Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements, particularly those identified with the words, "anticipates," "believes," "expects," "plans," "intends," "objectives," and similar expressions. These statements reflect management's best judgment based on factors known at the time of such statements. The reader may find discussions containing such forward-looking statements in the material set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as elsewhere in this Quarterly Report on Form 10-Q. Actual events or results may differ materially from those discussed herein. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guarantee, or warranty is to be inferred from those forward-looking statements. The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.

Overview

Rubber Leaf Inc was incorporated under the laws of the State of Nevada on May 18, 2021. We acquired Rubber Leaf Sealing Products (Zhejiang) Co., Ltd. on May 27, 2021, through an equity transfer between Rubber Leaf LLC and Rubber Leaf Inc. After the acquisition, RLSP became our 100% directly controlled subsidiary and wholly foreign-owned enterprise in China. Currently, all of our business is conducted through RLSP. RLSP was established in Fenghua, Ningo, China and commenced operations in July 2019. RLSP was a wholly-owned subsidiary of Rubber Leaf LLC, a Delaware company organized on June 1, 2018, and Xingxiu Hua was the sole member of Rubber Leaf LLC. RLSP specializes in the production and sales of automotive rubber and plastic sealing strips. We are a well-known auto parts enterprise, and we are also a first-tier supplier of well-known auto brands such as eGT and Volkswagen.

Our principal business address is located at Qixing Road, Weng'ao Industrial Zone, Chunhu Subdistrict, Fenghua District Ningbo, Zhejiang, China.

Components of Our Results of Operations

Sales Revenue

We generate revenue through selling automotive rubber and plastic sealing strips under two models of supply:

Model A (Direct Supply Model)

Following successful on-site inspections by auto OEMs, RLSP secures listing in its directories as a first-tier supplier that directly provides products to the OEM. For example, eGT is an auto OEM, and we serve as their first-tier supplier. eGT directly signs purchase or supply agreements with RLSP. This positions RLSP to independently procure raw materials, manufacture final products and directly deliver finished goods to the warehouses of the auto OEMs. RLSP fulfills its performance obligation upon the delivery of finished products to their warehouses, following a subsequent quality inspection approved by them. Simultaneously, they may request product replacements for disqualified items. Ownership and control of our finished products transfer to customers upon successful inspection and acceptance into an OEM's warehouse. Revenue recognition occurs upon the transfer of control of our products to a customer, with payments made directly by the OEM.

Model B (Indirect Supply Model)

RLSP receives the purchase orders from our related parties-Shanghai Xinsen and Xinsen Sealing Products (Hangzhou) Co., Ltd ("Hangzhou Xinsen") (collectively named as "Xinsen Group" for two companies together). The Company's Chief Executive Officer, President and Chairperson, Ms. Xingxiu Hua, previously held a 90% ownership interest in Shanghai Xinsen and Shanghai Xinsen holds a 70% ownership interest in Hangzhou Xinsen. Effective October 1, 2022, Ms. Hua reduced her ownership of Shanghai Xinsen from 90% to 15%, and accordingly reduced her indirect ownership of Hangzhou Xinsen from 63% to 10.5%. The Xinsen Group is a rubber product trading expert with 20 years of experience in the auto parts market, who charges 1% of the total sales amount before VAT tax as sales commission before September 30, 2022, and subsequently 0.25% effective from October 1, 2022 after the renegotiation between RLSP and Xinsen Group. The sales commission incurred in each period is recorded as part of selling expenses of the Company. The Xinsen Group serves as a certified second-tier supplier for branded Automobile Manufacturers ("Auto Manufacturers"). A second-tier supplier refers to a supplier that provides products to the first-tier suppliers of the OEM. First-tier suppliers could be suppliers of car doors, rubber and plastic components and other automobile parts. Auto Manufacturers issue consolidated purchase orders for complete sets of rubber and plastic auto parts for a particular model to their first-tier suppliers. These first-tier suppliers subcontract the production of rubber and plastic seals to second-tier suppliers. As a second-tier supplier and a facilitator of production rather than a direct manufacturer, Xinsen Group coordinates with us to fulfill orders. Upon receipt of purchase orders, RLSP procures rubber materials from our vendors. The production process involves outsourcing to third-party manufacturers for either work-in-process products ("WIP") or finished products, based on management's decisions in response to operational circumstances.

We employ two distinct forms of outsourced processing under Model B.

	1)	RLSP purchases raw materials and subcontracts production to third-party manufacturers for WIP. Once WIP is finished and delivered to RLSP's warehouse, RLSP performs certain manual processes, such as welding and constructing in order to meet the specification of the purchase orders. The completion of the final products is contingent upon a rigorous quality inspection conducted by RLSP, ensuring they meet the highest standards.
	2)	RLSP purchases raw materials and subcontracts third party manufacturers to produce finished products. RLSP will trace and observe each step of production undertaken by third-party manufacturers, with a primary focus on the final quality control step.

The finished products are delivered to the warehouses of Xinsen Group's upstream first-tier suppliers, either from our locations or those of the third-party manufacturers. Quality inspection is carried out by assigned inspectors from Xinsen Group upon delivery. RLSP fulfills its obligation when the finished products reach Xinsen Group's customers and pass the qualified quality inspection.

In the event of products that do not pass inspection, the Xinsen Group initiates a product replacement process. Upon confirmation of quality and quantity, and acceptance of finished products into Xinsen Group's customers' warehouses, invoices are provided to us as proof of delivery. The date of the invoices signifies the transfer of ownership and control of the finished products under model B from us to Xinsen Group and indirectly to its upstream first-tier suppliers. We recognize at such time as Xinsen Group's customers accept delivery of products.

We also generate revenue through contract manufacturing model or OEM supply model, which is described in the model C.

Model C (OEM Supply Model)

The contract manufacturing process begins with the customer placing an order and supplying all necessary raw materials. We provide the labor and equipment required to process the raw materials into finished products. The customer is charged a processing fee, which is calculated based on the cost per individual part and settled monthly. At the start of each month, we calculate the number of parts processed in the previous month, and both parties confirm the quantity by stamping the relevant documents. Once confirmed, we issue an invoice for the processing fee, and the customer makes payment upon receipt of the invoice.

Related Party Revenues

We also generate revenue through the indirect supply model. We process the purchase orders from our related parties, subcontract them to third party suppliers, who will produce and deliver the finished products to the final customers. Specifically, we either purchase raw materials and subcontract them for manufacturing or procure the products directly in the market to supply our customers, which depends on the specific requirements of the orders.

Cost of Revenues

Cost of revenues is comprised of raw materials consumed, manufacturing costs, third party logistics and distribution costs including packaging, freight, transportation, shipping and handling costs, and inventory adjustment due to the defectives and inventory count.

Selling Expense

Selling expense principally consist of costs associated with our sales force. Our main selling cost is the commission fee from indirect supply model sales.

General and Administrative Expense

General and administrative expenses include the expenses for commercial support personnel, personnel in executive and other administrative functions, other commercial costs necessary to support the commercial operation of our products, professional fees for legal, consulting and accounting services. General and administrative expenses also include depreciation and impairments of office furniture and equipment.

Interest Expense

Interest expense primarily consists of interest expense incurred under our Revolving Loan Agreement with banks, individual third parties, and minor bank service charges.

Income taxes

We are governed by the Income Tax Law of the PRC, and the United States. We account for income tax using the liability method prescribed by ASC 740, "Income Taxes." Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. We record a valuation allowance to offset deferred tax assets if based on the weight of available evidence; it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.

Result of Operations

Comparison of the Three Months Ended on June 30, 2025 and 2024

The following table summarizes our results of operations for the three months ended on June 30, 2025 and 2024:

		For three months ended on June 30,
		2025				2024				Changes
Sales		$	-			$	-			$	-
Sales-related parties			-				1,957,758				(1,957,758	)
Total			-				1,957,758				(1,957,758	)
Cost of sales			-				1,947,951				(1,947,951	)
Loss on factory relocation			-				167,964				(167,964	)
Loss on idle capacity			157,923				-				157,923
Total cost of sales			157,923				2,115,915				(1,957,992	)
Gross loss			(157,923	)			(158,157	)			234
Operating Expenses
Selling expenses			-				6,590				(6,590	)
General & administrative expenses			105,055				323,884				(218,829	)
Total operation expenses			105,055				330,474				(225,419	)
Loss from operation			(262,978	)			(488,631	)			225,653
Other income (expense):
Interest expense			(78,657	)			(91,138	)			12,481
Other expense, net			-				(2,410	)			2,410
Total other expenses, net			(78,657	)			(93,548	)			14,891
Net loss before income taxes			(341,635	)			(582,179	)			240,544
Income tax benefit			-				(8,587	)			8,587
Net loss		$	(341,635	)		$	(573,592	)		$	231,957

Sales Revenue

Sales revenue for the three months ending on June 30, 2025 and 2024 amounted to $Nil and $1,957,758, respectively, marking a decrease of $2.0 million or 100% year over year. The substantial decline was primarily attributable to a construction-related lawsuit with Zhejiang Fengrong, which led to the freezing of the Company's bank accounts. As a result, the Company was compelled to temporarily suspend all business operations of RLSP, including its sales activities. The management of the Company anticipates resuming business operations in September 2025.

Cost of Sales

Cost of sales were $157,923 and $2,115,915 for the three months ended June 30, 2025 and 2024, respectively, a decrease of $1.9 million, or 100% year over year. The decrease in cost of sales was directly linked to the suspension of business operations during the second quarter of 2025.

Gross loss

Gross loss were $(157,923) and $(158,157) for the three months ended on June 30, 2025 and 2024, respectively. Our revenue and gross profit margin were presented as below:

		For the three months ended June 30,
		2025				2024				changes
Revenue:
Direct supply model		$	-			$	-			$	-
Indirect supply model			-				1,957,758				(1,957,758	)
Total			-				1,957,758				(1,957,758	)
Gross profit margin:
Direct supply model			-	%			-	%			-	%
Indirect supply model			-	%			(1	)%			1	%
Idle capacity			(100	)%			-				(100	)%
Total			(100	)%			(8	)%			(92	)%

As stated above, due to the lawsuit with Zhejiang Fengrong, we were compelled to temporarily suspend all business operations, including our sales activities in the second quarter of 2025.

Selling expenses

Selling expenses were $Nil and $6,590 for the three months ended June 30, 2025 and 2024, respectively, with a decrease of 6,590 or 100 % year over year. The reduction was primarily due to the temporary suspension of all sales activities

General and administrative cost

General and administrative expenses were $105,055 and $323,884 for the three months ended June 30, 2025 and 2024, respectively, decrease by $218,829, or 68% year over year. The decrease was mainly attributable to the suspension of business operation in the second quarter of 2025. In contrast, the 2024 period included significant professional service fees related to the Company's application for uplisting to The Nasdaq Capital Market.

Loss from Operations

For the three months ended June 30, 2025, loss from operations was $(262,978), as compared to loss from operations of $(488,631) for the three months ended June 30, 2024, an increase of $225,653 or 46% year over year. The reduction in operating loss was primarily attributable to the suspension of all business operations during the second quarter of 2025, resulting in significantly lower operating expenses. In contrast, the same period in 2024 was impacted by a lower gross margin and higher general and administrative expenses.

Net loss

As a result of the factors described above, our net loss was $(341,635) for the three months ended June 30, 2025, improved by $231,957 from the net loss of $(573,592) for the three months ended June 30, 2024.

Comparison of the Six Months Ended on June 30, 2025 and 2024

The following table summarizes our results of operations for the six months ended on June 30, 2025 and 2024:

		For six months ended on June 30,
		2025				2024				Changes
Sales		$	-			$	-			$	-
Sales-related parties			-				4,912,365				(4,912,365	)
Total			-				4,912,365				(4,912,365	)
Cost of sales			-				4,908,480				(4,908,480	)
Loss on factory relocation			-				358,667				(358,667	)
Loss on idle capacity			319,729				-				319,729
Total cost of sales			319,729				5,267,147				(4,947,418	)
Gross loss			(319,729	)			(354,782	)			35,053
Operating Expenses
Selling expenses			-				15,300				(15,300	)
General & administrative expenses			223,423				715,533				(492,110	)
Total operation expenses			223,423				730,833				(507,410	)
Loss from operation			(543,152	)			(1,085,615	)			542,463
Other income (expense):
Interest expense			(143,819	)			(213,673	)			69,854
Other expense, net			-				(8,001	)			8,001
Total other expenses, net			(143,819	)			(221,674	)			77,855
Net loss before income taxes			(686,971	)			(1,307,289	)			620,318
Income tax benefit			-				(8,587	)			8,587
Net loss		$	(686,971	)		$	(1,298,702	)		$	611,731

Sales Revenue

Sales revenue were $Nil and $4,912,365 for the six months ended on June 30, 2025 and 2024, respectively, a decrease of $4.9 million or 100 % year over year. The substantial decline was primarily attributable to a construction-related lawsuit with Zhejiang Fengrong, which led to the freezing of the Company's bank accounts. As a result, the Company was compelled to temporarily suspend all business operations of RLSP, including its sales activities. The management of the Company anticipates resuming business operations in September 2025.

Cost of Sales

Cost of sales were $319,729 and $5,267,147 for the six months ended on June 30, 2025 and 2024, respectively, a decrease of $4.9 million, or 94% year over year. The decrease in cost of sales was directly linked to the suspension of business operations during half year of 2025.

Gross loss

Gross loss were $(319,729) and $(354,782) for the six months ended on June 30, 2025 and 2024, respectively. Our revenue and gross profit margin were presented as below:

		For the six months ended on June 30
		2025				2024				changes
Revenue:
Direct supply model		$	-				-				-
Indirect supply model			-				4,912,365				(4,912,365	)
Total			-				4,912,365				(4,912,365	)
Gross profit margin:
Direct supply model			-	%			-	%			-	%
Indirect supply model			-	%			0	%			(0	)%
Idle capacity			(100	)%			-				(100	)%
Total			(100	)%			(7	)%			(93	)%

As stated above, due to the lawsuit with Zhejiang Fengrong, we were compelled to temporarily suspend all business operations, including our sales activities in the half year of 2025.

Selling expenses

Selling expenses were $Nil and $15,300 for six months ended on June 30, 2025 and 2024 respectively, with a decrease of $15,300 or 100% year over year. The reduction was primarily due to the temporary suspension of all sales activities

General and administrative cost

General and administrative expenses were $223,423 and $715,533 for the six months ended on June 30, 2025 and 2024, respectively, decreased by $492,110, or 69% year over year. The decrease was mainly attributable to the suspension of business operation in the half year of 2025. In contrast, the 2024 period included significant professional service fees related to the Company's application for uplisting to The Nasdaq Capital Market.

Loss from Operations

For the six months ended on June 30, 2025, loss from operations was $(543,152), as compared to loss from operations of $(1,085,615) for the six months ended on June 30, 2024, a increase of $542,463 or 50% year over year. The reduction in operating loss was primarily attributable to the suspension of all business operations during the second quarter of 2025, resulting in significantly lower operating expenses. In contrast, the same period in 2024 was impacted by a lower gross margin and higher general and administrative expenses.

Net Loss

As a result of the factors described above, our net loss was $(686,971) for the six months ended on June 30, 2025, increased by $611,731 from the net loss of $(1,298,702) for the six months ended on June 30, 2025.

Liquidity and Capital Resources

As of June 30, 2025, we had an accumulated deficit of $(6,108,496). As of June 30, 2025, we had cash of $13,418 and negative working capital of $(14,814,397), compared to cash of $12,273 and a negative working capital of $(14,263,400) on December 31, 2024. The decrease in the working capital was primarily due to the increased borrowings and other payables to related parties of the Company. These factors and our ability to raise additional capital to accomplish our objectives raises substantial doubt about our ability to continue as a going concern. We do not believe we will have sufficient capital to fund our operations and capital expenditure requirements for the next twelve months from the date the consolidated financial statements are issued and beyond.

We did not enter into any financing agreements or arrangements or obtain funds from any financing activities for the six month period ended June 30, 2025. During the fiscal year 2024, RLSP obtained a one-year bank loan of $1,391,285 (RMB 10 million) and $2,772,272 RMB (20 million) from the Industrial and Commercial Bank of China, Ningbo National Gaoxin Branch, at an annual interest rate of 3.55%. This loan matured on April 1, 2025. RLSP and the Industrial and Commercial Bank of China, Ningbo National Gaoxin Branch entered into an extension agreement on March 27, 2025 to extend the maturity date to April 1, 2026. As of June 30, 2025 and December 31, 2024, the outstanding balance of this loan amounted to $4,187,839 (RMB 30 million) and $4,109,815 (RMB 30 million).

In addition, during the fiscal year 2024, RLSP secured approval for a line of credit ("LOC") from the Industrial and Commercial Bank of China, Ningbo National Gaoxin Branch, with a total amount of $7.75 million (RMB 56 million), using its new factory building and land use right located at Qixing Road, Weng'ao Industrial Zone, Chunhu Subdistrict, Fenghua District, Ningbo, Zhejiang, China as collateral pledged. The LOC can be utilized through separate loans and has a term of two years. However, due to an ongoing account freeze resulting from litigation with Zhejiang Fengrong, RLSP has not yet opted to utilize this facility. Our legal counsel is in the process of preparing an appeal to the Zhejiang Provincial High Court. Once the appeal is filed, all current enforcement actions, including the account freeze, will be suspended, allowing us to resume normal operations. Per the discussion with our legal counsel, our management believes that it is probable that we will achieve a favorable resolution.

The uncertainties surrounding our ability to access capital when needed create substantial doubt about our ability to continue as a going concern. Since our management anticipates that we will be dependent on additional investment capital to fund operating expenses for the next twelve months, we have included a discussion concerning the presentation of our financial statements on a going concern basis in the notes to our consolidated financial statements. We plan to raise additional capital in the future to continue and fund operations, although there are no firm arrangements in place for any such financing at this time other than any funds that may be drawn from the LOC, if and when available. In light of management's efforts, there are no assurances that we will be successful obtaining additional funds or accomplishing our endeavors, and if we fail to become financially viable, we may be unable to continue as a going concern.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Critical Accounting Policies

The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires making estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies are discussed in further detail in the notes to the unaudited financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.