Gulf Resources Reports Fourth Quarter and Fiscal Year 2009 Results

Published Mar 03rd, 2010

NEW YORK and Shandong Province, China, March 3 /PRNewswire-Asia-FirstCall/ -- Gulf Resources, Inc. (Nasdaq: GFRE) ("Gulf Resources" or the "Company"), a leading manufacturer of bromine, crude salt and specialty chemical products in China, today announced its financial results for the fourth quarter and fiscal year ended December 31, 2009.

Fourth Quarter Highlights
-- Revenue was $29.4 million, a year-over-year increase of 21.8%
-- Gross profit was $13.5 million, a year-over-year increase of 36.6%
-- Gross margin increased to 46.0% from 40.9% for the fourth quarter
of 2008
-- Income from operations was $10.2 million, a year-over-year increase
of 20.3%
-- Operating margin was 34.7% compared to 35.2% for the fourth quarter
of 2008
-- Net income was $6.8 million, or $0.21 per basic and diluted share, an
increase of 8.6% from $6.2 million, or $0.25per basic and diluted share
a year ago
-- Excluding a non-cash expense of $1.4 relating to warrants issued in
December 2009, the Company's adjusted net income for the fourth quarter
2009 was $8.1 million, or $0.25 per diluted share
-- Cash totaled $45.5 million as of December 31, 2009
-- Completed upgrades to its chemical production line focused on producing
pesticide additives with a production capacity of 3,000 metric tons
-- Closed a private placement financing and issued 2,941,182 shares of the
Company's common stock at a price of $8.50 per share for an approximate
aggregate purchase price of $25.0 million
-- Hosted a dinner event to celebrate its successful NASDAQ listing in
Hong Kong
-- Commenced formal production using the assets acquired in September 2009
and expects daily bromine and crude salt production of 10 and 370
metric tons, respectively from the assets
Full Year 2009 Highlights
-- Revenue was $110.3 million, a year-over-year increase of 26.0%
-- Gross profit was $48.9 million, an increase of 38.9%
-- Gross margin was 44.3%, compared to 40.2% in 2008
-- Net income was $30.6 million, or $1.00 per basic and diluted share, a
year-over-year increase of 36.6% from $22.4 million, or $0.90 per basic
and diluted share post reverse stock split
-- Excluding a non-cash expense of $1.4 million relating to warrants
issued in December 2009, the Company's adjusted net income for fiscal
year 2009 was $32.0 million, or $1.04 per basic and diluted share
-- Exceeded guidance of $100 to $105 million in revenue and hit the higher
end of the range of $29 to $31 million in net income for 2009

Fourth Quarter 2009 Results
 

"Higher than expected bromine prices and an earlier than anticipated production start of our new pesticide intermediate chemicals allowed us to exceed our revenue guidance and meet the upper range of our net income guidance for 2009. After a softer start in 2009, we have seen a rebound in bromine prices throughout the fourth quarter, with quarterly average selling prices returning close to levels obtained at the end of last year," said Xiaobin Liu, the new Chief Executive Officer of Gulf Resources. "In the fourth quarter we continued to develop our chemical product segment by replacing our old pesticide intermediate products with a new formulation that commands a higher gross profit margin. The feedback from customers who have switched to the upgraded product has been positive so far."
 

Gulf Resources' revenue was $29.4 million for the fourth quarter of 2009, an increase of 21.8% from $24.1 million for the fourth quarter of 2008. The increase in net revenue was primarily attributable to growth in the Company's bromine and crude salt segment as a result of the increase in sales volume arising from the increase in production capacity following the Company's two acquisitions of bromine and crude salt production assets in 2009 which are now in full operation. Revenue from the bromine and crude salt product segment was $19.5 million, or 66.2% of total revenue for the fourth quarter of 2009, an increase of 21.3% from $16.0 million last year.
 

Revenue from the chemical products segment was $9.9 million, or 33.8% of total revenue, for the fourth quarter of 2009, an increase of 22.6% from $8.1 million in the corresponding period last year. The increase in revenue from the Company's chemical product segment was mainly due to increased sales of environmentally friendly additive products, solid lubricant and polyether lubricant, for use in oil and gas field exploration partially due to higher capacity utilization of its second chemical production line, and the improvement of the Company's pesticide intermediate products. The contribution per business segment to total revenue remained similar to that of last year.
 

Gross profit for the fourth quarter of 2009 totaled $13.5 million, compared to $12.1 million for the fourth quarter of 2008 and gross profit margin for the three months ended December 31, 2009 was 46.0%, compared to 40.9% for the corresponding three-month period last year. The improved gross profit margin was due to an increase in the net revenue, which enabled the Company to leverage its fixed costs. The increase was also due to the fact that increases in the selling prices were higher than raw material costs and general inflation in China, because the demand exceeded the supply of bromine in China's domestic market.
 

Selling, general and administrative expenses for the fourth quarter of 2009 were $3.2 million, compared to $1.3 million in the fourth quarter of 2008. The increase was mainly due to a non-cash expense of $1.4 million relating to warrants issued to the Company's placement agent for its December 2009 private placement and $0.2 million in expenses relating to its listing on NASDAQ Global Select market in October 2009. Research and development expenses were $0.1 million, unchanged from the fourth quarter of 2008.
 

As a result, income from operations for the fourth quarter of 2008 was $10.2 million, an increase of 20.3% compared to $8.5 million for the corresponding quarter of 2008. Operating margin was 34.7% for the fourth quarter of 2009, compared to 35.2% for the fourth quarter of 2008.
 

For the fourth quarter of 2009, the Company incurred other expenses of $0.5 million compared with other income of $23,729 for the corresponding quarter last year. The expenses were mainly due to a $0.5 million loss on disposal of property and equipment which were outdated and not in operating condition.
 

Income taxes were $2.9 million for the fourth quarter of 2009, an increase of 29.0% from $2.3 million for the fourth quarter of 2008. The Company's effective income rate was 30.4% compared to 26.9% in the year ago period. The Company's effective income tax rate increased due to the loss from the disposal of assets not being deducted from taxation in 2009 and was instead recorded as deferred tax asset.
 

Net income was $6.8 million for the fourth quarter of 2009, an increase of 8.6% from $6.2 million for the fourth quarter of 2008. Basic and diluted earnings per share in fourth quarter of 2009 were $0.21 compared to $0.25 per fully diluted share in the fourth quarter of 2008. Excluding a non-cash expense of $1.4 relating to warrants issued in December 2009, the Company's adjusted net income for the fourth quarter 2009 was $8.1 million, or $0.25 per diluted share. For a reconciliation of adjusted net income to GAAP net income, please see the reconciliation table below.
 

Weighted average number of diluted shares for the three months ended December 31, 2009 was 32,250,669.
 

Fiscal Year 2009 Financial Results
 

Revenue for fiscal year 2009 was $110.3 million, an increase of 26.0% from $87.5 million for fiscal year 2008. Gross profit was $48.9 million, an increase of 38.9% from $35.2 million for fiscal year 2008. Gross margin for fiscal 2008 was 44.3%, compared to 40.2% for fiscal year 2008. Operating income was $42.2 million, an increase of 38.1% from $30.6 million for fiscal year 2008. Net income was $30.6 million, or $1.00 per basic and diluted share, an increase of 36.6% from $22.4 million, or $0.90 per basic and diluted share, for fiscal year 2008. Excluding a non-cash expense of $1.4 relating to warrants issued in December 2009, the Company's adjusted net income for fiscal year 2009 was $32.0 million, or $1.04 per diluted share.
 

Reconciliation of Adjusted Net Income to GAAP Net Income
 

To supplement the Company's consolidated financial statements for the fiscal years ended December 31, 2009 and December 31, 2008 presented on a GAAP basis, the Company provided adjusted financial information in this release that excludes non-cash expenses including expenses relating to warrants issued to the Company's placement agent for its December 2009 private placement. The Company's management believes that these adjusted measures, adjusted net income and adjusted diluted earnings per share, provide investors with a better understanding of how the results relate to the Company's current and historical performance. The additional adjusted information is not meant to be considered in isolation or as a substitute for GAAP financials. The adjusted financial information that the Company provides also may differ from the adjusted information provided by other companies. Management believes that these adjusted financial measures are useful to investors because they reflect the essential operating activities of the Company. A reconciliation of each adjusted measures to the nearest GAAP measure appears in the table below.
 

Q4 2009
Q4 2008
FY 2009
FY 2008
U.S. GAAP net income
6,758,886
6,225,071
30,591,415
22,395,472
Non-cash expense relating
to warrants issued in
December 2009
1,367,156
--
1,367,156
--
Adjusted net income
8,126,042
6,225,071
31,958,571
22,395,472
Diluted weighted average
number of shares
32,250,669
24,917,211
30,701,697
24,917,211
Adjusted net income per
diluted share
0.25
0.25
1.04
0.90

Financial Condition
 

As of December 31, 2009, Gulf Resources had cash of $45.5 million, current liabilities of $12.0 million, and shareholders' equity $134.4 million. At fiscal year end, the Company had working capital of $51.7 million and a current ratio of 5.3. For the twelve months ended December 31, 2009, the Company generated $39.8 million in cash flow from operations, primarily attributable to net income, and used $38.2 million in investing activities, mainly due to acquisitions of mineral rights, property, plant and equipment for its bromine and crude salt business segment and upgrades to its chemical production lines. For fiscal year 2010, the Company's plans to invest $7.3 million for the construction of a new chemical additives production line for waste water treatment line.
 

Recent Developments
 

In February 2010, Gulf Resources engaged BDO Limited, the Hong Kong-based member firm of the BDO International network, as its new independent auditor, replacing Morison Cogen LLP. The change was effective on February 10, 2010.
 

In January 2010, the Company commenced the construction of the new chemical additives production line for waste water treatment, which is expected to start production in the second half of 2010 with production capacity of 3,000 metric tons per year. The new production line will be located in the Company's Yuxing Chemical Plant and the Company estimates that it will contribute approximately $9 to $10 million in revenues with an estimated gross profit margin over 40% in the first year of operation.
 

Business Outlook
 

For fiscal year 2010, Gulf Resources expects to focus on expanding both its bromine production capacity and developing its chemical product business segment in order to expand sales in its domestic market. Supported by a healthy balance sheet, the Company continues to look for acquisition targets in both the bromine and crude salt, and the chemical business segment on an opportunistic basis.
 

In the second half of 2010, the Company is planning to introduce water treatment additives that utilize bromine in their formulation in its chemical business segment following the completion of a new chemical production line.
 

"Based on feedback from our customers, we expect the pharmaceutical intermediate and pesticide manufacturing to be the main drivers of bromine demand this year. Moreover, we still see consolidation opportunities in China's bromine industry in terms of the occurrence of non-operating production assets owned by unlicensed players. We plan to continue pursuing additional acquisitions of such unlicensed players this year in order to expand our bromine and crude salt manufacturing capacity, partially supported by our raise of $25.0 million in December 2009," said Mr. Liu. "Although bromine prices have continued increasing in the beginning of 2010, we have experienced some volatility in our selling prices after the Chinese New Year. Therefore, we have decided to wait with providing guidance for 2010 until we have better visibility into our revenue streams. However, because of added production capacity in both the bromine and crude salt, and the chemical business segment and current more favorable pricing environment compared with the first half last year, we expect to see continued double-digit growth in revenue and net income in the first six months of 2010.
 

"For 2010, Gulf Resources' main strategic objectives are expanding bromine and crude salt production capacity, while moving up the value chain towards more value-added chemicals," concluded Mr. Liu.
 

Conference Call
 

Gulf Resources' management will host a conference call at 8:00 a.m. EST on Wednesday, March 3, 2010 to discuss its results for the period ended December 31, 2009. To participate in this live conference call, please dial (877) 440-3774 five to ten minutes prior to the scheduled conference call time. International callers should call (706) 902-4014. The conference pass code is 59293465.
 

A replay of the conference call will be available for 7 days starting from 9:00 a.m. EST on Wednesday, March 3, 2010. To access the replay, call (800) 642-1687. International callers should call (706) 645-9291. The replay pass code is 59293465.
 

This conference call will be broadcast live over the Internet and can be accessed by all interested parties by clicking on http://www.gulfresourcesinc.cn/events.html . Please access the link at least fifteen minutes prior to the start of the call to register, download, and install any necessary audio software. For those unable to participate during the live broadcast, a 90-day replay will be available shortly after the call by accessing the same link.
 

About Gulf Resources, Inc.
 

Gulf Resources, Inc. operates through two wholly-owned subsidiaries, Shouguang City Haoyuan Chemical Company Limited ("SCHC") and Shouguang Yuxin Chemical Industry Co., Limited ("SYCI"). The Company believes that it is one of the largest producers of bromine in China. Elemental Bromine is used to manufacture a wide variety of compounds utilized in industry and agriculture. Through SYCI, the Company manufactures chemical products utilized in a variety of applications, including oil & gas field explorations and as papermaking chemical agents. For more information, visit http://www.gulfresourcesinc.cn .
 

Forward-Looking Statements
 

Certain statements in this news release contain forward-looking information about Gulf Resources and its subsidiaries business and products within the meaning of Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the safe harbor created by those rules. The actual results may differ materially depending on a number of risk factors including, but not limited to, the general economic and business conditions in the PRC, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition from existing and new competitors for bromine and other oilfield and power production chemicals, changes in technology, the ability to make future bromine asset purchases, and various other factors beyond its control. All forward-looking statements are expressly qualified in their entirety by this Cautionary Statement and the risks factors detailed in the Company's reports filed with the Securities and Exchange Commission. Gulf Resources undertakes no duty to revise or update any forward- looking statements to reflect events or circumstances after the date of this release.
 

For further information, please contact:
Gulf Resources, Inc.
David Wang, VP of Finance
Email: gfre.2008@vip.163.com
Helen Xu
Email: beishengrong@vip.163.com
Web:
http://www.gulfresourcesinc.cn/
CCG Investor Relations
Ms. Linda Salo, Sr. Financial Writer
Phone: +1-646-922-0894
Email: linda.salo@ccgir.com
Mr. Crocker Coulson, President
Phone: +1-646-213-1915
Email: crocker.coulson@ccgir.com
Web:
http://www.ccgirasia.com/
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in U.S. dollars)
Three months ended
December 31,
Year Ended December 31,
(Unaudited)
(Audited)
2009
2008
2009
2008
REVENUE
Net sales
$29,385,314
$24,133,725
$110,276,908
$87,488,334
Maintenance service
income
--
--
--
--
29,385,314
24,133,725
110,276,908
87,488,334
OPERATING EXPENSES
Cost of net revenue
-15,882,463
-14,251,114
-61,402,820
-52,302,085
Research and
development cost
-125,219
-124,927
-500,406
-514,780
General and
administrative
expenses
-3,166,473
-1,269,935
-6,132,848
-4,094,312
-19,174,155
-15,645,976
-68,036,074
-56,911,177
INCOME FROM
OPERATIONS
10,211,159
8,487,749
42,240,834
30,577,157
OTHER INCOME
(EXPENSES)
Interest expense and
bank charges
10,066
--
-17,078
-60,111
Rental income
--
--
--
--
Sundry income
-528,748
0
-528,748
-3,764
Interest income
15,198
23,729
80,805
94,129
-503,484
23,729
-465,021
30,254
INCOME BEFORE INCOME
TAXES
9,707,675
8,511,478
41,775,813
30,607,411
INCOME TAXES
-2,948,789
-2,286,407
-11,184,398
-8,211,939
NET INCOME
$6,758,886
$6,225,071
$30,591,415
$22,395,472
EARNINGS PER SHARE
BASIC
$0.21
$0.25
$1.00
$0.90
DILUTED
$0.21
$0.25
$1.00
$0.90
WEIGHTED AVERAGE
NUMBER OF SHARES
BASIC
32,250,669
24,917,211
30,698,824
24,917,211
DILUTED
32,250,669
24,917,211
30,701,697
24,917,211
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Expressed in U.S. dollars)
Three months ended
December 31,
Year Ended December 31,
2009
2008
2009
2008
NET INCOME
$6,758,886
$6,225,071
$30,591,415
$22,395,472
OTHER COMPREHENSIVE
INCOME
Foreign currency
translation adjustment
-277,057
153,450
-183,595
2,494,763
COMPREHENSIVE INCOME
$6,481,829
$6,378,521
$30,407,820
$24,890,235
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)
As of December 31,
2009
2008
Current Assets
Cash
$45,536,735
$30,878,044
Accounts receivable
14,960,002
11,674,645
Inventories
650,332
418,259
Prepayment and deposit
233,330
229,408
Prepaid land lease
46,133
15,849
Deferred tax asset
85,672
3,453
Other receivable
2,195,208
2,641
Total Current Assets
63,707,412
43,222,299
Property, plant and equipment, net
81,993,894
45,399,456
Prepaid land lease, net of current
portion
721,862
737,711
Total Assets
$146,423,168
$89,359,466
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses
$5,823,745
$4,746,994
Loan payable
--
4,034,250
Retention payable
660,150
--
Notes and loan payable - related
parties
--
4,650,000
Due to related parties
1,190
852,067
Taxes payable
5,555,113
4,269,442
Total Current Liabilities
12,040,198
18,552,753
Non Current Liabilities
--
--
Note payable, net of current portion
--
18,337,493
Total Liabilities
12,040,198
36,890,246
Stockholders' Equity
PREFERRED STOCK ; $0.001 par value;
1,000,000 shares authorized none
outstanding
$--
$--
COMMON STOCK; $0.0005 par value;
100,000,000 shares authorized;
34,541,066 and 24,917,211 shares
issued and outstanding as of
December 31, 2009 and 2008,
respectively
17,271
12,459
Additional paid in capital
64,718,026
13,072,668
Retained earnings unappropriated
59,808,289
31,817,465
Retained earnings appropriated
5,679,769
3,223,418
Cumulative translation adjustment
4,159,615
4,343,210
Total Stockholders' Equity
134,382,970
52,469,220
Total Liabilities and Stockholders'
Equity
$146,423,168
$89,359,466
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)
Year Ended December 31,
2009
2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$30,591,415
$22,395,472
Adjustments to reconcile net income
Amortization of warrants
--
979,144
Amortization of prepaid expenses
57,985
145,484
Depreciation and amortization
7,199,658
4,727,865
Allowance for obsolete and slow-
moving inventories
(9,182)
--
Loss from disposal of property, plant
and equipment
528,749
--
Stock-based compensation expense
2,022,240
--
Changes in assets and liabilities
Accounts receivable
(3,283,341)
(7,203,377)
Inventories
(222,749)
49,955
Prepayment and deposit
(3,920)
(588,542)
Deferred tax
(82,166)
(3,448)
Other receivable
353
--
Accounts payable and accrued expenses
1,075,519
1,788,969
Retention payable
659,745
--
Due to related parties
1,190
2,604,784
Taxes payable
1,284,882
--
Net cash provided by operating
activities
39,820,378
24,896,306
CASH FLOWS FROM INVESTING ACTIVITIES
Additions of prepaid land lease
(72,411)
--
Proceeds from sales of property,
plant and equipment
704,767
--
Purchase of property, plant and
equipment
(38,876,657)
(17,365,195)
Net cash used in investing activities
(38,244,301)
(17,365,195)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes payable
(1,650,000)
--
Repayment of stockholder's notes
payable
(50,000)
--
Proceeds from private placement
21,307,142
--
Proceeds from bank loan
--
--
Repayment of loan payable
(4,031,775)
4,023,250
Advances (to)/from related parties
(852,067)
852,105
Proceeds from notes and loan payable
- related parties
--
10,240,800
Repayment to related party
(1,649,837)
(3,843,675)
Dividends paid
--
--
Net cash provided by financing
activities
13,073,463
11,272,480
EFFECTS OF EXCHANGE RATE CHANGE ON
CASH
9,151
1,300,578
NET INCREASE IN CASH & CASH
EQUIVALENT
14,658,691
20,104,169
CASH & CASH EQUIVALENT - BEGINNING OF
YEAR
30,878,044
10,773,875
CASH & CASH EQUIVALENT - END OF YEAR
$45,536,735
$30,878,044
GULF RESOURCES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Expressed in U.S. dollars)
Year Ended December 31,
2009
2008
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for:
Income taxes
$10,514,697
$6,813,943
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
$--
$--
Issuance of common stock for
prepaid expenses
$--
$--
Issuance of common stock for
settlement of stockholder's
notes payable
$21,287,493
$--
Issuance of stock options to
employees
$606,468
$--
Issuance of warrants to non-
employees
$1,415,772
$--
Issuance of common stock for
acquiring property, plant and
equipment
$6,028,588
$--

SOURCE Gulf Resources, Inc.