| BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (a) Basis
of Presentation and Consolidation The accompanying audited consolidated financial
statements have been prepared by Gulf Resources, Inc. (“Gulf Resources”), a Nevada corporation and its subsidiaries (collectively,
the “Company”). The consolidated financial statements include
the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the British
Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”). HKJI
owns 100% of Shouguang City Haoyuan Chemical Company Limited (“SCHC”) which owns 100% of Shouguang Yuxin Chemical Industry
Co., Limited (“SYCI”) ,Daying County Haoyuan Chemical Company Limited (“DCHC”) and Shouguang Hengde Salt Industry
Co. Ltd. (“SHSI”). All material intercompany transactions have been eliminated on consolidation. (b) Nature
of the Business The Company manufactures and trades bromine through
its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited (“SCHC”) ;manufactures and trades crude salt
through its wholly-owned subsidiary, SHSI; and manufactures chemical products for use in the oil industry, pesticides, paper manufacturing
industry and for human and animal antibiotics through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”)
in the People’s Republic of China (“PRC”). DCHC was established to further explore and develop natural gas and brine
resources (including bromine and crude salt) in the PRC. DCHC’s business commenced trial operation in January 2019 but suspended
production temporarily in May 2019 as required by the government to obtain project approval (see Note 1 (b)(iii)). On March 11, 2020, the World Health Organization
(WHO) officially declared COVID-19 a pandemic. The duration and intensity of the impact of the COVID-19 and resulting disruption to the
Company’s operations and financial position is uncertain. While not fully quantifiable, the Company believes this situation did
not have a material adverse impact on its operating results in the year of 2021. In 2022, COVID may have a slightly larger impact. The
government is conducting frequent unannounced inspections, somewhat disrupting production. In addition, the Company believes the focus
on COVID may have slightly delayed the approval process for one or more of the closed factories. The virus outbreak and resulting supply
chain issues has impacted the overall Chinese economy and thus impacted demand from end customers. It has delayed the delivery of machinery
and other equipment for the Yuxin Chemical factory causing a postponement in its completion and opening. The Company believes the virus
outbreak has delayed the finalization of the Sichuan Province environmental plan, causing a further delay for the Company’s project
in Sichuan Province. (i) Bromine and Crude Salt Segments 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 passed inspection and could resume operations.
In April 2019, Factory No.1, and Factory No.7 resumed operation. On November 25, 2019, the government of Shouguang
City issued a notice ordering all bromine facilities in Shouguang City, including the Company’s bromine facilities, including Factory
No. 1 and Factory No. 7, to temporarily stop production from December 16, 2019 to February 10, 2020. Subsequently, due to the coronavirus
outbreak in China, the local government ordered those bromine facilities to postpone the commencement of production. Subsequently, the
Company received an approval dated February 27, 2020 issued by the local governmental authority allowing the Company to resume production
after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s Government
dated March 5, 2020 allowing the Company 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 (the “March 2020 Approval”). The Company’s Factories No.
1 and No. 7 commenced trial production in mid-March 2020 and commercial production on April 3, 2020 and its Factories No. 4 and No. 9
commenced commercial production on May 6, 2020. The Company received an oral notification from the government for its Factory No. 8, which
permits the Factory No. 8 to resume production in August 2022. The Company is still waiting for governmental
approval for Factories No. 2 and No. 10. To our knowledge, the government is currently completing its planning process for all mining
areas including that for prevention of flood. As a result, we 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. Pursuant to the notification from the government
of Shouguang City, all bromine facilities in Shouguang City were temporarily closed from December 10, 2022 until February 1, 2023 8:00
AM China Time. To comply with such notification, the Company temporarily stopped production at its bromine facilities during the aforesaid
period and reopened the operating bromine and crude salt factories in February2023. (ii) Chemical Segment 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 to the Bohai Marine Fine Chemical Industrial Park (“Bohai Park”).
This was because the two plants were located in a residential area and their production activities impacted the living environment of
the residents. This was as a result of the country’s effort to improve the development of the chemical industry, manage safe production
and curb environmental pollution accidents effectively, and ensure the quality of the living environment of residents. All chemical enterprises
which did not comply with the requirements of the safety and environmental protection regulations were ordered to shut down. In December 2017, the Company secured from the
government the land use rights for its chemical plants located at the Bohai Park and in June 2018, the Company presented a completed construction
design draft and other related documents to the local authorities for approval. In January 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 and basically completed
the civil works by the end of June 2021. On November 15, 2021, the Company announced that due to the supply chain issues as well as the
electric restrictions in China, the delivery of some equipment, the equipment installation and testing and beginning trial production
at the chemical factory had been delayed. On February 22, 2022, the Company announced that 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 and begin testing and trial production. The COVID restrictions and resulting national and international supply
chain issues as well as permitting issues have caused delays in receiving some previously ordered machinery and equipment. The Company
is working with its existing suppliers and may identify new suppliers so that it can complete construction of its factory based on accelerated
delivery. Currently, the Company can not estimate when construction will be completed and production can begin. The Company estimates this relocation process will cost approximately
$ 69 45,584,344 45,584,344 On March 23, 2023, the Company issued a
press release detailing the delays in the opening of our Yuxin chemical factory due to COVID and stricter government regulations. As
noted in the press release, the Company believes that once all of the equipment is delivered, it will take 3 to 4 months to get
them installed. After installation, the testing process is anticipated to take 2 to 3 months, after which it will be in a position
to apply for environmental and safety approval. After we get the approval, it will take us 4 months to conduct trial production, and
then we may start commercial production. (iii) Natural Gas Segment 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 whole natural gas
and brine water project, and approvals for safety production inspection, environmental protection assessment, and to solve the
related land issue. Until these approvals have been received, the Company has had to temporarily halt trial production at its
natural gas well in Daying. In compliance with the Chinese government new policies, the Company is also required to obtain an
exploration license and a mining license for bromine and natural gas, respectively. 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 until the governmental planning has been finalized. (c) Allowance
for Doubtful Accounts We make estimates of the uncollectibility
of accounts receivable, especially analyzing accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts. Credit
evaluations are undertaken for all major sale transactions before shipment is authorized. On a quarterly basis, we evaluate aged items
in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If management were
to make different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could
result. (d) Concentration
of Credit Risk The Company is exposed to credit risk in the normal
course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash
and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited, China
Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise protected. The Company placed $ 115,771,833 108,226,214 (e) Property,
Plant and Equipment Property, plant and equipment are stated at cost
less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment
of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such
costs less 5% residual value over the estimated productive lives. All other ordinary repair and maintenance costs are expensed as incurred. Mineral rights are recorded at cost less accumulated
depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under
the units of production method, whichever is shorter. Construction in process primarily represents direct
costs of construction of property, plant and equipment. Costs incurred are capitalized and transferred to property, plant and equipment
upon completion and depreciation will commence when the completed assets are placed in service. The Company’s depreciation and amortization
policies on property, plant and equipment, other than mineral rights and construction in process, are as follows: Basis of Presentation and Summary of
Significant Accounting Policies - Schedule of Property, Plant and Equipment Useful Life
Minimum Maximum
Useful life (in years)
Buildings (including salt pans) 8 20
Plant and machinery (including protective shells, transmission channels and ducts) 3 8
Motor vehicles
Motor Vehicles 5
Furniture, fixtures and equipment 3 8 Property, plant and equipment under the
capital lease are depreciated over their expected useful lives on the same basis as owned assets, or if where shorter, the term of
the lease. Producing oil and gas properties are depreciated
on a unit-of-production basis over the proved developed reserves. Common facilities that are built specifically to service production
directly attributed to designated oil and gas properties are depreciated based on the proved developed reserves of the respective oil
and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas properties
are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant development projects
are not depreciated until commercial production commences and the reserves related to those costs are excluded from the calculation of
depreciation. (f) Retirement
Benefits Pursuant to the relevant laws and regulations
in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization.
The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required contributions
under the retirement plans are charged to the condensed consolidated statement of income on an accrual basis when they are due. The Company’s
contributions totaled $ 154,184 201,265 (g) Revenue
Recognition Net revenue is net of discount and value added
tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized when the control of the promised goods
is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the customers in
exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product is deemed to be transferred.
Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no rights to return the goods upon acknowledgement
of receipt of goods. Revenue from contracts with customers is disaggregated in Note 14. (h) Recoverability
of Long-lived Assets In accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35 “Impairment or Disposal of Long-lived
Assets” The Company determines the existence of such impairment
by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount
of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the
discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such
assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold
or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to
their estimated salvage value in connection with the decision to dispose of such assets. For the three-month period ended March 31, 2023
and 2022, the Company determined that there were no events or circumstances indicating possible additional impairment of its long-lived
assets. (i) Basic
and Diluted Net Income per Share of Common Stock Basic earnings per common share are based on the
weighted average number of shares outstanding during the periods presented. Diluted earnings per share are computed using weighted
average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would
have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding
stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from
the calculation of number of dilutive common stock equivalents amounted to 0 and 0 shares for the three-month periods ended March 31,
2023 and 2022, respectively. Because the Company reported a net loss for the
three-month periods ended March 31, 2023 and 2022, common stock equivalents including stock options and warrants were anti-dilutive, therefore
the amounts reported for basic and diluted loss per share were the same. (j) Reporting
Currency and Translation The financial statements of the Company’s
foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional
currency and reporting currency of the Company is the United States dollar (“USD” or “$”). As such, the Company uses the “current rate
method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”.
The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date.
The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s
PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive income. The statement of income
and comprehensive income is translated at average rate during the reporting period. Gains or losses resulting from transactions in currencies
other than the functional currencies are recognized in net income for the reporting periods as part of general and administrative expense.
The statement of cash flows is translated at average rate during the reporting period, with the exception of the consideration paid for
the acquisition of business which is translated at historical rates. (k) Foreign
Operations All of the Company’s operations and assets
are located in PRC. The Company may be adversely affected by possible political or economic events in this country. The
effect of these factors cannot be accurately predicted. (l) Inventories Inventories are stated at the lower of cost, determined
on a first-in first-out cost basis, or net realizable value. Costs of work-in-progress and finished goods comprise direct materials, direct
labor and an attributable portion of manufacturing overhead. Net realizable value is based on estimated selling price less costs to complete
and selling expenses. (m) Leases The Company determines if an arrangement is a
lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities
in the consolidated balance sheets. Finance leases are included in finance lease ROU assets and finance lease liabilities in the consolidated
balance sheets. ROU assets represent the Company’s right
to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising
from the lease. Operating lease and finance lease ROU assets and liabilities are recognized at January 1, 2019 based on the present value
of lease payments over the lease term discounted using the rate implicit in the lease. In cases where the implicit rate is not readily
determinable, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the
present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not recognize operating lease
ROU assets and liabilities arising from lease arrangements with lease term of twelve months or less. (n) Stock-based Compensation Stock-based awards issued to employees are recorded
at their fair values estimated at grant date using the Black-Scholes model and the portion that is ultimately expected to vest is recognized
as compensation cost over the requisite service period. Consistent with the accounting requirement for employee stock-based awards, nonemployee
stock-based awards are measured at the grant-date fair value of the equity instruments that the Company is obligated to issue when the
good has been delivered or the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments
have been satisfied. The Company has elected to account for the forfeiture
of stock-based awards as they occur. (o) Loss
Contingencies The Company accrues for loss contingencies relating
to legal matters, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities, when
such liabilities become probable and could be reasonably estimable. Such estimates may be based on advice from third parties or on management’s
judgment, as appropriate. Revisions to accruals are reflected in earnings (loss) in the period in which different facts or information
become known or circumstances change that affect the Company’s previous assumptions with respect to the likelihood or amount of
loss. Amounts paid upon the ultimate resolution of such liabilities may be materially different from previous estimates . (p) Income
Tax The Company accounts for income taxes in accordance
with the Income Taxes Topic of the FASB ASC, which requires the use of the liability method of accounting for deferred income taxes. Under
this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax
basis of assets and liabilities and their reported amounts at each period end. Deferred tax assets and liabilities are measured using
tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized
or settled. The deferred income tax effects of a change in tax rates are recognized in the period of enactment. If it is more likely than
not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The guidance also provides
criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax
position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical
merits. Interests and penalties associated with unrecognized tax benefits are included within the (benefit from) provision for income
tax in the consolidated statement of profit (loss). (q) New
Accounting Pronouncements Recent accounting pronouncements adopted There were no recent accounting pronouncements adopted during the three
months ended March 31, 2023. Recently Issued Accounting Pronouncements Not
Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments
– Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update affect loans,
debt securities, trade. receivables, and any other financial assets that have the contractual
right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets.
For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within
those fiscal years. For the Company which is a smaller reporting company, ASU No. 2019-10 extends the effective dates for two years. The
Company is currently evaluating the effect of this on the condensed consolidated financial statements and related disclosure. |
