GULF RESOURCES, INC. Cautionary Note Regarding Forward-Looking Statements
The discussion below contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act. We have used words such as "believes," "intends," "anticipates," "expects" and similar expressions to identify forward-looking statements. These statements are based on information currently available to us and are subject to a number of risks and uncertainties that may cause our actual results of operations, financial condition, cash flows, performance, business prospects and opportunities and the timing of certain events to differ materially from those expressed in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances, or for any other reason. Overview
We are a holding company which conducts operations through our wholly-owned
Through our wholly-owned subsidiary, SCHC, we produce and trade bromine and crude salt. We are one of the largest producers of bromine inChina , as measured by production output. Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine also is used to form intermediary chemical compounds such as Tetramethylbenzidine. Bromine is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants. Crude salt is the principal material in alkali production as well as chlorine alkali production and is widely used in the chemical, food and beverage, and other industries. SCHC is also planning to do Seawater desalination; Seawater desalination technology research and service; To handle the import and export of goods and technologies within the scope permitted
by the state.
Through our wholly-owned subsidiary, SYCI, we manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, papermaking chemical agents, inorganic chemicals and 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) inSichuan Province ,China . 21 Table of Contents Recent Developments OnSeptember 21, 2018 , the Company received a closing notice from the People's Government ofYangkou Town , Shouguang City informing it that its three bromine factories (No. 3, No. 4, and No. 11.) are not allowed to resume production and hence the Company has to demolish these factories. The crude salt fields surrounding these factories have been reclaimed as cultivated or construction land and hence did not meet the requirement for bromine and crude salt co-production set by the relevant authority. InJanuary 2017 , the Company completed the first brine water and natural gas well field construction in Daying located inSichuan Province and commenced trial production inJanuary 2019 . OnMay 29, 2019 , the Company received a verbal notice from the government ofTianbao Town ,Daying County,Sichuan Province , whereby the Company is required to obtain project approval for its well located in Daying, including the whole natural gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve the related land issue. Until these approvals have been received, the Company has to temporarily halt trial production at its natural gas well in Daying. In compliance with the Chinese government new policies, the Company is also required to obtain an exploration license and a mining license for bromine natural gas, respectively. Pursuant to the Opinions of theMinistry of Natural Resources on Several Issues in Promoting the Reform of Mineral Resources Management (Trial) promulgated by theMinistry of Natural Resources of PRC onJanuary 9, 2020 , which came into effect onMay 1, 2020 , privately owned enterprises are allowed to participate in the oil and gas exploration and production. The Company plans to proceed with its applications for the natural gas and brine project approvals with related government departments. The Company received an approval from the Shouguang Yangkou People's Government dated onMarch 5, 2020 allowing the Company to resume production at its bromine factories No.1, No. 4 (which was renamed from Subdivision Factory No. 1), No.7 and No. 9 in order to meet the needs of bromide products for epidemic prevention and control. As of the date of this report, all those four bromine factories have commenced commercial production of bromine and crude salt. At the present time, our chemical factory SYCI is closed pursuant to the letter from government dated onNovember 24, 2017 . It will be relocated toBohai Marine Fine Chemical Industry Park , Shouguang City. To date, we have secured the land for our new chemical factory. The Company also has had the final approval regarding environmental protection assessment. The Company expects to start our new chemical factory construction within the second quarter of 2020.
Our current corporate structure chart is set forth in the following diagram:
[[Image Removed]]
As a result of our acquisitions of SCHC and SYCI, our historical financial
statements and the information presented below reflects the accounts of SCHC,
SYCI and DCHC. The following discussion should be read in conjunction with our
condensed consolidated financial statements and notes thereto appearing
elsewhere in this report.
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RESULTS OF OPERATIONS
The following table presents certain information derived from the condensed
consolidated statements of income, cash flows and stockholders' equity for the
three-month periods ended
Comparison of the Three-Month Periods Ended
Three-Month Three-Month
Period Period Percent Change
Ended March 31, Ended March 31, Increase/
2020 2019 (Decrease)
Net revenue $ 557,670 $ 38,570 1346 %
Cost of net revenue $ (921,320 ) $ (36,407 ) 2431 %
Gross profit (loss) $ (363,650 ) $ 2,163 (16912 %)
Sales, marketing and other operating
expenses $ (2,243 ) $ - 100 %
Direct labor and factory overheads incurred
during plant shutdown $ (3,610,423 ) (4,293,022 ) (16 %)
Other operating loss $ (15,776 ) - 100 %
General and administrative expenses $ (843,337 ) $ (2,105,171 ) (60 %)
Loss from operations $ (4,835,429 ) $ (6,396,030 ) (24 %)
Other income, net $ 39,228 $ 96,755 (59 %)
Loss before taxes $ (4,796,201 ) $ (6,299,275 ) (24 %)
Income tax benefit $ 1,256,443 $ 1,395,137 (10 %)
Net loss $ (3,539,758 ) $ (4,904,138 ) (28 %)
Net revenue The table below shows the changes in net revenue in the respective
segment of the Company for the three-month period ended March 31, 2020 compared
to the same period in 2019:
Net Revenue by Segment
Three-Month Period Ended Three-Month Period Ended Percent Change
March 31, 2020 March 31, 2019 Increase (Decrease)
Segment % of total % of total
Bromine $ 462,846 83 % $ - - -
Crude Salt $ 94,824 17 % $ - - -
Chemical Products $ - - $ - -
Natural Gas $ - - $ 38,570 100 % (100 %)
Total sales $ 557,670 100 % $ 38,570 100 % 1346 %
Three-Month Period Ended Percentage Change
Bromine and crude salt segments product sold
in tonnes March 31, 2020 March 31, 2019 Decrease
Bromine (excluded volume sold to SYCI) 122
- -
Crude Salt 5,341 - -
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Three-Month Period Ended Percentage ChangeNatural gas segments product sold in cubic metreMarch 31, 2020
March 31, 2019 Decrease Natural Gas - 260,201 (100 %) Bromine segment
For the three-month periods endedMarch 31, 2020 and 2019, the net revenue for the bromine segment was$462,846 and$0 , respectively, due to the closure of our plant and factories to perform rectification and improvements in 2019 throughmid-March 2020 , except for the second quarter and part of the third quarter of 2019 when factory no. 1 and factory no. 7 resumed production. Crude salt segment
For the three-month periods endedMarch 31, 2020 and 2019, the net revenue for the crude salt was$94,824 and$0 due to the closure of our plant and factories to perform rectification and improvements in 2019 throughmid-March 2020 except for the second quarter and part of the third quarter of 2019 when factory no. 1 and factory no. 7 resumed production. Chemical products segment
For the three-month periods endedMarch 31, 2020 and 2019, the net revenue for the chemical products segment was$0 due to the closure of our chemical factories sinceSeptember 1, 2017 . We are setting up a new factory inBohai Park . As a result there were no chemical products for sale for the three-month period endedMarch 31, 2020 . Natural gas segment For the three-month period endedMarch 31, 2020 , the net revenue for the natural gas was$0 . OnMay 29, 2019 , the Company received a verbal notice from the government ofTianbao Town ,Daying County,Sichuan Province , whereby the Company is required to obtain project approval for its well located in Daying, including the whole natural gas and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve the related land issue. Until these approvals have been received, the Company has to temporarily halt trial production at its natural gas well in Daying. Based on the government new policies, the Company is also required to obtain an exploration license and a mining license for bromine and natural gas, respectively. For the three-month period endedMarch 31, 2019 , the net revenue for the natural gas was$38,570 . We commenced natural gas trial production fromJanuary 2019 . Cost of Net Revenue Cost of Net Revenue by Segment Percent Change Three-Month Period Ended Three-Month Period Ended of Cost of March 31, 2020 March 31, 2019 Net Revenue Segment % of total % of total Bromine$ 609,820 66 % $ - - - Crude Salt$ 311,500 34 % $ - - - Chemical Products $ - - $ - - - Natural Gas $ - -$ 36,407 100 % (100 %) Total$ 921,320 100 %$ 36,407 100 % 2431 % 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. 24 Table of Contents
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:
Utilization
Annual Production Capacity (in tonnes) Ratio (i)Three-month period ended March 31, 2019 31,506 - - Three-month period ended March 31, 2020 31,506 - 5 % Variance of the three-month periods ended March 31, 2020 and 2019 - - (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 5% for the three-month period ended
Our utilization ratio was 0% for the three-month period ended
Bromine segment
For the three-month period ended
For the three-month period endedMarch 31, 2019 , the cost of net revenue for the bromine segment was$0 due to the closure ofour plant and factories to perform rectification and improvements. As a result, there was no bromine in inventory for sale for the three-month period endedMarch 31, 2019 . Crude salt segment
For the three-month period ended
The cost of net revenue for our crude salt segment for the three-month period endedMarch 31, 2019 was$0 due to the closure of our plant and factories to perform rectification and improvements. Chemical products segment Cost of net revenue for our chemical products segment for the three-month period endedMarch 31, 2020 and 2019 was$0 due to the closure of our chemical factories sinceSeptember 1, 2017 . We are setting up a new factory inBohai Park . As a result there were no chemical products for sale for the three-month period endedMarch 31, 2020 and 2019. Natural gas segment
Cost of net revenue for our natural gas segment for the three-month period ended
Cost of net revenue for our natural gas segment for the three-month period ended
Gross Profit(Loss) Gross loss was$363,650 , or 65%, of net revenue for three-month period endedMarch 31, 2020 , representing a decrease of$365,813 (or 16912%), as compared to a gross profit of$2,163 , or 6%, of net revenue for the same period in 2019. 25 Table of Contents Gross Profit(Loss) by Segment % Point Change Three-Month Period Ended Three-Month Period Ended of Gross March 31, 2020 March 31, 2019 Profit (Loss)Margin Gross Profit Segment Gross Profit Margin Margin Bromine$ (146,974 ) (32 %) $ - - (32 %) Crude Salt$ (216,676 ) (229 %) $ - - (229 %) Chemical Products $ - - $ - - - Natural Gas $ - - 2,163 6 % (6 %) Total Gross Profit (Loss)$ (363,650 ) (65 %) $ 2,163 6 % (71 %) Bromine segment
For the three-month period endedMarch 31, 2020 , the gross loss margin for our bromine segment was 32% . This 32% decrease was primarily attributable to the increase in factory overhead per unit produced due to lower volume of production. For the three-month period endedMarch 31, 2019 , the gross profit margin for our bromine segment was 0% due to the closure of our plant and factories to perform rectification and improvements. As a result, there was no bromine in inventory for sale for the three-month period endedMarch 31, 2019 . Crude salt segment
For the three-month period endedMarch 31, 2020 , the gross loss margin for our crude salt segment was 229%. This 229% decrease was primarily attributable to the increase in factory overhead per unit produced due to lower volume of production.
For the three-month period ended
Chemical products segment For the three-month period endedMarch 31, 2020 , the gross profit margin for our chemical segment was 0% due to the closure of our plant and factories to perform rectification and improvement. All chemical products inventories were sold as ofMarch 31, 2019 . As a result, there were no chemical products for sale for the three-month period endedMarch 31, 2020 . Natural gas segment
For the three-month period ended
The gross profit margin for our natural gas segment for the three-month period
ended
Direct labor and factory overheads incurred during plant shutdown OnSeptember 1, 2017 , the Company received notification from the government of Yangkou County, Shouguang City of PRC that stated that production at all its bromine and crude salt and chemical factories should be halted with immediate effect in order for the Company to perform rectification and improvement in accordance with the county's new safety and environmental protection requirements. OnNovember 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 toBohai Park . As a result, direct labor and factory overhead costs (including depreciation of plant and machinery) in the amount of$3,610,423 and$4,293,022 incurred for the three-month periods endedMarch 31, 2020 and 2019, respectively, of factories that have not resumed production were presented as part of the operating expense. 26 Table of Contents
General and Administrative ExpensesGeneral and administrative expenses were
Loss from Operations Loss from operations was$4,835,429 the three-month period endedMarch 31, 2020 , compared to loss from operation of$6,396,030 in the
same
period in 2019.
Loss from Operations by Segment
Three-Month Period Ended Three-Month Period Ended
March 31, 2020 March 31, 2019
Segment: % of total % of total
Bromine $ (2,866,438 ) 56 % $ (3,625,014 ) 63 %
Crude Salt (1,513,582 ) 29 % (1,411,809 ) 24 %
Chemical Products (710,909 ) 14 % (673,550 ) 12 %
Natural Gas (48,846 ) 1 % (41,983 ) 1 %
Loss from operations before
corporate costs (5,139,775 ) 100 % (5,752,356 ) 100 %
Corporate cost (96,103 ) (140,446 )
Unrealized loss on translation
of intercompany balance 400,449 (503,228 )
Loss from operations $ (4,835,429 ) $ (6,396,030 )
Bromine segment
Loss from operations from our bromine segment was $2,866,438 for the three-month
period ended March 31, 2020 , compared to loss from operations of $3,625,014 in
the same period in 2019. This decrease in loss was mainly due to the resumption
of production in March 2020 .
Crude salt segment
Loss from operations from our crude salt segment increased to $1,513,582 for the
three-month period ended March 31, 2020 , compared to loss from operations of
$1,411,809 in the same period in 2019. This increase in loss was mainly
attributable to an increase in depreciation and amortization of manufacturing
plant and machinery and other manufacturing costs allocated to our crude salt
segment for the three-month period ended March 31, 2020 compared to the same
period in 2019 resulting from the changes in the average selling price and
production volume used to arrive at the allocation ratio of common costs inthe two periods. Chemical products segment Loss from operations from our chemical products segment was$710,909 for the three-month period endedMarch 31, 2020 , compared to loss from operations of$673,550 in the same period in 2019. Natural gas segment
Loss from operations from our natural gas segment was
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Other Income Net Other income, net of $39,228 represented bank interest income,
net of capital lease interest expense for the three -month period ended March
31, 2020 , a decrease of $57,527 (or approximately 59%) as compared to the same
period in 2019.
Net Loss Net loss was
Effective Tax Rate Our effective tax rate for the three-month periods endedMarch 31, 2020 and 2019 was 26% and 22% respectively. The effective tax rate for the three-month period endedMarch 31, 2020 was 1% higher than the PRC statutory income tax rate of 25%, mainly due to non-taxable items net of decrease in change in valuation allowance. The effective tax rate for the three-month period endedMarch 31, 2019 was 3% lower than the PRC statutory income tax rate of 25%, due to non-deductible expense net of non-taxable items.
LIQUIDITY AND CAPITAL RESOURCES
As of
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