Gulf Resources, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The unaudited consolidated financial statements cover the company’s bromine, crude salt and chemical-products businesses in China. SCRC, acquired on February 4, 2015, is included from the acquisition date.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $34.91 million | $25.59 million; up 36% |
| Gross profit and margin | $9.43 million; 27% | $6.86 million; 27% |
| Operating income and margin | $7.11 million; 20% | $5.60 million; up 27% |
| Net income | $5.32 million | $4.29 million; up 24% |
| Basic and diluted EPS | $0.12 | $0.11 |
| Operating cash flow | $17.78 million | $12.82 million |
| Cash and cash equivalents | $111.41 million at March 31 | $146.59 million at December 31, 2014 |
Working capital was approximately $157.3 million, down from $186.0 million at year-end; current assets were $179.1 million and current liabilities $21.9 million. Accounts receivable rose 44% to $60.4 million, mainly reflecting the acquisition. The company reported that approximately 69% of receivables aged over 90 days at quarter-end were collected in April.
Investing cash outflow was $52.56 million, principally the $66.31 million cash consideration for SCRC, partly offset by $14.07 million of cash acquired. Financing cash outflow was $37,713 for share repurchases. Capital lease obligations totaled $3.07 million, including $255,000 current; the filing reports no other borrowings. Cash is primarily held at PRC banks and is uninsured or otherwise unprotected, according to the filing.
Material changes and acquisition
- Revenue growth primarily reflected SCRC, which contributed $10.50 million revenue and $2.58 million net income after acquisition. The company issued 7,268,011 shares, valued at $13.37 million for accounting purposes, as part of the $79.68 million total purchase price. The sellers agreed to a five-year lock-up.
- Pro forma results assuming SCRC had been acquired at the start of each period were revenue of $40.63 million and net income of $6.79 million for Q1 2015, versus $40.66 million and $7.70 million, respectively, for Q1 2014.
- Chemical-products revenue increased 92% to $21.91 million, largely due to SCRC. Bromine revenue decreased 6% to $11.03 million and crude-salt revenue decreased 20% to $1.96 million.
- Segment margins weakened in bromine (13%, down from 17%) and crude salt (18%, down from 33%); overall gross margin remained 27%. Bromine and crude-salt operating income fell substantially year over year.
- Shares outstanding increased following the acquisition issuance. The company repurchased 31,000 shares at an average $1.22 per share during the quarter.
Outlook, risks and unusual items
- Management said available funds and operating cash flows should meet anticipated operating needs for the next 12 months. It intends to retain cash for business expansion and does not anticipate cash dividends in the foreseeable future.
- Management expected bromine and crude-salt prices to remain around then-current levels through 2015, subject to market conditions. It planned to resume transmission-channel and duct enhancement work in Q2 and Q3 2015, weather permitting.
- The company reported a natural-gas discovery beneath a bromine well in Sichuan. A third-party assessment cited estimated annual revenue of $4.7 million and net income of $2.3 million. Trial production was expected in Q3 2015, subject to government permission; the company had spent about $7.85 million and expected to spend another $2 million before production. Further drilling would require additional approval, and projected economics are not assured.
- Risks include dependence on China, customer and supplier concentration, and uncertain collection timing. The top five customers accounted for 31.2% of sales and the top five suppliers for 57.0% of raw-material purchases in Q1. The company also disclosed land-use and property-ownership certificates it could not obtain for certain land, buildings and salt pans.
- Goodwill of $31.45 million arose from the SCRC acquisition and is not expected to be tax-deductible. Acquisition and exploration spending, foreign-currency translation losses, and higher depreciation were notable items. Management reported effective disclosure controls and no material change in internal controls; no legal proceedings were reported.
Important facts for investors to verify
- Whether SCRC’s post-acquisition performance and the pro forma results support the strategic and earnings rationale for the acquisition.
- Collection of the enlarged receivables balance, particularly older balances, and the continuing concentration of customers and suppliers.
- Government approvals, trial-production timing, additional costs and independent economics for the Sichuan natural-gas project.
- Progress and cost impact of bromine infrastructure enhancements, including their effect on capacity, depreciation and segment margins.
- The balance sheet reports total assets of $354,324,931, but total liabilities of $24,703,768 plus stockholders’ equity of $329,621,163 equals $354,324,931? No: these figures sum to $354,324,931; verify the filing’s presentation, as the extracted balance-sheet text also shows a conflicting total of $353,324,931 in one location.