Company Quick10K Filing
Gulf Resources
Price0.98 EPS-0
Shares48 P/E-2
MCap47 P/FCF-4
Net Debt-105 EBIT-12
TEV-59 TEV/EBIT5
TTM 2019-09-30, in MM, except price, ratios
10-K 2020-12-31 Filed 2021-04-08
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8-K 2018-05-10
8-K 2017-12-31

GURE 10K Annual Report

Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data
Note 1 - Nature of Business and Summary of Significant Accounting Policies
Note 2 - Inventories
Note 3 - Prepaid Land Leases
Note 4 - Property, Plant and Equipment, Net
Note 5 - Finance Lease Right - of - Use Assets
Note 6 - Operating Lease Right - of - Use Assets
Note 7 - Payable and Accrued Expenses
Note 8 - Related Party Transactions
Note 9 - Taxes Payable
Note 10 - Lease Liabilities - Finance and Operating Lease
Note 11 - - Equity
Note 12 - Treasury Stock
Note 13 - Stock - Based Compensation
Note 14 - Income Taxes
Note 15 - Business Segments
Note 16 - Customer Concentration
Note 17 - Major Suppliers
Note 18 - Fair Value of Financial Instruments
Note 19 - Capital Commitment and Other Service Contractual Obligations
Note 20 - Loss Contingencies
Note 21 - Subsequent Event
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10 - K Summary.
EX-23.1 e620446_ex23-1.htm
EX-31.1 e620446_ex31-1.htm
EX-31.2 e620446_ex31-2.htm
EX-32.1 e620446_ex32-1.htm

Gulf Resources Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
4103282461648202012201420172020
Assets, Equity
5035205-10-252012201420172020
Rev, G Profit, Net Income
40212-17-36-552012201420172020
Ops, Inv, Fin

10-K 1 e620446_10k-gulf.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the fiscal year ended December 31, 2020

 

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 Shouguang City, Shandong, China   262700
(Address of principal executive offices)   (Zip Code)

 

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

 

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

 

Securities registered pursuant to section 12(g) of the Act:

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes    No

 

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    No

 

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

 

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

 

Large accelerated filer  Accelerated filer
Non-accelerated filer Smaller reporting company
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.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes    No

 

As of June 30, 2020, the aggregate market value of the common stock of the registrant held by non-affiliates (excluding shares held by directors, officers and others holding more than 5% of the outstanding shares of the class) was approximately $29 million based upon a closing sale price of $5.35.

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes    No

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of March 31, 2021, the registrant had outstanding 9,997,477 shares of common stock.

 

 

 

 

Table of Contents

 

PART I 1
Item 1. Business. 1
Item 1A. Risk Factors. 11
Item 1B. Unresolved Staff Comments. 11
Item 2. Properties. 11
Item 3. Legal Proceedings. 18
Item 4. Mine Safety Disclosures. 18
   
PART II 19
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 19
Item 6. Selected Financial Data. 19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 31
Item 9A. Controls and Procedures. 31
Item 9B. Other Information. 32
   
PART III 32
Item 10. Directors, Executive Officers and Corporate Governance 32
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 40
Item 13. Certain Relationships and Related Transactions, Director Independence 41
Item 14. Principal Accounting Fees and Services 41
   
PART IV 42
Item 15. Exhibits and Financial Statement Schedules. 42
Item 16. Form 10-K Summary. 43
SIGNATURES 44

 

i

 

Special Note Regarding Forward Looking Information

 

This report contains forward-looking statements that reflect management’s current views and expectations with respect to our business, strategies, future results and events, and financial performance. All statements made in this report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to future reserves, cash flows, revenues, profitability, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. In particular, the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “plan”, “may”, “will”, variations of such words and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking. Readers should not place undue reliance on forward-looking statements which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include those discussed in this report, particularly under the caption “Risk Factors”.  Except as required under the federal securities laws, we do not undertake any obligation to update the forward-looking statements in this report.

 

PART I 

 

Item 1. Business.

 

Introduction

 

We manufacture and trade bromine and crude salt, natural gas, manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, papermaking chemical agents, and manufacture and sell materials for human and animal antibiotics. To date, our products have been sold only within the People’s Republic of China. As used in this report, the terms “we,” “our,” “Company” and “Gulf Resources” refers to Gulf Resources, Inc. and its wholly-owned subsidiaries, and the terms “ton” and “tons” refers to metric tons, in each case, unless otherwise stated or the context requires otherwise.

 

The functional currency of the Company’s operating foreign subsidiaries is the Renminbi (“RMB”), which had an average exchange rate of $0.14509 and $0.14508 during fiscal years 2019 and 2020, respectively, the reporting currency of the Company is the United States dollar (“USD” or $”).

 

Our Corporate History

 

We were originally incorporated in Delaware and subsequently re-incorporated in Nevada. From November 1993 through August 2006, we were engaged in the business of owning, leasing and operating coin and debit card pay-per copy photocopy machines, fax machines, microfilm reader-printers and accessory equipment under the name “Diversifax, Inc.”. Due to the increased use of internet services, demand for our services declined sharply, and in August 2006, our Board of Directors decided to discontinue our operations.

 

Upper Class Group Limited, incorporated in the British Virgin Islands in July 2006, acquired all the outstanding stock of Shouguang City Haoyuan Chemical Company Limited (“SCHC”), a company incorporated in Shouguang City, Shandong Province, the People’s Republic of China (the “PRC”), in May 2005. At the time of the acquisition, members of the family of Mr. Ming Yang, our president and former chief executive officer, owned approximately 63.20% of the outstanding shares of Upper Class Group Limited. Since the ownership of Upper Class Group Limited and SCHC was then substantially the same, the acquisition was accounted for as a transaction between entities under common control, whereby Upper Class Group Limited recognized the assets and liabilities transferred at their carrying amounts.

 

1 

 

On December 12, 2006, our Company, then known as Diversifax, Inc., a public “shell” company, acquired Upper Class Group Limited and SCHC. Under the terms of the agreement, the stockholders of Upper Class Group Limited received 13,250,000 (restated for the 2-for-1 stock split in 2007 and the 1-for-4 stock split in 2009) shares of our voting common stock in exchange for all outstanding shares of Upper Class Group Limited. Members of the Yang family received approximately 62% of our common stock as a result of the acquisition. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction rather than a business combination. That is, the share exchange is equivalent to the issuance of stock by Upper Class Group Limited for the net assets of Gulf Resources, Inc., accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange is identical to that resulting from a reverse acquisition, except no goodwill is recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical consolidated financial statements of the legal acquirer, Diversifax, Inc., are those of the legal acquiree, Upper Class Group Limited. Share and per share amounts stated have been retroactively adjusted to reflect the share exchange. On February 20, 2007, we changed our corporate name to Gulf Resources, Inc.

 

On February 5, 2007, we acquired Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”), a company incorporated in the People’s Republic of China. Under the terms of the acquisition agreement, the stockholders of SYCI received a total of 8,094,059 (restated for the 2-for-1 stock split in 2007 and the 1-for-4 stock split in 2009) shares of common stock of Gulf Resources, Inc. in exchange for all outstanding shares of SYCI’s common stock. Simultaneously with the completion of the acquisition, a dividend of $2,550,000 was paid to the former stockholders of SYCI. At the time of the acquisition, approximately 49.1% of the outstanding shares of SYCI were owned by Ms. Yu, Mr. Yang’s wife, and the remaining 50.9% of the outstanding shares of SYCI were owned by SCHC, all of whose outstanding shares were owned by Mr. Yang and his wife. Since the ownership of Gulf Resources, Inc. and SYCI are substantially the same, the acquisition was accounted for as a transaction between entities under common control, whereby Gulf Resources, Inc. recognized the assets and liabilities of SYCI at their carrying amounts. Share and per share amounts have been retroactively adjusted to reflect the acquisition.

 

To satisfy certain ministerial requirements necessary to confirm certain government approvals required in connection with the acquisition of SCHC by Upper Class Group Limited, all of the equity interest of SCHC were transferred to a newly formed Hong Kong corporation named Hong Kong Jiaxing Industrial Limited (“Hong Kong Jiaxing”) all of the outstanding shares of which are owned by Upper Class Group Limited. The transfer of all of the equity interest of SCHC to Hong Kong Jiaxing received approval from the local State Administration of Industry and Commerce on December 10, 2007.

 

As a result of the transactions described above, our corporate structure is linear. That is Gulf Resources owns 100% of the outstanding shares of Upper Class Group Limited, which owns 100% of the outstanding shares of Hong Kong Jiaxing, which owns 100% of the outstanding shares of SCHC, which owns 100% of the outstanding shares of SYCI. Further, as a result of our acquisitions of SCHC and SYCI, our historical consolidated financial statements, as contained in our Consolidated Financial Statements and Management’s Discussion and Analysis, appearing elsewhere in the report, reflect the accounts of SCHC and SYCI.

 

On January 12, 2015, the Company and SCHC entered into an Equity Interest Transfer Agreement with Shouguang City Rongyuan Chemical Co., Ltd (“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 1,453,603 (restated for the 1-for-5 reverse stock split in January 2020) shares of its common stock, par value $0.0005 per share (the “Shares”), at the closing market price of $9.20 (restated for the 1-for-5 reverse stock split in January 2020) 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.

 

2 

 

The sellers of SCRC agreed as part of the purchase price to accept the Shares, based on a valuation of $10.00 (restated for the 1-for-5 reverse stock split in January 2020), which was a 73% premium to the price on the day the agreement was reached. For accounting purposes, the Shares were valued at $9.20 (restated for the 1-for-5 reverse stock split in January 2020), which was the closing price of our stock on the closing date of the agreement. The price difference between the original sale price of $10.00 (restated for the 1-for-5 reverse stock split in January 2020) and the $9.20 (restated for the 1-for-5 reverse stock split in January 2020) closing price of our stock on the closing date of the agreement 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 its 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 RMB13,848,730 capital contributed by SCHC as of December 31, 2018. DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt) in China.

 

On September 2, 2016, the Company announced the planned merger of two of its 100% owned subsidiaries, ShouguanYuxin Chemical Co., Limited (“SYCI”) and ShouguanRongyuan 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 under SYCI in the fiscal year 2018.

 

On January 27, 2020, we completed a 1-for-5 reverse stock split of our common stock, such that for each five shares outstanding prior to the stock split there was one share outstanding after the reverse stock split. All shares of common stock referenced in this report have been adjusted to reflect the stock split figures. On January 28, 2020, our shares began trading on the NASDAQ Global Select Market under the new CUSIP # 40251W 408.

 

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

 

 

 

Our executive offices are located at Level 11, Vegetable Building, Industrial Park of the East in Shouguang City, Shandong Province, P.R.C. Our telephone number is +86 (536) 5670008. Our website address is www.gulfresourcesinc.com. The information contained on or accessed through our website is not intended to constitute and shall not be deemed to constitute part of this Form 10-K.

 

3 

 

Closure and rectification process of our Bromine, Crude Salt and Chemical Products factories

 

On September 1, 2017, the Company received letters from the People’s Government of Yangkou Town, Shouguang City to each of its subsidiaries, Shouguang City Haoyuan Chemical Company Limited and Shouguang Yuxin Chemical Industry Co., Limited, which stated that in an effort to improve the safety and environmental protection management level of chemical enterprises, the plants are requested to immediately stop production and perform rectification and improvements in accordance with the country’s new safety, environmental protection requirements. As a result, our facilities located in Yangkou Town were closed on September 1, 2017 to allow for rectification.

 

Subsequently, the Safety Supervision and Administration Department and the Environmental Protection Departments of the local government conducted inspections of every bromine production enterprise within its jurisdiction including our facilities, in order to improve security, environmental protections, pollution, and safety.

 

On September 21, 2018, the Company received a closing notice from the People’s Government of Yangkou Town, Shouguang City informing it to close its three bromine factories (Number 3, Number 4, and Number 11.) and not allowed to resume production. The crude salt fields surrounding these factories have been reclaimed as cultivated or construction land and hence did not meet the requirement for bromine and crude salt co-production set by the relevant authority. In closing these factories, the Company wrote off net book value of these factories’ property, plant and equipment in the amount of $18,644,473 in the loss on demolition of the factory in the consolidated statements of loss for the fiscal year ended December 31, 2018, recorded an impairment loss on the related mineral rights of these three factories of $1,284,832 included in the impairment of property, plant and equipment in the consolidated statements of loss for the fiscal year ended December 31, 2018 and wrote off $52,926 of prepaid land lease recorded in other operating loss in the consolidated statements of loss for fiscal year ended December 31, 2018. The Company incurred dismantling fee in the amount of $273,757 recorded in other operating loss in the consolidated statements of loss for fiscal year ended December 31, 2018. The Company negotiated with the local villages over compensation for the payment already made for these land leases and mineral rights in the past. This part of the cost has been used as the resumption of land use, so the village committee will not be compensated.

 

The Company has completed all the rectification and improvements in accordance with the government requirements, and it is still waiting for governmental approval for factories #2, #8, and #10. To our knowledge, the government is currently completing its planning process for all mining areas including that for prevention of flood. As a result, we may be required to make some modifications to our current wells and aqueducts prior to commencement of operations of these factories to satisfy the local government's requirements. Nevertheless, the Company expects to receive approvals for these factories in the second half of 2021. However, there is no assurance that we will be able to obtain the approvals necessary to operate those factories from the government.

 

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 had 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.

 

Because many smaller producers have not had the capital to conduct the rectification required by the government, management believes there could be some extremely attractive acquisition opportunities in bromine. However, at the present time, all of management’s attention is focused on getting its facilities approved and in full production. Management may consider acquisition opportunities in this segment in the future if the prices were sufficiently attractive.

 

4 

 

To date, we have secured the land for our new chemical factory. The Company also has had the final approval regarding environmental protection assessment and commenced construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020. There was an impairment loss on the property, plant and equipment related to the relocation of our chemical plants to Bohai Park in the amount of $16,636,322, since much of the equipment that was used in the chemical factories was relatively old. Further, even if it had been newer, we believe that it might not have passed new environmental tests.  The total cost of building the new factory is currently estimated to be approximately $64 million. The Company incurred relocation costs in the amount of $33,496,295 and $10,320,017 as of December 31, 2020 and 2019.

 

In January 2017, the Company completed the first brine water and natural gas well field construction in Daying located in Sichuan Province and commenced trial production in January 2019. On May 29, 2019, the Company received a verbal notice from the government of Tianbao Town, Daying County, Sichuan Province, whereby the Company is required to obtain further approval for its well located in Daying, including the entire natural gas and brine water project, including approvals for land use, safety production inspection, and environmental protection assessment. Until these approvals have been received, the Company has to temporarily halt trial production at its natural gas well in Daying. The Company plans to proceed with its applications for the natural gas and brine project approvals with related government departments after the government has finalized the land and resources planning for Sichuan Province.

 

 We are not writing off any of the goodwill related to our chemicals business. We believe the new chemical factory could produce strong sales and profits. We believe there may be much less capacity in the chemical industry, as many factories may be permanently closed. In addition, other competitor factories may reduce their production capacity. We expect to have a factory that operates efficiently. Considering the above factors and our strength with better equipment, we expect to generate sales and earnings in this segment at a level well above previous periods.

 

We will continue to control the land and buildings where the old chemical factories are located. At this time, we have not considered how or if we can monetize those assets.

 

Impact of COVID-19 on Our Operations and Financial Performance

 

Outbreaks of epidemic, pandemic, or contagious diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread of COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. Substantially all of our revenues and workforce are concentrated in China. In response to the intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday in 2020, quarantining individuals suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering, among other things. 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 again 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.

 

There remain significant uncertainties surrounding the COVID-19 outbreak and its further development as a global pandemic. Hence, the extent of the business disruption and the related impact on our financial results and outlook for 2021 cannot be reasonably estimated at this time. The extent to which the COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still assessing our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences, including downturns in business sentiment generally.

 

Our Business Segments

 

Our business operations are conducted in four segments, bromine, crude salt, chemical products, and natural gas.  We manufacture and trade bromine, crude salt and natural gas, and manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, papermaking chemical agents and materials for human and animal antibiotics.  We conduct all of our operations in China.

 

Bromine and Crude Salt

 

We manufacture and distribute bromine through our wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited, or SCHC.  Bromine is a halogen element. It is a red volatile liquid at standard room temperature which has reactivity between chlorine and iodine. Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine is also used to form intermediates in organic synthesis, which is somewhat preferable over iodine due to its lower cost. Bromine is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants.

 

The extraction of bromine in the Shandong Province is limited by the provincial government to licensed operations.  We hold one such license.  As part of our business strategy, it is our plan to continue acquiring smaller scaled and unlicensed producers and to use our bromine to expand our downstream chemical operations

 

Location of Production Sites

 

Our production sites are located in the Shandong Province in northeastern China. The productive formation (otherwise referred to as the “working region”), extends from latitude N 36°56’ to N 37°20’ and from longitude E 118°38’ to E 119°14’, in the north region of Shouguang city, from the Xiaoqing River of Shouguang city to the west of the Dan River, bordering on Hanting District in the east, from the main channel of “Leading the Yellow River to Supply Qingdao City Project” in the south to the coastline in the  north. The territory is classified as coastal alluvial – marine plain with an average height two to seven meters above the sea level. The terrain is relatively flat.

 

5 

 

Geological background of this region

 

The Shandong Province working region is located to the east of Lubei Plain and on the south bank of Bohai Laizhou Bay. The geotectonic location bestrides on the North China Platte (I) and north three-level structure units, from west to east including individually the North China Depression, Luxi Plate, and Jiaobei Plate. Meanwhile, 4 V-level structure units including the Dongying Sag of Dongying Depression (IV) of North China Depression, the Buried Lifting Area of Guangrao, Niutou sag and Buried Lifting Area of Shuanghe and are all on two V-level structure units including Xiaying Buried Lifting Area of Weifang Depression (IV) of Luxi Plate and Chuangyi Sag, as well as on a V-level structure units of Jiaobei Buried Lifting Area of Jiaobei Plate.

 

Processing of Bromine

 

Natural brine is a complicated salt-water system, containing many ionic compositions in which different ions have close interdependent relationships and which can be reunited to form many dissolved soluble salts such as sodium chloride, potassium chloride, calcium sulfate, potassium sulfate and other similar soluble salts. The goal of natural brine processing is to separate and precipitate the soluble salts or ions away from the water.  Due to the differences in the physical and chemical characteristics of brine samples, the processing methods are varied, and can result in inconsistency of processing and varied technical performance for the different useful components from the natural brine.

 

Bromine is the first component extracted during the processing of natural brine. In natural brine, the bromine exists in the form of bromine sodium and bromine magnesium and other soluble salts.

 

The bromine production process is as follows:

 

  1. natural brine is pumped from underground through extraction wells by subaqueous pumps;
     
  2. the natural brine then passes through transmission pipelines to storage reservoirs;
     
  3. the natural brine is sent to the bromine refining plant where bromine is extracted from the natural brine.  In neutral or acidic water, the bromine ion is easily oxidized by adding the oxidative of chlorine, which generates the single bromine away from the brine. Thereafter the extracted single bromine is blown out by forced air, then absorbed by sulfur dioxide or soda by adding acid, chlorine and sulfur. Extracted bromine is stored in containers of different sizes; and
     
  4. the wastewater from this refining process is then transported by pipeline to brine pans.

 

Our production feeds include (i) natural brine; (ii) vitriol; (iii) chlorine; (iv) sulfur; and (v) coal.

 

Crude Salt

 

We also produce crude salt, which is produced from the evaporation of the wastewater after our bromine production process. Once the brine is returned to the surface and the bromine is removed, the remaining brine is pumped to on-site containing pools and then exposed to natural sunshine. This causes the water to evaporate from the brine, resulting in salt being left over afterwards. 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.

 

Chemical Products

 

We produce chemical products through our wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Company Limited, or SYCI.  At the present time, SYCI is closed pursuant to the letter from government dated on November 24, 2017. It is being relocated to Bohai Marine Fine Chemical Industry Park, Shouguang City. SYCI paid $9,115,276 for a 50-year lease of a piece of land for its new factories at Bohai Marine Fine Chemical Industrial Park in December, 2017 and leased another piece of land from the third party for its new chemical factory. We received the final approval for our new chemical factory and started construction in June 2020.

 

6 

 

Historically, SYCI concentrated its efforts on the production and sale of chemical products that are used in oil and gas field exploration, oil and gas distribution, oil field drilling, papermaking chemical agents, inorganic chemicals and materials that are used for human and animal antibiotics. SYCI engaged in depth study of existing products and new product research and development at the same time. SYCI’s annual production of oil and gas field exploration products and related chemicals was over 26,000 tons, and its production of papermaking-related chemical products was over 5,000 tons. SYCI’s annual production capacity of materials that are used for human and animal antibiotics was over 6,800 tons.

 

Sales and Marketing

 

We have an in-house sales staff of 19 persons. Our customers send their orders to us first.  Our in-house sales staff then attempts to satisfy these orders based on our actual production schedules and inventories on hand. Many of our customers have a long term relationship with us. We expect this to continue due to stable demand for mineral products, however, these relationships cannot be guaranteed in the future.

 

Principal Customers

 

We sell a substantial portion of our products to a limited number of PRC customers.  Our principal customers during 2020 were Shandong Morui Chemical Company Limited, Shandong Brother Technology Limited, and Shouguang Weidong Chemical Company Limited. We have ongoing policies in place to ensure that sales are made to customers who are credit-worthy.

 

During the year ended December 31, 2020, sales to our three largest bromine customers, based on net revenue from such customers, aggregated $11,771,830 or approximately 47% of total net revenue from sale of bromine; and sales to our largest customer represented approximately 19%, respectively, of total net revenue from the sale of bromine.

 

During the year ended December 31, 2019, sales to our three largest bromine customers, based on net revenue from such customers, aggregated $5,371,125, or approximately 54% of total net revenue from sale of bromine; and sales to our largest customer represented approximately 22%, respectively, of total net revenue from the sale of bromine.

 

During each of the years ended December 31, 2020 and 2019, sales to our three largest crude salt customers, based on net revenue from such customers, aggregated $3,022,215 and $522,758, respectively, or approximately 100% and 100% of total net revenue from sale of crude salt; and sales to our largest customer represented approximately 36% and 37%, respectively, of total net revenue from the sale of crude salt.

 

During each of the years ended December 31, 2020 and 2019, the net revenue for the chemical products was $0.

 

Principal Suppliers

 

Our principal external suppliers are Laizhou Shengfu Chemical Company Limited, Shandong Xinlong Group Company Limited, Weifang Wanhong Chemical Company Limited, Shandong Xinlong International Trade Company Limited. 

 

During the year ended December 31, 2020 and 2019, we purchased 100% of raw materials for our bromine and crude production from our top three suppliers.

 

During the year ended December 31, 2020 and 2019, we did not purchase any raw materials for chemical products production. This supplier concentration makes us vulnerable to a near-term adverse impact, should the relationships be terminated.

 

Business Strategy

 

Expansion of Production Capacity to Meet Demand

 

▼ Bromine and Crude Salt

 

In view of keen competition and the trend of less bromine contraction of brine water being extracted in Shouguang City, Shandong Province, the Company intended to access more bromine and crude salt resources by finding new underground brine water resources in the Sichuan Province. On January 30, 2015 we announced that we had found natural gas resources under our bromine well in the Sichuan area. On November 23, 2015, the Company’s wholly owned subsidiary SCHC entered into an agreement with the People’s Government of Daying County in Sichuan Province for the exploration and development of natural gas and brine resources (including bromine and crude salt). 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. Then later on, the Company found some issues related to the water and other potential impurities in the natural gas during trial production. In resolving the problem, the Company purchased customized equipment for its natural gas project. The installation of such equipment, including providing piping and electricity, was completed in July 2018. The Company completed the test production at its first natural gas well in Sichuan Province and commenced trial production in January 2019. 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 further approval for its well located in Daying, including the entire natural gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and the related land issues. Until these approvals have been received, the Company has had to temporarily halt trial production at its natural gas well in Daying. The Company plans to proceed with its applications for the natural gas and brine project approvals with related government departments after the government has finalized the land and resources planning for Sichuan Province.

 

7 

 

On September 1, 2017, the Company received notification from the Government of Yangkou Town, Shouguang City of PRC that required production at all its factories be immediately halted in order for the Company to perform rectification and improvement in accordance with the local new safety and environmental protection requirements.

 

The Company has been working closely with the County authorities to develop rectification plans for both its bromine and crude salt businesses and had agreed on a plan in October 2017. In the fiscal year ended December 31, 2018, the Company incurred $16,243,677 in the rectification and improvements of plant and equipment of the bromine and crude salt factories resulting in a cumulative amount of $34,182,329 incurred as of December 31, 2018. 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. In April 2019, Factory No.1, Factory No.5 and Factory No.7 (Factory no. 5 is considered part of Factory no.7 and both are managed as one factory since 2010) restarted operations upon receipt of verbal notification from local government of Yangkou County. On May 7, 2019, the Company renamed its Subdivision Factory No. 1 to Factory No. 4; and Factory No. 5 (which was previously considered part of Factory No. 7) to Factory No. 7. 

 

On November 25, 2019, the government of Shouguang City issued a notice ordering all bromine facilities in Shouguang City, including the Company’s all bromine facilities, including Factory No.1 and Factory No. 7, to temporarily stop production from December 16, 2019 to February 10, 2020. Subsequently, due to the coronavirus outbreak in China, the local government ordered those bromine facilities to postpone the commencement of production. Subsequently, the Company received an approval dated on February 27, 2020 issued by the local governmental authority which allows us to resume production after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s Government dated on March 5, 2020 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.7 and No.1 started trial production in mid-March 2020, and commenced commercial production on April 3, 2020.

 

The Company is still waiting for governmental approval for factories #2, #8, and #10. To our knowledge, the government is currently completing its planning process for all mining areas including that for prevention of flood. As a result, we may be required to make some modifications to our current wells and aqueducts prior to commencement of operations of these factories to satisfy the local government's requirements. Nevertheless, the Company expects to receive approvals for these factories in the second half of 2021. However, there is no assurance that we will be able to obtain the approvals necessary to operate those factories from the government.

 

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 had temporarily stopped production at its bromine facilities during the aforesaid period and back to production as scheduled on February 19, 2021.

 

8 

 

▼ Chemical Products

 

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 the Bohai Marine Fine Chemical Industrial Park (the “November 2017 Letter”). Since then, our chemical factory has been shut down. We believe this is part of the country’s efforts to improve the development of the chemical industry, facilitate safe production and curb environmental pollution, and ensure the quality of living environment of residents. The Company expects to cost approximately $64 million in total in connection with the relocation. The Company incurred relocation costs in the amount of $33,496,295 as of December 31, 2020.

 

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 was permitted to construct our new chemical factory and the Company commenced construction in June 2020.

 

Competition

 

To date, our sales have been limited to customers within the PRC and we expect that our sales will remain primarily domestic for the immediate future.  Our marketing strategy involves developing long term ongoing working relationships with customers based on large multi-year agreements which foster mutually advantageous relationships.

 

We compete with PRC domestic private companies and state owned companies. Certain state owned and state backed competitors are more established and have more control of certain resources in terms of pricing than we do.  We compete based on price, our reputation for quality, on-time delivery, our relationship with suppliers and our geographical proximity to natural brine deposits in the PRC for bromine, crude salt and chemical productions.  Management believes that our stable quality, manufacturing processes and plant capacity for the production of bromine, crude salt and chemical products are key considerations in awarding contracts in the PRC.

 

Our principal competitors in the bromine business are Shandong Yuyuan Group Company Limited, Shandong Haihua Group Company Limited, Shandong Dadi Salt Chemical Group Company Limited and Shandong Haiwang Chemical Company Limited, all of which produce bromine principally for use in their chemicals businesses and sell part of the bromine produced to customers. These companies may switch to selling bromine to the market if they no longer use bromine in their chemical businesses.

 

Our principal competitors in the crude salt business are Shandong Haiwang Chemical Company Limited, Shandong Haihua Group Company Limited, Shandong Weifang Longwei Industrial Company Limited, Shandong Yuyuan Group Company Limited and Shandong Caiyangzi Saltworks.

 

Our principal competitors in the chemical business are Beijing Shiji Zhongxing Energy Technology Co., Ltd, Yanan Chaozheng Nijiang Co., Ltd, Shandong Dacheng Pesticides Company Limited, Binhua Group Company Limited, Dongying City Dongchen (Group) Chemical Industry Company Limited, Beijing Peikangjiaye Technologies Limited, Shouguang Fukang Pharmaceutical Co., Ltd. Shandong Xinhua Pharmaceutical Limited by Share Ltd, Hunan Erkang Pharmaceutical Limited by Share Ltd and Xinan Synthetic Pharmaceutical Limited by Share Ltd.

 

9 

 

Government Regulation

 

China has been reinforcing the environmental requirements for the entire chemical industry, demanding the closure or rectification of those factories that do not meet the emission requirements and are highly polluting. In early 2017, the government announced the closure or relocation of those chemical industry facilities that are close to residential areas and the new environmental law officially came into full effect in January 2018.

 

The following is a summary of the principal governmental laws and regulations that are or may be applicable to our operations in the PRC. The scope and enforcement of many of the laws and regulations described below are uncertain. We cannot predict the effect of further developments in the Chinese legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement of laws.

 

In the natural resources sector, the PRC and the various provinces have enacted a series of laws and regulations over the past 20 years, including laws and regulations designed to improve safety and decrease environmental degradation.  The “China Mineral Resources Law” declares state ownership of all mineral resources in the PRC.  However, mineral exploration rights can be purchased, sold and transferred to foreign owned companies. Mineral resource rights are granted by the Central Government permitting recipients to conduct mineral resource activities in a specific area during the license period. These rights entitle the licensee to undertake mineral resource activities and infrastructure and ancillary work, in compliance with applicable laws and regulations, within the specific area covered by the license during the license period. The licensee is required to submit a proposal and feasibility studies to the relevant authority and to pay the Central Government a natural resources tax in an amount equal to a percent of annual crude salt sales and tones of bromine sold. Shandong Province has determined that bromine is to be extracted only by licensed entities and we hold one of such licenses. Despite the Province desire to limit extraction to licensed entities hundreds of smaller operations have continued to extract bromine without licenses.

 

The Ministry of Land and Resources (“MLR”) is the principal regulator of mineral rights in China. The Ministry has authority to grant licenses for land-use and exploration rights, issue permits for mineral rights and leases, oversee the fees charged for them and their transfer, and review reserve evaluations. We are required to hold a bromine and salt production license in order to operate our bromine and salt production business in the PRC. Our bromine and salt production license is subject to a yearly audit. If we do not successfully pass the yearly approval by relevant government authorities, our bromine and salt production operations may be suspended until we are able to comply with the license requirements which could have a material adverse effect on our business, financial condition and results of operations.

 

Human Capital Resources

 

Employee Profiles

 

As of December 31, 2020, we employed approximately 585 full-time employees, of whom approximately 60% are with SCHC and DCHC, and 40% are with SYCI. Approximately 6% of our employees are management personnel and 4% are sales and procurement staff. None of our employees are represented by a union.

 

Total Rewards

 

Our compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals and create long-term value for our stockholders. Our employees in China participate in a state pension arrangement organized by Chinese municipal and provincial governments. We are required to contribute to the arrangement at the rate of 17% of the average monthly salary. In addition, we are required by Chinese law to cover employees in China with other types of social insurance. We have purchased social insurance for almost all of our employees. Expense related to social insurance was approximately $295,252 for fiscal year 2020.

 

 Health and Safety

 

The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes having the vast majority of our employees work from home, while implementing additional safety measures for employees continuing critical on-site work.

 

Talent

 

A core tenet of our talent system is to both develop talent from within and supplement with external hires. This approach has yielded loyalty and commitment in our employee base which in turn grows our business, our products, and our customers, while adding new employees and external ideas supports a continuous improvement mindset and our goals of a diverse and inclusive workforce. Our talent acquisition team uses internal and external resources to recruit highly skilled and talented workers in the PRC, and we encourage employee referrals for open positions.

 

Available Information

 

We make available free of charge on or through our internet website, www.gulfresourcesinc.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and all amendments to those reports, if any, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers like our Company that file electronically with the SEC at http://www.sec.gov. The information contained on our website is not intended to be incorporated into this Annual Report on Form 10-K.

 

10 

 

Item 1A. Risk Factors.

 

Pursuant to Item 301(c) of Regulation S-K (§ 229.301(c)), 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 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

FIGURE 2.1 - REGIONAL MAP OF MINING PROPERTIES

 

 

 

11 

 

FIGURE 2.2 – DETAILED MAP OF MINING PROPERTIES

  

 

 

We do not own any land, although we do own some of the buildings on land we lease. Our executive offices are located at Level 11, Vegetable Building, Industrial Park of the East in Shouguang City, Shandong Province, P.R.C, which also is the headquarters of SCHC and SYCI. These offices were purchased from Shandong Shouguang Vegetable Seed industry Group Co., Ltd, in which Mr. Ming Yang, the Chairman of the Company, had 99% equity interest.

 

SYCI concentrates its efforts on the production and sale of chemical products that are used in oil and gas field exploration, oil and gas distribution, oil field drilling, papermaking chemical agents, and manufacture and sell materials that are used for human and animal antibiotics in China. Currently, SYCI is closed according to the November 2017 Letter and currently under construction at Bohai Marine Fine Chemical Industry Park, Shouguang City, Shandong Province, China, where SYCI will be relocated to.

 

12 

 

DCHC, is a registered company exploring and developing natural gas and brine resources (including bromine and crude salt) in China located in No.14 team, Liguanggou Village, Tianbao Township, Daying County, Suining City, Sichuan Province, China.

 

In the first quarter of 2018, six out of its ten bromine factories completed their rectification process within factory areas (i.e. excluding crude salt field area) and were approved and scheduled for production commencement by April 2018 as verbally indicated by the local government. The remaining four factories were still undergoing rectification at that time. Three factories (Factory No. 3, Factory No. 4 and Factory No. 11) had to be demolished in September 2018 as required by the government and rectification for Factory No. 10 was completed in November 2018.

 

The Company operates its bromine and crude salt production facilities through its wholly-owned subsidiary SCHC.  SCHC has land use rights to one property (10,790 square meters, or approximately 3 acre) as bromine production area for Factory No. 1 and land lease contracts to seven properties (approximately 17,816 acre), totaling nearly 17,819 acre, located on the south bank of Laizhou Bay on the Shandong Peninsula of the People’s Republic of China (“China”).  Each of the properties is accessible by road. The Yiyang railway line is within 50 kilometers and the Yangkou port is five kilometers away.

 

Each of the seven properties contains natural brine deposits which are extracted through wells and are used to extract bromine and produce crude salt. Bromine is a simple molecular element which is produced by extracting the bromine ion from natural brine. Crude salt is sodium chloride.  Bromine is an important chemical raw material in flame retardants, fire extinguishing agents, refrigerants, photographic materials, pharmaceuticals, pesticides, and oil and other industries.  Crude salt, also known as industrial salt, is used in a wide range of chemical industries, is the major raw material in the soda and chlor-alkali industries and can be widely used in agricultural, animal husbandry, fisheries and food processing industries.  Crude salt is also the main raw material for edible salt.

 

Nature of Ownership Interest in the Properties

 

All of the land in the PRC is owned by the state. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes at no cost. In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. The Company does not own any land but has entered into contracts with the local government and original owners of the land use rights to acquire their rights for a period of 50 years.  The contracts required us to pay a one-time fee plus an annual rent.

 

Mineral Rights

 

The Chinese and provincial governments have enacted a series of laws and regulations relating to the natural resources sector over the past 20 years, including laws and regulations designed to improve safety and decrease environmental degradation.  The “China Mineral Resources Law” declares state ownership of all mineral resources in China.  However, mineral exploration rights can be purchased, sold and transferred to both domestic and foreign owned companies. Mineral resource rights are granted by the central government permitting recipients to conduct mineral resource activities in a specific area during the license period.  These rights entitle the licensee to undertake mineral resource activities and infrastructure and ancillary work, in compliance with applicable laws and regulations, within the specific area covered by the license during the license period. The licensee is required to submit a proposal and feasibility studies to the relevant authority and to pay the central government a natural resources tax in an amount equal to RMB 1,050 per tonne of bromine sales volumes.  The Company was exempt from paying the fee prior to January 1, 2008. Shandong province has determined that bromine is to be extracted only by licensed entities.

 

13 

 

Our mineral rights are issued by the local government and allow for a one year period of mining.  The rights provide us with the exclusive rights to explore and extract natural brine under the leased land and produce bromine and crude salt. The government performs an annual inspection of the company’s previous year’s state of production & operations at beginning of each year.  The annual inspection reviews: (1) whether the production is safe and if any accidents occurred during the previous year; (2) whether the natural resources tax and other taxes were timely paid; (3) whether employees’ salary and welfare benefits were timely paid; and (4) whether the Company meets environment protection standards. Only those companies who pass the inspection receive mineral rights for another one year term. For those companies who do not pass the inspection, additional mineral rights are not allocated until they can meet the requirements. If there is major safety accident, the government may revoke the mining permit.

 

The mining certificate were renewed in July 2018 with production limit of 24,000 tons of bromine production per year.

 

On September 21, 2018, we received a closing notice from the People’s Government of Yangkou Town, Shouguang City informing us that we had to shut down our three bromine factories (Factory No. 3,No. 4, and No. 11.).

 

The following is a description of the land use and mineral rights related to each of the nine properties held by SCHC as of December 31, 2020.

 

All of the bromine factories are under rectification process without production.

 

Property Factory No. 1 – Haoyuan General  Factory
Area 6,442 acres
Date of Acquisition February 5, 2007
Land Use Rights Lease Term Fifty Years
Land Use Rights Expiration Date 2054 (for mining areas only)
The number of remaining years to expiration of the of the land lease as of December 31, 2020 33.25 Years
Prior fees paid for land use rights RMB8.6 million
Annual Rent RMB186,633
Mining Permit No.: C3707002009056220022340
Date of Permission: July 2018, subject to renewal per three years
Period of Permission: Three year

 

 

Property Factory No. 4 (originally named as Subdivision of Factory No. 1) – State-owned Shouguang Qinshuibo Farm
Area 0.79 acres
Date of Factory lease January 1, 2011
Factory Lease Term Twenty Years
Factory lease Expiration Date 2030
The number of remaining years to expiration of the of the factory lease as of December 31, 2020 10.0 Years
Prior Fees Paid for Land Use Rights Not applicable
Annual Rent RMB5,000,000
Mining Permit No.: Under application

 

14 

 

Property Factory No. 2 – Yuwenbo
Area 1,846 acres
Date of Acquisition April 7, 2007
Land Use Rights Lease Term Fifty Years
Land Use Rights Expiration Date 2052
The number of remaining years to expiration of the of the land lease as of December 31, 2020 32 Years
Prior Fees Paid For Land Use Rights RMB7.5 million
Annual Rent RMB162,560
Mining Permit No.: C3707002009056220022340
Date of Permission: July 2018, subject to renewal per three years
Period of Permission: Three year

 

 

Property Factory No. 2 – State Operated Shouguang Qingshuibo Farm
Area 568 acres
Date of Acquisition December 30, 2010
Land Use Rights Lease Term Thirty Years
Land Use Rights Expiration Date 2040
The number of remaining years to expiration of the of the land lease as of December 31, 2020 20.7 Years
Prior Fees Paid for Land Use Rights Not applicable
Annual Rent RMB172,500 (increase 5% per year)
Mining Permit No.: Under application

 

 

Property Factory No. 7 (originally named as No. 5)– Wangjiancai
Area 2,165 acres
Date of Acquisition October 25, 2007
Land Use Rights Lease Term Fifty Years
Land Use Rights Expiration Date 2054
The number of remaining years to expiration of the of the land lease as of December 31, 2020 34 Years
Annual Rent RMB176,441
Prior Fees Paid for Land Use Rights RMB8.3 million
Mining Permit No.: Under application, written consent obtained from local land and resources departments

 

 

Property Factory No. 7 – Qiufen Yuan
Area 1,611 acres
Date of Acquisition January 7, 2009
Land Use Rights Lease Term Fifty Years
Land Use Rights Expiration Date 2059
The number of remaining years to expiration of the of the land lease as of December 31, 2020 38.17 Years
Prior Fees Paid for Land Use Rights Not applicable
Annual Rent RMB171,150 (increase 5% per two years)
Mining Permit No.: C3707002009056220022340
Date of Permission: July 2018, subject to renewal per three years
Period of Permission: Three year

 

15 

 

Property Factory No. 8 – Fengxia Yuan
Area 2,723 acres
Date of Acquisition September 7, 2009
Land Use Rights Lease Term Fifty Years
Land Use Rights Expiration Date 2059
The number of remaining years to expiration of the of the land lease as of December 31, 2020 38.66 Years
Prior Fees Paid for Land Use Rights Not applicable
Annual Rent RMB347,130 (increase 5% per two years)
Mining Permit No.: Under application, written consent obtained from local land and resources departments

 

 

Property Factory No. 9 – Jinjin Li
Area 759 acres
Date of Acquisition June 7, 2010
Land Use Rights Lease Term Fifty Years
Land Use Rights Expiration Date 2060
The number of remaining years to expiration of the of the land lease as of December 31, 2020 39.5 Years
Prior Fees Paid for Land Use Rights Not applicable
Annual Rent RMB184,200 (increase 5% per two years)
Mining Permit No.: Under application, written consent obtained from local land and resources departments

 

 

Property Factory No. 10 – Liangcai Zhang
Area 1,700 acres
Date of Acquisition December 22, 2011
Land Use Rights Lease Term Ten Years
Land Use Rights Expiration Date 2021
The number of remaining years to expiration of the of the land lease as of December 31, 2020 1.0 Years
Prior Fees Paid for Land Use Rights Not applicable
Annual Rent RMB688,000 (increase 5% per year)
Mining Permit No.: Under application

 

Leased Facility

 

On November 5, 2010, SCHC entered into a Lease Contract with State-Operated Shouguang Qingshuibo Farm. Pursuant to the Lease Contract, SCHC shall lease certain property with an area of 3,192 square meters (or 0.8 acres) and buildings adjacent to the Company’s Factory No. 1.  There are currently non-operating bromine production facilities on the property which have not been in production for more than 12 months.  The annual lease payment for the property is RMB 5.0 million, approximately $794,550, per year and shall be paid by SCHC no later than June 30th of each year.  The term of the Lease Contract is for twenty years commencing January 1, 2011. The Lease Contract may be renewed by SCHC for an additional twenty year period on the same terms.  The Lessor has agreed to permit SCHC to reconstruct and renovate the existing bromine production facilities on the property.

 

16 

 

The chart below represents the annual production capacity and annualized utilization ratios for our bromine producing properties currently leased by the Company, which are all located in Shouguang City, Shandong Province, China.  There are no proven and probable reserves located on our properties.

 

Bromine Property   Facility
Acquisition Date
  Acres  

Annual Production
Capacity #

(in tons)

  2020
Utilization
Ratio
    2019
Utilization 
Ratio
Factory No. 1         6,442       6,681       31 %   28%
Factory No. 2     April 7, 2007     1,846       4,844          
                                   
                                   
Factory No. 7* (originally named as No. 5 and No. 7)    

October 25, 2007/ 

January 7, 2009 

    3,776       6,986       30 %   27%
                                   
Factory No. 8     September 7, 2009     2,723       4,016          
Factory No. 9     June 7, 2010     759       2,793       66  
Factory No.4 (originally named as Subdivision of Factory No. 1)     January 1, 2011     1       3,186       54  
Factory No. 10     December 22, 2011     1,700       3,000          
                                   
* Bromine production for Factory No. 5 and Factory No. 7 were combined in early 2010 as both factories are located adjacent to each other, and renamed Factory No. 5 (which was previously considered part of Factory No. 7) as Factory No. 7 on May 2019.

 

The following table shows the annual bromine produced and sold for each of our production facilities and the weighted average price received for all products sold for the last two years.

 

    2020   2019
Bromine
Facility
  Produced 
(in tons)
  Sold
(in tons)
  Selling price (RMB/ton)   Produced 
(in tons)
  Sold
(in tons)
  Selling price (RMB/ton)
Factory No. 1     1,707       1,802       28,821       1,227       1,113       29,752  
Factory No. 2                                    
Factory No. 3**                                    
Factory No. 4**                                    
Factory No. 7* (originally named as No. 5 and
No. 7) *
    1,768       1,799       28,820       1,255       1,207       29,740  
                                                 
Factory No. 8                                    
Factory No. 9     1,231       1,212       28,668                    
Factory No. 4( originally know Subdivision of Factory No. 1)     1,154       1,144       28,920                    
Factory No. 10                                    
Factory No. 11**                                    
Total     5,860       5,957               2,482       2,320          

 

* Bromine production for Factory No. 5 and Factory No. 7 were combined in early 2010 as both factories are located adjacent to each other., and renamed Factory No. 5 (which was previously considered part of Factory No. 7) as Factory No. 7 on May 2019.
   
** Factory No. 3, 4 and 11 were demolished in September 2018.

 

17 

 

The following table shows the annual crude salt produced and sold for each of our production facilities and the weighted average price received for all products sold for the last two years.

 

    2020   2019
Crude Salt
Facility
  Produced 
(in tons)
  Sold
(in tons)
  Selling price (RMB/ton)   Produced 
(in tons)
 

Sold

(in tons)

  Selling price (RMB/ton)
Factory No. 1     6,160       5,632       118       8,431       7,419       143  
Factory No. 2                             1,859       170  
Factory No. 7* (Originally Named as No. 5 and
No. 7) *
    116,083       112,938       120       13,131       15,163       147  
                                                 
Factory No. 8                                    
Factory No. 9     56,822       56,152       118                    
Total     179,065       174,722               21,562       24,441          

 

* Bromine production for Factory No. 5 and Factory No. 7 were combined in early 2010 as both factories are located adjacent to each other, and renamed Factory No. 5 (which was previously considered part of Factory No. 7) as Factory No. 7 on May 2019
   

The following table shows the chemical products produced and sold for our SYCI’s production facilities and the weighted average price received for all products sold for the last two years.

 

    2020   2019
Chemical
Products
  Produced
  (in tons)
  Sold
(in tons)
  Selling price (RMB/ton)   Produced
  (in tons)
  Sold
(in tons)
  Selling price (RMB/ton)
Oil and gas exploration additives                                    
Paper manufacturing additives                                    
Pesticides manufacturing additives                                    
Pharmaceutical intermediates                                    
By products                                    
Total                                                

 

Item 3. Legal Proceedings.

 

On or about August 3, 2018, written decisions of administration penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo Tu Zi Fa Gao Zi [2018] No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu Zi Fa Gao Zi [2018] No. 296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company Limited (“SCHC”) by the Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as respondent. For more details and information related to the Written Decisions, please see “Note 20 – Loss Contingencies, Notes to Consolidated Financial Statement” contained in this annual report.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

18 

 

PART II 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market for Our Common Stock

 

Our common stock is listed for trading on the NASDAQ Global Select Market, or NASDAQ, under the symbol “GURE”.

 

Dividends

 

We have never paid cash dividends on our common stock. Holders of our common stock are entitled to receive dividends, if any, declared and paid from time to time by the Board of Directors out of funds legally available. We intend to retain any earnings for the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon future earnings, results of operations, future expansion of bromine and crude salt business and other, capital requirements, our financial condition and other factors that our Board of Directors may consider.

 

Our Equity Compensation Plans

 

The following table provides information as of December 31, 2020 about our equity compensation plans and arrangements.

 

Equity Compensation Plan Information - December 31, 2020

 

Plan category

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights

Weighted-average

exercise price of

outstanding options,

warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
  (a) (b) (c)
Equity compensation plans approved by security holders 121,600 $7.09 515,648
Equity compensation plans not approved by security holders
Total 121,600 $7.09 515,648

 

Purchases of Equity Securities by the Company and Affiliated Purchasers

 

None.

 

Recent Sales of Unregistered Securities

 

None.

 

Item 6. Selected Financial Data.

 

Pursuant to Item 301(c) of Regulation S-K (§ 229.301(c)), 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).

 

19 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

We are a holding company which conducts operations through our wholly-owned China-based subsidiaries.  Our business is conducted and reported in four segments, namely, bromine, crude salt, chemical products and natural gas.

 

Through our wholly-owned subsidiary, SCHC, we produce and trade bromine and crude salt.  We are one of the largest producers of bromine in China, as measured by production output. Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine also is used to form intermediary chemical compounds such as Tetramethylbenzidine.  Bromine is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants.  Crude salt is the principal material in alkali production as well as chlorine alkali production and is widely used in the chemical, food and beverage, and other industries.

 

Through our wholly-owned subsidiary, SYCI, we manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, papermaking chemical agents, inorganic chemicals and materials that are used for human and animal antibiotics.

 

Our wholly-owned subsidiary, DCHC, was established to explore and develop natural gas and brine resources (including bromine and crude salt) in Sichuan Province, China.

 

As disclosed in the Company’s Current Report on Form 8-K filed on September 8, 2017, the Company received, on September 1, 2017, letters from the Yangkou County, Shouguang City government addressed to each of its subsidiaries, SCHC and SYCI, which stated that in an effort to improve the safety and environmental protection management level of chemical enterprises, the plants are requested to immediately stop production and perform rectification and improvements in accordance with the country’s new safety and environmental protection requirements. In the Company’s press release of August 11, 2017 and on its conference call of August 14, 2017, the Company addressed concerns that increased government enforcement of stringent environmental rules that were adopted in early 2017 to insure corporations bring their facilities up to necessary standards so that pollution and other negative environmental issues are limited and remediated, could have an impact on our business in both the short and long-term. The Company also expressed that although it believed its facilities were fully compliant at the time, the Company did not know how its facilities would fare under the new rules. Teams of inspectors from the government were sent to many provinces to inspect all mining and manufacturing facilities. The local government requested that facilities be closed, so that the facilities could undergo the inspection and analysis in the most efficient manner by inspectors’ team. As a result, our facilities were closed on September 1, 2017.

 

The Company believes that this is another step by the government to improve the environment. It further believes the goal of the government is not to close all plants, but rather to codify the regulations related to project approval, land use, planning approval and environmental protection assessment approval so that illegal plants are not able to open in the future and so that plants close to population centers do not cause serious environmental damage. In addition, the Company believes that the Shandong provincial government wants to assure that each of its regional and county governments has applied the Notice in a consistent manner.

 

The Shouguang City Bromine Association, on behalf of all the bromine plants in Shouguang, started discussions with the local government agencies. The local governmental agencies confirmed the facts that their initial requirements for the bromine industry did not include the project approval, the planning approval and the land use rights approval and that those three additional approvals were new requirements of the provincial government. The Company understood from the local government that it has been coordinating with several government agencies to solve these three outstanding approval issues in a timely manner and that all the affected bromine plants will not be allowed to commence production prior to obtaining those approvals.

 

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

  

On February 28, 2020, the Company announced that it received an approval from the government to resume bromine production after winter temporary closure. Subsequently, it received another approval from the Shouguang Yangkou People’s Government dated on March 5, 2020 to resume production at its bromine factories No.1, No. 4, No.7 and No. 9 in order to meet the needs of bromide products for epidemic prevention and control. With these two approvals, the Company was allowed to resume production at all four bromine factories.

 

20 

 

The Company is still waiting for governmental approval for factories No.2, No.8, and No.10. To its knowledge, the government is currently completing its planning process for all mining areas including that for prevention of flood. As a result, the Company may be required to make some modifications to our current wells and aqueducts prior to commencement of operations of these factories to satisfy the local government's requirements. The Company expects to receive approvals for these factories in the second half of 2021 due to the COVID-19 impact. However, there is no assurance that we will be able to obtain the approvals necessary to operate those factories from the government.

 

On November 24, 2017, Gulf Resources received a letter from the People’s Government of Yangkou County, Shouguang City notifying the Company that due to the new standards and regulations relating to safety production and environmental pollution, from certain local governmental departments, such as the municipal environmental protection department, the security supervision department and the fire department, its chemical enterprises would have to be relocated to a new industrial park called Bohai Marine Fine Chemical Industry Park.  Although our chemical companies were in compliance with regulations, they were also close to a residential area. As a result, the government determined we should relocate to the Bohai park. Chemical companies that are not being asked to move into the park are being permanently closed.  Since our factories closed, the Company has secured from the government the land use rights for its chemical plant On January 6, 2020, the Company received the environmental protection approval by the government of Shouguang City, Shandong Province for the proposed Yuxin Chemical factory. The Company began the construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020. The construction is expected to take approximately one year, and an additional six months to complete the equipment installation and testing. The Company expects to begin trial production at the beginning of 2022.

 

In January 2017, the Company completed the first brine water and natural gas well field construction in Sichuan Province and announced the commencement of trial production. The Company has been working with Xinan Shiyou Daxue (Southwest Petroleum University) and developed a solution to DHCH’s technical drilling problem. In resolving the problem, the Company purchased customized equipment for its natural gas project. The installation of such equipment, including providing piping and electricity, was completed in July 2018. The Company completed the test production at its first natural gas well in Sichuan Province and commenced trial production in January 2019. Later On May 29, 2019, the Company received a verbal notice from the government of Tianbao Town, Daying County, Sichuan Province, whereby the Company is required to obtain project approval for its well located in Daying, including the entire natural gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve the related land issue. Until these approvals have been received, the Company has to temporarily halt trial production at its natural gas well in Daying.

 

As a result of our acquisitions of SCHC and SYCI, our historical consolidated financial statements and the information presented below reflects the accounts of SCHC, SYCI and DCHC, the consolidated financial statements and the information presented below as of and for the year ended December 31, 2020. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.

 

On January 28, 2020 we completed a 1-for-5 reverse stock split of our common stock, such that for each five shares outstanding prior to the stock split there was one share outstanding after the reverse stock split.  All shares of common stock referenced in this report have been adjusted to reflect the stock split figures.

 

21 

 

RESULTS OF OPERATIONS.

 

Year ended December 31, 2020 as compared to year ended December 31, 2019

 

    Years ended    
    December 31, 2020   December 31, 2019   Percent Change 
Increase/ 
(Decrease)
Net Revenue   $ 28,207,024     $ 10,596,521       166 %
Cost of Net Revenue   $ (19,415,034 )   $ (5,430,269 )     258 %
Gross Profit   $ 8,791,990     $ 5,166,252       70 %
Sales, Marketing and Other Operating Expense   $ (42,663 )   $ (12,434 )     243 %
Direct labor and factory overheads incurred during plant shutdown   $ (8,170,390 )   $ (15,175,280 )     (46 %)
General and Administrative Expenses   $ (10,239,943 )   $ (13,272,921 )     (23 %)
Other Operating Expense   $ (22,386   $        
Loss from Operations   $ (9,683,392 )   $ (23,294,383 )     (58 %)
Other Income, Net   $ 154,877     $ 301,325       (49 %)
Loss before Taxes   $ (9,528,515 )   $ (22,993,058 )     (59 %)
Income Tax Benefit (Expense)   $ 1,108,471     $ (2,806,987     139 %
Net loss   $ (8,420,044 )   $ (25,800,045 )     (67 %)

 

Net Revenue  The table below shows the changes in net revenue in the respective segment of the Company for the fiscal year 2020 compared to the same period in 2019:

 

    Net Revenue by Segment    
    Year Ended   Year Ended   Percent Increase (Decrease)
    December 31, 2020   December 31, 2019   of Net Revenue
Segment       % of total       % of total    
Bromine   $ 25,184,808       89 %   $ 10,022,027       95 %     151
Crude Salt     3,022,216       11 %     522,758       4 %     478 %
Chemical Products                              
Natural Gas                 51,736       1 %     (100 %) 
Total sales   $ 28,207,024       100 %   $ 10,596,521       100 %     166 %

 

 

    Years Ended December 31   Percent Change
Bromine and crude salt segments product sold in tonnes   2020   2019   Increase
Bromine (excluded volume sold to SYCI)     5,957       2,320       157 %
Crude Salt     174,722       24,441       615 %

 

22 

 

    Year Ended   Percentage
Natural gas segments product sold in cubic metre   December 31, 2020   December 31, 2019   Change
Decrease
Natural Gas           349,900       (100 %) 
                         

Bromine segment

 

Net revenue from our bromine segment increased by 151% to $25,184,808 for the year ended December 31, 2020 compared to $10,022,027 for the year ended December 31, 2019.

 

Crude salt segment

 

Net revenue from our crude salt segment increased by 478% to $3,022,216 for the year ended December 31, 2020 compared $522,758 for the same period in 2019. This increase is due to the fact that only two plants were restarted in 2019 and were in production for only four months, but three plants were restarted in 2020 and were in production for 10 months.

 

Chemical products segment

 

For the year ended December 31, 2020 and December 31, 2019, the net revenue for the chemical products segment was $0 due to the closure of our chemical factories since September 1, 2017. As a result there were no chemical products for sale for the years ended December 31, 2020 and 2019.

 

23 

 

Natural gas segment

 

For the year ended December 31, 2020, the net revenue for the natural gas was $0.

 

For the year ended December 31, 2019, the net revenue for the natural gas was $51,736.

 

Cost of Net Revenue

 

    Cost of Net Revenue by Segment   % Change
    Year Ended   Year Ended   of Cost of
    December 31, 2020   December 31, 2019   Net Revenue
Segment       % of total       % of total    
Bromine   $ 15,950,812       82 %   $ 4,815,890       89 %     231
Crude Salt     3,464,222       18 %     564,091       10 %     514 %
Chemical Products                              
Natural Gas                 50,288       1 %     (100 %) 
Total   $ 19,415,034       100 %   $ 5,430,269       100 %     257 %

 

Cost of net revenue reflects mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was $19,415,034 for the year ended December 31, 2020, an increase of $13,984,765(or 257%) as compared to the same period in 2019 As a percentage of sales, cost of net revenue was 69% in fiscal year 2020 versus 51% in fiscal year 2019.

 

Bromine production capacity and utilization of our factories

 

The table below represents the annual capacity and utilization ratios for all of our bromine producing properties:

 

    Annual Production Capacity (in tonnes)   Utilization
Ratio (i)
Fiscal year 2019     31,506       19
Fiscal year 2020     31,506       25 %
Variance of the fiscal year 2020 and 2019     0       6

 

  (i) Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes.

 

Our utilization ratio was 25% for the year ended December 31, 2020. an increase of 6% compared to that for the year ended December 31, 2019 because four plants resumed production in the year ended December 31, 2020 compared to two plants in operations in the year ended December 31, 2019.

 

Bromine segment

 

For the year ended December 31, 2020 the cost of net revenue for the bromine segment was $15,950,812.

 

For the year ended December 31, 2019 the cost of net revenue for the bromine segment was $4,815,890.

 

As a percentage of sales, cost of net revenue of the bromine segment was 63% in fiscal year 2020 versus 48% in fiscal year 2019.

 

Crude salt segment

 

For the year ended December 31, 2020 the cost of net revenue for the crude salt segment was $3, 464,222.The cost of net revenue for our crude salt segment for the year ended December 31, 2019 was $564,091.

 

As a percentage of sales, cost of net revenue of the crude salt segment was 115% in fiscal year 2020 versus 108% in fiscal year 2019.

 

Chemical products segment

 

Cost of net revenue for our chemical products segment for the fiscal year 2020 and 2019 was $0.

 

Natural gas segment

 

Cost of net revenue for our natural gas segment for the year ended December 31, 2020 and 2019 was $0 and $50,288.

 

24 

 

Gross Profit. Gross profit was $8,791,990, or 31%, of net revenue for the year ended December 31, 2020 compared to $5,166,252, or 49%, of net revenue for the same period in 2019.

 

    Gross Profit (Loss) by Segment   % Point Change
    Year Ended   Year Ended   of Gross
    December 31, 2020   December 31, 2019   Profit Margin
Segment       Gross Profit (loss) Margin       Gross Profit (loss) Margin    
Bromine   $ 9,233,996       37 %   $ 5,206,136       52 %     (15 %)
Crude Salt     (442,006 )     (15 %)      (41,332 )     (8 %)      (7 %)
Chemical Products                              
Natural Gas                 1,448       3 %     (3 %) 
Total Gross Profit   $ 8,791,990       31 %   $ 5,166,252       49 %     (18 %)

 

Bromine segment

 

For the year ended December 31, 2020, the gross profit margin for our bromine segment was 37%. This 15% decrease was primarily attributable to the increase in factory overhead per unit produced due to depreciation charges of plant and equipment that were placed in service in March and April in 2020 and the lower average selling price of bromine of $4,228 per ton in the year ended December 31, 2020 compared to $4,319 per ton in the year ended December 31, 2019.

 

For the year ended December 31, 2019, the gross profit margin for our bromine segment was 52%.

 

Crude salt segment

 

For the year ended December 31, 2020, the gross loss margin for our crude salt segment was 15%, compared to 8% in the year ended December 31, 2019. This 7% decrease was primarily attributable to the lower selling price of crude salt offset by the lower allocation of depreciation charges for plant and equipment put into use in March and April 2020 resulting from higher volume of production crude salt in the year ended December 31, 2020 compared to the previous year.

 

Direct labor and factory overheads incurred during plant shutdown. On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang City of PRC stating that production at all its bromine and crude salt and chemical factories should be halted immediately in order for the Company to perform rectification and improvement in accordance with the county’s new safety and environmental protection requirements. On November 24, 2017, the Company received a letter from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants located in the second living area of the Qinghe Oil Extraction Plant to Bohai Park. As such, direct labor and factory overhead costs (including depreciation of plant and machinery) related to factories that have not resumed production of a total amount of $8,170,390 and $15,175,280 for fiscal years 2020 and 2019 were presented as operating expenses instead of in cost of revenue. The decrease in the direct labor and factory overheads incurred during plant shutdown in the year ended December 31, 2020 compared to the same period in 2019 was due to five plants not in operation in 2019, but only three were not in operation in 2020.

 

General and Administrative Expenses. General and administrative expenses were $10,239,943 for the year ended December 31, 2020, a decrease of $3,032,978 (or 23%) as compared to$13,272,921 for the same period in 2019. This decrease was primarily attributable to repairs costs incurred for damages to the factories caused by the flooding resulting from Typhoon Lekima in fiscal year 2019.

 

25 

 

Loss from Operations. Loss from operations was $9,683,392 for the fiscal year 2020, compared to a loss of $23,294,383 in the same period in 2019.

 

    Income (loss) from Operations by Segment
    Year ended December 31, 2020     Year ended December 31, 2019
Segment:       % of total         % of total
Bromine   $ 1,616,542       (33 %)   $ (15,609,979 )     68 %
Crude Salt   $ (3,589,494 )     73 %   $ (4,446,900 )     19 %
Chemical Products   $ (2,745,297 )     56 %   $ (2,823,298 )     12 %
Natural Gas   $ (204,514 )     4 %   $ (188,949 )     1 %
Loss from operations before corporate costs   $ (4,922,763 )     100 %   $ (23,069,126 )     100 %
Corporate costs   $ (2,928,603 )           $ (646,914 )        
Unrealized gain (loss) on translation of intercompany balance   $ (1,832,026           $ 421,657          
Loss from operations   $ (9,683,392 )           $ (23,294,383 )        

 

Bromine segment

 

Income from operations from our bromine segment was $1,616,542 for the fiscal year 2020, compared to a loss of $15,609,979 in the same period in 2019.

 

Crude salt segment

 

Loss from operations from our crude salt segment was $3,589,494 for fiscal year 2020, compared to a loss of $4,446,900 in the same period in 2019.

 

Chemical products segment

 

Loss from operations from our chemical products segment was $2,745,297 for the fiscal year 2020, compared to a loss of $2,823,298 in the same period in 2019.

 

Natural gas segment

 

Loss from operations from our natural gas segment was $204,514 for the fiscal year 2020, compared to a loss of $188,949 in the same period in 2019.

 

Other Income, Net. Other income, net, which represent bank interest income, net of finance lease interest expense was $154,877 for the fiscal year 2020, a decrease of $146,448 (or approximately 49%) as compared to the same period in 2019.

 

Net Income (loss). Net loss was $8,420,044 for the fiscal year 2020, compared to net loss of $25,800,045 in the same period in 2019. This decrease in the net loss was mainly attributable to the commencement of production and sales at four plants in 2020, resulting in less losses than in 2019.

 

Effective Tax Rate. Our effective income tax (expense) benefit rate for the fiscal years 2020 and 2019 were 12% and (12%) respectively. The effective tax rate for the fiscal years 2020 was lower than the PRC statutory income tax rate of 25% mainly due to a non-deductible item in connection with the unrealized exchange loss and an increase in valuation allowance recorded for deferred tax assets arising from net operating losses of the parent company.

 

26 

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of December 31, 2020, cash and cash equivalents were $94,222,538 as compared to $100,301,986 as of December 31, 2019.  The components of this decrease of $6,079,448 are reflected below.

 

Statement of Cash Flows
    Years Ended December 31
    2020   2019
Net cash (used in) provided by operating activities   $ 9,305,627     $ (15,309,112
Net cash used in investing activities   $ (21,719,369 )   $ (60,611,949 )
Net cash used in financing activities   $ (264,976 )   $ (275,509 )
Effects of exchange rate changes on cash and cash equivalents   $ 6,599,270     $ (2,500,379 )
Net decrease in cash and cash equipment   $ (6,079,448 )   $ (78,696,949 )

 

For the fiscal years 2020 and 2019, we met our working capital and capital investment requirements by using cash flows from operations and cash on hand.

 

Net Cash Provided by Operating Activities

 

During the year ended December 31, 2020, cash flows provided by operating activities of approximately $8.3 million was mainly due to non-cash adjustments related to depreciation and amortization of property, plant and equipment of $16.0 million, unrealized translation loss of $1.8 million and stock-based compensation expense of $2.4 million reduced by net loss of $8.4 million.

 

During the year ended December 31, 2019, cash flow used in operating activities of approximately $15 million was mainly due to a net loss of $25.8 million, an increase in accounts receivable of $5.07 million, reduced by a non-cash adjustment related to a decrease in deferred tax assets of $2.7 million and to depreciation and amortization of property, plant and equipment.

 

Accounts receivable

 

Cash collections on our accounts receivable had a major impact on our overall liquidity. The following table presents the aging analysis of our accounts receivable as of December 31, 2020 and 2019.

 

    December 31, 2020   December 31, 2019
        % of total       % of total
Aged 1-30 days   $ 3,801,417       58   $        
Aged 31-60 days     2,720,381       42            
Aged 61-90 days                        
Aged 91-120 days                        
Aged 121-150 days                 506,703       10 %
Aged 151-180 days                 2,368,495       49 %
Aged 181-210 days                 2,001,908       41 %
Aged 211-240 days                        
Total   $ 6,521,798       100 %   $ 4,877,106       100 %

 

The overall accounts receivable balance as of December 31, 2020 increased by $1,644,692, as compared to those of December 31, 2019. We have policies in place to ensure that sales are made to customers with an appropriate credit history. We perform ongoing credit evaluation on the financial condition of our customers. All receivables were collected in the January through March in 2021.

 

27 

 

Inventory

 

Our inventory consists of the following:

 

    December 31, 2020   December 31, 2019
        % of total       % of total
Raw materials   $ 21,484       5 %   $ 20,928       3 %
Finished goods     398,125       95 %     669,159       97 %
Total   $ 419,609       100 %   $ 690,087       100 %

 

The net inventory level as of December 31, 2020 decreased by $270,478, as compared to the net inventory level as of December 31, 2019.

 

Raw materials increased by $556 as of December 31, 2020 as compared to December 31, 2019.

 

Finished goods decreased by $271,034 as of December 31, 2020 as compared to December 31, 2019.

 

Net Cash Used In Investing Activities

 

For the fiscal year 2020, we used approximately $22 million to acquire property, plant and equipment for the chemical factory.

 

For the fiscal year 2019, we used approximately $61 million to acquire property, plant and equipment for the bromine and crude salt factories.

 

Net Cash Used In Financing Activities

 

We have no major financing activities for the year ended December 31, 2020.

 

We believe that our available funds and cash flows generated from operations will be sufficient to meet our anticipated ongoing operating needs for the next twelve months.

 

We had available cash of approximately $94 million at December 31, 2020, all of which is in highly liquid current deposits which earn no or little interest. We do not anticipate paying cash dividends in the foreseeable future.

 

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

 

We may not be able to identify, successfully integrate or profitably manage any businesses or business segment we may acquire, or any expansion of our business. An expansion may involve a number of risks, including possible adverse effects on our operating results, diversion of management’s attention, inability to retain key personnel, risks associated with unanticipated events and the financial statement effect of potential impairment of acquired intangible assets, any of which could have a materially adverse effect on our condition and results of operations. In addition, if competition for acquisition candidates or operations were to increase, the cost of acquiring businesses could increase materially. We may effect an acquisition with a target business which may be financially unstable, under-managed, or in its early stages of development or growth. Our inability to implement and manage our expansion strategy successfully may have a material adverse effect on our business and future prospects.

 

Contractual Obligations and Commitments

 

We have no significant contractual obligations not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. Additional information regarding our contractual obligations and commitments at December 31, 2020 is provided in the notes to our consolidated financial statements. See “Notes to Consolidated Financial Statements, Note 19 - Capital Commitment and Other Service Contractual Obligations.”

 

28 

 

Material Off-Balance Sheet Arrangements

 

We do not currently have any off-balance sheet arrangements falling within the definition of Item 303(a) of Regulation S-K.

 

Critical Accounting Policies and Estimates

 

Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which requires us to make judgments, estimates and assumptions. See “Note 1 – Nature of Business and Summary of Significant Accounting Policies,” in Notes to the Consolidated Financial Statements, which is included in “Item 8. Financial Statements and Supplementary Data,” which describes our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The methods, estimates and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.

 

Our most critical estimates include:

 

  · allowance for doubtful accounts, which impacts revenue;
  · the valuation of inventory, which impacts gross margins;
  · impairment of long-lived assets;
  · the valuation and recognition of share-based compensation, which impacts operating expenses; and
  · the recognition and measurement of deferred income taxes, which impact our provision for taxes.

 

Allowance for Doubtful Accounts

 

We makes estimates of the uncollectibility of accounts receivable, especially analyzing accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts. Credit evaluations are undertaken for all major sale transactions before shipment is authorized. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If management were to make different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could result.

 

Inventory Valuation

 

Inventory is stated at the lower of cost or market, with cost determined on a first-in first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated market value based upon assumptions about future demand. We evaluate the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required in the future, which could have a material adverse effect on our results of operations.

 

Depreciation of Property, Plant and Equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives. All other ordinary repair and maintenance costs are expensed as incurred. Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter. In some situations, the life of the asset may be extended or shortened if circumstances arise that would lead us to believe that the estimated life of the asset has changed. The life of leasehold improvements may change based on the extension of lease contracts with our landlords. Changes in the estimated lives of assets will result in an increase or decrease in the amount of depreciation recognized in future periods.

 

29 

 

Impairment of Long Lived Assets

 

We periodically evaluate whether events or circumstances have occurred that indicate long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.

 

Valuation Allowance on Deferred Tax Assets

 

We evaluate our deferred income tax assets to determine if valuation allowances are required or should be adjusted. A valuation allowance is established against our deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with expiring unused tax attributes and tax planning alternatives. In making such judgments, significant weight is given to evidence that can be objectively verified.

 

Stock-based compensation

 

We account for stock-based compensation in accordance with the fair value recognition provisions of U.S. GAAP. We use the Black-Scholes model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them, the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements. The assumptions for expected volatility and expected term are the two assumptions that significantly affect the grant date fair value. Changes in expected risk-free rate of return do not significantly impact the calculation of fair value, and determining this input is not highly subjective.

 

We use annualized historical stock price volatility which is deemed to be appropriate to serve as the expected volatility of our stock price and is assumed to be constant and prevailing. The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected life is based on historical option exercise pattern.

 

Recent Accounting Pronouncements

 

See “Note 1 – Nature of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on the consolidated financial statements.

 

Item 7A. 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 8. Financial Statements and Supplementary Data

 

The financial statements and supplementary data required by this item are included in a separate section of this Report. See “Index to Consolidated Financial Statements” on Page F-1.

 

30 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020 and 2019

 

C O N T E N T S

 

  PAGE
   
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
   
CONSOLIDATED BALANCE SHEETS F-3
   
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) F-4
   
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY F-5
   
CONSOLIDATED STATEMENTS OF CASH FLOWS F6 – F-7
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 – F-29
   
FINANCIAL STATEMENT SCHEDULE:  
   
SCHEDULE I – PARENT ONLY FINANCIAL INFORMATION S-1 – S-2

 

F-1 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Gulf Resources, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Gulf Resources, Inc. and Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and schedules (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

 

Impairment of Long-Lived Assets

 

As discussed in Note 2(j) to the consolidated financial statements, long-lived assets held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Management did not carry out an impairment assessment on its long-lived assets as it determined that there were no such events or changes in circumstances indicating possible impairment.

 

The principal considerations for our determination that performing procedures relating to the impairment of long-lived assets is a critical audit matter are the use of significant judgment and subjective factors in management’s assessment of any changes in events or circumstances that may affect the carrying amount of its long-lived assets.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included the following:

 

·Reviewing the sales volume and average selling prices of bromine and crude salt against past results and current market conditions;

·Evaluating assumptions used in management’s projection of future income to determine whether they reflect any indication of change in events or circumstances that may affect the carrying amount of its long-lived assets; and

·Conducting inquiries of management on any adverse trend that may affect the carrying amount of long-lived assets.

 

Deferred Tax Asset Valuation Allowance

 

As discussed in Note 14 to the consolidated financial statements, the Company recognized a valuation allowance to the extent that more likely than not some portion or all of the deferred tax assets will not be realized.

 

The principal considerations for our determination that performing procedures relating to the realization of the deferred tax assets is a critical audit matter are the use of significant judgment by management when assessing the forecast of future taxable income and the assumption that there is no change in future tax regulations, all of these which may be affected by future market or economic conditions, regulatory and political changes. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s assessment and evaluation of the amount of valuation allowances required to offset the deferred tax assets.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included the following:

 

·Evaluating the reasonableness of key assumptions and estimates used by management in the taxable income projection in the light of its past performances, existing operating capabilities, requirements and plans;

·Evaluating the reasonableness of assumption used in the carryforward of losses and the timing of reversal taking into consideration the existing tax law; and

·Testing the completeness, accuracy, and relevance of underlying data in the projection.

 

Loss Contingencies

 

As discussed in Notes 2(t) and 20 to the consolidated financial statements, the Company accrues for loss contingencies relating to legal matters when such liabilities become probable and reasonably able to be estimated. In August 2018, written decisions of administrative penalty (“Written Decisions”) were served by the Shouguang City Natural Resources and Planning Bureau (“Bureau”) on the Company challenging the land use of six of its bromine and crude salt factories. In May 2019, written decisions of administrative ruling (“Court Rulings”) were made by the Court in favor of the Bureau. The Court orders, among other relief, to enforce each of the Written Decisions, to return each subject land to its legal lessor and demolish or confiscate the buildings and facilities thereon and restore the land to its original state within 10 days from the service of the Court Rulings. As described by management, the Company believes that the likelihood of the enforcement of the Written Decisions and Court Rulings is remote and therefore did not accrue for any estimated losses or impairment losses related to property, plant and equipment, finance lease right-of-use assets and operating lease right-of-use assets.

 

The principal consideration for our determination that performing procedures relating to the loss contingency arising from the Written Decisions and Court Rulings is a critical audit matter is the highly complex, judgmental and subjective process involved in management’s assessment of the likelihood of the enforcement of the Written Decisions and related Court Rulings. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s assessment and conclusion.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included the following:

 

·Gaining an understanding of the matter by reviewing the documentation related to the Written Decisions and Court Rulings;

·Gaining an understanding of the matter by reviewing documentation that management received from the Bureau and the local city government in respect of the commencement of production of the bromine and crude salt factories;

·Gaining an understanding of the latest progress of the matter by visiting the Bureau’s office in Shouguang City to conduct an interview with the officer-in-charge;

·Obtaining and evaluating the legal representation letters from external legal counsels for significant legal actions; and

·Evaluating the sufficiency of the loss contingencies disclosures.

 

/s/ Morison Cogen LLP

 

We have served as the Company’s auditor since 2011.

 

Blue Bell, Pennsylvania

 

April 8, 2021

 

F-2 

 

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

 

    December 31, 2020   December 31, 2019
Current Assets                
Cash   $ 94,222,538     $ 100,301,986  
Accounts receivable     6,521,798       4,877,106  
Inventories, net     419,609       690,087  
Prepayments and deposits     6,146,461       1,332,970  
Prepaid land leases            
Other receivables     559       559  
Total Current Assets     107,310,965       107,202,708  
Non-Current Assets                
Property, plant and equipment, net     148,947,689       137,994,949  
Finance lease right-of use assets     186,272       179,526  
Operating lease right-of –use assets     8,868,661       8,817,884  
Prepaid land leases, net of current portion     10,134,004       9,115,276  
Deferred tax assets     18,590,227       15,940,642  
Total non-current assets     186,726,853       172,048,277  
Total Assets   $ 294,037,818     $ 279,250,985  
Commitment and Contingencies                
Liabilities and Stockholders’ Equity                
Current Liabilities                
Payable and accrued expenses   $ 5,081,701     $ 1,106,048  
Retention payable     -       3,805,483  
Taxes payable-current     1,326,179       779,623  
Finance lease liability, current portion     217,070       198,506  
Operating lease liabilities, current portion     477,350       416,604  
Total Current Liabilities     7,102,300       6,306,264  
Non-Current Liabilities                
Finance lease liability, net of current portion     1,888,903       1,905,772  
Operating lease liabilities, net of current portion     8,022,342       7,931,849  
Total Non-Current Liabilities     9,911,245       9,837,621  
Total Liabilities     17,013,545       16,143,885  
                 
Commitment and Contingencies     —        —   
                 
Stockholders’ Equity                
PREFERRED STOCK; $0.001 par value; 1,000,000 shares authorized; none outstanding                
COMMON STOCK; $0.0005 par value; 80,000,000 shares authorized; 10,043,307and 9,563,257 shares issued; and 9,997,477 and 9,517,427 shares outstanding as of December 31, 2020 and December 31, 2019     24,139       23,904  
Treasury stock; 45,830 and 45,830  shares as of December 31, 2020 and December 31, 2019 at cost     (510,329 )     (510,329 )
Additional paid-in capital     97,435,316       95,043,388  
Retained earnings unappropriated     151,388,356       159,808,400  
Retained earnings appropriated     24,233,544       24,233,544  
Accumulated other comprehensive income (loss)     4,453,247       (15,491,807 )
Total Stockholders’ Equity     277,024,273       263,107,100  
Total Liabilities and Stockholders’ Equity   $ 294,037,818     $ 279,250,985  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Expressed in U.S. dollars)

 

    Years Ended December 31,
    2020   2019
         
NET REVENUE   $ 28,207,024     $ 10,596,521  
                 
OPERATING EXPENSE                
Cost of net revenue     (19,415,034 )     (5,430,269 )
Sales, marketing and other operating expenses     (42,663 )     (12,434 )
Direct labor and factory overheads incurred during plant shutdown     (8,170,390 )     (15,175,280 )
General and administrative expenses     (10,239,943 )     (13,272,921 )
Other operating expense     (22,386      
                 
      (37,890,416 )     (33,890,904 )
                 
LOSS FROM OPERATIONS     (9,683,392 )     (23,294,383 )
                 
OTHER INCOME (EXPENSE)                
Interest expense     (136,430 )     (145,445 )
Interest income     291,307       446,770  
LOSS BEFORE INCOME TAXES     (9,528,515 )     (22,993,058 )
                 
INCOME TAX (EXPENSE) BENEFIT     1,108,471       (2,806,987
NET LOSS   $ (8,420,044 )   $ (25,800,045 )
                 
COMPREHENSIVE INCOME (LOSS):                
NET LOSS   $ (8,420,044 )   $ (25,800,045 )
OTHER COMPREHENSIVE INCOME (LOSS)                
- Foreign currency translation adjustments     19,945,054       (5,013,759 )
COMPREHENSIVE INCOME (LOSS)   $ 11,525,010     $ (30,813,804 )
                 
BASIC AND DILUTED LOSS PER SHARE   $ (0.87 )   $ (2.73 )
                 
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES:     9,650,619       9,465,432  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2020 AND 2019
(Expressed in U.S. dollars)

  

    Common stock  

Treasury

stock

Additional

paid-in

capital

Retained

earnings

unappropriated

Retained

earnings

appropriated

Accumulated

other

comprehensive

Income(loss)

Total

Number

of shares

issued

Number

of shares

outstanding

Number

of treasury

stock

Amount
BALANCE AT JANUARY 1, 2019     9,411,401       9,361,571       49,830     $ 23,525     $ (554,870 )   $ 95,020,808     $ 185,608,445     $ 24,233,544     $ (10,478,048 )   $ 293,853,404  
Currency translation  adjustment                                   —-                   (5,013,759 )     (5,013,759 )
Shares issued from treasury stock for services           4,000       (4,000 )           44,541       (22,941 )                       21,600  
Cashless exercise of stock options     151,856       151,856             379             (379 )                        
Issuance of stock options to employees                                             45,900                               45,900  
Net loss for year ended December 31, 2019                                         (25,800,045 )                 (25,800,045 )
BALANCE AT DECEMBER 31, 2019     9,563,257       9,517,427       45,830     $ 23,904     $ (510,329 )   $ 95,043,388     $ 159,808,400     $ 24,233,544     $ (15,491,807 )   $ 263,107,100  
                                                                                   

 

BALANCE AT JANUARY 1, 2020

      9,563,257       9,517,427       45,830     $ 23,904     $ (510,329 )   $ 95,043,388     $ 159,808,400     $ 24,233,544     $ (15,491,807 )   $ 263,107,100  
Restricted shares issued for services       480,050       480,050             235             2,391,928                         2,392,163  
Currency translation adjustment                                     —-                   19,945,054       19,945,054  

Net loss for year ended December 31, 2020

                                          (8,420,044 )                 (8,420,044 )

BALANCE AT DECEMBER 31, 2020

      10,043,307       9,997,477       45,830     $ 24,139     $ (510,329 )   $ 97,435,316     $ 151,388,356     $ 24,233,544     $ 4,453,247     $ 277,024,273  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5 

 

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

 

    Years Ended December 31,  
    2020   2019  
CASH FLOWS FROM OPERATING ACTIVITIES                
Net loss   $ (8,420,044 )   $ (25,800,045 )
Adjustments to reconcile net income to net cash (used in) provided by operating activities:                
Interest on capital lease obligation     135,936       144,881  
Depreciation and amortization     15,987,860       14,060,927  
Unrealized translation difference     1,832,026       (421,657 )
Deferred tax asset     (1,108,471     2,746,770  
Stock-based compensation expense     2,392,163       45,900  
Shares issued from treasury stock for services           21,600  
Changes in assets and liabilities                
Accounts receivable     (1,161,704 )     (5,070,180
Other receivables           11,794  
Inventories     292,101       (700,476
Prepayment and deposits     (6,925     14,166  
Accounts and Other payable and accrued expenses     342,790       (102,963 )
Taxes payable     (449,915 )     (374,575
Prepaid land leases     (372,259 )      
Operating lease     (157,931     114,746  
Net cash provided by (used in) operating activities     9,305,627       (15,309,112
                 
CASH FLOWS FROM INVESTING ACTIVITIES                
Purchase of property, plant and equipment     (21,719,369 )     (60,611,949 )
Net cash used in investing activities     (21,719,369 )     (60,611,949 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES                
Repayment of finance lease obligation     (264,976 )     (275,509 )
Net cash used in financing activities     (264,976 )     (275,509 )
                 
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS     6,599,270       (2,500,379 )
NET DECREASE IN CASH AND CASH EQUIVALENTS     (6,079,448 )     (78,696,949 )
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR     100,301,986       178,998,935  
CASH AND CASH EQUIVALENTS - END OF YEAR   $ 94,222,538     $ 100,301,986  

 

F-6 

 

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

 

    Years Ended December 31,
    2020   2019
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
Cash paid during the year for:                
Income taxes   $     $  
Interest on finance lease obligation   $ 136,774     $ 149,286  
Operating right-of-use assets obtained in exchange for lease obligations   $     $ 8,241,818  
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES                
Purchase of Property, plant and equipment included in Payable and
accrued expenses
  $ 3,537,644     $ 3,515,132  
Par value of common stock issued upon cashless exercise of options   $     $ 379  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

  (a) Basis of Presentation and Consolidation

 

The accompanying audited consolidated financial statements have been prepared by Gulf Resources, Inc. (“Gulf Resources”). a Nevada corporation and its subsidiaries (collectively, the “Company”).

 

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

 

  (b) Nature of Business

 

The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited (“SCHC”) and manufactures chemical products for use in the oil industry, pesticides, paper manufacturing industry and for human and animal antibiotics through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”) in the People’s Republic of China (“PRC”). DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt) in the PRC. DCHC’s business commenced trial operation in January 2019 but suspended production temporarily in May 2019 as required by the government to obtain project approval (see Note 1 (b)(iii)).

 

On March 11, 2020, the World Health Organization (WHO) officially declared COVID-19 a pandemic. The duration and intensity of the impact of the COVID-19 and resulting disruption to the Company’s operations and financial position is uncertain. While our operations are currently not materially affected, it is unknown whether or how they may be affected if such a pandemic persists for an extended period. While not yet quantifiable, the Company believes this situation did not have a material adverse impact on its operating results in the year of 2020 and will continue to assess the financial impact. The virus outbreak slightly delayed the commencement of the operations for Factory No.1, No.4, No.7, No.9, and it may also delay the approval for the remaining three factories No.2, No.8 and No.10.

 

(i) Bromine and Crude Salt Segments

 

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

 

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

 

F-8 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

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

 

(ii) Chemical Segment

 

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

 

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

 

The Company believes this relocation process will cost approximately $64 million in total. The Company incurred relocation costs comprising prepaid land lease, professional fees related to the design of the new chemical factory, and progress payments and deposits for the construction of the new factory building in the amount of $33,496,295 and $10,320,017, which were recorded in the prepaid land leases, prepayments and deposits and property, plant and equipment in the consolidated balance sheets as of December 31, 2020 and 2019. 

 

(iii) Natural Gas Segment

 

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

 

  (c) Use of Estimates

 

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  The most significant accounting estimates with regard to these consolidated financial statements that require the most significant and subjective judgments include, but are not limited to, useful lives of property, plant and equipment, recoverability of long-lived assets, determination of impairment losses, assessment of market value of inventories and provision for inventory obsolescence, allowance for doubtful accounts, recognition and measurement of deferred income taxes, valuation allowance for deferred tax assets, and assumptions used for the valuation of share based payments.  Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.

 

F-9 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

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

 

  (d) Cash and Cash Equivalents

 

Cash and cash equivalents consist of all cash balances and highly liquid investments with original maturities of three months or less. Because of short maturity of these investments, the carrying amounts approximate their fair values.

 

  (e) Accounts receivable and Allowance for Doubtful Accounts

 

Accounts receivable is stated at cost, net of allowance for doubtful accounts. The normal credit term extended to customers ranges between 90 and 240 days. The company reviews all receivables that exceed the term. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade and other receivables. A considerable amount of judgment is required in assessing the amount of allowance and the Company considers the historical level of credit losses. The Company makes judgments about the credit worthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customer begins to deteriorate, resulting in their inability to make payments within credit term provided, an allowance may be required.

 

As of December 31, 2020 and December 31, 2019, There were no allowances for doubtful accounts. No allowances for doubtful accounts were charged to the consolidated statements of comprehensive income (loss) for years ended December 31, 2020 and 2019.

 

  (f) Concentration of Credit Risk

 

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

 

Concentrations of credit risk with respect to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition and extends credit terms as and when appropriate.

 

Accounts receivable of $6,521,798 as of December 31, 2020 was fully collected in the period January through February in 2021.

 

  (g) Inventories

 

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

 

F-10 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

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

 

  (h) Property, Plant and Equipment

 

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

 

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

 

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

 

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

 

   

Useful life

(in years)

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

 

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

 

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

 

  (i) Asset Retirement Obligation

 

The Company follows Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), which established a uniform methodology for accounting for estimated reclamation and abandonment costs. FASB ASC 410 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded.

 

F-11 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

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

 

Currently, there are no reclamation or abandonment obligations associated with the land being utilized for exploitation by the bromine and crude salt factories. Also, for the two chemical plants that are to be relocated, currently, there are no obligations to restore the land to its original condition.

 

  (j) Recoverability of Long-lived Assets

 

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

 

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

 

For the year ended December 31, 2020 and 2019, the Company determined that there were no events or circumstances indicating possible impairment of its long-lived assets.

 

  (k) Retirement Benefits

 

Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the consolidated statement of comprehensive income (loss) on an accrual basis when they are due. The Company’s contributions totaled $295,252 and $1,035,687 for the years ended December 31, 2020 and 2019, respectively.

 

F-12 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

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

 

  (l) Mineral Rights

 

The Company follows FASB ASC 805 “Business Combinations” that certain mineral rights are considered tangible assets and that mineral rights should be accounted for based on their substance. Mineral rights are included in property, plant and equipment.

 

  (m) Leases

 

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

 

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

 

The Company has elected not to recognize operating lease ROU assets and liabilities arising from short-term lease.

 

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

 

Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 71,327 and 103,392 shares for the years ended December 31, 2020 and 2019, respectively. These awards could be dilutive in the future if the market price of the common stock increases and is greater than the exercise price of these awards.

 

Because the Company reported a net loss for the years ended December 31, 2020 and 2019, common stock equivalents including stock options and warrants were anti-dilutive, therefore the amounts reported for basic and diluted loss per share were the same.

 

  (o) Reporting Currency and Translation

 

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

 

F-13 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

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

 

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

 

  (p) Foreign Operations

 

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

 

  (q) Revenue Recognition

 

Net revenue is net of discount and value added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized at a point time when the control of the promised goods is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product is deemed to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no rights to return the goods upon acknowledgement of receipt of goods. Revenue from contracts with customers is disaggregated in Note 15.

 

  (r) Income Taxes

 

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

 

  (s) Exploration Costs

 

Exploration costs, which included the cost of researching for appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other resources, are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs are capitalized.

 

F-14 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

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

 

For oil and gas properties, the successful efforts method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expenses. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required before production would begin and when the major capital expenditure depends upon the successful completion of further exploratory work remain capitalized and are reviewed periodically for impairment.

 

  (t) Loss Contingencies

 

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

 

  (u) Stock-based Compensation

 

The Company accounts for stock-based compensation under the provisions of FASB ASC 718, Compensation Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 7I8), Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Prior to this Update, Topic 718 applied only to share-based transactions to employees. Consistent with the accounting requirement for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The Company has elected to account for the forfeiture of stock-based awards as they occur.

 

  (v) New Accounting Pronouncements

 

Recent accounting pronouncements adopted

 

There were no recent accounting pronouncements adopted for the year ended December 31, 2020.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

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

 

F-15 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Expressed in U.S. dollars)

 

NOTE 2 – INVENTORIES

 

Inventories consist of:

 

    December 31,
2020
  December 31,
2019
         
Raw materials   $ 21,484     $ 20,928  
Finished goods     398,125       669,159  
    $ 419,609     $ 690,087  

 

The was no allowance for slow-moving inventories as of December 31, 2020 and 2019.

 

NOTE 3 – PREPAID LAND LEASES

 

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

 

In December 2017, the Company paid a one lump sum upfront amount of $9,746,108 for a 50-year lease of a parcel of land at Bohai Marine Fine Chemical Industrial Park (“Bohai”) for the new chemical factory to be built. There is no purchase option at the end of the lease term. This was classified as an operating lease prior to and as of January 1, 2019. The land use certificate was issued on October 25, 2019. The lease term expires on August 12, 2069. The amount paid was recorded as prepaid land leases, net of current portion in the consolidated balance sheet as of December 31 2020 and 2019. As of December 31, 2020, the prepaid land lease increased to $10,134,004 due to an additional amount paid for stamp duty and related land use rights fees. Amortization of this prepaid land lease will commence when the chemical factory is built and placed in service.

 

In June 2020, the construction of the new chemical factory commenced and is expected to be completed around June 2021.

  

F-16 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

(Expressed in U.S. dollars)

 

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET

 

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

 

    December 31,
2020
  December 31,
2019
At cost:                
Mineral rights   $ 2,955,780     $ 2,764,462  
Buildings     64,024,667       59,880,567  
Plant and machinery     258,400,710       234,669,007  
Motor vehicles     6,553       6,129  
Furniture, fixtures and office equipment     3,318,564       3,235,736  
Construction in process     12,095,565       1,204,742  
Total     340,801,839       301,760,643  
Less: Accumulated depreciation and amortization     (173,212,554 )     (146,330,705 )
Impairment     (18,641,596 )     (17,434,989 )
Net book value   $ 148,947,689     $ 137,994,949  

 

The Company has certain buildings and salt pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships or the government authority. The Company has not been able to obtain property ownership certificates over these buildings and salt pans. The aggregate carrying values of these properties situated on parcels of the land are $19,302,600 and $19,894,947 as at December 31, 2020 and December 31, 2019, respectively.

 

During the year ended December 31, 2020, depreciation and amortization expense totaled $15,982,485 of which $5,512,920, $815,605 and $9,653,960 were recorded in direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue respectively.

 

During the year ended December 31, 2019, depreciation and amortization expense totaled $13,991,583 of which $ 10,796,085, $848,345 and $2,347,153 were recorded in direct labor and factory overheads incurred during plant shutdown, administrative expenses and cost of net revenue respectively.

 

There were no impairment losses recorded in the years ended December 31, 2020 and 2019. The increase in the impairment of $1,206,607 from $17,434,989 at December 30, 2019 was due to currency translation adjustment.

 

NOTE 5 –FINANCE LEASE RIGHT-OF-USE ASSETS

 

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

 

    December 31,
2020
  December 31,
2019
At cost:                
Buildings   $ 126,120     $ 117,956  
Plant and machinery     2,307,184       2,157,848  
Total     2,433,304       2,275,804  
Less: Accumulated depreciation and amortization     (2,247,032 )     (2,096,278 )
Net book value   $ 186,272     $ 179,526  

 

F-17 

 

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

 

During the year ended December 31, 2020, depreciation and amortization expense totaled $5,375, respectively, which was recorded in direct labor and factory overheads incurred during plant shutdown.

 

During the year ended December 31, 2019, depreciation and amortization expense totaled $69,344, respectively, which was recorded in direct labor and factory overheads incurred during plant shutdown.

 

NOTE 6 – OPERATING LEASE RIGHT–OF-USE ASSETS

 

As of December 31, 2020, the total operating lease ROU assets was $8,868,661.

 

The total operating lease cost for the years ended December 31, 2020 and 2019 was $927,745 and $889,683.

 

The Company has the rights to use certain parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships or the government authority (See Note 3). For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels of land of which the Company cannot obtain land use rights certificates covers a total of approximately 38.6 square kilometers with an aggregate operating lease right-of-use assets amount of $8,357,900 as at December 31, 2020.

 

NOTE 7 –PAYABLE AND ACCRUED EXPENSES

 

Payable and accrued expenses consist of the following:

 

    December 31,   December 31,
    2020   2019
Accounts payable   $ 479,958     $ -  
Salary payable     320,549       310,097  
Social security insurance contribution payable     49,167       105,750  
Other payable-related party (see Note 8)     95,616       89,424  
Deposit on subscription of a subsidiary’s share     153,260       144,798  
Accrued expense for construction     3,537,644       97,913  
Accrued expense-others     445,507       358,066  
Total   $ 5,081,701     $ 1,106,048  

 

The deposit on subscription of a subsidiary’s share of $153,260 as of December 31, 2020 relates to sale of non-controlling interests in DCHC.

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

During the fiscal years 2020 and 2019, the Company borrowed $0 and $419,995 from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, has a 100% equity interest. The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand.

 

There was no balance owing to Jiaxing Lighting as of December 31, 2020 and 2019.

 

On September 25, 2012, the Company purchased five floors of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd. (the “Seller”) at a cost of approximately $5.7 million in cash, of which Mr. Ming Yang, the Chairman of the Company, had a 99% equity interest in the Seller. During the first quarter of 2018, the Company entered into an agreement with the Seller, a related party, to provide property management services for an annual amount of approximately $95,613 for five years from January 1, 2018 to December 31, 2022. The expense associated with this agreement for the year ended December 31, 2020 was $90,510. The expense associated with this agreement for the year ended December 31, 2019 was $90,516. Amount owing to the Seller as of December 31, 2020 and 2019 was $95,616 and $89,424.

 

F-18 

 

NOTE 9 – TAXES PAYABLE

 

    December 31,   December 31,
    2020   2019
Land use tax payable   $ 833,576     $ 779,623  
Value added tax and other taxes payable     492,603       -  
    $ 1,326,179     $ 779,623  

 

NOTE 10 –LEASE LIABILITIES-FINANCE AND OPERATING LEASE

 

The components of finance lease liabilities were as follows:

 

    Imputed   December 31,   December 31,
    Interest rate   2020   2019
Total finance lease liability   6.7%   $ 2,105,973     $ 2,104,278  
Less: Current portion         (217,070 )     (198,506 )
Finance lease liability, net of current portion       $ 1,888,903     $ 1,905,772  

 

Interest expenses from capital lease obligations amounted to $135,936 and $144,880 for the years ended December 31, 2020 and 2019, respectively, which were charged to the consolidated statement of comprehensive income (loss).

 

The components of operating lease liabilities as follows:

 

    Discount   December 31,   December 31,
    rate   2020   2019
Total Operating lease liabilities   4.89%   $ 8,499,692     $ 8,348,453  
Less: Current portion         (477,350 )     (416,604
Operating lease liabilities, net of current portion       $ 8,022,342     $ 7,931,849  

 

The weighted average remaining operating lease term at December 31, 2020 was 21.3 years and the weighted average discounts rate was 4.89%, This discount rates used are based on the base rate quoted by the People’s Bank of China and vary with the remaining term of the lease. Lease payments for the years ended December 31, 2020 and 2019, respectively, were $765,288 and $784,540.

 

Maturities of lease liabilities were as follows:

 

    Finance lease   Operating Lease
Payable within:                
the next 12 months   $ 287,669     $ 841,021  
the next 13 to 24 months     287,669       681,399  
the next 25 to 36 months     287,669       688,729  
the next 37 to 48 months     287,669       686,373  
the next 49 to 60 months     287,669       694,187  
thereafter     1,438,345       11,539,854  
Total     2,876,690       15,131,563  
Less: Amount representing interest     (770,717 )     (6,631,871 )
Present value of net minimum lease payments   $ 2,105,973     $ 8,499,692  

 

F-19 

 

NOTE 11 ––EQUITY

 

Reverse Stock Split and Authorized Shares

 

On January 27, 2020, the Company completed a 1-for-5 reverse stock split of the company’s common stock, such that for each five shares outstanding prior to the stock split there was one share outstanding after the reverse stock split. All shares of common stock referenced in this report have been adjusted to reflect the stock split figures.

 

There is no change to the authorized shares of the Company' common stock which remain at 80,000,000.

 

Issuance of Restricted Shares

 

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

 

During the year ended December 31, 2020, the Company granted in the aggregate, 480,050 restricted shares of common stock to a consultant, the company's directors, officers and an employee. The restricted shares award were granted under the 2019 Omnibus Equity Incentive Plan (See Note 13) and vested immediately. The fair value of the award on the date of grant was $2,350,250 which was expensed in full during the year ended December 31, 2020.

 

Retained Earnings - Appropriated

 

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

 

Statutory Common Reserve Funds

 

SCHC, SYCI and DCHC are required each year to transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common Reserve Funds until the balance reaches 50% of the registered share capital.  This reserve can be used to make up any loss incurred or to increase share capital.  Except for the reduction of losses incurred, any other application should not result in this reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of December 31, 2020 for SCHC, SYCI and DCHC is 16%, 14% and 0% of its registered capital respectively.

 

Retained earnings - Unappropriated

 

SCHC transferred approximately $84 million ( equivalent to RMB590 million) from its undistributed profit to its paid in capital during the year ended December 31, 2019.

 

NOTE 12 – TREASURY STOCK

 

In January 2019, the Company issued 4,000 shares of common stock from the treasury shares to one of its consultants. The shares were valued at $21,600 based on the closing market price on the date of the agreement and recorded as general and administrative expense in the consolidated statement of comprehensive income (loss) for the year ended December 31, 2019. The shares issued were deducted from the treasury shares at weighted average cost and the excess of the cost over the closing market price was charged to additional paid-in-capital.

 

F-20 

 

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

 

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

 

NOTE 13 – STOCK-BASED COMPENSATION

 

Pursuant to the Company’s 2019 Omnibus Equity Incentive Plan adopted and approved in 2019 (“ 2019 Plan”), awards under the 2019 Plan is limited in the aggregate to 2,068,398 shares of our common stock, inclusive of the awards that were previously issued and outstanding under the Company’s 2007 Equity Incentive Plan, as amended (the “2007 Plan”). Upon adoption and approval of the 2019 Plan, the 2007 Plan was frozen, no new awards will be granted under the 2007 Plan, and outstanding awards under the 2007 Plan will continue to be governed by the terms and condition of the 2007 Plan and applicable award agreement. As of December 31, 2020, the number of shares of the Company’s common stock available for grant of stock options and issuance under the 2019 Plan is 515,648 shares.

 

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

 

On April 1, 2019, the Company granted to one employee options to purchase 30,000 shares of the Company’s common stock, at an exercise price of $4.55 per share and the options vested immediately. The options were valued at $45,900 fair value, with assumed 45.26% volatility, a four-year expiration term with an expected tenor of 1.60 years, a risk free rate of 2.37% and no dividend yield.

 

For the year ended December 31, 2020 and 2019, total compensation costs for options issued recorded in the consolidated statement of comprehensive income (loss) were $0 and $45,900. There were no related tax benefits as a full valuation allowance was recorded in the years ended December 31, 2020 and 2019.

 

F-21 

 

NOTE 13 – STOCK-BASED COMPENSATION – Continued

 

The following table summarizes all Company stock option transactions between January 1, 2020 and December 31, 2020.

 

    Number of Option
and Warrants
Outstanding and exercisable
  Weighted- Average Exercise price of Option
and Warrants
  Range of
Exercise Price per Common Share
Balance, January 1, 2020     135,100       $7.21       $3.57 - $9.9  
Exercised                  
Expired     (13,500)       $8.20       $7.20-$9.90  
Balance, December 31, 2020     121,600       $7.09       $3.57 - $7.27  

 

Stock and Warrants Options Exercisable and Outstanding
            Weighted Average Remaining
    Outstanding at December 31, 2020  

Range of

Exercise Prices

 

Contractual Life

(Years)

Exercisable and outstanding   121,600   $3.57 - $7.27   0.65

 

All options exercisable and outstanding at December 31, 2020 are fully vested. As of December 31, 2020, there was no unrecognized compensation cost related to outstanding stock options,

 

The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2020 and 2019 was $3,330 and $0. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlining options and the stock price of $4.12 and $2.55 for the Company's common stock on December 31, 2020 and 2019.

 

The aggregate intrinsic value of options exercised during the years ended December 31, 2020 and 2019 was $0 and $922,429.

 

During the year ended December 31, 2020 and 2019, 0 and 151,856 shares of common stock were issued upon cashless exercise of 0 and 379,400 options.  

 

F-22 

 

NOTE 14 – INCOME TAXES

 

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

 

  (a) United States (“US”)

 

Gulf Resources, Inc. may be subject to the United States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the years ended December 31, 2020 and 2019, and management believes that its earnings are permanently invested in the PRC.

 

  (b) British Virgin Islands (“BVI”)

 

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the years ended December 31, 2020 and 2019.

 

  (c) Hong Kong

HKJI, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong.  No provision for income tax has been made as it has no taxable income for the years ended December 31, 2020 and 2019.  The applicable statutory tax rates for the years ended December 31, 2020 and 2019 are 16.5%. There is no dividend withholding tax in Hong Kong.

 

  (d) PRC

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

 

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

 

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

 

As of December 31, 2020 and 2019, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $126,643,733 and $124,616,722, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of December 31, 2020 and December 31, 2019, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject to WHT in China. As of December 31, 2020 and December 31, 2019, the unrecognized WHT are $5,288,346 and $5,254,560, respectively.

 

F-23 

 

NOTE 14 – INCOME TAXES – Continued

 

The Company’s income tax returns are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s income tax returns filed in the United States for three years from the date of filing. The Company’s US income tax returns since 2017 are currently subject to examination.

 

Inland Revenue Department of Hong Kong (“IRD”) may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing. For the years 2012 through 2018, HKJI did not report any taxable income. It did not file any income tax returns during these years except for 2014 and 2018. For companies which do not have taxable income, IRD typically issues notification to companies requiring them to file income tax returns once in every four years. The tax returns for 2014 and 2018 are currently subject to examination.

 

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

 

    Years Ended
December 31,
    2020   2019
Current taxes – PRC   $     $  
Deferred taxes – PRC entities     1,108,471       5,546,825  
Deferred taxes –US entity     607,643       319,005  
Change in valuation allowance     (607,643 )     (8,672,817 )
    $ 1,108,471     $ (2,806,987

 

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

 

    Years Ended
December 31,
Reconciliations   2020   2019
Statutory income tax rate     25 %     25 %
Non-taxable (non-deductible) items     (5 %)     1 %
Change in valuation allowance     (8 %)     (38 %)
Effective income tax benefit (expense) rate     12 %     (12 %)

 

As of December 31, 2020 and 2019, the Company had a US Federal net operating loss carry forwards of approximately $4,900,000 and $2,100,000 which are allowed for an indefinite carry forward period but limited to 80% of each subsequent year's net income. The timing and manner in which the Company can utilize operating loss carry forwards in any year may be limited by provisions of the Internal Revenue Code regarding changes in ownership of corporations. Such limitation may have an impact on the ultimate realization of its carry forwards and future tax deductions. In addition, since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, a 100% deferred tax asset valuation allowance was recorded for these net operating losses.

 

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

 

    December 31,   December 31,
    2020   2019
Deferred tax liabilities   $     $  
                 
Deferred tax assets:                
Allowance for obsolete and slow-moving inventories   $     $  
Impairment on property, plant and equipment     2,907,548       2,974,542  
Impairment on prepaid land lease     883,884       826,673  
Exploration costs     1,908,087       1,784,583  
Compensation costs of unexercised stock options     74,883       171,672  
PRC tax losses     21,643,028       18,737,005  
US federal net operating loss     1,045,503       432,000  
Total deferred tax assets     28,462,933       24,926,475  
Valuation allowance     (9,872,706 )     (8,985,833 )
Net deferred tax asset   $ 18,590,227     $ 15,940,642  

 

F-24 

 

The increase in valuation allowance for the year ended December 31, 2020 is $886,873.

 

The increase in valuation allowance for the year ended December 31, 2019 is $8,672,817.

 

The increase in valuation allowance in the year ended December 31, 2019 is mainly attributable to valuation allowance recorded for the deferred tax assets related to a portion of the PRC tax losses that more likely than not will expire before it could be utilized and the exploration costs which more likely than not will not be realized.

 

There were no unrecognized tax benefits and accrual for uncertain tax positions as of December 31, 2020 and 2019.

 

There were no amounts accrued for penalties and interest for the years ended December 31, 2020 and 2019.

 

There were no change in unrecognized tax benefits during the years ended December 31, 2020 and 2019.

 

NOTE 15 – BUSINESS SEGMENTS

 

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

 

Year Ended

December 31, 2020

  Bromine*  

Crude

Salt*

 

Chemical

Products

  Natural Gas  

Segment

Total

  Corporate   Total
Net revenue
(external customers)
  $ 25,184,808     $ 3,022,216     $     $     $ 28,207,024     $     $ 28,207,024  
Net revenue
(intersegment)
                                             
Loss from operations before income tax expense     1,616,542       (3,589,494 )     (2,745,297 )     (204,514 )     (4,922,763 )     (4,760,629 )     (9,683,392 )
Income tax (expense) benefit     (404,135 )     890,331       622,275             1,108,471             1,108,471  
Loss from operations after
income tax  (expense) benefit
    1,212,407       (2,699,163 )     (2,123,022 )     (204,514 )     (3,814,292 )     (4,760,629 )     (8,574,921 )
Total assets     140,043,211       31,602,967       120,746,404       1,636,467       294,029,049       8,769       294,037,818  
Depreciation and amortization     10,714,004       4,672,181       459,558       142,117       15,987,860             15,987,860  
Capital expenditures     3,157,669       646,752       17,914,948             21,719,369             21,719,369  

 

 

Year Ended

December 31, 2019

  Bromine*  

Crude

Salt*

 

Chemical

Products

  Natural Gas  

Segment

Total

  Corporate   Total
Net revenue
(external customers)
  $ 10,022,027     $ 522,758     $     $ 51,736     $ 10,596,521     $     $ 10,596,521  
Net revenue
(intersegment)
                                         
Loss from operations before income tax expense     (15,609,979 )     (4,446,900 )     (2,823,298 )     (188,949 )     (23,069,126 )     (225,257 )     (23,294,383 )
Income tax (expense) benefit     (3,181,343 )     (247,250 )     621,606             (2,806,987 )           (2,806,987 )
Loss from operations after
income tax  (expense) benefit
    (18,791,322 )     (4,694,150 )     (2,201,692 )     (188,949 )     (25,876,113 )     (225,257 )     (26,101,370 )
Total assets     142,568,684       23,352,060       111,506,728       1,732,380       279,159,852       91,133       279,250,985  
Depreciation and amortization     9,625,334       3,833,288       459,613       142,692       14,060,927             14,060,927  
Capital expenditures     57,607,104       3,004,845                   60,611,949             60,611,949  

  

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

 

F-25 

 

    Years Ended
December 31,
Reconciliations   2020   2019
Total segment operating loss   $ (4,922,763 )   $ (23,069,126 )
Corporate costs     (2,928,603 )     (646,914 )
Unrealized gain (loss) on translation of intercompany balance     (1,832,026     421,657  
Loss from operations     (9,683,392 )     (23,294,383 )
Other income, net of expense     154,877       301,325  
Loss before taxes   $ (9,528,515 )   $ (22,993,058 )

 

The following table shows the major customers (10% or more) for the year ended December 31, 2020

 

Number   Customer  

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%)

1   Shandong Morui Chemical Company Limited   $ 4,901     $ 1,062     $     $ 5,963       21.2 %
2   Shandong Brother Technology Limited   $ 3,188     $ 1,083     $     $ 4,271       15.2 %
3   Shouguang Weidong Chemical Company Limited   $ 3,683     $ 876     $     $ 4,559       16.2 %
4   Shandong Shouguang Shenrunfa Ocean Chemical Company Limited   $ 3,320     $     $     $ 3,320       11.8 %
5   Dongying Bomeite Chemical Company Limited   $ 2,970     $     $     $ 2,970       10.5 %

.

 

The following table shows the major customers (10% or more) for the year ended December 31, 2019.

 

Number   Customer  

Bromine

(000’s)

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

(000’s)

 

Percentage of

Total

Revenue (%) 

1   Shandong Morui Chemical Company Limited   $ 2,203     $ 175     $     $ 2,378       22.6 %
2   Shouguang Weidong Chemical Company Limited   $ 1,629     $ 154     $     $ 1,783       16.9 %
3   Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited   $ 1,539     $ 192     $     $ 1,731       16.4 %
4   Shandong Shouguang Shenrunfa Ocean Chemical Company Limited   $ 1,297     $     $     $ 1,297       12.3 %
5   Dongying Bomeite Chemical Company Limited   $ 1,098     $     $     $ 1,098       10.4 %
                                             

 

F-26 

 

NOTE 16– CUSTOMER CONCENTRATION

 

The Company sells a substantial portion of its products to a limited number of customers. During the year ended December 31, 2020, the Company sold 74.9% of its products to its top five customers, respectively. As of December 31, 2020, amounts due from these customers were $5,417,101.

 

The Company sells a substantial portion of its products to a limited number of customers. During the year ended December 31, 2019, the Company sold 78.6% of its products to its top five customers, respectively. As of December 31, 2019, amounts due from these customers were $4,877,106.

 

NOTE 17– MAJOR SUPPLIERS

 

During the year ended December 31, 2020, the Company purchased 100% of its raw materials from its top five suppliers.  As of December 31, 2020, amounts due to those suppliers were $479,958.