UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
Or | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _________ to _________ |
Commission File Number: 001-34499
GULF RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Nevada | 13-3637458 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Level 11,Vegetable Building, Industrial Park of the East City, Shouguang City, Shandong, | 262700 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: +86 (536) 567 0008
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol (s) | Name of each exchange on which registered |
Common Stock, $0.0005 par value | GURE | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |
Non-accelerated filer x | Smaller reporting company x | |
Emerging Growth Company | ||
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 November 8, 2017,May 17, 2021, the registrant had outstanding 46,803,79110,469,477 shares of common stock.
PART I—FINANCIAL INFORMATION
GULF RESOURCES, INC. |
AND SUBSIDIARIES |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(Expressed in U.S. dollars) |
September 30, 2017 Unaudited | December 31, 2016 Audited | March 31, 2021 Unaudited | December 31, 2020 Audited | |||||||||||||
Current Assets | ||||||||||||||||
Cash | $ | 193,385,686 | $ | 163,884,574 | $ | 96,699,324 | $ | 94,222,538 | ||||||||
Accounts receivable | 71,792,364 | 51,835,218 | 4,859,705 | 6,521,798 | ||||||||||||
Inventories, net | 2,431,079 | 5,881,681 | 576,607 | 419,609 | ||||||||||||
Prepayments and deposits | 575,013 | 117,338 | 2,449,526 | 6,146,461 | ||||||||||||
Prepaid land leases | 381,588 | 47,255 | ||||||||||||||
Other receivable | 2,066 | 1,424 | 559 | 559 | ||||||||||||
Total Current Assets | 268,567,796 | 221,767,490 | 104,585,721 | 107,310,965 | ||||||||||||
Non-Current Assets | ||||||||||||||||
Property, plant and equipment, net | 97,623,268 | 108,731,126 | 149,966,631 | 148,947,689 | ||||||||||||
Property, plant and equipment under capital leases, net | 345,705 | 554,257 | ||||||||||||||
Finance lease right-of use assets | 183,550 | 186,272 | ||||||||||||||
Operating lease right-of –use assets | 8,662,972 | 8,868,661 | ||||||||||||||
Prepaid land leases, net of current portion | 4,796,415 | 4,754,169 | 10,063,469 | 10,134,004 | ||||||||||||
Deferred tax assets | 2,315,993 | 2,215,772 | 19,131,925 | 18,590,227 | ||||||||||||
Goodwill | 28,920,005 | 27,668,539 | ||||||||||||||
Total non-current assets | 134,001,386 | 143,923,863 | 188,008,547 | 186,726,853 | ||||||||||||
Total Assets | $ | 402,569,182 | $ | 365,691,353 | $ | 292,594,268 | $ | 294,037,818 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable and accrued expenses | $ | 4,342,615 | $ | 8,682,318 | ||||||||||||
Retention payable | — | 733,869 | ||||||||||||||
Capital lease obligation, current portion | 160,027 | 187,678 | ||||||||||||||
Taxes payable | 2,960,147 | 4,341,331 | ||||||||||||||
Accounts and other payable and accrued expenses | $ | 8,549,889 | $ | 5,081,701 | ||||||||||||
Taxes payable-current | 1,405,772 | 1,326,179 | ||||||||||||||
Finance lease liability, current portion | 250,591 | 217,070 | ||||||||||||||
Operating lease liabilities, current portion | 317,544 | 477,350 | ||||||||||||||
Total Current Liabilities | 7,462,789 | 13,945,196 | 10,523,796 | 7,102,300 | ||||||||||||
Non-Current Liabilities | ||||||||||||||||
Capital lease obligation, net of current portion | 2,268,315 | 2,284,959 | ||||||||||||||
Finance lease liability, net of current portion | 1,875,592 | 1,888,903 | ||||||||||||||
Operating lease liabilities, net of current portion | 7,857,421 | 8,022,342 | ||||||||||||||
Total Non-Current Liabilities | 9,733,013 | 9,911,245 | ||||||||||||||
Total Liabilities | $ | 9,731,104 | $ | 16,230,155 | $ | 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; 47,052,940 and 47,052,940 shares issued; and 46,803,791 and 46,793,791 shares outstanding as of September 30, 2017 and December 31, 2016, respectively | 23,525 | 23,525 | ||||||||||||||
Treasury stock; 249,149 and 259,149 shares as of September 30, 2017 and December 31, 2016 at cost | (554,870 | ) | (577,141 | ) | ||||||||||||
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 | 94,509,908 | 94,156,679 | 97,435,316 | 97,435,316 | ||||||||||||
Retained earnings unappropriated | 271,367,728 | 248,941,696 | 148,886,232 | 151,388,356 | ||||||||||||
Retained earnings appropriated | 25,737,372 | 22,910,966 | 24,233,544 | 24,233,544 | ||||||||||||
Accumulated other comprehensive income/(loss) | 1,754,415 | (15,994,527 | ) | |||||||||||||
Accumulated other comprehensive income | 2,268,557 | 4,453,247 | ||||||||||||||
Total Stockholders’ Equity | 392,838,078 | 349,461,198 | 272,337,459 | 277,024,273 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 402,569,182 | $ | 365,691,353 | $ | 292,594,268 | $ | 294,037,818 |
See accompanying notes to the condensed consolidated financial statements.
1
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMELOSS
(Expressed in U.S. dollars)
(UNAUDITED)
Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
NET REVENUE | ||||||||||||||||
Net revenue | $ | 23,840,391 | $ | 38,811,622 | $ | 104,160,873 | $ | 120,907,839 | ||||||||
OPERATING INCOME (EXPENSE) | ||||||||||||||||
Cost of net revenue | (14,518,439 | ) | (23,107,921 | ) | (61,664,044 | ) | (76,184,822 | ) | ||||||||
Sales, marketing and other operating expenses | (65,599 | ) | (83,087 | ) | (242,045 | ) | (269,357 | ) | ||||||||
Research and development cost | (42,074 | ) | (68,115 | ) | (169,246 | ) | (198,330 | ) | ||||||||
Write-off/Impairment on property, plant and equipment | — | (90,395 | ) | — | (90,395 | ) | ||||||||||
General and administrative expenses | (4,451,027 | ) | (1,613,933 | ) | (8,236,430 | ) | (4,539,845 | ) | ||||||||
Other operating income | 72,000 | 108,029 | 281,613 | 328,550 | ||||||||||||
(19,005,139 | ) | (24,855,422 | ) | (70,030,152 | ) | (80,954,199 | ) | |||||||||
INCOME FROM OPERATIONS | 4,835,252 | 13,956,200 | 34,130,721 | 39,953,640 | ||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest expense | (40,092 | ) | (42,012 | ) | (124,068 | ) | (134,150 | ) | ||||||||
Interest income | 139,801 | 120,054 | 398,382 | 356,828 | ||||||||||||
INCOME BEFORE TAXES | 4,934,961 | 14,034,242 | 34,405,035 | 40,176,318 | ||||||||||||
INCOME TAXES | (1,509,321 | ) | (3,518,529 | ) | (9,152,597 | ) | (9,996,622 | ) | ||||||||
NET INCOME | $ | 3,425,640 | $ | 10,515,713 | $ | 25,252,438 | $ | 30,179,696 | ||||||||
COMPREHENSIVE INCOME: | ||||||||||||||||
NET INCOME | $ | 3,425,640 | $ | 10,515,713 | $ | 25,252,438 | $ | 30,179,696 | ||||||||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
- Foreign currency translation adjustments | 8,450,433 | (2,637,763 | ) | 17,748,942 | (10,505,475 | ) | ||||||||||
COMPREHENSIVE INCOME | $ | 11,876,073 | $ | 7,877,950 | $ | 43,001,380 | $ | 19,674,221 | ||||||||
EARNINGS PER SHARE: | ||||||||||||||||
BASIC | $ | 0.07 | $ | 0.23 | $ | 0.54 | $ | 0.65 | ||||||||
DILUTED | $ | 0.07 | $ | 0.23 | $ | 0.54 | $ | 0.65 | ||||||||
WEIGHTED AVERAGE NUMBER OF SHARES: | ||||||||||||||||
BASIC | 46,794,443 | 46,301,217 | 46,794,011 | 46,106,194 | ||||||||||||
DILUTED | 46,897,995 | 46,309,250 | 46,833,030 | 46,560,937 |
Three-Month Period Ended March 31, | ||||||||
2021 | 2020 | |||||||
NET REVENUE | ||||||||
Net revenue | $ | 5,259,243 | $ | 557,670 | ||||
OPERATING EXPENSE | ||||||||
Cost of net revenue | (4,181,389 | ) | (921,320 | ) | ||||
Sales, marketing and other operating expenses | (9,545 | ) | (2,243 | ) | ||||
Direct labor and factory overheads incurred during plant shutdown | (2,613,483 | ) | (3,610,423 | ) | ||||
General and administrative expenses | (1,736,250 | ) | (843,337 | ) | ||||
Other operating expense | — | (15,776 | ) | |||||
(8,540,667 | ) | (5,393,099 | ) | |||||
LOSS FROM OPERATIONS | (3,281,424 | ) | (4,835,429 | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Interest expense | (36,862 | ) | (35,428 | ) | ||||
Interest income | 72,453 | 74,656 | ||||||
LOSS BEFORE TAXES | (3,245,833 | ) | (4,796,201 | ) | ||||
INCOME TAX BENEFIT | 743,709 | 1,256,443 | ||||||
NET LOSS | $ | (2,502,124 | ) | $ | (3,539,758 | ) | ||
COMPREHENSIVE LOSS: | ||||||||
NET LOSS | $ | (2,502,124 | ) | $ | (3,539,758 | ) | ||
OTHER COMPREHENSIVE LOSS | ||||||||
- Foreign currency translation adjustments | (2,184,690 | ) | (4,515,359 | ) | ||||
COMPREHENSIVE LOSS | $ | (4,686,814 | ) | $ | (8,055,117 | ) | ||
LOSS PER SHARE: | ||||||||
BASIC AND DILUTED | $ | (0.25 | ) | $ | (0.37 | ) | ||
WEIGHTED AVERAGE NUMBER OF SHARES: | ||||||||
BASIC AND DILUTED | 9,997,477 | 9,517,427 |
See accompanying notes to the condensed consolidated financial statements.
2
GULF RESOURCES, INC. |
AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY |
(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 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 | Income/(loss) | Total | |||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2016 Audited | 47,052,940 | 46,793,791 | 259,149 | $ | 23,525 | $ | (577,141 | ) | $ | 94,156,679 | $ | 248,941,696 | $ | 22,910,966 | $ | (15,994,527 | ) | $ | 349,461,198 | |||||||||||||||||||||
Translation adjustment | — | — | — | — | — | — | — | 17,748,942 | 17,748,942 | |||||||||||||||||||||||||||||||
Common stock issued | — | 10,000 | (10,000 | — | 22,271 | (4,471 | ) | — | — | — | 17,800 | |||||||||||||||||||||||||||||
Issuance of stock options to employees and directors | — | — | — | — | — | 357,700 | — | — | — | 357,700 | ||||||||||||||||||||||||||||||
Net income for nine-month period ended September 30, 2017 | — | — | — | — | — | — | 25,252,438 | — | — | 25,252,438 | ||||||||||||||||||||||||||||||
Transfer to statutory common reserve fund | — | — | — | — | — | — | (2,826,406 | ) | 2,826,406 | — | — | |||||||||||||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2017 Unaudited | 47,052,940 | 46,803,791 | 249,149 | $ | 23,525 | $ | (554,870 | ) | $ | 94,509,908 | $ | 271,367,728 | $ | 25,737,372 | $ | 1,754,415 | $ | 392,838,078 |
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.
3
GULF RESOURCES, INC. |
AND SUBSIDIARIES |
(Expressed in U.S. dollars) |
(UNAUDITED) |
Nine-Month Period Ended September 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 25,252,438 | $ | 30,179,696 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Interest on capital lease obligation | 123,795 | 133,504 | ||||||
Amortization of prepaid land leases | 717,969 | 514,455 | ||||||
Depreciation and amortization | 16,042,003 | 19,031,650 | ||||||
Write-off/Impairment loss on property, plant and equipment | — | 90,395 | ||||||
Unrealized translation difference | 1,140,363 | (729,764 | ) | |||||
Stock-based compensation expense-options | 357,700 | 17,400 | ||||||
Shares issued from treasury stock for services | 17,800 | 15,000 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (16,557,825 | ) | (23,296,361 | ) | ||||
Inventories | 3,668,582 | 1,219,588 | ||||||
Prepayments and deposits | (9,126 | ) | (20,850 | ) | ||||
Other receivable | (580 | ) | — | |||||
Accounts payable and accrued expenses | (4,866,247 | ) | 941,315 | |||||
Retention payable | (739,329 | ) | (356,348 | ) | ||||
Taxes payable | (1,670,121 | ) | 1,474,602 | |||||
Net cash provided by operating activities | 23,477,422 | 29,214,282 | ||||||
�� | ||||||||
CASH FLOWS USED IN INVESTING ACTIVITIES | ||||||||
Payment land leases | (859,219 | ) | (673,934 | ) | ||||
Purchase of property, plant and equipment | (623,735 | ) | (16,749,192 | ) | ||||
Net cash used in investing activities | (1,482,954 | ) | (17,423,126 | ) | ||||
CASH FLOWS USED IN FINANCING ACTIVITIES | ||||||||
Repayment of capital lease obligation | (273,873 | ) | (287,387 | ) | ||||
Net cash used in financing activities | (273,387 | ) | (287,387 | ) | ||||
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | 7,780,517 | (4,026,574 | ) | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 29,501,112 | 7,477,195 | ||||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 163,884,574 | 133,606,392 | ||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 193,385,686 | $ | 141,083,587 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash paid during the periods for: | ||||||||
Income taxes | $ | 9,590,640 | $ | 8,740,519 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INVESTING AND FINANCING ACTIVITIES | ||||||||
Par value of common stock issued upon cashless exercise of options | $ | — | $ | 386 |
Three-Month Period Ended March 31, | ||||||||
2021 | 2020 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (2,502,124 | ) | $ | (3,539,758 | ) | ||
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 | 4,104,357 | 3,454,891 | ||||||
Unrealized exchange (gain) loss on translation of inter-company balances | 104,812 | (400,449 | ) | |||||
Deferred tax asset | (743,709 | ) | (1,256,443 | ) | ||||
Common stock issued for services | — | — | ||||||
Changes in assets and liabilities | ||||||||
Accounts receivable | 1,637,800 | 4,245,576 | ||||||
Inventories | (162,099 | ) | 523 | |||||
Prepayments and deposits | (71,888 | ) | 54,350 | |||||
Other receivables | — | — | ||||||
Accounts and Other payable and accrued expenses | 830,751 | (41,562 | ) | |||||
Retention payable | — | — | ||||||
Taxes payable | 72,758 | (18,999 | ) | |||||
Prepaid land leases | — | (369,066 | ) | |||||
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 | — | (7,416,211 | ) | |||||
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 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | 2,476,786 | (6,669,296 | ) | |||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 94,222,538 | 100,301,986 | ||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 96,699,324 | $ | 93,632,690 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | — | $ | — | ||||
Operating right-of-use assets obtained in exchange for lease obligations | $ | — | $ | — | ||||
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.
4
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 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 nine monthsquarter ended September 30, 2017March 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 2016Annual Report on Form 10-K.10-K for the fiscal year ended December 31, 2020. Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the preparation of these condensed financial statements in certainthe areas including classification of leases and related party transactions.
On September 2, 2016, the Company announced the planned merger of two of its 100% owned subsidiaries, Shouguan Yuxin Chemical Co., Limited (“SYCI”) and Shouguan Rongyuan Chemical Co., Ltd (“SCRC”). On March 24, 2017, the legal process of the merger was completed and SCRC was officially deregistered on March 28, 2017. The results of these two subsidiaries were reported as SYCI in the three and nine months ended September 30, 2017.
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 antibiotics for use by human and animalsanimal 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 SeptemberMarch 11, 2020, the World Health Organization (WHO) officially declared COVID-19 a pandemic. The duration and intensity of the impact of the COVID-19 and resulting disruption to the Company’s operations and financial position is uncertain. While our operations are currently not materially affected, it is unknown whether or how they may be affected if such a pandemic persists for an extended period. While not yet quantifiable, the Company believes this situation did not have a material adverse impact on its operating results in the first quarter of 2021 and will continue to assess the financial impact. The virus outbreak slightly delayed the commencement of the operations for Factory No.1, No.4, No.7, No.9, and it may also delay the approval for the remaining three factories include No.2, No.8 and No.10. It is, however, still unclear how the pandemic will evolve going forward, and we cannot assure you whether the COVID-19 pandemic will bring about significant negative impact on our business operations, financial condition and operating results, including but not limited to negative impact to our total revenues.
(i) Bromine and Crude Salt Segments
In February 2019, the Company received a notification from the local government of Yangkou County that its Factory No. 1, No. 4, No. 7 and No. 9 passed inspection and could resume operations. In April 2019, Factory No.1, and Factory No.7 resumed operation.
On November 25, 2019, the government of Shouguang City issued a notice ordering all bromine facilities in Shouguang City, including the Company’s bromine facilities, including Factory No.1 and Factory No. 7, to temporarily stop production from December 16, 2019 to February 10, 2020. Subsequently, due to the coronavirus outbreak in China, the local government ordered those bromine facilities to postpone the commencement of production. Subsequently, the Company received an approval dated February 27, 2020 issued by the local governmental authority which allowed the Company to resume production after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s Government dated March 5, 2020 allowing the Company to resume production at its bromine factories No.1, No. 4, No.7 and No. 9 in order to meet the needs of bromide products for epidemic prevention and control (the “March 2020 Approval”). The Company’s Factories No. 1 and No. 7 commenced trial production in mid-March 2020 and commercial production on April 3, 2020 and its Factories No. 4 and No. 9 commenced commercial production on May 6, 2020.
Pursuant to the notification issued on November 24, 2020 from the government of Shouguang City, all bromine facilities in Shouguang City had to be temporarily closed from December 25, 2020 until February 19, 2021 8:00 AM China Time. To comply with such notification, the Company temporarily stopped production at its bromine facilities in factory No. 1, No. 4, No. 7 and No. 9 during the aforesaid period and commenced production as scheduled on February 19, 2021.
(ii) Chemical Segment
On November 24, 2017, the Company received notificationa letter from the governmentGovernment of Yangkou County, Shouguang City of PRC that production at all its factories be halted with immediate effect in order fornotifying the Company to perform rectificationrelocate 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 improvement in accordancetheir 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 county’s newrequirements of the safety and environmental protection requirements. As such, direct laborregulations 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 docu15ments 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 overheadand began the construction in the second quarter of 2020.
The Company estimates this relocation process will cost approximately $64 million in total. The Company incurred relocation costs (including depreciationcomprising prepaid land lease, professional fees related to the design of the new chemical factory, purchase of plant and machinery) of a totalequipment and construction costs and installation costs incurred for the new chemical factory in the amount of $1,876,462 incurred$35,635,297 and $33,496,295, which were recorded in Septemberthe Property, plant and equipment in the consolidated balance sheets as of March 31, 2021 and December 31, 2020.
(iii) Natural Gas Segment
In January 2017, which wouldthe 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 presentedreceived, 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 cost of net revenue were presented as part of generalnatural gas production. The Company plans to proceed with its applications for the natural gas and administrative expense inbrine project approvals with related government departments until after the three-monthgovernmental planning has been finalized the land and nine-month periods ended September 30, 2017 (Note 19).resource planning for Sichuan Province.
(c) Allowance for Doubtful Accounts
As of September 30, 2017March 31, 2021 and December 31, 2016,2020, there were no allowances for doubtful accounts were nil.accounts. No allowances for doubtful accounts were charged to the condensed consolidated statements of incomeloss for the three-month and nine-month periods ended September 30, 2017March 31, 2021 and 2016.2020.
The Company collected from its accounts receivable an amount of $3,396,688 in April 2021 through 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 $193,385,686$96,699,324 and $163,884,574$94,222,538 with these institutions as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. The Company has not experienced any losses in such accounts in the PRC.
Concentrations of credit risk with respect to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition and extends credit terms as and when appropriate. Approximately 38.0% and 61.6% of the balances of accounts receivable as of September 30, 2017 and December 31, 2016, respectively, are outstanding for less than three months. All outstanding receivables as of September 30, 2017 and December 31, 2016 are within the credit terms which range between 90 and 240 days. For the balances of accounts receivable aged more than 90 days as of September 30, 2017, approximately 30% were settled in October 2017. For the balances of all accounts receivable as of September 30, 2017, approximately 22% were settled in October 2017.
The rate of collection in October 2017 for accounts receivable aged more than 90 days as of September 30, 2017 was analyzed as follows:
5
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 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 ( including Oil and gas properties)
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs 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 machinery and equipment. Costs incurred are capitalized and transferred to property, plant and equipment upon completion at which timeand depreciation commences.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 capital lease are depreciated over the shorter of their expected useful lives on the same basis as owned assets, or where shorter, the remaining term of the 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 designated oil and gas properties are depreciated based on the proved developed reserves of the respective oil and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas properties are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant development projects are not depreciated until commercial production commences and the reserves related to those costs are excluded from the calculation of depreciation.
(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 income on an accrual basis when they are due. The Company’s contributions totaled $288,779$246,622 and $269,254$140,108 for the three-month periodperiods ended September 30, 2017March 31, 2021 and 2016, respectively, and totaled $801,655 and $768,870 for the nine-month period ended September 30, 2017 and 2016,2020, respectively.
(g) Revenue Recognition
The Company recognizesNet revenue is net of value-addeddiscount and value added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized when persuasive evidencethe control of the promised goods is transferred to the customers in an arrangement exists, deliveryamount 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 has occurred and customer acceptance has been obtained, which meansby the significant risks and ownershipcustomers. Customers have been transferredno rights to return the customer, the pricegoods upon acknowledgement of receipt of goods. Revenue from contracts with customers is fixed or determinable and collectability is reasonably assured.disaggregated in Note 14.
6
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 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.
Production in allFor the factories ofthree-month period ended March 31, 2021 and 2020, the Company was temporarily suspended from September 1, 2017 to allow for rectification and improvement in accordance with PRC’s new safety and environmental protection requirements. Due to this, the Company reviewed the possibility ofdetermined that there were no events or circumstances indicating possible additional impairment of its property, plant and equipment and determined that there will be no material effect on the financial statements.
For the three-month and nine-month periods ended September 30, 2016, certain property, plant and machinery, with net book values of $90,395 were replaced during the enhancement project to protective shells for transmission channels, write-offs of the same amounts, were made and included in write-off/impairment on property, plant and equipment.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 increased to include the number of additionalperiod. Potential common shares of common stock that would have been outstanding if the potentially dilutive outstanding stock options had been exercised. Potentially dilutive outstanding stock options 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 arewere greater than the market price of the common stock. The number of anti-dilutive outstandingAnti-dilutive common stock optionsequivalents which were excluded from the calculation of diluted earnings was 41,944number of dilutive common stock equivalents amounted to 62,704 and 75,000113,370 shares for the three-month periodperiods ended September 30, 2017March 31, 2021 and 2016 respectively, and 35,366 and 136,8752020, respectively.
Because the Company reported a net loss for the nine-month periodthree-month periods ended September 30, 2017March 31, 2021 and 2016 respectively. These awards could be dilutive in the future if the market price of the2020, common stock increasesequivalents including stock options and is greater thanwarrants were anti-dilutive, therefore the exercise price of these awards.amounts reported for basic and diluted loss per share were the same.
7
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2021
(Expressed(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(i) Basic and Diluted Earnings per Share of Common Stock – Continued
The following table sets forth the computation of basic and diluted earnings per share:
Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator | ||||||||||||||||
Net income | $ | 3,425,640 | $ | 10,515,713 | $ | 25,252,438 | $ | 30,179,696 | ||||||||
Denominator | ||||||||||||||||
Basic: Weighted-average common shares outstanding during the period | 46,794,443 | 46,301,217 | 46,794,011 | 46,106,194 | ||||||||||||
Add: Dilutive effect of stock options | 103,552 | 8,033 | 39,019 | 454,743 | ||||||||||||
Diluted | 46,897,995 | 46,309,250 | 46,833,030 | 46,560,937 | ||||||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.07 | $ | 0.23 | $ | 0.54 | $ | 0.65 | ||||||||
Diluted | $ | 0.07 | $ | 0.23 | $ | 0.54 | $ | 0.65 |
(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 income. The statement of income and comprehensive income is translated at average ratesrate during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods as part of general and administrative expense. The statement of cash flows is translated at average ratesrate during the reporting period, with the exception of issuancethe consideration paid for the acquisition of shares and payment of dividendsbusiness which areis 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) Exploration CostsInventories
ExplorationInventories 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 including the cost of researching for appropriate places to drill wellscomplete and the cost of well drilling in search of potential natural brine, are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs are capitalized.
For oil and gas properties, the successful efforts method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged toselling expenses. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required before production would begin and when the major capital expenditure depends upon the successful completion of further exploratory work remain capitalized and are reviewed periodically for impairment.
(m) GoodwillLeases
Goodwill representsThe 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 excessconsolidated 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 the purchase pricelease payments over the net oflease term discounted using the fairrate 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 identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in business acquisitions. Goodwill impairment is assessed based on qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying amount, including goodwill. If the Company determines that it is more likely than not that the fair value of a reporting entity is less than its carrying amount, the two-step goodwill impairment test will be performed. The Company performs its impairment assessment annually and between annual tests in certain circumstances and determined that the two-step goodwill impairment test is not required to be carried out as of September 30, 2017.lease term.
(n) New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment award transactions, including: (1) income tax consequences; (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. For public companies, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the amendments in this Update as of January 1, 2017. There is no impact on the financial statements since any excess tax benefits were fully offset by a valuation allowance and not recognized for financial statement purposes.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14 which deferred the effective date of Update 2014-09 to annual reporting periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016. The Company expects to adopt the new standard in the first quarter of 2018. The Company does not expect the adoption of this Update to have a material effect on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this Update specify the accounting for leases. The core principle of Topic 842 is that a lessee should recognize theoperating lease ROU assets and liabilities that arisearising from leases. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impactlease arrangements with lease term of this on the consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The Update addresses eight specific changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company does not expect the adoption of this Update to have a material effect on the financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The amendments in this Update provide a more robust framework to use in determining when a set of assets and activities is a business. The amendments in this Update are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not expect the adoption of this Update to have a material effect on the financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual,twelve months or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the effect of the adoption of this Update.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date.less.
8
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2021
(Expressed(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 loss contingencies relating to legal matters, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities, when such liabilities become probable and could be reasonably estimabled. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Revisions to accruals are reflected in earnings (loss) in the period in which different facts or information become known or circumstances change that affect the Company’s previous assumptions with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of such liabilities may be materially different from previous estimates.
(p) Income Tax
The Company accounts for income taxes in accordance with the Income Taxes Topic of the FASB ASC, which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their reported amounts at each period end. Deferred tax assets and liabilities are measured using tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The deferred income tax effects of a change in tax rates are recognized in the period of enactment. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The guidance also provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits. Interests and penalties associated with unrecognized tax benefits are included within the (benefit from) provision for income tax in the consolidated statement of profit (loss).
(q) New Accounting Pronouncements
Recent accounting pronouncements adopted
There were no recent accounting pronouncements adopted during the three months ended 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.
9
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.
NOTE 2 – INVENTORIES
Inventories consist of:
September 30, 2017 | December 31, 2016 | March 31, 2021 | December 31, 2020 | |||||||||||||
Raw materials | $ | 449,575 | $ | 818,500 | $ | 39,855 | $ | 21,484 | ||||||||
Finished goods | 1,981,504 | 4,370,331 | 536,752 | 398,125 | ||||||||||||
Work-in-process | — | 692,850 | ||||||||||||||
$ | 2,431,079 | $ | 5,881,681 | $ | 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 prepaid its land leases with lease terms for periods ranging from one to fifty years to use the land on which the production facilities and warehouses of the Company are situated. The prepaid land lease is amortized on a straight line basis.
During the three-month period ended September 30, 2017, amortization of prepaid land leases totaled $488,848, of which $400,605 and $88,243 were recorded as cost of net revenue and administrative expenses, respectively. During the three-month period ended September 30, 2016, amortization of prepaid land leases totaled $259,194, respectively, which amounts were recorded as cost of net revenue. During the nine-month period ended September 30, 2017, amortization of prepaid land leases totaled $717,969, of which $629,727 and $88,243 were recorded as cost of net revenue and administrative expenses, respectively. During the nine-month period ended September 30, 2016, amortization of prepaid land leases totaled $514,454, respectively, which amounts were recorded as cost of net revenue.
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. ForThe 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 that are collectively owned by local townships,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 cannot obtainpaid a one lump sum upfront amount of $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 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 March 31 2021 and December 31, 2020. As of March 31, 2021, the prepaid land lease increased to $10,063,469 due to an additional amount paid for stamp duty and related land use rights certificates. The parcelsfees. Amortization of this prepaid land thatlease will commence when the Company cannot obtain land use rights certificates cover a totalchemical factory is built and placed in service.
In June 2020, the construction of approximately 54.97 square kilometers with an aggregate carrying valuethe new chemical factory commenced and is expected to complete around June 2021.
10
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016, respectively.2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
September 30, 2017 | December 31, 2016 | March 31, 2021 | December 31, 2020 | |||||||||||||
At cost: | ||||||||||||||||
Mineral rights | $ | 4,638,854 | $ | 4,438,115 | $ | 2,934,951 | $ | 2,955,780 | ||||||||
Buildings | 66,796,949 | 63,601,451 | 63,573,495 | 64,024,667 | ||||||||||||
Plant and machinery | 191,789,494 | 183,243,077 | 256,579,799 | 258,400,710 | ||||||||||||
Motor vehicles | 8,656 | 8,282 | 6,507 | 6,553 | ||||||||||||
Furniture, fixtures and office equipment | 4,086,312 | 3,909,483 | 3,295,179 | 3,318,564 | ||||||||||||
Construction in process | — | 374,790 | 18,127,541 | 12,095,565 | ||||||||||||
Total | 267,320,265 | 255,575,198 | 344,517,472 | 340,801,839 | ||||||||||||
Less: Accumulated depreciation and amortization | (169,696,997 | ) | (146,844,072 | ) | (176,040,608 | ) | (173,212,554 | ) | ||||||||
Impairment | (18,510,233 | ) | (18,641,596 | ) | ||||||||||||
Net book value | $ | 97,623,268 | $ | 108,731,126 | $ | 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.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 $34,822,905$18,720,653 and $35,184,613$19,302,600 as at September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively.
9
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued
During the three-month period ended September 30, 2017,March 31, 2021, depreciation and amortization expense totaled $5,155,187,$4,102, 929, of which $3,356,534$1,816,782, $163,233 and $1,798,653$2,122,914 were recorded asin direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue, and administrative expenses, respectively.
During the three-month period ended September 30, 2016,March 31, 2020, depreciation and amortization expense totaled $5,435,740,$3,453,563, of which $5,104,288$2,578,771, $201,406 and $331,452$673,386 were recorded asin direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue, and administrative expenses, respectively. During the nine-month period ended September 30, 2017, depreciation and amortization expense totaled $15,814,006, of which $13,430,768 and $2,383,238 were recorded as cost of net revenue and administrative expenses respectively. During the nine-month period ended September 30, 2016, depreciation and amortization expense totaled $18,783,424, of which $17,765,477 and $1,017,948 were recorded as cost of net revenue and administrative expenses respectively.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NETFINANCE LEASE RIGHT-OF-USE ASSETS
Property, plant and equipment under capital leases,finance lease, net consist of the following:
September 30, 2017 | December 31, 2016 | March 31, 2021 | December 31, 2020 | |||||||||||||
At cost: | ||||||||||||||||
Buildings | $ | 123,988 | $ | 118,623 | $ | 125,231 | $ | 126,120 | ||||||||
Plant and machinery | 2,330,629 | 2,229,775 | 2,290,926 | 2,307,184 | ||||||||||||
Total | 2,454,617 | 2,348,398 | 2,416,157 | 2,433,304 | ||||||||||||
Less: Accumulated depreciation and amortization | (2,108,912 | ) | (1,794,141 | ) | (2,232,607 | ) | (2,247,032 | ) | ||||||||
Net book value | $ | 345,705 | $ | 554,257 | $ | 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-month period ended September 30, 2017 and 2016,March 31, 2021, depreciation and amortization expense totaled $77,527 and $81,618, respectively,$1,428, which was recorded as cost of net revenue.in direct labor and factory overheads incurred during plant shutdown. During the nine-monththree-month period ended September 30, 2017 and 2016,March 31, 2020, depreciation and amortization expense totaled $227,998 and $248,226, respectively,$1,327, which was recorded as cost of net revenue.
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payablein direct labor and accrued expenses consist of the following:factory overheads incurred during plant shutdown.
September 30, 2017 | December 31, 2016 | |||||||
Accounts payable | $ | 3,437,703 | $ | 7,513,075 | ||||
Salary payable | 385,686 | 319,489 | ||||||
Social security insurance contribution payable | 133,109 | 119,444 | ||||||
Other payables | 386,117 | 730,310 | ||||||
Total | $ | 4,342,615 | $ | 8,682,318 |
1011
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2021
(Expressed(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 6 – OPERATING LEASE RIGHT-OF USE ASSETS
As of March 31, 2021, the total operating lease ROU assets was $8,662,972.
The total operating lease cost for the three-month period ended March 31, 2021 and 2020 was $240,150 and $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. For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels of land of which the Company cannot obtain land use rights certificates covers a total of approximately 38.6 square kilometers of aggregate carrying value of $8,155,820 as at March 31, 2021.
NOTE 7 – ACCOUNTS AND OTHER PAYABLE AND ACCRUED EXPENSES
Accounts and other payable and accrued expenses consist of the following:
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Accounts payable | $ | 1,040,950 | $ | 479,958 | ||||
Salary payable | 318,291 | 320,549 | ||||||
Social security insurance contribution payable | 101,446 | 49,167 | ||||||
Other payable-related party (see Note 8) | 23,738 | 95,616 | ||||||
Deposit on subscription of a subsidiary’s share | 152,180 | 153,260 | ||||||
Accrued expense-construction | 6,296,071 | 3,537,644 | ||||||
Accrued expense-others | 617,213 | 445,507 | ||||||
Total | $ | 8,549,889 | $ | 5,081,701 |
The deposit on subscription of a subsidiary's share of $152,180 as of March 31, 2021 relates to sale of non-controlling interests in DCHC.
12
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 78 – RELATED PARTY TRANSACTIONS
During the three-month and nine-month periods endedOn September 30, 2017,25, 2012, the Company borrowed $100,000 and $350,000, respectively,purchased five floors of a commercial building in the PRC, through SYCI, from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”)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, a shareholder and the Chairman of the Company, hashad a 100%99% equity interest in Jiaxing Lighting. The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand and were fully settled in the three-month period ended September 30, 2017. There was no balance owing to Jiaxing Lighting as of September 30, 2017 and December 31, 2016.
Seller. During the fiscal year 2013,first quarter of 2018, the Company entered into an agreement with the Shandong Shouguang Vegetable Seed Industry Group Co., Ltd,Seller, a related party, to provide property management services for an annual amount of approximately $100,000$94,940 for five years from January 1, 20132018 to December 31, 2017.2022. The expensesexpense associated with this agreement for the three month periodmonths ended September 30, 2017March 31, 2021 and 2016 were $23,3952020 was approximately $23,735 and $23,401.$22,013. The expenses associated with this agreementamounting owing for the nine month period ended September 30, 2017property management services as of March 31, 2021 and 2016 were $68,801December 31, 2020 was $23,738 and $71,170.
$95,616 (Note 7). The amount owed as of March 31, 2021 is interest-free, unsecured and payable in January 2022.
NOTE 89 – TAXES PAYABLE
September 30, 2017 | December 31, 2016 | |||||||
Income tax payable | $ | 1,582,939 | $ | 1,849,535 | ||||
Natural resource tax | 18,599 | 651,230 | ||||||
Value added tax payable | 456,166 | 887,913 | ||||||
Land use right tax payable | 798,285 | 818,921 | ||||||
Other tax payables | 104,158 | 133,732 | ||||||
Total | $ | 2,960,147 | $ | 4,341,331 |
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Land use tax payable | 827,702 | 833,576 | ||||||
Value added tax and other taxes payable | 578,070 | 492,603 | ||||||
Land use tax payable | $ | 1,405,772 | $ | 1,326,179 |
NOTE 9 – CAPITAL10 –LEASE LIABILITIES-FINANCE AND OPERATING LEASE OBLIGATIONS
The components of capitalfinance lease obligations areliabilities were as follows:
Imputed | September 30, | December 31, | ||||||||||
Interest rate | 2017 | 2016 | ||||||||||
Total capital lease obligations | 6.7% | $ | 2,428,342 | $ | 2,472,637 | |||||||
Less: Current portion | (160,027 | ) | (187,678 | ) | ||||||||
Capital lease obligations, net of current portion | $ | 2,268,315 | $ | 2,284,959 |
Imputed | March 31, | December 31, | ||||||||||
Interest rate | 2020 | 2020 | ||||||||||
Total finance lease liability | 6.7% | $ | 2,126,183 | $ | 2,105,973 | |||||||
Less: Current portion | (250,591 | ) | (217,070 | ) | ||||||||
Finance lease liability, net of current portion | $ | 1,875,592 | $ | 1,888,903 |
Interest expenses from capitala finance lease obligationsliability amounted to $40,667$35,538 and $41,740$35,262 for the three-month periodperiods ended September 30, 2017March 31, 2021 and 2016,2020, respectively, which were charged to the condensed consolidated statement of income. Interest expenses from capitalloss. The remaining finance lease obligations amounted to $123,795term at March 31, 2020 was 10 years.
The components of operating lease liabilities as follows:
Imputed | March 31, | December 31, | ||||||||||
Interest rate | 2021 | 2020 | ||||||||||
Total Operating lease liabilities | 4.89% | $ | 8,174,965 | $ | 8,499,692 | |||||||
Less: Current portion | (317,544 | ) | (477,350 | ) | ||||||||
Operating lease liabilities, net of current portion | $ | 7,857,421 | $ | 8,022,342 |
The weighted average remaining operating lease term at March 31, 2021 was 21 years and $133,504 for the nine-month periodweighted average discounts rate was 4.89%. This discount rates used are based on the base rate quoted by the People's Bank of China and vary with the remaining term of the lease. Lease payment in the three-months ended September 30, 2017March 31, 2021 and 2016, respectively, which2020 was $204,951 and $181,665.
Maturities of lease liabilities were charged to the condensed consolidated statement of income.as follows:
Financial lease | Operating Lease | |||||||
Payable within: | ||||||||
the next 12 months | $ | 285,642 | $ | 672,669 | ||||
the next 13 to 24 months | 285,642 | 678,258 | ||||||
the next 25 to 36 months | 285,642 | 677,300 | ||||||
the next 37 to 48 months | 285,642 | 683,280 | ||||||
the next 49 to 60 months | 285,642 | 689,295 | ||||||
thereafter | 1,428,210 | 11,421,886 | ||||||
Total | 2,856,420 | 14,822,688 | ||||||
Less: Amount representing interest | (730,237 | ) | (6,647,723 | ) | ||||
Present value of net minimum lease payments | 2,126,183 | $ | 8,174,965 |
NOTE 1011 –EQUITY
Restricted Shares
DuringA restricted stock award (“RSA”) is an award of common shares that is subject to certain restrictions during a specified period. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the annual general meeting held on June 18, 2013, the shareholdersrelease of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares of nonvested restricted stock have the same voting rights as common stock, are entitled to receive dividends and other distributions thereon and are considered to be currently issued and outstanding. The Company approvedexpenses the amendment to the Certificate of Incorporation to decrease the numbercost of the authorized sharesrestricted stock awards, which is determined to be the fair market value of the Company’sshares 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 to 80,000,000. The Company has completedon the filing of the amendment and restatement of the Certificate of Incorporation with the Secretary of the State of Delaware to decrease the number of authorized shares of the Company’s common stock. Accordingly, 80,000,000 is disclosed as the authorized shares of the Company’s common stock in the consolidated balance sheets as of September 30, 2017 and December 31, 2016.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 a portion of 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 September 30, 2017March 31, 2021 for SCHC, SYCI and DCHC is 47%16%, 17%14% and 0% of its registered capital respectively.
NOTE 11 – TREASURY STOCK
In September 2017, the Company issued 10,000 shares of common stock from the treasury shares to one of its consultants. The shares were valued at the closing market price on the date of the agreement and recorded as general and administrative expense in the condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2017. 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.
1113
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2021
(Expressed(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 12 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended2019 Omnibus Equity Incentive Plan adopted and Restatedapproved 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, approved in 2011(“as amended (the “2007 Plan”),. Upon adoption and approval of the aggregate2019 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 March 31, 2021, the number of shares of the Company’s common stock available for grant and issuance of stock options is 4,341,989 shares. On October 5, 2015, during the annual meeting of the Company’s stockholders, the aggregate number of shares reserved and available for grant and issuance pursuant to the Plan was increased to 10,341,989. As of September 30, 2017, the number of shares of the Company’s common stock available for issuance under the 2019 Plan is 6,757,489.515,648 shares.
The fair value of each option award below is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted, volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical option exercise pattern.
On March 2, 2017, the Company granted to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.98 per share and the options vested immediately. The options were valued at $9,000 fair value, with assumed 57.42% volatility, a three-year expiration term, with an expected tenor of 1.69 years, a risk free rate of 1.59% and no dividend yield. For the three-month periodthree months ended March 31, 2017, $9,000 was recognized as general2021 and administrative expenses.2020, total compensation costs for options issued recorded in the consolidated statement of loss were $0.
On May 7, 2017,During the Company grantedthree months ended March 31, 2021, there were no options issued to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.90 per share and the options vested immediately. The options were valued at $5,700 fair value, with assumed 45.71% volatility, a three-year expiration term with an expected tenor of 1.70 years, a risk free rate of 1.25% and no dividend yield. For the three-month period ended June 30, 2017, $5,700 was recognized as general and administrative expenses.
On July 1, 2017, the Company granted to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.62 per share and the options vested immediately. The options were valued at $4,500 fair value, with assumed 43.45% volatility, a three-year expiration term with expected tenor of 1.70 years, a risk free rate of 1.34% and no dividend yield. For the three-month period ended September 30, 2017, $4,500 was recognized as general and administrative expenses.
On August 23, 2017, the Company granted to 28 members of the management staff options to purchase 281,000 shares of the Company’s common stock, at an exercise price of $1.454 per share and the options vested immediately. The options were valued at $146,700 fair value, with assumed 42.65% volatility, a four-year expiration term with an expected tenor of 1.41 years, a risk free rate of 1.26% and no dividend yield. For the three-month period ended September 30, 2017, $146,700 was recognized as general and administrative expenses
On August 23, 2017, the Company granted to three directors options to purchase 300,000 shares of the Company’s common stock, at an exercise price of $1.454 per share and the options vested immediately. The options were valued at $191,800 fair value, with assumed 46.47% volatility, a four-year expiration term with an expected tenor of 2.26 years, a risk free rate of 1.34% and no dividend yield. For the three-month period ended September 30, 2017, $191,800 was recognized as general and administrative expensesemployees or non-employees.
The following table summarizes all Company stock option transactions between January 1, 20172021 and September 30, 2017.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, 2017 | 185,000 | $ | 2.19 | $1.54 - $4.80 | |||||||||
Granted and vested during the period Ended September 30, 2017 | 618,500 | $ | 1.48 | $1.45-$1.98 | |||||||||
Expired during the period ended September 30, 2017 | (37,500 | ) | $ | 2.18 | $1.83-$2.55 | ||||||||
Balance, September 30, 2017 | 766,000 | $ | 1.62 | $1.45 - $4.80 |
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 |
12
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 12 – STOCK-BASED COMPENSATION – Continued
Stock and Warrants Options Exercisable and Outstanding | |||||||
Weighted Average | |||||||
Remaining | |||||||
Outstanding at September 30, 2017 | Range of Exercise Prices | Contractual Life (Years) | |||||
Exercisable and outstanding | 766,000 | $1.45 - $4.80 | 3.37 |
Stock Options and Warrants Outstanding and Exercisable | ||||||||||||
Weighted Average | ||||||||||||
Remaining | ||||||||||||
Outstanding at March 31, 2021 | Range of Exercise Prices | Contractual Life (Years) | ||||||||||
Outstanding and exercisable | 121,600 | $3.57 - $7.27 | 0.41 |
The aggregate intrinsic value of options outstanding and exercisable as of September 30, 2017March 31, 2021 was $267,966.$4,710.
During the three months ended March 31, 2021 and 2020, there were no options exercised.
14
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2021
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10. 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 lawlaws at a tax rate of 35%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 nine-month periods ended September 30, 2017March 31, 2021 and 2016,2020, and management believes that its earnings are permanently invested in the PRC.
(b) BVIBritish 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 nine-month periods ended September 30, 2017March 31, 2021 and 2016.2020.
(c) Hong Kong
Hong Kong Jiaxing Industrial Limited,HKJI, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company 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 profitsincome tax has been made as the Companyit has no assessabletaxable income for the three-month and nine-month periods ended September 30, 2017March 31, 2021 and 2016.2020. The applicable statutory tax rates for the three-month and nine-month periods ended September 30, 2017March 31, 2021 and 20162020 are 16.5%. There is no dividend withholding tax in Hong Kong.
(d) PRC
Enterprise income tax (“EIT”) for SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC, SYCI and DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign EnterpriseLocal 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 September 30, 2017March 31, 2021 and December 31, 2016,2020, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are $312,552,128subject to WHT are $122,460,382 and $274,769,840,$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 September 30, 2017March 31, 2021 and December 31, 2016,2020, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of September 30, 2017 and December 31, 2016, the unrecognized WHTthat are $14,601,406 and $12,756,698, respectively.subject
1315
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2021
(Expressed(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – INCOME TAXES – Continuedto WHT in China. As of March 31, 2021 and December 31, 2020, the unrecognized WHT are $5,086,534 and $5,288,346, respectively.
The Company’s income tax returns are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s income tax returns filed in the United States for three years from the date of filing. The Company’s US income tax returns since 20132017 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. The Company’s Hong KongFor the years 2012 through 2019, HKJI did not report any taxable income. It did not file any income tax returns since 2010during these years except for 2014 and 2018. For companies which do not have taxable income, IRD typically issues notification to companies requiring them to file income tax returns once in every four years. The tax returns for 2014 and 2018 are currently subject to examination.
The components of the provision for income taxestax benefit (expense) from continuing operations are:
Three-Month Period Ended March 31, | ||||||||||||||||||||||||
Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | 2021 | 2020 | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Current taxes – PRC | $ | 1,509,321 | $ | 3,518,529 | $ | 9,152,597 | $ | 9,996,622 | $ | — | $ | — | ||||||||||||
Deferred taxes – PRC | — | — | — | — | ||||||||||||||||||||
Deferred tax – PRC entities | 743,709 | 1,256,443 | ||||||||||||||||||||||
Deferred taxes –US entity | 15,957 | 24,053 | ||||||||||||||||||||||
Change in valuation allowance | (15,957 | ) | (24,053 | ) | ||||||||||||||||||||
$ | 1,509,321 | $ | 3,518,529 | $ | 9,152,597 | $ | 9,996,622 | $ | 743,709 | $ | 1,256,443 |
The effective income tax expensesbenefit differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
Reconciliations | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Statutory income tax rate | 25 | % | 25 | % | 25 | % | 25 | % | ||||||||
Non-deductible (Non-taxable)item | 3 | % | — | 1 | % | — | ||||||||||
Change in valuation allowance - US federal net operating loss | 3 | % | — | 1 | % | — | ||||||||||
Effective tax rate | 31 | % | 25 | % | 27 | % | 25 | % |
Three-Month Period Ended March 31, | ||||||||
Reconciliations | 2021 | 2020 | ||||||
Statutory income tax rate | 25 | % | 25 | % | ||||
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 September 30, 2017March 31, 2021 and December 30, 201631, 2020 are as follows:
September 30, 2017 | December 31, 2016 | |||||||
Deferred tax liabilities | $ | — | $ | — | ||||
Deferred tax assets: | ||||||||
Allowance for obsolete and slow-moving inventories | $ | — | $ | — | ||||
Impairment on property, plant and equipment | 440,152 | 421,106 | ||||||
Exploration costs | 1,875,841 | 1,794,666 | ||||||
Compensation costs of unexercised stock options | 452,386 | 120,986 | ||||||
US federal net operating loss | 11,723,000 | 11,575,000 | ||||||
Total deferred tax assets | 14,491,379 | 13,911,758 | ||||||
Valuation allowance | (12,175,386 | ) | (11,695,986 | ) | ||||
Net deferred tax asset | $ | 2,315,993 | $ | 2,215,772 |
14
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – INCOME TAXES – Continued
March 31, | December 31, | |||||||
2021 | 2020 | |||||||
Deferred tax liabilities | $ | — | $ | — | ||||
Deferred tax assets: | ||||||||
Impairment on property, plant and equipment | $ | 2,712,092 | $ | 2,907,548 | ||||
Impairment on prepaid land lease | 877,656 | 883,884 | ||||||
Exploration costs | 1,894,641 | 1,908,087 | ||||||
Compensation costs of unexercised stock options | 72,699 | 74,883 | ||||||
PRC tax losses | 22,296,935 | 21,643,028 | ||||||
US federal net operating loss | 1,063,644 | 1,045,503 | ||||||
Total deferred tax assets | 28,917,667 | 28,462,933 | ||||||
Valuation allowance | (9,785,742 | ) | (9,872,706 | ) | ||||
Net deferred tax asset | $ | 19,131,925 | $ | 18,590,227 |
The increasedecrease in valuation allowance for each of the three-month periodsperiod ended September 30, 2017 and 2016March 31, 2021 is $406,000 and $227,574, respectively.$86,964.
The increase in valuation allowance for the nine-monththree-month period ended September 30, 2017March 31, 2020 is $479,400.
The increase in valuation allowance for the nine-month period ended September 30, 2016 is $127,424.$128,868.
There were no unrecognized tax benefits and accrual for uncertain tax positions as of September 30, 2017March 31, 2021 and December 31, 2016.2020 and no amounts accrued for penalties and interest for the three months ended March 31, 2021 and 2020.
NOTE 14 – 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.
16
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 September 30, 2017 | 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) | $ | 9,549,777 | $ | 2,054,729 | $ | 12,235,885 | $ | — | $ | 23,840,391 | $ | — | $ | 23,840,391 | $ | 4,810,990 | $ | 448,253 | $ | — | $ | — | $ | 5,259,243 | $ | — | $ | 5,259,243 | ||||||||||||||||||||||||||||
Net revenue (intersegment) | 1,216,406 | — | — | — | 1,216,406 | — | 1,216,406 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Income from operations before taxes | 2,257,069 | 497,783 | 3,176,458 | (33,184 | ) | 5,898,126 | (1,062,874 | ) | 4,835,252 | |||||||||||||||||||||||||||||||||||||||||||||||
Income taxes | 564,267 | 117,494 | 827,560 | — | 1,509,321 | — | 1,509,321 | |||||||||||||||||||||||||||||||||||||||||||||||||
Income from operations after taxes | 1,692,802 | 380,289 | 2,348,898 | (33,184 | ) | 4,388,805 | (1,062,874 | ) | 3,325,931 | |||||||||||||||||||||||||||||||||||||||||||||||
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 | 318,868 | 252,396 | 172,445 | — | 743,709 | — | 743,709 | |||||||||||||||||||||||||||||||||||||||||||||||||
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 | 161,722,622 | 36,586,589 | 202,404,825 | 1,815,010 | 402,529,046 | 40,136 | 402,569,182 | 144,744,423 | 24,170,863 | 121,760,637 | 1,875,459 | 292,551,382 | 42,886 | 292,594,268 | ||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 3,556,296 | 765,183 | 911,235 | — | 5,232,714 | — | 5,232,714 | 2,920,689 | 1,077,460 | 68,607 | 37,601 | 4,104,357 | — | 4,104,357 | ||||||||||||||||||||||||||||||||||||||||||
Capital expenditures | 466,636 | 95,864 | — | 1,260 | 563,760 | — | 563,760 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Goodwill | — | — | 28,920,005 | — | 28,920,005 | — | 28,920,005 | |||||||||||||||||||||||||||||||||||||||||||||||||
Three-Month Period Ended September 30, 2016 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Net revenue (external customers) | $ | 15,971,847 | $ | 2,310,799 | $ | 20,528,976 | $ | — | $ | 38,811,622 | $ | — | $ | 38,811,622 | ||||||||||||||||||||||||||||||||||||||||||
Net revenue (intersegment) | 2,008,397 | — | — | — | 2,008,397 | — | 2,008,397 | |||||||||||||||||||||||||||||||||||||||||||||||||
Income from operations before taxes | 7,898,302 | (382,917 | ) | 6,442,708 | (2,476 | ) | 13,955,617 | 583 | 13,956,200 | |||||||||||||||||||||||||||||||||||||||||||||||
Income taxes | 1,974,576 | (97,982 | ) | 1,641,935 | — | 3,518,529 | — | 3,518,529 | ||||||||||||||||||||||||||||||||||||||||||||||||
Income from operations after taxes | 5,923,726 | (284,935 | ) | 4,800,773 | (2,476 | ) | 10,437,088 | 583 | 10,437,671 | |||||||||||||||||||||||||||||||||||||||||||||||
Total assets | 150,950,225 | 32,757,666 | 192,128,326 | 1,687,960 | 377,524,177 | 183,416 | 377,707,593 | |||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 3,121,243 | 1,315,140 | 1,080,975 | — | 5,517,358 | — | 5,517,358 | |||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditures | 12,890,713 | 2,336,309 | — | 651,295 | 15,878,317 | — | 15,878,317 | |||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | — | — | 28,743,418 | — | 28,743,418 | — | 28,743,418 |
15
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – BUSINESS SEGMENTS – Continued
Nine-Month Period Ended September 30, 2017 | 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) | $ | 41,895,304 | $ | 6,390,390 | $ | 55,875,179 | $ | — | $ | 104,160,873 | $ | — | $ | 104,160,873 | $ | 462,846 | $ | 94,824 | $ | — | $ | — | $ | 557,670 | $ | — | $ | 557,670 | ||||||||||||||||||||||||||||
Net revenue (intersegment) | 6,305,642 | — | — | — | 6,305,642 | — | 6,305,642 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations before taxes | 17,269,984 | 2,434,872 | 16,441,115 | (90,471 | ) | 36,055,500 | (1,924,779 | ) | 34,130,721 | |||||||||||||||||||||||||||||||||||||||||||||||
Income taxes | 4,358,455 | 586,240 | 4,207,902 | — | 9,152,597 | — | 9,152,597 | |||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations after taxes | 12,911,529 | 1,848,632 | 12,233,213 | (90,471 | ) | 26,902,903 | (1,924,779 | ) | 24,978,124 | |||||||||||||||||||||||||||||||||||||||||||||||
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 | 717,438 | 378,396 | 160,609 | — | 1,256,443 | — | 1,256,443 | |||||||||||||||||||||||||||||||||||||||||||||||||
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 | 161,722,622 | 36,586,589 | 202,404,825 | 1,815,010 | 402,529,046 | 40,136 | 402,569,182 | 117,061,540 | 39,066,713 | 109,222,446 | 1,657,769 | 267,008,468 | 105,430 | 267,113,898 | ||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 11,349,477 | 1,843,856 | 2,848,670 | — | 16,042,003 | — | 16,042,003 | 2,197,844 | 1,108,443 | 113,484 | 35,120 | 3,454,891 | — | 3,454,891 | ||||||||||||||||||||||||||||||||||||||||||
Capital expenditures | 466,636 | 95,864 | 61,235 | — | 623,735 | — | 623,735 | 3,157,669 | 646,752 | 3,611,790 | — | 7,416,211 | — | 7,416,211 | ||||||||||||||||||||||||||||||||||||||||||
Goodwill | — | — | 28,920,005 | — | 28,920,005 | — | 28,920,005 | |||||||||||||||||||||||||||||||||||||||||||||||||
Nine-Month Period Ended September 30, 2016 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
Net revenue (external customers) | $ | 47,621,980 | $ | 6,383,095 | $ | 66,902,764 | $ | — | �� | $ | 120,907,839 | $ | — | $ | 120,907,839 | |||||||||||||||||||||||||||||||||||||||||
Net revenue (intersegment) | 6,501,530 | — | — | — | 6,501,530 | — | 6,501,530 | |||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations before taxes | 19,103,472 | (165,403 | ) | 20,698,116 | (2,501 | ) | 39,633,684 | 319,956 | 39,953,640 | |||||||||||||||||||||||||||||||||||||||||||||||
Income taxes | 4,775,868 | (46,369 | ) | 5,267,123 | — | 9,996,622 | — | 9,996,622 | ||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations after taxes | 14,327,604 | (119,034 | ) | 15,430,993 | (2,501 | ) | 29,637,062 | 319,956 | 29,957,018 | |||||||||||||||||||||||||||||||||||||||||||||||
Total assets | 150,950,225 | 32,757,666 | 192,128,326 | 1,687,960 | 377,524,177 | 183,416 | 377,707,593 | |||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 11,633,581 | 3,847,502 | 3,550,567 | — | 19,031,650 | — | 19,031,650 | |||||||||||||||||||||||||||||||||||||||||||||||||
Capital expenditures | 12,943,491 | 2,340,817 | — | 1,464,884 | 16,749,192 | — | 16,749,192 | |||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | — | — | 28,743,418 | — | 28,743,418 | — | 28,743,418 |
* CommonCertain 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.
Three-Month Period Ended September 30, | Nine-Month Period Ended September 30, | |||||||||||||||
Reconciliations | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Total segment operating income | $ | 5,898,126 | $ | 13,955,617 | $ | 36,055,500 | $ | 39,633,684 | ||||||||
Corporate costs | (526,421 | ) | (180,447 | ) | (784,416 | ) | (409,808 | ) | ||||||||
Unrealized translation difference | (536,453 | ) | 181,030 | (1,140,363 | ) | 729,764 | ||||||||||
Income from operations | 4,835,252 | 13,956,200 | 34,130,721 | 39,953,640 | ||||||||||||
Other income, net of expense | 99,709 | 78,042 | 274,314 | 222,678 | ||||||||||||
Income before taxes | $ | 4,934,961 | $ | 14,034,242 | $ | 34,405,035 | $ | 40,176,318 |
1617
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2021
(Expressed(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – BUSINESS SEGMENTS – Continued
Three-Month Period Ended March 31, | ||||||||
Reconciliations | 2021 | 2020 | ||||||
Total segment operating loss | $ | (3,090,406 | ) | $ | (5,139,775 | ) | ||
Corporate costs | (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 | ) | ||||
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 September 30, 2017.March 31, 2021.
Number | Customer | Bromine (000’s) | Crude Salt (000’s) | Chemical Products (000’s) | Total Revenue (000’s) | Percentage of Total Revenue (%) | |||||||||||||||||
1 | Shandong Morui Chemical Company Limited | $ | 1,938 | $ | 809 | $ | 695 | $ | 3,442 | 14.4% |
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 | $ | 896 | $ | 169 | $ | — | $ | 1,065 | 20.2 | % | |||||||||||
2 | Shouguang Weidong Chemical Company Limited | $ | 703 | $ | 108 | $ | — | $ | 811 | 15.4 | % | |||||||||||
3 | Shandong Brother Technology Limited | $ | 634 | $ | 172 | $ | — | $ | 806 | 15.3 | % | |||||||||||
4 | Shandong Shouguang Shenrunfa Ocean Chemical Company Limited | $ | 672 | $ | — | $ | — | $ | 672 | 12.8 | % | |||||||||||
5 | Dongying Bomeite Chemical Company Limited | $ | 565 | $ | — | $ | — | $ | 565 | 10.7 | % |
The following table shows the major customer(s) (10% or more) for the nine-month period ended September 30, 2017.
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 | $ | 7,643 | $ | 2,059 | $ | 3,463 | $ | 13,165 | 12.6% |
The following table shows the major customer(s)customers (10% or more) for the three-month period ended September 30, 2016.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 | $ | 2,538 | $ | 747 | $ | 1,324 | $ | 4,609 | 11.9% |
The following table shows the major customer(s) (10% or more) for the nine-month period ended September 30, 2016.
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 | $ | 8,230 | $ | 1,919 | $ | 4,321 | $ | 14,470 | 12.0% |
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 | $ | 70 | $ | 41 | $ | — | $ | 111 | 20 | % | |||||||||||
2 | Shandong Brother Technology Limited | $ | 60 | $ | 36 | $ | — | $ | 96 | 17.1 | % | |||||||||||
3 | Shouguang Weidong Chemical Company Limited | $ | 65 | $ | 18 | $ | — | $ | 83 | 14.9 | % | |||||||||||
4 | 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 15 –15– CUSTOMER CONCENTRATION
The Company sells a substantial portion of its products to a limited number of customers. During the three-month and nine-month periodsperiod ended September 30, 2017,March 31, 2021, the Company sold 36.0% and 35.2%74.5% of its products to its top five customers, respectively.customers. As of September 30, 2017,March 31, 2021, amounts due from these customers were $39,124,728. $3,571,150.
During the three-month and nine-month periodsperiod ended September 30, 2016,March 31, 2020, the Company sold 34.6% and 34.3%84.8% of its products to its top five customers, respectively.six customers. As of September 30, 2016,March 31, 2020, amounts due from these customers were $31,621,828. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
17
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Expressed in U.S. dollars)
(UNAUDITED)$526,288.
NOTE 16 – MAJOR SUPPLIERS
During the three-month and nine-month periodsperiod ended September 30, 2017,March 31, 2021, the Company purchased 71.6% and 68.2%100% of its raw materials from its top five suppliers, respectively.suppliers. As of September 30, 2017,March 31, 2021, amounts due to those suppliers included in accounts payable were $1,353,182. $1,040,950.
During the three-month and nine-month periodsperiod ended September 30, 2016,March 31, 2020, the Company purchased 56.2% and 55.2%100% of its raw materials from its top five suppliers, respectively.suppliers. As of September 30, 2016,March 31, 2020, amounts due to those suppliers included in accounts payable were $4,104,237. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.$53,707.
NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments, which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term nature of these instruments. There were no material unrecognized financial assets and liabilities as of September 30, 2017March 31, 2021 and December 31, 2016.2020.
NOTE 18 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS
As of September 30, 2017, the Company leased real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment and the buildings located on the property, underacapital lease. The future minimum lease payments required under the capital lease, together with the present value of such payments, are included in the table shown below.OTHER SERVICE CONTRACTUAL OBLIGATIONS
The Company has leased nine parcelsno purchase commitments as of land under non-cancelable operating leases, which are fixed rentals and expire through December 2021, December 2023,December 2030, December 2031, December 2032, December 2040, February 2059, August 2059 and June 2060, respectively.March 31, 2021.
The following table sets forth the Company’s contractual obligations as of September 30, 2017:March 31, 2021:
Capital Lease Obligations | Operating Lease Obligations | Property Management Fees | ||||||||||
Payable within: | ||||||||||||
the next 12 months | $ | 282,808 | $ | 973,544 | $ | 23,499 | ||||||
the next 13 to 24 months | 282,808 | 996,682 | — | |||||||||
the next 25 to 36 months | 282,808 | 1,017,918 | — | |||||||||
the next 37 to 48 months | 282,808 | 1,043,191 | — | |||||||||
the next 49 to 60 months | 282,808 | 897,662 | — | |||||||||
thereafter | 2,262,459 | 16,326,743 | — | |||||||||
Total | $ | 3,676,499 | $ | 21,255,740 | $ | 23,499 | ||||||
Less: Amount representing interest | (1,248,157 | ) | ||||||||||
Present value of net minimum lease payments | $ | 2,428,342 |
18
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 18 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS – Continued
Rental expenses related to operating leases of the Company amounted to $264,113 and $259,196, which were charged to the condensed consolidated statements of income for the three months ended September 30, 2017 and 2016, respectively. Rental expenses related to operating leases of the Company amounted to $775,680 and $783,820, which were charged to the income statements for the nine months ended September 30, 2017 and 2016, respectively.
Property Management Fees | Capital Expenditure | |||||||
Payable within: | ||||||||
the next 12 months | $ | 94,940 | $ | 12,391,563 | ||||
the next 13 to 24 months | 94,940 | 748,433 | ||||||
the next 25 to 36 months | — | — | ||||||
Total | $ | 189,880 | $ | 13,139,996 |
NOTE 19 – SUBSEQUENT EVENTS–LOSS CONTINGENCIES
On September 1, 2017or about August 3, 2018, written decisions of administration penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo Tu Zi Fa Gao Zi [2018] No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu Zi Fa Gao Zi [2018] No. 296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company Limited (“SCHC”) by Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as respondent respectively thereof. The Decisions challenged the land use of Factory nos. 2, 9, 7, 4, 8 and 10, respectively, and alleged, among other things, that SCHC had illegally occupied and used the land in the total area of approximately 52,674 square meter, on which Factory nos. 2, 9, 7, 4, 8 and 10 were built, respectively. The Written Decisions ordered SCHC, among other things, to return the land subject to the Written Decisions to its respective legal owner, restore the land to its original state, and demolish or confiscate all the buildings and facilities thereon and pay monetary penalty of approximately RMB 1.3 million ($184,000) in the aggregate. Each of the Written Decisions shall be executed within 15 days upon serving on SCHC. Additional interest penalty shall be imposed at a daily rate of 3% in the event that SCHC does not make the monetary penalty payment in a timely manner. Subsequently, the Bureau filed enforcement actions to the People’s Court of Shouguang City, Shandong Province (the “Court”), naming SCHC as enforcement respondent and alleged, among other things, that SCHC failed to perform its obligations under each of the Written Decisions within the specified timeframe. The enforcement proceedings sought court orders to enforce the Written Decisions. On May 5, 2019, written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 384, (2019) Lu 0783 Xing Shen No. 385, (2019) Lu 0783 Xing Shen No. 389, (2019) Lu 0783 Xing Shen No. 390, (2019) Lu 0783 Xing Shen No. 393, and (2019) Lu 0783 Xing Shen No. 394, respectively (together, the “Court Rulings”) were made by the Court in favor of the Bureau. The Court orders, among other relief, to enforce each of the Written Decisions, to return each subject land to its legal owners and demolish or confiscate the buildings and facilities thereon and restore the land to its original state within 10 days from the service of the Court Rulings on SCHC. The Court Rulings became enforceable immediately upon service on SCHC on May 5, 2019.
In the last twenty years, to the Company’s knowledge, there were no government regulations requiring bromine manufacturers to obtain land use and planning approval document. As such, the Company announced itbelieves most of the bromine manufacturers in Shouguang City do not have land use and planning approval documents and lease their land parcels from the village associations. They are facing the same issues in connection with land use and planning as the Company. To the Company’s knowledge, the local government has submitted its plan to solve the issues to higher authority and are waiting for approval from the higher authority.
The Company is in the process of resolving the issues in connection with SCHC’s land use and planning diligently. The Company has been in discussions closely with the local government authorities with the help from Shouguang City Bromine Association to seek reliefs and, based on verbal confirmation by local government authorities, believes the administrative penalties imposed by the Bureau according to the Written Decisions are being re-assessed by local government authorities and may be revoked. Pursuant to a Written Application dated October 28, 2019 addressed to the Court by the Bureau, the Bureau withdrew its application for the enforcement proceedings regarding the administrative penalty imposed on Factory No. 7, Factory No. 8 and Factory No.10. Pursuant to a written decisions of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 389 Zhi Yi, dated November 25, 2020, the Court orders to terminate the enforcement of the case captioned (2019) Lu 0783 Xing Shen No. 389. Production of Factory No. 7 was allowed to resume in April 2019. The Company received a notification from the government of Yangkou County, Shouguang City that production at its factories had to be haltedGovernment in order forFebruary 2019 informing the Company that Factory No. 1, No.4, No. 7 and No. 9 have passed inspection and were approved to perform rectification and improvement in accordance with the country's new safety, environmental protection requirements.resume operation.
On October 27, 2017,In addition, on August 28, 2019, the CompanyPeople’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 the government agreed on a plan for SCHC which the Company believes will cost approximately US$35 million to undertake and complete all the rectification steps.other chemical industry-related types of projects (clause 11 of section 3). The Company believes that the rectification for allgoal of the bromine business will be completedgovernment is to standardize and that operations will recommence byregulate the end of March 2018. However,industry and not to demolish the Company will try its best to implementfacilities or penalize the measures quickly to commence production for part of its bromine factories before this date.manufacturers. As of the date of filing 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 discussionfurther 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 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 governmentoptions to arrive atpurchase 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 rectification plan for its chemical business.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.
1918
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. These risks, uncertainties and other factors include, without limitation, those matters discussed in Item 1A of Part I of our 2016 Form 10-K. 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. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing in our 2016 Form 10-K and Item 1A, “Risk Factors” for the year ended December 31, 2016.
Overview
We are a holding company which conducts operations through our wholly-owned China-based subsidiaries. Our business is conducted and reported in four segments, namely, bromine, crude salt, chemical products and natural gas.
Through our wholly-owned subsidiary, SCHC, we produce and trade bromine and crude salt. We are one of the largest producers of bromine in China, as measured by production output. Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine also is used to form intermediary chemical compounds such as Tetramethylbenzidine. Bromine is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants. Crude salt is the principal material in alkali production as well as chlorine alkali production and is widely used in the chemical, food and beverage, and other industries.
Through our wholly-owned subsidiary, SYCI, we manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents, inorganic chemicals and manufacture and sell chemical productsmaterials that are used for human and animal antibiotics.
On December 12, 2006, we acquired, through a share exchange, Upper Class Group Limited, a British Virgin Islands holding corporation which then owned all of the outstanding shares of SCHC. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination. That is, the share exchange is equivalent to the issuance of stock by Upper Class for the net assets of our Company, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange was identical to that resulting from a reverse acquisition, except no goodwill was recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical consolidated financial statements of the legal acquirer, our Company, are those of the legal acquiree, Upper Class Group Limited, which is considered to be the accounting acquirer. Share and per share amounts reflected in this report have been retroactively adjusted to reflect the merger.
On February 5, 2007, the Company, acting through SCHC, acquired SYCI. Since the ownership of the Company and SYCI was then substantially the same, the transaction was accounted for as a transaction between entities under common control, whereby we recognized the assets and liabilities of SYCI at their carrying amounts. Share and per share amounts stated in this report have been retroactively adjusted to reflect the merger.
On August 31, 2008, SYCI completed the construction of a new chemical production line. It passed the examination by Shouguang City Administration of Work Safety and local fire department. This new production line focuses on producing environmental friendly additive products, solid lubricant and polyether lubricant, for use in oil and gas exploration. The line has an annual production capacity of 5,000 tons. Formal production of this chemical production line started on September 15, 2008. The total annual production capacity of SYCI is 36,300 tons (exclude SCRC which was merged with SYCI on January 1, 2017).
20
On October 12, 2009 we completed a 1-for-4 reverse stock split of our common stock, such that for each four shares outstanding prior to the stock split there was one share outstanding after the reverse stock split. All shares of common stock referenced in this report have been adjusted to reflect the stock split figures. On October 27, 2009 our shares began trading on the NASDAQ Global Select Market under the ticker symbol “GFRE” and on June 30, 2011 we changed our ticker symbol to “GURE” to better reflection of our corporate name.
On January 12, 2015, the Company and SCHC entered into an Equity Interest Transfer Agreement with SCRC pursuant to which SCHC agreed to acquire SCRC and all rights, title and interest in and to all assets owned by SCRC, a leading manufacturer of materials for human and animal antibiotics in China and other parts of Asia.
On February 4, 2015 the Company closed the transactions contemplated by the agreement between the Company, SCHC and SCRC.
On the closing date, the Company issued 7,268,011 shares of its common stock, par value $0.0005 per share (the “Shares”), at the closing market price of $1.84 per Share on the closing date to the four former equity owners of SCRC .The issuance of the Shares was exempt from registration pursuant to Regulation S of the Securities Act of 1933, as amended. On the closing date, the Company entered into a lock-up agreement with the four former equity owners of SCRC. In accordance with the terms of the lock-up agreement, the shareholders agreed not to sell or transfer the Shares for five years from the date the stock certificates evidencing the Shares were issued.
The sellers of SCRC agreed as part of the purchase price to accept the Shares, based on a valuation of $2.00, which was a 73% premium to the price on the day the agreement was entered into. For accounting purposes, the Shares are now being valued at $1.84, which was the closing price of our stock on the day of the closing date of the agreement. The price difference between the original $2.00 and the current $1.84 is solely for accounting purposes. There has been no change in the number of shares issued.
On November 24, 2015, Gulf Resources, Inc., a Delaware corporation consummated a merger with and into itsOur wholly-owned subsidiary, Gulf Resources, Inc., a Nevada corporation. As a result of the reincorporation, the Company is now a Nevada corporation.
On December 15, 2015, the Company registered a new subsidiary in the Sichuan Province of the PRC named Daying County Haoyuan Chemical Company Limited (“DCHC”) with registered Capital of RMB50,000,000, and there was RMB11,833,535 capital contributed by SCHC as of September 30, 2017. DCHC, was established to further explore and develop natural gas and brine resources (including bromine and crude salt) in Sichuan Province, China.
On September 2, 2016, the Company announced the planned merger of two of its 100% owned subsidiaries, Shouguan Yuxin Chemical Co., Limited (“SYCI”) and Shouguan Rongyuan Chemical Co., Ltd (“SCRC”). On March 24, 2017, the legal process of the merger was completed and SCRC was officially deregistered on March 28, 2017. The results of these two subsidiaries were reported as SYCI in the three and nine months ended September 30, 2017. The total production capacity of the merged entity is 60,900 tons.
As disclosed in the Company’s Current Report on Form 8-K filed on September 8, 2017, the Company disclosed thatreceived, on September 1, 2017, the Company received 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'scountry’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.
All direct laborThe 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 factory overhead costsenvironmental 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.
19
In February 2019, the Company received a notification from the local government of Yangkou County that its Factory No. 1, No.4, No. 7 and No. 9 have passed inspection and can resume operations. In April 2019, Factory No. 1 and No. 7 resumed operations.
On February 28, 2020, the Company announced that it received an approval from the government to resume bromine production after winter temporary closure. Subsequently, it received another approval from the Shouguang Yangkou People’s Government dated on March 5, 2020 to resume production at its bromine factories No.1, No. 4, No.7 and No. 9 in order to meet the needs of bromide products for epidemic prevention and control. With these two approvals, the Company was allowed to take the steps to resume production at all four bromine factories.
The Company is still waiting for governmental approval for factories No.2, No.8, and No.10. To its knowledge, the government is currently completing its planning process for all mining areas including depreciationthat for prevention of plantflood. As a result, the Company may be required to make some modifications to our current wells and machinery incurred in Septemberaqueducts 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, whichthe Company received a letter from the People’s Government of Yangkou County, Shouguang City notifying the Company that due to the new standards and regulations relating to safety production and environmental pollution, from certain local governmental departments, such as the municipal environmental protection department, the security supervision department and the fire department, its chemical plants would have to be relocated to a new industrial park called Bohai Marine Fine Chemical Industry Park. Chemical companies that were not being asked to move into the park will be permanently closed. Although our chemical plants were in compliance with regulations, they were also close to a residential area. As a result, the government determined we should relocate to the Bohai park. Since our chemical factories closed, the Company has secured from the government the land use rights for its chemical plants located at the Bohai Park and presented a completed construction design draft and other related documents to the local authorities for approval. On January 6, 2020, the Company received the environmental protection approval by the government of Shouguang City, Shandong Province for the proposed Yuxin Chemical factory. The Company began the construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020. The construction is expected to take approximately one year, and an additional six months to complete the equipment installation and testing. The Company expects to begin trial production at the beginning of 2022.
In January 2017, the Company completed the first brine water and natural gas well field construction in Sichuan Province and announced the commencement of trial production. The Company has been working with Xinan Shiyou Daxue (Southwest Petroleum University) and developed a solution to DHCH’s technical drilling problem. In resolving the problem, the Company purchased customized equipment for its natural gas project. The installation of such equipment, including providing piping and electricity, was completed in July 2018. The Company has completed the test production at its first natural gas well in Sichuan Province and has commenced trial production in January 2019. Later On May 29, 2019, the Company received a verbal notice from the government of Tianbao Town, Daying County, Sichuan Province, whereby the Company is required to obtain project approval for its well located in Daying, including the whole natural gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve the related land issue. Until these approvals have been received, the Company has to temporarily halt trial production at its natural gas well in Daying.
As a result of our acquisitions of SCHC and SYCI, our historical consolidated financial statements and the information presented below reflects the accounts of SCHC, SYCI and DCHC, the condensed consolidated financial statements and the information presented below as of and for the quarter ended March 31, 2021. The following discussion should be read in the costconjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report.
20
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.
21
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 nine-month periods ended September 30, 2017March 31, 2021 and 2016.2020.
Comparison of the Three-Month PeriodPeriods Ended September 30, 2017March 31, 2021 and 20162020
Three-Month Period Ended September 30, 2017 | Three-Month Period Ended September 30, 2016 | Percent Change Increase/ (Decrease) | ||||||||||
Net revenue | $ | 23,840,391 | $ | 38,811,622 | (39 | %) | ||||||
Cost of net revenue | $ | (14,518,439 | ) | $ | (23,107,921 | ) | (37 | %) | ||||
Gross profit | $ | 9,321,952 | $ | 15,703,701 | (41 | %) | ||||||
Sales, marketing and other operating expenses | $ | (65,599 | ) | $ | (83,087 | ) | (21 | %) | ||||
Research and development costs | $ | (42,074 | ) | $ | (68,115 | ) | (38 | %) | ||||
Write-off/Impairment on property, plant and equipment | $ | — | $ | (90,395 | ) | (100 | %) | |||||
General and administrative expenses | $ | (4,451,027 | ) | $ | (1,613,933 | ) | 176 | % | ||||
Other operating income | $ | 72,000 | $ | 108,029 | (33 | %) | ||||||
Income from operations | $ | 4,835,252 | $ | 13,956,200 | (65 | %) | ||||||
Other income, net | $ | 99,709 | $ | 78,042 | 28 | % | ||||||
Income before taxes | $ | 4,934,961 | $ | 14,034,242 | (65 | %) | ||||||
Income taxes | $ | (1,509,321 | ) | $ | (3,518,529 | ) | (57 | %) | ||||
Net income | $ | 3,425,640 | $ | 10,515,713 | (67 | %) |
Three-Month Period Ended March 31, 2021 | Three-Month Period Ended March 31, 2020 | Percent Change Increase/ (Decrease) | ||||||||||
Net revenue | $ | 5,259,243 | $ | 557,670 | 843 | % | ||||||
Cost of net revenue | $ | (4,181,389 | ) | $ | (921,320 | ) | 353 | % | ||||
Gross profit (loss) | $ | 1,077,854 | $ | (363,650 | ) | 396 | % | |||||
Sales, marketing and other operating expenses | $ | (9,545 | ) | $ | (2,243 | ) | 325 | % | ||||
Direct labor and factory overheads incurred during plant shutdown | $ | (2,613,483 | ) | (3,610,423 | ) | (27 | %) | |||||
Other operating expense | $ | — | (15,776 | ) | — | |||||||
General and administrative expenses | $ | (1,736,250 | ) | $ | (843,337 | ) | 106 | % | ||||
Loss from operations | $ | (3,281,424 | ) | $ | (4,835,429 | ) | (32 | %) | ||||
Other income, net | $ | 35,591 | $ | 39,228 | (9 | %) | ||||||
Loss before taxes | $ | (3,245,833 | ) | $ | (4,796,201 | ) | (32 | %) | ||||
Income tax benefit | $ | 743,709 | $ | 1,256,443 | (41 | %) | ||||||
Net loss | $ | (2,502,124 | ) | $ | (3,539,758 | ) | (29 | %) |
21
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 September, 2017March 31, 2021 compared to the same period in 2016:2020:
Net Revenue by Segment | Net Revenue by Segment | |||||||||||||||||||||||||||||||||||||||
Three-Month Period Ended | Three-Month Period Ended | Percent change (Decrease) | Three-Month Period Ended | Three-Month Period Ended | Percent Change | |||||||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | of Net Revenue | March 31, 2021 | March 31, 2020 | Increase | |||||||||||||||||||||||||||||||||||
Segment | % of total | % of total | % of total | % of total | ||||||||||||||||||||||||||||||||||||
Bromine | $ | 9,549,777 | 40 | % | $ | 15,971,847 | 41 | % | (40 | %) | $ | 4,810,990 | 92 | % | $ | 462,846 | 83 | % | 939 | % | ||||||||||||||||||||
Crude Salt | $ | 2,054,729 | 9 | % | $ | 2,310,799 | 6 | % | (11 | %) | $ | 448,253 | 8 | % | $ | 94,824 | 17 | % | 373 | % | ||||||||||||||||||||
Chemical Products | $ | 12,235,885 | 51 | % | $ | 20,528,975 | 53 | % | (40 | %) | $ | — | — | $ | — | — | — | |||||||||||||||||||||||
Natural Gas | $ | — | — | $ | — | — | — | |||||||||||||||||||||||||||||||||
Total sales | $ | 23,840,391 | 100 | % | $ | 38,811,621 | 100 | % | (39 | %) | $ | 5,259,243 | 100 | % | $ | 557,670 | 100 | % | 843 | % |
Bromine and crude salt segments | Three-Month Period Ended | Percentage Change | ||||||||||
product sold in tonnes | September 30, 2017 | September 30, 2016 | (Decrease) | |||||||||
Bromine (excluding volume sold to SYCI) | 2,592 | 4,511 | (43 | %) | ||||||||
Crude Salt | 64,362 | 82,547 | (22 | %) |
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 | % |
Three-Month Period Ended | Percentage Change | |||||||||||
Chemical products segment sold in tonnes | September 30, 2017 | September 30, 2016 | (Decrease) | |||||||||
Oil and gas exploration additives | 1,361 | 2,914 | (53 | %) | ||||||||
Paper manufacturing additives | 450 | 835 | (46 | %) | ||||||||
Pesticides manufacturing additives | 239 | 606 | (61 | %) | ||||||||
Pharmaceutical intermediates | 293 | 388 | (25 | %) | ||||||||
By products | 1,435 | 3,045 | (53 | %) | ||||||||
Overall | 3,778 | 7,788 | (51 | %) |
22
Three-Month Period Ended | Percentage Change | |||||||||||
Natural gas segments product sold in cubic metre | March 31, 2021 | March 31, 2020 | Decrease | |||||||||
Natural Gas | — | — | — |
Bromine segment
The table below showsFor the changes inthree-month periods ended March 31, 2021 and 2020, the average selling price and changes in the sales volume of bromine for three-month period ended September 30, 2017 from the same period in 2016.
Three-Month Period Ended September 30, | ||||
Decrease in net revenue of bromine as a result of: | 2017 vs. 2016 | |||
Increase in average selling price | $ | 509,270 | ||
Decrease in sales volume | $ | (6,931,340 | ) | |
Total effect on net revenue of bromine | $ | (6,422,070 | ) |
The decrease in net revenue from ourfor the bromine segment was mainly$4,810,990 and $462,846, respectively, due to the decreasefact that four plants resumed production and sales in the sales volume. The sales volumefirst quarter of bromine decreased from 4,511 tonnes for the three-month period ended September 30, 2016 to 2,592 tonnes for the same period2021, while only two plants were in 2017, a decrease of 43%. The major reasons for the decreaseoperation in the sales volumefirst quarter of bromine were (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume.
The average selling price of bromine increased from $3,541 per tonne for the three-month period ended September 30, 2016 to $3,684 per tonne for the same period in 2017, an increase of 4%.2020.
Crude salt segment
The table below showsFor the changes inthree-month periods ended March 31, 2021 and 2020, the average selling price and changes innet revenue for the sales volume of crude salt for three-month period ended September 30, 2017 from the same period in 2016.
Three-Month Period Ended September 30, | ||||
Decrease in net revenue of crude salt as a result of: | 2017 vs. 2016 | |||
Increase in average selling price | $ | 288,745 | ||
Decrease in sales volume | $ | (544,815 | ) | |
Total effect on net revenue of crude salt | $ | (256,070 | ) |
The decrease in net revenue from our crude salt segment was $448,253 and $94,824 due to the decreasefact that production and sales resumed at three plants in the sales volumefirst quarter of crude salt. The sales volume of crude salt decreased by 22% from 82,547 tonnes for the three-month period ended September 30, 2016 to 64,362 tonnes for the same period in 2017. The major reason for the decrease2021, while only two plants resumed production in the sales volumefirst quarter of crude salt were (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume.2020.
The average selling price of crude salt increased from $27.99 per tonne for the three-month period ended September 30, 2016 to $31.92 per tonne for the same period in 2017, an increase of 14%.
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Chemical products segment
Product Mix of Chemical Products Segment | Percent | |||||||||||||||||||
Three-Month Period Ended | Three-Month Period Ended | Change of | ||||||||||||||||||
September 30, 2017 | September 30, 2016 | Net Revenue | ||||||||||||||||||
Chemical Products | % of total | % of total | ||||||||||||||||||
Oil and gas exploration additives | $ | 2,620,464 | 21 | % | $ | 5,362,309 | 26 | % | (51 | %) | ||||||||||
Paper manufacturing additives | $ | 517,905 | 4 | % | $ | 930,262 | 4 | % | (44 | %) | ||||||||||
Pesticides manufacturing additives | $ | 1,311,326 | 11 | % | $ | 3,010,391 | 15 | % | (56 | %) | ||||||||||
Pharmaceutical intermediates | $ | 6,081,137 | 50 | % | $ | 7,586,616 | 37 | % | (20 | %) | ||||||||||
By products | $ | 1,705,053 | 14 | % | $ | 3,639,397 | 18 | % | (53 | %) | ||||||||||
Total sales | $ | 12,235,885 | 100 | % | $ | 20,528,975 | 100 | % | (40 | %) |
NetFor the three-month periods ended March 31, 2021 and 2020, the net revenue from ourfor the chemical products segment decreased from $20,528,975was $0 due to the closure of our chemical factories since September 1, 2017. As a result there were no chemical products for sale for the three-month period ended September 30, 2016 to $12,235,885 for the same periodMarch 31, 2021. Our new chemical factory is under construction in 2017, a decrease of approximately 40%. This decrease was primarily attributable to the decreased sales volume of all our chemical products mainly due to (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume. Net revenue from our oil and gas exploration chemicals decreased from $5,362,309 for the three-month period ended September 30, 2016 to $2,620,464 for the same period in 2017, a decrease of approximately 51%. Net revenue from our paper manufacturing additives decreased from $930,262 for the three-month period ended September 30, 2016 to $517,905 for the same period in 2017, a decrease of approximately 44%. Net revenue from our pesticides manufacturing additives decreased from $3,010,391 for the three-month period ended September 30, 2016 to $1,311,326 for the same period in 2017, a decrease of approximately 56%. Net revenue from our pharmaceutical intermediates decreased from $7,586,616 for the three-month period ended September 30, 2016 to $6,081,137 for the same period in 2017, a decrease of approximately 20%. Net revenue from our by products decreased from $3,639,397 for the three-month period ended September 30, 2016 to $1,705,053 for the same period in 2017, a decrease of approximately 53%.Bohai Park.
The table below shows the changes in the average selling price and changes in the sales volume of major chemical products of the chemical products segment for the three-month period ended September 30, 2017 from the same period in 2016.
Decrease in net revenue, for the three-month period ended September 30, 2017 vs. 2016, as a result of: | Oil and gas exploration additives | Paper manufacturing additives | Pesticides manufacturing additives | Pharmaceutical intermediates | By products | Total | ||||||||||||||||||
Increase/(Decrease) in average selling price | $ | 182,459 | $ | 23,003 | $ | 220,254 | $ | 414,274 | $ | (15,611 | ) | $ | 824,379 | |||||||||||
Decrease in sales volume | $ | (2,924,304 | ) | $ | (435,360 | ) | $ | (1,919,319 | ) | $ | (1,919,753 | ) | $ | (1,918,733 | ) | $ | (9,117,469 | ) | ||||||
Total effect on net revenue of chemical products | $ | (2,741,845 | ) | $ | (412,357 | ) | $ | (1,699,065 | ) | $ | (1,505,479 | ) | $ | (1,934,344 | ) | $ | (8,293,090 | ) |
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Natural gas segment
For the three-month period ended March 31, 2021 and 2020, the net revenue for the natural gas was $0.
Cost of Net Revenue.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 | |||||||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | Net Revenue | March 31, 2021 | March 31, 2020 | Net Revenue | |||||||||||||||||||||||||||||||||||
Segment | % of total | % of total | % of total | % of total | ||||||||||||||||||||||||||||||||||||
Bromine | $ | 5,150,471 | 35 | % | $ | 7,106,210 | 31 | % | (28 | %) | $ | 3,514,046 | 84 | % | $ | 609,820 | 66 | % | 476 | % | ||||||||||||||||||||
Crude Salt | $ | 1,102,060 | 8 | % | $ | 2,498,817 | 11 | % | (56 | %) | $ | 667,343 | 16 | % | $ | 311,500 | 34 | % | 114 | % | ||||||||||||||||||||
Chemical Products | $ | 8,265,908 | 57 | % | $ | 13,502,894 | 58 | % | (39 | %) | $ | — | — | $ | — | — | — | |||||||||||||||||||||||
Natural Gas | $ | — | — | $ | — | — | — | |||||||||||||||||||||||||||||||||
Total | $ | 14,518,439 | 100 | % | $ | 23,107,921 | 100 | % | (37 | %) | $ | 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. Our cost of net revenue was $14,518,439 for the three-month period ended September 30, 2017, a decrease of $8,589,482 (or 37%) as compared to the same period in 2016. This decrease was primarily attributable to the decrease volume of products sold due to (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume.
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 September 30, 2016 | 47,347 | 46 | % | ||||||
Three-month period ended September 30, 2017 | 42,808 | 37 | % | ||||||
Variance of the three-month period ended September 30, 2017 and 2016 | (4,539 | ) | (9 | %) |
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 periodperiods divided by the annual production capacity in tonnes.
Our utilization ratio decreased by 9%was 17% for the three-month period ended September 30, 2017 asMarch 31, 2021, an increase of 12% compared withto that for the samethree-month period ended March 31, 2020 because four plants resumed production in 2016. This decrease was mainly dueMarch 31, 2021 compared to the slowdowntwo plants in the Chinese economy.operations in March 31, 2020.
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Bromine segment
For the three-month period ended September 30, 2017,March 31, 2021 the cost of net revenue for the bromine segment was $5,150,471, a decrease$3,514,046. This $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 $1,955,739 or 28% overplant and equipment for four factories that resumed operation in the samethree-month ended March 31, 2021.
For the three-month period in 2016. The major components ofended March 31, 2020 the costscost of net revenue for the bromine segment were the cost of raw materials and finished goods consumed of $1,442,686 (or 28%), depreciation and amortization of manufacturing plant and machinery of $2,373,683 (or 46%) and Resource tax of $418,311 (or 8%) for the three-month period ended September 30, 2017. For the three-month period ended September 30, 2016, the major components of the cost of net revenue were the cost of raw materials and finished goods consumed of $2,150,607 (or 30%), depreciation and amortization of manufacturing plant and machinery of $3,012,969 (or 42%) and electricity of $738,926 (or 10%). The cost structure changed where the proportion of cost of raw materials and finished goods consumed over the total cost of net revenue decreased by 2% in the three-month period ended September 30, 2017 compared to the same period in 2016. The decrease in net cost of net revenue was the decrease in the sales volume of bromine as mentioned in net revenue of bromine and decrease in depreciation and amortization of manufacturing plant and machinery mainly due to (i) some plant and equipment related to the crude salt and bromine facilities were fully depreciated in June 2016; and (ii) the demolition Factory No.6 in December 2016 for bromine and crude salt segment, which partially offset by the increase in depreciation and amortization of manufacturing plant and machinery due to the enhancement projects carried out for our extraction wells and transmission channels and ducts which commenced in August 2016 and completed in September 2016 .
The table below represents the major production cost component of bromine per tonne for respective periods:
Per tonne production cost | Three-Month Period Ended | Three-Month Period Ended | ||||||||||||||||||
component of bromine segment | September 30, 2017 | September 30, 2016 | % Change | |||||||||||||||||
% of total | % of total | |||||||||||||||||||
Raw materials | $ | 909 | 42 | % | $ | 819 | 46 | % | 11 | % | ||||||||||
Depreciation and amortization | $ | 811 | 37 | % | $ | 593 | 33 | % | 37 | % | ||||||||||
Electricity | $ | 128 | 6 | % | $ | 146 | 8 | % | (12 | %) | ||||||||||
Others | $ | 328 | 15 | % | $ | 237 | 13 | % | 38 | % | ||||||||||
Production cost of bromine per tonne | $ | 2,176 | 100 | % | $ | 1,795 | 100 | % | 21 | % |
Our production cost of bromine per tonne was $2,176 for the three-month period ended September 30, 2017, an increase of 21% (or $381) as compared to the same period in 2016.$609,820.
Crude salt segment
TheFor the three-month period ended March 31, 2021 the cost of net revenue for ourthe crude salt segment forwas $667,343. This $355,843 increase was primarily attributable to the three-month period ended September 30, 2017 was $1,102,060, representing a decrease of $1,396,757, or 56%, compared to $2,498,817 for the same periodincrease in 2016. The decrease in costfactory overhead per unit produced, which was mainly due to the decrease in depreciation and amortization of manufacturing plant and machinery mainly due to (i) some plant and equipment related to the crude salt and bromine facilities were fully depreciated in June 2016; and (ii) the demolition Factory No.6 in December 2016 for bromine and crude salt segment, which partially offsetcaused by the increase in depreciation and amortizationcharges of manufacturing plant and machinery due toequipment for three factories that resumed operation in the enhancement projects carried out for our extraction wells and transmission channels and ducts which commenced in August 2016 and completed in September 2016. The significant cost components forthree-month ended March 31, 2021.
For the three-month period ended September 30, 2017 were depreciation and amortizationMarch 31, 2020 the cost of $612,699 (or 56%), resource taxes calculated based onnet revenue for the crude salt sold of $205,473 (or 19%) and electricity of $89,961 (or 8%). The significant cost components for the three-month period ended September 30, 2016 were depreciation and amortization of $1,751,438 (or 70%), resource taxes calculated based on crude salt sold of $247,707 (or 10%) and electricity of $183,842 (or 7%). The table below represents the major production cost component of crude salt per ton for respective periods:segment was $311,500.
Per tonne production cost | Three-Month Period Ended | Three-Month Period Ended | ||||||||||||||||||
component of crude salt segment | September 30, 2017 | September 30, 2016 | % Change | |||||||||||||||||
% of total | % of total | |||||||||||||||||||
Depreciation and amortization | $ | 9.5 | 55 | % | $ | 21.2 | 70 | % | (55 | %) | ||||||||||
Resource tax | $ | 3.2 | 19 | % | $ | 3.0 | 10 | % | 7 | % | ||||||||||
Electricity | $ | 1.4 | 8 | % | $ | 2.3 | 7 | % | (39 | %) | ||||||||||
Others | $ | 3.0 | 18 | % | $ | 3.8 | 13 | % | (21 | %) | ||||||||||
Production cost of crude salt per tonne | $ | 17.1 | 100 | % | $ | 30.3 | 100 | % | (43 | %) |
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Chemical products segment
Cost of net revenue for our chemical products segment for the three-month period ended September 30, 2017March 31, 2021 and 2020 was $8,265,908, representing a decrease of $5,236,986, or 39%, over the same period in 2016. This decrease was primarily attributable to the decrease in sales volume of all our chemical products due to (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume.$0.
.Natural gas segment
Cost of net revenue for our natural gas segment for the three-month period ended March 31, 2021 and 2020 was $0.
Gross Profit.Profit(Loss) Gross profit was $9,321,952,$1,077,854, or 39%21%, of net revenue for three-month period ended September 30, 2017March 31, 2021, representing an increase of $1,441,504 (or 86%), as compared to $15,703,701,a gross loss of $363,650, or 40%65%, of net revenue for the same period in 2016.2020.
Gross Profit (Loss) by Segment | Percent 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 | |||||||||||||||||||||||||||||||||||
September 30, 2017 | September 30, 2016 | Profit Margin | March 31, 2021 | March 31, 2020 | Profit (Loss) Margin | |||||||||||||||||||||||||||||||||||
Segment | Gross Profit Margin | Gross Profit (Loss) Margin | Gross Profit Margin | Gross Profit Margin | ||||||||||||||||||||||||||||||||||||
Bromine | $ | 4,399,306 | 46 | % | $ | 8,865,637 | 56 | % | (10 | %) | $ | 1,296,944 | 27 | % | $ | (146,974 | ) | (32 | %) | 59 | % | |||||||||||||||||||
Crude Salt | $ | 952,669 | 46 | % | $ | (188,018 | ) | (8 | %) | 54 | % | $ | (219,090 | ) | (49 | %) | $ | (216,676 | ) | (229 | %) | 180 | % | |||||||||||||||||
Chemical Products | $ | 3,969,977 | 32 | % | $ | 7,026,082 | 34 | % | (2 | %) | $ | — | — | $ | — | — | — | |||||||||||||||||||||||
Total Gross Profit | $ | 9,321,952 | 39 | % | $ | 15,703,701 | 40 | % | (1 | %) | ||||||||||||||||||||||||||||||
Natural Gas | $ | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Total Gross Profit (Loss) | $ | 1,077,854 | 21 | % | $ | (363,650 | ) | (65 | %) | 86 | % |
Bromine segment
For the three-month period ended September 30, 2017,March 31, 2021, the gross profit margin for our bromine segment was 46%27%. This 59% increase was due to the fact that production and sales resumed at four 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 March 31, 2020, the gross loss margin for our bromine segment was 32%.
Crude salt segment
For the three-month period ended March 31, 2021, the gross loss margin for our crude salt segment was 49%. 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 March 31, 2020, the gross loss margin for our crude salt segment was 229%.
Direct labor and factory overheads incurred during plant shutdown On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang City of PRC 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 $2,613,483 and $3,610,423 incurred for the three-month periods ended March 31, 2021 and 2020, respectively, of factories that have not resumed production 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 period ended March 31, 2021 compared to 56%the same period in 2020 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 General and administrative expenses were $1,736,250 for the three-month period ended March 31, 2021, an increase of $892,913 (or 106%) as compared to $843,337 for the same period in 2016. This 10% decrease2020. The increase was primarily attributablemainly due to the increaseunrealized foreign currency transaction loss on intercompany balance recorded in factory overhead per unit produced duethree-month period ended March 31, 2021 compared to lower volumean unrealized foreign currency transaction gain on intercompany balance recorded in the same period in the previous year.
Loss from Operations Loss from operations was $3,281,424 the three-month period ended March 31, 2021, compared to loss from operation of production.$4,835,429 in the same period in 2020.
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 $1,279,565 for the three-month period ended March 31, 2021, compared to loss from operations of $2,866,438 in the same period in 2020.
Crude salt segment
For the three-month period ended September 30, 2017 the gross profit (loss) margin for our crude salt segment was 46% compared to (8)% for the same period in 2016. This 54% increase in our gross (loss) profit margin is mainly attributable to the decrease in depreciation and amortization of manufacturing plant and machinery as mentioned in cost of net revenue of crude salt.
27
Chemical products segment
The gross profit margin for our chemical products segment for the three-month period ended September 30, 2017 was 32% compared to 34% for the same period in 2016.
Research and Development Costs. The total research and development costs incurred for the three-month period ended September 30, 2017 and 2016 were $42,074 and $68,115, respectively, a decrease of 38%. Research and development costs for the three-month period ended September 30, 2017 represented raw materials used by SYCI for testing the manufacturing routine. Research and development costs for the three-month period ended September 30, 2016 represented raw materials used by SYCI and SCRC for testing the manufacturing routine.
Write-off/Impairment on property, plant and equipment. Write-offs on property, plant and equipment for the three-month period ended September 30, 2017 and 2016 were $0 and $90,395, respectively, a decrease of 100%. Write-offs on property, plant and equipment of $90,395 for the three-month period ended September 30, 2016 represented the write-offs of certain protective shells to transmission pipelines and ducts replaced that started in August 2016 and completed in September 2016.
General and Administrative Expenses. General and administrative expenses were $4,451,027 for the three-month period ended September 30, 2017, an increase of $2,837,094 (or 176%) as compared to $1,613,933 for the same period in 2016. This increase in general and administrative expenses was primarily due to (i) the unrealized exchange loss of $536,453 in relation to the translation of current portion of inter-company balance owing in RMB for the three-month period ended September 30, 2017, as compared to the unrealized exchange gain for the same period in 2016 in the amount of $181,030; and (ii) depreciation and amortization of manufacturing plant and machinery incurred in September 2017 classified in general and administrative expense as production in all factories was temporarily stopped from September 1, 2017 to allow for rectification and improvement to be made to the facilities to comply with the new safety and environmental protection requirements of PRC.
Other Operating Income. Other operating income was $72,000 for the three-month period ended September 30, 2017, a decrease of $36,029 (or 33%) as compared to $108,029 for the same period in 2016 for sales of wastewater. Wastewater is generated from the production of bromine and eventually becomes crude salt when it evaporates. Not all of our bromine production plants have sufficient area on the property to allow for evaporation of wastewater to produce crude salt. Certain of our customers who have facilities located adjacent to our bromine production plants have agreed to allow us to channel our wastewater into brine pans on their properties for evaporation. These customers then are able to sell the resulting crude salt themselves. We signed agreements with four of our customers to sell them our wastewater at market prices.
Income from Operations. Income from operations was $4,835,252 for the three-month period ended September 30, 2017 (or 20% of net revenue), a decrease of $9,120,948, or approximately 65%, over the income from operations for the same period in 2016.
Income by Segment | ||||||||||||||||
Three-Month Period Ended September 30, 2017 | Three-Month Period Ended September 30, 2016 | |||||||||||||||
Segment: | % of total | % of total | ||||||||||||||
Bromine | $ | 2,257,069 | 38 | % | $ | 7,898,302 | 57 | % | ||||||||
Crude Salt | 497,783 | 8 | % | (382,917 | ) | (3 | %) | |||||||||
Chemical Products | 3,176,458 | 54 | % | 6,442,708 | 46 | % | ||||||||||
Natural Gas | (33,184 | ) | — | (2,476 | ) | — | ||||||||||
Income from operations before corporate costs | 5,898,126 | 100 | % | 13,955,617 | 100 | % | ||||||||||
Corporate costs | (526,421 | ) | (180,447 | ) | ||||||||||||
Unrealized translation difference | (536,453 | ) | 181,030 | |||||||||||||
Income from operations | $ | 4,835,252 | $ | 13,956,200 |
28
Bromine segment
Income from operations from our bromine segment was $2,257,069 for the three-month period ended September 30, 2017, a decrease of $5,641,233 (or approximately 71%) compared to the same period in 2016. This decrease was primarily attributable to the decrease in sales volume of all our bromine segment products as mentioned in net revenue of bromine.
Crude salt segment
IncomeLoss from operations from our crude salt segment was $497,783$1,009,585 for the three-month period ended September 30, 2017,March 31, 2021, compared to loss from operations of $382,917$1,513,582 in the same period in 2016. This increase was primarily attributable to the decrease in depreciation and amortization of manufacturing plant and machinery as mentioned in cost of net revenue of crude salt.2020.
Chemical products segment
IncomeLoss from operations from our chemical products segment was $3,176,458$746,469 for the three-month period ended September 30, 2017, a decreaseMarch 31, 2021, compared to loss from operations of $3,266,250 (or approximately 51%) compared to$710,909 in the same period in 2016. This decrease2020.
Natural gas segment
Loss from operations from our natural gas segment was primarily attributable$54,787 for the three -month period ended March 31, 2021, compared to a loss of $48,846 in the decreasesame period in sales volume of all of our chemical products as mentioned in net revenue of chemical products.2020.
Other Income.Income Net Other income, net of $99,709$35,591 represented bank interest income, net of capitalfinance lease interest expense for the three -month period ended September 30, 2017, an increaseMarch 31, 2021, a decrease of $21,667$3,637 (or approximately 28%9%) as compared to the same period in 2016.2020.
Net Income.Loss Net incomeloss was $3,425,640$2,502,124 for the three-month period ended September 30, 2017,March 31, 2021, compared to a decreasenet loss of $7,090,073 (or approximately 67%) compared to$3,539,758 in the same period in 2016. This decrease was primarily attributable to the decrease in sales volume2020.
25
Effective Tax Rate.Rate Our effective tax rate for the three-month periodperiods ended September 30, 2017March 31, 2021 and 20162020 was 31%23% and 25%,26% respectively. The effective tax rate of 31% for the three-month period ended September 30, 2017 differs fromMarch 31, 2021 was 2% lower than the PRC statutory income tax rate of 25%, mainly due to non-taxablea non-deductible item in connection with the unrealized exchange loss and an increase in valuation allowance recorded for deferred tax assets arising from net operating losses of the Company. parent company.
The effective tax rate of 25% for the three-month period ended September 30, 2016 is consistent with the PRC statutory income tax rate.
Comparison of the Nine-Month Period Ended September 30, 2017 and 2016
Nine-Month Period Ended September 30, 2017 | Nine-Month Period Ended September 30, 2016 | Percent Change Increase/ (Decrease) | ||||||||||
Net revenue | $ | 104,160,873 | $ | 120,907,839 | (14 | %) | ||||||
Cost of net revenue | $ | (61,664,044 | ) | $ | (76,184,822 | ) | (19 | %) | ||||
Gross profit | $ | 42,496,829 | $ | 44,723,017 | (5 | %) | ||||||
Sales, marketing and other operating expenses | $ | (242,045 | ) | $ | (269,357 | ) | (10 | %) | ||||
Research and development costs | $ | (169,246 | ) | $ | (198,330 | ) | (15 | %) | ||||
Write-off/Impairment on property, plant and equipment | $ | — | $ | (90,395 | ) | (100 | %) | |||||
General and administrative expenses | $ | (8,236,430 | ) | $ | (4,539,845 | ) | 81 | % | ||||
Other operating income | $ | 281,613 | $ | 328,550 | (14 | %) | ||||||
Income from operations | $ | 34,130,721 | $ | 39,953,640 | (15 | %) | ||||||
Other income, net | $ | 274,314 | $ | 222,678 | 23 | % | ||||||
Income before taxes | $ | 34,405,035 | $ | 40,176,318 | (14 | %) | ||||||
Income taxes | $ | (9,152,597 | ) | $ | (9,996,622 | ) | (8 | %) | ||||
Net income | $ | 25,252,438 | $ | 30,179,696 | (16 | %) |
29
Net revenue. The table below shows the changes in net revenue in the respective segment of the Company for the nine-month period ended September, 2017 compared to the same period in 2016:
Net Revenue by Segment | ||||||||||||||||||||
Nine-Month Period Ended | Nine-Month Period Ended | Percent change (Decrease) | ||||||||||||||||||
September 30, 2017 | September 30, 2016 | of Net Revenue | ||||||||||||||||||
Segment | % of total | % of total | ||||||||||||||||||
Bromine | $ | 41,895,304 | 40 | % | $ | 47,621,980 | 40 | % | (12 | %) | ||||||||||
Crude Salt | $ | 6,390,390 | 6 | % | $ | 6,383,095 | 5 | % | — | |||||||||||
Chemical Products | $ | 55,875,179 | 54 | % | $ | 66,902,764 | 55 | % | (16 | %) | ||||||||||
Total sales | $ | 104,160,873 | 100 | % | $ | 120,907,839 | 100 | % | (14 | %) |
Bromine and crude salt segments | Nine-Month Period Ended | Percentage Change | ||||||||||
product sold in tonnes | September 30, 2017 | September 30, 2016 | (Decrease) | |||||||||
Bromine (excluding volume sold to SYCI) | 10,600 | 12,552 | (16 | %) | ||||||||
Crude Salt | 206,289 | 222,124 | (7 | %) |
Nine-Month Period Ended | Percentage Change | |||||||||||
Chemical products segment sold in tonnes | September 30, 2017 | September 30, 2016 | (Decrease) | |||||||||
Oil and gas exploration additives | 6,751 | 8,461 | (20 | %) | ||||||||
Paper manufacturing additives | 2,016 | 2,435 | (17 | %) | ||||||||
Pesticides manufacturing additives | 1,309 | 1,760 | (26 | %) | ||||||||
Pharmaceutical intermediates | 1,058 | 1,225 | (14 | %) | ||||||||
By products | 7,638 | 9,324 | (18 | %) | ||||||||
Overall | 18,772 | 23,205 | (19 | %) |
Bromine segment
The decrease in net revenue from our bromine segmentMarch 31, 2020 was mainly due to the decrease in the sales volume of bromine. The sales volume of bromine decreased from 12,552 tonnes for the nine-month period ended September 30, 2016 to 10,600 tonnes for the same period in 2017, a decrease of 16%. The major reason for the decrease in the sales volume of bromine was mainly due to (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume.
The average selling price of bromine increased from $3,794 per tonne for the nine-month period ended September 30, 2016 to $3,952 per tonne for the same period in 2017, an increase of 4%.
Nine-Month Period Ended September 30, | ||||
Decrease in net revenue of bromine as a result of: | 2017 vs. 2016 | |||
Increase in average selling price | $ | 1,831,786 | ||
Decrease in sales volume | $ | (7,558,462 | ) | |
Total effect on net revenue of bromine | $ | (5,726,676 | ) |
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Crude salt segment
The increase in net revenue from our crude salt segment was due to the increase in the selling price of crude salt, which offset by the sales volume of crude salt. The sales volume of crude salt decreased by 7% from 222,124 tonnes for the nine-month period ended September 30, 2016 to 206,289 tonnes for the same period in 2017. The average selling price of crude salt increased from $28.74 per tonne for the nine-month period ended September 30, 2016 to $30.98 per tonne for the same period in 2017, an increase of 8%.
The table below shows the changes in the average selling price and changes in the sales volume of crude salt for nine-month period ended September 30, 2017 from the same period in 2016.
Nine-Month Period Ended September 30, | ||||
Increase in net revenue of crude salt as a result of: | 2017 vs. 2016 | |||
Increase in average selling price | $ | 480,083 | ||
Decrease in sales volume | $ | (472,788 | ) | |
Total effect on net revenue of crude salt | $ | 7,295 |
Chemical products segment
Product Mix of Chemical Products Segment | Percent | |||||||||||||||||||
Nine-Month Period Ended | Nine-Month Period Ended | Change of | ||||||||||||||||||
September 30, 2017 | September 30, 2016 | Net Revenue | ||||||||||||||||||
Chemical Products | % of total | % of total | ||||||||||||||||||
Oil and gas exploration additives | $ | 12,852,210 | 23 | % | $ | 16,125,700 | 24 | % | (20 | %) | ||||||||||
Paper manufacturing additives | $ | 2,275,236 | 4 | % | $ | 2,799,108 | 4 | % | (19 | %) | ||||||||||
Pesticides manufacturing additives | $ | 6,953,930 | 12 | % | $ | 9,062,903 | 14 | % | (23 | %) | ||||||||||
Pharmaceutical intermediates | $ | 24,486,047 | 44 | % | $ | 27,370,395 | 41 | % | (11 | %) | ||||||||||
By products | $ | 9,307,756 | 17 | % | $ | 11,544,658 | 17 | % | (19 | %) | ||||||||||
Total sales | $ | 55,875,179 | 100 | % | $ | 66,902,764 | 100 | % | (16 | %) |
Net revenue from our chemical products segment decreased from $66,902,764 for the nine-month period ended September 30, 2016 to $55,875,179 for the same period in 2017, a decrease of approximately 16%. This decrease was primarily attributable to the decreased sales volume of all our chemical products due to (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume. Net revenue from our oil and gas exploration chemicals decreased from $16,125,700 for the nine-month period ended September 30, 2016 to $12,852,210 for the same period in 2017, a decrease of approximately 20%. Net revenue from our paper manufacturing additives decreased from $2,799,108 for the nine-month period ended September 30, 2016 to $2,275,236 for the same period in 2017, a decrease of approximately 19%. Net revenue from our pesticides manufacturing additives decreased from $9,062,903 for the nine-month period ended September 30, 2016 to $6,953,930 for the same period in 2017, a decrease of approximately 23%. Net revenue from our pharmaceutical intermediates decreased from $27,370,395 for the nine-month period ended September 30, 2016 to $24,486,047 for the same period in 2017, a decrease of approximately 11%. Net revenue from our by products decreased from $11,544,658 for the nine-month period ended September 30, 2016 to $9,307,756 for the same period in 2017, a decrease of approximately 19%.
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The table below shows the changes in the average selling price and changes in the sales volume of major chemical products of the chemical products segment for the nine-month period ended September 30, 2017 from the same period in 2016.
Decrease in net revenue, for the nine-month period ended September 30, 2017 vs. 2016, as a result of: | Oil and gas exploration additives | Paper manufacturing additives | Pesticides manufacturing additives | Pharmaceutical intermediates | By products | Total | ||||||||||||||||||
Increase/(Decrease) in average selling price | $ | (16,016 | ) | $ | (47,108 | ) | $ | 250,772 | $ | 919,164 | $ | (166,082 | ) | $ | 940,730 | |||||||||
Decrease in sales volume | $ | (3,257,474 | ) | $ | (476,764 | ) | $ | (2,359,745 | ) | $ | (3,803,512 | ) | $ | (2,070,820 | ) | $ | (11,968,315 | ) | ||||||
Total effect on net revenue of chemical products | $ | (3,273,490 | ) | $ | (523,872 | ) | $ | (2,108,973 | ) | $ | (2,884,348 | ) | $ | (2,236,902 | ) | $ | (11,027,585 | ) |
Cost of Net Revenue.
Cost of Net Revenue by Segment | Percent Change | |||||||||||||||||||
Nine-Month Period Ended | Nine-Month Period Ended | of Cost of | ||||||||||||||||||
September 30, 2017 | September 30, 2016 | Net Revenue | ||||||||||||||||||
Segment | % of total | % of total | ||||||||||||||||||
Bromine | $ | 20,833,351 | 34 | % | $ | 25,591,482 | 34 | % | (19 | %) | ||||||||||
Crude Salt | $ | 3,297,064 | 5 | % | $ | 6,119,665 | 8 | % | (46 | %) | ||||||||||
Chemical Products | $ | 37,533,629 | 61 | % | $ | 44,473,675 | 58 | % | (16 | %) | ||||||||||
Total | $ | 61,664,044 | 100 | % | $ | 76,184,822 | 100 | % | (19 | %) |
Costof net revenue reflects mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was $61,664,044 for nine-month period ended September 30, 2017, a decrease of $14,520,778 (or 19%) over the same period in 2016. This decrease was primarily attributable to the decrease in sales volume of products due to (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume.
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) | ||||||||
Nine-month period ended September 30, 2016 | 47,347 | 40 | % | ||||||
Nine-month period ended September 30, 2017 | 42,808 | 42 | % | ||||||
Variance of the nine-month period ended September 30, 2017 and 2016 | (4,539 | ) | 2 | % |
(i) Utilization ratio is calculated based on the annualized actual production volume in tonnes for the period divided by the annual production capacity in tonnes. The product produce below reflect the annualized production.
Our utilization ratio increased by 2% for the nine-month period ended September 30, 2017 as compared with the same period in 2016. This increase in utilization ratio was mainly due to the demolition Factory No.6 in December 2016, which reduced the total annual production capacity.
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Bromine segment
For the nine-month period ended September 30, 2017, the cost of net revenue for the bromine segment was $20,833,351, a decrease of $4,758,131 or 19% over the same period in 2016. The major components of the costs of net revenue for the bromine segment were the cost of raw materials and finished goods consumed of $4,935,223 (or 24%), depreciation and amortization of manufacturing plant and machinery of $9,979,858 (or 48%) and electricity of $1,732,036 (or 8%) for the nine-month period ended September 30, 2017. For the nine-month period ended September 30, 2016, the major components of the cost of net revenue were the cost of raw materials and finished goods consumed of $8,455,261 (or 33%), depreciation and amortization of manufacturing plant and machinery of $11,289,541 (or 44%) and electricity of $2,183,710 (or 9%). The cost structure changed where the proportion of cost of raw materials and finished goods consumed over the total cost of net revenue decreased by 9% in the nine-month period ended September 30, 2017 compared to the same period in 2016. The decrease in net cost of net revenue was attributable mainly to the decrease in sales volume of products sold due to (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume.
Per tonne production cost | Nine-Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||
component of bromine segment | September 30, 2017 | September 30, 2016 | % Change | |||||||||||||||||
% of total | % of total | |||||||||||||||||||
Raw materials | $ | 924 | 41 | % | $ | 1,049 | 47 | % | (12 | %) | ||||||||||
Depreciation and amortization | $ | 821 | 37 | % | $ | 792 | 35 | % | 4 | % | ||||||||||
Electricity | $ | 142 | 6 | % | $ | 153 | 7 | % | (7 | %) | ||||||||||
Others | $ | 344 | 16 | % | $ | 257 | 11 | % | 34 | % | ||||||||||
Production cost of bromine per tonne | $ | 2,231 | 100 | % | $ | 2,251 | 100 | % | (1 | %) |
Our production cost of bromine per tonne was $2,231 for the nine-month period ended September 30, 2017, a decrease of 1% (or $20) over the same period in 2016.
Crude salt segment
For the nine-month period ended September 30, 2017, the cost of net revenue for our crude salt segment was $3,297,064, representing a decrease of $2,822,601, or 46%, compared to $6,119,665 for the same period in 2016. The decrease in cost was mainly due to the decrease in depreciation and amortization of manufacturing plant and machinery mainly due to (i) some plant and equipment related to the crude salt and bromine facilities were fully depreciated in June 2016; and (ii) the demolition Factory No.6 in December 2016 for bromine and crude salt segment, which partially offset by the increase in depreciation and amortization of manufacturing plant and machinery due to the enhancement projects carried out for our extraction wells and transmission channels and ducts which commenced in August 2016 and completed in September 2016 .The significant cost components for the nine-month period ended September 30, 2017 were depreciation and amortization of $1,804,343 (or 55%), resource taxes calculated based on crude salt sold of $639,039 (or 19%) and electricity of $267,022 (or 8%). The significant cost components for the nine-month period ended September 30, 2016 were depreciation and amortization of $4,379,288 (or 71%), resource taxes calculated based on crude salt sold of $675,190 (or 11%) and electricity of $358,741 (or 6%). The table below represents the major production cost component of crude salt per ton for the respective periods:
Per tonne production cost | Nine-Month Period Ended | Nine-Month Period Ended | ||||||||||||||||||
component of crude salt segment | September 30, 2017 | September 30, 2016 | % Change | |||||||||||||||||
% of total | % of total | |||||||||||||||||||
Depreciation and amortization | $ | 8.8 | 55 | % | $ | 19.7 | 71 | % | (56 | %) | ||||||||||
Resource tax | $ | 3.1 | 19 | % | $ | 3.0 | 11 | % | 3 | % | ||||||||||
Electricity | $ | 1.3 | 8 | % | $ | 1.6 | 6 | % | (20 | %) | ||||||||||
Others | $ | 2.8 | 18 | % | $ | 3.2 | 12 | % | (13 | %) | ||||||||||
Production cost of crude salt per tonne | $ | 16.0 | 100 | % | $ | 27.5 | 100 | % | (42 | %) |
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Our production cost of crude salt per tonne was $16.0 for the nine-month period ended September 30, 2017, a decrease of 42% (or $11.5) as compared to the same period in 2016.
Chemical products segment
For the nine-month period ended September 30, 2017, cost of net revenue for our chemical products segment was $37,533,629, representing a decrease of $6,940,045 or 16% over the same period in 2016. This decrease was primarily attributable to the decrease in sales volume of all our chemical products due (i) the slowdown in the Chinese economy, and (ii) the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. Some of our local customers were also requested to stop production, which affected our customers’ industries and our sales volume.
Gross Profit. Gross profit was $42,496,829, or 41%, of net revenue for nine-month period ended September 30, 2017 compared to $44,723,017, or 37%, of net revenue for the same period in 2016. The increase in gross profit percentage was primarily attributable to an increase in the margin percentage of bromine and crude salt.
Gross Profit by Segment | % Point Change | |||||||||||||||||||
Nine-Month Period Ended | Nine-Month Period Ended | of Gross | ||||||||||||||||||
September 30, 2017 | September 30, 2016 | Profit Margin | ||||||||||||||||||
Segment | Gross Profit Margin | Gross Profit Margin | ||||||||||||||||||
Bromine | $ | 21,061,953 | 50 | % | $ | 22,030,498 | 46 | % | 4 | % | ||||||||||
Crude Salt | $ | 3,093,326 | 48 | % | $ | 263,430 | 4 | % | 44 | % | ||||||||||
Chemical Products | $ | 18,341,550 | 33 | % | $ | 22,429,089 | 34 | % | (1 | %) | ||||||||||
Total Gross Profit | $ | 42,496,829 | 41 | % | $ | 44,723,017 | 37 | % | 4 | % |
Bromine segment
The gross profit margin for our bromine segment for the nine-month period ended September 30, 2017 was 50% compared to 46% for the same period in 2016. This 4% increase is mainly due to the increased average selling price and the decrease in the purchase price of raw material and the decrease in depreciation and amortization of manufacturing plant and machinery mainly due to (i) some plant and equipment related to the crude salt and bromine facilities were fully depreciated in June 2016; and (ii) the demolition Factory No.6 in December 2016 for bromine and crude salt segment, which partially offset by the increase in depreciation and amortization of manufacturing plant and machinery due to the enhancement projects carried out for our extraction wells and transmission channels and ducts which commenced in August 2016 and completed in September 2016 .
Crude salt segment
For the nine-month period ended September 30, 2017, the gross profit margin for our crude salt segment was 48% compared to 4% for the same period in 2016. This 44% increase is mainly due to the increase in crude salt price and decrease in depreciation and amortization of manufacturing plant and machinery as mentioned in cost of net revenue of crude salt.
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Chemical products segment
The gross profit margin for our chemical products segment for the nine-month period ended September 30, 2017 was 33% compared to 34% for the same period in 2016.
Research and Development Costs. For the nine-month period ended September 30, 2017 and 2016, the total research and development costs incurred were $169,246 and $198,330, respectively, a decrease of 15%. Research and development costs for the nine-month period ended September 30, 2017 represented raw materials used by SYCI for testing the manufacturing routine. Research and development costs for the nine-month period ended September 30, 2016 represented raw materials used by SYCI and SCRC for testing the manufacturing routine.
Write-off/Impairment on property, plant and equipment. Write-offs on property, plant and equipment for the nine-month period ended September 30, 2017 and 2016 were $0 and $90,395, respectively, a decrease of 100%. Write-offs on property, plant and equipment of $90,395 for the nine-month period ended September 30, 2016 represented the write-offs of certain protective shells to transmission pipelines and ducts during the enhancement project that started in August 2016 and completed in September 2016.
General and Administrative Expenses. General and administrative expenses were $8,236,430 for the nine-month period ended September 30, 2017, an increase of $3,696,585 (or 81%) as compared to $4,539,845 for the same period in 2016. This increase in general and administrative expenses was primarily due to (i) a non-cash expense related to stock options granted to employees increased from $17,400 for the nine-month period ended September 30, 2016 to $357,700 for the same period of 2017; and (ii) the unrealized exchange gain in relation to the translation difference of inter-company balance in RMB for the nine-month period ended September 30,2017 amounted to $1,140,363, as compared to the unrealized exchange gain for the same period in 2016 of $729,764; and (iii) depreciation and amortization of manufacturing plant and machinery incurred in September 2017 classified in general and administrative expense as production in all factories was temporarily stopped from September 1, 2017 to allow for rectification and improvement to be made to the facilities to comply with the new safety and environmental protection requirements of PRC.
Other Operating Income. Other operating income was $281,613 for the nine-month period ended September 30, 2017, a decrease of $46,937(or 14%) as compared to $328,550 for the same period in 2016 for sales of wastewater. Wastewater is generated from the production of bromine and eventually becomes crude salt when it evaporates. Not all of our bromine production plants have sufficient area on the property to allow for evaporation of wastewater to produce crude salt. Certain of our customers who have facilities located adjacent to our bromine production plants have agreed to allow us to channel our wastewater into brine pans on their properties for evaporation. These customers then are able to sell the resulting crude salt themselves. We signed agreements with four of our customers to sell them our wastewater at market prices.
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Income from Operations. Income from operations was $34,130,721 for the nine-month period ended September 30, 2017 (or 33% of net revenue), a decrease of $5,822,919, or approximately 15%, over income from operations for the same period in 2016.
Income from Operations by Segment | ||||||||||||||||
Nine-Month Period Ended September 30, 2017 | Nine-Month Period Ended September 30, 2016 | |||||||||||||||
Segment: | % of total | % of total | ||||||||||||||
Bromine | $ | 17,269,984 | 48 | % | $ | 19,103,472 | 48 | % | ||||||||
Crude Salt | 2,434,872 | 7 | % | (165,403 | ) | — | ||||||||||
Chemical Products | 16,441,115 | 45 | % | 20,698,116 | 52 | % | ||||||||||
Natural Gas | (90,471 | ) | — | (2,501 | ) | — | ||||||||||
Income from operations before corporate costs | 36,055,500 | 100 | % | 39,633,684 | 100 | % | ||||||||||
Corporate costs | (784,416 | ) | (409,808 | ) | ||||||||||||
Unrealized exchange difference | (1,140,363 | ) | 729,764 | |||||||||||||
Income from operations | $ | 34,130,721 | $ | 39,953,640 |
Bromine segment
Income from operations from our bromine segment was $17,269,984 for the nine-month period ended September 30, 2017, a decrease of $1,833,488 (or approximately 10%) compared to the same period in 2016. This decrease was primarily attributable to the decrease in sales volume as mentioned in net revenue of bromine partially offset by the increased average selling price.
Crude salt segment
For the nine-month period ended September 30, 2017, income from operations from our crude salt segment was $2,434,872, compared to loss of $165,403 in the same period in 2016. This increase was primarily attributable to the increase in crude salt price and decrease in depreciation and amortization of manufacturing plant and machinery as mentioned in cost of net revenue of crude salt.
Chemical products segment
For the nine-month period ended September 30, 2017, income from operations from our chemical products segment was $16,441,115, a decrease of $4,257,001 (or approximately 21%) over same period in 2016. This decrease was primarily attributable to the decrease in sales volume of all of our chemical products as mentioned in cost of net revenue of chemical products.
Other Income, Net. Other income, net of $274,314 represented bank interest income, net of capital lease interest expense for the nine -month period ended September 30, 2017, an increase of $51,636 (or approximately 23%) as compared to the same period in 2016.
Net Income. Net income was $25,252,438 for the nine-month period ended September 30, 2017, a decrease of $4,927,258 (or approximately 16%) compared to the same period in 2016. This decrease was primarily attributable to decrease in sales volume of all of our products as mentioned in cost of net revenue of bromine, crude and chemical products.
Effective Tax Rate. Our effective tax rate for the nine-month period ended September 30, 2017 and 2016 was 27% and 25%, respectively. The effective tax rate of 27% for the nine-month period ended September 30, 2017 differs fromhigher than the PRC statutory income tax rate of 25%, mainly due to non-taxable itemitems net of decrease in connection with the unrealized and the exchange loss for the Company.change in valuation allowance.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2017,March 31, 2021, cash and cash equivalents were $193,385,686$96,699,324 as compared to $163,884,574$94,222,538 as of December 31, 2016.2020. The components of this increase of $29,501,112$2,476,786 are reflected below.
Statement of Cash Flows
Nine-Month Period Ended September 30, | Three-Month Period Ended March 31, | |||||||||||||||
2017 | 2016 | 2021 | 2020 | |||||||||||||
Net cash provided by operating activities | $ | 23,477,422 | $ | 29,214,282 | $ | 3,341,395 | $ | 2,202,357 | ||||||||
Net cash used in investing activities | $ | (1,482,954 | ) | $ | (17,423,126 | ) | $ | — | $ | (7,416,211 | ) | |||||
Net cash used in financing activities | $ | (273,873 | ) | $ | (287,387 | ) | ||||||||||
Effects of exchange rate changes on cash and cash equivalents | $ | 7,780,517 | $ | (4,026,574 | ) | $ | (864,609 | ) | $ | (1,455,442 | ) | |||||
Net Increase in cash and cash equivalents | $ | 29,501,112 | $ | 7,477,195 | ||||||||||||
Net increase(decrease) in cash and cash equivalents | $ | 2,476,786 | $ | (6,669,296 | ) |
For the nine-monththree-month period ended September 30, 2017,March 31, 2021, we met our working capital and capital investment requirements mainly by using cash flow from operations and cash on hand.
Net Cash Provided by Operating Activities
During the nine-monththree -month period ended September 30, 2017 and 2016, we had positiveMarch 31, 2021, cash flow from operating activities approximately of $23.5 million and $29.2 million, respectively, primarily attributable to net income.
During the nine-month period ended September 30, 2017, cash flow fromprovided by operating activities of approximately $23.5$3.3 million was less than our net income of approximately $25.3 million, mainly due to (i) cash used in working capital of approximately $20.2 million, which mainly consisted of the increasea decrease in accounts receivable of $1.6 million, and decrease in accounts payable and accrued expenses and tax payable, partially offset by the decrease in inventories; partially offset by (ii) substantiala non-cash charges of approximately $18.4 million, mainly in the form ofadjustment related to depreciation and amortization of property, plant and equipment.equipment, reduced by a net loss of $2.5 million and an adjustment for income tax benefit of $0.7 million.
During the nine-monththree -month period ended September 30, 2016,March 31, 2020, cash flow fromprovided by operating activities of approximately $29.2$2.2 million was less than our net income of approximately $30.2 million, mainly due to (i) cash used in working capital of approximately $20.0 million, which mainly consisted of the increasea decrease in accounts receivable partially offset by the decrease in inventories, increase in accounts payableof $4.2 million, and accrued expenses and tax payable; partially offset by (ii) substantiala non-cash charges of approximately $19.1 million, mainly in the form ofadjustment 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 September 30, 2017March 31, 2021 and December 31, 2016.2020.
September 30, 2017 | December 31, 2016 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||
% of total | % of total | % of total | % of total | |||||||||||||||||||||||||||||
Aged 1-30 days | $ | 3,077,055 | 4 | % | $ | 10,300,739 | 20 | % | $ | 4,350,483 | 90 | % | $ | 3,801,417 | 58 | % | ||||||||||||||||
Aged 31-60 days | $ | 12,976,950 | 18 | % | $ | 11,074,573 | 21 | % | 509,222 | 10 | % | 2,720,381 | 42 | % | ||||||||||||||||||
Aged 61-90 days | $ | 11,197,750 | 16 | % | $ | 10,577,810 | 21 | % | — | — | — | — | ||||||||||||||||||||
Aged 91-120 days | $ | 13,905,925 | 19 | % | $ | 7,919,209 | 15 | % | — | — | — | — | ||||||||||||||||||||
Aged 121-150 days | $ | 12,707,546 | 18 | % | $ | 6,924,979 | 13 | % | — | — | — | — | ||||||||||||||||||||
Aged 151-180 days | $ | 8,423,396 | 12 | % | $ | 5,037,908 | 10 | % | — | — | — | — | ||||||||||||||||||||
Aged 181-210 days | $ | 6,982,162 | 10 | % | $ | — | — | — | — | — | — | |||||||||||||||||||||
Aged 211-240 days | $ | 2,521,580 | 3 | % | $ | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | 71,792,364 | 100 | % | $ | 51,835,218 | 100 | % | $ | 4,859,705 | 100 | % | $ | 6,521,798 | 100 | % |
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The overall accounts receivable balance as of September 30, 2017 increasedMarch 31, 2021 decreased by $19,957,146 (or 39%),$1,662,093, as compared to those as of December 31, 2016. Such increase is mainly attributable to the extended settlement days by customers due to the macro-economic tightening policy imposed by PRC government to slow down the economy, which in turn lengthened the average turnover days of accounts receivable from 138 days for the nine-month period ended September 30, 2016 to 162 days for the nine-month period ended September 30, 2017. In fiscal year 2016, a 90 to 180-day credit period was granted to customers with good payment history. To maintain the source of the Company’s business and in view of the strong cash flow position that the Company is in, management has extended credit terms to some customers up to 240 days in the nine months ended September 30, 2017. Approximately 30% of the balances of accounts receivable as of September 30, 2017 aged more than 90 days in the amount of $13,319,887 were settled in October 2017.2020. 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.
Some of our customers’ production is also affected by the new safety and environmental protection rules. We have communicated with our customers who have stopped their production for inspection by the government and have not resumed production. They confirmed that they will make payments owing to our Company on time. Based on our knowledge of these customers, they appear to have the ability to settle the accounts receivable as of September 30, 2017 within the credit term. Therefore, we believe that no No allowance for doubtful accounts for the nine-monththree-month period ended September 30, 2017March 31, 2021 is required.
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Inventory
Our inventory consists of the following:
September 30, 2017 | December 31, 2016 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||
% of total | % of total | % of total | % of total | |||||||||||||||||||||||||||||
Raw materials | $ | 449,575 | 18 | % | $ | 818,500 | 14 | % | $ | 39,855 | 7 | % | $ | 21,484 | 5 | % | ||||||||||||||||
Finished goods | $ | 1,981,504 | 82 | % | $ | 4,370,331 | 74 | % | 536,752 | 93 | % | 398,125 | 95 | % | ||||||||||||||||||
Work-in-process | — | — | 692,850 | 12 | % | |||||||||||||||||||||||||||
$ | 2,431,079 | 100 | % | $ | 5,881,681 | 100 | % | |||||||||||||||||||||||||
Allowance for obsolete and slowing-moving inventory | $ | — | — | $ | — | — | ||||||||||||||||||||||||||
Total | $ | 2,431,079 | 100 | % | $ | 5,881,681 | 100 | % | $ | 576,607 | 100 | % | $ | 419,609 | 100 | % |
The net inventory level as of September 30, 2017 decreasedMarch 31, 2021 increased by $3,450,602$156,998 (or 59%37%), as compared to the net inventory level as of December 31, 2016.2020.
Raw materials decreasedincreased by 45%$18,371 as of September 30, 2017March 31, 2021 as compared to December 31, 2016. All of the raw materials are basic chemical industry materials, few of which have a possibility of loss over time, or major fluctuations in their prices. We concluded that all of our raw materials as of September 30, 2017 are fully realizable for production of finished goods without any impairment.2020.
Our finished goods consistincreased by $138,627 as of bromine, crude salt and chemical products. Our chemical products are similar to raw materials, with no loss over time, a relatively stable market price and a gross profit margin of 33% for the nine-month period ended September 30, 2017March 31, 2021 as compared to 34% for the same period in fiscal year 2016. Therefore, we believe that the realization of the chemical products is 100%. Similarly, as there is no depletion of bromine, we believe that the realization of it is also 100%. The gross profit margin for bromine for the nine-month period ended September 30, 2017 increased to 50%, as compared with 46% for the same period in fiscal year 2016, we anticipated that the price through 2017 will not fluctuate significantly to impair the cost of bromine.
As of September 30, 2017, the crude salt included in the inventory is approximately $1.35 million. The annual loss of crude salt due to evaporation is approximately 3%. The average selling price of crude salt per tonne increased from $27.99 for the third quarter of 2016 to $31.92 for the same period of 2017. The gross (loss) profit also increased from (8)% for the third quarter of 2016 to 46% for the same period in 2017. We believe that there will be no realization problem for crude salt as we do not expect selling price to be lower than the current price. If the selling price continues to decrease, there will be an impact on our crude salt realization value.December 31, 2020.
Net Cash Used in Investing Activities
InFor the nine-monththree-month period ended September 30, 2017,March 31, 2021, we have no investing activities.
For the three-month period ended March 31, 2020, we used approximately $0.86 million cash for the prepayment of land leases. We also used approximately $0.06$7.4 million to acquire property, plant and equipment for the nine-month period ended September 30, 2017.
In the nine-month period ended September 30, 2016, we used approximately $0.67 million cash for the prepayment of land leases. In the same period, we also used approximately $15.23 million cash to carry out enhancement projects to our existing bromine extraction and crude salt production facilities and $1.46 million cash for the construction of roads and related infrastructure needed to begin operations in the remote and mountainous region of Daying county.
The investing activities described above were financed by opening cash balances as of December 31, 2016, and 2015, and cash generated from operation during the nine-month period ended September 30, 2017.equipment.
Net Cash Used in Financing Activities
We repaid approximately $0.3 million cash for our capital lease obligationhave no financing activities for the nine-month periodthree-month periods ended September 30, 2017March 31, 2021 and 2016.2020.
We believe that our available funds and cash flows generated from operations will be sufficient to meet our anticipated ongoing operating needs forand our obligations as they full due in the next twelve (12) months.
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Working capital was approximately $261.1 million at September 30, 2017 as compared to approximately $207.8 million at December 31, 2016. The increase was mainly attributable to the cash provided by operating activities during the nine-month period ended September 30, 2017.
We had available cash of approximately $193.4$96.7 million at September 30, 2017,March 31, 2021, most of which is in highly liquid current deposits which earn no or little interest. We do not anticipate to spend approximately $35 million of capital expenditurepaying cash dividends in the rectification and improvement of the facilities to comply with the new safety and environmental protection requirements of PRC and this will be funded from our cash balance.foreseeable future.
We intend to retain the cash for future expansion of our bromine and crude salt businesses through acquisition, enhancements to our existing bromine and crude salt business, and further development of the new resources in Sichuan Province.
In the future we intendcontinue 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 managementmanagement’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. In addition, if competition for acquisition candidates or operations were to increase, the cost of acquiring businesses could increase materially. 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 September 30, 2017March 31, 2021 is provided in the notes to our condensed consolidated financial statements. See “Notes to Condensed Consolidated Financial Statements, Note 18 –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 theseits 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, 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 stock-based compensation.loss contingencies. These policies and estimates are described in the Company’s 2016 Form 10-K.10-Q for the three months ended March 31, 2021.
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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).
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 which is the subject of this report, 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
None.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.
For more details and information related to the Written Decisions, please see “Note 19 – Loss Contingencies, Notes to Condensed Consolidated Financial Statement” contained in this quarterly report.
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AsInvesting in our common stock involves a smaller reporting company,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 Company is not requiredother information in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Readers should carefully review risks described in other documents we file from time to make disclosures under this Item 1A.time with the Securities and Exchange Commission.
Item 2. Unregistered Shares of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Exhibit No. | Description |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.1 | The following financial statements from Gulf Resources, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended |
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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: | By: | /s/ Xiaobin Liu |
Xiaobin Liu | ||
Chief Executive Officer | ||
Dated: | By: | /s/ Min Li |
Min Li | ||
Chief Financial Officer | ||
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