Gulf Resources, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The company manufactures and sells bromine, crude salt and chemical products in China and is developing natural gas resources. All operations and assets are in the PRC.
Financial performance and position
| Metric | Q3 2018 | Nine months 2018 | Comparable 2017 |
|---|---|---|---|
| Revenue | $343,080 | $2.59 million | $23.84 million and $104.16 million, respectively |
| Gross profit / margin | $274,624 / 80% | $1.28 million / 50% | $9.32 million / 39%; $42.50 million / 41% |
| Operating income (loss) | $(26.80) million | $(41.93) million | $4.84 million; $34.13 million |
| Net income (loss) | $(19.49) million | $(31.28) million | $3.43 million; $25.25 million |
| Basic and diluted EPS | $(0.42) | $(0.67) | $0.07; $0.54 |
| Operating cash flow | Not separately stated | $22.98 million | $23.48 million |
- Revenue fell 99% in Q3 and 98% for the nine-month period. Bromine and chemical-product revenue was nil in Q3; crude salt accounted for all Q3 revenue. For nine months, bromine revenue was nil, crude salt revenue was $1.98 million and chemical-product revenue was $613,368.
- Gross margin percentages rose despite the sharp drop in sales; the small revenue base and shutdown conditions make these percentages an incomplete indicator of ongoing operating economics.
- At September 30, cash was $208.25 million; current assets were $211.69 million and current liabilities $3.13 million, yielding working capital of about $208.56 million. Total liabilities were $5.20 million. Capital-lease obligations totaled $2.23 million, including current and long-term portions.
- Nine-month investing cash outflow was $12.10 million, primarily property and equipment spending; financing cash outflow was $294,295. Cash declined $660,819 from year-end, including an $11.25 million adverse exchange-rate effect.
- Total assets were $336.50 million, down from $387.50 million at December 31, 2017. Stockholders’ equity was $331.30 million. Foreign-currency translation adjustments reduced equity by $19.38 million during the nine months.
Material changes, outlook and risks
- Government-ordered shutdowns for safety and environmental rectification have halted production at the company’s factories since September 1, 2017. Required provincial approvals remain outstanding, and the company cannot predict how long the delay will last. Bromine utilization was reported as zero for the 2018 periods.
- On September 21, 2018, local authorities ordered closure of bromine factories Nos. 3, 4 and 11. The company recorded $18.64 million for factory demolition/write-offs and $1.40 million of property, plant and equipment impairment, including mineral-rights and flood-related losses. It estimated dismantling costs at approximately $290,000; potential recovery for prior land-lease and mineral-rights payments is uncertain.
- The company estimates approximately $35 million for bromine and crude-salt rectification, with $28.13 million incurred by September 30 and about $7 million remaining. It also expects approximately $40 million in extraction-well enhancement contracts. These anticipated costs are distinct from its estimated $60 million relocation program for two chemical plants; relocation costs incurred were $10.93 million at September 30. The new chemical factory was expected to be fully operational by early 2020, subject to approvals and possible delays.
- Management anticipated natural-gas equipment testing and trial production in Q4 2018; the business was not fully operational as of September 30. These are expectations, not reported results.
- Management said available funds and operating cash flows should cover anticipated needs for the next 12 months. Cash is largely held in PRC financial institutions and is uninsured or otherwise unprotected. The company does not anticipate cash dividends in the foreseeable future.
- Customer concentration is significant: the top five customers represented 100% of Q3 sales and 90% of nine-month sales. Management warns that termination of customer relationships could have a severe near-term impact. All September 30 receivables were collected in October 2018.
- Disclosure controls and procedures were deemed ineffective because of a material weakness related to foreign-tax accounting. The company filed amendments to its 2017 Form 10-K and Q1 and Q2 2018 Form 10-Qs to correct an error involving the U.S. transition tax; management described remediation plans including new tax controls and staff training.
- Other notable commitments include $15.91 million of future operating-lease payments and $3.27 million of undiscounted capital-lease payments. Subsequent to quarter-end, the company signed contracts for well reconstruction and flood repairs, wastewater projects and related work; listed contract amounts total approximately $14.4 million, plus a $0.2 million land-compensation agreement.
Key facts for investors to verify
- Current status and timing of required government approvals, remaining-factory production resumption, and the final disposition of the three closed factories.
- Funding, timing and total commitments for rectification, well enhancements and chemical-plant relocation, including whether estimates or signed contracts have changed.
- Whether the new chemical plant became operational by early 2020 and whether natural-gas trial production commenced as anticipated.
- Sustainability of cash and liquidity given prolonged shutdown losses, capital spending and cash held in PRC institutions.
- Progress in remediating the foreign-tax accounting material weakness and whether disclosure controls have subsequently been judged effective.
- Customer concentration and continued collection performance as sales resume.