Quanome Technologies, Inc.: Form 10-Q for the period ended Mar 31, 2026

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere 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. All amounts included herein with respect to the three and nine months ended March 31, 2026 and 2025 are derived from our unaudited condensed consolidated financial statements included elsewhere in this Report. Our financial statements have been prepared in accordance with the U.S. GAAP.

Overview

Prior to February 12, 2026, we operated as a U.S.-based integrated cross-border supply chain solutions provider with a strategic focus on the Asian market, including China, through ABL Chicago, and were also engaged in the distribution of pharmaceutical products in China through Hupan Pharmaceutical. On February 12, 2026, we transferred the operations of ABL Chicago to an unrelated third party, which obtained operational control and substantially all economic interests associated with the business. Following the transfer, we ceased substantive involvement in ABL Chicago’s operations. Accordingly, the operations of ABL Chicago were classified as discontinued operations in our condensed consolidated financial statements. The disposal represents a strategic shift in our business operations and allows management to further streamline resources and focus on the development and expansion of our pharmaceutical distribution business.

Our continuing operations are focused on the distribution of pharmaceutical products in China through Hupan Pharmaceutical. Revenue from continuing pharmaceutical operations was primarily derived from infusion products, specialty prescription drugs, and medical nutrition products. We procure products from manufacturers, store the products at designated warehouses, and distribute them to hospitals, distributors and other healthcare providers, primarily through agents. The Company operates within a highly regulated healthcare environment and generates revenue through sales to distributors, hospitals, and clinics.

The Company continually evaluates potential opportunities to expand and diversify its business operations. Smart Reserve Holding LTD and Smart Reserve Inc were formed in connection with the Company’s preliminary evaluation of potential opportunities relating to digital asset business activities. As of the date of this report, the Company has not commenced any such business and has not adopted any concrete operational plan relating thereto. Any future expansion initiatives may be affected by factors including market conditions, capital availability, regulatory developments, operational execution, technological requirements, and management resources.

The Company’s results of operations for the period reflect the performance of its continuing pharmaceutical distribution business, and accordingly, prior period results have been recast to present the disposed business as discontinued operations where applicable. Management evaluates the performance of the continuing operations based on revenue growth, gross margin, operating efficiency, and working capital.

Key Factors Affecting Our Results of Operations

We believe the most significant factors that affect our business and results of operations include the following:

Regulatory Environment in China

The pharmaceutical industry in China is subject to extensive government regulation, including pricing controls, tendering processes, and reimbursement policies. Government initiatives, such as centralized procurement programs and healthcare reforms, may affect product pricing, sales volumes, and margin levels.

Supplier and Manufacturer Relationships

The Company relies on relationships with pharmaceutical manufacturers and suppliers for product sourcing. Changes in supply terms, pricing arrangements, or product availability may impact revenue and gross margins.

Customer Concentration and Hospital Demand

A significant portion of the Company’s sales is generated from hospitals and large distributors. Purchasing patterns, tender cycles, and changes in hospital demand or procurement policies can lead to fluctuations in revenue. During the nine months ended March 31, 2026, we have generated revenue from the distribution of pharmaceutical products from 59 customers, of which, four customers took over 10% of the revenue.

Pricing Pressure and Competition

The Company operates in a competitive market with pressure from both domestic and international pharmaceutical distributors. Competitive pricing dynamics and participation in government bidding processes may compress margins.

Product types and composition

During the nine months ended March 31, 2026, the pharmaceutical products we distribute mainly consist of infusion drugs, specialty foods, and therapeutic drugs. The profitability level of different products varies, and the proportion of various products affects our gross profit level.

Accounts receivable collection

The current payment term provided by us to our main customers is between 60-90 days; while the payment term from the supplier is 60 days. There is also a situation of prepaying payment to the supplier. If the accounts receivable cannot be collected in a timely manner or there are identifiable uncollectible balances, our cash flow in operating activities may be negatively affected.

Foreign Currency Fluctuations

As the Company operates primarily in China while reporting in United States Dollar (“USD”), fluctuations in foreign exchange rates, particularly between the Renminbi and the reporting currency, may impact reported revenue and profitability.

Key Components of Results of Operations

Revenues. We generate revenues primarily from the distribution of pharmaceutical and medical products since December 2024. We order from the manufacturer, receive and carry the products at a designated warehouse, and deliver the products to the customers’ warehouses or designated locations.

Cost of Revenues. Our cost of revenues from the distribution of pharmaceutical and medical products comprises cost of pharmaceutical products from manufacturers, less discount and rebate.

Selling Expenses. Our selling expenses primarily include salaries expense, advertising expenses, marketing expense of a system, entertainment expenses and traveling expense of sales team engaged in developing potential customers and maintaining customer relationships and transportation cost for selling pharmaceutical products.

General and Administrative Expenses. Our general and administrative expenses primarily include salaries and staff benefits, repair and maintenance expenses, depreciation on property and equipment, amortization on intangible assets, lease expenses warehouses used for administrative purpose and office premises, travelling and entertainment expenses, bank charges, legal and professional fees, insurance expenses and other office expenses.

Other Income. Our other income primarily consists of interest income in connection with a third-party loan.

Interest Expenses. Our interest expenses primarily consist of the interest expenses incurred for convertible debts and other loans.

Income Tax Expenses. Our income tax expenses consist primarily of PRC enterprise income tax.

Results of Operations

Continuing Operation

Our continuing operations are focused on the distribution of pharmaceutical products in China. Revenue from continuing pharmaceutical operations was primarily derived from infusion products, specialty prescription drugs, and medical nutrition products. The Company operates within a highly regulated healthcare environment and generates revenue through sales to hospitals through agent, and other healthcare providers.

Discontinued Operation

ABL Chicago is a U.S.-based integrated cross-border supply chain solution provider with a strategic focus on the Asian market including China. We primarily provide customized cross-border ocean freight solutions and airfreight solutions in the U.S. that specifically cater to our customers’ requirements and needs in transporting goods into the U.S. We offer a wide variety of integrated services under our cross-border ocean freight solutions and cross-border airfreight solutions, including (i) cross-border freight consolidation and forwarding services, (ii) customs clearance services, (iii) warehousing and distribution services and (iv) U.S. domestic ground transportation services.

On February 12, 2026, the sale of 100% of the issued and outstanding shares of ABL Chicago was duly approved and adopted by the Company’s shareholders. Accordingly, the Company consummated the transfer of the ABL Chicago business. Immediately prior to the Transaction, the Company forgave $3,402,808 of amounts due from The Company recorded a gain on the sale of the ABL Chicago business in the amount of $2,556,315 as follows:

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The following table summarizes the results of condensed consolidated statements of operations and comprehensive income (loss) for the three months and nine months ended March 31, 2026 and 2025 in U.S. dollars.

(unaudited)

(unaudited)

(unaudited)

(unaudited)

For the Three Months Ended March 31, 2026 Compared to the Three Months Ended March 31, 2025

The following table summarizes our consolidated results of operations and percentages of certain items in relation to total revenues for the three months ended March 31, 2026 and 2025, and provides information regarding the dollar and percentage increase or (decrease) during such periods. The operating results in any historical period are not necessarily indicative of the results that may be expected for any future period.

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Revenues

Revenue from the distribution of pharmaceutical products increased by approximately $0.8 million, or 167.0%, from approximately $0.5 million for the three months ended March 31, 2025 to approximately $1.3 million for the three months ended March 31, 2026. This increase was primarily attributable to the continued expansion of our pharmaceutical distribution business, which commenced operations in December 2024, and reflects the early-stage growth trajectory of this segment.

The growth in revenue was mainly driven by increased sales of infusion products, which accounted for approximately 99% and 93% of total pharmaceutical distribution revenue for the three months ended March 31, 2026 and 2025, respectively. Revenue from infusion products increased by approximately $0.9 million period over period, reflecting both higher sales volume and broader market penetration.

A key contributor to this increase was the expansion of the Company’s customer base, with the number of active customers increasing from 4 to 12 during the period. This growth was supported by the Company’s dedicated sales team, which has focused on developing new customer relationships, enhancing engagement with existing customers, and participating in hospital and distributor procurement processes. As a result, the Company experienced increased order volumes and improved sales coverage across its target market.

Cost of Revenues and Gross Profit

Cost of revenue from the distribution of pharmaceutical products increased by approximately $0.2 million, or 192.2%, from approximately $0.1 million for the three months ended March 31, 2025 to approximately $0.3 million for the three months ended March 31, 2026. The increase was primarily driven by higher sales volume, consistent with the significant growth in revenue during the period as the Company continued to expand its pharmaceutical distribution operations.

Despite the increase in revenue, gross profit margin decreased from approximately 76.0% for the three months ended March 31, 2025 to approximately 73.8% for the three months ended March 31, 2026. The decline in gross margin was primarily attributable to changes in supplier incentives, specifically a reduction in purchase rebates offered by suppliers in the current period compared to the prior-year period. In the prior-year period, higher proportion of purchase rebates received from suppliers, which contributed to an elevated gross margin during the initial phase of operations. Gross margin without purchase rebate was 43.3% and 41.6% for the three months ended March 31, 2026 and 2025, respectively.

Selling Expenses

Our selling expenses amounted to approximately $0.7 million for the three months ended March 31, 2026, compared to approximately $0.1 million for the same period in 2025. The increase was primarily driven by the salaries for our sales team, marketing expense of a system, entertainment expenses and the advertising expense amounted to approximately $0.6 million, both of which were incurred in connection with the launch of our new pharmaceutical distribution service during the year.

General and Administrative Expenses

Our general and administrative expenses increased by approximately $1.1 million, or 181.1%, from approximately $0.6 million for the three months ended March 31, 2025, to approximately $1.7 million for the three months ended March 31, 2026. The increase was primarily attributable to an approximately $1.2 million increase in professional fees, partially offset by an approximately $0.1 million decrease in salaries and insurance expenses.

Our professional fees increased by approximately $1.2 million, or 598.5%, from approximately $0.2 million for the three months ended March 31, 2025, to approximately $1.4 million for the three months ended March 31, 2026. Our professional fee represented 84.5% and 34.0% of our total general and administrative expenses for the three months ended March 31, 2026 and 2025, respectively. The increase was primarily due to advisory and consulting expenses strategic planning initiatives. These costs included external support for market assessments, financial and operational due diligence, and the development of long-term strategic plans to guide future growth.

Other Income, net

Our other income, net increased by $92,023, or 787.7%, from $11,682 for the three months ended March 31, 2025, to $103,705 for the three months ended March 31, 2026. The increase was primarily due to increase in interest income of $77,713 in connection with a third-party loan.

Interest Expenses

Our interest expenses decreased by $13,808, or 34.1%, from $40,541 for the three months ended March 31, 2025, to $26,733 for the three months ended March 31, 2026.

Loss Before Income Taxes

We had a net loss before income taxes of approximately $1.5 million and approximately $0.4 million for the three months ended March 31, 2026 and 2025, respectively. We were in a loss position before income taxes for the three months ended March 31, 2026, primarily attributable to the net effects of: (i) the rise in operating expenses, which was partly offset by an increase in gross profit due to the new business segment for the three months ended March 31, 2026 as mentioned above.

Income Tax Expense

We had income tax expense of $29,593 and $18,594 for the three months ended March 31, 2026 and 2025. A current income tax provision of $84,954 was recognized for a subsidiary with net assessable income while no current income tax provision was recognized for subsidiaries in net operating loss for the three months ended March 31, 2026.

Based on management’s assessment of future taxable income, the Company determined that it was no longer more likely than not that sufficient future taxable income would be available to utilize the deferred tax benefits. As a result, the Company recorded a full valuation allowance against its DTAs and did not recognize any deferred tax assets. We recognized a deferred income tax credit of $27,069 due to credit loss allowance and amortization of intangible assets, and a deferred income tax credit of $28,292 due to expected sales return, resulting in a net income tax credit of $55,361 for the three months ended March 31, 2026.

A current income tax provision of $26,608 was recognized for a subsidiary with net assessable income while no current income tax provision was recognized for subsidiaries in net operating loss for the three months ended March 31, 2025. We recognized a recovery of deferred income tax of $8,014 due to amortization of intangible assets, resulting in a net income tax expense of $18,594 for the three months ended March 31, 2025.

Net loss from continuing operation

As a result of the foregoing, we had a net loss of approximately $1.5 million and approximately $0.4 million for the three months ended March 31, 2026 and 2025, respectively.

Result of Discontinued Operation

Net income (loss) from discontinued operations for the three months ended March 31, 2026 and 2025 is as follows:

We recognized income from discontinued operations, net of tax, of approximately $1.7 million during the three months ended March 31, 2026, compared to loss from discontinued operations, net of tax, of approximately $0.7 million during the three months ended March 31, 2025, representing an increase of approximately $2.4 million. The income from discontinued operations of approximately $1.7 million for the three months ended March 31, 2026 is comprised of a gain on the sale of the ABL Chicago business of approximately $2.6 million, offset by an operational loss of approximately $0.8 million. The operational loss includes an approximately $0.8 million loss from business activities for the 43-day period ended February 12, 2026.

For the Nine Months Ended March 31, 2026 Compared to the Nine Months Ended March 31, 2025

The following table summarizes our consolidated results of operations and percentages of certain items in relation to total revenues for the nine months ended March 31, 2026 and 2025, and provides information regarding the dollar and percentage increase or (decrease) during such periods. The operating results in any historical period are not necessarily indicative of the results that may be expected for any future period.

Revenues

Revenue from the distribution of pharmaceutical products increased by approximately $4.4 million, or 614.1%, from approximately $0.7 million for the nine months ended March 31, 2025 to approximately $5.1 million for the nine months ended March 31, 2026. This increase was primarily attributable to the continued expansion of our pharmaceutical distribution business, which commenced operations in December 2024, and reflects the early-stage growth trajectory of this segment.

The growth in revenue was mainly driven by increased sales of infusion products, which accounted for approximately 93% and 95% of total pharmaceutical distribution revenue for the nine months ended March 31, 2026 and 2025, respectively. Revenue from infusion products increased by approximately $4.1 million period over period, reflecting both higher sales volume and broader market penetration.

A key contributor to this increase was the expansion of the Company’s customer base, with the number of active customers increasing from 8 to 14 during the period. This growth was supported by the Company’s dedicated sales team, which has focused on developing new customer relationships, enhancing engagement with existing customers, and participating in hospital and distributor procurement processes. As a result, the Company experienced increased order volumes and improved sales coverage across its target market.

Cost of Revenues and Gross Profit

Cost of revenue from the distribution of pharmaceutical products increased by approximately $2.1 million, or 868.4%, from approximately $0.2 million for the nine months ended March 31, 2025 to approximately $2.3 million for the nine months ended March 31, 2026. The increase was primarily driven by higher sales volume, consistent with the significant growth in revenue during the period as the Company continued to expand its pharmaceutical distribution operations.

Despite the increase in revenue, gross profit margin decreased from approximately 66.3% for the nine months ended March 31, 2025 to approximately 54.3% for the nine months ended March 31, 2026. The decline in gross margin was primarily attributable to changes in supplier incentives, specifically a reduction in purchase rebates offered by suppliers in the current period compared to the prior-year period. In the prior-year period, higher proportion of purchase rebates received from suppliers, which contributed to an elevated gross margin during the initial phase of operations.

Selling Expenses

Our selling expenses amounted to approximately $1.8 million for the nine months ended March 31, 2026, compared to approximately $0.2 million for the same period in 2025. The increase was primarily attributable to the additional salaries for our sales team of approximately $0.4 million, system-related marketing expenses of approximately $0.3 million, and increased entertainment expense of approximately $0.1 million and advertising expense of approximately $0.7 million incurred in connection with the launch of our pharmaceutical distribution service.

General and Administrative Expenses

Our general and administrative expenses increased by approximately $2.1 million, or 115.3%, from approximately $1.8 million for the nine months ended March 31, 2025, to approximately $3.9 million for the nine months ended March 31, 2026. The increase was mainly due to an increase in our professional expense.

Our professional fees increased by approximately $2.0 million, or 261.6%, from approximately $0.8 million for the nine months ended March 31, 2025, to approximately $2.7 million for the nine months ended March 31, 2026. Our professional fee represented 70.0% and 41.7% of our total general and administrative expenses for the nine months ended March 31, 2026 and 2025, respectively. The increase was primarily due to advisory and consulting expenses for strategic planning initiatives. These costs included external support for market assessments, financial and operational due diligence, and the development of long-term strategic plans to guide future growth.

Other Income, net

Our other income, net, increased by $187,185, or 1,118.7%, from $16,733 for the nine months ended March 31, 2025, to $203,918 for the nine months ended March 31, 2026. The increase was primarily due to an increase in interest income in connection with a third-party loan.

Interest Expenses

Our interest expenses increased by $108,814, or 268.4%, from $40,541 for the nine months ended March 31, 2025, to $149,355 for the nine months ended March 31, 2026. The increase in interest expense was mainly due to interest expense in connection with the convertible note.

Loss Before Income Taxes

We had a net loss before income taxes of approximately $3.3 million and approximately $1.5 million for the nine months ended March 31, 2026 and 2025, respectively. We were in a loss position before income taxes for the nine months ended March 31, 2026, primarily attributable to the net effects of: (i) the rise in operating expenses, which was partly offset by an increase in gross profit due to the new business segment for the nine months ended March 31, 2026 as mentioned above.

Income Tax Expense

We had income tax expenses of $110,632 and $18,594 for the nine months ended March 31, 2026 and 2025, respectively. A current income tax provision of $189,487 was recognized for a subsidiary with net assessable income while no current income tax provision was recognized for subsidiaries in net operating loss for the nine months ended March 31, 2026.

Based on management’s assessment of future taxable income, the Company determined that it was no longer more likely than not that sufficient future taxable income would be available to utilize the deferred tax benefits. As a result, the Company recorded a full valuation allowance against its DTAs and did not recognize any deferred tax assets. We recognized a deferred income tax credit of $50,563 due to credit loss allowance and amortization of intangible assets, and a deferred income tax credit of $28,292 due to expected sales return, resulting in a net income tax credit of $78,855 for the nine months ended March 31, 2026.

A current income tax provision of $26,608 was recognized for a subsidiary with net assessable income while no current income tax provision was recognized for subsidiaries in net operating loss for the nine months ended March 31, 2025. We recognized a deferred income tax credit of $8,014 due to amortization of intangible assets, resulting in a net income tax expense of $18,594 for the nine months ended March 31, 2025.

Net loss from continuing operation

As a result of the foregoing, we had a net loss of approximately $3.5 million and approximately $1.5 million for the nine months ended March 31, 2026 and 2025, respectively.

Result of Discontinued Operation

Net income (loss) from discontinued operations for the nine months ended March 31, 2026 and 2025 is as follows:

We recognized income from discontinued operations, net of tax, of approximately $0.7 million during the nine months ended March 31, 2026, compared to loss from discontinued operations, net of tax, of approximately $2.8 million during the nine months ended March 31, 2025, representing an increase of approximately $3.5 million. The income from discontinued operations, net of tax, for the nine months ended March 31, 2026 is comprised of a gain on the sale of the ABL Chicago business of approximately $2.6 million, offset by an operational loss of approximately $1.9 million. The operational loss includes an approximately $1.8 million loss from business activities for the 226-day period ended February 12, 2026.

Liquidity and Capital Resources

The following table summarizes our total current assets, current liabilities and working capital from continuing operations as of March 31, 2026 and June 30, 2025, respectively:

As of March 31, 2026, we had a cash balance of approximately $1.3 million. Our current assets were approximately $17.0 million, and our current liabilities were approximately $4.0 million, resulting in a current ratio of 4.3 and working capital surplus of approximately $13.1 million. Total stockholders’ equity as of March 31, 2026 was approximately $13.6 million.

As of March 31, 2026 and June 30, 2025, we had accounts receivable net of allowance of approximately $1.9 million and approximately $1.4 million, respectively. We periodically review our accounts receivable and allowance level to ensure our methodology for determining allowances is reasonable and to accrue additional allowances if necessary. For accounts receivable as of March 31, 2026 and June 30, 2025, we provided a credit loss allowance of $171,180 and $33,039, respectively.

As of March 31, 2026, our liquidity position is significantly influenced by a material loan receivable from an unaffiliated third party. The gross principal balance is governed by a loan agreement dated July 3, 2025, bearing interest at 4.35% per annum with a maturity date of July 3, 2026.

As of March 31, 2026, the carrying value of this receivable was approximately $8.7 million, net of an allowance for credit losses of approximately $0.35 million. This net balance represents 49.0% of our total current assets, constituting a significant concentration of credit risk.

Our ability to fund future operating activities and working capital requirements is partially dependent on the timely collection of this principal and interest. While we continue to monitor the counterparty’s creditworthiness and currently believe they maintain the financial capacity to meet their obligations, the recorded allowance reflects our estimate of expected credit losses under the CECL (Current Expected Credit Loss) model. Any material default or significant delay in payment by this third party could adversely impact our short-term liquidity and necessitate alternative financing. There can be no assurance that the balance will be collected in full in accordance with its contractual terms.

In assessing our liquidity, we monitor and analyze our cash on hand, our ability to generate sufficient revenues sources in the future, and our operating and capital expenditure commitments. Historically, we have funded our working capital needs primarily through operations, issuances of convertible debts, private placements, loans, initial public offerings and working capital loans from stockholders. Our working capital requirements are influenced by the efficiency of our operations, the volume and dollar value of our revenue contracts, the progress in the execution of customer contracts, and the timing of accounts receivable collections.

Cash Flows

The following table sets forth a summary of our cash flows from continuing operations for the periods indicated:

Operating Activities - continuing operations

Net cash used in operating activities was $3,041,062 in the nine months ended March 31, 2026, primarily reflecting a net loss from continuing operations of $3,452,877, adjusted for non-cash items of $2,626,615 and changes in working capital deficits of $2,214,800. The non-cash items primarily included $87,881 straight-line lease expense related to operating leases, $2,089,460 stock-based compensation for consulting expenses, $37,919 depreciation, $109,753 amortization of discount and bond issuance cost, $64,112 amortization of intangible assets, $177,765 interest income from a third party loan, $350,000 from provision of allowance for expected credit loss on loan receivable, $133,772 from provision of allowance for expected credit loss on accounts receivable and a decrease of $78,855 from deferred tax liabilities. The adjustments for changes in working capital mainly included an increase of $517,421 in accounts receivable due to an increase of revenues near period end, an increase of $2,926,217 in prepayment, deposit and other receivable and a payment of $70,171 for operating lease liabilities, partially offset by an increase of $38,079 in accounts payable, a decrease of $65,152 in note receivable, an increase of $162,204 in refund liabilities, an increase of $185,250 in tax payable, and an increase of $846,065 in accrued liabilities and other payables and a decrease in inventory of $74,510.

Net cash used in operating activities was $979,735 for the nine months ended March 31, 2025, including net loss from continuing operations of $1,529,602, adjusted for non-cash items for $109,895 and changes in working capital surplus of $439,972. The non-cash items primarily included $51,805 straight-line lease expense of operating leases, $5,152 depreciation expense, $32,056 amortization of intangible asset, $40,541 interest expense of convertible notes, $11,645 uncollected interest income from a third-party loan and a decrease of $8,014 from deferred tax asset. The adjustments for changes in working capital mainly included an increase of $807,540 in accrued expense and other payable, an increase of $299,114 in accounts payable and an increase of $42,168 in contract liabilities, partially offset by an increase of $337,288 in accounts receivable, an increase of $216,538 in inventories, an increase of $100,923 in prepayment, deposit and other receivable and a decrease of $80,709 in operating lease liabilities.

The $2,061,327 increase in cash used in operating activities for the nine months ended March 31, 2026, compared to the prior year, was primarily due to an increase in advance deposits of $2,825,294 to suppliers.

Investing Activities - continuing operations

Net cash used in investing activities was $8,497,511 and $1,147,422 for the nine months ended March 31, 2026 and 2025, respectively. Net cash used in investing activities for the nine months ended March 31, 2026, was primarily attributable to loans of $8,497,511 to a third party. The cash used in the same period of last year was primarily attributable to net cash payments of $552,721 for intangible assets through the acquisition of 100% equity interest in Hupan Pharmaceutical and a loan of $561,901 to a third party.

Financing Activities - continuing operations

Net cash provided by financing activities was $7,770,045 and $5,790,999 for the nine months ended March 31, 2026 and 2025. The increase was primarily due to proceeds from private placement of financing activities compared with the prior period. During the nine months ended March 31, 2026, we generated cash inflows from private placements of $8,236,231, which were partially offset by $432,948 in principal repayments of convertible debt. During the nine months ended March 31, 2025, we had due to the net proceeds of $5,351,281 from the offering and net proceeds of $755,512 from issuance of convertible note and advances of $276,365 from Hupan Pharmaceutical prior to acquisition, partly offset by repayment of $592,159 to shareholders, during the nine months ended March 31, 2025.

Cash Flows from Discontinued Operations

Cash flows from discontinued operations are associated with the disposal of ABL Chicago. Cash used in operations of approximately $1.4 million and approximately $1.2 million for nine months ended March 31, 2026 and 2025. Net loss of ABL Chicago were the primary components of operating cash flows for nine months ended March 31, 2026 and 2025. Cash used in investing activities of approximately $0.1 million for nine months ended March 31, 2025, which is related to capital expenditures. Cash provided by financing activities of approximately $1.3 million for nine months ended March 31, 2026 due to loan borrowing. Cash used in financing activities of approximately $1.0 million for nine months ended March 31, 2025 due to advances to related parties. See Note 15. “Discontinued Operations” to our condensed consolidated financial statements for additional information.

Capital Expenditure

Our capital expenditures are incurred primarily in connection with the purchase of fixed assets, including machinery and equipment, furniture and fixtures, leasehold improvement and vehicles. Our capital expenditures amounted to nil and $32,800 for the nine months ended March 31, 2026 and 2025, respectively.

We expect that our capital expenditures will increase in the future as our business continues to develop and expand. We intend to fund our future capital expenditures with our existing cash balance, proceeds of loans and issuance of convertible debts and private placement offering.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect our reported amounts of assets, liabilities, revenue, costs and expenses, and any related disclosures. Actual results could materially differ from those estimates. Critical accounting policy is both material to the presentation of financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on financial condition or results of operations. Accounting estimates and assumptions may become critical when they are material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on financial condition or operating performance.

Critical accounting estimates are estimates that require us to make assumptions about matters that were highly uncertain at the time the accounting estimate were made and if different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely occur from period to period, have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. The management of the Company believes the following critical accounting estimate is the most significantly affected by judgments and assumptions used in the preparation of our consolidated financial statements.

Common Stock Warrants Instruments

The Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the instruments’ specific terms and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the instruments are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the instruments meet all of the requirements for equity classification under ASC 815, including whether the instruments are indexed to the Company’s own ordinary shares and whether the instrument holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the instruments are outstanding. The Company determined, upon further review of the warrant agreement and the convertible debt agreement, that the common stock warrants are qualified for equity accounting treatment. The fair value of equity-classified warrants is estimated as of the date of issuance using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model includes various assumptions, including the fair market value of our common stock, expected life of stock options, the expected volatility and the expected risk-free interest rate, among others. These assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside our control.

Allowance of expected credit losses on loan receivable from a third party

The Company accounts for its allowance for credit losses on loan receivables in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 326, Financial Instruments—Credit Losses (“ASC 326”). The Company assesses the credit risk of its third-party loan receivables at each reporting date to ensure that the allowance reflects management’s current estimate of expected credit losses over the contractual life of the instrument.

The measurement of the allowance for expected credit losses is primarily determined using a Probability of Default (“PD”) and Loss Given Default (“LGD”) methodology. This assessment considers whether the borrower meets its contractual obligations and involves an evaluation of the borrower’s historical performance, current financial condition, and the value of any underlying collateral.

The PD × LGD model includes various assumptions, including the selection of forward-looking macroeconomic forecasts (such as interest rate environments), the borrower’s credit rating, and estimated recovery rates. This assessment, which requires the use of significant professional judgment, is conducted at the time of loan inception and as of each subsequent quarterly period end date while the loan is outstanding. These assumptions reflect management’s best estimates based on current and supportable information, but they involve inherent uncertainties based on economic and market conditions generally outside of the Company’s control. Changes in these estimates are recognized in the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) in the period in which they occur.

Refer to Notes 2 to the condensed consolidated financial statements included in this report for further discussion of our significant accounting policies and the effect on our condensed consolidated financial statements.

Recent Accounting Pronouncements

The Company considers the applicability and impact of all accounting standards updates (“ASUs”). Management periodically reviews new accounting standards that are issued, see Note 2 - Summary Of Significant Accounting Policies in the note of financial statement.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are not required to provide the information otherwise required under this item.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.

Based upon this evaluation, our management concluded that as of March 31, 2026, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

• We are lacking adequate segregation of duties and effective risk assessment; and
• We are lacking sufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both the U.S. GAAP, and SEC guidelines.

A material weakness is a deficiency, or a combination of deficiencies, within the meaning of PCAOB Auditing Standard AS2201, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We plan to address the weaknesses identified above by implementing the following measures:

(i) Continuously hiring additional accounting staffs with comprehensive knowledge of U.S. GAAP and SEC reporting requirements;

(ii) Designing and implementing formal procedures and controls supporting the Company’s period-end financial reporting process, such as controls over the preparation and review of account reconciliations and disclosures in the consolidated financial statements; and

(iii) Ameliorating our internal audit to assist with assessment of Sarbanes-Oxley compliance requirements and improvement of internal controls related to financial reporting.

Changes in Internal Control over Financial Reporting

During the most recent fiscal quarter, there has not been any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are not required to provide the information otherwise required under this item.