10-Q/A: Hong Yuan Amends 10-Q, Clarifies Non-Shell Status

Hong Yuan Holding Group filed an amended quarterly report to correct its shell company designation, highlighting recent revenue generation and operational activities.

Summary

• The company filed an Amendment No. 1 to its Quarterly Report on Form 10-Q for the period ended March 31, 2025, originally filed on July 31, 2025.
• The primary purpose of the amendment was to change the designation of a shell corporation on the cover page from 'Yes' to 'No', as the company generated revenues and operating expenses, in addition to assets other than cash and cash equivalents.
• For the three months ended March 31, 2025, the company reported revenue of $241,065, a significant increase from nil in the same period last year.
• Net income for the three months ended March 31, 2025, was $37,357, a substantial improvement from a net loss of $46,554 in the prior year period.
• Operating expenses increased by 64.5% to $76,580 for the three months ended March 31, 2025, primarily due to higher general and administrative expenses and professional fees.
• As of March 31, 2025, the company had a cash balance of $33,300, down from $46,291 at December 31, 2024.
• The company continues to face a significant accumulated deficit of $97,746,780 and a net working capital deficit of $168,763 as of March 31, 2025.
• Management believes the company will continue to incur losses and negative cash flows and is dependent on additional debt and equity financing to fund operations.
• Auditors have included a going concern qualification in their report, citing substantial doubt about the company's ability to continue as a going concern.
• In June 2025, the company changed its business model, with Rongcheng relinquishing 55% ownership in Xuchang but continuing to fund store openings, with investment funds to be recovered as future loans from store profits.

Sentiment

Score: 4

Explanation: While the company achieved net income and revenue for the first time, which is a positive step, it remains a development stage company with a significant accumulated deficit, working capital deficit, and a going concern warning from auditors. The internal control weakness and reliance on the majority shareholder for future funding without a formal agreement also weigh heavily on the sentiment. The business model change for Xuchang adds an element of uncertainty.

Positives

• Generated revenue of $241,065 for the three months ended March 31, 2025, compared to nil in the same period last year, indicating the commencement of significant operations.
• Achieved a net income of $37,357 for the three months ended March 31, 2025, a substantial improvement from a net loss of $46,554 in the prior year period.
• Reported a gross profit of $116,718 for the three months ended March 31, 2025, demonstrating initial operational efficiency from its consolidated Chinese VIEs.
• The correction of the shell company designation clarifies the company's active operational status, potentially improving its perception among investors and regulators.
• The majority shareholder, Xudong Li, has historically provided funding and would favorably entertain funding corporate expenses for approximately 24 months through interest-free loans.

Negatives

• Cash and cash equivalents decreased to $33,300 as of March 31, 2025, from $46,291 at December 31, 2024.
• Net cash used in operating activities was $13,234 for the three months ended March 31, 2025.
• The company has a significant accumulated deficit of $97,746,780 and a net working capital deficit of $168,763 as of March 31, 2025.
• Total stockholders deficit was $(130,826) as of March 31, 2025.
• Operating expenses increased by 64.5% to $76,580 for the three months ended March 31, 2025, primarily due to increases in general and administrative expenses and professional fees.
• Auditors have included a going concern qualification in their report, raising substantial doubt about the company's ability to continue operations.
• Disclosure controls and procedures were not effective as of March 31, 2025, due to a weakness in the design of internal control over financial reporting.
• There is no written agreement with Mr. Xudong, the CEO and principal shareholder, to advance further funds for future operating expenses, providing no assurance that such funds will be forthcoming.
• The company is still considered a development stage enterprise, with insignificant revenues since inception prior to the recent consolidation of VIEs.
• A business model change in June 2025 involves Rongcheng relinquishing 55% ownership in Xuchang, but funding stores as loans, which could introduce new operational and financial complexities.

Risks

• Substantial doubt exists about the company's ability to continue as a going concern due to insufficient revenues to cover operating costs, dependence on debt/equity financing, an accumulated deficit of $97,746,780, a working capital deficit of $168,763, and a stockholders deficit of $130,826 as of March 31, 2025.
• There is no assurance that additional equity capital or debt financing will be available when needed or on terms acceptable to the company.
• Inadequate funds may require delaying or terminating certain programs, which would have a material adverse effect on the company.
• A going concern qualification from auditors may make it more difficult for the company to raise funds when needed.
• Disclosure controls and procedures were not effective as of March 31, 2025, due to a weakness in the design of internal control over financial reporting, posing risks to financial reporting reliability.
• As a development stage company, there is no assurance that the company will ever establish profitable operations.
• Heavy reliance on the majority shareholder for funding, with no formal written agreement for future advances, creates funding uncertainty.
• The recent business model change for Xuchang, where Rongcheng relinquishes ownership but funds stores as loans, could introduce new operational and financial risks related to loan recovery and management of these new arrangements.

Future Outlook

Management expects to continue incurring losses and negative cash flows from operating activities for the foreseeable future and will need additional equity or debt financing to sustain operations until profitability is achieved, if ever. Efforts are underway to raise additional funding, but there is no assurance that such capital will be available or that the company will be successful in its business development. The CEO and principal shareholder has indicated a willingness to provide interest-free loans for approximately 24 months, but no formal written agreement exists for these future advances.

Management Comments

• Management is making efforts to raise additional funding until a registration statement relating to an equity funding facility is in effect.
• While management believes it will be successful in its capital formation and planned operating activities, there can be no assurance that the Company will be able to raise additional equity capital, or be successful in the development and commercialization of the products it develops or initiates collaboration agreements thereon.
• Management believes the Company will continue to incur losses and negative cash flows from operating activities for the foreseeable future and will need additional equity or debt financing to sustain its operations until it can achieve profitability and positive cash flows, if ever.
• Mr. Xudong, the CEO and principal shareholder of the Company, would favorably entertain funding, through loans, corporate expenses for approximately 24 months.
• We have no written agreement with Mr. Xudong to advance any further funds for future operating expense, therefore there is no assurance that such funds from Mr. Xudong will be forth coming, if required.
• Our disclosure controls and procedures were not effective as a result of a weakness in the design of internal control over financial reporting.

Industry Context

Hong Yuan Holding Group, through its consolidated Chinese Variable Interest Entities (VIEs), operates in the supply chain management sector, focusing on wholesale and internet sales of fast-moving consumer goods (FMCG) such as food, daily necessities, and electronic products in China. This positions the company in a highly competitive and dynamic market, influenced by e-commerce growth and evolving consumer preferences. The use of a VIE structure is a common strategy for foreign-listed companies to navigate regulatory restrictions in certain Chinese industries. The recent business model change for Xuchang, involving a shift from majority ownership to funding stores as loans, suggests an adaptation to market conditions or a strategic move towards a more asset-light or partnership-based expansion within the retail/distribution landscape.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results to assess against global or regional industry benchmarks in supply chain management or FMCG distribution.
• As a development stage company with recent revenue generation, direct comparison to established industry leaders would be premature and likely unfavorable given its current scale and financial position.
• The company's significant accumulated deficit of $97,746,780 and ongoing going concern warning indicate that it is far from meeting typical profitability, liquidity, or solvency standards for mature companies in its sector.
• The effectiveness of its specific supply chain model and internet sales strategy in the highly competitive Chinese market cannot be adequately assessed without more detailed operational data, market share information, and competitive analysis.

Corporate Governance

Legal Proceedings

• The company is not a party to or otherwise involved in any material legal proceedings.
• In the ordinary course of business, the company is from time to time involved in various pending or threatened legal actions, but management does not expect them to have a material adverse effect on its financial position or results of operations.

Related Party Transactions

• During the three months ended March 31, 2025, the current majority shareholder advanced $2,461 to the company as working capital.
• As of March 31, 2025, the company owed its current majority shareholder $254,349 (up from $251,887 at December 31, 2024), which includes $64,103 for the acquisition of Hongyuan HK.
• These advances from the majority shareholder are non-interest bearing and are due on demand.
• The company acquired 100% equity interest of Hongyuan HK from Xudong Li (the majority shareholder) for HK$500,000 (approximately $64,103).
• Xudong Li, the majority shareholder of the company, controls 95% of Fengcuiyuan, the Variable Interest Entity (VIE) consolidated by Hongyuan HK.

Stakeholder Impact

• Shareholders face potential dilution from future capital raises and significant risks to value due to the going concern warning and internal control weakness, despite nascent positive operational results.
• Creditors face elevated risk due to the company's going concern status, substantial accumulated deficit, and reliance on related party debt.
• Employees' job security is directly impacted by the company's ability to continue as a going concern, though increased personnel expenses suggest some operational growth.
• Customers and suppliers in the supply chain management and consumer goods sectors may experience uncertainty regarding the company's long-term stability and ability to maintain reliable operations and relationships.

Next Steps

• Management plans to seek additional debt and/or equity financing to sustain operations.
• Efforts will continue to raise additional funding until a registration statement relating to an equity funding facility is in effect.
• Rongcheng will fund the opening of stores operated by Xuchang, with investment funds to be recovered as loans from future profits.

Key Dates

Recommendation

Despite reporting revenue and a net income for the first time, Hong Yuan Holding Group faces severe financial distress, evidenced by a substantial accumulated deficit, working capital deficit, and a going concern qualification from its auditors. The company's reliance on its majority shareholder for future funding, without a formal agreement, introduces significant uncertainty. Furthermore, the identified weakness in internal control over financial reporting raises serious governance concerns. While the correction of the shell company designation is a positive administrative step, it does not outweigh the fundamental financial and operational risks. A seasoned investor would view the company as highly speculative with a high probability of further capital raises that could dilute existing shareholders, and significant uncertainty regarding its long-term viability. The recent business model change for a subsidiary also adds complexity and potential risk.

Keywords

Supply Chain Management, Fast-Moving Consumer Goods, China Market, SEC Filing, Quarterly Report, Going Concern, Financial Performance, Internal Controls, Related Party Transactions, Development Stage Company, VIE Structure