99
Wenchang Road, Chenming Industrial Park, Shouguang City, Shandong, China,
262714
+86 (536)
567-0008
(Address,
including zip code, and Telephone Number, including area code, of Registrant’s
Principal Executive Offices)
_________
Loeb
& Loeb LLP
345 Park
Avenue
New York,
New York 10154
(212)
407-4000
(Name,
Address, including zip code, and Telephone Number, including area code, of Agent
for Service)
__________
With a
copy to:
Mitchell
S. Nussbaum, Esq.
Loeb
& Loeb LLP
345 Park
Avenue
New York,
New York 10154
Tel: (212)
407-4159
Fax:(212)
407 4990
Approximate date of commencement of
proposed sale to the public
: From time to time after this
registration statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box.
ý
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
o
(Do
not check if smaller reporting company)
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Smaller
reporting company
x
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EXPLANATION
NOTE
This
registration statement constitutes Post-Effective Amendment No. 1 to
registration statement (no. 333-164444) previously filed by the registrant on
Form S-1 and declared effective on February 9, 2010, and such post-effective
amendment removes from registration 132,424 shares which have been sold, prior
to the filing hereof, originally covered by the original registration
statement.
The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING
STOCKHOLDERS MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Prospectus
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Subject to Completion, Dated
April 30, 2010
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GULF
RESOURCES, INC.
2,985,229
SHARES OF COMMON STOCK
This
prospectus relates to the resale of 2,985,229 shares (the “Shares”) of our
common stock, par value $.0005 per share (the “Common Stock”) being offered by
the selling stockholders (the “Selling Stockholders”) identified in this
prospectus. The shares of Common Stock offered under this
prospectus includes (i) 176,471 shares of Common Stock issuable upon
exercise of a warrant (the “Warrant”), and (ii) 2,808,758 shares of Common Stock
currently issued and outstanding.
We will
not receive any of the proceeds from the sale of the Shares by the Selling
Stockholders. To the extent the Warrants is exercised for cash, if at
all, we will receive the exercise price for the Warrant. The Selling
Stockholders may sell their shares of Common Stock on the Nasdaq Global Select
Market at prevailing market prices or in negotiated transactions.
We have
agreed to pay certain expenses in connection with the registration of the
Shares.
Our
Common Stock is traded on The Nasdaq Global Select Market under the symbol
“GFRE”. We expect it to continue to trade in that market. The closing price for
our Common Stock on April 27, 2010 was $10.72 per share.
Investing
in our Common Stock involves risk. You should carefully consider the risk
factors beginning on page 4 of this prospectus before purchasing shares of our
Common Stock.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES, OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date
of this prospectus
is ,
2010
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F-1
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This
summary highlights material information about us that is described more fully
elsewhere in this prospectus. It may not contain all of the information that you
find important. You should carefully read this entire document, including the
“Risk Factors” section beginning on page 4 of this prospectus and the financial
statements and related notes to those statements appearing elsewhere in this
prospectus before making a decision to invest in our Common Stock.
Unless
otherwise indicated in this prospectus or the context otherwise requires, all
references to “we,” “us,” “our,” “the Company” and “Gulf Resources” refers to
Gulf Resources, Inc. and all of its subsidiaries and affiliated companies.
References to “PRC” are to the People’s Republic of China. References to the
“SEC” or “Commission” refers to the U.S. Securities and Exchange Commission.
References to “Ton” and “Tons” refer to metric tons. All information in this
prospectus gives retroactive effect to a 1-for-100 reverse stock split of our
common stock effected on October 23, 2006, a 2-for-1 forward stock split of our
common stock effected on November 28, 2007 and a 1-for-4 reverse stock split of
our common stock effected on October 9, 2009.
OUR
COMPANY
We
conduct our operations through our two wholly-owned PRC subsidiaries, Shouguang
City Haoyuan Chemical Company Limited (“SCHC”) and Shouguang Yuxin Chemical
Industry Co., Limited (“SYCI”). Through SCHC we manufacture and trade
bromine and crude salt, and we believe that we are one of the largest producers
of bromine in China, as measured by production output. Through 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. We report our business in two
segments; Bromine and Crude Salt, and Chemical Products.
Bromine
(Br
2
)
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 the PRC, 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.
As of
December 31, 2009, we had 696 employees.
Our
Common Stock is listed on The Nasdaq Global Select Market under the symbol
“GFRE.”
Our
executive offices are located in the PRC at 99 Wenchang Road, 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.
Recent
Development
On
December 11, 2009, we entered into a securities purchase agreement, with
institutional investors (the “Investors”), pursuant to which we sold 2,941,182
shares of our Common Stock at a purchase price of $8.50 per share, for gross
proceeds of approximately $25.0 million (the “Financing”). The
closing of the Financing occurred on December 21, 2009 (the “Closing
Date”).
Until the earlie
r of (i) seven months after the Closing Date,
provided that the Company is in compliance with the current public information
requirement under Rule 144(c) on such date, and (ii) thirty (30) days after the
Effective Date (as defined below)(the “Trigger Date”), the Company shall not (a)
file any registration statements, other than in connection with the Financing,
(b) directly or indirectly, offer, sell, grant any option to purchase, or
otherwise dispose of (or announce any offer, sale, grant or any option to
purchase or other disposition of) any of its or its Subsidiaries’ equity or
equity equivalent securities, including without limitation any debt, preferred
stock or other instrument or security that is, at any time during its life and
under any circumstances, convertible into or exchangeable or exercisable for
shares of Common Stock, or securities exercisable to convertible into shares of
Common Stock (a “Subsequent Placement”), or (c) be party to any solicitations,
negotiations or discussions with regard to the foregoing. In addition
to the foregoing restrictions, for a period of two years after the Trigger Date,
the Investors have a right to participate in any Subsequent Placement; except
that the foregoing restrictions shall not apply to (x) certain issuances of the
Company’s securities, including, without limitation, (i) under an approved
equity incentive plan, and (ii) in connection with mergers, acquisitions,
strategic business partnerships or joint ventures, in each case with
non-affiliated third parties and otherwise on an arm’s-length basis, the primary
purpose of which is not to raise additional capital, or (y) any bona fide firm
commitment underwritten public offering or a shelf” registration statement for
an “at-the-market offering” as defined in Rule 415(a)(4) of the Securities Act
of 1933, as amended.
In
connection with the Financing, we entered into a registration rights agreement
with the Investors in which we agreed to file a registration statement (the
“Registration Statement”) with the SEC to register the Shares no later than
January 20, 2010. We have agreed to use our best efforts to have the
Registration Statement declared effective by March 21, 2010, or by April 20,
2010 in the event the Registration Statement is subject to a “full review” by
the SEC (the “Effective Date”). In the event we are unable to
register all of the Registrable Securities on the Registration Statement, due to
the SEC’s application of Rule 415, we have agreed to file such number
of additional registration statements as necessary to register all of the
remaining Registrable Securities.
We are
required to keep all applicable registration statements continuously effective
under the Securities Act until such date as is the earlier of the date when all
of the securities covered by that registration statement have been sold or the
date on which such securities may be sold without any restriction pursuant to
Rule 144 (the “Financing Effectiveness Period”). We will pay
liquidated damages of 2% of each holder’s initial investment in the Shares sold
in the Financing on the date of, and until such failure is cured, every 30
days thereafter if the Registration Statement is not filed or declared effective
within the foregoing time periods or ceases to be effective prior to the
expiration of the Financing Effectiveness Period. However, no
liquidated damages shall be paid (i) with respect to any securities being
registered that we are not permitted to include in the Registration
Statement due to the SEC’s application of Rule 415 if the Shares exceed
one-third of the Company’s public float, or (ii) with respect to any Investor,
solely because such Investor is required to be described as an underwriter under
applicable securities laws.
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this Form S-1 that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act, and Section 21E of the Securities Exchange Act of 1934 (the “
Exchange Act
”). These
include statements about the Company’s expectations, beliefs, intentions or
strategies for the future, which are indicated by words or phrases such as
“anticipate,” “expect,” “intend,” “plan,” “will,” “the Company believes,”
“management believes” and similar words or phrases. The forward-looking
statements are based on the Company’s current expectations and are subject to
certain risks, uncertainties and assumptions. The Company’s actual results could
differ materially from results anticipated in these forward-looking statements.
All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statements.
This
prospectus relates to the resale of 2,985,229 shares of our common stock, par
value $.0005 per share being offered by the Selling Stockholders identified in
this prospectus. The shares of Common Stock being offered under this
prospectus includes (i) 176,471 shares of Common Stock issuable upon exercise of
the Warrant and (ii) 2,808,758 shares of Common Stock currently issued and
outstanding.
Common
Stock being offered by Selling Stockholders
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2,985,229
shares
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Common
Stock outstanding
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34,569,447
shares as of the date of this Prospectus
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Common
Stock outstanding after the Offering (assuming full exercise of the
Warrant)
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34,745,918
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Use
of Proceeds
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We
will not receive any proceeds from the sale of shares by the Selling
Stockholders. However, to the extent that the Warrant is
exercised for cash, we will receive proceeds from any exercise of the
Warrant up to an aggregate of approximately $1.8 million. We intend to use
any proceeds received from the exercise of the Warrant, for working
capital and other general corporate purposes.
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Trading
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Our
Common Stock is listed on The Nasdaq Global Select Market under the symbol
“GFRE.”
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Risk
Factors
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The
securities offered by this prospectus are speculative and involve a high
degree of risk and investors purchasing securities should not purchase the
securities unless they can afford the loss of their entire investment. See
“Risk Factors” beginning on page 4.
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An
investment in our Common Stock is speculative and involves a high degree of risk
and uncertainty. You should carefully consider the risks described below,
together with the other information contained in this prospectus, including the
consolidated financial statements and notes thereto, before deciding to invest
in our Common Stock. Additional risks not presently known to us or that we
presently consider immaterial may also adversely affect our Company. If any of
the following risks occur, our business, financial condition and results of
operations and the value of our Common Stock could be materially and adversely
affected.
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 former chief executive officer, our
business may suffer.
We are
dependent on Mr. Ming Yang, our chairman and former chief executive officer and
Mr. Xiaobin Liu, or current chief executive officer. The loss of
either 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.
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:
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the
success of identifying and completing mergers and
acquisitions;
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the
introduction of competitive products by different or
new competitors;
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reduced
demand for any given product;
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difficulty
in keeping current with changing
technologies;
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increased
or uneven expenses, whether related to sales and marketing, product
development or administration;
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deferral
of recognition of our revenue in accordance with applicable accounting
principles due to the time required to complete projects;
and
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costs
related to possible acquisitions of technology or
businesses.
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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.
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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:
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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;
|
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 the common stock offered
hereby.
As of
April 22, 2010, Mr. Ming Yang, our chairman and then chief executive officer,
and his affiliates, beneficially owned approximately 38.7% 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 34,569,447 shares of our common stock outstanding as of April 21,
2010. There are a limited number of holders of our common
stock. Future sales of our common stock, pursuant to the registration
statement relating to this prospectus, or another 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.
There
may not be sufficient liquidity in the market for our securities in order for
investors to sell their securities.
There is
a limited public market for our common stock, which began trading on The Nasdaq
Global Select Market on October 27, 2009, and there can be no assurance that a
trading market will develop further or be maintained in the future. As of April
20, 2010, the closing price of our common stock on The Nasdaq Global Select
Market was $11.40 per share.
The
sale of material amounts of our common stock could reduce the price of our
common stock.
Sales of
significant amounts of shares held by our directors and executive officers, or
the prospect of these sales, could adversely affect the market price of our
common stock. As shares of our common stock are sold and options to purchase
shares of our common stock are issued pursuant to option agreements, if and to
the extent that these stockholders and/or option holders sell our common stock,
the price of our common stock may decrease due to the additional shares in the
market.
USE
OF PROCEEDS
We will
not receive any of the proceeds from the sale of the Shares being offered by the
Selling Stockholders. However, to the extent that the Warrant is
exercised for cash, we will receive proceeds from any exercise of the Warrant up
to an aggregate of approximately $1.8 million. We intend to use any proceeds
received from the exercise of the Warrant, for working capital and other general
corporate purposes.
EXCHANGE
RATE INFORMATION
Our
business is primarily conducted in China and all of our revenues are denominated
in RMB. Capital accounts of our consolidated financial statements are translated
into United States dollars from RMB at their historical exchange rates when the
capital transactions occurred. Assets and liabilities are translated at the
exchange rates as of the balance sheet date. Income and expenditures are
translated at the average exchange rate of the period. RMB is not freely
convertible into foreign currency and all foreign exchange transactions must
take place through authorized institutions. No representation is made that the
RMB amounts could have been, or could be, converted into United States dollars
at the rates used in translation.
The
following table sets forth information concerning exchange rates between the RMB
and the United States dollar for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
7.2946
|
|
|
|
7.5806
|
|
2008
|
|
|
6.8225
|
|
|
|
6.9193
|
|
2009
|
|
|
6.8282
|
|
|
|
6.8314
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8268
|
|
|
|
6.8269
|
|
February
|
|
|
6.8258
|
|
|
|
6.8285
|
|
March
|
|
|
6.8258
|
|
|
|
6.8262
|
|
April
(to April 16, 2010)
|
|
|
6.8253
|
|
|
|
6.8252
|
|
(1)
|
For
periods prior to January 1, 2008, the exchange rates reflect the noon
buying rates as reported by the Federal Reserve Bank of New York. For
periods after January 1, 2008, the exchange rates reflect the exchange
rates as set forth on the website of The People’s Bank of
China.
|
(2)
|
Annual
averages are calculated from month-end rates. Monthly averages are
calculated using the average of the daily rates during the relevant
period.
|
The
following selected historical financial information should be read in
conjunction with our financial statements and related notes included as part of
this prospectus as well as and the information contained in the section of this
prospectus captioned “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” The selected financial information
for the fiscal years ended December 31, 2009, 2008 and 2007 have been derived
from our audited consolidated financial statements of included elsewhere in this
prospectus.
|
|
|
|
|
|
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
|
|
MANAGE
MENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except
for the historical information contained herein, the matters discussed in this
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and elsewhere in this prospectus are forward-looking statements
that involve risks and uncertainties. The factors listed in the section
captioned “Risk Factors,” as well as any cautionary language in this prospectus,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from those projected. Except as may be required by
law, we undertake no obligation to update any forward-looking statement to
reflect events after the date of this prospectus.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
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%
|
|
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
December 31,
2009
|
|
|
Year
Ended
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
December 31,
2008
|
|
|
Year
Ended
December 31,
2007
|
|
Segments
|
|
|
|
|
% of
total
|
|
|
|
|
|
% 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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
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
|
|
Less
than
|
More
than
|
|
Total
|
1
year
|
1-3
years
|
3-5
years
|
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.
Quantitative
and Qualitative Disclosures About Market Risk.
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
prospectus.
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.
The
Company’s functional currency is the Renminbi, which had an average exchange
rate of $0.13167, $0.14415 and $0.14642 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 then 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 6,625,000 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 4,047,030 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 prospectus.
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
October 6, 2009, we amended our certificate of incorporation to effect a 1-for-4
reverse stock split of our outstanding shares of common stock on October 9,
2009.
Acquisitions of Bromine
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 50-year mineral rights and production land lease
covering 747 hectares, or 7.5 square kilometers, of real property, with
non-reserve mineralized materials of approximately 223,000 tons of bromine
and 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 cash in the amount
$3,051,282.
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 50-year mineral rights and land lease
covering 938 hectares of real property, with non-reserve mineralized materials
of approximately 235,000 tons of bromine and 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 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 50-year mineral
rights and land lease covering 876 hectares of real property, with non-reserve
mineralized materials of approximately 225,000 tons of bromine and 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 50-year
mineral rights and land lease covering 935 hectares of real property, with
non-reserve mineralized materials of approximately 240,000 tons of bromine
and 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 8th, 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 50-year mineral rights and land lease covering 1,069
hectares of real property, with non-reserve mineralized materials of
approximately 205,000 tons of bromine and 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 30, 2009, the Company acquired substantially all of the assets owned by
Qiufen Yuan, Han Wang and Yufen Zhang in the Shouguang City Renjiazhuangzi
Village North Area (the ‘Yuan-Wang-Zhang property” or “Factory No.
7”). The Yuan-Wang-Zhang property includes a 50-year mineral rights
and land lease covering 652 hectares of real property, with non-reserve
mineralized materials of approximately 3,000 tons of bromine and 200,000
tons of crude salt, and 350 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 $11,500,000, of
which $10,000,000 was paid in cash and $1,500,000 was paid by the issuance of
375,000 shares of the Company’s common stock on March 3, 2009.
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 mineral rights and land lease covering 11.02 KM2 of real property, with
non-reserve mineralized materials of approximately 150,000 tons of bromine, 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.
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; with respect to
Factory No. 7, the assets had not been operational for twelve months; with
respect to Factory No. 8, the assets had not been operational for eight
months.
Recent
Developments
On
January 24, 2009, the Company entered into an agreement to issue 5,250,000
shares of the Company’s common stock at a price equal to $1.0137 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
December 11, 2009, we entered into a securities purchase agreement with
institutional investors, pursuant to which we sold 2,941,182 shares of our
common stock at a purchase price of $8.50 per share, for gross proceeds of
approximately $25.0 million. The closing of the financing
occurred on December 21, 2009.
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.
Bromine
reserve study conducted by Institute of Mineral Resources Chinese Academy of
Geological Science
In
November 2007 the Institute of Mineral Resources Chinese Academy of Geological
Science completed a study of the non-reserve mineralized material included in
the assets of SCHC at the time it was acquired (now referred to as the
“Haoyuan general facility” or “Factory No. 1”), Factory No. 2 and Factory No. 3.
This study determined the occurrences and burying conditions, distribution range
and characteristics of natural brine occurring in these assets; analyzed the
creation, supply and exploration conditions of these properties. The
study concluded that there are non-reserve mineralized materials of bromine in
the amount of 776,000 tons in Factory No. 1, 230,000 tons in Factory No. 2, and
280,000 tons in Factory No. 3, that the natural brine resources of these three
assets collectively is about 3.9 billion cubic meters. In addition it estimated
that the non-reserve mineralized materials in these three assets collectively
are approximately 300 million tons of rock salt (liquid NaCl), 4.3 million tons
of potassium chloride, 55 million tons of magnesium chloride, 29 million tons of
magnesium sulfate, and 9.8 million tons of calcium sulfate.
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:
1.
|
natural
brine is pumped from underground through extraction wells by subaqueous
pumps;
|
2.
|
the
natural brine then passes through transmission pipelines to storage
reservoirs;
|
3.
|
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.
|
4.
|
the
wastewater from this refining process is then transported by pipeline to
brine pans;
|
5.
|
the
evaporation of the wastewater produces crude
salt.
|
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:
|
|
|
Hydroxyl
guar gum
|
|
Oil
Exploration & Production
|
Demulsified
agent
|
|
Oil
Exploration & Production
|
Corrosion
inhibitor for acidizing
|
|
Oil
Exploration & Production
|
Bactericide
|
|
Oil
Exploration / Agricultural
|
Chelant
|
|
Paper
Making
|
Iron
ion stabilizer
|
|
Oil
Exploration & Production
|
Clay
stabilizing agent
|
|
Oil
Exploration & Production
|
Flocculants
agent
|
|
Paper
Making
|
Remaining
agent
|
|
Paper
Making
|
Expanding
agent with enhanced gentleness
|
|
Paper
Making
|
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 10,000 tons, and its production of papermaking-related
chemical products is over 3,500 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.
In
January 2010, the Company commenced the construction of a new chemical additives
production line for waste water treatment and expects it to start production in
July of 2010 with chemical additives production capacity of 3,000 metric tons
per year. The new production line is located in the Company’s SYCI’s chemical
plant.
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 follow
SFAS No. 131,
Disclosures
about Segments of and Enterprise and Related Information,
which requires
us to provide certain information about our operating segments. We
have two reportable segments: bromine and crude salt and chemical
products.
|
|
|
|
|
|
Nine
months ended
|
|
|
Nine
months ended
|
|
|
|
|
|
|
|
|
Segments
|
|
|
|
|
Percent
of total
|
|
|
|
|
|
Percent
of total
|
|
Bromine
and Crude salt
|
|
$
|
54,874,656
|
|
|
|
67.8
|
%
|
|
$
|
47,627,468
|
|
|
|
75.2
|
%
|
Chemical
Products
|
|
|
26,016,938
|
|
|
|
32.2
|
%
|
|
|
15,727,141
|
|
|
|
24.8
|
%
|
Total
Revenues
|
|
$
|
80,891,594
|
|
|
|
100.0
|
%
|
|
$
|
63,354,609
|
|
|
|
100.0
|
%
|
|
Nine
Months Ended September 30,
|
|
2009
vs. 2008
|
Segment
|
Percent
increase of Net revenue
|
Bromine
and Crude salt
|
15.2%
|
Chemical
Products
|
65.4%
|
|
|
Income
from Operations by Segment
|
|
|
|
Nine
months ended
|
|
|
Nine
months ended
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Bromine
and Crude salt
|
|
$
|
23,986,058
|
|
|
|
73.0
|
%
|
|
$
|
18,427,749
|
|
|
|
77.8
|
%
|
Chemical
Products
|
|
|
8,879,769
|
|
|
|
27.0
|
%
|
|
|
5,252,071
|
|
|
|
22.2
|
%
|
Income
from operations before corporate costs
|
|
|
32,865,827
|
|
|
|
100.0
|
%
|
|
|
23,679,820
|
|
|
|
100.0
|
%
|
Corporate
costs
|
|
|
(836,152
|
)
|
|
|
|
|
|
|
(1,590,412
|
)
|
|
|
|
|
Income
from operations
|
|
$
|
32,029,675
|
|
|
|
|
|
|
$
|
22,089,408
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
Months Ended
|
|
|
Twelve
Months Ended
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Bromine
and Crude salt
|
|
$
|
63,664,159
|
|
|
|
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
|
%
|
|
|
Percentage
Increase in Net Sales from fiscal year 2006 to 2007
|
|
Percentage
Increase in Net Sales from fiscal year 2007 to
2008
|
|
|
|
|
|
Bromine
and Crude salt
|
|
90.8%
|
|
87%
|
Chemical
Products
|
|
45.4%
|
|
18%
|
SCHC
Product
sold in metric tons
|
|
|
|
|
|
|
Bromine
|
|
28,673
|
|
17,648
|
|
+62.47%
|
|
|
|
|
|
|
|
Crude
Salt
|
|
66,500
|
|
51,000
|
|
+30.39%
|
|
|
Income
from Operations by Segment
|
|
|
|
Twelve
Months Ended
December
31, 2008
|
|
|
Twelve
Months Ended
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(2,063,050
|
)
|
|
|
|
|
|
$
|
(1,320,959
|
)
|
|
|
|
|
Income
from operations
|
|
$
|
30,721,397
|
|
|
|
|
|
|
$
|
20,024,928
|
|
|
|
|
|
|
|
Bromine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Crude
|
|
|
Chemical
|
|
|
Segment
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
63,664,156
|
|
|
$
|
23,824,178
|
|
|
|
87,488,334
|
|
|
$
|
-
|
|
|
$
|
87,488,334
|
|
Income
from operations
|
|
|
24,663,244
|
|
|
|
8,121,203
|
|
|
|
32,784,447
|
|
|
|
(2,063,050
|
)
|
|
|
30,721,397
|
|
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
|
|
|
10,529,284
|
|
|
|
6,835,909
|
|
|
|
17,365,195
|
|
|
|
-
|
|
|
|
17,365,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
34,015,484
|
|
|
$
|
20,233,166
|
|
|
$
|
54,248,650
|
|
|
$
|
-
|
|
|
$
|
54,248,650
|
|
Income
(loss) from operations
|
|
|
14,181,054
|
|
|
|
7,164,833
|
|
|
|
21,345,887
|
|
|
|
(1,320,959
|
)
|
|
|
20,024,928
|
|
Total
assets
|
|
|
36,614,939
|
|
|
|
9,516,930
|
|
|
|
46,131,869
|
|
|
|
197,963
|
|
|
|
46,329,831
|
|
Depreciation
and amortization
|
|
|
1,111,580
|
|
|
|
186,871
|
|
|
|
1,298,451
|
|
|
|
-
|
|
|
|
1,298,451
|
|
Sales
and Marketing
As of
December 31, 2009, we had an in-house sales staff of eleven employee 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
product 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
In 2008,
our revenues from bromine and crude salt were approximately
$63,664,156. We sell a substantial portion of our products to a
limited number of customers. Our principal customers during 2008 were
Shouguang City Weidong Chemical Company Limited, Shouguang City Ruitai Chemical
Company Limited, Weifang City Luguang Chemical Company Limited, Shouguang City
Fu Hai Chemical Company Limited, and Dongying Hongze Chemical Company Limited,
Shandong Morui Chemical Company Limited and Shouguang City Rongyuan Chemical
Company Limited.
During
the year ended December 31, 2008, sales to our three largest bromine customers,
based on net sales made to such customers, aggregated $21,427,380, or
approximately 35% of total net sales, and sales to our largest customer
represented approximately 14.5% of total net sales. At December 31, 2008,
amounts due from these customers totaled $2,750,621.
During
the 12 months ended December 31, 2007, sales to our three largest bromine
customers, based on net revenue derived from such customers, aggregated
$19,010,000, or approximately 56% of total bromine and crude salt net
revenue. At December 31, 2007, amounts due from these customers
totaled approximately $2,552,068.
This
concentration of customers makes us vulnerable to an adverse
near-term impact, should one or more of these relationships be
terminated.
In 2008,
our revenues from our bromine and crude salt business were approximately
$63.0 million. The following table shows our major customers (9%
or more) for our bromide and crude salt business for the year ended
December 31, 2008.
|
|
|
|
|
|
|
Percentage
of Segment’s Revenue (%)
|
|
|
1
|
|
Shandong
Morui Chemical Company Limited
|
|
$
|
8,912
|
|
|
|
14.50%
|
|
|
2
|
|
Shouguang
City Rongyuan Chemical Company Limited
|
|
$
|
6,662
|
|
|
|
10.84%
|
|
|
3
|
|
Shouguang
Fuhai Chemical Company Limited
|
|
$
|
5,853
|
|
|
|
9.53%
|
|
TOTAL
|
|
|
|
$
|
21,427
|
|
|
|
34.87%
|
|
In 2008,
our revenues from our chemicals business were approximately
$23.8 million. The following table shows our major customers
(10% or more) for our chemicals business as of December 31,
2008:
|
|
|
|
|
|
|
Percentage
of Segment’s Revenue (%)
|
|
|
1
|
|
Talimu
Oil Company -1st, 2nd, and 3rd exploiture dept. Ltd.
(1)
|
|
$
|
8,554
|
|
|
|
35.92%
|
|
|
2
|
|
Sinopec
Shengli -field Ltd’s Qinghe factory
|
|
$
|
4,160
|
|
|
|
17.47%
|
|
|
3
|
|
Wuhan
City Chenming Hanyang Papermaking Ltd
|
|
$
|
3,656
|
|
|
|
15.36%
|
|
TOTAL
|
|
|
|
$
|
16,371
|
|
|
|
68.75%
|
|
(1) Represents
sales to three autonomous entities within a single corporate group.
Principal
Suppliers
Our
principle suppliers during 2009 were Shandong Haihua Chlor-Alkali Resin Co.,
Ltd., Shandong Dadi Salt Group Co., Ltd. and Shandong Shouguang Hongye
Trade Co.,Ltd. Our principal suppliers during 2008 were Shandong
Haike Shengli Electric Chemical Co., Ltd, Shandong Ruitai Chemicals Co., LTD,
and Shouguang City Xingyi Fuel Commercial Company Limited, and during 2007 were
Shandong Haike Shengli Electric Chemical Co., Ltd., Shandong Ruitai Chemicals
Co., Ltd, and Shouguang City Xingyi Fuel Commercial Company
Limited.
During
the 12 months ended December 31, 2008, we purchased 74.2% of our raw material
from two suppliers. Shandong Haike Shengli Electric Chemical
Co., Ltd accounted for 31.61 % of our purchases of raw materials and Shandong
Ruitai Chemicals Co., LTD accounted for 42.67% of our purchases
of raw materials, respectively during that period. As of December 31, 2008, the
accounts payable due these suppliers was approximately $558,598.
During
2007, we purchased 49% of our products from two suppliers. At December 31, 2007,
the aggregate amount due these suppliers were $1,395,300.
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
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 properties. These seven acquisitions expanded
our annual production capacity to 43,300 metric tons of bromine and 350,000
metric tons of crude salt. These properties were purchased with a
combination of cash and shares of our common stock, at purchase prices totaling
$62,985,233. 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.
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.
Our
principal competitors in the chemicals business are Shandong Haihua Group Ltd.,
Shouguang Weidong Salt Field Co Ltd., Shouguang Fukang Pharmaceutical
Co., Ltd., and Shouguang Caiyangzi Salt Field Co., Ltd.
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 had 696 full-time employees, of whom 82% are with
SCHC and 18% are with SYCI. Approximately 2% of our employees are
management personnel and 3% are sales and procurement
staff. 20% 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 $374,744 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.
Legal
proceedings
We are
not currently a party to any legal proceedings. We are also not aware
of any legal proceeding, investigation or claim, or other legal exposure that
could have a material effect on our business, financial condition or results of
operations.
Properties
FIGURE
2.1 - REGIONAL MAP OF MINING PROPERTIES