See accompanying notes to the condensed consolidated financial
statements.
See accompanying notes to the condensed consolidated financial
statements.
See accompanying notes to the condensed consolidated financial
statements.
See accompanying notes to the condensed consolidated financial
statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(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 (“Gulf Resources”) 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, 2018 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 2017 Form 10-K/A (Amendment
No. 2). 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, 2018.
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") 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 was not fully operational as of March 31, 2018.
On September 1, 2017, the Company received
notification from the Government of Yangkou County, Shouguang City of PRC that production at all its 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.
The Company has been working closely with
the county authorities to develop rectification plans for both its bromine and crude salt businesses and had agreed on a plan in
October 2017. SCHC is currently under rectification process. The Company believes this rectification and improvement process will
cost approximately $35 million in total. The Company incurred rectification and improvements in the amount of $18,046,005 and $17,938,652
as of March 31, 2018 and December 31, 2017.
Originally, six bromine factories completed
their rectification process and passed the inspection by local governments and were scheduled for production commencement by April
2018. Subsequently, the Provincial government required the local government to conduct “four rating and one comprehensive
evaluation” for all of the chemical companies within its jurisdiction. This has delayed the production commencement schedule
of the six factories.
The Company is currently actively working
on the rectification of the remaining four factories. The Company expects to complete the rectification and improvements of the
bromine and crude salt factories and be ready for the government inspection, rating and evaluation by June 2018, and will resume
operation for those when they have approval from the government.
Four of the remaining bromine and crude
salt factories have a slightly more complex issue that needs to be resolved. All bromine factories now require paired crude salt
pans to prevent the halogen water resulting from the production process from flowing into the sea. Four of these bromine factories
do not have a designated crude salt pan where the wastewater could be channeled. The Company has four alternatives for these four
factories which do not have paired crude salt pans: 1. It can form partnerships with adjacent bromine facilities that do have crude
salt pans. The nature of these partnerships could take many forms. 2. The company could petition the government for a zoning change
so that additional land for salt pans could be obtained. This might be difficult but is worth pursuing. 3. The Company could negotiate
a different method of dealing with this issue. 4. Or these factories could conceivably be forced to close. At the present time,
the Company is working with the government on these issues and did not reach the final solution yet.
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 the Bohai Marine Fine Chemical Industrial Park (“Bohai
Park”). This is because the two plants are located in a residential area and their production activities will impact the
living environment of the residents. This is 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 do not comply with the requirements of the safety and environmental protection regulations
will be ordered to shut down. The Company believes this relocation process will cost approximately $60 million in total. The
Company incurred relocation cost in the amount of $9,732,118 as of March 31, 2018 and December 31, 2017 and estimated that the
new factory will be fully operational by the beginning of 2020.
During the first quarter, the Company continued
its related environmental and planning preparation work for the new factory. Since the Company has paid for the lease of a piece
of land at the Bohai Park, it does not see any potential delay with the construction of the new factory. The Company has signed
several contracts for the new factory (see subsequent event in Note 19).
As previously disclosed, during the course
of drilling for more bromine and crude salt resources, the Company found natural gas resources under our bromine well in the Sichuan
area. DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt). On
January 2017, the Company completed the first brine water and natural gas well field construction in Sichuan Province and announced
the commencement of trial production. The Company has been working with Xinan Shiyou Daxue (Southwest Petroleum University) and
developed a solution to DHCH’s technical drilling problem. In resolving the problem, the Company needs customized equipment.
The customized equipment has been ordered and is now being manufactured. Once the equipment arrives, it will be installed and production
will commence. While the Company hopes this will occur during the second quarter of 2018, the company has no control over the exact
timing of the delivery of the equipment. It is possible the commencement of production might not occur until early in the third
quarter in 2018.
(c) Allowance
for Doubtful Accounts
As of March 31, 2018 and December 31, 2017,
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, 2018 and 2017.
(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 $236,720,969 and $208,906,759 with these institutions as of March 31, 2018 and December 31, 2017,
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 24% and 13% of the balance of accounts receivable as of March 31, 2018 and December 31, 2017, respectively,
are outstanding for less than three months. For the balances of accounts receivable aged more than 90 days as of March 31, 2018,
approximately 41% were collected by April 30, 2018.
The rate of collection in April 2018 for accounts receivable
aged more than 90 days as of March 31, 2018 was analyzed as follows:
Accounts Receivable Aging
|
Percent Collected
|
90-120 days
|
0%
|
121-150 days
|
12%
|
151-180 days
|
0%
|
181-210 days
|
16%
|
211-240 days
|
100%
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(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.
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 $302,418 and $255,216 for the three-month periods ended March 31, 2018
and 2017, respectively.
(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.
(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, 2018
(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.
To comply with the new safety and environmental
regulations (see Note 1 (b)), the Company started the rectification and improvement program for the bromine and crude salt factories
towards the end of the third quarter of fiscal year 2017, and as a result recorded an impairment loss of $216,181 and a write-off
of $728,740 for certain property, plant and equipment in the year ended December 31, 2017.
With the relocation of the chemical factories
and the length of time required to set up the new factory building in the Bohai Marine Fine Chemical Industrial Park (see Note
1 (b)), the Company believes that it is not beneficial to move the existing plant and equipment to the new premises. This is because
of the age of the plant and equipment and the impact on the production efficiency at the new plant using plant and equipment that
are idle for a substantial amount of time. In addition, the Company also risks the possibility of not passing the inspection by
the government at the new plant if existing plant and equipment are used. Therefore, an impairment loss of $16,636,322 equivalent
to the net book values of all the property, plant and equipment at the two chemical factories was recorded in the year ended December
31, 2017.
For the three-month period ended March
31, 2018 and 2017, 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 75,614 and 25,000
shares for the three-month periods ended March 31, 2018 and 2017, respectively.
The following table sets forth the computation
of basic and diluted earnings per share:
|
|
Three-Month Period Ended
March 31,
|
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
Net income/(loss)
|
|
$
|
(6,977,100
|
)
|
|
$
|
8,075,120
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic: Weighted-average common shares outstanding during the period
|
|
|
46,803,791
|
|
|
|
46,793,791
|
|
Add: Dilutive effect of stock options
|
|
|
22,597
|
|
|
|
10,450
|
|
Diluted
|
|
|
46,826,388
|
|
|
|
46,804,241
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.15
|
)
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
(0.15
|
)
|
|
$
|
0.17
|
|
(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 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.
For oil and gas properties, the successful
efforts method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient
quantity of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing
the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged
to expenses. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required
before production would begin and when the major capital expenditure depends upon the successful completion of further exploratory
work remain capitalized and are reviewed periodically for impairment.
(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. Goodwill impairment is assessed based on qualitative factors to determine whether it is more
likely than not that the fair value of a reporting entity is less than its carrying amount, including goodwill. If the Company
determines that it is more likely than not that the fair value of a reporting entity is less than its carrying amount, the two-step
goodwill impairment test will be performed. The Company performs its impairment assessment annually and between annual tests in
certain circumstances and determined that the two-step goodwill impairment test is not required to be carried out as of March 31,
2018.
(n) New
Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In May 2014 and April 2016, the FASB issued
ASU No. 2014-09 and ASU No. 2016-10, 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.
The Company adopted this Update as of January 1, 2018. This adoption did not have a material impact on the Company’s condensed
consolidated financial statements as of and for the three months ended March 31, 2018 as the amount and timing of all the Company’s
revenue will continue to be recognized at a point in time. As required by the Update, the Company disclosed its revenues from contracts
with customers into disaggregated categories in Note 14.
In August 2016, the FASB issued ASU No.
2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The Update addresses eight
specific changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments
in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in
the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented.
If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be
applied prospectively as of the earliest date practicable. The Company adopted this Update as of January 1, 2018 with no material
impact on the condensed consolidated financial statements as of and for the three months ended March 31, 2018.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this Update provide guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.
The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017. The amendments in this Update should be applied prospectively to an award modified on or after
the adoption date. The Company adopted this Update as of January 1, 2018 with no material impact on the condensed consolidated
financial statements as of and for the three months ended March 31, 2018.
Recently Issued Accounting Pronouncements
Not Yet Adopted
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 currently evaluating the effect of this on the consolidated financial statements and related disclosure.
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. The Company is currently evaluating the effect of this on the consolidated financial statements and
related disclosure.
In January 2017, the FASB issued ASU No.
2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. To simplify the subsequent
measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in this Update,
an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this
Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is
currently evaluating effect of this on the consolidated financial statements and related disclosure.
NOTE 2 – RESTATEMENT OF PREVIOUSLY
ISSUED FINANCIAL STATEMENTS
The Company determined
that the entire one-time mandatory federal transition tax on accumulated foreign earnings accrued in fiscal year 2017 can be offset
against a portion of the Company’s US federal net operating loss carryovers and foreign tax credit carryovers. As a result,
the Company did not need to accrue the $5,402,000 of income taxes in fiscal year 2017 and the Company is restating condensed consolidated
financial statements as of March 31, 2018 to correct this error.
The table below sets forth the effect of the restatement on
the condensed consolidated balance sheet as of March 31, 2018.
|
|
As Reported
|
|
Correction
|
|
As Restated
|
Taxes
payable-current
|
|
$
|
2,204,954
|
|
|
$
|
(433,000
|
)
|
|
$
|
1,771,954
|
|
Total
Current Liabilities
|
|
|
4,444,786
|
|
|
|
(433,000
|
)
|
|
|
4,011,786
|
|
Taxes
payable-non-current
|
|
|
4,969,000
|
|
|
|
(4,969,000
|
)
|
|
|
—
|
|
Total
non-Current Liabilities
|
|
|
7,363,174
|
|
|
|
(4,969,000
|
)
|
|
|
2,394,174
|
|
Total Liabilities
|
|
|
11,807,960
|
|
|
|
(5,402,000
|
)
|
|
|
6,405,960
|
|
Retained
earnings unappropriated
|
|
|
243,193,331
|
|
|
|
5,402,000
|
|
|
|
248,595,331
|
|
Total Stockholders’ Equity
|
|
$
|
385,532,007
|
|
|
$
|
5,402,000
|
|
|
$
|
390,934,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth the effect of the restatement on the consolidated statement of stockholders' equity as of March 31, 2018.
|
|
Retained earnings unappropriated
|
|
Total
|
Balance at March 31, 2018 as reported
|
|
|
$
|
243,193,331
|
|
|
$
|
385,532,007
|
|
Correction
|
|
|
$
|
5,402,000
|
|
|
$
|
5,402,000
|
|
Balance at March 31, 2018 as restated
|
|
|
$
|
248,595,331
|
|
|
$
|
390,934,007
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 3 – INVENTORIES
Inventories consist of:
|
|
March 31,
2018
|
|
December 31,
2017
|
|
|
|
|
|
Raw materials
|
|
$
|
23,893
|
|
|
$
|
396,482
|
|
Finished goods
|
|
|
175,381
|
|
|
|
844,224
|
|
Allowance for obsolete and slow-moving inventory
|
|
|
(5,473
|
)
|
|
|
(43,921
|
)
|
|
|
$
|
193,801
|
|
|
$
|
1,196,785
|
|
NOTE 4 – 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.
The Company paid $9,732,118 for a 50-year
lease of a parcel of land for the new factory at Bohai Marine Fine Chemical Industrial Park in December, 2017. The land use certificate
is being processed by the government and the commencement date of the lease will be known upon completion of the application process.
During the three-month period ended March
31, 2018, amortization of prepaid land lease totaled $144,097, which amount was recorded as direct labor and factory overheads
incurred during plant shutdown.
During the three-month period ended March
31, 2017, amortization of prepaid land leases totaled $107,461, which amount was 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 $916,059 and approximately 54.97 square kilometers of aggregate carrying value of $645,761 as at
March 31, 2018 and December 31, 2017, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
|
|
March 31,
2018
|
|
December 31,
2017
|
At cost:
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
4,896,244
|
|
|
$
|
4,711,822
|
|
Buildings
|
|
|
70,400,195
|
|
|
|
67,748,512
|
|
Plant and machinery
|
|
|
208,538,996
|
|
|
|
200,742,652
|
|
Motor vehicles
|
|
|
9,136
|
|
|
|
8,792
|
|
Furniture, fixtures and office equipment
|
|
|
4,313,043
|
|
|
|
4,150,588
|
|
Construction in process
|
|
|
190,200
|
|
|
|
183,036
|
|
Total
|
|
|
288,347,814
|
|
|
|
277,545,402
|
|
Less: Accumulated depreciation and amortization
|
|
|
(174,767,162
|
)
|
|
|
(163,597,407
|
)
|
Impairment
|
|
|
(19,528,775
|
)
|
|
|
(18,833,491
|
)
|
Net book value
|
|
$
|
94,051,877
|
|
|
$
|
95,114,504
|
|
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 $28,025,014 and $27,432,351 as at March
31, 2018 and December 31, 2017, respectively.
During the three-month period ended March
31, 2018, depreciation and amortization expense totaled $4,688,248, of which $4,504,249 and $183,999 were recorded in direct labor
and factory overheads incurred during plant shutdown and administrative expenses, 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.
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES,
NET
Property, plant and equipment under capital leases, net consist
of the following:
|
|
March 31,
2018
|
|
December 31,
2017
|
At cost:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
130,868
|
|
|
$
|
125,939
|
|
Plant and machinery
|
|
|
2,404,774
|
|
|
|
2,314,196
|
|
Total
|
|
|
2,535,642
|
|
|
|
2,440,135
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,050,782
|
)
|
|
|
(1,947,897
|
)
|
Net book value
|
|
$
|
484,860
|
|
|
$
|
492,238
|
|
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, 2018, depreciation and amortization expense totaled $69,282, which was recorded in direct labor and factory overheads incurred
during plant shutdown. During the three-month period ended March 31, 2017, depreciation and amortization expense totaled $78,996,
which was recorded as cost of net revenue.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
Accounts payable and accrued expenses consist
of the following:
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
—
|
|
Salary payable
|
|
|
270,901
|
|
|
|
393,617
|
|
Social security insurance contribution payable
|
|
|
140,671
|
|
|
|
135,203
|
|
Other payables
|
|
|
579,649
|
|
|
|
503,263
|
|
Total
|
|
$
|
991,221
|
|
|
$
|
1,032,083
|
|
NOTE 8 – RELATED PARTY TRANSACTIONS
During the three-month period ended March
31, 2018, the Company borrowed a sum of $185,912 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, 2018. There
was no balance owing to Jiaxing Lighting as of March 31, 2018 and December 31, 2017.
On September 25, 2012, the Company purchased
five floors of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd.
(the “Seller”) at a cost of approximately $5.7 million in cash, of which Mr. Ming Yang, the Chairman of the Company,
had a 99% equity interest in the Seller. During the first quarter of 2018, the Company entered into an agreement with the Seller,
a related party, to provide property management services for an annual amount of approximately $99,200 for five years from January
1, 2018 to December 31, 2022. The expense associated with this agreement for the three months ended March 31, 2018 was approximately
$24,500.
NOTE 9 – TAXES PAYABLE
Taxes payable consists of the following:
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
(Restated)
|
|
2017
|
Natural resource tax
|
|
$
|
—
|
|
|
$
|
156,147
|
|
Land use tax payable
|
|
|
1,698,290
|
|
|
|
810,841
|
|
Other tax payables
|
|
|
73,664
|
|
|
|
74,604
|
|
Total current taxes payable
|
|
$
|
1,771,954
|
|
|
$
|
1,041,592
|
|
NOTE 10 – CAPITAL LEASE OBLIGATIONS
The components of capital lease obligations
are as follows:
|
|
Imputed
|
|
March 31,
|
|
December 31,
|
|
|
Interest rate
|
|
2018
|
|
2017
|
Total capital lease obligations
|
|
|
6.7%
|
|
|
$
|
2,649,003
|
|
|
$
|
2,507,201
|
|
Less: Current portion
|
|
|
|
|
|
|
(254,829
|
)
|
|
|
(203,206
|
)
|
Capital lease obligations, net of current portion
|
|
|
|
|
|
$
|
2,394,174
|
|
|
$
|
2,303,995
|
|
Interest expenses from capital lease obligations
amounted to $41,797 and $41,753 for the three-month periods ended March 31, 2018 and 2017, respectively, were charged to the condensed
consolidated statement of income. See Note 18 for future minimum lease payments disclosure.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 11 –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 stock to 80,000,000. The Company filed an amended and restated 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, 2018 and December 31, 2017.
|
(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,
2018 for SCHC, SYCI and DCHC is 46%, 14% and 0% of its registered capital respectively.
NOTE 12 – 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, 2018, the number of shares of the Company’s common stock available for issuance under the Plan
is 6,714,989.
The fair value of each option award 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.
During the three months ended March 31, 2018, there were no
options issued to employees or non-employees.
The following table summarizes all Company
stock option transactions between January 1, 2018 and March 31, 2018.
|
|
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, 2018
|
|
|
|
808,500
|
|
|
$
|
1.61
|
|
|
|
$1.44 - $4.80
|
|
Granted and vested during the period
ended March 31, 2018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired during the
period ended March 31, 2018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, March 31, 2018
|
|
|
|
808,500
|
|
|
$
|
1.61
|
|
|
|
$1.44 - $4.80
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
Outstanding at March 31, 2018
|
|
|
|
Range of
Exercise Prices
|
|
|
|
Contractual Life
(Years)
|
|
Exercisable and outstanding
|
|
|
808,500
|
|
|
|
$1.44 - $4.80
|
|
|
|
2.86
|
|
The aggregate intrinsic value of options outstanding and exercisable
as of March 31, 2018 was $0.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – INCOME TAXES (Restated)
The Company utilizes the asset and liability
method of accounting for income taxes in accordance with FASB ASC 740-10.
(a) United
States (“US”)
Gulf Resources, Inc. may be subject to
the United States of America Tax laws at a tax rate of 21%. 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, 2018 and 2017, and management believes that its earnings are
permanently invested in the PRC.
On December 22, 2017, the Tax Cuts and
Jobs Act (“TCJA”) was enacted in law. With the new tax law, the corporation income tax rate is reduced from 35% to
21% and there is a one-time mandatory federal transition tax on accumulated foreign earnings. The Company computed this one-time
mandatory transition tax on accumulated foreign earnings to be approximately $5.4 million. However, as the Company has available
US federal net operating loss carryovers and foreign tax credit to fully offset the mandatory inclusion of the accumulated foreign
earnings, no net tax liability arose from the inclusion of these accumulated foreign earnings.
(b) British
Virgin Islands (“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, 2018 and 2017.
(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, 2018
and 2017. The applicable statutory tax rates for the three-month periods ended March 31, 2018 and 2017 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 Local 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, 2018 and December 31, 2017,
the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject
to WHT are $286,732,938 and $282,660,981, 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, 2018 and December 31, 2017, the Company has not recorded any
WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject to WHT in
China. As of March 31, 2018 and December 31, 2017, the unrecognized WHT are $14,336,647 and $14,133,049, 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 2014 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 2010
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
tax expense (benefit) from continuing operations are:
|
|
Three-Month Period Ended March31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Current taxes – PRC
|
|
$
|
—
|
|
|
$
|
2,821,826
|
|
Deferred tax – PRC
|
|
|
(1,193,746
|
)
|
|
|
—
|
|
|
|
$
|
(1,193,746
|
)
|
|
$
|
2,821,826
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – INCOME TAXES (Restated)
– 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
|
|
2018
|
|
2017
|
Statutory income tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
Non-deductible expense and change in valuation allowance
|
|
|
(7
|
%)
|
|
|
1
|
%
|
Non-taxable items
|
|
|
(3
|
%)
|
|
|
—
|
|
Effective tax rate
|
|
|
15
|
%
|
|
|
26
|
%
|
Significant components of the Company’s
deferred tax assets and liabilities at March 31, 2018 and December 31, 2017 are as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2018
(Restated)
|
|
2017
|
Deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
1,368
|
|
|
$
|
10,980
|
|
Impairment on property, plant and equipment
|
|
|
4,076,604
|
|
|
|
4,610,228
|
|
Exploration costs
|
|
|
1,979,924
|
|
|
|
1,905,347
|
|
Compensation costs of unexercised stock options
|
|
|
98,088
|
|
|
|
98,092
|
|
PRC tax losses
|
|
|
1,931,983
|
|
|
|
—
|
|
US federal net operating loss
|
|
|
27,100
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
8,115,067
|
|
|
|
6,624,647
|
|
Valuation allowance
|
|
|
(125,188
|
)
|
|
|
(98,092
|
)
|
Net deferred tax asset
|
|
$
|
7,989,879
|
|
|
$
|
6,526,555
|
|
The increase in valuation allowance for
the three-month period ended March 31, 2018 is $27,096.
The increase in valuation allowance for
the three-month period ended March 31, 2017 is $40,800.
There were no unrecognized tax benefits
and accrual for uncertain tax positions as of March 31, 2018 and December 31, 2017.
NOTE 14 – 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, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – 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, 2018
|
|
Bromine *
|
|
Crude
Salt *
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
—
|
|
|
$
|
1,638,493
|
|
|
$
|
608,774
|
|
|
$
|
—
|
|
|
$
|
2,247,267
|
|
|
$
|
—
|
|
|
$
|
2,247,267
|
|
Net revenue
(intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) from operations before income taxes(benefit)
|
|
|
(5,590,555
|
)
|
|
|
(807,884
|
)
|
|
|
(674,771
|
)
|
|
|
(35,655
|
)
|
|
|
(7,108,865
|
)
|
|
|
(1,188,115
|
)
|
|
|
(8,296,980
|
)
|
Income tax expense (benefit)
|
|
|
(1,391,152
|
)
|
|
|
(201,971
|
)
|
|
|
399,377
|
|
|
|
—
|
|
|
|
(1,193,746
|
)
|
|
|
—
|
|
|
|
(1,193,746
|
)
|
Income (loss) from operations after income taxes(benefit)
|
|
|
(4,199,403
|
)
|
|
|
(605,913
|
)
|
|
|
(1,074,148
|
)
|
|
|
(35,655
|
)
|
|
|
(5,915,119
|
)
|
|
|
(1,188,115
|
)
|
|
|
(7,103,234
|
)
|
Total assets
|
|
|
149,458,703
|
|
|
|
52,746,108
|
|
|
|
192,807,722
|
|
|
|
2,162,119
|
|
|
|
397,174,652
|
|
|
|
165,315
|
|
|
|
397,339,967
|
|
Depreciation and amortization
|
|
|
3,719,712
|
|
|
|
913,350
|
|
|
|
124,468
|
|
|
|
—
|
|
|
|
4,757,530
|
|
|
|
—
|
|
|
|
4,757,530
|
|
Capital expenditures
|
|
|
93,174
|
|
|
|
14,179
|
|
|
|
—
|
|
|
|
14,357
|
|
|
|
121,710
|
|
|
|
—
|
|
|
|
121,710
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
30,524,646
|
|
|
|
—
|
|
|
|
30,524,646
|
|
|
|
—
|
|
|
|
30,524,646
|
|
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 income 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 income 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
|
|
Capital expenditures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,975
|
|
|
|
59,975
|
|
|
|
—
|
|
|
|
59,975
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
27,820,174
|
|
|
|
—
|
|
|
|
27,820,174
|
|
|
|
—
|
|
|
|
27,820,174
|
|
* 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, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – BUSINESS SEGMENTS – Continued
|
|
Three-Month Period Ended March 31,
|
Reconciliations
|
|
2018
|
|
2017
|
Total segment operating income (loss)
|
|
$
|
(7,108,865
|
)
|
|
$
|
11,080,240
|
|
Corporate costs
|
|
|
(129,263
|
)
|
|
|
(129,988
|
)
|
Unrealized loss on translation of intercompany balance
|
|
|
(1,058,852
|
)
|
|
|
(137,255
|
)
|
Income (loss) from operations
|
|
|
(8,296,980
|
)
|
|
|
10,812,997
|
|
Other income
|
|
|
126,134
|
|
|
|
83,949
|
|
Income (loss) before income taxes
|
|
$
|
(8,170,846
|
)
|
|
$
|
10,896,946
|
|
The following table shows the major customer(s)
(10% or more) for the three-month period ended March 31, 2018.
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
|
|
$
|
—
|
|
|
$
|
534
|
|
|
$
|
155
|
|
|
$
|
689
|
|
|
|
30.6
|
%
|
|
2
|
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
—
|
|
|
$
|
670
|
|
|
$
|
—
|
|
|
$
|
670
|
|
|
|
29.8
|
%
|
|
3
|
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
435
|
|
|
$
|
—
|
|
|
$
|
435
|
|
|
|
19.3
|
%
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15– CUSTOMER CONCENTRATION
During the three-month periods ended March
31, 2018 and 2017, the Company sold 88.8% and 36.4% of its products to its top five customers, respectively. As of March 31, 2018
and 2017, amounts due from these customers were $8,831,030 and $30,263,356, respectively. This concentration makes the Company
vulnerable to a near-term severe impact, should the relationships be terminated.
NOTE 16 – MAJOR SUPPLIERS
During the three-month period ended March
31, 2018 and 2017, the Company purchased 0% and 69.7% of its raw materials from its top five suppliers, respectively. As
of March 31, 2018 and 2017, amounts due to those suppliers included in accounts payable were $0 and $5,639,164, 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, 2018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 17 – 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, 2018
and December 31, 2017.
NOTE 18 – CAPITAL COMMITMENT AND
OPERATING LEASE COMMITMENTS
As of March 31, 2018, 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, 2018.
The following table sets forth the Company’s
contractual obligations as of March 31, 2018:
|
|
Capital Lease Obligations
|
|
Operating Lease Obligations
|
|
Property Management Fees
|
|
Capital Expenditure
|
Payable within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
298,499
|
|
|
$
|
1,045,795
|
|
|
$
|
99,213
|
|
|
$
|
167,016
|
|
the next 13 to 24 months
|
|
|
298,499
|
|
|
|
1,069,473
|
|
|
|
99,213
|
|
|
|
—
|
|
the next 25 to 36 months
|
|
|
298,499
|
|
|
|
1,094,416
|
|
|
|
99,213
|
|
|
|
—
|
|
the next 37 to 48 months
|
|
|
298,499
|
|
|
|
942,133
|
|
|
|
99,213
|
|
|
|
—
|
|
the next 49 to 60 months
|
|
|
298,499
|
|
|
|
960,539
|
|
|
|
99,213
|
|
|
|
—
|
|
thereafter
|
|
|
2,387,996
|
|
|
|
16,951,287
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
3,880,491
|
|
|
$
|
22,063,643
|
|
|
$
|
496,065
|
|
|
$
|
167,016
|
|
Less: Amount representing interest
|
|
|
(1,231,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
2,649,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses related to operating leases
of the Company amounted to $281,613 and $255,120, which were charged to the condensed consolidated statements of income for the
three months ended March 31, 2018 and 2017, respectively.
NOTE 19 – SUBSEQUENT EVENTS
In April 2018, SYCI signed several
contracts (preliminary design, investigative work and assessment and evaluation of safety) related to the SYCI’s relocation
project. The total of these contracts amounted to approximately $1.3 million (RMB8.0 million).
In April 2018, SYCI and Shouguang City
Rongyuan Pharmaceutical Co., Ltd signed a land lease contract for a 20-year term commencing May 1, 2018 in the Bohai Park for an
annual rent of approximately $13,000. This is for an area of 26.89 mou (approximately 1.79 hectares) and for the construction of
the new chemical factory.
In April 2018, SCHC signed a purchase agreement
for rectification equipment for an amount of approximately $260,000 (RMB1.7 million).
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and
Procedures
We maintain disclosure controls and procedures
(as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to
be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as
appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the
participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this
evaluation, our CEO and CFO concluded that due to the material weakness described below, our disclosure controls and
procedures were ineffective as of the end of the period covered by this Form 10-Q/A to provide reasonable assurance that
information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC'S rules and forms, and were not effective as of the end
of the period covered by this Form 10-Q/A to provide reasonable assurance that such information is accumulated and
communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
(b) Changes in internal controls
Subsequent to the filing of the Company’s
quarterly report on Form 10-Q for the period ended March 31, 2018, the Company filed Amendment No. 2 on Form 10-K/A to reflect
the correction of an error in the previously reported fiscal year 2017 financial statements as filed on March 23, 2018 related
to the one-time mandatory federal transition tax on accumulated foreign earnings.
Management is actively engaged in the
planning for, and implementation of, remediation efforts to address the material weakness identified above. The remediation
plan includes i) the implementation of new controls designed to evaluate the appropriateness of foreign tax recognition
policies and procedures, ii) new controls over recording of foreign tax transactions, and iii) additional training for the
accounting and financial reporting personnel.
Management believes the measures described
above and others that may be implemented will remediate the material weakness that we have identified. As management continues
to evaluate and improve internal control over financial reporting, we may decide to take additional measures to address control
deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures identified.
There were no changes in our internal control
over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during our most recently completed
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.