Armlogi Holding Corp. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. Forward-Looking Statements This Quarterly Report on Form 10-Q contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to: any projections of earnings, revenue, or other financial items; any statements regarding the adequacy, availability, and sources of capital, any statements of the plans, strategies, and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan,” “project,” or “anticipate,” and other similar words. In addition to any assumptions and other factors and matters referred to specifically in connection with such forward-looking statements, factors that could cause actual results or outcomes to differ materially from those contained in the forward-looking statements include those factors set forth in the “Risk Factors” section included in our registration statement on Form S-1 (File No. 333-274667), which was initially filed with the U.S. Securities and Exchange Commission (the “SEC”) on September 25, 2023, as amended, and declared effective by the SEC on May 13, 2024. Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed in this Quarterly Report. We do not intend, and undertake no obligation, to update any forward-looking statement, except as required by law. The information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes included in this Quarterly Report, and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our registration statement on Form S-1 (File No. 333-274667). Results of Operations The following table outlines our unaudited condensed consolidated statements of income for the three and nine months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Nine Months Ended March 31, 2024 Nine Months Ended March 31, 2023 US$ US$ US$ US$ Unaudited Unaudited Unaudited Unaudited Revenue 38,439,935 30,133,445 121,689,863 86,961,574 Costs of sales 35,115,736 23,855,350 105,461,383 67,959,387 Gross profit 3,324,199 6,278,095 16,228,480 19,002,187 Operating costs and expenses: General and administrative 3,269,493 3,051,137 8,097,196 6,974,146 Total operating costs and expenses 3,269,493 3,051,137 8,097,196 6,974,146 Income from operations 54,706 3,226,958 8,131,284 12,028,041 Other (income) expenses: Other income (914,419 ) (293,016 ) (1,902,813 ) (954,447 ) Finance costs 11,041 15,650 37,779 45,885 Total other (income) expenses (903,378 ) (277,366 ) (1,865,034 ) (908,562 ) Income before provision for income taxes 958,084 3,504,324 9,996,318 12,936,603 Current income tax expense 200,612 1,335,189 2,079,038 3,495,908 Deferred income tax expense 75,252 (9,972 ) 735,459 480,002 Total income tax expenses 275,864 1,325,217 2,814,497 3,975,910 Net income 682,220 2,179,107 7,181,821 8,960,693 Total comprehensive income 682,220 2,179,107 7,181,821 8,960,693 Basic & diluted net earnings per share 0.02 0.05 0.18 0.22 Weighted average number of shares of common stock-basic and diluted 40,000,000 40,000,000 40,000,000 40,000,000 17 Revenue, costs of sales, and gross profit margin The following table sets forth our revenue for the three and nine months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Nine Months Ended March 31, 2024 Nine Months Ended March 31, 2023 US$ US$ US$ US$ Unaudited Unaudited Unaudited Unaudited Revenue 38,439,935 30,133,445 121,689,863 86,961,574 Costs of sales 35,115,736 23,855,350 105,461,383 67,959,387 Gross profit 3,324,199 6,278,095 16,228,480 19,002,187 Gross profit margin % 8.6 % 20.8 % 13.3 % 21.9 % The following table outlines the compositions of our revenue streams: Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Nine Months Ended March 31, 2024 Nine Months Ended March 31, 2023 US$ US$ US$ US$ Unaudited Unaudited Unaudited Unaudited Transportation services 25,024,889 21,166,120 84,664,603 61,998,726 Warehousing services 13,372,014 8,885,368 36,606,859 24,531,240 Other services 43,032 81,957 418,401 431,608 Total 38,439,935 30,133,445 121,689,863 86,961,574 Three Months Ended March 31, 2024 and 2023 Our revenue increased by $8.3 million, or 27.6%, to $38.4 million during the three months ended March 31, 2024, from $30.1 million for the same period in 2023. The increase was due to the effect of following factors: 1) Revenue from our transportation services increased by $3.9 million, or 18.2%, due to the rapid expansion of our business in 2023, as we expanded our warehouse operational capacities in California and New Jersey. 2) Revenue from our warehousing services increased by $4.5 million, or 50.5%. As an integrated part of our one-stop warehousing and logistics services, our warehousing services also increased as a result of the growth in our transportation services. 3) Revenue from other services decreased by $0.04 million. Other revenue mainly consisted of revenue from our customs brokerage services. Our costs of sales mainly represented the costs incurred for the use of third-party direct freight service carriers, such as FedEx and UPS, warehouse rental expenses, costs of labor, and trucking expenses. Costs of sales increased by $11.3 million, or 47.2%, during the three months ended March 31, 2024, compared with the same period in 2023. The increase was in line with the increase of our revenue. 18 Nine Months Ended March 31, 2024 and 2023 Our revenue increased by $34.7 million, or 39.9%, to $121.7 million during the nine months ended March 31, 2024, compared to $87.0 million for the same period in 2023. The increase was due to the following factors: 1) Revenue from our transportation services increased by $22.7 million, or 36.6%, due to the rapid expansion of our business in 2023, as we expanded our warehouse operational capacities in California and New Jersey. 2) Revenue from our warehousing services increased by $12.1 million, or 49.2%. As an integrated part of our one-stop warehousing and logistics services, our warehousing services also increased as a result of the growth in our transportation services. 3) Revenue from other services decreased by $0.01 million. Other revenue mainly consisted of revenue from our customs brokerage services. Our costs of sales mainly represented the costs incurred for the use of third-party direct freight service carriers, such as FedEx and UPS, warehouse rental expenses, costs of labor, and trucking expenses. Costs of sales increased by $37.5 million, or 55.2%, during the nine months ended March 31, 2024, compared with the same period in 2023. The increase was in line with the significant increase of our revenue. The following table sets forth a breakdown of our costs of sales for the three and nine months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Nine Months Ended March 31, 2024 Nine Months Ended March 31, 2023 US$ US$ US$ US$ Unaudited Unaudited Unaudited Unaudited Amortization 8,829 8,229 26,488 151,501 Depreciation 436,084 236,601 1,222,550 641,222 Rental expenses 7,633,143 3,794,044 20,837,098 9,922,594 Freight expenses 19,872,642 16,908,762 62,766,326 48,369,492 Port handling and customs fees 51,347 762 370,438 99,461 Salary and benefits 2,095,115 809,754 5,556,288 2,332,045 Temporary labor expenses 3,118,921 1,619,054 9,399,535 5,370,568 Warehouse expenses 1,767,328 265,570 4,235,306 633,086 Utilities 102,494 102,924 362,468 303,594 Other expenses 29,833 109,650 684,886 135,824 Total 35,115,736 23,855,350 105,461,383 67,959,387 Three Months Ended March 31, 2024 and 2023 Our freight expenses, rental expenses (primarily warehouse operating lease expenses), temporary labor expenses, and salary and benefits increased significantly by $3.0 million, $3.8 million, $1.5 million, and $1.3 million, respectively, during the three months ended March 31, 2024, compared to the same period in 2023. The increases in these expenses were all due to the growth of our revenue in transportation services and warehouse services. Our overall gross profit margin decreased from 20.8% for the three months ended March 31, 2023 to 8.6% for the same period in 2024, primarily due to our expansion into the Fontana, California warehouse and the temporary disruption of operations in California as inventory was relocated to a new facility. Although the profit margins of our transportation services (e.g. FedEx, ocean freight, and truck deliveries) for the three months ended March 31, 2024, remained stable or slightly higher compared to the previous year, the profit margins for our warehousing services experienced a decrease during the same period. This decline is attributable to increases in the rental expenses, salary and benefits, temporary labor expenses, and warehouse expenses of approximately 101%, 159%, 93%, and 565%, respectively, despite a relatively modest increase in warehousing services revenue of approximately 50.5%. 19 Nine Months Ended March 31, 2024 and 2023 Our freight expenses, rental expenses (primarily warehouse operating lease expenses), temporary labor expenses, and salary and benefits increased significantly by $14.4 million, $10.9 million, $4 million, and $3.2 million, respectively, during the nine months ended March 31, 2024 compared to the same period in 2023. The increases in these expenses were all due to the growth of our revenue in transportation services and warehouse services. Our overall gross profit margin decreased from 21.9% for the nine months ended March 31, 2023 to 13.3% for the same period in 2024, primarily due to our expansion into the Fontana, California warehouse and the temporary disruption of operations in California, as inventory was relocated to a new facility. Although the profit margins of our transportation services (e.g. FedEx, ocean freight, and truck deliveries) for the nine months ended March 31, 2024, remained stable or slightly higher compared to the previous year, the profit margins for our warehousing services experienced a significant decrease during the same period. This decline is attributable to increases in the rental expenses, salary and benefits, temporary labor expenses, and warehouse expenses of approximately 110%, 138%, 75%, and 569%, respectively, despite a relatively modest increase in warehousing services revenue of approximately 49.2%. Operating expenses Our operating expenses consist primarily of general and administrative expenses. The following table sets forth a breakdown of our general and administrative expenses for the three and nine months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 Three Months Ended March 31, 2023 Nine Months Ended March 31, 2024 Nine Months Ended March 31, 2023 US$ US$ US$ US$ Unaudited Unaudited Unaudited Unaudited Bank charges 2,347 1,390 51,890 12,306 Depreciation 89,083 54,211 221,889 147,477 Office expenses 470,490 240,431 1,846,669 808,027 Professional fees 103,849 118,376 217,412 278,867 Rental expenses 1,056,224 1,052,826 1,258,030 1,506,997 Repairs and maintenance 383,941 170,916 816,717 359,766 Salary and benefits 950,441 1,296,570 3,190,431 3,530,958 Sundries 121,136 9,181 157,596 44,480 Tax and licenses 21,216 45,443 123,084 78,366 Vehicle expenses 47,209 55,130 145,697 160,122 Other expenses 21,821 6,663 90,608 46,780 Credit loss expenses 1,736 — (22,827 ) — Total 3,269,493 3,051,137 8,097,196 6,974,146 Three Months Ended March 31, 2024 and 2023 Our general and administrative expenses increased by $0.2 million, from $3.1 million for the three months ended March 31, 2023, to $3.3 million for the same period in 2024, representing an increase of 7%. The increase was due to increased administrative activities primarily related to office supplies, and repairs and maintenance, to accommodate our business expansion. Nine Months Ended March 31, 2024 and 2023 Our general and administrative expenses increased by $1.1 million, from $7.0 million for the nine months ended March 31, 2023 to $8.1 million for the same period in 2024, representing an increase of 16%. The increase was due to increased administrative activities primarily related to office supplies, and repairs and maintenance, to accommodate our business expansion. Income Tax Our income tax expense decreased by $1.0 million for the three months ended March 31, 2024 compared to the same period in 2023, mainly due to the decrease in profit before tax by $2.5 million during the three months ended March 31, 2024. Our income tax expense decreased by $1.2 million for the nine months ended March 31, 2024 compared to the same period in 2023, mainly due to the decrease in profit before tax by $2.9 million during the nine months ended March 31, 2024. Net income As a result of the foregoing, our net income for the three months ended March 31, 2024 was $0.7 million, compared with the net income of $2.2 million for the same period in 2023, representing a decrease by $1.5 million. Our net income for the nine months ended March 31, 2024 was $7.2 million, compared with the net income of $9.0 million for the same period in 2023, representing a decrease by $1.8 million. 20 Liquidity and Capital Resources In assessing our liquidity, management monitors and analyzes our cash on-hand, our ability to generate sufficient revenue sources in the future, and our operating and capital expenditure commitments. As of the date of this Quarterly Report , we have financed our operations primarily through cash generated by operating activities and capital contributions from stockholders. As of March 31, 2024 and June 30, 2023, we had cash (including restricted cash) of $6.0 million and $6.6 million, respectively, which primarily consisted of cash deposited in banks. Our working capital requirements mainly consist of costs of sales and general and administrative expenses. We expect that our capital requirements will be met by cash generated from our operating activities and financing activities from our principal stockholders. We believe that our current cash and cash generated from our operating activities will be sufficient to meet our current and anticipated working capital requirements and capital expenditures for at least the next 12 months. We may, however, need additional cash resources in the future if we experience changes in our business conditions or other developments. Cash Flows for the Nine Months Ended March 31, 2024 and 2023 For the Nine months Ended March 31, 2024 For the Nine months Ended March 31, 2023 US$ US$ Net cash provided by operating activities 3,992,195 10,473,446 Net cash used in investing activities (4,680,643 ) (4,265,712 ) Net cash provided by (used in) financing activities 177,025 (3,024,108 ) Net increase (decrease) in cash (511,423 ) 3,183,626 Cash at beginning of period 6,558,099 2,248,760 Cash and restricted cash at end of period 6,046,676 5,432,386 We had a balance of cash and restricted cash of $6.0 million as of March 31, 2024, compared with a balance of $6.6 million as of June 30, 2023. During the nine months ended March 31, 2024, we mainly derived our cash inflow from operating activities. Operating Activities Net cash provided by operating activities was $4.0 million for the nine months ended March 31, 2024, compared to net cash provided in operating activities of $10.5 million for the same period in 2023, representing a $6.5 million decrease in the net cash inflow provided by operating activities. The decrease was primarily due to the following: (i) We had net income of $7.2 million for the nine months ended March 31, 2024. For the same period in 2023, we had net income of $9.0 million, which led to a $1.8 million decrease in net cash inflow from operating activities. (ii) Changes in accounts receivable and other receivables were $7.7 million cash outflow for the nine months ended March 31, 2024. For the same period in 2023, changes in accounts receivable and other receivables were $2.6 million cash outflow, which led to a $5.1 million increase in net cash outflow from operating activities. (iii) Changes in accounts payable and accrued liabilities used $2.2 million net cash outflow for the nine months ended March 31, 2024. For the same period in 2023, changes in accounts payable and accrued liabilities provided net cash inflow of $0.6 million, which led to a $2.8 million increase in net cash outflow from operating activities. (iv) Changes in tax payable provided $1.9 million net cash inflow for the nine months ended March 31, 2024. For the same period in 2023, changes in tax payable provided net cash inflow of $2.9 million, which led to a $0.9 million decreased in net cash inflow from operating activities. (v) Changes in payroll liabilities provided $0.2 million net cash inflow for the nine months ended March 31, 2024. For the same period in 2023, changes in payroll liabilities provided net cash inflow of $0.3 million, which led to a $0.1 million decrease in net cash inflow from operating activities. (vi) Changes in non-cash items provided $5.6 million net cash inflow for the nine months ended March 31, 2024. For the same period in 2023, changes in non-cash items provided net cash inflow of $1.7 million, which led to a $3.9 million increase in net cash inflow from operating activities. 21 Investing Activities Net cash used in investing activities was $4.7 million for the nine months ended March 31, 2024, primarily attributable to $3.1 million cash used for the purchase of property and equipment and $1.6 million used for loans extended to a customer for the nine months ended March 31, 2024. For the same period in 2023, net cash used in investing activities was $4.3 million, primarily attributable to $1.8 million cash used for the purchase of property and equipment and $2.4 million used for loans extended to a customer. Financing Activities For the nine months ended March 31, 2024, we had net cash provided by financing activities of $0.2 million, which was primarily attributable to the net effects of: (i) $0.5 million collected from related parties for the repayment of loans we previously advanced to them; (ii) $0.6 million used for expenses relating to the initial public offering; (iii) $0.2 million used to repay finance lease liabilities; and (iv) $0.5 million in capital contributions from stockholders. For the nine months ended March 31, 2023, we had net cash used in financing activities of $3.0 million, which was primarily attributable to the net effects of: (i) $2.5 million used to repay related parties; (ii) $0.5 million advanced to related parties; iii) $0.2 million used for expenses relating to the initial public offering; (iv) $0.2 million used to repay finance lease liabilities; and (v) $0.4 million in capital contributions from stockholders. Commitments and Contractual Obligations As of March 31, 2024, we had operating and finance leases for office space, warehouse space, and forklifts. Lease terms expire at various dates through April 2026 to November 2034 with options to renew for varying terms at our sole discretion. We have not included these options to extend or terminate in the calculation of right-of-use assets or lease liabilities, as there is no reasonable certainty, as of the date of this Quarterly Report , that these options will be exercised. As of March 31, 2024, maturities of lease liabilities for each of the following fiscal years ending June 30 and thereafter were as follows: Operating Finance US$ US$ 2024 4,418,689 48,331 2025 28,620,864 175,880 2026 and beyond 138,682,715 196,392 Total minimum lease payment 171,722,268 420,603 Less: imputed interest (48,562,783 ) (56,834 ) Total lease liabilities 123,159,485 363,769 Less: current potion (23,890,833 ) (170,531 ) Non-current portion 99,268,652 193,238 Other than the above leases, we did not have significant commitments, long-term obligations, or guarantees as of March 31, 2024. Off-balance Sheet Commitments and Arrangements Other than two one-year term standby letters of credit with Eastwest Bank in the aggregate amount of $2,061,673, we did not have during the period presented, and we do not currently have, any off-balance sheet financing arrangements as defined under the rules and regulations of the SEC, or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of March 31, 2024, we still have unused credit of $2,061,673 with Eastwest Bank. Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of this Quarterly Report , and revenue and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions, and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. Management bases their estimates on historical experience and on various other factors that they believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements. 22 Despite that management determines that there are no critical accounting estimates, the one that requires relatively significant estimates relates to useful lives of property and equipment. Property and equipment are recorded at cost, less accumulated depreciation and impairment. The estimation of useful lives impacts the level of annual depreciation expenses recorded and the estimation is a matter of judgment based on the experience of our Company and general industry practice with similar assets. The estimated annual deprecation rates of our property and equipment are generally as follows: Category Depreciation method Depreciation rate Furniture and fixtures Straight-line 7 years Auto & trucks Straight-line 5 – 8 years Trailers & truck chassis Straight-line 15 – 17 years Machinery & equipment Straight-line 2 – 7 years Leasehold improvements Straight-line Shorter of lease term or 15 years As of March 31, 2024 and June 30, 2023, the historical cost of property and equipment was $13,503,962 and $9,566,675, respectively. We recorded depreciation expenses of $1,313,684 and $788,699 during the nine months ended March 31, 2024 and 2023, respectively. For the nine months ended March 31, 2024 and 2023, we recorded depreciation expenses of $1,091,795 and $641,222 in costs of sales, respectively, and $221,889 and $147,477 in general and administrative expenses, respectively. While our significant accounting policies are more fully described in “Note 2 — Summary of Significant Accounting Policies” in the notes to our unaudited financial statements , we believe that there were no critical accounting policies that affect the preparation of financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk . As a smaller reporting company, we are not required to provide this information.