Park (“Bohai”)
for the new chemical factory to be built. There is no purchase option at the end of the lease term. This was classified as an operating
lease prior to and as of January 1, 2019. The land use certificate was issued on October 25, 2019. The lease term expires on August 12,
2069. The amount paid was recorded as prepaid land leases, net of current portion in the consolidated balance sheet as of December 31
2021 and 2020. As of December 31, 2021, the prepaid land lease increased to $10,368,469 due to an additional amount paid for stamp duty
and related land use rights fees. Amortization of this prepaid land lease will commence when the chemical factory is built and placed
in service.
In June 2020, the construction of the new chemical
factory commenced and the civil works have basically been completed in June, 2021.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment, net consist of
the following:
Property, Plant and Equipment, Net -
Schedule of Property, Plant and Equipment
| |
December 31, 2021 | |
December 31, 2020 |
At cost: | |
| | | |
| | |
Mineral rights | |
$ | 3,025,017 | | |
$ | 2,955,780 | |
Buildings | |
| 34,906,137 | | |
| 64,024,667 | |
Plant and machinery | |
| 201,012,254 | | |
| 258,400,710 | |
Motor vehicles | |
| 139,563 | | |
| 6,553 | |
Furniture, fixtures and office equipment | |
| 2,494,400 | | |
| 3,318,564 | |
Construction in process | |
| 44,310,149 | | |
| 12,095,565 | |
Total | |
| 285,887,520 | | |
| 340,801,839 | |
Less: Accumulated depreciation and amortization | |
| (123,229,974 | ) | |
| (173,212,554 | ) |
Impairment | |
| — | | |
| (18,641,596 | ) |
Net book value | |
$ | 162,657,546 | | |
$ | 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 $17,911,910 and $19,302,600 as at December 31, 2021 and December 31, 2020,
respectively.
During the year ended December 31, 2021, there
were total $57,388,456 write off on the company plan and machinery, which mainly include the write off of the machinery, wells and aqueducts.
During the year ended December 31, 2021, depreciation
and amortization expense totaled $20,537,682 of which $8,318,487, $644,349 and $11,574,846 were recorded in direct labor and factory overheads
incurred during plant shutdown, administrative expenses and cost of net revenue respectively.
During the year ended December 31, 2020, depreciation
and amortization expense totaled $15,982,485 of which $5,512,920, $815,605 and $9,653,960 were recorded in direct labor and factory overheads
incurred during plant shutdown, administrative expenses and cost of net revenue respectively.
NOTE
5 – FINANCE LEASE RIGHT-OF-USE ASSETS
Property, plant and equipment under finance leases,
net consist of the following:
Finance Lease Right-Of-Use Assets - Schedule of Property,
Plant and Equipment Under Finance Leases
| |
December 31, 2021 | |
December 31, 2020 |
At cost: | |
| | | |
| | |
Buildings Buildings | |
$ | 129,074 | | |
$ | 126,120 | |
Plant and machinery Plant and Machinery | |
| 2,361,228 | | |
| 2,307,184 | |
Total | |
| 2,490,302 | | |
| 2,433,304 | |
Less: Accumulated depreciation and amortization | |
| (2,305,478 | ) | |
| (2,247,032 | ) |
Net book value | |
$ | 184,824 | | |
$ | 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 year ended December 31, 2021, depreciation
and amortization expense totaled $5,743, respectively, which was recorded in direct labor and factory overheads incurred during plant
shutdown.
During the year ended December 31, 2020, depreciation
and amortization expense totaled $5,375, respectively, which was recorded in direct labor and factory overheads incurred during plant
shutdown.
NOTE 6 – OPERATING LEASE RIGHT–OF-USE
ASSETS
As of December 31, 2021, the total operating lease
ROU assets was $8,311,127.
The total operating lease cost for the years ended
December 31, 2021 and 2020 was $965,690 and $927,745.
The Company has the rights to use certain parcels
of land located in Shouguang, the PRC, through lease agreements signed with local townships or the government authority (See Note 3).
For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels
of land of which the Company cannot obtain land use rights certificates covers a total of approximately 38.6 square kilometers with an
aggregate operating lease right-of-use assets amount of $7,964,164 as at December 31, 2021.
NOTE
7 – PAYABLE AND ACCRUED EXPENSES
Payable and accrued expenses consist of the following:
Payable and Accrued Expenses - Schedule of Accounts Payable and Accrued Liabilities
| |
December 31, | |
December 31, |
| |
2021 | |
2020 |
Accounts payable | |
$ | 202,289 | | |
$ | 479,958 | |
Salary payable | |
| 267,215 | | |
| 320,549 | |
Social security insurance contribution payable | |
| — | | |
| 49,167 | |
Other payable-related party (see Note 8) | |
| 97,856 | | |
| 95,616 | |
Deposit on subscription of a subsidiary’s share | |
| — | | |
| 153,260 | |
Accrued expense for construction | |
| 8,944,367 | | |
| 3,537,644 | |
Accrued expense-others | |
| 1,019,049 | | |
| 445,507 | |
Total | |
$ | 10,530,776 | | |
$ | 5,081,701 | |
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 $97,853 for five years from January 1, 2018 to December 31, 2022. The expense
associated with this agreement for the year ended December 31, 2021 was $96,390. The expense associated with this agreement for the year
ended December 31, 2020 was $90,510.
NOTE 8 – RELATED PARTY TRANSACTIONS – Continued
Name of related parties |
Position |
YangMing |
Chairman Of the Board |
LiuXiaoBin |
Chief Executive Officer |
LiMin |
Chief Financial Officer |
MiaoNaiHui |
Chief Operating Officer |
b)
| |
December 31, | |
December 31, |
| |
2021 | |
2020 |
Amount due to related parties: | |
| | | |
| | |
YangMing | |
$ | 462,680 | | |
$ | — | |
LiuXiaoBin | |
| 599,766 | | |
| — | |
LiMin | |
| 393,299 | | |
| — | |
MiaoNaiHui | |
| 393,299 | | |
| — | |
Total | |
$ | 1,849,044 | | |
$ | — | |
Considering that the Company has not performed well
in recent years, the Company and its executive officers mutually agreed and to returned all, or a portion of their cash compensation earned
for their services with the Company, which may be considered for future compensation should the Company improve its results of operations.
NOTE 9 – TAXES PAYABLE
| |
December 31, | |
December 31, |
| |
2021 | |
2020 |
Land use tax payable | |
$ | 27,427 | | |
$ | 833,576 | |
Value added tax and other taxes payable | |
| 748,281 | | |
| 492,603 | |
Land use tax payable | |
$ | 775,708 | | |
$ | 1,326,179 | |
NOTE
10 – LEASE LIABILITIES-FINANCE AND OPERATING LEASE
The components of finance lease liabilities were
as follows:
Lease Liabilities - Finance and Operating
Lease - Schedule of Finance Leased Liabilities
| |
Imputed | |
December 31, | |
December 31, |
| |
Interest rate | |
2021 | |
2020 |
Total finance lease liability | |
| 6.7% | | |
$ | 1,997,955 | | |
$ | 2,105,973 | |
Less: Current portion | |
| | | |
| (227,429 | ) | |
| (217,070 | ) |
Finance lease liability, net of current portion | |
| | | |
$ | 1,770,526 | | |
$ | 1,888,903 | |
Interest expenses from capital lease obligations
amounted to $135,707 and $135,936 for the years ended December 31, 2021 and 2020, respectively, which were charged to the consolidated
statement of comprehensive income (loss).
The components of operating lease liabilities
as follows:
Lease Liabilities - Finance and Operating
Lease - Schedule of Operating Leased Liabilities
| |
Discount | |
December 31, | |
December 31, |
| |
rate | |
2021 | |
2020 |
Total Operating lease liabilities | |
| 4.89% | | |
$ | 8,064,162 | | |
$ | 8,499,692 | |
Less: Current portion | |
| | | |
| (506,579 | ) | |
| (477,350 | ) |
Operating lease liabilities, net of current portion | |
| | | |
$ | 7,557,583 | | |
$ | 8,022,342 | |
The weighted average remaining operating lease
term at December 31, 2021 was 20.3 years and the weighted average discounts rate was 4.89%, This discount rates used are based on the
base rate quoted by the People’s Bank of China and vary with the remaining term of the lease. Lease payments for the years ended
December 31, 2021 and 2020, respectively, were $848,660 and $765,288.
Maturities of lease liabilities were as follows:
Lease Liabilities - Finance and Operating
Lease - Schedule of Financing and Operating Lease Maturities
|
|
Finance lease |
|
Operating Lease |
Payable within: |
|
|
|
|
|
|
|
|
the next 12 months |
|
$ |
294,407 |
|
|
$ |
697,360 |
|
the next 13 to 24 months |
|
|
294,407 |
|
|
|
704,862 |
|
the next 25 to 36 months |
|
|
294,407 |
|
|
|
702,451 |
|
the next 37 to 48 months |
|
|
294,407 |
|
|
|
710,448 |
|
the next 49 to 60 months |
|
|
294,407 |
|
|
|
715,159 |
|
thereafter |
|
|
1,177,630 |
|
|
|
11,095,006 |
|
Total |
|
|
2,649,665 |
|
|
|
14,625,286 |
|
Less: Amount representing interest |
|
|
(651,710 |
) |
|
|
(6,561,124 |
) |
Present value of net minimum lease payments |
|
$ |
1,997,955 |
|
|
$ |
8,064,162 |
|
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 year ended December 31, 2021, the Company
granted in the aggregate, 472,000 restricted shares of common stock to a consultant, the company's directors, officers and an employee.
The restricted shares award were granted under the 2019 Omnibus Equity Incentive Plan 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 year ended December 31, 2021.
During the
year ended December 31, 2020, the Company granted in the aggregate, 480,050 restricted shares of common stock to a consultant, the company's
directors, officers and an employee. The restricted shares award were granted under the 2019 Omnibus Equity Incentive Plan and vested
immediately. The fair value of the award on the date of grant was $2,350,250 which was expensed in full during the year ended December
31, 2020.
Retained Earnings - Appropriated
In accordance with the relevant PRC regulations
and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit after
tax to the following reserve:
Statutory Common Reserve Funds
SCHC, SYCI and DCHC are required each year to
transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common Reserve
Funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any loss incurred
or to increase share capital. Except for the reduction of losses incurred, any other application should not result in this
reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of December 31, 2021 for SCHC, SYCI
and DCHC is 16%, 14% and 0% of its registered capital respectively.
NOTE 12 – TREASURY STOCK
None
NOTE 13 – STOCK-BASED COMPENSATION
Pursuant to the Company’s 2019 Omnibus Equity
Incentive Plan adopted and approved in 2019 (“2019 Plan”), awards under the 2019 Plan is limited in the aggregate to 2,068,398
shares of our common stock, inclusive of the awards that were previously issued and outstanding under the Company’s 2007 Equity
Incentive Plan, as amended (the “2007 Plan”). Upon adoption and approval of the 2019 Plan, the 2007 Plan was frozen, no new
awards will be granted under the 2007 Plan, and outstanding awards under the 2007 Plan will continue to be governed by the terms and condition
of the 2007 Plan and applicable award agreement. As of December 31, 2021, the number of shares of the Company’s common stock available
for grant of stock options and issuance under the 2019 Plan is 1,056,801 shares.
The fair value of each option award is estimated
on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity in continuous
compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted, volatility is based
on the annualized historical stock price volatility of the Company, and the expected life is based on the historical option exercise pattern.
For the year ended December 31, 2021 and 2020,
total compensation costs for options issued recorded in the consolidated statement of comprehensive income (loss) were $0 and $0. There
were no related tax benefits as a full valuation allowance was recorded in the years ended December 31, 2021 and 2020.
NOTE 13 – STOCK-BASED COMPENSATION –
Continued
The following table summarizes all Company stock
option transactions between January 1, 2021 and December 31, 2021.
Stock-Based Compensation - Schedule of Stock
Option Activity
|
|
Number of Option
and Warrants
Outstanding and exercisable |
|
Weighted- Average Exercise price of Option
and Warrants |
|
Range of
Exercise Price per Common Share |
Balance, January 1, 2021 |
|
|
121,600 |
|
|
$ |
7.09 |
|
|
$ |
3.57
- 7.27 |
|
Exercised |
|
|
(6,000 |
) |
|
$ |
3.57 |
|
|
$ |
3.57 |
|
Expired/Canceled |
|
|
(115,600 |
) |
|
|
— |
|
|
$ |
7.27 |
|
Balance, December 31, 2021 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock and Warrants Options Exercisable and Outstanding |
|
|
|
|
|
|
Weighted Average Remaining |
|
|
Outstanding at December 31, 2021 |
|
Range of
Exercise Prices |
|
Contractual Life
(Years) |
Exercisable and outstanding |
|
— |
|
— |
|
— |
All options exercisable and outstanding at December
31, 2021 are fully vested. As of December 31, 2021, there was no unrecognized compensation cost related to outstanding stock options,
The aggregate intrinsic value of options outstanding
and exercisable as of December 31, 2021 and 2020 was $0
and $3,330.
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlining options and the stock price
of $4.33 and $4.12 for the Company's common stock on December 31, 2021 and 2020.
During the
year ended December 31, 2021, 2,447 shares of common stock were issued upon cashless exercise of 6,000 options.
NOTE 14 – INCOME TAXES
The Company utilizes the asset and liability method
of accounting for income taxes in accordance with FASB ASC 740-10. If it is more likely than not that some portion or all of a deferred
tax asset will not be realized, a valuation allowance is recognized.
United States
Gulf Resources, Inc. may be subject to the United
States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable
income for the years ended December 31, 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 years ended December 31, 2021 and 2020.
Hong Kong
HKJI, a subsidiary of Upper Class Group Limited, was
incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived
from Hong Kong. No provision for income tax has been made as it has no taxable income for the years ended December 31, 2021
and 2020. The applicable statutory tax rates for the years ended December 31, 2021 and 2020 are 16.5%. There is no dividend
withholding tax in Hong Kong.
PRC
Enterprise income tax (“EIT”) for
SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC, SYCI and DCHC
are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Local Income Tax Law. The PRC
tax losses may be carried forward to be utilized against future taxable profit for ten years for High-tech enterprises and small and medium-sized
enterprises of science and technology and for five years for other companies. Tax losses of the operating subsidiaries of the Company
may be carried forward for five years.
On February 22, 2008, the Ministry of Finance
(“MOF”) and the State Administration of Taxation (“SAT”) jointly issued CaiShui [2008] Circular 1 (“Circular
1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign
investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after
January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.
As of December 31, 2021 and 2020, the accumulated
distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $140,006,862
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 December 31, 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 December 31, 2021 and December 31, 2020,
the unrecognized WHT are $5,932,051 and $5,288,346, respectively.
NOTE 14 – INCOME TAXES – Continued
The Company’s income tax returns are subject
to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s
income tax returns filed in the United States for three years from the date of filing. The Company’s US income tax returns since
2017 are currently subject to examination.
Inland Revenue Department of Hong Kong (“IRD”)
may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing. For the years 2012 through
2018, HKJI did not report any taxable income. It did not file any income tax returns during these years except for 2014 and 2018. For
companies which do not have taxable income, IRD typically issues notification to companies requiring them to file income tax returns once
in every four years. The tax returns for 2014 and 2018 are currently subject to examination.
The components of the provision for income tax
benefit (expense) from continuing operations are:
Income Taxes - Schedule of Components of Income Tax Expense Benefit
|
|
|
|
|
|
|
|
|
| |
Years Ended December 31, |
| |
2021 | |
2020 |
Current taxes – PRC | |
$ | — | | |
$ | — | |
Deferred taxes – PRC entities | |
| 6,298,128 | | |
| 1,108,471 | |
Deferred taxes –US entity | |
| — | | |
| 607,643 | |
Change in valuation allowance | |
| — | | |
| (607,643 | ) |
Tax Expense Benefit | |
$ | 6,298,128 | | |
$ | 1,108,471 | |
The effective
income tax benefit (expense) rate differs from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
Income Taxes - Schedule
of Income Tax Rate Reconciliation
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31, |
Reconciliations |
|
2021 |
|
2020 |
Statutory income tax rate |
|
|
25 |
% |
|
|
25 |
% |
Non-taxable (non-deductible) items |
|
|
75 |
% |
|
|
(5 |
%) |
Change in valuation allowance |
|
|
17 |
% |
|
|
(8 |
%) |
Effective income tax benefit (expense) rate |
|
|
117 |
% |
|
|
12 |
% |
As of December
31, 2021 and 2020, the Company had a US Federal net operating loss carry forwards of approximately $8,470,000 and $4,900,000 which are
allowed for an indefinite carry forward period but limited to 80% of each subsequent year's net income. The timing and manner in which
the Company can utilize operating loss carry forwards in any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. Such limitation may have an impact on the ultimate realization of its carry forwards and future
tax deductions. In addition, since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its
foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future.
Accordingly, a 100% deferred tax asset valuation allowance was recorded for these net operating losses.
Significant components of the Company’s
deferred tax assets and liabilities at December 31, 2021 and December 31, 2020 are as follows:
Income Taxes - Schedule of Deferred
Tax Assets and Liabilities
| |
December 31, | |
December 31, |
| |
2021 | |
2020 |
Deferred tax liabilities | |
$ | — | | |
$ | — | |
| |
| | | |
| | |
Deferred tax assets: | |
| | | |
| | |
Allowance for obsolete and slow-moving inventories | |
$ | — | | |
$ | — | |
Impairment on property, plant and equipment | |
| — | | |
| 2,907,548 | |
Impairment on prepaid land lease | |
| — | | |
| 883,884 | |
Exploration costs | |
| 1,952,783 | | |
| 1,908,087 | |
Compensation costs of unexercised stock options | |
| — | | |
| 74,883 | |
PRC tax losses | |
| 19,621,674 | | |
| 21,643,028 | |
US federal net operating loss | |
| 1,308,335 | | |
| 1,045,503 | |
Total deferred tax assets | |
| 22,882,792 | | |
| 28,462,933 | |
Valuation allowance | |
| (9,982,758 | ) | |
| (9,872,706 | ) |
Net deferred tax asset | |
$ | 12,900,034 | | |
$ | 18,590,227 | |
The increase in valuation allowance for the year
ended December 31, 2021 is $110,052.
The increase in valuation allowance for the year
ended December 31, 2020 is $886,873.
There were no unrecognized tax benefits and accrual
for uncertain tax positions as of December 31, 2021 and 2020.
There were no amounts accrued for penalties and
interest for the years ended December 31, 2021 and 2020.
There were no change in unrecognized tax benefits
during the years ended December 31, 2021 and 2020.
NOTE 15 – BUSINESS SEGMENTS
An operating segment’s performance is primarily
evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs and other income
not associated with the operations of the segment. These corporate costs are separately stated below and also include costs that are related
to functional areas such as accounting, treasury, information technology, legal, human resources, and internal audit. The Company believes
that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of its segments. All
the customers are located in PRC.
Year
Ended December
31, 2021 | |
Bromine* | |
Crude Salt* | |
Chemical Products | |
Natural Gas | |
Segment Total | |
Corporate | |
Total |
Net revenue (external customers) | |
$ | 48,871,396 | | |
$ | 6,080,242 | | |
$ | — | | |
$ | 78,948 | | |
$ | 55,030,586 | | |
$ | — | | |
$ | 55,030,586 | |
Net revenue (intersegment) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Income (loss) from operations before income tax expense | |
| 13,364,649 | | |
| (1,078,320 | ) | |
| (2,550,561 | ) | |
| (167,139 | ) | |
| 9,568,629 | | |
| (4,357,759 | ) | |
| 5,210,870 | |
Income tax (expense) benefit | |
| (3,349,220 | ) | |
| 269,786 | | |
| (3,218,784 | ) | |
| — | | |
| (6,298,218 | ) | |
| — | | |
| (6,298,218 | ) |
Income (loss) from operations after income
tax (expense) benefit | |
| 10,015,429 | | |
| (808,534 | ) | |
| (5,769,345 | ) | |
| (167,139 | ) | |
| 3,270,411 | | |
| (4,357,759 | ) | |
| (1,087,348 | ) |
Total assets | |
| 155,311,561 | | |
| 30,530,413 | | |
| 122,026,497 | | |
| 1,622,953 | | |
| 309,491,424 | | |
| 365,438 | | |
| 309,856,862 | |
Depreciation and amortization | |
| 15,077,729 | | |
| 5,054,976 | | |
| 286,380 | | |
| 124,340 | | |
| 20,543,425 | | |
| — | | |
| 20,543,425 | |
Capital expenditures | |
| 18,205,560 | | |
| 2,250,126 | | |
| 9,637,454 | | |
| — | | |
| 30,093,140 | | |
| — | | |
| 30,093,140 | |
Year
Ended December
31, 2020 | |
Bromine* | |
Crude Salt* | |
Chemical Products | |
Natural Gas | |
Segment Total | |
Corporate | |
Total |
Net revenue (external customers) | |
$ | 25,184,808 | | |
$ | 3,022,216 | | |
$ | — | | |
$ | — | | |
$ | 28,207,024 | | |
$ | — | | |
$ | 28,207,024 | |
Net revenue (intersegment) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Loss from operations before income tax expense | |
| 1,616,542 | | |
| (3,589,494 | ) | |
| (2,745,297 | ) | |
| (204,514 | ) | |
| (4,922,763 | ) | |
| (4,760,629 | ) | |
| (9,683,392 | ) |
Income tax (expense) benefit | |
| (404,135 | ) | |
| 890,331 | | |
| 622,275 | | |
| — | | |
| 1,108,471 | | |
| — | | |
| 1,108,471 | |
Loss from operations after income tax (expense) benefit | |
| 1,212,407 | | |
| (2,699,163 | ) | |
| (2,123,022 | ) | |
| (204,514 | ) | |
| (3,814,292 | ) | |
| (4,760,629 | ) | |
| (8,574,921 | ) |
Total assets | |
| 140,043,211 | | |
| 31,602,967 | | |
| 120,746,404 | | |
| 1,636,467 | | |
| 294,029,049 | | |
| 8,769 | | |
| 294,037,818 | |
Depreciation and amortization | |
| 10,714,004 | | |
| 4,672,181 | | |
| 459,558 | | |
| 142,117 | | |
| 15,987,860 | | |
| — | | |
| 15,987,860 | |
Capital expenditures | |
| 3,157,669 | | |
| 646,752 | | |
| 17,914,948 | | |
| — | | |
| 21,719,369 | | |
| — | | |
| 21,719,369 | |
* Certain common production overheads, operating
and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were
split by reference to the average selling price and production volume of the respective segment.
|
|
|
|
|
|
|
|
|
| |
Years Ended
December 31, |
Reconciliations | |
2021 | |
2020 |
Total segment operating Profit (loss) | |
$ | 9,568,629 | | |
$ | (4,922,763 | ) |
Corporate costs | |
| (3,575,099 | ) | |
| (2,928,603 | ) |
Unrealized gain (loss) on translation of intercompany balance | |
| (782,660 | ) | |
| (1,832,026 | ) |
Profit (loss) from operations | |
| 5,210,870 | | |
| (9,683,392 | ) |
Other income, net of expense | |
| 162,630 | | |
| 154,877 | |
Income (loss) before taxes | |
$ | 5,373,500 | | |
$ | (9,528,515 | ) |
The following table shows the major customers
(10% or more) for the year ended December 31, 2021
Business Segments - Schedule of
Revenue by Major Customers
Number | |
Customer | |
Bromine (000’s) | |
Crude
Salt (000’s) | |
Chemical
Products (000’s) | |
Total Revenue (000’s) | |
Percentage
of Total Revenue (%) |
| 1 | | |
Shandong Morui Chemical Company Limited | |
$ | 9,314 | | |
$ | 2,338 | | |
$ | — | | |
$ | 11,652 | | |
| 21.2 | % |
| 2 | | |
Shandong Brother Technology Limited | |
$ | 8,018 | | |
$ | 1,999 | | |
$ | — | | |
$ | 10,017 | | |
| 18.2 | % |
| 3 | | |
Shouguang Weidong Chemical Company Limited | |
$ | 7,688 | | |
$ | 1,744 | | |
$ | — | | |
$ | 9,432 | | |
| 17.2 | % |
The following table shows the major customers
(10% or more) for the year ended December 31, 2020.
Number | |
Customer | |
Bromine (000’s) | |
Crude
Salt (000’s) | |
Chemical
Products (000’s) | |
Total Revenue (000’s) | |
Percentage
of Total Revenue (%) |
| 1 | | |
Shandong Morui Chemical Company Limited | |
$ | 4,901 | | |
$ | 1,062 | | |
$ | — | | |
$ | 5,963 | | |
| 21.2 | % |
| 2 | | |
Shandong Brother Technology Limited | |
$ | 3,188 | | |
$ | 1,083 | | |
$ | — | | |
$ | 4,271 | | |
| 15.2 | % |
| 3 | | |
Shouguang Weidong Chemical Company Limited | |
$ | 3,683 | | |
$ | 876 | | |
$ | — | | |
$ | 4,559 | | |
| 16.2 | % |
| 4 | | |
Shandong Shouguang Shenrunfa Ocean Chemical Company Limited | |
$ | 3,320 | | |
$ | — | | |
$ | — | | |
$ | 3,320 | | |
| 11.8 | % |
| 5 | | |
Dongying Bomeite Chemical Company Limited | |
$ | 2,970 | | |
$ | — | | |
$ | — | | |
$ | 2,970 | | |
| 10.5 | % |
NOTE
16 – CUSTOMER CONCENTRATION
The Company sells a substantial portion of its
products to a limited number of customers. During the year ended December 31, 2021, the Company sold 64.8% of its products to its top
five customers, respectively. As of December 31, 2021, amounts due from these customers were $13,372,159.
The Company sells a substantial portion of its
products to a limited number of customers. During the year ended December 31, 2020, the Company sold 74.9% of its products to its top
five customers, respectively. As of December 31, 2020, amounts due from these customers were $5,417,101.
NOTE
17 – MAJOR SUPPLIERS
During the year ended December 31, 2021, the Company
purchased 100% of its raw materials from its top five suppliers. As of December 31, 2021, amounts due to those suppliers were
$202,289.
During the year ended December 31, 2020, the Company
purchased 100% of its raw materials from its top five suppliers. As of December 31, 2020, amounts due to those suppliers were
$479,958.
NOTE 18 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments,
which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term
nature of these instruments. There were no material unrecognized financial assets and liabilities as of December 31, 2021 and
2020.
NOTE 19 – CAPITAL COMMITMENT AND OTHER SERVICE
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company’s
contractual obligations as of December 31, 2021:
Capital Commitment and Other Service
Contractual Obligations - Schedule of Contractual Obligations
|
|
Property Management Fees |
|
Capital Expenditure |
Payable within: |
|
|
|
|
|
|
|
|
the next 12 months |
|
$ |
97,853 |
|
|
$ |
53,689,926 |
|
the next 13 to 24 months |
|
|
97,853 |
|
|
|
1,081,180 |
|
the next 25 to 36 months |
|
|
— |
|
|
|
— |
|
the next 37 to 48 months |
|
|
— |
|
|
|
— |
|
Total |
|
$ |
195,706 |
|
|
$ |
54,771,106 |
|
NOTE
20 – LOSS CONTINGENCIES
On or about August 3, 2018, written decisions
of administration penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo Tu Zi Fa
Gao Zi [2018] No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu Zi Fa Gao Zi [2018]
No. 296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company Limited (“SCHC”)
by Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as respondent respectively thereof. The
Decisions challenged the land use of Factory nos. 2, 9, 7, 4, 8 and 10, respectively, and alleged, among other things, that SCHC had illegally
occupied and used the land in the total area of approximately 52,674 square meter, on which Factory nos. 2, 9, 7, 4, 8 and 10 were built,
respectively. The Written Decisions ordered SCHC, among other things, to return the land subject to the Written Decisions to its respective
legal owner, restore the land to its original state, and demolish or confiscate all the buildings and facilities thereon and pay monetary
penalty of approximately RMB 1.3 million ($184,000) in the aggregate. Each of the Written Decisions shall be executed within 15 days upon
serving on SCHC. Additional interest penalty shall be imposed at a daily rate of 3% in the event that SCHC does not make the monetary
penalty payment in a timely manner. Subsequently, the Bureau filed enforcement actions to the People’s Court of Shouguang City,
Shandong Province (the “Court”), naming SCHC as enforcement respondent and alleged, among other things, that SCHC failed to
perform its obligations under each of the Written Decisions within the specified timeframe. The enforcement proceedings sought court orders
to enforce the Written Decisions. On May 5, 2019, written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 384,
(2019) Lu 0783 Xing Shen No. 385, (2019) Lu 0783 Xing Shen No. 389, (2019) Lu 0783 Xing Shen No. 390, (2019) Lu 0783 Xing Shen No. 393,
and (2019) Lu 0783 Xing Shen No. 394, respectively (together, the “Court Rulings”) were made by the Court in favor of the
Bureau. The Court orders, among other relief, to enforce each of the Written Decisions, to return each subject land to its legal owners
and demolish or confiscate the buildings and facilities thereon and restore the land to its original state within 10 days from the service
of the Court Rulings on SCHC. The Court Rulings became enforceable immediately upon service on SCHC on May 5, 2019.
In the last twenty years, to the Company’s
knowledge, there were no government regulations requiring bromine manufacturers to obtain land use and planning approval document. As
such, the Company believes most of the bromine manufacturers in Shouguang City do not have land use and planning approval documents and
lease their land parcels from the village associations. They are facing the same issues in connection with land use and planning as the
Company. To the Company’s knowledge, the local government has submitted its plan to solve the issues to higher authority and are
waiting for approval from the higher authority.
The Company is in the process of resolving the
issues in connection with SCHC’s land use and planning diligently. The Company has been in discussions 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 December 31, 2021.
NOTE 21 - SUBSEQUENT EVENT
The Company received an oral notification from
the government of Shouguang City on December 23, 2021, pursuant to which all bromine facilities in Shouguang City will be temporarily
closed from December 28, 2021 until February 21, 2022 8:00 AM China Time. The Company believed the seasonal closure ordered by the
government was part of governmental action plan to curb air pollution in the winter and improve the comprehensive development efficiency
of brine resources. On February 21, 2022, as planned, the Company reopened its four operating bromine and crude salt factories.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
(Expressed in U.S. dollars)
SCHEDULE I – PARENT ONLY FINANCIAL INFORMATION
The following presents condensed parent company
only financial information of Gulf Resources, Inc.
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
Parent | |
As of December 31, |
| |
2021 | |
2020 |
| |
| |
|
Current Assets | |
| | | |
| | |
Prepayments and deposits | |
$ | — | | |
$ | — | |
Total Current Assets | |
| — | | |
| — | |
Non-Current Assets | |
| | | |
| | |
Interests in subsidiaries | |
| 224,559,060 | | |
| 214,505,860 | |
Amounts due from group companies | |
| 63,039,564 | | |
| 62,987,953 | |
Total non-current assets | |
| 287,598,624 | | |
| 277,493,813 | |
Total Assets | |
$ | 287,598,624 | | |
$ | 277,493,813 | |
| |
| | | |
| | |
Liabilities and Stockholders’ Equity | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Other payables and accrued expenses | |
$ | 216,940 | | |
$ | 326,839 | |
Amounts due to related party | |
| 599,766 | | |
| — | |
Amounts due to group companies | |
| 142,701 | | |
| 142,701 | |
Total Current Liability | |
| 959,407 | | |
| 469,540 | |
| |
| | | |
| | |
Total Liabilities | |
$ | 959,407 | | |
$ | 469,540 | |
| |
| | | |
| | |
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; 10,517,754 and 10,043,307 shares issued; and 10,471,924 and 9,997,477 shares outstanding as of December 31, 2021 and December 31, 2020 | |
| 24,376 | | |
| 24,139 | |
Treasury stock; 45,830 and 45,830 shares as of December 31, 2021 and December 31, 2020 at cost | |
| (510,329 | ) | |
| (510,329 | ) |
Additional paid-in capital | |
| 100,569,159 | | |
| 97,435,316 | |
Retained earnings unappropriated | |
| 150,463,638 | | |
| 151,388,356 | |
Retained earnings appropriated | |
| 24,233,544 | | |
| 24,233,544 | |
Cumulative translation adjustment | |
| 11,858,829 | | |
| 4,453,247 | |
Total Stockholders’ Equity | |
| 286,639,217 | | |
| 277,024,273 | |
Total Liabilities and Stockholders’ Equity | |
$ | 287,598,624 | | |
$ | 277,493,813 | |
Condensed Statements of Comprehensive Loss
|
|
|
|
|
|
|
|
|
| |
Years Ended December 31, |
| |
2021 | |
2020 |
| |
| |
|
OPERATING EXPENSES | |
| | | |
| | |
General and administrative expenses | |
$ | (3,572,334 | ) | |
$ | (2,922,671 | ) |
TOTAL OPERATING EXPENSES | |
| (3,572,334 | ) | |
| (2,922,671 | ) |
OTHER EXPENSES | |
| | | |
| | |
Interest expense | |
| — | | |
| (367 | ) |
TOTAL OTHER EXPENSES | |
| — | | |
| (367 | ) |
TOTAL EXPENSES | |
| (3,572,334 | ) | |
| (2,923,038 | ) |
Equity in net income (loss) of
subsidiaries | |
| 2,647,616 | | |
| (5,497,004 | ) |
LOSS BEFORE INCOME TAXES | |
| (924,718 | ) | |
| (8,420,044 | ) |
INCOME TAXES | |
| — | | |
| — | |
NET LOSS | |
$ | (924,718 | ) | |
$ | (8,420,044 | ) |
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
| |
Years Ended December 31, |
| |
2021 | |
2020 |
| |
| |
|
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | |
Net Loss | |
$ | (924,718 | ) | |
$ | (8,420,044 | ) |
Adjustments to reconcile net Loss to net cash used in operating activities: | |
| | | |
| | |
Equity Loss in unconsolidated subsidiaries | |
| 2,647,616 | | |
| 5,497,004 | |
Stock-based compensation expense-options | |
| 3,134,080 | | |
| 2,350,250 | |
Shares issued from treasury stock for services | |
| — | | |
| — | |
Changes in assets and liabilities: | |
| | | |
| | |
Other payables and accrued expenses | |
| (109,901 | ) | |
| 14,508 | |
Net cash used in operating activities | |
| (548,155 | ) | |
| (558,282 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Advances from group companies | |
| 548,155 | | |
| 558,282 | |
Net cash provided by financing activities | |
| 548,155 | | |
| 558,282 | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | |
| — | | |
| — | |
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | |
| — | | |
| — | |
CASH AND CASH EQUIVALENTS - END OF YEAR | |
$ | — | | |
$ | — | |
|
(i) |
Basis of presentation |
In the condensed parent-company-only
financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries
since the date of acquisition. The Company’s share of net loss of its subsidiaries is included in condensed statements of comprehensive
loss using the equity method. These condensed parent-company-only financial statements should be read in connection with the consolidated
financial statements and notes thereto.
As of December 31, 2021, the Company
itself has no purchase commitment, capital commitment and operating lease commitment.
|
(ii) |
Restricted Net Assets |
Schedule I of Rule 5-04 of Regulation
S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test,
restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets
of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred
to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender,
regulatory agency, foreign government, etc.).
The condensed parent company financial
statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries
of Gulf Resources, Inc. exceed 25% of the consolidated net assets of Gulf Resources, Inc. The ability of the Company’s Chinese operating
subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the
Chinese operating subsidiaries. Because a significant portion of the Company’s operations and revenues are conducted and generated
in China, a significant portion of the revenues being earned and currency received are denominated in RMB. RMB is subject to the exchange
control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange
control regulations that restrict the Company’s ability to convert RMB into US Dollars.