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 annual report on Form 10-K (File No. 001-42099), filed with the SEC on September 26, 2024. 20 Overview We are a fast-growing U.S.-based warehousing and logistics service provider that offers a comprehensive package of supply-chain solutions relating to warehouse management and order fulfillment. With the boom of e-commerce and Internet technology, along with the development of global supply chains, a growing number of merchants are seeking to sell their products through international e-commerce platforms, such as Amazon and eBay. These merchants, however, are confronted with major logistical challenges because of the complexities involved in shipping goods across borders. Specifically, when a foreign consumer places an order online, it can take a long time for the goods to be delivered from one country to another (especially for bulky items), while facing high damage rates and congestion during peak seasons. One of the solutions to such problems is to set up overseas warehouses, which are local storage facilities established in a foreign country where the cross-border merchants intend to sell their goods. Cross-border e-commerce merchants can export goods in batches in advance to overseas warehouses, which can then be delivered to overseas consumers once orders are placed via e-commerce platforms. As a result, the delivery time and the rate of damaged and lost packages may be reduced significantly, therefore enhancing the shopping experience of consumers. We provide one-stop warehousing and logistics services to cross-border e-commerce merchants outside the U.S. who seek to sell in the U.S. market. We currently operate nine warehouses across the country, with an aggregate gross floor area of approximately 2,765,667 square feet. Aside from a nationwide footprint and large storage space, our warehouses are equipped with automated sorting systems, heavy-duty forklifts, and pallets and trays that are suitable for processing bulky items. As a one-stop warehousing and logistics service provider, we offer a full spectrum of services, including (i) customs brokerage services; (ii) transportation of merchandise to U.S. warehouses; and (iii) warehouse management and order fulfillment services, which further include (a) product storage and retrieval, (b) product packing and labeling, (c) kitting and repackaging, (d) order assembly and load consolidation, (e) inventory management and sales forecasting, (f) third-party distribution coordination, and (g) other value-added services. We also provide warehousing and logistics services to our U.S.-based commercial customers, who are typically domestic e-commerce merchants seeking efficient and reliable warehousing and logistics solutions to support their operations. In general, the warehousing and logistics services we provide to our domestic customers are similar to those we provide to our overseas customers. This allows us to provide integrated solutions for our customers, whether they need domestic or international warehousing and logistics support. As of September 30, 2024 and June 30, 2024 and 2023, we had an active customer base of 156, 105, and 83, respectively, for our warehousing and logistics services. For the three months ended September 30, 2024 and 2023, we had total revenue of $42.5 million and $41.2 million, and net loss of $4.6 million and net income of $2.8 million, respectively. While we do not have any subsidiaries, assets, or employees in the PRC, we generate a significant portion of our revenue from customers based in China. During the three months ended September 30, 2024 and 2023, we generated approximately 85% and 95% of our revenue from PRC-based customers, respectively. 21 Results of Operations The following table outlines our consolidated statements of operations for the three months ended September 30, 2024 and 2023: For the Three Months Ended September 30, 2024 For the Three Months Ended September 30, 2023 US$ US$ Revenue 42,481,896 41,245,845 Costs of sales 46,088,686 36,019,413 Gross profit (loss) (3,606,790 ) 5,226,432 Operating costs and expenses: General and administrative 3,668,825 1,908,156 Total operating costs and expenses 3,668,825 1,908,156 Income (loss) from operations (7,275,615 ) 3,318,276 Other (income) expenses: Other income (1,205,665 ) (542,215 ) Finance costs 9,008 13,387 Total other (income) expenses (1,196,657 ) (528,828 ) Income (loss) before provision for income taxes (6,078,958 ) 3,847,104 Current income tax expense (recovery) (57,589 ) 649,305 Deferred income tax expense (recovery) (1,373,498 ) 443,023 Total income tax expenses (recovery) (1,431,087 ) 1,092,328 Net income (loss) (4,647,871 ) 2,754,776 Total comprehensive income (loss) (4,647,871 ) 2,754,776 Basic & diluted net earnings per share (0.11 ) 0.07 Weighted average number of shares of common stock-basic 41,634,000 40,000,000 Weighted average number of shares of common stock-diluted 41,714,000 40,000,000 22 Revenue, costs of sales, and gross profit margin The following table sets forth our revenue for the three months ended September 30, 2024 and 2023: For the Three Months Ended September 30, 2024 For the Three Months Ended September 30, 2023 US$ US$ Revenue 42,481,896 41,245,845 Costs of sales 46,088,686 36,019,413 Gross profit (loss) (3,606,790 ) 5,226,432 Gross profit (loss) margin % (8.5 )% 12.7 % The following table outlines the compositions of our revenue streams: For the Three Months Ended September 30, 2024 For the Three Months Ended September 30, 2023 US$ US$ Transportation services 28,490,756 29,738,530 Warehousing services 13,973,694 11,289,613 Other services 17,446 217,702 Total 42,481,896 41,245,845 Our revenue increased by $1.2 million, or 3.0%, to $42.5 million during the three months ended September 30, 2024, compared to $41.2 million for the same period in 2023. The increase was due to the following factors: 1) Revenue from our transportation services decreased by $1.2 million, or 4.2%, due to decreases in customer order volumes. Several major customers have significantly decreased serviced volume for the three months ended September 30, 2024. 2) Revenue from our warehousing services increased by $2.7 million, or 23.8%, driven by the addition of new warehouses acquired in the last fiscal quarter. 3) Revenue from other services decreased by $0.2 million, or 92%. 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 $10.1 million, or 28.0%, during the three months ended September 30, 2024, compared with the same period in 2023. The increase was driven by two main factors. First , there was a rise in freight expenses due to higher UPS shipping charges. Second , lease expenses, employee salary and benefits, and temporary labor costs increased as we expanded our warehouse and operations team to support growth. 23 The following table sets forth a breakdown of our costs of sales for the three months ended September 30, 2024 and 2023: For the Three Months Ended September 30, 2024 For the Three Months Ended September 30, 2023 US$ US$ Amortization 8,829 53,266 Depreciation 475,101 324,849 Lease expenses 9,106,604 6,803,740 Freight expenses 25,706,479 22,477,545 Port handling and customs fees 152,745 150,244 Salary and benefits 2,564,863 1,614,339 Temporary labor expenses 5,720,926 2,961,150 Warehouse expenses 2,059,111 1,388,731 Utilities 229,220 143,778 Other expenses 64,808 101,771 Total 46,088,686 36,019,413 Our lease expenses (primarily warehouse operating lease expenses), freight expenses, temporary labor expenses, and salary and benefits increased significantly by $2.3 million, $3.2 million, $2.8 million, and $1.0 million, respectively, during the three months ended September 30, 2024 compared to the same period in 2023. The increases in lease expenses are due to the additional operating leases acquired in the last fiscal quarter. The increases in freight expenses are due to the increase of the surcharge by FedEx. The increase in temporary labor expenses and salary and benefits is due to the expansion of the warehouse operations. Our overall gross profit (loss) margin decreased from 12.7% for the for the three months ended September 30, 2023 to (8.5%) for the same period in 2024, primarily due to the increase of the surcharge by UPS and the decreases in customer order volume, as well as some of the recently leased warehouses that are not fully utilized. Operating expenses Our operating expenses consist primarily of general and administrative expenses. The following table sets forth a breakdown of our general and administrative expenses for the three months ended September 30, 2024 and 2023: For the Three Months Ended September 30, 2024 For the Three Months Ended September 30, 2023 US$ US$ Bank charges 40,390 57,103 Amortization 142,064 64,080 Office expenses 1,164,214 565,664 Professional fees 387,263 66,175 Rental expenses 113,354 116,988 Repairs and maintenance 339,068 162,100 Salary and benefits 1,181,280 976,994 Sundries 47,745 47,496 Tax and licenses 67,455 44,247 Vehicle expenses 33,638 95,668 Other expenses 25,418 46,979 Credit loss expenses (recovery) 126,936 (335,338 ) Total 3,668,825 1,908,156 24 Our general and administrative expenses increased by $1.8 million, from $1.9 million for the three months ended September 30, 2023 to $3.7 million for the same period in 2024, representing an increase of 92%. The increase was due to the following factors: 1) Office expenses increased by $0.6 million, or 106%, mainly due to an increase in general insurance by $0.5 million associated with the rapid expansion of our business. 2) Repairs and maintenance expenses increased by $0.2 million, or 109%, as a result of the growth in our transportation services. 3) Professional fees increased by $0.3 million, or 485%, mainly due to increase of audit fees. Income Tax Our income tax expense decreased by $2.5 million for the three months ended September 30, 2024 compared to the same period in 2023, mainly due to the decrease in profit before tax by $10 million during the three months ended September 30, 2024. Net income (loss) As a result of the foregoing, our net income (loss) for the three months ended September 30, 2024 was $(4.6) million, compared with the net income of $2.8 million for the same period in 2023, representing a decrease by $7.4 million. 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 September 30, 2024 and June 30, 2024, we had cash and restricted cash of $5.0 million and $10.0 million, respectively, which primarily consisted of cash deposited in banks. Our working capital requirements mainly consist of costs of sales and general and administrative expenses. We expect that our capital requirements will be met by cash generated from our operating activities and financing activities. We believe that our current cash and cash generated from our operating activities will be sufficient to meet our current and anticipated working capital requirements and capital expenditures for at least the next 12 months. We may, however, need additional cash resources in the future if we experience changes in our business conditions or other developments. Cash Flows for the three months Ended September 30, 2024 and 2023 For the Three Months Ended September 30, 2024 For the Three Months Ended September 30, 2023 US$ US$ Net cash provided by (used in) operating activities (3,603,104 ) 3,061,420 Net cash used in investing activities (1,316,592 ) (2,164,663 ) Net cash provided by (used in) financing activities (44,839 ) 939,344 Net increase (decrease) in cash (4,964,535 ) 1,836,101 Cash and restricted cash at beginning of year 9,950,384 6,558,099 Cash and restricted cash at end of year 4,985,849 8,394,200 25 We had a balance of cash and restricted cash of $5.0 million as of September 30, 2024, compared with a balance of $10.0 million as of June 30, 2024. During the three months ended September 30, 2024, changes in our cashflow were mainly due to the following activities: Operating Activities Net cash used in operating activities was $3.6 million for the three months ended September 30, 2024, compared to net cash provided by operating activities of $3.1 million for the same period in 2023, representing a $6.7 million decrease in the net cash inflow provided by operating activities. The decrease was primarily due to the following: (i) We had net loss of $4.6 million for the three months ended September 30, 2024. For the three months ended September 30, 2023, we had net income of $2.8 million, which led to a $7.4 million decrease in net cash inflow from operating activities. (ii) Changes in accounts receivable and other receivables were $0.2 million cash inflow for the three months ended September 30, 2024. For the three months ended September 30, 2023, changes in accounts receivable and other receivables were $0.6 million cash inflow, which led to a $0.4 million decrease in net cash outflow from operating activities. (iii) Changes in accounts payable and accrued liabilities used $1.9 million net cash outflow for the three months ended September 30, 2024. For the three months ended September 30, 2023, changes in accounts payable and accrued liabilities provided net cash outflow of $2.1 million, which led to a $0.2 million decrease in net cash outflow from operating activities. (iv) Changes in tax payable provided $0.1 million net cash outflow for the three months ended September 30, 2024. For the three months ended September 30, 2023, changes in tax payable provided net cash inflow of $0.6 million, which led to a $0.7 million decreased in net cash inflow from operating activities. (v) Changes in non-cash items provided $2.0 million net cash inflow for the three months ended September 30, 2024. For the three months ended September 30, 2023, changes in non-cash items provided net cash inflow of $1.0 million, which led to a $1.0 million increase in net cash inflow from operating activities. Investing Activities Net cash used in investing activities was $1.3 million for the three months ended September 30, 2024, primarily attributable to $1.4 million cash used for the purchase of property and equipment, $1.0 million cash used for loans extended to others, and $1.0 million proceeds received from loan repayments. For the three months ended September 30, 2023, net cash used in investing activities was $2.2 million, primarily attributable to $1.1 million cash used for the purchase of property and equipment and $1.0 million used for loans extended to others. Financing Activities For the three months ended September 30, 2024, we had net cash used in financing activities of $0.05 million, which was primarily attributable to the net effects of $0.05 million used to repay finance lease liabilities. For the three months ended September 30, 2023, we had net cash provided from financing activities of $1.0 million, which was primarily attributable to the net effects of: (i) $0.5 million collected from related parties for the repayments of loans the Company previously advanced to them; (ii) $0.5 million lent from related parties; (iii) $0.1 million used for expenses relating to the initial public offering; (iv) $0.05 million used to repay finance lease liabilities; and (v) $0.1 million in capital contributions from stockholders. 26 Commitments and Contractual Obligations As of September 30, 2024, we had operating and finance leases for office space, warehouse space, and forklifts. Lease terms expire at various dates through February 2025 to July 2034 with options to renew for varying terms at our sole discretion. We have not included these options to extend or terminate in the calculation of ROU assets or lease liabilities, as there is no reasonable certainty, as of the date of this Quarterly Report, that these options will be exercised. As of September 30, 2024, maturities of lease liabilities for each of the following fiscal years ending June 30 and thereafter were as follows: Operating Finance US$ US$ 2025 20,326,296 133,049 2026 29,216,224 129,332 2027 28,967,443 61,194 2028 29,694,748 5,866 2029 and beyond 48,526,954 - Total minimum lease payment 156,731,665 329,441 Less: imputed interest (41,763,350 ) (39,964 ) Total lease liabilities 114,968,315 289,477 Less: current potion (26,272,945 ) (155,625 ) Non-current portion 88,695,370 133,852 Other than the above leases, we did not have significant commitments, long-term obligations, or guarantees as of September 30, 2024. Off-balance Sheet Commitments and Arrangements Other than two 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 September 30, 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 U.S. 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. 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. 27 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 September 30, 2024 and June 30, 2024, the historical cost of property and equipment was $16,127,139 and $14,773,842, respectively. We recorded depreciation expenses of $578,432 and $388,929 during the three months ended September 30, 2024 and 2023, respectively. Specifically, $436,368 and $324,849 of the depreciation expenses were recorded in costs of sales for the three months ended September 30, 2024 and 2023, respectively. $142,064 and $64,080 of the depreciation expenses were recorded in general and administrative expenses for the three months ended September 30, 2024 and 2023, respectively. Our significant accounting policies are more fully described in Note 2 — Summary of Significant Accounting Policies” in the notes to our unaudited consolidated financial statements. We believe that there were no critical accounting policies that affected the preparation of such financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk . As a smaller reporting company, we are not required to provide this information.