Gulf Resources, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The unaudited consolidated statements cover the company’s China-based bromine, crude salt, chemical products and natural gas businesses.
Financial results and liquidity
- Revenue: $2.25 million, down 93% from $32.79 million in Q1 2017. Bromine sales were zero; crude salt contributed $1.64 million and chemical products $0.61 million.
- Profitability: Gross profit was $1.01 million (45% margin), versus $12.57 million (38%) a year earlier. Operating loss was $8.30 million, compared with operating income of $10.81 million; net loss was $6.98 million, or $0.15 per share, versus net income of $8.08 million, or $0.17 per share.
- Comprehensive income: $8.97 million, including $15.95 million of foreign-currency translation gains; this does not change the reported net loss.
- Cash flow: Operating cash flow was $19.90 million, investing cash outflow was $0.49 million, and cash increased by $27.81 million to $236.72 million. Operating cash generation was supported by receivable and inventory reductions and higher taxes payable, as well as noncash adjustments.
- Liquidity and debt: Current assets were $249.37 million and current liabilities $4.44 million; working capital was approximately $244.9 million. Cash exceeded total liabilities of $11.81 million. Capital lease obligations totaled $2.65 million; the filing reports no major financing activities. The company said funds and operating cash flows should cover anticipated needs for 12 months.
- Other balance-sheet measures: Accounts receivable were $10.25 million, down 66% from year-end; inventory was $0.19 million, down 84%. Stockholders’ equity was $385.53 million.
Material changes and operating context
- Government-ordered shutdowns beginning September 1, 2017 for safety and environmental rectification sharply curtailed operations. The company recorded $5.70 million of direct labor and factory overhead during the shutdown as operating expense.
- All bromine factories were shut, with no bromine revenue or production in Q1. Crude salt sales volume fell 31%, although its average selling price rose 32% to $39.41 per tonne. Chemical-products revenue fell 96%, mainly because factories were closed; the new factory is not expected to be fully operational until early 2020.
- General and administrative expenses rose 107% to $3.57 million, primarily reflecting a $1.06 million unrealized foreign-exchange loss on intercompany balances and higher property and land-use taxes.
- The company reported a $1.19 million income-tax benefit, including a deferred-tax benefit. It also has a $5.40 million U.S. transition tax liability payable over time under the tax law’s installment schedule.
Outlook, risks and contingencies
- Management expected rectification at bromine and crude-salt factories to be ready for government inspection, rating and evaluation by June 2018, with operations resuming only after approval. Six factories’ planned April restart was delayed by a new provincial evaluation requirement. Four other factories have unresolved wastewater/salt-pan arrangements; the filing says they could conceivably be forced to close.
- Estimated total cost of bromine and crude-salt rectification was approximately $35 million; the company reported $18.05 million incurred by March 31, 2018. Relocation of two chemical plants was estimated to cost approximately $60 million; reported relocation costs were $9.73 million, unchanged from year-end. These estimates and schedules are subject to execution and regulatory uncertainty.
- Natural-gas and brine production in Sichuan depended on delivery of customized equipment. Management hoped production could begin in Q2 2018 but said timing could slip to early Q3.
- Customer concentration increased: the top five customers represented 88.8% of Q1 sales, and three customers accounted for approximately 79.7%. About 41% of receivables aged over 90 days at quarter-end had been collected by April 30. Verify subsequent collections and customer retention.
- Substantially all cash was held at PRC financial institutions and was not insured or otherwise protected; substantially all operations and assets are in China. RMB movements affected reported results, including the quarter’s translation gain and intercompany-balance loss. The company reported no legal proceedings and no off-balance-sheet arrangements.
- Subsequent to quarter-end, the chemical subsidiary signed approximately $1.3 million of relocation-related contracts, and the bromine/crude-salt subsidiary agreed to buy approximately $260,000 of rectification equipment.
Important facts for investors to verify
- Government inspection and restart approvals, especially the four factories’ unresolved salt-pan and wastewater arrangements.
- Actual spending, funding needs and completion timetable for the estimated $35 million rectification and $60 million chemical-plant relocation.
- Receivable collections after April 30, customer concentration and any further deterioration in aged balances.
- Delivery and installation of customized Sichuan equipment and whether natural-gas production begins on the stated timetable.
- Cash availability and currency exposure, given the concentration of cash in PRC banks and the company’s substantial RMB exposure.