INNO HOLDINGS INC. 10-Q

ITEM 2. 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 condensed consolidated financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q. All share and per-share information presented in this report has been retroactively adjusted to reflect the 1-for-10 reverse stock split of our common stock, which was effective on October 9, 2024. 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 Quarterly Report . 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. Since the quarter ended December 31, 2024, we have introduced a new business of electronic products trading. We source and purchase electronic devices, including pre-owned smartphones, tablets, and laptops, from suppliers in Asia, and sell these products to wholesale clients and retail customers in Southeast Asia, Europe and other areas. Recent Developments Disposition of Investments On March 28, 2025, we entered into a Membership Interest Purchase Agreement (the “Agreement with CM”) with Strucraft Group Limited, a Marshall Islands limited corporation (the “Buyer”), and Core Modu LLC, a Texas limited liability company (“CM”). Pursuant to the Agreement with CM, we sold all of the membership interests we own in CM, which represents 15% of the outstanding membership interest in CM, to the Buyer for an aggregate purchase price of $700,000, payable in four equal installments with the initial payment due on March 31, 2025, the closing date. In addition, on the same date, we entered into a separate Membership Interest Purchase Agreement (the “Agreement with CBT”) with the Buyer and Castor Building Tech LLC, a California limited liability company (“CBT”). Pursuant to the Agreement with CBT, we sold all of the membership interests we own in CBT, which represents 53% of the outstanding membership interest in CBT, to the Buyer for an aggregate purchase price of $1,000. The transactions contemplated by the Agreement with CBT closed on March 31, 2025. 18 2025 Omnibus Incentive Plan In February 2025, our Board adopted, and our stockholders subsequently approved on March 17, 2025, the Inno Holdings Inc. 2025 Omnibus Incentive Plan (the “2025 Plan”), which provides for the issuance of equity awards, including options, restricted stock, stock appreciation rights, restricted stock units, performance awards and other stock-based awards, to eligible directors, officers, employees and consultants. The 2025 Plan is intended to encourage our profitability and growth through short-term and long-term incentives that are consistent with our objectives, give participants an incentive for excellence in individual performance, promote teamwork among participants and give the Company a significant advantage in attracting and retaining key employees, officers, directors and consultants. The maximum number of shares of common stock initially reserved for issuance under the 2025 Plan is 880,000 shares, of which shall automatically increase on the first (1st) trading day of January of each calendar year during the term of the 2025 Plan, beginning in 2026, by an amount equal to the lesser of (i) 20% of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year and (ii) a maximum of 5,000,000 additional shares, as determined by the administrator of the 2025 Plan minus the total number of reserved and available shares under the Inno Holdings Inc. 2023 Omnibus Incentive Plan. Disposition of Subsidiaries On March 4, 2025, we entered into a Share Purchase Agreement (the “AL Agreement”) with Architectix Limited, a British Virgin Islands company, Inno Metal Studs Corp, a Texas Corporation (“IMSC”), and Inno AI Tech Corp, a Texas corporation (“AT”). Pursuant to the AL Agreement, we sold all issued and outstanding shares of our wholly owned subsidiaries, IMSC and AT, to the Buyer for an aggregate purchase price of $1,000 in cash. Standby Equity Purchase Agreement On January 27, 2025, we entered into a Standby Equity Purchase Agreement (the “SEPA”) with certain investors, pursuant to which we have the right, but not the obligation, to issue and sell, from time to time at its discretion, up to $15 million of shares of our common stock to the investors at a price equal to 40%, or a percentage between 20% and 40% as determined by us, of the Minimum Price, subject to specified limitations and conditions, including a $1 million minimum per drawdown and a 9.99% beneficial ownership cap per investor. The SEPA has a three-year term and may be terminated earlier by us, and we expect to use any proceeds for working capital and general corporate purposes. No shares have been issued under the SEPA as of the date of filing this Quarterly Report. Dismissal and Appointment of Independent Registered Public Accounting Firm On January 13, 2025, we dismissed Simon & Edward, LLP as our independent registered public accounting firm, effective immediately. On January 13, 2025, the Audit Committee of the Board approved the engagement and appointment of JWF Assurance PAC to serve as the Company’s independent registered public accounting firm for the fiscal year ended September 30, 2025. Departure and Appointment of Certain Officer and Directors On January 3, 2025, the Board accepted the resignation of Tianwei Li from his position as our Chief Financial Officer. Mr. Li shall continue to serve as one of our directors. In addition, the Board appointed Mengshu Shao to fill the Chief Financial Officer vacancy and to hold such position until her resignation, removal or the appointment of her successor. 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 steel mills, in order to obtain a better payment cycle to secure the raw materials and to maximize the use of funds. At the same time, to match the raw-material usage of the sales order each quarter, we make quarterly purchase plans, to ensure the efficiency of capital turnover is higher. 19 The collection period of accounts receivable Timely payments from customers are essential to a successful business. Based on our historical collectability experience, we will target strategic relationships with large-scale homebuilders and professional companies to reduce the risk associated with accounts receivable and reduce 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. 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 Three Months Ended March 31, 2025, and 2024 Three Months Ended March 31, 2025 2024 Revenues $ 478,100 - 100 % Costs of goods sold 436,600 - 100 % Selling, general and administrative expenses (exclusive of items shown separately below) 1,410,805 276,427 410 % Operating loss (1,369,305 ) (276,427 ) 395 % Other income (expenses) (2,131,836 ) 201,832 -1,156 % Loss before income taxes (3,501,141 ) (74,595 ) 4,594 % Income tax expense - - - % Net loss from discontinued operations (48,127 ) (1,019,332 ) -95 % Net loss (3,549,268 ) (1,093,927 ) 224 % Non-controlling interest 71,229 (33,470 ) -313 % Net loss attributable to Inno Holdings Inc. $ (3,620,497 ) (1,060,457 ) 241 % For the Six Months Ended March 31, 2025, and 2024 Six Months Ended March 31, 2025 2024 Revenues $ 674,100 - 100 % Costs of goods sold 616,600 - 100 % Selling, general and administrative expenses (exclusive of items shown separately below) 1,881,397 475,998 295 % Impairment loss 3,514 - 100 % Operating loss (1,827,411 ) (475,998 ) 284 % Other income (expenses) (2,131,470 ) 211,032 -1,110 % Loss before income taxes (3,958,881 ) (264,966 ) 1,394 % Income tax expense - (800 ) -100 % Net loss from discontinued operations (195,796 ) (1,645,425 ) -88 % Net loss (4,154,677 ) (1,911,191 ) 117 % Non-controlling interest 69,517 (49,216 ) -241 % Net loss attributable to Inno Holdings Inc. $ (4,224,194 ) (1,861,975 ) 127 % 20 Revenues Revenue for the three months ended March 31, 2025 increased 100% to $478,100 in comparison to $Nil for the three months ended March 31, 2024. Revenue for the three months ended March 31, 2025 consists solely of the Company’s new business of electronic products trading that started during this period. The new business of electronic products trading contributes to the increase in revenue for the three months ended March 31, 2025 against the comparable period in 2024. Our revenues are significantly impacted by demand for economic conditions including 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 the negative overall economic conditions currently being experienced. Costs of Goods Sold Cost of Goods Sold (COGS) includes electronic products purchased from our suppliers. COGS for the three months ended March 31, 2025, increased to $436,600 in comparison to $Nil for the three months ended March 31, 2024. COGS for the three months ended March 31, 2025 consists solely of electronic products purchased from our suppliers in the Company’s new business of electronic products trading that started during this period. The new business of electronic products trading contributes to the increase in COGS for the three months ended March 31, 2025 against the comparable period in 2024. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended March 31, 2025, increased 410% to $1,410,805 in comparison to $276,427 for the comparable period in 2024. The main reason for the increase was because multiple subsidiaries, which incurred a large amount of selling, general and administrative expenses in the comparable period in 2024, were disposed during this quarter ended March 31, 2025. Operating Loss Operating loss was $1,369,305 for the three months ended March 31, 2025, in comparison to an operating loss of $276,427 for the comparable period in 2024. The increase in operating loss was primarily attributed to the increase in selling, general and administrative expenses, as discussed above. Other Income (Expense) Other expense for the three months ended March 31, 2025, was $2,131,836, in comparison to other income of $201,832 for the comparable period in 2024. Other expenses for the three months ended March 31, 2025, primarily consisted of a $2,152,622 loss on investment disposal, partially offset by a $11,046 interest income. In contrast, other expenses for the three months ended March 31, 2024, were primarily attributable to the recognition of supporting services provided to one of customers and the interest income. Net Loss Net loss for the three months ended March 31, 2025 was $3,549,268, in comparison to net loss of $1,093,927 for the three months ended March 31, 2024. The decrease in net loss was primarily due to changes in revenue, costs and expenses as outlined above. 21 Liquidity and Capital Resources Sources of Liquidity During the three months ended March 31, 2025 and 2024, 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 $3,888,816 as of March 31, 2025 compared to $1,077,138 of cash as of September 30, 2024. The cash increase was primarily due to the proceeds from the several private-placement offerings during the quarter ended December 31, 2024, and offset by the cash usage in operating and investing activities during the periods ended March 31, 2025. The Company has participated in several private-placement offerings since September 30, 2024. On October 31, 2024, the Company entered into a securities purchase agreement with certain investors, providing for the sale and issuance of 500,000 shares of the Company’s common stock, no par value, for an aggregate purchase price of $2,000,000 at $4.00 per share (the “October 2024 Private Placement”). The offering closed on November 6, 2024. On November 13, 2024, the Company entered into a securities purchase agreement with nine non-U.S. investors, pursuant to which the Company agreed to issue and sell in a private placement offering (the “November 2024 Private Placement”) an aggregate of 729,167 shares of common stock, no par value, at a purchase price per share of $4.80, for gross proceeds of approximately $3.5 million, of which proceeds will be used for working capital and other general corporate purposes. The offering closed on December 13, 2024. On December 11, 2024, the Company entered into a securities purchase agreement with nine non-U.S. investors, pursuant to which the Company agreed to issue and sell in a private placement offering (the “December 2024 Private Placement”) an aggregate of 700,000 shares of common stock, no par value, at a purchase price per share of $2.50, for gross proceeds of approximately $1.75 million, of which proceeds will be used for working capital and other general corporate purposes. The offering closed on December 23, 2024. On January 27, 2025, we entered into a Standby Equity Purchase Agreement with certain investors, pursuant to which we have the right, but not the obligation, to issue and sell, from time to time at its discretion, up to $15 million of shares of our common stock to the investors at a price equal to 40%, or a percentage between 20% and 40% as determined by us, of the Minimum Price, subject to specified limitations and conditions, including a $1 million minimum per drawdown and a 9.99% beneficial ownership cap per investor. The SEPA has a three-year term and may be terminated earlier by us, and we expect to use any proceeds for working capital and general corporate purposes. No shares have been issued under the SEPA as of the date of filing this Quarterly Report. We do not believe the cash and cash equivalents on hand as of March 31, 2025 of $3,888,816 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. Even though we have entered into the SEPA with a potential availability of up to $15 million, we cannot provide assurance that we will be able to draw sufficient funds pursuant to the SEPA when required. 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 and the availability of sufficient funds pursuant to the SEPA 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, including, without limitation, pursuant to the SEPA, in order to raise additional cash, although there are no firm arrangements in place for any such financing at this time other than any funds obtained pursuant to the sale of common stock per the SEPA. We cannot provide any assurances as to whether we will be able to secure the necessary financing, pursuant to the SEPA or otherwise, 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 March 31, 2025 and September 30, 2024, our working capital (deficit) was $7,076,701 and $975,755, respectively. The historical seasonality in our business and our capital raising activities during the year can cause cash and cash equivalents, inventory, and accounts payable to fluctuate, resulting in changes in our working capital. 22 Cash Flows Operating Activities For the six months ended March 31, 2025, net cash used in operating activities was $3,109,869, primarily driven by the net loss from continuing operation of $3,958,881 and net loss from discontinuing operation of $265,313, partially offset by non-cash items of stock-based compensation expense of $1,050,005 and loss from investment disposal of $2,152,622, and working capital used cash of $1,692,868, which was primarily driven by a $97,000 increase in accounts receivable and a $1,658,400 increase in inventories. For the six months ended March 31, 2024, net cash used in operating activities was $3,131,454, primarily driven by the net loss from continuing operation of $265,766 and net loss from discontinuing operation of $1,596,209, partially offset by non-cash items of $62,500 and working capital used cash of $1,886,989, which was primarily driven by a $1,788,447 increase of prepayments and other current assets, including prepaid insurance, advance to suppliers, prepaid marketing expenses as well as escrow deposits for building purchase, and a $249,103 decrease in accounts payable, unearned revenue and other current liabilities. Investing Activities For the six months ended March 31, 2025, net cash used in investing activities was $1,328,453 and was primarily the result of investment in equity investee of $1,400,000, which is related to the investment in Core Modu LLC. For the six months ended March 31, 2024, net cash used in investing activities was $269,229 and was mainly related to the purchase of machinery, tools, motor vehicles, and leasehold improvements. Financing Activities Net cash provided by financing activities was $7,250,000 and $7,438,223, respectively, for the six months ended March 31, 2025 and 2024. For the six months ended March 31, 2025, net cash provided by financing activities was due to the $7,250,000 net cash from the several private-placement offerings. For the six months ended March 31, 2024, net cash provided by financing activities was primarily due to the $8,450,000 net cash from the initial public offering, $91,000 proceeds from related parties and offset by $740,000 payment of short-term loans and $325,372 repayment to related parties. 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 Condensed 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 Condensed 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 Condensed 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 Condensed Consolidated Financial Statements upon adoption. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.