Gulf Resources, Inc. 2006 Financial Results Reports

Published Apr 02nd, 2007

LOS ANGELES and SHENZHEN, China, April 2 /Xinhua-PRNewswire/ -- Gulf Resources, Inc. (the "Company") (OTC Bulletin Board: GUFR - News) a leading producer of Bromine and crude salt in China through its wholly-owned subsidiary Shuoguang City Haoyuan Chemical Company Limited (SCHC), announced today operating results for the year ending December 31, 2006.
 

The company's financial results reflect full year pro forma revenues and profits for its operating company SCHC, which was acquired by Gulf Resources, Inc., formerly Diversifax, Inc. in December 2006. The results reported for the fiscal year 2005 reflect the operating results of SCHC.
 

These results exclude any contribution from the February 2007 acquisition of Shouguang Yuxin Chemical Industry Company Limited ("SYCI"), a manufacturer of chemical products utilized by customers in the oil and gas distribution, oil field drilling, wastewater processing, and paper manufacturing industries. Pro forma results including the operations of SYCI, can be found in the Company's 8-K filed with the Securities and Exchange Commission on February 9, 2007.
 

Net sales for 2006 were $17.8 million, which was derived exclusively from the sale of bromine. During 2006 the Company's two largest customers accounted for 74% of total revenue. The Company's crude salt plants began production at the end of December and therefore provided no sales contribution during the 2006 year. The Company sold 10,035 tons of bromine with an average selling price (ASP) of $1,828 per ton.
 

Cost of sales for the 2006 year was $10.5 million, yielding gross profits of $7.3 million and gross margins of 41.2%. Electricity expenses were one of the largest components of costs of sales at $2.7 million. General and administrative expenses were $5.6 million, of which $5.3 million was a non- cash charge related to consulting expenses which was paid through the issuance of 4.4 million shares of common stock. The Company does not anticipate this to be a recurring cost and thus believes G&A expenses will decrease significantly during 2007.
 

Operating income for the year totaled $1.7 million, which was impacted by the previously mentioned non-cash equity compensation charge of $5.3 million. Net income was $1.1 million with earnings per share of $.04 based on 27.0 million fully diluted shares outstanding. Excluding the aforementioned non- cash equity compensation charge, pro forma net income was $6.5 million, with $0.24 in earnings per diluted weighted average share.
 

Net cash provided by operating activities for 2006 totaled $3.5 million. On December 31, 2006 the company reported a cash balance of $3.7 million, a current ratio of 1.0 to 1.0 and shareholder's equity of $3.5 million.
 

"During 2006, we made further progress in establishing our presence as a premier bromine producer for the domestic China market while prudently managing both production and operating expenses. We increased the utilization efficiency of both raw and recyclable packaging materials while passing along the responsibility of shipping costs to our customers, two initiatives which we expect to benefit margins during 2007. In addition, we recently brought our crude salt production online and expect this to contribute to revenues during the current year," stated Mr. Ming Yang, Chairman and CEO of Gulf Resources, Inc.
 

Bromine is utilized as an important component to manufacture dyes, fire retardants, insect repellants, oilfield completion fluids, perfumes, pharmaceuticals, photographic and water treatment chemicals, and in the paper industry. The Company's customers typically process bromine into semi or finished products. It is estimated that the annual domestic bromine market in China is approximately $290 million in China and $1.24 billion globally.
 

SCHC is one of six companies in China which holds a license to produce and distribute bromine. The Company currently maintains a 50-year mineral rights and land lease covering 77,100 acres of property with proven and probable reserves of 780,000 tons of bromine. Current bromine production capacity is estimated between 8,000 to 12,000 tons annually.
 

"There are several large bromine reserves controlled by local producers in our immediate geographic region, many which are undercapitalized but possess the necessary licenses to produce and distribute, thus providing a substantial opportunity for consolidation. The Company's management team is currently evaluating several acquisition opportunities, which we expect to pursue during this calendar year. In addition, we are evaluating the acquisition of direct customers. This vertically integrated methodology would enable us to further increase the size and scope of our Company, have more control over the supply chain, further improve our collective production capacity, leverage and cross sell to a larger base of end customers, which will lead to both economies of scale and further margin enhancement opportunities," Mr. Ming Yang concluded.
 

Consistent with this strategy, the Company completed its first acquisition on February 5, 2007 through the purchase of Shouguang Yuxin Chemical Industry Company, Ltd. (SYCI) including its 14,500 square foot, ISO9001-2000 certified manufacturing facility. During 2006, SYCI produced and sold approximately 10,000 tons of chemical products utilized in oil & gas field explorations and 7,000 tons of papermaking chemical agents, which resulted in approximately $13.9 million in revenues and $2.65 million in net income. SYCI maintains Guarantee Certificate from the China Association for Quality, is accredited by the Shandong Province as a Provincial Credit Enterprises and is a Class One supplier for both China Petroleum & Chemical Corporation (SINOPC) and PetroChina Company Limited, both which are currently customers. SYCI has been engaged in research and development projects with Shandong University, Shandong Institute of Light Industry, Southeast University and other higher education institutions, with a focus on developing new chemical product and medicine intermediates.