Gulf Resources, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results are reported in U.S. dollars. Gulf Resources operates through China-based subsidiaries in bromine, crude salt, chemical products and natural gas.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $15.71 million | $11.15 million | $24.64 million | $16.41 million |
| Gross profit / margin | $7.61 million / 48% | $4.23 million / 38% | $11.99 million / 49% | $5.31 million / 32% |
| Operating income (loss) | $5.11 million | $(2.38) million | $5.04 million | $(5.66) million |
| Net income (loss) | $3.90 million | $(2.70) million | $3.78 million | $(5.21) million |
| Diluted EPS | $0.37 | $(0.26) | $0.36 | $(0.50) |
| Operating cash flow | Not separately stated for the quarter | $18.49 million | $7.03 million |
- Revenue growth was driven primarily by higher selling prices. Q2 bromine revenue rose 39% to $13.89 million; crude salt revenue rose 62% to $1.82 million. For the first half, bromine revenue increased 48% and crude salt revenue 64%.
- Q2 gross margin improved to 48% from 38%. Bromine’s Q2 average selling price was $7,740 per tonne versus $5,556 a year earlier; crude salt’s average selling price increased 47%, while sales volume increased 10%.
- Q2 results also benefited from substantially lower corporate costs: Q2 2021 included about $3.1 million of management stock-grant charges. First-half 2022 general and administrative expense fell 60% year over year.
- Cash was $79.12 million at June 30, down from $95.77 million at year-end 2021. Current assets were $95.55 million and current liabilities $13.61 million. The company reported $18.49 million of operating cash flow, offset by $33.22 million of capital spending, $0.28 million of lease repayments and $1.64 million of adverse exchange effects.
- Total liabilities were $23.04 million, principally lease obligations; the filing reports no borrowings. Finance and operating lease liabilities totaled $10.04 million. Capital expenditure commitments were $18.70 million, including $17.67 million due within 12 months.
Material developments, outlook and risks
- All reported revenue was from bromine and crude salt in Q2; chemical factories remained closed and generated no revenue. Natural-gas activity remained suspended pending approvals, with only $50,678 of first-half revenue from equipment rental.
- Management attributed production disruption to government COVID-related inspections and temporary facility shutdowns. The four operating bromine/crude-salt facilities reopened on February 21, 2022. Bromine utilization was reported at 23% for Q2 and 27% for the first half, calculated against annual capacity including facilities not yet operating.
- Factories No. 2, 8 and 10 still required government approval. Management expected approval for one in 2022 and was seeking another in early 2023; modifications to wells and aqueducts may be required.
- The chemical-factory relocation and construction project is estimated to cost approximately $69 million. About $45.58 million had been recorded in prepaid land leases and property, plant and equipment by June 30. Supply-chain, COVID-related and permitting delays continued, and management could not estimate completion or production start.
- Management stated that available funds and operating cash flows should meet operating needs and obligations over the next 12 months. No cash dividends were anticipated in the foreseeable future. No formal financial guidance was provided.
- Currency exposure was significant: the RMB declined approximately 6.1% against the U.S. dollar, contributing to a $14.84 million first-half foreign-currency translation loss. Net income therefore coexisted with a comprehensive loss of $11.06 million for the six months.
- Land-use enforcement remains a contingency. Prior administrative decisions and court rulings involved potential land return, restoration or demolition and aggregate penalties of about RMB 1.3 million ($184,000). The company considered enforcement and material loss remote and recorded no accrual, but acknowledged further action could cause liabilities, penalties or operational disruption.
- Other notable exposures include substantially all cash held at PRC financial institutions without deposit insurance, 52.9% of first-half sales to the top five customers, and 100% of raw-material purchases from the top five suppliers. The company also reported land-use certificates were unavailable for certain properties.
Key facts for investors to verify
- Whether bromine and crude-salt selling prices and margins remain resilient, and how production is affected by inspections and shutdowns.
- Progress and timing of approvals for additional bromine factories, completion of the chemical relocation project, and resumption of natural-gas operations.
- Cash deployment, the scale and timing of remaining capital commitments, and the location and accessibility of cash held in China.
- Resolution of land-use enforcement matters and the status of property and land-use certificates.
- Customer and supplier concentration, RMB exchange-rate effects, and the basis for management’s liquidity assessment.