Northann (NCL) - 2025 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Northann Corp.'s unaudited consolidated financial statements, including balance sheets, statements of operations, shareholders' deficit, cash flows, and detailed notes on organization and accounting policies Consolidated Balance Sheets The consolidated balance sheets as of March 31, 2025, and December 31, 2024, show increased total assets, liabilities, and stockholders' equity despite an accumulated deficit | Metric | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Total Assets | $16,494,218 | $13,875,685 | | Total Liabilities | $12,583,269 | $11,276,512 | | Total Stockholders' Equity | $3,910,949 | $2,599,173 | | Cash | $1,866,303 | $245,164 | | Accounts receivable, net | $3,747,662 | $3,106,561 | | Inventory, net | $2,340,949 | $1,995,611 | | Bank borrowings - current | $4,778,357 | $4,699,081 | | Accounts and other payables and accruals | $4,813,041 | $2,600,469 | | Accumulated deficits | $(12,324,547) | $(9,693,818) | Consolidated Statements of Operations and Comprehensive Income (Loss) The consolidated statements of operations reveal a significant shift from net income to a substantial net loss for the three months ended March 31, 2025, compared to the same period in 2024, primarily due to decreased revenues and increased operating expenses | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Revenues | $3,437,727 | $4,595,531 | | Cost of Revenues | $3,047,069 | $3,051,541 | | Gross Profit | $390,658 | $1,543,990 | | Operating Expenses | $2,965,315 | $1,216,009 | | (Loss) Income from Operations | $(2,574,658) | $327,981 | | Net (Loss) Income | $(2,630,729) | $60,033 | | Basic and diluted (loss) earnings per share | $(0.0276) | $0.0065 | - Revenues decreased by 25.2% year-over-year[13] - Gross margin declined from 33.6% in Q1 2024 to 11.4% in Q1 2025[13] Consolidated Statements of Shareholders' Deficit This statement outlines the changes in stockholders' equity for the periods ended March 31, 2025, and 2024, reflecting the impact of net loss, common stock issuance, and accrued compensation expense on the overall equity balance | Metric | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Total Stockholders' Equity | $3,910,949 | $2,599,173 | | Net loss | $(2,630,729) | - | | Issuance of common stock | $3,332,150 | - | | Accrued compensation expense | $816,750 | - | Consolidated Statements of Cash Flows The consolidated statements of cash flows detail the cash inflows and outflows from operating, investing, and financing activities, showing a significant increase in cash from financing activities in Q1 2025, which offset the cash used in operating activities | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(1,010,467) | $297,897 | | Net cash used in investing activities | $(149,042) | $(270,242) | | Net cash provided by (used in) financing activities | $3,148,197 | $(641,782) | | Cash at end of period | $1,866,304 | $593,934 | Notes to Unaudited Condensed Financial Statements These notes provide detailed explanations and disclosures for the unaudited condensed financial statements, covering the company's organizational structure, significant accounting policies, specific balance sheet and income statement items, and other relevant financial information 1. ORGANIZATION AND BUSINESS This note outlines Northann Corp.'s corporate history, including the establishment of various subsidiaries, its initial public offering in October 2023, and recent acquisitions, also highlighting a 'going concern' uncertainty due to a working capital deficit and net cash used in operations - The Company consummated its initial public offering (IPO) on October 23, 2023, selling 1,200,000 shares of common stock at $5.00 per share, with underwriters fully exercising an over-allotment option for an additional 180,000 shares[25] - In October and November 2024, the Company acquired Cedar Modern Limited and Raleigh Industries Limited[26] - As of March 31, 2025, the Company had a working capital deficit of $2,517,988 and net cash used in operating activities of $1,010,467, raising substantial doubt about its ability to continue as a going concern, with management focused on boosting revenue and improving profitability[27] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the significant accounting policies applied in the preparation of the consolidated financial statements, including the basis of presentation, revenue recognition, income tax accounting, foreign currency translation, and the impact of recently adopted and issued accounting pronouncements - The consolidated financial statements are prepared in accordance with U.S. GAAP and include all subsidiaries, with significant inter-company transactions eliminated[28] - Revenue for sales of products (hardwood and 3D printed flooring) is recognized at the time of delivery when physical and legal control passes to the customer, with no returns, refunds, or warranties allowed, but minor discounts for complaints are provided as period expenses[33] - The functional currency of the Company and its subsidiaries is the Chinese Yuan (RMB), with consolidated financial statements presented in U.S. dollars[43][45] - The Company adopted ASU 2023-07, which improves reportable segment disclosure requirements, effective January 1, 2024[70] - The Company is evaluating the impact of ASU 2023-09 (new income tax disclosures, effective after December 15, 2024) and ASU 2024-03 (expense disaggregation disclosures, effective after December 15, 2026)[71][72] 3. ACCOUNTS RECEIVABLE, NET This note details the gross accounts receivable balance, noting an increase from December 31, 2024, to March 31, 2025, and that no allowance for doubtful accounts was recorded for either period | Metric | March 31, 2025 | December 31, 2024 | | :---------------------- | :------------- | :---------------- | | Gross accounts receivable | $3,747,662 | $3,106,561 | | Total | $3,747,662 | $3,106,561 | | Allowance for doubtful accounts | $0 | $0 | 4. OTHER RECEIVABLES This note presents the balance of other receivables, which primarily consist of deposits and other assets, showing a decrease from December 31, 2024, to March 31, 2025 | Metric | March 31, 2025 | December 31, 2024 | | :------------------ | :------------- | :---------------- | | Deposit and other assets | $29,255 | $74,984 | | Total | $29,255 | $74,984 | 5. INVENTORY, NET This note provides a breakdown of the company's inventory, net, into raw materials and finished goods, indicating an increase in both categories from December 31, 2024, to March 31, 2025 | Metric | March 31, 2025 | December 31, 2024 | | :---------------------- | :------------- | :---------------- | | Raw materials and components | $1,806,220 | $1,517,698 | | Finished goods | $534,729 | $477,913 | | Total Inventories, net | $2,340,949 | $1,995,611 | 6. EQUIPMENT, NET This note details the company's equipment, net, including manufacturing and office equipment, and accumulated depreciation, showing a slight decrease in net value due to depreciation | Metric | March 31, 2025 | December 31, 2024 | | :----------------------- | :------------- | :---------------- | | Manufacturing equipment | $8,456,138 | $8,315,845 | | Office equipment | $317,438 | $314,748 | | Less: Accumulated depreciation | $4,975,670 | $4,736,159 | | Total Equipment, net | $3,797,906 | $3,894,434 | | Depreciation expenses (3M) | $239,511 | $127,076 | 7. LAND USE RIGHTS, NET This note reports the net value of land use rights and software, after accumulated amortization, and discloses that the land use rights are pledged as collateral for bank loans | Metric | March 31, 2025 | December 31, 2024 | | :----------------------- | :------------- | :---------------- | | Land use right | $1,105,071 | $1,087,291 | | Software | $23,544 | $23,154 | | Less: Accumulated amortization | $140,640 | $132,459 | | Total Land use rights, net | $987,975 | $977,986 | - Land use rights at No. 199, Newtag, Wujin District, Changzhou, Jiangsu Province, China, are pledged as collateral for loans from Industrial and Commercial Bank of China Limited[78] 8. BANK BORROWINGS This note provides details on the company's current and non-current bank borrowings, including the financial institutions, loan periods, and interest rates, with current borrowings increasing slightly and secured by land use rights | Metric | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Total current bank borrowings | $4,778,357 | $4,699,080 | | Weighted average interest rate (3M) | 5.72% | 4.71% | | Non-current EIDL Loan | $136,947 | $136,947 | - Short-term bank borrowings are secured by land use rights[79] 9. BALANCES WITH RELATED PARTY This note discloses the balances due to related parties, specifically Lin Li, the Chief Executive Officer and Chairman, for working capital support, noting these borrowings are unsecured, due on demand, and interest-free | Metric | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Amount due to related party (Lin Li) | $1,153,203 | $1,416,432 | - Related party borrowings are unsecured, due on demand, and interest-free, used to support the Company's operations[82][83] 10. EQUITY This note describes the company's authorized and outstanding preferred and common stock, including their par values, voting rights, and the impact of a 2-for-1 reverse stock split implemented in July 2023 - The Company is authorized to issue 400,000,000 shares of common stock ($0.001 par value) and 100,000,000 shares of preferred stock ($0.001 par value)[84][85] - Series A Preferred Stock (10,000,000 shares outstanding) carries ten votes per share, while common stock (95,464,000 shares outstanding as of March 31, 2025) carries one vote per share, with neither being convertible and Series A Preferred Stock having no dividend rights or liquidation preference over common stock[10][84] 11. INCOME TAXES This note details the income tax regulations and rates applicable to the company's operations in the U.S., Hong Kong, and PRC, and provides a reconciliation of the actual tax provision to the U.S. statutory rate, showing no income tax expense for the periods presented - The Company anticipates no material impact on its financial statements from the U.S. Tax Cuts and Jobs Act or the CARES Act[86] - Hong Kong subsidiaries are subject to a two-tier profits tax system (8.25% for the first HKD 2 million, 16.5% thereafter), with Benchwick elected for this benefit[87][88] - PRC subsidiaries are subject to a 25% income tax rate, with net operating losses generally carrying forward for five years[89] | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Total income tax expense | $0 | $0 | | Effective tax rate | 0% | 0% | 12. CHINA CONTRIBUTION PLAN This note reports the company's contributions to a government-mandated multi-employer defined contribution plan in China, which provides retirement, medical, and other welfare benefits to employees | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------ | :-------------------------------- | :-------------------------------- | | Total contributions | $15,005 | $15,889 | - The Company participates in a government-mandated multi-employer defined contribution plan in China for employee retirement, medical, and welfare benefits[98] 13. OPERATING LEASE This note provides information on the company's operating leases for office facilities, including right-of-use assets, lease liabilities, and lease expenses, noting the renewal of the California office lease for an additional 36 months | Metric | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Operating lease right-of-use assets | $1,735,972 | $1,822,266 | | Total lease liabilities | $1,735,972 | $1,822,266 | | Operating lease expense (3M) | $108,714 | $8,767 | | Weighted-average remaining lease term | 4.33 years | 4.57 years | | Weighted-average discount rate | 5% | 5% | - The lease for the office facilities at 9820 Dino Drive, Suite 110, Elk Grove, California, was renewed for an additional 36 months[99] 14. CONCENTRATIONS AND CREDIT RISK This note discusses the company's concentrations of revenue and accounts receivable among a few key customers, as well as concentrations of cost of revenues among suppliers, and addresses credit risk related to cash holdings and accounts receivable - Two customers accounted for approximately 74% of revenues for the three months ended March 31, 2025, and 81% for the same period in 2024[103] - Five customers accounted for 41% of accounts receivable as of March 31, 2025, and 84% as of December 31, 2024[104] - Five suppliers accounted for a total of 73% of the Company's cost of revenues for the three months ended March 31, 2025[106] - Substantially all of the Company's cash is held by major financial institutions in the PRC, Hong Kong, and the United States, which management believes are of high credit quality[107] 15. CAPITAL COMMITMENTS This note discloses a significant capital commitment for the construction of a second phase of the company's factory in China - The Company has contracted Changzhou Wanyuan Construction Engineering Co. to build a second phase of its factory for $10 million, expected to be approximately 250,000 square feet and take about one and a half years to complete[109] 16. STOCK SPLIT This note informs about a 2-for-1 reverse stock split implemented on July 6, 2023, which retroactively adjusted all share and per share data presented in the financial statements - Effective July 6, 2023, the Company implemented a 2-for-1 reverse stock split, converting every two outstanding shares into one ordinary share, with all share and per share data in the consolidated financial statements retroactively restated[110] 17. SECURED BORROWING ARRANGEMENT This note details a secured borrowing agreement from July 2023 and a new EB-5 loan agreement entered into in January 2025 with the controlling shareholder - In July 2023, the Company borrowed $1,000,000 under a secured borrowing agreement, collateralized by $1,491,000 in accounts receivable, with weekly repayments of $49,700 over thirty weeks[111] - On January 21, 2025, 3D PRINTING entered into an EB-5 loan agreement with Lin Li, the Chairman and controlling shareholder, for an initial maximum principal amount of $24,000,000 at an interest rate of 1.00% per year[112] 18. SUBSEQUENT EVENT This note states that no material subsequent events occurred between March 31, 2025, and the report issuance date of July 16, 2025, other than those already disclosed within the financial statements - No material subsequent events to disclose between March 31, 2025, and July 16, 2025, other than those already presented[113] 19. UNRESTRICTED NET ASSETS This note provides condensed financial information for Northann Corp. (parent only) and discusses the concept of restricted net assets, highlighting potential restrictions on the transfer of assets from Chinese operating subsidiaries due to foreign exchange control policies | Metric | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Total Assets (Parent only) | $16,494,218 | $13,875,685 | | Total Liabilities (Parent only) | $12,583,269 | $11,276,512 | | Total Stockholders' Equity (Deficit) (Parent only) | $3,910,949 | $2,599,173 | | Net (loss) income – Consolidated | $(2,630,728) | $60,035 | - The ability of Chinese operating subsidiaries to pay dividends or transfer assets to the parent company may be restricted due to foreign exchange control policies and the availability of cash balances[118] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results of operations for the three months ended March 31, 2025, compared to the same period in 2024, focusing on revenue, gross profit, operating expenses, and liquidity Results of Operations The results of operations show a significant decline in revenue and gross profit for the three months ended March 31, 2025, compared to 2024, coupled with a substantial increase in operating expenses, leading to a net loss | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (%) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Revenues | $3,437,727 | $4,595,531 | -25.2% | | Cost of revenues | $3,047,069 | $3,051,541 | -0.1% | | Gross profit | $390,658 | $1,543,990 | -74.7% | | Gross margin | 11.4% | 33.6% | -22.2 pp | | Selling expenses | $1,021,999 | $218,375 | +368.0% | | General and administrative expenses | $1,481,255 | $485,037 | +205.4% | | Research and development expenses | $462,062 | $512,597 | -9.9% | | Net (loss) income | $(2,630,729) | $60,033 | N/A (shift to loss) | - The decrease in gross margin was primarily due to higher purchase prices of raw materials[123] - The increase in selling expenses was mainly caused by a $506,250 increase in share-based compensation[124] - The increase in general and administrative expenses was mainly caused by a $640,125 increase in service fees for legal, auditing, and other professional services[125] Liquidity and Capital Resources This section discusses the company's cash position and sources of funding, noting a significant increase in cash at period-end primarily due to financing activities, with management believing current liquidity is sufficient for the next twelve months but acknowledging potential needs for additional capital | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Cash at period end | $1,866,303 | $593,934 | | Net cash (used in) provided by operating activities | $(1,010,467) | $297,897 | | Net cash used in investing activities | $(149,042) | $(270,242) | | Net cash provided by (used in) financing activities | $3,146,197 | $(641,782) | - The net cash provided by financing activities for the three months ended March 31, 2025, was primarily due to the issuance of 40,000,000 common stock[135] - Management believes current cash and cash flows from operations will be sufficient for at least the next twelve months, but may seek additional debt or equity for future investment or acquisition opportunities[129] Contractual Obligations This section briefly outlines the company's contractual obligations, primarily consisting of an operating lease for its corporate office and equipment - The Company's subsidiary NDC has an operating lease for its corporate office and equipment, with lease expenses of $8,767 for both the three months ended March 31, 2025, and 2024[136][137] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a 'smaller reporting company,' Northann Corp. is not required to provide quantitative and qualitative disclosures about market risk under Item 229.10(f)(1) of Regulation S-K - The Company is a 'smaller reporting company' and is therefore not required to make disclosures under this item[138] Item 4. Control and Procedures The company's management, including the Chief Executive Officer and Interim Chief Financial Officer, concluded that its disclosure controls and procedures were effective as of March 31, 2025, with no material changes to internal control over financial reporting occurring during the fiscal quarter - The Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2025[139] - No material changes in the Company's internal control over financial reporting occurred during the fiscal quarter covered by this report[140] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section states that there are no legal proceedings to report for the company - No legal proceedings to report[143] Item 1A. Risk Factors As a smaller reporting company, Northann Corp. is not required to provide disclosures regarding risk factors under this item - Not applicable as the company is a 'smaller reporting company'[144] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities This section indicates that there are no unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities to report - None to report[145] Item 3. Defaults Upon Senior Securities This section states that there are no defaults upon senior securities to report for the company - None to report[146] Item 4. Mine Safety Disclosures This section states that the disclosure requirements for mine safety are not applicable to the company - Not applicable[147] Item 5. Other Information This section indicates that there is no other information to report - None to report[148] Item 6. Exhibits This section lists all exhibits filed as part of, or incorporated by reference into, the Quarterly Report, including various certifications and XBRL documents - Includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2)[150] - Includes Inline XBRL Instance Document and Taxonomy Extension Documents (Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[150] - Includes Cover Page Interactive Data File (Exhibit 104)[150] SIGNATURES SIGNATURES This section confirms the official signing of the Quarterly Report on Form 10-Q by the company's Chief Executive Officer and Interim Chief Financial Officer on July 18, 2025 - The report was duly signed on July 18, 2025, by Lin Li, Chief Executive Officer, and Sunny S. Prasad, Interim Chief Financial Officer[152][153]