INNO HOLDINGS(INHD) - 2024 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION This section provides unaudited condensed consolidated financial statements, management's discussion, and controls and procedures ITEM 1: Financial Statements This section presents the unaudited condensed consolidated financial statements for INNO HOLDINGS INC. and its subsidiaries, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows, along with detailed notes explaining the company's business, accounting policies, and specific financial line items Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific dates Condensed Consolidated Balance Sheets | Metric | June 30, 2024 (unaudited) | September 30, 2023 | | :-------------------------- | :------------------------ | :------------------- | | Total assets | $4,373,336 | $2,545,762 | | Total liabilities | $1,358,745 | $4,489,348 | | Total equity (deficit) | $3,014,591 | $(1,943,586) | - The company's total assets increased by approximately 71.8% from September 30, 2023, to June 30, 2024, while total liabilities decreased significantly by about 69.7% This led to a substantial improvement in stockholders' equity, moving from a deficit of $(1,943,586) to a positive equity of $3,014,591[11][13] Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including revenues, expenses, and net loss over specific periods Condensed Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Nine Months Ended June 30, 2024 | Nine Months Ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Revenues | $45,682 | $104,058 | $395,495 | $501,672 | | Total costs and expenses | $1,080,119 | $1,597,865 | $3,473,630 | $3,419,524 | | Loss from operations | $(1,034,437) | $(1,493,807) | $(3,078,135) | $(2,917,852) | | Net loss | $(1,050,881) | $(1,511,805) | $(2,962,072) | $(2,971,728) | | Net loss attributable to INNO HOLDINGS INC. | $(1,064,702) | $(1,466,781) | $(2,926,677) | $(2,864,167) | | Basic and Diluted Losses Per Share | $(0.05) | $(0.08) | $(0.15) | $(0.16) | - For the three months ended June 30, 2024, revenues decreased by 56% YoY, while net loss decreased by 30% YoY For the nine months ended June 30, 2024, revenues decreased by 21% YoY, and net loss remained relatively stable with a slight decrease of 0.3% YoY[15] Condensed Consolidated Statements of Changes in Stockholders' Equity This section details changes in the company's equity, including common stock, additional paid-in capital, and accumulated deficit Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | September 30, 2023 | June 30, 2024 | | :-------------------------------- | :----------------- | :------------ | | Common Stock Shares (outstanding) | 18,251,726 | 20,751,726 | | Additional Paid-in Capital | $2,830,000 | $10,676,534 | | Accumulated Deficit | $(4,524,815) | $(7,451,492) | | Total Equity (Deficit) | $(1,943,586) | $3,014,591 | - The company's total equity significantly improved from a deficit of $(1,943,586) as of September 30, 2023, to a positive $3,014,591 as of June 30, 2024, primarily due to the issuance of 2,500,000 shares upon IPO completion, contributing $7,859,534 to additional paid-in capital[18] - The number of common stock shares issued and outstanding increased from 18,251,726 to 20,751,726 during the nine months ended June 30, 2024[18] Condensed Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Nine Months Ended June 30, 2024 | Nine Months Ended June 30, 2023 | | :----------------------- | :------------------------------ | :------------------------------ | | Operating Activities | $(4,859,567) | $(1,066,467) | | Investing Activities | $(412,231) | $(226,900) | | Financing Activities | $7,157,803 | $1,356,096 | | Net Change in Cash | $1,886,005 | $62,729 | | Cash, End of Period | $1,890,903 | $113,357 | - Net cash used in operating activities significantly increased to $(4,859,567) for the nine months ended June 30, 2024, compared to $(1,066,467) in the prior year, primarily due to increased net loss and working capital outflow[22][157][158] - Net cash provided by financing activities increased substantially to $7,157,803, mainly driven by $8,450,000 net cash from the initial public offering in 2024[22][161] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the company's business, accounting policies, and specific financial statement line items Note 1 — Nature of business and organization This note describes the company's primary business activities, organizational structure, and significant corporate changes - INNO HOLDINGS, INC. is primarily engaged in marketing and selling construction products and providing full-scope construction services in the US[24] - The company increased its ownership in Castor Building Tech LLC (CBT) to 55% effective January 18, 2022[25] - In January 2024, Inno Research Institute LLC (IRI) was voluntarily terminated, with R&D activities transferred to a new wholly-owned subsidiary, Inno AI Tech Corp., incorporated in February 2024[27][28] Note 2 — Basis of Presentation and Summary of significant accounting policies This note outlines the financial statement preparation basis, key accounting principles, and going concern assessment - The financial statements are prepared in accordance with U.S. GAAP and SEC regulations, with a fiscal year ending September 30[29] - The company's ability to continue as a going concern is in substantial doubt due to an accumulated deficit of $7,451,492 and net cash used in operations of $4,859,567 for the nine months ended June 30, 2024[33] - Revenue is recognized when performance obligations are satisfied, typically upon delivery of products or completion of services[48] - The company is evaluating the impact of recently issued ASUs on Income Tax Disclosures (ASU 2023-09) and Segment Reporting (ASU 2023-07), effective for fiscal years 2026 and 2025/2026 respectively[71][72] Note 3 — Accounts Receivable, Net This note details the company's accounts receivable balances, including allowances for credit losses and net amounts Accounts Receivable, Net | Metric | June 30, 2024 (unaudited) | September 30, 2023 | | :-------------------------- | :------------------------ | :------------------- | | Accounts receivable | $0 | $1,338,395 | | Less: allowance for credit losses | $0 | $(1,267,960) | | Accounts receivable, net | $0 | $70,435 | - The company had no net accounts receivable as of June 30, 2024, compared to $70,435 as of September 30, 2023, indicating successful collection or write-off of prior balances[79] - Allowance for credit losses decreased from $1,267,960 at the beginning of the nine months ended June 30, 2024, to $0 at the end, primarily due to $1,327,895 in write-offs[79] Note 4 — Inventories This note provides a breakdown of the company's inventory, including raw materials and production inventory Inventories | 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 | - Total inventories decreased by approximately 14.2% from $394,293 as of September 30, 2023, to $338,430 as of June 30, 2024, mainly driven by a reduction in raw material inventory[80] Note 5 — Deferred offering costs This note explains the treatment and disposition of costs incurred in connection with the company's public offering - Deferred offering costs, which amounted to $538,765 as of September 30, 2023, were reduced to $Nil as of June 30, 2024, as the entire amount was charged to additional paid-in capital upon the completion of the initial public offering on December 18, 2023[81] Note 6 — Prepayments and other current assets This note details the composition of the company's prepaid expenses and other short-term assets Prepayments and other current assets | 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 | - Total prepayments and other current assets increased by 75.3% from $180,467 as of September 30, 2023, to $316,348 as of June 30, 2024, driven by new prepaid marketing, promotional services, and advances to service providers[83] Note 7 — Property and equipment, net This note presents the company's property and equipment, including additions, depreciation, and impairment losses Property and equipment, net | 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 | - Net property and equipment increased by 36.5% to $1,187,141 as of June 30, 2024, primarily due to a significant increase in construction-in-progress related to factory expansion in Texas[85] - An impairment loss of $23,911 was recorded during the nine months ended June 30, 2024, to write down leasehold improvements due to early lease termination in Corona, CA[59][86] Note 8 — Loans payable This note outlines the company's various loan obligations, including revolving lines of credit and individual loans - The revolving line of credit with Origin Bank, totaling $560,000 as of September 30, 2023, was fully paid off and closed by June 30, 2024[87] - Short-term loans from individuals decreased from $230,000 as of September 30, 2023, to $50,000 as of June 30, 2024, with $180,000 repaid[88] - The outstanding balance of the long-term promissory note decreased from $160,239 to $123,414, with current and non-current portions of $51,287 and $72,127 respectively as of June 30, 2024[90] Note 9 — Related party transactions This note discloses transactions and balances with related parties, including former executives and affiliated entities - The amount due to former CEO, Mr. Dekui Liu, decreased from $327,372 as of September 30, 2023, to $2,000 as of June 30, 2024, following his resignation and share transfer[91] - The company had no outstanding accounts payable to Yunited Assets LLC or Baicheng Trading LLC as of June 30, 2024, compared to $50,000 and $485,595 respectively as of September 30, 2023[93][94] - An agreement with Vision 101 (a related party) for $15,875,800 in supplies and project development has resulted in $257,685 received as deferred revenue, with no revenue recognized as of June 30, 2024[95] Note 10 — Equity This note details changes in the company's equity structure, including common stock, IPO proceeds, and warrants - The company completed an Initial Public Offering (IPO) on December 18, 2023, issuing 2,500,000 shares at $4.00 per share, generating $10,000,000 in gross proceeds and $8,450,000 in net cash after $2,140,466 in transaction costs[104][105] - The total authorized shares were reduced from 200,000,000 to 100,000,000, and outstanding shares increased from 18,251,726 to 20,751,726 between September 30, 2023, and June 30, 2024[100][101] - The company assumed underwriters' warrants for 201,250 shares by paying $13,000, and these warrants are no longer outstanding as of June 30, 2024[104] Note 11 — Concentration of risk This note identifies significant concentrations of risk related to cash deposits, customers, and suppliers - As of June 30, 2024, the company had $1,199,883 in uninsured deposits with two financial institutions, exceeding the FDIC insurance limit[108] - Customer concentration risk is high: one customer accounted for 98% of total revenues for the three months ended June 30, 2024, and four customers for 100% for the nine months ended June 30, 2024[110] - Vendor concentration risk is also present: two suppliers accounted for 100% of total purchases for the three months ended June 30, 2024, and 58% for the nine months ended June 30, 2024[111] Note 12— Commitments and contingencies This note describes the company's contractual commitments, lease terminations, and potential legal or regulatory contingencies - The company terminated its Texas facility lease without penalty on January 1, 2024, and entered a new lease with a monthly rent of $18,000, prepaying lease payments until December 31, 2026, to secure a rent-free 2027[113] - The Corona, CA office lease was terminated, resulting in a $24,710 loss, and a subsequent settlement with the landlord on June 20, 2024, generated $44,204 of non-operating income[114][148] - The company received a Nasdaq notice on April 12, 2024, for non-compliance with the $1.00 minimum bid price requirement and has until October 9, 2024, to regain compliance[122][123] - An 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[118] 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 performance, condition, and operational results, including an overview of its business, key performance indicators, detailed analysis of revenues and expenses, liquidity, capital resources, and critical accounting policies Overview This section provides an introduction to the company's business model, operations, and market strategies - INNO HOLDINGS is a building technology company specializing in manufacturing cold-formed-steel members and offering comprehensive construction services, transforming raw steel into precise framing products and prefabricated homes[129] - The company mitigates exposure to steel price fluctuations by entering fixed-price forward contracts and maintaining a 1-3 month inventory of actively used rolled steel coils[130][131][132] Key Performance Indicators ("KPIs") This section outlines the key metrics used by management to assess 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 quarterly purchase plans to maximize fund efficiency[131][132] - Collection period of accounts receivable: Targets strategic relationships with large-scale homebuilders and professional companies to reduce risk and days outstanding, with an eventual goal of 100% payment before product delivery[133] - Lead time: Strives to communicate frequently with customers and optimize production to minimize storage and shorten lead times[134] - Growth of total operating income: Maintains internal long-term targets for gross profit and operating income, focusing on profitable long-term growth[135] - Production capacity improvement: Committed to investing in capacity and efficiency to support larger orders and increase total operating income[136] Results of Operation This section analyzes the company's financial performance, detailing changes in revenues, expenses, and net loss Results of Operation | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Change (%) | Nine Months Ended June 30, 2024 | Nine 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% | | Impairment loss | $0 | $0 | - | $23,911 | $0 | 100% | | Depreciation | $22,405 | $17,764 | 26% | $65,728 | $50,547 | 30% | | 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% | | Other income (expenses) | $(16,444) | $(17,998) | -9% | $116,863 | $(53,876) | -317% | | Net loss | $(1,050,881) | $(1,511,805) | -30% | $(2,962,072) | $(2,971,728) | 0% | | Net loss attributable to INNO HOLDINGS INC. | $(1,064,702) | $(1,466,781) | -27% | $(2,926,677) | $(2,864,167) | 2% | - Revenues decreased by 56% for the three months and 21% for the nine months ended June 30, 2024, primarily due to project completion status and focus on larger customers requiring permit acquisition[139] - Selling, general and administrative expenses increased significantly by 70% and 79% for the three and nine months, respectively, due to additional overhead costs for future expansion and public company regulatory standards[144] - Bad debt expense decreased by 100% for the three months and 95% for the nine months, reflecting strengthened risk control and a focus on customers with 30-day payment terms[145] - Operating loss decreased by 31% for the three months but increased by 5% for the nine months, influenced by the interplay of decreased bad debt expense, increased SG&A, and lower revenue[146][147] Liquidity and Capital Resources This section discusses the company's ability to meet short-term obligations and fund operations, including cash position and financing activities - Cash and cash equivalents increased from $4,898 as of September 30, 2023, to $1,890,903 as of June 30, 2024, primarily due to proceeds from the initial public offering[152] - The company successfully closed an initial public offering on December 18, 2023, generating net proceeds of $8 million[154] - Management believes current cash and cash equivalents are insufficient to fund operations for the next twelve months, raising substantial doubt about the company's ability to continue as a going concern without additional financing[155] - Working capital improved from a deficit of $(2,913,827) as of September 30, 2023, to a positive $1,266,609 as of June 30, 2024[156] Cash Flows This section provides a detailed analysis of cash generated and used across operating, investing, and financing activities - Net cash used in operating activities increased significantly to $4,859,567 for the nine months ended June 30, 2024, from $1,066,467 in the prior year, driven by increased net loss and working capital outflow[157][158] - Net cash used in investing activities increased to $412,231, primarily due to $424,800 in additions to property and equipment, mainly for machinery, tools, motor vehicles, and leasehold improvements[160] - Net cash provided by financing activities surged to $7,157,803, largely due to $8,450,000 net cash from the IPO, partially offset by loan and related party repayments[161] Critical Accounting Policies and Estimate This section highlights the significant accounting policies and estimates requiring management's judgment - Key critical accounting estimates include revenue recognition, inventory valuation, going concern assessment, and the provision for income taxes, which require significant judgments and assumptions[163] New Accounting Standards This section discusses the potential impact of recently issued accounting pronouncements on the company's financial statements - The company is evaluating the impact of ASU 2023-09 (Income Tax Disclosures) and ASU 2023-07 (Segment Reporting), effective for fiscal years 2026 and 2025/2026 respectively[71][72][164] ITEM 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of June 30, 2024, due to material weaknesses, including insufficient personnel and inadequate policies in internal control functions The company plans to hire additional qualified personnel to address these issues - As of June 30, 2024, the company's disclosure controls and procedures were deemed not effective due to material weaknesses[166] - Lack of sufficient personnel commensurate with accounting and reporting requirements and insufficient segregation of duties within accounting functions[170] - Lack of adequate policies and procedures in internal control function to ensure proper control and procedures have been designed and implemented over key business cycles[170] - The company plans to hire additional qualified personnel to strengthen the financial reporting function and establish a financial and system control framework[167] PART II: OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, other information, and exhibits ITEM 1. LEGAL PROCEEDINGS. The company is not currently a party to any material legal proceedings, investigations, or claims that would have a material adverse effect on its business, financial condition, or results of operations - The company believes it does not have any threatened litigation that would individually or in aggregate have a material adverse effect on its business, results of operations, financial condition, and/or cash flows[172] ITEM 1A. RISK FACTORS. The company faces a significant risk of delisting from the Nasdaq Capital Market due to its common stock trading below the $1.00 minimum bid price requirement Failure to regain compliance by October 9, 2024, could lead to delisting, negatively impacting market price, liquidity, and access to capital markets - On April 12, 2024, Nasdaq notified the company of non-compliance with the $1.00 minimum bid price requirement for 30 consecutive business days[174] - The company has an initial compliance period 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[174][175] - Failure to regain compliance could lead to delisting, potentially subjecting the common stock to 'penny stock' rules, which would reduce trading activity and make it harder for stockholders to sell securities[176][178][179][180] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. The company did not purchase any equity securities reportable under Item 703 of Regulation S-K during the quarter ended June 30, 2024 - No equity securities reportable under Item 703 of Regulation S-K were purchased by the company during the period from April 1, 2024, to June 30, 2024[181] ITEM 3. DEFAULTS UPON SENIOR SECURITIES. There were no defaults upon senior securities reported by the company - The company reported no defaults upon senior securities[182] ITEM 5. OTHER INFORMATION. No director or officer of the company adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2024 - No director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the quarter ended June 30, 2024[183] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including organizational documents, underwriting agreements, incentive plans, and certifications, with details on their form, file number, and filing date - The exhibit index includes Amended and Restated Certificate of Formation, Amended and Restated Bylaws, Underwriter's Warrant, Form of Common Stock Certificate, Indemnification Agreement, Development and Supply Agreement, Omnibus Incentive Plan, Offer Letter, Agreement for Purchase and Sale and Escrow Instructions, and various certifications (31.1, 31.2, 32.1, 32.2)[185] SIGNATURES This section contains the official signatures certifying the accuracy and completeness of the financial report - The report was signed on August 12, 2024, by Tianwei Li, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer, Financial and Accounting Officer) of INNO HOLDINGS, INC[188][189][190]