UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
FOR THE QUARTERLY PERIOD ENDED
or
FOR THE TRANSITION PERIOD FROM _________ to __________
COMMISSION FILE NUMBER
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
| |
| (Address of principal executive offices) (Zip Code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No
As of August 13, 2024, the registrant had a total
of
INDEX
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends impacting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.
Forward-looking statements include all statements that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “intend,” “seek,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential,” “might,” “forecast,” “continue,” or the negative of those terms, and similar expressions and comparable terminology intended to reference future periods. Forward-looking statements include, but are not limited to, statements about:
| ● | Our ability to effectively operate our business segments; |
| ● | Our ability to manage our research, development, expansion, growth and operating expenses; |
| ● | Our ability to evaluate and measure our business, prospects and performance metrics; |
| ● | Our ability to compete, directly and indirectly, and succeed in a highly competitive and evolving industry; |
| ● | Our ability to respond and adapt to changes in technology and customer behavior; and |
| ● | Our ability to protect our intellectual property and to develop, maintain and enhance a strong brand. |
Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.
Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We cannot guarantee future results, levels of activity, performance or achievements. Accordingly, the forward-looking statements in this Quarterly Report on Form 10-Q should not be regarded as representations that the results or conditions described in such statements will occur or that our objectives and plans will be achieved, and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements.
ii
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NATURE’S MIRACLE HOLDING INC., SUBSIDIARIES AND VIE
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| As of June 30, | As of December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalent | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Accounts receivable - related parties, net | ||||||||
| Inventories, net | ||||||||
| Prepayments and other current assets | ||||||||
| Loans receivable - related parties | ||||||||
| Total Current Assets | ||||||||
| NON-CURRENT ASSETS | ||||||||
| Security deposit | ||||||||
| Right-of-use assets, net | ||||||||
| Cost method investment | ||||||||
| Property and equipment, net | ||||||||
| Deferred offering costs | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Short-term loans | $ | $ | ||||||
| Short-term loans - related parties | ||||||||
| Current portion of long-term debts | ||||||||
| Accounts payable | ||||||||
| Accounts payable - related parties | ||||||||
| Other payables and accrued liabilities | ||||||||
| Other payables - related parties | ||||||||
| Operating lease liabilities - current | ||||||||
| Tax accrual | ||||||||
| Deferred income - Contract liabilities | ||||||||
| Total Current Liabilities | ||||||||
| NON-CURRENT LIABILITIES | ||||||||
| Long-term debts, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total Non-Current Liabilities | ||||||||
| Total Liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| SHAREHOLDERS’ DEFICIT | ||||||||
| Preferred Stock ($ | ||||||||
| Common Stock ($ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
| * |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
NATURE’S MIRACLE HOLDING INC., SUBSIDIARIES AND VIE
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
| For the Three Months Ended | For the Three Months Ended | For the Six Months Ended | For the Six Months Ended | |||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| REVENUE (including related party revenue of $ | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUE | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Stock compensation expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER EXPENSES | ||||||||||||||||
| Interest (expense) income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Non cash finance expense | ( | ) | ||||||||||||||
| Loss on loan extinguishment | ( | ) | ( | ) | ||||||||||||
| Other expenses | ||||||||||||||||
| Total other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| PROVISION FOR (BENEFIT OF) INCOME TAXES | ( | ) | ( | ) | ||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| OTHER COMPREHENSIVE LOSS | ||||||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON STOCK* | ||||||||||||||||
| LOSS PER SHARE | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| * | Giving retroactive effect to reverse recapitalization effected on March 11, 2024 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
NATURE’S MIRACLE HOLDING INC., SUBSIDIARIES AND VIE
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS’ DEFICIT
| Preferred stock | Common stock | Additional paid in | Accumulated | Accumulated other comprehensive | ||||||||||||||||||||||||||||
| Shares | Amount | Shares* | Amount | capital | deficit | loss | Total | |||||||||||||||||||||||||
| BALANCE, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Issuance of shares upon the reverse recapitalization | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Shares to be issued for stock compensation | ( | ) | ( | ) | - | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE, March 31, 2024 (Unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||
| Shares to be issued for stock compensation | ( | ) | ( | ) | - | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE, June 30, 2024 (Unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| Preferred stock | Common stock | Additional paid in | Accumulated | Accumulated other comprehensive | ||||||||||||||||||||||||||||
| Shares | Amount | Shares* | Amount | capital | deficit | loss | Total | |||||||||||||||||||||||||
| BALANCE, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE, March 31, 2023 (Unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||
| Foreign currency translation adjustments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| BALANCE, June 30, 2023 (Unaudited) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||
| * |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
NATURE’S MIRACLE HOLDING INC., SUBSIDIARIES AND VIE
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, | June 30, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Allowance for credit losses | ||||||||
| Amortization of operating right-of-use asset | ||||||||
| Amortization of debt issuance cost | ||||||||
| Deferred taxes benefits | ( | ) | ||||||
| Loss on loan extinguishment | ||||||||
| Loss on early termination of right-of-use asset | ||||||||
| Stock compensation expenses | ||||||||
| Non cash finance expense | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ||||||||
| Prepayments and other current assets | ( | ) | ||||||
| Security deposit | ||||||||
| Accounts payable | ( | ) | ||||||
| Other payables and accrued liabilities | ( | ) | ||||||
| Accrued interest payable - related parties | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Tax accrual | ||||||||
| Deferred income - Contract liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from the reverse recapitalization | ||||||||
| Payments of transaction costs incurred by Lakeshore | ( | ) | ||||||
| Repayments of promissory note – related party of Lakeshore | ( | ) | ||||||
| Loan to related parties | ( | ) | ||||||
| Loan to Lakeshore | ( | ) | ||||||
| Loan repayment from third parties | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments of deferred offering costs | ( | ) | ( | ) | ||||
| Long-term loan borrowing | ||||||||
| Repayments on long-term loan | ( | ) | ( | ) | ||||
| Short-term loan borrowing from third parties | ||||||||
| Repayments on short-term loan from third parties | ( | ) | ( | ) | ||||
| Short-term loan borrowing from related parties | ||||||||
| Repayments on short-term loan from related parties | ( | ) | ||||||
| Borrowings from other payables - related parties | ||||||||
| Net cash provided by financing activities | ||||||||
| EFFECT OF FOREIGN EXCHANGE ON CASH | ( | ) | ||||||
| CHANGES IN CASH | ( | ) | ||||||
| CASH AND CASH EQUIVALENT, beginning of period | ||||||||
| CASH AND CASH EQUIVALENT, end of period | $ | $ | ||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for income tax | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: | ||||||||
| Right of use assets acquired under new operating leases | $ | $ | ||||||
| Long term investment converted from accounts receivable | $ | $ | ||||||
| Derecognition of early termination of right-of-use asset | $ | $ | ||||||
| Derecognition of early termination of operating lease liabilities | $ | $ | ||||||
| Reduce of right-of-use asset and operating lease liabilities based on modification | $ | $ | ||||||
| Accumulated deficit acquired upon the reverse recapitalization | $ | $ | ||||||
| Deferred offering cost converted to APIC upon the reverse recapitalization | $ | $ | ||||||
| The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. |
4
Nature’s Miracle Holding Inc., Subsidiaries
and VIE
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 — Nature of business and organization
Nature’s Miracle Holding Inc., which until March 11, 2024 was known as LBBB Merger Corp. (the “Company”, “Nature’s Miracle”) is a company incorporated on August 1, 2022 under Delaware law as a wholly owned subsidiary of the Lakeshore Acquisition II Corp., a Cayman Islands exempted company (“Lakeshore”).
On March 11, 2024, Lakeshore
merged with and into the Company for the sole purpose of reincorporating Lakeshore into the State of Delaware (“Reincorporation”).
Immediately after the Reincorporation, the Company consummated the merger contemplated by the Merger Agreement between the Company and
Nature’s Miracle, Inc., a Delaware corporation (“NMI”), resulting in the stockholders of NMI becoming
Pursuant to the Merger Agreement,
at the effective time of the Merger, each share of NMI common stock issued and outstanding immediately prior to the effective time was
canceled and automatically converted into the right to receive the applicable pro rata portion of shares of the Company common stock,
the aggregate value of which was equal to: (a) $
The Merger is considered as
a reverse recapitalization in accordance with Accounting Standards Codification (“ASC”) 805-40. Under this method of accounting,
Lakeshore will be treated as the “acquired” company for financial reporting purposes. This determination is primarily based
on NMI’s stockholders comprise
Accordingly, for accounting purposes, the financial statements of the Company will represent a continuation of the financial statements of NMI with the Merger treated as the equivalent of NMI issuing stock for the net assets of Lakeshore, accompanied by a recapitalization. The net assets of Lakeshore will be stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Merger will be presented as those of NMI in financial statements of the Company. The consolidation of the Company and its subsidiaries have been accounted for at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements in accordance with ASC 805-50-45-5. All share and per share data has been retroactively restated to reflect the current capital structure of the Company.
The Company is a growing agriculture technology company focusing on the greenhouse and cultivation industry and providing products to indoor growers in a CEA (Controlled Environment Agriculture) setting in North America.
Reorganization under NMI
NMI is a holding company incorporated on March 31, 2022 in Delaware. NMI has no substantial operations other than holding all the outstanding share capital of its subsidiaries. NMI, its subsidiaries and variable interest entity (“VIE”).
On June 1, 2022, NMI entered
into the Share Exchange Agreements with the stockholders of Visiontech Group, Inc. (“Visiontech”, a California Company), resulting
in the stockholders of Visiontech becoming
The transaction was accounted
as a reverse recapitalization in accordance with ASC 805. The process of identifying the accounting acquirer began with a consideration
of the guidance in ASC 810-10 related to determining the existence of a controlling financial interest. The general rule provided
by ASC 810-10 is that the party that holds directly or indirectly greater than
5
On June 1, 2022, NMI also
entered into the Share Exchange Agreements with the stockholders of Hydroman, Inc. (“Hydroman”, a California Company) to acquire
On July 28, 2022, Nature’s Miracle (California), Inc., (“NMCA”), a California corporation wholly owned by NMI was incorporated. NMCA focuses on greenhouse development services and started provide container grow sales in first quarter of 2024.
On August 18, 2022, NMI
acquired
On August 27, 2021, Visiontech
and Upland 858 LLC (“Upland”), who share common stockholders with Visiontech, entered into a promissory note agreement. Upland
is a special purchase entity set up to purchase and hold a warehouse located in California. Upland promised to pay to Visiontech the sum
of $
On August 27, 2022, Upland
entered into an assignment and assumption of unsecured promissory note with Zhiyi (Jonathan) Zhang, Vartor Vahe Doudakian and Yang Wei
(collectively “Assignees”). Upland transferred to Assignees all of its right, title, duties, liabilities and obligation under
the promissory note signed by and among Visiontech and Upland on August 27, 2021 in the original principal amount of $
Note 2 — Going concern
In assessing liquidity, the
Company monitors and analyzes cash on-hand and operating expenditure commitments. The Company’s liquidity needs are to meet working
capital requirements and operating expense obligations. To date, the Company financed its operations primarily through cash flows from
operations, debt financing from financial institution and related parties. As of June 30, 2024 and December 31, 2023, the Company had
approximately $
6
On July 3, 2024, the Company
signed four convertible note investment agreements total of $
On July 16, 2024, the Company
entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a certain investor (the “Purchaser”)
pursuant to which the Company sold, in a private placement (the “July 2024 Offering”), a $
On July 25, 2024, the Company
entered into an underwriting agreement with EF Hutton LLC as the underwriter, relating to a firm commitment underwritten public offering
of
On August 13, 2024, the Company entered a securities purchase agreement with 1800 Diagonal Lending LLC (“Diagonal”), in connection
with the issuance of a promissory note in the aggregate principal amount of $
The Company has experienced recurring losses from operations and negative cash flows from operating activities since 2022. In addition, the Company had, and may potentially continue to have, an ongoing need to raise additional cash from outside sources to fund its expansion plan and related operations. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. In connection with the Company’s assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that these conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements are issued.
If the Company is unable to realize its assets within the normal operating cycle of a twelve (12) month period, the Company may have to consider supplementing its available sources of funds through the following sources:
| ● | financial support from the Company’s related parties and stockholders; |
| ● | other available sources of financing from banks and other financial institutions; |
| ● | equity financing through capital market. |
The Company can make no assurances that required financings will be available for the amounts needed, or on terms commercially acceptable to the Company, if at all. If one or all of these events does not occur or subsequent capital raises are insufficient to bridge financial and liquidity shortfall, there would likely be a material adverse effect on the Company and would materially adversely affect its ability to continue as a going concern.
The unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty.
7
Note 3 — Basis of presentation and summary of significant accounting policies
Basis of presentation
The unaudited condensed consolidated financial statements include the accounts of the Company and its variable interest entities and have been prepared in accordance with U.S. GAAP and the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These unaudited condensed consolidated financial statements have been prepared on the same basis as its annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2024, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.
Principles of consolidation
The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries, which include its wholly owned subsidiaries and VIE over which the Company exercises control and, when applicable, entities for which the Company has a controlling financial interest or is the primary beneficiary. All transactions and balances among the Company and its subsidiaries and VIE have been eliminated upon consolidation.
Use of estimates and assumptions
The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported and disclosures of contingent assets and liabilities as of the date of the unaudited financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates.
Cash and cash equivalents
Cash and cash equivalents consist of amounts held as cash on hand and bank deposits.
From time to time, the Company
may maintain bank balances in interest bearing accounts in excess of the $
Prepayments and other current assets
Prepaid expenses and other current assets primarily include prepaid expenses paid to product providers, and other deposits. Management regularly reviews the aging of such balances and changes in payment and realization trends and records allowances when management believes collection or realization of amounts due are at risk. Accounts considered uncollectable are written off against allowances after exhaustive efforts at collection are made. As of June 30, 2024 and December 31, 2023, no allowance for doubtful account was recorded.
Accounts receivable, net
During the ordinary course of business, the Company extends unsecured credit to its customers. Accounts receivable are stated at the amount the Company expects to collect from customers. Management reviews its accounts receivable balances each reporting period to determine if an allowance for doubtful accounts is required. An allowance for doubtful accounts is recorded in the period in which loss is determined to be probable based on assessment of specific evidence indicating likelihood of collection, historical experience, account balance aging and prevailing economic conditions. Bad debts are written off against the allowance after all collection efforts have ceased. Starting from January 1, 2023, the Company adopted ASU No.2016-13 “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC Topic 326”). The Company used a modified retrospective approach, and the adoption does not have an impact on our unaudited condensed consolidated financial statements. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company’s management continues to evaluate the reasonableness of the valuation allowance policy and update it if necessary.
8
Inventory
Inventory consists of finished goods ready for sale and is stated at the lower of cost or market. The Company values its inventory using the weighted average costing method. The Company’s policy is to include as a part of cost of goods sold any freight incurred to ship the product from its vendors to warehouses. Outbound freight costs related to shipping costs to customers are considered periodic costs and are reflected in cost of revenue. The Company regularly reviews inventory and considers forecasts of future demand, market conditions and product obsolescence.
If the estimated realizable value of the inventory is less than cost, the Company makes provisions in order to reduce its carrying value to its estimated market value. The Company also reviews inventory for slow moving inventory and obsolescence and records impairment for obsolescence. During the three and six months ended June 30, 2024, there was no inventory impairment loss recorded. During the three and six months ended June 30, 2023, there was no inventory impairment loss recorded.
Cost method investment
The Company accounts for investments
with less than
Cost method investment is evaluated for impairment when facts or circumstances indicate that the fair value of the long-term investments is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near-term prospects of the investments; and (v) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. No event had occurred and indicated that other-than-temporary impairment existed and therefore during the three and six months ended June 30, 2024, the Company did not record any impairment charges for its investments. During the three and six months ended June 30, 2023, the Company did not record any impairment charges for its investments.
Security deposits
To maintain a stable supply for goods and build a long-term relationship, the Company may pay certain amount of funds to its vendors as security deposits which are recorded as non-current assets on the balance sheet depending on its return date.
Property and equipment
| Useful Life | ||
| Machinery and equipment | ||
| Computer and peripherals | ||
| Trucks and automobiles | ||
| Buildings |
9
The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statements of operations. Expenditures for maintenance and repairs are expensed as incurred, while additions, renewals and betterments, which are expected to extend the useful life of assets, are capitalized.
Deferred offering costs
Deferred offering costs consist primarily of expenses paid to attorneys, consultants, underwriters, and etc. related to its merger transaction. The balance has been offset with the proceeds received after the close of the offering.
Fair value measurement
The Company adopted ASC Topic 820, Fair Value Measurements and Disclosures which defines fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements.
ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. ASC Topic 820 specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. Unobservable inputs are valuation technique inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
When available, the Company uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Company measures fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates.
Fair values of financial instruments
Financial instruments include cash and cash equivalents, accounts receivable, prepayments, loan receivable, and other current assets, other payable and accrued liabilities, accounts payable — related parties, short term loans and taxes payable. The Company considers the carrying amount of short-term financial instruments to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. The Company’s long-term debts are measured at amortized cost, no fair value option is elected.
Revenue recognition
The Company follows Accounting Standards Codification (“ASC”) 606 Revenue Recognition and recognizes revenue from product sales revenues, net of promotional discounts and return allowances, when the following revenue recognition criteria are met: a contract has been identified, separate performance obligations are identified, the transaction price is determined, the transaction price is allocated to separate performance obligations and revenue is recognized upon satisfying each performance obligation.
10
The Company is a growing agriculture technology company providing CEA hardware products to growers in the controlled environment agriculture industry setting in North America. Majority of the Company’s products were grow lights and related products for the indoor growing settings. Starting from first quarter of 2024, the Company also provides indoor grow containers to its customers.
The Company’s contracts with customers where the amounts charged per product is fixed and determinable, the specific terms of the contracts were agreed on by the Company including payment terms which are typically 30 to 60 days for existing customers and prepaid for most new customers. In certain contracts involving customers that entered into rebate programs with utility companies for using LED lighting, payment term ranges from 60 to 120 days.
The Company’s performance obligation is to deliver the products to customers. For indoor grow container products, the Company also involved in customization of the products to suit customer’s specific needs. The provision of customization and configuration to meet certain technical specification per US market and delivery of product is considered one performance obligation as the as the services provided are not distinct within the context of the contract whereas the customers can only obtain benefit when the services and products are provided together.
Transaction prices are mostly
fixed. In some contracts, when determining the transaction price, the Company adjusts consideration for the effects of the time value
of money if the timing of payments provides the Company with a significant benefit of financing. The Company does not assess whether
a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the
customers and the transfer of the promised goods or services to the licensees will be one year or less. The Company had one contract
with customer with installment payment terms of up to 16 months. The difference between the contract price and the Company’s
cash selling price of the same products are recognized as interest income over the term of the payments. Interest income amounted to $
The Company transfers the risk of loss or damage upon shipment, therefore, revenue from product sales is recognized at a point in time when control of product transfer to customer and the Company has no further obligation to provide services related to such product evidenced by customer signing acceptances upon receipt of goods. Return allowances, which reduce product revenue by the Company’s best estimate of expected product returns, are estimated using historical experience.
The Company evaluates the criteria of ASC 606 — Revenue Recognition Principal-Agent Considerations in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. The Company ships the products according to shipping terms on the purchase order or sales order. Once delivery is complete, the Company then sends an invoice to the customer according to the quantity and price of shipment.
The Company evaluates the indicators of control in accordance with ASU 2016-08: 1) the Company is the most visible entity to customers and assumes fulfilment risk and risks related to the acceptability of products, including addressing customer inquiries directly and handling of product returns or refunds directly if any. For grow light products, the Company has its own brand for marketing. For indoor grow containers products, the Company is also involved in the design and technical specification of the products to meet requirement in the US market 2) The Company assumes inventory risk either through storing the products in its own warehouses; or for drop shipments directly from vendors, the Company takes the title from vendors through inspection and acceptance and is responsible for product damage during shipment period prior to acceptance of its customers and is also responsible for product return if the customer is not satisfied with the products. 3) The Company determines the resale price of the products. 4) The Company is the party that directs the use of the inventory and can prevent the vendor from transferring the product to a customer or to redirect the products to a different customer, after evaluating the above scenario, the Company considers itself the principal of these arrangements and records revenue on a gross basis.
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Grow light | $ | $ | $ | $ | ||||||||||||
| Indoor grow containers | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
11
Prepayments received from customers prior to the delivery of goods to customers or picked up by the customers are recorded as contract liability under the account Deferred income — contract liabilities.
| As of June 30, 2024 | As of December 31, 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Prepayments from customers | ||||||||
| Recognized as revenues | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
The Company periodically provides incentive offers to its customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by the Company’s customers, are treated as a reduction to the transaction price of the related transaction.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are recorded and estimated based on historical returns which were generally immaterial to the Company.
Estimated warranty are immaterial because suppliers provide a warranty period of 1-5 years for all products, varying depending on the product type. After customers provide their purchase invoices and serial numbers for the return products, the factories will issue the replacement products. Additionally, the factories will also bear the corresponding shipping costs, making the company’s warranty expenses negligible.
Cost of revenue
Cost of revenue mainly consist of costs for purchases of products and related storage, warehouse rent, outbound freight, delivery fees and payroll related expenses.
Segment reporting
The Company follows ASC 280,
Segment Reporting. The Company’s chief operating decision maker, the Chief Executive Officer, reviews the results of operations
when making decisions about allocating resources and assessing the performance of the Company as a whole and hence, the Company has only
Leases
The Company follows ASC 842 — Leases (“ASC 842”), which requires lessees to record right-of-use (“ROU”) assets and related lease obligations on the balance sheet, as well as disclose key information regarding leasing arrangements.
ROU assets represent our right to use an underlying asset for the lease terms and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
12
Income taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company follows the provisions of ASC 740 and has analyzed filing positions in each of the federal and state jurisdictions where the Company is required to file income tax returns, as well as open tax years in such jurisdictions. The Company has identified the U.S. federal jurisdiction, and the states of Delaware, as its “major” tax jurisdictions.
The Company believes that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740. The Company’s policy for recording interest and penalties associated with income-based tax audits is to record such items as a component of income taxes.
Stock-based compensation
The Company accounts for stock-based compensation awards to employees in accordance with FASB ASC Topic 718, “Compensation – Stock Compensation”, which requires that stock-based payment transactions with employees be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period.
The Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC Topic 718 amended by ASU 2018-07. Under FASB ASC Topic 718, stock compensation granted to non-employees has been determined as the fair value of the consideration received or the fair value of equity instrument issued, whichever is more reliably measured and is recognized as an expense as the goods or services are received.
Warrants
The Company evaluates the public and private warrants as either equity-classified or liability-classified instruments based on an assessment of the warrants’ 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 warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares, among other conditions for equity classification. Pursuant to such evaluation, both public and private warrants are classified in shareholders’ equity.
Commitments and Contingencies
In the ordinary course of business, the Company is subject to certain contingencies, including legal proceedings and claims arising out of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes a liability for such contingency if it determines it is probable that a loss has occurred, and a reasonable estimate of the loss can be made. The Company may consider many factors in making these assessments including historical and specific facts and circumstances of each matter.
13
Loss per share
Basic loss per share is computed by dividing net loss attributable to holders of common stock by the weighted average number of common stock outstanding during the year. During the three and six months ended June 30, 2024, basic and diluted loss per share are the same because the Company had net loss for the periods. During the three and six months ended June 30, 2023, basic and diluted loss per share are the same because the Company had net loss for the periods.
Recently issued accounting pronouncements
In December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. The Company is currently evaluating the potential impact of adopting this new guidance on its unaudited condensed consolidated financial statements and related disclosures.
Except as mentioned above, the Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the Company’s unaudited condensed consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
Note 4 — Variable interest entity
The Company does not have direct ownership in Upland but has been actively involved in their operations and has the power to direct the activities and significantly impact Upland’s economic performance. The Company also bears the risk of losses from Upland. As such, in accordance with ASC 810, Upland is considered variable interest entity (“VIE”) of the Company and the financial statements of Upland was consolidated from the date of control and variable interest existed.
Based on the loan agreement between its creditor and Upland 858 LLC, the loan is a non-recourse debt secured by the assets owned by Upland 858 LLC only and guaranteed by the stockholders of Upland 858 LLC only. Upland 858 LLC’s creditor will have no-recourse to Visiontech which is considered to be the primary beneficiary of the VIE structure but not the legal owner of Upland 858 LLC:
Accordingly, the accounts of Upland were consolidated in the accompanying financial statements as VIE of Visiontech from January 2022 when Upland acquired the warehouse in California.
| As of June 30, 2024 | ||||
| Cash | $ | |||
| Prepaid expense | ||||
| Property and equipment, net | ||||
| Total assets | $ | |||
| Current portion of long-term debt | $ | |||
| Long-term debt, net of current portion | ||||
| Accrued expenses | ||||
| Intercompany payable to Visiontech | ||||
| Total liabilities | $ | |||
14
| For the three months ended June 30, 2024 | For the six months ended June 30, 2024 | |||||||
| Revenue* | $ | $ | ||||||
| Selling, general and administrative | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Income tax | ( | ) | ||||||
| Net income | $ | $ | ||||||
| * |
Note 5 — Reverse recapitalization
On March 11, 2024, Lakeshore merged with and into
the Company for the sole purpose of reincorporating Lakeshore into the State of Delaware. Immediately after the Reincorporation, the Company
consummated the merger between the Company and NMI, resulting in the stockholders of NMI becoming
| Common Stock |
||||
| Lakeshore’s shares outstanding prior to reverse recapitalization | ||||
| Shares issued to private rights | ||||
| Conversion of the Lakeshore’s public shares and rights | ||||
| Shares issued to service providers | ||||
| Bonus shares issued to investors | ||||
| Conversion of NMI’s shares into the Company’s ordinary shares | ||||
| Total shares outstanding | ||||
In
connection with the reverse recapitalization, the Company has assumed
15
In
connection with the reverse recapitalization, the Company raised approximately $
The following table reconcile the elements of the reverse recapitalization to the unaudited condensed consolidated statements of cash flows and the changes in shareholders’ equity (deficit):
| As of March 11, 2024 | ||||
| Funds held in Lakeshore’s trust account | $ | |||
| Funds held in Lakeshore’s operating cash account | ||||
| Less: amount paid to redeem public shares of Lakeshore’s ordinary shares | ( | ) | ||
| Proceeds from the reverse recapitalization | ||||
| Less: payments of transaction costs incurred by Lakeshore | ( | ) | ||
| Less: repayments of promissory note – related party of Lakeshore’ | ( | ) | ||
| Less: notes assumed from Lakeshore | ( | ) | ||
| Less: liability assumed from Lakeshore | ( | ) | ||
| Less: transaction costs paid by NMI | ( | ) | ||
| Add: receivable assumed from Lakeshore | ||||
| Net liabilities assumed from issuance of common stock upon the Merger, balance classified to retained deficit | $ | ( | ) | |
Note 6 — Accounts receivable, net
| As of June 30, 2024 | As of December 31, 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for credit losses | ( | ) | ( | ) | ||||
| Subtotal accounts receivable, net | ||||||||
| Accounts receivable - related parties | ||||||||
| Total accounts receivable, net | $ | $ | ||||||
Provision for credit losses
were $
(Recovery) provision for credit
losses were $(
16
Movement of allowance:
| June 30, 2024 | December 31, 2023 | |||||||
| Beginning balance | $ | $ | ||||||
| Addition | ||||||||
| Recovery/write-off | ( | ) | ( | ) | ||||
| Ending balance | $ | $ | ||||||
Note 7 — Loans Receivable
In September 2022, Visiontech
and CGGP, LLC (“CGGP”), a customer who purchased industrial light fixtures, entered into three promissory note agreements
with terms of six months. The total amount of the notes was $
In September 2022, Visiontech
and NewCo Vision, LLC (“NewCo”), a customer who purchased industrial light fixtures, entered into three promissory note agreements
with terms of six months. The total amount of the notes was $
Note 8 — Cost method investment
Cost method investment consist of the following:
| As of June 30, 2024 | As of December 31, 2023 | |||||||
| $ | $ | |||||||
| Total | $ | $ | ||||||
On April 11, 2023, one
of the Company’s customers, Iluminar Lighting LLC (“Iluminar”) entered into Debt Conversion Agreement with the Company
pursuant to which it will convert $
Note 9 — Property and equipment, net
| As of June 30, 2024 | As of December 31, 2023 | |||||||
| Trucks & Automobiles | $ | $ | ||||||
| Machinery & Equipment | ||||||||
| Building | ||||||||
| Land | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Depreciation expense during
the three and six months ended June 30, 2024 amounted to $
Depreciation expense during
the three and six months ended June 30, 2023 amounted to $
17
Note 10 — Loans payable
Short-term loans:
Short-term loans consist of one account receivable factoring agreement, one subordinated business loan, three third parties loans as of June 30, 2024.
Short-term loans consist of one account receivable factoring agreement and one individual loan as of December 31, 2023.
On October 23, 2023, NMI, Visiontech
and Hydroman (collectively “Merchants”) entered into a standard merchant cash advance agreement with Factor H. The Company
sold $
On May 2, 2024, the Merchants
entered into another standard merchant cash advance agreement with Factor H. The Company sold $
These receivable purchase agreements
were accounted for as secured borrowing under ASC 860 since there is no legal, actual, effective transfer of the receivables to the
Factors. Rather, the Factors only have generally claim against the receivable pools not a particular receivable. As of June 30, 2024 and
December 31, 2023, outstanding balance amounted to $
On October 30, 2023, NMI entered
into a loan agreement with an independent third party pursuant to which the Company borrowed a principal amount of $
On March 7, 2024, the Company’s
subsidiary Nature’s Miracles entered into a loan agreement with Peng Zhang, a shareholder of the Company. The amount of the loan
is $
On February 10, March 28, June
5, June 27, September 22, December 22, 2023 and February 20, 2024, Lakeshore entered into seven promissory notes with RedOne Investment
Limited (“Redone”) to which Lakeshore borrowed an aggregate principal amount of $
On March 11, 2024, NMI, Redone
and Deyin Chen (Bill) entered into agreement that $
On June 6, 2024, the Merchants
entered into a subordinated business loan and security agreement with Agile Capital Funding, LLC and Agile Lending, LLC for the principal
amount of $
18
The Company also make the following principal payments for the below loans for the period ended June 30, 2023:
On August 31, 2022, the
Merchants entered into a standard merchant cash advance agreement with Factor A. Merchants sells to Factor A $
On September 1, 2022,
Visiontech entered into a receivables purchase agreement with another Factor B. Visiontech sold to Factor B $
On October 31, 2022, Hydroman
entered into a receivables purchase agreement with Factor C. Hydroman sold to Factor C $
On October 31, 2022, Visiontech
entered into a future receivable sale and purchase agreement with a capital management institution D at a sale price of $
On November 2, 2022, Hydroman
entered into a receivables purchase agreement with Factor E. Hydroman sold to Factor E $
On November 18, 2022,
the “Merchants” entered into a standard merchant cash advance agreement with Factor F. The Company sold to Factor F $
On November 18, 2022,
the “Merchants” entered into a standard merchant cash advance agreement with Factor G. The Company sold to Factor G $
19
On September 21, 2022,
Hydroman signed a commercial loan with WebBank for the principal amount of $
On September 18, 2022,
Hydroman and ClassicPlan Premium Financing, Inc., entered into a premium financing agreement with a total gross policy premium and related
fees of $
On February 13, 2023,
Hydroman and First Insurance Funding entered into a premium financing agreement with a total gross policy premium and related fees of
$
Short-term loans — related parties: refer to Note 11 Related Party transactions.
Interest expenses for short
term loans amounted to $
Interest expenses for short
term loans amounted to $
Long-term debts:
Long-term debts consist of three auto loans, one building loan, and one secured business loan as of June 30, 2024 and December 31, 2023.
The outstanding amount of the
auto loans were $
| Twelve months ended June 30, | Repayment | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
20
The outstanding amount of the
building loan was $
| Twelve months ended June 30, | Repayment | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
The outstanding amount of the
secured business loan was $
| Twelve months ended June 30, | Repayment | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
Interest expenses for long
term loans amounted to $
Interest expenses for long
term loans amounted to $
Note 11 — Related party transactions
Purchases and accounts payable – related parties:
UniNet Global Inc., a vendor
whose stockholder is Zhiyi (Jonathan) Zhang who is also one of the stockholders and management of the Company, sold certain products to
Visiontech. As of June 30, 2024 and December 31, 2023, the outstanding accounts payable amount due to UniNet Global Inc. was $
From 2022 to April 2023, Jinlong
(David) Du, the CEO of Megaphoton, was also the Director of NMI and will serve as Director of the Company following the Merger with Lakeshore.
On April 17, 2023, Jinlong Du resigned from his position as a member of the NMI’s board of director and will not serve as the
Company’s director post merger. During the three and six months ended June 30, 2023, the purchases Visiontech made from Megaphoton
was $
21
On April 11, 2023, one
of the Company’s customers and vendors, Iluminar Lighting LLC (“Iluminar”) entered into Debt Conversion Agreement with
the Company pursuant to which it will convert $
Revenue and accounts receivable - related party:
During the three and
six months ended June 30, 2024, the sales revenue from Iluminar was $
Other payables — related parties
For the year ended December 31,
2022, Nature’s Miracle Inc. (Cayman) (“NMCayman”), former stockholders of NMI, currently under common control of Mr.
Tie (James) Li, the Company’s CEO, paid a total amount of $
For the year ended December 31,
2021, Yang Wei, former shareholder of the Visiontech and current shareholder of the Company, paid a total amount of $
For the year ended December 31,
2022, Zhiyi (Jonathan) Zhang, paid a total amount of $
As of June 30, 2024 and December
31, 2023, accrued interest expense from related parties, were $
| As of June 30, 2024 | As of December 31, 2023 | |||||||
| Loan to Lakeshore Acquisition II Corp. | $ | $ | ||||||
| Total loan receivable – related parties | $ | $ | ||||||
On June 8, 2023, the Company
and Lakeshore entered into a promissory note for the principal amount of $
On July 7, 2023, August 10,
2023, September 11, 2023, October 11, 2023 and November 9, 2023, NMI and Lakeshore entered into five promissory notes for the principal
amount of $
On December 7, 2023, January
8, 2024, and February 6, 2024, NMI and Lakeshore entered into three promissory notes pursuant to which Lakeshore borrowed the principal
amount of $
As a result of the Merger, all loans to Lakeshore had been consolidated and eliminated on the Company’s unaudited condensed consolidated balance sheets.
Interest income for loan receivable
– related parties amounted to $
22
Interest income for loan receivable
– related parties amounted to $
Short-term loans — related parties
On November 29, 2022,
Visiontech signed a loan with Zhiyi (Jonathan) Zhang, one of the stockholders of the Company, for the principal amount of $
In December 2022, the
Company signed two loans with Tie (James) Li, the Company’s CEO, for the total principal amount of $
On July 11, 2023, Lakeshore
signed one loan with Tie (James) Li for a principal amount of $
On January 17, 2023, the
Company and NMCayman, one of the stockholders of the Company, entered into a loan agreement for the principal amount of $
On January 17, 2023, the
Company and NMCayman entered into a loan agreement for the principal amount of $
On April 1, 2023, NMI
and NMCayman entered into a loan agreement for the principal amount of $
Interest expense for short-term
loan - related parties amounted to $
Interest expense for short-term
loan - related parties amounted to $
Note 12 — Income taxes
As of June 30, 2024 and December
31, 2023, the Company’s deferred tax asset had a full valuation allowance recorded against it. The effective tax rate for the three
and six months ended June 30, 2024 were
23
Note 13 — Equity
The total number of shares
which the Company shall have the authority to issue is one hundred and ten million (
| Common Stock | ||||
| Lakeshore’s shares outstanding prior to reverse recapitalization | ||||
| Shares issued to private rights | ||||
| Conversion of the Lakeshore’s public shares and rights | ||||
| Shares issued to service providers | ||||
| Bonus shares issued to in connection with Lakeshore loans * | ||||
| Bonus shares issued to in connection with NMI loans * | ||||
| Conversion of NMI’s shares into the Company’s ordinary shares | ||||
| Total shares outstanding | ||||
| * | In connection with the Merger, the Company, Lakeshore and NMI further entered into a Letter Agreement on November 15, 2023, a total of |
The shares were valued $
2024 Incentive Plan
In connection with the Merger, the Company adopted the Equity Incentive Plan (the “2024 Incentive Plan”).
The 2024 Incentive Plan will provide for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock or equity-related cash-based awards. Directors, officers and other employees of the Company and its subsidiaries, as well as others performing consulting or advisory services for the Company, will be eligible for grants under the 2024 Incentive Plan.
The 2024 Incentive Plan provides
for the future issuance of shares of the Company’s Common Stock, representing
24
Shares award to Mr. Hausman
and Mr. Carpenter per Letter Agreement stated above has a fair value of $
Pursuant to board resolution
dated March 24, 2024, certain key employees were approved for stock incentives including George Yutuc (Chief Financial Officer), Kirk
Collins (Director of Sales), and Amber Wang (Controller). Each can receive shares that vest over time of
On April 2, 2024, the Company
entered into an investor relations consulting agreement with MZHCI LLC (“MZHCI”) pursuant to which MZHCI will provide investor
relations services to the company and the agreement has a term of six months. The Company will pay $
For the three and six months ended June 30, 2024, the Company recorded
stock compensation expenses of $
Warrants
In
connection with the reverse recapitalization, the Company has assumed
Each
whole warrant entitles the holder to purchase one ordinary share at a price of $
The
Company may redeem the warrants at a price of $
In
addition, if (a) the Company issues additional ordinary shares or equity-linked securities for capital raising purposes in connection
with the closing of its initial business combination at a newly issued price of less than $
25
Note 14 — Concentration of risk
Credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.
As of June 30, 2024 and December
31, 2023, $
Accounts receivable is typically unsecured and derived from revenue earned from customers, thereby exposing the Company to credit risk. The risk is mitigated by the Company’s assessment of its customers’ creditworthiness and its ongoing monitoring of outstanding balances. The Company maintains reserves for estimated credit losses, and such losses have generally been within expectations.
Customer and vendor concentration risk
| For the three months ended June 30, 2024 | For the six months ended June 30, 2024 | As of June 30, 2024 | ||||||||||
| Percentage of Revenue | Percentage of Revenue | Percentage of Account Receivable | ||||||||||
| Customer A | % | % | % | |||||||||
| Customer C | % | % | % | |||||||||
| Iluminar | % | % | % | |||||||||
| For the three months ended June, 2023 | For the six months ended June, 2023 | As of December 31, 2023 | ||||||||||
| Percentage of Revenue | Percentage of Revenue | Percentage of Account Receivable | ||||||||||
| Customer C | < | % | % | % | ||||||||
| Customer G | < | % | < | % | % | |||||||
| Customer H | < | % | < | % | % | |||||||
| Customer I | < | % | < | % | % | |||||||
| Iluminar | < | % | < | % | % | |||||||
| Customer E | < | % | % | < | % | |||||||
| Customer F | % | < | % | < | % | |||||||
26
| For the three months ended June 30, 2024 | For the six months ended June 30, 2024 | As of June 30, 2024 | ||||||||||
| Percentage of Purchase | Percentage of Purchase | Percentage of Account Payable | ||||||||||
| Megaphoton Inc. | < | % | < | % | % | |||||||
| Uninet Global Inc. | < | % | < | % | % | |||||||
| Vendor A | % | % | < | % | ||||||||
| Vendor E | % | % | % | |||||||||
| For the six months ended June 30, 2023 | For the six months ended June 30, 2023 | As of December 31, 2023 | ||||||||||
| Percentage of Purchase | Percentage of Purchase | Percentage of Account Payable | ||||||||||
| Megaphoton | % | % | % | |||||||||
| Uninet Global Inc. | < | % | < | % | % | |||||||
| Vendor A | % | % | < | % | ||||||||
| Vendor D | < | % | % | < | % | |||||||
Note 15 — Lease
The Company follows ASC 842
Leases. The Company has entered into lease agreements for vehicle, offices and warehouses space in California, Pennsylvania and Texas.
$
On January 28, 2021, Hydroman
entered into a lease agreement of the warehouse in Texas. The lease term was from
On April 14, 2021, Hydroman
entered into a lease agreement of the warehouse in Pennsylvania. The lease term was from
On May 15, 2021, Hydroman
entered into a lease agreement of the warehouse in California. The lease term was from
27
On September 1, 2022,
Photon Technology Ltd entered into a year-to-year lease agreement for an office located in Canada. The term of the lease commenced on
September 1, 2022. The monthly payment was CAD
On September 21, 2022,
NMI entered into a month-to-month lease agreement for an office located in California. The term of the lease commenced on September 21,
2022. The monthly payment was $
On May 28, 2023, Visiontech
entered into a lease agreement for a vehicle. The leasing term began on May 28, 2023 and will terminate on April 28, 2025 with
a first installment of $
On April 11, 2024, the Company
entered into a lease agreement for an office located in California. The lease term was from May 1, 2024 to April 30, 2027. The lease payments
are $
As of June 30, 2024 and
December 31, 2023, the weighted-average remaining operating lease term of its existing leases is approximately
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||||||
| Lease cost | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||
| Operating lease cost (included in Cost of Revenue and Other Expense in the Company’s Statement of Operations) | $ | $ | $ | $ | ||||||||||||
| Other information | ||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||||
| As of June 30, 2024 | As of December 31, 2023 | |||||||
| Operating leases | ||||||||
| Right of use asset | ||||||||
| Lease Liability – current portion | ||||||||
| Lease Liability – net of current portion | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
28
| Twelve months ended June 30, | Operating Lease |
|||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| Less: Imputed interest/present value discount | ( |
) | ||
| Present value of lease liabilities | $ | |||
Note 16 — Contingencies
The Company may, from time to time, be involved in legal matters arising in the ordinary course of its business. While the Company is not presently subject to any material legal proceedings, there can be no assurance that such matters will not arise in the future or that any such matters in which the Company is involved, or which may arise in the ordinary course of the Company’s business, will not at some point proceed to litigation or that such litigation will not have a material adverse effect on the business, financial condition or results of operations of the Company.
On August 22, 2023, two separate
lawsuits were filed against NMI and two of its wholly-owned subsidiaries: Visiontech Group Inc., a California corporation, and Hydroman
Inc., a California corporation (collectively referred to as the “Defendants”) by Megaphoton. Megaphoton, a manufacturer and
producer of artificial lighting equipment for use in agriculture and industrial applications, filed the lawsuits against the Defendants
in Los Angeles Superior Court, asserting that the Defendants have breached a contract/guarantee agreement by failing to pay a total of
$
On March 1, 2024 NMI was notified of a complaint in San Bernardino Superior Court by Vien Le, its former CFO, who was employed approximately 2 months. The lawsuit claims wrongful discharge, untimely payment of wages and other related items. The Company has retained counsel and believes it will successfully defend against this lawsuit.
Nasdaq Notification Letter
On
April 26, 2024, the “Company received a notification letter (the “Notification Letter on MVPHS”) from The Nasdaq Stock
Market LLC (“Nasdaq”) that the Company is not in compliance with the minimum Market Value of Publicly Held Shares (the “MVPHS”)
set forth in Nasdaq Listing Rule 5450(b)(2)(C) for continued listing on Nasdaq, which requires a minimum MVPHS of $
Additionally,
on April 26, 2024, the Company received a separate notification letter (the “Notification Letter on MVLS”) from Nasdaq, indicating
that the Company was no longer in compliance with the minimum Market Value of Listed Securities (“MVLS”) of $
The Company has a period of 180 calendar days, or until October 23, 2024, to regain compliance with the Requirements.
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On
May 23, 2024, the Company received another notice from Nasdaq, notifying the Company that, because the closing bid price for the Common
Stock has fallen below $
The Company intends to monitor the MVPHS Requirement, MVLS Requirement, and minimum bid price requirement of its Common Stock and will consider implementing available options to regain compliance with the MVPHS Requirement, MVLS Requirement and minimum bid price requirement under the Nasdaq Listing Rules.
The Company intends to monitor the MVPHS Requirement and MVLS Requirement of its Common Stock and will consider implementing available options to regain compliance with the MVPHS Requirement and MVLS Requirement under the Nasdaq Listing Rules.
Note 17— Subsequent events
On July 3, 2024, the
Company signed four convertible note investment agreements total of $
On July 16, 2024, the Company
entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a certain investor (the “Purchaser”)
pursuant to which the Company sold, in a private placement (the “July 2024 Offering”), a $
On July 25, 2024, the Company
entered into an underwriting agreement with EF Hutton LLC as the underwriter, relating to a firm commitment underwritten public offering
of
On August 1, 2024, the Company
and Darin Carpenter entered into the mutual termination of employment agreement and intent to transition to project-based work (the “Agreement”),
in which it was agreed that Mr. Carpenter shall resign from his position as Chief Operating Officer of the Company effective as of July
31, 2024. Pursuant to the Agreement, the Company and Mr. Carpenter agreed that Mr. Carpenter will provide services as a consultant to
the Company on a per project basis as needed. In addition, the Company agreed to fully vest
On August 13, 2024, the Company
entered a securities purchase agreement with 1800 Diagonal Lending LLC (“Diagonal”), in connection with the issuance of a
promissory note in the aggregate principal amount of $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the other information set forth in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the Securities and Exchange Commission (the “SEC”) on April 16, 2024. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the SEC.
Reverse recapitalization
Nature’s Miracle Holding Inc., which until March 11, 2024 was known as LBBB Merger Corp. (the “Company”, “we” or “us”) is a company incorporated on August 1, 2022 under Delaware law as a wholly owned subsidiary of the Lakeshore Acquisition II Corp., a Cayman Islands exempted company (“Lakeshore”).
Lakeshore entered into the Merger Agreement with Nature’s Miracle Inc. (“Nature’s Miracle”) and shareholders of Nature’s Miracle and Lakeshore on September 9, 2022, and as amended on June 7, 2023. Pursuant to the terms of the Merger Agreement, the merger will be completed through a two-step process consisting of the reincorporation and the merger. Pursuant to the Merger Agreement, at the effective time of the merger, each share of Nature’s Miracle common stock issued and outstanding immediately prior to the effective time was cancelled and automatically converted into the right to receive the applicable pro rata portion of shares of our common stock, the aggregate value of which was equal to: (a) $230,000,000 minus (b) the estimated Closing Net Indebtedness (as defined in the Merger Agreement) (the “Merger Consideration”).
On March 11, 2024, Lakeshore merged with and into the Company for the sole purpose of reincorporating Lakeshore into the State of Delaware (“Reincorporation”). Immediately after the Reincorporation, we consummated the merger resulting in the stockholders of Nature’s Miracle becoming 84.7% stockholders of our Company and our Company becoming the 100% stockholder of Nature’s Miracle. Immediately after giving effect to the merger, there were 26,306,764 issued and outstanding shares of our common stock. The consolidation of our Company and our subsidiaries have been accounted for as Lakeshore is the “acquired” company for financial reporting purposes at historical cost and prepared on the basis as if the aforementioned transactions had become effective as of the beginning of the first period presented in the accompanying consolidated financial statements. All share and per share data has been retroactively restated to reflect our current capital structure.
Overview
We are a growing agriculture technology company providing products to indoor growers in a CEA (Controlled Environment Agriculture) setting in North America.
We focus on the greenhouse and cultivation industry and aim at providing integrated greenhouse solutions, including grow lights and grow media for vertical farming and multiple growing system. These systems enable year-round cultivation of crops, avoids harsh environments with very cold or hot climate. Many states focused on farming are limited to grow crops are certain months such as Spring to Fall only, and or are too far from production states too have fresh produce year-round. There are cost advantages also as vertical farming systems produces a much higher yield per acre of land. In most cases, water consumption is much lower, up to 90%. Many indoor growers can locate closer to large population centers which can significantly reduce cost of trucking, and lead time whilst reducing carbon emissions as well.
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In February 2024 the Company started shipping a new product line of grow containers. These systems are indoor vertical farming units inside a traditional shipping container but equipped with temperature controls, multiple layers of growing space, L.E.D. lights, water controls and other systems. The Company has branded these “Growtainers” and “5 plus 1” representing five grow containers plus one container used as a control unit.
We operate mainly through two subsidiaries in California, Visiontech and Hydroman. Visiontech is known for the brand “eFinity” and provides high-efficiency and high-quality grow lights, grow media, fixtures and other related equipment; Hydroman supplies commercial greenhouse developers and owners with professional lighting technology and equipment.
The Company was founded by a CEO with a track record of putting together business models, securing financing, successfully listing on Nasdaq and enhancing shareholder value; and in since December 2023 an experienced chief financial officer and a director of sales with significant experience in the CEA space. The Management team is committed to making the Company the leading provider of commercial greenhouse infrastructure, providing greenhouse fully controlled environmental system, operations consulting services, equipment, and a leader in supplying vertical farming equipment, nutrients, grow feed, and related supplies.
In its first expansion plan, the Company has added additional products to our offering. These include organic and non-organic fertilizers, organic plant growth additives, and dehumidifiers. We have diverse suppliers including from countries such as India, Holland and Turkey. Additional equipment is being considered as well. These are value add components that will help growers increase yield, but more importantly reduce failures and dramatically improve growing environments such. The new products are a natural complement to its our base of LED grow lights.
The Company also seeks to enter the joint ventures in other industry verticals to utilize excess space available for vertical farming. An example of such verticals includes Bitcoin mining centers, independently-owned Artificial Intelligence data-centers and electrical power-grid equipment operators. These facilities produce complimentary by-products that our systems utilize to manage ideal growing conditions.
The Company has signed supplier agreements with Solar panel companies in order to enter the field of supplying solar power systems to indoor farmers.
Trends and Expectations
The global indoor farming market was estimated at $18.6 billion in 2022, $20.3 billion in 2023 and poised to grow to $32.3 billion in 2028 according to Markets and Markets research. We are part of this unique and lucrative industry. The drivers are:
| ● | Increase in demands for fresh foods with high nutritional value |
| ● | Large population center’s demand for produce from a short distance |
| ● | the rise of fuel and transport costs |
| ● | the need to conserve water as indoor systems have highly efficient water use |
| ● | the need for year-round farming, protection from the elements and pests |
| ● | an exponential yield per acre compared to conventional farming. |
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The following factors have been important to our business, and we expect them to impact our results of operations and financial condition in future periods:
Product and Brand Development
We plan to increase investments in product and brand development. We actively evaluate and pursue acquisitions of product brand names and improvements on existing products. We continue to work with our suppliers in improving lighting products to be both of the highest quality and simultaneously cost effective for the customer. The Company invests in trips abroad to source and partner with manufacturing companies. We expect to develop additional manufacturing relationships and suppliers in Europe in the near future.
The Company is also developing proprietary “all in one” automated and robotic indoor growing systems that are under design and testing phases.
The Company utilizes its vast network in the industry and recent publicity in listing on Nasdaq in acquiring leads for potential partnerships in sourcing, research and development of new product and business acquisitions.
Regulatory Environment
Unless otherwise indicated or the context otherwise requires, references in this section to “we,” “us,” “our,” and other similar terms refer to Nature’s Miracle Holding Inc. and its consolidated subsidiaries.
The importation of LED lighting and distribution of such equipment in the United States and Canada does not require strict government disclosures and technical inspections. The Company obtains local business permits to store in our main warehouses, obtain licenses to resell, and follows guidelines on packaging. Certain utility companies in the U.S. have programs that award rebates to heavy usage customers, some of which are in the indoor farming business. These customers are required to install LED lights with a minimum 50,000 hours life. There is also a performance requirement set by DesignLights Consortium, a non-profit energy improvement agency.
Sourcing
The Company has long-term relationships with suppliers in Asia. Our top three suppliers of LED equipment are American Agricultural Innovation Technology Inc., Solislike-Tech Co., Ltd., Dongguan ZSC Lighting Co., Ltd. Each supplier provides us net 30 to net 90 day terms. The Company has also been approached by established lighting companies based in Japan and Germany. On grow feed, fertilizers and nutrients, our potential suppliers are based in Europe and some in Asia. Our grow container product was jointly developed and manufactured by a company based in Shenzhen, China.
On April 24, 2023, we entered into a strategic cooperation agreement with Sinoinnovo Technology (Guangdong) Co., Ltd. (“Sinoinnovo”), a company incorporated under the laws of China, pursuant to which Nature’s Mircle will source from Sinoinnovo its grow light systems for distribution in the U.S. and Europe. Both companies will also cooperate jointly to set up advanced manufacturing capabilities in China and the U.S.
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RESULTS OF OPERATIONS
For the Three Months ended June 30, 2024 and 2023
The following table presents certain combined statement of operations information and presentation of that data as a percentage of change from year to year.
| For the Three Months Ended | Percentage | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Revenues | 3,404,967 | 1,943,528 | 1,461,439 | 75.2 | % | |||||||||||
| Cost of revenues | 2,952,747 | 1,843,257 | 1,109,490 | 60.2 | % | |||||||||||
| Gross profit | 452,220 | 100,271 | 351,949 | 351.0 | % | |||||||||||
| Operating expenses | 1,736,891 | 458,037 | 1,278,854 | 279.2 | % | |||||||||||
| Loss from operation | (1,284,671 | ) | (357,766 | ) | (926,905 | ) | 259.1 | % | ||||||||
| Total other expense, net | (482,848 | ) | (187,844 | ) | (295,004 | ) | 157.0 | % | ||||||||
| Loss before income taxes | (1,767,519 | ) | (545,610 | ) | (1,221,909 | ) | 224.0 | % | ||||||||
| Total provision for (benefit of) income taxes | 800 | (139,040 | ) | 139,840 | (100.6 | )% | ||||||||||
| Net Loss | (1,768,319 | ) | (406,570 | ) | (1,361,749 | ) | 334.9 | % | ||||||||
| Gross profit % of revenues | 13.3 | % | 5.2 | % | ||||||||||||
| Net Loss % of revenues | (51.9 | )% | (20.9 | )% | ||||||||||||
Revenue
Revenue for the three months ended June 30, 2024 increased 75.2% to $3,404,967 as compared to $1,943,528 for the three months ended June 30, 2023. Revenue increased due to rising customer demand from older customers, newer customers achieved via additional hiring of five sales-workers in first half of 2024 and the availability of new product lines that are new to 2024.
For the three months ended June 30, 2024 and 2023, we had 52 and 74 customers, respectively. Average revenue per customer for the three months ended June 30, 2024 and 2023 were approximately $65,480 and $26,264, respectively. Our revenue from top 5 customers for the three months ended June 30, 2024 was approximately $2.7 million compared to approximately $0.9 million for the three months ended June 30, 2023, representing an increase of 194.1%. The higher average sale and increased revenue from top 5 customer are reflective of higher industry demand.
In addition, our staff have been in constant communication with customers on their lighting and indoor farming needs and monitor their plans to replenish old equipment and related components as well us in building new facilities. We also hired a new director of sales in January 2024 plus in March of 2024 hired a new sales representative in northern California and another hired on the east coast.
Also, our principal business is in CEA industry which rapidly expanding due to growing consumer demand for low-environmental-impact food, local food systems, and improved accessibility to high-quality produce with shorter supply chains. In addition, our access to capital market will allow us to expend significant resources to compete, increase our product supply and develop new products and new market. Starting in 2023, the Company has two customers supplying LED lighting to growers that apply to rebate programs with utility companies. Utility companies are incentivizing volume users of electricity to convert to LED lighting by providing rebates. The rebate process can take time to verify and document by Utility companies resulting in payments of 60 to 120 days. The Company believes the credit quality of rebate payers more than offset the risk of long collection turnover of receivables. For the three months ended June 30, 2024 and 2023, the Company has sold via these programs with total sales to two customers of approximately $1,640,741 and nil, respectively.
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Costs of Revenue
Costs of revenue for the three months ended June 30, 2024 increased 60.2% to $2,952,747 as compared to $1,843,257 for the three months ended June 30, 2023. Cost of revenue increased primarily due to the increase in revenue, which was in turn primarily driven by higher sales volume of our products due to higher customer demand.
Gross profit
Gross profit was $452,220 and $100,271 for the three months ended June 30, 2024 and 2023, respectively. The gross margin for the three months ended June 30, 2024 increase to 13.3% from 5.2% for the three months ended June 30, 2023. The increase was due to a combination of customers moving to premium grow lighting such as our own “Efinity” brand, more favorable purchasing conditions from Asian suppliers and the same fixed costs of warehouse rent and labor are spread over higher volume of sales.
Operating Expenses
Operating expenses for the three months ended June 30, 2024 increased 279.2% to $1,736,891 as compared to $458,037 for the three months ended June 30, 2023. The increase was mainly due to increased payroll and compensation expense of $450,786, which was attributed to increased compensation expenses provided to executives and key employees, increased professional fees of $396,282 and increased stock compensation expense of $195,908. The Company started its listing on Nasdaq in March 2024 and started paying director’s and officer’s insurance, additional costs in public relations, increased stock compensation costs to employees and outsourced providers.
Pursuant to a Letter Agreement entered on November 15, 2023, a total of 110,000 shares of our common stock will be issued upon closing of the merger in connection with certain transactions relating to our employment agreements, including: (i) 10,000 shares to Charles Jourdan Hausman in connection with his appointment as a board member with us and (ii) 100,000 shares to Darin Carpenter in connection with an employment agreement with us. The shares were valued at approximately $1.1 million and were expensed as general and administrative expenses in accordance with the service period.
Pursuant to board resolution dated March 24, 2024, certain key employees were approved for stock incentives including George Yutuc (Chief Financial Officer), Kirk Collins (Director of Sales), and Amber Wang (Controller). Each can receive shares that vest over time of 100,000, 50,000 and 50,000 shares, respectively. Each of these employees have signed an employment agreement that reflects such shares and unique vesting schedules. The fair value of the shares to be issued was approximately $178,000 at $0.89 per share and were expensed as general and administrative expenses in accordance with the service period.
On April 2, 2024, we entered into an investor relations consulting agreement with MZHCI LLC (“MZHCI”) pursuant to which MZHCI will provide investor relations services to us and the agreement has a term of six months. We will pay $14,000 cash per month and to issue MZHCI 150,000 shares of restricted common stock, 75,000 shares will be vested immediately upon signing the agreement and 75,000 shares will vest on October 1, 2024. The fair value of the shares to be issued was approximately $143,000 at $0.95 per share. The 150,000 shares were issued on May 7, 2024.
Total stock compensation expenses amounted to $195,908 for the three months ended June 30, 2024.
Other Expenses
Other expenses primarily consist of net interest expense and non-cash finance expense. Other expenses for the three months ended June 30, 2024 was $482,848 as compared to other expense of $187,844 for the three months ended June 30, 2023. The increase was mainly due to the interest expenses increased by $525,476.
Interest expense for the three months ended of June 30, 2024 was $486,586 and interest income for the three months ended June 30, 2023 was $38,890. The principal reason of increase of interest expense is the company paid off most of receivable factoring loans of approximately $1.5 million in June 2023 and got four additional short loans in 2024.
35
Income Tax Expense (Benefit)
Our income tax expense was amounted to $800 for the three months ended June 30, 2024 and our income tax benefit was amounted to approximately $0.1 million for the three months ended June 30, 2023.
The effective tax rate for the three months ended June 30, 2024 and 2023 were (0.0)% and 25.5%, respectively. The effective tax rate differs from the federal and state statutory tax rate of 21.0% primarily due to the valuation allowance on the deferred tax assets.
Net Loss
Net loss for the three months ended June 30, 2024 was $1,768,319 as compared to net loss of $406,570 for the three months ended June 30, 2023, representing an increase of $1,361,749. The increase in net loss for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily due to increased salaries and compensation expense and stock compensation expense after merger.
For the Six Months ended June 30, 2024 and 2023
The following table presents certain combined statement of operations information and presentation of that data as a percentage of change from year to year.
| For the Six Months Ended | Percentage | |||||||||||||||
| 2024 | 2023 | Change | Change | |||||||||||||
| Revenues | 5,609,687 | 4,910,200 | (699,487 | ) | (14.2 | )% | ||||||||||
| Cost of revenues | 4,845,150 | 4,512,669 | (332,481 | ) | (7.4 | )% | ||||||||||
| Gross profit | 764,537 | 397,531 | 367,006 | 92.3 | % | |||||||||||
| Operating expenses | 3,051,925 | 1,015,046 | 2,036,879 | 200.7 | % | |||||||||||
| Loss from operation | (2,287,388 | ) | (617,515 | ) | (1,669,873 | ) | 270.4 | % | ||||||||
| Total other expense, net | (1,785,237 | ) | (587,124 | ) | (1,198,113 | ) | 204.1 | % | ||||||||
| Loss before income taxes | (4,072,625 | ) | (1,204,639 | ) | (2,867,986 | ) | 238.1 | % | ||||||||
| Total provision for (benefit of) income taxes | 2,500 | (230,690 | ) | 233,190 | (101.1 | )% | ||||||||||
| Net Loss | (4,075,125 | ) | (973,949 | ) | (3,101,176 | ) | 318.4 | % | ||||||||
| Gross profit % of revenues | 13.6 | % | 8.1 | % | ||||||||||||
| Net Loss % of revenues | (72.6 | )% | (19.8 | )% | ||||||||||||
Revenue
Revenue for the six months ended June 30, 2024 increased 14.2% to $5,609,687 as compared to $4,910,200 for the six months ended June 30, 2023. Revenue increased due to rising customer demand from older customers, a larger salesforce in 2024 and an increase in products lines and services including our rebate program that was introduced in the second half of 2023.
For the six months ended June 30, 2024 and 2023, we had 90 and 104 customers, respectively. Average revenue per customer for the six months ended June 30, 2024 and 2023 were approximately $62,330 and $47,213, respectively. Our revenue from top 5 customers for the six months ended June 30, 2024 was approximately $3.5 million compared to approximately $2.6 million for the six months ended June 30, 2023, representing an increase of 34.8%. The higher average sale and increased revenue from top 5 customer are reflective of higher industry demand.
In addition, our staff have been in constant communication with customers on their lighting and indoor farming needs and monitor their plans to replenish old equipment and related components as well us in building new facilities. we also hired a new director of sales in January 2024 plus in March of 2024 hired a new sales representative in northern California and another hired on the east coast.
36
Also, our principal business is in CEA industry which rapidly expanding due to growing consumer demand for low-environmental-impact food, local food systems, and improved accessibility to high-quality produce with shorter supply chains. In addition, our access to capital market will allow us to expend significant resources to compete, increase our product supply and develop new products and new market. Starting in 2023, the Company has two customers supplying LED lighting to growers that apply to rebate programs with utility companies. Utility companies are incentivizing volume users of electricity to convert to LED lighting by providing rebates. The rebate process can take time to verify and document by Utility companies resulting in payments of 60 to 120 days. The Company believes the credit quality of rebate payers more than offset the risk of long collection turnover of receivables. For the six months ended June 30, 2024 and 2023, the Company has sold via these programs with total sales to two customers of approximately $2,023,795 and nil, respectively.
Costs of Revenue
Costs of revenue for the six months ended June 30, 2024 increased 7.4% to $4,845,150 as compared to $4,512,669 for the six months ended June 30, 2023. Cost of revenue increased primarily due to the increase in revenue, which was in turn primarily driven by higher sales volume of our products due to higher customer demand.
Gross Profit
Gross profit was $764,537 for the six months ended June 30, 2024 and gross profit was $397,531 for six months ended June 30, 2023. The gross margin for the six months ended June 30, 2024 increase to 13.6% from 8.1% for the six months ended June 30, 2023. The increase was due to better purchasing conditions with suppliers in Asia and higher sales volume spread over fixed warehousing and labor costs.
Operating Expenses
Operating expenses for the six months ended June 30, 2024 increased 200.7% to $3,051,925 as compared to $1,015,046 for the six months ended June 30, 2023. The increase was mainly due to increased payroll and compensation expense of $814,218, which was attributed to increased compensation expenses provided to executives and key employees, increased professional fees of $416,829, and increased stock compensation expense of $367,805. The Company started its listing on Nasdaq in March 2024 and started paying director’s and officer’s insurance, additional costs in public relations, increased stock compensation costs to employees and outsourced providers.
Pursuant to a Letter Agreement entered on November 15, 2023, a total of 110,000 shares of our common stock will be issued upon closing of the merger in connection with certain transactions relating to our employment agreements, including: (i) 10,000 shares to Charles Jourdan Hausman in connection with his appointment as a board member with us and (ii) 100,000 shares to Darin Carpenter in connection with an employment agreement with us. The shares were valued at approximately $1.1 million and were expensed as general and administrative expenses in accordance with the service period.
Pursuant to board resolution dated March 24, 2024, certain key employees were approved for stock incentives including George Yutuc (Chief Financial Officer), Kirk Collins (Director of Sales), and Amber Wang (Controller). Each can receive shares that vest over time of 100,000, 50,000 and 50,000 shares, respectively. Each of these employees have signed an employment agreement that reflects such shares and unique vesting schedules. The fair value of the shares to be issued was approximately $178,000 at $0.89 per share and were expensed as general and administrative expenses in accordance with the service period.
On April 2, 2024, we entered into an investor relations consulting agreement with MZHCI LLC (“MZHCI”) pursuant to which MZHCI will provide investor relations services to us and the agreement has a term of six months. We will pay $14,000 cash per month and to issue MZHCI 150,000 shares of restricted common stock, 75,000 shares will be vested immediately upon signing the agreement and 75,000 shares will vest on October 1, 2024. The fair value of the shares to be issued was approximately $143,000 at $0.95 per share. The 150,000 shares were issued on May 7, 2024.
Total stock compensation expenses amounted to $367,805 for the six months ended June 30, 2024.
On August 1, 2024, we and Darin Carpenter entered into the mutual termination of employment agreement and intent to transition to project-based work (the “Agreement”), in which it was agreed that Mr. Carpenter shall resign from his position as Chief Operating Officer of us effective as of July 31, 2024. Pursuant to the Agreement, we and Mr. Carpenter agreed that Mr. Carpenter will provide services as a consultant to us on a per project basis as needed. In addition, we agreed to fully vest 100,013 shares of common stock that was issuable to Mr. Carpenter pursuant to the Employment Agreement dated as of September 17, 2023, by and between us and Mr. Carpenter. We also agreed to pay Mr. Carpenter the equivalent of one month of salary payable in September 2024.
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Other Expenses
Other expenses primarily consist of net interest expense and non-cash finance expense. Other expenses for the six months ended June 30, 2024 was $1,785,237 as compared to other expense of $587,124 for the six months ended June 30, 2023. The increase was mainly due to the non-cash finance expense of $1.0 million and higher costs associated with a publicly-listed company.
Interest expense for the six months ended of June 30, 2024 increased 119.1% to $788,975 as compared to $360,020 for the six months ended of June 30, 2023. The principal reason of increase of interest expense is the company paid off most of receivable factoring loans of approximately $1.5 million in June 2023 and got four additional short loans in 2024.
Pursuant to a Letter Agreement entered on November 15, 2023, a total of 100,000 shares of our common stock will be issued upon closing of the merger in connection with certain transactions relating to merger including: (i) 50,000 shares to Tie (James) Li and 50,000 shares to Zhiyi, Zhang (or 100,000 shares in the aggregate) in connection with their guarantees of the repayment of the Newtek Loan, which was loaned to a subsidiary of us with the principal amount of $3,700,000; The shares were valued at approximately $1.0 million and was expensed as non-cash finance expenses after consummation of the Merger.
Income Tax Expense (Benefit)
Our income tax expense was amounted to $2,500 for the six months ended June 30, 2024 and our income tax benefit was amounted to approximately $0.2 million for the six months ended June 30, 2023.
The effective tax rate for the six months ended June 30, 2024 and 2023 were (0.1)% and 19.2%, respectively. The effective tax rate differs from the federal and state statutory tax rate of 21.0% primarily due to the valuation allowance on the deferred tax assets.
Net Loss
Net loss for the six months ended June 30, 2024 was $4,075,125 as compared to net loss of $973,949 for the six months ended June 30, 2023, representing an increase of $3,101,176. The increase in net loss for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily due to increased salaries and compensation expense, additional liabilities inherited from merging with the SPAC (LBBB Merger Corp.), higher audit, legal, Nasdaq fees and other costs related to public companies, higher legal and travel costs related to potential acquisition of Agrify, and stock compensation expense after merger.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
In assessing liquidity, we monitor and analyze cash on-hand and operating expenditure commitments. Our liquidity needs are to meet working capital requirements and operating expense obligations. To date, we financed our operations primarily through debt financing from financial institution and related parties. As of June 30, 2024, we had approximately $31,000 in cash which primarily consists of bank deposits, which are unrestricted as to withdrawal and use. Our working capital deficit was approximately $13.0 million as of June 30, 2024.
On July 3, 2024, we signed four convertible note investment agreements total of $410,000 from four investors. Each note bears 12% interest per annum and matures in 6 months. We shall repay the principal and accumulated interest after six months. If the investors choose to convert, the number of shares will be calculated by dividing the principal plus accumulated interest by $0.442. $410,000 had been deposited into our bank account in July 2024.
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On July 16, 2024, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a certain investor (the “Purchaser”) pursuant to which we sold, in a private placement (the “July 2024 Offering”), a $180,000 convertible note (the “July 2024 Note” and, the shares underlying the July 2024 Note, the “July 2024 Note Shares”) with an original issue discount of $27,500 and warrant (the “July 2024 Warrant”) to purchase up to 217,500 shares of common stock (the “July 2024 Warrant Shares”) at an exercise price of $0.87 per share. As consideration for entering into the Securities Purchase Agreement, we issued a total of 180,000 shares (the “Commitment Shares”) to the Purchaser on July 18, 2024. The July 2024 Warrant is exercisable on July 16, 2024 until five years from July 18, 2024. On July 30, 2024, the note was terminated as a result of the Company’s full payment of the note’s principal amount and accrued interest and other fees in the total amount of $212,400. As a result, all obligations under the note have been satisfied, and the note is no longer outstanding.
On July 25, 2024, we entered into an underwriting agreement with EF Hutton LLC as the underwriter, relating to a firm commitment underwritten public offering of 5,000,000 units (the “Units”) consisting of (i) one share of common stock, par value $ 0.0001 per share (“Common Stock”) and (ii) one Series A Warrant to purchase one share of Common Stock (“Warrant”) at a public offering price of $0.24 per Unit, for aggregate gross proceeds of $1.2 million, prior to deducting underwriting discounts and other offering expenses. The closing of the offering occurred on July 29, 2024.
On August 13, 2024, we entered a securities purchase agreement with 1800 Diagonal Lending LLC (“Diagonal”), in connection with the issuance of a promissory note in the aggregate principal amount of $181,700, including an original issue discount of $23,700, closing expenses of $8,000 deducted from funding amount; with additional tranches of financing of up to $1.0 million in the aggregate during the next twelve months subject to further agreement by and between Diagonal and us. The initial funding shall be payable in 10 equal monthly installments of $20,350. In the event of default, the note has convertibility provisions.
We have experienced recurring losses from operations and negative cash flows from operating activities since 2022. In addition, we had, and may potentially continue to have, an ongoing need to raise additional cash from outside sources to fund our expansion plan and related operations. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure. In connection with our assessment of going concern considerations in accordance with Financial Accounting Standard Board’s Accounting Standards Update (“ASU”) 2014-15, “Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” management has determined that these conditions raise substantial doubt about our ability to continue as a going concern within one year after the date that these unaudited condensed consolidated financial statements are issued. If we are unable to realize our assets within the normal operating cycle of a twelve (12) month period, we may have to consider supplementing our available sources of funds through the following sources:
| ● | financial support from our related parties and shareholders; |
| ● | other available sources of financing from banks and other financial institutions; |
| ● | equity financing through capital market |
We can make no assurances that required financings will be available for the amounts needed, or on terms commercially acceptable to us, if at all. If one or all of these events does not occur or subsequent capital raises are insufficient to bridge financial and liquidity shortfall, there would likely be a material adverse effect on us and would materially adversely affect our ability to continue as a going concern.
The unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty.
Cash Flows
Operating Activities
Net cash used in operating activities was approximately $1.7 million for the six months ended June 30, 2024, which was mainly due to our net loss of approximately $4.1 million after adjustment of non cash items and increased accounts receivable of approximately $1.3 million due to increased revenue offset by cash inflow of approximately $0.8 million from accounts payable as we increased our purchase from vendors and approximately $0.9 million as we used more on hand inventory.
Net cash used in operating activities was $497,271 for the six months ended June 30, 2023. We had net loss of $973,949, our net loss from operating cashflow was decreased by approximately $2.2 million of cash inflow from inventory as we used more inventory on hand instead of making new purchases offset by decrease of accounts payable as we payoff more vendors using on hand cash.
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Investing Activities
For the six months ended June 30, 2024, net cash used in investing activities amount to approximately $40,000 which was primarily for loan to Lakeshore of $40,000 prior to the Merger, offset by net proceed from reverse recapitalization of $197.
For the six months ended June 30, 2023, net cash used in investing activities amount to approximately $17,000 which was primarily for loan to related parties of $150,000, offset by loan repayment from third parties of $132,913.
Financing Activities
Net cash provided by financing activities was approximately $1.6 million for the six months ended June 30, 2024. The main reason for the increase in net cash provided was primarily a result of net proceeds from short-term loan from a third party of $2.5 million, offset by payments of deferred offering costs of approximately $0.3 million, repayments on long term loans which are mainly our car and mortgage loan of approximately $0.1 million, repayments on short-term loan from third parties of approximately $0.5 million.
Net cash provided by financing activities was approximately $1.1 million for the six months ended June 30, 2023. The main reason for the increase in net cash provided was primarily a result of net proceeds from long-term loan borrowing from third parties of approximately $3.3 million and short-term loan borrowing from related parties of approximately $0.8 million, offset by payments of deferred offering costs of approximately $0.5 million, repayments on long term loans which are mainly our car and mortgage loan of approximately $55,000, and repayments on short-term loan from third parties of approximately $1.8 million.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition and results of operations will be affected. We base our estimates on experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies, which we discuss further below. While our significant accounting policies are more fully described in Note 3 to our unaudited condensed consolidated financial statements, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our unaudited condensed consolidated financial statements.
Revenue recognition
We follow Accounting Standards Codification (“ASC”) 606 Revenue Recognition and recognizes revenue from product sales revenues, net of promotional discounts and return allowances, when the following revenue recognition criteria are met: a contract has been identified, separate performance obligations are identified, the transaction price is determined, the transaction price is allocated to separate performance obligations and revenue is recognized upon satisfying each performance obligation.
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We are a growing agriculture technology company providing CEA hardware products to growers in the controlled environment agriculture industry setting in North America. Majority of our products were grow lights and related products for the indoor growing settings. Starting from first quarter of 2024, we also provide indoor grow containers to our customers.
Our contracts with customers where the amounts charged per product is fixed and determinable, the specific terms of the contracts were agreed on by us including payment terms which are typically 30 to 60 days for existing customers and prepaid for most new customers. In certain contracts involving customers that entered into rebate programs with utility companies for using LED lighting, payment term ranges from 60 to 120 days.
In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the customers and the transfer of the promised goods or services to the licensees will be one year or less. The risk of loss or damage upon shipment, therefore, revenue from product sales is recognized at a point in time when control of product transfer to customer and we have no further obligation to provide services related to such product. Return allowances which are immaterial based on historical experience.
We evaluate the criteria of ASC 606 — Revenue Recognition Principal-Agent Considerations in determining whether it is appropriate to record the gross amount of product sales and related costs, or the net amount earned as commissions.
We ship the products according to shipping terms on the purchase order or sales order. Once delivery is complete, we then send an invoice to the customer according to the quantity and price of shipment.
We evaluate the indicators of control in accordance with ASU 2016-08: 1) We are the most visible entity to customers and assumes fulfilment risk and risks related to the acceptability of products, including addressing customer inquiries directly and handling of product returns or refunds directly if any. For grow light products, we have our own brand for marketing. For indoor grow containers products, we are also involved in the design and technical specification of the products to meet requirement in the US market. 2) We assume inventory risk either through storing the products in our own warehouses; or for drop shipments directly from vendors, we take the title from vendors through inspection and acceptance and are responsible for product damage during shipment period prior to acceptance of our customers and are also responsible for product return if the customer is not satisfied with the products. 3) We determine the resale price of the products. 4) We are the party that direct the use of the inventory and can prevent the vendor from transferring the product to a customer or to redirect the products to a different customer, after evaluating the above scenario, we consider ourselves the principal of these arrangements and records revenue on a gross basis.
Payments received prior to the delivery of goods to customers or picked up by the customers are recorded as contract liabilities.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers.
Current discount offers, when accepted by our customers, are treated as a reduction to the transaction price of the related transaction.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are recorded upon recognizing the related sales.
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Inventory
Inventory consists of finished goods ready for sale and is stated at the lower of cost or market. We value our inventory using the weighted average costing method. We include a part of cost of goods sold any freight incurred to ship the product from our vendors to warehouses. Outbound freight costs related to shipping costs to customers are considered period costs and reflected in cost of revenue. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence.
If the estimated realizable value of the inventory is less than cost, we make provisions in order to reduce our carrying value to our estimated market value. We also review inventory for slow moving and obsolescence and records allowance for obsolescence.
Recently adopted accounting pronouncements
In May 2019, the FASB issued ASU 2019-05, which is an update to ASU Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced the expected credit losses methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendments in Update 2016-13 added Topic 326, Financial Instruments — Credit Losses, and made several consequential amendments to the Codification. Update 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized cost basis, in accordance with Subtopic 326-30, Financial Instruments — Credit Losses — Available-for-Sale Debt Securities. The amendments in this Update address those stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. In November 2019, the FASB issued ASU No. 2019-10, which to update the effective date of ASU No. 2016-02 for private companies, not-for-profit organizations and certain smaller reporting companies applying for credit losses, leases, and hedging standard. The new effective date for these preparers is for fiscal years beginning after December 15, 2022. We adopted the ASU on January 1, 2023 and the adoption of this ASU does not have a material effect on our unaudited condensed consolidated financial statements.
Recently issued accounting pronouncements
In December 2023, the FASB issued Accounting Standards Update No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. We are currently evaluating the potential impact of adopting this new guidance on our unaudited condensed consolidated financial statements and related disclosures.
Except as mentioned above, we do not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on our unaudited condensed consolidated balance sheets, statements of income and comprehensive income and statements of cash flows.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2024. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were not effective as of June 30, 2024, due solely to the material weakness in our internal control over financial reporting related to (i) a lack of effective risk assessment process; (ii) a lack of effective overall control environment; (iii) a lack of controls over monitoring; (iv) a lack of human resources within finance and accounting functions leading to lack of segregation of duties; (v) a lack of information technology control design and operating effectiveness; (vi) a lack of controls or ineffectively designed controls impacting financial reporting; (vii) an inadequate control over proper revenue recognition and purchase cutoff; and (viii) a lack of controls over income tax. Following the identification of the material weaknesses and control deficiencies, we plan to continue to take remedial measures including (i) hiring more qualified accounting personnel with relevant U.S. generally accepted accounting principles (“GAAP”) and SEC reporting experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework; (ii) implementing regular and continuous GAAP accounting and financial reporting training programs for our accounting and financial reporting personnel; (iii) engaging an external consulting firm to assist us with assessment of Sarbanes-Oxley compliance requirements and improvement of overall internal control; and (iv) appointing independent directors, establishing an audit committee and strengthening corporate governance.
We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
From time to time, claims are made against us in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in other activities. There were no reportable litigation events and there have been no material developments to litigation events previously disclosed in our SEC filings during the quarter ended June 30, 2024.
ITEM 1A. RISK FACTORS
As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item. In any event, there have been no material changes in our risk factors as previously disclosed in the Registration Statement.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(A) Unregistered Sales of Equity Securities
None.
(B) Use of Proceeds
Not applicable.
(C) Issuer Purchases of Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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ITEM 5.
Investment Agreements
On July 3, 2024, we entered into four convertible note investment agreements (the “Agreements”) with certain investors named thereto (the “Investors”), in a private placement (the “Private Placement”) of our unsecured convertible notes (“Notes”) for aggregate gross proceeds of $410,000. Each of the Agreements contained customary terms, representations and warranties by the parties for offerings of similar sizes. The Notes have an interest of 12% per annum, and a maturity date that is six months from the date of issuance. The Investors may also choose to convert the accumulated principal amount and interest outstanding on the maturity date to shares of our common stock at a conversion price of $0.442, subject to adjustments. Pursuant to the Agreements, if the Investor elects to receive our shares, we agreed that within three business days of such conversion, we shall file a registration statement on Form S-1 providing for the resale by the Investors of the shares.
July 2024 Private Placement
On July 17, 2024, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with a certain investor (the “Purchaser”) pursuant to which we sold, in a private placement, a $180,000 convertible note (the “Note”) with an original issue discount of $27,500 and a warrant (the “Private Placement Warrant”) to purchase up to 217,500 shares of common stock (the “Warrant Shares”) at an exercise price of $0.87 per share. As consideration for entering into the Securities Purchase Agreement, we issued a total of 180,000 shares to the Purchaser on July 19, 2024. The Private Placement Warrant is exercisable on July 17, 2024 until five years from July 17, 2024. The total number of Warrant Shares is subject to adjustments for stock splits, recapitalizations and reorganizations.
The Note is convertible into shares of our common stock. If we fail to make an Amortization Payment, we will have the right to convert the Amortization Payment at a conversion price equal to the lower of (i) $0.40 and (ii) 80% of the lowest closing price in the 10 Trading Days prior to the conversion, subject to a floor price of $0.10. The maturity date of the Note is 12 months from July 17, 2024 (“Maturity Date”). The Note accrues interest at an annual rate of 12%, commencing on July 17, 2024 and payable on the Maturity Date. We may repay all and not less than all of the Outstanding Principal Amount by paying 118% of the Principal Amount then being prepaid, provided that we provide at least 10 Trading Days’ written notice to the Purchaser. The total number of shares underlying the Note is subject to adjustments for stock splits, recapitalizations and reorganizations. Capitalized terms not otherwise defined in this paragraph have the meaning given to them in the Note.
On July 30, 2024, the Note was terminated as a result of our full payment of the Note’s principal amount and accrued interest and other fees in the total amount of $212,400. As a result, all obligations under the Note have been satisfied, and the Note is no longer outstanding.
July 2024 Public Offering
On July 25, 2024, we entered into an underwriting agreement (the “Underwriting Agreement”) with EF Hutton LLC as the underwriter (the “Underwriter”), relating to a firm commitment underwritten public offering (the “Offering”) of 5,000,000 units at a public offering price of $0.24 per Unit, with each Unit consisting of: (i) one share of common stock; and (ii) one Series A warrant (“Warrant”) to purchase one share of common stock. We granted the Underwriter a 45-day over-allotment option to purchase up to 750,000 shares of common stock and/or 750,000 Warrants.
The Warrant is immediately exercisable on the date of issuance at an exercise price of $0.24 per share of common stock and expires five years from the closing date of the Offering. The net proceeds to us from the Offering were approximately $0.9 million, after deducting underwriting discounts and commissions and the payment of other estimated offering expenses associated with the Offering that are payable by us. We also paid the Underwriter an underwriting discount equal to 7.0% of the gross proceeds of the Offering and a non-accountable expense fee equal to 1.0% of the gross proceeds of the Offering. We intend to use the net proceeds of the Offering for general corporate purposes, including working capital and investments.
If we issue shares or securities at a price that is less than the Warrant’s exercise price, then the exercise price of the Warrant will be adjusted to that exercise price of which will not be less than $0.05.
A registration statement on Form S-1, as amended (File No. 333-280066), relating to the Offering was declared effective by the SEC on July 25, 2024. The Offering was made only by means of a prospectus forming a part of the effective registration statement.
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ITEM 6. EXHIBITS
EXHIBIT INDEX
| + | Indicates management contract or compensatory plan. |
| † | Annexes, schedules and exhibits to this Exhibit omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. |
| * | Filed herewith. |
| ** | Exhibits 32.1 and 32.2 are being furnished and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise specifically stated in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NATURE’S MIRACLE HOLDING INC. | |
| Dated: August 14, 2024 | /s/ Tie (James) Li |
| Tie (James) Li | |
| Chief Executive Officer (Principal Executive Officer) | |
| Dated: August 14, 2024 | /s/ George Yutuc |
| George Yutuc | |
| Chief Financial Officer (Principal Financial and Accounting Officer) |
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