Gulf Resources, Inc.

Greetings. Welcome to Gulf Resources 2020 Annual Fourth Quarter Earnings Conference. At this time, all participants will be in a listen-only mode. Any question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Helen Chu. Helen, you may now begin.

Thank you, operator. Good morning, ladies and gentlemen, and good evening to you. all those of you for joining us from China. And we'd like to welcome all of you to Drop Resources, fourth quarter and fiscal year 2020, a news conference call. My name is Helen, the AI Director. Our CEO of the company, Mr. Sheldon Liu, will also join this call today. I'd like to remind you to all of our listeners that in this call, certain management statements during the call will contain forelooking statements for looking information about Gulf Resources Incorporation and its subsidiary business and products within the meaning of Rule 175 under Securities Act of 1933 and Rule 3-6 under the Securities Exchange Act of 1934 and are subject to the safe harbor created by those rules. Actual results may differ from those discussed today, taking into account a number of risk factors, including but not limited to the general economic and business conditions in the PRC, the risks associated with the COVID-19 pandemic outbreak, future product development and production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition from existing and new competition from the bromine and the other oil fields and the chemicals, changing technology, the ability to make future bromine assets and the various other factors beyond its control. All four looking statements are expressly qualified in their entirety by the cautionary statement and the risk factors detailed with the company's report filed with the SEC. GovResulted assumes no obligation to revise or update any forelooking statements to reflect events or circumstances after the date of this call. Accordingly, our company believes that expectations reflected in those forelooking statements are reasonable and there can be no assurance of such will prove to be correct. In addition, any reference to the company's future performance represents the management's estimates as of today, the 9th of April, 2021. For those of you unable to listen to the entire call at this time, a replay will be available on the company's website. The call is also accessible through the webcast, and the link is accessible through our website. So please locate our press release issued earlier for the details. So before we review the fourth quarter and the full year, which I believe have covered all of the questions from the company investors and shareholders, I'd like to turn the call over to Mr. Liu for some introductory comments. Mr. Liu.

Hi. Hi, Mr. Liu. Can you hear me?

Yes.

Thank you, Helen. For our company, The past three years have been extremely difficult. We must abide by the government's new policy. The regulation requires us to clean up all the embroidery factories and build a new chemical factory. Not long after, the company was hit by one of the most devastating typhoons in Chinese history. This not only forced the company to rebuild some of our embroidery and original facilities, Thank you, Helen. The past three years have been extremely difficult for our company.

We had to comply with all the new government regulations, which required us to rectify all of our bromine facilities and construct a new chemical plant. Then shortly after the first of our bromine and crude salt facilities opened, we were hit by the most destructive typhoon in Chinese history. This not only forced us to rebuild our bromine and crude salt facilities and build new wells and aqueducts, It also forced the government to implement flood control as another environmental element. Then we had to face the COVID-19 pandemic.

Now, three years later, we finally announced a profitable quarter and produced a positive cash flow. Now, after three years, we have finally reported a profitable quarter and generated positive cash flow from operations. We did this just for Browning and Co. factories during a seemingly slow period

because of cold temperatures, and in a quarter, the government forced an early closure for environmental reasons.

As we look to the future we are becoming increasingly optimistic. The Chinese economy is recovering

Bromine prices continue to increase and are approaching record highs. Many of our smaller competitors will never be able to reopen. We also expect to receive approvals for the red bromine and the crude salt factories in the second half of 2021. However, there is no assurance that we will be able to obtain the approvals necessary to operate those factories from government. The construction of our new chemistry is on schedule. We expect this factory will make higher net profit margins as the company plans to focus more on the higher margin pharmaceutical intermediate products. The company is optimistic about its project in Sichuan province and plans to proceed with its application for the natural gas and brine projects. approval with related government departments after the government planning has been finalized.

Okay, in the past two years, we have spent over six

$60 million on property, plant, and equipment, yet our balance sheet is still in excellent shape. We have over $94 million in cash and no debt. Although the closure for Chai's new year will impact our first quarter, we believe we will be able to generate profits and cash flow in future quarters. Now let me turn the call back to Helen to review the fourth quarter and the fiscal year 2020 results. Thank you, Mr. Liu. So now let's look at the fourth quarter 2020 results first. In the fourth quarter, health resources had revenues of approximately $11.8 million. Cost of revenues was $6.7 million. Capital expense were approximately $7.97 million. We earned a profit of $808,000 before taxes. Our loss for the two months was 4 cents less than our loss for the nine months, meaning that we earned 4 cents in the fourth quarter 2020. These results also include approximately $1.3 million of direct labor and factory overhead incurred during the planned shutdown, meaning they were attributable to operations that were not yet open. If this total is added back to our income, our operating businesses earned approximately $2.2 million during the first quarter. Further, our operating facilities had to close on December 26, 2020 for environmental reasons, meaning we lost one week of operations. Our plumbing business earned $3.5 million in the quarter, This was offset by a loss of approximately $527,000 in crude salt. As we have noted, crude salt business is normally weak during the winter because it is difficult to mine crude salt when temperatures are low. Our chemical and natural gas business, which were not in operation, which generated losses of $106,000 and $54,000 respectively. In the fourth quarter, we generated cash from operations of approximately $6 million compared to a negative of approximately $3.0 million in Q4 2019, an improvement of approximately $9 million over the results from the previous year. As the Chinese economy continues to recover and production has resumed after the Chinese New Year, the price of bromine has continued to increase based on the monthly prices from CEIC data group and the spot prices from sensors. The price of bromine on April 7th, 2021 was RMB 36,667. This is an increase of 25% from Q2 2020, 30.9% from Q3 2020, and 12.5% from Q4 2020. Since our costs are relatively fixed, these types of price increases, if they are changed, could significantly increase the company's profitability. Now let's look at the fiscal year 2020 results. In the year 2020, the company generated revenue increased 166% to approximately $28 million. Net profits increased 70% to approximately $8.8 million. Our long-term operations declined 58% to approximately $10.2 million. The loss included approximately $8.2 million of their labor and structural overhead incurred during the planned shutdown. These losses were attributable to businesses that were not operating. GA general expenses, general and administrative expenses declined 23% to approximately $10.2 million. Our loss from operations declined 58% to approximately $10 million. Our net loss declined 67% to approximately $8.4 million. We lost 87 cents per share compared to $2.73 per share in 2019. Cash flow. Our cash flow showed significant improvement We generated net cash from operations of approximately $9.3 million, compared to a loss of $15.3 million in 2019. And during year 2020, the company spent approximately $21.7 million on property plans and agreements. In year 2019, the company spent approximately $60.6 million on PPP. This includes major investments in our new machine chemical factories, new bromine and crude salt factories, and thousands of newly drilled wells and aqueducts. Balance sheet. The company's balance sheet remains strong. As of December 31, 2020, The cash equals to approximately $94 million. Cash per share equals to $9.43. Net net cash, which represents the cash minus all liabilities, equals to approximately $77 million. The net net cash per share equals to $7.72 per share. Current assets equal to approximately $107.3 million. Current liabilities equal to approximately $7.1 million. Working capital equal to approximately $100.2 million. Working capital per share equal to $10.02 million. Shareholder's equity equal to approximately $277 million. Shareholder's equity per share equals to $27.71. Now let's look at the updates on operations by segments. This is an important discussion part which will cover most of the questions from companies, investors, and shareholders. Firstly, let's look at warming and cool thoughts. The company is very optimistic about the opportunities in farming and the crude salt segment, especially with a strong increase in prices since the third quarter and through the beginning of April, as we discussed previously. We expect the price to remain elevated because demand is increasing, especially with COVID-19, since farming can be widely used in decontamination, and there are few competitors in the market. The bromine prices remain at this level. We should have a good year for 2021. Because our factories were closed for the first week of first quarter, and because we had to take a few days to get our factories fully operational, our first quarter may be our lowest quarter in the year. However, we have seen excellent demand, and we believe we will see strong quarters for the remainder of the year. The company is working with the local authorities in Shandong Province, Shouguang City, to finalize the issues related to our three remaining blooming and crucial factories. At this time, the major issues appeared to relate to securing the land for the county's and constructing aqueducts to move wastewater to areas away from population centers and follow the government's further control policy because the government is still considering which modification they would like the company to make. the company judgment most of the modifications may not be that complex. However, we cannot be certain when the approvals will come and the timing of bringing these factories up to government-accepted standards. We think excellent progress is being made, but at this time, The company expects to receive the approvals from the Browning and Cusart factories in the second half of 2021. However, there is no assurance that it will obtain the approvals from the government. In terms of 2021, we expect our utilization to be higher than 25% in the year 2020. We are not making projections at this time, but we will make them when we release our first quarter results, which will be in approximately one month later. As we have indicated, we expect blooming prices to remain high. As an example, on April 2nd, blooming prices were RMB 35,772 per ton. Two days later, they were RMB 36,222. Yesterday, they reached 36,667. As we have noted, the Chinese economy is recovering. Bromine is a powerful disinfectant that is a key element in COVID-19 protection. And the capacity has been significantly reduced because many competitors have not been able to conduct their rectification. Now, secondly, let's look at the chemical segments. The company is also making excellent progress in the construction of Yixing Chemical Factory. We expect to have construction completed at the second quarter of year 2021, and then the company will restore the machinery and test equipment during the remainder of the year. and expect to begin the trial production by the starting of year 2022. Our current cost estimates are still $60 million, exclude the land lease for this new chemical factory. We expect this factory will produce higher net profit margin as we plan to focus more on the higher gross margin pharmaceutical intermediate products As a reference, our two factories had operating earnings of averaging $29.2 million in year 2015 to year 2016. The last two years prior to the shutdown, we are not yet in a position to make projections for year 2020. The key issue is how quickly the company will be able to ramp up production and the However, with less competition and more demand, we are optimistic about this new chemical factory. And the company will continue to post new photos of the progress of its chemical factory on its website. At last, let's look at the natural gas segment. We are also committed to our natural gas and brine projects in Sichuan. PetroChina has made one of the largest natural gas discoveries in Chinese history in the same time as our will. We are waiting for Sichuan province to finalize all its planning of its use relating to the natural gas and brine. However, we are encouraged by our discussion and believe A recent ruling allows private companies to participate for gas algorithm for this project. We are in a slightly different position than other companies because our approvals are for both natural gas and brine, while Citron has huge deposits of natural gas. It also has the most concentrated brine results we have seen. to drill for both products in the same location. Once we receive approval for our first rail, we may be submitting applications for next two additional rails. Further, once we receive approval, we may consider partnering with other companies or enterprises, such as PetroChina. At last, their message to our shareholders. The company have worked very diligently to respond to the request of our shareholders. We have updated our website. Please take a look at the changes and updates we have provided. We will continue to make improvements and ensure all information is current. We also posted a new letter from the chairman. In addition, we will commit ourselves to planning investors' events. At this point, traveling is still difficult. We will also consider expanding our shareholder base by reaching out to institutional investors once our market capitalization increases. Finally, as all our factories, including the new chemical factory, opens, we should be in a position to generate free cash flow. Once we are in this position, we may consider how we can utilize this free cash flow to benefit our shareholders. We understand that right now the focus is on reopening plants and building a new kind of factory. But what steps are you prepared to take to help make the share price move reflective of the value of the company. The company will also provide our shareholders with a five-year plan in the near future once all business come back on track. We appreciate your support and hope to have continued positive news. At last, the company management would like to thank to our shareholders for their patience during this extremely In September 2017, we could not have understood how many difficult and different problems we would have to address. Now, however, we have excellent visibility towards the future, and what we see is very exciting. We believe we are in a position to produce record earnings for our company once all of the company's facilities are back in operation. Okay, operator, can we open up for the POA section?

Sure, thank you. If you'd like to ask a question at this time, you may press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, that's star 1.

Thank you. Our first question is coming from the line of Matt Waring.

Please proceed with your question. Mr. Waring, please proceed with your question.

Oh, hi. You say the factory will have higher margins, the chemical factory will have higher margins, but will the factory have higher revenue as well? Thank you.

Yes, that's right. The first question the investor asked was... Hello, did you hear that? His question was about the chemical factory. He said that... We are more focused on higher-priced products, and then there will be more profits. High wine, which is a response to our new debt.

Yes, we will focus on higher-priced products.

you'll have higher net profit margin.

Okay, so you'll have higher net profit margin? Yeah. Okay, thank you. And then the other question is, you just said the company is focusing on rebuilding factories before buying back shares and anything, but Is the company allowed to buy back shares? I know a while ago you guys weren't allowed to buy back shares. Are you allowed to now? Thanks.

I think we didn't say very clearly what we will do, but we say that once the company will consider how it can utilize the free cash flow to benefit the shareholders in the future.

Okay, yeah, but are you allowed to buy back shares?

Okay, okay. Thank you. I will ask again. be allowed to repurchase stocks?

We haven't yet. We haven't yet submitted this application. Because the company has considered that in the next few years, we still need to make the existing industry of the company do well. Make the embroidery factory and other embroidery factories able to open soon. Make the chemical products Taiwan, so as we say that

As all our factories, including the new chemical factories, opened, we should be in a position. And because we need the free cash for these chemical factories for natural gas and for our bromine factories to back our operation. And at this point, we did not submit our petition yet to the government for this shared buyback. So we are not confirmed about your answer.

Okay.

Based on current government policy, yes.

You're welcome.

My next question comes from the line of John Ralls, a private investor. Please proceed with your questions.

Yes. Congratulations on returning to profitability. Thank you. Is there any timetable for decision to build additional wells at the Sichuan province? Um,

um um um

Hi, John. Here's a response from Ms. Liu that because now the company is still waiting for the government to finish its plan because the Sichuan Province government is doing its fourth round mining resources planning for the whole province. Once the government finishes its plan, then the company can continue with its application and submit its application to government departments for their approval. After that, then we can have a more specific and clear timetable on the company's plan. So now we cannot provide a really specific timetable until government finishes their job first.

You seem to be in a similar position with regard to your unopened factories, that you're waiting for the government or the province to make decisions. Are there any?

It's not a decision. It's not a decision. It's like they are doing the planning for the whole province regarding its mining resources and land resources.

Yeah, usually there's some schedule for the government to make a decision. You don't have such a schedule?

Just wait a minute. I have to check with you.

Okay, so

Based on our understanding, the plan is in this year, 2021, the cities and the towns are submitting their plan to provincial government in Sichuan province by this year, 2021. And when the Sichuan provincial government may finish their plan by beginning of year 2022, And at that time, the company may submit its application for further approval and further wealth at that time.

Thank you.

You're welcome.

Our next question is from the line of Charlie Cheever, Cheever Partners. Please proceed with your questions.

Yeah, my question is, what is the... development plan for the natural gas, will you try to develop that on your own, or will you bring in one of the SOEs as partners to develop it? And then the second question is, would you consider spinning out the natural gas into a separate company?

Mr. Liu, this question is for Mr. Liu. This is a long term plan.

We all have some of these plans, including cooperating with powerful companies, or separating them separately as a company. This is one of our long-term goals. But for now, first of all, after the local government's plan is completed, we will try our best to get the license of the local government. Okay, so this is a really long-term planning. The company may consider partnership with

other enterprises or state-owned enterprise, all separate with natural gas projects as a separate company in long-term strategy. But the first important thing we think we have to do now is after government finish its plan, then company get the approvals first and have more wealth approvals as well. After this, companies will have more bargaining power when it's in discussion with other companies during the considering partnership or separate this mutual debt into a new company.

Okay, thank you.

Thank you. You're welcome.

The next question is from the line of Kim Ming-Jin, a private investor. Let's just see if it's your question.

Hi, I've been a shareholder for the past 10 years on and off. My question is that what measures the company is planning to take in order to meet the most stringent requirement for auditing by security and exchange commissions?

Hi. Sorry, Tim. I think I did not get you clearly. Do you mind just repeat your question?

Yes. What is the company's long-term or short-term plan in order to meet the most stringent requirement, auditing requirement set by security and exchange commission? That's the most concerned matter from the shareholder point of view.

Okay. Do you mind if I just repeat the question? So you mean what's the company's long-term and short-term plan to make it comply with the SEC rules? Yes. Okay. But if we do not have a plan.

Sorry, go ahead.

Okay, thank you. Okay, thank you.

First of all, we need to do our own business. First of all, we need to make sure that our processing plant can be fully manufactured as soon as possible. We need to make sure that our chemical plant can be fully manufactured as soon as possible. Thirdly, we need to apply for the production of natural gas as soon as possible under the new policy. in the project in Sichuan. This is our current short-term goal. In the long term, we are also thinking about how to repay the shareholders of the company and increase the stock price of the company. In the future, we will also consider doing some kind of acquisition. and return to the company's stock when the time is right, etc. In short, we will do our best to produce in accordance with the ICCD requirements and temporarily review some relevant information so that the company can meet the requirements of the U.S. listed companies.

But that didn't directly answer my question. Your CEO, Mr. Liu, mentioned that is how he's trying to do to increase the shareholder's value. But does he understand the requirement of the Security and Exchange Commission.

Mr. Lu, Mr. Jin just said that your answer is to answer how to improve the value of shareholders, how to improve the management of the company. But regarding the requirements of the Procuratorate, are you... Is to fully understand and then how to ensure that the company is always in a long-term harmonious state Well, first of all, we will strictly follow some of the requirements of the U.S.

Regulatory Commission for timely disclosure of information and timely announcement of relevant information We will also study and observe some of the requirements of the new Regulatory Commission OK. So first, hi, Mr. Jin. Hello? I'm listening, yes.

Okay, okay. So here is your response from Mr. Liu that, firstly, of course, the company operating business had to be operating well. So every, like he mentioned, every business segment back and increase the shares, of course, which is what we want to do best for our investors. Then, of course, we will follow the HGTU strictly and do all type, filing time on time, and learn new rules. Always continue learning in order to continually satisfy the requirements by FTC and NASDAQ. Of course, this whole process helped by the company legal counsel and monitored by the company's auditor.

What message are you going to pass on to the investors? I know some friends, Chinese friends, they're all kind of concerned about whether the company is meeting the screening requirement of the Security and Exchange Commission. They're concerned that the requirement is not, I mean, the measure is not taken correctly. up to the satisfaction of the SEC. And then the company will be delisted. All their investment will be lost. That's the most concern of the investors. Some of them already sold shares. I'm one of the few that have not sold my shares.

Okay. What kind of information does the company want to convey to the investor? Because Mr. Jin is a long-term investor, some of his previous friends have already sold their shares. But Mr. Jin has been a long-term shareholder. He is very worried that if the company, for example, is not satisfied with the requirements after this year, will be asked to retire or unable to continue to go public, This is a huge loss for the shareholders. I think you can rest assured.

First of all, according to the current policy of the U.S. Stock Exchange, we have not violated any of its regulations. Second, the company's requirements for the Stock Exchange is also very important. Whether it is some of its new policy requirements or some of our past related systems, the company will work hard to abide by them. Of course, it is also inevitable that in the future, some things between the US government and the Chinese government will affect the company. I think we The company level is uncontrollable, but we haven't seen any signs of it yet. Because we are a private private company, our products are also a kind of basic chemical products. It will not involve some important national information or national security, etc., etc. In some areas of these aspects. So we can't see it yet. The U.S. government or the government will have some special requirements for us. Thank you, Mr. Liu. I have another question for you. Do you think your factory

How long will it take to restore the operating status of your factory? We are still working on some basic work this year.

We expect to be able to restore the original operating status by next year. What is the number of your factory?

After the recovery, will it increase or decrease? Of course, compare it with the number of factories that were closed before.

In terms of the number, because a few factories were permanently closed last year. This may not be able to recover. But we will have a few more factories this year, that is, all production can reach the original two-thirds of this scale. We are planning to complete the reconstruction of the chemical factory this year. After this factory is completed, it will gradually resume production next year. At the end of next year, it is expected to be to the original profit level. Thank you.

In addition, I would like to ask you that your chemical products are rising in the short term. Can you tell us the main reason for the rise? The main reason is based on the following aspects.

The first is that China's economy is recovering. The demand for chemical products is increasing. This is one. The second is that there are some factories with relatively small scale and poor competitiveness that may be completely eliminated in the process of this country's reform. So the total output is reduced. This leads to the price of our current embroidery and flower products rising. Okay. The third is the world's large environment. That is to say, some basic raw materials may be in the process of recovery. There are three reasons.

The main price increase, is it your company's sales? You can decide the price yourself based on the market, right? Yes. Of course, the customer will accept it, he will bear it.

This may still be based on the market situation. If it is a supply and demand, then it can be said that it may be impossible for us to increase the price. But if the demand is greater than the supply, then at this time, we will make full use of our scale to ensure our best economic benefits.

In addition, if you use the percentage to talk about the entire market of your company, How much of the whole market?

Last year, our proportion is estimated to be around 4% to 5%. After all of our factories are restored to production, we are expected to reach 6% to 7%. Thank you.

Okay, so for the fairness to our listeners, I just want to have a brief translation between Mr. Liu and Mr. Jin. Firstly, they were talking about when the company's bromide factory come back in its normal operation. What's the size it will be? And this will say that when our Z-Brony companies and the Crusader companies back in operation, it will be two out of three as compared to the beginning of before the factories shut down. And by the next year, the company can do this and achieve this target. Chemical factory will finish starting its production almost like a food production as a child production by the end of next year. Then we ask about why the bromine and the chemical product prices are increasing in China. What is the reason for this? which will explain that there are several reasons. The first reason, because China economy is recovering, and they need more bromine and the basic chemical materials. Second reason, there are less competitors, because for the rectification, there are some bromine-centric chemical factories were shut down before. And the total production capacity in this industry had decreased. Third, the basic chemical product materials are increasing in China now. Then Mr. Jin asked about, is the bromine price companies selling totally based on company size or not? Mr. Jin's response said, it's not totally dependent on the company. The bromine price are still dependent by the market demand. The last question from Mr. Jin. He asked about the market share of bromine owned by Gulf Resources in the bromine industry. Last year, there are four to five percentage of bromine. Their percentage in the market by Gulf Resources. When the bromine sector and crude oil sector are back on operation, The year after next year, its market share may achieve 6% to 7%. This is a brief translation between Mr. Liu and Ms. Xu for your information. Hi, operator. Do we still have questions?

There are no additional questions at this time, Ms. Xu.

Okay, thank you. Thank you.

Let's hope for today.

Thank you for the call. You have a good night and enjoy the day.

Thank you. This will conclude today's conference.

Thank you.

You're welcome. You may disconnect your lines at this time. Thank you for your participation.