GULF RESOURCES, INC. 10-K/A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a discussion of the results of operations for our fiscal years ended December 31, 2024, and 2023, and changes in financial condition during those years. The Consolidated Financial Statements for the year ended December 31, 2024, have been restated to correct prior period misstatements. The discussion and tables included below have been corrected to reflect the restatements. For more information see Note 23 – Restatement of Previously Issued Financial Statements in the Consolidated Financial Statements of this Annual Report on Form 10-K. The following information should be read in conjunction with the consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K. In addition to historical information, this report contains forward-looking statements that involve risks and uncertainties which may cause our actual results to differ materially from plans and results discussed in forward-looking statements. We encourage you to review the risks and uncertainties discussed in the sections entitled Item 1A. “Risk Factors” and “Forward-Looking Statements” included at the beginning of this Annual Report on Form 10-K. The risks and uncertainties can cause actual results to differ significantly from those forecasts in forward-looking statements or implied in historical results and trends. Overview We are a Nevada holding company which conducts operations through our wholly-owned China-based subsidiaries. Our business is conducted and reported in four segments, namely, bromine, crude salt, chemical products and natural gas. Through our wholly-owned subsidiary, SCHC, we produce and trade bromine and SHSI for crude salt production and trading. crude salt. We are one of the largest producers of bromine in China, as measured by production output. Elemental bromine is used to manufacture a wide variety of bromine compounds used in industry and agriculture. Bromine also is used to form intermediary chemical compounds such as Tetramethylbenzidine. Bromine is commonly used in brominated flame retardants, fumigants, water purification compounds, dyes, medicines and disinfectants. 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. Through our wholly-owned subsidiary, SYCI, we manufacture and sell chemical products 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. Our wholly-owned subsidiary, DCHC, was established to explore and develop natural gas and brine resources (including bromine and crude salt) in Sichuan Province, China. Bromine and Crude Salt As disclosed in the Company’s Current Report on Form 8-K filed on September 8, 2017, the Company received, on September 1, 2017, letters from the Yangkou County, Shouguang City government addressed to each of its subsidiaries, SCHC and SYCI, 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 and environmental protection requirements. In the Company’s press release of August 11, 2017 and on its conference call of August 14, 2017, the Company addressed concerns that increased government enforcement of stringent environmental rules that were adopted in early 2017 to insure corporations bring their facilities up to necessary standards so that pollution and other negative environmental issues are limited and remediated, could have an impact on our business in both the short and long-term. The Company also expressed that although it believed its facilities were fully compliant at the time, the Company did not know how its facilities would fare under the new rules. Teams of inspectors from the government were sent to many provinces to inspect all mining and manufacturing facilities. The local government requested that facilities be closed, so that the facilities could undergo the inspection and analysis in the most efficient manner by inspectors’ team. As a result, our facilities were closed on September 1, 2017. The Company believes that this is another step by the government to improve the environment. It further believes the goal of the government is not to close all plants, but rather to codify the regulations related to project approval, land use, planning approval and environmental protection assessment approval so that illegal plants are not able to open in the future and so that plants close to population centers do not cause serious environmental damage. In addition, the Company believes that the Shandong provincial government wants to assure that each of its regional and county governments has applied the Notice in a consistent manner. 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 the 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 will not be allowed to commence production prior to obtaining those approvals. In February 2019, the Company received a notification from the local government of Yangkou County that its Factories No. 1, No. 4, No. 7 and No. 9 passed inspection and were allowed to resume operations. In April 2019, Factory No. 1 and No. 7 resumed operations. 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. 27 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 15, 2024, until February 12, 2025. 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 2025. Chemical Products On November 24, 2017, the Company received a letter from the People’s Government of Yangkou County, Shouguang City notifying the Company that due to the new standards and regulations relating to safety production and environmental pollution, from certain local governmental departments, such as the municipal environmental protection department, the security supervision department and the fire department, its chemical enterprises would have to be relocated to a new industrial park called Bohai Marine Fine Chemical Industry Park. Although our chemical companies were in compliance with regulations, they were also close to a residential area. As a result, the government determined we should relocate to the Bohai park. Chemical companies that are not being asked to move into the park are being permanently closed. Since our factories closed, the Company has secured from the government the land use rights for its chemical plant. On January 6, 2020, the Company received the environmental protection approval by the government of Shouguang City, Shandong Province for the proposed Yuxin Chemical factory. Construction of the new chemical facilities 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 refrigeration and air compressor units. 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. Natural Gas 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. As a result of our acquisitions of SCHC and SYCI, our historical consolidated financial statements and the information presented below reflects the accounts of SCHC , SYCI and DCHC, the consolidated financial statements and the information presented below as of and for the year ended December 31, 2024. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report. Flood Prevention Project In August 2023, the Company initiated its preventive measures for safeguarding its bromine facilities. Our strategy involves the renovation of the channels of four major rivers within our mining area, encompassing the tributary of the Mihe River. The aim is to prevent flooding that could harm the wells, aqueducts and crude salt pans at our plant. In December 2023, the Company completed this flood prevention project. As of December 31, 2023, we incurred $46,510,856 in other expenses for the project. The cost incurred for four major rivers are: (1) Liansigou Section for $8,057,722;(2) Mi River Section for $20,168,321;(3) Ta River Section $10,070,033; (4) Weitan River Section for $8,214,780. 28 RESULTS OF OPERATIONS. Year ended December 31, 2024 as compared to year ended December 31, 2023 Years ended December 31, 2024 (Restated) December 31, 2023 Percent Change Increase/ (Decrease) Net Revenue $ 7,661,010 $ 30,043,790 (75 %) Cost of Net Revenue $ (14,746,741 ) $ (28,089,953 ) (48 %) Gross (Loss)/Profit $ (7,085,731 ) $ 1,953,837 (463 %) Sales and Marketing Expense $ (46,264 ) $ (59,055 ) (22 %) Direct labor and factory overheads incurred during plant shutdown $ (8,880,643 ) $ (9,544,675 ) (7 %) General and Administrative Expenses $ (6,235,931 ) $ (4,240,832 ) 47 % Loss from Operations $ (22,248,569 ) $ (11,890,725 ) 87 % Other Income, Net $ (62,113 ) $ 144,919 (143 %) Expenditure on water pollution treatment $ — $ (46,510,856 ) (100 %) Loss on disposal of property, plant and equipment $ (29,169,008 ) $ — N/A Impairment of Property, plant and equipment $ (6,772,500 ) $ — N/A Loss before Taxes $ (58,252,190 ) $ (58,256,662 ) (0 %) Income Tax Expense (Benefit) $ (1,648,182 ) $ (3,538,617 ) (53 %) Net Loss $ (59,900,372 ) $ (61,795,279 ) (3 %) Net Loss of $59,900,372 for year 2024 was mainly attributable to decreased sales and reduced margins. The company also suffered a loss of $29,169,008 and $6,772,500 on retirement of fixed assets and impairment of fixed assets. Additionally, the compensation expenses amounted to $194,700 for shares issued to company employees, officers and consultants for the year 2024. Net Loss of $61,795,279 for year 2023 was mainly attributable to decreased sales and reduced margins. Additionally, the compensation expenses amounted to $451,350 for shares issued to company employees, officers and consultants for the year 2023 . The Company also incurred losses of $46,510,856 on a flood prevention project. Net Revenue The table below shows the changes in net revenue in the respective segments of the Company for the fiscal year 2024 compared to the same period in 2023: Net Revenue by Segment Segment Year Ended December 31, 2024 % of total Year Ended December 31, 2023 % of total Percent Increase (Decrease) of Net Revenue Bromine $ 5,549,815 72.4 % $ 26,921,462 89.6 % (79.4 %) Crude Salt 2,049,988 26.8 % 2,971,467 9.9 % (31.0 %) Chemical Products — — — — — Natural Gas 61,207 0.8 % 150,861 0.5 % (59.4 %) Total sales $ 7,661,010 100.0 % $ 30,043,790 100.0 % (74.5 %) Years Ended December 31 Percent Change Bromine and crude salt segments product sold in tonnes 2024 2023 Increase Bromine (excluded volume sold to SYCI) 2,250 7,951 (72 %) Crude Salt 77,289 97,101 (20 %) 29 Bromine se g ment Net revenue from our bromine segment decreased by 79.4% to $5,549,815 for the year ended December 31, 2024, compared to $26,921,462 for the year ended December 31, 2023. This decrease was due to a decrease in bromine unit price of 27% and a decrease in volume of 72%. Crude salt se g ment Net revenue from our crude salt segment decreased by 31.0% to $2,049,988 for the year ended December 31, 2024, compared to $2,971,467 for the last year. This decrease was due to a decrease in crude salt unit price of 13% and a decrease in volume of 20%. Chemical products segment For the years ended December 31, 2024, and December 31, 2023, the net revenue for the chemical products segment was $0 due to the closure of our chemical factories since September 1, 2017. 30 Natural Gas segment For the year ended December 31, 2024, and December 31, 2023, the net revenue for the n atural g as se g ment was $61,207 and $150,861. The 59.4% decrease in revenue was primarily due to the expiration of contracts. Cost of Net Revenue Cost of Net Revenue by Segment % Change Year Ended Year Ended of Cost of December 31, 2024 December 31, 2023 Net Revenue Segment % of total % of total Bromine $ 13,750,051 93 % $ 26,521,281 94 % (48 %) Crude Salt 996,396 7 % 1,567,993 6 % (37 %) Chemical Products — — — — — Natural Gas 294 — 679 — (57 %) Total $ 14,746,741 100 % $ 28,089,953 100 % (48 %) Cost of net revenue primarily includes costs of the raw materials consumed, the direct salaries and benefits for production staff, electricity costs, depreciation and amortization of manufacturing plants and machinery, and other manufacturing-related costs. Our cost of net revenue was $14,746,741 for the year ended December 31, 2024, representing a $13,343,212 (or 48%) decrease compared to the preceding year. The decrease in costs was mainly due to a significant decrease in sales volume. Bromine production capacity and utilization of our factories The table below represents the annual capacity and utilization ratios for all of our bromine producing properties: Annual Production Capacity (in tonnes) Utilization Ratio (i) Fiscal year 2024 31,506 7 % Fiscal year 2023 31,506 25 % Variance of the fiscal year 2024 and 2023 0 (18 %) (i) Utilization ratio is calculated based on the annualized actual production volume in tonnes for the periods divided by the annual production capacity in tonnes. Bromine segment For the year ended December 31, 2024, the cost of net revenue for the bromine segment was $13,750,051. For the year ended December 31, 2023, the cost of net revenue for the bromine segment was $26,521,281. Crude salt segment For the year ended December 31, 2024, the cost of net revenue for the crude salt segment was $996,396. The cost of net revenue for our crude salt segment for the year ended December 31, 2023 was $1,567,993. Chemical products segment Cost of net revenue for our chemical products segment for the fiscal year 2024 and 2023 was $0. Natural Gas segment Cost of net revenue for our natural gas segment for the year ended December 31, 2024, and 2023 was $294 and $679. 31 Gross (Loss) Profit. Gross (loss) was $7,085,731or 93%, of net revenue for the year ended December 31, 2024, compared to $1,953,837, or 7%, of net revenue for the same period in 2023. Gross Profit (Loss) by Segment Year Ended December 31, 2024 Year Ended December 31, 2023 % Point Change of Gross Profit Margin Segment Gross Profit (loss) Margin Gross Profit (loss) Margin Bromine $ (8,200,236 ) (147 %) $ 400,181 2 % (145 %) Crude Salt 1,053,592 51 % 1,403,474 47 % 4 % Chemical Products — — — — — Natural Gas 60,913 100 % 150,182 100 % 0 % Total Gross (Loss) Profit $ (7,085,731 ) (93 %) $ 1,953,837 7 % (86 %) Bromine se g ment For the year ended December 31, 2024, the gross loss margin for our bromine segment was 147% compared to the gross profit of 2% in the previous year. This decrease was due to a decrease in bromine unit price of 27% and a decrease in volume of 72%. Crude salt se g ment For the year ended December 31, 2024, the gross profit margin for our crude salt segment was 51%, compared to 47% in the preceding year, representing a 4% increase. Direct labor and factory overheads were incurred during plant shutdown. On September 1, 2017, the Company received notification from the government of Yangkou County, Shouguang City of PRC stating that production at all its bromine and crude salt and chemical factories should be halted with immediate effect in order for the Company to perform rectification and improvement in accordance with the county’s new safety and environmental protection requirements. 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 Bohai Park. As such, direct labor and factory overhead costs (including depreciation of plant and machinery) amounted to $8,880,643 and $9,544,675 for fiscal years 2024 and 2023, which were presented as operating expenses instead of in cost of revenue. The decrease in direct labor and factory overhead costs was primarily attributable to the factories operation status during the fiscal year 2024 and year 2023, respectively. These five factories (including No.1, No.4,No.7,No.8 and No.9)were in production during the year 2024. General and Administrative Expenses. General and administrative expenses were $6,235,931 for the year ended December 31, 2024, representing an increase of $1,995,099 (or 47%) as compared to $4,240,832 for the same period in 2023. The increase was mainly contributed by an increase in bad debt expenses. 32 Loss from Operations. Operating loss was $22,248,569 for the fiscal year 2024, compared to a loss of $11,890,725 in the same period in 2023. Income (loss) from Operations by Segment Year ended December 31, 2024 (Restated) Year ended December 31, 2023 Segment: % of total % of total Bromine $ (17,455,130 ) 81.2 % $ (10,005,755 ) 90.1 % Crude Salt $ (668,110 ) 3.1 % $ 640,309 (5.8 %) Chemical Products $ (3,185,472 ) 14.8 % $ (1,653,349 ) 14.9 % Natural Gas $ (195,364 ) 0.9 % $ (86,284 ) 0.7 % Loss from operations before corporate costs $ (21,504,076 ) 100 % $ (11,105,079 ) 100 % Corporate costs $ (744,493 ) $ (785,646 ) Loss from operations before taxes $ (22,248,569 ) $ (11,890,725 ) Bromine se g ment Loss from operations from our bromine segment was $17,455,130 for the fiscal year 2024, compared to a loss of $10,005,755 in the same period in 2023. This decrease was due to a decrease in bromine unit price of 27% and a decrease in volume of 72%. Crude salt se g ment Loss from operations from our crude salt segment was $668,110 for fiscal year 2024 compared to an income of $640,309 in the same period in 2023. The main reason for the decline in crude salt in 2024 compared with 2023 is that the unit price of sales is down by 13%, and the sales volume is also down by 20%. Chemical products segment Loss from operations from our chemical products segment was $3,185,472 for the fiscal year 2024, compared to a loss of $1,653,349 in the same period in 2023. Natural Gas segment Loss from operations from our natural gas segment was $195,364 for the fiscal year 2024, compared to a loss of $86,284 in the same period in 2023. Other (Expense)/Income, Net . Other income, net, which represent bank interest income, net of finance lease interest expense and $50,470 of non-operating expenses was $62,113 for the fiscal year 2024, representing a decrease of $207,032 (or approximately 143% as compared to the preceding year. Loss on disposal of property, plant and equipment. Loss on disposal of property, plant and equipment was $29,169,008 in the fiscal year 2024. In June 2024, considering the bromide well and transmission channel have been in use for many years, the Company conducted a site inspection and found that some wells and channels were seriously damaged by water seepage which in turn required write-off or new construction, and the write-off amount is $29,169,008. Impairment of property, plant and equipment. Impairment of property, plant and equipment was $6,772,500 in the fiscal year 2024. In December 2024, due to the delayed completion of some machinery and equipment of Yuxin Chemical's new plant resulting from the impact of the current market environment, our company hired professional evaluators to perform impairment tests on these assets. The latter determined impairment was $6,772,500. Net Loss. Net loss was $59,900,372 for the fiscal year 2024, compared to net loss of $61,795,279 in the preceding year. Net Loss Per Share For the fiscal year 2024, net loss per share was $54.88 compared to net loss per share of $58.16 in the preceding year. There were 1,091,562 shares outstanding compared to 1,091,562 shares Foreign Currency Translation Adjustment For the fiscal year 2024, the Company had a negative foreign currency translation adjustment of $2,730,049 versus a negative adjustment of $5,025,980 in the previous year. This adjustment impacts all balance sheet translations into U.S. dollars. 33 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2024, cash and cash equivalents were $10,075,162 as compared to $72,223,894 as of December 31, 2023. The components of this decrease of $62,148,732 are reflected below. Statement of Cash Flows Years Ended December 31 2024 (Restated) 2023 Net cash provided by (used in) operating activities $ 675,826 $ (32,751,851 ) Net cash used in investing activities $ (28,948,917 ) $ — Net cash used in financing activities $ (31,851,811 ) $ (267,810 ) Effects of exchange rate changes on cash and cash equivalents $ (2,023,830 ) $ (2,982,659 ) Net decrease in cash and cash equipment $ (62,148,732 ) $ (36,002,320 ) For the fiscal years 2024 and 2023, we met our working capital and capital investment requirements by using cash flows from operations and cash on hand. Net Cash Provided by (Used in) Operating Activities During the year ended December 31, 2024, cash flow used in operating activities of approximately $0.68 million was mainly due to a net loss of $59.9 million, offset by a non-cash adjustment related to depreciation and amortization of property, plant and equipment of $15.82 million, impairment of property, gain on disposal of equipment of $29 million, plant and equipment of $6.8 million and an decrease in account receivable of $4.26 million. During the year ended December 31, 2023, cash flow used in operating activities of approximately $32.75 million was mainly due to a net loss of $61.8 million, offset by a non-cash adjustment related to depreciation and amortization of property, plant and equipment of $27.13 million and an increase in accounts and other payable and accrued expenses of $1.11 million. Accounts receivable Cash collections on our accounts receivable had a major impact on our overall liquidity. The following table presents the aging analysis of our accounts receivable as of December 31, 2024, and 2023. December 31, 2024 December 31, 2023 % of total % of total Aged 1-30 days $ 419,581 74 % $ 2,040,377 42 % Aged 31-60 days 144,942 26 % 2,460,233 51 % Aged 61-90 days — — 365,086 7 % Aged 91-120 days — — — — Aged 121-150 days — — — — Aged 151-180 days — — — — Aged 181-210 days — — — — Aged 211-240 days — — — — Total $ 564,523 100 % $ 4,865,696 100 % The overall accounts receivable balance as of December 31, 2024, decreased by $4,301,173, compared to those of December 31, 2023. The decrease was mainly due to the decrease in the amount of accounts receivable in the current period as a result of the decrease in sales revenue. We have policies in place to ensure that sales are made to customers with an appropriate credit history. We perform ongoing credit evaluations on the financial condition of our customers. 34 Inventory Our inventory consists of the following: December 31, 2024 December 31, 2023 % of total % of total Raw materials $ 10,610 3 % $ 32,840 5 % Finished goods 304,761 97 % 544,389 95 % Total $ 315,371 100 % $ 577,229 100 % The net inventory level as of December 31, 2024, decreased by $261,858, as compared to the net inventory level as of December 31, 2023, one of the main reasons for the reduction in inventories was the decline in sales. Raw materials decreased by $22,230 as of December 31, 2024, as compared to December 31, 2023. Finished goods decreased by $239,628 as of December 31, 2024, as compared to December 31, 2023. Net Cash Used In Investing Activities For the fiscal year 2024, we used approximately $28.92 million for purchase of fixed assets. For the fiscal year 2023, we used $0 for investing activities. Net Cash Used In Financing Activities For the fiscal year 2024 and 2023, we used $31.87 and $0.3 million to repay finance lease obligations. We believe that our available funds and cash flows generated from operations will be sufficient to meet our anticipated ongoing operating needs for the next twelve months. As of December 31, 2024, we had approximately $10 million in available cash, all of which is in highly liquid current deposits yielding minimal or no interest. We do not anticipate paying cash dividends in the foreseeable future. We intend to continue to focus our efforts on the activities of SCHC, SYCI, SHSI and DCHC as these segments continue to expand within the Chinese market. We may not be able to identify, successfully integrate or profitably manage any business or business segment we may acquire, or any expansion of our business. An expansion may involve a number of risks, including possible adverse effects on our operating results, diversion of management’s attention, inability to retain key personnel, risks associated with unanticipated events and the financial statement effect of potential impairment of acquired intangible assets, any of which could have a materially adverse effect on our condition and results of operations. In addition, if competition for acquisition candidates or operations were to increase, the cost of acquiring businesses could increase materially. We may effect an acquisition with a target business which may be financially unstable, under-managed, or in its early stages of development or growth. Our inability to implement and manage our expansion strategy successfully may have a material adverse effect on our business and future prospects. Going Concern Consideration The consolidated financial statements are prepared on the going concern basis, meaning that the enterprise is expected to realize the assets and settle the liabilities through normal business operations. However, the going concern of the enterprise relies on many factors, such as profitable operations, generating operating cash flows, obtaining financing, etc. The company assesses its liquidity by monitoring cash and cash equivalents, as well as operating and capital expenditure commitments. As of December 31, 2024, As of Dec 31, 2024, the Company had current assets of $17.45 million and current liabilities of $12.98 million. As a result, the surplus was $4.47 million, and it has suffered losses in both the fiscal years of 2024 and 2023 as well. If it is unable to raise additional funds, it may need to take measures such as cutting administrative and operational costs and save funds. If there are significant doubts regarding the company's ability to continue operations, the company is attempting to alleviate such concerns through measures such as controlling operating expenses, shifting business focus to revenue-generating activities, obtaining authorization from domestic banks and other financial institutions, and seeking equity or debt financing. Additionally, the company will also obtain financial support commitments from related parties. However, these situations still pose significant doubts regarding the company's ability to continue operations. The financial statements do not consider the potential impact on the recoverability of assets, classification, and amounts and classification of liabilities if the company is unable to continue operations. Contractual Obligations and Commitments We have no significant contractual obligations not fully recorded on our consolidated balance sheets or fully disclosed in the notes to our consolidated financial statements. Additional information regarding our contractual obligations and commitments on December 31, 2024, is provided in the notes to our consolidated financial statements. 35 Material Off-Balance Sheet Arrangements We do not currently have any off-balance sheet arrangements falling within the definition of Item 303(a) of Regulation S-K. Critical Accounting Policies and Estimates Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which requires us to make judgments, estimates and assumptions. See “Note 1 – Nature of Business and Summary of Significant Accounting Policies,” in Notes to the Consolidated Financial Statements, which is included in “Item 8. Financial Statements and Supplementary Data,” which describes our significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The methods, estimates and judgments that we use in applying our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical estimates include: · allowance for doubtful accounts, which impacts revenue; · the valuation of inventory, which impacts gross margins; · impairment of long-lived assets; · the valuation and recognition of share-based compensation, which impacts operating expenses; and · the recognition and measurement of deferred income taxes, which impact our provision for taxes. Allowance for Doubtful Accounts We make estimates of the uncollectibility of accounts receivable, especially analyzing accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms, when evaluating the adequacy of the allowance for doubtful accounts. Credit evaluations are undertaken for all major sale transactions before shipment is authorized. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If management were to make different judgments or utilize different estimates, material differences in the amount of our reported operating expenses could result. Inventory Valuation Inventory is stated at the lower of cost or market, with cost determined on a first-in first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated market value based upon assumptions about future demand. We evaluate the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required in the future, which could have a material adverse effect on our results of operations. Depreciation of Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Expenditures for new facilities or equipment, and major expenditures for betterment of existing facilities or equipment are capitalized and depreciated using the straight-line method at rates sufficient to depreciate such costs over the estimated productive lives. All other ordinary repair and maintenance costs are expensed as incurred. Mineral rights are recorded at cost less accumulated depreciation and any impairment losses. Mineral rights are amortized ratably over the term of the lease, or the equivalent term under the units of production method, whichever is shorter. In some situations, the life of the asset may be extended or shortened if circumstances arose that would lead us to believe that the estimated life of the asset has changed. The life of leasehold improvements may change based on the extension of lease contracts with our landlords. Changes in the estimated lives of assets will result in an increase or decrease in the amount of depreciation recognized in future periods. 36 Impairment of Long Lived Assets We periodically evaluate whether events or circumstances have occurred that indicate long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events or circumstances are present, we assess the recoverability of long- lived assets by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Allowance on D eferred Tax Assets We evaluate our deferred income tax assets to determine if valuation allowances are required or should be adjusted. A valuation allowance is established against our deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with expiring unused tax attributes and tax planning alternatives. In making such judgments, significant weight is given to evidence that can be objectively verified. Stock-based compensation We account for stock-based compensation in accordance with the fair value recognition provisions of U.S. GAAP. We use the Black- Scholes model which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them, the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements. The assumptions for expected volatility and expected term are the two assumptions that significantly affect the grant date fair value. Changes in expected risk-free rate of return do not significantly impact the calculation of fair value, and determining this input is not highly subjective. We use annualized historical stock price volatility, which is deemed to be appropriate to serve as the expected volatility of our stock price and is assumed to be constant and prevailing. The expected term represents the weighted-average period that our stock options are expected to be outstanding. The expected life is based on historical option exercise pattern. Recent Accounting Pronouncements See “Note 1 – Nature of Business and Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on the consolidated financial statements.