NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Basis
of Presentation and Consolidation
The accompanying condensed financial statements
have been prepared by Gulf Resources, Inc. a Nevada corporation and its subsidiaries (collectively, the “Company”),
without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and
footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting
principles generally accepted in the United States (“US GAAP”).
In the opinion of management, the unaudited
financial information for the quarter ended March 31, 2017 presented reflects all adjustments, which are only normal and recurring,
necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements
should be read in conjunction with the financial statements included in the Company’s 2016 Form 10-K. Operating
results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the
financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current
events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company
also exercises judgments in the preparation of these condensed financial statements in the areas including classification of leases
and related party transactions.
On September 2, 2016, the Company announced the planned merger
of two of its 100% owned subsidiaries, Shouguan Yuxin Chemical Co., Limited (“SYCI”) and Shouguan Rongyuan Chemical
Co., Ltd (“SCRC”). On March 24, 2017, the legal process of the merger was completed and SCRC was officially deregistered
on March 28, 2017. The results of these two subsidiaries were reported as SYCI in the three months ended March 31, 2017.
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”) and Daying County Haoyuan Chemical Company Limited (“DCHC”). All
material intercompany transactions have been eliminated on consolidation.
(b) Nature
of the Business
The Company manufactures and trades bromine
and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC"), 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 PRC. The business is not fully operational as of March 31, 2017.
(c) Allowance
for Doubtful Accounts
As of March 31, 2017 and December 31, 2016,
allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the condensed consolidated statements
of income for the three-month periods ended March 31, 2017 and 2016.
(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 $172,804,078 and $163,884,574 with these institutions as of March 31, 2017 and December 31, 2016,
respectively. The Company has not experienced any losses in such accounts in the PRC.
Concentrations of credit risk with respect
to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However,
such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial
condition. Approximately 61.8% and 61.6% of the balance of accounts receivable as of March 31, 2017 and December 31, 2016,
respectively, are outstanding for less than three months. For the balances of accounts receivable aged more than 90 days as of
March 31, 2017, approximately 30% were settled by April 30, 2017.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(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 plant, machinery and equipment. Costs incurred are capitalized and transferred to property and
equipment upon completion, at which time depreciation commences.
The Company’s depreciation and amortization
policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:
|
|
|
Useful life
(in years)
|
|
Buildings (including salt pans)
|
|
8 - 20
|
|
Plant and machinery (including protective shells, transmission channels and ducts)
|
|
3 - 8
|
|
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 where shorter, the term of
the lease, which is 20 years.
(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 $255,216 and $249,463 for the three-month periods ended March 31, 2017
and 2016, respectively.
(g) Revenue
Recognition
The Company recognizes revenue, net of
value-added tax, when persuasive evidence of an arrangement exists, delivery of the goods has occurred, customer acceptance has
been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable
and collectability is reasonably assured.
(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”
, long-lived assets to be held and used are analyzed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets
are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that
indicate possible impairment.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(h) Recoverability
of Long-lived Assets – Continued
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, 2017 and 2016, the Company determined that there are no events or circumstances indicating possible 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 25,000 and 57,192 shares for the three-month periods
ended March 31, 2017 and 2016, respectively.
The following table sets forth the computation
of basic and diluted earnings per share:
|
|
|
Three-Month Period Ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
Numerator
|
|
|
|
|
|
Net income
|
|
$
|
8,075,120
|
|
|
$
|
6,466,964
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Basic: Weighted-average common shares outstanding during the period
|
|
|
46,793,791
|
|
|
|
46,007,120
|
|
|
Add: Dilutive effect of stock options
|
|
|
10,450
|
|
|
|
733,206
|
|
|
Diluted
|
|
|
46,804,241
|
|
|
|
46,740,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
(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) Exploration
Costs
Exploration costs, which included the cost
of researching for appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other
resources, are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all
subsequent costs are capitalized.
(m) Goodwill
Goodwill represents the excess of the purchase
price over the net of the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities
assumed in business acquisitions. Management of the Company evaluates the carrying value of goodwill annually or when a possible
impairment is indicated. The Company performs its impairment assessment annually and between annual tests in certain circumstances
and determined that there was no impairment of goodwill. Goodwill impairment is assessed using the expected present value of associated
future cash flows.
(n) New
Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU No.
2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies
several aspects of the accounting for share-based payment award transactions, including: (1) income tax consequences; (2) classification
of awards as either equity or liabilities, and (3) classification on the statement of cash flows. For public companies, the amendments
in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.
The Company adopted the amendments in this Update as of January 1, 2017. There is no impact on the financial statements since
any excess tax benefits were fully offset by a valuation allowance and not recognized for financial statement purposes.
Recently Issued Accounting Pronouncements
Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14 which deferred the effective
date of Update 2014-09 to annual reporting periods beginning after December 15, 2017. Early application is permitted only as of
annual reporting periods beginning after December 15, 2016. The Company expects to adopt the new standard in the first quarter
of 2018. It has made significant progress in evaluating its existing contracts and accounting policies to determine the impact
this standard will have on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842). The amendments in this Update specify the accounting for leases. The core principle of Topic 842 is
that a lessee should recognize the assets and liabilities that arise from leases. For public business entities, the amendments
in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. The Company is evaluating the impact of this on the consolidated financial statements and related disclosures.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 2 – INVENTORIES
Inventories consist of:
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
796,244
|
|
|
$
|
818,500
|
|
|
Finished goods
|
|
|
3,561,912
|
|
|
|
4,370,331
|
|
|
Work-in-progress
|
|
|
789,607
|
|
|
|
692,850
|
|
|
Allowance for obsolete and slow-moving inventory
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
5,147,763
|
|
|
$
|
5,881,681
|
|
NOTE 3 – PREPAID LAND LEASES
The Company prepaid for land leases with
lease terms for periods ranging from one to fifty years to use the land on which the production facilities and warehouses of the
Company are situated. The prepaid land lease is amortized on a straight line basis.
During the three-month periods ended March
31, 2017 and 2016, amortization of prepaid land leases totaled $107,461 and $131,544, respectively, which amounts were recorded
as cost of net revenue.
The Company has the rights to use certain
parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships or the government authority.
For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The
parcels of land of which the Company cannot obtain land use rights certificates covers a total of approximately 54.97 square kilometers
of aggregate carrying value of $858,871 and approximately 54.97 square kilometers of aggregate carrying value of $620,978 as at
March 31, 2017 and December 31, 2016, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
At cost:
|
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
4,462,438
|
|
|
$
|
4,438,115
|
|
|
Buildings
|
|
|
62,300,940
|
|
|
|
61,656,398
|
|
|
Plant and machinery
|
|
|
185,802,691
|
|
|
|
184,544,140
|
|
|
Motor vehicles
|
|
|
8,327
|
|
|
|
8,282
|
|
|
Furniture, fixtures and office equipment
|
|
|
4,578,428
|
|
|
|
4,553,473
|
|
|
Construction in process
|
|
|
—
|
|
|
|
374,790
|
|
|
Total
|
|
|
257,152,824
|
|
|
|
255,575,198
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(152,998,604
|
)
|
|
|
(146,844,072
|
)
|
|
Net book value
|
|
$
|
104,154,220
|
|
|
$
|
108,731,126
|
|
The Company has certain buildings and salt
pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships or
the government authority. The Company has not been able to obtain property ownership certificates over these buildings and salt
pans. The aggregate carrying values of these properties situated on parcels of the land are $34,751,155 and $35,184,613 as at March
31, 2017 and December 31, 2016, respectively.
During the three-month period ended March
31, 2017, depreciation and amortization expense totaled $5,360,103, of which $5,068,503 and $291,600 were recorded as cost of net
revenue and administrative expenses, respectively. During the three-month period ended March 31, 2016, depreciation and amortization
expense totaled $6,786,400, of which $6,438,140 and $348,260 were recorded as cost of net revenue and administrative expenses,
respectively.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES,
NET
Property, plant and equipment under capital leases, net consist
of the following:
|
|
|
March 31,
2017
|
|
December 31,
2016
|
|
At cost:
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
119,273
|
|
|
$
|
118,623
|
|
|
Plant and machinery
|
|
|
2,241,995
|
|
|
|
2,229,775
|
|
|
Total
|
|
|
2,361,268
|
|
|
|
2,348,398
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(1,882,817
|
)
|
|
|
(1,794,141
|
)
|
|
Net book value
|
|
$
|
478,451
|
|
|
$
|
554,257
|
|
The above buildings erected on parcels
of land located in Shouguang, PRC, are collectively owned by local townships. The Company has not been able to obtain
property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying
parcels of land.
During the three-month period ended March
31, 2017, depreciation and amortization expense totaled $78,996, which was recorded as cost of net revenue. During the three-month
period ended March 31, 2016, depreciation and amortization expense totaled $83,320, which was recorded as cost of net revenue.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
Accounts payable and accrued expenses consist
of the following:
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Accounts payable
|
|
$
|
9,433,132
|
|
|
$
|
7,513,075
|
|
|
Salary payable
|
|
|
292,789
|
|
|
|
319,489
|
|
|
Social security insurance contribution payable
|
|
|
117,905
|
|
|
|
119,444
|
|
|
Other payables
|
|
|
522,950
|
|
|
|
730,310
|
|
|
Total
|
|
$
|
10,366,776
|
|
|
$
|
8,682,318
|
|
NOTE 7 – RELATED PARTY TRANSACTIONS
During the three-month period ended March
31, 2017, the Company borrowed a sum of $150,000 from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in
which Mr. Ming Yang, a shareholder and the Chairman of the Company, has a 100% equity interest. The amount due to Jiaxing Lighting
was unsecured, interest free and repayable on demand and was fully settled in the three-month period ended March 31, 2017. There
was no balance owing to Jiaxing Lighting as of March 31, 2017 and December 31, 2016.
During the fiscal year 2013, the Company
entered into an agreement with the Shandong Shouguang Vegetable Seed Industry Group Co., Ltd, a related party, to provide property
management services for an annual amount of approximately $100,704 for five years from January 1, 2013 to December 31, 2017. The
expense associated with this agreement for the three months ended March 31, 2017 and 2016 was approximately $22,600 and $25,500.
NOTE 8 – TAXES PAYABLE
|
Taxes payable consists of the following:
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
201
7
|
|
2016
|
|
Income tax payable
|
|
$
|
2,880,718
|
|
|
$
|
1,849,535
|
|
|
Natural resource tax
|
|
|
359,597
|
|
|
|
651,230
|
|
|
Value added tax payable
|
|
|
1,661,531
|
|
|
|
887,913
|
|
|
Land use tax payable
|
|
|
767,926
|
|
|
|
818,921
|
|
|
Other tax payables
|
|
|
185,793
|
|
|
|
133,732
|
|
|
Total
|
|
$
|
5,855,566
|
|
|
$
|
4,341,331
|
|
NOTE 9 – CAPITAL LEASE OBLIGATIONS
The components of capital lease obligations
are as follows:
|
|
|
Imputed
|
|
March 31,
|
|
December 31,
|
|
|
|
Interest rate
|
|
2017
|
|
2016
|
|
Total capital lease obligations
|
|
|
6.7%
|
|
|
$
|
2,527,862
|
|
|
$
|
2,472,637
|
|
|
Less: Current portion
|
|
|
|
|
|
|
(230,380
|
)
|
|
|
(187,678
|
)
|
|
Capital lease obligations, net of current portion
|
|
|
|
|
|
$
|
2,297,482
|
|
|
$
|
2,284,959
|
|
Interest expenses from capital lease obligations
amounted to $41,753 and $45,891 for the three-month periods ended March 31, 2017 and 2016, respectively, were charged to the condensed
consolidated statement of income. See Note 17 for future minimum lease payments disclosure.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 10 –EQUITY
During the annual general meeting held
on June 18, 2013, the shareholders of the Company approved the amendment to the Certificate of Incorporation to decrease the number
of the authorized shares of the Company’s common stocks to 80,000,000. The Company has completed the filing of the amendment
and restatement of the Certificate of Incorporation with the Secretary of the State of Delaware to decrease the number of authorized
shares of the Company’s common stock. Accordingly, 80,000,000 is disclosed as the authorized shares of the Company’s
common stock in the consolidated balance sheets as of March 31, 2017 and December 31, 2016.
|
|
(b)
|
Retained Earnings - Appropriated
|
In accordance with the relevant PRC regulations
and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit
after tax to the following reserve:
Statutory Common Reserve Funds
SCHC, SYCI and DCHC are required each year
to transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common
Reserve Funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any
loss incurred or to increase share capital. Except for the reduction of losses incurred, any other application should
not result in this reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of March 31,
2017 for SCHC, SYCI and DCHC is 45%, 15% and 0% of its registered capital respectively.
NOTE 11 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended and Restated 2007 Equity
Incentive Plan approved in 2011(“Plan”), the aggregate number shares of the Company’s common stock available
for grant of stock options and issuance is 4,341,989 shares. On October 5, 2015, during the annual meeting of the Company’s
stockholders, the aggregate number of shares reserved and available for grant and issuance pursuant to the Plan was increased to
10,341,989. As of March 31, 2017, the number of shares of the Company’s common stock available for issuance under the Plan
is 7,338,489.
The fair value of each option award below
is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity
in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted,
volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical
option exercise pattern.
On March 2, 2017, the Company granted to
an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.98
per share and the options vested immediately. The options were valued at $9,000 fair value, with assumed 57.42% volatility, a three-year
expiration term, with an expected tenor of 1.69 years, a risk free rate of 1.59% and no dividend yield. For the three-month period
ended March 31, 2017, $9,000 was recognized as general and administrative expenses.
The following table summarizes all Company
stock option transactions between January 1, 2017 and March 31, 2017.
|
|
|
Number of Option
and Warrants
Outstanding and exercisable
|
|
Weighted- Average Exercise price of Option
and Warrants
|
|
Range of
Exercise Price per Common Share
|
|
Balance, January 1, 2017
|
|
|
|
185,000
|
|
|
|
$2.19
|
|
|
|
$1.54 - $4.80
|
|
|
Granted
and vested during the period ended March 31, 2017
|
|
|
|
12,500
|
|
|
|
$1.98
|
|
|
|
$1.98
|
|
|
Expired
during the period ended March 31, 2017
|
|
|
|
(12,500
|
)
|
|
|
$2.55
|
|
|
|
$2.55
|
|
|
Balance, March 31, 2017
|
|
|
|
185,000
|
|
|
|
$2.16
|
|
|
|
$1.54 - $4.80
|
|
|
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
Outstanding at March 31, 2017
|
|
Range of
Exercise Prices
|
|
Contractual Life
(Years)
|
|
|
Exercisable and outstanding
|
|
185,000
|
|
$1.54 - $4.80
|
|
1.81
|
|
The aggregate intrinsic value of options outstanding and exercisable
as of March 31, 2017 was $5,100.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 12 – INCOME TAXES
The Company utilizes the asset and liability
method of accounting for income taxes in accordance with FASB ASC 740-10.
(a) United
States
Gulf Resources, Inc. may be subject to
the United States of America Tax law at tax rate of 35%. No provision for the US federal income taxes has been made as the Company
had no US taxable income for the three-month periods ended March 31, 2017 and 2016, and management believes that its earnings are
permanently invested in the PRC.
(b) BVI
Upper Class Group Limited, a subsidiary
of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income
or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month periods ended March
31, 2017 and 2016.
(c) Hong
Kong
Hong Kong Jiaxing Industrial Limited, a
subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company
is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No
provision for profits tax has been made as the Company has no assessable income for the three-month periods ended March 31, 2017
and 2016. The applicable statutory tax rates for the three-month periods ended March 31, 2017 and 2016 are 16.5%.
(d) PRC
Enterprise income tax (“EIT”)
for SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC, SYCI and
DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise
Income Tax Law.
On February 22, 2008, the Ministry of Finance
(“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular
1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008
to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned
by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.
As of March 31, 2017 and December 31, 2016,
the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC are $283,863,796
and $274,769,840, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland
China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the
foreseeable future. Accordingly, as of March 31, 2017 and December 31, 2016, the Company has not recorded any WHT on the cumulative
amount of distributable retained earnings of its foreign invested enterprises in China. As of March 31, 2017 and December 31, 2016,
the unrecognized WHT are $13,206,016 and $12,756,698, respectively.
The Company’s tax returns are subject
to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the
Company’s tax returns filed in the United States for three years from the date of filing. The Company’s US tax returns
since 2013 are currently subject to examination. Inland Revenue Department of Hong Kong may examine the Company’s tax returns
filed in Hong Kong for seven years from date of filing. The Company’s Hong Kong tax returns since incorporation in year 2009
are currently subject to examination. The tax authorities of the PRC may examine the Company’s PRC tax returns for three
years from the date of filing.
The components of the provision for income
taxes from continuing operations are:
|
|
|
Three-Month Period Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
Current taxes – PRC
|
|
$
|
2,821,826
|
|
|
$
|
2,267,671
|
|
|
Deferred taxes – PRC
|
|
|
—
|
|
|
|
—
|
|
|
|
|
$
|
2,821,826
|
|
|
$
|
2,267,671
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 12 – INCOME TAXES – Continued
The effective income tax expenses differ
from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
|
|
|
Three-Month Period Ended March 31,
|
|
Reconciliations
|
|
2017
|
|
2016
|
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
Non-deductible expense and change in valuation allowance
|
|
|
1
|
%
|
|
|
1
|
%
|
|
Effective tax rate
|
|
|
26
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Company’s
deferred tax assets and liabilities at March 31, 2017 and December 30, 2016 are as follows:
|
|
|
March 31,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Impairment on property, plant and equipment
|
|
|
423,413
|
|
|
|
421,106
|
|
|
Exploration costs
|
|
|
1,804,502
|
|
|
|
1,794,667
|
|
|
Compensation costs of unexercised stock options
|
|
|
119,786
|
|
|
|
120,986
|
|
|
US federal net operating loss
|
|
|
11,617,000
|
|
|
|
11,575,000
|
|
|
Total deferred tax assets
|
|
|
13,964,701
|
|
|
|
13,911,759
|
|
|
Valuation allowance
|
|
|
(11,736,786
|
)
|
|
|
(11,695,986
|
)
|
|
Net deferred tax asset
|
|
$
|
2,227,915
|
|
|
$
|
2,215,773
|
|
The increase in valuation allowance for
the three-month period ended March 31, 2017 is $40,800.
The decrease in valuation allowance for
the three-month period ended March 31, 2016 is $101,645.
There were no unrecognized tax benefits
and accrual for uncertain tax positions as of March 31, 2017 and December 31, 2016.
NOTE 13 – BUSINESS SEGMENTS
The Company has four reportable segments: bromine,
crude salt, chemical products and natural gas. The reportable segments are consistent with how management views the markets served
by the Company and the financial information that is reviewed by its chief operating decision maker.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – BUSINESS SEGMENTS – Continued
An operating segment’s performance
is primarily evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs
and other income not associated with the operations of the segment. These corporate costs (income) are separately stated below
and also include costs that are related to functional areas such as accounting, treasury, information technology, legal, human
resources, and internal audit. The Company believes that segment operating income, as defined above, is an appropriate measure
for evaluating the operating performance of its segments. All the customers are located in PRC.
|
Three-Month Period Ended March 31, 2017
|
|
Bromine *
|
|
Crude
Salt *
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
13,922,394
|
|
|
$
|
1,813,778
|
|
|
$
|
17,052,321
|
|
|
$
|
—
|
|
|
$
|
32,788,493
|
|
|
$
|
—
|
|
|
$
|
32,788,493
|
|
Net revenue
(intersegment)
|
|
|
2,178,493
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,178,493
|
|
|
|
—
|
|
|
|
2,178,493
|
|
|
Income (loss) from operations before taxes
|
|
|
5,271,933
|
|
|
|
885,888
|
|
|
|
4,946,177
|
|
|
|
(23,758
|
)
|
|
|
11,080,240
|
|
|
|
(267,243
|
)
|
|
|
10,812,997
|
|
|
Income taxes
|
|
|
1,330,103
|
|
|
|
223,582
|
|
|
|
1,268,141
|
|
|
|
—
|
|
|
|
2,821,826
|
|
|
|
—
|
|
|
|
2,821,826
|
|
|
Income (loss) from operations after taxes
|
|
|
3,941,830
|
|
|
|
662,306
|
|
|
|
3,678,036
|
|
|
|
(23,758
|
)
|
|
|
8,258,414
|
|
|
|
(267,243
|
)
|
|
|
7,991,171
|
|
|
Total assets
|
|
|
155,178,113
|
|
|
|
28,641,633
|
|
|
|
192,675,503
|
|
|
|
1,802,854
|
|
|
|
378,298,103
|
|
|
|
37,109
|
|
|
|
378,335,212
|
|
|
Depreciation and amortization
|
|
|
3,998,581
|
|
|
|
454,447
|
|
|
|
986,070
|
|
|
|
—
|
|
|
|
5,439,098
|
|
|
|
—
|
|
|
|
5,439,098
|
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
27,820,174
|
|
|
|
—
|
|
|
|
27,820,174
|
|
|
|
—
|
|
|
|
27,820,174
|
|
|
Three-Month Period Ended March 31, 2016
|
|
Bromine *
|
|
Crude
Salt *
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
13,169,528
|
|
|
$
|
1,766,608
|
|
|
$
|
19,559,314
|
|
|
$
|
—
|
|
|
$
|
34,495,450
|
|
|
$
|
—
|
|
|
$
|
34,495,450
|
|
Net revenue
(intersegment)
|
|
|
1,822,202
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,822,202
|
|
|
|
—
|
|
|
|
1,822,202
|
|
|
Income (loss) from operations before taxes
|
|
|
3,005,518
|
|
|
|
227,613
|
|
|
|
5,723,731
|
|
|
|
—
|
|
|
|
8,956,862
|
|
|
|
(290,544
|
)
|
|
|
8,666,318
|
|
|
Income taxes
|
|
|
743,370
|
|
|
|
63,504
|
|
|
|
1,460,797
|
|
|
|
—
|
|
|
|
2,267,671
|
|
|
|
—
|
|
|
|
2,267,671
|
|
|
Income (loss) from operations after taxes
|
|
|
2,262,148
|
|
|
|
164,109
|
|
|
|
4,262,934
|
|
|
|
—
|
|
|
|
6,689,191
|
|
|
|
(290,544
|
)
|
|
|
6,398,647
|
|
|
Total assets
|
|
|
150,811,432
|
|
|
|
30,335,316
|
|
|
|
185,961,792
|
|
|
|
—
|
|
|
|
367,108,540
|
|
|
|
36,152
|
|
|
|
367,144,692
|
|
|
Depreciation and amortization
|
|
|
4,367,792
|
|
|
|
1,192,666
|
|
|
|
1,309,263
|
|
|
|
—
|
|
|
|
6,869,721
|
|
|
|
—
|
|
|
|
6,869,721
|
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
29,706,970
|
|
|
|
—
|
|
|
|
29,706,970
|
|
|
|
—
|
|
|
|
29,706,970
|
|
* Certain common production overheads,
operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments
in SCHC were split by reference to the average selling price and production volume of respective segment.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – BUSINESS SEGMENTS – Continued
|
|
|
Three-Month Period Ended March 31,
|
|
Reconciliations
|
|
2017
|
|
2016
|
|
Total segment operating income
|
|
$
|
11,080,240
|
|
|
$
|
8,956,862
|
|
|
Corporate costs
|
|
|
(129,988
|
)
|
|
|
(160,082
|
)
|
|
Unrealized loss on translation of intercompany balance
|
|
|
(137,255
|
)
|
|
|
(130,462
|
)
|
|
Income from operations
|
|
|
10,812,997
|
|
|
|
8,666,318
|
|
|
Other income
|
|
|
83,949
|
|
|
|
68,317
|
|
|
Income before taxes
|
|
$
|
10,896,946
|
|
|
$
|
8,734,635
|
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended March 31, 2017.
|
Number
|
|
Customer
|
Bromine
(000’s)
|
|
Crude Salt
(000’s)
|
|
Chemical Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage of
Total
Revenue (%)
|
|
1
|
|
Shandong Morui Chemical Company Limited
|
$ 2,594
|
|
$ 497
|
|
$ 1,085
|
|
$ 4,176
|
|
12.7%
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended March 31, 2016.
|
Number
|
|
Customer
|
Bromine
(000’s)
|
|
Crude Salt
(000’s)
|
|
Chemical Products
(000’s)
|
|
Total
Revenue
(000’s)
|
|
Percentage of
Total
Revenue (%)
|
|
1
|
|
Shandong Morui Chemical Company Limited
|
$ 2,422
|
|
$ 487
|
|
$ 1,301
|
|
$ 4,210
|
|
12.2%
|
NOTE 14– CUSTOMER CONCENTRATION
During the three-month periods ended March
31, 2017 and 2016, the Company sold 36.4% and 34.4% of its products to its top five customers, respectively. As of March 31, 2017
and 2016, amounts due from these customers were $30,263,356 and $22,632,476, respectively. This concentration makes the Company
vulnerable to a near-term severe impact, should the relationships be terminated.
NOTE 15 – MAJOR SUPPLIERS
During the three-month period ended March
31, 2017 and 2016, the Company purchased 69.7% and 55.2% of its raw materials from its top five suppliers, respectively. As
of March 31, 2017 and 2016, amounts due to those suppliers included in accounts payable were $5,639,164 and $5,328,377, respectively.
This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2017
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 16 – FAIR VALUE OF FINANCIAL
INSTRUMENTS
The carrying values of financial instruments,
which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term
nature of these instruments. There were no material unrecognized financial assets and liabilities as of March 31, 2017
and December 31, 2016.
NOTE 17 – CAPITAL COMMITMENT AND
OPERATING LEASE COMMITMENTS
As of March 31, 2017, the Company has leased
a real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment
and the buildings located on the property, under a capital lease. The future minimum lease payments required under the capital
lease, together with the present value of such payments, are included in the table show below.
The Company has leased nine parcels of
land under non-cancelable operating leases, which are fixed rentals and expire through December 2021, December 2023, December 2030,
December 2031, December 2032, December 2040, February 2059, August 2059 and June 2060, respectively.
The Company has no purchase commitments
as of March 31, 2017.
The following table sets forth the Company’s
contractual obligations as of March 31, 2017:
|
|
|
Capital Lease Obligations
|
|
Operating Lease Obligations
|
|
Property Management Fees
|
|
Payable within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
272,052
|
|
|
$
|
932,376
|
|
|
$
|
90,423
|
|
|
the next 13 to 24 months
|
|
|
272,052
|
|
|
|
953,137
|
|
|
|
—
|
|
|
the next 25 to 36 months
|
|
|
272,052
|
|
|
|
974,719
|
|
|
|
—
|
|
|
the next 37 to 48 months
|
|
|
272,052
|
|
|
|
997,450
|
|
|
|
—
|
|
|
the next 49 to 60 months
|
|
|
272,052
|
|
|
|
858,660
|
|
|
|
—
|
|
|
thereafter
|
|
|
2,448,472
|
|
|
|
16,324,845
|
|
|
|
—
|
|
|
Total
|
|
$
|
3,808,732
|
|
|
$
|
21,041,187
|
|
|
$
|
90,423
|
|
|
Less: Amount representing interest
|
|
|
(1,280,870
|
)
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
2,527,862
|
|
|
|
|
|
|
|
|
|
Rental expenses related to operating leases
of the Company amounted to $255,120 and $260,383, which were charged to the condensed consolidated statements of income for the
three months ended March 31, 2017 and 2016, respectively.