Attached files
file | filename |
---|---|
EX-5.1 - GULF RESOURCES, INC. | e606322_ex5-1.htm |
EX-23.1 - GULF RESOURCES, INC. | e606322_ex23-1.htm |
As filed
with the Securities and Exchange Commission on January 20, 2010
Registration
No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
GULF
RESOURCES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
13-3637458
|
2800
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(IRS
Employer Identification No.)
|
(Primary
Standard Industrial
Classification
Code Number)
|
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. ¨
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. ¨
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. ¨
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
¨
|
Accelerated filer
¨
|
Non-accelerated filer
ý
(Do not check if smaller
reporting company)
|
Smaller reporting company ¨
|
CALCULATION
OF REGISTRATION FEE
Title
of each class of securities to
be
registered
|
Amount
of
shares
to be
registered
(1)
|
Proposed
Maximum
offering
price
per
share (2)
|
Proposed
maximum
aggregate
offering
price
|
Amount
of
registration
fee
|
||||||||||
Common
Stock, par value $0.0005 per share
|
2,941,182
|
$12.85
|
|
$37,794,188.70
|
$2,694.73
|
|||||||||
Common
Stock, par value $0.0005 per share underlying the Warrant
|
176,471
|
$12.85
|
2,267,652.35
|
161.68
|
||||||||||
Total
|
3,117,653
|
|
|
$40,061,841.05
|
$2,856.41
|
(1)
|
Pursuant
to Rule 416 under the Securities Act of 1933, as amended, this
registration statement includes an indeterminate number of shares as may
become necessary to adjust the number of shares issued by the Registrant
to the Selling Stockholders resulting from stock splits, stock dividends
or similar transactions involving the Common
Stock.
|
(2)
|
Estimated
solely for the purpose of calculating the registration fee in accordance
with Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low prices of our common stock
reported on the NASDAQ Global Select Market on January 15,
2010.
|
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
|
Subject
to Completion, Dated January 20,
2010
|
GULF
RESOURCES, INC.
3,117,653
SHARES OF COMMON STOCK
This
prospectus relates to the resale of 3,117,653 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 (iv) 2,941,182 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 January 13, 2010 was $13.39 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
Table of Contents
Page
1
|
|
2
|
|
3
|
|
4
|
|
12
|
|
12
|
|
13
|
|
15
|
|
29
|
|
47
|
|
53
|
|
55
|
|
56
|
|
59
|
|
61
|
|
62
|
|
64
|
|
64
|
|
64
|
|
Q-1
|
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
(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 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 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
earlier 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.
THE
OFFERING
This
prospectus relates to the resale of 3,117,653 shares of our common stock, par
value $.0005 per share being offered by the Selling Stockholders identified in
this prospsectus. 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) 2,941,182 shares of Common Stock currently issued and
outstanding.
Common
Stock being offered by Selling Stockholders
|
3,117,653
shares
|
|
Common
Stock outstanding
|
34,541,066
shares as of the date of this Prospectus
|
|
Common
Stock outstanding after the Offering (assuming full exercise of the
Warrant)
|
34,717,537
|
|
Use
of Proceeds
|
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.
|
|
Trading
|
Our
Common Stock is listed on The Nasdaq Global Select Market under the symbol
“GFRE.”
|
|
Risk
Factors
|
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.
|
RISK FACTORS
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. We do not
have key-man term life insurance policy on Mr. Yang or Mr. Liu.
Our
inability to successfully manage the growth of our business may have a material
adverse effect on our business, results or operations and financial
condition.
We expect
to experience growth in the number of employees and the scope of our operations
as a result of internal growth and acquisitions. Such activities could result in
increased responsibilities for management. Our future success will be highly
dependent upon our ability to manage successfully the expansion of operations.
Our ability to manage and support our growth effectively will be substantially
dependent on our ability to implement adequate improvements to financial,
inventory, management controls, reporting, order entry systems and other
procedures, and hire sufficient numbers of financial, accounting,
administrative, and management personnel.
Our
future success depends on our ability to address potential market opportunities
and to manage expenses to match our ability to finance operations. The need to
control our expenses will place a significant strain on our management and
operational resources. If we are unable to control our expenses effectively, our
business, results of operations and financial condition may be adversely
affected.
Our
management is comprised almost entirely of individuals residing in the PRC with
very limited English skills.
Our
management is comprised almost entirely of individuals born and raised in the
PRC. As a result of differences in culture, educational background
and business experiences, our management may analyze, evaluate and present
business opportunities and results of operations differently from the way they
are analyzed, evaluated and presented by management teams of public companies in
Europe and the United States. In addition, our management has very
limited skills in English. Consequently, it is possible that our
management team will emphasize or fail to emphasize aspects of our business that
might customarily be emphasized in a different manner by comparable public
companies from different geographical and political areas.
We
will face many of the difficulties that companies in the early stage may
face.
We have a
limited operating history as a bromine produce and chemical processing company,
which may make it difficult for you to assess our ability to identify merger or
acquisition candidates and our growth and earnings potential. Therefore, we may
face many of the difficulties that companies in the early stages of their
development in new and evolving markets often face. We may continue to face
these difficulties in the future, some of which may be beyond our
control. If we are unable to successfully address these problems, our
future growth and earnings will be negatively affected.
We
cannot accurately forecast our future revenues and operating results, which may
fluctuate.
Our short
operating history and the rapidly changing nature of the markets in which we
compete make it difficult to accurately forecast our revenues and operating
results. Furthermore, our revenues and operating results may fluctuate in
the future due to a number of factors, including the
following:
·
|
the
success of identifying and completing mergers and
acquisitions;
|
|
·
|
the
introduction of competitive products by different or
new competitors;
|
·
|
reduced
demand for any given product;
|
|
·
|
difficulty
in keeping current with changing
technologies;
|
·
|
increased
or uneven expenses, whether related to sales and marketing, product
development or administration;
|
|
·
|
deferral
of recognition of our revenue in accordance with applicable accounting
principles due to the time required to complete projects;
and
|
|
·
|
costs
related to possible acquisitions of technology or
businesses.
|
Due to
these factors, forecasts may not be achieved, either because expected revenues
do not occur or because they occur at lower prices or on terms that are less
favorable to us. In addition, these factors increase the chances that our
results could be lower than the expectations of investors and analysts. If so,
the market price of our stock would likely decline.
Conflicts
of interest.
Mr. Ming
Yang, our chairman, was a substantial owner of SCHC and SCYI before their
acquisition by us, and remains a substantial owner of our
securities. There may have been conflicts of interest between Mr.
Yang and our Company as a result of such ownership interests. The terms on
which we acquired SCHC and SCYI may have been different from those that
would have been obtained if SCHC and SCYI were owned by unrelated
parties.
Risks
Related to Doing Business in the People's Republic of China
Our
business operations take place primarily in the People's Republic of
China. Because Chinese laws, regulations and policies are changing,
our Chinese operations will face several risks summarized below.
-
Limitations on Chinese economic market reforms may discourage foreign investment
in Chinese businesses.
The value
of investments in Chinese businesses could be adversely affected by political,
economic and social uncertainties in China. The economic reforms in China in
recent years are regarded by China's central government as a way to introduce
economic market forces into China. Given the overriding desire of the central
government leadership to maintain stability in China amid rapid social and
economic changes in the country, the economic market reforms of recent years
could be slowed, or even reversed.
Any
change in policy by the Chinese government could adversely affect investments in
Chinese businesses.
Changes
in policy could result in imposition of restrictions on currency conversion,
imports or the source of supplies, as well as new laws affecting joint ventures
and foreign-owned enterprises doing business in China. Although China has been
pursuing economic reforms, events such as a change in leadership or social
disruptions that may occur upon the proposed privatization of certain
state-owned industries, could significantly affect the government's ability to
continue with its reform.
-
We face economic risks in doing business in China.
As a
developing nation, China's economy is more volatile than that of developed
Western industrial economies. It differs significantly from that of the U.S. or
a Western European country in such respects as structure, level of development,
capital reinvestment, legal recourse, resource allocation and self-sufficiency.
Only in recent years has the Chinese economy moved from what had been a command
economy through the 1970s to one that during the 1990s encouraged substantial
private economic activity. In 1993, the Constitution of China was amended to
reinforce such economic reforms. The trends of the 1990s indicate that future
policies of the Chinese government will emphasize greater utilization of market
forces. For example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinate to state-owned companies, which are the mainstay
of the Chinese economy. However, we cannot assure you that, under some
circumstances, the government's pursuit of economic reforms will not
be restrained or curtailed. Actions by the central government of China
could have a significant adverse effect on economic conditions in the country as
a whole and on the economic prospects for our Chinese operations.
-
The Chinese legal and judicial system may negatively impact foreign
investors.
In 1982,
the National Peoples Congress amended the Constitution of China to authorize
foreign investment and guarantee the "lawful rights and interests" of foreign
investors in China. However, China's system of laws is not yet comprehensive.
The legal and judicial systems in China are still under development , and
enforcement of existing laws is inconsistent. Many judges in China lack the
depth of legal training and experience that would be expected of a judge in a
more developed country. Because the Chinese judiciary is relatively
inexperienced in enforcing the laws that exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. China's legal system is based on written statutes; a
decision by one judge does not set a legal precedent that is required to be
followed by judges in other cases. In addition, the interpretation of Chinese
laws may shift to reflect domestic political changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. We cannot assure you that a change
in leadership, social or political disruption, or unforeseen circumstances
affecting China's political, economic or social life, will not affect the
Chinese government's ability to continue to support and pursue these reforms.
Such a shift could have a material adverse effect on our business and
prospects.
The
practical effect of the People’s Republic of China’s legal system on our
business operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign Invested
Enterprise laws provide significant protection from government interference. In
addition, these laws guarantee the full enjoyment of the benefits of corporate
articles and contracts to Foreign Invested Enterprise participants. These laws,
however, do impose standards concerning corporate formation and governance,
which are not qualitatively different from the general corporation laws of the
several states. Similarly, the accounting laws and regulations of the People’s
Republic of China mandate accounting practices which are not consistent with
U.S. Generally Accepted Accounting Principles. China's accounting laws require
that an annual "statutory audit" be performed in accordance with People’s
Republic of China’s accounting standards and that the books of account of
Foreign Invested Enterprises are maintained in accordance with Chinese
accounting laws. Article 14 of the People’s Republic of China Wholly
Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to
submit certain periodic fiscal reports and statements to designated financial
and tax authorities, at the risk of business license revocation. Second, while
the enforcement of substantive rights may appear less clear than United States
procedures, Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises
are Chinese registered companies, which enjoy the same status as other Chinese
registered companies in business-to-business dispute resolution. Generally, the
Articles of Association provide that all business disputes pertaining to Foreign
Invested Enterprises are to be resolved by the Arbitration Institute of the
Stockholm Chamber of Commerce in Stockholm, Sweden, applying Chinese substantive
law. Any award rendered by this arbitration tribunal is, by the express terms of
the respective Articles of Association, enforceable in accordance with the
"United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (1958)." Therefore, as a practical matter, although no
assurances can be given, the Chinese legal infrastructure, while different in
operation from its United States counterpart, should not present any significant
impediment to the operation of Foreign Invested Enterprises.
Because
our principal assets are located outside of the United States and some of our
directors and all of our executive officers reside outside of the United States,
it may be difficult for you to enforce your rights based on the United States
Federal securities laws against us and our officers and directors in the United
States or to enforce judgments of United States courts against us or them in the
People's Republic of China.
In
addition, our operating subsidiaries and substantially all of our assets are
located outside of the United States. You will find it difficult to enforce your
legal rights based on the civil liability provisions of the United States
Federal securities laws against us in the courts of either the United States or
the People's Republic of China and, even if civil judgments are obtained in
courts of the United States, to enforce such judgments in the courts of the
People's Republic of China. In addition, it is unclear if extradition treaties
in effect between the United States and the People's Republic of China would
permit effective enforcement against us or our officers and directors of
criminal penalties, under the United States Federal securities laws or
otherwise.
-
Economic Reform Issues
Although
the Chinese government owns the majority of productive assets in China, during
the past several years the government has implemented economic reform measures
that emphasize decentralization and encourage private economic activity.
Because these economic reform measures may be inconsistent or ineffectual,
we are unable to assure you that:
·
|
We
will be able to capitalize on economic reforms;
|
|
·
|
The
Chinese government will continue its pursuit of economic reform
policies;
|
·
|
The
economic policies, even if pursued, will be successful;
|
|
·
|
Economic
policies will not be significantly altered from time to time;
and
|
·
|
Business
operations in China will not become subject to the risk of
nationalization.
|
Since
1979, the Chinese government has reformed its economic
systems. Because many reforms are unprecedented or experimental, they
are expected to be refined and improved. Other political, economic and social
factors, such as political changes, changes in the rates of economic growth,
unemployment or inflation, or in the disparities in per capita wealth between
regions within China, could lead to further readjustment of the reform measures.
This refining and readjustment process may negatively affect our
operations.
Over the
last few years, China's economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government recently has taken measures to curb this excessively
expansive economy. These measures have included revaluations of the Chinese
currency, the Renminbi (RMB), restrictions on the availability of domestic
credit, and limited re-centralization of the approval process for purchases of
some foreign products. These austerity measures alone may not succeed in slowing
down the economy's excessive expansion or control inflation, and may result in
severe dislocations in the Chinese economy. The Chinese government may adopt
additional measures to further combat inflation, including the establishment of
freezes or restraints on certain projects or markets.
To date,
reforms to China's economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China's economic system
will continue or that we will not be adversely affected by changes in China's
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which may
be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import
restrictions.
Risks
Associated with Bromine Extraction
We
are subject to risks associated with our operations which may affect our
results.
The
resource industry in the PRC has drawbacks that the resource industry does not
have within the United States. For instance:
·
|
In
China, insurance coverage is a relatively new concept compared to that of
the United States and for certain aspects of a business
operation, insurance coverage is restricted or
expensive. Workers compensation for employees in the PRC may be
unavailable or, if available, insufficient to adequately cover such
employees.
|
·
|
The
environmental laws and regulations in the PRC set various standards
regulating certain aspects of health and environmental quality, including,
in some cases, the obligation to rehabilitate current and former
facilities and locations where operations are or were
conducted. Violation of those standards could result in a
temporary or permanent restriction by the PRC of our bromine
operations.
|
We cannot
assure you that we will be able to adequately address any of these or other
limitations.
Our
earnings and, therefore our profitability, may be affected by price
volatility.
We
anticipate that the majority of our future revenues will be derived from the
sale of bromine and products derived from bromine and, as a result, our earnings
are directly related to the prices of these products. There are many factors
influencing the price of these products including expectations for inflation;
global and regional demand and production; political and economic conditions;
and production costs. These factors are beyond our control and are impossible
for us to predict. As a result, price changes may adversely affect our operating
results.
We may become
subject to numerous risks and hazards associated with our chemical processing
business.
Bromine
is highly corrosive and must be handled carefully in order to avoid leakage and
damage to containers, transportation equipment and other
facilities. The risks associated with bromine include:
·
|
environmental
hazards; and
|
|
·
|
industrial
accidents, including personal
injury.
|
Such
risks could result in:
·
|
damage
to or destruction of properties or production
facilities;
|
|
·
|
personal
injury or death;
|
·
|
environmental
damage;
|
|
·
|
monetary
losses; and
|
·
|
legal
liability.
|
Our
business operations and related activities may be subject to PRC government
regulations concerning environmental protection.
We may
have to make a significant financial commitment for the construction of
environmental protection facilities and the establishment of a sound
environmental protection management and monitoring system. Compliance with
existing and future environmental protection regulations may increase our
operating costs and may adversely affect our operating results.
Our
operations and business activities may involve dangerous materials.
Although
we may establish stringent rules relating to the storage, handling and use of
dangerous materials, there is no assurance that accidents will not occur. Should
we be held liable for any such accident, we may be subject to penalties and
possible criminal proceedings may be brought against our employees.
Risks
Relating to our Common Stock and our status as a Public Company
The
price of our common stock may be affected by a limited trading volume and may
fluctuate significantly.
There has
been a limited public market for our common stock and we cannot assure you that
an active trading market for our stock will develop or if developed, will be
maintained. The absence of an active trading market may adversely affect our
stockholders' ability to sell our common stock in short time periods, or
possibly at all. In addition, we cannot assure you that you will be able to sell
shares of common stock that you have purchased without incurring a loss. The
market price of our common stock may not necessarily bear any relationship to
our book value, assets, past operating results, financial condition or any other
established criteria of value, and may not be indicative of the market price for
the common stock in the future. In addition, the market price for our common
stock may be volatile depending on a number of factors, including business
performance, industry dynamics, and news announcements or changes in general
economic conditions.
We
have not and do not anticipate paying any dividends on our common stock; because
of this our securities could face devaluation in the market.
We have
paid no dividends on our common stock to date and it is not anticipated that any
dividends will be paid to holders of our common stock in the foreseeable future.
While our dividend policy will be based on the operating results and capital
needs of the business, it is anticipated that any earnings will be retained
to finance our future expansion and for the implementation of our business plan.
As an investor, you should take note of the fact that a lack of a dividend can
further affect the market value of our stock, and could significantly affect the
value of any investment in our Company.
We
will continue to incur significant increased costs as a result of operating as a
public company, and our management will be required to devote substantial time
to new compliance requirements.
As a
public company we incur significant legal, accounting and other expenses under
the Sarbanes-Oxley Act of 2002, together with rules implemented by the
Securities and Exchange Commission and applicable market regulators. These rules
impose various requirements on public companies, including requiring certain
corporate governance practices. Our management and other personnel will need to
devote a substantial amount of time to these new compliance requirements.
Moreover, these rules and regulations will increase our legal and financial
compliance costs and will make some activities more time-consuming and
costly.
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular, commencing in 2007, we must perform system and
process evaluations and testing of our internal controls over financial
reporting to allow management and our independent registered public accounting
firm to report on the effectiveness of our internal controls over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or
the subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Compliance with Section 404 may require that
we incur substantial accounting expenses and expend significant management
efforts. If we are not able to comply with the requirements of Section 404 in a
timely manner, or if our accountants later identify deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, the
market price of our stock could decline and we could be subject to sanctions or
investigations by the SEC or other applicable regulatory
authorities.
Lack
of management control by purchasers of the common stock offered
hereby.
As of
January 12, 2010, Mr. Ming Yang, our chairman and then chief executive officer,
and his affiliates, beneficially owned approximately 31.5% 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 34,541,066 shares of our common stock outstanding as of January
12, 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.
Risks
relating to the offering
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
January 13, 2010, the closing price of our common stock on The Nasdaq Global
Select Market was $13.39 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.
Year Ended December 31,
|
Year End
|
Yearly
Average
|
||||||
|
||||||||
2007
|
7.2946
|
7.5806
|
||||||
2008
|
6.8225
|
6.9193
|
||||||
2009
|
6.8282
|
6.8314
|
||||||
Month End
|
Monthly
Average
|
|||||||
2010
|
||||||||
January
(to January 15, 2010)
|
6.8271
|
6.8276
|
(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.
|
SELECTED CONSOLIDATED FINANCIAL DATA
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 consolidated statement of income data for the
fiscal years ended December 31, 2006, 2007 and 2008 and the consolidated balance
sheet data as of December 31, 2007 and 2008 have been derived from our audited
consolidated financial statements of included elsewhere in this
prospectus. We derived our selected historical consolidated financial
data as of September 30, 2009 and for the nine months ended September 30, 2008
and 2009 from our unaudited consolidated financial statements included in this
prospectus, which include all adjustments, consisting of normal recurring
adjustments, that management considers necessary for a fair presentation of our
financial position and results of operations as of the dates and for the periods
presented. The results of operations for past accounting periods are not
necessarily indicative of the results to be expected for any future
periods.
Year
Ended December 31,
|
Nine
Months Ended
September
30
|
|||||||||||||||||||
2008
|
2007
|
2006
|
2009
|
2008
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||||||
(in
thousands, except per share data)
|
||||||||||||||||||||
Statement
of Operations Data:
|
||||||||||||||||||||
Revenue
|
$ | 87,488 | $ | 54,248 | $ | 31,736 | $ | 80,892 | 63,355 | |||||||||||
Cost
of goods sold
|
(52,302 | ) | (32,108 | ) | (20,504 | ) | (45,520 | ) | 38,051 | |||||||||||
Gross
profit
|
35,186 | 22,140 | 11,232 | 35,371 | 25,304 | |||||||||||||||
Operating
expenses:
|
||||||||||||||||||||
General
and administrative expenses
|
(4,466 | ) | (2,082 | ) | (5,789 | ) | (2,966 | ) | (2,824 | ) | ||||||||||
Depreciation
and amortization
|
(143 | ) | (33 | ) |
-
|
(4,817 | ) | (3,426 | ) | |||||||||||
Total
operating expenses
|
(4,609 | ) | (2,115 | ) | (5,789 | ) | (7,783 | ) | (6,250 | ) | ||||||||||
Income
from operations
|
30,577 | 20,025 | 5,443 | 32,030 | 22,089 | |||||||||||||||
Interest
income (expense), net
|
34 | (107 | ) | 6 | - | - | ||||||||||||||
Other
income (expense), net
|
(4 | ) | 113 | 246 | 38 | 6 | ||||||||||||||
Income
before income taxes
|
30,607 | 20,031 | 5,695 | 32,068 | 22,096 | |||||||||||||||
Income
tax
|
(8,212 | ) | (7,798 | ) | (1,884 | ) | (8,236 | ) | (5,926 | ) | ||||||||||
Net
income
|
22,395 | 12,233 | 3,811 | 23,833 | 16,170 | |||||||||||||||
Net
income per share
|
||||||||||||||||||||
Basic
|
$ | 0.22 | $ | 0.13 | $ | 0.04 | $ | 0.79 | $ | 0.65 | ||||||||||
Diluted
|
$ | 0.22 | $ | 0.13 | $ | 0.04 | $ | 0.79 | $ | 0.65 | ||||||||||
Weighted
average number of shares outstanding
|
||||||||||||||||||||
Basic
|
99,668,842 | 96,688,504 | 86,410,880 | 30,179,367 | 24,917,211 | |||||||||||||||
Diluted
|
99,668,842 | 96,688,504 | 86,410,880 | 30,179,367 | 24,919,164 |
As
of December 31,
|
As
of
September
30
|
|||||||||||||||
2008
|
2007
|
2006
|
2009
|
|||||||||||||
(Unaudited)
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 30,878 | $ | 10,773 | $ | 5,692 | $ | 19,257 | ||||||||
Working
capital
|
24,669 | 1,150 | 3,151 | 22,207 | ||||||||||||
Total
assets
|
89,359 | 46,329 | 14,955 | 117,406 | ||||||||||||
Total
liabilities
|
36,890 | 19,861 | 6,722 | 13,336 | ||||||||||||
Total
Stockholders' equity
|
52,469 | 26,468 | 8,232 | 104,069 |
MANAGEMENT’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.
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
prospectus.
Recent
Developments
On
December 21, 2009, we sold to institutional investors 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.
COMPARISON
OF THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Results
of Operations
The
following table presents certain information derived from the consolidated
statements of operations, cash flows and shareholders’ equity for the three
months and nine months ended September 30, 2009 and September 30, 2008,
respectively.
Three
months ended
September
30, 2009
|
Three
months
ended
September
30,
2008
|
Percentage
Change
|
||||||||||
Net
Revenue
|
$ | 27,667,158 | $ | 17,554,873 | 57.6 | % | ||||||
Cost
of Net Revenue
|
15,533,613 | 11,388,348 | 36.4 | % | ||||||||
Gross
Profit
|
12,133,545 | 6,166,525 | 96.8 | % | ||||||||
Research
and Development costs
|
125,122 | 122,744 | 1.9 | % | ||||||||
General
and Administrative expenses
|
870,555 | 960,747 | -9.4 | % | ||||||||
Income
from operations
|
11,137,869 | 5,083,034 | 119.1 | % | ||||||||
Other
Income (expenses), net
|
19,713 | 26,922 | -26.8 | % | ||||||||
Income
before taxes
|
11,157,582 | 5,109,956 | 118.4 | % | ||||||||
Income
Taxes
|
2,829,772 | 1,373,055 | 106.1 | % | ||||||||
Net
Income
|
$ | 8,327,810 | $ | 3,736,901 | 122.9 | % |
Nine
months
ended
September
30, 2009
|
Nine
months
ended
September
30,
2008
|
Percentage
Change
|
||||||||||
Net
Revenue
|
$ | 80,891,594 | $ | 63,354,609 | 27.7 | % | ||||||
Cost
of Net Revenue
|
45,520,357 | 38,050,971 | 19.6 | % | ||||||||
Gross
Profit
|
35,371,237 | 25,303,638 | 39.8 | % | ||||||||
Research
and Development costs
|
375,187 | 389,853 | 03.8 | % | ||||||||
General
and Administrative expenses
|
2,966,375 | 2,824,377 | 5.0 | % | ||||||||
Income
from operations
|
32,029,675 | 22,089,408 | 45.0 | % | ||||||||
Other
Income (expenses), net
|
38,462 | 6,525 | 489.5 | % | ||||||||
Income
before taxes
|
32,068,138 | 22,095,933 | 45.1 | % | ||||||||
Income
Taxes
|
8,235,609 | 5,925,532 | 39.0 | % | ||||||||
Net
Income
|
$ | 23,832,529 | $ | 16,170,401 | 47.4 | % |
Net revenue
Net revenue was $27.7 million for three months ended September 30,
2009, an increase of $10.1 million (or approximately 57.6%) compared to the same
period in 2008. This increase was primarily attributable to the growth in
our bromine and crude salt segment, with net revenue increasing from $13.1
million for three months ended September 30, 2008 compared to $18.8 million in
the same period in 2009, an increase of approximately $5.7 million or 43.5%.
This increase was primarily the result of increased production due to the
acquisition of a bromine producing property in the first quarter of 2009. The
increased production of crude salt generated approximately $2.1 of additional
net revenue for this quarter. Another important reason for overall the increase
in net revenue was the growth in the sales of chemical products, with net
revenue increasing from $4.4 million for three months ended September 30, 2008
to $8.8 million in the same period in 2009, an increase of 99.0%. The increase
in our chemical products segment was primarily a result of increased sales of
our new environmentally friendly additive products, solid lubricant and
polyether lubricant, which are used in oil and gas exploration and were first
introduced in the fourth quarter of 2008
Net
Revenue by Segment
|
||||||||||||||||
Three
months ended
|
Three
months ended
|
|||||||||||||||
September 30,
2009
|
September 30,
2008
|
|||||||||||||||
Segment
|
Percent
of total
|
Percent
of total
|
||||||||||||||
Bromine
and Crude salt
|
$
|
18,814,932
|
68%
|
$
|
13,106,804
|
74.7%
|
||||||||||
Chemical
Products
|
8,852,226
|
32%
|
4,448,069
|
25.3%
|
||||||||||||
Total
Revenues
|
$
|
27,667,158
|
100.0%
|
$
|
17,554,873
|
100.0%
|
Three
months ended September 30
|
|
2009
vs. 2008
|
|
Segment
|
Percent
increase of Net revenue
|
Bromine
and Crude salt
|
43.5%
|
Chemical
Products
|
99.0%
|
Net
revenue for the nine months ended September 30, 2009, was $80.9 million,
representing an increase of $17.5 million or 27.7% compared to the same period
in 2008. Approximately 65% of the increase came from the chemical products
segment, and net revenue in this segment increased by $10.3 million from $15.7
million to $26.0 million. The increase in the chemical products segment was
primarily a result of increased sales of our new environmentally friendly
additive products. Approximately 41% of the increase came from the bromine and
crude salt segment, and net revenue in this segment increased by $7.2 million
from $47.6 million to $54.9 million. This increase was mainly due to
the acquisition of a bromine producing property during the first quarter of
2009.
Net
Revenue by Segment
|
||||||||||||||||
Nine
months ended
|
Nine
months ended
|
|||||||||||||||
September 30,
2009
|
September 30,
2008
|
|||||||||||||||
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%
|
Cost of Net
revenue and Gross profit. The cost of net revenue reflects raw
materials consumed, electricity, depreciation, direct salaries and benefits of
staff engaged in the production process, and other manufacturing costs. The cost
of net revenue and the resulting gross profit for the three and nine months
ended September 30, 2009 and 2008 were:
Three
months ended September 30
|
||||||||||||||||
2009
|
%
of Net revenue
|
2008
|
%
of Net revenue
|
|||||||||||||
Cost
of net revenue
|
$
|
15,533,613
|
56.1
|
%
|
$
|
11,388,348
|
64.9
|
%
|
||||||||
Gross
Profit
|
12,133,545
|
43.9
|
%
|
6,166,525
|
35.1
|
%
|
||||||||||
Nine
months ended September 30
|
||||||||||||||||
2009
|
%
of Net revenue
|
2008
|
%
of Net revenue
|
|||||||||||||
Cost
of net revenue
|
$
|
45,520,357
|
56.3
|
%
|
$
|
38,050,971
|
60.0
|
%
|
||||||||
Gross
Profit
|
35,371,237
|
43.7
|
%
|
25,303,638
|
40.0
|
%
|
The
increases in the cost of net revenue were largely the result of the
substantially higher sales volumes recorded in both the three and nine month
periods ended September 30, 2009 as compared to the corresponding prior year
periods. The reduction in the cost of net revenue as a percentage of
net revenue for the nine month periods ended September 30, 2009 compared to 2008
was due to a higher percentage of revenue from high margin products: crude salt
and an environmentally friendly chemical product, which has a lower product cost
as a percentage of its net revenue, as well as production efficiencies in
consumables and electricity, in part as a result of economies of scale achieved
due to the acquisitions, and greater utilization of our chemical production
capacity. The increases in gross profit for both periods were largely the result
of higher sales volumes as well as the other factors noted above
Research and
Development Costs The research and development costs result from the
agreement that SYCI and East China University of Science and Technology entered
into in September 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. The research and development costs incurred for the
three months ended September 30, 2009 and 2008 was $125,197 and $122,744
respectively. The research and development costs incurred for the nine months
ended September 30, 2009 and 2008 was $375,262 and $389,853
respectively. All research findings and patents developed by this
Center will belong to Gulf Resources.
General and
Administrative Expenses General and administrative expenses were $870,555
and $2,966,375 for the three and nine months ended September 30 ,2009, a
decrease of $90,193 and an increase of $141,998, compared to the three and nine
months ended September 30, 2008 respectively. The decrease in general
and administrative expenses in the third quarter of 2009 was primarily due to
decrease in consulting expenses. The increase in general and administrative
expenses for the nine months ended September 30, 2009 was primarily due to
stock-based compensation incurred and the increase in depreciation and mineral
resource compensation fee during the third quarter and for the nine months ended
September 30, 2009
Income
from Operations
Income
from Operations by Segment
|
||||||||||||||||
Three
months ended
|
Three
months ended
|
|||||||||||||||
September
30, 2009
|
September
30, 2008
|
|||||||||||||||
Segment
|
Percent
of total
|
Percent
of total
|
||||||||||||||
Bromine
and Crude salt
|
$
|
8,245,278
|
73.0%
|
$
|
4,086,664
|
74.8%
|
||||||||||
Chemical
Products
|
3,053,245
|
27.0%
|
1,369,393
|
25.2%
|
||||||||||||
Income
from operations before corporate costs
|
11,298,523
|
100%
|
5,465,194
|
100.0%
|
||||||||||||
Corporate
costs
|
(160,654)
|
(382,160)
|
||||||||||||||
Income
from operations
|
$
|
11,137,869
|
$
|
5,083,034
|
Income
from Operations by Segment
|
||||||||||||||||
Nine
months ended
|
Nine
months ended
|
|||||||||||||||
September
30, 2009
|
September
30, 2008
|
|||||||||||||||
Segment
|
Percent
of total
|
Percent
of total
|
||||||||||||||
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
|
Income
from operations before corporate costs was $11.3 million for the three months
ended September 30, 2009 (40.8% of net revenue), an increase of $5.9 million (or
approximately 106.7%) compared to the same period in 2008. Income
from operations before corporate costs was $32.9 million for the nine months
ended September 30, 2009 (40.6% of net revenue), an increase of $9.2 million (or
approximately 38.8%) compared to the same period in 2008. These increases
resulted primarily from the increases in net revenue and the resulting higher
income from operations from the bromine and crude salts segment of the Company.
For the three months ended September 30, 2009, income from operations for the
bromine and crude salt segment was $8.2 million, an increase of 102% from $4.1
million for the same period in 2008. For nine months ended September 30, 2009,
income from operations for the bromine and crude salt segment was $23.9 million,
an increase of 30% from $18.4 million for the same period in 2008. These
increases in net revenue and income from operations of bromine and crude salt
segment were primarily as a result of the purchase of a bromine producing asset
in the first quarter of 2009 and a higher gross margin due to production cost
efficiencies. The larger increases in net revenue and income from operations of
our chemical products were largely due to increased sales of an environmentally
friendly chemical product and an oil and gas exploration additive chemical
product.
Net Income
Net income was $8.3 million for three months ended September 30, 2009, an
increase of $4.6 million (122.9%) compared to the same period in
2008. Net income was $23.8 million for the nine months ended
September 30, 2009, an increase of $7.7 million (47.4%), compared to the same
period in 2008. These increases were primarily attributable to the higher
operating profit resulting from the increases in revenue, and a decrease in the
effective tax rate to 25.6% in 2009 from approximately 26.8% in
2008
Liquidity
and Capital Resources
As of
September 30, 2009, cash, and cash equivalents were $19,256,504 as compared to
$30,878,044 as of December 31, 2008. The components of this decrease of
$11,621,540 are reflected below.
Cash
Flow
Nine
Months Ended
September
30
|
||||||||
2009
|
2008
|
|||||||
Net
cash provided by operating activities
|
$
|
27,958,786
|
$
|
17,617,854
|
||||
Net
cash used in investing activities
|
(33,828,480)
|
(17,365,195)
|
||||||
Net
cash provided by financing activities
|
(5,747,597)
|
11,144,787
|
||||||
Net
cash inflow (outflow)
|
$
|
(11,621,540)
|
$
|
12,100,485
|
For the
nine months ended September 30, 2009 the Company met its working capital and
capital investment requirements mainly by using cash flow from
operations.
Net
Cash Provided by Operating Activities
During
nine months ended September 30, 2009, we had positive cash flow from operating
activities of $27,958,786, primarily attributable to net income of $23,832,529,
as well as depreciation of fixed assets of $4,816,540. Net cash provided by
operating activities during nine months ended September 30, 2009 increased by
$10,340,932 from the same period in 2008, primarily due to a $7,662,128 increase
in net income, and the increase in depreciation.
Net
Cash Provided (Used) by Investing Activities and Financing
Activities
We used
$10,000,000 cash and issued 375,000 shares to acquire additional mineral rights,
property, plant and equipment during three months ended March 31,
2009.
We used
$5,638,785 cash to complete the construction of well and channel, which are used
for the production of bromine and crude salt during three months ended June 30,
2009.
We used
$5,941,350 cash to complete the construction of waste water disposal system
during three months ended September 30, 2009.
We used
$11,516,960 cash and agreed to issue, but has not yet issued 1,057,342 shares to
acquire additional mineral rights, property, plant and equipment during three
months ended September 30, 2009.
We
believe that our available funds and cash flows generated from operations will
be sufficient to meet our anticipated ongoing operating needs for the next
twelve months. However we will likely need to raise additional capital in order
to fund the ongoing program of acquiring unlicensed bromine properties. 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.
For the
immediate future we intend to focus our efforts on the activities of SCHC and
SYCI as these segments continue to expand within the Chinese market. Our
long-term strategic goal is to extend our sales to overseas
countries.
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. We may affect an acquisition with a target business which may be
financially unstable, under-managed, or in its early stages of development or
growth. 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 are
not currently party to any contracts or other arrangements with respect to
future acquisitions.
COMPARISON
OF THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
Results
of Operations
Year
ended December 31, 2008 as compared to year ended December 31, 2007
For
the year ended
|
||||||||||||
December 31, 2008
|
December 31, 2007
|
%Change
|
||||||||||
Net
Revenue
|
$
|
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
|
)
|
114%
|
|||||
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
|
54%
|
|||||||
Income
Taxes
|
$
|
8,211,939
|
$
|
7,798,682
|
5%
|
|||||||
Net
Income
|
$
|
22,395,472
|
$
|
12,232,963
|
84%
|
|||||||
Basic
and Diluted Earnings Per Share
|
$
|
0.22
|
$
|
0.13
|
Net
Revenue Net revenue
was $87,488,334 in fiscal 2008, an increase of $33,239,684 (or approximately
61%) as compared to fiscal 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 2007 to $63,664,156 for fiscal 2008, an increase of
approximately 87%; and in our sales of chemical products, which increased from
$ 20,233,166 for fiscal 2007 to $23,824,178 for fiscal 2008, an
increase of approximately 18%.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 production. Among the total increase/decrease
of net sales, $24,836,255 was due to the asset acquisitions. The
increase/decrease in the sales of our chemical products was due to the
introduction of new environmental friendly additive products, solid lubricant
and polyether lubricant, for use in oil and gas exploration in fourth quarter of
2008, which generated $2,503,526 net revenue for our chemical products
segment.
Net
Revenue by Segment
|
||||||||||||||||
Year
Ended
|
Year
Ended
|
|||||||||||||||
December 31, 2008
|
December 31, 2007
|
|||||||||||||||
Segment
|
% 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 (decrease) of Net
Sales
|
|
Bromine
and Crude salt
|
87%
|
|
Chemical
Products
|
18%
|
Shouguang
City Haoyuan Chemical Company Limited
|
Year Ended December 31,
|
|||
Product sold in metric tons
|
2008
|
2007
|
% Change
|
|
Bromine
|
28,673
|
17,648
|
62.47%
|
|
Crude
Salt
|
66,500
|
51,000
|
30.39%
|
The
proportion of our total net sales represented by bromine and crude salt in
fiscal 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 2008, an increase of $20,193,905 (or approximately 63%) from the cost of
net revenue in fiscal 2007. This increase was in line with the
increase in our net revenue which was approximately 61% higher in
2008.
Gross
Profit
Year
Ended December 31
|
||||||||||||||||
2008
|
% of Net
revenue
|
2007
|
% of Net
revenue
|
|||||||||||||
Cost
of net revenue
|
$
|
52,302,085
|
59.78
|
%
|
$
|
32,108,180
|
59.19
|
%
|
||||||||
Gross
Profit
|
$
|
35,186,249
|
40.22
|
%
|
$
|
22,140,470
|
40.81
|
%
|
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 2008, an increase of $2,246,938 (or approximately 122%)
from the general and administrative expenses of $1,847,374 during fiscal
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 2008 (or 34.9% of net revenue), an
increase of $10,552,229 (or approximately 52.7%) over income from operations in
fiscal 2007. This increase resulted primarily from the increase in revenues and
relatively lower increase in cost of net sales as showed 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 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 2007. In fiscal 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 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 2008, an increase of $10,162,509 (or
approximately 83%) as compared to fiscal 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.
Year
ended December 31, 2007 as compared to year ended December 31, 2006
For the year
ended
|
Percentage
|
||
December 31, 2007
|
December 31, 2006
|
Change
|
|
Net
Revenue
|
$54,248,650
|
$31,736,216
|
+70.9%
|
Cost
of Net Revenue
|
$32,108,180
|
$20,503,829
|
+56.6%
|
Gross
Profit
|
$22,140,470
|
$11,232,387
|
+97.1%
|
Research
and Development costs
|
$268,168
|
-
|
-
|
General
and Administrative expenses
|
$1,847,374
|
$5,789,166
|
-68.1%
|
Income
from operations
|
$20,024,928
|
$5,443,221
|
+267.9%
|
Other
Income (expenses), net
|
$6,717
|
$252,483
|
-97.3%
|
Income
before taxes
|
$20,031,645
|
$5,695,704
|
+251.7%
|
Income
Taxes
|
$7,798,682
|
$1,884,244
|
+313.9%
|
Net
Income
|
$12,232,963
|
$3,811,460
|
+221.0%
|
Basic
and Diluted Earnings Per Share
|
$
0.13
|
$
0.04
|
Net
Revenue Net
revenue were $54,248,650 in fiscal 2007, an increase of $22,512,434 (or
approximately 70.9%) as compared to fiscal 2006. This increase in was primarily
attributable to strong growth in our sales of bromine and crude salt, which
increased from $17,825,097 in fiscal 2006 to $34,015,484 in fiscal 2007, an
increase of approximately 90.8%, and in our sales of chemical products, which
increased from $13,911,119 in fiscal 2006 to $20,233,166 in fiscal 2007, an
increase of approximately 45.5%. The increase in the net sales of
bromine and crude salt was primarily as a result of the purchase of four bromine
producing properties acquired during 2007, the completion of 280 new bromine
wells in December 2006, the addition of new customers.. Among the total increase
of net sales, about $12,000,000 was due to the properties acquired during 2007,
and $4,300,000 was from organic growth. The increase in the sales of our
chemical products was due to the completion of equipment upgrades and the
development of new chemical products.
Net
Revenue by Segment
|
||||||||||||||||
Year
Ended
|
Year
Ended
|
|||||||||||||||
December 31, 2007
|
December 31, 2006
|
|||||||||||||||
Segment
|
Percent
of total
|
Percent
of total
|
||||||||||||||
Bromine
and Crude salt
|
$
|
34,015,484
|
63
|
%
|
$
|
17,825,097
|
56
|
%
|
||||||||
Chemical
Products
|
$
|
20,233,166
|
37
|
%
|
$
|
13,911,119
|
44
|
%
|
||||||||
Total
sales
|
$
|
54,248,650
|
100
|
%
|
$
|
31,736,216
|
100
|
%
|
Year
Ended December 31
|
|
2007
vs. 2006
|
|
Segment
|
% Increase of Net Sales
|
Bromine
and Crude salt
|
90.8%
|
Chemical
Products
|
45.4%
|
Shouguang
City Haoyuan Chemical Company Limited
|
Year Ended December 31
|
||
Product sold in metric tons
|
2007
|
2006
|
% Change
|
Bromine
|
17,648
|
10,035
|
+75.
9%
|
Crude
Salt
|
51,000
|
No
Production
|
The
proportion of our total net sales represented by bromine and crude salt in
fiscal 2007 increased as compared to the comparable period in
2006. 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 four bromine asset acquisitions during fiscal 2007.
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 $32,108,180 in
fiscal 2007, an increase of $11,604,351 (or approximately 56.6%) from the Cost
of revenue net in fiscal 2006. This increase resulted
primarily from the increase in our net revenue which were approximately 69.5%
higher in 2007. The decrease in the Cost of net revenue as a
percentage of revenue was due to greater utilization of bromine production
capacity and tighter control of direct costs and indirect costs such as
salaries, transportation and consumables as a result of economies of scale
achieved.
Gross
Profit Gross profit was 41% of net sales in fiscal 2007 compared to
35% in fiscal 2006, an improvement of 6 percentage points, reflecting the
benefits of the factors discussed above.
Research and
Development Costs Research and development costs were first recorded
in third quarter of 2007. The research and development costs result from SYCI
and East China University of Science and Technology having entered into a five
year agreement to establish a Co-Op Research and Development Center in June 2007
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
$1,847,374 in fiscal 2007, a decrease of $3, 941,792 (or approximately 68.1%)
from the general and administrative expenses of $5,789,166 during fiscal
2006. This significant decrease in general and administrative
expenses was primarily due to incurring organizational expenses of $5,344,295 in
fiscal 2006, partially offset by the addition of corporate functions resulting
from the creation of Gulf Resources, Inc.
Income
from Operations
Income
from Operations by Segment
|
||||||||||||||||
Year
Ended
|
Year
Ended
|
|||||||||||||||
December 31, 2007
|
December 31, 2006
|
|||||||||||||||
Segments
|
% of total
|
% of total
|
||||||||||||||
Bromine
and Crude salt
|
$
|
14,181,054
|
66
|
%
|
$
|
1,728,746
|
32
|
%
|
||||||||
Chemical
Products
|
$
|
7,164,833
|
34
|
%
|
$
|
3,714,475
|
68
|
%
|
||||||||
Income
from operations before corporate costs
|
$
|
21,345,887
|
100
|
%
|
$
|
5,443,221
|
100
|
%
|
||||||||
Corporate
costs
|
$
|
(1,320,959
|
)
|
$
|
-
|
|||||||||||
Income
from operations
|
$
|
20,024,928
|
$
|
5,443,221
|
Income
from Operations was $20,024,928 in fiscal 2007 (or 39.9% of net revenue), an
increase of $14,581,707 (or approximately 268%) over Income from Operations in
fiscal 2006. This increase resulted primarily from the increase in revenues and
relatively lower increase in cost of net sales as discussed
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 2007, income from operations in
the bromine and crude salt segment was $14,181,054, an increase of 720% from
$1,728,746 in fiscal 2006. In fiscal 2007, income from operations in the
chemical products division was $7,164,833, an increase of 93% from income from
operations in this division of $3,714,475 in fiscal 2006. The increase in the
income from operations of bromine and crude salt was primarily as a result of
the purchase of four new bromine assets and the organizational expenses of
$5,344,295 incurred in 2006, as well as a higher gross margin. The increase in
the income from operations of our chemical products was due to the completion of
equipment upgrade and the development of new chemical products.
Other Income
(Expense) Other Income (Expense) was $6,717 for fiscal year 2007, a
decrease of $245,766 from the Other Income (Expense) of $252,483 for fiscal year
2006. This decrease was primarily due to an increase in interest expense
resulting from debt incurred in fiscal 2007 whereas there were no interest
expenses incurred in 2006.
Net Income
Net Income was $12,232,963 in fiscal 2007, an increase of $8,421,503 (or
approximately 221%) as compared to fiscal 2006. This increase was primarily
attributable to the higher operating profit resulting from the increase in
revenues, the organizational expenses incurred in 2006,and relatively lower
increase in cost of net sales, as discussed above, partially offset by an
increase in the effective tax rate to 38.9% in 2007 from 33.1% in 2006 due to
disallowance of certain expenses.
Liquidity
and Capital Resources
As of
December 31, 2008, Cash and Cash Equivalents were $30,878,044 as compared to
$10,773,875 as of December 31, 2007. The components of this increase
of $20,104,169 are reflected below.
Cash
Flow
|
||||||||
Year
Ended December 31
|
||||||||
2008
|
2007
|
|||||||
Net
cash provided by operating activities
|
$
|
24,896,306
|
$
|
15,968,028
|
||||
Net
cash used in investing activities
|
$
|
(17,365,195
|
)
|
$
|
(22,679,319
|
)
|
||
Net
cash provided by (used in) financing activities
|
$
|
11,272,480
|
$
|
11,336,324
|
||||
Effects
of exchange rate changes on Cash
|
$
|
1,300,578
|
$
|
456,234
|
||||
Net
cash inflow
|
$
|
20,104,169
|
$
|
5,081,267
|
In 2008
the Company met its working capital and capital investment requirements mainly
by using operating cash flows and notes payable.
The
following table sets forth the information about the Company’s debt instruments
as of December 31, 2008 (also see Note 7 of the Notes to Consolidated Financial
Statements in Item 8, “Consolidated Financial Statements and Supplemental
Data”):
Year
of Maturity
|
||||||||
2008
|
2009
|
|||||||
Bank
Borrowing
|
$
|
3,770,250
|
-
|
|||||
Average
Interest Rate
|
6.5
|
%
|
-
|
|||||
Note
payable including Current portion
|
$
|
6,169,500
|
$
|
5,484,000
|
||||
Average
Interest Rate
|
3.33
|
%
|
n/a
|
Net
Cash Provided by Operating Activities
During
twelve months ended December 31, 2008, we had positive cash flow from operating
activities of $24,896,306, primarily attributable to net income of
$22,395,472. Net cash provided by operating activities in 2008
improved by $8,928,278 from that of 2007. The primary source of this
was an increase in 2008 net income, which was $10,162,509 more than in
2007.
Net
Cash Provided (Used) by Investing Activities and Financing
Activities
The
Company used $17,365,195 to acquire additional mineral rights, property, plant
and equipment during fiscal 2008. The acquisition was financed by cash flows
from operating activities and proceeds from the issuance of notes payable
totaling $36,690,878.
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, 2008 was approximately $24,669,553 at December 31, 2008
as compared to $1,150,016 at December 31, 2007.
Contractual
Commitments
The
following table sets forth payments due by period for fixed contractual
obligations as of December 31, 2008.
Contractual
obligations
|
Payments
due by period
|
|||||||||||||||||||
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
||||||||||||||||
Long-Term
Debt Obligations
|
$
|
22,987,493
|
$
|
4,650,000
|
$
|
18,337,493
|
-
|
-
|
||||||||||||
Capital
Lease Obligations
|
-
|
-
|
-
|
-
|
||||||||||||||||
Operating
Lease Obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Purchase
Obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Other
Long-Term Liabilities Reflected on the Registrant's Balance Sheet under
GAAP
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total
|
$
|
22,987,493
|
$
|
4,650,000
|
$
|
18,337,493
|
-
|
-
|
On
January 24, 2009, the Company entered into an agreement to issue 21 million
shares of the Company's common stock at a price equal to $1.0137 per share to
Top King Group Limited, Billion Gold Group Limited. Topgood International
Limited, 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. Upon the issuance of the
shares, the aforesaid loans were deemed paid in full and cancelled.
Off
Balance Sheet Arrangements
We have
no off-balance sheet arrangements.
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
bills and accounts receivable. The credit risk on cash in bank and fixed
deposits is limited because the counterparties are recognized financial
institutions. Bills and 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.
Significant
Accounting Policies and Estimates
See Note
1 of the Financial Statements.
DESCRIPTION OF THE BUSINESS
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 $0.12557, $0.13167, and $0.14415 during fiscal year 2006, 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:
Product name
|
Application sector
|
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.
Net
Revenue by Segment
|
||||||||||||||||
Nine
months ended
|
Nine
months ended
|
|||||||||||||||
September 30,
2009
|
September 30,
2008
|
|||||||||||||||
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
|
|||||||||||||||
September
30, 2009
|
September
30, 2008
|
|||||||||||||||
Segment
|
Percent
of total
|
Percent
of total
|
||||||||||||||
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
|
Net Sales by Segment
|
||||||||||||||||
Twelve
Months Ended
December 31, 2008
|
Twelve
Months Ended
December 31, 2007
|
|||||||||||||||
Segment
|
% 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
|
%
|
Percentage
Increase in Net Sales
from fiscal year 2006 to
2007
|
Percentage
Increase in Net Sales
from fiscal year 2007 to
2008
|
|||||||
Segment
|
||||||||
Bromine
and Crude salt
|
90.8
|
%
|
87
|
%
|
||||
Chemical
Products
|
45.4
|
%
|
18
|
%
|
SCHC
Product sold in metric tons
|
Year ended 12/31/08
|
Year ended 12/31/07
|
Percentage Change
|
|||||||||
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
|
|||||||||||||||
Segment
|
% 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
|
$
|
(2,063,050
|
)
|
$
|
(1,320,959
|
)
|
||||||||||
Income
from operations
|
$
|
30,721,397
|
$
|
20,024,928
|
Bromine
|
||||||||||||||||||||
and
Crude
|
Chemical
|
Segment
|
Consolidated
|
|||||||||||||||||
Salt
|
Products
|
Total
|
Corporate
|
Total
|
||||||||||||||||
December
31, 2008
|
||||||||||||||||||||
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
|
|||||||||||||||
December
31, 2007
|
||||||||||||||||||||
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.
Number
|
Customer
|
Revenue
(000’s)
|
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:
Number
|
Customer
|
Revenue
(000’s)
|
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. Sanndong 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
▼
Bromine and Crude Salt
The
Company has announced its intent to acquire bromine properties that are
unlicensed and thus not legally permitted to produce bromine. In 2007
and 2008 the Company acquired five such properties and in 2009 the Company
acquired another two 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.
▼
Chemical Products
To expand
its chemical production capacity, the Company intends to acquire chemical
product producers. These acquisitions will be funded by a combination
of cash on hand, and the issuance of debt or equity
securities
Competition
The
markets for our products have been experiencing increased levels of demand as
China continues its recent pace of accelerated growth. Nevertheless,
the markets for our products are highly competitive. To date, our
sales have been limited to customers within the PRC and we expect that our sales
will remain primarily domestic for the immediate future. Our
marketing strategy involves developing long term ongoing working relationships
with customers based on large multi-year agreements which foster mutually
advantageous relationships.
Many of
our competitors, particularly those engaged in the distribution of chemicals,
are better established than us, have larger infrastructures, greater resources
and the capacity to respond to much larger contracts.
Our
principal competitors in the bromine and crude salts business are Shandong Hai
Hua Holding Limited, Shouguang Fu Kang Medicines Manufacturing Company Limited,
Shouguang Weidong Chemical Company Limited, and Shandong Cai Yangzi Salt Field
Company, all of which produce bromine principally for use in their chemicals
businesses.
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
FIGURE
2.2 - DETAILED MAP OF MINING PROPERTIES
We do not
own any land, though we do own some of the buildings on land we lease. Our
executive offices are located in China at Chenming Industrial Park, Shouguang
City, Shandong Province, People's Republic of China, which also is the
headquarters of SCHC. These offices are located on approximately 17,342 square
meters of land owned by Shouguang City Wo Pu Town Ba Mian He Village. The lease
for the land expires on March 31, 2054. The annual rent for the land is RMB
46,230, or approximately US$5,779. The building on this land has approximately
3,335 square meters of usable space and is owned by SCHC.
SYCI's
headquarters are located in the 2nd Living District, Shouguang City, Shandong
Province, People's Republic of China. SYCI's headquarters are located on
approximately 18,768 square meters of land owned by Shouguang City Houxin
village. There are three buildings owned by SYCI located on the property. Two of
the buildings are operational plants of steel structure with an aggregate of
approximately 1,560 square meters of production space and a total of 4,000
square meters for pump rooms, boiler rooms, finished products and raw materials
storage. The third building is primarily for administration and has
approximately 795 square meters. The company has a 50 year
lease on the land from April 1, 1998 to March 31, 2048 at an annual rent of
RMB200,000 or $25,641.
The
Company operates its bromine and crude salt production facilities through its
wholly-owned subsidiary SCHC. SCHC has land use rights to eight
properties totaling nearly 10,454 hectares located on the south bank
of Laizhou Bay on the Shandong Peninsula of the People’s Republic of China
(“China”). Each of the properties is accessible by road. The Yiyang
railway line is within 50 kilometers and the Yangkou port is five kilometers
away.
Each of
the eight properties contains natural brine deposits which are extracted through
wells and are used to extract bromine and produce crude salt. Bromine is a
simple molecular element which is produced by extracting the bromine ion from
natural brine. Crude salt is sodium chloride. Bromine is an important
chemical raw material in flame retardants, fire extinguishing agents,
refrigerants, photographic materials, pharmaceuticals, pesticides, and oil and
other industries. Crude salt, also known as industrial salt, is used
in a wade range of chemical industries, is the main raw material in the soda and
chlor-alkali industries and can be widely used in agricultural, animal
husbandry, fisheries and food processing industries. Crude salt is
also the main raw material for edible salt.
Nature of Ownership Interest
in the Properties
The
Company does not own any property but has entered into contracts with the local
government to acquire land use rights for a period of 50 years. The
contracts required us to pay a one-time fee plus an annual rent.
Mineral
Rights
The
Chinese and provincial governments have enacted a series of laws and regulations
relating to the natural resources sector over the past 20 years, including laws
and regulations designed to improve safety and decrease environmental
degradation. The “China Mineral Resources Law” declares state
ownership of all mineral resources in China. However, mineral
exploration rights can be purchased, sold and transferred to both domestic and
foreign owned companies. Mineral resource rights are granted by the central
government permitting recipients to conduct mineral resource activities in a
specific area during the license period. These rights entitle the
licensee to undertake mineral resource activities and infrastructure and
ancillary work, in compliance with applicable laws and regulations, within the
specific area covered by the license during the license period. The licensee is
required to submit a proposal and feasibility studies to the relevant authority
and to pay the central government a natural resources fees in an amount equal to
2% of annual bromine sales. The Company was exempt from paying the
fee prior to January 1, 2008. Shandong province
has determined that bromine is to be extracted only by licensed
entities.
Our
mineral rights are issued by the local government and allow for a one year
period of mining. The rights provide us with the exclusive rights to
explore and extract natural brine under the leased land and produce bromine and
crude salt. The government performs an annual inspection of the company’s
previous year’s state of production & operations at beginning of each
year. The annual inspection reviews: whether the production is safe
and if any accidents occurred during the previous year, whether the mineral
resources compensation fees and other taxes were timely paid, whether employees’
salary and welfare benefits were timely paid, whether the company meets
environment protection meet standards. Only those companies who pass the
inspection receive mineral rights for another one year term; for those companies
who do not pass the inspection, additional mineral rights are not allocated
until they can meet the requirements. If there is major safety accident, the
government may revoke the mining permit. All of the relevant
documentation to apply for renewal of mining rights must be filed with the Land
and Resources Bureau before March 31st each
year.
All of
our bromine and crude salt production facilities have been authorized by the
local land and resources departments and are included under a single permit,
which was originally issued in January 2005. In addition, all of our
operations are subject to and have passed government safety inspections. We
also have been granted environmental certification from the PRC Bureau of
Environmental Protection.
Each of
the eight properties is in the production stage and operates bromine extraction
and crude salt production facilities. The facilities each
include wells, which are used to extract natural brine from underground, natural
brine transmission pipelines, natural brine storage reservoirs, bromine refining
equipment, wastewater transport pipes, and drying brine drying
pans.
The
equipment and facilities described above were constructed within three months
after the acquisition of each of our respective properties using the latest
technology and equipment and do not currently require
modernization. Because bromine is a highly corrosive liquid, the
equipment undergoes inspection and maintenance each year, especially the
subaqueous pumps which need to be regularly inspected and maintained or
replaced.
As of
December 31, 2009, the Company had invested approximately $62.5 million in its
seven production factories, facilities and paid approximately $5.9 million in
prepaid land lease payments. In addition, the company estimates that
equipment maintenance will cost approximately $1.0 million each year and that it
will invest approximately $2.0 million in new extraction wells.
Each of
the seven bromine production facilities are provided with electricity and water
by local government utilities.
Following
is a description of the land use and mineral rights related to each of the eight
properties held by SCHC as of December 31, 2009.
Property
|
Factory
No. 1 – Haoyuan General Factory
|
Area
|
4,135
hectares
|
Date
of Acquisition
|
February
5, 2007
|
Land
Use Rights Lease Term
|
Fifty
Years
|
Land
Use Rights Expiration Date
|
2054
|
Prior
fees paid for land use rights
|
RMB3.9
million
|
Annual
Rent
|
RMB3,000
|
Mining
Permit No.:
|
3707000730088
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
Period
of Permission:
|
One
year
|
Property
|
Factory
No. 2 – Yuwenbo
|
Area
|
747
hectares
|
Date
of Acquisition
|
April
7, 2007
|
Land
Use Rights Lease Term
|
Fifty
Years
|
Land
Use Rights Expiration Date
|
2052
|
Prior
Fees Paid For Land Use Rights
|
RMB7.5
million
|
Annual
Rent
|
RMB20,000
|
Mining
Permit No.:
|
3707000730088
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
Period
of Permission:
|
One
year
|
Property
|
Factory
No. 3 – Yangdonghua
|
Area
|
938
hectares
|
Date
of Acquisition
|
June
11, 2007
|
Land
Use Rights Lease Term
|
Fifty
Years
|
Land
Use Rights Expiration Date
|
2052
|
Prior
Fees Paid For Land Use Rights
|
RMB5
million
|
Annual
Rent
|
10,669
|
Mining
Permit No.:
|
3707000730088
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
Period
of Permission:
|
One
year
|
Property
|
Factory
No. 4 – Wangjiancai
|
Area
|
876
hectares
|
Date
of Acquisition
|
October
25, 2007
|
Land
Use Rights Lease Term
|
Fifty
Years
|
Land
Use Rights Expiration Date
|
2054
|
Annual
Rent
|
19,000
|
Prior
Fees Paid For Land Use Rights
|
RMB8.3
million
|
Mining
Permit No.:
|
3707000730088
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
Period
of Permission:
|
One
year
|
Property
|
Factory
No. 5 – Liuxingji
|
Area
|
935
hectares
|
Date
of Acquisition
|
October
26, 2007
|
Land
Use Rights Lease Term
|
Fifty
Years
|
Land
Use Rights Expiration Date
|
2055
|
Annual
Rent
|
RMB14,000
|
Prior
Fees Paid for Land Use Rights
|
RMB6.5
million
|
Mining
Permit No.:
|
3707000730088
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
Period
of Permission:
|
One
year
|
Property
|
Factory
No. 6 – Yangxiaodong
|
Area
|
1,069
hectares
|
Date
of Acquisition
|
January
8, 2008
|
Land
Use Rights Lease Term
|
Fifty
Years
|
Land
Use Rights Expiration Date
|
2055
|
Prior
Fees Paid for Land Use Rights
|
RMB9.1
million
|
Annual
Rent
|
RMB17,000
|
Mining
Permit No.:
|
3707000730088
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
Period
of Permission:
|
One
year
|
Property
|
Factory
No. 7 – Qiufen Yuan, Han Wang,
Yufen
Zhang
|
Area
|
652
hectares
|
Date
of Acquisition
|
January 30,
2009
|
Land
Use Rights Lease Term
|
50
years
|
Land
Use Rights Expiration Date
|
February
22, 2059
|
Prior
Fees Paid for Land Use Rights
|
N/A
|
Annual
Rent
|
RMB163,000
|
Mining
Permit No.:
|
3707000730088
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
Period
of Permission:
|
One
year
|
Property
|
Factory
No. 8- Fengxia Yuan, Han Wang, Qing Yang
|
Area
|
1,102
hectares
|
Date
of Acquisition
|
September
30, 2009
|
Land
Use Rights Lease Term
|
50
years
|
Land
Use Rights Expiration Date
|
August
19,2059
|
Prior
Fees Paid for Land Use Rights
|
N/A
|
Annual
Rent
|
RMB330,600
|
Mining
Permit No.:
|
3707000730088
|
Date
of Permission:
|
January
2005, subject to annual renewal
|
Period
of Permission:
|
One
year
|
The chart
below represents the seven bromine producing properties currently leased by the
Company, which are all located in Shouguang City, Shandong Province,
China.
Facility
|
Hectares
|
Approximate
non- reserve mineralized materials
(in
tons)
|
Annual
Production Capacity
(in
tons)
|
2007
Utilization Ratio
|
2008
Utilization Ratio
|
2009
Utilization
Ratio
|
Factory
No. 1
|
4,135
|
776,000
|
10,000
|
92.6%
|
95%
|
97.33%
|
Factory
No. 2
|
747
|
230,000
|
4,700(1)(2)
|
74.8%
|
90%
|
81.05%
|
Factory
No. 3
|
938
|
280,000
|
3,700(1)(3)
|
68.7%
|
87%
|
88.65%
|
Factory
No. 4
|
876
|
225,000
|
3,900(1)(4)
|
22.1%
|
92%
|
89.40%
|
Factory
No. 5
|
935
|
240,000
|
4,700(1)(5)
|
20.5%
|
94%
|
96.32%
|
Factory
No. 6
|
1,069
|
210,000
|
4,700(1)(6)
|
—
|
80%
|
79.21%
|
Factory
No. 7
|
654
|
3,000
|
3,500(1)(7)
|
—
|
—
|
67.86%
|
Factory
No. 8
|
1,102
|
150,000
|
4,100(1)(8)
|
—
|
—
|
10.24%
|
(1)
|
Each
of the properties described above was not in operation when the Company
acquired the asset. The owners of each of the properties did
not hold the proper license for the exploration and production of bromine,
and production at each of the assets acquired had been previously halted
by the government. With respect to Factory No. 2, the property
had not been operational for nine months; with respect to Factory No. 3,
the property had not been operational for eleven months; with respect to
Factory No. 4 and No. 5, the property had not been operational for fifteen
months; with respect to Factory No. 6, the property had not been
operational for eighteen months; with respect to Factory No. 7, the
property had not been operational for more than seven months; and with
respect to Factory No. 8, the property had not been operational for eight
months. This figures represent estimated annual production
capacity based upon existing facilities, historical production rates and
capital expenditure the Company planned for these assets to fund
improvements and make them
operational.
|
(2)
|
This
facility was acquired on April 7,
2007.
|
(3)
|
This
facility was acquired on June 11,
2007.
|
(4)
|
This
facility was acquired on October 25,
2007.
|
(5)
|
This
facility was acquired on October 26,
2007.
|
(6)
|
This
facility was acquired on January 8,
2008.
|
(7)
|
This
facility was acquired on January 30,
2009.
|
(8)
|
This
facility was acquired on September 30,
2009.
|
The
following table shows the annual production sold for each of our six production
facilities and the weighted average price received for all products sold for the
last three years.
Facility
|
2007
|
2008
|
2009
|
|||
Production
(in
tons)
|
Price
(RMB/ton)
|
Production
(in
tons)
|
Price
(RMB/ton)
|
Production
(in
tons)
|
Price
(RMB/ton)
|
|
Factory
No. 1
|
9,264
|
14,435
|
9,502.2
|
14,899
|
11679.60
|
12,583.28
|
Factory
No. 2 (1)
|
3,520
|
14,172
|
4,235.1
|
14,819
|
4052.40
|
12,637.35
|
Factory
No. 3 (2)
|
2,747
|
14,491
|
3,221.1
|
14,858
|
4255.30
|
12,459.16
|
Factory
No. 4 (3)
|
816
|
14,506
|
3,579.3
|
14,822
|
4112.50
|
12,589.84
|
Factory
No. 5 (4)
|
801
|
14,539
|
4,396.8
|
14,843
|
4334.50
|
12,743.72
|
Factory
No. 6 (5)
|
–
|
–
|
3,738.0
|
14,891
|
3802.30
|
12,581.03
|
Factory
No. 7 (6)
|
–
|
–
|
–
|
–
|
2375.00
|
12,852.24
|
Factory
No. 8 (7)
|
–
|
–
|
–
|
–
|
420.00
|
15,356.39
|
Total
|
17,648
|
28,673
|
35,031.60
|
1.
|
This
property was acquired on April 7,
2007.
|
2.
|
This
property was acquired on June 11,
2007.
|
3.
|
This
property was acquired on October 25,
2007.
|
4.
|
This
property was acquired on October 26,
2007.
|
5.
|
This
property was acquired on January 8,
2008.
|
6.
|
This
property was acquired on January 30,
209.
|
7.
|
This
property was acquired on September 30,
2009.
|
DIRECTORS AND EXECUTIVE OFFICERS
Executive
Officers and Directors
The following discussion sets forth
information regarding the executive officers and directors of the Company as of
the date of this prospectus. The board of directors is comprised of
only one class. All of the directors will serve until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. To date we have not had
an annual meeting. Provided below is a brief description of our
executive officers’ and directors’ business experience during the past five
years.
Our
directors, executive officers and key employees are:
Name
|
Age
|
Title
|
||
Ming
Yang
|
42
|
Chairman
and Director
|
||
Xiaobin
Liu
|
41
|
Chief
Executive Officer and Director
|
||
Min
Li
|
31
|
Chief
Financial Officer
|
||
Naihui
Miao
|
40
|
Secretary
and Director
|
||
Richard
Khaleel
|
58
|
Director
|
||
Biagio
Vignolo
|
61
|
Director
|
||
Shi
Tong Jiang
|
41
|
Director
|
||
Ya
Fei Ji
|
45
|
Director
|
Ming Yang has served as
Chairman of Shouguang City Yuxin Chemical Company Limited since July 2000. Since
May 2005, Mr. Yang has served as Chairman of Shouguang City Haoyuan Chemical
Company Limited, Shouguang City He Mao Yuan Bromize Company Limited, and
Shouguang City Qing River Real Estate Construction Company. He was
nominated as director of Qinghe Oil Field Office in 1993, where he managed
operations. In 1997 he was appointed chairman and general manager of Shouguang
Qinghe Shiye LLC and during the next three years its profits doubled. He took
the position of general manager of Shouguang City Yu Xin Chemical Industry Co.,
Ltd. in 2000. During his stay, he focused on quality management and technology
progress, which led to a 100 percent success rate of all products. He also
helped the company successfully pass the ISO certification and become a private
high-tech enterprise. In 2005 he was appointed to the position of chairman,
where he has helped the company to become a leading producer of bromine and
crude salt in China. In 2006 he became the chairman of Gulf
Resources, Inc. Mr. Yang has been the representative of Shandong Shouguang
congress since 1995 and in 1998 he was awarded as Honorary Entrepreneur in
Weifang City.
Xiaobin Liu was appointed as
Chief Executive Officer and Director on March 10, 2009. Mr. Liu joined the
Company as Vice President in January 2007. Before he joined the
Company, Mr. Liu had served as Vice President of Shenzhen Dasheng Corporation, a
public company in China, from 2005 to 2006, Manager of Securities Department
with Saige International Trust and Investment Corporation from 2000 to 2005,
Vice President with Hainan Wanquanhe Development Corporation from 1995 to
2000. Prior to that, Mr. Yang worked in the Financial Department of
Chinese Black Metal Limited Company from 1992 to 1995 and the Financial
Department of Shaanxi Aircraft Manufacturing Company from 1988 to
1992. Mr. Liu earned a masters degree from the Economic and
Management School at Hong Kong City University.
Min Li was appointed a
director on October 30, 2007 and resigned on June 22, 2009. He has
served as our Chief Financial Officer since December 2006 and as Chief Financial
Officer for Shouguang City Haoyuan Chemical Company Limited. From 2004 to 2006,
Mr. Li served as Manager of Financial and Asset Management Department for
Shouguang City Yuxin Chemical Company Limited. From 2000 to 2004, Mr. Li served
as Manager of the Accounting Department for the Yang Kou Branch of the China
Construction Bank. From 1998 to 1999, he worked at China Construction
Bank Shandong branch and in 2000 he worked at the Yangkou Office as the
accounting manager. He has helped implement effective cost controls while
efficiently increasing the use of capital.
Naihui Miao has served as
Chief Operating Officer of Gulf Resources, Inc. since July 10, 2009 and he is in
charge of sales, human resource and business management. Since
January 2006, Mr. Miao has served as Director, Secretary of Gulf Resources, Inc.
and as Vice-President of Shouguang City Haoyuan Chemical Company
Limited. From 2005 to 2006, Mr. Miao served as Vice President of
Shouguang City Yuxin Chemical Company Limited as the deputy general
manager. From 1991 to 2005, Mr. Miao served as a Manager and then
Vice President of Shouguang City Commercial Trading Center Company
Limited. He was the director of Shouguang Business Trade Center since
1986.
Richard Khaleel, was
appointed a director on October 24, 2007. From 2004 to 2007, Mr. Khaleel served
as Executive Vice President and Chief Marketing Officer for the Bank of New
York, a $30 billion leading global financial services company, where he helped
create and implement programs that grew the institutional asset management
business of that bank. From 1996 to 2003, Mr. Khaleel was Chief
Creative Marketing Officer at Alliance Bernstein LP, where he led development
and execution of marketing programs for its institutional and retail business.
From 1994 to 1996, Mr. Khaleel was vice president of marketing for CNBC, where
he was responsible for consumer marketing, strategic planning, positioning and
promotions. Prior to 1996, Mr. Khaleel worked in senior marketing positions at
various global advertising agencies. He received a degree in Political Science
from Princeton University and an MBA in Finance from New York
University.
Biagio Vignolo was appointed
a director on November 6, 2007. Mr. Vignolo has been CFO of
Perseus Books Group since May of 2008. Prior to that he
was a partner with Tatum, LLC, the largest executive services firm in the US
since 2005. As a Tatum Partner he was the acting CFO for Sara
Lee's $5 billion Hanes Brands, Inc. division where he where he built a separate
financial team for the new public company as it separated from Sara Lee and also
implemented Sarbanes-Oxley controls. From 2003 through 2005,
Mr. Vignolo was Executive Vice President and Chief Financial Officer at Exide
Technologies. From 1989 to 2001, Mr. Vignolo was Executive Vice
President and CFO of Sun Chemical Corp. Mr. Vignolo received a B.S.
degree in Accounting from Rider University.
Shi Tong Jiang was appointed
a director on April 23, 2008. Mr. Jiang is Chief of the Shouguang
City Audit Bureau, Shandong Province, has been with the Audit bureau since 1990.
During his career at the Shouguang City Audit Bureau he has held multiple
positions including, Auditing Officer and Audit Section Deputy Chief. The
Shouguang City Audit Bureau is responsible for the independent audit supervision
of the affairs of the government. From 1987 to 1990 Mr. Jiang attended Shandong
Financial Institution.
Ya Fei Ji was appointed a
director on June 13, 2009. Mr. Ji graduated from East China
University in 1992 with a Master’s degree in Fine Chemicals. From 1992 through
1996, Mr. Ji worked as an assistant researcher at the Drug Research Institute of
Anhui Province. Mr. Ji taught and conducted research at the China University of
Mining and Technology (Beijing) from 1996 until 2001, where he became an
Associate Professor in 1999 and received a doctorate degree in chemical
engineering in 2001. From 2001 to 2003, Mr. Ji conducted post-doctorate research
at the Institute of Materia Medica, Chinese Academy of Medical Sciences and
Peking Union Medical College. From 2003 to the present, Mr. Ji has taught and
conducted research at the East China University of Science and
Technology. Mr. Ji has published over 40 articles and has applied for
two patents.
Corporate
Governance: Board Committees and Independent Directors
Board
of Directors
We have
seven members serving on our board of directors, of which a majority are
independent directors. All actions of the board of directors require the
approval of a majority of the directors in attendance at a meeting at which a
quorum is present. In 2009, our board of directors held seven
meetings.
Board
Committees
Our board
of directors has an audit committee, a nominating and corporate governance
committee and a compensation committee.
Audit
Committee
Our Board
of Directors established an Audit Committee in October 2007. The members of the
Audit Committee are Richard Khaleel, Biagio Vignolo and Shi Tong
Jiang. The Audit Committee is responsible for reviewing the results
and scope of the audit, and other services provided by our independent auditors,
and reviewing and evaluating our system of internal
controls. Mr. Vignolo is the Audit Committee Financial Expert and Mr.
Jiang is the chair of the Audit Committee. Our audit committee met
five times during 2009. Our Board of Directors has determined that
Messrs. Khaleel, Vignolo and Jiang are “independent directors” within the
meaning of Rule 10A-3 under the Exchange Act, as determined based upon the
criteria for “independence” set forth in the rules of The NASDAQ Stock Market,
Inc.
Nominating
and Corporate Governance Committee
Our Board
of Directors established a nomination and corporate governance committee in June
2009. The purpose of the nominating and corporate governance
committee is to assist our board of directors in identifying qualified
individuals to become board members, in determining the composition of the board
of directors and in monitoring the process to assess board effectiveness. Each
of Ya Fei Ji, Shi Tong Jiang and Richard Khaleel are members of the nominating
and corporate governance committee. The nominating and corporate governance
committee operates under a written charter. Mr. Jiang is the chairman of
nominating and corporate governance committee.
Compensation
Committee
The
compensation committee is responsible for (a) reviewing and providing
recommendations to the board of directors on matters relating to employee
compensation and benefit plans, and (b) assisting the board in determining the
compensation of the chief executive officer and making recommendations to the
board with respect to the compensation of the chief financial officer, other
executive officers of the Company and independent directors. Each of Ya Fei Ji,
Shi Tong Jiang and Biagio Vignolo are members of the compensation committee. The
compensation committee operates under a written charter. Mr. Ji is the chairman
of compensation committee.
Code
of Ethics
We
adopted a Code of Business Conduct and Ethics on March 13, 2009. The Code of
Ethics, in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and
Item 406 of Regulation S-K, constitutes our Code of Ethics for our principal
executive officer, our principal financial and accounting
officer and our other senior financial officers. The Code of Ethics is intended
to promote honest and ethical conduct, full and accurate reporting, and
compliance with laws as well as other matters. A copy of the Code of Ethics is
included as Exhibit 14 to this report. A printed copy of the Code of Ethics may
also be obtained free of charge by writing to Cheming Industrial Park, Shouguang
City, Shandong Province, PRC 262714.
Compensation
of Officers
Compensation
Discussion and Analysis
We strive
to provide our named executive officers with a competitive base salary that is
in line with their roles and responsibilities. We believe that other peer
companies in China which are listed on U.S. stock markets would be the most
appropriate to use for salary comparison purposes. However, none of our direct
competitors are public companies in the U.S. We believe that the compensation of
our executive officers is appropriate.
The base
salary level is established and reviewed based on the level of responsibilities,
the experience and tenure of the individual and the current and potential
contributions of the individual. The base salary is compared to similar
positions within comparable peer companies and with consideration of the
executive’s relative experience in his or her position. Based on an evaluation
of available information with respect to the base salaries of executives of our
competitors located in China, the base salary paid to our named executive
officers is in line with our domestic competitors, such as Shandong Haihua Group
Ltd., Weidong Salt Field Co. Ltd. and Shouguang Caiyangzi Salt Field co., Ltd.
Base salaries are reviewed periodically and at the time of promotion or other
changes in responsibilities.
Our 2007
Equity Incentive Plan provides for the grant of incentive stock options,
nonqualified stock options and restricted stock awards to our named executive
officers, and any such grants are approved by our Compensation
Committee.
We will
consider other elements of compensation, including without limitation, short-
and long-term compensation, cash and non-cash, and other equity-based
compensation. We believe our current compensation package is comparable to our
peers in the industry and is aimed to retain and attract talented
individuals.
The
following table reflects the cash compensation we paid, as well as certain other
compensation paid or accrued, during the fiscal years ended December 31, 2009
and 2008 to the identified persons, also referred to as named executive
officers.
Summary
Compensation Table
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
awards
($)
|
Option
awards
(1)
|
Non-equity
incentive plan compensation
($)
|
Nonqualified
Deferred Compensation earnings
($)
|
All
other compensation
($)
|
Total
($)
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
Ming
Yang, Chief Executive Officer (2)
|
2008
|
20,724
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
20,724
|
2009
|
26,361
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
26,361
|
|
Min
Li Chief Financial Officer
|
2008
|
14,004
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
14,004
|
2009
|
17,574
|
N/A
|
N/A
|
25,000
|
N/A
|
N/A
|
N/A
|
17,574
|
|
Xiaobin
Liu, Chief Executive Officer(3)
|
2008
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
2009
|
43,935
|
N/A
|
N/A
|
25,000
|
N/A
|
N/A
|
N/A
|
43,935
|
|
(1)
Represents the number of options granted to the director in 2009. As
of the date of this prospectus, we have not calculated the dollar amount
recognized for financial statement reporting purposes in accordance with FAS
123R.
(2) Mr.
Yang became our Chief Executive Officer on December 11, 2006, and resigned as
Chief Executive Officer on March 9, 2009. Mr. Yang remains the
Chairman of our Board of Directors.
(3) Mr.
Liu became our Chief Executive Officer on March 10, 2009.
Except as
disclosed below under the caption “Directors Compensation,” we have not paid or
accrued any fees to any of our executive directors for serving as a member of
our Board of Directors. We do not have any retirement, pension, profit sharing
or stock option plans or insurance or medical reimbursement plans covering our
officers and directors.
During
each of the last two fiscal years, none of our other officers had salary and
bonus greater than $100,000. Our executive officers are reimbursed by us for any
out-of-pocket expenses incurred in connection with activities conducted on our
behalf. There is no limit on the amount of these out-of-pocket expenses and
there will be no review of the reasonableness of such expenses by anyone other
than our board of directors, which includes persons who may seek reimbursement,
or a court of competent jurisdiction if such reimbursement is
challenged.
Employment
Contracts and Termination of Employment, and Change-In-Control
The
following employment agreements were entered into by the Company and the
following executive officers:
Xiaobin
Liu
The
Company entered into an employment agreement with Xiaobin Liu on March 12, 2009
to serve as Chief Executive Officer and a member of the board of directors for a
term of three years. Pursuant to the agreement Mr. Liu will receive
annual compensation equal to $43,935. In addition Mr. Liu is entitled
to participate in any and all benefit plans from time to time, in effect for
employees, along with vacation, sick and holiday pay in accordance with policies
established and in effect from time to time.
Min
Li
Shouguang
Yuxin Chemical Industry Company Limited, or SYCI, entered into an employment
agreement with Min Li on March 18, 2008 to serve as chief financial officer for
a term of ten years. Pursuant to the agreement Mr. Li is entitled to
participate in any and all benefit plans from time to time, in effect for
employees, along with vacation, sick and holiday pay in accordance with policies
established and in effect from time to time.
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information as of December 31, 2009, concerning
outstanding equity awards granted to the individuals listed in the Summary
Compensation Table.
Option
awards
|
Stock
awards
|
||||||||||||||
Name
|
Number
of securities underlying unexercised options
(#)
exercisable
|
Number
of securities underlying unexercised options
(#)
unexercisable
|
Equity
incentive plan awards: number of securities underlying unexercised
unearned options
(#)
|
Option
exercise price
($)
|
Option
expiration date
|
Number
of shares or units of stock that have not vested
(#)
|
Market
value of shares or units of stock that have not vested
(#)
|
Equity
incentive plan awards: number of unearned shares, units or other rights
that have not vested
(#)
|
Equity
incentive plan awards: market or payout value of unearned shares, units or
other rights that have not vested
($)
|
||||||
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
||||||
Ming
Yang, CEO
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||
Xiaobin
Liu, CEO
|
25,000
|
4.80
|
3/10/19
|
||||||||||||
Min
Li,
CFO
|
25,000
|
4.80
|
3/10/19
|
Compensation
of Directors
The
following table sets for the compensation that we paid to our non-executive
directors for 2009.
Name
|
Fees
Earned or Paid in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
(1)
|
Non-equity
incentive plan compensation
($)
|
Change
in pension value and nonqualified deferred compensation
earnings
($)
|
All
other compensation
($)
|
Total
($)
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
Richard
Khaleel
|
32,500
|
N/A
|
12,500
|
N/A
|
N/A
|
N/A
|
32,500
|
Biagio
Vignolo
|
32,500
|
N/A
|
12,500
|
N/A
|
N/A
|
N/A
|
32,500
|
Shi
Tong Jiang
|
10,000
|
N/A
|
12,500
|
N/A
|
N/A
|
N/A
|
10,000
|
Ya
Fei Ji
|
N/A
|
25,000
|
(1) Represents
the number of options granted to the director in 2009. As of the date
of this prospectus, we have not calculated the dollar amount recognized for
financial statement reporting purposes in accordance with FAS 123R.
We have
entered into an agreement on October 24, 2007 and November 6, 2007
with Richard Khaleel and Biagio Vignolo, respectively pursuant to which we
pay them $32,500 per annum for serving as a director, plus additional fees for
serving on committees of the Board. In addition, those agreements
provide that we will grant Mr. Khaleel and Mr. Vignolo options to purchase12,500
shares of our common stock upon execution of the agreements, and on the
anniversary of that date in 2008 and 2009 at an exercise price not less than the
closing sale price of such stock on the date of grant. The granting
of future options is contingent upon the individual’s continued service with our
company.
We have
agreed to pay Shi Tong Jiang $10,000 per annum for serving as a director. In May
of 2009, we granted to Shi Tong Jiang an option to purchase 12,500 shares of our
common stock at an exercise of $4.80 per share. We do not provide any
additional compensation for our executive officers who also serve as
directors.
We do not
pay Ya Fei Ji any cash compensation for serving as a director. In
June 2009 we granted Y Fei Ji an option to purchase 25,000 shares of our common
stock at an exercise price of $4.80 per share for his first year as a director
with the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The
following table sets forth certain information regarding beneficial ownership of
our Common Stock as of January 12, 2010 by (i) each person (or group of
affiliated persons) who is known by us to own more than five percent of the
outstanding shares of our common stock, (ii) each director and executive
officer, and (iii) all of our directors and executive officers and director
nominees as a group. As of January 12, 2010, we had 34,541,066 shares of Common
Stock issued and outstanding.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise noted,
the principal address of each of the stockholders, directors and officers listed
below is Chenming Industrial Park, Shouguang City, Shandong, China
262714.
All share
ownership figures include shares of our Common Stock issuable upon securities
convertible or exchangeable into shares of our Common Stock within sixty (60)
days of January 12, 2010, which are deemed outstanding and beneficially owned by
such person for purposes of computing his or her percentage ownership, but not
for purposes of computing the percentage ownership of any other person, after
giving effect to our October 2009 1-for-4 reverse stock split.
Name and Address of Beneficial
Owner
|
Amount and Nature of Beneficial
Ownership
|
Percent of Outstanding of Common
Stock
|
||||||
Beneficial owners of more than
5%:
|
||||||||
Billion
Gold Group Limited
|
2,000,000
|
(1)
|
5.8%
|
|||||
FMR
LLC
|
3,740,091
|
(2)
|
10.8%
|
|||||
Topgood
International Limited
|
1,750,000
|
(3)
|
5.1%
|
|||||
Directors and Executive
Officers:
|
||||||||
Ming
Yang
|
10,879,254
|
(4)
|
31.5%
|
|||||
Min
Li
|
25,000
|
(5)
|
*
|
|||||
Naihui
Miao
|
25,000
|
(6)
|
*
|
|||||
Richard
Khaleel
|
37,500
|
(7)
|
*
|
|||||
Biagio
Vignolo
|
37,500
|
(8)
|
*
|
|||||
Shi
Tong Jiang
|
12,500
|
(9)
|
*
|
|||||
Xiaobin
Liu
|
25,000
|
(10)
|
*
|
|||||
Ya
Fei Ji
|
25,000
|
(11)
|
*
|
|||||
All
directors and executive officers as a group
|
11,066,754
|
(4)(5)(6)(7)
(8)(9)(10)(11)
|
31.9%
|
____
* Less
than 1%
(1) The
address of Billion Gold Group is No. 41 Huajia Thorpe, Fenghuang Village, Tingzu
Township, Echeng District, Ezhou City, Hubei Province, China.
(2) The
address of Fidelity Management & Research Company ("Fidelity") is 82
Devonshire Street, Boston, Massachusetts 02109. Fidelity is a
wholly-owned subsidiary of FMR LLC and an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940, is the beneficial owner of
3,740,091 shares or 11.857% of the Common Stock outstanding of the Company as a
result of acting as investment adviser to various investment companies
registered under Section 8 of the Investment Company Act of 1940.
The
ownership of one investment company, Fidelity Dividend Growth Fund, amounted to
2,504,740 shares or 7.26% of the common stock outstanding. Fidelity Dividend
Growth Fund has its principal business office at 82 Devonshire Street, Boston,
Massachusetts 02109.
Edward C.
Johnson 3d and FMR LLC, through its control of Fidelity, and the funds each has
sole power to dispose of the 3,740,091 shares owned by the
Funds. Members of the family of Edward C. Johnson 3d, Chairman of FMR
LLC, are the predominant owners, directly or through trusts, of Series B voting
common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The
Johnson family group and all other Series B shareholders have entered into a
shareholders' voting agreement under which all Series B voting common shares
will be voted in accordance with the majority vote of Series B voting common
shares. Accordingly, through their ownership of voting common shares
and the execution of the shareholders' voting agreement, members of the Johnson
family may be deemed, under the Investment Company Act of 1940, to form a
controlling group with respect to FMR LLC.
Neither
FMR LLC nor Edward C. Johnson 3d, Chairman of FMR LLC, has the sole power to
vote or direct the voting of the shares owned directly by the Fidelity Funds,
which power resides with the Funds' Boards of Trustees. Fidelity carries out the
voting of the shares under written guidelines established by the Funds' Boards
of Trustees.
(3) The
address of Topgood International Limited is No. 48 Huajia Thorpe, Fenghuang
Village, Tingzu Township, Echeng District, Ezhou City, Hubei Province,
China.
(4)
Includes 5,079,721 shares owned by Ms. Wenxiang Yu, the wife of Mr. Yang,
1,674,800 shares owned by Mr. Zhi Yang, Mr. Yang’s son, and 4,124,733 shares
owned by Shandong Haoyuan Industry Group Ltd. ("SHIG"), of which Mr.
Yang is the controlling shareholder, chief executive officer and a
director. Mr. Yang disclaims beneficial ownership of the shares owned
by his wife and SHIG.
(5)
Includes 25,000 shares issuable upon exercise of options held by Mr. Li
described above.
(6)
Includes 25,000 shares issuable upon exercise of options held by Mr. Miao
described above.
(7)
Includes 37,500 shares issuable upon exercise of options held by Mr. Khaleel
described above.
(8)
Includes 37,500 shares issuable upon exercise of options held by Mr. Vignolo
described above.
(9)
Includes 12,500 shares issuable upon exercise of options held by Mr. Jiang
described above.
(10)
Includes 25,000 shares issuable upon exercise of options held by Mr. Liu
described above.
(11)
Includes 25,000 shares issuable upon exercise of options held by Mr. Ji
described above.
Changes
in Control
There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
following table provides a summary of our related party transaction during 2007
and 2008.
December
31,
2008
|
December
31,
2007
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Waiver
of interest expenses during first quarter 2008 by a related
party:
|
||||||||
Shenzhen
Huayin Guaranty and Investment Company Limited (Note 8)
|
$
|
131,533
|
$
|
-
|
||||
Note
payable - related parties
|
||||||||
Shenzhen
Huayin Guaranty and Investment Company Limited (Note 8)
|
$
|
21,337,493
|
$
|
11,653,500
|
||||
Loan
from First Capital Limited, a shareholder
|
$
|
1,650,000
|
||||||
Due
to related party:
|
||||||||
Jiaxing
Lighting
|
$
|
852,067
|
$
|
-
|
||||
Advance
from major stockholder - First Capital Limited
|
-
|
32,230
|
||||||
$
|
852,067
|
$
|
32,230
|
As of
December 31, 2008 we had outstanding loans from Shenzhen Huayin Guaranty and
Investment Company Limited (“SHG”), a shareholder of the Company, in the
aggregate amount of $21, 337,493. Of this amount, $3,000,000 was
unsecured, non-interest bearing and was due in May 2009. The balance,
$18,337,493 was loaned by SHG during 2007 and 2008 to the Company unsecured
pursuant to an agreement which, as is Chinese custom, states that the loan need
not be paid in the immediate future.
During
the three months ended March 31, 2008, Shenzhen Huayin Guaranty and Investment
Company Limited waived $131,533 of accrued interest, which was recorded as a
credit to additional paid in capital
On
January 24, 2009, the Company entered into an agreement with SHG to issue an
aggregate of 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
SHG. Upon the issuance of the shares in the amount of 1,500,000
shares to Top King 2,000,000 shares to Billion Gold, 1,750,000 shares
to Topgood, the aforesaid loans were deemed paid in full and
cancelled.
The
$1,650,000 was loaned to the company on September 30, 2008 by First Capital
Limited, a shareholder and was unsecured, non-interest bearing with no fixed
term of repayment
The
$852,067 due to Jiaxing Lighting represents funds the Company received from
Jiaxing Lighting for investment purposes in SCHC. Mr. Ming Yang, our
then CEO, is the director and shareholder of Jiaxing Lighting. These
monies are unsecured, non-interest bearing and have no fixed repayment
terms.
SELLING STOCKHOLDERS
We are
registering for resale shares of our Common Stock that are issued and
outstanding held by the Selling Stockholders identified below. We are
registering the shares to permit the Selling Stockholders and their pledgees,
donees, transferees and other successors-in-interest that receive their shares
from a Selling Stockholder as a gift, partnership distribution or other non-sale
related transfer after the date of this prospectus to resell the shares when and
as they deem appropriate in the manner described in the “Plan of
Distribution”. As of the date of this prospectus there are 34,541,066
shares of common stock issued and outstanding.
The
following table sets forth:
·
|
the
name of the Selling Stockholders,
|
·
|
the
number of shares of our Common Stock that the Selling Stockholders
beneficially owned prior to the offering for resale of the shares under
this prospectus,
|
·
|
the
maximum number of shares of our Common Stock that may be offered for
resale for the account of the Selling Stockholders under this prospectus,
and
|
·
|
the
number and percentage of shares of our Common Stock to be beneficially
owned by the Selling Stockholders after the offering of the shares
(assuming all of the offered shares are sold by the Selling
Stockholders).
|
None of
the Selling Stockholders has been an officer or director of the Company or any
of its predecessors or affiliates within the last three years, nor has any
Selling Stockholder had a material relationship with the Company.
Except
for Ancora Greater China fund, LP and Brean Murray, Carret & Co., who was
our placement agent in the Financing, none of the Selling Stockholders is a
broker dealer or an affiliate of a broker dealer. Ancora Greater China fund, LP
(“Ancora”) is an affiliate of a broker dealer. Ancora purchased the shares in
the Financing in the ordinary course of business. None of the Selling
Stockholders, including Ancora, had any agreement or understanding, directly or
indirectly, to distribute any of the shares being registered at the time of
purchase.
We
entered into a placement agency agreement (the "Placement Agent Agreement") with
Brean Murray, Carret & Co. (“BMC”) on July 29, 2009 whereby BMC received as
compensation for acting as placement agent in the Financing (i) a cash fee in
the amount of approximately $1.5 million, equal to 6% of the gross proceeds of
the Financing and (ii) warrants to purchase up to 176,471 shares of Common Stock
(the “Warrant”).
Each
Selling Stockholder may offer for sale all or part of the shares from time to
time. The table below assumes that the Selling Stockholders will sell all of the
shares offered for sale. A Selling Stockholder is under no obligation, however,
to sell any shares pursuant to this prospectus.
Name
of Selling Stockholder
|
Shares
of Common Stock
Beneficially
Owned Prior to Offering (1)
|
Percentage
Ownership Prior to Offering
|
Maximum
Number
of Shares of Common Stock to be Sold (2)
|
Number
of
Shares
of Common Stock
Owned
After
Offering
|
Percentage
Ownership
After
Offering
|
Common Stock
|
|||||
Alder
Capital Partners I, L.P. (3)
|
88,236
|
*
|
88,236
|
-0-
|
-0-
|
Ancora
Greater China Fund, LP (4)
|
62,794
|
*
|
35,294
|
27,500
|
*
|
Guerrilla
Partners, LP (5)
|
39,050
|
*
|
30,000
|
9,050
|
*
|
Hua-Mei
21st Century Partners, LP (5)
|
79,050
|
*
|
70,000
|
9,050
|
*
|
Jayhawk
Private Equity Fund II, LP (6)
|
70,588
|
*
|
70,588
|
-0-
|
-0-
|
Fidelity
Advisor Series I: Fidelity Advisor Dividend Growth Fund
(7)
|
262,166
|
*
|
200,630
|
61,536
|
*
|
Fidelity
Securities Fund: Fidelity Dividend Growth Fund (7)
|
2,476,640
|
7.17%
|
1,894,460
|
582,180
|
1.69%
|
Fidelity
Advisor Series I: Fidelity Advisor Value Strategies Fund
(7)
|
245,828
|
*
|
180,390
|
65,438
|
*
|
Variable
Insurance Products Fund III: Value Strategies Portfolio
(7)
|
74,573
|
*
|
54,910
|
19,663
|
*
|
Variable
Insurance Products Fund III: Balanced Portfolio (7)
|
337,884
|
*
|
257,850
|
80,034
|
*
|
Straus-GEPT
Partners, L.P. (8)
|
11,765
|
*
|
11,765
|
-0-
|
-0-
|
Straus
Partners, L.P. (8)
|
47,059
|
*
|
47,059
|
-0-
|
-0-
|
Warrant
|
|||||
Brean
Murray, Carret & Co. (9)
|
176,471
|
176,471
|
|||
Total
|
3,972,104
|
3,117,653
|
* Less
than one percent
|
(1)
|
Beneficial
ownership is determined in accordance with the rules and regulations of
the SEC. In computing the number of shares beneficially owned by a person
and the percentage ownership of that person, securities that are currently
convertible or exercisable into shares of our Common Stock, or convertible
or exercisable into shares of our Common Stock within 60 days of the date
hereof are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of any
other person. Except as indicated in the footnotes to the following table,
each stockholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such stockholder’s name. The
percentage of beneficial ownership is based on 34,541,066 shares of Common
Stock outstanding as of January 12,
2010.
|
|
(2)
|
Includes
the number of shares set forth opposite each Selling Stockholders’ name,
and the number of shares that may be issued pursuant to the
Warrant.
|
(3)
|
Michael
Licosati, Managing Partner, has voting and dispositive power over the
shares held by the selling stockholder. Mr.Licosati may be deemed to
beneficially own the shares of Common Stock held by the selling
stockholder. Mr. Licosati disclaims beneficial ownership of such
shares. The address for the selling stockholder is 1223 Camino Del
MarDel Mar, CA 92014.
|
(4)
|
John
P. Micklitsch, CFA, Managing Partner, has voting and dispositive power
over the shares held by the selling stockholder. Mr. Micklitsch may
be deemed to beneficially own the shares of Common Stock held by the
selling stockholder. Mr. Micklitsch disclaims beneficial ownership
of such shares. The address for the selling stockholder is
2000 Auburn Dr. #300 Cleveland, OH
44122.
|
(5)
|
Peter
Siris, Managing Director, and Leigh S. Curry share voting and dispositive
power over the shares held by the selling stockholder. Messrs. Siris
and Curry may be deemed to beneficially own the shares of Common Stock
held by the selling stockholder. Messrs. Siris and Curry disclaim
beneficial ownership of such shares. The address for the
selling stockholder is 237 Park Ave., 9th Fl. New York, NY
10017.
|
(6)
|
Kent
C. McCarthy has voting and dispositive power over the shares held by the
selling stockholder. Mr. McCarthy may be deemed to beneficially own
the shares of Common Stock held by the selling stockholder. Mr.
McCarthy disclaims beneficial ownership of such shares. The address
for the selling stockholder is 930 Tahoe Blvd. 802-281Incline
Village, NV 89451.
|
(7)
|
Fidelity
Management & Research Company ("Fidelity"), 82 Devonshire Street,
Boston, Massachusetts 02109, a wholly-owned subsidiary of FMR LLC and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 3,397,091 shares of the Common
Stock outstanding of GULF RESOURCES, INC. ("the Company") as a result of
acting as investment adviser to various investment companies registered
under Section 8 of the Investment Company Act of
1940.
|
Edward C.
Johnson 3d and FMR LLC, through its control of Fidelity, and the funds each has
sole power to dispose of the 3,397,091shares owned by the Funds.
Members
of the family of Edward C. Johnson 3d, Chairman of FMR LLC, are the predominant
owners, directly or through trusts, of Series B voting common shares of FMR LLC,
representing 49% of the voting power of FMR LLC. The Johnson family group and
all other Series B shareholders have entered into a shareholders' voting
agreement under which all Series B voting common shares will be voted in
accordance with the majority vote of Series B voting common shares. Accordingly,
through their ownership of voting common shares and the execution of the
shareholders' voting agreement, members of the Johnson family may be deemed,
under the Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC.
Neither
FMR LLC nor Edward C. Johnson 3d, Chairman of FMR LLC, has the sole power to
vote or direct the voting of the shares owned directly by the Fidelity Funds,
which power resides with the Funds' Boards of Trustees. Fidelity carries out the
voting of the shares under written guidelines established by the Funds' Boards
of Trustees.
(8)
|
Melville
Straus, Managing Principal, has voting and dispositive power over the
shares held by the selling stockholder. Mr. Straus may be deemed to
beneficially own the shares of Common Stock held by the selling
stockholder. Mr. Straus disclaims beneficial ownership of such
shares. The address for the selling stockholder is 767 Third Avenue,
New York, NY 10017.
|
(9)
|
Consists
of 176, 471 shares underlying warrants to purchase up to 176,471 shares of
our Common Stock. William J. McCluskey has voting and dispositive
power over the shares held by the selling stockholder. Mr. McCluskey
may be deemed to beneficially own the shares of Common Stock held by the
selling stockholder. Mr. McCluskey disclaims beneficial ownership of
such shares. The address for the selling stockholder is 570 Lexington
Avenue, New York, NY
10022.
|
PLAN OF DISTRIBUTION
We are
registering (i) shares of common stock previously issued and (ii) shares of
common stock underlying the Warrant to permit the resale of such shares of
common stock by the holders from time to time after the date of this prospectus.
We will not receive any of the proceeds from the sale by the selling
stockholders of the shares of common stock, except to the extent that the
Warrant is exercised for cash. We will bear all fees and expenses incident to
our obligation to register the shares of common stock.
BMC is a
registered broker dealer and FINRA member firm and listed as a selling
stockholder in this prospectus. BMC served as placement agent for our Financing,
which was completed on December 21, 2009. BMC received a (i) a cash fee in the
amount of $1.5 million, equal to 6% of the gross proceeds of the Financing; (ii)
warrants to purchase up to 176,471 shares of Common Stock. The registration
statement of which this prospectus forms a part includes the shares of Common
Stock underlying warrants granted to BMC. The warrants granted to BMC expire on
December 18, 2014.
BMC does
not have an underwriting agreement with us and/or the Selling Stockholders and
no Selling Stockholders are required to execute transactions through BMC.
Further, other than any existing brokerage relationship as customers with BMC,
no Selling Stockholders has any pre-arranged agreement, written or otherwise,
with BMC to sell their securities through BMC.
The
selling stockholders may sell all or a portion of the shares of common stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
common stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agent's commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
|
·
|
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
|
|
·
|
in
the over-the-counter market;
|
|
·
|
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
|
|
·
|
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
short
sales;
|
|
·
|
Sales
pursuant to Rule 144;
|
|
·
|
broker-dealers
may agree with the selling securityholders to sell a specified number of
such shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
If the
selling stockholders effect such transactions by selling shares of common stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of the shares of common stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of
the shares of common stock or otherwise, the selling stockholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in positions they
assume. The selling stockholders may also sell shares of common stock short and
deliver shares of common stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales. The
selling stockholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
The
selling stockholders may pledge or grant a security interest in some or all of
the shares of Common Stock owned by them and, if they default in the performance
of their secured obligations, the pledgees or secured parties may offer and sell
the shares of common stock from time to time pursuant to this prospectus or any
amendment to this prospectus under Rule 424(b)(3) or other applicable provision
of the Securities Act of 1933, as amended, amending, if necessary, the list of
selling stockholders to include the pledgee, transferee or other successors in
interest as selling stockholders under this prospectus. The selling stockholders
also may transfer and donate the shares of common stock in other circumstances
in which case the transferees, donees, pledgees or other successors in interest
will be the selling beneficial owners for purposes of this
prospectus.
The
selling stockholders and any broker-dealer participating in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of the
shares of common stock is made, a prospectus supplement, if required, will be
distributed which will set forth the aggregate amount of shares of common stock
being offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In addition, in
some states the shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There can
be no assurance that any selling stockholder will sell any or all of the shares
of common stock registered pursuant to the registration statement, of which this
prospectus forms a part.
The
selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of common stock by the selling
stockholders and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of common
stock to engage in market-making activities with respect to the shares of common
stock. All of the foregoing may affect the marketability of the shares of common
stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.
We will
pay all expenses of the registration of the shares of common stock pursuant to
the registration rights agreement, estimated to be approximately $40,000 in
total, including, without limitation, Securities and Exchange Commission filing
fees and expenses of compliance with state securities or "blue sky" laws;
provided, however, that a selling stockholder will pay all underwriting
discounts and selling commissions, if any. We will indemnify the selling
stockholders against liabilities, including some liabilities under the
Securities Act, in accordance with the registration rights agreements, or the
selling stockholders will be entitled to contribution. We may be indemnified by
the selling stockholders against civil liabilities, including liabilities under
the Securities Act, that may arise from any written information furnished to us
by the selling stockholder specifically for use in this prospectus, in
accordance with the related registration rights agreement, or we may be entitled
to contribution.
Once sold
under the registration statement, of which this prospectus forms a part, the
shares of common stock will be freely tradable in the hands of persons other
than our affiliates.
DESCRIPTION OF SECURITIES
Capital
Stock
General
As of
January 12, 2010, our authorized capital stock consists of 400,000,000 shares of
common stock, par value $0.0005 per share, of which approximately 34,541,066
shares are issued and outstanding, and 1,000,000 shares of preferred stock,
par value $0.001 per share, of which none of which are outstanding.
Common
Stock
The
holders of our common stock are entitled to one vote for each share held of
record. The affirmative vote of a majority of shares present in person or
represented by proxy at a meeting of stockholders that commences with a lawful
quorum is sufficient for approval of matters upon which stockholders may vote,
including questions presented for approval or ratification at the annual
meeting. Our common stock does not carry cumulative voting rights, and holders
of more than 50% of our common stock have the power to elect all directors and,
as a practical matter, to control our company. Holders of our common stock are
not entitled to preemptive rights, and our common stock may only be redeemed at
our election.
After the
satisfaction of requirements with respect to preferential dividends, if any,
holders of our common stock are entitled to receive, pro rata, dividends when
and as declared by our board of directors out of funds legally available
therefore. Upon our liquidation, dissolution or winding-up, after distribution
in full of the preferential amount, if any, to be distributed to holders of the
preferred stock, holders of our common stock are entitled to share ratably in
our assets legally available for distribution to our stockholders. All
outstanding shares of common stock are fully paid and
non-assessable.
Our
common stock is listed on The NASDAQ Global Select Market under the symbol
“GFRE.” The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
Preferred
Stock
Our board
of directors is authorized to issue up to the total of 1,000,000 shares of
preferred stock, which includes without any further action by the stockholders.
Our board of directors may also divide the shares of preferred stock into series
and fix and determine the relative rights and preferences of the preferred
stock, such as the designation of series and the number of shares constituting
such series, dividend rights, redemption and sinking fund provisions,
liquidation and dissolution preferences, conversion or exchange rights and
voting rights, if any. Issuance of preferred stock by our board of directors
will result in such shares having dividend and/or liquidation preferences senior
to the rights of the holders of our common stock and could dilute the voting
rights of the holders of our common stock.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our
common stock is listed for trading on the NASDAQ Global Selected Market, or
NASDAQ, under the symbol “GFRE.” Before October 27, 2009, our common stock was
traded in the over-the-counter market and quoted through the Over-The-Counter
Bulletin Board, or OTCBB, under the symbol “GRUS”. The following table sets
forth the high and low bid prices for our common stock prior to October 27, 2009
as reported by the OTCBB, and the high and low sale prices for our common stock
from October 27 through December 31, as reported by NASDAQ. The OTCBB quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not represent actual transactions. On October 9, 2009 we effected a
1-for-4 reverse stock split of our common stock.
2010
|
High
|
Low
|
||||||
First
Quarter (through January 12)
|
$ | 14.74 | $ | 13.39 |
2009
|
High
|
Low
|
||||||
First
Quarter
|
$ | 0.52 | $ | 0.29 | ||||
Second
Quarter
|
$ | 0.65 | $ | 0.42 | ||||
Third
Quarter
|
$ | 1.75 | $ | 0.49 | ||||
Fourth
Quarter (through October 26)
|
$ | 10.26 | $ | 1.80 | ||||
Fourth
Quarter (from October 27 to December 31)
|
$ | 11.94 | $ | 8.64 |
2008
|
High
|
Low
|
||||||
First
Quarter
|
$ | 3.19 | $ | 1.50 | ||||
Second
Quarter
|
$ | 2.45 | $ | 1.07 | ||||
Third
Quarter
|
$ | 1.90 | $ | 0.33 | ||||
Fourth
Quarter
|
$ | 0.40 | $ | 0.15 |
Holders
As of
January 12, 2010, there were 32 holders of record of our common stock. The
transfer agent for our common stock is American Stock Transfer & Trust
Company, LLC. The transfer agent’s contact information is 59 Maiden Lane Plaza
Level New York, NY 10038. The transfer agent’s telephone number is
718-921-8360.
Dividend
Policy
We do not
anticipate paying cash dividends in the foreseeable future. Presently, we intend
to retain all of our earnings, if any, to finance development and expansion of
our business.
We are a
holding company incorporated in the State of Delaware and do not have any assets
or conduct any business operations other than our investments in our
subsidiaries and consolidated entities. As a result of our holding company
structure, we rely entirely on dividend payments from our PRC subsidiary. PRC
accounting standards and regulations currently permit payment of dividends only
out of accumulated profits, a portion of which is required to be set aside for
certain reserve funds. Our inability to receive all of the revenues from our PRC
subsidiary’s operations may provide an additional obstacle to our ability to pay
dividends if we so decide in the future.
Our
Equity Compensation Plans
In 2007,
we adopted the 2007 Equity Incentive Plan (the “Plan”) the plan
provides for the grant of incentive stock options and restricted stock
awards. The total number of shares of our common stock that may
be issued under the Plan may not exceed 2,500,000 shares. The
following table provides information as of December 31, 2009 about our
Plan.
Equity
Compensation Plan Information - December 31, 2009
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
(a)
|
(b)
|
(c)
|
Equity
compensation plans approved by security holders
|
0
|
-
|
0
|
Equity
compensation plans not approved by security holders
|
325,000
|
$6.80
|
2,175,000
|
Total
|
325,000
|
-
|
2,175,000
|
In August
2008 we issued warrants to purchase 25,000 shares of common stock at a price of
$4.80 per share pursuant to a consulting agreement with our public relations /
investor relations firm. The warrants vested August 1, 2009 and may be exercised
through August 2018.
On
December 19, 2009 we granted the Warrant to BMC which is exercisable for 176,471
shares of our common stock at an exercise price of $10.20 per
share. The Warrant vested immediately and may be exercised through
December 19, 2014.
LEGAL MATTERS
The
validity of the shares of our Common Stock offered hereby has been passed upon
for us by Loeb & Loeb LLP, New York, New York.
The
audited financial statements as of and for the years ended December 31, 2008 and
December 31, 2007 have been included in this prospectus in reliance upon the
report of Morison Cogen LLP, an independent registered public accounting firm
and their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are a
public company and file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any document we file
at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549.
You can request copies of these documents by writing to the SEC and paying a fee
for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the public reference room. Our SEC filings are also
available, at no charge, to the public at the SEC’s web site at http://www.sec.gov
.
GULF RESOURCES, INC.
AND
SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
C O N T E N T
S
PAGE
|
|
Consolidated
Balance Sheets as at September 30, 2009 and December 31,
2008
|
Q-1
|
Consolidated
Statement of Operations for the Three and Nine Months ended September 30,
2009 and 2008
|
Q-2
|
Consolidated
Statement of Comprehensive Income for the Three and Nine Months ended
September 30, 2009 and 2008.
|
Q-3
|
Consolidated
Statement of Stockholders’ Equity for the Nine Months ended September 30,
2009
|
Q-4
|
Consolidated
Statements of Cash Flows for the Nine Months ended September 3, 2009 and
2008
|
Q-5
- Q-6
|
Reports
of Independent Registered Public Accounting Firm
|
F-1 -
F-3
|
|
|
Consolidated
Balance Sheets for the Years as at December 31, 2008 and
2007
|
F-4
|
Consolidated
Statement of Operations for the Years ended December 31, 2008, 2007 and
2006
|
F-5
|
Consolidated
Statement of Comprehensive Income for the Years ended December 31, 2008,
2007 and 2006
|
F-6
|
|
|
Consolidated
Statement of Stockholders’ Equity for the Years ended December 31, 2008,
2007 and 2006
|
F-7
|
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2008, 2007 and
2006
|
F-8
- F-9
|
|
|
Notes
to Consolidated Financial Statements
|
F-10 -
F-29
|
65
3,117,653
Shares
Common
Stock
GULF
RESOURCES, INC.
PROSPECTUS
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus or any prospectus supplement. This prospectus is not an offer
of these securities in any jurisdiction where an offer and sale is not
permitted
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The
estimated expenses payable by the Registrant in connection with the issuance and
distribution of the securities being registered are as follows:
SEC
Registration Fee
|
$
|
2,856.41
|
||
Legal
Fees and Expenses
|
35,000
|
|||
Accounting
Fees and Expenses *
|
||||
Miscellaneous
*
|
|
|||
Total
|
$
|
39,856.41
|
* To be
completed by amendment
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Section
145 of the Delaware General Corporation Law authorizes a court to award, or a
corporation’s board of directors to grant, indemnity to directors and officers
in terms sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the “Securities
Act”).
The
Certificate of Incorporation and By-Laws of the Registrant provide that the
registrant shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the “DGCL”). Section 145 of the DGCL, relating
to indemnification, is hereby incorporated herein by reference.
Our
Certificate of Incorporation eliminates the liability of a director for monetary
damages for breach of duty as a director, subject to certain exceptions. In
addition, our Certificate of Incorporation provides for indemnification, under
certain conditions, of our directors, officers, employees and agents against all
expenses, liabilities and losses reasonably incurred by them in the course of
their duties. These provisions may reduce the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from suing directors for breaches of their duty of care, even though
such an action, if successful, might otherwise benefit us and our
stockholders.
In
addition, the registrant currently maintains an officers’ and directors’
liability insurance policy which insures, Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the registrant, pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
RECENT
SALES OF UNREGISTERED SECURITIES
During
the past 3 years, we issued the following unregistered securities pursuant to
various exemptions from registration under the Securities Act of 1933, as
amended:
1. On
December 11, 2006, we issued a total of 6,625,000 shares of our common stock to
the shareholders of Upper Class Group Limited ("UCG"), a British Virgin Islands
company, in connection with the merger of our wholly-owned subsidiary, DFAX
Acquisition Vehicle, Inc. ("DFAX") with and into UCG in accordance with that
certain Agreement and Plan of Merger, dated as of December 10, 2006, by and
among us, DFAX , UCG, and the shareholders of UCG (the "Merger
Agreement.")
2. On
February 5, 2007, we issued a total of 4,047,030 shares of our common stock and
our non-interest bearing promissory notes in the aggregate principal amount of
$2,550,000 to the shareholders of Shouguang Yuxin Chemical Industry Co., Ltd.
("SYCI") in exchange for the all of the outstanding shares of SYCI under a Share
Exchange Agreement with UCG, SCHC, SYCI and the shareholders of
SYCI.
These
shares were issued without registration under Section 5 of the Securities Act of
1933, as amended (the "Securities Act") in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act and Regulation S
under the Securities Act.
We
believe that all of the requirements to qualify to use the exemption from
registration contained in Section 4(2) of the Securities Act have been satisfied
in connection with the issuance of these shares. Specifically, (i) we have
determined that each investor is knowledgeable and experienced in finance and
business matters and thus is able to evaluate the risks and merits of acquiring
our securities; (ii) each investor has advised us that he, she or it is able to
bear the economic risk of purchasing our common stock; (iii) we have provided
each investor with access to the type of information normally provided in a
prospectus; and (iv) we did not use any form of public solicitation or general
advertising in connection with the issuance of the shares.
We also
believe that the issuance of our shares to these investors constituted an
offshore transaction. Each investor was a resident of China, and at the time we
offered to issue our shares to these investors, each investor was located in
China. At the time we issued our common stock to these investors, we reasonably
believed that each investor was outside of the United States. As a result, we
believe that these facts also enable us to rely on Regulation S for an exemption
from the registration requirements of Section 5 of the Securities Act with
respect to the issuance of these shares.
3. In
March 2007, we issued 1,663,300 shares of our common stock as payment for
$5,344,395 of accrued consulting expenses.
4. In
March 2007, we issued 112,500 shares of our common stock, valued at $892,500
(fair value), for two consulting contracts, one that expires on December 31,
2007 and one that expires in March 2008.
We relied
upon the exemption provided in Section 4(2) of the Securities Act and/or Rule
506 thereunder, which covers "transactions by an issuer not involving any public
offering," to issue these securities without registration under the Securities
Act. We made a determination in each case that the person to whom the securities
were issued did not need the protections that registration would afford. The
certificates representing the securities issued displayed a restrictive legend
to prevent transfer except in compliance with applicable laws, and our transfer
agent was instructed not to permit transfers unless directed to do so by our
company, after approval by our legal counsel. We believe that the investors to
whom securities were issued had such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of the
prospective investment. We also believe that the investors had access to the
same type of information as would be contained in a registration
statement.
5. On
April 7, 2007, in consideration for the purchase of the assets located in the
Shouguang City Qinshuibo Area, we issued to Wenbo Yu 399,643 shares of our
common stock and a non-interest bearing promissory note in the aggregate
principal amount of $3,051,282. We believe that the issuance of the shares and
the note was exempt from the registration requirements of the Securities Act in
reliance on the exemption from registration contained in Section 4(2) of the
Securities Act and in Regulation S under the Securities Act.
6. On
June 8, 2007, in consideration for the purchase of the assets located in the
Dong Ying City Liu Hu Area, we issued to Dong Hua Yang 204,898 shares of our
common stock and interest-free promissory note in the aggregate principal amount
of $889,005. We believe that the issuance of the shares and the note was exempt
from the registration requirements of the Securities Act in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act and
in Regulation S under the Securities Act.
7. In
January, 2009, in consideration for the purchase of the assets located at the
Shouguang City Renjiazhuangzi Village North Area, we issued to Qiufen Yuan, Han
Wang and Yufen Zhang 375,000 shares of our common stock in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act and
in Regulation S under the Securities Act.
8. In
September 2009, in consideration for the purchase of the assets located at
Shouguang City Yingli Township Beishan Village, we issued to Fengxia Yuan, Han
Wang and Qing Yang, 1,057,342 shares of our common stock in reliance on the
exemption from registration contained in Section 4(2) of the Securities Act and
in Regulation S
under the
Securities Act.
9. On
December 21, 2009, we sold 2,941,182 shares of our common stock to institutional
investors for an aggregate purchase price of $25,000,047 in a private placement
in reliance on the exemption from registration contained in Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. Brean Murray, Carret
& Co., LLC, acted as the exclusive placement agent in the private
placement.
EXHIBITS
Exhibit
No.
|
Description
|
2.1
|
Agreement
and Plan of Merger dated December 10, 2006, among the Registrant, DFAX
Acquisition vehicle, Inc., Upper Class Group Limited and the shareholders
of UCG, incorporated herein by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K filed on December 12,
2006.
|
2.2
|
Share
Exchange Agreement among the Registrant, Upper Class Group Limited,
Shouguang City Haoyuan Chemical Company Limited, Shouguang Yuxin Chemical
Industry Company Limited and shareholders of Shouguang Yuxin Chemical
Industry Company Limited, incorporated herein by reference to Exhibit 10.1
to the Registrant's Current Report on Form 8-K filed on February 9,
2007.
|
3.1
|
Restated
Certificate of Incorporation, incorporated herein by reference to the
Registrant's Registration Statement on Form S-1 (No. 33-46580) declared
effective on November 18, 1992.
|
3.2
|
Amendment
to Restated Certificate of Incorporation, increasing the authorized
capital stock, incorporated herein by reference to Exhibit A to the
Registrant's definitive Schedule 14A filed on October_, 1995.
|
3.3
|
Amendment
to Restated Certificate of Incorporation, increasing the authorized
capital stock, incorporated herein by reference to Exhibit B to the
Registrant's definitive Schedule 14A filed on August 12,
1997.
|
3.4
|
Amendment
to Restated Certificate of Incorporation, increasing the authorized
capital stock, incorporated herein by reference to Exhibit A to the
Registrant's definitive Schedule 14A filed on October 16,
1998.
|
3.5
|
Amendment
to Restated Certificate of Incorporation, filed with the Secretary of the
State of Delaware on October 16, 2006, effecting a reverse stock
split.
|
3.6
|
Amendment
to Restated Certificate of Incorporation, changing the name of the
Registrant to Gulf Resources, Inc., incorporated herein by reference to
Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed on
February 20, 2007.
|
3.7
|
Amendment
to Restated Certificate of Incorporation, increasing the authorized
capital stock of the Registrant and effecting a 2-for-1 forward stock
split, incorporated herein by reference to Exhibit 3.1 of the Registrant's
Current Report on Form 8-K filed on December 4, 2007.
|
3.8
|
By-laws,
incorporated herein by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (No. 33-46580) declared effective on
November 18, 1992.
|
Exhibit
No.
|
Description
|
4.1
|
Certificate
of Designation, Powers, Preferences and Rights of Series D Convertible
Preferred Stock incorporated herein by reference to Exhibit 3 (c) to the
Registrant's Registration Statement on Form SB-2 (No. 33-30021) filed on
June 25, 1997.
|
4.2
|
Non-interest
bearing promissory note dated April 7, 2007 in the aggregate principal
amount of $3,051,282 issued to Wenbo Yu incorporated herein by reference
to Exhibit 99.2 to the Registrant's Current Report on Form 8-K filed on
April 10, 2007.
|
5.1+
|
Opinion
of Loeb & Loeb LLP.
|
10.1
|
Stock
Purchase Agreement, dated as of August 25, 2006, by and between Juxiang Yu
and Irwin Horowitz, incorporated herein by reference to Exhibit 99.1 to
the Registrant's Current Report on Form 8-K filed on August 31,
2006.
|
10.2
|
Asset
Purchase Agreement between Shouguang City Haoyuan Chemical Company Limited
and Dong Hua Yang dated June 8, 2007, incorporated herein by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on June
11, 2007.
|
10.3
|
Asset
Purchase Agreement between the Registrant and Shouguang City Haoyuan
Chemical Company Limited and Wenbo Yu dated April 4, 2007, incorporated
herein by reference to Exhibit 99.1 to the Registrant's Current Report on
Form 8-K filed on April 10, 2007.
|
10.4
|
Asset
Purchase Agreement between Shouguang City Haoyuan Chemical Company Limited
and Jianci Wang dated as of October 25, 2007, incorporated herein by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed on October 31, 2007.
|
10.5
|
Asset
Purchase Agreement between Shouguang City Haoyuan Chemical Company Limited
and Xingji Liu dated October 26 2007, incorporated herein by reference to
Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on
October 31, 2007.
|
10.6
|
Asset
Purchase Agreement between Shouguang City Haoyuan Chemical Company Limited
and Qiufen Yuan, Han Wang and Yufen Zhang dated January 7, 2009,
incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on January 7,
2009.
|
10.7
|
Amendment
Agreement between the Registrant, Shouguang City Haoyuan Chemical Company
Limited, China Finance, Inc., Shenzhen Hua Yin Guaranty and Investment
Company, Top King Group Limited, Billion Gold Group Limited, Topgood
International Limited dated January 24, 2009, incorporated herein by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on February 6, 2009.
|
10.8
|
Agreement
by and between the Registrant and Biagio Vignolo, dated November 6, 2007,
incorporated herein by reference to Exhibit 10.8 to the Registrant’ annual
report on Form 10-K filed on March 16, 2009.
|
10.9
|
Agreement
by and between the Registrant and Richard Khaleel, dated October 24, 2007,
incorporated herein by reference to Exhibit 10.9 to the Registrant’ annual
report on Form 10-K filed on March 16, 2009.
|
10.10
|
Employment
Contract by and between the Registrant and Xiaobin Liu, incorporated
herein by reference to Exhibit 10.10 to the Registrant's current report on
Form 8-K filed on March 16, 2009.
|
Exhibit
No.
|
Description
|
10.11
|
Employment
Contract by and between the Registrant and Jiang Shitong, dated April 1,
2008, incorporated herein by reference to Exhibit 10.11 to the Registrant’
annual report on Form 10-K filed on March 16, 2009.
|
10.12
|
Lock-up
Agreement by and among the Registrant, Top King Group Limited, Billion
Gold Group Limited, Topgood International Limited, Ming Yang, Wenxiang Yu,
Zhi Yang and Shandong Haoyuan Industry Group Ltd., dated May
10, 2009, incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on May 14,
2009.
|
10.13
|
Asset
Purchase Agreement by and among the Registrant, Shouguang City Haoyuan
Chemical Company Limited, Fengxia Yuan, Han Wang and Qing Yang, dated
September 7, 2009, incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on September 10,
2009.
|
10.14
|
Securities
Purchase Agreement by and among the Registrant and institutional investors
dated December 11, 2009, incorporated herein by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed on December 11,
2009.
|
10.15
|
Registration
Rights Agreement by and among the Registrant and institutional investors
dated December 11, 2009, incorporated herein by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed on December 11,
2009.
|
14
|
Code
of Ethics, incorporated herein by reference to Exhibit 14 to the
Registrant’ annual report on Form 10-K filed on March 16,
2009.
|
21.1
|
List
of Subsidiaries, incorporated herein by reference to Exhibit 21.1 to the
Registrant’s Annual Report on Form 10-K filed on March 12,
2008.
|
23.1+
|
Consent
of Morison & Cogen LLP, an independent registered accounting
firm.
|
23.2+
|
Consent
of Loeb & Loeb LLP (included in its opinion filed as Exhibit
5.1).
|
24.1+
|
Power
of Attorney (contained in the signature page to this registration
statement).
|
+ Filed
herewith.
UNDERTAKINGS.
Undertaking
Required by Item 512 of Regulation S-K.
(a) The
undersigned registrant will:
(1) File,
during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
(i) include
any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) reflect
in the prospectus any facts or events arising after the effective date of this
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information in the registration statement; and notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration statement;
and
(iii) include
any additional or changed material information on the plan of
distribution.
(2) For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering.
(3) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(b) For
determining liability of the registrant under the Securities Act to any
purchaser in the initial distribution of the securities, the registrant
undertakes that in a primary offering of securities of the registrant pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the registrant
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any
preliminary prospectus or prospectus of the registrant relating to the offering
required to be filed pursuant to Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
registrant or used or referred to by the registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the registrant or its securities provided by or on
behalf of the registrant; and
(iv) Any
other communication that is an offer in the offering made by the registrant to
the purchaser.
(c) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(d) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i) Each
prospectus filed by the registrant pursuant to 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in Shouguang, PRC on January 20,
2010.
GULF
RESOURCES, INC.
|
||
By:
|
/s/
Xiaobin Liu
|
|
Name:
|
Xiaobin
Liu
|
|
Title:
|
Chief
Executive Officer (Principal Executive Officer)
|
|
By:
|
/s/
Min Li
|
|
Name:
|
Min
Li
|
|
Title:
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Xiaobin Liu as his true and lawful attorney-in-fact and
agent, with full power of substitution and re-substitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments, exhibits thereto and other
documents in connection therewith) to this Registration Statement and any
subsequent registration statement filed by the registrant pursuant to Rule
462(b) of the Securities Act of 1933, as amended, which relates to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons and in the capacities and on
the dates indicated.
Dated:
January 20, 2010
|
By:
|
/s/
Xiaobin Liu
|
Name:
|
Xiaobin
Liu
|
|
Title:
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
Dated:
January 20, 2010
|
By:
|
/s/
Min Li
|
Name:
|
Min
Li
|
|
Title:
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
Dated:
January 20, 2010
|
By:
|
/s/
Ming Yang
|
Name:
|
Ming
Yang
|
|
Title:
|
Chairman
and Director
|
|
Dated:
January 20, 2010
|
By:
|
/s/
Naihui Miao
|
Name:
|
Naihui
Miao
|
|
Title:
|
Director
|
|
Dated:
January 20, 2010
|
By:
|
/s/
Richard Khaleel
|
Name:
|
Richard
Khaleel
|
|
Title:
|
Director
|
|
Dated:
January 20, 2010
|
By:
|
/s/
Biagio Vignolo
|
Name:
|
Biagio
Vignolo
|
|
Title:
|
Director
|
|
Dated:
January 20, 2010
|
By:
|
/s/
Shi Tong Jiang
|
Name:
|
Shi
Tong Jiang
|
|
Title:
|
Director
|
|
Dated:
January 20, 2010
|
By:
|
/s/
Ya Fei Ji
|
Name:
|
Ya
Fei Ji
|
|
Title:
|
Director
|
|
GULF RESOURCES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER
30, 2009 AND DECEMBER 31, 2008
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
(audited)
|
|||||||
ASSETS
|
|
|
||||||
|
|
|||||||
CURRENT
ASSETS
|
|
|
||||||
Cash
|
$ | 19,256,504 | $ | 30,878,044 | ||||
Accounts
receivable, net of allowance
|
15,431,176 | 11,674,645 | ||||||
Inventories
|
471,469 | 418,259 | ||||||
Prepayment
and deposit
|
362,915 | 229,408 | ||||||
Prepaid
land lease
|
15,849 | 15,849 | ||||||
Deferred
tax asset
|
3,453 | 3,453 | ||||||
Other
receivable
|
2,289 | 2,641 | ||||||
35,543,655 | 43,222,299 | |||||||
PROPERTY,
PLANT AND EQUIPMENT, Net
|
81,136,111 | 45,399,456 | ||||||
|
||||||||
PREPAID
LAND LEASE, Net of current portion
|
725,824 | 737,711 | ||||||
|
||||||||
TOTAL
ASSETS
|
$ | 117,405,590 | $ | 89,359,466 | ||||
|
||||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|||||||
|
||||||||
CURRENT
LIABILITIES
|
|
|||||||
Accounts
payable and accrued expenses
|
$ | 6,653,162 | $ | 4,746,993 | ||||
Loan
Payable
|
- | 4,034,250 | ||||||
Retention
Payable
|
660,150 | - | ||||||
Note
and loan payable – related parties
|
- | 4,650,000 | ||||||
Due
to related party
|
769,090 | 852,068 | ||||||
Taxes
payable
|
5,253,780 | 4,269,442 | ||||||
TOTAL
CURRENT LIABILITIES
|
13,336,182 | 18,552,753 | ||||||
|
||||||||
NON
CURRENT LIABILITIES
|
|
|||||||
Note
payable, net of current portion
|
- | 18,337,493 | ||||||
|
||||||||
TOTAL
LIABILITIES
|
13,336,182 | 36,890,246 | ||||||
|
||||||||
STOCKHOLDERS’
EQUITY
|
|
|||||||
|
||||||||
PREFERED
STOCK ; $0.001 par value; 1,000,000 shares
|
|
|||||||
authorized
none outstanding
|
- | - | ||||||
COMMON
STOCK; $0.0005 par value; 100,000,000 shares
|
|
|
||||||
authorized;
31,599,552 and 24,917,210
|
|
|||||||
issues
and outstanding in 2009 and 2008
|
15,800 | 12,459 | ||||||
|
||||||||
ADDITIONAL
PAID-IN CAPITAL
|
40,743,524 | 13,072,668 | ||||||
|
||||||||
RETAINED
EARNINGS – UNAPPROPRIATED
|
55,649,994 | 31,817,465 | ||||||
|
||||||||
RETAINED
EARNINGS – APPROPRIATED
|
3,223,418 | 3,223,418 | ||||||
|
||||||||
CUMULATIVE
TRANSLATION ADJUSTMENT
|
4,436,672 | 4,343,210 | ||||||
|
||||||||
TOTAL
STOCKHOLDERS’ EQUITY
|
104,069,408 | 52,469,220 | ||||||
|
||||||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 117,405,590 | $ | 89,359,466 |
See
accompanying notes to condensed consolidated financial statements.
GULF RESOURCES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
NET
REVENUE
|
||||||||||||||||
Net
sales
|
$
|
27,667,158
|
$
|
17,554,873
|
$
|
80,891,594
|
$
|
63,354,609
|
||||||||
OPERATING
EXPENSES
|
||||||||||||||||
Cost
of net revenue
|
15,533,613
|
11,388,348
|
45,520,357
|
38,050,971
|
||||||||||||
Research
and development cost
|
125,122
|
122,744
|
375,187
|
389,853
|
||||||||||||
General
and administrative expenses
|
870,554
|
960,747
|
2,966,375
|
2,824,377
|
||||||||||||
16,529,289
|
12,471,839
|
48,861,919
|
41,265,201
|
|||||||||||||
INCOME
FROM OPERATIONS
|
11,137,869
|
5,083,034
|
32,029,675
|
22,089,
408
|
||||||||||||
OTHER
INCOME (EXPENSES)
|
||||||||||||||||
Interest
expense
|
(102)
|
-
|
(27,144)
|
(60,111)
|
||||||||||||
Interest
income
|
19,815
|
26,143
|
65,607
|
70,400
|
||||||||||||
Sundry
income (expense)
|
-
|
779
|
-
|
(3,764)
|
||||||||||||
INCOME
BEFORE INCOME TAXES
|
11,157,582
|
5,109,956
|
32,068,138
|
22,095,933
|
||||||||||||
INCOME
TAXES current
|
2,829,772
|
1,373,055
|
8,235,609
|
5,925,532
|
||||||||||||
NET
INCOME
|
$
|
8,327,810
|
$
|
3,736,901
|
$
|
23,832,529
|
$
|
16,170,401
|
||||||||
EARNINGS
PER SHARE:
|
||||||||||||||||
BASIC
|
$
|
0.27
|
$
|
0.15
|
$
|
0.79
|
$
|
0.65
|
||||||||
DILUTED
|
$
|
0.27
|
$
|
0.15
|
$
|
0.79
|
$
|
0.65
|
||||||||
WEIGHTED
AVERAGE NUMBER OF SHARES:
|
||||||||||||||||
BASIC
|
30,806,546
|
24,917,211
|
30,179,367
|
24,917,211
|
||||||||||||
DILUTED
|
30,806,546
|
24,917,211
|
30,179,367
|
24,919,164
|
See
accompanying notes to condensed consolidated financial statements.
GULF RESOURCES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three
Months Ended
September 30, |
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
NET
INCOME
|
$
|
8,327,810
|
$
|
3,736,901
|
$
|
23,832,529
|
$
|
16,170,401
|
||||||||
OTHER
COMPREHENSIVE INCOME
|
||||||||||||||||
Foreign
currency translation adjustment
|
148,833
|
228,921
|
93,462
|
2,341,313
|
||||||||||||
COMPREHENSIVE
INCOME
|
$
|
8,476,643
|
$
|
3,965,822
|
$
|
23,925,991
|
$
|
18,511,714
|
See
accompanying notes to condensed consolidated financial statements.
GULF RESOURCES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
NINE
MONTHS ENDED SEPTEMBER 30, 2009
Statutory
|
||||||||||||||||||||||||||||
Additional
|
Common
|
Cumulative
|
||||||||||||||||||||||||||
Number
|
Common
|
Paid-in
|
Reserve
|
Retained
|
Translation
|
|||||||||||||||||||||||
of
Shares
|
Stock
|
Capital
|
Fund
|
Earnings
|
Adjustment
|
Total
|
||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||
BALANCE
AT
DECEMBER
31, 2008
|
99,668,842 | $ | 49,834 | $ | 13,035,293 | $ | 3,223,418 | $ | 31,817,465 | $ | 4,343,210 | $ | 52,469,220 | |||||||||||||||
Retroactive
Restatement due to 1:4 stock split
|
(74,751,631 | ) | (37,375 | ) | 37,375 | - | - | - | - | |||||||||||||||||||
Balance
at December 31, 2008
(restated) |
24,917,211 | 12,459 | 13,072,668 | 3,223,418 | 31,817,465 | 4,343,210 | 52,469,220 | |||||||||||||||||||||
Cumulative
translation
Adjustment
|
- | - | - | - | - | 93,462 | 93,462 | |||||||||||||||||||||
Common
stock issuance for settlement of shareholder’s note
payable
|
5,250,000 | 2,625 | 21,284,868 | - | - | - | 21,287,493 | |||||||||||||||||||||
Common
stock issuance for acquiring assets
|
1,432,341 | 716 | 6,027,872 | - | - | - | 6,028,588 | |||||||||||||||||||||
Issuance
of warrants for consulting expenses
|
- | - | 48,616 | - | - | - | 48,616 | |||||||||||||||||||||
Issuance
of stock options
|
- | - | 309,500 | - | - | - | 309,500 | |||||||||||||||||||||
Net
income for nine months ended September 30, 2009
|
- | - | - | - | 23,832,529 | - | 23,832,529 | |||||||||||||||||||||
BALANCE
AT
September
30, 2009 (unaudited)
|
31,599,552 | 15,800 | 40,743,524 | 3,223,418 | 55,649,994 | 4,436,672 | 104,069,408 |
See
accompanying notes to condensed consolidated financial statements.
GULF RESOURCES, INC.AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS PROVIDED BY OPERATING ACTIVITIES
|
||||||||
Net
income
|
$
|
23,832,529
|
$
|
16,170,401
|
||||
Adjustments
to reconcile net income to
net cash provided by operating activities
|
||||||||
Amortization
of warrants issued for expenses
|
309,500
|
602,142
|
||||||
Amortization
of prepaid expenses by shares issued for consulting fee
|
48,616
|
145,484
|
||||||
Amortization
and prepaid expense
|
11,943
|
-
|
||||||
Depreciation
and amortization
|
4,816,540
|
3,426,455
|
||||||
Bad
debt provision
|
78,150
|
|||||||
(Increase)
decrease in assets
|
||||||||
Accounts
receivable
|
(3,831,618
|
)
|
(4,426,119
|
)
|
||||
Inventories
|
(53,099
|
)
|
(1,659,098
|
)
|
||||
Prepayment
and deposit
|
(133,215
|
)
|
(713,470
|
)
|
||||
Income
tax receivable
|
-
|
-
|
||||||
Increase
(decrease) in liabilities
|
-
|
|||||||
Accounts
payable and accrued expenses
|
1,874,951
|
3,102,777
|
||||||
Taxes
payable
|
1,004,489
|
969,282
|
||||||
Net
cash provided by operating activities
|
27,958,786
|
17,617,854
|
||||||
CASH
FLOWS USED IN INVESTING ACTIVITIES
|
||||||||
Property,
plant and equipment
|
(33,828,480
|
)
|
(17,365,195
|
)
|
||||
Net
cash used in investing activities
|
(33,828,480
|
)
|
(17,365,195
|
)
|
||||
CASH
FLOWS PROVIDED BY FINANCING ACTIVITIES
|
||||||||
Repayment
to bank loan
|
-
|
(3,843,675
|
)
|
|||||
Proceeds
from loan payable
|
-
|
4,023,250
|
||||||
Repayment
to loan payable
|
(4,031,775
|
)
|
-
|
|||||
Proceeds
from Note and loan payable (related parties)
|
-
|
13,635,405
|
||||||
Repayment
to Note and loan payable (related parties)
|
-
|
(2,670,192
|
)
|
|||||
Proceeds
from related party
|
8,452,194
|
-
|
||||||
Repayment
to related party
|
(10,168,016
|
)
|
-
|
|||||
Net
cash used in provided by financing activities
|
(5,747,597
|
)
|
11,144,788
|
|||||
EFFECTS
OF EXCHANGE RATE CHANGE ON CASH
|
(4,249
|
)
|
703,038
|
|||||
NET
INCREASE (DECREASE) IN CASH
|
(11,621,540
|
)
|
12,100,485
|
|||||
CASH
– BEGINNING OF PERIOD
|
30,878,044
|
10,773,875
|
||||||
CASH
– END OF PERIOD
|
$
|
19,256,504
|
$
|
22,874,360
|
See
accompanying notes to condensed consolidated financial statements.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE
MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
Nine
Months Ended
September
30,
|
||||||||
2009
|
2008
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash
paid during the period for:
|
||||||||
Income
taxes
|
$
|
7,681,162
|
$
|
5,444,244
|
||||
Interest
paid
|
$
|
27,009
|
$
|
126,715
|
||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
|
||||||||
Waiver
of accrued interest to Additional Paid In Capital
|
$
|
-
|
$
|
131,533
|
||||
Issuance
of common stock as payment for shareholders note payable
|
$
|
21,287,493
|
$
|
-
|
||||
Issuance
of common stock for prepaid expenses
|
$
|
-
|
$
|
-
|
||||
Issuance
of common stock for purchase of assets
|
$
|
6,028,588
|
$
|
-
|
||||
Purchase
of property, plant and equipment for retention payable
|
$
|
659,745
|
$
|
See
accompanying notes to condensed consolidated financial statements.
GULF RESOURCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
accompanying unaudited condensed consolidated financial statements have been
prepared by Gulf Resources, Inc. a Delaware corporation and its subsidiaries
(collectively, the “Company”). These statements include all
adjustments (consisting only of their normal recurring adjustments) which
management believes are necessary for a fair presentation of the statements and
have been prepared on a consistent basis using the accounting policies described
in the Form 10-K for the year ended December 31, 2008 (“2008 Form
10-K”). Certain financial information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although the Company believes that the accompanying disclosures are
adequate to make the information presented not misleading. The Notes
to Financial Statements included in the 2008 Form 10-K should be read in
conjunction with the accompanying interim financial statements. The
interim operating results for the nine months ended September 30, 2009 may not
be indicative of operating results expected for the full year.
Nature of the
Business
The
Company manufactures and trades bromine and crude salt through its wholly-owned
subsidiary, Shouguang City Haoyuan Chemical Company Limited, a company
incorporated in the People’s Republic of China (“PRC”) (“SCHC”), and
manufactures chemical products for use in the oil industry and paper
manufacturing industry through its wholly-owned subsidiary, Shouguang Yuxin
Chemical Industry Co., Limited, a company incorporated in the PRC
(“SYCI”).
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 in consolidation.
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 and the related disclosure of
contingent 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.
GULF
RESOURCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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 considerate
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 deteriorate,
resulting in their inability to make payments, a larger allowance may be
required.
Based on
the above assessment, during the reporting period ended September 30, 2009, the
management established the general provision allowance according to the aging of
trade and other receivable as follows:
Provision
Base
|
Aging
|
Provision
rate
|
The
balance of
|
<120
days
|
0.5%
|
Accounts
receivable
|
121
days – 1 year
|
5%
|
1 –
2 year
|
30%
|
|
2 –
3 year
|
50%
|
|
>3
year
|
100%
|
Bad debts
are written off when identified. The company extends unsecured credit to
customers ranging from 45 days to 90 days in the normal course of business. The
company does not accrue interest on trade and other receivable.
As of
September 30, 2009, allowance for doubtful accounts amounted to $ 78,242. As of
December 31, 2008, allowance for doubtful accounts was $0.
GULF
RESOURCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Concentration of Credit
Risk
Concentrations
of credit risk with respect to accounts receivable 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 net realizable value. Costs of work-in-progress and finished goods are
composed of direct materials, direct labor and an attributable portion of
manufacturing overhead. Net realizable value is based on estimated selling price
less selling expenses.
Property, Plant and
Equipment
Property,
Plant and Equipment is 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 50
year 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 are as
follows:
Useful
life
(in years)
|
|
Mineral
rights
|
Period
of lease or 50 years or the equivalent term under the units of production
method, whichever is shorter
|
Buildings
|
20
|
Machinery
|
8
|
Motor
vehicles
|
5
|
Equipment
|
8
|
GULF
RESOURCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Asset Retirement
Obligation
The
Company follows FASB ASC 410-20, which established a uniform methodology for
accounting for estimated reclamation and abandonment costs. FASB ASC 410-20
requires the fair value of a liability for an asset retirement obligation to be
recognized in the period in which the legal obligation associated with the
retirement of the long-lived asset is incurred. When the liability is initially
recorded, the offset is capitalized by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful life
of the related asset. To settle the liability, the obligation is paid, and
to the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded.
Currently,
there are no reclamation or abandonment obligations associated with the land
being utilized for exploitation
Recoverability of Long Lived
Assets
The
Company follows FASB ASC 360-10, “Accounting for the Impairment of Disposal of
Long-Lived Assets.” The Statement requires that 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.
Mineral
Rights
The
Company follows FASB ASC 805-10 which provides 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.
Fair Value of Financial
Instruments
FASB ASC
825-10 requires disclosing fair value to the extent practicable for financial
instruments that are recognized or unrecognized in the balance sheet. The fair
value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or
settlement.
For
certain financial instruments, including cash, accounts and other receivables,
accounts payable, short-term loans, accruals and other payables, it was assumed
that the carrying amounts approximate fair value because of the near term
maturities of such obligations. The carrying amounts of loans payable
approximate fair value since the interest rate associated with the debt
approximates the current market interest rate.
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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
In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 104, 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
pursuant to FASB ASC 740-10. Under the asset and liability method of
SFAS No. 109, 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.
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Shipping and Handling Fees
and Costs
The
Company follows FASB ASC 605-45, “accounting for 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. For the three months ended September
30, 2009 and 2008, shipping and handling costs were $123,794 and $91,365
respectively, and for the nine months ended September 30, 2009 and 2008,
shipping and handling costs were $365,525 and $312,611
respectively.
Basic and Diluted Net Income
per Share of Common Stock
In
accordance with, FASB ASC 260-10, 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.
Recently Adopted Accounting
Pronouncements
FASB ASC
820-10 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this standard relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. This standard is effective for fiscal years beginning after
November 15, 2007; however, it provides a one-year deferral of the effective
date for non-financial assets and non-financial liabilities, except those that
are recognized or disclosed in the financial statements at fair value at least
annually. The Company adopted this standard for financial assets and financial
liabilities and nonfinancial assets and nonfinancial liabilities disclosed or
recognized at fair value on a recurring basis (at least annually) as of January
1, 2008. The Company adopted the standard for nonfinancial assets and
nonfinancial liabilities on January 1, 2009. The adoption of this standard in
each period did not have a material impact on its financial
statements.
FASB ASC
805 establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. This standard also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. This standard was adopted by the Company beginning January 1,
2009 and will change the accounting for business combinations on a prospective
basis.
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recently Adopted Accounting
Pronouncements (continued)
FASB ASC
810-10 requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements. The standard
establishes a single method of accounting for
changes in a parent’s ownership interest in a subsidiary that does not result in
deconsolidation and expands disclosures in the consolidated financial
statements. This standard is effective for fiscal years beginning after December
15, 2008 and interim periods within those fiscal years. This standard
is not currently applicable to the Company.
FASB ASC
815-10 is effective January 1, 2009. This standard requires enhanced disclosures
about derivative instruments and hedging activities to allow for a better
understanding of their effects on an entity’s financial position, financial
performance, and cash flows. Among other things, this standard requires
disclosures of the fair values of derivative instruments and associated gains
and losses in a tabular formant. This standard is not currently applicable to
the Company since the Company does not have derivative instruments or hedging
activity.
FASB ASC
350-30 and 275-10 amend the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. This standard is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early adoption is prohibited. This standard is not
currently applicable to the Company.
FASB ASC
260-10 provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. This standard is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The Company does not
currently have any share-based awards that would qualify as participating
securities. Therefore, application of this standard is not expected to have an
effect on the Company’s financial reporting.
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recently Adopted Accounting
Pronouncements (continued)
FASB ASC
470-20 will be effective for financial statements issued for fiscal years
beginning after December
15, 2008. The standard includes guidance that convertible debt instruments that
may be settled in cash upon conversion should be separated between the liability
and equity components, with each component being accounted for in a manner that
will reflect the entity’s nonconvertible debt borrowing rate when interest costs
are recognized in subsequent periods. This standard is currently not applicable
to the Company since the Company does not have any convertible
debt.
FASB ASC
815-10 and 815-40 are effective for financial statements for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. The standard addresses the determination of whether an instrument (or an
embedded feature) is indexed to an entity’s own stock, which is the first part
of the scope exception for the purpose of determining whether the instrument is
classified as an equity instrument or accounted for as a derivative instrument
which would be recognized either as an asset or liability and measured at fair
value. The standard shall be applied to outstanding instruments as of the
beginning of the fiscal year in which this standard is initially applied. Any
debt discount that was recognized when the conversion option was initially
bifurcated from the convertible debt instrument shall continue to be amortized.
The cumulative effect of the change in accounting principles shall be recognized
as an adjustment to the opening balance of retained earnings. The Company
adopted this standard as of January 1, 2009, and was not required to reclassify
any of its warrants as liabilities
FASB ASC
825-10 requires disclosures about the fair value of financial instruments for
interim reporting periods. This standard is effective for interim reporting
periods ending after June 15, 2009. The adoption of this standard did not have a
material impact on the Company’s financial statements.
FASB ASC
820-10 provides additional guidance for Fair Value Measurements when
the volume and level of activity for the asset or liability has significantly
decreased. This standard is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this standard did not have a
material effect on its financial statements.
FASB ASC
320-10 amends the other-than-temporary impairment guidance for debt and equity
securities. This standard is effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this standard did not have a
material effect on its financial statements.
FASB ASC
855-10 is effective for interim or annual financial periods ending after June
15, 2009 and establishes general standards of accounting and disclosure of
events that occur after the balance sheet but before financial statements are
issued or are available to be issued. However, since the Company is a public
entity, management is required to evaluate subsequent events through the date
that financial statements are issued and disclose the date through which
subsequent events have been evaluated, as well as the date the financial
statements were issued. This standard was adopted for its interim period ending
June 30, 2009. Subsequent events have been evaluated through November 9, 2009,
the date the financial statements were issued.
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Recently Adopted Accounting
Pronouncements (continued)
As of
September 30, 2009, the FASB has issued Accounting Standards Updates (ASU)
through No. 2009-12. None of the ASUs have had an impact on the Company’s
financial statements.
Recently Issued Accounting
Pronouncements Not Yet Adopted
As of
September 30, 2009, there are no recently issued accounting standards not yet
adopted which would have a material effect on the Company’s financial
statements.
NOTE 2 –
ASSETS ACQUISITIONS
On
January 8, 2008, the Company acquired substantially all of the
assets owned by Xiaodong Yang in the Shouguang City Hanting Area (the
“Yangxiaodong property” or Factory No. 6”). The Yangxiaodong property
includes a 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 7, 2009, the Company acquired substantially all of the assets
owned by Fenqiu Yuan, Han Wang and Yufen Zhang in the Shouguang City
Renjiazhuangzi Village North Area (the “Fenqiu Yuan, Han Wang & Yufen Zhang
property” or Factory No. 7”). The Fenqiu Yuan, Han Wang and Yufen Zhang property
includes a 50-year mineral rights and land lease covering 1,611 hectares 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 $10,615,000, consisting of
$10,000,000 in cash and 375,000 shares of the Company’s Common Stock valued at
$615,000 (fair value), (note 11).
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 (fair
value), (note 11).
The asset
acquisitions described above were not in operation when the Company acquired the
assets. The owners of each of the assets did not hold the proper
license for the exploration and production of bromine, and production at each of
the assets acquired had been previously halted by the government.
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 3 –
INVENTORY
Inventory
consists of:
September
30,
2009
|
December
31, 2008
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Raw
Material
|
$
|
322,374
|
$
|
202,435
|
||||
Finished
Goods
|
162,909
|
229,638
|
||||||
Allowance
for obsolete and slow moving inventory
|
(13,814)
|
(13,814)
|
||||||
|
$
|
471,469
|
$
|
418,259
|
NOTE 4 –
PREPAID LAND LEASE
The
Company prepaid for land leases for a period of fifty years to use the land on
which the office premises, production facilities and warehouse of the Company
are situated. The prepaid land lease are amortized on a straight line basis.
During the three months ended September 30, 2009, amortization of prepaid land
lease totaled $ 3,960, of which $3,813 and $147 were recorded as cost of sales
and administrative expenses respectively. During the nine months ended September
30, 2009, amortization of prepaid land lease totaled $11,878, of which $11,438
and $440 were recorded as cost of sales and administrative expenses
respectively.
NOTE 5 –
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net consist of the following :
September
30,
2009
(unaudited)
|
December
31,
2008
(audited)
|
|||||||
At
cost:
|
||||||||
Mineral
rights
|
$
|
5,840,594
|
5,840,594
|
|||||
Buildings
|
21,218,761
|
6,410,813
|
||||||
Plant
and machinery
|
61,443,813
|
37,619,002
|
||||||
Motor
vehicles
|
57,947
|
57,947
|
||||||
Furniture,
fixtures and office equipment
|
4,277,972
|
2,353,789
|
||||||
Total
|
92,838,820
|
52,282,144
|
||||||
Less:
accumulated depreciation and amortization
|
11,702,975
|
6,882,688
|
||||||
Net
book value
|
$
|
81,136,111
|
45,399,456
|
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
During
the three months ended September 30, 2009, the Company completed a sewage
treatment project which had a total cost of RMB45,000,000 (USD
$6,601,500). The company is retaining RMB4,500,000 (USD$660,150),
reflected on the balance sheet as retention payable, which represents 10% of the
value of the sewage project until the quality guarantee period expires which is
one year after the completion of the project. According to the agreement, this
amount will be paid within one year.
By
September 2009, the Company completed the construction of well and channel,
which are used for the production of bromine and crude salt and resulted in the
addition of $5,638,785 in property, plant and equipment.
During
the three months ended September 30, 2009, depreciation and amortization expense
totaled $1,789,660, of which $1,749,949 and $39,711 were recorded as cost of
sales and administrative expenses respectively. During the three months ended
September 30, 2008, depreciation and amortization expense totaled $1,299,305, of
which $1,261,017 and $38,288 were recorded as cost of sales and administrative
expenses respectively. During the nine months ended September 30, 2009,
depreciation and amortization expense totaled $4,816,540, of which $4,675,676
and $140,773 were recorded as cost of sales and administrative expenses
respectively. During the nine months ended September 30, 2008, depreciation and
amortization expense totaled $3,198,613, of which $3,107,235 and $91,378 were
recorded as cost of sales and administrative expenses respectively.
NOTE 6 –
LOAN PAYABLE
This
amount is interest free with no fixed terms of repayment, and not secured
against the company’s assets. This amount is owed to a non-related
party.
NOTE 7 –
NOTES AND LOAN PAYABLE – RELATED PARTIES
September
30,
|
December
31,
|
||||||||
2009
|
2008
|
||||||||
(unaudited)
|
(audited)
|
||||||||
Note
payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
Limited is unsecured, non-interest bearing, pursuant to an agreement
which, as is Chinese custom, states that the loan need not be paid in the
immediate future. This loan is denominated in RMB (a)
|
$
|
-
|
$
|
18,337,493
|
|||||
Note
payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
Limited is unsecured, non-interest bearing and is due May 2009. The loan
is denominated in US dollars. (a)
|
-
|
3,000,000
|
|||||||
Loan
from a stockholder First Capital Limited is unsecured, non-interest
bearing with no fixed term of repayment.
|
-
|
1,650,000
|
|||||||
Total
loans
|
-
|
22,987,493
|
|||||||
Less:
current portion
|
-
|
(4,650,000)
|
|||||||
Long-term
loans, less current portion
|
$
|
-
|
$
|
18,337,493
|
|||||
Future
maturities of notes payable-related parties are as
follows:
|
|
|
|||||||
2009
|
|
$
|
-
|
$
|
-
|
||||
2010
|
-
|
-
|
|||||||
2011
|
|
-
|
18,337,493
|
||||||
Total
|
$
|
-
|
$
|
18,337,493
|
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
(a)
|
Based
on an amendment agreement dated January 24, 2009, the Company issued
5,250,000 shares of its common stock in lieu of repayment of
the Loans to Shenzhen Huayin Guaranty and Investment Company Limited to
the following companies, which assumed the Loans from Shenzhen Hua Yin,
and in the following amounts: Top King, 1,500,000 million shares of common
stock; Billion Gold, 2,000,000 shares of common stock; Topgood, 1,750,000
shares of common stock. Upon the issuance of the shares, the Loans were
deemed paid in full and were
cancelled.
|
Since the
conversion of debt into shares of common stock took place with an existing
shareholder, the conversion was accounted for as a capital
transaction.
NOTE 8 –
DUE TO A RELATED PARTY
Due
to related parties consists of the following:
|
||||||||
September
30,
2009
|
December
31,
2008 |
|||||||
(unaudited)
|
(audited)
|
|||||||
Due
to related company - Jiaxing Lighting
|
867,900
|
852,068
|
||||||
Due
from related company – Haoyuan Group
|
(98,810)
|
-
|
||||||
$
|
769,090
|
$
|
852,068
|
The
$867,900 due to related company represents funds received from Jiaxing Lighting
for investment purpose in SCHC. Mr. Ming Yang, Chairman of the
Company, is the director and shareholder of Jiaxing Lighting.
The
$98,810 due from related company represents funds advanced to Haoyuan Group, Mr.
Ming Yang, Chairman of the Company, is the director and shareholder of Haoyuan
Group. As of June 30, 2009, Haoyuan Group had loaned the company $7,667,138.
During the three months ended September 30, 2009, the company repaid Haoyuan
Group $7,667,138 and lent them $98,810.
Balances
due to related company are unsecured, non-interest bearing and have no fixed
repayment terms.
NOTE 9 –
TAXES PAYABLE
Taxes
payable consists of the following:
|
||||||||
September
30,
2009
|
December
31,
2008 |
|||||||
(unaudited)
|
(audited)
|
|||||||
Income
tax payable
|
$
|
2,881,664
|
$
|
2,329,227
|
||||
Mineral
resource compensation fee payable
|
327,157
|
291,861
|
||||||
Value
added tax payable and others
|
2,044,959
|
1,648,354
|
||||||
Total
|
$
|
5,253,780
|
$
|
4,269,442
|
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 10 –
RETAINED EARNINGS – APPROPRIATED
In
accordance with the relevant PRC regulations and the Company’s Articles of
Association, the Company is required to allocate its profit after tax to the
following reserves:
Statutory Common Reserve
Funds
SCHC and
SYCI are required each year to transfer 10% of the profit after tax as reported
under the PRC statutory financial statements to the Statutory Common Reserve
Funds until the balance reaches 50% of the registered share
capital. This reserve can be used to make up any loss incurred or to
increase share capital. Except for the reduction of losses incurred,
any other application should not result in this reserve balance falling below
25% of the registered capital. Due to the increase in capital contribution in
SCHC in 2009, the statutory common Reserve Fund as of September 30, 2009 is 25%
of its registered capital.
Statutory Public Welfare
Funds
Prior to
January 1, 2007, SCHC and SYCI were required each year to transfer 5% of the
profit after tax as reported under the PRC statutory financial statements to the
Statutory public welfare funds. This reserve was restricted to
capital expenditure for employees’ collective welfare facilities that are owned
by the Company. The Statutory public welfare funds are not available
for distribution to the stockholders (except on liquidation). Once
capital expenditure for staff welfare facilities has been made, an equivalent
amount must be transferred from the Statutory public welfare funds to the
discretionary common reserve funds. Due to a change in the PRC
Company Law, appropriation of profit to the Statutory Public Welfare Fund is no
longer required. Therefore, the balance in the Statutory Public
Welfare Fund was transferred to the Statutory Common Reserve Fund on January 1,
2007.
NOTE 11 –
COMMON STOCK
On July
29, 2009, holders of 67,638,898 shares of our issued and outstanding common
stock, or 55.4% of the 122,168,842 issued and outstanding shares of common stock
on that date, authorized, by written consent, an amendment to our certificate of
incorporation to effect a four-for-one reverse stock split of our common
stock. On October 6, 2009, the Company filed the amendment to
the certificate of incorporation with the Secretary of State of the State of
Delaware, effecting the reverse stock split on October 9, 2009. All
shares and per share amount for all periods presented have been adjusted to
reflect the stock split.
In March
2009, the Company issued 5,250,000 shares of its common stock as payment for
$21,287,493 of Notes and Loan Payable-Related Party (Note 7).
In March
2009, the Company issued 375,000 shares of its common stock, valued at $615,000
(fair value), to acquire assets owned by Mr. Fenqiu Yuan, Han Wang and Yufen
Zhang (Note 2)
In
September 2009, the Company agreed to issue 1,057,342 shares of its common
stock, valued at $5,297,850 (fair value), to acquire assets owned by Mr. Fenqiu
Yuan, Han Wang and Yufen Zhang. These shares have not yet been issued
by the company (Note 2).
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 12 –
STOCK-BASED COMPENSATION
The Company
issued 25,000 warrants on August 1, 2008 at a price of $4.80 per share as part
of a consulting agreement with its investor relations firm. These options fully
vest on August 1, 2009. The warrants were valued at $65,000, fair value, using
the Black-Scholes option-pricing model with assumed 1,430%
volatility, a four year expiration term, a risk free rate of 3% and a dividend
yield of 0%. The value of the warrants will be expensed over one year, which
is the term of the consulting agreement. For the three and nine months
ended September 30, 2009, $16,384 and $48,616 was recognized as consulting
expense.
In March
2009, the Company granted to 9 management staffs (including 4 board of
directors) options to purchase a total of 150,000 shares (25,000 for each of 3
board of directors, and 12,500 for each of 1 non executive independent director
and 5 other management staff) of the Company’s common stock at an exercise
price of $4.80 per share and the options vested immediately. The options were
valued at $222,000,fair value, using the Black-Scholes option pricing model with
assumed 1,098% volatility, a ten year expiration term, a risk free rate of 3%
and a dividend yield of 0%. For the three and nine months ended September 30,
2009, $0 and $222,000 was recognized as general and administrative
expenses.
In May
2009 the Company granted to one director options to purchase 12,500
shares of the Company’s common stock at an exercise price of $4.80 per
share and the options vested immediately. The options were valued at
$29,500,fair value, using the Black-Scholes option pricing model with assumed
1,096% volatility, a ten year expiration term, a risk free rate of 3% and a
dividend yield of 0%. For the three months and nine months
ended September 30, 2009, $0 and $29,500 was recognized as general
and administrative expenses.
In June
2009 the Company granted to 1 director options to purchase 25,000 shares of
the Company’s common stock at an exercise price of $4.80 per share and the
options vested immediately. The options were valued at $58,000, fair value,
using the Black-Scholes option pricing model with assumed 1,096% volatility, a
three year expiration term, a risk free rate of 3% and a dividend yield of 0%.
For the three and nine months ended September 30, 2009, $- and $58,000 was
recognized as general and administrative expenses.
The
following table summarizes all Company stock option and warrant transactions
between December 31,2008 and September 30, 2009.
Option
&Warrants
Outstanding
|
Option
&Warrants
Vested
|
Range
of
Exercise
Price per Common Share
|
||||||||||
Balance,
December 31, 2008
|
325,000
|
112,500
|
|
$0.84
- $9.80
|
||||||||
Granted
or vested during nine months ended September 30, 2009
|
187,500
|
233,333
|
$4.80
|
|||||||||
Expired
during nine months ended September 30, 2009
|
||||||||||||
Forfeited
during nine months ended September 30, 2009
|
(250,000)
|
(83,333)
|
|
$9.80
|
||||||||
Balance,
September 30, 2009
|
262,500
|
262,500
|
|
$0.84
- $8.20
|
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
Stock
and Warrants Options Outstanding
|
||||||
Number
Outstanding
|
Weighted
Average
|
Weighted
Average
|
||||
Range
of
|
Currently
Exercisable
|
Remaining
|
Exercise
Price of Options
|
|||
Exercise
Prices
|
at
September 30, 2009
|
Contractual
Life (Years)
|
Currently
Exercisable
|
|||
$0.84-$8.20
|
262,500
|
6.57
|
$ 7.07
|
NOTE 13 –
INCOME TAXES
The
Company utilizes the asset and liability method of accounting for income taxes
in accordance with FASB ASC 740-10. The Company’s effective tax rates for the
three months and nine months ended September 30, 2009 were 25.3% and
25.6%. Effective tax rates for both the three months and nine months
ended September 30, 2008 were 26.8%. These rates in those periods
differed from the statutory PRC rates of 25%, due to the non-deductibility of
certain expenses incurred outside of the PRC.
No
provision for deferred taxes has been made as there were no material temporary
differences for the period ended September 30, 2009 and 2008. Deferred taxes
asset amounted to $3,453 and $3,453 as of September 30, 2009 and December 31,
2008.
There was
no change in unrecognized tax benefits and accrual for uncertain tax positions
the period ended September 30, 2009.
Tax years
from 2005 through 2008 remain subject to examination by major tax
jurisdiction.
United
States
Gulf
Resources Inc. is subject to the United States of America Tax law at tax rate of
34%. No provision for the US federal income taxes has been made as the Company
had no US taxable income for the nine months ended September 30, 2009 and 2008
and management believes that its earnings are permanently invested in the
PRC.
BVI
Upper
Class Group Limited was incorporated in the BVI and, under the current laws of
the BVI, it is not subject to income taxes.
Hong
Kong
Hong Kong
Jiaxing Industrial Limited was incorporated in Hong Kong and is
subject to Hong Kong profits tax. The Company is subject to Hong Kong taxation
on its activities conducted in Hong Kong and income arising in or derived from
Hong Kong. No provision for profits tax has been made as the Company
has no assessable income for the year. The applicable statutory tax
rate for the nine months ended September 30, 2009 and 2008 is
16.5%.
PRC
Enterprise
income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the
assessable profits, of which 15% is for national tax and 10% is for
local tax.
GULF
RESOURCES, INC.AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 14 –
BUSINESS SEGMENTS
The
Company follows SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which requires the Company to provide
certain information about their operating segments. The Company has
two reportable segments: bromine and crude salt and chemical
products.
Three
Months Ended
|
||||||||||||||||||||
September
30, 2009
(unaudited)
|
Bromine
and
Crude
Salt
|
Chemical
Products
|
Segment
Total
|
Corporate
|
Consolidated
Total
|
|||||||||||||||
Net
sales
|
$
|
18,814,932
|
8,852,226
|
27,667,158
|
-
|
27,667,158
|
||||||||||||||
Income
(loss) from operations
|
8,245,278
|
3,053,245
|
11,298,523
|
(160,654
|
)
|
11,137,869
|
||||||||||||||
Total
assets
|
91,479,066
|
25,776,330
|
117,255,396
|
150,194
|
117,405,590
|
|||||||||||||||
Depreciation
and amortization
|
1,502,376
|
287,284
|
1,789,660
|
-
|
1,789,660
|
|||||||||||||||
Capital
expenditures
|
12,227,274
|
2,638,980
|
14,866,254
|
-
|
14,866,254
|
Three
Months Ended
|
||||||||||||||||||||
September
30, 2008
(unaudited)
|
Bromine
and
Crude
Salt
|
Chemical
Products
|
Segment
Total
|
Corporate
|
Consolidated
Total
|
|||||||||||||||
Net
sales
|
$
|
13,106,804
|
4,448,069
|
17,554,873
|
-
|
17,554,873
|
||||||||||||||
Income
(loss) from operations
|
4,086,664
|
1,378,530
|
5,465,194
|
(382,160
|
)
|
5,083,034
|
||||||||||||||
Total
assets
|
63,513,465
|
17,961,014
|
81,474,479
|
75,507
|
81,549,986
|
|||||||||||||||
|
|
|
||||||||||||||||||
Depreciation
and amortization
|
1,068,738
|
221,664
|
1,290,402
|
-
|
1,290,402
|
|||||||||||||||
Capital
expenditures
|
519,977
|
-
|
519,977
|
-
|
519,977
|
Nine
Months Ended
|
||||||||||||||||||||
September
30, 2009
(unaudited)
|
Bromine
and
Crude
Salt
|
Chemical
Products
|
Segment
Total
|
Corporate
|
Consolidated
Total
|
|||||||||||||||
Net
sales
|
$
|
54,874,656
|
26,016,938
|
80,891,594
|
-
|
80,891,594
|
||||||||||||||
Income
(loss) from operations
|
23,986,058
|
8,879,769
|
32,865,827
|
(836,152
|
)
|
32,029,675
|
||||||||||||||
Total
assets
|
91,479,066
|
25,776,330
|
117,255,396
|
150,194
|
117,405,590
|
|||||||||||||||
Depreciation
and amortization
|
4,085,235
|
731,305
|
4,816,540
|
-
|
4,816,540
|
|||||||||||||||
Capital
expenditures
|
27,890,325
|
5,938,155
|
33,828,480
|
-
|
33,828,480
|
GULF
RESOURCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
Nine
Months Ended
|
||||||||||||||||||||
September
30, 2008
(unaudited)
|
Bromine
and
Crude
Salt
|
Chemical
Products
|
Segment
Total
|
Corporate
|
Consolidated
Total
|
|||||||||||||||
Net
sales
|
$
|
47,627,468
|
15,727,141
|
63,354,609
|
-
|
63,354,609
|
||||||||||||||
Income
(loss) from operations
|
18,427,749
|
5,252,071
|
23,679,820
|
(1,590,412
|
)
|
22,089,408
|
||||||||||||||
Total
assets
|
63,513,465
|
17,961,014
|
81,474,479
|
75,507
|
81,549,986
|
|||||||||||||||
Depreciation
and amortization
|
3,043,928
|
382,527
|
3,426,455
|
-
|
3,426,455
|
|||||||||||||||
Capital
expenditures
|
10,529,286
|
6,835,909
|
17,365,195
|
-
|
17,365,195
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
Reconciliations
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Total
segment operating income
|
$
|
11,298,523
|
$
|
5,465,194
|
$
|
32,865,828
|
$
|
23,679,820
|
||||||||
Corporate
overhead expenses
|
(160,654
|
)
|
(382,160
|
)
|
(836,152
|
)
|
(1,590,412
|
)
|
||||||||
Other
income (expense)
|
19,713
|
26,922
|
38,462
|
6,525
|
||||||||||||
Income
tax expense
|
(2,829,772
|
)
|
(1,373,055
|
)
|
(8,235,609
|
)
|
(5,925,532
|
)
|
||||||||
Total
consolidated net income
|
$
|
8,327,810
|
$
|
3,736,901
|
$
|
23,832,529
|
$
|
16,170,401
|
NOTE 15 –
MAJOR SUPPLIER
During
the three and nine months ended September 30, 2009, the Company purchased 20%
and 12% of its raw material from two different suppliers. At
September 30, 2009, amounts due to those suppliers included in accounts payable
were $1,734,846. During the three months and nine months ended September 30,
2008, the Company purchased 62% and 59% of its raw material from three
suppliers. At September 30, 2008, amounts due to those suppliers
included in accounts payable were $2,504,000. This concentration makes the
Company vulnerable to a near-term severe impact, should the relationships be
terminated.
NOTE 16 –
CUSTOMER CONCENTRATION
The
Company sells a substantial portion of its product to a limited number of
customers. During the three months ended September 30, 2009, there were no
customers that represented more than 10% of net revenue. During the nine months
ended September 30, 2009, the Company’s two largest customers aggregated
$16,760,658, or approximately 21% of total net revenue. At September 30, 2009,
amounts due from these customers were $ 1,949,385.
During
the three months ended September 30, 2008, sales to the Company’s two largest
customers, based on net revenue from such customers, aggregated $5,257,000, or
approximately 30% of total net revenue. During the nine months ended
September 30, 2008, the Company’s largest customers aggregated $6,578,000, or
approximately 10% of total net revenue. At September 30, 2008,
amounts due from these customers were $2,309,518.
This
concentration makes the Company vulnerable to a near-term severe impact, should
the relationships be terminated.
GULF
RESOURCES, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2009
(UNAUDITED)
NOTE 17 –
ESTABLISHMENT OF CO-OP RESEARCH AND DEVELOPMENT CENTER
On
September 6, 2007, the Company’s wholly-owned subsidiary, SYCI, and East China
University of Science and Technology formally opened a Co-Op Research and
Development Center. The research center is equipped with state of the art
chemical engineering instruments for the purpose of pursuing targeted research
and development of refined bromide compounds and end products. According to the
Co-op Research Agreement, any research achievement or patents will become assets
of the Company. The Company will provide $500,000 annually during the next five
years to East China University of Science and Technology for research. The
research and development expense recognized during the three months and nine
months ended September 30, 2009 was $125,197 and $375,262. The research and
development expense recognized during the three months and nine months ended
September 30, 2008 was $122,744 and $389,853.
NOTE 18 –
RELATED PARTY TRANSACTIONS
September
30, 2009
|
December
31, 2008
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Shenzhen
Huayin Guaranty and Investment Company Limited Waiver of accrued interest
during first quarter 2008
|
$
|
-
|
$
|
131,533
|
||||
Note
and loan payable – First Capital Limited (Note 7)
|
$
|
-
|
1,650,000
|
|||||
Shenzhen
Huayin Guaranty and Investment Company Limited (Note 7)
|
$
|
-
|
$
|
21,337,493
|
||||
Due
to related party:
|
||||||||
Jiaxing
Lighting (Note 8)
|
$
|
867,900
|
$
|
852,068
|
||||
Haoyuan
Group (Note 8)
|
$
|
(98,810)
|
$
|
-
|
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Forward
Looking Statements
This
quarterly report on Form 10-Q and other reports filed by Gulf Resources, Inc.
(the “Company” or “we”) from time to time with the Securities and Exchange
Commission (collectively the “Filings”) contain or may contain forward-looking
statements and information that are based upon beliefs of, and information
currently available to, the Company’s management as well as estimates and
assumptions made by Company’s management. Readers are cautioned not to place
undue reliance on these forward-looking statements, which are only predictions
and speak only as of the date hereof. When used in the filings, the words
“anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or
the negative of these terms and similar expressions as they relate to the
Company or the Company’s management identify forward-looking statements. Such
statements reflect the current view of the Company with respect to future events
and are subject to risks, uncertainties, assumptions, and other factors,
including the risks contained in the “Risk Factors” section of the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed
with the Securities and Exchange Commission, relating to the Company’s industry,
the Company’s operations and results of operations, and any businesses that the
Company may acquire. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may differ significantly from those anticipated, believed, estimated,
expected, intended, or planned.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and
Stockholders
of Gulf Resources, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Gulf resources, Inc. and
subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the
related consolidated statements of income, comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2008 and 2007, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
As
discussed in Note 1 to the Consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes and Interpretation of FASBStatement No. 109, on January
1, 2007, and as discussed in Note 14 to the Consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards No.
123 (revised 2004), Share-Based Payment, on
January 1, 2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 12, 2009
expressed an adverse opinion thereon.
/s/ Morison
Cogen, LLP
Bala
Cynwyd, Pennsylvania
March 12,
2009
REPORT OF
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING
FIRM
To the
Board of Directors and Shareholders of
Gulf
Resources, Inc. and Subsidiaries
We have
audited the internal control over financial reporting of Gulf Resources, Inc.
and Subsidiaries (the “Company”) as of December 31, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weaknesses were noted during our audit however, in management’s
assessment, management concluded that these deficiencies were not material
weaknesses as of December 31, 2008:
|
1.
|
Insufficient
complement of accounting personnel with the appropriate level of
accounting knowledge, experience and training in the application of
accounting principles generally accepted in the United States commensurate
with financial statement reporting
requirements.
|
|
2.
|
Inability
to timely and properly recognize issuance of share-based
compensation.
|
These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2008 consolidated financial
statements, and this report does not affect our report dated March 12, 2009 on
these financial statements.
In our
opinion, because of the effect of the aforementioned material weakness on the
achievement of the objectives of the control criteria, Gulf Resources, Inc. and
Subsidiaries has not maintained effective internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of the
Company as of and for the year ended December 31, 2008 and our report dated
March 12, 2009 expressed an unqualified opinion on those financial statements
and included an explanatory paragraph regarding the Company’s adoption of new
accounting standards.
/s/
Morison Cogen LLP
Bala
Cynwyd, Pennsylvania
March 12,
2009
GULF RESOURCES , INC.
|
||||||||
AND
SUBSIDIARIES
|
||||||||
CONSOLIDATED
BALANCE SHEET
|
||||||||
Years
ended December,
|
||||||||
2008
|
2007
|
|||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$ | 30,878,044 | $ | 10,773,875 | ||||
Accounts
receivable
|
11,674,645 | 3,945,000 | ||||||
Inventories
|
418,259 | 413,391 | ||||||
Prepaid
expenses
|
- | 145,484 | ||||||
Prepayment
and deposit
|
229,408 | 236,269 | ||||||
Prepaid
land lease
|
15,849 | 13,521 | ||||||
Deferred
tax asset
|
3,453 | - | ||||||
Other
receivable
|
2,641 |
-
|
||||||
Total
Current Assets
|
43,222,299 | 15,527,540 | ||||||
Property,
Plant and Equipment, Net
|
45,399,456 | 30,105,185 | ||||||
Prepaid
land lease, Net of current portion
|
737,711 | 697,107 | ||||||
Total
Assets
|
$ | 89,359,466 | $ | 46,329,832 | ||||
Liabilities
and stockholders’ Equity
|
|
|
||||||
Current
Liabilities
|
||||||||
Bank
Loan
|
- | 3,770,250 | ||||||
Accounts
payable and accrued expenses
|
$ | 4,746,994 | $ | 2,928,248 | ||||
Loan
payable
|
4,034,250 | - | ||||||
Note
and loan payable – related parties
|
4,650,000 | 6,169,500 | ||||||
Due
to related party
|
852,067 | 32,230 | ||||||
Taxes
payable
|
4,269,442 | 1,477,296 | ||||||
Total
Current Liabilities
|
18,552,753 | 14,377,524 | ||||||
Non
Current Liabilities
|
||||||||
Note
payable, net of current portion
|
18,337,493 | 5,484,000 | ||||||
Total
Liabilities
|
36,890,246 | 19,861,524 | ||||||
|
|
|
||||||
Stockholders’
Equity
|
||||||||
PREFERED
STOCK ; $0.001 par value; 1,000,000 shares
|
||||||||
authorized
none outstanding
|
- | - | ||||||
COMMON
STOCK; $0.0005 par value; 400,000,000 shares
|
||||||||
authorized;
99,668,842 shares issued and outstanding
|
49,834 | 49,834 | ||||||
Additional
Paid in Capital
|
13,035,293 | 11,924,616 | ||||||
Retained
Earnings Unappropriated
|
31,817,465 | 11,323,518 | ||||||
Retained
Earnings Appropriated
|
3,223,418 | 1,321,893 | ||||||
Cumulative
Translation Adjustment
|
4,343,210 | 1,848,447 | ||||||
Total
Stockholders’ Equity
|
52,469,220 | 26,468,308 | ||||||
|
|
|
||||||
Total
Liabilities and stockholders’ Equity
|
$ | 89,359,466 | $ | 46,329,832 |
The
accompanying notes are an integral part of these consolidated financial
statements.
GULF RESOURCES , INC.
|
|||||||||||
AND
SUBSIDIARIES
|
|||||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||||||
Years
Ended December 31,
|
|||||||||||
2008
|
2007
|
2006
|
|||||||||
REVENUE
|
|||||||||||
Net
sales
|
$ | 87,488,334 | $ | 53,780,313 | 31,736,216 | ||||||
Maintenance
service income
|
- | 468,337 |
-
|
||||||||
|
87,488,334 | 54,248,650 | 31,736,216 | ||||||||
OPERATING
EXPENSES
|
|||||||||||
Cost
of net revenue
|
(52,302,085 | ) | (32,108,180 | ) | (20,503,829 | ) | |||||
Consulting
fees
|
- | - | (5,344,395 | ) | |||||||
Research
and development cost
|
(514,780 | ) | (268,168 | ) |
-
|
||||||
General
and administrative expenses
|
(4,094,312 | ) | (1,847,374 | ) | (444,771 | ) | |||||
|
(56,911,177 | ) | (34,223,722 | ) | (26,292,995 | ) | |||||
INCOME
FROM OPERATIONS
|
30,577,157 | 20,024,928 | 5,443,221 | ||||||||
OTHER
INCOME (EXPENSES)
|
|
|
|
||||||||
Interest
expense
|
(60,111 | ) | (161,577 | ) | - | ||||||
Rental
income
|
-
|
15,801 |
-
|
||||||||
Sundry
income
|
(3,764 | ) | 97,524 | 246,493 | |||||||
Interest
income
|
94,129 | 54,969 | 5,990 | ||||||||
30,254 | 6,717 | 252,483 | |||||||||
INCOME
BEFORE INCOME TAXES
|
30,607,411 | 20,031,645 | 5,695,704 | ||||||||
INCOME
TAXES
|
(8,211,939 | ) | (7,798,682 | ) | (1,884,244 | ) | |||||
NET
INCOME
|
$ | 22,395,472 | $ | 12,232,963 | 3,811,460 | ||||||
EARNINGS
PER SHARE
|
|
|
|
||||||||
BASIC
|
$ | 0.22 | $ | 0.13 | $ | 0.04 | |||||
DILUTED
|
$ | 0.22 | $ | 0.13 | $ | 0.04 | |||||
WEIGHTED
AVERAGE NUMBER OF SHARES
|
|
|
|
||||||||
BASIC
|
99,668,842 | 96,688,504 | 86,410,880 | ||||||||
DILUTED
|
99,668,842 | 96,688,504 | 86,410,880 |
The
accompanying notes are an integral part of these consolidated financial
statements.
GULF RESOURCES, INC.
|
||||||||||||
AND
SUBSIDIARIES
|
||||||||||||
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
|
||||||||||||
Years
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
NET
INCOME
|
$ | 22,395,472 | $ | 12,232,963 | $ | 3,811,460 | ||||||
|
|
|
||||||||||
OTHER
COMPREHENSIVE INCOME
|
|
|
|
|||||||||
Foreign
currency translation adjustment
|
2,494,763 | 1,480,056 | 227,906 | |||||||||
|
|
|
||||||||||
COMPREHENSIVE
INCOME
|
$ | 24,890,235 | $ | 13,713,019 | $ | 4,039,366 |
The
accompanying notes are an integral part of these consolidated financial
statements.
GULF RESOURCES, INC.
|
||||||||||||||||||||||||||||||||
AND
SUBSIDIARIES
|
||||||||||||||||||||||||||||||||
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||
YEARS
ENDED DECEMBER 31, 2008, 2007 AND 2006
|
||||||||||||||||||||||||||||||||
Statutory
|
Statutory
|
|||||||||||||||||||||||||||||||
Additional
|
Common
|
Public
|
Cumulative
|
|||||||||||||||||||||||||||||
Number
|
Common
|
Paid-in
|
Reserve
|
Welfare
|
Retained
|
Translation
|
||||||||||||||||||||||||||
of
Shares
|
Stock
|
Capital
|
Fund
|
Fund
|
Earnings
|
Adjustment
|
Total
|
|||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
BALANCE
AT
DECEMBER 31, 2005 |
85,376,236 | $ | 42,688 | $ | 1,733,304 | $ | 696,719 | $ | 348,359 | $ | 5,918,390 | $ | 140,485 | $ | 8,879,945 | |||||||||||||||||
Issue
of share capital at merger
|
1,034,644 | 517 | (517 | ) | - | - | - | - | - | |||||||||||||||||||||||
Capital
Contribution
|
- | - | 936,030 | - | - | - | - | 936,030 | ||||||||||||||||||||||||
Net
income for year
|
- | - | - | - | - | 3,811,460 | - | 3,811,460 | ||||||||||||||||||||||||
Dividend
distribution
|
- | - | - | - | - | (5,622,880 | ) | - | (5,622,880 | ) | ||||||||||||||||||||||
Transfer
to reserve funds
|
- | - | - | 381,145 | 190,573 | (571,718 | ) | - | - | |||||||||||||||||||||||
Cumulative
translation adjustment
|
- | - | - | - | - | - | 227,906 | 227,906 | ||||||||||||||||||||||||
BALANCE
AT
DECEMBER 31, 2006 |
86,410,880 | $ | 43,205 | $ | 2,668,817 | $ | 1,077,864 | $ | 538,932 | $ | 3,535,252 | $ | 368,391 | $ | 8,232,461 | |||||||||||||||||
Common
stock issues as payment for accrued expenses
|
9,979,800 | 4,990 | 5,339,405 | - | - | - | - | 5,344,395 | ||||||||||||||||||||||||
Common
stock issuance for prepaid expenses
|
900,000 | 450 | 892,050 | - | - | - | - | 892,500 | ||||||||||||||||||||||||
Common
stock issuance for acquiring assets
|
1,558,572 | 779 | 1,986,400 | - | - | - | - | 1,987,179 | ||||||||||||||||||||||||
Common
stock issuance for acquiring assets
|
819,590 | 410 | 940,890 | - | - | - | - | 941,300 | ||||||||||||||||||||||||
Issuance
of stock options
|
- | - | 97,054 | - | - | - | - | 97,054 | ||||||||||||||||||||||||
Transfer
from Statutory Public Welfare Fund
|
- | - | - | 538,932 | (538,932 | ) | - | - | - | |||||||||||||||||||||||
Transfer
from Statutory Common Reserve Fund
|
- | - | - | (294,903 | ) | - | 294,903 | - | - | |||||||||||||||||||||||
Cumulative
translation adjustment
|
- | - | - | - | - | - | 1,480,056 | 1,480,056 | ||||||||||||||||||||||||
Dividend
distribution
|
- | - | - | - | - | (4,739,600 | ) | - | (4,739,600 | ) | ||||||||||||||||||||||
Net
income for year ended December 31, 2007
|
- | - | - | - | - | 12,232,963 | - | 12,232,963 | ||||||||||||||||||||||||
BALANCE
AT
DECEMBER 31, 2007 |
99,668,842 | $ | 49,834 | $ | 11,924,616 | $ | 1,321,893 | $ | - | $ | 11,323,518 | $ | 1,848,447 | $ | 26,468,308 | |||||||||||||||||
Cumulative
translation
adjustment
|
- | - | - | - | - | - | 2,494,763 | 2,494,763 | ||||||||||||||||||||||||
Waiver
of accrued interest
|
- | - | 131,533 | - | - | - | - | 131,533 | ||||||||||||||||||||||||
Issuance
of stock options
|
- | - | 28,500 | - | - | - | - | 28,500 | ||||||||||||||||||||||||
Issuances
of warrants for consulting expenses
|
- | - | 950,644 | - | - | - | - | 950,644 | ||||||||||||||||||||||||
Transfer
to Statutory Common Reserve Fund
|
- | - | - | 1,901,525 | - | (1,901,525 | ) | - | - | |||||||||||||||||||||||
Net
income for year ended December 31,2008
|
- | - | - | - | - | 22,395,472 | - | 22,395,472 | ||||||||||||||||||||||||
BALANCE
AT
DECEMBER 31,2008 |
99,668,842 | $ | 49,834 | $ | 13,025,293 | $ | 3,223,418 | $ | - | $ | 31,817,465 | $ | 4,343,210 | $ | 52,469,220 |
The
accompanying notes are an integral part of these consolidated financial
statements.
GULF RESOURCES, INC.
|
||||||||||||
AND
SUBSIDIARIES
|
||||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
Years
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|||||||||
Net
income
|
$ | 22,395,472 | $ | 12,232,963 | $ | 3,811,460 | ||||||
Adjustments
to reconcile net income
|
|
|
|
|||||||||
Net
cash provided by operating activities
Amortization
of warrants and options
|
979,144 | - | - | |||||||||
|
|
|
||||||||||
Amortization
of prepaid expenses
|
145,484 | 747,016 | - | |||||||||
Depreciation
and amortization
|
4,727,865 | 1,298,451 | 283,454 | |||||||||
Stock-based
compensation expense
|
- | 97,054 | - | |||||||||
(Increase)
decrease in assets
|
-
|
-
|
-
|
|||||||||
Accounts
receivable
|
(7,203,377 | ) | (2,347,199 | ) | (915,152 | ) | ||||||
Inventories
|
49,955 | 86,336 | 440,239 | |||||||||
Prepaid
expense
|
- | - | (558,787 | ) | ||||||||
Prepayment
and deposit
|
(588,542 | ) | (226,911 | ) | 29,822 | |||||||
Deferred
tax
|
(3,448 | ) | - | |||||||||
Income
tax receivable
|
- | - | (1,088,359 | ) | ||||||||
Increase
(decrease) in liabilities
|
-
|
-
|
|
|||||||||
Accounts
payable and accrued expenses
|
1,788,969 | 2,014,738 | 5,662,627 | |||||||||
Taxes
payable
|
2,604,784 | 2,065,580 | (1,248,108 | ) | ||||||||
Net
cash provided by operating activities
|
24,896,306 | 15,968,028 | 6,417,196 | |||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|||||||||
Property,
plant and equipment
|
(17,365,195 | ) | (22,679,319 | ) | (1,573,003 | ) | ||||||
|
|
|
||||||||||
Net
cash used in investing activities
|
(17,365,195 | ) | (22,679,319 | ) | (1,573,003 | ) | ||||||
|
|
|
||||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Advances
to director
|
- | - | (121,829 | ) | ||||||||
Capital
contribution
|
-
|
50,000 | 936,523 | |||||||||
Proceeds
from bank loan
|
- | 3,620,925 | - | |||||||||
Proceeds
from loan payable
|
4,023,250 | - | - | |||||||||
Advances
from/(to) related party
|
852,105 | 1,213,049 | (18,835 | ) | ||||||||
Proceeds
from issuance of notes and loan payable - related parties
|
10,240,800 | 11,191,950 | - | |||||||||
Repayment
on bank loan
|
(3,843,675 | ) | - | |||||||||
Dividends
paid
|
-
|
(4,739,600 | ) | (5,675,764 | ) | |||||||
Net
cash provided by (used in) financing activities
|
11,272,480 | 11,336,324 | (4,879,905 | ) | ||||||||
EFFECTS
OF EXCHANGE RATE CHANGE ON CASH
|
1,300,578 | 456,234 | 185,931 | |||||||||
NET
INCREASE IN CASH & CASH EQUIVALENT
|
20,104,169 | 5,081,267 | 150,219 | |||||||||
CASH
& CASH EQUIVALENT - BEGINNING OF YEAR
|
10,773,875 | 5,692,608 | 5,542,389 | |||||||||
CASH
& CASH EQUIVALENT - END OF YEAR
|
$ | 30,878,044 | $ | 10,773,875 | $ | 5,692,608 |
The
accompanying notes are an integral part of these consolidated financial
statements.
GULF
RESOURCES, INC.
|
||||||||||||
AND
SUBSIDIARIES
|
||||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
|
||||||||||||
Years
Ended December 31,
|
||||||||||||
2008
|
2007
|
2006
|
||||||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|||||||||
Cash
Paid during the period for:
|
|
|
|
|||||||||
Income
taxes
|
$ | 6,813,943 | $ | 6,123,070 | $ | 4,637,792 | ||||||
Interest
paid
|
59,976
|
-
|
-
|
|||||||||
SUPPLEMENTAL
DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
|
|
|
|
|||||||||
Waiver of accrued interest
|
$
|
131,533
|
$
|
-
|
$
|
-
|
||||||
Issuance
of common stock as payment for accrued expenses
|
$
|
-
|
$ | 5,344,395 | $ | - | ||||||
|
|
|
||||||||||
Issuance
of common stock for prepaid expenses
|
$
|
-
|
$
|
892,500 | $ | - | ||||||
|
|
|
||||||||||
Issuance
of common stock for acquiring assets
|
$
|
-
|
$
|
2,928,479 | $ | - | ||||||
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
GULF RESOURCES , INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 1 –
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
Upper
Class Group Limited was incorporated with limited liability in the British
Virgin Islands on July 28, 2006 and was inactive until October 9, 2006 when
Upper Class Group Limited acquired all the issued and outstanding stock of
Shouguang City Haoyuan Chemical Company Limited (“SCHC”). SCHC is an
operating company incorporated in Shouguang City, Shangdong Province, the
People’s Republic of China (the “PRC”) on May 18, 2005. SCHC is
engaged in manufacturing and trading bromine and crude salt in
China. Since the ownership of Upper Class Group Limited and SCHC were
the same, the merger was accounted for as a transaction between entities under
common control, whereby Upper Class Group Limited recognized the assets and
liabilities transferred at their carrying amounts.
On
December 12, 2006, Gulf Resources, Inc. (formerly Diversifax, Inc.), a public
“shell” company, acquired Upper Class Group Limited and its wholly-owned
subsidiary, SCHC (together “Upper Class”). Under the terms of the
agreement, all stockholders of Upper Class received a total amount of 26,500,000
shares of voting common stock of Gulf Resources, Inc. in exchange for all shares
of Upper Class’ common stock held by all stockholders. Under
accounting principles generally accepted in the United States, the share
exchange is considered to be a capital transaction in substance, rather than a
business combination. That is, the share exchange is equivalent to
the issuance of stock by Upper Class for the net monetary assets of Gulf
Resources, Inc., accompanied by a recapitalization, and is accounted for as a
change in capital structure. Accordingly, the accounting for the share exchange
will be identical to that resulting from a reverse acquisition, except no
goodwill will be recorded. Under reverse takeover accounting, the
post reverse acquisition comparative historical financial statements of the
legal acquirer, Gulf Resources, Inc., are those of the legal acquiree, Upper
Class, which is considered to be the accounting acquirer. Share and
per share amounts stated have been retroactively adjusted to reflect the
merger.
On
February 5, 2007, Upper Class acquired Shouguang Yuxin Chemical Industry Co.,
Limited (“SYCI”) incorporated in PRC on October 30, 2000. SYCI
manufactures chemical products utilized in oil and gas field explorations and as
papermaking chemical agents. Under the terms of the merger agreement, all
stockholders of SYCI received a total amount of 16,188,118 shares of voting
common stock of Gulf Resources, Inc. in exchange for all shares of SYCI’s common
stock held by all stockholders. Also, upon the completion of
the merger, Gulf Resources, Inc. paid a $2,550,000 dividend to the original
stockholders of SYCI. Since the ownership of Gulf Resources, Inc. and
SYCI are substantially the same, the merger was accounted for as a transaction
between entities under common control, whereby Gulf Resources, Inc. recognized
the assets and liabilities of the Company transferred at their carrying
amounts. Share and per share amounts stated have been retroactively
adjusted to reflect the merger.
On
November 11, 2007, Upper Class formed Hong Kong Jiaxing Industrial Limited
(formerly known as Jiaxing Technology Limited) (“HKJI”), a wholly-owned
subsidiary of Upper Class, in Hong Kong. Upper Class transferred the net assets
of SCHC to HKJI.
Nature of the
Business
The
Company manufactures and trades bromine and crude salt through its SCHC
subsidiary, and manufactures chemical products for use in the oil industry and
paper manufacturing industry through its SYCI subsidiary.
Basis of
Consolidation
The
consolidated financial statements include the accounts of Gulf Resources, Inc.
and its wholly-owned subsidiaries, Upper Class Group Limited, SCHC, SYCI and
HKJI (collectively the “Company”). All material intercompany
transactions have been eliminated in 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.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
1 – NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
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 and the related disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances. Accordingly, actual results may differ significantly from these
estimates under different assumptions or conditions.
Cash and Cash
Equivalents
Cash and
cash equivalents consist of all cash balances and highly liquid investments with
maturities of three months or less.
Accounts
Receivable
Accounts
receivable is stated at cost, net of allowance for doubtful accounts. As
of December 31, 2008, 2007 and 2006 the Company considered all accounts and
other receivables collectable and has not recorded an allowance for doubtful
accounts .
Concentration of Credit
Risk
Concentrations
of credit risk with respect to accounts receivable 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 net realizable value. Costs of work-in-progress and finished goods are
composed of direct materials, direct labor and an attributable portion of
manufacturing overhead. Net realizable value is based on estimated selling price
less selling expenses.
Property, Plant and
Equipment
Property,
Plant and Equipment is 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 50
year 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 are as
follows:
Useful
life
(in
years)
|
|
Mineral
rights
|
Lower
of the period of lease or 50 years
|
Buildings
|
20
|
Machinery
|
8
|
Motor
vehicles
|
5
|
Equipment
|
8
|
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
1 – NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Asset Retirement
Obligation
The
Company follows SFAS No. 143, “Accounting for Asset Retirement Obligations”
(“SFAS No. 143”), which established a uniform methodology for accounting for
estimated reclamation and abandonment costs. SFAS No. 143 requires the fair
value of a liability for an asset retirement obligation to be recognized in the
period in which the legal obligation associated with the retirement of the
long-lived asset is incurred. When the liability is initially recorded, the
offset is capitalized by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of
the related asset. To settle the liability, the obligation is paid, and to
the extent there is a difference between the liability and the amount of cash
paid, a gain or loss upon settlement is recorded. Currently, there are no
reclamation or abandonment obligations associated with the land being utilized
for exploitation.
Recoverability of Long Lived
Assets
The
Company follows SFAS No. 144, ”Accounting for the Impairment of Disposal of
Long-Lived Assets.” The Statement requires that 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 to the Company’s
annual financial statements.
Mineral
Rights
The
Company follows FASB Staff Position amending SFAS No. 142 and No. 144 which
provide 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.
Fair Value of Financial
Instruments
Statement
of Financial Accounting Standards No. 107, “Disclosures about Fair Values of
Financial Instruments”, requires disclosing fair value to the extent practicable
for financial instruments that are recognized or unrecognized in the balance
sheet. The fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or settled, nor
does the fair value amount consider the tax consequences of realization or
settlement.
For
certain financial instruments, including cash, accounts and other receivables,
accounts payable, short-term loans, accruals and other payables, it was assumed
that the carrying amounts approximate fair value because of the near term
maturities of such obligations. The carrying amounts of long-term loans payable
approximate fair value since the interest rate associated with the debt
approximates the current market interest rate
Reporting Currency and
Translation
The
Company’s functional currency is Renminbi (“RMB”); 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
In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) No. 104, 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.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
1 – NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Income
Taxes
The
Company uses the asset and liability method of accounting for income taxes
pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the
asset and liability method of SFAS No. 109, 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 follows Emerging Issues Task Force No. 00-10, “Accounting for 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. For the years
ended December 31, 2008 and 2007,2006 shipping and handling costs were $424,819
and $384,868, and $492,749
Basic and Diluted Net Income
per Share of Common Stock
In
accordance with Financial Accounting Standards No. 128, “Earnings per Share”,
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.
Reclassification
Certain
prior year amounts on the balance sheet and statement of cash flow have been
reclassified to conform with current year presentation. These
reclassification had no effect on previously reported results of operation or
financial position.
Recently Adopted Accounting
Pronouncements
FIN 48 – Accounting for
Uncertainty in Income Taxes
In June
2006, the Financial Accounting Standard Board (“FASB”) issued Interpretation No.
48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes
detailed guidance for the financial statement recognition, measurement and
disclosure of uncertain tax positions recognized in an enterprise’s financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. Tax positions must meet a more-likely-than-not recognition threshold at
the effective date to be recognized upon the adoption of FIN 48 and in
subsequent periods. The provisions of FIN 48 are to be applied
to all tax positions under Statement No. 109 upon initial
adoption. The cumulative effect of applying the provisions of this
interpretation is to be reported as an adjustment to the opening balance of
retained earnings for that fiscal year. FIN 48 was effective for
fiscal years beginning after December 15, 2006. The Company adopted FIN 48
effective January 1, 2007. The adoption of FIN 48 did not require an adjustment
to the opening balance of retained earnings as of January 1, 2007.
SFAS No. 157 – Fair Value
Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No.
157 establishes a framework for measuring fair value and expands disclosures
about fair value measurements. The changes to current practice resulting from
the application of this statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued FSP No. SFAS 157-2,
Effective Date of FASB Statement No. 157, which provides a one-year deferral of
the effective date of SFAS No. 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Therefore the Company has adopted
the provisions of SFAS No. 157 with respect to its financial assets and
liabilities only. However, the Company does not anticipate that the full
adoption of SFAS 157 will significantly impact their consolidated financial
statements.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
1 – NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
SFAS No. 159 – The Fair
Value Option for Financial Assets and Financial Liabilities
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This statement permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company adopted SFAS No. 159 on January
1, 2008, and did not elect the fair value option for any of its assets or
liabilities.
SFAS No. 162 – The Hierarchy
of Generally Accepted Accounting Principles
In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The
Hierarchy of Generally Accepted Accounting Principles (“FAS 162"). This Standard
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles. FAS 162 directs the hierarchy to the entity,
rather than the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with generally accepted accounting principles. Effective November 15, 2008, the
Company adopted SFAS No.162, which did not have any impact on the Company’s
financial statements.
Recently Issued Accounting
Pronouncements Not Yet Adopted
SFAS No. 160 –
Noncontrolling interest in Consolidated Financial Statements
On
December 4, 2007, the FASB issued SFAS No. 160, Non-controlling interest in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160
requires all entities to report non-controlling (minority) interests in
subsidiaries as equity in the consolidated financial statements. The statement
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation and expands
disclosures in the consolidated financial statements. SFAS No. 160 is effective
for fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. The Company has not yet determined the impact of
the adoption of SFAS No. 160 on its consolidated financial statements and
footnote disclosures.
SFAS No. 141R – Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. This statement
is effective for the Company beginning January 1, 2009 and will change the
accounting for business combinations on a prospective basis.
SFAS No. 161 – Disclosures
about Derivative Instruments and Hedging
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, which is effective January 1, 2009. SFAS 161 requires
enhanced disclosures about derivative instruments and hedging activities to
allow for a better understanding of their effects on an entity’s financial
position, financial performance, and cash flows. Among other things, SFAS 161
requires disclosures of the fair values of derivative
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE
1 – NATURE
OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
instruments
and associated gains and losses in a tabular formant. SFAS 161 is not currently
applicable to the Company since the Company does not have derivative instruments
or hedging activity.
FSA 142-3 – Determination of
the Useful Life of Intangible Assets
In April
2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. This Staff Position is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
Company is currently evaluating the impact that FSP No. 142-3 will have on its
consolidated financial statements.
EITF 03-6-1 – Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities
In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted
in Share-Based Payment Transactions are Participating Securities. This FSP
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities and shall be included in the computation of earnings
per share pursuant to the two-class method. The Company does not currently have
any share-based awards that would qualify as participating securities.
Therefore, application of this FSP is not expected to have an effect on the
Company's financial reporting.
APB 14-1 – Accounting for
Convertible Debt That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) (“FSP 14-1”)
In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for
Convertible Debt That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) ("FSP 14-1"). FSP 14-1 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008. The FSP
includes guidance that convertible debt instruments that may be settled in cash
upon conversion should be separated between the liability and equity components,
with each component being accounted for in a manner that will reflect the
entity's nonconvertible debt borrowing rate when interest costs are recognized
in subsequent periods. FSP 14-1 is currently not applicable to the Company since
the Company does not have any convertible debt.
EITF 07-05 – Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock
In June
2008, the FASB issued EITF Issue No. 07-05, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity’s Own Stock (“EITF Issue No.
07-05”) which is effective for financial statements for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal
years. The Issue addresses the determination of whether an instrument
(or an embedded feature) is indexed to an entity’s own stock, which is the first
part of the scope exception in Paragraph 11(a) of SFAS No. 133 for the purpose
of determining whether the instrument is classified as an equity instrument or
accounted for as a derivative instrument which would be recognized either as an
asset or liability and measured at fair value. The guidance shall be
applied to outstanding instruments as of the beginning of the fiscal year in
which this Issue is initially applied. Any debt discount that was
recognized when the conversion option was initially bifurcated from the
convertible debt instrument shall continue to be amortized. The
cumulative effect of the change in accounting principles shall be recognized as
an adjustment to the opening balance of retained earnings. The
Company is currently evaluating the impact of EITF Issue No. 07-05 on its
consolidated financial statements and footnote disclosure.
NOTE 2 –
ASSETS ACQUISITIONS
On April
7, 2007, the Company’s wholly owned subsidiary, SCHC, acquired assets from Mr.
Wenbo Yu (the “Yuwenbo property” or “Factory No. 2”) in exchange for 1,558,572
newly issued shares of the Company’s common stock valued at $1,987,179 and
$3,076,923 in cash. Factory No. 2 includes a 50 year mineral rights
and land lease covering 1,846 acres of real property through December 2052, with
approximately 230,000 metric tons of non-reserve mineralized materials of
bromine and 575 wells, as well as the related production facility, the
pipelines, other production equipment, and the buildings located on the
property.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 2 –
ASSETS ACQUISITIONS (Continued)
On June
8, 2007, SCHC acquired assets from Mr. Donghua Yang (the “Yangdonghua property”
or “Factory No. 3”) in exchange for 819,590 newly issued shares of the Company’s
common stock valued at $941,300 and $4,837,233 in cash and an interest-free
promissory note in the aggregate principal amount of $889,005, with a maturity
date of July 8, 2007. The Company issued the promissory note, and the
promissory note was fully paid in June 2007. Factory No. 3 include a
50-year mineral rights and land lease covering 2,318 acres of real property
through April 2052, with non-reserve mineralized materials of approximately
280,000 metric tons of bromine and 405 wells, and the related production
facility, the pipelines, other production equipment, and the buildings located
on the property.
On
October 25, 2007, SCHC acquired substantially all of the assets of Shouguang
City Renjia Area (the “Wangjiancai property” or Factory No. 4”), a bromine
producer located in close proximity to SCHC for $6,399,147 in total cash
consideration. Factory No. 4 includes a 50-year mineral rights and
land lease covering 2,165 acres through April, 2052, which has been paid in the
full. The property has approximately 225,000 metric tons of non-reserve
mineralized materials of bromine and. Additional assets to be conveyed with the
purchase include the related production facility, wells, pipelines and other
production equipment, in addition to the current buildings and other assets on
the property.
On
October 26, 2007, SCHC acquired substantially all of the assets of Shouguang
City Houxing Area (the “Liuxingji Assets” or “Factory No. 5”), a bromine
producer located in close proximity to SCHC for $6,665,778 in total cash
consideration. Factory No. 5 includes a 50-year mineral rights and land lease
covering 2,310 acres through April 2052, which has been paid in the full. The
property has approximately 240,000 metric tons of non-reserve mineralized
materials of bromine. Additional assets to be conveyed with the purchase include
the related production facility, wells, pipelines and other production
equipment, in addition to the current buildings and other assets on the
property.
On
January 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.
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 Factory No. 2, the assets had not been
operational for nine months; with respect to Factory No. 3, the assets had not
been operational for eleven months; with respect to Factory No. 4 and No. 5, the
assets had not been operational for fifteen months; with respect to Factory No.
6, the assets had not been operational for eighteen months.
In
accordance with Emerging Issues Task Force No.98-3 “Determining Whether a Non
Monetary Transactions Involves Receipt of Productive Assets of a Business”, the
Company recorded the above transactions as purchase of assets.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 3 –
INVENTORY
Inventory
consists of:
Years
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Raw
Material
|
$ | 202,435 | $ | 310,548 | ||||
Finished
Goods
|
229,638 | 102,843 | ||||||
Allowance for obsolete and slow moving inventory | (13,814 | ) | - | |||||
|
$ | 418,259 | $ | 413,391 |
There was
$ 13,814 allowance made for obsolete or slow moving inventory as of December 31,
2008, no allowance made for obsolete or slow moving inventory as of December 31,
2007
NOTE 4 –
PREPAID LAND LEASE
The
Company prepaid for land leases for a period of fifty years to use the land on
which the office premises, production facilities and warehouse of the Company
are situated.
NOTE 5 –
INCOME TAX RECEIVABLE
The
Income tax receivable of $1,111,154 in Shouguang City Haoyuan Chemical Company
Limited in 2006 was not fully refunded. As a result, $707,000 was recognized as
the Income taxes expense in 2007
NOTE 6 –
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment, net consist of the following :
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
At
cost:
|
||||||||
Mineral
rights
|
$
|
5,840,594
|
4,221,059
|
|||||
Buildings
|
6,410,813
|
2,379,252
|
||||||
Plant
and machinery
|
37,619,002
|
24,280,820
|
||||||
Motor
vehicles
|
57,947
|
54,154
|
||||||
Furniture,
fixtures and office equipment
|
2,353,789
|
1,120,058
|
||||||
Total
|
52,282,144
|
32,055,343
|
||||||
Less:
accumulated depreciation and amortization
|
6,882,688
|
1,950,158
|
||||||
Net
book value
|
$
|
45,399,456
|
30,105,185
|
There
were no impairment provisions made at December 31, 2008 and 2007
During
the year ended December 31, 2008, depreciation and amortization expense totaled
$4,727,865 of which $ 4,584,072 and $ 143,793 were recorded as cost of sales and
administrative expenses, respectively.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 7 –
LOAN PAYABLE
This
amount is interest free with no fixed terms of repayment, and not secured
against the company’s assets. This amount is owed to a non-related
party
NOTE 8 –
BANK LOAN
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
Bank
borrowing from Citibank (China) Company Limited Shanghai Branch of
$3,770,250 was due March 30, 2008 at the prevailing interest rate
regulated by The People’s Bank of China minus 5% from October 31, 2007 to
March 30, 2008, guaranteed by a shareholder, Shenzhen Huayin Guaranty and
Investment Company Limited.
|
$ | - | $ | 3,770,250 |
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 9 –
NOTES AND LOAN PAYABLE – RELATED PARTIES
December
31,
|
December
31,
|
||||||||
2008
|
2007
|
||||||||
Note
payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
Limited with interest at 3.33% per annum from March 20, 2007 to March 19,
2008 and was due on March 19, 2008. In March 2008, this amount was
consolidated as part of the $ 18,337,493 loan
|
- | 6,169,500 | |||||||
Note
payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
Limited is unsecured, non-interest bearing, pursuant to an agreement
which, as is Chinese custom, states that the loan need not be paid in the
immediate future. The Company believes the earliest the loan would be
required to be repaid is January 2011. This loan is denominated in
RMB.
|
18,337,493 | 5,484,000 | |||||||
Note
payable to a stockholder, Shenzhen Huayin Guaranty and Investment Company
Limited is unsecured, non-interest bearing and is due May 2009. The loan
is denominated in US dollars.
|
3,000,000 | - | |||||||
Loan
from a stockholder First Capital Limited is unsecured, non-interest
bearing with no fixed term of repayment.
|
1,650,000 |
-
|
|||||||
|
|
||||||||
Total
loans
|
22,987,493 | 11,653,500 | |||||||
Less:
current portion
|
(4,650,000 | ) | (6,169,500 | ) | |||||
Long-term
loans, less current portion
|
$ | 18,337,493 | $ | 5,484,000 | |||||
Future
maturities of notes payable-related parties are as
follows:
|
|
|
|||||||
2009
|
|
$ | - | $ | - | ||||
2010
|
- | - | |||||||
2011
|
|
18,337,493 |
5,484,000
|
||||||
Total
|
$ | 18,287,493 | $ | 5,484,000 |
During
the three months ended March 31, 2008, Shenzhen Huayin Guaranty and Investment
Company Limited, a stockholder, waived $131,533 of accrued interest, which was
recorded as a credit to additional paid in capital.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 10 –
DUE TO A RELATED PARTY
Amounts
represent payables due to a company whose stockholder and director is also a
stockholder and director of the company
Due
to related parties consists of the following:
|
||||||||
December
31,
|
December
31,
|
|||||||
2008
|
2007
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Advance
from major stockholder - First Capital Limited
|
$ | - | $ | 32,230 | ||||
Due
to related company - Jiaxing Lighting
|
852,067 | - | ||||||
$ | 852,067 | $ | 32,230 |
The
$32,230 due to related party represents advance from major
stockholder. The $852,067 due to related company represents funds
received from Jiaxing Lighting for investment purpose in SCHC. Mr.
Ming Yang, CEO of the Company, is the director and shareholder of Jiaxing
Lighting. Advance from major stockholder and balances due to related company are
unsecured, non-interest bearing and have no fixed repayment terms.
NOTE 11 –
TAXES PAYABLE
Taxes
payable consists of the following:
|
||||||||
As
of December 31,
|
||||||||
2008
|
2007
|
|||||||
Income
tax payable
|
$ | 2,329,227 | $ | 798,090 | ||||
Mineral
resource compensation fee payable
|
291,861 | |||||||
Value
added tax payable and others
|
1,6548,354 | 679,206 | ||||||
Total
|
$ | 4,269,442 | $ | 1,477,296 |
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 12 –
RETAINED EARNINGS – APPROPRIATED
In
accordance with the relevant PRC regulations and the Company’s Articles of
Association, the Company is required to allocate its profit after tax to the
following reserves:
Statutory Common Reserve
Funds
SCHC and
SYCI are required each year to transfer 10% of the profit after tax as reported
under the PRC statutory financial statements to the Statutory Common Reserve
Funds until the balance reaches 50% of the registered share
capital. This reserve can be used to make up any loss incurred or to
increase share capital. Except for the reduction of losses incurred,
any other application should not result in this reserve balance falling below
25% of the registered capital. Due to the increase in capital contribution in
SCHC in 2008, the statutory common Reserve Fund as of December 31, 2008 is 40%
of its registered capital after the 10% allocation of its net profit after tax
to the reserve.
Statutory Public Welfare
Funds
Prior to
January 1, 2007, SCHC and SYCI were required each year to transfer 5% of the
profit after tax as reported under the PRC statutory financial statements to the
Statutory public welfare funds. This reserve was restricted to
capital expenditure for employees’ collective welfare facilities that are owned
by the Company. The Statutory public welfare funds are not available
for distribution to the stockholders (except on liquidation). Once
capital expenditure for staff welfare facilities has been made, an equivalent
amount must be transferred from the Statutory public welfare funds to the
discretionary common reserve funds. Due to a change in the PRC
Company Law, appropriation of profit to the Statutory Public Welfare Fund is no
longer required. Therefore, the balance in the Statutory Public
Welfare Fund was transferred to the Statutory Common Reserve Fund on January 1,
2007.
NOTE 13 –
COMMON STOCK
Effective
November 28, 2007, the Company affected a two for one stock split. All shares
and per share amount for all periods presented have been adjusted to reflect the
stock split.
In March
2007, the Company issued 9,979,800 shares of its common stock as payment for
$5,344,395 of accrued consulting expenses.
In March
2007, the Company issued 900,000 shares of its common stock, valued at $892,500
(fair value), for two consulting contracts, one that expired on December 31,
2007 and one that expires in March 2008. These issuances were recorded in
prepaid expenses on the balance sheet and expensed over the terms of the
contracts.
In April
2007, the Company issued 1,558,572 shares of its common stock, valued at
$1,987,179 (fair value), to acquire assets owned by Mr. Wenbo Yu, (Note
2).
In June
2007, the Company issued 819,590 shares of its common stock, valued at $941,300
(fair value), to acquire assets owned by Mr. Donghua Yang, (Note
2).
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 14 –
STOCK-BASED COMPENSATION
On
January 1, 2006, the Company adopted SFAS No. 123R (revised 2004), “Share-Based
Payment” (“SFAS No. 123R”), using the modified prospective method as permitted
under SFAS No. 123R. Under this transition method, compensation cost
recognized in 2006 includes compensation cost for all share-based payments
granted prior to, but not yet vested as of, December 31, 2005, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123R. In accordance with the modified prospective method of adoption,
the Company’s results of operations and financial position for prior periods
have not been restated. There were no share-based payments granted prior to 2007
and therefore there were no unrecognized compensation cost as of December 31,
2006
During
the year ended December 31, 2007, the Company’s net income was reduced by
approximately $97,054,due to stock-based compensation expense as a result of the
adoption of SFAS No. 123R and the issuance of stock options, as shown below.
There was no stock granted during the year ended December 31, 2006.
The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an option award, with the following assumptions: no dividend
yield, expected volatility of 68%, and a risk-free interest rate of 4.2%. In
determining volatility of the Company’s options, the Company used the average
volatility of the Company’s stock.
In the
fourth quarter of 2007, the Company granted to two Board members options to
purchase a total of 100,000 shares of the Company’s common stock at an exercise
price averaging $2.025 per share and the options vested
immediately.
The
vesting of the options is the contingent on the continued participation as a
Board of Director. The option expires in three years. Based on the Black-Scholes
option pricing model, the options were valued at $97,054. In accordance with
SFAS No. 123R, the Company has recorded stock-based compensation expense during
the year ended December 31, 2007 of $97,054 in connection with the issuance of
these options.
Common
stock, stock options and common stock warrants issued to other than employees or
directors are recorded on the basis of their fair value, as required by SFAS No.
123(R), which is measured as of the date required by EITF Issue 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.” In
accordance with EITF 96-18, the stock options or common stock warrants are
valued 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.
The Company
issued 1,000,000 warrants on February 5, 2008 at a price of $2.51 per share as
part of a consulting agreement with its investor relations firm. The warrants
were valued using the Black-Scholes option-pricing model with assumed
86% volatility, a three year expiration term, a risk free rate of 3% and a
dividend yield of 0%. These warrants may be exercised through the third
anniversary of the date of the agreement , and vested in 12 quarterly
installments in equal amounts beginning in the second quarter of 2008. The
consulting expense is recognized on a straight line basis over the one year
period of the related consulting agreement. The related expense for the period
ended December 31,2008 is $923,454.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 14 –
STOCK-BASED COMPENSATION (Continued)
The Company
issued 100,000 warrants on August 1, 2008 at a price of $1.20 per share as part
of a consulting agreement with its investor relations firm. These options fully
vest on August 1, 2009. The warrants were valued at $65,000 using the
Black-Scholes option-pricing model with assumed 1,430% volatility, a
four year expiration term, a risk free rate of 3% and a dividend yield of 0%.
The value of the warrants will be expensed over one year, which is the term of
the consulting agreement. For the year ended December 31, 2008, $26,890 was
recognized as consulting expense.
In the
fourth quarter of 2008, the Company granted to two Board members options to
purchase a total of 100,000 shares (50,000 each) of the Company’s common
stock at an exercise price of $0.21
and $0.36 per share and the options vested immediately.
The options were valued at $28,500 using the Black-Scholes option
pricing model with assumed 1,430% volatility, a three year expiration term, a
risk free of 3% and a dividend yield of 0%. For the year ended December 31,
2008, $28,500 was recognized as consulting expense.
The
vesting of the options is the contingent on the continued participation as a
Board of Director. The option expires in three years. Based on the Black-Scholes
option pricing model, the options were valued at $28,500. In accordance with
SFAS No. 123R, the Company has recorded stock-based compensation expense during
the year ended December 31, 2008 of $28,500 in connection with the issuance of
these options
The
following table summarizes all Company stock option transactions between January
1,2008 and December 31, 2008.
Option
&Warrants
Outstanding
|
Option
&Warrants
Vested
|
Range
of
Exercise
Price per Common Share
|
||||||||||
Granted
or vested during year ended December 31, 2007
|
100,000 | 100,000 | $2.00 - $2.05 | |||||||||
Balance,
December 31, 2007
|
100,000 | 100,000 | $2.00 - $2.05 | |||||||||
Granted
or vested during year ended December 31, 2008
|
1,200,000 | 349,999 | $0.21 -$ 2.51 | |||||||||
Expired
during the year ended December 31, 2008
|
- | - | - | |||||||||
Balance,
December 31, 2008
|
1,300,000 | 449,999 | $0.21 - $2.51 |
Stock
and Warrants Options Outstanding
|
||||||
Number
Outstanding
|
Weighted
Average
|
Weighted
Average
|
||||
Range
of
|
Currently
Exercisable
|
Remaining
|
Exercise
Price of Options
|
|||
Exercise
Prices
|
at
December 31, 2008
|
Contractual
Life (Years)
|
Currently
Exercisable
|
|||
$0.21-$2.51
|
449,999
|
1.60
|
$ 1.91
|
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 15 –
DIVIDEND DISTRIBUTION
On
January 31, 2007, SYCI distributed a dividend to two stockholders in the amount
of $2,189,600. On February 5, 2007, in conjunction with the merger of SYCI, Gulf
Resources, Inc. paid a $2,550,000 dividend to the original stockholders of
SYCI.
On
February 13, 2006, SCHC distributed dividend to two stockholders in the amount
of $2,450,680.
On March
15, 2006, SYCI distributed dividend to two stockholders in the amount of
$3,172,200.
NOTE 16 –
INCOME TAXES
The
Company utilizes the asset and liability method of accounting for income taxes
in accordance with SFAS No. 109.
United
States
Gulf
Resources Inc. is subject to the United States of America Tax law at tax rate of
34%. No provision for the US federal income taxes has been made as the Company
had no US taxable income for the years ended December 31, 2008, 2007 and 2006
believes that its earnings are permanently invested in the PRC.
BVI
Upper
Class Group Limited was incorporated in the BVI and, under the current laws of
the BVI, it is not subject to income taxes.
Hong
Kong
Hong Kong Jiaxing Industrial
Limited was incorporated in Hong Kong and is subject to Hong Kong
profits tax. The Company is subject to Hong Kong taxation on its activities
conducted in Hong Kong and income arising in or derived from Hong
Kong. No provision for profits tax has been made as the Company has
no assessable income for the year. The applicable statutory tax rate
for the year ended December 31, 2008 is 16.5%, for the years ended December 31, 2007 and
2006 is 17.5%.
PRC
Enterprise
income tax (“EIT”) for SCHC and SYCI in the PRC is charged at 25% of the
assessable profits, of which 15% is for national tax and 10% is for
local tax.
The
components of the provision for income taxes from continuing operations
are:
Year
ended
December 31 |
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Current
taxes – PRC
|
$ | 8,202,477 | $ | 7,043,641 | $ | 1,879,582 | ||||||
Non-deductible
items disallowed for prior year
|
- | 706,869 |
-
|
|||||||||
Others
|
9,462 | 48,172 | 4,662 | |||||||||
|
|
|
|
|||||||||
|
$ | 8,211,939 | $ | 7,798,682 | $ | 1,884,244 |
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 16 –
INCOME TAXES - (Continued)
The
effective income tax expenses differs from the PRC statutory income tax rate of
25% from continuing operations in the PRC as follows :-
Year
ended
December 31 |
||||||||||||
2008
|
2007
|
2006
|
||||||||||
Statutory
income tax rate
|
25 | % | 33 | % | 33 | % | ||||||
Non-deductible
items disallowed for prior year
|
- | % | 4 | % | - | % | ||||||
Non-deductible
items
|
2 | % | 2 | % | - | % | ||||||
|
|
|
|
|||||||||
Effective
tax rate
|
27 | % | 39 | % | 33 | % |
Deferred
taxes $ 3453 has been made as of December 31, 2008
No
provision for deferred taxes has been made as there were no material temporary
differences as of December 31, 2007 and 2006
The
company adopted FIN 48 effective January 1, 2007 which did not require an
accrual for uncertain tax positions as of January 1, 2007.
There was
no change in unrecognized tax benefits and accrual for uncertain tax positions
as of December 31, 2007 and 2008.
Tax years
from 2005 through 2007 remain subject to examination by major tax
jurisdiction.
NOTE 17 –
BUSINESS SEGMENTS
The
Company follows SFAS No. 131, “Disclosures about Segments of and Enterprise and
Related Information” ,
which requires the Company to provide certain information about their operating
segments This classification is based on the nature of the
products consistent with the method by which the Company’s chief operating
decision-maker assesses the operating performance and allocates resources .
The Company has two reportable segments: bromine and
crude salt, and chemical products.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 17 –
BUSINESS SEGMENTS (Continued)
Bromine
|
||||||||||||||||||||
and
Crude
|
Chemical
|
Segment
|
Consolidated
|
|||||||||||||||||
December
31, 2008
|
Salt
|
Products
|
Total
|
Corporate
|
Total
|
|||||||||||||||
Net
revenue
|
63,664,156 | $ | 23,824,178 | $ | 87,488,334 | $ | - | $ | 87,488,334 | |||||||||||
Income
(loss) from operations
|
24,663,244 | 8,121,203 | 32,784,447 | (2,209,290 | ) | 30,577,157 | ||||||||||||||
Total
assets
|
67,868,644 | 20,899,118 | 88,767,762 | 591,704 | 89,359,466 | |||||||||||||||
Depreciation
and amortization
|
4,123,131 | 604,734 | 4,727,865 | - | 4,727,865 | |||||||||||||||
Capital
expenditures
|
10,529,286 | 6,835,909 | 17,365,195 |
-
|
17,365,195 | |||||||||||||||
December
31, 2007
|
||||||||||||||||||||
Net
revenue
|
34,015,484 | 19,764,829 | 53,780,313 | - | 53,780,313 | |||||||||||||||
Maintenance
service income
|
- | 468,337 | 468,337 | - | 468,337 | |||||||||||||||
Income
(loss) from operations
|
14,181,054 | 7,164,833 | 21,345,887 | (1,320,959 | ) | 20,024,928 | ||||||||||||||
Total
assets
|
36,614,939 | 9,516,930 | 46,131,869 | 197,963 | 46,329,832 | |||||||||||||||
Depreciation
and amortization
|
1,111,580 | 186,871 | 1,298,451 |
-
|
1,298,451 | |||||||||||||||
December
31, 2006
|
||||||||||||||||||||
Net
revenue
|
17,825,097 | 13,911,119 | 31,736,216 | - | 31,736,216 | |||||||||||||||
Income
(loss) from operations
|
1,728,746 | 3,714,475 | 5,443,221 | - | 5,443,221 | |||||||||||||||
Total
assets
|
9,835,484 | 5,069,584 | 14,905,068 | 50,000 | 14,955,068 | |||||||||||||||
Depreciation
and amortization
|
213,092 | 70,362 | 283,454 | - | 283,454 |
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 17 –
BUSINESS SEGMENTS (Continued)
Years
ended December 31,
|
||||||||||||
Reconciliations
|
2008
|
2007
|
2006
|
|||||||||
Total
segment operating income
|
$ | 32,784,447 | $ | 21,345,887 | $ | 5,443,221 | ||||||
Corporate
overhead expenses
|
(2,209,290 | ) | (1,320,959 | ) | - | |||||||
Other
income (expense), net
|
30,254 | 6,717 | 252,483 | |||||||||
Income
tax expense
|
(8,211,939 | ) | (7,798,682 | ) | (1,884,244 | |||||||
|
|
|
|
|||||||||
Total
consolidated net income
|
$ | 22,395,472 | $ | 12,232,963 | $ | 3,811,460 |
NOTE 18 –
MAJOR SUPPLIERS
During
the year ended December 31, 2008, the Company purchased 49% of its
raw material from two suppliers. At December 31, 2008, amounts due to
those suppliers included in accounts payable were $558,598. This
concentration makes the Company vulnerable to a near-term adverse impact, should
the relationships be terminated.
NOTE 19 –
CUSTOMER CONCENTRATION
The
Company sells a substantial portion of its product to a limited number of
customers. During the year ended December 31, 2008, sales to the
Company’s largest customer aggregated $8,912,065, or approximately 10% of total
net revenue. At December 31, 2008, amounts due from this customer
were $1,237,980. This concentration could make the Company vulnerable
to a near-term adverse impact, should the relationships be
terminated.
NOTE 20 –
FIXED PRICE STANDBY EQUITY DISTRIBUTION AGREEMENT
On May 7,
2007, the Company entered into a Fixed Price Standby Equity Distribution
Agreement with eight investors (the “Investors”). Pursuant to the
Fixed Price Standby Equity Distribution Agreement, the Company was able, at its
discretion, periodically sell to the Investors up to 60 million shares of the
Company’s common stock for a total purchase price of up to $60 million, at a per
share purchase price of $1.00 per share. The Investors’ obligation to
purchase shares of common stock under the Fixed Price Standby Equity
Distribution Agreement was subject to certain conditions, including the Company
obtaining an effective registration statement for the resale of the common stock
sold under the Fixed Price Standby Equity Distribution Agreement. An individual
advance under the Fixed Price Standby Equity Distribution Agreement could not
exceed $10 million. In no event could the number of shares issued to
any Investor pursuant to an advance cause any Investor to own more than 9.9% of
the shares of common stock outstanding.
The
commitment period under the Fixed Price Standby Equity Distribution Agreement
was to commence on the earlier to occur of (i) the date that the Registration
Statement is declared effective by the Securities and Exchange Commission (the
“Effective Date”), or (ii) such earlier date as the Company and the Investors
may mutually agree in writing.
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 20 –
FIXED PRICE STANDBY EQUITY DISTRIBUTION AGREEMENT (Continued)
The
commitment period under the Fixed Price Standby Equity Distribution Agreement
was to expire on the earliest to occur of (i) the date on which the Investors
have purchased an aggregate amount of $60 million shares of our common stock
under the Fixed Price Standby Equity Distribution Agreement, (ii) the date
occurring eighteen months after the Effective Date, or (iii) the date the
Agreement is earlier terminated as defined in the agreement. No sale or
distribution of stock under this Agreement has been made. On March 6, 2008 the
Company terminated the Fixed Price Standby Equity Distribution
Agreement.
NOTE 21 –
ESTABLISHMENT OF CO-OP RESEARCH AND DEVELOPMENT CENTER
On
September 6, 2007, the Company’s wholly-owned subsidiary, SYCI, and East China
University of Science and Technology formally opened a Co-Op Research and
Development Center. The research center is equipped with state of the art
chemical engineering instruments for the purpose of pursuing targeted research
and development of refined bromide compounds and end products. According to the
Co-op Research Agreement, any research achievement or patents will become assets
of the Company. The Company will provide $500,000 annually during the next five
years to East China University of Science and Technology for research. As of
December 31, 2008, $500,000 has been paid and recognized as research and
development expense.
NOTE 22 –
FORWARD STOCK SPLIT
On
October 19, 2007, the Board of Directors recommended and the holders of a
majority of the outstanding Common Stock voted in favor of resolutions in
connection with the following actions:
Amending
the Company's Certificate of Incorporation, as amended, (i) to affect a forward
stock split of the issued and outstanding shares of the Company's Common Stock
on the basis of two (2) post-split shares of Common Stock for every one (1)
pre-split share of Common Stock (the "Forward Stock Split") and (ii) to increase
the total number of authorized shares of Common Stock from 70,000,000 to
400,000,000 (the "Authorized Shares Increase"). All shares and per
share data (except par value) have been adjusted to reflect the effect of the
stock split for all periods presented.
The
decisions to affect the Forward Stock Split and the Authorized Shares Increase
of common stock were approved by the Board of Directors and shareholders owning
a majority of the outstanding shares of the Company's Common Stock in order to
provide greater availability of common stock in the public marketplace, to help
improve future liquidity and further diversify the Company's shareholder
base.
NOTE 23 –
RELATED PARTY TRANSACTIONS
December
31, 2008
|
December
31, 2007
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Waiver
of interest expenses during first quarter 2008 by a related
party:
|
||||||||
Shenzhen
Huayin Guaranty and Investment Company Limited (Note 9)
|
$
|
131,533
|
$
|
-
|
||||
Note
and loan payable – First Capital Limited (Note 9)
|
1,650,000
|
|||||||
Shenzhen
Huayin Guaranty and Investment Company Limited (Note 9)
|
$
|
21,337,493
|
$
|
11,653,500
|
||||
Due
to related party:
|
||||||||
Jiaxing
Lighting (Note 10)
|
$
|
852,067
|
$
|
-
|
||||
Advance from major stockholder
- First Capital
Limited
|
-
|
32,230
|
||||||
$
|
852,067
|
$
|
32,230
|
GULF
RESOURCES, INC.
AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008
NOTE 24 –
SUBSEQUENT EVENTS
On
January 24, 2009, the Company entered into an agreement to issue an aggregate of
21 million 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 shares in the amount of
six million shares to Top King, eight million shares to Billion Gold, and seven
million shares to Topgood, and the aforesaid loans were deemed paid in full and
cancelled.
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”). Factory No. 7 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. Factory No. 7
had not been operations for twelve months prior to the
acquisition. 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 1,500,000 shares of the Company’s common stock on March 3, 2009.
The company recorded the transaction as an asset acquisition in accordance with
SFAS 141(R)
F-29