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 $0.14042 and $0.13999 during
fiscal years 2024 and 2025, 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 common 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
incorporated 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.
In April 2022, Shouguang Hengde
Salt Industry Co. Ltd, our subsidiary, was incorporated in Shandong Province, China, for crude salt production and trading.
On October 27, 2025, the Company
completed a 1-for-10 reverse stock split of our common stock, such that for each ten 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 October 27, 2025, our shares began trading on the NASDAQ Global Select Market under the new CUSIP # 40251W507.
On May 6, 2025, the Company was
notified by the Listing Qualifications Staff of The Nasdaq Stock Market LLC that the Staff granted the Company’s request to transfer
the listing of its common stock, par value $0.0005 per share, from The Nasdaq Global Select Market tier to The Nasdaq Capital Market tier.
On October 27, 2025, our shares began trading on the Nasdaq Capital Market under the same symbol “GURE”.
Recent Developments
On November 12, 2025, the Company
issued a press release providing certain updates on its hearing scheduling process with the Nasdaq Hearings Panel. The Company has received
a hearing notification letter from Nasdaq scheduling an oral hearing for December 9, 2025. As of November 10, 2025, the Company’s
common stock had maintained the requisite closing bid price in compliance with Listing Rule 5550(a)(2). In light of the above and in accordance
with the instructions provided by the hearing notification letter, the Company has submitted a request to cancel the hearing, subject
to the Company’s Listing Analyst review and confirmation.
On December 1, 2025, the Company
received a letter from The Nasdaq Stock Market, LLC stating that the Company had regained compliance with the minimum bid price requirement
for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2). Consequently, the hearing before the
Hearings Panel scheduled to take place on December 9, 2025 has been cancelled. The Company’s securities will continue to be listed
and traded on The Nasdaq Stock Market.
On December 2, 2025, the Company issued a press release announcing
that it has regained compliance with the minimum bid price requirement for continued listing on The Nasdaq Capital Market.
On December 10,
2025, Shouguang City Haoyuan Chemical Company Limited, an indirect wholly owned subsidiary of Gulf Resources, Inc. (the “Company”),
entered into an equity transfer agreement to sell 100% of the equity interests in Shouguang Yuxin Chemical Industry Co., Limited to Shandong
Rongyuan Pharmaceutical Co., Ltd. for aggregate consideration of RMB 21.2 million, payable in instalments through 2028. The Company’s
board of directors reviewed and affirmed the terms of the transaction, concluding that the sale is fair to and in the best interests of
the Company and its shareholders. The disposition removes the operational and financial burdens associated with the prolonged suspension
of the Yuxin Chemical facility and enables the Company to reallocate resources to its other, more profitable business segments. The transaction
closed on December 22, 2025 following completion of the required governmental registration changes.
On December 18,
2025, the Company announced that, pursuant to a notice dated December 15, 2025 from the Shouguang Municipal People’s Government
Office (the “Government of Shouguang City”), it would temporarily suspend relevant operations in Shouguang City to comply
with local regulatory requirements. The Company characterized the suspension as seasonal in nature and aligned with the Government of
Shouguang City’s objectives for the orderly extraction, effective utilization, and comprehensive development of brine resources,
as well as the protection of the ecological environment. The Company further noted that bromine demand typically declines during the Chinese
New Year holiday period and that crude salt processing becomes more difficult in winter due to lower temperatures, which mitigated the
commercial impact of the temporary shutdown. Operations in Shouguang City subsequently resumed on March 2, 2026 in compliance with the
same government notice.
On December 22,
2025, the transaction previously announced on December 10, 2025 to sell 100% of the equity interests in Shouguang Yuxin Chemical Industry
Co., Limited by Shouguang City Haoyuan Chemical Company Limited, an indirect wholly owned subsidiary of Gulf Resources, Inc. (the “Company”),
to Shandong Rongyuan Pharmaceutical Co., Ltd. closed following completion of the industrial and commercial change registration by the
relevant Administration for Market Regulation (AMR), which recorded the Purchaser as the sole shareholder of the Target Company. The Company
had previously disclosed the terms of the equity transfer agreement and related matters in its Current Report on Form 8-K filed with the
SEC on December 15, 2025.
On March 2, 2026,
the Company announced that as previously reported on its Form 8-K filed on December 18, 2025, it had temporarily suspended certain operations
in Shouguang City in compliance with a seasonal government notice (the “Notice”) issued by the Government of Shouguang City
to support the orderly extraction, effective utilization, and comprehensive development of brine resources and the protection of the ecological
environment, and that such operations have now resumed in compliance with the Notice.
On January 26, 2026, March 5,
2026, March 19, 2026 and March 28, 2026, respectively, the Company entered into equity financing agreements (individually the “Private
Placement Agreement”; collectively the “Private Placement Agreements”), with four individual investors (individually
the “Private Placement Purchaser”; collectively “Private Placement Purchasers”), pursuant to which the Company
agreed to issue new shares of common stock to such investors that in aggregate accounted for approximately 18% of the total shares issued
and outstanding of the Company as of December 31, 2025. The purchase price per share under the Private Placement Agreement dated January
26, 2026, was set at 90% of the average closing price of the Company’s common stock for the five trading days prior to the date
of such agreement, while the purchase prices under the Private Placement Agreements executed in March 2026 were set at 85% of, or 15%
off, the closing price of the Company’s common stock on the trading day immediately preceding the respective agreement dates, as
quoted on the Nasdaq Stock Market. For more information, see the Current Report on Form 8-K of the Company filed with the Securities Exchange
Commission, or the SEC.
On April 23,
2026, the Company received a notice (the “Initial Notice”) from the Listing Qualifications Department of The Nasdaq Stock
Market LLC (“Nasdaq”) notifying the Company that due to the Company’s failure to timely file its Annual Report on Form
10-K for the fiscal year ended December 31, 2025 (the “Form 10-K”), with the SEC, the Company was not in compliance with Nasdaq’s
continued listing requirements under Nasdaq Listing Rule 5250(c)(1) (the “Listing Rule 5250(c)(1) Rule”), which requires the
timely filing of all required periodic reports with the SEC, and the Company subsequently received a notice (the “May Notice”)
from Nasdaq on May 26, 2026 due to the Company’s non-compliance with the Listing Rule 5250(c)(1) Rule as a result of the Company’s
failure to timely file its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2026(the “First Quarter Form 10-Q”,
together with the Form 10-K, the “Delinquent Reports”). The May Notice states that the Company had until June 22, 2026 to
submit to Nasdaq a plan to regain compliance with the Rule.
On May 26, 2026,
Gulf Resources (the “Company”) received a notice (the “Notice”) from the Listing Qualifications Department of The
Nasdaq Stock Market LLC (“Nasdaq”), indicating that, as a result of not having timely filed its quarterly report on Form 10-Q
for the quarter ended March 31, 2026 (the “Form 10-Q”), and the Company remains delinquent in filing its annual report on
Form 10-K for the year ended December 31, 2025 (the “Initial Delinquent Filing”), the Company is in non-compliance with Nasdaq
Listing Rule 5250(c)(1), which requires timely filing all required periodic financial reports with the Securities Exchange Commission.
On June 1, 2026,
Gulf Resources (the “Company”), following the Company’s ongoing dialogue with the staff of the United States Securities
and Exchange Commission, concluded that the Company will amend its fiscal year 2024 Form 10-K (the “FY2024 Form 10-K”) and
Form 10-Qs for the first, second and third quarters of 2025 (collectively, the “Q1, Q2 and Q3 2025 Form 10-Qs”) to restate
the disclosures (Note 6, Note 7 and Note 12 included in the FY2024 Form 10-K and the Q1, Q2 and Q3 2025 Form 10-Qs) to revise the previous
recognition of buildings without ownership certificates as fixed assets in the balance sheets and to reclassify such buildings as right-of-use
(ROU) assets based on lease agreements and ASC 842 Leases, for each of the periods included in those filing, including fiscal years 2023
and 2024 in the FY2024 Form 10-K and each of the quarterly and year-to-date periods included in the Q1, Q2 and Q3 FY2025 Form 10-Qs (collectively,
the “Prior Filings”). The Prior Filings should no longer be relied upon because of errors identified in such financial statements,
as described above.
In connection
with the identification of the above mentioned restatement, the Company delayed the completion of its fiscal year 2025 Form 10-K and Quarterly
Report on Form 10-Q for the quarter ended March 31, 2026, and filed a Form 12b-25 (Notice of Late Filing) with the Securities and Exchange
Commission to provide notice of such delay to the SEC and its shareholders.
On June 25, 2026, the Company received a letter from
Nasdaq indicating that, based on its further review and the plan of compliance submitted by the Company on June 17, 2026, Nasdaq determined
to grant an exception to enable the Company to regain compliance with the Listing Rule 5250(c)(1) Rule. The terms of the exception were
as follows: on or before August 31, 2026, the Company must file the Delinquent Reports, as required by the Listing Rule 5250(c)(1) Rule.
In the event the Company does not satisfy the terms, Nasdaq will provide written notification that its securities will be delisted. At
that time, the Company may appeal Nasdaq’s determination to a hearings panel.
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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; (iii) Daying County Haoyuan Chemical Co., Ltd., or DCHC; and (iv) Shouguang Hengde Salt
Industry Co. Limited, or SHSI, each a PRC company.
On December 10, 2025, Shouguang
City Haoyuan Chemical Company Limited (the “Seller”), an indirect wholly owned subsidiary of Gulf Resources, Inc. (the “Company”),
entered into an equity transfer agreement (the “SPA”) with Shandong Rongyuan Pharmaceutical Co., Ltd. (the “Purchaser”)
to sell 100% of the equity interests in Shouguang Yuxin Chemical Industry Co., Limited (the “Target Company”) for RMB 21.2
million, payable in instalments through 2028. The Company’s board of directors reviewed and approved the SPA, determining that its
terms, including the consideration and payment arrangements, are fair and in the best interests of the Company and its shareholders. Given
the prolonged suspension of operations at the Yuxin Chemical facility and its adverse impact on performance, the Board believes that completing
the sale will relieve the Company of related burdens and allow it to focus on more profitable business segments.
As previously reported, on December
10, 2025, Shouguang City Haoyuan Chemical Company Limited (the “Seller”), an indirect wholly owned subsidiary of Gulf Resources,
Inc. (the “Company”), entered into an equity transfer agreement (the “SPA”) with Shandong Rongyuan Pharmaceutical
Co., Ltd. (the “Purchaser”) to sell 100% of the equity interest in Shouguang Yuxin Chemical Industry Co., Limited (the “Target
Company”). The industrial and commercial registration reflecting the Purchaser as the sole shareholder of the Target Company was
completed by the relevant governmental authority on December 22, 2025, marking the closing of the transaction. In connection with the
closing, the Company filed a Current Report on Form 8-K on December 29, 2025, which includes the Company’s audited financial statements
for the year ended December 31, 2024, and unaudited financial statements for the nine months ended September 30, 2025, together with related
notes and pro forma financial information filed as Exhibit 99.1 of the aforementioned Form 8-K filed on December 29, 2025.
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.
Enforcement of Civil Liabilities
under United States Federal Securities Laws
Although the Company is a Nevada
corporation, most of the Company’s operations are and will be located outside of the United States and all Company directors and
officers reside outside the United States. Moreover, a majority of Company assets are located outside the United States. Since a majority
of the assets owned by the Company are located outside the United States, any judgment obtained in the United States against the Company
may not be collectible within the United States. There is no treaty between the United States and China providing for the reciprocal recognition
and enforcement of judgments in civil and commercial matters and a final judgment for the payment of money rendered by any federal or
state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws, would, therefore,
not be automatically enforceable in China. Under the PRC Civil Procedure Law, foreign shareholders may originate actions based on PRC
law against the Company in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other
procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete
claim, a factual basis and a cause for the suit.
There is uncertainty as to whether
the courts of China would (1) recognize or enforce judgments of United States courts obtained against the Company or its directors or
officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States,
or (2) entertain original actions brought in each respective jurisdiction against the Company or its directors or officers predicated
upon the securities laws of the United States or any state in the United States.
The recognition and enforcement
of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance
with the requirements of the PRC Civil Procedure Law based either on treaties between China and the country where the judgment is made
or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States
that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedure Law,
courts in China will not enforce a foreign judgment against the Company or its directors and officers if they decide that the judgment
violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and
on what basis a PRC court would enforce a judgment rendered by a court in the United States. Under the PRC Civil Procedure Law, foreign
shareholders may originate actions based on PRC law against the Company in the PRC, if they can establish sufficient nexus to the PRC
for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct
interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit.
In addition, it will be difficult
for U.S. shareholders to originate actions against us in China in accordance with PRC laws because we are incorporated under the laws
of State of Nevada and it will be difficult for U.S. shareholders, holding our common stock, to establish a connection to China for a
PRC court to have jurisdiction as required under the PRC Civil Procedure Law.
Recent Regulatory Developments in China
We face various legal and operational
risks and uncertainties associated with having all of our operations in China and the complex and evolving PRC laws and regulations.
The Chinese government has significant authority in regulating our operations and may intervene or influence our operations at any time,
which could result in a material adverse change in our operations and the value of our securities. The PRC government has recently indicated
its intent to exert more oversight and control over offerings that are conducted overseas and foreign investment in China-based issuers.
Such actions could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause
the value of such securities to significantly decline or be worthless. For example, anti-monopoly regulators in China have promulgated
new anti-monopoly and competition laws and regulations and strengthened the enforcement under these laws and regulations. There remain
uncertainties as to how the laws, regulations and guidelines recently promulgated will be implemented and whether these laws, regulations
and guidelines will have a material impact on our business, financial condition, results of operations and prospects. If any non-compliance
is identified by relevant authorities, we may be subject to fines and other penalties. See “Item 1A. Risk Factors— Risks
Related to Doing Business in China—Because all of our operations are in China, our business is subject to the complex and rapidly
evolving laws and regulations there. 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.”, “—if the Chinese government chooses to exert more oversight and control over offerings
that are conducted overseas and/or foreign investment in China-based issuers, such action could significantly limit or completely hinder
our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or
be worthless.” and “—If the Chinese government were to impose new requirements for approval from the PRC Authorities
to issue our common stock to foreign investors or list on a foreign exchange, such action could significantly limit or completely hinder
our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or
be worthless.”
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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.
On February 17, 2023, the China
Securities Regulatory Commission (‘CSRC”) released the Trial Measures for Administration of Overseas Securities Offerings
and Listings by Domestic Companies (the “Trial Measures”) and five supporting guidelines, which came into effect on March
31, 2023. Pursuant to the Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly,
should fulfill the filing procedures and report relevant information to the CSRC. If a domestic company fails to complete the filing procedures
or conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to administrative
penalties by the CSRC, such as order to rectify, warnings, fines, and its controlling shareholders, actual controllers, the person directly
in charge and other directly liable persons may also be subject to administrative penalties, such as warnings and fines. As a listed company,
we believe that we, and all of our PRC subsidiaries are not required to fulfill filing procedures and obtain approvals from the CSRC to
continue to offer our securities or operate our business as of the date of this annual report. In addition, to date, none of us and our
PRC subsidiaries has received any filing or compliance requirements from CSRC for the listing of the Company at Nasdaq and all of its
overseas offerings. Furthermore, based on our understanding of the current PRC laws, we believe that the CSRC’s approval is not
required to be obtained for the Company’s listing on Nasdaq; however, there are substantial uncertainties regarding the interpretation
and application of the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors (“M&A Rules”),
other PRC Laws and future PRC laws and regulations, and there can be no assurance that any governmental agency will not take a view that
is contrary to or otherwise different from our belief stated herein.
On February 24, 2023, the CSRC, the Ministry of Finance, the National
Administration of State Secrets Protection and the National Archives Administration jointly issued the Provisions on Strengthening Confidentiality
and Archives Administration of Overseas Securities Offering and Listing by Domestic Companies, or the Confidentiality and Archives Provisions,
which took effective from March 31, 2023. The Confidentiality and Archives Provisions specify that during the overseas securities offering
and listing activities of domestic companies, domestic companies and securities companies and securities service institutions that provide
relevant securities business shall, by strictly abiding by the relevant laws and regulations of the PRC and this Confidentiality and Archives
Provisions, institute a sound confidentiality and archives administration systems, take necessary measures to fulfill confidentiality
and archives administration obligations, and shall not divulge any national secrets, work secrets of governmental agencies and harm national
and public interests. Confidentiality and Archives Provisions provide that it is applicable to initial public offerings as well as other
types of securities listing of PRC domestic enterprises, and any future issuance of securities and listing activities after the initial
listing. Working papers generated in the PRC by securities companies and securities service providers that provide relevant securities
services for overseas issuance and listing of securities by domestic companies shall be kept in the PRC. Confidentiality and Archives
Provisions provide no explicit definition of working papers. In practice, the securities companies’ working papers usually refer
to various important information and work records related to the securities business obtained and prepared by the securities companies
and securities service providers and their representatives in the whole process of the securities businesses, such as due diligence work.
Without the approval of relevant competent authorities, such as CSRC, MOF PRC National Administration of State Secrets Protection, and
National Archives Administration of China, depending on the nature and transmission method of secrets, it shall not be transferred overseas.
Where documents or materials need to be transferred outside of the PRC, it shall be subject to the approval procedures in accordance with
relevant PRC regulations. The relevant competent authorities, such as, CSRC, MOF, PRC National Administration of State Secrets Protection,
and National Archives Administration of China will regulate, supervise and inspect pursuant to their respective statutory mandates over
matters of Confidentiality and Archives Administration concerning overseas offering and listing by domestic companies. As Confidentiality
and Archives Administration is newly promulgated, there is substantial uncertainty regarding their specific requirements. If we fail to
comply with related laws and regulations, we may be subject to fine, confiscation, blocking transmission or criminal offense. We have
taken measures to adopt management systems for the compliance of Confidentiality and Archives Provisions. We believe our listing does
not involve in national secrets, work secrets of governmental agencies and undermine national and public interests. There is no assurance
that we will be able to meet all applicable regulatory requirements and guidelines, or comply with all applicable regulations at all times,
or that we will not be subject to fines or other penalties in the future as a result of regulatory inspections.
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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”) and DCHC through the Hong Kong company, Hong Kong 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 or to the shareholders of 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.
7
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 “Item 1A. Risk
Factors— Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by our PRC
subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make
payments to us could have a material and adverse effect on our ability to conduct our business.” and “— PRC regulation
of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay
us from making loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity
and our ability to fund and expand our business.”
Holding Foreign Company Accountable
Act
Our common stock may be delisted from the Nasdaq
under the Holding Foreign Companies Accountable Act (“HFCAA”), if the PCAOB is unable to adequately inspect audit documentation
located in China, or investigate our auditor. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign
Companies Accountable Act, which was signed into law, and amends the HFCAA and requires the SEC to prohibit an issuer’s securities
from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
Our auditor, GGF CPA LTD., Certified Public Accountants, is a China-based accounting firm registered with the PCAOB, and is subject to
laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional
standards. Our auditor is headquartered in the China and is subject to inspection by the PCAOB on a regular basis. On August 26, 2022,
the PCAOB signed the Protocol with the CSRC and the MOF of the People’s Republic of China, governing inspections and investigations
of audit firms based in mainland China and Hong Kong. The Protocol remains unpublished and is subject to further explanation and implementation.
Pursuant to the fact sheet with respect to the Protocol disclosed by the SEC, the PCAOB shall have independent discretion to select any
issuer audits for inspection or investigation and the unfettered ability to transfer information to the SEC. On December 15, 2022, the
PCAOB issued a report that vacated its December 16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions
where it is unable to inspect or investigate completely registered public accounting firms. On December 29, 2022, legislation entitled
“Consolidated Appropriations Act, 2023” (the “Consolidated Appropriations Act”), was signed into law by President
Joseph Biden of the United States. The Consolidated Appropriations Act contained, among other things, an identical provision to Accelerating
Holding Foreign Companies Accountable Act, which reduces the number of consecutive non-inspection years required for triggering the prohibitions
under the HFCAA from three years to two. Each year, the PCAOB will determine whether it can inspect and investigate completely audit
firms in mainland China and Hong Kong, among other jurisdictions. We cannot assure you that we will not be identified by the SEC under
the HFCAA as an issuer that has retained an auditor that has a branch or office located in a foreign jurisdiction that the PCAOB determines
it is unable to inspect or investigate completely because of a position taken by an authority in that foreign jurisdiction. In addition,
there can be no assurance that, if we have a “non-inspection” year, we will be able to take any remedial measures. If we
were so identified for two consecutive years, trading in our common stock could in the future be prohibited under the HFCAA and, as a
result, we cannot assure you that we will be able to maintain the listing of our securities on the Nasdaq Stock Market or that you will
be allowed to trade our common stock in the United States on the “over-the-counter” markets or otherwise. Should our common
stock become not listed or tradeable in the United States, the value of our common stock could be materially affected. See “ Risk
Factors - Our common stock may be delisted from the Nasdaq under the Holding Foreign Companies Accountable Act if the PCAOB is unable
to adequately inspect audit documentation located in China. The delisting of our common stock, or the threat of their being delisted,
may materially and adversely affect the value of your investment .”
8
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.
In February 2019, the Company received
a notification from the local government of Yangkou County that its Factory No. 1, No. 4, No. 7 and No. 9 passed inspection and could
resume operations. In April 2019, Factory No.1 and Factory No.7 resumed operation.
On November 25, 2019, the government
of Shouguang City issued a notice ordering all bromine facilities in Shouguang City, including the Company’s 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 February 27, 2020 issued by the local governmental authority allowing the Company
to resume production after the winter temporary closure. Further, the Company received another approval from the Shouguang Yangkou People’s
Government dated March 5, 2020 allowing the Company 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. 1 and No. 7 commenced trial production in mid- March 2020 and commercial production on April 3, 2020 and its Factories No.
4 and No. 9 commenced commercial production on May 6, 2020. The Company received verbal notification from the government regarding Factory
No. 8, allowing it to recommence production in August 2022. Factory No. 8 began contributing revenue in the fourth quarter 2022.
Pursuant to a notification from
the government of Shouguang City, all bromine facilities in Shouguang City were temporarily closed from December 26, 2025 until February
24, 2026. In compliance with the notification, the Company ceased production at its bromine facilities during this period and resumed
operations at the bromine and crude salt factories as scheduled in February 2026.
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.
9
We secured the land for our upcoming
chemical factory and obtained the final approval regarding environmental protection assessment. Construction of the new chemical facilities
located at Bohai Marine Fine Chemical Industrial Park, commenced in June 2020. Initially, the construction was projected to last around
one year, with an additional six months for equipment installation and testing, However, due to the COVID epidemic and electrical restrictions,
the opening of the chemical factory has been postponed. The Company has received the refrigeration and air compressor units. The estimated
total cost for the relocation process is approximately $69 million. As of December 31, 2025 and 2024, the Company incurred relocation
costs in the amount of $45,584,344 and $45,584,344, respectively. Additionally, the procurement of the final equipment for our chemical
factory has been postponed until we have a better understanding of the potential for derivative bromine products. We anticipate proceeding
with the completion of its chemical factory in due course. However, in the event that the Chinese economy persists in its weakness and
if we perceive this trend to be ongoing, there is a possibility that the chemical factory could be repurposed for the production of Sodium-Ion
batteries.
In January 2017, the Company completed the construction of the first
brine water and natural gas well field in Daying County, Sichuan Province, and commenced trial production in January 2019. On May 29,
2019, the Company received verbal notice from the government of Tianbao Town, Daying County, Sichuan Province, mandating the need for
project approval for its Daying well, encompassing the entire natural gas and brine water project. This also includes approvals for safety
production inspection, environmental protection assessment, and to solve the related land issue. Until these approvals are obtained, the
Company must temporarily suspend trial production at its natural gas well in Daying. Additionally, in compliance with the Chinese government
new policies, the Company is required to obtain an exploration license for bromine and a mining license for natural gas. 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 natural gas production. The Company is engaged in ongoing discussions with the government of Daying County regarding
the establishment of a joint venture for the exploration and production of natural gas and brine products in Sichuan.
We are not writing off any of the
goodwill related to our chemicals business. We believe the upcoming chemical factory could produce 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.
In April 2022, our subsidiary, Shouguang
Hengde Salt Industry Co. Ltd, was incorporated in Shandong Province, China, specifically for crude salt production and trading. This subsidiary
was established in response to a new government policy mandating separate registrations for bromine and crude salt companies.
As of the date of this annual report,
the Company is awaiting governmental approval for Factories No. 2 and No. 10.
10
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 in oil 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
bromines 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.
Permissions Required from the PRC Authorities
for Our Operations
Our operations in China are governed
by PRC laws and regulations. We engage in the manufacturing and trading of bromine through our wholly-owned subsidiary, Shouguang City
Haoyuan Chemical Company Limited (“SCHC”), which holds the necessary licenses for bromine and crude salt mining and production.
Shouguang Hengde Salt Industry Co. Ltd (“SHSI”) is responsible for trading crude salt. No operational license is required
for such business activity. Currently, operations at Shouguang Yuxin Chemical Industry Company Limited (“SYCI”) are suspended
due to relocation and construction, which we have obtained the required construction permit. To further explore and develop natural gas
and brine resources (including bromine and crude salt) within the PRC in Sichuan Province, the Company established Daying County Haoyuan
Chemical Company Limited (“DCHC”). DCHC is currently in discussions with government authorities regarding permits for mining
natural gas and halogen water.
As of the date of this report,
our management believes that these entities have obtained the requisite licenses and permits from the PRC government authorities that
are material for their business operations, including, among others, certain business licenses, approvals for the establishment of enterprises
with foreign investment, approvals for overseas direct investment and environmental and occupational safety and health approvals. Given
the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government
authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform
in the future.
Furthermore, in connection with
our issuance of securities to foreign investors, under current PRC laws, regulations and regulatory rules, as of the date of this annual
report, we, and our PRC subsidiaries, (i) are not required to obtain permissions from the China Securities Regulatory Commission, or the
CSRC, (ii) are not required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC, and (iii) have not
been asked to obtain such permissions by any PRC authority.
However, the PRC government has
recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment
in China-based issuers. If we fail to receive or maintain the required permissions or approvals, we may be forced to suspend or cease
operations, lending to loss in revenue. Authorities may impose fines, sanctions, or initiate legal proceedings, negative publicity would
affect our Company’s image. Investors may react negatively, causing share price declines due to perceived regulatory risk. Because
of the regulatory uncertainty, which can potentially lead to valuation adjustments and increased risk premiums. Our business plans may
need to be suspended or scaled back if approvals or permits become harder to obtain.
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.
11
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 November
24, 2017. It is being relocated to Bohai Marine Fine Chemical Industry Park, Shouguang City. SYCI paid $9,047,232 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.
12
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 7 people. 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 2025 were Shandong Morui
Chemical Company Limited, Shandong Shouguang God Runfa Ocean Chemical Co., Ltd, 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,
2025, sales to our three largest bromine customers, based on net revenue from such customers, aggregated $9,971,820 or approximately 43%
of total net revenue from sale of bromine; and sales to our largest customer represented approximately 15%, respectively, of total net
revenue from the sale of bromine.
During the year ended December 31,
2024, sales to our three largest bromine customers, based on net revenue from such customers, aggregated $1,969,624 or approximately 35%
of total net revenue from sale of bromine; and sales to our largest customer represented approximately 12%, respectively, of total net
revenue from the sale of bromine.
During each of the years ended December
31, 2025, and 2024, sales to our three largest crude salt customers, based on net revenue from such customers, aggregated $2,418,032 and
$2,049,988, respectively, or approximately 100% and 100% of total net revenue from sale of crude salt; and sales to our largest customer
represented approximately 40% and 38%, respectively, of total net revenue from the sale of crude salt.
During each of the years ended December
31, 2025, and 2024, the net revenue for the chemical products was $0. During each of the years ended December 31, 2025, and 2024, the
net revenue for natural gas was $0 and $61,207.
Principal Suppliers
Our principal external suppliers
are Laizhou Shengfu Chemical Company Limited, Weifang Wanhong Chemical Company Limited, Shandong Xinlong International Trade Company Limited,
Shouguang Runfeng trading Company Limited.
During the year ended December 31,
2025, and 2024, we purchased 100% of raw materials for our bromine and crude production from our top four suppliers.
During the year ended December 31,
2025, and 2024, we did not purchase any raw materials for chemical products production. This supplier’s concentration makes us vulnerable
to a near-term adverse impact, should the relationships be terminated.
13
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 Sichuan Province. On November 23, 2015, the Company’s
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 construction
of the first brine water and natural gas well field in Sichuan Province. Subsequently, the Company found some issues related to 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 verbal notice from the government
of Tianbao Town, Daying County, Sichuan Province, mandating the need for project approval for its Daying well, encompassing the entire
natural gas and brine water project. This also includes approvals for safety production inspection, environmental protection assessment,
and to solve the related land issue. Until these approvals are obtained, the Company must temporarily suspend trial production at its
natural gas well in Daying. Additionally, in compliance with the Chinese government new policies, the Company is required to obtain an
exploration license for bromine and a mining license for natural gas. 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 natural gas production.
The Company is engaged in ongoing discussions with the government of Daying County regarding the establishment of a joint venture for
the exploration and production of natural gas and brine products in Sichuan.
14
On September 1, 2017, the Company
received notification from the Government of Yangkou Town, Shouguang City of PRC that production at all its factories must be halted immediately.
This was required for the Company to perform rectification and improvement in compliance with the new local safety and environmental protection
requirements.
The Company has worked closely
with the county authorities to develop rectification plans for its bromine and crude salt businesses, reaching an agreement on a
plan in October 2017. During 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 producers in Shouguang, initiated
negotiations with the local government agencies. The local governmental agencies acknowledged the fact that their initial
requirements for the bromine industry did not include the project, the planning and land use rights approvals, which were later
introduced by the provincial government as new requirements. The Company understood from the local government that local government
was coordinating with various government agencies to solve these three outstanding approval issues in a timely manner and that all
impacted 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)
resumed operations upon receipt of verbal notification from local government of Yangkou County. Then, on May 7, 2019, the Company
renamed its Subdivision Factory No. 1 to Factory No. 4; and Factory No. 5 (previously integrated with Factory No. 7) as the new
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 approval dated 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 in middle March 2020, and commenced commercial production on April 3, 2020.
The Company received oral notification
from the government regarding Factory No. 8, allowing it to resume production in August 2022. Factory No.8 began contributing revenue
in the fourth quarter of 2022.
The Company is awaiting governmental
approval for Factories No. 2 and No. 10. To our knowledge, the government is finalizing plans for all mining areas, including flood
prevention measures. As a result, we may be required to make certain modifications to our existing wells and aqueducts prior to commencement
of operations of these factories in order to satisfy the local government's requirements. The Company completed its flood prevention project
in December 2023. This project was implemented for safeguarding its bromine facilities.
Pursuant to the notification from
the government of Shouguang City, all bromine facilities in Shouguang City were temporarily closed from December 26, 2025, until February
24, 2026. In compliance with the notification, the Company ceased production at its bromine facilities during this period and resumed
preparation operations at the bromine and crude salt factories as scheduled in February 2026.
15
▼ 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 $69 million in total in connection with the relocation. The Company
incurred relocation costs in the amount of $45,584,344 as of December 31, 2025.
In January 2020, the Company received
the environmental protection approval by the government of Shouguang City, Shandong Province for the planned Yuxin Chemical factory. Construction
of the new chemical facilities at Bohai Marine Fine Chemical Industrial Park commenced in June 2020, with the bulk of the civil engineering
works completed by the end of June 2021. However, due to the supply chain issues as well as the electric restrictions in China, the delivery
of some equipment, along with the equipment installation and testing and beginning trial production at the chemical factory, was delayed.
On February 22, 2022, the Company announced that discussions with the government had led to an easing of electricity restrictions. As
a result, the Company re-engaged with its suppliers to proceed with the production and delivery of the remainder of the equipment, aiming
to finish installation and begin testing and trial production. At this stage, the Company also began preparation work for its application
for safety and environmental assessment. Additionally, the procurement of the final equipment for our chemical factory has been postponed
until we have a better understanding of the potential for derivative bromine products. We anticipate proceeding with the completion of
its chemical factory in due course. However, in the event that the Chinese economy persists in its weakness and if we perceive this trend
to be ongoing, there is a possibility that the chemical factory could be repurposed for the production of Sodium-Ion batteries.
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.
16
Government Regulation and Permissions Required from
the PRC Authorities for Our Operations
Since all of our operations
are conducted in China through our PRC subsidiaries, the Chinese government has significant authority in regulating our operations and
may intervene or influence our operations at any time, which could result in a material adverse change in our operations and the value
of our common stock. see “ Item 1A. Risk Factors — Risks Related to Doing Business in China. ”
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. For more
details, see “Item 1A. Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect to the
PRC legal system could adversely affect us.”
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.
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 percentage 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.
In April 2022, our subsidiary,
Shouguang Hengde Salt Industry Co. Ltd, was incorporated in Shandong Province, China, specifically for crude salt production and trading.
This subsidiary was established in response to a new government policy mandating separate registrations for bromine and crude salt companies.
As of the date of this annual report, the Company is awaiting governmental approval for Factories No. 2 and No. 10.
We engage in the manufacturing
and trading of bromine through our PRC wholly-owned subsidiary, Shouguang City Haoyuan Chemical Company Limited (“SCHC”),
which holds the licenses for bromine and crude salt mining and production. Shouguang Hengde Salt Industry Co. Ltd (“SHSI”)
is in the business of trading crude salt. No operational license is required for such business activity. Currently, Shouguang Yuxin Chemical
Industry Company Limited (“SYCI”) had entered into an equity transfer agreement with Shandong Rongyuan Pharmaceutical Co.,
Ltd. (the “Purchaser”) to sell 100% of the equity interests of SYCI. To further explore and develop natural gas and brine
resources (including bromine and crude salt) within the PRC in Sichuan Province, the Company established Daying County Haoyuan Chemical
Company Limited (“DCHC”). DCHC is currently in discussions with government authorities regarding permits for mining natural
gas and halogen water.
Recently, the PRC government
has initiated a series of regulatory actions and made a number of public statements on offerings that are conducted overseas and/or involved
foreign investment in China-based issuers, including the “Opinions on Severely Cracking Down on Illegal Securities Activities According
to Law,” or the Opinions, (promulgated by the General Office of the Central Committee of the Communist Party of China and the General
Office of the State Council on July 6, 2021). The Opinions emphasized the need to strengthen the administration over illegal securities
activities, and the need to strengthen the supervision over overseas listings by Chinese companies. Given the current PRC regulatory environment,
it is uncertain when and whether we or our PRC subsidiaries, will be required to obtain permission from the PRC government to list on
U.S. exchanges in the future, and even when such permission is obtained, whether it will be denied or rescinded. We have been closely
monitoring regulatory developments in China regarding any necessary approvals from the CSRC or other PRC governmental authorities required
for overseas listings. As of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory
objection to listing on U.S. exchange from the CSRC or other PRC governmental authorities. However, there remains significant uncertainty
as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital
markets activities.
On February 17, 2023, the
CSRC released the Trial Administrative Measures for Administration of Overseas Securities Offerings and Listings by Domestic
Companies (the “Trial Measures”) and five supporting guidelines, which came into effect on March 31, 2023. Pursuant to
the Trial Measures, domestic companies that seek to offer or list securities overseas, both directly and indirectly, should fulfill
the filing procedures and report relevant information to the CSRC. If a domestic company fails to complete the filing procedures or
conceals any material fact or falsifies any major content in its filing documents, such domestic company may be subject to
administrative penalties by the CSRC, such as order to rectify, warnings, fines, and its controlling shareholders, actual
controllers, the person directly in charge and other directly liable persons may also be subject to administrative penalties, such
as warnings and fines. As a listed company, we believe that we and all of our PRC subsidiaries are not required to fulfill filing
procedures and obtain approvals from the CSRC to continue to offer our securities or operate our business as of the date of this
annual report. In addition, to date, none of us and our PRC subsidiaries has received any filing or compliance requirements from
CSRC for the listing of the Company at Nasdaq and all of its overseas offerings. Furthermore, based on our understanding of the
current PRC laws, we believe that the CSRC’s approval is not required to be obtained for the Company’s listing on
Nasdaq; however, there are substantial uncertainties regarding the interpretation and application of the Regulation on Mergers and
Acquisitions of Domestic Companies by Foreign Investors (“M&A Rules”), other PRC Laws and future PRC laws and
regulations, and there can be no assurance that any governmental agency will not take a view that is contrary to or otherwise
different from our belief stated herein.
17
On February 24, 2023, the CSRC
published the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities Offering
and Listing by Domestic Enterprises (the “Provisions on Confidentiality and Archives Administration”), which came into effect
on March 31, 2023. The Provisions on Confidentiality and Archives Administration require that, in the process of overseas issuance and
listing of securities by domestic entities, the domestic entities, and securities companies and securities service institutions that provide
relevant securities service shall strictly implement the provisions of relevant laws and regulations and the requirements of these provisions,
establish and improve rules on confidentiality and archives administration. Where the domestic entities provide with or publicly disclose
documents, materials or other items related to the state secrets and government work secrets to the relevant securities companies, securities
service institutions, overseas regulatory authorities, or other entities or individuals, the companies shall apply for approval of competent
departments with the authority of examination and approval in accordance with law and report the matter to the secrecy administrative
departments at the same level for record filing. Where there is unclear or controversial whether or not the concerned materials are related
to state secrets, the materials shall be reported to the relevant secrecy administrative departments for determination. However, there
remain uncertainties regarding the further interpretation and implementation of the Provisions on Confidentiality and Archives Administration.
As of the date of this annual
report, we and our PRC subsidiaries have obtained all requisite licenses and permits from the PRC government authorities needed for the
business operations of our PRC subsidiaries in China, and no permission or approval has been denied. Further, the Company is awaiting
governmental approval for Factories No. 2 and No. 10 as of the date of this annual report. For more details, please see “Item
1. Business - Business Strategy- Expansion of Production Capacity to Meet Demand.”
As of the date of this annual
report, we and our PRC subsidiaries have not been involved in any investigations or review initiated by any PRC regulatory authority,
not having any of them received any inquiry, notice or sanction for the business operation, accepting foreign investment or listing on
the Nasdaq Stock Market. In addition, as of the date of this annual report, we believe that under the currently effective PRC laws
and regulations, we and our PRC subsidiaries are not required to obtain approval or permission from the CSRC or the CAC or any other entity
that is required to approve our PRC subsidiaries’ operations or required for us to offer securities to foreign investors under any
currently effective PRC laws, regulations, and regulatory rules. If it is determined that we are subject to filing requirements imposed
by the CSRC under the Overseas Listing Regulations or approvals from other PRC regulatory authorities or other procedures, including the
cybersecurity review under the revised Cybersecurity Review Measures, for our future offshore offerings, it would be uncertain whether
we can or how long it will take us to complete such procedures or obtain such approval and any such approval could be rescinded. Any failure
to obtain or delay in completing such procedures or obtaining such approval for our offshore offerings, or a rescission of any such approval
is obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to file with the CSRC or
failure to seek approval from other government authorization for our offshore offerings. These regulatory authorities may impose fines
and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China,
delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially
and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our common
stock. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore
offerings before settlement and delivery of the securities offered. Consequently, if investors engage in market trading or other activities
in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition,
if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish
the required filing or other regulatory procedures for our prior offshore offerings, we may be unable to obtain a waiver of such approval
requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval
requirement could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our
common stock.
Given the uncertainties of interpretation
and implementation of laws and regulations and the enforcement practice by government authorities, we may be required to obtain additional
licenses, permits, filings or approvals for our business and operations in the future. We cannot assure you that we will be able to obtain,
in a timely manner or at all, or maintain such licenses, permits or approvals, and we may also inadvertently conclude that such permissions
or approvals are not required. Any lack of or failure to maintain requisite approvals, licenses or permits applicable to us or our PRC
subsidiaries may have a material adverse impact on our business, results of operations, financial condition and prospects, significantly
limit or completely hinder our ability to offer or continue to offer securities to investors, and cause the value of our securities to
significantly decline or become worthless. For more details, see “ Item 1A. Risk Factors - Risks Related to Doing Business in
China - If the Chinese government were to impose new requirements for approval from the PRC Authorities to issue our common stock to foreign
investors or list on a foreign exchange, such action could significantly limit or completely hinder our ability to offer or continue to
offer securities to investors and cause the value of such securities to significantly decline or be worthless.”
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.
18
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, 2025, we employed approximately 355 full-time employees, of whom approximately 79% are with SCHC, SHSI and DCHC, and
21% are with SYCI. Approximately 30% of our employees are management personnel and 5% 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 $508,947 for
fiscal year 2025.
19
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.
20
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.