INNO HOLDINGS(INHD) - 2024 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and related disclosures for INNO HOLDINGS INC ITEM 1: Financial Statements This section presents the unaudited condensed consolidated financial statements for INNO HOLDINGS INC., including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with detailed notes explaining the company's financial position, performance, and significant accounting policies for the periods ended June 30, 2024, and September 30, 2023 Condensed Consolidated Balance Sheets Provides a snapshot of the company's assets, liabilities, and equity as of June 30, 2024, and September 30, 2023 | Metric | June 30, 2024 (Unaudited) | September 30, 2023 | Change (%) | | :-------------------------- | :------------------------ | :----------------- | :--------- | | Cash and cash equivalent | $1,890,903 | $4,898 | 38500% | | Total current assets | $2,545,681 | $1,188,858 | 114% | | Total assets | $4,373,336 | $2,545,762 | 72% | | Total current liabilities | $1,279,072 | $4,102,685 | -69% | | Total liabilities | $1,358,745 | $4,489,348 | -70% | | Additional paid in capital | $10,676,534 | $2,830,000 | 277% | | Accumulated deficit | $(7,451,492) | $(4,524,815) | 65% | | Total equity (deficit) | $3,014,591 | $(1,943,586) | 255% | Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net loss for the three and nine months ended June 30, 2024 and 2023 | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change (%) | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | Change (%) | | :-------------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------------------------- | :--------------------------- | :--------- | | Revenues | $45,682 | $104,058 | -56% | $395,495 | $501,672 | -21% | | Costs of materials and labor | $25,549 | $103,886 | -75% | $404,157 | $472,710 | -15% | | Selling, general and administrative expenses | $1,032,165 | $608,855 | 70% | $2,919,899 | $1,628,307 | 79% | | Bad debt expense | $0 | $867,360 | -100% | $59,935 | $1,267,960 | -95% | | Loss from operations | $(1,034,437) | $(1,493,807) | -31% | $(3,078,135) | $(2,917,852) | 5% | | Net loss attributable to INNO HOLDINGS INC. | $(1,064,702) | $(1,466,781) | -27% | $(2,926,677) | $(2,864,167) | 2% | | Basic and Diluted Losses Per Share | $(0.05) | $(0.08) | -37.5% | $(0.15) | $(0.16) | -6.25% | Condensed Consolidated Statements of Changes in Stockholders' Equity Outlines the changes in the company's equity components, including common shares and accumulated deficit, between September 30, 2023, and June 30, 2024 | Metric | September 30, 2023 | June 30, 2024 (Unaudited) | Change | | :-------------------------- | :----------------- | :------------------------ | :----- | | Common Shares | 18,251,726 | 20,751,726 | 2,500,000 shares issued upon IPO completion | | Additional Paid in Capital | $2,830,000 | $10,676,534 | $7,846,534 increase | | Accumulated Deficit | $(4,524,815) | $(7,451,492) | $(2,926,677) increase in deficit | | Total Equity (Deficit) | $(1,943,586) | $3,014,591 | $4,958,177 increase | Condensed Consolidated Statements of Cash Flows Summarizes the cash inflows and outflows from operating, investing, and financing activities for the nine months ended June 30, 2024 and 2023 | Cash Flow Activity | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | Change | | :---------------------------------- | :--------------------------- | :--------------------------- | :----- | | Net cash used in operating activities | $(4,859,567) | $(1,066,467) | $(3,793,100) increase in usage | | Net cash used in investing activities | $(412,231) | $(226,900) | $(185,331) increase in usage | | Net cash provided by financing activities | $7,157,803 | $1,356,096 | $5,801,707 increase | | CASH AND CASH EQUIVALENT, beginning of period | $4,898 | $50,628 | $(45,730) decrease | | CASH AND CASH EQUIVALENT, ending of period | $1,890,903 | $113,357 | $1,777,546 increase | Notes to Condensed Consolidated Financial Statements Provides detailed explanations and additional information supporting the condensed consolidated financial statements Note 1 — Nature of business and organization Describes the company's primary business activities, organizational structure, and recent corporate changes - Company is primarily engaged in marketing and sale of construction products and full-scope construction services in the US[10] - Increased ownership in Castor Building Tech LLC to 55% retroactively from January 18, 2022[10] - Voluntarily terminated Inno Research Institute LLC on January 27, 2024, transferring R&D activities to Inno AI Tech Corp[11] - Incorporated Inno Disrupts Inc. (Jan 2024) for building remodeling and Inno AI Tech Corp. (Feb 2024) for AI tech research and consulting[12] Note 2 — Basis of Presentation and Summary of significant accounting policies Explains the accounting principles used in preparing the financial statements and outlines key accounting policies - Financial statements prepared in accordance with U.S. GAAP, with interim disclosures condensed[13][14] - Substantial doubt about the Company's ability to continue as a going concern due to accumulated deficit of $7,451,492 and net loss of $2,962,072 for the nine months ended June 30, 2024, and net cash used in operations of $4,859,567[16] - Company adopted ASC 606 for revenue recognition, recognizing revenue when performance obligations are satisfied, and ASC 842 for leases, recording ROU assets and lease liabilities[26][37] - Recently issued ASUs on Income Taxes (2023-09), Segment Reporting (2023-07), and Fair Value Measurement (2022-03) are being evaluated for potential impact, with adoption required in fiscal years 2025 or 2026[44][45] Note 3 — Accounts Receivable, Net Details the composition of accounts receivable and the allowance for credit losses for the specified periods | Metric | June 30, 2024 (Unaudited) | September 30, 2023 | | :----------------------------------- | :------------------------ | :----------------- | | Accounts receivable, net | $0 | $70,435 | | Allowance for credit losses, beginning | $1,267,960 | $0 | | Provision for credit loss | $59,935 | $1,267,960 | | Write-offs | $(1,327,895) | $0 | | Allowance for credit losses, end | $0 | $1,267,960 | Note 4 — Inventories Presents the breakdown of inventory by type, including raw materials and production inventory | Inventory Type | June 30, 2024 (Unaudited) | September 30, 2023 | | :----------------- | :------------------------ | :----------------- | | Raw material | $73,452 | $134,299 | | Production inventory | $264,978 | $259,994 | | Total | $338,430 | $394,293 | Note 5 — Deferred offering costs Explains the treatment and disposition of costs incurred in connection with the company's initial public offering | Metric | June 30, 2024 (Unaudited) | September 30, 2023 | | :------------------------ | :------------------------ | :----------------- | | Deferred offering costs | $0 | $538,765 | - The entire amount of deferred offering costs was charged to additional paid-in capital upon the completion of the initial public offering on December 18, 2023[50] Note 6 — Prepayments and other current assets Itemizes various prepaid expenses and other current assets held by the company | Asset Type | June 30, 2024 (Unaudited) | September 30, 2023 | | :------------------------------------------ | :------------------------ | :----------------- | | Prepaid marketing and promotional services | $128,368 | $0 | | Advance to other service providers | $66,748 | $0 | | Advance to suppliers | $25,127 | $87,217 | | Prepaid insurance | $79,840 | $3,663 | | Prepaid for services by stock grants | $0 | $83,333 | | Other prepayments and current assets | $16,265 | $6,254 | | Total | $316,348 | $180,467 | Note 7 — Property and equipment, net Provides a breakdown of the company's property and equipment, net of accumulated depreciation | Asset Type | June 30, 2024 (Unaudited) | September 30, 2023 | | :------------------------- | :------------------------ | :----------------- | | Machinery and equipment | $346,900 | $346,900 | | Office equipment | $3,064 | $5,488 | | Motor vehicles | $109,276 | $64,082 | | Construction-in-progress | $846,054 | $497,000 | | Leasehold improvements | $18,000 | $54,049 | | Total | $1,323,294 | $967,519 | | Less: accumulated depreciation | $(136,153) | $(97,935) | | Property and equipment, net | $1,187,141 | $869,584 | - Construction-in-progress is related to the project to expand the Company's operation and manufacturing capabilities in the factory in Texas[53] - Recorded $23,911 impairment loss for leasehold improvements due to early termination of a lease in Corona, CA[54] Note 8 — Loans payable Details the company's outstanding loan obligations, including revolving lines of credit and promissory notes | Loan Type | June 30, 2024 (Unaudited) | September 30, 2023 | | :------------------------ | :------------------------ | :----------------- | | Revolving line of credit | $0 | $560,000 | | Short term loan (no interest) | $50,000 | $230,000 | | Promissory note payable (total) | $123,414 | $160,239 | | - Current portion | $51,287 | $49,393 | | - Non-current portion | $72,127 | $110,846 | - The revolving line of credit with Origin Bank was fully paid off and closed as of June 30, 2024[54] Note 9 — Related party transactions Discloses financial transactions and balances with related parties, including former executives and affiliated entities | Related Party | June 30, 2024 (Unaudited) | September 30, 2023 | | :-------------------------- | :------------------------ | :----------------- | | Amount due to Mr. Dekui Liu (Former CEO) | $2,000 | $327,372 | | Accounts payable – related party (Yunited) | $0 | $50,000 | | Accounts payable – related party (Baicheng) | $0 | $485,595 | | Outstanding balance due to Zfounder and Wise Hill | $0 | $177,000 | - Mr. Dekui Liu resigned as CEO, Chairman, and Director effective May 31, 2024, and transferred his shares[57] - Entered into a $15,875,800 development and supply agreement with Vision 101 (related party), with $257,685 received as deferred revenue and no revenue recognized as of June 30, 2024[61] Note 10 — Equity Describes the company's equity structure, including common stock and the impact of its initial public offering | Metric | June 30, 2024 (Unaudited) | September 30, 2023 | | :----------------------------------- | :------------------------ | :----------------- | | Common Stock Issued and Outstanding | 20,751,726 | 18,251,726 | | Total Authorized Shares | 100,000,000 | 100,000,000 | - Completed an Initial Public Offering (IPO) on December 18, 2023, issuing 2,500,000 shares at $4.00 per share, generating $10,000,000 gross proceeds and $8,450,000 net cash[68][69] - Paid $13,000 to assume underwriters' warrants, reducing Additional Paid-in Capital, and the warrants are no longer outstanding as of June 30, 2024[68] Note 11 — Concentration of risk Identifies significant concentrations of risk related to cash deposits, customer revenues, and supplier accounts payable - As of June 30, 2024, the Company had $1,199,883 in uninsured deposits with two financial institutions, exceeding the FDIC insurance limit[70] - For the three and nine months ended June 30, 2024, one customer accounted for 98% and 100% of total revenues, respectively, indicating high customer concentration risk[72] - As of June 30, 2024, accounts payable to two suppliers accounted for 56% of total accounts payable, indicating vendor concentration risk[72] Note 12— Commitments and contingencies Outlines the company's contractual commitments, lease obligations, and potential contingent liabilities - Entered a new Texas lease (Jan 2024 - Jan 2027) with monthly rent of $18,000, and prepaid lease payments until December 31, 2026, securing a rent-free period for 2027[74] - Terminated Corona, CA lease, recognizing a $24,710 loss, and later settled for $55,000, resulting in $44,204 non-operating income[75] | Lease Metric | June 30, 2024 | September 30, 2023 | | :-------------------------------- | :------------ | :----------------- | | Operating lease ROU assets | $630,663 | $437,770 | | Total operating lease liabilities | $79,578 | $488,094 | | Average discount rate | 9.5% | 8% | - Agreement to acquire a $14.6 million real property in Pomona, CA, was terminated on April 29, 2024, and the $440,000 deposit was fully refunded[80] - Received a Nasdaq notice on April 12, 2024, for non-compliance with the minimum bid price requirement ($1.00), with a 180-calendar day compliance period until October 9, 2024[82][83] ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, highlighting key performance indicators, revenue and expense trends, and liquidity. It discusses the impact of the IPO on cash resources, ongoing challenges with profitability, and the need for additional capital, while also outlining strategies to mitigate risks and improve efficiency Cautionary Note Regarding Forward-Looking Statements Advises readers on the inherent uncertainties and risks associated with forward-looking information presented in the report - Forward-looking statements are subject to risks including operational effectiveness, expense management, industry competition, technological changes, and intellectual property protection[87] - Investors are cautioned not to place undue reliance on forward-looking statements, and the company does not undertake to update them[87] Overview Describes the company's core business of manufacturing cold-formed-steel members and providing construction services, including risk mitigation strategies - Company manufactures cold-formed-steel members and provides full-scope construction services, transforming raw materials into steel framing products and prefabricated homes[88] - Mitigates exposure to steel price fluctuations by entering fixed-price forward contracts with suppliers and maintaining a 1-3 month inventory of actively used rolled steel coils[89][90] Key Performance Indicators ("KPIs") Identifies and explains the primary metrics used by management to evaluate operational efficiency and financial performance - Capital turnover rate of raw-material procurement: Aims for 1-3 months of raw materials inventory, establishing long-term relationships with suppliers for better payment cycles and efficient capital turnover[91] - Collection period of accounts receivable: Targets strategic relationships with large-scale homebuilders to reduce risk and aims for 100% payment before products leave the shop[92] - Lead time: Strives to communicate frequently with customers and optimize production to minimize storage and shorten lead times[93] - Growth of total operating income: Maintains internal long-term targets for gross profit and operating income, focusing on profitable long-term growth[95] - Production capacity improvement: Committed to investing in capacity and efficiency to support larger orders and increase total operating income[95] Results of Operation Analyzes the company's financial performance, including revenue, costs, and net loss, for the reported periods | Metric | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change (%) | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | Change (%) | | :-------------------------------------- | :--------------------------- | :--------------------------- | :--------- | :--------------------------- | :--------------------------- | :--------- | | Revenues | $45,682 | $104,058 | -56% | $395,495 | $501,672 | -21% | | Costs of materials and labor | $25,549 | $103,886 | -75% | $404,157 | $472,710 | -15% | | Selling, general and administrative expenses | $1,032,165 | $608,855 | 70% | $2,919,899 | $1,628,307 | 79% | | Bad debt expense | $0 | $867,360 | -100% | $59,935 | $1,267,960 | -95% | | Operating loss | $(1,034,437) | $(1,493,807) | -31% | $(3,078,135) | $(2,917,852) | 5% | | Net loss | $(1,050,881) | $(1,511,805) | -30% | $(2,962,072) | $(2,971,728) | 0% | - Revenue decrease for both periods was due to project completion status and the various stages of projects, with the company focusing on larger customers and obtaining permits for new large projects[97] - Backlog as of June 30, 2024, was approximately $14,000,000 to $19,000,000, including a $15,875,800 agreement with Vision 101, none of which has been recognized as revenue[98] - Bad debt expense significantly decreased by $867,360 (3 months) and $1,208,025 (9 months) due to strengthened risk control, discontinuing business with high-risk smaller customers, and maintaining a high collection rate[101] Liquidity and Capital Resources Assesses the company's ability to meet its short-term and long-term financial obligations and fund operations | Metric | June 30, 2024 | September 30, 2023 | Change | | :----------------------------------- | :------------ | :----------------- | :----- | | Cash and cash equivalents | $1,890,903 | $4,898 | $1,886,005 increase | | Working capital (deficit) | $1,266,609 | $(2,913,827) | $4,180,436 increase | - Cash increase primarily due to $8.45 million net proceeds from the initial public offering in December 2023[105][106] - Management believes current cash is insufficient to fund operations for the next twelve months, creating substantial doubt about the company's ability to continue as a going concern, requiring additional capital[107] | Cash Flow Activity | 9 Months Ended June 30, 2024 | 9 Months Ended June 30, 2023 | Change | | :---------------------------------- | :--------------------------- | :--------------------------- | :----- | | Net cash used in operating activities | $(4,859,567) | $(1,066,467) | $(3,793,100) increase in usage | | Net cash used in investing activities | $(412,231) | $(226,900) | $(185,331) increase in usage | | Net cash provided by financing activities | $7,157,803 | $1,356,096 | $5,801,707 increase | Critical Accounting Policies and Estimate Highlights the accounting policies that require significant judgment and estimation by management - Critical accounting estimates include revenue recognition, inventory valuation, going concern assessment, and provision for income taxes[113] New Accounting Standards Discusses recently issued accounting pronouncements and their potential impact on the company's financial statements - Evaluating ASU 2023-09 (Income Taxes), ASU 2023-07 (Segment Reporting), and ASU 2022-03 (Fair Value Measurement) for potential impact[114] - Adoption of these standards is required in fiscal years 2025 and 2026, with no material impact expected on consolidated financial statements[114] ITEM 4. Controls and Procedures This section addresses the effectiveness of the company's disclosure controls and internal controls over financial reporting. Management concluded that disclosure controls were ineffective due to material weaknesses, including insufficient personnel and inadequate policies. The company acknowledges inherent limitations in control systems and reports no material changes in internal controls during the period Disclosure Controls and Procedures Evaluates the effectiveness of the company's controls designed to ensure timely and accurate financial reporting - Disclosure controls and procedures were not effective as of June 30, 2024, due to material weaknesses[116] - Material weaknesses include lack of sufficient personnel for accounting/reporting, insufficient segregation of duties, and inadequate policies/procedures for internal control over key business cycles[117] - Company plans to hire additional qualified personnel and establish a financial and system control framework to remediate weaknesses[117] Inherent Limitations Over Internal Controls Acknowledges that internal control systems have inherent limitations that prevent absolute assurance against misstatements - Internal control systems provide only reasonable, not absolute, assurance against errors and fraud[118] - Inherent limitations include faulty judgments, simple errors, circumvention by individuals or collusion, and management override[118] Changes in Internal Control over Financial Reporting Reports on any material changes in the company's internal controls over financial reporting during the period - No material changes in internal controls over financial reporting during the period ended June 30, 2024[119] PART II OTHER INFORMATION Presents additional non-financial information and disclosures required for the reporting period ITEM 1. LEGAL PROCEEDINGS. The company is not currently involved in any material legal proceedings, investigations, or claims that would significantly impact its business, financial condition, or results of operations, although it may encounter routine legal matters in the ordinary course of business - Not currently a party to any material legal proceedings, investigations, or claims[121] ITEM 1A. RISK FACTORS. The company faces a significant risk of delisting from the Nasdaq Capital Market due to its common stock bid price falling below $1.00. It has a compliance period until October 9, 2024, to regain compliance, potentially through a reverse stock split. Failure to comply could negatively impact market price, liquidity, and access to capital, and could subject the stock to "penny stock" rules, further reducing trading activity - Received a Nasdaq notice on April 12, 2024, for non-compliance with the minimum bid price requirement ($1.00) for 30 consecutive business days[122] - Has 180 calendar days, until October 9, 2024, to regain compliance by having its common stock close at or above $1.00 for at least 10 consecutive business days[123] - Failure to regain compliance could lead to delisting, negatively impacting market price and liquidity, and potentially subjecting the stock to SEC "penny stock" rules, which require extensive broker disclosures and could reduce trading activity[124][125][126] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. The company did not engage in any purchases of equity securities reportable under Item 703 of Regulation S-K during the quarter ended June 30, 2024 - No equity securities were purchased by the company during the quarter ended June 30, 2024[128] ITEM 3. DEFAULTS UPON SENIOR SECURITIES. The company reported no defaults upon senior securities during the period covered by this report - No defaults upon senior securities were reported[128] ITEM 5. OTHER INFORMATION. During the quarter ended June 30, 2024, no directors or officers of the company adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers during the quarter ended June 30, 2024[129] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including key corporate documents, agreements, and certifications, some of which contain redacted information in compliance with SEC regulations - Exhibits include Amended and Restated Certificate of Formation, Bylaws, Underwriter's Warrant, Omnibus Incentive Plan, and various agreements[129] - Portions of some exhibits have been redacted in compliance with Regulation S-K Item 601(b)(10) due to immateriality and potential competitive harm[131] SIGNATURES Confirms the official submission of the report by authorized company officers - Report signed by Tianwei Li, CEO and CFO, on August 12, 2024[134]