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. 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 ten warehouses across the country, with an aggregate gross floor area of approximately 3,858,667 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 December 31, 2024 and June 30, 2024 and 2023, we had an active customer base of 298, 105, and 83, respectively, for our warehousing and logistics services. For the six months ended December 31, 2024 and 2023, we had total revenue of $93.6 million and $83.2 million, and net loss of $6.3 million and net income of $6.5 million, respectively. While we do not have any subsidiaries, assets, or employees in the PRC, we generate a significant portion of our revenue from customers based in China. During the six months ended December 31, 2024 and 2023, we generated approximately 86% and 96% of our revenue from PRC-based customers, respectively. 21 Results of Operations The following table outlines our consolidated statements of operations for the three and six months ended December 31, 2024 and 2023: For Three Months Ended December 31, 2024 For Three Months Ended December 31, 2023 For Six Months Ended December 31, 2024 For Six Months Ended December 31, 2023 US$ US$ US$ US$ Revenue 51,143,682 42,004,083 93,625,578 83,249,928 Costs of sales 50,660,690 34,326,234 96,749,376 70,345,647 Gross profit 482,992 7,677,849 (3,123,798 ) 12,904,281 Operating costs and expenses: General and administrative 2,659,156 2,919,547 6,327,981 4,827,703 Total operating costs and expenses 2,659,156 2,919,547 6,327,981 4,827,703 Income (loss)from operations (2,176,164 ) 4,758,302 (9,451,779 ) 8,076,578 Other (income) expenses: Other income, net (564,656 ) (446,179 ) (1,770,321 ) (988,394 ) Loss on disposal of assets 43,625 — 43,625 — Finance costs 79,989 13,351 88,997 26,738 Total other (income) expenses (441,042 ) (432,828 ) (1,637,699 ) (961,656 ) Income before provision for income taxes (1,735,122 ) 5,191,130 (7,814,080 ) 9,038,234 Current income tax expense — 1,229,121 — 1,878,426 Deferred income tax expense (recovery) (75,882 ) 217,184 (1,506,969 ) 660,207 Total income tax expenses (75,882 ) 1,446,305 (1,506,969 ) 2,538,633 Net income (loss) (1,659,240 ) 3,744,825 (6,307,111 ) 6,499,601 Total comprehensive income (1,659,240 ) 3,744,825 (6,307,111 ) 6,499,601 Basic & diluted net earnings per share (0.04 ) 0.09 (0.15 ) 0.16 Weighted average number of shares of common stock-basic and diluted 41,642,442 40,000,000 41,638,221 40,000,000 22 Revenue, costs of sales, and gross profit margin The following table sets forth our revenue for the three and six months ended December 31, 2024 and 2023: For the Three Months Ended December 31, 2024 For the Three Months Ended December 31, 2023 For the Six Months Ended December 31, 2024 For the Six Months Ended December 31, 2023 US$ US$ US$ US$ Revenue 51,143,682 42,004,083 93,625,578 83,249,928 Costs of sales 50,660,690 34,326,234 96,749,376 70,345,647 Gross profit (loss) 482,992 7,677,849 (3,123,798 ) 12,904,281 Gross profit (loss) margin % 0.9 % 18.3 % -3.3 % 15.5 % The following table outlines the compositions of our revenue streams: For the Three Months Ended December 31, 2024 For the Three Months Ended December 31, 2023 For the Six Months Ended December 31, 2024 For the Six Months Ended December 31, 2023 US$ US$ US$ US$ Transportation services 36,127,069 29,901,184 64,617,825 59,639,714 Warehousing services 15,010,370 11,945,232 28,984,064 23,234,845 Other services 6,243 157,667 23,689 375,369 Total 51,143,682 42,004,083 93,625,578 83,249,928 Three Months Ended December 31, 2024 and 2023 Our revenue increased by $9.1 million, or 21.8%, to $51.1 million during the three months ended December 31, 2024, compared to $42.0 million for the same period in 2023. The increase was due to the following factors: 1) Revenue from our transportation services increased by $6.2 million, or 20.8%, due to the addition of new warehouse locations, which has enabled an increase in shipment volume compared to the same period in the 2023. 2) Revenue from our warehousing services increased by $3.1 million, or 25.7%, driven by the addition of new warehouses acquired in the last fiscal quarter. 3) Revenue from other services decreased by $0.2 million, or 96%. 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 $16.3 million, or 47.6%, during the three months ended December 31, 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 Six Months Ended December 31, 2024 and 2023 Our revenue increased by $10.4 million, or 12.5%, to $93.6 million during the six months ended December 31, 2024, compared to $83.2 million for the same period in 2023. The increase was due to the following factors: 1) Revenue from our transportation services increased by $5.0 million, or 8.3%, due to due to the addition of new warehouse locations, which has enabled an increase in shipment volume compared to the same period in the 2023. 2) Revenue from our warehousing services increased by $5.7 million, or 24.7%, driven by the addition of new warehouses acquired in the last fiscal quarter. 3) Revenue from other services decreased by $0.4 million, or 93.7%. 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 $26.4 million, or 37.5%, during the six months ended December 31, 2024, compared with the same period in 2023. The increase was driven by two main factors. First , there was a rise in freight expenses due to higher UPS shipping charges. Second , lease expenses, employee salary and benefits, and temporary labor costs increased as we expanded our warehouse and operations team to support growth. The following table sets forth a breakdown of our costs of sales for the three months and six months ended December 31, 2024 and 2023: For the Three Months Ended December 31, 2024 For the Three Months Ended December 31, 2023 For the Six Months Ended December 31, 2024 For the Six Months Ended December 31, 2023 US$ US$ US$ US$ Amortization 8,830 8,830 17,659 17,659 Depreciation 707,122 417,180 1,182,223 786,466 Lease expenses 8,943,724 6,400,215 18,050,328 13,203,955 Freight expenses 28,715,466 20,416,139 54,421,945 42,893,684 Port handling and customs fees 189,143 168,847 341,888 319,091 Salary and benefits 2,509,610 1,846,834 5,074,473 3,461,173 Temporary labor expenses 6,230,201 3,319,464 11,951,127 6,280,614 Warehouse expenses 2,240,217 1,079,247 4,299,328 2,467,978 Utilities 245,877 116,196 475,097 259,974 Other expenses 870,500 553,282 935,308 655,053 Total 50,660,690 34,326,234 96,749,376 70,345,647 24 Three Months Ended December 31, 2024 and 2023 Our freight expenses, lease expenses (primarily warehouse operating lease expenses), temporary labor expenses, warehouse expenses, and salary and benefits increased significantly by $8.3 million, $2.5 million, $2.9 million, $1.2 million and $0.7 million, respectively, during the three months ended December 31, 2024, compared to the same period in 2023. The increases in lease expenses were due to the additional operating leases acquired in the last and current fiscal quarter. The increases in freight expenses were due to the increase in UPS expenses. The increases in temporary labor expenses, warehouse expenses, and salary and benefits were due to the expansion of the warehouse operations. Our overall gross profit margin decreased from 18.3% for the three months ended December 31, 2023 to 0.9% 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. Six Months Ended December 31, 2024 and 2023 Our freight expenses, lease expenses (primarily warehouse operating lease expenses), temporary labor expenses, warehouse expenses, and salary and benefits increased significantly by $11.5 million, $4.8 million, $5.7 million, $1.8 million and $1.6 million, respectively, during the six months ended December 31, 2024 compared to the same period in 2023. The increases in lease expenses were due to the additional operating leases acquired in the last and current fiscal quarter. The increases in freight expenses were due to the increase in UPS expense. The increases in temporary labor expenses, warehouse expenses, and salary and benefits were due to the expansion of the warehouse operations. Our overall gross profit (loss) margin decreased from 15.5% for the for the six months ended December 31, 2023 to (3.3%) for the same period in 2024, primarily due to the increase of the surcharge by UPS and the decreases in customer order volume, as well as some of the recently leased warehouses that are not fully utilized. Operating expenses Our operating expenses consist primarily of general and administrative expenses. The following table sets forth a breakdown of our general and administrative expenses for the three and six months ended December 31, 2024 and 2023: For the Three Months Ended December 31, 2024 For the Three Months Ended December 31, 2023 For the Six Months Ended December 31, 2024 For the Six Months Ended December 31, 2023 US$ US$ US$ US$ Bank charges 12,727 34,565 53,117 49,543 Amortization 55,808 68,726 108,247 132,806 Office expenses 351,217 668,101 1,605,056 1,310,579 Professional fees 846,705 47,388 1,233,968 113,563 Rental expenses 105,670 84,818 219,024 201,806 Repairs and maintenance 82,682 270,676 421,750 432,776 Salary and benefits 820,963 1,262,996 2,002,243 2,239,990 Sundries 111,252 23,653 158,997 36,460 Tax and licenses 72,405 123,221 139,860 167,468 Vehicle expenses 29,607 2,820 63,245 98,488 Other expenses 68,693 21,808 94,111 68,787 Credit loss expenses (recovery) 101,427 310,775 228,363 (24,563 ) Total 2,659,156 2,919,547 6,327,981 4,827,703 25 Three Months Ended December 31, 2024 and 2023 Our general and administrative expenses decreased by $0.2 million, or 9%, from $2.9 million for the three months ended December 31, 2023 to $2.7 million for the same period in 2024. The increase was due to the net of the following factor: 1) Professional fees increased by $0.8 million, or 1,686.7%, mainly due to fees for the consulting services of an investment financial advisor. 2) Office expenses decreased by $0.3 million, or 47.4%, mainly due to the large insurance refund received during the period. 3) Salary expenses decreased by $0.4 million, or 35.0%, mainly due to a decrease in bonus payout, a lower salary range adjustment for one employee and the resignation of several employees during the period. 4) Credit loss expenses decreased by $0.2 million, or 67.4%, mainly due to the better receivable collection (low loss rate) during the period. Six Months Ended December 31, 2024 and 2023 Our general and administrative expenses increased by $1.5 million, or 31%, from $4.8 million for the three months ended December 31, 2023 to $6.3 million for the same period in 2024. The increase was due to the following factors: 1) Office expenses increased by $0.3 million, or 23%, mainly due to an increase in general insurance associated with the rapid expansion of our business. 2) Professional fees increased by $1.1 million, or 987%, mainly due to the fees for the consulting services of an investment financial advisor and audit fees. Income Tax Our income tax expense decreased by $1.5 million for the three months ended December 31, 2024, compared to the same period in 2023, mainly due to the decrease in profit before tax by $6.9 million during the three months ended December 31, 2024. Our income tax expense decreased by $4.0 million for the six months ended December 31, 2024, compared to the same period in 2023, mainly due to the decrease in profit before tax by $17.0 million during the six months ended December 31, 2024. Net income (loss) As a result of the foregoing, our net (loss) income for the three months ended December 31, 2024 was $(1.7) million, compared with the net income of $3.7 million for the same period in 2023, representing a decrease by $5.4 million. Our net (loss) income for the six months ended December 31, 2024 was $(6.3) million, compared with the net income of $6.5 million for the same period in 2023, representing a decrease by $12.8 million. 26 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 proceeds from the Convertible Note. As of December 31, 2024 and June 30, 2024, we had cash and restricted cash of $7.4 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 financing activities. On November 25, 2024, we entered into the SEPA with the Investor, pursuant to which we have the right to sell to the Investor up to $50.0 million of our common stock. We believe that our current cash and cash generated from our financing activities will be sufficient to meet our current and anticipated working capital requirements and capital expenditures for at least the next 12 months. We may, however, need additional cash resources in the future if we experience changes in our business conditions or other developments. Cash Flows for the Six Months Ended December 31, 2024 and 2023 For the Six Months Ended December 31, 2024 For the Six Months Ended December 31, 2023 US$ US$ Net cash provided by (used in) operating activities (9,232,468 ) 3,494,935 Net cash used in investing activities (1,009,065 ) (3,948,594 ) Net cash provided by financing activities 7,669,896 911,415 Net increase (decrease) in cash and restricted cash (2,571,637 ) 457,756 Cash and restricted cash at beginning of six months period 9,950,384 6,558,099 Cash and restricted cash at end of six months period 7,378,747 7,015,855 We had a balance of cash and restricted cash of $7.4 million as of December 31, 2024, compared with a balance of $10.0 million as of June 30, 2024. During the six months ended December 31, 2024, changes in our cashflow were mainly due to the following activities: Operating Activities Net cash used in operating activities was $9.2 million for the six months ended December 31, 2024, compared to net cash provided by operating activities of $3.5 million for the same period in 2023, representing a $12.7 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 $6.3 million for the six months ended December 31, 2024. For the six months ended December 31, 2023, we had net income of $6.5 million, which led to a $12.8 million decrease in net cash inflow from operating activities. (ii) Changes in accounts receivable and other receivables were $6.0 million cash outflow for the six months ended December 31, 2024. For the six months ended December 31, 2023, changes in accounts receivable and other receivables were $7.7 million cash outflow, which led to a $1.7 million decrease in net cash outflow from operating activities. 27 (iii) Changes in accounts payable and accrued liabilities used $2.0 million net cash outflow for the six months ended December 31, 2024. For the six months ended December 31, 2023, changes in accounts payable and accrued liabilities provided net cash outflow of $2.0 million, which led to a $0.1 million decrease in net cash outflow from operating activities. (iv) Changes in tax payable provided used $0.1 million net cash outflow for the six months ended December 31, 2024. For the six months ended December 31, 2023, changes in tax payable provided net cash inflow of $1.7 million, which led to a $1.8 million decrease in net cash inflow from operating activities. (v) Changes in contract liabilities provided $1.0 million net cash inflow for the six months ended December 31, 2024. For the six months ended December 31, 2023, changes in contract liabilities used net cash outflow of $0.2 million, which led to a $1.2 million increase in net cash inflow from operating activities. (vi) Changes in non-cash items provided $4.4 million net cash inflow for the six months ended December 31, 2024. For the six months ended December 31, 2023, changes in non-cash items provided net cash inflow of $4.7 million, which led to a $0.3 million decrease in net cash inflow from operating activities. Investing Activities Net cash used in investing activities was $1.0 million for the six months ended December 31, 2024, primarily attributable to $2.1 million cash used for the purchase of property and equipment, $1.0 million cash used for loans extended to others, and $2.0 million proceeds received from loan repayments. For the six months ended December 31, 2023, net cash used in investing activities was $3.9 million, primarily attributable to $2.9 million cash used for the purchase of property and equipment and $1.0 million used for loans extended to others. Financing Activities For the six months ended December 31, 2023, we had net cash provided by financing activities of $0.9 million, which was primarily attributable to the net effects of: (i) $1.0 million collected from related parties for the repayments of loans we previously advanced to them; (ii) $0.3 million used for expenses relating to the initial public offering; (iii) $0.1 million used to repay finance lease liabilities; and (iv) $0.3 million in capital contributions from stockholders. For the six months ended December 31, 2024, we had net cash provided from financing activities of $7.7 million, which was primarily attributable to the net effects of: (i) $0.4 million repayment related parties; (ii) $8.1 million of net proceeds from the Pre-Paid Advance under the SEPA. Commitments and Contractual Obligations As of December 31, 2024, we had operating and finance leases for office space, warehouse space, and forklifts. Lease terms expire at various dates through February 2025 to November 2034 with options to renew for varying terms at our sole discretion. We have not included these options to extend or terminate in the calculation of ROU assets or lease liabilities, as there is no reasonable certainty, as of the date of this Quarterly Report, that these options will be exercised. 28 As of December 31, 2024, maturities of lease liabilities for each of the following fiscal years ending June 30 and thereafter were as follows: Operating Finance US$ US$ 2025 12,261,677 86,699 2026 28,442,219 129,332 2027 30,055,170 61,194 2028 31,108,699 5,866 2029 and beyond 56,070,308 - Total minimum lease payment 157,938,073 283,091 Less: imputed interest (42,743,595 ) (30,150 ) Total lease liabilities 115,194,478 252,941 Less: current potion (25,021,785 ) (117,500 ) Non-current portion 90,172,693 135,441 Other than the above leases, we did not have significant commitments, long-term obligations, or guarantees as of December 31, 2024. Off-balance Sheet Commitments and Arrangements Other than three standby letters of credit with Eastwest Bank in the aggregate amount of $2,259,932, 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 December 31, 2024, we still have unused credit of $2,259,932 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. 29 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 December 31, 2024 and June 30, 2024, the historical cost of property and equipment was $16,736,612 and $14,773,842, respectively. We recorded depreciation expenses of $1,216,422 and $919,272 during the six months ended December 31, 2024 and 2023, respectively. Specifically, $1,108,175 and $786,466 of the depreciation expenses were recorded in costs of sales for the six months ended December 31, 2024 and 2023, respectively, $108,247 and $132,806 of the depreciation expenses were recorded in general and administrative expenses for the six months ended December 31, 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.