Gulf Resources, Inc.

Good day, ladies and gentlemen, and welcome to the Gulf Resources Conference to discuss fourth quarter and full year 2021 financial results. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Helen Zhu. Ma'am, the floor is yours.

Okay. Thank you, Operator. Good morning, ladies and gentlemen, and good evening to all those of you for joining us from China. And we'd like to welcome all of you to Gulf Resources' fourth quarter and fourth year 2021 earnings conference call. I'm Helen Xu, the IR Director, and our CEO of the company, Mr. Shelby Liu, also joining us for this call today. I'd like to remind you to all of our listeners that in this call, Third, amendment statements during the call will contain forelooking information about Gulf resources incorporation and its subsidiary business and products with the meaning of Rule 175 under Securities Act of 1933 and Rule 3B-6 under the Securities Exchange Act of 1934. And as subject to the safe harbors, 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 China, the risks associated with the COVID 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 other chemicals products, changing technology, the ability to make future bromine assets, and the various other factors beyond the company's control. All four looking statements are expressly qualified in their entirety by this cautionary statement and the risk factors detailed in the company's report filed with the SEC. GovResources assumes no obligation to revise or update any follow-up statement to reflect events or circumstances after the date of this call. Accordingly, our company believes the 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 estimates as of today, the 13th of April, 2022. 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 webcast. So please locate our press release issued earlier for the details. So first of all, I like to start by reviewing the fiscal year and fourth quarter 2021 and then product updating investors on each of our segments. For the 2021 fiscal year, the revenues exceeded approximately $65 million and increased of 95% compared to the previous fiscal year. The gross profit was approximately 21.9 million, an increase of 217% from the previous year. Gross margins were 15.7% versus 31.2%. Profits before taxes improved approximately 14.9 million to 5.2 million from a loss of approximately 9.7 million. Taxes were approximately 6.3 million, 117% of profits reflecting the cancellation of deferred tax assets. The loss after taxes declined 89% to $924,718. Three factors contributed to the net loss. Firstly, the depreciation expenses of approximately $4.3 million for closed factories number two, number eight, and number 10. Second reason, there are approximately $2.7 million for the cancellation of deferred tax assets. And the third reason, approximately $3.1 million in compensation charges for the shares being issued to companies, management consultants, and staff. So now we review the operating results by segment. Firstly, let's look at the bromine segment. The revenues in bromine increased by 78% to approximately $48.8 million. The increase was due to an increase in volume of 24% and an increase in pricing of 57%. For the year 2021, the average selling price of bromine was RMB $42,444. The current price is RMB $55,600. Gross profit increased by 182% to approximately $26 million. Gross profit margins were 53% compared to 37%. Net income in Bromley increased by 727%. to approximately $13.4 million. For crude salt segment, the revenues in crude salt increased by 101% to approximately $6.1 million. For the physical year, the crude salt segment lost approximately $1.1 million compared to a loss of $3.6 million in the previous year. Lastly, let's look at the chemicals and natural gas segment. The chemical product segment sustained a loss of approximately $2.5 million, roughly in line with the loss in the previous year. The chemical business did not operate in year 2021. The natural gas segment sustained a loss of approximately $167,000. The natural gas segment also did not operate in year 2021. Now let's review our first quarter 2021 results. In the first quarter 2021, revenues increased 76.7% to approximately $20.9 million. Growth margin increased 156.2%. Margins were 62.4% compared to 43.1% in the previous year, reflecting the higher prices for both Bromine and Crusade. Income from operations increased 350%. Tax increased 718.1%. The company incurred a loss of approximately $1.1 million versus a profit in a previous year. a number of unique accounting sectors impacted the first quarter results. Firstly, the depreciation in the first quarter was approximately $4.5 million higher than the previous year, primarily because we took all the depreciation from the three factories closed in one quarter, as we mentioned earlier. Secondly, the tax rate was 129% of profit instead of the traditional 25% because we canceled some deferred tax assets. Third reason, in excluding this one-time event, we would have shown a profit in the fourth quarter and in the year as a whole. Now let's look at cash flow. For the year, the company generated $23.3 million cash from operations compared to $9.3 million in the previous year. Capital expenditures were $30.1 million compared to $21.7 million in the previous year. Approximately $20.3 million worth spent on upgrading wells, aqueducts, and other resources for the chemical and crude salt segments with expenditures. And there are approximately $8.4 million worth spent on equipment for the new chemical factory. Now let's look at the balance sheet. The company ended the year with cash of approximately $95.8 million on a per share basis using $10,471,924 shares issued and outstanding ended by December 31, 2021. This equals to $9.15 The net cash per share was $7.82. Working capital per share was $9.70. Shareholders' equity was $27.37. Now let's review our business by segment. Firstly, let's look at Bromley and Cushot segments. The pricing of Bromley. While Bromley prices have declined from the record highs, when all factories were closed. They remain substantially higher than last year. According to Census.com, roaming prices per ton were $36,222 on April 5, 2021, and $55,600 on April 5, 2022. We expect higher prices to continue for a number of reasons. First, the bromine factories have been permanently shut down. Secondly, because of the winter shutdown and the new COVID restrictions, some of our customers have not yet resumed production. Third, demand for bromine products such as pharmaceuticals and their products is increasing. Fourth, sector that could potentially lead to an even more significant price increase is the use of zinc and bromine batteries. The combination of zinc and bromine is now being used in hybrid batteries that appear to offer significant applications for EVs and power storage. The company does not know how important this application could be. But according to a study by marketdataforecast.com published on April 7th, the title of the market for zinc and bromine batteries is projected to grow from $8.6 billion in year 2021 to $20.6 billion in year 2027. We are not making any projections. But we think the adoption of these batteries could have a significant positive impact on the price of bromine. Fact sheet number two, number eight, number 10. The government is continuing its environmental planning to protect the pollution, sorry, the population against the pollution and the impact of flours. However, Recent contacts make us increasingly optimistic that the company will receive approval to open one or more of these factories in year 2022. We would like to be required to invest in new wells and aqueducts. The total cost of this rectification will depend on the requirements of the government, which cannot be estimated until the government gives us specific instructions. However, with the current price of bromine, we expect this factory to be strong contributors to profit. Chemical factories segment. Following the electricity restrictions are being eased in February year 2022 regarding its using chemical factories. At that time, the company requested the production and delivery of most of the equipment in an expedited manner. We are not certain when all the equipment will be delivered as some of our vendors are still closed because of the renewal of COVID restrictions in China. However, we do believe that all equipment should be delivered and installed by the third quarter of 2022. The delays caused by the electricity issues may increase the total cost of the chemical factory by approximately $5 million. As we have previously noted, once the equipment is installed, we will begin test and then trial production. This process should take about approximately six months. Assuming this could be another winter closure, we expect commercial production to begin in year 2023. The company has strong demand for the types of pharmaceutical intermediate products and byproducts this chemical factory will produce. Pricing remains extremely strong. The company believes this factory will generate sales and profit by year 2024. The company will be active in posting photographs of the factory so investors can follow our progress. Lastly, let's look at our Sichuan natural gas and brine projects. The company is still waiting for the provincial government of Sichuan to finalize its land and resource planning for Sichuan province. We hope investors can understand that this planning is not only for the entire province, which is about 84 million people, not just for our project. As a result, we cannot project when the province will complete its work. However, we do remain optimistic about the long-term potential. Investors have asked why we remain optimistic about this project. There are two reasons. Firstly, the central government has approved that privately owned enterprises are allowed to participate in the natural gas production. Given this approval, we do not think our application will be denied. Secondly, while we have been waiting for the province to complete its plans, the fundamentals underlying this project have changed significantly. natural gas prices continue to rise and China has faced a shortage of energy, especially clean energy. Bromid prices, as we have discussed, also continue to rise. The company would like to remind investors that the bromide concentrations in Sichuan are extraordinarily high. Finance sheet and cash. Investors have also asked why we do not put our substantial cash balance in long-term financing instruments that could provide us with additional income? The answer is that we have no exact handle on the timing of decisions by the government or opportunities on which we could capitalize. We are now moving ahead to complete construction of our chemical factory. We believe we will receive approval to open one or more of our closed roaming factories in year 2022. The opening of these factories will require some capital expenditures as well. If and when we receive approval in Sichuan province, we want to be very aggressive in treating for both natural gas and brine resources, not just in our existing location well, but in other locations that we have identified We also consider acquisitions, guidance. We will provide guidance for the full year when we report our first quarter in about one month. Because of the winter closures and the impact of the cold on crude salt production, the first quarter, year 2022, normally the first quarter is the weakest quarter of the year. In the first quarter of year 2022, the company expects first quarter revenues to be higher than those of the previous years. It also expects the loss to be very significantly reduced. However, any estimates exclude any potential non-recurring factors or write-offs. Now, let me turn the call over to Mr. Liu. Hello, everyone. Thank you.

I'm Mr. Xiaobin Liu, the CEO of the company. First of all, I'd like to welcome all of you to GovResources

call post quarter and fiscal year 2021.

The last four years have been very difficult for our company. We could not have predicted our business would be impacted by one of the worst typhoons in Chinese history. I could not have predicted COVID

or its recurrence. We could not have predicted the impact that COVID could have on the planning processes of the government. However, we believe we are beginning to see significant progress on all fronts.

and supply is still at a high level. At this level, our embroidery and raw material business should be profitable. We also believe that at least one embroidery factory will be approved this year. With the easing of the limited-time policy, we are completing the construction of the new Yuxing Flower Factory as soon as possible, and starting to test

We are very encouraged about the continuing high price of bromine. As we noted in our press release, we are seeing new demand for bromine and supply remains highly constrained. At these levels, our bromine and crude salt business should be profitable. We also believe we will be able to get approval for at least one of our bromine factories this year. Now that following the electricity restrictions are being eased, we are moving as fast as we can to finish construction and begin and then can begin testing and trial production in our new Easton Chemical Factory. We expect this factory, which will primarily produce pharmaceutical intermediate products with higher growth margin.

Although we are not sure whether or when this will happen, we know that the opportunity is huge. We have enough cash to realize the company's growth, and we have a new auditor who is in line with the PCAOB standards. We believe that in 2022 and the following years, the company's sales and profits

Despite the delays, we remain confident that we will be able to produce natural gas and bromine in Sichuan. China needs more natural gas and bromine, and we expect to be part of this development. While we cannot determine if or when this will occur, we know the opportunity is huge. We have the cash to grow our company and the new auditor who is PCAOB compliant. We believe that sales and profits will increase in year 2022 and in subsequent years. Now, let me turn the call back to Helen for questions. So, hi, operator. Can we open our QA section?

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Your first question for today is coming from Asher Stein. Asher, your line is live.

Yeah, hi. My question relates to buybacks and dividends. I know you rejected before, but it appears that the net current assets of the company is around $9 per share. I got an email from you over this quarter saying that there's no actual restrictions on share buybacks or dividends, just that it's really difficult. But in my opinion, if the company can't do any share buybacks or dividends, These shares are pretty much worthless, and the company would be better off liquidating and returning all the cash to the shareholders. I just want to know what your opinion on that is.

Okay. So I also need a major question. That is, does the company consider any buyback based on its current net assets per share with $9 something?

Yeah, my question is that the net current assets per share is around $9, and obviously the share price is well below that, and obviously the reason is because, you know, the company is not returning value to shareholders through buybacks or in any way. I mean, there's no way to pay a cashback to the shareholders, so I don't see where that value is going to come from if the company, like what... Has the company started any process in which it will return value to shareholders through buybacks?

Okay, I got it. Okay, thank you. I will translate to Mr. Liu for your question firstly. Hello, Mr. Liu. The first question is from investor Asher Stain. His question is that because the company currently has plenty of cash, and the company currently has a lot of US shares, It's more than nine dollars, but the company's stock price is very low, so there's no other way in the company. If you don't consider the return of the shareholder, what do you think of the company's return on the stock? Because I've mentioned this before. It's the same as before.

The company now has a lot of business to do, so we need to do our business first. We'll think about it later, okay?

Okay. Hi, Asher. With the response that, as we explained in our call, and even in our press release, that the company wants to because its major concentration still is operation. We have three major business segments. Our bromine factories, we have to reopen them. We may need cash on hand to open it. And our chemical factories, which is also under construction now. And our natural gas in Sichuan project, which may need funds any time when government approved. And we need to do more investment on that project. So the company's current concentration still, it wants to put its efforts to make its operations back on normal, firstly. Then after everything is on track and the business on normal operation, then it will consider buyback or pay dividends that time to reward our shareholders and investors.

Got it. Thanks.

Okay, thank you.

You're welcome. Your next question for today is coming from Frank Manning. Frank, your line is live.

Thank you. I have a suggestion that should dramatically increase Gulf Resources share price and liquidity. You should hire a good investment banker to sell Gulf Resources to an appropriate buyer. Gulf Resources could be bought with the buyer's shares. The buyer should be a publicly traded company with a good business, reasonable share price, and much higher trading volume than Gulf Resources. A reasonable price should be at least $12 per share. I say this because of the company's cash, working capital, shareholders' equity, and business, as recently reported. The buyer could keep the current Gulf Resources employees to operate your business. Mr. Liu, please comment. What do you think of this idea? Will you discuss this with your board of directors?

Okay, thank you. I will translate. Mr. Liu, the second question is from Frank Manley. He said he has a very good suggestion, which is to build a company, find a very good investment, and then sell the company to other companies. Because he thinks the company's current net worth is very high. The company's stock price should be at least 12 yuan or more. Then he wants to know what you think. Or give this suggestion to the board of directors to see what their thoughts are. He wants to know your understanding first. This question was asked by the board of directors before.

But he also expressed his opinion to us. He said it was because the company was founded by him. And he thinks the company's future prospects are still very good. He didn't plan to sell the company. If the epidemic gets better, we can hire a better investor to help the company improve its value, including to introduce a strategic investor. But he doesn't plan to sell all of them. He also expressed some of his opinions to our board of directors.

Hi, Frank. Here's a response from Ms. Liu. She stated that there is one call when investor contacted the company chairman previously about your idea. And the chairman and the boss discussed about it. Because based on chairman's opinion, he built up this company with all his efforts and hard work. He does not want to sell all of his efforts to others, but they do consider to, when the COVID becomes better and controlled, they may consider to find an investment bank to increase the value of the company and to find strategic investors and try to increase the company value more.

Okay. I think everybody that follows Gulf Resources knows that a big problem is the share price and the liquidity. And I know one issue is the difficulty of dividends. And I just think that the idea of selling the company to a company that was public and had a higher trading volume and a reasonable share price would be a good way for the investors to get the the price they deserve.

I think we've got your idea. And there is a discussion with chairman and the board already. And the chairman is hard to make the decision, you know, for him. And then the board as well, they think they may find investment bankers to increase the value of the company more when the company can travel better. Maybe, when the situation becomes better in market, and try to increase the value for our investors.

Okay, thank you very much.

You're welcome. Once again, if there are any questions or comments, please press star 1 now. Your next question for today is coming from Randy Liggett. Randy, your line is live.

Hey, Alan. How are you this morning?

Hi, Randy.

I'm fine. Thank you.

Good. Hey, I just wanted to check in and see whatever happened to the idea of hiring a more kind of, I don't want to say worldwide, well, yeah, worldwide PR firm to get the story out a little bit more. I mean, the man... The gentleman right before me, he's right. I mean, the volume is just horrid. And not much y'all can do about that, but I think a good PR firm could certainly help with that. Y'all are making a ton of money and managing the company well, but the story just can't seem to get out there, and you can only do so much. Now I was just wondering whatever happened to that idea.

Okay, thank you. I'm translating this one for us. This question is from Randy Legit. He said that Frank's suggestion is also good, but his suggestion is that the company should consider finding a world-renowned PR company, an investor-related company, and tell the story of the company to let more people know. Hello? Hello? Hello?

我们公司一直也有这个想法,并且在积极的寻找一些在国际上有名的IR公司来替我们做一些推广的工作。 但是由于现在中国的对待这个疫情的一些政策,导致我们跟国外的一些公司交流不是很顺畅。 Hi, Randy. Firstly, thank you for your comment, Mr. Lu said. And he said that the company has always been thinking. Hello?

Yes, ma'am. The company has always been thinking thinking about this suggestion, and we have been looking for the worldwide well-known PR firm.

Yeah.

But due to the policy now, COVID control in China, we have difficulties to have face-to-face discussion with the possible PR firm. But when this COVID being, you know, the policy one is in China, we can go out or like overseas, we can come in China easily and would be much easier for our discussion on this matter with them.

Okay. Thank you. I appreciate it.

I'll talk to you soon. Okay. Thank you.

There are no further questions in queue.

Okay, 刘总,那没有问题了。 我们今天这个电话会到此结束。 Hi, operator, if there is no more questions, can we close the call for today? And thank you for all of you attending this call for today. Have a good day.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.