NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Consolidation
The accompanying condensed financial statements have been prepared by Gulf Resources, Inc., a Nevada corporation and its subsidiaries (collectively, the “Company”), 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 nine months ended September 30, 2016 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 2015 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.
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”), Shouguang City Rongyuan Chemical Co, Ltd (“SCRC”) and Daying County Haoyuan Chemical Company Limited (“DCHC”). All material intercompany transactions have been eliminated on consolidation.
On September 2, 2016 the Company announced the planned merger of SYCI and SCRC. As of September 30, 2016, this merger has not yet been finalized. This merger has no material impact on the Company’s financial statements as of and for the three and nine months ended September 30, 2016.
(b) Nature of the Business
The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC"), manufactures chemical products for use in the oil industry, pesticides and paper manufacturing industry through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI"), and manufactures chemical products used for human and animal antibiotics through its wholly-owned subsidiary, Shouguang City Rongyuan Chemical Co, Ltd (“SCRC”) in the People’s Republic of China (“PRC”). DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt) in PRC. The DCHC business is not fully operational yet.
(c) Allowance for Doubtful Accounts
As of September 30, 2016 and December 31, 2015, allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2016 and 2015.
(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 $141,083,587 and $133,606,392 with these institutions as of September 30, 2016 and December 31, 2015, 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 there are generally short payment terms. The ordinary credit term ranges from 90 to 180 days. Approximately 65.9% and 73.3% of the balances of accounts receivable as of September 30, 2016 and December 31, 2015, respectively, are less than or equal to 90 days. Approximately 27% of the accounts receivable as of September 30, 2016 was collected in October 2016. Approximately 54% of the accounts receivable as of September 30, 2016 which is more than 90 days old were settled in October 2016.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives. All other ordinary repair and maintenance costs are expensed as incurred.
Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.
Construction in process primarily represents direct costs of construction of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.
The Company’s depreciation and amortization policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:
|
|
Useful life
(in years)
|
Buildings (including salt pans)
|
|
8 - 20
|
Plant and machinery (including protective shells, transmission channels and ducts)
|
|
3 - 8
|
Motor vehicles
|
|
5
|
Furniture, fixtures and equipment
|
|
3-8
|
Property, plant and equipment under the capital lease are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which is 20 years.
(f) Retirement Benefits
Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the condensed consolidated statement of income on an accrual basis when they are due. The Company’s contributions totaled $269,254 and $258,977 for the three-month period ended September 30, 2016 and 2015, respectively, and totaled $768,870 and $727,526 for the nine-month period ended September 30, 2016 and 2015, respectively.
(g) Revenue Recognition
The Company recognizes revenue, net of value-added tax, when persuasive evidence of an arrangement exists, delivery of the goods has occurred and customer acceptance has been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(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-month and nine-month periods ended September 30, 2016, certain property, plant and machinery, with net book values of $90,395 were replaced during the enhancement project to protective shells for transmission channels, write-offs of the same amounts, were made and included in write-off/impairment on property, plant and equipment.
For the three-month and nine-month periods ended September 30, 2015, certain property, plant and machinery, with net book values of $819,701 were replaced during the fourth phase enhancement project to protective shells for transmission channels and the enhancement work to bromine production facilities in Factory No.11, write-offs of the same amounts, were made and included in write-off/impairment on property, plant and equipment.
(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 outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive outstanding stock options had been exercised. Potentially dilutive outstanding stock options 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 are greater than the market price of the common stock. The number of anti-dilutive outstanding stock options which were excluded from the calculation of diluted earnings was 75,000 and 137,500 for the three-month period ended September 30, 2016 and 2015 respectively, and 136,875 and 125,000 for the nine-month period ended September 30, 2016 and 2015 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.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(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
September 30,
|
|
|
Nine-Month Period Ended
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2015
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,515,713
|
|
|
$
|
10,679,422
|
|
|
$
|
30,179,696
|
|
|
$
|
26,769,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: Weighted-average common shares outstanding during the period
|
|
|
46,301,217
|
|
|
|
46,007,120
|
|
|
|
46,106,194
|
|
|
|
44,884,268
|
|
Add: Dilutive effect of stock options
|
|
|
8,033
|
|
|
|
898,242
|
|
|
|
454,743
|
|
|
|
969,862
|
|
Diluted
|
|
|
46,309,250
|
|
|
|
46,905,362
|
|
|
|
46,560,937
|
|
|
|
45,854,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
|
$
|
0.23
|
|
|
$
|
0.65
|
|
|
$
|
0.60
|
|
Diluted
|
|
$
|
0.23
|
|
|
$
|
0.23
|
|
|
$
|
0.65
|
|
|
$
|
0.58
|
|
(j) Reporting Currency and Translation
The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).
As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive income. The statement of income and comprehensive income is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods as part of general and administrative expense. The statement of cash flows is translated at average rates during the reporting period, with the exception of issuance of shares and payment of dividends which are translated at historical rates.
(k) Foreign Operations
All of the Company’s operations and assets are located in PRC. The Company may be adversely affected by possible political or economic events in this country. The effect of these factors cannot be accurately predicted.
(l) Exploration Costs
Exploration costs, which included the cost of researching for appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other resources, are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs are capitalized.
(m) Goodwill
Goodwill represents the excess of the purchase price over the net of the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in business acquisitions. Management of the Company evaluates the carrying value of goodwill annually or when a possible impairment is indicated. The Company performs its impairment assessment annually and between annual tests in certain circumstances and determined that there was no impairment of goodwill. Goodwill impairment is assessed using the expected present value of associated future cash flows.
(n) New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory. The amendments in this Update require an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments in this Update are effective for fiscal years beginning after December 15, 2016. The amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. As of January 1, 2016, the Company adopted the amendments in this Update which has no material impact on the financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. As of January 1, 2016, the Company adopted the amendments in this Update which has no material impact on the financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
As of September 30, 2016, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements through 2017.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 2 – BUSINESS ACQUISITION
In order to increase the Company’s profit margins, produce more consistent and reliable earnings and lessen dependence on the economically sensitive bromine industry, on January 12, 2015, Gulf Resources, Inc. (the“Company” or “Gulf”) and Shouguang City Haoyuan Chemical Company Limited, a wholly owned subsidiary of the Company (“SCHC”), entered into an Equity Interest Transfer Agreement (the “Agreement”) to acquire 100% of Shouguang City Rongyuan Chemical Co., Ltd. (“SCRC”) for a total consideration of $79,678,746 to be settled in cash and in shares of common stock of the Company.
On February 4, 2015, the Company closed the transactions contemplated by the Agreement between the Company, SCHC and SCRC. The Closing Date is deemed to be the acquisition date.
On the Closing Date, the Company issued 7,268,011shares of its common stock, par value $0.0005 per share (the “Shares”), at the closing market price of $1.84 per Share on the Closing Date to the four former equity owners of SCRC. The sellers of SCRC agreed as part of the purchase price to accept 7,268,011 restricted shares of Gulf Resources stock, based on a valuation of $2.00, which was a 73% premium to the price on the day the agreement was reached. For accounting purposes, these shares are being valued at $1.84, which was the closing price of the Company’s stock on the Closing Date. There is no change in the number of shares issued. The total purchase consideration consisted of $66,305,606 in cash and $13,169,506 in the shares of the common stock of the Company.
The issuance of the Shares was exempt from registration pursuant to Regulation S of the Securities Act of 1933, as amended. On the Closing Date, the Company entered into a lock-up agreement with the four former equity owners of SCRC. In accordance with the terms of the lock-up agreement, the shareholders have agreed not to sell or transfer the Shares for five years from the date the stock certificates evidencing the Shares are issued.
The following table represents the fair value of identifiable assets and liabilities of SCRC acquired and goodwill recognized at acquisition date.
Cash
|
|
$
|
14,074,720
|
|
Accounts receivable
|
|
|
19,365,259
|
|
Inventories
|
|
|
1,646,196
|
|
Other current assets
|
|
|
82,562
|
|
Property, plant and equipment, net
|
|
|
17,891,360
|
|
Prepaid land leases, net of current portion
|
|
|
4,800,404
|
|
Goodwill
|
|
|
28,743,418
|
|
Accounts payable and accrued expenses
|
|
|
(8,670,568
|
)
|
Taxes payable
|
|
|
(963,458
|
)
|
Cumulative translation adjustment
|
|
|
2,708,853
|
|
Total purchase price
|
|
$
|
79,678,746
|
|
The net revenue and net income of SCRC since the acquisition date that are included in the consolidated statement of income for the fiscal year 2015 were $51,274,989 and $12,667,379. Goodwill is not expected to be deductible for tax purpose.
Costs of $121,512 related to the acquisition, which included audit fee and valuation fees, have been charged directly to operations and are included in general and administrative expenses in the consolidated statement of income for the fiscal year 2015.
The following table shows supplemental information of the actual results of operations for the nine months ended September 30, 2016 and on a pro forma basis for the nine months ended September 30, 2015, as if the acquisition of SCRC had been completed at the beginning of the Company’s interim periods presented:
|
|
For the nine months ended
|
|
|
|
September 30, 2016
|
|
|
September 30, 2015
|
|
|
|
Actual
|
|
|
Pro forma
|
|
Net Revenue
|
|
$
|
120,907,839
|
|
|
$
|
132,576,760
|
|
Net Income
|
|
$
|
30,179,696
|
|
|
$
|
28,239,987
|
|
EARNINGS PER SHARE
|
|
|
|
|
|
|
|
|
-Basic
|
|
$
|
0.65
|
|
|
$
|
0.61
|
|
-Diluted
|
|
$
|
0.65
|
|
|
$
|
0.60
|
|
The pro forma information presented has been calculated after adjusting for results of SCRC to reflect the business combination accounting effect resulting from this acquisition including the elimination of intercompany sales, depreciation and amortization on the increase in valuation of property, plant and equipment and prepaid land lease. There are no nonrecurring items included in the pro forma results of operations presented.
NOTE 3 – INVENTORIES
Inventories consist of:
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
879,085
|
|
|
$
|
1,014,917
|
|
Finished goods
|
|
|
4,161,087
|
|
|
|
5,486,970
|
|
Work-in-process
|
|
|
744,241
|
|
|
|
691,604
|
|
Allowance for obsolete and slow-moving inventory
|
|
|
(12,341
|
)
|
|
|
(12,691
|
)
|
|
|
$
|
5,772,072
|
|
|
$
|
7,180,800
|
|
NOTE 4 – PREPAID LAND LEASES
The Company prepaid its land leases with lease terms for periods ranging from one to fifty years to use the land on which the production facilities and warehouses of the Company are situated. The prepaid land lease is amortized on a straight line basis.
During the three-month period ended September 30, 2016 and 2015, amortization of prepaid land leases totaled $259,194 and $257,083, respectively, which amounts were recorded as cost of net revenue. During the nine-month period ended September 30, 2016 and 2015, amortization of prepaid land leases totaled $514,454 and $511,170, respectively, which amounts were recorded as cost of net revenue.
The Company has the rights to use certain parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships or the government authority. For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels of land that the Company cannot obtain land use rights certificates cover a total of approximately 59.43 square kilometers with an aggregate carrying value of $886,580 and approximately 59.43 square kilometers with an aggregate carrying value of $686,073 as at September 30, 2016 and December 31, 2015, respectively.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following:
|
|
September 30, 2016
|
|
December 31, 2015
|
At cost:
|
|
|
|
|
|
|
Mineral rights
|
|
$
|
5,962,024
|
|
|
$
|
6,131,230
|
|
Buildings
|
|
|
67,954,932
|
|
|
|
68,510,164
|
|
Plant and machinery
|
|
|
203,242,535
|
|
|
|
195,295,877
|
|
Motor vehicles
|
|
|
8,603
|
|
|
|
8,847
|
|
Furniture, fixtures and office equipment
|
|
|
4,730,368
|
|
|
|
4,864,619
|
|
Construction in process
|
|
|
172,925
|
|
|
|
57,596
|
|
Total
|
|
|
282,071,387
|
|
|
|
274,868,333
|
|
Less: Accumulated depreciation and amortization
|
|
|
(159,646,621
|
)
|
|
|
(146,997,010
|
)
|
Net book value
|
|
$
|
122,424,766
|
|
|
$
|
127,871,323
|
|
``````````````````````````````````````````````````````````````````
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 $39,389,001 and $42,526,151 as at September 30, 2016 and December 31, 2015, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET – Continued
During the three-month period ended September 30, 2016, depreciation and amortization expense totaled $5,435,740, of which $5,104,288 and $331,452 were recorded as cost of net revenue and administrative expenses, respectively. During the three-month period ended September 30, 2015, depreciation and amortization expense totaled $6,960,873, of which $6,592,218 and $368,655 were recorded as cost of net revenue and administrative expenses, respectively. During the nine-month period ended September 30, 2016, depreciation and amortization expense totaled $18,783,424, of which $17,765,477 and $1,017,948 were recorded as cost of sales and administrative expenses respectively. During the nine-month period ended September 30, 2015, depreciation and amortization expense totaled $21,690,038, of which $20,585,226 and $1,104,812 were recorded as cost of sales and administrative expenses respectively.
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET
Property, plant and equipment under capital leases, net consist of the following:
|
|
September 30, 2016
|
|
December 31, 2015
|
At cost:
|
|
|
|
|
|
|
Buildings
|
|
$
|
123,231
|
|
|
$
|
126,729
|
|
Plant and machinery
|
|
|
2,316,398
|
|
|
|
2,382,139
|
|
Total
|
|
|
2,439,629
|
|
|
|
2,508,868
|
|
Less: Accumulated depreciation and amortization
|
|
|
(1,782,380
|
)
|
|
|
(1,581,650
|
)
|
Net book value
|
|
$
|
657,249
|
|
|
$
|
927,218
|
|
The above buildings erected on parcels of land located in Shouguang, PRC, are collectively owned by local townships. The Company has not been able to obtain property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying parcels of land.
During the three-month period ended September 30, 2016 and 2015, depreciation and amortization expense totaled $81,618 and $86,970, respectively, which was recorded as cost of net revenue. During the nine-month period ended September 30, 2016 and 2015, depreciation and amortization expense totaled $248,226 and $264,474, respectively, which was recorded as cost of net revenue.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
|
|
September 30, 2016
|
|
December 31, 2015
|
Accounts payable
|
|
$
|
9,654,778
|
|
|
$
|
8,835,442
|
|
Salary payable
|
|
|
266,482
|
|
|
|
271,369
|
|
Social security insurance contribution payable
|
|
|
128,798
|
|
|
|
114,370
|
|
Other payables
|
|
|
442,137
|
|
|
|
708,519
|
|
Total
|
|
$
|
10,492,195
|
|
|
$
|
9,929,700
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 8 – RELATED PARTY TRANSACTIONS
During the three-month and nine-month periods ended September 30, 2016, the Company borrowed $200,000 and $655,369, respectively, from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, had a 100% equity interest in Jiaxing Lighting. The amounts due to Jiaxing Lighting were unsecured, interest free and repayable on demand and were fully settled in the three-month period ended September 30, 2016. There was no balance owing to Jiaxing Lighting as of September 30, 2016 and December 31, 2015.
During the fiscal year 2013, the Company entered into an agreement with the Shandong Shouguang Vegetable Seed Industry Group Co., Ltd, a related party, to provide property management services for an annual amount of approximately $100,704 for five years from January 1, 2013 to December 31, 2017. The expenses associated with this agreement for the three month period ended September 30, 2016 and 2015 were $23,401 and $24,936. The expense associated with this agreement for the nine month period ended September 30, 2016 and 2015 were $71,170 and $75,829.
NOTE 9 – TAXES PAYABLE
Taxes payable consists of the following:
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Income tax payable
|
|
$
|
3,549,990
|
|
|
$
|
2,400,400
|
|
Mineral resource compensation fee payable
|
|
|
358,910
|
|
|
|
255,984
|
|
Value added tax payable
|
|
|
1,092,008
|
|
|
|
1,030,664
|
|
Land use right tax payable
|
|
|
879,397
|
|
|
|
904,354
|
|
Other tax payables
|
|
|
219,166
|
|
|
|
222,601
|
|
Total
|
|
$
|
6,099,471
|
|
|
$
|
4,814,003
|
|
NOTE 10 – CAPITAL LEASE OBLIGATIONS
The components of capital lease obligations are as follows:
|
Imputed
|
|
September 30,
|
|
December 31,
|
|
Interest rate
|
|
2016
|
|
2015
|
Total capital lease obligations
|
6.7%
|
|
$
|
2,527,036
|
|
|
$
|
2,752,692
|
|
Less: Current portion
|
|
|
|
(153,310
|
)
|
|
|
(196,778
|
)
|
Capital lease obligations, net of current portion
|
|
|
$
|
2,373,726
|
|
|
$
|
2,555,914
|
|
Interest expenses from capital lease obligations amounted to $41,740 and $46,348 for the three-month period ended September 30, 2016 and 2015, respectively, which were charged to the condensed consolidated statement of income. Interest expenses from capital lease obligations amounted to $133,504 and $147,808 for the nine-month period ended September 30, 2016 and 2015, respectively, which were charged to the condensed consolidated statement of income.
NOTE 11 –EQUITY
During the annual general meeting held on June 18, 2013, the shareholders of the Company approved the amendment to the Certificate of Incorporation to decrease the number of the authorized shares of the Company’s common stock to 80,000,000. The Company has completed the filing of the amendment and restatement of the Certificate of Incorporation with the Secretary of the State of Delaware to decrease the number of authorized shares of the Company’s common stock. Accordingly, 80,000,000 is disclosed as the authorized shares of the Company’s common stock in the consolidated balance sheets as of September 30, 2016 and December 31, 2015.
(b)
|
Retained Earnings - Appropriated
|
In accordance with the relevant PRC regulations and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate a portion of its profit after tax to the following reserve:
Statutory Common Reserve Funds
SCHC, SYCI, SCRC 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 September 30, 2016 for SCHC, SYCI, SCRC and DCHC is 43%, 50%, 11% and 0% of its registered capital respectively.
NOTE 12 – TREASURY STOCK
In January 2015, the Company repurchased 31,000 shares of common stock of the Company at an average price of $1.22 per share for a total cost of $37,713 under the share repurchase plan that was approved by the Board of Directors. The Company recorded the entire purchase price of the treasury stock as a reduction of equity.
In July 2016, the Company issued 10,000 shares of common stock from the treasury shares to one of its consultants. The shares were valued at the closing market price on the date of the agreement and recorded as general and administrative expense in the condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2016. The shares issued were deducted from the treasury shares at weighted average cost and the excess of the cost over the closing market price was charged to additional paid-in-capital.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – STOCK-BASED COMPENSATION
Pursuant to the Company’s Amended and Restated 2007 Equity Incentive Plan approved in 2011(“Plan”), the aggregate number of shares of the Company’s common stock available for grant and issuance of stock options is 4,341,989 shares. On October 5, 2015, during the annual meeting of the Company’s stockholders, the aggregate number of shares reserved and available for grant and issuance pursuant to the Plan was increased to 10,341,989. As of September 30, 2016, the number of shares of the Company’s common stock available for issuance under the Plan is 7,368,489.
The fair value of each option award below is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted, volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical option exercise pattern.
In early March 2016, 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 $1.78 per share and the options vested immediately. The options were valued at $7,300 fair value, with assumed 65.69% volatility, a three-year expiration term with expected tenor of 1.33 years, a risk free rate of 0.71% and no dividend yield. For the three-month period ended March 31, 2016, $7,300 was recognized as general and administrative expenses.
On May 7, 2016, 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 $1.45 per share and the options vested immediately. The options were valued at $5,500 fair value, with assumed 66.40% volatility, a three-year expiration term with an expected tenor of 1.33 years, a risk free rate of 0.58% and no dividend yield. For the three-month period ended June 30, 2016, $5,500 was recognized as general and administrative expenses.
On July 1, 2016, 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 $1.54 per share and the options vested immediately. The options were valued at $4,600 fair value, with assumed 52.38% volatility, a three-year expiration term with expected tenor of 1.33 years, a risk free rate of 0.49% and no dividend yield. For the three-month period ended September 30, 2016, $4,600 was recognized as general and administrative expenses.
The following table summarizes all Company stock option transactions between January 1, 2016 and September 30, 2016.
|
|
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, 2016
|
|
|
2,399,000
|
|
|
$
|
1.39
|
|
|
$0.95 - $12.60
|
|
Granted and vested during the period
Ended September 30, 2016
|
|
|
37,500
|
|
|
$
|
1.59
|
|
|
$1.45-1.78
|
|
Exercised during the period ended
September 30, 2016
|
|
|
(1,831,500
|
)
|
|
$
|
1.11
|
|
|
$0.95-1.45
|
|
Expired during the period ended
September 30, 2016
|
|
|
(450,000
|
)
|
|
$
|
2.25
|
|
|
$0.95-12.60
|
|
Balance, September 30, 2016
|
|
|
155,000
|
|
|
$
|
2.21
|
|
|
$1.54 - $4.80
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 13 – STOCK-BASED COMPENSATION – Continued
|
|
Stock and Warrants Options Exercisable and Outstanding
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Outstanding at September 30, 2016
|
|
Range of
Exercise Prices
|
|
Contractual Life
(Years)
|
|
Exercisable and outstanding
|
|
155,000
|
|
$1.54 - $4.80
|
|
1.64
|
|
The aggregate intrinsic value of options outstanding and exercisable as of September 30, 2016 was $33,150.
The total intrinsic value of options exercised was $1,464,750 and $0 for the three months ended September 30, 2016 and 2015.
The total intrinsic value of options exercised was $1,479,042 and $236,535 for the nine months ended September 30, 2016 and 2015.
During the nine months ended September 30, 2016, 776,671 shares of common stock were issued upon cashless exercise of 1,831,500 options.
NOTE 14 – INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.
(a) United States
Gulf Resources, Inc. may be subject to the United States of America Tax law at a tax rate of 35%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the three-month and nine-month periods ended September 30, 2016 and 2015, and management believes that its earnings are permanently invested in the PRC.
(b) BVI
Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month and nine-month periods ended September 30, 2016 and 2015.
(c) Hong Kong
Hong Kong Jiaxing Industrial Limited, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong. No provision for profits tax has been made as the Company has no assessable income for the three-month and nine-month periods ended September 30, 2016 and 2015. The applicable statutory tax rates for the three-month and nine-month periods ended September 30, 2016 and 2015 are 16.5%. There is no dividend withholding tax in Hong Kong.
(d) PRC
Enterprise income tax (“EIT”) for SCHC, SYCI, SCRC and DCHC in the PRC is charged at 25% of the assessable profits.
The operating subsidiaries SCHC, SYCI, SCRC and DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Foreign Enterprise Income Tax Law.
On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.
As of September 30, 2016 and December 31, 2015, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC are $280,522,787 and $260,471,507, 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 September 30, 2016 and December 31, 2015, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises in China. As of September 30, 2016 and December 31, 2015, the unrecognized WHT are $13,006,205 and $11,974,695, respectively.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – INCOME TAXES – Continued
The Company’s tax returns are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s tax returns filed in the United States for three years from the date of filing. The Company’s US tax returns since 2012 are currently subject to examination. Inland Revenue Department of Hong Kong may examine the Company’s tax returns filed in Hong Kong for seven years from date of filing. The Company’s Hong Kong tax returns from year 2009 are currently subject to examination.
The components of the provision for income taxes from continuing operations are:
|
Three-Month Period
Ended September 30,
|
|
Nine-Month Period
Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Current taxes – PRC
|
|
$
|
3,518,529
|
|
|
$
|
3,290,372
|
|
|
$
|
9,996,622
|
|
|
$
|
9,086,618
|
|
Deferred taxes – PRC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(81,460
|
)
|
|
|
$
|
3,518,529
|
|
|
$
|
3,290,372
|
|
|
$
|
9,996,622
|
|
|
$
|
9,005,158
|
|
The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:
|
Three-Month Period
Ended September 30,
|
|
Nine-Month Period
Ended September 30,
|
Reconciliations
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Statutory income tax rate
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
Non-taxable item
|
|
-
|
|
|
|
(1
|
%)
|
|
|
-
|
|
|
|
(1
|
%)
|
|
Change in valuation allowance - US federal net operating loss
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
1
|
%
|
|
Effective tax rate
|
|
25
|
%
|
|
|
24
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
|
Significant components of the Company’s deferred tax assets and liabilities at September 30, 2016 and December 30, 2015 are as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for obsolete and slow-moving inventories
|
|
$
|
3,085
|
|
|
$
|
3,173
|
|
Impairment on property, plant and equipment
|
|
|
437,465
|
|
|
|
449,879
|
|
Exploration costs
|
|
|
1,864,387
|
|
|
|
1,917,301
|
|
Compensation costs of unexercised stock options
|
|
|
106,586
|
|
|
|
629,162
|
|
US federal net operating loss
|
|
|
11,485,000
|
|
|
|
10,835,000
|
|
Total deferred tax assets
|
|
|
13,896,523
|
|
|
|
13,834,515
|
|
Valuation allowance
|
|
|
(11,591,586
|
)
|
|
|
(11,464,162
|
)
|
Net deferred tax asset
|
|
$
|
2,304,937
|
|
|
$
|
2,370,353
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
-
|
|
|
$
|
3,173
|
|
Long-term deferred tax asset
|
|
$
|
2,304,937
|
|
|
$
|
2,367,180
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 14 – INCOME TAXES – Continued
The increase in valuation allowance for each of the three-month period ended September 30, 2016 and 2015 is $227,574 and $70,320, respectively.
The increase in valuation allowance for the nine-month period ended September 30, 2016 is $127,424.
The decrease in valuation allowance for the nine-month period ended September 30, 2015 is $484,075.
There were no unrecognized tax benefits and accrual for uncertain tax positions as of September 30, 2016 and December 31, 2015.
NOTE 15 – BUSINESS SEGMENTS
The Company has four reportable segments: bromine, crude salt, chemical products and natural gas. The reportable segments are consistent with how management views the markets served by the Company and the financial information that is reviewed by its chief operating decision maker.
An operating segment’s performance is primarily evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs and other income not associated with the operations of the segment. These corporate costs (income) are separately stated below and also include costs that are related to functional areas such as accounting, treasury, information technology, legal, human resources, and internal audit. The Company believes that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of its segments. All the customers are located in PRC.
Three-Month
Period Ended
September 30, 2016
|
|
Bromine*
|
|
|
Crude
Salt*
|
|
|
Chemical
Products
|
|
|
Natural Gas
|
|
|
Segment
Total
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
(external customers)
|
|
$
|
15,971,847
|
|
|
$
|
2,310,799
|
|
|
$
|
20,528,976
|
|
|
$
|
-
|
|
|
$
|
38,811,622
|
|
|
$
|
-
|
|
|
$
|
38,811,622
|
|
Net revenue
(intersegment)
|
|
|
2,008,397
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,008,397
|
|
|
|
-
|
|
|
|
2,008,397
|
|
Income from operations before taxes
|
|
|
7,898,302
|
|
|
|
(382,917
|
)
|
|
|
6,442,708
|
|
|
|
(2,476
|
)
|
|
|
13,955,617
|
|
|
|
583
|
|
|
|
13,956,200
|
|
Income taxes
|
|
|
1,974,576
|
|
|
|
(97,982
|
)
|
|
|
1,641,935
|
|
|
|
-
|
|
|
|
3,518,529
|
|
|
|
-
|
|
|
|
3,518,529
|
|
Income from operations after taxes
|
|
|
5,923,726
|
|
|
|
(284,935
|
)
|
|
|
4,800,773
|
|
|
|
(2,476
|
)
|
|
|
10,437,088
|
|
|
|
583
|
|
|
|
10,437,671
|
|
Total assets
|
|
|
150,950,225
|
|
|
|
32,757,666
|
|
|
|
192,128,326
|
|
|
|
1,687,960
|
|
|
|
377,524,177
|
|
|
|
183,416
|
|
|
|
377,707,593
|
|
Depreciation and amortization
|
|
|
3,121,243
|
|
|
|
1,315,140
|
|
|
|
1,080,975
|
|
|
|
-
|
|
|
|
5,517,358
|
|
|
|
-
|
|
|
|
5,517,358
|
|
Capital expenditures
|
|
|
12,890,713
|
|
|
|
2,336,309
|
|
|
|
-
|
|
|
|
651,295
|
|
|
|
15,878,317
|
|
|
|
-
|
|
|
|
15,878,317
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
28,743,418
|
|
|
|
-
|
|
|
|
28,743,418
|
|
|
|
-
|
|
|
|
28,743,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month
Period Ended
September 30, 2015
|
|
Bromine*
|
|
|
Crude
Salt*
|
|
|
Chemical
Products
|
|
|
Natural Gas
|
|
|
Segment
Total
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
(external customers)
|
|
$
|
14,940,666
|
|
|
$
|
3,032,201
|
|
|
$
|
24,628,731
|
|
|
$
|
-
|
|
|
$
|
42,601,598
|
|
|
$
|
-
|
|
|
$
|
42,601,598
|
|
Net revenue
(intersegment)
|
|
|
2,330,808
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,330,808
|
|
|
|
-
|
|
|
|
2,330,808
|
|
Income from operations before taxes
|
|
|
4,307,709
|
|
|
|
351,251
|
|
|
|
8,393,184
|
|
|
|
-
|
|
|
|
13,052,144
|
|
|
|
851,014
|
|
|
|
13,903,158
|
|
Income taxes
|
|
|
1,076,927
|
|
|
|
86,638
|
|
|
|
2,126,807
|
|
|
|
-
|
|
|
|
3,290,372
|
|
|
|
-
|
|
|
|
3,290,372
|
|
Income from operations after taxes
|
|
|
3,230,782
|
|
|
|
264,613
|
|
|
|
6,266,377
|
|
|
|
-
|
|
|
|
9,761,772
|
|
|
|
851,014
|
|
|
|
10,612,786
|
|
Total assets
|
|
|
142,874,828
|
|
|
|
42,858,017
|
|
|
|
181,468,875
|
|
|
|
-
|
|
|
|
367,201,720
|
|
|
|
38,165
|
|
|
|
367,239,885
|
|
Depreciation and amortization
|
|
|
3,961,290
|
|
|
|
1,680,827
|
|
|
|
1,405,726
|
|
|
|
-
|
|
|
|
7,047,843
|
|
|
|
-
|
|
|
|
7,047,843
|
|
Capital expenditures
|
|
|
2,365,417
|
|
|
|
427,283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,792,700
|
|
|
|
-
|
|
|
|
2,792,700
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
30,173,391
|
|
|
|
-
|
|
|
|
30,173,391
|
|
|
|
-
|
|
|
|
30,173,391
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 15 – BUSINESS SEGMENTS – Continued
Nine-Month
Period Ended
September 30, 2016
|
|
Bromine*
|
|
|
Crude
Salt*
|
|
|
Chemical
Products
|
|
|
Natural Gas
|
|
|
Segment
Total
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
(external customers)
|
|
$
|
47,621,980
|
|
|
$
|
6,383,095
|
|
|
$
|
66,902,764
|
|
|
$
|
-
|
|
|
$
|
120,907,839
|
|
|
$
|
-
|
|
|
$
|
120,907,839
|
|
Net revenue
(intersegment)
|
|
|
6,501,530
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,501,530
|
|
|
|
-
|
|
|
|
6,501,530
|
|
Income (loss) from operations before taxes
|
|
|
19,103,472
|
|
|
|
(165,403
|
)
|
|
|
20,698,116
|
|
|
|
(2,501
|
)
|
|
|
39,633,684
|
|
|
|
319,956
|
|
|
|
39,953,640
|
|
Income taxes
|
|
|
4,775,868
|
|
|
|
(46,369
|
)
|
|
|
5,267,123
|
|
|
|
-
|
|
|
|
9,996,622
|
|
|
|
-
|
|
|
|
9,996,622
|
|
Income (loss) from operations after taxes
|
|
|
14,327,604
|
|
|
|
(119,034
|
)
|
|
|
15,430,993
|
|
|
|
(2,501
|
)
|
|
|
29,637,062
|
|
|
|
319,956
|
|
|
|
29,957,018
|
|
Total assets
|
|
|
150,950,225
|
|
|
|
32,757,666
|
|
|
|
192,128,326
|
|
|
|
1,687,960
|
|
|
|
377,524,177
|
|
|
|
183,416
|
|
|
|
377,707,593
|
|
Depreciation and amortization
|
|
|
11,633,581
|
|
|
|
3,847,502
|
|
|
|
3,550,567
|
|
|
|
-
|
|
|
|
19,031,650
|
|
|
|
-
|
|
|
|
19,031,650
|
|
Capital expenditures
|
|
|
12,943,491
|
|
|
|
2,340,817
|
|
|
|
-
|
|
|
|
1,464,884
|
|
|
|
16,749,192
|
|
|
|
-
|
|
|
|
16,749,192
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
28,743,418
|
|
|
|
-
|
|
|
|
28,743,418
|
|
|
|
-
|
|
|
|
28,743,418
|
|
Nine-Month
Period Ended
September 30, 2015
|
|
Bromine*
|
|
|
Crude
Salt*
|
|
|
Chemical
Products
|
|
|
Natural Gas
|
|
|
Segment
Total
|
|
|
Corporate
|
|
|
Total
|
|
Net revenue
(external customers)
|
|
$
|
41,066,776
|
|
|
$
|
7,905,274
|
|
|
$
|
77,890,447
|
|
|
$
|
-
|
|
|
$
|
126,862,497
|
|
|
$
|
-
|
|
|
$
|
126,862,497
|
|
Net revenue
(intersegment)
|
|
|
6,355,047
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,355,047
|
|
|
|
-
|
|
|
|
6,355,047
|
|
Income (loss) from operations before taxes
|
|
|
8,950,595
|
|
|
|
534,760
|
|
|
|
26,205,578
|
|
|
|
-
|
|
|
|
35,690,933
|
|
|
|
(115,735
|
)
|
|
|
35,575,198
|
|
Income taxes
|
|
|
2,237,649
|
|
|
|
133,956
|
|
|
|
6,633,553
|
|
|
|
-
|
|
|
|
9,005,158
|
|
|
|
-
|
|
|
|
9,005,158
|
|
Income (loss) from operations after taxes
|
|
|
6,712,946
|
|
|
|
400,804
|
|
|
|
19,572,025
|
|
|
|
-
|
|
|
|
26,685,775
|
|
|
|
(115,735
|
)
|
|
|
26,570,040
|
|
Total assets
|
|
|
142,874,828
|
|
|
|
42,858,017
|
|
|
|
181,468,875
|
|
|
|
-
|
|
|
|
367,201,720
|
|
|
|
38,165
|
|
|
|
367,239,885
|
|
Depreciation and amortization
|
|
|
13,198,194
|
|
|
|
4,671,613
|
|
|
|
4,084,705
|
|
|
|
-
|
|
|
|
21,954,512
|
|
|
|
-
|
|
|
|
21,954,512
|
|
Capital expenditures
|
|
|
2,365,417
|
|
|
|
427,283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,792,700
|
|
|
|
-
|
|
|
|
2,792,700
|
|
Goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
30,173,391
|
|
|
|
-
|
|
|
|
30,173,391
|
|
|
|
-
|
|
|
|
30,173,391
|
|
* Common production overheads, operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were split by reference to the average selling price and production volume of respective segment.
|
|
Three-Month Period
Ended September 30,
|
|
|
Nine-Month Period
Ended September 30,
|
|
Reconciliations
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Total segment operating income
|
|
$
|
13,955,617
|
|
|
$
|
13,052,144
|
|
|
$
|
39,633,684
|
|
|
$
|
35,690,933
|
|
Corporate costs
|
|
|
(180,447
|
)
|
|
|
(210,707
|
)
|
|
|
(409,808
|
)
|
|
|
(1,153,164
|
)
|
Unrealized translation difference
|
|
|
181,030
|
|
|
|
1,061,721
|
|
|
|
729,764
|
|
|
|
1,037,429
|
|
Income from operations
|
|
|
13,956,200
|
|
|
|
13,903,158
|
|
|
|
39,953,640
|
|
|
|
35,575,198
|
|
Other income, net of expense
|
|
|
78,042
|
|
|
|
66,636
|
|
|
|
222,678
|
|
|
|
199,913
|
|
Income before taxes
|
|
$
|
14,034,242
|
|
|
$
|
13,969,794
|
|
|
$
|
40,176,318
|
|
|
$
|
35,775,111
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 15 – BUSINESS SEGMENTS – Continued
The following table shows the major customer(s) (10% or more) for the three-month period ended September 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
|
|
$
|
2,538
|
|
|
$
|
747
|
|
|
$
|
1,324
|
|
|
$
|
4,609
|
|
|
|
11.9%
|
|
The following table shows the major customer(s) (10% or more) for the nine-month period ended September 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
|
|
$
|
8,230
|
|
|
$
|
1,919
|
|
|
$
|
4,321
|
|
|
$
|
14,470
|
|
|
|
12.0%
|
|
The following table shows the major customer(s) (10% or more) for the three-month period ended September 30, 2015.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
|
Crude Salt
(000’s)
|
|
|
Chemical Products
(000’s)
|
|
|
Total
Revenue
(000’s)
|
|
|
Percentage of
Total Revenue (%)
|
|
1
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
2,059
|
|
|
$
|
852
|
|
|
$
|
2,085
|
|
|
$
|
4,996
|
|
|
|
11.7%
|
|
The following table shows the major customer(s) (10% or more) for the nine-month period ended September 30, 2015.
Number
|
|
Customer
|
|
Bromine
(000’s)
|
|
|
Crude Salt
(000’s)
|
|
|
Chemical Products
(000’s)
|
|
|
Total
Revenue
(000’s)
|
|
|
Percentage of
Total Revenue (%)
|
|
1
|
|
Shandong Morui Chemical Company Limited
|
|
$
|
6,130
|
|
|
$
|
2,047
|
|
|
$
|
5,769
|
|
|
$
|
13,946
|
|
|
|
11.0%
|
|
NOTE 16 – CUSTOMER CONCENTRATION
The Company sells a substantial portion of its products to a limited number of customers. During the three-month and nine-month periods ended September 30, 2016, the Company sold 34.6% and 34.3% of its products to its top five customers, respectively. As of September 30, 2016, amounts due from these customers were $31,621,828. During the three-month and nine-month periods ended September 30, 2015, the Company sold 32.7% and 31.6% of its products to its top five customers, respectively. As of September 30, 2015, amounts due from these customers were $27,417,737. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 17 – MAJOR SUPPLIERS
During the three-month and nine-month periods ended September 30, 2016, the Company purchased 56.2% and 55.2% of its raw materials from its top five suppliers, respectively. As of September 30, 2016, amounts due to those suppliers included in accounts payable were $4,104,237. During the three-month and nine-month periods ended September 30, 2015, the Company purchased 58.5% and 57.2% of its raw materials from its top five suppliers, respectively. As of September 30, 2015, amounts due to those suppliers included in accounts payable were $4,320,350. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.
NOTE 18 – 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 September 30, 2016 and December 31, 2015.
NOTE 19 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS
As of September 30, 2016, the Company leased real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment and the buildings located on the property, under
a
capital lease. The future minimum lease payments required under the capital lease, together with the present value of such payments, are included in the table show below.
The Company has leased ten parcels of land under non-cancelable operating leases, which are fixed rentals and expire through December 2021, December 2022, December 2023,December 2030, December 2031, December 2032, December 2040, February 2059, August 2059 and June 2060, respectively.
The following table sets forth the Company’s contractual obligations as of September 30, 2016:
|
|
Capital Lease Obligations
|
|
|
Operating Lease Obligations
|
|
|
Property Management Fees
|
|
|
Capital Expenditure
|
|
Payable within:
|
|
|
|
|
|
|
|
|
|
|
|
|
the next 12 months
|
|
$
|
281,081
|
|
|
$
|
948,380
|
|
|
$
|
93,424
|
|
|
$
|
267,154
|
|
the next 13 to 24 months
|
|
|
281,081
|
|
|
|
967,599
|
|
|
|
23,356
|
|
|
|
-
|
|
the next 25 to 36 months
|
|
|
281,081
|
|
|
|
990,595
|
|
|
|
-
|
|
|
|
-
|
|
the next 37 to 48 months
|
|
|
281,081
|
|
|
|
1,011,702
|
|
|
|
-
|
|
|
|
-
|
|
the next 49 to 60 months
|
|
|
281,081
|
|
|
|
1,036,821
|
|
|
|
-
|
|
|
|
-
|
|
thereafter
|
|
|
2,529,726
|
|
|
|
17,119,230
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
3,935,131
|
|
|
$
|
22,074,327
|
|
|
$
|
116,780
|
|
|
$
|
267,154
|
|
Less: Amount representing interest
|
|
|
(1,408,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
$
|
2,527,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GULF RESOURCES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Expressed in U.S. dollars)
(UNAUDITED)
NOTE 19 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS – Continued
Rental expenses related to operating leases of the Company amounted to $259,196 and $267,281, which were charged to the condensed consolidated statements of income for the three months ended September 30, 2016 and 2015, respectively. Rental expenses related to operating leases of the Company amounted to $783,820 and $810,983, which were charged to the income statements for the nine months ended September 30, 2016 and 2015, respectively.