NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Basis
of Presentation and Consolidation
The accompanying condensed financial statements
have been prepared by Gulf Resources, Inc (“Gulf Resources”). a Nevada corporation and its subsidiaries (collectively,
the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily
include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash
flows in accordance with accounting principles generally accepted in the United States (“US GAAP”).
In the opinion of management, the unaudited
financial information for the three and nine months ended September 30, 2019 presented reflects
all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position
and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the
Company’s 2018 Form 10-K. Operating results for the interim periods are not necessarily indicative of operating results for
an entire fiscal year.
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the
financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current
events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company
also exercises judgments in the preparation of these condensed financial statements in certain areas, including classification
of leases and related party transactions.
The consolidated financial statements include
the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the
British Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”).
HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited ("SCHC") which owns 100% of Shouguang Yuxin Chemical
Industry Co., Limited (“SYCI”) and Daying County Haoyuan Chemical Company Limited (“DCHC”). All
material intercompany transactions have been eliminated on consolidation.
(b)
Nature of Business
The Company manufactures and trades bromine
and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC") 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)).
(i) Bromine and Crude Salt Segments
On September 1, 2017, the Company received
notification from the Government of Yangkou County, Shouguang City of PRC that production at all its factories should be halted
with immediate effect in order for the Company to perform rectification and improvement in accordance with the county’s new
safety and environmental protection requirements.
The Company worked closely with the county
authorities to develop rectification plans for both its bromine and crude salt businesses and 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
recorded in the plant, property and equipment in the consolidated balance sheet. No such costs were incurred in the three-month
and nine-month periods ended September 30, 2019 and the Company does not expect to incur any additional capital expenditure in
the rectification of its bromine and crude salt factories in respect of meeting the county's new safety and environmental protection
requirement.
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.
In 2018, the Shandong Provincial government
required the local government to conduct “four rating and one comprehensive evaluation” for all of the chemical companies
within its jurisdiction. This has delayed the production commencement schedule of the six bromine and crude salt factories in which
rectification work was completed. On June 29 2018, the Company received a formal notice (dated June 25, 2018) jointly issued by
various provincial government agencies in Shandong Province (the “Notice”) forwarded by the Weifang City Special Operations
Leading Group Office of Safe Production, Transformation and Upgrading of Chemical Industry. In the Notice, the provincial government
agencies set forth further requirements and procedures covering the following four aspects for the chemical industrial enterprises:
project approval, planning approval, land use rights approval and environmental protection assessment approval. Those standards
and procedures apply to all chemical industrial enterprises in Shandong Province including the Company’s bromine plants that
have not completed project approval procedures, planning approval procedures, land use rights approval procedures and environmental
protection assessment procedures. The Company believes that the government will not grant approval to the Company to allow its
bromine and crude salt plants to resume operations until the Company has fully complied with the aforesaid rules set forth in the
Notice.
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.
The Company is not certain when the issuance
of the approval documents will be effected. 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 Company believes the issues related
to the remaining five bromine and crude salt factories which have passed inspection are almost resolved. The Company is actively
working with the local government to obtain the documentation for approval of project, planning, land use rights and environmental
protection evaluation.
(ii) Chemical Segment
On November 24, 2017, the Company received
a letter from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants
located in the second living area of the Qinghe Oil Extraction to the Bohai Marine Fine Chemical Industrial Park (“Bohai
Park”). This is because the two plants are located in a residential area and their production activities will impact the
living environment of the residents. This is as a result of the country’s effort to improve the development of the chemical
industry, manage safe production and curb environmental pollution accidents effectively, and ensure the quality of the living environment
of residents. All chemical enterprises which do not comply with the requirements of the safety and environmental protection regulations
will be ordered to shut down.
The Company believes this relocation process
will cost approximately $60 million in total. The Company incurred relocation costs comprising prepaid land lease and professional
fees related to the design of the new chemical factory in the amount of $10,925,081, which were recorded in the prepaid land leases
and property, plant and equipment in the consolidated balance sheets as of September 30, 2019 and December 31, 2018.
The Company does not anticipate that the
Company’s new chemical factory to be significantly impacted by the Notice. The Company has secured from the government the
land use rights for its chemical plants located at the Bohai Park and presented a completed construction design draft and other
related documents to the local authorities for approval. The Company is still waiting for the last approval report and is uncertain
when the approval will be issued. There could be a delay in the approval process given the ongoing rectification and approvals
process for the Company’s other plants. As the construction of the new factory cannot commence until the final approval from
the government is received, the delay in the receipt of the final approval will delay the commencement date of the construction
of the new factory.
(iii) Natural Gas Segment
In January 2017, the Company completed
the first brine water and natural gas well field construction in Daying located in Sichuan Province and commenced trial production
in January 2019. On May 29, 2019, the Company received a verbal notice from the government of Tianbao Town ,Daying County, Sichuan
Province, whereby the Company is required to obtain project approval for its well located in Daying, including the whole natural
gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve
the related land issue. Until these approvals have been received, the Company has to temporarily halt trial production at its natural
gas well in Daying.
(c) Allowance
for Doubtful Accounts
As of September 30, 2019 and December 31,
2018, There were no allowances for doubtful accounts. No allowances for doubtful accounts were charged to the condensed consolidated
statements of loss for the three-month and nine-month periods ended September 30, 2019 and 2018.
(d) Concentration
of Credit Risk
The Company is exposed to credit risk in
the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the
Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial
Bank of China Limited, China Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise
protected. The Company placed $105,218,569 and $178,998,935 with these institutions as of September 30, 2019 and December 31, 2018,
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.
As of September 30, 2019, proceeds from
accounts receivable balance outstanding of $0.58 million was collected in October 2019, In the amount collected, $0.47 million
was for receivable more than 90 days old. As of December 31, 2018, there were no accounts receivable balances as they were all
collected in the year ended December 31, 2018.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(e) Property,
Plant and Equipment
Property, plant and equipment are stated
at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures
for betterment of existing facilities or equipment are capitalized and depreciated, when available for intended use, using the
straight-line method at rates sufficient to depreciate such costs less 5% residual value over the estimated productive lives. All
other ordinary repair and maintenance costs are expensed as incurred.
Mineral rights are recorded at cost less
accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent
term under the units of production method, whichever is shorter.
Construction in process primarily represents
direct costs of construction of property, plant and equipment. Costs incurred are capitalized and transferred to property, plant
and equipment upon completion and depreciation will commence when the completed assets are placed in service.
The Company’s depreciation and amortization
policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:
|
|
Useful life
(in years)
|
Buildings (including salt pans)
|
|
8 - 20
|
Plant and machinery (including protective shells, transmission channels and ducts)
|
|
3 - 8
|
Motor vehicles
|
|
5
|
Furniture, fixtures and equipment
|
|
3-8
|
Property, plant and equipment under the
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.
(f) Retirement
Benefits
Pursuant to the relevant laws and regulations
in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization.
The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required
contributions under the retirement plans are charged to the condensed consolidated statement of loss on an accrual basis when they
are due. The Company’s contributions totaled $207,175 and $308,669 for the three-month period ended September 30, 2019 and
2018, respectively, and totaled $810,911 and $912,744 for the nine-month period ended September 30, 2019 and 2018, respectively.
(g) Revenue
Recognition
Net revenue is net of discount and value
added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized when the control of the promised
goods is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the
customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product
is deemed to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no
rights to return the goods upon acknowledgement of receipt of goods.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(h) Recoverability
of Long-lived Assets
In accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35“Impairment or Disposal
of Long-lived Assets”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets
are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that
indicate possible impairment.
The Company determines the existence of
such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount
to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount
of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying
amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of
the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the
carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.
For the three and nine months period ended
September 30, 2019, the Company determined that there were no events or circumstances indicating possible impairment of its long-lived
assets.
In the three and nine- month periods ended
September 30, 2018, the Company recorded an impairment loss of $1,284,832 for the mineral rights for factories No 3 and No 4 due
to closure notice from the People's Government of Yangkou Town, Shouguang City and a write-off of $112,481 for write-offs of certain
wells and equipments damaged by flood from a typhoon during third quarter 2018.
(i) Basic
and Diluted Earnings per Share of Common Stock
Basic earnings per common share are based
on the weighted average number of shares outstanding during the periods presented. Diluted earnings per share are computed
using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential
common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the
exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock
equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 587,720 and 259,590
shares for the three-month period ended September 30, 2019 and 2018, respectively, and amounted to 362,206 and 141,629 shares for
the nine-month period ended September 30, 2019 and 2018, 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 three and nine
months ended September 30, 2019 and 2018, 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.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(i) Reporting
Currency and Translation
The financial statements of the Company’s
foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the
functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
As such, the Company uses the “current
rate method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”.
The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet
date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets
of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive loss.
The statement of loss and comprehensive loss is translated at average rate during the reporting period. Gains or losses resulting
from transactions in currencies other than the functional currencies are recognized in net loss for the reporting periods as part
of general and administrative expense. The statement of cash flows is translated at average rate during the reporting period, with
the exception of the consideration paid for the acquisition of business which is translated at historical rates.
(j) 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.
(k) Exploration
Costs
Exploration costs, which included the cost
of researching appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other resources,
are charged to the loss statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs
are capitalized.
For oil and gas properties, the successful
efforts method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient
quantity of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing
the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged
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.
(l) 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.
(m)
Stock-based Compensation
Common stock, stock options and stock warrants
issued are recorded at their fair values estimated at grant date using the Black-Scholes model and the portion that is ultimately
expected to vest is recognized as compensation cost over the requisite service period.
The Company has elected to account for
the forfeiture of stock-based awards as they occur.
(n) New
Accounting Pronouncements
Recent accounting pronouncements adopted
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842). The amendments in this Update specify the accounting for leases. The core principle of Topic 842 is
that a lessee should recognize the assets and liabilities that arise from operating leases. The Company adopted the standard effective
January 1, 2019 under the optional transition method which allows an entity to apply the new lease standard at the adoption date
and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the period of adoption. The
Company elected the available practical expedients. As a result of the adoption of this standard, the Company recognized operating
lease ROU assets of $8,817,327, operating lease liabilities of $8,137,541, and the remaining balance in the prepaid land lease
and accrued expense in the condensed consolidated financial statements as of and for the nine months ended September 30, 2019 with
no cumulative-effect adjustment to retained earnings as of January 1, 2019.
In June 2018, the FASB issued ASU No.2018-07,
Compensation- Stock Compensation (Topic 718). 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 requirements
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 amendments
in the Update are effective for public business entities form fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. The Company adopted this standard as of January 1, 2019. This adoption of this standard does not
have a material impact on the Company’s condensed consolidated financial statements.
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. The Company is currently evaluating the effect of this on the condensed consolidated financial statements and related disclosure.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
September 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 2 – INVENTORIES
Inventories consist of:
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
|
Raw materials
|
|
$
|
20,642
|
|
|
$
|
—
|
|
Finished goods
|
|
|
660,008
|
|
|
|
65,169
|
|
Allowance for obsolete and slow-moving inventory
|
|
|
—
|
|
|
|
(65,169
|
)
|
|
|
$
|
680,650
|
|
|
$
|
—
|
|
NOTE 3 – PREPAID LAND LEASES
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.
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 lease 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 these leases that have commenced were classified as operating lease right-of-use
assets (“ROU”). See Note 6.
In December 2017, the Company paid a one
lump sum upfront amount of $8,990,636 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 is being processed by the government and the commencement date
of the lease will be known upon completion of the application process. Since the construction plan of the factory at Bohai is still
in the process of being approved by the government and the lease term of the land has not commenced, the Company classified the
lease payment in prepaid land lease instead of Right-of –use assets. No amortization of this prepaid land lease was recorded
as of September 30, 2019.
During the three and nine months period
ended September 30, 2018, amortization of prepaid land leases totaled $252,091 and $546,767, which amounts were recorded as direct
labor and factory overheads incurred during plant shutdown.
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 cover a total of approximately 38.6 square kilometers with aggregate carrying value of $599,747
as at December 31, 2018 and 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 $8,570,115 as at September
30, 2019.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
|
|
September 30,
2019
|
|
December 31,
2018
|
At cost:
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
2,726,661
|
|
|
$
|
2,809,977
|
|
Buildings
|
|
|
59,061,773
|
|
|
|
60,866,462
|
|
Plant and machinery
|
|
|
231,460,194
|
|
|
|
161,178,816
|
|
Motor vehicles
|
|
|
6,045
|
|
|
|
6,230
|
|
Furniture, fixtures and office equipment
|
|
|
3,191,491
|
|
|
|
3,289,010
|
|
Construction in process
|
|
|
1,188,268
|
|
|
|
6,535,808
|
|
Total
|
|
|
297,634,432
|
|
|
|
234,686,303
|
|
Less: Accumulated depreciation and amortization
|
|
|
(140,889,652
|
)
|
|
|
(134,681,628
|
)
|
Impairment
|
|
|
(17,196,587
|
)
|
|
|
(17,722,045
|
)
|
Net book value
|
|
$
|
139,548,193
|
|
|
$
|
82,282,630
|
|
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 $19,881,983 and $20,409,998 as at September
30, 2019 and December 31, 2018, respectively.
During the three-month period ended September
30, 2019, depreciation and amortization expense totaled $3,632,805 of which $2,449,352, $201,182 and $982,271 were recorded in
direct labor and factory overheads incurred during plant shutdown,
administrative expenses and cost of net revenue. During the nine-month
period ended September 30, 2019,depreciation and amortization expense
totaled $10,530,985 of which $7,535,376, $648,456 and $2,347,153 were recorded in direct labor and factory overheads incurred during
plant shutdown, administrative expenses and cost of net revenue.
During the three-month period ended September
30, 2018, depreciation and amortization expense totaled $4,601,338, of which $4,353,824 and $247,514 were recorded in direct labor
and factory overheads incurred during plant shutdown and administrative expenses, respectively. During the nine-month period ended
September 30, 2018, depreciation and amortization expense totaled $13,974,456, of which $13,210,971 and $763,485 were recorded
in direct labor and factory overheads incurred during plant shutdown and administrative expenses, respectively.
NOTE 5 –FINANCE LEASE RIGHT-OF-USE ASSETS
Property, plant and equipment under finance leases, net consist
of the following:
|
|
September 30,
2019
|
|
December 31,
2018
|
At cost:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
116,344
|
|
|
$
|
119,899
|
|
Plant and machinery
|
|
|
2,128,342
|
|
|
|
2,193,375
|
|
Total
|
|
|
2,244,686
|
|
|
|
2,313,274
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,066,305
|
)
|
|
|
(2,062,517
|
)
|
Net book value
|
|
$
|
178,381
|
|
|
$
|
250,757
|
|
The above buildings erected on parcels
of land located in Shouguang, PRC, are collectively owned by local townships. The Company has not been able to obtain
property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying
parcels of land.
During the three and nine months period
ended September 30, 2019, depreciation and amortization expense totaled $1,326 and $68,027, respectively, which was recorded in
direct labor and factory overheads incurred during plant shutdown.
During the three and nine months period
ended September 30, 2018, depreciation and amortization expense totaled $64,874 and $203,271, respectively, which was recorded
in direct labor and factory overheads incurred during plant shutdown.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 6 – OPERATING LEASE RIGHT–OF-USE
ASSETS
As of September 30, 2019, the total operating
lease ROU assets was $8,817,327. The total operating lease cost for the three-month period ended September 30, 2019 and 2018 was
$219,411 and $266,875.
The total operating lease cost for the
nine-month period ended September 30, 2019 and 2018 was $671,652 and $831,539.
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 $8,570,115 as at September 30, 2019.
NOTE 7 – OTHER PAYABLE AND ACCRUED
EXPENSES
Payable and accrued expenses consist of
the following:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
—
|
|
Salary payable
|
|
|
308,181
|
|
|
|
241,343
|
|
Social security insurance contribution payable
|
|
|
104,480
|
|
|
|
140,326
|
|
Other payable-related party (see Note 8)
|
|
|
66,151
|
|
|
|
90,900
|
|
Deposit on subscription of a subsidiary's share
|
|
|
141,380
|
|
|
|
—
|
|
Accrued expense-for repair work
|
|
|
2,912,355
|
|
|
|
104,246
|
|
Accrued expense-others
|
|
|
337,969
|
|
|
|
328,443
|
|
Total
|
|
$
|
3,870,516
|
|
|
$
|
905,258
|
|
The deposit on subscription of a subsidiary's share of
$141,380 as of September 30, 2019 relates to sale of non-controlling interests in DCHC.
NOTE 8 – RELATED PARTY TRANSACTIONS
During the three-month period ended September
30, 2019, the Company borrowed a sum of $299,995 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 amount due to Jiaxing Lighting
was unsecured, interest free and repayable on demand and was fully settled in the three-month period ended September 30, 2019.
There was no balance owing to Jiaxing Lighting as of September 30, 2019 and December 31, 2018.
On September 25, 2012, the Company purchased
five floors of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd.
(the “Seller”) at a cost of approximately $5.7 million in cash, of which Mr. Ming Yang, the Chairman of the Company,
had a 99% equity interest in the Seller. During the first quarter of 2018, the Company entered into an agreement with the Seller,
a related party, to provide property management services for an annual amount of approximately $88,202 for five years from January
1, 2018 to December 31, 2022. The expense associated with this agreement for the three and nine months ended September 30, 2019
was approximately $22,050 and $67,900.The expense associated with this agreement for the three and nine months ended September
30, 2018 was approximately $23,000 and $72,000.
NOTE 9 – TAXES PAYABLE
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Land use tax payable
|
|
$
|
768,962
|
|
|
$
|
1,188,687
|
|
Value-added tax withheld from suppliers
|
|
|
2,977,283
|
|
|
|
—
|
|
Other tax payable
|
|
|
274,547
|
|
|
|
—
|
|
|
|
$
|
4,020,792
|
|
|
$
|
1,188,687
|
|
|
|
|
|
|
|
|
|
|
NOTE 10 –LEASE LIABILITIES-FINANCE
AND OPERATING LEASE
The components of finance lease liabilities
were as follows:
|
|
Imputed
|
|
September 30,
|
|
December 31,
|
|
|
Interest rate
|
|
2019
|
|
2018
|
Total finance lease liability
|
|
|
6.7%
|
|
$
|
2,041,845
|
|
|
$
|
2,267,025
|
|
Less: Current portion
|
|
|
|
|
|
(162,132
|
)
|
|
|
(197,480
|
)
|
Finance lease liability, net of current portion
|
|
|
|
|
$
|
1,879,713
|
|
|
$
|
2,069,545
|
|
Interest expenses from capital lease obligations
amounted to $34,080 and $37,138 for the three-month period ended September 30, 2019 and 2018, respectively, which were charged
to the condensed consolidated statement of income (loss). Interest expenses from capital lease obligations amounted to $111,020
and $123,352 for the nine-month period ended September 30, 2019 and 2018, respectively, which were charged to the condensed consolidated
statement of income (loss).
The components of operating lease liabilities
as follows:
|
|
Imputed
|
|
September 30,
|
|
December 31,
|
|
|
Interest rate
|
|
2019
|
|
2018
|
Total Operating lease liabilities
|
|
|
4.89%
|
|
$
|
8,137,541
|
|
|
$
|
-
|
|
Less: Current portion
|
|
|
|
|
|
(406,156
|
)
|
|
|
-
|
|
Operating lease liabilities, net of current portion
|
|
|
|
|
$
|
7,731,385
|
|
|
$
|
-
|
|
The weighted average remaining operating
lease term at September 30, 2019 was 23 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.
Maturities of lease liabilities were as
follows:
|
|
Financial lease
|
|
Operating Lease
|
Payable within:
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
265,370
|
|
|
$
|
762,298
|
|
the next 13 to 24 months
|
|
|
265,370
|
|
|
|
775,828
|
|
the next 25 to 36 months
|
|
|
265,370
|
|
|
|
628,579
|
|
the next 37 to 48 months
|
|
|
265,370
|
|
|
|
635,341
|
|
the next 49 to 60 months
|
|
|
265,370
|
|
|
|
633,168
|
|
thereafter
|
|
|
1,592,225
|
|
|
|
11,285,715
|
|
Total
|
|
|
2,919,075
|
|
|
|
14,720,929
|
|
Less: Amount representing interest
|
|
|
(877,230
|
)
|
|
|
(6,583,388
|
)
|
Present value of net minimum lease payments
|
|
$
|
2,041,845
|
|
|
$
|
8,137,541
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 11 ––EQUITY
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 September
30, 2019 for SCHC, SYCI and DCHC is 46%, 14% and 0% of its registered capital respectively.
NOTE 12 – TREASURY STOCK
In January 2019, the Company issued 20,000
shares of common stock from the treasury shares to one of its consultants. The shares were valued at the closing market price on
the date of the agreement and recorded as general and administrative expense in the condensed consolidated statement of loss and
comprehensive loss for the nine months ended September 30, 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.
On September 13, 2019, the Company received a staff deficiency
notice from The Nasdaq Stock Market informing the Company that it has failed to comply with Nasdaq's shareholder approval requirements
relating to shares issued to this consultant. A total of 40,000 restricted shares issued to this consultant from treasury will
be canceled. The Company will reissue the same amount of shares from the 2019 Omnibus Equity Incentive Plan adopted by the board
of directors of the Company subject to the approval by the stockholders of the Company at the annual meeting of the stockholders.
This annual meeting of the stockholders of the Company is scheduled to take place on December 18, 2019.
On October 30, 2019, the Company received
a letter from Nasdaq notifying the Company that Nasdaq has granted the Company an extension until January 7, 2020, to regain compliance
with the Rule. Under the terms of the extension, the Company must provide, on or before January 7, 2020, evidence that it has
cancelled the Consultant Shares and re-issued the shares under the Plan. In the event that the Company does not satisfy the terms
set forth in the extension, Nasdaq will provide written notification that the Company's securities will be delisted. In such an
event, the Company may appeal Nasdaq's determination to a hearing panel.
NOTE 13 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended and Restated 2007 Equity
Incentive Plan approved in 2011(“Plan”), the aggregate number shares of the Company’s common stock available
for grant of stock options and issuance is 4,341,989 shares. On October 5, 2015, during the annual meeting of the Company’s
stockholders, the aggregate number of shares reserved and available for grant and issuance pursuant to the Plan was increased to
10,341,989. As of September 30, 2019, the number of shares of the Company’s common stock available for issuance under the
Plan is 4,920,989.
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 01, 2019, the Company granted
to one employee staff options to purchase 150,000 shares of the Company’s common stock, at an exercise price of $0.91 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.
During the three months ended September 30,
2019, there were no options issued to employees or non-employees.
The following table summarizes all Company
stock option transactions between January 1, 2019 and September 30, 2019.
|
|
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, 2019
|
|
|
2,518,000
|
|
|
|
$0.97
|
|
|
|
$0.71 - $4.80
|
|
Granted and vested during the period ended September 30, 2019
|
|
|
150,000
|
|
|
|
$0.91
|
|
|
|
$0.91
|
|
Exercised during the period ended September 30, 2019
|
|
|
(1,897,000)
|
|
|
|
$0.73
|
|
|
|
$0.73
|
|
Expired/cancelled during the period ended September 30, 2019
|
|
|
(65,500)
|
|
|
|
$2.31
|
|
|
|
$2.61
|
|
Balance, September 30, 2019
|
|
|
705,500
|
|
|
|
$1.47
|
|
|
|
$0.71 - $2.10
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
|
Range of
Exercise Prices
|
|
|
|
Contractual Life
(Years)
|
|
Exercisable and outstanding
|
|
|
705,500
|
|
|
|
$0.71 - $2.10
|
|
|
|
1.74
|
|
The aggregate intrinsic value of options outstanding and exercisable
as of September 30, 2019 was $0.
During the three months ended September
30, 2019, 0 shares of common stock were issued upon cashless exercise of 0 options.
During the nine months ended September
30, 2019, 759,281 shares of common stock were issued upon cashless exercise of 1,897,000 options.
The aggregate intrinsic value of options
exercised during the three months ended September 30, 2019 was $0.
There was no option exercised during the three months ended September 30, 2018.
The aggregate intrinsic value of options
exercised during the nine months ended September 30, 2019 was $922,429. There was no option exercised during the nine months ended
September 30, 2018.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
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 three-month and nine-month periods ended September 30, 2019 and 2018, and management believes
that its earnings are permanently invested in the PRC.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”)
was enacted in law. With the new tax law, the corporation income tax rate is reduced from 35% to 21% and there is a one-time mandatory
transition tax on accumulated foreign earnings. The Company computed this one-time mandatory transition tax on accumulated foreign
earnings to be approximately $5.4 million. However, as the Company has available US federal net operating loss carry forwards and
foreign tax credit to fully offset the mandatory inclusion of the accumulated foreign earnings, no net tax liability arose from
the inclusion of these accumulated foreign earnings.
(b) British
Virgin Islands (“BVI”)
Upper Class Group Limited, a subsidiary
of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income
or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month and nine-month periods
ended September 30, 2019 and 2018.
(c) Hong
Kong
HKJI, a subsidiary of Upper Class Group
Limited, was incorporated in Hong Kong and is subject to Hong Kong taxation on its activities conducted in Hong Kong and income
arising in or derived from Hong Kong. No provision for income tax has been made as it has no taxable income for the
three-month and nine-month periods ended September 30, 2019 and 2018. The applicable statutory tax rates for the three-month
and nine-month periods ended September 30, 2019 and 2018 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 September 30, 2019 and December 31,
2018, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject
to WHT are $215,205,425 and $240,563,868, respectively. Since the Company intends to reinvest its earnings to further expand its
businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding
companies in the foreseeable future. Accordingly, as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018, the unrecognized WHT are $9,797,344 and $11,035,843, respectively.
The Company’s income tax returns
are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may
examine the Company’s income tax returns filed in the United States for three years from the date of filing. The Company’s
US income tax returns since 2015 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 (expense) income tax benefit from continuing operations are:
|
|
Three-Month Period Ended
September 30,
|
|
Nine-Month Period Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Current taxes – PRC
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred taxes – PRC
|
|
|
1,650,132
|
|
|
|
7,205,521
|
|
|
|
3,756,199
|
|
|
|
10,338,103
|
|
Change in valuation allowance
|
|
|
(8,379,571
|
)
|
|
|
(24,000
|
)
|
|
|
(8,724,517
|
)
|
|
|
(79,595
|
)
|
|
|
$
|
(6,729,439
|
)
|
|
$
|
7,181,521
|
|
|
$
|
(4,968,318
|
)
|
|
$
|
10,258,508
|
|
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:
|
|
Three-Month Period Ended September 30,
|
|
Nine-Month Period Ended
September 30,
|
Reconciliations
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Non-taxable income
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(133
|
%)
|
|
|
—
|
|
|
|
(63
|
%)
|
|
|
—
|
|
Effective income tax benefit (expense) rate
|
|
|
(107
|
%)
|
|
|
27
|
%
|
|
|
(36
|
%)
|
|
|
25
|
%
|
Significant components of the Company’s
deferred tax assets and liabilities at September 30, 2019 and December 31, 2018 are as follows:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
—
|
|
|
$
|
16,292
|
|
Impairment on property, plant and equipment
|
|
|
3,197,763
|
|
|
|
3,696,332
|
|
Impairment on prepaid land lease
|
|
|
815,370
|
|
|
|
840,284
|
|
Exploration costs
|
|
|
1,760,181
|
|
|
|
1,813,965
|
|
Compensation costs of unexercised stock options
|
|
|
171,672
|
|
|
|
194,016
|
|
PRC tax losses
|
|
|
16,043,972
|
|
|
|
12,663,985
|
|
US federal net operating loss and foreign tax credit
|
|
|
508,102
|
|
|
|
119,000
|
|
Total deferred tax assets
|
|
|
22,497,060
|
|
|
|
19,343,874
|
|
Valuation allowance
|
|
|
(9,037,533
|
)
|
|
|
(313,016
|
)
|
Net deferred tax asset
|
|
$
|
13,459,527
|
|
|
$
|
19,030,858
|
|
The increase in valuation allowance for
the three-month period ended September 30, 2019 is $8,379,571.
The increase in valuation allowance for
the three-month period ended September 30, 2018 is $24,000.
The increase in valuation allowance for
the nine-month period ended September 30, 2019 is $8,724,517.
The increase in valuation allowance for
the nine-month period ended September 30, 2018 is $79,595.
The increase in valuation allowance in
the three and nine months ended September 30, 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 September 30, 2019 and December 31, 2018.
There were no amounts accrued for penalties
and interest for the three and nine months ended September 30, 2019 and 2018. There were no change in unrecognized tax benefits
during the three and nine months ended September 30, 2019 and 2018.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
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 (income) are separately stated below
and also include costs that are related to functional areas such as accounting, treasury, information technology, legal, human
resources, and internal audit. The Company believes that segment operating income, as defined above, is an appropriate measure
for evaluating the operating performance of its segments. All the customers are located in PRC.
Three-Month
Period Ended
September 30, 2019
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
4,270,863
|
|
|
$
|
277,679
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,548,542
|
|
|
$
|
—
|
|
|
$
|
4,548,542
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income(loss) from operations before income tax benefit
|
|
|
(5,185,484
|
)
|
|
|
(1,001,988
|
)
|
|
|
(744,963
|
)
|
|
|
(62,265
|
)
|
|
|
(6,994,700
|
)
|
|
|
628,291
|
|
|
|
(6,366,409
|
)
|
Income tax (expense) benefit
|
|
|
(5,778,726
|
)
|
|
|
(1,116,620
|
)
|
|
|
165,907
|
|
|
|
—
|
|
|
|
(6,729,439
|
)
|
|
|
—
|
|
|
|
(6,729,439
|
)
|
Income(loss) from operations after income tax benefit
|
|
|
(10,964,210
|
)
|
|
|
(2,118,608
|
)
|
|
|
(579,056
|
)
|
|
|
(62,265
|
)
|
|
|
(13,724,139
|
)
|
|
|
628,291
|
|
|
|
(13,095,848
|
)
|
Total assets
|
|
|
153,825,697
|
|
|
|
21,738,770
|
|
|
|
110,464,372
|
|
|
|
1,767,155
|
|
|
|
287,795,994
|
|
|
|
150,836
|
|
|
|
287,946,830
|
|
Depreciation and amortization
|
|
|
3,303,155
|
|
|
|
182,538
|
|
|
|
113,357
|
|
|
|
35,081
|
|
|
|
3,634,131
|
|
|
|
—
|
|
|
|
3,634,131
|
|
Capital expenditures
|
|
|
56,137,239
|
|
|
|
1,180,129
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,317,368
|
|
|
|
—
|
|
|
|
57,317,368
|
|
Three-Month
Period Ended
September 30, 2018
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
—
|
|
|
$
|
343,080
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
343,080
|
|
|
$
|
—
|
|
|
$
|
343,080
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income(loss) from operations before income tax benefit
|
|
|
(24,369,917
|
)
|
|
|
(2,611,203
|
)
|
|
|
(698,693
|
)
|
|
|
(32,079
|
)
|
|
|
(27,711,892
|
)
|
|
|
912,975
|
|
|
|
(26,798,917
|
)
|
Income tax benefit
|
|
|
4,774,432
|
|
|
|
2,171,383
|
|
|
|
235,706
|
|
|
|
—
|
|
|
|
7,181,521
|
|
|
|
—
|
|
|
|
7,181,521
|
|
Income (loss) from operations after income tax benefit
|
|
|
(19,595,485
|
)
|
|
|
(439,820
|
)
|
|
|
(462,987
|
)
|
|
|
(32,079
|
)
|
|
|
(20,530,371
|
)
|
|
|
912,975
|
|
|
|
(19,617,396
|
)
|
Total assets
|
|
|
119,939,092
|
|
|
|
39,297,116
|
|
|
|
175,343,915
|
|
|
|
1,903,319
|
|
|
|
336,483,442
|
|
|
|
16,927
|
|
|
|
336,500,369
|
|
Depreciation and amortization
|
|
|
3,948,751
|
|
|
|
600,912
|
|
|
|
116,549
|
|
|
|
—
|
|
|
|
4,666,212
|
|
|
|
—
|
|
|
|
4,666,212
|
|
Capital expenditures
|
|
|
936,598
|
|
|
|
142,529
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,079,127
|
|
|
|
—
|
|
|
|
1,079,127
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
27,902,709
|
|
|
|
—
|
|
|
|
27,902,709
|
|
|
|
—
|
|
|
|
27,902,709
|
|
* Certain common production overheads,
operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments
in SCHC were split by reference to the average selling price and production volume of respective segment.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 15 – BUSINESS SEGMENTS – Continued
Nine -Month
Period Ended
September 30, 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)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income(loss) from operations before income tax benefit
|
|
|
(8,847,210
|
)
|
|
|
(3,242,534
|
)
|
|
|
(2,074,937
|
)
|
|
|
(165,649
|
)
|
|
|
(14,330,330
|
)
|
|
|
369,725
|
|
|
|
(13,960,605
|
)
|
Income tax (expense) benefit
|
|
|
(4,871,839
|
)
|
|
|
(548,308
|
)
|
|
|
451,828
|
|
|
|
—
|
|
|
|
(4,968,319
|
)
|
|
|
—
|
|
|
|
(4,968,319
|
)
|
Income(loss) from operations after income tax benefit
|
|
|
(13,719,049
|
)
|
|
|
(3,790,842
|
)
|
|
|
(1,623,109
|
)
|
|
|
(165,649
|
)
|
|
|
(19,298,649
|
)
|
|
|
369,725
|
|
|
|
(18,928,924
|
)
|
Total assets
|
|
|
153,825,697
|
|
|
|
21,738,770
|
|
|
|
110,464,372
|
|
|
|
1,767,155
|
|
|
|
287,795,994
|
|
|
|
150,836
|
|
|
|
287,946,830
|
|
Depreciation and amortization
|
|
|
8,442,421
|
|
|
|
1,701,769
|
|
|
|
346,985
|
|
|
|
107,836
|
|
|
|
10,599,011
|
|
|
|
—
|
|
|
|
10,599,011
|
|
Capital expenditures
|
|
|
56,137,239
|
|
|
|
1,180,129
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,317,368
|
|
|
|
—
|
|
|
|
57,317,368
|
|
Nine -Month
Period Ended
September 30, 2018
|
|
Bromine*
|
|
Crude
Salt*
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
—
|
|
|
$
|
1,981,573
|
|
|
$
|
613,368
|
|
|
$
|
—
|
|
|
$
|
2,594,941
|
|
|
$
|
—
|
|
|
$
|
2,594,941
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income(loss) from operations before income tax benefit
|
|
|
(35,537,744
|
)
|
|
|
(5,150,679
|
)
|
|
|
(2,101,059
|
)
|
|
|
(113,029
|
)
|
|
|
(42,902,511
|
)
|
|
|
975,007
|
|
|
|
(41,927,504
|
)
|
Income tax benefit
|
|
|
7,745,098
|
|
|
|
2,613,721
|
|
|
|
(100,311
|
)
|
|
|
—
|
|
|
|
10,258,508
|
|
|
|
—
|
|
|
|
10,258,508
|
|
Income (loss) from operations after income tax benefit
|
|
|
(27,792,646
|
)
|
|
|
(2,536,958
|
)
|
|
|
(2,201,370
|
)
|
|
|
(113,029
|
)
|
|
|
(32,644,003
|
)
|
|
|
975,007
|
|
|
|
(31,668,996
|
)
|
Total assets
|
|
|
119,939,092
|
|
|
|
39,297,116
|
|
|
|
175,343,915
|
|
|
|
1,903,319
|
|
|
|
336,483,442
|
|
|
|
16,927
|
|
|
|
336,500,369
|
|
Depreciation and amortization
|
|
|
11,686,782
|
|
|
|
2,125,762
|
|
|
|
365,183
|
|
|
|
—
|
|
|
|
14,177,727
|
|
|
|
—
|
|
|
|
14,177,727
|
|
Capital expenditures
|
|
|
8,843,486
|
|
|
|
1,345,783
|
|
|
|
1,192,963
|
|
|
|
30,616
|
|
|
|
11,412,848
|
|
|
|
—
|
|
|
|
11,412,848
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
27,902,709
|
|
|
|
—
|
|
|
|
27,902,709
|
|
|
|
—
|
|
|
|
27,902,709
|
|
* 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.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 15 – BUSINESS SEGMENTS – Continued
|
|
Three-Month Period Ended
September 30,
|
|
Nine-Month Period Ended
September 30,
|
Reconciliations
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Total segment operating loss
|
|
$
|
(6,994,700
|
)
|
|
$
|
(27,711,892
|
)
|
|
$
|
(14,330,330
|
)
|
|
$
|
(42,902,511
|
)
|
Corporate costs
|
|
|
(105,702
|
)
|
|
|
(116,254
|
)
|
|
|
(408,695
|
)
|
|
|
(399,308
|
)
|
Unrealized gain on translation of intercompany balance
|
|
|
733,993
|
|
|
|
1,029,229
|
|
|
|
778,420
|
|
|
|
1,374,315
|
|
Loss from operations
|
|
|
(6,366,409
|
)
|
|
|
(26,798,917
|
)
|
|
|
(13,960,605
|
)
|
|
|
(41,927,504
|
)
|
Other income, net of expense
|
|
|
66,820
|
|
|
|
124,362
|
|
|
|
258,052
|
|
|
|
385,989
|
|
Loss before taxes
|
|
$
|
(6,299,589
|
)
|
|
$
|
(26,674,555
|
)
|
|
$
|
(13,702,553
|
)
|
|
$
|
(41,541,515
|
)
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended September 30, 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
|
|
$
|
843
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
946
|
|
|
|
20.8
|
%
|
2
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
529
|
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
613
|
|
|
|
13.5
|
%
|
3
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
500
|
|
|
$
|
90
|
|
|
$
|
—
|
|
|
$
|
590
|
|
|
|
13
|
%
|
4
|
|
Dongying Bomeite Chemical Company Limited
|
|
$
|
557
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
557
|
|
|
|
12.2
|
%
|
5
|
|
Shandong Shouguang Shenrunfa Ocean Chemical Company Limited
|
|
$
|
525
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
525
|
|
|
|
11.5
|
%
|
The following table shows the major customer(s)
(10% or more) for the nine-month period ended September 30, 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
|
|
Dongying Bomeite Chemical Company Limited
|
|
$
|
1,098
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,098
|
|
|
|
10.4
|
%
|
5
|
|
Shandong Shouguang Shenrunfa Ocean Chemical Company Limited
|
|
$
|
1,297
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,297
|
|
|
|
12.3
|
%
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended September 30, 2018.
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
|
|
$
|
—
|
|
|
$
|
122
|
|
|
$
|
—
|
|
|
$
|
122
|
|
|
|
35
|
%
|
2
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
—
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
112
|
|
|
|
33
|
%
|
3
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
109
|
|
|
$
|
—
|
|
|
$
|
109
|
|
|
|
32
|
%
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2019
(Expressed in U.S. dollars)
(UNAUDITED)
The following table shows the major customer(s)
(10% or more) for the nine-month period ended September 30, 2018.
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
|
|
$
|
—
|
|
|
$
|
656
|
|
|
$
|
155
|
|
|
$
|
811
|
|
|
|
31
|
%
|
2
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
—
|
|
|
$
|
783
|
|
|
$
|
—
|
|
|
$
|
783
|
|
|
|
30
|
%
|
3
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
543
|
|
|
$
|
—
|
|
|
$
|
543
|
|
|
|
21
|
%
|
NOTE 16– CUSTOMER CONCENTRATION
During the nine-month period ended September
30, 2019, the Company sold 78.5% of its products to its top five customers, respectively. As of September 30, 2019, amounts due
from these customers were $8,834,543.
The Company sells a substantial portion
of its products to a limited number of customers. During the three-month and nine-month periods ended September 30, 2018, the Company
sold 100% and 90% of its products to its top five customers, respectively. As of September 30, 2018, amounts due from these customers
were $396,494.
NOTE 17– MAJOR SUPPLIERS
During the nine-month period ended September
30, 2019, the Company purchased 100% of its raw materials from its top five suppliers. As of September 30, 2019, amounts
due to those suppliers were $0. During the nine-month period ended September 30, 2018, the Company did not purchase any raw materials.
NOTE 18 – FAIR VALUE OF FINANCIAL
INSTRUMENTS
The carrying values of financial instruments,
which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term
nature of these instruments. There were no material unrecognized financial assets and liabilities as of September 30,
2019 and December 31, 2018.
NOTE 19 – CAPITAL COMMITMENT AND
OTHER SERVICE CONTRACTUAL OBLIGATIONS
The following table sets forth the Company’s
contractual obligations as of September 30, 2019:
|
|
Property Management Fees
|
|
Capital Expenditure
|
Payable within:
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
88,202
|
|
|
$
|
25,448
|
|
the next 13 to 24 months
|
|
|
88,202
|
|
|
|
—
|
|
the next 25 to 36 months
|
|
|
88,202
|
|
|
|
—
|
|
the next 37 to 48 months
|
|
|
88,202
|
|
|
|
—
|
|
Total
|
|
$
|
352,808
|
|
|
$
|
25,448
|
|
NOTE 20 –LOSS CONTINGENCIES
On or about August 3, 2018, written decisions of administration
penalty captioned Shou Guo Tu Zi Fa Gao Zi [2018] No. 291, Shou Guo Tu Zi Fa Gao Zi [2018] No. 292, Shou Guo Tu Zi Fa Gao Zi [2018]
No. 293, Shou Guo Tu Zi Fa Gao Zi [2018] No. 294, Shou Guo Tu Zi Fa Gao Zi [2018] No. 295 and Shou Guo Tu Zi Fa Gao Zi [2018] No.
296 (together, the “Written Decisions”) were served on Shouguang City Haoyuan Chemical Company Limited ("SCHC")
by the Shouguang City Natural Resources and Planning Bureau (the “Bureau”), naming SCHC as respondent. The Written
Decisions challenged the land use of Factory nos. 2, 9, 7, 4, 8 and 10, respectively, and alleged, among other things, that SCHC
had illegally occupied and used the land in the total area of approximately 52,674 square meter, on which Factory nos. 2, 9, 7,
4, 8 and 10 were built. The Written Decisions ordered SCHC, among other things, to return the land subject to the Written Decisions
to its respective legal owner, restore the land to its original state, and demolish or confiscate all the buildings and facilities
thereon and pay monetary penalty of approximately RMB 1.3 million ($184,000) in the aggregate. Each of the Written Decisions were
to be executed within 15 days upon serving SCHC. Additional interest penalties would be imposed at a daily rate of 3% in the event
that SCHC did not make the monetary penalty payment in a timely manner. As discussed below, the Company did not believe the local
government would enforce the penalties so it did not make the payment. Subsequently, the Bureau filed enforcement actions to the
People’s Court of Shouguang City, Shandong Province (the “Court”), naming SCHC as enforcement respondent and
alleged, among other things, that SCHC failed to perform its obligations under each of the Written Decisions within the specified
timeframe. The enforcement proceedings sought court orders to enforce the Written Decisions. On May 5, 2019, written decisions
of administrative ruling captioned (2019) Lu 0783 Xing Shen No. 384, (2019) Lu 0783 Xing Shen No. 385, (2019) Lu 0783 Xing
Shen No. 389, (2019) Lu 0783 Xing Shen No. 390, (2019) Lu 0783 Xing Shen No. 393, and (2019) Lu 0783 Xing Shen No. 394, respectively
(together, the “Court Rulings”) were made by the Court in favor of the Bureau. The Court ordered, among other relief,
to enforce each of the Written Decisions, to return each subject land to its legal owner and demolish or confiscate the buildings
and facilities thereon and restore the land to its original state within 10 days from the service of the Court Rulings on SCHC.
The Court Rulings became enforceable immediately upon service on SCHC on May 5, 2019.
In the last twenty years, there were no government regulations
requiring bromine manufacturers to obtain land use and planning approval documents. As such, we believe most of the bromine manufacturers
in Shouguang City do not have land use and planning approval documents and lease their land parcels from the village associations
and are facing the same issues in connection with land use and planning as the Company.
The Company has been in the process of resolving the issues
in connection with SCHC’s land use and planning diligently. The Company has been in close discussion with the local government
authorities with the help from Shouguang City Bromine Association to seek relief and, based on verbal confirmation by local government
authorities, believes the administrative penalties imposed by the Bureau according to the Written Decisions are being re-assessed
by local government authorities and may be revoked. The Company has obtained verbal confirmation from local government authorities
that the administrative penalty imposed on Factory No. 7 and Factory No. 8 are being revoked, and production at Factory No. 7 was
allowed to resume in April 2019. In addition, on August 28, 2019, the People's Government of Shandong Province, issued a regulation
titled "Investment Project Management Requirements of Chemical Companies in Shandong Province" permitting the construction
of facilities on existing sites or infrastructure of bromine manufacturing and other chemical industry-related types of projects
(clause 11 of section 3). The Company believes that the goal of the government is to standardize and regulate the industry and
not to demolish the facilities or penalize the manufacturers. As of the date of this report, the Company has not been notified
by the local government that it will take any measure to enforce the administrative penalties or implement the Court Rulings. Based
on information known to date, the Company believes that it is remote that the Written Decisions or Court Rulings will be enforced
within the expected timeframe, and a material penalty or costs and expenses against the Company will result. However, there can
be no assurance that there will not be any further enforcement action, the occurrence of which may result in further liabilities,
penalties and operational disruption.
In view of the above facts and circumstances, the Company believes
that it is not necessary to accrue for any estimated losses or impairment as of September 30, 2019.