As filed with the U.S. Securities and Exchange Commission on September 13, 2023.
No. 333-273429
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________________
INNO HOLDINGS INC.
(Exact name of registrant as specified in its charter)
__________________________
Texas |
3317 |
87-4294543 |
||
(State or Other Jurisdiction of |
(Primary Standard Industrial |
(I.R.S. Employer |
2465 Farm Market 359 South
Brookshire, TX 77423
(800) 909-8800
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
__________________________
Dekui Liu
2465 Farm Market 359 South
Brookshire, TX 77423
(800) 909-8800
(Name, address, including zip code, and telephone number, including area code, of agent for service)
__________________________
Copies to:
Michael J. Blankenship |
William S. Rosenstadt |
__________________________
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
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 ☐ |
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Non-accelerated filer ☒ |
Smaller reporting company ☒ |
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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 to Section 7(a)(2)(B) of the Securities Act. ☐
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.
The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated SEPTEMBER 13, 2023
PRELIMINARY PROSPECTUS
INNO HOLDINGS INC.
2,500,000 Shares of Common Stock being offered by the Company
1,386,990 Shares of Common Stock being offered by the Selling Stockholders
This is an initial public offering of 2,500,000 shares of common stock of INNO HOLDINGS INC., of no par value, and the registration of an additional 1,386,990 shares of common stock held by selling shareholders.
It is currently estimated that the initial public offering price per share will be between $4.00 and $5.00. We have selected the lowest price of $4.00 per share for use herein as the estimated actual sales price for our shares for purposes of calculation of estimated use of proceeds, estimated dilution and other matters in this prospectus. We have applied to have our common stock listed on the Nasdaq Capital Market under the symbol “INHD,” which listing is a condition to this offering. There can be no assurance that we will be successful in listing our common stock on the Nasdaq Capital Market.
Prior to this offering, there was no public market for our common stock. Of the total securities being offered under this prospectus, INNO is offering 2,500,000 shares. The selling stockholders named in the section entitled “Selling Stockholders” in this prospectus (the “Selling Stockholders”) are offering 1,386,990 shares. No shares offered by the Selling Stockholders will be sold until after our common stock has begun trading on the Nasdaq Capital Market (but see below).
Following this initial public offering, assuming no exercise of the underwriters’ option to purchase additional shares, Dekui Liu, the Company’s Chief Executive Officer, Director and Chairman, will beneficially own 60.8% of the Company’s outstanding common stock. Accordingly, INNO will be a “controlled company” as defined under the corporate governance rules of Nasdaq. See “Management — Controlled Company” and “Description of Securities.”
We intend to use the proceeds from this offering to increase marketing capabilities, increase production capacity, expand research and development, and other working capital and general corporate purposes, including working capital. See “Use of Proceeds.”
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 18 of this prospectus for a discussion of information that should be considered in connection with an investment in our common stock.
Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
We are an “emerging growth company” as that term is used in the Jumpstart Our Business Start-ups Act of 2012 (the “Jobs Act”), and we have elected to comply with certain reduced public company reporting requirements.
Per Share |
Total |
|||||
Initial public offering price |
$ |
4.00 |
$ |
10,000,000 |
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Underwriting discounts and commissions(1) |
$ |
0.28 |
$ |
700,000 |
||
Proceeds, before expenses, to us(2) |
$ |
3.72 |
$ |
9,300,000 |
____________
(1) Represents underwriting discount and commissions equal to 7.0% of the initial public offering price per share (or $4.00 per share).
(2) Does not include an accountable expense allowance of up to $250,000 from the gross proceeds of this offering payable to AC Sunshine Securities LLC. See “Underwriting” beginning on page 105 of this prospectus for a description of all compensation payable to the underwriters.
In addition to the underwriting discounts listed above and the expense allowance described in the footnote, we have agreed to issue upon the closing of this offering to AC Sunshine Securities LLC warrants that will expire on the fifth anniversary of the date of the commencement of sales of the offering, entitling the representative to purchase 7.0% of the number of shares of common stock sold in this offering. The warrants are exercisable at a per share price equal to 120% of the public offering price per share in the offering. The registration statement of which this prospectus is a part also covers the underwriters’ warrants and the common shares issuable upon the exercise thereof. For additional information regarding our arrangement with the underwriters, please see “Underwriting” beginning on page 105.
We have granted the representative of the underwriters an option to purchase from us, at the public offering price, up to 375,000 additional shares of common stock (equal to 15% of the shares sold in this offering), less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover overallotments, if any. If the representative of the underwriters exercises the option in full, the total underwriting discounts and commissions payable will be $805,000, and the total proceeds to us, before expenses, will be $10,695,000.
The underwriters expect to deliver the shares against payment on or about [•], 2023.
The date of this prospectus is September 13, 2023
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS |
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PLAN OF DISTRIBUTION FOR STOCK REGISTERED FOR SELLING STOCKHOLDERS |
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Through and including [•], 2023 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriter and with respect to their unsold allotments or subscriptions.
You should rely only on the information contained in this prospectus or any prospectus supplement or amendment. Neither we nor the underwriters have authorized any other person to provide you with information that is different from, or adds to, that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the underwriters take responsibility for, or can provide assurance as to the reliability of, any other information that others may give you. You should assume that the information contained in this prospectus or any free writing prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations, and prospects may have changed since that date. We are not making an offer of any securities in any jurisdiction in which such offer is unlawful.
No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this public offering and the distribution of this prospectus applicable to that jurisdiction.
This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. See the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
i
Throughout this prospectus, unless otherwise designated or the context suggests otherwise,
• all references to the “Company,” “INNO,” the “registrant,” “we,” “our,” or “us” mean INNO HOLDINGS INC. and its subsidiaries;
• “year” or “fiscal year” means the year ending September 30;
• all dollar or $ references, when used in this prospectus, refer to United States dollars;
• “framing” means the process of connecting building materials together to create a structure;
• “stud” means a vertical framing member which forms part of a wall or partition, also known as a wall stud, a fundamental component of frame construction.
• “truss” means a web-like roof design that uses tension and compression to create strong, light components that can span a long distance;
• “joist” means a horizontal structural member used in framing to span an open space, often between beams that subsequently transfer loads to vertical members;
• “cold-formed steel” or “CFS” or “light-gauge steel” or “LGS” means steel products shaped by cold-working processes carried out near room temperature, such as rolling, pressing, stamping, bending, etc.;
• “turnkey cost” is the total cost that must be covered before a product or service is ready to be sold and used by consumers;
• “prefab” means a building manufactured in sections to enable assembly on site.
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We are responsible for the information contained in this prospectus and the registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission, of which this prospectus constitutes a part. Market data and certain industry data and forecasts used throughout this prospectus were obtained from market research, consultant surveys, publicly available information, reports of governmental agencies, and industry publications and surveys. We did not commission any third party for collecting or providing data used in this prospectus. Industry surveys, publications, consultant surveys, and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. Third-party projections may be overstated and should not be given undue weight. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite. Statements as to our market position are based on the most current data available to us. While we are not aware of any misstatements regarding the industry data presented in this prospectus, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.
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This summary provides a brief overview of the key aspects of our business and our securities. The reader should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors.” Some of the statements contained in this prospectus, including statements under “Summary” and “Risk Factors” as well as those noted in the documents incorporated herein by reference, are forward-looking statements and may involve a number of risks and uncertainties. Our actual results and future events may differ significantly based upon a number of factors. The reader should not put undue reliance on the forward-looking statements in this document, which speak only as of the date on the cover of this prospectus.
Solely for convenience, our trademarks and trade names referred to in this registration statement may appear without the ® or ™ symbols, but such references are not intended to indicate in any way that we will not assert to the fullest extent under applicable law our rights to these trademarks and trade names. All other trademarks, service marks, and trade names included in this prospectus are the property of their respective owners.
Our Company and Mission
INNO HOLDINGS INC. (“INNO,” “we,” “us,” or “Company”) is an innovative building-technology company with a mission to transform the construction industry with our proprietary cold-formed steel-framing technology and other building innovations. INNO recognized the inherent inefficiency and waste in traditional lumber-based construction techniques and sought to develop steel-based construction technologies to solve the problems. INNO takes its name from “innovation” and is committed to the research and development of steel studs/tracks/headers, providing higher performance and greater efficiencies in all aspects of construction, making better structural solutions for both commercial and residential buildings, resulting in substantial labor cost savings, in our view. The Company’s products are created using a combination of intelligent machines and cutting-edge techniques to provide an optimal design solution of framing for engineers, builders, and construction companies. We are currently a manufacturer of cold-formed-steel members and we offer a full range of services required to transform raw materials into precise steel framing products and prefabricated homes. We sell these finished products either to businesses or directly to customers. The finished products and cold-formed-steel members are used in a variety of building types, including residential, commercial, industrial, and infrastructure. We hope to transform the building industry by reducing construction times while providing more affordable, environmentally sustainable, and durable solutions compared to traditional construction materials and methods. We believe we are also well positioned to disrupt the construction industry, which now accounts for $10 trillion of the global economy.
We work with our customers to manufacture products in accordance with the customers’ drawings and specifications. Our work complies with specific national and international codes and standards applicable to the construction industry. We believe that we have earned our reputation through outstanding technical expertise, attention to detail, and a total commitment to excellence in customer service.
Our primary manufacturing operations are located on approximately five acres in Brookshire, Texas. Our facility houses state-of-the-art equipment that gives us the capability to manufacture 15,000 linear feet of product per day. We offer a full range of services such as structural designs, metal stud production, and preassembly of metal studs into steel wall panels, which are required to transform raw materials into finished products that are compliant with local building codes. Our manufacturing capabilities include fabrication operations, such as cutting, punching, forming and assembling, and machine operations, which includes computer numerical controlled (“CNC”) machine operations. We also provide support services for our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, and manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management, and expediting), and final assembly.
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All manufacturing at our facility is done in accordance with our written quality assurance program, which meets specific national codes as well as international codes, standards, and specifications. For example, we have ICC-ES evaluation reports (ESR-4641) that show that our cold-formed steel-framing members are compliant with the 2018 and 2015 International Building Code (“IBC”), 2019 California Building Code (“CBC”), and 2020 Florida Building Code. The standards used for each customer project are specific to each customer’s needs, and we have implemented those standards into our manufacturing operations.
Revenue increased 49.9% to $4,502,568 for the fiscal year ended September 30, 2022 as compared to $3,003,624 for the fiscal year ended September 30, 2021, and declined 86% to $501,672 for the nine months ended June 30, 2023 as compared to $3,281,839 for the nine months ended June 30, 2022. We incurred a net loss of $1,008,662 for the fiscal year ended September 30, 2022 as compared to a net loss of $105,996 for the year ended September 30, 2021, and a net loss of $2,971,728 for the nine months ended June 30, 2023 as compared to a net loss of $568,582 for the nine months ended June 30, 2022. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.
Major Drivers of INNO’s Business Opportunity
The traditional construction industry is labor intensive and suffers from a skilled labor shortage, which increases overall labor costs and contributes to inefficiencies in the construction process. Our steel-framing technology can decrease construction times by 50% or more by prefabricating panels and can reduce labor costs proportionately due to reduced construction timelines. Our intelligent CNC cold-formed roller machine automatically punches the holes for Mechanical, Electrical and Plumbing (MEP) channels eliminating many steps at the job site, compared to traditional onsite manual measurement and cutting procedures. INNO is dedicated to bringing automation to the construction industry to solve the overreliance on a declining supply of expensive, skilled labor.
Construction Site
Source: INNO
Reducing the need for on-site customization found in traditional construction processes is not only more profitable, it can decrease the risks associated with an inherently dangerous workplace. According to Frommer D’Amico, “10 Top Hazards In a Building Site”, nearly 6.5 million people go to work at approximately 252,000 construction sites across the U.S each day. On the job, these construction workers face a wide range of occupational safety hazards. Heavy equipment, bad weather and chaotic job site conditions can create dangerous situations. INNO typically manufactures metal studs and prefab wall panels, joists, and trusses within our indoor facility, unaffected by weather. The final products delivered to the jobsite are assembled wall panels, joists and trusses, which means almost 70% of structure framing work has been completed before it gets to the construction site where the remaining tasks are to erect and connect the pieces. A construction jobsite using INNO framing products is typically very clean and organized due to a lack of cuttings and debris, which reduces the risk of safety hazards. We anticipate that cold-formed steel-framing technology will ultimately replace wooden and traditional steel structures and we believe it is a big step forward in construction industry.
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Construction site
Source: INNO
We are bringing sustainability to the market by replacing traditional wooden structures with cold-formed steel framing, allowing for the reduction of material waste — an average of 2% of steel scrap versus ~20% for wood waste. All steel scrap is 100% recyclable, which we support through our recycling operations. Many businesses are seeking actions that demonstrate sustainability, and steel is uniquely environmental-friendly in its reuse, giving us an edge in Leadership in Energy and Environmental Design (“LEED”) certifiable products and projects.
Scrap Metal Recycling Bin
Source: INNO
We are constantly striving to produce lasting results within the building technology sector. With increasingly evolving technological advancements in the industry, our objective is to continue staying ahead of the curve by focusing our ongoing research and development on cold-formed steel framing with an emphasis on architectural and engineering technologies. Our cold-formed steel-framing system increases building and labor savings by integrating each stage of
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the construction process with Building Information Modeling (“BIM”), which is a highly collaborative process that allows architects, engineers, real estate developers, contractors, manufacturers, and other construction professionals to plan, design, and construct a structure or building within one 3D model, to establish a common data environment, ensuring INNO delivers the final products with the minimum amount of rework needed.
BIM Model
Source: INNO
Off-site building is a technique in which a building or an infrastructure is planned and designed in a modular format. Those modules are fabricated offsite in a factory. Once fabricated, those modules are transported to the site and are installed together to finalize the structure. According to the Allied Market Research published report, titled “Offsite Construction Market by Material (Steel, Wood, Concrete, and Others) and Application (Residential, Commercial, and Industrial): Global Opportunity Analysis and Industry Forecast, 2021-2030”, the global Offsite Construction industry generated $130.4 billion in 2020, and is anticipated to generate $235.4 billion by 2030, representing a CAGR of 5.9% from 2021 to 2030. The rapid rise in urbanization and industrialization, increase in the pace of construction, high efficiency of offsite building is driving the growth of this market. The North America off-site construction market size was valued at $49.5 billion in 2021, and is projected to reach $80.9 billion by 2031, representing a CAGR of 4.9% from 2022 to 2031.
In its 2016 article titled, “Imagining Construction’s Digital Future,” McKinsey & Company noted that large construction projects typically take 20% longer to complete than projected and are up to 80% over budget. The article noted that developers are searching for “… off-site approaches that help them improve predictability, consistency, and repeatability.” The article also highlighted that developers can leverage off-site capabilities “… to transform the construction site into a manufacturing system. The result: greater efficiency, less waste, and improved safety.” Off-site construction is one of the five key trends discussed in the article in which we believe INNO participates, Due to our efficient production model, environmentally sustainable solutions, and superior product quality, believe we also participate the other four trends discussed, including green construction; cost efficiency; supply chain agility; and improved durability and strength).
We are leveraging the trend toward off-site and modular building techniques to increase productivity, reduce errors on-site, and decrease construction costs. As the market continues to move toward panelized building, we anticipate having an edge in the industry as a large-scale pioneer and building industry leader with our cost-reducing, time-saving, and quality solutions.
Our Products
Cold-Formed Steel Framing
Cold-formed steel is the material of choice to lower building costs and adapt to modular or off-site building. It is consistent in quality and form, and it can be shipped preassembled or it can be assembled on-site by workers with little training. Our steel roof trusses, wall panels, and joist systems are a cost-effective noncombustible alternative to
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traditional building materials. They are now commonly used to build apartments, hotels, temporary housing, nursing homes, commercial buildings, industrial buildings, and single-family detached homes. These types of structures are expected to be the targets of our Company’s sales and marketing team.
Our proprietary cold-formed roller machines are equipped with proprietary software, which optimizes production efficiency and supports individual part customization to ensure each cold-formed-steel member is produced to the exact specifications of the plans. Our intelligent machines can precisely cut and punch out steel studs, leaving channels for the mechanical, electrical, and plumbing designs. We arrive at an accurate, comprehensive, and information-rich design model with the utilization of light-gauge steel-framing engineering software, which creates a digital model of the project that includes all functional systems, geometric features, and aesthetics, such as electrical wiring, air conditioning, doors, and windows. The light-gauge steel-framing engineering software is a shared multidisciplinary resource that allows collaborators to achieve maximum efficiency and effectiveness by compressing design lead time. We have created a full BIM solution that instructs our advanced cold-formed roller machines to produce each steel-framing piece to certain specifications.
INNO Cube 300 CNC Machine
Source: INNO
Metal Studs Manufactured by INNO’s CNC Machine
Source: INNO
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After the design phase, our top-quality raw materials are processed on several production lines, each with made-to-order specific dimensions, screw holes, and cross-cut stitching. These customizations reduce the need for on-site manual calculations and simplify the assembling steps, both of which increase construction efficiency and reduce labor costs. All steel-framing products produced by our Company are International Code Council (ICC) certified. The International Code Council is the leading global source of model codes and standards and building safety solutions that include product evaluation, accreditation, technology, training, and certification. The Code Council’s codes, standards, and solutions are used to ensure safe, affordable, and sustainable communities and buildings worldwide.
Our modular steel building framing systems avoid construction delays caused by partial or unsynchronized delivery of different building components. By breaking away from the methods of traditional stick-built building, our customers report that their construction timelines have been reduced at least by 20%.
Castor Cube
Due to high housing prices, some are having difficulties purchasing a home. Housing market trends have shown a gradual preference for modular homes, which is a prefabricated building that consists of repeated sections called modules, and involves constructing sections away from the building site, then delivering them to the intended site where the installation is completed. We believe demand for prefab homes is on an upward growth trend in the United States. According to the Straits Research Institute, North America’s share of the global modular building market was valued at $28 billion in 2021 and is expected to grow to $53 billion by 2030, representing a CAGR of 7%. According to the summary of an IBISWorld report titled, “Prefabricated Home Manufacturing in the US — Market Size 2002-2029,” the prefabricated home manufacturing market size in the U.S. is expected to be $9.1 billion in 2023. We expect to capitalize on this trend by providing high-quality and affordable modular homes.
Most consumers are drawn to prefab homes because of their cost-effectiveness, efficiency, and permanent property characteristics. Castor Cube is a low-maintenance, single-story, 743-square-foot manufactured home with 4 color options that can resist earthquakes, withstand winds, and prevent pests. It is a cold-formed-steel building system equipped with honeycomb panels, and it is designed to maximize the strength-to-weight value. As a result, it yields high structural stability. Castor Cube can be built on a foundation or used as a mobile home.
The Castor Cube can be built on a foundation steel chassis, which can be single or used as a mobile multi-sectioned. We anticipate that this modular home product will be completely constructed within our facilities starting in the fourth quarter of 2023. Once built, it will be transported to permanent locations for installation. The timeline for product delivery is not affected by weather since it will be manufactured in our 100% climate-controlled factory. Furthermore, we expect that streamlined building process will shorten the completion time. We anticipate being able to produce up to one Castor Cube per day beginning in the fourth quarter of 2023. We believe the Castor Cube demonstrates the effectiveness of our Company’s modular technique.
Castor Cube Rendering
Source: INNO
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Mobile Factory: Off-site Equipment Rental, Sales, Service, and Support
We believe innovative technology can increase productivity in the building sector. Research and development of more efficient methods in the manufacturing and building space is at the forefront of our business model.
Our Mobile Factory is an all-in-one, secured production facility that will produce steel-framing members onsite. It can print wall panel, floor truss, and roof truss components. The size is customized for a trailer, which enables it to be transported anywhere, ranging from metropolitan suburbs to remote areas with little to no infrastructure. It is designed to enable immediate stud production on any site.
Our Mobile Factory is complete with metal stud production equipment and a diesel generator. This generator can supply continuous power to our cold-formed roller machine. The production capacity of our Mobile Factory is at least 1,000 linear feet per day. We believe this innovation is the good solution for urgent deployment in disaster areas or remote areas. It is designed to reduce the cost and time of transportation of metal studs, which we believe can drive a lower carbon footprint for larger projects.
Mobile Factory Illustration
Source: INNO
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Image of Mobile Factory
Source: INNO
The Mobile Factory is operated and managed by Internet of Things (“IoT”) technology, a network of physical objects that are embedded with sensors, software and other technologies for the purpose of connecting and exchanging data with other devices and systems over the internet. INNO developed its proprietary IoT production management system independently. The system controls equipment and manages the Mobile Factory via a dashboard, allowing the user to gain a comparative understanding of production parameters, such as operation data, machinery breakdown data, uptime data and production efficiency.
IoT Production Management System
Source: INNO
Related Services
We may from time to time participate in land development and contractor services if an opportunity exists to leverage our products. Specifically, we have evaluated the development of apartment complexes, retirement communities, and remodels for projects that would incorporate our metal framing studs. For example, we have agreed to provide project development services for our contract with Vision Opportunity Fund LP, partially owned by a minority shareholder of the Company, related to the development of an approximately 110,000 sqft retirement community.
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Our Customers
We serve commercial, residential, and industrial customers. For the cold-formed steel-framing business, the sales model is business-to-business, and our main customers are developers, builders, and contractors. For the Castor Cube prefab home products, the sales model is expected to be either business-to-business or business-to-customer.
Our Competitive Strengths
Technology Innovations
We believe our innovative products simplify construction, lowering the time and complexity to build, while also delivering more affordable, environmentally sustainable, and durable solutions compared to traditional construction. INNO is committed to remaining a pioneer in the industry by constantly researching and developing new technologies while focusing on regulations, equipment autonomy, design technology, production efficiency, coordinated transportation, and remote production. In this way, INNO aims to have the most advanced and comprehensive technology in the industry; we view our technology development as a significant barrier for competitors.
A significant competitive strength in our research and development capability is the Inno Research Institute, LLC, a subsidiary of INNO (“IRI”). Led by our Chief Scientist, Dr. Cheng Yu, IRI focuses on patentable innovative products and commercializing research discoveries. Dr. Yu is a leading figure in the cold-formed steel industry in the U.S., committed to bringing innovation in the field of thin-walled structures, cold-formed steel building technology, and design methodology for resilient buildings.
Fully Integrated Manufacturing Process
Compared to other traditional metal stud manufacturers, INNO differentiates itself by integrating services from design to metal stud production to prefabrication, utilizing off-site building technology to reduce the need for on-site framing labor. This approach allows INNO to streamline the production process, increase efficiency, and reduce dependency on labor. By implementing off-site building technologies, INNO is able to prefabricate and assemble many components of the building in a factory setting, which can lead to improved quality control, faster construction times and reduced on-site labor costs. This approach allows INNO to be a leader in the metal studs manufacturing industry in the U.S. and set a new standard for the building industry.
Compared to other prefab home companies, INNO sets itself apart by making an innovation in the overall structure system and developing its own patent-pending panel material for faster installation. Unlike prefab home competitors who still use traditional wood-stick construction or other methods, such as 3D printing, which may not be as efficient, INNO’s patent-pending panel material and overall structure system allows for fast installation, high-quality, improved efficiency, and guaranteed delivery times. This allows INNO to offer a cost-effective, high-quality solution for the prefab home market.
Rising Cost of Traditional Wood Construction Favors Transition to Steel
Utilizing INNO’s off-site building technology can significantly reduce overall construction costs, even when compared to wood building. The past several years of western wildfires in the United States have had a significant impact on lumber stocks and mills, leading to disruptions in supply and fluctuations in lumber prices. A study by the Steel Framing Industry Association (SFIA) indicates that the cost to build with cold-formed steel is relatively the same as building with wood when the cost comparison includes the construction insurance premiums associated with using the materials. As the price of wood no longer provides a cost advantage, alternative building materials like steel have become increasingly popular in the market. By leveraging its off-site building technology, INNO is able to offer a cost-effective solution that takes advantage of the cost benefits of steel buildings while also providing faster and more efficient construction.
We are keeping our prices at a competitive level with the cost of wood construction. In a recent internal case study, we found that INNO’s products delivered real-world cost-savings of 8-16% compared to wood framing. This study compared our solution against wood for a 2,2663 sqft. home built in 2022, for which we supplied materials. Based on fully quoted materials and estimated labor and insurance costs, we estimate the contractor saved 16% by using INNO products compared to wood framing. For the “low” scenario, we recently requested updated wood bids and used the lowest one; in this case, we estimate that INNO products would have provided the contractor with 8% savings.
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Market Opportunity
We believe we compete in a $40 billion+ U.S. based market opportunity in 2023.
Light-Gauge Steel-Framing Market
In concept, cold-formed-steel building structures are very similar to wooden structures. In steel building, the wooden structural elements are replaced by thin-walled steel components. The cold-forming process is the core technology used. By our estimates, the U.S. light-gauge steel framing market should be roughly $6B in 2023.
According to the report released by Grand View Research in 2020, titled “Light Gauge Steel Framing Market Size, Share & Trends Analysis Report By Type, By End-use, By Region, and Segment Forecasts, 2021-2028”, the global light-gauge steel-framing market was valued at $33.89 billion in 2020 and is expected to reach $48.21 billion by 2028, growing at a CAGR of 4.6% from 2021 to 2028. The substantial rise in construction spending and a shift in trend toward sustainable materials have contributed to higher energy efficiency at a lower cost, in turn driving the market demand for light-gauge steel frames. According to KBV Research’s report released in February 2022, titled “North America Light Gauge Steel Framing Market Size, Share and Industry Trend Analysis Report By Type, By End Use, By Country, Historical Data and Growth Forecast, 2021-2027,” the U.S. market has dominated the North American cold-formed steel-framing market, and it is expected to continue to be a dominant market player until 2027; thereby achieving a market value of $7.2 billion by 2027.
According to the summary of an IBISWorld report titled, “Wood Framing in the US — Market Size 2005-2029,” the wood framing market size in the U.S. is expected to be $24.9B in 2023. Since the wood structures could be replaced by cold-formed-steel structures, INNO’s target market size includes the wood-framing market.
Prefabricated Building Market
According to the summary of an IBISWorld report titled, “Prefabricated Home Manufacturing in the US — Market Size 2002-2029,” the prefabricated home manufacturing market size in the U.S. is expected to be $9.1B in 2023. According to the report released by Global Industry Analysts, Inc, titled “Prefabricated Building Global Market Trajectory & Analytics”, the global prefabricated building market, estimated at $106.1 billion in the year 2020, is projected to reach a revised size of $164.1 billion by 2027, growing at a CAGR of 6.4% over the analysis period of 2020 through 2027. According to Straits Research Institute, the U.S. modular home market is projected to be valued at $53 billion in 2030.
Prefabricated houses are those that are built with the help of prefabricated building materials. These building materials are prefabricated in an off-site facility and then transported to the desired location for assembly. The building materials used to develop prefabricated houses are divided into concrete-based and metal-based materials. The market is being driven by factors such as shorter construction times and cost savings. The market is also benefiting from increased customer interest in reducing CO2 emissions, green building, and waste reduction.
Regulatory and Governmental Pressures for Change
President Biden’s Executive Order 14057 on the adoption of the federal Sustainable Development Catalyst for America’s Clean Energy Industry and Jobs and the accompanying federal Sustainable Development Plan establish the ambitious goal of achieving zero emissions from building by 2045. The federal government will work on new construction, major renovations, and existing real estate to achieve linked electrification, reduced energy use, lower water consumption, and waste reduction. The federal government will develop data-driven targets and annual indicators for energy and water reduction by 2030 based on leading performance benchmarks for building type categories and the composition of institutional building portfolios. As part of this journey, the federal government will use performance contracts to reduce emissions, improve efficiency, and modernize facilities while providing financial savings.
In 2021, the Los Angeles City Council Public Safety Committee approved a proposal to expand Fire District I, an anachronistic planning overlay that would effectively ban wood-frame building in much of the city. The motion currently winding its way through the City Council would expand Fire District I to neighborhoods with a population density of 5,000 residents per square mile, among other areas. With nearly all of Los Angeles comfortably above 5,000 residents per square mile, this expansion would effectively ban timber and wood-frame building in much of the city, including many rapidly growing neighborhoods near public transportation.
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Sustainability and Green Building
Building and construction materials account for ~11% of global CO2 emissions according to the Global Status Report 2018, Global Alliance for Buildings and Construction & International Energy Agency. Increased global awareness of green building has driven efforts among all levels of government. For example, local governments are beginning to regulate in favor of using alternatives to wood in building projects. To reduce the city’s vulnerability to wildfires, the Los Angeles City Council voted in early 2021 to explore a proposal that could prohibit the use of wood-frame building for larger developments in some of its most densely populated neighborhoods. Similarly, the Los Angeles City Council Public Safety Committee approved a proposal in 2021 to expand Fire District 1, an anachronistic planning overlay that would effectively ban wood-frame building in much of the city. In most U.S. cities, fire safety is ensured by the International Building Code (IBC), which sets strict rules on allowable building materials and methods.
CFS is a highly sustainable, green building solution. Through technological advances and processing changes, steel has drastically reduced its carbon footprint. CFS boasts a high level of recyclability, energy savings, and greenhouse gas reduction. Due to its inherent advantages, such as fire resistance, termite resistance, consistent material quality, and sustainability, we believe cold-formed steel will be the optimal alternative building material.
Corporate Structure
Our Company was incorporated in Texas on September 8, 2021. It has three subsidiaries: Inno Metal Studs Corp, Castor Building Tech LLC, and Inno Research Institute LLC.
Corporate Information
Our principal executive office is located at 2465 Farm to Market 359 South, Brookshire, Texas 77423, and our California office is located at 4225 Prado Road, Suite 101, Corona, California 92880. In August 2023, the California office was relocated to 21660 Copley Drive, Suite 175, Diamond Bar, California 91765. Our corporate website address is www.innometalstuds.com. Our telephone number is (800) 909-8800. Information contained in, or accessible through, our website does not constitute part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.
Summary Risk Factors
Our business is subject to a number of risks. You should be aware of these risks before making an investment decision. These risks are discussed more fully in the section of this prospectus titled “Risk Factors,” which begins on page 18. These risks include, among others, that:
• We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
• We face strong competition in our markets.
• Our Company’s failure to successfully market its products could result in adverse financial consequences.
• Changes in delivery schedules and order specifications may affect our revenue stream.
• Demand in our end-use markets can be cyclical, impacting the demand for the products we produce.
• Because most of our contracts are individual purchase orders and not long-term agreements, there is no guarantee that we will be able to generate a similar amount of revenue in the future.
• Because of our dependence on a limited number of customers that change year to year, our failure to generate major contracts from a small number of customers may impair our ability to operate profitably.
• We rely partly on developer-driven housing projects, and any slowdown in the housing industry could adversely impact our business.
• We may not be able to successfully develop and promote new products or services, which could result in adverse financial consequences.
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• We rely on the performance of highly skilled personnel, and if we are unable to attract, retain, and motivate well-qualified employees, our business could be harmed.
• Any decrease in the availability or increase in the cost of raw materials could materially affect our earnings.
• Our manufacturing processes are complex, must constantly be upgraded to remain competitive, and depend upon critical high-cost equipment that may require costly repair or replacement.
• Our production facilities are energy-intensive, and we rely on third parties to supply energy consumed at our production facilities.
• If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.
• We compete with traditional wood frame construction, and any fluctuation in the price of wood could adversely impact demand for our products.
• We rely partly on contractors and builders that from time to time may have difficulty paying for our materials on time.
• We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.
• We may experience extreme stock price volatility unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our common stock.
In addition to the above risks, businesses are often subject to risks not foreseen or fully appreciated by management. In reviewing this filing, potential investors should keep in mind that other possible risks may adversely impact our business operations and the value of our securities.
Implications of Being an Emerging Growth Company
We are an “emerging growth company,” as defined in the Jobs Act. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act; (ii) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed to be a large accelerated filer under applicable SEC rules. We expect that we will remain an emerging growth company for the foreseeable future, but we cannot retain our emerging growth company status indefinitely and will no longer qualify as an emerging growth company on or before the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from specified disclosure requirements that are applicable to other public companies that are not emerging growth companies.
These exemptions include:
• being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosures;
• not being required to comply with the requirement of an auditor needing to attest to our internal controls over financial reporting;
• not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or providing a supplement to the auditor’s report regarding additional information about the audit and the financial statements;
• reduced disclosure obligations regarding executive compensation; and
• not being required to hold a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
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We have taken advantage of certain reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
An emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period, and, as a result, we will not be required to adopt new or revised accounting standards on the dates on which adoption of such standards is required for other public reporting companies.
We are also a “smaller reporting company” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and have elected to take advantage of certain scaled disclosures available for smaller reporting companies.
Status as a Controlled Company
Upon the completion of this offering, we expect to be considered a “controlled company” within the meaning of the listing standards of Nasdaq. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements. We intend to take advantage of some exemptions following the completion of this offering. These exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the applicable requirements of the Sarbanes-Oxley Act and rules with respect to our audit committee within the applicable time frame. For more information, please see “Management — Controlled Company.”
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Summary Historical Financial Information
The following tables set forth our summary historical financial data as of, and for the periods ended on, the dates indicated. The summary consolidated statements of operations data as of and for the years ended September 30, 2022 and 2021 are derived from our audited consolidated financial statements and notes that are included elsewhere in this prospectus. We have prepared the audited consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”) and have included all adjustments, consisting of only normal recurring adjustments that, in our opinion, we consider necessary for a fair statement of the consolidated financial information set forth in those statements. Our historical results are not necessarily indicative of our results in any future period.
The following summary consolidated financial data should be read together with the information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. The summary financial data in this section are not intended to replace our audited consolidated financial statements and the related notes and are qualified in their entirety by such financial statements and related notes included elsewhere in this prospectus.
Statement of operations data:
For the nine months ended |
For the year ended |
|||||||||||||||
6/30/2023 |
6/30/2022 |
9/30/2022 |
9/30/2021 |
|||||||||||||
Revenues |
$ |
501,672 |
|
$ |
3,531,839 |
|
$ |
4,502,568 |
|
$ |
3,003,624 |
|
||||
Costs of materials and labor |
|
472,710 |
|
|
2,254,643 |
|
|
3,405,506 |
|
|
2,069,581 |
|
||||
Selling, general and administrative expenses (exclusive of depreciation shown separately below) |
|
1,628,307 |
|
|
1,692,131 |
|
|
1,873,902 |
|
|
1,229,651 |
|
||||
Depreciation |
|
50,547 |
|
|
19,698 |
|
|
33,138 |
|
|
6,000 |
|
||||
Bad debt expense |
|
1,267,960 |
|
|
— |
|
|
— |
|
|
— |
|
||||
Loss from operations |
|
(2,917,852 |
) |
|
(434,633 |
) |
|
(809,978 |
) |
|
(301,608 |
) |
||||
Other income (expenses) |
|
(53,876 |
) |
|
(122,164 |
) |
|
(310,114 |
) |
|
222,193 |
|
||||
Loss before income taxes |
|
(2,971,728 |
) |
|
(556,797 |
) |
|
(1,120,092 |
) |
|
(79,415 |
) |
||||
Income tax expenses |
|
— |
|
|
12,887 |
|
|
9,915 |
|
|
26,581 |
|
||||
Net loss |
|
(2,971,728 |
) |
|
(569,684 |
) |
|
(1,130,007 |
) |
|
(105,996 |
) |
||||
Non-controlling interest |
|
(107,561 |
) |
|
(61,092 |
) |
|
(121,345 |
) |
|
— |
|
||||
Net loss attributable to INNO HOLDINGS INC. |
$ |
(2,864,167 |
) |
$ |
(508,592 |
) |
$ |
(1,008,662 |
) |
$ |
(105,996 |
) |
||||
Losses per share, basic and diluted |
$ |
(0.16 |
) |
$ |
(0.03 |
) |
$ |
(0.06 |
) |
$ |
(0.01 |
) |
||||
Weighted average Common Stock outstanding, basic and diluted |
|
18,122,543 |
|
|
17,049,121 |
|
|
17,230,822 |
|
|
16,170,000 |
|
Balance sheet data:
6/30/2023 |
9/30/2022 |
9/30/2021 |
||||||||
Current assets |
$ |
1,836,247 |
|
$ |
2,464,413 |
$ |
939,509 |
|||
Total assets |
$ |
3,115,156 |
|
$ |
3,652,117 |
$ |
1,160,278 |
|||
Current liabilities |
$ |
3,625,499 |
|
$ |
2,085,631 |
$ |
649,093 |
|||
Total liabilities |
$ |
4,007,266 |
|
$ |
2,597,499 |
$ |
775,653 |
|||
Total equity |
$ |
(892,110 |
) |
$ |
1,054,618 |
$ |
384,625 |
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Common stock offered by us |
2,500,000 shares. In addition, the Selling Stockholders are offering 1,386,990 shares of Common Stock. The underwriter is not underwriting any shares offered by Selling Stockholders, and there is no over-allotment with respect to the shares sold by the Selling Stockholders. |
|
Common stock outstanding prior to the offering |
18,251,726 shares. |
|
Common stock to be outstanding after the offering |
20,751,726 (21,126,726 shares if the underwriters exercise their option to purchase additional shares in full). |
|
Overallotment option of common stock offered by us |
The underwriters have a 45-day option to purchase up to 375,000 additional shares of common stock solely to cover overallotments, if any. |
|
Underwriter warrants |
Upon the closing of this offering, we will issue to the Representative, warrants entitling the Representative to purchase up to 175,000 shares of common stock (201,250 shares if the over-allotment option is exercised in full). The warrants shall be exercisable for a period of five years from the commencement of sales of this offering, which is the date of this prospectus. For additional information, please refer to “Underwriting.” |
|
Use of Proceeds |
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the proceeds from this offering to increase marketing capabilities, increase production capacity, expand research and development, and other working capital and general corporate purposes, including working capital. See “Use of Proceeds” beginning on page 36. |
|
Proposed Listing |
We have applied to have our common stock listed on the Nasdaq Capital Market under the symbol “INHD,” which listing is a condition to this offering. |
|
Lock-up agreements |
We, our executive officers, directors and director nominees and certain holders of the outstanding shares of common stock of our Company have agreed with the underwriters not to sell, transfer, or dispose of any shares or similar securities for 180 days following the effective date of the registration statement for this offering. For additional information regarding our arrangement with the underwriters, please see “Underwriting.” |
|
Transfer Agent |
VStock Transfer, LLC., 18 Lafayette Place, Woodmere, New York 11598. |
|
Controlled Company |
Dekui Lui controls a majority of the outstanding common stock. As a result, we qualify as a “controlled company” within the meaning of the listing standards of Nasdaq. Under these rules, a “controlled company” may elect not to comply with certain corporate governance requirements. We have elected to take advantage of some exemptions. |
|
Risk Factors |
You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page 18 of this prospectus before deciding whether or not to invest in shares of our common stock. |
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Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occur, our business and financial performance could be adversely affected, our actual results could differ materially from our expectations, and the price of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may adversely affect our business and financial performance. You should carefully consider the risks described below, together with all other information included in this prospectus, including our financial statements and related notes, before making an investment decision. The statements contained in this prospectus that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition, or results of operations could be harmed. In that case, the trading price of our common stock could decline, and investors in our securities may lose all or part of their investment.
Risks Related to Our Business
We have a limited operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
The Company has a limited operating history on which to base an evaluation of its business and prospects. The Company is subject to all the risks inherent in a small company seeking to develop, market, and distribute its products and services. The likelihood of the Company’s success must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with the development, introduction, marketing, and distribution of new products and services in a competitive environment.
Such risks for the Company include, but are not limited to, dependence on the success and acceptance of the Company’s products and services, the ability to attract and retain a suitable customer base, and the management of growth. To address these risks, the Company must, among other things, generate increased demand, attract a sufficient clientele base, respond to competitive developments, successfully introduce new products and services, attract, retain, and motivate qualified personnel and upgrade and enhance the Company’s technologies to accommodate expanded service offerings. In view of the rapidly evolving nature of the Company’s business and its limited operating history, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon as an indication of future performance.
The Company is therefore subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources, and lack of revenues.
We face strong competition in our markets.
We face competition from both domestic and foreign manufacturers in each of the markets we serve. No one company dominates the industry in which we operate. Our competitors include international, national, and local manufacturers, some of whom may have greater financial, manufacturing, marketing, and technical resources than we do, or greater penetration in or familiarity with a particular geographic market than we have.
Some competitors may be better known or have greater resources at their disposal, and some may have lower production costs. For certain products, being a domestic manufacturer may play a role in determining whether we are awarded a certain contract. For other products, we may be competing against foreign manufacturers who have a lower cost of production. If a contracting party has a relationship with a vendor and is required to place a contract for bids, the preferred vendor may provide or assist in the development of the specification for the product that may be tailored to that vendor’s needs. In such event, we would be at a disadvantage in seeking to obtain that contract. We believe that customers focus on such factors as quality of work, reputation of the vendor, perception of the vendor’s ability to meet the required schedule, and price in selecting a vendor for their products. Some of our customers have moved manufacturing operations or product sourcing overseas, which can negatively impact our sales. To remain competitive, we will need to invest continuously in our manufacturing capabilities and customer service, and we may need to reduce our prices, particularly with respect to customers in industries that are experiencing downturns, which may adversely affect our results of operations. We cannot provide assurance that we will be able to maintain our competitive position in each of the markets that we serve.
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If we fail to raise capital when needed, it will have a material adverse effect on the Company’s business, financial condition, and results of operations.
The Company has limited revenue-producing operations and will require the proceeds from this offering to execute its full business plan. Further, no assurance can be given if additional capital is needed as to how much additional capital will be required or that additional financing can be obtained, or, if obtainable, that the terms will be satisfactory to the Company, or that such financing would not result in a substantial dilution of shareholders’ interests. A failure to raise capital when needed would have a material adverse effect on the Company’s business, financial condition, and results of operations. In addition, debt and other equity financing may involve a pledge of assets and may be senior to interests of equity holders. Any debt financing secured in the future could involve restrictive covenants relating to capital-raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital or to pursue business opportunities, including potential acquisitions. If adequate funds are not obtained, the Company may be required to reduce, curtail, or discontinue operations.
Any deterioration or disruption of the credit and capital markets may adversely affect our access to sources of funding.
Disruptions in the credit markets have in the past severely restricted access to capital for companies. When credit markets deteriorate or are disrupted, our ability to incur additional indebtedness to fund a portion of our working capital needs and other general corporate purposes, or to refinance maturing obligations as they become due, may be constrained. This risk could be exacerbated by future deterioration in the Company’s credit ratings. In the event that we need to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all. In addition, the COVID-19 pandemic has significantly disrupted world financial markets, increased volatility in U.S. capital markets, and may reduce opportunities for us to seek additional funding. Our inability to obtain financing on terms and within a time acceptable to us could have an adverse impact on our results of operations, financial condition, and liquidity.
The Company’s failure to successfully market its products could result in adverse financial consequences.
Promoting its products will depend largely on the success of the Company’s marketing efforts and the ability of the Company to provide high quality products and services. In order to promote its products, the Company will need to increase its marketing budget and otherwise increase its financial commitment to creating and maintaining brand loyalty among customers. There can be no assurance that marketing efforts will yield increased revenues or that any such revenues would offset the expenses incurred by the Company. If the Company fails to promote and maintain its brand or incurs substantial expenses in an attempt to promote and maintain its brand or if the Company’s existing or future strategic relationships fail to promote the products, the Company’s business, results of operations, and financial condition would be materially adversely affected.
The longevity of our business depends in part on our ability to enhance and sell the functionality of our current building solutions and technology platform to remain competitive and meet customer needs.
The market for housing development is relatively seasonal worldwide and is characterized by moving very slowly in changes of product utilization, frequent new entrants, uncertain product life cycles, fluctuating customer demands, and evolving industry and government energy-related standards and regulations. We may not be able to successfully develop and market new, reliable solutions that comply with present or emerging demands, regulations, and standards on a cost-effective basis.
Negative economic conditions may adversely impact the demand for our products and services and the ability of our customers to meet their obligations to us on a timely basis. Any disputes with customers could also have an adverse impact on our income and cash flows.
Negative economic conditions, including tightening of credit in financial markets, may lead businesses to postpone spending, which may impact our customers, causing them to cancel, decrease, or delay their existing and future orders with us. Declines in economic conditions may further impact the ability of our customers to meet their obligations to us on a timely basis. If customers are unable to meet their obligations to us on a timely basis, it could adversely impact the realization of receivables, the valuation of inventories, and the valuation of long-lived assets. Additionally, we may be negatively affected by contractual disputes with customers, which could have an adverse impact on our income and cash flows.
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Changes in delivery schedules and order specifications may affect our revenue stream.
Although we perform manufacturing services pursuant to orders placed by our customers, we have in the past experienced delays in scheduling and changes in the specification of our products. Delays in scheduling have been, and in the future may be, caused by disruptions relating to the COVID-19 pandemic, government-imposed lockdowns, and supply chain issues, while changes in order specifications may result from a number of factors, including a determination by the customer that the product specifications need to be changed after receipt of an initial product or prototype. As a result of these changes, we may suffer a delay in the recognition of revenue from projects and may incur contract losses. We cannot assure you that our results of operations will not be affected in the future by delays or changes in specifications or that we will ever be able to recoup revenue that was lost as a result of the delays or changes. Further, if we cannot allocate our personnel to a different project, we will continue to incur expenses relating to the initial project, including labor and overhead. Thus, if orders are postponed, our results of operations would be impacted by our need to maintain staffing and other expense-generating aspects of production for the postponed projects, even though they were not fully utilized, and revenue associated with the project will not be recognized, during this period. We cannot assure that our operating results will not decline in future periods as a result of changes in customers’ orders.
Failure to find collaborative business partners for housing development projects could adversely affect us.
Part of our growth strategy is to increase our involvement in residential and commercial housing development projects by using our light-gauge steel framing. Participation in these projects requires that we find collaborative partners who are seeking to develop affordable manufactured housing. Given the highly competitive environment in which we operate, we cannot guarantee that we will be able to secure or continue such partnerships, which could have an adverse impact on our results of operations.
Demand in our end-use markets can be cyclical, impacting the demand for the products we produce.
Demand in our end-use markets, can be cyclical in nature and sensitive to general economic conditions, competitive influences, and fluctuations in inventory levels throughout the supply chain. Our sales are sensitive to the market conditions present in the industries in which the ultimate consumers of our products operate, which in some cases have been highly cyclical and subject to substantial downturns.
As a result of the cyclical nature of these markets, we have experienced, and in the future, we may experience, significant fluctuations in our sales and results of operations with respect to a substantial portion of our total product offering, and such fluctuations could be material and adverse to our overall financial condition, results of operations, and liquidity.
Because most of our contracts are individual purchase orders and not long-term agreements, there is no guarantee that we will be able to generate a similar amount of revenue in the future.
We must bid or negotiate each of our contracts separately, and when we complete a contract, there is generally no continuing source of revenue under that contract. As a result, we cannot assure you that we will have a continuing stream of revenue from any contract. Our failure to generate new business on an ongoing basis would materially impair our ability to operate profitably. Additionally, our reliance on individual purchase orders has historically caused, and may in future periods cause, our results of operations and cash flows to vary considerably and unpredictably from period to period. The COVID-19 pandemic may also reduce demand for our products and services as a result of delays or disruptions in our customers’ ability to continue their own production, including due to supply chain issues, shutdowns of our customers’ facilities, and the continuation of remote work by our customers, which may result in slowed responses and resolutions to production issues.
Because of our dependence on a limited number of customers that change year to year, our failure to generate major contracts from a small number of customers may impair our ability to operate profitably.
We have, in the past, been dependent in each year on a small number of customers who generate a significant portion of our business, and these customers change from year to year. For fiscal year 2021, we had 15 customers, and for fiscal year 2022 we had 46 customers, of which only five were customers from the prior fiscal year. For the years ended September 30, 2022 and 2021, one customer accounted for 15% and three customers (including two different from prior fiscal year) accounted for 91% of the Company’s total revenues, respectively.
As a result, we may have difficulty operating profitably if there is a default in payment by any of our major customers, we lose an existing order, or we are unable to generate orders from new or existing customers. Furthermore, to the extent that any one customer accounts for a large percentage of our revenue, the loss of that customer could materially affect
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our ability to operate profitably. The loss of these customers could have a material adverse effect upon our business and may impair our ability to operate profitably. We anticipate that our dependence on a limited number of customers in any given fiscal year will continue for the foreseeable future. There is always a risk that existing customers will elect not to do business with us in the future or will experience financial difficulties. If our customers experience financial difficulties or business reversals, or lose orders or anticipated orders, which would reduce or eliminate the need for the products that they ordered from us, they could be unable or unwilling to fulfill their contracts with us.
There is also a risk that our customers will attempt to impose new or additional requirements on us that reduce the profitability of the orders placed by those customers with us. Further, even if the orders are not changed, these orders may not generate margins equal to our recent historical or targeted results. If we do not book more orders with existing customers, or develop relationships with new customers, we may not be able to increase, or even maintain, our revenue, and our financial condition, results of operations, business, and/or prospects may be materially adversely affected.
We rely partly on developer-driven housing projects, and any slowdown in the housing industry could adversely impact our business.
We rely partly on developer-driven housing projects, and any slowdown in the industry could adversely impact our business. The homebuilding industry is cyclical and is highly sensitive to changes in local and general economic conditions that are outside our control, including:
• consumer confidence, employment levels, job growth, spending levels, wage and personal income growth, personal indebtedness levels, and household debt-to-income levels of potential homebuyers;
• the availability and cost of financing for homebuyers or restrictive mortgage standards, including private and federal mortgage financing programs and federal, state, and provincial regulation of lending practices;
• real estate taxes and federal and state income tax provisions, including provisions for the deduction of mortgage interest payments;
• U.S. and global financial system and credit markets, including short- and long-term interest rates and inflation;
• housing demand from population growth, household formations, new home buying catalysts (such as marriage and children), second home buying catalysts (such as retirement), home sale catalysts (such as an aging population), demographic changes (including immigration levels and trends in urban and suburban migration), generational shifts, or otherwise, or perceptions regarding the strength of the housing market, and home price appreciation and depreciation resulting therefrom;
• competition from other real estate investors with significant capital, including other real estate operating companies and developers, institutional investment funds and companies solely focused on single-family rentals; and
• the supply of new or existing homes, including foreclosures, and other housing alternatives, such as apartments and other residential rental property, and the aging of existing housing inventory.
We rely partly on contractors and builders that from time to time may have difficulty paying for our materials on time.
We rely partly on contractors and builders that from time to time may have difficulty paying for our materials on time. We may potentially have a greater difficulty collecting accounts receivable and longer payment cycles, which may negatively impact our business.
Because we have relied upon a limited number of material suppliers for our products, problems with our material suppliers could impair our ability to meet our obligations to our customers.
For fiscal year-end 2022, we relied on four suppliers to provide us with substantially all of our steel raw materials. For the years ended September 30, 2022 and 2021, three suppliers accounted for 75% and two suppliers accounted for 70% of the Company’s total purchases, respectively. As of September 30, 2022 and 2021, accounts payable to those three and two suppliers accounted for 94% and 84% of the Company’s total accounts payable, respectively. Although we believe other suppliers are generally available on commercial terms, in the event that we have any quality, delivery,
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or other problems with our existing suppliers or in the event that we are not otherwise able to purchase steel from our suppliers, it may be more difficult for us to find alternative suppliers. If we fail to develop or maintain our relationships with these, or our other, suppliers or if the suppliers are not able to meet our quality, quantity, and delivery schedules, we may not be able to meet our delivery and installation schedules for our systems and we may be unable to enter into new contracts with potential customers, thus impairing our revenue stream. Further, any increases in price would affect our ability to market our products or generate acceptable gross margins. We cannot assure you that our current suppliers will be able to meet our quality, quantity, and delivery requirements or that we will be able to find alternate suppliers that can meet our quality, quantity, delivery, and price requirements. The failure to find alternate suppliers could materially affect our ability to conduct our business. Further, because suppliers may have a limited operating history and limited financial resources, we may not be able obtain an adequate remedy in the event that the suppliers are unable to meet their contractual obligations to us. Although there are a number of suppliers of steel, we cannot assure you that we will be able to negotiate reasonable terms for the purchase of steel if our existing suppliers are unable to meet our quality, delivery, and price requirements. Because we do not control the manufacture of key components for our other products, we are subject to our suppliers’ ability to perform as well as the suppliers’ allocation of their own resources to us and to other customers. We cannot assure you that we will be able to purchase key components for our other products on acceptable terms, if at all, and the failure to obtain these components could materially impair our ability to generate revenue.
The Company may not be able to successfully develop and promote new products or services, which could result in adverse financial consequences.
The Company plans to expand its operations and product development efforts. There can be no assurance that the Company will be able to expand its operations in a cost-effective or timely manner or that any such efforts will maintain or increase overall market acceptance. Furthermore, any new business or service launched by the Company that is not favorably received by consumers could damage the Company’s reputation and diminish the value of its brand. Expansion of the Company’s operations in this manner would also require significant additional expenses and development, operations, and other resources and would strain the Company’s management, financial, and operational resources. The lack of market acceptance of such services or products or the Company’s inability to generate satisfactory revenues from such expanded products and services to offset their cost could have a material adverse effect on the Company’s business, results of operations, and financial condition.
There is no assurance that the Company will be profitable.
There is no assurance that we will earn profits in the future, or that profitability will be sustained. There is no assurance that future revenues will be sufficient to generate the funds required to continue our business development and marketing activities. If we do not have sufficient capital to fund our operations, we may be required to reduce our sales and marketing efforts or forego certain business opportunities.
We have identified conditions and events that raise substantial doubt about our ability to continue as a going concern.
We do not believe the cash and cash equivalents on hand as of June 30, 2023 of $113,357 will be sufficient to fund our operations and capital expenditure requirements for the next twelve months from the date the condensed consolidated financial statements are issued. We will be required to raise additional capital to continue to fund operations and capital expenditures. Such funding may not be available on acceptable terms, or at all. If we are unable to access additional funds when needed, we may not be able to continue operations or we may be required to delay, scale back or eliminate some or all of our ongoing research and development efforts and other operations. Our ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially harm our business, financial condition and results of operations. These uncertainties create substantial doubt about our ability to continue as a going concern.
Additional information regarding our ability to continue as a going concern can be found in the notes to the financial statements, included elsewhere in this prospectus.
Our operating results may fluctuate significantly from quarter to quarter, and we cannot be certain that we will maintain profitability in every quarterly reporting period.
Our operating results historically have been difficult to predict and have at times significantly fluctuated from quarter to quarter due to a variety of factors, many of which are outside our control. As a result of these factors, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as
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an indication of our future performance. Our operating expenses do not always vary directly with revenue and may be difficult to adjust in the short term. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionately reduce operating expenses for that quarter, and therefore such a revenue shortfall would have a disproportionate effect on our operating results for that quarter.
The Company may not have the ability to manage its growth.
The Company anticipates that significant expansion will be required to address potential growth in its customer base and market opportunities. The Company’s anticipated expansion is expected to place a significant strain on the Company’s management, operational, and financial resources. To manage any material growth of its operations and personnel, the Company may be required to improve existing operational and financial systems, procedures, and controls and to expand, train, and manage its employee base. There can be no assurance that the Company’s planned personnel, systems, procedures, and controls will be adequate to support the Company’s future operations, that management will be able to hire, train, retain, motivate, and manage required personnel, or that the Company’s management will be able to successfully identify, manage, and exploit existing and potential market opportunities. If the Company is unable to manage growth effectively, its business, prospects, financial condition, and results of operations may be materially adversely affected.
We rely on the performance of highly skilled personnel, and if we are unable to attract, retain, and motivate well-qualified employees, our business could be harmed.
The Company is, and will be, heavily dependent on the skill, acumen, and services of the management and other employees of the Company. Our future success depends on our continuing ability to attract, develop, motivate, and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract them. In addition, the loss of any of our senior management or key employees could materially adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements. All of our officers and employees are at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business could be harmed.
Our business may be impacted by external factors that we may not be able to control, including the COVID-19 pandemic.
War, including the war in Ukraine, civil conflict, terrorism, natural disasters, and public health issues including domestic or international pandemics have caused and could cause damage or disruption to domestic or international commerce by creating economic or political uncertainties. Additionally, the volatility in the financial markets and disruptions or downturns in other areas of the global or U.S. economies could negatively impact our business. These events could result in a decrease in demand for our products, make it difficult or impossible to deliver orders to customers or receive materials from suppliers, affect the availability or pricing of energy sources, or result in other severe consequences that may or may not be predictable. As a result, our business, financial condition, and results of operations could be materially adversely affected.
At the beginning of calendar year 2020, the COVID-19 pandemic began to adversely affect our business and operations. The effects of the continuing pandemic and related governmental responses have included, and could in future periods include extended disruptions to supply chains and capital markets, reduced labor availability and productivity, and a prolonged reduction in demand for our products and services and overall global economic activity. The full extent of the COVID-19 pandemic, related business and travel restrictions, and changes to social behavior remain uncertain as the health crisis continues to evolve globally. Management has been closely monitoring the impact that the COVID-19 pandemic is having on the Company. The COVID-19 pandemic negatively affected the Company’s customers, suppliers, and labor force. Customer impacts have included certain customers halting operations entirely for a period of time, shifting to remote work, and suspending on-site inspections — which delays customer acceptance of completed work, customer payment of milestone payments to us, and delivery of finished goods. Supplier impacts have included difficulties experienced by the Company in ordering certain essential supplies. Labor impacts have included a few issues related to employee attendance such as voluntary avoidance of work out of fear of contracting the coronavirus, certain employees becoming ill, and others self-quarantining as a result of potential exposure to
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other individuals with symptoms of COVID-19, as well as increased difficulties in attracting and retaining skilled employees. To date, this has had a minor impact on the Company’s production levels; however, if more employees become ill in the future, the Company could experience more significant disruptions, which could have a material adverse effect on our results of operations, financial condition, and cash flows.
However, given the speed and frequency of continuously evolving developments with respect to this pandemic, the extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. As a result, we cannot reasonably estimate the magnitude of the impact on our financial condition and results of operations for future periods.
The current conflict between Ukraine and Russia has exacerbated market instability and disrupted the global economy.
The current conflict between Ukraine and Russia has caused uncertainty about economic and political stability, increasing volatility in the credit and financial markets and disrupting the global economy. The United States, the European Union, and several other countries are imposing far-reaching sanctions and export control restrictions on Russian entities and individuals. These sanctions and export controls may contribute to higher oil and gas prices and inflation, which could reduce demand for new construction projects. There is also a risk that Russia, as a retaliatory action to sanctions, may launch cyberattacks against the United States, the European Union, or other countries or their infrastructures and businesses. Additional consequences of the conflict may include diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, and various shortages and supply chain disruptions. While we do not currently directly rely on goods or services sourced in Russia or Ukraine and thus have not experienced any direct disruptions, we may experience indirect disruptions in our supply chain. Any of the foregoing factors, including developments or effects that we cannot yet predict, may adversely affect our business, results of operations, and financial condition.
Any decrease in the availability, or increase in the cost, of raw materials could materially affect our earnings.
The availability of certain critical raw materials, such as steel, nickel, invar, monel, inconel, aluminum, and other alloys, is subject to factors that are not within our control. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, at prices and other terms acceptable to us, or at all.
If suppliers increase the price of critical raw materials or are unwilling or unable to meet our demand, we may not have alternative sources of supply. In addition, to the extent that we have existing contracts or have quoted prices to customers and accepted customer orders for products prior to purchasing the necessary raw materials, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials, including delays or shortages caused by the COVID-19 pandemic and the government-imposed lockdowns. If we are unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions, or suffer harm to our reputation.
In addition, costs of certain critical raw materials have been volatile due to factors beyond our control. Raw material costs are included in our contracts with customers, but in some cases, we are exposed to changes in raw material costs from the time purchase orders are placed to when we purchase the raw materials for production. Changes in business conditions could adversely affect our ability to recover rapid increases in raw material costs and may adversely affect our results of operations.
Additionally, changes in international trade duties and other aspects of international trade policy, both in the United States and abroad, could materially impact the cost of raw materials. For example, in March 2018, the United States imposed an additional 25% tariff under section 232 of the Trade Expansion Act of 1962, as amended, on steel products imported into the United States. The tariff has been imposed on all steel imports, although imports from certain countries were initially excluded, the tariffs on steel and aluminum imports from Mexico and Canada have been lifted, and the tariffs on steel and aluminum imports from Europe have been partially lifted and replaced with a quota system. The United States also imposed a 10% tariff on all aluminum imports into the United States, with initial exemptions for aluminum imported from certain U.S. trading partners. Such actions could increase steel and aluminum costs and
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decrease supply availability. Any increase in steel and/or aluminum prices that is not offset by an increase in our prices could have an adverse effect on our business, financial position, results of operations, or cash flows. In addition, if we are unable to acquire timely steel or aluminum supplies, we may need to decline bid and order opportunities, which could also have an adverse effect on our business, financial position, results of operations, or cash flows.
We compete with traditional wood frame construction, and any fluctuation in the price of wood could adversely impact demand for our products.
We compete with traditional wood frame construction, and any fluctuation in the price of wood could adversely impact demand for our products. For example, if the price of wood drops our ability to compete with traditional wood frame construction prices may be adversely impacted.
Our manufacturing processes are complex, must constantly be upgraded to remain competitive, and depend upon critical, high-cost equipment that may require costly repair or replacement.
It is possible that we could experience prolonged periods of reduced production due to unplanned equipment failures, and we could incur significant repair or replacement costs in the event of those failures.
We must make regular capital investments and changes to our manufacturing processes to lower production costs, improve productivity, manufacture new or improved products, and remain competitive. We may not be in a position to take advantage of business opportunities or respond to competitive pressures if we fail to update, replace, or make additions to our equipment or our manufacturing processes in a timely manner. The cost to repair or replace much of our equipment or facilities could be significant. We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary capital expenditures in the future.
Our production facilities are energy-intensive, and we rely on third parties to supply energy consumed at our production facilities.
The prices for and availability of electricity, natural gas, oil, and other energy resources are subject to volatile market conditions, some of which have materially worsened as a result of recent shortages and price increases for energy in some markets. These market conditions often are affected by political and economic factors beyond our control. Disruptions or lack of availability in the supply of energy resources could temporarily impair our ability to operate our production facility. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, may adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost-sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.
Our systems and information technology infrastructure may be subject to security breaches and other cybersecurity incidents.
We rely on the accuracy, capacity, and security of our information technology systems to obtain, process, analyze, and manage data, as well as to facilitate the manufacture and distribution of products to and from our facility. We receive, process, and ship orders, manage the billing of and collections from our customers, and manage the accounting for and payment to our vendors. Maintaining the security of computers, computer networks, and data storage resources is a critical issue for us and our customers as security breaches could result in vulnerabilities and loss of and/or unauthorized access to confidential information. We may face attempts by experienced hackers, cybercriminals, or others with authorized access to our systems to misappropriate our proprietary information and technology, interrupt our business, and/or gain unauthorized access to confidential information. The reliability and security of our information technology infrastructure and software, and our ability to expand and continually update technologies in response to our changing needs are critical to our business. To the extent that any disruptions or security breaches result in a loss or damage to our data, it could cause harm to our reputation. This could lead some customers to stop using us for building their products and reduce or delay future purchases of our products or use competing products. In addition, we could face enforcement actions by U.S. states, the U.S. federal government, or foreign governments, which could result in fines, penalties, and/or other liabilities and which may cause us to incur legal fees and costs, and/or additional costs associated with responding to the cyberattack. Increased regulation regarding cybersecurity may increase our costs of compliance, including fines and penalties, as well as costs of cybersecurity audits. Any of these actions could materially adversely impact our business and results of operations.
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Our internal computer and information technology systems, or those of our third-party vendors, collaborators, contractors, consultants or other third parties, may fail or suffer security incidents or data breaches, which could result in a material disruption of our product development programs, compromise confidential, sensitive or personal information related to our business or prevent us from accessing critical information, potentially exposing us to liability or otherwise adversely affecting our business.
Our internal computer and information technology systems and those of our current and any future third-party vendors, collaborators, contractors, consultants or other third parties, are vulnerable to damage or interruption from, among other things, computer viruses, computer hackers, phishing attacks, ransomware, malware, social engineering, malicious code, employee theft, fraud, misconduct or misuse, denial-of-service attacks, sophisticated nation-state and nation-state-supported actors, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we seek to protect our information technology systems from system failure, accident and security breach, we have in the past and may in the future experience attempted phishing and other security incidents which could result in a disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other proprietary, personal or confidential information or other disruptions.
Controls employed by our information technology department and other third parties could prove inadequate, and our ability to monitor such third parties’ data security practices is limited. Due to applicable laws, rules, regulations and standards or contractual obligations, we may be held responsible for any information security failure or cybersecurity attack attributed to our third-party vendors as they relate to the information we share with them.
If we were to experience a cybersecurity breach or other security incident relating to our information systems or data, the costs, time and effort associated with the investigation, remediation and potential notification of the breach to counterparties, regulators and data subjects could be material. We may incur significant costs in an effort to detect and prevent security incidents, and we may face increased costs and requirements to expend substantial resources in the event of an actual or perceived security incident. In addition, techniques used to sabotage or to obtain unauthorized access to networks in which data is stored or through which data is transmitted change frequently, become more complex over time and generally are not recognized until launched against a target. As a result, we and our third-party vendors may be unable to anticipate these techniques or implement adequate preventative measures quickly enough to prevent either an electronic intrusion into our systems or services or a compromise of critical information. We cannot guarantee that we will be able to detect or prevent any such incidents, and, our remediation efforts may not be successful or timely. Our efforts to improve security and protect data from compromise may also identify previously undiscovered instances of data breaches or other cybersecurity incidents. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology and cybersecurity infrastructure, we could suffer significant business disruption, including transaction errors, supply chain or manufacturing interruptions, processing inefficiencies, data loss or the loss of or damage to intellectual property or other proprietary, personal or confidential information. Additionally, we do not currently maintain cybersecurity insurance, and any insurance we may maintain in the future against the risk of this type of loss in the future may not be sufficient to cover actual losses, or may not apply to the circumstances relating to any particular loss.
The extensive environmental, health, and safety regulatory regimes applicable to our manufacturing operations create potential exposure to significant liabilities.
The nature of our manufacturing business subjects our operations to numerous and varied federal, state, local, and international laws and regulations relating to pollution, protection of public health and the environment, natural resource damages, and occupational safety and health. Failure to comply with these laws and regulations, or with the permits required for our operations, could result in fines or civil or criminal sanctions, third-party claims for property damage or personal injury, and investigation and cleanup costs. Potentially significant expenditures could be required in order to comply with environmental laws that may be adopted or imposed in the future.
We have used, and currently use, certain substances that are considered hazardous, extremely hazardous, or toxic under worker safety and health laws and regulations. Although we implement controls and procedures designed to reduce continuing risk of adverse impacts and health and safety issues, we could incur substantial cleanup costs, fines and civil or criminal sanctions, and third-party property damage or personal injury claims as a result of violations, noncompliance, or liabilities under these regulatory regimes.
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As a manufacturing business, we also must comply with federal and state environmental laws and regulations that relate to the manner in which we store and dispose of materials and the reports that we are required to file. We cannot assure you that we will not incur additional costs to maintain compliance with environmental laws and regulations or that we will not incur significant penalties for failure to be in compliance.
The dangers inherent in our operations and the limits on insurance coverage could expose us to potentially significant liability costs and materially interfere with the performance of our operations.
The fabrication of large steel structures involves potential operating hazards that can cause personal injury or loss of life, severe damage to and destruction of property and equipment, and suspension of operations. The failure of such structures during and after installation can result in similar injuries and damages. Although we believe that our insurance coverage is adequate, there can be no assurance that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims that may arise. Claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage. The availability of insurance that covers risks we and our competitors typically insure against may decrease, and the insurance that we are able to obtain may have higher deductibles, higher premiums, and more-restrictive policy terms.
The requirements of being a public company are complex and will increase costs.
As a public company, we will be subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. We may need to hire more employees in the future to comply with these requirements, which will increase our costs and expenses.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business may be harmed.
We also expect that because we are a public company, these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors (“Board”), particularly to serve on our audit committee and renumeration committee, and qualified executive officers.
As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in increased threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.
Litigation is costly and time-consuming and could have a material adverse effect on our business, results of operations, and reputation.
The Company’s directors and officers may be subject to a variety of civil or other legal proceedings relating to the business affairs of companies with which they are, were or may be in the future affiliated, with or without merit. From time to time in the ordinary course of the Company’s business, we may become involved in various legal
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proceedings — including commercial, employment, and other litigation and claims — as well as governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources, and cause us to incur significant expenses. Furthermore, because litigation is inherently unpredictable, the results of any such actions may have a material adverse effect on our business, operating results, or financial condition.
Even if the claims are without merit, the costs associated with defending these types of claims may be substantial, in terms of time, money, and management distraction. In particular, patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain features, purchase licenses, or modify our products and features while we develop non-infringing substitutes or may result in significant settlement costs.
The results of litigation and claims to which we may be subject cannot be predicted with certainty. Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, results or operations, and reputation.
If our customers successfully assert product liability claims against us due to defects in our products, our operating results may suffer and our reputation may be harmed.
Due to the circumstances under which many of our products are used and the fact that some of our products are relied upon by our customers in their facilities or operations, we face an inherent risk of exposure to claims in the event that the failure, use, or misuse of our products results, or is alleged to result, in bodily injury, property damage, or economic loss. Although we carry product liability insurance, a successful product liability claim or series of claims against us, or a significant warranty claim or series of claims against us, could materially decrease our liquidity and impair our financial condition and materially and adversely affect our results of operations.
We may need new or additional financing in the future to expand our business, and our inability to obtain capital on satisfactory terms or at all may have an adverse impact on our operations and our financial results.
We may need new or additional financing in the future to expand our business, refinance existing indebtedness, or make strategic acquisitions, and our inability to obtain capital on satisfactory terms or at all may have an adverse impact on our operations and our financial results. As we grow our business, we may have to incur significant capital expenditures. We may make capital investments to, among other things, build new or upgrade our existing facilities, purchase or lease new equipment, and enhance our production processes. If we are unable to access capital on satisfactory terms and conditions, we may not be able to expand our business or meet our payment requirements under our existing credit facilities. Our ability to obtain new or additional financing will depend on a variety of factors, many of which are beyond our control. We may not be able to obtain new or additional financing because we may have substantial debt, our current receivable and inventory balances may not support additional debt availability, or we may not have sufficient cash flows to service or repay our existing or future debt. In addition, depending on market conditions and our financial performance, equity financing may not be available on satisfactory terms or at all. Moreover, if we raise additional funds through issuances of equity or convertible debt securities, our current stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. If we are unable to access capital on satisfactory terms and conditions, this could have an adverse impact on our business, results of operations, and financial condition.
Our intellectual property rights may be inadequate to protect us against others claiming violations of their proprietary rights, and the cost of enforcement could be significant.
The future success of our business is dependent upon the intellectual property rights surrounding our technology, including trade secrets, know-how, and continuing technological innovation. Although we will seek to protect our proprietary rights, our actions may be inadequate to protect any proprietary rights or to prevent others from claiming violations of their proprietary rights. There can be no assurance that other companies are not investigating or developing other technologies that are similar to our technology. In addition, effective intellectual property protection may be unenforceable or limited in certain countries. Any of these claims, with or without merit, could subject us to costly litigation. If the protection of proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible assets may be diminished. Any of these events could have an adverse effect on our business and financial results.
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Effective trade secret, copyright, trademark, and domain name protection is expensive to develop and maintain, in terms of both initial and ongoing registration requirements and the expenses and costs of defending our rights. We are seeking to protect our trademarks and domain names in an increasing number of jurisdictions, a process that is expensive and may not be successful or that we may not pursue in every location. Litigation may be necessary to enforce our intellectual property rights, protect our respective trade secrets, or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect our business and operating results. We may incur significant costs in enforcing our trademarks against those who attempt to imitate our brand. If we fail to maintain, protect, and enhance our intellectual property rights, our business and operating results may be harmed.
Our intellectual property rights may not be adequate to protect our business.
We currently do not hold any patents for our products. To date, we have filed five patent applications. Although we expect to continue filing, where applicable, patent applications related to our technology, no assurances can be given that any patent will be issued on our patent applications or any other application that we may file in the future or that, if such patents are issued, they will be sufficiently broad to adequately protect our technology. In addition, we cannot assure you that any patents that may be issued to us will not be challenged, invalidated, or circumvented.
If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.
In addition to seeking patent protection, we rely upon trade secret protection — as well as nondisclosure agreements and invention assignment agreements with our employees, consultants, and third parties — to protect our confidential and proprietary information. In addition to contractual measures, we try to protect the confidential nature of our proprietary information using commonly accepted physical and technological security measures. Such measures may not, for example, in the case of misappropriation of a trade secret by an employee or third party with authorized access, provide adequate protection for our proprietary information. Our security measures may not prevent an employee or consultant from misappropriating our trade secrets and providing them to a competitor, and any recourse we take against such misconduct may not provide an adequate remedy to protect our interests fully. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our product that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome is unpredictable. Even though we use commonly accepted security measures, trade secret violations are often a matter of state law, and the criteria for protection of trade secrets can vary among different jurisdictions. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information were independently developed by a competitor, our business and competitive position could be harmed.
The existence of a family relationship between Dekui Liu, as our Chief Executive Officer, and Ying Liu, as a board member, may result in a conflict of interest in connection with a decision to be made by us through our board, standing committees thereof, and management and what they each may believe is best for themselves or their family members in connection with the same decision.
Dekui Liu is the son of Ying Liu. In her position as a member of our board, Ying Liu owes a fiduciary duty to our stockholders and must act in good faith in a manner she reasonably believes to be in the best interests of the stockholders. And in his position as our Chief Executive Officer, Dekui Liu owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of the stockholders. Nevertheless, the existence of this family relationship may result in a conflict of interest on the part of such persons between what they may believe is in our best interests and the best interests of our stockholders and what they may believe is best for themselves or their family members in connection with a business opportunity or other matter to be decided by INNO through its board, standing committees thereof, and management. Moreover, even if such a family relationship does not create an actual conflict, the perception of a conflict in the press or the financial or business community generally could create negative publicity or another reaction with respect to the business opportunity or other matters to be decided by us through our board, standing committees thereof, and management, which could adversely affect the business generated
29
by us and our relationships with our existing customers and other counterparties, impact the behavior of third-party participants or other persons in the proposed business opportunity or other matter to be decided, otherwise negatively impact our business prospects related to this matter, or negatively impact the trading market for our securities.
Risks Related to This Offering
Our management will have broad discretion over the use of any net proceeds from this offering, and you may not agree with how we use the proceeds and the proceeds may not be invested successfully.
Our management will have broad discretion as to the use of any net proceeds from this offering and could use them for purposes other than those contemplated at the time of this offering and in ways that do not necessarily improve our results of operations or enhance the value of our common stock. Accordingly, you will be relying on the judgment of our management with regard to the use of any proceeds from this offering and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the proceeds will be invested in a way that does not yield a favorable, or any, return for you.
Investors in this offering may experience future dilution as a result of this and future equity offerings.
In order to raise additional capital, we may in the future offer additional shares of our common stock or other securities convertible into or exchangeable for our common stock. Investors purchasing our shares or other securities in the future could have rights superior to existing common stockholders, and the price per share at which we sell additional shares of our common stock or other securities convertible into or exchangeable for our common stock in future transactions may be higher or lower than the price per share in this offering.
Sales of a significant number of shares of our common stock in the public markets, or the perception that such sales could occur, could depress the market price of our common stock.
Sales of a substantial number of shares of our common stock in the public markets could depress the market price of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the effect that future sales of our common stock would have on the market price of our common stock.
Existing shareholders may sell significant quantities of common stock.
The existing shareholders will own 88% (or 86% if the underwriters exercise their option to purchase additional shares in full) of our common stock following the successful completion of this offering. Notwithstanding that certain officers and directors who are shareholders will be locked up for a period of 180 days following the completion of this offering, they may have acquired their shares at a lower price than that of this offering. Accordingly, they may be incentivized to sell all or part of their holdings as soon as any applicable transfer restrictions have ended, and such sales could have a negative impact on the market price of our common stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Several analysts may cover our stock. If one or more of those analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price will likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.
We expect to be a “controlled company” within the meaning of the listing standards of Nasdaq, and as a result, we will qualify for exemptions from certain corporate-governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Dekui Liu, our CEO, controls a majority of the outstanding common stock. As a result, we qualify as a “controlled company” within the meaning of the listing standards of Nasdaq, and we have elected not to comply with certain Nasdaq corporate-governance requirements. Under these rules, a “controlled company” may elect not to comply with certain corporate-governance requirements. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of Nasdaq’s corporate-governance requirements.
30
Risks Relating to Ownership of Our Securities
There is no active public trading market for our common stock, and we cannot assure you that an active trading market will develop in the near future.
Our common stock is not quoted in the over-the-counter markets and is not listed on any stock exchange, and there is currently no active trading in our securities. We will apply to have our common stock listed on the Nasdaq Capital Market under the symbol INHD, which listing is a condition to this offering. We cannot assure you that an active trading market for our common stock will develop in the future due to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until we became more seasoned and viable. We cannot give you any assurance that an active public trading market for our common stock will develop or be sustained. You may not be able to liquidate your shares quickly or at the market price if trading in our common stock is not active.
The public price of our common stock may be volatile and could, following a sale, decline significantly and rapidly.
The initial-public-offering price for the shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in the offering, or at all. Following this offering, the public price of our common stock in the secondary market will be determined by private buy-and-sell transaction orders collected from broker-dealers.
We may experience extreme stock price volatility unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our common stock.
Recently, there have been instances of extreme stock price run-ups followed by rapid price declines and strong stock price volatility with a number of recent initial public offerings, especially among companies with relatively smaller public floats. As a relatively small-capitalization company with relatively small public float, we may experience greater stock price volatility, extreme price run-ups, lower trading volume and less liquidity than large-capitalization companies. In particular, our common stock may be subject to rapid and substantial price volatility, low volumes of trades and large spreads in bid and ask prices. Such volatility, including any stock-run up, may be unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our common stock.
In addition, if the trading volumes of our common stock are low, persons buying or selling in relatively small quantities may easily influence prices of our common stock. This low volume of trades could also cause the price of our common stock to fluctuate greatly, with large percentage changes in price occurring in any trading day session. Holders of our common stock may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due to low volume trading. Broad market fluctuations and general economic and political conditions may also adversely affect the market price of our common stock. As a result of this volatility, investors may experience losses on their investment in our common stock. A decline in the market price of our common stock also could adversely affect our ability to issue additional common stock or other securities and our ability to obtain additional financing in the future. No assurance can be given that an active market in our common stock will develop or be sustained. If an active market does not develop, holders of our common stock may be unable to readily sell the common stock they hold or may not be able to sell their common stock at all.
A possible “short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to price volatility in our common stock.
Following this offering, investors may purchase our common stock to hedge existing exposure in our common stock or to speculate on the price of our common stock. Speculation on the price of our common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our common
31
stock for delivery to lenders of our common stock. Those repurchases may, in turn, dramatically increase the price of our common stock until investors with short exposure are able to purchase additional shares of common stock to cover their short position. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to the performance or prospects of our company, and once investors purchase the shares of common stock necessary to cover their short position, the price of our common stock may decline.
We may not be able to satisfy the listing requirements of Nasdaq to maintain a listing of our common stock.
If our common stock is listed on Nasdaq, we must meet certain financial and liquidity criteria to maintain such a listing. If we violate the maintenance requirements for continued listing of our common stock, our common stock may be delisted. In addition, our board may determine that the cost of maintaining our listing on a national securities exchange outweighs the benefits of such listing. A delisting of our common stock from Nasdaq may materially impair our stockholders’ ability to buy and sell our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock. In addition, the delisting of our common stock could significantly impair our ability to raise capital in the future.
We may be subject to securities litigation, which is expensive and could divert our management’s attention.
The market price of our securities may be volatile, and in the past, companies that experienced volatility in the market price of their securities were subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns.
Our failure to maintain effective internal controls over financial reporting could have an adverse impact on us.
We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition, or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting, or disclosure of our public-accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Further, controls can be circumvented by the individual acts of some persons, by the collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon 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. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
If we fail to have effective controls and procedures for financial reporting in place, we could be unable to provide timely and accurate financial information, which could result in an investigation by the SEC and civil or criminal sanctions, investors losing confidence in the accuracy of our periodic reports filed under the Exchange Act, and a decline in our stock price.
32
We are an “emerging growth company” under the JOBS Act, and we cannot be certain whether the reduced disclosure requirements applicable to emerging-growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are not applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes — Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden-parachute payments not previously approved. We cannot predict whether investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
In addition, section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in section 7(a)(2)(B) of the Securities Act of 1933 (the “Securities Act”) for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.
We will remain an “emerging growth company” until the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act, although we will lose that status sooner if our revenues exceed $1.235 billion, if we issue more than $1 billion in nonconvertible debt in a three-year period, or if the market value of our common stock that is held by nonaffiliates equals $700 million or more as of the last day of our most recently completed second fiscal quarter.
Changes in tax law may materially adversely affect our financial condition, results of operations, and cash flows or adversely impact the value of an investment in our common stock.
New income, sales, use, or other tax laws, statutes, rules, regulations, or ordinances could be enacted at any time or interpreted, changed, modified, or applied adversely to us, any of which could adversely affect our business operations and financial performance. We urge our investors to consult with their legal and tax advisors with respect to any changes in tax law and the potential tax consequences of investing in our common stock.
We have not paid dividends in the past and do not expect to pay dividends in the future, and any return on investment may be limited to the value of our stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings to support the development of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our Board after taking into account various factors, including, but not limited to, our financial condition, operating results, cash needs, and growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by Texas state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.
Our Amended and Restated Bylaws provide that the United States District Court for the Southern District of Texas, Houston Division, or in the event that court lacks jurisdiction to hear such action, the District Courts of the County of Harris, Texas will be the sole and exclusive forum for certain disputes which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with the Company or its directors, officers, employees or agents.
Our amended and restated bylaws provide that the state or federal courts located in Harris County, Texas will be the exclusive forum for: (i) any actual or purported derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty by any of our current or former directors or officers; (iii) any action asserting a claim against us or our current or former directors or officers arising pursuant to the Texas Business Organizations Code, or the TBOC, our certificate of formation, or our amended and restated bylaws; or (iv) any action asserting a claim against us or our current or former officers or directors that is governed by the internal affairs
33
doctrine, in each case subject to said courts having personal jurisdiction over the indispensable parties named as defendants therein. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock will be deemed to have notice of and to have consented to this provision of our bylaws. This provision does not apply to claims brought under the Securities Act or the Exchange Act. The exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
IN ADDITION TO THE ABOVE RISKS, BUSINESSES ARE OFTEN SUBJECT TO RISKS NOT FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS FILING, POTENTIAL INVESTORS SHOULD KEEP IN MIND THAT OTHER POSSIBLE RISKS MAY ADVERSELY IMPACT THE COMPANY’S BUSINESS OPERATIONS AND THE VALUE OF THE COMPANY’S SECURITIES.
34
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains “forward-looking statements.” Forward-looking statements reflect the current view about future events. When used in this prospectus, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions, as they relate to us or our management, identify forward-looking statements. Such statements include, but are not limited to, statements contained in this prospectus relating to our business strategy, our future operating results, and our liquidity and capital-resources outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees of assurance of future performance. We caution you, therefore, against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation:
• 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;
• our ability to protect our intellectual property and to develop, maintain, and enhance a strong brand; and
• other factors (including the risks contained in the section of this prospectus entitled “Risk Factors”) relating to our industry, our operations, and results of operations.
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. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
35
We estimate that we will receive net proceeds of approximately $8,840,000 (or approximately $10,220,000 if the underwriters’ option to purchase additional shares is exercised in full) from the sale of the common stock offered by us in this offering, based on an assumed public offering price of $4.00 per share (the lowest price of the price range set forth on the front cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our marketing capabilities, increase production capacity, expand research and development, evaluate strategic opportunities, other working capital and general corporate purposes, and create a public market for our common stock. As of the date of this prospectus, we cannot specify with certainty all the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds to us from this offering for general corporate purposes. In addition, we may use a portion of the proceeds for acquisitions, but we have not yet identified nor entered into preliminary negotiations with any specific acquisition target. To the extent we enter into an acquisition agreement, the cash costs would come from the working capital and general-corporate-purposes amount below.
The table below sets forth the manner in which we expect to use the net proceeds we receive from this offering. All amounts included in the table below are estimates.
Description |
Amount |
|||
Marketing |
|
20 |
% |
|
Increasing Production Capacity |
|
20 |
% |
|
Research and Development |
|
20 |
% |
|
Working Capital and General Corporate Purposes |
|
40 |
% |
|
Total |
$ |
100 |
% |
Changing circumstances may cause us to consume capital significantly faster than we currently anticipate. The amounts and timing of our actual expenditures will depend upon numerous factors, including the progress of our marketing and sales efforts, our development efforts, and the overall economic environment. Therefore, our management will retain broad discretion over the use of the proceeds from this offering. We may ultimately use the proceeds for different purposes from what we currently intend. Pending any ultimate use of any portion of the proceeds from this offering, if the anticipated proceeds will not be sufficient to fund all the proposed purposes, our management will determine the order of priority for using the proceeds, as well as the amount and sources of other funds needed. We believe that the funds raised in this offering will be sufficient to finance the purposes described above, and we do not think that material amounts of other funds will be necessary to finance such purposes.
Pending our use of the net proceeds from this offering, we may invest the net proceeds in a variety of capital-preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
36
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to this offering, our common stock has not been listed on any stock exchange or quoted on any over-the-counter market or quotation system, and there has been no public market for our common stock. We intend to apply to have our common stock listed on the Nasdaq Capital Market under the symbol “INHD,” which listing is a condition to this offering. There can be no assurance that our listing application will be approved. For more information see the section “Risk Factors.”
As of September 13, 2023, 18,251,726 shares of our common stock were issued and outstanding and were held by 11 stockholders of record.
37
We have not declared any cash dividends since inception, and we do not anticipate paying any dividends in the foreseeable future. Instead, we anticipate that all of our earnings will be used to provide working capital, to support our operations, and to finance the growth and development of our business. The payment of dividends is within the discretion of the Board and will depend on our earnings; capital requirements; financial condition; prospects; applicable Texas law, which provides that dividends are only payable out of surplus or current net profits; and other factors our Board might deem relevant. There are no restrictions that currently limit our ability to pay dividends on our common stock other than those generally imposed by applicable state law.
38
The following table sets forth our consolidated cash and capitalization as of June 30, 2023. Such information is set forth on the following basis:
• on an actual basis;
• on a pro forma basis to reflect the filing and effectiveness of our amended and restated certificate of formation;
• on a pro forma as-adjusted basis to reflect (i) the pro forma adjustments set forth above and (ii) the sale of 2,500,000 shares (exclude additional shares that the underwriters might exercise the option to purchase) of our common stock by us in this initial public offering at an assumed initial-public-offering price of $4.00 per share (the lowest price of the price range set forth on the front cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
You should read the following table in conjunction with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes included in this prospectus.
The pro forma as-adjusted information set forth below is illustrative only and will be adjusted based on the actual public-offering price and other terms of this offering determined at pricing.
As of June 30, 2023 |
||||||||||||
Actual |
Pro Forma |
Pro Forma |
||||||||||
Cash, cash equivalents and investments |
$ |
113,357 |
|
$ |
8,840,000 |
|
$ |
8,953,357 |
|
|||
|
|
|
|
|
|
|||||||
Deferred offering costs |
$ |
399,305 |
|
$ |
(399,305 |
) |
|
— |
|
|||
Short term debts (including short term loans from related parties) |
$ |
1,262,183 |
|
$ |
— |
|
$ |
1,262,183 |
|
|||
Long term debts |
$ |
123,414 |
|
$ |
— |
|
$ |
123,414 |
|
|||
|
|
|
|
|
|
|||||||
Stockholders’ equity |
|
|
|
|
|
|
||||||
Common stock, no par value, 100,000,000 shares authorized, 18,251,726 shares issued and outstanding, actual; 2,500,000 shares issued and outstanding, pro forma; 20,751,726 shares issued and outstanding, pro forma as adjusted |
|
|
|
|
|
|
||||||
Additional paid-in capital |
|
2,830,000 |
|
|
8,440,695 |
|
|
11,270,695 |
|
|||
Accumulated deficit |
|
(3,493,204 |
) |
|
— |
|
|
(3,493,204 |
) |
|||
Non-controlling interest |
|
(228,906 |
) |
|
— |
|
|
(228,906 |
) |
|||
Total stockholders’ equity (deficit) |
|
(892,110 |
) |
|
8,440,695 |
|
|
7,548,585 |
|
|||
|
|
|
|
|
|
|||||||
Total Capitalization |
$ |
493,487 |
|
$ |
8,440,695 |
|
$ |
8,934,182 |
|
____________
(1) Each $1.00 increase or decrease in the assumed initial-public-offering price per share of $4.00 (which is the lowest price of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, the pro forma as-adjusted amount of each of cash and cash equivalents, additional paid-in capital, and total stockholders’ deficit by approximately $2.3 million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each 1-million-share increase or decrease in the number of shares of common stock offered in this offering would increase or decrease, as applicable, the pro forma as-adjusted amount of each of cash and cash equivalents, additional paid-in capital, and total stockholders’ deficit by $3.6 million, assuming that the initial-public-offering price per share remains $4.00 (which is the lowest price of the price range set forth on the cover page of this prospectus), and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
39
Purchasers of our common stock in this offering will experience an immediate and substantial dilution in the as-adjusted net tangible book value of their shares of common stock. Dilution results from the fact that the $4.00 per share offering price is substantially in excess of the book value per share attributable to the existing shareholders for our presently outstanding common stock. Our net tangible book value attributable to shareholders at June 30, 2023 was $(892,110) or approximately $(0.05) per share. Net tangible book value as of June 30, 2023 represents the amount of total tangible assets minus total liabilities, divided by the number of common stock outstanding.
After giving effect to the sale of shares of common stock in this offering at the assumed offering price of $4.00 per share and after deducting the underwriting discounts and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at June 30, 2023 would have been $7,548,585, or $0.36 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $0.41 per share to existing investors and immediate dilution of $3.64 per share to new investors.
The following table illustrates this per-share dilution to new investors:
Offering |
Offering |
|||||||
Assumed initial public offering price per share |
$ |
4.00 |
|
$ |
4.00 |
|
||
Historical net tangible book value per share as of June 30, 2023 |
$ |
(0.05 |
) |
$ |
(0.05 |
) |
||
Pro forma as adjusted net tangible book value as of June 30, 2023 |
$ |
7,548,585 |
|
$ |
8,928,585 |
|
||
Increase in as-adjusted pro forma net tangible book value per share attributable to the offering |
$ |
0.41 |
|
$ |
0.47 |
|
||
Pro forma net tangible book value per share as of June 30, 2023, after this offering |
$ |
0.36 |
|
$ |
0.42 |
|
||
Dilution per share to investors participating in this offering |
$ |
3.64 |
|
$ |
3.58 |
|
Each $1.00 increase (decrease) in the assumed offering price of $4.00 per share would increase (decrease) our pro forma as adjusted net tangible book value per share as of June 30, 2023 by approximately $0.11, and would increase (decrease) dilution to new investors by $0.89 per share, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual offering price and other terms of this offering determined at pricing.
If the underwriter exercises the Over-Allotment Option in full, the pro forma as adjusted net tangible book value per share after the offering would be $0.42, the increase in net tangible book value per share to existing shareholders would be $0.06, and the immediate dilution in net tangible book value per share to new investors in this offering would be $3.58.
After completion of this offering, our existing stockholders would own approximately 88% (or 86% if the underwriters exercise their option to purchase additional shares in full) of our common stock, and our new investors would own approximately 12% (or 14% if the underwriters exercise their option to purchase additional shares in full) of the total number of shares of our common stock outstanding after this offering.
We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.
The following table summarizes, on a pro forma as adjusted basis as of June 30, 2023 (assuming the underwriters will not exercise their option to purchase additional shares), the differences between existing shareholders and the new investors with respect to the number of shares of common stock purchased, the total consideration paid and the average price per share before deducting the underwriting discounts to the underwriter and the estimated offering expenses payable by us.
Shares Purchased |
Total Consideration |
|||||||||||||
Number |
Percent |
Amount |
Percent |
Per Share |
||||||||||
Existing stockholders |
18,251,726 |
88 |
% |
$ |
2,850,000 |
22 |
% |
$ |
0.16 |
|||||
New Investors |
2,500,000 |
12 |
% |
|
10,000,000 |
78 |
% |
|
4.00 |
|||||
20,751,726 |
100 |
% |
$ |
12,850,000 |
100 |
% |
$ |
0.62 |
40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section headed “Selected Consolidated Financial and Operating Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Overview
We are a building technology company that primarily manufactures cold-formed-steel members and offers a full range of services required to transform raw materials into precise steel framing products and prefabricated homes. We transform raw material (coils of rolled steel of various gauges and other materials) through our proprietary technologies to cut, punch and bend the steel into members or other components. These work-in-process components are further processed into finished products which are used in a variety of building types, including residential, commercial, industrial, and infrastructure. At each stage of the process, we are adding value to the original rolled steel (and other materials) to its final assembled use by businesses or directly to customers.
Our largest commodity expense is our primary raw material — rolled steel in various gauges and widths. Like any commodity, steel is subject to supply/demand-based price fluctuations which can have an impact on the profitability of our business if prices change between the time we enter into a contract with a customer to deliver finished goods and the time the steel is purchased from the mill. We seek to mitigate our exposure to steel price fluctuations in two ways:
• Entering fixed price forward contracts with steel mills/suppliers for delivery in the future so that our bids for customer contracts have known pricing for the steel. This is particularly useful in larger projects that involve delivery of product over many months.
• Maintaining an approximately three-month inventory of our most actively used rolled steel coils (defined by width and gauge). This inventory requires an active forward-looking assessment of steel needs to meet expected demand. Maintaining inventory is a real financial exposure especially during periods of pricing volatility.
Key Performance Indicators (“KPIs”)
In addition to the measures presented in our consolidated financial statements, our management regularly monitors certain KPIs for our business. The KPIs used by the Company include:
The capital turnover rate of raw-material procurement
Our business is reliant on timely delivery of raw materials. At the same time, our primary raw material (steel) is expensive to warehouse. We strive to achieve roughly 1-3 months of raw materials inventory to balance our cost of inventory against the risk of not having raw materials when needed. We do this by setting up long-term cooperative relationship with multiple local and national suppliers, including the mills, so that we will gain a better payment cycle to secure the raw material, to maximize the usage of the funds. At the same time, to match the raw-material usage of the sales order each quarter, we will make the quarterly purchase plans ahead, so that the efficiency of capital turnover is higher.
The collection period of accounts receivable
Timely payments from customers are essential to a successful business. Based on our historical collectability experience, we will seek to gradually eliminate the types of small-size homebuilders and cooperate with large-size and professional companies to strengthen risk control of accounts receivable and shorten the days outstanding for accounts receivable. Eventually, we expect to achieve the goal of receiving 100% of the payment before products leave the shop.
Lead time
Construction requires the coordination of many contractors, subcontractors, permitting, etc. that must be done on very exacting schedules where any delays will have a ripple effect down the chain. While there are many things we cannot control, we strive to communicate with the customers at a high frequency and make the best production arrangement to minimize storage period and shorten the lead time, which is one of the most important operating indicators of INNO.
41
The growth of total operating income
We maintain internal long-term targets for both gross profit and operating income, based partly on long-term revenue growth targets and partly on execution and internal controls. Ultimately, we strive to deliver profitable long-term growth.
Production capacity improvement
We are committed to investing in the improvement of production capacity and production efficiency in an effort to support larger orders and to meet the goal of increasing total operating income.
Results of Operation
For the years ended September 30, 2022, and 2021
The following table presents certain consolidated statement-of-operations information and presentation of that data as a percentage of change from year to year.
For the Years Ended September 30, |
|||||||||||
2022 |
2021 |
Variance |
|||||||||
Revenues |
$ |
4,502,568 |
|
$ |
3,003,624 |
|
49.9 |
% |
|||
Costs of materials and labor |
|
3,405,506 |
|
|
2,069,581 |
|
64.6 |
% |
|||
Selling, general and administrative expenses (exclusive of depreciation shown separately below) |
|
1,873,902 |
|
|
1,229,651 |
|
52.4 |
% |
|||
Depreciation |
|
33,138 |
|
|
6,000 |
|
452.3 |
% |
|||
Operating loss |
|
(809,978 |
) |
|
(301,608 |
) |
168.6 |
% |
|||
Other income (expenses) |
|
(310,114 |
) |
|
222,193 |
|
(239.6 |
)% |
|||
Loss before income taxes |
|
(1,120,092 |
) |
|
(79,415 |
) |
1,310.4 |
% |
|||
Income tax expense |
|
9,915 |
|
|
26,581 |
|
(62.7 |
)% |
|||
Net loss |
|
(1,130,007 |
) |
|
(105,996 |
) |
966.1 |
% |
|||
Non-controlling interest |
|
(121,345 |
) |
|
— |
|
|
||||
Net loss attributable to INNO HOLDINGS INC. |
$ |
(1,008,662 |
) |
$ |
(105,996 |
) |
851.6 |
% |
|||
|
|
|
|
|
|||||||
Operating loss % of revenues |
|
(18.0 |
)% |
|
(10.0 |
)% |
|
||||
Net loss % of revenues |
|
(25.1 |
)% |
|
(3.5 |
)% |
|
For the nine months ended June 30, 2023 and 2022
The following table presents certain unaudited condensed consolidated statement-of-operations information and presentation of that data as a percentage of change from period to period.
For the Nine Months Ended June 30, |
|||||||||||
2023 |
2022 |
Variance |
|||||||||
Revenues |
$ |
501,672 |
|
$ |
3,531,839 |
|
-86 |
% |
|||
Costs of materials and labor |
|
472,710 |
|
|
2,254,643 |
|
-79 |
% |
|||
Selling, general and administrative expenses (exclusive of depreciation and bad debt expenses shown separately below) |
|
1,628,307 |
|
|
1,692,131 |
|
-4 |
% |
|||
Depreciation |
|
50,547 |
|
|
19,698 |
|
157 |
% |
|||
Bad debt expense |
|
1,267,960 |
|
|
— |
|
100 |
% |
|||
Operating loss |
|
(2,917,852 |
) |
|
(434,633 |
) |
571 |
% |
|||
Other income (expenses) |
|
(53,876 |
) |
|
(122,164 |
) |
-56 |
% |
|||
Loss before income taxes |
|
(2,971,728 |
) |
|
(556,797 |
) |
434 |
% |
|||
Income tax expense |
|
— |
|
|
12,887 |
|
0 |
% |
|||
Net loss |
|
(2,971,728 |
) |
|
(569,684 |
) |
422 |
% |
|||
Non-controlling interest |
|
(107,561 |
) |
|
(61,092 |
) |
76 |
% |
|||
Net loss attributable to INNO HOLDINGS INC. |
$ |
(2,864,167 |
) |
$ |
(508,592 |
) |
463 |
% |
|||
|
|
|
|
|
|||||||
Operating loss % of revenues |
|
-582 |
% |
|
-12 |
% |
|
||||
Net loss % of revenues |
|
-592 |
% |
|
-16 |
% |
|
42
Revenues
Revenue for the fiscal year ended September 30, 2022 increased 49.9% to $4,502,568 in comparison to $3,003,624 for the fiscal year ended September 30, 2021. The increase in revenue resulted primarily from an increase in the number of customers, to 48 in fiscal year 2022 from 20 in fiscal year 2021, and the corresponding increase in sales volume. We had 11 repeat customers in fiscal year 2022. We had four customers that each accounted for over 10% of sales in fiscal year 2022, contributing 15.33%, 9.74%, 9.16%, and 8.74% of revenue, respectively.
Revenue for the nine months ended June 30, 2023 declined 86% to $501,672 in comparison to $3,531,839 for the nine months ended June 30, 2022. The decline in revenue primarily resulted from a decrease in customer construction activity, a decline in the number of customers, to 21 in the nine months ended June 30, 2023 from 45 in the nine months ended June 30, 2022, and a decline in the average size of projects, which resulted in a decline in average revenue per customer to $23,889 in the nine months ended June 30, 2023 from $78,625 in the nine months ended June 30, 2022. We had eight repeat customers in the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022. We had four customers that each accounted for over 10% of revenue in the nine months ended June 30, 2023, contributing 32%, 10%, 10%, and 10% of revenue, respectively.
Our backlog as of June 30, 2023 was approximately $15,000,000 to $20,000,000. The range of backlog amount is comprised of all remaining payments related to our signed customer contracts and estimation of order adjustments. We expect revenue from these contracts to be realized within 24 months from June 30, 2023. These signed contracts included an agreement, amount of $15,875,800, with Vision Opportunity Fund LP, partially owned by one of our minority shareholders.
Our revenues are significantly impacted by demand for residential and commercial buildings, economic conditions including interest rates and costs of labor, materials and other variables that impact the cost of our finished goods. We cannot ensure that growth will continue, and our business may be adversely affected by negative overall economic conditions currently being experienced.
Costs of Materials and Labor
Costs of materials and labor include raw materials (primarily rolled steel) and direct labor in the processing of raw materials through the manufacturing process. Fluctuations in raw materials pricing and production volume can have an impact on our costs as indicated in the table below, with raw steel contributing between approximately 40% of the cost of goods sold and 61% of the cost of goods sold, depending on price and volume.
Costs of materials and labor for the fiscal year ended September 30, 2022, increased 64.6% to $3,405,506 in comparison to $2,069,581 for the fiscal year ended September 30, 2021. The increase was primarily due to an increase in the number of customers and a corresponding increase in sales volume as discussed above, an increase in the number of workers (primarily at-will contractors), and increased costs of raw material.
Costs of materials and labor for the nine months ended June 30, 2023, declined 79% to $472,710 in comparison to $2,254,643 for the nine months ended June 30, 2022. The decrease was primarily due to the sharp year-over-year decline in revenue, as discussed above.
While the Company seeks to minimize the impact of fluctuations of steel prices by advance purchases of steel tied to the price to be paid by customers in their contracts, available capital resources has limited our ability to make advance purchases to about three months of supply, which has left us with some exposure to supply price changes. Among the uses of proceeds from this offering, the Company intends to extend the number of months of supply to match the expected need for raw materials of purchases under contract.
Steel Price Sensitivity Analysis |
||||
Steel Price |
Steel as % of COGS |
|||
Variance |
Low Volume |
High Volume |
||
(20)% |
40% |
51% |
||
(10)% |
43% |
54% |
||
0 |
45% |
57% |
||
10% |
48% |
59% |
||
20% |
50% |
61% |
43
Table Notes: “Low Volume” assumes three tons of steel material used per one eight-hour shift; “High Volume” assumes seven tons of steel material used per shift. Steel price variance assumes a baseline price of $1,200 per U.S. ton.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended September 30, 2022, increased 52.4% to $1,873,902 in comparison to $1,229,651 for the year ended September 30, 2021. While the increase in these expenses was less than the revenue growth, the absolute dollar increase was mainly due to an increase in marketing and promotional activities, the opening of our California office and an increase in professional-service fees.
Selling, general and administrative expenses for the nine months ended June 30, 2023, decreased 4% to $1,628,307 in comparison to $1,692,131 for the nine months ended June 30, 2022. The decrease was primarily due to the recognition of non-employee wages and commissions recognized in the nine months ended June 30, 2022, partly offset by increases in marketing and promotional activities, additional overhead expenses to support long-term growth, and an increase in professional service fees to begin preparation for our public filing in the nine months ended June 30, 2023.
Bad debt expense
Bad debt expense increased by $1,267,960 for the nine months ended June 30, 2023 compared to the same period in 2022 due to the reserves for doubtful accounts. The increase in bad debt expense was primarily driven by the economic downturn in the industry and the status of customers’ financial situation. We continue to monitor our accounts receivable balances and limit small-size homebuilders and cooperate with large-size and professional companies to strengthen risk control of accounts receivable and shorten the days outstanding for accounts receivable.
Operating Loss
Operating loss was $809,978 for the year ended September 30, 2022, in comparison to $301,608 for the year ended September 30, 2021. The operating loss ratio also increased to 18.0% for the year ended September 30, 2022, from 10.0% for the year ended September 30, 2021. This was due to a combination of the increase in sales and the higher costs and expenses, as discussed above.
Operating loss was $2,917,852 for the nine months ended June 30, 2023, in comparison to operating loss of $434,633 for the nine months ended June 30, 2022. The increased loss was primary attributed to lower revenue and increased costs and expenses, as discussed above.
Other Income (Expense)
Other income (expenses) consists of interest expense and other nonoperating income (expenses). Other expenses for our fiscal year ended September 30, 2022 were $310,114, in comparison to other income of $222,193 for the year ended September 30, 2022. The increase in other expenses was mainly due to the combination of an increase in stock compensation expenses of $300,000 and decrease in other income of $230,000, which was the PPP loans forgiven in fiscal year ended September 30, 2021.
Other expenses for the nine months ended June 30, 2023, were $53,876, in comparison to other expenses of $122,164 for the nine months ended June 30, 2022. The decrease in expense was primarily related to stock compensation expense recorded for the nine months ended June 30, 2022.
Net Loss
Net loss for the fiscal year ended September 30, 2022, was $1,008,662, in comparison to a net loss of $105,996 for the year ended September 30, 2021. The increase in net loss for fiscal year 2022 compared to fiscal year 2021 was primarily due to changes in revenue, costs and expenses as outlined above, including higher stock compensation expense and a decrease in PPP loan forgiveness.
Net loss for the nine months ended June 30, 2023, was $2,971,728, in comparison to net loss of $569,684 for the nine months ended June 30, 2022. The year-over-year increase in net loss was primarily due to changes in revenue, costs and expenses as outlined above, including lower year-over-year revenue and higher costs to prepare for our public filing.
44
Key Factors That Affect Operating Results
The following are factors that affect our operating results.
• Acquisition of new (large size) builders, developers, and other types of customers and assisting them to complete the structural design and engineering more efficiently.
• Consistently providing value-added professional services for our customers, saving costs, and shortening construction periods to win more loyal customers.
• Maintaining technological leadership, competitive prices, and other advantages over competitors.
• Consistent investment in automation and other systems to improve efficiencies required to improve margins.
• Investment in employees in an effort to efficiently manage operations, finances, and other corporate efforts.
• Demand for residential and commercial buildings can be substantially impacted by the cost of borrowing money. Recent increases in interest rates and recessionary fears have slowed building activities. However, we believe demand for affordable housing remains stable. Builders in this segment are driven to seek breakthroughs and optimization in terms of cost and lead time, which we believe may benefit INNO.
Our Ability to Create Value for Our Users and Generate Revenue
Our ability to create value for our users and generate our revenues from merchants is driven by the factors described below:
• Our competitors include traditional wood framing, competing steel framing solutions, and other building techniques, as well as prefab homes and prefabricated building components. With respect to framing solutions, we expect cost savings, quality, and construction efficiency over our competitors to be the main driver of outperformance for INNO. For prefab homes and components, we differentiate through modern design, high quality, technology innovation, and affordability, and we believe our product is differentiated in this large and growing market space.
• From applying AI design technology, innovation of new products, and exploration of new materials, to developing a whole new structural system, we provide customers with the most optimized solutions and LGS framing, which can lead to lower costs and construction times.
• Our steel framing products are formed by automated CNC production lines. We currently own five automatic production lines that can cover 3 ⅝" to 12" studs/tracks of different thickness ranging from 25 gauge to 12 gauge. We believe our lead time is faster than other traditional suppliers.
Inflation, Supply Chain Disruption, and Price Fluctuations
Inflationary pressures of the past year, as evidenced by rising interest rates and cost of living indices, have had a direct impact on all aspects of our business from the cost of the raw materials we use to the demand for our finished goods. While we have no control over the decisions our customers make of whether to move forward with construction projects in the face of recessionary fears, we endeavor to limit our exposure by carefully managing our steel purchases to match expected demand and maintaining a flexible as-needed work force.
While steel material remains more expensive than wood on an absolute basis, we believe demand for our steel framing products will continue to grow due to significant advantages, including lower construction times (shorter time to building completion, lower labor costs), higher quality (limited waste, true and straight walls, durability), and insurance savings. We saw evidence of this in the fiscal year ended September 30, 2022, when steel prices increased sharply (price increases peaked at +143% year to year), yet demand remained strong, and our revenue grew approximately 50% year
45
to year. We also note that steel and softwood price changes tend to track reasonably closely over time, which held even through the pandemic (see figure below). We believe this suggests that our steel framing products will likely remain competitive with wood framing, even in periods of high price volatility.
Steel Mill Products and Softwood Pricing Trends, 2018-2022
Source: U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: Lumber and Wood Products: Softwood Lumber [WPS0811], retrieved from FRED, Federal Reserve Bank of St. Louis, and Metals and Metal Products: Steel Mill Products [WPU1017], retrieved from FRED, Federal Reserve Bank of St. Louis.
The supply chain covers material sourcing, logistics, and macroeconomic factors.
• INNO is a technology-based manufacturing company, with all manufacturing operations currently based in the U.S. We currently source our steel from U.S.-based steel mills, which greatly reduces our exposure to global supply chain concerns; however, we may in the future source steel from other countries. We may also source other materials internationally from time-to-time to ensure we maintain an efficient cost profile.
• Timely transportation of our inbound raw materials and outbound finished goods are critical to our operations and meeting our obligations to our customers. We are exposed to the overall shortage in capacity in the transportation industry including the well-publicized driver shortage and volatile fuel price. We have mitigated some of the transportation shortages and maintained high service levels by having one company-owned truck and may add more if demand warrants it.
• An additional innovation aiding in our logistics strategy, is our patent-pending Mobile Factory. Our Mobile Factory can be transported to the jobsite for production. Once launched, our Mobile Factory can greatly reduce the logistic costs of all or a portion of finished products produced at the factory.
Impact of Global Conflicts and Uncertainties
The conflict between Russia and Ukraine continues to affect economic and global financial markets. The effects of the conflict have contributed to other ongoing economic challenges such as global supply-chain disruptions, labor shortages, inflation, and cybersecurity attacks, creating a challenging business environment for all industries. While we have not been materially affected by the conflict or these other economic challenges, future unpredictable and uncertain events and the protentional for future global conflicts could impact the Company. We continue monitor developments in the Russia-Ukraine conflict and evaluate our supply chain to mitigate any effects on our business, which includes currently sourcing all of our steel from the U.S.
46
We currently source all of our steel within the U.S. and ensure that the steel coils we source meet U.S. standards. We may source steel and other materials internationally to ensure a favorable cost profile. Our robust supply chain efforts help ensure consistent quality standards are met.
Impact of COVID-19 and Any Future Pandemic
At this time the COVID-19 pandemic and shutdowns related to additional outbreaks have not had a material effect on our business. However, the pandemic continues to affect energy prices, inflation, labor supply, the global supply chain and capital resources. Future impacts related the pandemic remain uncertain and could have an adverse effect on our business, including with regard to the Company’s ability to acquire raw materials used in our finished goods at sufficiently low prices, find and hire qualified employees, and access capital.
We’ve taken our previous experiences operating during the pandemic and related shutdowns and used them to implement strategies to ensure our continued success. We have adapted to the ongoing COVID-19 pandemic in order to continue functioning. This has included implementing safety protocols and flexible remote work.
Our supply chain has not been significantly impacted by the recent COVID-19 pandemic since we source raw materials locally which helps reduce lead times and minimize risk of disruptions. We also attempt to keep a safety stock of raw material inventory which can help to ensure that we have enough product on hand to meet urgent demand even if there are unexpected delays or disruptions in supply chain.
Liquidity and Capital Resources
Sources of Liquidity
During the years ended September 30, 2022, and 2021, we primarily funded our operations with cash generated from operations, sale of equity, as well as through borrowing under our revolving line of credit, a long term promissory note, and PPP loans from the Small Business Administration. See Note 8 and Note 12 to the consolidated financial statements for details. We had cash of $50,628 as of September 30, 2022, representing a $46,233 decrease from $96,861 of cash as of September 30, 2021. The cash decrease was primarily the result of the increase in net cash used by operating activities and purchase of equipment in the fiscal year ended September 30, 2022.
The Company has participated in several private-placement offerings. On December 3, 2022, we closed on a private-placement offering pursuant to which we sold to an accredited investor an aggregate of $500,000 in common stock, at a purchase price of $3.50 per share. On March 13, 2023, we closed on a private-placement offering pursuant to which we sold to an accredited investor an aggregate of $100,000 in common stock, at a purchase price of $3.70 per share. On March 29, 2023, we closed on a private-placement offering pursuant to which we sold to an accredited investor an aggregate of $300,000 in common stock, at a purchase price of $3.80 per share. The offerings were completed pursuant to an exemption from registration under Rule 506(b) of the Securities Act of 1933, as amended.
As of June 30, 2023, our cash balance increased to $113,357. The cash increase was primarily the result of the private placement offering discussed above, partly offset by lower revenue in the quarter, ongoing operating activities, and costs associated with our public offering.
We do not believe the cash and cash equivalents on hand as of June 30, 2023 of $113,357 will be sufficient to fund its operations and capital expenditure requirements for the next twelve months from the date the condensed consolidated financial statements are issued. We will be required to raise additional capital to continue to fund operations and capital expenditures. The uncertainties surrounding our ability to access capital when needed create substantial doubt about our ability to continue as a going concern.
Based on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion concerning the presentation of our financial statements on a going concern basis in the notes to our consolidated financial statements and our independent public accountants have included a similar discussion in their opinion on our financial statements through September 30, 2022. We will be required in the near future to issue debt or sell our Company’s equity securities in order to raise additional cash, although there are no firm arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure
47
the necessary financing, or the terms of any such financing transaction if one were to occur. The failure to secure such financing could severely curtail our plans for future growth or in more severe scenarios, the continued operations of our Company.
Working Capital
As of June 30, 2023, September 30, 2022, and 2021, our working (deficit) capital was $(1,789,252), $378,782 and $290,416, respectively. The historical seasonality in our business during the year can cause cash and cash equivalents, inventory, and accounts payable to fluctuate, resulting in changes in our working capital.
Cash Flows
Operating Activities
Net cash used in operating activities for the nine months ended June 30, 2023, and 2022 was $1,066,467 and $1,006,752, respectively. The slightly increase was mainly due to the combination of an increase in loss of $2.4 million offset by an increase of non-cash item bad debt expense of $1.3 million and a decrease in working capital consumption of $1.1 million. For the nine months ended June 30, 2023, net cash used in operating activities was $1.1 million, primarily driven by the net loss of $3.0 million, partially offset by non-cash items, which mainly included bad debt expense of $1.3 million. Working capital provided cash of $0.6 million, which was primarily driven by a $1.0 million increase in accounts payable, unearned revenue and other current liabilities, a $0.4 million decrease in account receivable, a $0.1 million decrease of prepayments and other current assets, and partially offset by a $0.6 million increase in inventories and a $0.4 million increase in deferred offering costs. For the nine months ended June 30, 2022, net cash used in operating activities was $1.0 million, primarily driven by the net loss of $0.6 million, partially offset by non-cash items, which mainly included stock compensation expense of $0.1 million. Working capital consumption of $0.6 million, which was primarily driven by a $0.7 million increase in account receivable, a $0.3 million increase of prepayments and other current assets, and partially offset by a $0.5 million increase in accounts payable, unearned revenue and other current liabilities.
Net cash used in operating activities for the years ended September 30, 2022, and 2021 was $1,717,819 and $545,065, respectively. The increase was mainly due to the increase in loss of $1.0 million, accounts receivable of $0.8 million, and prepayments of $0.1 million, and a decrease in unearned revenue of $0.6 million during the year ended September 30, 2022, which was offset by an increase in stock based compensation expense of $0.3 million, accounts payable of $0.9 million, and a decrease in PPP loan forgiven of $0.2 million. We are continuing to invest in the business to support growth, which includes investments in sales and marketing, finance, human resources, IT, and similar functions, which may continue to result in negative net cash used in operating activities. We are also working to improve our accounts receivables collection, which may improve our net cash position.
Investing Activities
For the nine months ended June 30, 2023, and 2022, net cash used in investing activities was the result of additions to property and equipment of $226,900 and $637,038, respectively, which are mainly related to the purchase of machinery, tools, motor vehicles, and leasehold improvements.
For the years ended September 30, 2022, and 2021, net cash used in investing activities was the result of additions to property and equipment of $684,815 and $60,550, respectively, which are mainly related to the purchase of machinery, tools, motor vehicles, and leasehold improvements.
Financing Activities
Net cash provided by financing activities was $1,356,096 and $1,658,212, respectively, for the nine months ended June 30, 2023, and 2022. The main reason for the decrease in net cash provided was primarily due to decrease in proceeds from shares sold for cash and long-term note, and offset by the increase in proceeds from related parties during the nine months ended June 30, 2023.
Net cash provided by financing activities was $2,356,401 and $230,706, respectively, for the years ended September 30, 2022, and 2021. The main reason for the increase in net cash provided was primarily due to proceeds from loans and sale of shares for cash.
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Related Party Transactions
The Company borrows short term loans without interest from its majority shareholder and CEO, Mr. Dekui Liu, for operation and cashflow needs from time to time. As of June 30, 2023, the amount due to Mr. Liu was $363,372. As of September 30, 2022 and 2021, the outstanding balance due to Mr. Liu was $12,233 and 80,706, respectively.
During the year ended September 30, 2022, the Company engaged Yunited Assets LLC (“Yunited”), a limited liability company owned by Mr. Cheng Yu, the minority owner of the Company’s subsidiary, Inno Research Institute, for consultation services on a project-by-project basis. During the nine months ended June 30, 2023 and 2022, the Company recorded $4,375 and $19,950, respectively, of project based consulting service fees, included in cost of materials and labor. During the nine months ended June 30, 2023 and 2022, the Company also recorded $90,000 and $80,000 consulting fee to Yunited for Mr. Yu’s daily operating services included in the general and administrative expenses. As of June 30, 2023, the outstanding balance of accounts payable — related party due to Yunited was $50,000. As of September 30, 2022 and 2021, there were no unpaid balances due to Yunited.
In March 2022, the Company entered into an agreement with Wise Hill Inc. (“Wise Hill”), a Florida corporation wholly owned by a minority shareholder of the Company. Pursuant to the agreement, the Company sold prefab home products of $250,000 to Wise Hill. For the year ended September 30, 2022, the Company recorded revenue-related party of $250,000. As of June 30, 2023, September 30, 2022 and 2021, the outstanding balance of accounts receivable — related party was $100,000.
During the year ended September 30, 2022, the Company purchased prefab home and other material and supplies from Baicheng Trading LLC, in which the father of Mr. Dekui Liu, the Company’s majority shareholder and CEO, is a director. As of June 30, 2023, September 30, 2022 and 2021, the outstanding balance of accounts payable — related party was $485,595, $485,595 and $0, respectively.
During the nine months ended June 30, 2023, the Company borrowed short term loans without interest from Zfounder Organization Inc., one of the Company’s minority shareholders for operation and cashflow needs. As of June 30, 2023, the outstanding balance due was $25,000. In addition, the Company borrowed short term loans without interest from Wise Hill Inc., a company owned by the CEO and Board member of Zfounder Organization Inc., for operation and cashflow needs. As of June 30, 2023, the outstanding balance due was $135,000.
During the quarter ended June 30, 2023, the Company borrowed short term loans without interest, amount of $100,000 and $30,000, respectively, from its Vice President of Product, Mr. Fei Xie and Director of Design, Mr. Zuoda He. As of June 30, 2023, the outstanding balance due to Mr. Xie and Mr. He was $100,000 and $30,000, respectively.
In March 2023, the Company entered into an agreement with Vision Opportunity Fund LP (“Vision”), a Florida limited partnership partially owned by a minority shareholder of the Company. Pursuant to the agreement, the Company agreed to provide supplies and act as project developer for an amount equal to $15,875,800 plus applicable taxes. The Company has not recorded revenue from the related party as of June 30, 2023. The Company expects to record 20% of the project amount by September 30, 2023 and the remaining 80% due by September 30, 2024.
Critical Accounting Policies and Estimate
We prepare our 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 consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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 2 to our audited 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 audited consolidated financial statements.
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Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, Inno Metal Studs Corp, Castor Building Tech LLC, and Inno Research Institute LLC. All intercompany balances and transactions have been eliminated.
Going concern
The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
Our consolidated financial statements have been prepared assuming that we will continue as a going concern. Such an assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Management is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products and services, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock.
Reverse acquisition under common control
Effective January 21, 2022, the Company acquired 100% of the common stock of Inno Metal Studs Corp (“IMSC”), a Texas corporation incorporated on October 31, 2019. Pursuant to the terms of the Share Purchase Agreement with IMSC’s sole owner, Mr. Dekui Liu, who was also the sole owner and CEO of the Company, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his 100% ownership in IMSC. Upon completion of the transaction, IMSC became a 100% owned subsidiary of the Company. As such, Under ASC 805-40 and ASC 805-50, the transaction is a reverse acquisition between entities under common control, in which INNO HOLDINGS INC. is the accounting acquiree and IMSC is the accounting acquirer. The assets, liabilities and operations of the two entities are combined at their historical carrying amounts, with all historical periods adjusted as if the entities had always been combined. The consolidated financial statements represent the continuation of the financial statements of IMSC except for its capital structure.
Accounts receivable
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 credit loss is required.
In October 2020, the Company adopted ASU 2016-13, Topics 326 — Credit Loss, Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology, for its accounting standard for its trade accounts receivable.
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The Company continuously monitors the recoverability of accounts receivable. If there are any indicators that a customer may not make payment, the Company may consider making a provision for non-collectability for that particular customer. At the same time, the Company may cease further sales or services to such a customer. The following are some of the factors that the Company develops allowance for credit losses:
• the customer fails to comply with its payment schedule;
• the customer is in serious financial difficulty;
• a significant dispute with the customer has occurred regarding job progress or other matters;
• the customer breaches any of its contractual obligations;
• the customer appears to be financially distressed due to economic or legal factors;
• the business between the customer and the Company is not active; and
• other objective evidence indicates non-collectability of the accounts receivable.
The adoption of the credit loss accounting standard has no material impact on the Company’s consolidated financial statements. Accounts receivable are recognized and carried at carrying amount less an allowance for credit losses, if any. The Company maintains an allowance for credit losses resulting from the inability of its customers to make required payments based on contractual terms. The Company reviews the collectability of its receivables on a regular and ongoing basis. The Company has also included in calculation of allowance for credit losses the potential impact of the COVID-19 pandemic on our customers’ businesses and their ability to pay their accounts receivable. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also considers external factors to the specific customer, including current conditions and forecasts of economic conditions, including the potential impact of the COVID-19 pandemic. In the event we recover amounts previously written off, we will reduce the specific allowance for credit losses.
Revenue recognition
The Company has adopted Accounting Standards Codification (“ASC”) 606 since its inception and recognizes revenue from product and service sales revenues, net of promotional discounts and return allowances, if any, 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. The Company transfers the risk of loss or damage upon shipment, therefore, revenue from product sales is recognized when it is shipped to the customer. Return allowances, which reduce product revenue by the Company’s best estimate of expected product returns, are estimated using historical experience. For services, all sales are recognized upon completion based on terms stated in the sales agreements.
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. Generally, when the Company is primarily responsible for fulfilling the promise to provide a specified good or service, the Company is subject to inventory risk before the good or service has been transferred to a customer and the Company has discretion in establishing the price, revenue is recorded at gross.
Payments received prior to the delivery of goods to customers are recorded as customer deposits.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses.
Costs and expenses
Costs and expenses are operating expenses, which consist of costs of material and labor, selling, general and administrative expenses, and depreciation, are expensed as incurred.
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Inventory
Inventory consists of material and finished goods ready for sale and is stated at the lower of cost or net realizable value. The Company values its inventory using the FIFO 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 selling expenses. 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 allowance for obsolescence.
Property and equipment
Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets as follows:
Machinery tools and equipment |
7 years |
|
Office furniture and equipment |
5 years |
|
Motor vehicles |
5 years |
|
Leasehold improvements |
5 to 15 years |
Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property and equipment were recorded during the nine months ended June 30, 2023 and 2022 and 2021.
Leases
On its inception date, the Company adopted 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.
Stock-based compensation
The Company applies ASC No. 718, “Compensation-Stock Compensation,” which requires that share-based payment transactions with employees and nonemployees upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar
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equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period. In addition to the requisite service period, the Company also evaluates the performance condition and market condition under ASC 718-10-20. For an award which contains both a performance and a market condition, and where both conditions must be satisfied for the award to vest, the market condition is incorporated into the fair value of the award, and that fair value is recognized over the employee’s requisite service period or nonemployee’s vesting period if it is probable the performance condition will be met. If the performance condition is ultimately not met, compensation cost related to the award should not be recognized (or should be reversed) because the vesting condition in the award has not been satisfied.
The Company will recognize forfeitures of such equity-based compensation as they occur.
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 has adopted the provisions of ASC 740 since inception 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 Texas and California, as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
The Company believes that its 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.
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 its 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.
Earnings per share
Basic earnings per share are computed by dividing net income attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities to issue common stock were exercised.
Recently Issued Accounting Pronouncements
In June 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU clarify the guidance in ASC 820 on the fair value measurement of an equity security that is subject to a contractual sale restriction and require specific disclosures related to such an equity security. This standard is effective for fiscal years beginning after December 15, 2024. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
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In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the entity had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2023, with early application permitted. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, “Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) — Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU among other things clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments — Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. ASU 2020-01 is effective For public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date. The adoption of ASU 2020-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes. The update is intended to simplify the current rules regarding the accounting for income taxes and addresses several technical topics including accounting for franchise taxes, allocating income taxes between a loss in continuing operations and in other categories such as discontinued operations, reporting income taxes for legal entities that are not subject to income taxes, and interim accounting for enacted changes in tax laws. The new standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022; however, early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.
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Our Company and Mission
INNO HOLDINGS INC. (“INNO,” “we,” “us,” or the “Company”) is an innovative building-technology company with a mission to transform the construction industry with our proprietary cold-formed steel-framing technology and other innovations. We are a manufacturer of cold-formed-steel members and prefabricated homes. We offer a full range of services required to transform raw materials into precise steel framing products and prefabricated homes. We sell these finished products either to businesses or directly to customers. The finished products and cold-formed-steel members are used in a variety of building types, including residential, commercial, industrial and infrastructure. We hope to transform the construction industry by having our proprietary cold-formed steel-framing technology replace wooden and traditional steel structures. We are well positioned to disrupt the construction industry, which now accounts for $10 trillion of the global economy.
We work with our customers to manufacture products in accordance with the customer’s drawings and specifications. Our work complies with specific national and international codes and standards applicable to the construction industry. We believe that we have earned our reputation through outstanding technical expertise, attention to detail, and a total commitment to excellence in customer service.
All our manufacturing operations are primarily located on approximately five acres in Brookshire, Texas. Our facility houses state-of-the-art equipment that gives us the capability to manufacture 15,000 linear feet of product per day. We offer a full range of services such as structural design, metal stud production, and preassembly of metal studs into steel panels, which are required to transform raw materials into finished products that are compliant with local building codes. Our manufacturing capabilities include fabrication operations, such as cutting, punching, forming and assembling, and machine operations, which includes computer numerical controlled (“CNC”) machine operations. We also provide support services for our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, and manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting), and final assembly.
All manufacturing at our facility is done in accordance with our written quality assurance program, which meets specific national codes as well as international codes, standards, and specifications. INNO has obtained an International Code Council (“ICC”) certificate which means our cold-formed steel framing members are compliant with 2018 and 2015 International Building Code, 2019 California Building Code, and 2020 Florida Building Code. The ICC Evaluation Service Report is re-issued every year on the basis of the most current published edition of the following model codes as of January 1st of each year, including International Codes, National Codes, Standard Codes, Uniform Codes and other codes as designated by the ICC-ES president. We have ISO 9001 Certificate which is defined as the international standard that specifics requirements for a quality management system (“QMS”). The standards used for each customer project are specific to each customer’s needs, and we have implemented those standards into our manufacturing operations.
Major Drivers of INNO’s Business Opportunity
The traditional construction industry is labor intensive and suffers from a skilled labor shortage, which increases overall labor costs and contributes to inefficiencies in the construction process. Our steel-framing technology can decrease construction times by 50% or more by prefabricating materials required at the jobsite and can reduce labor costs proportionately due to reduced construction timelines. Compared to the traditional onsite manual measurement and cutting procedures, our intelligent CNC cold-formed roller machine automatically punches the holes for Mechanical, Electrical and Plumbing (MEP) channels eliminating many steps at the job site. INNO is dedicated to bringing automation to the construction industry to solve the over reliance on a declining supply of expensive, skilled labor.
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Construction Site
Source: INNO
Reducing the need for on-site customization found in traditional construction processes is not only more profitable, it can decrease the risks associated with an inherently dangerous workplace. According to Frommer D’Amico, “10 TOP HAZARDS IN A BUILDING SITE”, nearly 6.5 million people go to work at approximately 252,000 construction sites across the U.S each day. On the job, these construction workers face a wide range of occupational safety hazards. Heavy equipment, bad weather and chaotic job site conditions can create dangerous situations. INNO manufactures metal studs and prefab wall panels, joists, and trusses within our indoor facility, unaffected by weather. The final products delivered to the jobsite are assembled wall panels, joists, and trusses, which means almost 70% of structure framing work has been completed before it gets to the construction site where the tasks are to erect and connect the pieces. The construction jobsite is very clean and organized due to a lack of cuttings and debris, which reduces the risk of safety hazards. We anticipate that cold-formed steel-framing technology will ultimately replace wooden and traditional steel structures and believe it will be a big step forward in construction industry.
Construction site
Source: INNO
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We are bringing sustainability to the market by replacing traditional wooden structures with cold-formed steel framing, allowing for the reduction of material waste — an average of 2% of steel scrap versus 20% for wood waste. All steel scrap is 100% recyclable, which we support through our recycling operations. Most businesses are seeking actions that demonstrate sustainability and steel is uniquely environmental-friendly in its reuse, giving us an edge in LEED certifiable products and projects.
Scrap Metal Recycling Bin
Source: INNO
We are constantly striving to produce lasting results within the building technology sector. With increasingly evolving technological advancements in the industry, our objective is to continue staying ahead of the curve by focusing our ongoing research and development on cold-formed steel framing with an emphasis on architectural and engineering technologies renovation and full-scope building services. Our cold-formed steel-framing system increases speed and labor savings by integrating each stage of the construction process with Building Information Modeling (“BIM”) which is a highly collaborative process that allows architects, engineers, real estate developers, contractors, manufacturers, and other construction professionals to plan, design and construct a structure or building within one 3D model, to establish a common data environment, ensuring INNO delivers the final products with a minimum amount of rework needed.
BIM Model
Source: INNO
Off-site building is a technique in which a building or an infrastructure is planned and designed in a modular format. Those modules are fabricated offsite in a factory. Once fabricated, those modules are transported to the site and are installed together to finalize the structure. According to the Allied Market Research published report, titled “Offsite Construction Market by Material (Steel, Wood, Concrete, and Others) and Application (Residential, Commercial, and
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Industrial): Global Opportunity Analysis and Industry Forecast, 2021-2030”, the global Offsite Construction industry generated $130.4 billion in 2020, and is anticipated to generate $235.4 billion by 2030, witnessing a CAGR of 5.9% from 2021 to 2030. The rapid rise in urbanization and industrialization, increase in the pace of construction, high efficiency of offsite building is driving the growth of this market. The North America off-site construction market size was valued at $49.5 billion in 2021, and is projected to reach $80.9 billion by 2031, registering a CAGR of 4.9% from 2022 to 2031. We are leveraging the trend toward off-site and modular building techniques to increase productivity, reducing errors on-site and decreasing construction costs. As the market continues to move toward panelized building, we anticipate having an edge in the industry as a large-scale pioneer and building technology industry leader with our cost-reducing, time-saving, and quality solutions.
Our Products
Cold-Formed Steel Framing
Cold-formed steel is the material of choice to lower construction costs and adapt to modular or off-site building. It is consistent in quality and form, and it can be shipped preassembled, or it can be assembled on site by workers with little training. Our steel roof trusses, wall panels, and joist systems are a cost-effective noncombustible alternative to traditional building materials. It is now commonly used to build apartments, hotels, temporary housing, nursing homes, commercial buildings, industrial buildings and single family detached homes. These types of structures are expected to be the targets of our Company’s sales and marketing team.
All our steel framing products begin from a roll of steel of the width and gauge for the specific piece required by the customer. While there are some pieces that are identical to each other (e.g., spacers, universal studs), almost every other finished product is unique in its own way to be placed in a specific location in final assembly of the pieces. Our intelligent cold-formed roller machines are equipped with proprietary software to ensure each steel member is precisely cut and punched leaving channels for the mechanical, electrical, and plumbing designs which makes one stud unique from the others and not interchangeable during assembly. All products are uniquely coded as they are produced to correspond with the final drawings followed in the field as they are assembled to the specifications of the plans.
Accomplishing the precision described above requires sophisticated software that we license from others and combine with our own internally developed software that differentiates our products. The light-gauge steel-framing engineering software is a shared multidisciplinary resource that allows collaborators to achieve maximum efficiency and effectiveness, thus reducing all phases — design, pre-construction and construction — of the construction timeline. We have an in-house engineering team, which reduces the communication time as compared to outsourcing the engineering to an architectural and engineering firm resulting in open communication, true collaboration, and aligned understanding. INNO uses CAD (Computer Aided Design) software to arrive an accurate, comprehensive, and information-rich design model with the utilization of light-gauge steel-framing engineering software, which is a digital model of the project that includes all functional systems, geometric features, and aesthetics, such as electrical wiring, air conditioning, doors, and windows. Taken all together, INNO has created a full BIM solution that works together to inform our state-of-the-art light-gauge roll forming machines the instructions to automatically produce each steel framing member to exact specification.
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Source: INNO
Metal Studs Manufactured by INNO’s CNC Machine
Source: INNO
After the design phase, our top-quality raw materials are processed on several production lines, each with made-to-order specific dimensions, screw holes and cross-cut stitching. These customizations eliminate the need for on-site manual calculations and simplifies the assembling steps, both of which increase construction efficiency and reduce labor costs. All steel-framing products produced by our Company are International Code Council (“ICC”) certified. The International Code Council is the leading global source of model codes and standards and building safety solutions that include product evaluation, accreditation, technology, training, and certification. The Code Council’s codes, standards, and solutions are used to ensure safe, affordable, and sustainable communities and buildings worldwide.
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Our modular steel building framing systems avoid construction delays caused by partial, unsynchronized delivery of different building components. By breaking away from the methods of traditional stick-built building, our customers report their construction timeline is reduced at least by 20%.
We may, from time to time, engage in project development activities that use our metal framing solutions in an effort to raise awareness and stimulate market demand in new regions. For example, we signed a contract in March 2023 to act as the developer for a large apartment complex in Florida that will use our metal framing solutions.
Castor Cube
Due to high housing prices, some are having difficulties purchasing a home. Housing market trends have shown a gradual preference for modular homes. We believe demand for prefab homes is on an upward growth trend in the United States. According to the Straits Research Institute, North America’s share of the global modular building market was valued at $28 billion in 2021 and is expected to grow to $53 billion by 2030, representing a CAGR of 7%. According to the summary of an IBISWorld report titled, “Prefabricated Home Manufacturing in the US — Market Size 2002-2029,” the prefabricated home manufacturing market size in the U.S. is expected to be $9.1 billion in 2023. We expect to capitalize on this trend by providing high-quality and affordable modular homes.
Most consumers are drawn to prefab homes because of their cost-effectiveness, efficiency, and permanent property characteristics. Castor Cube is a low-maintenance, single-story, 743-square-foot manufactured home with 4 color options that can resist earthquakes, withstand winds, and prevent pests. It is a cold-formed-steel building system equipped with honeycomb panels, and it is designed to maximize the strength-to-weight value. As a result, it yields high structural stability. Castor Cube can be built on a foundation or used as a mobile home.
Castor Cube Rendering
Source: INNO
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Castor Cube Transportation Illustration
Source: INNO
Castor Cube leverages two patents invented by Dekui Liu. They are “Aluminum Honeycomb Plate for Interior Wall Construction” (Application Number: 63367663) and “Z-Shaped Pedant For Castor Cube Exterior Wall Replaces The Z-Shaped Pedant For Sheetrock With Honeycomb Aluminum Plate” (Application number: 63434155). The goal for these two patents is to find a material that can replace exterior and interior wall panels and directly dry-hang it on the exterior wall of the building, saving labor, while improving construction cycle and reducing the heavy dependence on labor.
The Castor Cube is built on a steel chassis, which can be single or multi-sectioned. We anticipate that this modular home product will be completely constructed within our facilities starting in late 2023, at an initial rate of up to one per day. Once constructed, the Cube will be transported to a permanent location for installation. The timeline for product delivery is not expected to be affected by weather, since the Cube will be manufactured in our 100% climate-controlled factory. Furthermore, we expect that the streamlined building process will shorten the completion time. We believe the Castor Cube will demonstrate the effectiveness of our Company’s modular technique.
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Castor Cube Aluminum Honeycomb Panel Installation Illustration
Source: INNO
Honeycomb aluminum panel is a metal composite panel product developed from the composite honeycomb panel technology used in the aviation industry. The panel is a box-type structure with surrounding edges, which has good airtightness and improves the safety and service life of the wall system. The product adopts a “honeycomb sandwich” structure: a plate made of high-strength alloy aluminum with a weather resistant coating as the surface, a similar bottom plate, and an aluminum honeycomb core. This product has excellent performance in terms of its large scale and precise flatness, and it can be produced with a wide variety of shapes, surface treatments, colors, and installation systems. This advanced technology enables the Company to manufacture high-strength and light-weight wall panel products. These siding products have very flat surfaces and tightly controlled seam widths, which allow architects to
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design with large panels. Except for certain technical constraints, there is no standard size for honeycomb aluminum panels, and all wall panels are factory-made according to design drawings. Our production method allows the panels to be highly flexible in size and shape, including curved panels and folded panels. This flexibility creates a complete and multi-functional, highly competitive wall panel system that can be installed on almost any joist. They are also fairly simple to install.
Aluminum Honeycomb Panel Illustration
Source: INNO
Without reinforcement, the size of the honeycomb aluminum panel can reach 14ft by 15ft while maintaining excellent flatness. The weight of this product is light, only 1.0-1.1 lbs./sqft, which greatly reduces the load bearing of the building. It can withstand high-pressure and shear force, is not easy to deform, and can meet the requirements of wind pressure resistance of super high-rise buildings. Honeycomb aluminum panels can be customized according to customer needs in terms of size, shape, paint finish and color. It can be installed in any order, and each wall panel can be disassembled and replaced individually, which improves the flexibility of installation and maintenance, while reducing costs.
Mobile Factory: Off-site Equipment Rental, Sales, Service, and Support
We believe innovative technology can increase productivity in the building sector. Research and development of more efficient methods in the manufacturing and building space is at the forefront of our business model.
Our Mobile Factory is an all-in-one, secured production facility that will produce steel-framing members onsite. It can print wall panel, floor truss, and roof truss components. The size is customized for a trailer, which enables it to be transported anywhere, ranging from metropolitan suburbs to remote areas with little to no infrastructure. It is designed to enable immediate stud production on any site.
Our Mobile Factory is complete with metal stud production equipment and a diesel generator. This generator can supply continuous power to our cold-formed roller machine. The production capacity of our Mobile Factory is at least 1,000 linear feet per day. We believe this innovation is a good solution for urgent deployment in disaster areas or remote locations. It is designed to reduce the cost and time of transportation of metal studs, which we believe can drive a lower carbon footprint for larger projects.
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Mobile Factory Illustration
Source: INNO
Mobile Factory in INNO’s California location
Source: INNO
The mobile factory is operated and managed by its own internally-developed production management system IoT (Internet of Things) Technology. The system controls the equipment and manages the remote mobile factory via dashboard to get a comparative understanding of production parameters, such as operation data, machinery breakdown data, uptime data and production efficiency.
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IoT Production Management System
Source: INNO
Related Services
We may from time to time participate in land development and contractor services if an opportunity exists to leverage our products. Specifically, we have evaluated the development of apartment complexes, retirement communities, and remodels for projects that would incorporate our metal framing studs. For example, we have agreed to provide project development services for our contract with Vision Opportunity Fund LP, partially owned by a minority shareholder of the Company, related to the development of an approximately 110,000 sqft retirement community. All rights, obligations and interests under the agreement were subsequently assigned by Vision Opportunity Fund LP to its general partner, New Vision 101 LLC.
Our Customers
We can serve commercial, residential, and industrial projects. For the cold-formed steel-framing business, the sales model is business-to-business because the main customers are developers, builders, and contractors. For the Castor Cube prefab home products, the sales model is expected to be either business-to-business or business-to-customer.
On a year-to-year basis we are generally dependent on a small number of major customers that change year to year. Our written agreements with major customers normally terminate upon completion, and our major customers change from year to year. For fiscal year 2021, we had 15 customers, and for fiscal year 2022 we had 46 customers, of which only five were customers the prior fiscal year. For the years ended September 30, 2022, and 2021, one customer accounted for 15% and three customers (including two customers different customers from prior fiscal year) accounted collectively for 91% of the Company’s total revenues, respectively. These agreements contain standard construction and supplier agreement terms including payment schedules, performance schedules, the ability to subcontract, insurance obligations and indemnification provisions, and confidentiality provisions.
Our written agreements with these customers generally terminate upon completion of the project and contain provisions restricting our right to assign the agreement. The agreement with Ironline, LLC, one of the three customers accounting for 91% of revenue in fiscal year 2021, contains a provision providing for termination upon the earlier of ten years or early termination upon mutual agreement of the parties. That agreement has since been terminated pursuant to mutual agreement. The Ironline, LLC agreement also restricts the parties’ ability to solicit for employment any employees or independent contractors of the other party during the term of the agreement and for one year after termination. The agreements with the other two customers accounting for 91% of revenues in fiscal year 2021, provide for early termination for convenience by the customer but not by INNO. The agreement with the customer accounting for 15% of revenues in fiscal year 2022 provides for early termination only upon mutual written agreement of the parties.
Our Suppliers
Historically we rely on a limited number of material suppliers. For the years ended September 30, 2022, and 2021, three suppliers accounted for 75% and two suppliers accounted for 70% of the Company’s total purchases, respectively. As of September 30, 2022, and 2021, accounts payable to those three and two suppliers accounted for 94% and 84% of
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the Company’s total accounts payable, respectively. We currently do not have written agreements with these suppliers or, generally, with any of our suppliers. All of our raw materials purchases from these suppliers are made by way of individual invoices.
Our Competitive Strengths
Technology Innovations
INNO recognizes that no technology or product is completely immune to being copied, and therefore the company is committed to being a pioneer in the industry by constantly researching and developing new technologies, and being ahead in various aspects of the industry such as regulations, equipment autonomy, design technology, production efficiency, new product birth, orderly management, coordinated transportation, remote production, etc. In this way, INNO aims to have the most advanced and comprehensive technology in the industry and be the true technological barrier for competitors to overcome.
A significant competitive strength in our research and development capability is the Inno Research Institute, LLC, a subsidiary of INNO (“IRI”). Led by our Chief Scientist, Dr. Cheng Yu, IRI focuses on patentable innovative products and commercializing research discoveries. Dr. Cheng Yu is a leading figure in the cold-formed steel industry in the U.S., committed to bringing innovation in the field of thin-walled structures, cold-formed steel building technology, and design methodology for resilient buildings.
Fully Integrated Manufacturing Process
Compared to other traditional metal stud manufacturers, INNO differentiates itself by integrating services from design to metal stud production to prefabrication, utilizing off-site building technology to reduce the need for on-site framing labor. This approach allows INNO to streamline the production process, increase efficiency, and reduce dependency on labor. By implementing off-site building technologies, INNO is able to prefabricate and assemble many components of the building in a factory setting, which can lead to improved quality control, faster construction times and reduced on-site labor costs. This approach allows INNO to be a leader in the metal studs manufacturing industry in the U.S. and set a new standard for the building industry.
Compared to other prefab home companies, INNO sets itself apart by making an innovation in the overall structure system and developing our own patent pending panel material for faster installation. Unlike other prefab home competitors who still use traditional wood-stick building methods or other unique liquid material (required by 3D printing), which are not as efficient and may not be able to guarantee delivery times, INNO’s patent pending panel material and overall structure system allows for faster installation, improved efficiency and guaranteed delivery times. This allows INNO to offer a more efficient and cost-effective solution for prefab home building and maintain a competitive edge in the market. Additionally, INNO’s patent pending material and system can guarantee the quality and safety of the building, which is a significant advantage over the other prefab home companies.
Rising Cost of Traditional Wood Construction Favors Transition to Steel
Utilizing INNO’s off-site building technology can significantly reduce overall construction costs, even when compared to wood building. The past several years of western wildfires in the United States have had a significant impact on lumber stocks and mills, leading to disruptions in supply and fluctuations in lumber prices. A study by the Steel Framing Industry Association (SFIA) indicates that the cost to build with cold-formed steel is relatively the same as building with wood when the cost comparison includes the construction insurance premiums associated with using the materials. As the price of wood no longer provides a cost advantage, alternative building materials like steel have become increasingly popular in the market. By leveraging its off-site building technology, INNO is able to offer a cost-effective solution that takes advantage of the cost benefits of steel building while also providing faster and more efficient construction.
We are keeping our prices at a competitive level with traditional wood framing solutions. In a recent internal case study, we found that INNO’s products delivered real-world cost-savings of 8-16% compared to wood framing. This study compared our solution against wood for a 2,2663 sqft. home built in 2022, for which we supplied materials. Based on fully quoted materials and estimated labor and insurance costs, we estimate the contractor saved 16% by using INNO products compared to wood framing. For the “low” scenario, we recently requested updated wood bids and used the lowest one; in this case, we estimate that INNO products would have provided the contractor with 8% savings.
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Market Opportunity
We believe we compete in a $40 billion+ U.S.-based market opportunity in 2023.
Light-Gauge Steel-Framing Market
In concept, cold-formed-steel building structures are very similar to wooden structures. In steel buildings, the wooden structural elements are replaced by thin-walled steel components. The cold-forming process is the core technology used. By our estimates, the U.S. light-gauge steel framing market should be roughly $6 billion in 2023.
According to the report released by Grand View Research in 2020, titled “Light Gauge Steel Framing Market Size, Share & Trends Analysis Report By Type, By End-use, By Region, and Segment Forecasts, 2021-2028”, the global light-gauge steel-framing market was valued at $33.89 billion in 2020 and is expected to reach $48.21 billion by 2028, growing at a CAGR of 4.6% from 2021 to 2028. The substantial rise in construction spending and a shift in trend toward sustainable materials have contributed to higher energy efficiency at a lower cost, in turn driving the market demand for light-gauge steel frames. According to KBV Research’s report released in February 2022, titled “North America Light Gauge Steel Framing Market Size, Share and Industry Trend Analysis Report By Type, By End Use, By Country, Historical Data and Growth Forecast, 2021-2027,” the U. S. market has dominated the North American cold-formed steel-framing market, and it is expected to continue to be a dominant market player until 2027; thereby, achieving a market value of $7.2 billion by 2027.
According to the summary of an IBISWorld report titled, “Wood Framing in the US — Market Size 2005-2029,” the wood framing market size in the U.S. is expected to be $24.9 billion in 2023. Since the wood structures could be replaced by cold-formed-steel structures, INNO’s target market size includes the wood-framing market. If we combined the US light gauge steel (which we estimate to be currently at approximately $6 billion based on the projected market value of $7.2 billion by 2027) and wood framing market ($24.9 billion) opportunities in 2023, we estimate it would amount to a $29.9B market opportunity in which INNO competes.
Prefabricated Building Market
According to the summary of an IBISWorld report titled, “Prefabricated Home Manufacturing in the US — Market Size 2002-2029,” the prefabricated home manufacturing market size in the U.S. is expected to be $9.1 billion in 2023. According to the report released by Global Industry Analysts, Inc, titled “Prefabricated Building Global Market Trajectory & Analytics”, the global prefabricated building market, estimated at $106.1 billion in the year 2020, is projected to reach a revised size of $164.1 billion by 2027, growing at a CAGR of 6.4% over the analysis period of 2020 through 2027. According to Straits Research Institute, the U.S. modular home market is projected to be valued at $53 billion in 2030.
Prefabricated houses are those that are built with the help of prefabricated building materials. These building materials are prefabricated in an off-site facility and then transported to the desired location for assembly. The building materials used to develop prefabricated houses are divided into concrete-based and metal-based materials. The market is being driven by factors such as shorter construction times and cost savings. The market is also benefiting from increased customer interest in reducing CO2 emissions, green building, and waste reduction.
Due to the rise in labor wages and material costs, operators want to unlock greater efficiencies, reduce project costs and increase labor productivity in the face of a skilled labor shortage and low profit margin. Modeling technologies are impacting all aspects of the design and building industry. Studies from Dodge Data & Analytics report reveal a strong correlation between companies’ BIM use and the degree to which they enjoy improved schedule and budget performance from using prefabrication or modular building. The modular building market is gaining popularity among the construction giants owing to the various benefits that it possesses, including reduced waste, speedy building, cost-effectiveness, eco-friendliness, and flexibility. According to experts, modular building projects can be completed 30% to 50% more quickly than traditional building. Modular buildings are extremely flexible, owing to the custom-made fit that are created according to the specific requirements of customers.
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Source: DDA’s new SmartMarket report, “Prefabrication and Modular Construction 2020.”
Design firms and contractors alike agree that both prefabrication and modular building are providing significant improvements to cost, schedule, quality and safety performance, productivity, client satisfaction and their ability to reduce waste. According to the McKinsey Global Institute (MGI’s) Reinventing construction: A route to higher productivity report, released in February 2017, parts of the construction industry are moving toward a manufacturing-like system of mass production, relying on prefabricated, standardized components that are produced off-site. Such system would include applications such as fully automated prefabrication processes that turn a 2D drawings or 3D model into a prefabricated building component, or fabrication directly off a 3D model or shop drawings, enabling the production of high-performing components and, ultimately, more efficient parts.
Regulatory and Governmental Pressures for Change
President Biden’s Executive Order 14057 on the adoption of the federal Sustainable Development Catalyst for America’s Clean Energy Industry and Jobs and the accompanying federal Sustainable Development Plan establish the ambitious goal of achieving zero emissions from building by 2045. The federal government will work on new construction, major renovations, and existing real estate to achieve linked electrification, reduced energy use, lower water consumption and waste reduction. The federal government will develop data-driven targets and annual indicators for energy and water reduction by 2030 based on leading performance benchmarks for building type categories and the composition of institutional building portfolios. As part of this journey, the federal government will use performance contracts to reduce emissions, improve efficiency, and modernize facilities while providing financial savings.
In 2021, the Los Angeles City Council Public Safety Committee approved a proposal to expand Fire District I, an anachronistic planning overlay that would effectively ban wood-frame building in much of the city. The motion currently winding its way through City Council would expand Fire District I to neighborhoods with a population density of 5,000 residents per square mile, among other areas. With nearly all of Los Angeles comfortably above 5,000 residents per square mile, this expansion would effectively ban timber and wood-frame building in much of the city, including many rapidly growing neighborhoods near transit.
Sustainability and Green Building
Manufacturing of materials for buildings and construction accounted for approximately 11% of global energy-related CO2 emissions in 2017 according to the Global Status Report 2018, Global Alliance for Buildings and Construction & International Energy Agency. Increased global awareness of green building has driven efforts among all levels
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of government. For example, local governments are beginning to regulate in favor of using alternatives to wood in building projects. To reduce the city’s vulnerability to wildfires, the Los Angeles City Council voted in early 2021 to explore a proposal that could prohibit the use of wood-frame building for larger developments in some of its most densely populated neighborhoods. Similarly, the Los Angeles City Council Public Safety Committee approval of a proposal in 2021 to expand Fire District 1, an anachronistic planning overlay that would effectively ban wood-frame building in much of the city. In most U.S. cities, fire safety is ensured by the International Building Code (IBC), which sets strict rules on allowable building materials and methods.
Cold-formed steel framing (“CFS”) is a highly sustainable, green building solution. Through technological advances and processing changes, steel has drastically reduced its carbon footprint. CFS boasts a high level of recyclability, energy savings and greenhouses gas reduction. Due to its inherent advantages such as fire-resistance, termite resistance, consistent material quality and sustainability, we believe cold-formed steel will be the optimal alternative building material.
Macroeconomic Factors
The past several years of western wildfires have had a devastating impact on lumber stock and mills that were in the path of these fires, plus the disruption of supply chain due to the COVID-19 pandemic, has resulted in rising lumber prices. The net result of the fall in steel prices and rise in lumber costs is a much stronger case for parity between the two raw materials.
A new study conducted by R.A Smith, Inc., Brookfield, WI, and the SFIA addresses framing costs on behalf of architects, building owners, and general contractors. The study, “Costs to Build with Cold-formed Steel Versus a Wood-Framed Building,” established that CFS framing and wood framing cost relatively the same when the cost comparison included the construction insurance premiums associated with using the selected material. CFS is noncombustible, which reduces the risk of property loss during construction and over the life of the structure. It reduces the risk of property loss leads to lower insurance premiums for builders and owners. The true cost of CFS over wood is less than 1% when insurance is included in the comparison.
Marketing
We are an innovative building-technology company with a mission to transform the construction industry with our proprietary cold-formed steel-framing technology and other innovations. While we have significant customer concentrations, we endeavor to broaden our customer base as well as the industries we serve. Our marketing strategy is a long-term plan to achieve our Company’s mission by understanding the needs of customers and creating a distinct and sustainable competitive advantage. We position ourselves as the leader in intelligent steel-framing building systems. We intend to leverage our marketing and sales efforts to establish new potential customers. We also intend to leverage customer referrals, which in the past have been a source of new business. A significant portion of our business is the result of competitive bidding processes, and a significant portion of our business is from contract negotiation. We believe that the reputation we have developed with our current customers represents an important part of our marketing effort.
Quotation requests from customers are reviewed to determine the specific requirements and our ability to meet such requirements. Quotations are prepared by estimating the material and labor costs and assessing our current production schedule to determine our delivery commitments. Competitive bid quotations are submitted to the customer for review and award of the contract.
We have several strategic partners, including real estate companies, general contractors, builders and developers. Our strategic partners connect our Company with potential customers who are either potential homeowners or developers.
Through the several architecture, builder and contractor associations that we have joined, we share the advantages of cold-formed steel framing with others, and we educate and encourage construction industry practitioners to move out of their wood-framing comfort zone to embrace steel-framing technology.
We have a digital market channel and a social media presence. Also, we are actively conducting market research to determine the viability of our new products and new patents. We have increased our marketing budget and formed a professional sales team to increase our online marketing, which we believe can help us grow our revenue.
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Research and Product Development/Innovations
We are a building technology company that is dedicated to research and product development innovation. Our scientists and engineers are committed to developing sturdier steel studs, tracks, headers, and other components, resulting in superior strength while maintaining the lowest costs possible. Our cold-formed roller machine is acquired from an original equipment manufacturer with certain modifications to the standard version of the machine that are unique and proprietary to INNO. When we refer to our “proprietary” cold-formed roller machines, we are referring to the modified machine with the intellectual property and process techniques we have developed. INNO uses CAD (Computer Aided Design) technology to arrive at the most accurate, comprehensive and information-rich design model within its parameters with the utilization of Vertex to ensure each member is produced to the exact specifications of called for in the design. The digital model of the project includes all functional systems and aesthetics, such as electrical wiring, air conditioning, doors, windows etc., as well as geometric features. It is a shared multi-disciplinary resource allowing all those working on a project to share information and working processes in order to achieve maximum efficiency and effectiveness, thus reducing all phases — design, pre-construction and construction — of the construction timeline. The platform gives us open communication, true collaboration, and aligned understanding. Taken all together, INNO has created a full BIM solution that works together to inform our state of the art light-gauge roll forming machines the instructions to automatically produce each steel framing member to exact specification.
We have continued making improvements to our cold-formed roller machines to optimally increase the printing speed. We are actively working on a list of 100 potential patentable products. Our goal is to commercialize patents and technologies that we own.
For example, the CFS portal frame system invented by our CEO could replace current shear wall systems to provide adequate lateral resistance against strong winds and severe earthquakes. The standard lateral force resisting systems in light frame cold-formed steel building are shear walls either sheathed by structural panels such as OSB, Plywood, and steel sheets or braced by steel straps. These systems require a large amount interior walls to be load bearing walls which limits flexibility for room layout and may not support large openings for windows and doors. The steel portal frame system is a novel long span framing system to replace the traditional hot-rolled structural steel frame. The new technologies in the portal frame system include optimized stiffened holes on cold-formed steel frame members to increase structural stability and span capacity and special moment joint technology using adhesive and rivet connections which enable superior energy dissipation capacity and fast fabrication.
This new CFS moment frame does not require any interior shear walls for the Castor Cube, our modular home product. It will allow the Cube to have various room layouts. The homeowners will also be able to change the room layout in the future. The new CFS moment frame can also be used for long-span residential and mid-rise commercial buildings. The new technology should improve the structural integrity of building structures, increase the lateral resistance, and lower the overall costs.
Another innovation, the cold-formed steel truss system, utilizes a strong axis of cold-formed steel stud members for both chords and webs which allow longer spans and lighter weight than the conventional type trusses. The steel truss system has wide applications in storage and education buildings.
We believe the steel truss system and steel portal framing system will also allow INNO to enter the high-rise commercial and large span industrial building markets (Type I and Type II buildings) and deliver more competitive and cost-effective building structures than the traditional structural steel frame and concrete masonry systems.
Honeycomb aluminum panel is a metal composite panel product series developed in combination with the composite honeycomb panel technology developed by the aviation industry. The panel is a box-type structure with surrounding edges, which has good airtightness and improves the safety and service life of the panel. The product adopts a “honeycomb sandwich” structure, that is, a composite plate made of high-strength alloy aluminum plate coated with a decorative coating with excellent weather resistance as the surface, bottom plate and aluminum honeycomb core through high temperature and high pressure. This product series has the advantages of excellent material selection, advanced technology, and reasonable structure. It not only has excellent performance in large scale and flatness, but also has many choices in terms of shape, surface treatment, color and installation system. This advanced technology enables the Company to manufacture high-strength and light-weight wall panel products. These siding products have very flat surfaces and tightly controlled seam widths, which allow architects to design very straight and beautiful
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walls with large panels. Except for certain technical restrictions, there is no standard size for honeycomb aluminum panels, and all wall panels are factory-made according to design drawings. Our production method allows the panels to be highly flexible in size and shape, such as curved panels and folded panels. This flexibility creates a complete and multi-functional highly competitive wall panel system that can be installed on almost any joist and are extremely simple to install.
Revenue Model
Our revenue model currently consists of sales of the following:
• Light-gauged studs and tracks;
• Prefabricated wall panels and trusses;
• Structure framing work on site;
• Engineering services; and
• Machine sales.
• Replicable Apartment product
Starting in 2023, we are also planning to sell the Castor Cube, sell or lease the Mobile Factory and sell replicable apartment product.
Light-gauged studs and tracks
We supply metal studs from 12GA to 24GA depending on the structure engineering requirements and city building codes. The model for selling cold-formed steel studs and tracks is wholesale because it is business-to-business. Given the specific nature of our products, we do not sell retail. Unlike traditional metal stud suppliers, whose products are “made to stock” with no consideration for engineer design, our metal studs are typically made-to-order and customized for each project.
Prefabricated wall panels and trusses
Prefabricated wall panels and trusses are another option for customers. With these products, the customer can either choose to assemble the panels themselves or include this prefab service in their contract with us. Most customers typically choose prefab service because of our skilled team given that most wood framers are not familiar with steel framing.
INNO also has standardized modular wall products which could be used for all residential and commercial buildings. We design modular walls in 20 specifications to cover different building requirements. Modular walls are “made to stock” products and participate in both business-to-business and business-to-customer model channels.
Structure framing work on site
Steel structure installation on site is also an optional service. Depending on the project size and scope, we will provide on-site installation service if customers requested. With our full turnkey solution, all elements of the project construction are included, not just the cold-formed steel. This may include cabinetry and other items. In cases where the customer simply wants the framing, we bring our expertise in working with steel to that portion of the project. We are in the process of reducing our on-site work offerings.
Engineering services
Our engineering services provide stamped and sealed structure design services by our in-house engineer team. Because of the specific nature of our services, the rates vary case by case depending on the square footage and project complexity. Our engineer team will collaborate with customer’s architect, civil engineers, and MEP engineers to make sure the final structure design is city approved. To begin the metal stud production, our engineer team also generates the shop drawings which is a digital file and readable by our intelligent CNC machine. We also have another option where the customer may outsource the engineer service and contact INNO for metal stud production, where we do not provide continuous services until the design is city approved.
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Machine sales
We may sell or lease our machines. We provide technical and design support at relatively low costs, including industry compliance license and permits, as well as shop drawings and structural design. We also offer administration, operation, and management consulting support, including directing and assisting factory set-up, operation procedures, equipment installation, machine maintenance, repairs, and efficiency improvement. The training for such operations and installations are also provided. We will recommend, select, and advise pricings for material suppliers and other vendors.
Replicable Apartment Product
Our flagship product within this series is Village 101, a smart senior living apartment comprising 155 units with a floor area of 110,000 square feet. The architectural plan package for Village 101 is complete and ready for implementation. Village 101 serves as a prototype building tech community, showcasing our innovative approach to senior living.
Our pipeline includes various apartment product options with different unit sizes, ranging from 15 to 150 units. These products are under active research and development, with the aim of creating replicable housing complexes across the United States. By leveraging our expertise in building technology and innovative design, we target to provide scalable and high-quality housing solutions that meet the evolving needs of residents including but not limited to senior citizen, college students and Gen Z etc.
Through our revenue model, we anticipate generating sustainable income by catering to the demand for replicable apartment products. By expanding our product line and continually advancing our research and development efforts, we aim to capture a significant market share in the housing industry while delivering superior value to our clients.
Cost of Sales
Cost of Sales is broken down into four primary components.
• Materials — Rolled steel represents the single largest cost. We manage our relationship with suppliers (primarily US Steel) very adroitly by building in purchase orders and their associated costs to the customer to minimize our exposure to changes in steel prices for any specific project. We manage our purchases and deliveries as close to “just in time” as possible.
• Labor — Labor is potentially the most variable component of cost of sales. We have a team of hourly workers who largely work onsite at the factory producing parts from raw steel and assembling them into prefabricated pieces to be delivered to job sites. Contractors are non-employee hourly workers who largely work in our turnkey projects. As-needed hourly labor is largely available in our markets.
• Freight and Shipping — Moving materials is highly variable, depending on the weight and distance from the factory that materials must be transported. As projects outside the greater Houston area increase, freight and shipping will increase; however, these costs are factored into the bidding of the project.
Other Expenses
Other expenses are typically comprised of payroll of salaried and hourly workers. We pride ourselves on running lean and efficiently. We operate in a business-friendly state with a large and available workforce. Rent, utilities, insurance, consulting service and other normal expenses are all competitive in the commercial area where we are based.
Our Growth Strategy
We seek to leverage the trend toward off-site and modular building techniques to increase productivity, reduce errors on-site, and decrease costs. With both Castor Cube and Mobile Factory as our featured products in the coming years, we seek to become leaders in the industry. As the market continues to move toward panelized construction, we seek to have an edge in the industry as a large-scale pioneer of the overall cost-reducing process.
INNO’s business growth strategy combines the following three parts: revenue growth strategy, profit growth strategy and technology growth strategy.
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Revenue Growth Strategy
Our revenue growth strategy is composed of the following.
Capacity expansion and in-house research and development. We plan to expand factory operations and manufacturing capabilities in line with demand. We are also investing in R&D to ensure a pipeline of competitive and innovative building-technology products.
Multiple products. We are in the process of developing the Castor Cube, a 743-square-foot modular house product with the goal of mass producing. We are also working on developing Village 101, a smart senior living apartment comprising 155 units with a floor area of 110,000 square feet. The architectural plan package for Village 101 is complete and ready for implementation. Village 101 serves as a prototype building tech community, showcasing our innovative approach to senior living. Meanwhile, the new products extend to new building material composed of stainless steel, such as stainless-steel roof and panels with the vision of using such materials for seaside buildings.
Marketing investment. We are in the process of optimizing our online sales and marketing efforts by recruiting marketing talent and developing a marketing plan.
Potential Acquisitions. In accordance with our growth strategy, our company intends to pursue vertical integration by acquiring several companies operating within the construction industry in the United States. The objective of this vertical integration is to strengthen our position as a prominent building-technology developer and expand our capabilities within the market. We will position ourselves to offer a comprehensive range of solutions encompassing the entire building. The expanded scope of our offerings includes prefab structure systems, centralized MEP (mechanical, electrical, plumbing) systems, integrated wall systems, integrated floor systems, roofing systems, and prefab cabinets, sinks, and countertops. This integration allows us to deliver a single-cycle turnkey solution, streamlining the traditional linear process employed by traditional developers. To fortify our supply chain and augment our capabilities, we will consider the strategic acquisition of construction vendors/suppliers with the proceeds from this offering to pursue potential acquisitions. The targeted companies would include the ones that enjoy the popularities in the industry, including but not limited to the companies that can supply the interior finish, exterior wall panels, insulation materials and roof system etc. By incorporating the targeted companies into our operations, we will establish a comprehensive one-stop-shop solution for the multi-family apartments, thereby further solidifying our market position and value proposition. Consistent with our growth strategy, we are firmly committed to implementing a robust product life cycle management approach, encompassing all stages from procurement to delivery. Through our pursuit of vertical integration and strategic acquisitions, we are poised for substantial growth to assume a leadership role within the market. By expanding our product offerings, strengthening our supply chain, and cultivating key partnerships, we are well-positioned to provide comprehensive building solutions that effectively meet the evolving needs of our clients while concurrently driving revenue growth and delivering enhanced shareholder value.
Profit Growth Strategy
Our profit growth strategy is composed of the following.
Improving assembly automation. We plan to source and develop production robots and to expand automation where possible, to further increase our production efficiency.
Reduce transportation costs by utilizing Mobile Factory. Our Mobile Factory is equipped with our proprietary machines and can be transported to any jobsite. Mobile Factory utilizes Inno Statlink Data System which is ideal for remote production management. Mobile Factory saves significant transportation costs and as such, our goal is to increase the use of Mobile Factory.
Optimizing artificial intelligence design capabilities. We intend to optimize the artificial intelligence design capabilities by utilizing machine learning to get the wisest structure supporting data and running several models for all types of walls. The model we tested could reduce the raw materials used in different projects.
Technology Growth Strategy
Our technology growth strategy is composed of the following.
Develop EQ products to replace existing building materials with thinner and lighter products. We are developing technology in an effort to replace existing building materials with thinner materials. Once this technology matures, it is expected to save approximately 10% in raw materials.
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Develop stainless steel as a building material for the high-end building market. We are developing technology to replace the current galvanized steel sheets with stainless steel. The new patent pending material could be used in extreme climate conditions for high-end customers.
Leverage module wall technology to increase the range of applications. We are in the process of developing different types of module wall products to expand our customer reach.
Strategic Partnerships
We have partnerships with at least 10 regional and national developers and builders. INNO’s customers include national real-estate developers and some local builders in both Texas and California. The regional/national developers and builders have a strong pipeline of projects coming each year. Their project types cover residential, commercial, and industrial. They either intend to use steel framing for structure or to develop land with Castor Cube and Village 101 projects, as their strategic partners, INNO will provide customized offer and have higher probability to bid and win projects. The cold-formed steel framing business is categorized as business-to-business model, and the Castor Cube as well as Village 101 projects will be either to business or to customers.
Competitive Outlook
Lumber-Based vs. Cold-Formed Steel
Our primary competitors (or segment with which we are most often compared) are traditional lumber-based building products solutions in certain categories, particularly buildings below six floors and residential. The accessibility and proficiency in assembling lumber-based structures can make practitioners in construction industry unwilling to move out of the wood framing comfort zone. Further, lumber prices were generally lower than the price of metal studs before the COVID-19 pandemic. The switch to cold-formed Steel is being driven by materials price and several market-based advantages of steel. Steel is strong, safe, durable, versatile, and cost-effective. Steel has the exceptional environmental advantage of being highly recycled and infinitely recyclable. Steel is tough and does not rot, spawl, split, or absorb moisture, and it is resistant to pests, unlike wood building materials.
Inherent Benefits of Steel Framing
• Steel has the highest strength-to-weight ratio of any framing material.
• Non-combustible. Steel will not contribute fuel to the spread of fire.
• Steel is termite and rodent resistant.
• Steel ensures dimensional stability. Will not rot, warp, crack or shrink.
• Lower builder’s risk insurance.
• Permanently straight walls. No call backs for nail pops.
• No toxicity contribution. Free of resins, adhesives, and chemicals normally present in other framing material.
• Consistent material quality. No regional variation.
• Grounded against electrical storms.
• Steel is inorganic. Unlike traditional framing products, steel is not vulnerable to mold.
• Steel is the most recycled product in the world. Optimum sustainability.
The SFIA has conducted studies of construction costs in two different locations using two identical buildings — one designed with wood and the other with cold-formed steel (CFS) framing. The mixed-use, 49,900 square foot building used in the studies is representative of many residential buildings constructed in the mid-rise market today and includes:
• A first floor non-combustible (concrete) podium with parking and retail space
• Residential dwellings on levels 2-5
• Roof-top/penthouse space atop level 5 housing building services.
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The first location for the study was a building constructed in Chicago in late 2017. Results include hard construction costs only. In this case, cold-formed steel cost 2.6% more than traditional wood construction.
SFIA Cost Analysis: Wood vs. Cold-Formed Steel, Location 1
Source: SFIA
The second location was in Morristown, New Jersey. It takes a deeper look at costs by including the impact of lower insurance premiums available for CFS construction compared to combustible framing (wood). The insurance costs from major insurers operating in New Jersey were converted to a cost per square foot and evaluated in terms of their impact on the overall building costs. In this case, cold-formed steel cost 0.9% more than traditional wood construction.
Cost Comparison Case Study 2
Source: SFIA
The two case studies mentioned above are taken from the official SFIA website. We believe INNO’s product cost is less than that of the preceding case studies, with the overall cost less than that of traditional wood.
Others Participating in Cold-formed Steel
The second category of competitors are divided into two groups: traditional manufacturers of metal studs and suppliers of cold-roller machines. Traditional manufacturers, such as Clark Dietrich and CEMCO, pre-punch their metal studs with punchouts at regular intervals for pipe installation, but the number of punchouts is fixed and not customized for each project. INNO employs proprietary software to calculate the minimum punchouts for MEP pipe installation that are consistent with the architectural plan set to ensure the structure’s load-bearing capability to the greatest extent possible. The load-bearing capability gradually decreases as the number of punchouts increases. Traditional steel framing manufacturers are unable to automatically make punchouts for screw holes, so manual drilling holes at the jobsite for metal stud connections are still required. The screw holes are precisely located and punched by the INNO CNC machines.
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Screw hole punchouts are left for panel assembly, and the stud spacing should be building code compliant. The number of screw holes for each panel is calculated systematically, and the screws are included in the product package. We prefabricate the wall panels, joists, and trusses in the factory, eliminating the need for on-site manual labor to measure stud intervals and drill holes for metal stud connection. These two traditional metal studs profile manufacturers have a nationwide retail network that we cannot compete with. We are using the Internet to increase the marginal effect of sales, and our future strategy is to use Internet sales to undermine traditional store-based sales.
In the cold-formed roller machine market, FRAMECAD is a traditional LGS/CFS machine manufacturer. When compared to their LGS equipment, INNO CNC machines manufacturing cost is approximately 50% less, based on our estimates. INNO CNC machines currently have three pending patents, the CUBE 200 (Application number: 63437142), CUBE 300 (Application number: 63427583) and NEW OPTIMIZED DESIGN FOR ROLL FORMER CNC MACHINE (Application number: 63427583). CUBE 200 is able to form C& U type studs and tracks in the thickness of 16 gauge and 6 inches width studs. CUBE 300 is able to form C&U type studs in the thickness of 12 gauge and 12 inches width studs.
In addition, mobile factories are an important countermeasure to traditional equipment. We have developed a mobile factory for offsite production of steel pieces and structures that compete in the traditional prefab and modular building markets. INNO differentiates itself from other steel framing companies and cold-formed roller machine suppliers by integrating services ranging from metal stud manufacturing to prefabrication. In this context, we distinguish ourselves through the technologies and innovations we bring to our process and methods for producing structural components from rolled steel into useful pieces that assemble without error.
3D “Printing” Technology
Currently, 3D printing technology is widely used for prefab homes; however, cooling time is required for formation because the technical principle is to melt the material and then wait for it to cool before settling. In contrast to other prefab home companies, which use 3D printing technology, INNO uses our own cold-formed steel technology to ensure that there is no waiting time for structure formation. 3D printing necessitates the use of unique liquid raw materials such as LAVACRETE and Light Stone Material (LSM), neither of which are easily accessible. This could lead to supply chain disruptions and affect delivery time. Furthermore, the steel is still commonly used to support the structure of prefab homes, regardless of the manufacturing technology used.
Safety is an important factor to consider when choosing a prefab home. Since INNO’s CASTOR CUBE uses steel structure entirely, which has a high strength to weight ratio and good performance to resist disasters such as hurricanes and earthquakes. The foldable prefab home product manufactured by other company may not have the same level of disaster resistance as CASTOR CUBE.
Castor Cube plans to apply a patent for its utility hook-up system, which enable consumers to connect utility within one day. This is a unique feature that can make the process of setting up a prefab home more convenient for consumers. It is also worth noting that according to other prefab companies’ product introduction videos and their social media platforms, they all take around 48 hours to construct a 350 square feet prefab home.
With the usage of INNO’s patent pending honeycomb aluminum panels and Z-shaped pendant designed for replacing manual sheetrock installation, we can significantly reduce the number of manufacturing steps and minimize manual labor. INNO is planning to set up an automatic streamline to produce CASTOR CUBE. This will bring the significant increase in production capacity and it can help INNO to meet the growing demand for prefab homes more efficiently.
Government Regulations
Building Codes
Building codes are laws that set minimum requirements for how structural systems, plumbing, heating, ventilation and air conditioning, natural gas systems and other aspects of residential and commercial buildings should be designed and constructed. In the U.S., building codes mostly fall under the purview of state and local governments. All metal studs used for building structures are required to pass inspections in the jurisdiction they are located. We have ICC-ES evaluation reports (ESR-4641) that show that our cold-formed steel-framing members are compliant with the 2018 and 2015 International Building Code (“IBC”), 2019 California Building Code (“CBC”), and 2020 Florida Building Code (“FBC”). Because of the nature and use of our products, we need to be compliant with quality assurance programs.
Fire safety is one critical area of the building codes. As fire codes become stricter in some geographical areas or specific types of structures, our cold-formed steel materials are inherently non-combustible and therefore are advantaged over combustible alternatives.
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Environmental Compliance
We are subject to U.S federal, state, and local environmental laws and regulations that involve the use, disposal and cleanup of substances regulated by those laws and subject to periodic inspections to monitor our compliance. We believe that we are currently in compliance with applicable environmental regulations. Expenditures for environmental compliance purposes during 2022, 2021 and 2020 were not material.
We were given awards by the U.S. Green Building Council (“USGBC”) in 2020. Our manufacturing processes minimizes waste, prevents pollution, and recycles wherever possible. Our manufacturing process manufactures special length products for all types of projects, has self-contained building system solutions that do not rely on third-party suppliers, and designs products to fulfill the BCA Energy Efficiency program. This compliance proves that we are a green company that meets basic environmental milestones and legal requirements.
Occupational Health and Safety Laws
Our business and operations are subject to numerous federal, state, and local laws and regulations intended to protect our employees. Due to the nature of manufacturing, we are subject to substantial regulations related to safety in the workplace. In addition to the requirements of local and state governments in Texas, we must comply with federal health and safety regulations, the most significant of which are enforced by the Occupational Safety and Health Administration.
Further, our operations and facilities are subject to additional federal, state, or local laws or regulations, such as the COVID-19 safety and prevention regulations. Our operations are also subject to federal, state, and local labor laws relating to employee privacy, wage and hour matters, overtime pay, discrimination and harassment, equal opportunity and employee leave and benefits.
It is our policy and practice to comply with all legal and regulatory requirements and our procedures and internal controls are designed to promote such compliance. Expenditures for compliance with occupational health and safety laws and regulations during 2022, 2021, and 2020 were not material.
Human Capital Resources
The success of our business depends in large part on our ability to attract, retain, and develop a workforce of skilled employees at all levels of our organization. We provide employees with base wages and salaries that we believe are competitive and consistent with each employee’s position. We also work with local, regional, and state-wide agencies to facilitate workforce hiring and development initiatives. As of September 30, 2022, we had 11 full-time employees. We also utilize at-will contractors in our business. As of September 30, 2022, we had 10 at-will contractors employed. That number has since grown to 18 contractors as of August 25, 2023.
Intellectual Property Matters
Presently, we have no registered intellectual property rights and trademarks. The trademarks application status of our name and other marketing materials is pending. There are currently five pending patent applications and descriptions of each pending patent are as follows:
• New optimized design for Roll Former CNC machine that efficiently produces C&U type studs and tracks to be used in building high quality, quick erection structures. (Application number: 63427583)
• Cube 200, which is a new optimized design for a Roll Former CNC machine that efficiently produces C&U type studs and tracks to be used in building high quality, quick erection structures. (Application number: 63437142)
• Z-shaped pendant for castor exterior wall to replace the Z-shaped pendant for sheetrock with honeycomb aluminum plate. (Application number: 63434155)
• Cube 300, which is a new optimized design for a Roll Former CNC machine that efficiently produces C&U type studs and tracks to be used in building high quality, quick erection structures. (Application number: 63437143)
• Aluminum honeycomb plate for interior wall construction. (Application number: 63367663)
In the course of our business, we develop expertise in the manufacturing process. Although we have non-disclosure policies in place with respect to our personnel and in our contractual relationships, we cannot assure you that we will be able to protect our intellectual property rights with respect to this expertise.
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Litigation
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We believe that we do not have any pending or threatened litigation which, individually or in the aggregate, would have a material adverse effect on our business, results of operations, financial condition and/or cash flows.
Properties
We lease our principal executive offices which are located at 2465 Farm Market 359 South, Brookshire, TX 77423. We also lease our California office at 4225 Prado Road, Suite 101, Corona, California 92880. The lease for the Company’s principal Executive Officer at 2465 Farm Market 359 South, Brookshire, TX 77423 has a 60 month term beginning on December 1, 2019 and ending on December 31, 2024. The landlord may assign the lease to a subsequent owner without consent, but the Company may only assign or sublet the property with written consent from the landlord. The lease for our California office has a five year term beginning on May 1, 2022 and ending on April 30, 2027. We may only assign or sublet the property with written consent from the landlord. Any transaction involving the Company or its assets that results in the reduction of the net worth of the Company by an amount greater than 25% of the net worth of the Company at the time of execution of the lease will be deemed an assignment of which the landlord may withhold its consent. Both lease agreements contain standard commercial lease terms including but not limited to provisions regarding utilities, alterations, maintenance and repair, insurance and indemnification.
In August 2023, our California office was relocated to 21660 Copley Drive, Diamond Bar, CA 91765. We will continue to be obligated to pay the monthly rent for the office in Corona California until the landlord find new lessee to occupy the facility. The new lease in Diamond Bar, CA 91765 has a 24 months term beginning on August 1, 2023 and ending on July 31, 2025. We may only assign or transfer the property with prior written consent from the landlord. In the event of a transfer, we will be required pay to the landlord any transfer premium received from transferee. A transfer premium includes any rent, additional rent or other consideration payable by the transferee in connection with the transfer which is in excess of the rent payable by the Company after deducting the reasonable expenses incurred by us. After receiving notice of transfer, the landlord has the option to recapture any transferred portion of the property by providing a recapture notice within 30 days of receipt of the transfer notice. Upon our receipt of the recapture notice, the lease would terminate with regard to any transferred portion of the property. The lease agreement contains standard commercial lease terms including but not limited to provisions regarding utilities, alterations, maintenance and repair, insurance and indemnification.
Corporate Structure
Our Company, INNO HOLDINGS INC., was incorporated in Texas on September 8, 2021. It has three subsidiaries, Inno Metal Studs Corp, Castor Building Tech LLC, and Inno Research Institute LLC.
Below is the corporate structure of the Company:
Corporate Information
Our principal executive offices are located at 2465 Farm Market 359 South, Brookshire, TX 77423, and our California office is located at 4225 Prado Rd, STE 101, Corona CA 92880. Our corporate website address is www.innometalstuds.com. Our telephone number is (800) 909-8800. Information contained in, or accessible through, our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.
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The following are our executive officers, directors and director nominees and their respective ages and positions as of July 25, 2023.
Name |
Age |
Position |
||
Dekui Liu |
42 |
Chief Executive Officer, Director and Chairman |
||
Tianwei (Solomon) Li |
35 |
Chief Financial Officer |
||
Dr. Li (Alice) Gong |
38 |
Chief Operation Officer |
||
Ying Liu |
67 |
Director |
||
Xiaogang (John) Zhang |
39 |
Independent Director Nominee* |
||
Chen Sung |
73 |
Independent Director Nominee* |
||
Richard B. Haws, PE |
66 |
Independent Director Nominee* |
____________
* Indicates nominee to become independent director of the Company, effective as of the closing of this offering.
Dekui (“DK”) Liu — Chief Executive Officer, Director and Chairman
Mr. Liu has over 10 years of ground-up experience within the real estate development industry in the United States. Three generations of his family have been engaged in industrial industry. Having grown up in the entrepreneurial environment, he took his family’s inherited interest in machinery. Practical experience in machinery made him proficient in mechanical principles, electronics principles, and hydraulic transmission principles. Prior to founding INNO, Mr. Liu was the founder and CEO of WBBC Company, engaging in industrial products manufacturing, international trades, and construction from October 2012 to October 2022. Mr. Liu was also the CEO of Hwami Builder LLC from August 2018 to August 2020 and president at the real estate holdings company, Cube Development & Supply LLC from May 2019 to September 2020. Concurrently in October 2019, he founded Inno Metal Studs Corp where he has served as CEO from its inception to the present day. He has also served as the CEO of INNO from September 2021 to the present day. He is the author of five mechanical-related pending patents in the United States. Mr. Liu obtained his A.S. Degree in 2003 in Dalian, China, with a major in Mechanical and Electrical Engineering.
Tianwei (Solomon) Li — Chief Financial Officer
Mr. Li is a highly accomplished finance professional with a diverse background spanning various prestigious institutions. From November 2021 to the present July 2023, he has served as a licensed banker at both J.P Morgan Securities LLC and JPMorgan Chase Bank, N.A., where he combined his matchless expertise in financial management, venture capital, and financial advisory to create real value for clients. Before joining INNO HOLDINGS INC, Mr. Li worked as an exclusive banker at J.P Morgan Securities LLC. From October 2021 to December 2021, he worked as a registered representative at Sutter Securities Inc, providing investment advice and navigating complex regulatory frameworks. Prior to that, from November 2020 to December 2021, he worked as a registered representative at Boustead Securities, LLC, where he offered investment, management, and consulting services to over 50 portfolio companies. Notably, Mr. Li held leadership positions as Vice President at both Multipoint Resources Management Corp, from April 2019 to December 2019, and CATHY LOGISTICS INC, from February 2019 to August 2019, where he demonstrated exceptional leadership skills and strategic decision-making abilities. With a master’s Mr. Li also worked as an agent at Provident Real Estate from October 2019 to February 2022. With a master’s degree in Business Administration and holding the US Financial Industry Regulatory Agency Series 7 and 63 Securities licenses, Mr. Li exemplifies professionalism and regulatory compliance in his work. Combining his extensive practical experience with his strong academic foundation, Mr. Li is committed to delivering exceptional financial solutions and building long-lasting client relationships.
Dr. Li (Alice) Gong — Chief Operation Officer
Dr. Gong has over 10 years of experience in the field of financial analysis, having collaborated with renowned research organizations including Morningstar China where she was a data analyst from August 2007 to August 2008. Prior to founding INNO, Dr. Gong was a Graduate Research and Teaching Assistant for the Ph.D. Program of Applied Economics, Auburn University, in Alabama from August 2010 until May 2015. She also taught economics as an adjunct instructor at each of Herzing University and North American University from May 2016 to August 2016 and August 2021 to December 2021, respectively. As the COO of INNO beginning in February 2023, and as General Manager of Inno Metal Studs Corp from October 2020 to present, Dr. Gong utilizes her deep understanding of economics to
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analyze current market trends, finding creative ways to increase INNO’s profits and expand our consumer base. Dr. Gong is responsible for our overall operations, including generating revenue and controlling costs. Her duties at INNO include managing staff, overseeing the budget, employing marketing strategies, and many other facets of the business. Dr. Gong obtained a Ph.D. in Applied Economics from Auburn University in May 2015 and a Master of Science in Finance from Auburn University in May 2010.
Ying Liu — Director
Ms. Liu has more than 25 years of supply chain management experience, specifically in demand planning role. Prior to joining INNO in September of 2021, she worked at China National Petroleum Corporation, Dalian Branch from 1979-2010. She is skilled at using the analytical, marketing, and sales data of a company to effectively estimate future product demands. She advises to develop effective forecast models based on industry trends and demand patterns and support management with risk assessments and mitigation activities including advising on planning inventory flow, analyzing statistical data, and generating forecasting solutions. She received her A.S. Degree in Mathematics in 1976 in Dalian, China.
Xiaogang (“John”) Zhang — Independent Director Nominee
Mr. Zhang has extensive experience providing professional services for large entities throughout his twelve plus years of public accounting careers. From October 2018 to June 2021, Mr. Zhang served as audit manager and audit senior manager in KPMG’s Atlanta office leading the audit engagements of a number of multi-billion companies in Metro Atlanta. From October 2009 to September 2018, Mr. Zhang served as senior auditor in Pershing Yoakley & Associates, a healthcare accounting and consulting firm. His experience included audit services for large manufacturing companies, SEC filings, multi-hospital health systems, IFRS audits and local statuary audits. Mr. Zhang also currently serves as Director of Corporate Accounting of an industry leading packaging company, Altium Packaging LLC, overseeing the entire Corporate Accounting Team in Atlanta, Georgia, starting from June 2021. He received an MBA from East Tennessee State University in 2009 and a Master of Accountancy from East Tennessee State University in 2008.
Chen Sung — Independent Director Nominee
Mr. Sung has over 30 years extensive experience in international trading and the construction industry. In 2018, he founded his own kitchen cabinet company, Bravo Home Products, Inc., and led the entire product development process, including design, manufacturing, and installation. As an engineer, he invented a hand-free classified dustbin device and still owns a patent in China for the device. He is also a community leader actively involved in the Chinese American Construction Professionals (“CACP”) organization where he serves as a communication coordinator. CACP is a non-profit trade organization in Southern California dedicated to enhancing members’ competitive-ness in global and local markets and providing networking opportunities for building and construction professionals. CACP’s corporate members include SOUTHERN CALIFORNIA EDISON, SoCalGas, Cathay Bank and Gensler. He also has served as a Fellow for Chinese American Construction Professionals, in California since 2015. He received an A.A. degree from Cypress College.
Richard B. Haws, PE — Independent Director Nominee
Mr. Haws has experience in commercial solutions and construction and building expertise. Starting in August 2004, Mr. Haws held various positions, including most recently senior research engineer and director of commercial solutions, at Nucor Buildings Corp, in Denton, Texas before retiring in August 2021. Mr. Haws is currently the chair of the American Iron and Steel Institute (“AISI”) Committee on Specifications and the AISI Standards Council. He has held both positions since January 2017. In his capacity as chair of the AISI Committee on Specifications and the AISI Standards Council, he leads the effort to integrate building information modeling into the design and detailing process, expands modeling to start at the estimate stage, and develops energy efficient systems to comply with increasingly more stringent energy code requirements. He was also chair of the Metal Building Manufacturers Association (“MBMA”) Energy Committee from April 2017 to May 2021. He received a master’s degree in Civil Engineering from Youngstown State University in 1983.
Family Relationships
The Board of Directors includes the mother of Dekui Liu, our Chief Executive Officer and Chairman, Ying Liu.
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Code of Ethics
Our Board plans to adopt a written code of business conduct and ethics (“Code of Ethics”) that applies to our directors, officers, and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. We intend to post on our website a current copy of the Code of Ethics and all disclosures that are required by law regarding any amendments to, or waivers from, any provision of the Code of Ethics.
Controlled Company
We are, and expect to continue to be, a controlled company within the meaning of the Nasdaq Stock Market Rules, and as a result, we qualify for exemptions from certain corporate governance requirements, on which we intend to rely.
Public companies that qualify as a “controlled company” with securities listed on the Nasdaq, must comply with the exchange’s continued listing standards to maintain their listings. Nasdaq has adopted qualitative listing standards. Companies that do not comply with these corporate governance requirements may lose their listing status. Under the Nasdaq rules, a “controlled company” is a company with more than 50% of its voting power held by a single person, entity, or group. Under Nasdaq rules, a controlled company is exempt from certain corporate governance requirements, including:
• the requirement that a majority of the Board of Directors consist of independent directors;
• the requirement that a listed company have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
• the requirement that a listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
• the requirement for an annual performance evaluation of the nominating and governance committee and compensation committee.
Controlled companies must still comply with the exchange’s other corporate governance standards. These include having an audit committee and the special meetings of independent or non-management directors.
Currently, Dekui Liu, our controlling shareholder, beneficially owns roughly 68.3% of our total issued and outstanding common stock. Upon the completion of this Offering, Dekui Liu will beneficially own approximately 60.8% of our total issued and outstanding common stock. As a result, we will continue to be a “controlled company” as defined under Nasdaq Listing Rule 5615(c), because Dekui Liu will hold more than 50% of the voting power for the election of directors. As a “controlled company,” we are permitted to elect not to comply with certain corporate governance requirements. We intend to rely on these exemptions.
Board Leadership Structure and Risk Oversight
Our Board has responsibility for the oversight of our risk management processes and, either as a whole or through its committees, regularly discusses with management our major risk exposures, their potential impact on our business and the steps we take to manage them. The risk oversight process includes receiving regular reports from board committees and members of senior management to enable our Board to understand our risk identification, risk management, and risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory, cybersecurity, strategic, and reputational risk. In particular, our Board will be responsible for closely monitoring the rapidly evolving COVID-19 pandemic, its potential effects on our business, and risk mitigation strategies. While the Company has not yet experienced a significant impact related to the situation in Ukraine caused by the Russian invasion, the Board will also closely monitor the risks in relation to such developments, including but not limited to risks related to cybersecurity, sanctions, supply chain, suppliers and service providers. Similarly, our board is monitoring US-China relations to monitor risks such as political disruption, supply chain, and foreign exchange.
Board of Directors
Our business and affairs are managed under the direction of our Board. Our Board consists of 5 directors, 3 of whom qualify as “independent” under the listing standards of Nasdaq.
Directors serve until the next annual meeting and until their successors are elected and qualified. Officers are appointed to serve until their successors have been elected and qualified.
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Committees of the Board of Directors
Effective as of the closing of the Offering, our Board will establish an audit committee and a compensation committee. Our Board has not yet adopted procedures by which stockholders may recommend nominees to the Board. The composition and responsibilities of each of the committees of our Board is described below. Members serve on these committees until their resignation or until as otherwise determined by our Board.
Audit Committee
Effective as of the closing of the Offering, we will establish an audit committee consisting of Xiaogang Zhang, Chen Sung and Richard B. Haws. Chen Sung will be the chairman of the audit committee. In addition, our Board has determined that Xiaogang Zhang is an audit committee financial expert within the meaning of Item 407(d) of Regulation S-K under the Securities Act of 1933, as amended, or the Securities Act. The audit committee’s duties, which are specified in our Audit Committee Charter, include, but are not limited to:
(a) reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the Board whether the audited financial statements should be included in our annual disclosure report;
(b) discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements;
(c) discussing with management major risk assessment and risk management policies;
(d) monitoring the independence of the independent auditor;
(e) verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;
(f) reviewing and approving all related-party transactions;
(g) inquiring and discussing with management our compliance with applicable laws and regulations;
(h) preapproving all audit services and permitted non-audit services to be performed by our independent auditor, including the fees and terms of the services to be performed;
(i) appointing or replacing the independent auditor;
(j) determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work;
(k) establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and
(l) approving reimbursement of expenses incurred by our management team in identifying potential target businesses.
The audit committee will be composed exclusively of “independent directors” who are “financially literate” as defined under the Nasdaq listing standards. The Nasdaq listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement.
In addition, the Company intends to certify to Nasdaq that the committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication.
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Compensation Committee
Effective as of the closing of the Offering, we will establish a compensation committee of the Board to consist of Xiaogang Zhang, Chen Sung and Richard B. Haws, each of whom is an independent director. Each member of our compensation committee is also a non-employee director, as defined under Rule 16b-3 promulgated under the Exchange Act. Chen Sung will be the chairman of the compensation committee. The compensation committee’s duties, which are specified in our Compensation Committee Charter, include, but are not limited to:
(a) reviews, approves and determines, or makes recommendations to our Board regarding, the compensation of our executive officers;
(b) administers our equity compensation plans;
(c) reviews and approves, or makes recommendations to our Board, regarding incentive compensation and equity compensation plans; and
(d) establishes and reviews general policies relating to compensation and benefits of our employees.
Involvement in Certain Legal Proceedings
To our knowledge, none of our current directors or executive officers has, during the past ten (10) years:
(a) been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(b) had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two (2) years prior to that time;
(c) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his or her involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
(d) been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
(e) been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(f) been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in section 3(a)(26) of the Exchange Act), any registered entity (as defined in section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
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EXECUTIVE AND DIRECTOR COMPENSATION
Introduction
As an emerging growth company, we have opted to comply with the executive compensation disclosure rules applicable to “smaller reporting companies,” as such term is defined in the rules promulgated under the Securities Act. This section discusses the material components of the executive compensation program for our named executive officers (“NEOs”) for the fiscal year ending September 30, 2022 (“Fiscal Year 2022”).
For Fiscal Year 2022, the Company’s NEOs were:
• Dekui Liu, Chief Executive Officer, and
• Dr. Li (Alice) Gong, General Manager of Inno Metal Studs Corp (a subsidiary of the Company).
The Company does not have a third NEO for Fiscal Year 2022 as Dr. Gong was the only individual, other than the Chief Executive Officer, whose total compensation in Fiscal Year 2022 and position at the Company (or its subsidiaries), would make her an executive officer of the Company at any point during Fiscal Year 2022.
The following discussion may contain forward-looking statements that are based on current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that the Company adopts could vary significantly from historical practices and currently planned programs summarized in this discussion.
Compensation Program
The objective of the compensation program of the Company and its subsidiaries (the “Company Group”) is to provide a total compensation package to each NEO that will enable the Company Group to attract, motivate and retain outstanding individuals, align the interests of our executive team with those of our shareholders, encourage individual and collective contributions to the successful execution of our short- and long-term business strategies and reward NEOs for performance.
• Base Salary. Each of the NEOs is paid a base salary commensurate with the executive’s skill set, experience, performance, role and responsibilities. For Fiscal Year 2022, the annual salaries for Mr. Liu and Dr. Gong were $80,000 and $100,347, respectively.
• Short-Term Cash Incentives. During Fiscal Year 2022, the Company Group did not grant any short-term cash bonuses to any of the NEOs.
• Long-Term Equity Incentives. During Fiscal Year 2022, the Company Group did not grant any incentive equity awards to any of the NEOs.
Summary Compensation Table
The following table presents information regarding the total compensation awarded to, earned by and paid to the Company’s NEOs for services rendered to the Company Group in all capacities in its Fiscal Year 2022.
Name and Principal Position |
Year |
Salary |
Total |
||||
Dekui Liu |
2022 |
80,000 |
$ |
80,000 |
|||
Chief Executive Officer |
|
||||||
|
|||||||
Dr. Li (Alice) Gong |
2022 |
100,347 |
$ |
100,347 |
|||
General Manager of Inno Metal Studs Corp |
|
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Narrative Disclosure to the Summary Compensation Table
Employee Benefits
The executive officers, including the NEOs, are eligible to receive the same employee benefits that are generally available to all full-time employees, subject to the satisfaction of certain eligibility requirements. In structuring these benefit plans, the Company Group seeks to provide an aggregate level of benefits that are comparable to those provided by similar companies.
Agreements with our NEOs
Neither NEO is currently subject to an employment agreement with the Company Group.
Outstanding Equity Awards at 2022 Fiscal Year-End
Neither NEO had any outstanding equity awards in the Company as of September 30, 2022.
Potential Payments Upon Termination or Change in Control
Neither NEO was eligible for any potential payments upon any form of termination or resignation of employment or a change in control of the Company if such event took place on September 30, 2022 or at any other point during Fiscal Year 2022.
Omnibus Incentive Plan
Our Board adopted, and our shareholders approved, the Inno Holdings, Inc. 2023 Omnibus Incentive Plan (the “Plan”), effective July 18, 2023. As of the date of this prospectus, no awards (as defined below) have been granted under the Plan, and any future awards will be made in the discretion of the Board, or if different, the Plan’s administrator.
Plan Purpose; Types of Awards
The purposes of the Plan are to (a) encourage the profitability and growth of the Company through short-term and long-term incentives that are consistent with the Company’s objectives; (b) give participants an incentive for excellence in individual performance; (c) promote teamwork among participants; and (d) give the Company a significant advantage in attracting and retaining key employees, non-employee directors and consultants. To accomplish these purposes, the Plan provides for the grant of stock options (both “incentive stock options” intended to meet the requirements under Section 422 of the Code and “nonqualified stock options” that do not meet such requirements), stock appreciation rights (“SARs”), restricted shares, restricted stock units (“RSUs”), dividend equivalent rights, other share-based, share-related or cash-based awards (including performance-based awards) (collectively “awards”), with each grant evidenced by an award agreement providing the terms of the award. Incentive stock options may be granted only to employees; all other awards may be granted to employees, directors and consultants.
Shares Subject to the Plan
A total number of shares of our common stock will be reserved and available for issuance under the Plan equal to 2,013,552 shares. The maximum number of shares that may be issued pursuant to options intended to be incentive stock options is 2,013,552 shares. The aggregate grant date fair market value of the Company’s common stock subject to awards granted during any fiscal year to any non-employee director, when taken together with the cash fees paid to such non-employee director during the fiscal year (in each case, with respect to his or her service as a non-employee director), shall not exceed $250,000.
If any Company common stock subject to an award granted under the Plan are forfeited, canceled, settled, or otherwise terminated without a distribution of shares, such shares will again become available for issuance under the Plan. The following shares will be available for issuance under the Plan: (i) shares delivered to or withheld to pay withholding taxes or any applicable exercise price, and (ii) shares subject to any exercised stock-settled SAR or options. In addition, any shares tendered to exercise outstanding options or other awards or repurchased on the open market using exercise price proceeds will be available for issuance under the Plan. Any substitute awards shall not reduce the shares authorized for grant under the Plan.
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Administration of the Plan
The Plan will be administered by the plan administrator, who is the Board or a committee that the Board designates. The plan administrator has the power to determine the terms of the awards granted under the Plan, including the exercise price, the number of shares subject to each award, and the exercisability and vesting terms of the awards. The plan administrator also has the power to determine the persons to whom and the time or times at which awards will be made and to make all other determinations and take all other actions advisable for the administration of the Plan. All decisions made by the plan administrator pursuant to the provisions of the Plan will be final, conclusive and binding.
Conditions on Awards
All of the awards described below are subject to the conditions, limitations, restrictions, vesting and forfeiture provisions determined by the plan administrator, in its sole discretion, subject to certain limitations provided in the Plan. Each award granted under the Plan will be evidenced by an award agreement, which will govern that award’s terms and conditions. To the extent necessary to do so, in the case of any conflict or potential inconsistency between the Plan and a provision of any award or award agreement with respect to an award, the Plan will govern.
The plan administrator may condition the vesting of or the lapsing of any applicable vesting restrictions or conditions on awards upon the attainment of performance goals, continuation of service, or any other term or conditions. If performance goals are established by the plan administrator If the plan administrator determines that an award under the Plan will be earned subject to the achievement of performance goals, the plan administrator may select one or more performance criteria upon which to grant such award, which may include, but are not limited to, any one or more of the following: earnings before interest and taxes; earnings before interest, taxes, depreciation and amortization; net operating profit after tax; cash flow; revenue; net revenues; sales; days sales outstanding; income; net income; operating income; net operating income, operating margin; earnings; earnings per share; return on equity; return on investment; return on capital; return on assets; return on net assets; total shareholder return; economic profit; market share; appreciation in the fair market value, book value or other measure of value of a share of common stock; expense/cost control; working capital; customer satisfaction; employee retention or employee turnover; employee satisfaction or engagement; environmental, health, or other safety goals; individual performance; strategic objective milestones; any other criteria specified by the plan administrator in its sole discretion; or, as applicable, any combination of, or a specified increase or decrease in, any of the foregoing.
The vesting conditions placed on any award need not be the same with respect to each grantee and the plan administrator will have the sole discretion to amend any outstanding award to accelerate or waive any or all restrictions, vesting provisions or conditions set forth in the award agreement. Any of the above criteria may be used with or without adjustment for extraordinary items or nonrecurring items and may be measured in absolute terms or relative to historic performance or the performance of other companies or an index.
Types of Awards
Stock Options
The Plan provides for grants of both nonqualified and incentive stock options. A nonqualified stock option entitles the recipient to purchase the Company common stock at a fixed exercise price. The exercise price per share will be determined by the compensation committee but such price will never be less than 100% of the fair market value of a share of common stock on the date of grant. Fair market value will generally be the closing price of a share of the Company common stock on Nasdaq on the date of grant. Nonqualified stock options under the Plan generally must be exercised within ten years from the date of grant. A nonqualified stock option is an option that does not meet the qualifications of an incentive stock option as described below.
An incentive stock option is a stock option that meets the requirements of Section 422 of the Code. Incentive stock options may be granted only to employees and the aggregate fair market value of a share of the Company common stock determined at the time of grant with respect to incentive stock options that are exercisable for the first time by a participant during any calendar year may not exceed $100,000. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own shares possessing more than 10% of the Company’s total combined voting power or that of any of the Company’s affiliates unless (i) the option exercise price is at least 110% of the fair market value of the shares subject to the option on the date of grant and (ii) the term of the incentive stock option does not exceed five years from the date of grant.
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Unless otherwise determined by the plan administrator, each vested and outstanding option granted under the Plan will automatically be exercised on the last business day of the applicable option term, to the extent that, as of such date, (i) the exercise price of such option is less than the fair market value of a share, and (ii) the holder of such option remains actively in service.
Stock Appreciation Rights
A SAR entitles the holder to receive an amount equal to the difference between the fair market value of a share of the Company common stock on the exercise date and the exercise price of the SAR (which may not be less than 100% of the fair market value of a share of the Company common stock on the grant date), multiplied by the number of the Company common stock subject to the SAR (as determined by the plan administrator). Unless otherwise determined by the plan administrator, each vested and outstanding SAR granted under the Plan will automatically be exercised on the last business day of the applicable SAR term, to the extent that, as of such date, (i) the exercise price of such SAR is less than the fair market value of a share, and (ii) the holder of such SAR remains actively in service.
Restricted Shares
A restricted share award is an award of the Company common stock that vest in accordance with the terms and conditions established by the plan administrator. The plan administrator will determine in the award agreement whether the participant will be entitled to receive dividends on such restricted shares.
Restricted Stock Units
A RSU is a right to receive shares or the cash equivalent of Company common stock at a specified date in the future, subject to forfeiture of such right. If the RSU has not been forfeited, then on the date specified in the RSU grant, the Company must deliver to the holder of the RSU unrestricted the Company common stock (or, in the plan administrator’s sole discretion, cash equal to the shares that would otherwise be delivered, or partly in cash and partly in shares).
Other Share-Based Awards
We may grant or sell to any participant a right or other interest that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, the Company common stock, including unrestricted the Company common stock under the Plan or a dividend equivalent. A dividend equivalent is a right to receive payments, based on dividends with respect to the Company common stock. To the extent that an award contains a right to receive dividends or dividend equivalents while the award remains unvested, the dividends and dividend equivalents will be accumulated and paid once and to the extent that the underlying award vests.
Other Cash-Based Awards
We may grant cash awards under the Plan, including cash awards as a bonus or upon the attainment of certain performance goals.
Performance-Based Awards
We may grant an award conditioned on satisfaction of certain performance criteria. Such performance-based awards include performance-based restricted shares and restricted share units. Any dividends or dividend equivalents payable or credited to a participant with respect to any unvested performance-based award will be subject to the same performance goals as the shares or units underlying the performance-based award.
Equitable Adjustments
In the event of a merger, consolidation, reclassification, recapitalization, spin-off, spin-out, repurchase or other reorganization or corporate transaction or event, extraordinary dividend, stock split, reverse stock split, combination or exchange of shares, or other change in corporate structure or payment of any other distribution, the maximum number and kind of the Company common stock reserved for issuance or with respect to which awards may be granted under the Plan will be adjusted to reflect such event, and the plan administrator will make such adjustments
87
as it deems appropriate and equitable in the number, kind and exercise price of the Company common stock covered by outstanding awards made under the Plan, and in any other matters that relate to awards and that are affected by the changes in the shares referred to in this section.
Change in Control
In the event of any proposed change in control (as defined in the Plan), the plan administrator will take any action as it deems appropriate and equitable to effectuate the purposes of the Plan and to protect the participants who hold outstanding awards under the Plan, which action may include, without limitation, the following: (i) the continuation of any award, if the Company is the surviving corporation; (ii) the assumption of any award by the surviving corporation or its parent or subsidiary; (iii) the substitution by the surviving corporation or its parent or subsidiary of equivalent awards for any award, provided, however, that any such substitution with respect to options and SARs shall occur in accordance with the requirements of Section 409A of the Code; or (iv) settlement of any award for the change in control price (less, to the extent applicable, the per share exercise or grant price), or, if the per share exercise or grant price equals or exceeds the change in control price or if the plan administrator determines that the award cannot reasonably become vested pursuant to its terms, such award shall terminate and be canceled without consideration.
Amendment and Termination
The plan administrator may alter, amend, modify, or terminate the Plan at any time, provided that the approval of our shareholders will be obtained for any amendment to the Plan that requires shareholder approval under the rules of the stock exchange(s) on which the Company common stock is then listed or in accordance with other applicable law, including, but not limited to, an increase in the number of the Company common stock reserved for issuance, a reduction in the exercise price of options or other entitlements, an extension of the maximum term of any award, or an amendment that grants the plan administrator additional powers to amend the Plan. In addition, no modification of an award will, without the prior written consent of the participant, adversely alter or impair any rights or obligations under any award already granted under the Plan, unless the plan administrator expressly reserved the right to do so at the time of the award.
Material U.S. Federal Income Tax Effects
The following discussion of certain relevant United States federal income tax effects applicable to certain awards granted under the Plan is only a summary of certain of the United States federal income tax consequences applicable to United States residents under the Plan, and reference is made to the Code for a complete statement of all relevant federal tax provisions. No consideration has been given to the effects of foreign, state, local and other laws (tax or other) on the Plan or on a participant, which laws will vary depending upon the particular jurisdiction or jurisdictions involved. In particular, participants who are stationed outside the United States may be subject to foreign taxes as a result of the Plan.
Nonqualified Stock Options
An optionee subject to United States federal income tax will generally not recognize taxable income for United States federal income tax purposes upon the grant of a nonqualified stock option. Rather, at the time of exercise of the nonqualified stock option, the optionee will recognize ordinary income, subject to wage and employment tax withholding, and the Company will be entitled to a deduction, in an amount equal to the excess of the fair market value of the shares on the date of exercise over the exercise price. If the shares acquired upon the exercise of a nonqualified stock option are later sold or exchanged, then the difference between the amount received upon such sale or exchange and the fair market value of such shares on the date of such exercise will generally be taxable as long-term or short-term capital gain or loss (if the shares are a capital asset of the optionee), depending upon the length of time such shares were held by the optionee.
Incentive Stock Options
An optionee subject to United States federal income tax will generally not recognize taxable income for United States federal income tax purposes upon the grant of an incentive stock option (within the meaning of Section 422 of the Code) and the Company will not be entitled to a deduction at that time. If the incentive stock option is exercised during employment or within ninety (90) days following the termination thereof (or within one year following termination, in
88
the case of a termination of employment due to death or disability, as such terms are defined in the Plan), the optionee will not recognize any income and the Company will not be entitled to a deduction. The excess of the fair market value of the shares on the exercise date over the exercise price, however, is includible in computing the optionee’s alternative minimum taxable income. Generally, if an optionee disposes of shares acquired by exercising an incentive stock option either within two years after the date of grant or one year after the date of exercise, the optionee will recognize ordinary income, and the Company will be entitled to a deduction, in an amount equal to the excess of the fair market value of the shares on the date of exercise (or the sale price, if lower) over the exercise price. The balance of any gain or loss will generally be treated as a capital gain or loss to the optionee. If the shares are disposed of after the two-year and one-year periods described above, the Company will not be entitled to any deduction, and the entire gain or loss for the optionee will be treated as a capital gain or loss.
SARs
A participant subject to United States federal income tax who is granted a SAR will not recognize ordinary income for United States federal income tax purposes upon receipt of the SAR. At the time of exercise, however, the participant will recognize ordinary income, subject to wage and employment tax withholding, equal to the value of any cash received and the fair market value on the date of exercise of any shares received. The Company will not be entitled to a deduction upon the grant of a SAR, but generally will be entitled to a deduction for the amount of income the participant recognizes upon the participant’s exercise of the SAR. The participant’s tax basis in any shares received will be the fair market value on the date of exercise and, if the shares are later sold or exchanged, then the difference between the amount received upon such sale or exchange and the fair market value of the shares on the date of exercise will generally be taxable as long-term or short-term capital gain or loss (if the stock is a capital asset of the participant) depending upon the length of time such shares were held by the participant.
Restricted Shares
A participant subject to United States federal income tax generally will not be taxed upon the grant of a restricted share award, but rather will recognize ordinary income for United States federal income tax purposes in an amount equal to the fair market value of the shares at the time the restricted stock is no longer subject to a substantial risk of forfeiture (within the meaning of the Code). The Company generally will be entitled to a deduction at the time when, and in the amount that, the participant recognizes ordinary income on account of the lapse of the restrictions. A participant’s tax basis in the shares will equal the fair market value of those shares at the time the restrictions lapse, and the participant’s holding period for capital gains purposes will begin at that time. Any cash dividends paid on the shares before the restrictions lapse will be taxable to the participant as additional compensation (and not as dividend income). Under Section 83(b) of the Code, a participant may elect to recognize ordinary income at the time the restricted shares are awarded in an amount equal to their fair market value at that time, notwithstanding the fact that such shares are subject to restrictions and a substantial risk of forfeiture. If such an election is made, no additional taxable income will be recognized by such participant at the time the restrictions lapse, the participant will have a tax basis in the restricted shares equal to their fair market value on the date of their award, and the participant’s holding period for capital gains purposes will begin at that time. The Company generally will be entitled to a tax deduction at the time when, and to the extent that, ordinary income is recognized by such participant.
RSUs
A participant subject to United States federal income tax who is granted a restricted share unit will not recognize ordinary income for United States federal income tax purposes upon the receipt of the restricted share unit, but rather will recognize ordinary income in an amount equal to the fair market value of the shares at the time the award is settled into shares, subject to wage and employment tax withholding, and the Company will have a corresponding deduction at that time.
Other Share-Based and Other Cash-Based Awards
In the case of other share-based and other cash-based awards, depending on the form of the award, a participant subject to United States federal income tax will not be taxed upon the grant of such an award, but, rather, will recognize ordinary income for United States federal income tax purposes when such an award vests or otherwise is free of restrictions. In any event, the Company will be entitled to a deduction at the time when, and in the amount that, a participant recognizes ordinary income.
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Tax Effects for the Company
In addition to the tax impact to the Company described above, the Company’s deduction may also be limited by Section 280G or Section 162(m) of the Code. In general, Section 162(m) of the Code denies a publicly held corporation a deduction for United States federal income tax purposes for compensation in excess of $1,000,000 per year per covered employee.
Director Compensation Table
Shaoren Liu and Ying Liu served as the Company’s non-employee directors during Fiscal Year 2022. Neither of the Company’s non-employee directors received any compensation related to the director’s Board service in Fiscal Year 2022 or had any outstanding equity awards as of September 30, 2022.
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The following table sets forth certain information, as of September 13, 2023 with respect to the holdings of (1) each person who is the beneficial owner of more than 5% of Company voting stock, (2) each of our directors, (3) each executive officer, and (4) all of our current directors and executive officers as a group.
Beneficial ownership of the voting stock is determined in accordance with the rules of the SEC and includes any shares of company voting stock over which a person exercises sole or shared voting or investment power, or of which a person has a right to acquire ownership at any time within 60 days of September 13, 2023. Except as otherwise indicated, we believe that the persons named in this table have sole voting and investment power with respect to all shares of voting stock held by them. Applicable percentage ownership in the following table is based on 18,251,726 shares of common stock issued and outstanding on September 13, 2023, and 22,765,278 shares of common stock issued and outstanding after this offering assuming a common stock offering of 2,500,000 shares and including 2,013,552 shares of common stock reserved for future issuance under the Plan, plus, for each individual, any securities that individual has the right to acquire within 60 days of September 13, 2023.
To the best of our knowledge, except as otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the shares of our common stock beneficially owned by such person, except to the extent such power may be shared with a spouse. To our knowledge, none of the shares listed below are held under a voting trust or similar agreement, except as noted. To our knowledge, there is no arrangement, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
Name and Address of Beneficial Owner(1) |
Title |
Beneficially |
Percent of |
Percent of |
||||||
Officers and Directors |
|
|
||||||||
Dekui Liu |
Chief Executive Officer, Director and Chairman |
13,837,893 |
68.3 |
% |
60.8 |
% |
||||
Tianwei Li |
Chief Financial Officer |
— |
|
|
||||||
Dr. Li (Alice) Gong |
Chief Operation Officer |
— |
|
|
||||||
Ying Liu |
Director |
— |
|
|
||||||
Xiaogang (John) Zhang |
Independent Director Nominee |
— |
|
|
||||||
Chen Sung |
Independent Director Nominee |
— |
|
|
||||||
Richard B. Haws, PE |
Independent Director Nominee |
— |
|
|
||||||
Officers and Directors as a Group (total of 7 persons) |
13,837,893 |
68.3 |
% |
60.8 |
% |
|||||
5% Stockholders |
|
|
||||||||
Dekui Liu |
Chief Executive Officer, Director and Chairman |
13,837,893 |
68.3 |
% |
60.8 |
% |
||||
Zfounder Organization Inc.(3)(4)(5) |
Investor |
3,013,685 |
14.9 |
% |
13.2 |
% |
____________
* Less than 1%
(1) Unless otherwise indicated the business address for each of the individuals is 2465 Farm Market 359 South, Brookshire, TX 77423.
(2) Approximate percentage of outstanding common stock includes 2,013,552 shares of common stock reserved for employee stock option pool, which will be implemented and approved immediately prior to the closing of this offering.
(3) The business address for Zfounder Organization Inc. is 12905 SW 42nd St. Unit 222 Miami, FL 33175.
(4) Beneficially owned by Wen Hua.
(5) Mr. Dekui Liu donated 4,427,371.52 shares of the Company’s common stock, which after giving effect to the Company’s reverse stock split effectuated on July 24, 2023, amounts to 2,213,685.76 shares of common stock, to Zfounder Organization, Inc. on May 4, 2023.
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We are registering shares of common stock held by the Selling Stockholders. The Selling Stockholders are offering an aggregate of 1,386,990 shares of common stock. (See Plan of Distribution).
The table below lists the Selling Stockholders. The Selling Stockholders are not required to sell any of the shares of common stock being registered under this prospectus. The following table assumes that the Selling Stockholders will sell all of the shares listed in this prospectus. The first column lists the number of shares of common stock beneficially owned by each of the Selling Stockholders, as of September 13, 2023. As of September 13, 2023, 18,251,276 shares of the Company’s common stock were issued and outstanding.
The second column lists the shares of common stock being offered by this prospectus by the Selling Stockholders. None of the Selling Stockholders are officers or directors of the Company. The Company has agreed to pay all of the expenses of this registration, and the Selling Shareholders will not contribute to the costs. The underwriters are not underwriting the shares of the Selling Shareholders.
Name |
Number of |
Maximum |
%of |
% of |
Date |
||||||
Lina Lii Chu |
500,000 |
500,000 |
2.7 |
% |
* |
February 1, 2022 |
|||||
Peter T Igler |
500,000 |
500,000 |
2.7 |
% |
* |
February 1, 2022 |
|||||
Haiyan Ma+ |
157,894 |
157,894 |
* |
|
* |
March 20, 2023 |
|||||
Donedeal LLC |
142,857 |
142,857 |
* |
|
* |
December 3, 2022 |
|||||
Advanta IRA Administration, LLC FBO Huifang Li IRA #1524624 |
27,028 |
27,028 |
* |
|
* |
February 24, 2023 |
|||||
Monsk LLC+ |
26,316 |
26,316 |
* |
|
* |
April 27, 2023 |
|||||
Yuhan Yang Yu |
19,737 |
19,737 |
* |
|
* |
June 20, 2023 |
|||||
Lyla Entrepreneur Academy Foundation Inc.+ |
13,158 |
13,158 |
* |
|
* |
May 1, 2023 |
|||||
|
|||||||||||
Total Selling Shareholders |
1,386,990 |
1,386,990 |
7.6 |
% |
* |
____________
* Represents less than 1% of the issued and outstanding common stock.
# Assumes that the Selling Stockholders dispose of all of the shares of common stock covered by this prospectus and does not acquire beneficial ownership of any additional shares of common stock. The registration of these shares of common stock does not necessarily mean that the Selling Stockholders will sell all or any portion of the shares of common stock covered by this prospectus.
+ The shares were acquired by sale from an existing shareholder who had originally acquired the shares from the issuer in an offer and sale which was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701.
Except as noted above, the offers and sales of the above shares were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving any public offering pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. There was no placement agent associated with any purchase of any of the shares noted above.
There is no material relationship between any Selling Shareholder and the Company, or any of the Company’s officers and directors.
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The following are the controlling principals in the non-human entities that are selling stockholders:
Investor |
Principal or |
|
Donedeal LLC |
Hsin-Yun Lee |
|
Advanta IRA Administration, LLC FBO Huifang Li IRA |
Huifang Li |
|
Monsk LLC |
Yuzhou Zhang |
|
Lyla Entrepreneur Academy Foundation Inc. |
Yuhan Yang Yu |
The Selling Stockholders named above acquired their shares in private transactions with the Company that was exempt from registration under Section 4(a)(2) of the Securities Act or are the transferees of shares so purchased.
93
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Unless described below, during the last two fiscal years, there are no transactions or series of similar transactions to which we were a party or will be a party, in which:
• the amounts involved exceed or will exceed $120,000; and
• any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of any of the foregoing had, or will have, a direct or indirect material interest.
The Company borrows short term loans without interest from its majority shareholder and CEO, Mr. Dekui Liu, for operation and cashflow needs from time to time. As of June 30, 2023, the amount due to Mr. Liu was $363,372. As of September 30, 2022 and 2021, the outstanding balance due to Mr. Liu was $12,233 and 80,706, respectively.
During the year ended September 30, 2022, the Company engaged Yunited Assets LLC (“Yunited”), a limited liability company owned by Mr. Cheng Yu, the minority owner of the Company’s subsidiary, Inno Research Institute, for consultation services on a project-by-project basis. During the nine months ended June 30, 2023 and 2022, the Company recorded $4,375 and $19,950, respectively, of project based consulting service fees, included in cost of materials and labor. During the nine months ended June 30, 2023 and 2022, the Company also recorded $90,000 and $80,000 consulting fee to Yunited for Mr. Yu’s daily operating services included in the general and administrative expenses. As of June 30, 2023, the outstanding balance of accounts payable – related party due to Yunited was $50,000. As of September 30, 2022 and 2021, there were no unpaid balances due to Yunited.
In March 2022, the Company entered into an agreement with Wise Hill Inc. (“Wise Hill”), a Florida corporation wholly owned by a minority shareholder of the Company. Pursuant to the agreement, the Company sold prefab home products of $250,000 to Wise Hill. For the year ended September 30, 2022, the Company recorded revenue-related party of $250,000. As of June 30, 2023, September 30, 2022 and 2021, the outstanding balance of accounts receivable — related party was $100,000.
During the year ended September 30, 2022, the Company purchased prefab home and other material and supplies from Baicheng Trading LLC, in which the father of Mr. Dekui Liu, the Company’s majority shareholder and CEO, is a director. As of June 30, 2023, September 30, 2022 and 2021, the outstanding balance of accounts payable — related party was $485,595, $485,595 and $0, respectively.
During the nine months ended June 30, 2023, the Company borrowed short term loans without interest from Zfounder Organization Inc., one of the Company’s minority shareholders for operation and cashflow needs. As of June 30, 2023, the outstanding balance due was $25,000. In addition, the Company borrowed short term loans without interest from Wise Hill Inc., a company owned by the CEO and Board member of Zfounder Organization Inc., for operation and cashflow needs. As of June 30, 2023, the outstanding balance due was $135,000.
During the quarter ended June 30, 2023, the Company borrowed short term loans without interest, amount of $100,000 and $30,000, respectively, from its Vice President of Product, Mr. Fei Xie and Director of Design, Mr. Zuoda He. As of June 30, 2023, the outstanding balance due to Mr. Xie and Mr. He was $100,000 and $30,000, respectively.
In March 2023, the Company entered into an agreement with Vision Opportunity Fund LP (“Vision”), a Florida limited partnership partially owned by a minority shareholder of the Company. Pursuant to the agreement, the Company agreed to provide supplies and act as project developer for an amount equal to $15,875,800 plus applicable taxes. The Company has not recorded revenue from the related party as of June 30, 2023.
Indemnification Agreements
Upon the closing of this offering, the Company will enter into indemnity agreements with each of its directors and officers (the “Indemnity Agreements”), undertaking to indemnify them to the fullest extent permitted by law on the terms set forth therein. This indemnification is limited to events where the director or officer acted in good faith and in a manner the relevant director or officer reasonably believed to be in and/or not opposed to the best interests of INNO, and the relevant director or officer had no reasonable cause to believe that his or her conduct was unlawful.
The foregoing summary of the Indemnity Agreements does not purport to be complete and is subject to and qualified in its entirety by reference to the form of Indemnity Agreement, a copy of which is filed as Exhibit 10.1.
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Policies and Procedures for Related Person Transactions
Upon the closing of this offering, the board of directors will adopt a written related person transaction policy that set forth the following policies and procedures for the review and approval or ratification of related person transactions. A “related person transaction” is a transaction, arrangement or relationship in which INNO or any of its subsidiaries was, is or will be a participant, the amount of which involved exceeds $120,000, and in which any related person had, has or will have a direct or indirect material interest. A “related person” means:
• any person who is, or at any time during the applicable period was, one of INNO’s executive officers or directors;
• any person who is known by INNO to be the beneficial owner of more than 5% of INNO’s voting securities;
• any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother in-law or sister-in-law of a director, executive officer or a beneficial owner of more than 5% of INNO’s voting securities, and any person (other than a tenant or employee) sharing the household of such director, executive officer or beneficial owner of more than 5% of INNO’s voting securities; and
• any firm, corporation or other entity in which any of the foregoing persons is a partner or principal, or in a similar position, or in which such person has a 10% or greater beneficial ownership interest.
We intend to establish policies and procedures designed to minimize potential conflicts of interest arising from any dealings we may have with our affiliates and to provide appropriate procedures for the disclosure of any real or potential conflicts of interest that may exist from time to time. Specifically, pursuant to its audit committee charter, the audit committee have the responsibility to review related party transactions.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of our common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership and disposition of our common stock.
This discussion is limited to Non-U.S. Holders that hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a Non-U.S. Holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income and the alternative minimum tax. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules, including, without limitation:
• U.S. expatriates and former citizens or long-term residents of the United States;
• persons holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;
• banks, insurance companies and other financial institutions;
• brokers, dealers or traders in securities;
• “controlled foreign corporations,” “passive foreign investment companies” and corporations that accumulate earnings to avoid U.S. federal income tax;
• partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);
• tax-exempt organizations or governmental organizations;
• persons deemed to sell our common stock under the constructive sale provisions of the Code;
• persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation;
• tax-qualified retirement plans; and
• “qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.
THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
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Definition of a Non-U.S. Holder
For purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of our common stock that is neither a “U.S. person” nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
• an individual who is a citizen or resident of the United States;
• a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;
• an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
• a trust that (i) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of section 7701(a)(30) of the Code), or (ii) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.
Distributions
As described in the section titled “Dividend Policy,” we do not anticipate declaring or paying cash dividends to holders of our common stock in the foreseeable future. However, if we do make distributions of cash or property on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below in “— Sale or Other Taxable Disposition.”
Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). If a Non-U.S. Holder holds the stock through a financial institution or other intermediary, the Non-U.S. Holder will be required to provide appropriate documentation to the intermediary, which then will be required to provide certification to the applicable withholding agent, either directly or through other intermediaries. A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.
If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment or fixed base in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.
Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.
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Sale or Other Taxable Disposition
Subject to the discussions below of backup withholding and withholding under FATCA (defined below), a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our common stock unless:
• the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment or fixed base in the United States to which such gain is attributable);
• the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or
• our common stock constitutes a U.S. real property interest (USRPI) by reason of our status as a U.S. real property holding corporation (USRPHC) for U.S. federal income tax purposes.
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
A Non-U.S. Holder described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on gain realized upon the sale or other taxable disposition of our common stock, which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.
With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition of our common stock by a Non-U.S. Holder will not be subject to U.S. federal income tax if our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and such Non-U.S. Holder owned, actually and constructively, 5% or less of our common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.
Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.
Information Reporting and Backup Withholding
Payments of dividends on our common stock will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any distributions on our common stock paid to the Non-U.S. Holder, regardless of whether such distributions constitute dividends or whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our common stock within the United States or conducted through certain U.S.-related brokers generally will be subject to backup withholding or information reporting unless the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person, or the holder otherwise establishes an exemption. Proceeds of a disposition of our common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.
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Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Additional Withholding Tax on Payments Made to Foreign Accounts
Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections are commonly referred to as the Foreign Account Tax Compliance Act (“FATCA”)) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or subject to the proposed Treasury Regulations discussed below, gross proceeds from the sale or other disposition of, our common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (i) the foreign financial institution undertakes certain diligence and reporting obligations, (ii) the nonfinancial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (iii) the foreign financial institution or nonfinancial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in clause (i) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.
These withholding taxes would be imposed on dividends with respect to our common stock to foreign financial institutions or non-financial foreign entities (including in their capacity as agents or custodians for beneficial owners of our common stock) that fail to satisfy the above requirements. Prior to the issuance of proposed U.S. Treasury regulations, withholding taxes under FATCA also would have applied to gross proceeds from the disposition of our common stock. However, the proposed U.S. Treasury regulations provide that such gross proceeds are generally not subject to withholding taxes under FATCA. Taxpayers (including withholding agents) may currently rely on these proposed U.S. Treasury regulations until they are revoked or final U.S. Treasury regulations are issued. There can be no assurance that final U.S. Treasury Regulations would provide an exemption from FATCA withholding for gross proceeds.
Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our common stock.
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The following description summarizes certain important terms of our capital stock, as they are expected to be in effect immediately prior to the completion of this offering. We have adopted an amended and restated certificate of incorporation and expect to adopt amended and restated bylaws that will become effective immediately prior to the completion of this offering, and this description summarizes the provisions that are included and are expected to be included in such documents. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description of the matters set forth in this section titled “Description of Securities,” you should refer to our amended and restated certificate of incorporation, amended and restated bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of Texas law. The following description of our securities is only a summary and is qualified in its entirety by reference to the actual terms and provisions of the capital stock contained in our Certificate of Incorporation and our Bylaws.
General
The Company is authorized to issue one class of stock. The total number of shares of stock which the Company is authorized to issue is 100,000,000 shares of capital stock, all of which are common stock, which 18,251,726 shares of which are issued and outstanding. As of September 13, 2023, there were 11 holders of record of our common stock.
Common Stock
The holders of our common stock are entitled to the following rights:
Voting Rights. Each share of INNO’s common stock entitles its holder to one vote per share on all matters to be voted or consented upon by the stockholders.
Dividend Rights. Subject to limitations under Texas law, holders of INNO’s common stock may receive dividends or other distributions, if any, as may be declared by INNO’s Board out of funds legally available therefor.
Liquidation Rights. In the event of the liquidation, dissolution or winding up of our business, the holders of INNO’s common stock are entitled to share ratably in the assets available for distribution after the payment of all of our debts and other liabilities.
Other Matters. All of the outstanding shares of INNO’s common stock are fully paid and non-assessable.
Registration Rights Agreement
Pursuant to an Investors’ Rights Agreement by and between us and certain investors, we are obligated to register for resale the total registrable shares of common stock of such investors. We must register such shares within one hundred eighty (180) days after the effective date of the registration statement for the Company’s initial public offering and if the Company receives a request from 50% of the registerable common stock. We must also file a Form S-3 registration statement after eligibility if the Company receives a request from 50% of the registerable common stock.
Anti-takeover Effects of Certain Provisions of Our Shareholders Agreement, Bylaws and Texas Law
Our shareholders agreement, bylaws and the Texas Business Organizations Code (“TBOC”) contain provisions, which are summarized in the following paragraphs, that are intended to enhance the likelihood of continuity and stability in the composition of our board of directors. These provisions are intended to avoid costly takeover battles, reduce our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize shareholder value in connection with any unsolicited offer to acquire us. However, these provisions may have an anti-takeover effect and may delay, deter or prevent a merger or acquisition of our Company by means of a tender offer, a proxy contest or other takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the prevailing market price for the shares of common stock held by shareholders.
Exclusive Forum
Our amended and restated bylaws provide that the state or federal courts located in Harris County, Texas will be the exclusive forum for: (i) any actual or purported derivative action or proceeding brought on our behalf; (ii) any action asserting a claim of breach of fiduciary duty by any of our current or former directors or officers; (iii) any action asserting a claim against us or our current or former directors or officers arising pursuant to the Texas Business Organizations Code, or the TBOC, our certificate of formation, or our amended and restated bylaws; or (iv) any action asserting a
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claim against us or our current or former officers or directors that is governed by the internal affairs doctrine, in each case subject to said courts having personal jurisdiction over the indispensable parties named as defendants therein. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock will be deemed to have notice of and to have consented to this provision of our bylaws. This provision does not apply to claims brought under the Securities Act or the Exchange Act. The exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Capital stock
Texas law does not require shareholder approval for any issuance of authorized shares. However, the listing requirements of the Nasdaq, which apply so long as our securities are listed on the Nasdaq, require shareholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of common stock. Additional shares that may be issued in the future may be used for a variety of corporate purposes.
Our Board of Directors may generally issue shares of common stock on terms calculated to discourage, delay or prevent a change of control of the Company or the removal of our management. Moreover, our authorized but unissued shares of common stock are available for future issuances without shareholder approval and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, to facilitate acquisitions and employee benefit plans.
One of the effects of the existence of unissued and unreserved shares of common stock may be to enable our Board of Directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive our shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices.
Vacancies
Our Certificate of Formation provides that directors may be removed only for cause. In addition, our Certificate of Formation also provides that any vacancy occurring in our Board of Directors may be filled by election at an annual or special meeting of the shareholders called for that purpose or by the affirmative vote of a majority of the directors then in office (even if the remaining directors constitute less than a quorum of the Board of Directors), and any director so chosen shall hold office for the remainder of the term to which the director has been selected and until such director’s successor shall have been elected and qualified.
No cumulative voting
Under Texas law, the right to vote cumulatively does not exist unless the certificate of formation specifically authorizes cumulative voting. Our Certificate of Formation does not authorize cumulative voting. Therefore, shareholders holding a majority in voting power of the shares of our stock entitled to vote generally in the election of directors will be able to elect all our directors.
Special shareholder meetings
Our Certificate of Formation provides that special meetings of our shareholders may be called at any time by the Board of Directors, the chairman of the Board of Directors or the chief executive officer of the Company. Our Bylaws prohibit the conduct of any business at a special meeting other than as specified in the notice for such meeting. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or changes in control or management of the Company.
Requirements for advance notification of director nominations and shareholder proposals
Our Bylaws establish advance notice procedures with respect to shareholder proposals and the nomination of individuals for election as directors, other than nominations made by or at the direction of the Board of Directors or a committee of the Board of Directors. In order for any matter to be “properly brought” before a meeting, a shareholder will have to comply with advance notice requirements and provide us with certain information. Generally, to be timely, a shareholder’s notice must be received at our principal executive offices not less than 75 days nor more than 100 days
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prior to the first anniversary date of the immediately preceding annual meeting of shareholders. However, if the date of the annual meeting is advanced more than 30 days prior to the anniversary date or delayed more than 60 days after the anniversary date, then to be timely the notice must be received by the Company no later than 70 days prior to the date of the annual meeting or the close of business on the 7th day following the earlier of the date on which notice of the annual meeting was first mailed or the date on which the meeting date is announced publicly. Our Bylaws also specify requirements as to the form and content of a shareholder’s notice. Our Bylaws allow the chairman of the meeting at a meeting of the shareholders to adopt rules and regulations for the conduct of meetings which may have the effect of precluding the conduct of certain business at a meeting if the rules and regulations are not followed. These provisions may also defer, delay or discourage a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to influence or obtain control of the Company.
Shareholder action by written consent
Our shareholders agreement provides that any action required or permitted to be taken at a meeting of shareholders may be taken by written consent in lieu of a meeting of shareholders.
Amendment and restatement of bylaws
Our Bylaws provide that the Board of Directors is expressly authorized to make, alter, amend, change, add to, rescind or repeal, in whole or in part, our Bylaws without a shareholder vote in any matter not inconsistent with the laws of the State of Texas and our Certificate of Formation.
The combination of the classification of our Board of Directors and the lack of cumulative voting will make it more difficult for shareholders to replace our Board of Directors as well as for another party to obtain control of us by replacing our Board of Directors. Because our Board of Directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing shareholders or another party to effect a change in management.
These provisions may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management or the Company, such as a merger, reorganization or tender offer. These provisions are intended to enhance the likelihood of continued stability in the composition of our Board of Directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of the Company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions are also intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions may also have the effect of preventing changes in management.
Dissenters’ rights of appraisal and payment
Under the TBOC, with certain exceptions, our shareholders will have appraisal rights in connection with a merger, a sale of all or substantially all of our assets, an interest exchange or a conversion. Pursuant to the TBOC, shareholders who properly request and perfect appraisal rights in connection with such merger, sale of all or substantially all of our assets, interest exchange or conversion will have the right to receive payment of the fair value of their shares as agreed to between the shareholder and the Company or, if they are unable to reach agreement, as determined by the State District Court in Brookshire, Texas.
Shareholders’ derivative actions
Under the TBOC, any of our shareholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the shareholder bringing the action (i) is a holder of our shares at the time of the transaction to which the action relates or such shareholder became a shareholder by operation of law from a person that was a shareholder at the time of the transaction to which the action relates and (ii) fairly and adequately represents the interests of the Company in enforcing the right of the Company.
Right of first refusal
Under the shareholders agreement, our shareholders grant us a right of first refusal to purchase all or any portion of transfer stock that any shareholder may propose to transfer. These provisions are designed to reduce our vulnerability to having unfamiliar individuals hold shares of our Company’s stock, which safeguards our financial and ownership interests.
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Limitations on liability and indemnification of officers and directors
The TBOC authorizes corporations to limit or eliminate the personal liability of directors to corporations and their shareholders for monetary damages for breaches of directors’ fiduciary duties (other than breaches of the directors’ duty of loyalty to corporations or their shareholders), subject to certain exceptions. Our bylaws include a provision that limits the personal liability of directors for monetary damages for an act or omission in the director’s capacity as a director to the fullest extent permitted by Texas law. However, exculpation will not apply to any director if the director has acted in bad faith, engaged in intentional misconduct, knowingly violated the law, authorized illegal dividends or redemptions, derived an improper benefit from his or her actions as a director or engaged in an act or omission for which the liability of the director is expressly provided by an applicable statute.
The limitation of liability and indemnification provisions in our bylaws may discourage shareholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our shareholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
As of September 13, 2023, there is no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.
Business combinations
Under Title 2, Chapter 21, Subchapter M of the TBOC, we may not engage in certain “business combinations” with any “affiliated shareholder,” or any affiliate or associate of the affiliated shareholder for a three-year period following the time that the shareholder became an affiliated shareholder, unless:
• prior to such time, our board of directors approved either the business combination of the transaction which resulted in the shareholder becoming an affiliated shareholder; or
• not less than six months after the affiliated shareholders’ share acquisition date, the business combination is approved by the affirmative vote at a meeting, and not by written consent, of holders of at least 2/3 of our outstanding voting shares that are not owned by the affiliated shareholder or an affiliate or associate of the affiliated shareholder.
Generally, a “business combination” includes a merger, asset or stock sale or other similar transaction. Subject to certain exceptions, an “affiliated shareholder” is a person who beneficially owns (as determined pursuant to Title 2, Chapter 21, Subchapter M of the TBOC), or within the previous three years beneficially owned, 20% or more of our outstanding voting shares. For purposes of this section only, “voting share” has the meaning given to it in Title 2, Chapter 21, Subchapter M of the TBOC.
Under certain circumstances, this provision will make it more difficult for a person who would be an “affiliated shareholder” to effect various business combinations with our Company for a three-year period. This provision may encourage companies interested in acquiring our Company to negotiate in advance with our board of directors because the shareholder approval requirement would be avoided if our Board of Directors approves either the business combination or the transaction that results in such shareholder becoming an affiliated shareholder. These provisions also may have the effect of preventing changes in our board of directors and may make it more difficult to accomplish transactions which shareholders may otherwise deem to be in their best interests.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be VStock Transfer, LLC., 18 Lafayette Place, Woodmere, New York 11598. Their phone number is (212) 828-8436.
Listing
We will apply to have our common stock listed on the Nasdaq Capital Market under the symbol “INHD” which listing is a condition to this offering.
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SHARES ELIGIBLE FOR FUTURE SALE
There is not currently an established U.S. trading market for our common stock. We cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock, in the public market after this offering, could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.
Upon completion of the sale of 2,500,000 shares of common stock pursuant to this offering, we will have 20,751,726 shares of common stock issued and outstanding. In the event the underwriters exercise the overallotment option in full, we will have 21,126,726 shares of common stock issued and outstanding. The common stock sold in this offering will be freely tradable without restriction or further registration or qualification under the Securities Act.
All previously issued shares of common stock that were not offered and sold in this offering, are or will be upon issuance, “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if such public resale is registered under the Securities Act or if the resale qualifies for an exemption from registration under Rule 144 under the Securities Act, which are summarized below.
In general, a person who has beneficially owned restricted shares of our common stock for at least six months in the event we have been a reporting company under the Exchange Act for at least ninety (90) days before the sale, would be entitled to sell such securities, provided that such person is not deemed to be an affiliate of ours at the time of sale or to have been an affiliate of ours at any time during the ninety (90) days preceding the sale. A person who is an affiliate of ours at such time would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of shares that does not exceed the greater of the following:
• 1% of the number of shares of our common stock then outstanding; or
• 1% of the average weekly trading volume of our common stock during the four calendar weeks preceding the filing by such person of a notice on Form 144 with respect to the sale;
• provided that, in each case, we are subject to the periodic reporting requirements of the Exchange Act for at least 90 days before the sale. Rule 144 trades must also comply with the manner of sale, notice and other provisions of Rule 144, to the extent applicable.
Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers or directors who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares.
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Subject to the terms and conditions of the underwriting agreement entered into by and between the Company and AC Sunshine Securities LLC, acting as the representative of the underwriters (the “Representative”) named below, the underwriters have severally agreed to purchase from us on a firm commitment basis the following respective number of common stock at the public price less the underwriting discounts set forth on the cover page of this prospectus:
Name |
Number of |
|
AC Sunshine Securities LLC |
2,500,000 |
|
Total |
2,500,000 |
The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the common stock offered by this prospectus if any such shares are taken.
We agree to indemnify the underwriters, its members, managers, officers, employees, agents, affiliates and controlling persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make in respect of those liabilities.
We plan to have our common stock approved for listing on the Nasdaq Capital Market under the symbol “INHD.”
Over-Allotment Option
If the underwriters sell more common stock than the total number set forth in the table above, we have granted to the underwriters a 45-day option to purchase up to an additional 15% of the total number of common stock to be offered in this offering, from us at the initial public offering price less the underwriting discounts and commissions. The option may be exercised in whole or in part, and may be exercised more than once, during the 45-day option period. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each underwriter must purchase a number of additional common stock approximately proportionate to that underwriter’s initial purchase commitment. Any common stock issued or sold under the option will be issued and sold on the same terms and conditions as the other common stock that are the subject of this offering.
In connection with the offering, the underwriters may purchase and sell common stock in the open market. Purchases and sales in the open market may include short sales, purchases to cover short positions, which may include purchases pursuant to the over-allotment option, and stabilizing purchases.
Purchases to cover short positions and stabilizing purchases, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the common stock. They may also cause the price of the common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions in the over-the-counter market or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.
Discounts, Commissions, and Expenses
We have agreed to pay the underwriters a discount equal to 7.0% of the aggregate gross proceeds raised in this offering.
The underwriters have advised us that they propose to offer the common stock to the public at the public offering price set forth on the cover page of this prospectus. After this offering, the public offering price and concession to dealers may be reduced by the Representative. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The securities are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part.
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The following table shows the price per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to us.
Per Share |
Total Without |
Total With |
|||||
Initial public offering price |
$ |
4.00 |
10,000,000 |
11,500,000 |
|||
Underwriting commissions and discounts (7.0%)(1) |
$ |
0.28 |
700,000 |
805,000 |
|||
Proceeds, before expenses, to us |
$ |
3.72 |
9,300,000 |
10,695,000 |
____________
(1) Does not include out-of-pocket expenses disclosed below.
We have agreed to reimburse the Underwriter, promptly when invoiced, for all of its reasonable, out-of-pocket expenses (including, but not limited to, travel, due diligence expenses, reasonable fees and expenses of its legal counsel, roadshow and background check on the Company’s principals) in connection with the performance of its services hereunder not to exceed an aggregate of $250,000, regardless of whether the Offering occurs, provided that any expense over $5,000 shall require prior written or email approval of the Company.
At the closing of the Offering, the Company agrees to reimburse the Underwriter one percent (1%) of the actual amount of the Offering as the nonaccountable expense of the Offering.
Underwriter’s Warrants
In addition, we have agreed to grant the Underwriter warrants to purchase an amount equal to seven percent (7.0%) of the common stock sold in the offering, which will shall be non-callable and non-cancelable, are due and exercisable upon the closing of the offering for nominal consideration, have a five (5) year term starting from the date of the commencement of sales of the offering, and a cashless exercise feature. Such warrants are exercisable at a price of 120% of the public offering price of the common stock offered pursuant to this offering. The Underwriter’s Warrants and the underlying common stock will be deemed compensation by FINRA, and therefore will be subject to FINRA Rule 5110(e)(1). In accordance with FINRA Rule 5110(e)(1), and except as otherwise permitted by FINRA rules, neither the Underwriter’s Warrants nor any of our common stock issued upon exercise of the Underwriter’s Warrants may be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of such securities by any person, for a period of 180 days beginning on the date of commencement of sales of this offering, except that (i) they may be transferred, in whole or in part, to any member participating in the offering and its officers or partners, its registered persons or affiliates, if all transferred securities remain subject to the lock-up restriction for the remainder of the 180-day lock-up period pursuant to FINRA Rule 5110(e)(2)(B)(i), (ii) they may be exercised or converted, in whole or in part, if all securities received remain subject to the lock-up restriction for the for the remainder of the 180-day lock-up period, (iii) they may be transferred back to the issuer in a transaction exempt from registration with the SEC, or other exceptions as provided under FIRNA Rule 5110(e)(2). Although the Underwriter’s Warrants and the underlying common stock will be registered in the registration statement of which this prospectus forms a part, we have also agreed that the Underwriter’s Warrants will provide for registration rights in certain cases.
The Underwriter’s Warrants will contain provisions for one demand registration right and unlimited “piggyback” registration rights of the sale of the underlying shares at the Company’s expense. These registration rights apply to all of the securities directly and indirectly issuable upon exercise of the Underwriter’s Warrants. The durations of the demand registration right and the “piggyback” registration right provided will not be more than five and seven years, respectively, from the effective date of the offering in compliance with FINRA Rule 5110(g)(8)(C) & (D).
The exercise price and number of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock split, stock dividend, extraordinary cash dividend, or our recapitalization, reorganization, merger, or consolidation. As a result, the warrant exercise price and/or underlying shares may also be adjusted for issuances of common stock at a price below the warrant exercise price. Additionally, the Underwriter’s Warrants shall contain such other terms and conditions no less favorable to AC Sunshine Securities LLC than the terms and conditions generally available to an unaffiliated third party under the same or similar circumstances.
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Right of First Refusal
The Company and the Representative agree that the Representative shall have an irrevocable right of first refusal (the “Right of First Refusal”) for a period of twelve (12) months after the date the Offering is completed, to act as sole and exclusive investment banker, sole and exclusive book-runner, sole and exclusive financial advisor, sole and exclusive underwriter and/or sole and exclusive placement agent, at the Representative’s sole and exclusive discretion, if the Company or any of its subsidiaries: (i) decides to finance or refinance any indebtedness; or (ii) decides to raise funds by means of a public offering (including at-the-market facility) or a private placement or any other capital raising financing of equity, equity-linked or debt securities. If the Representative decides to accept such engagement, the agreement governing such engagement will contain, among other things, provisions for fees customary to the Representative for transactions of similar size and nature, and the provisions of this Agreement, including indemnification, which are appropriate to such transaction. Notwithstanding the foregoing, the decision to accept the Company’s engagement under this Section 3(q) shall be made by the Representative, by a written notice to the Company, within fifteen (15) business days of the receipt of the Company’s notification of its financing needs. The Representative shall have the sole right to determine whether or not any other broker dealer shall have the right to participate in any such transaction and the economic terms of any such participation.
Observer’s Right
For a period of one year from the effective date of this Registration Statement, upon notice from the Representative to the Company, the Representative shall have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors of the Company; provided that such representative shall sign a Regulation FD compliant confidentiality agreement which is reasonably acceptable to the Representative and its counsel in connection with such representative’s attendance at meetings of the Board of Directors; and provided further that upon written notice to the Representative, the Company may exclude the representative from meetings where, in the written opinion of counsel for the Company, the representative’s presence would destroy attorney-client privilege. The Company agrees to give the Representative with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the other directors, and to reimburse the representative of the Representative for his reasonable out-of-pocket expenses incurred in connection with its attendance at the meeting, including but not limited to, food, lodging, and transportation. Upon mutual agreement of the Company and Representative, the representative may be granted compensation in an amount less than the compensation received by any member of the Company’s Board of Directors.
Electronic Offer, Sale and Distribution of Common Stock
A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of common stock to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the Representative to underwriters and selling group members that may make internet distributions on the same basis as other allocations.
Lock-up Agreements
We have agreed that we will not offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, make any short sale, lend, or otherwise transfer or dispose of (including entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequence of ownership interests), directly or indirectly, any of our common stock or any securities that are convertible into or exercisable or exchangeable for or represent the right to receive our common stock, without the prior written consent of the Representative for a period of 180 days from the consummation of this offering, except the grant of equity-based incentives under an equity-based incentive plan, filing registration statement on Form S-8, issuing securities in connection with an acquisition of assets or a business, and filing a registration statement in connection with an acquisition.
Each of our directors, officers and certain holders of our common stock have agreed to be subject to the foregoing restrictions for a period of 180 days from the effective date of the registration statement.
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Stabilization
Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for our common stock will be determined by negotiations among us and the Representative. Among the factors to be considered in determining the initial public offering price are the information set forth in this prospectus and otherwise available to the underwriters, our results of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, the assessment of our management, currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to our company, and other factors deemed relevant by the underwriters and us. Neither we nor the underwriters can assure investors that an active trading market will develop for common stock, or that our common stock will trade in the public market at or above the initial public offering price.
The initial public offering price of $4.00 set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. We plan to have our common stock approved for listing on the Nasdaq Capital Market under the symbol “INHD.”
In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Exchange Act.
• Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
• Over-allotment involves sales by the Underwriter of the common stock in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.
• Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of our common stock available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
• Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.
• In passive market making, market makers in the shares who are the underwriters or prospective underwriter may, subject to limitations, make bids for or purchases of our common stock until the time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of common stock. As a result, the price of common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq or otherwise, and, if commenced, may be discontinued at any time.
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A prospectus in electronic format may be made available by e-mail or on the websites or through online services maintained by one or more of the underwriters or their affiliates. In those cases, prospective investors may view offering terms online and may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of common stock for sale to online brokerage account holders. Any such allocation for online distributions will be made by the underwriters on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters’ websites and any information contained in any other website maintained by any of the underwriters is not part of this prospectus, has not been approved and/or endorsed by us or the underwriters and should not be relied upon by investors.
Relationships
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses. In addition, in the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their clients and may at any time hold long and short positions in such securities and instruments. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Selling Restrictions
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Notice to Investors
Notice to Prospective Investors in the European Economic Area
In relation to each member state of the European Economic Area, an offer of common stock described in this prospectus may not be made to the public in that member state unless the prospectus has been approved by the competent authority in such member state or, where appropriate, approved in another member state and notified to the competent authority in that member state, all in accordance with the Prospectus Regulation, except that an offer to the public in that member state of any common stock may be made at any time under the following exemptions under the Prospectus Regulation:
• to any legal entity which is a qualified investor as defined in the Prospectus Regulation;
• to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Regulation), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by us for any such offer; or
• in any other circumstances falling within Article 1(4) of the Prospectus Regulation,
provided that no such offer of common stock shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.
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For purposes of this provision, the expression an “offer of securities to the public” in any member state means the communication in any form and by any means of sufficient information on the terms of the offer and the common stock to be offered so as to enable an investor to decide to purchase or subscribe for the common stock and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
The sellers of the common stock have not authorized and do not authorize the making of any offer of common stock through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the common stock as contemplated in this prospectus. Accordingly, no purchaser of the common stock, other than the underwriters, is authorized to make any further offer of the common stock on behalf of the sellers or the underwriters.
Notice to Prospective Investors in the United Kingdom
This prospectus is only being distributed to, and is only directed at, persons in the United Kingdom that are qualified investors as defined in the Prospectus Regulation that are also (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or Order, or (ii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (each such person being referred to as a “relevant person”). This prospectus and its contents are confidential and should not be distributed, published or reproduced (in whole or in part) or disclosed by recipients to any other persons in the United Kingdom. Any person in the United Kingdom that is not a relevant person should not act or rely on this document or any of its contents.
Notice to Prospective Investors in France
Neither this prospectus nor any other offering material relating to the common stock described in this prospectus has been submitted to the clearance procedures of the Autorité des Marchés Financiers or of the competent authority of another member state of the European Economic Area and notified to the Autorité des Marchés Financiers. The common stock have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France. Neither this prospectus nor any other offering material relating to the common stock has been or will be:
• released, issued, distributed or caused to be released, issued or distributed to the public in France; or
• used in connection with any offer for subscription or sale of the common stock to the public in France.
Such offers, sales and distributions will be made in France only:
• to qualified investors (investisseurs qualifiés) and/or to a restricted circle of investors (cercle restreint d’investisseurs), in each case investing for their own account, all as defined in, and in accordance with articles L.411-2, D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the French Code monétaire et financier;
• to investment services providers authorized to engage in portfolio management on behalf of third parties; or
• in a transaction that, in accordance with article L.411-2-II-1° -or-2° -or 3° of the French Code monétaire et financier and article 211-2 of the General Regulations (Règlement Général) of the Autorité des Marchés Financiers, does not constitute a public offer (appel public à l’épargne).
The common stock may be resold directly or indirectly, only in compliance with articles L.411-1, L.411-2, L.412-1 and L.621-8 through L.621-8-3 of the French Code monétaire et financier.
Notice to Prospective Investors in Switzerland
This document, as well as any other offering or marketing material relating to the common stock which are the subject of the offering contemplated by this prospectus, neither constitutes a prospectus pursuant to Article 652a or Article 1156 of the Swiss Code of Obligations nor a simplified prospectus as such term is understood pursuant to article 5 of the Swiss Federal Act on Collective Investment Schemes. Neither the common stock nor the shares underlying the common stock will be listed on the SIX Swiss Exchange and, therefore, the documents relating to the
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common stock, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange.
The common stock are being offered in Switzerland by way of a private placement, i.e. to a small number of selected investors only, without any public offer and only to investors who do not purchase the common stock with the intention to distribute them to the public. The investors will be individually approached from time to time. This document, as well as any other offering or marketing material relating to the common stock, is confidential and it is exclusively for the use of the individually addressed investors in connection with the offer of the common stock in Switzerland and it does not constitute an offer to any other person. This document may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without our express consent. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in or from Switzerland.
Notice to Prospective Investors in Australia
This prospectus is not a formal disclosure document and has not been, nor will be, lodged with the Australian Securities and Investments Commission. It does not purport to contain all information that an investor or their professional advisers would expect to find in a prospectus or other disclosure document (as defined in the Corporations Act 2001 (Australia)) for the purposes of Part 6D.2 of the Corporations Act 2001 (Australia) or in a product disclosure statement for the purposes of Part 7.9 of the Corporations Act 2001 (Australia), in either case, in relation to the common stock.
The common stock are not being offered in Australia to “retail clients” as defined in sections 761G and 761GA of the Corporations Act 2001 (Australia). This offering is being made in Australia solely to “wholesale clients” for the purposes of section 761G of the Corporations Act 2001 (Australia) and, as such, no prospectus, product disclosure statement or other disclosure document in relation to the securities has been, or will be, prepared.
This prospectus does not constitute an offer in Australia other than to wholesale clients. By submitting an application for the common stock, you represent and warrant to us that you are a wholesale client for the purposes of section 761G of the Corporations Act 2001 (Australia). If any recipient of this prospectus is not a wholesale client, no offer of, or invitation to apply for, the common stock shall be deemed to be made to such recipient and no applications for the common stock will be accepted from such recipient. Any offer to a recipient in Australia, and any agreement arising from acceptance of such offer, is personal and may only be accepted by the recipient. In addition, by applying for the common stock you undertake to us that, for a period of 12 months from the date of issue of the common stock, you will not transfer any interest in the common stock to any person in Australia other than to a wholesale client.
Notice to Prospective Investors in Hong Kong
The common stock may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong) and no advertisement, invitation or document relating to the common stock may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to common stock which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.
Notice to Prospective Investors in Japan
The common stock offered in this prospectus have not been and will not be registered under the Financial Instruments and Exchange Law of Japan. The common stock have not been offered or sold and will not be offered or sold, directly or indirectly, in Japan or to or for the account of any resident of Japan (including any corporation or other entity organized under the laws of Japan), except (i) pursuant to an exemption from the registration requirements of the Financial Instruments and Exchange Law and (ii) in compliance with any other applicable requirements of Japanese law.
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Notice to Prospective Investors in Singapore
This prospectus (and any other materials relating to the common stock) has not been and will not be lodged or registered as a prospectus with the Monetary Authority of Singapore pursuant to the Securities and Futures Act 2001 of Singapore (the “SFA”). Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the common stock may not be issued, circulated or distributed, nor may the common stock be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than pursuant to, and in accordance with, the conditions of an exemption invoked under any provision of Subdivision (4) of Division 1 of Part 13 of the SFA.
Notice to Prospective Investors in Canada
The common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the common stock must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Notice to Prospective Investors in the Cayman Islands
This prospectus does not constitute a public offer of the common stock, whether by way of sale or subscription, in the Cayman Islands. common stock have not been offered or sold, and will not be offered or sold, directly or indirectly, in the Cayman Islands.
Notice to Prospective Investors in Mainland China
This prospectus has not been and will not be circulated or distributed in mainland China, and our common stock may not be offered or sold, and will not be offered or sold to any person for re-offering or resale, directly or indirectly, to any residents of mainland China except pursuant to applicable laws and regulations of mainland China.
Notice to Prospective Investors in Qatar
In the State of Qatar, the offer contained herein is made on an exclusive basis to the specifically intended recipient thereof, upon that person’s request and initiative, for personal use only and shall in no way be construed as a general offer for the sale of securities to the public or an attempt to do business as a bank, an investment company or otherwise in the State of Qatar. This prospectus and the underlying securities have not been approved or licensed by the Qatar Central Bank or the Qatar Financial Centre Regulatory Authority or any other regulator in the State of Qatar. The information contained in this prospectus shall only be shared with any third parties in Qatar on a need to know basis for the purpose of evaluating the contained offer. Any distribution of this prospectus by the recipient to third parties in Qatar beyond the terms hereof is not permitted and shall be at the liability of such recipient.
Notice to Prospective Investors in Kuwait
Unless all necessary approvals from the Kuwait Ministry of Commerce and Industry required by Law No. 31/1990 “Regulating the Negotiation of Securities and Establishment of Investment Funds,” its Executive Regulations and the various Ministerial Orders issued pursuant thereto or in connection therewith, have been given in relation to the
112
marketing and sale of the common stock, these may not be marketed, offered for sale, nor sold in the State of Kuwait. Neither this prospectus (including any related document), nor any of the information contained therein is intended to lead to the conclusion of any contract of whatsoever nature within Kuwait. Investors in Kuwait who approach us or any of the underwriters to obtain copies of this prospectus are required by us and the underwriters to keep such prospectus confidential and not to make copies thereof nor distribute the same to any other person in Kuwait and are also required to observe the restrictions provided for in all jurisdictions with respect to offering, marketing and the sale of the common stock.
Notice to Prospective Investors in the United Arab Emirates
The common stock have not been offered or sold, and will not be offered or sold, directly or indirectly, in the United Arab Emirates, except: (1) in compliance with all applicable laws and regulations of the United Arab Emirates; and (2) through persons or corporate entities authorized and licensed to provide investment advice and/or engage in brokerage activity and/or trade in respect of foreign securities in the United Arab Emirates. The information contained in this prospectus does not constitute a public offer of securities in the United Arab Emirates in accordance with the Commercial Companies Law (Federal Law No. 8 of 1984 (as amended)) or otherwise and is not intended to be a public offer and is addressed only to persons who are sophisticated investors.
Notice to Investors in the Dubai International Financial Centre
This document relates to an Exempt Offer, as defined in the Offered Securities Rules module of the DFSA Rulebook, or the OSR, in accordance with the Offered Securities Rules of the Dubai Financial Services Authority. This document is intended for distribution only to Persons, as defined in the OSR, of a type specified in those rules. It must not be delivered to, or relied on by, any other Person. The Dubai Financial Services Authority has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The Dubai Financial Services Authority has not approved this document nor taken steps to verify the information set out in it, and has no responsibility for it. The common stock to which this document relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the common stock offered should conduct their own due diligence on the common stock. If you do not understand the contents of this document you should consult an authorized financial adviser.
Notice to Prospective Investors in Saudi Arabia
This prospectus may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Offers of Securities Regulations issued by the Capital Market Authority. The Capital Market Authority does not make any representation as to the accuracy or completeness of this prospectus, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this prospectus. Prospective purchasers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities. If you do not understand the contents of this prospectus you should consult an authorized financial adviser.
113
PLAN OF DISTRIBUTION FOR STOCK REGISTERED FOR SELLING STOCKHOLDERS
We are registering 1,386,990 shares of common stock for Selling Stockholders. We are required to pay all fees and expenses incident to the registration of the shares of our securities to be offered and sold pursuant to this prospectus, including the shares of the Selling Securityholders.
The shares of common stock beneficially owned by the Selling Securityholders covered by this prospectus may be offered and sold from time to time by the Selling Securityholders, but only after our common stock has begun trading on the Nasdaq Capital Market. No assurance can be given that we will meet those requirements. If our common stock is not approved for listing on Nasdaq, we will not consummate this offering.
The term “Selling Securityholders” includes donees, pledgees, transferees or other successors in interest selling securities received after the date of this prospectus from a Selling Securityholder as a gift, pledge, partnership distribution or other transfer. The Selling Securityholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. Such sales may be made on one or more exchanges or in the over-the-counter market or otherwise, at prices and under terms then prevailing or at prices related to the then-current market price or in negotiated transactions. The Selling Securityholders may dispose of their securities by one or more of, or a combination of, the following methods once our common stock has commenced trading on the Nasdaq Capital Market.:
• distributions to members, partners, stockholders or other equity holders of the Selling Security holders;
• purchases by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this prospectus;
• ordinary brokerage transactions and transactions in which the broker solicits purchasers;
• block trades in which the broker-dealer so engaged will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;
• an over-the-counter distribution in accordance with the rules of the Nasdaq;
• through trading plans entered into by a Selling Securityholder pursuant to Rule 10b5-1 under the Exchange Act, that are in place at the time of an offering pursuant to this prospectus and any applicable prospectus supplement hereto that provide for periodic sales of their securities on the basis of parameters described in such trading plans;
• to or through underwriters or broker-dealers;
• in “at the market” offerings, as defined in Rule 415 under the Securities Act, at negotiated prices, at prices prevailing at the time of sale or at prices related to such prevailing market prices, including sales made directly on a national securities exchange or sales made through a market maker other than on an exchange or other similar offerings through sales agents;
• in privately negotiated transactions;
• in options transactions;
• through a combination of any of the above methods of sale; or
• any other method permitted pursuant to applicable law.
In addition, any securities that qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. A Selling Securityholder that is an entity may elect to make an in-kind distribution of securities to its members, partners, stockholders or other equity holders pursuant to the registration statement of which this prospectus forms a part by delivering a prospectus. To the extent that such members, partners, stockholders or other equity holders are not affiliates of ours, such members, partners, stockholders or other equity holders would thereby receive freely tradable securities pursuant to a distribution pursuant to the registration statement of which this prospectus forms a part.
114
To the extent required, this prospectus may be amended or supplemented from time to time to describe a specific plan of distribution. In connection with distributions of the securities or otherwise, the Selling Securityholders may enter into hedging transactions with broker-dealers or other financial institutions. In connection with such transactions, broker-dealers or other financial institutions may engage in short sales of securities in the course of hedging the positions they assume with Selling Securityholders. The Selling Securityholders may also sell securities short and redeliver the securities to close out such short positions. The Selling Securityholders may also enter into option or other transactions with broker-dealers or other financial institutions that require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction). The Selling Securityholders may also pledge securities to a broker-dealer or other financial institution, and, upon a default, such broker-dealer or other financial institution, may effect sales of the pledged securities pursuant to this prospectus (as supplemented or amended to reflect such transaction).
A Selling Securityholder may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to third parties in privately negotiated transactions. If the applicable prospectus supplement indicates, in connection with those derivatives, the third parties may sell securities covered by this prospectus and the applicable prospectus supplement, including in short sale transactions. If so, the third party may use securities pledged by any Selling Securityholder or borrowed from any Selling Securityholder or others to settle those sales or to close out any related open borrowings of stock, and may use securities received from any Selling Securityholder in settlement of those derivatives to close out any related open borrowings of stock. The third party in such sale transactions will be an underwriter and will be identified in the applicable prospectus supplement (or a post-effective amendment). In addition, any Selling Securityholder may otherwise loan or pledge securities to a financial institution or other third party that in turn may sell the securities short using this prospectus. Such financial institution or other third party may transfer its economic short position to investors in our securities or in connection with a concurrent offering of other securities.
In effecting sales, broker-dealers or agents engaged by the Selling Securityholders may arrange for other broker-dealers to participate. Broker-dealers or agents may receive commissions, discounts or concessions from the Selling Securityholders in amounts to be negotiated immediately prior to the sale.
In offering the securities covered by this prospectus, the Selling Securityholders and any broker-dealers who execute sales for the Selling Securityholders may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. Any profits realized by the Selling Securityholders and the compensation of any broker-dealer may be deemed to be underwriting discounts and commissions.
In order to comply with the securities laws of certain states, if applicable, the securities must be sold in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states the securities may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
We have advised the Selling Securityholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of securities in the market and to the activities of the Selling Securityholders and their affiliates. In addition, we will make copies of this prospectus available to the Selling Securityholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The Selling Securityholders may indemnify any broker-dealer that participates in transactions involving the sale of the securities against certain liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of securities is made, if required, a prospectus supplement will be distributed that will set forth the number of securities being offered and the terms of the offering, including the name of any underwriter, dealer or agent, the purchase price paid by any underwriter, any discount, commission and other item constituting compensation, any discount, commission or concession allowed or reallowed or paid to any dealer, and the proposed selling price to the public.
115
TAAD LLP, an independent certified public accounting firm, audited our consolidated financial statements for the years ended September 30, 2022 and 2021. We have included our consolidated financial statements in this prospectus and elsewhere in the registration statement in reliance on the reports of TAAD LLP which contains an explanatory paragraph related to substantial doubt about the ability of INNO HOLDINGS INC. to continue as a going concern as described in Note 2 to the consolidated financial statements, given on their authority as experts in accounting and auditing.
Certain legal matters with respect to the validity of the securities being offered by this prospectus will be passed upon by Winston & Strawn LLP, Houston, Texas. Ortoli Rosenstadt LLP, New York, New York is acting as counsel for the Representative with respect to the offering.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document is not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. You may obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, DC 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
We are subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, are required to file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above. We also maintain a website at www.innometalstuds.com. You may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.
116
Page |
||
Financial Statements as of and for the Nine Months Ended June 30, 2023 and 2022 |
||
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2023 and September 30, 2022 |
F-2 |
|
F-4 |
||
F-5 |
||
F-6 |
||
F-7 |
Financial Statements as of and for the Fiscal Years Ended September 30, 2022 and 2021 |
||
Report of Independent Registered Public Accounting Firm PCAOB ID# (05854) |
F-21 |
|
Consolidated Balance Sheets as of September 30, 2022 and 2021 |
F-22 |
|
Consolidated Statements of Operations for the years ended September 30, 2022 and 2021 |
F-23 |
|
F-24 |
||
Consolidated Statements of Cash Flows for the years ended September 30, 2022 and 2021 |
F-25 |
|
F-26 |
F-1
INNO HOLDINGS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
As of June 30, 2023 and September 30, 2022
June 30, |
September 30, |
|||||
ASSETS |
|
|
||||
Current assets |
|
|
||||
Cash and cash equivalent |
$ |
113,357 |
$ |
50,628 |
||
Accounts receivable, net |
|
95,730 |
|
1,807,290 |
||
Accounts receivable – related party |
|
100,000 |
|
100,000 |
||
Inventories |
|
966,094 |
|
329,904 |
||
Deferred offering costs |
|
399,305 |
|
— |
||
Prepayments and other current assets |
|
161,761 |
|
176,591 |
||
Total current assets |
|
1,836,247 |
|
2,464,413 |
||
|
|
|||||
Non-current assets |
|
|
||||
ROU assets |
|
368,735 |
|
453,883 |
||
Property and equipment, net |
|
870,475 |
|
694,122 |
||
Other non-current assets |
|
39,699 |
|
39,699 |
||
Total non-current assets |
|
1,278,909 |
|
1,187,704 |
||
Total assets |
$ |
3,115,156 |
$ |
3,652,117 |
||
|
|
|||||
LIABILITIES AND EQUITY |
|
|
||||
Current liabilities |
|
|
||||
Accounts payable |
|
716,747 |
|
471,778 |
||
Accounts payable – related party |
|
535,595 |
|
485,595 |
||
Credit cards payable |
|
6,345 |
|
— |
||
Unearned revenue |
|
861,283 |
|
201,730 |
||
Other payables and accrued liabilities |
|
123,275 |
|
46,043 |
||
Other payables – related party |
|
653,372 |
|
12,233 |
||
Short-term loan payable |
|
560,000 |
|
710,000 |
||
Lease liability – current |
|
120,071 |
|
110,993 |
||
Long-term notes payable – current portion |
|
48,811 |
|
47,259 |
||
Total current liabilities |
|
3,625,499 |
|
2,085,631 |
||
|
|
|||||
Non-current liabilities |
|
|
||||
Notes payable |
|
123,414 |
|
160,009 |
||
Lease liability – non-current |
|
258,353 |
|
349,402 |
||
Other non-current liabilities |
|
— |
|
2,457 |
||
Total non-current liabilities |
|
381,767 |
|
511,868 |
||
Total liabilities |
|
4,007,266 |
|
2,597,499 |
||
|
|
|||||
Commitments and contingency |
|
— |
|
— |
F-2
INNO HOLDINGS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets — (Continued)
As of June 30, 2023 and September 30, 2022
June 30, |
September 30, |
|||||||
Stockholders’ Equity (Deficit) |
|
|
|
|
||||
Common stock, no par value; 100,000,000 shares authorized;18,251,726 and 17,970,000 shares issued and outstanding at June 30, 2023 and September 30, 2022 |
|
— |
|
|
— |
|
||
Additional paid in capital |
|
2,830,000 |
|
|
1,805,000 |
|
||
Accumulated deficit |
|
(3,493,204 |
) |
|
(629,037 |
) |
||
Non-controlling interest |
|
(228,906 |
) |
|
(121,345 |
) |
||
Total equity |
|
(892,110 |
) |
|
1,054,618 |
|
||
Total liabilities and equity |
$ |
3,115,156 |
|
$ |
3,652,117 |
|
____________
* On November 30, 2022, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Common Stock of the Company. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. All references to number of shares, and to per share information in the consolidated financial statements have been retroactively adjusted.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-3
INNO HOLDINGS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
For the Nine Months Ended June 30, 2023 and 2022
For the Nine Months Ended |
||||||||
2023 |
2022 |
|||||||
REVENUES |
$ |
501,672 |
|
$ |
3,281,839 |
|
||
REVENUES – related party |
|
— |
|
|
250,000 |
|
||
TOTAL REVENUES |
|
501,672 |
|
|
3,531,839 |
|
||
|
|
|
|
|||||
COSTS AND EXPENSES: |
|
|
|
|
||||
Costs of materials and labor |
|
472,710 |
|
|
2,254,643 |
|
||
Selling, general and administrative expenses (exclusive of depreciation shown separately below) |
|
1,628,307 |
|
|
1,692,131 |
|
||
Depreciation |
|
50,547 |
|
|
19,698 |
|
||
Bad debt expense |
|
1,267,960 |
|
|
— |
|
||
Total costs and expenses |
|
3,419,524 |
|
|
3,966,472 |
|
||
LOSS FROM OPERATIONS |
|
(2,917,852 |
) |
|
(434,633 |
) |
||
|
|
|
|
|||||
OTHER INCOME (EXPENSE) |
|
|
|
|
||||
Interest expenses |
|
(51,446 |
) |
|
(7,473 |
) |
||
Stock compensation expense |
|
— |
|
|
(100,000 |
) |
||
Other non-operating income (expense) |
|
(2,430 |
) |
|
(14,691 |
) |
||
Total other income (expenses), net |
|
(53,876 |
) |
|
(122,164 |
) |
||
|
|
|
|
|||||
LOSS BEFORE INCOME TAXES |
|
(2,971,728 |
) |
|
(556,797 |
) |
||
|
|
|
|
|||||
PROVISION FOR INCOME TAXES |
|
— |
|
|
12,887 |
|
||
NET LOSS |
|
(2,971,728 |
) |
|
(569,684 |
) |
||
Non-controlling interest |
|
(107,561 |
) |
|
(61,092 |
) |
||
NET LOSS ATTRIBUTABLE TO INNO HOLDINGS INC. |
$ |
(2,864,167 |
) |
$ |
(508,592 |
) |
||
|
|
|
|
|||||
WEIGHTED AVERAGE NUMBER OF COMMON STOCK |
|
|
|
|
||||
Basic |
|
18,122,543 |
|
|
17,049,121 |
|
||
Diluted |
|
18,122,543 |
|
|
17,049,121 |
|
||
|
|
|
|
|||||
LOSSES PER SHARE |
|
|
|
|
||||
Basic |
$ |
(0.16 |
) |
$ |
(0.03 |
) |
||
Diluted |
$ |
(0.16 |
) |
$ |
(0.03 |
) |
____________
* On November 30, 2022, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Common Stock of the Company. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. The computation of basic and diluted Losses Per Share were retroactively adjusted for all periods presented.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-4
INNO HOLDINGS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Months Ended June 30, 2023 and 2022
|
Additional |
Retained |
Non- |
Total |
||||||||||||||||
Shares |
Amount |
|||||||||||||||||||
Balance, September 30, 2021 |
16,170,000 |
$ |
— |
$ |
5,000 |
$ |
379,625 |
|
$ |
— |
|
$ |
384,625 |
|
||||||
Net loss |
|
|
|
(508,592 |
) |
|
(61,092 |
) |
|
(569,684 |
) |
|||||||||
Shares issued for cash |
1,500,000 |
|
— |
|
1,500,000 |
|
— |
|
|
— |
|
|
1,500,000 |
|
||||||
Shares issued for service |
100,000 |
|
— |
|
100,000 |
|
— |
|
|
— |
|
|
100,000 |
|
||||||
Balance, June 30, 2022, unaudited |
17,770,000 |
|
— |
|
1,605,000 |
|
(128,967 |
) |
|
(61,092 |
) |
|
1,414,941 |
|
||||||
|
|
|
|
|
|
|
|
|||||||||||||
Balance, September 30, 2022 |
17,970,000 |
|
— |
$ |
1,805,000 |
$ |
(629,037 |
) |
$ |
(121,345 |
) |
$ |
1,054,618 |
|
||||||
Net loss |
|
|
|
(2,864,167 |
) |
|
(107,561 |
) |
|
(2,971,728 |
) |
|||||||||
Shares issued for cash |
248,832 |
|
— |
|
900,000 |
|
— |
|
|
— |
|
|
900,000 |
|
||||||
Shares issued for service |
32,894 |
|
— |
|
125,000 |
|
— |
|
|
— |
|
|
125,000 |
|
||||||
Balance, June 30, 2023, unaudited |
18,251,726 |
$ |
— |
$ |
2,830,000 |
$ |
(3,493,204 |
) |
$ |
(228,906 |
) |
$ |
(892,110 |
) |
____________
* On January 21, 2022, the sole owner of the Company and Inno Metal Studs Corp. (“IMSC”), Mr. Dekui Liu, entered into an agreement to sell 100% of his ownership in IMSC for 15,170,000 shares of the Company’s common stock (the “Transaction”). Under ASC 805-40 and ASC 805-50, the Transaction was considered as a reverse acquisition between entities under common control. Accordingly, the outstanding shares of common stock upon completion of the Transaction was presented retroactively as outstanding for all reporting periods.
* On November 30, 2022, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Common Stock of the Company. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. All references to number of shares, and to per share information in the consolidated financial statements have been retroactively adjusted.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-5
INNO HOLDINGS INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2023 and 2022
For the Nine Months Ended |
||||||||
2023 |
2022 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
||||
Net loss |
$ |
(2,971,728 |
) |
$ |
(569,684 |
) |
||
Adjustments to reconcile net income to cash used in operating activities: |
|
|
|
|
||||
Depreciation expense |
|
50,547 |
|
|
19,698 |
|
||
Stock-based compensation expense |
|
10,417 |
|
|
100,000 |
|
||
Non-cash operating lease expense |
|
3,177 |
|
|
(151 |
) |
||
Bad debt expense |
|
1,267,960 |
|
|
— |
|
||
Change in operating assets and liabilities |
|
|
|
|
||||
Accounts receivable |
|
443,600 |
|
|
(699,420 |
) |
||
Inventories |
|
(636,190 |
) |
|
(34,145 |
) |
||
Deferred offering costs |
|
(399,305 |
) |
|
— |
|
||
Prepayments and other current assets |
|
129,413 |
|
|
(276,711 |
) |
||
Other non-current assets |
|
— |
|
|
(39,699 |
) |
||
Accounts payable |
|
244,969 |
|
|
665,167 |
|
||
Accounts payable – related party |
|
50,000 |
|
|
— |
|
||
Credit cards payable |
|
6,345 |
|
|
(815 |
) |
||
Unearned revenue |
|
659,553 |
|
|
(164,736 |
) |
||
Income tax payable |
|
— |
|
|
(13,809 |
) |
||
Other payables and accrued liabilities |
|
77,232 |
|
|
7,553 |
|
||
Other non-current liabilities |
|
(2,457 |
) |
|
— |
|
||
Net cash used in operating activities |
|
(1,066,467 |
) |
|
(1,006,752 |
) |
||
|
|
|
|
|||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
||||
Purchase of equipment |
|
(226,900 |
) |
|
(637,038 |
) |
||
Net cash used in investing activities |
|
(226,900 |
) |
|
(637,038 |
) |
||
|
|
|
|
|||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
||||
Proceeds from related parties |
|
740,000 |
|
|
— |
|
||
Payments to related parties |
|
(98,861 |
) |
|
(60,473 |
) |
||
Proceeds from long-term note |
|
— |
|
|
248,500 |
|
||
Payments to short-term loans |
|
(150,000 |
) |
|
— |
|
||
Payments to long-term note |
|
(35,043 |
) |
|
(29,815 |
) |
||
Shares issued for cash |
|
900,000 |
|
|
1,500,000 |
|
||
Net cash provided by financing activities |
|
1,356,096 |
|
|
1,658,212 |
|
||
|
|
|
|
|||||
CHANGES IN CASH |
|
62,729 |
|
|
14,422 |
|
||
CASH AND CASH EQUIVALENT, beginning of year |
|
50,628 |
|
|
96,861 |
|
||
CASH AND CASH EQUIVALENT, end of year |
$ |
113,357 |
|
$ |
111,283 |
|
||
|
|
|
|
|||||
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
||||
Cash paid for income tax |
$ |
— |
|
$ |
— |
|
||
Cash paid for interest |
$ |
51,446 |
|
$ |
7,473 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
F-6
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 1 — Nature of business and organization
INNO HOLDINGS, INC., a Texas corporation (the “Company”), was incorporated on September 8, 2021. The Company is principally engaged in the marketing and sale of construction products along with full-scope construction services in the US.
On January 18, 2022, the Company formed a limited liability company, Castor Building Tech LLC (“CBT”), in California. The Company owns 53% of the equity interest in CBT.
Effective January 21, 2022, the Company acquired 100% of the ordinary shares of Inno Metal Studs Corp. (“IMSC”), a Texas corporation incorporated on October 31, 2019. Pursuant to the terms of the Share Purchase Agreement with IMSC’s sole owner, Mr. Dekui Liu, who was also the sole owner and CEO of the Company, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his 100% ownership in IMSC. Upon completion of the transaction, IMSC became a 100% owned subsidiary of the Company. See Note 3 below for details.
Inno Research Institute LLC, a Texas limited liability company incorporated on September 8, 2021, is a 65% owned subsidiary of IMSC.
Note 2 — 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 subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 September 30, 2023, or for any other interim period or for any other future years. All intercompany balances and transactions have been eliminated in consolidation.
These unaudited condensed consolidated interim financial statements should be read in conjunction with our audited financial statements for years ended September 30, 2022 and 2021 included in the prospectus herein.
Principles of consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, Inno Metal Studs Corp., Castor Building Tech LLC, and Inno Research Institute LLC. All inter-company balances and transactions have been eliminated.
Going concern
As of June 30, 2023, the Company had total cash of $113,357 and accumulated deficit of $3,493,204. For the nine months ended June 30, 2023, the Company had incurred a net loss of $2,971,728 and used net cash in operations of $1,066,467. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
F-7
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Management is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms to the Company, or which may not be available at all. If such financing is not available on satisfactory terms, the Company may not be able to continue operations or may be required to delay, scale back or eliminate some or all of its ongoing research and development efforts and other operations. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially harm its business, financial condition and results of operations. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock. Given the uncertainties associated with the Company’s ability to access capital and its business growth strategy, management has concluded that substantial doubt exists regarding the Company’s ability to continue as a going concern for the next twelve months from the date the condensed consolidated financial statements are issued.
Our unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Use of estimates and assumptions
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates.
Reverse acquisition under common control
Effective January 21, 2022, the Company acquired 100% of the ordinary shares of Inno Metal Studs Corp. (“IMSC”), a Texas corporation incorporated on October 31, 2019. Pursuant to the terms of the Share Purchase Agreement with IMSC’s sole owner, Mr. Dekui Liu, who was also the sole owner and CEO of the Company, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his 100% ownership in IMSC. Upon completion of the transaction, IMSC became a 100% owned subsidiary of the Company. As such, Under ASC 805-40 and ASC 805-50, the Transaction is a reverse acquisition between entities under common control, in which INNO HOLDINGS, INC. is the accounting acquiree and IMSC is the accounting acquirer. The assets, liabilities and operations of the two entities are combined at their historical carrying amounts, with all historical periods adjusted as if the entities had always been combined. The consolidated financial statements represent the continuation of the financial statements of IMSC except for its capital structure.
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 $250,000, which is currently the maximum amount insured by the Federal Deposit Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts). The Company has not experienced any losses with respect to cash. Management believes the Company is not exposed to any significant credit risk with respect to its cash.
F-8
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Accounts receivable
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 credit loss is required.
In October 2020, the Company adopted ASU 2016-13, Topics 326 — Credit Loss, Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology, for its accounting standard for its trade accounts receivable.
The Company continuously monitors the recoverability of accounts receivable. If there are any indicators that a customer may not make payment, the Company may consider making provision for non-collectability for that particular customer. At the same time, the Company may cease further sales or services to such customer. The following are some of the factors that the Company develops allowance for credit losses:
• the customer fails to comply with its payment schedule;
• the customer is in serious financial difficulty;
• a significant dispute with the customer has occurred regarding job progress or other matters;
• the customer breaches any of its contractual obligations;
• the customer appears to be financially distressed due to economic or legal factors;
• the business between the customer and the Company is not active; and
• other objective evidence indicates non-collectability of the accounts receivable.
The adoption of the credit loss accounting standard has no material impact on the Company’s consolidated financial statements. Accounts receivable are recognized and carried at carrying amount less an allowance for credit losses, if any. The Company maintains an allowance for credit losses resulting from the inability of its customers to make required payments based on contractual terms. The Company reviews the collectability of its receivables on a regular and ongoing basis. The Company has also included in the calculation of allowance for credit losses the potential impact of the COVID-19 pandemic on our customers’ businesses and their ability to pay their accounts receivable. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also considers external factors to the specific customer, including current conditions and forecasts of economic conditions, including the potential impact of the COVID-19 pandemic. In the event we recover amounts previously written off, we will reduce the specific allowance for credit losses.
Fair values of financial instruments
ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments. ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current assets and liabilities are approximate fair values due to their short-term nature.
For other financial instruments to be reported at fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset
F-9
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 — |
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; |
|
Level 2 — |
Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and |
|
Level 3 — |
Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. |
As of June 30, 203 and September 30, 2022, the Company did not have any other financial instruments reported at fair value.
Revenue recognition
The Company has adopted Accounting Standards Codification (“ASC”) 606 since its inception and recognizes revenue from product and service sales revenues, net of promotional discounts and return allowances, if any, 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. The Company transfers the risk of loss or damage upon delivery, therefore, revenue from product sales is recognized when it is delivered to the customer. For services, all sales are recognized upon completion based on terms stated in the sales agreements.
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. Generally, when the Company is primarily responsible for fulfilling the promise to provide a specified good or service, the Company is subject to inventory risk before the good or service has been transferred to a customer and the Company has discretion in establishing the price, revenue is recorded at gross.
Payments received prior to the delivery of goods to customers are recorded as customer deposits.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses.
Costs and expenses
Costs and expenses are operating expenses, which consist of costs of material and labor, selling, general and administrative expenses, and depreciation, are expensed as incurred.
Inventory
Inventory consists of material and finished goods ready for sale and is stated at the lower of cost or net realizable value. The Company values its inventory using the FIFO 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 selling expenses. The Company regularly reviews inventory and considers forecasts of future demand, market conditions and product obsolescence.
F-10
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
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 net realizable value. The Company also reviews inventory for slow moving inventory and obsolescence and records allowance for obsolescence.
Deferred offering costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly related to an equity financing that is probable of successful completion until such financing is consummated. After consummation of an equity financing, these costs are recorded as a reduction of the proceeds received as a result of the financing. Should a planned equity financing be abandoned, terminated or significantly delayed, the deferred offering costs are immediately written off to operating expenses in the consolidated statements of operations in the period of determination.
Property and equipment
Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets as follows:
Machinery and equipment |
7 years |
|
Office equipment |
5 years |
|
Motor vehicles |
5 years |
|
Leasehold improvements |
5 to 15 years |
Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property and equipment were recorded during the nine months ended June 30, 2023 and 2022.
Leases
On its inception date, the Company adopted 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.
F-11
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Stock-based Compensation
The Company applies ASC No. 718, “Compensation-Stock Compensation,” which requires that share-based payment transactions with employees and nonemployees upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period. In addition to the requisite service period, the Company also evaluates the performance condition and market condition under ASC 718-10-20. For an award which contains both a performance and a market condition, and where both conditions must be satisfied for the award to vest, the market condition is incorporated into the fair value of the award, and that fair value is recognized over the employee’s requisite service period or nonemployee’s vesting period if it is probable the performance condition will be met. If the performance condition is ultimately not met, compensation cost related to the award should not be recognized (or should be reversed) because the vesting condition in the award has not been satisfied.
The Company will recognize forfeitures of such equity-based compensation as they occur.
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 has adopted the provisions of ASC 740 since inception 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 Texas and California, as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
The Company believes that its 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.
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 its 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.
F-12
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Earnings per share
Basic earnings per share are computed by dividing net income attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities to issue common stock were exercised.
Recently issued accounting pronouncements
In June 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU clarify the guidance in ASC 820 on the fair value measurement of an equity security that is subject to a contractual sale restriction and require specific disclosures related to such an equity security. This standard is effective for fiscal years beginning after December 15, 2024. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the entity had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2023, with early application permitted. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, “Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU among other things clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments — Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. ASU 2020-01 is effective For public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date. The adoption of ASU 2020-01 is not expected to have a material impact on the Company’s unaudited condensed consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes. The update is intended to simplify the current rules regarding the accounting for income taxes and addresses several technical topics including accounting for franchise taxes, allocating income taxes between a loss in continuing operations and in other categories such as discontinued operations, reporting income taxes for legal entities that are not subject to income taxes, and interim accounting for enacted changes in tax laws. The new standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022; however, early adoption is permitted. The Company does not expect the adoption of this standard have a material impact on the unaudited condensed consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the unaudited condensed consolidated financial position, statements of operations and cash flows.
F-13
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Subsequent events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date through September 13, 2023, which is the date that the unaudited condensed consolidated financial statements are available to be issued. Material subsequent events that required recognition or additional disclosure in the consolidated financial statements are presented.
Note 3 — Reverse Acquisition under Common Control
On January 21, 2022, the sole owner of the Company and IMSC, Mr. Dekui Liu, entered into an agreement to sell 100% of his ownership in IMSC in exchange for 15,170,000 shares of the Company’s common stock (the “Transaction”). Below are the charts illustrating the structure before and after the Transaction:
F-14
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 3 — Reverse Acquisition under Common Control (cont.)
Under ASC 805, Business Combination, A common-control transaction is typically a transfer of net assets or an exchange of equity interests between entities under the control of the same parent. While a common-control transaction is similar to a business combination for the entity that receives the net assets or equity interests, such a transaction does not meet the definition of a business combination because there is no change in control over the net assets. Therefore, the accounting and reporting for a transaction between entities under common control is outside the scope of the business combinations guidance in ASC 805-10, ASC 805-20, and ASC 805-30 and is addressed in the “Transactions Between Entities Under Common Control” subsections of ASC 805-50.
Note 4 — Accounts Receivable, Net
Accounts receivable for the Company consisted of the following as of the dates indicated below:
June 30, |
September 30, |
||||||
Accounts receivable |
$ |
1,363,690 |
|
$ |
1,807,290 |
||
Accounts receivable – related party |
|
100,000 |
|
|
100,000 |
||
Less: allowance for credit losses |
|
(1,267,960 |
) |
|
— |
||
Total accounts receivable, net |
$ |
195,730 |
|
$ |
1,907,290 |
The Company recorded allowance for credit losses of $1,267,960 and $0 for the nine months ended June 30, 2023 and 2022, respectively.
Note 5 — Inventories
As of June 30, 2023 and September 30, 2022, inventories consisted of the following:
June 30, |
September 30, |
|||||
Raw material |
$ |
252,771 |
$ |
296,042 |
||
Production inventory |
|
713,323 |
|
33,862 |
||
Total |
$ |
966,094 |
$ |
329,904 |
As of June 30, 2023 and September 30, 2022, there was no allowance for obsolescence recorded.
Note 6 — Deferred offering costs
Deferred offering costs consisted of fees and expenses incurred in connection with the sale of the Company’s common stock in the IPO, including the legal, accounting, printing and other offering related costs. Upon completion of the IPO, these deferred offering costs are to be reclassified from current assets to stockholders’ equity and recorded against the net proceeds from the offering. As of June 30, 2023 and September 30, 2022, deferred offering costs amounted to $399,305 and $0, respectively.
Note 7 — Prepayments and other current assets
As of June 30, 2023 and September 30, 2022, prepayments and other current assets consisted of the following:
June 30, |
September 30, |
|||||
Advance to suppliers |
$ |
25,127 |
$ |
102,027 |
||
Other prepayments and current assets |
|
136,634 |
|
74,564 |
||
Total |
$ |
161,761 |
$ |
176,591 |
F-15
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 8 — Property and equipment, net
As of June 30, 2023 and September 30, 2022, property and equipment consisted of the following:
June 30, |
September 30, |
|||||||
Machinery and equipment |
$ |
346,900 |
|
$ |
270,000 |
|
||
Office equipment |
|
5,488 |
|
|
5,488 |
|
||
Motor vehicles |
|
64,082 |
|
|
64,082 |
|
||
Leasehold improvements |
|
533,050 |
|
|
383,050 |
|
||
Total |
|
949,520 |
|
|
722,620 |
|
||
Less: accumulated depreciation |
|
(79,045 |
) |
|
(28,498 |
) |
||
Property and equipment, net |
$ |
870,475 |
|
$ |
694,122 |
|
For the nine months ended June 30, 2023 and 2022, depreciation expenses amounted to $50,547 and $19,698, respectively.
Note 9 — Loans payable
Short-term loans
Revolving line of credit
On September 16, 2022, the Company entered into an agreement with Origin Bank for a revolving line of credit (the “Line of Credit”) of up to $1,000,000 with interest at the floating Prime Rate plus one percent (1.0%) per annum, which is to be adjusted daily to the rate in effect. Interest shall be due and payable monthly as it accrues. The accrued unpaid interest and the principal is due and payable in twelve (12) months from September 16, 2022. The Line of Credit is secured by a Security Agreement and Financing Statement that covers certain properties of the Company and guaranteed by Mr. Dekui Liu, the majority shareholder and CEO of the Company. For the nine months ended June 30, 2023, the Company recorded interest expense related to the Line of Credit of $42,699. As of June 30, 2023 and September 30, 2022, the total outstanding balance of the Note was $560,000, which was presented on the unaudited condensed consolidated balance sheet as a short-term loan.
Long-term loan
Promissory note payable
On October 28, 2021, the Company issued to BancorpSouth Bank a five-year unsecured 4.75% promissory note, payable in equal monthly installments of $4,661 commencing November 28, 2021 (the “Note”). The principal amount of the Note was $248,500. The Note is secured by a Security Agreement and Financing Statement that covers certain properties of the Company and guaranteed by Mr. Dekui Liu, the majority shareholder and CEO of the Company.
For the nine months ended June 30, 2023 and 2022, the Company recorded interest expense of $6,830 and $7,458, respectively. As of June 30, 2023 and September 30, 2022, the total outstanding balance of the Note was $172,225 and $207,268, respectively, which was presented on the unaudited condensed consolidated balance sheet as a current portion of $48,811 and $47,259, and a non-current portion of $123,414 and $160,009, respectively.
Note 10 — Related party transactions
The Company borrows short term loans without interest from its majority shareholder and CEO, Mr. Dekui Liu, for operation and cashflow needs from time to time. As of June 30, 2023, the amount due from Mr. Liu was $363,372. As of September 30, 2022, the outstanding balance due to Mr. Liu was $12,233.
F-16
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 10 — Related party transactions (cont.)
During the year ended September 30, 2022, the Company engaged Yunited Assets LLC (“Yunited”), a limited liability company owned by Mr. Cheng Yu, the minority owner of the Company’s subsidiary, Inno Research Institute, for consultation services on a project-by-project basis. During the nine months ended June 30, 2023 and 2022, the Company recorded $4,375 and $19,950, respectively, of project-based consulting service fees, included in cost of materials and labor. During the nine months ended June 30, 2023 and 2022, the Company also recorded $90,000 and $80,000 consulting fee to Yunited for Mr. Yu’s daily operating services included in the general and administrative expenses. As of June 30, 2023, the outstanding balance of accounts payable – related party due to Yunited was $50,000. As of September 30, 2022 and 2021, there were no unpaid balances due to Yunited.
In March 2022, the Company entered into an agreement with Wise Hill Inc. (“Wise Hill”), a Florida corporation wholly owned by a minority shareholder of the Company. Pursuant to the agreement, the Company sold prefab home products of $250,000 to Wise Hill. For the nine months ended June 30, 2022, the Company recorded revenue-related party of $250,000. As of June 30, 2023 and September 30, 2022, the outstanding balance of accounts receivable — related party was $100,000.
During the year ended September 30, 2022, the Company purchased prefab home and other material and supplies from Baicheng Trading LLC, in which the father of Mr. Dekui Liu, the Company’s majority shareholder and CEO, is a director. As of June 30, 2023 and September 30, 2022, the outstanding balance of accounts payable-related party was $485,595 and $485,595, respectively.
During the nine months ended June 30, 2023, the Company borrowed short term loans without interest from Zfounder Organization Inc., one of the Company’s minority shareholders for operation and cashflow needs. As of June 30, 2023, the outstanding balance due was $25,000. In addition, the Company borrowed short term loans without interest from Wise Hill Inc., a company owned by the CEO and Board member of Zfounder Organization Inc. for operation and cashflow needs. As of June 30, 2023, the outstanding balance due was $135,000.
During the quarter ended June 30, 2023, the Company borrowed short term loans without interest, amount of $100,000 and $30,000, respectively, from its Vice President of Product, Mr. Fei Xie and Director of Design, Mr. Zuoda He. As of June 30, 2023, the outstanding balance due to Mr. Xie and Mr. He was $100,000 and $30,000, respectively.
Note 11 — Losses per share
The following table sets forth the computation of basic and diluted losses per share for the periods presented:
For the nine months ended |
||||||||
2023 |
2022 |
|||||||
Numerator: |
|
|
|
|
||||
Net loss attributable to INNO HOLDINGS INC. |
$ |
(2,864,167 |
) |
$ |
(508,592 |
) |
||
Denominator: |
|
|
|
|
||||
Weighted-average shares used in computing basic and diluted losses per share* |
|
18,122,543 |
|
|
17,049,121 |
|
||
Losses per share of ordinary shares: – basic and diluted |
$ |
(0.16 |
) |
$ |
(0.03 |
) |
____________
* On January 21, 2022, the sole owner of the Company and Inno Metal Studs Corp. (“IMSC”), Mr. Dekui Liu, entered into an agreement to sell 100% of his ownership in IMSC for 15,170,000 shares of the Company’s common stock (the “Transaction”). Under ASC 805-40 and ASC 805-50, the Transaction was considered as a reverse acquisition between entities under common control. Accordingly, the outstanding shares of common stock upon completion of the Transaction was presented retroactively as outstanding for all reporting periods.
* On November 30, 2022, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Common Stock of the Company. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. The computation of basic and diluted EPS was retroactively adjusted for all periods presented.
F-17
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 12 — Equity
The Company was incorporated in Texas on September 8, 2021. The total authorized shares of capital stock were 200,000,000 shares without par value.
On November 30, 2022, the Company effected a forward stock split (the “Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 2-for-1. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. Shortly after the Reverse Stock Split, the Board of Directors of the Company approved issuance of additional shares to preserve the original purchase price per share of the shares sold in the period from February 1 to June 30, 2023. All share numbers of the Company’s Common Stock are stated on a post-split basis.
At the inception date, September 8, 2021, the Company issued 1,000,000 shares of common stock to its founder, Mr. Dekui Liu.
On February 2, 2022, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his 100% ownership in IMSC. See Note 3 above for details.
On January 31, 2022, the Company issued 1,500,000 of its series A convertible preferred stock to three accredited investors for $1,500,000 in cash. During 2022, the 1,500,000 shares of series A convertible preferred stock had been converted to 1,500,000 shares of common stock after giving effect to the stock splits.
On January 31 and September 30, 2022, the Company issued a total of 300,000 shares of common stock to an investor for services. These shares were valued at $1.0 per share, which was the per share price for the most recent sale of the Company’s capital stock to accredited investors. For the nine months ended June 30, 2023 and 2022, the Company recorded $0 and $100,000 as stock compensation expense, respectively.
In December 2022, The Company issued 142,857 shares of its common stock at a price of $3.5 per share to an accredited investor for $500,000 in cash.
In February 2023, The Company issued 27,028 shares of its common stock at a price of $3.7 per share to an accredited investor for $100,000 in cash.
In March 2023, The Company issued 78,947 shares of its common stock at a price of $3.8 per share to an accredited investor for $300,000 in cash.
In April and May 2023, Mr. Dekui Liu, the Company’s chief executive officer, sold 118,421 shares of the Company’s common stock he owned to three investors at $3.80 per share for $450,000 in cash. Mr. Liu then lent the $450,000 to the Company as a short-term loan, which is due on demand without interest. See Note 10 — Related party transactions.
On June 20, 2023, the Company issued 13,158 shares of its common stock for a total value of $50,000 for services to be rendered during next twelve months by the immediate relative of the Company’s Chief Financial Officer. On June 20, 2023, the Company issued 19,737 shares of its common stock for a total value of $75,000 for services to be rendered during next twelve months by one nonemployee contractor. These shares were valued at $3.8 per share, which was the per share price for the most recent sale of the Company’s capital stock to accredited investors. For the nine months ended June 30, 2023, the Company recorded $10,417 as stock compensation expense. As of June 30, 2023, the remaining balance of $114,583 was recorded as Prepayments and other current assets.
As of June 30, 2023 and September 30, 2022, after giving effect to the stock splits of the outstanding shares of Common Stock, there were 18,251,726 and 17,970,000 shares of Common Stock issued and outstanding, respectively. The total authorized number of shares of capital stock was 100,000,000 shares without par value.
F-18
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 13 — 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, 2023 and September 30, 2022, $113,357 and $50,628, respectively, were deposited with various major financial institutions in the United States. Accounts at each institution in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. The Company did not have deposit in excess of the FDIC insurance limit, as of June 30, 2023 and September 30, 2022.
Accounts receivable are 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.
Customer and vendor concentration risk
For the nine months ended June 30, 2023 and 2022, four customers accounted for 62% (32%, 10%, 10%, and 10%) and four customers accounted for 54% (20%, 12%, 12% and 10%) of the Company’s total revenues, respectively. As of June 30, 2023 and September 30, 2022, accounts receivable from five customers accounted for 87% and 80% of the Company’s total gross accounts receivable, respectively.
For the nine months ended June 30, 2023 and 2022, four suppliers accounted for 55% and three suppliers accounted for 77% of the Company’s total purchases, respectively. As of June 30, 2023 and September 30, 2022, accounts payable to three suppliers accounted for 68% and three suppliers accounted for 94% of the Company’s total accounts payable, respectively.
Note 14 — Commitments and contingencies
Lease commitments
The Company has adopted ASC 842 since its inception date.
The Company has entered into a lease agreement for office and production space in Texas with a lease period from December 1, 2019 until December 31, 2024 at a rate of $4,129 to $5,089 per month.
The Company has also entered into a lease agreement for office and production space in Corona, California with a lease period from May 1, 2022 until April 30, 2027 at a rate of $6,617 to $7,740 per month. In August 2023, the Company relocated its California office from Corona to Diamond Bar. The Company is obligated to pay the monthly rent for the office in Corona California until the landlord finds a new lessee to occupy the facility. The new lease in Diamond Bar, California has a term of 24 months from August 1, 2023 to July 31, 2025 at a rate of $4,730 to $4,926 per month.
In addition, the Company will be responsible for its pro rata share of certain costs, including utility costs, insurance and common area costs, as further detailed in the lease agreements.
Total commitment for the full term of these leases is $605,426. $368,735 and $453,883 of operating lease right-of-use assets and $378,424 and $460,395 of operating lease liabilities were reflected on the June 30, 2023 and September 30, 2022 unaudited condensed balance sheets, respectively.
F-19
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2023 and September 30, 2022 and for the Nine Months Ended
June 30, 2023 and 2022
Note 14 — Commitments and contingencies (cont.)
Nine Months Ended June 30, 2023 and 2022:
Lease cost |
6/30/2023 |
6/30/2022 |
||||||
Operating lease cost (included in G&A in the Company’s statement of operations) |
$ |
109,052 |
|
$ |
58,880 |
|
||
Other information |
|
|
|
|
||||
Cash paid for amounts included in the measurement of lease liabilities |
$ |
105,875 |
|
$ |
59,030 |
|
||
Remaining term in years |
|
1.5 – 3.83 |
|
|
2.5 – 4.83 |
|
||
Average discount rate – operating leases |
|
8 |
% |
|
8 |
% |
The supplemental balance sheet information related to leases is as follows:
Operating leases |
6/30/2023 |
9/30/2022 |
||||
Right of use asset – non-current |
$ |
368,735 |
$ |
453,883 |
||
Lease Liability – current |
|
120,071 |
|
110,993 |
||
Lease Liability – non-current |
|
258,353 |
|
349,402 |
||
Total operating lease liabilities |
$ |
378,424 |
$ |
460,395 |
Maturities of the Company’s lease liabilities are as follows:
Operating |
||||
For periods subsequent to June 30, 2023: |
|
|
||
Remainder of 2023 |
$ |
35,909 |
|
|
2024 |
|
145,013 |
|
|
2025 |
|
102,574 |
|
|
2026 |
|
90,800 |
|
|
2027 |
|
54,183 |
|
|
Less: Imputed interest/present value discount |
|
(50,055 |
) |
|
Present value of lease liabilities |
$ |
378,424 |
|
Contingencies
The Company is not currently a party to any material legal proceedings, investigations or claims. As the Company may, from time to time, be involved in legal matters arising in the ordinary course of its business, 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.
Note 15 — Subsequent events
On July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. Shortly after the Reverse Stock Split, the Board of Directors of the Company approved issuance of additional shares to preserve the original purchase price per share of the shares sold in the period from December 1, 2022 to June 30, 2023. All references to number of shares, and to per share information in the consolidated financial statements have been retroactively adjusted.
In August 2023, the Company entered into a new lease in Diamond Bar, California with a term of 24 months from August 1, 2023 to July 31, 2025 at a rate of $4,730 to $4,926 per month, and relocated its California office from Corona to Diamond Bar. The Company is obligated to pay the monthly rent for the leased office in Corona California until the landlord finds a new lessee to occupy the facility.
On August 25, 2023, the Company extended an offer to 14810 Delano St. LLC to acquire a piece of vacant land located at 14810 Delano St. Van Nuys, CA 91411, for a total purchase price of $2.95 million. On September 6, 2023, the company paid $88,500 as an initial deposit.
F-20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of INNO HOLDINGS INC.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of INNO HOLDINGS INC. and its subsidiaries (the Company) as of September 30, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended September 30, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Matter
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations that raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2 to the consolidated financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ TAAD LLP
We have served as the Company’s auditor since 2022.
Diamond Bar, California
February 7, 2023, except for Note 13, as to which the date is May 8, 2023; Notes 11, 12, and 15 as to which the date is July 25, 2023; and Note 2 as to which the date is August 14, 2023
F-21
INNO HOLDINGS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 2022 and 2021
September 30, |
September 30, |
||||||
2022 |
2021 |
||||||
ASSETS |
|
|
|
||||
Current assets |
|
|
|
||||
Cash and cash equivalent |
$ |
50,628 |
|
$ |
96,861 |
||
Accounts receivable |
|
1,807,290 |
|
|
537,100 |
||
Accounts receivable – related party |
|
100,000 |
|
|
— |
||
Inventories |
|
329,904 |
|
|
285,110 |
||
Prepayments and other current assets |
|
176,591 |
|
|
20,438 |
||
Total current assets |
|
2,464,413 |
|
|
939,509 |
||
|
|
|
|||||
Non-current assets |
|
|
|
||||
Right of use – non-current |
|
453,883 |
|
|
170,718 |
||
Property and equipment, net |
|
694,122 |
|
|
50,051 |
||
Other non-current assets |
|
39,699 |
|
|
— |
||
Total non-current assets |
|
1,187,704 |
|
|
220,769 |
||
Total assets |
$ |
3,652,117 |
|
$ |
1,160,278 |
||
|
|
|
|||||
LIABILITIES AND EQUITY |
|
|
|
||||
Current liabilities |
|
|
|
||||
Accounts payable |
|
471,778 |
|
|
27,078 |
||
Accounts payable – related party |
|
485,595 |
|
|
— |
||
Credit cards payable |
|
— |
|
|
6,263 |
||
Unearned revenue |
|
201,730 |
|
|
412,616 |
||
Other payables and accrued liabilities |
|
46,043 |
|
|
59,035 |
||
Other payables – related party |
|
12,233 |
|
|
80,706 |
||
Income tax payable |
|
— |
|
|
13,809 |
||
Short-term loan payable |
|
710,000 |
|
|
— |
||
Lease liability – current |
|
110,993 |
|
|
49,586 |
||
Long-term notes payable – current portion |
|
47,259 |
|
|
— |
||
Total current liabilities |
|
2,085,631 |
|
|
649,093 |
||
|
|
|
|||||
Non-current liabilities |
|
|
|
||||
Notes payable |
|
160,009 |
|
|
— |
||
Lease liability – non-current |
|
349,402 |
|
|
126,560 |
||
Other non-current liabilities |
|
2,457 |
|
|
— |
||
Total non-current liabilities |
|
511,868 |
|
|
126,560 |
||
Total liabilities |
|
2,597,499 |
|
|
775,653 |
||
|
|
|
|||||
Commitments and contingency |
|
— |
|
|
— |
||
|
|
|
|||||
Stockholders’ Equity |
|
|
|
||||
Common stock, no par value; 100,000,000 shares authorized; 17,970,000 and 16,170,000 shares issued and outstanding at September 30, 2022 and 2021 |
|
— |
|
|
— |
||
Additional paid in capital |
|
1,805,000 |
|
|
5,000 |
||
(Accumulated deficit) Retained earnings |
|
(629,037 |
) |
|
379,625 |
||
Non-controlling interest |
|
(121,345 |
) |
|
— |
||
Total equity |
|
1,054,618 |
|
|
384,625 |
||
Total liabilities and equity |
$ |
3,652,117 |
|
$ |
1,160,278 |
____________
* On November 30, 2022, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Common Stock of the Company. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. All references to number of shares, and to per share information in the consolidated financial statements have been retroactively adjusted.
The accompanying notes are an integral part of these consolidated financial statements
F-22
INNO HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended September 30, 2022 and 2021
For the Years Ended |
||||||||
2022 |
2021 |
|||||||
REVENUES |
$ |
4,252,568 |
|
$ |
3,003,624 |
|
||
REVENUES – related party |
|
250,000 |
|
|
— |
|
||
TOTAL REVENUES |
|
4,502,568 |
|
|
3,003,624 |
|
||
|
|
|
|
|||||
COSTS AND EXPENSES: |
|
|
|
|
||||
Costs of materials and labor |
|
3,405,506 |
|
|
2,069,581 |
|
||
Selling, general and administrative expenses (exclusive of depreciation shown separately below) |
|
1,873,902 |
|
|
1,229,651 |
|
||
Depreciation |
|
33,138 |
|
|
6,000 |
|
||
Total costs and expenses |
|
5,312,546 |
|
|
3,305,232 |
|
||
|
|
|
|
|||||
LOSS FROM OPERATIONS |
|
(809,978 |
) |
|
(301,608 |
) |
||
|
|
|
|
|||||
OTHER INCOME (EXPENSE) |
|
|
|
|
||||
Interest expenses |
|
(10,114 |
) |
|
(7,807 |
) |
||
Stock compensation expense |
|
(300,000 |
) |
|
— |
|
||
PPP loan forgiveness |
|
— |
|
|
230,000 |
|
||
Other non-operating income (expense) |
|
— |
|
|
— |
|
||
Total other income (expenses), net |
|
(310,114 |
) |
|
222,193 |
|
||
|
|
|
|
|||||
LOSS BEFORE INCOME TAXES |
|
(1,120,092 |
) |
|
(79,415 |
) |
||
|
|
|
|
|||||
PROVISION FOR INCOME TAXES |
|
9,915 |
|
|
26,581 |
|
||
NET LOSS |
|
(1,130,007 |
) |
|
(105,996 |
) |
||
|
|
|
|
|||||
Non-controlling interest |
|
(121,345 |
) |
|
— |
|
||
|
|
|
|
|||||
NET LOSS ATTRIBUTABLE TO INNO HOLDINGS INC. |
$ |
(1,008,662 |
) |
$ |
(105,996 |
) |
||
|
|
|
|
|||||
WEIGHTED AVERAGE NUMBER OF COMMON STOCK |
|
|
|
|
||||
Basic |
|
17,230,822 |
|
|
16,170,000 |
|
||
Diluted |
|
17,230,822 |
|
|
16,170,000 |
|
||
|
|
|
|
|||||
LOSSES PER SHARE |
|
|
|
|
||||
Basic |
$ |
(0.06 |
) |
$ |
(0.01 |
) |
||
Diluted |
$ |
(0.06 |
) |
$ |
(0.01 |
) |
____________
* On November 30, 2022, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Common Stock of the Company. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. The computation of basic and diluted Losses Per Share were retroactively adjusted for all periods presented.
The accompanying notes are an integral part of these consolidated financial statements
F-23
INNO HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended September 30, 2022 and 2021
|
Additional |
Retained |
Non- |
Total |
||||||||||||||||
Shares |
Amount |
|||||||||||||||||||
Balance, September 30, 2020 |
16,170,000 |
$ |
— |
$ |
5,000 |
$ |
485,621 |
|
$ |
— |
|
$ |
490,621 |
|
||||||
Net loss |
|
|
|
|
|
|
(105,996 |
) |
|
|
|
|
(105,996 |
) |
||||||
|
|
|
|
|
|
|
|
|||||||||||||
Balance, September 30, 2021 |
16,170,000 |
|
— |
|
5,000 |
|
379,625 |
|
|
— |
|
|
384,625 |
|
||||||
Net loss |
|
|
|
(1,008,662 |
) |
|
(121,345 |
) |
|
(1,130,007 |
) |
|||||||||
Shares issued for cash |
1,500,000 |
|
— |
|
1,500,000 |
|
|
|
|
|
1,500,000 |
|
||||||||
Shares issued for service |
300,000 |
|
— |
|
300,000 |
|
|
|
|
|
|
|
300,000 |
|
||||||
Balance, September 30, 2022 |
17,970,000 |
$ |
— |
$ |
1,805,000 |
$ |
(629,037 |
) |
$ |
(121,345 |
) |
$ |
1,054,618 |
|
____________
* On January 21, 2022, the sole owner of the Company and Inno Metal Studs Corp. (“IMSC”), Mr. Dekui Liu, entered into an agreement to sell 100% of his ownership in IMSC for 15,170,000 shares of the Company’s common stock (the “Transaction”). Under ASC 805-40 and ASC 805-50, the Transaction was considered as a reverse acquisition between entities under common control. Accordingly, the outstanding shares of common stock upon completion of the Transaction was presented retroactively as outstanding for all reporting periods.
* On November 30, 2022, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Common Stock of the Company. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. All references to number of shares, and to per share information in the consolidated financial statements have been retroactively adjusted.
The accompanying notes are an integral part of these consolidated financial statements
F-24
INNO HOLDINGS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2022 and 2021
For the Years Ended |
||||||||
2022 |
2021 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
||||
Net loss |
$ |
(1,130,007 |
) |
$ |
(105,996 |
) |
||
Adjustments to reconcile net income to cash used in operating activities: |
|
|
|
|
||||
Depreciation expense |
|
33,138 |
|
|
6,000 |
|
||
Stock-based compensation expense |
|
300,000 |
|
|
— |
|
||
Non-cash operating lease expense |
|
1,084 |
|
|
(1,670 |
) |
||
PPP loan forgiven |
|
— |
|
|
(230,000 |
) |
||
Change in operating assets and liabilities |
|
|
|
|
||||
Accounts receivable |
|
(1,270,190 |
) |
|
(537,100 |
) |
||
Accounts receivable – related party |
|
(100,000 |
) |
|
— |
|
||
Inventories |
|
(44,794 |
) |
|
(145,853 |
) |
||
Prepayments and other current assets |
|
(156,153 |
) |
|
(16,772 |
) |
||
Other non-current assets |
|
(39,699 |
) |
|
— |
|
||
Accounts payable |
|
444,700 |
|
|
1,604 |
|
||
Accounts payable – related party |
|
485,595 |
|
|
— |
|
||
Credit cards payable |
|
(6,263 |
) |
|
6,263 |
|
||
Unearned revenue |
|
(210,886 |
) |
|
412,615 |
|
||
Income tax payable |
|
(13,809 |
) |
|
13,809 |
|
||
Other payables and accrued liabilities |
|
(12,992 |
) |
|
52,035 |
|
||
Other non-current liabilities |
|
2,457 |
|
|
— |
|
||
Net cash used in operating activities |
|
(1,717,819 |
) |
|
(545,065 |
) |
||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
||||
Purchase of equipment |
|
(695,815 |
) |
|
(60,550 |
) |
||
Proceed from sale of truck |
|
11,000 |
|
|
|
|
||
Net cash used in investing activities |
|
(684,815 |
) |
|
(60,550 |
) |
||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
||||
Proceeds from related parties |
|
146,233 |
|
|
80,706 |
|
||
Payments to related parties |
|
(214,706 |
) |
|
— |
|
||
Proceeds from short-term loans |
|
710,000 |
|
|
— |
|
||
Proceeds from PPP loan |
|
— |
|
|
150,000 |
|
||
Proceeds from long-term note |
|
248,500 |
|
|
— |
|
||
Payment to long-term note |
|
(33,626 |
) |
|
— |
|
||
Shares issued for cash |
|
1,500,000 |
|
|
— |
|
||
Net cash provided by financing activities |
|
2,356,401 |
|
|
230,706 |
|
||
CHANGES IN CASH |
|
(46,233 |
) |
|
(374,909 |
) |
||
CASH AND CASH EQUIVALENT, beginning of year |
|
96,861 |
|
|
471,770 |
|
||
CASH AND CASH EQUIVALENT, end of year |
$ |
50,628 |
|
$ |
96,861 |
|
||
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
||||
Cash paid for income tax |
$ |
23,724 |
|
$ |
12,772 |
|
||
Cash paid for interest |
$ |
10,114 |
|
$ |
7,807 |
|
||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS: |
|
|
|
|
||||
Right of use assets acquired under new operating leases |
$ |
355,963 |
|
$ |
— |
|
The accompanying notes are an integral part of these consolidated financial statements
F-25
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 1 — Nature of business and organization
INNO HOLDINGS INC., a Texas corporation (the “Company”), was incorporated on September 8, 2021. The Company is principally engaged in the marketing and sale of construction products along with full-scope construction services in the US.
On January 18, 2022, the Company formed a limited liability company, Castor Building Tech LLC (“CBT”), in California. The Company owns 53% of the equity interest in CBT.
Effective January 21, 2022, the Company acquired 100% of the ordinary shares of Inno Metal Studs Corp. (“IMSC”), a Texas corporation incorporated on October 31, 2019. Pursuant to the terms of the Share Purchase Agreement with IMSC’s sole owner, Mr. Dekui Liu, who was also the sole owner and CEO of the Company, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his 100% ownership in IMSC. Upon completion of the transaction, IMSC became a 100% owned subsidiary of the Company. See Note 3 below for details.
Inno Research Institute LLC, a Texas limited liability company incorporated on September 8, 2021, is a 65% owned subsidiary of IMSC.
Below is the corporate structure of the Company:
Note 2 — Basis of Presentation and Summary of significant accounting policies
Basis of presentation
The accompanying financial statements have been prepared in accordance with the generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The Company’s fiscal year end date is September 30.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, Inno Metal Studs Corp., Castor Building Tech LLC, and Inno Research Institute LLC. All inter-company balances and transactions have been eliminated.
F-26
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Going concern
As of September 30, 2022, the Company had total cash of $50,628 and accumulated deficit of $629,037. For the year ended September 30, 2022, the Company had incurred a net loss of $1,130,007 and used net cash in operations of $1,717,819. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
Management is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms to the Company, or which may not be available at all. If such financing is not available on satisfactory terms, the Company may not be able to continue operations or may be required to delay, scale back or eliminate some or all of its ongoing research and development efforts and other operations. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, will materially harm its business, financial condition and results of operations. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock. Given the uncertainties associated with the Company’s ability to access capital and its business growth strategy, management has concluded that substantial doubt exists regarding the Company’s ability to continue as a going concern for the next twelve months from the date the condensed consolidated financial statements are issued.
Our consolidated financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Use of estimates and assumptions
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates.
Reverse acquisition under common control
Effective January 21, 2022, the Company acquired 100% of the ordinary shares of Inno Metal Studs Corp. (“IMSC”), a Texas corporation incorporated on October 31, 2019. Pursuant to the terms of the Share Purchase Agreement with IMSC’s sole owner, Mr. Dekui Liu, who was also the sole owner and CEO of the Company, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his 100% ownership in IMSC. Upon completion of the transaction, IMSC became a 100% owned subsidiary of the Company. As such, Under ASC 805-40 and ASC 805-50, the Transaction is a reverse acquisition between entities under common control, in which INNO HOLDINGS INC. is the accounting acquiree and IMSC is the accounting acquirer. The assets, liabilities and operations of the two entities are combined at their historical carrying amounts, with all historical periods adjusted as if the entities had always been combined. The consolidated financial statements represent the continuation of the financial statements of IMSC except for its capital structure.
F-27
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
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 $250,000, which is currently the maximum amount insured by the Federal Deposit Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts). The Company has not experienced any losses with respect to cash. Management believes the Company is not exposed to any significant credit risk with respect to its cash.
Accounts receivable
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 credit loss is required.
In October 2020, the Company adopted ASU 2016-13, Topics 326 — Credit Loss, Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology, for its accounting standard for its trade accounts receivable.
The Company continuously monitors the recoverability of accounts receivable. If there are any indicators that a customer may not make payment, the Company may consider making provision for non-collectability for that particular customer. At the same time, the Company may cease further sales or services to such customer. The following are some of the factors that the Company develops allowance for credit losses:
• the customer fails to comply with its payment schedule;
• the customer is in serious financial difficulty;
• a significant dispute with the customer has occurred regarding job progress or other matters;
• the customer breaches any of its contractual obligations;
• the customer appears to be financially distressed due to economic or legal factors;
• the business between the customer and the Company is not active; and
• other objective evidence indicates non-collectability of the accounts receivable.
The adoption of the credit loss accounting standard has no material impact on the Company’s consolidated financial statements. Accounts receivable are recognized and carried at carrying amount less an allowance for credit losses, if any. The Company maintains an allowance for credit losses resulting from the inability of its customers to make required payments based on contractual terms. The Company reviews the collectability of its receivables on a regular and ongoing basis. The Company has also included in calculation of allowance for credit losses the potential impact of the COVID-19 pandemic on our customers’ businesses and their ability to pay their accounts receivable. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also considers external factors to the specific customer, including current conditions and forecasts of economic conditions, including the potential impact of the COVID-19 pandemic. In the event we recover amounts previously written off, we will reduce the specific allowance for credit losses.
F-28
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Fair values of financial instruments
ASC 825, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information about financial instruments. ASC 820, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and all other current assets and liabilities approximate fair values due to their short-term nature.
For other financial instruments to be reported at fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 — |
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; |
|
Level 2 — |
Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and |
|
Level 3 — |
Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. |
As of September 30, 2022 and 2021, the Company did not have any other financial instruments reported at fair value.
Revenue recognition
The Company has adopted Accounting Standards Codification (“ASC”) 606 since its inception and recognizes revenue from product and service sales revenues, net of promotional discounts and return allowances, if any, 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. The Company transfers the risk of loss or damage upon delivery, therefore, revenue from product sales is recognized when it is delivered to the customer. For services, all sales are recognized upon completion based on terms stated in the sales agreements.
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. Generally, when the Company is primarily responsible for fulfilling the promise to provide a specified good or service, the Company is subject to inventory risk before the good or service has been transferred to a customer and the Company has discretion in establishing the price, revenue is recorded at gross.
Payments received prior to the delivery of goods to customers are recorded as customer deposits.
Sales discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses.
F-29
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Costs and expenses
Costs and expenses are operating expenses, which consist of costs of material and labor, selling, general and administrative expenses, and depreciation, are expensed as incurred.
Inventory
Inventory consists of material and finished goods ready for sale and is stated at the lower of cost or net realizable value. The Company values its inventory using the FIFO 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 selling expenses. 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 net realizable value. The Company also reviews inventory for slow moving inventory and obsolescence and records allowance for obsolescence.
Property and equipment
Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets as follows:
Machinery and equipment |
7 years |
|
Office equipment |
5 years |
|
Motor vehicles |
5 years |
|
Leasehold improvements |
5 to 15 years |
Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property and equipment were recorded during the years ended September 30, 2022 and 2021.
Leases
On its inception date, the Company adopted 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
F-30
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
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.
Stock-based Compensation
The Company applies ASC No. 718, “Compensation-Stock Compensation,” which requires that share-based payment transactions with employees and nonemployees upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period. In addition to the requisite service period, the Company also evaluates the performance condition and market condition under ASC 718-10-20. For an award which contains both a performance and a market condition, and where both conditions must be satisfied for the award to vest, the market condition is incorporated into the fair value of the award, and that fair value is recognized over the employee’s requisite service period or nonemployee’s vesting period if it is probable the performance condition will be met. If the performance condition is ultimately not met, compensation cost related to the award should not be recognized (or should be reversed) because the vesting condition in the award has not been satisfied.
The Company will recognize forfeitures of such equity-based compensation as they occur.
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 has adopted the provisions of ASC 740 since inception 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 Texas and California, as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect to the year in which such attributes are utilized.
The Company believes that its 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.
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
F-31
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
tax matters. The Company recognizes its 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.
Earnings per share
Basic earnings per share are computed by dividing net income attributable to holders of common stock by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities to issue common stock were exercised.
Recently issued accounting pronouncements
In June 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments in this ASU clarify the guidance in ASC 820 on the fair value measurement of an equity security that is subject to a contractual sale restriction and require specific disclosures related to such an equity security. This standard is effective for fiscal years beginning after December 15, 2024. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the entity had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2023, with early application permitted. The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, “Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU among other things clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments — Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. ASU 2020-01 is effective For public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. An entity should apply ASU 2020-01 prospectively at the beginning of the interim period that includes the adoption date. The adoption of ASU 2020-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes. The update is intended to simplify the current rules regarding the accounting for income taxes and addresses several technical topics including accounting for franchise taxes, allocating income taxes between a loss in continuing operations and in other categories such as discontinued operations, reporting income taxes for legal entities that are not subject to income taxes, and interim accounting for enacted changes in tax laws. The new standard is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022; however, early adoption is permitted. The Company does not expect the adoption of this standard have a material impact on the consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.
F-32
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
Subsequent events
The Company evaluated subsequent events and transactions that occurred after the balance sheet date through February 7, 2023, which is the date that the consolidated financial statements are available to be issued. Material subsequent events that required recognition or additional disclosure in the consolidated financial statements are presented.
Note 3 — Reverse Acquisition under Common Control
On January 21, 2022, the sole owner of the Company and IMSC, Mr. Dekui Liu, entered into an agreement to sell 100% of his ownership in IMSC in exchange for 15,170,000 shares of the Company’s common stock (the “Transaction”). Below are the charts illustrating the structure before and after the Transaction:
F-33
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 3 — Reverse Acquisition under Common Control (cont.)
Under ASC 805, Business Combination, A common-control transaction is typically a transfer of net assets or an exchange of equity interests between entities under the control of the same parent. While a common-control transaction is similar to a business combination for the entity that receives the net assets or equity interests, such a transaction does not meet the definition of a business combination because there is no change in control over the net assets. Therefore, the accounting and reporting for a transaction between entities under common control is outside the scope of the business combinations guidance in ASC 805-10, ASC 805-20, and ASC 805-30 and is addressed in the “Transactions Between Entities Under Common Control” subsections of ASC 805-50.
Further, a reverse acquisition occurs when there is a business combination in which the entity issuing securities is designated as the acquiree for accounting purposes. This arrangement usually takes place so that a privately-held company can be acquired by a smaller shell company that is publicly-held, resulting in a combined entity that is publicly-held. As of the date of the Transaction, INNO HOLDINGS INC. did not have any operations or assets, which in substance was a shell company, and IMSC was an operating company with net assets of approximately $1.2 million.
Accordingly, Under ASC 805-40 and ASC 805-50, the Transaction is a reverse acquisition between entities under common control, in which INNO HOLDINGS INC. is the accounting acquiree and IMSC is the accounting acquirer. The assets, liabilities and operations of the two entities are combined at their historical carrying amounts, with all historical periods adjusted as if the entities had always been combined. The consolidated financial statements represent the continuation of the financial statements of IMSC except for its capital structure.
Note 4 — Accounts receivable
Accounts receivable for the Company consisted of the following as of the dates indicated below:
September 30, |
September 30, |
|||||
Accounts receivable |
$ |
1,807,290 |
$ |
537,100 |
||
Accounts receivable – related party |
|
100,000 |
|
— |
||
Less: allowance for credit losses |
|
— |
|
— |
||
Total accounts receivable |
$ |
1,907,290 |
$ |
537,100 |
There was no credit loss for the years ended September 30, 2022 and 2021.
Note 5 — Inventories
As of September 30, 2022 and 2021, inventories consisted of the following:
September 30, |
September 30, |
|||||
Raw material |
$ |
296,042 |
$ |
41,822 |
||
Production inventory |
|
33,862 |
|
243,288 |
||
|
|
|||||
Total |
$ |
329,904 |
$ |
285,110 |
As of September 30, 2022 and 2021, there was no allowance for obsolescence recorded.
F-34
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 6 — Prepayments and other current assets
As of September 30, 2022 and 2021, prepayments and other current assets consisted of the following:
September 30, |
September 30, |
|||||
Advance to suppliers |
$ |
102,027 |
$ |
— |
||
Other prepayments |
|
74,564 |
|
20,438 |
||
|
|
|||||
Total |
$ |
176,591 |
$ |
20,438 |
Note 7 — Property and equipment, net
As of September 30, 2022 and 2021, property and equipment consisted of the following:
September 30, |
September 30, |
|||||||
Machinery and equipment |
$ |
270,000 |
|
$ |
— |
|
||
Office equipment |
|
5,488 |
|
|
— |
|
||
Motor vehicles |
|
64,082 |
|
|
60,551 |
|
||
Leasehold improvements |
|
383,050 |
|
|
— |
|
||
Total |
|
722,620 |
|
|
60,551 |
|
||
Less: accumulated depreciation |
|
(28,498 |
) |
|
(10,500 |
) |
||
Property and equipment, net |
$ |
694,122 |
|
$ |
50,051 |
|
For the years ended September 30, 2022 and 2021, depreciation expenses amounted to $33,138 and $6,000, respectively.
Note 8 — Loans payable
Short-term loans
PPP loans payable
On April 26, 2020, the Company entered into an agreement with Allegiance Bank (the “Lender”) for a total amount of $80,000, pursuant to a loan agreement issued by the Company to the Lender (the “PPP Loan 1”).
On February 16, 2021, the Company entered into another agreement with the Lender for a total amount of $150,000, pursuant to a loan agreement issued by the Company to the Lender (the “PPP Loan 2”).
The PPP Loans were made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The PPP Loans bear interest at the rate of 1.00% per annum and may be repaid at any time without penalty. The PPP Loans contain customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the loan agreement. The occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the PPP Loans.
The Company accounts for the PPP loans under Topic 470 as follows: (a) Initially record the cash inflow from the PPP Loans as a financial liability and accrued interest in accordance with the interest method under ASC Subtopic 835-30; (b) Not impute additional interest at a market rate; (c) Continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven and the debtor has been legally released by the Lender or (2) the debtor pays off the loan; (d) Reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.
F-35
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 8 — Loans payable (cont.)
On July 30, 2021, the total $230,000 PPP Loans due to Allegiance Bank was fully forgiven. As of September 30, 2022 and 2021, the Company had an outstanding balance of $0 and $0, respectively, under the PPP Loans.
Revolving line of credit
On September 16, 2022, the Company entered into an agreement with Origin Bank for a revolving line of credit (the “Line of Credit”) of up to $1,000,000 with interest at the floating Prime Rate plus one percent (1.0%) per annum, which is to be adjusted daily to the rate in effect. Interest shall be due and payable monthly as it accrues. The accrued unpaid interest and the principal is due and payable in twelve (12) months from September 16, 2022. The Line of Credit is secured by a Security Agreement and Financing Statement that covers certain properties of the Company and guaranteed by Mr. Dekui Liu, the majority shareholder and CEO of the Company. For the year ended September 30, 2022, the Company recorded interest expense of $0. As of September 30, 2022, the total outstanding balance of the Note was $710,000, which was presented on the consolidated balance sheet as a short-term loan.
Long-term loan
Promissory note payable
On October 28, 2021, the Company issued to BancorpSouth Bank a five-year unsecured 4.75% promissory note, payable in equal monthly installments of $4,661 commencing November 28, 2021 (the “Note”). The principal amount of the Note was $248,500. The Note is secured by a Security Agreement and Financing Statement that covers certain properties of the Company and guaranteed by Mr. Dekui Liu, the majority shareholder and CEO of the Company. For the year ended September 30, 2022, the Company recorded interest expense of $10,114. As of September 30, 2022, the total outstanding balance of the Note was $207,268, which was presented on the consolidated balance sheet as a current portion of $47,259 and a non-current portion of $160,009.
Note 9 — Related party transactions
During the years ended September 30, 2022 and 2021, the Company borrowed short term loans without interest from its majority shareholder and CEO, Mr. Dekui Liu, for operation and cashflow needs from time to time. As of September 30, 2022 and 2021, the outstanding balance due to Mr. Liu was $12,233 and $80,706, respectively.
During the year ended September 30, 2022, the Company engaged Yunited Assets LLC (“Yunited”), a limited liability company owned by Mr. Cheng Yu, the Chief Scientist and minority owner of the Company’s subsidiary, Inno Research Institute, for consultation services on a project-by-project basis. During the year ended September 30, 2022, the Company recorded $19,950 of consulting fees in the general and administrative expenses. As of September 30, 2022 and 2021, there were no unpaid balances due to Yunited.
In March 2022, the Company entered into an agreement with Wise Hill Inc. (“Wise Hill”), a Florida corporation wholly owned by a minority shareholder of the Company. Pursuant to the agreement, the Company sold prefab home products of $250,000 to Wise Hill. For the year ended September 30, 2022, the Company recorded revenue-related party of $250,000. As of September 30, 2022, the outstanding balance of accounts receivable — related party was $100,000.
During the year ended September 30, 2022, the Company purchased prefab home and other material and supplies from Baicheng Trading LLC, in which the father of Mr. Dekui Liu, the Company’s majority shareholder and CEO, is a director. As of September 30, 2022, the outstanding balance of accounts payable from a related party was $485,595.
F-36
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 10 — Income taxes
On December 22, 2017, the President of the United States signed into law H.R.1, formerly known as the Tax Cuts and Jobs Act (the “Tax Legislation”). The Tax Legislation significantly revised the U.S. tax code by (i) lowering the U.S. federal statutory income tax rate from 35% to 21%, (ii) implementing a territorial tax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, (iv) requiring a current inclusion of global intangible low taxed income of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creating the base erosion anti-abuse tax regime, (vi) implementing bonus depreciation that will allow for full expensing of qualified property, and (vii) limiting deductibility of interest and executive compensation expense, among other changes. The Company has computed its tax expenses using the new statutory rate effective on January 1, 2018 of 21%.
Other provisions of the new legislation include, but are not limited to, limiting deductibility of interest and executive compensation expense. These additional items have been considered in the income tax provision for the years ended September 30, 2022 and 2021.
Texas imposes a franchise tax that applies to most business entities that are formed or qualified to do business, or which are otherwise doing business, in Texas. Under the Texas franchise tax, a 0.75% tax is imposed for the years ended September 30, 2022 and 2021 on the Company’s taxable margin that is apportioned to Texas. Taxable margin is generally defined as revenues less certain costs.
The income tax provision for the years ended September 30, 2022 and 2021 consisted of the following:
September 30, |
||||||||
2022 |
2021 |
|||||||
Current: |
|
|
|
|
||||
Federal |
$ |
— |
|
$ |
22,104 |
|
||
State |
|
9,915 |
|
|
4,477 |
|
||
Total current income tax provision |
|
9,915 |
|
|
26,581 |
|
||
|
|
|
|
|||||
Deferred: |
|
|
|
|
||||
Federal |
|
(235,219 |
) |
|
(88,022 |
) |
||
State |
|
— |
|
|
— |
|
||
Increase/(decrease) in valuation allowance |
|
235,219 |
|
|
88,022 |
|
||
Total deferred taxes |
|
— |
|
|
— |
|
||
|
|
|
|
|||||
Total provision for income taxes |
$ |
9,915 |
|
$ |
26,581 |
|
The deferred tax asset as of September 30, 2022 and 2021 consisted of the following:
September 30, |
||||||||
2022 |
2021 |
|||||||
Stock-based compensation |
$ |
63,000 |
|
$ |
— |
|
||
Net operating loss |
|
94,531 |
|
|
— |
|
||
Depreciation |
|
65,691 |
|
|
86,107 |
|
||
Unearned revenue |
|
9,462 |
|
|
— |
|
||
Others |
|
2,535 |
|
|
1,915 |
|
||
Total deferred tax assets |
|
235,219 |
|
|
88,022 |
|
||
Less: valuation allowance |
|
(235,219 |
) |
|
(88,022 |
) |
||
$ |
— |
|
$ |
— |
|
F-37
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 10 — Income taxes (cont.)
The Company is subject to U.S. federal income tax as well as state income tax in certain jurisdictions. The tax years 2019 to 2022 remain open to examination by the major taxing jurisdictions to which the Company is subject. The following is a reconciliation of income tax expenses at the effective rate to income tax at the calculated statutory rates:
September 30, |
September 30, |
|||||
Statutory tax rate |
|
|
||||
Federal |
21.00 |
% |
21.00 |
% |
||
State (net of federal benefit) |
(0.89 |
)% |
0.75 |
% |
||
Net effect of state income tax deduction and other permanent differences |
(21.00 |
)% |
(55.22 |
)% |
||
Effective tax rate |
(0.89 |
)% |
(33.47 |
)% |
As of September 30, 2022 and 2021, the outstanding income tax payable was $0 and $13,809, respectively.
Note 11 — Losses per share
The following table sets forth the computation of basic and diluted losses per share for the years presented:
For the year ended |
||||||||
2022 |
2021 |
|||||||
Numerator: |
|
|
|
|
||||
Net loss attributable to INNO HOLDINGS INC. |
$ |
(1,008,662 |
) |
$ |
(105,996 |
) |
||
Denominator: |
|
|
|
|
||||
Weighted-average shares used in computing basic |
|
17,230,822 |
|
|
16,170,000 |
|
||
Losses per share of ordinary shares: – basic and diluted |
$ |
(0.06 |
) |
$ |
(0.01 |
) |
____________
* On January 21, 2022, the sole owner of the Company and Inno Metal Studs Corp. (“IMSC”), Mr. Dekui Liu, entered into an agreement to sell 100% of his ownership in IMSC for 15,170,000 shares of the Company’s common stock (the “Transaction”). Under ASC 805-40 and ASC 805-50, the Transaction was considered as a reverse acquisition between entities under common control. Accordingly, the outstanding shares of common stock upon completion of the Transaction was presented retroactively as outstanding for all reporting periods.
* On November 30, 2022, the Company implemented a 2-for-1 forward split of the issued and outstanding shares of Common Stock of the Company. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. The computation of basic and diluted Losses Per Share were retroactively adjusted for all periods presented.
Note 12 — Equity
The Company was incorporated in Texas on September 8, 2021. The total authorized shares of capital stock were 200,000,000 shares without par value.
On November 30, 2022, the Company effected a forward stock split (the “Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 2-for-1. Further on July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. Shortly after the Reverse Stock Split, , the Board of Directors of the Company approved issuance of additional shares to preserve the original purchase price per share of the shares sold in the period from February 1 to June 30, 2023. All share numbers of the Company’s Common Stock are stated on a post-split basis.
F-38
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 12 — Equity (cont.)
At the inception date, September 8, 2021, the Company issued 1,000,000 shares of common stock to its founder, Mr. Dekui Liu.
On February 2, 2022, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his 100% ownership in IMSC. See Note 3 above for details.
On January 31, 2022, the Company issued 1,500,000 of its series A convertible preferred stock to three accredited investors for $1,500,000 in cash. As of September 30, 2022, the 1,500,000 shares of series A convertible preferred stock had been converted to 1,500,000 shares of common stock after giving effect to the stock splits.
On January 31 and September 30, 2022, the Company issued a total of 300,000 shares of common stock to an investor for services. These shares were valued at $1.0 per share, which was the per share price for the most recent sale of the Company’s capital stock to accredited investors. For the year ended September 30, 2022, the Company recorded $300,000 as stock compensation expense.
As of September 30, 2022 and 2021, after giving effect to the stock splits of the outstanding shares of Common Stock, there were 17,970,000 and 16,170,000 shares of Common Stock issued and outstanding, respectively. The total authorized number of shares of capital stock was 100,000,000 shares without par value.
Note 13 — 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 September 30, 2022 and 2021, $50,626 and $96,861, respectively, were deposited with various major financial institutions in the United States. Accounts at each institution in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. The Company did not have amount in excess of the FDIC insurance limit, as of September 30, 2022 and 2021.
Accounts receivable are 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.
Customer and vendor concentration risk
For the years ended September 30, 2022 and 2021, one customer accounted for 15% and three customers accounted for 91% (55%, 20%, and 16%) of the Company’s total revenues, respectively. As of September 30, 2022 and 2021, accounts receivable from five customers accounted for 80% and one customer accounted for 100% of the Company’s total accounts receivable, respectively.
For the years ended September 30, 2022 and 2021, three suppliers accounted for 75% and two suppliers accounted for 70% of the Company’s total purchases, respectively. As of September 30, 2022 and 2021, accounts payable to three suppliers accounted for 94% and two suppliers accounted for 84% of the Company’s total accounts payable, respectively.
Note 14 — Commitments and contingencies
Lease commitments
The Company has adopted ASC 842 since its inception date.
The Company has entered into a lease agreement for office and production space in Texas with a lease period from December 1, 2019 until December 31, 2024 at a rate of $4,129 to $5,089 per month.
F-39
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 14 — Commitments and contingencies (cont.)
The Company has also entered into a lease agreement for office and production space in California with a lease period from May 1, 2022 until April 30, 2027 at a rate of $6,617 to $7,740 per month.
In addition, the Company will be responsible for its pro rata share of certain costs, including utility costs, insurance and common area costs, as further detailed in the lease agreements.
Total commitment for the full term of these leases is $605,426. $453,883 and $170,718 of operating lease right-of-use assets and $460,395 and $176,146 of operating lease liabilities were reflected on the September 30, 2022 and 2021 financial statements, respectively.
Years Ended September 30, 2022 and 2021:
Lease cost |
9/30/2022 |
9/30/2021 |
||||||
Operating lease cost (included in G&A in the Company’s statement of operations) |
$ |
95,230 |
|
$ |
59,393 |
|
||
Other information |
|
|
|
|
||||
Cash paid for amounts included in the measurement of lease liabilities |
$ |
94,146 |
|
$ |
61,063 |
|
||
Remaining term in years |
|
2.25 – 4.58 |
|
|
3.25 |
|
||
Average discount rate – operating leases |
|
8 |
% |
|
8 |
% |
The supplemental balance sheet information related to leases for the year is as follows:
Operating leases |
9/30/2022 |
9/30/2021 |
||||
Right of use asset – non-current |
$ |
453,883 |
$ |
170,718 |
||
Lease Liability – current |
|
110,993 |
|
49,586 |
||
Lease Liability – non-current |
|
349,402 |
|
126,560 |
||
Total operating lease liabilities |
$ |
460,395 |
$ |
176,146 |
Maturities of the Company’s lease liabilities are as follows:
Operating |
||||
For year ending September 30: |
|
|
||
2023 |
$ |
141,784 |
|
|
2024 |
|
145,013 |
|
|
2025 |
|
102,574 |
|
|
2026 |
|
90,800 |
|
|
2027 |
|
54,183 |
|
|
Less: Imputed interest/present value discount |
|
(73,959 |
) |
|
Present value of lease liabilities |
$ |
460,395 |
|
Contingencies
The Company is not currently a party to any material legal proceedings, investigations or claims. As the Company may, from time to time, be involved in legal matters arising in the ordinary course of its business, 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.
F-40
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of September 30, 2022 and 2021 and for the Years Ended September 30, 2022 and 2021
Note 15 — Subsequent events
On November 30, 2022, the Company effected a forward stock split (the “Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 2-for-1. All share numbers of the Company’s Common Stock are stated on a post-split basis.
On December 3, 2022, the Company entered into an agreement with Donedeal LLC ( “Donedeal” ), an accredited investor to sell 142,857 shares of its common stock at a per share price of $3.5 for a total of $500,000 in cash.
In February 2023, The Company issued 27,028 shares of its common stock at a price of $3.7 per share to an accredited investor for $100,000 in cash.
In March 2023, The Company issued 78,947 shares of its common stock at a price of $3.8 per share to an accredited investor for $300,000 in cash.
In April and May 2023, Mr. Dekui Liu, the Company’s chief executive officer, sold 118,421 shares of the Company’s common stock he owned to three investors at $3.8 per share for $450,000 in cash. Mr. Liu then lent the $450,000 to the Company as a short-term loan, which is due on demand without interest.
On June 20, 2023, the Company issued 32,895 shares of its common stock to two accredited investors at $3.8 per share for a total value of $125,000 for services.
On July 24, 2023, the Company effected a reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding shares of the common stock at a split ratio of 1-for-2 such that every holder of common stock of the Company shall receive one share of common stock for every two shares of common stock held and to reduce the number of authorized shares of common stock from 200,000,000 to 100,000,000. Shortly after the Reverse Stock Split, the Board of Directors of the Company approved issuance of additional shares to preserve the original purchase price per share of the shares sold in the period from December 1, 2022 to June 30, 2023. All references to number of shares, and to per share information in the consolidated financial statements have been retroactively adjusted.
F-41
2,500,000 Shares
INNO HOLDINGS INC.
_______________________
PROSPECTUS
_______________________
September 13, 2023
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table indicates the expenses to be incurred in connection with the offering described in this registration statement, other than underwriting discounts and commissions, all of which will be paid by us. All amounts are estimated except the Securities and Exchange Commission registration fee and the Financial Industry Regulatory Authority, Inc., or FINRA filing.
Amount |
|||
Securities and Exchange Commission registration fee |
$ |
11,020 |
|
FINRA filing fee |
$ |
3,950 |
|
NASDAQ listing fee |
$ |
5,000 |
|
Accountants’ fees and expenses |
$ |
300,773 |
|
Legal fees and expenses |
$ |
405,000 |
|
Printing and engraving expenses |
$ |
40,000 |
|
Miscellaneous |
$ |
30,257 |
|
Total expenses |
$ |
796,000 |
____________
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers.
The Texas Business Organizations Code, or the TBOC, permits a corporation to indemnify a director who was, is or is threatened to be a named defendant or respondent in a proceeding as a result of the performance of his duties if such person acted in good faith and, in the case of conduct in the person’s official capacity as a director, in a manner he reasonably believed to be in the best interests of the corporation and, in all other cases, that the person reasonably believed his conduct was not opposed to the best interests of the corporation and with respect to any criminal action or proceeding, that such person had no reasonable cause to believe his conduct was unlawful. Subject to certain exceptions, the TBOC further permits a corporation to eliminate in its certificate of formation all monetary liability of the corporation’s directors to the corporation or its shareholders for conduct in performance of such director’s duties. Our amended and restated certificate of formation provides that a director of the Company will not be liable to the Company or its shareholders for monetary damages for any act or omission by the director in the performance of his duties, except that, pursuant to the TBOC, there will be no limitation of liability to the extent the director has been found liable under applicable law for (i) breach of the director’s duty of loyalty owed to the Company or its shareholders; (ii) an act or omission not in good faith that constitutes a breach of duty of the director to the Company or that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which the director received an improper benefit, regardless of whether the benefit resulted from an action taken within the scope of the director’s duties; or (iv) an act or omission for which the liability of the director is expressly provided for by an applicable statute.
Section 8.101 and 8.103 of the TBOC provide that a corporation may indemnify a person who was, is or is threatened to be a named defendant or respondent in a proceeding because the person is or was a director only if a determination is made that such indemnification is permissible under the TBOC: (i) by a majority vote of the directors who at the time of the vote are disinterested and independent, regardless of whether such directors constitute a quorum; (ii) by a majority vote of a board committee designated by a majority of disinterested and independent directors and consisting solely of disinterested and independent directors; (iii) by special legal counsel selected by the Board of Directors or a committee of the Board of Directors as set forth in (i) or (ii); (iv) by the shareholders in a vote that excludes the shares held by directors who are not disinterested and independent; or (v) by a unanimous vote of the shareholders.
Section 8.104 of the TBOC provides that a corporation may pay or reimburse, in advance of the final disposition of the proceeding, reasonable expenses incurred by a present director who was, is or is threatened to be made a named defendant or respondent in a proceeding after the corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under Section 8.101 and a written undertaking by or on behalf of the director to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the director is not otherwise permitted
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under the TBOC. Section 8.105 also provides that reasonable expenses incurred by a former director, or a present or former employee, agent or officer of a corporation, who was, is or is threatened to be made a named defendant or respondent in a proceeding may be paid or reimbursed by the corporation, in advance of the final disposition of the action, as the corporation considers appropriate.
Section 8.105 of the TBOC provides that, subject to restrictions in its certificate of formation and to the extent consistent with other law, a corporation may indemnify and advance expenses to a person who is not a director, including an officer, employee or agent of the corporation as provided by: (i) the corporation’s governing documents; (ii) an action by the corporation’s governing authority; (iii) resolution by the shareholders; (iv) contract; or (v) common law. As consistent with Section 8.105, persons who are not directors may seek indemnification and advancement of expenses from the Company to the same extent that directors may seek indemnification and advancement of expenses from the Company.
Further, our amended and restated certificate of formation and amended and restated bylaws provide that we must indemnify our directors and officers to the fullest extent authorized by law. We believe that these indemnification provisions and the directors’ and officers’ insurance are useful to attract and retain qualified directors and executive officers.
We expect to maintain standard policies of insurance that provide coverage (1) to our directors and officers against loss rising from claims made by reason of breach of duty or other wrongful act and (2) to us with respect to indemnification payments that we may make to such directors and officers.
In any underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act of 1933, as amended, or the Securities Act, against certain liabilities.
Item 15. Recent Sales of Unregistered Securities.
At the inception date, September 8, 2021, the Company issued 1,000,000 shares of common stock to its founder, Mr. Dekui Liu.
On January 31, 2022, the Company issued 1,500,000 of its series A convertible preferred stock to three accredited investors for $1,500,000 in cash. As of September 30, 2022, the 1,500,000 shares of series A convertible preferred stock had been converted to 1,500,000 shares of common stock after giving effect to the stock split.
On January 31 and September 30, 2022, the Company issued a total of 300,000 shares of common stock to an investor for services. These shares were valued at $1.0 per share, which was the per share price for the most recent sale of the Company’s capital stock to accredited investors.
On February 2, 2022, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his 100% ownership in Inno Metal Studs Corp.
On December 3, 2022, we entered into a Pre-IPO Stock I Purchase Agreement with Donedeal LLC (the “Purchaser”) whereby the Purchaser purchased 142,857 shares of common stock at a purchase price of $500,000.
On February 24, 2023, The Company issued 27,028 shares of its common stock to an accredited investor at $3.7 per share for $100,000 in cash.
On March 20, 2023, The Company issued 78,947 shares of its common stock to an accredited investor at $3.80 per share for $300,000 in cash.
On April 27, 2023, Mr. Dekui Liu, the Company’s chief executive officer, sold 26,316 shares of the Company’s common stock he owned to an investor at $3.80 per share for $100,000 in cash. Mr. Liu then lent the $100,000 to the Company as a short-term loan, which is due on demand without interest.
In May 2023, Mr. Dekui Liu, the Company’s chief executive officer, sold 92,105 shares of the Company’s common stock he owned to two investors at $3.8 per share for $350,000 in cash. Mr. Liu then lent the $350,000 to the Company as a short-term loan, which is due on demand without interest.
On June 20, 2023, the Company issued 13,158 shares of its common stock for a total value of $50,000 for services to be rendered during next twelve months by the immediate relative of the Company’s Chief Financial Officer. On June 20, 2023, the Company issued 19,737 shares of its common stock for a total value of $75,000 for services to be rendered during next twelve months by one nonemployee contractor. These shares were valued at $3.8 per share.
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Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits: Reference is made to the Exhibit Index following the signature pages hereto, which Exhibit Index is hereby incorporated into this Item.
Exhibit No. |
Description |
|
1.1** |
||
3.1* |
||
3.2* |
First Amendment to Certificate of Formation of the Registrant |
|
3.3* |
Second Amendment to Certificate of Formation of the Registrant |
|
3.4* |
||
3.5* |
Amended and Restated Certificate of Formation of the Registrant |
|
3.6* |
||
4.1* |
||
5.1** |
||
10.1* |
||
10.2*++# |
||
10.3* |
||
10.4* |
Offer Letter, by and between Inno Holdings, Inc. and Tianwei Li, dated July 14, 2023. |
|
10.5**++ |
||
14.1* |
||
21.1* |
||
23.1** |
||
23.2* |
||
24.1* |
||
99.1* |
||
99.2* |
||
99.3* |
||
99.4* |
||
99.5* |
||
107** |
____________
* Previously filed.
** Filed or furnished herewith.
++ Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10). The omitted information is not material and would likely cause competitive harm to the Company if publicly disclosed. The Company agrees to furnish an unredacted copy to the SEC upon its request.
# Certain schedules and exhibits have been omitted in compliance with Regulation S-K Item 601(a)(5). The Company agrees to furnish a copy of any omitted schedule or exhibit to the SEC upon its request.
(b) Financial Statement Schedules: All schedules are omitted because the required information is inapplicable or the information is presented in the financial statements and the related notes.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933, as amended (the “Securities Act”);
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the
II-3
foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (1)(i), (1)(ii) and (1)(iii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the Securities and Exchange Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part of the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the Securities Act to any purchaser:
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and
(B) Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
(5) That for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to any charter provision, by law or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the registrant of expenses incurred or paid by a
II-4
director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Houston, State of Texas on September 13, 2023.
INNO HOLDINGS, INC. |
||||
By: |
/s/ Dekui Liu |
|||
Dekui Liu |
||||
Chief Executive Officer (Principal Executive Officer) |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Name |
Position |
Date |
||
/s/ Dekui Liu |
Chief Executive Officer, Director and Chairman |
September 13, 2023 |
||
Dekui Liu |
(Principal Executive Officer) |
|||
* |
Chief Financial Officer |
September 13, 2023 |
||
Tianwei Li |
(Principal Financial and Accounting Officer) |
|||
* |
Director |
September 13, 2023 |
||
Ying Liu |
||||
* |
Director |
September 13, 2023 |
||
Shaoren Liu |
*By: |
/s/ Dekui Liu |
|||
Name: |
Dekui Liu |
|||
Title: |
Attorney-in-fact |
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Exhibit 1.1
INNO HOLDINGS INC.
UNDERWRITING AGREEMENT
[ ], 2023
AC Sunshine Securities LLC
8761 The Esplanade Ct., STE 30
Orlando, FL 32836
As Representative of the Underwriters
named on Schedule A hereto
Ladies and Gentlemen:
The undersigned, Inno Holdings Inc., a Texas corporation (collectively with its subsidiaries and affiliates, including, without limitation, all entities disclosed or described in the Registration Statement (as hereinafter defined) as being subsidiaries or affiliates of the Company, the “Company”), hereby confirms its agreement (this “Agreement”) with the several underwriters (such underwriters, including the Representative (as defined below), the “Underwriters” and each an “Underwriter”) named in Schedule A hereto for AC Sunshine Securities LLC is acting as the representative (in such capacity, the “Representative”) to issue and sell an aggregate of [●] shares of common stock (“Firm Shares”), of no par value (“Common Stock”). The Company has also granted to the Underwriters an option to purchase up to [●]1 shares of Common Stock, on the terms and for the purposes set forth in Section 2(c) hereof (the “Additional Shares”). The Firm Shares and any Additional Shares purchased pursuant to this Agreement are herein collectively referred to as the “Offered Securities.” The offering and sale of the Offered Securities contemplated by this Agreement is referred to herein as the “Offering.”
The Company confirms its agreement with the Underwriters as follows:
SECTION 1. Representations and Warranties of the Company.
The Company represents and warrants to the Underwriters as follows with the understanding that the same may be relied upon by the Underwriters in this Offering, as of the date hereof and as of the Closing Date (as defined below) and each Option Closing Date (as defined below), if any:
(a) Filing of the Registration Statement. The Company has prepared and filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (File No. 333-273429), which contains a form of prospectus to be used in connection with the public offering and sale of the Offered Securities. Such registration statement, as amended, including the financial statements and the notes thereto, exhibits and schedules thereto contained in the registration statement at the time such registration statement became effective, in the form in which it was declared effective by the Commission under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations promulgated thereunder (the “Securities Act Regulations”), and including any required information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A under the Securities Act, or pursuant to the Securities Exchange Act of 1934, as amended (collectively, the “Exchange Act”) and the rules and regulations promulgated thereunder (the “Exchange Act Regulations”), is called the “Registration Statement.” Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the “Rule 462(b) Registration Statement,” and from and after the date and time of filing of the Rule 462(b) Registration Statement, the term “Registration Statement” shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first filed pursuant to Rule 424(b) under the Securities Act after the date and time that this Agreement is executed and delivered by the parties hereto, or, if no filing pursuant to Rule 424(b) under the Securities Act is required, the form of final prospectus relating to the Offered Securities included in the Registration Statement at the effective date of the Registration Statement (“Effective Date”), is called the “Prospectus.” All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, the preliminary prospectus included in the Registration Statement (each, a “preliminary prospectus”), the Prospectus, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”). The preliminary prospectus that was included in the Registration Statement immediately prior to the Applicable Time (as defined below) is hereinafter called the “Pricing Prospectus.” Any reference to the “most recent preliminary prospectus” shall be deemed to refer to the latest preliminary prospectus included in the registration statement. Any reference herein to any preliminary prospectus or the Prospectus or any supplement or amendment to either thereof shall be deemed to refer to and include any documents incorporated by reference therein as of the date of such reference.
1 | 15% of the shares of common stock being offered. |
(b) “Applicable Time” means [●] p.m., Eastern Time, on the date of this Agreement.
(c) Compliance with Registration Requirements. The Registration Statement has been declared effective by the Commission under the Securities Act and the Securities Act Regulations on [●], 2023. The Company has complied, to the Commission’s satisfaction, with all requests of the Commission for additional or supplemental information. No stop order preventing or suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied or will comply in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical in content to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Offered Securities, other than with respect to any artwork and graphics that were not filed. Each of the Registration Statement, any Rule 462(b) Registration Statement, and any post-effective amendment to either the Registration Statement or the Rule 462(b) Registration Statement, at the time it became effective and at all subsequent times until the expiration of the prospectus delivery period required under Section 4(3) of the Securities Act, complied and will comply in all material respects with the Securities Act and the Securities Act Regulations and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times until the Underwriters have completed the Offering, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement or any Rule 462(b) Registration Statement, or any post-effective amendment to either the Registration Statement or the Rule 462(b) Registration Statement, or in the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, made in reliance upon and in conformity with information relating to the Underwriters furnished to the Company in writing expressly for use therein, it being understood and agreed that the only such information furnished on behalf of any of the Underwriters consists of (i) the name of the Underwriters contained on the cover page of the Pricing Prospectus and Prospectus and (ii) the sub-sections titled “Price Stabilization” and “Electronic Offer, Sale and Distribution of Shares” in each case under the caption “Underwriting” in the Prospectus (the “Underwriter Information”). There are no contracts or other documents required to be described in the Pricing Prospectus or the Prospectus or to be filed as exhibits to the Registration Statement that have not been fairly and accurately described in all material respects or filed as required.
(d) Disclosure Package. The term “Disclosure Package” shall mean (i) the Pricing Prospectus, as amended or supplemented, (ii) each issuer free writing prospectus, as defined in Rule 433 under the Securities Act (each, an “Issuer Free Writing Prospectus”), if any, identified in Schedule B hereto, (iii) the pricing terms set forth in Schedule C to this Agreement, and (iv) any other free writing prospectus that the parties hereto shall hereafter expressly agree in writing to treat as part of the Disclosure Package. As of the Applicable Time, the Disclosure Package did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from the Disclosure Package based upon and in conformity with the Underwriter Information.
2
(e) Company Not Ineligible Issuer. (i) At the time of filing the Registration Statement and (ii) as of the date of the execution and delivery of this Agreement, the Company was not and is not an Ineligible Issuer (as defined in Rule 405 under the Securities Act), without taking account any determination by the Commission pursuant to Rule 405 under the Securities Act that it is not necessary that the Company be considered an Ineligible Issuer.
(f) Issuer Free Writing Prospectuses. No Issuer Free Writing Prospectus includes any information that conflicts with the information contained in the Registration Statement, including any document incorporated by reference therein that has not been superseded or modified. The foregoing sentence does not apply to statements in or omissions from any Issuer Free Writing Prospectus based upon and in conformity with the Underwriter Information.
(g) Offering Materials Furnished to the Underwriters. The Company has delivered to the Underwriters copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and each preliminary prospectus and the Prospectus, as amended or supplemented, in such quantities and at such places as the Underwriters have reasonably requested in writing.
(h) Distribution of Offering Material by the Company. The Company has not distributed or authorized the distribution of, and will not distribute, prior to the completion of the Underwriters’ purchase of the Offered Securities, any offering material in connection with the offering and sale of the Offered Securities other than a preliminary prospectus, the Pricing Prospectus, the Prospectus, any Issuer Free Writing Prospectus reviewed and consented to by the Underwriters, and the Registration Statement.
(i) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles.
(j) Authorization of the Offered Securities and the Underwriter’s Securities. The Offered Securities to be sold by the Company through the Underwriters have been duly and validly authorized by all required corporate action and have been reserved for issuance and sale pursuant to this Agreement and, when so issued and delivered by the Company, will be validly issued, fully paid and non-assessable, free and clear of all Liens (as defined in sub-section (r)) imposed by the Company. The shares of Common Stock underlying the Underwriters’ Warrant (the “Underlying Shares” and together with the Underwriters’ Warrant, the “Underwriters’ Securities”) are duly authorized and, when issued and paid for in accordance with the terms of the Underwriters’ Warrant, as applicable, will be duly and validly issued, fully paid and non-assessable, free and clear of all Liens imposed by the Company. The Company has sufficient shares of Common Stock for the issuance of the maximum number of Offered Securities and underlying Shares issuable pursuant to the Offering as described in the Prospectus.
(k) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any securities of the Company registered for sale under the Registration Statement and included in the Offering.
(l) No Material Adverse Change. Except as otherwise disclosed in the Disclosure Package, subsequent to the respective dates as of which information is given in the Disclosure Package: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, prospects or operations, whether or not arising from transactions in the ordinary course of business, of the Company (any such change, a “Material Adverse Change” and any resulting effect, a “Material Adverse Effect”); (ii) the Company has not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company in respect of its shares of Common Stock.
3
(m) Independent Accountant. TAAD LLP (the “Accountant”), which has expressed its opinions with respect to the audited financial statements (which term as used in this Agreement includes the related notes thereto) of the Company filed with the Commission as a part of the Registration Statement and included in the Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Exchange Act.
(n) Preparation of the Financial Statements. Each of the historical financial statements of the Company, respectively, filed with the Commission as a part of the Registration Statement and included in the Disclosure Package and the Prospectus, presents fairly the information provided as of and at the dates and for the periods indicated. Such financial statements comply as to form with the applicable accounting requirements of the Securities Act and the Securities Act Regulations and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto or in the case of unaudited interim financial statements, which are subject to normal year-end audit adjustments that are not expected to be material. No other financial statements or supporting schedules are required to be included or incorporated by reference in the Registration Statement. Each item of historical financial data relating to the operations, assets or liabilities of the Company set forth in summary form in each of the preliminary prospectuses and the Prospectus fairly presents such information on a basis consistent with that of the complete financial statements contained in the Registration Statement.
(o) Incorporation and Good Standing. The Company has been duly incorporated or formed and is validly existing and in good standing as a corporation under the laws of the jurisdiction of its formation and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the Disclosure Package and the Prospectus and to enter into and perform its obligations under this Agreement. As of the Closing Date, the Company does not own or control, directly or indirectly, any corporation, association or other entity that is not otherwise disclosed in the Registration Statement, the Disclosure Package or the Prospectus.
(p) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in each of the Disclosure Package and the Prospectus (other than for subsequent issuances, if any, pursuant to employee benefit plans described in each of the Disclosure Package and the Prospectus or upon exercise of outstanding options or warrants described in the Disclosure Package and Prospectus, as the case may be). The shares of Common Stock conform, and, when issued and delivered as provided in this Agreement, the Offered Securities will conform, in all material respects to the description thereof contained in each of the Disclosure Package and Prospectus. All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable and have been issued in compliance with applicable laws. None of the outstanding shares of capital stock of the Company were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any shares of the Company other than those described in the Disclosure Package and the Prospectus. The description of the Company’s stock option and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Disclosure Package and the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the Offered Securities and the Underlying Shares. Except as set forth in the Registration Statement, the Disclosure Package and the Prospectus, there are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.
4
(q) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. The Company is not in violation of its articles of incorporation or amended and restated bylaws or in default (or, with the giving of notice or lapse of time, would be in default) (“Default”) under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which it is a party or by which it may be bound (including, without limitation, any agreement or contract filed as an exhibit to the Registration Statement or to which any of the property or assets of the Company are subject (each, an “Existing Instrument”)), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company’s execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Disclosure Package and the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the bylaws of the Company, as amended and restated, (ii) will not conflict with or constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, or require the consent of any other party to, any Existing Instrument and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company, except in the case of each of clauses (ii) and (iii), to the extent such conflict, breach Default or violation could not reasonably be expected to result in a Material Adverse Effect. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company’s execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Disclosure Package and the Prospectus, except the registration or qualification of the Offered Securities under the Securities Act and applicable state securities or blue sky laws and from the Financial Industry Regulatory Authority (“FINRA”).
(r) Subsidiaries. Each of the Company’s direct and indirect subsidiaries (each a “Subsidiary” and collectively, the “Subsidiaries”) has been identified on Schedule E hereto. Each of the Subsidiaries has been duly formed, is validly existing under the laws of it State of formation, as the case may be, and in good standing under the laws of the jurisdiction of its incorporation, has full power and authority (corporate or otherwise) to own its property and to conduct its business as described in the Registration Statement, the Disclosure Package, the Prospectus, and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not result in a Material Adverse Change on the Company and its Subsidiaries, taken as a whole. Except as otherwise disclosed in the Registration Statement, the Disclosure Package and the Prospectus, all of the equity interests of each Subsidiary have been duly and validly authorized and issued, are owned directly or indirectly by the Company, are fully paid in accordance with its bylaws or charter documents and non-assessable and are free and clear of all liens, encumbrances, equities or claims (“Liens”). None of the outstanding share capital or equity interest in any Subsidiary was issued in violation of preemptive or similar rights of any security holder of such Subsidiary. All of the constitutive or organizational documents of each of the Subsidiaries comply with the requirements of applicable laws of its jurisdiction of incorporation or organization and are in full force and effect. Apart from the Subsidiaries, the Company has no direct or indirect subsidiaries or any other company over which it has direct or indirect effective control. Other than the Subsidiaries, the Company does not directly or indirectly control any entity through contractual arrangements or otherwise such that the entity would be deemed a consolidated affiliated entity whose financial results would be consolidated under U.S. GAAP with the financial results of the Company on the consolidated financial statements of the Company, regardless of whether the Company directly or indirectly owns less than a majority of the equity interests of such person.
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(s) No Material Actions or Proceedings. Except as otherwise disclosed in the Disclosure Package and the Prospectus, there are no legal, governmental or regulatory investigations, actions, demands, claims, suits, arbitrations, inquiries or proceedings (collectively, “Actions”) pending or, to the Company’s knowledge, threatened (i) against the Company or any of its Subsidiaries, (ii) to the Company’s knowledge, which have as the subject thereof any officer or director (in such capacities) of, or property owned or leased by, the Company or any of its Subsidiaries, where in any such case (A) there is a reasonable possibility that such Action might be determined adversely to the Company and (B) any such Action, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. Except as otherwise disclosed in the Disclosure Package and the Prospectus, no material labor dispute with the employees of the Company exists or, to the Company’s knowledge, is threatened or imminent. None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or such Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relationships with their employees are good. No executive officer, to the knowledge of the Company, is in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company and its Subsidiaries are in compliance with all applicable laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Change. Neither the Company or any Subsidiary, nor any director or officer thereof, is or has within the last 10 years been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company.
(t) Intellectual Property Rights. The Company owns, possesses or licenses, and otherwise has legally enforceable rights to use all patents, patent applications, trademarks, trade names, copyrights, domain names, licenses, approvals and trade secrets (collectively, “Intellectual Property Rights”) necessary to conduct its business as now conducted or, otherwise, as disclosed in the Registration Statement, the Disclosure Package and the Prospectus, except to the extent such failure to own, possess or have other rights to use such Intellectual Property would not be expected to result in a Material Adverse Change. Except as otherwise disclosed in the Registration Statement, the Disclosure Package and the Prospectus: (i) the Company has not received any written notice of infringement or conflict with asserted Intellectual Property Rights of others; (ii) the Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, Disclosure Package and the Prospectus and are not described in all material respects; (iii) none of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or, to the Company’s knowledge, in violation of the rights of any persons; and (iv) the Company is not subject to any judgment, order, writ, injunction or decree of any court or any governmental department, commission, board, bureau, agency or instrumentality, or any arbitrator, nor has it entered into nor is it a party to any agreement made in settlement of any pending or threatened litigation, which materially restricts or impairs its use of any Intellectual Property Rights.
(u) All Necessary Permits, etc. Except as otherwise disclosed in the Disclosure Package and the Prospectus, each of the Company and its Subsidiaries possesses such valid and current certificates, authorizations or permits issued by the applicable regulatory agencies or bodies necessary to conduct its business, and has made all declarations and filings with, the appropriate national, regional, local or other governmental or regulatory authorities that are necessary for the ownership or lease of their respective properties or assets or the conduct of their respective business as described in the Registration Statement, the Disclosure Package and the Prospectus, except where lack of the licenses would not reasonably be expected to have, individually or in aggregate, a Material Adverse Effect, and has not received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such licenses and, to the knowledge of the Company, the Company has no reason to believe that such licenses will not be renewed in the ordinary course of their respective business that, if determined adversely to the Company, would individually or in the aggregate have a Material Adverse Effect. Such licenses are valid and in full force and effect and contain no materially burdensome restrictions or conditions not described in the Registration Statement, the Disclosure Package or the Prospectus.
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(v) Title to Properties. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company has good and marketable title to all the properties and assets reflected as owned by it in the financial statements referred to in Section 1(n) above (or elsewhere in the Disclosure Package and the Prospectus), in each case free and clear of any security interest, mortgage, lien, encumbrance, equity, adverse claim or other defect, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company. The real property, improvements, equipment and personal property held under lease by the Company are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company.
(w) Tax Law Compliance. (i) The Company and its Subsidiaries have each filed all federal, state, local and foreign income tax returns required to be filed as of the date of this Agreement or have timely and properly filed requested extensions thereof and have paid all taxes required to be paid by them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them in all material respects; (ii) No tax deficiency has been determined adversely to the Company or any of its Subsidiaries that has had (nor does the Company nor any of its Subsidiaries have any notice or knowledge of any tax deficiency which could reasonably be expected to be determined adversely to the Company or its Subsidiaries and which could reasonably be expected to have) a Material Adverse Effect; and (iii) The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(n) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company has not been finally determined.
(x) Company Not an “Investment Company.” The Company is not, and after giving effect to payment for the Offered Securities and the application of the proceeds as contemplated under the caption “Use of Proceeds” in each of the Disclosure Package and the Prospectus will not be, required to register as an “investment company” within the meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”).
(y) FINRA Affiliation. No officer, director or any beneficial owner of 10% or more of the Company’s unregistered securities has any direct or indirect affiliation or association with any Participating Member (as defined under FINRA rules). The Company will advise the Representative and Ortoli Rosenstadt LLP if it learns that any officer, director or owner of 10% or more of the Company’s outstanding shares of capital stock is or becomes an affiliate or registered person of a Participating Member.
(z) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to cause or result in, stabilization or manipulation of the price of any securities of the Company to facilitate the sale or resale of the Offered Securities.
(aa) Related Party Transactions. There are no business relationships or related-party transactions, directly or indirectly, involving the Company or its Subsidiaries with any related person required to be described or filed in the Registration Statement, or described in the Disclosure Package or the Prospectus, that have not been as set forth in the Registration Statement, the Prospectus and the Pricing Prospectus.
(bb) Disclosure Controls and Procedures. To the extent required, the Company has established and maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Exchange Act Regulations) designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Except as otherwise disclosed in the Registration Statement, the Disclosure Package and the Prospectus, the Company is not aware of (a) any significant deficiency in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or any material weaknesses in internal controls or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls.
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(cc) Company’s Accounting System. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company maintains a system of accounting controls designed to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(dd) Money Laundering Law Compliance. The operations of the Company are and have been conducted at all times in material compliance with all applicable financial recordkeeping and reporting requirements, including those of the United States Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money laundering statutes of jurisdictions where the Company conducts business, and the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any competent governmental agency (collectively, the “Anti-Money Laundering Laws”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company with respect to any Anti-Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
(ee) OFAC.
(i) Neither the Company, any of its Subsidiaries nor, to the knowledge of the Company, any director, officer, employee or affiliate of the Company or any Subsidiary, of any other person authorized to act on behalf of the Company, is an individual or entity (“Person”) that is, or is owned or controlled by a Person that is:
A. the subject of any sanctions administered or enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the United Nations Security Council (“UNSC”), the European Union (“EU”), His Majesty’s Treasury (“HMT”), or other relevant sanctions authority (collectively, “Sanctions”), nor
B. located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, Libya, North Korea, Sudan and Syria).
(ii) The Company will not, directly or indirectly, use the proceeds of the Offering, or lend, contribute or otherwise make available such proceeds to any Subsidiary or affiliated entity, joint venture partner or other Person:
A. to fund or facilitate any activities or business of or with any Person or in any country or territory that, at the time of such funding or facilitation, is the subject of Sanctions; or
B. in any other manner that will result in a violation of Sanctions by any Person (including any Person participating in the Offering, whether as underwriter, advisor, investor or otherwise).
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(ff) Foreign Corrupt Practices Act. Neither the Company nor any of its Subsidiaries, to the best of the Company’s knowledge, any director, officer, employee or affiliate of the Company, any Subsidiary or any other person authorized to act on behalf of the Company has, directly or indirectly, taken any action that (i) would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”) or otherwise subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding; (ii) if done in the past, might reasonably be expected to have a Material Adverse Effect or (iii) if continued in the future, might reasonably be expected to materially and adversely affect the assets, business, or operations of the Company. The foregoing includes, without limitation, giving or agreeing to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding.
(gg) Internal Control and Compliance with Sarbanes-Oxley Act of 2002. The Company is in full compliance with any provision applicable to it of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the rules and regulations promulgated in connection therewith, including, without limitation, Section 402 related to loans and Sections 302 and 906 related to certifications of the Sarbanes-Oxley Act and all applicable rule of the listing exchanges. The Company maintains a system of internal controls, including, but not limited to, disclosure controls and procedures, internal controls over accounting matters and financial reporting, an internal audit function and legal and regulatory compliance controls that comply with all applicable laws and regulations including without limitation the Securities Act, the Exchange Act, the Sarbanes-Oxley Act, the rules and regulations of the Commission, and the rules of the listing exchanges.
(hh) Exchange Act Filing. A registration statement in respect of the Common Stock has been filed on Form 8-A pursuant to Section 12(b) of the Exchange Act, which registration statement complies in all material respects with the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the shares of Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration.
(ii) Earning Statements. The Company will make generally available (which includes filings pursuant to the Exchange Act made publicly through the EDGAR system) to its security holders as soon as practicable, but in any event not later than 16 months after the end of the Company’s current fiscal year, an earnings statement (which need not be audited) covering a 12-month period that shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of the Rules and Regulations.
(jj) Periodic Reporting Obligations. During the Prospectus Delivery Period, the Company shall file, on a timely basis, with the Commission all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall report the use of proceeds from the issuance of the Firm Shares as may be required under Rule 463 under the Securities Act.
(kk) Valid Title. Except as otherwise disclosed in the Disclosure Package and the Prospectus, the Company has legal and valid title to all of its properties and assets, free and clear of all liens, charges, encumbrances, equities, claims, options and restrictions except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by such entity; each lease agreement to which it is a party is duly executed and legally binding; its leasehold interests are set forth in and governed by the terms of any lease agreements, and, to the best of the Company’s knowledge such agreements are valid, binding and enforceable in accordance with their respective terms; and the Company does not own, operate, manage or have any other right or interest in any other material real property of any kind, except as described in the Prospectus or the Disclosure Package.
(ll) [Reserved]
(mm) [Reserved]
(nn) [Reserved]
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(oo) D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers prior to the Offering (the “Insiders”) as well as in the Lock-Up Agreement in the form attached hereto as Exhibit B provided to the Representative is true and correct in all respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires completed by each Insider to become inaccurate and incorrect.
Any certificate signed by an officer of the Company and delivered to the Representative or to counsel for the Representative shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters set forth therein. The Company acknowledges that the Underwriters and, for purposes of the opinions to be delivered pursuant to Section 5 hereof, counsel to the Company, will rely upon the accuracy and truthfulness of the foregoing representations and hereby consents to such reliance.
(pp) Solvency. Based on the consolidated financial condition of the Company as of each Closing Date, after giving effect to the receipt by the Company of the proceeds from the sale of the Offered Securities hereunder, the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, are sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). Except as set forth in the Registration Statement and the Prospectus, the Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from each Closing Date. The Registration Statement and the Prospectus set forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” means (x) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Company’s consolidated balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with U.S. GAAP. Except as set forth in the Registration Statement and the Prospectus, neither the Company nor any Subsidiary is in default with respect to any Indebtedness.
(qq) Regulation M Compliance. The Company has not, and to its knowledge no one authorized to act on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Offered Securities or the Underlying Shares, (ii) sold, bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Offered Securities or the Underlying Shares, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Underwriter in connection with the Offering.
(rr) EGS Status and Testing the Waters Communications. From the time of initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly or through any person authorized to act on its behalf in any Test the Waters Communication) through the date hereof, the Company has been and is an “emerging growth company”, as defined in Section 2(a) of the Act (“Emerging Growth Company”). “Testing the Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Act. The Company (a) has not alone engaged in any Testing-the-Waters Communication other than Testing-the-Waters Communications with the consent of the Underwriters with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (b) has not authorized anyone other than the Underwriters to engage in Testing-the-Waters Communications. The Company reconfirms that the Underwriters have been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications.
(ss) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries owns or controls, directly or indirectly, five percent or more of the outstanding shares of any class of voting securities or 25% or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.
(tt) U.S. Real Property Holding Corporation. The Company is not and has never been a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon the Underwriters’ request.
(uu) Margin Securities. The Company owns no “margin securities” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and none of the proceeds of Offering will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Offered Securities to be considered a “purpose credit” within the meanings of Regulation T, U or X of the Federal Reserve Board.
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(vv) Integration. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause the Offering to be integrated with prior offerings by the Company for purposes of the Securities Act that would require the registration of any such securities under the Securities Act.
(ww) No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement. Notwithstanding anything in this Agreement to the contrary, the Company acknowledges that the Underwriters may have financial interests in the success of the Offering that are not limited to the difference between the price to the public and the purchase price paid to the Company by the Underwriters for the Offered Securities and the Underwriters have no obligation to disclose, or account to the Company for, any of such additional financial interests. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriters with respect to any breach or alleged breach of fiduciary duty.
(xx) No Accounting Issues. The Company has not received any notice, oral or written, from its Board of Directors or Audit Committee stating that it is reviewing or investigating, and neither the Company’s independent auditors nor its internal auditors have recommended that the Board of Directors or Audit Committee review or investigate, (i) adding to, deleting, changing the application of, or changing the Company’s disclosure with respect to, any of the Company’s material accounting policies; or (ii) any matter which could result in a restatement of the Company’s financial statements for any annual or interim period during the current or prior two fiscal years.
(yy) Forward-looking Statements. No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Disclosure Package, the Prospectus, or shall be contain in any amendments and supplements thereof, has been made or reaffirmed, or will be made, without a reasonable basis, or has been disclosed or will be disclosed other than in good faith.
(zz) Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged in the jurisdictions that the Company and each of its Subsidiaries operate as required by the laws of such jurisdictions; neither the Company nor any of its Subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor any of its Subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.
(aaa) No Finder’s Fee. There are no contracts, agreements, or understandings between the Company or its Subsidiaries and any other person that would give rise to a valid claim against the Company or its Subsidiaries or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with this Offering, or any other arrangements, agreements, understandings, payments, or issuance with respect to the Company, or its Subsidiaries, or any of their respective officers, directors, shareholders/stockholders, partners, employees or related parties that may affect the Underwriters’ compensation as determined by FINRA.
(bbb) Operating and Other Data. All operating and other data pertaining to the Disclosure Package and the Prospectus are true and accurate in all materials respects.
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(ccc) Third-party Data. Any statistical, industry-related and market-related data included in the Disclosure Package and the Prospectus is based on or derived from sources that the Company reasonably and in good faith believes to be reliable and accurate, and such data agrees with the sources from which it is derived, and the Company has obtained the written consent for the use of such data from such sources to the extent required.
(ddd) Compliance with Environmental Laws. The Company and its subsidiaries are (a) in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (b) have received and are in compliance with all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (c) have not received notice of any actual or potential liability for the investigation or remediation of any disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants, except where such non-compliance with Environmental Laws, failure to receive required permits, licenses or other approvals, or liability would not have a Material Adverse Effect.
(eee) Compliance with Law, Constitutive Documents and Contracts. Neither the Company nor any of the Subsidiaries is (a) in breach or violation of any provision of applicable law (including, but not limited to, any applicable law concerning information collection and user privacy protection) or (b) in breach or violation of its respective constitutive documents, or (c) in default under (nor has any event occurred that, with notice, lapse of time or both, would result in any breach or violation of, constitute a default under or give the holder of any indebtedness (or a person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a part of such indebtedness under) any agreement or other instrument that is binding upon the Company or any of the Subsidiaries, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any of the Subsidiaries, except in the cases of (a) and (c) above, where any such breach, violation or default would not have a Material Adverse Effect.
(fff) No Unlawful Influence. The Company has not offered, or caused the Underwriters to offer, shares to any person or entity with the intention of unlawfully influencing: (a) a customer or supplier of the Company or any affiliate of the Company to alter the customer’s or supplier’s level or type of business with the Company or such affiliate or (b) a journalist or publication to write or publish favorable information about the Company or any such affiliate.
(ggg) The Company acknowledges that the Underwriters and, for purposes of the opinions to be delivered pursuant to Section 6 hereof, counsel to the Company, will rely upon the accuracy and truthfulness of the foregoing representations and hereby consents to such reliance.
SECTION 2. Firm Shares, Additional Shares and Underwriters’ Warrant.
(a) Purchase of Firm Shares. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Underwriters an aggregate of [●] shares of Common Stock (the “Firm Shares”) at a purchase price (net of discounts)2 of $[●] per Share. The Underwriters agree to purchase from the Company the Firm Shares.
(b) Delivery of and Payment for Firm Shares. Delivery of and payment for the Firm Shares shall be made at 10:00 A.M., Eastern time, on the third (3rd) Business Day following the Applicable Time, or at such time as shall be agreed upon by the Underwriters and the Company, at the offices of the Representative’s counsel or at such other place as shall be agreed upon by the Underwriters and the Company. The hour and date of delivery of and payment for the Firm Shares is called the “Closing Date.” The closing of the payment of the purchase price for is referred to herein as the “Closing.” Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds upon delivery to the Underwriters of certificates (in form and substance reasonably satisfactory to the Underwriters) representing the Firm Shares (or if uncertificated through the full fast transfer facilities of the Depository Trust Company (the “DTC”)) for the account of the Underwriters. The Firm Shares shall be registered in such names and in such denominations as the Underwriters may request in writing at least two Business Days prior to the Closing Date. If certificated, the Company will permit the Underwriters to examine and package the Firm Shares for delivery at least one full Business Day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Underwriters for all the Firm Shares.
2 | 7.0% of the total number of securities sold by the Representative. |
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(c) Additional Shares. The Company hereby grants to the Underwriters an option (the “Over-allotment Option”) to purchase up to an additional [●]3 shares of Common Stock (the “Additional Shares”), in each case solely for the purpose of covering over-allotments of such securities, if any. The Over-allotment Option is, at the Underwriters’ sole discretion, for Additional Shares.
(d) Exercise of Over-allotment Option. The Over-allotment Option granted pursuant to Section 2(c) hereof may be exercised by the Representative within 45 days of the Closing Date. The purchase price to be paid per Additional Shares shall be equal to the price per Firm Share in Section 2(a). The Underwriters shall not be under any obligation to purchase any Additional Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Underwriters, which shall be confirmed in writing via overnight mail or facsimile or other electronic transmission, setting forth the number of Additional Shares to be purchased and the date and time for delivery of and payment for the Additional Shares (the “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Underwriters, at the offices of the Representative’s counsel or at such other place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Underwriters. If such delivery and payment for the Additional Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Additional Shares, subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Additional Shares specified in such notice and (ii) the Underwriters shall purchase that portion of the total number of Additional Shares.
(e) Delivery and Payment of Additional Shares. Payment for the Additional Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, upon delivery to the Underwriters of certificates (in form and substance satisfactory to the Underwriters) representing the Additional Shares (or through the facilities of DTC) for the account of the Underwriters. The Additional Shares shall be registered in such name or names and in such authorized denominations as the Underwriters may request in writing at least two (2) full Business Days prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Additional Shares except upon tender of payment by the Underwriters for applicable Additional Shares. The Option Closing Date may be simultaneous with, but not earlier than, the Closing Date; and in the event that such time and date are simultaneous with the Closing Date, the term “Closing Date” shall refer to the time and date of delivery of the Firm Shares and Additional Shares.
(f) Underwriting Discount. In consideration of the services to be provided for hereunder, the Underwriters shall receive a seven percent (7.0%) underwriting discount, with respect to any Offered Securities sold to investors in this Offering.
(g) Underwriter’s Warrant. The Company hereby agrees to issue to the Representative (and/or its designees) on the applicable Closing Date and Option Closing Date (if applicable), Warrants, substantially in the form of Exhibit A attached hereto, to purchase such number of shares of Common Stock equal to seven percent (7.0%) of the Offered Securities sold by the Company (the “Underwriter’s Warrant”), including any shares of Common Stock issued pursuant to the exercise of Over-allotment Option. The Underwriter’s Warrant shall be exercisable, in whole or in part, commencing six months from issuance and expiring on the fifth-year anniversary of the commencement of sale of the Offering at an initial exercise price of $[●] per shares of Common Stock, which is equal to one hundred and twenty percent (120%) of the initial public offering price of a Firm Share.
(h) Non-accountable Expense Allowance. The Company agrees that upon the closing of the Offering it will pay to the Representative a non-accountable expense allowance (the “Non-accountable Expense Allowance”) equal to one percent (1%) of the gross proceeds to be receive by the Company on the Closing Date.
3 | 15% of the Firm Shares |
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SECTION 3. Covenants of the Company.
The Company covenants and agrees with the Underwriters as follows:
(a) Underwriters’ Review of Proposed Amendments and Supplements. During the period beginning at the Applicable Time and ending on the later of the Closing Date or such date as, in the opinion of Representative’s counsel, the Prospectus is no longer required by law to be delivered in connection with sales by the Underwriters or selected dealers, including under circumstances where such requirement may be satisfied pursuant to Rule 172 under the Securities Act (the “Prospectus Delivery Period”), prior to amending or supplementing the Registration Statement or the Prospectus, including any amendment or supplement through incorporation by reference of any report filed under the Exchange Act, the Company shall furnish to the Underwriters for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Underwriters reasonably objects.
(b) Securities Act Compliance. After the date of this Agreement, during the Prospectus Delivery Period, the Company shall promptly advise the Underwriters in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to the Pricing Prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order or notice preventing or suspending the use of the Registration Statement, the Pricing Prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Offered Securities from any securities exchange upon which they are listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order or order or notice of prevention or suspension at any time, the Company will use commercially reasonable efforts to obtain the lifting of such order at the earliest possible moment, or will file a new registration statement and use commercially reasonable efforts to have such new registration statement declared effective as soon as practicable. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b) and 430A, as applicable, under the Securities Act, including with respect to the timely filing of documents thereunder and will confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission.
(c) Exchange Act Compliance. During the Prospectus Delivery Period, to the extent the Company becomes subject to reporting obligation under the Exchange Act, the Company will file all documents required to be filed with the Commission pursuant to Sections 13, 14 or 15 of the Exchange Act in the manner and within the time periods required by the Exchange Act.
(d) Amendments and Supplements to the Registration Statement, Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event or development shall occur or condition exist as a result of which the Disclosure Package or the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein in light of the circumstances under which they were made, as the case may be, not misleading, or if it shall be necessary to amend or supplement the Disclosure Package or the Prospectus, in order to make the statements therein, in light of the circumstances under which they were made, as the case may be, not misleading, or if in the opinion of the Underwriters it is otherwise necessary to amend or supplement the Registration Statement, the Disclosure Package or the Prospectus, or to file a new registration statement containing the Prospectus, in order to comply with law, including in connection with the delivery of the Prospectus, the Company agrees to (i) notify the Underwriters of any such event or condition (unless such event or condition was previously brought to the Company’s attention by the Underwriters during the Prospectus Delivery Period) and (ii) promptly prepare (subject to Section 3(a) and Section 3(f) hereof), file with the Commission (and use commercially reasonable efforts to have any amendment to the Registration Statement or any new registration statement to be declared effective) and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Registration Statement, the Disclosure Package or the Prospectus, or any new registration statement, necessary in order to make the statements in the Disclosure Package or the Prospectus as so amended or supplemented, in light of the circumstances under which they were made, as the case may be, not misleading or so that the Registration Statement, the Disclosure Package or the Prospectus, as amended or supplemented, will comply with law.
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(e) Permitted Free Writing Prospectuses. The Company represents that it has not made, and agrees that, unless it obtains the prior written consent of the Underwriters, it will not make, any offer relating to the Offered Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus” (as defined in Rule 405 under the Securities Act) required to be filed by the Company with the Commission or retained by the Company under Rule 433 under the Securities Act; provided that the prior written consent of the Underwriters hereto shall be deemed to have been given in respect of each free writing prospectuses listed on Schedule B hereto. Any such free writing prospectus consented to by the Underwriters is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company agrees that (i) it has treated and will treat, as the case may be, each Permitted Free Writing Prospectus as an Issuer Free Writing Prospectus, and (ii) has complied and will comply, as the case may be, with the requirements of Rules 164 and 433 under the Securities Act applicable to any Permitted Free Writing Prospectus, including in respect of timely filing with the Commission, legending and record keeping.
(f) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Underwriters, without charge, during the Prospectus Delivery Period, as many copies of each of the preliminary prospectuses, the Prospectus and the Disclosure Package and any amendments and supplements thereto (including any documents incorporated or deemed incorporated by reference therein) as the Underwriters may reasonably request.
(g) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Offered Securities sold by it in the manner described under the caption “Use of Proceeds” in the Disclosure Package and the Prospectus.
(h) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Offered Securities.
(i) Internal Controls. The Company will maintain a system of internal accounting controls designed to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with U.S. GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The internal controls, upon consummation of the Offering, will be, overseen by the Audit Committee (the “Audit Committee”) of the Board in accordance with the rules of the Nasdaq Stock Market (“Nasdaq”).
(j) Exchange Listing. The shares of Common Stock have been duly authorized for listing on Nasdaq Capital Market, subject to official notice of issuance. The Company is in material compliance with the provisions of the rules and regulations promulgated by Nasdaq and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements (to the extent applicable to the Company as of the date hereof, the Closing Date or the Option Closing Date; and subject to all exemptions and exceptions from the requirements thereof as are set forth therein, to the extent applicable to the Company). Without limiting the generality of the foregoing and subject to the qualifications above: (i) all members of the Company’s board of directors who are required to be “independent” (as that term is defined under applicable laws, rules and regulations), including, without limitation, all members of each of the audit committee, compensation committee and nominating and corporate governance committee of the Company’s board of directors, meet the qualifications of independence as set forth under such laws, rules and regulations, (ii) the audit committee of the Company’s board of directors has at least one member who is an “audit committee financial expert” (as that term is defined under such laws, rules and regulations), and (iii) that, based on discussions with Nasdaq, the Company meets all requirements for listing on Nasdaq Capital Market. The Company shall use its commercially reasonable efforts to maintain the listing of the Nasdaq Capital Market for five (5) years after the date of this Agreement.
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(k) Future Reports to the Underwriters. For one year after the date of this Agreement, the Company will furnish, if not otherwise available on EDGAR, to the Representative at 8761 The Esplanade Ct., STE 30, Orlando, FL 32836, Attention: Ying Cui, President: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders’ equity and cash flows for the year then ended and the opinion thereon of the Company’s independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, quarterly financial statements on Form 10-Q or other report filed by the Company with the Commission; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its shares.
(l) No Manipulation of Price. The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company.
(m) Existing Lock-Up Agreements. Except as described in the Registration Statement, the Disclosure Package and the Prospectus, there are no existing agreements between the Company and its security holders that prohibit the sale, transfer, assignment, pledge or hypothecation of any of the Company’s securities. The Company will direct the transfer agent to place stop transfer restrictions upon the securities of the Company that are bound by such “lock-up” agreements for the duration of the periods contemplated therein.
(n) Company Lock-up.
(i) The Company will not, without the prior written consent of the Representative, for a period of 180 days from the date of this Agreement (the “Lock-Up Period”), (i) issue, offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the shares of Common Stock or any such other securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of shares of Common Stock or such other securities, in cash or otherwise, except to the Underwriters pursuant to this Agreement. The Company agrees not to accelerate the vesting of any option or warrant or the lapse of any repurchase right prior to the expiration of the Lock-Up Period.
(ii) The restrictions contained in Section 3(n)(i) hereof shall not apply to: (A) the Offered Securities, (B) the Underlying Shares, (C) any shares of Common Stock issued pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding as of the Applicable Time and as described in the Registration Statement, the Disclosure Package or the Prospectus, (D) any shares of Common Stock or options to purchase any shares of Common Stock or other any shares of Common Stock based award issued or granted pursuant to the Company’s stock incentive plans, stock purchase plan, stock ownership plan or dividend reinvestment plan in effect at the Applicable Time and as described in the Registration Statement, the Disclosure Package or the Prospectus, and (E) shares of Common Stock or other securities issued in connection with a transaction with an unaffiliated third party that includes a bona fide commercial relationship (including joint ventures, marketing or distribution arrangements, collaboration agreements or intellectual property license agreements) or any acquisition of assets or acquisition of not less than a majority or controlling portion of the equity of another entity; provided that (x) the aggregate number of shares of Common Stock issued pursuant to clause (E) shall not exceed five percent (5%) of the total number of outstanding shares of Common Stock immediately following the issuance and sale of the Offered Securities pursuant hereto and (y) the recipient of any such shares of Common Stock or other securities issued or granted pursuant to clause (E) during the Lock-Up Period shall enter into an agreement substantially in the form of Exhibit B hereto.
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(o) Restriction on Continuous Offerings. Notwithstanding the restrictions contained in Section 3(n), the Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Underwriters, it will not, for a period of twelve months from the commencement of the Company’s first day of trading, directly or indirectly in any “at-the-market” or continuous equity transaction, offer to sell, sell, contract to sell, grant any option to sell or otherwise dispose of shares of Common Stock of the Company or any securities convertible into or exercisable or exchangeable for shares of Common Stock of the Company.
(p) Absence of Further Requirements. No consent, approval, authorization, or order of, or filing or registration with, any person (including any governmental or regulatory agency or body or any court) is required to be obtained or made by the Company for the consummation of the transactions contemplated by this Agreement, and issuance and sale of the Offered Securities, except such as have been obtained, or made on or prior to the Closing Date, and are, or on the Closing Date will be, in full force and effect. No authorization, consent, approval, license, qualification or order of, or filing or registration with any person (including any governmental agency or body or any court) in any foreign jurisdiction is required for the consummation of the transactions contemplated by this Agreement in connection with the Offering, issuance and sale of the Offered Securities under the laws and regulations of such jurisdiction except such as have been obtained or made.
(q) Right of First Refusal. The Company and the Representative agree that the Representative shall have an irrevocable right of first refusal (the “Right of First Refusal”) for a period of twelve (12) months after the date the Offering is completed, to act as sole and exclusive investment banker, sole and exclusive book-runner, sole and exclusive financial advisor, sole and exclusive underwriter and/or sole and exclusive placement agent, at the Representative’s sole and exclusive discretion, if the Company or any of its subsidiaries: (i) decides to finance or refinance any indebtedness; or (ii) decides to raise funds by means of a public offering (including at-the-market facility) or a private placement or any other capital raising financing of equity, equity-linked or debt securities. If the Representative decides to accept such engagement, the agreement governing such engagement will contain, among other things, provisions for fees customary to the Representative for transactions of similar size and nature, and the provisions of this Agreement, including indemnification, which are appropriate to such transaction. Notwithstanding the foregoing, the decision to accept the Company’s engagement under this Section 3(q) shall be made by the Representative, by a written notice to the Company, within fifteen (15) business days of the receipt of the Company’s notification of its financing needs. The Representative shall have the sole right to determine whether or not any other broker dealer shall have the right to participate in any such transaction and the economic terms of any such participation.
(r) Tail Period. The Representative shall be entitled to receive from the Company a cash placement fee equal to six percent (6.0%) of the aggregate purchase price paid by each purchaser of securities of the Company, with respect to any public or private offering or other financing or capital-raising transaction of any kind (the “Tail Financing”) to the extent that such financing or capital is provided to the Company by investors whom the Representative has introduced, directly or indirectly by way of at least one meeting in person or telephonically, to the Company during the Engagement Period (as defined below), if such Tail Financing is consummated at any time during the Engagement Period or within twelve (12) months following the expiration of the Engagement Period or termination of that certain engagement letter agreement by and between the Company and the Representative, dated as of June 27, 2023 (the “Engagement Agreement”). The Representative will provide a list of investors at the conclusion of the Engagement Period that were introduced to the Company during the Engagement Period and only these investors will be eligible for the fees specified in this section. “Engagement Period” shall mean the period beginning on June 27, 2023, and ending on the earliest of (i) December 31, 2023 or (ii) the date the Offering is completed. The Company reserves the right of “termination for cause.” Upon exercising the right of termination for cause, the Representative shall not be entitled to any compensation of any Tail Financing under this Section 3(r) and shall not be entitled to the Right of First Refusal as described in Section 3(q) hereof. “Cause”, for the purpose of this Agreement, shall mean, willful misconduct, gross negligence or a material failure to provide the underwriting service contemplated in this Agreement by the Representative.
SECTION 4. Payment of Fees and Expenses. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the shares of Common Stock to be sold in the Offering with the Commission; (b) all Public Filing System filing fees associated with the review of the Offering by FINRA; (c) all fees and expenses relating to the listing of such Offered Securities on the Exchange and such other stock exchanges as the Company and the Representative together determine, including any fees charged by DTC for new securities; (d) all fees, expenses and disbursements relating to background checks of the Company’s officers and directors; (e) all fees, expenses and disbursements relating to the registration or qualification of the Offered Securities under the “Blue Sky” laws of such states and other jurisdictions as the Representative may reasonably designate (including, without limitation, all filing and registration fees); (f) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Offered Securities under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (g) the costs of all mailing and printing of the underwriting documents (including, without limitation, the Underwriting Agreement, any Blue Sky Surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers’ Agreement, Underwriters’ Questionnaire and Power of Attorney), Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representative may reasonably deem necessary; (h) the costs of preparing, printing and delivering certificates representing the Offered Securities; (i) fees and expenses of the transfer agent for the shares of Common Stock; (j) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Underwriters; (k) the fees and expenses of the Company’s accountants; (l) the fees and expenses of the Issuer’s Counsel and other agents and representatives; (m) the Company’s actual “road show” expenses for the Offering; and (n) all out-of-pocket accountable expenses of the Underwriters (including, but not limited to, fees and disbursements of Ortoli Rosenstadt LLP’s and the Underwriters’ reasonable travel, database, printing, postage, facsimile and telephone expenses) incurred in connection with the Underwriters’ performance of their obligations hereunder. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or each Option Closing Date, if any, all such out-of-pocket fees, expenses and disbursements in connection with the forgoing clause (n) incurred by Underwriters as a result of providing services related to the Offering to be paid by the Company to the Underwriters up to a maximum aggregate expense allowance of $250,000 and will be reimbursed to the extent not offset by actual expenses in accordance with FINRA Rule 5110(g)).
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SECTION 5. Conditions of the Obligations of the Underwriters. The obligations of the Underwriters to purchase the Offered Securities as provided herein on the Closing Date or the Option Closing Date shall be subject to (1) the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the Closing Date or the Option Closing Date as though then made; (2) the timely performance by the Company of its covenants and other obligations hereunder; and (3) each of the following additional conditions:
(a) Accountant’s Comfort Letter. On the date hereof, the Representative shall have received from the Accountant, a letter dated the date hereof addressed to the Representative, in form and substance satisfactory to the Representative, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to the Representative, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus.
(b) Effectiveness of Registration Statement; Compliance with Registration Requirements; No Stop Order. During the period from and after the execution of this Agreement to and including the Closing Date or the Option Closing Date, as applicable:
(i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; and
(ii) no stop order suspending the effectiveness of the Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission.
(c) No Material Adverse Change. For the period from and after the date of this Agreement to and including the Closing Date or the Option Closing Date, in the reasonable judgment of the Representative there shall not have occurred any Material Adverse Change.
(d) CFO Certificate. On the Closing Date and/or the Option Closing Date, the Representative shall have received a written certificate executed by the Chief Financial Officer of the Company, dated as of such date, on behalf of the Company, with respect to certain financial data contained in the Registration Statement, Disclosure Package and the Prospectus, providing “management comfort” with respect to such information, in form and substance reasonably satisfactory to the Underwriters.
(e) Officers’ Certificate. On the Closing Date and/or the Option Closing Date, the Representative shall have received a written certificate executed by the Chief Executive Officer and the Chief Financial Officer of the Company, dated as of such date, to the effect that the signers of such certificate have reviewed the Registration Statement, the Disclosure Package and the Prospectus and any amendment or supplement thereto, each Issuer Free Writing Prospectus and this Agreement, to the effect that:
(i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of such Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date;
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(ii) No stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus has been issued and no proceedings for that purpose have been instituted or are pending or, to the Company’s knowledge, threatened under the Securities Act; no order having the effect of ceasing or suspending the distribution of the Offered Securities or any other securities of the Company has been issued by any securities commission, securities regulatory authority or stock exchange in the United States and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, contemplated by any securities commission, securities regulatory authority or stock exchange in the United States; and
(iii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been: (a) any Material Adverse Change; (b) any transaction that is material to the Company and the Subsidiaries taken as a whole, except transactions entered into in the ordinary course of business; (c) any obligation, direct or contingent, that is material to the Company and the Subsidiaries taken as a whole, incurred by the Company or any Subsidiary, except obligations incurred in the ordinary course of business; (d) any material change in the capital stock (except changes thereto resulting from the exercise of outstanding options or warrants or conversion of outstanding indebtedness into shares of Common Stock of the Company) or outstanding indebtedness of the Company or any Subsidiary (except for the conversion of such indebtedness into shares of Common Stock of the Company); (e) any dividend or distribution of any kind declared, paid or made on shares of Common Stock of the Company; or (f) any loss or damage (whether or not insured) to the property of the Company or any Subsidiary which has been sustained or will have been sustained which has a Material Adverse Effect
(f) Secretary’s Certificate. On the Closing Date and/or the Option Closing Date, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated such Closing Date, certifying: (i) that each of the Company’s articles of incorporation and bylaws attached to such certificate is true and complete, has not been modified and is in full force and effect; (ii) that each of the Subsidiaries bylaws or charter documents attached to such certificate is true and complete, has not been modified and is in full force and effect; (iii) that the resolutions of the Company’s board of directors relating to the Offering attached to such certificate are in full force and effect and have not been modified; and (iv) the good standing of the Company and each of the Subsidiaries (except in such jurisdictions where the concept of good standing is not applicable). The documents referred to in such certificate shall be attached to such certificate.
(g) Bring-down Comfort Letter. On the Closing Date and/or the Option Closing Date, the Representative shall have received from the Accountant, a letter dated such date, in form and substance satisfactory to the Representative, to the effect that the Accountant reaffirms the statements made in the letter furnished by it pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the Closing Date and/or the Option Closing Date.
(h) Lock-Up Agreement from Certain Securityholders of the Company. On or prior to the date hereof, the Company shall have furnished to the Representative an agreement substantially in the form of Exhibit B hereto from each of the Company’s officers, directors, and certain Company’s security holders listed on Schedule D hereto.
(i) Exchange Listing. The Offered Securities to be delivered on the Closing Date and/or the Option Closing Date shall have been approved for listing on Nasdaq Capital Market, subject to official notice of issuance.
(j) Company Counsel Opinions. On the Closing Date and/or the Option Closing Date, the Representative shall have received
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(i) the favorable opinion of Winston & Strawn LLP, U.S. counsel to the Company, including, without limitation, a negative assurance letter, addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative; and
(ii) the favorable opinion of [ ], [ ] counsel to the Company, addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative.
(k) Additional Documents. On or before the Closing Date and/or the Option Closing Date, the Representative and counsel for the Representative shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Offered Securities as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representative by written notice to the Company at any time on or prior to the Closing Date and/or the Option Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4 (with respect to the reimbursement of out-of-pocket accountable, bona fide expenses actually incurred by the Representative) and Section 7 shall at all times be effective and shall survive such termination.
SECTION 6. Effectiveness of this Agreement.
This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification (including by way of oral notification from the reviewer at the Commission) by the Commission to the Company of the effectiveness of the Registration Statement under the Securities Act.
SECTION 7. Indemnification.
(a) Indemnification by the Company. The Company shall indemnify and hold harmless the Underwriters, their respective affiliates and each of their respective directors, officers, members, employees and agents and each person, if any, who controls such Underwriters within the meaning of Section 15 of the Securities Act of or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each a “Underwriter Indemnified Party”) from and against any losses, claims, damages or liabilities (including in settlement of any litigation if such settlement is effected with the prior written consent of the Company) arising out of (i) an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including the information deemed to be a part of the Registration Statement at the time of effectiveness and at any subsequent time pursuant to Rules 430A and 430B of the Securities Act Regulations, or arise out of or are based upon the omission from the Registration Statement, or alleged omission to state therein, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; or (ii) an untrue statement or alleged untrue statement of a material fact contained in the Prospectus, or any amendment or supplement thereto, or in any other materials used in connection with the Offering, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and shall reimburse such Underwriter Indemnified Party for any legal or other expenses reasonably incurred by it in connection with evaluating, investigating or defending against such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, expense or liability arises out of or is based upon an untrue statement in, or omission from any preliminary prospectus, any Registration Statement or the Prospectus, or any such amendment or supplement thereto, or any Issuer Free Writing Prospectus or in any other materials used in connection with the Offering made in reliance upon and in conformity with the Underwriter Information. The indemnification obligations under this Section 7(a) are not exclusive and will be in addition to any liability, which the Underwriters might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Underwriter Indemnified Party.
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(b) Indemnification by the Underwriters. The Underwriters shall indemnify and hold harmless the Company and the Company’s affiliates and each of their respective directors, officers, employees, agents and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Company Indemnified Parties” and each a “Company Indemnified Party”) from and against any losses, claims, damages or liabilities (including in settlement of any litigation if such settlement is effected with the prior written consent of the Underwriters) arising out (i) any untrue statement of a material fact contained in any preliminary prospectus, any Issuer Free Writing Prospectus, any “issuer information” filed or required to be filed pursuant to Rule 433(d) of the Securities Act Regulations, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, or (ii) the omission to state in any preliminary prospectus, any Issuer Free Writing Prospectus, any “issuer information” filed or required to be filed pursuant to Rule 433(d) of the Securities Act Regulations, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, but in each case only to the extent that the untrue statement or omission was made in reliance upon and in conformity with the Underwriters Information and shall reimburse the Company for any legal or other expenses reasonably incurred by such party in connection with investigating or preparing to defend or defending against or appearing as third party witness in connection with any such loss, claim, damage, liability, action, investigation or proceeding, as such fees and expenses are incurred. Notwithstanding the provisions of this Section 7(b), in no event shall any indemnity by the Underwriters under this Section 7(b) exceed the total discounts received by the Underwriters in connection with the Offering. The indemnification obligations under this Section 7(b) are not exclusive and will be in addition to any liability, which the Company might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Company Indemnified Party.
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(c) Procedure. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify such indemnifying party in writing of the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 7 except to the extent it has been materially adversely prejudiced by such failure; and, provided, further, that the failure to notify an indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 7. If any such action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense of such action with counsel reasonably satisfactory to the indemnified party (which counsel shall not, except with the written consent of the indemnified party, be counsel to the indemnifying party). After notice from the indemnifying party to the indemnified party of its election to assume the defense of such action, except as provided herein, the indemnifying party shall not be liable to the indemnified party under Section 7(a) or 7(b), as applicable, for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense of such action other than reasonable costs of investigation; provided, however, that any indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense of such action but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be at the expense of such indemnified party unless (i) the employment thereof has been specifically authorized in writing by the Company in the case of a claim for indemnification under Section 7(a), (ii) such indemnified party shall have been advised by its counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party, or (iii) the indemnifying party has failed to assume the defense of such action and employ counsel reasonably satisfactory to the indemnified party within a reasonable period of time after notice of the commencement of the action or the indemnifying party does not diligently defend the action after assumption of the defense, in which case, if such indemnified party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of (or, in the case of a failure to diligently defend the action after assumption of the defense, to continue to defend) such action on behalf of such indemnified party and the indemnifying party shall be responsible for legal or other expenses subsequently incurred by such indemnified party in connection with the defense of such action; provided, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time any such indemnified party (in addition to any local counsel), which firm shall be designated in writing by the Underwriters if the indemnified party under this Section 7 is an Underwriter Indemnified Party or by the Company if an indemnified party under this Section 7 is a Company Indemnified Party. Subject to this Section 7(c), the amount payable by an indemnifying party under Section 7 shall include, but not be limited to, (x) reasonable legal fees and expenses of counsel to the indemnified party and any other expenses in investigating, or preparing to defend or defending against, or appearing as a third party witness in respect of, or otherwise incurred in connection with, any action, investigation, proceeding or claim, and (y) all amounts paid in settlement of any of the foregoing. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of judgment with respect to any pending or threatened action or any claim whatsoever, in respect of which indemnification or contribution could be sought under this Section 7 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party in form and substance reasonably satisfactory to such indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. Subject to the provisions of the following sentence, no indemnifying party shall be liable for settlement of any pending or threatened action or any claim whatsoever that is effected without its written consent (which consent shall not be unreasonably withheld or delayed), but if settled with its written consent, if its consent has been unreasonably withheld or delayed or if there be a judgment for the plaintiff in any such matter, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, if at any time an indemnified party shall have requested that an indemnifying party reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated herein effected without its written consent if (i) such settlement is entered into more than forty-five (45) days after receipt by such indemnifying party of the request for reimbursement, (ii) such indemnifying party shall have received notice of the terms of such settlement at least thirty (30) days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.
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(d) Contribution. If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under Section 7(a) or Section 7(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid, payable or otherwise incurred by such indemnified party as a result of such loss, claim, damage, expense or liability (or any action, investigation or proceeding in respect thereof), as incurred, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified parry or parties on the other hand from the Offering, or (ii) if the allocation provided by clause (i) of this Section 7(d) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) of this Section 7(d) but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party or parties on the other with respect to the statements, omissions, acts or failures to act which resulted in such loss, claim, damage, expense or liability (or any action, investigation or proceeding in respect thereof) as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total proceeds from the Offering purchased by investors as contemplated by this Agreement (before deducting expenses) received by the Company bear to the total underwriting discounts received by the Underwriters in connection with the Offering, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement, omission, act or failure to act; provided that the parties hereto agree that the written information furnished to the Company by the Underwriters for use in any preliminary prospectus, any Registration Statement or the Prospectus, or in any amendment or supplement thereto, consists solely of the Underwriters’ Information. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(d) be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage, expense, liability, action, investigation or proceeding referred to above in this Section 7(d) shall be deemed to include, for purposes of this Section 7(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against or appearing as a third party witness in respect of, or otherwise incurred in connection with, any such loss, claim, damage, expense, liability, action, investigation or proceeding. Notwithstanding the provisions of this Section 7(d), the Underwriters shall not be required to contribute any amount in excess of the total discounts received in cash by the Underwriters in connection with the Offering less the amount of any damages that the Underwriters have otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement, omission or alleged omission, act or alleged act or failure to act or alleged failure to act by the Underwriters. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
SECTION 8. Termination of this Agreement. Prior to the Closing Date, whether before or after notification by the Commission to the Company of the effectiveness of the Registration Statement under the Securities Act, this Agreement may be terminated by the Underwriters by written notice given to the Company if at any time (i) trading or quotation in any of the Company’s securities shall have been suspended or limited by the Commission or by Nasdaq; (ii) a general banking moratorium shall have been declared by any U.S. federal authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States’ or international political, financial or economic conditions that, in the reasonable judgment of the Underwriters, is material and adverse and makes it impracticable to market the Offered Securities in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities, (iv) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative’s opinion, make it inadvisable to proceed with the delivery of the Offered Securities, (v) if the Company is in material breach of any of its representations, warranties or covenants hereunder, or (vi) if the Representative shall have become aware after the date hereof of such a material adverse change in the conditions or prospects of the Company, or such adverse material change in general market conditions as in the Representative’s reasonable judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Securities or to enforce contracts made by the Underwriters for the sale of the Offered Securities. Any termination pursuant to this Section 8 shall be without liability on the part of (a) the Company to any of the Underwriters, except that the Company shall be, subject to demand by the Underwriters, obligated to reimburse the Underwriters for only those out-of-pocket expenses (including the reasonable fees and expenses of their counsel, and expenses associated with a due diligence report), actually incurred by the Underwriters in connection herewith as allowed under FINRA Rule 5110, less any amounts previously paid by the Company; provided, however, that all such expenses shall not exceed $250,000 in the aggregate, (b) the Underwriters to the Company, or (c) of any party hereto to any other party except that the provisions of Section 4 (with respect to the reimbursement of out-of-pocket accountable, bona fide expenses actually incurred by the Underwriters) and Section 7 shall at all times be effective and shall survive such termination.
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SECTION 9. No Advisory or Fiduciary Responsibility. The Company hereby acknowledges that the Underwriters are acting solely as underwriters in connection with the Offering. The Company further acknowledges that the Underwriters are acting pursuant to a contractual relationship created solely by this Agreement entered into on an arm’s-length basis and in no event do the parties intend that the Underwriters act or be responsible as a fiduciary to the Company, its management, stockholders, creditors or any other person in connection with any activity that the Underwriters may undertake or have undertaken in furtherance of the Offering, either before or after the date hereof. The Underwriters hereby expressly disclaim any fiduciary or similar obligations to the Company, either in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions, and the Company hereby confirms its understanding and agreement to that effect. The Company hereby further confirms its understanding that no Underwriter has assumed an advisory or fiduciary responsibility in favor of the Company with respect to the Offering contemplated hereby or the process leading thereto, including, without limitation, any negotiation related to the pricing of the Offered Securities; and the Company has consulted its own legal and financial advisors to the extent it has deemed appropriate in connection with this Agreement and the Offering. The Company and the Underwriters agree that they are each responsible for making their own independent judgments with respect to any such transactions, and that any opinions or views expressed by the Underwriters to the Company regarding such transactions, including but not limited to any opinions or views with respect to the price or market for the Company’s securities, do not constitute advice or recommendations to the Company. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriters with respect to any breach or alleged breach of any fiduciary or similar duty to the Company in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions.
SECTION 10. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriters or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Offered Securities sold hereunder and any termination of this Agreement.
SECTION 11. Taxes. All sums payable by the Company under this Agreement shall be paid free and clear of and without deductions or withholdings of any present or future taxes or duties, unless the deduction or withholding is required by law, in which case the Company shall pay such additional amount as will result in the receipt by an Underwriter or Representative (each a “Taxable Entity”) of the full amount that would have been received had no deduction or withholding been made.
SECTION 12. Observer’s right. For the period of one year from the Effective Date, upon notice from the Representative to the Company, the Representative shall have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors of the Company; provided that such representative shall sign a Regulation FD compliant confidentiality agreement which is reasonably acceptable to the Representative and its counsel in connection with such representative’s attendance at meetings of the Board of Directors; and provided further that upon written notice to the Representative, the Company may exclude the representative from meetings where, in the written opinion of counsel for the Company, the representative’s presence would destroy the attorney-client privilege. The Company agrees to give the Representative written notice of each such meeting and to provide the Representative with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the other directors, and reimburse the representative of the Representative for his or her reasonable out-of-pocket expenses incurred in connection with its attendance at the meeting, including but not limited to, food, lodging and transportation, as well fees or compensation not in excess of those received by other members of the Board of Directors of the Company.
SECTION 13. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or emailed to the parties hereto as follows:
If to the Underwriters:
AC Sunshine Securities LLC
8761 The Esplanade Ct., STE 30
Orlando, FL 32836
Attn: Dr. Ying Cui
Email: ycui@acsunshine.com
With a copy (which shall not constitute notice) to:
Ortoli Rosenstadt LLP
366 Madison Avenue, 3rd FL
New York, NY 10017
Attn: | William S. Rosenstadt, Esq. |
Mengyi “Jason” Ye, Esq
Email: | wsr@orllp.legal |
jye@orllp.legal
If to the Company:
Inno Holdings Inc.
2465 Farm Market 359 South
Brookshire, TX 77423
Attn: Dekui Liu
Email: dkhwami@gmail.com
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With a copy (which shall not constitute notice) to:
Winston & Strawn LLP
800 Capitol Street Suite 2400
Houston, TX 77002-2925
Attn: | Michael J. Blankenship, Esq. |
Email: | MBlankenship@winston.com |
Any party hereto may change the address for receipt of communications by giving written notice to the others.
SECTION 14. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and in each case their respective successors, and no other person will have any right or obligation hereunder. The term “successors” shall not include any purchaser of the Offered Securities as such merely by reason of such purchase.
SECTION 15. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.
SECTION 16. Governing Law Provisions. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to conflict of laws principles thereof.
SECTION 17. Consent to Jurisdiction. No legal suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby (each, a “Related Proceeding”) may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts (collectively, the “Specified Courts”) shall have jurisdiction over the adjudication of any Related Proceeding, and the parties to this Agreement hereby irrevocably consent to the exclusive jurisdiction the Specified Courts and personal service of process with respect thereto. The parties to this Agreement hereby irrevocably waive any objection to the laying of venue of any Related Proceeding in the Specified Courts and irrevocably waive and agree not to plead or claim in any Specified Court that any Related Proceeding brought in any Specified Court has been brought in an inconvenient forum.
SECTION 18. General Provisions. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the Offering. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement.
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Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification and contribution provisions of Section 7, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Section 7 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act.
The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of the Underwriters, the officers or employees of the Underwriters, any person controlling any of the Underwriters, the Company, the officers or employees of the Company, or any person controlling the Company, (ii) acceptance of the Offered Securities and payment for them as contemplated hereby and (iii) termination of this Agreement.
Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, the Underwriters’ officers and employees, any controlling persons referred to herein, the Company’s directors and the Company’s officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term “successors and assigns” shall not include a purchaser of any of the Offered Securities from the Underwriters merely because of such purchase.
[Signature Page Follows]
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If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms.
Very truly yours, | |||
INNO HOLDINGS INC. | |||
By: | |||
Name: | Dekui Liu | ||
Title: | Chairman of the Board and Chief Executive Officer |
The foregoing Underwriting Agreement is hereby confirmed and accepted by the Underwriters as of the date first above written.
For itself and on behalf of the several | |||
Underwriters listed on Schedule A hereto | |||
AC Sunshine Securities LLC | |||
By: | |||
Name: | Ying Cui | ||
Title: | President |
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SCHEDULE A
Underwriter | Number
of Firm Shares | |||
AC Sunshine Securities LLC | [● | ] | ||
[__] | [● | ] | ||
Total | [● | ] |
Sch A-1
SCHEDULE B
Issuer Free Writing Prospectus(es)
[●]
Sch B-1
SCHEDULE C
Pricing Information
Number of Firm Shares:
Number of Additional Shares:
Public Offering Price per one Share: $
Underwriting Discount per one Share: $
Proceeds to Company per one Share (before expenses): $
Sch C-1
SCHEDULE D
Lock-Up Parties
Name
Dekui Liu Tianwei Li
Dr. Li Gong
Ying Liu
Xiaogang (John) Zhang
Chen Sung
Richard B. Haws, PE
Zfounder Organization Inc.
Liwen Que
Sch D-1
SCHEDULE E
Subsidiaries
Name of Subsidiary | Jurisdiction of Incorporation or Organization | |
Castor Building Tech LLC | California | |
Inno Metal Studs Corp. | Texas | |
Inno Research Institute LLC | Texas |
Sch E-1
EXHIBIT A
Form of Warrant
As attached.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCK-UP PERIOD OF ONE HUNDRED AND EIGHTY (180) DAYS BEGINNING ON THE DATE OF COMMENCEMENT OF SALES OF THE OFFERING PURSUANT TO THE REGISTRATION STATEMENT OF THE COMPANY (FILE NO. [__]) AND MAY NOT BE (A) SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED TO ANYONE OTHER THAN AC SUNSHINE SECURITIES LLC, OR BONA FIDE OFFICERS OR PARTNERS OF AC SUNSHINE SECURITIES LLC, OR (B) CAUSED TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THIS SECURITIES HEREUNDER, EXCEPT AS PROVIDED FOR IN FINRA RULE 5110(E)(2).
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [●], 2023. VOID AFTER 5:00 P.M., EASTERN TIME, [●], 20285.
UNDERWRITER’S WARRANT
FOR THE PURCHASE OF [ ] SHARES OF COMMON STOCK
OF
INNO HOLDINGS INC.
1. Purchase Warrant. THIS CERTIFIES THAT, pursuant to that certain Underwriting Agreement by and between Inno Holdings Inc., a Texas corporation (the “Company”), on the one hand, and AC Sunshine Securities LLC (the “Holder”), on the other hand, dated [●], 2023 (the “Underwriting Agreement”), the Holder, as registered owner of this Purchase Warrant, is entitled, at any time or from time to time from the date that is six months from [●], 2023 (the “Exercise Date”), and at or before 5:00 p.m., Eastern time, on [●], 2028, (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to such number of shares of common stock of the Company, of no par value (“Common Stock”) as equates to seven percent (7.0%) of the aggregate number of shares of Common Stock sold in the Offering (the “Shares), including any Common Stock sold upon exercise of the over-allotment option, subject to adjustment as provided in Section 6 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[●] per share of Common Stock (which is equal to one hundred and twenty percent (120%) of the price of the shares of Common Stock sold in the Offering); provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per share of Common Stock and the number of shares of Common Stock to be received upon such exercise, shall be adjusted as therein specified. The term “Exercise Price” shall mean the initial exercise price as set forth above or the adjusted exercise price as a result of the events set forth in Section 6 below, depending on the context. Capitalized terms not defined herein shall have the meaning ascribed to them in the Underwriting Agreement.
2. Exercise.
2.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto as Exhibit A must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Common Stock being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern Time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.
5 | Five (5) years from the commencement of sales of the public offering. |
Ex A-1
2.2 Cashless Exercise. After the Exercise Date and until the Expiration Date, Holder may elect to receive the number of shares of Common Stock equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company shall issue to Holder, Shares in accordance with the following formula:
X | = | Y(A-B)
A |
||
Where, | X | = | The number of shares of Common Stock to be issued to Holder; | |
Y | = | The number of shares of Common Stock for which the Purchase Warrant is being exercised; | ||
A | = | The fair market value of one share of Common Stock; and | ||
B | = | The Exercise Price. |
For purposes of this Section 2.2, the “fair market value” of one share of Common Stock is defined as follows:
(i) | if the Common Stock is traded on a national securities exchange, the value shall be deemed to be the weighted average price on such exchange for the five consecutive trading days ending on the day immediately prior to the exercise form being submitted in connection with the exercise of the Purchase Warrant; or |
(ii) | if the Common Stock is actively traded over-the-counter, the value shall be deemed to be the weighted average price of the Common Stock for the five consecutive trading days ending on the trading day immediately prior to the exercise form being submitted in connection with the exercise of the Purchase Warrant; or |
(iii) | if there is no market for the Common Stock, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors. |
2.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear the following legends unless such securities have been registered under the Securities Act of 1933, as amended (the “Act”), or are exempt from registration under the Act:
(i) “THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A LOCK-UP PERIOD OF ONE HUNDRED AND EIGHTY (180) DAYS BEGINNING ON THE DATE OF COMMENCEMENT OF SALES OF THE OFFERING PURSUANT TO THE REGISTRATION STATEMENT OF THE COMPANY(FILE NO. [__]) AND MAY NOT BE (A) SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED TO ANYONE OTHER THAN AC SUNSHINE SECURITIES LLC, OR BONA FIDE OFFICERS OR PARTNERS OF AC SUNSHINE SECURITIES LLC, OR (B) CAUSED TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THIS SECURITIES HEREUNDER, EXCEPT AS PROVIDED FOR IN FINRA RULE 5110(E)(2).”
(ii) Any legend required by the securities laws of any state to the extent such laws are applicable to the Shares represented by a certificate, instrument, or book entry so legended.
Ex A-2
3. Transfer.
3.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, for a period of one hundred eighty (180) days from the date of commencement of sales of the public offering (the “Effective Date”), that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant to anyone other than: (i) the Underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of the Underwriter or of any such selected dealer, in each case in accordance with FINRA Rule 5110(e)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(e)(2). On and after that date that is one hundred eighty (180) days after the commencement of sales of the offering, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto as Exhibit B duly executed and completed, together with this Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of shares of Common Stock purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
3.2 Restrictions Imposed by the Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Company that the securities may be transferred pursuant to an exemption from registration under the Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company, (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities that has been declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and includes a current prospectus or (iii) a registration statement, relating to the offer and sale of such securities has been filed and declared effective by the Commission and compliance with applicable state securities law has been established.
4. Registration Rights.
4.1 Demand Registration.
4.1.1 Grant of Right. Unless all of the Registrable Securities (as defined below) are included in an effective registration statement with a current prospectus or a qualified offering statement with a current registration statement, the Company, upon written demand (a “Demand Notice”) of the Holder(s) of at least fifty-one percent (51%) of the shares of Common Stock (“Majority Holders”), agrees to register, on one occasion, all or any portion of the shares of Common Stock underlying this Purchase Warrant that are permitted to be registered under the Act (collectively, the “Registrable Securities”). On such occasion, the Company will file a registration statement with the Commission (a “Demand Registration Statement”) covering the Registrable Securities within sixty (60) days after receipt of a Demand Notice and use its best efforts to have the registration statement declared effective promptly thereafter, subject to compliance with review by the Commission; provided, however, that the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect to which the Holder is entitled to piggyback pursuant to Section 4.2 hereof and either: (i) the Holder has elected to participate in the offering covered by such registration statement; or (ii) if such registration statement relates to an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been withdrawn or until thirty days after such offering is consummated. The demand for registration may be made at any time during a period of five years beginning on the date of commencement of sales of the Offering.
4.1.2 Terms. The Company shall bear all fees and expenses attendant to the Demand Registration Statement pursuant to Section 4.1.1, but the Holder(s) shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holder(s) to represent the Holder(s)in connection with the sale of the Registrable Securities. The Company agrees to use its best efforts to cause the filing of a Demand Registration Statement required herein to become effective promptly and to qualify or register the Registrable Securities in such states as are reasonably requested by the Holder(s); provided, however, that in no event shall the Company be required to register the Registrable Securities in a state in which such registration would cause: (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal stockholders of the Company to be obligated to escrow their shares of Common Stock of the Company. The Company shall cause any registration statement filed pursuant to the demand right granted under Section 4.1.1 to remain effective for a period of at least 12 consecutive months after the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities. The Holder(s) shall only use the prospectuses provided by the Company to sell the shares of Common Stock covered by such registration statement, and will immediately cease to use any prospectus furnished by the Company if the Company advises the Holder(s) that such prospectus may no longer be used due to a material misstatement or omission. Notwithstanding the provisions of this Section 4.1.2, the Holder(s) shall be entitled to a Demand Registration Statement under this Section 4.1.2 on only one occasion and such demand registration right shall terminate on the fifth anniversary of the commencement of sales of the Offering in accordance with FINRA Rule 5110(g)(8)(C).
Ex A-3
4.2 “Piggy-Back” Registration.
4.2.1 Grant of Right. Unless all of the Registrable Securities are included in an effective registration statement with a current prospectus or a qualified offering statement with a current offering circular, the Holder shall have the right, for a period of five years commencing on the date of commencement of sales of the Offering, to include the remaining Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145 promulgated under the Act or pursuant to Form F-3 or any equivalent form).
4.2.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 4.2.1 hereof, but the Holder(s) shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holder(s) to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than 30 days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holder(s) shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been registered under an effective registration statement. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice, within ten days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 4.2.2. Notwithstanding the provisions of this Section 4.2.2, such piggyback registration rights shall terminate on the seventh anniversary of the commencement of sales of the Offering in accordance with FINRA Rule 5110(g)(8)(D).
5. New Purchase Warrants to be Issued.
5.1 Partial Exercise or Transfer. Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereof, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of shares of Common Stock purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.
5.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
6. Adjustments.
6.1 Adjustments to Exercise Price and Number of Shares of Common Stock. The Exercise Price and the number of shares of Common Stock underlying this Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:
6.1.1 Stock Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split up of the shares of Common Stock or other similar event, then, on the effective day thereof, the number of shares of Common Stock purchasable hereunder shall be increased in proportion to such increase in outstanding shares of Common Stock, and the Exercise Price shall be proportionately decreased.
6.1.2 Aggregation of Shares of Common Stock. If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of Common Stock or other similar event, then, on the effective date thereof, the number of shares of Common Stock purchasable hereunder shall be decreased in proportion to such decrease in outstanding shares of Common Stock, and the Exercise Price shall be proportionately increased.
Ex A-4
6.1.3 Replacement of Common Stock upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding shares of Common Stock other than a change covered by Section 6.1.1 or Section 6.1.2 hereof or that solely affects the par value of such shares of Common Stock, or in the case of any stock reconstruction or amalgamation or consolidation of the Company with or into another corporation (other than a consolidation or stock reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding shares of Common Stock), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of Common Stock or other securities or property (including cash) receivable upon such reclassification, reorganization, stock reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of shares of Common Stock of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in the shares Common Stock covered by Section 6.1.1 or Section 6.1.2, then such adjustment shall be made pursuant to Section 6.1.1, Section 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, stock reconstructions or amalgamations, or consolidations, sales or other transfers.
6.1.4 Fundamental Transaction. If, at any time while this Purchase Warrant is outstanding, the Company enters into the following transactions with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with, the other Persons making or party to such stock or share purchase agreement or other business combination): (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any direct or indirect purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding shares of Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the shares of Common Stock or any compulsory share exchange pursuant to which the shares of Common Stock are effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spinoff or scheme of arrangement) with another Person or group of Persons (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Purchase Warrant, the Holder shall have the right to receive, for each Purchase Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional or alternative consideration (the “Alternative Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Purchase Warrant is exercisable immediately prior to such Fundamental Transaction. For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternative Consideration based on the amount of Alternative Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternative Consideration in a reasonable manner reflecting the relative value of any different components of the Alternative Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternative Consideration it receives upon any exercise of this Purchase Warrant following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Purchase Warrant, and to deliver to the Holder in exchange for this Purchase Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Purchase Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Purchase Warrant prior to such Fundamental Transaction, and with an exercise price which applies the Exercise Price hereunder to such shares of capital stock (but taking into account the relative value of the Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Purchase Warrant immediately prior to the consummation of such Fundamental Transaction). Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Purchase Warrant and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of, the Company and shall assume all of the obligations of the Company, under this Purchase Warrant and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.
Ex A-5
6.1.5 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of shares of Common Stock as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the date hereof or the computation thereof.
6.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or stock reconstruction or amalgamation of the Company with or into, another corporation (other than a consolidation or stock reconstruction or amalgamation which does not result in any reclassification or change of the outstanding shares of Common Stock), the corporation formed by such consolidation or stock reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of Common Stock and other securities and property receivable upon such consolidation or stock reconstruction or amalgamation, by a holder of the number of shares of Common Stock of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, stock reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section 6 shall similarly apply to successive consolidations or stock reconstructions or amalgamations.
6.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of shares of Common Stock or other securities, properties or rights.
7. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon exercise of this Purchase Warrant, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of this Purchase Warrant and payment of the Exercise Price therefor, in accordance with the terms hereby, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder. As long as this Purchase Warrant shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon exercise of this Purchase Warrant to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTCQB Market or any successor quotation system) on which the Common Stock issued to the public in the Offering may then be listed and/or quoted (if at all).
8. Certain Notice Requirements.
8.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen days prior to the date fixed as a record date or the date of closing the transfer books (the “Notice Date”) for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other stockholders of the Company at the same time and in the same manner that such notice is given to the stockholders.
Ex A-6
8.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its shares of Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or stock reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.
8.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made if made in accordance with the notice provisions of the Underwriting Agreement to the addresses and contact information set forth below:
If to the Holder, then to:
AC Sunshine Securities LLC
8761 The Esplanade Ct., STE 30
Orlando, FL 32836
Attn: Dr. Ying Cui
Email: ycui@acsunshine.com
With a copy (which shall not constitute notice) to:
Ortoli Rosenstadt LLP
366 Madison Avenue, 3rd FL
New York, NY 10017
Attn: William S. Rosenstadt, Esq.
Mengyi “Jason” Ye, Esq
Email: wsr@orllp.legal
jye@orllp.legal
If to the Company:
Inno Holdings Inc.
2465 Farm Market 359 South
Brookshire, TX 77423
Attn: Dekui Liu
Email: dkhwami@gmail.com
With a copy (which shall not constitute notice) to:
Winston & Strawn LLP
800 Capitol Street Suite 2400
Houston,
TX 77002-2925
Attn: Michael J. Blankenship, Esq.
Email: MBlankenship@winston.com
Ex A-7
9. Miscellaneous.
9.1 Amendments. The Company and the Underwriter may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and the Underwriter may deem necessary or desirable and that the Company and the Underwriter deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.
9.3. Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.
9.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
9.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
9.7 Exchange Agreement. As a condition of the Holder’s receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and the Underwriter enter into an agreement (“Exchange Agreement”) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.
9.8 Execution in Counterparts. This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.
9.9 Holder Not Deemed a Stockholder. Except as otherwise specifically provided herein, the Holder, solely in its capacity as a holder of this Purchase Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of capital stock of the Company for any purpose, nor shall anything contained in this Purchase Warrant be construed to confer upon the Holder, solely in its capacity as the Holder of this Purchase Warrant, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Shares which it is then entitled to receive upon the due exercise of this Purchase Warrant. In addition, nothing contained in this Purchase Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Purchase Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.
9.10 Restrictions. The Holder acknowledges that the Shares acquired upon the exercise of this Purchase Warrant, if not registered, and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
9.10 Severability. Wherever possible, each provision of this Purchase Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Purchase Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Purchase Warrant.
[Signature Page Follows]
Ex A-8
IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the ____ day of _______, 202_.
INNO HOLDINGS INC. | ||
By: | ||
Name: | ||
Title: |
Ex A-9
EXHIBIT A
Exercise Notice
Form to be used to exercise Purchase Warrant:
Date: __________, 20___
The undersigned hereby elects irrevocably to exercise the Purchase Warrant for ______shares of Common Stock of Inno Holdings Inc., a Texas corporation (the “Company”) and hereby makes payment of $____ (at the rate of $____ per share of Common Stock) in payment of the Exercise Price pursuant thereto. Please issue the Common Stock as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of shares of Common Stock for which this Purchase Warrant has not been exercised.
or
The undersigned hereby elects irrevocably to convert its right to purchase ___ shares of Common Stock under the Purchase Warrant for ______shares of Common Stock, as determined in accordance with the following formula:
X | = | Y(A-B) | ||
A | ||||
Where, | X | = | The number of shares of Common Stock to be issued to Holder; | |
Y | = | The number of shares of Common Stock for which the Purchase Warrant is being exercised; | ||
A | = | The fair market value of one share of Common Stock which is equal to $_____; and | ||
B | = | The Exercise Price which is equal to $______ per share of Common Stock |
The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.
Please issue the shares of Common Stock as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of shares of Common Stock for which this Purchase Warrant has not been converted.
Signature
Signature Guaranteed
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name:
(Print in Block Letters)
Address:
NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
Ex A-10
EXHIBIT B
Assignment Notice
Form to be used to assign Purchase Warrant:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):
FOR VALUE RECEIVED, _____________________ does hereby sell, assign and transfer unto the right to purchase _______________shares of Common Stock of Inno Holdings Inc., a Texas corporation (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.
Dated: __________ 20__
Signature
Signature Guaranteed
NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
Ex A-11
EXHIBIT B
Form of Lock-Up Agreement
As attached.
Lock-Up Agreement
[ ], 20236
AC Sunshine Securities LLC
8761 The Esplanade Ct., STE 30
Orlando, FL 32836
Ladies and Gentlemen:
This Lock-Up Agreement (this “Agreement”) is being delivered to AC Sunshine Securities LLC (the “Representative”) in connection with the proposed Underwriting Agreement (the “Underwriting Agreement”) between Inno Holdings Inc., a Texas corporation (the “Company”), and the Representative, relating to the proposed public offering (the “Offering”) of common stock, of no par value (“Common Stock”), of the Company.
In order to induce the Underwriters (as defined in the Underwriting Agreement) to continue their efforts in connection with the Offering, and in light of the benefits that the Offering will confer upon the undersigned in its capacity as a shareholder and/or an officer, director or employee of the Company, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with the Representative that, during the period beginning on and including the date of this Agreement through and including the date that is six months from the date of this Agreement (the “Lock-Up Period”), the undersigned will not, without the prior written consent of the Representative, directly or indirectly, (i) offer, sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, or announce the intention to otherwise dispose of, any Common Stock now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (including, without limitation, Common Stock which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations promulgated under the Securities Act of 1933, as amended, and as the same may be amended or supplemented on or after the date hereof from time to time (the “Securities Act”)) (such shares, the “Beneficially Owned Shares”) or securities convertible into or exercisable or exchangeable for Common Stock, (ii) enter into any swap, hedge or similar agreement or arrangement that transfers in whole or in part, the economic risk of ownership of the Beneficially Owned Shares or securities convertible into or exercisable or exchangeable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or (iii) engage in any short selling of the Common Stock.
The restrictions set forth in the immediately preceding paragraph shall not apply to:
(1) if the undersigned is a natural person, any transfers made by the undersigned (a) as a bona fide gift to any member of the immediate family (as defined below) of the undersigned or to a trust the beneficiaries of which are exclusively the undersigned or members of the undersigned’s immediate family, (b) by will or intestate succession upon the death of the undersigned, (c) as a bona fide gift to a charity or educational institution, (d) any transfer pursuant to a qualified domestic relations order or in connection with a divorce; or (e) if the undersigned is or was an officer, director or employee of the Company, to the Company pursuant to the Company’s right of repurchase upon termination of the undersigned’s service with the Company;
(2) if the undersigned is a corporation, partnership, limited liability company or other business entity, any transfers to any shareholder, partner or member of, or owner of a similar equity interest in, the undersigned, as the case may be, if, in any such case, such transfer is not for value;
(3) if the undersigned is a corporation, partnership, limited liability company or other business entity, any transfer made by the undersigned (a) in connection with the sale or other bona fide transfer in a single transaction of all or substantially all of the undersigned’s capital stock, partnership interests, membership interests or other similar equity interests, as the case may be, or all or substantially all of the undersigned’s assets, in any such case not undertaken for the purpose of avoiding the restrictions imposed by this Agreement or (b) to another corporation, partnership, limited liability company or other business entity so long as the transferee is an affiliate (as defined below) of the undersigned and such transfer is not for value;
6 | Pricing date |
Ex B-1
(4) (a) exercises of stock options or equity awards granted pursuant to an equity incentive or award or other plan or warrants to purchase Common Stock or other securities (including by cashless exercise to the extent permitted by the instruments representing such stock options or warrants so long as such cashless exercise is effected solely by the surrender of outstanding stock options or warrants to the Company and the Company’s cancellation of all or a portion thereof to pay the exercise price), provided that in any such case the securities issued upon exercise shall remain subject to the provisions of this Agreement (as defined below); (b) transfers of Common Stock or other securities to the Company in connection with the issuance, vesting or exercise of any equity awards granted pursuant to an equity incentive or other plan and held by the undersigned to the extent, but only to the extent, as may be necessary to satisfy tax withholding obligations pursuant to the Company’s equity incentive or other plans;
(5) the exercise by the undersigned of any warrant(s) issued by the Company prior to the date of this Agreement, including any exercise effected by the delivery of shares of Common Stock of the Company held by the undersigned; provided, that, the Common Stock received upon such exercise shall remain subject to the restrictions provided for in this Agreement;
(6) the occurrence after the date hereof of any of (a) an acquisition by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of 100% of the voting securities of the Company, (b) the Company merges into or consolidates with any other entity, or any entity merges into or consolidates with the Company, (c) the Company sells or transfers all or substantially all of its assets to another person, or (d) provided, that, the Common Stock received upon any of the events set forth in clauses (a) through (c) above shall remain subject to the restrictions provided for in this Agreement;
(7) the Offering;
(8) transfers consented to, in writing by the Representative;
(9) transactions relating to Common Stock acquired in open market transactions after the completion of the Offering; provided that, no filing by any party under the Exchange Act or other public announcement shall be required or shall be voluntarily made in connection with such transactions;
provided however, that in the case of any transfer described in clauses (1), (2) or (3) above, it shall be a condition to the transfer that the transferee executes and delivers to the Representative, acting on behalf of the Underwriters, not later than one business day prior to such transfer, a written agreement, in substantially the form of this Agreement (it being understood that any references to “immediate family” in the agreement executed by such transferee shall expressly refer only to the immediate family of the undersigned and not to the immediate family of the transferee) and otherwise satisfactory in form and substance to the Representative.
In addition, the restrictions set forth herein shall not prevent the undersigned from entering into a sales plan pursuant to Rule 10b5-1 under the Exchange Act after the date hereof, provided that (i) a copy of such plan is provided to the Representative promptly upon entering into the same and (ii) no sales or transfers may be made under such plan until the Lock-Up Period ends or this Agreement is terminated in accordance with its terms. For purposes of this paragraph, “immediate family” shall mean a spouse, child, grandchild or other lineal descendant (including by adoption), father, mother, brother or sister of the undersigned; and “affiliate” shall have the meaning set forth in Rule 405 under the Securities Act.
If (i) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this Agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of such material news or material event, as applicable, unless the Representative waives, in writing, such extension.
Ex B-2
If the undersigned is an officer or director of the Company, the Representative agrees that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Common Stock, the Representative will notify the Company of the impending release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two business days after the publication date of such press release; provided, that such press release is not a condition to the release of the aforementioned lock-up provisions due to the expiration of the Lock-Up Period. The provisions of this paragraph will also not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this Agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.
In furtherance of the foregoing, (1) the undersigned also agrees and consents to the entry of stop transfer instructions with any duly appointed transfer agent for the registration or transfer of the securities described herein against the transfer of any such securities except in compliance with the foregoing restrictions, and (2) the Company, and any duly appointed transfer agent for the registration or transfer of the securities described herein, are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Agreement.
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Agreement and that this Agreement has been duly authorized (if the undersigned is not a natural person), executed and delivered by the undersigned and is a valid and binding agreement of the undersigned. This Agreement and all authority herein conferred are irrevocable and shall survive the death or incapacity of the undersigned (if a natural person) and shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned for the term of the Lock-Up Period.
This Agreement shall automatically terminate upon the earliest to occur, if any, of (1) either the Representative, on the one hand, or the Company, on the other hand, advising the other in writing, they have determined not to proceed with the Offering, (2) termination of the Underwriting Agreement before the sale of Common Stock, or (3) the withdrawal of the Registration Statement.
This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York, without regard to the conflict of laws principles thereof.
[Signature Page Follows]
Ex B-3
Very truly yours, | ||
(Name - Please Print) | ||
(Signature) | ||
(Name of Signatory, in the case of entities - Please Print) | ||
(Title of Signatory, in the case of entities - Please Print) | ||
Address: | ||
# of shares of Common Stock Held by Signatory: |
Ex B-4
Exhibit 5.1
September 13, 2023
Inno Holdings Inc.
2465 Farm Market 359 South
Brookshire, TX 77423
Re: | Form S-1 Registration Statement |
Ladies and Gentlemen:
We have acted as special counsel to Inno Holdings Inc., a Texas corporation (the “Company”), in connection with the Company’s registration statement on Form S-1 (Registration No. 333-273429) initially filed with the Securities and Exchange Commission (the “Commission”) on July 26, 2023, as amended to date (the “Registration Statement”), under the Securities Act of 1933, as amended (the “Securities Act”). The Registration Statement relates to the registration of the offer and sale of (i) up to 2,500,000 shares (the “Company Shares”) of the Company’s common stock, no par value (the “Common Stock”), (ii) up to 375,000 shares of Common Stock that may be purchased to cover over-allotments, if any (the “Over-Allotment Shares”), by AC Sunshine Securities LLC, in its capacity as representative of the underwriters (the “Underwriter”), (iii) warrants to purchase up to 201,250 shares of Common Stock that will be issued to the Underwriter (the “Underwriter’s Warrants”), (iv) up to 201,250 shares of Common Stock underlying the Underwriter’s Warrants (the “Underwriter’s Warrant Shares”) and (v) up to 1,386,990 shares of Common Stock that may be sold by the selling stockholders named in the Registration Statement (the “Stockholder Shares”).
This opinion letter is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K promulgated under the Securities Act.
In rendering the opinions set forth below, we have examined and relied upon such certificates, corporate records, agreements, instruments and other documents, and examined such matters of law, that we considered necessary or appropriate as a basis for the opinions, including the Amended and Restated Certificate of Formation of the Company filed with the Secretary of State of the State of Texas on July 14, 2023 and the form of Underwriter’s Warrants, substantially in the form of Exhibit A attached to the underwriting agreement. In our examination, we have assumed the genuineness of all signatures, the legal capacity of all natural persons, the authenticity of all documents submitted to us as originals, the conformity to authentic original documents of all copies submitted to us as conformed, certified, or reproduced copies and the authenticity of the originals of such latter documents. In making our examination of documents executed by the parties (other than the Company), we have assumed that such parties had the power, corporate or other, to enter into and perform all obligations thereunder and have assumed the due authorization by all requisite action, corporate or other, and the execution and delivery by such parties of such documents and the validity and binding effect thereof. As to any facts material to the opinions expressed herein that we did not independently establish or verify, we have relied upon oral or written statements and representations of officers or other representatives of the Company and others.
September 13, 2023 Page 2 |
Based upon the foregoing, and subject to the assumptions, exceptions, qualifications, and limitations stated herein, we are of the opinion that:
1. | the Company Shares and the Over-Allotment Shares have been duly authorized, and, when the Company Shares and Over-Allotment Shares are delivered to the Underwriter against payment of the agreed consideration therefor in accordance with the underwriting agreement, the Company Shares and Over-Allotment Shares will be validly issued, fully paid and nonassessable. |
2. | The Underwriter’s Warrants have been duly authorized, and, when the Underwriter’s Warrants are delivered to the Underwriter against payment of the agreed consideration therefor in accordance with the underwriting agreement, the Underwriter’s Warrants will constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms. |
3. | The Underwriter’s Warrant Shares have been duly authorized and, when issued and delivered by the Company upon exercise of the Underwriter’s Warrants against payment therefor as set forth in the Registration Statement, the underwriting agreement and the Underwriter’s Warrants, will be validly issued, fully paid and nonassessable. |
4. | The Stockholder Shares have been duly authorized and are validly issued, fully paid and nonassessable. |
The opinions expressed herein are based upon and limited to the laws of the State of New York and the Texas Business Organizations Code, as amended, including the statutory provisions, the applicable provisions of the Texas Constitution and reported judicial decisions interpreting the foregoing. We express no opinion herein as to any other laws, statutes, regulations or ordinances. The opinions expressed herein that are based on the laws of the State of New York are limited to the laws generally applicable in transactions of the type covered by the Registration Statement.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the use of our name in the prospectus forming a part of the Registration Statement under the caption “Legal Matters.” In giving such consent, we do not thereby admit that we within the category of persons whose consent is required under Section 7 of the Securities Act and the rules and regulations thereunder.
Very truly yours, | |
/s/ Winston & Strawn LLP |
Exhibit 10.5
REDACTED COPY
ADDENDUM TO DEVELOPMENT AND SUPPLY AGREEMENT
This Addendum (the “Addendum”) to the DEVELOPMENT AND SUPPLY AGREEMENT dated [March 24, 2023] (the “Agreement”) is entered into as of [August 9, 2023], by and among Vision Opportunity Fund LP (“Original Client”), New Vision 101 LLC (“Assignee Client”), and Inno Metal Studs Corp (“Inno”).
WHEREAS, the Original Client entered into the Agreement with Inno and now wishes to assign its rights, obligations, and interests under the Agreement to Assignee Client;
WHEREAS, Assignee Client is willing to assume such rights, obligations, and interests under the Agreement;
WHEREAS, Inno consents to such assignment and the parties collectively wish to modify certain terms and conditions of the Agreement as set forth below;
NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. | Assignment to New Vision 101 LLC: The Original Client hereby assigns all its rights, obligations, and interests under the Agreement to the Assignee Client, who is the owner and general partner of the Original Client. From the date of this Addendum, New Vision 101 LLC shall assume all rights and obligations of the Original Client under the Agreement. Consequently, Vision Opportunity Fund LP shall be released from all obligations under the Agreement from and after the date of this Addendum. |
2. | Loan Assistance: Notwithstanding any provision in the Agreement to the contrary, Inno shall no longer have any obligation or responsibility to assist the Assignee Client in obtaining any construction loan related to the Project. Sections 1.1.11 and 1.5 of the Agreement are entirely removed. |
Certain identified information has been omitted from this exhibit because it is not material and would likely cause competitive harm to the registrant if publicly disclosed. [***] indicates that information has been omitted.
3. | The Payment Schedule: |
Section 2.2.3 of the Agreement shall be removed entirely, and Section 2.2.1, 2.2.2, and 2.2.4 of the Agreement shall be replaced in their entirety with the following:
2.2.1. During the preparation period before obtaining permits, Client shall make down payment equal to [***] of the Total Fee (“Down Payment”) to be due within [***]. Down Payment is not refundable. However, if Inno fails to obtain required permits and licenses, Inno needs to return the deposit.
2.2.2. After commencing the project officially, Inno shall provide a detailed draw request of line items with inspector’s signature by the last day of each month. Based on the monthly progress report, which is inspected, signed and accepted by an inspector engaged or assigned by the Client, Inno has the right to receive payments and the Client is obligated to pay the amount. Title and risk to all equipment and materials to be incorporated into the Project shall pass to Client upon delivery of such equipment and materials to the Project site.
2.2.4. Client shall response, approve, and pay the funds within five (5) business days after receiving each draw request. The down payment and all other progress payments are NOT Refundable, unless Inno fails to obtain required permits and licenses.
4. | Rights to Terminate. Section 4 shall be replaced in its entirety with the following: Unless otherwise stated under the terms of this Agreement, no party has the right to terminate this Agreement unless mutually agreed upon in writing by both parties. However, if Inno fails to obtain required permits and licenses, the agreement should be terminated automatically. |
5. | Ownership of Designs and Drawings: All drawings, designs, and related materials associated with the Project, whether prepared by or on behalf of lnno, shall remain the exclusive property of Inno. The Assignee Client is prohibited from using, reproducing, or permitting the use or reproduction of any such drawings, designs, or related materials for any purpose other than the construction of the Project, without the prior written consent of Inno. |
2
6. | Supplier Role: Inno’s responsibility with respect to the Project is expressly limited to the provision of framing and/or other construction materials. Any other services or responsibilities of Inno not explicitly stipulated in the Agreement or this Addendum are hereby excluded. |
7. | Effect of Addendum: Except as explicitly amended by this Addendum, all terms and conditions of the Agreement are to remain in full force and effect. Should there be any discrepancies between this Addendum and the Agreement, the stipulations of this Addendum shall take precedence. |
8. | Entire Agreement: This Addendum, together with the Agreement, encapsulates the whole understanding between the parties regarding the subject matter and supersedes any prior discussions, negotiations, understandings, and agreements between the parties. |
3
IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of the date first above written.
[Signature Page]
New Vision 101 LLC | |||||
By: | /s/ Wen Hua | Name: | Wen Hua | ||
Title: | president |
Vision Opportunity Fund LP | |||||
By: | /s/ Wen Hua | Name: | Wen Hua | ||
Title: | General Partner |
Inno Metals Studs Corp | |||||
By: | /s/ Dekui Liu | Name: | Dekui Liu | ||
Title: | CEO |
4
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
To the Board of Directors of INNO HOLDINGS INC.:
We hereby consent to the inclusion in this Registration Statement of INNO HOLDINGS INC. and its subsidiaries (the “Company”) on Form S-1 amendment No. 2 of our report dated February 7, 2023, except for Notes 13, as to which the date is May 8, 2023; Notes 11, 12 and 15 as to which the date is July 25, 2023; Note 2 as to which the date is August 14, 2023, related to the Form S-1 amendment No. 2 with respect to our audit of the Company’s consolidated financial statements as of and for the years ended September 30, 2022 and 2021 which appears in this Registration Statement on Form S-1 amendment No. 2. Our report dated February 7, 2023, relating to the consolidated financial statements includes an emphasis paragraph relating to uncertainty as to the Company’s ability to continue as a going concern.
We also consent to the reference to us under the caption “Experts” in the Registration Statement.
Diamond Bar, California
September 13, 2023
Exhibit 107
Calculation of Filing Fee Tables
Form S-1
(Form Type)
INNO HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Table 1: Newly Registered Securities
Security Type | Security Class Title | Fee Calculation or Carry Forward Rule | Amount Registered | Proposed Maximum Offering Price Per Unit | Maximum Aggregate Offering Price | Fee Rate | Amount of Registration Fee | |||||||||||||||||||
Fees to be Paid | Equity | Common stock, no par value(1)(2) | 457(o) | 2,500,000 | $ | 5.00 | $ | 12,500,000.00 | 0.00011020 | $ | 1,377.50 | |||||||||||||||
Fees to be Paid | Equity | Common stock, no par value(3) | 457(o) | 1,386,990 | $ | 5.00 | $ | 6,934,950.00 | 0.00011020 | $ | 764.24 | |||||||||||||||
Fees to be Paid | Equity | Underwriter’s Warrants(4) | 457(g) | — | — | — | — | — | ||||||||||||||||||
Fees to be Paid | Equity | Common stock, par value $0.00 per share(1)(5) | 457(o) | 175,000 | $ | 6.00 | $ | 1,050,000 | 0.00011020 | $ | 115.71 | |||||||||||||||
Total Offering Amounts | $ | 20,484,950 | $ | 2,257.45 | ||||||||||||||||||||||
Total Fees Previously Paid | $ | 2,257.45 | ||||||||||||||||||||||||
Total Fee Offsets | - | |||||||||||||||||||||||||
Net Fee Due | - |
(1) | Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
(2) | Includes shares of our common stock which the underwriters have the option to purchase to cover over-allotments. |
(3) | Includes shares of common stock being offered by selling shareholders of the Company (the “Selling Shareholders”). |
(4) | We have agreed to grant AC Sunshine Securities LLC (the “Underwriter”) warrants to purchase an amount equal to seven percent (7%) sold in this offering (the “Underwriter’s Warrants”), inclusive of the Underwriter’s over-allotment option. No fee required pursuant to Rule 457(g) under the Securities Act. |
(5) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The Underwriter’s Warrants are exercisable at a per share exercise price equal to 120% of the public offering price. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the Underwriter’s Warrants is $6.00, which is equal to 120% of $5.00 per share exercise price for 175,000 shares of common stock underlying the warrants. |
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