Gulf Resources, Inc.

Greetings, and welcome to Gulf Resources 2021 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Helen Hsu, Director of IR.

Thank you, operator.

Good morning, ladies and gentlemen, and good evening to all of those of you joining us from China. And we'd like to welcome all of you to Gulf Resources' first quarter 2021 earnings conference call. I'm Helen Xu, the AI Director. The company's CEO, Mr. Xiaobin 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 forward-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 3B-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, shipment to end customers, market acceptance of new and existing products, additional competition from existing and new competition from the bromine and the other production chemicals, changing technology, ability to make future bromine assets, and the various other factors beyond the company's control. All forward-looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed with the company's report filed with the SEC. Gov. researchers assume no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Accordingly, our company believes expectations reflecting 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 18th of May, 2021. For those of you unable to listen to the entire call at this time, a replay will be available at 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 list issued earlier for the details. Before turning the call over to Mr. Liu, I like to place our first quarters from 2020 and 2021 in context. The first quarters of 2020 and 2021 were both significantly impacted by the garment force closures related to winter weather and Chinese New Year. In year 2021, our factories were closed from December 25, 2020 to February 19, 2021. In addition, even though the factories were closed for a majority of the period, the company still had to pay salaries, rent, and incur depreciation and amortization. In other words, the company had more than one month of production and three months of overhead. In addition, the company also incurred substantial costs for the facilities that were still closed. Finally, because of the process of salt crystallization, winter is always the slowest season for cool salt production. Now, let me turn the call over to Mr. Liu for some opening remarks. Hello, Mr. Liu.

Thank you, Helen. Hello, everyone. I am the CEO of the company. First of all, I would like to welcome everyone to the first quarter of the 2021 financial management meeting. Although the company has four embroidery and raw material factories, most of the time in the first quarter is closed. There are also three embroidery factories and raw material factories that are still waiting for government approval. The chemical factory is still under construction. The factory in Sichuan is still waiting for approval from the government. But the company can still produce a free cash flow of 3.3 million dollars in this quarter. With the comprehensive operation of the four repair factories, the repair price is close to the highest level in history. The company is very optimistic. Even if other factories in the company are still closed, our second quarter and the whole year Thank you, Mr. Liu.

I will do the translation for Ms. Liu. So, thank you, Helen. I'm Shoubin Liu, the CEO of the company. First of all, I'd like to welcome all of you to the CoffeeSource's earnings conference call for the first quarter of the year 2021. despite all of the four operating Bromine and Crusade facilities being closed for majority of the quarter. The three other Bromine and Crusade facilities are waiting for government approval. The technical section is under construction and the Citron facilities also awaiting government approval. Our company was still able to generate $3.3 million in free cash flow. with our full facilities fully operational and with roaming prices nearing the cost levels. We are very optimistic that our second quarter and full year 2021 will be profitable, even if our other facilities remain closed. So now let's start a discussion of the results for this quarter. which I believe will answer most of the questions we received from the company's investors recently. Firstly, let's look at the balance sheet. Despite two and a half years of closure of most of our facilities, the impact of typhoon Lekema, the most destructive typhoon ever to hit China, the cost of constructing our new chemical factories, the cost of drilling new wells, and all the costs related to new government environmental policies. Our balance sheet remains in excellent shape. The company ended the first quarter with cash of $96.7 million, approximately $9.67 per share, net net cash, which is cash minus all liabilities of $76.4 million. Current assets were $104.6 million versus current liabilities of $10.5 million. Working capital equaled $94.1 million. Shareholder's equity equaled to $272.3 million. We have enough capital to finish the construction of our chemical plant, open our remaining bromine and cruise ship facilities, expand our natural gas and brand project in Sichuan, making acquisitions, and may consider taking other actions that will help the price of the company's shares. Now let's turn to the income statement. Net revenues for Q1 2021 increased by 843% to $5.1 million. compared to $557.7 billion in the previous year. The company had two factories operating in year 2020 and four factories in year 2021. In the period in which we were operating in year 2021, our factories produced positive results. Cost of goods sold in year 2021 was 79.5% as compared to 165% in the previous year. Loss from operations was $3.3 million versus $4.8 million. Net loss was $2.5 million versus $3.5 million. Loss per share was $0.35 versus $0.37. Several factors contributed to these losses. Firstly, because only our four facilities were open in the quarter. the company spent $2.6 million on direct labor and factory overhead, compared to $3.6 million in year 2020 for facilities that were closed. General and administrative expenses increased to $892.9 thousand, the majority of which was related to an unrealized foreign currency translation. loss compared to again in the previous year. While the cost of closed factories depreciation and amortization and foreign currency losses caused the company to report a loss, the company did generate free cash flow. In a quarter, net cash from operating activities was 3.3 million. We had no tax expenditures. That means Our free cash flow was also $3.3 million. The impact of the change in exchange rates was a negative of $835,000. Now let's look at our operating segments. Browning, firstly. Browning revenues increased 939% to $4.8 million from $463,000. Bromine production increased to 955 tons compared to 122 tons, an increase of 683%. The average price of bromine increased 33% to $5,037 per ton from $3,794 per ton. In the past 19 to 10 months, bromine prices have increased sharply Since July 2020, warming prices are up 52%. Since the end of the first quarter, warming prices have been up 15%. Higher prices are important factors attributable to our profitability. While we do not know where warming prices will go in the future, we are very encouraged by this strong price increase. During the quarter, the utilization rates in our Borneo factories were 17%. As noted, our factories were closed until February 19, 2021. We expect to continue straw production through the second quarter and third quarter. For the fourth quarter, the primary unknown is whether the government will again force a wintertime closure. If it does, the closure is likely to be about 10 days earlier than last year. However, potential sales lost in the first quarter are likely to be offset by higher sales in the first quarter of 2022 because of likely earlier reopening. We have no way of knowing if the government will enact another winter shutdown, but we are trying to be conservative. Now let's look at crude salt segment. Crude salt revenues increased 373% to $448,000. Because the factories were open for a short period of time and because mining crude salt in the winter is difficult, first quarter revenues in both years are not that significant. Now please. As with Bromley, crucial profitability was impacted by overheads and closed facilities. To our knowledge, the government is currently continuing to finalize the planning for all mining areas, including that for prevention of floods. We continue to be optimistic that we will receive permission to open our remaining three factories Should we receive approval, we may have to make some modifications to this section. Lastly, we continue to be optimistic about these facilities. Unfortunately, we cannot make any estimates on timing. We are not currently considering any acquisition in broming and crude salt segment. With the current high broming prices Operating companies are not anxious to sell. With the government still developing its planning and environmental standards, we are not willing to risk purchasing facilities that do not have clear paths to operation. Our goal is to protect our capital from our shareholders. Chemicals segment. We have no revenues from chemicals in the first quarter. The loss in our chemical segment was $746.5 million. We are making excellent progress in the construction of this new chemical factory. We estimate the relocation process will cost approximately $64 million. The company has already incurred costs of $35.6 million. comprising prepaid land lease, professional fees related to the design of the new chemical factory, purchase of plant and equipment, construction costs, and installation costs. Most of the remaining expenditures will be incurred in the year 2021. We continue to believe construction will be completed by the end of the second quarter or immediately thereafter. Once construction is completed, we will install the machinery and test the equipment during the remainder of the year. We expect to begin trial production by the start of the year 2022. While this new factory will be smaller than the combined two old factories, the company expects is to make a higher net profit margin as the company plan to focus on higher margin pharmaceutical intermediary products. We are very optimistic by the progress we are making on constructing our new factory. We will continue to post photos on the company website so investors can track the progress of the construction of the chemical factory. When the factory opens and production has began, we like to have an investor day to show investors in person and our new factory. Now let's look at the natural gas business segment. We have no revenue in our natural gas segment in the first quarter. our natural gas business lost approximately $34.8 billion in the quarter. We are working with government of Tianbao Town, Danyin County, and Sichuan Province in China closely and plan to proceed with our application for the natural gas and the brine project approvals with related government departments after the government has finalized the land and the resources planning for Sichuan Province. As we noted previously, there are important gas discoveries in Tianbao Town, Danyin County. Natural gas is a cleaner fuel than coal. China is in short supply of natural gas. They continue to be optimistic about the approval for our project. Our natural gas greenhouse plants currently include three wells. Our initial well located at Tianbao Town, Danyin County, Sichuan Province in China. And two others may be in nearby locations. In addition to natural gas, the company also plans to produce bromine and crude salt. We have found huge concentration of bromine in Sichuan. However, because the areas are mountainous, we will have to develop additional plans for the handling of crude salt and waste water. Guidance. Because of the closures in the first quarter, the company believes it should be useful to offer guidance for the second quarter and 2021 fiscal year. For the second quarter, the company estimates its net revenue will be in the range of $12 million to $14 million, net income will be estimated to be in the range of $2 million to $2.4 million without considering non-operational factors. For the full year 2021, the company estimates net revenue will be in the range of $45 million to $47 million, and net income will be in the range of $4.2 million and $4.7 million. without considering non-organizational factors. These estimates include only revenues from the four facilities currently in operation. No estimates revenues are included from the remaining three warming and coastal facilities, the new chemical factory under construction, or the natural gas and the brine project in Sichuan. In addition, These estimates assume warming price could decline from the current levels and that the government will again suspend production for the winter season and the Chinese New Year holidays. Because the 2022 Chinese New Year is 11 days earlier than the year 2021 Chinese New Year, the closure may have more effects on the first fourth quarter of year 2001 as compared to the same quarter of the year 2020. The first quarter of 2022 could benefit from this additional date. We do not know when we will receive approvals for our closed facilities or if the government will again force a winter closure. but we believe that we should be as conservative as possible. Shareholder relations. As you can see that the company has been working hard to upgrade and update its website. We plan to have it completely updated this quarter. We intend to continue to be very active in communicating with shareholders. As we noted, we plan to have a conference when our chemical factory opens. We are also considering other in-person and virtual events. We are exploring various technologies we can utilize. Now let me turn the call back to Mr. Shelby Liu for closing remarks.

In the first half of the second quarter, we are confident that the second quarter and this fiscal year will be profitable. With the opening of the company's chemical plant and some other facilities, we are also looking forward to a strong financial performance in 2022. In the past three and a half years, Due to the changes in the government's environment and the impact of the typhoon, the company has been forced to shut down the factory's related work. Even with so many difficulties, the company's asset coverage is still very strong. Currently, the company has nearly $97 million of cash that can be used to build our chemical plant. We also believe that in addition to the remaining expenses of the flower factory, the company will also restore the current cash flow and achieve profit. Once the company has a reasonable judgment of the time for the flower factory and the currently closed embroidery factory to be opened, Thank you, Mr. Liu. So based on the strong results in the first half of the second quarter,

We have confidence that our quarter and fiscal year both will be profitable. With the projected opening of our chemical factory and some of our other facilities, we look forward to strong financial results for the year 2022. Over the past three and a half years, we have struggled with the closure of all of our facilities with environmental remediation as well as the impact of platform that came up. Even with all of our difficulties, our balance sheet remains very strong. We have almost $97 million in cash, which can be used to build our chemical factory, open our closed facilities, and develop our business in Sichuan. We also believe that with the exception of the remaining expenditures for our chemical factory, we will return to generating free cash flow and will achieve profits. As soon as we have visibility on the timing of production in our chemical factory, as well as the opening of our closed facilities, the company will present to investors our five-year plan for growth and development in future. And the company will also organize virtual events so shareholders can better know and appreciate the company. Now let's open up for the Q&A section. Hi, operator.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For participants 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.

Our first question is from Keegan Weinschwitz, a retail investor. Please proceed.

Hi, Helen. My name is Keegan. I had one question for you. So, Gulf Resources repurchased shares in 2011, 2014, and 2015. The company has $97 million in cash, and if I'm interpreting the latest 10-Q correctly, it will take $28.5 million to finish the chemical factory, leaving a large amount of cash remaining. Given the shares are so undervalued from a shareholder equity perspective, and we expect a strong second quarter, can we return to purchasing shares? Repurchasing shares would provide significant investor confidence in the company's financials.

Okay, thank you. I will translate to Mr. Liu. Mr. Liu, the first question is from Kigin, an investor. He said that the company currently has almost 97 million cash on its account. Then the company predicts that in the future, except for the remaining expenses for the chemical plant, there will be a lot of cash left. Considering the current stock price of the company, the company will consider the stock movement.

Um.

Hi, Keith. Sorry. So this question, Mr. Lohse, this question, the company always explains to our investors that even though companies have this cash, in cash, but besides the conditions for the chemical section, The company also had to get back the rest three Bromine and Crusade facilities back in operation if there is any further upgrade need by the diamonds. And our Sichuan project, which also needs funds in future, company also considered expand its business by doing acquisition in future. So firstly, company wants to keep enough cash on hand for all of this and it's normal business operation and growth first.

Okay, I understand. Can I make a request then for the next 10Q to put a plan of what it would take to repurchase shares or at least put what you just told me in writing into the 10Q? I think a lot of investors are watching the share repurchase pretty closely. Just an idea.

That's all from me.

Thanks, Helen.

Okay. Thank you.

Thank you. Our next question is from Randy Widgett, a private investor. Please proceed.

Hey, Helen. Good morning. Just a quick question. Can you all expound a little bit, just very briefly, on why the approvals on the gas and the other factories are taking so long, and maybe explain what all goes into that. I realize you're dealing with governmental people, but it sure does seem like it's taking a long time. And as usual, I appreciate it. Thank you.

Okay, I will do Blamey. Mr. Liu, this question is for Blamey. He hopes that the company can... First, let me talk about the Sichuan project. The Sichuan project

At that time, when we signed the investment agreement, when we were investing in this project, we signed the investment agreement with the local county government. At that time, China's mining resources policy allowed the county government to lead the development of local natural resources. So we signed the agreement. Later, in the previous few years, some changes occurred in China's mining resources policy. These resources, mining resources, have to be unified by provincial government departments, unified mining, and not randomly mined. So the power of the county government has been taken back. We have to terminate the investment agreement with the county government for the time being. The county government will report to the provincial government about the planning of the local disaster relief resources. After the provincial government and related departments agree, the county government will continue to lead the development. China China China China China China We are currently waiting for the unification of Sichuan Province. If it can be established, we will have the right to continue to develop. So we have to stop now. This is a matter of Sichuan. Let me translate it first. I will explain it later. Let me translate this first. Okay, thank you.

So firstly, let's look at the Sichuan project. This will provide a very detailed explanation on this background and the current situation. Firstly, back in the beginning, the company signed an investor agreement with county-level governments. At that time, it was allowed that company signed with this country level government investment agreement and it was allowed company can do mining. But later on, the Chinese mining policy changed after some years. It needs provincial level approval and the planning approval. Then the company can do mining in Sichuan province. So companies have to temporarily stop its agreement with previous county level government agreements. Now the county level government is organizing all its planning and submit its application to provincial governments and waiting for provincial governments feedback and approval on this mining and the planning. This is the current situation. I hope I explained it clearly.

Yeah, thank you.

Okay, now let's look at the second question. On the rest three blooming and crucial facilities, Mr. Liu will explain. Mr. Liu, please continue. The second question is about the remaining facilities. Okay.

The rest of the sewing factories in Shandong, when we were acquiring them, they didn't have the license to open production. We acquired them at a relatively low price. Because our company had the license to open production and the license to produce. After the re-evaluation and planning is completed, you can produce. So we have to do it for every factory. The first one is to report to the government about the planning and the surrounding environment. We have been actively doing this work for the past few years. We have already had our original main factory and each purchasing branch to ask the government to re-plan and re-evaluate this work. Over the past few years, OK. OK. So for the US,

three for me as a crucial facility because this was back in many years ago. The acquisition the company did with these three factories, they with lower price but without, they don't have mining permits that time. But that time the government policy allowed, previously allowed to use one parent company permits can do mining. But now, after some years, the government policy also changed. It needs individual permit facilities have its individual permits and assessment. So companies have to do for each permit facility is project planning, lending, environmental protection and all relevant approval again and submit to government. Then the company's recent years, like three and a half years, were doing this and upgrading its facilities. We already get four of these factories approved. So we believe with our continuing work and experience, we will get our remaining three facilities approval and the backing operation. Because the company, the government is also finalizing the planning for all areas, also including the prevention of so it may take a longer time. But these are in process.

Okay, thanks so much.

You're welcome.

Thank you. There are no more questions at this time. Would you like me to make any closing remarks?

No more questions?

No.

Okay, thank you.

Hi, operator. Thank you. Can we close for the call today? Thank you for attending the conference call, and thank you very much. Have a good night, and have a good morning in the U.S. Thank you.

Bye-bye. This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation, and have a great day.