Earnings Call Transcript - GURE Q2 2021

Operator, Operator

Good day, ladies and gentlemen. And welcome to the Gulf Resources 2021 Second Quarter Earnings Conference. 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 Xu, IR Director at Gulf Resources. Helen, the floor is yours.

Helen Xu, IR Director

Thank you, operator. Good morning, ladies and gentlemen. And good evening to all of you joining us from China and the US. We'd like to welcome all of you to Gulf Resources' second quarter 2021 earnings conference call. I am Helen Xu, the IR Director. Our CEO of the company, Mr. Xiaobin Liu, will also join us today. I'd like to remind all of our listeners that, in this call, certain management's statements during the call will 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 SEC 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 developments and production capabilities, shipments to end customers, market acceptance of new and existing products, additional competition from existing and new competition from bromine and other oilfield and power production chemicals, changing technology, the 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 in the company's reports filed with the SEC. Gulf Resources assumes 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 those forward-looking 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, August 16, 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 release issued earlier for the details. And at this moment, I just want to say that due to the company website issue and the webcasting we issued early in our press release has been updated, and the company already issued a new webcasting link, and the PR is on its way. So, I think it will be issued very soon, in 5 or 10 minutes before the call, which is supposed to be before the call. It's underway now. So, now, let's turn the call back to Mr. Liu now.

Xiaobin Liu, CEO

Thank you, Helen. I'm Xiaobin Liu, CEO of the company. First of all, I'd like to welcome all of you to the Gulf Resources earnings call for the second quarter of 2021. In this quarter, the company's former auditors, Morison Cogen, resigned, and the company quickly engaged WWC as the independent auditor, allowing us to file our 2021 second quarter 10-Q report on time. We are optimistic about the second half of 2021. We expect to recover production losses from the second quarter in the third quarter, and bromine prices remain high. At our current production levels, our bromine business is expected to be profitable. We have accounted for all of our annual stock grants, which will reduce overhead costs. We are hopeful about receiving approvals for one or more of our closed bromine facilities soon. In 2022, we may begin generating revenues from our chemical factory, and we anticipate that our chemical business could be profitable by 2023. We also believe there is potential for us to produce both natural gas and brine products in Sichuan if we obtain the necessary government approvals. Now I will turn the call back to Helen.

Helen Xu, IR Director

So, now, I would like to discuss with our investors and shareholders about the company's financial results and some questions we received from our investors. So, I assume most of you have seen our press release that contains our income statement, balance sheet, and cash flow as well as a review of events in the quarter and future expectations. Because there is much to discuss, we will quickly review the press release, major points, and focus on questions we have already received from the investors. Then we will open the call to questions for those on the phone now. So, now let's look at the balance sheet first, ending June 30, 2021. The cash balance is approximately $97.1 million, and the current asset is approximately $105 million. Working capital was approximately $95.7 million. Book value is approximately $278.1 million. Now, looking at the income statement, net revenues for the second quarter of 2021 increased 108% to approximately $11.1 million compared to the previous year's same period. Gross margin increased for the second quarter of 2021 by 1,157% from $336,500 to $4 million compared to the same period of the previous year. As a percentage of revenues, gross margin for the second quarter of 2021 was 38% compared to 6.3% in the previous year. Direct labor and factory overhead for the second quarter of 2021 incurred during the plant shutdown decreased 19.7%. As a percentage of sales, they were 10.5% against 32.4%. G&A expenses for the second quarter of 2021 increased approximately $3.7 million compared to the previous year. However, approximately $3.1 million of the increase was attributable to one-time stock awards. Net loss before taxes for the second quarter of 2021 declined 19.6% compared to the previous year's same period. Taxes were a loss of $356,000 for the second quarter of 2021 against a benefit of $672,633 for the second quarter of 2020. Net loss after taxes was $2.7 million for the second quarter of 2021 versus the $2.2 million for the second quarter of 2020. The company had a comprehensive net gain for the second quarter of 2021 of approximately $2.6 million versus a net loss of $2 million for the second quarter of 2020. So, now we will read the questions we have received and then provide answers. Each question can be answered by either myself or Mr. Liu later in the Q&A section. Firstly, now let's look at the questions regarding company auditors. The first question relates to the change in auditors. The question is, while Morison Cogen stated there were no political reasons for their resignation, such a resignation always makes investors nervous. Can the company provide an understanding of why they resigned? The answer is, we do not know why Morison Cogen resigned, but it did not have any conflict with the company while it resigned. And the question is, why did you select WWC? So, the answer is this: WWC came highly recommended by other Chinese firms. We see several advantages to using WWC. WWC has an extensive Chinese-speaking staff. If an auditor is going to be effective, its staff has to be able to speak to people and understand the answers. WWC has offices in Beijing, Guangzhou, and Hong Kong, so we can discuss methods with them on our time. WWC is also an approved registrant of the PCAOB in the US, the CPAB in Canada, and the HKICPA in Hong Kong. Given some of the issues that are currently occurring between the US and China, we believe it was important to have an auditing partner that was approved in Hong Kong and had offices in China. WWC is committed to filing our 10-Q in a timely manner. We did not want to disappoint investors and file late. We'd like to thank WWDC for working so hard that we could get our 10-Q filed on time. The next question is: I know you filed an 8-K, but why is it necessary to issue a press release? Changing the auditor is an important issue. Some investors may have missed the 8-K. We agree completely. But we were advised by our counsel that the 8-K filing was sufficient based on related policies and requirements at that time. So in the future, we'll be more assertive to make sure we file a press release as well. Did changing auditor have any adverse impact on the company? The answer: Changing auditor was a major distraction. Morison Cogen has been our auditor for nearly 10 years. We've never contemplated having to find a new auditor on short notice. When we received the letter from Morison Cogen, we talked to them a lot. We also started calling other companies to get recommendations. We rushed to interview and conduct due diligence on potential auditors. During this time period, a number of issues that we probably should have addressed fell through the cracks. We would like you to understand this created great stress for us. The next question is: Can you explain the stock awards in the second quarter and their impact on earnings? First of all, during the quarter, we issued shares of stock to the company management, directors, consultants and the employees. Our auditors determined they should be priced at approximately $6.61 based on when they were issued. Had they been issued at the end of the quarter when the closing price was approximately $5, the charge would have been much lower. These are annual grants in lieu of other compensation. In coming quarters, our SG&A should be lower because we have paid people in shares. The next question is: Why are you giving these stock grants? This is a very important element of our investor relations strategy. Shareholders keep asking about the low price of our stock and often seem to think management does not care. They do care about the price, and we wish we could do more at this time. However, by giving out stock instead of cash compensation, we are aligning their interests with that of you, our shareholders, as these people increase their holdings in our stock; they become increasingly focused on the price. By keeping the stock grants in lieu of salary, we are ensuring management has a vested interest in seeing the price of the stock go up. The next question is: You normally provide balance sheet or share valuation to save us the trouble of doing the calculation. Can you provide these numbers? The answer is: Yes. Based on 10,469,477 shares outstanding at the end of the second quarter, cash per share was $9.27. Net-net cash, which is cash minus all liabilities, was $7.52. Working capital was $9.15 and the book value was $26.56. As you can see, our stock continues to sell at a discount to all of these measures. Now, firstly, let's look at the questions regarding the bromine business segment. You have been optimistic about the reopening of factories number 2, number 8, and number 10. But these factories are still not open. What is happening with these factories? Why is it taking so long to get open? As we disclosed in our 10-Q, to the company's knowledge, the government is currently completing its planning process for all mining areas, including that for the prevention of flood. As a result, the company may be required to make some modifications to our current wells and aqueducts prior to the commencement of operations of these factories to satisfy the local government's requirements. Because when Gulf Resources acquired these facilities, it was able to use its corporate mining license, but now the government is requiring that each factory have its own license. The major issue with these factories relates to the processing of crude salt and wastewater. These factories are located in some areas. However, the presence of halogen water means the soil content is not rich. The economic value of this land from the production of bromine and crude salt is much higher than the economic value from crops. To finalize licenses for these three properties, the company is working to reach an agreement with the village government. We are optimistic about receiving approval, but as part of the process, we may have to modify our crude salt field and aqueducts. So, the question is: What can we expect from bromine in the third and fourth quarter in terms of pricing and production? Before we deal with the third and fourth quarter, I want to stress that, even with the destruction caused by the inspection, bromine had an excellent quarter. Revenue increased 123%. Gross profit increased 1,953%. As a percentage of sales, gross profit was 45% compared to 5%. During the quarter, bromine made a profit of approximately $2.7 million compared to a loss of approximately $1.5 million. Production in tonnes increased 48% to 1,805 tonnes, while the average selling price increased 51.3% to $5,554 per tonne. As we indicated, we expect no further inspections for the remainder of the year. This means that production should be at least 25% higher in the coming quarters. Bromine prices have continued at a very high level. At the end of Q1, bromine was around RMB 35,000. In the middle of the quarter, it was at RMB 41,000. At the end of Q2, it had risen to record highs of RMB 45,950. Since the end of the quarter, it has declined slightly to RMB 43,000, still very close to its record highs and well above the average for the second quarter. The company expects bromine prices to remain near their current levels for the foreseeable future. This augurs well for our profitability in the third and fourth quarters. Now, let's look at the chemical segment questions. The first question is: I was confused by the photograph on your website and hope you can label them in the future. How many buildings are there in the chemical factory? And are they all complete? How many square meters are they in total? The answer is: We have 11 major buildings, including workshop and warehouses, and a number of smaller supporting facilities. We will label our photographs in the future. Can you explain the timing for installing equipment and the various parts of the production? We are starting to install equipment. This should take a few more months. Then we will begin to test the equipment. If everything works well, we could start trial production early next year. However, since this is all new and modern equipment, we do not know what problems will occur. Trial production, in which we produce small amounts of products on a trial basis, should take approximately six months. Assuming teams work at the plant, we could begin commercial production around the middle of 2022, but we cannot assure that. We expect full production in 2023. However, since this is a major new project with new equipment, there are no guarantees. How much will this factory cost and how much has been spent to date? We originally estimated $60 million. Inflation has raised the cost somewhat. We are now expecting costs around $67 million. We have already spent $41.4 million, including $5.8 million in the second quarter. Question: What can we expect in revenues and profits when the factory is at full production? Where are you focusing on pharmaceutical intermediaries and other products? The answer is: Because we will have modern equipment and focus on pharmaceutical intermediaries and its byproducts, the margin will be higher. There are two primary reasons for focusing on the pharmaceutical product. They are much more profitable and they are less polluting. Given the focus on green energy and more difficult government approvals, we did not want to produce products like oil and gas activities, which had traditionally been our largest product segment. Regarding the Sichuan natural gas projects, question: What is happening in Sichuan province? Are we ever going to be able to produce gas or mine bromine there? The answer is: We remain optimistic about our opportunities in the Sichuan region. We continue to maintain a staff in Sichuan. Senior management always continues to travel to the province to meet with government officials. We know investors are frustrated, but creating environmental plans for a province of 84 million people is a complex undertaking. We believe we will receive government feedback regarding this matter by the first half of next year. This concludes our answer to some of the questions we have received directly from our shareholders. We'd like now to offer those of you on the call to ask questions on your own. So, operator, can we open up the call for the Q&A session?

Operator, Operator

Your first question is coming from Max Waring.

Max Waring, Analyst

Hi. This is Max Waring. I was just wondering what's the annual production capacity of these four factories? This quarter, we did about 1,800 tonnes. I thought maybe we could do about 2,500 tonnes. What's about the maximum these four factories can do in one quarter?

Xiaobin Liu, CEO

For this entire year, considering we typically have one month of downtime and cease production around the end of the year, the total production for the bromine facilities would be approximately 8,000 to 8,500 tonnes for this fall.

Max Waring, Analyst

Okay, for this year, but what's maximum capacity? Like, what's full production?

Helen Xu, IR Director

You mean this year? Or, like, the whole year?

Max Waring, Analyst

No, not this year. Just ever. What's the full capacity? Is that the full capacity for any year, 8,500 tonnes? Or can we do more?

Helen Xu, IR Director

8,000 tonnes to 8,500 tonnes is the maximum production, like, normal production.

Max Waring, Analyst

This question has to do with share repurchases. That would bring huge shareholder value. Is there any chance to get that next year once we get the cash flows going, or is that still longer than that?

Xiaobin Liu, CEO

Currently, the company management has not considered share buybacks because we need the cash to restore the company's operations. Additionally, we are always on the lookout for promising acquisition targets. However, once our business operations are back on track and generating positive cash flow and revenue, the company will evaluate the possibility of implementing these buybacks.

Operator, Operator

The next question is coming from John Rolls.

John Rolls, Analyst

My summary is the company managed to lose money in an extremely strong market for your main product, bromine. And that leads me to two questions and then one comment. One question is that the average price you received for bromine was much lower than the market price throughout the second quarter. How did that come about and what are the prospects for the future? Are you now selling bromine at close to the market price?

Xiaobin Liu, CEO

Firstly, the second quarter saw a significant increase in bromine market prices. Our data reflects the average selling price, but some of our bromine sales were based on agreements made in the first quarter with our customers. These are two primary factors influencing the situation. However, in the third quarter, we expect the selling price to align more closely with the market price.

John Rolls, Analyst

The second question is that you spent a considerable amount of money during your shutdown to add wells. And it was stated that this would increase capacity utilization. Instead, your bromine capacity utilization does not go up in Q2. But according to my calculations, it actually went down somewhat. Why did that happen?

Xiaobin Liu, CEO

Firstly, the wells and output aqueducts have finite lifespans. Therefore, to prolong their usefulness, it is necessary to conduct extensive maintenance to prevent a significant decline in the utilization rate. Additionally, as some wells and aqueducts reach their limit of use, the associated write-off accounting also contributes to the increased costs of constructing new wells and aqueducts.

John Rolls, Analyst

I'd like to close with just one comment. I agree that stock grants are a sensible way of rewarding management. But it's almost always linked to good performance. In my view, performance in this quarter was not good. You had lower volume sales than you had predicted, lower price than the market price, your auditor quits, there was no progress and the continuing issues of shutdown factories of natural gas, and the stock price has not improved. Yet you rewarded management for the second time in a year. I recommend that you look at future grants as rewards for good performance.

Xiaobin Liu, CEO

Thank you for your comments. Mr. Liu points out that the company's revenue and income did not decline this quarter, but it was affected by taxation due to the National Environmental Protection inspection team visiting Shandong Province. This news can be found in public media. Their visit caused local governments to become anxious, resulting in unexpected inspections and requests for the company to halt production temporarily for preparations. Consequently, the company's production volume fell below expectations this quarter. Additionally, the resignation of the company's auditor impacted staff morale, and to boost their confidence and motivation, stock compensation was granted. Moving forward, the company will take your comments into account and connect future compensation more closely to staff performance and overall company performance.

Operator, Operator

The next question is coming from Matthew Macchiarella.

Matthew Macchiarella, Private Investor

I just want to make a comment. I think there's one problem with the company as such. It's about communication. So, I would really appreciate if you consider investing, like, for example, $1 million in order to do these three things. The first one, hire a professional investor relations firm so that you can start to participate at conferences with investment bankers and make sure that Gulf Resources will be known in the financial community. Make a presentation of your company, like a PDF. Another topic that according to me would be very important is to hire a professional communication firm, so that you can start to give, for example, one month update. So, each month, you write like a press release giving an update to investors so they are informed of what happens because we will have 12 updates during the new year. And the third part is that I really think that you should also hire a professional web service because, as of today, I am just on your website; it told that the site is temporarily unavailable. It's very important today that your website provides a lot of information to investors. It works well. It's full of information that is not accessible. Your website is unavailable today. Because otherwise people have a bad reputation of your company if your website doesn't work.

Xiaobin Liu, CEO

Hi, Massimo. Here is Mr. Liu's response. He appreciates your comments and notes that your question has been considered, and your email has been received. In previous years, the company had no income due to all our facilities being shut down. This year, discussions with U.S. professional investor relations firms have not gone smoothly because of COVID-19. Travel restrictions have made it difficult for them to come to China, and for us to go to the U.S. as well. This has hindered our ability to hire a new investor relations professional. However, we will take your comments into account and plan to hire an investor relations expert in the near future. We will also look into updating the company website based on your feedback.

Matthew Macchiarella, Private Investor

As I mentioned before, communication is very important. So, please consider also making a lot of press releases in order to keep investors informed. I want to add another question that was already posed, but I want to put it from another angle. In the last two or three years, the number of shares increased from 9.5 million to 10.5 million primarily for stock grants. Your company has $100 million in cash. I understand that you want to invest this cash to rebuild the company factories and also to make light acquisitions. However, I strongly urge you – I might be your first international shareholder because I have a huge backup – but to do at least a share buyback of 1 million shares. This is the number of shares that were stock granted in the last two years. So, if you do like this, it would be really appreciated. All the stock granted to management for incentives should come from a bank of the company and not from the issuance of new shares. This is something very useful and is something very common in Europe and the United States where stock grants are not done to dilute shareholder but are done with share buybacks. So, if you do 1 million share buybacks, you basically do the share buybacks to cover the stocks granted in the last two years. I would really be happy if you could accept this.

Xiaobin Liu, CEO

Yes, thank you for your comments, and we will take them into careful consideration.

John Rolls, Analyst

I hope that you would put this into practice because I think that would be a good choice.

Helen Xu, IR Director

Yes, we will. Just email me anytime you have questions.

Operator, Operator

And the next question is coming from Randy Leggett.

Randy Leggett, Private Investor

Just to reiterate what the fellow said before. It's kind of like hiding – I know you're not hiding and don't take that the wrong way. It's kind of like the accounting issue and then not telling us about the inspection because all of us are working at the price of bromine and saying there's no way they can't hit that guide. And then we either find out on a conference call. It just seems to happen every quarter. I totally agree with the earlier comments about hiring a professional PR firm. You can't do it all under that. But it's just not looking good. Let's face it. Any company that I've ever invested in, if they didn't do that, they would get creamed in the market. And it's just kind of frustrating. You have so much going for you, nobody really knows about except for us on the conference calls. That's what I find kind of sad. You could be making tons of money if you just get the news out somewhere. Getting back, is there any government regulation? I know we have a problem with dividends because we don't have an overseas subsidiary. And that's been talked about for years too. But is there anything holding us back from doing a buyback from a government regulation standpoint? That's my question really. We should have said something about the accounting firm, and we should have said something about the inspection before the quarterly call. And the CEO should know that. I don't really know what else to say, it's just kind of frustrating. You have so much going for you, nobody really knows about except for us on the conference calls. That's what I find kind of just sad. You could be making tons of money if we just get the news out somewhere.

Helen Xu, IR Director

Yes, I'll double-check it for you.

Randy Leggett, Private Investor

And also, we should let investors know a week beforehand when we're doing an investor call too. Those are just simple things that management can get straightened out on their own, I think.

Xiaobin Liu, CEO

Actually, there are no government restrictions on the share buyback. However, the Chinese government has implemented very strict policies regarding the wiring of funds overseas, which poses a challenge. Sending funds abroad is quite difficult as we must submit applications and obtain approvals. Even for companies to pay invoices, a significant amount of documentation is necessary.

Randy Leggett, Private Investor

I guess I understand that. But again, it would be really simple to tell investors. Hey, put out a press release until we hire a PR firm. Hey, this is what happened with the accounting firm. Hey, we had an inspection this week. We're two weeks behind. People would understand that if you just tell us. It just concerns shareholders when we don't tell everybody. I think you should know that.

Xiaobin Liu, CEO

Okay, we got you.

Operator, Operator

The next question is coming from Keegan Wynn Switzer.

Keegan Wynn Switzer, Private Investor

This is Keegan Wynn Switzer. I'm a private investor. My question is actually one that was submitted earlier around the chemical factory. I think someone had asked what the projected revenues and profits or profit margins were expected to be. I know this is really hard to predict this far in advance, but are there any ranges that you guys are thinking or considering?

Xiaobin Liu, CEO

We cannot provide it right now, but we will do our best. The next time the company issues guidance, we will try to estimate the gross margin and revenue for our chemical segments and products.

Keegan Wynn Switzer, Private Investor

I think that would be great. And then, I know it will probably have to ramp up. So maybe, by quarter or by half-year would be helpful because I know it will take some time to ramp up. But people like me are holding this just because that will be coming in the future. It'll be helpful to know how much revenue it will bring in. So, that's all from me.

Operator, Operator

And the next question is coming from Peter Osiris.