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.
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.
17
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 and No.10.
To its knowledge, the government is currently
completing its planning process for all mining areas including that for prevention of flood. As a result, the Company may be required
to make 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.
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 period ended Setpember 30, 2023. 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.
18
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.
19
Recent Developments
In 2018, Shouguang City experienced the devastating impact of Typhoon
Winbiya, regarded as one of the most destructive typhoons in history. In 2019, Typhoon Lekima struck Shouguang City, surpassing the destructive
force of its predecessor. These typhoons inflicted significant damage upon our facilities and the surrounding agricultural fields. The
Company incurred substantial expenses, amounting to more than $46 millions, including write-offs, for road repairs, equipment replacement,
salt pan reconstruction, the re-drilling of flooded wells and etc.. To mitigate similar damages in the future, the Company has commenced
a flood prevention initiative. Our strategy involves the renovation of the channels of four major rivers within our mining area, encompassing
the tributary of the Mihe River. The aim is to prevent flooding that could harm the wells, aqueducts and crude salt pans at our plant.
The projected expenditure for this initiative amounts to approximately $50.5 million. As of September 30, 2023, we disbursed approximately
$15.2 for the initial phase of this project. Apart from reducing risk to surrounding regions, we anticipate three advantages from this
flood prevention plan. It is expected to: (i) enhance the probability of obtaining authorization to reopen factories No. 2 and No. 10;
(ii) enable the drilling of additional wells across our five operating factories, and (iii) mitigate the risks and associated expenses
related to future storms-induced flooding.
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 nine-month
periods ended September 30, 2023 and 2022.
Comparison of the Three-Month Period Ended
September 30, 2023 and 2022
Three-Month Period
Ended September 30, 2023
Three-Month Period
Ended September 30, 2022
Percent Change
Increase/
(Decrease)
Net revenue
$ 5,865,615
$ 22,862,795
(74 %)
Cost of net revenue
(6,373,902 )
(8,405,694 )
(24 %)
Gross profit
(508,287 )
14,457,101
(104 %)
Sales, marketing and other operating expenses
(14,428 )
(19,681 )
(27 %)
Direct labor and factory overheads incurred during plant shutdown
(1,007,689 )
(1,910,318 )
(47 %)
General and administrative expenses
(762,884 )
(584,473 )
31 %
Other operating income(loss)
—
(37 )
(100 %)
Income(Loss) from operations
(2,293,288 )
11,942,592
(119 %)
Other income
33,967
35,755
(5 %)
Income(Loss) before taxes
(2,259,321 )
11,978,347
(119 %)
Income tax benefit
483,524
(3,010,967 )
(116 %)
Net income(loss)
$ (1,775,797 )
$ 8,967,380
(120 %)
Net revenue. The table
below shows the changes in net revenue in the respective segment of the Company for the three-month period ended September 30, 2023 as
compared to the same period in 2022:
Net Revenue by Segment
Three-Month Period Ended
Three-Month Period Ended
Percent Change
Increase
September 30, 2023
September 30, 2022
of Net Revenue
Segment
% of total
% of total
Bromine
$ 4,908,152
84 %
$ 19,845,773
86 %
(75 %)
Crude Salt
889,556
15 %
2,934,707
13 %
(70 %)
Chemical Products
—
—
—
—
Natural Gas
67,907
1 %
82,315
1 %
(17 %)
Total sales
$ 5,865,615
100 %
$ 22,862,795
100 %
(74 %)
Bromine and crude salt segments
Three-Month Period Ended
Percentage Change
product sold in tonnes
September 30, 2023
September 30, 2022
Increase (Decrease)
Bromine
1,516
2,655
(43 %)
Crude Salt
30,334
81,810
(63 %)
Bromine segment
For the three-month periods ended September 30, 2023 and 2022, the
net revenue for the bromine segment was $4,908,152 and $19,845,773, respectively. The decrease of the net revenue of bromine was due to
the 43% decrease in tonnes sold and 57% decrease in average selling price of bromine in the third quarter of 2023. The average selling
price of bromine in the third quarter of 2023 was $3,237 compared to the average selling price of bromine in the third quarter of 2022
of $7,474(calculated by dividing revenue by tonnes).
Crude salt segment
For the three-month periods ended September 30, 2023 and 2022, the
net revenue for the crude salt was $889,556 and $2,934,707, respectively. The decrease of net revenue of crude salt was mainly due to
the 63% decrease in tonnes sold and 18% decrease in average selling price of crude salt for the three-month period ended September 30,
2023.
20
Chemical products segment
For the three-month periods ended September 30,
2023 and 2022, 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 September 30,
2023 and 2022, the net revenue was $0.
Equipment Lease
For the three-month period ended September 30,
2023 and 2022, the net revenue for the equipment lease was $67,907 and $82,315.
Cost of Net Revenue
Cost of Net Revenue by Segment
Percent Change
Three-Month Period Ended
Three-Month Period Ended
of Cost of
September 30, 2023
September 30, 2022
Net Revenue
Segment
% of total
% of total
Bromine
$ 5,995,496
94.06 %
$ 7,362,103
87.58 %
(19 %)
Crude Salt
378,100
5.93 %
1,043,260
12.41 %
(64 %)
Chemical Products
—
—
—
—
—
Natural Gas
306
0.01 %
331
0.01 %
(8 %)
Total
$ 6,373,902
100 %
$ 8,405,694
100 %
(24 %)
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 September 30, 2022
31,506
34%
Three-month period ended September 30, 2023
31,506
19%
Variance of the three-month period ended September 30, 2023 and 2022
-
(15%
)
(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.
Bromine segment
For the three-month period ended September 30,
2023, the bromine segment had a net cost of revenue of $5,995,496.
For the three-month period ended September 30,
2022 the cost of net revenue for the bromine segment was $7,362,103.
Crude salt segment
For the three-month period ended September 30,
2023 the cost of net revenue for the crude salt segment was $378,100.
For the three-month period ended September 30,
2022 the cost of net revenue for the crude salt segment was $1,043,260.
Chemical products segment
Cost of net revenue for our chemical products
segment for the three-month period ended September 30, 2023 and 2022 was $0.
Natural gas segment
Cost of net revenue for our natural gas segment
for the three-month period ended September 30, 2023 and 2022 was $306 and 331.
21
Gross Profit. Gross loss was $508,287
or 9%, of net revenue for three-month period ended September 30, 2023, representing an decrease of $14,965,388, as compared to a gross
profit of $14,457,101, or 63%, of net revenue for the same period in 2022.
Gross Profit (Loss) by Segment
% Point Change
Three-Month Period Ended
Three-Month Period Ended
of Gross
September 30, 2023
September 30, 2022
Profit Margin
Segment
Gross Profit
(loss) Margin
Gross Profit (loss) Margin
Bromine
$ (1,087,344 )
(22 %)
$ 12,483,670
63 %
(85 %)
Crude Salt
511,456
57 %
1,891,447
64 %
(7 %)
Chemical Products
—
—
—
—
—
Natural Gas
67,601
100 %
81,984
100
0 %
Total Gross Profit
$ (508,287 )
(9 %)
$ 14,457,101
63 %
(72 %)
Bromine segment
For the three-month period ended September 30,
2023, the gross loss for our bromine segment was 22%, compared to 63% in the three-month period ended September 30, 2022. The decrease
in gross profit margin was primarily attributable to the lower average selling price of bromine of $3,237 per ton in the three-month
period ended September 30, 2023 compared to $7,474 per ton in the three-month period ended September 30, 2022.
For the three-month period ended September 30,
2022, the gross profit margin for our bromine segment was 63%.
Crude salt segment
For the three-month period ended September 30,
2023, the gross profit margin for our crude salt segment was 57%.
For the three-month period ended September 30, 2022, the gross profit
margin for our crude salt segment was 64%.
Direct labor and factory overheads incurred
during plant shutdown On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang
City of PRC that stated that production at all its bromine and crude salt and chemical factories should be halted with immediate effect
in order for the Company to perform rectification and improvement in accordance with the county’s new safety and environmental protection
requirements. On November 24, 2017, the Company received a letter from the Government of Yangkou County, Shouguang City notifying the
Company to relocate its two chemical production plants located in the second living area of the Qinghe Oil Extraction Plant to Bohai
Park. As a result, direct labor and factory overhead costs (including depreciation of plant and machinery) in the amount of $1,007,689
and $1,910,318 incurred for the three-month periods ended September 30, 2023 and 2022, respectively, of factories that have not resumed
production were presented as part of the operating expense.
Income (loss) from Operations loss
from operations was $2,293,288 for the three-month period ended September 30, 2023, compared to income of $11,942,592 in the same period
in 2022.
Loss from Operations by Segment
Three-Month Period Ended
September 30, 2023
Three-Month Period Ended
September 30, 2022
Segment:
% of total
% of total
Bromine
$
(2,143,203)
(105.27%)
$
10,552,343
87.94%
Crude Salt
500,469
24.58%
1,876,161
15.63%
Chemical Products
(397,410
)
(19.52%)
(447,960
)
0.16%
Natural Gas
4,156
0.21%
19,500
(3.73%)
Income(loss) from operations before corporate costs
(2,035,988)
100%
12,000,044
100%
Corporate costs
(65,148
)
(50,505
)
Unrealized gain (loss) on translation of Intercompany balance
(192,152
)
(6,947
)
Income (loss) from operations
$
(2,293,288
)
$
11,942,592
22
Bromine segment
Loss from operations from our bromine segment was $2,143,203 for the
three-month period ended September 30, 2023, compared to income from operations of $10,552,343 in the same period in 2022. The decrease
of the net revenue of bromine was due to the 43% decrease in tonnes sold and 57% decrease in average selling price of bromine in the third
quarter of 2023.
Crude salt segment
Income from operations from our crude salt segment
was $500,469 for the three-month period ended September 30, 2023, compared to income from operations of $1,876,161 in the same period
in 2022. The decrease of net revenue of crude salt was mainly due to the 63% decrease in tonnes sold and 18% decrease in average selling
price of crude salt for the three-month period ended September 30, 2023.
Chemical products segment
Loss from operations from our chemical products
segment was $397,410 for the three-month period ended September 30, 2023, compared to loss from operations of $447,960 in the same period
in 2022.
Natural gas segment
Income from operations from our natural gas segment
was $4,156 for the three -month period ended September 30, 2023, compared to a loss of $19,500in the same period in 2022.
Other Income, Net Other income,
net of $33,967 represented bank interest income, net of capital lease interest expense for the three -month period ended September 30,
2023, an decrease of $1,788 as compared to the same period in 2022.
Net Income (loss) Net loss was $1,775,797
for the three-month period ended September 30, 2023, compared to a net income of $8,967,380 in the same period in 2022.
Comparison of the Nine-Month Period Ended
September 30, 2023 and 2022
Nine-Month Period
Ended September 30, 2023
Nine-Month Period
Ended September 30, 2022
Percent Change
Increase/
(Decrease)
Net revenue
$ 23,173,404
$ 47,505,246
(51 %)
Cost of net revenue
(20,464,418 )
(21,056,782 )
(3 %)
Gross profit
2,708,986
26,448,464
(90 %)
Sales, marketing and other operating expenses
(42,850 )
(47,086 )
(9 %)
Direct labor and factory overheads incurred during plant shutdown
(4,471,954 )
(6,022,206 )
(26 %)
Other operating loss
60,134
(8,441 )
812 %
General and administrative expenses
(2,266,260 )
(3,384,063 )
(33 %)
Income(Loss) from operations
(4,011,944 )
16,986,668
(124 %)
Other income
119,805
118,843
1 %
Income(Loss) before taxes
(3,892,139 )
17,105,511
(123 %)
Income tax benefit (expense)
876,779
(4,356,283 )
120 %
Net income(loss)
$ (3,015,360 )
$ 12,749,228
(124 %)
23
Net revenue. The table
below shows the changes in net revenue in the respective segment of the Company for the nine-month period ended September 30, 2023 as
compared to the same period in 2022:
Net Revenue by Segment
Nine-Month Period Ended
Nine-Month Period Ended
Percent Increase
September 30, 2023
September 30, 2022
of Net Revenue
Segment
% of total
% of total
Bromine
$ 20,734,871
89.48 %
$ 41,865,598
88 %
(51 %)
Crude Salt
2,287,672
9.87 %
5,506,655
11 %
(59 %)
Chemical Products
—
—
—
Natural Gas
150,861
0.65 %
132,993
1 %
13 %
Total sales
$ 23,173,404
100 %
$ 47,505,246
100 %
(51 %)
Bromine and crude salt segments
Nine-Month Period Ended
Percentage Change
product sold in tonnes
September 30, 2023
September 30, 2022
Increase
Bromine (excluding volume sold to SYCI)
5,937
5,456
9 %
Crude Salt
71,354
144,750
(51 %)
Bromine segment
Net revenue from our bromine segment increased
to $20,734,871 for the nine-month period ended September 30, 2023 compared to $41,865,598 for the same period in 2022 respectively, due
to the lower selling price and selling quantity.
Crude salt segment
Net revenue from our crude salt segment increased
to $2,287,672 for the nine-month period ended September 30, 2023 compared $5,506,655 for the same period in 2022, respectively, due to
the lower selling price and selling quantity.
Chemical products segment
For the nine-month period ended September 30,
2023 and 2022, 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 nine-month period ended September 30,
2023 and 2022, the net revenue for the natural gas was $0.
Equipment Lease
For the nine-month period ended September 30,
2023 and 2022, the net revenue for the equipment lease was $150,861 and $132,993.
Cost of Net Revenue
Cost of Net Revenue by Segment
% Change
Nine-Month Period Ended
Nine-Month Period Ended
of Cost of
September 30, 2023
September 30, 2022
Net Revenue
Segment
% of total
% of total
Bromine
$ 19,187,620
94 %
$ 18,148,260
86 %
6 %
Crude Salt
1,276,119
6 %
2,908,108
4 %
(56 %)
Chemical Products
—
—
—
—
—
Natural Gas
679
—
414
—
64 %
Total
$ 20,464,418
100 %
$ 21,056,782
100 %
(3 %)
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.
24
Bromine production capacity and utilization
of our factories
The table below represents the annual capacity
and utilization ratios for all of our bromine producing properties:
Annual Production Capacity (in tonnes)
Utilization
Ratio (i)
Nine-month period ended September 30, 2022
31,506
23%
Nine-month period ended September 30, 2023
31,506
29%
Variance of the nine-month period ended September 30, 2023 and 2022
-
6%
(i)
Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes.
Bromine segment
For the nine-month period ended September 30,
2023 the cost of net revenue for the bromine segment was $19,187,620.
For the nine-month period ended September 30,
2022 the cost of net revenue for the bromine segment was $18,148,260.
Crude salt segment
For the nine-month period ended September 30,
2023 the cost of net revenue for the crude salt segment was $1,276,119. The cost of net revenue for our crude salt segment for the nine-month
period ended September 30, 2022 was $2,908,108.
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 nine-month period ended September 30, 2023 and 2022 was $679 and $414.
Gross Profit. Gross profit was $2,708,986,
or 12%, of net revenue for nine-month period ended September 30, 2023 compared to $26,448,464, or 56%, of net revenue for the same period
in 2022.
Gross Profit (Loss) by Segment
% Point Change
Nine-Month Period Ended
Nine-Month Period Ended
of Gross
September 30, 2023
September 30, 2022
Profit Margin
Segment
Gross Profit (loss) Margin
Gross Profit Margin
Bromine
$ 1,547,251
7 %
$ 23,717,338
57 %
(50 %)
Crude Salt
1,011,553
44 %
2,598,547
47 %
(3 %)
Chemical Products
—
—
—
—
—
Natural Gas
150,182
100 %
132,579
99.7 %
0.3 %
Total Gross Profit
$ 2,708,986
12 %
$ 26,448,464
56 %
(44 %)
Bromine segment
For the nine-month period ended September 30,
2023, the gross profit margin for our bromine segment was 7%, compared to 57% in the nine-month period ended September 30, 2022. The decrease
in gross profit margin was primarily attributable to the lower average selling price of bromine of $3,493 per ton in the nine-month period
ended September 30, 2023 compared to $7,674 per ton in the nine-month period ended September 30, 2022.
For the nine-month period ended September 30,
2022, the gross profit margin for our bromine segment was 57%.
Crude salt segment
For the nine-month period ended September 30,
2023, the gross profit margin for our crude salt segment was 44%.
For the nine-month period ended September 30,
2022 the gross profit margin for our crude salt segment was 47%.
25
Chemical products segment
For the nine-month period ended September 30,
2023, the gross profit margin for our chemical segment was 0% due to the closure of our plant.. As a result of the closure, there were
no chemical products for sale for the nine-month period ended September 30, 2023.
Direct labor and factory overheads incurred
during plant shutdown On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang
City of PRC that stated that production at all its bromine and crude salt and chemical factories should be halted with immediate effect
in order for the Company to perform rectification and improvement in accordance with the county’s new safety and environmental protection
requirements. On November 24, 2017, the Company received a letter from the Government of Yangkou County, Shouguang City notifying the
Company to relocate its two chemical production plants located in the second living area of the Qinghe Oil Extraction Plant to Bohai
Park. As a result, direct labor and factory overhead costs (including depreciation of plant and machinery) in the amount of $4,471,954
and $6,022,206 incurred for the nine-month periods ended September 30, 2023 and 2022, respectively, for the factories that have not resumed
production were presented as part of the operating expense.
General and Administrative Expenses.
General and administrative expenses were $ 2,266,260 for the nine-month period ended September 30,
2023, a decrease of $1,117,803 (or 33%) as compared to $3,384,063 for the same period in 2022. The decrease was mainly due to the unrealized
foreign currency transaction loss on intercompany balance recorded in nine-month period ended September 30, 2023 compared to an unrealized
foreign currency transaction gain on intercompany balance recorded in the same period in the previous year.
Income (Loss) from Operations. Loss
from operations was $ 4,011,944 for the nine-month period ended September 30, 2023, compared to an
income of $16,986,668 in the same period in 2022.
Income(Loss) from Operations by Segment
Nine-Month Period Ended
September 30, 2023
Nine-Month Period Ended
September 30, 2022
Segment:
% of total
% of total
Bromine
$ (3,340,404 )
91.43 %
$ 17,226,718
100 %
Crude Salt
904,482
(24.76 %)
1,497,208
8.7 %
Chemical Products
(1,231,302 )
33.7 %
(1,436,443 )
(8.34 %)
Natural Gas
14,011
(0.37 %)
(68,938 )
(0.36 %)
Income (Loss) from operations before corporate costs
(3,653,213 )
100 %
17,218,545
100 %
Corporate costs
(193,287 )
(186,682 )
Unrealized gain on translation of intercompany balance
(165,444 )
(45,195 )
Income (Loss) from operations before taxes
$ (4,011,944 )
$ 16,986,668
Bromine segment
Loss from operations from our bromine segment
was $3,340,404 for the nine-month period ended September 30, 2023, compared to an income of $17,226,718 in the same period in 2022. The
decrease in gross profit margin was primarily attributable to the lower average selling price of bromine of $3,493 per ton in the nine-month
period ended September 30, 2023 compared to $7,674 per ton in the nine-month period ended September 30, 2022.
Crude salt segment
Income from operations from our crude salt segment
was $904,482 for the nine-month period ended September 30, 2023, compared to an income of $1,497,208 in the same period in 2022.
Chemical products segment
Loss from operations from our chemical products
segment was $1,231,302 for the nine-month period ended September 30, 2023, compared to a loss of $1,436,443 in the same period in 2022.
Natural gas segment
Income from operations from our natural gas segment
was $14,011 for the nine-month period ended September 30, 2023, compared to a loss of $68,938 in the same period in 2022.
Other Income, Net. Other income,
net of $119,805 represented bank interest income, net of capital lease interest expense for the nine -month period ended September 30,
2023, an increase of $962 (or approximately 1%) as compared to the same period in 2022.
Net Income (Loss). Net loss was
$3,015,360 for the nine-month period ended September 30, 2023, compared to a net income of $12,749,228 in the same period in 2022.
Net Income Per Share
For the nine months ended September 30, 2023,
net loss per share was $0.29 compared to an income of $1.22 in the period ending September 30, 2022. There were 10,431,924 shares outstanding
compared to 10,471,924 shares.
Foreign Currency Translation Adjustment
For the nine months ending September 30, 2023,
the Company had a negative foreign currency translation adjustment of $7,879,513 versus a positive adjustment of $30,774,686 in the previous
year. This adjustment impacts all balance sheet translations into U.S. dollars.
26
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2023, cash and cash equivalents
were $103,774,977 as compared to $108,226,214 as of December 31, 2022. The components of this decrease of $4,451,237 are reflected below.
Statement of Cash Flows
Nine-Month Period Ended September 30,
2023
2022
Net cash (used in) provided by operating activities
$ 9,869,612
$ 37,101,024
Net cash used in investing activities
(15,197,648 )
(33,217,987 )
Net cash used in financing activities
(267,810 )
(283,915 )
Effects of exchange rate changes on cash and cash equivalents
1,144,609
(6,728,107 )
Net decrease in cash and cash equivalents
$ (4,451,237 )
$ (3,128,985 )
For the nine-month period ended September 30,
2023, we met our working capital and capital investment requirements by using cash on hand.
Net Cash (used in) Provided by Operating Activities
During the nine-month period ended September 30,
2023, cash flow provided by operating activities of approximately $9.9 million was mainly due to a net loss of $3.02 million, a decrease
in accounts receivable of $3.13 million, an increase in accounts payable of $1.5 million, an increase in deferred taxes of $1.0 million,
and a non-cash adjustment related to depreciation and amortization of property, plant and equipment of $15.4 million, offset by increases
in operating leases, and prepayments.
During the nine-month period ended September 30,
2022, cash flow provided by operating activities of approximately $37 million was mainly due to a net income of $12.75 million, a decrease
in accounts receivable of $3.45 million, an increase in accounts payable of $1.55 million, an decrease in deferred taxes of $3.8 million,
and a non-cash adjustment related to depreciation and amortization of property, plant and equipment of $16.3 million, offset by increases
in operating leases, and prepayments.
Accounts receivable
Cash collections on our accounts receivable had
a major impact on our overall liquidity. The following table presents the aging analysis of our accounts receivable as of September 30,
2023 and December 31, 2022.
September 30, 2023
December 31, 2022
% of total
% of total
Aged 1-30 days
$ 2,149,608
99.9 %
$ 2,792,156
52 %
Aged 31-60 days
510
0.1 %
2,571,010
48 %
Aged 61-90 days
—
—
—
—
Aged 91-120 days
—
—
—
—
Aged 121-150 days
—
—
—
—
Aged 151-180 days
—
—
—
—
Aged 181-210 days
—
—
—
—
Aged 211-240 days
—
—
—
—
Total
$ 2,150,118
100 %
$ 5,363,166
100 %
The overall accounts receivable balance as of
September 30, 2023 decreased by $3,213,048, as compared to those of December 31, 2022. 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 nine-month periods ended September 30, 2023 is required.
27
Inventory
Our inventory consists of the following:
September 30, 2023
December 31, 2022
% of total
% of total
Raw materials
$ 30,413
4 %
$ 26,192
2 %
Finished goods
844,407
96 %
1,572,380
98 %
Total
$ 874,820
100 %
$ 1,598,572
100 %
The net inventory level as of September 30, 2023
decreased by $723,752, as compared to the net inventory level as of December 31, 2022.
Raw materials increased by $4,221 as of September
30, 2023 as compared to December 31, 2022.
Our finished goods decreased by $727,973 as of
September 30, 2023 as compared to December 31, 2022.
Net Cash Used in Investing Activities
For the nine-month period ended September 30,
2023, we used approximately $15.2 million to the flood prevention project aiming to prevent flooding that could harm the wells, aqueducts
and crude salt pans at our plant.
For the nine-month period ended September 30,
2022, we used approximately $33.2 million to acquire property, plant and equipment, which mainly includes the cost for bromine wells,
aqueducts and the installation of high and low voltage lines for bromine Wells.
Net Cash Used in Financing Activities
For the nine-month period ended September 30,
2023 and 2022, we used $0.3 million to repay 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 $103.77
million at September 30, 2023, all of 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 September 30, 2023 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 2022 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).
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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.