UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: |
For the transition period from __________ to __________.
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including ZIP Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
The
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Smaller
reporting company | |
Emerging
growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The registrant was not a public company as of the last business day of its most recently completed second fiscal quarter and, therefore, cannot calculate the aggregate market value of its voting and non-voting common equity held by non-affiliates as of such date.
As of February 14, 2024, there were shares of common stock, no par value, issued and outstanding.
Table of Contents
i |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this quarterly report, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially. When used in this annual report, 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 annual report 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 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.
ii |
INNO HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of December 31, 2023 (unaudited) and September 30, 2023
December 31, 2023 (unaudited) | September 30, 2023 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalent | $ | $ | ||||||
Accounts receivable, net | ||||||||
Inventories | ||||||||
Deferred offering costs | ||||||||
Prepayments and other current assets | ||||||||
Total current assets | ||||||||
Non-current assets | ||||||||
ROU assets | ||||||||
Property and equipment, net | ||||||||
Other non-current assets | ||||||||
Total non-current assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | $ | ||||||
Accounts payable – related party | ||||||||
Unearned revenue | ||||||||
Other current liabilities | ||||||||
Other payables – related party | ||||||||
Short-term loan payable | ||||||||
Lease liability – current | ||||||||
Long-term notes payable – current portion | ||||||||
Total current liabilities | ||||||||
Non-current liabilities | ||||||||
Notes payable | ||||||||
Lease liability – non-current | ||||||||
Total non-current liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingency |
1 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of December 31, 2023 (unaudited), and September 30, 2023
December 31, 2023 (unaudited) | September 30, 2023 | |||||||
Stockholders’ Equity (Deficit) | ||||||||
Common stock, par value; shares authorized; and shares issued and outstanding at December 31, 2023 and September 30, 2023 | ||||||||
Additional paid in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Noncontrolling interest | ( | ) | ( | ) | ||||
Total equity (deficit) | ( | |||||||
Total liabilities and equity (deficit) | $ | $ |
* | 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 accompanying notes are an integral part of these Condensed Consolidated financial statements
2 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended December 31, 2023 and 2022 (unaudited)
For the Three Month Ended December 31, | ||||||||
2023 | 2022 | |||||||
REVENUES | $ | $ | ||||||
COSTS AND EXPENSES: | ||||||||
Costs of materials and labor | ||||||||
Selling, general and administrative expenses (exclusive of depreciation and bad debt expense shown separately below) | ||||||||
Depreciation | ||||||||
Bad debt expense | ||||||||
Total costs and expenses | ||||||||
LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Interest expenses, net | ( | ) | ( | ) | ||||
Other non-operating (expense) income | ( | ) | ||||||
Total other expenses, net | ( | ) | ( | ) | ||||
LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ||||
PROVISION FOR INCOME TAXES | ||||||||
NET LOSS | ( | ) | ( | ) | ||||
Non-controlling interest | ( | ) | ( | ) | ||||
NET LOSS ATTRIBUTABLE TO INNO HOLDINGS INC. | $ | ( | ) | $ | ( | ) | ||
WEIGHTED AVERAGE NUMBER OF COMMON STOCK | ||||||||
Basic and diluted | ||||||||
LOSSES PER SHARE | ||||||||
Basic and diluted | $ | ) | $ | ) |
* | 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 accompanying notes are an integral part of these Condensed Consolidated financial statements
3 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended December 31, 2023 and 2022
Common Stock* | Additional Paid in | Retained Earnings (Accumulated | Non- controlling | Subscription | ||||||||||||||||||||||||
Shares | Amount | Capital | Deficit) | interest | Receivable | Total | ||||||||||||||||||||||
Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
Net loss | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Shares issued for cash | ( | ) | ||||||||||||||||||||||||||
Balance, December 31, 2022 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
Net loss | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Shares issued upon IPO completion | ||||||||||||||||||||||||||||
Balance, December 31, 2023 (unaudited) | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ |
* | |
* |
The accompanying notes are an integral part of these Condensed Consolidated financial statements
4 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended December 31, (unaudited) | ||||||||
2023 | 2022 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to reconcile net income to cash (used in) provided by operating activities: | ||||||||
Depreciation expense | ||||||||
Stock-based compensation expense | ||||||||
Non-cash operating lease expense | ||||||||
Bad debt expense | ||||||||
Fixed assets disposal loss | ||||||||
Change in operating assets and liabilities | ||||||||
Accounts receivable | ||||||||
Inventories | ( | ) | ||||||
Deferred offering costs | ( | ) | ( | ) | ||||
Prepayments and other current assets | ( | ) | ||||||
Accounts payable | ||||||||
Unearned revenue | ( | ) | ||||||
Other current liabilities | ||||||||
Other non-current liabilities | ( | ) | ||||||
Net cash (used in) provided by operating activities | ( | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Fixed assets additions | ( | ) | ( | ) | ||||
Proceed from fixed assets disposal | ||||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from related parties | ||||||||
Payments to related parties | ( | ) | ||||||
Proceeds from short-term loans | ||||||||
Payments to short-term loans | ( | ) | ||||||
Payment to long-term note | ( | ) | ( | ) | ||||
Proceeds from IPO | ||||||||
Net cash provided by financing activities | ||||||||
CHANGES IN CASH | ||||||||
CASH AND CASH EQUIVALENT, beginning of period | ||||||||
CASH AND CASH EQUIVALENT, ending of period | $ | $ | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Cash paid for income tax | $ | $ | ||||||
Cash paid for interest | $ | $ | ||||||
Noncash deferred offering costs offset to APIC upon IPO completion | $ | $ |
The accompanying notes are an integral part of these Condensed Consolidated financial statements
5 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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
owned
Effective
January 21, 2022, the Company acquired
Inno
Research Institute LLC (“IRI”), a Texas limited liability company incorporated on September 8, 2021, is a
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.
Certain information and footnote disclosures normally included in the Company’s annual audited financial statements and accompanying notes have been condensed or omitted in this accompanying interim consolidated financial statements and footnotes. Accordingly, the accompanying interim condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2023, filed with the Securities and Exchange Commission (“SEC”) on January 16, 2024.
In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments and accruals, consisting only of normal, recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein. The results of the interim periods are not necessarily indicative of the results expected for the full fiscal year or any other interim period or any future year or period.
Consolidated 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.
Going concern
As
of December 31, 2023, the Company had total cash of $
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.
6 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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 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 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.
Cash and cash equivalents
Cash and cash equivalents consist of amounts held as cash on hand, bank deposits and money market deposits.
From
time to time, the Company may maintain bank balances in interest bearing accounts in excess of the $
7 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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 receivables 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 based on its 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. 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 or liability in the principal or most advantageous market. When considering market participant
8 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
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 December 31, 2023 and September 30, 2023, 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 and accepted by 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 unearned revenue.
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 materials 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.
9 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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 regularly assesses its inventory for obsolescence and records an allowance only when the inventory is no longer suitable for reproduction. The Company’s inventory generally has a long life cycle and does not become obsolete quickly.
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 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 | |
Office equipment | |
Motor vehicles | |
Leasehold improvements |
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 as 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 three months ended December 31, 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.
10 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
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.
11 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 2 — Basis of Presentation and Summary of significant accounting policies (cont.)
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 but not yet adopted accounting pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740), Improvements to Income Tax Disclosures. The new guidance requires enhanced disclosures about income tax expenses. The Company is required to adopt this guidance in the first quarter of the fiscal year 2026. Early adoption is permitted on a prospective basis. We are currently evaluating the impact of this ASU on our annual income tax disclosures.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. The new guidance requires enhanced disclosures about significant segment expenses. The Company is required to adopt this guidance for its annual reporting in fiscal year 2025 and for interim period reporting beginning the first quarter of fiscal year 2026 on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this ASU on our segment disclosures.
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.
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.
12 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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 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 — Accounts Receivable, Net
Accounts receivable for the Company consisted of the following as of the dates indicated below:
December 31, 2023 (unaudited) | September 30, 2023 | |||||||
Accounts receivable | $ | $ | ||||||
Less: allowance for credit losses | ( | ) | ( | ) | ||||
Accounts receivable, net | $ | $ |
The
Company recorded credit losses of $ and $
Note 4 — Inventories
As of December 31, 2023 and September 30, 2023, inventories consisted of the following:
December 31, 2023 (unaudited) | September 30, 2023 | |||||||
Raw material | $ | $ | ||||||
Production inventory | ||||||||
Total | $ | $ |
As
of December 31, 2023 and September 30, 2023, there was
Note 5 — 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 December
31, 2023 and September 30, 2023, deferred offering costs amounted to $ and $
Note 6 — Prepayments and other current assets
As of December 31, 2023 and September 30, 2023, prepayments and other current assets consisted of the following:
December 31, 2023 (unaudited) | September 30, 2023 | |||||||
Advance to suppliers | $ | $ | ||||||
Prepaid for services by stock grants | ||||||||
Other prepayments and current assets | ||||||||
Total | $ | $ |
13 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 7 — Property and equipment, net
As of December 31, 2023 and September 30, 2023, property and equipment consisted of the following:
December 31, 2023 (unaudited) | September 30, 2023 | |||||||
Machinery and equipment | $ | $ | ||||||
Office equipment | ||||||||
Motor vehicles | ||||||||
Construction-in-progress | ||||||||
Leasehold improvements | ||||||||
Total | ||||||||
Less: accumulated depreciation | ( | ) | ( | ) | ||||
Property and equipment, net | $ | $ |
For
the three months ended December 31, 2023 and 2022, depreciation expenses amounted to $
Note 8 — Loans
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 $
Short term loan without interest
From
June 2023 to August 2023, the Company borrowed short-term loans due on demand without interest, amounting to $
Long-term loan
Promissory note payable
On
October 28, 2021, the Company issued to BancorpSouth Bank a five-year unsecured
For
the three months ended December 31, 2023 and 2022, the Company recorded interest expense of $
As
of December 31, 2023 and September 30, 2023, the total outstanding balance of the Note was $
Note 9 — 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 December 31, 2023, the amount due to Mr. Liu was $
14 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 9 — Related party transactions (cont.)
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 three months
ended December 31, 2023 and 2022, the Company recorded $ and $
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 December 31, 2023, and September
30, 2023, the outstanding balance of accounts payable-related party was both $
In
March 2023, the Company entered into an agreement with Vision Opportunity Fund LP, a Florida limited partnership partially owned by a
minority shareholder of the Company. In August 2023, all rights, obligations and interests under the agreement were subsequently assigned
by Vision Opportunity Fund LP to its general partner, New Vision 101 LLC (“Vision 101”). Pursuant to the agreement, the Company
agreed to provide supplies and act as project developer for an amount equal to $
Starting
December 2022, for operation and cashflow needs, the Company advances funds from Zfounder Organization Inc., one of the Company’s
minority shareholders, and Wise Hill Inc., a company owned by a minority shareholder of the Company who also serves as the CEO and Board
member of Zfounder Organization Inc. The advanced amounts are non-interest bearing. As of December 31, 2023, the outstanding balance
due to Zfounder Organization Inc. and Wise Hill Inc. was $
For the three months ended December 31, (unaudited) | ||||||||
2023 | 2022 | |||||||
Numerator: | ||||||||
Net loss attributable to INNO HOLDINGS INC. | $ | ( | ) | $ | ( | ) | ||
Denominator: | ||||||||
Weighted-average shares used in computing basic and diluted losses per share* | ||||||||
Losses per share of ordinary shares: – basic and diluted | $ | ) | $ | ) |
* | |
* |
15 |
INNO HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 11 — Equity
The Company was incorporated in Texas on September 8, 2021. The total authorized shares of capital stock were 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,
At the inception date, September 8, 2021, the Company issued shares of common stock to its founder, Mr. Dekui Liu.
On
February 2, 2022, the Company issued
On
January 31, 2022, the Company issued
On January 31 and September 30, 2022, the Company issued a total of shares of common stock to an investor for services. These shares were valued at $ 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 $ as stock compensation expense.
In
December 2022, The Company issued
In
February 2023, The Company issued
In
March 2023, The Company issued
In
April and May 2023, Mr. Dekui Liu, the Company’s chief executive officer, sold
On
June 20, 2023, the Company issued
As of September 30, 2023 and 2022, after giving effect to the stock splits of the outstanding shares of Common Stock, there were and shares of Common Stock issued and outstanding, respectively. The total authorized number of shares of capital stock was shares without par value.
The
registration statement for the Company’s Initial Public Offering (“the Offering”) was declared effective on
November 9, 2023. The Common Stock commenced trading on the Nasdaq Capital Market on December 14, 2023, under the symbol
“INHD.” The closing of the Offering took place on December 18, 2023. On December 18, 2023, in connection with the
closing of the initial public offering of
16 |
The
total gross proceeds from the Offering were $
Note 12 — 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 December 31, 2023 and September 30, 2023, $
Accounts receivables 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 three months ended December 31, 2023 and 2022, two customers accounted for
For
the three months ended December 31, 2023 and 2022, three suppliers accounted for
Note 13— 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 rent rate of $
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 $
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.
17 |
Total
commitment for the full term of these leases is $
The three months ended December 31, 2023 and 2022:
Lease cost | 2023 | 2022 | ||||||
Operating lease cost (included in G&A in the Company’s statement of operations) | $ | $ | ||||||
Other information | ||||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
Remaining term in years | ||||||||
Average discount rate – operating leases | % | % |
The supplemental balance sheet information related to leases is as follows:
Operating leases | December 31, 2023 | September 30, 2023 | ||||||
Right of use asset – non-current | $ | $ | ||||||
Lease Liability – current | ||||||||
Lease Liability – non-current | ||||||||
Total operating lease liabilities | $ | $ |
Maturities of the Company’s lease liabilities are as follows:
Operating Lease | ||||
For periods subsequent to December 31, 2023: | ||||
The remaining nine months ended September 30, 2024 | $ | |||
2025 | ||||
2026 | ||||
2027 | ||||
Less: Imputed interest/present value discount | ( | ) | ||
Present value of lease liabilities | $ |
Contingencies
A
garnishment order on December 27, 2023 resulting from a legal action initiated by a creditor against the Company was issued by a court
in the state of Ohio. The Creditor is seeking a total amount of $
18 |
Note 14 — Subsequent events
On
January 1, 2024, the Company terminated the facility lease in Texas without penalty and entered into a new lease agreement with the landlord.
The new lease term is from January 1, 2024 to January 1, 2027, with a monthly rent of $
On
January 4, 2024, the Company entered into an agreement to acquire certain real property located at 300 South Park Avenue, Pomona, Los
Angeles, California, approximately
On January 21, 2024, the Company established Inno Disrupts Inc., a wholly owned subsidiary in Texas. The purpose of Inno Disrupts Inc. is to conduct research and innovation in new technologies, to remodel buildings using the Company’s framing steel products, to enhance marketing capabilities, to manage the designated buildings in US, and among other activities.
On
January 27, 2024, the Company and the minority shareholder of IRI agreed to dissolve IRI, a subsidiary of IMSC with
19 |
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth under the heading “Cautionary Note Regarding Forward-Looking Statements” in this Quarter Report on Form 10-Q.
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.
20 |
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 three months ended December 31, 2023, and 2022
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 Three Months Ended December 31, | ||||||||||||
2023 | 2022 | Variance | ||||||||||
Revenues | $ | 166,617 | $ | 309,001 | -46 | % | ||||||
Costs of materials and labor | 169,617 | 283,812 | -40 | % | ||||||||
Selling, general and administrative expenses (exclusive of depreciation and bad debt expenses shown separately below) | 785,536 | 462,101 | 70 | % | ||||||||
Depreciation | 21,060 | 15,019 | 40 | % | ||||||||
Bad debt expense | - | 400,600 | -100 | % | ||||||||
Operating loss | (809,596 | ) | (852,531 | ) | -5 | % | ||||||
Other income (expenses) | (6,868 | ) | (18,497 | ) | -63 | % | ||||||
Loss before income taxes | (816,464 | ) | (871,028 | ) | -6 | % | ||||||
Income tax expense | 800 | - | 100 | % | ||||||||
Net loss | (817,264 | ) | (871,028 | ) | -6 | % | ||||||
Non-controlling interest | (15,746 | ) | (30,023 | ) | -48 | % | ||||||
Net loss attributable to INNO HOLDINGS INC. | $ | (801,518 | ) | $ | (841,005 | ) | -5 | % | ||||
Operating loss % of revenues | -486 | % | -276 | % | ||||||||
Net loss % of revenues | -491 | % | -282 | % |
Revenues
Revenue for the three months ended December 31, 2023 declined 46% to $166,617 in comparison to $309,001 for the three months ended December 31, 2022. The decline in revenue was primarily due to the various statuses and stages of projects. To mitigate collection issues, the Company has focused on developing relationships with large-sized customers. During the three months ended December 31, 2023, the Company has been working on obtaining permits for large projects and exploring new business opportunities with potential large customers.
Our backlog as of December 31, 2023 was approximately $14,000,000 to $19,000,000. The range of backlog amount is comprised of all remaining payments related to our signed customer contracts and estimation of order adjustments. The timing of revenue recognition from these contracts is subject to variation based on each project’s permit status and construction progress. These signed contracts included an agreement, amount of $15,875,800, with Vision Opportunity Fund LP, assigned to Vision 101 LLC (“Vision 101”), partially owned by one of our minority shareholders. None of the contract amount has been delivered to Vision 101 or recognized as revenue as of December 31, 2023.
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.
21 |
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. Costs of materials and labor for the three months ended December 31, 2023, declined 40% to $169,617 in comparison to $283,812 for the three months ended December 31, 2022. The decrease was primarily due to the year-over-year decline in revenue, as discussed above. The revenue decline exceeded the cost reduction, partly because some fixed costs have not declined along with the revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended December 31, 2023, increased 70% to $785,536 in comparison to $462,101 for the comparable period in 2022. The main reason for the increase was the additional overhead costs, such as rent, payroll, consulting and professional fees, to support our future expansion and meet the regulatory standards of a public company. We also incurred expenses related to the successful completion and celebration of our initial public offering (the “IPO”) in December 2023.
Bad debt expense
Bad debt expense decreased by $400,600 for the three months ended December 31, 2023 compared to the same period in 2022. We estimated the credit losses based on each customer’s financial situation, project status and the outstanding days of the accounts receivable balance. Started prior year, we strengthen our risk control of accounts receivable and reduce the days outstanding for accounts receivable by discontinuing business with smaller customers with high credit risk. Most of our current customers adhere to a 30-day payment term. For the current quarter’s transactions, we have maintained a high collection rate.
Operating Loss
Operating loss was $809,596 for the three months ended December 31, 2023, in comparison to operating loss of $852,531 for the comparable period in 2022. The slightly decrease in loss was primarily attributed to the decrease in bad debt expense offset by lower revenue and increased expenses, as discussed above.
Other Income (Expense)
Other expenses for the three months ended December 31, 2023, were $6,868, in comparison to other expenses of $18,497 for the comparable period in 2022. The decrease in other expense was primarily related to the decrease of interest expense, net in current quarter compared with the comparable period in 2022. The IPO proceeds deposit in December 2023 resulted in $9,200 interest income.
Net Loss
Net loss for the three months ended December 31, 2023 was $817,264, in comparison to net loss of $871,028 for the three months ended December 31, 2022. The decrease in net loss was primarily due to changes in revenue, costs and expenses as outlined above.
Liquidity and Capital Resources
Sources of Liquidity
During the three months ended December 31, 2023, and 2022, we primarily funded our operations with cash generated from operations, private and public shares offerings, as well as through borrowing under our revolving line of credit, a long term promissory note, and related parties. We had cash of $7,677,270 as of December 31, 2023 compared to $4,898 of cash as of September 30, 2023. The cash increase was primarily due to the proceeds from the IPO closing in December 2023.
22 |
On December 18, 2023, the Company successfully closed the IPO with aggregate net proceeds of approximately $7.9 million ($8.5 million net cash proceeds upon IPO completion offset by $0.6 million deferred offering costs).
As disclosed in Note14 Subsequent events, the Company entered into an agreement in January 2024 to acquire a building for $14.6 million to increase the Company’s marketing capabilities.
We do not believe the cash and cash equivalents on hand as of December 31, 2023 of $7,677,270 will be sufficient to fund our operations and capital expenditure requirements for the next twelve months from the date the 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 condensed consolidated financial statements. 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 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 December 31, 2023 and September 30, 2023, our working capital (deficit) was $4,080,742 and $(2,913,827), 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 three months ended December 31, 2023 was $195,197 compared to $129,688 of net cash provided by operating activities for the three months ended December 31, 2022. The increase of net cash usage in operating activities in current quarter was mainly due to a $396,181 increase of loss with non-cash reconciling items adjustment.
For the three months ended December 31, 2023, net cash used in operating activities was $195,197, primarily driven by the net loss of $817,264, partially offset by non-cash items of $74,437 and working capital provided cash of $547,630, which was primarily driven by a $595,552 increase in accounts payable, unearned revenue and other current liabilities.
For the three months ended December 31, 2022, net cash provided by operating activities was $129,688, primarily driven by the net loss of $871,028, partially offset by non-cash items of $416,854, which mainly included bad debt expense of $400,600. Working capital provided cash of $583,862, which was primarily driven by a $453,007 increase in accounts payable, unearned revenue and other current liabilities, a $410,892 decrease in account receivable, a $97,900 decrease of prepayments and other current assets, and partially offset by a $290,437 increase in inventories and a $87,500 increase in deferred offering costs.
23 |
Investing Activities
For the three months ended December 31, 2023, and 2022, net cash used in investing activities was the result of additions to property and equipment of $54,452 and $226,900, 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 $7,920,452 and $491,345, respectively, for the three months ended December 31, 2023, and 2022.
For the three months ended December 31, 2023, net cash provided by financing activities was primarily due to the $8,450,000 net cash from the initial public offering, $91,000 proceeds from related parties and offset by $287,089 payment of short term loans and $325,372 repayment to related parties.
For the three months ended December 31, 2022, net cash provided by financing activities was primarily due to the $500,000 proceeds from short term loans.
Critical Accounting Policies and Estimate
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 2 — Basis of Presentation and Summary of significant accounting policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed Form 10-K, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recently filed Form 10-K, include the discussion of estimates used for revenue recognition, inventory valuation, going concern assessment, and our provision for income taxes. Such accounting estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported.
New Accounting Standards
From time to time, the FASB or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2 — Basis of Presentation and Summary of significant accounting policies, “Recently issued but not yet adopted accounting pronouncements”, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.
24 |
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
An evaluation was performed under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2023, our disclosure controls and procedures were not effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms due to material weaknesses in our internal controls described below.
● | Lack of sufficient personnel commensurate with our accounting and reporting requirements and insufficient segregation of duties within accounting functions. | |
● | Lack of adequate policies and procedures in internal control function to ensure that proper control and procedures have been designed and implemented over key business cycles. |
We plan to hire additional qualified personnel with relevant experience and qualifications to strengthen the financial reporting function and to set up a financial and system control framework. However, we cannot assure you that we will remediate our material weaknesses in a timely manner.
Inherent Limitations Over Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. 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. Our control systems are designed to provide such reasonable assurance of achieving their objectives. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation 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, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is 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, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal controls over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
25 |
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There were no material developments during the quarter ended December 31, 2023 to the legal proceedings previously disclosed in Item 3 “Legal Proceedings” of our Annual Report on Form 10-K filed on January 16, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 6. EXHIBITS
EXHIBIT INDEX
101.INS* | Inline XBRL Instance Document | |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101). |
* | 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. |
26 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INNO HOLDINGS, INC. | ||
Date: February 16, 2024 | By: | /s/ Dekui Liu |
Dekui Liu | ||
Chief Executive Officer | ||
(Principal Executive Officer) |
Date: February 16, 2024 | By: | /s/ Tianwei Li |
Tianwei Li | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
27 |