10-Q/A 1 e618030_10qa-gulf.htm

 

 UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

(Amendment No. 1)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended March 31, 2018
   
  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. Yes x No o

 

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). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer o Accelerated filer o Emerging Growth Company o
Non-accelerated filer (Do not check if a smaller reporting company) x Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

 

As of May 1, 2018, the registrant had outstanding 46,803,791 shares of common stock.

 

 

 

 

Explanatory Note

 

This Amendment No. 1 on Form 10-Q/A is being filed to reflect the correction of an error in the previously reported quarterly financial statements for the period ended March 31, 2018 filed on May 10, 2018 related to the one-time mandatory federal transition tax on accumulated foreign earnings accrued in the fiscal year 2017. See Note 2 to the Consolidated Financial Statements included in item 1 for additional information and a reconciliation of the previously reported amounts to the restated amounts. Items that have not been amended have been omitted from this amendment. The Company is also concurrently filing previously issued financial statements to restate the error described above (i) Amendment No. 2 to the Annual Report for the fiscal year ended December 31, 2017 and (ii) Amendment No. 1 to the Quarterly Report for the six months ended June 30, 2018.

 

The following are the sections that are impacted by the correction of the error:

 

Part I, Item 1 – Financial Statement

 

Part I, Item 4 – Controls and Procedures

 

Part II, Item 6 - Exhibits

 

Table of Contents

 

Part I – Financial Information  
Item 1. Financial Statements 1
Item 4. Controls and Procedures 20
Part II – Other Information  
Item 6. Exhibits 21
Signatures 22

 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GULF RESOURCES, INC.
 AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)

 

   March 31, 2018
Unaudited
(Restated)
  December 31, 2017
Audited
Current Assets          
Cash  $236,720,969   $208,906,759 
Accounts receivable   10,246,518    29,765,884 
Inventories, net   193,801    1,196,785 
Prepayments and deposits   1,598,858    1,395,289 
Prepaid land leases   607,396    246,640 
Other receivable   2,149    2,089 
Total Current Assets   249,369,691    241,513,446 
Non-Current Assets          
Property, plant and equipment, net   94,051,877    95,114,504 
Property, plant and equipment under capital leases, net   484,860    492,238 
Prepaid land leases, net of current portion   14,919,014    14,477,771 
Deferred tax assets   7,989,879    6,526,555 
Goodwill   30,524,646    29,374,909 
Total non-current assets   147,970,276    145,985,977 
Total Assets  $397,339,967   $387,499,423 
           
Liabilities and Stockholders’ Equity          
Current Liabilities          
Accounts payable and accrued expenses  $991,221   $1,032,083 
Retention payable   993,782    956,351 
Capital lease obligation, current portion   254,829    203,206 
Taxes payable-current   1,771,954    1,041,592 
Total Current Liabilities   4,011,786    3,233,232 
Non-Current Liabilities          
Capital lease obligation, net of current portion   2,394,174    2,303,995 
Total Non-Current Liabilities   2,394,174    2,303,995 
Total Liabilities  $6,405,960   $5,537,227 
           
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; 47,052,940 shares issued and 46,803,791 shares outstanding as of March 31, 2018 and December 31, 2017, respectively   23,525    23,525 
Treasury stock; 249,149 shares as of March 31, 2018 and December 31, 2017 at cost   (554,870)   (554,870)
Additional paid-in capital   94,524,608    94,524,608 
Retained earnings unappropriated   248,595,331    255,572,431 
Retained earnings appropriated   24,233,544    24,233,544 
Accumulated other comprehensive income   24,111,869    8,162,958 
Total Stockholders’ Equity   390,934,007    381,962,196 
Total Liabilities and Stockholders’ Equity  $397,339,967   $387,499,423 

 

See accompanying notes to the condensed consolidated financial statements.

  

1 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Expressed in U.S. dollars)

(UNAUDITED)

 

   Three-Month Period Ended
March 31,
   2018  2017
       
NET REVENUE          
Net revenue  $2,247,267   $32,788,493 
           
OPERATING INCOME (EXPENSE)          
Cost of net revenue   (1,241,809)   (20,213,863)
Sales, marketing and other operating expenses   (34,974)   (75,833)
Research and development cost       (61,898)
Direct labor and factory overheads incurred during plant shutdown   (5,695,519)    
General and administrative expenses   (3,571,945)   (1,728,460)
Other operating income       104,558 
    (10,544,247)   (21,975,496)
           
INCOME/(LOSS) FROM OPERATIONS   (8,296,980)   10,812,997 
           
OTHER INCOME (EXPENSE)          
Interest expense   (43,344)   (41,911)
Interest income   169,478    125,860 
INCOME/(LOSS) BEFORE TAXES   (8,170,846)   10,896,946 
           
INCOME TAX (EXPENSE) BENEFIT   1,193,746    (2,821,826)
           
NET INCOME/(LOSS)  $(6,977,100)  $8,075,120 
           
COMPREHENSIVE INCOME:          
NET INCOME/(LOSS)  $(6,977,100)  $8,075,120 
OTHER COMPREHENSIVE INCOME          
- Foreign currency translation adjustments   15,948,911    2,037,272 
           
COMPREHENSIVE INCOME  $8,971,811   $10,112,392 
           
EARNINGS (LOSS) PER SHARE:          
BASIC  $(0.15)  $0.17 
DILUTED  $(0.15)  $0.17 
           
WEIGHTED AVERAGE NUMBER OF SHARES:          
           
BASIC   46,803,791    46,793,791 
DILUTED   46,826,388    46,804,241 

 

See accompanying notes to the condensed consolidated financial statements.

 

2 

 

GULF RESOURCES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
THREE-MONTH PERIOD ENDED MARCH 31, 2018
(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   income   Total
                            (Restated)           (Restated)
                                         
BALANCE AT DECEMBER 31, 2017 (Audited)     47,052,940       46,803,791       249,149     $ 23,525     $ (554,870 )   $ 94,524,608     $ 255,572,431       24,233,544     $ 8,162,958     $ 381,962,196  
Translation adjustment                                                       15,948,911       15,948,911  
Net loss for three-month period ended March 31, 2018                                         (6,977,100 )                 (6,977,100 )
Transfer to statutory common reserve fund                                                            
BALANCE AT MARCH 31, 2018 (Unaudited)(Restated)     47,052,940       46,803,791       249,149     $ 23,525     $ (554,870 )   $ 94,524,608     $ 248,595,331     $ 24,233,544     $ 24,111,869     $ 390,934,007  

  

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)

 

   Three-Month Period Ended March 31,
   2018  2017
       
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income/(loss)  $(6,977,100)  $8,075,120 
Adjustments to reconcile net income(loss) to net cash provided by operating activities:          
Interest on capital lease obligation   41,797    41,753 
Amortization of prepaid land leases   144,097    107,461 
Depreciation and amortization   4,757,530    5,439,098 
Unrealized exchange loss on translation of inter-company balances   1,058,852    137,255 
Deferred tax asset   (1,193,746)    
Stock-based compensation expense       9,000 
Changes in assets and liabilities          
Accounts receivable   20,442,483    (8,523,139)
Inventories   1,039,959    767,825 
Prepayments and deposits   (81,635)   (29,129)
Other receivables       (580)
Accounts payable and accrued expenses   (68,833)   1,641,677 
Retention payable       (736,894)
Taxes payable   735,426    1,493,322 
Net cash provided by operating activities   19,898,830    8,422,769 
           
CASH FLOWS USED IN INVESTING ACTIVITIES          
Additions of prepaid land leases   (367,143)   (324,743)
Purchase of property, plant and equipment   (121,710)   (59,975)
Net cash used in investing activities   (488,853)   (384,718)
           
EFFECTS OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS
   8,404,233    881,453 
NET INCREASE IN CASH AND CASH EQUIVALENTS   27,814,210    8,919,504 
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD   208,906,759    163,884,574 
CASH AND CASH EQUIVALENTS - END OF PERIOD  $236,720,969   $172,804,078 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid during the period for:          
Income taxes  $   $1,798,807 

 

See accompanying notes to the condensed consolidated financial statements.

 

4 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

(a)           Basis of Presentation and Consolidation

 

The accompanying condensed financial statements have been prepared by Gulf Resources, Inc (“Gulf Resources”) a Nevada corporation and its subsidiaries (collectively, the “Company”), without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of its financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“US GAAP”).

 

In the opinion of management, the unaudited financial information for the quarter ended March 31, 2018 presented reflects all adjustments, which are only normal and recurring, necessary for a fair statement of results of operations, financial position and cash flows. These condensed financial statements should be read in conjunction with the financial statements included in the Company’s  2017 Form 10-K/A (Amendment No. 2). Operating results for the interim periods are not necessarily indicative of operating results for an entire fiscal year.

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates. The Company also exercises judgments in the preparation of these condensed financial statements in the areas including classification of leases and related party transactions.


 

On September 2, 2016, the Company announced the planned merger of two of its 100% owned subsidiaries, Shouguan Yuxin Chemical Co., Limited (“SYCI”) and Shouguan Rongyuan Chemical Co., Ltd (“SCRC”). On March 24, 2017, the legal process of the merger was completed and SCRC was officially deregistered on March 28, 2017. The results of these two subsidiaries were reported as SYCI in the three months ended March 31, 2018.

 

The consolidated financial statements include the accounts of Gulf Resources, Inc. and its wholly-owned subsidiary, Upper Class Group Limited, a company incorporated in the British Virgin Islands, which owns 100% of Hong Kong Jiaxing Industrial Limited, a company incorporated in Hong Kong (“HKJI”). HKJI owns 100% of Shouguang City Haoyuan Chemical Company Limited ("SCHC") which owns 100% of Shouguang Yuxin Chemical Industry Co., Limited (“SYCI”) and Daying County Haoyuan Chemical Company Limited (“DCHC”).  All material intercompany transactions have been eliminated on consolidation.

 

(b)           Nature of the Business

 

The Company manufactures and trades bromine and crude salt through its wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited ("SCHC") and manufactures chemical products for use in the oil industry, pesticides, paper manufacturing industry and for human and animal antibiotics through its wholly-owned subsidiary, Shouguang Yuxin Chemical Industry Co., Limited ("SYCI") in the People’s Republic of China (“PRC”). DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt) in the PRC. DCHC’s business was not fully operational as of March 31, 2018.

 

On September 1, 2017, the Company received notification from the Government of Yangkou County, Shouguang City of PRC that production at all its factories should be halted with immediate effect in order for the Company to perform rectification and improvement in accordance with the county’s new safety and environmental protection requirements.

 

The Company has been working closely with the county authorities to develop rectification plans for both its bromine and crude salt businesses and had agreed on a plan in October 2017. SCHC is currently under rectification process. The Company believes this rectification and improvement process will cost approximately $35 million in total. The Company incurred rectification and improvements in the amount of $18,046,005 and $17,938,652 as of March 31, 2018 and December 31, 2017.

 

Originally, six bromine factories completed their rectification process and passed the inspection by local governments and were scheduled for production commencement by April 2018. Subsequently, the Provincial government required the local government to conduct “four rating and one comprehensive evaluation” for all of the chemical companies within its jurisdiction. This has delayed the production commencement schedule of the six factories.

 

The Company is currently actively working on the rectification of the remaining four factories. The Company expects to complete the rectification and improvements of the bromine and crude salt factories and be ready for the government inspection, rating and evaluation by June 2018, and will resume operation for those when they have approval from the government.

 

5 

 

Four of the remaining bromine and crude salt factories have a slightly more complex issue that needs to be resolved. All bromine factories now require paired crude salt pans to prevent the halogen water resulting from the production process from flowing into the sea. Four of these bromine factories do not have a designated crude salt pan where the wastewater could be channeled. The Company has four alternatives for these four factories which do not have paired crude salt pans: 1. It can form partnerships with adjacent bromine facilities that do have crude salt pans. The nature of these partnerships could take many forms. 2. The company could petition the government for a zoning change so that additional land for salt pans could be obtained. This might be difficult but is worth pursuing. 3. The Company could negotiate a different method of dealing with this issue. 4. Or these factories could conceivably be forced to close. At the present time, the Company is working with the government on these issues and did not reach the final solution yet.

 

On November 24, 2017, the Company received a letter from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants located in the second living area of the Qinghe Oil Extraction Plant to the Bohai Marine Fine Chemical Industrial Park (“Bohai Park”). This is because the two plants are located in a residential area and their production activities will impact the living environment of the residents. This is as a result of the country’s effort to improve the development of the chemical industry, manage safe production and curb environmental pollution accidents effectively, and ensure the quality of the living environment of residents. All chemical enterprises which do not comply with the requirements of the safety and environmental protection regulations will be ordered to shut down. The Company believes this relocation process will cost approximately $60 million in total. The Company incurred relocation cost in the amount of $9,732,118 as of March 31, 2018 and December 31, 2017 and estimated that the new factory will be fully operational by the beginning of 2020.

 

During the first quarter, the Company continued its related environmental and planning preparation work for the new factory. Since the Company has paid for the lease of a piece of land at the Bohai Park, it does not see any potential delay with the construction of the new factory. The Company has signed several contracts for the new factory (see subsequent event in Note 19).

 

As previously disclosed, during the course of drilling for more bromine and crude salt resources, the Company found natural gas resources under our bromine well in the Sichuan area. DCHC was established to further explore and develop natural gas and brine resources (including bromine and crude salt). On January 2017, the Company completed the first brine water and natural gas well field construction in Sichuan Province and announced the commencement of trial production. The Company has been working with Xinan Shiyou Daxue (Southwest Petroleum University) and developed a solution to DHCH’s technical drilling problem. In resolving the problem, the Company needs customized equipment. The customized equipment has been ordered and is now being manufactured. Once the equipment arrives, it will be installed and production will commence. While the Company hopes this will occur during the second quarter of 2018, the company has no control over the exact timing of the delivery of the equipment. It is possible the commencement of production might not occur until early in the third quarter in 2018.

 

(c)           Allowance for Doubtful Accounts

 

As of March 31, 2018 and December 31, 2017, allowances for doubtful accounts were nil. No allowances for doubtful accounts were charged to the condensed consolidated statements of income for the three-month periods ended March 31, 2018 and 2017.

 

(d)           Concentration of Credit Risk

 

The Company is exposed to credit risk in the normal course of business, primarily related to accounts receivable and cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents are maintained with financial institutions in the PRC, namely, Industrial and Commercial Bank of China Limited, China Merchants Bank Company Limited and Sichuan Rural Credit Union, which are not insured or otherwise protected. The Company placed $236,720,969 and $208,906,759 with these institutions as of March 31, 2018 and December 31, 2017, respectively.  The Company has not experienced any losses in such accounts in the PRC.

 

Concentrations of credit risk with respect to accounts receivable exists as the Company sells a substantial portion of its products to a limited number of customers. However, such concentrations of credit risks are limited since the Company performs ongoing credit evaluations of its customers’ financial condition. Approximately 24% and 13% of the balance of accounts receivable as of March 31, 2018 and December 31, 2017, respectively, are outstanding for less than three months. For the balances of accounts receivable aged more than 90 days as of March 31, 2018, approximately 41% were collected by April 30, 2018.

 

 The rate of collection in April 2018 for accounts receivable aged more than 90 days as of March 31, 2018 was analyzed as follows:

 

Accounts Receivable Aging Percent Collected
90-120 days 0%
121-150 days 12%
151-180 days 0%
181-210 days 16%
211-240 days 100%

 

6 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

(e)           Property, Plant and Equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs less 5% residual value over the estimated productive lives. All other ordinary repair and maintenance costs are expensed as incurred.

 

Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter.

 

Construction in process primarily represents direct costs of construction of plant, machinery and equipment. Costs incurred are capitalized and transferred to property and equipment upon completion, at which time depreciation commences.

 

The Company’s depreciation and amortization policies on property, plant and equipment, other than mineral rights and construction in process, are as follows:

 

   

Useful life

(in years)

Buildings (including salt pans)   8 - 20
Plant and machinery (including protective shells, transmission channels and ducts)   3 - 8
Motor vehicles   5
Furniture, fixtures and equipment   3-8

 

Property, plant and equipment under the capital lease are depreciated over their expected useful lives on the same basis as owned assets, or where shorter, the term of the lease, which is 20 years.

 

Producing oil and gas properties are depreciated on a unit-of-production basis over the proved developed reserves. Common facilities that are built specifically to service production directly attributed to designated oil and gas properties are depreciated based on the proved developed reserves of the respective oil and gas properties on a pro-rata basis. Common facilities that are not built specifically to service identified oil and gas properties are depreciated using the straight-line method over their estimated useful lives. Costs associated with significant development projects are not depreciated until commercial production commences and the reserves related to those costs are excluded from the calculation of depreciation.

 

(f)           Retirement Benefits

 

Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement plan at the applicable rate based on the employees’ salaries. The required contributions under the retirement plans are charged to the condensed consolidated statement of income on an accrual basis when they are due. The Company’s contributions totaled $302,418 and $255,216 for the three-month periods ended March 31, 2018 and 2017, respectively.

 

(g)           Revenue Recognition

 

Net revenue is net of discount and value added tax and comprises the sale of bromine, crude salt and chemical products. Revenue is recognized when the control of the promised goods is transferred to the customers in an amount that reflects the consideration that the Company expects to receive from the customers in exchange for those goods. The acknowledgement of receipt of goods by the customers is when control of the product is deemed to be transferred. Invoicing occurs upon acknowledgement of receipt of the goods by the customers. Customers have no rights to return the goods upon acknowledgement of receipt of goods.

 

(h)           Recoverability of Long-lived Assets

 

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360-10-35 “Impairment or Disposal of Long-lived Assets” , long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment.

 

7 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

 

(h)           Recoverability of Long-lived Assets – Continued

 

The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as the amount by which the carrying amount of the asset exceeds the discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. Asset impairment charges are recorded to reduce the carrying amount of the long-lived asset that will be sold or disposed of to their estimated fair values. Charges for the asset impairment reduce the carrying amount of the long-lived assets to their estimated salvage value in connection with the decision to dispose of such assets.

 

To comply with the new safety and environmental regulations (see Note 1 (b)), the Company started the rectification and improvement program for the bromine and crude salt factories towards the end of the third quarter of fiscal year 2017, and as a result recorded an impairment loss of $216,181 and a write-off of $728,740 for certain property, plant and equipment in the year ended December 31, 2017.

 

With the relocation of the chemical factories and the length of time required to set up the new factory building in the Bohai Marine Fine Chemical Industrial Park (see Note 1 (b)), the Company believes that it is not beneficial to move the existing plant and equipment to the new premises. This is because of the age of the plant and equipment and the impact on the production efficiency at the new plant using plant and equipment that are idle for a substantial amount of time. In addition, the Company also risks the possibility of not passing the inspection by the government at the new plant if existing plant and equipment are used. Therefore, an impairment loss of $16,636,322 equivalent to the net book values of all the property, plant and equipment at the two chemical factories was recorded in the year ended December 31, 2017.

 

For the three-month period ended March 31, 2018 and 2017, the Company determined that there were no events or circumstances indicating possible additional impairment of its long-lived assets.

 

(i)           Basic and Diluted Net Income per Share of Common Stock

 

Basic earnings per common share are based on the weighted average number of shares outstanding during the periods presented.  Diluted earnings per share are computed using weighted average number of common shares plus dilutive common share equivalents outstanding during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered to be anti-dilutive, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock. Anti-dilutive common stock equivalents which were excluded from the calculation of number of dilutive common stock equivalents amounted to 75,614 and 25,000 shares for the three-month periods ended March 31, 2018 and 2017, respectively.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

   Three-Month Period Ended
March 31,
   2018  2017
Numerator      
Net income/(loss)  $(6,977,100)  $8,075,120 
           
Denominator          
Basic: Weighted-average common shares outstanding during the period   46,803,791    46,793,791 
Add: Dilutive effect of stock options   22,597    10,450 
Diluted   46,826,388    46,804,241 
           
Net income/(loss) per share          
Basic  $(0.15)  $0.17 
Diluted  $(0.15)  $0.17 

 

8 

 

(j)           Reporting Currency and Translation

 

The financial statements of the Company’s foreign subsidiaries are measured using the local currency, Renminbi (“RMB”), as the functional currency; whereas the functional currency and reporting currency of the Company is the United States dollar (“USD” or “$”).

 

As such, the Company uses the “current rate method” to translate its PRC operations from RMB into USD, as required under FASB ASC 830 “Foreign Currency Matters”. The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiaries are recorded in stockholders’ equity as part of accumulated other comprehensive income. The statement of income and comprehensive income is translated at average rate during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods as part of general and administrative expense. The statement of cash flows is translated at average rate during the reporting period, with the exception of the consideration paid for the acquisition of business which is translated at historical rates.

 

(k)           Foreign Operations

 

All of the Company’s operations and assets are located in PRC.  The Company may be adversely affected by possible political or economic events in this country.  The effect of these factors cannot be accurately predicted.

 

(l)           Exploration Costs

 

Exploration costs, which included the cost of researching appropriate places to drill wells and the cost of well drilling in search of potential natural brine or other resources, are charged to the income statement as incurred. Once the commercial viability of a project has been confirmed, all subsequent costs are capitalized.

 

For oil and gas properties, the successful efforts method of accounting is adopted. The Company carries exploratory well costs as an asset when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expenses. Exploratory wells that discover potentially economic reserves in areas where major capital expenditure will be required before production would begin and when the major capital expenditure depends upon the successful completion of further exploratory work remain capitalized and are reviewed periodically for impairment.

 

(m)  Goodwill

 

Goodwill represents the excess of the purchase price over the net of the fair value of the identifiable tangible and intangible assets acquired and the fair value of liabilities assumed in business acquisitions. Goodwill impairment is assessed based on qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying amount, including goodwill. If the Company determines that it is more likely than not that the fair value of a reporting entity is less than its carrying amount, the two-step goodwill impairment test will be performed. The Company performs its impairment assessment annually and between annual tests in certain circumstances and determined that the two-step goodwill impairment test is not required to be carried out as of March 31, 2018.

 

(n)           New Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

In May 2014 and April 2016, the FASB issued ASU No. 2014-09 and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, FASB issued ASU 2015-14, which deferred the effective date of Update 2014-09 to annual reporting periods beginning after December 15, 2017. The Company adopted this Update as of January 1, 2018. This adoption did not have a material impact on the Company’s condensed consolidated financial statements as of and for the three months ended March 31, 2018 as the amount and timing of all the Company’s revenue will continue to be recognized at a point in time. As required by the Update, the Company disclosed its revenues from contracts with customers into disaggregated categories in Note 14.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The Update addresses eight specific changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company adopted this Update as of January 1, 2018 with no material impact on the condensed consolidated financial statements as of and for the three months ended March 31, 2018.

 

9 

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The Company adopted this Update as of January 1, 2018 with no material impact on the condensed consolidated financial statements as of and for the three months ended March 31, 2018.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this Update specify the accounting for leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect of this on the consolidated financial statements and related disclosure.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. For public entities, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the effect of this on the consolidated financial statements and related disclosure.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating effect of this on the consolidated financial statements and related disclosure.

 

NOTE 2 – RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

The Company determined that the entire one-time mandatory federal transition tax on accumulated foreign earnings accrued in fiscal year 2017 can be offset against a portion of the Company’s US federal net operating loss carryovers and foreign tax credit carryovers. As a result, the Company did not need to accrue the $5,402,000 of income taxes in fiscal year 2017 and the Company is restating condensed consolidated financial statements as of March 31, 2018 to correct this error.

 

The table below sets forth the effect of the restatement on the condensed consolidated balance sheet as of March 31, 2018.

 

   As Reported  Correction  As Restated
Taxes
payable-current
  $2,204,954   $(433,000)  $1,771,954 
Total
Current Liabilities
   4,444,786    (433,000)   4,011,786 
Taxes
payable-non-current
   4,969,000    (4,969,000)    
Total
non-Current Liabilities
   7,363,174    (4,969,000)   2,394,174 
Total Liabilities   11,807,960    (5,402,000)   6,405,960 
Retained
earnings unappropriated
   243,193,331    5,402,000    248,595,331 
Total Stockholders’ Equity  $385,532,007   $5,402,000   $390,934,007 
                

The table below sets forth the effect of the restatement on the consolidated statement of stockholders' equity as of March 31, 2018.

 

   Retained earnings unappropriated  Total
Balance at March 31, 2018 as reported   $243,193,331   $385,532,007 
Correction   $5,402,000   $5,402,000 
Balance at March 31, 2018 as restated   $248,595,331   $390,934,007 

 

10 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 3 – INVENTORIES

 

Inventories consist of:

 

    March 31,
2018
  December 31,
2017
         
Raw materials   $ 23,893     $ 396,482  
Finished goods     175,381       844,224  
Allowance for obsolete and slow-moving inventory     (5,473 )     (43,921 )
    $ 193,801     $ 1,196,785  

 

NOTE 4 – PREPAID LAND LEASES

 

The Company prepaid for land leases with lease terms for periods ranging from one to fifty years to use the land on which the production facilities and warehouses of the Company are situated. The prepaid land lease is amortized on a straight line basis.

 

The Company paid $9,732,118 for a 50-year lease of a parcel of land for the new factory at Bohai Marine Fine Chemical Industrial Park in December, 2017. The land use certificate is being processed by the government and the commencement date of the lease will be known upon completion of the application process.

 

During the three-month period ended March 31, 2018, amortization of prepaid land lease totaled $144,097, which amount was recorded as direct labor and factory overheads incurred during plant shutdown.

 

During the three-month period ended March 31, 2017, amortization of prepaid land leases totaled $107,461, which amount was recorded as cost of net revenue. 

 

The Company has the rights to use certain parcels of land located in Shouguang, the PRC, through lease agreements signed with local townships or the government authority. For parcels of land that are collectively owned by local townships, the Company cannot obtain land use rights certificates. The parcels of land of which the Company cannot obtain land use rights certificates covers a total of approximately 54.97 square kilometers of aggregate carrying value of $916,059 and approximately 54.97 square kilometers of aggregate carrying value of $645,761 as at March 31, 2018 and December 31, 2017, respectively.

 

11 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net consist of the following:

 

   March 31,
2018
  December 31,
2017
At cost:          
Mineral rights  $4,896,244   $4,711,822 
Buildings   70,400,195    67,748,512 
Plant and machinery   208,538,996    200,742,652 
Motor vehicles   9,136    8,792 
Furniture, fixtures and office equipment   4,313,043    4,150,588 
Construction in process   190,200    183,036 
Total   288,347,814    277,545,402 
Less: Accumulated depreciation and amortization   (174,767,162)   (163,597,407)
     Impairment   (19,528,775)   (18,833,491)
Net book value  $94,051,877   $95,114,504 

 

The Company has certain buildings and salt pans erected on parcels of land located in Shouguang, PRC, and such parcels of land are collectively owned by local townships or the government authority. The Company has not been able to obtain property ownership certificates over these buildings and salt pans. The aggregate carrying values of these properties situated on parcels of the land are $28,025,014 and $27,432,351 as at March 31, 2018 and December 31, 2017, respectively.

 

During the three-month period ended March 31, 2018, depreciation and amortization expense totaled $4,688,248, of which $4,504,249 and $183,999 were recorded in direct labor and factory overheads incurred during plant shutdown and administrative expenses, respectively.

 

During the three-month period ended March 31, 2017, depreciation and amortization expense totaled $5,360,103, of which $5,068,503 and $291,600 were recorded as cost of net revenue and administrative expenses, respectively.

 

NOTE 6 – PROPERTY, PLANT AND EQUIPMENT UNDER CAPITAL LEASES, NET

 

Property, plant and equipment under capital leases, net consist of the following:

 

   March 31,
2018
  December 31,
2017
At cost:          
Buildings  $130,868   $125,939 
Plant and machinery   2,404,774    2,314,196 
Total   2,535,642    2,440,135 
Less: Accumulated depreciation and amortization   (2,050,782)   (1,947,897)
Net book value  $484,860   $492,238 

 

The above buildings erected on parcels of land located in Shouguang, PRC, are collectively owned by local townships.  The Company has not been able to obtain property ownership certificates over these buildings as the Company could not obtain land use rights certificates on the underlying parcels of land.  

 

During the three-month period ended March 31, 2018, depreciation and amortization expense totaled $69,282, which was recorded in direct labor and factory overheads incurred during plant shutdown. During the three-month period ended March 31, 2017, depreciation and amortization expense totaled $78,996, which was recorded as cost of net revenue.

 

12 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following:

 

   March 31,  December 31,
   2018  2017
Accounts payable  $   $ 
Salary payable   270,901    393,617 
Social security insurance contribution payable   140,671    135,203 
Other payables   579,649    503,263 
Total  $991,221   $1,032,083 

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

During the three-month period ended March 31, 2018, the Company borrowed a sum of $185,912 from Jiaxing Lighting Appliance Company Limited (Jiaxing Lighting”), in which Mr. Ming Yang, a shareholder and the Chairman of the Company, has a 100% equity interest. The amount due to Jiaxing Lighting was unsecured, interest free and repayable on demand and was fully settled in the three-month period ended March 31, 2018. There was no balance owing to Jiaxing Lighting as of March 31, 2018 and December 31, 2017.

 

On September 25, 2012, the Company purchased five floors of a commercial building in the PRC, through SYCI, from Shandong Shouguang Vegetable Seed Industry Group Co., Ltd. (the “Seller”) at a cost of approximately $5.7 million in cash, of which Mr. Ming Yang, the Chairman of the Company, had a 99% equity interest in the Seller. During the first quarter of 2018, the Company entered into an agreement with the Seller, a related party, to provide property management services for an annual amount of approximately $99,200 for five years from January 1, 2018 to December 31, 2022. The expense associated with this agreement for the three months ended March 31, 2018 was approximately $24,500.

 

NOTE 9 – TAXES PAYABLE

 

Taxes payable consists of the following:

 

   March 31,  December 31,
   2018
(Restated)
  2017
Natural resource tax  $   $156,147 
Land use tax payable   1,698,290    810,841 
Other tax payables   73,664    74,604 
Total current taxes payable  $1,771,954   $1,041,592 

   

NOTE 10 – CAPITAL LEASE OBLIGATIONS

 

The components of capital lease obligations are as follows:

 

   Imputed  March 31,  December 31,
   Interest rate  2018  2017
Total capital lease obligations   6.7%  $2,649,003   $2,507,201 
Less: Current portion        (254,829)   (203,206)
Capital lease obligations, net of current portion       $2,394,174   $2,303,995 

 

Interest expenses from capital lease obligations amounted to $41,797 and $41,753 for the three-month periods ended March 31, 2018 and 2017, respectively, were charged to the condensed consolidated statement of income. See Note 18 for future minimum lease payments disclosure.

 

13 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 11 –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 March 31, 2018 and December 31, 2017.

 

  (b) Retained Earnings - Appropriated

 

In accordance with the relevant PRC regulations and the PRC subsidiaries’ Articles of Association, the Company’s PRC subsidiaries are required to allocate its profit after tax to the following reserve:

 

Statutory Common Reserve Funds

 

SCHC, SYCI and DCHC are required each year to transfer at least 10% of the profit after tax as reported under the PRC statutory financial statements to the Statutory Common Reserve Funds until the balance reaches 50% of the registered share capital.  This reserve can be used to make up any loss incurred or to increase share capital.  Except for the reduction of losses incurred, any other application should not result in this reserve balance falling below 25% of the registered capital. The Statutory Common Reserve Fund as of March 31, 2018 for SCHC, SYCI and DCHC is 46%, 14% and 0% of its registered capital respectively.

 

NOTE 12 – STOCK-BASED COMPENSATION

 

Pursuant to the Company’s Amended and Restated 2007 Equity Incentive Plan approved in 2011(“Plan”), the aggregate number shares of the Company’s common stock available for grant of stock options and issuance is 4,341,989 shares. On October 5, 2015, during the annual meeting of the Company’s stockholders, the aggregate number of shares reserved and available for grant and issuance pursuant to the Plan was increased to 10,341,989. As of March 31, 2018, the number of shares of the Company’s common stock available for issuance under the Plan is 6,714,989.

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The risk free rate is based on the yield-to-maturity in continuous compounding of the US Government Bonds with the time-to-maturity similar to the expected tenor of the option granted, volatility is based on the annualized historical stock price volatility of the Company, and the expected life is based on the historical option exercise pattern.

 

During the three months ended March 31, 2018, there were no options issued to employees or non-employees.

 

The following table summarizes all Company stock option transactions between January 1, 2018 and March 31, 2018.

 

   Number of Option
and Warrants
Outstanding and exercisable
  Weighted- Average Exercise price of Option
and Warrants
  Range of
Exercise Price per Common Share
Balance, January 1, 2018    808,500   $1.61    $1.44 - $4.80 
Granted and vested during the period
ended March 31, 2018
             
Expired during the
period ended March 31, 2018
             
Balance, March 31, 2018    808,500   $1.61    $1.44 - $4.80 

 

Stock and Warrants Options Exercisable and Outstanding
                      Weighted Average  
                      Remaining  
      Outstanding at March 31, 2018      

Range of

Exercise Prices

     

Contractual Life

 (Years)

 
Exercisable and outstanding     808,500       $1.44 - $4.80       2.86  

 

The aggregate intrinsic value of options outstanding and exercisable as of March 31, 2018 was $0.

 

14 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 13 – INCOME TAXES (Restated)

 

The Company utilizes the asset and liability method of accounting for income taxes in accordance with FASB ASC 740-10.

 

(a)           United States (“US”)

 

Gulf Resources, Inc. may be subject to the United States of America Tax laws at a tax rate of 21%. No provision for the US federal income taxes has been made as the Company had no US taxable income for the three-month periods ended March 31, 2018 and 2017, and management believes that its earnings are permanently invested in the PRC.

 

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted in law. With the new tax law, the corporation income tax rate is reduced from 35% to 21% and there is a one-time mandatory federal transition tax on accumulated foreign earnings. The Company computed this one-time mandatory transition tax on accumulated foreign earnings to be approximately $5.4 million. However, as the Company has available US federal net operating loss carryovers and foreign tax credit to fully offset the mandatory inclusion of the accumulated foreign earnings, no net tax liability arose from the inclusion of these accumulated foreign earnings.  

 

(b)           British Virgin Islands (“BVI”)

 

Upper Class Group Limited, a subsidiary of Gulf Resources, Inc., was incorporated in the BVI and, under the current laws of the BVI, it is not subject to tax on income or capital gain in the BVI. Upper Class Group Limited did not generate assessable profit for the three-month periods ended March 31, 2018 and 2017.

 

(c)           Hong Kong

 

Hong Kong Jiaxing Industrial Limited, a subsidiary of Upper Class Group Limited, was incorporated in Hong Kong and is subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation on its activities conducted in Hong Kong and income arising in or derived from Hong Kong.  No provision for profits tax has been made as the Company has no assessable income for the three-month periods ended March 31, 2018 and 2017.  The applicable statutory tax rates for the three-month periods ended March 31, 2018 and 2017 are 16.5%.

 

(d)           PRC

 

Enterprise income tax (“EIT”) for SCHC, SYCI and DCHC in the PRC is charged at 25% of the assessable profits.

 

The operating subsidiaries SCHC, SYCI and DCHC are wholly foreign-owned enterprises (“FIE”) incorporated in the PRC and are subject to PRC Local Income Tax Law.

 

On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by a FIE prior to January 1, 2008 to foreign investor(s) in 2008 will be exempted from withholding tax (“WHT”) while distribution of the profit earned by an FIE after January 1, 2008 to its foreign investor(s) shall be subject to WHT at 5% effective tax rate.

 

As of March 31, 2018 and December 31, 2017, the accumulated distributable earnings under the Generally Accepted Accounting Principles (GAAP”) of PRC that are subject to WHT are $286,732,938 and $282,660,981, respectively. Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, as of March 31, 2018 and December 31, 2017, the Company has not recorded any WHT on the cumulative amount of distributable retained earnings of its foreign invested enterprises that are subject to WHT in China. As of March 31, 2018 and December 31, 2017, the unrecognized WHT are $14,336,647 and $14,133,049, respectively.

 

The Company’s tax returns are subject to the various tax authorities’ examination. The federal, state and local authorities of the United States may examine the Company’s tax returns filed in the United States for three years from the date of filing. The Company’s US tax returns since 2014 are currently subject to examination. Inland Revenue Department of Hong Kong may examine the Company’s tax returns filed in Hong Kong for seven years from date of filing. The Company’s Hong Kong tax returns since incorporation in year 2010 are currently subject to examination. The tax authorities of the PRC may examine the Company’s PRC tax returns for three years from the date of filing.

 

The components of the provision for income tax expense (benefit) from continuing operations are:

 

   Three-Month Period Ended March31,
   2018  2017
       
Current taxes – PRC  $   $2,821,826 
Deferred tax – PRC   (1,193,746)    
   $(1,193,746)  $2,821,826 

 

15 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 13 – INCOME TAXES (Restated) – Continued

 

The effective income tax expenses differ from the PRC statutory income tax rate of 25% from continuing operations in the PRC as follows:

 

    Three-Month Period Ended March 31,
Reconciliations   2018   2017
Statutory income tax rate     25 %     25 %
Non-deductible expense and change in valuation allowance     (7 %)     1 %
Non-taxable items     (3 %)      
Effective tax rate     15 %     26 %

 

Significant components of the Company’s deferred tax assets and liabilities at March 31, 2018 and December 31, 2017 are as follows:

 

   March 31,  December 31,
   2018
(Restated)
  2017
Deferred tax liabilities  $   $ 
           
Deferred tax assets:          
Allowance for obsolete and slow-moving inventories  $1,368   $10,980 
Impairment on property, plant and equipment   4,076,604    4,610,228 
Exploration costs   1,979,924    1,905,347 
Compensation costs of unexercised stock options   98,088    98,092 
PRC tax losses   1,931,983     
US federal net operating loss   27,100     
Total deferred tax assets   8,115,067    6,624,647 
Valuation allowance   (125,188)   (98,092)
Net deferred tax asset  $7,989,879   $6,526,555 

 

The increase in valuation allowance for the three-month period ended March 31, 2018 is $27,096.

 

The increase in valuation allowance for the three-month period ended March 31, 2017 is $40,800.

 

There were no unrecognized tax benefits and accrual for uncertain tax positions as of March 31, 2018 and December 31, 2017.

 

NOTE 14 – BUSINESS SEGMENTS

 

The Company has four reportable segments:  bromine, crude salt, chemical products and natural gas. The reportable segments are consistent with how management views the markets served by the Company and the financial information that is reviewed by its chief operating decision maker.

 

16 

 

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 14 – BUSINESS SEGMENTS – Continued

 

An operating segment’s performance is primarily evaluated based on segment operating income, which excludes share-based compensation expense, certain corporate costs and other income not associated with the operations of the segment. These corporate costs (income) are separately stated below and also include costs that are related to functional areas such as accounting, treasury, information technology, legal, human resources, and internal audit. The Company believes that segment operating income, as defined above, is an appropriate measure for evaluating the operating performance of its segments. All the customers are located in PRC.

 

Three-Month Period Ended March 31, 2018  Bromine * 

Crude

 Salt *

 

Chemical

 Products

  Natural Gas 

Segment

 Total

  Corporate  Total
Net revenue
(external customers)
  $   $1,638,493   $608,774   $   $2,247,267   $   $2,247,267 
Net revenue
(intersegment)
                            
Income (loss) from operations before income taxes(benefit)   (5,590,555)   (807,884)   (674,771)   (35,655)   (7,108,865)   (1,188,115)   (8,296,980)
Income tax expense (benefit)   (1,391,152)   (201,971)   399,377        (1,193,746)       (1,193,746)
Income (loss) from operations after income taxes(benefit)   (4,199,403)   (605,913)   (1,074,148)   (35,655)   (5,915,119)   (1,188,115)   (7,103,234)
Total assets   149,458,703    52,746,108    192,807,722    2,162,119    397,174,652    165,315    397,339,967 
Depreciation and amortization   3,719,712    913,350    124,468        4,757,530        4,757,530 
Capital expenditures   93,174    14,179        14,357    121,710        121,710 
Goodwill           30,524,646        30,524,646        30,524,646 

 

Three-Month Period Ended March 31, 2017  Bromine * 

Crude

 Salt *

 

Chemical

 Products

  Natural Gas 

Segment

 Total

  Corporate  Total
Net revenue
(external customers)
  $13,922,394   $1,813,778   $17,052,321   $   $32,788,493   $   $32,788,493 
Net revenue
(intersegment)
   2,178,493                2,178,493        2,178,493 
Income (loss) from operations before income taxes   5,271,933    885,888    4,946,177    (23,758)   11,080,240    (267,243)   10,812,997 
Income taxes   1,330,103    223,582    1,268,141        2,821,826        2,821,826 
Income (loss) from operations after income taxes   3,941,830    662,306    3,678,036    (23,758)   8,258,414    (267,243)   7,991,171 
Total assets   155,178,113    28,641,633    192,675,503    1,802,854    378,298,103    37,109    378,335,212 
Depreciation and amortization   3,998,581    454,447    986,070        5,439,098        5,439,098 
Capital expenditures               59,975    59,975        59,975 
Goodwill           27,820,174        27,820,174        27,820,174 

 

* Certain common production overheads, operating and administrative expenses and asset items (mainly cash and certain office equipment) of bromine and crude salt segments in SCHC were split by reference to the average selling price and production volume of respective segment.

 

17 

  

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 14 – BUSINESS SEGMENTS – Continued

 

   Three-Month Period Ended March 31,
Reconciliations  2018  2017
Total segment operating income (loss)  $(7,108,865)  $11,080,240 
Corporate costs   (129,263)   (129,988)
Unrealized loss on translation of intercompany balance   (1,058,852)   (137,255)
Income (loss) from operations   (8,296,980)   10,812,997 
Other income   126,134    83,949 
Income (loss) before income taxes  $(8,170,846)  $10,896,946 

 

The following table shows the major customer(s) (10% or more) for the three-month period ended March 31, 2018.

 

Number   Customer  

Bromine

(000’s) 

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s)

 

Percentage of

Total

Revenue (%)

  1     Shandong Morui Chemical Company Limited   $     $ 534     $ 155     $ 689       30.6 %
  2     Shandong Brother Technology Limited, Kuerle Xingdong Trading Limited   $     $ 670     $     $ 670       29.8 %
  3     Shouguang Weidong Chemical Company Limited   $     $ 435     $     $ 435       19.3 %

 

The following table shows the major customer(s) (10% or more) for the three-month period ended March 31, 2017.

 

Number   Customer  

Bromine

(000’s) 

 

Crude Salt

(000’s)

 

Chemical Products

(000’s)

 

Total

Revenue

 (000’s) 

 

Percentage of

Total

Revenue (%)

  1     Shandong Morui Chemical Company Limited   $ 2,594     $ 497     $ 1,085     $ 4,176       12.7 %
                                                 

NOTE 15– CUSTOMER CONCENTRATION

 

During the three-month periods ended March 31, 2018 and 2017, the Company sold 88.8% and 36.4% of its products to its top five customers, respectively. As of March 31, 2018 and 2017, amounts due from these customers were $8,831,030 and $30,263,356, respectively. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

 

NOTE 16 – MAJOR SUPPLIERS

 

During the three-month period ended March 31, 2018 and 2017, the Company purchased 0% and 69.7% of its raw materials from its top five suppliers, respectively.  As of March 31, 2018 and 2017, amounts due to those suppliers included in accounts payable were $0 and $5,639,164, respectively. This concentration makes the Company vulnerable to a near-term severe impact, should the relationships be terminated.

 

18 

  

GULF RESOURCES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2018

(Expressed in U.S. dollars)

(UNAUDITED)

 

NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying values of financial instruments, which consist of cash, accounts receivable and accounts payable and other payables, approximate their fair values due to the short-term nature of these instruments.  There were no material unrecognized financial assets and liabilities as of March 31, 2018 and December 31, 2017.

 

NOTE 18 – CAPITAL COMMITMENT AND OPERATING LEASE COMMITMENTS

 

As of March 31, 2018, the Company has leased a real property adjacent to Factory No. 1, with the related production facility, channels and ducts, other production equipment and the buildings located on the property, under a capital lease. The future minimum lease payments required under the capital lease, together with the present value of such payments, are included in the table show below.

 

The Company has leased nine parcels of land under non-cancelable operating leases, which are fixed rentals and expire through December 2021, December 2023, December 2030, December 2031, December 2032, December 2040, February 2059, August 2059 and June 2060, respectively.

 

The Company has no purchase commitments as of March 31, 2018.

 

The following table sets forth the Company’s contractual obligations as of March 31, 2018:

 

    Capital Lease Obligations   Operating Lease Obligations   Property Management Fees   Capital Expenditure
Payable within:                                
the next 12 months   $ 298,499     $ 1,045,795     $ 99,213     $ 167,016  
the next 13 to 24 months     298,499       1,069,473       99,213        
the next 25 to 36 months     298,499       1,094,416       99,213        
the next 37 to 48 months     298,499       942,133       99,213        
the next 49 to 60 months     298,499       960,539       99,213        
thereafter     2,387,996       16,951,287              
Total     3,880,491     $ 22,063,643     $ 496,065     $ 167,016  
Less: Amount representing interest     (1,231,488 )                        
Present value of net minimum lease payments   $ 2,649,003                          

 

Rental expenses related to operating leases of the Company amounted to $281,613 and $255,120, which were charged to the condensed consolidated statements of income for the three months ended March 31, 2018 and 2017, respectively.

 

NOTE 19 – SUBSEQUENT EVENTS

 

 In April 2018, SYCI signed several contracts (preliminary design, investigative work and assessment and evaluation of safety) related to the SYCI’s relocation project. The total of these contracts amounted to approximately $1.3 million (RMB8.0 million).

 

In April 2018, SYCI and Shouguang City Rongyuan Pharmaceutical Co., Ltd signed a land lease contract for a 20-year term commencing May 1, 2018 in the Bohai Park for an annual rent of approximately $13,000. This is for an area of 26.89 mou (approximately 1.79 hectares) and for the construction of the new chemical factory.

 

In April 2018, SCHC signed a purchase agreement for rectification equipment for an amount of approximately $260,000 (RMB1.7 million).

 

19 

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO concluded that due to the material weakness described below, our disclosure controls and procedures were ineffective as of the end of the period covered by this Form 10-Q/A to provide reasonable assurance that information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC'S rules and forms, and were not effective as of the end of the period covered by this Form 10-Q/A to provide reasonable assurance that such information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

 

(b) Changes in internal controls

 

Subsequent to the filing of the Company’s quarterly report on Form 10-Q for the period ended March 31, 2018,  the Company filed Amendment No. 2 on Form 10-K/A to reflect the correction of an error in the previously reported fiscal year 2017 financial statements as filed on March 23, 2018 related to the one-time mandatory federal transition tax on accumulated foreign earnings.

 

Management is actively engaged in the planning for, and implementation of, remediation efforts to address the material weakness identified above. The remediation plan includes i) the implementation of new controls designed to evaluate the appropriateness of foreign tax recognition policies and procedures, ii) new controls over recording of foreign tax transactions, and iii) additional training for the accounting and financial reporting personnel.

 

Management believes the measures described above and others that may be implemented will remediate the material weakness that we have identified. As management continues to evaluate and improve internal control over financial reporting, we may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures identified.

 

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

20 

 

 PART II—OTHER INFORMATION

 

Item 6. Exhibits

 

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/A (Amendment No. 1) for the quarterly period ended March 31, 2018 formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Other Comprehensive Income (Loss); (iii) the Consolidated Statements of Changes in Equity; (iv) the Consolidated Statement of Cash Flows; and, (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

 

21 

 

SIGNATURES

 

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: November 9, 2018 By: /s/ Xiaobin Liu
    Xiaobin Liu
    Chief Executive Officer
     
     
Dated: November 9, 2018 By: /s/ Min Li
    Min Li
    Chief Financial Officer

 

22