{"url_path":"/sec/lud/10-k/2026/item-5","section_key":"item-5","section_title":"Item 5 **","topic":"sec","document":{"doc_type":"20-F","doc_date":"2026-05-15","source_url":"https://www.sec.gov/Archives/edgar/data/1984124/0001213900-26-057512-index.html","accession_number":"0001213900-26-057512","cik":"0001984124","ticker":"LUD","issuer_name":"Luda Technology Group Ltd","edgar_url":"https://www.sec.gov/Archives/edgar/data/1984124/0001213900-26-057512-index.html","primary_entity_key":"0001984124","primary_entity_name":"Luda Technology Group Ltd"},"word_count":5644,"has_tables":true,"body_markdown":"**ITEM 5.**\n**OPERATING AND FINANCIAL REVIEW AND PROSPECTS**\n\n \n\n*You should read the following discussion and\nanalysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related\nnotes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current\nexpectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking\nstatements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors”\nor in other parts of this annual report on Form 20-F.*\n\n* *\n\n**5.A. Operating Results**\n\n** **\n\n**Overview**\n\n \n\nWe are a manufacturer and trader of stainless\nsteel and carbon steel flanges and fittings products. Our history began with Luda HK which was incorporated in Hong Kong in 2004 and is\nprincipally engaged in the trading of steel flanges and fittings. In 2005, the Company’s business expanded further upstream when\nLuda PRC was set up to commence the manufacturing of flanges and fittings with self-owned factory in China. We have established an operation\nhistory of over 20 years. We are principally engaged in (i) the manufacture and sale of stainless steel and carbon steel flanges and fittings\nproducts; and (ii) trading of steel pipes, valves, and other steel tubing products. We are headquartered in Hong Kong with manufacturing\nbase in Taian City, Shandong Province of the PRC. Our sales network comprises customers from China, South America, Australia, Europe,\nAsia (excluding China) and North America and our customers comprise manufacturers and traders from the chemical, petrochemical, maritime\nand manufacturing industries.\n\n \n\nFor the years ended December 31, 2025 and 2024, total revenue was approximately\n$33.5 million and $44.9 million, respectively. Our gross profit and net income were approximately $5.9 million and $0.6 million, respectively,\nfor the year ended December 31, 2025 (“FY2025”), as compared to our gross profit and net loss of $11.4 million and $0.4 million,\nrespectively, for the year ended December 31, 2024 (“FY2024”). For the year ended December 31, 2023 (“FY2023”),\nour gross profit and net income of $10.9 million and $3.0 million, respectively.\n\n** **\n\n60\n\n** **\n\n**Our Operating Segments**\n\n \n\nWe organize and report our business in two operating segments, being\n(i) Hong Kong Trading; and (ii) PRC Manufacturing. Hong Kong Trading mainly represents trading of flanges and fittings products sourced\nfrom suppliers and this operating segment is conducted through Luda HK. PRC Manufacturing is the largest business segment of the Company\nthat contributes approximately 73.3%, 83.8% and 89.4% of the total revenue in FY2025, FY2024 and FY2023, respectively and represents trading\nand manufacturing of our inhouse flanges and fittings products. This operating segment is conducted through Luda PRC. We present segment\ninformation after elimination of inter-company transactions. In general, revenue, cost of revenue and operating expenses are directly\nattributable, or are allocated, to each segment. Since Luda HK and Luda PRC are two separate operating entities, the relevant revenue,\ncosts and expenses incurred by the respective entities can be allocated to the corresponding operating segments directly.\n\n \n\n  \nFor the years ended\nDecember 31, \n\n  \n2025  \n2024  \n2023 \n\nRevenue \n   \n   \n  \n\n— Hong Kong Trading \n$8,961,686  \n$7,282,272  \n$5,461,367 \n\n— PRC Manufacturing \n 25,080,099  \n 38,102,258  \n 46,155,510 \n\nElimination of internal transaction \n (506,434) \n (521,100) \n (188,823)\n\n**Total revenue** \n**$****33,535,351**  \n$44,863,430  \n$51,428,054 \n\n  \n    \n    \n   \n\nCost of sales \n    \n    \n   \n\n— Hong Kong Trading \n$6,978,182  \n$5,655,693  \n$4,341,978 \n\n— PRC Manufacturing \n 21,224,333  \n 28,323,614  \n 36,418,495 \n\nElimination of internal transaction \n (586,977) \n (521,100) \n (227,396)\n\n**Total cost of sales** \n**$****27,615,538**  \n$33,458,207  \n$40,533,077 \n\n  \n    \n    \n   \n\nGross Profit \n    \n    \n   \n\n— Hong Kong Trading \n$1,983,504  \n$1,626,579  \n$1,119,389 \n\n— PRC Manufacturing \n 3,855,766  \n 9,778,644  \n 9,737,015 \n\nElimination of internal transaction \n 80,543  \n -  \n 38,573 \n\n**Total gross profit** \n**$****5,919,813**  \n$11,405,223  \n$10,894,977 \n\n  \n    \n    \n   \n\nSelling Expenses \n    \n    \n   \n\n— Hong Kong Trading \n$661,262  \n$417,823  \n$190,198 \n\n— PRC Manufacturing \n 1,144,930  \n 5,924,928  \n 2,519,178 \n\n**Total selling expense** \n**$****1,806,192**  \n$6,342,751  \n$2,709,376 \n\n  \n    \n    \n   \n\nGeneral and Administrative Expenses \n    \n    \n   \n\n— Hong Kong Trading \n$2,374,450  \n$2,268,421  \n$1,756,780 \n\n— PRC Manufacturing \n 1,265,653  \n 954,538  \n 1,193,408 \n\nElimination of internal transaction \n 80,543  \n -  \n - \n\n**Total general and administrative expense** \n**$****3,720,646**  \n$3,222,959  \n$2,950,188 \n\n  \n    \n    \n   \n\nSegment net income (loss): \n    \n    \n   \n\n— Hong Kong Trading \n$2,445,459  \n$5,059,493  \n$2,780,297 \n\n— PRC Manufacturing \n 495,604  \n 1,379,362  \n 3,995,034 \n\nElimination of internal transaction \n (2,384,234) \n (6,799,871) \n (3,742,754)\n\n**Total segment net income (loss)** \n**$****556,829**  \n$(361,016) \n$3,032,577 \n\n \n\n  \nAs of December 31, \n\n  \n2025  \n2024 \n\nSegment assets \n    \n   \n\n— Hong Kong Trading \n$30,803,643  \n$17,112,819 \n\n— PRC Manufacturing \n 35,824,110  \n 36,286,620 \n\nElimination of internal transaction \n (17,502,656) \n (14,093,614)\n\nTotal segment assets \n$49,125,097  \n$39,305,825 \n\n \n\nThe following table summarized the Company’s\nlong-lived assets, including property, plant and equipment, net, intangible assets, net, and operating lease right-of-use assets, net\nby geographical regions:\n\n \n\n  \nAs of December 31, \n\nLong-lived assets \n2025  \n2024 \n\n— HK \n$524,634  \n$56,637 \n\n— PRC \n 5,650,058  \n 5,768,949 \n\nTotal long-lived assets \n$6,174,692  \n$5,825,586 \n\n \n\n61\n\n \n\n**Key factors affecting operating results**\n\n \n\nWe believe the following key factors may affect\nour results of operations:\n\n \n\n**Economic conditions in the PRC and Hong\nKong**\n\n \n\nA substantial part of our operations is located\nin the PRC and Hong Kong. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant\ndegree by political, economic and social conditions in China and Hong Kong generally and by continued economic growth in the PRC and Hong\nKong. Economy in China is sensitive to global economic conditions. Any prolonged slowdown in the global or Chinese economy may affect\npotential customers’ confidence in financial market as a whole and have a negative impact on our business, results of operations\nand financial condition.\n\n \n\n**Trade war or restrictions**\n\n \n\nA significant portion of our business originates\nfrom customers in the PRC and therefore depends on the level of trade activities in China. Therefore, we are subject to risks related\nto the changes in trade policies, tariff regulations, embargoes, or other trade restrictions adverse to our customers’ business.\nTariffs restrictions imposed by the U.S. on China exports intensified during 2019 which resulted in a negative impact to the international\ntrading activities globally and have attributed to the overall decrease in the cargo shipment volume of Hong Kong. Although an agreement\nhas been entered into between the U.S. and China on January 15, 2020, to suspend certain planned tariff, our results of operation may\nbe adversely affected if the trade war or restrictions further intensify, whether in the form of embargo, tariff, or otherwise, and may\nfurther affect the relationship between the U.S. and China or more countries in the future.\n\n** **\n\n**Market demand and competition**\n\n** **\n\nThe steel forging industry is highly competitive\nand fragmented. The ability for us to maintain competitiveness in the market is critical to for our business development. It is important\nfor us to maintain competitiveness in terms of pricing and quality, variety of products, product certifications and lead time to delivery.\n\n \n\n**Market supplies and cost of sales**\n\n** **\n\nOur cost of sales includes cost of raw materials,\nlabor cost, depreciation, transportation, utilities and other costs which directly affects our profitability. Supplies and prices of the\nraw materials can be affected by varies factors, such as transportation, seasonal fluctuations, market demand, politics, and economics\nfactors. Unstable or reduced supply of these raw materials will increase our procurement costs and if we are not able to increase the\nsales prices to cover the increased costs, our profitability may be adversely affected.\n\n \n\n**Relationship with customers**\n\n** **\n\nA significant portion of our revenue was derived from recurring customers\nand our sales to the top 5 customers accounted for approximately 49.9%, 59.7% and 59.5% of our total revenue for FY2025, FY2024 and FY2023,\nrespectively. Hence, our future growth depends on our ability to retain current customers and expand our customer base. If we are unable\nto retain and expand our client base, or any of the major customers substantially reduces the purchase orders, our business operation\nand financial performance would be adversely affected.\n\n \n\nThe above does not list all the material risk\nfactors that may affect our results of operations. The above-mentioned risks and others are discussed in more detail in the section titled\n“3.D. Risk Factors”.\n\n \n\n62\n\n \n\n**Results of Operations**\n\n**Comparison of FY2025 and FY2024**\n\n** **\n\nThe following table sets forth the consolidated results of our operations\nfor FY2025 and 2024, respectively:\n\n \n\n  \nFor the years ended\nDecember 31, \n\n  \n2025  \n2024 \n\nRevenues \n$33,535,351  \n$44,863,430 \n\nCost of sales \n (27,615,538) \n (33,458,207)\n\nGross profit \n 5,919,813  \n 11,405,223 \n\n  \n    \n   \n\nOperating expenses \n    \n   \n\nSelling expenses \n$(1,806,192) \n$(6,342,751)\n\nGeneral and administrative expenses \n (3,720,646) \n (3,222,959)\n\nResearch and development expenses \n (1,452,052) \n (1,383,605)\n\nTotal operating expenses \n (6,978,890) \n (10,949,315)\n\n(Loss) income from operations \n (1,059,077) \n 455,908 \n\n  \n    \n   \n\nOther income (expenses) \n    \n   \n\nInterest expenses \n (520,916) \n (556,156)\n\nOther income, net \n 2,571,217  \n 3,453 \n\nTotal other income (expenses), net \n$2,050,301  \n$(552,703)\n\n  \n    \n   \n\nIncome (loss) before income taxes \n$991,224  \n$(96,795)\n\nIncome taxes \n (434,395) \n (264,221)\n\nNet income (loss) \n$556,829  \n$(361,016)\n\n  \n    \n   \n\nOther comprehensive income (loss): \n    \n   \n\nForeign currency translation adjustment \n 605,921  \n (344,879)\n\nComprehensive income (loss) \n$1,162,750  \n$(705,895)\n\n \n\n63\n\n** **\n\n**Revenues**\n\n** **\n\nRevenues decreased by approximately $11.3 million or 25.3% from $44.9\nmillion in FY2024 to $33.5 million in FY2025, mainly because of the decrease in sales by Luda PRC to customers in the PRC market. Revenue\ngenerated by Luda PRC represented approximately 73.3% and 83.8% of the total revenue of the Company in FY2025 and FY2024, respectively.\n\n \n\nThe following table sets forth the breakdown of our revenue by geographic\nareas for FY2025 and FY2024, respectively:\n\n \n\n  \nFY2025  \nFY2024 \n\n  \nSales Amount  \nAs %  \nSales Amount  \nAs % \n\nRevenue by International Markets: \n(In USD)  \nof Sales  \n(In USD)  \nof Sales \n\nPeople’s Republic of China \n$22,397,641  \n 66.8% \n$36,863,348  \n 82.2%\n\nSouth America \n 6,708,846  \n 20.0% \n 4,100,965  \n 9.1%\n\nAsia excluding PRC \n 2,281,627  \n 6.8% \n 871,783  \n 1.9%\n\nAustralia \n 1,020,860  \n 3.0% \n 1,802,150  \n 4.0%\n\nNorth America \n 828,038  \n 2.5% \n 699,013  \n 1.6%\n\nEurope \n 219,957  \n 0.7% \n 368,772  \n 0.8%\n\nOthers \n 78,382  \n 0.2% \n 157,399  \n 0.4%\n\nTotal revenue \n$33,535,351  \n 100% \n$44,863,430  \n 100%\n\n \n\nAs shown in the table above, our sales were largely generated from\nthe PRC market. The net decrease in total revenue by approximately $11.3 million, or 25.3% in FY2025 was mainly attributable to decrease\nin sales in the PRC market.\n\n \n\nThe following table sets forth the breakdown of our revenue by category\nof products for FY2025 and FY2024, respectively:\n\n \n\n  \nFor the years ended December 31, \n\n  \n2025  \n2024 \n\n  \nUS$  \n%  \nUS$  \n% \n\nFittings \n 11,018,432  \n 32.9  \n 13,617,429  \n 30.4 \n\nFlanges \n 21,732,191  \n 64.8  \n 30,923,382  \n 68.9 \n\nOthers \n 784,728  \n 2.3  \n 322,619  \n 0.7 \n\nTotal \n 33,535,351  \n 100.0  \n 44,863,430  \n 100.0 \n\n \n\nThe following table sets forth the breakdown of our revenue stream\nfor FY2025 and FY2024, respectively:\n\n \n\n  \nFor the years ended December\n31, \n\n  \n2025  \n2024 \n\n  \nUS$  \n%  \nUS$  \n% \n\nSelf-manufactured production sales revenue \n 24,573,665  \n 73.3  \n 37,581,158  \n 83.8 \n\nTrading sales revenue \n 8,961,686  \n 26.7  \n 7,282,272  \n 16.2 \n\nTotal revenue \n 33,535,351  \n 100.0  \n 44,863,430  \n 100.0 \n\n \n\nThe drop in sales in FY2025 was largely driven by our inhouse products\nmanufactured in Luda PRC and sold in the PRC market.\n\n \n\n**Cost of sales**\n\n** **\n\nCost of sales consists primarily of cost of materials, direct labor\ncosts, and overhead costs. Our cost of sales decreased by approximately $5.8 million, or 17.5% in FY2025 as compared with FY2024. The\ndecrease was mainly attributable to a reduction in cost of materials, which was in line with the decline in revenue.\n\n \n\n64\n\n \n\n**Gross profit**\n\n \n\nOur total gross profit decreased by approximately $5.5 million, or\n48.1%, from approximately $11.4 million for FY2024 to $5.9 million for FY2025. The decrease in total gross profit was driven by the decline\nin revenue and gross profit margin. Our gross profit margin declined from approximately 25.4% in FY2024 to 17.7% in FY2025.\n\n \n\n**Total operating expenses**\n\n** **\n\n*Selling expenses*\n\n* *\n\nSelling expenses represented approximately 5.4% and 14.1% of total\nsales in FY2025 and FY2024, respectively. Selling expenses are mainly sales commissions for bidding consultation, freight expenses and\nentertainment expenses incurred by Luda PRC. The decrease in selling expenses by approximately $4.5 million in FY2025 was mainly attributable\nto decrease in sales consulting fee by $4.6 million.\n\n \n\n*General and administrative expenses*\n\n* *\n\nGeneral and administrative expenses are mainly management and office\nstaff salaries and employee benefits, expected credit loss, depreciation of office furniture and equipment, staff salaries and bonus,\ntransportation and entertainment, statutory audit fees, bank charges and other office expenses incurred. The increase in general and administrative\nexpenses by approximately $0.5 million in FY2025 was mainly attributable to increase in employee compensation and audit fee.\n\n \n\n*Research and Development expenses*\n\n* *\n\nOur research and development expenses mainly comprised materials used\nfor research and development, salaries for research employees, contract services and supplies attributable to the development of new products\nas well as improvements in existing processes. Our research and development expenses remained stable at approximately $1.5 million and\n$1.4 million in FY2025 and FY2024, respectively.\n\n \n\n**Other income (expenses), net**\n\n** **\n\n*Interest expenses*\n\n* *\n\nOur finance expense mainly comprised interest expense on bank and other\nborrowings. The interest expense remained stable at approximately $0.5 million and $0.6 million in FY2025 and FY2024, respectively.\n\n \n\n*Other income, net*\n\n \n\nOur other income, net amounted to $2.6 million and $3 thousand in FY2025\nand FY2024, respectively. The increase was mainly due to unrealized and realized fair value gain of short-term investments of approximately\n$0.9 million and $0.7 million, respectively, gain on extinguishment of consulting expenses payable of approximately $0.6 million and dividend\nincome from short-term investments of approximately $0.2 million in FY2025.\n\n \n\n**Income taxes**\n\n** **\n\nWe are subject to income tax on an entity basis\non profit arising in or derived from the jurisdiction in which the Company and its subsidiaries domicile or operate. Income tax expense\nincludes the Hong Kong income tax, PRC enterprise income tax, deferred tax and PRC dividend withholding tax.\n\n \n\nOur income tax expense amounted to $0.4 million\nand $0.3 million for FY2025 and FY2024, respectively. The increase was mainly due to income before income tax in FY2025 and net loss before\nincome tax in FY2024. The effective tax rate was 43.9% in the year ended December 31, 2025, while the effective tax rate for the year\nended December 31, 2024 was not applicable due to the pre-tax loss.\n\n \n\n**Net income (loss)**\n\n \n\nWe\nrecorded a net income of approximately $0.6 million for the year ended December 31, 2025, as compared to a net loss of $0.4 million for\nthe year ended December 31, 2024. Such increase in net income was due to the reasons as discussed above. Net profit margin increase from\napproximately -0.8% in FY2024 to 1.7% in FY2025.  \n\n \n\n65\n\n \n\n**Comparison of FY2024 and FY2023**\n\n** **\n\nThe following table sets forth the consolidated results of our operations\nfor FY2024 and FY2023, respectively:\n\n \n\n  \nFor the years ended\nDecember 31, \n\n  \n2024  \n2023 \n\nRevenues \n$44,863,430  \n$51,428,054 \n\nCost of sales \n (33,458,207) \n (40,533,077)\n\nGross profit \n 11,405,223  \n 10,894,977 \n\n  \n    \n   \n\nOperating expenses: \n    \n   \n\nSelling expenses \n$(6,342,751) \n$(2,709,376)\n\nGeneral and administrative expenses \n (3,222,959) \n (2,950,188)\n\nResearch and development expenses \n (1,383,605) \n (1,364,473)\n\nTotal operating expenses \n (10,949,315) \n (7,024,037)\n\nIncome from operations \n 455,908  \n 3,870,940 \n\n  \n    \n   \n\nOther income (expenses) \n    \n   \n\nInterest expenses \n (556,156) \n (406,692)\n\nOther income, net \n 3,453  \n 15,228 \n\nTotal other expenses, net \n$(552,703) \n$(391,464)\n\n  \n    \n   \n\n(Loss) income before taxes \n$(96,795) \n$3,479,476 \n\nIncome taxes \n (264,221) \n (446,899)\n\nNet (loss) income \n$(361,016) \n$3,032,577 \n\n  \n    \n   \n\nOther comprehensive income (loss): \n    \n   \n\nForeign currency translation adjustment \n (344,879) \n (566,358)\n\nComprehensive (loss) income \n$(705,895) \n$2,466,219 \n\n \n\n66\n\n \n\n**Revenues**\n\n \n\nRevenues decreased by approximately $6.6 million or 12.8% from $51.4\nmillion in FY2023 to $44.9 million in FY2024, mainly because of the decrease in sales by Luda PRC to customers in the PRC market. Revenues\ngenerated by Luda PRC represented approximately 83.8% and 89.4% of the total revenues of the Company in FY2024 and FY2023, respectively.\n\n \n\nThe following table sets forth the breakdown of our revenue by geographic\nareas for FY2024 and FY2023, respectively:\n\n \n\n \nFY2024  \nFY2023 \n\n \nSales Amount  \nAs %  \nSales Amount  \nAs % \n\nRevenues by International Markets: \n(In USD)  \nof Sales  \n(In USD)  \nof Sales \n\nPeople’s Republic of China \n$36,863,348  \n 82.2% \n$45,237,236  \n 88.0%\n\nSouth America \n 4,100,965  \n 9.1% \n 2,769,090  \n 5.3%\n\nAustralia \n 1,802,150  \n 4.0% \n 1,373,689  \n 2.7%\n\nAsia excluding PRC \n 871,783  \n 1.9% \n 888,563  \n 1.7%\n\nEurope \n 368,772  \n 0.8% \n 666,772  \n 1.3%\n\nNorth America \n 699,013  \n 1.6% \n 445,423  \n 0.9%\n\nOthers \n 157,399  \n 0.4% \n 47,281  \n 0.1%\n\nTotal revenues \n$44,863,430  \n 100% \n$51,428,054  \n 100%\n\n \n\nAs shown in the table above, our sales were largely generated from\nthe PRC market. The net decrease in total revenues by approximately $6.6 million, or 12.8% in FY2024 was mainly attributable to decrease\nin sales in the PRC market.\n\n \n\nThe following table sets forth the breakdown of\nour revenue by category of products for FY2024 and FY2023, respectively: \n\n \n\n  \nFor the years ended December 31, \n\n  \n2024  \n2023 \n\n  \nUS$  \n%  \nUS$  \n% \n\nFittings \n 13,617,429  \n 30.4  \n 9,784,712  \n 19.0 \n\nFlanges \n 30,923,382  \n 68.9  \n 40,773,687  \n 79.3 \n\nOthers \n 322,619  \n 0.7  \n 869,655  \n 1.7 \n\nTotal \n **44,863,430**  \n 100.0  \n 51,428,054  \n 100.0 \n\n \n\nThe following table sets forth the breakdown of\nour revenue stream for FY2024 and FY2023, respectively:\n\n \n\n  \nFor the years ended December\n31, \n\n  \n2024  \n2023 \n\n  \nUS$  \n%  \nUS$  \n% \n\nSelf-manufactured production sales revenue \n 37,581,158  \n 83.8  \n 45,966,687  \n 89.4 \n\nTrading sales revenue \n 7,282,272  \n 16.2  \n 5,461,367  \n 10.6 \n\nTotal revenue \n 44,863,430  \n 100.0  \n 51,428,054  \n 100.0 \n\n \n\nThe drop in sales in FY2024 was largely driven\nby our inhouse products manufactured in Luda PRC and sold in the PRC market.\n\n \n\n**Cost of sales**\n\n \n\nCost of sales consists primarily of cost of materials,\ndirect labor costs, overhead costs. Our cost of sales decreased by approximately $7.1 million, or 17.5% in FY2024 as compared with FY2023.\nThe decrease was mainly attributable to a reduction in cost of materials, which was in line with the decline in revenue.\n\n \n\n67\n\n** **\n\n**Gross profit**\n\n** **\n\nOur total gross profit increased by approximately $0.5 million, or\n4.7%, from approximately $10.9 million for FY2023 to $11.4 million for FY2024. The increase in total gross profit was driven by the improvement\nin our gross profit margin. Our gross profit margin improved from approximately 21.2% in FY2023 to 25.4% in FY2024.\n\n \n\n**Total operating expenses**\n\n** **\n\n*Selling expenses*\n\n* *\n\nSelling expenses represented approximately 14.1% and 5.3% of total\nsales in FY2024 and FY2023, respectively. Selling expenses are mainly sales commissions for bidding consultation, freight expenses and\nentertainment expenses incurred by Luda PRC. The increase in selling expenses by approximately $3.6 million in FY2024 was mainly attributable\nto increase in sales consulting fee by $3.5 million.\n\n \n\n*General and administrative expenses*\n\n* *\n\nGeneral and administrative expenses are mainly management and office\nstaff salaries and employee benefits, expected credit loss, depreciation of office furniture and equipment, staff salaries and bonus,\ntransportation and entertainment, statutory audit fees, bank charges and other office expenses incurred by Luda HK. The increase in general\nand administrative expenses by approximately $0.3 million in FY2024 was mainly attributable to increase of employee compensation and benefits,\nand professional fee, and partially offset by the decrease of the allowance of expected credit loss.\n\n* *\n\n*Research and Development expenses*\n\n* *\n\nOur research and development expenses mainly comprised materials used\nfor research and development, salaries for research employees, contract services and supplies attributable to the development of new products\nas well as improvements in existing processes. Our research and development expenses remained stable at approximately $1.4 million and\n$1.4 million in FY2024 and FY2023, respectively.\n\n \n\n**Other expense, net**\n\n** **\n\n*Interest expenses*\n\n* *\n\nOur finance expense mainly comprised interest expense on bank borrowings.\nThe interest expense increased by approximately $0.2 million, or 36.8%, from approximately $0.4 million for FY2023 to approximately $0.6\nmillion for FY2024, and such increase was due to an increase in average loan balances in FY2024.\n\n \n\n**Income tax expense**\n\n** **\n\nWe are subject to income tax on an entity basis on profit arising in\nor derived from the jurisdiction in which the Company and its subsidiaries domicile or operate. Income tax expense includes the Hong Kong\nincome tax, PRC enterprise income tax, deferred tax and PRC dividend withholding tax.\n\n \n\n68\n\n \n\nOur income tax expense amounted to approximately $0.3 million and $0.4\nmillion for FY2024 and FY2023, respectively. The decrease was mainly due to net loss before income tax in FY2024. The effective tax rate\nfor FY2023 was 12.8%, while the effective tax rate for FY2024 is not applicable due to the pre-tax loss.\n\n \n\n**Net income**\n\n \n\nWe recorded a net loss of approximately $0.36 million for the year\nended December 31, 2024, as compared to a net income of $3.0 million for the year ended December 31, 2023. Such decrease in net income\nwas due to the reasons as discussed above. Net profit margin decreased from approximately 5.9% in FY2023 to -0.8% in FY2024.\n\n \n\n**5.B. Liquidity and Capital Resources**\n\n** **\n\n**Liquidity and Capital Resources **\n\n \n\nWe have financed our operations primarily through\ncash flows from operations and loans from banks and related parties, if necessary.\n\n \n\nAs of December 31, 2025, we had cash and cash equivalents of $4,516,669\nand restricted cash of $255,255 and outstanding bank borrowings of $12,451,851 and margin loan of $216,312, of which the borrowings of\napproximately $10.9 million will be payable within one year and the bank borrowings of $1.8 million will be payable after one year. The\nbank borrowings bore an annual effective interest rate ranging from 2.64% to 6.95%. As of December 31, 2025, our current assets were approximately\n$40.0 million, and our current liabilities were approximately $24.5 million.\n\n \n\nAs of December 31, 2024, we had cash and cash\nequivalents of $8,132,655 and restricted cash of $200,517 and outstanding bank borrowings of $12,289,550, of which the bank borrowings\nof approximately $11.7 million will be payable within one year and the bank borrowings of $0.6 million will be payable after one year.\nThe bank borrowings bore an annual effective interest rate ranging from 3.2% to 8.27%. As of December 31, 2024, our current assets were\napproximately $31.9 million, and our current liabilities were approximately $25.9 million.\n\n \n\nAs of December 31, 2023, we had cash and cash\nequivalents of $8,082,691 and restricted cash of $ 313,235 and outstanding bank borrowings of $11,914,093, of which the bank borrowings\nof approximately $11.2 million will be payable within one year and the bank borrowings of $0.8 million will be payable after one year.\nThe bank borrowings bore an annual effective interest rate ranging from 2.66% to 8.06%. As of December 31, 2023, our current assets were\napproximately $39.5 million, and our current liabilities were approximately $28.7 million.\n\n \n\nIn view of the current cash and bank balances,\nfunds generated by operating activities and the bank borrowings, we believe our Company has sufficient resources to meet the working capital\nneeds in the next 12 months from the date the audited financial statements are issued. However, our ability to meet the liquidity and\ncapital requirement will be subject to future economic conditions and other factors which are beyond our control.\n\n \n\n69\n\n \n\n**Cash Flows**\n\n* *\n\nA summary of the sources and uses of cash and\ncash equivalents is as follows:\n\n \n\n  \nFor the years end December 31, \n\n  \n2025  \n2024  \n2023 \n\n  \nUS$  \nUS$  \nUS$ \n\nSelected Consolidated Statements of Cash Flows Data: \n   \n   \n  \n\nNet cash (used in) provided by operating activities \n (1,708,680) \n 5,457,591  \n 3,332,852 \n\nNet cash used in investing activities \n (11,033,445) \n (2,821,353) \n (1,759,266)\n\nNet cash provided by (used in) financing activities \n 8,821,775  \n (2,585,153) \n 2,707,362 \n\nEffect of exchange rate changes on cash, cash equivalents and restricted cash \n 359,102  \n (113,839) \n (165,164)\n\nNet (decrease) increase in cash and cash equivalents \n (3,561,248) \n (62,754) \n 4,115,784 \n\n \n\n*Operating Activities*\n\n* *\n\nIn FY2025, our net cash used in operating activities was approximately\n$1.7 million, which primarily reflected cash inflow from our net income of approximately $0.6 million adjusted for (i) net cash used in\nof non-cash expenses of approximately $1.3 million, which mainly consisted of fair value changes of short-term investments, depreciation,\ngain on extinguishment of consulting expenses payable and provisions for inventory, and (ii) net decrease in cash of approximately $1.0\nmillion mainly attributable to cash inflow arising from (i) decrease in inventory of approximately $0.8 million, which offset by cash\noutflow arising from (ii) increase in contract assets of approximately $0.6 million, (iii) increase in notes receivable of approximately\n$0.6 million, (iv) increase in accounts, other payables, accruals and income taxes payable of approximately $0.3 million and (v) decrease\nin refundable liabilities of approximately $1.0 million.\n\n \n\nIn FY2024, our net cash provided by operating activities was approximately\n$5.5 million, which primarily reflected cash outflow from our net loss of approximately $0.4 million adjusted for (i) net non-cash expenses\nof approximately $0.9 million, which mainly consisted of depreciation, fair value changes of investment in equity securities, provisions\nfor inventory and deferred IPO cost, and (ii) net increase in cash of approximately $4.9 million mainly attributable to cash inflow arising\nfrom (i) decrease in accounts receivables of approximately $3.0 million; (ii) decrease in contract assets current and non-current of approximately\n$2.4 million; (iii) decrease in notes receivables of approximately $1.6 million; and (iv) decrease in inventories of approximately $1.2\nmillion, which were offset by cash outflow arising from decrease in trade and other payables of approximately $1.9 million.\n\n \n\nIn FY2023, our net cash provided by operating activities was approximately\n$3.3 million, which primarily reflected cash inflow from our net income of approximately $3.0 million adjusted for (i) net non-cash expenses\nof approximately $1.2 million, which mainly consisted of depreciation, provisions for inventory and allowance for expected credit loss,\nand (ii) net decrease in cash of approximately $0.9 million mainly attributable to cash outflow arising from (i) increase in inventories\nof approximately $1.6 million; (ii) increase in contract assets current and non-current of approximately $0.6 million; and (iii) increase\nin accounts receivables of approximately $1.0 million, which were offset by cash inflow arising from (i) increase in refundable liabilities\nof approximately $1.6 million; (ii) decrease in notes receivable of approximately $0.3 million; and (iii) decrease in other current assets\nof approximately $0.4 million.\n\n \n\n*Investing Activities*\n\n* *\n\nNet cash used in investing activities for FY2025\nwas approximately $11.0 million, mainly representing cash payments to purchase short-term investments, cash proceeds from disposal of\nshort-term investment and cash payment for purchase of property, plant and equipment.\n\n \n\nNet cash used in investing activities for FY2024\nwas approximately $2.8 million, mainly representing payments for investment in equity security and cash payment for purchase of property,\nplant and equipment and cash payment for purchase of investment in equity security.\n\n* *\n\nNet cash used in investing activities for FY2023 was approximately\n$1.8 million, mainly represent cash payment for purchase of property, plant and equipment and cash payment for purchase of investment\nin equity security.\n\n \n\n*Financing Activities*\n\n \n\nIn FY2025, net cash provided by financing activities\nwas approximately $8.8 million, mainly consisted of net proceeds from initial public offering of approximately $8.9 million, net proceeds\nfrom share over-allotment of $0.7 million and proceeds from bank loans of $14.7 million, which were offset by repayments of bank loans\nof $15.0 million and payment of deferred offering cost of approximately $0.6 million.\n\n \n\nIn FY2024, net cash used in financing activities was approximately\n$2.6 million, mainly consisted of repayments on bank loans of approximately $13.9 million and dividend paid of approximately $3.4 million,\nwhich were offset by proceeds from bank loans of approximately $14.5 million.\n\n \n\nFor FY2023, net cash provided by financing\nactivities was approximately $ 2.7 million, mainly consisted of proceeds from bank borrowings of $12.9 million, which is offset by\n(i) payment of deferred costs related to initial public offering of $0.6 million; (ii) dividend payment of $0.6 million; and (iii)\nrepayments on bank borrowings of $8.9 million.\n\n \n\n70\n\n \n\n**Off-Balance Sheet Arrangements**\n\n** **\n\nThe Company has restricted cash held in designated\nbank accounts as secured deposits for issuance of letter of credit and bank guarantee to assure product quality and/or contract performance\nas requested by some of our customers. As of December 31, 2025, December 31, 2024 and December 31, 2023, restricted cash was $255,255,\n$200,517 and $313,235, respectively. As of December 31, 2025, the credit line secured by restricted cash amounted to $255,255. Save as\nthe restricted cash, the Company has no other off-balance sheet arrangements.\n\n** **\n\n**Leased Properties**\n\n \n\nWe have leased an office in Hong Kong with a total\narea of approximately 6,400 square feet, under two separate lease terms. The first lease covers from August 28, 2025 to August 27, 2027\nat a monthly rent of $13,128 and the first three months are rent-free with a $0.13 license fee charged for fitting-out works. The second\nlease covers from November 7, 2025 to November 6, 2027 at a monthly rent of $13,338 and the first two months are rent-free with a $0.13\nlicense fee charged for fitting-out works.\n\n \n\nWe continued to lease a flat in Hong Kong from a related party, Wong\nFittings Company Limited, for document storage purposes. The flat has a total area of approximately 3,460 square feet. The lease term\nwas from April 1, 2025, to March 31, 2026 and was renewed for further term from April 1, 2026, to March 31, 2027. The monthly rent is\n$6,795.\n\n** **\n\n**Contractual obligations**\n\n \n\nThe following table summarizes our contractual obligations as of December\n31, 2025:\n\n** **\n\n  \nPayment due by period \n\n  \nLess than  \n1 to 3  \nMore than  \n  \n\n  \n1 year  \nyears  \n3 years  \nTotal \n\nBorrowings \n$10,894,987  \n 1,773,176  \n -  \n 12,668,163 \n\n** **\n\n**Capital Expenditures**\n\n \n\nFor the years ended December 31, 2025, 2024 and\n2023, we purchased $458,221, $1,078,271 and $1,758,567, respectively, of property and equipment, respectively, mainly for use in our operations.\n\n  \n\n**5.C. Research and Development, Patents and Licenses, etc.**\n\n** **\n\nSee “Item 4. Information on the Company—B.\nBusiness Overview — Intellectual Property”.\n\n \n\n**D. Trend Information**\n\n \n\nOther than as disclosed elsewhere in this annual report, we are not\naware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2024 to December 31, 2025 that are reasonably\nlikely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause the disclosed\nfinancial information to be not necessarily indicative of future operating results or financial conditions.\n\n \n\n**E. Critical Accounting Estimates**\n\n \n\nThe discussion of our financial condition and\nresults of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation\nof these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and\nliabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues\nand expenses during the reporting periods. We evaluate our estimates and assumptions on an ongoing basis using the vest information available.\nActual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material\nto our consolidated financial statements.\n\n \n\nCritical accounting policies are those policies\nthat, in management’s view, are the most important in the portrayal of our financial condition and results of operations. The notes\nto the consolidated financial statements also include disclosure of significant accounting policies. The methods, estimates and judgments\nthat we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial\nstatements. These critical accounting policies require us to make difficult and subjective judgments, often as a result of the need to\nmake estimates regarding matters that are inherently uncertain. Those critical accounting policies and estimates that require the most\nsignificant judgment are discussed further below.\n\n \n\n71\n\n \n\n*Allowance for expected credit losses*\n\n \n\nThe Company considered various factors, including nature, historical\ncollection experience, the age of the accounts receivable, other receivables, notes receivable and contract assets, credit quality and\nspecific risk characteristics of its customers, current economic conditions, forecasts of future economic conditions, reversion period,\nand qualitative and quantitative adjustments to develop an estimate of credit losses. The Company has adopted loss rate method and individual\nspecific valuation method to calculate the credit loss and considered the relevant factors of the historical and future conditions of\nthe Company to make reasonable estimation of the risk rate. For accounts receivable and other receivables aged less than 360 days, notes\nreceivables and contract assets, the Company uses the loss rate method, which is a combination of historical rate method and adjustment\nrate method, to estimate the credit loss. For accounts receivable aged over 360 days and overdue retainage receivable, the Company uses\nthe individual specific valuation method to estimate the credit loss.\n\n \n\nThe Company believes that the estimates utilized\nin preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from these estimates. To the\nextent that there are material differences between these estimates and the actual results, future financial statements will be affected.\n\n* *\n\n*Allowance for inventory valuation*\n\n \n\nInventories are stated at the lower of cost or net realizable value.\nCost is calculated on the weighted average basis and includes all costs to acquire and other costs to bring the inventories to their present\nlocation and condition. The Company records adjustments to inventory for excess quantities, obsolescence or impairment when appropriate\nto reflect inventory at net realizable value. These adjustments are based upon a combination of factors including current sales volume,\nmarket conditions, lower of cost or market analysis and expected realizable value of the inventory. Any excess of the cost over the net\nrealizable value of each item of inventories is recognized as an allowance for inventory valuation. Once inventory is written-down, a\nnew, lower-cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration\nor increase in that newly established cost basis. The Company recognized change in allowance for inventory valuation of $303,834, $210,377\nand $231,715 in cost of sales for the years ended December 31, 2025, 2024 and 2023, respectively.\n\n \n\n*Sales returns*\n\n \n\nA significant area of judgment affecting reported revenue and net income\nis estimate of sales return, which represents that portion of gross revenues not expected to be realized. In determining estimate of sales\nreturns, management takes into account (i) repurchase percentage stipulated in sales agreements with certain customers or ii) estimated\nreturn rate base on historical experience and industry practice for those sales agreement without repurchase terms. The Company determines\nrepurchase terms in sales contracts as sales return rather than repurchase arrangement as repurchase price usually are the same as selling\nprice.\n\n \n\nThe Company recognizes purchase obligations derived\nfrom sales returns as refundable liabilities and the related product costs as inventory to be returned on the balance sheet at the end\nof each financial period. The estimate is based on accumulated sales revenue and stipulated repurchase percentage or estimated return\nrate. No significant sales return occurred historically, therefore, the Company determined that estimated return rates for those sales\nagreements without repurchase terms are not significant, and refundable liability as of December 31, 2025 and December 31, 2024 mainly\nrepresents obligations related to sales agreements with repurchase term.\n\n \n\nThe Company generally provides rights of return\nup to certain percentage of contract for certain customers. As of December 31, 2025 and December 31, 2024, refundable liabilities\nof $331,737 and $1,303,748 were provided, respectively.\n\n** **\n\n72"}