Quarterly Report for Quarter Ending June 30, 2025 (Form 10-Q)

Management's discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Overview

We are a pioneering provider of end-to-end innovative Hemp dosing solutions in the US that possesses the medical atomization and nebulizing background and sells nebulizers. We engage in the key activities in the Hemp cannabinoid E-vapors industry, including the research and development, formulation design, e-liquid production, e-liquid filling and e-liquid co-packing services. We primarily generated revenues from sales of Hemp cannabinoid E-vapors and consuming E-vapors, which collectively accounted for 92.3% and 90.2% of the total revenues for the six months ended June 30, 2025, and 2024, respectively, and 89.3%of the total revenues for the year ended December 31, 2024.

Reorganization

In preparation for IPO in the United States, the following transaction was undertaken to reorganize the legal structure of PAPA Health. The Company was incorporated in connection with the Reorganization of PAPA Health.

On April 15, 2024, the Company acquired 10,000,000 shares of PAPA Health representing 100% of the equity interest with an aggregate purchase price of US$190,000 from Shenzhen LFS, a related party directly controlled by Mr. Jian Hua, the principal shareholder of the Company. The Company has accounted for the Reorganization as transaction between entities with common ownership, which is akin to a reorganization of entities under common control. As all the entities involved in the process of the Reorganization are under common ownership of the Company's shareholders before and after the Reorganization, the Reorganization is accounted for in a manner similar to a pooling of interests with the assets and liabilities of the parties to the Reorganization carried over at their historical amounts. Therefore, the accompanying condensed consolidated financial statements were prepared as if the corporate structure of the Company had been in existence since the beginning of the periods presented.

Since our businesses are effectively controlled by the same group of the shareholders before and after the Reorganization, they are considered under common control. The above-mentioned transactions were accounted for as recapitalization. The consolidation of PAPA Medical Inc and our subsidiaries has been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the consolidated financial statements, including the unaudited interim condensed consolidated financial statements.

Key Factors that Affect Results of Operations

Our results of operations have been, and are expected to continue to be, affected by various factors, which primarily include the following:

●

The effect of legislation and regulations affecting the Hemp and consuming E-vapors.

●

The development of an international market for E-vapors, which is presently primarily limited to certain states in the United States.

●

Our ability to obtain regulatory approval to market additional Hemp and consuming E-vapors in the United States, Europe and other target countries and regions.

●

Our ability to develop and market Hemp and consuming E-vapors to meet the changing tastes of users.

Key Components of Results of Operations

Revenues

We primarily generate revenues from sales of Hemp and consuming E-vapors, which collectively accounted for 93.1% and 92.1% of our total revenues for the three months ended June 30, 2025 and 2024, respectively. For the six months ended June 30, 2025 and 2024, these products collectively accounted for 92.3% and 90.2% of the total revenues, respectively. The following table breaks down our revenues by amounts and as percentages of our total revenues for the periods presented:

		For the three months ended June 30,																For the six months ended June 30,
		2025								2024								2025								2024
		US$				%				US$				%				US$				%				US$				%
		(Unaudited)
Revenues
Hemp Cannabis E-vapors			13,431,184				91.3				7,325,501				84.3				29,567,116				90.8				14,357,374				82.9
Consuming E-vapors			268,503				1.8				677,547				7.8				489,692				1.5				1,256,094				7.3
Medical nebulizers			556,699				3.8				385,540				4.4				1,566,543				4.8				1,135,171				6.6
Online candy sales			398,386				2.7				256,607				3.0				795,108				2.4				475,383				2.7
Third-party sales of raw materials			33,621				0.2				17,506				0.2				55,825				0.2				25,219				0.1
Related party sales of raw materials			383				0.003				7,566				0.1				4,249				0.01				7,566				0.1
Others			22,645				0.2				18,482				0.2				101,989				0.3				53,061				0.3
Total revenues			14,711,421				100.0				8,688,749				100.0				32,580,522				100.0				17,309,868				100.0

Cost of Revenues

Our cost of revenues includes the manufacturing cost of Hemp and consuming E-vapors, which primarily consists of direct material costs, salaries and benefits for staff engaged in production activities and related expenses which are directly attributable to the production of products. The following table breaks down our cost of revenues by amounts and as percentages of our total revenues for the periods presented:

		For the three months ended June 30,																For the six months ended June 30,
		2025								2024								2025								2024
		US$				%				US$				%				US$				%				US$				%
		(Unaudited)
Cost of revenues
Hemp Cannabinoid E-vapors			10,259,559				92.7				5,885,688				90.2				23,265,302				93.3				11,725,227				90.3
Consuming E-vapors			218,676				2.0				442,411				6.8				347,671				1.4				815,925				6.3
Medical nebulizers			330,020				3.0				143,452				2.2				795,350				3.2				361,758				2.8
Third-party purchase of raw materials sold			33,373				0.3				17,643				0.3				54,316				0.2				23,481				0.2
Related party purchase of raw materials sold			-				-				8,660				0.1				7,142				0.1				8,660				0.1
Online candy sales			41,488				0.4				27,665				0.4				88,588				0.3				42,452				0.2
Others			8,110				0.1				551				0.01				107,019				0.4				8,633				0.1
Inventory Adjustments			170,781				1.5				-				-				283,214				1.1				-				-
Total cost of revenues			11,062,007				100.0				6,526,070				100.0				24,948,602				100.0				12,986,136				100.0

Gross Profit and Gross Profit Margin

For the three months ended June 30, 2025, our gross profit surged by 68.7% to US$3.6 million, compared to US$2.1 million for the three months ended June 30, 2024, primarily driven by expanded sales volumes. Additionally, our gross profit margin slightly decreased to 24.8% for the three months ended June 30, 2025, from 24.9% for the same period in 2024, primarily due to adjustments in product mix to meet evolving customer preferences.

For the six months ended June 30, 2025, our gross profit surged by 76.5% to US$7.6 million, compared to US$4.3 million for the six months ended June 30, 2024, primarily driven by expanded sales volumes. Additionally, our gross profit margin decreased to 23.4% for the six months ended June 30, 2025, from 25.0% for the same period in 2024. The decrease in gross profit margin resulted from (i) volume-related cost increases that were not fully offset by economies of scale, and (ii) adjustments in product mix to meet evolving customer preferences.

Operating Expenses

The following table sets forth our operating expenses and as percentages of our total revenues for the periods presented:

		For the three months ended June 30,																For the six months ended June 30,
		2025								2024								2025								2024
		US$				%				US$				%				US$				%				US$				%
		(Unaudited)
Operating expenses
Selling and marketing expenses			1,694,837				11.5				1,021,999				11.8				3,646,819				11.2				2,080,737				12.1
General and administrative expenses			654,567				4.5				411,218				4.7				1,456,782				4.5				883,357				5.1
Research and development expenses			329,096				2.2				163,461				1.9				625,993				1.9				315,365				1.8
Total operating expenses			2,678,500				18.2				1,596,678				18.4				5,729,594				17.6				3,279,459				19.0

Sales and marketing expenses

Our sales and marketing expenses primarily consist of (i) compensation to selling personnel, including the salaries and other benefits; and (ii) commission paid to the third parties relevant to the sales and marketing function.

We expect our selling and marketing expenses to continue to increase in absolute dollars as we expand our sales force and continue to grow our presence.

General and administrative expenses

Our general and administrative expenses primarily consist of salaries, bonuses and benefits for employees involved in general corporate functions, and those not specifically dedicated to sales activities, such as depreciation and amortization of fixed assets, legal and other professional services fees, rental and other general corporate related expenses.

We expect to incur additional expenses after we complete this offering, primarily due to the costs of operating as a public company, which are expected to include additional legal, accounting, corporate governance, and investor relations expenses, as well as higher directors' and officers' insurance premiums.

Research and development expenses

Our research and development expenses consist primarily of materials cost for testing, payroll and related expenses for research and development professionals and the utilities expenses occurred in designing, developing and operating our technology innovations for launching new products and upgrading existing products.

We expect that our overall research and development expenses will vary from period to period as a percentage of revenue.

Operating income

Our profit from operations increased by approximately 71.5% from US$1.0 million for the three months ended June 30, 2024, to US$0.6 million for the three months ended June 30, 2025. This increase was primarily due to the significant increase in gross profit, which grew at a faster rate than our operating expenses.

For the six months ended June 30, 2025, our profit from operations was US$1.9 million, compared to US$1.0 million for the six months ended June 30, 2024. The 82.2% operating profit surge was primarily due to the significant increase in gross profit, which grew at a faster rate than our operating expenses.

Net income

Our net income increased by approximately 44.0% from US$0.4 million for the three months ended June 30, 2024, to US$0.6 million for the three months ended June 30, 2025. This increase was primarily a result of the factors contributing to the higher operating income discussed above for the interim period.

For the six months ended June 30, 2025, our net income was US$1.4 million, an increase of 89.6% from US$0.7 million for the six months ended June 30, 2024. This increase was primarily a result of the factors contributing to the higher operating income discussed above for the interim period.

Taxation

Income taxes

Current income taxes are provided on the basis of income/(loss) for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes are provided using the assets and liabilities method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statement of income and comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more-likely-than-not that some portion of, or all of the deferred tax assets will not be realized.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of our management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We consider positive and negative evidence when determining whether a portion or all of its deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, its experience with tax attributes expiring unused, and its tax planning strategies. The ultimate realization of deferred tax assets is dependent upon its ability to generate sufficient future taxable income within the carry-forward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, we consider possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carry-forwards, (iii) future taxable income arising from implementing tax planning strategies, and (iv) specific known trend of profits expected to be reflected within the industry.

Uncertain tax positions

We evaluate each uncertain tax position (including the potential application of interest and penalties) based on the technical merits, and measure the unrecognized benefits associated with the tax positions. as of June 30, 2025, and as of December 31, and 2024, we did not have any significant unrecognized uncertain tax positions.

We did not accrue any liability, interest or penalties related to uncertain tax positions in the provision for income taxes line of our consolidated statements of operations for the six months ended June 30, 2025, and for the fiscal years ended December 31, 2024.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. We continually evaluate our estimates, including, but not limited to, those related to the allowance for credit loss for uncollectible accounts receivable and other receivable, slow moving of inventories, recoverability and useful lives of long-lived assets, and valuation allowance for deferred tax assets. Out of our significant accounting policies, which are described in Note 2 - "Summary of principal accounting policies" of our consolidated financial statements included elsewhere in this registration statement, certain accounting policies are deemed "critical," as they require management's highest degree of judgment, estimates and assumptions. While management believes its judgments, estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates under different assumptions and conditions.

Impairment of Right-of-use Assets and Other Long-lived Assets

We review our right-of-use assets, or ROU assets, and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. Factors we consider to be important which could trigger an impairment review primarily include:

●

significant underperformance relative to projected operating results;

●

significant changes in the overall business strategy;

●

significant adverse changes in legal or business environment; and

●

significant competition, unfavorable industry trends, or economic outlook.

When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposal. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we would recognize an impairment loss based on the excess of the carrying value over the fair value of the assets. Fair value is generally determined by discounting the cash flow expected to be generated by the assets, when the market prices are not readily available. as of June 30, 2025 and December 31, 2024, there was impairment of long-lived assets of nil and US$87,392, respectively. This recognized loss highlights the reality of this risk.

Should significant adverse changes occur in the future, such as intensified market competition leading to sales continuously falling below expectations, or if a key technology becomes obsolete, we may need to recognize additional impairment losses. Any future impairment loss would be recorded as a non-cash charge to our operating expenses, which would materially and adversely impact our operating income and net income.

Revenue recognition

We recognize our revenues under ASC Topic 606, Revenue from Contracts with Customers ("ASC 606"). The core principle underlying the revenue recognition of this Accounting Standards Update ("ASU") allows us to recognize revenue that represents the transfer of goods and services to customers in an amount that reflects the consideration to which we expect to be entitled in such exchange. This will require us to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time, based on when control of goods and services transfers to a customer.

We apply five-step model to recognize revenue from customer contracts. The five-step model requires us to (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) we satisfy the performance obligation.

We recognize revenues at a point in time when control of the products is transferred to the customers, generally occurs upon delivery according to the terms of the underlying contracts. Our standalone selling prices are based on the prices charged to customers for the single performance obligation which is transfer of control of products upon delivery to the customers. Our general terms and conditions for its contracts do not contain a right of return that allows the customer to return products and receive credit, and therefore we do not estimate returns.

Contract Balances

When either party to a contract has been performed, we present the contract in the consolidated balance sheets as the contract assets or contract liabilities, depending on the relationship between the entity's performance and the customer's payment.

Contract assets represent our right to consideration in exchange for products that we have transferred to customers. We have no contract assets as of June 30, 2025, and as of December 31, 2024.

Generally, we collect the considerations in advance. The contract liabilities primarily are related to unsatisfied performance obligations when payment has been received from customers before satisfying the corresponding performance obligation. The contract liabilities are recorded as "advance from customers" on the consolidated balance sheets. as of June 30, 2025, the balance of contract liabilities was US$2.5 million. Approximately 94.3% of the balance of 2024 has been recognized as revenue as of the date of this prospectus. As of December 31, 2024, the balance of contract liabilities was US$4.9 million. We expect to recognize the balance as of June 30, 2025 as revenue within the next 3 months.

Recent accounting pronouncements

See the discussion of the recent accounting pronouncements in the section headed "Summary of Significant Accounting Policies" contained in Note 2 to the combined financial statements.

Results of Operations

The three months ended June 30, 2025 compared to the three months ended June 30, 2024

		For the three months ended June 30,
		2025								2024
		US$				%				US$				%
Revenues			14,711,421				100.0				8,688,749				100.0
Cost of revenues			(11,062,007	)			(75.2	)			(6,526,070	)			(75.1	)
Gross profit			3,649,414				24.80				2,162,679				24.9
Operating expenses:
Selling and marketing expenses			(1,694,837	)			(11.5	)			(1,021,999	)			(11.8	)
General and administrative expenses			(654,567	)			(4.5	)			(411,218	)			(4.7	)
Research and development expenses			(329,096	)			(2.2	)			(163,461	)			(1.9	)
Total operating expenses			(2,678,500	)			(18.2	)			(1,596,678	)			(18.4	)
Operating income			970,914				6.6				566,001				6.5
Interest income/(expense), net			27,176				0.2				13,594				0.2
Other gain, net			(57,442	)			(0.4	)			(104,530	)			(1.2	)
Income before taxes			940,648				6.4				475,065				5.5
Income tax expenses			(319,425	)			(2.2	)			(43,646	)			(0.5	)
Net income			621,223				4.2				431,419				5.0

Revenues: Our total revenues increased by approximately 69.3% from US$8.7 million for the three months ended June 30, 2025 to US$14.7 million for the three months ended June 30, 2025. The increase was primarily due to the expansion of our cannabis E-vapors sales volume base in the United States, which is mainly driven by the increased demand on cannabis E-vapors by the customers. Additionally, the sales of newly developed medical nebulizers and online candy sales for the three months ended June 30, 2025 contributed to the increase in revenue with our improved brand recognition.

Cost of Revenues: Our total cost of sales increased by approximately 69.5% to US$ 11.1 million for the three months ended June 30, 2025 from US$6.5 million for the three months ended June 30, 2024, primarily due to our increased cost of raw materials and increased manufacturing cost in line with the increased sales for the three months ended June 30, 2025.

Gross profit and gross profit margin: As a result of the factors set out above, our gross profit increased by approximately 68.7% from US$2.1 million for the three months ended June 30, 2024 to US$3.6 million for the three months ended June 30, 2025, primarily attributable to an increase in sales volume and customers' demands with our improved brand recognition, which resulted from an increasing number of 19 new clients in the first half of 2025. However, our gross profit margin slightly decreased from 24.9% for the three months ended June 30, 2024 to 24.8% for the three months ended June 30, 2025, primarily due to adjustments in product mix to meet evolving customer preferences.

Selling and marketing expenses: Our sales and marketing expenses increased by approximately 65.8% to US$1.7 million for the three months ended June 30, 2025 from US$1.0 million for the three months ended June 30, 2024, principally due to the increased cost of sales person, and shipping expense and the additional amount of US$0.3 million related to Amazon platform fee in 2025.

General and administrative expenses: Our general and administrative expenses increased by approximately 59.2% to US$0.7 million for the three months ended June 30, 2025 from US$0.4 million for the three months ended June 30, 2024, primarily due to the increased labor cost.

Research and Development Expenses: Our research and development expenses increased by approximately 101.3% from US$0.2 million for the three months ended June 30, 2024 to US$0.3 million for the three months ended June 30, 2025, primarily due to the increased R&D personnel for our new series of E-vapors, iPrefer in the first quarter of 2025.

Interest income/(expenses), net: We had a net of interest income of US$27,176 and interest expense of US$13,594 for the three months ended June 30, 2025 and 2024, respectively, This increase was mainly attributable to: (a) interest income generated from unrestricted working capital deposits with original maturities of three months or less; and (b) increased exchange gains from currency translation.

Other loss, net: We recorded a net of other loss of US$57,442 for the three months ended June 30, 2025, which was mainly loss on disposal of property, plant and equipment of US$54,653. We recorded a net of other loss of US$104,531 for the three months ended June 30, 2024, which was mainly due to inventory adjustments of US$97,467.

Income tax expenses: Our income tax expense increased by approximately 631.9% from US$43,646 for the three months ended June 30, 2024 to US$319,425 for the three months ended June 30, 2025, primarily due to the increase of taxable income generated from operations.

Net income: As a result of the above, our net income increased from US$0.4 million for the three months ended June 30, 2024 to US$0.6 million for the three months ended June 30, 2025.

The six months ended June 30, 2025 compared to the six months ended June 30, 2024

		For the six months ended June 30,
		2025								2024
		US$				%				US$				%
Revenues			32,580,522				100.0				17,309,868				100.0
Cost of revenues			(24,948,602	)			(76.6	)			(12,986,136	)			(75.0	)
Gross profit			7,631,920				23.4				4,323,732				25.0
Operating expenses:
Selling and marketing expenses			(3,646,819	)			(11.2	)			(2,080,737	)			(12.1	)
General and administrative expenses			(1,456,782	)			(4.5	)			(883,357	)			(5.1	)
Research and development expenses			(625,993	)			(1.9	)			(315,365	)			(1.8	)
Total operating expenses			(5,729,594	)			(17.6	)			(3,279,459	)			(19.0	)
Operating income			1,902,326				5.8				1,044,273				6.0
Interest income, net			118,335				0.4				44,382				0.3
Other (loss)/gain, net			(49,788	)			(0.1	)			(104,528	)			(0.6	)
Income before taxes			1,970,873				6.1				984,127				5.7
Income tax expense			(560,596	)			(1.8	)			(240,243	)			(1.4	)
Net income			1,410,277				4.3				743,884				4.3

Revenues: Our total revenues increased by approximately 88.2% from US$17.3 million for the six months ended June 30, 2024 to US$32.6 million for the six months ended June 30, 2025. This increase was primarily due to the expansion of our Hemp cannabinoid E-vapors customer base in the United States, which is mainly driven by the increased demand on Hemp cannabinoid E-vapors by the customers.

Cost of Revenues: Our total cost of revenues increased by approximately 92.1% to US$24.9 million for the six months ended June 30, 2025 from US$13.0 million for the six months ended June 30, 2024. This increase was primarily due to our increased sales quantity and increased manufacturing cost in line with the increased sales for the six months ended June 30, 2025.

Gross profit and gross profit margin: Our gross profit increased by approximately 76.5% from US$4.3 million for the six months ended June 30, 2024 to US$7.6 million for the six months ended June 30, 2025. This increase was primarily attributable to an increase in sales volume and customers' demands with our improved brand recognition for the six months ended June 30, 2025. Our gross profit margin increased from approximately 23.4% for the six months ended June 30, 2024 to approximately 25.0% for the six months ended June 30, 2025, primarily due to the increased cost of our products and the offering price discounts by the Company to new clients in order to stimulate sales and gain more market share, and due to adjustments in product mix to meet evolving customer preferences.

Selling and marketing expenses: Our sales and marketing expenses increased by approximately 75.3% to US$3.6 million for the six months ended June 30, 2025 from US$2.0 million for the six months ended June 30, 2024. This increase was principally due to the increased cost of sales person and related to Amazon platform fee in 2025.

General and administrative expenses: Our general and administrative expenses increased by approximately 64.9% to US$1.5 million for the six months ended June 30, 2025 from US$0.9 million for the six months ended June 30, 2024. This change was primarily due to the increased labor cost, property insurance fees, decoration costs, depreciation expenses, taxes and legal service fees.

Research and development expenses: Our research and development expenses increased by approximately 98.5% from US$0.3 million for the six months ended June 30, 2024 to US$0.6 million for the six months ended June 30, 2025. This increase was primarily due to the increased R&D personnel and activities for our new series of E-vapors, iPrefer since the first quarter of 2024.

Interest income, net: We had a net interest income of US$118,335 and US$44,832 for the six months ended June 30, 2025 and 2024, respectively. This increase was mainly attributable to:(a) Interest income generated from unrestricted working capital deposits with original maturities of three months or less;(b) Increased exchange gains from currency translation.

Other loss, net: We recorded a net other loss of US$49,778 for the six months ended June 30, 2025, which was mainly loss on disposal of property, plant and equipment of US$54,653. We recorded a net other loss of US$104,528 for the six months ended June 30, 2024, which was mainly due to inventory adjustments of US$97,467.

Income tax expense: We recorded income tax expense of US$560,596 for the six months ended June 30, 2025 and US$240,243 for the six months ended June 30, 2024. The increase of 133.3% was primarily due to the increase of taxable income generated from operations.

Net income: As a result of the factors discussed above, our net income increased by 89.6% from US$0.74 million for the six months ended June 30, 2024 to US$1.41 million for the six months ended June 30, 2025.

Liquidity and Capital Resources

Cash Flows and Working Capital

As of June 30, 2025 and December 31, 2024, we held cash and cash equivalents of US$2.4 million and US$4.7 million, respectively. We believe that our existing cash balances, cash flows expected to be generated from operations, and access to capital markets will be sufficient to meet our working capital requirements for at least the next twelve months. No funding commitments exist from related parties. We do not anticipate requiring additional financing to meet our liquidity needs within the next twelve months. To execute our growth strategies, we plan to expand our business operations, which may necessitate additional equity financing to scale production capacity and address market demand.

Our primary source of liquidity historically has been cash generated from our business operations and equity contributions from our shareholders, which have historically been sufficient to meet our working capital and capital expenditure requirements.

We may, however, decide to enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding. We may need additional cash resources in the future if we experience changes in business conditions or other developments, or if we find and wish to pursue opportunities for investments, acquisitions, capital expenditures or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Our ability to manage our working capital, including receivables and other assets and liabilities and accrued liabilities, may materially affect our financial condition and results of operations.

The following table sets forth a summary of our cash flows for the six months ended June 30, 2025 and 2024:

		for the six months ended June 30,
		2025				2024
		US$				US$
Summary Consolidated Cash Flow:
Net cash used in operating activities		$	(3,258,202	)		$	(1,584,680	)
Cash used in investing activities			(253,828	)			(350,097	)
Cash used in financing activities			(62,000	)			(34,000	)
Net decrease in cash and cash equivalents		$	(3,574,030	)		$	(1,968,777	)
Cash and cash equivalents, at beginning of year			4,749,842				4,119,608
Cash and cash equivalents, at end of year			1,175,812				2,150,831

Operating Activities

For the six months ended June 30, 2025, net cash used in operating activities was US$3.2 million. This net cash outflow was primarily driven by the relationship between our net income of US$1.4 million and significant non-cash adjustments and changes in our operating assets and liabilities: (i) We had net positive non-cash adjustments of $1.0 million, which positively impacted our operating cash flow. This amount was primarily composed of $1.0 million in depreciation and amortization and a US$0.1 million provision for inventory obsolescence, partially offset by a non-cash deferred income tax benefit of US$0.1 million; and (ii) these positive contributions were more than offset by a net cash outflow of US$5.6 million from changes in our operating assets and liabilities. The most significant factor contributing to this outflow was a US$0.7 million use of cash required to fund an increase in our inventories. Further cash was used to fund a decrease in advances from customers of US$2.4 million and a decrease in amounts due to related parties of US$1.6 million. These cash uses were partly expedited by a cash outflow of $1.0 million generated from an decrease in our accounts payable and other current liabilities.

For the six months ended June 30, 2024, net cash used in operating activities was $1.6 million. This net cash outflow, despite a net income of US$0.7 million, was the result of significant cash uses within our operating assets and liabilities, after accounting for non-cash items: (i) We had net positive non-cash adjustments of US$0.4 million, an amount primarily consisting of US$0.4 million in depreciation and amortization and a US$0.1 million provision for inventory obsolescence; partially offset by a non-cash deferred income tax benefit of US$0.1 million; and (ii) these factors were more than offset by a net cash outflow of US$2.7 million from changes in our operating assets and liabilities. The principal drivers of this outflow were a US$1.2 million cash use resulting from a decrease in amounts due to related parties, an additional US$0.5 million cash use for an decrease in Accrued expenses and other current liabilities, an additional US$0.2 million cash use for an increase in other current assets, and an increase of advance from customers of US$1.2million, partially offset by an increase of inventories of US$2.4 million.

Investing Activities

For the six months ended June 30, 2025, cash used in investing activities was US$253,828, mainly due to the purchase of property, plant and equipment of US$253,828.

For the six months ended June 30, 2024, cash used in investing activities was US$350,097, mainly due to the purchase of property, plant and equipment of US$160,097 and the payment to Shenzhen LFS related to the acquisition of PAPA Health of US$190,000.

Financing Activities

For the six months ended June 30, 2025, net cash used in financing activities was US$34,000, primarily attributable to the payment deferred offering cost.

For the six months ended June 30, 2024, net cash used in financing activities was US$34,000, primarily attributable to an increase of deferred offering cost of US$36,000, partially offset by the proceeds from capital contribution of US$2,000.

Trend Information

Other than as described elsewhere in this prospectus, we are not aware of any trends, uncertainties, demands, commitments, or events that are reasonably likely to have a material adverse effect on our revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause our reported financial information not necessarily to be indicative of future operating results or financial condition.

Off-balance sheet arrangement

The Company has no off-balance sheet arrangements, including arrangements that would affect its liquidity, capital resources, market risk support, and credit risk support or other benefits.

Capital Expenditures

Our capital expenditures were US$253,828 and US$160,097 for the six months ended June 30, 2025 and 2024, respectively. Our capital expenditures are incurred primarily in connection with purchase of property, plant and equipment. Our capital expenditures was US$332,005 for the years ended December 31, 2024. As of the date of this prospectus, there have been no material commitments for capital expenditures. We intend to fund our future capital expenditure with our existing cash balance, proceeds of bank loans and proceeds from this offering.

Commitments and Contingencies

In the normal course of business, we are subject to loss contingencies, such as legal proceedings and claims arising out of our business, that cover a wide range of matters, including, among others, government investigations and tax matters. In accordance with ASC No. 450-20, "Loss contingencies," we will record accruals for such loss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.

The Company is subject to legal proceedings and regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome arising out of any such matter will have a material adverse effect on our consolidated business, financial position, cash flows or results of operations taken as a whole. As of the date of this prospectus, the Company is not a party to any material legal or administrative proceedings.

Quantitative and Qualitative Disclosures about Market Risk

Concentration of credit risk

Financial instruments that potentially subject us to the concentration of credit risks consist of cash, cash equivalents, and accounts receivable. As of June 30, 2025 and December 31, 2024, substantially all of our cash and cash equivalents were held by major financial institutions located in the United States, which management believes are of high credit quality. In the United States, a depositor has up to US$250,000 insured by the Federal Deposit Insurance Corporation ("FDIC"). As of June 30, 2025 and December 31, 2024, US$397,791 and US$3,984,526 of our cash and cash equivalents held by financial institutions were uninsured, respectively. For the credit risk related to accounts receivable, we perform ongoing credit evaluations of our customers and establish a provision for expected credit loss based upon estimates and factors surrounding the credit risk of specific customers.

Concentration of customers and suppliers

Major customers

For the six months ended June 30, 2025 and 2024, there were two customers, respectively, from whom revenues individually represented greater than 10% of our total revenues. The total sales to these customers accounted for approximately 68.4% and 56.0% of our total revenues for the six months ended June 30, 2025 and 2024, respectively.

For the years ended December 31, 2024,thhere were two customers from whom revenues individually represent greater than 10% of the total revenues of the Group. The total sales to these customers accounted for approximately 56.7% of total revenues for the year ended December 31, 2024.

As of June 30, 2025, accounts receivable from one customer accounted for approximately 64.4% of our total accounts receivable. As of December 31, 2024, two customers accounted for approximately 23.3% of our total accounts receivable.

Major suppliers

For the six months ended June 30, 2025 and 2024, there were two and three suppliers, respectively, from whom the Group's purchases individually exceeded 10% of its total purchases. The aggregate purchases from these suppliers totaled approximately 30.2% and 51.8% of the Group's total purchases for the six months ended June 30, 2025 and 2024, respectively. For the years ended December 31, 2024, there were two suppliers, from whom the Group's purchases individually exceeded 10% of its total purchases. The aggregate purchases from these suppliers totaled approximately 34.0% of the Group's total purchases for the years ended December 31, 2024.

As of June 30, 2025, there were three third-party suppliers who accounted for approximately 83.3% of the Group's accounts payable. As of December 31, 2024, there were three third-party suppliers accounted for approximately 75.4% of the Group's accounts payable.

For the six months ended June 30, 2025 and 2024, this related party supplier individually represented 1.4% and 1.1% of the total cost of revenues, 26.6% and 12.3% of the total selling and marketing expenses, 6.8% and 4.4% of the total general and administrative expenses, and 31.2% and 26.2% of the total research and development expenses of the Group, respectively.

Separately, for the year ended December 31, 2024, there was a related party, Shenzhen Life, providing selling services and E-vapors technology services to the Group. This supplier individually represented 0.7% of the total cost of revenues, 28.4% of the total selling and marketing expenses, 7.3% of the total general and administrative expenses, and 49.0% of the total research and development expenses of the Group.