CN Healthy Food Tech Group Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Unless otherwise indicated, references to “we”, “us”, “our”, “CN Healthy” or the “Company” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are to CN Healthy Food Tech Group Corp. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto, included in Part 1. Item 1. of this Quarterly Report, risk factors, included in Part 2. Item 1A. of this Quarterly Report, our Current Report on Form 8-K filed with the SEC on September 30, 2025 and the proxy statement/prospectus filed with the SEC by Iron Horse Acquisitions Corp. (“Iron Horse”) on May 15, 2025 (the “proxy statement/prospectus”), and the information included in our Current Report on Form 8-K, as filed with the SEC on October 6, 2025. Overview On September 29, 2025 (the “Closing Date”), Iron Horse Acquisition Corp. (“Iron Horse)” consummated the merger transactions contemplated by the business combination agreement (the “Initial BCA”) executed during September 2024 with Zhong Guo Liang Tou Group Limited (“Legacy CFI”), and Rosy Sea Holdings Limited (“Rosy Sea” or the “Seller”) and the owner of 100% of the issued and outstanding capital stock of Legacy CFI, with Legacy CFI surviving the mergers as a wholly-owned subsidiary of Iron Horse (the “Business Combination”). As a result of the Business Combination, we became listed on the Nasdaq stock market. We operate within the health and wellness food industry or holistic health food industry, focusing on distributing natural, grain-based health foods that support preventative health and wellness through our wholly-owned subsidiaries. We offer products that cater to the rising demand for safe, high-quality nutritional options, blending modern technology with traditional Chinese medicine. Our operations commenced in May 2024 and our key products at September 30, 2025 include Cordyceps Peptide Selenium powder, Baofei Granule Extract plant-based drink, Sea Cucumber Peptide Selenium powder, Double protein peptide selenium powder, Hundred-grain quality porridge. We manage our business in two operating segments: wholesale distribution and live-stream sales, which account for approximately 81.5% and 18.5% of consolidated revenue for the nine months ended September 30, 2025. The wholesale distribution segment consists of product sales made through our extensive distributor network. The live-stream sales segment consists of digital coupon sales for goods and services made through online platforms, primarily live-streaming platforms such as Douyin (TikTok), Meituan and Kuaishou. Recent Developments As disclosed on it current report on Form 8-K filed with the SEC on October 6, 2025, following its listing on Nasdaq on October 1, 2025, the Company was notified by Nasdaq that it had received a notification from personnel at the China Securities Regulatory Commission (the “CSRC”) informing Nasdaq that the CSRC had not yet completed its process of review of the Company’s U.S. listing. As a result, Nasdaq has halted trading in the Company’s Common Stock and Warrants while it seeks clarification of these matters from the Company. The Company believes it has satisfied its obligations with respect to the CSRC and has received a legal opinion from its Chinese securities counsel to that effect. The Company has provided Nasdaq with additional documentation and is awaiting further information at this time. Comparability of Financial Information Our historical operations and statements of assets and liabilities may not be comparable to our current operations and statements of assets and liabilities as a result of (a) our commencement of operations during May 2024, resulting in only five months in the nine month period ending September 30, 2024 where there were revenue generating activities as compared to the nine months over revenue generating activities during the same period in 2025 and (b) the consummation of the Business Combination in September 2025 and becoming a public company. 18 Results of Operations Comparison of the three and nine months ended September 30, 2025 and 2024 The following table summarizes our results of operations for the three and nine months ended September 30, 2025 and 2024: For the three months ended September 30, 2025 2024 % Change Revenues, net $ 7,905,065 $ 4,291,966 84.1 % Costs of revenue (2,337,565 ) (1,343,843 ) 73.9 % Gross profit 5,567,500 2,948,123 88.8 % Total operating expenses 983,465 650,655 51.1 % Operating income 4,584,035 2,297,468 99.5 % Total other income, net 139,183 13,217 953.0 % Income before income taxes 4,723,218 2,310,685 104.4 % Provision for income tax (1,378,252 ) (743,648 ) 85.3 % Net income $ 3,344,966 $ 1,567,037 113.4 % Other comprehensive income 140,988 294,893 (52.1 )% Comprehensive income $ 3,485,954 $ 1,861,930 87.2 % For the nine months ended September 30, 2025 2024 % Change Revenues, net $ 19,884,127 $ 5,254,161 278.4 % Costs of revenue (7,320,423 ) (1,786,842 ) 309.6 % Gross profit 12,563,704 3,467,319 262.3 % Total operating expenses 3,305,992 794,850 315.9 % Operating income 9,257,712 2,672,469 246.4 % Total other income, net 392,637 18,584 2,012.7 % Income before income taxes 9,650,349 2,691,053 258.6 % Provision for income tax (2,609,658 ) (766,803 ) 240.3 % Net income $ 7,040,691 $ 1,924,250 265.8 % Other comprehensive income 373,395 259,827 43.7 % Comprehensive income $ 7,414,086 $ 2,184,077 239.4 % 19 Revenue Total revenue for the three months ended September 30, 2025 was $7.9 million, compared to $4.3 million for the same period in 2024, an increase of $3.6 million, or 84.1%, and for the nine months ended September 30, 2025 was $19.9 million, compared to $5.3 million for the same period in 2024, an increase of $14.6 million, or 278.4%. Growth for both periods was primarily driven by strategic promotional campaigns and new product launches to reach new customers and increase business with existing customers to drive revenue growth. Cost of Revenue Total cost of revenue for the three months ended September 30 2025 was $2.3 million, compared to $1.3 million for the same period in 2024, an increase of $1.0 million, or 73.9%, and for the nine months ended September 30, 2025 was $7.3 million, compared to $1.8 million for the same period in 2024, an increase of $5.5 million, or 309.6%. The increase was primarily driven by the increase in revenue. Operating Expenses Total operating expenses for the three months ended September 30, 2025 were $1.0 million, compared to $0.7 million for the same period in 2024, an increase of $0.3 million, or 51.1%, and for the nine months ended September 30, 2025 were $3.3 million, compared to $0.8 million for the same period in 2024, an increase of $2.5 million, or 315.9%. The increases in both periods were attributable to our focus to scale and grow our business as business operations generated cash flows enabling us to hire additional employees, establish a sales and marketing function, and establish a research and development function that facilitated additional growth in both our customer base and our product offerings. Other Income, net Total other income, net for the three months ended September 30, 2025 was $0.1 million, compared to less than $0.1 million for the same period in 2024, an increase of $0.1 million, or 953.0%, and for the nine months ended September 30, 2025 was $0.4 million, compared to less than $0.1 million for the same period in 2024, an increase of $0.4 million, or 2,012.7%. The increase in both periods is primarily driven by increased cash balances from operations to hold in deposit accounts and generate interest income. Provision for Income Tax The provision for income tax for the three months ended September 30, 2025 was $1.4 million, compared to $0.7 million for the same period in 2024, an increase of $0.7 million, or 85.3%, and for the nine months ended September 30, 2025 was $2.6 million, compared to $0.8 million for the same period in 2024, an increase of $1.8 million, or 240.3%. The increase in the provision for income tax in both periods is attributable to the increase in revenue, offset by the increase in cost of revenue, operating expenses and other income. Liquidity and Capital Resources Overview Historically, our primary uses of cash have been to finance working capital needs and to make deposits with certain of our suppliers. We expect that we will be able to meet our needs to fund operations, capital expenditures and other commitments in the next 12 months primarily with our cash and cash equivalents, operating cash flows and bank borrowings. 20 We may, however, require additional cash resources due to changes in business conditions or other future developments. If these sources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could result in additional dilution to stockholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financial covenants that would restrict operations. Financing may not be available in amounts or on terms acceptable to us, or at all. Our primary sources of liquidity have been cash provided by operating activities, our cash and cash equivalents, which have historically been sufficient to meet our working capital and substantially all of our capital expenditure requirements. As of September 30,2025, our cash and cash equivalents totaled $37,207,274 and a net working capital surplus of $7,992,232. As of September 30, 2025, about $36,190,512 and $1,016,762 of our cash and cash equivalents were held in the PRC and United States, respectively. We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs over at least the next twelve months, though we may require additional capital resources in the future. Additionally, if the wholesale distribution segment and live-stream sales segment revenue mix changes, the operating cash flow generated from the wholesale distribution segment may not be sufficient to cover operating costs and additional capital resources may be required in the future. We may elect to raise additional capital through the sale of equity to fund our future needs beyond the next twelve months or through the acquisition of a debt facility. Cash Flows Summary Presented below is a summary of our net cash flows from operating, investing and financing activities: For the nine months ended September 30, 2025 2024 Net cash provided by (used in): Operating activities $ (5,707,674 ) $ 21,852,126 Investing activities $ (625,392 ) $ (2,807,808 ) Financing activities $ 1,016,762 $ - Cash flows (used in) provided by operating activities For the nine months ended September 30, 2025, operating activities used $5.7 million in cash and cash equivalents, primarily resulting from a net income of $7.0 million, non-cash adjustments totaling approximately $0.4 million, and a net cash outflow from changes in operating assets and liabilities of $13.2 million. Net cash used in changes in operating assets and liabilities was driven primarily by an increase in inventory of $0.6 million, an increase in prepaid and other current assets of $1.2 million, and a decrease in advances from customers of $13.6 million. These outflows were partially offset by an increase in accounts payable of $1.4 million, an increase in other taxes payable of $0.3 million and an increase in income tax payable of $0.5 million. For the nine months ended September 30, 2024, operating activities provided $21.9 million in cash and cash equivalents, primarily resulting from a net income of $1.9 million, non-cash adjustments totaling $0.1 million, and a net cash inflow from changes in operating assets and liabilities of $19.8 million. Net cash provided by changes in operating assets and liabilities was driven primarily by an increase to advances from customers of $22.5 million, an increase in income taxes payable of $0.7 million, an increase in accounts payable of $0.7 million, an increase in accrued expenses and other current liabilities of $0.1 million. The inflows were partially offset by an increase in inventories of $1.6 million, an increase in prepaid and other current assets of $1.6 million, and an increase in accounts receivable of $1.0 million. 21 Cash flows used in investing activities During the nine months ended September 30, 2025, net cash used in investing activities was $0.6 million, of which $0.4 million was attributed to the purchase of property and equipment, $0.1 million was attributed to the purchase of an equity investment, and less than $0.1 million was attributed to the acquisition of intangible assets. During the nine months ended September 30, 2024, net cash used in investing activities was approximately $2.8 million and was primarily attributable to a loan made to our construction developer. Cash flows provided by financing activities During the nine months ended September 30, 2025, the consummation of the Business Combination provided approximately $1.1 million of cash. During the nine months ended September 30, 2024, the cash provided by financing activities was nil. Holding Company Structure We face various risks and uncertainties relating to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, which may impact our ability to conduct certain businesses, accept foreign investments, or list and conduct offerings on a United States or other foreign exchange. These risks could result in a material adverse change in our operations and the value of our common stock, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. For a detailed description of risks relating to doing business in China, see “ Risk Factors - Risks Related to Doing Business in the PRC ” in our proxy statement/prospectus. The PRC government’s significant discretion and authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of our securities to significantly decline or become worthless. For more details, see “ Risk Factors - Risks Relating to Doing Business in the PRC - Chinese regulatory authorities could disallow our holding company structure, which may result in a material change in our operations and/or a material change in the value of New CFI’s securities, including that it could cause the value of such securities to significantly decline ” in our proxy statement/prospectus and “ Risk Factors - The Company and CFI have concluded, based on advice received from CFI’s legal counsel in the PRC, that CFI has made all necessary filings with the CSRC under applicable PRC securities laws, and that there are no material legal impediments under currently effective PRC securities laws that would prevent the completion of the Business Combination and the combined company’s listing on a U.S. national securities exchange. If the relevant PRC governmental authorities, including the CSRC, reach a different conclusion about the transaction or the applicability or scope of current PRC laws and regulations, the Company could be subject to legal sanctions or penalties ” in our Current Report on Form 8-K, as filed with the SEC on October 6, 2025. Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and cause our Common Stock to decrease in value or become worthless. For more details, see “ Risk Factors - Risks Relating to Doing Business in the PRC - Uncertainties with respect to the legal system and changes in laws and regulations in mainland China could adversely affect us in our proxy statement/prospectus. Cash and Other Assets Transfers between the Holding Company and Its Subsidiaries We refer to our subsidiaries domiciled in the PRC as the “PRC Subsidiaries” and the parent company of the PRC Subsidiaries domiciled in Hong Kong as “CFI HK”. As of September 30, 2025, there were no capital contributions made to our PRC Subsidiaries, neither directly nor through intermediate holding companies. To date, there have not been any dividends or other distributions from our PRC Subsidiaries to our intermediate holding companies located outside of mainland China. Our intermediate holding companies may rely on dividends and other distributions on equity paid by our PRC Subsidiaries for their cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to their stockholders, subject to our charter and M&A and BVI law or HK law (as applicable) or to service any expenses and other obligations it may incur. 22 Within our direct holding structure, the cross-border transfer of funds from CFI HK to its PRC Subsidiaries is permitted under laws and regulations of the PRC currently in effect. Specifically, CFI HK is permitted to provide funding to its PRC Subsidiaries in the form of shareholder loans or capital contributions, subject to satisfaction of applicable government registration, approval and filing requirements in China. There are no quantity limits on CFI HK’s ability to make capital contributions to its PRC Subsidiaries under the PRC law and regulations. However, the PRC Subsidiaries may only procure stockholder loans from CFI HK in an amount equal to the difference between its registered capital and total investment amount as recorded in the Chinese Foreign Investment Comprehensive Management Information System or 2.5 times of its net assets, at the discretion of such PRC Subsidiaries. For additional information, see “ Risk Factors - Risks Related to Doing Business in the PRC - PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our offshore financing to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business ” in our proxy statement/prospectus. The PRC Enterprise Income Tax Law (the “EIT Law”) and its implementation rules provide that a withholding tax will be applicable to dividends payable by PRC companies at a rate of 10% 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 CFI HK from our PRC Subsidiaries. This withholding tax will reduce the amount of dividends we may receive from our PRC Subsidiaries. If we or CFI HK is classified as a PRC resident enterprise for PRC enterprise income tax purposes because the PRC tax authorities determined that either we or CFI HK has an actual management body located within the territory of China, we will be subject to a uniform 25% enterprise income tax rate on our worldwide income, which would materially reduce net income. For additional information, see “ Risk Factors - Risks Related to Doing Business in the PRC - Under the PRC Enterprise Income Tax Law, New CFI may be classified as a PRC “resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to New CFI and its non-PRC shareholders and have a material adverse effect on its results of operations and the value of your investment” in our proxy statement/prospectus. There is no assurance that the PRC government will not intervene or impose restrictions on the ability of us or our PRC Subsidiaries to transfer cash. Most of our cash is in Renminbi, and the PRC government could prevent the cash maintained in our bank accounts in mainland China from leaving mainland China, could restrict deployment of the cash into the business of our subsidiaries and restrict the ability to pay dividends. For details regarding the restrictions on our ability to transfer cash between us, and our subsidiaries, see “ Risk Factors - Risks Related to Doing Business in the PRC - Restrictions on the remittance of Renminbi into and out of China and governmental control of currency conversion may limit our ability to pay dividends and other obligations and affect the value of your investment ” in our proxy statement/prospectus. We currently do not have cash management policies that dictate how funds are transferred between our holding company and our subsidiaries. Restrictions on Our Ability to Transfer Cash Out of the PRC and to U.S. Investors Our PRC Subsidiaries ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC Subsidiaries to pay dividends to its shareholders only out of its accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. In addition, under PRC law, our PRC Subsidiaries are required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. These reserves are not distributable as cash dividends. If our PRC Subsidiaries incur debt on its own behalf in the future, the instruments governing such debt may restrict its ability to pay dividends to CFI HK. 23 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, 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 mainland China. 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. For additional information, see “Risk Factors - Risks Related to Doing Business in the PRC - Restrictions on the remittance of Renminbi into and out of China and governmental control of currency conversion may limit our ability to pay dividends and other obligations and affect the value of your investment” in our proxy statement/prospectus. Commitments and Contingencies Legal Proceedings The Company is periodically involved in legal proceedings, legal actions, and claims arising in the normal course of business, including proceedings relating to intellectual property, safety and health, employment and other matters. Management believes that the outcome of such legal proceedings, legal actions, and claims will not have a significant adverse effect, individually, or in the aggregate, on the Company’s financial position, results of operations or cash flows. The Company accrues costs associated with these matters when they become probable and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Government Contribution Plan Pursuant to the laws applicable to companies organized under the laws of the PRC, the PRC Subsidiaries are required to participate in a government-mandated multi-employee defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the PRC Subsidiaries to pay to the local labor bureau a monthly contribution rate based on the monthly basic compensation of qualified employees. The relevant local bureau is responsible for meeting all retirement benefit obligations and there are no further commitments beyond the monthly contribution for the PRC Subsidiaries. Off-Balance Sheet Financing Arrangements As of September 30, 2025, we did not have any off-balance sheet arrangements. Related Party Transactions On May 30, 2024, the stockholder of Rosy Sea contributed to the Company (i) a building with a gross floor area of 4,032.36 square meters and (ii) a land use right for 18,000 square meters that expire in September 2056, both of which are located in Deliger Industrial Park, Duerbot Mongolian Autonomous County, Daqing City, Heilongjiang Province. These building and land use rights (collectively, the “Contributed Assets”) were recorded on the contribution date at fair value of RMB 30,310,000 ($4,189,937 at May 30, 2024 and $4,153,193 at December 31, 2024) and RMB 19,860,000 ($2,745,369 at May 30, 2024 and $2,721,294 at December 31, 2024), respectively. Critical Accounting Policies and Estimates An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. For a description of our significant accounting policies, see Note 2 to our consolidated financial statements for the year end December 31, 2024 and the period from August 14, 2023 (inception) through December 31, 2023 and the related notes thereto which are included elsewhere in our proxy statement/prospectus. We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires management to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates 24 The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and accompanying notes and other disclosures included in this proxy statement/prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. Revenue Recognition Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. ASC 606 requires the use of a five-step model to recognize revenue from customer contracts. The five-step model requires that the Company (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocate the transaction price to the respective performance obligations in the contract, and (v) recognize revenue when (or as) the Company satisfies the performance obligation. In accordance to ASC 606, the Company recognizes revenue when it transfers its goods and services to customers in an amount that reflects the consideration to which the Company expects to be entitled in such exchange. The Company accounts for the revenue generated from sales of its products primarily to its customers in PRC, as the Company is acting as a principal in these transactions, is subject to inventory risk, has latitude in establishing prices, and is responsible for fulfilling the promise to provide customers the specified goods, which the Company has control of the goods and has the ability to direct the use of goods to obtain substantially all the benefits. All of the Company’s contracts have one single performance obligation as the promise is to transfer the individual goods to customers, and there is no separately identifiable other promises in the contracts. The Company’s revenue streams are recognized at a point in time when title and risk of loss passes and the customer accepts the goods, which generally occurs at the time of shipment for the wholesale distribution segment and the time of digital coupon redemption for the live-stream sales segment. The Company’s sales are net of value added tax (“VAT”) and business tax and surcharges collected on behalf of tax authorities in respect of product sales. We make significant estimates related to revenue recognition including estimates for refund reserves for digital coupons that will be refunded as a result of customer dissatisfaction with goods or services received, services fees paid to the live-stream platforms for digital coupons redeemed, and an allowance for inventories that will be returned. We estimate refunds, service fees and returns allowance using historical refund, service fee, and redemption experience. We also consider trends when making those estimates that could be driven by changes to our policies, or in general, economic conditions that may impact customer behavior. We reevaluate our estimate as facts and circumstances change and at the end of each quarter. These estimate rely on judgments regarding future expectations of customer behavior. While the basis of our estimates is historical data, customer behavior may not always be predictable. If actual refunds and returns differ from our estimates, the effects could be material to the consolidated financial statements. We evaluate our variable consideration estimates related to the potential shortfall to a minimum purchase volume at the end of our distributor agreements and recognize revenue in the period we can assert it is probable that a significant reversal in the amount of revenue recognized would not occur. Contract Assets and Liabilities Payment terms are established based upon credit approvals. Contract assets are recognized for in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing when an order is placed and when shipment, delivery, and digital coupon redemption occurs. As of September 30, 2025 and December 31, 2024, other than accounts receivable and advances from customers, the Company had no other material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheets. Costs of fulfilling customers’ purchase orders, such as shipping, handling and delivery, which occur prior to the transfer of control, are recognized in general and administrative expense when incurred. 25 The Company generally warrants that its products will substantially conform to the agreed-upon specifications. The Company’s liability is limited to either a credit equal to the purchase price or replacement of the defective part. Returns and refunds have historically been immaterial. As such, the Company does not record a specific return or refund reserve and does not consider activities related to such activities to be a separate performance obligation. Inventories Inventory consists of finished goods and is stated at the lower of cost or net realizable value. Cost is determined using a first-in, first-out (“FIFO”) methodology. The Company writes down excess and obsolete inventory to its estimated net realizable value based upon assumptions about future demand and market conditions. For finished goods, if the estimated net realizable value for an inventory item, which is the estimated selling price in the ordinary course of business, less reasonably predicable costs to disposal, is lower than its cost, the specific inventory item is written down to its estimated net realizable value. Provisions for inventory write-downs are included in the cost of revenues in the consolidated statements of income. Inventories are carried at this lower cost basis until sold or scrapped. Valuation of Contributed Assets The fair value of the Contributed Assets from the stockholder of Rosy Sea was determined by our board of directors, after considering a third-party valuation and input from management, as there is no public trading market for the Contributed Assets. The cost approach was determined to be the most appropriate valuation methodology as relevant financial data, valuation information, and appraisal data for these Contributed Assets was readily available. The cost approach estimates fair value based on the expected cost to replace or reproduce the assets and relies on assumptions regarding the occurrence and extent of any physical, functional and/or economic obsolescence. The fair value is calculated by multiplying the replacement cost of the Contributed Assets by the condition rate The replacement cost of the Contributed Assets considered the cost to reacquire the asset as of the contribution date, including all reasonable and necessary expenses, capital cost and profit. The condition rate refers to the ratio obtained by subtracting physical depreciation, functional depreciation, and economic depreciation from the asset’s replacement cost and then dividing that difference by the replacement cost, were: ● Physical depreciation refers to the loss in value of an asset due to wear and tear and natural forces affecting the physical performance of the asset. ● Functional depreciation is caused by technological advancements that make an asset’s functions relatively obsolete. ● Economic depreciation refers to the loss in value due to external conditions causing the asset to become idle or decrease in earnings. Impairment of Long-lived and Intangible Assets Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, the Company uses market quotes, if available or an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether or not the asset values are recoverable. Identified intangible assets are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company has determined there have been no events and circumstances that indicate possible impairment since inception on its long-lives and intangible assets. Income Taxes We account for income taxes using the asset and liability method and assess whether it is more likely than not that the deferred tax assets will be realized. We are also subject to taxation in BVI, Hong Kong, and the PRC. Significant judgment is required in determining the worldwide provision for income taxes and recording the related income tax assets and liabilities. 26 To assess whether it is more likely than not that deferred tax assets will be realized and whether a valuation allowance needs to be recorded against them, we consider the following four sources of taxable income for each tax jurisdiction: (a) future reversals of existing taxable temporary differences, (b) projected future earnings, (c) taxable income in carryback years, and (d) tax planning strategies. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rate could be adversely affected by earnings being lower than anticipated in countries where it has lower statutory rates and higher than anticipated in countries where it has higher statutory rates, by changes in foreign currency exchange rates, by changes in the valuation of deferred tax assets and liabilities, by changes in the measurement of certain tax positions, by changes affecting transfer pricing or by changes in the relevant laws, regulations, principles and interpretations. The Company’s operating subsidiaries in China are subject to the income tax laws of the PRC. No significant income was generated outside the PRC for the year ended December 31, 2024 or for the period from August 14, 2023 (inception) through December 31, 2023. The Company’s operations in the PRC commenced during 2024, and as such has not yet been required to file a tax return with PRC tax authorities. Item 3. Quantitative and Qualitative Disclosures about Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information otherwise required under this item.