The financial statements and supplementary
data required by this item are included in a separate section of this Report. See “Index to Consolidated Financial Statements”
on Page F-1.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
(Expressed in U.S. dollars)
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(a) Basis
of Presentation and Consolidation
The accompanying audited consolidated financial
statements have been prepared by Gulf Resources, Inc (“Gulf Resources”). a Nevada corporation and its subsidiaries
(collectively, the “Company”). On November 24, 2015, Gulf Resources, Inc., a Delaware corporation consummated a merger
with and into its wholly-owned subsidiary, Gulf Resources, Inc., a Nevada corporation. As a result of the reincorporation, the
Company is now a Nevada corporation.
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.
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.
On January 12, 2015, Gulf Resources and
SCHC, a wholly owned subsidiary of the Company, entered into an Equity Interest Transfer Agreement (the “Agreement”)
with Shouguang City Rongyuan Chemical Co., Ltd (“SCRC”).
On February 4, 2015 the Company closed
the transactions contemplated by the Agreement between the Company, SCHC and SCRC.
On the Closing Date, the Company
issued 7,268,011 shares of its common stock, par value $0.0005 per share (the “Shares”), at the closing market
price of $1.84 per Share on the Closing Date to the four former equity owners of SCRC .The issuance of the Shares was exempt
from registration pursuant to Regulation S of the Securities Act of 1933, as amended. On the Closing Date, the Company
entered into a lock-up agreement with the four former equity owners of SCRC. In accordance with the terms of the lock-up
agreement, the shareholders have agreed not to sell or transfer the Shares for five years from the date the stock
certificates evidencing the Shares are issued.
The sellers of SCRC agreed as part of the
purchase price to accept 7,268,011 shares of Gulf Resources stock, based on a valuation of $2.00, which was a 73% premium to the
price on the day the agreement was reached. For accounting purposes, these shares are now being valued at $1.84, which was the
closing price of Gulf Resources' stock on the day of the closing of the agreement. The price difference between the original $2.00
and the current $1.84 is solely for accounting purposes. There has been no change in the number of shares issued.
On December 15, 2015, the Company registered
a new subsidiary in the Sichuan Province of the PRC named Daying County Haoyuan Chemical Company Limited (“DCHC”) with
registered Capital of RMB50,000,000, and capital of RMB13,848,730 contributed by SCHC as of December 31, 2018. DCHC was established
to further explore and develop natural gas and brine resources (including bromine and crude salt) in China.
On September 2, 2016, the Company announced the planned merger
of two of its 100% owned subsidiaries, ShouguanYuxin Chemical Co., Limited (“SYCI”) and ShouguanRongyuan 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 fiscal year 2018.
(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 December 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 agreed
on a plan in October 2017. In the fiscal year ended December 31, 2018, the Company incurred $16,243,677 in the rectification
and improvements of plant and equipment of the bromine and crude salt factories resulting in a cumulative amount of
$34,182,329 incurred as of December 31, 2018 recorded in the plant, property and equipment in the consolidated balance sheet.
The Company does not expect to incur any additional capital expenditure in the rectification of its bromine and crude salt
factories in respect of meeting the county's new safety and environmental protection requirement.
Originally, six bromine factories completed
their rectification process within factory areas (i.e. excluding crude salt field area) and were approved and scheduled for production
commencement by April 2018 as verbally indicated by the local government. Subsequently, the Shandong 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 bromine and crude salt factories. As of the
date of this report, the Company has not received any official approval from the government in respect of meeting the county's new safety and environmental protection requirement..
Subsequently on June 29, 2018, the Company
received a formal notice (dated June 25, 2018) jointly issued by various provincial government agencies in Shandong Province (the
“Notice”) forwarded by the Weifang City Special Operations Leading Group Office of Safe Production, Transformation
and Upgrading of Chemical Industry. In the Notice, the provincial government agencies set forth further requirements and procedures
covering the following four aspects for the chemical industrial enterprises: project approval, planning approval, land use rights
approval and environmental protection assessment approval. Those standards and procedures apply to all chemical industrial enterprises
in Shandong Province including the Company’s bromine plants that have not completed project approval procedures, planning
approval procedures, land use rights approval procedures and environmental protection assessment procedures. The Company believes
that the government will not grant approval to the Company to allow its bromine and crude salt plants to resume operations until
the Company has fully complied with the aforesaid rules set forth in the Notice.
The Shouguang City Bromine Association,
on behalf of all the bromine plants in Shouguang, has started discussions with the local government agencies. The local governmental
agencies confirmed the facts that their initial requirements for the bromine industry did not include the project approval, the
planning approval and the land use rights approval and that those three additional approvals were new requirements of the provincial
government. The Company understood from the local government that it has been coordinating with several government agencies to
solve these three outstanding approval issues in a timely manner and that all the affected bromine plants are not allowed to commence
production prior to obtaining those approvals.
The Company is not certain how long the
temporary delay will be due to the issuance and implementation of the Notice. The Company believes that this is another step by
the government to improve the environment. It further believes the goal of the government is not to close all plants, but rather
to codify the regulations related to project approval, land use, planning approval and environmental protection assessment approval
so that illegal plants are not able to open in the future and plants close to population centers do not cause serious environmental
damage. In addition, the Company believes that the Shandong Provincial government wants to assure that each of its regional and
county government applies the Notice in a consistent manner.
On September 21, 2018, the Company received
a closing notice from the People's Government of Yangkou Town, Shouguang City informing it that its three bromine factories (Number
3, Number 4, and Number 11.) are not allowed to resume production and hence the Company has to demolish these factories. The crude
salt fields surrounding these factories have been reclaimed as cultivated or construction land and hence did not meet the requirement
for bromine and crude salt co-production set by the relevant authority.
The Company entered into a
contract with a third party to allow the Company to use the land adjacent to Factory No. 10 for waste water discharge and
invested $1.0 million to build a aqueduct to discharge the waste water to a designated place for treatment by a designated
party. This project was completed as of December 31, 2018.
The Company believes the issues related
to the remaining seven bromine and crude salt factories which have passed inspection are almost resolved. The Company is actively
working with the local government to obtain the documentation for approval of project, planning, land use rights and environmental
protection evaluation.
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 costs comprising prepaid land lease and professional fees related to the design of the new chemical factory in the amount of $10,925,081
and $9,732,118, which were recorded in the prepaid land leases and property, plant and equipment in the consolidated balance
sheets as of December 31, 2018 and 2017.
The Company does not anticipate that the
Company’s new chemical factory to be significantly impacted by the Notice. The Company has secured from the government the
land use rights for its chemical plants located at the Bohai Park and presented a completed construction design draft and other
related documents to the local authorities for approval. The Company is still waiting for the last approval report and is uncertain
when the approval will be issued. There could be a delay in the approval process given the ongoing rectification and approvals
process for the Company’s other plants. As the construction of the new factory cannot commence until the final approval from
the government is received, the delay in the receipt of the final approval will delay the commencement date of the construction
of the new factory.
In 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 purchased customized equipment for its natural gas project. The
installation of such equipment, including providing piping and electricity, was completed in July 2018. The Company has completed
the test production at its first natural gas well in Sichuan Province and has commenced trial production in January 2019.
The Company has available cash of approximately
$179.0 million at December 31, 2018. The Company intends to retain the cash for the relocation of its chemical factories
which it expects to incur additional capital expenditure of approximately $50.0 million, future expansion of its bromine and
crude salt businesses through acquisition, construction of extraction wells for its existing bromine and crude salt business
which it expects to incur capital expenditure of approximately $28 million, and further development of the new resources in
Sichuan Province. The Company does not anticipate paying cash dividends in the foreseeable future. It believe that there is
enough funds to cover the rectification and improvement, the setting up of the new chemical factory and the operating expense
of the Company during the rectification and relocation period. The Company believes that it has sufficient cash to meet
its obligations and anticipated ongoing operating needs as they fall due in the next twelve months.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(c) 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 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.
(d) 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.
(e) 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 240 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, 2018 and 2017, allowances
for doubtful accounts were zero. No allowances for doubtful accounts were charged to the consolidated statement of income/(loss)
for the years ended December 31, 2018 and 2017.
(f) 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. 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 $178,998,935 and $208,906,759 with these institutions as of December 31, 2018 and 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 and extends credit terms as and when appropriate. Approximately 13% of the balances of accounts receivable as of December
31, 2017, were 90 days old or less. There were no accounts receivable as of December 31, 2018 as they were fully collected in the
year ended December 31, 2018.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(g) Inventories
Inventories are stated at the lower of
cost, determined on a first-in first-out cost basis, or net realizable value. Costs of work-in-progress and finished goods comprise
direct materials, direct labor and an attributable portion of manufacturing overhead. Net realizable value is based on estimated
selling price less costs to complete and selling expenses.
(h)
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 (in tonnes) of production method, whichever is shorter.
Construction in process primarily represents
direct costs of construction of property, plant and equipment. Costs incurred are capitalized and transferred to property, plant
and equipment upon completion and depreciation will commence when the completed assets are placed in service.
The Company’s depreciation and amortization
policies on property, plant and equipment other than mineral rights and construction in process are as follows:
|
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.
(i) Asset
Retirement Obligation
The Company follows Financial Accounting
Standards Board Accounting Standards Codification (“FASB ASC”), 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 by the bromine and crude salt factories. Also,
for the two chemical plants that are to be relocated, currently, there are no obligations to restore the land to its original condition.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(j) Recoverability
of Long Lived Assets
In accordance with FASB 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.
Upon the receipt of the closure notice
from the People's Government of Yangkou Town, Shouguang City in September 2018 (See Note 1(b)), the Company demolished the affected
factories. As a result, the Company wrote off net book value of the affected factories’ property, plant and equipment in
the amount of $18,644,473 which was recorded in the loss on demolition of factories in the consolidated statements of loss for
the fiscal year ended December 31, 2018. The Company will negotiate with the local villages over compensation for the payment already
made for the land leases and mineral rights of these factories. However, the Company is uncertain of the amount that it could recover
and when this could be accomplished. Therefore, the Company wrote off the mineral rights of the affected factories of $1,284,832
included in the write-off/impairment on property, plant and equipment in the consolidated statements of loss for the fiscal year
ended December 31, 2018 and $52,926 of prepaid land lease recorded in other operating loss in the consolidated statements of loss
for fiscal year ended December 31, 2018. The Company incurred dismantling fees in the amount of $273,757 recorded in other operating
loss in the consolidated statements of loss for fiscal year ended December 31, 2018. In addition, the Company recorded a write-off
of $112,481 included in the write-off/impairment of property, plant and equipment for certain wells and equipment damaged by flood
from a typhoon that occurred in August 2018.
To comply with the new safety and environmental
regulations, 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 two chemical
factories and the length of time required to set up the new factory building in the Bohai Park, 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 with 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 as of October
31, 2017 of all the property, plant and equipment at the two chemical factories were recorded in the year ended December 31, 2017.
With the delayed commencement of the production bromine and crude salt factories, the Company is uncertain as to the future plan
for the land on which the two factories are sitting on. After considering the current circumstances and situation, Company determined
that it is appropriate to write off prepaid land lease related to the land on which the two factories are sitting on of $4,004,788
in the year ended December 31, 2018.
(k) 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 consolidated statement of income/(loss) on an accrual basis when they
are due. The Company’s contributions totaled $1,216,096 and $1,093,716 for the years ended December 31, 2018 and 2017, respectively.
(l) Mineral
Rights
The Company follows FASB ASC 805 “Business
Combinations” that certain mineral rights are considered tangible assets and that mineral rights should be accounted for
based on their substance. Mineral rights are included in property, plant and equipment.
(m) Leasing
arrangements
Rentals payable under operating leases
are charged to the consolidated statement of income/(loss) on a straight line basis over the term of the relevant lease. For capital
leases, the present value of future minimum lease payments at the inception of the lease is reflected as an asset and a liability
in the consolidated balance sheet. Amounts due within one year are classified as short-term liabilities and the remaining balance
as long-term liabilities.
NOTE 1 – NATURE OF BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(n) Reporting
Currency and Translation
The financial statements of the Company’s
foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the
functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
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/(loss).
The consolidated statement of income/(loss) and comprehensive income/(loss) 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/(loss)
for the reporting periods as part of general and administrative expense. Included in the general and administrative expense is
a foreign exchange gain of $1,315,454 and a foreign exchange loss $1,557,759 for the years ended December 31, 2018 and 2017. The
consolidated statement of cash flows is translated at the average rate during each quarter, with the exception of issuance of shares
and payment of dividends which are translated at historical rates.
(o) 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.
(p) 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.
(q) 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. Deferred tax assets
and liabilities are measured using tax rates that are expected to apply to taxable income for the years in which those tax assets
and liabilities are expected to be realized or settled. The deferred income tax effects of a change in tax rates are recognized
in the period of enactment. If it is more likely than not that some portion or all of a deferred tax asset will not be realized,
a valuation allowance is recognized. The guidance also provides criteria for the recognition, measurement, presentation and disclosures
of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not”
that the position is sustainable based solely on its technical merits. Interests and penalties associated with unrecognized tax
benefits are included within the (benefit from) provision for income tax in the consolidated statement of income (loss).
(r) Exploration
Costs
Exploration costs, which included the cost
of researching for appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other
resources, are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all
subsequent costs are capitalized.
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.
(s) 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
(t) 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 option-pricing
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 period in which services are to be received. 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.
(u) Basic
and Diluted Earnings (Loss) 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 258,737 and 43,541
shares for the years ended December 31, 2018 and 2017, respectively.
The following table sets forth the computation of basic and
diluted earnings(loss) per share:
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
Net income/(loss)
|
|
$
|
(69,963,986
|
)
|
|
$
|
7,953,313
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic: Weighted-average common shares
outstanding during the year
|
|
|
46,803,791
|
|
|
|
46,796,476
|
|
Add: Dilutive effect of stock options
|
|
|
—
|
|
|
|
39,354
|
|
Diluted
|
|
|
46,803,791
|
|
|
|
46,835,830
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.49
|
)
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
(1.49
|
)
|
|
$
|
0.17
|
|
NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES – Continued
(v) Goodwill
Goodwill represents the excess of the purchase
price over the net of the estimated fair value of the identifiable tangible and intangible assets acquired and liabilities assumed
in business acquisitions. Goodwill is tested for impairment at the reporting unit level annually or when events or changes in circumstances
indicate that the fair value of the reporting unit more likely than not is below the carrying amount, including goodwill. Goodwill
impairment is assessed based on qualitative factors and if the Company determines that it is more likely than not that the fair
value of a reporting unit is less than its carrying amount, quantitative test will be performed. As of December 31, 2018, the Company
performed the qualitative assessment and determined that it is more likely than not that the fair value of its chemical segment
is less than its carrying amount due to the uncertainty in the timing of receipt of the final approval of the design of the new
factory, the uncertainty in the forecast of demand for chemical products which may be affected by China’s environmental protection
policies and the time that the segment may need to build up the customer base to a level similar to the past. Considering these
factors, the Company determined the fair value of its chemical segment based on the discounted cash flow model is less than the
carrying amount of its chemical segment to the extent of the entire goodwill and recorded an impairment charge of $27,966,050 in
the year ended December 31, 2018.
(w) 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 consolidated
financial statements as of December 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 consolidated financial statements as of and for the fiscal year ended December 31, 2018.
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, Step 2 was eliminated 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. Early
adoption is permitted for goodwill impairment tests with a measurement date on or after January 1, 2017. The Company adopted this
Update as of December 31, 2018. See Note 1(v).
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 consolidated financial
statements as of and for the fiscal year ended December 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 will adopt this ASU and related amendments on January 1, 2019 and expects to elect certain practical expedients
permitted under the transition guidance. The Company will also elect the optional transition method that allows for a cumulative-effect
adjustment in the period of adoption and will not restate prior periods’ financial statements. The Company continues
to evaluate the effect of the adoption of this ASU on its consolidated financial statements and related disclosure. Based on preliminary
estimates, the Company expects the total assets and total liabilities to increase upon the adoption of the ASU but does not expect
the effect on its consolidated balance sheet to be material. The Company does not expect adoption of the ASU to have a material
effect on the consolidated statement of income.
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 June 2018, the FASB issued ASU No.2018-07,
Compensation- Stock Compensation (Topic 718). Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this
update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.
Prior to this update, Topic 718 applied only to share-based transactions to employees. Consistent with the accounting requirements
for employee share-based payment awards, nonemployee share-based payment awards within the scope of Topic 718 are measured at grant-date
fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been
rendered and any other conditions necessary to earn the right to benefit from the instruments have been satisfied. The amendments
in the Update are effective for public business entities form fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
This is not expected to have a material effect on the Company’s consolidated financial statements.
NOTE 2 – INVENTORIES
Inventories consist of:
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Raw materials
|
|
$
|
—
|
|
|
$
|
396,482
|
|
Finished goods
|
|
|
65,169
|
|
|
|
844,224
|
|
Allowance for obsolete and slow-moving inventories
|
|
|
(65,169
|
)
|
|
|
(43,921
|
)
|
|
|
$
|
—
|
|
|
$
|
1,196,785
|
|
NOTE 3 – 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 production facilities and warehouses of the
Company are situated. The prepaid land lease is amortized on a straight line basis.
In December 2017, the Company paid $9,732,118
for a 50-year lease of a piece of land for the new factory at Bohai Marine Fine Chemical Industrial Park. 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
(See Note 1(b)).
During the year ended December 31,
2018, amortization of prepaid land lease totaled $761,713 was recorded as direct labor and factory overheads incurred during
plant shutdown in the consolidated statement of income (loss), and wrote off $4,004,788 of prepaid land lease (See Note 1(j)
for further details).
During the year ended December 31, 2017,
amortization of prepaid land lease totaled $989,816, of which $634,535 and $355,281 were recorded as cost of net revenue and direct
labor and factory overheads incurred during plant shutdown.
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 38.6 square
kilometers of aggregate carrying value of $599,747 and approximately 54.97 square kilometers of aggregate carrying
value of $645,761 as at December 31, 2018 and 2017, respectively.
NOTE 4– PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment, net consist
of the following:
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
At cost:
|
|
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
2,809,977
|
|
|
$
|
4,711,822
|
|
Buildings
|
|
|
60,866,462
|
|
|
|
67,748,512
|
|
Plant and machinery
|
|
|
161,178,816
|
|
|
|
200,742,652
|
|
Motor vehicles
|
|
|
6,230
|
|
|
|
8,792
|
|
Furniture, fixtures and office equipment
|
|
|
3,289,010
|
|
|
|
4,150,588
|
|
Construction in progress
|
|
|
6,535,808
|
|
|
|
183,036
|
|
Total
|
|
|
234,686,303
|
|
|
|
277,545,402
|
|
Less: accumulated depreciation and amortization
|
|
|
(134,681,628
|
)
|
|
|
(163,597,407
|
)
|
Impairment
|
|
|
(17,722,045
|
)
|
|
|
(18,833,491
|
)
|
Net book value
|
|
$
|
82,282,630
|
|
|
$
|
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. 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 $20,409,998 and $27,432,351 as at December 31,
2018 and 2017, respectively.
During the year ended December 31, 2018,
depreciation and amortization expense totaled $17,176,306, of which $16,209,588 and $966,718 were recorded in direct labor and
factory overheads incurred during plant shutdown and administrative expenses, respectively in the consolidated statement of income
(loss).
During the year ended December 31, 2017,
depreciation and amortization expense totaled $19,930,786 of which $13,443,298 and $1,213,010 were recorded as cost of net revenue
and administrative expenses, respectively in the consolidated statement of income (loss). During the year ended December 31, 2017,
depreciation and amortization expense related to property, plant and equipment of $5,274,478 was recorded in direct labor and factory
overheads incurred during plant shutdown in the consolidated statement of income (loss).
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT,
NET – Continued
In the fiscal year 2018, the Company incurred
approximately $16.2 million to perform the rectification and improvements of the bromine and crude salt factories and approximately
$1.2 million in relocation cost of the chemical factories.
In the fourth quarter of 2018, the
Company built new extraction wells for bromine facilities at costs of approximately $5.8 million to replace wells damaged by
flood from a typhoon during the third quarter of 2018. The construction of this project was completed as of December 31,
2018. In the fourth quarter of 2018, the Company built new extraction wells for bromine facilities at costs of approximately
$5.3 million to replace the old bromine wells. This project is expected to complete in June 30, 2019.
In the third quarter of 2017, the Company
incurred enhancement works for rectification and improvement in order to meet the new environmental rules in China at costs of
approximately $0.6 million. In the fourth quarter of 2017, the Company incurred enhancement works for rectification and improvement
in order to meet the new environmental rules in China at costs of approximately $17.3 million. The construction of these projects
was completed as of December 31, 2017.
For the years ended December 31, 2018 and
2017, ordinary repair and maintenance expenses were $2,590,003 and $130,842, respectively.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
UNDER CAPITAL LEASES, NET
Property, plant and equipment under capital leases, net consist
of the following:
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
At cost:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
119,899
|
|
|
$
|
125,939
|
|
Plant and machinery
|
|
|
2,193,375
|
|
|
|
2,314,196
|
|
Total
|
|
|
2,313,274
|
|
|
|
2,440,135
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,062,517
|
)
|
|
|
(1,947,897
|
)
|
Net book value
|
|
$
|
250,757
|
|
|
$
|
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 year ended December 31, 2018,
depreciation and amortization expense totaled $267,012, which was recorded as cost of net revenue.
During the year ended December 31, 2017,
depreciation and amortization expense totaled $266,527, of which $198,998 and $67,529 were recorded as cost of net revenue and
administrative expenses, respectively.
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED
EXPENSE
Accounts payable and accrued expenses consist
of the following:
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Salary payable
|
|
$
|
241,343
|
|
|
$
|
393,617
|
|
Social security insurance contribution payable
|
|
|
140,326
|
|
|
|
135,203
|
|
Other payables
|
|
|
523,589
|
|
|
|
503,263
|
|
Total
|
|
$
|
905,258
|
|
|
$
|
1,032,083
|
|
NOTE 7 – DUE TO A RELATED PARTY AND
RELATED PARTY TRANSACTIONS
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 $90,897 for five years from January
1, 2018 to December 31, 2022. The expense associated with this agreement for the December 31, 2018 was approximately $90,897.
During the fiscal year 2018 and 2017, the
Company borrowed $355,212 and $450,000, 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, has a 100% equity interest.
The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand.
NOTE 8 – TAXES PAYABLE
Taxes payable consists of the following:
|
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Natural resource tax
|
|
$
|
—
|
|
|
$
|
156,147
|
|
Land use tax payable
|
|
|
1,188,687
|
|
|
|
810,841
|
|
Other tax payables
|
|
|
—
|
|
|
|
74,604
|
|
Total current taxes payable
|
|
$
|
1,188,687
|
|
|
$
|
1,041,592
|
|
NOTE 9 – CAPITAL LEASE OBLIGATIONS
The components of capital lease obligations are as follows:
|
|
Imputed
|
|
As of December 31,
|
|
|
Interest rate
|
|
2018
|
|
2017
|
Total capital lease obligations
|
|
6.7%
|
|
$
|
2,267,025
|
|
|
$
|
2,507,201
|
|
Less: Current portion
|
|
|
|
|
(197,480
|
)
|
|
|
(203,206
|
)
|
Capital lease obligations, net of current portion
|
|
|
|
$
|
2,069,545
|
|
|
$
|
2,303,995
|
|
Interest expense from capital lease obligations
amounted to $159,839 and $163,184, which were charged to the consolidated statement of income for the years ended December 31,
2018 and 2017. See Note 18 for future minimum lease payments disclosure.
NOTE 10 –EQUITY
During the annual general meeting held
on June 18, 2013, the shareholders of the Company approved the amendment to the Certificate of Incorporation to decrease the number
of the authorized shares of the Company’s common stock to 80,000,000. The Company has completed the filing of the amendment
and restatement of the Certificate of Incorporation with the Secretary of the State of Delaware to decrease the number of authorized
shares of the Company’s common stock. Accordingly, 80,000,000 is disclosed as the authorized shares of the Company’s
common stock in the consolidated balance sheet as of December 31, 2018.
(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 a portion
of 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 for SCHC, SYCI
and DCHC is 46%, 14% and 0% of its registered capital as of December 31, 2018 and 2017.
NOTE 11 – TREASURY STOCK
In September 2017, the Company issued 10,000
shares of common stock from the treasury shares to one of its consultants. The shares were valued at the closing market price on
the date of the agreement and recorded as general and administrative expense in the consolidated statements of income and comprehensive
income for the fiscal year 2017. The shares issued were deducted from the treasury shares at weighted average cost and the excess
of the cost over the closing market price was charged to additional paid-in-capital.
NOTE 12 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended
and Restated 2007 Equity Incentive Plan approved in 2011(“Plan”), the aggregate number of shares of the Company’s
common stock available for grant and issuance of stock options 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 December 31, 2018, the number of shares of the Company’s common stock available for
issuance under the Plan is 5,005,489.
The fair value of each option award below
is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity
in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted,
volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical
option exercise pattern.
On December 3, 2018, the Company granted
to 17 members of the management staff options to purchase 497,000 shares of the Company’s common stock, at an exercise price
of $0.713 per share and the options vested immediately. The options were valued at $121,000 fair value, with assumed 39.91% volatility,
a four-year expiration term with an expected tenor of 1.64 years, a risk free rate of 2.78% and no dividend yield.
On December 3, 2018, the Company granted
to our Chief Executive Officer, Chief Operating Officer and Chief Financial Officer options to purchase 1,200,000 shares of the
Company’s common stock, at an exercise price of $0.713 per share and the options vested immediately. The options were valued
at $354,700 fair value, with assumed 41.72% volatility, a four-year expiration term with an expected tenor of 2.62 years, a risk
free rate of 2.83% and no dividend yield.
On December 3, 2018, the Company granted
to four independent directors and a consultant options to purchase 80,000 shares of the Company’s common stock at an
exercise price of $0.713 per share and the options vested immediately. The options were valued at $20,500 fair value, with assumed
38.87% volatility, a three-year expiration term with expected tenor of 1.97 years, a risk free rate of 2.82% and no dividend yield.
For the year ended December 31, 2018 and
2017, total compensation costs for options issued recorded in the consolidated statement of income (loss) were $496,200 and $372,400.
There were no related tax benefits as a full valuation allowance was recorded in the years ended December 31, 2018 and 2017.
NOTE 12 – STOCK-BASED COMPENSATION
– Continued
The following table summarizes all Company
stock option transactions between January 1, 2017 and December 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, 2017
|
|
|
185,000
|
|
|
$
|
2.19
|
|
|
$1.54 - $4.80
|
Granted and vested during the year ended December 31, 2017
|
|
|
661,000
|
|
|
$
|
1.47
|
|
|
$1.44 - $1.98
|
Expired during the year ended December 31, 2017
|
|
|
(37,500
|
)
|
|
$
|
2.18
|
|
|
$1.83-$2.55
|
Balance, December 31, 2017
|
|
|
808,500
|
|
|
$
|
1.61
|
|
|
$1.44 - $4.80
|
Granted and vested during the year ended December 31, 2018
|
|
|
1,777,000
|
|
|
$
|
0.71
|
|
|
$0.71
|
Expired during the year ended December 31, 2018
|
|
|
(67,500
|
)
|
|
$
|
1.96
|
|
|
$1.71-$2.55
|
Balance, December 31, 2018
|
|
|
2,518,000
|
|
|
$
|
0.97
|
|
|
$0.71 - $4.80
|
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
Weighted Average
|
|
|
Outstanding
|
|
|
|
Remaining
|
|
|
at December 31,
2018
|
|
Range of
Exercise Prices
|
|
Contractual Life
(Years)
|
Exercisable and outstanding
|
|
2,518,000
|
|
$0.71 - $4.80
|
|
3.42
|
All options exercisable and outstanding at December 31, 2018
are fully vested.
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underling options and the stock price of $0.78 and $1.47 for the Company’s common stock
on December 31, 2018 and 2017.
The aggregate intrinsic value of options outstanding and exercisable
as of December 31, 2018 was $119,059.
The aggregate intrinsic value of options outstanding and exercisable
as of December 31, 2017 was $10,571.
NOTE 13 – 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 (“US”)
Gulf Resources, Inc. may be subject to
the United States of America Tax law at 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 years ended December 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 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 carry forwards 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 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 December 31, 2018 and 2017.
(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 ended December 31, 2018 and 2017. The applicable statutory tax rates
for the years ended December 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.
The PRC tax losses may be carried forward to be utilized against future taxable profit for ten years for High-tech enterprises
and small and medium-sized enterprises of science and technology and for five years for other companies. Tax losses of the operating
subsidiaries of the Company may be carried forward for five years.
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, 2018 and 2017, the accumulated
distributable earnings under the Generally Accepted Accounting Principles (“GAAP”) of PRC that are subject to WHT are
$240,563,868 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 December 31, 2018 and 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 December
31, 2018 and 2017, the unrecognized WHT are $11,035,843 and $14,133,049, respectively.
NOTE 13 – INCOME TAXES – Continued
The Company’s income 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 income tax returns filed in the United States for three years from the date of filing. The Company’s
US income tax returns since 2015 are currently subject to examination.
Inland Revenue Department of Hong Kong
(“IRD”) may examine the Company’s income tax returns filed in Hong Kong for seven years from date of filing.
For the years 2011 through 2017, HKJI did not report any taxable income. It did not file any income tax returns during these years
except for 2014. For companies which do not have taxable income, IRD typically issues notification to companies requiring them
to file income tax returns once in every four years. The tax returns for 2014 are currently subject to examination.
The components of the provision for
income taxes/(tax benefits) from continuing operations are:
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Current taxes – PRC
|
|
$
|
—
|
|
|
$
|
7,737,087
|
|
Deferred tax – PRC
|
|
|
(13,087,855
|
)
|
|
|
(4,126,947
|
)
|
|
|
$
|
(13,087,855
|
)
|
|
$
|
3,610,140
|
|
The effective income tax expenses (benefits)
differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:-
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Statutory income tax rate-PRC
|
|
|
(25
|
%)
|
|
|
25
|
%
|
Non-deductible net of Non-taxable items
|
|
|
9
|
%
|
|
|
4
|
%
|
Change in valuation allowance-US federal net operating loss
|
|
|
—
|
|
|
|
2
|
%
|
Effective tax rate
|
|
|
(16
|
%)
|
|
|
31
|
%
|
As of December 31, 2018 and 2017, the Company
had a US federal net operating loss (“NOL”) of approximately $0.6 million and $15.3 million available to offset against
future federal income tax liabilities, respectively. The NOL can be carried forward up to 20 years from the year the
loss was incurred and will begin to expire after 2019. It is however subject to limitation of the US tax regulations arising from
previous changes in ownership and business of the Company. Due to these limitations, the NOL carryovers as of December 31, 2017
are no longer available for use to offset against future US federal taxable income.
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 December 31, 2018
and 2017 are as follows:
|
|
As of December 31,
|
|
|
2018
|
|
2017
|
Deferred tax liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
16,292
|
|
|
$
|
10,980
|
|
Impairment on property, plant and equipment
|
|
|
3,696,332
|
|
|
|
4,610,228
|
|
Impairment on prepaid land lease
|
|
|
840,284
|
|
|
|
—
|
|
Exploration costs
|
|
|
1,813,965
|
|
|
|
1,905,347
|
|
Compensation costs of unexercised stock options
|
|
|
194,016
|
|
|
|
98,092
|
|
PRC tax losses
|
|
|
12,663,985
|
|
|
|
—
|
|
US federal net operating loss
|
|
|
119,000
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
19,343,874
|
|
|
|
6,624,647
|
|
Valuation allowance
|
|
|
(313,016
|
)
|
|
|
(98,092
|
)
|
Net deferred tax asset
|
|
$
|
19,030,858
|
|
|
$
|
6,526,555
|
|
The increases in valuation allowance for
the year ended December 31, 2018 was $214,924. This relates to the tax effect of NOL and compensation costs of unexercised stock
options as of December 31, 2018. As the Company intends to reinvest its earnings in its business in mainland China, it recorded
a 100% valuation allowance for these deferred tax effect assets as of December 31, 2018 and 2017.
The decrease in valuation allowance for
the year ended December 31, 2017 was $11,597,894. This was mainly due to the change in tax rate in the amount of $4,681,528, the
utilization of NOL to offset the one-time mandatory transition tax on accumulated foreign earnings in the amount of $3,721,336
and the NOL limitation adjustment in the amount of $3,220,530.
There were no unrecognized tax benefits
as of January 1, 2017 and hence the Company did not recognize any interest or penalties during 2018 and 2017 related to unrecognized
tax benefits. There has been no change in unrecognized tax benefits during 2018 and 2017 and there was no accrual for uncertain
tax positions as of December 31, 2018 and 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.
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 income (costs) 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. All intersegment transactions have been eliminated. 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 31,2018
|
|
Bromine *
|
|
Crude
Salt *
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
—
|
|
|
$
|
1,981,573
|
|
|
$
|
613,368
|
|
|
$
|
—
|
|
|
$
|
2,594,941
|
|
|
$
|
—
|
|
|
$
|
2,594,941
|
|
Net revenue (intersegment)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income (loss) from operations before income taxes benefit
|
|
|
(40,504,752
|
)
|
|
|
(8,336,305
|
)
|
|
|
(34,757,750
|
)
|
|
|
(204,517
|
)
|
|
|
(83,803,324
|
)
|
|
|
250,793
|
|
|
|
(83,552,531
|
)
|
Income taxes benefit
|
|
|
(10,304,897
|
)
|
|
|
(1,902,111
|
)
|
|
|
(880,847
|
)
|
|
|
—
|
|
|
|
(13,087,855
|
)
|
|
|
-
|
|
|
|
(13,087,855
|
)
|
Income (loss) from operations after
income taxes (benefit)
|
|
|
(30,199,855
|
)
|
|
|
(6,434,194
|
)
|
|
|
(33,876,903
|
)
|
|
|
(204,517
|
)
|
|
|
(70,715,469
|
)
|
|
|
250,793
|
|
|
|
(70,464,676
|
)
|
Total assets
|
|
|
115,233,773
|
|
|
|
37,254,518
|
|
|
|
144,172,070
|
|
|
|
1,883,419
|
|
|
|
298,543,780
|
|
|
|
3,010
|
|
|
|
298,546,790
|
|
Depreciation and amortization
|
|
|
11,979,985
|
|
|
|
4,983,636
|
|
|
|
479,697
|
|
|
|
—
|
|
|
|
17,443,318
|
|
|
|
—
|
|
|
|
17,443,318
|
|
Capital expenditures
|
|
|
31,904,288
|
|
|
|
2,145,440
|
|
|
|
1,192,963
|
|
|
|
30,616
|
|
|
|
35,273,307
|
|
|
|
—
|
|
|
|
35,273,307
|
|
Year Ended
December 31, 2017
|
|
Bromine *
|
|
Crude
Salt *
|
|
Chemical
Products
|
|
Natural Gas
|
|
Segment
Total
|
|
Corporate
|
|
Total
|
Net revenue
(external customers)
|
|
$
|
42,224,901
|
|
|
$
|
8,986,080
|
|
|
$
|
56,311,460
|
|
|
$
|
—
|
|
|
$
|
107,522,441
|
|
|
$
|
—
|
|
|
$
|
107,522,441
|
|
Net revenue (intersegment)
|
|
|
6,305,642
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,305,642
|
|
|
|
—
|
|
|
|
6,305,642
|
|
Income from operations before income taxes
|
|
|
12,460,230
|
|
|
|
2,426,137
|
|
|
|
(1,024,569
|
)
|
|
|
(116,465
|
)
|
|
|
13,745,333
|
|
|
|
(2,573,722
|
)
|
|
|
11,171,611
|
|
Income taxes
|
|
|
3,156,016
|
|
|
|
585,521
|
|
|
|
(131,397
|
)
|
|
|
—
|
|
|
|
3,610,140
|
|
|
|
-
|
|
|
|
3,610,140
|
|
Income from operations after income taxes
|
|
|
9,304,214
|
|
|
|
1,840,616
|
|
|
|
(893,172
|
)
|
|
|
(116,465
|
)
|
|
|
10,135,193
|
|
|
|
(2,573,722
|
)
|
|
|
7,561,471
|
|
Total assets
|
|
|
147,124,127
|
|
|
|
51,512,530
|
|
|
|
186,677,501
|
|
|
|
2,119,756
|
|
|
|
387,433,914
|
|
|
|
65,509
|
|
|
|
387,499,423
|
|
Depreciation and amortization
|
|
|
14,533,169
|
|
|
|
2,452,737
|
|
|
|
3,211,407
|
|
|
|
—
|
|
|
|
20,197,313
|
|
|
|
—
|
|
|
|
20,197,313
|
|
Capital expenditures
|
|
|
465,655
|
|
|
|
17,411,762
|
|
|
|
—
|
|
|
|
61,235
|
|
|
|
17,938,652
|
|
|
|
—
|
|
|
|
17,938,652
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
29,374,909
|
|
|
|
—
|
|
|
|
29,374,909
|
|
|
|
—
|
|
|
|
29,374,909
|
|
* 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.
NOTE 14 – BUSINESS SEGMENTS –
Continued
|
|
Years ended December 31,
|
Reconciliations
|
|
2018
|
|
2017
|
|
|
|
|
|
Total segment operating income(loss)
|
|
$
|
(83,803,324
|
)
|
|
$
|
13,745,333
|
|
Corporate costs
|
|
|
(1,064,661
|
)
|
|
|
(1,015,963
|
)
|
Unrealized gain/(loss) on translation of intercompany balance
|
|
|
1,315,454
|
|
|
|
(1,557,759
|
)
|
Income (loss) from operations
|
|
|
(83,552,531
|
)
|
|
|
11,171,611
|
|
Other income net of expense
|
|
|
500,690
|
|
|
|
391,842
|
|
Income (loss) before income taxes
|
|
$
|
(83,051,841
|
)
|
|
$
|
11,563,453
|
|
The following table shows the major customer(s)
(10% or more) for the year ended December 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
|
|
$
|
—
|
|
|
$
|
656
|
|
|
$
|
155
|
|
|
$
|
811
|
|
|
|
31
|
%
|
2
|
|
Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited
|
|
$
|
—
|
|
|
$
|
783
|
|
|
$
|
—
|
|
|
$
|
783
|
|
|
|
30
|
%
|
3
|
|
Shouguang Weidong Chemical Company Limited
|
|
$
|
—
|
|
|
$
|
543
|
|
|
$
|
—
|
|
|
$
|
543
|
|
|
|
21
|
%
|
The following table shows the major customer(s)
(10% or more) for the year ended December 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
|
|
$
|
7,852
|
|
|
$
|
2,952
|
|
|
$
|
3,463
|
|
|
$
|
14,267
|
|
|
|
13.3
|
%
|
NOTE 15 – CUSTOMER CONCENTRATION
The Company sells a substantial portion
of its products to a limited number of customers. During the year ended December 31, 2018, the Company sold 90% of its products
to its top five customers, respectively. At December 31, 2018, amount due from these customers were $0.
During the year ended December 31, 2017,
the Company sold 36.7% of its products to its top five customers. At December 31, 2017, amount due from these customers were $22,804,914.
NOTE 16 – MAJOR SUPPLIERS
During the year ended December 31, 2018,
the Company did not purchase any raw materials. During the year ended December 31, 2017, the Company purchased 68.2% of its
raw materials from its top five suppliers. At December 31, 2017, amounts due to those suppliers included in accounts
payable were $0.
NOTE 17 – FAIR VALUE OF FINANCIAL
INSTRUMENTS
The carrying values of financial instruments,
which consist of cash 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, 2018 and 2017.
NOTE 18 – CAPITAL COMMITMENT AND
OPERATING LEASE COMMITMENTS
As of December 31, 2018, the Company leased
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 shown below.
The Company has eight parcels of land under
non-cancelable operating leases, with fixed rentals and expire through, December 2021, December 2023, December 2030, April 2038,
December 2040, February 2059, August 2059 and June 2060, respectively. The remaining lease obligations of lease agreements related
to the factories that were not allowed to resume production as required by the government (See Note 1(b)) were excluded from the
Operating Lease Obligations below as the lease agreements are considered terminated.
NOTE 18 – CAPITAL COMMITMENT AND
OPERATING LEASE COMMITMENTS – Continued
The following table sets forth the Company’s
contractual obligations as of December 31, 2018
|
|
Capital Lease Obligations
|
|
Operating Lease Obligations
|
|
Property Management Fees
|
|
Capital Expenditure
|
Payable within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
273,479
|
|
|
$
|
774,948
|
|
|
$
|
90,897
|
|
|
$
|
28,167,276
|
|
the next 13 to 24 months
|
|
|
273,479
|
|
|
|
785,488
|
|
|
|
90,897
|
|
|
|
—
|
|
the next 25 to 36 months
|
|
|
273,479
|
|
|
|
799,432
|
|
|
|
90,897
|
|
|
|
—
|
|
the next 37 to 48 months
|
|
|
273,479
|
|
|
|
647,683
|
|
|
|
90,897
|
|
|
|
—
|
|
the next 49 to 60 months
|
|
|
273,479
|
|
|
|
654,652
|
|
|
|
90,897
|
|
|
|
—
|
|
thereafter
|
|
|
1,914,353
|
|
|
|
12,281,658
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
3,281,748
|
|
|
$
|
15,943,861
|
|
|
$
|
454,485
|
|
|
$
|
28,167,276
|
|
Less: Amount representing interest
|
|
|
(1,014,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
2,267,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses related to operating leases
of the Company amounted to $1,046,486 and $1,044,611 were charged to the consolidated statements of income/(loss) for the years
ended December 31, 2018 and 2017, respectively.
NOTE 19 – SUBSEQUENT EVENT
On January 28, 2019, 96,969 shares of
common stock were issued upon cashless exercise of 245,000 options.
In January 2019, the Company
issued 20,000 shares of common stock from the treasury shares to one of its consultants. The shares issued will be deducted
from the treasury shares at weighted average cost and the excess of the cost over the closing market price will be charged to
additional paid-in-capital.
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,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Prepayments and deposits
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Current Assets
|
|
|
—
|
|
|
|
—
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
Interests in subsidiaries
|
|
|
230,229,081
|
|
|
|
317,771,899
|
|
Amounts due from group companies
|
|
|
64,017,517
|
|
|
|
64,578,603
|
|
Total non-current assets
|
|
|
294,246,598
|
|
|
|
382,350,502
|
|
Total Assets
|
|
$
|
294,246,598
|
|
|
$
|
382,350,502
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
$
|
250,493
|
|
|
$
|
245,605
|
|
Amounts due to group companies
|
|
|
142,701
|
|
|
|
142,701
|
|
Total Current Liability
|
|
|
393,194
|
|
|
|
388,306
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
393,194
|
|
|
$
|
388,306
|
|
|
|
|
|
|
|
|
|
|
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; 46,803,791 shares outstanding as of December 31, 2018 and 2017, respectively
|
|
|
23,525
|
|
|
|
23,525
|
|
Treasury stock; 249,149 shares, at cost, as of December 31, 2018 and 2017
|
|
|
(554,870
|
)
|
|
|
(554,870
|
)
|
Additional paid-in capital
|
|
|
95,020,808
|
|
|
|
94,524,608
|
|
Retained earnings unappropriated
|
|
|
185,608,445
|
|
|
|
255,572,431
|
|
Retained earnings appropriated
|
|
|
24,233,544
|
|
|
|
24,233,544
|
|
Cumulative translation adjustment
|
|
|
(10,478,048
|
)
|
|
|
8,162,958
|
|
Total Stockholders’ Equity
|
|
|
293,853,404
|
|
|
|
381,962,196
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
294,246,598
|
|
|
$
|
382,350,502
|
|
Condensed Statements of Income(loss)
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
(1,061,674
|
)
|
|
$
|
(1,011,593
|
)
|
TOTAL OPERATING EXPENSES
|
|
|
(1,061,674
|
)
|
|
|
(1,011,593
|
)
|
OTHER EXPENSES
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(500
|
)
|
|
|
(414
|
)
|
TOTAL OTHER EXPENSES
|
|
|
(500
|
)
|
|
|
(414
|
)
|
TOTAL EXPENSES
|
|
|
(1,062,174
|
)
|
|
|
(1,012,007
|
)
|
Equity in net income (loss) of subsidiaries
|
|
|
(68,901,812
|
)
|
|
|
8,965,320
|
|
INCOME (LOSS) BEFORE TAXES
|
|
|
(69,963,986
|
)
|
|
|
7,953,313
|
|
INCOME TAXES
|
|
|
—
|
|
|
|
—
|
|
NET INCOME(LOSS)
|
|
$
|
(69,963,986
|
)
|
|
$
|
7,953,313
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Cash Flows
|
|
Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(69,963,986
|
)
|
|
$
|
7,953,313
|
|
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Equity loss (earnings) in unconsolidated subsidiaries
|
|
|
68,901,812
|
|
|
|
(8,965,320
|
)
|
Stock-based compensation expense-options
|
|
|
496,200
|
|
|
|
372,400
|
|
Shares issued from treasury stock for services
|
|
|
—
|
|
|
|
17,800
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
4,888
|
|
|
|
2,760
|
|
Net cash used in operating activities
|
|
|
(561,086
|
)
|
|
|
(619,047
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances from group companies
|
|
|
561,086
|
|
|
|
619,047
|
|
Net cash provided by financing activities
|
|
|
561,086
|
|
|
|
619,047
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
—
|
|
|
|
—
|
|
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR
|
|
|
—
|
|
|
|
—
|
|
CASH AND CASH EQUIVALENTS - END OF YEAR
|
|
$
|
—
|
|
|
$
|
—
|
|
|
(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(loss) of its subsidiaries is included in condensed
statements of income(loss) 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, 2018, the
Company itself has no purchase commitment, capital commitment and operating lease commitment.
|
(ii)
|
Restricted Net Assets
|
Schedule I of Rule 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.