Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
The discussion below contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section
21E of the Exchange Act. We have used words such as “believes,” “intends,” “anticipates,”
“expects” and similar expressions to identify forward-looking statements. These statements are based on information currently
available to us and are subject to a number of risks and uncertainties that may cause our actual results of operations, financial condition,
cash flows, performance, business prospects and opportunities and the timing of certain events to differ materially from those expressed
in, or implied by, these statements. Except as expressly required by the federal securities laws, we undertake no obligation
to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future
events, developments, or changed circumstances, or for any other reason.
Overview
We are a Nevada holding company which conducts
operations through our wholly-owned China-based subsidiaries. Our business is conducted and reported in four segments, namely,
bromine, crude salt, chemical products and natural gas.
Through our wholly-owned subsidiary, SCHC we produce
and trade bromine; and through our wholly-owned subsidiary, SHSI, we manufacture and sell crude salt. We are one of the largest
producers of bromine in China, as measured by production output. Elemental bromine is used to manufacture a wide variety of bromine compounds
used in industry and agriculture. Bromine also is used to form intermediary chemical compounds such as Tetramethylbenzidine. Bromine
is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants. Crude
salt is the principal material in alkali production as well as chlorine alkali production and is widely used in the chemical, food and
beverage, and other industries.
Through our wholly-owned subsidiary, SYCI, we
manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, papermaking
chemical agents, inorganic chemicals and materials that are used for human and animal antibiotics.
Our wholly-owned subsidiary, DCHC, was established
to explore and develop natural gas and brine resources (including bromine and crude salt) in Sichuan Province, China.
As disclosed in the Company’s Current Report
on Form 8-K filed on September 8, 2017, the Company received, on September 1, 2017, letters from the Yangkou County, Shouguang City government
addressed to each of its subsidiaries, SCHC and SYCI, which stated that in an effort to improve the safety and environmental protection
management level of chemical enterprises, the plants are requested to immediately stop production and perform rectification and improvements
in accordance with the country’s new safety and environmental protection requirements. In the Company’s press release of August
11, 2017 and on its conference call of August 14, 2017, the Company addressed concerns that increased government enforcement of stringent
environmental rules that were adopted in early 2017 to insure corporations bring their facilities up to necessary standards so that pollution
and other negative environmental issues are limited and remediated, could have an impact on our business in both the short and long-term.
The Company also expressed that although it believed its facilities were fully compliant at the time, the Company did not know how its
facilities would fare under the new rules. Teams of inspectors from the government were sent to many provinces to inspect all mining and
manufacturing facilities. The local government requested that facilities be closed, so that the facilities could undergo the inspection
and analysis in the most efficient manner by inspectors’ team. As a result, our facilities were closed on September 1, 2017.
The Company believes that this is another step
by the government to improve the environment. It further believes the goal of the government is not to close all plants, but rather to
codify the regulations related to project approval, land use, planning approval and environmental protection assessment approval so that
illegal plants are not able to open in the future and so that plants close to population centers do not cause serious environmental damage.
In addition, the Company believes that the Shandong provincial government wants to assure that each of its regional and county governments
has applied the Notice in a consistent manner.
The Shouguang City Bromine Association, on behalf
of all the bromine plants in Shouguang, started discussions with the local government agencies. The local governmental agencies confirmed
the facts that their initial requirements for the bromine industry did not include the project approval, the planning approval and the
land use rights approval and that those three additional approvals were new requirements of the provincial government. The Company understood
from the local government that it has been coordinating with several government agencies to solve these three outstanding approval issues
in a timely manner and that all the affected bromine plants will not be allowed to commence production prior to obtaining those approvals.
15
In February 2019, the Company received a notification from the local
government of Yangkou County that its Factory No. 1, No.4, No. 7 and No. 9 have passed inspection and were allowed to resume operations.
In April 2019, Factory No. 1 and No. 7 resumed operations.
On February 28, 2020, the Company announced that
it received an approval from the government to resume bromine production after winter temporary closure. Subsequently, it received another
approval from the Shouguang Yangkou People’s Government dated on March 5, 2020 to resume production at its bromine factories No.1,
No. 4, No.7 and No. 9 in order to meet the needs of bromide products for epidemic prevention and control. With these two approvals, the
Company was allowed to resume production at all four bromine factories.
On December 27, 2021, the Company announced that
the government of Shouguang City ordered the closing of all bromine facilities during the period from December 28, 2021 to February 21,
2022. The Company reopened its four operating bromine and crude salt facilities as planned on February 21, 2022.
The Company is still waiting for governmental
approval for factories No. 2, No. 8, and No.10. The Company expects to receive approval to open one of these factories in 2022 and perhaps
try its best effort to get another one in early 2023. To its knowledge, the government is currently completing its planning process for
all mining areas including that for prevention of flood. As a result, the Company may be required to make some modifications to our current
wells and aqueducts prior to commencement of operations of these factories to satisfy the local government's requirements.
On November 24, 2017, Gulf Resources received
a letter from the People’s Government of Yangkou County, Shouguang City notifying the Company that due to the new standards and
regulations relating to safety production and environmental pollution, from certain local governmental departments, such as the municipal
environmental protection department, the security supervision department and the fire department, its chemical enterprises would have
to be relocated to a new industrial park called Bohai Marine Fine Chemical Industry Park. Although our chemical companies were
in compliance with regulations, they were also close to a residential area. As a result, the government determined the Company should
relocate to the Bohai park. Chemical companies that were not asked to move into the park have been closed. Since the closure of
our factories, the Company has secured from the government the land use rights for its chemical plant. On January 6, 2020, the Company
received the environmental protection approval by the government of Shouguang City, Shandong Province for the proposed Yuxin Chemical
factory. The Company began the construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June
2020. The completion of construction has been delayed due to COVID-19 related restrictions, supply chain disruption and electric restrictions.
On February 22, 2022, the Company announced that while the Company did not receive a formal notice from the government regarding the electricity
needed for its Yuxin Chemical factory, discussions with the government have convinced management that the electricity restrictions are
being eased. Accordingly, the Company has contacted its suppliers and will have the remainder of the equipment produced and delivered,
so the Company can complete installation. Because of supply chain issues, largely related to COVID 19, the delivery of some of the equipment
has been delayed. At this time, the Company cannot estimate when construction will be completed.
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 natural gas and brine water project, and
approvals for safety production inspection, environmental protection assessment, as well as related land issues. Until these approvals
have been received, the Company has temporarily halted trial production at its natural gas well in Daying. In compliance with the Chinese
government new policies, the Company is also required to obtain exploration and mining licenses for both bromine and natural gas. Pursuant
to the Opinions of the Ministry of Natural Resources on Several Issues in Promoting the Reform of Mineral Resources Management (Trial)
promulgated by the Ministry of Natural Resources of PRC on January 9, 2020, which came into effect on May 1, 2020, privately owned enterprises
are allowed to participate in the natural gas production. The Company plans to proceed with its applications for the natural gas and brine
project approvals with related government departments after the governmental planning has been finalized and the land and resource planning
for Sichuan Province has been approved.
16
As a result of our acquisitions of SCHC and SYCI, our historical consolidated
financial statements and the information presented below reflects the accounts of SCHC, SYCI , SHSI and DCHC, the consolidated financial
statements and the information presented below as of and for the year ended June 30, 2022. The following discussion should be read
in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
On January 28, 2020 we completed a 1-for-5 reverse
stock split of our common stock, such that for each five shares outstanding prior to the stock split there was one share outstanding after
the reverse stock split. All shares of common stock referenced in this report have been adjusted to reflect the stock split
figures.
Our current corporate structure chart is set forth in the following
diagram:
As a result of our acquisitions of SCHC and SYCI, our historical financial
statements and the information presented below reflects the accounts of SCHC, SYCI, SHSI and DCHC. The following discussion should be
read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report.
17
RESULTS OF OPERATIONS
The following table presents certain information
derived from the condensed consolidated statements of operations, cash flows and stockholders equity for the three-month and six-month
periods ended June 30, 2022 and 2021.
Comparison of the Three-Month Period Ended
June 30, 2022 and 2021
Three-Month Period
Ended June 30, 2022
Three-Month Period
Ended June 30, 2021
Percent Change
Increase/ (Decrease)
Net revenue
$
15,711,714
$
11,148,008
41
%
Cost of net revenue
(8,101,120
)
(6,915,774
)
17
%
Gross profit
7,610,594
4,232,234
80
%
Sales, marketing and other operating expenses
(17,045
)
(15,625
)
9
%
Direct labor and factory overheads incurred during plant shutdown
(1,927,297
)
(1,394,717
)
38
%
General and administrative expenses
(557,089
)
(5,204,701
)
Income(loss) from operations
5,109,163
(2,382,809
)
314
%
Other income
42,252
36,069
17
%
Income (loss) before taxes
5,151,415
(2,346,740
)
320
%
Income tax benefit
(1,249,621
)
(356,480
)
251
%
Net Income (loss)
$
3,901,794
$
(2,703,220
)
244
%
Net revenue. The table
below shows the changes in net revenue in the respective segment of the Company for the three-month period ended June 30, 2022 as compared
to the same period in 2021:
Net Revenue by Segment
Three-Month Period Ended
Three-Month Period Ended
Percent Change
Increase
June 30, 2022
June 30, 2021
of Net Revenue
Segment
% of total
% of total
Bromine
$ 13,893,809
88.43 %
$ 10,025,438
89.93 %
38 %
Crude Salt
1,817,904
11.57 %
1,122,570
10.07 %
62 %
Chemical Products
—
—
—
—
—
Natural Gas
—
—
—
—
—
Total sales
$ 15,711,713
100 %
$ 11,148,008
100 %
41 %
Three-Month Period Ended
Percentage Change
Bromine and crude salt segments
product sold in tonnes
June 30, 2022
June 30, 2021
Increase (Decrease)
Bromine
1,795
1,805
(0.5 %)
Crude Salt
47,480
43,104
10 %
18
Bromine segment
For the three-month periods ended June 30, 2022 and 2021, the net revenue
for the bromine segment was $13,893,809 and $10,025,438, respectively. The increase of the net revenue of bromine was due to an increase
in selling prices of bromine in the second quarter of 2022. During the second quarter of 2022, in order to control COVID, the government
made a series of unannounced inspections of our bromine and crude salt facilities. These inspections caused the Company to shut and then
reopen its facilities. During the second quarter of 2021, the government made an inspection that also caused the Company to close and
reopen its facilities. However, the Company believes the inspections in the second quarter of 2022 had a far more significant impact on
production than did those in the second quarter of 2021.
The average selling price of bromine in the second quarter was $7,740
compared to $5,556 of the second quarter previous year.
Crude salt segment
For the three-month periods ended June 30, 2022 and 2021, the net revenue
for the crude salt was $1,817,904 and $1,122,570, respectively. The increase of net revenue of crude salt was mainly due to the 10% increase
in tonnes sold and a 47% increase in average selling price of crude salt. During the second quarter of 2022, in order to control COVID,
the government made a series of unannounced inspections of our bromine and crude salt facilities. These inspections caused the Company
to shut and then reopen its facilities. During the second quarter of 2021, the government made an inspection that also caused the Company
to close and reopen its facilities. However, the Company believes the inspections in the second quarter of 2022 had a far more significant
impact on production than did those in the second quarter of 2021.
Chemical products segment
For the three-month periods ended June 30, 2022
and 2021, the net revenue for the chemical products segment was $0 due to the closure of our chemical factories since September 1, 2017.
Natural gas segment
For the three-month period ended June 30, 2022
and 2021, the net revenue for the natural gas was $0.
19
Cost of Net Revenue
Cost of Net Revenue by Segment
Percent Change
Three-Month Period Ended
Three-Month Period Ended
of Cost of
June 30, 2022
June 30, 2021
Net Revenue
Segment
% of total
% of total
Bromine
$ 6,865,832
84.8 %
$ 5,553,493
80.3 %
23 %
Crude Salt
1,235,288
15.2 %
1,362,281
19.7 %
(9 %)
Chemical Products
—
—
—
—
—
Natural Gas
—
—
—
—
—
Total
$ 8,101,120
100 %
$ 6,915,774
100 %
17 %
Cost of net revenue reflects mainly
the raw materials consumed, the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and
amortization of manufacturing plant and machinery and other manufacturing costs.
Bromine production capacity and utilization
of our factories
The table below represents the annual capacity
and utilization ratios for all of our bromine producing properties:
Annual Production Capacity (in tonnes)
Utilization
Ratio (i)
Three-month period ended June 30, 2021
31,506
23 %
Three-month period ended June 30, 2022
31,506
23 %
Variance of the three-month period ended June 30, 2022 and 2021
—
0 %
(i) Utilization ratio is calculated based on the
annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes of all the seven factories
including those that have not commenced operations.
Our utilization ratio was 23% for the three-month
period ended June 30, 2022, the same as compared to the three-month period ended June 30, 2021.
Bromine segment
For the three-month period ended June 30, 2022,
the cost of net revenue for the bromine segment was $6,865,832. The increase of $1,312,339 in cost of net revenue for the bromine segment
was primarily due to an increase in manufacturing unit overhead, which was mainly due to the split between the bromine and crude salt
businesses in May 2022.
For the three-month period ended June 30, 2021,
the cost of net revenue for the bromine segment was $5,553,493.
Crude salt segment
For the three-month period ended June 30, 2022
the cost of net revenue for the crude salt segment was $1,235,288. The reason for the decrease is that there is no further cost split
with bromine segment , because the Company started independent accounting by each subsidiary since May 2022 for SCHC and SHSI.
For the three-month period ended June 30, 2021
the cost of net revenue for the crude salt segment was $1,362,281.
Chemical products segment
Cost of net revenue for our chemical products
segment for the three-month period ended June 30, 2022 and 2021 was $0.
Natural gas segment
Cost of net revenue for our natural gas segment
for the three-month period ended June 30, 2022 and 2021 was $0.
Gross Profit. Gross profit was $7,610,594,
or 48%, of net revenue for the three-month period ended June 30, 2022, representing an increase of $3,378,360, as compared to a gross
profit of $4,232,234, or 38%, of net revenue for the same period in 2021.
Gross Profit (Loss) by Segment
% Point Change
Three-Month Period Ended
Three-Month Period Ended
of Gross
June 30, 2022
June 30, 2021
Profit Margin
Segment
Gross Profit Margin
Gross Profit Margin
Bromine
$ 7,027,978
51 %
$ 4,471,945
45 %
6 %
Crude Salt
582,616
32 %
(239,711 )
(21 %)
53 %
Chemical Products
—
—
—
—
Natural Gas
—
—
—
—
—
Total Gross Profit
$ 7,610,594
48 %
$ 4,232,234
38 %
10 %
20
Bromine segment
For the three-month period ended June 30, 2022,
the gross profit margin for our bromine segment was 51%. This 6% increase was due to the increase in the selling price of bromine sold
in the second quarter of 2022.
For the three-month period ended June 30, 2021,
the gross profit margin for our bromine segment was 45%.
Crude salt segment
For the three-month period ended June 30, 2022,
the gross profit margin for our crude salt segment was 32%. The increase of net revenue of crude salt was mainly due to the 10% increase
in tonnes sold and a 47% increase in average selling price of crude salt.
For the three-month period ended June 30, 2021,
the gross loss margin for our crude salt segment was 21%. The swing from a loss to a profit was due to an increase in volume and selling
price as well as the new accounting which shifted some costs away from crude salt to bromine
Direct labor and factory overheads incurred
during plant shutdown The direct labor and factory overhead costs (including depreciation of plant and machinery) in the amount
of $1,927,297 and $1,394,717 incurred for the three-month period end June 30, 2022 and 2021, respectively, were that of the factories
that have not resumed operations in the three-month periods ended June 30, 2022 and 2021.
On September 1, 2017, the Company received notification
from the government of Yangkou County, Shouguang City of PRC that stated that production at all its bromine and crude salt and chemical
factories should be halted with immediate effect in order for the Company to perform rectification and improvement in accordance with
the county’s new safety and environmental protection requirements. On November 24, 2017, the Company received a letter from the
Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants located in the second
living area of the Qinghe Oil Extraction Plant to Bohai Park. As a result, direct labor and factory overhead costs (including depreciation
of plant and machinery) in the amount of $1,927,297 and $1,394,717 incurred for the three-month periods ended June 30, 2022 and 2021,
respectively, of factories that have not resumed production were presented as part of the operating expense.
Corporate Costs
Corporate costs declined to $67,987 from $3,193,107.
In the second quarter of 2021, we incurred $3,133,140 in corporate charges for the stock grants to management.
Income (loss) from Operations Income
from operations was $5,109,163 for the three-month period ended June 30, 2022, compared to loss from operations of $2,382,809 in the same
period in 2021.
Income (loss) from Operations by Segment
Three-Month Period Ended
June 30, 2022
Three-Month Period Ended
June 30, 2021
Segment:
% of total
% of total
Bromine
$ 5,325,541
108 %
$ 2,682,233
206 %
Crude Salt
142,968
3 %
(578,435 )
(45 %)
Chemical Products
(475,201 )
(10 %)
(741,312 )
(57 %)
Natural Gas
(61,699 )
(1 %)
(62,850 )
(4 %)
Income (loss) from operations before corporate costs
4,931,609
100 %
1,299,636
100 %
Corporate costs
(67,987 )
(3,193,107 )
Unrealized gain on translation of Intercompany balance
245,541
(489,338 )
Income (loss) from operations
$ 5,109,163
$ (2,382,809 )
21
Bromine segment
Income from operations from our bromine segment
was $5,325,541 for the three-month period ended June 30, 2022, compared to income from operations of $2,682,233 in the same period in
2021. This increase was due to a 39% increase in average selling price of bromine, slightly offset by increased expense allocation commencing
May 2022.
Crude salt segment
Income from operations from our crude salt segment
was $142,968 for the three-month period ended June 30, 2022, compared to loss from operations of $578,435 in the same period in 2021.
This increase in income from operation was due to a 10% increase in tonnes sold, a 47% increase in average selling price of crude salt,
and a reallocation of some expenses commencing May 2022.
Chemical products segment
Loss from operations from our chemical products
segment was $475,201 for the three-month period ended June 30, 2022, compared to loss from operations of $741,312 in the same period in
2021.
Natural gas segment
Loss from operations from our natural gas segment
was $61,699 for the three -month period ended June 30, 2022, compared to a loss from operations of $62,850 in the same period in 2021.
Other Income, Net Other income,
net of $42,252 represented bank interest income, net of capital lease interest expense for the three-month period ended June 30, 2022,
an increase of $6,1831 (or approximately 17%) as compared to the same period in 2021.
Corporate Costs
Corporate costs declined to $67,987 from $3,193,107.
In the second quarter of 2021, we incurred approximately $3.1 million in corporate charges for the stock grants to management.
Net Income (loss) Net income was
$3,901,794 for the three-month period ended June 30, 2022, compared to a net loss of $2,703,220 in the same period in 2021.
Net Income Per Share
For the three months ended June 30, 2022, net
income per share was $0.37 compared to a loss of $0.26 in the period ending June 30, 2021. There were 10,471,924 shares outstanding compared
to 10,469,477 shares.
Foreign Currency Translation Adjustment
For the three months ending June 30, 2022, the
Company had a negative foreign currency translation adjustment of $16,393,444 versus a positive adjustment of $5,334,236 in the previous
year. The cause of this currency translation adjustment was due to an approximate 6.1% decline of the RMB vs. the USD. This adjustment
impacts all balance sheet translations into U.S. dollars.
Comparison of the Six-Month Period Ended
June 30, 2022 and 2021
Six-Month Period
Ended June 30, 2022
Six-Month Period
Ended June 30, 2021
Percent Change
Increase/
(Decrease)
Net revenue
$
24,642,451
$
16,407,251
50
%
Cost of net revenue
(12,651,088
)
(11,097,163
)
14
%
Gross profit
11,991,363
5,310,088
126
%
Sales, marketing and other operating expenses
(27,405
)
(25,170
)
9
%
Direct labor and factory overheads incurred during plant shutdown
(4,111,888
)
(4,008,200
)
3
%
Other operating expense
(8,404
)
—
100
%
General and administrative expenses
(2,799,590
)
(6,940,951
)
(60
%)
Income (loss) from operations
5,044,076
(5,664,233
)
189
%
Other income
83,088
71,660
16
%
Income (loss) before taxes
5,127,164
(5,592,573
)
192
%
Income (loss) tax benefit
(1,345,316
)
387,229
(447
%)
Net Income (loss)
$
3,781,848
$
(5,205,344
)
173
%
22
Net revenue. The table
below shows the changes in net revenue in the respective segment of the Company for the six-month period ended June 30, 2022 as compared
to the same period in 2021:
Net Revenue by Segment
Six-Month Period Ended
Six-Month Period Ended
Percent Increase
June 30, 2022
June 30, 2021
of Net Revenue
Segment
% of total
% of total
Bromine
$ 22,019,825
89 %
$ 14,836,428
90 %
48 %
Crude Salt
2,571,948
10 %
1,570,823
10 %
64 %
Chemical Products
—
—
—
—
—
Natural Gas
50,678
1 %
—
—
100 %
Total sales
$ 24,642,451
100 %
$ 16,407,251
100 %
50 %
Bromine and crude salt segments
Six-Month Period Ended
Percentage Change
product sold in tonnes
June 30, 2022
June 30, 20210
Increase
Bromine (excluding volume sold to SYCI)
2,801
2,759
1.5
%
Crude Salt
62,940
63,540
(1
%)
Bromine segment
Net revenue from our bromine segment increased
to $22,019,825 for the six-month period ended June 30, 2022 compared to $14,836,428 for the same period in 2021 due to the higher selling
price of bromine.
Crude salt segment
Net revenue from our crude salt segment increased
to $2,571,948 for the six-month period ended June 30, 2022 compared $1,570,823 for the same period in 2021 due to the higher selling price
of crude salt.
Chemical products segment
For the six-month period ended June 30, 2022 and
2021, the net revenue for the chemical products segment was $0 due to the closure of our chemical factories since September 1, 2017.
Natural gas segment
For the six-month period ended June 30, 2022 and
2021, the net revenue for the rental of equipment was $50,678 and $0, respectively.
Cost of Net Revenue
Cost of Net Revenue by Segment
% Change
Six-Month Period Ended
Six-Month Period Ended
of Cost of
June 30, 2022
June 30, 2021
Net Revenue
Segment
% of total
% of total
Bromine
$ 10,786,157
85.2 %
$ 9,067,539
82 %
19 %
Crude Salt
1,864,848
14.7 %
2,029,624
18 %
(8 %)
Chemical Products
—
—
—
—
—
Natural Gas
83
0.1 %
—
—
100 %
Total
$ 12,651,088
100 %
$ 11,097,163
100 %
14 %
Cost of net revenue reflects mainly
the raw materials consumed-direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization
of manufacturing plant and machinery and other manufacturing costs.
Bromine production capacity and utilization
of our factories
The table below represents the annual capacity
and utilization ratios for all of our bromine producing properties:
Annual Production Capacity (in tonnes)
Utilization
Ratio (i)
Six-month period ended June 30, 2021
31,506
27 %
Six-month period ended June 30, 2022
31,506
27 %
Variance of the six-month period ended June 30, 2022 and 2021
—
8 %
(i) Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods
divided by the annual production capacity in tonnes of all the seven factories including those that have not commenced operations.
23
Bromine segment
For the six-month period ended June 30, 2022,
the cost of net revenue for the bromine segment was $10,786,157. This $1,718,618 increase was mainly because that some expenses have no
longer been split between bromine and crude salt segments since May 2022 SHSI started the crude salt sales.
For the six-month period ended June 30, 2021,
the cost of net revenue for the bromine segment was $9,067,539.
Crude salt segment
For the six-month period ended June 30, 2022,
the cost of net revenue for the crude salt segment was $1,864,848. ]
For the six-month period ended June 30, 2021,
the cost of net revenue for the crude salt segment was $2,029,624.
The reason for the decrease is that there is that
with the creation of SHSI, some costs formerly allocated to crude sale were allocated to bromine. \
Natural gas segment
Cost of net revenue for our natural gas segment
for the six-month period ended June 30, 2022 and 2021 was $83 and $0, respectively.
Gross Profit. Gross profit was $11,991,363,
or 49%, of net revenue for six-month period ended June 30, 2022 compared to $5,310,088, or 32%, of net revenue for the same period in
2021.
Gross Profit (Loss) by Segment
% Point Change
Six-Month Period Ended
Six-Month Period Ended
of Gross
June 30, 2022
June 30, 2021
Profit Margin
Segment
Gross Profit (loss) Margin
Gross Profit Margin
Bromine
$ 11,233,668
51 %
$ 5,768,889
39 %
12 %
Crude Salt
707,100
28 %
(458,801 )
(29 %)
57 %
Chemical Products
—
—
—
—
Natural Gas
50,595
99 %
—
— %
99 %
Total Gross Profit
$ 11,991,363
49 %
$ 5,310,088
32 %
17 %
Bromine segment
For the six-month period ended June 30, 2022,
the gross profit margin for our bromine segment was 51%. This 12% increase was primarily due to the higher selling price.
For the six-month period ended June 30, 2021,
the gross profit margin for our bromine segment was 39%.
Crude salt segment
For the six-month period ended June 30, 2022,
the gross profit margin for our crude salt segment was 28%. The increase of net revenue of crude salt was mainly due to the 65% increase
in average selling price of crude salt as well as the change in accounting related to the creation of SHSI,
For the six-month period ended June 30, 2021 the
gross loss margin for our crude salt segment was 29%.
Chemical products segment
For the six-month period ended June 30, 2022,
the gross profit margin for our chemical segment was 0% due to the closure of our plant and factories to perform rectification and improvement.
As a result, there were no chemical products for sale for the six-month period ended June 30, 2022.
Direct labor and factory overheads incurred
during plant shutdown The direct labor and factory overhead costs (including depreciation of plant and machinery) in the amount
of $4,111,888 and $4,008,200 incurred for the six-month period end June 30, 2022 and 2021, respectively, were for factories that have
not resumed production in the six-month periods ended June 30, 2022 and 2021.
24
General and Administrative Expenses.
General and administrative expenses were $2,799,590 for the six-month period ended June 30, 2022, a decrease of $4,141,361 (or 60%) as
compared to $6,940,951 for the same period in 2021, the major reason for this was due to the cost of approximately $3.1 million for stock
grants in the second quarter of year 2021.
Income (Loss) from Operations. Income
from operations was $5,044,076 for the six-month period ended June 30, 2022, compared to a loss from operations of $5,664,23 in the same
period in 2021.
Income(loss) from Operations by Segment
Six-Month Period Ended
June 30, 2022
Six-Month Period Ended
June 30, 2021
Segment:
% of total
% of total
Bromine
$
6,674,375
128
%
$
1,402,668
(79
%)
Crude Salt
(378,953
)
(7
%)
(1,588,020
)
89
%
Chemical Products
(988,483
)
(19
%)
(1,487,781
)
83
%
Natural Gas
(88,438
)
(2
%)
(117,637
)
7
%
Income(loss) from operations before corporate costs
5,218,501
100
%
(1,790,770
)
100
%
Corporate costs
(136,177
)
(3,279,313
)
Unrealized gain on translation of intercompany balance
(38,248
)
(594,150
)
Income(loss) from operations before taxes
$
5,044,076
$
(5,664,233
)
Bromine segment
Income from operations from our bromine segment
was $6,674,375 for the six-month period ended June 30, 2022, compared to an income from operations of $1,402,668 in the same period in
2021. The increase in income was primarily due to a 39% increase in average selling price partially offset by additional cost allocations
from the new divisional structure.
Crude salt segment
Loss from operations from our crude salt segment
was $378,953 for the six-month period ended June 30, 2022, compared to a loss from operations of $1,588,020 in the same period in 2021.
The reason for this was due to cost allocations from the new divisional structure.
Chemical products segment
Loss from operations from our chemical products
segment was $988,483 for the six-month period ended June 30, 2022, compared to a loss from operations of $1,487,781 in the same period
in 2021.
Natural gas segment
Loss from operations from our natural gas segment
was $88,438 for the six-month period ended June 30, 2022, compared to a loss from operations of $117,637 in the same period in 2021.
Other Income, Net. Other income,
net of $83,088 represented bank interest income, net of capital lease interest expense for the six -month period ended June 30, 2022,
a decrease of $11,428 (or approximately 16%) as compared to the same period in 2021.
25
Net Income (Loss). Net income was
$3,781,848 for the six-month period ended June 30, 2022, compared to a net loss of $5,205,344 in the same period in 2021. The loss in
2021 includes approximately $3.1 million in charges for share grants to management.
Net Income Per Share
For the six months ended June 30, 2022, net income
per share was $0.36 compared to a loss of $0.50 in the period ending June 30, 2021. There were 10,471,924 shares outstanding compared
to 10,469,477 shares.
Foreign Currency Translation Adjustment
For the six months ending June 30, 2022, the Company
had a negative foreign currency translation adjustment of $14,844,410 versus a positive adjustment of $3,149,546 in the previous year.
The cause of this currency translation adjustment was due to an approximate 6.1% decline of the RMB vs. the USD. This adjustment impacts
all balance sheet translations into U.S. dollars.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2022, cash and cash equivalents
were $79,115,431 as compared to $95,767,263 as of December 31, 2021. The components of this decrease of $16,651,832 are reflected below.
Statement of Cash Flows
Six-Month Period Ended June 30,
2021
2021
Net cash (used in) provided by operating activities
$ 18,492,397
$ 7,025,775
Net cash used in investing activities
(33,217,987 )
(5,806,435 )
Net cash used in financing activities
(283,915 )
(296,597 )
Effects of exchange rate changes on cash and cash equivalents
(1,642,327 )
1,912,746
Net increase (decrease) in cash and cash equivalents
$ (16,651,832 )
$ 2,835,489
For the six-month period ended June 30, 2022,
we met our working capital and capital investment requirements by using cash on hand.
Net Cash (used in) Provided by Operating Activities
During the six-month period ended June 30, 2022,
cash flow provided by operating activities of approximately $18.5 million was mainly due to a net income of $3.8 million, a decrease in
accounts receivable of $4.68 million, an increase in accounts payable of $2.2 million, an increase in deferred taxes of $1.3 million,
and a non-cash adjustment related to depreciation and amortization of property, plant and equipment of $10.28 million, offset by increases
in operating leases, and prepayments. \
During the six-month period ended June 30, 2021,
cash flow provided by operating activities of approximately $7.02 million was mainly due to a net loss of $5.2 million offset by depreciation
and amortization of $8.2 million, stock awards charges of $3.1 million, a decrease in accounts receivable of $1.8 million, and other charges.
26
Accounts receivable
Cash collections on our accounts receivable had
a major impact on our overall liquidity. The following table presents the aging analysis of our accounts receivable as of June 30, 2022
and December 31, 2021.
June 30, 2022
December 31, 2021
% of total
% of total
Aged 1-30 days
$ 7,966,253
86 %
$ 4,097,207
28 %
Aged 31-60 days
1,336,149
14 %
5,164,840
36 %
Aged 61-90 days
—
—
5,263,760
36 %
Aged 91-120 days
—
—
—
—
Aged 121-150 days
—
—
—
—
Aged 151-180 days
—
—
—
—
Aged 181-210 days
—
—
—
—
Aged 211-240 days
—
—
—
—
Total
$ 9,302,402
100 %
$ 14,525,807
100 %
The overall accounts receivable balance as of
June 30, 2022 decreased by $5,223,405, as compared to those of December 31, 2021. We have policies in place to ensure that sales are made
to customers with an appropriate credit history. We perform ongoing credit evaluation on the financial condition of our customers. No
allowance for doubtful accounts for the three-month and six-month periods ended June 30, 2022 is required.
Inventory
Our inventory consists of the following:
June 30, 2022
December 31, 2021
% of total
% of total
Raw materials
$ 67,335
12 %
$ 42,553
6 %
Finished goods
504,373
88 %
648,558
94 %
Total
$ 571,708
100 %
$ 691,111
100 %
The net inventory level as of June 30, 2022 decreased
by $119,403 (or 17%), as compared to the net inventory level as of December 31, 2021.
27
Raw materials increased by $24,782 as of June
30, 2022 as compared to December 31, 2021.
Our finished goods decreased by $144,185 as of
June 30, 2022 as compared to December 31, 2021.
Net Cash Used in Investing Activities
For the six-month period ended June 30,
2022, we used approximately $33.2 million to acquire property, plant and equipment, which mainly include the cost for bromi ne
wells, aqueducts and the installation of high and low voltage lines for bromine Wells.
For the six-month period ended June 30, 2021,
we used approximately $5.8 million to acquire property, plant and equipment, primarily for our chemical plant.
Net Cash Used in Financing Activities.
For the six-month period ended June 30, 2022 and
2021, we used $0.3 million to fulfil finance lease obligations.
We believe that our available funds and cash flows
generated from operations will be sufficient to meet our anticipated ongoing operating needs and our obligations as they full due in the
next twelve (12) months.
We had available cash of approximately $79 million
at June 30, 2022, all which is in highly liquid current deposits earning no or little interest. We do not anticipate paying cash dividends
in the foreseeable future.
We intend to continue to focus our efforts on the activities of SCHC,
SYCI , SHSI and DCHC as these segments continue to expand within the Chinese market.
We may not be able to identify, successfully integrate
or profitably manage any businesses or business segment we may acquire, or any expansion of our business. An expansion may involve a number
of risks, including possible adverse effects on our operating results, diversion of management’s attention, inability to retain
key personnel, risks associated with unanticipated events, risks associated with the COVID-19 pandemic and the financial statement effect
of potential impairment of acquired intangible assets, any of which could have a materially adverse effect on our condition and results of
operations. In addition, if competition for acquisition candidates or operations were to increase, the cost of acquiring businesses could
increase materially. We may effect an acquisition with a target business which may be financially unstable, under-managed, or in its early
stages of development or growth. Our inability to implement and manage our expansion strategy successfully may have a material adverse
effect on our business and future prospects.
Contractual Obligations and Commitments
We have no significant contractual obligations
not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. Additional
information regarding our contractual obligations and commitments at June 30, 2022 is provided in the notes to our consolidated financial
statements. See “Notes to Condensed Consolidated Financial Statements, Note 17 – Capital Commitment and Operating Lease Commitments”.
Material Off-Balance Sheet Arrangements
We do not currently have any off balance sheet
arrangements falling within the definition of Item 303(a) of Regulation S-K.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America and this requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. We base its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from
these estimates under different assumptions or conditions. We have identified the following critical accounting policies and estimates
used by us in the preparation of our financial statements: accounts receivable and allowance for doubtful accounts, leases, property,
plant and equipment, recoverability of long lived assets, revenue recognition, income taxes, loss contingencies, and stock-based compensation.
These policies and estimates are described in the Company’s 2021 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to Item 305(e) of Regulation S-K (§
229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,”
as defined by Rule 229.10(f)(1).
28
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.