INNO HOLDINGS INC. 10-K

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. 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. 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. 19 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. Beyond our manufacturing operations, we offer consulting services to support clients in developing their own building technology companies. Our subsidiary- Inno AI Tech Corp., formed in February 2024, specializes in providing research, consulting, incorporation assistance, training, market research, and business development guidance. In 2024, we successfully assisted a client in establishing a new steel technology company. Key Factors Affecting our Performance As a result of a number of factors, our historical results of operations may not be comparable to our results of operations in future periods, and our results of operations may not be directly comparable from period to period. Set forth below is a brief discussion of the key factors impacting our results of operations. Inflation Prices of certain commodity products, including raw materials, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, trade restrictions and tariffs. Increasing prices of the component materials for parts of our goods may impact the availability, quality and price of our products as suppliers search for alternatives to existing materials and increase the prices they charge. Our suppliers may also fail to provide consistent quality of product as they may substitute lower cost materials to maintain pricing levels. Rapid and significant changes in commodity prices may negatively affect our profit margins, and it may be difficult to mitigate worsened margins through customer pricing actions and cost reduction initiatives. Interest Rates Rising interest rates have also resulted in a shift in institutional holdings away from micro-cap equities, which has negatively influenced our stock’s trading volume. We continue to forge relationships with institutional investors and analysts in order to maintain a healthy trading volume. Geopolitical Conditions In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and export controls against Russia, Belarus and certain individuals and entities connected to Russian or Belarusian political, business, and financial organizations, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the conflict continue or worsen. It is not possible to predict the broader consequences of these conflicts, including related geopolitical tensions, and the measures and retaliatory actions taken by the U.S. and other countries in respect thereof as well as whether any counter measures or retaliatory actions in response, including, for example, potential cyberattacks or the disruption of energy exports, are likely to cause regional instability and geopolitical shifts, which could materially adversely affect global trade, currency exchange rates, regional economies and the global economy. These situations remain uncertain, and while it is difficult to predict the impact of any of the foregoing, the conflicts and actions taken in response to these conflicts could increase our costs, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition, and results of operations. 20 In addition, while we do not have any direct operations or significant sales in the Middle East nor Africa, geopolitical tensions and ongoing conflicts in these regions, particularly in Gaza, northern Israel and southern Lebanon, the Red Sea, Sudan, and Ethiopia, may lead to further global economic instability and fluctuating energy prices that could materially affect our business. It is not possible to predict the broader consequences of these conflicts, including related geopolitical tensions, and the measures and actions taken by other countries in respect thereof, which could materially and adversely affect global trade, currency exchange rates, regional economies and the global economy. While it is difficult to predict the impact of any of the foregoing, these conflicts may increase our costs, disrupt our supply chain, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our business, financial condition and results of operations. Results of Operation 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, 2024, and 2023 Years Ended September 30, 2024 2023 Revenue - products $ 395,495 $ 799,747 -51 % Revenue - consulting services 205,000 - 100 % Revenue – License income 285,000 - 100 % Total Revenue 885,495 799,747 11 % Costs of materials and labor 409,169 1,255,315 -67 % Selling, general and administrative expenses (exclusive of items shown separately below) 3,678,866 2,191,043 68 % Impairment loss 23,911 - 100 % Depreciation 87,116 69,437 25 % Bad debt expense 59,935 1,267,960 -95 % Operating loss (3,373,502 ) (3,984,008 ) -15 % Other income (expenses) 123,175 (39,196 ) -414 % Loss before income taxes (3,250,327 ) (4,023,204 ) -19 % Income tax expense 800 - 100 % Net loss (3,251,127 ) (4,023,204 ) -19 % Non-controlling interest (37,298 ) (127,426 ) -71 % Net loss attributable to INNO HOLDINGS INC. $ (3,213,829 ) $ (3,895,778 ) -18 % Revenues Total revenue for the year ended September 30, 2024 increased 11% to $885,495 in comparison to the year ended September 30, 2023. 21 In February 2024, we started our second revenue stream by offering consulting service through our newly formed subsidiary, Inno AI Tech Corp. Throughout the year, we successfully supported a client in establishing a steel technology company. Our services included incorporation assistance, comprehensive training programs, in-depth market research, and strategic business development guidance. This engagement generated consulting revenue of $205,000. During the fourth quarter of 2024, we entered into a one-time licensing agreement with an individual and his startup company. This agreement provided them with a license to utilize our logo, technology, trademarks and other intellectual property for the purpose of startup operations and marketing development. The agreement generated $285,000 in licensing income. Our product revenue decreased 51% to $395,495 in comparison to $799,747 for the year ended September 30, 2023. The decrease was primarily due to the various statuses and stages of projects. To mitigate collection issues, the Company has focused on developing relationships with larger customers. During the year ended September 30, 2024, the Company has been working on obtaining permits for large projects and exploring new business opportunities with larger customers. Our backlog as of September 30, 2024 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. The timing of revenue recognition from these contracts is subject to variation based on each project’s permit status and construction progress. These signed contracts included an agreement, amount of $15,875,800, with Vision Opportunity Fund LP (assigned to Vision 101) partially owned by one of our shareholders. None of the contract amount has been delivered to Vision 101 or recognized as revenue as of September 30, 2024. 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. Costs of materials and labor for the year ended September 30, 2024 was $409,169 compared to $1,255,315 for the year ended September 30, 2023. The decrease in the Cost of Goods Sold (COGS), pertaining to materials and labor, is predominantly due to the decrease in product sales volume. The primary cost of consulting service revenue in fiscal year 2024 was the payroll expense for office employees, which is included in selling, general, and administrative expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended September 30, 2024, increased 68% to $3,678,866 in comparison to $2,191,043 for the comparable period in 2023. This increase was primarily driven by higher overhead costs, including rent, payroll, insurance, consulting and professional fees, marketing, and promotional expenses. These additional expenses were incurred to support our growth in the consulting business and comply with the regulatory requirements of a public company. Bad debt expense Bad debt expense decreased by $1,208,025 for the year ended September 30, 2024 compared to the same period in 2023. We estimated the credit losses based on each customer’s financial situation, project status and the outstanding days of the accounts receivable balance. Starting prior year, we strengthened our risk control of accounts receivable and reduced 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. Operating Loss Operating loss was $3,373,502 for the year ended September 30,2024, in comparison to an operating loss of $3,984,008 for the comparable period in 2023. The increase in operating loss was primarily attributed to the lower revenue and increased expenses offset by the decrease in bad debt expense, as discussed above. 22 Other Income (Expense) Other income for the year ended September 30, 2024, was $123,175, in comparison to other expenses of $39,196 for the comparable period in 2023. The increase in other income was primarily due to interest earned on bank deposits of $76,047, supporting services provided to a customer of $104,674, and offset by settlements with former lessor, customers and subcontractor. Other expenses for the year ended September 30, 2023, were primarily attributable to loan interest. Net Loss Net loss for the year ended September 30, 2024 was $3,251,127, in comparison to a net loss of $4,023,204 for the year ended September 30, 2023. The decrease in net loss was primarily due to changes in revenue, costs, expenses and other income (expense) as outlined above. Liquidity and Capital Resources Sources of Liquidity During the year ended September 30, 2024 and 2023, we primarily funded our operations with cash generated from operations, private and public shares offering, as well as through borrowing under our revolving line of credit, a long term promissory note, and related parties. We had cash of $1,526,661 as of September 30, 2024 compared to $4,898 of cash as of September 30, 2023. The cash increase was primarily due to the proceeds from the initial public offering closed in December 2023 and offset by the cash usage in operating and investing activities during the periods ended September 30, 2024. 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 $35 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 $37 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 $38 per share. The offerings were completed pursuant to an exemption from registration under Rule 506(b) of the Securities Act of 1933, as amended. On December 18, 2023, the Company successfully closed the initial public offering with net proceeds of $8 million. We do not believe the cash and cash equivalents on hand as of September 30, 2024 of $1,526,661 will be sufficient to fund our 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 expenditure. The uncertainties surrounding our ability to access capital when needed creates substantial doubt about our ability to continue as a going concern. 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. 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. On October 31, 2024, the Company entered into a Securities Purchase Agreement with certain investors to issue and sell 500,000 shares of its common stock at a price of $4.00 per share, for an aggregate purchase price of $2,000,000. On November 13, 2024, the Company entered into a Securities Purchase Agreement with nine non-U.S. investors to issue and sell an aggregate of 729,167 shares of common stock in a private placement offering at a price per share of $4.80, for total proceeds of approximately $3.5 million. 23 Working Capital As of September 30, 2024 and September 30, 2023, our working capital (deficit) was $975,755 and $(2,913,827), 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 year ended September 30, 2024 was $5,075,412 compared to $1,225,941 of net cash used in operating activities for the year ended September 30, 2023. The increase of net cash usage in operating activities was mainly due to a $128,733 increase of loss with non-cash reconciling items adjustment and a $3,720,738 increase of working capital outflow. For the year ended September 30, 2024, net cash used in operating activities was $5,075,412, primarily driven by the net loss of $3,251,127, partially offset by non-cash items of $599,057 and working capital used cash of $2,423,342, which was primarily driven by a $322,739 increase of prepayments and other current assets, including prepaid insurance and prepayments to service suppliers, a $547,568 decrease in unearned revenue, a $729,359 decrease in operating lease liabilities and a $843,694 decrease in accounts payable, accounts payable - related party, and other current liabilities. For the year ended September 30, 2023, net cash used in operating activities was $1,225,941, primarily driven by the net loss of $4,023,204, partially offset by non-cash items of $1,499,867, which mainly included bad debt expense of $1,267,960. Working capital provided cash of $1,297,396, which was primarily driven by a $936,098 increase in unearned revenue, a $325,951 increase in accounts payable, accounts payable - related party, operating lease liabilities and other current liabilities, a $468,895 decrease in account receivable, a $79,457 decrease of prepayments and other current assets, and partially offset by a $64,389 increase in inventories and a $538,765 increase in deferred offering costs. Investing Activities For the year ended September 30, 2024 and 2023, net cash used in investing activities was primarily the result of additions to property and equipment of $559,629 and $244,899, respectively, which are mainly related to the additions of machinery, tools, motor vehicles, and leasehold improvements. Financing Activities Net cash provided by financing activities was $7,144,235 and $1,425,110, respectively, for the year ended September 30, 2024 and 2023. For the year ended September 30, 2024, net cash provided by financing activities was primarily due to the $8,450,000 net cash from the initial public offering, offset by $740,000 payment of short-term loans, $503,372 repayment to related parties, $49,393 payments of notes payable, and an aggregate amount payment of $13,000 for the assumption of the Warrants. For the year ended September 30, 2023, net cash provided by financing activities was primarily due to the $900,000 proceeds from stock issuance, $627,000 proceeds from related parties, $230,000 proceeds from short-term loans and offset by $150,000 payment of short-term loans, $134,861 repayment to related parties, and $47,029 payments of notes payable. 24 Critical Accounting Policies and Estimate The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 2 — Basis of Presentation and Summary of significant accounting policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed Form 10-K, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recently filed Form 10-K, include the discussion of estimates used for revenue recognition, inventory valuation, going concern assessment, and our provision for income taxes. Such accounting estimates require significant judgments and assumptions to be used in the preparation of the Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported. New Accounting Standards From time to time, the FASB or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2 — Basis of Presentation and Summary of significant accounting policies, “Recently issued but not yet adopted accounting pronouncements”, in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required under Regulation S-K for “smaller reporting companies.” 25