Gulf Resources, Inc. (NASDAQ: GURE) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated financial statements; amounts in U.S. dollars. The company operates in China, primarily producing and selling bromine and crude salt.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $11.15 million | $5.36 million | $16.41 million | $5.92 million |
| Gross profit | $4.23 million | $0.34 million | $5.31 million | $(0.03) million |
| Gross margin | 38% | 6% | 32% | Approximately (0.5)% |
| Operating loss | $(2.38) million | $(2.95) million | $(5.66) million | $(7.79) million |
| Net loss | $(2.70) million | $(2.24) million | $(5.21) million | $(5.78) million |
| Basic and diluted loss per share | $(0.26) | $(0.24) | $(0.50) | $(0.61) |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $7.03 million | $1.18 million |
| Capital expenditures | Not separately presented for the quarter | Not separately presented for the quarter | $5.81 million | $9.86 million |
Financial position and liquidity
- At June 30, 2021, cash was $97.06 million, compared with $94.22 million at December 31, 2020. Cash was held with financial institutions in China and was not insured or otherwise protected, according to the filing.
- Current assets were $104.96 million and current liabilities were $9.21 million, implying working capital of approximately $95.75 million. Total assets were $296.43 million; total liabilities were $18.32 million.
- The filing reports finance and operating lease liabilities totaling $9.74 million. It does not disclose conventional bank borrowings in the presented balance sheet.
- Six-month cash increased by $2.84 million: operating cash flow of $7.03 million and exchange-rate effects of $1.91 million more than offset $5.81 million of investing outflows and $0.30 million of finance-lease repayments.
- Management said available funds and operating cash flows should meet anticipated operating needs and obligations for the next 12 months. The company reported no planned cash dividends in the foreseeable future.
Changes and operating performance
- Q2 revenue increased 108% year over year; first-half revenue increased 177%. Management attributed the gains principally to higher bromine selling prices and volumes, and higher crude-salt selling prices and volumes.
- Bromine accounted for approximately 90% of first-half revenue. First-half bromine revenue rose to $14.84 million from $4.95 million; crude-salt revenue rose to $1.57 million from $0.97 million. Chemical-products and natural-gas revenue remained zero.
- First-half bromine gross margin improved to 39% from 1%. Crude salt remained loss-making, with a 29% gross loss margin versus 10% a year earlier.
- Despite higher Q2 sales, the company’s Q2 net loss widened to $2.70 million from $2.24 million. General and administrative expense rose to $5.20 million from $1.54 million, including $3.13 million of expense for 472,000 restricted shares granted and immediately vested during the quarter.
- For the first half, net loss narrowed to $5.21 million from $5.78 million, while general and administrative expense increased to $6.94 million from $2.39 million. Bromine operations moved to a first-half operating profit of $1.40 million from a $4.35 million loss.
- Bromine capacity utilization was reported as 23% for Q2 and 27% for the first half, compared with 15% and 17%, respectively, in 2020. These utilization calculations use capacity across all seven factories, including factories not operating.
Outlook, risks and unusual items
- Production approvals and construction: Four bromine factories were operating after resuming production; approvals for factories No. 2, No. 8 and No. 10 remained pending. Management expected approvals in the second half of 2021, while noting possible modifications and COVID-related delays. This is an expectation, not formal financial guidance.
- Chemical business: Chemical factories had been closed since 2017 and generated no revenue. The replacement facility at Bohai Park had substantially completed civil works by June 2021; equipment installation and testing were expected to take six months or longer, followed by another six months of trial production. The relocation was estimated to cost approximately $67 million in total; $41.08 million had been incurred or recorded in relevant asset accounts by June 30, 2021. Capital expenditure commitments totaled $11.13 million.
- Legal and land-use contingency: Government decisions and court rulings concern alleged unauthorized land use at several bromine factories and include potential land return, restoration, demolition or confiscation, and an aggregate monetary penalty of approximately $184,000. The company said enforcement was considered remote and recorded no accrual, but acknowledged further enforcement could create liabilities, penalties or operational disruption.
- Other risks: Operations and assets are in China; cash is concentrated in Chinese financial institutions. COVID-19’s future impact was uncertain. The top five customers represented 66.4% of first-half sales, and the top five suppliers provided all raw materials. The company also reported buildings and salt pans without ownership certificates and land parcels for which it could not obtain land-use-right certificates.
- Currency and equity: Foreign-currency translation produced a $3.15 million first-half other comprehensive gain. The 472,000 restricted shares issued for services increased outstanding shares; 10,469,477 shares were outstanding at June 30, 2021.
Important facts for investors to verify
- Progress and timing of approvals for bromine factories No. 2, No. 8 and No. 10, and any resulting changes to production capacity or utilization.
- Completion, total cost, remaining commitments and start-up schedule for the Bohai chemical factory, including whether trial production begins as expected.
- Current status and potential financial or operational consequences of the land-use enforcement matters, including whether any penalties or court orders may be enforced.
- Cash availability and concentration risk at Chinese banks, customer collections, and the company’s ability to fund capital spending and operating needs.
- Revenue and margin sustainability given dependence on bromine, customer concentration, and continuing crude-salt losses.
- Reconcile apparent presentation errors in the filing: its MD&A narrative contains inconsistent wording about Q2 operating results and six-month gross profit, while the financial statements report an operating loss in Q2 2021 and six-month gross profit of $5.31 million.