Item 5. Market for Registrant’s Common Equity
ITEM
5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
We
have our common stock listed on the Nasdaq Capital Market under the symbol “INHD”.
Holders
As
of January 11, 2024, there were approximately 4 stockholders of record of our common stock. The actual number of stockholders is
greater than this number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street
name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust
by other entities.
Dividend
Policy
We
have not declared any cash dividends since inception, and we do not anticipate paying any dividends in the foreseeable future. Instead,
we anticipate that all of our earnings will be used to provide working capital, to support our operations, and to finance the growth
and development of our business. The payment of dividends is within the discretion of the Board and will depend on our earnings; capital
requirements; financial condition; prospects; applicable Texas law, which provides that dividends are only payable out of surplus or
current net profits; and other factors our Board might deem relevant. There are no restrictions that currently limit our ability to pay
dividends on our common stock other than those generally imposed by applicable state law.
Transfer
Agent
VStock
Transfer, LLC., 18 Lafayette Place, Woodmere, New York 11598.
Recent
Sales of Unregistered Securities
During
the period from October 1, 2022 to September 30, 2023, we have granted or issued the following securities that were not registered under
the Securities Act:
(a) Issuance
of common stock.
● On
December 3, 2022, the Company issued 142,857 shares of its common stock, on a pre-reverse stock split basis, to an accredited
investor at $3.5 per share for $500,000 in cash.
● On
March 13, 2023, the Company issued 27,028 shares of its common stock, on a pre-reverse stock split basis, to an accredited investor
at $3.7 per share for $100,000 in cash.
● On
April 25, 2023, The Company issued 78,947 shares of its common stock, on a pre-reverse stock split basis, to an accredited investor
at $3.80 per share for $300,000 in cash.
● On
June 20, 2023, the Company issued 13,158 shares of its common stock, on a pre-reverse stock split basis, for a total value of
$50,000 for services to be rendered during next twelve months by the immediate relative of
the Company’s Chief Financial Officer.
● On
June 20, 2023, the Company issued 19,737 shares of its common stock, on a pre-reverse stock split basis, for a total value of
$75,000 for services to be rendered during next twelve months by one nonemployee contractor.
These shares were valued at $3.8 per share.
20
● On
July 24, 2023, the Company issued 13,514 shares of its common stock to an accredited investor
for no additional consideration following the Company’s previously disclosed reverse
stock split.
● On
July 24, 2023, the Company issued 39,473.50 shares of its common stock to an accredited investor
for no additional consideration following the Company’s previously disclosed reverse
stock split.
● On
July 24, 2023, the Company issued 6,579 shares of its common stock to an accredited investor
for no additional consideration following the Company’s previously disclosed reverse
stock split.
● On
July 24, 2023, the Company issued 9,868.50 shares of its common stock to an accredited investor
for no additional consideration following the Company’s previously disclosed reverse
stock split.
● On
July 24, 2023, the Company issued 71,428.50 shares of its common stock to an accredited investor
for no additional consideration following the Company’s previously disclosed reverse
stock split.
The
issuance of the common stock in private placements was deemed exempt from registration under Section 4(a)(2) of the Securities Act or
Regulation D promulgated thereunder in that the issuance of securities were made to an accredited investor and did not involve a public
offering. The recipient of such securities represented its intention to acquire the securities for investment purposes only and not with
a view to or for sale in connection with any distribution thereof.
(b) Warrants.
● On
December 18, 2023, the Company issued warrants to AC Sunshine Securities LLC, the underwriter
of its IPO (as defined below), to purchase up to 201,250 shares of common stock at an exercise price of $4.80
per share.
Use
of Proceeds from our Initial Public Offering of Common Stock
On
December 18, 2023, we closed our initial public offering (the “IPO”), in which we sold and issued 2,500,000 shares of
our common stock at a price to the public of $4.00 per share. We received approximately $7,859,533 in aggregate net proceeds from
our IPO after deducting underwriting discounts and commissions and other offering expenses. AC Sunshine Securities LLC was the
underwriter of our IPO.
The
offer and sale of all of the shares of our common stock in our IPO were registered under the Securities Act pursuant to a registration
statement on Form S-1 (File No. 333-273429), which was declared effective by the SEC on November 9, 2023.
As
of January 11, 2023, we have used approximately $0.9 million of the net proceeds from our IPO for working capital and general corporate
purposes. There has been no material change in our planned use of the net proceeds from our IPO as described in our final prospectus
filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on December 4, 2023.
Purchases
of Equity Securities
Neither
we nor any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) of the Exchange Act, purchased any of our equity securities
during the period covered by this annual report.
Securities
Authorized for Issuance Under Equity Compensation Plans.
The
information required by this Item regarding equity compensation plans is incorporated by reference to the information set forth in Item
12 of this Annual Report on Form 10-K.
21
ITEM
6. [RESERVED]
ITEM
7. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated
financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated
financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward-looking statements as a result of various factors, including
those set forth under the heading “Cautionary Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.
Overview
We
are a building technology company that primarily manufactures cold-formed-steel members and offers a full range of services required
to transform raw materials into precise steel framing products and prefabricated homes. We transform raw material (coils of rolled steel
of various gauges and other materials) through our proprietary technologies to cut, punch and bend the steel into members or other components.
These work-in-process components are further processed into finished products which are used in a variety of building types, including
residential, commercial, industrial, and infrastructure. At each stage of the process, we are adding value to the original rolled steel
(and other materials) to its final assembled use by businesses or directly to customers.
Our
largest commodity expense is our primary raw material — rolled steel in various gauges and widths. Like any commodity, steel is
subject to supply/demand-based price fluctuations which can have an impact on the profitability of our business if prices change between
the time we enter into a contract with a customer to deliver finished goods and the time the steel is purchased from the mill. We seek
to mitigate our exposure to steel price fluctuations in two ways:
●
Entering fixed price forward
contracts with steel mills/suppliers for delivery in the future so that our bids for customer contracts have known pricing for the
steel. This is particularly useful in larger projects that involve delivery of product over many months.
●
Maintaining an approximately
three-month inventory of our most actively used rolled steel coils (defined by width and gauge). This inventory requires an active
forward-looking assessment of steel needs to meet expected demand. Maintaining inventory is a real financial exposure especially during
periods of pricing volatility.
Key
Performance Indicators (“KPIs”)
In
addition to the measures presented in our consolidated financial statements, our management regularly monitors certain KPIs for our business.
The KPIs used by the Company include:
The
capital turnover rate of raw-material procurement
Our
business is reliant on timely delivery of raw materials. At the same time, our primary raw material (steel) is expensive to warehouse.
We strive to achieve roughly 1-3 months of raw materials inventory to balance our cost of inventory against the risk of not having raw
materials when needed. We do this by setting up long-term cooperative relationship with multiple local and national suppliers, including
the mills, so that we will gain a better payment cycle to secure the raw material, to maximize the usage of the funds. At the same time,
to match the raw-material usage of the sales order each quarter, we will make the quarterly purchase plans ahead, so that the efficiency
of capital turnover is higher.
22
The
collection period of accounts receivable
Timely
payments from customers are essential to a successful business. Based on our historical collectability experience, we will seek to gradually
eliminate the types of small-size homebuilders and cooperate with large-size and professional companies to strengthen risk control of
accounts receivable and shorten the days outstanding for accounts receivable. Eventually, we expect to achieve the goal of receiving
100% of the payment before products leave the shop.
Lead
time
Construction
requires the coordination of many contractors, subcontractors, permitting, etc. that must be done on very exacting schedules where any
delays will have a ripple effect down the chain. While there are many things we cannot control, we strive to communicate with the customers
at a high frequency and make the best production arrangement to minimize storage period and shorten the lead time, which is one of the
most important operating indicators of INNO.
The
growth of total operating income
We
maintain internal long-term targets for both gross profit and operating income, based partly on long-term revenue growth targets and
partly on execution and internal controls. Ultimately, we strive to deliver profitable long-term growth.
Production
capacity improvement
We
are committed to investing in the improvement of production capacity and production efficiency in an effort to support larger orders
and to meet the goal of increasing total operating income.
Results
of Operation
For
the years ended September 30, 2023, and 2022
The
following table presents certain Consolidated statement-of-operations information and presentation of that data as a percentage of change
from year to year.
For the Years Ended September 30,
2023
2022
Variance
Revenues
$ 799,747
$ 4,252,568
-81 %
Revenues– related party
-
250,000
-100 %
TOTAL REVENUES
799,747
4,502,568
-82 %
Costs of materials and labor
1,255,315
3,031,588
-59 %
Selling, general and administrative expenses (exclusive of depreciation and bad debt expenses shown
separately below)
2,191,043
2,247,820
-3 %
Depreciation
69,437
33,138
110 %
Bad debt expense
1,267,960
-
100 %
Operating loss
(3,984,008 )
(809,978 )
392 %
Other income (expenses)
(39,196 )
(310,114 )
-87 %
Loss before income taxes
(4,023,204 )
(1,120,092 )
259 %
Income tax expense
-
9,915
-100 %
Net loss
(4,023,204 )
(1,130,007 )
256 %
Non-controlling interest
(127,426 )
(121,345 )
5 %
Net loss attributable to INNO HOLDINGS INC.
$ (3,895,778 )
$ (1,008,662 )
286 %
Operating loss % of revenues
(498 )%
(18 )%
Net loss % of revenues
(503 )%
(25 )%
23
Revenues
Revenue
for the fiscal year ended September 30, 2023 declined 82% to $799,747 in comparison to $4,502,568 for the fiscal year ended September
30, 2022. The decline in revenue primarily resulted from a decrease in customer construction activity, a decline in the number of customers,
to 24 in the fiscal year ended September 30, 2023 from 48 in fiscal year 2022, and a decline in the average size of projects, which resulted
in a decline in average revenue per customer to $33,323 in the fiscal year ended September 30, 2023 from $93,804 in the fiscal year ended
September 30, 2022. We had nine repeat customers in the year ended September 30, 2023 compared to the year ended September 30, 2022.
Our
backlog as of September 30, 2023 was approximately $14,000,000 to $19,000,000. The range of backlog amount is comprised of all
remaining payments related to our signed customer contracts and estimation of order adjustments. We expect revenue from these
contracts to be realized within next 24 months. These signed contracts included an agreement in the amount of $15,875,800 with
Vision Opportunity Fund LP, assigned to Vision 101 LLC (“Vision 101”), which is partially owned by one of our minority
shareholders. None of the contract amount has been delivered to Vision 101 or recognized as revenue during the fiscal year ended
September 30, 2023.
Our
revenues are significantly impacted by demand for residential and commercial buildings, economic conditions including interest rates
and costs of labor, materials and other variables that impact the cost of our finished goods. We cannot ensure that growth will continue,
and our business may be adversely affected by negative overall economic conditions currently being experienced.
Costs
of Materials and Labor
Costs
of materials and labor include raw materials (primarily rolled steel) and direct labor in the processing of raw materials through the
manufacturing process. Fluctuations in raw materials pricing and production volume can have an impact on our costs as indicated in the
table below, with raw steel contributing between approximately 40% of the cost of goods sold and 61% of the cost of goods sold, depending
on price and volume.
Costs
of materials and labor for the fiscal year ended September 30, 2023, declined 59% to $1,255,315 in comparison to $3,031,588 for the fiscal
year ended September 30, 2022. The decrease was primarily due to the sharp year-over-year decline in revenue, as discussed above. The
revenue decline exceeded the cost reduction, partly because some fixed costs are not declined along with the revenue and some expenses
were incurred for long-term projects that are not eligible for revenue recognition in the current year.
While
the Company seeks to minimize the impact of fluctuations of steel prices by advance purchases of steel tied to the price to be paid by
customers in their contracts, available capital resources has limited our ability to make advance purchases to about three months of
supply, which has left us with some exposure to supply price changes. Among the uses of proceeds from our IPO, the Company intends
to extend the number of months of supply to match the expected need for raw materials of purchases under contract.
Steel Price Sensitivity Analysis
Steel Price
Steel as % of COGS
Variance
Low Volume
High Volume
(20)%
40%
51%
(10)%
43%
54%
0
45%
57%
10%
48%
59%
20%
50%
61%
Table
Notes: “Low Volume” assumes three tons of steel material used per one eight-hour shift; “High Volume” assumes
seven tons of steel material used per shift. Steel price variance assumes a baseline price of $1,200 per U.S. ton.
24
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses for the fiscal year ended September 30, 2023, decreased 3% to $2,191,043 in comparison to $2,247,820
for the fiscal year ended September 30, 2022. The decrease was primarily due to the decrease of nonemployee commission offset by the
increase of overhead to support long-term growth.
Bad
debt expense
Bad
debt expense increased by $1,267,960 for the fiscal year ended September 30, 2023 compared to the same period in 2022 due to the reserves
for doubtful accounts. We estimated the credit losses based on each customer’s financial situation, project status and the outstanding
days of the accounts receivable balance. Following table illustrates the allowance for credit losses related to each age group of receivables.
Aging Category
1 – 30 days
> 270 days
Total
Accounts receivable
$ —
$ 1,338,395
$ 1,338,395
Less: allowance for credit losses
—
(1,267,960 )
(1,267,960 )
Accounts receivable, net
$ —
$ 70,435
$ 70,435
At
the beginning of our 2023 fiscal year, we started to strengthen our risk control of accounts receivable and reduce the days outstanding
for accounts receivable by discontinuing business with smaller customers with high credit risk. Most of our current customers adhere
to a 30-day payment term. For the current year’s transactions, we have maintained a high collection rate. For aged outstanding
balances, we assessed the provision for credit loss based on the aging groups, each customer’s business and project status, contractual
term, and financial situation. We reserved 95% of the balance that is aged over nine months. Below, we have summarized the nature of
our current collection issues:
A.
We were notified that the
ownership of one of our projects had been transferred in the middle of construction. We had collection issues from the former owner
and reserved approximately $0.5 million credit losses accordingly.
B.
As a subcontractor to provide
the designing service and prefab products, we recognize the revenue upon completion of our performance obligations. However, there
are two projects that had been significantly changed during the later stage of construction, our delivered services and prefab products
had been replaced. We are experiencing difficulties in collecting payment for the services rendered and prefab products delivered.
The related balance of approximately $0.3 million has been reserved as credit losses.
C.
We were notified that several
customers have cash flow issues and are facing challenges in securing loans. We are experiencing difficulties in collecting payment
for the services rendered and prefab products delivered. We assessed the customers’ financial situation and reserved approximately
$0.4 million as credit losses.
We
continue to monitor our accounts receivable balances and limit small-size homebuilders and cooperate with large-size and professional
companies to strengthen risk control of accounts receivable and shorten the days outstanding for accounts receivable.
Operating
Loss
Operating
loss was $3,984,008 for the fiscal year ended September 30, 2023, in comparison to operating loss of $809,978 for the fiscal year ended
September 30, 2022. The increased loss was primarily attributed to lower revenue and increased expenses, as discussed above.
25
Other
Income (Expense)
Other
expenses for the fiscal year ended September 30, 2023, were $39,196, in comparison to other expenses of $310,114 for the fiscal year
ended September 30, 2022. The decrease in expense was primarily related to stock compensation expense recorded for the fiscal year ended
September 30, 2022.
Net
Loss
Net
loss for the fiscal year ended September 30, 2023 was $4,023,204, in comparison to net loss of $1,130,007 for the fiscal year ended September
30, 2022. The year-over-year increase in net loss was primarily due to changes in revenue, costs and expenses as outlined above, including
lower year-over-year revenue, occurred bad debt expenses and higher expenses as a result of the increase of headcounts and our public
filing process.
Key
Factors That Affect Operating Results
The
following are factors that affect our operating results.
●
Acquisition of new (large
size) builders, developers, and other types of customers and assisting them to complete the structural design and engineering more
efficiently.
●
Consistently providing value-added
professional services for our customers, saving costs, and shortening construction periods to win more loyal customers.
●
Maintaining technological
leadership, competitive prices, and other advantages over competitors.
●
Consistent investment in
automation and other systems to improve efficiencies required to improve margins.
●
Investment in employees in
an effort to efficiently manage operations, finances, and other corporate efforts.
●
Demand for residential and
commercial buildings can be substantially impacted by the cost of borrowing money. Recent increases in interest rates and recessionary
fears have slowed building activities. However, we believe demand for affordable housing remains stable. Builders in this segment are
driven to seek breakthroughs and optimization in terms of cost and lead time, which we believe may benefit INNO.
Our
Ability to Create Value for Our Users and Generate Revenue
Our
ability to create value for our users and generate our revenues from merchants is driven by the factors described below:
●
Our competitors include traditional
wood framing, competing steel framing solutions, and other building techniques, as well as prefab homes and prefabricated building
components. With respect to framing solutions, we expect cost savings, quality, and construction efficiency over our competitors to
be the main driver of outperformance for INNO. For prefab homes and components, we differentiate through modern design, high quality,
technology innovation, and affordability, and we believe our product is differentiated in this large and growing market space.
●
From applying AI design technology,
innovation of new products, and exploration of new materials, to developing a whole new structural system, we provide customers with
the most optimized solutions and LGS framing, which can lead to lower costs and construction times.
●
Our steel framing products
are formed by automated CNC production lines. We currently own five automatic production lines that can cover 3 ⅝ ”
to 12 ” studs/tracks of different thickness ranging from 25 gauge to 12 gauge. We believe our lead time is faster than
other traditional suppliers.
26
Inflation,
Supply Chain Disruption, and Price Fluctuations
Inflationary
pressures of the past year, as evidenced by rising interest rates and cost of living indices, have had a direct impact on all aspects
of our business from the cost of the raw materials we use to the demand for our finished goods. While we have no control over the decisions
our customers make of whether to move forward with construction projects in the face of recessionary fears, we endeavor to limit our
exposure by carefully managing our steel purchases to match expected demand and maintaining a flexible as-needed work force.
While
steel material remains more expensive than wood on an absolute basis, we believe demand for our steel framing products will continue
to grow due to significant advantages, including lower construction times (shorter time to building completion, lower labor costs), higher
quality (limited waste, true and straight walls, durability), and insurance savings. We saw evidence of this in the fiscal year ended
September 30, 2022, when steel prices increased sharply (price increases peaked at +143% year to year), yet demand remained strong, and
our revenue grew approximately 50% year to year. We also note that steel and softwood price changes tend to track reasonably closely
over time, which held even through the pandemic (see figure below). We believe this suggests that our steel framing products will likely
remain competitive with wood framing, even in periods of high price volatility.
Steel
Mill Products and Softwood Pricing Trends, 2018-2022
Source:
U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: Lumber and Wood Products:
Softwood Lumber [WPS0811], retrieved from
FRED, Federal Reserve Bank of St. Louis, and Metals and Metal
Products: Steel Mill Products [WPU1017], retrieved from FRED, Federal Reserve
Bank of St. Louis.
The
supply chain covers material sourcing, logistics, and macroeconomic factors.
●
INNO is a technology-based
manufacturing company, with all manufacturing operations currently based in the U.S. We currently source our steel from U.S.-based
steel mills, which greatly reduces our exposure to global supply chain concerns; however, we may in the future source steel from other
countries. We may also source other materials internationally from time-to-time to ensure we maintain an efficient cost profile.
●
Timely transportation of
our inbound raw materials and outbound finished goods are critical to our operations and meeting our obligations to our customers.
We are exposed to the overall shortage in capacity in the transportation industry including the well-publicized driver shortage and
volatile fuel price. We have mitigated some of the transportation shortages and maintained high service levels by having one company-owned
truck and may add more if demand warrants it.
●
An additional innovation
aiding in our logistics strategy, is our patent-pending Mobile Factory. Our Mobile Factory can be transported to the jobsite for production.
Once launched, our Mobile Factory can greatly reduce the logistic costs of all or a portion of finished products produced at the factory.
27
Impact
of Global Conflicts and Uncertainties
The
conflict between Russia and Ukraine continues to affect economic and global financial markets. The effects of the conflict have contributed
to other ongoing economic challenges such as global supply-chain disruptions, labor shortages, inflation, and cybersecurity attacks,
creating a challenging business environment for all industries. While we have not been materially affected by the conflict or these other
economic challenges, future unpredictable and uncertain events and the protentional for future global conflicts could impact the Company.
We continue monitor developments in the Russia-Ukraine conflict and evaluate our supply chain to mitigate any effects on our business,
which includes currently sourcing all of our steel from the U.S.
We
currently source all of our steel within the U.S. and ensure that the steel coils we source meet U.S. standards. We may source steel
and other materials internationally to ensure a favorable cost profile. Our robust supply chain efforts help ensure consistent quality
standards are met.
Impact
of COVID-19 and Any Future Pandemic
At
this time the COVID-19 pandemic and shutdowns related to additional outbreaks have not had a material effect on our business. However,
the pandemic continues to affect energy prices, inflation, labor supply, the global supply chain and capital resources. Future impacts
related the pandemic remain uncertain and could have an adverse effect on our business, including with regard to the Company’s
ability to acquire raw materials used in our finished goods at sufficiently low prices, find and hire qualified employees, and access
capital.
We’ve
taken our previous experiences operating during the pandemic and related shutdowns and used them to implement strategies to ensure our
continued success. We have adapted to the ongoing COVID-19 pandemic in order to continue functioning. This has included implementing
safety protocols and flexible remote work.
Our
supply chain has not been significantly impacted by the recent COVID-19 pandemic since we source raw materials locally which helps reduce
lead times and minimize risk of disruptions. We also attempt to keep a safety stock of raw material inventory which can help to ensure
that we have enough product on hand to meet urgent demand even if there are unexpected delays or disruptions in supply chain.
Liquidity
and Capital Resources
Sources
of Liquidity
During
the years ended September 30, 2023, and 2022, we primarily funded our operations with cash generated from operations, sale of equity,
as well as through borrowing under our revolving line of credit, a long term promissory note, and related parties. See Note 9, Note 10
and Note 12 to the consolidated financial statements for details. We had cash of $4,898 as of September 30, 2023 compared to $50,628
of cash as of September 30, 2022. The cash decrease was primarily the result of the increase in net cash used by operating activities
and purchase of equipment in the fiscal year ended September 30, 2023.
The
Company has participated in several private-placement offerings. On December 3, 2022, we closed on a private-placement offering pursuant
to which we sold to an accredited investor an aggregate of $500,000 in common stock, at a purchase price of $3.50 per share. On March
13, 2023, we closed on a private-placement offering pursuant to which we sold to an accredited investor an aggregate of $100,000 in common
stock, at a purchase price of $3.70 per share. On March 29, 2023, we closed on a private-placement offering pursuant to which we sold
to an accredited investor an aggregate of $300,000 in common stock, at a purchase price of $3.80 per share. The offerings were completed
pursuant to an exemption from registration under Rule 506(b) of the Securities Act of 1933, as amended.
We
do not believe the cash and cash equivalents on hand as of September 30, 2023 of $4,898 will be sufficient to fund its operations and
capital expenditure requirements for the next twelve months from the date the consolidated financial statements are issued. We will be
required to raise additional capital to continue to fund operations and capital expenditures. As previously disclosed, on December 18,
2023, the Company successfully closed the IPO with gross proceeds of $10 million. The management has concluded that
substantial doubt is not alleviated regarding the Company’s ability to continue as a going concern for 12 months from the date
of issuance of these financial statements. We will be required to raise additional capital to continue to fund operations and capital
expenditure. The uncertainties surrounding our ability to access capital when needed creates substantial doubt about our ability to continue
as a going concern.
28
Based
on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion concerning
the presentation of our financial statements on a going concern basis in the notes to our consolidated financial statements and our independent
public accountants have included a similar discussion in their opinion on our financial statements through September 30, 2023. We will
be required in the near future to issue debt or sell our Company’s equity securities in order to raise additional cash, although
there are no firm arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be
able to secure the necessary financing, or the terms of any such financing transaction if one were to occur. The failure to secure such
financing could severely curtail our plans for future growth or in more severe scenarios, the continued operations of our Company.
Working
Capital
As
of September 30, 2023 and 2022, our working (deficit) capital was $(2,913,827) and $378,782, respectively. The historical seasonality
in our business during the year can cause cash and cash equivalents, inventory, and accounts payable to fluctuate, resulting in changes
in our working capital.
Cash
Flows
Operating
Activities
Net
cash used in operating activities for the years ended September 30, 2023, and 2022 was $1,225,941 and $1,717,819, respectively. The decrease
was mainly due to the combination of an increase in loss of $2.9 million offset by an increase of non-cash reconciling items of $1.1
million and a decrease in working capital consumption of $2.3 million.
For
the year ended September 30, 2023, net cash used in operating activities was $1.2 million, primarily driven by the net loss of
$4.0 million, partially offset by non-cash items, which mainly included bad debt expense of $1.3 million. Working capital provided
cash of $1.4 million, which was primarily driven by a $1.3 million increase in accounts payable, unearned revenue and other current
liabilities, a $0.6 million decrease in account receivable and account receivable -related party, a $0.1 million decrease of
prepayments and other current assets, and partially offset by a $0.5 million increase in deferred offering costs and a $0.1 million
increase in inventories.
For
the year ended September 30, 2022, net cash used in operating activities was $1.7 million, primarily driven by the net loss of $1.1 million,
partially offset by non-cash items, which mainly included stock compensation expense of $0.3 million. Working capital consumption of
$0.9 million, which was primarily driven by a $1.4 million increase in account receivable and account receivable -related party, a $0.2
million increase of prepayments and other current assets, and partially offset by a $0.7 million increase in accounts payable, unearned
revenue and other current liabilities.
Investing
Activities
For
the years ended September 30, 2023, and 2022, net cash used in investing activities was the result of additions to property and equipment
of $244,899 and $684,815, respectively, which are mainly related to the purchase of machinery, tools, motor vehicles, and leasehold improvements.
Financing
Activities
Net
cash provided by financing activities was $1,425,110 and $2,356,401, respectively, for the years ended September 30, 2023, and 2022.
The main reason for the decrease in net cash provided was primarily due to decrease in proceeds from shares sold for cash, short term loans and
long-term note and offset by the increase in proceeds from related parties during the year ended September 30, 2023.
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Critical
Accounting Policies and Estimate
We
prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States, or GAAP
and pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The preparation of consolidated
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In some cases, changes
in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially
from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition
and results of operations will be affected. We base our estimates on experience and other assumptions that we believe are reasonable
under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical
accounting policies, which we discuss further below. While our significant accounting policies are more fully described in note 2 to
our audited consolidated financial statements, we believe that the following accounting policies are critical to the process of making
significant judgments and estimates in the preparation of our audited consolidated financial statements.
Principles
of consolidation
The
consolidated financial statements include the accounts of the Company and its subsidiaries, Inno Metal Studs Corp, Castor Building Tech
LLC, and Inno Research Institute LLC. All intercompany balances and transactions have been eliminated.
Going
concern
The
Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet
its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as
may be required.
Our
consolidated financial statements have been prepared assuming that we will continue as a going concern. Such an assumption contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do
not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Management
is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale of the
Company’s products and services, management is also seeking to raise additional working capital through various financing sources,
including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms
to our Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue
our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially
adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless
of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional
funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences
or privileges senior to those of the current holders of our common stock.
Reverse
acquisition under common control
Effective
January 21, 2022, the Company acquired 100% of the common stock of Inno Metal Studs Corp (“IMSC”), a Texas corporation incorporated
on October 31, 2019. Pursuant to the terms of the Share Purchase Agreement with IMSC’s sole owner, Mr. Dekui Liu, who was also
the sole owner and CEO of the Company, the Company issued 15,170,000 shares of its common stock to Mr. Dekui Liu in exchange for his
100% ownership in IMSC. Upon completion of the transaction, IMSC became a 100% owned subsidiary of the Company. As such, Under ASC 805-40
and ASC 805-50, the transaction is a reverse acquisition between entities under common control, in which INNO HOLDINGS INC. is the accounting
acquiree and IMSC is the accounting acquirer. The assets, liabilities and operations of the two entities are combined at their historical
carrying amounts, with all historical periods adjusted as if the entities had always been combined. The consolidated financial statements
represent the continuation of the financial statements of IMSC except for its capital structure.
30
Accounts
receivable
During
the ordinary course of business, the Company extends unsecured credit to its customers. Accounts receivable are stated at the amount
the Company expects to collect from customers. Management reviews its accounts receivable balances each reporting period to determine
if an allowance for credit loss is required.
In
October 2020, the Company adopted ASU 2016-13, Topics 326 — Credit Loss, Measurement of Credit Losses on Financial Instruments,
which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss
(CECL) methodology, for its accounting standard for its trade accounts receivable.
The
Company continuously monitors the recoverability of accounts receivable. If there are any indicators that a customer may not make payment,
the Company may consider making a provision for non-collectability for that particular customer. At the same time, the Company may cease
further sales or services to such a customer. The following are some of the factors that the Company develops allowance for credit losses:
●
the customer fails to comply
with its payment schedule;
●
the customer is in serious
financial difficulty;
●
a significant dispute with
the customer has occurred regarding job progress or other matters;
●
the customer breaches any
of its contractual obligations;
●
the customer appears to be
financially distressed due to economic or legal factors;
●
the business between the
customer and the Company is not active; and
●
other objective evidence
indicates non-collectability of the accounts receivable.
The
adoption of the credit loss accounting standard has no material impact on the Company’s consolidated financial statements. Accounts
receivable are recognized and carried at carrying amount less an allowance for credit losses, if any. The Company maintains an allowance
for credit losses resulting from the inability of its customers to make required payments based on contractual terms. The Company reviews
the collectability of its receivables on a regular and ongoing basis. The Company has also included in calculation of allowance for credit
losses the potential impact of the COVID-19 pandemic on our customers’ businesses and their ability to pay their accounts receivable.
After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also considers
external factors to the specific customer, including current conditions and forecasts of economic conditions, including the potential
impact of the COVID-19 pandemic. In the event we recover amounts previously written off, we will reduce the specific allowance for credit
losses.
Revenue
recognition
The
Company has adopted Accounting Standards Codification (“ASC”) 606 since its inception and recognizes revenue from product
and service sales revenues, net of promotional discounts and return allowances, if any, when the following revenue recognition criteria
are met: a contract has been identified, separate performance obligations are identified, the transaction price is determined, the transaction
price is allocated to separate performance obligations and revenue is recognized upon satisfying each performance obligation. The Company
transfers the risk of loss or damage upon shipment, therefore, revenue from product sales is recognized when it is shipped to the customer.
Return allowances, which reduce product revenue by the Company’s best estimate of expected product returns, are estimated using
historical experience. For services, all sales are recognized upon completion based on terms stated in the sales agreements.
The
Company evaluates the criteria of ASC 606 — Revenue Recognition Principal Agent Considerations in determining whether it is appropriate
to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when the Company is
primarily responsible for fulfilling the promise to provide a specified good or service, the Company is subject to inventory risk before
the good or service has been transferred to a customer and the Company has discretion in establishing the price, revenue is recorded
at gross.
31
Payments
received prior to the delivery of goods to customers are recorded as customer deposits.
Sales
discounts are recorded in the period in which the related sale is recognized. Sales return allowances are estimated based on historical
amounts and are recorded upon recognizing the related sales. Shipping and handling costs are recorded as selling expenses.
Costs
and expenses
Costs
and expenses are operating expenses, which consist of costs of material and labor, selling, general and administrative expenses, and
depreciation, are expensed as incurred.
Inventory
Inventory
consists of material and finished goods ready for sale and is stated at the lower of cost or net realizable value. The Company values
its inventory using the FIFO costing method. The Company’s policy is to include as a part of cost of goods sold any freight incurred
to ship the product from its vendors to warehouses. Outbound freight costs related to shipping costs to customers are considered periodic
costs and are reflected in selling expenses. The Company regularly reviews inventory and considers forecasts of future demand, market
conditions and product obsolescence.
If
the estimated realizable value of the inventory is less than cost, the Company makes provisions in order to reduce its carrying value
to its estimated market value. The Company also reviews inventory for slow moving inventory and obsolescence and records allowance for
obsolescence.
Property
and equipment
Property
and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using
the straight-line method over the estimated useful lives of the assets as follows:
Machinery
tools and equipment
7
years
Office
furniture and equipment
5
years
Motor
vehicles
5
years
Leasehold
improvements
the
shorter of the lease term or the estimated useful life of the improvements
Expenditures
for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations
in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase
in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost
of the asset.
Upon
sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from
their respective accounts and any gain or loss is recorded in the statements of income.
The
Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying
value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment
include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand,
competition and other economic factors. Based on this assessment, no impairment expenses for property and equipment were recorded during
the years ended September 30, 2023 and 2022.
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Leases
On
its inception date, the Company adopted ASC 842 — Leases (“ASC 842”), which requires lessees to record right-of-use
(“ROU”) assets and related lease obligations on the balance sheet, as well as disclose key information regarding leasing
arrangements.
ROU
assets represent our right to use an underlying asset for the lease terms and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company generally uses
its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease
payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease
expense for lease payments is recognized on a straight-line basis over the lease term.
Stock-based
compensation
The
Company applies ASC No. 718, “Compensation-Stock Compensation,” which requires that share-based payment transactions with
employees and nonemployees upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and
recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation
cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award
and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally
is the vesting period. In addition to the requisite service period, the Company also evaluates the performance condition and market condition
under ASC 718-10-20. For an award which contains both a performance and a market condition, and where both conditions must be satisfied
for the award to vest, the market condition is incorporated into the fair value of the award, and that fair value is recognized over
the employee’s requisite service period or nonemployee’s vesting period if it is probable the performance condition will
be met. If the performance condition is ultimately not met, compensation cost related to the award should not be recognized (or should
be reversed) because the vesting condition in the award has not been satisfied.
The
Company will recognize forfeitures of such equity-based compensation as they occur.
Income
taxes
The
Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
As
a result of the implementation of certain provisions of ASC 740, Income Taxes (“ASC 740”), which clarifies the accounting
and disclosure for uncertainty in tax position, as defined, ASC 740 seeks to reduce the diversity in practice associated with certain
aspects of the recognition and measurement related to accounting for income taxes. The Company has adopted the provisions of ASC 740
since inception and has analyzed filing positions in each of the federal and state jurisdictions where the Company is required to file
income tax returns, as well as open tax years in such jurisdictions. The Company has identified the U.S. federal jurisdiction, and the
states of Texas and California, as its “major” tax jurisdictions. However, the Company has certain tax attribute carryforwards
which will remain subject to review and adjustment by the relevant tax authorities until the statute of limitations closes with respect
to the year in which such attributes are utilized.
The
Company believes that its income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments
that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been
recorded pursuant to ASC 740. The Company’s policy for recording interest and penalties associated with income-based tax audits
is to record such items as a component of income taxes.
33
Commitments
and contingencies
In
the ordinary course of business, the Company is subject to certain contingencies, including legal proceedings and claims arising out
of the business that relate to a wide range of matters, such as government investigations and tax matters. The Company recognizes its
liability for such contingency if it determines it is probable that a loss has occurred, and a reasonable estimate of the loss can be
made. The Company may consider many factors in making these assessments including historical and specific facts and circumstances of
each matter.
Earnings
per share
Basic
earnings per share are computed by dividing net income attributable to holders of common stock by the weighted average number of shares
of common stock outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if securities
to issue common stock were exercised.
Recently
issued but not yet adopted accounting pronouncements
In
June 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual
Sale Restrictions. The amendments in this ASU clarify the guidance in ASC 820 on the fair value measurement of an equity security that
is subject to a contractual sale restriction and require specific disclosures related to such an equity security. This standard is effective
for fiscal years beginning after December 15, 2024. The Company does not expect the adoption of this standard to have a material impact
on the consolidated financial statements.
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract
liabilities in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as if the entity
had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2023, with early application permitted.
The Company does not expect the adoption of this standard to have a material impact on the consolidated financial statements.
Recently
issued and adopted accounting pronouncements
In
January 2020, the FASB issued ASU 2020-01, “Investments — Equity Securities (Topic 321), Investments — Equity Method
and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and
Topic 815.” This ASU among other things clarifies that a company should consider observable transactions that require a company
to either apply or discontinue the equity method of accounting under Topic 323, Investments — Equity Method and Joint Ventures,
for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing
the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options a
company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity
method or fair value option. The Company adopted ASU 2020-01 on October 1, 2022. The adoption did not have a material impact on the Company’s
consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) — Simplifying the Accounting for Income Taxes. The update
is intended to simplify the current rules regarding the accounting for income taxes and addresses several technical topics including
accounting for franchise taxes, allocating income taxes between a loss in continuing operations and in other categories such as discontinued
operations, reporting income taxes for legal entities that are not subject to income taxes, and interim accounting for enacted changes
in tax laws. The Company adopted ASU 2019-12 on October 1, 2022. The adoption did not have a material impact on the Company’s consolidated
financial statements.
The
Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material
effect on the consolidated financial position, statements of operations and cash flows.
34