Item 1. Business
Item 1. Business.
Introduction
We manufacture and trade bromine and crude salt,
natural gas, manufacture and sell chemical products used in oil and gas field explorations and papermaking chemical agents, and materials
for human and animal antibiotics . To date, our products have been sold only within the People’s Republic of China. As used
in this report, the terms “we,” “us,” “our,” “Company” and “Gulf Resources”
refers to Gulf Resources, Inc., a holding company and/or its consolidated wholly-owned subsidiaries, and the terms “ton” and
“tons” refers to metric tons, in each case, unless otherwise stated or the context requires otherwise.
The functional currency of the Company’s
operating foreign subsidiaries is the Renminbi (“RMB”), which had an average exchange rate of $0.14508 and $0.15501 during
fiscal years 2020 and 2021, respectively, the reporting currency of the Company is the United States dollar (“USD” or $”).
Our Corporate History and Corporate Structure
We (Gulf Resources Inc.) were originally incorporated
in Delaware and subsequently re-incorporated in Nevada. From November 1993 through August 2006, we were engaged in the business of owning,
leasing and operating coin and debit card pay-per copy photocopy machines, fax machines, microfilm reader-printers and accessory equipment
under the name “Diversifax, Inc.”. Due to the increased use of internet services, demand for our services declined sharply,
and in August 2006, our Board of Directors decided to discontinue our operations.
Upper Class Group Limited, incorporated in the
British Virgin Islands in July 2006, acquired all the outstanding stock of Shouguang City Haoyuan Chemical Company Limited (“SCHC”),
a company incorporated in Shouguang City, Shandong Province, the People’s Republic of China (the “PRC”), in May 2005.
At the time of the acquisition, members of the family of Mr. Ming Yang, our president and former chief executive officer, owned approximately
63.20% of the outstanding shares of Upper Class Group Limited. Since the ownership of Upper Class Group Limited and SCHC was then substantially
the same, the acquisition was accounted for as a transaction between entities under common control, whereby Upper Class Group Limited
recognized the assets and liabilities transferred at their carrying amounts.
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On December 12, 2006, our Company, then known
as Diversifax, Inc., a public “shell” company, acquired Upper Class Group Limited and SCHC. Under the terms of the agreement,
the stockholders of Upper Class Group Limited received 13,250,000 (restated for the 2-for-1 stock split in 2007 and the 1-for-4 stock
split in 2009) shares of our voting common stock in exchange for all outstanding shares of Upper Class Group Limited. Members of the Yang
family received approximately 62% of our common stock as a result of the acquisition. Under accounting principles generally accepted in
the United States, the share exchange is considered to be a capital transaction rather than a business combination. That is, the share
exchange is equivalent to the issuance of stock by Upper Class Group Limited for the net assets of Gulf Resources, Inc., accompanied by
a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the share exchange is identical
to that resulting from a reverse acquisition, except no goodwill is recorded. Under reverse takeover accounting, the post reverse acquisition
comparative historical consolidated financial statements of the legal acquirer, Diversifax, Inc., are those of the legal acquiree, Upper
Class Group Limited. Share and per share amounts stated have been retroactively adjusted to reflect the share exchange. On February 20,
2007, we changed our corporate name to Gulf Resources, Inc.
On February 5, 2007, we acquired Shouguang Yuxin
Chemical Industry Co., Limited (“SYCI”), a company incorporated in the People’s Republic of China. Under the terms of
the acquisition agreement, the stockholders of SYCI received a total of 8,094,059 (restated for the 2-for-1 stock split in 2007 and the
1-for-4 stock split in 2009) shares of common stock of Gulf Resources, Inc. in exchange for all outstanding shares of SYCI’s common
stock. Simultaneously with the completion of the acquisition, a dividend of $2,550,000 was paid to the former stockholders of SYCI. At
the time of the acquisition, approximately 49.1% of the outstanding shares of SYCI were owned by Ms. Yu, Mr. Yang’s wife, and the
remaining 50.9% of the outstanding shares of SYCI were owned by SCHC, all of whose outstanding shares were owned by Mr. Yang and his wife.
Since the ownership of Gulf Resources, Inc. and SYCI are substantially the same, the acquisition was accounted for as a transaction between
entities under common control, whereby Gulf Resources, Inc. recognized the assets and liabilities of SYCI at their carrying amounts. Share
and per share amounts have been retroactively adjusted to reflect the acquisition.
To satisfy certain ministerial requirements necessary
to confirm certain government approvals required in connection with the acquisition of SCHC by Upper Class Group Limited, all of the equity
interest of SCHC were transferred to a newly formed Hong Kong corporation named Hong Kong Jiaxing Industrial Limited (“Hong Kong
Jiaxing”) all of the outstanding shares of which are owned by Upper Class Group Limited. The transfer of all of the equity interest
of SCHC to Hong Kong Jiaxing received approval from the local State Administration of Industry and Commerce on December 10, 2007.
As a result of the transactions described above,
our corporate structure is linear. That is Gulf Resources owns 100% of the outstanding shares of Upper Class Group Limited, which owns
100% of the outstanding shares of Hong Kong Jiaxing, which owns 100% of the outstanding shares of SCHC, which owns 100% of the outstanding
shares of SYCI. Further, as a result of our acquisitions of SCHC and SYCI, our historical consolidated financial statements, as contained
in our Consolidated Financial Statements and Management’s Discussion and Analysis, appearing elsewhere in the report, reflect the
accounts of SCHC and SYCI.
On January 12, 2015, the Company and SCHC entered
into an Equity Interest Transfer Agreement with Shouguang City Rongyuan Chemical Co., Ltd (“SCRC”) pursuant to which SCHC
agreed to acquire SCRC and all rights, title and interest in and to all assets owned by SCRC, a leading manufacturer of materials for
human and animal antibiotics in China and other parts of Asia.
On February 4, 2015, the Company closed the transactions
contemplated by the agreement between the Company, SCHC and SCRC. On the closing Date, the Company issued 7,268,011 shares of its
common stock, par value $0.0005 per share (the “Shares”), at the closing market price of $1.84 per Share on the closing date
to the four former equity owners of SCRC .The issuance of the Shares was exempt from registration pursuant to Regulation S of the Securities
Act of 1933, as amended. On the Closing Date, the Company entered into a lock-up agreement with the four former equity owners of SCRC.
In accordance with the terms of the lock-up agreement, the shareholders agreed not to sell or transfer the Shares for five years from
the date the stock certificates evidencing the Shares were issued.
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The sellers of SCRC agreed as part of the purchase
price to accept the Shares, based on a valuation of $10.00 (restated for the 1-for-5 reverse stock split in January 2020), which was a
73% premium to the price on the day the agreement was reached. For accounting purposes, the Shares were valued at $9.20 (restated for
the 1-for-5 reverse stock split in January 2020), which was the closing price of our stock on the closing date of the agreement. The price
difference between the original sale price of $10.00 (restated for the 1-for-5 reverse stock split in January 2020) and the $9.20 (restated
for the 1-for-5 reverse stock split in January 2020) closing price of our stock on the closing date of the agreement is solely for accounting
purposes. There has been no change in the number of shares issued.
On November 24, 2015, Gulf Resources, Inc., a
Delaware corporation, consummated a merger with and into its wholly-owned subsidiary, Gulf Resources, Inc., a Nevada corporation. As a
result of the reincorporation, the Company is now a Nevada corporation.
On December 15, 2015, the Company registered a
new subsidiary in the Sichuan Province of the PRC named Daying County Haoyuan Chemical Company Limited (“DCHC”) with registered
capital of RMB50,000,000, and there was RMB14,848,730 capital contributed by SCHC as of December 31, 2021. DCHC was established to further
explore and develop natural gas and brine resources (including bromine and crude salt) in China.
On September 2, 2016, the Company announced the
planned merger of two of its 100% owned subsidiaries, SYCI and SCRC. On March 24, 2017, the legal process of the merger was completed
and SCRC was officially deregistered on March 28, 2017. The results of these two subsidiaries were reported under SYCI in the fiscal year
2018.
On January 27, 2020, we completed a 1-for-5 reverse
stock split of our common stock, such that for each five shares outstanding prior to the stock split there was one share outstanding after
the reverse stock split. All shares of common stock referenced in this report have been adjusted to reflect the stock split figures. On
January 28, 2020, our shares began trading on the NASDAQ Global Select Market under the new CUSIP # 40251W 408.
Corporate Structure
Our current corporate structure chart is set forth
in the following diagram:
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Currently, we operate our business through our
wholly-owned subsidiaries in China, including (i) Shouguang City Haoyuan Chemical Company Limited, or SCHC; (ii) Shouguang Yuxin Chemical
Industry Co., Limited, or SYCI; and (iii) Daying County Haoyuan Chemical Co., Ltd., or DCHC, each a PRC company.
Our executive offices are located at Level 11,
Vegetable Building, Industrial Park of the East in Shouguang City, Shandong Province, P.R.C. Our telephone number is +86 (536) 5670008.
Our website address is www.gulfresourcesinc.com. The information contained on or accessed through our website is not intended to constitute
and shall not be deemed to constitute part of this Form 10-K.
Recent Regulatory Developments in China
Because all of our operations are conducted in
China through our wholly-owned subsidiaries, the Chinese government may exercise significant oversight and discretion over the conduct
of our business and may intervene in or influence our operations at any time, which could result in a material change in our operations
and/or the value of our common stock.
Recent statements by the Chinese government have
indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China
based issuers. Any future action by the Chinese government expanding the categories of industries and companies whose foreign securities
offerings are subject to government review could significantly limit or completely hinder our ability to offer or continue to offer securities
to investors and could cause the value of such securities to significantly decline or be worthless.
Recently, the PRC government initiated a series
of regulatory actions and made a number of public statements on the regulation of business operations in China with little advance notice,
including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas
using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding efforts
in anti-monopoly enforcement. We do not believe that we are directly subject to these regulatory actions or statements, as we do not have
a variable interest entity structure and our business does not involve the collection of user data, implicate cybersecurity, or involve
any other type of restricted industry. Because these statements and regulatory actions are new, however, it is highly uncertain how soon
legislative or administrative regulation making bodies in China will respond to them, or what existing or new laws or regulations will
be modified or promulgated, if any, or the potential impact such modified or new laws and regulations will have on our daily business
operations or our ability to accept foreign investments and list on an U.S. exchange.
Cash Transfers and Dividend Distribution
Our corporate structure is a direct holding structure,
that is, the overseas entity listed in the U.S., Gulf Resources, Inc., a Nevada corporation (“Gulf Resources”), controls SCHC
(the “WFOE”), SYCI and DCHC through the Hong Kong company, Hong Hong Jiaxing Industrial Limited, or Hong Kong Jiaxing.
Within our direct holding structure, the cross-border
transfer of funds within our corporate group is legal and compliant with the laws and regulations of the PRC. Foreign investors’
funds can be directly transferred to Hong Kong Jiaxing, and then transferred to subordinate operating entities through SCHC, or the WFOE.
If the Company intends to distribute dividends,
the Company will transfer the dividends to Hong Kong Jiaxing in accordance with the laws and regulations of the PRC, and then Hong Kong
Jiaxing will transfer the dividends to Gulf Resources, and the dividends will be distributed from Gulf Resources to all shareholders respectively
in proportion to the shares they hold, regardless of whether the shareholders are U.S. investors or investors in other countries or regions.
In the reporting periods presented in this annual
report, no cash and other asset transfers have occurred among the Company and its subsidiaries; and no dividends or distributions of a
subsidiary has been made to the Company. For the foreseeable future, the Company does not expect to pay any cash dividends.
Our PRC subsidiaries’ ability to distribute
dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective
shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In
addition, each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory
reserve until such reserve reaches 50% of each of their registered capitals. These reserves are not distributable as cash dividends.
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To address persistent capital outflows and the
RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration
of Foreign Exchange, or SAFE, have implemented a series of capital control measures in the subsequent months, including stricter vetting
procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments.
The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may
be subject to tightened scrutiny in the future. The PRC government also imposes controls on the conversion of RMB into foreign currencies
and the remittance of currencies out of the PRC. Therefore, we may experience difficulties in completing the administrative procedures
necessary to obtain and remit foreign currency for the payment of dividends from our profits, if any. Furthermore, if our subsidiaries
in the PRC incur debt on their own in the future, the instruments governing the debt may restrict their ability to pay dividends or make
other payments.
In addition, the Enterprise Income Tax Law and
its implementation rules provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies
to non-PRC-resident enterprises unless reduced under treaties or arrangements between the PRC central government and the governments of
other countries or regions where the non-PRC resident enterprises are tax resident. Pursuant to the tax agreement between Mainland China
and the Hong Kong Special Administrative Region, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to
a Hong Kong enterprise may be reduced to 5% from a standard rate of 10%. However, if the relevant tax authorities determine that our transactions
or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable
withholding tax in the future. Accordingly, there is no assurance that the reduced 5% withholding rate will apply to dividends received
by our Hong Kong subsidiary from our PRC subsidiaries. This withholding tax will reduce the amount of dividends we may receive from our
PRC subsidiaries.
Please see “Risk Factors” beginning
on page 11 of this annual report for additional information.
Holding Foreign Company
Accountable Act
Pursuant to the Holding
Foreign Companies Accountable Act (“HFCAA”), the Public Company Accounting Oversight Board (the “PCAOB”) issued
a Determination Report on December 16, 2021 which found that the PCAOB is unable to inspect or investigate completely registered public
accounting firms headquartered in: (1) mainland China of the People’s Republic of China because of a position taken by one or more
authorities in mainland China; and (2) Hong Kong, a Special Administrative Region and dependency of the PRC, because of a position taken
by one or more authorities in Hong Kong. In addition the PCAOB’s report identified the specific registered public accounting firms
which are subject to these determinations.
Our auditor, WWC, P.C.,
Certified Public Accountants (“WWC”), is an independent registered public accounting firm with the PCAOB, and as an auditor
of publicly traded companies in the U.S., is subject to laws in the U.S. pursuant to which the PCAOB conducts regular inspections to assess
its compliance with the applicable professional standards. WWC, P.C., Certified Public Accountants, is based in the United States and
has been inspected by the PCAOB on a regular basis, with the last inspection in November 2021. WWC is not headquartered in mainland
China or Hong Kong and was not identified in the Determination Report on December 16, 2021 as a firm subject to the PCAOB’s
determination. Notwithstanding the foregoing, if the PCAOB is not able to fully conduct inspections of our auditor’s work papers
in China, our investors may be deprived of the benefits of such inspection which could result in limitation or restriction to our access
to the U.S. capital markets and trading of our securities may be prohibited under the HFCAA. See Risk Factor –“ Although the
audit report included in this annual report was issued by U.S. auditors who are currently inspected by the PCAOB, if it is later determined
that the PCAOB is unable to inspect or investigate our auditor completely, investors would be deprived of the benefits of such inspection
and our common stock may be delisted or prohibited from trading.”
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Closure and rectification process of our Bromine,
Crude Salt and Chem i cal Products factories
On September 1, 2017, the Company received letters
from the People’s Government of Yangkou Town, Shouguang City to each of its subsidiaries, Shouguang City Haoyuan Chemical Company
Limited and Shouguang Yuxin Chemical Industry Co., Limited, which stated that in an effort to improve the safety and environmental protection
management level of chemical enterprises, the plants are requested to immediately stop production and perform rectification and improvements
in accordance with the country’s new safety, environmental protection requirements. As a result, our facilities located in Yangkou
Town were closed on September 1, 2017 to allow for rectification.
Subsequently, the Safety Supervision and Administration
Department and the Environmental Protection Departments of the local government conducted inspections of every bromine production enterprise
within its jurisdiction including our facilities, in order to improve security, environmental protections, pollution, and safety.
On September 21, 2018, the Company received a
closing notice from the People’s Government of Yangkou Town, Shouguang City informing it to close its three bromine factories (Number
3, Number 4, and Number 11.) and not allowed to resume production. The crude salt fields surrounding these factories have been reclaimed
as cultivated or construction land and hence did not meet the requirement for bromine and crude salt co-production set by the relevant
authority. In closing these factories, the Company wrote off net book value of these factories’ property, plant and equipment in
the amount of $18,644,473 in the loss on demolition of the factory in the consolidated statements of loss for the fiscal year ended December
31, 2018, recorded an impairment loss on the related mineral rights of these three factories of $1,284,832 included in the impairment
of property, plant and equipment in the consolidated statements of loss for the fiscal year ended December 31, 2018 and wrote off $52,926
of prepaid land lease recorded in other operating loss in the consolidated statements of loss for fiscal year ended December 31, 2018.
The Company incurred dismantling fee in the amount of $273,757 recorded in other operating loss in the consolidated statements of loss
for fiscal year ended December 31, 2018. The Company negotiated with the local villages over compensation for the payment already made
for these land leases and mineral rights in the past. This part of the cost has been used as the resumption of land use, so the village
committee will not be compensated.
The Company has completed all the rectification
and improvements in accordance with the government requirements, and it is still waiting for governmental approval for factories #2, #8,
and #10. To our knowledge, the government is currently completing its planning process for all mining areas including that for prevention
of flood. As a result, we may be required to make some modifications to our current wells and aqueducts prior to commencement of operations
of these factories to satisfy the local government's requirements. Pursuant to the notification issued from the government of Shouguang
City, all bromine facilities in Shouguang City had to be temporarily closed from December 28, 2021 until February 21, 2022 8:00 AM China
Time. To comply with such notification, the Company had temporarily stopped production at its bromine facilities in factory No. 1, No.
4, No. 7 and No. 9 during the aforesaid period and commenced production as scheduled on February 21, 2022.
Because many smaller producers have not had the
capital to conduct the rectification required by the government, management believes there could be some extremely attractive acquisition
opportunities in bromine. However, at the present time, all of management’s attention is focused on getting its facilities approved
and in full production. Management may consider acquisition opportunities in this segment in the future if the prices were sufficiently
attractive.
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To date, we have secured the land for our new
chemical factory. The Company also has had the final approval regarding environmental protection assessment and commenced construction
on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020. There was an impairment loss on the
property, plant and equipment related to the relocation of our chemical plants to Bohai Park in the amount of $16,636,322, since much
of the equipment that was used in the chemical factories was relatively old. Further, even if it had been newer, we believe that it might
not have passed new environmental tests. The total cost of building the new factory is currently estimated to be approximately $64
million. The Company incurred relocation costs in the amount of $45,584,344 and $33,496,295 as of December 31, 2021 and 2020.
In January 2017, the Company completed the first
brine water and natural gas well field construction in Daying located in Sichuan Province and commenced trial production in January 2019.
On May 29, 2019, the Company received a verbal notice from the government of Tianbao Town ,Daying County, Sichuan Province, whereby the
Company is required to obtain project approval for its well located in Daying, including the whole natural gas and brine water project,
and approvals for safety production inspection, environmental protection assessment, and to solve the related land issue. Until these
approvals have been received, the Company has to temporarily halt trial production at its natural gas well in Daying. In compliance with
the Chinese government new policies, the Company is also required to obtain an exploration license and a mining license for bromine and
natural gas, respectively. Pursuant to the Opinions of the Ministry of Natural Resources on Several Issues in Promoting the Reform of
Mineral Resources Management (Trial) promulgated by the Ministry of Natural Resources of PRC on January 9, 2020, which came into effect
on May 1, 2020, privately owned enterprises are allowed to participate in the natural gas production. The Company plans to proceed with
its applications for the natural gas and brine project approvals with related government departments until after the governmental planning
has been finalized the land and resource planning for Sichuan Province.
We are not writing off any of the goodwill related
to our chemicals business. We believe the new chemical factory could produce strong sales and profits. We believe there may be much less
capacity in the chemical industry, as many factories may be permanently closed. In addition, other competitor factories may reduce their
production capacity. We expect to have a factory that operates efficiently. Considering the above factors and our strength with better
equipment, we expect to generate sales and earnings in this segment at a level well above previous periods.
We will continue to control the land and buildings
where the old chemical factories are located. At this time, we have not considered how or if we can monetize those assets.
Impact of COVID-19 on Our Operations and Financial
Performance
Outbreaks of epidemic, pandemic, or contagious
diseases such as COVID-19, could have an adverse effect on our business, financial condition, and results of operations. The spread of
COVID-19 has resulted in the World Health Organization declaring the outbreak of COVID-19 as a global pandemic. Substantially
all of our revenues and workforce are concentrated in China. In response to the intensifying efforts to contain the spread of COVID-19,
the Chinese government took a number of actions, which included extending the Chinese New Year holiday in 2020, quarantining individuals
suspected of having COVID-19, asking residents in China to stay at home and to avoid public gathering, among other things. The virus outbreak
slightly delayed the commencement of the operations for Factory No.1, No.4, No.7, No.9, and it may also delay the approval for the remaining
three factories include No.2, No.8 and No.10. It is, however, still unclear how the pandemic will evolve going forward, and we cannot
assure you whether the COVID-19 pandemic will again bring about significant negative impact on our business operations, financial
condition and operating results, including but not limited to negative impact to our total revenues.
There remain significant uncertainties surrounding
the COVID-19 outbreak and its further development as a global pandemic. Hence, the extent of the business disruption and the related
impact on our financial results and outlook for 2021 cannot be reasonably estimated at this time. The extent to which the COVID-19 impacts
our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may
emerge concerning the severity of the coronavirus and the actions taken globally to contain the coronavirus or treat its impact, among
others. Existing insurance coverage may not provide protection for all costs that may arise from all such possible events. We are still
assessing our business operations and the total impact COVID-19 may have on our results and financial condition, but there can be
no assurance that this analysis will enable us to avoid part or all of any impact from the spread of COVID-19 or its consequences,
including downturns in business sentiment generally.
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Our Business Segments
Our business operations are conducted in four segments, bromine, crude
salt, chemical products, and natural gas. We manufacture and trade bromine, crude salt and natural gas, and manufacture and
sell chemical products used inoil and gas field explorations and papermaking chemical agents, and materials for human and animal antibiotics. We
conduct all of our operations in China.
Bromine and Crude Salt
We manufacture and distribute bromine through
our wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited, or SCHC. Bromine is a halogen element. It is
a red volatile liquid at standard room temperature which has reactivity between chlorine and iodine. Elemental bromine is used to
manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine is also used to form intermediates in organic
synthesis, which is somewhat preferable over iodine due to its lower cost. Bromine is commonly used in brominated flame retardants,
fumigants, water purification compounds, dyes, medicines and disinfectants.
The extraction of bromine in the Shandong Province
is limited by the provincial government to licensed operations. We hold one such license. As part of our business
strategy, it is our plan to continue acquiring smaller scaled and unlicensed producers and to use our bromine to expand our downstream
chemical operations
Location of Production Sites
Our production sites are located in the Shandong
Province in northeastern China. The productive formation (otherwise referred to as the “working region”), extends from latitude
N 36°56’ to N 37°20’ and from longitude E 118°38’ to E 119°14’, in the north region of Shouguang
city, from the Xiaoqing River of Shouguang city to the west of the Dan River, bordering on Hanting District in the east, from the main
channel of “Leading the Yellow River to Supply Qingdao City Project” in the south to the coastline in the north.
The territory is classified as coastal alluvial – marine plain with an average height two to seven meters above the sea level.
The terrain is relatively flat.
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Geological background of this region
The Shandong Province working region is located
to the east of Lubei Plain and on the south bank of Bohai Laizhou Bay. The geotectonic location bestrides on the North China Platte (I)
and north three-level structure units, from west to east including individually the North China Depression, Luxi Plate, and Jiaobei Plate.
Meanwhile, 4 V-level structure units including the Dongying Sag of Dongying Depression (IV) of North China Depression, the Buried Lifting
Area of Guangrao, Niutou sag and Buried Lifting Area of Shuanghe and are all on two V-level structure units including Xiaying Buried Lifting
Area of Weifang Depression (IV) of Luxi Plate and Chuangyi Sag, as well as on a V-level structure units of Jiaobei Buried Lifting Area
of Jiaobei Plate.
Processing of Bromine
Natural brine is a complicated salt-water system,
containing many ionic compositions in which different ions have close interdependent relationships and which can be reunited to form many
dissolved soluble salts such as sodium chloride, potassium chloride, calcium sulfate, potassium sulfate and other similar soluble salts.
The goal of natural brine processing is to separate and precipitate the soluble salts or ions away from the water. Due to the
differences in the physical and chemical characteristics of brine samples, the processing methods are varied, and can result in inconsistency
of processing and varied technical performance for the different useful components from the natural brine.
Bromine is the first component extracted during
the processing of natural brine. In natural brine, the bromine exists in the form of bromine sodium and bromine magnesium and other soluble
salts.
The bromine production process is as follows:
1.
natural brine is pumped from underground through extraction wells by subaqueous pumps;
2.
the natural brine then passes through transmission pipelines to storage reservoirs;
3.
the natural brine is sent to the bromine refining plant where bromine is extracted from the natural brine. In neutral or acidic water, the bromine ion is easily oxidized by adding the oxidative of chlorine, which generates the single bromine away from the brine. Thereafter the extracted single bromine is blown out by forced air, then absorbed by sulfur dioxide or soda by adding acid, chlorine and sulfur. Extracted bromine is stored in containers of different sizes; and
4.
the wastewater from this refining process is then transported by pipeline to brine pans.
Our production feeds include (i) natural brine;
(ii) vitriol; (iii) chlorine; (iv) sulfur; and (v) coal.
Crude Salt
We also produce crude salt, which is produced
from the evaporation of the wastewater after our bromine production process. Once the brine is returned to the surface and the bromine
is removed, the remaining brine is pumped to on-site containing pools and then exposed to natural sunshine. This causes the water to evaporate
from the brine, resulting in salt being left over afterwards. Crude salt is the principal material in alkali production as well as chlorine
alkali production and is widely used in the chemical, food and beverage, and other industries.
Chemical Products
We produce chemical products through our wholly-owned
subsidiary, Shouguang Yuxin Chemical Industry Company Limited, or SYCI. At the present time, SYCI is closed pursuant to the letter
from government dated on November 24, 2017. It is being relocated to Bohai Marine Fine Chemical Industry Park, Shouguang City. SYCI
paid $9,115,276 for a 50-year lease of a piece of land for its new factories at Bohai Marine Fine Chemical Industrial Park in December,
2017 and leased another piece of land from the third party for its new chemical factory. We received the final approval for our new chemical
factory and started construction in June 2020.
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Historically, SYCI concentrated its efforts on
the production and sale of chemical products that are used in oil and gas field exploration, oil and gas distribution, oil field drilling,
papermaking chemical agents, inorganic chemicals and materials that are used for human and animal antibiotics. SYCI engaged in depth study
of existing products and new product research and development at the same time. SYCI’s annual production of oil and gas field exploration
products and related chemicals was over 26,000 tons, and its production of papermaking-related chemical products was over 5,000 tons.
SYCI’s annual production capacity of materials that are used for human and animal antibiotics was over 6,800 tons.
Sales and Marketing
We have an in-house sales staff of 9 persons.
Our customers send their orders to us first. Our in-house sales staff then attempts to satisfy these orders based on our actual
production schedules and inventories on hand. Many of our customers have a long term relationship with us. We expect this to continue
due to stable demand for mineral products, however, these relationships cannot be guaranteed in the future.
Principal Customers
We sell a substantial portion of our products
to a limited number of PRC customers. Our principal customers during 2021 were Shandong Morui Chemical Company Limited, Shandong
Brother Technology Limited, and Shouguang Weidong Chemical Company Limited. We have ongoing policies in place to ensure that sales are
made to customers who are credit-worthy.
During the year ended December 31, 2021, sales
to our three largest bromine customers, based on net revenue from such customers, aggregated $25,020,136 or approximately 51% of total
net revenue from sale of bromine; and sales to our largest customer represented approximately 19%, respectively, of total net revenue
from the sale of bromine.
During the year ended December 31, 2020, sales
to our three largest bromine customers, based on net revenue from such customers, aggregated $11,771,830 or approximately 47% of total
net revenue from sale of bromine; and sales to our largest customer represented approximately 19%, respectively, of total net revenue
from the sale of bromine.
During each of the years ended December 31, 2021
and 2020, sales to our three largest crude salt customers, based on net revenue from such customers, aggregated $6,080,241 and $3,022,215,
respectively, or approximately 100% and 100% of total net revenue from sale of crude salt; and sales to our largest customer represented
approximately 38% and 36%, respectively, of total net revenue from the sale of crude salt.
During each of the years ended December 31, 2021
and 2020, the net revenue for the chemical products was $0.
Principal Suppliers
Our principal external suppliers are Laizhou Shengfu
Chemical Company Limited, Weifang Wanhong Chemical Company Limited, Shandong Xinlong International Trade Company Limited.
During the year ended December 31, 2021 and 2020,
we purchased 100% of raw materials for our bromine and crude production from our top three suppliers.
During the year ended December 31, 2021 and 2020,
we did not purchase any raw materials for chemical products production. This supplier concentration makes us vulnerable to a near-term
adverse impact, should the relationships be terminated.
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Business Strategy
Expansion of Production Capacity to Meet Demand
▼ Bromine and Crude
Salt
In view of keen competition and the trend of less
bromine contraction of brine water being extracted in Shouguang City, Shandong Province, the Company intended to access more bromine and
crude salt resources by finding new underground brine water resources in the Sichuan Province. On January 30, 2015 we announced that we
had found natural gas resources under our bromine well in the Sichuan area. On November 23, 2015, the Company’s wholly owned subsidiary
SCHC entered into an agreement with the People’s Government of Daying County in Sichuan Province for the exploration and development
of natural gas and brine resources (including bromine and crude salt). In January 2017, the Company completed the first brine water and
natural gas well field construction in Sichuan Province and announced the commencement of trial production. Then later on, the Company
found some issues related to the water and other potential impurities in the natural gas during trial production. In resolving the problem,
the Company purchased customized equipment for its natural gas project. The installation of such equipment, including providing piping
and electricity, was completed in July 2018. The Company completed the test production at its first natural gas well in Sichuan Province
and commenced trial production in January 2019.
On May 29, 2019, the Company received a verbal
notice from the government of Tianbao Town ,Daying County, Sichuan Province, whereby the Company is required to obtain project approval
for its well located in Daying, including the whole natural gas and brine water project, and approvals for safety production inspection,
environmental protection assessment, and to solve the related land issue. Until these approvals have been received, the Company has to
temporarily halt trial production at its natural gas well in Daying. In compliance with the Chinese government new policies, the Company
is also required to obtain an exploration license and a mining license for bromine and natural gas, respectively. Pursuant to the Opinions
of the Ministry of Natural Resources on Several Issues in Promoting the Reform of Mineral Resources Management (Trial) promulgated by
the Ministry of Natural Resources of PRC on January 9, 2020, which came into effect on May 1, 2020, privately owned enterprises are allowed
to participate in the natural gas production. The Company plans to proceed with its applications for the natural gas and brine project
approvals with related government departments until after the governmental planning has been finalized the land and resource planning
for Sichuan Province.
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On September 1, 2017, the Company received notification
from the Government of Yangkou Town, Shouguang City of PRC that required production at all its factories be immediately halted in order
for the Company to perform rectification and improvement in accordance with the local new safety and environmental protection requirements.
The Company has been working closely with the
County authorities to develop rectification plans for both its bromine and crude salt businesses and had agreed on a plan in October 2017.
In the fiscal year ended December 31, 2018, the Company incurred $16,243,677 in the rectification and improvements of plant and equipment
of the bromine and crude salt factories resulting in a cumulative amount of $34,182,329 incurred as of December 31, 2018. The Shouguang
City Bromine Association, on behalf of all the bromine plants in Shouguang, has started discussions with the local government agencies.
The local governmental agencies confirmed the facts that their initial requirements for the bromine industry did not include the project
approval, the planning approval and the land use rights approval and that those three additional approvals were new requirements of the
provincial government. The Company understood from the local government that it has been coordinating with several government agencies
to solve these three outstanding approval issues in a timely manner and that all the affected bromine plants are not allowed to commence
production prior to obtaining those approvals. In April 2019, Factory No.1, Factory No.5 and Factory No.7 (Factory no. 5 is considered
part of Factory no.7 and both are managed as one factory since 2010) restarted operations upon receipt of verbal notification from local
government of Yangkou County. On May 7, 2019, the Company renamed its Subdivision Factory No. 1 to Factory No. 4; and Factory No. 5 (which
was previously considered part of Factory No. 7) to Factory No. 7.
On November 25, 2019, the government of Shouguang
City issued a notice ordering all bromine facilities in Shouguang City, including the Company’s all bromine facilities, including
Factory No.1 and Factory No. 7, to temporarily stop production from December 16, 2019 to February 10, 2020. Subsequently, due to the coronavirus
outbreak in China, the local government ordered those bromine facilities to postpone the commencement of production. Subsequently, the
Company received an approval dated on February 27, 2020 issued by the local governmental authority which allows us to resume production
after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s Government
dated on March 5, 2020 to resume production at its bromine factories No.1, No. 4, No.7 and No. 9 in order to meet the needs of bromide
products for epidemic prevention and control (the “March 2020 Approval”). The Company’s factories No.7 and No.1 started
trial production on middle of March, 2020, and commenced commercial production on April 3, 2020.
The company is still waiting for governmental approval for factories
#2, #8, and #10. To our knowledge, the government is currently completing its planning process for all mining areas including that for
prevention of flood. As a result, we may be required to make some modifications to our current wells and aqueducts prior to commencement
of operations of these factories to satisfy the local government's requirements. Nevertheless, the Company expects to receive approval
to open at least one and potentially more of its closed factories in 2022.
Pursuant to the notification issued from the government
of Shouguang City, all bromine facilities in Shouguang City had to be temporarily closed from December 28, 2021 until February 21, 2022.
To comply with such notification, the Company had temporarily stopped production at its bromine facilities during the aforesaid period
and resumed production as scheduled on February 21, 2022.
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▼ Chemical Products
On November 24, 2017, the Company received a letter
from the Government of Yangkou County, Shouguang City notifying the Company to relocate its two chemical production plants located in
the second living area of the Qinghe Oil Extraction Plant to the Bohai Marine Fine Chemical Industrial Park (the “November
2017 Letter”). Since then, our chemical factory has been shut down. We believe this is part of the country’s efforts to improve
the development of the chemical industry, facilitate safe production and curb environmental pollution, and ensure the quality of living
environment of residents. The Company expects to cost approximately $64 million in total in connection with the relocation. The Company
incurred relocation costs in the amount of $45,584,344 as of December 31, 2021.
In January 2020, the Company received the
environmental protection approval by the government of Shouguang City, Shandong Province for the proposed Yuxin Chemical factory. The
Company began the construction on its new chemical facilities located at Bohai Marine Fine Chemical Industrial Park in June 2020 and basically
completed the civil works by end of June 2021. Nov. 15, 2021, the company announced due to the supply chain issues as well as the electric
restrictions in China, the delivery of some equipment, the equipment installation and testing and beginning trial production at the chemical
factory had been be delayed. On February 22, 2022, the company announced that discussions with the government have convinced management
that the electricity restrictions are being eased. Accordingly, the Company has contacted its suppliers and will have the remainder of
the equipment produced and delivered, so the Company can complete installation and begin testing and trial production.
Competition
To date, our sales have been limited to customers
within the PRC and we expect that our sales will remain primarily domestic for the immediate future. Our marketing strategy
involves developing long term ongoing working relationships with customers based on large multi-year agreements which foster mutually
advantageous relationships.
We compete with PRC domestic private companies
and state owned companies. Certain state owned and state backed competitors are more established and have more control of certain resources
in terms of pricing than we do. We compete based on price, our reputation for quality, on-time delivery, our relationship with
suppliers and our geographical proximity to natural brine deposits in the PRC for bromine, crude salt and chemical productions. Management
believes that our stable quality, manufacturing processes and plant capacity for the production of bromine, crude salt and chemical products
are key considerations in awarding contracts in the PRC.
Our principal competitors in the bromine business
are Shandong Yuyuan Group Company Limited, Shandong Haihua Group Company Limited, Shandong Dadi Salt Chemical Group Company Limited and
Shandong Haiwang Chemical Company Limited, all of which produce bromine principally for use in their chemicals businesses and sell
part of the bromine produced to customers. These companies may switch to selling bromine to the market if they no longer use bromine in
their chemical businesses.
Our principal competitors in the crude salt business
are Shandong Haiwang Chemical Company Limited, Shandong Haihua Group Company Limited, Shandong Weifang Longwei Industrial Company Limited,
Shandong Yuyuan Group Company Limited and Shandong Caiyangzi Saltworks.
Our principal competitors in the chemical business
are Beijing Shiji Zhongxing Energy Technology Co., Ltd, Yanan Chaozheng Nijiang Co., Ltd, Shandong Dacheng Pesticides Company Limited,
Binhua Group Company Limited, Dongying City Dongchen (Group) Chemical Industry Company Limited, Beijing Peikangjiaye Technologies Limited,
Shouguang Fukang Pharmaceutical Co., Ltd. Shandong Xinhua Pharmaceutical Limited by Share Ltd, Hunan Erkang Pharmaceutical Limited by
Share Ltd and Xinan Synthetic Pharmaceutical Limited by Share Ltd.
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Government Regulation
China has been reinforcing the environmental requirements
for the entire chemical industry, demanding the closure or rectification of those factories that do not meet the emission requirements
and are highly polluting. In early 2017, the government announced the closure or relocation of those chemical industry facilities
that are close to residential areas and the new environmental law officially came into full effect in January 2018.
The following is a summary of the principal governmental
laws and regulations that are or may be applicable to our operations in the PRC. The scope and enforcement of many of the laws and regulations
described below are uncertain. We cannot predict the effect of further developments in the Chinese legal system, including the promulgation
of new laws, changes to existing laws or the interpretation or enforcement of laws.
In the natural resources sector, the PRC and the
various provinces have enacted a series of laws and regulations over the past 20 years, including laws and regulations designed to improve
safety and decrease environmental degradation. The “China Mineral Resources Law” declares state ownership of all
mineral resources in the PRC. However, mineral exploration rights can be purchased, sold and transferred to foreign owned companies.
Mineral resource rights are granted by the Central Government permitting recipients to conduct mineral resource activities in a specific
area during the license period. These rights entitle the licensee to undertake mineral resource activities and infrastructure and ancillary
work, in compliance with applicable laws and regulations, within the specific area covered by the license during the license period. The
licensee is required to submit a proposal and feasibility studies to the relevant authority and to pay the Central Government a natural
resources tax in an amount equal to a percent of annual crude salt sales and tones of bromine sold. Shandong Province has determined that
bromine is to be extracted only by licensed entities and we hold one of such licenses. Despite the Province desire to limit extraction
to licensed entities hundreds of smaller operations have continued to extract bromine without licenses.
The Ministry of Land and Resources (“MLR”)
is the principal regulator of mineral rights in China. The Ministry has authority to grant licenses for land-use and exploration rights,
issue permits for mineral rights and leases, oversee the fees charged for them and their transfer, and review reserve evaluations. We
are required to hold a bromine and salt production license in order to operate our bromine and salt production business in the PRC. Our
bromine and salt production license is subject to a yearly audit. If we do not successfully pass the yearly approval by relevant government
authorities, our bromine and salt production operations may be suspended until we are able to comply with the license requirements which
could have a material adverse effect on our business, financial condition and results of operations.
Human Capital Resources
Employee Profiles
As of December 31, 2021, we employed approximately
423 full-time employees, of whom approximately 70% are with SCHC and DCHC, and 30% are with SYCI. Approximately 6% of our employees
are management personnel and 4% are sales and procurement staff. None of our employees are represented by a union.
Total Rewards
Our compensation program is designed to attract
and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our
strategic goals and create long-term value for our stockholders. Our employees in China participate in a state pension arrangement organized
by Chinese municipal and provincial governments. We are required to contribute to the arrangement at the rate of 16% of the
average monthly salary. In addition, we are required by Chinese law to cover employees in China with other types of social insurance.
We have purchased social insurance for almost all of our employees. Expense related to social insurance was approximately $950,505 for
fiscal year 2021.
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Health and Safety
The success of our business is fundamentally connected
to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees
and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their
physical and mental health by providing tools and resources to help them improve or maintain their health status; and that offer choice
where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic,
we implemented significant operating environment changes that we determined were in the best interest of our employees, as well as the
communities in which we operate, and which comply with government regulations. This includes having the vast majority of our employees
work from home, while implementing additional safety measures for employees continuing critical on-site work.
Talent
A core tenet of our talent system is to both develop
talent from within and supplement with external hires. This approach has yielded loyalty and commitment in our employee base which in
turn grows our business, our products, and our customers, while adding new employees and external ideas supports a continuous improvement
mindset and our goals of a diverse and inclusive workforce. Our talent acquisition team uses internal and external resources to recruit
highly skilled and talented workers in the PRC, and we encourage employee referrals for open positions.
Available Information
We make available free of charge on or through
our internet website, www.gulfresourcesinc.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, including exhibits, and all amendments to those reports, if any, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission. The SEC maintains an Internet site that contains reports, proxy and information statements,
and other information regarding issuers like our Company that file electronically with the SEC at http://www.sec.gov. The information
contained on our website is not intended to be incorporated into this Annual Report on Form 10-K.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.