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Edited Transcript of GURE earnings conference call or presentation 15-Nov-19 1:00am GMT

Q3 2019 Gulf Resources Inc Earnings Call

WEIFANG Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Gulf Resources Inc earnings conference call or presentation Friday, November 15, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Helen Xu

Gulf Resources, Inc. - IR Director

* Xiaobin Liu

Gulf Resources, Inc. - CEO, President & Director

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Presentation

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Operator [1]

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Greetings, and welcome to the Gulf Resources 2019 Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Helen Xu. Thank you. You may begin.

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Helen Xu, Gulf Resources, Inc. - IR Director [2]

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Thank you, operator. Good night, ladies and gentlemen, and good morning to those of you joining us from China. We'd like to welcome all of you to Gulf Resources Third Quarter 2019 Earnings Conference Call. My name is Helen. I am a Director. Our CEO of the company, Mr. Xiaobin Liu, will also join us in this call today. I will be also in translation of his comments during our Q&A section.

I'd like to remind you to all our listeners that in this call, certain management statements during the call will contain forward-looking statements about the Gulf Resources and its subsidiary business products within the meaning of the Rule 175 under Securities Act of 1933 and the Rule 3b-6 under 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 China; 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 oilfields in the power production chemicals; change in technology; the ability to make future bromine assets; and the various other factors beyond its 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 reflected in those forward-looking statements are reasonable and there can be no assurance [that] 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 15th of November 2019, China time.

For those of you unable to listen to the entire call at this time, a replay will be available for 14 days at the company's website. The call is also accessible through the webcast and the link is accessible through our website. So please look at our press release issued earlier for that detail. (foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [3]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [4]

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[Interpreted] Okay. Hello, everyone. Thanks for attending Gulf Resources 2019 Third Quarter Earnings Conference Call. So next, Helen will provide the summary for this quarter's operation and financial results.

So before covering the details of the third quarter of 2019, Gulf Resources would like to review current regulatory situation in China as well as the clean-up from Typhoon Lekima.

So when the bromine industry started in Shouguang City more than 20 years ago, the city granted permission for companies to mine the bromine and crude salt. Everything we did from that time was in accordance with the rules of Shouguang City and the surrounding counties. As environmental problems in China became more severe, the Chinese Central Government promulgated a series of national regulation. Based on the new National Environmental Protection regulations and requirements from Land Supervision, we believe that most of the companies in our industry have to submit a series of rigorous plans, including our factories, even though some of our bromine centers have been operating for more than 20 years. We believe that the central government intends to strengthen the environmental protection in China by implementing the new national regulations. However, we believe that this has put a significant strain on local governments and corporations, which were not required to have these approvals before.

Since enactment of this regulation, the local government has had to work with the provincial governments to develop a comprehensive plan that limits pollution, protects the environment and does not harm workers and farmers. This has been a complex and extremely difficult task. It has been made more difficult because many of the processes have continued to change as provincial governments attempt to meet the requirements of the national government.

We would like to briefly review where we are in this process. So let's look at our bromine and crude salt segment firstly. In Shouguang City, all of the bromine producers are working closely with the local government to develop a comprehensive plan that will satisfy the requirements of the provincial and national governments. We are pleased with the progress that is being made and believe that the full plan will be implemented in the near future. This does not mean that we will definitely receive approval to open our remaining facilities, but we are confident that the process will be completed in the near future and that most, if not all -- all of our remaining facilities will receive full approvals for opening.

The task in Shouguang City has been made significantly more complicated by Typhoon Lekima, which flooded many of the bromine mines and crude ponds -- crude salt ponds. In addition to the project approval and the land issue for each company, the government has to review the actions of each company to repair damages caused by the storm. This has put further stress on approval process. While we do not believe it will change the outcome, but we do believe that [the stress] at government officials has caused delays in the final approval process.

In the third quarter of 2019, Gulf Resources has been working on the repairs on damages from Typhoon Lekima and has also completed the construction of new ponds and aqueducts. During the quarter, we had focused on getting factories #1 and #7 fully repaired soon. We believe these factories will reopen in December. Winter is a slow seasonal period for bromine production because of Chinese New Year and because some crude salt product cannot be processed well during the coldest months. We expect to reach normal commercial production level in these 2 factories in March next year.

We have also been conducting repairs on factories #4 and #9. We expect to receive approvals for these 2 factories around the end of the year and begin production early next year.

We have also been conducting repairs on factories #2, #8 and #10. At this point, we expect to complete the repairs by the end of the year or early in next year. We do not anticipate major impediments to receiving government approval for these 3 factories and mines.

At the same time, we have been spending a considerable amount of money drilling new wells. In the third quarter, we paid more than $25 million drilling new wells. While the capacity of each factory is fixed, the new wells should enable the company to raise our capacity utilization rate by 10 basis points. In other words, if the current capacity utilization in a factory is 40%, we should be able to attain capacity utilization rate of 50% with these new wells. This could be extremely significant. Production costs are relatively fixed. Increases in capacity utilization should flow straight to our bottom line. Given the current level -- elevated price of bromine, our business should be more profitable.

So let's look at the Chemicals business segments. The focus on the overall planning and project approval process has caused delays in the approval to begin construction of our chemical plant. We have leased land in the designated chemical industrial park. We have provided the government with a comprehensive set of plans. We have discussed our plans with the government officials, who have informed us that there are no technical issues. We are only awaiting for the government officials to have sufficient time to give us their final authorization so we can begin our construction. We are very confident that we will receive approval and begin construction in the first half of next year.

And lastly, let's look at the Natural Gas business segment. In Daying County, the situation is a little more complex. The company signed an agreement with the county to explore and develop potential underground brine water resources back in year 2011. Our initial drilling indicated that there are large deposits of both bromine and natural gas. There is ample natural gas in Sichuan Province, and the government has enacted drilling rules, which we are following. However, the government has also decided that it needs the Mineral Resources Planning now. This is a reasonable position for the government to take. The government needs to protect its people and its environment. However, because we believe we are not the only company in Sichuan, but with the potential drilling for brine water, we have to wait until the provincial government has this plan done. We remain optimistic about the opportunities in Daying County. However, we are not committing more resources to this project until the government fully established the Mineral Resources Planning.

So let's look at the financial results for 3 months ended September 30, 2019 compared to 3 months ended September 30, 2018. Net revenue for the quarter were approximately $4.5 million against $343,000. Costs of net revenue were approximately $2.4 million against $68,000. Direct labor and factory overhead incurred during the plant shutdown were approximately $3.5 million against $5.6 million. General and administrative expenses were approximately $5.0 million against $1.3 million. Loss from operations were approximately $6.4 million against $26.8 million. Loss before taxes were approximately $6.3 million against $26.7 million. Income tax expense were approximately $6.7 million against a benefit of approximately $7.2 million. The net loss was approximately $13.0 million against $19.5 million. Net loss per share was $0.27 against $0.42.

During the quarter, we had 2 bromine and crude salt factories open for approximately 6 months (sic) [6 weeks] until Shandong was hit by Typhoon Lekima. Our chemical business was not in operation as we await approval for our new factory. Our natural gas business was also not in operation as we await approval by the government of Sichuan Province.

In this quarter, we paid approximately $46.1 million on property, plant and equipment. We spent approximately $20 million on building aqueducts and related facilities. We also spent $25.7 million in drilling new bromine wells. We finished the quarter with cash approximately with $105.2 million against 178 -- $179.0 million at December 31, 2018. Net cash per share was $2.21. The net-net cash per share, which is like cash minus all liabilities per share, which is $1.75. Despite our losses and heavy capital expenditure, we are still in a strong cash position and have sufficient cash to complete our rectification and build our chemical factory.

Current assets were approximately $117.1 million, while current liabilities were $12.2 million. Property, plant and equipment was approximately $139.5 million against $82.2 million at December 31, 2018, which reflects a major capital expenditure program to upgrade our facilities. The total assets were $288.0 million, while total liabilities were only approximately 21.8 -- [$21,800]. Stockholders' equity were approximately $266.1 million, stockholders' equity per share equals to like around approximately $5.59.

For greater detail of our financials, so please refer to our 10-Qs we filed earlier.

So this has been obviously a very difficult time for the company. Fortunately, we enter into this period with a large amount of cash and virtually no liabilities. But Mr. Liu stated that he is very pleased with what we see happening in Shouguang City. The government is working closely and very supportive with the bromine manufacturers. So he believe that factories 1 and 7 will reopen soon. Also, we will get approval to open factories 4 and 9 in the very near future, and the factories 2, 8 and 10 should be also be operational early next year.

The only issue currently interfering the cost -- with the construction of our new chemical factory is the environmental protection certification. Based on discussions with the government, we believe it is only a matter of time before this project is underway and we can once again profitably produce chemicals. As far as the natural gas is concerned, the company is continuing to work with Daying County until Sichuan Province has the Mineral Resources Planning created.

So the company are committed to do better communication with our shareholders. When anything happens, we will communicate it. We will also provide shareholders with our 3-year plan, so they can appreciate the opportunities we will have ahead of us once our facilities are open. We are also trying our best to keep our NASDAQ listing. We have nominated a new independent director to fill the vacancy on the board. The new independent director is to be elected at the Annual Shareholders' Meeting scheduled on December 18, 2019. We also have included a proposal to vote for a reverse stock split at our shareholders' meeting in order to regain compliance with NASDAQ requirements.

We appreciate the support of our long-term shareholders and believe that we are very close to returning to profitability.

There is the update and explanation on the legal issues that we want to highlight it here as well. So I think for those of you who read the 10-Q in the Note 20, loss contingencies. They did mention that there are several written decisions of the administration penalty to be sent to the company. Because in the last 20 years, there were no common regulations to call bromine plant manufacturers to approve land use and planning approval documents. As such, we believe most of bromine manufacturers in China, Shouguang City do not have land use and planning approval documents. And the lease we advanced come from village associations. We are facing the same issue in connection with the land use and planning as a company.

So the company was in the process of resolving the issue in connection with -- into Haoyuan Chemical land use and planning diligently. The company has been in discussion closely with the local government authorities, with help from Shouguang City Bromine Association to seek relief. And based on our verbal confirmation by government authorities, we believe that the administrative penalties imposed by the bureau according to the written decision are being reassessed by local government authorities and may be revoked. The company has obtained verbal confirmation from the local government authorities that the administrative penalty imposed on factories #7 and #8 are being revoked and the production of factory #7 was allowed to start operation back in April 2019. So in addition, on August 28, 2019, the People's Government of Shandong Province issued a regulation titled "Investment Project Management Requirements of Chemical Companies in Shandong Province," permitting the construction of facilities on existing sites or infrastructure of bromine manufacturing and other chemical industry-related types of projects. The company believes that the goal of government is to standardize and regulate the industry, but not to demolish the facilities or penalty the manufacturers.

As of the date of this report, the company has not been notified by the local government that it will take any measure to enforce the administrative penalties based on the information known to today. The company believes that it is remote that the written decisions or court rulings will be enforced within the expected time frame, and a material penalty or costs and expenses against the company will result. However, there can be no assurance that there will not be any future enforcement actions, the occurrence of which may result in future, further liabilities, penalties and operational disruption.

So at last, let's look at some past few questions we received during this quarter from some shareholders. Firstly, during the -- on the bromine factory, the first question asked: So in your September 24, 2019 press release, you said that factory 1 and 7 were damaged by Typhoon Lekima and that the repair will take 2 months and it would cost around $5.6 million to $7.2 million.

The answer: The repairs are basically completed and within budget. This cost did not include the possible drilling new wells, which will increase our utilization. Rather, they are solely cleanup cost.

Question two: On production is that as with these 2 factories, how long do you expect it will take to return to the pre-Lekima production levels?

As we noted earlier, we think we can start production December and reaching our normal commercial production level in March of next year because many of our customers close early for Chinese New Year. In addition, it's also difficult to mine crude salt and bromine when the weather is too cold. As far as there is a new well, our production utilization should be higher.

Question three: In your May 13, 2019 press release, you say it's hard to receive approvals. So you said electrification for factory #4 and #9 by the end of second quarter 2019 or early in the third quarter of 2019. In your September 21, 2019 press release, you stated that factories #4 and #9 will gain their final approvals and commence production soon.

Answer: We have discussed the delays above, but expect these 2 factories open remain soon and to reach full production during the second quarter.

Question four: What is the status of factories #2, #8 and #10, [while watching] those regional governments [and they are] optimistic about openings the factories early next year [chemical plant reopening].

Question five: In your May 13, 2019 press release, you said that you are waiting for the repair approvals to begin construction, and that you have the factory to be operational before the end of 2020.

We have discussed the chemical factory early. We are nearly reaching for that environmental approval. So as soon as we receive this approval we will begin construction. We have spent about $10 million on the land lease and expect to spend an additional [$60 million] on the factory, Daying County.

Number six, Question #6: At the end of May, you were told that a factory needs the new approvals before starting production of natural gas. You stated that you expected your project will not take more than 3 months. It's now almost 9 months since this announcement. So as you stated about, the government has decided to create new Mining Resources Planning, so the bromine and natural gas in Sichuan Province. We are working closely with the Government of Daying County and to hope we'll receive the plans done by the Sichuan provincial government. Because these decisions are being made on provincial level, we cannot estimate the time that will be declared. Until we see the approval and understand the rules related to our industry, we will not make any more investment in this project. Nevertheless, we remain optimistic about the opportunity.

Question 7: We have seen that the amount of shares from the executive officers. We understand that given the lack of your dollars, this was definitely a way of -- for the Chairman to buy those shares. But we are concerned about why these executive share -- officers sold their shares at such a low price?

Answer, [Mr. Liao] felt under great pressure to protect the shares to which he has committed. But if he could not get money out of China bank shares from his (inaudible) was his only alternative [course.] And employees who sold their shares were helping the Chairman from losing face with shareholders.

Question 8: We understand that the Board has until February 17, 2020 to fix the below $1 [efficiency view] of the NASDAQ enlisting. In the event the stock price remained there, it is -- you have a proposal for a 1 to 2, up to 8 reverse stock split, which would bring back the stock in compliance. When do you expect to make a final decision?

We expect to make the decision at or shortly after the shareholders meeting on December 18, 2019.

Question 9: Will you wait for production to at least restart and see the impact on the stock price before making a final decision?

Answer, we will not wait for production to begin. We do not want to [ostracize] the shareholders.

Question 10: Out [on the right, 20 shares 20,000 shares] as per approval of shareholder equity compensation plan, you had until October 28 to submit a plan, which we would assume will be linked to the Annual Meeting of Shareholders.

We are in the process of solving this problem and having help from the company's strategic counsel.

Question 11: Regarding the communications with shareholders. We, as usual, would like to hear more from the company and not have to wait until the earnings call to know what is going on. Providing regular news on the process to get them reopened would help a lot. You have done that but you could do more.

We are committed to providing more information to our shareholders. But unfortunately, this quarter, we do not have any big progress on repairing damages from Lekima and working with the local government. We have had really no big thing we were able to report. In the future however, we will update shareholders whenever something happens.

Question 12: Shareholders would like to hear from the company on the strategy for the company longer term, let's say, for the next 2 to 3 years.

As we noted above, we are developing a 3-year plan and will communicate this plan to shareholders as soon as it is complete.

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Operator [5]

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Ms. Xu, would you like us to begin the question-and-answer session?

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Helen Xu, Gulf Resources, Inc. - IR Director [6]

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Yes.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question coming from the line of [Christopher Heck], a private investor.

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Unidentified Participant, [2]

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Helen, thank you for the call tonight. This quality is much better, so it's good to hear. I just have a question about the 10.3 million shares for the equity incentive plan, whether that will be adjusted by the same percentage as the reverse stock split?

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Helen Xu, Gulf Resources, Inc. - IR Director [3]

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Yes.

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Unidentified Participant, [4]

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Okay. It will definitely be adjusted by the same percentage of the stock reverse split?

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Helen Xu, Gulf Resources, Inc. - IR Director [5]

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You mean the intensive plan, right, which I think is the answer to that.

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Unidentified Participant, [6]

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Yes. So it's 10.3 million, and you do a reverse stock split for 1 for 4.

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Helen Xu, Gulf Resources, Inc. - IR Director [7]

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For loans already issued, it will be not affected. But for those still left in the pool will be reversed.

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Unidentified Participant, [8]

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Okay. So any new shares to be issued?

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Helen Xu, Gulf Resources, Inc. - IR Director [9]

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Will be...

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Unidentified Participant, [10]

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Well, there's 10.34 -- [10,341,000], you're asking the shareholders to approve. And then if you reverse split the stock 4:1, 1:4, I'm assuming that 10 million would be reversed, 4 for 1 also?

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Helen Xu, Gulf Resources, Inc. - IR Director [11]

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Sorry, yes, so I'm not quite sure. I think I have to consult the company's legal counsel. But I can e-mail back when I have the clearer confirmation, do you mind? Maybe -- what's your name please? Maybe you can e-mail me and I will ask company counsel when we have the very sure answer, I will let you know.

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Unidentified Participant, [12]

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Sure. Will definitely look.

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Helen Xu, Gulf Resources, Inc. - IR Director [13]

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Okay, e-mail me then.

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Unidentified Participant, [14]

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I would appreciate it. I'd like to get the accurate answer on that. I did e-mail you already, to both you and Max the question on November 4, but I will resend the e-mail. I'm referring to the same...

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Helen Xu, Gulf Resources, Inc. - IR Director [15]

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Okay, okay. I'll wait for it.

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Unidentified Participant, [16]

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...e-mail that I've communicated with you before that you've responded to.

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Helen Xu, Gulf Resources, Inc. - IR Director [17]

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Okay. So, I will do that. Appreciate it.

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Unidentified Participant, [18]

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Okay. And I did have a couple of other questions. Could you tell me how many bromine wells were drilled for the $25,671,000 that was spent? How many new bromine wells were drilled for that $25 million?

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Helen Xu, Gulf Resources, Inc. - IR Director [19]

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Okay. You have to wait for that, I'll ask Mr. Liu. (foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [20]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [21]

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[Interpreted] Hi, this is the [amount] which comes from the company CEO, Mr. Xiaobin Liu. He says that the average price to drill for 1 new well, which costs around more than $20,000 a well. So there are totally more than 1,000 wells drilled by this $25 million.

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Unidentified Participant, [22]

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Okay, maybe 1,000 new wells were drilled?

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Helen Xu, Gulf Resources, Inc. - IR Director [23]

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Yes, yes.

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Unidentified Participant, [24]

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Okay. Are you able to ask him that question? I would think that would be a pretty basic question as far as whether the equity incentive shares of 10.3 million that you're asking shareholders to approve, whether that will be adjusted the same amount as the reverse split? I think the shareholders have a right to know that.

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Helen Xu, Gulf Resources, Inc. - IR Director [25]

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I do not think it's really clear because we did not ask this question to counsel. So I'm not sure if he can understand it or -- no, not understand, if he can really give you the correct answer. I think it's still a good idea we ask counsel and get back to you.

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Unidentified Participant, [26]

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Okay. Are you going to make that known to all the shareholders publicly before the proxy? It's unclear on the proxy.

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Helen Xu, Gulf Resources, Inc. - IR Director [27]

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Yes, I think so. I will talk to counsel to see what we can do.

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Unidentified Participant, [28]

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Yes, I think that would be great if you...

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Helen Xu, Gulf Resources, Inc. - IR Director [29]

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To share with shareholders. Yes.

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Unidentified Participant, [30]

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Yes, especially in light of the recent transactions with the insiders buying and selling [all together] at the same time, I think that would be good to clarify ahead of time before the proxy vote.

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Helen Xu, Gulf Resources, Inc. - IR Director [31]

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And the proxy have already been filed. But when we have the -- but we have a clear answer from counsel. We will try to talk with counsel to see how to let the public know about this -- during this (inaudible) answering the call, [but not all].

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Unidentified Participant, [32]

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Okay. I appreciate that. The general and administrative expenses this quarter were approximately $5 million versus $1.3 million previously. Do you know what the increase of about $4 million was over the last quarter?

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Helen Xu, Gulf Resources, Inc. - IR Director [33]

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(foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [34]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [35]

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(foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [36]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [37]

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[Interpreted] Basically there are 2 major reasons for the general administrative expense increase. First one was due to the major increase in labor cost. Second cause was some of the [repairment in Bang] and the damages in -- after the Typhoon Lekima, some of the costs were recorded in this [pack.]

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Unidentified Participant, [38]

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Okay. Last question. There was an income tax expense of $6.7 million this quarter. I'm just not sure I understand why when there was a net loss -- if there was a $6.7 million income tax expense. Just wondering if you could clarify that.

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Helen Xu, Gulf Resources, Inc. - IR Director [39]

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(foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [40]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [41]

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(foreign language)

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Xiaobin Liu, Gulf Resources, Inc. - CEO, President & Director [42]

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(foreign language)

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Helen Xu, Gulf Resources, Inc. - IR Director [43]

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So because that is there -- [naturally] from our Daying County factories, because before we did have some income tax, which can be deferred. But now because this new situation in our Daying County, we think, the better we should offset those deferred tax. So those expenses happen now.

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Unidentified Participant, [44]

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Okay. Okay. That was the only questions. Helen if you can get back to me quickly, after you speak to counsel about that question on the equity incentive plan shares.

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Helen Xu, Gulf Resources, Inc. - IR Director [45]

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Yes. Yes, I will. We will.

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Unidentified Participant, [46]

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I would appreciate it very much. I think it's important.

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Operator [47]

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(Operator Instructions) Ms. Xu, we don't see any additional questions coming in at this time, would you like to make any additional concluding comments?

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Helen Xu, Gulf Resources, Inc. - IR Director [48]

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Operator, if there is no more questions for the call, do you mind if you ask one more time?

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Operator [49]

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Absolutely. (Operator Instructions)

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Helen Xu, Gulf Resources, Inc. - IR Director [50]

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Okay. I think if there are no more questions, we can close the call for today. Thank you. (foreign language) Thank you, operator. Have a nice day.

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Operator [51]

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Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.