ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of CFI’s financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2025 and 2024, and the notes related thereto which are included elsewhere in this Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements”, “Risk Factors”, and elsewhere in this Report.
In this section, “we”, “us”, “our” and “CN Healthy” refer to CN Healthy Food Tech Group Corp., a holding company, and its wholly owned subsidiaries.
Overview
On September 30, 2025, Iron Horse announced the completion of its business merger with Rosy Sea, a company based in the British Virgin Islands. Rosy Sea is the parent company of CFI. The merged new company will be renamed as CN Healthy Food Tech Group Corp. and listed on the NASDAQ market on October 1, 2025 under the stock codes “UCFI” and “UCFIW”.
CN Healthy Food Tech Group Corp. is a comprehensive enterprise integrating grain biotechnology and health product research and development, production, and sales, focusing on the deep processing of grain raw materials into green ecological products. Our corporate vision is to create a healthy world through AI technology and biotechnology. The product advocates a green, healthy, international, and popular consumption concept, which is widely welcomed by the market. The group is based on the “big health food industry”, mainly engaged in the distribution of natural grain health food channels, providing safe and reliable nutritional protection for health conscious consumers.
Our business began in May 2024, and by December 31, 2025, our main products include cordyceps peptide selenium powder, Baofei granule extract plant drink, Yancui peptide selenium powder, Ganoderma lucidum and matsutake peptide selenium powder, ginseng peptide selenium powder, collagen peptide prebiotic drink, plant essential oil, and Shangshangyi Congee. We manage our business in two operational departments: offline dealer sales and online live streaming sales. Among them, offline dealer sales mainly rely on our extensive dealer channels for distribution, and online live sales mainly sell goods and services through digital coupons through e-commerce and social platforms such as Douyin, Meituan, Kuaishou, etc. As of December 31, 2025 and 2024, offline dealer sales accounted for approximately 86.2% and 94.0% of the consolidated revenue, respectively, while online live streaming sales accounted for approximately 13.8% and 6.0% of the comprehensive revenue, respectively.
Recent Developments
After our company was listed on the NASDAQ Stock Exchange (hereinafter referred to as “NASDAQ”) on October 1, 2025, we received a notification from NASDAQ that they have received a notification from the staff of the China Securities Regulatory Commission (hereinafter referred to as “CSRC”) that the review process for our company’s listing in the United States has not been completed. Accordingly, Nasdaq has suspended the trading of our common stock and warrants, pending Nasdaq’s verification and clarification of the relevant matters with our company. As of the date of issuance of this report, our company has submitted relevant supporting documents to NASDAQ and is awaiting further notification from NASDAQ.
We need to complete the filing procedures related to this corporate merger with the China Securities Regulatory Commission in accordance with the requirements of the “Overseas Listing Application Rules” before its securities are listed on NASDAQ. We submitted the necessary documents related to this corporate merger to the China Securities Regulatory Commission on December 21, 2024. On March 19, 2025, the China Securities Regulatory Commission requested supplementary materials, and we subsequently submitted the supplementary materials on April 2, 2025. As of the date of disclosure of this year’s report, we have not yet obtained the filing notice from the China Securities Regulatory Commission.
We issued an interest-free promissory note of $1,000,000 to non-affiliated lender Jiao Yanjun on September 29, 2025. On September 30, 2025, an interest-free promissory note for $2,018,000 was issued to Underwriter D. Boral Capital, LLC. On September 30, 2025, an interest-free promissory note of $1,421,343 was issued to the Sponsor Bengochea SPAC Sponsors I LLC. The promissory note company has repaid $1,014,000 in the current year, and as of December 31, 2025, the outstanding balance of the promissory note is $454,690. The three notes have all matured, and as of December 31, 2025, a default interest of de minimis has been incurred, which is relatively insignificant compared to the overall financial statements. The company is currently negotiating with all parties to extend the expiration date.
We have established our own production base in September 2025 and officially put it into operation in October. This production base focuses on producing high-end health foods, including Yancui Peptide Selenium Powder, Lingzhi Matsutake Peptide Selenium Powder, and Shanshen Peptide Selenium Powder. Our core products are gradually being self-produced and sold, providing a stable foundation for long-term sustainable operation.
Components of Operating Results
Revenue
Revenue represents the sales of inventories and digital coupons to customers where our performance obligation to transfer a promised good or service to a customer is satisfied at a point in time, when ownership and control have been transferred to the customer. Revenue is reported net of variable consideration, including applicable discounts, estimated returns, allowances, estimated refunds, and service fees.
Revenue from our wholesale distribution segment is comprised of sales of inventories to distributors, and includes shipping and handling charges billed to the distributor. We have determined that distributor agreements that include a minimum purchase volume do not create a material right that gives right to a separate performance obligation as there are no discounts or other incentives provided to the distributor associated with the distribution agreement, or with the minimum purchase volume. Our performance obligation is created as new orders are received from a distributor. We are not obligated to transfer any products until a distributor submits an order specifying the quantity of products it wishes to purchase, which represents an option to purchase additional goods, not variable consideration. As a result, the Company recognizes revenue at the time control of the products ordered transfers to the distributor.
We determined that any variable consideration related to a potential shortfall to a minimum purchase volume at the end of the distributor agreements was deemed to be fully constrained at inception and therefore excluded from the initial transaction price due to the high degree of uncertainty and risk associated with these potential payments as we could not assert that it was probable that a significant reversal in the amount of revenue recognized would not occur. We will recognize any remaining revenue associated with a shortfall to a minimum purchase volume during the period we can assert that it is probable that a significant reversal in the amount of revenue recognized would not occur. We review our variable consideration estimates at the end of each quarter. As of December 31, 2025 and 2024, we could not assert that it was probable that a significant reversal in the amount of revenue recognized would not occur for a potential shortfall to the minimum purchase volume at the end of the in place distributor agreements, which have a remaining term of twelve months.
Additionally, if the minimum purchase volume is not met, we may reassess whether to renew the distribution agreement or maintain the distributor at their current tier, ensuring alignment with our strategic objectives and market conditions.
Revenue from our live-stream sales segment is comprised of sales of digital coupons to customers for goods or services (or for discounts on goods or services) to be provided by third-party merchants. We determined that we are the principal in these transactions as we have complete discretion in establishing the pricing of the digital coupons.
Cost of Revenues
Cost of revenue consists primarily of the cost of inventories where the performance obligation to transfer a promised good or service to the customer is satisfied as of period end.
Operating Expenses
Operating expenses are recorded when incurred and consist of three components — selling expenses, general and administrative expenses and research and development expenses.
Selling Expenses consist primarily of advertising costs on social networking sites and affiliate programs, offline marketing costs, such as television, and online marketing costs, such as search engine marketing.
General and Administrative Expenses consist primarily of compensation expense, including employee benefits, for employees involved in customer service, operations, technology, as well as general corporate functions, such as finance, legal, and human resources. Additional costs include depreciation and amortization, amortization of shares issued for services to certain consultants, rent, utilities, professional fees, travel and entertainment, recruiting, maintenance, certain technology costs and other general corporate costs.
Research and Development Expenses consist primarily of compensation expense, including employee benefits, material costs, testing costs and other expenses related to our investment in the development of new products and services.
Other Income, net
Other income consists primarily of interest income from bank deposits.
Comprehensive Income
Comprehensive income consists of two components, net income and other comprehensive income. The foreign currency translation adjustment results from the translation of the financial statements from an entities functional currency to our reporting currency is reported in other comprehensive income.
Key Factors Affecting Our Performance
Our results of operations and our ability to grow our business over time could be impacted by a number of factors and trends that affect our industry generally, as well as new offerings of products and services we may acquire or seek to acquire in the future. Additionally, our business is concentrated in certain markets, putting us at risk of region-specific disruptions such as adverse economic, regulatory, political, weather and other conditions. See “Risk Factors” elsewhere in this Report for further discussion of risks affecting our business. We believe the factors discussed below are key to our success.
Attracting and Retaining Customers
Our wholesale distribution segment depends on our ability to attract and retain individual distributors to comprise our entire distribution network. Recruiting, onboarding, and training new distributors can be time-consuming and costly, impacting our ability to replace distributors that are underperforming, expand our market share, maintain positive relationships with the end consumer of our products, and sustain financial stability.
Our live-stream sales segment depends on our ability to attract and retain local merchants who are willing to offer us digital coupons to the local merchants’ experiences. Merchants can cancel their unsold digital coupon offerings at any time, and their willingness to continue offering the digital coupons through our live-stream offerings depends on the effectiveness and reach of our live-stream offerings. We are focused on improving the live-stream offerings and merchant value proposition by exploring opportunities to better balance the needs of the local merchant partners, end customers, and CN Healthy.
To grow our business, we must continue to acquire new distributors and local merchants and successfully engage and retain them, including assisting our distributors to engage and retain customers for the distributor’s business. Our marketing strategy aims to preserve liquidity and achieve profitability, while simultaneously attracting long-term customers to fuel a return to growth. We utilize both digital and offline channels to attract new visitors to our website and subsequently convert them into customers. Our marketing costs are largely composed of advertising. At any given time, our advertising efforts may include, social media marketing, keyword search campaigns, affiliate programs, partnerships, campaigns with celebrities and influencers, display advertising, television, radio, video, content, direct mail, email, mobile “push” communications, SMS, and search engine optimization. We expect our marketing expenses to vary from period to period.
Inventory Management
Since our own production base was put into operation in October 2025, our core products have gradually achieved self production and self sales, and the proportion of self production is expected to gradually increase. At present, we still have some products manufactured through OEM or purchased from suppliers. We consider the cooperating manufacturers and suppliers as key partners in the product development process, who are crucial to the group’s supply chain and provide important products to support the group’s continued operation and development. The procurement department rigorously screens suppliers through on-site assessments of their scale, technical capabilities, production capacity, and delivery cycles to ensure they meet the group’s quality standards.
Supplier Arrangement
Since our own production base was put into operation in October 2025, it has solved the supply problems of three main products, ensuring the stability and timeliness of product delivery. With the release of internal production capacity, our dependence on a single or a few external suppliers and the risk of supplier concentration have been effectively alleviated, reflected in a decrease in the number and proportion of suppliers with procurement volume exceeding 10%. This structural optimization has reduced our dependence on specific suppliers and effectively dispersed the risk of supply chain disruptions that may arise from single supplier production capacity, quality, or delivery issues.
Impact of Macroeconomic Conditions
We may be impacted by adverse consequences of the macroeconomic environment, including but not limited to, global economics and geopolitical uncertainty, higher labor costs, labor shortages, government regulations, trade restrictions and tariffs, supply chain challenges and resulting changes in consumer and merchant behavior. We cannot predict whether, or when, such circumstances may improve or worsen or what impact such circumstances could have on our business.
Increasing prices in the component materials for our inventories that we source from our suppliers may impact the availability, the quality and the price of our products, as suppliers search for alternatives to existing materials and increase the prices they charge. Our suppliers may also fail to provide consistent quality of products as they may substitute lower cost materials to maintain pricing levels.
A discrete event impacting a specific supplier, customer, industry or region in which we have a concentrated exposure could negatively impact our results of operations.
Foreign Currency Translation Risk
Our reporting currency is the U.S. dollar and our operations in the PRC use its local currency as the functional currency. Substantially all of our revenue and expenses are in the Chinese Renminbi (“RMB”). We are subject to the effects of exchange rate fluctuations with respect to any such currency. For example, the value of the RMB depends to a large extent on Chinese government policies and China’s domestic and international economic and political developments, as well as supply and demand in the local market.
The consolidated income statements of our operations are translated into U.S. dollars at the average exchange rates in each applicable period. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currencies denominated transactions results in reduced revenue, operating expenses and net income for our international operations.
Results of Operations
The following table summarizes our results of operations for years ended December 31, 2025 and 2024:
For the Years Ended
December 31
Change
Revenues, net
Costs of revenue
Gross profit
Total operating expenses
Operating income
Total other income, net
Income before income taxes
Provision for income tax
Net income
Other comprehensive income (loss)
Comprehensive income
Revenue
Total revenue for the year ended December 31, 2025 was $27.8 million, compared to $11.3 million for the same period in 2024, an increase of $16.5 million, or 144.6%. Growth for the period was driven by our life cycle with four additional months of revenue generating activities during the year ended December 31, 2025 as compared to the same period in 2024. We also implemented 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 year ended December 31, 2025 was $9.3 million, compared to $3.8 million for the same period in 2024, an increase of $5.5 million, or 145.7%. The increase was primarily driven by a 126.0% increase in revenue from our wholesale distribution segment and the introduction of digital coupons for goods from our live-stream sales segment during 2025. These increases were partially offset by costs savings attributed to bringing production in-house during the fourth quarter of 2025.
Operating Expenses
Total operating expenses for the year ended December 31, 2025 were $6.6 million, compared to $2.0 million for the same period in 2024, an increase of $4.6 million, or 231.6%. The increase was 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. Our operating expenses also increased as a result of certain costs associated with the Business Combination and costs attributed to becoming a public company during September 2025 including, $2.0 million of expenses associated with management advisory services, $0.34 million of additional insurance expense, and $0.09 million of additional audit fees incurred during the year ended December 31, 2025 that were not incurred during the same period in 2024.
Other Income, net
Total other income, net for the year ended December 31, 2025 was $0.5 million, compared to less than $0.1 million for the same period in 2024, an increase of $0.5 million, or 706.9%. The increase was 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 year ended December 31, 2025 was $3.9 million, compared to $1.6 million for the same period in 2024, an increase of $2.3 million, or 142.3%. The increase in the provision for income tax was 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.
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 December 31, 2025, our cash and cash equivalents totaled $33,013,749 and a net working capital surplus of $12,280,831. As of December 31, 2025, the majority of our cash and cash equivalents were held in the PRC.
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
The following table summarizes our net cash flows from operating, investing and financing activities:
For the Years Ended
December 31
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Cash flows (used in) provided by operating activities
For the year ended December 31, 2025, operating activities used $9.0 million in cash and cash equivalents, primarily resulting from a net income of $8.4 million, non-cash adjustments totaling approximately $2.8million, and a net cash outflow from changes in operating assets and liabilities of $20.2 million. Net cash used in changes in operating assets and liabilities was driven primarily by a decrease in advances from customers of $21.2 million, an increase in prepayments and other current assets of $1.2 million, a decrease in accounts payable of $0.6 million, an increase in inventories of $0.2 million, and a decrease in accrued expenses and other current liabilities of $0.2 million. These outflows were partially offset by an increase in income tax payable of $0.2 million.
For the year ended December 31, 2024, operating activities provided $42.1 million in cash and cash equivalents, primarily resulting from a net income of $4.0 million, non-cash adjustments totaling $0.3 million, and a net cash inflow from changes in operating assets and liabilities of $37.8 million. Net cash provided by changes in operating assets and liabilities was driven primarily by an increase to advances from customers of $38.3 million, an increase in income tax payable of $0.9 million, an increase in accounts payable of $0.6 million, and an increase in accrued expenses and other current liabilities of $0.8 million. These inflows were primarily offset by an increase in prepayments and other current assets of $1.4 million and an increase in inventories of $1.4 million
Cash flows used in investing activities
During the year ended December 31, 2025, net cash used in investing activities was $0.9 million, of which $0.7 million was attributed to the purchase of property and equipment, $0.1 million was attributed to the acquisition of intangible assets and less than $0.1 million was attributed to long term investment.
During the year ended December 31, 2024, net cash used in investing activities of approximately less than $0.1 million was primarily attributable to a loan made and repaid to our construction developer for RMB 20 million (approximately $2.8 million at December 31, 2024) and a purchase of an intangible asset of approximately less than $0.1 million.
Cash flows provided by financing activities
During the year ended December 31, 2025, net cash provided by financing activities was less than $0.1 million, of which $1.0 million was attributed to consummation of Business combination and partially offset by a repayment of a promissory note to a related party of $1.0 million.
During the year ended December 31, 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 this Report.
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 this Report “ 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 ” 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 this Report.
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 December 31, 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.
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 this Report.
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 this Report.
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 this Report.
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.
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 Report.
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.
Commitments
Our contractual obligations consist of annual lease payments of $247,541 on a lease that terminates on December 31, 2027.
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.
Going Concern
As of December 31, 2025, despite the following circumstances—the Nasdaq trading suspension has lasted for more than five months with no clear recovery date, three outstanding promissory notes are in default, and the filing result with the China Securities Regulatory Commission (CSRC) remains pending—the company maintains sufficient cash on hand, amounting to $33 million, which is adequate to cover all its debts. The company is currently engaged in constructive negotiations with creditors to resolve the promissory note defaults, and communication regarding the CSRC filing is progressing in an orderly manner. In addition, the company has demonstrated strong operating performance, with continued growth in revenue and net profit. Its own production base has commenced operations, reducing reliance on external suppliers, and overall operations remain stable. Based on the above, management has assessed that there are no material doubts regarding the company’s ability to continue as a going concern.
Off-Balance Sheet Financing Arrangements
As of December 31, 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 $4,332,228 at December 31, 2025) and RMB 19,860,000 ($2,745,369 at May 30, 2024 and $2,838,603 at December 31, 2025), respectively.
At Closing, compensation of $2,000,000, as provided in the Amended BCA, was accounted for as transaction costs related to the Business Combination and charged to additional paid-in capital and was payable to the Sponsor, a shareholder of the Company. The Company included $1,000,000 in accrued expenses and other current liabilities, included $900,000 as part of a promissory note that was entered into with the Sponsor, and paid $100,000 at Closing. During the year ended December 31, 2025, the Company made repayments totaling $1,014,000 on the promissory note with the Sponsor. As of December 31, 2025, $1,000,000 of unpaid compensation owed to the Sponsor was included as a component of accrued expenses and other current liabilities and $454,690 remains outstanding under the promissory notes with the Sponsor.
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 years end December 31, 2025 and 2024, and the related notes thereto which are included elsewhere in this Report.
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.
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 Report. When reviewing our consolidated 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 or services 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”) 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 contacts where our performance obligation is satisfied prior to where payment has been received in related accounts receivable. Contract liabilities are recognized for contracts where payment has been received in advance of when our performance obligation is satisfied. 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 December 31, 2025 and 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.
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 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.
Warrants
We account for warrants as either equity-classified or liability classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing liabilities from equity (“ASC 480”), and ASC 815 Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of our control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance, modification, and as of each subsequent quarterly period end date while the warrants are outstanding.
For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the liability-classified warrants are recognized as a non-cash gain or loss on the accompanying consolidated statements of operations and comprehensive loss. We assess the classification of our warrants at each reporting date to determine whether a change in classification between equity and liability is required.
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 the United States, 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.
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 years ended December 31, 2025 and 2024.
Contingencies
We are involved in legal proceedings regarding contractual and employment relationships and a variety of other matters. We record contingent liabilities when a loss is assessed to be probable and its amount is reasonably estimable. If it is reasonably possible that a material loss could occur through ongoing litigation, we provide disclosure in the footnotes to our financial statements. Assessing probability of loss and estimating the amount of probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third-party claimants and courts. Should we experience adverse court judgments or should negotiated outcomes differ to our expectations with respect to such ongoing litigation it could have a material adverse effect on our results of operations, financial position, and cash flows.
Recently Issued Accounting Standards
See Note 2 to our consolidated financial statements for the year ended December 31, 2025 and 2024 included elsewhere in this Report for a description of recent accounting pronouncements applicable to our consolidated financial statements.
