UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, | |
Or | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________ |
Commission File Number: 001-34499
GULF RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Nevada | 13-3637458 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
Level 11,Vegetable Building, Industrial Park of the East City, Shouguang City,Shandong, | 262700 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: +86 (536) 567 0008
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filero | |
Non-accelerated filer (Do not check if a smaller reporting company) | Smaller reporting companyx | |
Emerging Growth Companyo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Nox
As of August 6, 2017,2018, the registrant had outstanding 46,793,79146,803,791 shares of common stock.
PART I—FINANCIAL INFORMATION
GULF RESOURCES, INC. |
��AND SUBSIDIARIES |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(Expressed in U.S. dollars) |
June 30, 2017 Unaudited | December 31, 2016 Audited | June 30, 2018 Unaudited | December 31, 2017 Audited | |||||||||||||
Current Assets | ||||||||||||||||
Cash | $ | 176,303,274 | $ | 163,884,574 | $ | 215,975,864 | $ | 208,906,759 | ||||||||
Accounts receivable | 86,858,779 | 51,835,218 | 4,650,250 | 29,765,884 | ||||||||||||
Inventories, net | 4,842,564 | 5,881,681 | 181,094 | 1,196,785 | ||||||||||||
Prepayments and deposits | 20,000 | 117,338 | 1,456,090 | 1,395,289 | ||||||||||||
Prepaid land leases | 783,741 | 47,255 | 773,480 | 246,640 | ||||||||||||
Other receivable | 2,035 | 1,424 | 12,952 | 2,089 | ||||||||||||
Total Current Assets | 268,810,393 | 221,767,490 | 223,049,730 | 241,513,446 | ||||||||||||
Non-Current Assets | ||||||||||||||||
Property, plant and equipment, net | 100,712,418 | 108,731,126 | 94,828,982 | 95,114,504 | ||||||||||||
Property, plant and equipment under capital leases, net | 414,977 | 554,257 | 394,180 | 492,238 | ||||||||||||
Prepaid land leases, net of current portion | 4,725,437 | 4,754,169 | 14,151,767 | 14,477,771 | ||||||||||||
Deferred tax assets | 2,268,957 | 2,215,772 | 9,408,852 | 6,526,555 | ||||||||||||
Goodwill | 28,332,661 | 27,668,539 | 29,010,218 | 29,374,909 | ||||||||||||
Total non-current assets | 136,454,450 | 143,923,863 | 147,793,999 | 145,985,977 | ||||||||||||
Total Assets | $ | 405,264,843 | $ | 365,691,353 | $ | 370,843,729 | $ | 387,499,423 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable and accrued expenses | $ | 14,540,121 | $ | 8,682,318 | $ | 774,134 | $ | 1,032,083 | ||||||||
Retention payable | - | 733,869 | 643,305 | 956,351 | ||||||||||||
Capital lease obligation, current portion | 117,558 | 187,678 | 128,575 | 203,206 | ||||||||||||
Taxes payable | 7,783,712 | 4,341,331 | ||||||||||||||
Taxes payable-current | 2,049,741 | 1,474,592 | ||||||||||||||
Total Current Liabilities | 22,441,391 | 13,945,196 | 3,595,755 | 3,666,232 | ||||||||||||
Non-Current Liabilities | ||||||||||||||||
Capital lease obligation, net of current portion | 2,222,247 | 2,284,959 | 2,146,816 | 2,303,995 | ||||||||||||
Taxes payable-non-current | 4,969,000 | 4,969,000 | ||||||||||||||
Total Non-Current Liabilities | 7,115,816 | 7,272,995 | ||||||||||||||
Total Liabilities | $ | 24,663,638 | $ | 16,230,155 | $ | 10,711,571 | $ | 10,939,227 | ||||||||
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 as of June 30, 2017 and December 31, 2016; 47,052,940 and 47,052,940 shares issued; and 46,793,791 and 46,793,791 shares outstanding as of June 30,2017 and December 31, 2016, respectively | 23,525 | 23,525 | ||||||||||||||
Treasury stock; 259,149 and 259,149 shares as of June 30, 2017 and December 31, 2016 at cost | (577,141 | ) | (577,141 | ) | ||||||||||||
COMMON STOCK; $0.0005 par value; 80,000,000 shares authorized; 47,052,940 shares issued and 46,803,791 shares outstanding as of June 30, 2018 and December 31, 2017, respectively | 23,525 | 23,525 | ||||||||||||||
Treasury stock; 249,149 shares as of June 30, 2018 and December 31, 2017 at cost | (554,870 | ) | (554,870 | ) | ||||||||||||
Additional paid-in capital | 94,171,379 | 94,156,679 | 94,524,608 | 94,524,608 | ||||||||||||
Retained earnings unappropriated | 268,444,917 | 248,941,696 | 238,380,458 | 250,170,431 | ||||||||||||
Retained earnings appropriated | 25,234,543 | 22,910,966 | 24,233,544 | 24,233,544 | ||||||||||||
Accumulated other comprehensive loss | (6,696,018 | ) | (15,994,527 | ) | ||||||||||||
Accumulated other comprehensive income | 3,524,893 | 8,162,958 | ||||||||||||||
Total Stockholders’ Equity | 380,601,205 | 349,461,198 | 360,132,158 | 376,560,196 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 405,264,843 | $ | 365,691,353 | $ | 370,843,729 | $ | 387,499,423 |
See accompanying notes to the condensed consolidated financial statements.
1
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Expressed in U.S. dollars)
(UNAUDITED)
Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
NET REVENUE | ||||||||||||||||||||||||||||||||
Net revenue | $ | 47,531,989 | $ | 47,600,767 | $ | 80,320,482 | $ | 82,096,217 | $ | 4,594 | $ | 47,531,989 | $ | 2,251,861 | $ | 80,320,482 | ||||||||||||||||
OPERATINGINCOME (EXPENSE) | ||||||||||||||||||||||||||||||||
Cost of net revenue | (26,931,742 | ) | (29,195,255 | ) | (47,145,605 | ) | (53,076,901 | ) | (7 | ) | (26,931,742 | ) | (1,241,816 | ) | (47,145,605 | ) | ||||||||||||||||
Sales, marketing and other operating expenses | (100,613 | ) | (104,369 | ) | (176,446 | ) | (186,270 | ) | (21,025 | ) | (100,613 | ) | (55,999 | ) | (176,446 | ) | ||||||||||||||||
Research and development cost | (65,274 | ) | (70,378 | ) | (127,172 | ) | (130,215 | ) | — | (65,274 | ) | — | (127,172 | ) | ||||||||||||||||||
Direct labor and factory overheads incurred during plant shutdown | (5,689,486 | ) | — | (11,385,005 | ) | — | ||||||||||||||||||||||||||
General and administrative expenses | (2,056,943 | ) | (1,009,882 | ) | (3,785,403 | ) | (2,925,912 | ) | (1,125,683 | ) | (2,056,943 | ) | (4,697,628 | ) | (3,785,403 | ) | ||||||||||||||||
Other operating income | 105,055 | 110,239 | 209,613 | 220,521 | — | 105,055 | — | 209,613 | ||||||||||||||||||||||||
(29,049,517 | ) | (30,269,645 | ) | (51,025,013 | ) | (56,098,777 | ) | (6,836,201 | ) | (29,049,517 | ) | (17,380,448 | ) | (51,025,013 | ) | |||||||||||||||||
INCOME FROM OPERATIONS | 18,482,472 | 17,331,122 | 29,295,469 | 25,997,440 | ||||||||||||||||||||||||||||
INCOME/(LOSS) FROM OPERATIONS | (6,831,607 | ) | 18,482,472 | (15,128,587 | ) | 29,295,469 | ||||||||||||||||||||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||||||||||||||||||
Interest expense | (42,065 | ) | (46,009 | ) | (83,976 | ) | (92,138 | ) | (43,185 | ) | (42,065 | ) | (86,529 | ) | (83,976 | ) | ||||||||||||||||
Interest income | 132,721 | 122,328 | 258,581 | 236,774 | 178,678 | 132,721 | 348,156 | 258,581 | ||||||||||||||||||||||||
INCOME BEFORE TAXES | 18,573,128 | 17,407,441 | 29,470,074 | 26,142,076 | ||||||||||||||||||||||||||||
INCOME/(LOSS) BEFORE TAXES | (6,696,114 | ) | 18,573,128 | (14,866,960 | ) | 29,470,074 | ||||||||||||||||||||||||||
INCOME TAXES | (4,821,450 | ) | (4,210,422 | ) | (7,643,276 | ) | (6,478,093 | ) | ||||||||||||||||||||||||
NET INCOME | $ | 13,751,678 | $ | 13,197,019 | $ | 21,826,798 | $ | 19,663,983 | ||||||||||||||||||||||||
INCOME TAXES (EXPENSE) BENEFIT | 1,883,241 | (4,821,450 | ) | 3,076,987 | (7,643,276 | ) | ||||||||||||||||||||||||||
NET INCOME/(LOSS) | $ | (4,812,873 | ) | $ | 13,751,678 | $ | (11,789,973 | ) | $ | 21,826,798 | ||||||||||||||||||||||
COMPREHENSIVE INCOME(LOSS): | ||||||||||||||||||||||||||||||||
NET INCOME | $ | 13,751,678 | $ | 13,197,019 | $ | 21,826,798 | $ | 19,663,983 | ||||||||||||||||||||||||
NET INCOME/(LOSS) | $ | (4,812,873 | ) | $ | 13,751,678 | $ | (11,789,973 | ) | $ | 21,826,798 | ||||||||||||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||||||||||||||||||
- Foreign currency translation adjustments | 7,261,237 | (9,760,773 | ) | 9,298,509 | (7,867,712 | ) | (20,586,976 | ) | 7,261,237 | (4,638,065 | ) | 9,298,509 | ||||||||||||||||||||
COMPREHENSIVE INCOME | $ | 21,012,915 | $ | 3,436,246 | $ | 31,125,307 | $ | 11,796,271 | ||||||||||||||||||||||||
COMPREHENSIVE INCOME/(LOSS) | $ | (25,399,849 | ) | $ | 21,012,915 | $ | (16,428,038 | ) | $ | 31,125,307 | ||||||||||||||||||||||
EARNINGS PER SHARE: | ||||||||||||||||||||||||||||||||
EARNINGS (LOSS) PER SHARE: | ||||||||||||||||||||||||||||||||
BASIC | $ | 0.29 | $ | 0.29 | $ | 0.47 | $ | 0.43 | $ | (0.10 | ) | $ | 0.29 | $ | (0.25 | ) | $ | 0.47 | ||||||||||||||
DILUTED | $ | 0.29 | $ | 0.28 | $ | 0.47 | $ | 0.42 | $ | (0.10 | ) | $ | 0.29 | $ | (0.25 | ) | $ | 0.47 | ||||||||||||||
WEIGHTED AVERAGE NUMBER OF SHARES: | ||||||||||||||||||||||||||||||||
BASIC | 46,793,791 | 46,008,102 | 46,793,791 | 46,007,611 | 46,803,791 | 46,793,791 | 46,803,791 | 46,793,791 | ||||||||||||||||||||||||
DILUTED | 46,796,848 | 46,631,091 | 46,800,545 | 46,685,709 | 46,803,791 | 46,796,848 | 46,815,089 | 46,800,545 |
See accompanying notes to the condensed consolidated financial statements.
2
GULF RESOURCES, INC. |
AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY |
SIX-MONTH PERIOD ENDED JUNE 30, |
(Expressed in U.S. dollars) |
Common stock | Accumulated | |||||||||||||||||||||||||||||||||||||||
Number | Number | Number | Additional | Retained | Retained | other | ||||||||||||||||||||||||||||||||||
of shares | of shares | of treasury | Treasury | Paid-in | earnings | earnings | comprehensive | |||||||||||||||||||||||||||||||||
issued | outstanding | stock | Amount | stock | capital | unappropriated | appropriated | (loss) income | Total | |||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2016 Audited | 47,052,940 | 46,793,791 | 259,149 | $ | 23,525 | $ | (577,141 | ) | $ | 94,156,679 | $ | 248,941,696 | $ | 22,910,966 | $ | (15,994,527 | ) | $ | 349,461,198 | |||||||||||||||||||||
Translation adjustment | - | — | — | - | - | - | - | 9,298,509 | 9,298,509 | |||||||||||||||||||||||||||||||
Issuance of stock options to employees and directors | — | — | — | — | — | 14,700 | — | — | — | 14,700 | ||||||||||||||||||||||||||||||
Net income for six-month period ended June 30, 2017 | - | — | — | - | — | - | 21,826,798 | — | - | 21,826,798 | ||||||||||||||||||||||||||||||
Transfer to statutory common reserve fund | — | — | — | — | — | — | (2,323,577 | ) | 2,323,577 | — | — | |||||||||||||||||||||||||||||
BALANCE AT JUNE 30, 2017 Unaudited | 47,052,940 | 46,793,791 | 259,149 | $ | 23,525 | $ | (577,141 | ) | $ | 94,171,379 | $ | 268,444,917 | $ | 25,234,543 | (6,696,018 | ) | $ | 380,601,205 |
Common stock | Accumulated | |||||||||||||||||||||||||||||||||||||||
Number | Number | Number | Additional | Retained | Retained | other | ||||||||||||||||||||||||||||||||||
of shares | of shares | of treasury | Treasury | Paid-in | earnings | earnings | comprehensive | |||||||||||||||||||||||||||||||||
issued | outstanding | stock | Amount | stock | capital | unappropriated | appropriated | (loss) income | Total | |||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2017 (Audited) | 47,052,940 | 46,803,791 | 249,149 | $ | 23,525 | $ | (554,870 | ) | $ | 94,524,608 | $ | 250,170,431 | $ | 24,233,544 | $ | 8,162,958 | $ | 376,560,196 | ||||||||||||||||||||||
Translation adjustment | — | — | — | — | — | — | — | (4,638,065 | ) | �� | (4,638,065 | ) | ||||||||||||||||||||||||||||
Net loss for six-month period ended June 30, 2018 | — | — | — | — | — | — | (11,789,973 | ) | — | — | (11,789,973 | ) | ||||||||||||||||||||||||||||
Transfer to statutory common reserve fund | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
BALANCE AT JUNE 30, 2018 (Unaudited) | 47,052,940 | 46,803,791 | 249,149 | $ | 23,525 | $ | (554,870 | ) | $ | 94,524,608 | $ | 238,380,458 | $ | 24,233,544 | $ | 3,524,893 | $ | 360,132,158 |
See accompanying notes to the condensed consolidated financial statements.
3
GULF RESOURCES, INC. |
AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Expressed in U.S. dollars) |
(UNAUDITED) |
Six-Month Period Ended June 30, | Six-Month Period Ended June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||||
Net income | $ | 21,826,798 | $ | 19,663,983 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Net income/(loss) | $ | (11,789,973 | ) | $ | 21,826,798 | |||||||||||
Adjustments to reconcile net income(loss) to net cash provided by operating activities: | ||||||||||||||||
Interest on capital lease obligation | 83,128 | 91,764 | 86,214 | 83,128 | ||||||||||||
Amortization of prepaid land leases | 234,307 | 255,261 | 294,676 | 234,307 | ||||||||||||
Depreciation and amortization | 10,809,289 | 13,514,292 | 9,511,515 | 10,809,289 | ||||||||||||
Exchange (gain) loss on inter-company balances | 603,910 | (548,734 | ) | |||||||||||||
Unrealized exchange (gain) loss on inter-company balances | (345,086 | ) | 603,910 | |||||||||||||
Deferred tax asset | (3,076,986 | ) | — | |||||||||||||
Stock-based compensation expense | 14,700 | 12,800 | — | 14,700 | ||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | (33,349,844 | ) | (22,737,450 | ) | 25,720,587 | (33,349,844 | ) | |||||||||
Inventories | 1,165,420 | 328,685 | 1,039,959 | 1,165,420 | ||||||||||||
Prepayments and deposits | (19,129 | ) | (14,094 | ) | (61,251 | ) | (19,129 | ) | ||||||||
Other receivables | (580 | ) | — | (11,289 | ) | (580 | ) | |||||||||
Accounts payable and accrued expenses | 5,582,026 | 5,353,742 | (256,603 | ) | 5,582,026 | |||||||||||
Retention payable | (739,329 | ) | (1,112,087 | ) | (312,429 | ) | (739,329 | ) | ||||||||
Taxes payable | 3,292,636 | 2,662,606 | 592,979 | 3,292,636 | ||||||||||||
Net cash provided by operating activities | 9,503,332 | 17,470,768 | 21,392,313 | 9,503,332 | ||||||||||||
CASH FLOWS USED IN INVESTING ACTIVITIES | ||||||||||||||||
Additions of prepaid land leases | (818,957 | ) | (616,512 | ) | (693,198 | ) | (818,957 | ) | ||||||||
Purchase of property, plant and equipment | (59,975 | ) | (870,875 | ) | (10,333,721 | ) | (59,975 | ) | ||||||||
Net cash used in investing activities | (878,932 | ) | (1,487,387 | ) | (11,026,919 | ) | (878,932 | ) | ||||||||
CASH FLOWS USED IN FINANCING ACTIVITIES | ||||||||||||||||
Repayment of capital lease obligation | (273,873 | ) | (287,387 | ) | (294,295 | ) | (273,873 | ) | ||||||||
Net cash used in financing activities | (273,873 | ) | (287,387 | ) | (294,295 | ) | (273,873 | ) | ||||||||
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | 4,068,173 | (3,029,146 | ) | (3,001,994 | ) | 4,068,173 | ||||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 12,418,700 | 12,666,848 | 7,069,105 | 12,418,700 | ||||||||||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 163,884,574 | 133,606,392 | 208,906,759 | 163,884,574 | ||||||||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 176,303,274 | $ | 146,273,240 | $ | 215,975,864 | $ | 176,303,274 | ||||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||||||
Cash paid during the periods for: | ||||||||||||||||
Income taxes | $ | 4,634,040 | $ | 4,586,259 | $ | — | $ | 4,634,040 | ||||||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Par value of common stock issued upon cashless exercise of options | $ | — | $ | 4 |
See accompanying notes to the condensed consolidated financial statements.
4
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Consolidation
The accompanying condensed financial statements have been prepared by Gulf Resources, Inc.Inc (“Gulf Resources”). a Nevada corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“US GAAP”).
In the opinion of management, the unaudited financial information for the three and six months ended June 30, 20172018 presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the Company’s 20162017 Form 10-K. Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the preparation of these condensed financial statements in certain areas, including classification of leases and related party transactions.
On September 2, 2016, the Company announced the planned merger of two of its 100% owned subsidiaries, Shouguan Yuxin Chemical Co., Limited (“SYCI”) and Shouguan Rongyuan Chemical Co., Ltd (“SCRC”). On March 24, 2017, the legal process of the merger was completed and SCRC was officially deregistered on March 28, 2017. The results of these two subsidiaries were reported as SYCI in the three and six months ended June 30, 2017.
The consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the British Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”). HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited ("SCHC") which owns 100% of Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”) and Daying County Haoyuan Chemical Company Limited (“DCHC”). All material intercompany transactions have been eliminated on consolidation.
(b) Nature of the Business
The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC"), and manufactures chemical products for use in the oil industry, pesticides, and 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 June 30, 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. SCHC is currently under rectification process. The Company believes this rectification process will cost approximately $35 million. In addition to the $35 million, the Company expects to spend an additional $40 million in 2018 to carry out enhancement projects for its extraction wells. The Company incurred rectification and improvements in the amount of $27,048,794 and $17,938,652 as of June 30, 2018 and December 31, 2017.
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 current date, the Company has not received any official approval from the government.
Four of the remaining bromine and crude salt factories have a slightly more complex issue that needs to be resolved. All bromine factories now require paired crude salt pans to prevent the halogen water resulting from the production process from flowing into the sea. Four of these bromine factories do not have a designated crude salt pan where the wastewater could be channeled. The Company has four alternatives for these four factories which do not have paired crude salt pans: 1. It can form partnerships with adjacent bromine facilities that do have crude salt pans. The nature of these partnerships could take many forms. At present, the Company is communicating with a third party about the waste water discharge of the Factory No 10. If an agreement is reached, the Company will invest RMB7 million to build a new aqueduct and discharge the waste water to the designated place for treatment by the designated party. 2. The Company could petition the government for a zoning change so that additional land for salt pans could be obtained. The Company believes this might be difficult but is worth pursuing; 3. The Company could negotiate a different method of dealing with this issue; or, 4. These factories could conceivably be forced to close. At the present time, the Company is also working with the government on these issues and has not reached any final solution yet.
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. We 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 implement 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 so that 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 governments has applied the Notice in a consistent manner.
On November 24, 2017, the Company received a letter from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants located in the second living area of the Qinghe Oil Extraction Plant to the Bohai Marine Fine Chemical Industrial Park (“Bohai Park”). This is because the two plants are located in a residential area and their production activities will impact the living environment of the residents. This is as a result of the country’s effort to improve the development of the chemical industry, manage safe production and curb environmental pollution accidents effectively, and ensure the quality of the living environment of residents. All chemical enterprises which do not comply with the requirements of the safety and environmental protection regulations will be ordered to shut down. The Company believes this relocation process will cost approximately $60 million in total. The Company incurred relocation cost in the amount of $10,925,081 and $9,732,118 as of June 30, 2018 and December 31, 2017 and estimated that the new factory will be fully operational by the beginning of 2020.
The Company does not anticipate that the Company’s new chemical factory will 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 Marine Fine Chemical Industry Park and presented a completed construction design draft and other related documents to the local authorities for approval. The Company expected to receive feedback from the local authorities. However, the Company does believe there could be a delay for the approval process given the ongoing rectification and approvals process for the Company’s other plants.
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 is preparing to test the equipment and anticipates to begin the trial production in September 2018.
(c) Allowance for Doubtful Accounts
As of June 30, 20172018 and December 31, 2016,2017, allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the condensed consolidated statements of income (loss) for the three-month and six-month periods ended June 30, 20172018 and 2016.2017.
(d) Concentration of Credit Risk
The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited, China Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise protected. The Company placed $176,303,274$215,975,864 and $163,884,574$208,906,759 with these institutions as of June 30, 20172018 and December 31, 2016,2017, 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 64.3%0% and 61.6%13% of the balances of accounts receivable as of June 30, 20172018 and December 31, 2016,2017, respectively, are outstanding for less than three months. All outstanding receivables as of June 30, 20172018 and December 31, 20162017 are within the credit terms. For the balances of accounts receivable aged more than 90 days as of June 30, 2017, approximately 27% were settled in July 2017. For the balances ofand all accounts receivable as of June 30, 2017,2018, approximately 15%28% were settledcollected in July 2017.2018.
The rate of collection in July 2018 for accounts receivable aged more than 90 days as of June 30, 2017 in July 20172018 was analyzed as follows:
Accounts Receivable Aging | Percent Collected |
90-120 days | |
121-150 days | |
151-180 days | |
181-210 days | |
211-240 days | 100% |
5
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment of existing facilities or equipment are capitalized and depreciated, when available for intended use, using the straight-line method at rates sufficient to depreciate such costs less 5% residual value over the estimated productive lives. All other ordinary repair and maintenance costs are expensed as incurred.
Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.
Construction in process primarily represents direct costs of construction of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.completion.
The Company’s depreciation and amortization policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:
Useful life (in years) | ||
Buildings (including salt pans) | 8 - 20 | |
Plant and machinery (including protective shells, transmission channels and ducts) | 3 - 8 | |
Motor vehicles | 5 | |
Furniture, fixtures and equipment | 3-8 |
Property, plant and equipment under the capital lease are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which is 20 years.
Producing oil and gas properties are depreciated on a unit-of-production basis over the proved developed reserves. Common facilities that are built specifically to service production directly attributed to designated oil and gas properties are depreciated based on the proved developed reserves of the respective oil and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas properties are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant development projects are not depreciated until commercial production commences and the reserves related to those costs are excluded from the calculation of depreciation.
(f) Retirement Benefits
Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the condensed consolidated statement of income (loss) on an accrual basis when they are due. The Company’s contributions totaled $257,660$301,657 and $250,152$257,660 for the three-month period ended June 30, 20172018 and 2016,2017, respectively, and totaled $512,876$604,075 and $499,615$512,876 for the six-month period ended June 30, 20172018 and 2016,2017, respectively.
(g) Revenue Recognition
The Company recognizesNet revenue is net of value-addeddiscount and value added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized when persuasive evidencethe control of the promised goods is transferred to the customers in an arrangement exists, deliveryamount 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 has occurred, customer acceptance has been obtained, which meansby the significant risks and ownershipcustomers. Customers have been transferredno rights to return the customer, the price is fixed or determinable and collectability is reasonably assured.goods upon acknowledgement of receipt of goods.
6
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(h) Recoverability of Long-lived Assets
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35“Impairment or Disposal of Long-lived Assets”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.
The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.
For the three-monththree and six-month periodssix months period ended June 30, 20172018 and 2016,2017, the Company determined that there arewere no events or circumstances indicating possible impairment of its long-lived assets.
(i) Basic and Diluted Earnings 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 39,15589,684 and 71,08639,155 shares for the three-month period ended June 30, 20172018 and 2016,2017, respectively, and amounted to 32,07782,649 and 64,13932,077 shares for the six-month period ended June 30, 20172018 and 2016,2017, respectively. These awards could be dilutive in the future if the market price of the common stock increases and is greater than the exercise price of these awards.
7
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(i) Basic and Diluted Earnings per Share of Common Stock – Continued
The following table sets forth the computation of basic and diluted earnings per share:
Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Numerator | ||||||||||||||||||||||||||||||||
Net income | $ | 13,751,678 | $ | 13,197,019 | $ | 21,826,798 | $ | 19,663,983 | ||||||||||||||||||||||||
Net income/(loss) | $ | (4,812,873 | ) | $ | 13,751,678 | $ | (11,789,973 | ) | $ | 21,826,798 | ||||||||||||||||||||||
Denominator | ||||||||||||||||||||||||||||||||
Basic: Weighted-average common shares outstanding during the period | 46,793,791 | 46,008,102 | 46,793,791 | 46,007,611 | 46,803,791 | 46,793,791 | 46,803,791 | 46,793,791 | ||||||||||||||||||||||||
Add: Dilutive effect of stock options | 3,057 | 622,989 | 6,754 | 678,098 | — | 3,057 | 11,298 | 6,754 | ||||||||||||||||||||||||
Diluted | 46,796,848 | 46,631,091 | 46,800,545 | 46,685,709 | 46,803,791 | 46,796,848 | 46,815,089 | 46,800,545 | ||||||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||
Net income/(loss) per share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.29 | $ | 0.29 | $ | 0.47 | $ | 0.43 | $ | (0.10 | ) | $ | 0.29 | $ | (0.25 | ) | $ | 0.47 | ||||||||||||||
Diluted | $ | 0.29 | $ | 0.28 | $ | 0.47 | $ | 0.42 | $ | (0.10 | ) | $ | 0.29 | $ | (0.25 | ) | $ | 0.47 |
(j) Reporting Currency and Translation
The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive income.income (loss). The statement of income (loss) and comprehensive income (loss) is translated at average rate during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income (loss) for the reporting periods as part of general and administrative expense. The statement of cash flows is translated at average rate during the reporting period, with the exception of the consideration paid for the acquisition of business which is translated at historical rates.
(k) Foreign Operations
All of the Company’s operations and assets are located in PRC. The Company may be adversely affected by possible political or economic events in this country. The effect of these factors cannot be accurately predicted.
(l) Exploration Costs
Exploration costs, which included the cost of researching for appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other resources, are charged to the income (loss) statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs are capitalized.
For oil and gas properties, the successful efforts method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expenses. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required before production would begin and when the major capital expenditure depends upon the successful completion of further exploratory work remain capitalized and are reviewed periodically for impairment.
(m) Goodwill
Goodwill represents the excess of the purchase price over the net of the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in business acquisitions. ManagementGoodwill impairment is assessed based on qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying amount, including goodwill. If the Company evaluatesdetermines that it is more likely than not that the carryingfair value of a reporting entity is less than its carrying amount, the two-step goodwill annually or when a possible impairment is indicated.test will be performed. The Company performs its impairment assessment annually and between annual tests in certain circumstances and determined that there was nothe two-step goodwill impairment test is not required to be carried out as of goodwill. Goodwill impairment is assessed using the expected present value of associated future cash flows.June 30, 2018.
(n) New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In MarchMay 2014 and April 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment award transactions, including: (1) income tax consequences; (2) classification of awards as either equity or liabilities,2014-09 and (3) classification on the statement of cash flows. For public companies, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the amendments in this Update as of January 1, 2017. There is no impact on the financial statements since any excess tax benefits were fully offset by a valuation allowance and not recognized for financial statement purposes.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09,2016-10, 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. Early application is permitted onlyThe Company adopted this Update as of annual reporting periods beginning after December 15, 2016. The Company expects to adopt the new standard in the first quarter ofJanuary 1, 2018. The Company doesThis adoption did not expect the adoption of this Update to have a material effectimpact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this Update specify the accounting for leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact of this on theCompany’s condensed consolidated financial statements as of and related disclosures.for the three and six months ended June 30, 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 13.
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 does not expect the adoption ofadopted this Update to have aas of January 1, 2018 with no material effectimpact on the condensed consolidated financial statements.statements as of and for the three and six months ended June 30, 2018.
In JanuaryMay 2017, the FASB issued ASU No. 2017-01, Business Combinations2017-09, Compensation – Stock Compensation (Topic 805)718), Clarifying the DefinitionScope of a Business.Modification Accounting. The amendments in this Update provide guidance about which changes to the terms or conditions of a more robust frameworkshare-based payment award require an entity to use in determining when a set of assets and activities is a business.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, 2017,2017. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The Company adopted this Update as of January 1, 2018 with no material impact on the condensed consolidated financial statements as of and for the three and six months ended June 30, 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 periods.fiscal years. The Company does not expectis currently evaluating the adoptioneffect of this Update to have a material effect on the consolidated financial statements.statements and related disclosure.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effect of this on the consolidated financial statements and related disclosure.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the effect of this on the adoption of this Update.consolidated financial statements and related disclosure.
In May 2017,June 2018, the FASB issued ASU 2017-09, Compensation –No.2018-07, Compensation- Stock Compensation (Topic 718), Scope of Modification. Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this Update provide guidance about which changesupdate expand the scope of Topic 718 to the terms or conditions of ainclude share-based payment award requiretransactions for acquiring goods and services from nonemployees. Prior to this update, Top 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 apply modification accounting.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 thisthe Update are effective for allpublic business entities for annual periods, and interim periods within those annual periods,form fiscal years beginning after December 15, 2017. The amendments in this Update should be applied prospectively2018, 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 an award modifiedhave a material effect on or after the adoption date.Company’s consolidated financial statements.
8
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 2 – INVENTORIES
Inventories consist of:
June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
Raw materials | $ | 617,048 | $ | 818,500 | $ | 14,414 | $ | 396,482 | ||||||||
Finished goods | 3,421,363 | 4,370,331 | 166,680 | 844,224 | ||||||||||||
Work-in-process | 804,153 | 692,850 | ||||||||||||||
Allowance for obsolete and slow-moving inventory | — | (43,921 | ) | |||||||||||||
$ | 4,842,564 | $ | 5,881,681 | $ | 181,094 | $ | 1,196,785 |
NOTE 3 – PREPAID LAND LEASES
The Company prepaid for land leases with lease terms for periods ranging from one to fifty years to use the land on which the production facilities and warehouses of the Company are situated. The prepaid land lease is amortized on a straight line basis.
The Company paid $9,732,118 for a 50-year lease of a parcel of land for the new factory at Bohai Marine Fine Chemical Industrial Park in December, 2017. The land use certificate is being processed by the government and the commencement date of the lease will be known upon completion of the application process when the land use certificate will be issued. Amortization of the lease will commence on the day the lease term starts.
During the three-monththree and six months period ended June 30, 20172018, amortization of prepaid land leases totaled $150,579 and 2016,$294,676, which amounts were recorded as direct labor and factory overheads incurred during plant shutdown.
During the three and six months period ended June 30, 2017, amortization of prepaid land leases totaled $126,846 and $123,717, respectively,$234,307, which amounts were recorded as cost of net revenue. During the six-month period ended June 30, 2017 and 2016, amortization of prepaid land leases totaled $234,307 and $255,261, respectively, which amounts were recorded as cost of net revenue.
The Company has the rights to use certain parcels of land located in Shouguang, 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 that the Company cannot obtain land use rights certificates cover a total of approximately 54.9754.99 square kilometers with an aggregate carrying value of $1,270,668$1,067,939 and approximately 54.97 square kilometers with an aggregate carrying value of $620,978$645,761 as at June 30, 20172018 and December 31, 2016,2017, respectively.
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
At cost: | ||||||||||||||||
Mineral rights | $ | 4,544,643 | $ | 4,438,115 | $ | 4,653,325 | 4,711,822 | |||||||||
Buildings | 63,448,611 | 61,656,398 | 66,907,410 | 67,748,512 | ||||||||||||
Plant and machinery | 189,225,440 | 184,544,140 | 205,294,156 | 200,742,652 | ||||||||||||
Motor vehicles | 8,480 | 8,282 | 8,683 | 8,792 | ||||||||||||
Furniture, fixtures and office equipment | 4,662,769 | 4,553,473 | 4,099,059 | 4,150,588 | ||||||||||||
Construction in process | — | 374,790 | 1,358,535 | 183,036 | ||||||||||||
Total | 261,889,943 | 255,575,198 | 282,321,168 | 277,545,402 | ||||||||||||
Less: Accumulated depreciation and amortization | (161,177,525 | ) | (146,844,072 | ) | (169,016,305 | ) | (163,597,407 | ) | ||||||||
Impairment | (18,475,881 | ) | (18,833,491 | ) | ||||||||||||
Net book value | $ | 100,712,418 | $ | 108,731,126 | $ | 94,828,982 | $ | 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 $34,906,905$26,162,718 and $35,184,613$27,432,351 as at June 30, 20172018 and December 31, 2016,2017, respectively.
9
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued
During the three-month period ended June 30, 2018, depreciation and amortization expense totaled $4,684,870, of which $4,420,180 and $262,689 were recorded in direct labor and factory overheads incurred during plant shutdown and administrative expenses, respectively. During the six-month period ended June 30, 2018, depreciation and amortization expense totaled $9,373,118, of which $8,857,147 and $515,971 were recorded in direct labor and factory overheads incurred during plant shutdown and administrative expenses, respectively.
During the three-month period ended June 30, 2017, depreciation and amortization expense totaled $5,294,777, of which $5,001,792 and $292,985 were recorded as cost of net revenue and administrative expenses, respectively. During the three-month period ended June 30, 2016, depreciation and amortization expense totaled $6,644,571, of which $6,306,337 and $338,235 were recorded as cost of net revenue and administrative expenses, respectively. During the six-month period ended June 30, 2017, depreciation and amortization expense totaled $10,658,819, of which $10,074,234 and $584,585 were recorded as cost of net revenue and administrative expenses respectively. During the six-month period ended June 30, 2016, depreciation and amortization expense totaled $13,514,292, of which $12,827,797 and $686,495 were recorded as cost of revenue and administrative expenses respectively.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET
Property, plant and equipment under capital leases, net consist of the following:
June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||
At cost: | ||||||||||||||||
Buildings | $ | 121,470 | $ | 118,623 | $ | 124,375 | $ | 125,939 | ||||||||
Plant and machinery | 2,283,296 | 2,229,775 | 2,285,465 | 2,314,196 | ||||||||||||
Total | 2,404,766 | 2,348,398 | 2,409,840 | 2,440,135 | ||||||||||||
Less: Accumulated depreciation and amortization | (1,989,789 | ) | (1,794,141 | ) | (2,015,660 | ) | (1,947,897 | ) | ||||||||
Net book value | $ | 414,977 | $ | 554,257 | $ | 394,180 | $ | 492,238 |
The above buildings erected on parcels of land located in Shouguang, PRC, are collectively owned by local townships. The Company has not been able to obtain property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying parcels of land.
During the three-monththree and six months period ended June 30, 20172018, depreciation and 2016,amortization expense totaled $69,115 and $138,397, respectively, which was recorded in direct labor and factory overheads incurred during plant shutdown.
During the three and six months period ended June 30, 2017, depreciation and amortization expense totaled $75,413 and $83,288, respectively, which was recorded as cost of net revenue. During the six-month period ended June 30, 2017 and 2016, depreciation and amortization expense totaled $150,470, and $166,608, respectively, which was recorded as cost of net revenue.
10
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Accounts payable | $ | 13,390,816 | $ | 7,513,075 | ||||||||||||
Salary payable | 353,110 | 319,489 | $ | 252,261 | $ | 393,617 | ||||||||||
Social security insurance contribution payable | 119,730 | 119,444 | 133,692 | 135,203 | ||||||||||||
Other payables | 676,465 | 730,310 | 388,181 | 503,263 | ||||||||||||
Total | $ | 14,540,121 | $ | 8,682,318 | $ | 774,134 | $ | 1,032,083 |
NOTE 7 – RELATED PARTY TRANSACTIONS
During the three-month and six-month periods ended June 30, 2017,2018, the Company borrowed $100,000$66,000 and $250,000,$251,912, respectively, 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 and were fully settled in the three-month period ended June 30, 2017.2018. There was no balance owing to Jiaxing Lighting as of June 30, 2017.2018.
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 fiscal year 2013,first quarter of 2018, the Company entered into an agreement with the Shandong Shouguang Vegetable Seed Industry Group Co., Ltd,Seller, a related party, to provide property management services for an annual amount of approximately $100,000$99,200 for five years from January 1, 20132018 to December 31, 2017.2022. The expensesexpense associated with this agreement for the three and six months period ended June 30, 20172018 was approximately $24,500 and 2016 were approximately $22,800 and $24,000. The expenses associated with this agreement for the six months period ended June 30, 2017 and 2016 were approximately $45,400 and $48,000.$49,000.
NOTE 8 – TAXES PAYABLE
Taxes payable consists of the following: |
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Income tax payable | $ | 4,943,143 | $ | 1,849,535 | $ | 433,000 | $ | 433,000 | ||||||||
Natural resource tax | 332,089 | 651,230 | — | 156,147 | ||||||||||||
Value added tax payable | 1,547,329 | 887,913 | ||||||||||||||
Land use tax payable | 782,072 | 818,921 | 1,616,741 | 810,841 | ||||||||||||
Other tax payables | 179,079 | 133,732 | — | 74,604 | ||||||||||||
Total current taxes payable | 2,049,741 | 1,474,592 | ||||||||||||||
Non-current taxes payable | 4,969,000 | 4,969,000 | ||||||||||||||
Total | $ | 7,783,712 | $ | 4,341,331 | $ | 7,018,741 | $ | 6,443,592 |
The non-current taxes payable of $4,969,000 relates to the one-time mandatory transition tax on accumulated foreign earnings that are payable in the following periods:
Year ending December 31 | ||||||||||
Current | ||||||||||
2018 | $ | 433,000 | ||||||||
Non-current | ||||||||||
2019 | $ | 433,000 | ||||||||
2020 | 433,000 | |||||||||
2021 | 433,000 | |||||||||
2022 | 433,000 | |||||||||
2023 and after | 3,237,000 | 4,969,000 | ||||||||
Total (See Note 12(a)) | $ | 5,402,000 |
NOTE 9 – CAPITAL LEASE OBLIGATIONS
The components of capital lease obligations are as follows:
Imputed | June 30, | December 31, | Imputed | June 30, | December 31, | |||||||||||||||
Interest rate | 2017 | 2016 | Interest rate | 2018 | 2017 | |||||||||||||||
Total capital lease obligations | 6.7% | $ | 2,339,805 | $ | 2,472,637 | 6.7% | $ | 2,275,391 | $ | 2,507,201 | ||||||||||
Less: Current portion | (117,558 | ) | (187,678 | ) | (128,575 | ) | (203,206 | ) | ||||||||||||
Capital lease obligations, net of current portion | $ | 2,222,247 | $ | 2,284,959 | $ | 2,146,816 | $ | 2,303,995 |
Interest expenses from capital lease obligations amounted to $41,375$43,055 and $45,873$41,375 for the three-month period ended June 30, 20172018 and 2016,2017, respectively, which were charged to the condensed consolidated statement of income.income (loss). Interest expenses from capital lease obligations amounted to $83,128$86,214 and $91,764$83,128 for the six-month period ended June 30, 20172018 and 2016,2017, respectively, which were charged to the condensed consolidated statement of income.income (loss).
11
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 10 ––EQUITY
(a) | Authorized shares |
During the annual general meeting held on June 18, 2013, the shareholders of the Company approved the amendment to the Certificate of Incorporation to decrease the number of the authorized shares of the Company’s common stock to 80,000,000. The Company filed an amended and restated Certificate of Incorporation with the Secretary of the State of Delaware to decrease the number of authorized shares of the Company’s common stock. Accordingly, 80,000,000 is disclosed as the authorized shares of the Company’s common stock in the consolidated balance sheets as of June 30, 20172018 and December 31, 2016.2017.
(b) | Retained Earnings - Appropriated |
In accordance with the relevant PRC regulations and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit after tax to the following reserve:
Statutory Common Reserve Funds
SCHC, SYCI and DCHC are required each year to transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common Reserve Funds until the balance reaches 50% of the registered share capital. This reserve can be used to make up any loss incurred or to increase share capital. Except for the reduction of losses incurred, any other application should not result in this reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of June 30, 20172018 for SCHC, SYCI and DCHC is 46%, 16%14% and 0% of its registered capital respectively.
NOTE 11 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended and Restated 2007 Equity Incentive Plan approved in 2011(“Plan”), the aggregate number of shares of the Company’s common stock available for grant of stock options and issuance is 4,341,989 shares. On October 5, 2015, during the annual meeting of the Company’s stockholders, the aggregate number of shares reserved and available for grant and issuance pursuant to the Plan was increased to 10,341,989. As of June 30, 2017,2018, the number of shares of the Company’s common stock available for issuance under the Plan is 7,325,989.6,739,989.
The fair value of each option award below is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted, volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical option exercise pattern.
On March 2, 2017,During the Company granted to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.98 per share and the options vested immediately. The options were valued at $9,000 fair value, with assumed 57.42% volatility, a three-year expiration term, with an expected tenor of 1.69 years, a risk free rate of 1.59% and no dividend yield. For the three-month and six-month periodssix months ended June 30, 2017, $9,000 was recognized as general and administrative expenses.
On May 7, 2017, the Company granted2018, there were no options issued to an independent director an option to purchase 12,500 shares of the Company’s common stock at an exercise price of $1.90 per share and the options vested immediately. The options were valued at $5,700 fair value, with assumed 45.71% volatility, a three-year expiration term with an expected tenor of 1.70 years, a risk free rate of 1.25% and no dividend yield. For the three-month and six-month period ended June 30, 2017, $5,700 was recognized as general and administrative expenses.employees or non-employees.
The following table summarizes all Company stock option transactions between January 1, 20172018 and June 30, 2017.2018.
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 period Ended June 30, 2017 | 25,000 | $ | 1.94 | $1.90-1.98 | |||||||||
Expired during the period ended June 30, 2017 | (37,500 | ) | $ | 2.18 | $1.83-2.55 | ||||||||
Balance, June 30, 2017 | 172,500 | $ | 2.16 | $1.54 - $4.80 |
Number of Option Outstanding and exercisable | Weighted- Average Exercise price of Option | Range of Exercise Price per Common Share | ||||||||||||
Balance, January 1, 2018 | 808,500 | $ | 1.61 | $1.44 - $4.80 | ||||||||||
Granted and vested during the period Ended June 30, 2018 | — | — | — | |||||||||||
Expired during the period ended June 30, 2018 | (25,000 | ) | $ | 2.31 | $2.07-2.55 | |||||||||
Balance, June 30, 2018 | 783,500 | $ | 1.58 | $1.44 - $4.80 |
12
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 11 – STOCK-BASED COMPENSATION – Continued
Stock and Warrants Options Exercisable and Outstanding | |||||||
Weighted Average | |||||||
Remaining | |||||||
Outstanding at June 30, 2017 | Range of Exercise Prices | Contractual Life (Years) | |||||
Exercisable and outstanding | 172,500 | $1.54 - $4.80 | 1.89 |
Stock Options Exercisable and Outstanding | ||||||
Weighted Average | ||||||
Remaining | ||||||
Outstanding at June 30, 2018 | Range of Exercise Prices | Contractual Life (Years) | ||||
Exercisable and outstanding | 783,500 | $1.44 - $4.80 | 2.70 |
The aggregate intrinsic value of options outstanding and exercisable as of June 30, 20172018 was $625.$0.
NOTE 12 – INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.
(a) United States (“US”)
Gulf Resources, Inc. may be subject to the United States of America Tax lawlaws at a tax rate of 35%21%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the three-month and six-month periods ended June 30, 20172018 and 2016,2017, 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 is allowed under TCJA to settle the tax liabilities over a period of eight years. The Company accrued a provisional amount of $5,402,000 (See Note 8) for the one-time mandatory transition as of and for the year ended December 31, 2017. On December 22, 2017, the Securities and Exchange Commission (“SEC”), staff issued Staff Accounting Bulletin (SAB) 118 which allows the Company to record a provisional amount of the one-time mandatory transition tax on accumulated foreign earning during a measurement period not to exceed one year of the enactment date.
(b) BVIBritish Virgin Islands (“BVI”)
Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month and six-month periods ended June 30, 20172018 and 2016.2017.
(c) Hong Kong
Hong Kong Jiaxing Industrial Limited,HKJI, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No provision for profitsincome tax has been made as the Companyit has no assessabletaxable income for the three-month and six-month periods ended June 30, 20172018 and 2016.2017. The applicable statutory tax rates for the three-month and six-month periods ended June 30, 20172018 and 20162017 are 16.5%. There is no dividend withholding tax in Hong Kong.
(d) PRC
Enterprise income tax (“EIT”) for SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC, SYCI and DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign EnterpriseLocal 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 CaiShui [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.
13
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 12 – INCOME TAXES – Continued
As of June 30, 20172018 and December 31, 2016,2017, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC of the FIE of the Company that are $302,276,282subject to WHT are $285,284,985 and $274,769,840,$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 June 30, 20172018 and December 31, 2016,2017, 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 June 30, 20172018 and December 31, 2016,2017, the unrecognized WHT are $14,108,455$13,234,848 and $12,756,698,$14,133,049, respectively.
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 20132014 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. The Company’s Hong KongFor the years 2011 through 2017, HKJI did not report any taxable income. It did not file any income tax returns from year 2010during 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 taxestax expense (benefit) from continuing operations are:
Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Current taxes – PRC | $ | 4,821,450 | $ | 4,210,422 | $ | 7,643,276 | $ | 6,478,093 | $ | — | $ | 4,821,450 | $ | — | $ | 7,643,276 | ||||||||||||||||
Deferred taxes – PRC | — | — | — | — | (1,883,241 | ) | — | (3,076,987 | ) | — | ||||||||||||||||||||||
$ | 4,821,450 | $ | 4,210,422 | $ | 7,643,276 | $ | 6,478,093 | $ | (1,883,241 | ) | $ | 4,821,450 | $ | (3,076,987 | ) | $ | 7,643,276 |
The effective income tax expensesrate differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | |||||||||||||||||||||||||||||
Reconciliations | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Statutory income tax rate | 25 | % | 25 | % | 25 | % | 25 | % | 25 | % | 25 | % | 25 | % | 25 | % | ||||||||||||||||
Non-deductible (Non-taxable)item | 1 | % | (1 | %) | 1 | % | - | |||||||||||||||||||||||||
Non-deductible expense | (1 | %) | 1 | % | (4 | %) | 1 | % | ||||||||||||||||||||||||
Non-taxable items | 5 | % | - | 1 | % | - | ||||||||||||||||||||||||||
Change in valuation allowance | (1 | %) | - | (1 | %) | - | ||||||||||||||||||||||||||
Effective tax rate | 26 | % | 24 | % | 26 | % | 25 | % | 28 | % | 26 | % | 21 | % | 26 | % |
Significant components of the Company’s deferred tax assets and liabilities at June 30, 20172018 and December 31, 20162017 are as follows:
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Deferred tax liabilities | $ | — | $ | — | $ | — | $ | — | ||||||||
Deferred tax assets: | ||||||||||||||||
Allowance for obsolete and slow-moving inventories | $ | — | $ | — | $ | — | $ | 10,980 | ||||||||
Impairment on property, plant and equipment | 431,213 | 421,106 | 3,706,211 | 4,610,228 | ||||||||||||
Exploration costs | 1,837,744 | 1,794,666 | 1,881,693 | 1,905,347 | ||||||||||||
Compensation costs of unexercised stock options | 109,386 | 120,986 | 94,287 | 98,092 | ||||||||||||
PRC tax losses | 3,820,948 | — | ||||||||||||||
US federal net operating loss | 11,660,000 | 11,575,000 | 7,138,700 | 7,080,000 | ||||||||||||
Total deferred tax assets | 14,038,343 | 13,911,758 | 16,641,839 | 13,704,647 | ||||||||||||
Valuation allowance | (11,769,386 | ) | (11,695,986 | ) | (7,232,987 | ) | (7,178,092 | ) | ||||||||
Net deferred tax asset | $ | 2,268,957 | $ | 2,215,772 | $ | 9,408,852 | $ | 6,526,555 |
The increase in valuation allowance for each of the three-month periods ended June 30, 2018 and 2017 is $28,499 and 2016 is $32,600, and $1,495, respectively.
The increase in valuation allowance for the six-month period ended June 30, 2018 and 2017 is $54,895 and $73,400.
The decrease in valuation allowance for the six-month period ended June 30, 2016 is $100,150.
There were no unrecognized tax benefits and accrual for uncertain tax positions as of June 30, 20172018 and December 31, 2016.2017.
14
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – BUSINESS SEGMENTS
The Company has four reportable segments: bromine, crude salt, chemical products and natural gas. The reportable segments are consistent with how management views the markets served by the Company and the financial information that is reviewed by its chief operating decision maker.
An operating segment’s performance is primarily evaluated based on segment operating income (loss), 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 (loss), as defined above, is an appropriate measure for evaluating the operating performance of its segments. All the customers are located in PRC.
Three-Month Period Ended June 30, 2017 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | |||||||||||||||||||||
Net revenue (external customers) | $ | 18,423,133 | $ | 2,521,883 | $ | 26,586,973 | $ | — | $ | 47,531,989 | $ | — | $ | 47,531,989 | ||||||||||||||
Net revenue (intersegment) | 2,910,743 | — | — | — | 2,910,743 | — | 2,910,743 | |||||||||||||||||||||
Income(loss) from operations before taxes | 9,740,981 | 1,051,202 | 8,318,480 | (33,529 | ) | 19,077,134 | (594,662 | ) | 18,482,472 | |||||||||||||||||||
Income taxes | 2,464,085 | 245,164 | 2,112,201 | — | 4,821,450 | — | 4,821,450 | |||||||||||||||||||||
Income (loss) from operations after taxes | 7,276,896 | 806,038 | 6,206,279 | (33,529 | ) | 14,255,684 | (594,662 | ) | 13,661,022 | |||||||||||||||||||
Total assets | 162,696,276 | 32,749,355 | 207,885,555 | 1,819,284 | 405,150,470 | 114,373 | 405,264,843 | |||||||||||||||||||||
Depreciation and amortization | 3,794,600 | 624,226 | 951,364 | — | 5,370,190 | — | 5,370,190 | |||||||||||||||||||||
Goodwill | — | — | 28,332,661 | — | 28,332,661 | — | 28,332,661 |
Three-Month Period Ended June 30, 2018 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | |||||||||||||||||||||
Net revenue (external customers) | $ | — | $ | — | $ | 4,594 | $ | — | $ | 4,594 | $ | — | $ | 4,594 | ||||||||||||||
Net revenue (intersegment) | — | — | — | — | — | — | — | |||||||||||||||||||||
Income(loss) from operations before income taxes(benefit) | (5,577,272 | ) | (1,731,592 | ) | (727,595 | ) | (45,295 | ) | (8,081,754 | ) | 1,250,147 | (6,831,607 | ) | |||||||||||||||
Income taxes expense (benefit) | (1,579,514 | ) | (240,367 | ) | (63,360 | ) | — | (1,883,241 | ) | — | (1,883,241 | ) | ||||||||||||||||
Income (loss) from operations after income taxes(benefit) | (3,997,758 | ) | (1,491,225 | ) | (664,235 | ) | (45,295 | ) | (6,198,513 | ) | 1,250,147 | (4,948,366 | ) | |||||||||||||||
Total assets | 138,510,016 | 47,572,477 | 182,669,040 | 2,011,378 | 370,762,911 | 80,818 | 370,843,729 | |||||||||||||||||||||
Depreciation and amortization | 4,018,318 | 611,499 | 124,167 | — | 4,753,984 | — | 4,753,984 | |||||||||||||||||||||
Capital expenditures | 7,813,714 | 1,189,075 | 1,192,963 | 16,259 | 10,212,011 | 10,212,011 | ||||||||||||||||||||||
Goodwill | — | — | 29,010,218 | — | 29,010,218 | — | 29,010,218 | |||||||||||||||||||||
Three-Month Period Ended June 30, 2017 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | |||||||||||||||||||||
Net revenue (external customers) | $ | 18,423,133 | $ | 2,521,883 | $ | 26,586,973 | $ | — | $ | 47,531,989 | $ | — | $ | 47,531,989 | ||||||||||||||
Net revenue (intersegment) | 2,910,743 | — | — | — | 2,910,743 | — | 2,910,743 | |||||||||||||||||||||
Income(loss) from operations before income taxes | 9,740,981 | 1,051,202 | 8,318,480 | (33,529 | ) | 19,077,134 | (594,662 | ) | 18,482,472 | |||||||||||||||||||
Income taxes | 2,464,085 | 245,164 | 2,112,201 | — | 4,821,450 | — | 4,821,450 | |||||||||||||||||||||
Income (loss) from operations after income taxes | 7,276,896 | 806,038 | 6,206,279 | (33,529 | ) | 14,255,684 | (594,662 | ) | 13,661,022 | |||||||||||||||||||
Total assets | 162,696,276 | 32,749,355 | 207,885,555 | 1,819,284 | 405,150,470 | 114,373 | 405,264,843 | |||||||||||||||||||||
Depreciation and amortization | 3,794,600 | 624,226 | 951,364 | — | 5,370,190 | — | 5,370,190 | |||||||||||||||||||||
Goodwill | — | — | 28,332,661 | — | 28,332,661 | — | 28,332,661 |
Three-Month Period Ended June 30, 2016 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | |||||||||||||||||||||
Net revenue (external customers) | $ | 18,480,605 | $ | 2,305,688 | $ | 26,814,474 | $ | — | $ | 47,600,767 | $ | — | $ | 47,600,767 | ||||||||||||||
Net revenue (intersegment) | 2,670,931 | — | — | — | 2,670,931 | — | 2,670,931 | |||||||||||||||||||||
Income(loss) from operations before taxes | 8,199,652 | (10,099 | ) | 8,531,677 | (25 | ) | 16,721,205 | 609,917 | 17,331,122 | |||||||||||||||||||
Income taxes | 1,810,252 | 235,779 | 2,164,391 | — | 4,210,422 | — | 4,210,422 | |||||||||||||||||||||
Income (loss) from operations after taxes | 6,389,400 | (245,878 | ) | 6,367,286 | (25 | ) | 12,510,783 | 609,917 | 13,120,700 | |||||||||||||||||||
Total assets | 149,221,327 | 30,673,443 | 193,703,787 | 1,058,651 | 374,657,208 | 118,573 | 374,775,781 | |||||||||||||||||||||
Depreciation and amortization | 4,144,546 | 1,339,696 | 1,160,329 | — | 6,644,571 | — | 6,644,571 | |||||||||||||||||||||
Capital expenditure | — | — | — | 813,589 | 813,589 | — | 813,589 | |||||||||||||||||||||
Goodwill | — | — | 28,944,958 | — | 28,944,958 | — | 28,944,958 |
15
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – BUSINESS SEGMENTS – Continued
Six-Month Period Ended June 30, 2017 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Six-Month Period Ended June 30, 2018 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenue (external customers) | $ | 32,345,527 | $ | 4,335,661 | $ | 43,639,294 | $ | - | $ | 80,320,482 | $ | - | $ | 80,320,482 | $ | — | $ | 1,638,493 | $ | 613,368 | $ | — | $ | 2,251,861 | $ | — | $ | 2,251,861 | |||||||||||||||||||||||||||
Net revenue (intersegment) | 5,089,236 | - | - | - | 5,089,236 | - | 5,089,236 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Income(loss) from operations before taxes | 15,012,915 | 1,937,089 | 13,264,657 | (57,287 | ) | 30,157,374 | (861,905 | ) | 29,295,469 | ||||||||||||||||||||||||||||||||||||||||||||||
Income taxes | 3,794,188 | 468,746 | 3,380,342 | - | 7,643,276 | - | 7,643,276 | ||||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations after taxes | 11,218,727 | 1,468,343 | 9,884,315 | (57,287 | ) | 22,514,098 | (861,905 | ) | 21,652,193 | ||||||||||||||||||||||||||||||||||||||||||||||
Income(loss) from operations before income taxes (benefit) | (11,167,828 | ) | (2,539,475 | ) | (1,402,366 | ) | (80,950 | ) | (15,190,619 | ) | 62,032 | (15,128,587 | ) | ||||||||||||||||||||||||||||||||||||||||||
Income taxes expense (benefit) | (2,970,666 | ) | (442,338 | ) | 336,017 | — | (3,076,987 | ) | — | (3,076,987 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations after income taxes(benefit) | (8,197,162 | ) | (2,097,137 | ) | (1,738,383 | ) | (80,950 | ) | (12,113,632 | ) | 62,032 | (12,051,600 | ) | ||||||||||||||||||||||||||||||||||||||||||
Total assets | 162,696,276 | 32,749,355 | 207,885,555 | 1,819,284 | 405,150,470 | 114,373 | 405,264,843 | 138,510,016 | 47,572,477 | 182,669,040 | 2,011,378 | 370,762,911 | 80,818 | 370,843,729 | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 7,793,181 | 1,078,673 | 1,937,435 | - | 10,809,289 | - | 10,809,289 | 7,738,030 | 1,524,850 | 248,635 | — | 9,511,515 | — | 9,511,515 | |||||||||||||||||||||||||||||||||||||||||
Capital expenditures | 7,906,888 | 1,203,254 | 1,192,963 | 30,616 | 10,333,721 | 10,333,721 | |||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | - | - | 28,332,661 | - | 28,332,661 | - | 28,332,661 | — | — | 29,010,218 | — | 29,010,218 | — | 29,010,218 |
Six-Month Period Ended June 30, 2016 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Six-Month Period Ended June 30, 2017 | Bromine* | Crude Salt* | Chemical Products | Natural Gas | Segment Total | Corporate | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
Net revenue (external customers) | $ | 31,650,133 | $ | 4,072,296 | $ | 46,373,788 | $ | - | $ | 82,096,217 | $ | - | $ | 82,096,217 | $ | 32,345,527 | $ | 4,335,661 | $ | 43,639,294 | $ | — | $ | 80,320,482 | $ | — | $ | 80,320,482 | |||||||||||||||||||||||||||
Net revenue (intersegment) | 4,493,133 | - | - | - | 4,493,133 | - | 4,493,133 | 5,089,236 | — | — | — | 5,089,236 | — | 5,089,236 | |||||||||||||||||||||||||||||||||||||||||
Income(loss) from operations before taxes | 11,205,170 | 217,514 | 14,255,408 | (25 | ) | 25,678,067 | 319,373 | 25,997,440 | |||||||||||||||||||||||||||||||||||||||||||||||
Income(loss) from operations before income taxes | 15,012,915 | 1,937,089 | 13,264,657 | (57,287 | ) | 30,157,374 | (861,905 | ) | 29,295,469 | ||||||||||||||||||||||||||||||||||||||||||||||
Income taxes | 2,553,622 | 299,283 | 3,625,188 | - | 6,478,093 | - | 6,478,093 | 3,794,188 | 468,746 | 3,380,342 | — | 7,643,276 | — | 7,643,276 | |||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations after taxes | 8,651,548 | (81,769 | ) | 10,630,220 | (25 | ) | 19,199,974 | 319,373 | 19,519,347 | ||||||||||||||||||||||||||||||||||||||||||||||
Income (loss) from operations after income taxes | 11,218,727 | 1,468,343 | 9,884,315 | (57,287 | ) | 22,514,098 | (861,905 | ) | 21,652,193 | ||||||||||||||||||||||||||||||||||||||||||||||
Total assets | 149,221,327 | 30,673,443 | 193,703,787 | 1,058,651 | 374,657,208 | 118,573 | 374,775,781 | 162,696,276 | 32,749,355 | 207,885,555 | 1,819,284 | 405,150,470 | 114,373 | 405,264,843 | |||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 8,512,338 | 2,532,362 | 2,469,592 | - | 13,514,292 | - | 13,514,292 | 7,793,181 | 1,078,673 | 1,937,435 | — | 10,809,289 | — | 10,809,289 | |||||||||||||||||||||||||||||||||||||||||
Capital expenditure | 52,777 | 4,509 | - | 813,589 | 870,875 | - | 870,875 | ||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | - | - | 28,944,958 | - | 28,944,958 | - | 28,944,958 | — | — | 28,332,661 | — | 28,332,661 | — | 28,332,661 |
* 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 the respective segment.
16
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – BUSINESS SEGMENTS – Continued
Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | Three-Month Period Ended June 30, | Six-Month Period Ended June 30, | |||||||||||||||||||||||||||||
Reconciliations | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||||||
Total segment operating income | $ | 19,077,134 | $ | 16,721,205 | $ | 30,157,374 | $ | 25,678,067 | ||||||||||||||||||||||||
Total segment operating income (loss) | $ | (8,081,754 | ) | $ | 19,077,134 | $ | (15,190,619 | ) | $ | 30,157,374 | ||||||||||||||||||||||
Corporate costs | (128,007 | ) | (69,279 | ) | (257,995 | ) | (229,361 | ) | (153,791 | ) | (128,007 | ) | (283,054 | ) | (257,995 | ) | ||||||||||||||||
Unrealized gain/(loss) on translation of intercompany balance | (466,655 | ) | 679,196 | (603,910 | ) | 548,734 | 1,403,938 | (466,655 | ) | 345,086 | (603,910 | ) | ||||||||||||||||||||
Income from operations | 18,482,472 | 17,331,122 | 29,295,469 | 25,997,440 | ||||||||||||||||||||||||||||
Income (loss) from operations | (6,831,607 | ) | 18,482,472 | (15,128,587 | ) | 29,295,469 | ||||||||||||||||||||||||||
Other income, net of expense | 90,656 | 76,319 | 174,605 | 144,636 | 135,493 | 90,656 | 261,627 | 174,605 | ||||||||||||||||||||||||
Income before taxes | $ | 18,573,128 | $ | 17,407,441 | $ | 29,470,074 | $ | 26,142,076 | ||||||||||||||||||||||||
Income (loss) before income taxes | $ | (6,696,114 | ) | $ | 18,573,128 | $ | (14,866,960 | ) | $ | 29,470,074 |
The following table shows the major customer(s) (10% or more) for the three-monthsix-month period ended June 30, 2017.2018.
Number | Customer | Bromine (000’s) | Crude Salt (000’s) | Chemical Products (000’s) | Total Revenue (000’s) | Percentage of Total Revenue (%) | 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 | $ 3,111
| $ 753
| $ 1,684
| $ 5,548 | 11.7% | Shandong Morui Chemical Company Limited | $ - | $ 534 | $ 155 | $ 689 | 30.6% | ||||||||||
2 | Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited | $ - | $ 670 | $ - | $ 670 | 29.8% | ||||||||||||||||
3 | Shouguang Weidong Chemical Company Limited | $ - | $ 435 | $ - | $ 435 | 19.3% |
The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 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 | $ 5,705 | $ 1,251 | $ 2,768 | $ 9,724 | 12.1% |
The following table shows the major customer(s) (10% or more) for the three-month period ended June 30, 2016.
Number | Customer | Bromine (000’s) | Crude Salt (000’s) | Chemical Products (000’s) | Total Revenue (000’s) | Percentage of Total Revenue (%) | |||||
1 | Shandong Morui Chemical Company Limited | $ 3,269
| $ 686
| $ 1,696
| $ 5,651 | 11.9% |
The following table shows the major customer(s) (10% or more) for the six-month period ended June 30, 2016.
Number | Customer | Bromine (000’s) | Crude Salt (000’s) | Chemical Products (000’s) | Total Revenue (000’s) | Percentage of Total Revenue (%) | |||||
1 | Shandong Morui Chemical Company Limited | $ 5,692
| $ 1,172
| $ 2,997
| $ 9,861 | 12.0% |
NOTE 14 – CUSTOMER CONCENTRATION
During the three-month and six-month periodsperiod ended June 30, 2017,2018, the Company sold 34.0% and 35.0%89% of its products to its top five customers, respectively. As of June 30, 2018, amounts due from these customers were $4,650,250. During the six-month period ended June 30, 2017, the Company sold 35.0% of its products to its top five customers. As of June 30, 2017, amounts due from these customers were $38,735,709. During the three-month and six-month periods ended June 30, 2016, the Company sold 33.9% and 34.1% of its products to its top five customers, respectively. As of June 30, 2016, amounts due from these customers were $28,870,903. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
NOTE 15 – MAJOR SUPPLIERS
During the three-month and six-month periodsperiod ended June 30, 2018, the Company did not purchase any raw materials. During the six-month period ended June 30, 2017, the Company purchased 66.5% and 67.5% of its raw materials from its top five suppliers, respectively.suppliers. As of June 30, 2017, amounts due to those suppliers for the three-month and six-month periods ended June 30, 2017 included in accounts payable were $8,048,563 and $6,833,430. During the three-month and six-month periods ended June 30, 2016, the Company purchased 54.5% and 54.8% of its raw materials from its top five suppliers, respectively. As of June 30, 2016, amounts due to those suppliers included in accounts payable were $6,542,424.This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
17
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 16 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of financial instruments, which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term nature of these instruments. There were no material unrecognized financial assets and liabilities as of June 30, 20172018 and December 31, 2016.2017.
NOTE 17 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS–COMMITMENTS
As of June 30, 2017,2018, the Company has 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 leased nineten parcels of land under non-cancelable operating leases, which arewith fixed rentals and expire through December 2021, December 2023, December 2030, December 2031, December 2032, April 2038, December 2040, February 2059, August 2059 and June 2060, respectively.
The following table sets forth the Company’s contractual obligations as of June 30, 2017:2018:
Capital Lease Obligations | Operating Lease Obligations | Property Management Fees | Capital Lease Obligations | Operating Lease Obligations | Property Management Fees | Capital Expenditure | ||||||||||||||||||||||
Payable within: | ||||||||||||||||||||||||||||
the next 12 months | $ | 277,064 | $ | 953,773 | $ | 46,044 | $ | 283,690 | $ | 1,008,208 | $ | 94,291 | $ | 39,822 | ||||||||||||||
the next 13 to 24 months | 277,064 | 973,475 | — | 283,690 | 1,032,548 | 94,291 | — | |||||||||||||||||||||
the next 25 to 36 months | 277,064 | 997,246 | — | 283,690 | 1,054,710 | 94,291 | — | |||||||||||||||||||||
the next 37 to 48 months | 277,064 | 1,018,890 | — | 283,690 | 911,914 | 94,291 | — | |||||||||||||||||||||
the next 49 to 60 months | 277,064 | 879,430 | — | 283,690 | 927,797 | 94,291 | — | |||||||||||||||||||||
thereafter | 2,216,512 | 16,060,555 | — | 1,985,828 | 15,688,637 | — | — | |||||||||||||||||||||
Total | $ | 3,601,832 | $ | 20,883,369 | $ | 46,044 | $ | 3,404,278 | $ | 20,623,814 | $ | 471,455 | $ | 39,822 | ||||||||||||||
Less: Amount representing interest | (1,262,027 | ) | (1,128,887 | ) | ||||||||||||||||||||||||
Present value of net minimum lease payments | $ | 2,339,805 | $ | 2,275,391 |
18
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20172018
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 17 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS – Continued
Rental expenses related to operating leases of the Company amounted to $256,447$283,051 and $264,240,$256,447, which were charged to the condensed consolidated statements of income (loss) for the three months ended June 30, 20172018 and 2016,2017, respectively. Rental expenses related to operating leases of the Company amounted to $511,566$564,664 and $524,624,$511,566, which were charged to the condensed consolidated statements of income (loss) for the six months ended June 30, 20172018 and 2016,2017, respectively.
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
The discussion below contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act. We have used words such as “believes,” “intends,” “anticipates,” “expects” and similar expressions to identify forward-looking statements. These statements are based on information currently available to us and are subject to a number of risks and uncertainties that may cause our actual results of operations, financial condition, cash flows, performance, business prospects and opportunities and the timing of certain events to differ materially from those expressed in, or implied by, these statements. These risks, uncertainties and other factors include, without limitation, those matters discussed in Item 1A of Part I of our 20162017 Form 10-K. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances, or for any other reason. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing in our 20162017 Form 10-K and Item 1A, “Risk Factors” for the year ended December 31, 2016.2017.
Overview
We are a holding company which conducts operations through our wholly-owned China-based subsidiaries. Our business is conducted and reported in four segments, namely, bromine, crude salt, chemical products and natural gas.
Through our wholly-owned subsidiary, SCHC, we produce and trade bromine and crude salt. We are one of the largest producers of bromine in China, as measured by production output. Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine also is used to form intermediary chemical compounds such as Tetramethylbenzidine. Bromine is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants. Crude salt is the principal material in alkali production as well as chlorine alkali production and is widely used in the chemical, food and beverage, and other industries.
Through our wholly-owned subsidiary, SYCI, we manufacture and sell chemical products used in oil and gas field exploration, oil and gas distribution, oil field drilling, wastewater processing, papermaking chemical agents, inorganic chemicals and inorganic chemicals.materials that are used for human and animal antibiotics.
On December 12, 2006, we acquired, throughAs disclosed in the Company’s Current Report on Form 8-K filed on September 8, 2017 the Company disclosed that on September 1, 2017, the Company received letters from the Yangkou County, Shouguang City government addressed to each of its subsidiaries, SCHC and SYCI, which stated that in an effort to improve the safety and environmental protection management level of chemical enterprises, the plants are requested to immediately stop production and perform rectification and improvements in accordance with the country's new safety and environmental protection requirements. In the Company’s press release of August 11, 2017 and on its conference call of August 14, 2017, the Company addressed concerns that increased government enforcement of stringent environmental rules that were adopted in early 2017 to insure corporations bring their facilities up to necessary standards so that pollution and other negative environmental issues are limited and remediated, could have an impact on our business in both the short and long-term.The Company also expressed that although it believed its facilities were fully compliant, the Company did not know how its facilities would fare under the new rules and that the Company expected to have a share exchange, Upper Class Group Limited, a British Virgin Islands holding corporation which then owned allfull understanding of the outstanding sharesimplications within the next two months. Teams of SCHC. Under accounting principles generally acceptedinspectors from the government were sent to many provinces to inspect all mining and manufacturing facilities. The local government requested that facilities be closed, so that the facilities can undergo the inspection and analysis in the United States, the share exchange is considered to bemost efficient manner by inspectors’ team. As 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 assets ofresult, our Company, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange was identical to that resulting from a reverse acquisition, except no goodwill was recorded. Under reverse takeover accounting, the post reverse acquisition comparative historical consolidated financial statements of the legal acquirer, our Company, are those of the legal acquiree, Upper Class Group Limited, which is considered to be the accounting acquirer. Share and per share amounts reflected in this report have been retroactively adjusted to reflect the merger.
On February 5, 2007, the Company, acting through SCHC, acquired SYCI. Since the ownership of the Company and SYCI was then substantially the same, the transaction was accounted for as a transaction between entities under common control, whereby we recognized the assets and liabilities of SYCI at their carrying amounts. Share and per share amounts stated in this report have been retroactively adjusted to reflect the merger.
On August 31, 2008, SYCI completed the construction of a new chemical production line. It passed the examination by Shouguang City Administration of Work Safety and local fire department. This new production line focuses on producing environmental friendly additive products, solid lubricant and polyether lubricant, for use in oil and gas exploration. The line has an annual production capacity of 5,000 tons. Formal production of this chemical production line startedfacilities were closed on September 15, 2008. The total annual production capacity of SYCI is 36,300 tons.1, 2017.
20
On October 12, 2009 we completedSubsequently, the Safety Supervision and Administration Department and the Environmental Protection Departments of the local government conducted inspections of every bromine production enterprise within its jurisdiction, in order to improve security, environmental protections, pollution, and safety. The Company had been working closely with the County authorities to develop rectification plans for both its bromine and its chemical businesses. The Company and the government had agreed on a 1-for-4 reverse stock split of our common stock, such thatrectification plan for each four shares outstanding prior toSCHC, the stock split there was one share outstanding after the reverse stock split. All shares of common stock referenced in this report have been adjusted to reflect the stock split figures. On October 27, 2009 our shares began trading on the NASDAQ Global Select MarketCompany’s bromine and crude salt businesses which is currently under the ticker symbol “GFRE” and on June 30, 2011 we changed our ticker symbol to “GURE” to better reflection of our corporate name.process.
On January 12, 2015, the CompanyOriginally, six bromine factories completed their rectification process within factory areas (i.e. excluding crude salt field area) and SCHC entered into an Equity Interest Transfer Agreement with SCRC pursuant to which SCHC agreed to acquire SCRCwere approved and all rights, title and interest in and to all assets ownedscheduled for production commencement by SCRC, a leading manufacturer of materials for human and animal antibiotics in China and other parts of Asia.
On February 4, 2015 the Company closed the transactions contemplatedApril 2018 as verbally indicated by the agreement betweenlocal government. Subsequently, the Company, SCHCShandong Provincial government required the local government to conduct “four rating and SCRC.
Onone comprehensive evaluation” for all of the closingchemical companies within its jurisdiction. This has delayed the production commencement schedule of the six bromine and crude salt factories. As of the current date, the Company issued 7,268,011 shareshas not received any official approval from the government.
Four of its common stock, par value $0.0005 per share (the “Shares”), at the closing market priceremaining bromine and crude salt factories have a slightly more complex issue that needs to be resolved. All bromine factories now require paired crude salt pans to prevent the halogen water resulting from the production process from flowing into the sea. Four of $1.84 per Share onthese bromine factories do not have a designated crude salt pan where the closing datewastewater could be channeled. The Company has four alternatives for these four factories which do not have paired crude salt pans: 1. It can form partnerships with adjacent bromine facilities that do have crude salt pans. The nature of these partnerships could take many forms. At present, the Company is communicating with a third party about the waste water discharge of the Factory No 10. If an agreement is reached, the Company will invest RMB7 million to build a new aqueduct and discharge the waste water to the four former equity ownersdesignated place for treatment by the designated party.2. The Company could petition the government for a zoning change so that additional land for salt pans could be obtained. The Company believes this might be difficult but is worth pursuing; 3. The Company could negotiate a different method of SCRC .The issuance ofdealing with this issue; or, 4. These factories could conceivably be forced to close. At the Shares was exempt from registration pursuant to Regulation S of the Securities Act of 1933, as amended. On the closing date,present time, the Company entered into a lock-up agreementis also working with the government on these issues and has not reached any final solution yet.
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 former equity owners of SCRC. In accordanceaspects 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 terms ofaforesaid rules set forth in the lock-up agreement, the shareholders agreed not to sell or transfer the Shares for five years from the date the stock certificates evidencing the Shares were issued.Notice.
The sellersShouguang City Bromine Association, on behalf of SCRC agreed as partall 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 purchase priceprovincial government. We understood from the local government that it has been coordinating with several government agencies to acceptsolve these three outstanding approval issues in a timely manner and that all the Shares, based on a valuation of $2.00, which was a 73% premiumaffected 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 price on the day the agreement was entered into. For accounting purposes, the Shares are now being valued at $1.84, which was the closing price of our stock on the dayissuance and implement of the closing dateNotice. The Company believes that this is another step by the government to improve the environment. It further believes the goal of the agreement. The price difference betweengovernment is not to close all plants, but rather to codify the original $2.00regulations related to project approval, land use, planning approval and the current $1.84 is solely for accounting purposes. There has been no changeenvironmental protection assessment approval so that illegal plants are not able to open in the numberfuture and so that 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 shares issued.its regional and county governments has applied the Notice in a consistent manner.
On November 24, 2015, Gulf Resources, Inc.,2017, the Company received a Delaware corporation consummatedletter 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 merger withresidential area and into its wholly-owned subsidiary, Gulf Resources, Inc., a Nevada corporation. Astheir production activities will impact the living environment of the residents. This is as a result of the reincorporation,country’s effort to improve the development of the chemical industry, manage safe production and curb environmental pollution accidents effectively, and ensure the quality of the living environment of residents. All chemical enterprises which do not comply with the requirements of the safety and environmental protection regulations will be ordered to shut down. The Company believes this relocation process will cost approximately $60 million in total. The Company incurred relocation cost in the amount of $10,925,081 and $9,732,118 as of June 30, 2018 and December 31, 2017 and estimated that the new factory will be fully operational by the beginning of 2020.
The Company does not anticipate that the Company’s new chemical factory will 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 Marine Fine Chemical Industry Park and presented a completed construction design draft and other related documents to the local authorities for approval. The Company expected to receive feedback from the local authorities. However, the Company is nowdoes believe there could be a Nevada corporation.delay for the approval process given the ongoing rectification and approvals process for the Company’s other plants.
On December 15, 2015,In January 2017, the Company registered a new subsidiarycompleted the first brine water and natural gas well field construction in the 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 PRC named Daying County Haoyuan Chemicalproblem, the Company Limited (“DCHC”) with registered Capital of RMB50,000,000, and there was RMB11,754,919 capital contributed by SCHC as of March 31, 2017. DCHC was established to further explore and developpurchased customized equipment for its natural gas project. The installation of such equipment, including providing piping 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, Shouguan Yuxin Chemical Co., Limited (“SYCI”) and Shouguan Rongyuan Chemical Co., Ltd (“SCRC”). On March 24, 2017, the legal process of the mergerelectricity, was completed in July 2018. The Company is preparing to test the equipment and SCRC was officially deregistered on March 28, 2017. The results of these two subsidiaries were reported as SYCIanticipates to begin the trial production in the three and six months ended June 30, 2017.September 2018.
Our current corporate structure chart is set forth in the following diagram:
As a result of our acquisitions of SCHC and SYCI, our historical financial statements and the information presented below reflects the accounts of SCHC, SYCI and DCHC. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
21
RESULTS OF OPERATIONS
The following table presents certain information derived from the condensed consolidated statements of operations, cash flows and stockholders equity for the three-month and six-month periods ended June 30, 20172018 and 2016.2017.
Comparison of the Three-Month Period Ended June 30, 20172018 and 20162017
Three-Month Period Ended June 30, 2017 | Three-Month Period Ended June 30, 2016 | Percent Change Increase/ (Decrease) | Three-Month Period Ended June 30, 2018 | Three-Month Period Ended June 30, 2017 | Percent Change Increase/ (Decrease) | ||||||||||||||||||
Net revenue | $ | 47,531,989 | $ | 47,600,767 | — | $ | 4,594 | $ | 47,531,989 | (100%) | |||||||||||||
Cost of net revenue | $ | (26,931,742 | ) | $ | (29,195,255 | ) | (8 | %) | $ | (7 | ) | $ | (26,931,742 | ) | (100%) | ||||||||
Gross profit | $ | 20,600,247 | $ | 18,405,512 | 12 | % | $ | 4,587 | $ | 20,600,247 | (100%) | ||||||||||||
Sales, marketing and other operating expenses | $ | (100,613 | ) | $ | (104,369 | ) | (4 | %) | $ | (21,025 | ) | $ | (100,613 | ) | (79%) | ||||||||
Research and development costs | $ | (65,274 | ) | $ | (70,378 | ) | (7 | %) | $ | — | $ | (65,274 | ) | (100%) | |||||||||
Direct labor and factory overheads incurred during plant shutdown | $ | (5,689,486 | ) | $ | — | — | |||||||||||||||||
General and administrative expenses | $ | (2,056,943 | ) | $ | (1,009,882 | ) | 104 | % | $ | (1,125,683 | ) | $ | (2,056,943 | ) | (45%) | ||||||||
Other operating income | $ | 105,055 | $ | 110,239 | (5 | %) | $ | — | $ | 105,055 | (100%) | ||||||||||||
Income from operations | $ | 18,482,472 | $ | 17,331,122 | 7 | % | |||||||||||||||||
Income (loss) from operations | $ | (6,831,607 | ) | $ | 18,482,472 | (137%) | |||||||||||||||||
Other income | $ | 90,656 | $ | 76,319 | 19 | % | $ | 135,493 | $ | 90,656 | 49% | ||||||||||||
Income before taxes | $ | 18,573,128 | $ | 17,407,441 | 7 | % | |||||||||||||||||
Income taxes | $ | (4,821,450 | ) | $ | (4,210,422 | ) | 15 | % | |||||||||||||||
Net income | $ | 13,751,678 | $ | 13,197,019 | 4 | % | |||||||||||||||||
Income (loss) before taxes | $ | (6,696,114 | ) | $ | 18,573,128 | (136%) | |||||||||||||||||
Income (taxes) benefit | $ | 1,883,241 | $ | (4,821,450 | ) | (139%) | |||||||||||||||||
Net income (loss) | $ | (4,812,873 | ) | $ | 13,751,678 | (135%) |
Net revenue. The table below shows the changes in net revenue in the respective segment of the Company for the three-month period ended June 30, 20172018 as compared to the same period in 2016:2017:
Net Revenue by Segment | Net Revenue by Segment | |||||||||||||||||||||||||||||||||||
Three-Month Period Ended | Three-Month Period Ended | Percent Change Increase/ (Decrease) | Three-Month Period Ended | Three-Month Period Ended | Percent Change Decrease | |||||||||||||||||||||||||||||||
June 30, 2017 | June 30, 2016 | of Net Revenue | June 30, 2018 | June 30, 2017 | of Net Revenue | |||||||||||||||||||||||||||||||
Segment | % of total | % of total | % of total | % of total | ||||||||||||||||||||||||||||||||
Bromine | $ | 18,423,133 | 39 | % | $ | 18,480,605 | 39 | % | - | $ | — | — | $ | 18,423,133 | 39 | % | (100%) | |||||||||||||||||||
Crude Salt | $ | 2,521,883 | 5 | % | $ | 2,305,688 | 5 | % | 9 | % | $ | — | — | $ | 2,521,883 | 5 | % | (100%) | ||||||||||||||||||
Chemical Products | $ | 26,586,973 | 56 | % | $ | 26,814,474 | 56 | % | (1 | %) | $ | 4,594 | 100 | % | $ | 26,586,973 | 56 | % | (100%) | |||||||||||||||||
Total sales | $ | 47,531,989 | 100 | % | $ | 47,600,767 | 100 | % | - | $ | 4,594 | 100 | % | $ | 47,531,989 | 100 | % | (100%) |
Bromine and crude salt segments | Three-Month Period Ended | Percentage Change | Three-Month Period Ended | Percentage Change | |||||||||||||||||||
product sold in tonnes | June 30, 2017 | June 30, 2016 | Increase/(Decrease) | June 30, 2018 | June 30, 2017 | Decrease | |||||||||||||||||
Bromine (excluding volume sold to SYCI) | 4,588 | 4,613 | (1 | %) | — | 4,588 | (100%) | ||||||||||||||||
Crude Salt | 81,263 | 80,377 | 1 | % | — | 81,263 | (100%) |
Three-Month Period Ended | Percentage Change | Three-Month Period Ended | Percentage Change | ||||||||||||||||||||
Chemical products segment sold in tonnes | June 30, 2017 | June 30, 2016 | Increase/(Decrease) | June 30, 2018 | June 30, 2017 | Decrease | |||||||||||||||||
Oil and gas exploration additives | 3,285 | 3,113 | 6 | % | — | 3,285 | (100%) | ||||||||||||||||
Paper manufacturing additives | 951 | 897 | 6 | % | — | 951 | (100%) | ||||||||||||||||
Pesticides manufacturing additives | 654 | 646 | 1 | % | — | 654 | (100%) | ||||||||||||||||
Pharmaceutical intermediate | 457 | 462 | (1 | %) | — | 457 | (100%) | ||||||||||||||||
By product | 3,556 | 3,484 | 2 | % | — | 3,556 | (100%) | ||||||||||||||||
Overall | 8,903 | 8,602 | 4 | % | — | 8,903 | (100%) |
22
Bromine segment
NetFor the three-month period ended June 30, 2018, the net revenue from ourfor the bromine segment decreasedwas $0 due to $18,423,133the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. As a result, there was no bromine in inventory for sale for the three-month period ended June 30, 2017 compared to $18,480,605 for the same period in 2016. The average selling price of bromine was $4,015 per tonne for the three-month period ended June 30, 2017 compared to $4,006 per tonne for the same period in 2016. The sales volume of bromine decreased from 4,613 tonnes for the three-month period ended June 30, 2016 to 4,588 tonnes for the same period in 2017, a decrease of 1%.2018.
The table below shows the changes in the average selling price and changes in the sales volume of bromine for the three-month period ended June 30, 2017 compared to the same period in 2016.
Three-Month Period Ended June 30, | ||||
Increase in net revenue of bromine as a result of: | 2017 vs. 2016 | |||
Increase in average selling price | $ | 41,597 | ||
Decrease in sales volume | $ | (99,069 | ) | |
Total effect on net revenue of bromine | $ | (57,472 | ) |
Crude salt segment
The increase inFor the three-month period ended June 30, 2018, the net revenue from ourfor the crude salt segment was $0 due to the increase in both the sales volumeclosure of all of our plant and average selling price of crude salt. The sales volume offactories to perform rectification and improvement since September 1, 2017. As a result, there were limited crude salt increased by 1% from 80,377 tonnesproducts for sale for the three-month period ended June 30, 2016 to 81,263 tonnes for the same period in 2017. The average selling price of crude salt increased from $28.69 per tonne for the three-month period ended June 30, 2016 to $31.03 per tonne for the same period in 2017, an increase of 8%.2018.
Three-Month Period Ended June 30, | ||||
Increase in net revenue of crude salt as a result of: | 2017 vs. 2016 | |||
Increase in average selling price | $ | 189,730 | ||
Increase in sales volume | $ | 26,465 | ||
Total effect on net revenue of crude salt | $ | 216,195 |
23
Chemical products segment
Product Mix of Chemical Products Segment | Percent | Product Mix of Chemical Products Segment | Percent | ||||||||||||||||||||||||||||||||||||
Three-Month Period Ended | Three-Month Period Ended | Change of | Three-Month Period Ended | Three-Month Period Ended | Change of | ||||||||||||||||||||||||||||||||||
June 30, 2017 | June 30, 2016 | Net Revenue | June 30, 2018 | June 30, 2017 | Net Revenue | ||||||||||||||||||||||||||||||||||
Chemical Products | % of total | % of total | % of total | % of total | |||||||||||||||||||||||||||||||||||
Oil and gas exploration additives | $ | 6,254,449 | 23 | % | $ | 6,087,314 | 23 | % | 3 | % | $ | — | — | $ | 6,254,449 | 23 | % | (100%) | |||||||||||||||||||||
Paper manufacturing additives | $ | 1,069,054 | 4 | % | $ | 1,056,309 | 4 | % | 1 | % | $ | — | — | $ | 1,069,054 | 4 | % | (100%) | |||||||||||||||||||||
Pesticides manufacturing additives | $ | 3,425,894 | 13 | % | $ | 3,422,250 | 13 | % | — | $ | — | — | $ | 3,425,894 | 13 | % | (100%) | ||||||||||||||||||||||
Pharmaceutical intermediates | $ | 11,441,402 | 43 | % | $ | 11,778,466 | 44 | % | (3 | %) | $ | — | — | $ | 11,441,402 | 43 | % | (100%) | |||||||||||||||||||||
By product | $ | 4,396,174 | 17 | % | $ | 4,470,135 | 16 | % | (2 | %) | $ | — | — | $ | 4,396,174 | 17 | % | (100%) | |||||||||||||||||||||
Raw materials | $ | 4,594 | 100 | % | $ | — | — | — | |||||||||||||||||||||||||||||||
Total sales | $ | 26,586,973 | 100 | % | $ | 26,814,474 | 100 | % | (1 | %) | $ | 4,594 | 100 | % | $ | 26,586,973 | 100 | % | (100%) |
Net revenue fromFor the three-month period ended June 30, 2018, we only sold raw materials in the amount of $4,594 due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. As a result, there were no chemical products segment decreased from $26,814,474in inventory for sale for the three-month period ended June 30, 2016 to $26,586,973 for the same period in 2017, a decrease of approximately 1%. Net revenue from our oil and gas exploration chemicals contributed $6,254,449 (or 23%) and $6,087,314 (or 23%) of our chemical segment revenue for the three-month periods ended June 30, 2017 and 2016, respectively, with an increase of $167,135, or 3%. Net revenue from our paper manufacturing additives increased from $1,056,309 for the three-month period ended June 30, 2016 to $1,069,054 for the same period in 2017, an increase of approximately 1%. Net revenue from our pesticides manufacturing additives was $3,422,250 for the three-month period ended June 30, 2016 compare to $3,425,894 for the same period in 2017. Net revenue from our pharmaceutical intermediates decreased from $11,778,466 for the three-month period ended June 30, 2016 to $11,441,402 for the same period in 2017 a decrease of approximately 3%. Net revenue from our by products decreased from $4,470,135 for the three-month period ended June 30, 2016 to $4,396,174 for the same period in 2017, a decrease of approximately 2%.2018.
The table below shows the changes in the average selling price and changes in the sales volume of major chemical products of the chemical products segment for the three-month period ended June 30, 2017 from the same period in 2016.
Decrease in net revenue, for the three-month period ended June 30, 2017 vs. 2016, as a result of: | Oil and gas exploration additives | Paper manufacturing additives | Pesticides manufacturing additives | Pharmaceutical intermediates | By products | Total | ||||||||||||||||||
Decrease in average selling price | $ | (164,773 | ) | $ | (49,401 | ) | $ | (38,501 | ) | $ | (210,738 | ) | $ | (165,458 | ) | $ | (628,871 | ) | ||||||
Increase/(Decrease) in sales volume | $ | 331,908 | $ | 62,147 | $ | 42,144 | $ | (126,326 | ) | $ | 91,497 | $ | 401,370 | |||||||||||
Total effect on net revenue of chemical products | $ | 167,135 | $ | 12,746 | $ | 3,643 | $ | (337,064 | ) | $ | (73,961 | ) | $ | (227,501 | ) |
Cost of Net Revenue
Cost of Net Revenue by Segment | Percent Change | Cost of Net Revenue by Segment | Percent Change | ||||||||||||||||||||||||||||||||||||
Three-Month Period Ended | Three-Month Period Ended | of Cost of | Three-Month Period Ended | Three-Month Period Ended | of Cost of | ||||||||||||||||||||||||||||||||||
June 30, 2017 | June 30, 2016 | Net Revenue | June 30, 2018 | June 30, 2017 | Net Revenue | ||||||||||||||||||||||||||||||||||
Segment | % of total | % of total | % of total | % of total | |||||||||||||||||||||||||||||||||||
Bromine | $ | 7,881,894 | 29 | % | $ | 9,327,259 | 32 | % | (15 | %) | $ | — | — | $ | 7,881,894 | 29 | % | (100%) | |||||||||||||||||||||
Crude Salt | $ | 1,344,171 | 5 | % | $ | 2,177,214 | 7 | % | (38 | %) | $ | — | — | $ | 1,344,171 | 5 | % | (100%) | |||||||||||||||||||||
Chemical Products | $ | 17,705,677 | 66 | % | $ | 17,690,782 | 61 | % | — | $ | 7 | 100 | % | $ | 17,705,677 | 66 | % | (100%) | |||||||||||||||||||||
Total | $ | 26,931,742 | 100 | % | $ | 29,195,255 | 100 | % | (8 | %) | $ | 7 | 100 | % | $ | 26,931,742 | 100 | % | (100%) |
24
Cost of net revenue reflects mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was $26,931,742$7 for the three-month period ended June 30, 2017,2018, a decrease of $2,263,513$26,931,735 (or 8%100%) as compared to the same period in 2016. This2017. The decrease was primarily attributableis because there is no production and all costs related to the decreased purchase cost of raw material of bromine segment due to the macro-economic tightening policy imposed by the PRC government, which has affected our customers’ industries.direct labor costs and factory overheads were classified in operating expense. See commentary on these costs incurred during plant shutdown in page 27.
Bromine production capacity and utilization of our factories
The table below represents the annual capacity and utilization ratios for all of our bromine producing properties:
Annual Production Capacity (in tonnes) | Utilization Ratio (i) | |||||||
Three-month period ended June 30, 2016 | 47,347 | 45% | ||||||
Three-month period ended June 30, 2017 | 42,808 | 50% | ||||||
Variance of the three-month period ended June 30, 2017 and 2016 | (4,539 | ) | 5% |
Annual Production Capacity (in tonnes) | Utilization Ratio (i) | ||||||||
Three-month period ended June 30, 2017 | 42,808 | 50 | % | ||||||
Three-month period ended June 30, 2018 | 42,808 | — | |||||||
Variance of the three-month period ended June 30, 2018 and 2017 | — | (50 | %) |
(i) Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes.
Our utilization ratio increased by 5%was 0% for the three-month period ended June 30, 2017 as compared with2018 due to the same period in 2016.closure of all of our plant and factories to perform rectification and improvement since September 1, 2017.
In view of the trend of a decrease in the bromine concentration of the brine water being extracted at our production facilities as explained in 20162017 Form 10-K, and in order to reduce the leakage rate and attempt to recover the annual production capacity of bromine and crude salt to a higher level in the future, we plan to carry out enhancement projects for the crude salt fieldstransmission channels and ducts and our existing bromine extraction in 2017.2018. During the three-month period ended June 30, 2017, no such enhancement work was2018, we carried out due to unexpected weather conditions.enhancement projects for the transmission channels and ducts in the amount of $8,707,856. We expect to resume thecarry out enhancement workprojects for our existing bromine extraction in the third andor fourth quarters of 20172018 when weather conditions permit.
Bromine segment
For the three-month period ended June 30, 2017,2018, the cost of net revenue for the bromine segment was $7,881,894, a decrease$0 due to the closure of $1,445,366 or 15% over the same period in 2016. The major componentsall of the costs of net revenue for the bromine segment were cost of raw materials and finished goods consumed of $1,708,734 (or 22%), depreciation and amortization of manufacturingour plant and machinery of $3,703,358 (or 47%)factories to perform rectification and electricity of $766,794 (or 10%)improvement since September 1, 2017. As a result, there was no bromine in inventory for sale for the three-month period ended June 30, 2017. For the three-month period ended June 30, 2016, the major components of the cost of net revenue were the cost of raw materials and finished goods consumed of $3,164,060 (or 34%), depreciation and amortization of manufacturing plant and machinery of $4,029,071 (or 43%) and electricity of $834,692 (or 9%). The cost structure changed where the proportion of cost of raw materials and finished goods consumed over the total cost of net revenue decreased by 12% and depreciation and amortization of manufacturing plant and machinery in relation to the total cost of net revenue increased by 4% in the three-month period ended June 30, 2017 compared to the same period in 2016. The decrease in net cost of net revenue was mainly attributable to the decrease in the purchase price of raw material.2018.
25
The table below represents the major production cost component of bromine per tonne sold for the respective periods:
Per tonne production cost | Three-Month Period Ended | Three-Month Period Ended | |||||||||||||||||||
component of bromine segment | June 30, 2017 | June 30, 2016 | % Change | ||||||||||||||||||
% of total | % of total | ||||||||||||||||||||
Raw materials | $ | 876 | 43 | % | $ | 1,106 | 49 | % | (21 | %) | |||||||||||
Depreciation and amortization | $ | 702 | 34 | % | $ | 764 | 33 | % | (8 | %) | |||||||||||
Electricity | $ | 145 | 7 | % | $ | 158 | 7 | % | (8 | %) | |||||||||||
Others | $ | 323 | 16 | % | $ | 246 | 11 | % | 31 | % | |||||||||||
Production cost of bromine per tonne sold | $ | 2,046 | 100 | % | $ | 2,274 | 100 | % | (10 | %) |
Our production cost of bromine per tonne sold was $2,046 for the three-month period ended June 30, 2017, a decrease of 10% (or $228) as compared to the same period in 2016, which was mainly to the decrease in the purchase price of raw material.
Crude salt segment
TheFor the three-month period ended June 30, 2018, cost of net revenue for ourthe crude salt segment was $0 due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. As a result, there were limited crude salt products for sale for the three-month period ended June 30, 2017 was $1,344,171, representing a decrease of $833,043, or 38%, compared to $2,177,214 for the same period in 2016. The decrease in cost was mainly due to the decrease in depreciation and amortization of manufacturing plant and machinery mainly due to some plant and equipment related to the crude salt and bromine facilities were fully depreciated in June 2016 and the demolition Factory No.6 in December 2016 for bromine and crude salt segment, which partially offset by the increase in depreciation and amortization of manufacturing plant and machinery due to the enhancement projects carried out for our extraction wells and transmission channels and ducts which commenced in August 2016 and completed in September 2016. The significant cost components for the three-month period ended June 30, 2017 were depreciation and amortization of $725,939 (or 54%), resource taxes calculated based on crude salt sold of $252,188 (or 19%) and electricity of $127,212 (or 9%). The significant cost components for the three-month period ended June 30, 2016 were depreciation and amortization of $1,554,715 (or 71%), resource taxes calculated based on crude salt sold of $246,130 (or 11%) and electricity of $127,597 (or 6%).The table below represents the major production cost component of crude salt per ton sold for respective periods:2018.
Per tonne production cost | Three-Month Period Ended | Three-Month Period Ended | ||||||||||||||||||
component of crude salt segment | June 30, 2017 | June 30, 2016 | % Change | |||||||||||||||||
% of total | % of total | |||||||||||||||||||
Depreciation and amortization | $ | 8.93 | 54 | % | $ | 19.34 | 71 | % | (54 | %) | ||||||||||
Resource tax | $ | 3.10 | 19 | % | $ | 3.06 | 11 | % | 1 | % | ||||||||||
Electricity | $ | 1.57 | 9 | % | $ | 1.59 | 6 | % | (1 | %) | ||||||||||
Others | $ | 2.94 | 18 | % | $ | 3.10 | 12 | % | (5 | %) | ||||||||||
Production cost of crude salt per tonne sold | $ | 16.54 | 100 | % | $ | 27.09 | 100 | % | (39 | %) |
Chemical products segment
Cost of net revenue for our chemical products segment for the three-month period ended June 30, 20172018 was $17,705,677$7 compared to $17,690,782$17,705,677 for the same period in 2016.2017. We only sold raw materials in the amount of $4,594 due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. As a result, there were no chemical products in inventory for sale for the three-month period ended June 30, 2018.
26
Gross Profit. Gross profit was $20,600,247, or 43%,$4,587, of net revenue for three-month period ended June 30, 20172018 compared to $18,405,512,$20,600,247, or 39%43%, of net revenue for the same period in 2016.2017.
Gross Profit by Segment | % Point Change | Gross Profit by Segment | % Point Change | ||||||||||||||||||||||||||||||||||||
Three-Month Period Ended | Three-Month Period Ended | of Gross | Three-Month Period Ended | Three-Month Period Ended | of Gross | ||||||||||||||||||||||||||||||||||
June 30, 2017 | June 30, 2016 | Profit Margin | June 30, 2018 | June 30, 2017 | Profit Margin | ||||||||||||||||||||||||||||||||||
Segment | Gross Profit Margin | Gross Profit Margin | Gross Profit Margin | Gross Profit Margin | |||||||||||||||||||||||||||||||||||
Bromine | $ | 10,541,239 | 57 | % | $ | 9,153,346 | 50 | % | 7 | % | $ | — | — | $ | 10,541,239 | 57 | % | (57%) | |||||||||||||||||||||
Crude Salt | $ | 1,177,712 | 47 | % | $ | 128,474 | 6 | % | 41 | % | $ | — | — | $ | 1,177,712 | 47 | % | (47%) | |||||||||||||||||||||
Chemical Products | $ | 8,881,296 | 33 | % | $ | 9,123,692 | 34 | % | (1 | %) | $ | 4,587 | 100 | % | $ | 8,881,296 | 33 | % | 67% | ||||||||||||||||||||
Total Gross Profit | $ | 20,600,247 | 43 | % | $ | 18,405,512 | 39 | % | 4 | % | $ | 4,587 | 100 | % | $ | 20,600,247 | 43 | % | 57% |
Bromine segment
For the three-month period ended June 30, 2017,2018, the gross profit margin for our bromine segment was 57% compared to 50% for the same period in 2016. This 7% increase is mainly0% due to the decreaseclosure of all of our plant and factories to perform rectification and improvements since September 1, 2017. As a result, there was no bromine in inventory for sale for the purchase price of raw material.three-month period ended June 30, 2018.
Crude salt segment
For the three-month period ended June 30, 20172018, the gross profit margin for our crude salt segment was 47% compared to 6% for the same period in 2016. This 41% increase is mainly0% due to the increased average selling price and the decrease in depreciation and amortizationclosure of manufacturingall of our plant and machinery as mentioned in cost of net revenue offactories to perform rectification and improvements since September 1, 2017. As a result, there were limited crude salt.salt products for sale for the three-month period ended June 30, 2018.
Chemical products segment
TheFor the three-month period ended June 30, 2018, the gross profit margin for our chemical products segment was 100% because the goods sold was raw materials in which we had recorded a 100% allowance for obsolescence in the three-month period ended June 30, 2017 was 33% compared to 34% for the same period in 2016.fiscal year 2017.
Research and Development Costs . The total research and development costs incurred for the three-month period ended June 30, 2018 and 2017 were $0 and 2016 were $65,274, and $70,378, respectively, a decrease of 7%100%. Due to the closure of our chemical factories since September 1, 2017, there were no research and development costs incurred for the three-month period ended June 30, 2018. Research and development costs for the three-month period ended June 30, 2017 represented raw materials used by SYCI for testing the manufacturing routine. Research
Direct labor and developmentfactory overheads incurred during plant shutdown On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang City of PRC that production at all its factories 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. As such, direct labor and factory overhead costs (including depreciation of plant and machinery) of a total amount of $5,689,486 incurred for the three-month period endedend June 30, 2016 represented raw materials used by SYCI2018 which would have been presented in the cost of net revenue were presented as part of the operating expense. The Company did not lay off any workers during the shutdown period and SCRC for testingcontinued to depreciate the manufacturing routine.plant and machinery as it intends to use these plant and machinery when the factories resume production.
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General and Administrative Expenses. General and administrative expenses were $2,056,943$1,125,683 for the three-month period ended June 30, 2017, an increase2018, a decrease of $1,047,061$931,260 (or 104%45%) as compared to $1,009,882$2,056,943 for the same period in 2016.2017. This increasedecrease in general and administrative expenses was primarily due to the unrealized exchange lossgain in relation to the translation difference of inter-company balances in USDRMB and RMBUSD for the three-month period ended June 30, 20172018 amounted to $466,655,$1,403,938, as compared to the unrealized exchange gainloss for the same period in 20162017 amounted to $679,196.$466,655, which offset by the increased property tax and land use right tax in the amount of $909,262 due to the increased tax rate by the government.
Other Operating Income Other operating income, which represented the sales of wastewater to some of our customers, was $105,055$0 for the three-month period ended June 30, 2017, representing a decrease of $5,184 (or 5%) from $110,239 for the same period in 2016. Wastewater is generated from the production of bromine and eventually becomes crude salt when it evaporates. Not all of our bromine production plants have sufficient area on the property to allow for evaporation of wastewater to produce crude salt. Certain of our customers who have facilities located adjacent to our bromine production plants have agreed to allow us to channel our wastewater into brine pans on their properties for evaporation. These customers then are able to sell the resulting crude salt themselves. We signed agreements with four of our customers to sell them our wastewater at market prices.
Income from Operations Income from operations was $18,482,472 for the three-month period ended June 30, 2017 (or 39% of net revenue), an increase of $1,151,350, or approximately 7%, over income from operations for the same period in 2016.
Income /loss from Operations by Segment | ||||||||||||
Three-Month Period Ended June 30, 2017 | Three-Month Period Ended June 30, 2016 | |||||||||||
Segment: | % of total | % of total | ||||||||||
Bromine | $ | 9,740,981 | 51% | $ | 8,199,652 | 49% | ||||||
Crude Salt | 1,051,202 | 5% | (10,099 | ) | - | |||||||
Chemical Products | 8,318,480 | 44% | 8,531,677 | 51% | ||||||||
Natural Gas | (33,529 | ) | - | (25 | ) | - | ||||||
Income from operations before corporate costs | 19,077,134 | 100% | 16,721,205 | 100% | ||||||||
Corporate costs | (128,007 | ) | (69,279 | ) | ||||||||
Unrealized(loss)/gain on translation of Intercompany balance | (466,655 | ) | 679,196 | |||||||||
Income from operations | $ | 18,482,472 | $ | 17,331,122 |
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Bromine segment
Income from operations from our bromine segment was $9,740,981 for the three-month period ended June 30, 2017, an increase of $1,541,329 (or approximately 19%)2018, as compared to the same period in 2016. This increase resulted primarily from the decrease in the purchase price of raw material.
Crude salt segment
Income from operations from our crude salt segment was $1,051,202 for the three-month period ended June 30, 2017. Loss from operations from our crude salt segment was $10,099 for the three-month period ended June 30, 2016. This increase resulted primarily from the increased average selling price and the decrease in depreciation and amortization of manufacturing plant and machinery as mentioned in cost of net revenue of crude salt.
Chemical products segment
Income from operations from our chemical products segment was $8,318,480 for the three-month period ended June 30, 2017, a decrease of $213,197 (or approximately 2%) compared to the same period in 2016.
Other Income, Net Other income, net of $90,656 represented bank interest income, net of capital lease interest expense for the three -month period ended June 30, 2017, an increase of $14,337 (or approximately 19%) as compared to the same period in 2016.
Net Income Net income was $13,751,678 for the three-month period ended June 30, 2017, an increase of $554,659 (or approximately 4%) compared to the same period in 2016. This significant increase was primarily attributable to the decrease in the purchase price of raw material of bromine segment and the decrease in depreciation and amortization of manufacturing plant and machinery, which offset by the increased general and administrative expenses.
Effective Tax Rate Our effective tax rate for the three-month period ended June 30, 2017 and 2016 were 26% and 24% respectively. The effective tax rate for the three-month period ended June 30, 2017 was 1% higher than the PRC statutory income tax rate of 25% mainly due to non-deductible expense in connection with the unrealized exchange loss for the Company. The effective tax rate for the three-month period ended June 30, 2016 was 1% lower than the PRC statutory income tax rate of 25% mainly due to non-deductible expense in connection with the unrealized exchange gain for the Company.
Comparison of the Six-Month Period Ended June 30, 2017 and 2016
Six-Month Period Ended June 30, 2017 | Six-Month Period Ended June 30, 2016 | Percent Change Increase/ (Decrease) | |||||||||
Net revenue | $ | 80,320,482 | $ | 82,096,217 | (2 | %) | |||||
Cost of net revenue | $ | (47,145,605 | ) | $ | (53,076,901 | ) | (11 | %) | |||
Gross profit | $ | 33,174,877 | $ | 29,019,316 | 14 | % | |||||
Sales, marketing and other operating expenses | $ | (176,446 | ) | $ | (186,270 | ) | (5 | %) | |||
Research and development costs | $ | (127,172 | ) | $ | (130,215 | ) | (2 | %) | |||
General and administrative expenses | $ | (3,785,403 | ) | $ | (2,925,912 | ) | 29 | % | |||
Other operating income | $ | 209,613 | $ | 220,521 | (5 | %) | |||||
Income from operations | $ | 29,295,469 | $ | 25,997,440 | 13 | % | |||||
Other income | $ | 174,605 | $ | 144,636 | 21 | % | |||||
Income before taxes | $ | 29,470,074 | $ | 26,142,076 | 13 | % | |||||
Income taxes | $ | (7,643,276 | ) | $ | (6,478,093 | ) | 18 | % | |||
Net income | $ | 21,826,798 | $ | 19,663,983 | 11 | % |
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Net revenue. The table below shows the changes in net revenue in the respective segment of the Company for the six-month period ended June 30, 2017 compared to the same period in 2016:
Net Revenue by Segment | ||||||||||||||||||||
Six-Month Period Ended | Six-Month Period Ended | Percent Increase /(Decrease) | ||||||||||||||||||
June 30, 2017 | June 30, 2016 | of Net Revenue | ||||||||||||||||||
Segment | % of total | % of total | ||||||||||||||||||
Bromine | $ | 32,345,527 | 40 | % | $ | 31,650,133 | 39 | % | 2 | % | ||||||||||
Crude Salt | $ | 4,335,661 | 6 | % | $ | 4,072,296 | 5 | % | 6 | % | ||||||||||
Chemical Products | $ | 43,639,294 | 54 | % | $ | 46,373,788 | 56 | % | (6 | %) | ||||||||||
Total sales | $ | 80,320,482 | 100 | % | $ | 82,096,217 | 100 | % | (2 | %) |
Bromine and crude salt segments | Six-Month Period Ended | Percentage Change | ||||||||||
product sold in tonnes | June 30, 2017 | June 30, 2016 | Increase | |||||||||
Bromine (excluding volume sold to SYCI) | 8,008 | 8,041 | — | |||||||||
Crude Salt | 141,927 | 139,577 | 2 | % |
Six-Month Period Ended | Percentage Change | |||||||||||
Chemical products segment sold in tonnes | June 30, 2017 | June 30, 2016 | Increase/(Decrease) | |||||||||
Oil and gas exploration additives | 5,390 | 5,547 | (3 | %) | ||||||||
Paper manufacturing additives | 1,566 | 1,600 | (2 | %) | ||||||||
Pesticides manufacturing additives | 1,070 | 1,154 | (7 | %) | ||||||||
Pharmaceutical intermediate | 765 | 837 | (9 | %) | ||||||||
By product | 6,203 | 6,279 | (1 | %) | ||||||||
Overall | 14,994 | 15,417 | (3 | %) |
Bromine segment
The increase in net revenue from our bromine segment was mainly due to the increase in the average selling price of bromine. The average selling price of bromine increased from $3,936 per tonne for the six-month period ended June 30, 2016 to $4,039 per tonne for the same period in 2017, an increase of 3%.
The table below shows the changes in the average selling price and changes in the sales volume of bromine for the six-month period ended June 30, 2017 compared to the same period in 2016.
Six-Month Period Ended June 30, | ||||
Increase in net revenue of bromine as a result of: | 2017 vs. 2016 | |||
Increase in average selling price | $ | 826,343 | ||
Decrease in sales volume | $ | (130,949 | ) | |
Total effect on net revenue of bromine | $ | 695,394 |
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Crude salt segment
The increase in net revenue from our crude salt segment was due to the increase in both the sales volume and average selling price of crude salt. The sales volume of crude salt increased by 2% from 139,577 tonnes for the six-month period ended June 30, 2016 to 141,927 tonnes$105,055 for the same period in 2017. The average selling price of crude salt increased from $29.18 per tonne for the six-month period ended June 30, 2016 to $30.55 per tonne for the same period in 2017, an increase of 5%.
Six-Month Period Ended June 30, | ||||
Increase in net revenue of crude salt as a result of: | 2017 vs. 2016 | |||
Increase in average selling price | $ | 193,179 | ||
Increase in sales volume | $ | 70,186 | ||
Total effect on net revenue of crude salt | $ | 263,365 |
Chemical products segment
Product Mix of Chemical Products Segment | Percent | |||||||||||||||||||
Six-Month Period Ended | Six-Month Period Ended | Change of | ||||||||||||||||||
June 30, 2017 | June 30, 2016 | Net Revenue | ||||||||||||||||||
Chemical Products | % of total | % of total | ||||||||||||||||||
Oil and gas exploration additives | $ | 10,231,746 | 24 | % | $ | 10,763,392 | 23 | % | (5 | %) | ||||||||||
Paper manufacturing additives | $ | 1,757,331 | 4 | % | $ | 1,868,845 | 4 | % | (6 | %) | ||||||||||
Pesticides manufacturing additives | $ | 5,642,604 | 13 | % | $ | 6,052,512 | 13 | % | (7 | %) | ||||||||||
Pharmaceutical intermediates | $ | 18,404,910 | 42 | % | $ | 19,783,779 | 43 | % | (7 | %) | ||||||||||
By product | $ | 7,602,703 | 17 | % | $ | 7,905,260 | 17 | % | (4 | %) | ||||||||||
Total sales | $ | 43,639,294 | 100 | % | $ | 46,373,788 | 100 | % | (6 | %) |
Net revenue from our chemical products segment decreased from $46,373,788 for the six-month period ended June 30, 2016 to $43,639,294 for the same period in 2017, a decrease of approximately 6%. This decrease was primarily attributable to the decreased sales volume of all our chemical products. Net revenue from our oil and gas exploration chemicals contributed $10,231,746 (or 24%) and $10,763,392 (or 23%) of our chemical segment revenue for the six-month periods ended June 30, 2017 and 2016, respectively, with a decrease of $531,646, or 5%. Net revenue from our paper manufacturing additives decreased from $1,868,845 for the six-month period ended June 30, 2016 to $1,757,331 for the same period in 2017, a decrease of approximately 6%. Net revenue from our pesticides manufacturing additives decreased from $6,052,512 for the six-month period ended June 30, 2016 to $5,642,604 for the same period in 2017, a decrease of approximately 7%. Net revenue from our pharmaceutical intermediates decreased from $19,783,779 for the six-month period ended June 30, 2016 to $18,404,910 for the same period in 2017, a decrease of approximately 7%. Net revenue from our by products decreased from $7,905,260 for the six-month period ended June 30, 2016 to $7,602,703 for the same period in 2017, a decrease of approximately 4%.
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The table below shows the changes in the average selling price and changes in the sales volume of major chemical products of the chemical products segment for the six-month period ended June 30, 2017 from the same period in 2016.
Decrease in net revenue, for the six-month period ended June 30, 2017 vs. 2016, as a result of: | Oil and gas exploration additives | Paper manufacturing additives | Pesticides manufacturing additives | Pharmaceutical intermediates | By products | Total | ||||||||||||||||||
Increase/(Decrease) in average selling price | $ | (230,309 | ) | $ | (72,581 | ) | $ | 31,860 | $ | 338,159 | $ | (208,256 | ) | $ | (141,127 | ) | ||||||||
Decrease in sales volume | $ | (301,336 | ) | $ | (38,933 | ) | $ | (441,768 | ) | $ | (1,717,028 | ) | $ | (94,302 | ) | $ | (2,593,367 | ) | ||||||
Total effect on net revenue of chemical products | $ | (531,645 | ) | $ | (111,514 | ) | $ | (409,908 | ) | $ | (1,378,869 | ) | $ | (302,558 | ) | $ | (2,734,494 | ) |
Cost of Net Revenue
Cost of Net Revenue by Segment | % Change | |||||||||||||||||||
Six-Month Period Ended | Six-Month Period Ended | of Cost of | ||||||||||||||||||
June 30, 2017 | June 30, 2016 | Net Revenue | ||||||||||||||||||
Segment | % of total | % of total | ||||||||||||||||||
Bromine | $ | 15,682,880 | 33 | % | $ | 18,485,272 | 35 | % | (15 | %) | ||||||||||
Crude Salt | $ | 2,195,004 | 5 | % | $ | 3,620,848 | 7 | % | (39 | %) | ||||||||||
Chemical Products | $ | 29,267,721 | 62 | % | $ | 30,970,781 | 58 | % | (5 | %) | ||||||||||
Total | $ | 47,145,605 | 100 | % | $ | 53,076,901 | 100 | % | (11 | %) |
Costof net revenue reflects mainly the raw materials consumed and the direct salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery and other manufacturing costs. Our cost of net revenue was $47,145,605 for the six-month period ended June 30, 2017, a decrease of $5,931,296 (or 11%) as compared to the same period in 2016. The decrease in cost was mainly due to decrease in the purchase price of raw material for bromine segment and the decrease in depreciation and amortization of manufacturing plant and machinery mainly due to (i) some plant and equipment related to the crude salt and bromine facilities were fully depreciated in June 2016; and (ii) the demolition Factory No.6 in December 2016 for bromine and crude salt segment which partially offset by the increase in depreciation and amortization of manufacturing plant and machinery due to the enhancement projects carried out for our extraction wells and transmission channels and ducts which commenced in August 2016 and was completed in September 2016.
Bromine production capacity and utilization of our factories
The table below represents the annual capacity and utilization ratios for all of our bromine producing properties:
Annual Production Capacity (in tonnes) | Utilization Ratio (i) | |||||||
Six-month period ended June 30, 2016 | 47,347 | 39% | ||||||
Six-month period ended June 30, 2017 | 42,808 | 43% | ||||||
Variance of the six-month period ended June 30, 2017 and 2016 | (4,539 | ) | 4% |
Our utilization ratio increased by 4% for the six-month period ended June 30, 2017 as compared with the same period in 2016.
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Bromine segment
For the six-month period ended June 30, 2017, the cost of net revenue for the bromine segment was $15,682,880, a decrease of $2,802,392 or 15% over the same period in 2016. The major components of the costs of net revenue for the bromine segment were cost of raw materials and finished goods consumed of $3,492,536 (or 22%), depreciation and amortization of manufacturing plant and machinery of $7,606,175 (or 48%) and electricity of $1,358,795 (or 9%) for the six-month period ended June 30, 2017. For the six-month period ended June 30, 2016, the major components of the cost of net revenue were the cost of raw materials and finished goods consumed of $6,304,653 (or 34%), depreciation and amortization of manufacturing plant and machinery of $8,276,572 (or 45%) and electricity of $1,444,784 (or 8%). The cost structure changed where the proportion of cost of raw materials and finished goods consumed over the total cost of net revenue decreased by 12% and depreciation and amortization of manufacturing plant and machinery in relation to the total cost of net revenue increased by 3% in the six-month period ended June 30, 2017 compared to the same period in 2016. The decrease in cost was mainly due to decrease in the purchase price of raw material for bromine segment and the decrease in depreciation and amortization of manufacturing plant and machinery mainly due to (i)some plant and equipment related to the crude salt and bromine facilities were fully depreciated in June 2016; and (ii) the demolition Factory No.6 in December 2016 for bromine and crude salt segment, which partially offset by the increase in depreciation and amortization of manufacturing plant and machinery due to the enhancement projects carried out for our extraction wells and transmission channels and ducts which commenced in August 2016 and was completed in September 2016.
The table below represents the major production cost component of bromine per tonne sold for the respective periods:
Per tonne production cost | Six-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||
component of bromine segment | June 30, 2017 | June 30, 2016 | % Change | |||||||||||||||||
% of total | % of total | |||||||||||||||||||
Raw materials | $ | 930 | 41 | % | $ | 1,176 | 47 | % | (21 | %) | ||||||||||
Depreciation and amortization | $ | 824 | 37 | % | $ | 902 | 36 | % | (9 | %) | ||||||||||
Electricity | $ | 147 | 7 | % | $ | 157 | 6 | % | (6 | %) | ||||||||||
Others | $ | 349 | 15 | % | $ | 268 | 11 | % | 30 | % | ||||||||||
Production cost of bromine per tonne sold | $ | 2,250 | 100 | % | $ | 2,503 | 100 | % | (10 | %) |
Our production cost of bromine per tonne sold was $2,250 for the six-month period ended June 30, 2017, a decrease of 10% (or $253) as compared to the same period in 2016.
Crude salt segment
For the six-month period ended June 30, 2017, the cost of net revenue for our crude salt segment was $2,195,004, representing a decrease of $1,425,844, or 39%, compared to $3,620,848 for the same period in 2016. The decrease in cost was mainly due to the decrease in depreciation and amortization of manufacturing plant and machinery mainly due to (i) some plant and equipment related to the crude salt and bromine facilities were fully depreciated in June 2016; and (ii) the demolition Factory No.6 in December 2016 for bromine and crude salt segment, which partially offset by the increase in depreciation and amortization of manufacturing plant and machinery due to the enhancement projects carried out for our extraction wells and transmission channels and ducts which commenced in August 2016 and completed in September 2016 .The significant cost components for the six-month period ended June 30, 2017 were depreciation and amortization of $1,191,644 (or 54%), resource taxes calculated based on crude salt sold of $433,566 (or 20%) and electricity of $177,061 (or 8%). The significant cost components for the six-month period ended June 30, 2016 were depreciation and amortization of $2,627,850 (or 73%), resource taxes calculated based on crude salt sold of $427,483 (or 12%) and electricity of $174,900 (or 5%).The table below represents the major production cost component of crude salt per ton sold for respective periods:
Per tonne production cost | Six-Month Period Ended | Six-Month Period Ended | ||||||||||||||||||
component of crude salt segment | June 30, 2017 | June 30, 2016 | % Change | |||||||||||||||||
% of total | % of total | |||||||||||||||||||
Depreciation and amortization | $ | 8.40 | 54 | % | $ | 18.83 | 73 | % | (55 | %) | ||||||||||
Resource tax | $ | 3.05 | 20 | % | $ | 3.06 | 12 | % | — | |||||||||||
Electricity | $ | 1.25 | 8 | % | $ | 1.25 | 5 | % | — | |||||||||||
Others | $ | 2.77 | 18 | % | $ | 2.80 | 10 | % | (1 | %) | ||||||||||
Production cost of crude salt per tonne sold | $ | 15.47 | 100 | % | $ | 25.94 | 100 | % | (40 | %) |
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Chemical products segment
Cost of net revenue for our chemical products segment for the six-month period ended June 30, 2017 was $29,267,721, representing a decrease of $1,703,060 or 5% over the same period in 2016. This decrease was primarily attributable to the decrease in volume of all our chemical products.
Gross Profit. Gross profit was $33,174,877, or 41%, of net revenue for six-month period ended June 30, 2017 compared to $29,019,316, or 35%, of net revenue for the same period in 2016.The increase in gross profit percentage was primarily attributable to an increase in the margin percentage of bromine and crude salt.
Gross Profit by Segment | % Point Change | |||||||||||||||||||
Six-Month Period Ended | Six-Month Period Ended | of Gross | ||||||||||||||||||
June 30, 2017 | June 30, 2016 | Profit Margin | ||||||||||||||||||
Segment | Gross Profit Margin | Gross Profit Margin | ||||||||||||||||||
Bromine | $ | 16,662,647 | 52 | % | $ | 13,164,861 | 42 | % | 10 | % | ||||||||||
Crude Salt | $ | 2,140,657 | 49 | % | $ | 451,448 | 11 | % | 38 | % | ||||||||||
Chemical Products | $ | 14,371,573 | 33 | % | $ | 15,403,007 | 33 | % | — | |||||||||||
Total Gross Profit | $ | 33,174,877 | 41 | % | $ | 29,019,316 | 35 | % | 6 | % |
Bromine segment
The gross profit margin for our bromine segment for the six-month period ended June 30, 2017 was 52% compared to 42% for the same period in 2016.This 10% increase was mainly due to decrease in the purchase price of raw material and the decrease in depreciation and amortization of manufacturing plant and machinery as mentioned in cost of net revenue of bromine.
Crude salt segment
For the six-month period ended June 30, 2017, the gross profit margin for our crude salt segment was 49% compared to 11% for the same period in 2016. This 38% increase was mainly due to the decrease in depreciation and amortization of manufacturing plant and machinery as mentioned in cost of net revenue of crude salt.
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Chemical products segment
The gross profit margin for our chemical products segment for the six-month period ended June 30, 2017 was 33% compared to 33% for the same period in 2016.
Research and Development Costs. For the six-month period ended June 30, 2017 and 2016, the total research and development costs incurred were $127,172 and $130,215, respectively, a decrease of 2%. Research and development costs for the six-month period ended June 30, 2017 represented raw materials used by SYCI for testing the manufacturing routine. Research and development costs for the six-month period ended June 30, 2016 represented raw materials used by SYCI and SCRC for testing the manufacturing routine.
General and Administrative Expenses. General and administrative expenses were $3,785,403 for the six-month period ended June 30, 2017, an increase of $859,491 (or 29%) as compared to $2,925,912 for the same period in 2016. This increase in general and administrative expenses was primarily due to the unrealized exchange loss in relation to the translation difference of inter-company balances in USD and RMB for the six-month period ended June 30, 2017 amounted to $603,910, as compared to the unrealized exchange gain for the same period in 2016 amounted to $548,734, which offset by the decreased property tax and land use right tax in the amount of $264,864 due to the demolition of factory No 6 by the government at the end of November 2016.
Other Operating Income Other operating income, which represented the sales of wastewater to some of our customers, was $209,613 for the six-month period ended June 30, 2017, representing a decrease of $10,908 (or 5%) from $220,521 for the same period in 2016.
Wastewater is generated from the production of bromine and eventually becomes crude salt when it evaporates. Not all of our bromine production plants have sufficient area on the property to allow for evaporation of wastewater to produce crude salt. Certain of our customers who have facilities located adjacent to our bromine production plants have agreed to channel our wastewater into brine pans on their properties for evaporation. These customers then are able to sell the resulting crude salt themselves. We signed agreements with four of our customers to sell them our wastewater at market prices. Due to the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017, there was no wastewater for sale for the three-month period ended June 30, 2018. We have no commitments under the agreement which terminated by February 28, 2018 for the minimum amount that we must sell.
Income (loss) from Operations Loss from operations was $6,831,607 for the three-month period ended June 30, 2018, compared to an income of $18,482,472 in the same period in 2017.
Income (loss) from Operations by Segment | ||||||||||||||||
Three-Month Period Ended June 30, 2018 | Three-Month Period Ended June 30, 2017 | |||||||||||||||
Segment: | % of total | % of total | ||||||||||||||
Bromine | $ | (5,577,272 | ) | 69 | % | $ | 9,740,981 | 51 | % | |||||||
Crude Salt | (1,731,592 | ) | 21 | % | 1,051,202 | 5 | % | |||||||||
Chemical Products | (727,595 | ) | 9 | % | 8,318,480 | 44 | % | |||||||||
Natural Gas | (45,295 | ) | 1 | % | (33,529 | ) | — | |||||||||
Income (loss) from operations before corporate costs | (8,081,754 | ) | 100 | % | 19,077,134 | 100 | % | |||||||||
Corporate costs | (153,791 | ) | (128,007 | ) | ||||||||||||
Unrealized(loss)/gain on translation of Intercompany balance | 1,403,938 | (466,655 | ) | |||||||||||||
Income (loss) from operations | $ | (6,831,607 | ) | $ | 18,482,472 |
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Bromine segment
Loss from operations from our bromine segment was $5,577,272 for the three-month period ended June 30, 2018, compared to an income of $9,740,981 in the same period in 2017. This decrease is due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017.The direct labor and factory overheads incurred during the plant shutdown were expensed in the three-month period ended June 30, 2018.
Crude salt segment
Loss from operations from our crude salt segment was $1,731,592 for the three-month period ended June 30, 2018, compared to an income of $1,051,202 in the same period in 2017. This decrease is due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. The direct labor and factory overheads incurred during plant shutdown were expensed in the three-month period ended June 30, 2018.
Chemical products segment
Loss from operations from our chemical products segment was $727,595 for the three-month period ended June 30, 2018, compared to an income of $8,318,480 in the same period in 2017. This decrease was attributable to the closure of our chemical factories since September 1, 2017. We are setting up a new factory in the Bohai Park. As a result, there were no chemical products, except for limited raw materials for sale for the three-month period ended June 30, 2018.
Other Income, Net Other income, net of $135,493 represented bank interest income, net of capital lease interest expense for the three -month period ended June 30, 2018, an increase of $44,837 (or approximately 49%) as compared to the same period in 2017.
Net Income (loss) Net loss was $4,812,873 for the three-month period ended June 30, 2018, compared to an net income of $13,751,678 in the same period in 2017. This decrease was attributable to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017, there are no bromine and chemical products in inventory, except for limited raw materials for selling for the three-month period ended June 30, 2018.
Effective Tax Rate Our effective tax rate for the three-month period ended June 30, 2018 and 2017 were 28% and 26% respectively. The effective tax rate for the three-month period ended June 30, 2018 was 3% higher than the PRC statutory income tax rate of 25% mainly due to non-taxable items, offset by non-deductible expense in connection with the unrealized exchange gain for the Company. The effective tax rate for the three-month period ended June 30, 2017 was 1% higher than the PRC statutory income tax rate of 25% mainly due to non-deductible expense in connection with the unrealized exchange loss for the Company.
Comparison of the Six-Month Period Ended June 30, 2018 and 2017
Six-Month Period Ended June 30, 2018 | Six-Month Period Ended June 30, 2017 | Percent Change Increase/ (Decrease) | |||||||||
Net revenue | $ | 2,251,861 | $ | 80,320,482 | (97%) | ||||||
Cost of net revenue | $ | (1,241,816 | ) | $ | (47,145,605 | ) | (97%) | ||||
Gross profit | $ | 1,010,045 | $ | 33,174,877 | (97%) | ||||||
Sales, marketing and other operating expenses | $ | (55,999 | ) | $ | (176,446 | ) | (68%) | ||||
Research and development costs | $ | — | $ | (127,172 | ) | (100%) | |||||
Direct labor and factory overheads incurred during plant shutdown | $ | (11,385,005 | ) | $ | — | — | |||||
General and administrative expenses | $ | (4,697,628 | ) | $ | (3,785,403 | ) | 24% | ||||
Other operating income | $ | — | $ | 209,613 | (100%) | ||||||
Income (loss)from operations | $ | (15,128,587 | ) | $ | 29,295,469 | (152%) | |||||
Other income | $ | 261,627 | $ | 174,605 | 50% | ||||||
Income (loss)before taxes | $ | (14,866,960 | ) | $ | 29,470,074 | (150%) | |||||
Income (taxes) benefit | $ | 3,076,987 | $ | (7,643,276 | ) | (140%) | |||||
Net income (loss) | $ | (11,789,973 | ) | $ | 21,826,798 | (154%) |
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IncomeNet revenue. The table below shows the changes in net revenue in the respective segment of the Company for the six-month period ended June 30, 2018 as compared to the same period in 2017:
Net Revenue by Segment | |||||||||||||||||||
Six-Month Period Ended | Six-Month Period Ended | Percent Decrease | |||||||||||||||||
June 30, 2018 | June 30, 2017 | of Net Revenue | |||||||||||||||||
Segment | % of total | % of total | |||||||||||||||||
Bromine | $ | — | — | $ | 32,345,527 | 40 | % | (100%) | |||||||||||
Crude Salt | $ | 1,638,493 | 73 | % | $ | 4,335,661 | 6 | % | (62%) | ||||||||||
Chemical Products | $ | 613,368 | 27 | % | $ | 43,639,294 | 54 | % | (99%) | ||||||||||
Total sales | $ | 2,251,861 | 100 | % | $ | 80,320,482 | 100 | % | (97%) |
Bromine and crude salt segments | Six-Month Period Ended | Percentage Change | |||||||||
product sold in tonnes | June 30, 2018 | June 30, 2017 | Decrease | ||||||||
Bromine (excluding volume sold to SYCI) | — | 8,008 | (100%) | ||||||||
Crude Salt | 41,580 | 141,927 | (71%) |
Six-Month Period Ended | Percentage Change | ||||||||||
Chemical products segment sold in tonnes | June 30, 2018 | June 30, 2017 | Decrease | ||||||||
Oil and gas exploration additives | — | 5,390 | (100%) | ||||||||
Paper manufacturing additives | — | 1,566 | (100%) | ||||||||
Pesticides manufacturing additives | 14 | 1,070 | (99%) | ||||||||
Pharmaceutical intermediate | — | 765 | (100%) | ||||||||
By product | 96 | 6,203 | (98%) | ||||||||
Overall | 110 | 14,994 | (99%) |
Bromine segment
For the six-month period ended June 30, 2018, the net revenue for the bromine segment was $0 due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. As a result, there was no bromine in inventory for sale for the six-month period ended June 30, 2018.
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Crude salt segment
The decrease in net revenue from Operations. Incomeour crude salt segment was due to the decrease in the sales volume of crude salt. The sales volume of crude salt decreased by 71% from operations was $29,295,469141,927 tonnes for the six-month period ended June 30, 2017 (or 36% of net revenue), an increase of $3,298,029, or approximately 13%, over income from operationsto 41,580 tonnes for the same period in 2016.
Income from Operations by Segment | ||||||||||||||||
Six-Month Period Ended June 30, 2017 | Six-Month Period Ended June 30, 2016 | |||||||||||||||
Segment: | % of total | % of total | ||||||||||||||
Bromine | $ | 15,012,915 | 50 | % | $ | 11,205,170 | 44 | % | ||||||||
Crude Salt | 1,937,089 | 6 | % | 217,514 | — | |||||||||||
Chemical Products | 13,264,657 | 44 | % | 14,255,408 | 56 | % | ||||||||||
Natural Gas | (57,287 | ) | — | (25 | ) | — | ||||||||||
Income from operations before corporate costs | 30,157,374 | 100 | % | 25,678,067 | 100 | % | ||||||||||
Corporate costs | (257,995 | ) | (229,361 | ) | ||||||||||||
Unrealized (loss)/gain on translation of intercompany balance | (603,910 | ) | 548,734 | |||||||||||||
Income from operations before taxes | $ | 29,295,469 | $ | 25,997,440 |
Bromine segment2018. This decrease was attributable to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. As a result, there was limited crude salt for sale for the six-month period ended June 30, 2018.
IncomeThe average selling price of crude salt increased by 29% from operations from our bromine segment was $15,012,915$30.55 per tonne for the six-month period ended June 30, 2017 an increase of $3,807,745 (or approximately 34%) compared to $39.41 per tonne for the same period in 2016. This was mainly due to decrease2018.
The table below shows the changes in the purchaseaverage selling price and changes in the sales volume of crude salt for six-month period ended June 30, 2018 from the same period in 2017.
Six-Month Period Ended June 30, | ||||
Decrease in net revenue of crude salt as a result of: | 2018 vs. 2017 | |||
Increase in average selling price | $ | 812,728 | ||
Decrease in sales volume | $ | (3,509,896 | ) | |
Total effect on net revenue of crude salt | $ | (2,697,168 | ) |
Chemical products segment
Product Mix of Chemical Products Segment | Percent | ||||||||||||||||||
Six-Month Period Ended | Six-Month Period Ended | Change of | |||||||||||||||||
June 30, 2018 | June 30, 2017 | Net Revenue | |||||||||||||||||
Chemical Products | % of total | % of total | |||||||||||||||||
Oil and gas exploration additives | $ | — | $ | 10,231,746 | 24 | % | (100%) | ||||||||||||
Paper manufacturing additives | $ | — | $ | 1,757,331 | 4 | % | (100%) | ||||||||||||
Pesticides manufacturing additives | $ | 98,200 | 16 | % | $ | 5,642,604 | 13 | % | (98%) | ||||||||||
Pharmaceutical intermediates | $ | — | — | $ | 18,404,910 | 42 | % | (100%) | |||||||||||
By product | $ | 154,666 | 25 | % | $ | 7,602,703 | 17 | % | (98%) | ||||||||||
Raw materials | $ | 360,502 | 59 | % | $ | — | — | — | |||||||||||
Total sales | $ | 613,368 | 100 | % | $ | 43,639,294 | 100 | % | (99%) |
Net revenue from our chemical products segment decreased from $43,639,294 for the six-month period ended June 30, 2017 to $613,368 for the same period in 2018, a decrease of approximately 99%. This decrease was attributable to the closure of our chemical factories since September 1, 2017. We are setting up a new factory in the Bohai Park. As a result there were limited chemical products for sale for the six-month period ended June 30, 2018 and no chemical product in inventory at the end of June 30, 2018. Net revenue from our pesticides manufacturing additives decreased from $5,642,604 for the six-month period ended June 30, 2017 to $98,200 for the same period in 2018, a decrease of approximately 98%. Net revenue from our byproducts decreased from $7,602,703 for the six-month period ended June 30, 2017 to $154,666 for the same period in 2018, a decrease of approximately 98%. Since we do not expect our new chemical factory to be fully operational until the beginning of 2020, we sold our raw materialmaterials in the amount of $360,502 for the six-month period ended June 30, 2018.
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Cost of Net Revenue
Cost of Net Revenue by Segment | % Change | ||||||||||||||||||
Six-Month Period Ended | Six-Month Period Ended | of Cost of | |||||||||||||||||
June 30, 2018 | June 30, 2017 | Net Revenue | |||||||||||||||||
Segment | % of total | % of total | |||||||||||||||||
Bromine | $ | — | — | $ | 15,682,880 | 33 | % | (100%) | |||||||||||
Crude Salt | $ | 697,488 | 56 | % | $ | 2,195,004 | 5 | % | (68%) | ||||||||||
Chemical Products | $ | 544,328 | 44 | % | $ | 29,267,721 | 62 | % | (98%) | ||||||||||
Total | $ | 1,241,816 | 100 | % | $ | 47,145,605 | 100 | % | (97%) |
Costof net revenue reflects mainly the raw materials consumed and the decreasedirect salaries and benefits of staff engaged in the production process, electricity, depreciation and amortization of manufacturing plant and machinery as mentioned inand other manufacturing costs. Our cost of net revenue was $1,241,816 for the six-month period ended June 30, 2018, a decrease of bromine.$45,903,789 (or 97%) as compared to the same period in 2017.
Bromine production capacity and utilization of our factories
The table below represents the annual capacity and utilization ratios for all of our bromine producing properties:
Annual Production Capacity (in tonnes) | Utilization Ratio (i) | |||||||||
Six-month period ended June 30, 2017 | 42,808 | 43 | % | |||||||
Six-month period ended June 30, 2018 | 42,808 | — | ||||||||
Variance of the six-month period ended June 30, 2018 and 2017 | — | (43 | %) |
(i) | Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes. |
Our utilization ratio was 0% for the six-month period ended June 30, 2018 was due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017.
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Bromine segment
For the six-month period ended June 30, 2018, the cost of net revenue for the bromine segment was $0 due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. As a result, there was no bromine in inventory for sale for the six-month period ended June 30, 2018.
Crude salt segment
The cost of net revenue for our crude salt segment for the six-month period ended June 30, 2018 was $697,488, representing a decrease of $1,497,516, or 68%, compared to $2,195,004 for the same period in 2017. This decrease was attributable to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017. As a result, there was limited crude salt for sale for the six-month period ended June 30, 2018.
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Chemical products segment
Cost of net revenue for our chemical products segment for the six-month period ended June 30, 2018 was $544,328, representing a decrease of $28,723,393 or 98% over the same period in 2017. This decrease was attributable to the sale of lower margin raw material items as the chemical factories were closed in September 2017 for relocation and is not expected to resume operations until early 2020.
Gross Profit. Gross profit was $1,010,045, or 45%, of net revenue for six-month period ended June 30, 2018 compared to $33,174,877, or 41%, of net revenue for the same period in 2017.
Gross Profit by Segment | % Point Change | ||||||||||||||||||
Six-Month Period Ended | Six-Month Period Ended | of Gross | |||||||||||||||||
June 30, 2018 | June 30, 2017 | Profit Margin | |||||||||||||||||
Segment | Gross Profit Margin | Gross Profit Margin | |||||||||||||||||
Bromine | $ | — | — | $ | 16,662,647 | 52 | % | (52%) | |||||||||||
Crude Salt | $ | 941,005 | 57 | % | $ | 2,140,657 | 49 | % | 8% | ||||||||||
Chemical Products | $ | 69,040 | 11 | % | $ | 14,371,573 | 33 | % | (22%) | ||||||||||
Total Gross Profit | $ | 1,010,045 | 45 | % | $ | 33,174,877 | 41 | % | 4% |
Bromine segment
For the six-month period ended June 30, 2018, the gross profit margin for our bromine segment was 0% due to the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017. As a result, there was no bromine in inventory for sale for the six-month period ended June 30, 2018.
Crude salt segment
For the six-month period ended June 30, 2018 the gross profit margin for our crude salt segment was 57%, as compared to of 49% for the same period in 2018. This 8% increase is mainly due to the increased average selling price.
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Chemical products segment
For the six-month period ended June 30, 2018, the gross profit margin for our chemical segment was 11% because the goods sold was raw materials in which we had recorded a 100% allowance for obsolescence in the fiscal year 2017.
Research and Development Costs. The total research and development costs incurred for the six-month period ended June 30, 2018 and 2017 were $0 and $127,172, respectively, a decrease of 100%. Due to the closure of our chemical factories since September 1, 2017, there were no research and development costs incurred for the six-month period ended June 30, 2018. Research and development costs for the six-month period ended June 30, 2017 represented raw materials used by SYCI for testing the manufacturing routine.
Direct labor and factory overheads incurred during plant shutdown On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang City of PRC that production at all its factories 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. As such, direct labor and factory overhead costs (including depreciation of plant and machinery) of a total amount of $11,385,005 incurred for the six-month period end June 30, 2018 which would have been presented in the cost of net revenue were presented as part of the operating expense. The Company did not lay off any workers during the shutdown period and continued to depreciate the plant and machinery as it intends to use these plant and machinery when the factories resume production.
General and Administrative Expenses. General and administrative expenses were $4,697,628 for the six-month period ended June 30, 2018, an increase of $912,225 (or 24%) as compared to $3,785,403 for the same period in 2017. This increase in general and administrative expenses was primarily due to the increased property tax and land use right tax in the amount of $1,823,926 due to the increased tax rate by the government, which offset by the unrealized exchange gain in relation to the translation difference of inter-company balances in USD and RMB for the six-month period ended June 30, 2018 amounted to $345,086, as compared to the unrealized exchange loss for the same period in 2017 amounted to $603,910.
Other Operating Income Other operating income, which represented the sales of wastewater to some of our customers, was $0 for the six-month period ended June 30, 2018, as compared to $209,613 for the same period in 2017. Wastewater is generated from the production of bromine and eventually becomes crude salt when it evaporates. Not all of our bromine production plants have sufficient area on the property to allow for evaporation of wastewater to produce crude salt. Certain of our customers who have facilities located adjacent to our bromine production plants have agreed to channel our wastewater into brine pans on their properties for evaporation. These customers then are able to sell the resulting crude salt themselves. We signed agreements with four of our customers to sell them our wastewater at market prices. Due to the closure of all of our plant and factories to perform rectification and improvements since September 1, 2017, there was no wastewater for sale for the six-month period ended June 30, 2018. We have no commitments under the agreement which terminated on February 28, 2018 for the minimum amount that we must sell.
35
Income (Loss) from Operations. Loss from operations was $15,128,587 for the six-month period ended June 30, 2018, compared to an income of $29,295,469 in the same period in 2017..
Income(Loss) from Operations by Segment | ||||||||||||||||
Six-Month Period Ended June 30, 2018 | Six-Month Period Ended June 30, 2017 | |||||||||||||||
Segment: | % of total | % of total | ||||||||||||||
Bromine | $ | (11,167,828 | ) | 73 | % | $ | 15,012,915 | 50 | % | |||||||
Crude Salt | (2,539,475 | ) | 17 | % | 1,937,089 | 6 | % | |||||||||
Chemical Products | (1,402,366 | ) | 9 | % | 13,264,657 | 44 | % | |||||||||
Natural Gas | (80,950 | ) | 1 | % | (57,287 | ) | — | |||||||||
Income(loss)from operations before corporate costs | (15,190,619 | ) | 100 | % | 30,157,374 | 100 | % | |||||||||
Corporate costs | (283,054 | ) | (257,995 | ) | ||||||||||||
Unrealized (loss)/gain on translation of intercompany balance | 345,086 | (603,910 | ) | |||||||||||||
Income (loss) from operations before taxes | $ | (15,128,587 | ) | $ | 29,295,469 |
Bromine segment
Loss from operations from our bromine segment was $11,167,828 for the six-month period ended June 30, 2018, compared to an income of $15,012,915 in the same period in 2017. This decrease is due to the closure of all of our plant and factories to perform rectification and improvement since September 1, 2017.The direct labor and factory overheads incurred during the plant shutdown were expensed in the six-month period ended June 30, 2018.
Crude salt segment
Loss from operations from our crude salt segment was $1,937,089, an increase of $1,719,575 (or approximately 791%)$2,539,475 for the six-month period ended June 30, 2018, compared to an income of $1,937,089 in the same period in 2016.2017. This was mainlydecrease is due to the decrease in depreciation and amortizationclosure of manufacturingall of our plant and machinery as mentionedfactories to perform rectification and improvement since September 1, 2017. The direct labor and factory overheads incurred during plant shutdown were expensed in cost of net revenue of crude salt.the six-month period ended June 30, 2018.
Chemical products segment
IncomeLoss from operations from our chemical products segment was 13,264,657$1,402,366 for the six-month period ended June 30, 2017, a decrease2018, compared to an income of $990,751 (or approximately 7%) compared to$13,264,657 in the same period in 2016.2017. This decrease was primarily attributable to the decrease in sales volume of allclosure of our chemical products.factories since September 1, 2017. We are setting up a new factory in the Bohai Park. As a result, there were no chemical products, except for limited raw materials for sale for the six-month period ended June 30, 2018.
Other Income, Net. Other income, net of $174,605$261,627 represented bank interest income, net of capital lease interest expense for the six -month period ended June 30, 2017,2018, an increase of $29,969$87,022 (or approximately 21%50%) as compared to the same period in 2016.2017.
Net Income.Income (Loss). Net incomeloss was $21,826,798$11,789,973 for the six-month period ended June 30, 2017,2018, compared to an increasenet income of $2,162,815 (or approximately 11%) compared to$21,826,798 in the same period in 2016.2017. This significant increasedecrease was primarily attributable to decrease in the purchase priceclosure of raw material and the decrease in depreciation and amortizationall of manufacturingour plant and machinery as mentioned in cost of net revenue offactories to perform rectification and improvement since September 1, 2017, there are no bromine and crude salt, which offset bychemical products in inventory, except for limited raw materials for selling for the increased general and administrative expenses.six-month period ended June 30, 2018.
Effective Tax Rate. Our effective tax rate for the six-month period ended June 30, 2018 and 2017 was 21% and 201626%, respectively. The effective tax rate for the six-month period ended June 30, 2018 was 26% and4% lower than the PRC statutory income tax rate of 25%, respectively.due to non-deductible expense, offset by non-taxable items. The effective tax rate for the six-month period ended June 30, 2017 was 1% higher than the PRC statutory income tax rate of 25% mainly due to non-deductible expense in connection with the unrealized exchange loss for the Company. The effective tax rate of 25% for the six-month period ended June 30, 2016 consistent with the PRC statutory income tax rate.
36
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2017,2018, cash and cash equivalents were $176,303,274$215,975,864 as compared to $163,884,574$208,906,759 as of December 31, 2016.2017. The components of this increase of $12,418,700$7,069,105 are reflected below.
Statement of Cash Flows
Six-Month Period Ended June 30, | Six-Month Period Ended June 30, | |||||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Net cash provided by operating activities | $ | 9,503,332 | $ | 17,470,768 | $ | 21,392,313 | $ | 9,503,332 | ||||||||
Net cash used in investing activities | $ | (878,932 | ) | $ | (1,487,387 | ) | $ | (11,026,919 | ) | $ | (878,932 | ) | ||||
Net cash used in financing activities | $ | (273,873 | ) | $ | (287,387 | ) | $ | (294,295 | ) | $ | (273,873 | ) | ||||
Effects of exchange rate changes on cash and cash equivalents | $ | 4,068,173 | $ | (3,029,146 | ) | $ | (3,001,994 | ) | $ | 4,068,173 | ||||||
Net increase in cash and cash equivalents | $ | 12,418,700 | $ | 12,666,848 | $ | 7,069,105 | $ | 12,418,700 |
For the six-month period ended June 30, 2017,2018, we met our working capital and capital investment requirements mainly by using cash flow from operations and cash on hand.
Net Cash Provided by Operating Activities
During the six-month period ended June 30, 20172018 and 2016,2017, we had positive cash flow from operating activities of approximately $21.4 million and $9.5 million, respectively.
During the six-month period ended June 30, 2018, cash flow from operating activities of approximately $21.4 million, mainly due to (i) substantial non-cash charges in the amounts of approximately $6.5 million, mainly in the form of depreciation and $17.5amortization of property, plant and equipment; partially offset by deferred tax assets; and (ii)cash generated from working capital of approximately $26.7 million, respectively.which mainly consisted of the decrease in accounts receivable and inventories and an increase in taxes payable.
During the six-month period ended June 30, 2017, cash flow from operating activities of approximately $9.5 million was less than our net income of approximately $21.8 million, mainly due to (i) cash used in working capital of approximately $24.1 million, which mainly consisted of the increase in accounts receivable, partially offset by the increase in accounts payable and accrued expenses and tax payable; partially offset by (ii) substantial non-cash charges of approximately $11.7 million, mainly in the form of depreciation and amortization of property, plant and equipment;
During the six-month period ended June 30, 2016, cash flow from operating activities of approximately $17.5 million was less than our net income of approximately $19.7 million, mainly due to (i) cash used in working capital of approximately $15.5 million, which mainly consisted of the increase in accounts receivable, partially offset by the increase in accounts payable and accrued expenses and tax payable; partially offset by (ii) substantial non-cash charges of approximately $13.3 million, mainly in the form of depreciation and amortization of property, plant and equipment;equipment.
Accounts receivable
Cash collections on our accounts receivable had a major impact on our overall liquidity. The following table presents the aging analysis of our accounts receivable as of June 30, 20172018 and December 31, 2016.2017.
June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||
% of total | % of total | % of total | % of total | |||||||||||||||||||||||||||||
Aged 1-30 days | $ | 17,828,694 | 21 | % | $ | 10,300,739 | 20 | % | $ | — | — | $ | 1,955,296 | 7 | % | |||||||||||||||||
Aged 31-60 days | $ | 19,835,972 | 23 | % | $ | 11,074,573 | 21 | % | $ | — | — | $ | 1,284,013 | 4 | % | |||||||||||||||||
Aged 61-90 days | $ | 18,198,636 | 21 | % | $ | 10,577,810 | 21 | % | $ | — | — | $ | 692,781 | 2 | % | |||||||||||||||||
Aged 91-120 days | $ | 14,998,813 | 17 | % | $ | 7,919,209 | 15 | % | $ | — | — | $ | 2,675,960 | 9 | % | |||||||||||||||||
Aged 121-150 days | $ | 5,384,856 | 6 | % | $ | 6,924,979 | 13 | % | $ | — | — | $ | 8,783,405 | 30 | % | |||||||||||||||||
Aged 151-180 days | $ | 4,854,956 | 6 | % | $ | 5,037,908 | 10 | % | $ | 1,843,488 | 40 | % | $ | 5,079,545 | 17 | % | ||||||||||||||||
Aged 181-240 days | $ | 5,756,852 | 6 | % | $ | — | — | |||||||||||||||||||||||||
Aged 181-210 days | $ | 1,804,233 | 39 | % | $ | 5,983,997 | 20 | % | ||||||||||||||||||||||||
Aged 211-240 days | $ | 1,002,529 | 21 | % | $ | 3,310,887 | 11 | % | ||||||||||||||||||||||||
Total | $ | 86,858,779 | 100 | % | $ | 51,835,218 | 100 | % | $ | 4,650,250 | 100 | % | $ | 29,765,884 | 100 | % |
The overall accounts receivable balance as of June 30, 2017 increased2018 decreased by $35,023,561$25,115,634 (or 68%84%), as compared to those as of December 31, 2016. Such increase is mainly attributable to the extended settlement days by customers due to the macro-economic tightening policy imposed by PRC government to slow down the economy, which in turn lengthened the average turnover days of accounts receivable from 124 days for the fiscal year 2016 to 156 days for the six-month period ended June 30, 2017. In fiscal year 2016, a 90 to 180-day credit period was granted to customers with good payment history. To maintain the source of the Company’s business and in view of the strong cash flow position that the Company is in, management has extended credit terms to some customers up to 240 days in the six months ended June 30, 2017. Approximately 27%28% of the balances of accounts receivable as of June 30, 20172018 aged more than 90 days were settled inby July 2017.31, 2018. We have policies in place to ensure that sales are made to customers with an appropriate credit history. We perform ongoing credit evaluation on the financial condition of our customers. No allowance for doubtful debts for the six-month period ended June 30, 20172018 is required.
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Inventory
Our inventory consists of the following:
June 30, 2017 | December 31, 2016 | June 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||
% of total | % of total | % of total | % of total | |||||||||||||||||||||||||||||
Raw materials | $ | 617,048 | 13 | % | $ | 818,500 | 14 | % | $ | 14,414 | 8 | % | $ | 396,482 | 33 | % | ||||||||||||||||
Finished goods | $ | 3,421,363 | 71 | % | $ | 4,370,331 | 74 | % | $ | 166,680 | 92 | % | $ | 844,224 | 71 | % | ||||||||||||||||
Work-in-process | 804,153 | 16 | % | 692,850 | 12 | % | ||||||||||||||||||||||||||
$ | 4,842,564 | 100 | % | $ | 5,881,681 | 100 | % | $ | 181,094 | 100 | % | $ | 1,240,706 | 104 | % | |||||||||||||||||
Allowance for obsolete and slowing-moving inventory | $ | — | — | $ | — | — | $ | — | — | $ | (43,921 | ) | (4 | ) | ||||||||||||||||||
Total | $ | 4,842,564 | 100 | % | $ | 5,881,681 | 100 | % | $ | 181,094 | 100 | % | $ | 1,196,785 | 100 | % |
The net inventory level as of June 30, 20172018 decreased by $1,039,117$1,015,691 (or 18%85%), as compared to the net inventory level as of December 31, 2016.2017.
Raw materials decreased by 25%96% as of June 30, 20172018 as compared to December 31, 2016.2017. All of the raw materials are basic chemical industry materials, few of which have a possibility of loss over time, or major fluctuations in their prices. So, we concluded that all of our raw materials as of June 30, 20172018 are fully realizable for production of finished goods without any impairment. We sold raw materials in amount of $360,502 due to our chemical factory relocation for the six-month periods ended June 30, 2018.
Our finished goods consist of bromine, crude salt and chemical products. OurThere are no bromine and chemical products are similar to raw materials, as there is no loss over time and a relatively stable market price with a positive gross profit margin of 33% forin inventory at the six-month period ended June 30, 2017 (33% for the same period of 2016). Therefore, we believe that the realizationend of the chemical products is 100%. Similarly, as there is no depletionsecond quarter of bromine, we believe that the realization of it is also 100%. The gross profit margin for bromine for the six-month period ended June 30, 2017 increased to 52%, as compared with 42% in the same period in 2016, we anticipated that the price though 2017 will not fluctuate significantly to impair the cost of bromine.2018.
As of June 30, 2017,2018, the crude salt included in the inventory is approximately $1.45$0.2 million. The annual loss of crude salt due to evaporation is approximately 3%. The average selling price of crude salt per tonne increased from $28.69$30.55 for fiscal year 2017 to $39.41 for the first quarter of 2018. We did not sell our crude salt in the second quarter of 20162018. We expect to $31.03 forsell the second quarter of 2017. The gross profit also increased from 6% forremaining crude salt in the second quarter of 2016 to 47% for the same period in 2017.inventory by September 2018. We believe that there will be no realization problem for crude salt as we do not expect selling price to be lower than the current price. If the selling price continues to decrease, there will be an impact on our crude salt realization value.
Net Cash Used in Investing Activities
For the six-month period ended June 30, 2018, we used approximately $0.7 million cash for the prepayment of land leases. We also used approximately $10.33 million to perform the rectification and improvements of our bromine and crude salt factories, the relocation of our chemical factories for the six-month period ended June 30, 2018.
For the six-month period ended June 30, 2017, we used approximately $0.8 million cash for the prepayment of land leases. We also used approximately $0.06 million to acquire property, plant and equipment for the six-month period ended June 30, 2017.
For the six-month period ended June 30, 2016, we used approximately $0.6 million cash for the prepayment of land leases. For the six-month period ended June 30, 2016, we also used approximately $0.06 million to acquire property, plant and equipment and $0.81 million cash for the construction of roads and related infrastructure needed to begin operations in the remote and mountainous region of Daying county.
Net Cash Used in Financing Activities
We repaid approximately $0.3 million cash for our capital lease obligation for the six-month period ended June 30, 20172018 and 2016.2017.
We believe that our available funds and cash flows generated from operations will be sufficient to meet our anticipated ongoing operating needs for the next twelve (12) months.
Working capital was approximately $246.4$219.5 million at June 30, 20172018 as compared to approximately $207.8$237.8 million at December 31, 2016. The increase was mainly attributable to the cash provided by operating activities during the six-month period ended June 30, 2017.
We had available cash of approximately $176.3$216.0 million at June 30, 2017,2018, most of which is in highly liquid current deposits which earn no or little interest. We intend to retain the cash for the rectification and improvements of our bromine and crude salt factories, the relocation of our chemical factories (See note 1(b) in the notes to the consolidated financial statements), future expansion of our bromine and crude salt businesses through acquisition, enhancements to our existing bromine and crude salt business, and further development of the new resources in Sichuan Province. We do not anticipate paying cash dividends in the foreseeable future.
In the future we intend to focus our efforts on the activities of SCHC, SYCI and DCHC as these segments continue to expand within the Chinese market.
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We may not be able to identify, successfully integrate or profitably manage any businesses or business segment we may acquire, or any expansion of our business. An expansion may involve a number of risks, including possible adverse effects on our operating results, diversion of management’s attention, inability to retain key personnel, risks associated with unanticipated events and the financial statement effect of potential impairment of acquired intangible assets, any of which could have a materially adverse effect on our condition and results of operations. In addition, if competition for acquisition candidates or operations were to increase, the cost of acquiring businesses could increase materially. We may effect an acquisition with a target business which may be financially unstable, under-managed, or in its early stages of development or growth. Our inability to implement and manage our expansion strategy successfully may have a material adverse effect on our business and future prospects.
Contractual Obligations and Commitments
We have no significant contractual obligations not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. Additional information regarding our contractual obligations and commitments at June 30, 20172018 is provided in the notes to our consolidated financial statements. See “Notes to Condensed Consolidated Financial Statements, Note 17 – Capital Commitment and Operating Lease Commitments”.
Material Off-Balance Sheet Arrangements
We do not currently have any off balance sheet arrangements falling within the definition of Item 303(a) of Regulation S-K.
Critical Accounting Policies and Estimates
Our 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. We base its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions. We have identified the following critical accounting policies and estimates used by us in the preparation of our financial statements: accounts receivable and allowance for doubtful accounts, assets retirement obligation, property, plant and equipment, recoverability of long lived assets, mineral rights, revenue recognition, income taxes, and stock-based compensation. These policies and estimates are described in the Company’s 20162017 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q.
(b) Changes in internal controls
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during our most recently completed fiscal quarter which is the subject of this report, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
None.
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There have been no changes with respect to risk factors as previously disclosed in our 20162017 Form 10-K. Investing in our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and in our 20162017 Form 10-K, under the caption “Risk Factors”, our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this Quarterly Report on Form 10-Q, our consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes, as well as our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the other information in our 20162017 Form 10-K. Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the Securities and Exchange Commission.
Item 2. Unregistered SharesSale of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
Exhibit No. | Description
|
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following financial statements from Gulf Resources, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GULF RESOURCES, INC. | ||
Dated: August | By: | /s/ Xiaobin Liu |
Xiaobin Liu | ||
Chief Executive Officer | ||
(principal executive officer) | ||
Dated: August | By: | /s/ Min Li |
Min Li | ||
Chief Financial Officer | ||
(principal financial and accounting officer) |
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