GULF RESOURCES, INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
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 000-20936
Gulf
Resources, Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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13-3637458
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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Cheming
Industrial Park, Shouguang City, Shandong, China
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262714
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(Address
of principal executive offices)
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(Zip
Code)
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+86
(536) 200-6316
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Name of each exchange
on which registered
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None
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Securities
registered pursuant to section 12(g) of the Act:
Common
Stock, $0.0005 par value
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No
x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer," "accelerated filer,” and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
x
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Smaller
reporting company
o
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(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o
No
x
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter. As of June 30, 2009, the aggregate market value of the common stock of
the registrant held by non-affiliates (excluding shares held by directors,
officers and others holding more than 5% of the outstanding shares of the class)
was $ 42,365,465 based upon a closing sale price of $0.58 as reported by
Bloomberg Finance.
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15 of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes
o
No
o
(APPLICABLE
ONLY TO CORPORATE REGISTRANTS)
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. As of February 22,
2010, the registrant had outstanding 34,553,566 shares of common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Table
of Contents
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Item 1.
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1 | |
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Item 1A.
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10 | |
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Item
1B
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17 | |||
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Item 2.
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17 | |
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Item 3.
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24 | |
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Item 4.
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24 | |
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PART
II
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Item 5.
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24 | |
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Item 6.
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26 | |
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Item 7.
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27 | |
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Item 7A.
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36 | |
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Item 8.
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37 | |
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Item 9.
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38 | |
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Item 9A.
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38 | |
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Item 9B.
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39 | |
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PART
III
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Item 10.
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39 | |
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Item 11.
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39 | |
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Item 12.
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40 | |
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Item 13.
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Item 14.
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40 | |
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PART
IV
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Item 15.
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40 | |
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43 | |||
Special
Note Regarding Forward Looking Information
This
report contains forward-looking statements that reflect management's current
views and expectations with respect to our business, strategies, future results
and events, and financial performance. All statements made in this report other
than statements of historical fact, including statements that address operating
performance, events or developments that management expects or anticipates will
or may occur in the future, including statements related to future reserves,
cash flows, revenues, profitability, adequacy of funds from operations,
statements expressing general optimism about future operating results and
non-historical information, are forward-looking statements. In particular, the
words "believe," "expect," "intend," "anticipate," "estimate," "plan," "may,"
"will," variations of such words and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. Readers should not place undue reliance on forward-looking
statements which are based on management's current expectations and projections
about future events, are not guarantees of future performance, are subject to
risks, uncertainties and assumptions. Our actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward-looking statements. Factors that could cause or contribute to
such differences include those discussed in this report, particularly under the
caption "Risk Factors." Except as required under the federal
securities laws, we do not undertake any obligation to update the
forward-looking statements in this report.
Introduction
We
manufacture and trade bromine and crude salt, and manufacture and sell chemical
products used in oil and gas field exploration, oil and gas distribution, oil
field drilling, wastewater processing, papermaking chemical agents and inorganic
chemicals. To date, our products have been sold only within the People’s
Republic of China. As used in this report, the terms "we," "our," "Company"
and "Gulf Resources" refers to Gulf Resources, Inc. and its wholly-owned
subsidiaries, and the terms “ton” and “tons” refers to metric tons, in each
case, unless otherwise stated or the context requires otherwise. All
information in this report gives retroactive effect to a 4-for-1 reverse stock
split of our common stock effected on October 12, 2009.
The
Company’s functional currency is the Renminbi, which had an average exchange
rate of $0.13167, $0.14415, and $0.14661 during fiscal year 2007, 2008 and 2009,
respectively.
Our Corporate
History
From
November 1993 through August 2006, we were engaged in the business of owning,
leasing and operating coin and debit card pay-per copy photocopy machines, fax
machines, microfilm reader-printers and accessory equipment. Due to the
increased use of internet services, demand for our services declined sharply,
and in August 2006, our Board of Directors decided to discontinue our
operations.
Upper
Class Group Limited, incorporated in the British Virgin Islands in July 2006,
acquired all the outstanding stock of Shouguang City Haoyuan Chemical Company
Limited ("SCHC"), a company incorporated in Shouguang City, Shandong Province,
the People's Republic of China, in May 2005. At the time of the acquisition,
members of the family of Mr. Ming Yang, our president and former chief executive
officer, owned approximately 63.20% of the outstanding shares of Upper Class
Group Limited. Since the ownership of Upper Class Group Limited and
SCHC was then substantially the same, the acquisition was accounted for as a
transaction between entities under common control, whereby Upper Class Group
Limited recognized the assets and liabilities transferred at their carrying
amounts.
On
December 12, 2006, we, then known as Diversifax, Inc., a public "shell" company,
acquired Upper Class Group Limited and SCHC. Under the terms of the agreement,
the stockholders of Upper Class Group Limited received 13,250,000 (restated
for the 2-for-1 stock split in 2007 and the 1-for-4 stock split in 2009) shares
of voting common stock of Gulf Resources, Inc. in exchange for all outstanding
shares of Upper Class Group Limited. Members of the Yang family received
approximately 62% of our common stock as a result of the
acquisition. Under accounting principles generally accepted in the
United States, the share exchange is considered to be a capital transaction
rather than a business combination. That is, the share exchange is equivalent to
the issuance of stock by Upper Class Group Limited for the net assets of Gulf
Resources, Inc., accompanied by a recapitalization, and is accounted for as a
change in capital structure. Accordingly, the accounting for the share exchange
is identical to that resulting from a reverse acquisition, except no goodwill is
recorded. Under reverse takeover accounting, the post reverse acquisition
comparative historical financial statements of the legal acquirer, Gulf
Resources, Inc., are those of the legal acquiree, Upper Class Group Limited.
Share and per share amounts stated have been retroactively adjusted to reflect
the share exchange.
To
satisfy certain ministerial requirements necessary to confirm certain government
approvals required in connection with the acquisition of SCHC by Upper Class
Group Limited, the shares of SCHC were transferred to a newly formed Hong Kong
corporation named Hong Kong Jiaxing, all of the outstanding shares of which are
now owned by Upper Class Group Limited.
On
February 5, 2007, we acquired Shouguang Yuxin Chemical Industry Co., Limited
("SYCI"), a company incorporated in the People's Republic of China, in October
2000. Under the terms of the acquisition agreement, the stockholders of SYCI
received a total of 8,094,059 (restated for the 2-for-1 stock split in 2007 and
the 1-for-4 stock split in 2009) shares of common stock of Gulf Resources, Inc.
in exchange for all outstanding shares of SYCI's common
stock. Simultaneously with the completion of the acquisition, a
dividend of $2,550,000 was paid to the former stockholders of
SYCI. At the time of the acquisition, approximately 49.1% of the
outstanding shares of SYCI were owned by Ms. Yu, Mr. Yang’s wife, and the
remaining 50.9% of the outstanding shares of SYCI were owned by SCHC,
all of whose outstanding shares were owned by Mr. Yang and his
wife. Since the ownership of Gulf Resources, Inc. and SYCI are
substantially the same, the acquisition was accounted for as a transaction
between entities under common control, whereby Gulf Resources, Inc. recognized
the assets and liabilities of SYCI at their carrying amounts. Share and per
share amounts have been retroactively adjusted to reflect the
acquisition.
As a
result of the transactions described above, our corporate structure is
linear. That is Gulf Resources owns 100% of the outstanding shares of
Upper Class Group Limited, which owns 100% of the outstanding shares
of Hong Kong Jiaxing, which owns 100% of the outstanding shares of SCHC,
which owns 100% of the outstanding shares of SYCI. Further, as a
result of our acquisitions of SCHC and SYCI, our historical financial
statements, as contained in our Condensed Consolidated Financial Statements and
Management's Discussion and Analysis, appearing elsewhere in the report, reflect
the accounts of SCHC and SYCI.
Our
executive offices are located in China at Chenming Industrial Park, Shouguang
City, Shandong, People's Republic of China. Our telephone number is +86 (536)
5670008. Our website address is www.gulfresourcesinc.cn.. The information
contained on or accessed through our website is not intended to constitute and
shall not be deemed to constitute part of this Form 10-K.
In
January 2007, stockholders holding approximately 62% of the then outstanding
shares of our common stock consented in writing to change our corporate
name from Diversifax, Inc. to Gulf Resources, Inc. Accordingly, on February
20, 2007, we filed a Certificate of Amendment to our Certificate of
Incorporation changing our corporate name to Gulf Resources, Inc.
On
November 28, 2007, we amended our certificate of incorporation to increase our
authorized shares of common stock from 70,000,000 to 400,000,000 and to effect a
2-for-1 forward stock split of our outstanding shares of common
stock.
On August
31, 2008, Gulf Resources completed the construction of a new chemical production
line. It passed the examination by Shouguang City Administration of Work Safety
and local fire department. This new production line focuses on producing
environmental friendly additive products, solid lubricant and polyether
lubricant, for use in oil and gas exploration. The line has an annual production
capacity of 5,000 tons. Formal production of this chemical production line
started on September 15, 2008.
On
January 24, 2009, the Company entered into an agreement to issue 5.25 million
shares of the Company's common stock at a price equal to $4.05 per share to Top
King Group Limited ("Top King"), Billion Gold Group Limited ("Billion Gold"),
Topgood International Limited ("Topgood"), in lieu of paying off in cash
approximately $21.3 million in existing loans payable to Shenzhen Hua Yin
Guaranty and Investment Limited Liability Company, a shareholder of the
Company. On March 3, 2009 the Company issued the 5.25 million shares
and the aforesaid loans were deemed paid in full and cancelled.
On
October 12, 2009 we completed a 1-for-4 stock split of our common stock, such
that for each four shares outstanding prior to the stock split there was one
share outstanding after the reverse stock split. All shares of common
stock referenced in this report have been adjusted to reflect the stock split
figures. On October 27, 2009 our shares began trading on the NASDAQ
Global Select Market under the ticker symbol “GFRE”.
On
December 21, 2009, Gulf Resources closed a private placement financing. In the
transaction the Company issued 2,941,182 shares of the Company's
common stock at a price of $8.50 per share for an approximate aggregate purchase
price of $25.0 million. Brean Murray, Carret & Co., LLC acted as the
exclusive placement agent for the financing. The Company plans to use the
proceeds of the private placement to acquire additional bromine and crude salt
production assets, as well as for general corporate purposes such as working
capital
Acquisitions
of Production Facilities
On April
7, 2007, the Company acquired substantially all of the assets of Wenbo Yu in the
Shouguang City Qinshuibo (the “Yuwenbo property” or “Factory No. 2”). The
Yuwenbo property includes a 45 years and 9 months (as of date acquisition)
mineral rights and production land lease covering 1,846 acres, of real property,
with 575 wells, as well as the related production facility, the pipelines, other
production equipment, and the buildings located on the property. The total
purchase price for the acquired assets was $5,100,000, consisting of an
aggregate of 399,643 shares of our common stock and $3,076,923 in
cash.
On
June 8, 2007, the Company acquired substantially all of the assets of Dong Hua
Yang in the Dong Ying City Liu Hu Area (the “Yangdonghua property or “Factory
No. 3”). The Yangdonghua property includes a 44 years and 11 months (as of
date acquisition) mineral rights and land lease covering 2,318 acres of real
property, with 405 wells, as well as the related production facility, the
pipelines, other production equipment, and the buildings located on the
property. The total purchase price for the acquired assets was $6,667,538,
consisting of an aggregate of 204,898 shares of our common stock valued at
$941,300 and cash in the amount $4,837,233 and interest-free promissory note in
the aggregate principal amount of $889,005.
On
October 25, 2007, the Company acquired substantially all of the assets owned by
Jiancai Wang in the Shouguang City Renjia Area (the “Wangjiancai property” or
“Factory No.4”). The Wangjiancai property includes a 45 years and 10
months (as of date acquisition) mineral rights and land lease covering 2,165
acres of real property, with 398 wells, as well as the related production
facility, the wells, the pipelines, other production equipment, and the
buildings located on the property. The total purchase price for the
acquired assets was $6,399,147, of which $2,519,664 was paid at the closing and
the remaining $3,879,483 was paid within five days after the
closing.
On
October 26, 2007, the Company acquired substantially all of the assets
owned by Xingji Liu in the Shouguang City Houxing Area (the “Liuxingji property”
or “Factory No. 5”). The Liuxingji property includes a 47 years (as
of date acquisition) mineral rights and land lease covering 2,310 acres of real
property, with 432 wells, as well as the related production facility, the
pipelines, other production equipment, and the buildings located on the
property. The total purchase price for the acquired assets was
$6,665,778.
On
January 8, 2008, the Company acquired substantially all of the
assets owned by Xiaodong Yang in the Shouguang City Hanting Area (the
“Yangxiaodong property” or “Factory No. 6”). The Yangxiaodong
property includes a 47 years and 6 months (as of date acquisition) mineral
rights and land lease covering 2,641 acres of real property, with 294 wells, as
well as the related production facility, the pipelines, other production
equipment, and the buildings located on the property. The total purchase price
for the acquired assets was $9,722,222.
On
January 7, 2009, the Company acquired substantially all of the assets
owned by Fenqiu Yuan, Han Wang and Yufen Zhang in the Shouguang City
Renjiazhuangzi Village North Area (the “Fenqiu Yuan, Han Wang & Yufen Zhang
property” or Factory No. 7”). The Fenqiu Yuan, Han Wang and Yufen Zhang property
includes a 50-year (as of date acquisition) mineral rights and land lease
covering 1,611 acres of real property as well as the related production
facility, the pipelines, other production equipment, and the buildings located
on the property. The total purchase price for the acquired assets was
$10,615,000, consisting of $10,000,000 in cash and 375,000 shares of the
Company’s Common Stock valued at $615,000 (fair value).
On
September 30, 2009, the company acquired substantially all of the assets owned
by FengxiaYuan, Han Wang and Qing Yang in the Shouguang City Yingli Township
Beishan Village (the “ Fengxia Yuan, Han Wang& Qing Yang property” or
Factory No. 8”). The FengxiaYuan, Han Wang and Qing Yang property includes a
50-year (as of date acquisition) mineral rights and land lease covering 2,723
acres of real property as well as the related production facility, the
pipelines, other production equipment, and the buildings located on the property
.The total purchase price for the acquired assets was $
16,930,548, consisting of
$11,516,960 in cash and 1,057,342 shares of the Company’s Common Stock valued at
$5,413,588 (fair value).
Each of
the asset acquisitions described above was not in operation when the Company
acquired the asset. The owners of each of the assets did not hold the
proper license for the exploration and production of bromine, and production at
each of the assets acquired had been previously halted by the
government. With respect to the Factory No. 2, the assets had not
been operational for nine months; with respect to Factory No. 3, the assets had
not been operational for eleven months; with respect to Factory No. 4 and 5 ,
the assets had not been operational for fifteen months; with respect to Factory
No. 6, the assets had not been operational for eighteen months; and with respect
to Factory No. 7, the assets had not been operational for twelve months; and
with respect to Factory No. 8, the assets had not been operational for thirteen
months
Our
Business Segments
Our
business operations are conducted in two segments, bromine and crude salt, and
chemical products. We manufacture and trade bromine and crude salt,
and manufacture and sell chemical products used in oil and gas field
exploration, oil and gas distribution, oil field drilling, wastewater
processing, papermaking chemical agents and inorganic chemicals. We
conduct all of our operations in China, in close proximity to China’s
petrochemical and oil refinery manufacturing base and its rapidly growing
market.
Bromine and Crude
Salt
We
manufacture and distribute bromine through our wholly-owned subsidiary,
Shouguang City Haoyuan Chemical Company Limited, or SCHC. Bromine
(Br2) is a halogen element and it is a red volatile liquid at standard room
temperature which has reactivity between chlorine and
iodine. Elemental bromine is used to manufacture a wide variety
of bromine compounds used in industry and agriculture. Bromine is also used to
form intermediates in organic synthesis, in which it is somewhat preferable over
iodine due to its lower cost. Our bromine is commonly used in
brominated flame retardants, fumigants, water purification compounds, dyes,
medicines and disinfectants. According to figures published by the China
Crude Salt Association, we are one of the largest manufacturers of
bromine in China, as measured by production output.
The
extraction of bromine in the Shandong Province is limited by the Provincial
Government to six licensees. We hold one of such
licenses. The other five license holders produce bromine mainly for
their own consumption. There are only six licensed bromine producers
in Shandong Province, and the government has shut down hundreds of small
unlicensed producers. Part of our business strategy is to acquire
these producers and to use our bromine to expand our downstream chemical
operations.
Location
of Production Sites
Our
production sites are located in the Shandong Province in northeastern China. The
productive formation (otherwise referred to as the “working region”), extends
from latitude N 36°56’ to N 37°20’ and from longitude E 118°38’ to E 119°14’, in
the north region of Shouguang city, from the Xiaoqing River of Shouguang city to
the west of the Dan River, bordering on Hanting District in the east, from the
main channel of “Leading the Yellow River to Supply Qingdao City Project” in the
south to the coastline in the north. The territory is classified as
coastal alluvial – marine plain with an average height two to seven meters
above the sea level. The terrain is relatively flat.
Geological
background of this region
The
Shandong Province working region is located to the east of Lubei Plain and on
the south bank of Bohai Laizhou Bay. The geotectonic location bestrides on the
North China Platte (I) and north three-level structure units, from west to east
including individually the North China Depression, Luxi Plate, and Jiaobei
Plate. Meanwhile, 4 V-level structure units including the Dongying Sag of
Dongying Depression(IV) of North China Depression, the Buried Lifting Area of
Guangrao, Niutou sag and Buried Lifting Area of Shuanghe and are all on two
V-level structure units including Xiaying Buried Lifting Area of Weifang
Depression (IV) of Luxi Plate and Chuangyi Sag, as well as on a V-level
structure units of Jiaobei Buried Lifting Area of Jiaobei
Plate.
Processing
of Bromine
Natural
brine is a complicated salt-water system, containing many ionic compositions in
which different ions have close interdependent relationships and which can be
reunited to be many dissolved soluble salts such as sodium chloride, potassium
chloride, calcium sulfate, potassium sulfate and other similar soluble salts.
The goal of natural brine processing is to separate and precipitate the soluble
salts or ions away from the water. Due to the differences in the
physical and chemical characteristics of brine samples, the processing methods
are varied, and can result in inconsistency of processing and varied technical
performance for the different useful components from the natural
brine.
Bromine
is the first component extracted during the processing of natural brine. In
natural brine, the bromine exists in the form of bromine sodium and bromine
magnesium and other soluble salts.
The
bromine production process is as follows:
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1.
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natural
brine is pumped from underground through extraction wells by subaqueous
pumps;
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2.
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the
natural brine then passes through transmission pipelines to storage
reservoirs;
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3.
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the
natural brine is sent to the bromine refining plant where bromine is
extracted from the natural brine. In neutral or acidic water,
the bromine ion is easily oxidized by adding the oxidative of chlorine,
which generates the single bromine away from the
brine. Thereafter the extracted single bromine is blown out by
forced air, then absorbed by sulfur dioxide or soda by adding acid,
chlorine and sulfur.
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4.
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the
wastewater from this refining process is then transported by pipeline to
brine pans;
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5.
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the
evaporation of the wastewater produces crude
salt.
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Our
production feeds include (i) natural brine; (ii) vitriol; (iii) chlorine; (iv)
sulfur; and (v) coal.
Soluble
salts
The
extraction of natural brine’s soluble salts is accomplished through the method
known as distillation crystallization, in which the extracted natural brine is
placed into containing pools and then exposed to natural sunshine, which makes
the soluble salts reach the saturation point and precipitate after
crystallization. This is a relatively simple method to operate with low
processing costs.
Chemical
Products
We
produce chemical products through our wholly-owned subsidiary, Shouguang Yuxin
Chemical Industry Company Limited , or SYCI. The products we
produce and the markets in which they are sold include, among
others:
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Product
name
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Application
sector
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Hydroxyl
guar gum
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Oil
Exploration & Production
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Demulsified
agent
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Oil
Exploration & Production
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Corrosion
inhibitor for acidizing
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Oil
Exploration & Production
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Bactericide
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Oil
Exploration / Agricultural
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Chelant
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Paper
Making
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Iron
ion stabilizer
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Oil
Exploration & Production
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Clay
stabilizing agent
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Oil
Exploration & Production
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Flocculants
agent
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Paper
Making
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Remaining
agent
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Paper
Making
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Expanding
agent with enhanced gentleness
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Paper
Making
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SYCI
concentrates its efforts on the production and sale of chemical products that
are in used in oil and gas field explorations, oil and gas distribution, oil
field drilling, wastewater processing, papermaking chemical agents, and
inorganic chemicals. SYCI also engages in research and development of commonly
used chemical products as well as medicine intermediates. Currently, SYCI's
annual production of oil and gas field exploration products and related
chemicals is over 16,000 tons, and its production of papermaking-related
chemical products is over 4,500 tons. These products are mainly distributed to
large domestic papermaking manufacturers and major oilfields such as Shengli
Oilfield, Daqing Oilfield, Zhongyuan Oilfield, Huabei Oilfield, and Talimu
Oilfields.
On August
31, 2008, SYCI completed the construction of a new chemical production line. It
passed the examination by Shouguang City Administration of Work Safety and local
fire department. This new production line focuses on producing environmental
friendly additive products, solid lubricant and polyether lubricant, for use in
oil and gas exploration. The line has an expected annual production capacity of
5,000 tons. Formal production of this chemical production line started on
September 15, 2008.
On
January 4, 2010, we announced that the SYCI commenced the construction of a new
production line for waste water treatment chemical additives. The new production
line will be located in our Yuxing Chemical Plant. The capital expenditure for
the new production line is expected to be approximately $8 to $10
million. We expect to fund the new production line with cash from
operations.
SYCI’s
headquarters are located in Shouguang City at 2nd Living District, Qinghe
Oil Factory, Shouguang City, Shandong Province, China. The company has
been certified as ISO9001-2000 compliant and received the Quality Products
and Services Guarantee Certificate from China Association for Quality. SYCI has
been accredited by Shandong as a Provincial Credit Enterprises and is a Class
One supplier for both China Petroleum & Chemical Corporation (”SINOPEC’) and
PetroChina Company Limited. SYCI has been engaged in product innovation and
R&D projects with Shandong University, Shandong Institute of Light Industry,
Southeast University and other higher education institutions. SYCI has hired
three college professors and three professionals who hold PhD degrees to
lead its Research and Development Department.
Segment
disclosure
We have
two reportable segments: bromine and crude salt and chemical
products.
The
amounts set forth below are based upon on an average Renminbi to US Dollar
exchange rates of, $0.14415 and $0.14661 during fiscal year 2008 and 2009
respectively.
|
Net Sales by
Segment
|
||||||||||||||||
|
Year
Ended
December 31,
2009
|
Year
Ended
December 31,
2008
|
|||||||||||||||
|
Segment
|
% of
total
|
% of
total
|
||||||||||||||
|
Bromine
and Crude salt
|
$ | 74,330,586 | 67 | % | $ | 63,664,156 | 73 | % | ||||||||
|
Chemical
Products
|
$ | 35,946,322 | 33 | % | $ | 23,824,178 | 27 | % | ||||||||
|
Total
sales
|
$ | 110,276,908 | 100 | % | $ | 87,488,334 | 100 | % | ||||||||
|
Percentage
Increase in Net Sales
from fiscal year 2008
to 2009
|
Percentage
Increase in Net Sales
from fiscal year 2007
to 2008
|
||
|
Segments
|
|||
|
Bromine
and Crude salt
|
17%
|
87%
|
|
|
Chemical
Products
|
51%
|
18%
|
|
SCHC
Product sold in metric
tons
|
Year
ended
December 31,
2009
|
Year
ended
December 31,
2008
|
Percentage
Change
|
|
|
Bromine
|
34,930
|
28,673
|
21.8
|
|
|
Crude
Salt
|
356,839
|
66,500
|
436.6
|
|
Income
from Operations by Segment
|
||||||||||||||||
|
Year
ended
December 31,
2009
|
Year
ended
December 31,
2008
|
|||||||||||||||
|
Segment
|
% of
total
|
% of
total
|
||||||||||||||
|
Bromine
and Crude salt
|
$ | 32,954,828 | 72 | % | $ | 24,663,244 | 75 | % | ||||||||
|
Chemical
Products
|
$ | 12,530,417 | 28 | % | $ | 8,121,203 | 25 | % | ||||||||
|
Income
from operations before corporate costs
|
$ | 45,485,245 | 100 | % | $ | 32,784,447 | 100 | % | ||||||||
|
Corporate
costs
|
$ | (3,244,411 | ) | $ | (2,209,290 | ) | ||||||||||
|
Income
from operations
|
$ | 42,240,834 | $ | 30,577,157 | ||||||||||||
|
Bromine
|
||||||||||||||||||||
|
and
Crude
|
Chemical
|
Segment
|
Consolidated
|
|||||||||||||||||
|
Salt
|
Products
|
Total
|
Corporate
|
Total
|
||||||||||||||||
|
Year
ended December 31, 2009
|
||||||||||||||||||||
|
Net
revenue
|
$
|
74,330,586
|
$
|
35,946,322
|
$
|
110,276,908
|
$
|
-
|
$
|
110,276,908
|
||||||||||
|
Income
(loss) from operations
|
32,954,828
|
12,530,417
|
45,485,245
|
(3,244,411)
|
42,240,834
|
|||||||||||||||
|
Income
tax
|
8,051,868
|
3,132,530
|
11,184,398
|
-
|
11,184,398
|
|||||||||||||||
|
Total
assets
|
115,621,458
|
28,274,118
|
143,895,576
|
2,527,592
|
146,423,168
|
|||||||||||||||
|
Depreciation
and amortization
|
6,048,995
|
1,150,663
|
7,199,658
|
0
|
7,199,658
|
|||||||||||||||
|
Capital
expenditures
|
36,066,805
|
8,838,440
|
44,905,245
|
0
|
44,905,245
|
|||||||||||||||
|
Year
ended December 31, 2008
|
||||||||||||||||||||
|
Net
revenue
|
$
|
63,664,156
|
$
|
23,824,178
|
$
|
87,488,334
|
$
|
-
|
$
|
87,488,334
|
||||||||||
|
Income
(loss) from operations
|
24,663,244
|
8,121,203
|
32,784,447
|
(2,209,290)
|
)
|
30,577,157
|
||||||||||||||
|
Income
tax
|
6,180,353
|
2,031,586
|
8,211,939
|
8,211,939
|
||||||||||||||||
|
Total
assets
|
67,868,644
|
20,899,118
|
88,767,762
|
591,704
|
89,359,466
|
|||||||||||||||
|
Depreciation
and amortization
|
4,123,131
|
604,734
|
4,727,865
|
-
|
4,727,865
|
|||||||||||||||
|
Capital
expenditures
|
10,529,286
|
6,835,909
|
17,365,195
|
17,365,195
|
||||||||||||||||
Sales
and Marketing
We have
an in-house sales staff. Our customers send their orders to us, usually
with cash paid in advance. Our in-house sales staff then attempts to
satisfy these orders based on our actual production and inventories. Many
of our customers have a long term relationship with us, and while we expect this
to continue due to continuing high demand for mineral products, this can’t be
guaranteed.
Principal
Customers
We sell a
substantial portion of our products to a limited number of
customers. Our principal customers during 2009 were Shandong Morui
Chemical Company Limited, Shouguang Rongyuan Chemical Company Limited, Shandong
Brother Technology Limited, Shouguang RuiTai Chemical Company Limited, Shouguang
Weidong Chemical Company Limited, Kuerle Xingdong Trading Limited, Shouguang
Longteng Trading Limited and Sinopec Shengli -field Ltd's Qinghe
factory.
During
the year ended December 31, 2009, sales to our two largest bromine and crude
salt customers, based on net revenue from such customers, aggregated
$22,911,853, or approximately 30.8% of total net revenue from the sale of
bromine and crude salt, and sales to our largest customer represented
approximately 15.4% of total net revenue from the sale of bromine and crude
salt. At December 31, 2009, amounts due from these customers were
$2,693,116.
During
the year ended December 31, 2008, sales to our three largest bromine customers,
based on net revenue from such customers, aggregated $21,427,380, or
approximately 34% of total net revenue from the sale of bromine and crude salt,
and sales to our largest customer represented approximately 14% of total net
revenue from the sale of bromine and crude salt. At December 31, 2008, amounts
due from these customers totaled $2,750,621.
This
concentration of customers makes us vulnerable to an adverse
near-term impact, should one or more of these relationships be
terminated.
The
following table shows our major customers (10% or more) for our bromine and
crude salt business for the year ended December 31, 2009.
|
Number
|
Customer
|
Revenue
(000’s)
|
Percentage
of
Segment’s
Revenue
(%)
|
|||||
|
1
|
Shandong
Morui Chemical Company Limited
|
$11,473
|
15.4%
|
|||||
|
2
|
Shouguang
City Rongyuan Chemical Company Limited
|
$11,439
|
15.4%
|
|||||
|
TOTAL
|
$22,912
|
30.8%
|
||||||
The
following table shows our major customers (10% or more) for our chemicals
business for the year ended December 31, 2009:
|
Number
|
Customer
|
Revenue
(000’s)
|
Percentage
of
Segment’s
Revenue (%)
|
||||||
|
1
|
Kuerle
Xingdong Trading Limited
|
$8,515
|
23.7%
|
||||||
|
2
|
Talimu
Oil Exploration Limited
|
$6,058
|
16.9%
|
||||||
|
3
|
Shouguang
Longteng Trading Limited
|
$5,134
|
14.3%
|
||||||
|
4
|
Sinopec
Shengli -field Ltd's Qinghe Factory
|
$4,660
|
13.0%
|
||||||
|
TOTAL
|
$24,367
|
67.9%
|
|||||||
Principal
Suppliers
Our
principal suppliers during 2009 were Shandong Haihua Chlorine & Alkali
colophony Chemicals Company Limited, Shouguang Hongye Trading Company Limited.,
and Shouguang City Rongguang Trading Company, Limited. During 2008 were Shandong
Haike Shengli Electric Chemical Company Limited, Shandong Ruitai Chemicals Co.,
Limited, and Shouguang City Xingyi Fuel Commercial Company Limited.
During
the 12 months ended December 31, 2009, we purchased 25.5% of our raw material
from two suppliers. As of December 31, 2009, the accounts payable due to these
suppliers was approximately $2,146,192.
During
the 12 months ended December 31, 2008, we purchased 48.7% of our products from
two suppliers. As of December 31, 2008, the accounts payable due to these
suppliers was approximately $558,598.
This
supplier concentration makes us vulnerable to a near-term adverse impact, should
the relationships be terminated.
Business
Strategy
Expansion
of Production Capacity to Meet Demand
▼
Bromine and Crude Salt
|
|
The
Company has announced its intent to acquire bromine properties that are
unlicensed and thus not legally permitted to produce
bromine. In 2007 and 2008 the Company acquired five such
properties and in 2009 the Company acquired another two such
properties. These seven acquisitions expanded our annual
production capacity to 43,300 metric tons of bromine and 450,000 metric
tons of crude salt. These properties were purchased with a
combination of cash and shares of our common stock, at purchase prices
totaling $62.5 million. The Company expects that it will continue its
acquisition program in 2010 and that these acquisitions will be funded by
a combination of cash on hand, and the issuance of debt or equity
securities, including securities issued to the
sellers.
|
▼Chemical
Products
|
|
To
expand its chemical production capacity, the Company intends to acquire
chemical product producers. These acquisitions will be funded
by a combination of cash on hand, and the issuance of debt or equity
securities
|
Competition
The
markets for our products have been experiencing increased levels of demand as
China continues its recent pace of accelerated growth. Nevertheless,
the markets for our products are highly competitive. To date, our
sales have been limited to customers within the PRC and we expect that our sales
will remain primarily domestic for the immediate future. Our
marketing strategy involves developing long term ongoing working relationships
with customers based on large multi-year agreements which foster mutually
advantageous relationships.
Many of
our competitors, particularly those engaged in the distribution of chemicals,
are better established than us, have larger infrastructures, greater resources
and the capacity to respond to much larger contracts.
Our
principal competitors in the bromine and crude salts business are Shandong Hai
Hua Holding Limited, Shouguang Fu Kang Medicines Manufacturing Company Limited,
Shouguang Weidong Chemical Company Limited, and Shandong Cai Yangzi Salt Field
Company, all of which produce bromine principally for use in their chemicals
businesses and sell part of the bromine produced to customers. These
companies may switch to selling bromine to the market if they no longer use
bromine in their chemical business.
Our
principal competitors in the chemicals business are Shandong Haihua Group
Limited, Shouguang Weidong Salt Field Company Limited, Shouguang Fukang
Pharmaceutical Company Limited, and Shouguang Caiyangzih Salt Field Company
Limited.
Government
Regulation
The
following is a summary of the principal governmental laws and regulations that
are or may be applicable to our operations in the PRC. The scope and enforcement
of many of the laws and regulations described below are uncertain. We cannot
predict the effect of further developments in the Chinese legal system,
including the promulgation of new laws, changes to existing laws or the
interpretation or enforcement of laws.
In the
natural resources sector, the PRC and the various Provinces have enacted a
series of laws and regulations over the past 20 years, including laws and
regulations designed to improve safety and decrease environmental
degradation. The "China Mineral Resources Law" declares state
ownership of all mineral resources in the PRC. However, mineral
exploration rights can be purchased, sold and transferred to foreign owned
companies. Mineral resource rights are granted by the Central Government
permitting recipients to conduct mineral resource activities in a specific area
during the license period. These rights entitle the licensee to undertake
mineral resource activities and infrastructure and ancillary work, in compliance
with applicable laws and regulations, within the specific area covered by the
license during the license period. The licensee is required to submit a proposal
and feasibility studies to the relevant authority and to pay the Central
Government a natural resources fee in an amount equal to a percent of annual
sales. Shandong Province has determined that bromine is to be
extracted only by licensed entities and we have received one of six licenses
granted. Despite the provinces desire to limit extraction to licensed entities
hundreds of smaller operations continue to extract bromine without
licenses.
The
Ministry of Land and Resources (MLR) is the principal regulator of mineral
rights in China. The Ministry has authority to grant licenses for land-use and
exploration rights, issue permits for mineral rights and leases, oversee the
fees charged for them and their transfer, and review reserve
evaluations.
All of
our operating activities in China have been authorized by land and resources
departments of local governments. In addition, all of our operations
are subject to and have passed government safety inspections. We also have
been granted environmental certification from the PRC Bureau of Environmental
Protection.
Employees
As of
December 31, 2009, we employed approximately 693 full-time employees, of
whom about 83% are with SCHC and 17% are with SYCI. Approximately 2%
of our employees are management personnel, 3% are sales and procurement
staff. 40% of our employees have a college degree or higher. None of
our employees is represented by a union.
Our
employees in China participate in a state
pension arrangement organized by Chinese municipal and provincial
governments. We are required to contribute to the arrangement at the
rate of 20% of the average monthly salary. In addition, we are required by
Chinese law to cover employees in China with other types of social insurance.
Our total contribution may amount to 31% of the average monthly salary. We have
purchased social insurance for all of our employees. Expense related to
social insurance was approximately $270,324 for fiscal year 2009.
Research and
Development
On June
11, 2007, the Company entered into a five year agreement with East China
University of Science and Technology to establish a Co-Op Research and
Development Center. The research center is equipped with state of the art
chemical engineering instruments for the purpose of pursuing targeted research
and development of new bromine-based chemical compounds and products to be
utilized in the pharmaceutical industry. Professor Ji of East China University
is the Center’s manager. He will provide his expertise in chemical applications
and medicine engineering. SYCI will make an annual payment of $500,000 to the
center until the agreement expires on June 14, 2012. All research
findings and patents developed by this Center will belong to Gulf
Resources.
You
should consider carefully each of the following business and investment risk
factors and all of the other information in this report. If any of the following
risks and uncertainties develops into actual events, the business, financial
condition or results of our operations could be materially adversely affected.
If that happens, the trading price of our shares of common stock could decline
significantly. The risk factors below contain forward-looking statements
regarding our business. Actual results could differ materially from those set
forth in the forward-looking statements. See "Special Note Regarding
Forward-Looking Information."
Risks
Relating to Our Business
The
unsuccessful integration of a business or business segment we acquire could have
a material adverse effect on our results.
As part
of our business strategy, we expect to acquire assets and businesses relating to
or complementary to our operations. These acquisitions will involve risks
commonly encountered in acquisitions. These risks include exposure to unknown
liabilities of the acquired companies, additional acquisition costs and
unanticipated expenses. Our quarterly and annual operating results could
fluctuate due to the costs and expenses of acquiring and integrating new
businesses. We may also experience difficulties in assimilating the operations
and personnel of acquired businesses. Our ongoing business may be disrupted
and our management's time and attention diverted from existing operations. Our
acquisition strategy will likely require additional equity or debt financing,
resulting in additional leverage or dilution of ownership. We cannot assure you
that any future acquisition will be consummated, or that if consummated, that we
will be able to integrate such acquisition successfully.
We
depend on revenues from a few significant relationships, and any loss,
cancellation, reduction, or interruption in these relationships could harm our
business.
In
general, we have derived a material portion of our revenue from a limited number
of customers. If sales to such customers were terminated or significantly
reduced, our revenues and net income could significantly decline. Our success
will depend on our continued ability to develop and manage relationships with
significant customers and suppliers. Any adverse change in our relationship with
our customers and suppliers may have a material adverse effect on our business.
Although we are attempting to expand our customer base, we expect that our
customer concentration will not change significantly in the near future. We
cannot be sure that we will be able to retain our largest customers and
suppliers or that we will be able to attract additional customers and suppliers,
or that our customers and suppliers will continue to buy our products in the
same amounts as in prior years. The loss of one or more of our largest customers
or suppliers, any reduction or interruption in sales to these customers or
suppliers, our inability to successfully develop relationships with additional
customers or suppliers or future price concessions that we may have to make
could significantly harm our business.
Attracting
and retaining key personnel is an essential element of our future
success.
Our
future success depends to a significant extent upon the continued service of our
executive officers and other key management and technical personnel and on our
ability to continue to attract, retain and motivate executive and other key
employees, including those in managerial, technical, marketing and information
technology support positions. Experienced management and technical, marketing
and support personnel are in demand and competition for their talents is
intense. The loss of the services of one or more of our key employees or our
failure to attract, retain and motivate qualified personnel could have a
material adverse effect on our business, financial condition and results of
operations.
If
we lose the services of our chairman and chief executive officer, our business
may suffer.
We are
dependent on Mr. Ming Yang, our chairman and Mr. Liu Xiaobin, our chief
executive officer. The loss of their services could materially harm
our business because of the cost and time necessary to retain and train a
replacement. Such a loss would also divert management attention away from
operational issues.
If
we do not pass the review and approval for renewing our bromine and salt
production license, our bromine business may suffer.
We are
required to hold a bromine and salt production license in order to operate our
bromine and salt production business in the PRC. Our bromine and salt production
license is subject to a yearly audit. If we do not successfully pass the yearly
approval by relevant government authorities, our bromine and salt production
operations may be suspended until we are able to comply with the license
requirements which could have a material adverse effect on our business,
financial condition and results of operations..
Our
inability to successfully manage the growth of our business may have a material
adverse effect on our business, results or operations and financial
condition.
We expect
to experience growth in the number of employees and the scope of our operations
as a result of internal growth and acquisitions. Such activities could result in
increased responsibilities for management. Our future success will be highly
dependent upon our ability to manage successfully the expansion of operations.
Our ability to manage and support our growth effectively will be substantially
dependent on our ability to implement adequate improvements to financial,
inventory, management controls, reporting, order entry systems and other
procedures, and hire sufficient numbers of financial, accounting,
administrative, and management personnel.
Our
future success depends on our ability to address potential market opportunities
and to manage expenses to match our ability to finance operations. The need to
control our expenses will place a significant strain on our management and
operational resources. If we are unable to control our expenses effectively, our
business, results of operations and financial condition may be adversely
affected.
Our
management is comprised almost entirely of individuals residing in the PRC with
very limited English skills
Our
management is comprised almost entirely of individuals born and raised in the
PRC. As a result of differences in culture, educational background
and business experiences, our management may analyze, evaluate and present
business opportunities and results of operations differently from the way they
are analyzed, evaluated and presented by management teams of public companies in
Europe and the United States. In addition, our management has very
limited skills in English. Consequently, it is possible that our
management team will emphasize or fail to emphasize aspects of our business that
might customarily be emphasized in a different manner by comparable public
companies from different geographical and political areas.
We
will face many of the difficulties that companies in the early stage may
face.
We have a
limited operating history as a bromine produce and chemical processing company,
which may make it difficult for you to assess our ability to identify merger or
acquisition candidates and our growth and earnings potential. Therefore, we may
face many of the difficulties that companies in the early stages of their
development in new and evolving markets often face. We may continue to face
these difficulties in the future, some of which may be beyond our
control. If we are unable to successfully address these problems, our
future growth and earnings will be negatively affected.
We
cannot accurately forecast our future revenues and operating results, which may
fluctuate.
Our short
operating history and the rapidly changing nature of the markets in which we
compete make it difficult to accurately forecast our revenues and operating
results. Furthermore, our revenues and operating results may fluctuate in
the future due to a number of factors, including the
following:
|
·
|
the
success of identifying and completing mergers and
acquisitions;
|
|
·
|
the
introduction of competitive products by different or
new competitors;
|
|
·
|
reduced
demand for any given product;
|
|
·
|
difficulty
in keeping current with changing
technologies;
|
|
·
|
increased
or uneven expenses, whether related to sales and marketing, product
development or administration;
|
|
·
|
deferral
of recognition of our revenue in accordance with applicable accounting
principles due to the time required to complete projects;
and
|
|
|
·
|
costs
related to possible acquisitions of technology or
businesses.
|
Due to
these factors, forecasts may not be achieved, either because expected revenues
do not occur or because they occur at lower prices or on terms that are less
favorable to us. In addition, these factors increase the chances that our
results could be lower than the expectations of investors and analysts. If so,
the market price of our stock would likely decline.
Conflicts
of interest.
Mr. Ming
Yang, our chairman, was a substantial owner of SCHC and SCYI before their
acquisition by us, and remains a substantial owner of our
securities. There may have been conflicts of interest between Mr.
Yang and our Company as a result of such ownership interests. The terms on
which we acquired SCHC and SCYI may have been different from those that
would have been obtained if SCHC and SCYI were owned by unrelated
parties.
Risks
Related to Doing Business in the People's Republic of China
Our
business operations take place primarily in the People's Republic of
China. Because Chinese laws, regulations and policies are changing,
our Chinese operations will face several risks summarized below.
-
Limitations on Chinese economic market reforms may discourage foreign investment
in Chinese businesses.
The value
of investments in Chinese businesses could be adversely affected by political,
economic and social uncertainties in China. The economic reforms in China in
recent years are regarded by China's central government as a way to introduce
economic market forces into China. Given the overriding desire of the central
government leadership to maintain stability in China amid rapid social and
economic changes in the country, the economic market reforms of recent years
could be slowed, or even reversed.
Any
change in policy by the Chinese government could adversely affect investments in
Chinese businesses.
Changes
in policy could result in imposition of restrictions on currency conversion,
imports or the source of supplies, as well as new laws affecting joint ventures
and foreign-owned enterprises doing business in China. Although China has been
pursuing economic reforms, events such as a change in leadership or social
disruptions that may occur upon the proposed privatization of certain
state-owned industries, could significantly affect the government's ability to
continue with its reform.
-
We face economic risks in doing business in China.
As a
developing nation, China's economy is more volatile than that of developed
Western industrial economies. It differs significantly from that of the U.S. or
a Western European country in such respects as structure, level of development,
capital reinvestment, legal recourse, resource allocation and self-sufficiency.
Only in recent years has the Chinese economy moved from what had been a command
economy through the 1970s to one that during the 1990s encouraged substantial
private economic activity. In 1993, the Constitution of China was amended to
reinforce such economic reforms. The trends of the 1990s indicate that future
policies of the Chinese government will emphasize greater utilization of market
forces. For example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinate to state-owned companies, which are the mainstay
of the Chinese economy. However, we cannot assure you that, under some
circumstances, the government's pursuit of economic reforms will not
be restrained or curtailed. Actions by the central government of China
could have a significant adverse effect on economic conditions in the country as
a whole and on the economic prospects for our Chinese operations.
-
The Chinese legal and judicial system may negatively impact foreign
investors.
In 1982,
the National Peoples Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in China. However, China's system of laws is not yet comprehensive.
The legal and judicial systems in China are still under development , and
enforcement of existing laws is inconsistent. Many judges in China lack the
depth of legal training and experience that would be expected of a judge in a
more developed country. Because the Chinese judiciary is relatively
inexperienced in enforcing the laws that exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. China's legal system is based on written statutes; a
decision by one judge does not set a legal precedent that is required to be
followed by judges in other cases. In addition, the interpretation of Chinese
laws may shift to reflect domestic political changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. We cannot assure you that a change
in leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life, will not affect the
Chinese government's ability to continue to support and pursue these reforms.
Such a shift could have a material adverse effect on our business and
prospects.
The
practical effect of the People’s Republic of China’s legal system on our
business operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign Invested
Enterprise laws provide significant protection from government interference. In
addition, these laws guarantee the full enjoyment of the benefits of corporate
articles and contracts to Foreign Invested Enterprise participants. These laws,
however, do impose standards concerning corporate formation and governance,
which are not qualitatively different from the general corporation laws of the
several states. Similarly, the accounting laws and regulations of the People’s
Republic of China mandate accounting practices which are not consistent with
U.S. Generally Accepted Accounting Principles. China's accounting laws require
that an annual "statutory audit" be performed in accordance with People’s
Republic of China’s accounting standards and that the books of account of
Foreign Invested Enterprises are maintained in accordance with Chinese
accounting laws. Article 14 of the People’s Republic of China Wholly
Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to
submit certain periodic fiscal reports and statements to designated financial
and tax authorities, at the risk of business license revocation. Second, while
the enforcement of substantive rights may appear less clear than United States
procedures, Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises
are Chinese registered companies, which enjoy the same status as other Chinese
registered companies in business-to-business dispute resolution. Generally, the
Articles of Association provide that all business disputes pertaining to Foreign
Invested Enterprises are to be resolved by the Arbitration Institute of the
Stockholm Chamber of Commerce in Stockholm, Sweden, applying Chinese substantive
law. Any award rendered by this arbitration tribunal is, by the express terms of
the respective Articles of Association, enforceable in accordance with the
"United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (1958)." Therefore, as a practical matter, although no
assurances can be given, the Chinese legal infrastructure, while different in
operation from its United States counterpart, should not present any significant
impediment to the operation of Foreign Invested Enterprises.
Because
our principal assets are located outside of the United States and some of our
directors and all of our executive officers reside outside of the United States,
it may be difficult for you to enforce your rights based on the United States
Federal securities laws against us and our officers and directors in the United
States or to enforce judgments of United States courts against us or them in the
People's Republic of China.
In addition, our operating subsidiaries
and substantially all of our assets are located outside of the United States.
You will find it difficult to enforce your legal rights based on the civil
liability provisions of the United States Federal securities laws against us in
the courts of either the United States or the People's Republic of China and,
even if civil judgments are obtained in courts of the United States, to enforce
such judgments in the courts of the People's Republic of China. In addition, it
is unclear if extradition treaties in effect between the United States and the
People's Republic of China would permit effective enforcement against us or our
officers and directors of criminal penalties, under the United States Federal
securities laws or otherwise.
-
Economic Reform Issues
Although
the Chinese government owns the majority of productive assets in China, during
the past several years the government has implemented economic reform measures
that emphasize decentralization and encourage private economic activity.
Because these economic reform measures may be inconsistent or ineffectual,
we are unable to assure you that:
·
We will be
able to capitalize on economic reforms;
·
The Chinese
government will continue its pursuit of economic reform policies;
·
The economic
policies, even if pursued, will be successful;
·
Economic policies
will not be significantly altered from time to time; and
·
Business operations
in China will not become subject to the risk of nationalization.
Since
1979, the Chinese government has reformed its economic
systems. Because many reforms are unprecedented or experimental, they
are expected to be refined and improved. Other political, economic and social
factors, such as political changes, changes in the rates of economic growth,
unemployment or inflation, or in the disparities in per capita wealth between
regions within China, could lead to further readjustment of the reform measures.
This refining and readjustment process may negatively affect our
operations.
Over the
last few years, China's economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government recently has taken measures to curb this excessively
expansive economy. These measures have included revaluations of the Chinese
currency, the Renminbi (RMB), restrictions on the availability of domestic
credit, and limited re-centralization of the approval process for purchases of
some foreign products. These austerity measures alone may not succeed in slowing
down the economy's excessive expansion or control inflation, and may result in
severe dislocations in the Chinese economy. The Chinese government may adopt
additional measures to further combat inflation, including the establishment of
freezes or restraints on certain projects or markets.
To date,
reforms to China's economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China's economic system
will continue or that we will not be adversely affected by changes in China's
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which may
be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import
restrictions.
Risks
Associated with Bromine Extraction
We
are subject to risks associated with our operations which may affect our
results.
The
resource industry in the PRC has drawbacks that the resource industry does not
have within the United States. For instance:
|
·
|
In
China, insurance coverage is a relatively new concept compared to that of
the United States and for certain aspects of a business
operation, insurance coverage is restricted or
expensive. Workers compensation for employees in the PRC may be
unavailable or, if available, insufficient to adequately cover such
employees.
|
|
·
|
The
environmental laws and regulations in the PRC set various standards
regulating certain aspects of health and environmental quality, including,
in some cases, the obligation to rehabilitate current and former
facilities and locations where operations are or were
conducted. Violation of those standards could result in a
temporary or permanent restriction by the PRC of our bromine
operations.
|
We cannot
assure you that we will be able to adequately address any of these or other
limitations.
Our
earnings and, therefore our profitability, may be affected by price
volatility.
We
anticipate that the majority of our future revenues will be derived from the
sale of bromine and products derived from bromine and, as a result, our earnings
are directly related to the prices of these products. There are many factors
influencing the price of these products including expectations for inflation;
global and regional demand and production; political and economic conditions;
and production costs. These factors are beyond our control and are impossible
for us to predict. As a result, price changes may adversely affect our operating
results.
We may become
subject to numerous risks and hazards associated with our chemical processing
business
.
Bromine
is highly corrosive and must be handled carefully in order to avoid leakage and
damage to containers, transportation equipment and other
facilities. The risks associated with bromine include:
|
·
|
environmental
hazards; and
|
|
·
|
industrial
accidents, including personal
injury.
|
Such
risks could result in:
|
·
|
damage
to or destruction of properties or production
facilities;
|
|
·
|
personal
injury or death;
|
|
·
|
environmental
damage;
|
|
·
|
monetary
losses; and
|
|
·
|
legal
liability.
|
Our
business operations and related activities may be subject to PRC government
regulations concerning environmental protection.
We may
have to make a significant financial commitment for the construction of
environmental protection facilities and the establishment of a sound
environmental protection management and monitoring system. Compliance with
existing and future environmental protection regulations may increase our
operating costs and may adversely affect our operating results.
Our
operations and business activities may involve dangerous materials.
Although
we may establish stringent rules relating to the storage, handling and use of
dangerous materials, there is no assurance that accidents will not occur. Should
we be held liable for any such accident, we may be subject to penalties and
possible criminal proceedings may be brought against our employees.
Risks
Relating to our Common Stock and our status as a Public Company
The
price of our common stock may be affected by a limited trading volume and may
fluctuate significantly.
There has
been a limited public market for our common stock and we cannot assure you that
an active trading market for our stock will develop or if developed, will be
maintained. The absence of an active trading market may adversely affect our
stockholders' ability to sell our common stock in short time periods, or
possibly at all. In addition, we cannot assure you that you will be able to sell
shares of common stock that you have purchased without incurring a loss. The
market price of our common stock may not necessarily bear any relationship to
our book value, assets, past operating results, financial condition or any other
established criteria of value, and may not be indicative of the market price for
the common stock in the future. In addition, the market price for our common
stock may be volatile depending on a number of factors, including business
performance, industry dynamics, and news announcements or changes in general
economic conditions.
We
have not and do not anticipate paying any dividends on our common stock; because
of this our securities could face devaluation in the market.
We have
paid no dividends on our common stock to date and it is not anticipated that any
dividends will be paid to holders of our common stock in the foreseeable future.
While our dividend policy will be based on the operating results and capital
needs of the business, it is anticipated that any earnings will be retained
to finance our future expansion and for the implementation of our business plan.
As an investor, you should take note of the fact that a lack of a dividend can
further affect the market value of our stock, and could significantly affect the
value of any investment in our Company.
We
will continue to incur significant increased costs as a result of operating as a
public company, and our management will be required to devote substantial time
to new compliance requirements.
As a
public company we incur significant legal, accounting and other expenses under
the Sarbanes-Oxley Act of 2002, together with rules implemented by the
Securities and Exchange Commission and applicable market regulators. These rules
impose various requirements on public companies, including requiring certain
corporate governance practices. Our management and other personnel will need to
devote a substantial amount of time to these new compliance requirements.
Moreover, these rules and regulations will increase our legal and financial
compliance costs and will make some activities more time-consuming and
costly.
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular, commencing in 2007, we must perform system and
process evaluations and testing of our internal controls over financial
reporting to allow management and our independent registered public accounting
firm to report on the effectiveness of our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or
the subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Compliance with Section 404 may require that
we incur substantial accounting expenses and expend significant management
efforts. If we are not able to comply with the requirements of Section 404 in a
timely manner, or if our accountants later identify deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, the
market price of our stock could decline and we could be subject to sanctions or
investigations by the SEC or other applicable regulatory
authorities.
Lack
of management control by purchasers of our common stock.
As of the
date of this report, Mr. Ming Yang, our chairman and former chief executive
officer, and his affiliates, beneficially owned approximately 38.8% of our
common stock. As a result of this concentration of ownership, our public
stockholders, acting alone, do not have the ability to influence the outcome of
matters requiring stockholder approval, including the election of our directors
or significant corporate transactions. In addition, this concentration of
ownership, which is not subject to any voting restrictions, may discourage or
thwart efforts by third parties to take-over or effect a change in control of
our Company that may be desirable for our stockholders, and may limit the price
that investors are willing to pay for our common stock.
Our Board
of Directors has the authority, without stockholder approval, to issue preferred
stock with terms that may not be beneficial to common stock holders and with the
ability to adversely affect stockholder voting power and perpetuate the board's
control over the Company.
Our
certificate of incorporation authorizes the issuance of up to 1,000,000 shares
of preferred stock. Our Board of Directors by resolution may authorize the
issuance of up to 1,000,000 shares of preferred stock in one or more series with
such limitations and restrictions as it may determine, in its sole discretion,
with no further authorization by security holders required for the issuance
thereof. The Board may determine the specific terms of the preferred stock,
including: designations; preferences; conversions rights; cumulative; relative;
participating; and optional or other rights, including: voting rights;
qualifications; limitations; or restrictions of the preferred
stock.
The
issuance of preferred stock may adversely affect the voting power and other
rights of the holders of common stock. Preferred stock may be issued quickly
with terms calculated to discourage, make more difficult, delay or prevent a
change in control of our company or make removal of management more difficult.
As a result, the Board of Directors' ability to issue preferred
stock may discourage the potential hostile acquirer, possibly
resulting in beneficial negotiations. Negotiating with an unfriendly acquirer
may result in terms more favorable to us and our stockholders. Conversely, the
issuance of preferred stock may adversely affect any market price of, and the
voting and other rights of the holders of the common stock. We presently have no
plans to issue any preferred stock.
We
may issue shares of our capital stock or debt securities to complete an
acquisition, which would reduce the equity interest of our stockholders or
subject our company to risks upon default
We may
issue our securities to acquire companies or assets. Most likely, we will issue
additional shares of our common stock or preferred stock, or both, to complete
acquisitions. If we issue additional shares of our common stock or shares of our
preferred stock, the equity interest of our existing stockholders may be reduced
significantly, and the market price of our common stock may decrease. The shares
of preferred stock we issue are likely to provide holders with dividend,
liquidation and voting rights, and may include participation rights, senior to,
and more favorable than, the rights and powers of holders of our common
stock.
If we
issue debt securities as part of an acquisition, and we are unable to generate
sufficient operating revenues to pay the principal amount and accrued interest
on that debt, we may be forced to sell all or a significant portion of our
assets to satisfy our debt service obligations, unless we are able to refinance
or negotiate an extension of our payment obligation. Even if we are able to meet
our debt service obligations as they become due, the holders of that debt may
accelerate payment if we fail to comply with, and/or are unable to obtain
waivers of, covenants that require us to maintain certain financial ratios or
reserves or satisfy certain other financial restrictions. In addition, financial
and other covenants in the agreements we may enter into to secure debt financing
may restrict our ability to obtain additional financing and our flexibility in
operating our business.
We have
significant indebtedness. We are significantly leveraged and our indebtedness is
substantial in relation to our stockholders' equity. Our ability to make
principal and interest payments will depend on future performance, which is
subject to many factors, some of which are outside our control. In the case of a
continuing default with respect to this indebtedness, the lender will have the
right to foreclose on our assets, which would have a material adverse effect on
our business. Payment of principal and interest on this indebtedness may limit
our ability to pay cash dividends to stockholders and the documents governing
this indebtedness prohibit the payment of cash dividends in certain situations.
Our leverage may also adversely affect our ability to finance future operations
and capital needs, may limit our ability to pursue business opportunities and
may make our results of operations more susceptible to adverse economic
conditions.
Future
sales of our common stock, or the perception that such sales could occur, could
have an adverse effect on the market price of our common stock.
We have
approximately 34,553,566 shares of our common stock outstanding as of February
22, 2010. There are a limited number of holders of our common
stock. Future sales of our common stock, pursuant to a registration
statement or Rule 144 under the Securities Act, or the perception that such
sales could occur, could have an adverse effect on the market price of our
common stock. The number of our shares available for sale pursuant to
registration statements or Rule 144 is very large relative to the trading volume
of our shares. Any attempt to sell a substantial number of our shares could
severely depress the market price of our common stock. In addition, we may use
our capital stock in the future to finance acquisitions and to compensate
employees and management, which will further dilute the interests of our
existing shareholders and could also depress the trading price of our common
stock.
None.
FIGURE
2.1 - REGIONAL MAP OF MINING PROPERTIES
FIGURE
2.2 - DETAILED MAP OF MINING PROPERTIES
We do not
own any land, though we do own some of the buildings on land we lease. Our
executive offices are located in China at Chenming Industrial Park, Shouguang
City, Shandong Province, People's Republic of China, which also is the
headquarters of SCHC. These offices are located on approximately 17,342 square
meters of land owned by Shouguang City Wo Pu Town Ba Mian He Village. The lease
for the land expires on November 1, 2054. The annual rent for the land is RMB
4,000, or approximately US$586. The building on this land has approximately
3,335 square meters of usable space and is owned by SCHC.
SYCI's
headquarters are located in the 2nd Living District, Shouguang City, Shandong
Province, People's Republic of China. SYCI's headquarters are located on
approximately 18,768 square meters of land owned by Shouguang City Houxin
village. There are three buildings owned by SYCI located on the property. Two of
the buildings are operational plants of steel structure with an aggregate of
approximately 1,560 square meters of production space and a total of 4,000
square meters for pump rooms, boiler rooms, finished products and raw materials
storage. The third building is primarily for administration and has
approximately 795 square meters. The company has a 50 year
lease on the land from April 1, 1998 to March 31, 2048 at an annual rent of
RMB4,000 or $586.
The
Company operates its bromine and crude salt production facilities through its
wholly-owned subsidiary SCHC. SCHC has land use rights to eight
properties totaling nearly 25,832 acre located on the south bank of Laizhou Bay
on the Shandong Peninsula of the People’s Republic of China
(“China”). Each of the properties is accessible by road. The Yiyang
railway line is within 50 kilometers and the Yangkou port is five kilometers
away.
Each of
the eight properties contains natural brine deposits which are extracted through
wells and are used to extract bromine and produce crude salt. Bromine is a
simple molecular element which is produced by extracting the bromine ion from
natural brine. Crude salt is sodium chloride. Bromine is an important
chemical raw material in flame retardants, fire extinguishing agents,
refrigerants, photographic materials, pharmaceuticals, pesticides, and oil and
other industries. Crude salt, also known as industrial salt, is used
in a wade range of chemical industries, is the main raw material in the soda and
chlor-alkali industries and can be widely used in agricultural, animal
husbandry, fisheries and food processing industries. Crude salt is
also the main raw material for edible salt.
Nature of Ownership Interest
in the Properties
The
Company does not own any property but has entered into contracts with the local
government to acquire land use rights for a period of 50 years. The
contracts required us to pay a one-time fee plus an annual rent.
Mineral
Rights
The
Chinese and provincial governments have enacted a series of laws and regulations
relating to the natural resources sector over the past 20 years, including laws
and regulations designed to improve safety and decrease environmental
degradation. The “China Mineral Resources Law” declares state
ownership of all mineral resources in China. However, mineral
exploration rights can be purchased, sold and transferred to both domestic and
foreign owned companies. Mineral resource rights are granted by the central
government permitting recipients to conduct mineral resource activities in a
specific area during the license period. These rights entitle the
licensee to undertake mineral resource activities and infrastructure and
ancillary work, in compliance with applicable laws and regulations, within the
specific area covered by the license during the license period. The licensee is
required to submit a proposal and feasibility studies to the relevant authority
and to pay the central government a natural resources fee in an amount equal to
2% of annual bromine sales. The Company was exempt from paying the
fee prior to January 1, 2008.
Shandong province
has determined that bromine is to be extracted only by licensed
entities.
Our
mineral rights are issued by the local government and allow for a one year
period of mining. The rights provide us with the exclusive rights to
explore and extract natural brine under the leased land and produce bromine and
crude salt. The government performs an annual inspection of the company’s
previous year’s state of production & operations at beginning of each
year. The annual inspection reviews: whether the production is safe
and if any accidents occurred during the previous year, whether the mineral
resources compensation fees and other taxes were timely paid, whether employees’
salary and welfare benefits were timely paid, whether the company meets
environment protection meet standards. Only those companies who pass the
inspection receive mineral rights for another one year term; for those companies
who do not pass the inspection, additional mineral rights are not allocated
until they can meet the requirements. If there is major safety accident, the
government may revoke the mining permit. All of the relevant
documentation to apply for renewal of mining rights must be filed with the Land
and Resources Bureau before March 31
st
each
year.
All of
our bromine and crude salt production facilities have been authorized by the
local land and resources departments and are included under a single permit,
which was originally issued in January 2005. In addition, all of our
operations are subject to and have passed government safety inspections. We
also have been granted environmental certification from the PRC Bureau of
Environmental Protection.
Each of
the eight properties is in the production stage and operates bromine extraction
and crude salt production facilities.
The facilities each
include wells, which are used to extract natural brine from underground, natural
brine transmission pipelines, natural brine storage reservoirs, bromine refining
equipment, wastewater transport pipes, and drying brine drying
pans.
The
equipment and facilities described above were constructed within three months
after the acquisition of each of our respective properties using the latest
technology and equipment and do not currently require
modernization. Because bromine is a highly corrosive liquid, the
equipment undergoes inspection and maintenance each year, especially the
subaqueous pumps which need to be regularly inspected and maintained or
replaced.
As of
December 31, 2009, the Company had invested approximately $63.7 million in its
eight production factories, facilities and paid approximately $6.2 million in
prepaid land lease payments and mineral rights. In addition, the
company estimates that equipment maintenance will cost approximately $1.0
million each year and that it will invest approximately $2.0 million in new
extraction wells.
Each of
the seven bromine production facilities is provided with electricity and water
by local government utilities.
Following
is a description of the land use and mineral rights related to each of the eight
properties held by SCHC as of December 31, 2009.
|
Property
|
Factory
No. 1 – Haoyuan General Factory
|
|
Area
|
6,442
acres
|
|
Date
of Acquisition
|
February
5, 2007
|
|
Land
Use Rights Lease Term
|
Fifty
Years
|
|
Land
Use Rights Expiration Date
|
2054
|
|
The
number of remaining years to expiration of the of the land lease as of
December 31, 2009
|
44.25
Years
|
|
Prior
fees paid for land use rights
|
RMB8.6
million
|
|
Annual
Rent
|
RMB186,633
|
|
Mining
Permit No.:
|
C3707002009056220022340
|
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
|
Period
of Permission:
|
One
year
|
|
Property
|
Factory
No. 2 – Yuwenbo
|
|
Area
|
1,846
acres
|
|
Date
of Acquisition
|
April
7, 2007
|
|
Land
Use Rights Lease Term
|
Fifty
Years
|
|
Land
Use Rights Expiration Date
|
2052
|
|
The
number of remaining years to expiration of the of the land lease as of
December 31, 2009
|
43
Years
|
|
Prior
Fees Paid For Land Use Rights
|
RMB7.5
million
|
|
Annual
Rent
|
RMB162,560
|
|
Mining
Permit No.:
|
C3707002009056220022340
|
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
|
Period
of Permission:
|
One
year
|
|
Property
|
Factory
No. 3 – Yangdonghua
|
|
Area
|
2,318
acres
|
|
Date
of Acquisition
|
June
8, 2007
|
|
Land
Use Rights Lease Term
|
Fifty
Years
|
|
Land
Use Rights Expiration Date
|
2052
|
|
The
number of remaining years to expiration of the of the land lease as of
December 31, 2009
|
42.3
Years
|
|
Prior
Fees Paid For Land Use Rights
|
RMB5
million
|
|
Annual
Rent
|
RMB111,317
|
|
Mining
Permit No.:
|
C3707002009056220022340
|
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
|
Period
of Permission:
|
One
year
|
|
Property
|
Factory
No. 4 – Wangjiancai
|
|
Area
|
2,165
acres
|
|
Date
of Acquisition
|
October
25, 2007
|
|
Land
Use Rights Lease Term
|
Fifty
Years
|
|
Land
Use Rights Expiration Date
|
2054
|
|
The
number of remaining years to expiration of the of the land lease as of
December 31, 2009
|
45
Years
|
|
Annual
Rent
|
RMB176,441
|
|
Prior
Fees Paid For Land Use Rights
|
RMB8.3
million
|
|
Mining
Permit No.:
|
C3707002009056220022340
|
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
|
Period
of Permission:
|
One
year
|
|
Property
|
Factory
No. 5 – Liuxingji
|
|
Area
|
2,310
acres
|
|
Date
of Acquisition
|
October
26, 2007
|
|
Land
Use Rights Lease Term
|
Fifty
Years
|
|
Land
Use Rights Expiration Date
|
2054
|
|
The
number of remaining years to expiration of the of the land lease as of
December 31, 2009
|
44.83
Years
|
|
Annual
Rent
|
RMB139,255
|
|
Prior
Fees Paid for Land Use Rights
|
RMB6.5
million
|
|
Mining
Permit No.:
|
C3707002009056220022340
|
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
|
Period
of Permission:
|
One
year
|
|
Property
|
Factory
No. 6 – Yangxiaodong
|
|
Area
|
2,641
acres
|
|
Date
of Acquisition
|
January
8, 2008
|
|
Land
Use Rights Lease Term
|
Fifty
Years
|
|
Land
Use Rights Expiration Date
|
2055
|
|
The
number of remaining years to expiration of the of the land lease as of
December 31, 2009
|
45.5
Years
|
|
Prior
Fees Paid for Land Use Rights
|
RMB9.1
million
|
|
Annual
Rent
|
RMB191,295
|
|
Mining
Permit No.:
|
C3707002009056220022340
|
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
|
Period
of Permission:
|
One
year
|
|
Property
|
Factory
No. 7 –Qiufen Yuan
|
|
Area
|
1,611
acres
|
|
Date
of Acquisition
|
January
7, 2009
|
|
Land
Use Rights Lease Term
|
Fifty
Years
|
|
Land
Use Rights Expiration Date
|
2059
|
|
The
number of remaining years to expiration of the of the land lease as of
December 31, 2009
|
49.17
Years
|
|
Prior
Fees Paid for Land Use Rights
|
Not
applicable
|
|
Annual
Rent
|
RMB163,000
|
|
Mining
Permit No.:
|
C3707002009056220022340
|
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
|
Period
of Permission:
|
One
year
|
|
Property
|
Factory
No. 8 –Fengxia Yuan
|
|
Area
|
2,723
acres
|
|
Date
of Acquisition
|
September
7, 2009
|
|
Land
Use Rights Lease Term
|
Fifty
Years
|
|
Land
Use Rights Expiration Date
|
2059
|
|
The
number of remaining years to expiration of the of the land lease as of
December 31, 2009
|
49.66
Years
|
|
Prior
Fees Paid for Land Use Rights
|
Not
applicable
|
|
Annual
Rent
|
RMB330,600
|
|
C3707002009056220022340
|
C3707002009056220022340
|
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
|
Period
of Permission:
|
One
year
|
The chart
below represents the seven bromine producing properties currently leased by the
Company, which are all located in Shouguang City, Shandong Province,
China. There are no proven and probable reserves located on our
properties. Estimates of non-reserve mineralized materials are based
on a November 2007 study prepared by the Mineral Resources Chinese Academy of
Geologic Science. Such mineralized material will not qualify as a
reserve until a comprehensive evaluation based upon unit cost, grade and other
material factors conclude both legal and economic feasibility.
|
Acres
|
Annual
Production Capacity
(in
tons)
|
2008
Utilization
Ratio
|
2009
Utilization
Ratio
|
|||||||
|
Factory
No. 1
|
6,442
|
12,000
|
95%
|
97%
|
||||||
|
Factory
No. 2 (1)
|
1,846
|
5,000
|
90%
|
81%
|
||||||
|
Factory
No. 3 (2)
|
2,318
|
4,800
|
87%
|
88%
|
||||||
|
Factory
No. 4 (3)
|
2,310
|
4,600
|
94%
|
96%
|
||||||
|
Factory
No. 5 (4)
|
2,165
|
4,500
|
92%
|
89%
|
||||||
|
Factory
No. 6 (5)
|
2,641
|
4,800
|
80%
|
79%
|
||||||
|
Factory
No. 7 (6)
|
1,611
|
3,500
|
-
|
67%
|
||||||
|
Factory
No. 8 (7)
|
2,723
|
4,100
|
-
|
10%
|
||||||
Each
of the properties described above was not in operation when the Company acquired
the asset. The owners of each of the properties did not hold the
proper license for the exploration and production of bromine, and production at
each of the assets acquired had been previously halted by the
government. With respect to Factory No. 2, the property had not been
operational for nine months; with respect to Factory No. 3, the property had not
been operational for eleven months; with respect to Factory No. 4 and No. 5, the
property had not been operational for fifteen months; and with respect to
Factory No. 6, the property had not been operational for eighteen months, and
with respect to Factory No. 7, the property had not been operational for
thirteen months, and with respect to Factory No. 8, the property had not been
operational for fourteen months. This figures represent estimated
annual production capacity based upon existing facilities, historical production
rates and capital expenditure the Company planned for these assets to fund
improvements and make them operational.
(1) This
facility was acquired on April 7, 2007.
(2) This
facility was acquired on June 8, 2007.
(3) This
facility was acquired on October 25, 2007.
(4) This
facility was acquired on October 26, 2007.
(5) This
facility was acquired on January 8, 2008.
(6) This
facility was acquired on January 7, 2009
(7) This
facility was acquired on September 7, 2009
The
following table shows the annual production sold for each of our eight
production facilities and the weighted average price received for all products
sold for the last three years.
|
Facility
|
2007
|
2008
|
2009
|
|||
|
Production
(in
tons)
|
Price
(RMB/ton)
|
Production
(in
tons)
|
Price
(RMB/ton)
|
Production
(in
tons)
|
Price
(RMB/ton)
|
|
|
Factory
No. 1
|
9,264
|
14,435
|
9,502.22
|
14,899
|
11,659.20
|
12,583.28
|
|
Factory
No. 2 (1)
|
3,520
|
14,172
|
4,235.10
|
14,819
|
4,054.00
|
12,637.35
|
|
Factory
No. 3 (2)
|
2,747
|
14,491
|
3,221.1
|
14,858
|
4,237.00
|
12,459.16
|
|
Factory
No. 4 (3)
|
801
|
14,539
|
4,396.8
|
14,843
|
4,327.00
|
12,
743.72
|
|
Factory
No. 5 (4)
|
816
|
14,506
|
3,579.3
|
14,822
|
4,
115.00
|
12,
589.84
|
|
Factory
No. 6 (5)
|
–
|
–
|
3,738
|
14,891
|
3,787.80
|
12,581.03
|
|
Factory
No. 7 (6)
|
2,355.00
|
12,852.24
|
||||
|
Factory
No. 8 (7)
|
395.00
|
15,356.39
|
||||
|
Total
|
17,148
|
24,934.52
|
34,930.00
|
|||
1. This
property was acquired on April 7, 2007.
2. This
property was acquired on June 8, 2007.
3. This
property was acquired on October 25, 2007.
4. This
property was acquired on October 26, 2007.
5. This
property was acquired on January 8, 2008.
6. This
facility was acquired on January 7, 2009
7. This
facility was acquired on September 7, 2009
We are
not a party to any legal proceedings.
We did
not submit any matter to a vote of our stockholders during the fourth quarter of
2009.
Market
for Our Common Stock
Our
common stock is listed for trading on the NASDAQ Global Select Market, or
NASDAQ, under the symbol “GFRE”. Before October 27, 2009 our common
stock was traded in the Over-the-Counter Bulletin Board, or OTCBB under the
symbol GRUS. On October 12, 2009 we completed a 1-for-4 reverse stock split of
our common stock, such that for each four shares outstanding prior to the stock
split there was one share outstanding after the reverse stock
split.
The
prices set forth below reflect the quarterly high and low bid price information
for our common stock prior to October 27, 2009 as reported by the
OTCBB, and the high and low sale prices for our common stock from October 27,
2009.
|
High
|
Low
|
|||||||
|
2010
|
||||||||
|
First
Quarter (through March 2)
|
$ | 14.74 | $ | 9.01 | ||||
|
2009
|
||||||||
|
First
Quarter
|
$ | 2.16 | $ | 1.20 | ||||
|
Second
Quarter
|
$ | 2.68 | $ | 1.72 | ||||
|
Third
Quarter
|
$ | 7.92 | $ | 1.96 | ||||
|
Fourth
Quarter (through October 26)
|
$ | 10.30 | $ | 7.40 | ||||
|
Fourth
Quarter (from October 27 to December 31)
|
$ | 11.94 | $ | 8.64 | ||||
|
2008
|
||||||||
|
First Quarter
|
$ | 12.76 | $ | 6.00 | ||||
|
Second
Quarter
|
$ | 9.80 | $ | 4.28 | ||||
|
Third
Quarter
|
$ | 7.60 | $ | 1.32 | ||||
|
Fourth
Quarter
|
$ | 1.60 | $ | 0.60 | ||||
Holders
As of
February 24, 2010, our common stock was held of record by approximately 34
stockholders, some of whom may hold shares for beneficial owners and have not
been polled to determine the extent of beneficial ownership.
Dividends
We have
never paid cash dividends on our common stock. Holders of our common stock are
entitled to receive dividends, if any, declared and paid from time to time by
the Board of Directors out of funds legally available. We intend to retain any
earnings for the operation and expansion of our business and do not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
the payment of cash dividends will depend upon future earnings, results of
operations, capital requirements, our financial condition and other factors that
our Board of Directors may consider.
Our
Equity Compensation Plans
The
following table provides information as of December 31, 2009 about our equity
compensation plans and arrangements.
Equity
Compensation Plan Information - December 31, 2009
|
Plan
category
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans(excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
0
|
0
|
0
|
|
Equity
compensation plans not approved by security holders
|
300,000
|
7.65
|
2,200,000
|
|
Total
|
300,000
|
$7.65
|
2,200,000
|
Purchases
of Equity Securities by the Company and Affiliated Purchasers
During
the fourth quarter of our fiscal year ended December 31, 2009, neither we nor
any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange
Act) purchased any shares of our common stock, the only class of our equity
securities registered pursuant to section 12 of the Exchange Act.
Recent
Sales of Unregistered Securities
We have
reported all sales of our unregistered equity securities that occurred during
2009 in our Reports on Form 10-Q or Form 8-K, as applicable.
The
selected financial information for each of the three years ended December 31,
2009, 2008 and 2007 has been derived from, and should be read in conjunction
with, our audited consolidated financial statements and other financial
information presented elsewhere herein. Capitalized terms are as
defined and described in the consolidated financial statements or elsewhere
herein.
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Statement
of Operations Data:
|
||||||||||||
|
Revenue
|
$ | 110,277 | $ | 87,488 | $ | 54,249 | ||||||
|
Cost
of goods sold
|
(61,403 | ) | (52,302 | ) | (32,108 | ) | ||||||
|
Gross
profit
|
48,874 | 35,186 | 22,140 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
General
and administrative
|
(5,953 | ) | (3,951 | ) | (1,814 | ) | ||||||
|
Research
and development cost
|
(500 | ) | (515 | ) | (268 | ) | ||||||
|
Depreciation
and amortization
|
(180 | ) | (143 | ) | (33 | ) | ||||||
|
Total
operating expenses
|
(6,633 | ) | (4,609 | ) | (2,115 | ) | ||||||
|
Income
from operations
|
42,241 | 30,577 | 20,025 | |||||||||
|
Interest
income (expense), net
|
64 | 34 | (107 | ) | ||||||||
|
Other
income (expense), net
|
(529 | ) | (4 | ) | 113 | |||||||
|
Income
before income taxes
|
41,776 | 30,607 | 20,031 | |||||||||
|
Income
tax
|
(11,184 | ) | (8,212 | ) | (7,798 | ) | ||||||
|
Net
income
|
$ | 30,592 | $ | 22,395 | $ | 12,233 | ||||||
|
Net
income per share
|
||||||||||||
|
Basic
|
$ | 1.00 | $ | 0.90 | $ | 0.51 | ||||||
|
Diluted
|
$ | 1.00 | $ | 0.90 | $ | 0.51 | ||||||
|
Weighted
average number of shares outstanding
|
|
|
|
|||||||||
|
Basic
|
30,698,824 | 24,917,211 | 24,172,126 | |||||||||
|
Diluted
|
30,701,697 | 24,917,211 | 24,172,126 | |||||||||
|
Year
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||
|
Cash,
cash equivalents and short-term investments
|
$ | 45,537 | $ | 30,878 | $ | 10,773 | ||||||
|
Working
capital
|
51,667 | 24,669 | 1,150 | |||||||||
|
Total
assets
|
146,423 | 89,359 | 46,329 | |||||||||
|
Total
debt (including current maturities)
|
12,040 | 36,890 | 19,861 | |||||||||
|
Stockholders'
equity
|
134,383 | 52,469 | 26,468 | |||||||||
Overview
We are a
holding company which conducts operations through our wholly-owned China
subsidiaries. Our business is conducted and reported in two
segments.
Through
our wholly-owned subsidiary, SCHC, we produce and trade bromine and crude salt.
We are one of the largest producers of bromine in China, as measured by
production output. Elemental bromine is used to manufacture a wide variety of
bromine compounds used in industry and agriculture. Bromine also is used to form
intermediary chemical compounds such as T.M.B. Bromine is commonly
used in brominated flame retardants, fumigants, water purification compounds,
dyes, medicines, disinfectants.
Through
our wholly-owned subsidiary, SYCI, we manufacture and sell chemical products
used in oil and gas field exploration, oil and gas distribution, oil field
drilling, wastewater processing, papermaking chemical agents and inorganic
chemicals.
On
December 12, 2006, we acquired, through a share exchange, Upper Class Group
Limited, a British Virgin Islands holding corporation which then owned all of
the outstanding shares of SCHC. Under accounting principles generally accepted
in the United States, the share exchange is considered to be a capital
transaction in substance, rather than a business combination. That is, the
share exchange is equivalent to the issuance of stock by Upper Class for the net
assets of our company, accompanied by a recapitalization, and is accounted for
as a change in capital structure. Accordingly, the accounting for the share
exchange was identical to that resulting from a reverse acquisition, except no
goodwill was recorded. Under reverse takeover accounting, the post reverse
acquisition comparative historical financial statements of the legal acquirer,
our company, are those of the legal acquiree, Upper Class Group Limited, which
is considered to be the accounting acquirer. Share and per share amounts
reflected in this report have been retroactively adjusted to reflect the
merger.
On
February 5, 2007, we, acting through SCHC, acquired SYCI. Since the ownership of
Gulf Resources, Inc. and SYCI was then substantially the same, the transaction
was accounted for as a transaction between entities under common control,
whereby we recognized the assets and liabilities of SYCI at their carrying
amounts. Share and per share amounts stated in this report have been
retroactively adjusted to reflect the merger.
On August
31, 2008, Gulf Resources completed the construction of a new chemical production
line. It passed the examination by Shouguang City Administration of Work Safety
and local fire department. This new production line focuses on producing
environmental friendly additive products, solid lubricant and polyether
lubricant, for use in oil and gas exploration. The line has an annual production
capacity of 5,000 tons. Formal production of this chemical production line
started on September 15, 2008.
On
October 12, 2009 we completed a 1-for-4 reverse stock split of our common stock,
such that for each four shares outstanding prior to the stock split there was
one share outstanding after the reverse stock split. All shares of
common stock referenced in this report have been adjusted to reflect the stock
split figures. On October 27, 2009 our shares began trading on the
NASDAQ Global Select Market under the ticker symbol “GFRE”.
As a
result of our acquisitions of SCHC and SYCI, our historical financial statements
and the information presented below reflects the accounts of SCHC and
SYCI. The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere in this
report.
RESULTS
OF OPERATIONS
Year
ended December 31, 2009 as compared to year ended December 31, 2008
|
Years
ended
|
||||||||||||
|
December 31,
2009
|
December 31,
2008
|
%Change
|
||||||||||
|
Net
Sales
|
$ | 110,276,908 | $ | 87,488,334 | 26 | % | ||||||
|
Cost
of Net Revenue
|
$ | (61,402,820 | ) | $ | (52,302,085 | ) | 17 | % | ||||
|
Gross
Profit
|
$ | 48,874,088 | $ | 35,186,249 | 39 | % | ||||||
|
Research
and Development costs
|
$ | (500,406 | ) | $ | (514,780 | ) | -3 | % | ||||
|
General
and Administrative expenses
|
$ | (6,132,848 | ) | $ | (4,094,312 | ) | 50 | % | ||||
|
Income
from operations
|
$ | 42,240,834 | $ | 30,577,157 | 38 | % | ||||||
|
Other
Income (expenses), net
|
$ | (465,021 | ) | $ | 30,254 | 1637 | % | |||||
|
Income
before taxes
|
$ | 41,775,813 | $ | 30,607,411 | 36 | % | ||||||
|
Income
Taxes
|
$ | 11,184,398 | $ | 8,211,939 | 36 | % | ||||||
|
Net
Income
|
$ | 30,591,415 | $ | 22,395,472 | 37 | % | ||||||
|
Basic
and Diluted Earnings Per Share
|
$ | 1.00 | $ | 0.90 | ||||||||
Net
Revenue
Net revenue
was $110,276,908 in fiscal year 2009, an increase of $22,788,574 (or
approximately 26%) as compared to fiscal year 2008. This increase was primarily
attributable to the
growth in our bromine
and crude salt segment with revenue increasing from $63,664,156 for fiscal year
2008 to $74,330,586 for fiscal year 2009, an increase of approximately 17%; and
in our sales of chemical products, which increased from $ 23,824,178 for
fiscal year 2008 to $35,946,322 for fiscal year 2009, an increase of
approximately 51%. The increase in the net sales of bromine and crude salt was
primarily due to the net effect of i) the increase in sales volume arising from
the increase in production capacity after the asset acquisitions made in January
of 2009 and in September of 2009, which are now in full operation and ii) the
decrease in average selling price of both bromine and crude salt. As the demand
for bromine always exceeded the supply available, the increase in production of
the Company contributed to the increase in sales in the current year. Among the
total increase of net sales, $7,145,507 was due to the asset
acquisitions. The increase in the sales of our chemical products was
due to the introduction of new environmental friendly additive products which
was in operation since September 2008, solid lubricant and polyether lubricant,
for use in oil and gas exploration in fourth quarter of 2009, and improvement of
our pesticide intermediate products.
|
Net
Revenue by Segment
|
|||||||||||||||
|
Year
Ended
|
Year
Ended
|
||||||||||||||
|
December 31,
2009
|
December 31,
2008
|
||||||||||||||
|
Segment
|
% of
total
|
% of
total
|
|||||||||||||
|
Bromine
and Crude salt
|
$ | 74,330,586 | 67 % | $ | 63,664,156 | 73 % | |||||||||
|
Chemical
Products
|
$ | 35,946,322 | 33 % | $ | 23,824,178 | 27 % | |||||||||
|
Total
sales
|
$ | 110,276,908 | 100 % | $ | 87,488,334 | 100 % | |||||||||
|
Year
Ended December 31
|
|
|
2009
vs. 2008
|
|
|
Segment
|
% Increase (decrease)
of Net Sales
|
|
Bromine
and Crude salt
|
17%
|
|
Chemical
Products
|
51%
|
|
Shouguang
City Haoyuan Chemical Company Limited
|
Years Ended December 31 |
|
||
|
Product sold in metric
tons
|
2009
|
2008
|
%
Change
|
|
|
Bromine
|
34,930
|
28,673
|
+21.8
|
|
|
Crude
Salt
|
356,839
|
66,500
|
+436.6
|
|
The
proportion of our total net sales represented by bromine and crude salt in
fiscal year 2009 decreased as compared to the same period in 2008 as a result of
fast growth in chemical segment. Although sales in both segments
grew, the growth of sales of bromine and crude salt was lower than that of our
chemical products operations mainly due the introduction of new environmental
friendly additive products, solid lubricant and polyether lubricant, for use in
oil and gas exploration in fourth quarter of 2009, and improvement of our
pesticide intermediate.
Cost of Net
Revenue
Cost
of net revenue reflects
the raw materials consumed, direct salaries and benefits, electricity and other
manufacturing costs. Our cost of net revenue was $61,402,820 in fiscal year
2009, an increase of $9,100,735 (or approximately 17%) from the cost of net
revenue in fiscal year 2008. This increase rate for cost of net
revenue was lower than the increase rate of sales due to the cost inflation rate
was lower than the increase rate of selling price.
Gross
Profit
|
Years
Ended December 31
|
||||||||||||||
| 2009 | % of Net revenue | 2008 | % of Net revenue | |||||||||||
|
Cost
of net revenue
|
$ | 61,402,820 | 55.68 % | $ | 52,302,085 | 59.78 % | ||||||||
|
Gross
Profit
|
$ | 48,874,088 | 44.32 % | $ | 35,186,249 | 40.22 % | ||||||||
Our gross
profit rate increased from 40.22% in 2008 to 44.32% in 2009 due to an increase
in our net revenue by 26% in 2009 compared to 2008, which enabled us to leverage
our fixed costs. The increase was also due to the fact that increases
in our selling prices were higher than increases in the rate of inflation in the
PRC in 2009, because the demand exceeded the supply of bromine in the China
domestic market. We except the trend will continue in the year of
2010
Research and
Development Costs
Research and development costs were first recorded
in the third quarter of 2007. The research and development costs result from a
five year agreement entered into by SYCI and East China University of Science
and Technology in June 2007 to establish a Co-Op Research and Development Center
to develop new bromine-based chemical compounds and products to be utilized in
the pharmaceutical industry. All research findings and patents
developed by this Center will belong to Gulf Resources. The research and
development costs incurred for the year ended December 31, 2009 and 2008 was
$500,406 and $514,780, respectively.
General and
Administrative Expenses
General and administrative expenses were
$6,132,848 in fiscal year 2009, an increase of $2,038,536 (or approximately 50%)
from the general and administrative expenses of $4,094,312 during fiscal year
2008. This increase in general and administrative expenses was primarily
due to an expense in the amount of $1,367,156 related to a warrant issued to the
placement agent in our December 2009 private placement and expenses in the
amount of $ 227,478 relating to our listing on Nasdaq in October
2009.
Income
from Operations
|
Income
from Operations by Segment
|
||||||||||||||||
|
Year
Ended
|
Year
Ended
|
|||||||||||||||
|
December 31,
2009
|
December 31,
2008
|
|||||||||||||||
|
Segments
|
% of
total
|
% of
total
|
||||||||||||||
|
Bromine
and Crude salt
|
$ | 32,954,828 | 72 % | $ | 24,663,244 | 75 % | ||||||||||
|
Chemical
Products
|
12,530,417 | 28 % | 8,121,203 | 25 % | ||||||||||||
|
Income
from operations before corporate costs
|
45,485,245 | 100 % | 32,784,447 | 100 % | ||||||||||||
|
Corporate
costs
|
(3,244,411 | ) | (2,209,290 | ) | ||||||||||||
|
Income
from operations
|
$ | 42,240,834 | $ | 30,577,157 | ||||||||||||
Income from operations was $42,240,834
in fiscal year 2009 (or 38.3% of net revenue), an increase of $11,663,677
(or approximately 38%) over
income from operations in fiscal year 2008. This increase resulted primarily
from the increase in revenues and relatively lower increase in cost of net sales
as shown above. This increase resulted from increases in income from
operations in both the bromine and crude salt, and the chemical products
segments of the Company. In fiscal year 2009, income from operations in the
bromine and crude salt segment was $32,954,828, an increase of 34% from
$24,663,244 in fiscal year 2008. In fiscal year 2009, income from operations in
the chemical products division was $12,530,417, an increase of 54% from income
from operations in this division of $8,121,203 in fiscal year 2008. The increase
in the income from operations of bromine and crude salt was primarily as a
result of the assets acquisitions as well production capacity expansion. The
increase in the income from operations of our chemical products was due to the
new product of friendly additive products, solid lubricant and polyether
lubricant, for use in oil and gas exploration in fourth quarter of 2009, and
improvement of our pesticide intermediate.
Other Income
(Expense)
Other expense was $465,021 for fiscal year 2009, an increase of
$495,275 from the other income of $30,254 for fiscal year 2008. This increase
was primarily due to the loss from disposal of property, plant and equipment.
During the year ended December 31, 2009, a loss on disposal of property, plant
and equipment of $528,749 was resulted because the PPE disposed of were
specialized equipment used in the bromine producing industry in which there are
a few suppliers and second-hand market is not active, resulting in low
second-hand price.
Net Income
Net income was $30,591,415 in fiscal year 2009, an increase of $8,195,943
(or approximately 37%) as compared to fiscal year 2008. This increase was
primarily attributable to the $10,666,430 net revenue increase from Bromine and
Crude Salt segment and the $12,122,144 net revenue increase from chemical
products segment. Another reason for this result was the leverage of fixed cost
due to expansion of sales.
Year
ended December 31, 2008 as compared to year ended December 31, 2007
|
Year
ended
|
Year
ended
|
Percentage
|
|
|
December
31, 2008
|
December
31, 2007
|
Change
|
|
|
Net
Sales
|
$87,488,334
|
$54,248,650
|
61%
|
|
Cost
of Net Revenue
|
$(52,302,085)
|
$(32,108,180)
|
63%
|
|
Gross
Profit
|
$35,186,249
|
$22,140,470
|
59%
|
|
Research
and Development costs
|
$(514,780)
|
$(268,168)
|
92%
|
|
General
and Administrative expenses
|
$(4,094,312)
|
$(1,847,374)
|
122%
|
|
Income
from operations
|
$30,577,157
|
$20,024,928
|
53%
|
|
Other
Income (expenses), net
|
$30,254
|
$6,717
|
350%
|
|
Income
before taxes
|
$30,607,411
|
$20,031,645
|
53%
|
|
Income
Taxes
|
$8,211,939
|
$7,798,682
|
5%
|
|
Net
Income
|
$22,395,472
|
$12,232,963
|
83%
|
|
Basic
and Diluted Earnings Per Share
|
$0.90
|
$
0.51
|
Net
Revenue
Net revenue
was $87,488,334 in fiscal year 2008, an increase of $33,239,684 (or
approximately 61%) as compared to fiscal year 2007. This increase was primarily
attributable to the
growth in our bromine
and crude salt segment with revenue increasing from $34,015,484 for fiscal year
2007 to $63,664,156 for fiscal year 2008, an increase of
approximately 87%; and in our sales of chemical products, which increased from
$ 20,233,166 for fiscal year 2007 to $23,824,178 for fiscal year
2008, an increase of approximately 20%.The increase in the net sales of bromine
and crude salt was primarily due to the fact that the asset acquisitions made in
2007 and in January of 2008 are now in full operation. Among the total
increase/decrease of net sales, $24,836,255 was due to the asset
acquisitions. The increase/decrease in the sales of our chemical
products was due to the introduction of new environmental friendly additive
products, solid lubricant and polyether lubricant, for use in oil and gas
exploration in fourth quarter of 2008, which generated $2,503,526 net revenue
for our chemical products segment
|
Net
Revenue by Segment
|
||||||
|
Year
Ended
|
Year
Ended
|
|||||
|
December 31,
2008
|
December 31,
2007
|
|||||
|
Segment
|
Percent
of total
|
Percent
of total
|
||||
|
Bromine
and Crude salt
|
$
|
63,664,156
|
73%
|
$
|
34,015,484
|
63%
|
|
Chemical
Products
|
$
|
23,824,178
|
27%
|
$
|
20,233,166
|
37%
|
|
Total
sales
|
$
|
87,488,334
|
100%
|
$
|
54,248,650
|
100%
|
|
Year
Ended December 31
|
|
|
2008
vs. 2007
|
|
|
Segment
|
% Increase of Net
Sales
|
|
Bromine
and Crude salt
|
87%
|
|
Chemical
Products
|
18%
|
|
Shouguang
City Haoyuan Chemical Company Limited
|
Years Ended December
31
|
||
|
Product sold in metric
tons
|
2008
|
2007
|
%
Change
|
|
Bromine
|
28,673
|
17,648
|
62.5%
|
|
Crude
Salt
|
66,500
|
51,000
|
30.4%
|
The
proportion of our total net sales represented by bromine and crude salt in
fiscal year 2008 increased as compared to the same period in
2007. Although sales in both segments grew, the growth of sales of
bromine and crude salt was greater than that of our chemical products operations
mainly due to the January 2008 bromine asset acquisition.
Cost of Net
Revenue
Cost
of net revenue reflects
the raw materials consumed, direct salaries and benefits, electricity and other
manufacturing costs. Our cost of net revenue was $52,302,085 in fiscal year
2008, an increase of $20,193,905 (or approximately 63%) from the cost of net
revenue in fiscal year 2007. This increase was in line with the
increase in our net revenue which was approximately 61% higher in
2008.
Gross
Profit
|
Years
Ended December 31
|
||||||||||
|
2008
|
%
of Net revenue
|
2007
|
%
of Net revenue
|
|||||||
|
Cost
of net revenue
|
$ | 52,302,085 |
59.78%
|
$ | 32,108,180 | 59.70% | ||||
|
Gross
Profit
|
$ | 35,186,249 | 40.22% | $ | 22,140,470 | 40.30% | ||||
Our net
revenue increased 61% in 2008 compared to 2007, which enabled us to leverage our
fixed costs. However, this was offset by an increase in raw material
prices in an inflationary environment during 2008. Especially in the
third quarter of 2008, the prices of raw materials for our bromine and crude
salt segment increased significantly. Both sulfur and sulphuric acid
increased by more than 100% and raw coal increased by approximately 200%. The
prices of raw materials for our chemical products segment increased
approximately 5-10%. As a result, cost of net revenue as a percentage of net
revenue stayed at 59% for both the 2008 and 2007. Gross profit as a
percentage of net revenue also stayed at 40% for both 2008 and
2007.
Research and
Development Costs
Research and development costs were first recorded
in the third quarter of 2007. The research and development costs
result from a five year agreement entered into by SYCI and East China University
of Science and Technology in June 2007 to establish a Co-Op Research and
Development Center to develop new bromine-based chemical compounds and products
to be utilized in the pharmaceutical industry. All research findings
and patents developed by this Center will belong to Gulf Resources.
General and
Administrative Expenses
General and administrative expenses were
$4,094,312 in fiscal year 2008, an increase of $2,246,938 (or approximately
122%) from the general and administrative expenses of $1,847,374 during fiscal
year 2007. This significant increase in general and
administrative expenses was primarily due to the land tax and mineral resources
compensation fees for 2008 are $660,474 and $1,228,834
respectively.
Income
from Operations
|
Income
from Operations by Segment
|
||||||
|
Year
Ended
|
Year
Ended
|
|||||
|
December 31,
2008
|
December 31,
2007
|
|||||
|
Segments
|
% of
total
|
% of
total
|
||||
|
Bromine
and Crude salt
|
$
|
24,663,244
|
75%
|
$
|
14,181,054
|
66%
|
|
Chemical
Products
|
$
|
8,121,203
|
25%
|
$
|
7,164,833
|
34%
|
|
Income
from operations before corporate costs
|
$
|
32,784,447
|
100%
|
$
|
21,345,887
|
100%
|
|
Corporate
costs
|
$
|
(2,209,290
)
|
$
|
(1,320,959)
|
||
|
Income
from operations
|
$
|
30,577,157
|
$
|
20,024,928
|
||
Income
from operations was $30,577,157 in fiscal year 2008 (or 34.9% of net revenue),
an increase of $10,552,229 (or approximately 52.7%) over income from operations
in fiscal year 2007. This increase resulted primarily from the increase in
revenues and relatively lower increase in cost of net sales as shown
above. This increase resulted from increases in income from operations in
both the bromine and crude salt, and the chemical products segments of the
Company. In fiscal year 2008, income from operations in the bromine and
crude salt segment was $24,663,244, an increase of 73% from $14,181,054 in
fiscal year 2007. In fiscal year 2008, income from operations in the chemical
products division was $8,121,203, an increase of 13% from income from operations
in this division of $7,164,833 in fiscal year 2007. The increase in the income
from operations of bromine and crude salt was primarily as a result of the
assets acquisitions. The increase in the income from operations of our chemical
products was due to the new product of friendly additive products, solid
lubricant and polyether lubricant, for use in oil and gas exploration in fourth
quarter of 2008.
Other Income
(Expense)
Other income was $30,254 for fiscal year 2008, an increase of
$23,537 from the other income of $6,717 for fiscal year 2007. This increase was
primarily due to the $34,018 of interest income and $3,764 of sundry
expense.
Net Income
Net income was $22,395,472 in fiscal year 2008, an increase of
$10,162,509 (or approximately 83%) as compared to fiscal year 2007. This
increase was primarily attributable to the $29,648,672 net revenue increase from
Bromine and Crude Salt segment. Another reason for this result was the slightly
increase of income taxes by $413,257 from $7,798,682 for fiscal year 2007 to
$8,211,939 for fiscal year 2008. Our income taxation rate was 25% in 2008 as
compared to 33% in 2007, and it become effective on January 1,
2008.
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2009, Cash and Cash Equivalents were $45,536,735 as compared to
$30,878,044 as of December 31, 2008. The components of this increase
of $14,658,691 are reflected below.
|
Cash
Flow
|
||||||||
|
Years
Ended December 31
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
cash provided by operating activities
|
$ | 39,820,378 | $ | 24,896,306 | ||||
|
Net
cash used in investing activities
|
$ | (38,244,301 | ) | $ | (17,365,195 | ) | ||
|
Net
cash provided by (used in) financing activities
|
$ | 13,073,463 | $ | 11,272,480 | ||||
|
Effects
of exchange rate changes on cash
|
$ | 9,151 | $ | 1,300,578 | ||||
|
Net
cash inflow
|
$ | 14,658,691 | $ | 20,104,169 | ||||
In 2009
the Company met its working capital and capital investment requirements mainly
by using operating cash flows
Net
Cash Provided by Operating Activities
During
the year ended December 31, 2009, we had positive cash flow from operating
activities of $
39,820,378
,
primarily attributable to net income of $30,591,415. Net cash
provided by operating activities in 2009 improved by $14,924,072 from that of
2008. The primary source of this was an increase in 2009 net income,
which was $8,195,943 more than in 2008.
Net
Cash Provided (Used) by Investing Activities and Financing
Activities
The
Company used $38,244,301 to acquire additional mineral rights, property,
plant and equipment during fiscal year 2009. The acquisition was
financed by cash flows from operating activities.
We
anticipate that our available funds and cash flows generated from operations
will be sufficient to meet our anticipated on-going operating needs for the next
twelve (12) months. However we will likely need to raise additional capital in
order to fund the ongoing program of acquiring unlicensed bromine properties and
increasing our chemical production capacity. We expect to raise those
funds through the issuance of additional shares of our equity securities in one
or more public or private offerings, or through credit facilities obtained with
lending institutions or a combination of both. There can be no
guarantee that we will be able to obtain such funding, whether through the
issuance of debt or equity, on terms satisfactory to management and our board of
directors.
Working
capital at December 31, 2009 was approximately $51,667,215 at December 31, 2009
as compared to $24,669,553 at December 31, 2008. The increase was mainly due to
the proceeds from the private placement in December 2009.
For the
immediate future we intend to focus our efforts on the activities of SCHC and
SYCI. Our short to mid-term strategic plan is based on expansion in the Chinese
market. Our long-term strategic goal is to expand our market to overseas
countries. As a result, we may issue additional shares of our capital
stock and incur new debt in order to raise cash for acquisitions and other
capital expenditures during the next twelve months.
On January 4
, 2010, the Company approved the
commencement of the construction of a new chemical additives production line for
waste water treatment, which is expected to start production in July 2010 and
the estimated capital expenditure for the new production line is expected to be
in the range of $8 million to $10 million.
We may
not be able to identify, successfully integrate or profitably manage any
businesses or business segment we may acquire, or any expansion of our business.
An expansion may involve a number of risks, including possible adverse effects
on our operating results, diversion of management attention, inability to retain
key personnel, risks associated with unanticipated events and the financial
statement effect of potential impairment of acquired intangible assets, any of
which could have a materially adverse effect on our condition and
results of operations. In addition, if competition for acquisition
candidates or operations were to increase, the cost of acquiring businesses
could increase materially. Our inability to implement and manage our expansion
strategy successfully may have a material adverse effect on our business
and future prospects. We may affect a business acquisition with a target
business which may be financially unstable, under-managed, or in its early
stages of development or growth.
Contractual
Commitments
The
following table sets forth payments due by period for fixed contractual
obligations as of December 31, 2009.
|
Contractual
obligations
|
Payments due by period |
|
||||||||||||||||||
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than
5
years
|
||||||||||||||||
|
Operating
Lease Obligations
|
$ | 6,840,427 | $ | 42,127 | $ | 150,355 | $ | 157,804 | $ | 6,490,141 | ||||||||||
Critical
Accounting Policies and Estimates
Basis of
Consolidation
The
consolidated financial statements include the accounts of Gulf Resources, Inc.
and its wholly-owned subsidiaries, 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”), which owns
100% of SCHC and SYCI, which is 100% owned by SCHC. All material
intercompany transactions have been eliminated on consolidation.
The
consolidated financial statements have been restated for all periods prior to
the mergers to include the financial position, results of operations and cash
flows of the commonly controlled companies.
Use of
Estimates
The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and this requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.
Accounts Receivable and
Allowance of Doubtful Accounts
Accounts
receivable is stated at cost, net of allowance for doubtful accounts. The
Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectivity of trade and other receivables. A considerable
amount of judgment is required in assessing the amount of allowance and the
Company considers the historic level of credit losses and applies certain
percentage to accounts receivable balance. The Company makes judgments about the
credit worthiness of each customer based on ongoing credit evaluations, and
monitors current economic trends that might impact the level of credit losses in
the future. If the financial condition of the customer begins to deteriorate,
resulting in their inability to make payments, a larger allowance may be
required.
As of
December 31, 2009 and 2008, allowance for doubtful accounts was nil. No
allowances for doubtful accounts were charged to the income statement for the
years ended December 31, 2009, 2008 and 2007.
Concentration of Credit
Risk
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 and due to the
generally short payment terms.
Inventories
Inventories
are stated at the lower of cost, determined on a first-in first-out cost basis,
or market. Costs of work-in-progress and finished goods comprise of direct
materials, direct labor and an attributable portion of manufacturing overhead.
Net realizable value is based on estimated selling price less costs to complete
and selling expenses.
Property, Plant and
Equipment
Property,
Plant and Equipment are stated at cost. Expenditures for new facilities or
equipment and expenditures that extend the useful lives 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.
Mineral
rights are recorded at cost. Mineral rights are amortized ratably over the term
of the lease, or the equivalent term under the units of production method,
whichever is shorter.
The
Company’s depreciation and amortization policies on fixed assets other than
mineral rights and construction in progress are as follows:
|
Useful
life
(in
years)
|
|
|
Buildings
|
20
|
|
Machinery
|
8
|
|
Motor
vehicles
|
5
|
|
Equipment
|
8
|
Asset Retirement
Obligation
The
Company follows a uniform methodology for accounting for estimated reclamation
and abandonment costs. The fair value of a liability for an asset retirement
obligation to be recognized in the period in which the legal obligation
associated with the retirement of the long-lived asset is incurred. When the
liability is initially recorded, the offset is capitalized by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. To settle the
liability, the obligation is paid, and to the extent there is a difference
between the liability and the amount of cash paid, a gain or loss upon
settlement is recorded.
Currently,
there are no reclamation or abandonment obligations associated with the land
being utilized for exploitation.
Recoverability of Long Lived
Assets
Long-lived
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. The Company is not aware of any events or circumstances
which indicate the existence of an impairment which would be
material.
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
scheme at the applicable rate based on the employees’ salaries. The
required contributions under the retirement plans are charged to the
consolidated income statement on an accrual basis when they are due. The
Company’s contributions totaled $270,324, $151,005 and nil for the years
ended December 31, 2009, 2008 and 2007, respectively.
Mineral
Rights
The
Company follows FASB ASC 805 that certain mineral rights are considered tangible
assets and that mineral rights should be accounted for based on their substance.
Mineral rights are included in property, plant and equipment.
Reporting Currency and
Translation
The
financial statements of the Company’s foreign subsidiaries are measured using
the local currency as the functional currency; however, the reporting currency
is the United States dollar (“USD”). Assets and liabilities of the
Company have been translated into dollars using the exchange rate at the balance
sheet date. The average exchange rate for the period has been used to translate
revenues and expenses. Translation adjustments are reported
separately and accumulated in a separate component of equity (cumulative
translation adjustment).
Foreign
Operations
All of
the Company’s operations and assets are located in China. The Company
may be adversely affected by possible political or economic events in this
country. The effect of these factors cannot be accurately
predicted.
Revenue
Recognition
The
Company recognizes revenue, net of any taxes, when persuasive evidence of a
customer or distributor arrangement exists or acceptance occurs, receipt of
goods by customer occurs, the price is fixed or determinable, and the sales
revenues are considered collectible. Subject to these criteria, the
Company generally recognizes revenue at the time of shipment or delivery to the
customer, and when the customer takes ownership and assumes risk of loss based
on shipping terms.
Income
Taxes
The
Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases and tax loss
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Shipping and Handling Fees
and Costs
The
Company does not charge its customers for shipping and handling. The
Company classifies shipping and handling costs as part of the cost of net sales,
which amounted to $492,582, $424,819 and $384,868 for the years ended December
31, 2009, 2008 and 2007, respectively.
Stock-based
compensation
Common
stock, stock options and stock warrants issued to employees or directors are
recorded at their fair values estimated at grant date using the Black-Scholes
model and the portion that is ultimately expected to vest is recognized as
compensation cost over the requisite service period.
Common
stock, stock options and stock warrants issued to other than employees or
directors are recorded on the basis of their fair value using the Black-Scholes
model on the basis of the market price of the underlying common stock on the
“valuation date,” which for options and warrants related to contracts that have
substantial disincentives to non-performance is the date of the contract, and
for all other contracts the measurement date is the date that the service is
complete. Expense related to the options and warrants is recognized on a
straight-line basis over the shorter of the period over which services are to be
received or the vesting period. Where expense must be recognized prior to a
valuation date, the expense is computed under the Black-Scholes model on the
basis of the market price of the underlying common stock at the end of the
period, and any subsequent changes in the market price of the underlying common
stock up through the valuation date is reflected in the expense recorded in the
subsequent period in which that change occurs.
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.
Interest
Rate Risk
We are
exposed to interest rate risk due primarily to our short-term bank loans.
Although the interest rates are fixed for the terms of the loans, the terms are
typically twelve months and interest rates are subject to change upon renewal.
Since July 20, 2007, the People’s Bank of China has increased the interest rate
of Renminbi bank loans with a term of six months or less by 0.2% and loans with
a term of six to 12 months by 0.3%. The new interest rates are approximately
6.0% and 6.8% for Renminbi bank loans with a term six months or less and loans
with a term of six to 12 months, respectively. The change in interest rates has
no impact on our bank loans secured before July 28, 2007. We monitor interest
rates in conjunction with our cash requirements to determine the appropriate
level of debt balances relative to other sources of funds. We have not entered
into any hedging transactions in an effort to reduce our exposure to interest
rate risk.
Credit
Risk
The
Company is exposed to credit risk from its cash in bank and fixed deposits and
accounts receivable. The credit risk on cash in bank and fixed deposits is
limited because the counterparties are recognized financial institutions.
Accounts receivable are subjected to credit evaluations. An allowance has been
made for estimated irrecoverable amounts which have been determined by reference
to past default experience and the current economic environment.
Foreign
Exchange Risk
The value
of the Renminbi against the U.S. dollar and other currencies is affected by,
among other things, changes in China’s political and economic conditions. Since
July 2005, the Renminbi has no longer been pegged to the U.S. Dollar at a
constant exchange rate. Although the People’s Bank of China regularly intervenes
in the foreign exchange market to prevent significant short-term fluctuations in
the exchange rate, the Renminbi may appreciate or depreciate within a flexible
peg range against the U.S. dollar in the medium to long term. Moreover, it is
possible that in the future, PRC authorities may lift restrictions on
fluctuations in the Renminbi exchange rate and lessen intervention in the
foreign exchange market.
Because
substantially all of our earnings and cash assets are denominated in Renminbi,
but our reporting currency is the U.S. dollar, fluctuations in the exchange rate
between the U.S. dollar and the Renminbi will affect our balance sheet and our
earnings per share in U.S. dollars. In addition, appreciation or depreciation in
the value of the Renminbi relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying
change in our business or results of operations. Fluctuations in the exchange
rate will also affect the relative value of any dividend we issue in the future
that will be exchanged into U.S. dollars and earnings from, and the value of,
any U.S. dollar-denominated investments we make in the future.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions in an effort to reduce our exposure to foreign currency exchange
risk. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert Renminbi into foreign
currencies.
Most of
the transactions of the Company are settled in Renminbi and U.S. dollars. In the
opinion of the directors, the Company is not exposed to significant foreign
currency risk.
Inflation
Inflationary
factors, such as increases in the cost of our products and overhead costs, could
impair our operating results. Although we do not believe that inflation has had
a material impact on our financial position or results of operations to date, a
high rate of inflation in the future may have an adverse effect on our ability
to maintain current levels of gross margin and selling, general and
administrative expenses as a percentage of sales revenue if the selling prices
of our products do not increase with these increased costs.
Company’s
Operations are Substantially in Foreign Countries
Substantially
all of our operations are conducted in China and are subject to various
political, economic, and other risks and uncertainties inherent in conducting
business in China. Among other risks, the Company and its subsidiaries’
operations are subject to the risks of restrictions on transfer of funds; export
duties, quotas, and embargoes; domestic and international customs and tariffs;
changing taxation policies; foreign exchange restrictions; and political
conditions and governmental regulations. Additional information regarding such
risks can be found under the heading “Risk Factors” in this Form
10-K.
|
March
31
|
June
30
|
September
30
|
December
31
|
Total
|
|||||||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Fiscal
Year 2009
|
|||||||||||||||||||||||||
|
Operating
revenue
|
$ | 23,634 | $ | 29,591 | $ | 27,667 | $ | 29,385 | $ | 110,277 | |||||||||||||||
|
Operating
income
|
|
8,868 |
|
12,024 |
|
11,138 |
|
10,211 |
|
42,241 | |||||||||||||||
|
Net
income (loss)
|
|
6,533 |
|
8,972 |
|
8,328 |
|
6,759 |
|
30,592 | |||||||||||||||
|
Basic
earnings (loss) per share
|
$ | 0.23 | $ | 0.29 | $ | 0.27 | $ | 0.21 | $ | 1.00 | |||||||||||||||
|
Diluted
earnings (loss) per share
|
$ | 0.23 | $ | 0.29 | $ | 0.27 | $ | 0.21 | $ | 1.00 | |||||||||||||||
|
Operating
income as a percentage of operating revenues
|
|
37.5 % |
|
40.6 % |
|
40.3 % |
|
34.7 % |
|
38.3 % | |||||||||||||||
|
Fiscal
Year 2008
|
|||||||||||||||||||||||||
|
Operating
revenue
|
$ | 22,034 | $ | 23,766 | $ | 17,555 | $ | 24,133 | $ | 87,488 | |||||||||||||||
|
Operating
income
|
|
8,447 |
|
8,559 |
|
5,083 |
|
8,488 |
|
30,577 | |||||||||||||||
|
Net
income (loss)
|
|
6,147 |
|
6,286 |
|
3,737 |
|
6,225 |
|
22,395 | |||||||||||||||
|
Basic
earnings (loss) per share
|
$ | 0.25 | $ | 0.25 | $ | 0.15 | $ | 0.25 | $ | 0.90 | |||||||||||||||
|
Diluted
earnings (loss) per share
|
$ | 0.25 | $ | 0.25 | $ | 0.15 | $ | 0.25 | $ | 0.90 | |||||||||||||||
|
Operating
income as a percentage of operating revenues
|
|
38.34 % |
|
36.01 % |
|
28.95 % |
|
35.17 % |
|
34.95 % | |||||||||||||||
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2009, 2008 and 2007
C O N T E N T
S
|
PAGE
|
||||||
|
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
|
F-2
– F-3
|
|||||
|
CONSOLIDATED
BALANCE SHEETS
|
F-4
|
|||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
F-5
|
|||||
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
F-6
|
|||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
F-7
– F-8
|
|||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
F-9
– F-10
|
|||||
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-11
– F-28
|
|||||
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Gulf
Resources, Inc.
We have
audited the accompanying consolidated balance sheet of Gulf Resources, Inc. (the
“Company”) as of December 31, 2009 and the related consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the year
ended December 31, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Gulf Resources, Inc. at
December 31, 2009, and the results of its operations and its cash flows for the
year ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
/s/
BDO
Limited
Hong
Kong, March 2, 2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and
Stockholders
of Gulf Resources, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheet of Gulf Resources, Inc. and
Subsidiaries (the “Company”) as of December 31, 2008, and the related
consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the two years in the period ended December 31,
2008. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2008, and the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 2008,
in conformity with accounting principles generally accepted in the
United States of America.
/s/ Morison
Cogen LLP
Bala
Cynwyd, Pennsylvania
March 12,
2009
|
GULF
RESOURCES, INC.
|
|||||||||||||
|
AND
SUBSIDIARIES
|
|||||||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||||||||
|
(Expressed
in U.S. dollars)
|
|||||||||||||
| As of December 31, | ||||||||
|
Current
Assets
|
2009
|
2008
|
||||||
|
Cash
|
$ | 45,536,735 | $ | 30,878,044 | ||||
|
Accounts
receivable
|
14,960,002 | 11,674,645 | ||||||
|
Inventories
|
650,332 | 418,259 | ||||||
|
Prepayment
and deposit
|
233,330 | 229,408 | ||||||
|
Prepaid
land lease
|
46,133 | 15,849 | ||||||
|
Deferred
tax asset
|
85,672 | 3,453 | ||||||
|
Other
receivable
|
2,195,208 | 2,641 | ||||||
|
Total
Current Assets
|
63,707,412 | 43,222,299 | ||||||
|
Property,
plant and equipment, net
|
81,993,894 | 45,399,456 | ||||||
|
Prepaid
land lease, net of current portion
|
721,862 | 737,711 | ||||||
|
Total
Assets
|
$ | 146,423,168 | $ | 89,359,466 | ||||
|
Liabilities
and Stockholders’ Equity
|
|
|||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable and accrued expenses
|
$ |
5,823,745
|
$ | 4,746,994 | ||||
|
Loan
payable
|
-
|
4,034,250 | ||||||
|
Retention
payable
|
660,150 | - | ||||||
|
Notes
and loan payable – related parties
|
-
|
4,650,000 | ||||||
|
Due
to related parties
|
1,190 | 852,067 | ||||||
|
Taxes
payable
|
5,555,113 | 4,269,442 | ||||||
|
Total
Current Liabilities
|
12,040,198 | 18,552,753 | ||||||
|
Non
Current Liabilities
|
- | - | ||||||
|
Note
payable, net of current portion
|
- | 18,337,493 | ||||||
|
Total
Liabilities
|
$ | 12,040,198 | $ | 36,890,246 | ||||
|
|
|
|||||||
|
Stockholders’
Equity
|
||||||||
|
PREFERRED
STOCK ; $0.001 par value; 1,000,000 shares
authorized
none outstanding
|
- | - | ||||||
|
COMMON
STOCK; $0.0005 par value; 100,000,000 shares
authorized;
34,541,066 and 24,917,211 shares issued and outstanding as of December 31,
2009 and 2008, respectively
|
$ | 17,271 | $ | 12,459 | ||||
|
Additional
paid in capital
|
64,718,026 | 13,072,668 | ||||||
|
Retained
earnings unappropriated
|
59,808,289 | 31,817,465 | ||||||
|
Retained
earnings appropriated
|
5,679,769
|
3,223,418 | ||||||
|
Cumulative
translation adjustment
|
4,159,615 | 4,343,210 | ||||||
|
Total
Stockholders’ Equity
|
134,382,970 | 52,469,220 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 146,423,168 | $ | 89,359,466 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GULF
RESOURCES, INC.
|
|
AND
SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
(Expressed
in U.S. dollars)
|
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
REVENUE
|
||||||||||||
|
Net
sales
|
$ | 110,276,908 | $ | 87,488,334 | $ | 53,780,313 | ||||||
|
Maintenance
service income
|
- | - | 468,337 | |||||||||
|
|
110,276,908 | 87,488,334 | 54,248,650 | |||||||||
|
OPERATING
EXPENSES
|
||||||||||||
|
Cost
of net revenue
|
(61,402,820 | ) | (52,302,085 | ) | (32,108,180 | ) | ||||||
|
Research
and development cost
|
(500,406 | ) | (514,780 | ) | (268,168 | ) | ||||||
|
General
and administrative expenses
|
(6,132,848 | ) | (4,094,312 | ) | (1,847,374 | ) | ||||||
|
|
(68,036,074 | ) | (56,911,177 | ) | (34,223,722 | ) | ||||||
|
INCOME
FROM OPERATIONS
|
42,240,834 | 30,577,157 | 20,024,928 | |||||||||
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|||||||||
|
Interest
expense and bank charges
|
(17,078 | ) | (60,111 | ) | (161,577 | ) | ||||||
|
Rental
income
|
-
|
-
|
15,801 | |||||||||
|
Sundry
income
|
(528,748 | ) | (3,764 | ) | 97,524 | |||||||
|
Interest
income
|
80,805 | 94,129 | 54,969 | |||||||||
| (465,021 | ) | 30,254 | 6,717 | |||||||||
|
INCOME
BEFORE INCOME TAXES
|
41,775,813 | 30,607,411 | 20,031,645 | |||||||||
|
INCOME
TAXES
|
(11,184,398 | ) | (8,211,939 | ) | (7,798,682 | ) | ||||||
|
NET
INCOME
|
$ | 30,591,415 | $ | 22,395,472 | $ | 12,232,963 | ||||||
|
EARNINGS
PER SHARE
|
|
|
|
|||||||||
|
BASIC
|
$ | 1.00 | $ | 0.90 | $ | 0.51 | ||||||
|
DILUTED
|
$ | 1.00 | $ | 0.90 | $ | 0.51 | ||||||
|
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
|
|||||||||
|
BASIC
|
30,698,824 | 24,917,211 | 24,172,126 | |||||||||
|
DILUTED
|
30,701,697 | 24,917,211 | 24,172,126 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GULF
RESOURCES, INC.
|
|
AND
SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
|
(Expressed
in U.S. dollars)
|
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
NET
INCOME
|
$ | 30,591,415 | $ | 22,395,472 | $ | 12,232,963 | ||||||
|
|
|
|
||||||||||
|
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|||||||||
|
Foreign
currency translation adjustment
|
(183,595 | ) | 2,494,763 | 1,480,056 | ||||||||
|
COMPREHENSIVE
INCOME
|
$ | 30,407,820 | $ | 24,890,235 | $ | 13,713,019 | ||||||
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS
ENDED DECEMBER 31, 2009 ,2008 AND 2007
(Expressed
in U.S. dollars)
|
Statutory
|
Statutory
|
|||||||||||||||
|
Additional
|
common
|
public
|
Cumulative
|
|||||||||||||
|
Number
|
Common
|
paid-in
|
reserve
|
welfare
|
Retained
|
translation
|
||||||||||
|
of
shares
|
stock
|
Capital
|
fund
|
fund
|
earnings
|
adjustment
|
Total
|
|||||||||
|
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
|||||||||
|
BALANCE
AT DECEMBER 31, 2006
|
21,602,720
|
10,801
|
2,701,221
|
1,077,864
|
538,932
|
3,535,252
|
368,391
|
8,232,461
|
||||||||
|
Common
stock issues as payment for accrued expenses
|
|
2,494,950
|
1,248
|
5,343,147
|
-
|
-
|
-
|
-
|
5,344,395
|
|||||||
|
Common
stock issuance for prepaid expenses
|
225,000
|
113
|
892,387
|
-
|
-
|
-
|
-
|
892,500
|
||||||||
|
Common
stock issuance for acquiring assets
|
|
389,643
|
195
|
1,986,984
|
-
|
-
|
-
|
-
|
1,987,179
|
|||||||
|
Common
stock issuance for acquiring assets
|
204,898
|
102
|
941,198
|
-
|
-
|
-
|
-
|
941,300
|
||||||||
|
Issuance
of stock options
|
|
-
|
-
|
97,054
|
-
|
-
|
-
|
-
|
97,054
|
|||||||
|
Transfer
from statutory public welfare fund
|
-
|
-
|
-
|
538,932
|
(538,932)
|
-
|
-
|
-
|
||||||||
|
Transfer
from statutory common reserve fund
|
|
-
|
-
|
-
|
(294,903)
|
-
|
294,903
|
-
|
-
|
|||||||
|
Translation
adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
1,480,056
|
1,480,056
|
||||||||
|
Dividend
distribution
|
|
-
|
-
|
-
|
-
|
-
|
(4,739,600)
|
-
|
(4,739,600)
|
|||||||
|
Net
income for year ended December 31, 2007
|
|
-
|
-
|
-
|
-
|
-
|
12,232,963
|
-
|
12,232,963
|
|||||||
|
BALANCE
AT DECEMBER 31, 2007
|
|
24,917,211
|
12,459
|
11,961,991
|
1,321,893
|
-
|
11,323,518
|
1,848,447
|
26,468,308
|
|||||||
|
Translation
adjustment
|
|
-
|
-
|
-
|
-
|
-
|
-
|
2,494,763
|
2,494,763
|
|||||||
|
Waiver
of accrued interest
|
|
-
|
-
|
131,533
|
-
|
-
|
-
|
-
|
131,533
|
|||||||
|
Issuances
of warrants for consulting expenses
|
|
-
|
-
|
979,144
|
-
|
-
|
-
|
-
|
979,144
|
|||||||
|
Transfer
to statutory common reserve fund
|
|
-
|
-
|
-
|
1,901,525
|
-
|
(1,901,525)
|
-
|
-
|
|||||||
|
Net
income for year ended December 31,2008
|
|
-
|
-
|
-
|
-
|
-
|
22,395,472
|
-
|
22,395,472
|
|||||||
| GULF RESOURCES, INC. |
| AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY |
| YEARS ENDED DECEMBER 31, 2009 ,2008 AND 2007 |
| (Expressed in U.S. dollars) |
|
Statutory
|
Statutory
|
|||||||||||||||
|
Additional
|
common
|
public
|
Cumulative
|
|||||||||||||
|
Number
|
Common
|
paid-in
|
reserve
|
welfare
|
Retained
|
translation
|
||||||||||
|
of
shares
|
stock
|
capital
|
fund
|
fund
|
earnings
|
adjustment
|
Total
|
|||||||||
|
|
$
|
$
|
$
|
$
|
$
|
$
|
$
|
|||||||||
|
BALANCE
AT DECEMBER 31,2008
|
24,917,211
|
12,459
|
13,072,668
|
3,223,418
|
-
|
31,817,465
|
4,343,210
|
52,469,220
|
||||||||
|
Translation
adjustment
|
|
-
|
|
-
|
-
|
-
|
-
|
-
|
133,789
|
133,789
|
||||||
|
Common
stock issued for settlement of stockholder’s notes payable
|
5,250,000
|
2,625
|
21,284,868
|
-
|
-
|
-
|
-
|
21,287,493
|
||||||||
|
Common
stock issuance for acquiring assets
|
|
1,432,341
|
|
716
|
6,027,872
|
-
|
-
|
-
|
-
|
6,028,588
|
||||||
|
Issuance
of warrants to non-employees
|
-
|
-
|
1,415,772
|
-
|
-
|
-
|
-
|
1,415,772
|
||||||||
|
Issuance
of stock options to employees
|
-
|
-
|
606,468
|
-
|
-
|
-
|
-
|
606,468
|
||||||||
|
Net
income for year ended December 31, 2009
|
|
-
|
|
-
|
-
|
-
|
-
|
30,591,415
|
-
|
30,591,415
|
||||||
|
Private
placement
|
2,941,182
|
1,471
|
23,498,569
|
-
|
-
|
-
|
-
|
23,500,040
|
||||||||
|
Fractional
shares upon reverse stock split
|
|
332
|
|
-
|
-
|
-
|
-
|
-
|
|
-
|
-
|
|||||
|
Transfer
to statutory common reserve fund
|
-
|
-
|
-
|
2,456,351
|
-
|
(2,456,351)
|
-
|
-
|
||||||||
|
Reclassification
adjustment
|
-
|
-
|
(1,188,191)
|
-
|
-
|
(144,240)
|
(317,384)
|
(1,649,815)
|
||||||||
|
BALANCE
AT December 31,2009
|
34,541,066
|
|
17,271
|
|
64,718,026
|
5,679,769
|
-
|
|
59,808,289
|
|
4,159,615
|
|
134,382,970
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
|
GULF
RESOURCES, INC.
|
|||||||||
|
AND
SUBSIDIARIES
|
|||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||||
|
(Expressed
in U.S. dollars)
|
|||||||||
|
Years
Ended December 31,
|
|||||||||
|
2009
|
2008
|
2007
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|||
|
Net
income
|
|
$
|
30,591,415
|
|
$
|
22,395,472
|
$
|
12,232,963
|
|
|
Adjustments
to reconcile net income
|
|
|
|
|
|
|
|
|
|
|
Amortization
of warrants
|
-
|
979,144
|
-
|
||||||
|
Amortization
of prepaid expenses
|
57,985
|
145,484
|
747,016
|
||||||
|
Depreciation
and amortization
|
7,199,658
|
4,727,865
|
1,298,451
|
||||||
|
Allowance
for obsolete and slow-moving inventories
|
|
|
(9,182)
|
|
|
-
|
|
-
|
|
|
Loss
from disposal of property, plant and equipment
|
528,749
|
-
|
-
|
||||||
|
Stock-based
compensation expense
|
2,022,240
|
-
|
97,054
|
||||||
|
Changes
in assets and liabilities
|
|
|
|
|
|
|
|
-
|
|
|
Accounts
receivable
|
(3,283,341)
|
(7,203,377)
|
(2,347,199)
|
||||||
|
Inventories
|
|
|
(222,749)
|
|
|
49,955
|
|
86,336
|
|
|
Prepayment
and deposit
|
|
|
(3,920)
|
|
|
(588,542)
|
|
(226,911)
|
|
|
Deferred
tax
|
(82,166)
|
(3,448)
|
-
|
||||||
|
Other
receivable
|
|
|
353
|
|
|
-
|
|
-
|
|
|
Accounts
payable and accrued expenses
|
1,075,519
|
1,788,969
|
2,014,738
|
||||||
|
Retention
payable
|
659,745
|
-
|
-
|
||||||
|
Due
to related parties
|
|
|
1,190
|
|
|
2,604,784
|
|
2,065,580
|
|
|
Taxes
payable
|
1,284,882
|
-
|
-
|
||||||
|
Net
cash provided by operating activities
|
|
|
39,820,378
|
|
|
24,896,306
|
|
15,968,028
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Additions
of prepaid land lease
|
(72,411)
|
-
|
-
|
||||||
|
Proceeds
from sales of property, plant and equipment
|
704,767
|
-
|
-
|
||||||
|
Purchase
of property, plant and equipment
|
|
(38,876,657)
|
|
(17,365,195)
|
|
(22,679,319)
|
|||
|
Net
cash used in investing activities
|
|
(38,244,301)
|
|
(17,365,195)
|
|
(22,679,319)
|
|||
|
|
|
|
|
|
|
|
|
||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||||
|
Repayment
of notes payable
|
(1,650,000)
|
-
|
-
|
||||||
|
Repayment
of stockholder’s notes payable
|
(50,000)
|
-
|
-
|
||||||
|
Proceeds
from private placement
|
|
|
21,307,142
|
|
|
-
|
|
50,000
|
|
|
Proceeds
from bank loan
|
-
|
-
|
3,620,925
|
||||||
|
Repayment
of loan payable
|
(4,031,775)
|
4,023,250
|
-
|
||||||
|
Advances
(to)/from related parties
|
(852,067)
|
852,105
|
1,213,049
|
||||||
|
Proceeds
from notes and loan payable – related parties
|
|
|
-
|
|
|
10,240,800
|
|
11,191,950
|
|
|
Repayment
to related party
|
(1,649,837)
|
(3,843,675)
|
-
|
||||||
|
Dividends
paid
|
|
|
-
|
|
|
-
|
|
(4,739,600)
|
|
|
Net
cash provided by financing activities
|
|
|
13,073,463
|
|
|
11,272,480
|
|
11,336,324
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE ON CASH
|
|
|
9,151
|
|
|
1,300,578
|
|
456,234
|
|
|
NET
INCREASE IN CASH & CASH EQUIVALENT
|
|
|
14,658,691
|
|
|
20,104,169
|
|
5,081,267
|
|
|
CASH
& CASH EQUIVALENT - BEGINNING OF YEAR
|
|
|
30,878,044
|
|
|
10,773,875
|
|
5,692,608
|
|
|
CASH
& CASH EQUIVALENT - END OF YEAR
|
|
$
|
45,536,735
|
|
$
|
30,878,044
|
$
|
10,773,875
|
|
|
GULF
RESOURCES, INC.
|
|||||||||
|
AND
SUBSIDIARIES
|
|||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
|
|||||||||
|
(Expressed
in U.S. dollars)
|
| Years Ended December 31, | |||||||||
| 2009 |
2008
|
2007
|
|||||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
||
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
||
|
Income
taxes
|
|
$
|
10,514,697
|
|
$
|
6,813,943
|
|
$
|
6,123,070
|
|
Interest
paid
|
|
|
-
|
|
|
59,976
|
|
|
-
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Waiver
of accrued interest
|
|
$
|
-
|
|
$
|
131,533
|
|
$
|
-
|
|
Issuance
of common stock as payment for accrued expenses
|
|
$
|
-
|
|
$
|
-
|
|
$
|
5,344,395
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for prepaid expenses
|
|
$
|
-
|
|
$
|
-
|
|
$
|
892,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for settlement of stockholder’s notes
payable
|
$
|
21,287,493
|
$
|
-
|
$
|
-
|
|||
|
Issuance
of stock options to employees
|
$
|
606,468
|
$
|
-
|
$
|
-
|
|||
|
Issuance
of warrants to non-employees
|
$
|
1,415,772
|
$
|
-
|
$
|
-
|
|||
|
Issuance
of common stock for acquiring property, plant and
equipment
|
|
$
|
6,028,588
|
|
$
|
-
|
|
$
|
2,928,479
|
The
accompanying notes are an integral part of these consolidated financial
statements.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(Expressed
in U.S. dollars)
Basis of
Presentation
The
accompanying audited consolidated financial statements have been prepared by
Gulf Resources, Inc. a Delaware corporation and its subsidiaries (collectively,
the “Company”).
Upper
Class Group Limited was incorporated with limited liability in the British
Virgin Islands on July 28, 2006 and was inactive until October 9, 2006 when
Upper Class Group Limited acquired all the issued and outstanding stock of
Shouguang City Haoyuan Chemical Company Limited (“SCHC”). SCHC is an
operating company incorporated in Shouguang City, Shangdong Province, the
People’s Republic of China (the “PRC”) on May 18, 2005. SCHC is
engaged in manufacturing and trading bromine and crude salt in
China. Since the ownership of Upper Class Group Limited and SCHC were
the same, the merger was accounted for as a transaction between entities under
common control, whereby Upper Class Group Limited recognized the assets and
liabilities transferred at their carrying amounts.
On
December 12, 2006, Gulf Resources, Inc. (formerly Diversifax, Inc.), a public
“shell” company, acquired Upper Class Group Limited and its wholly-owned
subsidiary, SCHC (together “Upper Class”). Under the terms of the
agreement, all stockholders of Upper Class received a total amount of 13,250,000
(restated for the 2-for-1 stock split in 2007 and the 1-for-4 stock split in
2009) shares of voting common stock of Gulf Resources, Inc. in exchange for all
shares of Upper Class’ common stock held by all stockholders. Under
accounting principles generally accepted in the United States, the share
exchange is considered to be a capital transaction in substance, rather than a
business combination. That is, the share exchange is equivalent to
the issuance of stock by Upper Class for the net monetary assets of Gulf
Resources, Inc., accompanied by a recapitalization, and is accounted for as a
change in capital structure. Accordingly, the accounting for the share exchange
will be identical to that resulting from a reverse acquisition, except no
goodwill will be recorded. Under reverse takeover accounting, the
post reverse acquisition comparative historical financial statements of the
legal acquirer, Gulf Resources, Inc., are those of the legal acquiree, Upper
Class, which is considered to be the accounting acquirer. Share and
per share amounts stated have been retroactively adjusted to reflect the
merger.
On
February 5, 2007, SCHC acquired Shouguang Yuxin Chemical Industry Co., Limited
(“SYCI”), a company incorporated in PRC on October 30, 2000. SYCI
manufactures chemical products utilized in oil and gas field explorations and as
papermaking chemical agents. Under the terms of the merger agreement, all
stockholders of SYCI received a total amount of 8,094,059 (restated for the
2-for-1 stock split in 2007 and the 1-for-4 stock split in 2009) shares of
voting common stock of Gulf Resources, Inc. in exchange for all shares of SYCI’s
common stock held by all stockholders. Also, upon the
completion of the merger, Gulf Resources, Inc. paid a $2,550,000 dividend to the
original stockholders of SYCI. Since the ownership of Gulf Resources,
Inc. and SYCI are substantially the same, the merger was accounted for as a
transaction between entities under common control, whereby Gulf Resources, Inc.
recognized the assets and liabilities of the Company transferred at their
carrying amounts. Share and per share amounts stated have been
retroactively adjusted to reflect the merger.
On
November 11, 2007, Upper Class formed Hong Kong Jiaxing Industrial Limited
(formerly known as Jiaxing Technology Limited) (“HKJI”), a wholly-owned
subsidiary of Upper Class, in Hong Kong. Upper Class transferred its equity
interest in SCHC to HKJI.
The
adoption of the FASB Accounting Standards Codification (Codification) did not
result in significant effect in the accounting policies adopted by the
Company.
All
relevant share data have been adjusted retrospectively to reflect a 1-for-4
stock split effective on October 12, 2009.
Nature of the
Business
The
Company manufactures and trades bromine and crude salt through its wholly-owned
subsidiary, SCHC, and manufactures chemical products for use in the oil industry
and paper manufacturing industry through SYCI.
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Basis of
Consolidation
The
consolidated financial statements include the accounts of Gulf Resources, Inc.
and its wholly-owned subsidiaries, 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”), which owns
100% of SCHC and SYCI, which is 100% owned by SCHC. All material
intercompany transactions have been eliminated on consolidation.
The
consolidated financial statements have been restated for all periods prior to
the mergers to include the financial position, results of operations and cash
flows of the commonly controlled companies.
Use of
Estimates
The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and this requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.
Cash and Cash
Equivalents
Cash and
cash equivalents consist of all cash balances and highly liquid investments with
maturities of three months or less. Because of short maturity of these
investments, the carrying amounts approximate their fair values.
Accounts Receivable and
Allowance of Doubtful Accounts
Accounts
receivable is stated at cost, net of allowance for doubtful accounts. The
Company establishes an allowance for doubtful accounts based on management’s
assessment of the collectivity of trade and other receivables. A considerable
amount of judgment is required in assessing the amount of allowance and the
Company considers the historic level of credit losses and applies certain
percentage to accounts receivable balance. The Company makes judgments about the
credit worthiness of each customer based on ongoing credit evaluations, and
monitors current economic trends that might impact the level of credit losses in
the future. If the financial condition of the customer begins to deteriorate,
resulting in their inability to make payments, a larger allowance may be
required.
As of
December 31, 2009 and 2008, allowance for doubtful accounts was nil. No
allowances for doubtful accounts were charged to the income statement for the
years ended December 31, 2009, 2008 and 2007.
Concentration of Credit
Risk
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 and due to the
generally short payment terms.
Inventories
Inventories
are stated at the lower of cost, determined on a first-in first-out cost basis,
or market. Costs of work-in-progress and finished goods comprise direct
materials, direct labor and an attributable portion of manufacturing overhead.
Net realizable value is based on estimated selling price less costs to complete
and selling expenses.
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 expenditures
that extend the useful lives 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.
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.
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Property, Plant and
Equipment (continued)
Construction
in progress primarily represents the renovation costs of plant, machinery and
equipment. Costs incurred are capitalized and transferred to property and
equipment upon completion, at which time depreciation commences. Cost of repairs
and maintenance is expensed as incurred.
The
Company’s depreciation and amortization policies on fixed assets other than
mineral rights and construction in progress are as follows:
|
Useful
life
(in
years)
|
|
|
Buildings
|
20
|
|
Machinery
|
8
|
|
Motor
vehicles
|
5
|
|
Equipment
|
8
|
Asset Retirement
Obligation
The
Company follows FASB ASC 410, which established a uniform methodology for
accounting for estimated reclamation and abandonment costs. FASB ASC 410
requires the fair value of a liability for an asset retirement obligation to be
recognized in the period in which the legal obligation associated with the
retirement of the long-lived asset is incurred. When the liability is initially
recorded, the offset is capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. To settle the liability, the obligation is paid, and
to the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded.
Currently,
there are no reclamation or abandonment obligations associated with the land
being utilized for exploitation.
Recoverability of Long Lived
Assets
Long-lived
and certain identifiable intangibles are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. The Company is not aware of any events or circumstances
which indicate the existence of an impairment which would be
material.
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
scheme at the applicable rate based on the employees’ salaries. The
required contributions under the retirement plans are charged to the
consolidated income statement on an accrual basis when they are due. The
Company’s contributions totaled $270,324, $151,005 and nil for the years ended
December 31, 2009, 2008 and 2007, respectively.
Mineral
Rights
The
Company follows FASB ASC 805 that certain mineral rights are considered tangible
assets and that mineral rights should be accounted for based on their substance.
Mineral rights are included in property, plant and equipment.
Reporting Currency and
Translation
The
financial statements of the Company’s foreign subsidiaries are measured using
the local currency as the functional currency; however, the reporting currency
is the United States dollar (“USD”). Assets and liabilities of the
Company have been translated into dollars using the exchange rate at the balance
sheet date. The average exchange rate for the period has been used to translate
revenues and expenses. Translation adjustments are reported
separately and accumulated in a separate component of equity (cumulative
translation adjustment).
Foreign
Operations
All of
the Company’s operations and assets are located in China. The Company
may be adversely affected by possible political or economic events in this
country. The effect of these factors cannot be accurately
predicted.
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue
Recognition
The
Company recognizes revenue, net of any taxes, when persuasive evidence of a
customer or distributor arrangement exists or acceptance occurs, receipt of
goods by customer occurs, the price is fixed or determinable, and the sales
revenues are considered collectible. Subject to these criteria, the
Company generally recognizes revenue at the time of shipment or delivery to the
customer, and when the customer takes ownership and assumes risk of loss based
on shipping terms.
Income
Taxes
The
Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statements carrying amounts of
existing assets and liabilities and their respective tax bases and tax loss
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Shipping and Handling Fees
and Costs
The
Company does not charge its customers for shipping and handling. The
Company classifies shipping and handling costs as part of the cost of net sales,
which amounted to $492,582, $424,819 and $384,868 for the years ended December
31, 2009, 2008 and 2007, respectively.
Stock-based
compensation
Common
stock, stock options and stock warrants issued to employees or directors are
recorded at their fair values estimated at grant date using the Black-Scholes
model and the portion that is ultimately expected to vest is recognized as
compensation cost over the requisite service period.
Common
stock, stock options and stock warrants issued to other than employees or
directors are recorded on the basis of their fair value using the Black-Scholes
model on the basis of the market price of the underlying common stock on the
“valuation date,” which for options and warrants related to contracts that have
substantial disincentives to non-performance is the date of the contract, and
for all other contracts the measurement date is the date that the service is
complete. Expense related to the options and warrants is recognized on a
straight-line basis over the shorter of the period over which services are to be
received or the vesting period. Where expense must be recognized prior to a
valuation date, the expense is computed under the Black-Scholes model on the
basis of the market price of the underlying common stock at the end of the
period, and any subsequent changes in the market price of the underlying common
stock up through the valuation date is reflected in the expense recorded in the
subsequent period in which that change occurs.
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.
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The
following table sets forth the computation of basic and diluted earnings per
share:
|
Years
ended
December
31,
|
||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Numerator
|
||||||||||||
|
Net
income
|
|
$ | 30,591,415 |
|
$ | 22,395,472 | $ | 12,232,963 | ||||
|
Denominator
|
||||||||||||
|
Basic:
Weighted-average common shares outstanding during the year
|
30,698,824 | 24,917,211 | 24,172,126 | |||||||||
|
Add:
Dilutive effect of stock options
|
2,873 | - | - | |||||||||
|
Diluted
|
30,701,697 | 24,917,211 | 24,172,126 | |||||||||
|
Net
income per share
|
||||||||||||
|
Basic
|
$ | 1.00 | $ | 0.90 | $ | 0.51 | ||||||
|
Diluted
|
|
1.00 |
|
0.90 | 0.51 | |||||||
Recently adopted accounting
pronouncements
In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination
of the Useful Life of Intangible Assets.” (“FSP 142-3”) The final FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”). The FSP is
intended to improve the consistency between the useful life of an intangible
asset determined under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141R, “Business Combinations,”
and other principles under GAAP. No significant impact on the consolidated
financial statements is expected since the Group had already considered the
period of expected cash flows in determining the economic useful life of the
intangible assets.
In May
2009, the FASB issued “Subsequent Events” (“FASB ASC 855”). This standard
incorporates into authoritative accounting literature certain guidance that
already existed within generally accepted auditing standards, but the rules
concerning recognition and disclosure of subsequent events will remain
essentially unchanged. FASB ASC 855 provides general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This statement is
effective for interim or annual financial periods ending after June 15, 2009
(fiscal 2009 for us). On February 24, 2010, the FASB issued ASU No. 2010-09,
Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements. The amendments in the ASU remove the requirement for a Securities
and Exchange Commission filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial statements. This
amendment was effective upon issuance. No significant impact on the consolidated
financial statements is expected as the Group had taken into consideration of
subsequent events in preparing the financial statements.
In June
2009, the FASB issued “Generally Accepted Accounting Principles.” (“FASB ASC
105”), which becomes the source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws remain sources of
authoritative GAAP for SEC registrants. On the effective date of FASB ASC 105,
the Codification will supersede all then-existing non-SEC accounting and
reporting standards. All other non-grandfathered, non-SEC accounting literature
not included in the Codification will become non-authoritative. All guidance
contained in the Codification carries an equal level of authority. Certain
accounting treatments that entities have followed, and continue to follow, which
are not part of the Codification are grandfathered because they were adopted
before a certain date or certain accounting standards have allowed for the
continued application of superseded accounting standards. FASB ASC 105 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Group’s adoption of FASB ASC 105 is not expected
to have a material impact on the consolidated financial statements except that
accounting standard reference made by the Group in the financial statements will
be based on the new codification.
Recently issued accounting
pronouncements not yet adopted
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, “Fair Value
Measurements and Disclosures, Measuring Liabilities at Fair Value” (“ASU
2009-05”). ASU 2009-05 provides amendments to FASB ASC 820-10, “Fair Value
Measurements and Disclosures – Overall” (“FASB ASC 820-10”), for the fair value
measurement of liabilities. This update provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, an entity is required to measure fair value using a
valuation technique that uses a quoted price of the identical liability when
traded as an asset, a quoted price for similar liabilities or similar
liabilities when traded as an asset, or another valuation technique that is
consistent with the principles of ASC 820. This ASU is effective for the first
period (including interim periods) beginning after issuance. No significant
impact on the financials statements of the Group is expected since most of the
financial liabilities of the Group are trade payables for which the fair value
is not materially different from the carrying amount.
On April
7, 2007, the Company’s wholly owned subsidiary, SCHC, acquired assets from Mr.
Wenbo Yu (the “Yuwenbo property” or “Factory No. 2”) in exchange for 389,643
newly issued shares of the Company’s common stock valued at $ 1,987,179 and $
3,076,923 in cash. Factory No. 2 includes a 45 years and 9 months (as
of date acquisition) mineral rights and land lease covering 1,846 acres of real
property through December 2052, with approximately 575 wells, as well as the
related production facility, the pipelines, other production equipment, and the
buildings located on the property.
On June
8, 2007, SCHC acquired assets from Mr. Donghua Yang (the “Yangdonghua property”
or “Factory No. 3”) in exchange for 204,898 newly issued shares of the Company’s
common stock valued at $941,300 and $4,837,233 in cash and an interest-free
promissory note in the aggregate principal amount of $889,005, with a maturity
date of July 8, 2007. The Company issued the promissory note, and the
promissory note was fully paid in June 2007. Factory No. 3 include a
44 years and 11 months (as of date acquisition) mineral rights and land
lease covering 2,318 acres of real property through April 2052, with 405 wells,
and the related production facility, the pipelines, other production equipment,
and the buildings located on the property.
On
October 25, 2007, SCHC acquired substantially all of the assets of Shouguang
City Renjia Area (the “Wangjiancai property” or Factory No. 4”), a bromine
producer located in close proximity to SCHC for $6,399,147 in total cash
consideration. Factory No. 4 includes a 45 years
and 10 months (as of date acquisition) mineral rights and land lease
covering 2,165 acres through April, 2052, which has been paid in full.
Additional assets to be conveyed with the purchase include the related
production facility, wells, pipelines and other production equipment, in
addition to the current buildings and other assets on the property.
On
October 26, 2007, SCHC acquired substantially all of the assets of Shouguang
City Houxing Area (the “Liuxingji Assets” or “Factory No. 5”), a bromine
producer located in close proximity to SCHC for $6,665,778 in total cash
consideration. Factory No. 5 includes a 47 years (as of date acquisition)
mineral rights and land lease covering 2,310 acres through April 2052, which has
been paid in full. Additional assets to be conveyed with the purchase include
the related production facility, wells, pipelines and other production
equipment, in addition to the current buildings and other assets on the
property.
On
January 8, 2008, the Company acquired substantially all of the assets
owned by Xiaodong Yang in the Shouguang City Hanting Area (the
“Yangxiaodong property” or Factory No. 6”). The Yangxiaodong property
includes a 47 years and 6 months (as of date acquisition) mineral rights and
land lease covering 2,641 acres of real property, with 294 wells, as well as the
related production facility, the pipelines, other production equipment, and the
buildings located on the property. The total purchase price for the acquired
assets was $9,722,222.
On
January 7, 2009, the Company acquired substantially all of the assets
owned by Fenqiu Yuan, Han Wang and Yufen Zhang in the
Shouguang
City Renjiazhuangzi Village North Area (the “Fenqiu Yuan, Han Wang & Yufen
Zhang property” or Factory No. 7”). The Fenqiu Yuan, Han Wang and Yufen Zhang
property includes a 50-year (as of date acquisition) mineral rights and land
lease covering 1,611 acres of real property, with the related production
facility, the pipelines, other production equipment, and the buildings located
on the property. The total purchase price for the acquired assets was
$10,615,000, consisting of $10,000,000 in cash and 375,000 shares of the
Company’s Common Stock valued at $615,000 (fair value).
On
September 7, 2009, the Company acquired substantially all of the assets owned by
FengxiaYuan, Han Wang and Qing Yang in the Shouguang City Yingli Township
Beishan Village (the “ Fengxia Yuan, Han Wang& Qing Yang property” or
Factory No. 8”). The FengxiaYuan, Han Wang and Qing Yang property includes a
50-year (as of date acquisition) mineral rights and land lease covering 2,723
acres of real property, with the related production facility, the pipelines,
other production equipment, and the buildings located on the property .The total
purchase price for the acquired assets was $16,930,548, consisting of
$11,516,960 in cash and 1,057,342 shares of the Company’s Common Stock valued at
$5,413,588 (fair value).
Each of
the asset acquisitions described above was not in operation when the Company
acquired the assets. The owners of each of the assets did not hold
the proper license for the exploration and production of bromine, and production
at each of the assets acquired had previously been halted by the
government. With respect to Factory No. 2, the assets had not been
operational for nine months; with respect to Factory No. 3, the assets had not
been operational for eleven months; with respect to Factory No. 4 and No. 5, the
assets had not been operational for fifteen months; with respect to Factory No.
6, the assets had not been operational for eighteen months; with respect to
Factory No. 7, the assets had not been operational for twelve months, and with
respect to Factory No. 8, the assets had not been operational for thirteen
months. The Company recorded the above transactions as purchase of
assets.
Inventories
consist of:
|
As
of December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
Raw
materials
|
|
$
|
298,359
|
|
|
$
|
202,435
|
|
Work
in process
|
|
|
-
|
|
|
|
-
|
|
Finished
goods
|
|
|
356,605
|
|
|
|
229,638
|
|
Allowance
for obsolete and slow-moving inventories
|
|
(4,632)
|
(13,814)
|
||||
|
|
|
$
|
650,332
|
|
|
$
|
418,259
|
The
Company prepaid for land leases for a period of fifty years to use the land on
which the office premises, production facilities and warehouse of the Company
are situated. The prepaid land lease is amortized on a straight line basis.
During the year ended December 31, 2009, amortization of prepaid land lease
totaled $57,985, of which $57,398 and $587 were recorded as cost of net revenue
and administrative expenses respectively. During the year ended
December 31, 2008, amortization of prepaid land lease totaled $15,574, of which
$14,997 and $577 were recorded as cost of net revenue and administrative
expenses respectively. During the year ended December 31, 2007, amortization of
prepaid land lease totaled $12,986, of which $12,467 and $519 were recorded as
cost of net revenue and administrative expenses respectively.
Property,
plant and equipment, net consist of the following :
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
At
cost:
|
||||||||
|
Mineral
rights
|
$
|
5,840,594
|
$
|
5,840,594
|
||||
|
Buildings
|
21,651,379
|
6,410,813
|
||||||
|
Plant
and machinery
|
63,270,428
|
37,619,002
|
||||||
|
Motor
vehicles
|
-
|
57,946
|
||||||
|
Furniture,
fixtures and office equipment
|
3,602,676
|
2,353,789
|
||||||
|
Construction
in progress
|
1,467,000
|
-
|
||||||
|
Total
|
95,832,077
|
52,282,144
|
||||||
|
Less:
accumulated depreciation and amortization
|
13,838,183
|
6,882,688
|
||||||
|
Net
book value
|
$
|
81,993,894
|
$
|
45,399,456
|
||||
There
were no impairment provisions made at December 31, 2009 and 2008.
During
the year ended December 31, 2009, the Company completed a sewage treatment
project at a total cost of $6,601,500. A retention amount
of $660,150, representing 10% of the total cost will be paid upon one
year after the completion date and within one year from the balance sheet
date.
During
the year ended December 31, 2009, depreciation and amortization expense totaled
$7,199,658, of which $7,019,608 and $180,050 were recorded as cost of net
revenue and administrative expenses, respectively.
During
the year ended December 31, 2008, depreciation and amortization expense totaled
$4,727,865 of which $4,584,072 and $143,793 were recorded as cost of net revenue
and administrative expenses, respectively.
Other
receivable includes $2,192,920 receivable from an institutional investor for the
private placement in December 2009. The amount was settled and the cash was
received in January 2010.
Accounts
payable and accrued expenses consist of the following:
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Accounts
payable
|
$
|
5,348,638
|
$
|
3,341,016
|
||||
|
Salary
payable
|
177,194
|
91,032
|
||||||
|
Social
security insurance contribution payable
|
19,132
|
33,717
|
||||||
|
Other
payable
|
278,781
|
1,281,229
|
||||||
|
Total
|
$
|
5,823,745
|
$
|
4,746,994
|
||||
This
amount was interest free with no fixed term of repayment, and not secured
against the Company’s assets. This amount was owed to a non-related party. The
amount is settled by cash during the year ended December 31, 2009.
|
As
of December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
Note
payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
Limited is unsecured, non-interest bearing, pursuant to an agreement
which, as is Chinese custom, states that the loan need not be paid in the
immediate future. As at December 31, 2008, the Company believed the
earliest the loan would be required to be repaid is January 2011. This
loan was denominated in RMB (Note i)
|
$
|
-
|
$18,337,493
|
||||
|
Notes
payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
Limited was unsecured, non-interest bearing and was due in May 2009. The
loan is denominated in US dollars. (Note i)
|
|
-
|
|
3,000,000
|
|||
|
Loan
from a stockholder First Capital Limited was unsecured, non-interest
bearing with no fixed term of repayment. (Note ii)
|
|
-
|
|
1,650,000
|
|||
|
|
|
||||||
|
Total
loans
|
|
-
|
|
22,987,493
|
|||
|
Less:
current portion
|
(4,650,000)
|
||||||
|
Long-term
loans, less current portion
|
$
|
-
|
$
|
$18,337,493
|
|||
|
Future
maturities of note payable-related parties are as follows:
|
|
|
|
|
|||
|
2010
|
-
|
-
|
|||||
| 2011 |
|
-
|
|
18,337,493
|
|||
|
2012
|
-
|
-
|
|||||
|
Total
|
$
|
-
|
$
|
18,337,493
|
|||
|
Note
i:
|
$21,287,493
and $50,000 were settled by the issuance of common stock and cash,
respectively during the year ended December 31,
2009.
|
|
Note
ii:
|
The
balance was settled by cash during the year ended December 31,
2009.
|
Amounts
represent payables due to a company whose stockholder and director is also a
stockholder and director of the Company.
|
The
amount consists of the following:
|
|||||||
|
As
of December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
Due
to a key management
|
$
|
1,190
|
$ |
-
|
|||
|
Due
to related company – Hong Kong Jiaxing Lighting Limited
|
-
|
852,067
|
|||||
|
$
|
1,190
|
$ |
852,067
|
||||
The
amount of $1,190 represents advance from a key management of the Company. The
amount of $852,067 due to related company represents funds received from Hong
Kong Jiaxing Lighting Limited for investment purpose in SCHC. Mr. Ming Yang, the
Chairman of the Company, is the director and shareholder of Hong Kong Jiaxing
Lighting Limited. and the above balances are unsecured, non-interest bearing and
have no fixed repayment terms.
|
Taxes
payable consists of the following:
|
||||||
|
As
of December 31,
|
||||||
|
2009
|
2008
|
|||||
|
Income
tax payable
|
|
$
|
3,079,233
|
|
$
|
2,329,227
|
|
Mineral
resource compensation fee payable
|
333,928
|
291,861
|
||||
|
Value
added tax payable and others
|
|
|
2,141,952
|
|
|
1,648,354
|
|
Total
|
$
|
5,555,113
|
$
|
4,269,442
|
||
In
accordance with the relevant PRC regulations and the Company’s Articles of
Association, the Company is required to allocate its profit after tax to the
following reserves:
Statutory Common Reserve
Funds
SCHC and
SYCI are required each year to transfer 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 December
31, 2009 for SCHC and SYCI is 16% and 50% of its registered capital
respectively.
Statutory Public Welfare
Funds
Prior to
January 1, 2007, SCHC and SYCI were required each year to transfer 5% of the
profit after tax as reported under the PRC statutory financial statements to the
statutory Public Welfare Funds. This reserve was restricted to
capital expenditure for employees’ collective welfare facilities that are owned
by the Company. The statutory Public Welfare Funds are not available
for distribution to the stockholders (except on liquidation). Once
capital expenditure for staff welfare facilities has been made, an equivalent
amount must be transferred from the statutory Public Welfare Funds to the
discretionary Common Reserve Funds. Due to a change in the PRC
Company Law, appropriation of profit to the statutory Public Welfare Funds is no
longer required. Therefore, the balance in the statutory Public
Welfare Funds was transferred to the statutory Common Reserve Funds on January
1, 2007.
Effective
October 12, 2009 the Company effected a 1-for-4 stock split. All
shares and per share amount for all periods presented have been adjusted to
reflect the reverse stock split.
In March
2009, the Company issued 5,250,000 shares of its common stock as payment for
$21,287,493 of Notes and Loan Payable-Related Party.
In March
2009, the Company issued 375,000 shares of its common stock, valued at $615,000,
to acquire assets owned by Mr. Fenqiu Yuan, Han Wang and Yufen
Zhang.
In
September 2009, the Company issued 1,057,342 shares of its common stock, valued
at $5,413,588, to acquire assets owned by Mr. Fenqiu Yuan, Han Wang and Yufen
Zhang.
In
December 2009, the Company issued 2,941,182 shares of its common stock at a
price of $8.50 per share in a private placement.
Pursuant
to the 2007 Equity Incentive Plan, the aggregate number of stock options
available for grant and issuance is 5,000,000 shares.
The Company
issued 25,000 warrants on August 1, 2008 at a price of $4.80 per share as part
of a consulting agreement with its investor relations firm. These options fully
vested on August 1, 2009. The warrants were valued at $65,000, fair value, using
the Black-Scholes option-pricing model with assumed 162% volatility,
a four-year expiration term, a risk free rate of 3% and no dividend yield. The
value of the warrants will be expensed over one year, which is the term of
the consulting agreement. For the years ended December 31, 2009 and 2008,
$48,616 and $26,890 was recognized as consulting expense,
respectively.
In March
2009, the Company granted to 9 management staff (including 4
directors of the Company) options to purchase a total of 150,000 shares (25,000
for each of the executive directors, and 12,500 each for one non executive
independent director and 5 other management staff) of the Company’s common
stock at an exercise price of $4.80 per share and the options vested
immediately. The options were valued at $143,820 fair value, using the
Black-Scholes option pricing model with assumed 174% volatility, a three-year
expiration term, a risk free rate of 1.43% and no dividend yield. For the year
ended December 31, 2009, $143,820 was recognized as general and administrative
expenses.
In May
2009, the Company granted to a director options to purchase 12,500
shares of the Company’s common stock at an exercise price of $4.80 per
share and the options vested immediately. The options were valued at $20,486
fair value, using the Black-Scholes option pricing model with assumed 170%
volatility, a three-year expiration term, a risk free rate of 1.43% and no
dividend yield. For the year ended December 31, 2009, $20,486 was recognized as
general and administrative expenses.
In June
2009, the Company granted to a director options to purchase 25,000
shares of the Company’s common stock at an exercise price of $4.80 per
share and the options vested immediately. The options were valued at $39,534
fair value, using the Black-Scholes option pricing model with assumed 167%
volatility, a three-year expiration term, a risk free rate of 1.43% and no
dividend yield. For the year ended December 31, 2009, $39,534 was recognized as
general and administrative expenses.
In
October 2009, the Company granted to 2 management staff options to purchase
37,500 shares of the Company’s common stock at an exercise price of $6.44
per share and the options vested immediately. The options were valued at
$219,656 fair value, using the Black-Scholes option pricing model with assumed
161% volatility, a three-year expiration term, a risk free rate of 1.43% and no
dividend yield. For the year ended December 31, 2009, $219,656 was recognized as
general and administrative expenses.
In
October 2009, the Company granted to an independent director options to purchase
12,500 shares of the Company’s common stock at an exercise price of $9.65
per share and the options vested immediately. The options were valued at $90,648
fair value, using the Black-Scholes option pricing model with assumed 160%
volatility, a three-year expiration term, a risk free rate of 1.43% and no
dividend yield. For the year ended December 31, 2009, $90,648 was recognized as
general and administrative expenses.
In
November 2009, the Company granted to an independent director options to
purchase 12,500 shares of the Company’s common stock at an exercise price
of $10.14 per share and the options vested immediately. The options were valued
at $92,315 fair value, using the Black-Scholes option pricing model with assumed
152% volatility, a three-year expiration term, a risk free rate of 1.43% and no
dividend yield. For the year ended December 31, 2009, $92,315 was recognized as
general and administrative expenses.
In
December 2009, the Company granted to an investment bank warrants to purchase
176,471 shares of the Company’s common stock at an exercise price of $10.2
per share and the warrants vested immediately. The warrants were valued at
$1,367,156 fair value, using the Black-Scholes option pricing model with assumed
156% volatility, a three-year expiration term, a risk free rate of 1.43% and no
dividend yield. For the year ended December 31, 2009, $1,367,156 was recognized
as general and administrative expenses.
The
following table summarizes all Company stock option transactions between January
1, 2009 and December 31, 2009.
|
Number
of Option
&Warrants
Outstanding
|
Number
of Option
&Warrants
Vested
|
Range
of
Exercise
Price per Common Share
|
||||||||||
|
Balance,
December 31, 2008
|
325,000
|
112,500
|
$0.84
- $10.04
|
|||||||||
|
Gra
Granted or vested during the year ended December 31, 2009
|
426,471
|
513,970
|
$4.80-10.2
|
|||||||||
|
Exp
Forfeited during the year ended December 31, 2009
|
(250,000)
|
(124,999)
|
$10.04
|
|||||||||
|
Balance,
December 31, 2009
|
501,471
|
501,471
|
$0.84
- $10.20
|
|||||||||
|
Stock
and Warrants Options Outstanding
|
||||||
|
Outstanding
and
|
Weighted
Average
|
Weighted
Average
|
||||
|
Range
of
|
Currently
Exercisable
|
Remaining
|
Exercise
Price of Options
|
|||
|
Exercise
Prices
|
at
December 31, 2009
|
Contractual
Life (Years)
|
Currently
Exercisable
|
|||
|
$0.84-$10.20
|
501,471
|
3.83
|
$ 7.65
|
|||
The
weighted average grant-date fair values as at December 31, 2009 and 2008 were
$6.84 and $6.85, respectively.
At
December 31, 2009, the aggregate intrinsic value of the stock options and
warrants was nil.
On
January 31, 2007, SYCI distributed a dividend to two stockholders in the amount
of $2,189,600. On February 5, 2007, in conjunction with the merger of SYCI, Gulf
Resources, Inc. paid a $2,550,000 dividend to the original stockholders of
SYCI.
The
Company utilizes the asset and liability method of accounting for income taxes
in accordance with FASB ASC 740-10.
United
States
Gulf
Resources, Inc. is subject to the United States of America Tax law at tax rate
of 34%. No provision for the US federal income taxes has been made as the
Company had no US taxable income for the years ended December 31, 2009, 2008 and
2007, and management believes that its earnings are permanently invested in the
PRC.
BVI
Upper
Class Group Limited 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 during the
year.
Hong
Kong
Hong Kong
Jiaxing Industrial 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 year. The applicable statutory tax
rates for the years ended December 31, 2009, 2008 and 2007 are 16.5%,16.5% and
17.5%, respectively.
PRC
Enterprise
income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the
assessable profits.
The
components of the provision for income taxes from continuing operations
are:
|
Years
ended
December
31,
|
||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Current
taxes – PRC
|
|
$ | 11,184,398 |
|
$ | 8,202,477 |
|
$ | 7,043,641 | |||
|
Non-deductible
items disallowed for prior year
|
|
- |
|
- |
|
706,869 | ||||||
|
Others
|
|
- |
|
9,462 |
|
48,172 | ||||||
|
|
|
|
|
|
|
|||||||
|
|
|
$ | 11,184,398 |
|
$ | 8,211,939 |
|
$ | 7,798,682 | |||
The
effective income tax expenses differs from the PRC statutory income tax rate of
25% from continuing operations in the PRC as follows:-
|
Years
ended
December
31,
|
|||||||||
| 2009 | 2008 | 2007 | |||||||
|
Statutory
income tax rate
|
|
25 |
%
|
25 |
%
|
33 |
%
|
||
|
Non-deductible
items disallowed for prior year
|
|
- |
%
|
- |
%
|
4 |
%
|
||
|
Non-deductible
items
|
|
2 |
%
|
2 |
%
|
2 |
%
|
||
|
|
|
|
|
|
|
|
|||
|
Effective
tax rate
|
|
27 |
%
|
27 |
%
|
39 |
%
|
||
The
operating subsidiaries SCHC and SYCI 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
exempt 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.
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 December 31, 2009, the Company has not recorded any
WHT on the cumulative amount of undistributed retained earnings of approximately
$69.4 million of its foreign invested enterprises in China.
Differences
between the application of accounting principles and tax laws cause differences
between the bases of certain assets and liabilities for financial reporting
purposes and tax purposes. The tax effects of these differences, to the extent
they are temporary, are recorded as deferred tax assets and liabilities.
Significant components of the Company’s deferred tax assets and liabilities at
December 31, 2009 and 2008 are as follows:
As of
December 31, 2009, the Company had federal net operating loss (“NOL”) of
approximately $20 million available to offset against future federal income tax
liabilities. The NOL will expire beginning 2014.
As of
December 31, 2008, the Company had federal NOL of approximately $16 million
available to offset against future federal income tax
liabilities. The NOL will expire beginning 2013.
|
As
of December 31,
|
||||||
|
2009
|
2008
|
|||||
|
Deferred
tax liabilities
|
$
|
-
|
$
|
-
|
||
|
Deferred
tax assets:
|
||||||
|
Allowance
for obsolete and slow-moving inventories
|
$
|
1,158
|
$
|
3,453
|
||
|
Property,
plant and equipment
|
81,437
|
-
|
||||
|
Net
Operating loss
|
6,692,426
|
5,590,626
|
||||
|
Other
assets
|
3,077
|
-
|
||||
|
Total
deferred tax assets
|
6,778,098
|
5,594,079
|
||||
|
Valuation
allowance
|
(6,692,426)
|
(5,590,626)
|
||||
|
Current
deferred tax asset
|
$
|
85,672
|
$
|
3,453
|
||
|
Long-term
deferred tax asset
|
$
|
-
|
$
|
-
|
||
There was
no unrecognized tax benefits and accrual for uncertainty tax positions as of
December 31, 2009 and 2008.
Tax
returns filed regarding tax years from 2005 through 2009 are subject to review
by the respective tax authorities.
The
Company has two reportable segments: bromine and crude salt and
chemical products.
|
Bromine
|
||||||||||||||||||||
|
|
and
Crude
|
Chemical
|
Segment
|
|||||||||||||||||
|
Salt
|
Products
|
Total
|
Corporate
|
Total
|
||||||||||||||||
|
December
31, 2009
|
||||||||||||||||||||
|
Revenue
from external customers
|
$ | 74,330,586 | $ | 35,946,322 | $ | 110,276,908 | $ | - | $ | 110,276,908 | ||||||||||
|
Income
(loss) from operations
|
32,954,828 | 12,530,417 | 45,485,245 | (3,244,411 | ) | 42,240,834 | ||||||||||||||
|
Income
taxes
|
8,051,868 | 3,132,530 | 11,184,398 | - | 11,184,398 | |||||||||||||||
|
Total
assets
|
115,621,458 | 28,274,118 | 143,895,576 | 2,527,592 | 146,423,168 | |||||||||||||||
|
Depreciation
and amortization
|
6,048,995 | 1,150,663 | 7,199,658 | - | 7,199,658 | |||||||||||||||
|
Capital
expenditures
|
36,066,805 | 8,838,440 | 44,905,245 | - | 44,905,245 | |||||||||||||||
|
December
31, 2008
|
||||||||||||||||||||
| Revenue from external customers | 63,664,156 | 23,824,178 | 87,488,334 | - | 87,488,334 | |||||||||||||||
|
Income
(loss) from operations
|
24,663,244 | 8,121,203 | 32,784,447 | (2,207,290 | ) | 30,577,157 | ||||||||||||||
|
Income
taxes
|
6,180,353 | 2,031,586 | 8,211,939 | - | 8,211,939 | |||||||||||||||
| Total assets | 67,868,644 | 20,899,118 | 88,767,762 | 591,704 | 89,359,466 | |||||||||||||||
|
Depreciation
and amortization
|
4,123,131 | 604,734 | 4,727,865 | 4,727,865 | ||||||||||||||||
| Capital expenditures | 10,529,286 | 6,835,909 | 17,365,195 |
|
17,365,195 | |||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||
| Revenue from external customers | 34,015,484 | 19,764,829 | 53,780,313 | 53,780,313 | ||||||||||||||||
|
Maintenance
service income
|
- | 468,337 | 468,337 | - | 468,337 | |||||||||||||||
|
Income
(loss) from operations
|
14,181,054 | 7,164,833 | 21,345,887 | (1,320,959 | ) | 20,024,928 | ||||||||||||||
|
Income
taxes
|
5,414,688 | 2,383,994 | 7,798,682 | - | 7,798,682 | |||||||||||||||
|
Total
assets
|
36,614,939 | 9,516,930 | 46,131,869 | 197,963 | 46,329,832 | |||||||||||||||
|
Depreciation
and amortization
|
1,111,580 | 186,871 | 1,298,451 |
-
|
1,298,451 | |||||||||||||||
|
Capital
expenditures
|
16,555,903 | 6,123,416 | 22,679,319 | - | 22,679,319 | |||||||||||||||
|
Years
ended December 31,
|
||||||||||||
|
Reconciliations
|
2009
|
2008
|
2007
|
|||||||||
|
Total
segment operating income
|
|
$
|
45,485,245
|
|
|
$
|
32,784,447
|
|
|
$
|
21,345,887
|
|
|
Corporate
overhead expenses
|
|
|
(3,244,411)
|
|
|
(2,207,290)
|
|
|
(1,320,959)
|
|
||
|
Other
income (expense), net
|
|
|
(465,021)
|
|
|
|
30,254
|
|
|
|
6,717
|
|
|
Income
tax expense
|
|
|
(11,184,398)
|
|
|
(8,211,939)
|
|
|
(7,798,682)
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated net income
|
|
$
|
30,591,415
|
|
|
$
|
22,395,472
|
|
|
$
|
12,232,963
|
|
The
following table shows the major customer(s) (10% or more) for the year ended
December 31, 2009.
|
Number
|
Customer
|
Bromine
and Crude Salt
(000’s)
|
Chemical
Products
(000’s)
|
Total
Revenue
(000’s)
|
Percentage
of
Total
Revenue (%)
|
|||||
|
1
|
Shandong
Morui Chemical Company Limited
|
$11,473
|
$-
|
$11,473
|
10.4%
|
|||||
|
2
|
Shouguang
City Rongyuan Chemical Company Limited
|
$11,439
|
$-
|
$11,439
|
10.4%
|
|||||
|
TOTAL
|
$22,912
|
$-
|
$22,912
|
20.8%
|
The
following table shows the major customer(s) (10% or more) for the year ended
December 31, 2008.
|
Number
|
Customer
|
Bromine
and Crude Salt
(000’s)
|
Chemical
Products
(000’s)
|
Total
Revenue
(000’s)
|
Percentage
of
Total
Revenue (%)
|
|||||
|
1
|
Shandong
Morui Chemical Company Limited
|
$8,912
|
$-
|
$8,912
|
10.2%
|
|||||
|
TOTAL
|
$8,912
|
$-
|
$8,912
|
10.2%
|
The
following table shows the major customer(s) (10% or more) for the year ended
December 31, 2007.
|
Number
|
Customer
|
Bromine
and Crude Salt
(000’s)
|
Chemical
Products
(000’s)
|
Total
Revenue
(000’s)
|
Percentage
of
Total
Revenue (%)
|
|||||
|
1
|
Talimu
Oil Exploration Limited
|
$-
|
$10,244
|
$10,244
|
19.0%
|
|||||
|
2
|
Shouguang
City Weidong Chemical Company Limited
|
$7,139
|
$-
|
$7,139
|
13.3%
|
|||||
|
3
|
Shandong
Ruitai Chemicals Company Limited
|
$6,761
|
$-
|
$6,761
|
12.6%
|
|||||
|
TOTAL
|
$13,900
|
$10,244
|
$24,144
|
44.9%
|
During
the year ended December 31, 2009, the Company purchased 49.5% of its raw
materials from its top five suppliers. At December 31, 2009, amounts
due to those suppliers included in accounts payable were $4,016,890. During the
year ended December 31, 2008, the Company purchased 64.4% of its raw materials
from its top five suppliers. At December 31, 2008, amounts due to
those suppliers included in accounts payable were $1,591,252. This concentration
makes the Company vulnerable to a near-term severe impact, should the
relationships be terminated.
The
Company sells a substantial portion of its products to a limited number of
customers. During the year ended December 31, 2009, the Company sold 40.1% of
its products to its top five customers. At December 31, 2009, amount due from
these customers were $5,449,638. During the year ended December 31, 2008, the
Company sold 42.7% of its products to its top five customers. At
December 31, 2008, amount due from these customers was $4,221,415. This
concentration makes the Company vulnerable to a near-term severe impact, should
the relationships be terminated.
On
September 6, 2007, the Company’s wholly-owned subsidiary, SYCI, and East China
University of Science and Technology formally opened a Co-Op Research and
Development Center. The research center is equipped with state of the art
chemical engineering instruments for the purpose of pursuing targeted research
and development of refined bromide compounds and end products. According to the
Co-Op Research Agreement, any research achievement or patents will become assets
of the Company. The Company will provide $500,000 annually during the next five
years to East China University of Science and Technology for research. The
research and development expense recognized during the years ended December 31,
2009, 2008 and 2007 were $500,406, $514,780, and $268,168,
respectively.
A reverse
stock split of the issued and outstanding shares of the Company's common stock
was effected on the basis of one share for every four shares of common stock and
was approved by the Board of Directors and shareholders owning a majority of the
outstanding shares of the Company’s common stock and became effective on October
12, 2009. All shares and per share data (except par value) have been adjusted to
reflect the effect of the stock split for all periods presented.
|
Years
ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Waiver
of interest expenses during first quarter 2008 by a related
party:
|
||||||||
|
Shenzhen
Huayin Guaranty and Investment Company Limited (Note i)
|
$
|
-
|
$
|
131,533
|
||||
|
Note
and loan payable – First Capital Limited (Note i)
|
-
|
1,650,000
|
||||||
|
Shenzhen
Huayin Guaranty and Investment Company Limited (Note i)
|
$
|
-
|
$
|
21,337,493
|
||||
|
Due
to related party:
|
||||||||
|
Hong
Kong Jiaxing Lighting Limited (Note ii)
|
$
|
-
|
$
|
852,067
|
||||
|
Due
to key management
|
1,190
|
-
|
||||||
|
$
|
1,190
|
$
|
852,067
|
|||||
|
Note
i:
|
The
above related parties were stockholders of the
Company.
|
|
Note
ii:
|
The
above party is related to the Company by way of director and shareholder
in common.
|
The
Company has committed approximately $5,868,000 for construction of new
production line as of December 31, 2009.
The Company has leased two pieces of
land under non-cancelable operating leases, which are fixed in rentals and
expire through February and August 2059, respectively. The Company accounts for
the leases as operating leases. Future minimum lease payments consist of the
following at December 31, 2009
:
|
Less
than 1 year
|
$
|
42,127
|
|
1- 3
years
|
150,355
|
|
|
3-5
years
|
157,804
|
|
|
More
than 5 years
|
6,490,141
|
|
|
Total
|
$
|
6,840,427
|
Rental
expense amounted to $42,102, nil and nil were charged to the income statements
for the years ended December 31, 2009, 2008 and 2007, respectively.
In
November 2009, the Company signed a contract with a third party for construction
of a new production line for waste water treatment chemical additives for a
total construction cost of approximately $7,335,000. The construction
commenced in November 2009. As of December 31, 2009, $1,467,000 was
included in construction in progress under property plan and
equipment. On January 3, 2010, the Company revised the construction
contract and the total construction cost was changed to $8,802,000.
Except
for the above, management has evaluated subsequent events from December 31, 2009
to the date which our financial statements have been issued and were available
to be issued, and has concluded that no material subsequent events have occurred
since December 31, 2009 that required recognition or disclosure in our current
year financial statements. Subsequent events that may occur after the date of
issue of financial statements have not been evaluated.
Previous
Independent Accountants
On
February 10, 2010, we dismissed Morison Cogen LLP (“M&C”), as our
independent accountant. The reports of M&C, on our financial statements for
each of the past two fiscal years contained no adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles. The decision to change independent accountants was
approved by our Audit Committee on February 9, 2010.
During
our two most recent fiscal years and through February 10, 2010, we have had no
disagreements with M&C on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of M&C, would have caused
it to make reference to the subject matter of such disagreements in its report
on our financial statements for such periods.
We
provided M&C with a copy of this disclosure before its filing with the SEC.
We requested that M&C provide us with a letter addressed to the SEC stating
whether or not it agrees with the above statements, and we received a letter
from M&C, stating that it does agree with the above
statements except for the following: as described in M&C’s annual
report dated March 12, 2009 on the Company’s internal control over financial
reporting included in the Company’s Form 10-K for the year ended December 31,
2008, that in M&C’s opinion the Company had not maintained effective
internal control over financial reporting as of December 31, 2008 based on
criteria established in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. A copy of such letter, dated as of February 10,
2010 has been filed as an Exhibit to our current report on Form 8-K filed with
the SEC on February 10, 2010.
New
Independent Accountants
On
February 10, 2010, we appointed BDO Limited (“BDO”) as our new independent
registered accounting firm. The appointment of BDO was approved by our Audit
Committee on February 9, 2010. During the two fiscal years of the Company ended
December 31, 2008 and 2009, and through the date of the BDO’s engagement, the
Company did not consult BDO regarding either: (i) the application of accounting
principles to a specified transaction (either completed or proposed), or the
type of audit opinion that might be rendered on the Company’s financial
statements; or (ii) any matter that was either the subject of a “disagreement”
or “reportable event” within the meaning set forth in Regulation S-K, Item 304
(a)(1)(iv) or (a)(1)(v).
Disclosure
Controls
As
required by Rule 13a-15(b) promulgated under the Exchange Act, our management,
with the participation of our Chief Executive Officer and Chief Financial
Officer, revaluated the effectiveness as of December 31, 2009 of our disclosure
controls and procedures, as defined in Rule 13a-15(e) promulgated under the
Exchange Act. Although we were late in filing two current reports on Form 8-K in
February and July of 2009, management believes that since July, management and
staff have significantly improved disclosure controls and
procedures. In August 2009 we and hired David Wang as Vice-President
of Finance. Mr. Wang has over nine years of experience in working for
companies listed on U.S stock exchanges. Based on this evaluation our
Chief Executive Officer and Chief Financial Officer concluded that, our
disclosure controls and procedures were effective as of December 31,
2009.
Management’s Report on
Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Internal control over financial reporting refers to the
process designed by, or under the supervision of, our principal executive
officer and principal financial officer, and effected by our Board of Directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:
(1)
Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets;
(2)
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors;
and
(3)
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a
material effect on the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the company.
Management
has used the framework set forth in the report entitled Internal
Control—Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission, known as COSO, to evaluate the
effectiveness of our internal control over financial reporting. Based on this
assessment, management has concluded that our internal control over financial
reporting was effective as of December 31, 2009.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our
management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only our management’s report in this annual
report.
Changes
in Internal Control Over Financial Reporting
There has
been no change in our internal control over financial reporting during the
fourth quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Not
applicable.
We are
incorporating by reference the information required by Part III of this
report on Form 10-K from our proxy statement relating to our 2010 annual
meeting of stockholders (the “2010 Proxy Statement”), which will be filed with
the Securities and Exchange Commission within 120 days after the end of our
fiscal year ended December 31, 2009.
The
information required by this item is included under the captions “Election of
Directors — Nominees,” “Information Concerning Executive Officers” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the 2010 Proxy
Statement and incorporated herein by reference.
The
information required by this item is included under the captions “Election of
Directors — Compensation of Non-Employee Directors,” “Election of
Directors — Compensation Committee Interlocks and Insider Participation,”
“Compensation Discussion and Analysis,” and “Compensation Committee Report” in
the 2010 Proxy Statement and incorporated herein by reference.
The
information required by this item is included under the captions “Security
Ownership of Certain Beneficial Owners and Management” and “Equity Compensation
Plan Information” in the 2010 Proxy Statement and incorporated herein by
reference.
The
information required by this item is included under the captions “Certain
Relationships and Related Person Transactions” and “Election of Directors —
Board Meetings and Committees” in the 2010 Proxy Statement and incorporated
herein by reference.
The
information required by this item is included under the caption “Audit Committee
Report” in the 2010 Proxy Statement and incorporated herein by
reference.
Exhibit
Index
|
2.1
|
Agreement
and Plan of Merger dated December 10, 2006, among the Registrant, DFAX
Acquisition vehicle, Inc., Upper Class Group Limited and the shareholders
of UCG, incorporated herein by reference to Exhibit 10 to the Registrant's
Current Report on Form 8-K filed on December 12, 2007.
|
|
|
2.2
|
Share
Exchange Agreement among the Registrant, Upper Class Limited, Shouguang
Yuxin Chemical Industry Company Limited and shareholders of Shouguang
Yuxin Chemical Industry Company Limited, incorporated herein by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on
February 9, 2007.
|
|
|
3.1
|
Restated
Certificate of Incorporation, incorporated herein by reference to Exhibit
3.1 to the Registrant's Registration Statement on Form S-1 (No. 33-46580)
declared effective on November 18, 1992.
|
|
|
3.2
|
Amendment
to Restated Certificate of Incorporation., increasing the authorized
capital stock, incorporated herein by reference to Exhibit A to the
Registrant's definitive Schedule 14A filed on October_,
1995.
|
|
|
3.3
|
Amendment
to Restated Certificate of Incorporation., increasing the authorized
capital stock, incorporated herein by reference to Exhibit B to the
Registrant's definitive Schedule 14A filed on August 12,
1997.
|
|
|
3.4
|
Amendment
to Restated Certificate of Incorporation., increasing the authorized
capital stock, incorporated herein by reference to Exhibit A to the
Registrant's definitive Schedule 14A filed on October 16,
1998.
|
|
|
3.5
|
Amendment
to Restated Certificate of Incorporation, filed with the Secretary of the
State of Delaware on October 16, 2006, effecting a reverse stock
split.
|
|
|
3.6
|
Amendment
to Restated Certificate of Incorporation, changing the name of the
Registrant to Gulf Resources, Inc., incorporated herein by reference to
Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on
February 20, 2007.
|
|
|
3.7
|
Amendment
to Restated Certificate of Incorporation, increasing the authorized
capital stock of the Registrant and effecting a 2-for-1 forward stock
split, incorporated herein by reference to Exhibit 3.1 of the Registrant's
Current Report on Form 8-K filed on December 4, 2007.
|
|
|
3.8
|
By-laws,
incorporated herein by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (No. 33-46580) declared effective on
November 18, 1992.
|
|
|
3.9
|
Amendment
to Restated Certificate of Incorporation, filed with the Secretary of the
State of Delaware on October 6, 2009, effecting a reverse stock split.
*
|
|
|
4.1
|
Certificate
of Designation, Powers, Preferences and Rights of Series D Convertible
Preferred Stock incorporated herein by reference to Exhibit 3 (c) to the
Registrant's Registration Statement on Form SB-2 (No. 33-30021) filed on
June 25, 1997.
|
|
|
4.2
|
Non-interest
bearing promissory note dated April 7, 2007 in the aggregate principal
amount of $3,051,282 issued to Wenbo Yu incorporated herein by reference
to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed on
April 10, 2007.
|
|
|
10.1
|
Stock
Purchase Agreement, dated as of August 25, 2006, by and between Juxiang Yu
and Irwin Horowitz, incorporated herein by reference to Exhibit 99.1 to
the Registrant's Current Report on Form 8-K filed on August 31,
2006.
|
|
|
10.2
|
Fixed
Price Standby Equity Distribution Agreement dated May 7, 2006,
incorporated herein by reference to Exhibit 99.1 of the Registrant's
Current Report on Form 8-K filed on May 10, 2007.
|
|
|
10.3
|
Asset
Purchase Agreement between Shouguang City Haoyuan Chemical Company Limited
and Dong Hua Yang dated June 8, 2007, incorporated herein by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on June
11, 2007.
|
|
|
10.4
|
Escrow
Agreement, dated as of August 25, 2007, by and among the Registrant, the
selling shareholders named in the registration statement and Eaton &
Van Winkle LLP, as escrow agent.*
|
|
|
10.5
|
Asset
Purchase Agreement between the Registrant and Shouguang City Haoyuan
Chemical Company Limited and Wenbo Yu dated April 4, 2007, incorporated
herein by reference to Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed on April 10, 2007.
|
|
|
10.6
|
Asset
Purchase Agreement between Shouguang City Haoyuan Chemical Company Limited
and Jianci Wang dated as of October 25, 2007, incorporated herein by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on October 31, 2007.
|
|
|
10.7
|
Asset
Purchase Agreement between Shouguang City Haoyuan Chemical Company Limited
and Xingji Liu dated October 26 2007, incorporated herein by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on
October 31, 2007.
|
|
|
10.8
|
Asset
Purchase Agreement between Shouguang City Haoyuan Chemical Company Limited
and Qiufen Yuan, Han Wang and Yufen Zhang dated January 7, 2009,
incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on January 7, 2009.
|
|
|
10.9
|
Amendment
Agreement between the Registrant, Shouguang City Haoyuan Chemical Company
Limited, China Finance, Inc., Shenzhen Hua Yin Guaranty and Investment
Company, Top King Group Limited, Billion Gold Group Limited, Topgood
International Limited dated January 24, 2009, incorporated herein by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on February 6, 2009.
|
|
|
10.10
|
Gulf
Resources, Inc. 2007 Equity Incentive Plan Stock Option Agreement between
the Registrant and Biagio Vignolo, dated November 6,
2008.
|
|
|
10.11
|
Gulf
Resources, Inc. 2007 Equity Incentive Plan Stock Option Agreement between
the Registrant and Richard Khaleel, dated October 24,
2008.
|
|
|
10.12
|
Lock-up
Agreement by and among the Registrant, Top King Group Limited, Billion
Gold Group Limited, Topgood International Limited, Ming Yang, Wenxiang Yu,
Zhi Yang and Shandong Haoyuan Industry Group Ltd., dated May
10, 2009, incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on May 14,
2009.
|
|
|
10.13
|
Asset
Purchase Agreement by and among the Registrant, Shouguang City Haoyuan
Chemical Company Limited, Fengxia Yuan, Han Wang and Qing Yang, dated
September 7, 2009, incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on September 10,
2009.
|
|
|
10.14
|
Securities
Purchase Agreement by and among the Registrant and institutional investors
dated December 11, 2009, incorporated herein by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed on December 11,
2009.
|
|
|
10.15
|
Registration
Rights Agreement by and among the Registrant and institutional investors
dated December 11, 2009, incorporated herein by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed on December 11,
2009.
|
|
|
14
|
Code
of Ethics, incorporated herein by reference to Exhibit 14 to the
Registrant’ annual report on Form 10-K filed on March 16,
2009.
|
|
|
21.1
|
List
of Subsidiaries, incorporated herein by reference to Exhibit 21.1 to the
Registrant’s Annual Report on Form 10-K filed on March 12,
2008.
|
|
|
31.1
|
Certification
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
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. *
|
* Filed
herewith.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act,
the Company has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Date: March
3, 2010
|
By:
|
/s/
Xiabin Liu
|
|
By: Xiaobin
Liu
|
||
|
Title: President
and Chief Executive Officer
(principal
executive officer)
|
|
By:
|
/s/
Min Li
|
|
|
By: Min
Li
|
||
|
Title: Chief
Financial Officer
(principal
financial and accounting officer)
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this Report has
been signed below by the following person on behalf of the Company and in the
capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/
Xiaobin liu
|
March
3, 2010
|
|||
|
Xiaobin
Liu
|
Chief
Executive Officer and Director
|
|||
|
/s/
Min Li
|
March
3, 2010
|
|||
|
Min
Li
|
Chief
Financial Officer and Director
|
|||
|
/s/
Ya Fei Ji
|
March
3, 2010
|
|||
|
Ya
Fei Ji
|
Director
|
|||
|
/s/
Richard Khaleel
|
March
3, 2010
|
|||
|
Richard
Khaleel
|
Director
|
|||
|
/s/
Biagio Vignolo
|
March
3, 2010
|
|||
|
Biagio
Vignolo
|
Director
|
|||
|
/s/
Shi Tong Jiang
|
March
3, 2010
|
|||
|
Shi
Tong Jiang
|
Director
|
43
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary Data (in Thousand)Note 1 Nature Of Business and Summary Of Significant Accounting PoliciesNote 1 Nature Of Business and Summary Of Significant Accounting Policies (continued)Note 2 Assets AcquisitionsNote 2 Assets Acquisitions (continued)Note 3 InventoriesNote 4 Prepaid Land LeaseNote 5 Property, Plant and Equipment, NetNote 6- Other ReceivablesNote 7 Accounts Payable and Accrued ExpenseNote 8 Loan PayableNote 9 Notes and Loan Payable Related PartiesNote 10 Due To Related PartiesNote 11 Taxes PayableNote 12 Retained Earnings AppropriatedNote 13 Common StockNote 14 Stock-based CompensationNote 14 Stock-based Compensation (conitnued)Note 15 Dividend DistributionNote 16 Income TaxesNote 16 Income Taxes (continued)Note 17 Business SegmentsNote 17 Business Segments - (continued)Note 18 Major SuppliersNote 19 Customer ConcentrationNote 20 Establishment Of Co-op Research and Development CenterNote 21 Reverse Stock SplitNote 22 Related Party TransactionsNote 23 Capital Commitment and Operating Lease CommitmentsNote 23 Capital Commitment and Operating Lease Commitments (continued)Note 24 Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors and Executive Officers Of The RegistrantItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules