UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 For the quarterly period ended June 30, 2020March 31, 2021
  
 Or
  
oTRANSITION 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 classTrading Symbol (s)Name of each exchange on which registered
Common Stock, $0.0005 par valueGURENASDAQ 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 oAccelerated filer o
Non-accelerated filer oxSmaller 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. o

 

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 15, 2020,May 17, 2021, the registrant had outstanding 9,517,42710,469,477 shares of common stock.

 

 

 

Table of Contents

 

Part I – Financial Information 
Item 1. Financial Statements1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations1719
Item 3. Quantitative and Qualitative Disclosures about Market Risk2728
Item 4. Controls and Procedures28
Part II – Other Information 
Item 1. Legal Proceedings2829
Item 1A. Risk Factors29
Item 2. Unregistered SaleShares of Equity Securities and Use of Proceeds29
Item 3. Defaults Upon Senior Securities29
Item 4. Mine Safety DisclosuresDisclosure29
Item 5. Other Information29
Item 6. Exhibits29
Signatures30

 

 

Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GULF RESOURCES, INC.
 AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)

 

 June 30, 2020
Unaudited
 December 31, 2019
Audited
 March 31, 2021
Unaudited
 December 31, 2020
Audited
Current Assets                
Cash $89,972,591  $100,301,986  $96,699,324  $94,222,538 
Accounts receivable  3,060,565   4,877,106   4,859,705   6,521,798 
Inventories, net  523,628   690,087   576,607   419,609 
Prepayments and deposits  2,930,094   1,332,970   2,449,526   6,146,461 
Other receivable  559   559   559   559 
Total Current Assets  96,487,437   107,202,708   104,585,721   107,310,965 
Non-Current Assets                
Property, plant and equipment, net  132,848,600   137,994,949   149,966,631   148,947,689 
Finance lease right-of use assets  174,293   179,526   183,550   186,272 
Operating lease right-of –use assets  8,429,714   8,817,884   8,662,972   8,868,661 
Prepaid land leases, net of current portion  9,349,625   9,115,276   10,063,469   10,134,004 
Deferred tax assets  17,498,544   15,940,642   19,131,925   18,590,227 
Total non-current assets  168,300,776   172,048,277   188,008,547   186,726,853 
Total Assets $264,788,213  $279,250,985  $292,594,268  $294,037,818 
                
Liabilities and Stockholders’ Equity                
Current Liabilities                
Accounts , other payable and accrued expenses $1,086,958  $1,106,048 
Retention payable     3,805,483 
Accounts and other payable and accrued expenses $8,549,889  $5,081,701 
Taxes payable-current  1,085,061   779,623   1,405,772   1,326,179 
Finance lease liability, current portion  137,103   198,506   250,591   217,070 
Operating lease liabilities, current portion  429,771   416,604   317,544   477,350 
Total Current Liabilities  2,738,893   6,306,264   10,523,796   7,102,300 
Non-Current Liabilities                
Finance lease liability, net of current portion  1,740,882   1,905,772   1,875,592   1,888,903 
Operating lease liabilities, net of current portion  7,279,206   7,931,849   7,857,421   8,022,342 
Total Non-Current Liabilities  9,020,088   9,837,621   9,733,013   9,911,245 
Total Liabilities $11,758,981  $16,143,885  $20,256,809  $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; 9,563,257 and 9,563,257 shares issued; and 9,517,427 and 9,517,427 shares outstanding as of June 30, 2020 and December 31, 2019, respectively  23,904   23,904 
Treasury stock; 45,830 and 45,830 shares as of June 30, 2020 and December 31, 2019 at cost  (510,329)  (510,329)
COMMON STOCK; $0.0005 par value; 80,000,000 shares authorized; 10,043,307 shares issued; and 9,997,477 shares outstanding as of March 31, 2021 and December 31, 2020, respectively  24,139   24,139 
Treasury stock; 45,830 shares as of March 31, 2021 and December 31, 2020 at cost  (510,329)  (510,329)
Additional paid-in capital  95,043,388   95,043,388   97,435,316   97,435,316 
Retained earnings unappropriated  154,024,022   159,808,400   148,886,232   151,388,356 
Retained earnings appropriated  24,233,544   24,233,544   24,233,544   24,233,544 
Accumulated other comprehensive loss  (19,785,297)  (15,491,807)
Accumulated other comprehensive income  2,268,557   4,453,247 
Total Stockholders’ Equity  253,029,232   263,107,100   272,337,459   277,024,273 
Total Liabilities and Stockholders’ Equity $264,788,213  $279,250,985  $292,594,268  $294,037,818 

 

See accompanying notes to the condensed consolidated financial statements.

 

Table of Contents

 

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, Three-Month Period Ended
March 31,
 2020 2019 2020 2019 2021 2020
            
NET REVENUE                        
Net revenue $5,359,483  $6,009,409  $5,917,153  $6,047,979  $5,259,243  $557,670 
                        
OPERATING INCOME (EXPENSE)                
OPERATING EXPENSE        
Cost of net revenue  (5,022,896)  (2,990,330)  (5,944,216)  (3,026,737)  (4,181,389)  (921,320)
Sales, marketing and other operating expenses  (10,838)  (6,613)  (13,081)  (6,613)  (9,545)  (2,243)
Direct labor and factory overheads incurred during plant shutdown  (1,737,599)  (2,875,285)  (5,348,022)  (7,168,307)  (2,613,483)  (3,610,423)
General and administrative expenses  (1,541,702)  (1,335,347)  (2,385,039)  (3,440,518)  (1,736,250)  (843,337)
Other operating income (loss)        (15,776)   
Other operating expense     (15,776)
  (8,313,035)  (7,207,575)  (13,706,134)  (13,642,175)  (8,540,667)  (5,393,099)
                        
LOSS FROM OPERATIONS  (2,953,552)  (1,198,166)  (7,788,981)  (7,594,196)  (3,281,424)  (4,835,429)
                        
OTHER INCOME (EXPENSE)                        
Interest expense  (34,888)  (38,396)  (70,316)  (77,220)  (36,862)  (35,428)
Interest income  71,188   132,873   145,844   268,452   72,453   74,656 
LOSS BEFORE TAXES  (2,917,252)  (1,103,689)  (7,713,453)  (7,402,964)  (3,245,833)  (4,796,201)
                        
INCOME TAX BENEFIT  672,633   365,983   1,929,076   1,761,120   743,709   1,256,443 
        
NET LOSS $(2,244,619) $(737,706) $(5,784,377) $(5,641,844) $(2,502,124) $(3,539,758)
                        
COMPREHENSIVE LOSS:                        
NET LOSS $(2,244,619) $(737,706) $(5,784,377) $(5,641,844) $(2,502,124) $(3,539,758)
OTHER COMPREHENSIVE LOSS                        
- Foreign currency translation adjustments  221,869   (6,603,591)  (4,293,490)  (437,241)  (2,184,690)  (4,515,359)
        
COMPREHENSIVE LOSS $(2,022,750) $(7,341,297) $(10,077,867) $(6,079,085) $(4,686,814) $(8,055,117)
                        
LOSS PER SHARE:                        
BASIC AND DILUTED $(0.24) $(0.08) $(0.61) $(0.60) $(0.25) $(0.37)
                        
WEIGHTED AVERAGE NUMBER OF SHARES:                        
                
BASIC AND DILUTED  9,517,427   9,442,815   9,517,427   9,413,683   9,997,477   9,517,427 

 

See accompanying notes to the condensed consolidated financial statements.

 

Table of Contents

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
SIX-MONTHTHREE-MONTH PERIOD ENDED JUNE 30,MARCH 31, 2021 AND 2020
(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, 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 
Translation adjustment                          (2,184,690)  (2,184,690)
Net loss for three-month period ended March 31, 2021                    (2,502,124)        (2,502,124)
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 

 

 

  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 loss Total
                     
BALANCE AT MARCH 31, 2019 (Unaudited)  9,429,982   9,384,152   45,830  $23,573  $(510,329) $94,997,819  $180,704,307  $24,233,544  $(4,311,698) $295,137,216 
Translation adjustment                           (6,603,591)  (6,603,591)
Issuance of stock options to employees                     45,900            45,900 
Cashless exercise of stock options  132,462   132,462      331      (331)     —-       
Net loss for three-month period ended June 30, 2019                    (737,706)        (737,706)
BALANCE AT JUNE 30, 2019
(Unaudited)
  9,562,444   9,516,614   45,830  $23,904  $(510,329) $95,043,388  $179,966,601  $24,233,544  $(10,915,289) $287,841,819 

  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 

  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 loss Total
                     
BALANCE AT DECEMBER 31, 2018 (Audited)  9,410,588   9,360,758   49,830  $23,525  $(554,870) $95,020,808  $185,608,445  $24,233,544  $(10,478,048) $293,853,404 
Translation adjustment                           (437,241)  (437,241)
Common stock issued for services      4,000   (4,000)     44,541   (22,941)           21,600 
Cashless exercise of stock options  151,856   151,856      379      (379)     —-       
Issuance of stock options to employees                      45,900               45,900 
Net loss for six-month period ended June 30, 2019                    (5,641,844)        (5,641,844)
BALANCE AT JUNE 30, 2019
(Unaudited)
  9,562,444   9,516,614   45,830  $23,904  $(510,329) $95,043,388  $179,966,601  $24,233,544  $(10,915,289) $287,841,819 
  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                          (4,515,359)  (4,515,359)
Net loss for three-month period ended March 31, 2020                    (3,539,758)        (3,539,758)
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 

  

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
(UNAUDITED)

 

 Six-Month Period Ended June 30, Three-Month Period Ended March 31,
 2020 2019 2021 2020
        
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss $(5,784,377) $(5,641,844) $(2,502,124) $(3,539,758)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Interest on finance lease obligation  70,009   76,940 
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:        
Interest on capital lease obligation  35,538   35,272 
Depreciation and amortization  7,559,224   6,964,880   4,104,357   3,454,891 
Unrealized exchange gain on translation of inter-company balances  (382,331)  (44,427)
Unrealized exchange (gain) loss on translation of inter-company balances  104,812   (400,449)
Deferred tax asset  (1,929,553)  (1,761,118)  (743,709)  (1,256,443)
Common stock issued for services     21,600       
Issuance of stock options to employee     45,900 
Changes in assets and liabilities:        
Changes in assets and liabilities        
Accounts receivable  1,807,547   (6,775,954)  1,637,800   4,245,576 
Inventories  152,369   (457,780   (162,099)  523 
Prepayments and deposits  32,807   (17,037)  (71,888)  54,350 
Other receivables     1,631       
Accounts and Other payable and accrued expenses  (9,284)  321,706   830,751   (41,562)
Retention payable            
Taxes payable  298,599   768,072   72,758   (18,999)
Prepaid land leases  (369,066)        (369,066)
Operating lease  (268,192)  (268,620)
Net cash provided by (used in) by operating activities  1,177,752   (6,766,051)
Operating leases  35,199   38,022 
Net cash provided by operating activities  3,341,395   2,202,357 
                
CASH FLOWS USED IN INVESTING ACTIVITIES                
Purchase of property, plant and equipment  (9,860,142)  (11,501,738)     (7,416,211)
Net cash used in investing activities  (9,860,142)  (11,501,738)     (7, 416,211) 
                
CASH FLOWS USED IN FINANCING ACTIVITIES        
Repayment of finance lease obligation  (264,976)  (275,506)
Net cash used in financing activities  (264,976)  (275,506)
        
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS  (1,382,029)  (101,571)  (864,609)  (1,455,442)
NET DECREASE IN CASH AND CASH EQUIVALENTS  (10,329,395)  (18,644,866)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  2,476,786   (6,669,296)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD  100,301,986   178,998,935   94,222,538   100,301,986 
CASH AND CASH EQUIVALENTS - END OF PERIOD $89,972,591  $160,354,069  $96,699,324  $93,632,690 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
Cash paid during the periods for:        
Cash paid during the period for:        
Income taxes $  $  $  $ 
Operating right-of-use assets obtained in exchange for lease obligations $  $8,241,818  $  $ 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES        
Purchase of Property, plant and equipment included in Payable and other accrued expense and Retention payable $  $28,094,696 
Par value of common stock issued upon cashless exercise of options $  $379 
SUPPLEMENTAL DISCLOSURE OF CASH NON-CASH INVESTING AND FINANCING ACTIVITIES        
Increase in Property, plant and equipment transferred from Prepayment and deposits and included in Accounts and other payable and accrued expenses $6,199,214  $ 

 

See accompanying notes to the condensed consolidated financial statements.

 

Table of Contents

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020MARCH 31, 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.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 monthsquarter ended June 30, 2020March 31, 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, 2019 (the “2019 Form 10-K”). .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 certainthe 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 the 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 the People’s Republic of China (“PRC”).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-19COVID-19 a pandemic, pointing to the over 118,000 cases of COVID-19 illness in over 110 countries and territories around the world and the sustained risk of further global spread. On May 8, 2020, WHO reported that there were more than 18 million of confirmed cases of COVID-19 including 702,642 deaths globally. Given this fact, thepandemic. 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 first six monthsquarter of 20202021 and will continue to assess the financial impact for the remainder of the year.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 on February 27, 2020 issued by the local governmental authority which allowed the Company to resume production after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s Government dated on March 5, 2020 allowing the Company to resume production at its bromine factories No.1, No. 4, (which was renamed from Subdivision Factory No. 1), No.7 and No. 9 in order to meet the needs of bromide products for epidemic prevention and control (the “March 2020 Approval”). The Company’s Factories No. 1 and No. 7 commenced trial production in mid-March 2020 and commercial production on April 3, 2020 and its Factories No. 4 and No. 9 commenced commercial production on May 6, 2020.

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 documentsdocu15ments 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 believesestimates this relocation process will cost approximately $60$64 million in total. The Company incurred relocation costs comprising prepaid land lease, professional fees related to the design of the new chemical factory, purchase of plant and progress paymentequipment and depositconstruction costs and installation costs incurred for the construction of the new chemical factory building in the amount of $16,538,768$35,635,297 and $10,320,017,$33,496,295, which were recorded in the prepaid land leases and property,Property, plant and equipment in the consolidated balance sheets as of June 30, 2020March 31, 2021 and December 31, 2019.2020. 

 

(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.finalized the land and resource planning for Sichuan Province.

 

(c)           Allowance for Doubtful Accounts

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, 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, 2020March 31, 2021 and 2019.2020.

 

The Company collected from on its accounts receivable an amount of $1,933,814 from July 1 2020$3,396,688 in April 2021 through August 7, 2020.May 5, 2021.

 

(d)           Concentration of Credit Risk

 

The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited, China Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise protected. The Company placed $89,972,591$96,699,324 and $100,301,986$94,222,538 with these institutions as of June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.  The Company has not experienced any losses in such accounts in the PRC.

 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020MARCH 31, 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 5
Furniture, fixtures and equipment 3-8

 

Property, plant and equipment under the financecapital 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.lease.

 

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 designatedesignated 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 lossincome on an accrual basis when they are due. The Company’s contributions totaled $43,838and $292,800for$246,622 and $140,108 for the three-month periodperiods ended June 30,March 31, 2021 and 2020, and 2019, respectively, and totaled $183,946 and $603,737 for the six-month period ended June 30, 2020 and 2019, respectively.

 

(g)           Revenue Recognition

 

Net revenue is net of discount and value added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized when the control of the promised goods is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product is deemed to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no rights to return the goods upon acknowledgement of receipt of goods. Revenue from contracts with customers is disaggregated in Note 15.14.

 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020MARCH 31, 2021

 (Expressed(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 monthsthree-month period ended June 30, 2020and 2019,March 31, 2021 and 2020, the Company determined that there were no events or circumstances indicating possible additional impairment of its long-lived assets.

 

(i)           Basic and Diluted EarningsNet Income per Share of Common Stock

 

Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to74,781to 62,704 and 33,981113,370 shares for the three-month periodperiods ended June 30, 2020and 2019, respectively,March 31, 2021 and amounted to 94,075 and50,790 shares for the six-month period ended June 30, 2020, and 2019, respectively. These awards could be dilutive in the future if the market price of the common stock increases and is greater than the exercise price of these awards.

 

AsBecause the Company reported a net loss for the threethree-month periods ended March 31, 2021 and six months ended June 30, 2020, and 2019, common stock equivalents including stock options and warrants were anti-dilutive. Therefore,anti-dilutive, therefore the amounts reported for basic and diluted loss per share were the same.

 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020MARCH 31, 2021

 (Expressed(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.income. The statement of lossincome and comprehensive lossincome 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 lossincome 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

 

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.

 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(Expressed in U.S. dollars)

(UNAUDITED)

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

(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 costsloss contingencies relating to litigation,legal matters, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities, when such liabilities become probable and could be reasonably estimable.estimabled. Such estimates may be based on advice from third parties or on management'smanagement’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'sCompany’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 incomeprofit (loss).

 

(q)        New Accounting Pronouncements

  

Recent accounting pronouncements adopted

 

There were no recent accounting pronouncements adopted during the sixthree months ended June 30, 2020.March 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 trade.

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(Expressed in U.S. dollars)

(UNAUDITED)

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

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.

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 2 – INVENTORIES

 

Inventories consist of:

 

 June 30,
2020
 December 31,
2019
 March 31,
2021
 December 31,
2020
        
Raw materials $29,304  $20,928  $39,855  $21,484 
Finished goods  494,324   669,159   536,752   398,125 
 $523,628  $690,087  $576,607  $419,609 

There was no allowance for slow-moving inventories as of March 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 $8,982,369$9,677,429 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.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 2020March 31 2021 and December 31, 2019.2020. As of June 30, 2020,March 31, 2021, the prepaid land lease increased to $9,349,625$10,063,469 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 is expected to complete in Mayaround June 2021.

 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020MARCH 31, 2021

 (Expressed(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET

 

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

 

 June 30,
2020
 December 31,
2019
 March 31,
2021
 December 31,
2020
At cost:                
Mineral rights $2,724,154  $2,764,462  $2,934,951  $2,955,780 
Buildings  59,007,466   59,880,567   63,573,495   64,024,667 
Plant and machinery  231,247,364   234,669,007   256,579,799   258,400,710 
Motor vehicles  6,039   6,129   6,507   6,553 
Furniture, fixtures and office equipment  3,188,556   3,235,736   3,295,179   3,318,564 
Construction in process  5,562,402   1,204,742   18,127,541   12,095,565 
Total  301,735,981   301,760,643   344,517,472   340,801,839 
Less: Accumulated depreciation and amortization  (151,706,607)  (146,330,705)  (176,040,608)  (173,212,554)
Impairment  (17,180,774)  (17,434,989)  (18,510,233)  (18,641,596)
Net book value $132,848,600  $137,994,949  $149,966,631  $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 $18,725,141$18,720,653 and $19,894,947as$19,302,600 as at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

During the three-month period ended June 30, 2020,March 31, 2021, depreciation and amortization expense totaled $4,103,026$4,102, 929, of which $1,167,114, $198,413$1,816,782, $163,233 and $2,737,500$2,122,914 were recorded in direct labor and factory overheads incurred during plant shutdown,, administrative expenses and cost of net revenue,. respectively.

During the six-monththree-month period ended June 30,March 31, 2020,,depreciation and amortization expense totaled $7,556,589$3,453,563, of which $3,745,884, $399,819$2,578,771, $201,406 and $3,410,886$673,386 were recorded in direct labor and factory overheads incurred during plant shutdown,, administrative expenses and cost of net revenue,. respectively.

During the three-month period ended June 30, 2019, depreciation and amortization expense totaled $3,586,272 of which $2,019,128, $222,444 and $1,344,700were recorded in direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue. During the six-month period ended June 30, 2019,depreciation and amortization expense totaled $6,898,179 of which $5,086,024, $447,274 and $1,364,881 were recorded in direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue.

 

NOTE 5 –FINANCE– FINANCE LEASE RIGHT-OF-USE ASSETS

 

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

 

 June 30,
2020
 December 31,
2019
 March 31,
2021
 December 31,
2020
At cost:                
Buildings $116,237  $117,956  $125,231  $126,120 
Plant and machinery  2,126,386   2,157,848   2,290,926   2,307,184 
Total  2,242,623   2,275,804   2,416,157   2,433,304 
Less: Accumulated depreciation and amortization  (2,068,330)  (2,096,278)  (2,232,607)  (2,247,032)
Net book value $174,293  $179,526  $183,550  $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 monthsthree-month period ended June 30, 2020,March 31, 2021, depreciation and amortization expense totaled $1,308 and$2,635, respectively,$1,428, which was recorded in direct labor and factory overheads incurred during plant shutdown.

During the three and six monthsthree-month period ended June 30, 2019,March 31, 2020, depreciation and amortization expense totaled $1,360 and$66,701, respectively,$1,327, which was recorded in direct labor and factory overheads incurred during plant shutdown.

 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020MARCH 31, 2021

 (Expressed(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 6 – OPERATING LEASE RIGHT–OFRIGHT-OF USE ASSETS

 

As of June 30, 2020,March 31, 2021, the total operating lease ROU assets was $8,429,714. $8,662,972.

The total operating lease cost for the three-month period ended June 30,March 31, 2021 and 2020 was $240,150 and 2019 was $216,422and $225,022.

The total operating lease cost for the six-month period ended June 30, 2020 and 2019 was $436,109 and $452,241.$219,687, respectively.

 

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).authority. For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels of land of which the Company cannot obtain land use rights certificates covers a total of approximately 38.6 square kilometers of aggregate carrying value of $7,946,227as$8,155,820 as at June 30, 2020.March 31, 2021.

 

NOTE 7 – ACCOUNTS PAYABLE,AND OTHER PAYABLE AND ACCRUED EXPENSES

 

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

 

 June 30, December 31, March 31, December 31,
 2020 2019 2021 2020
Accounts payable $286,401  $  $1,040,950  $479,958 
Salary payable  289,734   310,097   318,291   320,549 
Social security insurance contribution payable  41,511   105,750   101,446   49,167 
Other payable-related party (see Note 8)  44,060   89,424   23,738   95,616 
Deposit on subscription of a subsidiary’s share  141,250   144,798   152,180   153,260 
Accrued expense-construction  96,485   97,913   6,296,071   3,537,644 
Accrued expense-others  187,517   358,066   617,213   445,507 
Total $1,086,958  $1,106,048  $8,549,889  $5,081,701 

 

The deposit on subscription of a subsidiary's share of $141,250$152,180 as of June 30, 2020March 31, 2021 relates to sale of non-controlling interests in DCHC. 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 8–8 – RELATED PARTY TRANSACTIONS  

During the three months ended June 30, 2020 and June 30, 2019, the Company borrowed $0 and $60,000 from a related company. There was no balance owing to this related company as of June 30, 2020 and December 31, 2019.

 

On September 25, 2012, the Company purchased five floors of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd. (the “Seller”) at a cost of approximately $5.7 million in cash, of which Mr. Ming Yang, the Chairman of the Company, had a 99% equity interest in the Seller. During the first quarter of 2018, the Company entered into an agreement with the Seller, a related party, to provide property management services for an annual amount of approximately $88,121$94,940 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, 2020wasMarch 31, 2021 and 2020 was approximately $22,030$23,735 and $44,043.The expense associated with this agreement$22,013. The amounting owing for the threeproperty management services as of March 31, 2021 and six months ended June 30, 2019was approximately $22,687December 31, 2020 was $23,738 and $45,849.

$95,616 (Note 7). The amount owed as of March 31, 2021 is interest-free, unsecured and payable in January 2022. 

NOTE 9–9 – TAXES PAYABLE

 

 June 30, December 31, March 31, December 31,
 2020 2019 2021 2020
Land use tax payable $768,254  $779,623   827,702   833,576 
Value added tax and other taxes payable  316,807      578,070   492,603 
 $1,085,061  $779,623 
Land use tax payable $1,405,772  $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, Imputed March 31, December 31,
 Interest rate 2020 2019 Interest rate 2020 2020
Total finance lease liability  6.7%  $1,877,985  $2,104,278   6.7%  $2,126,183  $2,105,973 
Less: Current portion    (137,103)  (198,506)    (250,591)  (217,070)
Finance lease liability, net of current portion   $1,740,882  $1,905,772    $1,875,592  $1,888,903 

 

Interest expenses from capitala finance lease obligationsliability amounted to $34,747$35,538 and $38,281for$35,262 for the three-month periodperiods ended June 30,March 31, 2021 and 2020, and 2019, respectively, which were charged to the condensed consolidated statement of income (loss). Interest expenses from capital lease obligations amounted to $70,009 and$76,940 for the six-month period ended June 30, 2020 and 2019, respectively, which were charged to the condensed consolidated statement of income (loss).Theloss. The remaining finance lease term at June 30,March 31, 2020 was 1110 years.

 

The components of operating lease liabilities as follows:

 

 Imputed June 30, December 31, Imputed March 31, December 31,
 Interest rate 2020 2019 Interest rate 2021 2020
Total Operating lease liabilities  4.89%  $7,708,977  $8,348,453   4.89%  $8,174,965  $8,499,692 
Less: Current portion    (429,771)  (416,604)    (317,544)  (477,350)
Operating lease liabilities, net of current portion   $7,279,206  $7,931,849    $7,857,421  $8,022,342 

 

The weighted average remaining operating lease term at June 30, 2020was 22yearsMarch 31, 2021 was 21 years and the weighted average discounts rate was 4.89%.Lease payments for. This discount rates used are based on the three-month periodbase rate quoted by the People's Bank of China and vary with the remaining term of the lease. Lease payment in the three-months ended June 30,March 31, 2021 and 2020 was $204,951 and 2019, respectively, were $522,636 and $543,405. Lease payments for the six-month period ended June 30, 2020 and 2019, respectively, were $704,301 and $724,144.$181,665.

 

Maturities of lease liabilities were as follows:

 

 Financial lease Operating Lease Financial lease Operating Lease
Payable within:             
the next 12 months $265,126  $772,135  $285,642  $672,669 
the next 13 to 24 months 265,126 628,001   285,642   678,258 
the next 25 to 36 months 265,126 631,628   285,642   677,300 
the next 37 to 48 months 265,126 632,586   285,642   683,280 
the next 49 to 60 months 265,126 636,503   285,642   689,295 
thereafter  1,325,634   10,704,542   1,428,210   11,421,886 
Total 2,651,264 14,005,395   2,856,420   14,822,688 
Less: Amount representing interest  (773,279)  (6,296,418  (730,237)  (6,647,723)
Present value of net minimum lease payments $1,877,985  $7,708,977   2,126,183  $8,174,965 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 11 ––EQUITY–EQUITY

 

Reverse Stock Split and AuthorizedRestricted Shares

 

On January 27, 2020, the Company completedA restricted stock award (“RSA”) is an award of common shares that is subject to certain restrictions during a 1-for-5 reversespecified period. Restricted stock splitawards are independent of the company’s common stock, such that for each five shares outstandingoption 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 split there was one share outstanding afterhave the reverse stock split. All shares ofsame voting rights as common stock, referenced in this report have been adjustedare entitled to reflectreceive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company expenses the stock split figures.

There is no change to the authorized sharescost of the Company'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 which remain at 80,000,000.on the grant date.

 

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, 2020March 31, 2021 for SCHC, SYCI and DCHC is 16%, 14% and 0% of its registered capital respectively.

 

NOTE 12– TREASURYSTOCK

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In January 2019, the Company issued 4,000 shares of common stock from the treasury shares to one of its consultants. The shares were valued at the closing market price on the date of the agreement and recorded as general and administrative expenseGULF RESOURCES, INC. 

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(Expressed in the consolidated statement of loss and comprehensive loss for the year ended December 31, 2019. The shares issued were deducted from the treasury shares at weighted average cost and the excess of the cost over the closing market price was charged to additional paid-in-capital.U.S. dollars)

(UNAUDITED)

On September 13, 2019, the Company received a staff deficiency notice from The Nasdaq Stock Market informing the Company that it has failed to comply with Nasdaq’s shareholder approval requirements relating to shares issued to this consultant. A total of 8,000 restricted shares issued to this consultant from treasury were canceled. On January 14, 2020, the Company reissued the shares from the 2019 Omnibus Equity Incentive Plan adopted by the board of directors of the Company and approved by the stockholders at the annual stockholders meeting held on December 18, 2019.

On January 23, 2020, the Company received a letter from the Nasdaq Stock Market Listing Qualifications Staff (the “Staff”) notifying that the Company has regained compliance with the shareholder approval requirements set forth in Nasdaq Listing Rule 5635(c) in connection with shares issued to a consultant based on the Staff’s review of the Company’s submitted materials.

 

NOTE 1312 – STOCK-BASED COMPENSATION

 

Pursuant to the Company’s 2019 Omnibus Equity Incentive Plan adopted and approved in 2019 (“ 2019 Plan”), awards under the 2019 Plan is limited in the aggregate to 2,068,398 shares of our common stock, inclusive of the awards that were previously issued and outstanding under the Company’s 2007 Equity Incentive Plan, as amended (the “2007 Plan”). Upon adoption and approval of the 2019 Plan, the 2007 Plan was frozen, no new awards will be granted under the 2007 Plan, and outstanding awards under the 2007 Plan will continue to be governed by the terms and condition of the 2007 Plan and applicable award agreement. As of June 30, 2020,March 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 989,698515,648 shares.

 

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

 

For the three and six months ended June 30,March 31, 2021 and 2020, and 2019, total compensation costs for options grantedissued recorded in the consolidated statement of loss were $0 and $45,900.$0.

 

During the three and six months ended June 30, 2020,March 31, 2021, there were no options grantedissued to employees or non-employees.

 

The following table summarizes all Company stock option transactions between January 1, 20202021 and June 30, 2020.March 31, 2021.

 

  Number of Option
and Warrants
Outstanding and exercisable
 Weighted- Average Exercise price of Option
and Warrants
 Range of
Exercise Price per Common Share
Balance, January 1, 2020  135,100  $7.21   $3.57 - $9.90 
Exercised during the period         
Expired during the period  (7,500) $9.17    
Balance, June 30, 2020  127,600  $7.09   $3.57 - $7.27 
  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 
Granted during the period         
Exercised  during the period         
Expired during the period    $  $ 
Balance, March 31, 2021  121,600  $7.09   $3.57 - $7.27 

  

Stock Options and Warrants Outstanding and Exercisable
     Weighted Average     Weighted Average 
     Remaining     Remaining 
 Outstanding at June 30, 2020 

Range of

Exercise Prices

 

Contractual Life

 (Years)

  Outstanding at March 31, 2021   

Range of

Exercise Prices

   

Contractual Life

 (Years)

 
Outstanding and exercisable 127,600 $3.57 - $7.27 1.13  121,600   $3.57 - $7.27   0.41 

 

The aggregate intrinsic value of options outstanding and exercisable as of June 30, 2020March 31, 2021 was $10,710.$4,710.

  

During the three months ended June 30,March 31, 2021 and 2020, and 2019, there were 0 and 132,462shares of common stock issued upon cashless exercise of 0 and 330,400 options.

During the six months ended June 30, 2020 and 2019, there were 0 and 151,856 shares of common stock issued upon cashless exercise of 0 and 379,400 options.

The aggregate intrinsic value ofno options exercised during the three months ended June 30, 2020 was $0.The aggregate intrinsic value of options exercised during the three months ended June 30, 2019 was $808,014.

The aggregate intrinsic value of options exercised during the six months ended June 30, 2020 was $0.The aggregate intrinsic value of options exercised during the six months ended June 30, 2019 was $922,429.exercised. 

 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020MARCH 31, 2021

 (Expressed(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1413 – 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.

 

(a)           United States (“US”)

 

Gulf Resources, Inc. may be subject to the United States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the three-month and six-month periods ended June 30, 2020and 2019,March 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 three-month and six-month periods ended June 30, 2020March 31, 2021 and 2019.2020. 

 

(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, 2020March 31, 2021 and 2019.2020.  The applicable statutory tax rates for the three-month and six-month periods ended June 30,March 31, 2021 and 2020 and 2019areare 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, 2020March 31, 2021 and December 31, 2019,2020, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $114,295,118$122,460,382 and $124,616,722,$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, 2020March 31, 2021 and December 31, 2019,2020, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject

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GULF RESOURCES, INC. 

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(Expressed in U.S. dollars)

(UNAUDITED)

to WHT in China. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the unrecognized WHT are $4,752,714$5,086,534 and $5,254,560,$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 2016are2017 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.are currently subject to examination.

 

The components of the provision for income tax benefit (expense) from continuing operations are:

 

 Three-Month Period Ended March 31,
 Three-Month Period Ended June 30, Six-Month Period Ended June 30, 2021 2020
 2020 2019 2020 2019    
Current taxes – PRC $  $  $  $  $  $ 
Deferred taxes – PRC  612,354   695,988   1,739,929   2,106,066 
Deferred tax – PRC entities  743,709   1,256,443 
Deferred taxes –US entity  15,957   24,053 
Change in valuation allowance  60,279   (330,005)  189,147   (344,946)  (15,957)  (24,053)
 $672,633  $365,983  $1,929,076  $1,761,120  $743,709  $1,256,443 

 

The effective income tax rate differsbenefit differ 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, Three-Month Period Ended March 31,
Reconciliations 2020 2019 2020 2019 2021 2020
Statutory income tax rate  25%  25%  25%  25%  25%  25%
Non-taxable income,(Non-deductible expense) and change in valuation allowance  (2%)  8%     (1%)
Effective tax rate  23%  33%  25%  24%
Non-taxable & Non-deductible items (1%) 2%
Change in valuation allowance  (1%)  (1%) 
Effective income tax benefit (expense) rate  23%  26%

 

Significant components of the Company’s deferred tax assets and liabilities at June 30, 2020March 31, 2021 and December 31,2019are31, 2020 are as follows:

 

 June 30, December 31, March 31, December 31,
 2020 2019 2021 2020
Deferred tax liabilities $  $  $  $ 
                
Deferred tax assets:                
Impairment on property, plant and equipment  2,764,893   2,974,542  $2,712,092  $2,907,548 
Impairment on prepaid land lease  814,620   826,673   877,656   883,884 
Exploration costs  1,758,563   1,784,583   1,894,641   1,908,087 
Compensation costs of unexercised stock options  74,883   171,672   72,699   74,883 
PRC tax losses  20,571,271   18,737,005   22,296,935   21,643,028 
US federal net operating loss  311,000   432,000   1,063,644   1,045,503 
Total deferred tax assets  26,295,230   24,926,475   28,917,667   28,462,933 
Valuation allowance  (8,796,686)  (8,985,833)  (9,785,742)  (9,872,706)
Net deferred tax asset $17,498,544  $15,940,642  $19,131,925  $18,590,227 

 

The decrease in valuation allowance for the three-month period ended June 30, 2020March 31, 2021 is $60,279.$86,964.

 

The increase in valuation allowance for the three-month period ended June 30, 2019is $330,005.

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

The increase in valuation allowance for the six-month period ended June 30, 2019is $344,946.March 31, 2020 is $128,868.

 

There were no unrecognized tax benefits and accrual for uncertain tax positions as of June 30, 2020March 31, 2021 and December 31, 20192020 and no amounts accrued for penalties and interest for the three and six months ended June 30, 2020March 31, 2021 and 2019.2020.

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 (Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1514 – BUSINESS SEGMENTS

The Company has four reportable segments:  bromine, crude salt, chemical products and natural gas. The reportable segments are consistent with how management views the markets served by the Company and the financial information that is reviewed by its chief operating decision maker.

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2021

(Expressed in U.S. dollars)

(UNAUDITED)

NOTE 14 – BUSINESS SEGMENTS – Continued

 

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

 

Three-Month

Period Ended

June 30, 2020

 Bromine* 

Crude

 Salt*

 

Chemical

 Products

 Natural Gas 

Segment

 Total

 Corporate Total
Three-Month Period Ended March 31, 2021 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  $4,810,990 $448,253 $ $ $5,259,243 $ $5,259,243 
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)
Loss from operations before income benefit (1,279,565) (1,009,585) (746,469) (54,787) (3,090,406) (191,018 (3,281,424)
Income tax benefit  350,708   172,849   149,076      672,633      672,633  318,868 252,396 172,445  743,709  743,709 
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)
Loss from operations after income taxes(benefit) (960,697) (757,189) (574,024) (54,787) (2,346,697) (191,018 (2,537,715)
Total assets  115,956,839   38,299,428   108,862,565   1,599,014   264,717,846   70,367   264,788,213  144,744,423 24,170,863 121,760,637 1,875,459 292,551,382 42,886 292,594,268 
Depreciation and amortization  3,038,936   919,003   111,797   34,598   4,104,334      4,104,334  2,920,689 1,077,460 68,607 37,601 4,104,357  4,104,357 
Capital expenditures        2,443,931      2,443,931      2,443,931         

 

Three-Month

Period Ended

June 30, 2019

 Bromine* 

Crude

 Salt*

 

Chemical

 Products

 Natural Gas 

Segment

 Total

 Corporate Total
Three-Month Period Ended March 31, 2020 Bromine * 

Crude

Salt *

 

Chemical

Products

 Natural Gas 

Segment

Total

 Corporate Total
Net revenue
(external customers)
 $5,751,164  $245,079  $  $13,166  $6,009,409  $  $6,009,409  $462,846 $94,824 $ $ $557,670 $ $557,670 
Net revenue (intersegment)                             
Income(loss) from operations before income tax benefit  (36,713)  (828,736)  (656,424)  (61,401)  (1,583,274)  385,108   (1,198,166)
Income (loss) from operations before income taxes(benefit) (2,866,438) (1,513,582) (710,909) (48,846) (5,139,775) 304,346 (4,835,429)
Income tax benefit  9,540   215,360   141,083      365,983      365,983  717,438 378,396 160,609  1,256,443  1,256,443 
Income(loss) from operations after income tax benefit  (27,173)  (613,376)  (515,341)  (61,401)  (1,217,291)  385,108   (832,183)
Income (loss) from operations after income taxes(benefit) (2,149,000) (1,135,186) (550,300) (48,846) (3,883,332) 304,346 (3,578,986)
Total assets  169,870,183   29,241,474   128,641,174   1,773,689   329,526,520   37,207   329,563,727  117,061,540 39,066,713 109,222,446 1,657,769 267,008,468 105,430 267,113,898 
Depreciation and amortization  2,476,960   958,352   116,240   36,080   3,587,632      3,587,632  2,197,844 1,108,443 113,484 35,120 3,454,891  3,454,891 
Capital expenditures  10,857,541   644,197         11,501,738      11,501,738  3,157,669 646,752 3,611,790  7,416,211  7,416,211 

   

* 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.

 

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GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020MARCH 31, 2021

 (Expressed(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1514 – BUSINESS SEGMENTS – Continued

 

Six-Month

Period Ended

June 30, 2020

 Bromine* 

Crude

 Salt*

 

Chemical

 Products

 Natural Gas 

Segment

 Total

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

Six-Month

Period Ended

June 30, 2019

 Bromine* 

Crude

 Salt*

 

Chemical

 Products

 Natural Gas 

Segment

 Total

 Corporate Total
Net revenue
(external customers)
 $5,751,164  $245,079  $  $51,736  $6,047,979  $  $6,047,979 
Net revenue
(intersegment)
                     
Loss from operations before income tax benefit  (3,661,727)  (2,240,545)  (1,329,974)  (103,384)  (7,335,630)  (258,566)  (7,594,196)
Income tax benefit  906,887   568,312   285,921      1,761,120      1,761,120 
Loss from operations after Income tax benefit  (2,754,840)  (1,672,233)  (1,044,053)  (103,384)  (5,574,510)  (258,566)  (5,833,076)
Total assets  169,870,183   29,241,474   128,641,174   1,773,689   329,526,520   37,207   329,563,727 
Depreciation and amortization  4,595,037   2,063,460   233,628   72,755   6,964,880      6,964,880 
Capital expenditures  10,857,541   644,197         11,501,738      11,501,738 

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

15 

Table of Contents

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2020

 (Expressed in U.S. dollars)

(UNAUDITED)

NOTE 15 – BUSINESS SEGMENTS – Continued

 Three-Month Period Ended June 30, Six-Month Period Ended June 30, Three-Month Period Ended March 31,
Reconciliations 2020 2019 2020 2019 2021 2020
Total segment operating loss $(2,798,478) $(1,583,274) $(7,938,253) $(7,335,630) $(3,090,406) $(5,139,775)
Corporate costs  (136,956)  (162,547)  (233,059)  (302,993)  (86,206)  (96,103)
Unrealized gain on translation of intercompany balance  (18,118)  547,655   382,331   44,427 
Unrealized gain (loss) on translation of intercompany balance  (104,812)  400,449 
Loss from operations  (2,953,552)  (1,198,166)  (7,788,981)  (7,594,196)  (3,281,424)  (4,835,429)
Other income, net of expense  36,300   94,477   75,528   191,232 
Loss before taxes $(2,917,252) $(1,103,689) $(7,713,453) $(7,402,964)
Other income  35,591   39,228 
Loss before income taxes $(3,245,833) $(4,796,201)

 

The following table shows the major customer(s)customers (10% or more) for the three-month period ended June 30, 2020.March 31, 2021.

 

Number Customer 

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%)

 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% Shandong Morui Chemical Company Limited $896  $169  $  $1,065   20.2%
2 Shandong Brother Technology Limited $550  $300  $  $850   15.8% Shouguang Weidong Chemical Company Limited $703 $108 $ $811 15.4%
3 Shouguang Weidong Chemical Company Limited $982  $251  $  $1,233   23% Shandong Brother Technology Limited $634 $172 $ $806 15.3%
4 Dongying Bomeite Chemical Company Limited $537  $  $  $537   10% Shandong Shouguang Shenrunfa Ocean Chemical Company Limited $672 $ $ $672 12.8%
5 Shandong Shouguang Shenrunfa Ocean Chemical Company Limited $711  $  $  $711   13.3% Dongying Bomeite Chemical Company Limited $565 $ $ $565 10.7%

 

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

Number Customer 

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%)

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

The following table shows the major customer(s)customers (10% or more) for the three-month period ended June 30, 2019.March 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 $1,360  $72  $  $1,432   23.9%
2 Shouguang Weidong Chemical Company Limited $1,100  $70  $  $1,170   19.5%
3 Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited $1,039  $102  $  $1,141   19%
4 

shouguang Shenrunfa

ocean Chemical Company Limited
 $772  $  $  $772   12.9%

The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2019.

Number Customer 

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%) 

 Customer 

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%)

1 Shandong Morui Chemical Company Limited $1,360  $72  $  $1,432   23.9% Shandong Morui Chemical Company Limited $70  $41  $  $111   20%
2 Shouguang Weidong Chemical Company Limited $1,100  $70  $  $1,170   19.5% Shandong Brother Technology Limited $60 $36 $ $96 17.1%
3 Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited $1,039  $102  $  $1,141   19% Shouguang Weidong Chemical Company Limited $65 $18 $ $83 14.9%
4 

Shouguang Shenrunfa

ocean Chemical Company Limited
 $772  $  $  $772   12.9% Dongying Bomeite Chemical Company Limited $70 $ $ $70 12.5%
5 Shandong Shouguang Shenrunfa Ocean Chemical Company Limited $57 $ $ $57 10.2%
6 Shouguang JinWang Chemical Company Limited $56 $ $ $56 10%

 

NOTE 16–15– CUSTOMER CONCENTRATION

 

During the six-monththree-month period ended June 30, 2020,March 31, 2021, the Company sold 82.4%74.5% of its products to its top five customers, respectively.customers. As of June 30,March 31, 2021, amounts due from these customers were $3,571,150.

During the three-month period ended March 31, 2020, the Company sold 84.8% of its products to its top six customers. As of March 31, 2020, amounts due from these customers were $2,488,001.

During the six-month period ended June 30, 2019, the Company sold 84% of its products to its top five customers, respectively. As of June 30, 2019, amounts due from these customers were $5,663,578.$526,288.

  

NOTE 17–16 – MAJOR SUPPLIERS

 

During the six-monththree-month period ended June 30,March 31, 2021, the Company purchased 100% of its raw materials from its top five suppliers.  As of March 31, 2021, amounts due to those suppliers were $1,040,950.

During the three-month period ended March 31, 2020, the Company purchased 100% of its raw materials from its top five suppliers.  As of June 30,March 31, 2020, amounts due to those suppliers were $286,401.$53,707.

During the six-month period ended June 30, 2019, the Company purchased 100% of its raw materials from its top five suppliers.  As of June 30, 2019, amounts due to those suppliers were $389,780.

 

NOTE 1817 – 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, 2020March 31, 2021 and December 31, 2019.2020.

 

NOTE 1918 – CAPITAL COMMITMENT AND OTHER SERVICE CONTRACTUAL OBLIGATIONS

The Company has no purchase commitments as of March 31, 2021.

 

The following table sets forth the Company’s contractual obligations as of June 30, 2020:March 31, 2021:

 

 Property Management Fees Capital Expenditure Property Management Fees Capital Expenditure
Payable within:             
the next 12 months $88,121  $5,323,609  $94,940  $12,391,563 
the next 13 to 24 months 88,121 407,553   94,940   748,433 
the next 25 to 36 months  88,121          
Total $264,363  $5,731,162  $189,880  $13,139,996 

 

NOTE 2019 –LOSS CONTINGENCIES

 

On or about August 3, 2018, written decisions of administration penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo Tu Zi Fa Gao Zi [2018] No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu Zi Fa Gao Zi [2018] No. 296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company Limited (“SCHC”) by Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as respondent respectively thereof. The Decisions challenged the land use of Factory nos. 2, 9, 7, 4, 8 and 10, respectively, and alleged, among other things, that SCHC had illegally occupied and used the land in the total area of approximately 52,674 square meters,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 ownerowners 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. The Company has obtained one confirmation fromPursuant to a Written Application dated October 28, 2019 addressed to the local government authorities thatCourt 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 are being revoked which are waiting forNo.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 formal approval ,and productionorders 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. The Company believes that the goal of the government is to standardize and regulate the industry and not to demolish the facilities or penalize the manufacturers. As of the date of this report, the Company has not been notified by the local government that it will take any measure to enforce the administrative penalties. Based on information known to date, the Company believes that it is remote that the Written Decisions or Court Rulings will be enforced within the expected timeframe and a material penalty or costs and expenses against the Company will result. However, there can be no assurance that there will not be any further enforcement action, the occurrence of which may result in further liabilities, penalties and operational disruption.

 

In view of the above facts and circumstances, the Company believes that it is not necessary to accrue for any estimated losses or impairment as of June 30, 2020.March 31, 2021.

NOTE 20 - SUBSEQUENT EVENT

On April 26, 2021, the Company entered into an agreement with its officers and employees, pursuant to which the options to purchase 115,600 shares of our common stock granted on August 23, 2017 were cancelled.

On May 10, 2021, the Company entered into restricted stock agreements with its consultant, officers, directors and employees, pursuant to which the Company issued a total of 472,000 restricted shares of common stock of the Company, par value $0.0005 per share under the Company’s 2019 Omnibus Equity Incentive Plan.

 

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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 manufacture and sell 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.

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Recent Development

On September 21, 2018,In February 2019, the Company received a closing noticenotification from the People'slocal 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 Town,County, Shouguang City informing itnotifying the Company that its three bromine factories (No. 3, No. 4,due to the new standards and No. 11.) are not allowedregulations relating to resumesafety production and henceenvironmental 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 demolish these factories. The crude salt fields surrounding these factories have been reclaimed as cultivated or construction land and hence did not meet the requirementlocal authorities for bromine and crude salt co-production setapproval. On January 6, 2020, the Company received the environmental protection approval by the relevant authority.government of Shouguang City, Shandong Province for the proposed Yuxin Chemical factory. The Company began the construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020. The construction is expected to take approximately one year, and an additional six months to complete the equipment installation and testing. The Company expects to begin trial production at the beginning of 2022.

 

In January 2017, the Company completed the first brine water and natural gas well field construction in Daying locatedSichuan 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, ,DayingDaying 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

As a result of our acquisitions of SCHC and SYCI, our historical consolidated financial statements and the Chinese government new policies,information presented below reflects the Company is also required to obtain an exploration licenseaccounts of SCHC, SYCI and a mining license for bromine natural gas, respectively. Pursuant toDCHC, the Opinionscondensed consolidated financial statements and the information presented below as 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 applicationsand for the natural gasquarter ended March 31, 2021. The following discussion should be read in conjunction with our condensed consolidated financial statements and brine project approvals with related government departments.notes thereto appearing elsewhere in this report.

 

The Company received an approval from the Shouguang Yangkou People’s Government dated on March 5, 2020 allowing the Company to resume production at its bromine factories No.1, No. 4 (which was renamed from Subdivision Factory No. 1), No.7 and No. 9 in order to meet the needs

20 

Table of bromide products for epidemic prevention and control. As of the date of this report, all those four bromine factories have commenced commercial production of bromine and crude salt. Factory no. 1 and no. 7 resumed operation in March 2020 and Factory no. 4 and no. 9 resumed operation in May 2020.Contents

At the present time, our chemical factory SYCI is closed pursuant to the letter from government dated on November 24, 2017. It will be relocated to Bohai Marine Fine Chemical Industry Park, Shouguang City. To date, we have secured the land for our new chemical factory. The Company also has had the final approval regarding environmental protection assessment. The Company expects to start our new chemical factory construction within the second quarter of 2020.

 

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.

18 

Table of Contents

 

RESULTS OF OPERATIONS

 

The following table presents certain information derived from the condensed consolidated statements of operations,income, cash flows and stockholdersstockholders’ equity for the three-month and six-month periods ended June 30, 2020March 31, 2021 and 2019.2020. 

 

Comparison of the Three-Month PeriodPeriods Ended June 30,March 31, 2021 and 2020 and 2019

 

 Three-Month Period
Ended June 30, 2020
 Three-Month Period
Ended June 30, 2019
 Percent Change
Increase/
(Decrease)
 Three-Month Period
Ended March 31, 2021
 Three-Month Period
Ended March 31, 2020
 Percent Change
Increase/
(Decrease)
Net revenue $5,359,483  $6,009,409   (11%) $5,259,243  $557,670   843%
Cost of net revenue  (5,022,896)  (2,990,330)  68% $(4,181,389) $(921,320)  353%
Gross profit  336,587   3,019,079   (89%)
Gross profit (loss) $1,077,854  $(363,650)  396%
Sales, marketing and other operating expenses  (10,838)  (6,613)  64% $(9,545) $(2,243)  325%
Research and development costs         
Direct labor and factory overheads incurred during plant shutdown  (1,737,599)  (2,875,285)  (40%) $(2,613,483)  (3,610,423)  (27%)
Other operating expense $   (15,776)   
General and administrative expenses  (1,541,702)  (1,335,347)  15% $(1,736,250) $(843,337)  106%
Loss from operations  (2,953,552)  (1,198,166)  147% $(3,281,424) $(4,835,429)  (32%)
Other income  36,300   94,477   (62%)
Other income, net $35,591  $39,228   (9%)
Loss before taxes  (2,917,252)  (1,103,689)  164% $(3,245,833) $(4,796,201)  (32%)
Income tax benefit  672,633   365,983   84% $743,709  $1,256,443   (41%)
Net loss $(2,244,619) $(737,706)  204% $(2,502,124) $(3,539,758)  (29%)

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Net revenue.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, 2020 asMarch 31, 2021 compared to the same period in 2019:2020:

 

 Net Revenue by Segment   Net Revenue by Segment  
 Three-Month Period Ended Three-Month Period Ended Percent Change
Increase (Decrease)
 Three-Month Period Ended Three-Month Period Ended Percent Change
 June 30, 2020 June 30, 2019 of Net Revenue March 31, 2021 March 31, 2020 Increase
Segment   % of total   % of total     % of total   % of total  
Bromine $4,487,017   83.72% $5,751,164   95.7%  (21.99%) $4,810,990   92% $462,846   83%  939%
Crude Salt  872,466   16.28%  245,079   4.1%  256% $448,253   8% $94,824   17%  373%
Chemical Products                $     $       
Natural Gas        13,166   0.2%  (100%) $     $       
Total sales $5,359,483   100% $6,009,409   100%  (11%) $5,259,243   100% $557,670   100%  843%

 

  Three-Month Period Ended Percentage Change
Bromine and crude salt segments product sold in tonnes March 31, 2021 March 31, 2020 Increase
Bromine (excluded volume sold to SYCI)  955   122   683%
Crude Salt  20,436   5,341   283%

 

Bromine and crude salt segments Three-Month Period Ended Percentage Change
product sold in tonnes June 30, 2020 June 30, 2019 Increase (Decrease)
Bromine  1,222   1,299   (6%)
Crude Salt  53,532   9,827   445%

  Three-Month Period Ended Percentage
Natural gas segments product sold in cubic metre June 30, 2020 June 30, 2019 Change
Natural Gas     89,699   (100%)
Three-Month Period EndedPercentage Change
Natural gas segments product sold in cubic metreMarch 31, 2021March 31, 2020Decrease
Natural Gas

 

Bromine segment

 

For the three-month periods ended June 30,March 31, 2021 and 2020, and 2019, the net revenue for the bromine segment was $4,487,017$4,810,990 and $5,751,164,$462,846, respectively, mainly due to the lower volume offact that four plants resumed production and lower selling price.sales in the first quarter of 2021, while only two plants were in operation in the first quarter of 2020. 

 

Crude salt segment

 

For the three-month periods ended June 30,March 31, 2021 and 2020, and 2019, the net revenue for the crude salt was $872,466$448,253 and $245,079 mainly$94,824 due to the higher volumefact that production and sales resumed at three plants in the first quarter of production. .

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Table2021, while only two plants resumed production in the first quarter of Contents2020. 

 

Chemical products segment

 

For the three-month periods ended June 30,March 31, 2021 and 2020, and 2019, the net revenue for the chemical products segment was $0 due to the closure of our chemical factories since September 1, 2017. As a result of the closure, there were no chemical products for sale for the three-month period ended June 30, 2020. We are setting up aMarch 31, 2021. Our new chemical factory is under construction in Bohai Park.

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Natural gas segment

 

For the three-month period ended June 30,March 31, 2021 and 2020, the net revenue for the natural gas was $0. 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. Based on the government new policies, the Company is also required to obtain an exploration license and a mining license for bromine and natural gas, respectively.

For the three-month period ended June 30, 2019, the net revenue for the natural gas was $13,166. We commenced natural gas trial production in January 2019.

 

Cost of Net Revenue

 

 Cost of Net Revenue by Segment Percent Change Cost of Net Revenue by Segment Percent Change
 Three-Month Period Ended Three-Month Period Ended of Cost of Three-Month Period Ended Three-Month Period Ended of Cost of
 June 30, 2020 June 30, 2019 Net Revenue March 31, 2021 March 31, 2020 Net Revenue
Segment   % of total   % of total     % of total   % of total  
Bromine $4,269,239   85% $2,717,808   91%  57% $3,514,046   84% $609,820   66%  476%
Crude Salt  753,657   15%  258,641   8.5%  191% $667,343   16% $311,500   34%  114%
Chemical Products                $     $       
Natural Gas        13,881   0.5%  (100%) $     $       
Total $5,022,896   100% $2,990,330   100%  68% $4,181,389   100% $921,320   100%  353%

 

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

 

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, 2019  31,506   18%
Three-month period ended June 30, 2020  31,506   15%
Variance of the three-month period ended June 30, 2020 and 2019     (3%)
  Annual Production Capacity (in tonnes) Utilization
Ratio (i)
Three-month period ended March 31, 2020   31,506      5
Three-month period ended March 31, 2021   31,506      17%
Variance of the three-month periods ended March 31, 2021 and 2020          12

 

(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.tonnes.

 

Our utilization ratio was 15%17% for the three-month period ended June 30, 2020March 31, 2021, an increase of 12% compared to 18% recordedthat for the three-month period ended June 30, 2019 mainlyMarch 31, 2020 because the overall market environment has not fully recovered, leadingfour plants resumed production in March 31, 2021 compared to a lower demand for our products.two plants in operations in March 31, 2020. 

 

Bromine segment

 

For the three-month period ended June 30, 2020March 31, 2021 the cost of net revenue for the bromine segment was $4,269,239.$3,514,046. This $1,551,431$2,904,226 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 that were placed in service in March and May in 2020 for four factories that resumed operation in the three-month ended June 30, 2020.March 31, 2021.

 

For the three-month period ended June 30, 2019March 31, 2020 the cost of net revenue for the bromine segment was $2,717,808.$609,820.

 

Crude salt segment

 

For the three-month period ended June 30, 2020March 31, 2021 the cost of net revenue for the crude salt segment was $753,657.$667,343. This $495,016$355,843 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 that were placed in service in March and May in 2020 for three factories that resumed operation in the three-month ended June 30, 2020.March 31, 2021.

 

For the three-month period ended June 30, 2019March 31, 2020 the cost of net revenue for the crude salt segment was $258,641.$311,500.

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Chemical products segment

 

Cost of net revenue for our chemical products segment for the three-month period ended June 30,March 31, 2021 and 2020 and 2019 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, 2020. We are setting up a new factory in Bohai Park.$0.

 

Natural gas segment

 

Cost of net revenue for our natural gas segment for the three-month period ended June 30,March 31, 2021 and 2020 was $0.

 

Cost of net revenue for our natural gas segment for the three-month period ended June 30, 2019 was $13,881.

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Gross Profit. Profit(Loss)Gross profit was $336,587,$1,077,854, or 6%21%, of net revenue for three-month period ended June 30, 2020,March 31, 2021, representing a decreasean increase of $2,682,492$1,441,504 (or 44%86%), as compared to a gross profitloss of $3,019,079,$363,650, or 50%65%, of net revenue for the same period in 2019.2020.

 

 Gross Profit (Loss) by Segment % Point Change Gross Profit(Loss) by Segment % Point Change
 Three-Month Period Ended Three-Month Period Ended of Gross Three-Month Period Ended Three-Month Period Ended of Gross
 June 30, 2020 June 30, 2019 Profit Margin March 31, 2021 March 31, 2020 Profit (Loss) Margin
Segment   Gross Profit Margin   Gross Profit Margin     Gross Profit Margin   Gross Profit Margin  
Bromine $217,778   5% $3,033,356   53%  (48%) $1,296,944   27% $(146,974)  (32%)  59%
Crude Salt  118,809   14%  (13,562)  (6%)  20% $(219,090)  (49%) $(216,676)  (229%)  180%
Chemical Products                 $     $       
Natural Gas        (715)       $             
Total Gross Profit $336,587   6% $3,019,079   50%  (44%)
Total Gross Profit (Loss) $1,077,854   21% $(363,650)  (65%)  86%

 

Bromine segment

 

For the three-month period ended June 30, 2020,March 31, 2021, the gross profit margin for our bromine segment was 5%27%. This 48% decrease59% increase was primarily attributabledue to the increase in factory overhead per unit produced mainly due to lower volume offact that production lower selling price and the increase in depreciation charges of plant and equipment that were placed in service in March and April in 2020 for factories thatsales resumed operationat four plants in the three-month ended June 30, 2020.first quarter of 2021, while only two plants resumed production in the first quarter of 2020, which caused the production volume to increase and unit cost to fall.

 

For the three-month period ended June 30, 2019,March 31, 2020, the gross profitloss margin for our bromine segment was 53%32%.

 

Crude salt segmentsegment

 

For the three-month period ended June 30, 2020, the gross profit margin for our crude salt segment was 14%. This 20% increase in the three-month period ended June 30, 2020 compared to the same period in 2019 was primarily attributable to higher volume of production in the three month ended June 30, 2020 compared to that recorded in the same period in 2019.

For the three-month period ended June 30, 2019,March 31, 2021, the gross loss margin for our crude salt segment was 6%

Chemical products segment49%. This 180% increase was due to the fact that production and sales resumed at three plants in the first quarter of 2021, while only two plants resumed production in the first quarter of 2020, which caused the production volume to increase and unit cost to fall.

 

For the three-month period ended June 30, 2020, the gross profit margin for our chemical segment was 0% due to the closure of our plant and factories to perform rectification and improvement in 2017. All chemical products inventories were sold as of June 30, 2019. As a result, there were no chemical products for sale for the three-month period ended June 30, 2020 and 2019.

Natural gas segment

For the three-month period ended June 30,March 31, 2020, the gross loss margin for our natural gascrude salt segment was 0%229%.

 

Direct labor and factory overheads incurred during plant shutdownThe 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 $1,737,599and $2,875,285$2,613,483 and $3,610,423 incurred for the three-month period end June 30, 2020and 2019,periods ended March 31, 2021 and 2020, respectively, were that of the factories that have not resumed operationsproduction were presented as part of the operating expense. The decrease in the direct labor and factory overheads incurred during plant shutdown in the three-month periodsperiod ended June 30,March 31, 2021 compared to the same period in 2020 and 2019.was due to five plants not in operation in 2020, but only three were not in operation in 2021.

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General and Administrative Expenses. ExpensesGeneral and administrative expenses were $1,541,702$1,736,250 for the three-month period ended June 30, 2020,March 31, 2021, an increase of $206,355(or 15.5%$892,913 (or 106%) as compared to $1,335,347$843,337 for the same period in 2019.

Income (loss) from Operations Loss from operations2020. The increase was $2,953,552 formainly due to the unrealized foreign currency transaction loss on intercompany balance recorded in three-month period ended June 30, 2020,March 31, 2021 compared to an income of $1,198,166unrealized foreign currency transaction gain on intercompany balance recorded in the same period in 2019.the previous year.

 

  Loss from Operations by Segment
  Three-Month Period Ended
June 30, 2020
 Three-Month Period Ended
June 30, 2019
Segment:   % of total   % of total
Bromine $(1,479,084)  53% $(36,713)  2%
Crude Salt  (611,472)  22%  (828,736)  52%
Chemical Products  (654,652)  23%  (656,424)  42%
Natural Gas  (53,270)  2%  (61,401)  4%
Loss from operations before corporate costs  (2,798,478)  100%  (1,583,274)  100%
Corporate costs  (136,956)      (162,547)    
Unrealized gain on translation of Intercompany balance  (18,118)      547,655     
Loss from operations $(2,953,552)     $(1,198,166)    

Loss from Operations Loss from operations was $3,281,424 the three-month period ended March 31, 2021, compared to loss from operation of $4,835,429 in the same period in 2020.

 

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  Loss from Operations by Segment
  Three-Month Period Ended
March 31, 2021
 Three-Month Period Ended
March 31, 2020
Segment:   % of total   % of total
Bromine $(1,279,565)  41% $(2,866,438)  56%
Crude Salt  (1,009,585)  33%  (1,513,582)  29%
Chemical Products  (746,469)  24%  (710,909)  14%
Natural Gas  (54,787)  2%  (48,846)  1%
Loss from operations before corporate costs  (3,090,406)  100%  (5,139,775)  100%
Corporate cost  (86,206)      (96,103)    
Unrealized gain (loss) on translation of intercompany balance  (104,812      400,449     
Loss from operations $(3,281,424)     $(4,835,429)    

 

Bromine segment

 

Loss from operations from our bromine segment was $1,479,084$1,279,565 for the three-month period ended June 30, 2020,March 31, 2021, compared to loss from operations of $36,713$2,866,438 in the same period in 2019. The increase in this loss was mainly due to depreciation of plant and equipment placed in service when the four factories resumed operation in the three-month period ended June 30, 2020.

 

Crude salt segment

 

Loss from operations from our crude salt segment was $611,472$1,009,585 for the three-month period ended June 30, 2020,March 31, 2021, compared to loss from operations of $828,736$1,513,582 in the same period in 2019.2020.

  

Chemical products segment

 

Loss from operations from our chemical products segment was $654,652$746,469 for the three-month period ended June 30, 2020,March 31, 2021, compared to loss from operations of $656,424$710,909 in the same period in 2019.2020.

 

Natural gas segment

 

Loss from operations from our natural gas segment was $53,270$54,787 for the three -month period ended June 30, 2020,March 31, 2021, compared to a loss of $61,401$48,846 in the same period in 2019.2020.

 

Other Income Net Other income, net of $36,300$35,591 represented bank interest income, net of capitalfinance lease interest expense for the three -month period ended June 30, 2020, anMarch 31, 2021, a decrease of $58,177$3,637 (or approximately 62%9%) as compared to the same period in 2019.2020.

 

Net Income (loss) LossNet loss was $2,244,619$2,502,124 for the three-month period ended June 30, 2020,March 31, 2021, compared to a net loss of $737, 706$3,539,758 in the same period in 2019.2020.

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Effective Tax Rate Our effective income tax benefit rate for the three-month periodperiods ended June 30,March 31, 2021 and 2020 and 2019 werewas 23% and 33%26% respectively. The effective tax rate for the three-month period ended June 30, 2020March 31, 2021 was 2% lower than the PRC statutory income tax rate of 25%, mainly due to non-taxable itemsa non-deductible item in connection with the unrealized exchange gainloss and an increase in valuation allowance recorded for deferred tax assets arising from net operating losses of the Company off set by non-deductible expense.parent company.

 

Comparison of the Six-Month Period Ended June 30, 2020 and 2019

  Six-Month Period
Ended June 30, 2020
 Six-Month Period
Ended June 30, 2019
 Percent Change
Increase/
(Decrease)
Net revenue $5,917,153  $6,047,979   (2%)
Cost of net revenue  (5,944,216)  (3,026,737)  96%
Gross profit  (27,063)  3,021,242   101%
Sales, marketing and other operating expenses  (13,081)  (6,613)  98%
Direct labor and factory overheads incurred during plant shutdown  (5,348,022)  (7,168,307)  (25%)
Other operating loss  (15,776)      (100%)
General and administrative expenses  (2,385,039)  (3,440,518)  (31%)
Loss from operations  (7,788,981)  (7,594,196)  3%
Other income  75,528   191,232   (61%)
Loss before taxes  (7,713,453)  (7,402,964)  4%
Income tax benefit  1,929,076   1,761,120   10%
Net loss $(5,784,377) $(5,641,844)  3%

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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, 2020as compared to the same period in 2019:

  Net Revenue by Segment  
  Six-Month Period Ended Six-Month Period Ended 

Percent Increase (Decrease)

  June 30, 2020 June 30, 2019 of Net Revenue
Segment    % of total    % of total    
Bromine $4,949,863   84% $5,751,164   95%  (14%) 
Crude Salt  967,290   16%  245,079   4%  295% 
Chemical Products  -       -   -   -  
Natural Gas  -       51,736   1%  (100%) 
Total sales $5,917,153   100% $6,047,979   100%  (2%) 

Bromine and crude salt segments Six-Month Period Ended Percentage Change
product sold in tonnes June 30, 2020 June 30, 2019 Increase
Bromine (excluding volume sold to SYCI)  1,344   1,299   3%
Crude Salt  58,873   9,827   499%

  Three-Month Period Ended Percentage Change
Natural gas segments product sold in cubic metre June 30, 2020 June 30, 2019 Decrease
Natural Gas     349,900   (100%)

Bromine segment

Net revenue from our bromine segment decreased to $4,949,863 for the six-month period ended June 30, 2020 compared to $5,751,164 for the same period in 2019respectively, due to the lower volume of production, lower selling price.

Crude salt segment

Net revenue from our crude salt segment increased to $967,290for the six-month period ended June 30, 2020 compared $245,079 for the same period in 2019,respectively, due to the higher volume of production.

Chemical products segment

For the six-month period ended June 30, 2020 and 2019, 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, 2020, the net revenue for the natural gas was $0.

For the six-month period ended June 30, 2019, the net revenue for the natural gas was $51,736.

Cost of Net Revenue

  Cost of Net Revenue by Segment % Change
  Six-Month Period Ended Six-Month Period Ended of Cost of
  June 30, 2020 June 30, 2019 Net Revenue
Segment   % of total   % of total  
Bromine $4,879,059   82% $2,717,808   90%  8%
Crude Salt  1,065,157   18%  258,641   8%  10%
Chemical Products               
Natural Gas        50,288   2%   
Total $5,944,216   100% $3,026,737   100%  96%

Costof 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. 

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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, 2019  31,506   18%
Six-month period ended June 30, 2020  31,506   17%
Variance of the six-month period ended June 30, 2020 and 2019     (1%)

(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 17% for the six-month period ended June 30, 2020 compared to 18% recorded for the six-month period ended June 30, 2019 mainly because the overall market environment has not fully recovered, leading to a lower demand for our products.

Bromine segment

For the six-month period ended June 30, 2020 the cost of net revenue for the bromine segment was $4,879,059. This $2,161,251 increase was primarily attributable to the increase in factory overhead per unit produced, which maily caused by the increase in depreciation charges of plant and equipment that were placed in service in March and April in 2020 for factories that resumed operation in the six-month ended June 30, 2020.

For the six-month period ended June 30, 2019 the cost of net revenue for the bromine segment was $2,717,808.

Crude salt segment

For the six-month period ended June 30, 2020 the cost of net revenue for the crude salt segment was $1,065,157.The cost of net revenue for our crude salt segment for the six-month period ended June 30, 2019 was $258,641. This $806,516 increase was primarily attributable to the increase in factory overhead per unit produced , which mainly caused by the increase in depreciation charges of plant and equipment that were placed in service in March and April in 2020 for factories that resumed operation in the three-month ended June 30, 2020.

Natural gas segment

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

Cost of net revenue for our natural gas segment for the six-month period ended June 30, 2019 was $50,288.

Gross Profit. Gross loss was $27,063, or 0.5%, of net revenue for six-month period ended June 30, 2020 compared to $3,021,242, or 50%, of net revenue for the same period in 2019.

  Gross Profit (Loss) by Segment % Point Change
  Six-Month Period Ended Six-Month Period Ended of Gross
  June 30, 2020 June 30, 2019 Profit Margin
Segment   Gross Profit (loss) Margin   Gross Profit Margin  
Bromine $70,804   1% $3,033,356   50%  (49%)
Crude Salt  (97,867)  (10%)  (13,562)  (0.2%)  (9.8%)
Chemical Products                
Natural Gas        1,448   3%   
Total Gross Profit $(27,063)  (0.5%) $3,021,242   50%  (50.5%)

Bromine segment

For the six-month period ended June 30, 2020, the gross loss margin for our bromine segment was 1%. This 49% decrease was primarily attributable to the increase in factory overhead per unit produced mainly due to lower volume of production , which maily caused by the increase in depreciation charges of plant and equipment that were placed in service in March and April in 2020 for factories that resumed operation in the six-month ended June 30, 2020.

For the six-month period ended June 30, 2019, the gross profit margin for our bromine segment was 50%.

Crude salt segment

For the six-month period ended June 30, 2020, the gross loss margin for our crude salt segment was 10%.This 9.8% decrease in the six-month period ended June 30, 2020 compared to the same period in 2019 was primarily attributable to higher volume of production in the six month ended June 30, 2020 compared to that recorded in the same period in 2019.

For the six-month period ended June 30, 2019 the gross loss margin for our crude salt segment was 0.2%.

Chemical products segment

For the six-month period ended June 30, 2020, 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, 2020.

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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$5,348,022 and $7,168,307 incurred for the six-month period end June 30, 2020 and 2019, respectively, were for factories that have not resumed production in the six-month periods ended June 30, 2020 and 2019. 

General and Administrative Expenses. General and administrative expenses were $2,385,039 for the six-month period ended June 30, 2020, a decrease of $1,055,479 (or 31%) as compared to$3,440,518for the same period in 2019.

Income (Loss) from Operations. Loss from operations was $7,788,981 for the six-month period ended June 30, 2020, compared to a loss of $7,594,196 in the same period in 2019.

  Income(Loss) from Operations by Segment
  Six-Month Period Ended
June 30, 2020
 Six-Month Period Ended
June 30, 2019
Segment:   % of total   % of total
Bromine $(4,345,522)  55% $(3,661,727)  50%
Crude Salt  (2,125,054)  27%  (2,240,545)  31%
Chemical Products  (1,365,561)  17%  (1,329,974)  18%
Natural Gas  (102,116)  1%  (103,384)  1%
Loss from operations before corporate costs  (7,938,253)  100%  (7,335,630)  100%
Corporate costs  (233,059)      (302,993)    
Unrealized gain on translation of intercompany balance  382,331       44,427     
Loss from operations before taxes $(7,788,981)     $(7,594,196)    

Bromine segment

Loss from operations from our bromine segment was $4,345,522 for the six-month period ended June 30, 2020, compared to a loss of $3,661,727 in the same period in 2019.

Crude salt segment

Loss from operations from our crude salt segment was $2,125,054 for the six-month period ended June 30, 2020, compared to a loss of $2,240,545 in the same period in 2019.

Chemical products segment

Loss from operations from our chemical products segment was $1,365,561 for the six-month period ended June 30, 2020, compared to a loss of $1,329,974 in the same period in 2019.

Natural gas segment

Loss from operations from our natural gas segment was $102,116 for the six-month period ended June 30, 2020, compared to a loss of $103,384in the same period in 2019.

Other Income, Net. Other income, net of $75,528 represented bank interest income, net of capital lease interest expense for the six -month period ended June 30, 2020, a decrease of $115,704 (or approximately61%) as compared to the same period in 2019.

Net Income (Loss). Net loss was $5,784,377 for the six-month period ended June 30, 2020, compared to a net loss of $5,641,844 in the same period in 2019.

Effective Tax Rate. Our effective income tax benefit rate for the six-month period ended June 30, 2020 and 2019 was 25% and 24%, respectively. The effective tax rate for the six-monththree-month period ended June 30,March 31, 2020 was the same as1% higher than the PRC statutory income tax rate of 25%, due to non-deductible expense, offset by non-taxable items. The effective tax benefit rate for the six-month period ended June 30, 2019was 1% lower than the PRC statutory income tax rate of 25% mainly due to non-deductible expense offset by non-taxable itemitems net of decrease in connection with the unrealized exchange loss for the Company.change in valuation allowance.

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LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2020,March 31, 2021, cash and cash equivalents were $89,972,591$96,699,324 as compared to $100,301,986$94,222,538 as of December 31, 2019.2020. The components of this decreaseincrease of $10,329,395$2,476,786 are reflected below.

 

Statement of Cash Flows

 

  Six-Month Period Ended June 30,
  2020 2019
Net cash (used in) provided by operating activities $1,177,752  $(6,766,051)
Net cash used in investing activities  (9,860,142)  (11,501,738)
Net cash used in financing activities  (264,976)  (275,506)
Effects of exchange rate changes on cash and cash equivalents  (1,382,029)  (101,571)
Net decrease in cash and cash equivalents $(10,329,395) $(18,644,866)
  Three-Month Period Ended March 31,
  2021 2020
Net cash provided by operating activities $3,341,395  $2,202,357 
Net cash used in investing activities $  $(7,416,211)
Effects of exchange rate changes on cash and cash equivalents $(864,609) $(1,455,442)
Net increase(decrease) in cash and cash equivalents $2,476,786  $(6,669,296)

       

For the six-monththree-month period ended June 30, 2020,March 31, 2021, we met our working capital and capital investment requirements mainly by using cash on hand.

 

Net Cash (used in) Provided by Operating Activities

 

During the six-monththree -month period ended June 30, 2020,March 31, 2021, cash flow provided by operating activities of approximately $1.18$3.3 million was mainly due to a decrease in accounts receivable of $1.8$1.6 million, and a non-cash adjustment related to depreciation and amortization of property, plant and equipment, reduced by a net loss of $7.6$2.5 million and an adjustment for income tax benefit of $1.93million.$0.7 million.

 

During the six-monththree -month period ended June 30, 2019,March 31, 2020, cash flow used inprovided by operating activities of approximately $6.8$2.2 million was mainly due to a net loss of $5.6 million, an increasedecrease in accounts receivable of $6.8$4.2 million, and inventories of $0.5 million, and a non-cash adjustment related to an increase in deferred tax assets of $1.8 million reduced by a non-cash adjustment related to depreciation and amortization of property, plant and equipment.equipment, reduced by a net loss of $3.5 million and an adjustment for income tax benefit of $1.2 million.

 

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, 2020March 31, 2021 and December 31, 2019.2020.

 

 June 30, 2020 December 31, 2019 March 31, 2021 December 31, 2020
   % of total   % of total   % of total   % of total
Aged 1-30 days $2,446,037   80% $     $4,350,483   90% $3,801,417   58%
Aged 31-60 days  614,528   20%        509,222   10%  2,720,381   42%
Aged 61-90 days     %                  
Aged 91-120 days                        
Aged 121-150 days        506,703   10%            
Aged 151-180 days        2,368,495   49%            
Aged 181-210 days        2,001,908   41%            
Aged 211-240 days                        
Total $3,060,565   100% $4,877,106   (100%) $4,859,705   100% $6,521,798   100%

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The overall accounts receivable balance as of June 30, 2020March 31, 2021 decreased by $1,816,541,$1,662,093, as compared to those of December 31, 2019.2020. 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 periodsperiod ended June 30, 2020March 31, 2021 is required.

 

Inventory

 

Our inventory consists of the following:

 

 June 30, 2020 December 31, 2019 March 31, 2021 December 31, 2020
   % of total   % of total   % of total   % of total
Raw materials $29,304   6% $20,928   3% $39,855   7% $21,484   5%
Finished goods  494,324   94%  669,159   97%  536,752   93%  398,125   95%
Total $523,628   100% $690,087   100% $576,607   100% $419,609   100%

 

The net inventory level as of June 30, 2020 decreasedMarch 31, 2021 increased by $174,835$156,998 (or 26%37%), as compared to the net inventory level as of December 31, 2019.2020.

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Raw materials increased by $8,376$18,371 as of June 30, 2020March 31, 2021 as compared to December 31, 2019.2020.

 

Our finished goods decreasedincreased by $174,835$138,627 as of June 30, 2020March 31, 2021 as compared to December 31, 2019.2020.

 

Net Cash Used in Investing Activities

 

For the six-monththree-month period ended June 30,March 31, 2021, we have no investing activities.

For the three-month period ended March 31, 2020, we used approximately $9.9$7.4 million to acquire property, plant and equipment.

For the six-month period ended June30, 2019, we used approximately $11.5million to acquire property, plant and equipment.

 

Net Cash Used in Financing Activities

 

ForWe have no financing activities for the six-month periodthree-month periods ended June 30, 2020March 31, 2021 and 2019, we used $0.3 million to repay finance lease obligation. 2020.

 

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 $90$96.7 million at June 30, 2020, allMarch 31, 2021, most of which is in highly liquid current deposits which earn no or little interest. We do not anticipate paying cash dividends in the foreseeable future.

 

We intend to continue to focus our efforts on the activities of SCHC, SYCI and DCHC as these segments continue to expand within the Chinese market.

 

We may not be able to identify, successfully integrate or profitably manage any businesses or business segment we may acquire, or any expansion of our business. An expansion may involve a number of risks, including possible adverse effects on our operating results, diversion of management’s attention, inability to retain key personnel, risks associated with unanticipated events, 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.

 

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Contractual Obligations and Commitments

 

We have no significant contractual obligations not fully recorded on our condensed consolidated balance sheets or fully disclosed in the notes to our condensed consolidated financial statements. Additional information regarding our contractual obligations and commitments at June 30, 2018March 31, 2021 is provided in the notes to our condensed consolidated financial statements. See “Notes to Condensed Consolidated Financial Statements, Note 17 –18– Capital Commitment and Operating Lease Commitments”Other Service Contractual Obligations”.

 

Material Off-Balance Sheet Arrangements

 

We do not currently have any off balance-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,inventories and allowance for obsolescence, assets retirement obligation, property, plant and equipment, recoverability of long lived assets, mineral rights, leases, revenue recognition, income taxes, and loss contingencies, and stock-based compensation.contingencies. These policies and estimates are described in the Company’s 2019 Form 10-K.10-Q for the three months ended March 31, 2021.

  

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).

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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.

 

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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 the 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, 8respondent.

For more details 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 subjectinformation related to the Written Decisions, please see “Note 19 – Loss Contingencies, Notes 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)Condensed Consolidated Financial Statement” contained in the aggregate. Each of the Written Decisions shall be executed within 15 days upon serving on SCHC. Additional interest penalty shall be imposed at a daily rate of 3% in the event that SCHC does not make the monetary penalty payment in a timely manner. Subsequently, the Bureau filed enforcement actions to the People’s Court of Shouguang City, Shandong Province (the “Court”), naming SCHC as enforcement respondent and alleged, among other things, that SCHC failed to perform its obligations under each of the Written Decisions within the specified timeframe. The enforcement proceedings sought court orders to enforce the Written Decisions. On May 5, 2019, written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 384, (2019) Lu 0783 Xing Shen No. 385, (2019) Lu 0783 Xing Shen No. 389, (2019) Lu 0783 Xing Shen No. 390, (2019) Lu 0783 Xing Shen No. 393, and (2019) Lu 0783 Xing Shen No. 394, respectively (together, the “Court Rulings”) were made by the Court in favor of the Bureau. The Court orders, among other relief, to enforce each of the Written Decisions, to return each subject land to its legal owner and demolish or confiscate the buildings and facilities thereon and restore the land to its original state within 10 days from the service of the Court Rulings on SCHC. The Court Rulings became enforceable immediately upon service on SCHC on May 5, 2019.

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

The Company is in the process of resolving the issues in connection with SCHC’s land use and planning diligently. The Company has been in discussions closely with the local government authorities with the help from Shouguang City Bromine Association to seek reliefs and, based on verbal confirmation by local government authorities, believes the administrative penalties imposed by the Bureau according to the Written Decisions are being re-assessed by local government authorities and may be revoked. The Company has obtained one confirmation from the local government authorities that the administrative penalty imposed on Factory No. 7 , Factory No. 8 and Factory No.10 are being revoked which are waiting for the Court formal approval ,and production of Factory No. 7 was allowed to resume in April 2019. In addition, on August 28, 2019, the People’s Government of Shandong Province, issued a regulation titled “Investment Project Management Requirements of Chemical Companies in Shandong Province” permitting the construction of facilities on existing sites or infrastructure of bromine manufacturing and other chemical industry-related types of projects (clause 11 of section 3).The Company believes that the goal of the government is to standardize and regulate the industry and not to demolish the facilities or penalize the manufacturers. As of the date of this report, the Company has not been notified by the local government that it will take any measure to enforce the administrative penalties. Based on information known to date, the Company believes that it is remote that the Written Decisions or Court Rulings will be enforced within the expected timeframe and a material penalty or costs and expenses against the Company will result. However, there can be no assurance that there will not be any further enforcement action, the occurrence of which may result in further liabilities, penalties and operational disruption.quarterly report.

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Item 1A. Risk Factors

 

ThisInvesting in our common stock involves a high degree of risk. Before you invest you should carefully review our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this Quarterly Report on Form 10-Q, our consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes, as well as our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the other information has been omitted basedin our Annual Report on Form 10-K for the Company’s status as a smaller reporting companyfiscal year ended December 31, 2020. Readers should carefully review risks described in other documents we file from time to time with the Securities and Exchange Commission.

 

Item 2. Unregistered SaleShares 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.
  
31.2Certification 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.

32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.1The following financial statements from Gulf Resources, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 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.

 

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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 14, 2020May 17, 2021By:/s/ Xiaobin Liu
  Xiaobin Liu
  Chief Executive Officer
  (principal executive officer)
   
Dated: August 14, 2020May 17, 2021By:/s/ Min Li
  Min Li
  Chief Financial Officer
  (principal financial and accounting officer)

 

 

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