NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
(Expressed in U.S. dollars)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying audited consolidated financial statements have been prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries (collectively, the “Company”).
Upper Class Group Limited was incorporated with limited liability in the British Virgin Islands on July 28, 2006 and was inactive until October 9, 2006 when Upper Class Group Limited acquired all the issued and outstanding stock of Shouguang City Haoyuan Chemical Company Limited (“SCHC”). SCHC is an operating company incorporated in Shouguang City, Shangdong Province, the People’s Republic of China (the “PRC”) on May 18, 2005. SCHC is engaged in manufacturing and trading bromine and crude salt in China. Since the ownership of Upper Class Group Limited and SCHC were the same, the merger was accounted for as a transaction between entities under common control, whereby Upper Class Group Limited recognized the assets and liabilities transferred at their carrying amounts.
On December 12, 2006, Gulf Resources, Inc. (formerly Diversifax, Inc.), a public “shell” company, acquired Upper Class Group Limited and its wholly-owned subsidiary, SCHC (together “Upper Class”). Under the terms of the agreement, all stockholders of Upper Class received a total amount of 13,250,000 (restated for the 2-for-1 stock split in 2007 and the 1-for-4 stock split in 2009) shares of voting common stock of Gulf Resources, Inc. in exchange for all shares of Upper Class’ common stock held by all stockholders. Under accounting principles generally accepted in the United States, the share exchange is considered to be a capital transaction in substance, rather than a business combination. That is, the share exchange is equivalent to the issuance of stock by Upper Class for the net monetary assets of Gulf Resources, Inc., accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange will be identical to that resulting from a reverse acquisition, except no goodwill will be recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical financial statements of the legal acquirer, Gulf Resources, Inc., are those of the legal acquiree, Upper Class, which is considered to be the accounting acquirer. Share and per share amounts stated have been retroactively adjusted to reflect the merger.
On February 5, 2007, SCHC acquired Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”), a company incorporated in PRC on October 30, 2000. SYCI manufactures chemical products utilized in oil and gas field explorations and as papermaking chemical agents. Under the terms of the merger agreement, all stockholders of SYCI received a total amount of 8,094,059 (restated for the 2-for-1 stock split in 2007 and the 1-for-4 stock split in 2009) shares of voting common stock of Gulf Resources, Inc. in exchange for all shares of SYCI’s common stock held by all stockholders. Also, upon the completion of the merger, Gulf Resources, Inc. paid a $2,550,000 dividend to the original stockholders of SYCI. Since the ownership of Gulf Resources, Inc. and SYCI are substantially the same, the merger was accounted for as a transaction between entities under common control, whereby Gulf Resources, Inc. recognized the assets and liabilities of the Company transferred at their carrying amounts. Share and per share amounts stated have been retroactively adjusted to reflect the merger.
On November 11, 2007, Upper Class formed Hong Kong Jiaxing Industrial Limited (formerly known as Jiaxing Technology Limited) (“HKJI”), a wholly-owned subsidiary of Upper Class, in Hong Kong. Upper Class transferred its equity interest in SCHC to HKJI.
(b) Nature of the Business
The Company manufactures and trades bromine and crude salt through SCHC, and manufactures chemical products for use in the oil industry and paper manufacturing industry through SYCI.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(c) Basis of Consolidation
The consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiaries, Upper Class, a company incorporated in the British Virgin Islands, which owns 100% of HKJI, a company incorporated in Hong Kong, which owns 100% of SCHC and SYCI, which is 100% owned by SCHC. All material intercompany transactions have been eliminated on consolidation.
(d) Use of Estimates
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The most significant accounting estimates with regard to these consolidated financial statements that require the most significant and subjective judgments include, but are not limited to, useful lives of property, plant and equipment, recoverability of long-lived assets, determination of impairment losses, assessment of market value of inventories and provision for inventory obsolescence, allowance for doubtful accounts, recognition and measurement of current and deferred income taxes, valuation allowance for deferred tax assets, and assumptions used for the valuation of share based payments. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions.
(e) Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances and highly liquid investments with original maturities of three months or less. Because of short maturity of these investments, the carrying amounts approximate their fair values.
(f) Accounts Receivable and Allowance of Doubtful Accounts
Accounts receivable is stated at cost, net of allowance for doubtful accounts. The normal credit term extended to customers ranges between 90 and 180 days. The company reviews all receivables that exceed the term. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade and other receivables. A considerable amount of judgment is required in assessing the amount of allowance and the Company considers the historical level of credit losses. The Company makes judgments about the credit worthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customer begins to deteriorate, resulting in their inability to make payments within credit term provided , a larger allowance may be required.
As of December 31, 2013 and 2012, allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the income statement for the years ended December 31, 2013 and 2012.
(g) 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 and China Merchants Bank Company Limited, which are not insured or otherwise protected. The Company placed $107,828,800 and $65,241,035 with these institutions as of December 31, 2013 and 2012, 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.
About 73.9% and 68.5% of the balances of accounts receivable as of December 31, 2013 and December 31, 2012, respectively, were outstanding for less than 90 days. For the balances of accounts receivable aged more than 90 days as of December 31, 2013, all were settled in the two months ended February 28, 2014.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(h) Inventories
Inventories are stated at the lower of cost, determined on a first-in first-out cost basis, or market. Costs of work-in-progress and finished goods comprise direct materials, direct labor and an attributable portion of manufacturing overhead. Net realizable value is based on estimated selling price less costs to complete and selling expenses.
(i) 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 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 (in tonnes) of production method, whichever is shorter.
Construction in progress primarily represents direct costs of construction of property, plant and equipment. Costs incurred are capitalized and transferred to property, plant 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 progress are as follows:
|
Useful life
(in years)
|
Buildings (including salt pans)
|
8 - 20
|
Plant and machinery (including protective shells, transmission channels and ducts)
|
5 - 8
|
Motor vehicles
|
5
|
Furniture, fixtures and equipment
|
8
|
Property, plant and equipment under capital leases 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.
(j) Asset Retirement Obligation
The Company follows FASB ASC 410, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. FASB ASC 410 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which the legal obligation associated with the retirement of the long-lived asset is incurred. When the liability is initially recorded, the offset is capitalized by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. To settle the liability, the obligation is paid, and to the extent there is a difference between the liability and the amount of cash paid, a gain or loss upon settlement is recorded.
Currently, there are no reclamation or abandonment obligations associated with the land being utilized for exploitation.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(k) Recoverability of Long Lived Assets
In accordance with 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.
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 year ended December 31, 2012, certain property, plant and machinery, with net book values of $1,042,138, respectively, were replaced during the second phase enhancement project to protective shells for transmission channels and ducts and the enhancement work to bromine production facilities in Factory No. 2, write-offs of the same amounts, were made and included in write-off/impairment on property, plant and equipment.
There is no impairment loss in fiscal year 2013.
(l) 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 scheme at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the consolidated income statement on an accrual basis when they are due. The Company’s contributions totaled $495,894 and $469,958 for the years ended December 31, 2013 and 2012, respectively.
(m) Mineral Rights
The Company follows FASB ASC 805 “Business Combinations” that certain mineral rights are considered tangible assets and that mineral rights should be accounted for based on their substance. Mineral rights are included in property, plant and equipment.
(n) Leasing arrangements
Rentals payable under operating leases are charged to the statements of income on a straight line basis over the term of the relevant lease. For capital leases, the present value of future minimum lease payments at the inception of the lease is reflected as an asset and a liability in the statement of financial position. Amounts due within one year are classified as short-term liabilities and the remaining balance as long-term liabilities.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(o) Reporting Currency and Translation
The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under 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 comprehensive income. The statement of income and comprehensive income is translated at average rates 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 rates during the reporting period, with the exception of issuance of shares and payment of dividends which are translated at historical rates.
(p) 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.
(q) 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.
(r) Income Taxes
The Company accounts for income taxes in accordance with the Income Taxes Topic of the FASB ASC, which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their reported amounts at each period end. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. The guidance also provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits.
(s) Exploration Costs
Exploration costs, which included the cost of researching appropriate places to drill wells and the cost of actual drilling of potential natural brine resources, were charged to the income statement as incurred. No further exploration cost was incurred for the fiscal year 2013 and 2012 as we are still discussing and negotiating with the local government of Daying County of the form of cooperation to further explore the brine water resources.
(t) Shipping and Handling Fees and Costs
The Company does not charge its customers for shipping and handling as all customers arrange their own transportation of finished goods. The Company classifies shipping and handling costs for purchase of raw materials as part of the cost of net revenue, which amounted to $0 and $80,607 for the years ended December 31, 2013 and 2012, respectively.
There is no such shipping and handling costs were charged to the company since April 2012, as they are borne by the suppliers.
(u) Contingencies
The Company accrues for costs relating to litigation, including litigation defense costs, claims and other contingent matters, including liquidated damage liabilities, when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Revisions to accruals are reflected in earnings (loss) in the period in which different facts or information become known or circumstances change that affect the Company’s previous assumptions with respect to the likelihood or amount of loss. Amounts paid upon the ultimate resolution of such liabilities may be materially different from previous estimates.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(v) Stock-based Compensation
Common stock, stock options and stock warrants issued to employees or directors are recorded at their fair values estimated at grant date using the Black-Scholes model and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period.
Common stock, stock options and stock warrants issued to other than employees or directors are recorded on the basis of their fair value using the Black-Scholes model on the basis of the market price of the underlying common stock on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to non-performance is the date of the contract, and for all other contracts the measurement date is the date that the service is complete. Expense related to the options and warrants is recognized on a straight-line basis over the shorter of the period over which services are to be received or the vesting period. Where expense must be recognized prior to a valuation date, the expense is computed under the Black-Scholes model on the basis of the market price of the underlying common stock at the end of the period, and any subsequent changes in the market price of the underlying common stock up through the valuation date is reflected in the expense recorded in the subsequent period in which that change occurs.
(w) 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 3,473,441 and 3,069,929 shares for the years ended December 31, 2013 and 2012, respectively.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
Years ended December 31,
|
|
|
|
|
2013
|
|
|
|
2012
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
20,967,358
|
|
|
|
$
|
14,995,503
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
Basic: Weighted-average common shares
outstanding during the year
|
|
|
|
38,395,921
|
|
|
|
|
34,706,356
|
|
Add: Dilutive effect of stock options
|
|
|
|
431,409
|
|
|
|
|
361,594
|
|
Diluted
|
|
|
|
38,827,330
|
|
|
|
|
35,067,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$
|
0.55
|
|
|
|
$
|
0.43
|
|
Diluted
|
|
|
$
|
0.54
|
|
|
|
$
|
0.43
|
|
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(x) New Accounting Pronouncements
As of December 31,2013 and for the year then ended, there were no recently adopted accounting pronouncements that had a material effect on the Company’s consolidated financial statements. As of December 31, 2013, there were no recently issued accounting standards not yet adopted which would have a material effect on the Company’s consolidated financial statements.
NOTE 2 – ASSETS ACQUISITIONS
On November 26, 2012, the Company acquired substantially all of the assets owned by Chengyong Zhao in Guantai Village located Shouguang City Yangkou Township area (the “Chengyong Zhao Property” or “Factory No. 11”). The Chengyong Zhao Property includes a 20-year land lease covering approximately 1,727 acres of real property, with the related production facility, wells, pipelines, other production equipment, and the buildings located on the property. The total purchase price for the acquired assets was RMB 62 million (approximately $9.80 million), consisting of RMB 31 million (approximately $4.93million) in cash and 3,806,728 shares of the Company’s Common Stock valued at approximately $4.87 million (fair value). The production line of Factory No. 11 was resumed in March 2013 after certain repair and adjustments.
The bromine factories acquisitions described above was not in operation when the Company acquired the assets. Production at the assets acquired had previously been halted by the government since the owners of the bromine factories did not hold the proper license for the exploration and production of bromine. The Factories described above had not been in operation for more than six months at the time of the acquisitions. The Company recorded the above transactions as purchase of assets.
NOTE 3 – INVENTORIES
Inventories consist of:
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
651,810
|
|
|
$
|
773,453
|
|
Finished goods
|
|
|
4,656,814
|
|
|
|
5,248,039
|
|
Allowance for obsolete and slow-moving inventories
|
|
|
(6,629
|
)
|
|
|
(27,894
|
)
|
|
|
$
|
5,301,995
|
|
|
$
|
5,993,598
|
|
NOTE 4 – PREPAID LAND LEASE
The Company prepaid for land leases with lease terms for periods ranging from one to fifty years to use the land on which the office premises, production facilities and warehouses of the Company are situated. The prepaid land lease is amortized on a straight line basis.
During the year ended December 31, 2013, amortization of prepaid land lease totaled $660,002, which was recorded as cost of net revenue.
During the year ended December 31, 2012, amortization of prepaid land lease totaled $493,849, which 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. Such parcels of land are collectively owned by local townships and accordingly, the Company could not obtain land use rights certificates on these parcels of land. The parcels of land of which the Company could not obtain land use rights certificates covers a total of approximately 59.39 square kilometers of aggregate carrying value of $761,496 and approximately 59.39 square kilometers square meters of aggregate carrying value of $753,086 as at December 31, 2013 and 2012, respectively.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
At cost:
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
6,530,158
|
|
|
$
|
6,334,277
|
|
Buildings
|
|
|
53,343,419
|
|
|
|
50,905,337
|
|
Plant and machinery
|
|
|
172,842,611
|
|
|
|
166,121,329
|
|
Motor vehicles
|
|
|
9,423
|
|
|
|
9,140
|
|
Furniture, fixtures and office equipment
|
|
|
4,902,627
|
|
|
|
4,777,044
|
|
Total
|
|
|
237,628,238
|
|
|
|
228,147,127
|
|
Less: accumulated depreciation and amortization
|
|
|
(91,227,802
|
)
|
|
|
(62,204,585
|
)
|
Net book value
|
|
$
|
146,400,436
|
|
|
$
|
165,942,542
|
|
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. The Company has not been able to obtain property ownership certificates over these buildings and salt pans as the Company could not obtain land use rights certificates on the underlying parcels of land. The Company could not obtain property ownership certificates covering certain properties of aggregate carrying value of $39,565,302 and $39,563,438 as at December 31, 2013 and 2012, respectively.
During the year ended December 31, 2013, depreciation and amortization expense totaled $27,109,455 of which $25,311,885 and $1,797,570 were recorded as cost of net revenue and administrative expenses, respectively.
During the year ended December 31, 2012, depreciation and amortization expense totaled $22,972,873 of which $22,033,952 and $938,920 were recorded as cost of net revenue and administrative expenses, respectively.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued
In the second quarter of 2012, the Company carried out the second phase enhancement projects to the Company’s existing bromine extraction and crude salt production facilities. In particular, the Company incurred enhancement works in Factories No. 1 to 9 at costs of approximately $12,786,791 to the extraction wells and approximately $8,125,659 to the protective shells to transmission channels and ducts. The above enhancement projects have estimated useful lives of 5 to 8 years and are capitalized as buildings and plant and machinery.
In the third quarter of 2012, the company carried out two enhancement projects to its existing bromine and chemical products production facilities, in particular, the company incurred enhancement work to the bromine production facilities in Factory No. 2 at a cost of approximately $1,256,506 and enhancement work to the chemical products production facilities at a cost of approximately $1,498,150. The above enhancement projects have estimated useful lives of 5 to 20 years and are capitalized as plant and machinery.
On September 25, 2012, the Company purchased five stories of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd. at a cost of approximately $5.7 million in cash, in which Mr. Ming Yang, the Chairman of the Company, had a 99% equity interest. The cost of the five stories of the commercial building was valued by an independent appraiser to its fair value and recorded as property, plant and equipment. The Company uses the property as the new headquarters.
On October 23, 2012, the Company entered into an agreement with a subcontractor for the renovation of the new office headquarters( the newly acquired five stories of commercial building) at a cost of approximately $1.86 million, which was capitalized as building upon completion.
In late September 2013, the Transportation Bureau of Dongying City and other local government agencies requested to requisition the land where the original Factory No. 3 of SCHC was located for railway construction.
The operations of the original Factory No. 3 were stopped in September 2013 to allow for the demolition and relocation of the factory. During the relocation, net book value of plant and machinery of $ 307,182 was written off and demolition costs of $1,059,965 were incurred. A new factory was constructed for the amount of $3,186,609 on the same piece of land near to the where the original factory was located. The relocation and the construction of the new factory were completed in December 2013 and the new Factory No. 3 started operations in the same month.
Upon completion of demolition and clearance of all ground fixtures in October 2013, a sum of $3,868,483 was received in the same month from the Transportation Bureau of Dongying City and other local government agencies as compensation for the demolition of original Factory No. 3. The write-off and demolition costs were offset against the compensation proceeds resulting in a net gain on location of factory of $2,501,336. This is included in the income statement for the year ended December 31, 2013 as gain on relocation of factory. This is accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-40 “Revenue Recognition – Gains and Losses”.
For the years ended December 31, 2013 and 2012, ordinary repair and maintenance expenses were $1,566 and $1,612,720, respectively.
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET
Property, plant and equipment under capital leases, net consist of the following:
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
At cost:
|
|
|
|
|
|
|
Buildings
|
|
$
|
134,975
|
|
|
$
|
130,925
|
|
Plant and machinery
|
|
|
2,537,133
|
|
|
|
2,461,028
|
|
Total
|
|
|
2,672,108
|
|
|
|
2,591,953
|
|
Less: accumulated depreciation and amortization
|
|
|
(970,780
|
)
|
|
|
(595,475
|
)
|
Net book value
|
|
$
|
1,701,328
|
|
|
$
|
1,996,478
|
|
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 year ended December 31, 2013, depreciation and amortization expense totaled $351,238, which was recorded as cost of sales.
During the year ended December 31, 2012, depreciation and amortization expense totaled $344,722, which was recorded as cost of sales.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSE
Accounts payable and accrued expenses consist of the following:
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,998,660
|
|
|
$
|
3,797,552
|
|
Salary payable
|
|
|
212,138
|
|
|
|
190,926
|
|
Social security insurance contribution payable
|
|
|
57,674
|
|
|
|
52,399
|
|
Price adjustment funds
|
|
|
861,071
|
|
|
|
1,758,828
|
|
Other payables
|
|
|
516,288
|
|
|
|
733,531
|
|
Total
|
|
$
|
5,645,831
|
|
|
$
|
6,533,236
|
|
NOTE 8 – DUE TO A RELATED PARTY AND RELATED PARTY TRANSACTIONS
On September 25, 2012, the Company purchased five stories 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. The cost of the five stories of the commercial building was valued by an independent appraiser to its fair value and recorded as property, plant and equipment. The Company intends to use the property as the new headquarters for the office.
During the fiscal year 2013, the Company entered into an agreement with the Seller to provide property management services for an annual amount of $100,704 for five years from January 1, 2013 to December 31, 2017. The Company recorded in general and administrative expense an amount of $100,704 in the year ended December 31, 2013.
During the fiscal year 2012, the Company borrowed $478,160, and fully repaid later during the same period, from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, had a 100% equity interest in Jiaxing Lighting. The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand.
During the fiscal year 2013, the Company borrowed $905,449, and fully repaid later during the same period, from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, had a 100% equity interest in Jiaxing Lighting. The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand.
NOTE 9 – TAXES PAYABLE
Taxes payable consists of the following:
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Income tax payable
|
|
|
$
|
2,653,168
|
|
|
$
|
606,190
|
|
Mineral resource compensation fee payable
|
|
|
|
300,856
|
|
|
|
239,776
|
|
Value added tax payable
|
|
|
|
1,079,143
|
|
|
|
771,673
|
|
Land use tax payable
|
|
|
|
952,972
|
|
|
|
888,349
|
|
Other tax payables
|
|
|
|
262,347
|
|
|
|
350,670
|
|
Total
|
|
|
$
|
5,248,486
|
|
|
$
|
2,856,658
|
|
NOTE 10 – CAPITAL LEASE OBLIGATIONS
The components of capital lease obligations are as follows:
|
Imputed
|
|
As of December 31,
|
|
Interest rate
|
|
2013
|
|
|
2012
|
|
Total capital lease obligations
|
6.7%
|
|
$
|
3,146,270
|
|
|
$
|
3,146,066
|
|
Less: Current portion
|
|
|
|
(202,392
|
)
|
|
|
(193,164
|
)
|
Capital lease obligations, net of current portion
|
|
|
$
|
2,943,878
|
|
|
$
|
2,952,902
|
|
Interest expense from capital lease obligations amounted to $207,393 and $209,584, which were charged to the income statements for the year ended December 31, 2013 and 2012. See Note 21 for future minimum lease payments disclosure.
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 comment 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 and accordingly 80,000,000 is disclosed as the authorized shares of the Company’s common stock in the consolidated balance sheet as of December 31, 2013.
(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 and SYCI 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 December 31, 2013 for SCHC and SYCI is 36% and 50% of its registered capital, respectively.
NOTE 12 – COMMON STOCK
In November 2012, the Company issued 3,806,728 shares of its common stock, valued at $4,872,612, to acquire assets owned by Mr. Chengyong Zhao. See Note 2.
NOTE 13 – TREASURY STOCK
No shares of common stock were repurchased for the fiscal year 2013 and 2012.
NOTE 14 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended and Restated 2007 Equity Incentive Plan, the aggregate number shares of the Company’s common stock available for grant of stock options and issuance is 4,341,989 shares.
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 estimated average of the life of options using the “simplified” method, as prescribed in FASB ASC 718, due to insufficient historical exercise activity during recent years as a basis from which to estimate future exercise patterns.
NOTE 14 – STOCK-BASED COMPENSATION – Continued
In early March 2012, 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 $2.77 per share and the options vested immediately. The options were valued at $15,300 fair value, with assumed 95.89% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.21% and no dividend yield.
On May 7, 2012, the Company entered into a service agreement with an independent director in which he would be entitled to receive stock option grants of 12,500 shares of common stock on the date of the agreement and on each anniversary date from that date through May 7, 2014. The exercise price of the options, which will equal or exceed the fair market value of a share of the Company’s common stock on the day before the grant date, shall be determined by the Board of Directors and the options shall vest immediately upon the grant date. This agreement remains effective as long as the director continues to serve as a non-employee director of the Company. Pursuant to this agreement, on May 7, 2012, the Company granted to this independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $2.06 per share and the options vested immediately. The options were valued at $11,000 fair value, with assumed 95.21% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.21% and no dividend yield.
On July 2, 2012, 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 $1.22 per share and the options vested immediately. The options were valued at $7,000 fair value, with assumed 94.92% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.24% and no dividend yield.
On July 17, 2012, the Company granted to 3 executive officers and 18 management staff options to purchase 600,000 shares and 218,000 shares of the Company’s common stock, respectively, at an exercise price of $0.952 per share and the options vested immediately. The options to executive officers and management staff were valued at $344,743 and $125,257 fair value, respectively, both with assumed 88.03% volatility, a four-year expiration term with expected tenor of 2 years, a risk free rate of 0.24% and no dividend yield.
On November 8, 2012, 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 $1.37 per share and the options vested immediately. The options were valued at $7,200 fair value, with assumed 94.88% volatility, a three-year expiration term with expected tenor of 1.50 years, a risk free rate of 0.21% and no dividend yield.
In early March 2013, 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 $1.12 per share and the options vested immediately. The options were valued at $4,900 fair value, with assumed 74.73% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.19% and no dividend yield. For the three-month period ended March 31, 2013, $4,900 was recognized as general and administrative expenses.
On May 30, 2013, the Company granted to 3 executive officers and 17 management staff options to purchase 600,000 shares and 203,000 shares of the Company’s common stock, respectively, at an exercise price of $0.952 per share and the options vested immediately. The options were valued at $394,100 and $133,300 fair value, respectively, both with assumed 80.76% volatility, a four-year expiration term with expected tenor of 2 years, a risk free rate of 0.29% and no dividend yield.
On July 2, 2013, 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 $1.17 per share and the options vested immediately. The options were valued at $4,100 fair value, with assumed 61.56% volatility, a three-year expiration term with expected tenor of 1.49 years, a risk free rate of 0.24% and no dividend yield.
On November 8, 2013, 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 $2.12 per share and the options vested immediately. The options were valued at $8,500 fair value, with assumed 66.49% volatility, a three-year expiration term with expected tenor of 1.50 years, a risk free rate of 0.21% and no dividend yield.
During the year ended December 31, 2013, 213,131 shares of common stock were issued upon cashless exercise of 344,000 options.
NOTE 14 – STOCK-BASED COMPENSATION – Continued
The following table summarizes all Company stock option transactions between January 1, 2012 and December 31, 2013.
|
|
Number of Option
and Warrants
Outstanding and exercisable
|
|
|
Weighted- Average Exercise price of Option
and Warrants
|
|
|
Range of
Exercise Price per Common Share
|
|
Balance, December 31, 2011
|
|
|
1,144,471
|
|
|
$
|
6.30
|
|
|
$
|
2.41 - $12.60
|
|
Granted and vested during the year
ended December 31, 2012
|
|
|
868,000
|
|
|
$
|
1.00
|
|
|
$
|
0.95 - $2.77
|
|
Forfeited during the
year ended December 31, 2012
|
|
|
(38,000
|
)
|
|
$
|
4.97
|
|
|
$
|
4.97
|
|
Balance, December 31, 2012
|
|
|
1,974,471
|
|
|
$
|
4.00
|
|
|
$
|
0.95 - $12.60
|
|
Balance, January 1, 2013
|
|
|
1,974,471
|
|
|
$
|
4 .00
|
|
|
$
|
0.95 - $12.60
|
|
Granted and vested during the year
ended December 31, 2013
|
|
|
840,500
|
|
|
$
|
0.98
|
|
|
$
|
0.95 - $2.12
|
|
Exercised during the year ended
December 31, 2013
|
|
|
(344,000
|
)
|
|
$
|
0.95
|
|
|
$
|
0.95
|
|
Expired during the
year ended December 31, 2013
|
|
|
(12,500
|
)
|
|
$
|
10.43
|
|
|
$
|
10.43
|
|
Balance, December 31, 2013
|
|
|
2,458,471
|
|
|
$
|
3.36
|
|
|
$
|
0.95 - $12.60
|
|
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
Outstanding
|
|
|
|
|
|
Remaining
|
|
|
Exercise Price of
|
|
|
|
at December 31,
2013
|
|
|
Range of
Exercise Prices
|
|
|
Contractual Life
(Years)
|
|
|
Options Currently
Outstanding
|
|
Exercisable and outstanding
|
|
|
2,458,471
|
|
|
$
|
0.95 - $12.60
|
|
|
|
2.22
|
|
|
$
|
3.36
|
|
The aggregate intrinsic value of options outstanding and exercisable as of December 31, 2013 was $1,682,136.
The total intrinsic value of options exercised during the year ended December 31, 2013 and 2012 was $64,672 and $0.
NOTE 15 – 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. is 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 years ended December 31, 2013 and 2012, and management believes that its earnings are permanently invested in the PRC.
(b) BVI
Upper Class Group Limited 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 years ended 31 December 31, 2013 and 2012.
(c) Hong Kong
Hong Kong Jiaxing Industrial 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 years. The applicable statutory tax rates for the years ended December 31, 2013 and 2012 are 16.5%.
(d) PRC
Enterprise income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC and SYCI 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 December 31, 2013 and 2012, the accumulated distributable earnings under the Generally Accepted Accounting Principles (“GAAP”) of PRC are $225,003,631 and $197,042,047, 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 December 31, 2013 and 2012, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of December 31, 2013 and 2012, the unrecognized WHT are $10,133,056 and $8,768,486, respectively.
NOTE 15 – INCOME TAXES – Continued
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 2010 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 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 Company’s PRC tax returns since 2010 are currently subject to examination.
The components of the provision for income taxes from continuing operations are:
|
|
Years ended December 31,
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Current taxes – PRC
|
|
$
|
7,607,050
|
|
|
$
|
5,102,119
|
|
Deferred tax – PRC
|
|
|
633
|
|
|
|
489,334
|
|
|
|
$
|
7,607,683
|
|
|
$
|
5,591,453
|
|
The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:-
|
|
|
Years ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
Statutory income tax rate
|
|
|
|
25
|
%
|
|
|
25
|
%
|
Non-deductible items
|
|
|
|
1
|
%
|
|
|
-
|
|
Change in valuation allowance
|
|
|
|
1
|
%
|
|
|
2
|
%
|
Effective tax rate
|
|
|
|
27
|
%
|
|
|
27
|
%
|
As of December 31, 2013 and 2012, the Company had US federal net operating loss (“NOL”) of approximately $26.5 million and $25.9 million available to offset against future federal income tax liabilities, respectively. NOL can be carried forward up to 15 years from the year the loss is incurred. NOL of approximately $12.0 million will expire at the beginning of 2014. The Company believes the realization of benefits from these losses remains uncertain due to the Company’s limited operating history and continuing losses. Accordingly, a 100% deferred tax asset valuation allowance has been provided.
Differences between the application of accounting principles and tax laws cause differences between the bases of certain assets and liabilities for financial reporting purposes and tax purposes. The tax effects of these differences, to the extent they are temporary, are recorded as deferred tax assets and liabilities. Significant components of the Company’s deferred tax assets and liabilities at December31, 2013 and 2012 are as follows:
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
1,657
|
|
|
$
|
6,973
|
|
Impairment on property, plant and equipment
|
|
|
479,151
|
|
|
|
464,778
|
|
Exploration costs
|
|
|
1,837,025
|
|
|
|
1,781,921
|
|
Repair and maintenance costs
|
|
|
-
|
|
|
|
-
|
|
Property, plant and equipment
|
|
|
-
|
|
|
|
-
|
|
Property, plant and equipment under capital leases
|
|
|
-
|
|
|
|
-
|
|
Compensation costs of unexercised stock options
|
|
|
2,053,310
|
|
|
|
1,809,378
|
|
US federal net operating loss
|
|
|
9,272,734
|
|
|
|
8,809,935
|
|
Total deferred tax assets
|
|
|
13,643,877
|
|
|
|
12,872,985
|
|
Valuation allowance
|
|
|
(11,326,044
|
)
|
|
|
(10,619,313
|
)
|
Net deferred tax asset
|
|
$
|
2,317,833
|
|
|
$
|
2,253,672
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
1,657
|
|
|
$
|
6,973
|
|
Long-term deferred tax asset
|
|
$
|
2,316,176
|
|
|
$
|
2,246,699
|
|
The increases in valuation allowance for each of the years ended December 31, 2013 and 2012 were $706,731 and $507,492 respectively.
There were no unrecognized tax benefits and accrual for uncertain tax positions as of December 31, 2013 and 2012.
NOTE 16 – BUSINESS SEGMENTS
The Company has three reportable segments: bromine, crude salt and chemical products. 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.
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.
Year Ended
December 31, 2013
|
|
Bromine *
|
|
|
Crude
Salt *
|
|
|
Chemical
Products
|
|
|
Segment
Total
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
(external customers)
|
|
$
|
60,488,886
|
|
|
$
|
13,790,128
|
|
|
$
|
44,112,769
|
|
|
$
|
118,391,783
|
|
|
$
|
-
|
|
|
$
|
118,391,783
|
|
Net revenue (intersegment)
|
|
|
2,947,350
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,947,350
|
|
|
|
-
|
|
|
|
2,947,350
|
|
Income (loss) from operations before taxes
|
|
|
13,152,092
|
|
|
|
3,831,272
|
|
|
|
13,371,119
|
|
|
|
30,354,483
|
|
|
|
(1,910,990
|
)
|
|
|
28,443,493
|
|
Income taxes
|
|
|
3,459,256
|
|
|
|
785,879
|
|
|
|
3,362,548
|
|
|
|
7,607,683
|
|
|
|
-
|
|
|
|
7,607,683
|
|
Income (loss) from operations after taxes
|
|
|
9,692,836
|
|
|
|
3,045,393
|
|
|
|
10,008,571
|
|
|
|
22,746,800
|
|
|
|
(1,910,990
|
)
|
|
|
20,835,810
|
|
Total assets
|
|
|
181,490,011
|
|
|
|
61,138,301
|
|
|
|
66,479,395
|
|
|
|
309,107,707
|
|
|
|
137,098
|
|
|
|
309,244,805
|
|
Depreciation and amortization
|
|
|
17,384,351
|
|
|
|
6,547,844
|
|
|
|
3,528,498
|
|
|
|
27,460,693
|
|
|
|
-
|
|
|
|
27,460,693
|
|
Capital expenditures
|
|
|
2,780,023
|
|
|
|
406,586
|
|
|
|
6,072
|
|
|
|
3,192,681
|
|
|
|
-
|
|
|
|
3,192,681
|
|
Write-off / Impairment
|
|
|
24,503
|
|
|
|
3,247
|
|
|
|
214
|
|
|
|
27,964
|
|
|
|
-
|
|
|
|
27,964
|
|
Year Ended
December 31, 2012
|
|
Bromine *
|
|
|
Crude
Salt *
|
|
|
Chemical
Products
|
|
|
Segment
Total
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
(external customers)
|
|
$
|
56,332,785
|
|
|
$
|
11,143,848
|
|
|
$
|
34,224,249
|
|
|
$
|
101,700,882
|
|
|
$
|
-
|
|
|
$
|
101,700,882
|
|
Net revenue (intersegment)
|
|
|
2,739,256
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,739,256
|
|
|
|
-
|
|
|
|
2,739,256
|
|
Income (loss) from operations before taxes
|
|
|
9,817,947
|
|
|
|
2,932,694
|
|
|
|
9,289,175
|
|
|
|
22,039,816
|
|
|
|
(1,554,961
|
)
|
|
|
20,484,855
|
|
Income taxes
|
|
|
2,658,235
|
|
|
|
588,556
|
|
|
|
2,344,662
|
|
|
|
5,591,453
|
|
|
|
-
|
|
|
|
5,591,453
|
|
Income (loss) from operations after taxes
|
|
|
7,159,712
|
|
|
|
2,344,138
|
|
|
|
6,944,513
|
|
|
|
16,448,363
|
|
|
|
(1,554,961
|
)
|
|
|
14,893,402
|
|
Total assets
|
|
|
168,434,071
|
|
|
|
55,732,942
|
|
|
|
53,995,682
|
|
|
|
278,162,695
|
|
|
|
30,339
|
|
|
|
278,193,034
|
|
Depreciation and amortization
|
|
|
14,589,701
|
|
|
|
6,063,323
|
|
|
|
2,664,571
|
|
|
|
23,317,595
|
|
|
|
-
|
|
|
|
23,317,595
|
|
Capital expenditures
|
|
|
26,302,483
|
|
|
|
5,771,888
|
|
|
|
10,180,860
|
|
|
|
42,255,231
|
|
|
|
-
|
|
|
|
42,255,231
|
|
Write-off / Impairment
|
|
|
891,605
|
|
|
|
150,533
|
|
|
|
-
|
|
|
|
1,042,138
|
|
|
|
-
|
|
|
|
1,042,138
|
|
NOTE 16 – BUSINESS SEGMENTS – Continued
|
* 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.
|
|
|
Years ended December 31,
|
Reconciliations
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
30,354,483
|
|
|
$
|
22,039,816
|
|
Corporate costs
|
|
|
(1,910,990
|
)
|
|
|
(1,554,961
|
)
|
Income from operations
|
|
|
28,443,493
|
|
|
|
20,484,855
|
|
Other income
|
|
|
131,548
|
|
|
|
102,101
|
|
Income before taxes
|
|
$
|
28,575,041
|
|
|
$
|
20,586,956
|
|
The following table shows the major customer(s) (10% or more) for the year ended December 31, 2013.
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
|
|
$
|
6,955
|
|
|
$
|
3,520
|
|
|
$
|
4,556
|
|
|
$
|
15,031
|
|
|
|
12.7
|
%
|
TOTAL
|
|
|
|
$
|
6,955
|
|
|
$
|
3,520
|
|
|
$
|
4,556
|
|
|
$
|
15,031
|
|
|
|
12.7
|
%
|
The following table shows the major customer(s) (10% or more) for the year ended December 31, 2012.
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
|
|
$
|
6,267
|
|
|
$
|
2,376
|
|
|
$
|
4,038
|
|
|
$
|
12,681
|
|
|
|
12.5
|
%
|
TOTAL
|
|
|
|
$
|
6,267
|
|
|
$
|
2,376
|
|
|
$
|
4,038
|
|
|
$
|
12,681
|
|
|
|
12.5
|
%
|
NOTE 17 – MAJOR SUPPLIERS
During the year ended December 31, 2013, the Company purchased 87.6% of its raw materials from its top five suppliers. At December 31, 2013, amounts due to those suppliers included in accounts payable were $3,550,572.
During the year ended December 31, 2012, the Company purchased 83.6% of its raw materials from its top five suppliers. At December 31, 2012, amounts due to those suppliers included in accounts payable were $3,235,622.
NOTE 18 – CUSTOMER CONCENTRATION
The Company sells a substantial portion of its products to a limited number of customers. During the year ended December 31, 2013, the Company sold 40.1% of its products to its top five customers. At December 31, 2013, amount due from these customers were $21,576,892. During the year ended December 31, 2012, the Company sold 43.2% of its products to its top five customers. At December 31, 2012, amount due from these customers were $18,031,569.
NOTE 19 – 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 December 31, 2013 and 2012.
NOTE 20 –RESEARCH AND DEVELOPMENT EXPENSES
On September 6, 2007, SYCI and East China University of Science and Technology formally opened a Co-Op Research and Development Center. The research center is equipped with state of the art chemical engineering instruments for the purpose of pursuing targeted research and development of refined bromide compounds and end products. According to the Co-Op Research Agreement, any research achievement or patents will become assets of the Company. Originally, the Company will provide $500,000 annually until June 2012 to East China University of Science and Technology for research. On June 7, 2011, the Company and East China University of Science and Technology mutually agreed to terminate the Co-op Research Agreement due to the successful completion of the cooperative research and development tasks related to the development of bromine-related chemical products for the Company.
The total research and development expenses recognized in the income statements during the years ended December 31, 2013 and 2012 were $140,445 and $164,586, respectively, of which the consumption of bromine produced by the company amounted to $36,158 and $41,598, respectively.
NOTE 21 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS
As of December 31, 2013,
the
Company 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 capital lease. The future minimum lease payments required under capital lease, together with the present value of such payments, are included in the table show below.
The Company has leased nine pieces of land under non-cancelable operating leases, which are fixed in rentals and expired through December 2021, December 2030, December 2031, December 2032, December 2040, February 2059, August 2059 and June 2060, respectively. The Company accounts for the leases as operating leases.
The Company has no purchase commitment as of December 31, 2013.
NOTE 21 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS – Continued
The following table sets forth the Company’s contractual obligations as of December 31, 2013:
|
|
Capital Lease Obligations
|
|
|
Operating Lease Obligations
|
|
|
Purchase Obligations
|
|
Payable within:
|
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
307,866
|
|
|
$
|
968,287
|
|
|
$
|
-
|
|
the next 13 to 24 months
|
|
|
307,866
|
|
|
|
989,424
|
|
|
|
-
|
|
the next 25 to 36 months
|
|
|
307,866
|
|
|
|
1,008,598
|
|
|
|
-
|
|
the next 37 to 48 months
|
|
|
307,866
|
|
|
|
1,031,668
|
|
|
|
-
|
|
the next 49 to 60 months
|
|
|
307,866
|
|
|
|
1,052,719
|
|
|
|
-
|
|
thereafter
|
|
|
3,694,384
|
|
|
|
22,043,857
|
|
|
|
-
|
|
Total
|
|
$
|
5,233,714
|
|
|
$
|
27,094,553
|
|
|
$
|
-
|
|
Less: Amount representing interest
|
|
|
(2,087,444
|
)
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
3,146,270
|
|
|
|
|
|
|
|
|
|
Rental expenses related to operating leases of the Company amounted to $951,465 and $777,564 were charged to the income statements for the years ended December 31, 2013 and 2012, respectively.
NOTE 22 – LEGAL PROCEEDINGS
Class Action
The Company and certain of its officers and directors (Ming Yang, Xiaobin Liu, and Min Li, collectively, the “Individual Defendants”) were named as defendants in a putative securities class action lawsuit alleging violations of the federal securities laws. That action, captioned Lewy, et al. v. Gulf Resources, Inc., et al., No. 11-cv-3722 ODW (MRWx), was filed on April 29, 2011 in the United States District Court for the Central District of California. The lead plaintiffs, who sought to represent a class of all purchasers and acquirers of the Company’s common stock between March 16, 2009 and April 26, 2011 inclusive, filed an amended complaint on September 12, 2011 asserting claims for violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The amended complaint alleged that the defendants made false or misleading statements in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2008, 2009, and 2010, and in interim quarterly reports by, among other things, overstating revenue and net income and failing to disclose material related party transactions and certain facts about the CEO’s prior employment at another company. The amended complaint also asserted claims against the Individual Defendants for violations of Section 20(a) of the Securities Exchange Act of 1934. The amended complaint sought damages in an unspecified amount. The Company filed a motion to dismiss the amended complaint. On May 15, 2012, the Court denied the Company’s motion to dismiss the amended complaint. On April 30, 2013, the parties executed a stipulation and agreement of settlement (“Proposed Settlement”). On January 8, 2014, the Court entered an Order and Final Judgment approving the Proposed Settlement and dismissing the lawsuit, which was made final on February 9, 2014 after the appeal period ended. Under the term of the settlement, the class-action lawsuit will be dismissed in return for the payment of a total settlement amount of approximately of $2.0 million, which will not have any effect on the Company’s financial statements due to coverage under its directors’ and officers’ insurance.
SCHEDULE I – PARENT ONLY FINANCIAL INFORMATION
The following presents condensed parent company only financial information of Gulf Resources, Inc.
Condensed Balance Sheets
|
|
As of December 31,
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Prepayments and deposits
|
|
$
|
4,583
|
|
|
$
|
-
|
|
Total Current Assets
|
|
|
4,583
|
|
|
|
-
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
Interests in subsidiaries
|
|
|
241,210,655
|
|
|
|
209,857,994
|
|
Amounts due from group companies
|
|
|
55,647,841
|
|
|
|
56,445,972
|
|
Total non-current assets
|
|
|
296,858,496
|
|
|
|
266,303,966
|
|
Total Assets
|
|
$
|
296,863,079
|
|
|
$
|
266,303,966
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
$
|
333,852
|
|
|
$
|
671,374
|
|
Amounts due to group companies
|
|
|
1,534,135
|
|
|
|
1,408,208
|
|
Total Liabilities
|
|
$
|
1,867,987
|
|
|
$
|
2,079,582
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
PREFERRED STOCK; $0.001 par value; 1,000,000 shares authorized; none outstanding
|
|
$
|
-
|
|
|
$
|
-
|
|
COMMON STOCK; $0.0005 par value; 80,000,000 shares authorized; 38,765,201 and 38,552,070 shares issued; and 38,580,602 and 38,367,471 shares outstanding as of December 31, 2013 and 2012, respectively
|
|
|
19,383
|
|
|
|
19,276
|
|
Treasury stock; 184,599 shares as of December 31, 2013 at cost
|
|
|
(500,000
|
)
|
|
|
(500,000
|
)
|
Additional paid-in capital
|
|
|
80,033,981
|
|
|
|
79,489,188
|
|
Retained earnings unappropriated
|
|
|
166,421,427
|
|
|
|
146,745,754
|
|
Retained earnings appropriated
|
|
|
17,265,572
|
|
|
15,973,887
|
|
Cumulative translation adjustment
|
|
|
31,754,729
|
|
|
|
22,496,279
|
|
Total Stockholders’ Equity
|
|
|
294,995,092
|
|
|
|
264,224,384
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
296,863,079
|
|
|
$
|
266,303,966
|
|
Condensed Statements of Income
|
|
Years Ended December 31,
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
OPERATING (EXPENSES) INCOME
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
(1,297,200
|
)
|
|
$
|
(2,446,380
|
)
|
Other operating income
|
|
|
171,092
|
|
|
|
954,812
|
|
TOTAL OPERATING EXPENSES
|
|
|
(1,126,108
|
)
|
|
|
(1,491,568
|
)
|
OTHER EXPENSES
|
|
|
|
|
|
|
Interest expense
|
|
|
(745
|
)
|
|
|
(1,058
|
)
|
TOTAL OTHER EXPENSES
|
|
|
(745
|
)
|
|
|
(1,058
|
)
|
TOTAL EXPENSES
|
|
|
(1,126,853
|
)
|
|
|
(1,492,626
|
)
|
Equity in net income of subsidiaries
|
|
|
22,094,211
|
|
|
|
16,488,129
|
|
INCOME BEFORE TAXES
|
|
|
20,967,358
|
|
|
|
14,995,503
|
|
INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
NET INCOME
|
|
$
|
20,967,358
|
|
|
$
|
14,995,503
|
|
Condensed Statements of Cash Flows
|
|
Years Ended December 31,
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$
|
20,967,358
|
|
|
$
|
14,995,503
|
|
Adjustments to reconcile net income to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Equity earnings in unconsolidated subsidiaries
|
|
|
(22,094,211
|
)
|
|
|
(16,488,129
|
)
|
Stock-based compensation expense
|
|
|
544,900
|
|
|
|
510,500
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepayment and deposits
|
|
|
(4,583
|
)
|
|
|
307,600
|
|
Other payables and accrued expenses
|
|
|
(337,522
|
)
|
|
|
(365,139
|
)
|
Net cash used in operating activities
|
|
|
(924,059
|
)
|
|
|
(1,039,665
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances from / (to) group companies
|
|
|
924,059
|
|
|
|
1,039,665
|
)
|
Net cash provided by financing activities
|
|
|
924,059
|
|
|
|
1,039,665
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
-
|
|
|
|
-
|
|
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
|
|
-
|
|
|
|
-
|
|
CASH AND CASH EQUIVALENTS - END OF YEAR
|
|
$
|
-
|
|
|
$
|
-
|
|
Notes:
(i)
|
Basis of presentation
|
In the condensed parent-company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. The Company’s share of net income of its subsidiaries is included in condensed statements of income using the equity method. These condensed parent-company-only financial statements should be read in connection with the consolidated financial statements and notes thereto.
As of December 31, 2013, the Company itself has no purchase commitment, capital commitment and operating lease commitment for the condensed parent-company-only financial statements.
(ii)
|
Restricted Net Assets
|
Schedule I of Article 5-04 of Regulation S-X requires the condensed financial information of registrant shall be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of the above test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.).
The condensed parent company financial statements have been prepared in accordance with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of the subsidiaries of Gulf Resources, Inc. exceed 25% of the consolidated net assets of Gulf Resources, Inc. The ability of the Company’s Chinese operating subsidiaries to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balances of the Chinese operating subsidiaries. Because a significant portion of the Company’s operations and revenues are conducted and generated in China, a significant portion of the revenues being earned and currency received are denominated in RMB. RMB is subject to the exchange control regulation in China, and, as a result, the Company may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict the Company’s ability to convert RMB into US Dollars.